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Are free markets history?

Governments are jettisoning the principles that made the world rich

image: maxine mouysset

Oct 5th 2023

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S ometimes, in wars and revolutions, fundamental change arrives with a bang. More
often, it creeps up on you. That is the way with what we are calling “homeland
economics”, a protectionist, high-subsidy, intervention-heavy ideology administered by
an ambitious state. Fragile supply chains, growing threats to national security, the energy
transition and the cost-of-living crisis have each demanded action by governments—and
for good reason. But when you lump them all together, it becomes clear just how
systematically the presumption of open markets and limited government has been left in
the dust.

For this newspaper, this is an alarming trend. We were founded in 1843 to campaign for,
among other things, free trade and a modest role for government. Today these classical
liberal values are not only unpopular, they are increasingly absent from political debate.
Less than eight years ago President Barack Obama was trying to sign America up to a
giant Pacific trade pact. Today if you argue for free trade in Washington, you will be
scoffed at as hopelessly naive. In the emerging world, you will be painted as a
neocolonial relic from the era when the West knew best.

Our special report this week argues that homeland economics will ultimately prove to be
a disappointment. It misdiagnoses what has gone wrong, it overburdens the state with
unmeetable responsibilities and it will botch a period of rapid social and technological
change. The good news is that eventually it will bring about its own demise.

Central to the new regime is the idea that protectionism is the way to cope with the
buffeting of open markets. China’s success convinced working-class Westerners that they
had a lot to lose from the free movement of goods across borders. The covid-19 pandemic
left elites thinking that global supply chains had to be “derisked”, often by moving
production closer to home. China’s rise under “state capitalism”, with its disregard for
rules-based trade and challenge to American power, was seized on in rich and emerging
economies as a justification for intervention.

This protectionism goes along with extra government spending. Industry is gobbling up
subsidies to boost the energy transition and guarantee the supply of strategic goods. Vast
handouts to households during the pandemic have raised expectations of the state as a
bulwark against life’s misfortunes. The Spanish and Italian governments are even bailing
out borrowers who cannot afford the rising cost of mortgages.

And, inevitably, state handouts go along with extra regulation. Antitrust has become
activist. Regulators are eyeing nascent markets, from cloud gaming to artificial
intelligence. Because carbon prices are still too low, governments end up micro-
managing the energy transition by decree.

This mix of protection, spending and regulation comes at a heavy cost. For a start, it is a
misdiagnosis. The pooling of risks is indeed an essential function of governments. But
not all risks: for markets to work, actions must have consequences.

In contrast to the accepted view, covid and the Ukraine war have shown that markets deal
with shocks better than planners do. Globalised trade coped with huge swings in
consumer demand: throughput at America’s ports in 2021 was 11% higher than in 2019. In
2022 Germany’s economy repeated the trick, suffering no calamity as it switched rapidly
from Russian gas to other sources of energy. By contrast, state-dominated markets like
the supply of shells for Ukraine are still struggling. Just like the old complaints about
trade with China—which has boosted Americans’ real incomes—gripes about
globalisation’s supposed fragility have built a cathedral of fear over a grain of truth.

Another flaw in homeland economics is to overburden the state. Governments are losing
all restraint just when they need to curtail welfare spending. Ageing populations weigh
down budgets with extra bills for pensions and health care. Rising interest rates make
everything worse. After a bond-market crisis in 2022, Britain’s right-wing government is
raising taxes, as a share of gdp, by more than in any parliamentary term in the country’s
history. As yields rise on long-dated bonds, indebted Italy looks wobbly again. America’s
rising debt-service bill will probably match its all-time high before the end of the decade
—testimony to the fiscal fragility of the new era.

The least visible, but potentially most costly flaw is that homeland economics is a blunt
instrument in a time of rapid change. The energy and ai transitions are too big for any
government to plan. Nobody knows the cheapest ways to decarbonise or the best uses of
new technology. Ideas need to be tested and channelled by markets, not governed by
checklists from the centre. Excessive regulation will inhibit innovation and, by raising
costs, make change slower and more painful.

Despite its flaws, homeland economics will be tough to restrain. People enjoy spending
other people’s money. As government budgets get bigger, the special interests that feed
on them will grow in size and influence. It is harder to withdraw protection and
handouts than to grant them—particularly with more elderly voters, who have less of a
stake in economic growth. Anyone doe-eyed about the arc of history bending towards
progress should remember that a century ago Argentina was about as rich as Switzerland.

Plan for the road ahead

Yet disillusionment will eventually set in. That may be because fiscal extravagance
catches up with indebted governments. Perhaps the rent-seekers’ greed will become too
hard to conceal. Or a stagnating, repressive China may no longer hold out the promise of
state-directed prosperity.

When change comes, it can be surprisingly swift—in democracies, at least. In the 1970s
the tide turned in favour of free markets almost as fast as it has turned against them
today, leading to the election of Margaret Thatcher and Ronald Reagan. The task for
classical liberals is to prepare for that moment by defining a new consensus that adapts
their ideas to a more dangerous, interconnected and fractious world. That will not be
easy, especially in the face of the rivalry between America and China. But it has been
done in the past. And think of the prize. 7

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This article appeared in the Leaders section of the print edition under the headline "Are free markets history?"

Leaders
October 7th 2023

→ Are free markets history?

→ Why Africans are losing faith in democracy

→ The ousting of Kevin McCarthy: bad for America, worse for Ukraine

→ Rising bond yields are exposing fiscal fantasy in Europe

→ In an ugly world, vaccines are a beautiful gift worth honouring

→ Rishi Sunak is wrong to amputate Britain’s high-speed rail line

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