This article is an expanded version of the Second Chris R. Tame Memorial Lecture delivered by Professor Dowd at the National Liberal Club, London, March 17th 2009. A recording of the original Lecture, with an introduction by Dr Tim Evans, President of the Libertarian Alliance and CEO of The Cobden Centre, can be found here. The original paper is available here: please see that paper for appendices and endnotes.
Introduction
Good evening everyone. I would like to start by thanking my friends at the Libertarian Alliance for inviting me to give this lecture. It’s good to see so many other friends here as well. I would like to thank you all for coming.
For those of us who were fortunate to know him, Chris Tame was an inspiring mentor and a loyal friend; he showed remarkable dignity and courage in the face of the illness that ultimately cost him his life, and his death was a massive loss. I owe him an immense personal debt myself, so it’s a very special honour to speak at his memorial lecture.
Chris was a central figure in the rebirth of Classical Liberalism in this country and it is very appropriate that we meet here in the National Liberal Club. But the Liberalism that Chris espoused was not the watered down ‘liberalism’ of the 20th Liberal Party—the liberalism of Lloyd George or Jeremy Thorpe—but the Classical Liberalism of an earlier age—the Liberalism of Gladstone, and earlier still, the Classical Liberalism of the great moral philosophers of the 18th century Enlightenment.
My topic this evening is the current financial crisis. My theme is that the Classical Liberal perspective can help us both to understand the crisis and to find a way of out it.
I always like to begin with a nice quote, and we are spoilt for choice when it comes to quotes about the financial crisis. Amongst those I can quote in mixed company, my favourite one is a comment by a Wall Street passer-by when asked his thoughts about the bank bailouts: “Its like not being invited to a party and then being given the bill for it”, he said.
This comment goes right to the heart of the matter—the widespread perception amongst the public that there is something wrong with the current financial system, i.e., that it lacks legitimacy. I agree with this view entirely: the current system does lack legitimacy and I am sure every right-thinking person would agree with me that it is manifestly indefensible.
Though correct, however, this perception is also dangerous, as it provides fodder for interventionists who argue that the current crisis is due to unconstrained market forces. Free markets have failed, they argue, so let’s have more state control instead.
Such arguments are mistaken in every respect. The current system involves limited competition within the constraints of a large variety of state-mandated parameters – a managed (or rather, mismanaged) economy, but not nothing like laissez-faire. And it is this ‘managed’ economy that has failed us all so badly.
The roots of this managed economy back a very long way:
- We had the establishment of the Bank of England in 1694 and the subsequent development of centralbanking.
- We had the establishment of the limited liability statutes in the 1850s, passed against bitter opposition by those who claimed—rightly—that they were a recipe for irresponsible risk-taking at other people’s expense.2 This might sound familiar.
- We had the stage-by-stage destruction of the commodity monetary standard. The pound, which was originally—and literally—‘as good as gold’, was replaced with the current inconvertible pound, which is intrinsically worthless. One consequence of this was the horrendous inflation of the 1970s and 1980s, not to mention the danger that inflation will return again if current monetary policies persist.
- We had the development and widespread adoption of Keynesian macroeconomics from the 1930s on. Keynesianism was discredited and then abandoned in this country in 1976, but the Keynesian legacy—in essence, the belief in a managed economy—still survives and poses a grave threat to our future.
- In the late 20th century, we had the establishment of state-mandated deposit insurance.
- And, over this same period, we had the growth of vast systems of financial regulation: these included the establishment of the Financial Services Authority and the growth of international bank capital adequacy regulation. Contrary to what one
- often hears, banking is not the epitome of laissez faire, but a heavily regulated industry.
My point here is each of these pillars of the current system—central banking, limited liability, inconvertible currency, the managed economy, deposit insurance and financial regulation—represents a major and profound state intervention into the economy, i.e., the opposite of a free market.
What I would like to do this evening is give my own view of the crisis as a Classical Liberal economist. Naturally, I can’t pretend to have all the answers, but I think there is a way out: we can put together a workable reform package. We then need to be confident in it and advocate it with all the powers of persuasion that we can muster. Above all, as Chris always maintained, we need to win the battle of ideas against those who would argue that we need even more of the interventionist medicine (or rather, poison) that has already caused so much damage—and threatens to do so much more.
The stakes haven’t this high since at least the 1930s.
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