Free Markets Are Not Enough

Professor G.R. Steele, of England's Lancaster University, writing in the September 1999 issue of Economic Affairs, says that laissez-faire is not enough for a robust, growing economy. That's an important point to make because the enemies of liberty, at home and abroad, point to the economic chaos in most of the former states of the Soviet Union, as evidence that capitalism and free markets do not work. Professor Steele says, "The absence of an adequate institutional structure explains why entrepreneurial capitalism did not automatically follow the collapse of central planning in the 1990s." His analysis is especially instructive for us because the very institutions needed for prosperity in the former USSR states are the very ones under increasing attack in our country.

Alan Greenspan, Federal Reserve Board Chairman, points out, "There is a vast amount of capitalist culture and infrastructure underpinning market economies that has evolved over generations: laws, conventions, behaviors, and a wide variety of business professions and practices that has no important function in a centrally planned economy." In our country, a major part of this infrastructure includes a bill of rights, whose main purpose is to protect citizens against arbitrary action by government. Citizens of the former Soviet Union have no such protection.

Another part of capitalist or laissez-faire culture and infrastructure is the rule of law and stability of the law. Rule of law is where everyone obeys and is judged by the same set of rules. Laws apply to government officials just as they apply to citizens. Outcomes are irrelevant. Baseball rules provide an excellent example of this process. In 1998, Mark McGuire hit 70 home runs while other players hit 10 or less. Nobody accuses McGuire of greed and exploitation. Politicians don't call for a redistribution of his home runs, or tell McGuire that he should give something back. We just say to other players, "You had your chance."

Stability of laws are also part of the infrastructure for prosperity. When laws constantly change, people cannot plan well. After all if you make investment decisions based on an existing legal structure, it's possible that you could be wiped out by unanticipated changes in the law. So what do people do in such an environment? They shorten their investment time horizon and become more now oriented. Now-orientation is not the way to prosperity.

In order to provide the institutional framework for a laissez-faire economy, government must restrict its functions mostly to that of being a "referee." As such it shouldn't choose sides. Governments should guarantee private property rights, enforce contractual terms (including the provisions of criminal law), establish rule of law and provide for certain public goods.

Going back to Alan Greenspan's 1997 "The Virtues of Market Economies" speech, "[m]uch of what we took for granted in our free market system and assumed to be human nature was not nature at all, but culture. The dismantling of the central planning function in an economy does not, as some supposed, automatically establish a free market entrepreneurial system."

So how can the West help nations of the former Soviet Union?

We can't help much with World Bank, International Monetary Fund and Agency for International Development giveaways. In fact, these giveaways make the status quo more politically viable. If indeed we can help at all, we should encourage, preach and admonish that they adopt the institutional and cultural infrastructure necessary for a free market economy. But just as importantly, and perhaps even more so, we should halt the attack in our own country on our institutional cultural infrastructure that explains why we are not in the same boat with the people of the former Soviet Union and a good part of the rest of the world.

Walter E. Williams
December 13, 1999
Return to Articles Page