Guess who set the market free?

What do Jimmy Carter, Ronald Reagan and Deng Xiaopeng – the Chinese Communist leader of the 1980s – have in common? Answer: they all reduced government’s role in the economy and expanded the scope of the free market.

In a free market economy, you can buy or sell any legal product or service. You are allowed to keep most of what you produce or what you earn – government does not tax away most of your earnings. If you want to start a business, you can. And prices are set by people’s desires and the supply of goods – not by the government.

President Carter’s most important free market contribution was his dramatic deregulation of air transportation. When Carter became president in 1977, regulations of the Civil Aeronautics Board benefited airlines at the expense of passengers. By setting minimum airfares, the CAB was prohibiting competition through lower fares. And by requiring airlines to get its permission before starting inter-city routes, the CAB was restricting entry to markets and further limiting competition between airlines.

Carter undermined the cozy relationship between the airlines and the CAB by appointing Alfred Kahn, a known opponent of airline regulation, to head the agency. Kahn issued radical new airline regulations undermining the CAB’s powers and opening the industry to genuine competition, all with Carter’s support.

By 1996, air passengers were paying less per trip – 26 percent less, according to one study – than they would have under CAB regulations. At the Bangor airport, for example, fares per passenger mile fell by 33 percent, in inflation-adjusted dollars, between 1990 and 1998, while monthly airplane departures increased by 188 percent. Passengers flying from Portland paid 20 percent less. And most of the country’s airports offered more frequent service.

In 1984, during Ronald Reagan’s presidency, the weakened CAB was simply abolished. And Reagan supported more vigorous competition in telecommunications and other industries.

If the free-market reforms of Presidents Carter and Reagan were important, then only a word like “momentous” can do justice to Deng Xiaopeng’s reforms.

In 1979, a severe drought struck the Chinese province of Anhui, resulting in rural starvation. Thousands of peasants abandoned their homes, while others demanded an end to the agricultural communes established by the communists. In desperation, Chinese leaders complied with these demands. They allowed family farms to replace communes all over the country and permitted peasants to consume or sell all of their crops above a quota for required deliveries to the state. Chinese leaders also gradually decontrolled farm prices. Deng pushed for these reforms.

In effect, free enterprise and the free market came to Chinese agriculture. Farm output increased, city dwellers found more variety in their food markets, and the improvements in agriculture soon provided a stimulus to rural industry and commerce.

Since the early 1980s, China has moved steadily toward free markets and – in fact if not in name – toward capitalism. Private industries and foreign investment have been encouraged. Though conservatives opposed to Deng’s economic reforms launched a powerful counter-attack around 1990, Deng fought back and eventually prevailed.

China now has the world’s most dynamic economy, with an economic growth rate that is simply amazing: between 1979 and 2000, its output per person quadrupled. And poverty has declined. Since 1981, the proportion of China’s people living in extreme poverty, defined as income per person below $1 per day, dropped from 60 percent to 17 percent.

Free markets have produced striking results in other countries too. In 1948, West Germany’s Economics Minister, Ludwig Erhard, faced with a stagnant economy hamstrung by price controls, abolished most controls overnight. This sudden move helped lay the ground for the German “Economic Miracle” of the 1950s and 1960s and for West Germany’s rise to the ranks of the world’s richest countries.

India too has implemented a free-market revolution. Before 1991, the Indian economy was governed by a nearly incomprehensible maze of controls and licenses. A company even had to get government approval before increasing output! Economic growth, of course, was torturously slow. In 1991 a financial crisis ensued, and a frustrated Indian government responded by suddenly ending the regulatory system. A burst of economic growth followed – in the next 10 years output per person grew by more than 50 percent.

Of course, not all countries that free their markets will immediately prosper. Other conditions, including political stability and a low level of corruption, must be met before free markets will produce rapid growth. Further, some government regulations – especially pro-environment and anti-discrimination measures – provide critical social benefits with little harm to economic growth.

These important qualifications aside, the benefits of free markets are enormous. If you are not yet persuaded, consider this: no country that drastically curtails its markets can be found among the top 30 countries in the world, ranked by its citizens’ living standards.

The free-market policies of Presidents Carter and Reagan benefited American consumers and helped the U.S. remain one of the world’s most prosperous countries. And Deng’s free-market policies benefited China’s farmers and consumers, while producing economic growth that is the envy of the developing world.

Edwin Dean, a seasonal resident of Vinalhaven, writes monthly about economic issues.