Capitalism is not the problem

Daniel Finkelstein:

The only people to have been vindicated by this crisis,” Ken Livingstone said across the lunch table, “are those of us who supported the 1983 manifesto.”

I didn't reply. We were both speaking at a charity lunch and everyone was being nice to each other. It wasn't the moment to have an argument. And in any case, Ken always makes me feel like a little kid. I fought him in Brent East in the 1987 election, when I was still a student and had to be driven around the constituency by my mum. I was called a Young Turk by the local paper, with the result that at one house they wouldn't vote for me because they didn't want a Turkish MP. Anyway, the long and the short of it is that I let the comment go.

Since then, however, I have heard it everywhere, this notion of my old foe. The idea is that the financial crisis vindicates the left-wing critique of capitalism. We are, apparently, at one of the most significant points in the ideological debate since the early years of Thatcher or since the fall of the Berlin Wall or something. The years of free-market triumphalism are over. The State is back.

I've heard it so often, in fact, that I can't let it go any more. The problem is - I am really not sure what all these people mean, what all this talk of vindication and new eras, and resurgence of the Left is really all about. And it's hard to mount a fierce rebuttal of an argument that never really takes shape.

I think we can agree - can't we? - for a start, that Mr Livingstone was joking about the 1983 manifesto. In 1983 Labour wanted to set up a national investment bank “to put new resources from private institutions and from the Government - including North Sea oil revenues - on a large scale into our industrial priorities”. It also wanted to force banks to grant mortgages to lower-income groups and favoured Labour causes.

These policies were accompanied by a threat both vague and menacing: “We expect the major clearing banks to co-operate with us fully on these reforms, in the national interest. However, should they fail to do so, we shall stand ready to take one or more of them into public ownership.”

In other words, what the banks did imprudently during the recent housing boom - lend to those to whom it was not sensible to lend - Labour in 1983 insisted they do as a conscious policy of the State. To describe the recent financial woes of the banks as a vindication of this programme is perverse. And maybe Mr Livingstone meant it to be so.

Yet the moment one abandons the idea that the supposed “new era” involves going back to 1983, one is left with, well, very little really.

The State has stepped in to save the banks, and has tried to safeguard its funds by taking stakes in them. Does this mean that we are entering a new era in which the State controls the bank? No. The policy of rescuing the banks will not work if the State forces them to engage in a loans policy that doesn't pay. The Government knows this. If it pushes the banks too hard, its recapitalisation policy will fail. That's the logic of the market, and the logic of the market will triumph over the “new era”.

So does the fact that we have stepped in to support the banks mean that the old orthodoxy is over and we should step in to rescue other businesses, such as the car industry for example? No, again. Banks are a utility. Just as we would act to prevent a cessation of electricity or water supply, so it is necessary to act to avoid the collapse of banks.

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Now we have had a credit crunch we will want smarter regulation, and smarter regulators. But this doesn't change the argument about markets, which have always been regulated. Indeed, the basis of free-market exchange is a regulation - the legal recognition of property rights.

Let's try a vaguer formulation of the “new era” argument, one that doesn't involve banks or intervention. Gordon Brown and Lord Mandelson both argue that the case for “active government” has now been made. In a lecture earlier this year, Mr (as he was then) Mandelson stated boldly that “government is making a comeback”.

Really? Has it been away? I hadn't noticed. I'd have bought it a welcome-home card.

Throughout the period of free-market triumphalism that is now supposed to be passing, the State spent 40 per cent or so of GDP, provided welfare to those down on their luck and participated in national and international schemes to prevent an economic crisis. This seems like quite active government to me.

In so far as the recent events have changed the argument, they have made it hard to see how government spending can keep on growing at such a pace and they have made a strong case for the State to be reorganised to be sure that it can afford its commitments. The borrowing mess suggests that government has been too active, rather than not active enough.

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Control freak government is not the answer to our current problems. Those problems flow from two sources, the primary one being the government insistence that lenders make bad loans. The secondary cause resulted from their first. The credit markets attempted to handle this new risks by compiling loans of various qualities and through some alchemy create instruments that were supposed to minimize the risks. They in fact , did not, but they did mask the risks which allowed the problem to grow to an unmanageable level.

So the obvious answer should be that we will no longer require lenders to make loans with unacceptable risks. If we do that the troubles in the credit market can work their way out.

While no one thinks the current situation is desirable, there have been some benefits. We have discovered some on going fraudulent business such as that of Mr. Madoff who might have been able to scam even more people if the good times had continued. The falling oil prices have also hurt those who would be out enemy and given us time to bring our own resources into production if we have the wisdom to do so.

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