What Happened To “Efficient Markets”?

The financial crisis of 2008 has challenged the reputation of the free-market economy in the public imagination in a way that it hasn’t been challenged since the Great Depression. The intellectual consensus after WWII was that markets are unstable and exploitive and thus in need of government action on a variety of fronts to counteract these undesirable characteristics. In the United States, this intellectual consensus did not result in nationalization of industry, but it did result in detailed regulation and heavy government involvement in economic life.

The stagnation of the 1970s reversed this trend in public policy at least in rhetoric. A new sense of reliance on the power of the market and a fear of the tyranny of government took hold of the public imagination. By the end of the 1980s, the collapse of communism throughout East and Central Europe and the former Soviet Union reinforced a sense of intellectual triumph for market-oriented thinking over the demands for government regulation and control. The consensus toward the free-market economy proved fleeting as the difficulties of transition, the plight of underdeveloped, and the tensions of globalization all came to represent, in the eyes of several pivotal intellectuals, the failings of the free market system.