The Free Market Myth
The crises that unfettered capitalism can’t solve
After losing their core industries, some places enter into an economic free-fall from which they never recover. When it comes to understanding why, we should think of two dinghies at sea, says Sir Paul Collier, Professor of Economics and Public Policy at the Blavatnik School of Government and the former Director of the Research Development Department of the World Bank.
One dinghy is floating comfortably, while the other is hit by a gust of wind and capsizes. As the breeze drops, both boats are stationary for a brief second. But then, as soon as the wind picks up again, they each chart a radically different course. The capsized dinghy — the place that has lost its core industries — drifts aimlessly with the current. Meanwhile, watching from the shore are banks, prospective workers, and government officials, who see this boat’s misfortune and decide to invest in the other dinghy, which picks up steam and sails even further away. Over time, the differences compound further.
“People living successful lives in prosperous places often misunderstand the decline of less fortunate places,” Collier writes in his latest book, Left Behind: A New Economics for Neglected Places.“ They assume that either the places or their people must have something wrong with them. If it is the places that are wrong, the people should leave. If the people are wrong, then they need to change.”
Conventional economic thought shares these misconceptions, Collier argues, and it offers the free market as a solution. However, that logic is fundamentally flawed for three reasons.
- It isn’t just the initial economic shock that destabilizes a place. It’s also the “localized discontent” that follows.
Barranquilla, Colombia was once a thriving port city on the Caribbean coast. But then, erratic rainfall caused the region’s estuary to silt up. This was the initial economic shock — that puff of wind that temporarily capsized the city. Though the solution to the estuary crisis was straightforward and relatively cheap, it required the city of Barranquilla to cooperate with all of the local governments upstream in order to dredge the estuary and revitalize the port. While such an agreement may have been possible when times were good, that was no longer the case.
Other regions in Colombia started to become more prosperous — the other dinghy sailing away — and trade unions in Barranquilla demanded that workers’ wages keep up. Businesses reasonably argued that they couldn’t afford these higher costs, further intensifying the blame game and failing to address the core issue. Predictably, local firms left the city, and firms from elsewhere were deterred from coming by the region’s poor reputation.
It didn’t have to be this way. Across the Atlantic was another group of governments that needed to cooperate and manage a shared body of water. Toward that end, Liberia, Sierra Leone, and Guinea created the Mano River Union, which had well-crafted rules and good leadership. Even if the three nations didn’t trust each other, they could trust the Union, which allowed them to avoid the demise of Barranquilla. However, the free market would never incentivize such an institution, showing how unequipped that ideology is to deal with complex, socially-entangled problems.
- When places transition from rural to urban, they face challenges that markets alone can’t manage.
People want to move to cities, where the economic opportunities are usually better. But as they flock to urban areas, they tend to overwhelm the existing infrastructure, which was built for a much smaller population. That leads to congestion, gridlock, and overcrowding, but as long as the job prospects are better in the city than in the rural areas, people will continue coming. Here, the free market is particularly unhelpful because installing, upgrading, and retrofitting infrastructure is often as much of a social and political problem as it is an economic one.
Consider Lagos, Nigeria, which was so choked by traffic jams that the governor restricted car use according to the first letter on the license plate: A to K cars could use roads only on Mondays, Wednesdays and Fridays; L to Z on the other days. From a public policy perspective, this wasn’t the most effective policy, but it was the most politically expedient. While many car owners lost out — their auto was now worthless for half of the week — wealthy residents simply bought another car to ensure they could drive whenever they wanted. Meanwhile, bus riders won because the streets were now far less congested.
“The governor had spotted this coincidence of interest between the two groups that most mattered for him, voters and the wealthy elite,” writes Collier. “He had forged a winning coalition for change, but one which wasted the country’s money. It was better than no change at all but left room to do better.”
- The free market would argue that natural resources are a blessing — but that’s only the case if the right policies are followed.
Liquid gold may seem like the answer to every country’s financial prayers, but resources like oil can be a double-edged sword. In order for everyone to benefit, not just the oil companies, the government must effectively tax the resource, the difficulties of which are exemplified by comparing Britain and Norway.
In Britain, the Treasury is obsessed with a short-term outlook, relies heavily on inexperienced junior staff straight out of college, and devalues or flatout ignores the advice of experts. Because of these characteristics, the Treasury is habitually erratic when it comes to taxing oil. In fact, over the past half decade, the Treasury has changed its tax on oil every two years on average, making it one of the least stable tax regimes in the world. The oil companies then respond by hiring an army of tax lawyers who easily outmaneuver whatever policy the young staffers have created.
Meanwhile, Norway takes a very different approach. Not only does the country employ a dedicated, stable, and highly specialized team of forty professionals to oversee the industry, but it also created a national oil company that now competes with the major oil firms. The results speak for themselves: Despite Norway’s population being less than one-tenth that of Britain, the revenues collected per barrel have averaged $33 in the Nordic country — and just $11 in Britain.
This should serve as a source of optimism for poor countries with valuable resources. Like them, Norway was a poor colony until the twentieth century, but by creating a committed team of subject matter experts, and adhering to a stable tax regime, it was able to reap major benefits from its natural resources.
That’s something that free market ideology won’t teach you.
Using examples of the “left behind” regions, renowned development economist Paul Collier shows that centralized western economies have been the most ineffective to alleviate poverty—even if nationally the country seems to be growing.
In Left Behind, Collier examines how the assumption that any impoverished area will find a way to progress through market forces has devastated nations all over the world.
With keen insight, he draws lessons from such disparate fields as behavioral psychology, evolutionary biology, and moral philosophy to explain how we can adapt to the needs of individual economies in order to build a brighter and fairer global future.