The Myth of the Free Market

Muscular regulation is often required to ensure genuine competition – but all too often, the political right has a knee-jerk reaction against regulation, and the political left has a knee-jerk reaction against competition. 

– Richard V. Reeves, Brookings Brief, 10/2/2019

Midway through President Barack Obama’s first term, as numbing news of multibillion dollar boondoggles, scandals and swindles dominated the  headlines, the times were ripe for a critical re-examination of the basic principles underlying capitalism.  Republicans and libertarians routinely attribute the economic and technological achievements of the United States and the Western Europe to the workings of the “free market”.   Do the facts or logic support that claim?  The result was a piece I published in the fall of 2011 entitled “The Myth of the Free Market”.*  At the time I did not imagine that Donald Trump, a man whose success in business and politics is based on a myth, would be our next president.

With our image in the world badly tarnished, the country deeply divided, and foreign policy in a shambles, the mythmaker-in-chief is now impeached and facing a trial in the U.S. Senate.  It’s time to take another look at the myth at the core of American capitalism.


In the wake of the worst banking crisis since the Great Depression and in the throes of a prolonged recession brought on by rogue financial institutions operating outside a regulatory system supposedly designed to prevent the very kind of reckless behavior and profiteering that led to the current doldrums, here is a short list of myths perpetrated by the corporate greed-is-good culture – myths that taken together add up to The Big Lie that is destroying the American economy, the middle class, and the good character of a once-great country.

Let’s begin with an axiom the US Chamber of Commerce, Wall Street, Koch Industries, Inc., Goldman Sachs, JPMorgan Chase and Company, and Bain Capital, to name but a few, would all wholeheartedly endorse:  state interference (“regulation”) is inimical to economic growth, job creation, and prosperity.  And this corollary:  a free Market is the best and only way to achieve the greatest good for the greatest number.

Myth #1: There is no such thing as a free market, never has been, never will be. All markets are regulated, but some markets are regulated in the interest of the many and others in the interest of the few. The American economy is now clearly and indisputably regulated by the few and for the few who now control the wealth of the nation.

Proof: The top 20% own all but about 15% of the privately held money and assets in this country. The top 10% of taxpayers owns roughly 72% of the wealth and over 90% of the stocks, bonds, and mutual funds. Between 1981 and 2005, federal taxes on business declined 43 percent. Corporate income taxes accounted for about one-quarter of federal revenues in 1950; today, corporations contribute a mere 6% to the Treasury.

Myth #2: Market economies are hardly a guarantee of peace. The United States boasts by far the world’s largest military establishment. Much of the money spent in the name of national security and war waging goes to private corporations through hundreds of thousands of procurement contracts (around 400,000). For FY2002 through FY2008, nearly half of all federal expenditures went to eight federal departments and agencies involved in national and homeland security – including the servicing of war-incurred debt.

Proof: The US is still enmeshed in two protracted wars we initiated (Afghanistan and Iraq). Not counting the intelligence services and “black budget”, the US accounts for 43-45% of total world military expenditures every year. According to the prestigious Stockholm International Peace Research Institute (SIPRI), the United States accounted for $19.6 billion of the $20.6 billion global increase in military spending in 2010 – fully 96% of the total. The “military-industrial complex” has corporate and defense tentacles reaching into virtually every political constituency. DOD alone maintains nearly 5,500 bases and military sites in the U.S. and around the world

Myth #3: Market economies are based on competition and therefore guarantee efficiency and prosperity.

Proof: At least 95 percent of the national debt is war-related. The Defense Department absorbs 25-30 percent of the federal budget, depending what is counted and who’s doing the counting. Two-thirds (68 percent) of all federal government civil and military employees are involved in national security and war related activities. If you add the $100 billion or more for the two wars we are still fighting, the $80 billion for the intelligence budget, and various other defense-related expenditures, that figure is actually much higher – roughly one-half the entire federal budget for the period 2002-2008.

Myth #4: The Constitution prescribes that corporations are no different from natural persons, with the same right to freedom of speech and expression as you and me, which means, among other things, that Chevron and Walmart can spend as much money as they please to manipulate public opinion and influence the outcome of elections.

Proof: The Constitution says nothing about corporations, much less does it declare ad absurdum that corporations are people. Not until 1886 in the case of Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394, did the Supreme Court make this astonishing discovery. Never mind that it’s preposterous to equate natural persons and corporations: the die was cast.   The 1886 precedent-setting decision –not the Constitution  –  is the sledgehammer the Supreme Court has used to smash all federal legislation aimed at limiting corporate campaign spending to bits.  The most recent example Citizens United decision, is also the most lethal for democracy because it puts Congress and the presidency on the auction block.


No democracy is immune from manipulation by the few—at present, in the form of right-wing populism.  During the Cold War the fear of subversion focused on Communism and the danger from below.  When the Cold War ended, the fear of subversion all but disappeared only to be replaced by state-sponsored terrorism after 9-ll.  Interference in free elections by states with advanced cyber warfare capabilities is now a bigger problem for Western democracies than the Soviet Union’s extensive but often clumsy efforts at disinformation, infiltration, and subversion ever were.

The extreme costs of political campaigns combined with the extreme inequality in wealth means that a very few individuals who control vast amounts of money can make or break virtually any candidate for high office, including incumbents. If you don’t believe me, ask former Senator Russ Feingold of Wisconsin – a latter-day Solon who tried to reform our disastrous campaign finance laws and was defeated in 2010 by Ron Johnson, a business executive and prominent member of America’s entrenched plutocracy, who poured eight million dollars of his own money into winning a Senate seat.

Before the 2016 election, it was difficult to imagine a populist pretender, a demagogue with a gift for manipulating the very people he and his corrupt circle of high-rolling titans and boot-licking toadies exploit, in the Oval Office.  Today, no imagination is necessary—the nightmare is a reality.


Conclusion: A vibrant market economy will not be long-lived or “sustainable” in the absence of smart regulation designed to accomplish two primary aims – wealth creation and social justice. In the pursuit of wealth and justice, it is the role of the state to balance these two aims.

Regulation is not the enemy of incentive, invention, or innovation. Nor is it incompatible with progress, profits, or personal gain.  In a properly ordered republic, business makes the money and the government makes the rules. If the federal government persists in allowing oil companies, investment banks, and front groups for billionaires to make the rules free of public scrutiny and transparency, the very competition so vital to a market economy will be ever more constricted and joblessness will become chronic rather than “cyclical”, as companies cut jobs here at home, replace workers with robots, and go abroad in search of cheap labor, lax labor laws, and tariff-free access to fast-growing markets in Asia and elsewhere.

Meanwhile, a dysfunctional Washington dithers, the rich get richer, the middle class gets poorer, the poor lose hope, elections are a sham, and the American Dream dies a slow but certain death.

*The original appeared at Open Salon in October 2011 where it became an Editor’s Pick.  This updated article is adapted from the original.  

Thomas Magstadt is the author of five books, including a college textbook (Understanding Politics, 12th edition) and a book on American foreign policy (An Empire If You Can Keep It: Power and Principle in American Foreign Policy).  Magstadt was a  Fulbright scholar (Czech Republic); former CIA foreign intelligence analyst; and taught national security and comparative politics courses at the U.S. Air War College.