Reich vs Reality: Free Markets Work Best

Robert Reich recently asserted that “free markets” aren't neutral or free, are actually shaped by those who wield power. Reich believes that government powers have been subverted by private interests- this part of his analysis is actually true in many cases. Reich hopes for some sort of miracle whereby countervailing government powers will work in the public interest to suppress greedy monopolists- this part of his analysis is delusional and dangerous¹.

Reich ignores the reality that governmental involvement in the economy of each nation varies. Some countries, like North Korea, have government run economies. Other nations, like Taiwan and Ireland, have far less governmental involvement in their economies. Scholars in several think tanks have estimated the degree of economic freedom in each nation’s economy. What have they found? The chart below one of many measures of how freedom correlates with the level of prosperity.

Why do government run economies perform so badly? The establishment of a large government in any nation creates opportunities for special interests to subvert these powers to their own ends. Special interest groups have inherent advantages over broader interests. Narrow interests organize more easily than do broader groups. Narrow interest groups can agree on a plan of action more easily than can broader interests. Narrow interest groups coordinate their actions more easily than can broader interests. Special interests will thus always win against broader interests. Interest groups in nations with large governments use resources to transfer wealth, rather than investing these resources to create more wealth².

Robert Reich’s dream of a large government operating as a countervailing power against narrow private interests will never become reality. On the contrary, history teaches us that privatization and deregulation is the only feasible path prosperity.

1. Jonathan Newman also responds to Reich here.

2. Reich points out that corporate spending on US politics has risen in the past few decades. Reich seems unaware of the fact that economic freedom in the US has declined over the past few decades. Increased governmental regulation in spending has attracted corporate money and lobbying.