The 2008 financial crisis dealt a heavy blow to the credibility of neoliberal economists. Blamed for promoting unchecked capitalism, economists like Milton Friedman were accused of contributing to the overvaluation of the US mortgage-backed securities market. This failure to identify the vulnerability in the mortgage market led to a catastrophic global recession.
In the aftermath of the crisis, faith in the promises of a market-based globalized order was shattered. Anti-elitist movements gained traction worldwide, with sentiments like “people have had enough of experts” becoming more prevalent. The lead-up to the 2016 Brexit referendum saw then justice secretary Michael Gove articulating this sentiment in favor of the UK’s exit from the European Union.
Despite the skepticism surrounding experts in recent years, the past week has seen a resurgence in their importance. In the field of economics, the fundamental truth remains that free trade generates wealth. This concept dates back to Adam Smith and his pin factory analogy, followed by David Ricardo’s law of comparative advantage, which demonstrated the mutual benefits of trade for all nations.
Attempts by politicians to implement tariff policies, such as the infamous Smoot-Hawley Tariff Act in 1930, have consistently proven the economic principles outlined by Smith and Ricardo. However, recent events, particularly the tariff policies enacted by US President Donald Trump, have sparked market turmoil. Market indicators have displayed negative trends, with the likelihood of a recession increasing significantly.
Critics have pointed out the nonsensical nature of the tariff calculations, with former Treasury secretary Larry Summers highlighting concerns about a lack of basic competence in policymaking. While there may be a temporary benefit in lower borrowing costs for the US government, the overall impact on economic growth and fiscal deficits could be detrimental.
The current wave of conservative populist movements has seen a growing mistrust of market mechanisms. Politicians like Liz Truss and Viktor Orban have made controversial economic decisions, such as unfunded tax cuts and price controls, resulting in market disruptions. These actions reflect a broader trend of skepticism towards free market principles.
While some may argue that commercialization and trade are morally questionable, the modern understanding of economics emphasizes the positive impact of innovation and specialization on productivity. Adam Smith’s caution about the negative consequences of excessive division of labor serves as a reminder of the importance of government intervention to prevent societal harm.
In conclusion, despite the lessons learned from past economic crises and the insights of classical economists like Aristotle and Adam Smith, the recent resurgence of protectionist policies and skepticism towards free trade poses new challenges. As we navigate these turbulent times, it is essential to balance economic growth with ethical considerations to ensure a sustainable and prosperous future for all.