Since the advent of civilisations, markets have represented the most effective social technology. They were developed by humanity to meet human needs and tackle evolving socioeconomic challenges. From barter to maritime trade, economic principles of scarcity and choice have been addressed through value exchanges in physical markets. Historically, markets functioned as tools to generate wealth and foster human prosperity; they were typically regulated by centralised systems under monarchical rule.
Regulated markets underwent a radical transformation ever since the publication of “The Wealth of Nations,” in 1776, by the Scottish economist and moral philosopher, Adam Smith, a towering figure of the Enlightenment. Although referenced only once in his tome, the term “invisible hand of markets” has since become the defining paradigm in economic theory and practice. The enduring metaphor was immediately patronised by liberal economists and affluent merchants, who erroneously propagated the belief that free markets are infallible and invariably lead to optimal outcomes.
Adam Smith emphasised virtues of justice, courage, temperance and prudence in all human activities, inclusive of trade and market mechanisms. He compared temperance to “self-control” and prudence to “self-interest.” Both terms were misrepresented and taken out of context by astute political ideologues and economic elites, who ushered in the flawed economic model of neoliberalism focused on market fundamentalism. Over time, virtues ceased to be part of market terminology. Markets began functioning as independent entities, governed by their own distinct morals and value systems, which sharply contrasted Smith’s proposition that markets should be integrated within society and reflect its values.
Victorian era economists such as John Stuart Mill, reinterpreting Adam Smith’s concept of “self-interest,” introduced the notion of “Homo economicus.” This school of thought posits that individuals are solely motivated by the desire to possess wealth, thus separating ethical considerations from economic behavior. The relegation of economics, trade and commerce into market fundamentalism has its roots in three monumental episodes in American history at the turn of the twentieth century.
Firstly, factories, particularly textile mills and mines in the United States, employed child labour. When public outcry clamoured for governmental regulation, the factory owners launched an insidious propaganda that such radical interventions infringed on the prerogatives of the capitalist class. They contended that government intervention was tantamount to an assault on freedom; American business owners surmised that children were better off in factories earning sweat shop wages than being in school.
The second issue pertained to disputes over workers’ compensation. Activists and unions lobbied for government legislation to mandate adequate compensation for workplace accidents and occupational hazards affecting survivors and dependents, often referred to as Accident Crises. In the early twentieth century, the workplace fatality rate was one in every 1,000 workers. Based on current estimates, this would translate to approximately 1.5 million fatalities. The business community opposed this initiative, asserting that they were best equipped to manage their own factories, and that government intervention would impede their operational autonomy.
The final episode covered rural electrification, highlighting the private sector’s disinclination to undertake this initiative due to concerns about economic feasibility and profitability of running electric lines across rural America. As a result, farming communities were eluded of this spectacular invention of the time. The National Electric Light Association (NELA) launched a vociferous propaganda against government intervention, claiming it would increase the costs of electricity production and distribution. Their campaign included enlisting academics and evangelists for lecture series extolling the virtues of capitalism, rewriting school textbooks to emphasise free market principles related to profit and welfare, and opposing government regulations and investments as contrary to individual freedom.
As a result, in the United States, free market capitalism became synonymous with functioning democracies, while any efforts to introduce socialism or collective action are perceived as potential regressions into communism. In Europe, the roots of neoliberal ideologies can be traced to post-World War I Vienna and the disintegration of the Hapsburg Empire’s trading system.
Ludwig von Mises and Frederick Hayek emerged as the high priests of neoliberalism in Europe. They identified the common enemy of free markets as labour unions and worker cooperatives. Mises even advocated, in 1928, for the suppression of the vibrant Austrian labour unions and social democracy by state action, thus contributing for a political climate for Austrian fascism. In his influential book Liberalism, often seen as the inviolable gospel of free market capitalism, he argues that dictators and fascists, with their noble intentions, have preserved European civilisation through their interventions. Frederick Hayek famously remarked that objecting to free markets is akin to complaining about the weather.
Iterations of such spurious ideologies have resurfaced in the twenty-first century, where demagogues, despots and fascists have ascended to power through democratic polity only to exercise their authoritarian instincts. These crafty politicians and economically illiterate cultists invariably promise the gullible voter base economic prosperity and appear as culture warriors. And under the pretext of tirelessly reviving the historical, civilisational and national glories, they propagate bigotry, xenophobia and cultural nationalism, relegating themselves into fissiparous forces. They collude with millionaires and billionaires to appropriate the wealth of the nation, creating monopolies and duopolies leaving the socioeconomic prospects of the poor and working class in doldrums.
Neoliberalism emerged from obscurity and was embraced as the dominant state-sponsored economic policy during the 1980s, when Ronald Reagan assumed the presidency of the United States. An actor from B-grade Hollywood films, who had performed alongside chimpanzees, evolved into a successful political leader of the twentieth century. He championed unfettered capitalism and free markets, dismantled labour unions, introduced government deregulation, and reduced fiscal spending.
Reaganomics in the United States found a counterpart in Thatcherism in the United Kingdom, which pursued an aggressive privatisation agenda for public entities. Milton Friedman and George Stigler of the Chicago School emerged as the champions of neoliberalism primarily by hijacking the writings of Adam Smith, compressing his ideas and work into one singular phrase “self-interest.”
However, their interpretation has completely overlooked another seminal work by Adam Smith titled The Theory of Moral Sentiments, that necessitates it reading in conjunction with The Wealth of Nations. Neoliberals interpret Adam Smith’s advocacy of self-interest as prioritising profits over principles. This is in stark contrast to Smith’s assertion that the pursuit of self-interest and profits should be balanced with benevolence and equitable wealth distribution. Smith would be appalled by the unbridled quest for profits in the twenty-first century, which prioritises a skewed development model that favours elitism and encapsulated in the business mantra known as “shareholder capitalism.” An astute analysis of Wealth of Nations reveals its inherent emphasis on “Stakeholder Capitalism.”
Free markets are fraught with challenges related to inefficiency and underperformance when addressing “externalities.” By definition, an “externality” occurs when the actions of one individual have a negative impact on others, and these effects are not accounted for in the prices paid or received. Climate change exemplifies an externality where greenhouse gas emissions from developed nations contribute to environmental degradation, biodiversity loss, and rising sea levels in developing countries that host transnational manufacturing facilities. This outsourcing stems from internationalisation of production and location advantages in cheap labor and lax environmental standards. Regrettably, climate change impacts are not included in GDP calculations, which only factor in the prices consumers pay for goods and services.
In the 1950s, Exxon Mobil’s scientists conducted pioneering research on the potential impacts of climate change associated with the Anthropocene epoch. However, their distraught management later decided to reject these findings and adopted a stance of climate change skepticism when they assessed that acknowledging it could adversely impact their profits.
Public health represents another externality that necessitates stringent government regulations related to labour contracts. Ravenous employers who deny sick leave to their employees, who subsist on minimal income with familial responsibilities and no savings, pose a significant risk to public health if they become ill. Free markets, without government oversight, often fail to adequately provide fringe benefits for the workforce and are often exploitative. This limitation of market mechanisms was evident during the Black Swan event of Covid-19 pandemic. Markets were not sufficiently prepared—both financially and operationally—to manage a pandemic of such magnitude and intensity in providing the necessary medical tests, quarantine centers and supply of masks.
A critique of neoliberalism is the perceived disparity between current profits and future risks. Corporations and economic elites are existentially rent-seeking, and the majority are concerned only about “bottom lines,” market share and stock prices. Their Corporate Social Responsibility programmes are public relations hype and marketing ploys rather than a genuine interest in giving back to the society. The double and triple bottom line social and sustainability initiatives are, at best, hypocritical.
Most free-market firms are afflicted with “principal agent problem” where top executives amass disproportionate wealth compared to line and staff managers and lower-level executives. Neoclassical economists defended such exploitation and income inequality by developing the Marginal Productivity Theory of workers’ compensation tied to their contributions to the society.
The Great Recession of 2008 is a testament to the manifest mismanagement within US financial firms and the effects of deregulation. The downside risks, interconnections, and volatility of financial instruments in the housing market eroded trillions of dollars in global wealth.
The bailouts for insolvent financial institutions reached approximately $1.2 trillion in the United States £1.5 trillion for ailing banks in Europe. The grotesque form of shareholder capitalism was witnessed when American Airlines received $14 billion dollars in federal bailout funds as air travel industry was crippled by the Covid-19 pandemic.
But ruefully, the firm used the hard-earned taxpayer dollars for dividend payouts and stock buybacks while they were adding $14 billion debt to their balance sheet. Research indicated that the five largest U.S. airlines, which have sought $50 billion in bailouts to mitigate pandemic-related losses, distributed payouts exceeding $45 billion over five years to shareholders and top executives. These were criminally irresponsible acts when 40 per cent of households had less than $400 in their savings accounts.
Contrary to the economic policy of free market capitalism associated with the political economy of neoliberalism, the world has witnessed stellar economic growth and progress when China adopted a mix of state directed industrial policy and controlled market economy. Chinese integration of capitalism with socialism is redefined under the moniker “Socialism with Chinese characteristics.” Since 1978, under the leadership of Deng Xiaoping, China has embarked on economic reforms and opened the country to foreign investments. These initiatives have lifted over 800 million Chinese citizens out of poverty, an achievement unprecedented in human history.
The East Asian Miracle is attributed to strategic government policy interventions that utilised markets as instruments to achieve socioeconomic progress. The Japanese economy experienced significant growth following the Meiji Restoration, which established secular institutions, a strong executive and an independent judiciary, guard-railed by a constitution and parliamentary system.
The governments of Japan and South Korea promoted “national champions” through the Zaibatsu and Chaebol programs, respectively. They handpicked companies to design and develop products capable of competing internationally. These leading-edge programs resulted in the creation of world-class global conglomerates such as Sony, Toyota, Honda, Hitachi, Samsung, Hyundai, and LG.
In Africa, the “Washington Consensus” and its coerced implementation through International Monetary Fund (IMF) structural adjustment programs resulted in economic stagnation of the continent for nearly twenty-five years. These free-market policies mandated the privatisation of industries, devaluation of currency, reduced government intervention in market mechanisms, and decreased fiscal spending in the true spirit of free market liberalisation.
When African countries transitioned from previous dictatorships to pro-reform governments that used markets as instruments, they began to experience sustained economic growth. Noteworthy beneficiaries of this progress include Ethiopia, Namibia Ghana, Nigeria and Botswana.
Ethiopia has consistently demonstrated its robust economic performance, registering a 10 per cent real growth rate since 2004, which is among the highest in the world. These governments prioritised infrastructure development and made substantial investments in healthcare and education, while concurrently promoting market reforms and addressing market distortions of high inflation, outrageous black-market premiums and negative real interest rates.
Free markets operate effectively only under certain restrictive conditions. Firstly, the market structure needs to exhibit high levels of competition or be reasonably close to perfect competition. Secondly, there should be no significant information asymmetries or imperfect risk markets. If these anomalies persist, they can lead to market failures. This is the malefactor in the high frequency of recessions and short boom-and-bust economic cycles, perpetuating a vicious loop of public distrust of political leaders, governments, and markets.
Market failures, economic deprivation, income and social inequalities, and public rage leads to populism and the rise of authoritarianism. Capitalism and free market systems yield suboptimal results if their underpinnings are unethical and immoral. However, the biggest threat to democracy and governance arises when the government is usurped by powerful corporations and economic elites. In such a scenario, how could the solution be more government?
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