How Free is the Free Market?

by Noam Chomsky

Noam Chomsky has been called "the most important intellectual alive today." He is a Professor of Linguistics at MIT and author of countless books, including Necessary Illusions, Year 501: The Conquest Continues, and The Fateful Triangle. This article has been reproduced in many places.

The free market is socialism for the rich: the public pays the costs and the rich get the benefit — markets for the poor and plenty of state protection for the rich.

There's a conventional doctrine about the era we're entering and the promise that it's supposed to afford. In brief, the story is that the good guys won the Cold War and they're firmly in the saddle. There may be some rough terrain ahead, but nothing that they can't handle. They ride off into the sunset, leading the way to a bright future, based on the ideals that they've always cherished: democracy, free markets and human rights.

In the real world, however, human rights, democracy and free markets are all under serious attack in many countries, including the leading industrial societies. Power is increasingly concentrated in unaccountable institutions. The rich and the powerful are no more willing to submit themselves to market discipline or popular pressures than they ever have been in the past.

Let's begin with human rights, because it's the easiest place to start: they're actually codified in the Universal Declaration of Human Rights, passed unanimously by the United Nations General Assembly in December, 1948. In the United States there's a good deal of very impressive rhetoric about how we stand for the principle of the universality of the Universal Declaration, and how we defend the principle against backward, Third World peoples who plead cultural relativism.

All this reached a crescendo about a year ago, at the Vienna Conference. But the rhetoric is rarely besmirched by any reference to what the Universal Declaration actually says. Article 25, for example, states: "Everyone has the right to a standard of living adequate for the health and well-being of himself and his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood."

How are these principles upheld in the richest country in the world, with absolutely unparalleled advantages and no excuses for not completely satisfying them? The US has the worst record on poverty in the industrialized world — a poverty level which is twice as high as England's. Tens of millions of people are hungry every night, including millions of children who are suffering from disease and malnutrition. In New York City 40% of children live below the poverty line, deprived of minimal conditions that offer some hope of escape from misery and destitution and violence.

Let's turn to Article 23. It states: "Everyone has a right to work under just and favourable conditions." The ILO has just published a report estimating the level of global unemployment — understood to mean the position of not having enough work for subsistence — in January 1994 at about 30%. That, it says accurately, is a crisis worse than that in the 1930s. It is, moreover, just one part of a general worldwide human rights catastrophe. UNESCO estimates that about 500,000 children die every year from debt repayment alone. Debt repayment means that commercial banks made bad loans to their favourite dictators, and those loans are now being paid by the poor, who have absolutely nothing to do with it, and of course by the taxpayers in the wealthy countries, because the debts are socialized. That's under the system of socialism for the rich that we call free enterprise. Nobody expects the banks to have to pay for the bad loans: that's your job and my job.

Meanwhile, the World Health Organisation estimates that 11 million children die every year from easily treatable diseases. WHO's head calls it a silent genocide: it could be stopped for pennies a day.

In the US, of course, there is currently a recovery. But it's remarkably sluggish, with less than a third of the job growth of the previous six recoveries. Furthermore, of the jobs that are being created, an enormous proportion more than a quarter in 1992Łare temporary jobs and most are not in the productive part of the economy. Economists welcome this vast increase in temporary jobs as an "improvement in the flexibility of labour markets". No matter that it means that when you go to sleep at night you don't know if you're going to have work the next morning it's good for profits, not people, which means that it's good for the economy in the technical sense.

Another aspect of the recovery is that people are working longer for less money. The workload is continuing to increase, while wages are continuing to decline which is unprecedented for a recovery. US wages as measured by labour costs per unit output are now the lowest in the industrial world, except for Britain. In 1991 the US even went below England, although England caught up and regained first place in the competition to crush poor and working people. Having been the highest in the world in 1985 (as one might expect in the world's richest country), US labour costs are today 60% lower than Germany's and 20% lower than Italy's. The Wall Street Journal called this turnaround "a welcome development of transcendent importance". It is usually claimed that these welcome developments just result from market forces, like laws of nature, and the usual factors are identified, such as international trade and automation. To put it kindly, that's a bit misleading: neither trade nor automation has much to do with market forces.

Take trade. One well-known fact about trade is that it's highly subsidized with huge market-distorting factors, which I don't think anybody's ever tried to measure. The most obvious is that every form of transport is highly subsidized, whether it's maritime, aeronautical, or roads or rail. Since trade naturally requires transport, the costs of transport enter into the calculation of the efficiency of trade. But there are huge subsidies to reduce the costs of transport, through manipulation of energy costs and all sorts of market-distorting fashion. If anybody wanted to measure this, it would be quite a job.

Take the US Pentagon, a huge affair. A very substantial part of the Pentagon is intervention forces directed at the Middle East, across the whole panoply of intimidation devices to make sure nobody gets in the way if the US tries to intervene. And a large part of the purpose of that is to keep oil prices within a certain range. Not too low, because the US and British oil companies have to make plenty of profit, and these countries also have to earn profits which they can then send back to their masters in London and New York. So, not too low. But also not too high, because you want to keep trade efficient. I'm not even mentioning so-called externalities, like pollution and so on. If the real costs of trade were calculated, the apparent efficiency of trade would certainly drop substantially. Nobody knows how much.

Furthermore, what's called trade isn't trade in any serious sense of the term. Much of what's called trade is just internal transactions, inside a big corporation. More than half of US exports to Mexico don't even enter the Mexican market. They're just transferred by one branch of General Motors to another branch, because you can get much cheaper labour if you happen to cross a border, and you don't have to worry about pollution. But that's not trade in any sensible sense of the term, any more than if you move a can of beans from one shelf to another of a grocery store. It just happens to cross an international border, but it's not trade. In fact, by now it's estimated that40% of what's called world trade is internal to corporations. That means centrally-managed transactions run by a very visible hand with major market distortions of all kinds, sometimes called a system of corporate mercantilism, which is fairly accurate.

GATT and NAFTA just increase these tendencies, hence harming markets in incalculable ways. And if we proceed, we find that the alleged efficiencies of trade are to a large extent an ideological construction. They don't have any substantive meaning. With automation, for instance, there's no doubt that it puts people out of work. But the fact of the matter is that automation is so inefficient that it had to be developed in the state sector for decades meaning the US military system. And the kind of automation that was developed in the state sector at huge public cost and enormous market distortion was a very special kind. It was designed in order to de-skill workers and to enhance managerial power. This has nothing to do with economic efficiency; it's to do with power relations.

There have been a number of academic and management-affirmed studies which have shown over and over that automation is introduced by managers, even when it increases costs when it's inefficient just for power reasons.

Take containerization. It was developed by the US Navy — that is, by the state sector in the economy — masking market distortions. In general, invocation of market forces, as if they were laws of nature, has a large element of fraud associated with it. It's a kind of ideological warfare. In the post Second World War period, this includes just about everything; electronics, computers, biotechnology and pharmaceuticals, for instance, were all initiated and maintained by enormous state subsidies and intervention — otherwise they would not exist. Computers, for example in the 1950s, before they were marketable were virtually 100% supported by the taxpayer. About 85% of all electronics was state-supported in the 1980s. The idea is that the public is supposed to pay the cost. If anything comes out of it, you hand it over to the corporations. It's called free enterprise!

All of this quite sharply increased under the Reagan administration. The state share of GNP rose to new heights in the first couple of years of the Reagan administration. And they were proud of it. To the public they had all kinds of free-market talk, but when they were talking to the business community, they talked differently. So James Baker, when he was Secretary of the Treasury, announced with great pride to a business convention, that the Reagan administration had offered more protection to US manufacturers than any of the preceding post-war administrations, which was true, but he was being too modest; it actually offered more protection than all of them combined.

One of the reasons why Clinton had unusual corporate support for a Democrat is that he planned to go even beyond that level of market distortion and market interference, for the benefit of domestic-based capital. His Secretary of Treasury, Lloyd Bentsen, was quoted in the Wall Street Journal as saying, "I'm tired of this level playing field business. We want to tilt the playing field in favour of US industry." Meanwhile, there's a lot of very passionate rhetoric about free markets but, of course, that's free markets for the poor, at home and abroad.

The fact is that people's lives are being destroyed on an enormous scale through unemployment alone. Meanwhile, everywhere you turn you find work that these people would be delighted to do if they had a chance. Work that would be highly beneficial both for them and their communities. But here you have to be a little careful. It would be beneficial to people, but it would be harmful to the economy, in the technical sense. And that's a very important distinction to learn. All of this is a brief way of saying that the economic system is a catastrophic failure. There's a huge amount of needed work. There's an enormous number of idle hands of suffering people, but the economic system is simply incapable of bringing them together. Now of course this catastrophic failure is hailed as a grand success. And indeed it is for a narrow sector of privileged; profits are skyrocketing. The economy is working just fine for some people, and they happen to be the ones who write the articles, and give the speeches, so it all sounds great in the intellectual culture.

Looking at these major tendencies, especially in the past twenty years, one crucial event was Richard Nixon's demolition of the Bretton Woods system in the early 1970s. That was the post-war system for regulating international currencies, with the US serving as a kind of international banker. He dismantled that with a lot of consequences.

One effect of the deregulation of currencies was a huge increase of capital and financial markets. The World Bank estimated it at about 14 trillion dollars, which totally swamps government. And the amount of capital that's being transferred daily is increasing. It's probably now about a trillion dollars a day [this article was written in 1997], again swamping government.

In addition to a huge increase in the amount of unregulated capital, there's also a very radical change in its composition. John Eatwell, an economist at Cambridge, and a specialist on finance, pointed out recently that in 1970 — before Nixon dismantled the system — about 90% of the capital used in financial transactions, internationally, was for long-term investment trade and10% for speculation. Now figures have reversed. It's 90% for speculation, and about 10% for investment and trade. Eatwell suggested that that may be a big factor in the considerable decline in growth rates since this happened in 1970.

The USA is the richest country in the world and it can't carry out even minimal economic planning because of the impact of speculative, unregulated capital. For a Third World country the situation is hopeless. There's no such thing as economic planning. Indeed the new GATT agreements are designed to undercut those possibilities by extending the so-called liberalization, and what they call services meaning that big Western banks the Japanese, British and American banks can displace the banks in smaller countries, eliminating any possibility of domestic national planning.

The accelerating shift from a national to a global economy has the effect of increasing polarization across countries, between rich and poor countries, but also, even more sharply, within the countries. It also has the effect of undermining functioning democracy. We're moving to a situation in which capital is highly mobile, and labour is immobile, and becoming more immobile. It means that it's possible to shift production to low- wage, high repression areas, with low environmental standards. It also makes it very easy to play off one immobile, national labour force against another.

During the NAFTA debate in the United States just about everybody agreed that the effect of NAFTA would be to lower wages in the United States for what are called unskilled workers, which means about 70% or 75% of the workforce. In fact, to lower wages you don't have to move manufacturing, you just have to be able to threaten to do it. The threat alone is enough to lower wages and increase temporary employment.

Consider the matter of democracy. Power is shifting into the hands of huge transnational corporations. That means away from parliamentary institutions. Furthermore, there's a structure of governance that's coalescing around these transnational corporations. This is not unlike the developments of the last couple of hundred years, when national states more or less coalesced around growing national economies. Now you've got a transnational economy, you're getting a transnational state, not surprisingly. The Financial Times described this as a de facto world government, including the World Bank and the IMF, and GATT, now the World Trade Organisation, the G7 Executive, and so on. Transnational bodies remove power from parliamentary institutions. It's important to keep the technocrats insulated — that's World Bank lingo; you want to make sure you have technocratic insulation. The Economist magazine describes how it's important to keep policy insulated from politics.

Power is drifting not only to corporations but into the structures around them — all of them completely unaccountable. The corporation itself has got a stricter hierarchy than exists in any human institution. That's a sure form of totalitarianism and unaccountability, the economic equivalent of fascism which is exactly why corporations are so strongly opposed by classical liberals.

Thomas Jefferson, for example, who lived just about long enough to see the early development of the corporate system, warned in his last years that what he called banking institutions, money and corporations would simply destroy liberty and would restore absolutism, eliminating the victories of the American Revolution.

Adam Smith was also concerned about their potential power, particularly if they were going to be granted the rights of "immortal persons".

The end of the Cold War accelerates all this. The Financial Times, for example, had an article called "Green shoots in communism's ruins"; one of the good things it saw going on was that the pauperization of the workforce and a high level of unemployment were offering new ways to undercut "pampered Western European workers" with their "luxurious lifestyles".

A British industrialist explained in the Wall Street Journal that when workers see jobs disappearing it has a salutary effect on people's attitudes. This was part of an article praising the Thatcher reforms for bringing about a low-wage, low-skill economy in England with great labour flexibility, and wonderful profits. Take General Motors, already the biggest employer in Mexico. It is now moving into Eastern Europe but in a very special way. When General Motors set up a plant in Poland they insisted upon high tariff protection; similarly, when Volkswagen sets up a plant in the Czech Republic it insists on tariff protection and also externalization of costs. They want the Czech people and the Czech Republic to pay the costs; they just want the profit and they get it. That's the tradition: markets for the poor and plenty of state protection for the rich.

The biggest test is Poland. A country where multinational corporations can get people who are well-trained and well-educated and they'll have blue eyes and blond hair unlike in the Third World, and they'll work for 10% of your wages, with no benefits, because of the effectiveness of capitalist reforms in pauperizing the populations and in increasing unemployment.

That in fact tells us something about what the Cold War was about. We learn a lot about what it was about just by asking a simple question: who's cheering and who's despairing? If we take the East, who's cheering? The old Communist Party hierarchy is; they think it's wonderful. They are now working for international capitalism. What about the population? Well, they lost the Cold War, they're in despair, despite their victory over the Soviet experiment.

What about the West? There's a lot of cheering from corporations and banks and management firms about the experts who were sent to Eastern Europe to clinch a friendly takeover, as the Wall Street Journal put it, but ran away with all the aid, it turns out. Very little of the aid got there; instead it went into the pockets of the Western experts and management firms.

The workers in General Motors and Volkswagen lost the Cold War because now the end of the Cold War just gives another weapon to undermine their "luxurious lifestyles".

These misnamed free-trade agreements, GATT and NAFTA, carry that process forwards. They are not freetrade agreements but investor rights agreements and they are designed to carry forward the attack on democracy. If you look at them closely, you realize they are a complicated mixture of liberalization and protectionism carefully crafted in the interests of the transnational corporations. So, for example, GATT excludes subsidies except for one kind: military expenditures.

Military expenditures are a huge welfare system for the rich and an enormous form of government subsidy that distort markets and trade. Military expenditures are staying very high: under Clinton they're higher in real terms than they were under Nixon and they are expected to go up. That is a system of market interference and benefits for the wealthy.

Another central part of the GATT agreement, and NAFTA, is what are called "intellectual property rights" which is protectionism: protection for ownership of knowledge and technology. They want to make sure that the technology of the future is monopolized by huge and generally government-subsidized private corporations. GATT includes an important extension of patents to include product patents; this means that if someone designs a new technique for producing a drug, they can't do it because they violate the patent. The product patents reduce economic efficiency and cut back technical innovation. France, for example, had product patents about a century ago and that was a reason why it lost a large part of its chemical industry to Switzerland, which didn't, and therefore could innovate.

It means that a country like India, where there is a big pharmaceutical industry which has been able to keep drug costs very low simply by designing smarter processes for producing things, cannot do that any longer.

Right after his NAFTA triumph Clinton went off to the Asia Pacific summit in Seattle where he proclaimed his "grand vision" of the free-market future. Corporations to emulate were the Boeing Corporation, for example, and in fact he gave a speech about the grand vision in a hangar of the Boeing Corporation. That was a perfect choice, as Boeing is an almost totally subsidized corporation. In fact, the aeronautical industry the leading export industry in the 1930s couldn't survive, and then the war came along and it made a huge amount of money, but it was understood right after the Second World War that they were not going to survive in the market. If you read Fortune magazine, it would explain how the aeronautical industry can't survive in the market. The public has to come in and subsidize them, and in fact the aircraft industry, which includes avionics and electronics and complicated metallurgy, is simply subsidized through the Pentagon and NASA. This is the model for the free-market future. The profits are privatized and that's what counts. It's socialism for the rich: the public pays the costs and the rich get the profits. That's what the free market is in practice.