Free market ideology, as represented in the nuanced ideas of Adam Smith or F.A. Hayek, has not outlived its purposefulness. Indeed, rejecting this ideology would be not just intellectually tragic. Rejection would be practically tragic, threatening the welfare and well-being of billions of people throughout the world.
What we do need to reject is “free market ideology” as caricatured by critics and corrupted by politics. Now more than any time in my professional lifetime actual free market economics needs to capture the imaginations of young scientists, political intellectuals, and the general public, so that we can reverse the economic catastrophe we are starring down due to fiscal irresponsibility and monetary mischief. The dire fiscal situation in Europe and the US is not a matter of mere opinion; we have simply reached the tipping point of sustainable public expenditures. In order to address the problem, we need to revisit fundamental questions concerning the proper scale and scope of government in a free society. Sound economic reasoning, not flights of theoretical fantasy, is what is required for this task.
The past thirty years proved the validity of Adam Smith’s assertion, “The natural effort of every individual to better his own condition…is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations".
During “the age of Milton Friedman”, as Andrei Shleifer dubed it, key developments in economic freedom—deregulation in the US and UK, the collapse of communism in East and Central Europe, and the opening up of the economies of China and India—allowed individuals to surmount government meddling in the economy. From 1980 to 2005, there were marked, world-wide improvements in life expectancy, education, democracy, and living standards as integration into a world economy delivered billions of individuals from poverty, ignorance and squalor.September 11, 2001 changed that. “The war on terror” justified another great expansion of the scale and scope of government. Thus, like the Great Depression before it, the Great Recession was preceded not by a “do nothing” administration that supported free market policies, but by an activist administration that embraced the power of government intervention and greatly expanded the role of government throughout the economy and society at large.
The great free market economic thinkers from Adam Smith to F. A. Hayek would understand why this change happened. They never argued that individuals were hyper-rational actors possessed with full and complete information, operating in perfectly competitive markets. They only argued that individuals will pursue, in the best way they can, those activities that are in their interest to pursue. These thinkers knew that individuals are individuals, fallible but capable human actors plagued by alluring hopes and haunting fears, not lightening calculators of pleasure and pain. Human fallibility may cause “failures,” inefficient markets, but this very fallibility also sets in motion the market process of discovery and adjustment.
A setting of private property rights, free pricing, and accurate profit and loss accounting aligns incentives and communicates information so that individuals realize the mutual gains from trade with one another. Efficient markets are an outcome of a process of discovery, learning, and adjustment, not an assumption going into the analysis. That process, however, operates within political, legal, and social institutions. Those institutions can promulgate policies that block discovery, inhibit learning, and prevent adjustment, causing the market to operate poorly.
So rather than free market ideology being obsolete, what is needed is a reinvigorated ideological vision of the free market economy: a society of free and responsible individuals who have the opportunity to prosper in a market economy based on profit and loss and to live in caring communities. Yes, caring communities. The Adam Smith that wrote The Wealth of Nations also wrote The Theory of Moral Sentiments, and the F. A. Hayek that wrote Individualism and Economic Order also wrote about the corruption of morals in The Fatal Conceit. Our challenge today is to embrace the full scope of free market ideology so as to understand the preconditions under which we can live better together in a world of peace, prosperity, and progress.