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The End of the Free-Market Paradigm

The assumption of isolated individuals transacting in free markets has underpinned highly damaging economic policies since the 1980s. Given the interdependent nature of the digital world, economic researchers need to ditch their unscientific attachment to this paradigm and instead focus on the economy of the 2020s.

CAMBRIDGE – The 2020s will be the decade when the idea that economic problems can be “left to the market” to solve is finally put to rest – after some 40 years during which that belief has caused untold damage to society and the environment.

We can foretell this with such confidence because of the nature of the digital economy. The long-standing economic theory, according to which firms or people deliver the best outcomes for society by acting individually to maximize profits or “utility,” has never been valid. If it were, businesses would see no advantage in becoming much larger, and advertisers would never use social pressure to manipulate consumers. But in the digital world, it is simply impossible to ignore our interdependence.

Consider today’s pervasive digital platforms. One reason why there are just a few globally dominant players is the existence of network effects: whether a platform matches diners with restaurants or enables users to connect with each other, the more users it has, the better it is for all users. As a platform becomes larger, the benefits for everyone increase, often at an accelerating pace.