Even capitalism’s fan club is losing faith

Free-market economists are generally seen as the most hardcore cheerleaders for capitalism. Others may equivocate or criticise, but economists are typically viewed as the high priests of market values. They are the ones who are portrayed as spreading the gospel of the benefits of economic growth and the untrammelled free market.

One year on from the onset of the credit crunch, it should be clear that this reputation is undeserved. Anyone who bothers to read what free market economists actually say – as opposed to assuming they know what is being argued – should notice a deep sense of doubt. The self-healing powers of the market are being called into question even by the staunchest free marketeers. Every day seems to bring proposals for new forms of regulation of the economy and finance. Indeed, their views often sound more like those of anti-globalisation activists than those conventionally associated with free marketeers.

Perhaps the most striking example is that of Martin Wolf, the chief economics commentator of the Financial Times and the author of an eloquent defence of globalisation (1). In response to the rescue of Bear Stearns, a troubled investment bank, by America’s Federal Reserve, he wrote: ‘Remember March 14 2008: it was the day the dream of global free market capitalism died.’ (2) In the same article, he quoted Joseph Ackerman, the chief executive of Deutsche Bank, saying: ‘I no longer believe in the market’s self-healing power.’

Wolf’s conclusion was that the financial markets can no longer be allowed to run along broadly free-market lines. Instead, he said, ‘there will need to be far greater regulation of such institutions’ (3). In this sense, he joined the critics of the free market who have long argued that the financial markets are a giant casino that cannot be allowed to operate untamed.

Nor are doubts on the efficacy of the free market restricted to Martin Wolf or to discussion of the financial markets. A belief in free trade – another cornerstone of the free-market outlook – is also under attack from former adherents. Take Alan Blinder, a former economic adviser to President Bill Clinton and a governor of the Federal Reserve. He started a recent article by saying ‘I’m a free trader down to my toes’, before going on to question some of the basic tenets of free trade (4). He argued that: ‘The offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.’

Blinder claimed some of his colleagues had branded him a ‘heretic’ for putting forward such views (5). In fact, many free-market economists are arguing, implicitly or explicitly, for the regulation of trade in goods and services. Larry Summers, a former US treasury secretary, sounds almost like an ‘anti-capitalist’ activist when he warns of a ‘race to the bottom’ in national regulations and the need for international labour standards (6). On a more academic note, Paul Krugman, a leading international trade theorist as well as a New York Times columnist, has recently argued that trade with low-income countries can lead to greater inequality than previously assumed (7). The clear implication of such arguments is that more extensive regulation of international trade is necessary. Whatever views others may take on this subject, it is a clear retreat from the ideal of free trade.

Free-market economists are not supporters of uninhibited economic growth, as is often assumed. The underlying assumption behind many of their criticisms is that the market can be too dynamic. Surging commodity prices and the rise of emerging economies such as China only seem to confirm this view (8). That is why they favour more restraints on market activity. This leads them on to question the benefits of growth itself.

Last week, Willem Buiter, a professor at the London School of Economics and former member of the Bank of England’s monetary policy committee, wrote in the Financial Times: ‘So how bad will things get? After the slowdown/recession has corrected the excesses of the past decade, prospects for the overdeveloped part of the world are quite reasonable, as long as material aspirations moderate in line with modest prospects for sustained growth in standards of living. For emerging and developing countries at the right end of the commodity boom, the potential for prosperity is there, as long as the resource curse is avoided. For poorer countries at the wrong end of the commodity boom, the combination of the terms-of-trade shock and acute environmental challenge will make life very difficult.’ (9)

The reference to the ‘overdeveloped part of the world’ is particularly telling. Buiter seems to think that a key problem is that the West is too wealthy rather than the developing world is too poor. In this respect, he sounds like many contemporary environmentalists.

Some might assume that the severity of the credit crunch explains why free-market economists are so gloomy about the prospects for capitalism. But such a contention does not hold up to scrutiny. Even mentioning the current economic slowdown in the same breath as the Great Depression of the 1930s is absurd. Between 1929 and 1933 America’s GDP fell by about 30 per cent and industrial production declined by 47 per cent (10). Unemployment rose to about a quarter of the civilian labour force and thousands of banks failed (11). The social dislocation of the Great Depression also helped pave the way for the rise of fascism and the Second World War.

Today, even according to the numbers that economists hold so dear, the situation is not comparable. According to the latest official figures, American GDP fell by an annual rate of 0.2 per cent in the final quarter of 2007, followed by a rise of 0.7 per cent in the first quarter of 2008 and an increase of 1.9 per cent in the second quarter (12). The July 2008 Staff Report from the International Monetary Fund forecasts growth of 1.75 per cent in 2008 and 0.75 per cent in 2009 (13). Of course, more rapid growth would be preferable to such slow growth, but the current slowdown is in no way comparable to the 1930s or even to the recession of 1981-1982, when American GDP fell by two per cent (14). Meanwhile, while the American and British economies are growing slowly, it should be remembered that the developing world is still enjoying relatively rapid growth.

The differences with the past are qualitative as well as quantitative. As Mick Hume has previously argued on spiked, the current downturn can be seen primarily as a consumption-led slowdown (see The real ‘depression’ is in political outlook). The problems are concentrated in the spheres of personal consumption and in the financial markets rather than the productive side of the economy. The slowdown is not characterised by the mass shakeouts of industrial enterprises that were the hallmarks of earlier downturns.

Of course, free marketeers with a sense of history do not fully accept the analogy with the 1930s. Niall Ferguson, a Harvard historian and arch free marketeer, recently argued in the Financial Times that ‘this is not the Great Depression 2.0’ (15). However, in the same article he talked of the possibility of a ‘catastrophic convergence’ of an American banking crisis, rising commodity prices and a global slowdown. In any case, one of the main differences he drew between the current problems and the past was not the objective situation, but the fact that today’s financial regulators are likely to act in a more astute way than their predecessors. As a defence of capitalism, it was a timid one.

It is also important to recognise that the free-market doubts about capitalism predate the onset of the credit crunch a year ago. Perhaps the most striking reservation is contained in the British Stern Review on the economics of climate change published in October 2006. It includes the argument that: ‘Climate change is the greatest market failure the world has ever seen, and it interacts with other market imperfections.’ (16) In other words, Stern views what is often portrayed as the greatest threat to humanity as a result of a failure of capitalism. Since the prices of goods and services do not reflect their environmental costs there is, it is conceded, the potential for capitalism to do great harm. For example, the price of a car does not embody the cost of pollution or the greenhouse gases that it emits.

That said, free-market ideologues do not see any alternative to the market. Yet at the same time, they concede that capitalism can do immense harm – indeed, they often overstate the case. This helps explain why their mindset is so gloomy. Such an outlook opens the way for even those who were previously the most ardent free marketeers to propose new and ever-more intrusive forms of restraint on economic activity.

Under such circumstances it is not the so-called anti-capitalists or anti-globalisation activists who lead the way in attacking the market. On the contrary, the core arguments of anti-globalisation thinkers such as Naomi Klein have already been expressed by those who are often wrongly seen as capitalism’s cheerleaders (17). And when the activists at Kingsnorth climate change camp in Kent, England, rail against ‘overconsumption’, they are only echoing the words of a former Bank of England official (18). Capitalism’s loudest cheerleaders find it difficult to defend the market system nowadays.

Even the most ardent free marketeers have bought into a one-sided critique of the market (19). They have at least partly accepted the mistaken view that capitalism is too dynamic rather than understanding that the real problem is that it is not dynamic enough. Even basic principles such as the benefits of economic growth and the need for development are being called into question.

Free-market economists cannot be relied upon to promote the benefits of a richer world in which everyone can enjoy the benefits of prosperity. That task demands the emergence of a new tradition that puts forward a more detailed critique of the limitations of the free market and unequivocally rejects the prevailing anti-consumption and anti-growth ethos of our time.

Daniel Ben-Ami is a journalist and author based in London. Visit his website here.

(1) For a review of Wolf’s book defending globalisation see Why Globalisation Works, by Daniel Ben-Ami

(2) The rescue of Bear Stearns marks liberalisation’s limit, Financial Times, 26 March 2008

(3) The rescue of Bear Stearns marks liberalisation’s limit, Financial Times, 26 March 2008

(4) Free trade’s great, but offshoring rattles me, Alan S Blinder, Washington Post 6 May 2007

(5) Free trade’s great, but offshoring rattles me, Alan S Blinder, Washington Post 6 May 2007

(6) A strategy to promote healthy globalisation, Lawrence Summers, Financial Times, 5 May 2008

(7) Trade and wages, reconsidered, Paul Krugman, February 2008 (pdf). Further examples of free marketers expressing doubts about globalisation can be found at No cheers for globalisation, Dani Rodrik, Guardian, 31 July 2008

(8) Paul Samuelson, a doyen of mainstream economics in the period following the Second World War, has argued that Chinese economic development can permanently hit real incomes in America. This contradicts the free market orthodoxy which says that both sides can benefit from the relationship. See Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization, Journal of Economic Perspectives 18(3), summer 2004 (abstract only publicly available), and An elder challenges outsourcing’s orthodoxy, Steve Lohr, New York Times, 9 September 2004

(9) Welcome to the world of diminished expectations, Willem Buiter, Financial Times, 6 August 2008

(10) ’Great Depression’, in Encyclopaedia Britannica Online (subscription required).

(11) The Climax of Capitalism, Tom Kemp, Longman 1990, p72.

(12) News release: Gross Domestic Product, Bureau of Economic Analysis, 31 July 2008

(13) United States: 2008 Article IV consultation, International Monetary Fund, p18 (pdf)

(14) ’Great Depression’, in Encyclopaedia Britannica Online (subscription required).

(15) How a local squall might become a global tempest, Niall Ferguson, Financial Times, 7 August 2008

(16) The Stern Review

(17) For a review of Naomi Klein’s latest book see Capitalism in ‘ruthless profit making’ shock!, Neil Davenport, spiked, 16 November 2007

(18) Kingsnorth: a camp of uncritical conformity, by Rob Lyons

(19) On the one-sided character of contemporary anti-capitalism see Starbucks and the socialism of fools, by Brendan O’Neill