LONDON (Reuters Breakingviews) - Free markets sound like such a good idea. They offer choice and opportunities, which are good things. And who does not want freedom? Besides, if the alternative to these markets is the impassive, incompetent bureaucratic state, then the policy path is obvious. Let markets go free and peg back governments, so their only role in the productive economy is to deal with the occasional failure of markets to work as they should.
This story of private sector freedom and state sector sloth is often told. In the United States, profit-hungry entrepreneurs are considered economic heroes. Even in more social democratic Europe, few politicians or commentators publicly doubt that the profit motive is almost always the best way to get things done.
As with all good myths, there is a thin tie to reality. The Soviet Union showed that economies stagnate without private enterprise. However, communist Russia is long gone. The pairing of good free markets and bad governments should be evaluated by the standard of what is actually happening. By that measure, the story makes no sense, for four reasons.
First, markets and governments are not enemies. Markets are created and sustained by law and they thrive in well-governed societies. Complex modern economies cannot thrive without extensive regulation, and only governments can ensure that rules actually serve the common good.
Second, free markets sometimes subvert that common good. Take the pharmaceutical industry. It certainly produces many useful products, but the search for ever higher profits has led too many companies to focus on drugs which patients have to take for many years, rather than on antibiotics, which cure quickly and usually cheaply. In the United States, the industry’s blind dedication to profits has contributed to the wild over-prescription of opioid painkillers, helping to spawn a public health crisis.
Third, the private-public split is too simple. Many important institutions are neither one nor the other. In healthcare, education, scientific research and public infrastructure, much of the work may ultimately be under government control, but the leading organisations are mostly self-perpetuating and self-governing bodies. Mostly they serve the common good fairly well.
Finally, not-for-profit organisations have advantages over market players. Taxpayers and donors can fund projects which are too risky for private investors. Organisations with a public responsibility can work on socially useful projects which will never generate a big cash profit. These attributes give the government a much wider remit than just resolving market failures.
The free market myth will not go away on its own. It needs to be replaced. One potential substitute, the old narrative of the social market or social democracy, has lost its appeal. Perhaps voters should be grateful that the mixed economy has given them the highest level of prosperity and economic security ever seen. They are not thankful. On the contrary, they are increasingly tempted by populist narratives which condemn, among other things, stultifying government bureaucracy.
It is true that many government agencies have lost their way. All institutions tend to become rigid over time, but governments have an additional problem with morale. It’s hard to be imaginative and energetic when you’re frequently told that your only job is to pick up the messes left by the generally much more competent private sector.
The free-market answer to all problems is to shrink the government, but that would only make everything worse. The modern economy is a shared project which cannot work well without a vibrant non-private sector. If that sector is tired and beaten down, it needs to be encouraged and revived. University College London (UCL), itself a pretty vibrant non-private institution, has launched a project with exactly that goal. The Institute for Innovation and Public Purpose is run by economist Mariana Mazzucato. Her book “The Entrepreneurial State”, a defence of the contributions and potential of government in the modern economy, inspires the IIPP’s motto: entrepreneurial societies need entrepreneurial states.
Mazzucato has gathered an impressive selection of big names in the non-private economy on the IIPP’s advisory board, from James Galbraith, who teaches about the economic role of government at the University of Texas, to Mike Bracken, who led the successful effort to create user-friendly websites for the British government.
But the names on the board – and the chat at last week’s launch party in London – also show how much work remains to be done. Almost all the people listening enthusiastically to the narrative of the central role of the non-private sector were already well ensconced in that part of the economy.
To get past preaching to the converted, the new story has to persuade politicians. There are few signs of that happening. The private sector is even less interested. Shareholder value is still the norm and government is still generally treated as either an enemy or a tool to be manipulated in the fight for competitive advantage. Old myths are hard to kill.
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