Not long ago, economist Robert Reich published an article, “The Myth of the ‘Free Market’ and How to Make the Economy Work for Us”. He never tells us exactly who “us” is - must be some club he belongs to - but he does say, “One of the most deceptive ideas continuously sounded by the Right [not ‘us’] … is that the ‘free market’ is natural and inevitable, existing outside and beyond government”. He goes on to say, “Governments don’t ‘intrude’ on free markets; governments organize and maintain them. Markets aren’t ‘free’ of rules; the rules define them”. I think he needs a reality check.

To say that “governments don’t intrude on free markets” is disingenuous, or to put it Reich’s own words, “deceptive”. The reality is that there is a constituency or special interest group that approves of that intrusion - the “us” he refers to. However, he’s right that markets (and individuals for that matter) aren’t free of rules. Generally, these rules are called “laws”. One of the legitimate purposes of government is the prosecution of fraud - or unlawful behavior.

So how does the government fare with regard to the “maintaining” (Reich’s word) of free markets and “the rules that define them”? Considering all of the recent cases of market manipulation prosecuted by government agencies, it is remarkable that they haven’t resulted in a single jail sentence. There have been fines levied against major banks for manipulation of LIBOR (a key interest rate), commodities markets and the massive $475 trillion currency market. No criminal charges for fraud have yet been filed. These are the same banks that have been called “too big to fail” a phrase that has since morphed into “too big to jail”. Some reports refer to the fines as simply the cost of doing business - and a source of revenue for the government.

In order to have free markets there must be honest price discovery. According to Austrian economist Ludwig von Mises, “In a market economy, prices are not arbitrary, but signal real, underlying scarcity and help everyone in the economy adjust his plans in light of reality. This includes interest rates on various loans”. While the manipulation of prices, also known as financial fraud, results in ill-gotten gains, it also causes harm to the economy as those false prices send false signals to market participants that act on them. Perhaps Reich’s faith in government is misplaced, especially since government is also in the business of manipulating markets.

The first chapter of Reich’s book “Aftershock” is dedicated to Marriner Eccles who served as chairman of the Federal Reserve Bank from 1934 to 1948. Incidentally, the Eccles Building is the current home of the Fed. Reich describes Eccles as “one of the architects of the Great Prosperity that the nation and much of the rest of the world enjoyed after the war” (WWII). According to Reich, Eccles served first as an economic advisor to President Roosevelt and then as Chairman of the Federal Reserve. As advisor to Roosevelt, he convinced the president to violate his campaign promise to balance the budget and to increase the federal deficit to fund more spending in order to boost the economy. Many of the programs implemented by Roosevelt were proposed by Eccles and additional taxes were proposed “on the wealthy in order to control capital accumulations.”

Whether or not you support Eccles’ ideas, and Reich clearly does, it is impossible to reconcile them with Reich’s assertion that “governments don’t intrude on free markets”. Ironically, several weeks later Eccles would accept the post of Chairman of the Federal Reserve, but according to Reich, only on condition that legislation be passed giving more power over the money supply to the Washington Fed and less to the NY Fed, ensuring a “loose” money policy. Sounds familiar.

Reich cheerily ends the chapter by saying, “For the next fourteen years, with great vigor and continuing vigilance for the welfare of average people, Eccles helped steer the economy through the remainder of the Depression and through World War II”. In other words, Eccles took over the Fed five years into the Great Depression and while he “helped steer the economy” the Depression ground on for at least another seven years. Yikes. If that’s a success story, then there’s another myth for you. For further irony, the economy didn’t really surge until after WWII during a time when federal spending was decreasing precipitously.

The Fed is considered the banker for the “too big to fail” banks. It was intimately involved in the bail outs of the “too big to fail banks”. It also has the power to set, or if you will, manipulate interest rates, although it does so legally.

In his article, “The Myth of the ‘Free Market’ and How to Make the Economy Work for Us”, Robert Reich calls the free market both a myth and fiction. However, he doesn’t explain how to “make the economy work for us”. Except at the end. Here’s the punchline. He says, “We must exert the power that is supposed to be ours”. Now I get it. It’s not about the peaceful and voluntary exchange of goods and services as in a free market. It’s about the power - as in government. And a mythical government at that.