Australia’s commentariat is thickly populated with right-wing guardians of the doctrine of free markets. Many of them have been groomed by right-wing think tanks in a long-term campaign to drag our perceptions to the right. Chris Berg and Sinclair Davidson, of the Institute of Public Affairs, are regulars on the ABC’s The Drum Opinion. The campaign has been highly successful, as the free market mantra has taken over both sides of politics and dominates economic discussion.
However it is very easy to demonstrate the doctrine is hopelessly wrong. The evidence is clear that free markets have retarded growth. The theory underlying the doctrine is plainly and absurdly unrealistic. The Global Financial Crisis was caused by financial markets building up mountains of debt, yet debt and money are absent from mainstream economic models and, apparently, from economists’ thinking. Hence their blindness to the GFC’s approach, its cause and its remedy.
These problems will be covered in a three-part series. First, the evidence.
Free markets are supposed to be the best and only way to organise an economy. Despite three decades of trumpeting the alleged glories of de-regulated, privatised, free-trade economies, the evidence tells a different story. Even by their favoured measure, the rate of growth of GDP, performance during the free-market era, since 1980, has been retarded relative to that in the post-war decades, during which governments more actively managed economies. And that is quite apart from the recent financial market collapse.
The mediocre performance of free markets is demonstrated comprehensively in a 2005 study by Mark Weisbrot and others. They show that during the free-market era, 1980-2005, GDP growth rates in over 100 countries averaged only 1.09%, less than half of the 1960-1980 growth rates, which averaged 2.47%.
For Latin America the period 1980-2005 has been the worst in their history,worse even than the Great Depression of the 1930s. In 2001 Argentina suffered a near-total financial collapse brought on by following free-market strictures. Since 2002 it has been recovering strongly, but only by explicitly re-asserting control over the economy, especially the financial markets. From 2002 to 2011 its GDP grew by 94% in real terms, an average of about 7% real growth, much the best in the hemisphere.
The poor performance of free-markets has been evident, to those willing to look, since at least 1997. Stephen Bell, in Ungoverning the Economy (Oxford, 1997) summarised some basic numbers for Australia and for the OECD. The period 1983-93 features slower growth, higher inflation and higher unemployment than in the pre-1974 period. Australian unemployment averaged 1.3% (1953-1974) and inflation averaged 3.3%, all while growth averaged 5.2% (1960-1974). Unemployment rates that low are now regarded as impossible by the youthfully or wilfully ignorant.
This poor performance in the aggregate is on top of the dramatic increase in inequality enabled by deregulation, accompanied by steady unravelling of the social fabric and increased stresses on families. In the US median incomes have been nearly stagnant for three decades, and male incomes have been steadily declining.
It is an indictment both of free-market economics and of economic reporting that such basic and telling information is virtually unknown in mainstream political discussion.
It is usually acknowledged that free markets do not work in absolutely all circumstances. Such failures are called “imperfections”, implying they’re only a little bit wrong, or occur only in minor situations. Nicholas Stern, in his Review on the Economics of Climate Change, called global warming the greatest market failure in history. He is not quite right, because global warming is only one of many planetary abuses resulting from the failure of markets to include such externalised environmental costs. Failure on such a scale cannot be dismissed as an imperfection.
The clearest indictment of free-market economics is the Global Financial Crisis that began in 2007. Deregulated financial markets essentially seized up through the creation of excessive debt, and were only reactivated through dramatic government interventions, using about $2 trillion of taxpayers’ money for bailouts. A second phase of the crisis now seems imminent, this time centred in Europe.
In spite of the GFC free-market economics is still the dominant paradigm. Free-market economists claim the crisis was an unforeseeable event, something that no-one could have predicted. However it is well known that many did predict its occurrence, if not its precise timing, notably Australia’s Steve Keen.
The claim that the crisis could not have been foreseen might have slight credence if there had not been a Great Depression in the 1930s, and another in the 1890s, and many sudden financial malfunctions before those. There have also been lesser malfunctions, such as the 1987 stock market crash, the 1997 Asian currency meltdown, the bursting of the dot-com bubble and a number of national crises in Mexico, Japan, Argentina, Brazil and other countries. And all of these episodes are in addition to something called “the business cycle”, in which slow-downs and recessions occur semi-regularly, accompanied by considerable economic disruption.
In Part II we will look at the absurdly unrealistic theory behind free-market rhetoric. In Part III we will see there is a good reason why free-market economists are blind to these persistent malfunctions. In the meantime, the actual record of the free-market era can not be described as anything better than mediocrity leading into disaster.