Saving capitalism from itself?

Those of a right-wing disposition may care to look away now.  

Robert Reich’s 2004 book, Reason, argues that liberals* have twice saved capitalism from its own excesses:

The first time was in the early 1900s. By then, captains of American industry had monopolized the economy into giant trusts, American politics had sunk into a swamp of patronage and corruption, and many factory jobs were unsafe – entailing long hours of work at meager pay, often exploiting children.  In response, liberals championed anti-trust laws, civil service reforms, and labor protections.

The second save occurred in the 1930s, after the stock market collapsed and a large portion of the American workforce was unemployed. Then liberals regulated banks and insured deposits, cleaned up the stock market, and provided social insurance to the destitute.

Both times, liberal reformers were accused of interfering in the free market. But in both instances, liberal reformers prevailed.  They did so by appealing to public morality and common sense.

It is time, once again, for liberals to restore confidence in our system and save capitalism from itself.

This seems interesting in two ways.  First, Reich is right that progressive politics has rescued capitalism from a tendency to self-destruct.  In this way, progressives have enabled capitalism to continue to serve its purpose as a driver of innovation and prosperity in society.  Pure laissez faire policies would have failed, resulting in a collapse of the capitalist project.  Second, this is a powerful narrative for the progressive left to adopt.  Progressive politics should define itself not in opposition to capitalism but as its guardian.

Is Reich right that it is time, once again, for liberals to step in to restore confidence in capitalism?  I think he probably is: we are seeing structural challenges which capitalism does not seem to be able to solve on its own terms.

The origins of capitalism’s next crisis? 

To my mind, the heart of the problem of capitalism today is its interaction with politics in modern democracies.  Many of us want to live in a world in which citizens elect and control governments;  and governments, in turn, regulate business to create well-functioning markets. But over the past quarter of a century we have an increasing sensation that this has been reversed. To an increasing extent, businesses fund the political process and much of the media, and so control government; and government increasingly controls the citizen.

That reversal of the normal flow, in which businesses rather than citizen determine government decision-making, is increasingly shifting our societies away from the outcomes which we expect from well-functioning markets.  The consequences include: 

  • The large and widening gap between rich and poor within developed countries.
    Top earners now earn 300 times as much as the bottom earners, compared with 20 times as much only twenty years ago. There is no economic rationale for the salaries earned by the super rich – far above their economic value on any reasonable measure – but the forces of corporate governance have been captured and seem powerless to bring the irrational exuberance of excecutive pay into line with the fundamentals.
  • The large and widening gap between rich countries and poor countries.
    The inequality between rich and poor is at historically unprecedented levels, and poor countries (such as many in Africa) appear to be trapped in a future of low growth.  The traditional mechanisms of catch-up – such as trade, technology and knowlege transfer and migration – are being deliberately choked off by the rich countries, apparently determined to pull up the ladder behind them.
  • A failure to grapple with the world’s most important long term challenges
    A drive to short term economic performance is leading us to ignore critical long-term challenges. We are unable to create incentives for our markets to tackle the growing environmental crisis. We face an obesity time bomb, driven by the cynical and deliberate efforts of the processed food industry to sell us food that is addictive but unhealthy.  We face an alarming growth of drug-resistant diseases,  caused by mismanagement of existing pharmaceuticals, and an unwillingness to invest enough in future medicines.
  • Erosion of confidence in financial services: heads-I-win-tails-you-lose
    The financial services industry is failing in its task of ensuring an efficient allocation of capital. Financial services companies earn large salaries investing our savings on our behalf, which is an economically valuable activity if they do it well.  I don’t expect traders and investors to anticipate expected profits in 15 years time within a margin of 50 percent either way.  But I do expect them to be able to distinguish a viable business with real customers, revenues and profits from a company with no economic foundations such as Enron or Worldcom.  Furthermore, we have reneged on society’s contract – implicit or explicit – to provide a decent life after a lifetime of work. The companies that took "pensions holidays" when the stock market was rising – unilaterally choosing not to make contributions for their employees’ pensions – now walk away from their obligations when pension funds underperform. 

These are not short term, temporary problems, like the US current account deficit. These are deep, structural challenges that require enlightened, intelligent intervention to restore the conditions in which free markets are able to deliver the kind of society we want. 

To achieve this, we have to address the relationship between corporations and government.  That may require relatively modest, and quite inexpensive changes such as campaign finance reform and an adjustment of the legal status of companies. It is not a plea for wholesale regulation and government interventionism: but rather to create a different sort of relationship between government and business, so that it government more responsive to the collective, long-term welfare of society, and less to the short term commercial pressures of powerful firms.

Fly-by-wire capitalism

The F117A Nighthawk fighter aircraft is aerodynamically unstable. It stays aloft because a computer constantly adjusts the flaps of the plane to keep it from falling out of the sky.  The plane is faster as a result of this design, but it needs constant trimming and adjustment to make it work.

Capitalism seems to be the same. The very forces that make it so effective at generating innovation, growth and incentives also make it unstable.  The rewards that drive innovation also reward rent-seeking and creation of monopolies.  The accumulation of wealth that motivates the most inventive people in our economy results in an accumulation of power that we do not find acceptable.   Capitalism is a great way to deliver the benefits of a dynamic, fast-moving economy; but like the F117A, it needs an occasional intervention to prevent it falling into a tailspin.

Retaking the agenda 

Conservatives and neo-conservatives have succeeded in framing liberals as idealogues, driven by their political agenda to undermine the efficient functioning of proven mechanisms to deliver growth, jobs and prosperity.  

Liberals should resist this. It is Conservatives who claim that unr
egulated markets are not only efficient but also the only morally justified way to organise society: and hence their ideology that hinders understanding of how markets can be effective at delivering the kind of society we want to build. Liberals, by contrast, are pragmatists who see competitive markets as an essential and efficient way to deliver prosperity and opportunity for everyone; and who recognise that there is a role for Government to create the conditions in which they will do so consistent with our vision of how we want to live.

Conclusion

Perhaps I am too pessimistic about the ability of democratic, liberal societies to adjust course.  But Reich’s examples are compelling: in both cases, intervention was needed to put the evolution of capitalism back on course.  

We are facing failures of capitalism that are potentially cataclysmic: whole generations of the developing world condemned to unacceptable poverty, financial systems which lack credibility, and ticking time-bombs, visible to us all, that we are unwilling to defuse.  Is it time for liberals, once again, to save capitalism from itself?

(* Note that the word "liberal" is being used here in the American way, not with the European meaning).

20 thoughts on “Saving capitalism from itself?”

  1. ” whole generations of the developing world condemned to unacceptable poverty,”

    *boggle*. You put this down to _capitalism_? How extraordinary. You yourself have pointed out that the problem is mostly government, largely the governments of the affected countries.

    You yourself have pointed out that another problem is trade subsidies, tariffs, etc which are explicitly anti-capitalist.

    How extraordinary.

  2. Just a couple of general points –

    One can claim a downward spiral or long term stagnancy is inevitable under laissez faire policies, but the situation the Liberals you describe sought to correct wasn’t the outcome of free market markets anyway. Additionally, there’s the assumption that a post bubble recession, low pay, and child labour would have remained the norm in the absence of legislation, despite growing productivity and national wealth. The dynamics and extent of change in the absence of interference is subject to debate but I’m wary of Reich’s self congratulatory tone.

    Rent seeking is clearly a problem albeit one inherent in most political systems. Seemingly honest politicians will be swayed by large special interest groups (even when transfers of money are prohibited) and supposedly impartial regulators will be influenced by the corporations they seek to control. It’s human nature to lobby for one’s interests; trade unions are no less guilty. Again, this isn’t something a proponent of free markets would agree with.

    It’s worth remembering that the politicians we’re criticising are the same people some Liberals would happily grant more regulatory powers & money to in the quest for a just outcome for poorer members of society and poorer countries. The suitability and efficiency of any organisation so easily swayed by the votes/cash of agribusinesses, multinationals and trade unions has got to be questioned.

  3. Owen, I wouldn’t take Reich’s word with such faith.

    The Great Depression was a government-induced phenomena, caused by dodgy monetary policy that exagerated the (until then mild) effects of 1929. To then claim that liberals were required to fix the mess ignores the issue of who caused it. I’m not 100% sure of my economic history in this regard, but sufficiently versed to severely question Reich’s assumptions.

    Finally, you say that:

    The rewards that drive innovation also reward rent-seeking and creation of monopolies. The accumulation of wealth that motivates the most inventive people in our economy results in an accumulation of power that we do not find acceptable.

    I don’t understand. If we are talking about a lassiez-faire system in contrast to government influence on economic affairs, then we have to be clear that the phenomena you claim to undermine the capitalist process (rent-seeking and monopolies) are definately NOT the consequence of a free market, rather the sort of Public Choice problems that arise out of a government that uses a heavy hand.

    I completely agree that rent-seeking, monopoly and the concentration of power severely limit the ability of an economy to grow, and generate prosperity. But tipping the power away from the market and toward the government will only increase the profitability of such uncompetitive methods.

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  5. Owen, have you read Saving Capitalism from the Capitalists by Rajan and Zingales? I’m guessing you have from the title, but it might be a coincidence. Anyway, reckon you’d like it.

    but I don’t see that only liberals can save the capitalism – surely by their own standards, right wingers ought to be against crony capitalism, patronage, etc. Right wingers ought not want to see corporate shills in the government, pork barrel politics etc. And take executive salaries – if shareholders think they are not getting value from execs, it is up to them to do something about it, and it is in the interests of right wing shareholders alike. but I agree, the right is so busy fighting off the left, it doesn’t pay enough mind to getting its own house in order. same goes for the left too though.

    am – point taken, but I think you have been knocked off the point by Owen’s rhetoric. Poverty might not be capitalism’s fault per se, but it is still a fault of capitalism (as in, could do better) that we still have so much poverty. And it might yet cause our world to collapse around our ears.

    Owen replies: Paddy: thanks. I haven’t read Saving Capitalism from the Capitalists, but it sounds as if I should. Thanks for the tip. There is an outstanding bookshop across the road from my hotel here in DC (Kramerbooks) and I hope they will have it in stock.

    Your reply to am is just right. It isn’t a feature of capitalism, but a consequence of it.

  6. this troubles me tho

    The traditional mechanisms of catch-up – such as trade, technology and knowledge transfer and migration – are being deliberately choked off by the rich countries, apparently determined to pull up the ladder behind them.

    I often read that the rich are in effect keeping the poor poor, but aside from a few examples that seem to me both marginal and surmountable, I’ve never really come across a systematic explanation of how the rich west is pulling the ladder up behind it. And, I know it’s hackneyed, but what about China / India – aren’t we pouring money & technology into those nations?

    Or was that just a case of your language being less moderate that your true opinions.

    Owen replies:

    Interesting question. It depends a bit what you mean (or what I mean) by pulling up the ladder. Does it include only the harm that we do, or also the good that we fail to do?

    On reflection, I think that I do mean that we are pulling up the ladder. My list would include:

    • Migration policies which prevent the movement of labour. Far from being at historic highs as implied by much of the rhetoric on globalisation, labour mobility is actually declining and on some measures it is well below its peak in the 18th century. Greater labour mobility is possibly the single biggest measure that we could introduce that would enable more rapid growth of developing countries.
    • Extensive rigging of global agricultural markets, which prevent poor countries from benefiting from their comparative advantage, and the escalation of tarrifs, which penalise poor countries for any attempt to move up the value chain.
    • Non tariff barriers as a form of hidden protectionism, especially taking the form of imposition of global labour standards, eroding an important source of competitive advantage for the poor
    • Our destruction of the global environment, of which poor countries bear a disproportionate share of the cost (for example, growing desertification of the region South of the Sahara, increased flooding of low-lying areas, and extreme weather events, all likely to be the result of global warming caused mainly by greenhouse gas emmissions of rich countries
    • Enclosure of the intellectual commons – using intellectual property laws not only to prevent the sharing of gains of technical progress – for example, the benefits of advances in pharmaceuticals – but also to weaken the competitiveness of developing countries (for example, through patenting of industrial processes)
    • Using our economic and political power to support undemocratic and unaccountable governments, extending back to the Cold War (and before) but continuing today, in pursuit of our perceived strategic, security or commercial interests
      I don’t think that is my rhetoric exceeding my real opinions.

  7. I agree with everything here. The uncomfortable reality is also the crony capitalism, so prevelant in the 1920’s in the west and 1980’s in Asia, is obvious in US, and less so but still obvious in UK society.

  8. I should make it clear that I am strongly in favour of competitive markets. I also agree that rent-seeking, market dominance, regulatory capture and divergences from competitive markets are not what free market thinkers would advocate. I am not claiming that these behaviours are characteristics of the capitalist model. I am saying that they are distortions of capitalism to which it naturally leads unless we take steps to intervene.

    There is a commonly cited section of Adam Smith’s Wealth of Nations:

    “People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.”

    In making this observation, Smith was not opposing free trade. He was observing that we must be vigilant to protect the advantages we get from free markets from the natural tendency of those who are able to do so to extract more, at the expense of the economy as a whole.

    By all means say that this is the fault of government, not capitalism. But this distinction is pure semantics. We will always have, and will always continue to need, government. One task of that government should be to create the conditions for competitive market to flourish. Sadly, the relationship between capitalism and governments in many western democracies makes it increasingly hard for governments to be effective in this role. Though not every bad decision by government is the result of its relationship with business, many are. We are experiencing a corruption of the market driven by economically powerful companies and individuals, with potentially disastrous consequences, both for capitalism and for society.

    So to repeat the central point of my original post. This is not an attack on capitalism; it is a call for it to be rescued from itself.

  9. Thanks Owen. I take your points, but I would contend that there is a debate to be had over the extent to which the trends/issues that you point out are acting to perpetuate poverty, in the context of all the other things that are going on in the world – some of which may be acting in the other direction. i.e. what’s the net effect of interaction between rich and poor?

    Also, it’s worth thinking about what the world would look like if, for instance, the rich nations lifted restrictions on immigration (i.e. what would conseqences on labour markets in both the rich and poor countries be) or if labour standards were relaxed (wouldn’t that be bad news in some ways?) or if environmental standards were raised (wouldn’t that cost some growth?). Generally, what would the costs be of fixing the problems you identify?

    I don’t mean to argue that this all means the rich aren’t pulling up the ladder, just that, for me, the answer is not conclusive (just because I need to find our more)

    Owen replies: It is hard to know what the counterfactual looks like. My colleague Bill Cline published a book recently which calculates that free trade would lift 500 million people out of poverty and inject $200 billion annually into the economies of developing countries, so this item alone would make a non-negligible difference between poverty and prosperity. Remittances from migrant workers vastly exceed overseas aid as a source of growth generating investment, and could be significantly increased by more relaxed migration policy. (I can’t find the reference right now, but I recall some evidence a few years ago that the effects of even a modest relaxation in the number of economic migrants would be hugely more important than the whole of world aid.)

    Nearly all of these problems would not only cost nothing for us to fix, we would actually be better off. More open markets, increased economic migration, better governments in developing countries, greater use of global public goods such as knowledge … all these would benefit our own economies as well as increasing the welfare of the world as a whole.

  10. Owen,

    I like your thoughts about liberalism as a guardian of capitalism. The problem lies in the people who are actually charged with this responsibility.

    I have worked in various parts of government and in private sector, in the law, military and Congress. My observation is that the people who have the task to regulate often are poorly equipped from both an educational stand point as well as lacking a personality which effectively interacts with those that are regulated. Plato’s discussion in his work The Republic calls to mind the fact that we don’t bother much with preparation of people for the roles they play in government.

    The difference between management (directive in nature, but wholly unimaginative) and leadership (the art of influencing people to accomplish the objective)is quite striking in government agencies and legislative fforts – especially when politics are interjected. I have seen the comment in one of the Tom Clancy books about how decisions based on ideology and not facts are generally very poor in quality. Much of government policy is based on such ideology, and rarely bothers to gain much in terms of facts. I blame this on a lack of understanding on how to actually identify critical paths/facts, then have the ability to wring such facts from the agencies that are responsible for such oversight.

    Critical to the relationship between the governed and the governed is a fundamental respect as well as flexibility in understanding the needs and interests of the governed and balancing those needs against public policy. I have found that government generally fails to respect those subject to its control treating them with varying degrees of contempt (oft showing itself in terms of inflexibility and lack of authority at levels meaningful to citizens) and legislatures more often than not legislates based on dogma rather than facts. As Thomas Paine once said, “Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one. Government, like dress, is the badge of lost innocence; the palaces of kings are built upon the ruins of the bowers of paradise.”

    All this being said, I appreciate the sentiment that you are expressing. It certainly is the ideal. However, I have strong doubts if it is achievable. As Mr. Thomas Hutchinson, the governor of Massachussets Colony said in 1765, “I pray God give us better hearts” when he expressed a hope that people would see how easy it is to spread false reports against the innocent saying “I hope all will see how easily the people may be deluded, inflamed and carried away with madness…” Ultimately, a mass of uneducated or indifferent people given the power to vote probably is most responsible.

    BTW, have you seen the article in Aug 18th 2005 edition of the Economist from Amartya Sen regarding the causes of the famine in Niger. This was one of the few articles that made me consider economic fundamentals and whether or not such a situation could be explained by a few macro economic fundamentals. Very good piece. A classic example of governments falling far short of Utopian ideals.

    Cheers

    Chris

  11. Chris – thanks. I did see the article in the 18 August 2005 Economist (subscription required) about Niger (which was about Amartya Sen’s theories, but not by him.) It is a good example of the mainstream media apparently picking up their stories from bloggers; I had made exactly the same point here on 2 August and there was a further conversation among bloggers about it on August 12th.

    Niger is, as you say, a classic case of Government not helping in the way it should. Sen points out the harm that Governments can do (and he subsequently made the point that countries with an unregulated press do not suffer from famines.) But famines are also a good example of where markets alone would not necessarily prevent famine. Sen’s book pointed out that famines could be caused by failures of entitlement that were the outcome of unregulated markets and that Government intervention would be needed to step in to provide the additional purchasing power that the affected citizens lacked. By all means use this as an argument to illustrate how the intervention by governments may have been less effective than it could have been; but it would not be right to conclude from Sen’s argument alone that the famine would not have occurred in the absence of government.

    I was interested in, and somewhat depressed by, your view of government. I have also worked in government for many years, and my experience has been the exact opposite of yours. I have written before that I have found British politicians typically principled, intelligent and decent, and certainly more than a match for their private sector counterparts.

    In the United States, I think the quality of political decision making and the effectiveness of the civil service are, for a variety of reasons, considerably worse than in the UK. It is also striking that the US public expects, and gets, far less from its Government than the northern European nations. I think this is in part because the United States is a very large and diverse country, which means that people feel much further from their government, both physically and otherwise, than do people who live in much smaller and more homogenous countries.

    I am not saying that governments always take good decisions. But capitalism needs governments to provide the framework within which it operates – such as the enforcement of contracts and, I would argue, competition policies (anti-trust laws as they are known in the US) to prevent the emergence of market dominance (and plenty else besides). I agree that many of these decisions are not well made – though in my view, the blame for this lies in the incentives we create for government, not in the stupidity or greed of those who make the decisions. And I believe that we are allowing companies to create incentives for government to take decisions in their interests, and not the interest of the public as a whole.

  12. One point, with regard to Reich’s claim that “liberals” saved the little man from exploitation. I think it was union agitation and organisation that did more in that respect. Big Gov Liberals, as celebrated by Reich, were chasing votes, and Big Business was encountering a “market force” for the first time…Mainly bolshie workers. They had to change. At the time, for instance, that the Sherman Anti-Trust Act was introduced, the company it was designed to break up, Standard Oil, had already broken itself up. Also, anti-trust laws in the US have been applied to about ten times as many union actions as to corporations, if I recall the number correctly.

    A second point: You point out to the gap between Rich and Poor increasing over the past twenty years, but by the same token, although that gap may have grown, how much better off are the poor relative to where they were twenty years ago?

    I think “globalisation” is a rising tide that lifts all boats, but maybe at faster rates for some than for others. And I completely agree with you on the count that governments should provide a framework within which business operates. But I don’t think competition law is a good thing…If a company’s products (and marketing) do not evolve to meet its market, they will be replaced by the competitor’s products.

    With regard to companies being the tail that wags the dog, I will grant, this is a major problem in the US, but I also find little in EU legislation, for instance, that seems to be driven by business, except for freer cross-border trade, and much that seems downright anti-business in general.

    Owen replies: James – thanks. Are you really saying that you think that there should be no government restraint to prevent cartels, collusion or monopolies, because competition will crowd out rent-seeking? Or am I misunderstanding what you mean by “I don’t think competition law is a good thing”?

    The rising tide metaphor doesn’t work for globalisation, precisely because the benefits may be distributed so unevenly (which would be unusual for tides). I agree that globalisation will benefit everyone, on average. We should be concerned with how those benefits are distributed (an issue about which we economists know much less than we would like). Free markets do not converge on a unique equilibrium: as the Second Fundamental Theorem of Welfare Economics tells us, free markets can result in any pareto-optimal allocation of resources, depending how the initial endowments are distributed. Within the framework of free market economics, there is a perfectly valid social choice to be made about which of those infinitely many optimal allocations we want to achieve.

  13. Some of us capitalists consider ourselves to be liberals. And you can be in favour of free enterprise and not an apologist for corporations that buy up the political process.

    I see Big Pharma forinstance as a leech on the taxpayer, the Defence contractors likewise, making up enemies to induce the politicians to justify spending billions of taxpayers money on their toys, agri-businesses subsidised at the expense of small entrepreneurial farmers in the developing world.

    Its not capitalism that your kind of liberals are saving, its not capitalism that neo-cons are defending.

    Liberal capitalism works and it could work for everyone, but as you say, monopolists and their political allies favour their private interests rather than the common good. Competitive, open markets are in the common interest.

    I’ve been reading your stuff and increasingly I think you should be less antagonistic towards us Cobdenite free-traders.

    There is an increasingly more vocal strand of right-of-centre opinion that you might find attractive :-

    http://www.global-growth.org

    http://www.globalizationinstitute.org/

    Owen replies: Paul – thanks. I do not know what you mean by “your kind of liberals”. Perhaps you were picking up my reference to the difference between the US and UK use of this term. I think of myself as fitting both definitions.

    I agree – as I think I made clear in this post and elsewhere on my blog – that competitive, open markets are in the common interest. I don’t think I have ever been antaganostic towards free-traders. I have spoken out against Christian Aid’s ludicrous analogy between free trade and slavery, against Mr Mandelson’s deal with China (before the practical problems with the deal emerged), and in favour of the WTO.

    You say that you are are right of centre, so you may not agree with all of the conclusions that I have suggested here as being important corollories of being a left-wing free trader (that is, a liberal in both senses). I’d be interested to know which you agree with.

    I do disagree with the GI about at least two things. First, I don’t think that free trade is enough – I believe in trade AND aid. Some of what GI has written has appeared advance the argument that we should either not give aid, or that aid provided to governments is not effective, which (if it is the GI view) is simply not supported by the evidence. Second, I am in favour of Fair Trade as a mechanism to increase returns to poor farmers, in a willing-seller, willing-buyer market, which Alex Singleton apparently opposes.

    So my question to you is this: in what way have I been antagonistic to free traders?

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  16. Owen,
    When I say I don’t think Competition Law is a good thing I refer mostly to the most recent applications of it, namely Microsoft.

    How often in the past 100 years have collusions and cartels happened in our own developed economies without, at the very least, tacit approval from our own governments? Our governments are just as much as wolfish in these instances as those who would seek to use them.

    Catch me on any other day and you might here a different story from me: but I believe people power can trump this either at the ballot box or at the cash register, and it has always been people power that trumps these abuses, not governments. Just governments reacting to the people.

    (As you may be able to tell with my own limited vocabulary, I am not an economist so am speaking from a level of ignorance that I am always willing to acknowledge.)

    With the rising tide metaphor, I always think of the illustration that Howard Bloom gives regarding cotton. How just a couple of hundred years ago cotton clothing was an extremely luxurious product that only the richest people in the world can afford. Now you look at any National Geographic special of indigenous people and there they are, wearing cotton tee-shirts as they go out on the hunt. Then there are all the mod cons that one can begin to see in even the most “primitive” societies.

    One can also argue that the advent of the division of labour which moves many people away from subsistence farming (which is not necessarily a nice way to live) into factories has freed up their time. (And if life was so darned good on the potato patch, why are there so many people living in the shanty towns at the edges of the world’s cities?)

    As you can see from my comments above, I am a bit skeptical of government being the vehicle through which we deliver the kind of society we want.

    But it is refreshing to meet a free marketeer of the left.

  17. “It is Conservatives who claim that unregulated markets are not only efficient but also the only morally justified way to organise society: and hence their ideology that hinders understanding of how markets can be effective at delivering the kind of society we want to build.”

    Generalisation tilting into misinformed caricature here, Owen. More true in the US than here in the UK, but even there there’s a long-tradition of backwoods protectionists (a la Pat Buchanan); intellectually speaking, many of the founding fathers of postwar American conservatism were very wary of untrammelled capitalism. Over here, to pick off two of the most influential English conservative intellectuals of recent decades, neither Michael Oakeshott nor Roger Scruton, are unalloyed market-worshippers. If we cross the Channel to France, then finding conservatives who like capitalism much at all becomes pretty difficult.

    If I may, your object is libertarianism – which is a species of liberalism, as you allude in your comment to Paul above. Just because conservatism doesn’t accept the egalitarian position, it doesn’t mean that it is identical with libertarianism, either.

    Put it this way: I’m very conservative, but I wouldn’t disagree with the substance of your post, that over time politics needs to rebalance market institutions. I would, though, say that the US Government’s response to the Depression was hardly a model to follow in future generations – recovery was patchy, to say the least.

    Owen replies: Good point, Blimpish. You are right: there are many strands of conservatism and my characterisation does not apply to them all. I suppose I meant primarily neo-cons here in the US, and the free-market wing of the Conservative Party.

  18. I’m not against aid, I just think that bottom-up approaches to aid work best. We could achieve much more with the aid we currently spend by spending it more wisely. When giving speeches in favour of free trade, I often make the point that developed countries should help poor country producers adapt when they open up to trade. I say that if you are in a rich country and lose your job, you get welfare. If you’re in a poor country, you may well starve.

    Owen replies: Alex – thanks. I agree that we could increase the effectiveness of aid substantially with some relatively simple and cheap reforms (mainly on the part of donors). In stressing the importance of improving aid effectiveness, however, I would not want to imply that aid as presently given is not effective, because the evidence is clear that, on average, it is.

    “Bottom up” is one of those motherhood-and-apple-pie terms that it is hard to be against. A lot depends on what you actually mean by it. For example, it might mean that funds should be collected in donor countries from individual citizens through voluntary donations rather than taxes. It might mean that development priorities in individual countries should be determined through an accountable and representative process of consultation. It might mean that donors should give money directly to individuals (eg vouchers or cash grants). It might mean donors should give money to NGOs and other organisations working directly in local communities. It might mean providing subsidies to small enterprises to promote economic activity rather than the provision of government services. It might mean that developing country spending priorities should be determined by considering the particular detailed constraints facing each country or community so that funds are targeted on those investment needs. And so on. All of these approaches may be relevant in some circumstances and for some challenges. Depending on the issue there are possible costs as well as advantages of using some of these channels (such as transaction costs, diminished government accountability, under-investment in public goods, loss of economies of scale etc). And we have some evidence – though not enough – about which approaches are likely to be effective.

    If by bottom up, you mean that aid should be delivered in ways which make it likely that the spending will be genuinely responsive to the actual needs of the people for whom it is intended, and in ways that enable the intended recipients to hold the spending agency to account, while increasing aid effectiveness by taking advantage of economies of scale and minimizing transactions costs, then I agree. But if you think there is a single model in which all aid should be given to grass roots organisations, then I would not agree. There is no one true path: we need different horses for different courses. (If you will excuse my metaphor soup.)

    Owen

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  20. Owen – I think the events of the last year and a half have supported your view that regulation is required – that unfettered capitalism is as equally disasterous as misregulation or overregulation.

    Still, with regard to the real estate market here in the US – it was patently clear to me that emotion and a lack of logic was driving up real estate prices as early as 2004. Interestingly enough, just basic law enforcement against fraud would have prevented much or most of the failures – no new government regulatory bodies needed – the ones that existed simply didn’t do their jobs. Which entirely supports my position above regarding incompetence in government regulators.

    Now it appears that loan applications and even appraisals were fraudulent – and were so prevalent that the mortgage industry began calling them “liar loans” where the securitization of mortgages into collaterilized debt obligations and other derivatives incentiviated (paid more) for stated income loans than for income and background check verified loans. It appears that the net effect of allowing publicly chartered mortgage brokers/pools (e.g., FREDDIE MAC and FANNIE MAE) to go public with stock offerings and indeed hire lobbyists to protect their interests in Congress coupled with an understood but unwritten loan guarantee directly led to the overstimulation of the mortgage market and insiders from both political parties who effectively shut down attempts in Congress and elsewhere to reign in mortgage lending – in effect, the reverse of what you mention above regarding the beneficial role of government regulation (or lack thereof).

    I stand by my original point above which is that ignorant but well meaning people create a great deal of damage particularly where there is a great deal of pressure to produce immediately results. A related point is that ideology versus logic/facts drive a significant number of decisions; the higher you go in any heirarchy, the more disconnected they are from the critical details which mean the difference between success and failure; that persons who have not personally experienced a failure mode have a very low probability of identifying such a failure prior to its occurence and taking effective action to avoid such a failure – particularly for low probability/rare failure events which have a tremendous negative impacts.

    The main point that comes to mind here is that it is one thing to say that Government needs to regulate – it is entirely another thing to have an effective regulator. This is all about being realistic about what is possible with regard to a typical government entity. Several Thomas More quotes come to mind which express a few additional sentiments in this area:

    Better ’tis to be fortunate than wise!
    — “The Words of Fortune to the People” (c.1504)

    I never saw fool yet that thought himself other than wise.
    — A Dialogue of Comfort Against Tribulation (1534)

    What you cannot turn to good, you must at least make as little bad as you can.
    — Utopia, Bk. 1. (1516)

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