21st Century: Conflict of liberalism

I have been observing in India and abroad how the present stand of liberalism moves forward. I find increasingly diluted even among the well experienced liberals. For instance, in today’s Business Standard Professor Deepal Lal argues “….US banks urgently need to be restored to health, perhaps through temporary nationalisation as in Sweden in 1992”. This is a dangerous suggestion. I have no idea how he reached this conclusion. Though, he gives some explanation in the article essentially the major difference between Hayek, Keynes and Fisher and Wicksell theory.

But I remember what Anna Schwartz said "we won't have a capitalist system . . . People are responsible for the decisions they make. If they've made wrong decisions, lost money and don't have the funds to operate, well, it's time to leave the market. And that's what the Fed's responsibility is, not to shore up firms that have no reason to continue." 

The concerns of MPS president……..

Professor Deepak Lal was called a urgent meeting of The Mont Pelerin Society to discuss the global crisis and in his address to the meeting said:

• “My greatest fear is that this crisis- and the responses to it- will stall or reverse the wholly benign process of globalization, which dates from the China's opening by Deng Tsiao Ping in 1978, and the reversal of India's Permit Raj in 1991. This has lifted more people from abject poverty than has ever been seen in human history. 
  
• It is notable that unlike the bowdlerized Keynes in the back pockets of Western politicians, the Chinese premier Wen Jiabao in an interview with the Financial Times at Davos said his bedtime reading was Adam Smith's The Moral Sentiments! 
  
• As will questions about the moral basis of capitalism. The shameless greed shown by many bankers- who have smashed the institutions they were charged to nurture on the rocks- is leading to a popular backlash against capitalism. This takes us back to questions raised by the great thinkers of the Scottish Enlightenment, who saw a common morality as providing the cement of society. A morality primarily dependent on a society's traditions and forms of socialization, based on using the moral emotions of shame and guilt, and not reliant on either God or Reason for their acceptance. How can the Victorian virtues embodied in the notion of the English gentleman which are today to be found more often amongst the burghers of Bombay and Shanghai than the denizens of Wall Street “The City” and Hollywood be inculcated? These are virtues which denoted a distinction of character rather than class, and consisted of 'integrity, honesty, generosity, courage, graciousness, politeness, consideration of others."21 They constituted the 'sympathy' which Adam Smith considered the highest virtue which allowed healthy ambition to be combined with an empathetic conscience to promote social stability and order. 
  
• …..what is the way to challenge the political correctness which is leading to the abuse of reason in the humanities and many social sciences in our citadels of higher learning and which increasingly provides the intellectual lens through which most politicians view numerous public policy issues? Last but not least, how can the growth of the Nanny State's undermining of Mill's principle of liberty be countered? These are some of the many questions raised by the current crisis which fall within the mandate of the society as seen by its founders”.
  

The dog’s breakfast of a stimulus package

Liberal economist narrates about the stimulus packages announced by new President of US. He says that the “If the purpose of the stimulus package is to raise aggregate demand by roughly the amount it has fallen because of the financial crisis, Valerie Ramey finds that from historical US data, the multiplier for public spending is not large: $1 in public spending raises GDP by $1.4 (“Identifying Government Spending Shocks: It’s all in the timing”, UC, San Diego, June 2008). Whilst Christina and David Romer’s study of the effect of tax changes on aggregate demand found that a $1 tax cut raises GDP by $3 (“The Macroeconomic Effects of Tax Changes”, UC, Berkeley, November 2008). Though it should be added that since being nominated as Obama’s Chair of the CEA, Christina Romer seems to have changed her tune and fallen into line (see C Romer and J Bernstein: “The Job Impact of the American Recovery and Reinvestment Plan”, January 10, 2009), with the claim that the proposed package will lead to the creation of over three million jobs by the end of 2010. But as many observers have noted, “The total package is so diffuse, it costs $223,000 to create a single job” (D Brooks: “The First Test”, NYT, January 23).”

Whether Free Banking Have life?

Professor Deepak Lal writes in BS “many classical liberals have favoured free banking. Banks combining the payment and investment functions and issuing their own notes would be monitored by their depositors, who would stand to lose if their banks undertook imprudent lending. But with the near universality of deposits as a means of payment, there is little likelihood of this monitoring function being effectively exercised. Whilst Demos precludes any government being able to resist pressures to bail out imprudent banks to protect their depositors. This makes deposit insurance inevitable. 

The near universal calls for greater regulation and state intervention is astounding. Public agents, not private ones— who reacted rationally to the implicit or explicit 'rules of the game' promoted— are to blame for the crisis. It would be foolish to blame the puppets for the failings of the puppeteer”.

Chinese rights in terms of property and economic miracle

Professor Deepak Lal writes in BS “Bureaucrats become capitalists with the right set of incentives”

Interestingly he note that “the Chinese had evolved a form of local bureaucratic competition based on granting ‘use’ rights to urban and industrial land without the need for corruption. At the heart of this was the evolution of a set of incentives provided to bureaucrats in xians (municipalities) to act like landlords selecting and granting share-cropping contracts to investors. The economic power of the xians lay in their sole right to decide and allocate the use of land. This right did not belong to villages, towns, cities, provinces or even Beijing. The xians are part of seven geographically determined layers: country, provinces, cities, xians, towns, villages and households. These layers are vertically linked by responsibility contracts (which, from their Chinese name, imply, “guarantee what I want and you can do what you want”). But horizontally, there are no contractual links and they are free to compete”.