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The free market hasn’t failed

Posted by Richard D North in Interrogating the Media / Media / Money on 10 March 2009

Why we posted this: It’s becoming quite common to declare that free market capitalism is dead, long live state interference. Even some Financial Times gurus are taken with this line, and it is useful to wonder if they are right.

The original story:
Seeds of its own destruction
by Martin Wolf
8 March 2009

Summary of the story:
Martin Wolf opens an FT analysis of the state of capitalism in The Crunch with a piece which supposes that free market capitalism ruled the roost for a while and that government was once despised and now isn’t.  The tone of Wolf’s piece then changes somewhat to suggest that whilst things may get very much worse, and government interference will certainly be needed, capitalism may not be quite as dead as the opening paragraphs imply.

livingissues comment:
It is worth pointing out that capitalism is and always has been an unruly beast. We should admire it for its energy much more than for qualities it couldn’t really have, like niceness or stability. What’s more, capitalism is premised on the idea that energetic and greedy people are important and can be harnassed for good. (Nice unambitious people can also be harnessed, but that’s not controversial.)

This is not a process in which governments are neutral. Indeed, they regulate so much that what they don’t outlaw they seem to condone. If government slackens the reins, that’s a government decision about the form of economy they want.

It is entirely possible for free-market fans to argue that it was over-regulation which caused the present crisis, as Eamon Butler points out in the Times.

But it is also and rather differently possible to argue that regulation matters and that the present crisis arises not because capitalism is a monster and an enemy of the state, but because it always presents a challenge to regulators.

There always was an understanding that markets are prone to “animal spirits”, as another FT piece notes. They overdo things.

The point is that managing capitalism is something which is always difficult and interesting.

We can’t seriously blame financiers for being greedy and enthusiastic. They are Alpha Males and being over the top is what they are for. On this line, the current problems were caused by governments wholly misreading the world they were dealing with.

In short, governments failed to do government much more than capitalists failed to do capitalism.

Of course it is also true that a generation of capitalists have failed: they destroyed the institutions they were employed to run. To that extent, they misread their own greedy self-interest.

But the free market did not fail and capitalism certainly didn’t. The free market and capitalism don’t exist independently of government and society. Indeed, they take the form allowed to them by government.

The lesson may indeed be that governments should not resile from their role in governmening capitalism, but that still places the present problem as a government failure as much as a failure of capitalism.

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