The Limits of Free Markets

The idea and the man have enjoyed a revival of late, bandied about with reference to General Motors and more broadly, capitalism's current crisis.

Free-market zealots are less likely to rehash the fact that Schumpeter thought capitalism was doomed, undermined by the growing dominance of the largest corporations and the popular opposition engendered by this concentration of wealth and power. Capitalism would give way to socialism not as a result of a tragic accident or a policy mistake but rather by popular demand. This would happen because capitalism would make most people richer. And richer people don't like surprises.

Our markets have been positively overflowing with surprises, of course: for the recent and soon to be ex-retirees, for the newly unemployed, for borrowers and lenders. And every bone-chilling gust of Schumpeter's destructive gale is making him look that much more prophetic, as voters demand that governments do something.

This popular distrust of change is something most libertarians don't deign to address. They just assume that more progress, more change, more absolute wealth is good, and that's that. The workers are to be promised "more jobs" and threatened with loss of same if they don't stoke capitalist fires. But what if the relatively prosperous worker no longer values maximizing his monetary gain as much as knowing that he won't lose his health care and home at the whim of the employer, or his nest egg to financial follies he can't fathom?

And what if millions of prosperous voters come to see such risks as an intolerable threat to their families and sense of well-being? What if it turns out that people value certainty and hate complexity? That's when the political market starts leaning to the left, irreversibly so according to Schumpeter. In the end, markets work for people and not the other way around. When markets fail, people seek fixes and alternatives.

The Greek chorus of free-marketeers would have us believe that the world as we know it is ending because governments around the world have thrown a few trillion of paper scrip and electrons at a mess of planetary proportions. In fact, this is not the end of the world or even of capitalism as we know it. Rather this is the continuation of the mixed economic system we've had for most of the last century, and the reason it's survived so long and will survive this is governments' rightful preference for expediency over ideology (aka principles) during emergencies.

Enterprise didn't die when children were banned from the factory floor nor when old-age pensions were introduced, though in both cases contemporary alarmists had argued that it might. On many quality of life measures, Japan and France lead the U.S. despite meddlesome public policies that don't seem to inconvenience the natives much.

The biggest political divide in Washington today is not between liberals and conservatives, or Democrats and Republicans. It is between realists who understand that the bailout, no matter how many zeros it ends up carrying, is part of the price of doing business in occasionally chaotic markets, and romantics whose notions of free-market efficiency have been cruelly dashed. But people aren't cogs and maximum efficiency is not their overarching goal. It's about time that free-market defenders started taking this into account.