On October 23, 2008, former Federal Reserve chairman Alan Greenspan testified before Congress that the current financial crisis was a consequence of the free market. His testimony marked the culmination of a narrative that had been developing since the start of the crisis.
Decades of “deregulation” and a “hands-off” approach to the financial industry, we are told, have unleashed Wall Street greed. The free market has proved itself incapable of policing the financial sector—a fact so obvious that even Greenspan, the alleged arch-defender of capitalism, could not deny it.
By and large, the public finds the narrative compelling. After all, most people today regard it as self-evident that the free-market economic system is responsible for a whole host of other problems and crises, such as the accounting scandals of 2002–03, the recent (and past) energy price spikes, and our ailing health-care system.
And, so the story goes, if the free market is the cause of these problems, then the solution is obvious: The government must intervene in the market. Thus the accounting scandals brought us Sarbanes-Oxley; the high price of oil and gas led to calls to shackle “speculators” (just as the energy crisis in the 1970s spawned the CAFE fleet mileage standards); the health-care crisis is paving the way for a complete government takeover of medicine; and the financial crisis has so far given us a cascade of bailouts, nationalizations, and stimulus schemes.
But all of this anti–free-market demagoguery is based on a myth. The free market could not have been the source of any of these problems because, whatever you wish to call America’s economy post World War I, you cannot call it a free market.
To be sure, today’s economy does have significant elements of freedom. Americans can own private property, choose their jobs, select from a smorgasbord of goods. Entrepreneurs can start businesses, hire and fire workers with relative ease, reap virtually unlimited rewards if successful. But the fact that our economy falls short of a socialist dictatorship does not make it a free market. America today is a mixed economy—a market that retains some elements of freedom but is subject to pervasive, entrenched, and expanding government control.
The actual meaning of “free market,” which advocates of government intervention seldom state openly, is: the economic system of laissez-faire capitalism. Under capitalism, the government’s sole purpose is to protect the individual’s rights to life, liberty, property, and the pursuit of happiness from violation by force or fraud. This means a government limited to three basic functions: the military, the police, and the court system. In a truly free market, there is no income tax, no alphabet agencies regulating every—or any—aspect of the economy, no handouts or business subsidies, no Federal Reserve. The government plays no more role in the economic lives of its citizens than it does in their sex lives. It does not impose on them the “will of God” or the “will of Society.” It simply protects their rights. . . .