Save the market economy – save the world

Jeremy Corbyn – the former leader of the Labour party now led by Keir Starmer – was quoted as saying a few months ago that he felt vindicated in the spending pledges he made in the December 2019 General Election and that, with better timing and luck, he could have won it.

The reason for this? Government spending is now far higher than any pledges he made last year, with more intervention in private sector markets than even he contemplated.

Saving the market economy

What do democratic socialists, free marketeers and right-wing Conservatives all have in common? Answer: saving the market economy. They may differ on most things but on this one thing they do agree: the best generator of rising living standards and wealth generation in the world is the free market economy.

Of course, the reason for doing this is wholly different from that given by Corbyn in December’s election.  The purpose is not about redistribution and creating a ‘socialist’ economy, but one of saving the current economic system that is based on free markets.

Unprecedented intervention

Around the world, free-market economies have intervened in private sector markets to an unprecedented degree. Millions of private-sector workers are getting paid by the government, and business are being subsidised. Governments and central banks have poured money into the broader economy and financial markets.

The sums involved are eye-watering on a global and local basis. Some $9 trillion of additional government spending has been announced in 2020 compared with 2019. Further Quantitative Easing (QE) of around $20 trillion has been pledged, with perhaps $7 trillion to $10 trillion in the US alone. Debt will rise by even more on account of lost revenue, guarantees and foregone taxes, by some $20 trillion, or roughly an economy the size of the US.

In the UK, total debt will rise from £1.8 trillion last year to over £2.4 trillion over the next five years. This year, the UK government will likely borrow £340bn, with funding of the deficit hitting £45bn alone in April – the largest monthly amount since first recorded on this basis in 1983.

Not entirely free?

So, what is the free market economy? For classical economists, such as Adam Smith, the term ‘free market’ does not necessarily refer to a market free from government interference, but rather free from all forms of economic privilege, monopolies and artificial scarcities. A free market is one that implies that economic rent, i.e. profits generated from a lack of perfect competition, must be reduced or eliminated as much as possible through free competition. For this to happen, some government intervention is justified.

But he also said in ‘The Wealth of Nations’, that “basic institutions that protect the liberty of individuals to pursue their economic interests result in greater prosperity for the larger society”.

This means a balancing act for regulators to ensure that free markets…well, operate freely. Rules to ensure monopolies are broken up, market abuse is curtailed, barriers to entry for new firms are reduced, etc. Adam Smith knew even then that markets can be rigged and that “merchants do not get together to work out how best to help their customers”.

Markets must not be seen or perceived to be in favour of one group of interest in society. Otherwise, it will lose popular support. Mismanaged free-market economies have seen a rise in populism and calls for state intervention. These sorts of responses by the state always lead to a Faustian pact between large businesses and governments against free markets and, ultimately, their citizens.

Ensuring the survival of free market economies

For some capitalists, all government intervention is anathema. But this crisis shows that there are some things that only the government have the authority, buy-in and support from society to do. Providing a social safety net and preventing the wholesale failure of the market economy is what is required at this time.

Markets are, after all, a social construct. A way of organising production based on the private sector responding to demand and supply signals free of government intervention, other than those that keep it operating for all. History shows that free markets are unequivocally linked to rising wealth, increased living standards and that democracy, the rule of law, freedom of association and assembly etc. flow from this, so protecting it is essential.

Hence, the government measures being currently taken are to ensure that free markets can begin operating as soon as the health crisis abates. Failure to do so would have opened the door to populist alternatives which time and time again have proved to be fallible and unworkable.