Summary of analysis
I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms [...] Something which looked to be a very solid edifice, and, indeed, a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me. I still do not fully understand why it happened and, obviously, to the extent that I figure out where it happened and why, I will change my views. If the facts change, I will change. - Alan Greenspan, 23 October 2008 Testimony to Committee of Government Oversight and Reform
[A detailed introduction to liberalization as an ideology and economic strategy and its historical development globally through the Washington Consensus and for Singapore is presented in Appendix D : Free Market Ideology]
In October 2008 when confronted with the systemic failure of the financial system in the subprime mortgage market and ensuring global financial crisis, Alan Greenspan, Chairman of the US Federal Reserve from 1987 to 2006 testified that the series of events had exposed a “flaw” in his ideology (Greenspan, 2008). The deregulated financial institutions that contributed to the 2008 crash were part of Greenspan’s legacy. He was one of the most prominent champions of free markets and personal friend of the influential liberalization ideology author Ayn Rand (Greenspan, 2007).
While the appeal of “freedom” and “rights” is simple to communicate it may be over ambitious to claim that one word can be leveraged as a universal moral truth to guide all policy decisions for all stages of development. The historical achievements of economic growth in the framework of free market capitalism are noteworthy, but should be understood together with their limitations and drawbacks. The benefits are different between developing and advanced economies and may be limited to the short-term, as the costs that accumulate over the long run - wealth inequality, system volatility and environmental depletion - eventually catch up with the short term gains.
The analysis critiques free market capitalism using the language and concepts from the field of Economics. The review draws from the five sources listed in the sources section and supplements with other sources specific to the topic. The methodology uses mostly secondary review complemented with primary statistical analysis. The critical evidence draw from the disciplines of economics, human behavior, and sociology and empirical analysis of policy performance assessment. The results of this approach is consolidated into three questions on free market capitalism
How well has it achieved its predicted results?
What are its utility strength for policy makers to deliver sustained political legitimacy?
How well supported are each of the claims and assumptions with science?
Has the policy achieved success by its own measures - GDP per capita growth?
Broadly - Yes and especially for developing economies. However, there are warning signs that this may reverse in the coming future as societies advance to service economy accelerated by technology and the build-up of long term costs start to erode the potential for future gains.
Is there a consensus that it is improving public welfare better than the alternative?
Yes and no, results vary regionally and by development status with questionable marginal benefit in the advanced compared to low income economies . For Singapore there are signs that the political costs of inequality are beginning to outweigh the political strengths of aggregate affluence growth.
Are all of the main claims supported theoretically and empirically, are there any contradictions or inconsistencies?
No not all of the claims have strong evidence support. There are a number of inconsistencies of the classical model with known realities of human behavior. The classical assumption of perfect information, self-interested rational decision maker does not match well with behavioral science. A tragedy of the commons is possible but not inevitable. Humans are not universally self-interested; they have both cooperative and competitive capabilities as a social species. Sometimes this cooperation is beneficial in the case of coops and common pool resources and other times it can be harmful in the case of corruption and cartels. Numerous market failures produce positive, negative externalities which can trace to imperfections of individuals, information asymmetries and bounded rationality of human decision making. Theoretical evidence suggests that a completely unregulated system with low taxes and small government may appear successful in the short run, but in the long run would accelerate positive feedback, winner-takes-all dynamics in social networks and create volatility rather than stability.
Economic policy covers a broad scope from trade, taxes, labor negotiations and the environment. A more nuanced approach reveals both strengths and weaknesses. The strengths are contracts - property rights, financial markets, institutional integrity, decentralization of decisions and fiscal discipline. While free market policy reforms generally achieve its stated aims measured in GDP per capita, there are exceptions and drawbacks. Weak areas identified are the incomplete agenda for known market failure externalities - volatility, environment and inequality, over-extended claims where evidence is not conclusive on labor and taxes, poor foundations of the human behavioral model, no one-size-fits-all panacea for advanced and developing economies and limits to growth.
Each of these strengths and weaknesses is analyzed in further detail in the respective report sections listed below.
Strengths
Weaknesses
The next section presents a selection of a few of the sources used in the analysis and a summary of the conclusions from the source.
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