In Search of a Free Market Solution
When do the free markets cease to be self-correcting? The article charts the evolution of economic thought, from traditional laissez-faire to modern-day free market economies.
A long time ago, the forefathers of economics set the stage for what came to be known as the free market economy. It all started with Adam Smith’s classical work, titled An Inquiry into the Nature and Causes of the Wealth of Nations, that laid the foundation of ideas of freedom and efficiency. This eighteenth-century classic revolutionized the way we look at economies today and inspired the economics textbooks taught at universities today.
Free market economics, driven by the infamous invisible hand, promotes production processes within an economy without any government intervention. The demand of goods by consumers and supply by producers sets the market equilibrium price and quantity at which the trade takes place. Smith termed this economic system as laissez-faire, a word of french origin that means ‘leave alone.’ The market, thus, should be left alone, free of government intervention.
Despite this, in The Wealth of Nations, Adam Smith addresses the lack of motivation among private players to supply education and, to its respite, proposes that it should be upon the state to provide education to its citizens. Still, other features of the free market make the economy unsustainable, unlike what Smith then proposed.
One of the central themes of his book extends throughout its first part. It notably is the division of labor within a pin factory. The idea is simple yet intuitive. On the one hand, a single worker will take the enormity of time to complete manufacturing a pin. He would have to single-handedly perform all the tasks — straightening and cutting down a wire, making the head, and packaging it. On the other hand, the same set of operations will take much less time when divided among different workers.
“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands.”
Once considered a revelation, it now remains a thing in the past. Technological advancements and growing dependence on Artificial Intelligence (AI) have transformed the sense of efficient production. Although arguments such as increased efficiency, freedom to innovate, and demand-driven production favor a free market economy, the scourge of inequality and persistence of market failure defies its presence.
The COVID-19 pandemic is one such disruption that has led to increasing income, wealth, and employment inequities. The 1930s Great Depression, which was a landmark event, indeed, further reformed economic thought. Keynesianism emerged and became popular to complement the war effort and depression caused by it. It proposed using government intervention as a policy tool during an economic slowdown, or in that case, a deep depression.
Since then, the free market idea has evolved from time to time, searching for a new solution. The monetarist view, pioneered by Milton Freidman in the late 1960s, believed in little government intervention, much like (also, unlike) the classical approach. It asserted that the more the government borrowed to spend, the higher will be the inflation. Further, it will crowd out private investment, making the wealthy wealthier and leading to exasperated inequalities.
One of Friedman’s assumptions was that people tend to adjust their annual spending habits with an increase in yearly incomes due to their permanence compared to a temporary, short-lived stimulus.
Soon, as we entered the 1980s, the Washington Consensus paved a path for the developing economies to defeat the crushing debt crisis using market-led development strategies. The fundamental financial institutions — the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade (now, the World Trade Organisation) — promised economic growth and prosperity and its trickling down to low and middle-income population.
Neoliberalism — a radical ideology that emerged during the same period, the 1980s — was shaped as Reaganomics and Thatcherism, respectively, in the United States and the United Kingdom. Both were essentially a thrust of free-market policies, massive privatization drives, and tax reductions. They aimed at shifting the economic burden of the government onto the private sector. Despite it all, present-day scenarios narrate a different story.
An interesting take on free markets is that they don’t exist. An article entitled “13 Ways We Can Fix The “Free Market” So It Works For Regular People, Not Just The Rich” provides an account of this idea proposed by Robert Reich. It states that a marketplace, being a highly engineered space, is run by rules — thousands of laws, regulations, bills, and codes.
If they exist, free markets reveal their dark sides in four domains — consumer spending, investment, health, and politics. Growing consumerism has led to increased spending, burning a hole in consumer’s pockets and making them financially vulnerable. Volatile financial markets, driven by stories, anecdotes, and some research, lead people to make bad investments with no relief offered. Though people receive a due share of gains, a loss could be a steep loss. Recent history is testimony- bad investments could, in no time, tremble the confidence of the whole financial system.
The market allows access and consumption of tobacco, alcohol, and sugary beverages with limited or no restrictions whatsoever. Lastly, a democratic political system resembles a free market economy. Politicians raise money for their campaigns from the ones with large money vaults and even larger vested interests. For investors, it is an investment opportunity. For politicians, it is a means to retain their jobs. And, alas, what is at work here, in all its glory, is a free market, providing a non-solution.
