Free Markets and Free Trade: Two Dangerous Illusions

      Let me begin with four examples, across three centuries. In 1760 American spermaceti candle manufacturers faced a serious problem. Well off consumers flocked to their product but the supply of raw material for the candles –the head matter from whales- was in short supply. If one manufacturer bid against another, the result would be a bidding war, raising the price of the raw material and the candles as well. To fend off this pre-capitalist disaster, manufacturers conspired to fix the market. As Eric Jay Dolan explains in Leviathan, on November 5, 1761, America’s eight largest candle manufacturers formally created an oligarchy, “The United Company of Spermaceti Chandlers”. They established a “maximum price” they would pay for head matter; they threatened to field a fleet of their own vessels if the sellers did not comply, and, in an early manifestation of “doublespeak”, they promised “to use all fair and honorable means to stop any potential rivals from building new candle works.” The last thing this “free” market needed was more competitors, so the existing manufacturers made certain that no one was able to buy the machinery needed to launch a new business. Before it even appeared, competition was crushed as efficiently as the monopolized screw presses that compressed whale head matter.

   Move into the early twentieth century and the electric light bulb cartel. General Electric and Westinghouse began to fix prices in the late 1890’s. In the real world, it was easy for Goliath to crush David, but if one Goliath fought another, the result could be a tie, or, even worse, two bodies on the ground. Setting prices guaranteed a stable, fixed market, but, as with the candle makers, the threat of additional competition was more than this market could bear. So, General Electric and Westinghouse made deals with Corning Glass and with the machine tool industry. This was the effective ultimatum offered by General Electric and Westinghouse. Sell glass to anyone else and we will go into the glass business and crush you. Sell machines to anyone else and we will go into the machine tool business and crush you. If I remember the figures rightly, as late as 1929, Westinghouse agreed to a roughly fifteen percent share of the light bulb market; and they also agreed to pay a penalty to General Electric for any sales over their allotted share of the American light bulb market.

     Here are two contemporary examples. As Gabor Steingart notes in The War for Wealth, in 2006 China passed a law that “pressures the Western auto  industry to outsource all of its production to China” The law mandates that anyone who “assembles more than sixty percent of a vehicle outside China is slapped with a 25% punitive tariff on parts they import to China.”

   The Chinese want to protect their own and they are not shy about doing so. Meanwhile, in the United States we hypocritically applaud ourselves for championing free markets and free trade. As Joseph Stiglitz’s stresses in Making Globalization Work, we bragged about opening our markets to 97% of the goods produced by the least developed countries. Bangladesh was free to send us as many jet engines as they could; however, when it came to the 3% of the market that actually mattered to countries like Bangladesh –i.e., textiles and apparel – the U.S. did its best to make sure that the “free” markets excluded the Bangladeshi products that threatened U.S. manufacturers.

      Here are my conclusions:

·         In the realm of commodities with serious economic import, free markets are as rare as an atheist in the Mormon Tabernacle Choir. Markets are more or less free; but to talk about free markets as if they were the rule is to embrace the absurd.

·         Controlling markets in capitalism is normal, and so are oligarchies or cartels like OPEC. Too much competition can be ruinous so it is perfectly rational –I did not say ethical or just- to try and control markets by fixing prices or eliminating the competition before it even appears.

·         Given the flat world possibilities of globalization, the inescapable exposure of one capitalist to the competitive efforts of another is greater than ever. Thus, the likelihood of corporations conspiring to fix prices, limit supply or influence public policy is greater than ever. In the United States, casino owners recently imitated the candle makers in 1761. In the name of eliminating immoral or addictive activity, they pressured Congress to bar credit card payments on all Internet gambling. This legislation effectively stymied the online competition that was reducing the profits of fixed site casinos from Connecticut to California.

       As long as we believe in the reality of free markets and free trade, the government is to keep its hands off business enterprises. However, once you admit that markets, through time, have imperfections as big as a sperm whale, somebody or something has to come to the rescue. Paraphrasing James K. Galbraith in The Predator State the government must assume a crucial role in at least policing markets because, as the casino and other lobbyists prove, private enterprise is inextricably linked to public policy. Otherwise the lobbyists would not be in Washington actually writing the laws that give them the competitive advantages that mock the ideals of free markets and free trade.

     Given the systemic need of capitalists to control markets, I would have the government involved in far more than police work. However, we can only have a reality based debate about the proper role of government once we face two facts: One, free markets and free trade are illusions. And, two, the language of free markets and trade is far too often a smokescreen for hypocrisy and the basest forms of self rather than public interest. When the British controlled Egypt in the nineteenth century, they waved the banner of free trade to impose countervailing tariffs, not on imports from Britain, but on the products of Egyptian industries. Very quickly, in the name of free trade, they wiped out the Egyptian tobacco industry.

    In the same time frame, the United States did very similar things to the tobacco industry in its Puerto Rican colony. This is perverse and we will continue to encounter this type of perversity until we accept, once and for all, that free markets and free trade are social constructs that smell like a load of buffalo chips.