Part of the debate "The current financial crisis sounds the death knell for laissez-faire capitalism"
Opposer: Dr Linda Yueh
There is a tendency in an economic crisis to go too far to the other extreme. There is a feeling that we should ditch the market and led government take the lead. Instead, we should take a more measured approach and reform what hasn't worked as well as assess what has.
We should not overlook the prosperity gained through economic reform over the past few decades, both in the developed and developing world. The reforms of the 1980s in the U.S. and UK opened up competition and enabled a sustained period of real economic growth, not just in the financial sector. It is evident in the extent of technological progress and global trade. Just looking around an office or home makes it apparent that technology, in the form of computers and others, has advanced considerably in the past three decades. Similarly, opening up to international trade has expanded consumption and production possibilities, including cheaper and a greater variety of goods, raising disposable incomes.
These markets in innovation and trade are of course regulated, as with markets generally. Incentives provided by the government for businesses to invest in R&D and the protection granted to intellectual property rights are some examples. International trade is also characterised by a global rules-based system which allows developing countries such as Brazil and African ones to challenge the U.S. and EU over illegal agricultural subsidies and win. No regime is perfect and all need constant reform, but these are examples of real gains in prosperity due to laissez-faire policies, governed by laws and regulations, over the last few years.
The financial crisis is an example of how regulation failed to keep up with markets. Jonathan Michie is right when he calls for more responsible lending; 125% mortgages were never a good idea. But the demand for mortgages was well motivated. There is nothing wrong with wanting to be an owner-occupier. The investment demand for property reflects people's willingness to save in a wider class of assets for the longer term, and again, it's not a bad motivation. The availability of credit certainly fuelled this, but the price of credit (interest rates) was equally/more important for fuelling the house price boom and this is not determined by banks but by policy.
To ensure a sensible response to the crisis, the actions of bankers, regulators and each of us must be examined. Bankers have ignored risk, regulators have been remiss, and consumers (and firms) have found it too easy to borrow and become too indebted. The failings to be addressed do not negate the entire capitalist system. Laissez-faire means that market forces lead economic decisions, but within a framework of regulation. Improving regulation is what is required; not handing the economy over to the government.