When I suggested a couple of weeks ago that the intellectual hegemony of free market capitalism was under threat, Dan Drezner expressed polite skepticism.
Is this the beginning of a norm shift in the global economy? It’s tempting to say yes, but I have my doubts. The last time the United States intervened on this scale in its own financial sector was the S&L bailout — and despite that intervention, financial globalization took off. The last time we’ve seen coordinated global interventions like this was the Asian financial crisis of a decade ago — and that intervention reinforced rather than retarded the privilege of private actors in the marketplace. In other words, massive interventions can take place without undercutting the ideological consensus that private actors should control the commanding heights of the economy.
Contradicting evidence began to emerge the weekend before this one, at least on the rhetorical level. First, this statement by Germany’s Finance Minister:
The minister, who has spearheaded German efforts to rein in financial markets in the past two years, attacked the US government for opposing stricter regulations even after the subprime crisis had broken out last summer. The US notion that markets should remain as free as possible from regulatory shackles “was as simplistic as it was dangerous”, he said.
Language like this – from politicians in countries that chafe most under the current ideological consensus – isn’t entirely unexpected – it suggests that they think they can get away with thumbing their nose at the speculators, but not that they are necessarily changing their minds (since they probably didn’t like the deregulated capitalism model in the first place). Perhaps more convincing are Gordon Brown’s condemnation of ‘the dogma of unbridled free-market forces’ and abnegation of ‘light touch regulation’ at his party’s annual conference. Not that Brown is necessarily convinced of the case against unbridled free markets either – but he clearly needs to say he is. Even more compelling as a short term rhetorical indicator was the Financial Times’ decision to turn their editorial the Saturday before last into a manifesto (in extra-large type) for the benefits of free markets – they wouldn’t be doing this if they weren’t spooked.
But we’re now moving from the realm of rhetoric into the realm of practical action – and everything seems to be pointing to a sea-change in government attitudes to market intervention. The UK (which has pushed some aspects of financial market liberalization further than the US) is now seriously considering partially nationalizing its banking industry. European business leaders are now complaining that the EU isn’t regulating enough – that is, it isn’t engaging in coordinated action to stop its own financial markets from tanking. The reasons for EU inaction lie in the lack of any structures that would militate towards concerted action to address problems of market confidence, in large part because European financial markets are even less regulated than their US equivalents (as I’ve noted before the EU is typically more interested in liberalizing markets than restraining them, contrary to the general impression in the US). The lack of EU level institutions means that states like Ireland and Germany are taking individual actions that are intended to shore up their own banking structures, but may have beggar-my-neighbour implications for their neighbours.
As with everything I write, I could be wrong. Still, if I had to lay bets on what will happen in the next 2-4 years, they would be on the following outcomes.
(1) Continued high level involvement of the US government in shaping financial markets, not only through regulation, but through manipulation of antitrust law, selective granting and withholding of government support, and substantial ownership stakes in major enterprises over the next several years. I imagine that these stakes will be wound down eventually – but the ever-present possibility that the US will do this again will fundamentally reshape the incentives of market actors in difficult-to-predict ways.
(2) A much tighter regulatory structure emerging at the EU level, hastening the kinds of processes that my former colleague Elliot Posner has examined in his academic work. The hostility of the UK to EU level structures is already much less surely grounded than it was, and is likely to become less grounded still over time. More speculatively, I might predict a UK-German consensus emerging on financial market regulation that would be intended to stave off French efforts to re-open the questions of EU constraints on fiscal policy. If such an implicit agreement emerges, Ireland and other smaller states will find it difficult to resist.
(3) The creation of formal – but weak – international structures, intended to ensure greater explicit coordination of regulatory policy and consultation over state actions that may potentially have international ramifications. These structures might or might not become stronger over time.
(4) The effective abandonment of international efforts to try to limit state involvement in the economy through tighter international rules on procurement etc, and the weakening or collapse of internal EU rules on permissible state aid.
These aren’t the only possibilities of course – another, perfectly plausible outcome might involve the collapse of international efforts at coordination, and the adoption by major states of beggar-thy-neighbour policies in a more systematic way. Nor do these possibilities necessarily imply the resurgence of social democracy – equally possible are various forms of managerial capitalism, of a return to economic nationalism, or even of a mild or less-than-mild resurgence of fascism. Whichever transpires, I still reckon that Dan is wrong in suggesting that there isn’t much to see here (he may of course have updated his priors given the events of the last couple of weeks) – this is a major crisis for the underlying ideologies of free market capitalism, and whatever emerges is likely to be quite different from what transpired before.