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Free markets & the economics of see & saw

A series of stories on Virgin Islands economics and politics urges visionary thinking from the country’s leaders. Possessing an appreciation of the importance of economics for policy making appears to be necessary for effective governance.
Dickson Igwe. Photo: VINO/File
By Dickson Igwe

The following article looks at the free market as a panacea for economic growth, but from two differing perspectives.

So what are the politician’s economic options as offered by his economic team? These options will be varied, even complex.

In a slow economy for example, one idea will be the free market option. This is where the economist advises Jack the Politician that the free market is the answer to correcting the slow or recessionary economy.

The free market option would have been obtained from the economist’s tool box. The free market option becomes the advising economist’s particular guiding philosophy for the economy.

Now, the idea of the supremacy of the free market is central to the type of economic thinking of the Chicago School of Economics. It is followed by the disciples of the late economist Milton Friedman.

This will entail deregulation and public spending cuts. Today, free market economics also advocates tax cuts, and managing an economy through control of the supply of money by the use of bank base rates. It states that tax cuts are a form of stimulus. Tax cuts allow businesses to retain their profits and reinvest. This in turn creates a multiplier effect.

The use of monetary controls such as Quantitative Easing, or the opposite of that, increasing interest rates and decreasing the amount of cash in circulation, is a favored method of economic management by free market thinkers.

Then, deregulation frees businesses to trade without having BIG GOVERNMENT watch their every move. Spending cuts it is argued reduce budget deficits and national debt which in turn increases business and investor confidence in the economy. These are a sampling of the arguments in favor of the free market model.

However, things are not that simple. There are caveats. The free market idea has historically led to greater inequality and a top down model of the economy where resources are controlled by the wealthy. That is a simple fact of recent economic history. Creating a level playing field has always been the job of interventionist governments.

Historically, the free market idea has also led to slower growth especially in the long run. The free market economy frequently begins with optimism and strong economic growth. This economic growth becomes a boom, followed by recession, and then a bust.

Furthermore, the free market has resulted in an economy where wealth is concentrated at the top of the social pyramid. The rich are not necessarily the big spenders most would believe them to be. The rich tend to be more frugal and savings oriented. That is how a great number became wealthy in the first place.

Consequently demand in the economy declines as wealth is transferred from the middle class, the true generators of economic growth, to the top 1%. The poor and middleclass are the vast majority of the population. Their spending is what keeps a modern economy going: the demand driven economic model. As the middle class spend, their cash enters the coffers of the wealthy owners of private enterprise.

There is an aspect of Maslow and his famous hierarchy of needs model here. The poor and middle classes spend exponentially more on essentials than the 1%. The wealthy supply these essentials through their corporations.

This has been the trend since the early 1980s. Unfettered free market economics is at the root of global wealth inequalities.

The profits generated in the free market economy go into the savings and investments of the top percentile. Furthermore and arguably, history shows that the level of unemployment increases more, under the free market model.

The reason for this is that big corporations traditionally cut jobs and utilize technology to increase their profits as they evolve. This is typically an Anglo Saxon phenomenon. Ultimately demand decreases as the middle class and poor are squeezed. This squeeze on the earnings of the majority leads to a drop in consumer confidence, falling demand, and ultimately to recession.

The free market model fosters deregulation, and smaller government interference in the economy. Recent history has shown the free market model unsustainable in its purest form. It leads to a ‘free for all.’

Ultimately, free market economics promotes unsustainable borrowing and high personal debt. Engineering easy credit is a method of creating demand driven by the banks under the free market model. But it often leads to a bubble economy, and ultimately to financial crisis. Government then has to intervene by rescuing critical economic institutions and instituting STIMULUS: the 2007 – 2009 Great Recession is a good reference point. In fact, stock market crashes are frequently preceded by an overheated economy.

History has further shown especially recent history, that economies do not self correct swiftly enough to avoid serious recession, also known as depression: Japanese and European deflation this 2014 point to that fact. Stimulus becomes the one option to correcting the recessionary economy: not austerity. Had the Feds not intervened between 2007 and 2009 the world could still be in depression today.

An economy with a heavy government footprint is frequently the result of the free market system failing under a previous regime. Government steps in to save the day usually through the election of a left of center government. The new government then raises taxes on the rich and spends on specific aspects of the physical and social infrastructure to stimulate economic growth. This is essentially a redistribution of wealth: a nightmare for the pure capitalist.

When there is economic crisis as the result of one economic model failing, the alternate takes its place. It can happen under both the free market model, and the stimulus or government intervention model.

For example, when there is too much government, and budget deficits are high through higher spending on public infrastructure and services, there is frequently a backlash from the private sector, and right of center politicians. Too much government can decrease business and investor confidence. Businesses then begin to cut back. Unemployment rises. The economy worsens.

This chain of events leads to the belief by the wealthy, right wing politicians, and private enterprise, that lowering taxes, and establishing smaller government and deregulation, will save the day.

A right of center government is subsequently elected. There is a return to a free market ideology. There is a turning away from big government, and a strong regulatory model. The wheel has turned 360 degrees, the cycle starts again from scratch. This is the classic economics of see and saw, of boom and bust.

To be continued

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