The second is more specific and recent – the tendency to replace ‘heavy-handed’ forms of regulation with ‘regulation with a light touch’ and self-regulation. This has been most marked in Anglo-American economies, but other countries (in continental Europe and elsewhere) have faced persistent ideological pressures to move in this direction. This is a large chunk of the so-called ‘reform’ agenda that the Economist magazine, the OECD and other such bodies keep pushing. Both of these shifts are largely ideological – that is, they gained much of their impetus from changes in the ideas which constitute policy-makers’ shared collective wisdom about how to deal with the economy.

The second shift (the reform agenda) is now a busted flush. Its proponents are in disarray (if I’m feeling in a vindictive mood, I may well buy a copy of the next Economist to see how its editorialists try to rationalize all of this).

Any reasonable assessment of the actions of the Fed and the US Treasury would suggest that they’re driven by confusion and are very much ad-hoc measures. Neither Bernanke nor Paulson seems to have much of a big picture grip, and politicians reciting “the fundamentals are sound” is clearly not going to cut the mustard now, even, as with John McCain, precipitating something of a backlash.

John Quiggin has speculated on how all this will play out. The confusion has led to some quite bizarre moments, such as pundits on Lateline Business declaiming “capitalism is in crisis” and “the financial markets may not be viable”. What we’re seeing – among other things – is a decomposition of that abstraction “the markets” and a reduction of these so-called impersonal forces to the panicked reactions of individuals. If Robert Skidelsky is right, and a tipping point has been reached, it begs a very big question, which Farrell answers in terms of process (because no one can know the outcome of such a fluid conjuncture).

Mark Blyth’s book, Great Transformations has a theory of the relationship between economic crises and economic ideas. Very roughly speaking, when a crisis occurs that is difficult or impossible for the prevailing wisdom to explain or deal with, intellectual entrepreneurs have an opportunity to create a new (partly self-reinforcing) collective wisdom. We’re most likely in just such a crisis now. Which set of intellectual entrepreneurs are going to succeed in reshaping a new collective wisdom – economic nationalists like Sarkozy and Putin, social democratic globalizers like Dani Rodrik, or some other crowd entirely – I have no idea.

Farrell rightly quotes Tyler Cowen:

The economic fallout from these events is dominating the headlines. The intellectual and ideological fallout we are just beginning to contemplate.

There’s no doubt as well, particularly in the US and in the UK, that an enormous climate of fear has been created and that there will be huge pressure on politicians to act. In the UK, Gordon Brown’s last shred of credibility – his claim to be a competent economic manager – has collapsed as the realisation has sunk in that his own out-deregulate the Americans strategy to make the City of London a more attractive financial node than Wall Street in the wake of Sarbanes-Oxley puts the British economy at great risk, even if the bursting of the housing bubble has not been as acute as it has in the States. It can confidently be predicted now that Brown’s premiership is terminal.

Many within the Labour Party are suggesting that the time has arrived for the British government to shut the door on neo-liberalism, including Jon Cruddas MP, who was recently in Australia and spoke to Labor MPs about the successes and failures of the “Third Way” project. Cruddas writes in The Guardian:

Labour now has an historic opportunity to seize the political high ground. The era of selfish individualism is on the wane. The electorate is increasingly concerned with social insurance, safeguarding living standards and ensuring social stability and ecological sustainability. From stranded holidaymakers to pension holders, to those falling ill, they are discovering that these collective goods are in dangerously short supply. The future will demand a more active and democratic state engaging with economic development and regulation. The redistribution of wealth and resources will be essential in rebalancing a dysfunctional economy.

However, it’s very difficult to see how these sentiments could be easily translated into policy action – here and now.

I don’t have any particular glee, unlike others, in observing that the US government has now become a huge player in its own economy. The US Treasury, if you read anything about the history of globalisation and global finance, has long been a massively influential player – as the point at which the state and capital meet in the world’s central financial node. Having 80% of equity in Freddie and Fannie and the AIG rescue has no particular implication for any project to use the power of the state for truly public purposes. In fact, even such minimal redistribution and healthcare reform as Obama has promised is likely to be impossible in the face of the enormous costs now being borne by the US state. We’ll end up, if Obama is elected, with the same “Eisenhower Republican” strategy Clinton bemoaned.

Nor do I necessarily think that state ownership is either a good in and of itself or some sine qua non of social democratic respectability. It has its purposes, but it shouldn’t be turned into a shibboleth. The lack of participatory and democratic administration of nationalised industries – a fact whose legacy can be traced back to the elitist Fabians – opened the door for privatisation, by failing to actually involve citizens democratically in the economy.

But here’s the rub – there may be an opening here for a revived social democratic economic policy framework. As far as I can see, though, no one has really developed such a framework at the very time it’s needed – so blinded have the left been by the nostrums of neo-liberal “no alternativism” in macro-economic policy. Many of those assumptions, as Farrell indicates, are now collapsing like a house of cards.

The sorts of questions being asked now are precisely the ones that can’t be answered by orthodox economics with a human capital theory supply side twist or by chanting mantras drawn from exogenous growth theory. If there’s a historical moment here that needs to be seized, then the intellectual resources to make a difference appear lacking.

We will probably just have to rely on muddling through. Fingers crossed. But I can’t help feeling that the left is in as much ideological and intellectual disarray here as the right.

Update: Gary Sauer-Thompson:

The significance of this is that politicians are on the sidelines watching like the rest of us despite their claim to inside information from those who really know what’s going on. They really don’t know what is happening or what to do about it.

Or the politicians could ghave mentioned how this financial crisis was different from the previous ones. The previous ones started on fringes of the global financial system– in the developing or emerging economies in Latin America, Asia or Russia— and the West (G7) worried about the contagion. This crisis was made in the US–the heart of the global financial system— and it is the emerging powers of the east that fear contagion. Doesn’t that highlight the big shift in economic power in the world?

Having reached this point, it’s hard to see how the US can turn back from a massive extension of financial regulation, starting with the derivative markets where AIG got into so much trouble, notably those for credit default swaps (CDS). Along with winding up the affairs of AIG, Lehman and others, the authorities will need to oversee an orderly unwinding of the transactions in these markets which they are now effectively guaranteeing. More generally, it’s time for a partial or complete reversal of the financialisation of the economy that took place after the breakdown of the Bretton Woods system back in the 1970s.

That needs to be read in conjunction with a column in The Guardian by Robert Skidelsky, the distinguished biographer of Keynes. Skidelsky argues that we’re at a conjuncture – a tipping point where one “cycle of economic fashion” gives way to another.

The bankruptcy of Lehman Brothers and the forced sale of Merrill Lynch, two of the greatest names in finance, mark the end of an era. But what will come next?

Cycles of economic fashion are as old as business cycles, and are usually caused by deep business disturbances. “Liberal” cycles are followed by “conservative” cycles, which give way to new “liberal” cycles, and so on.

Liberal cycles are characterised by government intervention and conservative cycles by government retreat. A long liberal cycle stretched from the 1930s to the 1970s, followed by a conservative cycle of economic deregulation, which now seems to have run its course.

With the nationalisation of America’s two giant mortgage banks, Fannie Mae and Freddie Mac, following the nationalisation earlier this year of Britain’s Northern Rock, governments have started stepping in again to prevent market meltdowns. The heady days of conservative economics are over – for now.

Skidelsky also has some quite scathing words about the economics profession and its mystifications and orthodoxies:

The cycles in economic fashion show how far economics is from being a science. One cannot think of any natural science in which orthodoxy swings between two poles. What gives economics the appearance of a science is that its propositions can be expressed mathematically by abstracting from many decisive characteristics of the real world.

The classical economics of the 1920s abstracted from the problem of unemployment by assuming that it did not exist. Keynesian economics, in turn, abstracted from the problem of official incompetence and corruption by assuming that governments were run by omniscient, benevolent experts. Today’s “new classical economics” abstracted from the problem of uncertainty by assuming that it could be reduced to measurable (or hedgeable) risk.

A few geniuses aside, economists frame their assumptions to suit existing states of affairs, and then invest them with an aura of permanent truth. They are intellectual butlers, serving the interests of those in power, not vigilant observers of shifting reality. Their systems trap them in orthodoxy.

When events, for whatever reason, coincide with their theorems, the orthodoxy that they espouse enjoys its moment of glory. When events shift, it becomes obsolete. As Charles Morris wrote: “Intellectuals are reliable lagging indicators, near-infallible guides to what used to be true.”

Update: Another interesting perspective from Ann Pettifor at Open Democracy.

Another post here by Mark.