Niall Ferguson: This financial crisis does have a Conservative solution

[Niall Ferguson is Laurence A Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. This is an abridged version of a lecture to be delivered tonight to the Centre for Policy Studies.]

... Suppose that a government can have any two of the following things, but not all three: globalisation, in the sense of openness to international flows of goods, services, capital and labour; social stability; and a small state. Or, to put it differently, conservatives can pick any two from an open economy, a stable society and political power – but not all three.

Why is this? Globalisation, it turns out, gives rise to an economic system which is highly efficient most of the time, because resources are optimally allocated through the effects of the division of labour and comparative advantage. But it is also prone to crises: minor ones roughly every decade, major ones roughly every 50 years.

The effect of globalisation is therefore double-edged. Most of the time, economic volatility is reduced by international integration. However, recent events show that volatility on a large scale has not gone for good, and never went away on the small scale, for the individual citizen or firm – on the contrary, globalisation seems to have increased it. In the short run, we have to live with bigger and more frequent changes in employment and income; in the long run, with the likelihood that we shall experience at least one really big global crisis.

It is far from coincidental, and far from illogical, that this crisis is perceived by many on the Left – not least the chief of staff of the most Left-wing Democrat ever elected to be President of the United States – as an opportunity too "good" to be wasted. Their vision is to resurrect the General Theory of John Maynard Keynes, with its claim that shortfalls in private consumption and investment can and should be compensated for by increases in government expenditure funded by borrowing.

The fact that these patent remedies for the last Great Depression ultimately got the Western world into the mess some of us remember from the 1970s is neither here nor there. As conservatives around the English-speaking world are discovering, the arguments that proved so effective in the Eighties are ineffective now. Should they decry the irresponsibility of such large deficits? Should they remain committed to tax cuts? It's hard to do both at the same time. Ken Clarke's recent faux pas on the abolition of inheritance tax on estates worth less than £1 million illustrates the problem: is it a Tory "aspiration"? A "commitment"? Or perhaps just an irrelevance?

By trying to have it three ways, Conservatives end up being identified with the social disruption globalisation brings in its wake, and particularly the losses of jobs associated with outsourcing, off-shoring and immigration. Only the Left appears to have a credible response: globalisation, plus social stability, plus a strong, interventionist state.

Is there any way for Conservatives to resolve the trilemma without abandoning either their commitment to the free market, their commitment to social order or their commitment to the small state?

I believe there is, but it will require them to redefine each of these things. They need to recognise not only the inherent vulnerability of the liberalised global economy, but also the continuing distortions imposed on the world market by governments, which have served to increase that vulnerability. Also, social stability should not in fact be sacrosanct: conservatives should be prepared to embrace social change on what might be called the "Leopard" principle, after the aphorism in Giuseppe Tomasi di Lampedusa's great novel Il Gattopardo: "If we want things to remain as they are, things have to change". Finally, they must argue that a small but "smart" state can more effectively regulate the interaction of globalisation and social change than the old Keynesian model.

Therefore, the first part of the Conservative solution to the current crisis is to reaffirm our faith in Adam Smith's vision of the wealth of nations enhanced by free exchange, by pointing out – as Boris Johnson does on the next page – how many government distortions still impede the working of globalisation.

The second part is to learn to stop worrying and love social change. No one wants instability, to be sure, but nor do we want stasis. The key here is to distinguish between an orderly society, in which crime and other forms of disorder are kept to a minimum, and a rigid society, in which order is achieved at the expense of social mobility. The fundamental difference between Conservatives and their opponents should not be (as the Left would have it) that Conservatives favour inequality, while they favour equality. The difference is that Conservatives favour social mobility, and believe that some measures adopted to promote equality – particularly large-scale redistribution of wealth – may have the unintended consequence of reducing mobility.

The third part of my solution is to reflect more deeply on how we think the state should work. One of the more troubling features of British Conservatism in recent years has been the tendency of the party's leaders to allow the Labour government to seize and retain the moral high ground on the issue of public spending and, to a degree, on taxation.

Emancipated by the financial crisis, the governments of the Left on both sides of the Atlantic are currently presiding over explosive increases in public expenditure, public debt and public employment, the short-run benefits of which they almost certainly overestimate, and the medium-term costs of which they almost certainly underestimate.

Yet Conservatives have no articulate response. It is high time they found one, and removed themselves from the horns of the trilemma.

comments powered by Disqus

More Comments:

Lorraine Paul - 3/28/2009

For Niall to call any government elected in the USA 'left' is a prime example of his skewed thinking!

History News Network