The case for free markets

I believe that intelligently regulated, market-driven capitalism is the worst economic system ever devised — except for all the others. No system lifts every boat, but broader participation in a system that relies on market forces to determine what should be produced, in what quantities, and at what price has created a global economy that provides more opportunity for more people around the world than at any time in human history.

The skeptic then points to the financial crisis/market meltdown/global recession of the past 21 months and asks the same question posed to me by a Chinese diplomat in the opening of my book: "Now that the free market has failed, what is the proper role for the state in the economy?"

He’s convinced that all this turmoil — and the various state-driven responses to it in the capitals of supposedly free market countries around the world — will prove that China’s state capitalism is a superior system for market stability. Where’s my evidence to prove him wrong?

Should I point to the $787 billion state-directed stimulus package that Washington has used to kickstart growth? Or to America’s 17.1 percent real unemployment rate? Should I brag about the success of the eurozone, the world’s largest-ever experiment in capitalism without borders? How about the dynamism of Japan’s economy?

The jury is beginning to wonder if I’m actually trying to win this case.

We’ll have to take a longer view. With the exception of developing countries in the very earliest stages of development, at no time in the past have political officials ever proven more effective than fundamental market forces at valuing assets and allocating resources over the course of several years. Market-driven capitalism is a game that can benefit all who participate in it, if the referees have the power to enforce intelligently crafted rules and if they’re paying attention to the game. In America, for the past several years, the players have too often been allowed to rewrite the rules in ways that serve their short-term interests.

Don’t blame the game for the (abject) failure of the referees. In fact, market-driven capitalism has survived mercantilism, communism, and many crises of its own making.

Between 1980 and 2007, global GDP rose by nearly 150 percent. Already-prosperous countries saw significant increases in their standards of living. Hundreds of millions within developing states moved from poverty into the global marketplace. The damage of the past two years has temporarily pushed some of them back toward poverty, but expectations have been created that, over the longer term, only free markets can fulfill. Even the most pessimistic forecasts for the final effects of the slowdown will not dramatically set back the overall growth trajectory of the past thirty years, and expectations will rise again as recovery picks up steam.

State capitalism deserves some of the credit for this expansion, especially within countries like China and Russia that have grown from a very low base. But the broader story of the past three decades is one of command economies embracing capitalism and of states loosening their grip on economic activity.

The leaders of developing countries — from Greece and Spain to Japan, Britain and America — are going to need cast-iron political will in years to come. Leaders in these and other free market democracies will have to find the courage to persuade voters that the time has come for government to live within its means.

But they will also need to stand up for free markets. Even when free trade, foreign investment, and immigration are remarkably unpopular. Especially when they’re unpopular.

These are the forces that, if intelligently regulated, can help lift the global economy back to its feet — and without a dangerous dependence for growth on state capitalists who make economic decisions mainly to secure their political survival.

Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)