The events of the past year have led to many hard questions being asked about our financial system and ‘free market economy’. Commentators are finally starting to challenge the assumption on which so much has depended, that the market is always right - the invisible hand will guide the economy to make the most effective use of resources – and if there is ever a deviation from this optimal state, the market will correct itself. That is why the bankers and their allies insist governments must not interfere with the operation of the market. In practice, however, it means that all important decisions are taken by the people who run the banks and the big corporations.
This is a very convenient theory for bankers, whose telephone number salaries are one of the things we are not to interfere with. But the theory is simply wrong.
To be sure, the market is generally able to correct small disturbances from the optimum. If there are too few pizza restaurants to satisfy the demand, more will open; if there are too many then some will go out of business. As a result, we should end up with about the right number. For that sort of thing, the market generally works a lot better than having some bureaucrat in charge.
Unfortunately, how a complex nonlinear system reacts to small perturbations is not in general a good indicator of how it will react to large ones, and that is certainly the case with economies. Markets frequently go to extremes and show no signs of returning to normal on their own, in complete contradiction of what the theory predicts. As George Soros points out , in recent years alone governments have had to intervene in the international banking crisis in 1982, the bankruptcy of Continental Illinois in 1984, the emerging markets crisis of 1997, the failure of Long Term Capital Management in 1998, and more besides, including of course the current credit crunch. The same bankers who demand free rein when times are good are quick to run to the government for help when their excesses get them into trouble.
The first priority of governments is clearly to get the economy moving again and people back into work. Now that the myth of the market has been so obviously demolished, however, they should ignore what Soros calls the “market fundamentalists” and put in place measures designed to stop it going wrong in the first place. To a large extent, this would mean simply bringing back rules that were abolished in the 1980s and 1990s, when the neo-liberals dominated economics both in theory and in practice.
It is now argued that there should be strict regulations governing what banks can do. They would not be obliged by law to comply, but those that did not could not expect to be bailed out by the taxpayer if they ran into trouble. We would also include a rule that because of the extra risk, pension funds and public bodies should not be permitted to invest in banks that have not signed up to the code. If we cannot prevent some people gambling, at least we can stop them doing it with our money.
As the advocates of laissez-faire keep reminding us, however, our whole economy, not just the financial sector, is based on the market. If there are lessons to be learned, they apply to other areas as well.
One of the chief causes of the crisis was the so-called light touch regulation that was begun by Reagan and Thatcher and continued by their successors. One by one, restrictions were lifted. Regulators have tended to take the banks’ word that all was well. They were not given the resources to do their job thoroughly, so that when a truckload of paper documents arrived, there was no way they could find the toxic needles hidden in the haystack of very ordinary material. The regulators were checking only the details of what the banks were doing, not their overall strategies, which turned out to be where the real dangers lay. The whole ethos of regulation was above all, not to kill the goose that was laying the golden eggs nor tempt it to fly away to a tax haven.
Light touch regulation has also been the rule in other sectors, including the pharmaceutical and biotech industries. Regulators depend on the companies not only to carry out the tests but to analyse and interpret the results, and then take their word for it.
A revolving door policy means that regulators often come from industry and then go back once they have served their terms. Regulation is largely about details rather than the strategic issues: when an application is being discussed it is considered enough for the person with a connection to that firm to leave the room, even though other corporations’ nominees may be just as anxious as the applicant to see permission granted because of the precedent it will set. The UK government has given its regulators a very strong steer that they are to favour GM not because the farmers and consumers want it – they don’t – but because they see it as one of our industrial golden geese. Here, of course, they are blatantly ignoring the market, which even the most committed neo-liberals seem willing to do when it suits them.
The positive opinion given to Monsanto’s GM maize MON 863 by the European Food Safety Authority (EFSA) was a case in point . The EFSA not only allowed the company to claim commercial confidentiality for raw data; but also agreed with the company that significant results suggesting kidney and liver toxicities were not “biologically meaningful” . No wonder the EU Council of Ministers have unanimously agreed that the current legislation on GMOs requires a thorough revision with respect to risk assessment .
Now that the neo-liberal model has been thoroughly discredited, the rich nations should stop imposing it on the rest of the world, which many commentators have blamed for creating poverty and global warming by encouraging over-exploitation of people and the planet  (see Financing Poverty, SiS 40).
At the same time, the recent multi-stakeholder International Assessment of Agricultural Knowledge, Science and Technology for Development (IAASTD)  (see GM-Free Organic Agriculture to Feed the World, SiS 38) has also declared industrial monoculture obsolete. Its major finding is that small farmers practicing agroecology are the way forward to feed the world, eradicate poverty and save the climate  (see also Food Futures Now *Organic *Sustainable *Fossil Fuel Free , ISIS/TWN Report).
The credit crunch occurred because governments took the advice of the bankers on how a banking system should be run. The result was a system specifically designed to make profits for the bankers rather than to play a useful role in the real economy . They should now learn from their mistake and pay heed to the words of Hans Herren, co-chair of the IAASTD : “It is for governments to implement the recommendations of the IAASTD, not following what Monsanto is telling them.”
Article first published 12/05/09
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Ilyan Comment left 13th May 2009 15:03:59
My 1991 Amex essay competition entry has been retitled "The Negative Outcome of Economics" and can be read at http://www.iww.org/en/node/2583 There are two appendixes that might have offered some survival for EarthLife if acted on then. Now it is too late, and Life survival on this planet seems to have three imperatives. 1) A collapse of the industrial economic complex back to the lowest levels of 1932. 2) A collapse of the global human population down to about one billion. 3) The sun has to cool a bit. I said that at Green Economy for Wales Conference at Welsh Botanic Garden. A schoolboy came up and said that as the Malenkov cycle of the Sun is entering a cooling phase survival might be possible. But I think the inflating idiots will make survival impossible. Wallace gave lecture in about 1847 in Neath on the Advantages of a varied knowledge. Darwin was a coward, and Marx too short sighted to see the necessity for a Dialectical Synthesis of Marx and Malthus. You have to think for yourselves 12 May 2009
Sky Comment left 13th May 2009 15:03:17
Opinions on capitalism are somewhat like those of hot chocolate. If you think raw sugar is unhealthful, you may recommend cocoa. However, if you own shares in Nestles, then you may focus on the beneficial effects of the small amount of cocoa contained in the hot chocolate mix. Capitalism is implemented according to the golden rule, They who make the gold make the rules. Has it ever been different in western Europe?
Comment left 13th May 2009 15:03:21
pete Comment left 14th May 2009 02:02:12
you said 'governments took the advice of the bankers on how a banking system should be run'. Just as they assumed biotech companies' products are safe because they understand about how genes function,I suppose. The parallel here does not bode well for people or planet.
Mae-Wan Ho Comment left 14th May 2009 02:02:45
It is up to people to take the initiative, as always, to get ourselves out of the mess. We hope that governments will follow this time round, as they have every reason to, now that the old paradigm has collapsed so spectacularly. What we are trying to say is that it is indeed the same battle, in banking as in GMOs.
Rory Short Comment left 14th May 2009 05:05:50
The current financial system allows people to make money from activities that actually harm the planet and society in the long term. The trouble is money has no 'colour' so to speak. Colour from which you could deduce by which means it was obtained. The money that a drug dealer proffers at a supermarket checkout looks exactly the same as the money proffered by someone in useful employment. We need to find a way to link money to the means by which it was obtained.
Kevin Walsh Comment left 14th May 2009 14:02:46
Remember in the final analysis being rich is a privilege not an entitlement.
John Steinsvold Comment left 14th May 2009 14:02:19
An Alternative to Capitalism? The following link, takes you to a "utopian" article, entitled "Home of the Brave?" which I wrote and appeared in the Athenaeum Library of Philosophy: http://evans-experientialism.freewebspace.com/steinsvold.htm John Steinsvold
Dylan Jones Comment left 14th May 2009 20:08:39
There has been no free market for at least the past 100 years, only a form of corporate welfare or corporatism as Joseph Stiglitz puts it. The excessive deviations from the optimum state did not arise from a free market economy, they came about as a result of the banking cartels and their friends in government deliberately inflating and then deflating the money supply, turning on and off credit to the advantage of the members of the club and to the disadvantage of the outsiders. Whilst they do this with their hands, they proclaim the sanctity of the free market with their lips. Once a crisis such as the great depression or today’s credit crisis has been deliberately orchestrated, they step in and offer the solution, which always without exception results in the enrichment of the cartel members and the impoverishment of the rest. So if this system never truly followed free market principles, how can this crash disprove them? The problem is one of deception, simple, bare-faced lying. If we believe in the scientific principle of experiment, we should give the free market a fair trial and bring in regulations to protect a real free market. This will never happen, however if we get sucked into the false dichotomy between the liberals and the conservatives who in reality are theatrical performers for our distraction from the financial gangsters and fraudsters who run the show.
sekhar Comment left 15th May 2009 15:03:22
free market does not mean without regulations.no society can afford to frame laws in consulation wih probablelaw breakers.laws are meant to protect the common man no the culprits.
Prince Pieray C. P Odor Comment left 18th May 2009 21:09:43
First, let me express the wish and hope that those who have shown interest in the necessarily and wonderfully connected piece – bringing out the connection between free market and free research and production of G.M.Os and G.M.Fs – by Dr. Ho and Prof Saunders of the ISIS have not been compelled by market forces to run along to other businesses and that someone would read my late contribution. The fundamental issues in human existence are understanding the essence and meaning of human existence -- whether we hold created or we hold evolved – and activities, and the ultimate purpose or end of human existence and activities. There is no doubt that American secularism, materialism and romanticism have done a very harm to those fundamentals. We who are gifted with intellectual sensitivity and independent intellectualisation – certainly not through the big bang and its sequel, evolution – or acquired these through training and hard work see universalisation made – or universals created – by few people for the whole people of the world based on the particular and the subjective. We see actions under a dialectical situation not reflecting the dialectical situation; reflecting instead a settled situation. In this regard, let me say that if it is taken that there is argument and uncertainty about the status of G.M.Fs – safe or not safe – the only right thing to do is to carry out any number of tests that satisfy the disputing sides and action carried out on the basis of the results of the tests. We cannot have a situation where some people claim that G.M. Foods are safe – without providing it and refusing independent establishment of safety – while some people “claim” that they are not safe and give proven reason for their “claim” – confirmed by even their opponents – yet the poisoned and death G.M. Foods are being produced and imposed on them for consumption. We see moral and spiritual values subordinated to material and romantic values or supplanted by material and romantic values or destroyed outright in favour of material and romantic values. We see collective interest or good dethroned and crucified and individual interests enthroned and worshipped. We see belief, assumption, hope, wish and desire promoted to the status of scientific methodologies although not too long ago these were consigned to the domain of religion, it was asserted that they belonged to lesser and the ordinary minds, slave morality, and the people of meagre and unsatisfactory disciplines. These are what the politics and culture of American romantic progressivism, modernism, freedom, and globalism have done to existence, meaning, epistemology, and existentialism. The questions now are: 1. Who has the authority, right and freedom to give or impose ideas, beliefs, models, practices, ethics and values on the rest of the entire nations and persons of the world? Contextually, who has the authority, right and freedom to say what foods the entire nations of the world MUST consume or ingest, and why? 2. How should we live and carry out our existential activities as sovereign, independent and free nations who have human and cultural rights and freedom? Prince Pieray C. P Odor Lagos, Nigeria