The Floundering Economy: When Ideology Clouds Reality

With world leaders gathering to meet this weekend at the G20 Summit in Washington D.C., the agenda has already been shaped by the recent financial crisis that has plunged much of the developed world into a recession.

Speculation continues as to whether the leaders of the twenty largest economies in the world will find enough common ground to address the problems that led to the crisis and take steps to first resolve it, and then ensure that it will not happen again. At the heart of the debate is the role that government should play in the regulation of financial markets, both domestic and international.

The past twenty years have been shaped by the adoption of a neoliberal ideology that proposes unbridled economic growth as the best way to ensure prosperity for all, and views any government intervention in the economy as being a hindrance to growth. This ideology has been used to justify cuts to social spending in the name of encouraging economic growth, which is intended to generate wealth that will eventually “trickle down” to the middle and lower classes.

However, the roots of the financial crisis have been tied to decades of U.S. financial deregulation in the name of neoliberalism. So what happens when the economic practices that have seemed so successful in the past are proven to be unreliable? How should our leaders react when their ideological foundations has been so deeply undermined?

Presently, European leaders such as France’s President Nicholas Sarkozy and German Chancellor Angela Merkel are pushing for much stronger government regulation of the economy to prevent the activities that led to the crisis.

The severity of the crisis has even seen previously hard-line proponents of free market capitalism such as former U.S. Federal Reserve Chairman Alan Greenspan admit that his economic ideology was “flawed”, and that our economic system does require some government regulation to ensure stability.

However, in the wake of the crisis, U.S. President George W. Bush has continued to reiterate his ideological belief that any problems created by the unregulated free-market economy can also be solved by more of the same. In a speech this week, he stated that, “if you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free-market system is the way to go.” It was also reported this week that Prime Minister Harper is expected to reflect a similar stance at the G20 meeting this weekend.

Some kind of ideology often plays a factor in the decisions of politicians, as political parties are often formed along ideological lines to reflect deeper values about how a society should function. However, ideology should not be followed simply for its own sake – it must be grounded, or at least reflective of, the reality about which decisions are made.

The current government in Canada has often favoured financial deregulation in the past. However, Finance Minister Jim Flaherty published an article in the Financial Post yesterday that outlined the reasons for Canada’s relative economic stability – namely, effective national regulation of the financial sector. Of the financial crisis, he quotes that, “some forgot Adam Smith’s maxim that the invisible hand needs to be supported by an appropriate legal and regulatory framework. We need to work together to strengthen those frameworks, and that work must begin at home."

Adding ambiguity to the government’s response to the crisis, today Prime Minister Stephen Harper told Tory supporters at a party convention that “Conservatives must be pragmatic, not ideological, in facing the economic challenges ahead.”

What the Prime Minister meant by this statement remains to be seen. However, what is certain is that when reality does not reflect ideology, it is reality that must be responded to. Ideology must not be followed blindly, and especially not if it becomes out of touch with the actual events it is meant to provide guidelines for.