The global financial crisis that started in 2007 through 2008 up to 2009 was the worst in the world economy since the Great Depression in 1930. Its genesis according to many economists across the world was the collapse of the US housing and mortgage industry. The international economy suffered growing of individual country’s national public debt, declining in the levels of productivity, and high levels of inflation levels. Many people especially in the US suffered huge losses due to declining productivity levels and credit contraction. Businesses adopted huge layoffs which resulted to massive unemployment levels. During this period, the US was an advocate of laissez – faire economy which was based on free market operations characterized by capitalistic ideas. These ideas were incorporated in the Keynesian school of thoughts which were criticized due to their inadequacy to tackle and handle financial crisis (Cassidy 2008).
However the ideas of the concept have been closely associated with Milton Friedman who is the founding father of the Chicago economists’ school of thought. Friedman is known not only as an economist but also academic intellectual who pioneered the free market and economic liberalization. Chicago economists as stated in Friedman’s free market has not only changed the public opinion and attitudes especially during the heights of the global financial crisis, but it has also transformed the whole economy and its players like the political elite, intelligentsia and the overall contribution on how they contributed alter public opinion and promising hope despite the economic crisis (Ashraf, Camere & Lowenstein 2005).
It is during the crisis that Chicago economists criticized market fundamentalisms and the neo-liberalism thoughts that were experienced in the economy more than ever before. Chicago economist raised concerns for the trend in the US economy but their concerns according to Friedman in the free market was interpreted as anti – capitalism or socialism including termed as introduction of some other liberal perspective. Chapter one of “The power of the Market” as indicated by Friedman would have played a key role in prevention of such financial crisis but their concerns were never considered by the US and other nation’s policymakers (Friedman 2008).
Chicago economists view
A group of economists from this school of thought including Milton Friedman and Adam Smith among others considered the genesis of financial crisis as a result of over - deregulation of the markets especially under the chairmanship of Alan Greenspan. Bush administration carried out a series of financial and market deregulation for the past one decade preceding the financial crisis in the world. These economists attributed this move from an ideological perspective and political influence when Bush appointed Greenspan to head the Federal Reserve, Henry Paulson and John Snow at the Treasury. According to Friedman’s power of the Market, these appointees believed in the ideology of free markets to self – regulate the economic activities and achieve a stable equilibrium in the market. This idea is boosted by Adam Smith especially in his writings of the “Wealth of Nations” who emphasized on classical model approach to economic stimulation (Friedman & Rose 1990).
The influence that Smith brought to the free market operations especially his description of the ‘invisible hand’ in the market operations was largely referred to contribute to the crisis. This was however interpreted by economic rationales that, when economic actors and agents in the system pursue their own individual interests, this eventually results to the societal welfare as a whole. However this ideology never worked especially at the eve of the financial crisis in mid 2007. The invisible hand as advocated by these economists brought about a credit crunch in the whole economy which was the unintended outcome. The self interest pursued by the free market agents in turn promotes the societal interests. Both Friedman and Smith perceived social responsibility of the business corporate is to increase profits. Its Friedman’s belief that business social conscience should be ready to provide employment opportunities, preventing pollution and elimination of discrimination to stimulate the economy (Friedman & Rose 1990)
Social Responsibility as a doctrine as referred by Friedman should be the optimal channel to allocate scarce resources spread through unlimited wants and needs. This notion as well inclines with the view that socialist economies consider political institutions as opposed to market mechanisms should be employed as the optimal way. In this view, the Chicago economists therefore terms the deregulation ideology adopted by the US government in the last one decade as the major cause of the financial crisis as opposed to the power of the market through freedom of choice. In addition, the economists considered the way economic activities were carried out coupled with the deregulation policy were fundamentally subversive as a doctrine for economic implementation (Friedman & Rose 2002).
This was further attributed by the political mechanism associated by the human activity especially in a free market environment. These economists in addition emphasized that businesses should engage in every kind of activities in an open and free manner as long as they are not engaging in fraud and deception activities. The financial crisis can therefore be attributed partly due to businesses and other economic actors engaging in open and free competition which promoted fraud and deceptive activities in the economy. The market interest rates escalated to high levels beyond the client’s capability to repay and commercial banks and mortgage industry engaged in credit trading which left millions homeless and unemployed. Therefore, these economists advocated for free market to maximize profits but subject to voluntary and free competitive form of the market with consideration of moral and ethical constraints in the society (Friedman & Rose 1990).