Myths of the market

John Quiggin, Australian National University

Thomas Frank, One Market Under God Sydney, Vintage, 2001 (464 pp). ISBN 0-09942-224-7 (paperback) RRP $24.95.

William Baumol, The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism Princeton, Princeton University Press, 2002 (312 pp). ISBN 0-69109-615-5 (cloth) RRP USD$35.00.

Some books seem ahead of their time and some behind it. Marx and Engels’ Communist Manifesto, with its simultaneous paean to capitalist innovation and denunciation of the inequalities generated by capitalism remains fresh and compelling today, long after the demise of Marx’s economic theories and the political movements they inspired. Thomas Frank and William Baumol have drawn on different aspects of this insight, with strikingly different results.

Reading One Market Under God gives the eerie impression that Frank, writing at the end of the twentieth century, had access to the newspapers for 2001 and beyond. The preface mentions Osama Bin Laden, then still an ‘exotic crazyman’, and the first chapter gives prominent mention to such now-fallen stars as Enron, General Electric CEO Jack Welch, and MCI (a precursor of WorldCom). Even more striking is the general tone of the book. Frank surveys the absurdities that dominated American thinking in the 1990s with an ironic distance that calls to mind, say, Gibbon on the decline and fall of the Roman Empire. It is surprising that such a book could be published as early as 2000, and startling to realise that most of it was written while the great bubble was still expanding.

As the title suggests, Frank begins with a survey of the way ‘the market’ has become seen as the only true representative of society, replacing nations and governments, and ultimately laying claim to a divine mandate. Writing from a left-labour background, Frank sees the ‘shareholder democracy’ of the 1990s as a spurious substitute for the economic democracy of the New Deal of the 1930s. He continually reminds the reader of the side of the story forgotten amid the euphoria of stock options for all — the wealth accruing to the already wealthy, and the downsizing, outsourcing, casualisation, and layoffs that beset lower-income workers for all but the last couple of years of the boom.

Frank excoriates the management theory literature, with the exception of Micklethwait and Wooldridge’s The Witch Doctors (1996, the title is self-explanatory). Going beyond the view that management gurus are charlatans inventing new fads to sell more books, Frank argues that the literature as a whole serves as a public relations exercise to make management legitimate, independent of any particular management theory.

The most interesting part of Frank’s story relates to the way the entrepreneurs of the Internet boom appropriated the rhetoric of the Vietnam-era left, to the extent that venture capitalists referred to themselves as VC and the employees of Internet firms called themselves ‘dotcommunists’. Simultaneously claiming victory in the cold war, they denounced both governments and Old Economy corporations as little better than Soviet commissars. In this story, the entrepreneurs stand for the liberation, not of the workers, but of ‘new money’.

For most Australians, the 'recession we had to have' was the end of optimistic dreams about free-market reform.

A cameo appearance is made by the postmodernists, whose alleged drive to destroy Western civilisation formed the basis of numerous denunciations of ‘political correctness’ in the 1990s. Frank shows that far from threatening capitalism, the postmodernists reinforced it. The postmodernist beliefs that all truth is relative, and that ‘there is nothing outside the text’ found their natural 1990s expression in work for the burgeoning advertising industry. The tools of critical theory and radical anthropology were pressed into service in the creation of a mythical reality for, say, a brand of toothpaste. The ultimate outcome of this radical theorising was the view that not only nations but individuals are ultimately brands and that most are in dire need of rebranding.

An interesting question that arises on reading this book is why there has been no comparable development in Australia. Although we have had an expansion as long and strong as that of the United States, the stock market has been far more restrained and the popular mood has ranged from sullen acquiescence in globalisation and marketisation, to vindictive outbursts like the One Nation eruption. The answer I suspect is that we are a decade ahead of the United States. The cult of the entrepreneur and ‘the markets’, the support for insurgent new money against staid old money, the package of cultural progressivism, economic liberalism, and historical inevitability — all of these were the stock-in-trade of Paul Keating in the 1980s. For most Australians, the ‘recession we had to have’ was the end of optimistic dreams about free-market reform. The United States, it seems, is now experiencing its own version of the same awakening.

If One Market Under God seems ahead of its time, William Baumol’s The Free-Market Innovation Machine seems decades behind it. (I will focus on the general argument of the book and not on the technical contributions to the theory of patent races and so on).

Baumol’s title is redolent of 1990s triumphalism, but his book has almost nothing to say about that technology-obsessed decade. The internet, the dotcom boom, and even the personal computer are mentioned only in passing. The basic focus of the book is on corporate R&D, with a particular focus on oligopoly situations and the resulting strategic problems.

In reading Baumol’s discussion of the research efforts of firms like Perkin-Elmer, Litton, and Honeywell, it is hard to escape a feeling of pervasive anachronism. The mental picture conveyed is that of the big corporate research labs that flowered in the 1950s, and characterised America’s technological leadership in the post war period.

But history shows that most of the big labs were broken up for scrap in the 1990s, victims of Wall Street’s relentless drive for short-term profits and of the idea that innovation is the province of the small, nimble start-ups funded so liberally during the bubble era. These trends have affected even the brightest stars in the firmament of capitalist innovation. General Electric, once a technological powerhouse, was by the end of the 1990s basically a finance company. Its much-imitated conglomerate model has been exposed as little more than a vehicle for creative accounting. Bell Labs — creator of UNIX and the transistor and winner of six Nobel prizes for Physics — was spun off from AT&T under the faux-Latin name ‘Lucent’ in 1996. Its commitment to pure research was killed off in the process. The sequence of divestitures and mass layoffs that followed the collapse of the telecom bubble has since driven Lucent to the edge of extinction. Its bonds now trade as low-grade junk and its shares are near the point of delisting. Whether or not Lucent survives, the Bell Labs are dead and gone.

The case against central planning seems obvious, but the Russians were, after all, first into space.

Meanwhile, the most-cited free-market innovation machine of the 1990s was the Enron Corporation, named by Fortune magazine as ‘America’s most innovative’ for six consecutive years, ending in 2001, when the firm filed for bankruptcy, revealing massive fraud. Enron’s innovations had been made in the supposedly new field of ‘financial engineering’. Unfortunately, they turned out to be little more than rediscoveries of the work of earlier inventors like Jay Gould, Charles Ponzi, and John Law.

Baumol concludes that the social rate of return to investment greatly exceeds the private rate, which would seem to imply a role for state intervention. However, except for some amusing errors, such as a reference to an ‘Australian firm with the acronym CSIRO’, the state is invisible in Baumol’s account. The massive contributions of universities, national research institutes, and military research to the R&D industry are ignored altogether.

This omission is particularly striking for a book published in the wake of the internet, a technological innovation created almost entirely by the public sector. The architecture of the internet was set up with seed money from the US Department of Defence, the network was built by the universities, and the World Wide Web was a gift from CERN, a physics research lab in Switzerland. The only significant private contribution was UNIX, the last important piece of public good research done by Bell Labs before its effective demise.

One would expect at the very least some sort of argument that free-market capitalism delivered more innovation than the alternatives of central planning and the social-democratic mixed economy. The case against central planning may seem obvious, but the Russians were, after all, first into space and managed plenty of innovation in areas they cared about, like weaponry. The Soviet system failed but that does not prove that lack of innovation was to blame. There is evidence to support the hypothesis that the Soviet Union performed poorly with respect to innovation, but Baumol does not cite it.

And Baumol is way off the mark when he asserts that whereas the capitalist countries achieved eightfold growth in per capita income in the twentieth century, the Soviet Union ‘failed to produce enough to materially raise the standard of living of its population’ (p. 20). While estimates of Soviet economic growth vary, they are comparable with the eightfold growth of Western countries. It is in any case obvious that between 1917 and 1989 Russia was transformed from a semi-feudal peasant economy into a middle-income developed country with living standards comparable to those of capitalist countries like Greece and Portugal.

Social democracies are dealt with using the simple technique of argument by definition. It turns out that the ‘free-market’ in Baumol’s title is redundant. In his analysis, all capitalist societies, even those where tax revenues exceed 50 per cent of national income, are classed as ‘free-market’. Thus, the question of the relative roles of the public and private sectors in research and development is effectively ignored.

The technical chapters of Baumol’s book may be of interest to specialists in the theory of R&D, though I imagine they would seek out more rigorous versions in the technical journals. As far as the main part of the book is concerned, it is so far from coming to grips with the issues implied by the title that it is in Samuelson’s scathing phrase ‘not even wrong’.

The Free-Market Innovation Machine is a disappointing book from an author who has made substantial and creative contributions in many fields of economics in the past. By contrast, One Market Under God deserves to be recognised as the best dissection of the bubble culture of the 1990s that has yet been written.


Micklethwait, J. & Wooldridge, A. 1996, The Witch Doctors: Making Sense of the Management Gurus, Times Books, New York.

Professor John Quiggin is an Australian Research Council Senior Fellow based at the Australian National University and Queensland University of Technology.

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