Part of the debate "The current financial crisis sounds the death knell for laissez-faire capitalism"
Opposer: Dr Linda Yueh
It is too early to sound the death knell for laissez-faire economics. Although tarnished, the capitalist system still provides the best model for spreading prosperity and lifting millions out of poverty. The most successful development example of the past 30 years is China, where gradual and prudent adoption of market principles has propelled from being a desperately poor country to a successful case of development while at the same time transitioning from a centrally planned economy. No government-led economic system has such a track record.
Perhaps the objection is to the notion of laissez-faire. The foundation of markets is centred on the "invisible hand" of market forces. But, government and institutions are acknowledged even in the fundamental precepts of a capitalist system since property rights definition, the costs of exchange, protecting against expropriation, and redistribution are all part of the foundations of markets, even the laissez-faire variety. With these foundations provided by government, markets develop.
Examining real examples, it has always been the case that government has played a large role in even free markets. The United States may be the pin-up for laissez-faire capitalism, but it also has the most developed legal system in the world. Just look at the number of lawyers per capita! It has always been the case that government plays a role directly or indirectly via the laws that they pass to legislate and regulate the so-called free market. It does not mean government-led development of markets, but rather that government provides the institutional foundations of markets. The success of American capitalism has much to do with its robust legal development. Indeed, after examining centuries and most countries in the world, economists now robustly argue that a strong rule of law is necessary for economic growth and free markets to develop. China, with a weak legal system and strong growth, is viewed as a paradox to be explained – though that is for a different debate. Today’s financial crisis is a result of not only excessive risk-taking by bankers and financiers, but also a consequence of ineffective regulators and insufficient regulations.
Overlooking this fact was one of the reasons for the frequent failure of the Washington Consensus advocacy of liberalisation and privatisation in developing countries which did not have the requisite institutional support behind their markets. After the Asian financial crisis, it was hoped that this lesson would have been learned. Strengthening the role of government in regulating the financial sector was one of the outcomes in Asia to ensure that capitalism could flourish.
This financial crisis reveals how many of the previous lessons were overlooked. Regulators did not keep up with the market and allowed bankers to take on too much risk and gamble with our money, making real for the first time in nearly 70 years the prospect of systemic banking failure in the developed world. The banking system should not have been permitted by the government to veer so far from a model premised on deposits to one where the foundations were built on debt.
Finally, perhaps the main reason why laissez-faire capitalism is not dead, or even nearly so, is because there is no viable alternative. The collapse of central planning removed the notion that governments know better than markets. What is left are capitalist systems in which the government plays different roles, e.g., strong legal system in the U.S. which has one of the freest markets in the world versus Scandinavia and some parts of continental Europe where the state plays a more prominent role in redistribution and the welfare state. All such systems are capitalist and laissez-faire, based on the principle that market forces are better than the government in generating economic transactions. Not recognising the need for market-supporting institutions to innovate alongside markets has led to the most significant ‘bust’ of our time. This crisis is as much a result of government failure as market failure. Throwing out capitalism condemns us to a more dismal future that billions of Chinese, Vietnamese, Russians and others have spent the past few decades escaping from. These are the reasons why the motion should be opposed.