It is odd to see that free market ideas are still prevailing despite the economic disaster that they caused just a few years ago. When the financial crisis burst in 2007, we all (I mean, serious economists) thought that market fundamentalism was dead and that ideology would not come back. We were simply wrong.
A year ago or so, there was a general consensus about government regulation of financial markets in the G-20 in Pittsburgh. Now, many conservative leaders, such as the Republican Ron Paul reckon that there is no need for regulation. The president of the World Bank, R. Zoelick (FT January 6) argues that free markets are more necessary than ever as if the Asian crisis never happened.
Neoliberalism had its heyday in the 90s roughly until the financial crisis of 1997. As J. Stiglitz put it, the Asian crisis revealed one of the biggest failures of self regulating markets as the main cause of the crisis was precisely the liberalization of short term capital flows which turned into a monetary crisis and then destabilized entire economies and pushed millions of people into poverty.
So, if free market ideas are so flawed, why are they still so powerful? We should go back to the fundamental work of K.Polanyi* who demonstrated how self regulating markets do not exist as market cannot be an end in itself, but just a means to an end and being part of the broader society. But in a sense, free market is traditionally the ideology of economic powers (just as free trade was imposed by the British Empire to the rest of the world in the 19s century).
A British political philosopher (and former conservative close to Thatcher and the New Right) John Gray, in an original book** , writes: 'the free market is not - as today's economic philosophy supposes- a natural state of affairs which comes about when political interference with market has been removed. In any long and broad historical perspective the free market is a rare, short lived aberration. regulated markets are the norm, arising spontaneously in the life of every society. The free market is a construction of state power (p211)'.
But let's go back to the roots of economic liberalism. Adam Smith's fundamental argument was that individuals should be allowed to pursue their own private economic interests as much as possible and so long as they do not violate basic principles of justice. In this way, Smith thought, they would do much more to further the public good and public interests than if the same people were to try to help the public deliberately and intentionally. If this were true, there would be no ethics; the existence of the ethical problem arises from the fact that the 'normal' functioning of the economy leads to profound ruptures in the society in terms of social justice and equity.
The same ideology of 'laissez faire' is tying up Europe and US with austerity policies. The problem is politics and political changes are needed to sustain growth and address global inequalities. The economy, by itself would not be able, to find the way to sustainable recovery in harmony with ethical aspirations.
* K.Polanyi, The Great Transformation- The Political and Economic origins of Our Time - Foreword by J.Stiglitz, Press Beacon Books 2nd ed. 2001
** John Gray, False Dawn: The Delusions of Global Capitalism, Granta Books (1998, 2nd ed. 2009)