by Daniel Yergin | Wall Street Journal

It is hard to imagine now, but not so many years ago people’s confidence in markets was on the upswing. Through much of the 20th century, governments had sought to seize and control the commanding heights of the economy. Then, however, competition, open trade, deregulation and privatization began to win out.

In the U.S. the process began in the 1970s, during the Gerald Ford and Jimmy Carter years. By the time of the Clinton presidency—Bill, that is—it had become well advanced. In 1997 the Council of Economic Advisers issued a report on the “advantage of markets” and their “insufficiently appreciated” power: the “ability to collect and distribute information.”

There had been a shift in the balance of confidence—the respective weighting in people’s minds between the role of markets and government, between the invisible hand and the visible one. I once asked the great statesman Lee Kuan Yew, the founder of modern Singapore: What caused the shift? He answered with his customary simplicity, “Communism collapsed, and the mixed economy failed. What else is there?”

In other words, it became clear that over-reliance on governments tended to run economies into a wall—whether it was stagflation in the U.S., or paralysis in the mixed economies of Britain and Western Europe, or devastating hyperinflation and budget deficits in Latin America.

Thus came the modern age of globalization. Between 1990 and 2012, the world’s foreign direct investment rose more than 10-fold, to $23 trillion from $1.8 trillion. In China, hundreds of millions of people have been lifted out of poverty. One might not know it from today’s political debates, but foreign trade accounts for about 30% of the U.S. economy. To put it in human terms, 41 million jobs depend on trade—more than one out of every five American jobs.

Yet the balance of confidence has been shifting once again. The market economy that generates the well-being of nations has become a source of deep and corrosive distrust. None of this year’s presidential candidates speak positively about the international economy and the value of trade. Instead they say that the game is “rigged” against the U.S.

Why this shift away from markets? Let me suggest four reasons:

The financial collapse of 2008. The Great Recession—the loss of jobs and homes, the despair of unemployment—is the decisive economic landmark of the century so far. Decades from now people will still debate what caused the 2008 crash, the same way they argue about what caused the Great Depression. But whatever its origins, it has caused a dramatic loss of confidence in markets.

A new focus on inequality. Inequality has been called the defining issue of our time. But the evidence is more complicated than we sometimes hear: Many studies of inequality leave out transfer payments by government, which have more than doubled since 1970 and now account for 17% of personal income. “It is false to claim that all the income gains of the past 2 or 3 decades have gone to the top,” writes Gary Burtless, a Brookings Institution economist. “Middle- and low-income Americans have managed to achieve income gains, too.”

The realities of global trade. Without question, globalization has promoted economic growth and created jobs. These benefits, however, are spread across the whole nation. In many local communities trade has led to factories closed, jobs lost and workers marooned with few prospects. Yet much of the disruption and job loss that is instinctively blamed on globalization is actually the result of new technology and increased productivity. Still, it is inarguable that global trade has led to job losses and heightened many workers’ sense of vulnerability. That reality has to be addressed.

Fading memories of the old order—or no memories at all. Voters under 30 were either very small or not yet born when the Berlin Wall came tumbling down in 1989. They have no memory of communism—what it meant in terms of poverty, thwarted opportunity and political repression. Closer to home, few Americans recall the likes of the now-defunct Civil Aeronautics Board, which not only set the price of an airline ticket but regulated the size of the in-flight sandwiches. What millennials do know is what happened in 2008—and for many it serves as an indictment of the market system.

Though the balance of confidence has swung toward greater government management of the economy, that doesn’t mean a turn to state-owned industrial enterprises, which were common in Western Europe. Instead, controlling the commanding heights now means ratcheting up regulation, which is much less visible and much more dispersed.

Rules are necessary for a market economy. As a Russian reformer once told me, without them you have not a market but a bazaar. But the question concerns the proper balance, and the quality of the regulation. What furthers the public interest? What stifles initiative, drains time and resources, discourages investment and hinders growth?

After the 2008 crisis, financial regulation needed to be fixed. But what about the results? The Dodd-Frank bill was 2,300 pages. Should it have been 2,500 pages, or would 1,800 have been enough? On top of that are an estimated 26,000 pages of complex rules to implement the bill.

If it is not instituted wisely, with restraint and foresight, regulation becomes a drag on the economy, a tax on job creation, a barrier to innovation. It also boosts “compliance,” America’s great new growth industry. Indeed, in these days of the gig economy, it is said that if you want lifetime employment, go into compliance.