Whither the Market Economy?

In a recent commentary, FNF Malaysia Project Director Mr. Rainer Heufers, gave an impression on the idea of Liberalism in modern day society and how the principles of such a philosophy are applicable to the many changes that developing countries are facing. To follow on from that, we present some of his ideas on the Market Economy and how in a liberal democracy – such an entity should be understood and valued. One of the key points that is made is that competition in a market economy must be allowed to provide for the good of all.

“Ever since the socialist experiment failed and reforms in the post-socialist countries show just how bad things have been, there has clearly been a recurrence of a liberal agenda. Countries, like China, Viet Nam, Poland, Hungary and also East Germany, have greatly benefited from the transition to a market economy. This can be regarded as a neoliberal, positive development. It finds its response on the left political spectrum in neosocialdemocratic concessions to the market economy, as developed by Anthony Giddens and as put on the political agenda by Toni Blair and Gerhard Schroeder.

However, it remains unclear what exactly is regarded as neoliberalism. It is either the newly established paradigm of open markets, or it is the way in which the Bretton Woods Organisations have forced countries to open their markets. Experiences in Southeast Asia with IMF loans and policies have contributed to denounce the liberal agenda. Especially in Indonesia these institutions have long supported the state-led development scheme of the dictatorial Suharto-regime. They only rediscovered market principles after they had to bail out foreign banks and governments during the crisis at the end of the 1990s. This has nothing to do with a liberal agenda for a market system.

Classical Liberals would even question the very existence of these institutions, because they are after all state-organised redistribution agencies.

The state as agent of redistribution is a great source of inefficiency, ineffectiveness and corruption. The more complicated the redistribution system, the higher the costs. Liberals, argue in favour of a minimum amount of state-organised redistribution.

When it comes to the social security system, the state should merely safeguard survival and basic care. The autonomy of the private initiative should remain untouched and should not be compromised by substituting government transfers. Western market economy and also liberalism is often accused of fragmenting societies and of sacrificing communal values for an overrated individualism. While it is certainly true that the concept of liberalism builds on strong individuals, however, it is the welfare state that replaces private initiative and that replaces communal, i.e. self-organised care with government schemes. It thus often creates unsatisfied claims by those in need and makes the more affluent apprehensive to engage and invest time, money and efforts.

In the economy, the state is an equally bad investor creating unnecessary inefficiency, ineffectiveness and corruption. Any market creates its own spontaneous order. Any government interference therefore distorts this order.

Take as an example the argument for infant industries. What exactly are these? All throughout the world, governments call for the protection of infant industries and invest in building national champions. Small and medium sized enterprises are much more left to survive in the market, in most European and Asian countries. Governments concentrate on those firms with a large number of employees and large investment potential. As a result, the surviving small and medium sized enterprises tend to be stronger, while the large ones often are political animals and have distorted the allocation of social resources. Many European attempts to create large corporations as competitors to dominating US firms have proven costly and futile. It has to be acknowledged that it is not corporate growth that leads to competitiveness, but, instead, only competitiveness facilitates the growth of a company.”

[ Back ]