Free market absolutism is the idea that markets are inherently rational and inherently create growth in all circumstances. These people, therefore, conclude that any slowdown in economic growth must be due to some government intervention somewhere. All improvements in economic growth must have occurred from increased free markets.
Let us take China and the Soviet Union, for example. Both countries faced economic problems in the late 1970s, and both took different paths. One opened up its markets to some degree, one opened it up to a very wide degree, implementing the “Washington Consensus.” The latter completely collapsed economically, this being post-USSR states, while the former has continued to have rapid economic development.
“THE ‘WASHINGTON CONSENSUS’, which for nearly a decade put the best face it could on Russia’s mis-transition, is showing signs of crumbling. It is now acknowledged that the Russian Federation’s post-communist depression was deep and painful, causing immense physical hardship and psychological stress. After reporting unemployment in the low single digits during the first half of the 1990s, it turns out that more than 17 million are seeking work or have left the labour force after years of discouragement…the physical hardships, social disruption and psychological distress associated with a 44% decline in Russia’s GNP caused millions of premature deaths, in addition to any adverse impact they may have had on fertility. The exercise reveals that there were 3.4 million Russian premature deaths in 1990–98 plausibly attributable to the travails of post-communism.”
— “Premature Deaths: Russia’s Radical Economic Transition in Soviet Perspective”, Europe-Asia Studies
Free market absolutists here run into a conundrum: the restoration of neoliberal capitalism in eastern Europe destroyed their economies, yet the partial restoration of market economies in China only boosted growth.
How do they respond to this? Well, simply put, they lie.
The first thing they will do is insist that the USSR’s economic collapse was caused, not by its transitional economics from socialism to capitalism, but from government intervention in the economy itself. While there is some debate to be had on whether or not socialism contributed to the economic slowdown in the 1970s, the claim that the major crash happened from government intervention and not from its economic transition makes little sense when starting in the mid 1980s, they started to privatize, and the crash began around 1990.
Up until the crash, the Soviet Union had pretty consistent economic growth for many decades straight. The insistence that “socialism” alone caused the collapse, despite decades of growth, therefore comes off as rather strange. Especially when the recessions tarted under Gorbachev’s privatization reforms during perestroika and the country descended into free fall during Boris Yeltsin’s economic shock therapy, which former Russian vice president Alexander Rutskoy described as “economic genocide.”
The first line here indicates the founding of the Soviet Union. The second, the Nazi invasion. The third, the beginning of privatization under perestroika. The fourth, the beginning of mass privatization under Boris Yeltsin, starting with the privatization of the Ministry of Fuel and Energy. The final line is when Putin began to re-nationalize industries.
From a closer look at the GDP of the Russian Federation specifically, we can see that its recovery mostly began after Yeltsin, starting in 2003.
What occurred in 2003 was not more privatization, but the exact opposite. What occurred was re-nationalizations of industry.
“Russia under Boris Yeltsin was economically depressed, militarily enfeebled, and dependent on Western assistance…Virtually all these assets were under government control until privatization of the mid 1990’s…There is wide consensus that the arrests of Yukos major shareholder, Platon Lebedev for fraud in July 2003 and the oil giant’s CEO, Mikhail Khodorkovsky for tax evasion in October 2003 were seminal events in Putin’s first term as President, marking the beginning of the process of re-nationalizing strategic industries by the Kremlin.”
— “A HISTORY OF PRESIDENT PUTIN’S CAMPAIGN TO RE-NATIONALIZE INDUSTRY AND THE IMPLICATIONS FOR RUSSIAN REFORM AND FOREIGN POLICY”, Colonel Richard J. Anderson United States Army
This leads into the second claim they will make, which is that China’s economy had no growth up until they began to open up markets. Therefore, if they continued to open up markets even more, they would surely only continue to have growth.
Let’s instead look at China. China in 1978 began to “open up.” Yet, unlike Boris Yeltsin, they did not implement the “Washington Consensus” and maintained large public ownership alongside a market economy.
As we can see, China not only retained the high GDP it had prior to the reforms, but GDP growth actually increased somewhat. This is directly opposite to the USSR, which did not maintain its high GDP growth and in fact collapsed. Its recovery was aided by a return to nationalizations. Not complete nationalizations, but an abandonment of free market economics.
The claim that China had no growth before market reforms is simply false. Even further, the claim that if they continued to privatize and followed the direction of Boris Yeltsin that they would have had even higher economic growth seems incredibly dubious.
I would posit that yes, China’s somewhat improved economic growth was encouraged by market reforms. But at the same time, no, expanding market reforms indefinitely would not necessarily yield higher growth, but may in fact crash the entire economy. Markets, in fact, can create growth under certain conditions, but simply mass privatizing does not necessarily equal high growth.
The path China took was fundamentally different from the one the post-USSR economies took. China maintained the socialist path while most the post-Soviet states abandoned it for free market economics.
“After the death of Joseph Stalin, especially in the 1970s and 1980s, the Soviet Union and Eastern European socialist nations embarked on the so-called market-oriented reform. This was not a mere abandonment of the Stalinist model, but rather a turn towards a capitalist system. The economic transition in China that started from the Third Plenary Session of the Eleventh CPC Central Committee, however, has not taken the road of the former Soviet bloc countries, but a socialist path with Chinese characteristics based on the idea that China is still in the primary stage of socialism.”
— Hong Yinxing, “The China Path to Economic Transition and Development”
China is not the only evidence of this. Part of the post-Soviet economic crash was caused by rapid de-industrialization that occurred as a result of mass privatization.
“…between 1991 and 1997…the volume of industrial production fell 47% and the volume of agricultural production decreased by 33% (CIS STAT, 1998).”
— “Structural Economic Change and the Natural Environment in the Russian Federation”, Post-Communist Economies
Belarus was the only eastern European country to resist mass privatization. As a result, it has avoided this same trend and maintains much of its manufacturing capabilities. It also has one of the lowest poverty rates in the world.
“Call it the Belarus exception. Almost 28 years since the collapse of the Soviet Union, this deeply cautious nation of 9.5 million — rolled over through the centuries by Moscow’s wars with other parts of Europe — has kept alive many of the industrial jobs and social ecosystems that centrally planned factory budgets once supported across the bloc.”
— Bloomberg Businessweek
Let’s compare the size of the public sector to GDP growth from various different countries. If the free market absolutists are right, there should be a clear negative correlation of GDP growth to the size of the public sector.
Notice how the R² is only 0.001. This means that, effectively, there is simply no relation between the two. The public sector size only can explain 0.1% of the real GDP growth. Notice how the trend line is nearly a flat line from 0% all the way up to 50%. This means even if we extend this out to 100% public ownership, we would not expect a significant difference in GDP growth.
There is one country I left out of the data because it is a massive outlier, and that country is Venezuela. Adding Venezuela back does not significantly change the trend. But it is such an enormous outlier that it likely should be left out. For full transparency, you can see what happens, however, if it is left in. The R² value only changes to 0.5%. Which still basically means there is no relation.
Free market absolutism, therefore, doesn’t seem to have a leg to stand on. There is no clear correlation between GDP growth and the size of the public sector. It does seem that markets and government intervention both can play some role, and simply mass privatizing and praying to the free market gods to fix all your problems doesn’t actually make for good economics.
Economics is actually complicated. How would’ve thought?
This is an article I will probably come back to and build upon more later. But this alone should make the point clear. Simply claiming “more government = bad economy” or “more free markets = good economy” is oversimplifying an incredibly complex subject.
