“The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery”
Free markets get bad press. Criticism of free markets is increasingly being crafted by masters of inconsequence, masquerading as paragons of compassion, as oracular sources of a discredited dogma. The opponents of the Washington Consensus’ of free trade, of free capital, of free choice, are pumped full of the arrogance of being submerged in the lazy world of the closed mind. They blame the market and capitalism for the credit crisis rather than government interference and special interests. Frederick Hayek is derided as the architect of the model that led to the global financial crisis. However the crisis has only proven Hayek right. When Governments intervene in the economy the results are distortions, bubbles and false booms.
Leading US presidential candidates on both sides of the aisle are promising restricting the free movement of capital, labour and goods. Billionaire Donald Trump would most likely be the most anti-business and anti-market GOP candidate ever if he is chosen as the nominee. His comments on the Pfizer merger and his promise to prevent companies moving offshore support this view, despite free movement of capital being a cornerstone of our economy. Elsewhere Trump rejects free trade agreements by throwing in falsehoods about China and promises protectionism. Trump is also utterly opposed to free movement of labour and immigration –despite the economic benefits that immigration brings. Trump may be more of a socialist that Sanders!
Following the credit crisis, it is not wise to be seen promoting free markets and Trump’s brand of economic populism has struck a chord with people as much as his darker political populism. Socialism and protectionism is back in vogue like as it was in the 1930s. Why is this view dangerous?
Global free trade is a win-win situation. Free trade increases trading partners’ living standards, higher quality goods can be consumed at less expensive prices. If a nation produces and exports goods in which it has a comparative advantage, it can import cheaper and superior goods that it can’t produce efficiently from other countries in return. Producers in both countries gain as they gain access to new markets and consumers gain as they can buy more goods at cheaper prices.
An economy that is subject to global market forces will be more productive per unit of labour and machinery employed in the production process, as new technologies are produced. The economy simply must be innovative to remain competitive. In the US private business sector, this productivity ratio of output to input, has more than doubled in the last 50 years the period since the US has abandoned the notorious Smoot- Hawley 1930 tariff act and began to promote multilateral trade- which was a major contributor to the Great Depression. This must be remembered when economic nationalism rears its ugly head. Calls for more trade tariffs must be ignored. Now is the time for more free trade.
The annual Heritage Foundation/Wall Street Journal Index of Economic freedom is an accurate measure of countries that have most enthusiastically adopted an open economy. The index measures nations in terms of free trade and investment, property rights, minimal government intervention and regulation. The index demonstrates a positive correlation between neo-liberalism and per capita GDP growth.
Developed countries that have high levels of government intervention in the economy, experience lower growth rates than those that are classified as economically free. The Franco-German policies of excessive government intervention in the guise of barriers to trade, subsidies, high taxes, constrictive labour markets, excessive regulations and massive welfare spending has ensured that the EU has suffered weak growth, with only average growth rates of 1.8% since 1990. This doesn’t just affect the EU but also the developing world by preventing the global economy from reaching its potential and thus increasing the size of the cake’. Resistance to market reform and loyalty to the out-moded welfare state and bloated public spending prevent the EU from truly challenging US economic dominance.
Freedom House annually produces a list of some of the worst violators of human rights. Countries such as Burma, Equatorial Guinea, Cuba, Libya, North Korea, Syria, Sudan and Turkmenistan are also economically unfree and far from being liberal market economies. Frederic Bastiat a 19th century free market economist said that if goods do not cross borders, soldiers will’. Research by Erik Gartzke of Columbia University has shown that economies that subscribe to neo-liberal principles are not interested in waging war on each other. They simply have too much to lose. What they could theoretically gain by force, they can gain through mediation, negotiation and trade. Trade and Capital flows don’t discriminate on grounds of gender, sexuality, race or nationality. The market is Colour blind. The only Colour that matters is green.
It is easy to point out individual cases of where capitalism has failed – Lehman Bros, Bear Stearns, AIG for example. It is easy to point out individual cases of where free market policies have failed because of the failure of governments to follow the principals of free market economics, as advocated by Hayek, correctly. No system with human involvement is fool-proof.
Human greed predates capitalism and human stupidity means mistakes of the past are doomed to be repeated. But, let us not blame free markets or free trade for the credit crisis, but rather rogue corporations, the greed of individuals and above all the meddling of governments. Price fixing by Governments in the form of cutting interest rates created a false boom that exploded with devastating consequences. Banks, corporations and individuals overindulged on cheap credit. It was akin to locking an alcoholic in a bar. Governments, ignoring the danger of moral hazard – the number one rule of capitalism, compounded the problem by bailing out the irresponsible. In effect the state is picking up the tab for the alcoholics. The great Austrian economist Frederick Hayek turned in his grave. By not allowing market forces to take their course and cleanse the system – governments sent out a message that failure was an option – tax payers would clean up the mess of the irresponsible. As Hayek consistently argued, for capitalism to work, badly run corporations must fail. The state cannot be allowed to distort the market, through quantitative easing, tax incentives, stimulus plans or increasing public sector spending.
Another example of state meddling was the attempt to blame hedge funds for the mess, by restricting short-selling, instead of recognising that the short-sellers were the ‘cleansers’. These were the people with foresight and common sense, who act rationally to allow a rational market to correct itself. Trump again peddles the myth that hedge funds are all to blame for the mess and promises a populist solution.
Of course, the rap-sheet against the ‘Washington consensus’ is most often trotted out by those on the left side of the aisle. To them Bernie Sanders is the great white hope. Inequality (Piketty has a lot to answer for) is the catchphrase for the Sanderistas and Corbynistas in the UK.
Reasoned debate has given way to cheap sound bites like ‘the rich get richer and the poor get poorer.’ The Washington consensus and free market economics as the pre-dominant economic ideology over the last 30 years gets burdened with the blame for this fallacy. The evidence available proves this is not true. UNDP figures show that world poverty has fallen more during the past 50 years in the period following the setting-up of the much maligned multilateral Bretton woods institutions than during the preceding 500. Between 1990 and 1998 the number of extremely poor fell by almost 100,000,000. Life expectancy was 60% of affluent countries in 1965, today it is 80%. Infant mortality was 18% in 1950. It had fallen to 6% in 1995. 60% of Asians were classified as extremely poor in 1975; the end of the 1990s classified fewer than 20% in that way. This period coincided with the opening up of markets and reduction of state intervention in this region. Yet the left throughout Europe, and elsewhere, demand more and more state intervention and nationalisation.
Supporters of Sanders (and Corbyn in the UK) – the rejectionists of the left – will probably quote statistics demonstrating how inequality has grown as a result of free market economics. They will select figures to justify rejecting a policy that if used properly is the only chance for the developing world to escape malaise and poverty. They may select figures saying that the richest 1/5 of the world’s population are 74 times richer than the poorest quintile. However when these figures are adjusted for purchasing power, the richest 1/5 are only 16 times richer than the poorest. Furthermore inequality needs to be put into social and economic context. These figures are relative. We cannot compare the income of someone in the US to someone in Uganda, because of purchasing power parity. We can’t even accurately compare the income of someone in Ireland against that of someone in Romania. It is of more use to focus on raising the income of all, rather than focusing on convergence of per-capita income globally.
It is not realistic that we can have income equality throughout the world in the short-term. The only way to achieve this would be restrict private enterprise and trade. It was tried before – it didn’t really work. Venezuela was quoted by the left as an example of a country implementing 21st century socialism and increasing equality. Today the economy of that oil rich country is in ruins with rampant stagflation and crime. That socialist experiment is due to end shortly.
“The inherent blessing of socialism is the equal sharing of misery”
Ireland is cited as an example of where neo-liberal policies and market economics have ruined an economy and indebted the people. This is simply not true. In 1987 the Irish government decided the Keynesian welfare state experiment of increased government intervention, expenditure and taxes on labour and consumption, followed from 1973 to 1986, was a disaster. In 1987 the government slashed spending. Current spending was reduced by 3% and capital spending by 16% in 1988. Public Sector jobs were cut by 10,000. The size of government in the economy was significantly reduced. Tariffs on imports were reduced. In 1975 the highest tax rate was 80%. By 2003 that rate had fallen to 42%. Tax revenue soared however. Corporation tax fell from 40% in 1996 to 12.5% in 2003 and FDI flows increased massively. Ireland receives almost 20% of US FDI to the EU, despite only representing 1% of the population. In 1987 Ireland’s GDP was only 63% of the UK. By the end of the 1990’s Ireland’s GDP per capita was higher than the UK. After almost a decade of tough fiscal medicine, the country is likely to experience growth rates of close to 10% in 2015 – an extraordinary increase for a developed economy and this is due to the open nature of the Irish economy. It was Ireland’s ability to export and at
With the free market system under threat from the left and the right – any urge to bring in protectionism, autarky or to restrict freedom of capital, labour and trade must be resisted.
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