All Commentary
Saturday, June 29, 2024

Responding to Reich, Part 2: Yes, the Government Obstructs the Market

Robert Reich swings and misses yet again.

Image Credit: YouTube screenshot - Robert Reich

The left-wing political commentator Robert Reich is doing a 10-part video series called 10 Economic Myths Debunked. Since Reich has a habit of taking aim at free-marketeers like us here at FEE, I’ve decided to do a response series called Responding to Reich, writing one response article for each video. In Part 1 we looked at Reich’s claim that economics was not an objective science. Today we’ll be looking at his second video and the claim that it’s a “myth” that the government obstructs the free market.

After watching the video a few times, my general takeaway is that Reich presents and thoroughly debunks a straw man. He makes some valid points, but they are directed at a position that, if it is held by anyone, is certainly not the primary argument most free-market proponents are making when we say the government obstructs the market.

To demonstrate that Reich is straw-manning our position, it will be helpful to briefly go over the actual free market position on this question before diving into Reich’s comments. Only when we know the genuine argument first will we be able to see whether it is represented accurately.

To begin, the idea of a free market and government obstruction is rooted in classical liberalism, a philosophy that—while not perfectly followed—lies at the center of our society. Liberalism, in turn, is centered on the idea of private property rights. A free market is one in which there are no infringements on property rights—that is, there are no coercive forces telling people what they can and can’t sell, what prices they can charge, or what kinds of standards their products must comply with.

The role of the government in a free market is, at most, defining and defending these property rights. If the government stays within this role, we can say that by and large a free market is operating. If it goes beyond this role and begins to impose rules that are not related to defining and defending property rights, it is obstructing the market. It becomes the very agent of coercion that it was supposed to be defending against.

The economist Ludwig von Mises explained this idea well in his 1927 book Liberalism:

As the liberal sees it, the task of the state consists solely and exclusively in guaranteeing the protection of life, health, liberty, and private property against violent attacks. Everything that goes beyond this is an evil. A government that, instead of fulfilling its task, sought to go so far as actually to infringe on personal security of life and health, freedom, and property would, of course, be altogether bad.

Given these definitions, it seems patently obvious that in our day the government is obstructing the market all over the place. Every tariff, every price control, every FDA regulation, and every occupational licensing law is a coercive infringement on property rights. It is the government compelling people, with the threat of a gun, to act a certain way in the market.

So, how does Reich try to say that government obstruction of the free market is a myth? Let’s take a look.

Do We Have to Choose Between Markets and Government?

Reich begins with a point that strikes me as somewhat abstruse.

Politicians of all stripes talk as if the rules that govern the economy are determined either by the free market or by government. But that’s wrong. There can’t be a choice between the free market and government, because a market cannot exist without a government to organize and enforce it.

I think the reason this part is confusing is that Reich is equivocating on the word rules. Free market proponents often cite economic laws like supply and demand, which could be considered “the rules that govern the economy.” But then rules can also mean the rules of the game, such as government laws. These are two distinct meanings of the word rules that Reich seems to be conflating.

Putting the language aside, I agree that politicians of all stripes speak of a dichotomy between markets and government. And, contrary to Reich, I think this is an important and useful dichotomy.

When Reich says “there can’t be any choice between the free market and government,” he is making an error analogous to the “diamond-water” mistake of the classical economists. He is assuming that the choice these politicians are speaking of is between “markets” in general or “government” in general. But what Reich misses is that there is a choice between markets and government on the margin. The government is constantly choosing whether to have a little more market direction or a little more government direction in any given sector, and that’s what free market proponents are referring to when we say things like “we must constantly choose between market forces and government direction.”

So when Reich tries to make his case by pointing out that “a market cannot exist without a government to organize it,” he’s basically saying, “Since markets-in-general require government-in-general, it can’t be the case that there is a choice between markets-in-general and government-in-general.” That’s a perfectly valid argument, but it is an argument against a straw man. The classical liberal position has never been that there is a choice between markets-in-general and government-in-general. It has always been that there is a choice on the margin, so Reich fails to refute the actual position.

Good Rules and Bad Rules

Reich continues his argument as follows:

A market is an arena where goods and services are exchanged. How that market functions depends upon rules determined by government. The rules govern property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be exchanged and under what circumstances), bankruptcy (what happens when borrowers can’t pay up)—and how is all of this enforced? These rules are decided on, one way or another, by human beings. But who exactly, and whose interests are they representing?

Reich is correct to point out that markets function based on the rules the government lays down. But his analysis here is problematic in that it completely fails to distinguish between rules that are about defining and defending property rights and rules that violate property rights and thus obstruct the market.

The distinction between these two categories of rules is commonly made in political philosophy. Consider this passage from Liberalism, where Mises is discussing interventionism:

Private property will be permitted to exist, but the ways in which the means of production are employed by the entrepreneurs, capitalists, and landowners will be regulated, guided, and controlled by authoritarian decrees and prohibitions. In this way, one forms the conceptual image of a regulated market, of a capitalism circumscribed by authoritarian rules, of private property shorn of its allegedly harmful concomitant features by the intervention of the authorities.

Notice how Mises refers to the authoritarian rules of the interventionist. That adjective is there to distinguish these rules from the legitimate rules of the non-authoritarian night-watchman state.

One could perhaps argue that, since Reich is not a free-marketeer, he is under no obligation to segregate these two kinds of rules sharply, as we do. But this is no excuse. Reich is trying to debunk our position. And one of the most basic elements of our position, as discussed in the opening section, is that there are two kinds of government rules: those that define and defend property rights, which are consistent with free markets, and those that violate property rights, which constitute obstructions of the free market.

If you’re going to debunk our position, you first need to demonstrate familiarity with the two kinds of rules and the distinction between them, and then show how the government does not, in fact, violate property rights with its current rules. But Reich doesn’t even seem to acknowledge the distinction.

Notice the rules he lists as examples: property, monopoly, contracts, and bankruptcy. The rules around property, contracts, and bankruptcy (which is really a subset of contracts) would all seem to fall into the general category of defining and defending property rights. But antitrust laws are clearly outside this scope and thus constitute obstructions of the free market.

Is Reich aware that he just highlighted an obstruction of the free market in a video ostensibly debunking the idea that such obstructions even exist? It seems not.

At this point, Reich unfortunately goes off topic and begins a lengthy discussion on concentrated power. So all we’ve gotten in the way of a debunking is a thorough refutation of a straw man followed by a list of rules that betrays an unwillingness to engage with the good rules/bad rules distinction which is central to our position.

Unobstructed, but Still Rigged?

Reich concludes the video with the following remarks:

As a result, the rules of the American economy are now largely organized by big corporations and those with great wealth, for their own gain. Ever-larger upward distributions inside the market from the poor working class to the top have become normalized as functions of a market that is assumed to be neutral. But remember, markets are not neutral. They reflect who wields power.

Reich is right to point out that the rules of the American economy are rigged in favor of the rich and powerful. But this complaint seems to be in tension with his thesis. How could it be that the government is rigging the market in favor of the rich and powerful if the government never interferes with the market?

To steelman his position, he would probably respond by saying, “I don’t buy your distinction between good rules and bad rules, so there is no such thing in my view as a free or obstructed market. There are just the rules of the game, and they are created by whoever has power.”

Reich is entitled to that opinion, but our argument is hardly bunk because he refuses to recognize the categories and definitions it draws on.

If we define “government obstructing the market” as “creating the bad kind of rules as understood in the classical liberal framework,” which is the definition, then it’s not a rebuttal to say, “I disagree with the classical liberal framework.” That’s like trying to debunk the claim that the sky is blue by saying that you don’t believe in color categories, so there’s no such thing as blue, and therefore the sky can’t be blue.

A proper rebuttal would have to demonstrate that “the bad kind of rules as understood in the classical liberal framework” don’t actually exist. It would have to explain why FDA regulations and occupational licensing and all the other examples don’t actually fall into that category. Yet Reich does not even attempt to make this case. And no wonder—it’s an impossible task.

Looking ahead, Myth #3 is going to be “Income & Wealth Are Deserved.” Now, I certainly don’t agree that, say, government subsidies are deserved. But I have a feeling Reich is talking about plain old voluntary transactions like CEO pay and receiving an inheritance. And those are practices I will gladly defend.

Additional Reading:

Liberalism by Ludwig von Mises

Responding to Reich, Part 1: Is Economics Objective? by Patrick Carroll

  • Patrick Carroll is the Managing Editor at the Foundation for Economic Education.