The Myth of the Free Market

When you open any introductory macroeconomic textbook, the perspective of the economic system is prone to eulogize the benefits of the market economy, in comparison to the command socialist economy. “…Market economies are more likely than other systems to allocate resources on the basis of comparative advantage…” (D. Curtis, I. Irvine, 2016) While textbooks serve as an objective educational material, the utterance of the principle level of macroeconomics simultaneously delivers its perspective in a subtle way.

The classic economist, Adam Smith,claims in The Wealth of Nations that free markets incentivize individuals without government intervention. The industrial revolution surged the efficiency of production and overthrew the period of subsistence, building the fundamental blocks for a free market system. While the idea of capitalism was endorsed by the majority of western countries, countries adopting other economic systems maintained different views. Acutely, the opinion on the economic system is speaking from its roots of history and adoption, yet the actual efficacy remains to be considered. The superiority of the free market economic system is a social-political fabrication that can be explained predominantly by the hegemony of the powerful countries that employ it.

The establishment of the market economy as a pioneered economic theory is built on the basis of anglo-american society surrounded by the adoption of industrial revolution. The transformation from handcrafted labor to large-scale manufacturing marked a turning point in the shift from agrarian economy to industrial economy. The focus on high-value commodities and inventions substantially improved the standard of life, encouraging interdependence among countries. The international exchange of surpluses naturally forged the essential idea of the free market: to provide economic freedom for both buyers and sellers. Because industrialization created a new kind of society and market relations, the world capitalist economy found a convenient circumstance to grow on a global scale. (ATEŞ, 2008) The spontaneous occurrence of globalization, as an interdependence of nations around the globe fostered through free trade (Fernando, 2024), intensified business competition which simulates the quality of the products and benefits the consumers with efficient price. The interconnection between countries not only promotes the exchange of goods but also acts as a catalyst for economic ideology which motivates reexamination and mitigation of trade barriers. The reliance on certain supplies continues to integrate the global economy, yet the need for certain goods from other nations rely heavily on the interrelationships across borders with constant competition and national insecurity over power.

As the debate of the economic system continues, a country not only consolidates the optimal economic selection for itself but also takes notice of others’.Why so? The economic system determines the means of a country to allocate and accumulate its wealth and capital. Although the issuance of currency differs among countries, fiat money functions as the medium of exchange and is a common convertible unit for the resource. The measurable wealth, which partly embodies the development of a country and predetermines the accessible resources, is a common language for acquiring resources. Each country can be considered as an interest group and its developmental level is unique due to its own characteristics, including: historical backgrounds, demographics, geographical features, etc. Malthus’ theory underlines the limited resources on earth which are essential for human development. To preempt the finite resources and act in their best interest, the causal relationship between development and global status are further reflected in the selection of the economic system. The adoption of an economic system is a game theory to which different countries achieve their own goals. For instance, the containment as the major foreign policy of the U.S was applied to the Soviet Union to prevent the spread of communism during the cold war. The Marshall Plan which provided financial aid to Western Europe guaranteed the benefits for allyship with the U.S. In response to the Marshall Plan, Comecon (the Council for Mutual Economic Assistance), created by the Soviet Union, strengthened the economic ties of Eastern Europe. In addition, the indirect confrontation between the Soviet Union and the U.S. through proxy countries overcame the geological barrier. The National Air and Space Museum dissects the cause of the Cuban Missile Crisis as a contest between super nations. Although it seemed like that the U.S. and the Soviet Union were providing defensive assistance to Turkey and Cuba respectively, offering destructive weapons including nuclear missiles, the subtle geological position of both recipients closer to rival countries unveils the unspoken intention of the arms race. Taking part in the rivalry contest, Turkey and Cuba benefited from military and national security assistance. The alliance of other nations with the two formidable world powers permitted economic incentives; nevertheless, as political rivalry, the United States and the USSR blustered their capability and influence among the globe. The economic advantages and pressure from these countries pushed the other postwar countries to take political positions by binding to similar economical systems. The collective adoption of capitalism against the Soviet Union along with the establishment of NATO (North Atlantic Treaty Organization) disclosed the success of geopolitical strategy by forming economic and military alliances. With the collapse of the Soviet Union, the U.S. dollar soon took its unprecedented status among all currencies, advocating democracy and antipathy to communism. Hence, the advocacy of an economic regime contains political opposition due to the individual interests of a country.

Besides the political intentions embodied in the economic power, the U.S. continues to spread the influence of the free market on top of its historical dominance. The interconnectedness between economy and power induces the obsession of economical competition to fulfill the stomach for global hegemony and imperialism. The result of the historical contest sets the ground that the winning countries gain recognition in global status as well as their preference of economic regime. As the largest economy in the world, the U.S. retained its global leadership standing based on its competitive productiveness and triumph in the cold war. On top of that, the U.S. continued to take advantage of its global power as soon as it existed to set up the rules of the game. The Bretton Woods meeting resulted in the founding of the IMF and the World Bank, twin intergovernmental pillars supporting the structure of the world’s economic and financial order. The World Bank finances economic development, while the IMF oversees the international monetary system. (IMF) The establishment of the two international financial organizations greatly impacts the international monetary trajectories and the U.S. perpetuates its superior power till today. As the only World Bank Group shareholder that retains veto power over certain changes in the Bank’s structure, the U.S. plays a unique role in influencing and shaping global development priorities. (The World Bank) In the IMF, the United States has always held at least 16.75% of the votes so it alone can veto efforts to redistribute quotas and voting power. (Blomberg, Broz) The exceeding legislative power ensures the U.S. its international economic status in employing funding and other financial decisions. As a result, the U.S. prolonged its global economic status and legitimized the exertion of power through intergovernmental organizations.

The pursuit of a superior economic system claims to be in the best interest of society; however, it takes a separate path in execution. The deviation of theoretical knowledge and practical application validates the adaptation of economic policies to a variety of circumstances. According to the IMF (International Monetary Fund), “Capitalism is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.” Despite the fact that the U.S. declared its economy to be a free market one, the adopted economic system only serves under its governmental framework. The economic decisions due to the demand and supply of the market have to go through the legislative procedure to be enacted. Bruce, in his article The Political Economy of Capitalism, points out that the remaining externalities of unincluded price in the market violate Adam’s assumptions. Bruce argues the necessity of a visible hand to capitalist systems which explicitly manage the economy by government through legislature and bureaucracy. For instance, the outbreak of Covid-19 gave rise to an unprecedented repercussion in the economy, stimulating deliberation on the prevalent dogma of capitalism supremacy and governmental response to crisis. Referring to the Center on Budget and Policy Priorities, “real gross domestic product (GDP) early in the pandemic fell abruptly to 9 percent below its level at the start of the recession — a much steeper decline than the nearly 4 percent drop in the deepest part of the Great Recession”. The classical theory trajectory the changes of the economy on its economic cycle, asserting that government intervention is necessary for the economic recovery. Nonetheless, the self-correction of the economy would take time as the confidence of the populace in the economy was deteriorating. Hence, the adoption of Keynesian theory to adjust the interest rate assisted the economic recovery during the Great Recession, which was further utilized during the Covid to prevent additional disadvantages to the currency system and market confidence. Thus, the underrated government intervention which deviated from the free market methodology shortened the duration of the economic cycle during the crisis and was proven to be an efficient monetary tool for a capitalist economy. The complexity of economic issues require the government to tackle it with multiple means. It is undoubtedly impractical to spread extreme interest towards an unitary economical system considering the multifaceted nature of the national economy.

The goal of the economic system in the 20th century tends to align with the global focus: establishment of international organizations and prompting globalization and technological innovation. As the major concern of society swift stepping into the 21st century, the delayed economic systems alternation in the 20th century failed to correspond with emerging societal shifts. The idea of a gift economy enumerates numerous resources without a price in the capitalist country which lead to collective issues. The negligence of unlabeled cost and externalities causes a single-minded pursuit of profits on top of demand and supply, disregarding the intangible drawbacks and future consequences. While merely focusing on the production and profits, the society fails to take potential cost into account. Blinded by the benefits, the oversupplying manufactured goods releases enormous amounts of greenhouse gasses including carbon dioxide, methane, nitrous oxide into the atmosphere, disregarding the consequences of global warming. The failure of the market design will cause unaffordable costs that are not calculated in the current system. According to NOAA’s 2023 Annual Climate Report the combined land and ocean temperature has increased at an average rate of 0.11° Fahrenheit (0.06° Celsius) per decade since 1850, or about 2° F in total. The rate of warming since 1982 is more than three times as fast: 0.36° F (0.20° C) per decade. Ever since the industrial revolution, the major fossil fuels, oil, coal and natural gas, which sustain human development and life quality continue to surge average temperatures on Earth, jeopardizing the only known habitat of mankind. Based on the research conducted by NASA, if warming reaches 2 degrees Celsius, more than 70 percent of Earth’s coastlines will see sea-level rise greater than 0.66 feet (0.2 meters), resulting in increased coastal flooding, beach erosion, salinization of water supplies and other impacts on humans and ecological systems. Yet, with the given disastrous outcome, the short-term profits blind countries from taking precautionary measures on global warming. The lack of design to include environmental damages in the free market economy encourages countries to forgo the cost of pollution or to take responsive actions.

Moreover, on account of separate interests and power dynamics among nations, the difficulty to reach consensus on the global issues results in collective action problems. The significance of self-interest and political competition between nations discourages the likelihood of cooperation. For instance, research and development on green energy are regarded as a common good, in which environmental improvements are shared by all countries. Taking advantage of the contribution, the possibility of free-riders contributes to the status quo on global issues. To address the imminent environmental problem, the adjustment to the market price is needed to arouse the awareness of prevention and solidify the opportunity cost of energy. As one of the successful cases of market reform commercialized air pollution to avoid collective action issues, referring to the United States Environmental Production Agency, the emission ceiling and tradable allowances of carbon dioxide along with sulfur dioxide creates the economic value of pollution within the market framework. Despite the success of the Clean Air Act in the U.S., effort on global warming remains insufficient. Therefore, the invention of the free-market system fulfilled the market design of the last century; nevertheless, it contained certain market defects regarding the current demand and unsettled problems, requiring modification and paradigm shift. To efficiently resolve present social matters, it is necessary to comprehensively analyze both the advantages and drawbacks of the economic system.

The prevalent trend across the globe is the adoption of a mixed economy by most countries, strategically blending elements of both capitalism and socialism. A mixed economy recognizes the merits of a market-driven system while acknowledging the importance of social welfare and equitable distribution of resources. The move towards a mixed economy underscores the recognition that wantonly advocating for a single economic system is impractical in the complex landscape of the contemporary world. Embracing a combination of market-driven principles and socially oriented policies allows nations to strike a balance between fostering economic growth and addressing societal needs. The pragmatic approach of a mixed economy acknowledges that a one-size-fits-all economic model may not adequately respond to the diverse challenges and aspirations of a modern and interconnected global community. As countries navigate the complexities of the 21st century, the flexibility inherent in a more comprehensive economic model provides a more adaptive and responsive framework to ensure a sustainable and inclusive path forward.