Free-market economists (mainly Austrian) influenced the common belief that private property and limited presence of the state in the economy create the foundations of democracy. After the experience of central planning in Eastern Europe and the dominant role of government in the Chinese economy, it was recognised that the statement about the need for deregulation, at least within every country, is quite right. International trade had a diversified history. Reality always brings a reflection on the validity of prevailing paradigms, and the history of economic thought shows us that the new is really old.
Currently, the United States of America is returning to protectionist practices in the spirit of the German historical school, breaking with classical economics and its theory of comparative costs, showing the benefits of the lack of barriers to international trade for all its participants, regardless of the level of economic development. The nineteenth-century German Historical School of Economics advocated deregulation of the domestic market and tariff protection of infant industries against competition from industrialised economies; with its precursor – Friedrich List, father of American protectionism. According to List, the agrarian German states (before unification in 1871) and the United States should apply tariffs on British goods to match Britain’s level of industrialisation. In the future, barriers to international trade should be removed in order to improve the quality of domestic products competing against foreign products. This strategy was used by Asian countries in the process of industrialisation in the twentieth century (for example by Japan). Cooperation related to the government and capital showed how private property and restrictions on imports helped increase capital productivity thanks to the protection against competition.
The twentieth century and the implementation of Marxist ideals in some parts of the world showed that the expropriation of capitalists did not bring freedom to workers and did not increase the efficiency of economies, although it initially accelerated the process of industrialisation. It was found out that without private ownership of the means of production, there were no appropriate incentives in the form of pursuit of self-interest of entrepreneurs focused on maximising profit, i.e. the goal which would give rise to efficient allocation of resources. And efficient allocation of resources is associated with the minimisation of production costs and maximisation of effect, i.e. production, which in theory should lead to the satisfaction of needs of majority of society. The free market, according to certain economic theories, guarantees us this. But what is free market? It is commonly identified with freedom from state interference in the form of legal regulations, but in economic theory, a free market is the one in which, for example, there are no barriers to entry, especially capital barriers. Are modern economies free market economies, if not can they become such economies? No. The state is part of the economy and has some classic functions to perform, such as providing universal education, border protection, etc. In addition, there are large corporations that create huge capital barriers to entry into key industries, which distinguishes modern economies from those of earlier stages of industrialisation (when Adam Smith wrote about the need for economic freedom in the eighteenth century, he observed a move away from craftsmanship in favour of small manufactories). Demanding deregulation in times of sprawling financial markets and the impact of digital giants on societies are not only dangerous for democracy, but also ridiculous. How come poor people in the United States identify their interests with the interests of billionaires?
This question seems to have been answered by John Kenneth Galbraith, an eminent American economist, who aptly described the structure of the twentieth-century American economy adequate to describe the contemporary economies of industrialised countries. According to him, there are two parallel sectors operating side by side: the market sector (small, atomised enterprises) and the planning sector (large corporations). The market sector operates in a manner similar to the neoclassical scheme based on the motive of profit maximisation of enterprises having no influence on regulations and prices. The planning sector requires huge capital expenditures in its operations, which prolongs the production process and increases risk. If so, it is necessary to guarantee the demand for manufactured goods and services. This can be achieved by influencing the government (lobbying), which can give rise to favourable regulations or public spending during a downturn (Keynesian government purchases aimed at stimulating aggregate demand in a situation of insufficient private investment). How to convince the public of the need to pursue the interests of corporations by the government? It is enough to get support of the neoclassical theory, which emerged in different conditions, and repeats the myth of the sovereignty of the consumer, whose needs are satisfied by corporations. The consumer pays, so he needs. The tools creating needs in the form of marketing departments are passed over in silence. The promotion of brands at universities in exchange for small gadgets also fails to be noticed, because commercialisation of research requires cooperation between science and business. Eventually, as Galbraith said, people came to believe that the interests of corporations are identical to the interests of consumers who make up society, voters…
And here we have business at the service of society: billionaires will guarantee freedom of speech, economic freedom, equality before the law, decent working conditions, adequate share of the labour factor in the benefits of economic growth that will take place thanks to deregulation…
N.B. Between 1925 and 1929 in the USA, wages increased by only 5% and profits on capital by 86%.
References:
Galbraith J. Ekonomia a cele społeczne (Economics and the Public Purpose), PWN, Warszawa 1979.
Korczyk M. Janusz Gedymin Zieliński 1931-1979. Portret ekonomisty (Janusz Gedymin Zieliński 1931-1979. Portrait of an economist), SGH, Warszawa 2020.
Korczyk M. Młynarski vs Triffin: jeden czy dwa dylematy. In: System z Bretton Woods i jego dziedzictwo. Od pieniądza złotego do cyfrowego (The Bretton Woods System and Its Legacy. From the gold bullion to a digital standard), Bartkowiak R., Ostaszewski J., Polański Z. (Eds), SGH, Warszawa 2022.
List F. National System of Political Economy, Longmans, Green and Co, London 1909.
Pigou A., C. Economics of Welfare, Macmillan, London, 1920.