Selling the Market Short

Last week in National Review Online, John Derbyshire warned that China is still a dangerous nation. While doing so, he ridicules the view "... that if we can just get China practicing free-market economics and open trade, then parliamentary democracy, the rule of law, and universal peace and harmony will inevitably follow." He refers to this view as "economism."

While Derbyshire might be correct in regarding China as a war-like nation (I'm no China expert, and would not care to comment on this), he underestimates the importance of economic freedom in generating peaceful relationships, and at times mistakes the nature of the market for that of game or battle.

Derbyshire briefly reviews the history of the conventional wisdom on the market and command systems of social organization. Quite correctly, he notes that many in the West viewed the command system as overtaking the market system in terms of productivity, and, in fact, thought it was the wave of the future. And he points out that today these views seem ludicrous. But he underrates the difference between a command and a free society, saying: "And in fairness it must be said that the command economy had its triumphs. Your average urban Russian, or Pole, or Chinese was materially better off in 1960 than his father had been in 1930."

It is not clear to me why we should try to be "fair" to systems that killed tens of millions of their own citizens. Moreover, any advances made by the citizens of communist countries during this period were due to the existing market economies. The communist countries copied the market countries' methods of production, their products, and their technologies. Soviet planners even copied commodity prices out of The Wall Street Journal so that they would be able to perform economic calculation. If the Soviet Union had ever succeeded in its plans for world domination, it simply would have hastened its own demise!

Nevertheless, I thought it would be interesting to see if Derbyshire even had his facts straight. I asked around some economic discussion groups, and was kindly sent the following analysis by Marco de Wit:

Russia

In 1930 Stalin's collectivization of agriculture had led to a famine. Millions died in the early thirties. In 1960 Stalin had been dead seven years, political power was far more divided, black markets were extensive and private agriculture was partially allowed. The average Russian, urban or not, was better off in 1960 than in 1930.

Poland

In 1930 Poland was an independent country with a corporatist but still relatively free market. The authoritarian right-wing government persecuted some dissidents and ethnic minorities. In 1960 Poland was a Soviet satellite with a socialist economy, though some private land-ownership existed. Catholics and other dissidents were severely persecuted. The average Pole, urban or not, was worse off in 1960 than in 1930.

China

In 1930 China was in a state of "anarchy" and ruled by several warlords but (or therefore) there still was relatively free market. In 1960 communists ruled and The Great Leap had totally socialized and destroyed the economy. There was a massive famine and millions of people died. The average resident of China, urban or not, was worse off in 1960 than in 1930. And vastly so. See: Jasper Becker's Hungry Ghosts: Mao's Secret Famine on the consequences of The Great Leap. (Reviewed by Richard M. Ebeling here.)

"TINA [There Is No Alternative (to the market)] economics has been a great leveller [sic]. In an open, globalized world, nations compete with nations much more freely than ever before. Alas, in any competition there will be winners and losers. What will decide, in the decades to come, who wins and who loses, whose standard of living soars, and whose stagnates? What will be the magic ingredient, the 'edge'? Who will have it?"

This is a misapprehension of the nature of the market process. Market competition is not like sports competition. It doesn't exist to pick "winners" and "losers": it exists to assign everyone a place in the scheme of production in which they can best satisfy the wishes of consumers.

A crucial insight into the market process is that it is not a zero-sum game. The market is a system of social cooperation. It is no less mistaken to view international markets as pitting one nation against another than it is to view the domestic market as pitting employees against employers, or producers against consumers. In a market economy, whether it is domestic or international in scope, everyone's standard of living can rise at once. America has not "lost" if Japan (or China) should become wealthier than the US. An increase in the standard of living anywhere benefits all people who are economically integrated with the area in question.

The discovery of the law of comparative advantage was a great achievement of the classical economists. It showed that any nation, no matter how poor and backward, how lacking in natural resources, will still benefit from trade with wealthier nations. The very nature of the market as a network of voluntary exchanges means that each participant must feel he is benefiting from a trade, or he would not enter into it.

China's economy, with its artificial currency, its opaque banking system, its rust-belt state-owned legacy industries no-one dares dismantle for fear of popular unrest, its still-ambiguous attitude to private property, its carefree approach to environmental despoliation, and – most of all – its sensational levels of corruption, is a natural consequence of China's political system: one-party dictatorship by an aloof nomenklatura caste who hate and fear the common people, and know little, and care less, about their lives.

Precisely. China does not have anything close to a free-market economy. None of the factors Derbyshire lists as holding China back would exist under a laissez-faire regime. And it is exactly these factors that would tend to push China into a war-like posture. Blaming foreigners for domestic troubles is a time-honored technique employed by despots anxious to retain power.

The economists who have sought to colonize the turf of all other social sciences are surely overreaching. We can certainly conclude that viewing one's choice of a religion or a marriage partner as if they were market transactions leaves something important out of the picture. And there are many non-economic factors that might lead nations into war. But it is equally mistaken to denigrate the importance of the market as a system of social cooperation – indeed, the only system that can create social cooperation across vast areas and large numbers of culturally diverse people.

The market is not a panacea. It does not guarantee peace on earth, but it does promote it. It does not eliminate all cultural differences, but it does make human cooperation possible despite cultural differences. It is not a means of redeeming fallen man, but it does provide a system in which man, although fallen, may survive and even prosper.

Selling the Market Short

by Gene Callahan