The truth about markets

• Author: Christine Ebrahim-zadeh
• Position: IMF External Relations Department
• Pages: 179-180

Page 179

In 1989, the repressive East German regime collapsed and the citizens of both East and West Germany tore down the Berlin Wall. Two years later, the Soviet Union disintegrated. The United States had won the cold war, as Kay states, "without firing a shot." During the decade that followed, the market triumphed as countries around the globe embraced capitalism and governments sold off companies that they had previously nationalized. Information technology, which boosted the U.S. economy's performance and resulted in an exceptional stock market boom, seemed to make conventional thinking about economics obsolete.

Capitalism under attack

But the decade, says Kay, "ended in a frenzy of speculation, followed by recrimination and self-doubt." Corporations that had never earned a cent of profit, and never would, were sold to investors for billions of dollars. Corporate executives filled their pockets and invented revenues and profits. As a result, many "Americans lost faith in corporations as their savings were eroded." Starting with the 1999 Seattle meeting of the World Trade Organization that broke up in chaos, "every subsequent international economic meeting would be besieged by demonstrators." Puzzled observers saw a seemingly triumphant capitalism come under renewed attack.

Revisiting the American business model

Despite the market economy's "public relations problem," business leaders and politicians continue to espouse, what Kay calls the "American business model," which may be summarized in four propositions:

- greed is the dominant motivation in economic matters;

- restrictions on the operation of free markets are costly and ought to be minimized;

- the economic role of the state should not extend much beyond protection of private property rights and the enforcement of contracts; and

- taxation should be limited to what is essential to perform these functions and to support a modest welfare safety net.

Kay challenges these propositions, arguing that "they bear little relation to a true account of how markets work," and that "attempts to redesign market economies in line with such principles have done at least as much harm as good to the effective operation of a market economy."

Role of self-interest

Economic behavior is not governed solely by...