Why the “Free Market” Today Resembles Soviet-Style Communism

March 9, 2016

 A free market isn’t the same as “freedom.” In several blog posts, I’ve heavily criticized the conservative perspective that naively – and inaccurately – couples neoliberal economics with our broader concept of freedom.

 

Like economist Milton Friedman and his legion of followers, proponents of free markets argue that any governmental regulation that prevents a private enterprise from achieving its profit goals is a widespread and unlawful attack on the freedom of every man, woman, and child. On the surface, the logic of the argument is convincing. Government regulation – in the form of new environmental standards, stricter health standards or small business registration hurdles – creates costs for private companies. It inhibits people’s ability to start new businesses that create jobs and to generate profits, which presumably create more jobs.   

 

But the connection between free markets and freedom is more complicated than that. It originates in the two socio-economic systems that at one time characterized our way of life on this planet. Up until the 1990s, “free-market” capitalism was considered the opposite of Soviet-style communism, in which economies were centrally planned, consumer choice was non-existent, and citizens were subject to the whims of a few centralized authorities. This dichotomy between communism and capitalism was characterized in the West as “The Free World” vs. “Behind the Iron Curtain.” 

 

I recently came across an interesting article in Salon.com that articulated the irony of our perception that free market capitalism equates to freedom in society. In particular, author Sara Robinson argues that neoliberal economics is not a counter to Soviet-style communism but in fact analogous to its attack on individual liberties.  There are at least three ways in which the free market ideology now mimics Soviet-based communism.

 

Central Planning and Control

 

First, one of the things we associate with communism is central planning and control of the economic system. The supposed free market approach was meant to completely decentralize economic development through the “invisible hand.” (The invisible hand theory argues that, driven by self-interest, individuals will use capital to address market needs, creating value for both consumers and themselves.)  

 

But a small number of business leaders today possess shocking levels of power over society. As Ira Jackson from the Kennedy School at Harvard explained, CEOs and executives of companies are “the new high priests, reining oligarchs of our capitalist system.” Driven primarily by the need to create shareholder wealth, these individuals secure highly prestigious positions of influence over governmental bodies. They do so through mechanisms like the US-based “super PACs” – powerful political action committees that spend millions of dollars bolstering, but not directly supporting, political candidates or specific pieces of legislation. They wield power through the “revolving door syndrome” – a practice that sees people from an industry take regulatory or legislative jobs overseeing that industry, and vice versa. And these powerful business leaders also suffer from the assumption that they are “too big to fail”.

 

Consider JP Morgan’s Jamie Dimon, who sits on the board of the Federal Reserve, the very same body meant to regulate his firm. Consider the many food and beverage corporations that have immense influence on food and safety regulations. Or the cozy relationship between oil giants and the Minerals Management Service – a now-defunct federal regulatory body that was responsible for managing the United States’ natural gas, oil and other mineral resources. That relationship resulted in the approval of careless oil projects and was associated with serious oil spills.

 

It is in business’ best interest to replace government regulation with self-regulation. And when that happens, you get CEOs and top executives - not that unlike communist totalitarians - with substantial power over the very products and services that define our way of life. 

 

Limited Consumer Choice

 

Second, communism limits consumers’ choice to those products and services determined by the state, not the market. Ironically, though, consumer choice in the West has become severely limited under free market capitalism.

 

My students often argue it is the consumer’s responsibility to “vote with their dollars”: the free market provides a powerful force through which to address issues of inequality and sustainability. I cringe when I hear this argument, though, because it overlooks the fundamental motivation of business: to limit consumers’ choice of products and services by erecting entry barriers to new ones or by buying out and eliminating existing ones.

 

For instance, North American consumers today have no choice but to purchase appliances that will break down in approximately seven years. This unavailability of longer-lasting appliances is not caused by limited technological capabilities; it is the result of an optimality equation designed to maximize repeat revenue. Companies make more money if they can sell you a new stove every seven years rather than every 30. Gone are the days, as Robinson explains, when products are as abundant as the mom and pop shops that sourced them. Product diversity is the antithesis of economies of scale and if companies have the power to limit the supply of this diversity, they will. So, the supposed freedom associated with market demand for products and services has been severely stunted by companies’ quest for market dominance and power. 

 

The Propaganda Machine

 

Third, and perhaps most sinister, is the level of cognitive influence companies hold over us. During the Cold War, the Iron Curtain earned its name because of its ability to prevent citizens living behind the curtain from knowing what was happening outside the borders of their country. This information control kept citizens in check and ensured the outside world didn’t affect people’s acceptance of the communist regime.

 

It’s no coincidence that one of the largest expense items on a corporation’s balance sheet today is communications, marketing and public relations. It is absolutely mind-boggling to comprehend the sheer magnitude of capital used by corporations on communications to the public. I’ve said before that it’s hard to believe this marketing hasn’t had a substantial impact on our values, our beliefs, and our way of life. As Naomi Klein explained in her book No Logo, marketing has evolved from promoting a product to promoting a lifestyle. As the largest institution in today’s society, business’ impact has gone beyond the provision of a product or service to the primary vehicle shaping society.

 

A very important debate I have with my students is whether citizens of the West realize how much the plethora of marketing messages dominate their lives. My students have a difficult time accepting the notion that their behaviour is influenced by decades of messaging. In their minds, every consumer has the ability to detach from this external influence and make objective decisions. But this assumption overlooks the fact that business, like any other actor, has the ability to socially construct the norms and beliefs of a given society, whether intentionally or not.

 

Take, as an extreme example, a marketing initiative that introduced the scent of bacon into baby blankets to establish a solid future customer base. On top of all this, there’s the very monopolistic media industry, where the dissemination of information is based on whether it generates shareholder return rather than whether it in the best interests of society.  There is no question in my mind that the West is equally trapped behind an iron curtain of commercialization, excessive consumption, and a biased media, shielded by a seemingly endless supply of messages.

 

Where is the freedom that a “free market” society was supposed to provide? 

 

Stephen Barley, one of the most prominent management academics recently called on his fellow researchers to examine more closely the influence companies have on those institutions meant to protect democracy and the public good. He did so in the backdrop of the role creditors played in changing bankruptcy reform, which made it more difficult for individuals to declare bankruptcy, and the role pharmaceutical companies’ played in persuading the US congress to amend the Food, Drug, and Cosmetics Act so that drugs are approved without going through any clinical trials.   

 

Yet management scholars have spent more time examining how companies can more effectively play this role rather than examining how to engage in business practices that preserve democracy and the public good.  A rather large research area in business is what is known as Corporate Political Activity where some of the leading management scholars theorize how for-profit businesses can manipulate the regulatory environment for their own benefit by, for example, pushing for government policy that will position firm level capabilities as having a competitive advantage over competitors. 

 

So while there is no doubt in my mind that “freedom” is a contentious term when discussed in the context of the “free market”, we as business scholars are no less complicit than the companies who directly or indirectly erode such freedoms.  

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