There is no substitute for markets. Countries prosper only when people are allowed to innovate and commercialize their ideas. Policy should be aimed at complementing markets, not replacing them.
While the fall of the Berlin Wall took place a generation ago, the ideas of socialism continue to live in the hearts and minds of so many intellectuals and regulators, spreading poverty wherever their policies are implemented.
Socialism, academically defined, represents an economic system in which the means of production are in the hands of the state. The government operates oil and gas fields, allocates labor between supply chains and economic sectors, redirects technological innovation according to its priorities, owns the land, and determines which economic sectors should be prioritized or even allowed.
Since I am Venezuelan, I have firsthand experience of life under socialism. In my country, the government not only nationalized but also politicized our oil and gas industries. It imposed production quotas in almost all economic sectors, applied universal price controls to the country’s product space, centralized the production and distribution network of the agricultural sector, expropriated hundreds of companies and pieces of land, and prohibited the free exchange of currencies.
This is not the experience of most people in the West, where most countries are actually mixed economies, in which market principles coexist with significant government intervention. This list obviously includes countries like France and Canada, where their governments operate extensive social welfare programs, directly manage industries, and heavily regulate markets. But it also includes the United States to a lesser extent. Despite its classical liberal, laissez-faire, and Lockean view of the state, the U.S. government still constitutes a substantial portion of the economy. Measures like the Biden Administration Inflation Reduction Act have also revived the discussion in the U.S. about the feasibility of industrial policy.
Some thinkers would argue that the existence of mixed economies is necessary as the state and the market are complementary to each other. They argue that “for cars to be built, there has to be roads. For commerce to exist, there have to be safe streets. For financial markets to function, there has to be a lender of last resort.” In other words, for markets to operate, they have to be embedded in institutions that guarantee public goods in an efficient and non-discriminatory manner.
“Markets need to be embedded in a range of non-market institutions in order to work well. These institutions perform several functions critical to markets’ performance: they create, regulate, stabilize, and legitimate markets.” Dani Rodrik, 2002.
While this is true in many areas of governance, the problem is that many states today are doing too much of what they are not supposed to do, and too little of what they should actually be doing. Instead of focusing on activities that complement markets (like having good public safety, transportation infrastructure, and education), they are choking or replacing markets. In other words, instead of invigorating and strengthening the dynamism, productivity, and competitiveness of their economies, states are actually distorting and even destroying their economies’ capacity to create wealth and prosperity.
Let’s take the European Union (EU), for example. Instead of embracing innovation and technological discovery, the EU has imposed a regulatory framework hostile to the development of a healthy and vibrant tech sector. As a result, only 4 of the biggest 50 tech companies are European. Only 8% of EU enterprises have adopted artificial intelligence in their operations, compared to 25% in the United States. And about 30% of unicorn startups (young, high-growth companies valued at over $1 billion) leave Europe to establish themselves in more market-friendly environments, particularly in the U.S.
The good news is that European policymakers are showing signs of concern for this problem. The bad news is that it may be too late. State-led initiatives to catch up with innovation, redesign the composition of a country’s product space, and increase its export portfolio usually end up without much success. Governments tend to fail at stimulating the sector they are aiming to grow as their companies can no longer compete with well-established firms that reinvested the extraordinary profit margins they experienced as part of their first-mover advantage in business. There are precedents of countries overcoming this obstacle, but it usually takes precise knowledge and intentional leadership to do so.
This is why it is so crucial for the United States to continue championing technological innovation and free markets. History and experience show that when markets are embraced, good things happen: innovation flourishes, businesses grow, jobs are created, and living standards improve. Countries prosper when individuals have the freedom to turn their ideas into reality, driving progress and competition.
Policy should not attempt to replace markets but rather create the conditions for their success. This means fostering a stable regulatory environment, reducing unnecessary barriers, and ensuring access to essential resources like education and infrastructure. By empowering entrepreneurs and businesses to thrive, we can ensure sustained growth, global leadership, and shared prosperity for future generations.
