What is the origin of the free market economy? Why do we place so much faith in markets?
In his book What Money Can’t Buy, Michael Sandel traces the origins of the free-market economic system back to the 1980s. According to Sandel, we put so much faith in markets because we believe it’s the optimal way to distribute limited resources.
Keep reading to learn about the rise of the free market.
The Growth of Free-Market Economics
Sandel suggests that the expansion of the free-market economic system began with a political shift to the right in the 1980s, largely due to the rise of British Prime Minister Margaret Thatcher and US President Ronald Reagan. It was their political success that created the conditions for capitalist values to permeate into spheres of life that had previously existed apart from the market.
As Sandel writes, Thatcher and Reagan were the leading ideological proponents of neoliberalism—believing that a reduction in taxes on the wealthy, privatization of previously state-owned enterprises, and an overall reduction of the state’s role in the economy would unleash a new wave of investment and prosperity. These two leaders substantially remade the economic order in each of their countries—bringing down inflation, sharply reducing top marginal tax rates, and deregulating a wide range of industries from aviation to trucking to banking.
|Was the Conservative Revolution a Failure?|
In the United States, Republicans see Ronald Reagan as the patron saint of economic conservatism, a figure whose presidency shifted the American political and economic consensus significantly—and permanently—to the right. In their telling, the so-called Reagan Revolution smashed the old liberal New Deal consensus, with its emphasis on an activist role for the federal government in the management of the economy, and replaced it with a pro-business, laissez-faire vision that continues to this day.
But some critics contend that Reagan never truly succeeded in achieving his economic policy goals, despite his political success. These detractors point to federal spending increasing during the Reagan presidency, his administration passing the largest tax increase in modern history, and his bipartisan deal to save Social Security by enacting large increases to the payroll tax.
In Britain, meanwhile, Margaret Thatcher’s government succeeded in making many long-lasting changes to the British economy—including reducing the influence of the once-powerful trade unions, boosting industrial productivity, and presiding over rising rates of homeownership. However, detractors argue that Thatcherism left behind a dubious legacy that included a sharp rise in the poverty rate—and a particularly alarming spike in the child-poverty rate.
|The Fall of Communism and the Rise of Economic “Shock Therapy”|
The collapse of the Soviet Union in 1991 and the subsequent decline of communism was another watershed moment in economic history that further entrenched the primacy of the market society. With the demise of communist-style planned economies, there was no longer any alternative model to free-market capitalism. Throughout the 1990s and 2000s, former Communist bloc countries like Russia, Ukraine, and Poland became capitalist economies.
This transition from planned economies to market economies often occurred with lightning speed and traumatic social and economic outcomes. In The White Man’s Burden, William Easterly writes that, following the 1991 collapse of the Soviet Union, Western economists implemented what they called “shock treatment” programs in Russia and other former Soviet republics. This entailed the sudden removal of protectionist measures like price controls and state subsidies and the immediate privatization of state assets. The theory was that these reforms would unleash a new age of entrepreneurship that would help these Communist bloc countries transition from authoritarian, planned economies to liberal, free-market economies.
The results, according to Easterly, were disastrous. Following sudden economic liberalization in the 1990s, many former Soviet republics experienced inflation, high unemployment, poverty, economic stagnation, and the rise of a plutocratic class (often drawn from the ranks of former top Soviet officials) who used their connections to buy former state-run enterprises at bargain prices.
Placing Faith in Markets
Sandel notes that we are living today with the legacy of these momentous political and economic events. The emergence of free-market capitalism as the sole, uncontested economic model, he writes, has profoundly shaped how we view the role of markets.
According to Sandel, our society places an increasingly greater degree of faith in markets as the optimal way to distribute goods and services. This has caused markets to play a more dominant (and in Sandel’s view, distressing) role in our lives.
|Our Growing Trust in Markets|
According to some data, Sandel’s assertion that we have a high degree of trust in markets seems correct. One 2021 survey found that 54% of Americans trust business—a higher figure than for nongovernmental organizations, the government, or the press.
However, other surveys report widespread dissatisfaction with the prevailing free-market global economic order. According to one survey, 56% of respondents said that 21st-century capitalism has done more harm than good—while only 20% said the system was working for them personally. The surveyors argued that fears of future job losses, rising levels of income and wealth inequality, and well-publicized incidents of public corruption have significantly eroded confidence in both capitalism and democracy.
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Here's what you'll find in our full What Money Can't Buy summary:
- How market values are corrupting society's morals
- Why markets lead to the inequitable distribution of essential goods, services, and experiences
- A look at the massive impact of living in a market society