Regarding the efficiency of market mechanisms, however, the anti-capitalists used mostly to confine themselves to cautious sniping, for a full frontal attack was awkward to mount while this system was delivering unprecedented material progress for the last half-century and was lifting a billion and a half people out of abject poverty.
Now, at long last, it is open season. Shooting up the free-for-all has the enthusiastic support of public opinion because it is supposed to have grievously failed. In its place, recourse is to be had to the strong arm and helping hand of the state to undo the trillions of dollars worth of damage wrought by stampeding bankers.
For several podcasts on the Great Depression, see Robert Higgs on the Great Depression, Eric Rauchway on the Great Depression and the New Deal, and Podcast Archive on Business Cycles with host Russ Roberts on EconTalk.
Public opinion holds deep beliefs, received from the media and from resentful economists, about how and why great events happen. It is absolutely convinced that Roosevelt beat the Great Depression. The judgment of many reputable economic historians that the New Deal actually retarded the recovery, is almost totally ignored. Likewise, the current economic downturn is ascribed to the pernicious practices of laissez faire. It is a fair bet that the coming generation of economic historians will refute this belief, too. For it is already clear that what undermined the banking system and through it indirectly industry and trade as well, was not the lack of regulation, but rather the hybrid nature of the regulations in force, made up of mutually incompatible rules. Imposing fixed solvency ratios on the banks was rather like ruling that you must always have at least €100 in your pocket. Since you must never use it, it is as if you did not have it at all. Once the need arises, you must sell the shirt off your back before using it. Combine this solvency rule with the "mark to market" rule that forced banks to write off to near-nothing the collateralised debt obligations they held once the media started shrieking that they were "toxic! toxic!" and their market temporarily disappeared—in part because nobody could use their last €100. Taken together, the two regulations were strong enough to ruin almost any banking system.
Another spectacular example of the vanity of belief in regulation is the recent Madoff fraud. Acting under the eagle eye of the Securities and Exchange Commission, and with his accounts audited by a firm hardly fit to audit the corner grocery, Madoff could attract several tens of billions for his fraudulent scheme from investors who might have been more careful if they had not been reassured by SEC supervision and audit. Regulation imparts a virtual stamp of approval that is really, well, "toxic! toxic!" if regulators are incompetent or corrupt. It is an open question whether regulation by fallible human beings is not more dangerous than the much-maligned free-for-all where people must watch their step.
It is no use saying that what we need is better regulation. We should always take something better than whatever we have, but it is infantile to think that we always can and that saying so will make it so.
The supposed free-for-all may now be fair game, but then so must be the hunter. It is high time to return the fire rather than duck or cower penitently under the punishment.
The whole controversy must be seen from a broader perspective. Is the free-for-all both viable and self-correcting? Respectable general equilibrium theory says it is. Empirical proof is not conclusive, for there is not, nor has there ever been, a pure enough free-for-all to provide a copper-bottomed thesis. Is socialism viable and self-correcting? Economics and psychology say that on the whole it is not. No contrary evidence exists. Even though pure socialism has occurred no more than pure capitalism, mankind's experience with Russian, Chinese, Indian and African attempts at socialism was sufficiently disastrous to make the answer an incontrovertible "no". There is, then, the hybrid system (or rather spectrum of systems) that unfolds as we advance along the Third Way, the "new, moral, sensibly controlled" ideal mix of elements borrowed from pure-bred capitalism and socialism and fitted together in the hope that it will work better than either of its two pure-bred parents.
Advocates of the Third Way claim that it would preserve the virtues of free markets while curbing their vices. It is strange to hear talk of free markets in countries where between 40 and 55 per cent (soon to rise to between 45 and 60 per cent) of the national products is disposed of by government bodies and compulsory social insurance. Directly or at one remove, deliberately or inadvertently, government influence must be all-pervasive and dominant in those countries.
A typical hybrid economy conjures up the image of a walking patient with multi-coloured plastic tubes snaking in and out of every orifice of his body. The tubes infuse and evacuate fluids of all sorts that nourish, stimulate, restrain and neutralise the effects of other fluids. They supplement, redirect and override the body's own autonomous circuits. Each tube turns out, after a little while, to need strengthening, offsetting, correcting by one or more new tubes, each of the new tubes turning out to need even newer, cleverer supplementary tubes. Every single tube adds something better, an improvement in safety, efficiency and, why not, moral uplift to the body's own innate equipment. There is every hope of ever-better results. There is no end-result, for the assembly of tubes is never final, but keeps evolving and getting more complicated. Little by little, however, the patient starts looking less and less like a potential athlete, and more like a real invalid. Could it be that the plastic tubes and the body's own circuits do not mix so well?