Monthly articles (English and French) on the theme "Querying economic orthodoxy"

No. 35 - November 2008

The end of the affair?


We must abandon the belief that selfish private interests harmonise with each other in spontaneous self-regulation.
Dany-Robert Dufour, Le Monde, 18 October 2008

And where love ceases, there hate begins.
Leo Tolstoy, Anna Karenina, part VII, chap. 30

Our long-running infatuation with the free-market concept could be about to turn very sour.

A stormy liaison

For thirty years and more, much of the world has been pursuing a blindly passionate love-affair with free markets. Or, to be more precise, with the idea of the free market; in practice, with carelessly-deregulated, disorderly, highly imperfect markets.

One may say that the coup de foudre that set off this affair was the ferment of 1968, though this was not originally an economic event. It was a broad social and cultural outburst of demands for 'negative liberty': freedom from traditional rules, constraints and conventions. But, as readers of this site will know, many of the ideologues who promoted negative freedom were economists.

Manifest at first in social and sexual mores, the mentality of 1968 spread in due course to the economic and business sphere. One by one the constraints we had grown up with began to melt away. Fixed currency rates, trade barriers, standard professional charges and stockbrokers' commission rates, trade union demarcation rules, ceilings on bank credit, restrictions on cross-border investment, statutory rules on investment policy for insurance offices and pension funds…all these restrictive practices have, in most of the developed world, essentially disappeared. The tidal wave of the doctrine of deregulation has swept all before it.

We have given markets their head and permitted them to dominate our lives as never before. This strategy has been good for economic growth as it is conventionally defined - that is, increasing the total quantity of goods and services available to consumers. But emphasis on this kind of growth has led to overconsumption of natural resources and dangerous levels of pollution.

This strategy has enhanced personal incomes, but mostly, and very sharply, at the top of the tree. For the majority of people, earnings have shown little improvement, some have seen their earnings decline, and nearly everyone's earnings have become less stable and reliable. Consequently, inequality and insecurity have greatly increased.

This strategy has led to deterioration in many public services. It has brought us excessive levels of personal and business debt, as the deregulation of credit and competition between banks have encouraged undisciplined lending.

Finally, this strategy has exploded in our faces, and very drastic measures have been needed to restore some kind of stability to gravely deranged banking systems and economies.

Freedom abused

Financial markets have been given their freedom, and they have disgraced themselves. As my Scottish headmaster used to say, back in the 1950s, privileges that are abused will be withdrawn. The time has come to put markets back under strict controls and restrictions, such as those under which they laboured from the 1930s till the 1970s - a period, however, in whose post-war years Europe and America enjoyed perfectly respectable rates of growth, while some Asiatic countries progressed very strongly.

But will this return to discipline actually happen? We have been through several serious financial crises since the old framework of regulations broke down; yet in the aftermath of those accidents, not much changed. Even today there are those who say that, in five years, or ten at the most, once the present mess has been tidied up, bankers and traders will quickly revert to their bad old ways. Is that likely? Or are we on the point of a major shift in the mentality and behaviour of governments and businesses, such as occurred in the 1930s?

Today we read of governments giving banks explicit instructions about acceptable levels of lending, and about where that lending should be directed. For example, the leading French banks, in return for injections of funds by the state totalling 10.5 billion euros this year, have committed themselves to increasing by 3% to 4% annually their total lending to businesses and individuals to promote economic activity. The idea is to try to avert a recession brought on by the drying-up of credit. Such an agreement must seem very odd to bankers of the younger generation, who have grown up with the belief that lending policy is a matters for bankers alone to decide, and is no concern of the government's.

But it does not seem odd to me. I can well remember a time when this kind of understanding between banks and governments was quite normal. When the Governor of the Bank of England, if a visiting chairman of a clearing bank let it be known that he was considering some not too prudent innovation, would raise his eyebrows a little and quietly say, I wouldn't do that if I were you. And the chairman would act (or refrain from acting) accordingly. In those days, we did not have major banking crises.

The penny drops

In my January essay, Bankers' Chernobyl, I wrote: But too many people still do not see the need for tight control and regulation of the credit system. Will we have to suffer an economic Chernobyl before they come to their senses? Now that the bankers' nuclear reactor has exploded, will the countless sheep-like followers of the free-market bandwagon come to their senses? There is surely a fair chance that most of them, apart from the dyed-in-the-wool ideologues, will see reason.

Financial leaders are showing the way. In a recent hearing in Washington, Alan Greenspan, former chairman of the US Federal Reserve, was questioned by Harry Waxman, chairman of the Congressional committee on Oversight and Government Reform. Greenspan has long been a strong advocate of market freedom and light regulation. When Waxman commented: you found that your view of the world, your ideology, was not right, it was not working, Greenspan replied: Absolutely, precisely, and went on to admit how shocked he had been by this discovery.

People are fed up and disgusted with watching their own financial circumstances stagnate or deteriorate, while traders in financial markets rake in gigantic bonuses - or so they did, until very recently. It has always appeared that these traders were making little positive contribution to the real economy; now we see that they have made a very large negative contribution. The public has every right to be angry over this nonsense. It is not difficult to envisage a turnround in prevailing opinion, from tolerance of the wild beasts (golden boys) of the financial jungle to a desire to hunt them down. And where love ceases, there hate begins. Our long-running infatuation with the free-market concept could be about to turn very sour.

Discredit for perverse policies

Perhaps we are at last reaching the stage where fascination with libertarian ideology is dying out, crushed by the ever-accumulating evidence that it yields perverse results. It should have been obvious years ago that libertarian economic policies - deregulation, excessive competition, cutbacks in tax rates for the top dogs and in public services for everyone else - are unlikely to be in the best interests of most people. It defies logic that such policies should be tolerated in any democracy.

But too many of us have been duped by the free-marketeers' seductive arguments: market freedom will generate more prosperity for everyone and, in any case, whether you like this strategy or not, there is no alternative (T. I. N. A. - remember that nickname for Margaret Thatcher?) This is a classic ploy of people who are determined to get an unpopular policy accepted; they simply tell us, over and over again, that it is the only possible policy. Eventually, most people come to believe them.

It is true, of course, that many of the libertarians' policies become unavoidable if pretty well everyone is following them. As we French have found with our wealth tax, a country that insists on taxing capital assets while other countries do not, will gradually lose its capitalists. Tight controls on British banks, in the absence of the same elsewhere, would drive banking business overseas. And so on.

But if the libertarian movement can conquer the world, so can an alternative. Once it becomes clear that the great majority of countries are cracking down on lax lending, and making the rich pay their whack, the aforesaid arguments against these reforms will evaporate. The business and fiscal environment will change everywhere, and there will be no way back to the financial jungle except in a few remote, recalcitrant, reprobate offshore islands. It will be a different world, and in many ways a better one - so long as the reaction does not become too extreme. The trick is to get the balance right!

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