Economists have long understood market failures, but the failures were always rather esoteric, like externalities, price fixing, lack of information, and other things that rarely caught much attention.Within the past few years, however, we have seen market failures so massive that they can not be ignored.
Unguided markets focused on short-term profit were largely responsible for the financial meltdown of 2008 and the near-collapse of the U.S. auto industry. Politicians were complicit by allowing the corrupting money of corporate lobbyists to grease palms and avert regulations. And the security rating companies, Moody’s and Standard & Poor, failed to note the risks in subprime mortgages because they were actually working for the banks that issued the securities. There’s plenty of blame to go around because everybody benefits from a bubble – that what makes it a bubble.
As another example, American presidents have tried to introduce a national heath care system since the time of Teddy Roosevelt, but they were always blocked by the conviction that free enteprise medicine was best. After almost a century of this, it is now clear that American health care costs twice as much as other nations, it produces poorer results, and has left 50 million uninsured. ObamaCare may not be perfect – or even great – but at least it is the beginning of a coherent system of some sort.
A final example can be seen in the failure of the trickle-down theory of wealth. The American middle class gained little during the Reagan-Bush Boom, while the wealthy profited handsomely. The top 10% of Americans kept almost all of the economic gains of the past 30 years, and the top 1% gained about half of all growth. The gap between the rich and poor in the United States is as great as it was during the Roaring Twenties, which produced the Great Depression.
This more pure form of Capitalism was justified on the grounds of superior growth and innovation, but overall returns declined somewhat during the Reagan-Bush era, investment in R&D was low, and the US lags other modern nations in energy, climate change, robotics, wireless, broadband, autos, health care, education, and many other crucial fields.
There are other examples, but these stand out as crucial signals that the American economic system is not working and needs to be redesigned for a more difficult era. World leaders from the Pope to Bill Gates are critical of these moral failings of an economic system based on narrow self-interest that threatens the stability of the world economy. Just as the collapse of Communism resulted from an over-controlled planned economy, this “collapse of Capitalism” can be viewed as the result of an under-controlled market economy. Nobel economist George Stiglitz wrote “Markets are not efficient and self-correcting….the financial collapse of 2008 may be to market fundamentalism what the Berlin Wall was to Communism.” And financier-philosopher George Soros said it marks “the end of free market capitalism.”
Markets are essential, of course, and this hard reality poses a huge challenge. How can we invent some new form of enterprise that provides a more equitable and less risky basis for economic vitality in a world that has changed so fundamentally ? Borrowing a phrase the English have used on such occasions, one might proclaim “Capitalism is dead. Long live Free Enterprise.”