I'd say there has been something of a shift going on but I'm not convinced that it is as significant as some would believe. The model of democratic capitalism is just re-evaluating priorities. In the 90s the 'Washington Consensus' was expanding and the ideological capitalism was the priority. Now democratic equality is expanding in South America (and perhaps now in South Africa), while economic growth is the priority for the political economy elsewhere. Maybe ideology in general is on the run, but the institutional arrangements of democratic capitalism will probably still be the dominant ones, they just might have slightly different priorities.

There's no doubt that the current state of the global economy is troubling. But if we consider the enormous accumulation and spread of wealth and thus development and advancement of civilisations around the world, then this moment pales in comparison to the overall accomplishments of the system.

The problem is that this moment of weakness for democratic capitalism has given voice to those who see the glass as being half full; they see the negatives -- which there are many -- and not the big picture.

Let's see where we are six months from now and do the predictions.

The center of this mess is a "private company" that performed a public function without adequate public oversight. (In fact, oversight was seen to be, somehow, an assault on poor folk just tryin' the best they can to aford a little house.)

I don't know. This comment will get broad and rambling, but I think the whole area is interesting.

I think the whole thing (market-capitalism) is all premised on rationality, and humans have all sorts of cognitive biases which make us vulnerable to making bad choices, poorly gauge risks, etc. Markets merely reflect aggregated decision making of people who are poor rational actors.

Of course, the best way to deal with these cognitive biases is more capitalism, since there is intense competitive pressure to be more rational. I think (looking at the literature) we're getting a better understanding of our biases and how they impact choices in the market place. Of course, the best equipped to deal with these biases are major firms who can afford to hire the few people trained to overcome their biases and make more rational choices (and have good modeling software to help). They'll always have an advantage over everyone else who does not have the training or inclination to overcome human nature. Maybe B2B transactions will tend to be more positive-sum, while with B2C, you will probably see more instances of predatory behavior.

If you want to put it in an extreme way, firms will more and more resemble rational optimization algorithms and they'll have an inherent ability to out perform individuals who are handicapped by all sorts of cognitive biases. Perhaps that's what happened, you had firms acting as predators, giving people loans and risks they should not have rationally accepted. (Other companies prey on people by selling them fatty/high-salt food, letting them gamble, etc., all taking advantage of the cognitive limitations of consumers.)

It all worked fine until the firms ate up all their prey. It's as if a big chunk of McDonald's customers died of heart-disease, so they can't buy more fries.

Anyway, I'm rambling and scratching my head at all this, and I'm wondering what economists have to say.

I think that politics in this country tends to ride a pendulum, and that the government created by politics pushes the economy through its swings. I think that we are in for a period of increasing nationalization/socialization, and that this is an appropriate correction at this time. The swing to increased free markets under Reagan was also an appropriate correction at that time.

Fundamentally, I believe the Reagan revolution has failed because he promoted the belief that "government is the problem". There is a real role for government, not only in regulation of the markets but also ways such as national defense, disaster response and the creation of some sort of social safety net. Bush has utterly failed to govern even in those ways that the right acknowledges are necessary, much less in the variety of ways that the moderate majority in this country thinks appropriate. The result is this weird state of foreign policy failure and economic chaos.

Now we will swing to the left, and probably swing hard to fix the mess. Eventually we will over-correct and swing back to the right again. This strikes me as a natural progression, not as anything to panic over.

This is just the beginning of a tough time for America, with the baby boomers set to retire and the entitlement programs ballooning. We're drowning in debt, and the only way out is to grow the economy and therefore the tax base, or drastically cut back spending. Plus, more and more money from the Western democracies is going toward dictatorial regimes, whether in the form of oil payments or cheap Chinese products. One obvious outcome of this is that the US will have to scale back its military committments. Since there is no other democratic-capitalist country that is willing to fill in the gap that this will leave (unless you count India, maybe?), this is very likely going to reduce stability in the world, which will impact negatively impact trade and continue to erode the democratic capitalist model.

The meltdown of Wall Street underscores the need for new thinking about the economy. What we need are smart, non-ideological solutions that allow American industry to be more competitive. This will require the vision to convince Americans we are stronger as a community than as a collection of loosely affiliated free economic agents each striving to protect our narrow interests. More broadly, in a global economy where lax regulatory oversight in China puts toxic toys in the hands of our children, where uninformed, rampant consumerism combines with ultra-efficient fishing technologies and corporate profiteering to deplete our stocks of tuna, cod, and other marine food sources, where the rising middle classes of China and India are driving demand for pollution-belching, coal-fired power plants, we can no longer afford to stand alone and to measure our prosperity solely in terms of gross output. A government-led model is probably not the answer, but neither are winners-take-all societies riveted by gaping income disparities.
We need to focus on common interests that enable us to build communities united by working-class respectability and values. The destruction of public trust in the financial system caused by negative real interest rates, lax regulation born of market fundamentalism, and rampant, debt-dependent speculation have led us to the brink of collapse. Market economies have created wealth for a broad swath of people in industrialized countries for the past two hundred years or so, but their shortcomings in protecting public trusts like banking and public commons like air, oceans, and drinking water have become glaringly evident. Before the Internet, price signals were the only reliable means of facilitating efficient production, and the scale of production was small enough that many ignored the attendant harmful effects of industrial waste, air pollution, and resource depletion. But these externalities are now too large to overlook. Perhaps the low-cost information dissemination and collection made possible by IT offers an alternative model of regulation and commence. We need to harness IT to better capture the efficiencies of price signals while guarding against the harmful effects of externalities and the exploitation of public commons. Whether we can counter the most harmful excesses of "raider-style" capitalism is perhaps the foremost challenge facing us today.

Next years big question will be whether the world continues to shop for the next Ponsi scheme in New York or decides to get robbed in Shanghai or Abu Dhabi.

Kurlantzick wrote a remarkably ill-informed and poorly-reasoned piece, I think. He should read a lot more history before writing such things, but then he would not write such nonsense.

The current financial crisis is a typical inflection point of democratic capitalism. Such crisises are marked by - regime change. As in the people go to the polls and change their government - peacefully. As in someone works out a way to salvage the banking system, whether JP Morgan, the Bank of England (in innumerable banking crashes during the 19th century), or the US Congress in this case.

Autocracies also have their crisises, and their own ways of working them out and getting regime change. In the case of truly entrenched autocracies these usually involve war, but occasionally not. But in the latter case the price to be paid is economic stagnation for decades or longer, often resulting in deprivation similar to a post-war period.

There is such a thing as an enlightened despotism, but sooner or later enlightened despotisms turn into the degenerative form. They are also much rarer in the real world than one would believe based upon the propoganda - measured by what they put out ALL despotisms are enlightened - when we know they are not. Even if a particular despotism begins as relatively enlightened there is a price to be paid in the long term, as Cuba shows.

It is during crisises such as this one that democracy shines brightest. Yes we are having a bank panic, a system crisis. But we will handle the panic and we will change the government - peacefully.

When China has it's systemic crisis the result is likely to be a major war, with hundreds of millions dying. That is the difference.