The onset of the global financial crisis is a troubling development for both U.S. and foreign markets. In May, the U.S. unemployment rate hit 9.4%. Within the last thirty years, only in 1982 and 1983 was this macroeconomic indicator even more ominous, climbing above 10%. In December 2008, the U.S. Federal Reserve was forced to drop the federal funds rate to a range of a zero and .25%, severely constraining the arsenal of tools that the institution has available to prop up the failing aggregate demand. And in late May of this year, the Mortgage Bankers Association reported that “12.07 percent of mortgage loans were delinquent or in the foreclosure process.”
An equally troubling implication, however, is the apparent decreased faith in the power of free markets among the general public and the acceleration of the building of the road toward the so-called “state capitalism.” As John B. Judis, senior editor of The New Republic, reminds us “the severe global economic downturn has undermined faith in the magic of the market and resurrected the specter of socialism.” This specter appears to be taking on a global proportion. As the May/June edition of the Foreign Policy magazine points out, In France, Sarkozy announced that “Laissez-faire is finished.” In UK, Gordon Brown effectively nationalized the banking industry. And in the U.S., Mr. Obama is bailing out one bank after another, has recently passed a series of new regulations for credit card companies, and senior officials are reporting that discussions to create a single agency to regulate the banking industry are currently underway.
What is a free-market proponent to do in a time when online sales of Karl Marx’s classic Das Kapital are surging? Presented below are three coherent steps that free-market advocates can take in the process of restoring faith in the now-threatened ideals of capitalism.
Acknowledge that free-markets are not flawless.
Even conservative economists like Gregory Mankiw agree that Smith’s “invisible hand” is not omnipotent. In fact, one of Mankiw’s 10 Principles of Economics is that government intervention is sometimes both justified and necessary. Negative externalities (e.g. pollution) and information asymmetries are both appropriate examples. It’d be naïve, after all, for us to genuinely believe that the general public will trust the “good-will of” of the corporate sector. At a time when the global financial giants like AIG are falling to the ground, unquestioned orthodoxy and blind ideological faith in the power of what Stiglitz calls “market fundamentalism” will only make conservatives seem out of touch with reality. If there’s any chance for success, we must make the general acknowledgment that there are times when governments must intervene to improve market outcomes, both in terms of efficiency and equity. This concession will go long way toward boosting the conservative credence among an increasingly distrustful public.
While acknowledging free-market failures, don’t forget to emphasize the achievements.
As Foreign Affairs points out in its May/June 2009 edition, the biggest mass movement out of poverty occurred in China during the 1980s, following Den Xiaoping’s free-market reforms in the agricultural sector. Consumers saw a sizable decline in fare prices as a result of the airline industry deregulation in the 1970s, and, as Adrian Karatnycky has calculated, that there is significant statistical correlation between economic freedom (as reported by the Index of Economic Freedom) and political freedom, as recorded by Freedom House. Though it’s vital to remain realistic, it’s equally instrumental, if not more, to emphasize the global benefits of fostering free markets. It’s important that the public not forget the periods of substantial economic growth and improved standards of living that would otherwise not have occurred under a socialist market system. The most difficult part of this task, of course, is compelling citizens to look beyond the short term duress that we’ve been experiencing for the past several months and to remember the times of prosperity in the mid 1990s and even the early 2000s, following the end of the recession at the beginning of these decades.
Emphasize that we do not live in a free market world.
Increasingly, politicians and the general public alike are busy proliferating the idea that the current economic crisis is flagrant evidence that the free-market system has been failed. To counter this superficially convincing fallacy, free-market proponents must be clear in pointing out that even in the United States and Hong Kong, the bastions of free markets, capitalism does not rule without limits. Instead of blaming BP and Exxon for the high oil prices, for example, why don’t we look toward state-owned oil companies, which control up to 90% of oil petroleum production? And instead of attributing unemployment and apartment shortages in New York and San Francisco to corporate greed, why not emphasize the unintended consequences of unemployment and shortages as a result of minimum wage and price ceiling laws? It’s hypocritical to assert that the government is the best solution to a problem that it itself contributed to.
The key ingredient in the recipe for free-market salvation lies in the abandonment of unquestioned power of the “invisible hand.” It’s difficult, after all, to convince a recently fired mother and a teenager who has been endlessly searching for a summer job that government is their enemy. The process of philosophical recovery will be long and painful, but certainly not impossible. Only with diligence and a newfound sense of realism, however, can we expect to see resurgence in the power of free markets.
Bremmer, Ian. “State Capitalism Comes of Age.” Foreign Affairs May-June 2009: 40-55.
E., Stiglitz, Joseph. Making Globalization Work. New York: W. W. Norton, 2007.
Judis, John B. “Confessions of a True Believer.” Foreign Policy May-June 2009: 142-43.
Mankiw, Gregory N. Principles of Economics. 4th ed. Mason: South-Western CENGAGE Learning, 2007.
U.S. Bureau of Labor Statistics (June, 2009)