Pragmatism chokes principled policies

The following comment by me appeared in this week’s Fund Strategy Although I think the argument is more valid than ever it has been over-taken by events over the weekend including the bankruptcy of Lehman Brothers and the takeover of Merrill Lynch. To me all of these developments reinforce the argument that “neo-liberalism” is a myth.

Last week marked another tightening of the noose around the neck of the free market. The American government felt obliged to nationalise two institutions, Fannie Mae and Freddie Mac, at the heart of free market capitalism: Wall Street.

Of course it does not follow that capitalism itself is about to collapse. Rather it means that virtually no one believes in the ideal of the free market. Even ardent free marketeers quickly ditch their beliefs at the first hint of serious trouble.

The trend has been clear for a while. Back in March the chief economic commentator of the Financial Times, Martin Wolf, started an article on the bail-out of Bear Stearns, a Wall Street investment bank, with the line: “Remember Friday March 14 2008: it was the day the dream of global free market capitalism died”. He also quoted Joseph Ackermann, the chief executive of Deutsche Bank, saying “I no longer believe in the market’s self-healing power”.

The nationalisation of Fannie and Freddie takes the trend a step further. It is worth pondering just how big a deal it is. America is seen as the bastion of free market capitalism. Wall Street its staunchest supporter of all. The scale of the bail-out – with up to $200 billion (£113 billion) pumped into the two institutions – is huge.

However much free marketeers play down the significance of the deal it is hard to take them seriously. It has illustrated in the most stark way possible that the market remains heavily dependent on state intervention. Such intervention may be driven by pragmatism, rather than by ideology, but it is just as real as in the past.

It is true that in earlier times the supporters of the free market have become advocates of intervention when their favourite institutions get into trouble. The difference with the past is the pervasive disaffection with the free market idea.
In fact hardly anyone expresses a strong principled stand on economics any more. Both right and left have more-or-less ceased to exist. Pragmatism rules.

While this development is welcome to some it brings many problems. In particular it means that policy-makers simply react to developments after they happen. The idea of shaping the world for the better seems to have been forgotten by all sides.