Sunday, March 8, 2009

The market and the state, redux.

As Yogi Berra famously quipped, "It's like deja vu all over again." And so it is with discussions about the appropriate balance between the market and the state as a means of guiding the economy. A bit of history would be useful here. If we stick just to this past century (by which I mean, the early 2oth, to the early 21st), we've had two huge swings of the pendulum already, and are, possibly, in the midst of a third, although it's still too early to tell for sure.

But ... before getting to that, let's dispose of one canard. You'll notice I said that what's at issue is the appropriate balance between the market and the state. That logically presupposes that the market and the state are both involved in governing the economy. Indeed, they are, joined at the hip, like Siamese twins, although sometimes in denial of that fact. In some popular discussion of the issue, it's framed as one of whether it's the "free market" or the government that should control the economy. That's a fundamentally wrongheaded, and ideologically driven, way to see matters. For one thing, when people who advocate it talk about a "free market", what they really mean is a market with minimal but vitally important government involvement, in particular, to enforce property rights, enforce contracts, and generally set the rules of the game, so that, within those rules, folks can trade freely and without the fear of coercion. (After all, if a hooligan puts a gun to your head and forces you to trade with him, it's not really free. And the doctrine of the gains from trade in economics is premissed on mutual, voluntary cooperation. But more on that another time.) That's a far cry from a "free" market. A truly free market, with no government intervention, would rather be the sort of thing you'd find in a Hobbesian state of nature. People in such a world would be so busy defending themselves and their stuff, and trying to stay alive and fend off attacks from their neighbours, that they wouldn't have too much time to trade much in anything, and the market would be pretty primitive. Life would be, as it were, poor, nasty, brutish, and short.

I spend time on what seeems like a minor semantic point, because, well, it's not really that minor. Words do matter, and there's an Orwellian sense in which the proponents of minimal government use the term "free market", trading on the emotive and hortative appeal of the concept of freedom, when the real debate is not about the market vs. the government, but the more nuanced one, of what sort of rules of the game should the government set, so that the market can do what it does best, both for itself and for society. The last bit is the tricky one, since this takes us into debates about the possible tradeoffs between efficiency and (say) fairness. There's the crux of the debate between so-called "liberals" and "conservatives", in American argot, or what would be called "social democrats" and "liberals" in Europe. (Their "liberals" are "conservatives" in American usage, which can get confusing.) But, again, I'm getting ahead of myself. Before weighing in on that big debate, that I might do another time, we need to get our history straight. That old one of knowing one's history or being condemned to repeat it comes to mind.

If we look back exactly a hundred years ago, there was a general consensus on the minimal government, maximal market, view, that is associated with today's free marketeers. Trade barriers were low, goods and capital flowed freely, there was monetary stability provided by the gold standard, and, quite different from today's globalization, immigration barriers were low. People more or less went and settled where they wanted without the need for passports and elaborate border controls. New technologies such as the automobile, the airplane, the telephone and the radio were breaking down barriers and bringing people closer together. Replace telephone and radio with cellphones and the internet, and it's not so different from today. Well, there was one big difference, a huge one actually, that all this good stuff was happening mostly for people living in Europe and North America, and most of the rest of the world remained in the grip of imperalism and colonization, and so missed the boat on economic development. But that huge subject is another one for the future. Let's keep our Eurocentric perspective for the moment.

As we all know, this first globalization came crashing down with the outbreak of the First World War, and the confusion of the interwar years. Thanks to the Russian Revolution, revolutionary socialism, of the Marxist-Leninist variety, seeemed at the time to be a viable alternative to liberal democracy. The Great Depression sealed the deal. There was a general dissilusionment and loss of faith in the market economy, and that led to the first big swing of the pendulum. Through the New Deal, and similar programmes elsewhere, the balance in the equation tipped towards markets being reigned in, and more government intervention in, and regulation of, the economy. One facet of this new scenario was the Keynesian revolution in macroeconomics: it was felt that governments could, and ought to, eliminate, or at any rate to attenuate, fluctuations in the business cycle, so that something like the Great Depression couldn't happen again. Another facet was to impose a set of new regulations on banks and other industries to ensure that the reckless speculation that caused the great stock market crash in 1929 that tipped the world into Depression couldn't happen again. And yet another facet was increased cooperation amongst governments to ensure, for instance, that beggar-thy-neighbour trade policies wouldn't be used again, as they were, with disastrous effects, during the Depression (America's infamous Smoot-Hawley tariff and copycats elsewhere), hence the creation of new international organization such as the Bretton Woods twins (the World Bank and IMF), and the GATT, now the WTO.

All of these developments led to what has come to be known as the golden quarter-century, roughly from the rebound in economic prosperity a few years after the end of the Second World War until the early 1970s. As well all know, a series of events, including the oil shocks, ushered in the era of "stagflation", that is, a combination of economic stagnation (falling output, rising unemployment) and rising prices. This should have been impossible under a naive Keynesian view of the world. What followed is too complex and multi-faceted to summarize easily here, but suffice it to say that the economic difficulties of the 1970s led to the second pendulum shift, a move back towards the market and away from the state. This was the era of deregulation of the 1980s, the era of Ronald Reagan in the United States, Margaret Thatcher in the United Kingdom, and, for those of us in Canada, Brian Mulroney (remember the Shamrock Summit and "Irish eyes are smiling"?). Those of us who grew up in those days will remember the deregulation of telephones, the airlines, and other industries, most importantly the banks, that had faced stiff regulation since the New Deal era. The mantra of the time was inspired both by Hayek, and the Chicago and Virgina Schools, that followed in his wake. The basic tenet of these libertarian economists is, to put it simply, that markets tend to work well, and governments don't. End of story. You will have gathered from my earlier remarks that this was most certainly too simplistic, and ideologically driven, a view.

What, of course, evidently sealed the triumph, the hegemony, of Anglo-American-style capitalism was the demise of the Soviet Union and the first tentative, then more fervent, embrace of an emphasis on liberalizing domestic regulations and opening up to international trade and investment that swept the transition countries (that is, those formerly socialist economies of Eastern Europe and the former Soviet Union) and the developing countries, most notably, China, starting in the late 1970s, and India, in the early 1990s. This enthusiasm for economic liberalization, and, its international dimension, globalization, survived even the Asian financial crisis of ten years ago, and, miraculously, survived even the tragedy of 9/11 and the "war on terrorism" that followed.

Acolytyes of globalization, and liberalization, were, consciously or not, slipping into a smug and complacement triumphalism when it came to the future of the global economy, and the doctrine of a liberal economic policy regime that has sometimes (and generally pejoratively) been called the "Washington consensus". This, too, is redolent of the earlier globalization. Then, people like Norman Angell were saying things like war is now impossible, as the economies and peoples of the world are too closely intertwined for us to comtemplate destroying our collective prosperity by breaking those bonds asunder. Tragically, of course, that proved to be far too optimistic an epistle. Even in the year or months before the financial crisis, emanating from the sub-prime mortgage fiasco in the US, broke last summer, some pundits were pontificating that globalization was irreversible, recessions were a thing of the past, and the only question was one of fine tuning and managing globalization and the markets, rather than fundamental questions about whether we have the right mix between the market and the government. It was thought those debates wer done. Over with. That thinking was wrong.

In the wake of the financial crisis, and the current global recession (that may turn into a mini-depression, or worse), the blithe acceptance that Anglo-American economics and the system of globalization that has been supported by it will continue as before has disappeared, and been replaced, as it should, by the sobering reality that some of the difficulties we are in now were probably caused by a misguided and doctrinaire understanding of the correct role of the government in regulating the market. A fundamental rethink, in intellectual and policy making cricles, is now taking place, and the pendulum is starting to swing back the other way, the third time in the past century.

The contours of the current crisis and the reasons for this loss of faith in the market are well discussed elsewhere, so I will not repeat it here. It is touched on briefly in my previous blog entry. But what I want to finish with is the the thought that, as the balance between the state and the market is being titled back towards the state, globalization too, the international manifestation of capitalism and the market system, is facing serious strains. and may, if we're not careful, start to unravel in front of our very eyes. As Niall Fergusson has been saying (including today, on Fareed Zakaria's excellent programme, GPS, on CNN), there is a "crisis in globalization". That's the subject for my next blog. Until then, I hope, you'll stay tuned, and watch this space.

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