The reality of market exchange — direct transactions between merchants and customers — appeared gradually 3,000 or 4,000 years ago. In this novel social relationship, the customer was free to buy whatever he wanted, whenever and from whomever he chose, often bargaining with the seller about the price.
Because of these features, the free market is part of a basic freedom that is rooted in everyday life. It remains dominant today, as all efforts to establish an alternative, even totalitarianism, failed. Indeed, it has been 20 years since the former communist countries of Eastern European rejoined the world of market exchange, a step taken as early as 1946 by social democrats around the world.
For several thousand years, the free market was comprised of individuals: craftsmen, traders and consumers. Capitalism when it arose three centuries ago was simply the same activity on a larger scale. Because of steam engines and electricity, a large number of people were enabled to work together and corporations could attract a large number of small savers who became capitalists. This system is fantastic. By the time of the French Revolution, the standard of living had hardly doubled since the Roman Empire. Today, it is 150 times higher.
But capitalism is also cruel. At its inception, people were compelled to work 17 hours a day without a day off or retirement. It was a form of slavery. Thanks to democracy, social struggle and workers’ unions, together with the political efforts of social democracy, the inhumanity of the system was partly softened.
Nevertheless, left to itself, the system is unstable. It undergoes a crisis about once a decade. The 20th century’s worst crisis, between 1929 and 1932, caused 70 million workers in the UK, the US and Germany to lose their jobs (with no unemployment benefits) in less than six months. It brought Adolf Hitler to power, leading to a war that left 50 million dead.
After the war, the belief that the system needed to be stabilized became widespread. Eventually, a more balanced system emerged, based on three main institutions: health insurance, Keynesian fiscal and monetary policy to soften the impact of the business cycle and, of utmost importance, a policy of high salaries and reduction of economic inequality in order to boost household consumption.
The achievement was stunning: 30 years of consistent and rapid economic growth, full and permanent employment in all developed nations and no financial or economic crisis. Standards of living rose nearly 10-fold during this period. Prosperity became the main weapon that ensured the West’s victory over Soviet communism. The people of Eastern Europe were eager to embrace this kind of capitalism.
Capitalism’s political success, however, came at the very moment when the system was starting to deteriorate. High salaries drove growth, but reduced earnings. Shareholders organized themselves into pension funds, investment funds and hedge funds. Because of their pressure, employment fell, reducing the share of wages in total national income by 10 percent over the past 30 years.
In developed nations, the number of the working poor reached 10 percent to 15 percent of the workforce, with another 5 percent to 10 percent of workers unemployed and 5 percent to 10 percent dropping out of the labor market altogether. Moreover, over the past 25 years, a severe financial crisis — regional or global — has erupted every four or five years. Annual growth fell below 3 percent on average. Today’s crisis was triggered by widespread concealment of bad loans within pools of securities sold all over the world. The spread of bankruptcies triggered a severe credit crunch, which triggered a deep recession and with it a brutal rise in unemployment. Capitalism’s three stabilizing devices lost their efficacy. While rich countries reacted more quickly and more wisely in stimulating their economies than in 1929, and the hemorrhaging of banks was stanched, this has not been enough to boost growth.
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