Markets Versus Governments

There are two long-standing debates in economics that fundamentally affect how one views the challenges our society faces.  The two sides of the first debate are often associated with Friedrich Hayek and Milton Friedman on one side and John Maynard Keynes and Karl Polanyi on the other.  Wapshott (2011) and Delong (2022) elaborate this debate in considerable detail.

Succinctly, is economic growth driven by market forces or government planning?  Hayek and Friedman argue that market forces determine everything and government should stay out of the way.  Keynes and Polanyi counter that market forces are important , but can sometimes results in disruptive outcomes, like discrimination and unemployment, that markets are unwilling to address.  Government needs to stabilize situations such as the Great Depression (1929-39) and Great Recession (2007-2009).

Those touting the market economy argue that governments are terrible at picking winners and should let the marketplace enable winners to emerge through competitive forces.  This does not always work, as demonstrated by the recently experienced real estate bubble (Lewis, 2011; Blinder, 2013). 

In real estate mortgage markets, impenetrable derivative securities were bought and sold.  The valuations and ratings of these securities were premised on any single mortgage default being a random event.  In other words, the default of any particular mortgage was assumed to have no impact on the possible default of any other mortgage.

The growing demand for these securities pressured mortgage companies to lower the standards for these loans.  Easily available mortgages drove the sales of homes, steadily increasing home prices.   Loans with initial periods of low, or even zero, interest, attracted home buyers to adjustable rate mortgages.  Many of these people could not possibly make the mortgage payments when the rates were adjusted after the initial period.

This was of less concern than one might think because people expected to flip these houses by selling them quickly at significantly increased prices.  This worked as long as prices continued increasing, but as more and more lower quality mortgages were sold, the numbers of defaults increased and dampened the increasing prices, which led to further increases of defaults.  The bubble quickly burst.

The defaults were not random events as assumed by those valuing these securities.  They constituted what is termed a “common mode failure” where a common cause results in widespread failure.  Thus, these securities were much more risky than sellers had advertised.  The consequences of such misinformation were enormous.

Hayek would argue that risk takers should earn rewards, but investments banks were not taking risks; they were selling risks that neither they nor the buyers understood.  When the bubble burst, the banks and investment companies were bailed out by the government, with banks amazingly using some of this money to provide executive bonuses.  Millions of home owners lost their homes when they could not make increasing mortgage payments on homes that were now worth less than the mortgage.

Greed of investment companies and consumers buying houses they could not afford, because they intended to flip them, drove the bubble.  Many understood what was happening and sold short these toxic assets.  Michael Lewis in The Big Short notes that many of the smartest people were betting against the country.  The market economy undermined the economy.

The implications for addressing societal challenges are quite clear.  Profit seekers are often quite willing to manipulate the rules of the game to satisfy their greedy aspirations.  Changes to the health, education and energy ecosystems will threaten profits.  Limits on misinformation and disinformation will affect both profits and votes.  I do not think that the marketplace will simply support and adapt to such changes.  Government will have to play a central role, perhaps facilitating rather than regulating, but nevertheless playing an active role.

The second debate in economics concerns sources of innovation and economic growth.  Mokyr (1992) argues and illustrates how technology has long been the driver.  There seems to be an emerging consensus that the US leadership in innovation has waned.  Gordon (2016) has argued that 1870-1970 was the United States’ century of innovation.  I made the same argument, based on the same line of reasoning, a couple of years earlier (Rouse, 2014).

More recently, DeLong (2022) proposed 1870-2007 as the country’s “long century” of innovation, ending with the onset of the Great Recession.  The rational for 1970 as the end point is that social networking is not as compelling as electricity and indoor plumbing.  Which one would you be willing to give up?  On the other hand, social media has been a compelling source of disruption.

The relevance of this debate concerns the extent to which technologies will mitigate the challenges.  My sense is that many existing technologies, if appropriately deployed and supported, can be leveraged to address societal challenges.  The hurdles are much more organizational and social than technological.  Overcoming these hurdles involves thoughtful planning, execution, and learning.


Blinder, A.S. (2013). After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. New York: Penguin.

DeLong, J.B. (2022). Slouching Towards Utopia: An Economic History of the Twentieth Century. New York: Basic Books.

Gordon, R.J. (2016). The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War. Princeton, NJ: Princeton University Press.

Lewis, M. (2011). The Big Short: Inside the Doomsday Machine. New York: Norton.

Mokyr, J. (1992). The Lever of Riches: Technological Creativity and Economic Progress. Oxford, UK: Oxford University Press.

Rouse, W.B. (2014). A Century of Innovation: From Wooden Sailing Ships to Electric Railways, Computers, Space Travel and Internet.  Raleigh, NC: Lulu Press.

Wapshott, N. (2011). Keynes Hayek: The Clash that Defined Modern Economics. New York: Norton.

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