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Dr Muriel Newman

Pointing the Finger of Blame

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Those who still believe that Karl Marx’s “Communist Manifesto” maps out the best path forward for mankind are now claiming that the current economic woes on Wall Street have been caused by the failure of capitalism and the free market.

In last week’s Herald, trade union organiser Matt McCarten launched just such a stinging attack of the free market. He stated, “The trillion-dollar, taxpayer-funded handout to criminal and irresponsible corporations in the United States surely puts an end to the nonsense that there is any such thing as a free market. Right-wing ideologues have bullied us for three decades that the only way for growth and prosperity is to have unregulated free markets, guided by some mystical force called the invisible hand. After the meltdown in the US this week there has been a deafening silence from these sages. Quite frankly, the free-market theoreticians have been shown to be a bunch of charlatans dressing up old-fashioned greed as a social good.”[1]

This article did not escape the attention of former Treasury official Roger Kerr, the executive director of the New Zealand Business Roundtable, who has provided the NZCPR with an exclusive rebuttal “The End of Capitalism? Dream On”. In this week’s Guest Commentary, Roger states: “It took no time for local members of the anti-capitalist brigade to appear from under stones. Trade unionist Matt McCarten told us in the Herald on Sunday of 28 September that “free market capitalism doesn’t work and never has”. Presumably he thinks China’s amazing success in lifting millions out of poverty over the last 30 years stems from rigid adherence to communist economic principles!

“For someone with no economic understanding, simple logic would have come in handy. Some obvious questions can be asked. First, why is the banking and financial system in New Zealand, Australia and many other parts of the world not suffering in the same way as in the United States and Europe? No apparent ‘crisis of capitalism’ here. Second, why are the lightly regulated hedge funds and private equity firms in the United States much less troubled than the highly regulated banking sector? Third, doesn’t history tell us that past financial crises typically had a large ‘made by government’ element to them, and wouldn’t one suspect the fingerprints of the ‘visible hand’ of government to be all over this crisis as well?”

The free market economic system is integral to modern democratic societies. In a market economy, citizens are able to pursue their own objectives in cooperation and collaboration with others who provide food, shelter, employment, infrastructure and the myriad of goods and services needed to live happy and fulfilling lives. The mutual cooperation which is intrinsic in a well-functioning free market is based on voluntary exchange whereby goods and services are freely exchanged for financial recompense or other goods and services. This market system is said to be governed by the “invisible hand” of self interest, which is and always has been a key driver of human progress. With each exchange enriching the participants, the free market is the engine of economic advancement.

Scotsman Adam Smith, widely regarded as the father of modern economics, in his seminal work The Wealth of Nations published in 1776, explained it in this way:

“Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me what I want, and you shall have this which you want, is the meaning of every such offer; and it is the manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.”[2]

Under a free market system, where governments ensure private property rights are protected and contracts upheld, consumers are able to freely choose what to buy. Producers are able to freely choose how to produce it and what price to sell it for. In other words, it is through the mechanism of a market that prices can be established which enable all participants in the exchange to come away satisfied. As more competitors enter the market, producers seek better and more efficient ways to produce their products, with consumers reaping the benefits of lower prices and greater innovation. Investors are also attracted into the market to fund producers into even greater efficiencies and productivity in order to maximise the return on their own investment. Again, consumers are the winners with the market delivering improved product quality at increasingly competitive prices.

The beauty of the free market is that it is a dynamic system that operates and adjusts continuously in the best interests of all concerned. Underpinning its operation is the notion of reward for hard work, the incentive that is a key driver of human behaviour. In fact, of all the mechanisms known to man, the free market has lifted more people out of poverty and disadvantage than any programme run by any government ever could.

In 1820, 85 percent of the world’s population lived in poverty; today, largely as a result of capitalism and the free market, it is less than 20 percent. Nine out of ten of the world’s population can now expect to live beyond 60, more than twice the average age of only 100 years ago. And through the technological developments that go hand in hand with capitalism, the workplace has been redefined with one hour of work delivering more than 25 times the value that it did in 1850.

The political left hates free market capitalism. Why? Because a free and “democratic” marketplace disenfranchises those who believe they know better than others. In a free market, the public hold the power and their collective will prevails. Contrast that with socialist state control which imposes – by force or regulation – the wishes of the ruling elite over a population.

Wherever populations have had a chance to migrate, the rush has always been towards free market capitalism, not away from it – just look at East and West Germany before the Berlin Wall fell, or North and South Korea. And if it isn’t the migration of citizens, it is certainly the migration of ideas with the former Eastern European Communist Bloc countries embracing free market capitalism – low flat taxes in particular – in order to “catch up” with western nations.

China, of course is another country that is busily transforming itself by embracing free market capitalism. And the results have been extraordinarily dramatic.

The People’s Republic of China came into being in 1949 under the Chairmanship of Mao Zedong. During the next thirty years, not only was the country torn by civil war, but millions of people died as a result of failed communist policies. Mao’s “Great Leap Forward” turned out to be a disastrous great leap backwards.

The crux of the problem was that under communist rule, the dictator always “knows best”. When Chairman Mao instructed farmers to sow grain crop seeds closer and deeper in order to “increase yields”, crops started rotting. But anyone who spoke against the policy was punished.

The fact that some 30 million people died in the famine is a grim reminder that while markets may fail the end result is never as tragic as the failure of governments that think they know best.

After Deng Xiaoping took power in 1978, China embarked on a programme of economic reform and within five years, largely as a result of the introduction of a market pricing system, China’s agricultural output had grown by 40 percent, doubling the average real income of farmers. While the country still has a long way to go, no-one should be under any doubt that free market capitalism is playing a fundamental role in China’s progress.[3]

Over the weekend, the $700 billion Wall Street bailout bill was passed by the US Congress. With the immediate steps to address the crisis in the US banking system now in place, the debate will inevitably move onto the reasons for the collapse.

Pro-government activists like Matt McCarten blame capitalist greed and want government to take greater control of the market place.

Free marketeers like Roger Kerr say otherwise. They believe it is in fact state intervention in the housing market that has given rise to credit being given to those unlikely to meet their repayment obligations.

That debate will no doubt continue.


1.Matt McCarten, US example puts paid to free market idea

2.Adam Smith, The Wealth of Nations

3.Tim Harford, The Undercover Economist. Published by Abacus