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The Student News Site of Stony Brook University

The Statesman


Hypocrisy And The Myth Of Free Trade Capitalism

It takes real guts, and/or an unbelievable level of ignorance, to defend “free trade” as the path to greater equality in the world—yet recent Statesman contributor Brent Neenan has done just that.

Unfortunately for Neenan, not only is financial deregulation the main cause behind the current economic catastrophe, but anyone vaguely familiar with the last 30 years of global history, including the World Bank’s own economists, knows that during this time of rampant free-market capitalism and slashing of government safety nets—generally known as “neoliberalism”—both poverty and inequality have skyrocketed.

In the U.S., tax cuts for the wealthy have been combined with cuts to social programs and rising military spending. Whereas the richest one percent received 10 percent of all income in 1979, in 2007 they got 23 percent.

Rising profits and productivity have coincided with falling wages for most workers. By 2006, real wages were $1 per hour less than in 1982. As economist John Schmitt points out in a 2009 paper, the past three decades have witnessed an “enormous increase in economic [wealth] concentration that is unprecedented in modern U.S. history.”  The trend at the world level has been at least as pronounced, and is hardly in dispute.

By the same token, defending the U.S. government as uniquely generous requires a great leap of the imagination. According to the Organization on Economic Cooperation and Development, the U.S. currently gives only 0.20 percent of its gross national income in the form of foreign development assistance, significantly less than other developed nations (common public perception notwithstanding).

By contrast, we spend $708 billion a year on the military. Much of the magnanimous “aid” that Neenan touts comes in the form of military aid, which almost inevitably enhances Third World repression; incidentally, the first example in his list is Colombia, the hemisphere’s top recipient of U.S. military aid since 1990, and also the holder of by far the hemisphere’s worst human rights record during that same period.

The notion that “we’re broke” is also a flagrant lie. The US spends half its national budget on wars and the military. The idea that universal health care or decent social services are fiscally impossible is thus demonstrably false. Not only would these services greatly improve human welfare, they’d also create far more jobs than spending on the military or giving tax cuts to the rich does

We have plenty of money, but we choose to spend it on killing people and further fattening the rich rather than meeting people’s basic needs.

There’s no space to address the rest of Neenan’s fallacies point-by-point, but I do want to mention what are arguably the two most profound examples of hypocrisy in this type of “free market” argument, not just in Neenan’s column but in more general “libertarian” arguments.

In practice, those who call themselves conservatives and libertarians tend to be neither fiscally conservative nor economically libertarian, and nor do they truly believe in free markets.

First, libertarianism is an ideology emphasizing individual freedom—not just from government authority but also from any form of concentrated power. In today’s world, large corporations and banks are far more powerful than most governments and exert preponderant influence over both parties in the U.S. government.

Although government is often oppressive and unaccountable, it is currently one of the best mechanisms available for curbing the power of concentrated private interests which are specifically designed to shield their members from any accountability to the public.

Removing government regulations and public services thus tends to further empower corporate interests, which are considerably less accountable and less legitimate than government. “Faux-libertarians” have little to say about concentrated corporate power, and in fact they often applaud it.

Second, faux-libertarians are enormously hypocritical (or astoundingly ignorant) regarding the history of the U.S. economy. One example comes in a recent letter to the Statesman praising Neenan’s column, referring to “free enterprise” and “lesser government” as “the principles that made this country great.”

The author flouts his “50 years out in the real world” as proof of his authoritative knowledge. Yet apparently at no point during those 50 years has he found time to study the economic history of the United States. If he had, he would know that U.S. capitalism, like capitalism in other industrialized nations, developed in large part as a result of very extensive government intervention in the economy.

Earlier leaders like Alexander Hamilton and Abraham Lincoln were avid protectionists whose ideas for protecting “infant industry” remained fully in-force in the U.S. through the late nineteenth century period of massive industrial growth.

The U.S. government deployed a wide range of protectionist policies including tariffs, subsidies to domestic producers, deliberate relaxation of patent laws, and strict regulations on foreign investment in order to develop its economy.

These measures are all antithetical to “free trade.” Again, very well-documented but omitted from the official history.

Likewise, in today’s U.S., there is a firm bipartisan consensus within government in favor of a massive system of state subsidies to private corporations, called for by the Pentagon. Similar subsidies prevail in other sectors, such as prisons and agribusiness. (Readers can consult Take the Rich off Welfare by Mark Zepezauer and Arthur Naiman, great for skeptics like Neenan who so value scholarship based on “credible facts and statistics.”)

Ronald Reagan—a hero to many faux-libertarians—presided over a huge expansion in these subsidies, resulting in a deep federal deficit and increasing inequality. The trend is not a partisan one, though: Obama’s baseline Pentagon budget is a record-high $708 billion.

The story is similar for other developed economies. As economist Ha-Joon Chang notes in a recent study entitled Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, “virtually all the successful developing countries since the Second World War initially succeeded through nationalistic policies, using protection, subsidies and other forms of government intervention…The truth of post-1945 globalization is almost the polar opposite of the official history”—the official history propagated by Neenan and other faux-libertarians.

This official history—that free trade and minimal government have allowed today´s advanced economies to develop—is hypocritically broadcast by First World leaders, international banks, and business elites in order to justify the imposition of neoliberal policies in the underdeveloped world.

Neoliberalism involves slashing government spending, opening national markets to foreign competition, deregulating financial transactions and relaxing labor and environmental laws to foster a favorable climate for foreign capitalists—basically, reducing government intervention except for the sort that aids big business.

So in other words, the U.S. and others have sought to impose a form of free trade on the Third World that they themselves never followed when industrializing their own economies. The results for poor countries have been devastating: not only have these policies slowed economic growth, they’ve greatly exacerbated inequality and driven millions of people into poverty, thereby increasing immigration to the U.S. and to Third World cities. And in countries like the U.S., inequality and poverty have likewise jumped. Again, these are facts that are not in dispute among serious economic analysts.

The key to deciphering the rhetoric of faux-libertarians is that “free markets” apply only to the general population. Those with wealth and political influence are showered with subsidies, tax breaks, and other hand-outs—basically, a system of socialism for the rich, market discipline for the rest (the “rest” including not just the underdeveloped countries, but also workers in the rich nations). For faux-libertarians, “big government” means government that uses public money to help ordinary people, not government that funnels public money to elite sectors. Neenan exemplifies this selective logic.

Adam Smith is the intellectual figure most often cited by faux-libertarians to justify the imposition of neoliberal and corporate-friendly policies. Yet many of Smith’s basic arguments and values were directly opposed to the values of those who invoke his name today.

First, Smith assumed that capitalism could only work if both bosses and workers had the same level of freedom—for example, workers should be able to migrate freely. Most of today’s so-called conservatives staunchly oppose the influx of “illegal immigrants” into this country, even though open borders were a key component of Smith’s thinking. Genuine free trade in Smith’s sense has never really existed under modern capitalism, and certainly not in the U.S.

Smith also believed that government should sometimes intervene on behalf of workers and in order to check the power of concentrated capital. He died before the emergence of the behemoth corporations that dominate today’s world, but even during his time he was critical of concentrated power and wealth.

Moreover, he resented the influence that these private interests exerted over government, lamenting that English “merchants and manufacturers” were “by far the principal architects” of government policy, with their interests “most peculiarly attended to.”

And Smith believed that free markets would ultimately lead to social and economic equality—rather different from the currently existing utopia of today’s faux-libertarians, where 1 percent of the world owns 40 percent of all wealth, where over 900 million people are chronically hungry and thousands of people die every day from treatable ailments.

Neenan’s solution is to “make people feel uncomfortable in their poverty” so that they’ll stop being so lazy; apparently the 45,000 Americans who die each year from lack of health insurance are too lazy to want to live. Fortunately, the vast majority of the U.S. public disagrees with Neenan, as the “credible facts and statistics” in my next column will amply demonstrate.

In sum, today’s faux-libertarians don’t actually believe in the ideas they claim to espouse. The only reason they enjoy so much influence is that their arguments serve the interests of private corporate power (and in fact, many of them are paid precisely to do so).

Though not the focus of this column, genuine free-market arguments are also deeply flawed on their own grounds: for example, 1) when some begin life with so much, and others with so little, “fairness” is a figment of the imagination; 2) unregulated free markets tend to increase inequality when capital and credit are scarce; 3) free market capitalism encourages the “externalization” of costs, for example through environmental degradation; and 4) fiscal conservatism in times of recession is a terrible strategy for generating economic growth, as numerous economists since Keynes have shown and as three devastating decades of global neoliberalism have confirmed. (Here readers might consult economist Robin Hahnel’s The ABCs of Political Economy). But Neenan and other faux-libertarians cannot even properly be labeled fiscal conservatives or free-marketeers since their arguments are so profoundly inconsistent.

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  • Z

    zorroNov 24, 2010 at 12:51 am

    @Kevin Young – you said that I’m being vague but you completely ignored the point. If you have $10 this week and I have $1, and next week you have $20 and I have $2, income inequality is greater than last week, but we’re both richer.

    Inequality statistics are misleading for this reason.

    All they say is how poor the poorest x% is relative to other groups. They don’t say who’s in those groups or net change in wealth over time… a much truer measure of income equality.

    As to your point about “freedom” I don’t see what it has to do with anything I said… Though you may be interested in reading about Hernando de Soto, and contrasting the influence of his pro-property rights reforms in Peru to anti-freedom movements (there, I said it) in Venezuela. It’s hard to imagine anyone would prefer Venezuela.

    It is interesting, indeed, how governments can trample on private property rights when it suits them – making a system of checks and balances extremely important for a working government that allows its citizens an equal opportunity for economic decision making.

  • E

    erusNov 24, 2010 at 12:34 am

    Venezuela is doing a great job at reducing inequality? You’re really drinking the liberal coolaid

  • K

    Kevin YoungOct 24, 2010 at 8:41 pm

    I’m not going to get into a pointless back-and-forth with these two clowns, but I simply can’t ignore these distortions:

    1) The statement that hunger, poverty, or inequality tend to decline with greater economic and political freedoms is deeply misleading, for several reasons. First, anyone who had read my article carefully would realize that the two commentators above have a very superficial, selective, and self-serving definition of “freedom.” Second, even by standard libertarian arguments, the US today can hardly be said to be genuinely “free”—at least not for the great majority; again, a basic point of my article. And third, the trend of rising inequality here and around the world since ca. 1980 is simply not open to debate—it’s an empirically verifiable fact, and one grudgingly acknowledged even by the World Bank and other neoliberal institutions. While there is no necessary correlation between “freedoms” and the level of poverty or inequality, it’s also a fact that many countries vilified by the US as “unfree” (e.g., Venezuela, Cuba) have made great strides—far greater than the US, and even more impressive given their Third World status—in reducing inequality and poverty, even if they’re not perfect.

    2) The second comment sets up a false dichotomy between a US-style system and “a dictatorship” or “central planner.” Not only does it conflate political authoritarianism with centralized planning, as most Western propagandists do, but it also implies that there are only two options for economic and political development. Neither of these options is very desirable, in my mind, but propagandists have long tried to convince us that “there is no alternative” to greed and corporate domination, other than a Soviet-style tyranny.

    3) The second comment also misquotes and distorts my passage on Smith—a remarkable feat since all it required was a simple cut-and-paste. And if the author had actually read Adam Smith carefully (as opposed to just reading the oft-quoted “invisible hand” part), he/she would know that Smith anticipated a rough level of equality resulting from capitalism, as I originally stated. I don’t see what’s “dishonest” about this characterization. Of course, Smith was writing almost 250 years ago, so his arguments aren’t necessarily applicable in the era of modern, global corporate capitalism, but I point all this out just to underscore the shameless hypocrisy and/or ignorance of those on the Right who invoke his name.

    4) On the question of military spending, what “zordon” labels “just another error” of mine: It’s blatantly false that social welfare programs constitute the majority of the national budget. When economists do these calculations, it’s standard practice to separate discretionary spending from trust funds, like Social Security, to which this person is presumably referring. It’s true that Soc. Security is a huge fund, but it’s not technically an “expenditure” in the same sense that military spending or actual welfare programs are, b/c it’s a totally separate and mostly self-sustaining trust fund. Military spending—a category which includes not just the 20-25 percent of the annual budget formally allocated, but also hidden costs like the US nuclear program and the ADDITIONAL 25% or so that PAST military expenditures and wars annually cost the country (e.g., in the form of service on the national debt, which was largely incurred in the 1980s b/c of military spending and tax cuts for the rich). Total military spending is routinely in the range of about 50 or so percent of total US spending, not counting trusts and other separate funds. It’s also routinely about half of the global total. Again, basic facts that are not open to dispute. To any doubters, I recommend undertaking some more detailed research beyond just consulting Wikipedia.

    5) Interesting that “zorro” brings up the topic of property rights, presumably implying that the US has traditionally guaranteed perfect “freedom” and security in this regard. In fact, countries like the US and UK historically ignored intellectual property rights when it was convenient for them to do so (see Chang’s “Bad Samaritans,” cited in my article), and have also trampled on the “property rights” of many ordinary people (the most glaring examples being black slavery and the genocide against Native Americans, but there are many others, including US-funded repression, forced land displacement, etc., in the Third World) in their quest for economic prosperity.

    I think that reading these two comments by “zordon” and “zorro” actually killed some brain cells—drinking varnish would probably improve my intelligence more—but hopefully my comments are still lucid enough to be understood by other readers.

  • Z

    zordonOct 22, 2010 at 12:15 am

    There’s a glaring error in here (good job editors!)

    While any good libertarian should be against such huge military expenditure, saying that 50% of the current national budget is military is complete bullocks!

    Mandatory spending (ie – Social welfare programs) is the solid majority of the national budget. Defense is a large part, but not even close to 50%.

    Just another error found in this article.

  • Z

    zorroOct 22, 2010 at 12:03 am

    “Whereas the richest one percent received 10 percent of all income in 1979, in 2007 they got 23 percent.”

    I think you are being intentionally misleading or vague here.

    Yes, the rich are richer today than they were in 1979, but the poor are also richer than they were (though admittedly less so than the rich) Also, the “rich” includes people (and their children) who were poor in 1979. Income disparity is a problem in this country but don’t misrepresent the problem.

    You are also being dishonest here:

    “And Smith believed that free markets would ultimately lead to social and economic equality—where 1 percent of the world owns 40 percent of all wealth, where over 900 million people are chronically hungry and thousands of people die every day from treatable ailments.”

    Smith’s idea of the invisible hand is more subtle than this: it’s that market processes work as if being guided by an invisible hand towards a general trend of improving life. Ironically, the places in the world that experience the most hunger and poverty are the areas with the least economic (and political) freedoms. Poverty is more common in areas where corrupt gov’ts aren’t defending property rights. It shouldn’t surprise you that people are agreeable about taking risks and making money for themselves when corruption and rent-seekers don’t stand in their way. The USA is very good at this.

    In your criticism of free-market economy (which you mis-define, by the way – you have said nothing about property rights) you miss the point that, while free markets are not perfect, its still miles better than any other coherent economic system out there… (try moving to a dictatorship and see what life is like under a unified central planner).