When one is a young intellectual economist, as I was, it’s quite attractive to follow libertarianism. You go so far right that you can end up left (Chomsky is basically a libertarian — “anarchy-syndicalist”), as I did.
But societies are big, complex spaces with lots of people. So politics is as important as economics. Or rather, how the pie is divided, who wins and loses, and differential outcomes seem to matter a lot — politics.
So there’s little doubt that reducing regulation (Millei 2025 in Argentina, Trump 2, Reagan, Thatcher, Chile’s Chicago Boys, Deng’s Chinese Capitalism, Singh’s post-Duty Raj India) spurs economies.
But the important question is why it comes and goes. Here are the arguments.
Strengths
1. Rapid Economic Growth – Robert Barro (1996)
• Paper: “Determinants of Economic Growth: A Cross-Country Empirical Study”
• Concept: Growth is higher in economies with lower government consumption and freer markets.
• Example: West Germany’s Wirtschaftswunder under Ludwig Erhard.
2. Innovation & Entrepreneurship – Joseph Schumpeter (1942)
• Book: “Capitalism, Socialism, and Democracy”
• Concept: Creative destruction—market competition fuels innovation.
• Example: Hong Kong’s deregulated, low-tax environment fostered business dynamism.
3. Fiscal Discipline – James Buchanan (1962)
• Book: “The Calculus of Consent” (with Gordon Tullock)
• Concept: Governments tend to overspend unless constrained; markets enforce discipline.
• Example: New Zealand’s Rogernomics cut deficits and reined in government debt.
4. Resilience Post-Crisis – Milton Friedman (1962)
• Book: “Capitalism and Freedom”
• Concept: Free-market economies recover faster from crises than planned economies.
• Example: Estonia’s rapid growth after Soviet collapse due to flat tax and deregulation.
Pitfalls & Perils
1. Rising Inequality – Thomas Piketty (2014)
• Book: “Capital in the Twenty-First Century”
• Concept: Capital accumulation in free markets leads to growing inequality unless taxed.
• Example: Chile’s inequality grew after privatization, leading to protests in the 2010s.
2. Social Unrest – Albert O. Hirschman (1970)
• Book: “Exit, Voice, and Loyalty”
• Concept: When economic policies create hardship, people either protest (voice) or disengage (exit).
• Example: Thatcher’s privatization policies led to widespread labor strikes.
3. Vulnerability to Crisis – Hyman Minsky (1986)
• Book: “Stabilizing an Unstable Economy”
• Concept: Deregulated financial systems are prone to speculative bubbles and crises.
• Example: Chile’s 1982 banking crisis resulted from financial deregulation.
4. Political Instability – Dani Rodrik (2007)
• Book: “One Economics, Many Recipes”
• Concept: Market reforms require political legitimacy, or they will be reversed.
• Example: West Germany’s ordoliberal model was softened under SPD rule in the 1970s.
5. Capture by Elites – Mancur Olson (1982)
• Book: “The Rise and Decline of Nations”
• Concept: Free markets often lead to rent-seeking, where elites entrench themselves.
• Example: Russia’s post-Soviet privatization led to oligarchic wealth concentration.