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Free-marketers must make a convincing case

By Oliver Hartwich - posted Monday, 1 December 2008


Markets, wherever they have been employed to solve economic problems, have been largely successful. This is most evident in cases where countries have chosen different paths. Communist East Germany collapsed, not the social market economy of the West. The Berlin Wall was torn down from the East, not the West. Capitalist South Korea prospers, while in North Korea people starve.

Markets have consistently proven to be better mechanisms for delivering better products and services at cheaper prices. It is easy to forget, but before the Australian economy opened to international competition, the quality of Australian-made products often left much to be desired. Worse still, they were so expensive that applying tariffs to raise the prices of imported goods was the only way to make people buy Australian. The subsequent success of microeconomic and trade reforms gave Australian consumers better and more affordable choices. It would be foolish to forget these lessons only because of the current financial crisis. Economic liberalism beats all of the big government alternatives in providing the right conditions for economic growth and wealth creation.

It is also worth setting the long term record straight on economic growth. The International Monetary Fund has just revised its forecast for next year’s economic growth to -0.3 per cent for developed countries and 2.2 per cent for the world as a whole. Everything under 3 per cent global growth, in the IMF’s own terminology, is a recession. But we should not forget that this sluggish growth, painful as it may be, is just a blip in the long term success of global capitalism.

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Per capita GDP grew at a snail’s pace for most of humankind’s history. But it skyrocketed from the time of the Industrial Revolution, which was also the beginning of capitalism as we know it.

The British economist Angus Maddison once calculated that the average inhabitant of the world in 1700 was only producing just a third more than the average person in the year 1. But in the following three centuries, worldwide per capita GDP increased tenfold. That this could happen is due to a number of factors, among them the end of mercantilist trade restrictions, the development of corporations and financial institutions, and above all the growing worldwide division of labour. In other words, the dramatic improvements in the global economy can directly be traced back to the institutions of the free market economy. The world’s stunning economic development in the past three centuries was not an accident but the result of global capitalism.

It is true that some countries have developed faster than others, but on closer inspection the reasons are obvious. There are now a number of empirical studies examining the effects of economic freedom on a country’s economy and society. The results confirm the superiority of capitalism. That economic freedom and economic growth are highly correlated may not surprise the supporters of free markets. But the beneficial effects of capitalism go far beyond the economic sphere. Countries with a liberal economic order also tend to be more democratic, they usually have a better record on human rights, and their inhabitants are also often healthier and better educated. Economic freedom, so the empirical evidence suggests, is as close to being a social cure-all as it gets.

And yet, even without all its beneficial results, something else about economic freedom is at least as important - that it cannot be divided from political freedoms. You cannot be “a little bit free”, just as you cannot be “a little bit pregnant”. The issue of economic liberty is part of the wider, more general question of what relationship we should have with each other and with the state. If we allow the government or its bureaucrats to tell us what we may buy and sell, and to whom and at what price, there is no logical reason why the government would not eventually attempt to decide other things for us as well.

There is a slippery slope that descends from a society that is fundamentally free towards a world where the individual is a mere servant of the state. But if we believe in human dignity, and in the principal right to make one’s own choices in life, then we have to be vigilant about all attempts to shift the power balance between the state and the individual. The current financial crisis may serve the supporters of more government control as a Trojan horse from which to mount an attack that pushes back the boundaries of the free society. The result may be a loss of autonomy that is felt far beyond the marketplace.

These are difficult times for liberals. The mood around the world is turning against them. Politicians find it easier to blame crazy economists and greedy managers for financial turmoil than to understand and fix their own mistakes.

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Free-marketers still have the evidence of economic history on their side, but they will have to make their case more forcefully from now on. They face a constant battle of ideas that can never be decisively won. But they can take consolation in the fact that today’s swing to the left will not spell the end of history, let alone of capitalism.

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First published in The Sydney Morning Herald on November 15, 2008 as "This is not the end of capitalism".



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About the Author

Dr Oliver Hartwich is a Research Fellow at the Centre for Independent Studies. His paper No Particular Place To Go: The Federal Government's Ill-Conceived Support for the Australian Car Industry was published by CIS on March 17, 2009.

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