The free market is up for review

Free market capitalism is on probation. It’s been the dominant economic theory since the 1980s but it looks like it has now expired.

In one of the first acts of his newly established government, Donald Trump pulled the plug on the Trans-Pacific Partnership.

The 11 other signatories are now looking at Xi Jinping, leader of the Chinese Communist party. They hope China, which wasn’t part of the original TPP, will take America’s place and save the free trade deal.

President Trump won the American election on a platform of greater protectionism, promising to ‘put America first’.

Britain’s vote in favour of Brexit, too, was at least in part a vote in which access to the world’s biggest market lost out to restricting free movement and protecting the NHS from privatisation (it remains to be seen what Westminster actually delivers in these areas).

Perhaps these developments should be interpreted as an acceptance that the current economic system is past its sell-by date.

Support for free market capitalism in its purest form is wavering. People are calling for new trade arrangements in which governments intervene to make the economy a bit fairer.

Despite the irony of China emerging as the world’s most ardent supporter of free trade (if one speech by Xi at Davos counts for much), it looks like we’re returning to a world with more protectionism.

Trump is only continuing a trend

Between mid-October 2015 and mid-May 2016, G20 economies imposed protectionist measures at the fastest pace since the crisis, a WTO report found.

Trump didn’t start something new, but many believe he will take things a lot further. He’s repeatedly promised to impose a 45% tariff on Chinese imports, for example.

The fact that these extraordinary tariff barriers are even being discussed – and enthusiastically cheered by many – suggests a widespread loss of faith in the free market.

The economic policies introduced by Ronald Reagan and Margaret Thatcher in the 1980s replaced a system that had run into problems.

The dominant economic theory at the time proved insufficient in dealing with the stagflation their economies had experienced in the 1970s.

Neoliberalism seemed to have the answers. Deregulation, privatisation, and a smaller role for the public sector in the economy became the new credo.

Now this theory has become unstuck itself.

“Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardising durable expansion,” an IMF paper claimed last year.

The problem has always been that the rewards of the system were distributed unevenly with the bulk going to the people whose pockets were already the deepest.

With household income stagnating in Europe, the US and Japan in the last decade, people may have become more acutely aware of the flaws of the present system.

Some believe it was only a matter of time before this would happen.

“It is hardly surprising that an economic system which distributes its rewards so badly should lose its popular legitimacy,” Michael Jacobs and Mariana Mazzucato write on LSE’s blog.

In any case, it’s hard to disconnect popular disenchantment with globalisation from recent political support for protectionism.

World leaders are taking notice. Belatedly

There are economists who are worried that global leaders will take this protectionism too far. They have a point.

Governments are believed to have exacerbated the Great Depression by reverting to protectionist policies in the 1930s. The IMF and WTO are therefore advocating lower trade barriers to prevent a global economic slowdown.

Going back to a 1930s-style protectionism would clearly be undesirable, but there’s no denying that politics is increasingly stepping away from the idea that markets should be completely unregulated.

Support for policies like wage caps and nationalisation of the railways is growing, which shows people are increasingly supporting policies that see government exchange its passive role on the sidelines for an active role on the pitch.

For decades politicians in the West seemed on a course to make markets as free as possible. Large regional trade blocs were formed and mega free trade agreements were negotiated to push globalisation along.

But support for one of the main tenets of globalisation, laissez-faire economics, is faltering and it looks like politicians have started to take note.

“There is a realisation in rich countries and among rich elites that there are problems with globalisation,” economist Branko Milanovic is quoted in a BBC article.

“They realise that for their own political self-preservation they have to tackle them.”

There now appears to be a coalition of parties willing to intervene in the markets to shield people from the most damaging effects of global free markets.

The previous Conservative government installed the ‘living wage’ while the current Prime Minister has stated her commitment to tackling inequality.

Both of these measures are quite obviously incompatible with Thatcher’s ideas that free markets should be left untouched.

Free market capitalism is on probation. It’s been the dominant economic theory for roughly as long as the system it replaced and it looks like it has now itself expired.

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