Is this event the Berlin Wall of Free Market Economics?
Another email from an old friend: “Is this event the Berlin Wall of Free Market Economics? Or even, as the press backs away from the hotness of the story, the Berlin Wall of Free Market Economics crashing not with a bang but a whimper?”
Paul Solman: A watershed, perhaps, but not a wall, and certainly not the Berlin Wall, which was literally built to keep capitalism out of East Germany (or East Germans from fleeing to the capitalism of West Berlin). Unless you mean the Berlin Wall would no longer be necessary now that capitalism seems to be losing its allure.
But the metaphor is not the point. The question: How big a deal is this for “Free Market Economics”?
Well first, as many have pointed out during this entire period of what’s been called “Free Market Fundamentalism,” beginning with supply-side economics and the first Reagan Administration, if TANSTAAFL is true (There Ain’t No Such Thing As A Free Lunch), so is TANSTAAFM: There Ain’t No Such Thing As A Free Market. I have never read of a market, from the Old Testament to OTC derivatives, that didn’t have rules. There is, however, a difference in the DEGREE to which rules are restrictively written, and enforced. And this is the nub of the question, I take it: Are we headed for a radically new regime of regulation?
Yes, for awhile at least. When governments the Western World over subsume private sector institutions, that’s nationalization. A larger enough public sector, as a percentage of the economy, and you’ve got what many would (and do) call socialism. Scandinavian-style socialism perhaps, as opposed to Cuban or North Korean. But something very different from what we’re used to in this country, and what we boast of.
The late Nobel laureate economist Milton Friedman of “Free to Choose” fame used to complain that the U.S. economy was already too dominated by the public sector. And this was well into the 21st century. (He made the argument to me once, saying I’d have been a very different sort of economics correspondent if I’d worked in Chicago, under the influence of THAT city’s university and “neo-classical” economics department, rather than having cut my teeth in Keynesian Boston)
But the public sector in the U.S. accounts for HALF what it does in a place like Denmark. I once asked a corporate executive in Stockholm how far he thought the free-market pendulum could swing back in Sweden, if Sweden was at that moment 100 on the socialist-capitalist continuum, and the U.S. was 1.
“85,” he said. “It will never swing further.”
So where will we be on the scale after this experience? Depends how bad things get, of course, and how much of the private sector the U.S. government has to swallow, for how long. How many more AIGs, WaMu’s, IndyMacs?
So my metaphor is not that the Berlin Wall is coming down, but try this instead: we’re swinging toward Scandinavia.