End of laissez-faire?? was the title of a lecture Keynes gave 83 years back. Keynes is back in the headlines, amidst a lot of soul searching about the present crisis. Amartya Sen has contributed to this great debate in his latest article in The New York Review of Books ?Capitalism Beyond the Crisis (March 26, 2009).
Sen has highlighted that not only Keynes but his arch rival and colleague Pigou must also be revived. Pigou cared more about income inequality and market failure than Keynes did. Even Adam Smith must be seen as the author of The Theory of Moral Sentiments, his first book on moral philosophy, and not just as the author of The Wealth of Nations.
Smith never used the word laissez-faire. It is an expression of mid-eighteenth century France. In 1751, when Colbert asked a Legendre, a merchant, ?What should be done to help you?? The merchant replied ?Leave us alone to help ourselves?. (Que faut-il pour vous aider? Nous laissez -faire. )
Gordon Brown, the British Prime Minister, told London?s Guardian ?laissez-faire has had its day. People on the centre-left and the progressive agenda should be confident enough to say that the old idea that markets were by definition efficient and could work things out themselves is gone.?
Brown has not yet said sorry for his mistakes in the present crisis. But he did admit that,?Perhaps ten years ago after the Asian crisis when other countries thought these problems would go away, we should have been tougher?keeping and forcing these issues on to the agenda.?
These two statements illustrate today?s analytical confusion. Faced with a horrendous financial crisis which we all failed to foresee, political leaders and economists are eager to jettison what they think were wrong doctrines. They renounce their own past beliefs or claim to have never held them. If we had wrong ideas, why did we not see the mistakes until the breakdown? Were we blinded or bullied into believing false doctrines? Or were we just swimming with the tide and now that the tide has turned, we change our minds?
There were regulatory systems already in place in all OECD countries. The US has the Securities and Exchange Commission (SEC), the Fed, the Federal Deposit Insurance Corporation (FDIC) and tough laws to regulate bad behaviour. The UK has the Bank of England, the Securities and Investment Board and later, the Financial Services Administration (FSA). The IMF was there for international supervision. After the Asian crisis, Gordon Brown himself established the Financial Stability Forum. It failed utterly to warn about the crisis which came ten years later, as did the IMF, SEC, FSA, Fed, Bank of England et al.
So, is it that we had laissez faire or just incompetent policy intervention? Amartya Sen says, ?Smith viewed markets and capital as doing good work within their own sphere, but first they required support from other institutions?including public services such as schools?and values other than pure profit-seeking, and second they needed restraint and correction by still other institutions?e.g., well-devised financial regulations and state assistance to the poor?for preventing instability, inequity, and injustice.?
I am all for good public schools. The US has them as does the UK though not India, since India is a socialist republic. But I am not sure how they contribute to reducing instability or inequity or injustice. Perhaps Sen can be understood implicitly to ask for better financial regulations since he mentions ?well-devised financial regulations?. So we need to ask how the already existing regulations were badly devised.
Robert Skidelsky in a forthcoming book singles out the recent orthodoxy in economic theory as being the main culprit. He says the triple of efficient market theory, rational expectations and real business cycle?the essence of Chicago new classical economics?is at fault. He argues that this new orthodoxy, which is also old pre-Keynesian doctrine refurbished with mathematics, is what led regulators to inaction when faced with warning signals. Alan Greenspan said as much when he said he was disappointed that bankers? self interest did not lead them to prudent behaviour.
We need a historical perspective, of events and ideas, for the current crisis. First let me examine why centre-left parties such as the Labour Party of which Gordon Brown is a leader and I am a proud member, abandoned our ideas of public ownership and state economics. Keynesian policies were the orthodoxy after 1945 in all major developed countries. But after twenty years of full employment, there was inflation. Keynesian cures for this problem led to stagflation?inflation plus unemployment. It was this crisis of the 1970s that led to the retreat of Keynesian orthodoxy.
At the same time the Soviet socialist camp was going through what proved to be an end-of-the-system crisis. To understand what happened next, we need to turn to Marx, more than Keynes. That will be the starting point of the concluding part of this argument.
(To be concluded)
?The author is a prominent economist and Labour peer