The broad sweep of economic history for the past century has been a tug of war between unrestrained capitalists and constrained capitalists. It may surprise some that liberals used to be the former and are now the latter, and conservatives were the latter but are now the former.
More importantly, the constrained capitalists are losing and the consequences of that are severe.
The switch in roles is easy enough to understand when you comprehend what conservatives are: aristocrats. They are the embodiment of entrenched interests and so in the past, the entrenched interests had gotten rich in the restricted trade world that had been. Then came the liberals who managed to push a lot of reforms and open up trade, regulations and capital flow. Over time, the power of the old aristocracy was broken (the world wars contributed a lot to this), and a new order of wealthy powerful elites rose up. These elites had succeeded under the new order of largely unrestrained capitalism. Thus, as aristocrats (whether they call themselves this or not doesn't really matter), they wanted to ensure the rules that have favoured them so much remained in place.
For the liberals though, freer markets had only been a means to an end. The end being the usual goals of liberals: equality and justice. But when it was apparent that unrestrained capitalism leads to perverse outcomes (Great Depression) liberals naturally shifted to a more constrained model of capitalism. Liberals, being empirical sorts and also pragmatists, realized that market competition is at best an imperfect regulator against real human abuses and infliction of misery for profit; Welcome to the New Deal. Some conservatives for their part were "scared into line" by seeing the Russian revolution too. Restrained capitalism was better than the masses storming the Bastille.
In truth, for conservatives freer markets were also just a means to an end, and in fact there is much to be said that conservatives do not really believe in free markets either. No bid government contracts, tax subsidies for giant corporations, the military-industrial complex all speak to the willingness of conservatives to use the power of government to foster their ends, once again those of an aristocratic elite with no interest in equality or justice. Further, the existence of the libertarians among US Republicans as a distinct (if largely irrelevant) grouping from the other portions of the Republican coalition bolsters the idea that conservative ideology borrows the rubric of the "free market" to bolster its interests, but will quietly abandon them when it works against them.
So far so good and if this was the extent of the fight, I'm confident that it's one that liberals would win, as they did under FDR and again under JFK/LBJ. But this model isn't complete, and other forces have been at work, hampering our ability to continue (or even fight) this battle against the would-be aristocracy in order to restrain the worst effects of market capitalism. Two new fronts: globalization and the environment.
Globalization
Here we should focus on the effects of trade agreements and internationalization of corporations, markets and capital beyond the reach of even powerful national governments. One could wonder if the market capitalists realized they were losing the political fight within individual nations on the obvious merits that most people don't benefit from the unrestricted capitalism model, and decided to take the fight above the heads of those governments and political arenas. It's difficult to tell if this was done on purpose, but it really has been the effect nonetheless. Globalization broadly speaking is taking market capitalism to be the defacto global political environment such that individual governments cannot successfully regulate and restrain capitalism, whatever political mandate they get from their citizens.
You can see this explicitly in agreements like NAFTA which allows non-state actors to sue foreign governments for compensation for "losses" incurred due to that government's laws or regulations of the market. Again, whether or not this was the intentional moustache-twirling evil purpose or not, this is the insidious effect. No longer does "the US" have to pressure Canada to loosen restrictions on harmful chemicals or ingredients to products. Frito-lay or DOW Chemical can do it, and no US politician has to incur any personal political costs for doing so. The system itself is now rigged to bring about free market outcomes, by allowing faceless giant corporations to force democratic governments to loosen restrictions on the market.
Now of course the ostensible purpose of this mechanism was to prevent governments from gaming the trade system with non-tariff regulations that really amount to protectionism of local industries. Quebec for example has rules about what colour margarine may be in order to protect its dairy industry. So while there are merits to freer trade and reducing tariffs to promote overall economic efficiency (again, as liberals do recognize the value of market capitalism), but of course there is a far cry difference between what Quebec did and a rule banning say, trans-fats in foods because the populace has elected a government which recognizes the great health benefits of eliminating this additive.
Yet in the world of trade regulation quasi-court proceedings, none of this matters. If Becel is suffering economic losses because of New Jersey's health rules, then New Jersey owes them compensation, regardless of the State's real rationale for effecting the ban. Clearly this is bizarre.
NAFTA is but one example, but even aside from objectionable (and possibly repairable) formal trade agreements, the broad thrust of the "free trade" movement has been to constrain the viable options of governments to ever lower taxes through races to the bottom and ever weaker worker laws and union protections. Again, Quebec's union laws allows Wal-Mart's workers to successfully unionize, and Wal-Mart just closes the store down.
Racing to the Bottom
Wal-Mart is a fine example of this effect as they are known to "shop around" between states, counties and towns for the locality that will offer them the best deal in tax incentives and other regulatory compromises in order to attract one of their stores. Of course, if the effects of a giant Wal-Mart were economically limited to just the town or county that it was built in, this might not be so bad. But since people are willing to drive for many miles to shop at a Wal-Mart, the surrounding towns will suffer economically from the flow of capital out of their boundaries to the "nearby" superstore.
So each town is locked into a prisoner's dilemma where they simply have to compete in a cut-throat manner with their neighbours to get a Wal-Mart, itself of dubious economic value to the town, in order to avoid the worse consequences of not winning the store. Turkeys voting for an early thanksgiving and every "victory" the envy of Pyrrhus.
Mitt Romney has been griping about the US corporate tax rate being the "second highest in the world." He uses that claim as justification for why the corporate tax rate must be cut. Whether or not it's true, the argument displays the principle here of the devastating counter-democratic power of the global market to even bring the world's largest and most powerful economy "into line" with the prevailing competitive tax rate. If the US can't compete with a higher tax rate than average, how could any other economy possibly hope to do so?
Worse, even if every country did bring their tax rate to some agreed upon standard, the incentive to cheat and drop your tax rate in order to have that competitive advantage would be very high. Ireland and Poland are prime examples of this. Yes, it attracts lots of business and from a narrow nationalist standpoint the policy is a "success" but it is a zero-sum gain. No pie is getting bigger with this fight.
Of course for those that can't understand why the Democratic party has been so unsuccessful in turning the tide, you have to see them in terms of the constraints they face under the current model. Even really good people end up voting for despicable bills and not all of that can be attributed to the Bush Dogs or DLC being secret market fundamentalists. The entirety of the Clinton presidency was marked by simply accepting all this while trying to work in some amelioration of the worst effects on the edges. So while welfare gets cut horribly, and various trade deals get signed, it would have been worse under a Republican president and so forth. The whole party is stuck in this prisoner's dilemma too. I'm reasonably certain this is the case because the Canadian Liberal party and UK Labour party have behaved similarly, better perhaps in degree, but still unable to buck the direction of the wind. You can't sail directly into the wind, however good your crew is (you can sail at 45 degrees though, and alternate back and forth to move upwind over time, so there's hope for sailors if not governments).
So with the advent and obvious prevalence of the freer trade movement, we have seen a huge counterweight added to the free market side of that tug of war described above. The nearly unanimous will of the citizens of a given state is not sufficient to effect smart or necessary restrictions on capitalism because the entire state will be punished for doing so by the global economy.
The Environment
This one immediately seems even more depressing than the trade issue, but it could also turn out to be the great liberal counterweight and the tipping point that leads to the economic revolution we require as a species. Simply, in the grand sweep, the planet cannot support our economic system as currently devised if continued indefinitely. It will come to a screeching halt just as the doomed residents of Easter Island discovered when the very last tree essential to their survival was cut down.
The case for this is laid out very well elsewhere, but in a host of areas, energy, natural resources, toxins, wildlife, desertification and most importantly global warming, we cannot keep consuming as we are for very much longer. The end is in sight. So turn around we must sooner or later. The idea now is to do a little disaster capitalism of our own and ensure that the system we turn to is one which fosters liberal outcomes of success and prosperity for all.
You will often see global warming sceptics openly claiming that global warming was invented only as an excuse for liberals to impose greater market restrictions. While this is emphatically not the case, I say we take good ideas where we find them and do precisely that. After all they used the threat of Soviet communism for decades to oppose liberal market reforms, notably Truman's push for universal health care in the 1940s. I rather suspect they really were afraid communism would infect liberalism and sweep the US capitalist system away in a tide of history, which is why the McCarthyites were so eager to conflate liberalism and communism. They never really understood that liberals really did oppose communism even if there was agreement on certain things between them. Today, with the utter demise of communism as a viable political force anywhere in the world, they have been forced to invent a new ideological enemy - or at least, trump up a minor one. Islamic extremism doesn't work as well though, not just because it lacks a superpower entity backing it, but because it isn't really a direct assault on aristocratic capitalism. Countries like Saudi Arabia are plenty capitalist and show the ability of Islamicism to reach accommodation with capitalism. But still this is the heart of their constant search for enemies with which to conflate liberalism and befuddle us in our quest to put a stop to their march toward feudalism. But the attacks are getting a lot clumsier now.
In Closing
It bears noting that market capitalism was always a dangerous beast for liberals to make use of in pursuit of their aims. Yes, there are many desirable side-effects of capitalism, but it was always a struggle to keep this beast serving our needs. Perhaps we were always riding a tiger, safe for the time being, but terrified to get off. As long as informed democratic majorities were on our side, it was enough to keep the model working, but throw in the counterweight of globalization and it's no wonder we're losing over and over.
So this is the turning point we face. A new day will come, and it is up to liberals to ensure it is a brighter one. Don't assume that the conservatives will see the error of their ways. Some already do, and simply do not care. Even when the crash comes, they will not mind much. The champagne and caviar kept flowing through the height of the Great Depression and while Marie Antoinette probably never said "let them eat cake" someone in her position could have said it, as the French nobility faced no food shortages. As then, the conservatives of today are well insulated from the likely negative effects of the crashing system they built (unless of course, the guillotine gets dusted off, but aristocrats never see that day coming until the blade is already half way down the shaft).
This isn't a manifesto for communism, socialism or any other past failure of economic reform. It is a call to thought and advancement though. The reason there are still communists and socialists isn't because those systems are viable options, but because they are based on some very valid and insightful critiques of capitalism. We mostly threw out the baby with the bathwater when we rejected those theories. After all, diagnosing a problem and prescribing a solution are distinct items. That they did the former fairly well has no bearing on how well they did the latter. This essay is also an attempt at the former.
More to follow I hope.
Cross posted at OpenLeft.com