Today is a pyrrhic victory for classical liberalism

August 5, 2011

Pyrrhic, because having the world’s economy go down the toilet to prove your point is a position no-one wants to be in. But it is a victory, nonetheless.

The cause of today’s market calamities is the fact that the Eurozone has spectacularly failed to get its house in order, and that no-one has any idea how the US is going to cut its deficit. Both of these are political failures, what could be perhaps termed massive regulatory or policy uncertainty. One of the major predictions of classically liberal theory is that people will work better without the Government on their backs – or, in this case, will work better if the Government doesn’t keep mixing it up.

The biggest flaw in the Coalition’s economic policy has been to combine a reduction in spending with large dollops of regulatory uncertainty. The financial sector has been hanging around for the results of Project Merlin. The construction industry has been waiting to find out exactly how much it’s going to be boned by the Localism Bill. Chris Huhne’s Electricity Market Reform, combined with the review of renewable energy support, has dramatically slowed investment in energy while people wait to see whether they’re going to be able to make money.

This uncertainty – whether the regulatory framework will allow returns on investment – has been one of the significant factors in the downturn in corporate investment over the last year. It’s now being repeated at a global level, and stock markets are reflecting that.

If the Eurozone puts together a proper stability fund in time, and the US comes up with a credible set of cuts, then we might avoid more economic calamity. Regardless, my advice to the Coalition at this point would be to stop changing stuff.


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