Wednesday, September 29, 2010

The Markets New Role

Anatole Kaletsky, in an Op-ed for the NYT, predicts the decline of "free-market thinking in international economic management," as well as the rise of greater state intervention in domestic economic management. In a passage highly reminiscent of Daniel Yergin's Commanding Heights, Kaletsky discusses the state prerogative for economic management:

"If market forces cannot do something as simple as financing home mortgages, can markets be trusted to restore and maintain full employment, reduce global imbalances or prevent the destruction of the environment and prepare for a future without fossil fuels?"

His answer to this question is nuanced - "yes and no" - an justifiably so. This article better articulates the options for economic development facing countries today than any that I have recently read. This passage summarizes the balance that must be struck between free markets and government management:

"Yes, because markets are the best mechanism for allocating scarce resources. No, because market investors are often short-sighted, fail to reflect widely held social objectives and sometimes make catastrophic mistakes. There are times, therefore, when governments must deliberately shape market incentives to achieve objectives that are determined by politics and not by the markets themselves, including financial stability, environmental protection, energy independence and poverty relief"

Kaletsky then explains the mechanism for effecting these policies without subsuming the power and benefits of the market, "This doesn’t necessarily mean that governments get bigger. The new model of capitalism evolving in Asia and parts of Europe generally requires government to be smaller, but more effective."

I couldn't have said it better myself. The Fair Market Movement is all about finding market based solutions to social, public and economic problems, without weighing the government with increased responsibility for outcomes. Kaletsky may be giving other countries more credit than is due in terms of the size of their shift from the "Washington Consensus" economic model, but he is spot on in describing America as embodying some of the worst Fair Market principles.

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