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In government we trust … when times are tough

Professor Warwick Funnell is Research Director of UOW's School of Accounting and Finance, in the Faculty of Commerce. He recently returned to UOW after spending two years at the University of Kent. Professor Funnell’s latest book, In Government We Trust: Market Failure and the Delusions of Privatisation, is published by UNSW Press and Pluto Press in the UK (co-authored with Robert Jupe and Jane Andrew).

According to the Nobel award-winning economist Milton Friedman, the most influential prophet of free markets in the late 20^th century, governments can do little which is beneficial to their citizens, apart from protecting us from each other and providing the legal framework in which markets can operate with certainty.

Now, in the depths of what is seen as the worst financial crisis since the Great Depression in the 1930s, governments which have come to our rescue can do little which is wrong. Citizens in the world’s most prosperous democratic states have been forced to look to their governments for their financial salvation. In Britain the government now effectively owns the four largest banks while in the US some of the largest, most powerful financial institutions have been saved from oblivion by the American Government with other large companies such as General Motors possibly to follow. Such events were inconceivable a little over a year ago.

For the past three decades the institution of government has been vilified by politicians, most famously by former British Prime Minister Margaret Thatcher and US president Ronald Reagan, and leading economists like Friedman. They contended government would always be the source of waste and rob citizens of the freedom to decide for themselves. The market, however, would always know best. The market would possess almost magical qualities to ensure the best outcomes for all, but only if government withdraws from the lives of its citizens and allowed self-interest and the discipline of the market to operate without unnecessary restrictions. Individual liberty must be preserved above all else.

So important was unrestrained individual initiative that Milton Friedman saw economic freedom as the essential requirement for political freedom. Once economic freedom is constrained by government actions then all other freedoms will suffer a similar fate. Friedman was so confident in the powers and beneficence of the market that he demanded, for example, that individuals should be allowed to decide which pharmaceutical drugs to use without governments interfering and regulating the industry.

Despite the apparent invincibility of the most ardent supporters of the market, there were frequent warnings of problems ahead. The well-known sociologist Anthony Giddens warned in 2000 that a “society that allows the market to infiltrate too far into other institutions will experience a failure of public life”.

A major UNICEF study in 2007 reported that of 21 advanced economies Britain ranked last on most measures of the well-being of its children. Possibly more surprising, the United States, the wealthiest nation in the world, was ranked just above Britain on most of these measures. The other similarity that both Britain and the US have, according to the UNICEF study, is that they both embraced the neoliberal market reforms of the past three decades with greatest gusto. However, northern European states such as Denmark, Finland and Norway, which chose not to sacrifice their social democratic credentials to the more demanding aspects of neoliberalism and the cult of the market, occupied the highest positions on measures of the well-being of their children.

Despite the warnings and the mounting cost to society of failed privatisations of core public services, the expansion of the market into government and the infusion of society with market values continued unabated.

Now, in our current state of economic chaos, we know that the market will be only ever interested in its own selfish interests, unless governments limit the consequences and insist that the public good must be protected. The scale of the collapse of national economies has confirmed irrefutably that left to their own devices and self regulation markets will not benefit all.

However, what we are experiencing now is little different in either cause or consequence from the Great Depression. Now we hear of the need for greater regulation of the behaviour of corporations but most especially banks. Over the past three decades banks were allowed in the US and Britain, the most prominent examples now of market failures, to use their privileged positions to become centres of risk rather than the cautious, responsible financial intermediaries that they are meant to be.

At the height of the Great Depression in January 1933, when delivering his inauguration address, US President Franklin D Roosevelt also directed much of the blame for the plight of America to the behaviour of the banks, accusing them of destructive self-interest and unbridled greed. Presaging the urgent pronouncements of governments today, and in almost the same words, the new President sought “an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. … There must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money”.

Markets have many valuable attributes but only when they are controlled and their motives not allowed to degenerate solely to self interest. Adam Smith, whose seminal work The Wealth of Nations has been used to justify the marketisation of the state and society, made it very clear that markets were fallible and needed to be watched. It may take a long time, as it did after the Great Depression, for market values to regain their influence but history confirms that, given enough time to forget, this will happen and with similar consequences. In the meantime, it is “in government we trust”.