[Viewpoint]Economic evolutionSuccess can plant seeds of failure. As time goes by, the environment changes, but people often become overly obsessed with the ideas and policies that brought success in different times. Such inability to adapt to a new environment leads to failure. As such, modesty and prudence should be virtues both of individuals and states. Only then can a person or a country change with the flow of history and continue to succeed without going to excess.
In the past, there was competition between theories on just how to operate a capitalist system. The period from the late 19th century up until World War I was the heyday of laissez-faire capitalism. The belief was that if the market was left alone, the economy would grow and find its own balance. People thought the economy should be left to what 18th-century economic philosopher Adam Smith called the “invisible hand,” saying that state intervention should be kept to a minimum.
However, getting stuck on the idea that the economy should not be interfered with removed the safety nets for those unable to keep up in the competition, producing a social group that was dissatisfied with the establishment. The Hungarian philosopher Karl Polanyi pointed out that blind trust in the autonomous control of the market caused the emergence of fascism and, in the end, opened the door for “The Great Transformation” of civilization, namely the Great Depression and world wars.
During the 20 years between World War I and World War II, the pendulum of ideas swung from laissez-faire to the other extreme - state intervention. Political leaders at the time thought it was vital that the state lead the economy in order to care for unemployed citizens and reinforce social welfare in the economic challenges after World War I. As a result, protectionism prevailed internationally and the gold standard system, which had been the basis of the international economic order, collapsed. In the end, economic ruptures such as the Great Depression of 1929 laid the political groundwork for the outbreak of World War II.
The age of the Bretton Woods system, from the end of World War II to the early 1970s, was a time when the proper role of the state and the restrained role of the market were harmonized based on the experience of the previous two periods. Political leaders embraced a liberal economic order grounded on market principles and created a system that emphasized international free trade. At the same time they ensured appropriate measures were in place to protect citizens in need, promoting both the efficiency of market principles and domestic welfare. The British economist John Maynard Keynes provided the theory and systematic basis for this system.
The world said farewell to the period of Keynesian economics as it went through the global economic crisis of the 1970s.
Developed nations in the West went into a growth slump and didn’t have the financial resources necessary to maintain the domestic welfare system. In Europe in particular, welfare had also began to cause side effects such as falling productivity.
Amid the chaos, U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher brought about a breakthrough by re-emphasizing the importance of the free market.
The era of neo-liberalism began in the early 1980s. Keynesian economics, which it displaced, was based on the Bretton Woods system, and while it valued free trade, it did not emphasize financial freedom. As finance became liberalized globally, each government’s freedom to promote welfare policies weakened.
The United States and the United Kingdom, the two leaders in finance, pushed for liberalization of financial markets and global integration, in order to make up for their relative lack in competitiveness in the manufacturing sector. Finally, the era of Friedrich Hayek, the economist who advocated free-market capitalism, came about.
In the last few years, the U.S. government was so overwhelmed by the myth of the market’s omnipotence that it removed regulations and neglected supervision. As Federal Reserve Chairman Alan Greenspan pursued low interest rates, the market was flooded with money, leading to the housing bubble. Once the bubble burst, a chain reaction began. The problem is that the chain reaction has spread across the world, riding on the wave of globalization.
It is not easy for a government to control the market. We need to carefully distinguish what the administration should and should not regulate, in order to allow the market to function, yet prevent adverse side effects.
The government needs to be strict about regulating behavior that goes against basic market principles, such as fair competition and transparency, while drastically relaxing regulations that interfere with creativity and the healthy business development of economic entities.
It is very dangerous when an idea or policy, no matter what it is, becomes dogma. It’s about time we studied the lessons of history.
*The writer is a professor of international politics at Seoul National University.Translation by the JoongAng Daily staff.
by Yoon Young-kwan