The recent collapse of Silicon Valley Bank and rescue of Credit Suisse Bank, which together held hundreds of billions of dollars, has many people worrying about an otherwise wonky topic: bank regulation. Senators Elizabeth Warren and Bernie Sanders, along with others, have suggested that the SVB collapse could have been prevented had key regulations not been weakened during the Trump years.
But calls for reform have led to a backlash: Some corporate executives claim that tightening bank regulation threatens the vigor of our capitalist economy.
We’ve heard this argument many times. And it’s wrong. Over-regulation, it is claimed, inhibits the creativity and risk-taking that fuels a vibrant economy. Alarmists say it leads to socialism, stagnation, and corruption — and from there to authoritarianism. While business leaders sometimes say that they accept the need for regulation, when push comes to shove, they much more often work to weaken regulation, claiming that compromises to economic freedom threaten political freedom.
As JP Morgan Chase CEO Jamie Dimon put it in a piece published in Time in 2020, “True freedom is inexorably linked with the free enterprise that capitalism guarantees, and we mustn’t forget that.” In other words, (economic) regulation is a potential threat to (political) freedom. Or they argue that they know best how to run their own businesses, as Google’s former CEO Eric Schmidt did recently, when he stated that “there’s no way a non-industry person” could understand the AI industry well enough to regulate it.
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It’s not capitalism that’s being defended, but an almost fundamentalist devotion to the wisdom of free markets. And it’s based in part on a longstanding misrepresentation of Adam Smith, who is often called the father of capitalism.
In 1776′s The Wealth of Nations, Smith argued for regulations when self-interest fails, and for raising funds for public goods that markets don’t provide. Banking regulation was essential to business functioning, even if it compromised bankers’ “true freedom.”
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Smith knew that some observers would object to any regulation as a denial of freedom. In response, he offered a succinct summary of when regulation is warranted: When the “natural liberty of a few individuals . . . endanger[s] the security of the whole society.” And so he concluded: Building “walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.” When banks aren’t regulated, we get burned.
Jacob Viner, one of the founders of the Chicago school of economics, summarized: “The modern advocate of laissez faire who objects to government participation in business on the grounds that it is an encroachment upon a field reserved by nature for private enterprise cannot find support for this argument in The Wealth of Nations.”
Why don’t more of us know this?
One reason is that it’s an inconvenient truth for captains of industry like Schmidt and Dimon. As we show in our new book, The Big Myth, American industrialists have been arguing for over a century that regulations — whether to protect workers from deadly conditions or protect the economy from reckless banking practices — are not just a threat to capitalism but a threat to freedom. They called this “the indivisibility thesis,” and used it in the 1920s and ‘30s to attempt to block diverse reforms from New Deal rural electrification to the creation of the Federal Deposit Insurance Corp., the very same agency that rescued SVB.
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They used it again in the ‘50s and ‘60s to weaken protections for unions and fight laws against discrimination in housing. And again in recent decades to justify loosening banking regulations, and weaken the enforcement of antitrust statutes.
But the argument wasn’t true. The Great Depression had proved the inadequacy of self-interest as an economic principle, while the New Deal and social democracy in Europe proved that a heavy government hand in the economy did not lead to totalitarianism — in fact, it probably helped to stave it off after World War II.
But business leaders associated with such famous corporations as DuPont, General Electric, Westinghouse, and General Motors spent millions on advertising, marketing, and outright propaganda campaigns to make us think the myth was true. Among other things, they supported the Chicago school of economics, a school of thought based at the University of Chicago, where Viner’s colleague, George Stigler, published an abridged edition of The Wealth of Nations that omitted Smith’s discussion of banking regulation entirely. The fact is, we’ve been sold a myth about economic freedom. It’s time to put that myth to rest.
Naomi Oreskes is a professor of the history of science at Harvard University and a visiting fellow at the Berggruen Institute in Los Angeles. Erik M. Conway is a historian of science and technology who works for the California Institute of Technology. Their new book, The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market, is published by Bloomsbury Press. Send comments to magazine@globe.com.
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