Part of the debate "The current financial crisis sounds the death knell for laissez-faire capitalism"
Opposer: Dr Linda Yueh
This debate has focused largely on the extent of regulation of markets. The United States is both the pin-up of laissez-faire capitalism and a benchmark for a strong legal system. Its legal and regulatory system is coincident with its laissez-faire markets. In other words, if there was not effective protection of property, security of economic transactions, and regulation of markets, then there would not be such robust market development in America.
The misperception that America has unfettered (unregulated) markets, or that deregulation of financial markets in the past few decades meant that markets were ungoverned, is inconsistent with the reality of what makes America such a robust free market that has generated high levels of technological progress and real economic growth.
It is laissez-faire in that the state does not tell the market what to do. But, the laissez-faire approach works because the government, though laws and regulations, supports, regulates, and moulds the incentives of the market to enable it to innovate and flourish.
This financial crisis clearly shows that regulations must keep abreast of markets. It is the role of regulators and policymakers to do so. As markets innovate and bring economic opportunities and prosperity, they change and the regulatory regime must too.
It is ironic that the current crisis stems from the financial sector's attempt to manage risk. There is nothing inherently wrong with the principle of securitisation and the financial sector should not be deterred from innovating and developing new products. Obviously the financial sector is central to consumption, investment and international trade, so the 'real' economy can always benefit from further financial market development. The financial sector became over-confident, even complacent, in its appreciation of risk. This is the challenge of the regulatory response and future regulatory structures to head off such crises, but care must be taken to not throw the baby out with the bathwater.
No other economic system has its track record of raising millions out of poverty and generating prosperity for developed and developing countries alike. Seeing that financial markets need regulation, just as all markets do, is not a reason to throw out the capitalist system. Reforms are always needed.
Perpetuating the mistaken belief that laissez-faire capitalism means unregulated markets is not a way forward. The United States, in terms of both its successes and failures, is testament to how laissez-faire capitalism flourishes (and languishes) when there are (or are not) effective legal and regulatory structures in place.
For these reasons, the motion that laissez-faire capitalism is dead as a result of the financial crisis should be opposed.