Why does market fundamentalism have so much clout in economics?
There's a couple of other words that describe what I'm talking about - neoliberalism, lassez-faire capitalism, and in a more general sense, the Chicago school of economics - but I chose market fundamentalism because it seemed to best describe precisely what I'm talking about. I mean the belief that the market is capable of self-regulation and that governmental intervention will cause damage to the economy.
I'm asking this because there's still a lot about economics that I don't know about and so I was hoping someone with a background in the subject who would be able to better answer the question. But I realize it's probably also a political question. I wonder if it's more of an issue of our politicians pressing these views than economists and academics.
Personally, with my life's experience, it seems almost obviously wrong. I've lived through several market downturns and even a crash, and looking through history it seems like every market crash can be attributed to the market failing to correct itself.
I think there's two main reasons.
One, is that the market is very elegant, when you think about it. With a market, you can assume that every participant is maximally hostile to each other, is maximally greedy, and basically harness those negative attributes into producing something approaching the optimal resource. A large economy is very complicated, and attempts to plan them have not gone well historically. A market is both mostly unplanned and assumes no positive attributes from its participants yet still reaches an optima.
Second, is that the act of trading between people is a pretty "normal" thing to do. People have been trading with various degrees of freedom throughout the entirety of human history.
You can see both in many modern countries with heavily restricted markets, where there is almost certainly a black, or underground, market. This is both because it's natural that if your neighbor has something you want, and you have something your neighbor wants, to exchange them, and because there tends to be shortages in the plan - not enough pills, not enough salt, etc. Some people have too much of X, some people have not enough of Y.
That's not to say that markets are in any way infallible, but allowing people to buy and sell things from each other mostly unfettered has been the way of most every prosperous country in the modern day.
I think you're conflating a market in the abstract to the stock market.
edit: Another thing is just success rate. If you live in the US, you likely have a list of countries that you think does things better, and has better outcomes in aggregate, than the US. How many of those countries do not have a mostly unfettered market? Calling the economies of, say, the Asian Tigers or Noridic Europe not market based should be enough to power a small village given how much Marx's corpse must be spinning.
What do you mean by “optima?” Looking at the US, it seems the only time things were good for nearly everyone were just post civil war, and just before wwii, both times there was heavy involvement of the federal government.
I feel like this position is mostly nostalgia for the "good old times". In actual terms, vastly more people live under better conditions today than back then wrt. basically all factors such as housing, food, health care, recreation, economic opportunity, education etc.
If we really were living in better conditions by every metric, then people wouldn't be complaining.
I disagree, and I already gave a reason for why people might complain in my previous reply: They are comparing current conditions to a rose-tinted view of the past, not the actual past.
Also note that I'm arguing conditions improved in the aggregate. Obviously this does not mean that an individual's situation can't be worse than someone else's 100 years ago.
Which aspect of the human life do you think has noticeably degraded since before the civil war / ww2? I'm honestly curious, since I'm struggling to think of something right now.
I honestly didn't want to go into any details because I wasn't interested in going down this tangent.
I can't say anything about things quite that old with any confidence, but in the last century or so we have seen relatively stagnant wage growth and more importantly home affordability is a huge issue that affects many people and reduces actual buying power.
Edit: data going back to WWII or earlier isn't really relavent, now that I think of it, since the people complaining wouldn't have had any personal experience of those time periods.
The good parts of history are publicized a lot more than the bad parts. Also, things can be better than before, and we should still complain, because it's natural to want things to continue to improve over time.
The current homeownership rate is higher than any point between 1965-1998 (the data starts at 1965, other tables suggest homeownership was even lower in the 50's). Aside from unsustainable real estate bubbles such as in the 00's, surely that's an improvement over the past.
Real (inflation adjusted) median income has trended upwards over time. So while certain sectors such as housing and education have issues, most things are more affordable than before.
Even if the metrics are better, we should still be complaining about the issues relating to housing or wage growth. It's just also true that we probably can't look at the past as an ideal, because it wasn't actually better then.
Even with the high homeownership rate, it seems as though in the US we also have a higher percentage of people without homes at all, whether rental or otherwise.
https://granicus.com/blog/are-short-term-vacation-rentals-contributing-to-the-housing-crisis/#:~:text=This%20conclusion%20is%20consistent%20with,a%2010%25%20increase%20in%20Airbnb
https://endhomelessness.org/homelessness-in-america/homelessness-statistics/state-of-homelessness/
https://en.wikipedia.org/wiki/Homelessness_in_the_United_States
A quote from the second link:
It seems that the in recent years, the number of homeless has increased, but only to roughly 2014 levels, which is still better than 2007. For this discussion, 2007 is not really the most convenient year for the data to start, given what happened with housing around that time.
What I was trying to address was people comparing the present with a more distant past, whether it's the 90's or the 60's. Unfortunately, we don't have very good data on homelessness that far back, and we know that older published numbers were almost certainly underestimating by a lot.
It's going to vary depending on the specific state (and country but that is outside my scope). However, from a California perpective, anecdotally, my uncle was able to buy a very nice house in the Montclair neighborhood in Oakland in the early 1970s for roughly 40,000 dollars. My grandfather retired and sold his nice Walnut Creek home in the late 1970s for less than 100,000.
My reading of literature from before 1930 includes frequent references to boarding houses and rooming houses in big cities. These housing options are no longer allowed for reasons I don't fully understand. The Japanese have capule hotels. We should too.
Edit, wages have not kept up with housing prices in California
This is exactly the kind of thing I'm trying to argue against. One person's experience isn't representative of general trends. Maybe another person's uncle was refused a mortgage because he was black, so other people got to benefit from his forced lack of participation in the real estate market (prices lower due to lower competition). Also, he was still paying taxes, so other people got to benefit from infrastructure and subsidies that his tax dollars contributed to, but he didn't.
If you just pick an example of someone who was successful, then you ignore all the people who didn't have the same success back then. That's why stats are more reliable for these conversations than selected anecdotes.
It has nothing to do with success, though. It has to do with prices in the real estate market. Specifically much lower ones as compared to typical yearly wages than would be true in california today. These cases were not unusual. Redlining was absolutely a thing, and maybe there was higher homelessness percentage wise among african americans? It is entirely possible, even likely.
Well, I think we're getting a little far from the original topic, so as it relates to market fundamentalism, saying that house prices are higher isn't necessarily an indicator that things are worse than before, since more people own their own homes than in the past. The fact that house prices have outpaced wage gains is more of a indicator that we need to remove barriers to construction, not that the market has failed as a method of distribution. There's no indication that the market has made things worse, because most indicators show that things are not worse compared to our parents' or grandparents' time.
Anecdotally, houses from the good old days sucked. My house was built in the 50's, and many thousands of dollars have been spent on it by me and previous owners to improve it to modern standards, more than the original price of the house even after adjusting for inflation. Anecdotes don't really help us determine whether things are working or not on a broader level though.
My bottom line is that I want people earning minimum wage to be able to afford walls, a roof, running water, plumbing and electricity. That is not possible where I currently live without severe crowding.
I don't think real median household income is a good measure for how affordable things are.
Has the number of people in a household changed?
Has the number of hours worked changed?
How has the development been for the lower income percentiles?
How has the development been for other segments of the population?
The data coming below is from 2014, so it is far from up-to-date and generally seems to correspond with a low point in the more up-to-date example you had, but I think it illustrates more salient measures.
I am currently unable to find newer data for this, so any references to that would be appreciated, and may very well show that the situation is better now. That said, I am only really arguing against the measure used, not whether the conclusion still holds.
Why America’s Workers Need Faster Wage Growth—And What We Can Do About It by the Economic Policy Institute has several graphs of interest. In particular, I would point to figure F (Cumulative change in real hourly wages of all workers, by wage percentile,* 1979–2013) as a better measure of the growth in general affordability.
That is, the gains are significantly lower than represented by the real median household income. In particular, the 10th percentile actually had a decrease in this measure over this time period.
Maybe it has increased since 2014, but at least for that time period the lowest income segment of the US population had to work more for the same real benefit. This is not visible at all in the real median household income, which for me goes to show that it is not an apt or sufficient measure to make these assessments.
I guess it kind of depends on what "good old days" one is talking about. So for figure F, the line dips lower in the 80's and 90's. That seems like good evidence that those years were worse than today. Ultimately, by 2013, all the lines except bottom 10% are above 0, which means that real hourly wages in 2013 were higher than in 1979 for most people. Most of these charts show real wage gains for the large majority of people since 1979 (aside from what appears to be increasing gender equality in wages).
So it seems like this data also supports what I am saying. The past was not better. We still have many problems, but we need to look forward, not backward, for the solutions to our problems.
To be clear, I am not arguing either side of this here, just that the real median household income is not a good measure for it.
This does not mean the measure I linked is perfect or all-encompassing either. If anything, it shows that the situation is complex and handwavingly and absolutely stating "the past was not better" (or vice versa, for that matter) is maybe too much of an oversimplification.
OK, that's understandable. I must have missed that line in the middle of your comment.
I think my point was just that a lot of evidence for the good old days being better is some anecdote representing some American Dream ideal, but not everyone had that. The world is complex and a single number doesn't tell the story about the entire distribution, but it's better than "my grandfather bought a house for the price of a box of cracker jacks." The median is not a perfect measure, but it is a more objective measure.
Im having a hard time finding statistics pre civil war, but this article at least compares 1900 to semi-recently (2003). While housing cost actually increased, I'd argue you also get vastly improved amenities in return: electricity, plumbing, fire codes, home size etc. You could probably pay a similar proportion of your income on housing today if you were willing to live in 1900's condition (e.g. a boarding house if you were an unmarried man).
Unfortunately I'm boarding a plane right now so I won't be able to continue this discussion in a bit.
Well, you could live that way if boarding houses or SRO's still exist where you live. A lot of that has been zoned and gentrified away.
The closest things are probably students and immigrants sharing housing.
Well life continues to improve by most every metric, but humans have always been pessimistic. Doomerism isn't a great organizing force; it's more effective to focus on how things have gotten better and what we can do to keep them improving.
https://www.brookings.edu/articles/why-are-we-so-pessimistic/
I selected my eras very carefully. I think you are right in terms of absolute numbers and basic necessities, I question whether it’s true in terms of ratios, wealth distribution, and free time.
But I’m not talking about just any “good old days.” I mean specifically the time between the civil war and jim crow (there were black congresspeople! From the south!), and fdr’s early years. We had not quite made the medical and food strides yet. But more segments of society had more of something that could be called equal opportunity than at any other time in us history.
Looks like wrt. Income equality, we are actually now 'back' to pre-ww2 levels, with ww2 being a large equalizer previously. See Figure 1 here.
I severely doubt we have less free time today, given all the advances we've made in reducing household tasks (laundry, dishes, eating out VS cooking, replacing instead of repairing/mending). Much more people also work a 40 hour office job today instead of working on a farm or factory floor with even fewer labor protections than today.
Pretty much every single example you gave is demonstrably worse in fundamental ways, even if it's become more advanced as humanity has become more advanced.
Most of the western hemisphere is undergoing some form of housing crisis at the moment, which at least for where I live is largely down to greedy property developers along with a series of governments happy to play ball with them.
We had shortages during COVID and since then inflation that is, once again, seemingly driven primarily by greed rather than anything with merit.
Do I even need to talk about how the American healthcare system will heal you, but also attempt to bankrupt you? I get most of the western hemisphere has better healthcare than America but I also know that at least where I live, the attempts to American-ise the system have been non-stop for my entire life.
There's many more things we can do for amusement true, but the bulk of modern ones have huge amounts of asterisks attached versus most of the recreation options available in the specified earlier times.
For example, you didn't have to worry about which streaming service has the TV show you wanted to watch or about changing the relevant financial details when you find out the one you're using got hacked and leaked data among many, many examples.
Then why is stuff like home-ownership largely going down due to financial issues?
Costs an absolute shitload these days, to the point where a number of people have crippled economic opportunity due to having an expensive student debt they can't ever repay due to being unable to get a job with a high enough pay.
Don't assume that the fruits of humanities advancement is the same as an increase in quality, they're two separate things that can affect one another. (eg. Sometimes advancement will directly lead to higher quality, or higher quality will lead to the rate of advancement slowing/speeding up)
I'm honestly baffled by this response. We are comparing to the 1900s here, none of these things are anything but massively better for the average American.
Housing might be more expensive (23% VS 33% of income, see my sibling comment here somewhere), but you also get vastly better and bigger houses, you don't board with other people or share a room with 8 siblings etc. Homeownership rates were also significantly lower back then.
Food: We are today so secure in our food supply, and have such a vast selection of all types of food and restaurants available, that a minor disruption like covid seems like a big deal. This situation is the norm if you live in 1900, when many more people might go hungry after a bad harvest, meat is a huge luxury, and food costs you about 30% of your income.
Health Care: The US Healthcare system is far from perfect, but in 1900 health insurance essential didn't even exist (in the US its emergence can be somewhat attributed to ww2). So your situation is even worse, not to speak of the actual care in general being much worse.
Recreation: I'm not sure which specific types of recreation you mean, but TVs/Computers didn't even exist then. You can get rid of yours today if you don't want them though?
Education / Economic Opportunity: 9% of Americans got a high school degree back then. Literacy rates were around 20%. Again, it's baffling to me how anyone could think these things used to be better in 1900.
Nearly everyone... except women and minorities. I think it's very important not to forget this. As a woman, I 100% prefer a 2023 economy over a "better" economy where I would not be allowed to work in my desired profession (or worse, be married off and expected to have kids). Women could not be financially independent. I'm sure Jim Crow ensured black people's financial situation wasn't so great either.
How would the economy be effected if the entire adult population were allowed to be engaged with it? Different possibly. Maybe worse for white men. Absolutely worth it though if it means more people are less oppressed.
I think this is why the commenter referred to "just after the Civil War," as in during Reconstruction, before Jim Crow laws were instituted. It was in large measure due to the development of black representation and upward mobility that anti-Reconstruction forces prevailed and Jim Crow was instituted. It's somewhat accurate to say that that period saw the greatest gains in the social and financial standing of African-Americans in the nation's history.
I think the commenter is taking a rather simplistic view, though. The Federal Government certainly invested tons during Reconstruction, and especially during the New Deal era, but there were a great many other forces at work than just federal investment–technological developments and economic realignment affected the Reconstruction South greatly, and labor organization played a part in the Depression, just to name a few.
Yes, also consider how much things have changed for LGBT people.
I think if you look more closely at the time periods I mentioned, it was a time when women and minorities had more engagement than they do today.
Post wwii was good for “white” men only, to be sure. But just before, we had women making great strides and the wpa and strong regulation of industry. Iffy on minorities.
Just after the civil war was probably the best time ever for black folks and indigenous people. Women made some strides, then, too. Jim crow was a response to this.
In regards to your first point, it seems that the assumption that each party is maximally greedy could be expanded to the idea that all players in every market are constantly trying to take over that market, and to do so is to set up a monopoly which means that there effectively is no market and everyone suffers for it. So with that in mind it would seem that strong anticompetition laws would be enforced but it seems that there has been very little efforts to enforce these rules in the past few decades. There's been more popular support to do so, but at the same time we just saw Microsoft get OKed to buy Activision.
My thoughts are based on the US market, yes, but I was not really considering any foreign markets. Rather I was thinking about local markets. When you take a look at individual US states, you see that some of the strongest economies are in states with the most regulation and some of the weakest economies are in states with the least regulation. Of course it's not a perfect correlation and there are many other factors in place that could account for that.
There are things I do wish we would do like some other countries, but those are more political than economic. I don't believe that our economy is what's stopping us from adopting those practices, except insofar as capital doesn't want us to do them.
So there's a few interesting points to this-
Corruption and consolidation of power to squeeze out competition affects EVERY system. The question isn't "why is this system corrupting" so much as "what system would corrupt less". While I absolutely think that some level of hybrid socialist/capitalist society is the next ideal evolution in most countries, I also think that one the reasons more "pure" forms of socialism/communism fail is because they're more susceptible to corruption, and are very bad at handling the changing of power. Anticompetition laws should ABSOLUTELY be more enforced worldwide, but it does struggle against our natural desire to not be over burdened with choices as consumers (i hate that we could be moving to a CONSTANT market on everything, where the price of your goods might be determined at the moment of checkout) and the theoretical efficiency of "one group" (since be it a government or a company, if you force everyone on the same page and do it right, you can get absurdly productive results....it's just the doing it right part that's tricky).
You can look at "free market" thinking as sort of a darwinisim, for good and for bad. In nature, if you've got a few deer and a lot of grass, the deer will reproduce and thrive...right up until there's too many deer and not enough grass, and then a bunch will starve and die for decades while the grass grows back, and repeat. There are arguably free market solutions to some modern problems, but I don't think the majority of people want to go through the economic equivalent of "mass starvation". Remember that as bad as recent crashes have been, the great depression makes them look like a day in the park, and there's many worse economic crisis that have happened/are happening right now in other countries.
Now to be clear, that doesn't mean all these countries are free market countries or that all of this is a perfect example, but it's something to remember that just because there's a free market solution doesn't mean it's something that's viable, especially when you consider political and international considerations. For example I think many people would not be thrilled if Russia steamrolled into Ukraine even faster because their allies couldn't afford to help.
All in all there will always be some level of regulation, but striking the balance is tricky. Governments aren't any more immune to corruption and monopolies than companies, and in some ways can be much worse. They already have monopolies in most places on things like utilities, and that comes with good (if it's sane usually everyone can afford it and has it) and bad (they are notorious horrible to work with in any capacity). It's not a solved equation that's easy to just drop in and say "do this".
Edit-
Oh i forgot the other point, the changing of power.
A common issue with beginner takes on both politics and economics is "well why don't they just do blah, blah is obviously good." And sure...maybe it is. But you have to think in spans of decades and centuries, not days. Having a benevolent tyrant is BY FAR the most efficient and effective way to manage everything...right up until they die. A lot of these systems are favored because even in total chaos they can produce good outcomes just by their very nature, while systems that require good actors to work will eventually fail. You can't just assume no bad actor will ever get in, so you need something that can handle them.
Sure, there could be more antitrust. That being said, I don't think the Microsoft/Activision acquisition is a good example of that. That was a vertical acquisition; within the market that Activision is in, the extent of the consolidation was essentially that Bethedsa merged with Activision, which in the grand scheme of things is not enough consolidation to dampen competition.
Verticals usually creates conglomerates, and in the US, the market did wipe out most conglomerates from before the turn of the century. They just weren't efficient enough - their component pieces operated better than together. The tech companies may be building new conglomerates post 2010, but we'll see if they'll last.
If you mean specifically like the Chicago school free marketism, that isn't in vogue that much anymore. For better or for worse Keynesian economics have been dominant in policymaking since the first and second world war.
There's also different degrees of controls. Economist that lean towards markets would propose economic policy that plays along markets, as opposed to controlling the output of the market (e.g something like externality credits/tokens, as opposed to hard caps).
Hmm, not entirely sure I agree with you on that one, but I would agree there have been worse examples if we look a bit further back.
Honestly I feel tempted to disagree with just about everything you said, but that's a sign that you did a good job of asking the questions I asked. So thank you for your explanations!
It's actually less influential than it used to be. For example, ESG (environmental, social, and governance) is big in investing now, and that means taking into account other considerations than just which investment is most profitable.
We've also pretty much accepted that central banks control the economy and this is better than the alternative.
It's well-known that markets aren't perfect, even among conservative economists. Market failures are studied. There are many studies of what minimum wage laws actually do based on data. Just-so stories about what they should do, in theory, aren't all that persuasive.
To the extent that it's still a thing, I think it's less about having faith in markets and more about deep skepticism about what governments can accomplish in practice. And that depends on the country and which part of the government you're talking about.
Also, the popularity of market fundamentalism among the general public tends to keep it alive, for example because of what sort of research conservative rich people like to fund.
I disagree that esg and keynesianism are dominant. I am sure chicago school does not completely rule the day, but most of the large, powerful, and well funded political constituencies lean that way.
I think politicians follow their constituencies, only one of which is the voters, sadly. So I don’t think bad policy originates with them, but they do bear responsibility when that bad policy counteracts the will of the people, and harms them.
I’m not sure what the solution is. The countries we might look to for examples, such as France or Denmark, benefit enormously from the global “peacekeeping” expenditures of the American government. If we could measure such a thing, I doubt they contribute their fair share. And if they did, their culture would probably look a lot different.
Modern monetary theory grew in popularity over the past decade, but recent inflation and the potential for a "soft landing" with monetary policy has given keynesianism a lot more street cred again. Fundamentals of industrial supply still matter.
Everyone here is apparently too young to remember Reagan’s trickle down economics, or Clinton’s championing of free trade agreements.
I don't really see it. Particularly not worldwide, but even in the US. Neither major political party is laissez-faire on principle. Locally, some places have tougher zoning laws than others, but land use is regulated everywhere.
We're being vague here, though, and a lot depends on definitions. Is the Federal Reserve effectively Keynesian?
Arguably, being against tax increases is sort of libertarian but I think it's more populist.
Hmm, we must be wearing different glasses, or have divergent understanding of the policy implications of various schools.
The only non market focused policy of any significance prior to trump was obamacare. And even that has so many concessions to private enterprise, both at inception and as modified since, that it barely qualifies.
With student debt relief, some of rhe sba loans etc, there was kenynsian action even under trump. But ultimately the tax bill pushed through seems to me to be strongly lassaiz faire.
I don’t know enough to say wheter contemporary fed is keynesian or strictly monetarist.
I will say that a rough equivalent of Chicago school in American jurisprudence very much rules the day: so called “freedom to contract.”
The only policy that is vaguely Chicago school-ish from Trump was the tax cuts. Other than that his Presidency involved immigration restrictions, starting a trade war with China (tariffs are definitely not laissez faire), and finally operation warp speed and the American Rescue Act, both of which are like the opposite of Chicago school policies. The fed was also pumping money during this period Keynes style.
Then when Biden took over, we had another big spending bill to curtail the effects of Covid - very classical Keynes. Then we had the Chips Act, the government subsidizing domestic high technology while also restricting exports of high technology to foreign markets like China. Student debt relief. The IRA, which was a massive ecological subsidizing program, earmarking money to subsidize green energy and EVs. A lot of that money was also conditional on the manufacture being in the US (which did NOT make Europe very happy).
Hmm, I had forgotten about tarrifs and immigration restrictions. I guess Trump was chaotic? Because he also directed a reduction in various health, safety, environmental, and other business regulation.
@skybrian
I’m not sure what counts as Chicago school, but Trump’s signature policies definitely aren’t laissez-faire. Tariffs are the opposite of free trade and Trump’s tariffs on imports were pretty severe. Immigration restrictions prevent employers from hiring who they want.
Regarding politics, I’ll agree the as advertised campaign platforms of both parties are keynesian or populist. But their actual policies and actions tend to mainly serve folks like the cnp and the folks behind imf and the finance industry. Dodd frank was the exception that proved the rule, especially given all the subsequent weakening amendments.
This is what I suspect as well. Thank you for writing all of this out!
I think you're right that it's more a political one.
An economist would easily see the difference between the ideological models and reality. People don't have perfect information or act in their best interest. That's pretty well known.
So, why is it treated as of they do? It's because the people who benefit the most from the imperfections have the money to drive opinions. It's been positioned as the sole motivator for the modern workforce. And a solid set of people who are most negatively impacted latch on to the "greed is good" idea because they know they are greedy, and wouldn't want to work if it didn't mean starvation, although they will always position it as "others". They're convinced any government action against capitalism is inherently taking from them.
Too bad they didn't see more than the trailer for Wall Street.