On the 25th July 2014, the UK economy final returned to its pre-crisis level of output after 6 long years of austerity which has plagued it and many of the Western economies following the 2008 global financial crisis. September 25th 2008 was the moment for many when it felt as if the world was standing on the edge of a precipice looking into the abyss below. This was of course the day that the big investment bank Lehman Brother filed for bankruptcy and looking back it is now regard as the tipping point that saw the global economy (in particular the US, UK and Eurozone) experience the worst economic downturn since the infamous Wall Street Crash of 1929 and the subsequent Great Depression of the 1930s. Of course things got even worse on 2nd May 2010 when Greece effectively went bankrupt, which triggered a further Eurozone crisis causing Ireland and Portugal to also require a bailing out and at the time it was feared that Spain and Italy would follow suit.
Although the UK may now be showing signs of healing, the Eurozone is still in trouble. The latest figures show Italy slipping into a triple- dip recession, France reporting flat growth for the year and even the mighty powerhouse Germany has seen a fall of 0.2% in GDP during the second quarter of this year. With inflation at a rate of 0.4% in Europe deflation is becoming a real possibility, prompting the European Central Bank (ECB) to be the first central bank ever to introduce negative real interest rates. Such has been the depth of the crisis that radical economic policy has become the norm from almost zero interest rates to the Quantitative Easing experiments tried by the Federal Reserve and the Bank of England. Even in the UK where the economy appears to be moving, things aren’t all that rosy with average pay growth for 2014 of 1.25pc which is below the 1.6pc rate of inflation leading to the biggest squeeze on living standards many have seen for some time.
It would seem reasonable to say that with all this doom and gloom, the free market system has failed us. Why should we continue to adopt a system that can go so wrong and cause so much damage to so many? The rise of Front National in France as well as other more extreme political parties across Europe in the recent May elections has highlighted people’s disillusionment with politics - perhaps the same can be said of our economies. The ‘Occupy Wall Street’ movement is merely one example of people showing that they’re no longer happy with the status quo. So have we really got it right? The question of which direction to take and what form the world’s economies should move towards, is one of the most important questions facing us today.
The free market model: a product of the dominant neoclassical school of thought. In essence, free market capitalism is an economic system based upon the theory of free trade, organized by the workings of the market dictated by the economic principle of supply and demand. It is important to be aware that there are absolutely no free market economies in the world. There are some that are freer than others but there aren’t and have never been any truly free market states. Markets are a simple but extremely powerful mechanism that coordinate the working of millions upon millions of people throughout the world, creating economic order out of what would otherwise be chaos.
Since all the people in a market are free to buy whatever they want from whomever they want, competitive rivalry results. Businesses compete for customers. Workers compete for jobs. Buyers compete for the goods and services they want to consume. As weird as it may sound, this rivalry works to harmonise the interest of everyone involved in trade. The best way to really grasp the power of competition is to consider the types of actions it encourages and the results it produces. The first example of such actions is lower prices. All else being equal, the company with the lowest price wins. This is how Wal-Mart has come to dominate its industry today through undercutting its opposition by offering lower prices without compromising on quality too much. Competition also leads to improved quality as companies strive to make sure that what they are offering is better than anyone else’s so as to attract more customers. This is one reason why Japanese automobile companies were able to break into the American market because they had a reputation for quality whereas their American counterparts had a reputation for a more substandard quality.
However the greatest single advantage to humanity that free markets create is innovation-the driving force of the capitalist engine of progress pushing forward the boundaries of economic and human development. One of many examples which best symbolises this progress is the iPhone. Steve Jobs wanted to make money as well as create something functional but beautiful. Free-markets were what allowed Mr Jobs to create his wealth while pursuing his passion. He has truly touched the lives of millions throughout the world, morphing it into what we see today. Furthermore, Bill Gates has helped more people improve their well-being through his creation of Microsoft than he ever will through his philanthropic work. One could easily assert that they iPhone or Microsoft PC may not have existed without the free market. Steve Jobs and Bill Gates epitomise the sheer power of the market and how it is able to change the lives of so many for the better more than any charitable act could ever do.
Although, as I have pointed out, there are no truly lassiez-faire free-market states it is worth looking at the world’s two ‘freest’ economies, according to the Economic Freedom Index, Hong Kong and Singapore. They rank third and fifth respectively in the Global competitiveness index. Singapore tops the business environment rankings meaning it has the least hindrances to the conduct of business in the world, Hong Kong comes in at number three on this measure. Furthermore Hong Kong ranks fourth on the technological readiness index and Singapore fifth. However, Singapore appears to have less corruption than Hong Kong as it is ranked the fifth lowest. In addition, both economies score in the top five for the least amount of government red tape. The statistics are undeniably impressive as Hong Kong’s stock market traded at the sixth largest value in 2013 and is set to topple London in the not so distant future as the world’s main financial hub. Moreover in 2014 Singapore had the eighth highest GDP per capita. Both of these economies, as well as so many other emerging economies, surely prove that a move toward freer markets could well be the remedy that the developed world’s economies so desperately need.