The breakout of ‘free market’ hysteria

The US administration has taken a 10% stake in Intel. The Pentagon (or should I now say the Department of War) has taken a $400 million preferred equity stake in a rare earth mining company. The administration is twisting corporate arms in many ways in pursuit of its political agenda.

Predictably, this has generated a bout of hysteria around the evils of government interference in that fictional concept – the free market. With unashamed hyperbole, gleefully taken up in a Bloomberg article title, Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics opined “It’s very much the Chinese model.” Really? Has he tried to run a business in China?

There is no such thing as the free market 

First, let us be clear that there is no such thing as the free market. Markets are political constructs at least as much as they are commercial constructs. Market structures are defined by laws and regulations without which there would be chaos. Some ‘products’ – such as bonds and stocks – only exist and can be traded because they are defined by laws and regulations. Even our money is a political construct. As Yuval Noah Harari puts it in Sapiens: A Brief History of Humankind:

‘Take a dollar bill and look at it carefully. You will see that it is simply a colourful piece of paper with the signature of the US secretary of the treasury on one side, and the slogan ‘In God We Trust’ on the other. We accept the dollar in payment, because we trust in God and the US secretary of the treasury. The crucial role of trust explains why our financial systems are so tightly bound up with our political, social and ideological systems.’

A first necessary step may be to abolish the free market fantasy from our vocabulary.

Hypocrisy abounds 

For those who argue that government should just keep out of the way of business, let us cast our mind back to the financial crisis and the COVID pandemic:

“Businesses of all shapes and sizes held their hands out for government bailouts that, all told, ran into the multi-trillions. They saw central banks buy their bonds in vast quantities and even start accepting junk bonds as collateral. All deep and wide interventions by public institutions to prop up business when needed. Where was the ‘Keep out of my way so I can get on with my business’ mantra then?”i

Add to this the endless subsidies, grants and all other support that governments provide to business – none of which raises a mere squeak of objection on ‘free market’ grounds. The applause from certain industry sectors when government intervenes with tariffs on lower cost global competitors. It’s all a bit reminiscent of conversations one has with the cowboys in the American West. They viscerally and deeply dislike the federal government even as they happily cash their monthly subsidy cheques. The nostalgic image of self in a phony picture of a long-gone wild west that is a real as the ‘free market’.

As regards the Intel equity stake, Kunjan Sobhani of Bloomberg Intelligence argued that it was OK for the government to give money to Intel in the form of a no strings attached grant but not to take an equity stake in return as that was not good for shareholders. Not a mention of what is good for the taxpayers whose money is being bandied about. But who in the financial industry cares a fig about them?

Getting past the noise 

Let us get past the noise and the free-market fantasy to understand two things. What role does government legitimately have in structuring markets? And how does the West best compete with the clear successes (and some clear failures) of the Chinese state-directed capitalist model?

Governments intervene in markets and market structures. It is their duty to do so in the public interest.

Those on the left of the political spectrum are more likely to intervene for what they see as distributional fairness. Those on the right are more likely to intervene for national security reasons. And both will intervene when industrial strategy happens to be in fashion.

They bail companies out, they set limits on the export of sensitive technologies, they block politically sensitive mergers and acquisitions, they take golden shares in companies considered of national importance, they provide science grants to support innovation, they support start-up initiatives that are considered too risky for private investment. The list goes on. And on. And on.

From cell phones to satellites, to antibiotics and solar power, it is hard to identify many, if any, major technological breakthroughs that were not, in one way or another, built on the work done by governments or government supported initiatives.

And while all these interventions can be considered ‘investments’, they are not investments in the same sense as private investments. From the latter, private investors are largely seeking a short/medium term financial return. Government, on the other hand, is deploying public money to deliver long term social and economic benefits and, in many instances, to go where private money dare not yet go.

Such long term, diffuse returns are difficult, if not impossible, to measure. Consider them more akin to the deployment of public money and/or government power as a public service rather than in any way being similar to private financial investments. Where there is similarity to the latter is in the investments made by sovereign wealth funds. No further.

Of course, different people will agree or disagree with the wisdom of specific interventions. That is simply a matter of personal opinion not driven by some immutable law of nature – much as though some economists try to make us believe that it is so.

Competing in the new world order 

China has been the main protagonist in the emerging new world order.

“Western governments can see the advantages of China’s ability to marshal both private and public resources to drive its economic development and its projection of power…Yet they are repelled by the Chinese top-down, authoritarian model…

The twenty-first-century challenge for democratic countries is to evolve their own distinct model of political capitalism. One that captures the advantages of being able to mobilize all to achieve, jointly, national and trans-national social, political and economic objectives without falling into a heavy-handed or even authoritarian model”i

The tensions inherent in this view can be clearly seen in the evolution of newly emerging industrial sectors such as electric vehicles. We have argued that the West can only compete in such sectors through the development of robust industry-government ecosystems – something that may well be anathema to those who have glugged the Friedmanite Kool Aid.

Defining what industry-government ecosystems could look like in capitalist democracies is not straightforward. It is a journey that will be beset by determined resistance, setbacks, errors – but hopefully also successes. We will all have to explore and learn how to evolve from the current model of financialized capitalism to something more appropriate for the 21st century world.

The role of industry 

Of course, none of this can happen effectively unless a significant proportion of industry buys into the concept and collaborates effectively and in good faith.

In his inaugural address, John F Kennedy appealed: “Ask not what your country can do for you – ask what you can do for your country.” In today’s venal, individualistic, financialised culture, these words sound as though they come from a different era – which they do. But maybe we would all benefit if that statement started once more to be discussed in boardrooms across the land.

We can but hope.