Guardian Live: will the market save us?

(Originally published by the Guardian)

The late Nobel Prize winning economist, Milton Friedman, once described free market capitalism as “the most effective system we have discovered to enable people who hate one another to deal with one another and help one another.”

Yet ever since the 2008 financial crash this understanding has come in for intense criticism from those who believe that unregulated markets are the cause of - rather than the solution to - many of society’s problems.

So, can we rely on markets to save us? At the People’s History Museum in Manchester Steve Davies, Education director of the Institute of Economic Affairs went head to head with Catriona Watson, founder of the Post-crash economics society at the University of Manchester, in front of an engaging audience.

Davies began by arguing that the financial crisis was an entirely foreseeable event which, far from expose the failure of unregulated markets, arose out of a misunderstanding of how markets ought to work:

“What lay behind it was a belief that the world was more controllable, more predictable than it actually is,” he explained. “What policy makers didn’t understand was that you’re dealing with a world of radical uncertainty in which you ultimately have to have a system based on profit and loss. That’s what capitalism is based on.”

The problem, according to Davies, was that too many people believed any losses they incurred from poor investments would be subsidised by the tax payer. This led to reckless investments which ultimately caused the global financial crisis. Furthermore, if market principles had been followed, governments would have done what Iceland did and allow financial institutions to go bust.  “A tough choice,” he admitted, “but the right one because once it’s done we can get over the bad investment caused by the artificial boom.”

Whilst the short term effects would have been disastrous for ordinary people with savings in bankrupt banks, longer term the void would have been filled by another central tenet of Davies’s market ideology: innovation. “What drives market economies is innovation and what we’re seeing right now is an unprecedented wave in innovation in the way commerce is organised through things like sharing economies such as Air BnB.”

Cariona Watson wasn’t convinced. Watson - who has campaigned against rigid economics curriculums at UK universities - argued that the profit-driven higher education sector provides as good an example as any of the limitations of markets:

“In order to market education you need to turn it into a commodity. It’s the market mechanism of minimising marginal costs for maximum gain for the university as a business rather than looking at how we’re going to give these students a good education,” she explained.

According to Watson, market pressures mean university economics departments are failing to create well rounded students who are able to engage with related subjects, such as politics and social sciences. Consequently, students who graduate in subjects like economics are often ill equipped to deal with global problems such as the 2008 financial crisis.

Asked by an audience member whether the market could ever be used to create a better society, Watson was deeply sceptical:

“People and institutions need to use markets to build a society where appropriate but the market won’t do it by itself. Markets don’t have an aim they respond to incentives and behaviour. It’s not a conscious thing that can achieve things like building a fairer society; it’s institutions and people who will do that.”

Another member asked the panel about social enterprises which, according to one study, are growing faster than mainstream businesses by responding to the ethical demands of consumers: “Is that the market fixing itself and becoming more ethical?”

“Yes, quite possibly,” Davies replied, “Entrepreneurs and people in the business world are going to respond to incentives and if there’s demand for ethical products they’ll do that. Also the change in technology is making it much easier to fund, start and organise alternative business models.”

Yet despite his unbridled positivity, Davies conceded one snag. While markets are efficient drivers of economic growth, they are less good at establishing social justice and equality. “Very often in society you need to make a choice between greater efficiency and output on the one hand and some principle of equity on the other. What you’ve got to realise if that there is a trade-off. Too many people think they can have their cake and eat it.”

For many in the audience this trade off was too much to digest. A straw poll following the debate found 70% disagreed with the motion with only 30% leaving the hall convinced that markets can save us.