The Myth of Free Market Generating Prosperity
For more than several decades, it is assumed that the power of free market would bring economic development in its wake. It was believed that financial benefits will be given to everyone involved when the regulations is minimized, enterprises are ubiquitous around the grobe, tax havens are vigorous, and most importantly, the governments keep their eyes closed. However, many criticisms around the free market theory have emerged too. While the western world was nearly doubt in the saying that: market trumps the state for more than a quarter of a century, some have been starting to question whether the free market is truly equal to the generation of prosperity for everyone in every nations, along with the financial disaster happened in the past several decades.
Some scholars claimed what collapsed was the myth that markets can regulate themselves. The crisis back to 2008 was attributed to the “misguided confidence in the infallibility of free market” of our governments in adopting free market theory as their policy orientation (). Due to such conflicting views, the discussion over the the myth of free market is an interesting topic to discuss. In this paper, it is therefore argued that adopting free market is not destined to increase prosperity for all because of the deep rooted inequality and the associated negative externalities.
I. Defining Free Market and Prosperity
Being regarded as the “invisible hand of the market, the definition of free market varies from different scholars. Still there is a consensus that, under a free market, supply and demand in the unregulated marketplace naturally reach a state of equilibrium where the maximum possible social good is achieved (). Many economists over the past half century have developed complex mathematical models to demonstrate how this classical and basic construct works, and these proofs have led to substantial deregulation for financial markets (). Since Ronald Reagan relaxed banking regulations in 1982, the apostles of the free market ruled many places (). What to do with social benefits and taxation? Minimization.State-owned enterprises? Privatization. The retirement pay? Individual savings through the free market. Opening borders for overseas market? Definitely. Some influential institutions such as the World Bank and the International Monetary Fund also uphold the strict market orientation as the new belief ().
As for the term “Prosperity”, it basically stands for the state with flourishing or successful social status (). Although prosperity was usually contained wealth, some indicated that there are other factors, such as social status and happiness from an individual perspective (). Taking Buddhism as an example, prosperity has been viewed as the emphasis on personal spirituality. Considering the time and word limit, this paper is focused on discussing the economic prosperity.
Traditionally, GDP has been regarded as the most familiar and widely used measure of prosperity. Even with enhancement, GDP nevertheless fails to account a lot for the economic prosperity in term of the living aspect, such as the social well-being, depletion of resources and other determinants affecting the living quality. According to XXX (), Robert Kennedy raised this concern “in a speech in 1968 when he lamented that GDP ‘measures everything . . . except that which makes life worthwhile.’ ” (). Therefore, economic growth is indeed not the absolute factor in evaluating the economic prosperity, despite the fact that it is one of the factors that always be used to measure economic prosperity. Apart from economic growth, The Rocky Mountain Institute, American Enterprise Institute and the Legatum Prosperity Index initiated by Legatum Institution all use a serial of factors to determine the the economic prosperity of a country by shifting more emphasis on the sustainability of an economy, such as security, governance, social capital, and natural environment (). In this paper, a prosperous economy is therefore argued as one not only where growth has returned but one where the economy can grow in a continuous way and that everyone has the opportunity to benefit from it in both an individual and national scale.
II. Individual Aspect: Inequality
Free market is a construct that was underpinned by the assumption that people are well informed and act rationally, and then rewards him accordingly (). We can choose the job of our favourite, to trade our thing with others’, to specialize and private our own innovation, and to choose what we really want and need. When everyone are free to trade with his best judgment rather than any coercion, the best product will win in every field of human endeavor and eventually raise the standard of living and the productive activity (). It is true that free market is a desirable system in producing a bunch of innovations and improving our living quality gradually.
However, it is not a perfect system for everyone. The market is created by human beings, and human beings are not perfect. This concept has some significant flaws which are rooted in its basic assumption for letting the pure free market to function efficiently. It includes the perfect flow of information regarding the prices and quality of goods, one that everyone in the market is free and accessible to it. Yet, it is in the best interest of businessmans to maintain an imbalance of information flow in an unregulated free market in reality (). Without market control from government, the private capitalists inevitably control the main sources of information in different channels, leaving the interests of the underprivileged class of the society impaired. Back to 2008, the mortgage derivatives has played a major role in constituting the crisis. The derivatives encompassed individual mortgages carrying varying levels of risk were sold with a single risk classification (). The Information about these individual mortgages was not completely publicize and not everyone in the market is free and accessible to it. Of course the enterprises want to maintain such status quo – the lack of information for general public in term of the structure of these investment so that they can sell it out more easily. Meanwhile, public is obviously not that rational as assumpted and were eager to cash in (). The devastating effects from mortgage could significantly attribute to the absence of sufficient product information.
This kind of uncontrolled and unregulated laissez-faire market has lead to the problem of information asymmetry, eventually creates a market with imbalance and disparity above. Also, no one is truly that rational as the assumptions that economist has placed on the theoretical analysis and academic paper. The premise for the free market to function well, including the rationality in every decision making simply do not exist in the real world. A pure free market does not provide benefit to everyone in the society, but just those with the capability and know-how to exploit vulnerable side in the market. The growing disparity between the rich and the poor has already corresponded with the outcome of of financial deregulation in a long term (Please refer to Fig.1) .
Fig.1 Percent Change in real income from 1948 to 2013 (https://www.forbes.com/sites/louiswoodhill/2013/03/28/the-mystery-of-income-inequality-broken-down-to-one-simple-chart/#5bba647e19ea)
III. National Aspect: Negative Externalities
To certain extent, free market delivers a message which recognizes the importance of individual rights for economic development (). When a market is out of the coercion from government, individual rights will lead to a free market full of ideas and executions. Free market also provides financial incentive to allow the best ideas to come up without any artificial hurdles (). It is admitted that free market is a fundamental element in uprising individual rights so that the innovation and creation from different people can eventually translate into economic growth and progress, making it to achieve the top.
In an unregulated market, the only goal is about profit maximization. In order to gain more profit, it is encouraged to form larger units of production at the expense of smaller ones through technological development, increasing division of labor, and the rapid competition, just like how WalMart utilized its market power of on local small businesses to influence suppliers and market price and the survival of small businesses (). When businessman start cooperating, hiring, bribing and monopolies, what if they produce stuffs and that process of production releases toxic gas and dumping toxic sludge into the drinking water? What if a trade between adults imposes costs on others who are not part of the deal? When more capital was pouring into property and fossil fuels rather than clean technology and resources conservation for maximizing the profits? It finally resulted in the polarization of resources
and the “negative externalities” for both environment and society, affecting the sustainability of our economic development.
Meanwhile, as mentioned above, not everyone is able to reach that top. When there is no restriction in the market and the only mission for business is just about profit maximization, the so called perfect competition would only become the battlefield of a few magnates. Today, 20% of people in the developing world lack the access to sufficient clean water and people are increasingly affected by climate change as well as its subsequent consequences (Brand, 2012). The associated negative externalities and the misallocation of capital was attributed to the current free market system. While we can’t deny about the boost of economic growth brought by free market, there is definitely a room for us to rethink the sustainability of such system and whether it can truly bring economic well-being for all the classes in the society.
IV. Do we need a certain extent of regulations?
Throughout the world, a lot of prosperity was indeed generated from free market. China and asian countries were able to sell off their cheap goods to the globe. Western world benefited from cheap clothing from the world factories in Vietnam and Bangladesh. Germany and Japan can export their machines to different places in the world. Yet setting up certain extent of regulations does not mean that we are going to lose the above advantages. For the countries which have good education level and already get out of starving, maybe it is the time to rethink whether regulations will become an improver for the economy to grow in a more sustainable way such as the global governance on climate change. In Hong Kong, the pressing housing issue nowadays is somehow attributed to the fact that the government has adopted the laissez-faire principle in dealing with the market. It further monopolise the economy, colluding and enriching the major developers at the expense of fundamental livelihood and welfare issues like housing and contributing to unequal opportunities. Although the government has started to control the property market in the recent years, it has been too late.
According to (), the study of economics is about how to guide markets ever since. A pure free market economy seeks the vanish of such guidance, which is contrary to the fundamental basis of economics. For the mature economy, the government must play a bigger and more hands on role to ensure that the economy is developed in a sustainable and equal way. For example, hiring experts to determine which type of investments product are more worthy and which are not and ensure the information is accessible for everyone in the market and limiting the he loan portion for the purchase of apartments.