How America Fell in Love with the Power of the Free Market
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The Big Myth is the remarkable, and largely untold, story of how America fell in love with market fundamentalism.
To appreciate the power of this ethos, look back no further than the recent pandemic.
Such was the degree of distrust of government during the COVID-19 pandemic that patients near death in South Dakota hospitals told nurses they were lying about their diagnosis.
This cynicism came at a horrific cost. In nations such as South Korea, Germany, and New Zealand, where the government response to the pandemic was far more vigorous and obtrusive than in the U.S, but where trust in government was higher, death rates were 40% lower than in the U.S.; a recent study comparing the American and Australian responses suggested that as many as 90% of deaths in the U.S. were unnecessary. Nor is this all; work by David Cutler, perhaps the nation’s foremost healthcare economist, estimated the pandemic losses to the U.S. economy at $16 trillion, to say nothing of the human cost of a million missing grandparents, parents, and children.
Just where did this mistrust come from? Those of a certain age might date its origin to Ronald Reagan’s 1981 inaugural address, where he famously asserted that “In this present crisis, government is not the solution to our problem; government is the problem.”
Reagan was of course half right: Even in nations with robust institutional checks on government overreach, poorly designed regulations can damage economies and individual liberties. But even the most dyed-in-the-wool libertarian has to wonder just where our economy, and our liberties, would be without the Erie Canal, transcontinental railway, rural electrification, interstate highway system, public universities, GPS, and internet, to name but a few government programs.
It turns out that this mistrust predated Reagan’s famous speech by more than a century, a history described in The Big Myth, a dense, sprawling, and meticulously researched book by historians Naomi Oreskes and Erik Conway.
Their previous effort, Merchants of Doubt, focused on how the tobacco and oil companies sowed disbelief about the obvious and overwhelming harm caused by those two industries. Oreskes and Conway initially chalked up these public relations efforts to narrow financial self-interest, but slowly came to recognize that the leadership of these two industries sincerely believed in the unalloyed good of a free market economy, unsullied by dangerous and corrupt government interference. Just where did this belief come from?
Oreskes and Conway date the origins of this mistrust to the opposition of factory owners to child labor legislation. In 1918, Supreme Court justice Oliver Wendell Holmes Jr. wrote in a dissenting opinion against the ruling that struck down the 1916 Keating-Owen Child Labor Act that “If there is any matter upon which civilized countries have agreed – it is the evil of premature and excessive child labor.”
Holmes was wrong, since at the time not everyone shared his disgust at child labor. Now, more than a century later, the modern citizen pigeonholes the high court’s 1916 failure to protect children alongside the judgments that upheld slavery and Jim Crow. Sadly, the early twentieth century court was in tune with its time, and particularly in tune with religious leaders who saw child labor laws as an affront to the freedom of parents to send children as young as six to the factory floor, and with businessmen angry at the assault on their freedom to hire whom they saw fit. As long ago as 1838, factory owners in Pennsylvania worried that state child labor legislation would make their businesses uncompetitive with those in other states.
The National Association of Manufacturers (NAM), founded in 1895, took the lead in the battle against not only child labor legislation, but against unionization and the workplace safety regulations that followed the catastrophic 1911 Shirtwaist fire that killed 146 workers trapped behind locked doors. The NAM asserted that child labor legislation constituted nothing more and nothing less than a government power grab that, in its words, operated under “the guise of protecting childhood.”
Nor were American manufacturers the only group threatened by creeping progressivism. When the nascent electric power industry looked north, it did not like what it saw. The government-run Ontario Hydro-Electric Power Commission, founded in 1906, provided Canadian citizens with electricity more widely, and at lower cost, than that supplied by the supposed genius of the American free market system (as would, a generation later, the Tennessee Valley Authority).
The power industry’s version of the NAM, the National Electric-Light Association (NELA), swung into action, conveying the message that “initiative free from the deadening influence both of bureaucracy and of socialistic experiment” was the sole source of American prosperity and liberty. Although they failed to stop Muscle Shoals and Hoover Dam projects, they succeeded in blocking public power projects elsewhere, such as Giant Power, the brainchild of Pennsylvania’s conservationist governor Gifford Pinchot.
American industrialists came to understand that their effort to preserve their free-market prerogatives required an intellectual counterweight to the seductive Marxist/socialist narrative of the era. They succeeded beyond their wildest expectations through their championship of four dramatis personae: Friedrich von Hayek, Ludwig von Mises, Milton Friedman, and Ronald Reagan.
Oreskes and Conway point out the obvious irony of the libertarian elevation of two Austrian economists while, at the same time, railing against the “foreign” ideology of socialism. More substantively, their meticulous research exposes the seamy underside of the Austrians’ rise to fame, which ran through the Foundation for Economic Education, the propaganda arm of wealthy industrialists such as Harold Luhnow, Henry Ford II, Charles Kettering, William Scripps, and J. Howard Pew.
Mises was an intolerant, fascist-leaning absolutist who, far from being a champion of personal liberty, helped stage manage chancellor Engelbert Dollfuss’s destruction of Austrian democracy. American economists ridiculed his writings for its rigidity, indigestible prose, and lack of empirical data.
After Mises fled Europe, his career in the U.S. would have languished had he not caught the eye of Henry Hazlitt, the conservative financial editor of the New York Evening Mail and later editorialist at The New York Times. Hazlitt arranged for Mises’s appointment at NYU, and when the university refused to renew his contract, industrialist Harold Luhnow’s propaganda arm, the Foundation for Economic Education, underwrote his lifelong NYU sinecure.
Hayek’s intellectual talents outshone Mises’s; one of the The Big Myth’s few serious omissions is the lack of mention of Hayek’s seminal contribution to economic theory, The Use of Knowledge in Society, his almost lyrical description of the genius of the price mechanism. American conservatives also fell in love with what became his most famous work, The Road to Serfdom. Published in 1944, it crystallized the by then well-established trope that economic and civil liberty were inextricably joined – what Oreskes and Conway call “the indivisibility thesis.” Any threat to economic freedom was a challenge to civil liberties, and vice versa. That meant, for example, child-labor laws would damage economic interests.
While the modern reader can pardon belief in the indivisibility thesis from Hayek’s 1944 perspective on a world at the brink of domination by Hitler and Stalin, the thesis does not survive the postwar reality of European and east Asian developed nations whose civil liberties and democratic health appear to be, if anything, better than that of the current American version. (Even more persuasive is the obverse case of Chile, whose post-Allende economy was actually designed by Friedman’s “Chicago boys,” and yet whose government perpetrated a steady stream of atrocities, including helicopter-borne death squads, the chopping off of poets’ hands, and a Washington DC car-bomb assassination.)
But even the formidable Hayek had the NAM/FEE financial wind at his back. As with Mises, an NAM-linked group paid for Hayek’s emigration to the U.S. and arranged for his appointment at the University of Chicago. More importantly, although Serfdom initially sold reasonably well among educated elites, it did not catch fire until it caught the eye of Reader’s Digest’s editor in chief DeWitt Wallace, a staunch opponent of the New Deal. The Digest’s nine-million circulation sent its condensation of Serfdom viral, and the NAM-FEE axis printed millions more copies as free school pamphlets. The Digest’s dumbed-down 20-page version mainly extracted the original’s most indivisibility-thesis oriented passages and scare-mongered readers by mentioning Nazi Germany far more than its real target, Stalin’s Russia.
In truth, today’s non-ideological reader of the original version of Serfdom will find it remarkably even-handed and nuanced. Chapter 9, for example, describes with warm approval the necessity of a generous social-safety net, up to and including government-run flood insurance. The next time someone quotes Hayek’s famous book to you, mention this chapter; a blank look is the tipoff that they read, at most, the Reader’s Digest version. (The Big Myth’s only humorous moment is a quote from none other than Tucker Carlson, who observed that “You read Hayek . . . and you think you’re a libertarian and you’ve got the world figured out as a kind of seamless theory of everything. Next thing you know, you’re arguing to privatize the sidewalks.”)
Among the Reader’s Digest version’s most enthusiastic readers was an actor named Ronald Reagan, whose political evolution from the liberal president of the Screen Actors Guild to conservative icon Oreskes and Conway describe with compelling narrative panache. Contrary to the popular conception, Reagan’s political rise had little to do with his acting fame, which was on the skids by the late 1950s.
Reagan’s stroke of great luck was that at that time General Electric had, along with Westinghouse and numerous other smaller firms, found itself in hot water after a devastating series of price-fixing prosecutions – the Great Electrical Price Fixing Conspiracy of 1956–1959 – that resulted in both massive civil judgments and criminal convictions.
GE’s response to this public relations disaster was the Reagan-hosted General Electric Theater, a high-concept drama series which consistently, though subtly, pushed the indivisibility thesis. More importantly, the company sent Reagan around the country to GE factories and schools as its anti-antitrust, anti-union emissary.
In his later political career, after its launch by GE Theater, Reagan told of discussions with students and workers who were upset by high taxes and government interference in their lives, a message he rode to political power.
Really? Factory workers, and especially students, many on government scholarships at state-funded colleges, angry at high taxes and oppressive government? No great cynicism is required to suspect that these were more likely the concerns of the GE executives who signed Reagan’s paychecks. (Reagan’s proclivity to ideologically driven confabulation became more plainly visible after his later assertions about Cadillac-driving welfare queens and of trees that polluted more than fossil fuels.)
The past few decades have not been kind to the indivisibility thesis. Only the most extreme libertarians, for example, will deny the role of government in bank regulation as clearly spelled out by Adam Smith himself in Book II, Chapter II of The Wealth of Nations. One by one, many of the most prominent, serious free-market enthusiasts have dropped their belief in the connection between economic and individual liberty. In 2008, during the global financial crisis, the towering conservative legal scholar Richard Posner published A Failure of Capitalism, in which he coyly observed that “a rational decision maker starts with a prior probability but adjusts that probability as new evidence comes to his attention.” (In a remarkable omission, Oreskes and Conway missed the congressional testimony of Ayn Rand’s most famous acolyte, Alan Greenspan, in which he admitted a slight “mistake” in believing that banks operating in their own self-interest would protect themselves and the rest of us.)
Oreskes and Conway are not economists, and occasionally, as described above it, shows. But, overall, their command of the economic literature impressed this reviewer. The book will no doubt anger many devout free-market believers. But if they are intellectually honest enough to expose themselves to an opposing viewpoint, The Big Myth should be it.
William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and four volumes of history, The Birth of Plenty, A Splendid Exchange, Masters of the Word, and The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from the CFA Institute.
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