Less than a month ago—in what now seems like a lifetime ago and another world—I was engaged in a discussion with a colleague from the economics department down the hall. He was arguing that—at least in policy circles—the neoclassical paradigm was the only model really under consideration. We had reached the “end of history” as Fukuyama would have it. “There is [was] no alternative,” to quote Margaret Thatcher.
Less than a month later, we now seem to be living in a different world. With world credit markets seizing up, financial markets in meltdown, and the Dow Jones in apparent freefall, governments are increasingly intervening in an attempt to prevent the expansion of the global financial crisis. The U.S. Congress passed a $700 billion rescue package. The British government took an even more dramatic step, partially nationalizing several major banks on Wednesday. The U.S. government is now considering a similar measure. The Federal Reserve has described the new policy as a “regime change,” stressing that the current economic environment is such that radical policy changes may be necessary, even going so far as to suspend traditional neoclassical principles of noninterference in the free market. This represents a dramatic shift from March 2007, when, during a visit to Shanghai to meet with Chinese officials, U.S. Treasury Secretary Henry Paulson argued that “an open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention.”
The policy reversal has led the conservative Daily Telegraph to conclude that “we’re all socialists now.” Perhaps a bit of dramatic license. But it does highlight the dramatic changes taking place in the world today. Communism it is not. But perhaps return to the Keynesian system of regulated domestic and international markets. Time will tell.