Part of the debate "The current financial crisis sounds the death knell for laissez-faire capitalism"
Proposer: Professor Jonathan Michie
Even the most extreme proponents of free-market capitalism – the Friedmanite monetarists of the Thatcher governments, or the 'Chicago boys' advising the Pinochet regime – admit some regulation is necessary. What marks out laissez-faire capitalism from other varieties is its belief that the capitalist economic system is inherently self-correcting, so even in recession it's best to keep government intervention to a minimum.
Critics of laissez-faire capitalism – such as Keynes – argue that markets are not self-correcting. Economic actors don't have perfect information, cannot compute all possible outcomes instantaneously, and act 'irrationally'. These failures of laissez-faire capitalism have been exacerbated by the complex financial vehicles that meant banks didn't understand what they were buying.
Markets are driven by expectations. Financial markets suffer from herd effects, with decisions to sell driven by beliefs others will sell, regardless of fundamentals. Markets involve externalities (pollution costs not being borne by those causing them), asymmetric information (doctors advising costly medication have more information than the patient – making market solutions to health care potentially flawed), moral hazard (if you're insured against defaulting, perhaps you take less care than you ought), and so on. The instinct that the market knows best is dangerously complacent.
There exists a variety of capitalisms, with the laissez-faire model being a minority taste. And now, thankfully, decidedly yesterday's model.
So yes, China's economic performance has been impressive over the past 30 years. But China is not a laissez-faire capitalist country; it is ruled by the Communist Party with a good deal of state direction and swathes of the economy nationalised. To be sure, the Communist Government has used markets vigorously. But Government has called the shots to a far greater degree than under laissez-faire capitalism.
Likewise, Japan and Korea developed under strong state direction and regulation. As did Britain and the US in their day. But a laissez-faire approach to economic relations favours the strong, so once developed, most countries espouse a laissez-faire approach for others. If Japan had accepted such advice in 1945, it would still specialise in rice growing and textiles.
Laissez-faire capitalism also creates instability globally. Tobin's proposal for a tax on speculation was precisely to put 'sand in the wheels' of global finance, reigning in markets.
When 'market failures' affect the financial system, it creates systemic failures. This was David Cameron's case for intervention – systemic failure requires far-reaching regulation of the whole financial system, including banning short-selling and part-nationalising the banks.