The Waterloo of Market Fundamentalism

November 21, 2016


[Ian Fletcher| November 17, 2016 |Huffington Post]

Trump’s election represents a lot of things, but one thing that doesn’t seem to have been quite noticed as much as it should be is this: it is the Battle of Waterloo, the final decisive defeat, of market fundamentalism.

Market fundamentalism, for readers unfamiliar with the term, is the belief that free markets aren’t just good, they’re everything.

This belief has been globally on the ascendant since the twin elections of Thatcher in 1979 in Britain and Reagan here in the USA in 1980.

It went into metastatic overdrive with the collapse of the Soviet Union in 1989.

It was never really accepted in East Asia, though nations like Japan, Taiwan, South Korea and China found it convenient that America believed in it and therefore tolerated their “free market” trade surpluses - which were anything but.

But the doctrine was swallowed deeply in Africa, Latin America, Eastern Europe, and much of the rest of the world in the 1990s. And, of course, here in the U.S.

It has been in slow retreat since about Y2K.

Latin America mostly repudiated it in the early 2000s.

Now we read that Prime Minister Theresa May has announced that if Donald Trump is turning America protectionist, Great Britain will now be the world’s “champion of free trade.”

Good luck with that, Madam 2.3% of world GDP.

In reality, the game is over. With the world’s four largest economies — the U.S., China, Japan, and Germany, between them accounting for half the world economy — turned towards economic nationalism, this simply is the new global economic order.

So market fundamentalism is finished internationally, its last redoubt. Domestically it’s been finished for a long time. Neither Thatcher, nor Reagan, nor Newt Gingrich nor George Bush actually reduced the size of government. The U.S., like all developed nations, has a mixed economy: about 40% government, maybe 20% heavily regulated capitalism, and less than 40% “pure” (or nearly so) capitalism.

Free-market purists may sob over this reality. Students of America’s real economic history will be unfazed, as they will know that America’s real economic heritage is Hamiltonian, i.e. focused on making markets serve the national interest, however corruptly defined at any given moment.

The economics profession that has played cheerleader to market fundamentalism for decades is headed for either a radical upheaval, or a fatal decline in its credibility, over the coming years. People were already asking “why didn’t economists foresee the Crash of 2008?” Unless Pres. Trump bungles protectionism so badly as to discredit an idea whose fundamentals are correct (I’m hoping not, but these things do happen), it will only get worse for the discipline in its current form.

Luckily, the seeds of renewal in the profession have already been sown. Ralph Gomory and William Baumol’s book Global Trade and Conflicting National Interestsis a fine starting point.

Does this all mean a swinging back from the economic “right” to the economic “left?” Is socialism okay after all? No.

For one thing, socialism isn’t even the issue here. For another, right and left aren’t really economic terms in the first place. They’re political terms that map imperfectly onto economics.

The free-market Right is in big trouble. It’s probably finished for our lifetimes. But that’s not the only kind of right, as Mr. Trump has just shown everyone who had forgotten. The Republican Party prior to 1948 was protectionist. It looks like it will be again.

Showing 4 reactions

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  • To understand this issue, you must Google “Balanced Trade.” A good start would be to read this article by Warren Buffett, published in Fortune in 2003. http://archive.fortune.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm

    Buffett realized back then that our “growing trade deficit is selling the nation out from under us.” He proposed a simple solution for reducing our trade deficit — one that is within the rules of the WTO.

    Since then, three economists, by the name of Richman, have proposed using “scaled tariffs” to restore the balance of trade with those “trading partners” who have been cheating us. This solution would also be within the rules of the WTO. The Richman’s have an excellent blog at www.idealtaxes.com

    Finally, for a flavor of how badly China has been cheating us on trade, check out “Death by China,” by Peter Navarro and Greg Autry. Here is a five minute teaser for their documentary. Also, the book, by that title is excellent.
  • Brian Riordan is correct in that we do not have a shortage of STEM workers. Corporations have been lying to Congress for years so that they could import foreigners on H-1B visas, who would do the work for half the salary, while thousands of highly-qualified Americans are stocking shelves at BigBoxMart.
  • I have to disagree with Mr. Crawford—the last thing we need is for Congress to decide which industries should be protected. This will only serve to sort out who has the most political pull. Fletcher’s proposal in Free Trade Doesn’t Work is for a uniform across-the-board tariff so cronyism doesn’t come into play. This makes sense as China’s advantages come from many things—low wages, lack of environmental regulations, lack of worker protections, etc. A uniform rate on all imports should be chosen to equalize things. Once again it would make economic sense to make things in America and good-paying jobs would return for the average American. At the same time immigration must be reduced because we don’t have a shortage of STEM workers—in fact we have high unemployment in those fields so we shouldn’t be importing all the H1-B workers. The increasing use of artificial intelligence and robotics mean we will have a problem employing the people we now have.
  • Ian,

    Protectionism has certainly failed many times over in the past. Winston Chirchill, for example, began his political career denouncing it. And I believe it is likely to be bungled badly by Trump’s team.

    I have the utmost respect and admiration for Dan DiMicco, but his desire to attack China for currency manipulation and condemn them for mercantilist practices will prove to be counterproductive if put into practice.

    Much as musicians must cooperate to play a symphony, a certain degree of comity amongst nations is indispensable to maintain a manageable level of economic harmony.

    The focus of the Administration should be on bringing our trading relationships back into balance; and not on trying to find ways to blame others for our failed policies and resulting problems.

    And the method of doing so should bring Congress back into the process as required by the Constitution. I am sure the steel industry will get taken care of in short order. But what, for example, should be the fate of the domestic hardwood furniture industry, which at present has no corporate sponsors?

    The actual composition of the industries to be protected in order to balance out trading relationships should be a matter for political debate in Congress, just like in the good old days.