All Commentary
Friday, April 1, 2011

Maybe the World Needs a Little Market Fundamentalism

Free market economists have expressed for years their concern about the ever-increasing role of the state over the economy. Despite these warnings, market regulations and restrictions have continued to grow at an alarming rate. In good times critics embrace the role of the state and proclaim, “we never had it so good,” as Leonard E. Read explains in the Clichés of Socialism number 32. But in bad times it’s a different story. The current financial crisis brings a very familiar cry: “the free market has failed us.” Thus, providing yet another excuse for even more market regulations and restrictions.

The problem is that it can’t be both. Are interventions into the market economy the cause of prosperity? If they are, then free markets cannot be blamed when things go wrong because we don’t have free markets on first place! It could, of course, be argued that there are not enough regulations but there are two problems with this. First, the flaw is still not that free markets failed us. And second, it is empirically not true.

The evidence tends to point to the importance of free markets for achieving high sustainable economic growth. Recently two empirical papers, Harvard University economist Andrei Shleifer’s The Age of Milton Friedman” and George Mason University economist Peter Leeson’s “Two Cheers for Capitalism?”, analyze economic growth throughout the world in the last quarter century. Both find similar results. Countries that became more “capitalist” during this period, meaning the freer the markets were, became wealthier, healthier, more educated, and politically freer. On the opposite, countries that restricted markets endured stagnating income, shorter lives, less education, and oppressive political regimes.

In other words, when it is appropriate to say, “we have never had it so good,” the reason is because markets have produced wealth in spite of the regulations and restrictions. In times of trouble the appropriate response should be to blame the regulations, which distorted the markets that were responsible for the wealth in the first place. What is needed in both good and bad economic times is not calls for the state to intervene, but instead calls for freer markets. The empirical evidence for pure free markets are a lot stronger than many give it credit for. As my colleague Daniel J. Smith once said, “It doesn’t make one dogmatic to embrace these facts, it makes one dogmatic to refuse to acknowledge them.” The world needs more individuals to fully embrace these facts, and maybe the world needs more market fundamentalism.

Download the Cliché of Socialism Number 32 by Leonard E. Read here.

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.