A defensive defence of capitalism 2008

A review of the Economist’s economic coverage of 2008 reminds its blog readers that the magazine often took a pessimistic stance even before the worst of the crisis broke. It also provides a useful reminder of one of its key articles of the year. In October it published a markedly defensive defence of capitalism. After setting itself up as “on the side of economic liberty” it went on to argue that:

“In the short term defending capitalism means, paradoxically, state intervention. There is a justifiable sense of outrage among voters and business people (and indeed economic liberals) that $2.5 trillion of taxpayers’ money now has to be spent on a highly rewarded industry. But the global bail-out is pragmatic, not ideological. When François Mitterrand nationalised France’s banks in 1981 he did so because he thought the state would run them better. This time governments are buying banks (or shares in them) because they believe, rightly, that public capital is needed to keep credit flowing.”

It goes on to argue that Walter Bagehot, one of the early editor’s of the Economist, supported state intervention to prevent bank runs from damaging the real economy. The article concludes with the lines:

“Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.”

It is true that the recent massive state intervention to bail out the financial system is pragmatic rather than ideological. Nevertheless it shows that the notion of a vibrant free market is a myth.