Like skaters on a lake’s frozen surface, we are sometimes reminded how thin is the crust of philosophical confidence on which our systems of political economy rest. Two years ago we were mostly agreed that free market economics had won the ancient argument between capitalism and the planned economy. Two years ago the case for a single market for goods and labour within the European Union was widely thought unanswerable.

Yet everywhere we turn today, wise heads mutter that the global free market has failed. And (after some placard-waving at the Total refinery and beyond) we heard Alan Johnson, the Health Secretary, declare on the Andrew Marr programme on BBC television last week that labour from outside Britain might ‘undercut’ domestic workers — as if this ‘undercutting’ were a bad thing, rather than the very engine of a capitalist economy.

Mr Johnson was not challenged. No senior colleague came to the public support of Lord Mandelson, the Business Secretary, in his restatement of the obvious about the single market. Is our grasp of general principle so weak? Do politicians not understand that if we say workers should not travel to ‘undercut’ local labour markets, the corollary that cheaper goods should not travel to ‘undercut’ locally produced goods cannot be far behind? How can our confidence in Adam Smith have evaporated so fast?

It is true that part of the reason for our former philosophical certitude lay in results. Why doubt prevailing theories when we were demonstrably getting richer? By their fruits we should (we thought) know them; and even an ignoramus may, if medical science cures him, claim to ‘believe’ in its theoretical base.

But did our confidence go no deeper? Medical science may be hard to fathom, but political economy is not. We did not need to believe the latter by dumb faith alone: we surely understood the argument that underpins free market economics and the free movement of goods and labour. The theoretical case is, after all, so simple, and has been explained with such clarity by writers from Adam Smith onwards. The mechanisms by which markets work can be grasped by any 12-year-old.

Inline sub2


So our confidence should have been solid not only because the free market was evidently delivering prosperity and growth, but because we understood why it must be the most efficient engine of wealth-creation. And if the market had then seemed to falter, we could still know this would only be a pause, a reculer pour mieux sauter, and feel reassured that, however stuttering the free market might be at delivering wealth, it would be more reliable than any rival system.

Or that is what we thought we believed. Yet now, after a setback which, though sharp, will turn very few of us out on to the streets, and require only a modest reassessment of what we are worth and how we can afford to live, we run around in philosophical panic, proclaiming our agnosticism or, worse, apostasy.

O ye of little faith! I feel as a priest must feel when a member of his flock abandons the faith because her child has died. Children (the priest might respond) do die; accidents do happen. You knew that. You knew when you embraced the faith. Theology has explanations for human suffering. You knew that too.

And world recessions do occur. You knew that. You were surely taught at school about the last big one in the first half of the 20th- century, and many smaller ones since. The theology of market economics has never denied that there could be sharp corrections and reverses; even, for a time, collapses. Indeed it explains them. You knew that too.

So amid all the doom-mongering and recanting, I have an assertion to make. The market has not failed. The present collapse is evidence that the market is working. Confidence bubbles are an inherent feature of a free market system. Panics — confidence vacuums — are an inherent feature too. The test of the theory of market capitalism is whether the system provides from within itself the means to prick both.

It does. The first — a confidence bubble — has been pricked. We are now sucking ourselves the other way: into a confidence vacuum. In time this too will be pricked. The market will steady.

The bubble that has just burst was based, worldwide, on financial services. Financial services are a product. It is true they are a product critical to the efficient functioning of the market (so is electricity, so is oil) but that just makes them an unusually important product. From time to time products fail in any market. They may fail through force majeure — droughts, floods, pestilence. They may fail due to inherent flaws — airships, Thalidomide, blue asbestos. Or they may fail through ignorance, trickery or the credulity of human beings — Madoff, the property bubble, the repackaging of sub-prime debt.

The present financial crash has been precipitated by product failure of the third kind. Trade in financial instruments too opaque for even those who traded in them to assess them properly, and bonus incentive schemes that acted against the interests of the companies offering them, fuelled a banking bubble that has now burst.

But ask: what pricked it? Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention — despite intervention — the market let itself down. The speed with which this has happened has been awful, but however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.

New rules and regulations will now be brought in. This, too, is no failure of the market. Free markets require — often demand — limits to the exercise of their freedom. Since the beginning of commerce, society has collectively imposed curbs and safeguards on the market (the very introduction of a law of contract was the first and still by far the biggest act of regulation) and a handful more of these, minor in the context of economic history, will now be applied. There will be no ‘new economic world order’, just some useful tweaks to the old one.

The earth will continue in its orbit, and nature will resume its course. No re-examination of our governing theories of political economy is called for. Calm down, dear, it’s only a market correction.

This article first appeared in the print edition of The Spectator magazine, dated