The Problems with Free Market Economics and How to Find a Better Alternative
It’s easy to get lulled into the idea that free market capitalism is the only viable economic path, especially when most economists on TV or in the papers seem to agree.
But 23 Things They Don’t Tell You About Capitalism debunks this notion and argues that this ‘one size fits all’ approach to economics is riddled with false ideas and ignores better alternatives.
Reading this book will make you realize why free market capitalism isn’t as amazing as it seems: it won’t always lead to Soviet Russia, nor should you always pay your cab fare and just because an economist has won a Nobel Prize for Economics doesn’t necessarily make them a financial expert.
Remember, if something sounds too good to be true, it usually is – don’t be too quick to believe that free market capitalism is the ultimate economic truth!
Economists Must Come to Realize That Economic Theory is Not an Objective Science, but Rather a Social Science With Plenty of Room for Alternative Perspectives
Despite what free-market economists may claim, economics is not a natural science; it is a social science.
This means that there are several valid theories out there, vying for acceptance in the economic world.
The dominant one at the moment is neo-classical free market theory which assumes self-interested people make decisions solely by calculating how much they will benefit from them.
However, this isn’t always the case; often people make decisions based off of emotion or values and beliefs rather than on pure calculations of benefit to themselves.
This renders the free market approach unrealistic and far from objective as an analysis of economic behaviors.
Economists need to recognize the complexities of economic behaviors and situations, and not just dismiss any criticism of their beliefs as simplistic.
After all, you don’t need to be a Nobel Prize winning economist to note that it’s unwise for a country to take risky bets with its money!
Economics needs practitioners that seriously consider alternative theories and embrace their multipartite nature in order to effectively analyze real-world economics crises better than before.
We Need Government Intervention to Help Us Make Better Economic Decisions
Despite what free market economists may tell us, it is impossible for individuals to make completely rational economic choices.
Robert Merton and Myron Scholes won the Nobel Prize in their field with their theories that people make fully informed decisions.
But when they applied these concepts in the real world, their companies ended up bankrupt twice in less than 10 years!
The failure of Merton and Scholes tells us that human beings are not able to take every single detail into consideration before making an investment or purchase.
We lack the necessary intellectual capacity to make entirely rational choices – instead, we can only be subject to bounded rationality.
To ensure better economic decision-making for everyone, our government needs to step in and limit our options.
By presenting us with only those products with effects we can understand, we can start to make more informed decisions.
Although this same system may be in place for other aspects of life, like preventing access to drugs with unknown side effects or cars with subpar safety standards, chances are it’s not being applied as rigorously into financial matters yet – something that could benefit all of us.
The Virtue of Selflessness: Why We Even Bother Paying for Our Taxi Rides
Contrary to popular belief, human beings are not entirely selfish.
We often act out of concerns that stem from other sources, such as honour and respect.
Take the example of the taxi: many of us would choose to pay for our fare instead of running away simply because we don’t want to develop a reputation as a fare dodger – and be shunned by taxi drivers in the future.
The free-market economists’ assumption that humans always act selfishly fails to take into account these hidden rewards and sanctions which influence our behaviour.
In the case of the taxi driver, he might be tempted to let the fare run off without paying if he only focuses on his own benefit; however, his actions will incur other costs in the long-term – such as helping out other taxi drivers by tracking down debtors and leaving his cab unattended while doing so.
We should all earn what we deserve
In today’s economic climate, it is less likely that people are going to be earning what they truly deserve for their work.
Just because someone should be earning a certain amount based on their skills and accomplishments, doesn’t mean that the economy will pay them that much.
Take example of workers in developed countries – even if they happen to be the least productive, they will still earn more than someone who works hard in a poor country.
This is because the wages are protected from the pressures of the market, and governments often use strict immigration controls to prevent workers from poorer countries coming into the workforce.
The same can also be seen within individual societies – those whose incomes place them toward the top tend to earn a lot more than those at the bottom.
For example, top executives saw their wages increasing by up to 400 times compared to an average worker’s wage over 20 years – hugely disproportionate when you consider that there is no evidence stating executives were worth more than400 times more than any other employee.
At the end of the day, it often appears as though success in life isn’t directly correlated to how hard one works but rather comes down to location and privilege – certainly not something that we can say everyone deserves.
We Shouldn’t Underestimate the Power of Manufacturing in the Western Economy
If you want your economy to stay strong and to be able to grow properly, having a strong manufacturing sector is even more important than having a robust service or tech economy.
Many people misread statistics and incorrectly assume that because fewer people are employed in manufacturing than in the past, there’s less industry — but that’s not necessarily true.
In fact, policymakers have been pushing for developing countries to move away from manufacturing towards the service and knowledge economies.
This isn’t necessarily the right move; sure, the service economy such as retail or IT services may appear to be growing, but it can actually be quite risk due to its slow rates of productivity growth.
Think about it — if you had a performance of Macbeth that lasted ten minutes instead of the normal two hours, it would be considered productive, but its quality would still suffer significantly.
So an economy overly reliant on this service sector will likely find itself growing slowly.
Similarly with knowledge economies: it is often overrated how much impact technologies such as the Internet can make on improving efficiency.
In fact, compared with other technological advancements such as the telegraph (which reduced message transmission time by 2,500 times), the Internet seems insignificant — offering only five times improvement in communication speed rather than 2,500 times.
The Financial Crisis of 2008: How Risky Derivatives and Wobbly Markets Resulted in a Global Economic Collapse
The 2008 financial crisis was a direct result of the risks that had been deliberately built up in the system.
This was due to the complicated bonds and derivatives which were created, with many of them being based on pools of securities such as mortgage loans.
In addition, some of the products created had poorer quality than their predecessors.
The more complex and riskier these products became, the higher the risk they posed in terms of investment.
To put this into perspective, it’s like building a house on a tiny piece of land where you can’t build outward so have to build upwards.
With every new floor you add, the stability decreases and it becomes top-heavy and wobbly – especially if layers are added with lower quality materials such as plasticine or paper.
The countries that were hardest hit by this crash were those that had opened their markets more readily in the years before; Ireland shrunk its economy by 7.5 percent and Latvia by 16 percent.
It is clear from this that an accumulation of deliberate risk in an economic system can have disastrous consequences for all involved.
Governments Can Play an Important Role in Economic Growth with Strategic Guidance
Despite what free market economists would have us believe, governments can and do have a hand in economic growth.
Take South Korea as an example.
Their government disagreed with the top electronics firm LG’s choice to focus on the textile market, believing that they would be more successful in electronics.
With a bit of direction from the state, LG is now one of South Korea’s biggest success stories.
The US government also took part in setting loose goals such as inflation targets and controlling interest rates which helped guide development of industries like internet, biotechnology, and aircraft computing within their country—all performing well today despite any fear economists had of governmental influence on the economy.
Governmental interventions do not need to stifle economic growth or cause chaos like what happened in Soviet Russia if they are done right.
Instead of trying to control every aspect of the economy, governments should take care to simply set strategic goals for it in order to move it steadily toward success.
Like a CEO for an individual company, governments should employ strategies that point their economies into favorable conditions for businesses and citizens alike.
The Real World Demonstrates That Social Welfare is Vital for Economic Growth
Social welfare can be an extremely valuable tool for stimulating economic growth.
The evidence is clear – countries that invest in their citizens with unemployment benefits and other social programs tend to have more dynamic economies than those who limit support.
The reason for this is obvious: if people are terrified of losing their job, they will seek stability in areas of the economy such as healthcare and law, which may be important but don’t always drive significant growth.
In order to encourage risk-taking and entrepreneurship, governments must provide a safety net in case of failure.
On the contrary, the ‘trickle down’ theory favored by free market economists suggests that by reducing spending on welfare, the government would allow money to trickle down from wealthy individuals through investments into the general economy – where it would create jobs and drive growth.
This strategy has not delivered on its promise in countries like the US and UK where it was adopted in the 80s – instead resulting in slower growth and greater concentration of money at the top.
Ultimately, social welfare is essential for promoting strong economic growth.
Not only does it make life easier for those who have trouble finding work, but it encourages risk-taking which breeds innovation and leads to overall improvements in national income levels too.
Western Free-Market Policies Are a Major Contributor to Poverty in Developing Countries
We need to stop trying to fix developing countries with the wrong tools.
Many Westerners sure they know what policies will help end poverty in the developing world but their confidence is misguided.
Structural causes such as terrain and climate aren’t the root causes of poverty– just look at landlocked, mountainous Austria and Switzerland who are prosperous despite those factors.
It’s also not right to argue that poor nations lack entrepreneurial spirit– self-employed people make up 30-50 percent of the workforce in poor countries compared to only ten percent selfish employment in the West!
What’s really hampering progress in developing countries are free market policies from Western governments.
In the 1980’s, these governments enforced opening of markets which tanked domestic economies across Sub-Saharan Africa for example.
The wealthy nations of today reached prosperity through protectionism in the 19th century– tariffs on goods coming into a country stood at 50%, and foreigners were forbidden from becoming financial directors.
We need to remember this and allow developing nations that same opportunity for success if we want them to move forward out of poverty.
The Power of Capitalism and the Need for Regulation to Ensure Safety and Fairness
It’s important to remember that it’s not necessarily capitalism itself that is the problem – it’s the way we approach and design it.
In particular, free-market capitalism has been linked to some of the most egregious economic disparities that we have seen in recent times.
Yet, if correctly regulated, capitalism can be incredibly effective in helping to coordinate and manage our economy.
The profit motive can drive people to both innovate and create successful enterprises, while allowing market forces to direct labor and capital towards areas where it is needed most effectively.
For an example of how this could work more fairly, we can look at bounded rationality – an idea that suggests people make better decisions when they have limited options available.
This could be achieved by increasing government power over the economic system, dictating regulations on banking practices and investment models which will encourage smarter choices from society as a whole.
The final takeaway from 23 Things They Don’t Tell You About Capitalism is this: don’t believe professional economists who say that the free market is the only way to manage the economy.
There are other, fairer options out there, and we all need to focus on these if we want to build a better and more stable world.
Furthermore, be careful when picking whom to vote for; while tax cuts may sound like a good idea initially, bear in mind what will have to be cut in order to provide this rebate.
Ultimately, it’s up to you which alternative will better suit your needs.