US policymakers now seem to get that this is a worldwide crisis, not a local disturbance; and that if America attempts to drag the world out of this mess on its own, then it will break its back.

It's taken them a long time to wake up.

Anon,
yep. The manic pursuit of shareholder value and personal profit by bankers in the US, UK, Europe etc operating within flawed incentive structures has been extraordinary damaging for the global economy and their different societies.

Modern finance, with its promise of future purchasing power for the individual, leaves us all the more exposed to existential anxiety.

Gary, on a slightly different note, did you catch cut'n'paste in the weekend OZ? It gleefully reports that there's evidence to show that depression, suicide and marriage breakups go up in a recession. Apparently this completely debunks Clive Hamilton's position on the disconnect between material wealth and happiness, 'affluenza' etc. Can't see it myself; to me they are one and the same - two sides of the same coin. Nevertheless, it'll be interesting to see what socio-cultural response this downturn will produce. A friend thinks that the US will be under martial law by the end of the year...

"This was not a failure of markets; it was a failure to create proper markets."

Ah, I see, the 'not a proper Scotsman' defence'.

http://en.wikipedia.org/wiki/No_true_Scotsman

Good grief it's like some Fundamentalist religion isn't it? Being a reluctant Catholic, I've heard this sort of thing before. God only brings us good things, he is only responsible for our blessings. Bad things happen because of our human failings and because we did not have enough FAITH.

Capitalism is just like any other f@&%ing "ism". It is just a bloody doctrine!!! It is NOT a rule of nature. As such, it cannot be viewed as separate from those who interpret it and use it to their advantage. We have known for a long time what it's limits are... yet those who profit most from it continue to spin every failure.

"The patient dies, but the operation was a success"

BAH!

I would be hilarious if we weren't up to our necks in it...

Humanity survived (and progressed) before this modern incarnation of capital-ism. It is one of the tools which we've used to get this far. Maybe it's too Primitive and Clumsy to get us much further.

Odd, isn't it??? The hard-core free marketeers (was there ever such a thing?) and globalism optimists preach about not clinging to the past and moving with the times. They hound workers into being more accepting of "change", equating change with progress... but they stubbornly refuse to question their own belief system.

It strikes me that the real evidence of the failure of capitalism is in Global Warming

Chris,
I agree. The Financial Times crowd can hardly say that form of market failure (global warming) is a little hiccup; nor can they dismiss the externalities as insignificant. Markets have to be radically redesigned so that capitalism can begin to address this externality.

Luke,
no I didn't read Cut 'n Past in the Weekend Australian. ---I agree with you entirely in your criticism of what they say. They are blind to the logic of their own position. I treat it as comedy for the politically informed. Provides a c good laugh now that the cartoons have fallen off a bit.

fred,
I didn't know about the 'not a proper Scotsman defence'. Love it. Logic is not a strong suit of people with a quite naive faith in markets is it.

What they are doing most of the time, as Ross Gittens points out in The Age, is reaffirming their faith in free markets.

mars08
As Ross Gittens points out in The Age, the free marketeers are trying to defend their position ----that markets never get it wrong, but governments always do.

They have to work pretty hard to do this in relation to the global financial crisis (and global warming). Michael Costa in The Australian has a go re the global financial crisis He says that Rudd:

has framed the debate in terms of the rediscovered benefits of neo-interventionism rather than conventional explanations of the bursting of asset price bubbles, inappropriate government regulation and the vagaries of business cycles in a mixed economy.

It just a business cycle! Costa's belief in the self-regulatory nature of the market economy is flawed because the insufficient regulation of financial activities has implications not only for illegitimate practices, but also for a tendency toward overspeculation by the promoters of excessive risk in search of profits ( eg., the issuers of subprime mortgages ) So we need state regulation to protect citizens from ths shysters selling unsound loans.

The implicit faith in the ability of the market economy to correct itself, which is largely responsible for the removal of established regulations in the United States, tended to ignore the activities of the those selling snake oil.

"A friend thinks that the US will be under martial law by the end of the year"

An interesting possibility to think with. We've heard plenty of comparisons between the conditions of capitalism leading up to the great depression and now, but I haven't heard any comparison of the social conditions.

Just say the free marketeers got their way and the market was allowed to go on 'correcting' itself. Would the populations of 2009 be as stoic?

Americans don't expect their government to protect them the way Australians do. How would Australians respond if we started seeing the equivalent of Ohio?

Australia's economy, like that of Europe, has built in shock absorbers---the welfare state. So the stimulus spend does not have to be as great as the US.

Hence the conflict between the US and Europe over the extent of the fiscal stimulus needed to kick start the global economy. Europe is more concerned about the toxic assets on the books of the big banks.

Lyn,
the free marketeers want flexibility in labour markets so they can restructure by taking away protected workers rights, conditions and privileges and sacking people. The more easily jobs can be destroyed the more easily new jobs can be created.

Seems to me that the market-fundies are spending more and more time these days, explaining what the magical, morphing "market" is NOT... rather than defining what it IS. Some unkind souls might be tempted to perceive it as making excuses.

++++
'When I use a word,' Humpty Dumpty said, in a rather scornful tone,' it means just what I choose it to mean, neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

Anon,
The public response to PacBrands and various other sackings. This is what happens when free market theory meets society.

Hi Everyone,

Some very insightful posts.

What is still largely absent form the discussion are the flaws in philosophical underpinnings that led to the structural inadequacies which have caused this meltdown. John Buchanan form Sydney Uni was on Lateline last Thursday speaking very sagely about the crisis. He said that the meltdown was a symptom, rather than a cause, of the deeper structural failings in the markets and the economies with which they are intertwined.

Taking this a little further, I don’t think that I have seen anyone dissect the assumptions that underpin market theory. First, on a technical level, a true ‘market’ is simply an abstraction - much like physicists use perfect vacuums and engineers have frictionless surfaces to simplify their theories, so economists have constructed a set of conditions to suit their quest for mathematical purity. True markets do not have monopolies or oligopolies; they exist on a level playing field (which is more than can be said of Wall St infested by a boys’ club Ivy League WASPs) and have minimal barriers to entry for players. On top of this, consumers have perfect information and are not adversely affected by previous consumption decision. This is the reason why any market more complex than your local fruit and veggie stalls tend to fail. It is pure fantasy to believe that a theoretical construct such as ‘free market capitalism’ can translate into a mechanism for guiding how wealth and prosperity are apportioned among populations and countries – about as optimistic as believing in communism. What we really had/have is a bastardised version driven by unchecked inherent human greed and deceitful avoidance of accountability– probably not what Adam Smith had in mind.

Secondly, on another level, the quaint belief that private greed leads to public good and that ‘self-interest is the engine of progress’ must also be obliterated if the world is to learn anything from this. The ad nauseum repetition of ‘capitalism has dragged millions out of poverty’ pulled out by commentators in their desperate defence of laissez-faire capitalism and cling onto their (false) Randian dogmas is wearing thin. I struggle to accept how a banker with a yacht, house in the Hampdens and chalet in Switzerland contrasted with a sweatshop worker who may be on $3 instead of 50c per day as a result of a ‘deal’ made on Wall Street is morally defensible. Statistics show that the gap between haves and don’t haves is growing. Just because the don’t haves have a little more doesn’t really cut it when the haves are gorging themselves on excess. The line just doesn’t wash.

Crucially, the issue of power is largely ignored. Power is important because it ensures a level playing field and addresses some of the structural imbalances that have been allowed to develop. Power is not only linked to wealth. Education and literacy is also a fundamental arbiter of power, as is civic involvement and democratic activity. For too long there has been a power differential between the political, industrial and financial elites and ‘the rest’. Another failing of neo-classical economic theory is that it largely ignores power distribution. This can only be tackled if we see the world through the prism of political economy and accept that the distribution of resources among groups of people (the study of which is essentially the ‘core business’ of economics) does not and cannot happen in a historical, political and power vacuum.

Luke
Amartya Sen in the New York Review of Books says about Adam Smith that:

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.

Smith is much quoted but not much read by the defenders of the free market.

Luke,
thanks for the reference to Dr John Buchanan, the director of the Workplace Research Centre at Sydney University, on Lateline. He says that:

the underlining problem of the OECD countries has been the emergence of what is excess capacity. The clearest example of that in the economy is that the world car industry only 12 months ago could produce a third more cars than they could sell. Now, when you've got that kind of excess capacity sloshing around in the system, there's a latent crisis. That was hell at bay by the provision of cheap credit, and that cheap credit was part of another problem which was excess liquidity. Now, the system was held together by, you know, smokes and mirrors, but ultimately those smokes and mirrors have fallen apart. So those deep imbalances are not simply a cyclical downturn, they are structural problems,

So we have a once in 100 year event rather than a business cycle.

This haste, by some groups, to explain away the current situation as simply a more "robust" swing in the business cycle is so predictable.

We've seen the same spin before. The public is supposed to believe that global warming can be dismissed as part of a natural cycle.

Evidence doesn't enter into it... Just echo the same reassuring stories often enough and someone is bound to fall for it.

The uneven distribution of power is more visible to someone on $3 a day than to someone who can afford the same model of flatscreen Warren Buffet watches.

Easy credit has given people the impression the old divides no longer exist. Easy consumption has been just as important as Mars' "same reassuring stories" in maintaining the free market illusion.

Peter, indeed...and your quote is absolutely spot on (thanks for the link - we should all be thankful that people like Amartya Sen and Martha Nussbaum exist). The other thing ignored by orthodox economic theory I neglected to mention is of course the pivotal importance of institutions as stabilising and unifying forces - something also written about by Hegel. People forget that Smith was a moral philosopher and one of the fathers of political economy.

Anon - I thought Buchanan was brilliant...and correct. We are still merely in the 'phony war' stage. I would urge readers to check out the transcript.

Dr Jerry Jordan, former President of the Reserve Bank of Cleveland is currently in Australia and I heard him talking about this very subject on Friday.

His take on the situation is that the two prime causes of the mess are financial industry capture of the legislature and interest rates that were too loose for too long.

Adam Smith himself recognised that free markets need to be regulated to operate fairly; a famous quotation from "The Wealth of Nations":

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Jordan's message is that government regulation failed in both respects (although he listed a number of other contributing factors).

A capitalist market economy inevitably tends, if unregulated, to move asymptotically towards an oligopoly. While oligopolies are not necessarily permanent (as Schumpeter explained), the very existence of entities such as Fannie Mae, Freddie Mac, AIG, Citicorp and BofA that are "too big to fail" means that the market mechanism and prudential regulation have both failed.

Here was Jordan back in 1999, saying that "financial crises typically arise from risk mismanagement by governments", http://www.clevelandfed.org/Research/commentary/1999/1001.pdf