The excesses of pragmatism

By Christopher Caldwell

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It is not just the reputation of capitalism that has suffered a blow from the financial crisis. The prestige of democracy has been struck amidships. We have been in the habit of talking about “democratic capitalism” and “liberal democracy” and “liberal democratic capitalism” as if all these products of our philosophical sophistication can be bundled together. In a time of prosperity, they can be. But there are circumstances in which people are forced to choose which they want more – democracy or prosperity. We are picking the latter.

Elected bodies look venal and shambolic. A week ago the US Congress rejected Hank Paulson’s troubled assets relief programme. The bill was rescued not through further deliberation, but by purchasing the votes of congressmen with “pork barrel” spending, the living symbol of US legislative corruption. The great worry among the public was that Tarp was a fiscal Iraq – a display of “shock and awe” that did not impress the people it was supposed to. That fear was borne out when the market plummeted after Tarp’s passage. In the UK, when Gordon Brown and Alistair Darling put forward their own, arguably more creative rescue plan this past Wednesday and Thursday, stocks fell even further. Even if they are well designed and work perfectly, such programmes cede vast democratic prerogatives to unelected experts.

There is a distinct note of schadenfreude among many commentators, who launch salvos of academic jargon at the free market and at capitalism. This has always been a straw man – “unbridled” and “savage” capitalism are far more present in the minds of capitalism’s detractors than of its defenders. A couple of months ago, it may have been possible to believe that such an ideology was regnant. But if market capitalism had been a real ideology, dogmatically held, there would be people making the case for it even today, arguing that those of us who did not put our money in gold or bury it in the backyard deserve a lesson we will never forget.

A beloved myth holds that dogmatists (or ideologues) get us into problems like these, and pragmatists get us out. In fact, the difference between dogmatists and pragmatists is hard to draw. We got into this mess in a pragmatic way. We kept following a method that had succeeded before. In the 1990s, securitised mortgages and various derivatives seemed to offer a sophisticated way of managing risk. Whatever works gets overdone. The longer the system went on without collapsing, the more incentive there was to strip protective “give” out of the system. The system became more complicated, diversified, elegant and (as we now know) fragile. There were horrible excesses, but they were excesses of pragmatism, not of ideology.

Throughout this crisis, pragmatists, not dogmatists, have had their hands on the tiller. Until about two weeks ago, market watchers were crowing about how US authorities had absorbed the “lessons of Japan” from the 1990s and would not make the mistake the Bank of Japan did when it loaded up its balance sheet with toxic assets that clogged its economy for a decade. That was dogma. Now the Fed and Treasury are coming around to the idea of rescuing financial entities by buying them. The west could wind up in a very Japanese position, with a couple of differences: a slightly more dynamic economy and a vastly lower rate of savings.

Alan Greenspan, who is being scapegoated for the excesses of derivatives, has defended himself by making the case that there was a moral failing on the part of those administering them, some combination of greed and diminished responsibility. “In a market system based on trust,” he said at Georgetown University last week, “reputation has a significant economic value. I am therefore distressed at how far we have let concerns for reputation slip in recent years.” But no special malevolence is necessary to explain what has been going on for the past few weeks – only a very human kind of complacency.

“Bold, persistent experimentation” was Franklin Delano Roosevelt’s formula for getting out of an economic crisis. In fact, bold, persistent experimentation is all we ever have. In the 1930s, FDR brought Americans hope with massive government involvement in the economy. Whether the New Deal’s economic effects were positive or negative is open to debate. But because it was politically popular, it was extended and expanded over the decades. The same pattern was followed throughout the west: sensible, pragmatic help for working-class families was, by popular demand, extended until it turned into a bubble – a benefits bubble, or a wage bubble or a unionisation bubble, or call it what you will. In the 1970s, that bubble popped, putting the global economy at risk. The result was “bold, persistent experimentation” à la Thatcher and Reagan, the most effective part of which was the idea of an “ownership society”. It has left us here.

Dogmatism is pragmatism that has stood the test of time. Institutions tend to be forged in moments of crisis. Ideas that fail are discarded; ideas that succeed are retained, elaborated and then over-elaborated until they collapse. The problems of 30 years from now will turn out to have been hidden somewhere in the parts of today’s bail-out packages that wind up being most effective. If we are lucky, the most effective parts will be the most morally admirable parts. But that is not inevitable. In politics, correlation often passes for causation. The recovery of the Russian economy after the rouble crisis of 1998 coincides with the arrival of Vladimir Putin in power. If a strong hand coincides with prosperity, the public sometimes assumes a stronger hand will mean more prosperity. Needless to say, leaders always think like that.

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