But the messiness of markets was unacceptable to socialists, some of whom led a revolution in Russia to establish the first state-controlled, planned economy.
The catastrophes of the Great War and The Great Depression led to the ascendancy of John Maynard Keynes, who argued that even capitalist economies need regulation to avert manias and subsequent implosions.
Keynesianism then reigned, as Britain, the US, and most other countries adopted regulations on banking, finance, and industry, in many cases nationalizing railways and other central features of the productive economy.
Meanwhile, rival economist Friedrich von Hayek quietly plotted the Austrian School’s revenge, the occasion for which was offered by stagflation and labour unrest in the 1970s. Von Hayek, who had toiled in obscurity, was now the man of the hour; his acolytes Margaret Thatcher and Ronald Reagan promised to show the way back to prosperity: government was the problem and privatisation the solution!
The ensuing three decades have seen economists crowding back to the ‘Let Markets Rule’ side of the ship, as they giddily praised the wonders of globalisation and free trade.
Since the Collapse of 2008, economists are rushing to announce a new era of neo-Keynesianism: lack of regulation in the finance industry has led us to the brink and only massive government intervention can put us back on track.
Sadly, this time the tracks are gone. The great economic paradigms simply took too much for granted. They assumed that economies run on money and labour, but ignored the roles of energy and ecosystems. They assumed that because population, resource extraction, and available energy had grown throughout the 19th and 20th centuries, they would grow in perpetuity once the proper relations between money, market forces and government regulation were worked out. Almost no one stopped to think that limits to Earth’s atmospheric carbon sinks and supplies of fossil fuels, topsoil and water might impose ultimate limits on economic activity.
The fields of ecological economics and biophysical economics have sprung up to fill in this blind spot of conventional economic thinking, but both are currently marginalised.
In the months ahead we will see a titanic battle over who can restore the beatific condition of perpetual growth. Sadly, neither free marketers nor state controllers have the answer. Humanity has reached physical limits to growth — peak oil and climate change — that spell ruin to all economic philosophies that fail to take such limits into account.
How long will it take the theoreticians to figure this out? How much of our remaining wealth will they destroy in a futile attempt to prove their paradigms eternally true? How far will society unravel before someone in charge begins to question the received wisdom?
Best hopes for quick learning.
Richard Heinberg is a Senior Fellow of the Post Carbon Institute and author of Peak Everything
This article first appeared in the Ecologist February 2009