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Simple (and naive) logic of free markets

June 3, 2011

“Free markets… produced greater prosperity; prosperity created middle classes; middle classes demanded better government. “Better government” implied more open government, the right of citizens to know much more about what their elected representatives were up to and to hold them accountable – at the ballot box and even in court. Transparency and accountability were essential for the proper functioning of free markets. The basic economic freedoms that underpin capitalism became concetually inseparable from core political liberties. At the heart of both lay the conviction that no person or institution can exercise these rights on someone else’s behalf. They’re not on loan from government, and the state has no right to revoke them. A marketplace for goods and services needs a marketplace for ideas. In other words, economic free markets function best within the supportive embrace of a political free market, because the full exercise of economic freedom depends on public access to information, a court system and a press that are independent of government, freedoms of speech and assembly, broad access to higher education, and the freedoms to travel and trade. Practitioners of state capitalism don’t agree.”
Source: Ian Bremmer, The End of the Free Market (New York: Portfolio, 2010) at 28-29.
However, it is worth noting that “even in the greatest economic boom times, no populous country has ever embraced pure free-market capitalism. All have adopted some form of regulated free-market capitalist system. The debate now revolves around the relative merits of the Keynesian view that increased government spending and reduced interest rates can stimulate demand, minimize unemployment, and return a damaged economy toward its natural equilibrium.” (Ibid at 38).
“State capitalism is a system in which the state dominates markets, primarily for political gain. But the division between state-capitalist and free-market countries isn’t always clear. There is no iron curtain separating the two sides neatly into opposing camps. Every country on Earth features both direct government involvement in regulating economic activity and some market exchange that exists beyond the state’s reach. No country’s economy is either purely state capitalist or purely free-market driven, and the degree of government intervention within each country fluctuates over time. That said, there are crucial differences among countries in how their governments regulate commercial activity and in their power to extend their influence.” (ibid at 43). “State capitalists see markets primarily as a tool that serves national interests, or at least those of ruling elites, rather than as an engine of opportunity for the individual. State capitalists use markets to extend their own political and economic leveraged – both within society and on the international stage.” (ibid at 52). “They try to harness [markets] for their own purposes…They want as much control as possible over economies that remain dynamic and innovative enough to produce explosive and sustainable growth.” (Ibid at 53). It is a system in which “both the referees and the strongest players” are controlled. (Ibid at 52). “Fear of chaos…, and a tradition of secrecy, and centralized control…” predates state capitalism (ibid at 52).
Commonly-used instruments of state capitalism: (1) state-owned sectors (state-owned enterprises), (2) regulation (mandatory restraints/standards: selective regulation: unequally strict among different sectors), (3) subsidies, and (4) monopoly practices.
State capitalism = protectionism, not really???
State capitalism vs free markets: political differences on the proper role of government in the society/economy.
Who (mainly) bet on state capitalism for the prosperity and sustainability of their countries and their political systems? China, Russia, Saudi Arabia…(ibid at 47)…
Who (mainly) bet on free market (free trade and free enterprise) for the prosperity and sustainability of their countries and their political systems? The US, Europe, Japan, Canada, Australia…(ibid at 48)… Government intervention (for example, the US’s $787 billion USD stimulus plan in 2009)… is “to save the free market, not to bury it”???? (ibid at 48).
Post-WWII Japanese approach: Government (especially MITI) “functioned as both a regulator and an interventionist policy maker. It orchestrated strategic industrial cartels, research and development, and mergers and investment decisions. It established and enforced environmental, health, and safety stantardards. It settled disputes between companies and unhappy customers. Its administrators guided the development of new technologies. It shielded vulnerable Japanese companies from foreign competition.” (ibid at 49).
Singaporean model: “the ruling People’s Action Party, … exercised nearly total control of parliament for more than fifty years, works to promote entrepreneurialism and economic competition.” Lee Hsien Loong: political competition can “cripple decision-making.” (ibid at 53).
Putin: “Any Russian who doesn’t regret the disintegration of the Soviet Union has no heart, but one who wants to revive it has no head.” (Ibid at 53).

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