Liberal economics coming unstuck?

Gwynne Dyer has written a pretty good summary of last week's financial bail-out in which he's criticised the media for over-hyping the extent of the banking crisis. Whether the West is due for a major depression over the next decade or so is still anyone's guess, but if a serious depression does occur, I agree that it's unlikely to take the same form it took in 1929.

Common sense suggests that having been through many previous financial crises over the last century, Western governments are pretty adept at dealing with acute problems in the financial sector.

Similarly, with so many workers now cushioned by the welfare state, there is less of a temptation for governments to resort to widespread protectionism to save jobs, which was one of the major issues in the 1930s.

However, western countries now face a number of serious long-term economic problems which didn't exist back in the thirties.The big question now is whether the West can deal with the chronic economic problems associated with de-industrialisation, rising energy and welfare costs and continuing immigration from second and third world countries with a poor economic track record.

In some ways it's probably fortunate this banking crisis has occurred sooner rather than later - if it occurred smack bang in the middle of another surge in oil prices and baby-boomer pension claims things could have been a lot worse.

Another concern is that many of the pundits who are willing to acknowledge these chronic problems, tend to be Ron Paul-style libertarians with a dogmatic attachment to classical liberalism. For example, pro-Ron Paul business commentator Peter Shiff predicted the current banking crisis back in 2006, but his credibility is undermined in my view by exaggerated claims about inflation and the wonders of the gold standard.

Shiff's approach is easy to attack, since critics can simply argue that classical liberalism failed spectacularly in the 1920s, and that's the reason why we now have a Keynesian economic system in which the government intervenes in the economy to smooth out recessions.

The dismissal of anti-Keynesian arguments by mainstream pundits is unfortunate, as they're quite right to question the use of Keynesian style economic policies to deal with today's economic problems.

In the 1930s, most people worked in productive jobs in farming and manufacturing, lived within their means, and received little in the way of government welfare or services.

Hence there was wasn't much economic danger in using government money to kick-start economic demand by increasing welfare spending and initiating public works programmes.

However, in today's consumption-driven post-industrial society, with its bloated public sector, extensive use of Keynesian policies doesn't make much sense. In a world dominated by liberal ideology, economists tend to view the health of the economy abstractly in terms of rational financial management, rather than concretely, in terms of the traditions and human capital on which economies are constructed and sustained.

Both right and left wing liberals are of the view that de-industrialisation is of little consequence, workers are interchangeable and culture can be replaced by financial incentives. I'll believe that when Toyotas are made in Zaire, billionaires opt for Argentinian banks, and IT entrepreneurs flock to Afghanistan.

Since today's economic problems go beyond the financial sphere perhaps non-mainstream economic theorists like Schumpeter, Veblen, Braudel, and List who put greater emphasis on technology, culture and human bio-diversity, should be read a little more widely.