Do you believe in markets?
John Kay does, as he demonstrated during his presentation at the Volcano symposium last weekend. We were together on a panel, “Crisis in and of Economics,” along with David Vines. Kay started with the usual neoclassical assertion—planning has failed and markets are successful (ignoring, of course, all the historical examples of successful planning and market failure)—and then admitted that the only reason the financial sector failed is because it curried favor with politicians and became an “oligarchy.”
Now, Kay is concerned that credibility has gone from being a “sensible point” to a “dogma.” And his worry? That, as a result of imposing credible austerity policies, mainstream political parties, in Greece and the UK, are losing out to “extremists”—that is, parties and movements of the Left.
As it turns out, that’s the same argument Paul Krugman is making. Krugman, too, believes in markets. But, in contrast to Kay, who presumes an invisible hand, Krugman invokes the visible hand of government intervention. In the end, however, he agrees with Kay, that the crisis in Europe is now “discrediting the political mainstream and empowering extremists.”
Both Kay and Krugman, each in their own way, are afraid that the Second Great Depression is encouraging the formation of political forces that are critical of capitalism—that have the temerity of no longer believing in markets, whether guided by the invisible or visible hand.
Stopping that from occurring and maintaining faith in capitalism is what unites Kay and Krugman, who represent the two sides of contemporary mainstream economics.