WASHINGTON -- The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.
Since the Reagan years, free market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing.
You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."
Dionne is not the first, nor will he be the last, to blame capitalism for our current problems. His list of talking points isn't one that any true free market capitalist would produce. No economist that I've read (event the dumb ones) believes that income and wealth distribution don't matter or that providing incentives is the only policy that counts. Dionne's statement about free trade is closer to the parody of free trade presented by those like Dionne who are employed in the media rather than any self respecting economist. Free trade does not produce well distributed economic growth but it does make efficient use of limited resources. It is dissent from common sense and freedom which gets one labeled a protectionist.
It does seem though that we go through these periods of doubt about capitalism:
This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free market notions. What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era.
Dionne misses the common element of all these periods. They are all preceded by periods of extraordinarily bad monetary policy. Every time the Fed screws up, people start to doubt the benefits of capitalism. That the Fed is not part of a free market, capitalistic system seems to matter little to those who prefer the government making economic decisions rather than individuals. It is ironic and maddening that an institution that represents the failure of monopolistic, centralized government planning could be the cause of so much doubt about the wonders of free market capitalism.
Update: Art Carden at Mises has similar thoughts.