Part of the debate "The current financial crisis sounds the death knell for laissez-faire capitalism"
Opposer: Dr Linda Yueh
Capitalism and associated economic models are constantly updated. For instance, it is now common belief that economic policies are needed to help economies out of recessions and economies growing too quickly and generating inflation should be reined in. That is the case even in laissez-faire United States.
This is the crucial point in the debate. Capitalism, even the laissez-faire variety, is supported by institutions provided by the government, regulated by the legal system, and often moulded by the aims of the state. But, this is not the same thing as governments dictating what markets should do. The perception that the U.S. is an unregulated free market is inconsistent with the fact that it has a highly developed legal and regulatory system that sets standards for everything from product safety to protection of intellectual property rights around the world and has a well developed economic policy system.
This does not mean that regulatory reform is not needed as we confront this economic crisis, but rather the opposite. Legal developments are expected to evolve to address market needs, so should be expected as it is evident that the regulatory regime was certainly inadequate in this crisis.
Indeed, this point is often overlooked. Proponents of the Washington Consensus dictated policies to developing countries that are not reflective of the situation in their own developed countries, i.e., free markets without adequate legal and institutional foundations. Indeed, the United States is the embodiment of laissez-faire capitalism, but also has one of the most developed regulatory and legal systems.
All markets are premised on institutional foundations. China's success is not because its government led its development. That model existed under central planning and was discredited through decades of hardship for its people. Instead, since 1978, the Chinese government gradually allowed market forces to work while the state provided institutional support, such as enabling private enterprises to form. The failure of transition in the former Soviet Union, along with the poor record of the Washington Consensus during crises such as in Asia in the late 1990s, is partly a result of overlooking this basic premise and not because market principles are worse than government in leading the economy.
There is much to be learned from this crisis. But, to overlook the evolution of macroeconomic models over the past few decades and somewhat advocate a return to a world in which government knows best is not warranted. Given the extent of regulatory and legal development in the U.S., simply calling for more regulation is also insufficient. Regulatory reform is likely to follow in any case, but it must be smarter regulation.