Ending the Myth of 'Market Fundamentalism'
By Dean Baker, CEPR
--This article was originally published in the Spring
2010 issue of Dissent Magazine
Progressives have wailed against "market fundamentalism"
for the last quarter-century. They complain that
conservatives want to eliminate the government and leave
everything to the market. This is nonsense.
The Right has every bit as much interest in government
involvement in the economy as progressives. The
difference is that conservatives want the government to
intervene in ways that redistribute income upward. The
other difference is that the Right is smart enough to
hide its interventions, implying that the structures
that redistribute income upward are just the natural
working of the market. Progressives help the Right's
cause when we accuse them of being "market
fundamentalists," effectively implying that the
conservatives' structuring of the economy is its natural
This is not just a question of framing; although the
framing is important. Economic outcomes that appear to
be the result of the natural workings of the market will
always sound more appealing than the machinations of
government bureaucrats, especially in the political
culture of the
interventions as nothing more than the free market left
to itself, then we place progressive policies at an
enormous political disadvantage.
But the confusion that this misguided war against market
fundamentalism creates in designing policy is even more
serious than the political damage. Progressives have no
reason to look to government to reverse market outcomes.
Rather, like our conservative opponents, we should look
for ways in which we can structure market rules so that
markets have better outcomes from a progressive
The most obvious recent government intervention to
redistribute income upward has been the bailout of the
financial industry. Faced with complete collapse in the
fall of 2008, Goldman Sachs, Citigroup, Morgan Stanley
and the rest did not yell that they wanted the
government to leave them alone. No, these financial
behemoths insisted that the government lend them money
at below-market interest rates and guarantee their
assets. Firms like Goldman Sachs even insisted that the
government make good on the debts of bankrupt business
partners, such as AIG.
Deregulation also increases profitability and has
nothing to do with the free market. In other words, the
financial industry wants the government to provide
"insurance" through the Federal Reserve Board, the
Federal Deposit Insurance Corporation and various ad hoc
channels, but it doesn't want to pay for it. It also
doesn't want the insurance to come with any
restrictions. In effect, the financial industry wants to
run an explosives factory out of its home and pay only
the standard residential insurance premium. That's not
the free market.
The demands of the financial industry on government are
not qualitatively different from what other sectors get
as a result of government interventions in structuring
the market. To take another example, the government
grants pharmaceutical companies patent monopolies that
allow them to mark up the price of prescription drugs by
several hundred percent or even several thousand percent
above what the same drugs would sell for in a
competitive market. As a result of patent protection,
many drugs sell for hundreds or even thousands of
dollars per prescription. By contrast, if all drugs were
sold as generics in a competitive market, the
overwhelming majority could be bought for $4 or $5 per
Patent monopolies do serve an important economic
function-they provide an incentive for researching new
drugs-but they clearly are not the only way to finance
research. The government spends more than $30 billion a
year financing biomedical research through the National
Institutes of Health, an amount comparable to what the
industry spends on research. In principle, we could
replace the industry-funded research through direct,
publicly funded research. Or, as Nobel Prize-winning
economist Joe Stiglitz has suggested, research could be
carried on in its current manner, but new patents could
be bought out through a prize system. Under this system,
a committee would assess the value of new patents and
pay this amount to patent holders. This would allow the
drugs based on new patents to be sold as generics in a
We can debate whether these alternative mechanisms are
better for supporting prescription-drug research than
the patent system, but the patent system is clearly not
the free market, and it is not essential for financing
prescription drug research. The proponents of drug
patents cannot claim to support a free market.
There is real money at stake. The country spent $250
billion last year on prescription drugs. In a
competitive market, the cost likely would have been
closer to $25 billion. The difference of more than $200
billion swamps the size of the payments to such programs
as Food Stamps, the State Children's Health Insurance
Program (SCHIP) or Head Start.
Furthermore, the drain from this patent monopoly is
projected to grow rapidly through time. Prescription
drug spending is the most rapidly rising component of
health care costs. In 2019 the country is projected to
spend almost $500 billion on prescription drugs. Over
the course of the next decade, expenditures are
projected to exceed $3.5 trillion, implying excess
payments to the drug industry of more than $3 trillion,
more than three times as much as will be spent on the
health care reform proposed in Congress at this writing
in early winter.
A similar story can be told about copyrights. Bill Gates
is an incredibly rich man because the
gives him a monopoly on Windows, threatening to arrest
anyone who sells it or even gives it away without
Gates's permission. Without the monopoly created by
copyright protection anyone would be able to instantly
download Microsoft software anywhere in the world at no
cost. As with drug patents, copyrights serve an
important economic function. They provide an incentive
for creative and innovative work, like developing new
and better software or producing good movies and music,
but we already have alternative mechanisms for
supporting this work and can develop new ones.
Copyright monopolies lead to an enormous transfer of
income to software and entertainment companies.
Microsoft alone pockets more than $60 billion a year in
revenue, almost all of which would not be possible
without copyright protection. The industry association
claims that, taken together, copyright industries
accounted for 6.6 percent of GDP. This is more than one-
third of the tax revenue collected by the federal
I could list more mechanisms and beneficiaries, but the
point should be clear. The idea that a "free market" is
allowing some people to get incredibly rich and causing
other people to be poor or financially insecure is
nonsense. The distribution of income is determined by
government policies that favor some groups and work
against others. If progressives accept the structures
put in place by conservatives as the free market and
then look to use tax and transfer policy to redress the
inequities, we have given ourselves a hopeless task.
We must instead focus on altering the rules that
redistribute income upward. There are many different
ways to structure markets. We must be as opportunistic
and creative as the Right in finding rules that both
produce efficient outcomes and lead to better
distributions of income.
The health care bill illustrates the need for a
fundamentally different approach. It does a good job of
meeting the important goal of extending coverage to most
of the uninsured. However, it does very little to
address the problem of exploding cost growth. As a
result, we will have created a system that we know will
be unaffordable over the long run. The idea that we can
somehow pay for this system in future decades with
progressive taxes is absurd on its face. It will almost
certainly not be possible politically to raise taxes
high enough to cover public-sector health care costs. We
will eventually either have to ratchet back the extent
of coverage and/or the quality of care or impose
substantial taxes on the middle class.
The alternative route is to directly attack the
structure of the health care system that leads to such
bloated costs. In this context, it is important to
remember that we pay more than twice as much per person
for care as people in other wealthy countries. As any
number of studies have shown, the reason for higher
costs in the
greater volume of services but rather the higher cost of
the services that we get. This can be addressed by
changing the markets for these services.
Let's return to prescription drugs. The current system
leads to enormous inefficiencies from any perspective
and leaves us with absurd choices that would disappear
with a more rational system of financing prescription
Consider the situation of an 80-year-old woman, in
generally good health, who develops a form of cancer.
Suppose that the only treatment likely to be
successfully is a new, bioengineered drug that would
cost $250,000 a year. Should the government be willing
to pay this expense?
As our moral philosophers labor over this problem,
consider that the drug would probably cost $200 a year
in the absence of patent protection. That would be the
marginal cost of manufacturing and distributing the
drug. Although the drug company may have spent a huge
amount of money developing the drug, this is money out
the door. We have already paid the research cost
(ideally through one of the mechanisms discussed above.)
The relevant question is, what does it cost to produce
the next dose. In the world where the year's dosage
costs $200 we won't have to spend too much time debating
This is not the only problem with the patent system.
When the government intervenes to artificially inflate
prices, it creates unexpected perverse incentives. As a
result of the enormous profits on its drugs, the
pharmaceutical industry spends a fortune marketing them.
This causes them to court and even bribe doctors to get
them to prescribe drugs. It leads to expensive direct-
to-consumer marketing campaigns. It leads the industry
to buy politicians to ensure that Medicare, Medicaid and
other government programs pay for the drugs. And, it
gives the industry an enormous incentive to conceal
research results that call into question the
effectiveness and safety of its drugs.
Progressives should have been pushing these "free
market" arguments in discussing prescription drugs. The
amount of money at stake dwarfs the sums at issue with
either the "Cadillac" plan tax or the millionaires'
surtax in the health care plans approved by the Senate
and the House.
Similarly, we could use a little free trade in health
care. Trade policy has been quite explicitly designed to
place our manufacturing workers in direct competition
with low-paid workers in the developing world.
Progressives often point to the loss of manufacturing
jobs in the
for non-college educated workers as evidence that free
trade doesn't work. This is completely wrong. These
outcomes are exactly what the trade models predicted
would be the result of the trade policies that the
were any other outcome.
However, we can design "free trade" policies that
produce different outcomes. In the case of health care,
we can start by allowing Medicare beneficiaries to buy
into the health care systems of other wealthy countries.
Because health care costs are so much lower in
move to another country to receive their care, there
would be enormous savings that could be split between
did calculations showing that a few decades out the
projected savings would be tens of thousands per
beneficiary each year. This was even after allowing for
a substantial premium above costs to the receiving
country of treating elderly patients, to ensure that
they also benefited from the deal.
In fact, since these countries would be getting a
premium above their cost of care, this could be a major
source of growth for these countries. The fact is that
everyone has a huge comparative advantage in health care
relative to the
only survives because of the extraordinary protectionist
measures that restrict foreign competition. It is easy
to devise mechanisms through which foreign countries
could provide care for
to provide better care for their own populations. An
international Medicare voucher system could allow
retirees to enjoy a much higher standard of living than
would otherwise be the case, while at the same time
in Medicare costs over the long term. By reducing demand
for health care in the
to downward pressure on domestic medical costs more
There are other ways in which the government can promote
trade in medical services. For example, it can license
facilities in other countries to ensure high standards
and also standardize rules on legal liability to ensure
that people who go overseas for treatment can be assured
of reasonable legal redress in the case of malpractice.
Given the enormous gap in costs for health care services
high-quality facilities in places like
for treatment outside the country, if we created the
proper institutional structure.
Of course, it would be much better to reform the system
leave the country to get decent affordable care. But, if
we lack the political power to reform the domestic
system, as is obviously the case now, it is absurd to
hold patients here as hostages of a broken system. After
the forces of market competition have worked their
magic, we will be much better able to discuss reform
with the domestic health care industry.
It is far more productive to talk about ways to use
market mechanisms to fundamentally restructure the
health care system than to try to scrape together
nickels and dimes in tax revenue to pay to maintain a
broken health care system for a few more years. The same
approach can be applied to almost any social problems.
We can and should push for progressive taxation, but it
is even better to change the institutional structures
that lead to gross inequality.
CEOs in the
dollars a year because we have created a corporate
governance structure that allows top managers to plunder
the corporation for their own ends. This corporate
governance structure was created by the government, it
did not develop through the free market. No other
country allows for the same sort of plundering. Changing
the rules in ways that return control to shareholders is
not government interfering with the market; it is simply
repairing a dysfunctional system. Europe and
have dynamic capitalist economies, but they do not have
the huge executive compensation packages of the United
States. This is not due to legal restrictions on pay, it
is due to the fact that they have governance structures
that don't allow the top executives to pilfer the
corporations that they ostensibly work for.
In the same vein, although minimum wages and other
direct income supports for less-educated workers are
desirable, it is better to restructure markets in ways
that increase the relative demand for their services.
For example, we should insist that the Fed allow the
unemployment rate to fall to low levels, rather than
raise interest rates to choke off any possibility of
inflation. Former Federal Reserve chief Alan Greenspan
made this choice in the 90s (over the protest of Bill
Clinton's appointees to the Fed), allowing the first
sustained period of real wage growth for workers at the
middle and bottom of the wage distribution since the
60s. More union-friendly laws, such as serious civil or
even criminal penalties for employers who violate
workers' right to organize, would also help equalize the
distribution of income.
We can also apply some good free market principles to
highly paid professionals, such as doctors, lawyers and
economists. Easing professional and immigration
restrictions that largely protect the most highly
educated workers from international competition will
reduce pay for those in the top 1 percent to 2 percent
of the wage distribution and help to lower the cost of
everything from health care to a college education.
There is an endless list of policies that alter economic
rules to lead to more egalitarian outcomes.. The current
rules were not given to us by a deity or by nature, they
were written by the wealthy and powerful interest groups
who benefit from them.
These people are absolutely not free market
fundamentalists, nor are they opposed to a well-working
government. No one can mass market unauthorized versions
of Pfizer's latest drugs or Microsoft's new software.
Even under Republican administrations the government
would quickly arrest a large-scale violator of patent or
copyright law. The wealthy want and expect a government
that enforces the rules that protect their wealth and
power. They don't care about government social programs,
but that is because they don't depend on these programs.
No rich person died in Hurricane Katrina.
A serious long-term progressive agenda must move away
from a focus on tax-and-transfer policy and instead
concentrate on changing the rules that lead to
undesirable market outcomes. We must be as aggressive
and creative as the Right in designing new rules that
redistribute income downward rather than upward. And, we
must bury the concept of "free market fundamentalism."
There are no free market fundamentalists in this debate,
just conservatives who want to pretend that their rules
are the natural working of the market. Progressives
should not help them in this effort.