Tuesday, August 18, 2009

BOOK REVIEW

Apart from the endorsements listed below, the following book review by Southern Utah University Associate Professor of Economics, Dr. David Berri, provides insight into what you can expect from my book. This review was originally published in the Kern Economic Journal (Vol. 11, No. 1), which you can access here.

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THE MYTH OF THE FREE MARKET: THE ROLE OF THE STATE IN A CAPITALIST ECONOMY
BY MARK A. MARTINEZ / KUMARIAN PRESS, 2 0 0 9
REVIEWED BY DR. DAVID BERRI, ASSOCIATE PROFESSOR OF ECONOMICS, SOUTHERN UTAH UNIVERSITY

M
uch has been said about how our current crisis is the “worst since the Great Depression.” Although our present economic problems certainly fall far short of what was experienced 80 years ago, much can be learned about how we view the current crisis by looking back at the 1930s.

At that time there were those who argued against employing market capitalism as the organizing principle for a nation’s economy. After all, while the market based economies of the United States and Europe experienced horrendous rates of unemployment, the centrally planned system utilized by the Soviet Union provided full employment to its citizens. Furthermore, the Soviet Union’s economy was actually growing in the 1930s. Into this debate stepped Friedrich Hayek. In the “Road to Serfdom”, Hayek demonstrated why a centrally planned system was doomed to failure. Hayek’s arguments in favor of capitalism were further echoed in the writings of Milton Friedman, whose work eventually inspired the “Reagan Revolution” in American politics. It was Ronald Reagan who argued “government is not the solution to our problem; government is the problem.” The choice Reagan presented was as follows: Either one could choose to solve problems via the free market. Or one could follow the example laid forth by communists and rely on the government. Given such a choice, the former is clearly preferred.

Within years of the “Reagan Revolution”, the Soviet Union collapsed. Furthermore, most other centrally planned economies have turned to capitalism and the free market system. All of this suggests that Hayek, Friedman, and Reagan were correct. Free markets – not government – should always rule the day.

The choice between government and markets, though, is a false choice. In “The Myth of the Free Market”, Mark Martinez argues convincingly that one cannot have market capitalism without government intervention. In fact, much of what we take for granted about capitalism was created and supported by government policies.

And when government fails to perform its proper function, the free market system itself fails to function.

Martinez begins his argument with the story with a Montana rancher named Lynn Cornwell. Cornwell came to Washington in 2000 to argue that the estate tax needed to be repealed. After all, a family should not lose both a family member and the family business at the same time. What Cornwell failed to note in his argument was that (a) there are no examples of a family farm being lost to the estate tax and (b) Cornwell had received more than $400,000 in federal subsidies to support his farm. In other words, Cornwell was opposed to government intervention when it might harm his interests. But he was more than willing to support government intervention when the invisible hand of self-interest led him to that conclusion.

The Cornwell story is not an isolated case. As Martinez notes “the self-interest and greed” that Adam Smith embraced in the market do not magically check itself at the gates of the state. Rather, the “laws of justice” (the shifting of resources from one party to another) that Smith spoke about are broken so consistently that we cannot simply shrug and chalk it up to market aberrations.” He goes on to add, “…market players – as the Lynn Cornwell case illustrates – often view the state as another vehicle to pursue their ends.”

It is important to note – as Martinez emphasizes – that Cornwell’s behavior is not some isolated incident. And this behavior is not something that has only manifested itself recently. The strength of Martinez’s argument lies in his frequent appeal to historical evidence in making his case.

Throughout this book Martinez makes reference to the historical figures and events that have shaped the capitalism observed today. Along the way we meet Genghis Kahn, William of Orange, Alexander Hamilton, Thomas Jefferson, James Madison, Michel Chevalier, and many others. In addition, Martinez references the writings of Adam Smith, Jeremy Bentham, Thorstein Veblen, John Kenneth Galbraith, and of course, Hayek and Freidman. The historical foundations of this book allow one to clearly see the role the state has played in the development of modern capitalism.

Returning to the 1930s, much has been made of the fact that Friedman’s study of the Great Depression concludes with the argument that this crisis was caused by a failure of government policy. According to Freidman, a simple recession became an economic catastrophe when the federal government allowed 33 percent of all banks to fail in the United States. It is important to note, though, that Freidman was not calling for less government intervention. No, Freidman actually believed that the Great Depression could have been averted by more aggressive government action. Specifically, Friedman himself believed the government should have done more to save the banks and expand the money supply.

Over time, though, this aspect of Freidman’s argument was lost. All that remained was the willingness to blame the government. This focus on blaming the government for societal problems led to a call for de-regulation in the 1980s. And this in turn led to the market excesses of the last twenty years.

Once again, we find ourselves in the same position seen eight decades ago. This time, though, decision-makers are actually following the original advice of Friedman. Banks are being bailed out and the money supply is being expanded. In addition, we are following the advice of John Maynard Keynes and employing government spending to return the economy to full employment.

In sum, the effects of our current crisis are being mitigated by the interventions of the state. As we learn from “The Myth of the Free Market”, the state has often played such a role. Furthermore – as Martinez forcefully argues – capitalism does not function well when government fails in its function.

One suspects that despite the current state of the economy, true believers in the “Reagan Revolution” will persist in their belief that “government is the problem.” For these people especially I recommend “The Myth of the Free Market.” Mark Martinez – via clear writing and a wealth of historical evidence – clearly demonstrates that the market mechanism without government intervention does not produce the outcomes society desires. Recent events do nothing but confirm this hypothesis. Now read this book and see why government can indeed be a solution to our problems.


In addition to teaching economics and his other academic related activities Dr. Berri is the co-author of Stumbling On Wins: Two Economists Expose the Pitfalls on the Road to Victory in Professional Sports and Wages of Wins: Taking Meassure of the Many Myths in Modern Sports, and numerous other academic articles. He also hosts his own website, The Wages of Wins Journal.

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