The blunt truth is that free markets are not a particularly efficient system for allocating resources. They are just – like democracy – more efficient than other systems and – unlike democracy – more innovative than other systems.
Barack Obama faces the dilemma that has confronted all politicians of the centre left since the demise of socialism: to articulate a new progressive account of the relationship between the state and the market. Tony Blair and Bill Clinton proclaimed a “third way”, but this degenerated into platitude and vacuity. Can President Obama do better?
The market economy remains a hard sell and recent events have brought out the Jeremiahs to proclaim the death of capitalism. But the modern critique of capitalism is incoherent, summed up by the May day protesters whose banner read: “Capitalism should be replaced by something nicer”. It is much clearer what anti-globalisation protesters are against than what they are for. For many people, environmentalism has taken the place of socialism as a focus of anti-market sentiment. But environmentalism offers no economic theory, only a visceral dislike of any economic calculus. The two principal strands of modern leftist economic thought are social democracy and redistributive market liberalism. Robert Reich, President Clinton’s labour secretary, expounded the social democratic philosophy in office and in his recent book Supercapitalism.
Modern social democrats insist that the activities of private businesses should be subject to democratic political control, although they dilute that control to near homeopathic proportions. They continue to believe that wise and public-spirited bureaucrats can see further than myopic and selfish business people and usefully co-ordinate their activities. This social democratic solution to the travails of the financial sector is widely advocated right across the political spectrum.
The alternative philosophy of redistributive market liberalism was espoused by Mr Clinton’s longest serving Treasury secretary, Robert Rubin. Mr Rubin (a Goldman Sachs alumnus, of course) believed “that the concept of state direction of economic activity and the state ownership of economic resources was likely to be highly inefficient” but yet “another focus of mine, unusually for a Treasury secretary … was poverty and the distress of inner cities”.
The essence of redistributive market liberalism is insistence on a division between issues of allocation of economic resources – to be left to the private sector – and the distribution of economic resources – a responsibility of government. For redistributive market liberals, government intervention in productive activity should be limited to a small number of issues of market failure, such as competition policy and environmental externalities. In the Clinton administration, Treasury secretary Rubin won: or, at least, labour secretary Reich lost.
Although there is not much popular support for redistributive market liberalism, it is the most widely espoused political philosophy among economists. It dominates thinking in the British Treasury and the European Commission. It has been the intellectual basis of Gordon Brown’s speeches, although the prime minister’s instincts are those of the social democrat.
So where does Mr Obama stand? Chicago trained, he shows a genuine interest in intellectual debate. The attitude to protection is a litmus test of economic philosophy. Social democrats are frequently sympathetic, but no redistributive market liberal will have truck with it. Mr Obama has made protectionist noises, but there is a widespread suspicion that these noises were for the period of the campaign rather than his time in office. His books and campaign speeches seem closer to the redistribution market liberal position.
If social democrats have a naively benign view of the powers of the state, redistributive market liberals have a naively benign view of the effectiveness of markets. The blunt truth is that free markets are not a particularly efficient system for allocating resources. They are just – like democracy – more efficient than other systems and – unlike democracy – more innovative than other systems.
Mr Obama himself told The New York Times: “My own core economic theory is pragmatism.” In the present crisis, that is a pretty good place from which to begin.