Monday, October 29, 2007

Why Are Free-Market Economists Still Taken Seriously?

They've been shown to be wrong time and time again. And their policies have led to widespread disaster and misery for millions of people.

Who am I talking about?

The NeoCons and their wrong-headed views on Iraq?

Nope, I'm talking about free-market economists.

No group of "experts" has a worse track record on accurate information about how our world really works. And yet, mysteriously, free-market economists are still held in reverence and awe by many. And their proclamations are hailed as the gospel truth by everyone from politicians to academia to the mainstream media.

Free-market economics seemingly got an enormous boost in credibility in the 1980s and has reigned supreme as the only conceivable policy for running America's economy ever since.

There's only one problem with free-market economists and their followers: they're full of sh*t and they have a dismal track record on the truth. And worse, the world simply doesn't operate the way they believe it does.

Free-market economists are rabid advocates of a unfettered, dog-eat-dog, ruthless form of capitalism. Leaving everything to the "free market" is the best way to run a society, they maintain. And at the end of the day, no other economic system can possibly compete with capitalism, they say.

As "Exhibit A," the free-market economists proudly point to capitalism's vanquishing of the Soviet Union's style of communism in the Cold War.

What more proof could one want that capitalism is the best way to create wealth and prosperity?

Actually, in the years since the Cold War ended, a few dissenting voices have started to speak up about the supposed superiority of unfettered capitalism.

First, there is the issue of whether the United States really prevailed in the Cold War, after all. A number of commentators have pointed out that, without enormous sums we borrowed from Japan in the 1980s, the U.S. wouldn't have "won" the Cold War.

Indeed, as the brilliant author Chalmers Johnson has pointed, out, it was really Japan, not the U.S. that won the Cold War. Indeed, the decade of the 1980s was nicely summed up by MIT economist Lester Thurow when he wrote: "We borrowed a trillion dollars from the Japanese and threw a party."

I should point out here the irony of celebrating an economic system that is totally dependent on vast amount of foreign capital in order to function. And make no mistake, no matter how one views the Japanese economy, it is definitely NOT anything that a Western economist would recognize as "capitalism."

Indeed, the Japanese model couldn't be further removed from U.S.-style economics. In Japan, the nation's economic destiny is shaped by powerful technocrats at the Ministry of Finance. Industrial policy is set by the government, rather than determined the whims of the private sector. It is a heavily regulated system that is a million light years removed from American-style "capitalism."

What's more, the Japanese economic model has been widely imitated throughout East Asia (which is now by far the most dynamic and fast-growing area on Earth). From Taiwan to South Korea to mainland China itself, Japanese economic policies are widely implemented these days. For example, China has copied elements of Japan's employment system, its mercantile policies, its emphasis on manufacturing, and even its Keiretsu system of organizing companies into powerful groups.

This important development, of course, is completely ignored by U.S. economists. Many of them maintain that "unfettered, free-market, U.S.-style capitalism" is the model that East Asia aspires to. Indeed, the "conventional wisdom" in U.S. economics is that Japan itself is "yesterday's news" and is a fading power. It's a bizarre viewpoint indeed, when one considers that the supposedly "more efficient, superior" U.S. economy would collapse were it not for the hundreds of billions of dollars in Japanese capital that props up the American economy and the dollar these days.

A big part of the problem with U.S. economists is that they are a remarkably ignorant about the rest of the world. The only country that they've studied at all, or paid any attention to (outside of the U.S.) is Britain.

Which brings me to another misconception spread by U.S. free-market economists. The latter are constantly praising the era of Margaret Thatcher.

What more proof does one need that unfettered capitalism reigns supreme than the example set by Thatcher's Britain, they ask? After all, Thatcher busted the unions, cut regulations and decimated the welfare state---and as a result, the former "Sick Man" of Europe prospered in the 1980s.

At least that's the fairy tale we've been led to believe.

As they did with Reagan's revolution, though, the economists aren't telling the whole story of the Thatcher era as they breathlessly sing the praises of the Iron Lady. Over the years, a growing number of writers, like James Howard Kunstler,
have pointed out that what really made Britain shine in the 1980s wasn't Thatcherism at all. Rather, it was the incredible bounty that Britain reaped with the North Sea oil bonanza in the 1980s.

It's this latter point that really irritates me and makes me question the honesty of the economics profession. The field's dishonesty can be summed up thusly:

1. Starting in the 1970s, free-market "Chicago School" economists urged various "reforms," from gutting the welfare state to crushing unions to abolishing any and all regulations on business.

2. In the 1980s, the above prescriptions were implemented in the U.S. and Britain, under Reagan and Thatcher.

3. The economies of both the U.S. and Britain prospered, thanks to hundreds of billions of borrowed dollars (in the case of the U.S.) and the North Sea Oil boom (in the case of Britain).

4. As the U.S. and Britain boomed, economists proclaim their free-market prescriptions "vindicated"---completely ignoring the fact that the prosperity in both nations had nothing to do with their remedies.

Free-market economists are so arrogant and sure of the wisdom of their teachings that they've become oblivious to the fact that the real world simply doesn't work the way they believe it does. (For example, the real economic success story of the past quarter century has been China---a nation which completely rejects every single tenet of how a nation's economy should be run, according to the gospel of the free-market economists).

And their ideas remain in vogue to this day among American policy-makers. Never mind the fact that the U.S. is in increasing peril, thanks to their policies. The gigantic deficits that Reagan racked up in the 1980s now seem trivial, compared to the even-more titanic deficits that America faces today.

Free-market economics has been directly responsible for America's out-of-control and spiraling fiscal and trade deficits. The latter crisis threatens to force a collapse in the value of the dollar. And when the dollar melts down, America's reign as a superpower will come to an end.

Free-market economists, of course, are blissfully unconcerned about this looming crisis. For them, the solution to anything and everything is more of the same. More tax cuts for the rich, more union busting, more elimination of any and all red tape and the complete rejection of anything remotely resembling a national industrial policy. As far as deficits go, they maintain a "Don't Worry, Be Happy" approach.

I never thought I'd find myself agreeing with anything that Pat Buchanan ever said---but actually, he of all people, once made a comment that neatly sums up the view of all those who wear free-market economics blinders: "To worship at the altar of free-market economics is no less a form of idolatry than worshipping at the altar of socialism."

Free-market economists have done at least as much damage to our nation as the NeoCons over the past quarter century. How much longer will we as a nation continue to follow their disastrous, wrong-headed advice?

By Marc McDonald of the progressive blog,