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How to promote the free market in 2009

Nada Almutawa
31/01/2009 12:00 AM

How to promote the free market in 2009 Print E-mail
Written by Tom Clougherty (January 2009)   

2008 was not an easy year for defenders of the free market. The credit crunch, the banking crisis, and the beginnings of a recession all fuelled the belief that markets are inherently unfair, unstable and destructive. It also gave those on the left the opportunity to resurrect big-state interventionism and, particularly, the economic doctrines of John Maynard Keynes. The idea that government should do less and spend less is, sadly, viewed with suspicion at the best of times, but in an economic downturn it is seen almost as heresy. Every politician feels compelled to `do something` regardless of its consequences. This tendency is reinforced by the 24-hour news media, with its insatiable thirst for new initiatives and dramatic announcements. And so the free market – perhaps for the first time in decades – is on the back foot.

And yet worrying as this is, it also poses an opportunity for defenders of freedom – and particularly those in the think tank world – provided we approach it in the right way. For starters, there is great potential for offering compelling media commentary that runs counter to common wisdom. Markets need defending, and we are the people to do it. We need to ensure that no expansion of government goes unopposed, that no leftist economic fallacy goes unchallenged, and that our ideas reach the widest possible audience. In short, the current economic and political climate gives us the chance to get exposure, be controversial, and get attention. Certainly, there are some people who will never be convinced by our arguments, but there are also huge numbers who would embrace our point of view if only they heard it. That is the challenge in 2009.

What are the key arguments we should be making? Well, the foremost challenge is clearly to oppose Keynesianism and, more specifically, the idea that government can and must `stimulate the economy`. There are a number of points here:

(1) We need to make people realize that government spending cannot boost the economy, for the simple reason that every pound it `injects` must first be taxed or borrowed from somewhere else. The government cannot create purchasing power out of thin air. Tax takes money out of the private sector economy. Borrowing does the same. And if the government resorts to printing money, they will succeed only in reducing the value of that already in circulation. [1]

(2) The fact that government cannot create new purchasing power, means that the case for government stimuli rests on the idea that politicians can allocate money better than the market can – an idea that has surely been tested to destruction. We already know that `priming the pump` simply creates temporary and artificially high demand in certain sectors (generally inefficient ones), at the expense of others (typically ones that actually create wealth). This is followed by dislocation and unemployment when the artificial demand inevitably ceases. The abject failure of a series Japanese stimulus packages in the 1990s backs this case up – all their debt-financed infrastructure spending accomplished was to run up debts amounting to 180 percent of GDP.

(3) Debt is a particularly potent issue, and one which people instinctively grasp. Borrowing enormous sums to prop up an economy that has been thrown into crisis by too much debt and too much credit is widely and correctly seen as absurd – not to mention deeply unfair on future generations. It is also unclear that this is really what Keynes advocated. He believed that there should be high taxes, low spending and budget surpluses in boom years (in order to restrain demand and check inflation), followed by tax cuts and increased public spending to boost demand (avoiding deflation) and increase consumer confidence when the economy turned bad. We can argue with some justification that the government can`t have it both ways: high spending and deficits whatever the economic weather! There is also the point that failing to control the public finances now will actually decrease business and consumer confidence, making things even worse. Nick Bosanquet calls this `toxic Keynesianism` – a useful soundbite.

So opposing the Keynesian-revival is probably the key economic task for defenders of freedom in 2009. But is also important that we continue to make the case that it was not unbridled free markets, but rather interventionist governments which caused the 2008 crisis. Interest rates that were held well below the neutral level for far too long caused a boom of cheap credit, fuelling a gigantic asset bubble, which subsequently burst with predictable consequences. Social policy added fuel to the fire: the US Congress` Community Reinvestment Act and taxpayer backing for Fannie Mae and Freddie Mac were a key driver of the sub-prime mortgage crisis that brought the financial system to its knees. And then there is the complete failure of the regulators to do the job they were paid to do. Legalistic, box-ticking regulation led to the micro-management of firms` business – and the diversion of enterprise into riskier areas – while completely ignoring the big picture. Perhaps we do need a different kind of regulation, or smarter regulation, but we certainly do not need more of the same.

Of course, it is not enough to simply argue against things: we also need a positive agenda. Unlike politicians, we should not claim that there is anything government can do to directly end the recession. However, we should be arguing for reforms that will make it easier for businesses and individuals to work their way out of the recession. In other words, we should be advocating policies across the board to raise productivity and increase the UK`s economic competitiveness. That means sustainably lower taxes on work, production and investment, balanced by spending restraint rather than increased borrowing. It means reforming the public sector so that it is not such a drain on resources. It means simplifying and reducing the regulatory burden that hampers small businesses. It means addressing infrastructure bottlenecks and liberalising the UK`s highly restrictive planning system. No one policy is a panacea, but the right combination could make a real and lasting difference. The important thing is that we come out of the recession stronger than we went into it – not saddled with debts that will take a generation or two to pay off. [2]

Finally, we should also realize that the economic crisis has sparked a renewed interest in the theories and ideas of the great free-market thinkers – particularly those of the Austrian School. With economics in the news so much, now is the perfect time to educate and engage a new generation in the concepts that lie behind free markets and the free society. It may not change policy now, but in the long-term winning the war of ideas is the most vital task that advocates of liberty face.


[1] See Why Government Spending Does Not Stimulate Economic Growth by Brian M. Riedl, Heritage Foundation (November 2008)

[2] See The hole we are in and how to get out of it by Dale Bassett, Professor Nick Bosanquet, Andrew Haldenby, Lucy Parsons & Elizabeth Truss, Reform (November 2008)