This installment is, once again, not on economics itself, but on a mistake which helps people misunderstand economic phenomena, and which lies at the root of an unfortunate trend. But before I explain more, allow me to start with a rather basic introduction, which may help make my point for me.

Suppose, just for the moment, that we never made the distinction between bureaucrats and factory workers, that we called IRS agents and men on the assembly line "labor", and that we had no way to easily distinguished between them, in fact, that people in general considered them to be the same thing. Do you think that might make America think quite poorly of those working in industrial jobs, if we had to ascribe to them the misdeeds of government workers?

Or, suppose we never established a way to distinguish between government offices and productive firms. If we called the IRS, the EPA, and OSHA "businesses". Do you think that might lead to same serious resentment of those selling goods, when we had to think of them whenever a new senseless regulation was handed down?

Thankfully neither of those happened. Unfortunately, two similar situations have, and they have led to equal confusion. The problem being that we often use "free market" or "capitalism" to describe a totally free, unregulated market, but also to describe a semi-free market with heavy government regulation and a lot of government favoritism and patronage. In addition, we use "corporation" and "business" to describe both those companies which thrive by providing needed goods and services, and to describe those firms which tend to flourish not through competition but through the securing of government favor.

Granted the confusion occurs because it was a real free market that eventually became the regulated "free market" we have now, and those companies living by patronage do still produce something, and probably started off as honest firms, but still, we need a way to distinguish between real, functioning firms and government parasites, ad we do to distinguish between the real free market and the pseudo-capitalism on its way to "communism of the German type" (that is Nazi/fascist command economy) that we presently have.

The reason I mention this is that  I think this confusion lies at the heart of a lot of resentment over the free market and hatred of corporations. Granted, some hatred of the market and corporations is just populist nonsense, or simple envy, but there are many for whom the resentment is not because of envy, but because they confuse the patronage seeking government loving firms and think they are characteristic of the real free market, at the same time mistaking our interventionist system for capitalism.

Just think of all the Coommunity Reinvestment Act nonsense, and how it was used to denounce "the free market", how those exploiting government subsidies were accused of "Wall Street greed", and how those who exploited government largesse were accused of being the "worst examples of capitalism". In other words, interventionist manipulation of the market, which forced companies to make bad loans, and allowed others to exploit those loans to cash in on government guarantees, was equated with a system free of government intervention.

Total nonsense.

But, unfortunately, total nonsense which many still accept.

I wrote before about the way the free market is often blamed for government intervention ("How To Blame the Free Market"), even how such failures are often used as excuses for even more government intervention ("The Endless Cycle of Intervention", "The Cycle of Compassion", "Of Wheat and Doctors"), with the failure of intervention confused with the failure of the market, and the very lack of success used to argue for more of the same. And in many ways this is the same. The market is made less and less free, with arbitrary government power favoring some firms ("Anti-Business Businesses"), and allowing some to exploit the government to make a fortune ("How Government Creates Crime"), and, once people begin to see the shortcomings of this state of affairs, all the failings of government involvement are blamed on the free market, justifying yet more intervention. ( "The Inevitability of Bureaucratic Management in Government Enterprises", "The Inherent Disappointment of Authoritarianism")

The simple truth is the free market does not provide the openings the government does In the free market, one must constantly produce or fail, and one must also surpass all competitors or go under. Once the government is involved, suddenly you do not need to defeat competitors, only win government favor. And, as most regulators come from established firms, the old established firms generally have an "in". Not to mention that the failure of a big existing firm scares politicians. And so, government intervention tends to favor stasis and the permanent retention of the status quo, which harms newcomers and favors lack of innovation and novelty by existing firms. On the other hand, thanks to the arbitrary nature of government, and the shifting laws, along with changing staff, it is also easy for small time individuals to exploit legal quirks to make a quick fortune without doing anything productive.

The differences are clear, and clearly favor the free market. At least, they do if we don't confuse the two, calling them all "capitalism" and failing to distinguish between production and patronage. Once you confuse the two, the free market doesn't look very good. And that is all to the benefit of the government, as well as anti-capitalist populists ("Beware Populist Deception", "Protectionism, "Protectionism Right and Left", "Deadly Cynicism")

However, there is no reason to confuse the two, and we need to do a better job of distinguishing between the two. Rather than saying that Obama's creation of a government favored cartel of insurers is a failure of capitalism ("Don't Fall For Populist Interpretations of ObamaCare"), we should point out that it is a socialist corruption of the free market, using private firms to do government work. We should not pretend he is some friend of big business or is creating a "compromise between socialism and capitalism", not any more than the Nazis or fascists were "free market" as they allowed nominal owners to retain their businesses. Once the government tells you what to sell, for what price, when and where, they own your store, whether they pay you or not, whether they pretend you own it or not.

We need to do a much better job making this clear to the rest of the public.

POSTSCRIPT

Here is a list of all previous installments of the "Bad Economics" series:

Bad Economics Part 1 - A discussion of how prices disprove theories of resource depletion
Bad Economics Part 2 - A debunking of the many theories based on "defective" or "damaging" competition
Bad Economics Part 3 - An examination of the many absurd claims about deregulation
Bad Economics Part 4 - An examination of problems with economic studies and empirical evidence
Bad Economics Part 5 - An examination of consumer protection and the harm it does to consumers and others
Bad Economics Part 6 - A rebuttal of claims offered in support of various types of farm price supports and other aid
Bad Economics Part 7 - A discussion of what inflation is and is not
Bad Economics Part 8 - A discussion what our money really is and is not
Bad Economics Part 9 - A refutation of the common belief that "thinking outside the box" is inherently valuable
Bad Economics Part 10 - A refutation of the theory that there is "waste" which can be eliminated from the free market
Bad Economics Part 11 - Bankruptcies, Bruises, Fevers and Extinctions - Examining how perspective makes events good or bad
Bad Economics Part 12 - An examination of the futility of using regulation to protect consumers and employees
Bad Economics Part 13 - (Also called "The Sky's Not Falling Part 2") - An examination of the transition from mostly manufacturing to a mix of manufacture and service and the reasons not to fear this change
Bad Economics Part 14 - An examination of the causes of unemployment and whether long term, involuntary unemployment is possible in a free economy
Bad Economics Part 15 - A response to a user comment, examining many of the most common mistaken beliefs about the free market and capitalism
Bad Economics Part 16 - The myth of "economic man" and mistaken beliefs about the theory underlying the free market

You can also read them in reverse order, starting with Bad Economics Part 16, as each post contains links to the previous chapters.