The end of global deregulatory reform

“Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2008/09/ive-always-want.html points to this “NYT article”:http://www.nytimes.com/2008/09/18/business/worldbusiness/18rescue.html on the international fallout from the current market crisis in the US.

Is the United States no longer the global beacon of unfettered, free-market capitalism? In extending a last-minute $85 billion lifeline to American International Group, the troubled insurer, Washington has not only turned away from decades of rhetoric about the virtues of the free market and the dangers of government intervention, but it has also probably undercut future American efforts to promote such policies abroad. “I fear the government has passed the point of no return,” said Ron Chernow, a leading American financial historian. “We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams.” … Mr. Monti said that past financial crises in Asia, Russia and Mexico brought government to the fore, “but this is the first time it’s in the heart of capitalism, which is enormously more damaging in terms of the credibility of the market economy.”

I could sort-of-plausibly claim that “I told you so back in March”:https://crookedtimber.org/2008/03/25/rhineland-capitalism-1-liberal-market-capitalism-0/#more-6764, but, like everyone else, I grossly underestimated the future and continuing consequences of the unraveling of the US credit markets. This is a genuinely epochal moment in US politics. But it has equally significant implications for the global political economy.

The last three decades have seen two important shifts among advanced industrialized economies. The first is the move away from state ownership of large chunks of the economy, and the replacement of hands-on government control with a variety of regulatory instruments. This has happened across all countries in the industrialized world – there are few developed states which still directly own substantial parts of their economy. The second is more specific and recent – the tendency to replace ‘heavy-handed’ forms of regulation with ‘regulation with a light touch’ and self-regulation. This has been most marked in Anglo-American economies, but other countries (in continental Europe and elsewhere) have faced persistent ideological pressures to move in this direction. This is a large chunk of the so-called ‘reform’ agenda that the Economist magazine, the OECD and other such bodies keep pushing. Both of these shifts are largely ideological – that is, they gained much of their impetus from changes in the ideas which constitute policy-makers’ shared collective wisdom about how to deal with the economy.

The second shift (the reform agenda) is now a busted flush. Its proponents are in disarray (if I’m feeling in a vindictive mood, I may well buy a copy of the next Economist to see how its editorialists try to rationalize all of this). But what is utterly startling to me is that the first bit – the claim that the state shouldn’t be directly involved in running the economy – is under serious threat too. I genuinely hadn’t expected this to happen. As the NYT notes, countries like France are using US actions as a way to justify state involvement in picking and supporting national champions. In a couple of years, perhaps we’ll see a new version of ‘le Plan’ (I’m half-joking here – but only half-joking). As Tyler says:

The economic fallout from these events is dominating the headlines. The intellectual and ideological fallout we are just beginning to contemplate.

Mark Blyth’s book, “Great Transformations”:http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FGreat-Transformations-Economic-Institutional-Twentieth%2Fdp%2F0521010527%3Fie%3DUTF8%26s%3Dbooks%26qid%3D1221744914%26sr%3D8-1&tag=henryfarrell-20&linkCode=ur2&camp=1789&creative=9325 has a theory of the relationship between economic crises and economic ideas. Very roughly speaking, when a crisis occurs that is difficult or impossible for the prevailing wisdom to explain or deal with, intellectual entrepreneurs have an opportunity to create a new (partly self-reinforcing) collective wisdom. We’re most likely in just such a crisis now. Which set of intellectual entrepreneurs are going to succeed in reshaping a new collective wisdom – economic nationalists like Sarkozy and Putin, social democratic globalizers like Dani Rodrik, or some other crowd entirely – I have no idea.