Martin Wolf in the Financial Times:
The response to the crisis among those in the pro-market camp is much on the lines of the 1930s. On one side are those who blame what has gone wrong entirely on government. The Tea Party, in the US, has taken that position, with some success. In the UK, this strand is weaker. But there, too, some argue that the crisis is the result of Gordon Brown’s fiscal incontinence, over-regulated markets or incompetent central banks. In this, they follow the Austrian economists, Ludwig von Mises and Friedrich Hayek, in the 1930s. Against them are those who, following John Maynard Keynes, argue for a managed capitalism.Once again, much of this debate is over use of macroeconomic policy tools: should one tighten or loosen fiscal policy in a recession? Are unconventional monetary policies a path to hyperinflation or effective policies in extreme circumstances? Again, just as radical Keynesians emerged in the 1930s and afterwards, proponents of more intervention in markets are now emerging.This is a debate we need. In my view, both perspectives are useful. The Tea Party is wrong on the future of government. Even the US is not going back to the 19th-century state. But its more coherent members are right – and even agree with today’s protesters – that we have promoted an insider form of capitalism which exploits and indeed creates subsidies and tax loopholes on which the insiders prosper. The need to rescue banks was horrifying. The role of money in politics is disturbing. The danger is that we are moving from what the Nobel laureate economic historian, Douglass North, calls an “open-access order” to its opposite, a system in which political influence is decisive.This is not merely inefficient. It is unjust. Few begrudged Steve Jobs his fortune. The view on those who emerged rich from rescued businesses is very different. The era of bail-outs must end. Restructuring finance to make this credible is of huge importance for the future. Yet this is not all. Market capitalism creates inherent difficulties. The two most obvious are macroeconomic instability and extremes of inequality. The tendency of a market-oriented financial system to run away with itself has, again, been demonstrated on a large scale. On the free market right people argue that if only we went back to the gold standard or ended fractional reserve banking, all would be well. I question such claims. Instability is inherent in the game of betting on the future. Humans seem prone to self-fulfilling waves of optimism and pessimism. Ways of mitigating the extent and the consequences of such instability always need to be found.