The Bankruptcy of Militant Free Market Ideology

Now that many economists and political leaders are denouncing free market extremism and calling for greater regulation, pundits have been trying to identify the people who were most influential in taking Americans down a mistaken path towards de-regulation and lax regulation of the economy. Lots of leaders are worthy candidates for this dubious honor roll of leaders who led the country astray by serving as militant champions of laissez faire, but five individuals are especially noteworthy: Milton Friedman, Alan Greenspan, Ronald Reagan, William E. Simon, and Phil Gramm.

Friedman was the chief ideologist for de-regulation. Greenspan was its protector at the Fed, and Reagan served as the major political critic of regulation. Simon was the cause's leading strategist, and Gramm served as its most influential legislator.

The biggest intellectual contributor to American enthusiasm for extremely "free" markets was a petite economics professor at the University of Chicago, Milton Friedman. He was a brilliant and original thinker who garnered a Nobel Prize in economics, but Friedman often made radical statements against government oversight in economic affairs. He leveled blistering attacks against federal regulatory agencies such as OSHA, which protects workers from unsafe conditions, and the Consumer Products Safety Commission (Friedman mocked the Commission's agents for testing the safety of toy guns for children). Milton Friedman's zealous positions led an interviewer to ask, "Do you think there's a constructive purpose to any government regulation of commerce?" Friedman responded confidently, "No, I don't."

Alan Greenspan began to make his mark as an economic thinker when he was a protégé of the controversial novelist, playwright, and philosopher, Ayn Rand. As an enthusiast of Rand's radically libertarian economic philosophy, Greenspan asserted that the basis of regulation was "armed force." At the bottom of "all regulation lies a gun," he declared, alluding to the notion of government tyranny. Contributing to Rand's spirited defense, Capitalism: The Unknown Ideal, young Greenspan lambasted building codes, the Food and Drug Administration, and the Securities and Exchange Commission.

Alan Greenspan later moved away from the cult of starry-eyed Rand worshippers and tempered his arguments, but important elements of his early discomfort with government intervention remained. As Federal Reserve chairman Greenspan sometimes expressed anxiety about "irrational exuberance" in the stock market, but a hands-off mentality prevented him from doing much about it. During boon times, political leaders praised Greenspan's leadership at the Fed, but lately he has been coming under criticism for failing to deal aggressively with Wall Street's speculative excesses and financial shenanigans during his years at the Fed (1987 to 2006). Joseph Stiglitz, a Nobel Prize-winning economist, blasted Greenspan, saying he "didn't really believe in regulation" and often "called for self-regulation - an oxymoron."

Eventually, champions of "free" markets found a great communicator who could transform their ideas about regulation into public policy. Ronald Reagan made de-regulation central to his political messages. He told voters that government was not the solution to the nation's problems; it was the problem. "The nine most terrifying words in the English language," said Reagan, are, "'I'm from the government and I'm here to help.'" The two-term president often warned about bureaucratic regulation's chilling effects on business enterprise.

Ronald Reagan provided the popular voice of free-market ideology, but the cause's most effective behind-the-scenes operator was William E. Simon, who served as Treasury Secretary under Presidents Nixon and Ford and later became president of the conservatively oriented Olin Foundation. Like Friedman and Greenspan, William E. Simon leveled sharp criticisms of "bureaucratic" federal agencies, such as the Food and Drug Administration, but his most important contribution to the movement for de-regulation came in the realm of organization. Simon promoted the creation of right-wing think tanks that sponsored hundreds of "scholars" who promoted militant forms of free market ideology in print and in radio and television commentary. Simon wanted to sponsor a "counterintelligentia" that could challenge the prevailing views about government's role in economic affairs in university teaching and in reporting by the national news media. Some of his efforts proved quite fruitful.

Texas senator Phil Gramm was probably the most influential legislator to push for de-regulation in the Congress. He was at the center of a 1999 bill that abandoned legislation from the Depression era designed to keep commercial and investment banks separate. More important in terms of today's crisis was his success in slipping a 262-page bill below the political radar in 2000 (around the time when legislators were focused on the Supreme Court's decision about the presidential election). Phil Gramm declared his bill would "protect financial institutions from overregulation." The Commodities Futures Modernization Act prevented serious oversight of credit default swaps. Those transactions are valued at about 62 trillion today, and problems with these little-understood trades have left financial markets vulnerable to gigantic meltdowns.

Phil Gramm served as a key economics adviser to John McCain and as co-chair of his presidential campaign until he embarrassed the candidate by describing Americans as "whiners" who were suffering from a "mental recession" rather than a real one. Even though that mishap forced Gramm out of the political limelight, he is still rumored as a possible choice for Treasury Secretary if McCain wins his bid for the White House.

Recent developments help us to see the roles of Friedman, Greenspan, Reagan, Simon and Gramm in a new light. Extremism is problematic, whether it comes from the left or the right. In the 1990s the collapse of communist states demonstrated in vivid fashion the bankruptcy of militant, over-the-top, collectivist ideas about dealing with economies. Now, in the early 2000s a financial crisis is demonstrating the bankruptcy of militant, over-the-top "free market" ideology. Better than ever before, Americans can recognize that competitive markets are fundamentally important, but that markets cannot work effectively without good regulations. Today's challenges call for more pragmatic thinking about economics, not the "free market" dogma that has long been promoted by ideologues.