A crisis that left politics untouched: parting thoughts on the social market

Five years ago, I became director of the Social Market Foundation just days before the financial crisis struck. A once-in-a-century financial meltdown, and the resulting deep recession, was a less-than-auspicious start for a think tank reliant on project sponsorship.

But on the plus side, the crisis in the market economy was an intellectually fascinating moment, particularly for a think tank founded in 1989, the twilight of state socialism. So as I leave the SMF today, what have we learnt about the relationship between the market and the state over the last five years?

Perhaps the most striking observation is that the crash doesn’t appear to have given rise to any radically new or compelling ideological vision.

Sure, there’s a rethink going on in macroeconomics. And at the level of microeconomics, the supposed efficiency of various markets – not least financial ones – has been a constant theme of debate over the past five years. But none of this has had much impact on politics, which betrays no sign of the deep trauma in the market economy.

Labour leans nervously leftwards but stops well short of repudiating the boundaries of the state accepted by the last Labour government. No plans here to retake the commanding heights of the economy.

The Coalition also remains pragmatic, and there’s little suggestion that the crisis has unleashed any more free-market zeal in the leadership than was evident before. Indeed in the cases of the housing market and immigration, quite the reverse. So why has such a profound crisis lacked political potency? The answer lies in the diagnosis of what went wrong.

Statists emphasise various market failures as the cause of the crash. An explosion of complexity in the banking system allowed rent-seeking bankers to bamboozle both retail and wholesale customers. Owners, and even chief executives, of financial institutions had little grasp of what their agents were doing, undermining accountability.

And ultimately, while the profits of the good times were privatised, the losses were socialised with profound consequences beyond the financial sector. These failures go to the very heart of the case for the market economy.

Free-marketeers on the other hand, see the crisis as a failure of policy. East Asian monetary policy in the wake of the 1997 Asian financial crisis was responsible for driving a wall of money westwards, pushing down global interest rates. Domestic financial regulators failed to police products and debt levels in the system. And the implicit government guarantee of the banks was a license to print money.

These are serious failures of government in its broadest sense, albeit in an intellectual climate that would not have allowed any government to act much differently.

The reality – perhaps frustratingly – is that there is truth in all of these critiques. There is no simple moral or intellectual victory for the devotees of statist or free-market dogma of the type we saw with the collapse of state socialism. The lessons of the crisis were about both the failures of the market and the frailties of government. This was, if you like, a very ‘social market’ crisis.

In the Westminster village, policies tend to be advocated or eviscerated based on tenuous assertions that ‘the private sector knows best’, or that the profit motive is a shabby one. The many lessons of the crash sit uneasily with such thinking. The crisis has shown that the economic and moral certainties of both the left and the right are hopelessly inadequate for tackling the complex challenges we face as a society.

All of this means that we need to ask searching questions of policymakers as they develop their offerings in the run-up to the next election.

If Labour plans to marginalise competition in the delivery of public services, how does it propose to sustain the quality of those essential services in the face of shrinking budgets?

If Conservatives care about equality of opportunity, how do they plan to tackle the increasingly unequal distribution of wealth that undermines it?

And if the Liberal Democrats advocate a more activist industrial policy, can they ensure that intervention is more successful than similar efforts of the past?

This is the territory of social market thinking. Navigating it with reference to the strengths and weaknesses of the state and the market is how I believe the SMF has helped to improve the quality of public debate over the last five years.

It is also precisely how we will find solutions to the many policy challenges that lie ahead as we move towards the 2015 election.

As I leave the SMF, that task will fall to my hugely capable successor, Emran Mian. The SMF is embarking on a new and exciting phase, I wish Emran the very best of luck.


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