English philosopher John Locke and Scottish economist Adam Smith are highly regarded as the architects of capitalism: Locke for planting the seed, developing the idea of individual liberty and rights in the late 1600s, and Smith for using his idea to create the first version of laissez-faire economics which he transcribed in the Wealth of Nations: a masterpiece that influenced the likes of Karl Marx and Alexander Hamilton.
In Smith’s magnum opus, he described the original concept and essential driver behind free-markets: price discovery. By giving buyers and sellers freedom to determine the price of anything through natural means, it was the perfect system; a system that liberated people from authoritarian power — feudalism and mercantilism to name a few. No one could argue with the collective mind of the market, or so Smith thought. Because as soon as the idea of independence sprung into mainstream economies, they grew to be less and less free as Smith described.
Today, the market mechanism remains the same, but the major difference is how governments control demand and supply. Governments, of course, are a good thing as shown by their inclusion in all major economic systems over history, and most economists from Smith’s era agreed a state — of some size — was necessary for society to function. Except they failed to predict how much power the state would possess in the future.
Today in society it’s a popular opinion that we’re moving away from capitalism, and, instead, embracing interventionism which is common in all major modern economies. Interventions such as price controls that produce shortages like the California Electricity Crisis of 2001, bailouts that save bad ideas like the Financial Crisis of 2008, and central banks that devalue fiat currencies like in the ongoing global currency war, show that society dropped Smith’s original concept a long time ago.
The major flaw behind free markets is the word: “free.” A market is complex in theory, but in objective terms, it’s simple. The free part, however, is highly subjective as one person’s concept of freedom will differ greatly from another’s. Ultimately, it was the subjectivity of freedom which made government intervention inevitable — it was just a matter of time.
Over the past century, interventionist policies have shaped what we now know as the “boom and bust” cycle which is anything but a free market, as one left to its own devices never creates such a uniform shape — a cycle resembling a sine wave with repetitive peaks and troughs has been subjected to intervention every step of the way.
Although market interference is ripe within a boom and bust cycle, still, it is a market of sorts. But in the decades ahead, we may finally see the end of “the market” as we know it as radical economic ideas are surfacing in mainstream circles: In an interview with Bloomberg, Bridgewater CIO, Bob Prince, made a bold move calling for the end of the boom and bust cycle and predicts the next monetary system will be based solely on central bank liquidity supporting markets — a system where sellers are redundant in the demand and supply equation.
As Prince explains, a radical shift is occurring where central banks are no longer hiding the fact that printing money creates speculative manias, instead, they are coming clean: Dallas Fed Chairman, Robert Kaplan, suggested in an interview that increasing the size of the Federal Reserve’s balance sheet causes asset bubbles — a rarity for a Fed official to make such an honest statement, considering his role over the past decade has been to preserve confidence by showing no signs of weakness. The final nail in the coffin for the free-market is when central banks take over, but this time on a permanent basis.
However, there is one problem: the new monetary regime Prince and the Fed are imagining means assets prices of stocks, bonds, real estate, etc., will have to rise indefinitely which has been tried multiple times already during the 21st century with both the Tech and Subprime booms failing in speculator fashion.
If this transition from an economy based on growth to a permanent liquidity pump turns out to be a pipe dream, whatever’s left of the free market will remain. History is on the free-market’s side as major economic crises like the Fall of Rome and the Great Depression demonstrate that despite markets being mispriced for years, decades, and even centuries, they always return to fair value. When true price discovery emerges from the shadows once again, what will happen in the future is something that occurs only once in a lifetime: a market purge of misallocation, malinvestment, and malformation, but on a much grander scale
