The Filtnib’s Progress

Back when I studied economics at A-level, my teacher instilled a healthy scepticism of absolutes. He had no time for teenage leanings towards purist doctrines; neither communism nor an uninhibited market economy, said Mr Walker, would ever succeed alone.

The only answer then, was a mixed economy – one that encouraged the best aspects of the market while tempering animal spirits with a certain degree of state intervention, in order to protect the weak and provide public goods such as healthcare and education.

But what ratio of ingredients would create the best mix?

Although my teacher was fairly left-wing, with a hatred of Maggie Thatcher and her legacy, he believed a hearty helping of capitalism was the foundation of an ideal economy.

Why? Because the overrarching desire for profits means private companies allocate resources in the most efficient way possible, and certainly far better than an overworked civil servant – or so we were taught. And not just by Mr Walker, but by our textbooks, our politicians and particularly the architects of New Labour. As Peter Mandelson once said: “We are intensely relaxed about people getting filthy rich, as long as they pay their taxes”.

The idea that individual greed might help boost wider economic conditions and thus wider society too, was suggested in 1776 by the great Scottish economist and philosopher Adam Smith in his Wealth of Nations:

“By directing that industry in such a manner as its produce may be of the greatest value, (the individual) intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

Alas, this recipe has recently gone a bit wrong. Given free rein, the invisible hand of the market didn’t allocate resources quite as accurately as expected, as Tom Tomorrow‘s cartoon suggests (if the writing’s too small, go here for the original).

So a cartoon is questioning capitalism, so what? Well it’s not just cartoons. The paradigm shift that is taking place in the way we think about economic theory is demonstrated by the fact that my own paper, the Financial Times, is now running a series entitled The Future of Capitalism, with the sub-headline: “The credit crunch has destroyed faith in the free market ideology that has dominated Western economic thinking for a generation. But what can – and should – replace it?”

Martin Wolf has penned a deeply insightful opening overview on the idealogical vacuum we now face:

On June 19 2007, I concluded an article on the “new capitalism” with the observation that it remained “untested”. The test has come: it failed. The era of financial liberalisation has ended. Yet, unlike in the 1930s, no credible alternative to the market economy exists and the habits of international co-operation are deep.

And  Gillian Tett has written a brilliant analysis of the banks’ descent into creative mayhem. Now I’m not recommending these just because they’re from the FT, though I suppose I am a little biased – but because they’re among the finest journalists currently writing on the crisis, and if you want to understand some of what’s going on, you won’t find more reliable and knowledgeable guides.  There’s no doubt Mr Walker’s mixed economy is still the only answer, but the question of ratio – the role of the state in relation to the free market – is up for grabs.