Australia’s commentariat is thickly populated with right-wing guardians of the doctrine of free markets. Many of them have been groomed by right-wing think tanks in a long-term campaign to drag our perceptions to the right. Chris Berg and Sinclair Davidson, of the Institute of Public Affairs, are regulars on the ABC’s The Drum Opinion. The campaign has been highly successful, as the free market mantra has taken over both sides of politics and dominates economic discussion.
However it is very easy to demonstrate the doctrine is hopelessly wrong. The evidence is clear that free markets have retarded growth. The theory underlying the doctrine is plainly and absurdly unrealistic. The Global Financial Crisis was caused by financial markets building up mountains of debt, yet debt and money are absent from mainstream economic models and, apparently, from economists’ thinking. Hence their blindness to the GFC’s approach, its cause and its remedy.
These problems will be covered in a three-part series. First, the evidence.
Free markets are supposed to be the best and only way to organise an economy. Despite three decades of trumpeting the alleged glories of de-regulated, privatised, free-trade economies, the evidence tells a different story. Even by their favoured measure, the rate of growth of GDP, performance during the free-market era, since 1980, has been retarded relative to that in the post-war decades, during which governments more actively managed economies. And that is quite apart from the recent financial market collapse.
The mediocre performance of free markets is demonstrated comprehensively in a 2005 study by Mark Weisbrot and others. They show that during the free-market era, 1980-2005, GDP growth rates in over 100 countries averaged only 1.09%, less than half of the 1960-1980 growth rates, which averaged 2.47%.
For Latin America the period 1980-2005 has been the worst in their history,worse even than the Great Depression of the 1930s. In 2001 Argentina suffered a near-total financial collapse brought on by following free-market strictures. Since 2002 it has been recovering strongly, but only by explicitly re-asserting control over the economy, especially the financial markets. From 2002 to 2011 its GDP grew by 94% in real terms, an average of about 7% real growth, much the best in the hemisphere.
The poor performance of free-markets has been evident, to those willing to look, since at least 1997. Stephen Bell, in Ungoverning the Economy (Oxford, 1997) summarised some basic numbers for Australia and for the OECD. The period 1983-93 features slower growth, higher inflation and higher unemployment than in the pre-1974 period. Australian unemployment averaged 1.3% (1953-1974) and inflation averaged 3.3%, all while growth averaged 5.2% (1960-1974). Unemployment rates that low are now regarded as impossible by the youthfully or wilfully ignorant.
This poor performance in the aggregate is on top of the dramatic increase in inequality enabled by deregulation, accompanied by steady unravelling of the social fabric and increased stresses on families. In the US median incomes have been nearly stagnant for three decades, and male incomes have been steadily declining.
It is an indictment both of free-market economics and of economic reporting that such basic and telling information is virtually unknown in mainstream political discussion.
It is usually acknowledged that free markets do not work in absolutely all circumstances. Such failures are called “imperfections”, implying they’re only a little bit wrong, or occur only in minor situations. Nicholas Stern, in his Review on the Economics of Climate Change, called global warming the greatest market failure in history. He is not quite right, because global warming is only one of many planetary abuses resulting from the failure of markets to include such externalised environmental costs. Failure on such a scale cannot be dismissed as an imperfection.
The clearest indictment of free-market economics is the Global Financial Crisis that began in 2007. Deregulated financial markets essentially seized up through the creation of excessive debt, and were only reactivated through dramatic government interventions, using about $2 trillion of taxpayers’ money for bailouts. A second phase of the crisis now seems imminent, this time centred in Europe.
In spite of the GFC free-market economics is still the dominant paradigm. Free-market economists claim the crisis was an unforeseeable event, something that no-one could have predicted. However it is well known that many did predict its occurrence, if not its precise timing, notably Australia’s Steve Keen.
The claim that the crisis could not have been foreseen might have slight credence if there had not been a Great Depression in the 1930s, and another in the 1890s, and many sudden financial malfunctions before those. There have also been lesser malfunctions, such as the 1987 stock market crash, the 1997 Asian currency meltdown, the bursting of the dot-com bubble and a number of national crises in Mexico, Japan, Argentina, Brazil and other countries. And all of these episodes are in addition to something called “the business cycle”, in which slow-downs and recessions occur semi-regularly, accompanied by considerable economic disruption.
In Part II we will look at the absurdly unrealistic theory behind free-market rhetoric. In Part III we will see there is a good reason why free-market economists are blind to these persistent malfunctions. In the meantime, the actual record of the free-market era can not be described as anything better than mediocrity leading into disaster.
Well done! look forward to the rest.
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The retardation in growth in advanced economies over the last 30 years correlates 100% with the increase in size of government debt, which has had the effect of crowding out the market and letting it operate properly. As a society we need to go back to the drawing board on what we want government to do and how much we’re prepared to pay for it.
I’d suggest that the rate of unemployment for young people is a good indicator about a) the health of a society and b) its priorities.
Spain’s youth unemployment rate approaches 50%, for example. How can anyone argue that Spain has its priorities right when this is the case. Is it a result of free markets? No. Is it a result of government policies? Yes. It’s impossible to demonstrate otherwise.
Good people can argue about where the priority should be but to deny the primary role of the state in creating the problem is to guarantee that a solution cannot be found.
But government debt is small compared with private debt, so why would it be the dominant factor. The “crowding out” story is the standard assumption, but there’s nothing to back it.
As to the correlation, that doesn’t establish causation. Neoliberals cut taxes and that has increased government debt, at the same time as growth has been retarded by unfettered markets, which often produce perverse results.
And if “the state” is so bad, why was growth so strong in the post-war decades, when governments were much more involved in the economy?
You have repeated the statements of faith without giving any convincing reasons.
Are we all talking about private debt and not government debt, are we?
A pissy little economy like Greece shouldn’t even be on the radar as a problem but its debt is so great that it can’t service it and it risks collapsing banks around the world. That’s Greek government debt. Are we talking about the debt of Greek shipping lines? Or any other Greek company?
Are we talking about the debt of Exxon or Mobil or Shell or millions of other private companies?
Why not? According to you the failure has been in the free market. Please explain to everyone how free markets caused the Greek government to be in such debt.
Government bonds are only backed by the full faith and credit of the government itself. If financial institutions think that they’re not going to get their money back or they will but it will be in devalued currency then interest rates increase and it’s trouble all around.
The problems in the world are entirely due to government debt created by the need to keep the social welfare state going. If the last three decades have proved anything it’s the failure of the social democratic idea; crushed under the weight of financial reality.
“Government deficits and debts even were at a historic low, in 2008, at the onset of the crisis. The mess was caused by absolutely reckless increases of private debts, in some countries as much of 40% of GDP a year and in many countries over 15 or 20% of GDP for many years in a stretch, increases which reached their zenith in 2006-2007. Private debts were at a historical high, in 2008.” This based on data from the EC:
There’s a graph that shows it even more clearly – if I find it I’ll note it here.
And you could educated yourself at Steve Keen’s blog, starting with
And again, the last three decades is when we moved away from social democracy, and economies have performed worse. You continue to ignore the better performance of the post-war years.
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The post-war growth was due to the ending of the war itself, not due to clever bureaucrats. Production was diverted from the war-effort to consumer goods and services.
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The first point, that government’s more actively managed the economy pre-1980, is completely false. The opposite is true. Economic freedom in Europe and USA has fallen since 1980, I didn’t bother to read the rest of your artcle after that.