Sunday, October 26, 2008

The "Free-Market Oracles" say it was all wrong!! - part-2

Continuing from the previous posting:

Almost two decades back, in a 1989 essay, Francis Fukuyama had declared The End of History (a thesis which he later elaborated in a book titled The End of History and the Last Man). His basic constention was that with the dawn of Liberal Democracy and Free Market Capitalism, mankind had achieved the fundamentally most effective and the final stage of human government and method of organising the economy.

With this achivement, he stated, all competing ideologies have fallen, or will fall. He wrote:

"...What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such... That is, the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government."

Such a momentus claim about the triumph of western (American) politico-economic system made Fukuyama something of a celebrity, and a poster-boy for the neo-liberals...

Recently, however, like Alan Greenspan's self-enlightenment that free-market capitalism is not flawless, Fukuyama too accepted that along with the Wall Street, the utopian vision of capitalism has also collapsed.

Excerpts from his article The Fall of America, Inc. (Newsweek, October 13th,'08)

"The implosion of America's most storied investment banks. The vanishing of more than a trillion dollars in stock-market wealth in a day. A $700 billion tab for U.S. taxpayers. The scale of the Wall Street crackup could scarcely be more gargantuan. Yet even as Americans ask why they're having to pay such mind-bending sums to prevent the economy from imploding, few are discussing a more intangible, yet potentially much greater cost to the United States — the damage that the financial meltdown is doing to America's "brand."

Ideas are one of our most important exports, and two fundamentally American ideas have dominated global thinking since the early 1980s... The first was a certain vision of capitalism—one that argued low taxes, light regulation and a pared-back government would be the engine for economic growth.... The second big idea was America as a promoter of liberal democracy around the world, which was seen as the best path to a more prosperous and open international order....

...But now the engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society."

Fukuyama goes on to justify that the Reagan-Thatcher revolution of unleashing the "free" market forces was appropriate in that historical context, but does accept that:

"...Like all transformative movements, the Reagan revolution lost its way because for many followers it became an unimpeachable ideology, not a pragmatic response to the excesses of the welfare state. Two concepts were sacrosanct: first, that tax cuts would be self-financing, and second, that financial markets could be self-regulating.

...Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit.... globalization masked the flaws in this reasoning for several decades. Foreigners seemed endlessly willing to hold American dollars, which allowed the U.S. government to run deficits while still enjoying high growth, something that no developing country could get away with.

...The second Reagan-era article of faith — financial deregulation — was pushed by an unholy alliance of true believers and Wall Street firms, and by the 1990s had been accepted as gospel by the Democrats as well. They argued that long-standing regulations... were stifling innovation and undermining the competitiveness of U.S. financial institutions. They were right — only, deregulation produced a flood of innovative new products like collateralized debt obligations, which are at the core of the current crisis.

....the downside of deregulation were clear well before the Wall Street collapse. In California, electricity prices spiraled out of control in 2000-2001 as a result of deregulation in the state energy market, which unscrupulous companies like Enron gamed to their advantage. Enron itself, along with a host of other firms, collapsed in 2004 because accounting standards had not been enforced adequately. Inequality in the United States rose throughout the past decade, because the gains from economic growth went disproportionately to wealthier and better-educated Americans, while the incomes of working-class people stagnated...

Full article is available here

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