The free market has served the world well. But its best time is over.
Guest post by Graeme Maxton
Free marketeers, please take a bow. It is time for those with other ideas to take centre stage.
Let's hear it for the free marketeers!
The free market has been a wonder of our age. Its ideas have been like some remarkable scientific breakthrough that transformed the world. The free market propelled America and the West to global economic dominance, and allowed hundreds of millions of people in China and elsewhere to prosper. It won the 20th century.
But the free market's best time is now behind it. It has made all the easy gains and, after so many years of glorious progress, it is running out of steam. With its principles fully established, it has little new to say. The free market is getting old, and in the face of new challenges, its magic is fading.
The free market is still the best way we know to allocate many resources. It ensures that goods and services are delivered to those that need them in the most efficient way, for the lowest possible price. Moreover, it strives to improve this process continuously, making the system ever leaner and driving prices ever lower. By making every penny go further, this makes us better off and so improves our standard of living. The free market is also exceptional in that it not only pushes down prices, it raises profits too. It serves everyone by stimulating growth, supporting investment and aiding human development. It is also astonishingly flexible, with the ability to respond to the changing needs of the market without falling apart. The system is fair too, or at least mostly fair. It rewards those who are efficient and competitive while stragglers are swiftly killed off.
The free market has its limits however. It works best when focussed on the short term, and where returns can be monetised easily. It is great at meeting the needs of end-consumers, like you and me. But it tends to work less well when it is expected to provide basic infrastructure, like roads, railways or airports. It is also less than perfect when it is asked to provide universal services, like schooling or defence. And it fails completely when there are disasters like Fukushima, where there is a 40 year clean up, life threatening risks and little sense in allowing people to profit.
The free market fails in many other ways, however. Because it depends on little or no regulation, it has allowed the finance sector and others to manipulate markets. It has also allowed whole industrial sectors to become dominated by a handful of firms. Most troubling of all, it is a major cause of many of the biggest and more intractable problems we now face.
Because it focuses on the short term and on price, the free market has ignored many of its own nasty consequences. It has had nothing to say as the gap between rich and poor has grown, in the US, China and much of the rest of the world. It has brushed the cost of nature aside, allowing forests to be chopped down, seas to be emptied of fish and species to be entirely wiped out, because the free market gave them no meaningful value. It also has little to contribute when there is persistently high unemployment, as there is in much of the world today. Most bothersome, the free market is useless when it comes to something as big as climate change, a problem which needs global action today, to allow those living 30 years in the future to prosper.
To address these challenges needs an understanding, not from the ground up but from the top down, from those who see can the bigger picture and take the long term interests of society and the planet into account.
It needs rules and leadership and vision. It needs good governance and the biggest trouble the free market has brought us is that most people cannot now imagine these two words ever being together again. But 'good' and 'governance' do work well together. They work in Germany and they worked in Singapore for many years. They have also worked extremely well in China for most of the last 30 years. But now they need to work harder. We need more and better governance again. It is time for the credits to roll and for the free marketeers to gallop off into the sunset. They were heroes. But they cannot help us as they once did.
Graeme Maxton is the author of The End of Progress and a Fellow of the International Centre of the Club of Rome