Farewell to the Neo-Classical Revolution

LONDON – The looming 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 characterized by government intervention and conservative cycles by government retreat. A long liberal cycle stretched from the 1930’s to the 1970’s, followed by a conservative cycle of economic deregulation, which now seems to have run its course. With the nationalization of America’s two giant mortgage banks, Fannie Mae and Freddie Mac, following the nationalization 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.

Each cycle of regulation and de-regulation is triggered by economic crisis. The last liberal cycle, associated with President Franklin Roosevelt’s New Deal and the economist John Maynard Keynes, was triggered by the Great Depression, though it took World War II’s massive government spending to get it properly going. During the three-decade-long Keynesian era, governments in the capitalist world managed and regulated their economies to maintain full employment and moderate business fluctuations.