Analysis |

Coronavirus Has Proven the 'Free Market' Illusion Wrong

The pandemic revealed the world's total dependence upon public financing and should finally explode the myth that the less a government 'interferes,' the better

Guy Rolnik
Guy Rolnik
A campaigner wearing a mask of Facebook CEO Mark Zuckerberg, outside the European Commission in Brussels on the day the Digital Services Act is published, December 15, 2020.
A campaigner wearing a mask of Facebook CEO Mark Zuckerberg, outside the European Commission in Brussels on the day the Digital Services Act is published, December 15, 2020.Credit: Olivier Matthys/AP Images for AVAAZ
Guy Rolnik
Guy Rolnik

Hundreds of planes, trucks and trains are now racing all over the world, carrying billions of ampoules and vials of coronavirus vaccines – from Pfizer and Moderna, and soon from AstraZeneca and other companies. Barring any nasty surprises, this moment will go down in history as a tremendous victory for science. Less than a year since a mysterious virus appeared and began sowing death and destruction, along with worldwide economic ruin, unprecedented collaborations by scientists from around the world are yielding an innovative solution to halt the pandemic, with technology that seems straight out of a science fiction movie.

In the thousands of news reports in the two months since the results of the Pfizer and Moderna trials were announced, much has been written about the companies involved in the vaccine development – Pfizer, BioNTech, Moderna, AstraZeneca – another historic triumph for the private market.

Less will be said, of course, about the part played by the quieter partner in all the developments: the public, governments and public research institutions. Moderna’s vaccine relies on technology that came out of the National Institutes of Health, the largest public research institution in the United States, in which American taxpayers invest $40 billion annually. Moderna also needed direct infusions of capital to finance its clinical trials and in the past year received approximately $1 billion in direct allocations from the U.S. administration.

Pfizer did not receive direct funding from the U.S. administration – a fact cited over and over again by the American press in reports about the company’s success. But the key contribution to Pfizer’s scientific achievement came from its German partner BioNTech, which received a direct infusion of $400 million from the German government and has worked in tandem for years with public research institutions in Germany. This obscuring of the role played by taxpayers, and specifically by public research institutions, in the most important and beneficial scientific developments is nothing new. Nor is it confined to the medical field, in which most major advances and new medications rely on basic scientific research carried out with public funding.

Only rarely is it mentioned that the vast majority of the elements that make up Apple’s incredible smartphone, the iPhone, were developed over the past 70 years in government and public institutions financed with taxpayer money, and by scientists who worked directly for government organizations. Apple founder Steve Jobs was a genius at developing attractive, user-friendly and useful products – but the science that enabled him to transform a dream into a product was not financed by stock market investors but rather by taxpayers over a period of decades.

Biden’s challenge

The involvement of public funding in the development of vaccines to halt the lethal 21st century pandemic is just one of numerous examples of the world economy’s complete dependence upon governments and public financing. From the moment the pandemic erupted, every government in the world, no matter how “right-wing,” “left-wing” or “centrist,” realized that the only way to prevent the health crisis from becoming the worst economic crisis in modern history was to provide an economic safety net unlike anything ever seen before. Almost every government in the world directly allocated 15-30 percent of its annual budget to saving the business sector, the self-employed and workers who were laid off or placed on indefinite unpaid leave.

When U.S. banks crashed in 2008 and the administration bailed them out with taxpayer money, a fierce debate ensued between the American right and left over whether the bailout was justified or necessary. But the massive bailout packages totaling trillions of dollars that have been distributed in 2020 have enjoyed support from the entire political spectrum everywhere in the world – it was clear to all that, if left to fend for itself, the private market would collapse.

If the lesson of 2008 was that in the absence of independent regulation, the financial system will wreak destruction and transfer wealth from the many to the few, the lesson of the year of the coronavirus is much broader: In 2020, the world began to bid farewell to the fairy tale known as the “free market.”

Fairy tales about the free market really began to gain ground in the 1970s, with the common thread among them being that the less a government “interferes” in an economy and society, the more that “natural” and “spontaneous” forces will be freed to work their wonders. For proof, one had to look no further than the complete failure of the Soviet Communist project that by the end of the 1980s was totally kaput.

But while rightists and leftists continue to argue over the optimal type and extent of government interference, the real problem of free market theory lies in the very term “interference.” This terminology causes us to believe that the natural, spontaneous state of modern society is the existence of a “market” in which the government then comes and “interferes.”

This popular notion lost relevance over the course of the last century, as incredible leaps in the standard of living, quality of life, technology and science – in conjunction with liberal democracy becoming the most popular type of regime – were paralleled by the development of political institutions, social safety nets and laws and regulations necessary to create and support the markets. A government does not only step in when markets stumble; it creates markets and facilitates their development. Whatever market you look at, everyone engaged in that market is aware that it functions because it rests upon a foundation of laws and regulations, with courts and regulatory authorities to enforce them.

U.S. President-elect Joe Biden arrives at his transition headquarters to speak about the economy and the final U.S. jobs report of 2020 in Wilmington, Delaware, December 4, 2020.Credit: Leah Millis/Reuters

One current example, of course, is the huge regulatory fight being waged against Facebook. One of the first questions facing the Biden administration come February will be what to do about the massive amount of garbage, hate and incitement being disseminated every minute on the social media platform, which is a monopoly almost everywhere in the world. At the same time, the Biden administration will have to spearhead the effort in American courts to dismantle the company for violating the Sherman and Clayton Antirust Acts, passed in the late 19th and early 20th centuries to prevent the formation of monopolies and their adverse impact.

This is precisely the moment when “free market” devotees will make a racket and explain the immense good that Facebook and similar companies have brought the public and how dangerous it is to “interfere” in the market. But Facebook, like all the other tech giants, is not some natural, spontaneous creation that just suddenly arose out of the jungle where the entrepreneurs live. It is also largely a product of government – of massive infrastructure investment, laws regulating property rights, massive regulation of the capital markets that issued its stock and, of course, countless basic scientific developments that came out of public institutions. Facebook’s business model relies entirely on a section of special legislation passed by the U.S. Congress in 1996 – Section 230 of the Communications Decency Act. This concise section, otherwise known as “the 26 words that changed the Internet,” basically says that companies like Facebook are not legally liable for the content they present to the public.

The implication is quite stark: If Facebook would have been deemed responsible for all the content posted on its network, at its inception it would have had to recruit dozens of workers to screen this content to avoid all kinds of lawsuits. By its second year, it would have needed hundreds of such screeners, by the third year this would have required thousands of workers, by the fifth year – tens of thousands, and by its 15th year, hundreds of thousands. In other words, from the very beginning, had the government not decided to pass special legislation exempting companies of this type from responsibility for the content their algorithm chooses to present, Facebook would not have had a sustainable business model. Unlike communications companies that came before it, Facebook is very deliberate about the content it spreads: Its algorithm targets the individual user and selects very specific information and advertising based on thousands of pieces of information about the user and his personal preferences collected over time.

In need of a New Deal

In economic terms, Section 230, which gives Facebook protection from being sued over the content it presents, is essentially a subsidy that Facebook has received for 15 years – a subsidy worth tens of billions of dollars from the American taxpayer. Modifying the conditions for receiving this subsidy, as Democrats and Republicans now seek to do, will evoke the predictable response from Facebook’s army of lawyers, economists and lobbyists: “You’re interfering in the market!” As if Facebook is just the spontaneous invention of Mark Zuckerberg and not a monopoly that arose thanks to mighty legal underpinnings and decades of massive taxpayer investment.

The philosophy that believes in a “free market” in which the government occasionally “intervenes” – when it has to remedy “market failures” or when corrupt and power-hungry politicians just can’t help themselves – was not always dominant. There was at least one era in modern economics when this theory was marginalized. Interestingly, this was a time that was characterized by a rising birthrate and by the highest standard of living in the past 100 years: the postwar boom in the decades after World War II.

In most of the West, the 1950s and 60s were a time of tremendous growth and prosperity, a time for reaping the fruits of democratization and of innovations in science and technology. The main engine was the United States, which began to thrive after 12 years in which Franklin Delano Roosevelt occupied the White House and implemented a series of economic programs known as the New Deal. These were not just years of rapid growth and the introduction of new technologies into all aspects of our lives, but also a time when economic inequality was at a low. The graph of inequality in the United States resembles the letter V: Today and exactly 100 years ago the level of inequality was at its highest, while in the 1960s it was at its lowest point.

President Franklin D. Roosevelt speaks on a national radio program from the White House in Washington, June 12, 1944.Credit: Eugene Abbott/AP

With the pandemic hitting not long after the financial crisis, along with widening inequality, social unrest and wariness at the rise of rabble-rousing nationalist, racist and authoritarian leaders, it would seem like an optimal time for a restart of the economic policy in Western democracies. But bidding goodbye to the free-market fairy tale won’t be easy. For when we understand that there is really no such thing as a free market – that the markets’ and the private sector’s ability to operate rests upon an enormous, complex system of laws, regulations, public investment and national infrastructure, we must also understand that there is no such thing as a science of “economics.” It’s “political economics,” or as the economist Abba Lerner said 50 years ago, “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”

The solution to the economic challenges and social pressures is not technocratic, and certainly not technological. The solution is always political: Politics sets the rules of the game. It determines whether a huge chunk of all the information and trade in the world will be controlled by a handful of digital monopolies headed by people wealthier than nearly the entire population of the United States put together.

Giving up the fairy tale is hard because many of the decision-makers are under 50 and were raised in a world in which politics is a dirty word, and a dirty business. Statements like “I’m not interested in politics,” “I don’t get into politics,” “I don’t read newspapers,” “All politicians are the same” long ago became standard phrases in much of the West and took root in Israel too.

So, for the benefit of our younger readers, let’s translate phrases like “I’m not interested in politics,” “Politicians, by definition, only cause harm” or “The government doesn’t do anything” into practical language: “I’m not interested in politics” means – I prefer that the rich, and powerful groups in the public and private sector, pass and enforce legislation that suits their interests and outlook. Saying, “The government doesn’t do anything,” is akin to saying my family and I have no need for the basic infrastructure of science, education, health, transportation and law enforcement provided and overseen by the government.

Giving up the fairy tale of the free market doesn’t mean giving blank checks for increasing government budgets or transferring assets to government ownership. Giving up this fairy tale means understanding that joint action through democratic and political institutions is the only way to solve social and economic problems. It means understanding that any attempt to construct a parallel world in which we as a society solve problems without politicians who must answer to the public and without professional and impartial state institutions – is essentially a smokescreen behind which the rules of the game, resources and laws are controlled by the centers of power and money. What we need is a New Deal with strong and decent democratic state institutions at its core.

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