Free market failure: Isn't it time to consider a different model?

Liu Jun (L) of Lenovo introduces his company's Lenovo K800 smart phone
Image caption Big business has thrived with government support in many Asian countries

Many news stories this week seemed depressingly familiar.

David Cameron's foolhardy let's-blame-the-Europeans (again) speech in Davos, Christine Lagarde's scaremongering about another 1930s-style crisis and Mitt Romney's desire for the rich to pay less tax than the poor show how much the Western world lacks leadership, new ideas and a moral compass right now.

When they are not trying to blame someone else, make us fearful or enrich themselves, the West's politicians, bankers and economists keep banging the same drum.

They say we should go shopping, pay less tax and print more money to solve our problems.

If we can boost spending in Europe and America by getting the banks to lend again, uncork the hidden desire for consumption in the developing world in places like China and India, and liberalise competition in countries such as Japan, France and Italy, vast new opportunities will be unleashed, they tell us.

The trouble with these ideas is not just that they contain a whiff of self-interest, it is that they are also an attempt to reimpose a model which has failed.

Logically, their suggestions will only make the situation worse - which is exactly what is happening.

Another way?

These politicians and experts are also being intellectually dishonest.

They refuse to consider a different approach, even one that seems to work better.

Many countries have avoided economic hardship in the past few years, not because they were lucky, but because they have a different economic philosophy.

In Asia, where economic growth has been strongest, the state has played a much bigger role than in the US or UK, with big businesses explicitly supported by governments.

China's 150 biggest companies are all government directed, with four of them now among the top ten companies in the world. It has also established many of the world's biggest banks, the second-largest producer of telecoms and internet equipment and the second-largest PC maker.

And it is not just in China. Many of Singapore and Malaysia's biggest and most successful companies are also state directed, while many of the firms that dominate South Korea retain close links to the state, too.

Governments help these companies in a variety of ways. They restrict unnecessary competition to help them build economies of scale. They provide them with finance, give them favoured access to local customers or use legislation to keep foreign rivals at bay.

Because they don't have to generate endlessly rising quarterly profits and dividends, these state-backed companies have been able to reinvest and grow more quickly.

Although Westerners see this approach as unfair, it is not. It is just a different way to compete, and perhaps a better way. It also ensures that skills, jobs and wealth are kept at home, not sucked away overseas.

When Chinese, South Korean or many South East Asian companies venture abroad, though, their governments are beside them too.

If Chinese companies bid to build power plants or railways in Africa or Eastern Europe, the state or one of its banks will provide the customer with low-cost financing. The government also helps Chinese businesses gain access to valuable resources.

Schools, roads and bridges are built by Chinese workers in return for coal, oil and iron ore. That way, China gets the business, the jobs and the resources.


These countries see big international business deals as a way to win contracts and geopolitical influence at the same time. They are not just about making a quick buck - there are wider strategic interests.

Many European countries also take a different approach to economic management, notably Germany, which remains one of the strongest economies in the world.

The German government believes it has a duty to regulate markets when they get out of control, when they create bubbles or widen the gap between rich and poor. German citizens want their markets to serve the needs of society, not a few fat-cats. They prefer harmony to greed, and are willing to accept greater regulation to achieve this.

Economists, politicians and financiers in America, Britain and many other countries have become obsessed with the free-market mantra, with their belief in consumption and minimal regulation, because it served them (sometimes personally) so well for so long.

In the end though, it failed.

Instead of telling us we need more of the same, isn't it time for them to reflect on how their model should be improved?

Graeme Maxton's new book, The End of Progress, how modern economics has failed us was published by Wiley in 2011. He is a Fellow of the Club of Rome.

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