The astonishing boldness of the UK government’s attempt to get credit flows moving again has rightly received high praise. But there is a danger that the moral of the whole affair will be misunderstood. Before he unveiled the £500 billion package, Chancellor Alistair Darling was often criticized for his blandness. Surely he should have known that confidence was leaking out of the global financial system well before panic accelerated? Surely he should have displayed more grip, more foresight?
What no one seemed to realize is that he was in good company. The national government of 1931 was formed to save the pound; and all good men and true assumed that it would do so. Yet a month after its formation, sterling left the gold standard after all, and proceeded to float down to unheard of levels. After the Wall Street crash of 1929, US bankers and political leaders insisted again and again that the worst was over — only for each new display of optimism to precipitate further stock market falls.
In the summer of 1949 Stafford Cripps, the Labour chancellor, repeatedly declared that sterling would not be devalued. When devaluation came in the autumn he was savagely attacked by the Conservatives for misleading the nation. It was the same story in 1967. Harold Wilson had set his face against devaluation when he formed his government in October 1964, despite a rapidly deteriorating payments balance, for which devaluation was the obvious remedy. From then until November 1967, when devaluation eventually took place, he, too, repeatedly insisted that nothing of the sort would happen and banned the very mention of devaluation from Whitehall.
In 1976 the Callaghan government insisted that all was well, until a long-predicted sterling crisis forced it to seek a massive credit injection from the IMF. In 1992, John Major denounced what he called “the soft option, the devaluers’ option”, only to preside over Britain’s departure from the ERM, and an effective sterling devaluation of 15 percent.
For free-market fundamentalists, the moral is plain: Governments and central banks cannot “buck the market”. Politicians should keep their sticky hands out of the economy and give free rein to market forces. The results will often be untidy, and sometimes painful. But that is the price of what Friedrich von Hayek, the high priest of the unfettered market economy, called “the Great Society”. Well-meant state intervention is a snare and a delusion, which is bound, sooner or later, to open “the road to serfdom”.
I doubt we shall hear much from that camp in the near future. It is obvious that the current financial crisis is the result of too little public intervention, not of too much. But the free-marketeers are not the only fundamentalists around. The populist left, now beginning to poke its head above the parapet, is equally fundamentalist, but in the opposite sense. For it, markets are nasty at best and wicked at worst. Bankers are evil, and ought to be punished, not rescued. Ordinary people who live beyond their means, put their money into dodgy institutions and take out mortgages they can’t afford, are blameless. They have been manipulated by an inherently wicked financial services industry. Globalization, the true author of the financial crisis, is evil too. We should put a stop to it, or at least slow it down.
It is not fashionable to say so at the moment, but that makes it all the more important to remind ourselves that globalization has made it possible for the governments of India and China to lift millions out of the most appalling poverty — and that, as Churchill said of democracy, the capitalist market economy is the worst economic system ever invented, apart from all the others.
In truth, the fundamentalisms of right and left mirror each other. One says, “market’s good, state’s bad”. The other says, “state’s good, market’s bad”. The truth is that they are both good and bad — at the same time. What the present conjuncture shows most obviously is that unregulated markets sooner or later destroy the ethical and institutional foundations on which market economies rest. When times are good, greed and credulity drive out prudence and common sense, not just in the City, but on every high street. When they turn bad, as they always do sooner or later, fear drives out hope. Ebbing confidence feeds on itself.
The truth is that market actors — which include you and me, as well as the faceless speculators of current demonology — are not the ice-cold rational calculators that classical economics assumes them to be. They are irrational, prone to panic and to behave more optimistically than they should. Nor, however, are they the helpless raw material for would-be social engineers.
The need now is for clever regulation, on a global scale. In the EU, there is an equal need for much stronger political institutions to complement the central bank. But the greatest need of all is for a new theory of the mixed economy, framed for the global marketplace of today, as the now-defunct Keynesian system was framed for the national postwar economies. In the early 90s, economists like John Kay and Will Hutton were groping their way toward such a theory, but when New Labour won its crushing victory their work was buried. It’s time to return to the charge.
