Capitalists Capitulate

‘Have the market liberals offered up any defence? Hardly. They have been brushed aside, dismissed as theological quacks’

Until a few months ago, market liberals disposed to Cobdenite wishful thinking believed that ever-freer markets and trade were inexorable following globalisation. The present global economic crisis has proved them wrong. They should recall Adam Smith’s sober realism: “To expect, indeed, that the freedom of trade should ever be entirely restored…is as absurd as to expect that an Oceana or Utopia should ever be established.”

The intellectual climate has now shifted decisively against free markets and for greater government intervention. Massive policy shifts are taking place, probably heralding the end of a 30-year free-market revolution. Have market liberals mounted any defence? Hardly. They have been brushed aside, dismissed as theological quacks, huddled in dwindling sects. How did this happen?

Harold Macmillan’s “events, dear boy, events” is part of the answer. The free-market victories of the 1980s and 1990s bred complacency. That was heightened by a Goldilocks global economy, which ended in 2007/8. Then the global crisis seemingly appeared from nowhere, and quickly battered the “real” economy. Escalating government intervention has followed-bank bailouts and indiscriminate subsidies to manufacturers, now spilling over into protectionism against foreign competition. Fiscal-stimulus packages are providing cover for industrial-policy activism at home and protectionism abroad.

There have been parallel, but subtle, changes in the market for ideas. These have been brewing for about a decade. Anti-market NGOs are more visible. In developing countries, sceptics say that liberalisation and globalisation have not delivered. They argue for Northern liberalisation while preserving Southern “policy space” (for protectionism, that is). They extol the virtues of infant-industry protection. In the West, “fear of globalisation” has broadened from a blue-collar rump of outdated manufacturing to the white-collar middle classes in the services economy. That has fed calls for “harmonising” developing – country labour, environmental and tax standards – and now for tighter carbon-emission standards to combat global warming. Such advocacy is backed by the threat of trade sanctions, much of which is directed at China.

The economic crisis has accelerated this. Even the pro-market, pro-globalisation political centre has lurched to the left. The new consensus espouses a renewed compact of “Keynes at home and Smith abroad”. Greater government macro- and micro-interventions at home are needed to stimulate recovery, reduce inequality and preserve social stability. Stronger international co-operation is needed to make this work in tandem with open markets abroad. A new generation of Platonic guardians – high-powered intellectuals and technocrats – is charged with fine-tuning this package and engineering desirable outcomes. Barack Obama, Gordon Brown and Larry Summers typify this, as do recent editorials in the FT and the Economist. These are also the new incantations of Davos Man. They also reach the innards of soft centre-right opposition.

Where does this leave the votaries of limited government, free markets and free trade? Very badly placed, which is their fault. Most free-market outfits have become flabby and effete and hark back to the Thatcher and Reagan golden era. Some have soiled themselves by partisan association with a disastrous Bush administration and a Republican Party of southern-fried jocks. Nobel laureates gather to worship at the altar of dead prophets and sing hymns of praise to each other. The latter debate what Hayek said on Monday compared with what Mises said on Tuesday. Congregations recite the age-old catechism, but few outside are listening. This recalls the Keynesian-social democratic consensus in the mid-1970s.

The new conventional wisdom is wrong and dangerous. Big government will result in huge debt burdens, taxation and inflation. And the combination of big government and a new age of protectionism will deepen and prolong recession. Both will damage economic globalisation and create new international political tensions. That is why these threats must be met by effective market-liberal opposition.

Effective opposition should repose on a Scottish Enlightenment foundation of moral philosophy and political economy. However, it must break free of self-indulgent sectarianism, scholasticism and theological therapy. Above all, a new generation of market liberals must get their feet wet and hands dirty with real-world problems. That will bring a welcome retreat from a Manichean worldview and an appreciation of shades-of-grey reality. Fundamentalists blame present woes on misguided government regulation. The messy reality, in contrast, is a combination of government failure and market failure, with markets overwhelmed by financial innovation and its unanticipated consequences. Rescuing the banking system and prudential reregulation of the markets are inevitable. Fundamentalists would wish these measures away. Realists would seek to make them work with the grain of markets and prevent them from spilling over into wider market interventions.

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