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An acid test for liberal democracies

By Chris Lewis - posted Monday, 15 December 2008

Has the fat lady sung for “extreme” capitalism, or is the recent policy response by Western governments to the current financial and economic crisis proof that the system works?

It is a question that may dominate political debate for many years, as the simplistic Left again rises to tell everyone that recent policy trends were a mistake.

Already Phillip Adams, on Late Night Live (November 12, 2008), again trumpeted the ideas of John Maynard Keynes; although that brilliant Brit did not have all of the answers to help competing nations avoid rocky roads ahead.


Yes, the 1944 Bretton Woods Agreement (influenced partly by Keynes) did promote a world order which gave all member governments an “explicit right” to control all capital movements to aid industry development, employment, and the welfare state.

But such a world order did not last because the economic fortunes of all Western nations have long been tied to the fortunes of the international economy. Even the mighty US, which provided much stability from the late 1940s until 1971 with many countries effectively tying their currency values to a US currency fixed to the value of gold, also needed to remain competitive.

Substantial policy reform has since taken place in all Western nations in order to adapt to increasing competition from developing nations - in regards to manufacturing - without jeopardising general support for freer trade. This has included floating exchange rates, financial deregulation, more flexible industrial relations systems, and taxation reform that favoured corporations and the wealthy.

The promotion of freer trade was hardly the wrong policy approach. After all, a free exchange of trade, capital and ideas are critical to a progressive world, notwithstanding justified concern today about income disparity both within and between nations as well as environmental degradation.

Furthermore, a greater acceptance of trade deficits and debt by certain Western nations (including the US and Australia) aided economic growth both internationally and in Australia, given the world’s greater demand for raw materials.

But now the good times for Western societies are over, as the illusion of recent economic stability has been exposed by a flawed reliance on such high levels of debt. Given the current economic crisis, and the reality that higher levels of national debt cannot be sustained forever, the promotion of freer trade is likely to be severely tested in coming decades.


As John Browne noted on the Euro Pacific Capital online site (November. 19, 2008), the US financial industry should never have been allowed “to hide the risk by using ‘off-balance-sheet’ accounting and fictitious capital asset classification”, as seen by Fannie Mae leveraging “its mortgage investments by some one hundred times its ‘true’ capital, while disclosing only some fifty times in its accounts”.

It is a view shared by the billionaire financier and philanthropist George Soros, who notes that the current crisis caused by “the ever-increasing use of credit and debt leverage, combined with the (false) conviction that markets are self-correcting, took more than 25 years to grow” (The Huffington Post, November 17, 2008).

But what solutions will emerge?

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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