E.J. Dionne has a column today arguing that the ideology of the free-market has failed. The column actually shows how deeply the ideology had taken hold and how deeply it is still held even by those who think they oppose it. For example, at one point the column asserts: "free trade produces well-distributed economic growth, and any dissent from this orthodoxy is 'protectionism.'" What? Where on earth did Dionne get this idea and what does it have to with U.S. trade policy? Trade theory (as in the standard neo-classical theory that gets taught in graduate programs) holds that trade will produce winners and losers. In principle, the winners should gain more than the losers lose, but that is not the same as "well-distributed economic growth." Furthermore, trade policy has not pursued "free" trade. If the Washington Post brought in a group of highly qualified people from India, who were prepared to work as reporters and columnists for half the pay of the current crew, its managers would risk fines and imprisonment (unless they lied about their motives). Trade policy has been about subjecting less-educated workers to competition with low-paid workers in the developing world. More highly educated workers, like Mr. Dionne, are still largely protected. Similarly, the ability of CEOs to get huge paychecks, even when they run their companies into the ground, has nothing to do with the free market. It is due to rules of corporate governance that allow top management to pillage the companies for their own ends. The government sets the rules of corporate governance, that is due to the fact that corporations are legal entities -- they are creations of government. The rules in principle are supposed to protect shareholders from abuse by insiders, but they clearly no longer serve that purpose. But this is not a failure of a free market. The current situation is not the free market.The current situation is one in which the government has rules that allow insiders to rip off shareholders. (Think of all the Wall Street firms where top executives pocketing tens or hundreds of millions of dollars based on what turned out to be non-existent profits.) There is a long list of policies that were designed to redistribute income upward that have been pushed in the last few decades as "free market" policies. These policies did not serve the bulk of the population precisely because this was not their design. The fact that income flowed upward over this period was not an accidental outcome of the market, it was the purpose of the policies. It's unfortunate that Mr. Dionne still fails to recognize this fact. (Of course knowledgeable people know all about this because they have read The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.)
--Dean Baker
