My column for the FT this week (mentioned here two posts ago) states my own view on the implications of the financial crisis for the future of capitalism--namely, that the effects outside finance will be limited, and this is not the end of capitalism as we know it. Here are two other interesting and forcefully expressed opinions.
Harold Meyerson in the Washington Post thinks the game is up for "unregulated capitalism":
In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled "The God That Failed."
Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. The fall of the financial system has been so fast and far-reaching that there's been no time to fully consider its implications for the reigning economic theology of the past 30 years. But with the most right-wing administration in modern American history scurrying to nationalize the banks, the question cannot be elided indefinitely.
What exactly do economic conservatives believe now that their god is dead? What's become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions?
No wonder we've seen a disoriented John McCain wandering the moors howling about Bill Ayers. What's he supposed to do? Admit that the Reagan-Thatcher faith in unregulated capitalism, to which every GOP presidential candidate was pledging allegiance just last winter, has collapsed?
Interesting to see this dismiss the Clinton and Blair administrations as mere extensions of the Reagan-Thatcher order. Actually I agree with Meyerson about that: they were. But I thought that the Democratic narrative upholds the 1990s as an example of how good things can be when intelligent, well-meaning people are in charge. In other words, good government is more a question of competence and good faith than ideology. To abandon that line, you have to consign Clinton and Blair to the trash.
I was also a bit puzzled by this:
McCain and Barack Obama disagree sharply on the government's role in bolstering the economy. Obama favors public outlays on alternative energy and education, which would not only create jobs but also make us more competitive globally.
What is this, "make us more competitive globally"? Surely that is the old, dead paradigm. Even as the piece reads its last rites, that Reagan-Thatcher way of thinking is stirring back to life. If you are going to dispense with market forces, I don't think you can afford to care very much about staying competitive globally.
The other piece, much more to my own way of thinking, is by Simon Jenkins. For many years (outside the specialist domain of economic commentary) he has been my favourite British pundit, and one of the two or three best I have come across anywhere. Rigorous, liberal (in the old-fashioned sense), open-minded and surprising. See what you think:
So this is to be Brown's Falklands. Victory on Mount All-fall-down. Bonfire of the bonuses. Service in St Paul's. March-past by the Royal Troop of Derivatives Traders. Anthem to the Bankers' Brigade. Tomb of the Unknown Arbitrageur.
A fortnight is clearly a long time in ideology. What fun historians will have with October 2008. Do you remember the hoary old days when they let Lehmans go bankrupt and refused to guarantee bank deposits? Where were you when a governor of the Bank of England worried about inflation and something called moral hazard? How tables turn. Socialism is now cock of the walk, capitalism mugged by reality.
It is rubbish, total rubbish. Market failure has been compounded by brain failure of the discredited profession of economics, overwhelmed by journalistic wish-fulfilment and glee.
The banks have not been "nationalised", just deluged with money. They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.
Yes, it is false hyperbole to portray this as the end of capitalism. Most people, even on the left, recognize that capitalistic markets are generally efficient and provide more social good than strict socialism/communism. But it does seem likely that recent events reflect a very serious, if not mortal, wound to the widespread talk the past 20 or 30 years that government has no legitimate role in regulating, and curbing the excesses of, markets - at all. Of course, there will and should be debate about where the appropriate balance is. But I don't expect to hear as much talk about privatizing every government activity that isn't nailed down. And I don't expect that the country will soon again trust that banking, financial, and other critical industries need not be monitored or regulated.
It strikes me that part of the problem is definitional. The more, shall we say, exhuberant among the capitalists and the Norquistian "drown the government" types (collective it is probably fair to call them the Club for Growthers) have managed to spin Adam Smith's free market into an omnipotent deity and the MSM and many laypersons have now come to find Meyerson's "unregulated capitalism" a redundancy. But "unregulated capitalism" is not the same thing as traditional free-market capitalism; Jenkins makes a slightly different error - one of false dichotomy - to suggest that the current government efforts are either socialism (which he denies) or throwing money at something that is really more of the same.
Somewhere between the granting of my Econ degree and the burnished-by-history Reagan Revolution everyone seemed to suffer collective amnesia as to the basic lessons in their Econ 101 text, that what we think of as a theory of the market depends on numerous simplifying assumptions that do not exist in real life. As a result, where those assumptions are not met, we may find market failures (here is where the problem starts: Growthers believe markets, like any good modern deity, are infallible - a problem for policymakers and for modern deities who miss out on the ornery fun the Olympians enjoyed).
It is not remotely inconsistent with "capitalism" for a government to step in where a market failure exists. There are scores of reasons why the credit markets were prime candidates for market failure, and scores more to see that market failure presently exists in those markets. All government is trying to do is mitigate the market failures. This is not socialism - it is an anticipated feature of market economies. It is also not business as usual with added money; if that is all it turns out to be it will fail as more cash doesn't address the disconnect between the assumptions and the reality in the market that resulted in the particular failure. (There is also a Heisenburg-type problem here in that the market really cannot be "the same" once the government has intervened.)
But enough about them; lets talk about you. You state:
As with Jenkins, this strikes me as a false dichotomy based on an assumption that the ideology in question is a belief in a market so strong (the deistic thing again) that the competence of the administration becomes wholly irrelevant. The issue of which is more important should not cloud that "all of the above" have impact. Clinton's (and late-term HW Bush) decision to be a defecit hawk even if it meant politically unpopular tax increases had an impact, as did his bottom-up stimulation through increases in the EITC.
But perhaps more important is that if one believes (as I do) that more than a little of the "grease" of all market mechanisms is intangible - confidence, optimism, etc. - Clinton's seeming intellect, engagement, and optismism and Bob Rubin's exceptional relationship with the Street also make a difference compared to W Bush's seeming indifference, incusiousness, and frequent changes in who is de facto or de jure in charge of policy. This seems left out of the equation when you ask whether ideology or competence matters more; perhaps this is encompassed in your use of the term "good faith" of an administration.
In any event, I think this is oversimplified by both Meyerson and Jenkins and, as much as I hate to say it, again then by your comments seeking to simplify this into a choice between the two.
"If you are going to dispense with market forces, I don't think you can afford to care very much about staying competitive globally."
Not at all. Mercantilism was also a form of global economic competition, for example. Reagan and Thatcher hardly invented the idea that economics are competitive at an international level...
My Prediction
I want to make a prediction, just in case it comes true and people will think that I'm very smart for no good reason. Many people are predicting the end of capitalism or saying more sensible things like this:
http://www.nytimes.com/2008/10/12/weekinreview/12leonhardt.html?hp
"It is possible, then, that the main legacy of the crisis will be some form of corrective to the country’s recent excesses. The economy looks to be heading into a period of more regulated, but still American-style, capitalism, more along the lines of how it operated in the 1950s, 1960s and 1990s. Those three decades happen to have produced the biggest and most widely shared economic gains since World War II."
I think that this is wrong, and the end of capitalism is silly.
I predict the following:
1) There will be more regulation, but it will focus on keeping crises from occurring, not on micro-managing the economy. ( See this post )
2) The government will more quickly than many believe get out out of these crisis investments.
3) A major cause of the crises infecting our current system will turn out to be the implicit and explicit guarantees by the government to intervene in crises such as this. It will be obvious that such interventions are too costly for governments in the future.
There you have it. We will have more government aid to the truly needy in the future, but the idea that government can manage the economies of the future more efficiently than private enterprise will turn out to be false.
Don't say you haven't been warned!
Surely the implict guarantee is due to the belief that it is too expensive for the government NOT to intervene in the middle of a crisis?
So the question is: how do you have the guarantee, which the the goverment cannot credibly revoke, without the moral hazard?
‘Ethical Markets’ and not ‘Capitalist’ Markets is what Humankind Needs for its Long-Term Development. Indeed, humankind's very survival depends upon this vital change.
With the turmoil in the financial markets that has shown quite clearly that they do not work in the long-term interests of sustainability and humankind, there is now no doubt that they have to be re-engineered to those of ‘ethical’ financial markets. Indeed, as the ‘capitalist’ market system and ‘capitalist’ economics are not also working in the long-term interests of sustainability and humankind, they too have to be re-engineered to those of ‘ethical’ markets and ethical economics.
For the financial crisis is a clear indication that governments do not control the world, but the very rich and powerful. These failures of ‘capitalism’ have, over the last quarter of a century of modern global ‘capitalism’, provided vast wealth to the very few and impoverished over 3,000, 000,000 of the world’s people. Indeed, the poor who live on no more than $2 a day will increase and by 2025 according to former World Bank president James Wolfensohn, will increase to 4,000,000,000 by 2025 where they will then be 8 billion human inhabitants - "If the world cannot make progress against hunger and poverty, by year 2025, there could be 4 billion people living on less than US$2 per day and more than 2 billion living in extreme poverty (1999).
These predictions that are now on course to be realised as poverty is not decreasing, clearly shows again that ‘capitalist markets and systems do not create wealth for the majority of the world’s people, but creates wealth for a very small minority of the world’s people. This cannot be good for the long-term survival of humankind, for as the population explosion and climate change hits head on with ever dwindling natural resources to sustain life, the ‘capitalist’ system will deliver global wars and possible human extinction. Indeed, it only takes no more than a 15% reduction in oil supplies and the whole of the capitalist engineered economies will shut down and fail humankind. Therefore the world’s people have to push their governments to change to both ‘ethical’ financial and trade markets, for if they do not with time now clearly running out, human misery on a scale never see before and far, far worse than the two world wars pt together, will be the eventual outcome.
Unfortunately for humankind and especially for our very young who will inherit this future world of anarchy and hellish conditions, mainstream economists, politicians and bankers have no real comprehension or willingness to adopt either ‘ethical’ markets or ‘ethical’ financial systems. Therefore as the world stays as it most probably will with these terrible systems that are totally redundant in human development terms, the world had better get prepared for human suffering of nightmarish proportions over the next quarter century.
For as the financial systems have failed already adhering to the ‘capitalist’ dictates, so too eventually will the capitalist market system fail humankind. Indeed, one was built on the foundations of immense global debt and the other is based upon unlimited natural resources, both of which now are to be seen as the coffin nails of human existence. There are many thousands of highly innovative people spread across the globe, independent of governments and commercial interests, who would help progressive governments to move towards ‘ethical’ markets and systems, but where it has to be said that governments are still presently blinded by current economic dogma and vested interests. Indeed, vested interests and sheer greed at the base of the minority will be found out eventually to be the total undoing of the human experience itself.
Dr David Hill
World Innovation Foundation Charity (WIFC)
Bern, Switzerland