By Edward Hadas
LONDON — What is it about “free markets”? The phrase creates a frisson of excitement among a certain group of people. In The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society, Binyamin Appelbaum describes what happened when these intellectual fanatics were given the power to act on their ideas. It is not a happy tale.
Like most foolish notions about human society, the basic belief in free markets is simple, appealing, and deeply wrong. It’s simple to think that all will be well if governments just leave competitive markets alone. It’s also appealing: There’s no need to plan or judge if price signals provided by the self-regulating market do all the economic work. And it’s wrong: Neither human nature nor the modern economy works the way these economists assume. Appelbaum’s narrative provides ample evidence of that.
The book is filled with lively accounts of personalities, ideas and events. It starts with Milton Friedman, widely regarded as the intellectual godfather of the free-market cult. Appelbaum, who writes about economics for the New York Times, lingers on how the Nobel laureate inspired the US military to replace compulsory conscription with better-paid soldiers. The innovation helped limit domestic opposition to a series of long wars with dubious purpose, because fewer children of the opinion-forming elite entered the armed forces.
Friedman’s simplistic monetarism had a brief triumph in the late 1970s. The goal was to find a mechanical process which would take active government out of the financial system. It coincided with a sharp drop in persistent inflation. Eventually, however, the approach failed totally. Free-market monetarists underestimated the complexity of inflationary behavior, the tendency of financial institutions to lend foolishly and the value of additional government spending when unemployment is high.
Undaunted, the free-market crew moved on to lowering tax rates, especially for rich people. Though these policies have not failed spectacularly, they have not delivered anything like the promised increase in entrepreneurial activity. As might be expected from an idea promoted by people who value individuals over the common good, lower taxes for high earners have led to increased economic inequality and social divisions.
The anti-government ideologues were basically thwarted in their campaign against helpful government regulations, which they demonized as “red tape.” Appelbaum’s account focuses on the few successes of the Friedman-inspired effort. He could have paid more attention to the areas where regulation has expanded. In the United States these include environmental standards, working conditions, food labelling and product safety. The American government today has much more to say about healthcare and education than in the past.
Free-marketers may fume. However, politicians know that when there is a problem in the economy or in society, most voters now expect the government to address it.
Appelbaum gets back on track by recounting another massive free-market policy error: financial liberalization. The true believers predicted that free markets in currencies and an end to restrictions on cross-border movements of money would lead to stable exchange rates and economically helpful flows of money. The actual results have been volatility, speculation, and periodic financial crises.
Although the book mostly focuses on the United States, Appelbaum also looks at the poor overseas record of the “Chicago Boys,” the free-market economists trained at the University of Chicago. In Chile their destructive policies were rescued by a speculative boom in copper prices. In Iceland, the economy was turned into something like a mid-sized hedge fund, with disastrous results.
It is easy and right to mock free-market ideology. After all, a complex economy cannot regulate itself, people cannot be trusted to behave rationally or honestly, and most of us, whether regular employees or chief executives, will often choose to cooperate rather than compete.
The Economists’ Hour does the demolition job well, although it focuses more on political and personal dramas than on the battles of ideas. Appelbaum’s tentative prediction is that the “hour” of the anti-government school of economics is now over and the time for more activist governments is at hand.
There are, though, two quite different reasons to be cautious about expecting a major change. First, by downplaying the many areas of government expansion, Appelbaum exaggerates the practical impact of free-market thinking. If governments become more intrusive, that may in fact be evidence of continuity rather than a big intellectual shift.
Second, professional economists themselves have not changed much. They mostly still have an exaggerated trust in the mechanics of supply and demand, and struggle to incorporate the impact of society, institutions, and cultures. They also still systematically underestimate the prevalence and success of centralised planning and extensive welfare states. Faced with such a large intellectual blind spot, it will take some time to stop giving bad advice.
Of course, the fanatics will never give up. Like the Marxists of old, they can always find an excuse for past failures. The rest of the world, though, can learn from Appelbaum’s account.