Debates in the United States over the economy, government and business tend to be viewed as one between free marketeers on the Right and government interventionists on the Left. As Arthur Brooks, president of the American Enterprise Institute, puts it at the outset of this week's edition of the Washington Post's “Five Myths” feature:

The 2012 presidential campaign is shaping up to be a battle of two economic philosophies. One favors a greater redistributive and regulatory role for the government; the other prioritizes the values of free enterprise, including private property, individual liberty and limited government.

It is appropriate to view some issues of public policy this way. Some people, who are found more on the Left than the Right, believe that even a smoothly operating free market does not meet all important public needs. There may be, for example, tragedy-of-the-commons phenomena that lead to unacceptable environmental degradation, to which an appropriate response is government-introduced incentives that lead the market to operate in a less destructive way. There may be other social needs, such as safety nets for the disadvantaged, to which the favored response might be not a tilting of market incentives but instead a circumvention of the market with governmental programs. Of course other people, found mainly on the Right, have different views about such issues.

In looking around at what is wrong with our crisis-generating, inequality-accentuating economy, however, one finds far more instances in which there is not enough of a free market than of ills flowing from a free market's unfettered operation. Brooks gets to this point when he identifies as his fourth myth to dispel, “The free market caused the financial meltdown.” Actually, says Brooks, “It wasn't free enterprise that was at fault; it was the lack of free enterprise.” He's right about that, although in his zeal to indict government he quickly narrows his description of the problem. “Statism and its co-dependent spouse—corporate cronyism—melted down our economy,” he says, pointing to the housing bubble and the role of government-chartered Fannie Mae and Freddie Mac.

That sort of codependence is indeed part of the problem, and one could find glaring examples of it in, say, the military-industrial complex. Another example that recently came to light through investigative journalism of the New York Times is a privatized system of halfway houses in New Jersey, run by a firm with close ties to the state's governor, Chris Christie. The halfway houses are houses of misery with awful supervision and resulting rampant drug use, gang violence and frequent escapes. As Paul Krugman, someone who approaches most political and economic issues from a much different perspective than Arthur Brooks, has observed, one thing companies like the one running the halfway houses

are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn't any market here, and there is, therefore, no reason to expect any magical gains in efficiency.

But government-contractor cronyism is still only a piece of the problem. The deficit in free markets is found in much else of the private sector, where there is no governmental angle at all. The myth involved here is that a private sector untrammeled by government interference equals a free market. It doesn't.

Take, for example, the compensation of corporate chief executives. CEO pay in the United States is vastly inflated, by any of several measures: by how much it has increased over the years, by comparison with pay throughout the same enterprises, by comparison with pay for CEOs in European corporations, by comparison with pay for senior executives in government and just by contemplating the value added by any one person, even the one in the top job. If we had a free market in CEOs, the pay of most of them would be much lower. Those are, after all, highly desirable jobs. For every CEO who is pulling down $10 million annually, there are probably several comparably talented executives who would love to have the position, would run the company just as well and be willing to do the job for a mere, say, $3 million. But there is nothing close to a free market in CEOs. Instead, what passes for corporate governance in much of the American private sector involves self-perpetuating structures led most often by an executive chairman.

A few months ago I attended a forum, oozing with a free-market ethos, in which the dominant theme of the speakers was the unwisdom of government interference in the private sector. Another member of the audience had the temerity to raise an issue about CEO pay along the lines of what I just mentioned. The response from the stage was, “Well, if a company gets the right person, those several million dollars aren't going to be very important.” When the questioner shot back that this assumes there is only one “right person,” the moderator changed the subject.

The departures from a free market often take the form of assuming there is only one “right” something—a CEO, an investment bank, a management adviser. At least as often the departures are a simple matter of control and exclusion. This is frequently the case in the financial sector, the portion of the American economy that is most bloated and parasitic and that attracts a disproportionate amount of young talent for the same reason that Willie Sutton robbed banks: because that's where the money is. Never mind for the moment the corruption of free markets that involves outright illegality, a new instance of which seems to arise nearly every week—including insider trading and, in the most recent story, the manipulation of Libor. Many bushels of money are made legally not by someone providing a superior product or service in competition with other providers but instead as a function of special access to assets, high barriers to entry by would-be competitors and manipulations too complicated for others—including not just the public but even would-be government regulators—to understand. These factors, especially the last one, had at least as much to do with the recession-precipitating financial meltdown as the government-chartered status of the giant mortgage companies.

The politically driven attention to Bain Capital has provided another window into the deficiency of free markets in the financial sector. The deficiency goes beyond the general respect in which the private-equity game (other than the part that involves venture capital helping to get start-ups off the ground) is itself a testimonial to a deficiency in free markets and to how players in the game are positioned to do things that John Q. Investor cannot. Where exclusion and an absence of competition became a surefire moneymaker for Bain was after it took control of a business, when it could then use that control to milk fees from the company no matter how well or poorly it was doing. As one description in the Times puts it:

Bain structured deals so that it was difficult for the firm and its executives to ever really lose, even if practically everyone else involved with the company that Bain owned did, including its employees, creditors and even, at times, investors in Bain's funds.

One example was a Michigan-based automotive supplier that sustained mounting losses for three years before filing for bankruptcy in 2000. All through this period, Bain continued to collect an annual $950,000 “advisory fee.” Over five years, Bain extracted more than $10 million in various fees from the company, while the $16 million stake that Bain's investors had in the company was wiped out. This situation is the antithesis of a free market, in which those who do better in open competition become financial winners and those who do not are losers. There was no competition for Bain's “advice.” This was instead a game of "heads I win, tails you lose."

Where government can intervene to increase the role of free markets in the economy, it should—not because government intervention is good but instead because free markets are good. The clearest example of such intervention is antitrust enforcement. Admittedly, beyond classic antitrust cases the opportunities for government to do good in this way are much harder to identify. It is one thing to go after a Microsoft or the old AT&T, in which the antitrust enforcers could count computers or telephones and make a case about a monopoly. It is something else to identify noncompetitive aspects of legerdemain in the financial sector, let alone to come up with feasible ways to do something about it.

Even if government solutions are not always obvious, let us at least be clear and honest about the nature of the issues involved. The usual way of expressing the main lines of debate, as Brooks expresses them, is incorrect. There is nothing anti–free enterprise about spotlighting and criticizing the structural inadequacies in the private sector or in favoring regulation to correct those inadequacies. To the contrary, such critics are the true proponents of free markets. The enemies of free markets are those who defend the status quo or resist any government interference with the private sector no matter what noncompetitive excesses, inequities and impediments that sector embodies.