The market's not finished yet

Has the market revolution run its course, and will we see a serious attempt to roll back the tide throughout the world?
Click to follow
IT HAD to come. For the last 15 years, the rolling revolution of market capitalism has swept across the globe. Now - quite suddenly - we are seeing the reaction. Instead of every bit of news supporting further advances of the market - a privatisation here, a Marxist government being overthrown there - the news is of push-back. Governments are saying: "No, we don't like the costs the market system imposes. Let's try to block it."

The mayhem in Russia was always bound to create concern that the country had made a terrible mistake in giving a bear hug to capitalism. But Russia effectively defaulting on part of its debt does not necessarily signify a rejection of the market: it merely means it can't pay its debts. More significant are the examples of push-back in East Asia, in Malaysia and in China itself.

Malaysia was one of the shining examples of the advance of the market, but has been caught up in the region's recession, just like everywhere else. Its Prime Minister, Mahathir Mohamad, has played a weak hand badly by alternatively fulminating against sabotage by foreigners and seeking to meet the financial markets' policy suggestions. But this week he has stepped up his attempt to buck the markets by effectively imposing exchange controls and by a ban on share sales for 12 months. Overseas trading of Malaysia securities has also been stopped. And yesterday Dr Mahathir rubbed home his anti-market drive. The pro-market Deputy Prime Minister, Anwar Ibrahim, was sacked.

This attempt to challenge the rules of the market contrasts with China's attempt to play within the rules, but use the state's resources to bump the market in the direction the government wants. China has been trying for two weeks to support the Hong Kong stock market, spending $12.5bn (pounds 7.5bn) in the process. This week it has switched to supporting the Hong Kong dollar. It remains to be seen whether the effort is successful in the long term, but it has had the incidental effect of making China the largest shareholder in Hong Kong securities, including the shares of Hong Kong and Shanghai Banking Corporation. If you happen to have a bank account at Midland or with First Direct (both owned by HSBC) you may like to know that Red China owns 8.91 per cent of the stock of your bank.

So, in their different ways, two east Asian countries are trying to buck the markets: one by bullying, the other by buying. When the market is running in your favour, capitalism is praised; when it runs against you, you try to fight back.

But what does all this mean for the market revolution? Has it run its course? Are we going to see a serious attempt to roll back the tide, a hunt for a "third way", not just here in Britain but throughout the world? Or is this merely a pause in its advance, an attempt by a few misguided (and probably frightened) politicians to check something they don't understand?

I think it is just a pause, a natural and inevitable pause, in the advance of the market and that in fact we are still in the very early stages of that advance.

The first thing to be clear about is that markets have never been allowed to live unchallenged. What China has been doing on the Hong Kong market is exactly what Japan tried to do: manage share prices. It is not a policy that is very wise, or one which is likely to be successful, but if governments want to risk taxpayers' money in that way, they are free to do so. As for supporting the Hong Kong dollar, all governments intervene on the exchanges from time to time.

In the case of Malaysia, it is breaking the rules of the market as they currently prevail, but that was the sort of thing that this country did a generation ago and no one suggested that we had rejected the market economy. We had exchange controls right up to 1979, and wage controls a couple of years before that. Besides, it is harsh to say it, but what a little country like Malaysia does is not going to swing the way the world economy works.

As for Russia, well, plenty of countries default on their debts from time to time. Usually they wrap things up, pretending that they are not defaulting when in fact they are; that is what happened in Latin America in the Eighties. But the end result - banks that have lent to them lose money - is the same. Russia will probably introduce more economic controls over the coming months but that does not necessarily signify a rejection of the market system; merely an attempt to buffer its more disagreeable effects. Maybe the Russians will try to move some way back to a command economy over the next few years, but I find it hard to see that affecting the rest of the world. Russia is not admired for the quality of its economic management: I can't see other countries trying to imitate it.

The second thing to be clear about is that there are lots of different versions of market capitalism, and the next generation will see a tussle between them. To pretend that there is a single model for a market economy is nuts. Take Sweden at one extreme. There the government takes and spends more than 60 per cent of GDP; in the US, by contrast, the Government accounts for less than 35 per cent of the economy. But both are recognisably market economies. The Netherlands has more than 50 per cent of GDP going through the state, but has a privatised post office. We have 40 per cent of GDP going through the state but don't yet feel politically able to take that step.

Not only are there lots of different ways of running a market economy; there ought to be lots of different ways of doing so. That is how we improve the performance of our economies: by allowing the different versions of market capitalism to compete against each other. But do not expect any one model to come out on top. Just as there are different ways of running companies, so there are different ways of running the market system. Finding out what works is a slow, painful and endless process.

It is much easier to be clear about what does not work: we really know with great confidence that the Communist command economy does not work. Only North Korea and Cuba have yet to figure that one out.

Nothing is for ever. Eventually, in some distant day, the run of market capitalism will come to an end. That could be one generation away; more likely, if you look at what happened in the 19th century, it could be three or four generations off.

But, for the foreseeable future, expect an onward march - but an onward march that is characterised by lots of experimentation, lots of shocks, lots of resistance, and, inevitably, some reverses.

We are working with a "least bad" system, not an optimal one. It takes a certain maturity, a certain common sense, to accept imperfection: not to call for governments to "do something" when things go wrong. Only 25 or so years later, when you look at the effects of government intervention, do you realise how often the intervention makes the problem worse, not better - usually because the politicians treat the symptoms rather than the illness. We can see that now, looking at a lot of the British government policies of the Sixties and Seventies: pay policies, support of an unrealistic exchange rate, nationalisation of lame duck industries.

That is a lesson I fear that the poor Malaysians are going to have to learn the hard way. As we did.