Sunday, February 10, 2013

Hurrah for the free market! (Can you leave now, please?)

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


  1. The phrase "wonderful servant, terrible master" comes to mind. People forget that before Adam Smith published "The Wealth of Nations", he wrote "The Theory of Moral Sentiments". His much touted "invisible hand" of the free market only works within a framework where people have ethical standards. The problem isn't so much the free market itself as it is allowing money to dominate politics.

  2. Quite interesting post, thank you.

    I am not sure if all of the seven billion current denizens of planet earth will be applauding, (and only a few will be demanding an encore) but I would agree that it is time now for the "free" " market"...(and was it ever "free" and was it ever even truly a "market" ? ) take a bow and leave the stage and in particular for the fundamentalist "true believers" "free marketeer" ideologues to leave and never return. (and many also were true cynics because they understood quite well the false goods they were selling)

    Nor am I very certain that -at this belated stage- "well regulated" markets in the context of so called "good governance" will be enough to replace it and put us on the right track. (i.e. one that can produce equity, justice, "reasonable" prosperity, and so called environmental "sustainability")

    Climate change and other related environmental phenomena and looming catastrophes of an environmental nature are probably already too far advanced. But having worked in China over several years, I AM quite sure that it was not "good governance" (at least not as it is commonly understood and defined) which "worked extremely well" in China for most of the last 30 years. (though perhaps strong central government did) (China now has Gini coefficients worse than the U.S. and is an environmental catastrophe in the making)

    Good governance at the country level is still possible in more and more countries (few actually have it at the moment) but although a nice and worthy goal, it is very difficult to achieve in practice. And good (and effective) governance at the global level is next to impossible to achieve as long as "sovereign nation states" will continue to exist. (some sovereignty will have to be formally given up by states for good global governance to be born) Though some improved forms of policy coordination certainly are possible. (at least in theory and mostly regarding those issues that are relatively easy to deal with)

    But it certainly will be interesting to see what actually happens in the short term and in the mid-term future because the "free market" (to the extent it ever really existed) is clearly on its way out and "muddling through" seems no longer to be an option. (too many black swans hovering overhead, some barely visible, although also many extremely serious problems which are quite visbile -but are not being addressed- )

    Hopefully 2013 will have some happy surprises for us all and churn out some truly creative and top quality leaders. (both national, corporate and in the international public sector and in civil society) At the moment not too many are in sight and Davos (at least the part of it which is intended for public consumption) was rather disappointing and not particularly inspiring.

    Thanks again for the article....and regards,

    Max Iacono

  3. Good article. I do agree with Max Iacono that more regulation and good governance may simply not be enough.

    I did just publish a book, Garden Earth, From Hunter and Gatherers to global capitalism and therafter which makes the point that the "capitalist system is a system of colonization, bent and suitable for geographical, physical and economic expansion. Society has now reached a stage of saturation; there is nothing left to colonize. The behaviours that were appropriate or at least acceptable for a species in rapid expansion are not the ones suitable for a life in balance."

    I call for a regenerative economy instead of the linear economy where nature is just resources to exploit or a dump for our waste.

    I just wrote about it on:

    1. Hello Gunnar,

      Thanks for your comment above... in which you also mentioned me. I now have read Chapter 33 of your book at the link above. I think it's quite clear, is a good analysis, and I mostly agree with it.

      For me personally the big question is how do we get from where we are today to wherever we need to be or decide to be in the future? And your vision of the future seems correct or at least reasonable enough to me. And perhaps in the rest of your book you also say something about how to get (human society on planet earth) from.... here... to ....there.

      That is, what would be the transformation program or process and who and how would implement it? (starting with the 196 nation states we now have with their respective political economies and political systems, the thousands of large corporations, the weak United Nations system, the existing civil society, and etc. etc.; i.e. who starts and who drives the process, and how would it snowball and gain momentum?

      My own view (and it has been my view for some time) is that the main problem we face as a human civilization on planet earth...(if a "civilization" is indeed what we are) is population and sheer numbers.
      (and then of course also GDP per capita and its resource and pollution intensity)

      In the year 1800 global population was about 1 billion persons. Coal had not started being used yet. (it started to be used soon after that). And of course other forms of fossil fuel energy also were not being used and the world ran mostly on what are today called biofuels. The massive explosion in population and in GDP had not occurred yet. And I think it was mostly driven -or at least permitted- first by coal, and then by petroleum. (and as I am sure you know we will sooner or later run out of it and arguing about when although important, is in a way also beside the point; we WILL run out of it)

      There are many things that I don't like about capitalism (both the recent globalized neo-liberal variety and also most of its earlier forms; and these things are probably not that different from the ones you don't like. On the other hand for at least a sizeable minority life is certainly livable. (although not sustainable)

      But I think that if we went back to having just one billion people (and how we would do that is a different and separate issue) I believe we could have almost any kind of system (capitalist, free market, social democratic capitalism, "socialist market economy with Chinese or any other characteristics", socialist, communist, or any hybrid thereof and of course also including your own "garden-earth regenerative model". With only one billion persons, the human system embedded within the ecosystem, in turn embedded and interacting with the the geophysical system (in some version of the Gaia hypothesis) all would be more or less sustainable with just a minor bit of good will, regulation and restraint.

      (end of part I of II)

    2. part II

      But completely unsurprisingly (at least to me) reducing our numbers is something that is almost never even raised let alone talked about or seriously discussed. At least not in any practical terms. It seems to me that it is almost a taboo subject. (in most circles including environmental activism circles)

      All analyses, discussions, systems and scenarios are viewed as somehow needing to accommodate what is presumably an immutable given. Namely that we will be at least 7 billion humans on earth and more likely we will be a minimum of 10 billion before population stabilizes. Personally I think THAT can NEVER work, no matter how one configures and organizes human society on the planet. And organizing it the way it was organized in 1800 certainly would NOT work.
      (that is, in my opinion, a ten billion strong human society cannot be sustained, no matter what political, economic, social, cultural and institutional systems are put in place either globally or locally)

      And the preceding -even though it would be far easier....(or at least it would have been easier than any alternative approach I can think of) namely to gradually reduce world population back down to about a billion in a "humane" manner....(and no, I don't mean by having a major world war to decimate earth’s human population, which is usually the actual meaning given to "humane" or at least to "human-like" )...and also just to pick a number, since it also could be larger or smaller than a billion... and gradually and in harmony and in tandem with such population shrinkage, also gradually shrink GDP step by step. (and its resource intensity also could be decreased as renewables are increasingly phased in)

      At the end of such a process (which could take about a century) (but now it's probably too late for that too) we would have a planet with just a billion people. Personally (I think) (but basing it only on my own life experience) I would prefer to live in a kind of social democratic system but with considerably more popular participation and direct democracy than now exists in most social democracies, but a socialist system also would be fine as also would be a reasonably regulated capitalist system. (though I don't know if a capitalist system ever could work without pursuing economic growth ad infinitum which simply cannot work as we are finally starting to realize even though we were clearly warned in 1972 by Limits to Growth) But since we don't seem to lack for Nobel prize winning economists so perhaps some of them could devote some thought to this option too?
      It may all sound like a strange idea but increasingly I am thinking that either humans will be able to gradually and humanely bring their own numbers down or nature and physics will do it for them in “less nice” ways.

      I certainly would be interested in hearing your own thoughts about any of the above. All the best and regards,

      Max Iacono

    3. P.S. coal was of course used in much lesser quantities also well before 1800, - and in particular in the eighteenth century- but very large scale extraction and use only started around 1800.

  4. I agree with everything but the following...

    "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."

    Top down governance, no matter how "good" it is, is also something that needs to bow out to make space for something different.



Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)