The University of Chicago has long been the center of opposition to government economic intervention and support for the claim that free markets best serve general interests. It is a surprise to find Bernard E. Harcourt—professor of law and political science at the University of Chicago—challenging neo-conservative market extremism.
In The Illusion of Free Markets: Punishment and the Myth of Natural Order, Harcourt holds that markets will be regulated by governments or by the rich on behalf of themselves. Few markets are actually unregulated. He goes on to make the case that markets directed by dominant players in their private interest result not in greater freedom but in heavier repression.
Harcourt begins by examining the Chicago Board of Trade and the New York Stock Exchange. These exchanges are widely viewed as epitomes of the free market, but they are actually self-regulated private monopolies protected by legislation. Their rules are made by member firms and policed by internal committees that determine the methods and time of trading as well as who may participate. As should be expected, the rules favor those who make them.
The Chicago Board of Trade forbids outsiders from engaging in after-hours trading. However, the insiders who control the Board, when they agree among themselves, can modify the rules, giving themselves opportunities for exceptionally profitable trades. The Chicago Board of Trade and the New York Stock Exchange allow brokerage firms to restrict retail buyers (outsiders) from reselling for periods of thirty to ninety days. “But the same brokerage firms may allow large institutions to dump their stock in the after-market at any time.” In New York, “members of the stock exchange may get together and fix the commission rates on stock transactions of less than $500,000,” but they can “freely negotiate commissions for larger stock transactions”—which they dominate.
In Chicago, when parties are in dispute, the Board’s Office of Investigation and Audits may investigate. Where its decisions are challenged, the Commodity Futures Trading Commission may get involved. If disputes are unresolved, the U.S. Attorney’s office can initiate civil or criminal actions. The point is that these “free markets” are minutely regulated, first by the dominant insiders and then by civil and criminal law.
Stock exchanges are not exceptions. Markets from the local to the global are dominated by firms with the largest market share, who typically have privileged access to supplies, technologies, marketing networks, and credit.
It is no revelation to point out that when a few are allowed to make the rules, they will direct markets in their own interests. Nonetheless, in mainstream opinion it is now taken for granted that markets regulated by dominant players are preferable to government regulation. This was not always so.
Before the rise of industrial capitalism, industries were self-regulated—by Guilds that were usually dominated by wealthy merchants. Seeing this, political thinkers from the Scholastics to the Enlightenment generally held that governments had a responsibility to intervene to curb speculation, price gouging, and hoarding, to keep the prices of necessities low, to police the quality of goods and services, and to maintain public hygiene.
Mainstream economists now teach that support for free markets can be traced back to Adam Smith in the late eighteenth century and Jeremy Bentham in the early nineteenth. Harcourt notes that Smith and Bentham did view self-interest in the market as generally beneficial, but he points out both also wrote of circumstances in which government intervention was clearly required to curb the self-interested power of great merchants and masters.
Harcourt also questions the prevailing view that the late nineteenth century was a time of laissez faire policies. While industrial production did expand dramatically, governments played critical roles in the accumulation of capitalist wealth. To expand their countries’ shares of global trade, governments organized and financed shipyards and railway construction. They spent lavishly on navies and armies and colonial wars. Each empire restricted access to captive markets through imperial preferences and tariff walls.
However, the claim that control of markets should be left to the rich has an historical precedent. Harcourt draws our attention to France before the 1789 revolution and the Physiocrats—so called because they advocated rule by natural laws. Most economic histories now dismiss Physiocrats for having insisted that land alone is the source of exchange value. In France in their time, that was not so controversial: land still was the main source of great wealth. In their time, what distinguished the Physiocrats was the claim that private property and unregulated markets were in accord with laws of nature and that the role of government was to vigorously repress criminal acts against this natural order.
Physiocrats held that absolute monarchy, by placing government in the hands of the largest landowners, was the natural form of government. Leading Physiocrats—Francois Quesnay, Samuel Du Pont de Nemours, and Le Mercier de la Riviere—were prominent in the Court of Louis XV. For them it was natural to oppose government restriction on profit-making. They likewise viewed it as natural to advocate repressive policing and onerous penalties for thieves, the idle, the disorderly and anyone else who could interfere with their natural order. Le Mercier, as governor of Martinique—then one of the wealthiest French slave colonies—gained notoriety for his heavy-handed policing which even plantation owners came to believe was provoking disorder among the slave population.
Although slavery, landed aristocracies, and absolute monarchies have largely passed into history, the ideology of natural order, freedom for the rich and powerful, and repression for the dispossessed and disaffected still resonates with the very rich and their supporters. That is at the root of the current neo-conservative reaction.
Beginning in the 1940s, University of Chicago economists Milton Friedman and Friedrich Hayek, began campaigning to replace liberal-social democratic welfare state policies with old ruling class verities. By the 1970s, they had a powerful constituency: the super-rich. Long hostile to Keynesian policies, and frustrated that domestic profit-making opportunities were decreasing, the wealthy heirs of great family fortunes were smitten by arguments that economic rewards and decisions are best left to the very rich. By the early 1980s, the policies promoted by Chicago School economists and generously financed by corporations and the foundations of wealthy families were adopted by the newly elected conservative governments of Margaret Thatcher in the U.K., Ronald Reagan in the U.S., and Brian Mulroney in Canada.
By the late 1980s a Washington Consensus called for the deregulation of markets, cuts to the taxes paid by corporations and the wealthy, privatization of public utilities and cuts to social services. Although some of the advocates of unregulated markets call themselves libertarians, the widening disparities that followed anti-Keynesian policies were accompanied by more repressive state power.
Freeing the rich to do as they choose in the markets they dominate, obviously allows them to appropriate more of total income. Among the masses, some may benefit from a trickle down. Of those who are left with less income and employment, some will find comfort in knowing that at least a few have gained more wealth than they can imagine. Others will go on strike, organize boycotts, or participate in unauthorized protests. A few will engage in petty criminality. In countries that have been impoverished, some may lash out with any weapons available. In response or in anticipation, the privileged will demand more aggressive policing, more onerous criminal sanctions and more punitive military actions abroad.
Neo-conservatives view repressive violence as a required response to domestic and international criminality. Harcourt makes the case that crime rates are actually related to entitlements, employment opportunities, and income disparities. For him, this is not purely academic. Earlier in his career, he had practiced law in Birmingham, Alabama, representing prisoners facing capital punishment. He continues to act pro bono as an attorney for prisoners on death row. In his 2001 book, The Illusion of Order: The False Promise of Broken-windows Policing, Harcourt had made the case that more aggressive policing had no significant impact on crime rates in New York. These, however, are closely related to changing social conditions.