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The Waterloo of Market Fundamentalism

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Trump's election represents a lot of things, but one thing that doesn't seem to have been quite noticed as much as it should be is this: it is the Battle of Waterloo, the final decisive defeat, of market fundamentalism.

Market fundamentalism, for readers unfamiliar with the term, is the belief that free markets aren't just good, they're everything.

This belief has been globally on the ascendant since the twin elections of Thatcher in 1979 in Britain and Reagan here in the USA in 1980.

It went into metastatic overdrive with the collapse of the Soviet Union in 1989.

It was never really accepted in East Asia, though nations like Japan, Taiwan, South Korea and China found it convenient that America believed in it and therefore tolerated their "free market" trade surpluses - which were anything but.

But the doctrine was swallowed deeply in Africa, Latin America, Eastern Europe, and much of the rest of the world in the 1990s. And, of course, here in the U.S.

It has been in slow retreat since about Y2K.

Latin America mostly repudiated it in the early 2000s.

Now we read that Prime Minister Theresa May has announced that if Donald Trump is turning America protectionist, Great Britain will now be the world's "champion of free trade."

Good luck with that, Madam 2.3% of world GDP.

In reality, the game is over. With the world's four largest economies -- the U.S., China, Japan, and Germany, between them accounting for half the world economy -- turned towards economic nationalism, this simply is the new global economic order.

So market fundamentalism is finished internationally, its last redoubt. Domestically it's been finished for a long time. Neither Thatcher, nor Reagan, nor Newt Gingrich nor George Bush actually reduced the size of government. The U.S., like all developed nations, has a mixed economy: about 40% government, maybe 20% heavily regulated capitalism, and less than 40% "pure" (or nearly so) capitalism.

Free-market purists may sob over this reality. Students of America's real economic history will be unfazed, as they will know that America's real economic heritage is Hamiltonian, i.e. focused on making markets serve the national interest, however corruptly defined at any given moment.

The economics profession that has played cheerleader to market fundamentalism for decades is headed for either a radical upheaval, or a fatal decline in its credibility, over the coming years. People were already asking "why didn't economists foresee the Crash of 2008?" Unless Pres. Trump bungles protectionism so badly as to discredit an idea whose fundamentals are correct (I'm hoping not, but these things do happen), it will only get worse for the discipline in its current form.

Luckily, the seeds of renewal in the profession have already been sown. Ralph Gomory and William Baumol's book Global Trade and Conflicting National Interests is a fine starting point.

Does this all mean a swinging back from the economic "right" to the economic "left?" Is socialism okay after all? No.

For one thing, socialism isn't even the issue here. For another, right and left aren't really economic terms in the first place. They're political terms that map imperfectly onto economics.

The free-market Right is in big trouble. It's probably finished for our lifetimes. But that's not the only kind of right, as Mr. Trump has just shown everyone who had forgotten. The Republican Party prior to 1948 was protectionist. It looks like it will be again.

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