Rethinking Free Markets in an Age of Anxiety

Like their forebears, those who favor market economies need to recalibrate their arguments to address new challenges—including those posed by China.

On December 26, 1991, the USSR’s Supreme Soviet passed its final piece of legislation. Declaration Number 142-Н formally stated that the Soviet Union had ceased to exist as a sovereign entity. That vote sealed America’s victory in the Cold War. Many also believed that the twentieth century’s primary economic contest—socialism versus capitalism—was over. Across the world, even nations with long histories of dirigisme seemed to be embracing markets.

All that seems like a long time ago. Today market skepticism is rife on the American left and right. Advocates of increased protectionism, industrial policy, and even autarky are found all across the political spectrum.

There are multiple reasons for this shift. They include increases in allegedly unjust economic inequalities, free trade’s lamentable association with Davos Man and open borders rhetoric, and claims that too many people have been net losers from economic globalization. Such concerns have been compounded by growing worries about policies currently being pursued by China.

It’s not the ’80s anymore

Underneath these anxieties, another factor is at work. Entrepreneurship and competition produce economic growth and, over time, higher living standards for everyone. But the same dynamisms exact a cost in terms of stability. Many believe, rightly or wrongly, that this price is now too high. Exacerbating matters is that many people have no memory of the disastrous realities of centrally planned economies, or of the high unemployment and rampant inflation that crippled Western nations in the 1970s and represented the cumulative effect of three decades of neo-Keynesian policies.

It’s not obvious that enough market supporters know that these and other developments in public opinion mean they need to reframe their arguments. By that I don’t mean rejecting the theoretical and empirical foundations for free markets. No contextual change alters the fact that free prices remain the best way to coordinate billions of pieces of economic information around the globe. An ever-increasing division of labor continues to be indispensable for economic growth.

Nevertheless, many arguments for free markets used over the past forty years don’t resonate the way they used to. Supporters of markets, for example, typically emphasize that everything is getting better for everyone in capitalist economies. In terms of aggregate living standards, that is generally true. We’re discovering, however, that pointing to the greater material well-being produced by markets has a limited purchase on many people’s affections.

That shouldn’t surprise us. Humans are not just consumers and utility maximizers. Our social nature extends beyond transactions and contracts. Moreover, the constant churn generated by capitalism—not to mention the inevitable market corrections—means that not everything is improving for everyone simultaneously. At any one moment in time, some are experiencing more downs than ups.

Another defense made by many free marketers in recent decades has been to underscore the market’s importance in protecting liberty more generally. The Nobel economist Milton Friedman was a gifted exponent of this insight. Significant suppressions of economic freedom, he argued, make it much harder to sustain free societies.

Again, that’s certainly true. But while freedom is a distinctively human attribute, it’s not separate from our reason’s ability to tell us how we should use our liberty. Many market liberals worry that “ought” questions open the door for the state to go where they believe governments should not go. It’s not that they don’t have a legitimate point. But it’s surely fallacious to view any substantive discussion of freedom’s relationship to truth as containing “echoes of the Spanish Inquisition,” as Friedman once wrote.

Learning from the Past

The good news is that free marketers have been down similar paths before. Following the Great War and Great Depression, leading market advocates realized that it was insufficient to simply repeat their nineteenth-century predecessors’ arguments.

For one thing, people like F.A. Hayek, Wilhelm Röpke, Jacques Rueff, and Walter Eucken had gained new insights into the workings of capitalism by studying things like business-cycle theory. They also learned a great deal from debating socialists as well as John Maynard Keynes and his followers.

Those disputes helped leading market liberals recognize the need to supplement their economic ideas with attention to prevailing political and cultural conditions if they wanted to counter the highly political arguments of socialists and Keynesians. That’s one reason why books written in the 1940s, such as Röpke’s The Social Crisis of Our Time (1942), Hayek’s The Road to Serfdom (1944), and Rueff’s L’Ordre Social (1945) integrated their authors’ deep economic knowledge into analysis of wider problems facing the West at the time.

A similar pattern manifested itself during the first meeting of the Mont Pelerin Society, one of the postwar period’s most influential pro-market groups. Largely at Hayek’s instigation, thirty-six classical liberal scholars gathered at a hotel at Mont Pelerin, Switzerland in 1947 to discuss how to restate the case for freedom. In his history of the Society, the Oxford economic historian Max Hartwell observed that most participants at the meeting believed, as Hayek stated in his opening address, that “liberalism had to come to terms with certain real problems that had either been ignored or shirked.”

What’s most noticeable from Hayek’s speech is how little it referenced economics. Indeed, half the meeting’s agenda focused on non-economic topics like “The Future of Germany,” “The Problems and Chances of European Federation,” “The Current Political Crisis,” and even “Liberalism and Christianity.”

Hayek’s address dwelt at length on this last subject. In fact, he insisted on its inclusion in the meeting’s agenda. Though an agnostic himself, Hayek described a reconciliation between liberalism and Christianity as something many believed to be “the one hope of preserving the ideals of Western civilization.”

Notes taken at the meeting reflect measured but intense debate about this topic. The Chicago economist and restless atheist Frank Knight expressed skepticism about any potential meeting of minds. By contrast, the Freiburg economist Walter Eucken not only firmly stated his Christian faith but also insisted on Christianity’s compatibility with a competitive market order.

No substantive agreement was reached on this issue—or on any other subject discussed at the meeting. That wasn’t the point of the exercise. The immediate object was to facilitate reflection on topics hitherto considered marginal in most economic liberal circles. The longer-term aim was to help advocates of markets respond better to particular challenges in a period in which public support for capitalism was weak, and when many regarded Keynesianism, socialism, or even the Soviet Union as the future.

Dealing with China

Market liberals confront similar situations in America today. Since 2015, one of the most significant challenges that they have faced is rising concern about the implications of trade liberalization for national sovereignty and national security.

The biggest backdrop to these concerns is America’s complicated and vexed relationship with China. The fact that China is America’s third largest trading partner tells us that both nations have found their trade relationship to be mutually beneficial, albeit in different and changing ways, for three decades.

Yet we also know that China is governed by a highly authoritarian regime. It presides over a mercantilist economy, violates WTO trade rules, steals intellectual property, crushes religious liberty, has placed a million Uighur Muslims in “reeducation” camps, and is pursuing geopolitical ambitions that are hardly conducive to freedom. The 2020 coronavirus pandemic has only deepened concerns about the regime’s domestic and international behavior.

Market liberals need to squarely address these realities, just as people like Hayek and Röpke didn’t overlook the threat to civilization posed by the Soviet Union in the postwar period. Röpke was, for instance, an outspoken free trader—far more outspoken than Hayek. But Röpke went so far as to state in his 1959 book, L’économie mondiale aux XIX et XX siècles, that Westerners shouldn’t trade with the USSR because of the sheer scale of the threat posed to liberty by what he called the “Red Empire.”

Röpke’s broader point was that economic facts such as free exchange’s mutually beneficial effects don’t settle economic policy debates. The framing of economic policy necessarily takes into account other factors because governments have to think about more than society’s economic well-being. What might this mean for how free marketers in America address the problem of China?

One point of departure is to remember that, from Adam Smith onwards, free traders have affirmed that genuine national security concerns constitute a legitimate political exception to the free trade principle. This is even written into the General Agreement on Tariffs and Trade. From this standpoint, market liberals should be asking which products and services genuinely fall into that category vis-à-vis China, and which don’t.

Tentative inquiries into that topic have proved instructive. The national security exception has, for example, been invoked over the past five years to protect American industries whose connection to U.S. security is arguably remote. In short, some American businesses have abused concerns about China to play crony capitalist games.

Nevertheless, there is also evidence that large Chinese tech companies indirectly controlled by the Chinese government have worked closely with Beijing’s security apparatus in carrying out internal repression. Even more worryingly, as one report states, “The [Chinese Communist Party’s] own policies and official statements make it clear that it perceives the expansion of Chinese technology companies as a crucial component of its wider project of ideological and geopolitical expansion, and that they are not purely commercial actors.”

Firm Principles, Prudent Minds

These facts suggest that the oft-repeated claim that trade liberalization inevitably facilitates freedom in other areas is very much in question. China shows that if a regime is willing to do whatever it takes to preserve its monopoly of power, we can’t assume that its control will eventually dissolve under the impact of doux commerce.

But that isn’t an argument for a full-on trade war with China, let alone a wholesale retreat from America’s postwar embrace of trade liberalization. The cost for import-reliant American businesses—and above all American consumers—would be enormous. It would also introduce long-term inefficiencies into America’s economy and incentivize cronyism. Nor is there much evidence that such measures would substantially change the Chinese regime’s behavior.

Put another way, market liberals shouldn’t back down from making their arguments, even in the face of as difficult a challenge as China. But they can make their case without sounding like ideologues. It has always been the lot of free market advocates to state unpopular truths. This is one of their major contributions to public debate, one that’s especially needed in our uncertain times. More people, however, will listen to market liberals if they demonstrate that, like great minds such as Hayek and Röpke, they are more attuned to the world’s political and cultural complexities than most people realize.

Keep up with the conversation! Subscribe to Public Discourse today.

Subscribe to Public Discourse!