How did the free-market ideas attain influence? It’s because capitalists and wealthy people in the United States pushed for a shift away from the welfare state for reasons that had nothing to do with the appeal of the ideas.
Why did they do it? It’s a response to a decade of economic stagnation in the 1970s. Under that stagnation, American businesses came to the conclusion that the only way they could come out of the economic malaise was by doing two things: rolling back the welfare state and dismantling the trade union movement. Why? The welfare state imposed a lot of costs on business along with the regulations that came with it, such as the demand for good pensions, the demand for safety, and the demand for a level of corporate taxation that could fund all the government programs.
When your margins are going down, when your rate of return on investments is being squeezed, now every little cost that you’re having to incur has a marginally greater impact on you than when you had high profits and high margins. And back then, you felt that you could absorb all the demands that the welfare state was making on you as a business.
Now, when your profit margins are shrinking, you’re desperate to reduce your costs. And the welfare state imposes a lot of extra costs on your normal business operations. So you’re trying to now strip down all your costs so it’s just the business operations.
The problem is, if you’re going to do that, you come up against the trade union movement, which has a place in the Democratic Party and has workplace power. If you try to take away the welfare state, you’re impacting and hurting workers. So they’re going to fight back.
This means that if you want to roll back the welfare state, you’ve got to dismantle the agency that’s been supporting it, which is the trade union movement. If you put this into economic language, you can say, “We want to return to free markets.”
How? First, you don’t want the regulations of the welfare state. You don’t want the demands that it’s making on you. You don’t want all the prohibitions that it’s put on your investment activity. And you don’t want high taxation.
Second, you want to free up the labor market. What’s the key word? “Flexibility.” You want labor market flexibility. That’s the justification; that’s not the reason you’re doing it. You don’t care about labor market regulation per se. What you care about is cheap wages and freedom to hire and fire.