Free Markets Vs Capitalism

I learned not everyone defines capitalism and free markets the same. I discovered this while writing a blog, freefreemarkets.com, since the economic meltdown of 2008. For me they are the same, markets operating under the model defined in Adam Smith’s book in 1776 called Wealth of Nations. For others the two concepts are different.

Society selects an economic model based on its objectives, an economic model does not select a society to best meet its goals. I recently got into a fun debate with a young lady attending Harvard where I was defending free markets while saying one the greatest impediments to free markets meeting the needs to society was our government being derelict in its role as the “umpire” to free markets. My debate opponent kept coming back to me and saying by definition a free market does not have a regulator and set of rules to follow and therefore such markets are not bound by the objectives of society.

At the end of the day, both of us did agree that no matter how we defined it, there must be some regulation overseeing societies economic system in order for that society to succeed. A major reason  for the historically high inequality of income and worth in our society today is that our government is failing in its role as referee to our economic system. More and more our economic system is being run like a NFL football game with amateur referees.

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Income Fairness or Tax Fairness

There is much debate about whether the tax rates should be kept low or raised. This is the wrong debate. Instead we should be deliberating whether we need to reform our economic system. If our markets were free of oligopolistic control we would have a wider distribution of income and income taxes with the result of more tax revenue going to the government with lower rates.


The republicans speak with pride how the free market system is the best economic model for increasing the living standards of the nation and the citizens of the country. They resolutely  proclaim that government needs to cut back on regulation and allow the free market to work. This is hard to argue against.

Below is a chart comparing tax rates and percent of taxes collected in 1979 to what Congress passed during the “Fiscal Cliff” crisis. As a result of these changes 99.3% of households will not experience any changes in their income taxes. The top 20% will be paying 68% of the federal taxes collected, compared to 55% in 1979.

I do not understand why most free market advocates are not up in arms over industries being taken over and controlled by a small group of firms. 

The founder of the concept of free markets said:

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”, Adam Smith, The Wealth of Nations, 1776

The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist who is quoted most often when conservatives are praising free markets and capitalism.

“But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire.These then are the basic role of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game.”

For whatever reason, this part of  Dr. Friedman’s philosophy is never mentioned when it comes to making “free markets” work.
Lack of freedom in the markets corrupts markets. It makes them inefficient. This lack of freedom causes prices to rise, less innovation, egregious salaries at the top and skewed income distribution, less competitiveness in markets and last but not least, consolidation of political power.
This is a major part of the income equality problem that is seldom discussed.

Romney "Guarding" Free Markets

How can Mitt Romney be the protector of free markets and small business when he will be indebted to the cronies who are destroying free markets?

On July 19, 2012 the Financial Times reported Paul Ryan saying,

“Both political parties have fallen victim to “partnership” with large and well-connected companies, especially in energy, housing, finance and healthcare. Republicans have been guilty of confusing our pro-market principles with pro-entrenched business policies…. A growing coalition of reformers … reject this pernicious crony capitalism. Our solutions promote an opportunity society, one that is rooted in the US commitment to free enterprise.”

Based on the source of their campaign funds, how is the Republican ticket going to say no to those filling their coffers?

“Republicans rule among these mega-donors. In total, mega-donors have now given $229.9 million to super PACs out of a total of $337.8 million contributed through July. Of that, $166.9 million came from just 79 Republican mega-donors. Democratic mega-donors, of which there are 42, have given $57.2 million. Another three donors have given $5.7 million to nonpartisan super PACs.

These donations have helped the two top GOP super PACs — Restore Our Future and American Crossroads — spend in excess of $18 million to help the Romney-Ryan ticket in July and August.

…Sheldon Adelson, the Las Vegas casino magnate, and his family have combined to give $37.75 million to super PACs in the 2012 election cycle. At first, Adelson pumped money into Winning Our Future, the super PAC supporting Newt Gingrich, but now he is funding groups backing Mitt Romney and congressional Republicans. Adelson is ranked on the Forbes list of the richest Americans at number eight, with $21.5 billion in net worth.”  Super PAC Contributions Top $300 Million, Most Goes To GOP Groups, Huntington Post, August 22, 2012

We must demand government carry out its function of protecting free markets from tyranny, both public and private. Romney is vocal in defending markets from public tyranny, but silent when it comes to tyranny from the private sector.

“Experience should teach us to be most on guard to protect liberty when the government’s purposes are beneficial. Men born to freedom are naturally alert to repel invasion of liberty by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.” Justice Louis Brandeis 1928

A private sector without umpires, and controlled by oligopolies, got us into this mess with sub prime lending. The umpire, the government, was bought with campaign contributions from oligopolies.

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.’ (Adam Smith, The Wealth of Nations, 1776).

In today’s market, the major goal of oligopolies is to pursue their self-interest of keeping the oligopoly alive. This goal is not in congruence with the citizens of this country. Why are we not demanding the enforcement of anti-trust laws? This country seems to be transforming into an Oligarch from a Republic and the defenders of free markets are doing nothing about it.

The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist quoted most often when conservatives are praising free markets and capitalism.

“…But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire. These then are the basic roles of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game.”

I have concluded that our “conservative” politicians ignore private tyranny because they enjoy the large campaign bribes provided to them by these oligopolies. What is the excuse for the rest of us? Why do we allow it and not speak up about the injustice?

Large Banks do Not Work

The quote below sounds like it was written by a lobbyist for the banking industry.

“A bit of recent history: none of the institutions that toppled like dominoes in 2008 — the investment banks Bear Stearns and Lehman Brothers, the mortgage-finance giants Fannie Mae and Freddie Mac, the insurance company American International Group — were commercial banks.” Regulate, Don’t Split up Large Banks, New York Times, July 31, 2012

That is because they were bailed out and not prosecuted for their wrong doing. Further, and maybe more importantly, they are oligopolies that hinder competition and take advantage of their control of the industry. The five largest banks in the country have more assets than the GDP of our nation. With that kind of size and power, it is naïve to think they cannot effect the price and quality of services and interest rates offered to the public. It allows them to be less efficient than if they had to compete in a free market.

Another result of free markets would be salaries of the top executives and board members would be lower because of the need to keep costs down to fight off competition.

The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist who is quoted most often when conservatives are praising free markets and capitalism.

“But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire. These then are the basic roles of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game.”

The best regulator of free markets is free markets. If they are working properly, competition will require the bank be managed efficiently, the best products offered to the consumer, at the lowest price possible. The industry, like all industries, needs a referee. This is especially true in banking since they hold our money and have a huge effect on the total economy if they fail. This is the role of government; make sure that all banks are playing by the rules when they are competing against others in the industry.
Regulators cannot keep pace with free market entrepreneurs and technology. Other entrepreneurs can. You are giving regulators too much credit if you think they can stay ahead of the industry. New regulation tends to be created after the fact; after the cat is out of the bag.

Yes, everyone missed the housing bubble coming, except maybe Goldman Sachs, and guess what; we will also miss the next one. The market is always ahead of regulators. The Glass-Steagall Act should be updated and banks should not be allowed to be too big to fail. More

Visible Hand of Government

Somehow over the last 30 years our economic system, capitalism, has lost its way. Most citizens believe a free market means government should have no control how the private sector operates. This is contrary to the teaching of the founder of capitalism, Adam Smith, and one of its biggest advocates, Milton Friedman.

” Capital cannot be expected to be self-policing. To prevent it from mortgaging humanity’s future, governments must reject laissez-faire attitudes. The “visible hand” of government is needed to manage the markets, revamp regulatory systems and bridle reckless behavior. Governments should encourage businesses to invest in the “real” economy — to promote technological innovation and job creation rather than speculation and profiteering.” Rebalancing the Global Economy, New York Times, Li Congjun, July 17, 2012


Li Congjun is the president of Xinhua News Agency, the official press agency of the People’s Republic of China. Too many, the above statement sounds like something said by a communist; however, some of what he is saying is not too different than what the founder of capitalism said over 200 years ago.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.” Adam Smith, The Wealth of Nations, 1776.


Adam Smith’s quote is reinforced by the economist quoted most often when conservatives are praising free markets and capitalism.

“But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire. These then are the basic roles of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game.” Capitalism and Freedom, Milton and Rose Friedman

The difference in our two countries philosophies shows up when Mr. Li Congjun says,

“Governments should encourage businesses to invest in the “real” economy — to promote technological innovation and job creation rather than speculation and profiteering.”

We believe the free market is better at determining the wants and needs of society. If a company produces something the market does not want it will fail. This does not mean that participants in a market should be allowed to destroy all of its competitors and gain oligarchical control of its’ industry. This would destroy the free market our society believes in. This is what is occurring and must be corrected. More