In 1776 the American colonies rebelled and Adam Smith published The Wealth of Nations, and both events caused revolutions that transformed the world.  America and the free-market capitalism espoused by Smith rose to power together, in a successful partnership of society and ideology, and now that partnership has stumbled and is again being challenged. 

During the Great Depression of the 1930s, capitalism's greatest crisis ever, its major ideological opponent was Marxism, which was its exact antithesis.  Free-market ideology said that government should always leave markets alone, despite clear evidence that free markets often do not work.  Marxism said government should always control markets, despite equally clear evidence that free markets often do work.  The trial-and-error process inherent in democracy eventually produced a mixed result that functioned well, in which free markets that worked well were mostly left alone (e.g., manufacturing), and free markets that worked badly were tightly regulated (e.g., finance). 

Despite the clear set of facts on the ground, however, the struggle between all-or-nothing economic ideologies has continued to this day.  The left maintained its Marxist sympathies up until the fall of the Soviet Union, while the right developed a free-market critique of the welfare state that resonated widely with the public.  After the fall of communism, the right had the ideological field to itself, and so it put in place the misguided policies that have led to the present economic collapse. 

Just as the right went back to an extreme position when the regulatory state faltered, so now the left is acting similarly.  The right failed in the 1930s and today because it was unable to say, "This is when markets do not work".  Similarly, the left has failed to persuade the country because it has never been able to say, "This is when markets DO work".  This is what the left must have, in order to be able to govern. 

This leaves the question posed in the title, "When do markets work?"  Here is a modest proposal, which I believe progressives should embrace: "Markets work when they are beneficially competitive.  This means that markets work when the only way for firms to make profits is by outcompeting other firms in benefiting people, without harming others".  

People on the left need a more clear understanding of how markets are beneficial, because when markets work well they serve progressive goals.  Well-functioning markets are not only productive, they are also redistributive.  The reason is that competition reduces profits.  If an industry is unusually profitable, then firms will produce more of what is profitable, or other firms will enter the market, and the increased supply will cause prices to drop.  The lower prices represent a transfer of income from producers to consumers, which redistributes income and wealth.  It promotes equality. 

When this happens it is very powerful.  Computers are a good example.  This is an extremely high-tech business, that produces a very sophisticated product of quite high value.  And computers have been improved by producers very rapidly.  But, due to competition, profit margins in the computer industry are pretty low.  Most of the increased value that has been created by this very productive industry has gone to consumers, with shareholders getting a much smaller fraction.  Many other industries have followed this pattern in the history of capitalist economies. 

The key aspect of this process is open competition.  When firms have to compete beneficially against all comers in order to make money, their activities then are tightly controlled by consumers.  This is itself a very strong type of regulation, and one that can ultimately be extremely effective.  When this type of regulation of business activity by consumers is operating naturally, then government regulation is superfluous. 

Now, I imagine that many leftist readers will be immediately objecting that this pattern is often not followed in a lot of other industries.  Well, of course not, that's the point.  People on the right tend to focus their attention mainly on those cases in which markets work, and to overgeneralize from those cases.  This limiting of attention and overgeneralizing from it is how the free-market ideology was created.  Of course, people on the left do exactly the same thing.  They focus attention mainly on those cases in which free markets do not work, and overgeneralize from those.  This is how the left-wing anti-business ideology is formed. 

Progressives should realize, however, that an anti-business ideology is politically very limited.  It works politically only in bad economic times, and when times get better it will be discarded.  But that is not the worst thing about it.  The worst thing about it is that it is simply wrong, just as a blindly-pro-business ideology is wrong.  Free markets do work sometimes, and the progressives desperately need an economic ideology that acknowledges that and does not needlessly alienate large sectors of the economy that are functioning well. 

We are now at a point where free-market ideology has been discredited and the voting public would consider an alternative.  I would love to see progressives offer something in that area that is economically sound, morally progressive, and politically appealing.  I like the phrase 'beneficially competitive' because it combine a nice-person word with a tough-guy word, so it can't be emotionally pigeonholed by people as either too hard or too soft, and the dissonance between the two makes it interesting.  But my major point is that progressives need to show the entire voting public that they understand markets and businesses as tools that society should use wisely to benefit people rather than as enemies to be subdued and subjugated.  I feel that a moment of possible liberalization is at hand in America, and I would hate to see that opportunity for progressives go to waste.