Keynes, not Marx, is back!

The financial crisis which is ricocheting worldwide and causing tremendous anguish and tremors. Governments in leading industrial countries have been forced t0 nationalize large chunks of their banking sect0rs and central banks have injected heavy amounts of liquidity in money markets for the sake of avoiding a financial meltdown. Some have hastened t0 say that this crisis indicates that capitalism does not work; others， from the opposite side， accuse governments that， de fact0， they are bringing in s0cialism. Both these trains of thought are wrong.

Economic freedom and entrepreneurship， which lie at the root of innovation and economic advance， rely on and feed on free markets; this is indisputable and explains why communist economies fell down， eventually. In this regard Ludwig von Mises， Friedrich von Hayek， and others were quite right. But it is misleading t0 argue that free markets are synonymous with non-regulated markets， with the practical extinction of public sect0rs and public policies. Modern economies and s0cieties do need regulations and public policies s0 that public goods be in adequate supply and negative externalities be prevented or constrained; this implies the functioning of public sect0rs against the backdrop of a free allocation of res0urces (at market prices) and vibrant economic competition. That one needs t0 streamline public sect0rs and make them run efficiently s0 that public res0urces be not wasted goes without saying.

Many accept nowadays the Asian crisis was caused， primarily， by a premature opening of the capital account in the economies of that region. Similarly， the rush t0 privatize public utilities is not warranted. In addition， there are public utilities which should rather stay in public hands. The oversimplification of "good practices" in governance and， not least， the hypocrisy which has， in not a few instances， accompanied their propounding， by industrialized countries， around the world is more than obvious nowadays. This deep financial crisis， the failed Doha trade round (with the controversy between free and fair trade)， the lack of results where-ever development policies have been simplistically encapsulated in the ideological mantra of neo-liberalism are quite telling. There is corruption， lack of clarity of property rights， waste and stealth of public res0urces in most poor countries， a huge misallocation of res0urces. But such structural weaknesses do not make up a convincing argument in favour of accepting， without qualifications， policy remedies that are t0o general and， s0metimes， in divorce of concrete local conditions.

The financial crisis which has hit the core of the world financial industry is， arguably， a persuasive refutation of the paradigm that glorified t0tal deregulation. The repeal of the Glass-Steagal Act in the US， in 1999， like the decision of the Securities and Exchange Commission of 2004 t0 exempt the brokerage operations of Wall Street investment banks from limits on the amount of debt they could take on have proved t0 be hist0rical blunders. The huge bail outs underway (in the financial sect0rs) are going t0 introduce， or reinforce， elements of state capitalism in numerous industrialized countries， including the US. The impact on national budgets would by tremendous for years t0 come. In order t0 mitigate the pains and reduce dependency on external borrowings savings ratios would have t0 go up in all economies where bank recapitalization will be very serious. A legitimate question arises： can rich countries' s0cieties become， almost all of a sudden， much more economizing and forward looking. This very much hinges on s0cial cohesion (s0lidarity) and the capacity of politicians t0 lead in times of duress. If one adds here the implications of aging and strained welfare states， climate change， as well as the competitiveness challenges posed by emerging global powers， the cont0urs of very complicated public policy agenda in the decades t0 come are not hard t0 delineate.

The effects of the current financial crisis have hit the western world at a time when tect0nic shifts in the global economy had been taken place for more then a decade. The rise of China， India， Brazil， the resuscitation of a capitalist Russia (that benefits on huge natural res0urces) are ushering in an increasingly multi-polar world， with growing reverberations economically and geopolitically. The struggle for the control of exhaustible res0urces (oil and gas in particular) epit0mizes this phenomenon. The financial crisis has given more salience t0 the inherent weaknesses of policies which are not pragmatic and which succumb t0 fundamentalist tenets.

The fall of communism， which was equated by s0me with the "End of Hist0ry"， has favoured immensely the advance of neo-liberal ideas. Needless t0 say that the overwhelming superiority of the US on all fronts (economic， military， technological)， offered a s0rt of a sui generis Pax Americana and created prerequisites for an international regime. The latter was supposed t0 order the world by providing international public goods and res0lving/preventing possibly major conflicts. But neo-liberalism (market fundamentalism) has revealed its serious flaws over time and is currently， willingly or not， put on the shelf for the sake of salvaging the functioning of markets economies. Because， what is happening now is not a dismissal of markets forces as an essential mechanism for res0urce allocation and stimulating entrepreneurship， but an invalidation of a grossly misinterpretation of what it takes for a modern economy t0 perform economically and s0cially over the long run. Fragments of state capitalism are being put in place and we will see what will remain out of them over time.  Probably， substantial portions of the new state sect0rs in the making will get back private at one point in time. Monetary policies are geared now t0ward achieving financial stability and have acquired a s0rt of flexibility that reminds of Keynesian injunctions regarding how t0 avoid bad equilibria (The Great Depression was a terribly bad "equilibrium"). The very concern of governments and central banks with over-hauling radically the regulation and supervision of financial markets， s0 that "Minsky moments" be averted is a strong validation of Keynes' intellectual legacy and of his sense of realism in understanding the functioning of markets in general. The crux of the matter here is that the reshaped mixed economies have t0 function in such a way that extravagant policies be avoided for the benefit of democracy and the welfare of most citizens. Cycles cannot be eliminated， and crises will pop up again. But a financial meltdown， with its very dire effects on the real economy， can be prevented by adopting proper policies and regulations.

The EU and US will come out of this crisis with reshaped economies (with larger public sect0rs) and will continue t0 be， fundamentally， liberal democracies. But the financial crisis has already weakened them whereas the ascendancy of the new global powers is hard t0 st0p. As argued previously the future will be driven by a competition between liberal democracy and authoritarian forms of capitalisms -the latter being represented by China and the Russian federation， principally. In liberal democracies war-type economy measures may have t0 be res0rted from time t0 time; as a matter of fact， the rescue operations of banks， under way currently， are t0 be ranged in this sphere of policy action.

Western countries will have t0 come t0 grips with their weakened relative status in the world economy and shed much of their hubris in dealing with the rest of the world， for their own sake. This woul

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