The Margaret Thatcher-Ronald Reagan economic model of free market capitalism is under attack. The system, which was responsible for jumpstarting this era of globalization, created the greatest economic growth the world has ever seen. It empowered people to achieve their dreams and unleashed their innovative and creative abilities that paved the way for tremendous gains in efficiency and productivity, not only in the U.S., but around the world.

Unfortunately, this lesson has not always been well understood. In turn, many policymakers now see free market capitalism as suspect and wish to “fix” it.

Once the post-global recessionary dust settles and sustainable economic growth resumes, companies, as well as countries, will need to prepare for what lies ahead.

Understanding Market Failure and Preventing Future Implosions

Due to the global economic crisis that began in the United States, the credibility of free market capitalism is now questioned. Is the cause of the most severe economic crisis since the Great Depression due to an inherently faulty system or a relatively few bad apples? The answer may exist somewhere in the middle.

Many contributing factors are responsible, including poor assumptions based on rising real estate values, combined with the wide availability of capital at extremely low interest rates. Nevertheless, what will be remembered did occur: greedy financial wizards packaged and sold dubious financial instruments that were subject to little or no government oversight.

In an effort to prevent future economic crises with a similar devastating punch, the U.S. government and others around the world are racing to implement new sets of rules and regulations. However, an incorrect diagnosis, coupled with an inappropriate prescription, could put the patient in a coma—or worse.

Where Does It Hurt?

“For 30 years, the Anglo-Saxon model of free-market capitalism spread across the globe. The role of the state was diminishing, and deregulation, privatization, and the openness of borders to capitalism and trade were rising,” says Roger Altman, who was Deputy Secretary of the Treasury during the first Clinton administration. Altman says in the July-August 2009 issue of Foreign Affairs, “The Anglo-Saxon financial system is seen as having failed. The global downturn, and all its human devastation, is being attributed to that failure.”

Is it reasonable to suggest that our economic system—which has made America into the most powerful engine of wealth, and has delivered an unmatched standard of living— is faulty at the core? I think not. Nevertheless, policymakers around the world are considering “throwing the baby out with the bath water,” and not thoughtfully implementing correct and limited remedies.

As a result, Altman says, “The era of laissez-faire economics has ended.” We don’t know what will replace it. However, whatever does replace it will undoubtedly involve a much greater government role.

Law of Unintended Consequences

The impact of one action on another is seldom considered in advance and rarely understood. Thus, quickly implementing a host of regulations is certain to have serious unintended consequences that could alter our economic landscape for decades. For example, as the level of government influence, oversight and control increases, the wheels of globalization will certainly slow. To what degree is largely unknown. It likely will depend on the amount of pain the economic recession inflicts.

How Far Will the Pendulum Swing?

When overzealous popes wielded excessive power, the Protestant Reformation formed and challenged existing doctrine. When the Great Depression caused unemployment to skyrocket, Fascism emerged as an alternative political system. And, when “unfettered” laissez-faire capitalism became the rage, Marxism provided the opposition.

Unfortunately, since cause and effect do not always fall closely together, forces often do not or cannot see the unintended consequences of their actions.

Just as there was no halting the Industrial Revolution, globalization won’t be stopped permanently. But it can be slowed, and even forced to take a few steps backward as it did during World Wars I and II.

Globalization has had a tremendous beneficial impact on the United States and the world. But altering proven mechanisms that make it work—like free market capitalism—could undermine future economic growth, jobs and standards of living.

As ambitious new rules and regulations are quickly implemented in the United Sates and abroad for the purpose of preventing future economic crises, they could act like wrenches being thrown in the wheels of economic prosperity.

Currently, Altman says, “Globalization is in retreat, both in concept and in practice. Global economic and financial integration are reversing. The role of the state, together with financial and trade protectionism, is ascending.”

Opposition Is Forming

Many people and business organizations are in opposition to greater government involvement in the private sector. According to a recently released Wall Street Journal/NBC News poll, 49 percent of respondents said they have “a great deal” of concern about the government’s increasing role in the economy. Plus, another 20 percent of respondents said they have “quite a bit” of concern. Overall, nearly seven out of ten respondents are concerned about a greater government involvement in the economy.

In an effort to stem what the U.S. Chamber of Commerce says are an avalanche of new government rules, restrictions, mandates and taxes, the Chamber plans to spend $100 million on what it calls the “Campaign for Free Enterprise.” According to Thomas Donohue, President and CEO of the U.S. Chamber of Commerce, “It’s our free enterprise system that creates jobs and wealth in this country, and greater government control could seriously undermine the wealth and job-creating capacities of this nation.”

Preventing “Creative Destruction”

Joseph Schumpeter advanced the concept of “creative destruction,” where the new destroys the old even while the old is still valuable. Schumpeter said the innovative entry into the market by entrepreneurs is the force that sustains long-term economic growth, even though the process destroys the value of existing organizations.

Our capitalist system constantly produces new and more advanced products, services, technology and organizations. In the process, jobs are created while some are lost, just as auto workers displaced buggy makers, while ATMs and voice mail continue to eliminate bank tellers and receptionists.

In many instances, the introduction of new regulations is designed to prevent job losses. The key, however, is not to prevent the process of creative destruction from doing its long-term beneficial job.

American Factors of Success

In addition to free market capitalism, other American factors of success include our entrepreneurism, “can-do” spirit and brilliant Constitution.

The framers of the U.S. Constitution understood the importance of transparency, the rule of law, separation of church and state, and the balance of power. These ingredients, which promote stability and individual opportunity, are some of the primary reasons why America is the world’s most powerful nation.

Our system may have flaws, but it has performed extremely well over time. The result: the United States continues to be the destination of the world’s brightest and the world’s hard-earned money year after year.

Achieving Balance

Dating back to the Revolutionary War, Americans have always questioned the authority, wisdom and efficiency of government bureaucracy. In turn, attempts to establish industrial policy are resisted.

Nonetheless, government- led improvements can be made. In turn, we must continue to refine our economic system. But fundamentally altering free market capitalism—a major factor that has made the U.S. the envy of the world—will create new post-recessionary economic realities that could negatively impact our quality of life and change America’s business environment for decades to come.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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