DJ: Isn't it slightly arbitrary though, when the state suddenly, for example, bans short selling, which until now was considered perfectly legitimate for speculators?

EH: No, short selling has never been considered perfectly legitimate! It's always had a bit of an odour about it. The idea of selling something you don't own always gets people a little nervous, and rightly so. I would make a broader statement on the state and the market. You make a radical distinction between the two, but as Sir Samuel's answer suggests, the state and the market in the finance world have had a long and sometimes quite painful relationship. The market goes to extremes, and the monetary system, which is pretty much always a state matter - it certainly is in modern economies - is very difficult to calibrate. We've had a great deal of trouble in the last 100 years - 200 even - getting it so that prices and goods are well balanced. Without a lot of wise state supervision and action, this monetary market often falls into imbalance. That is what happened in the credit bubble. I would argue that the aberration, if any, has been the ability of a certain set of financiers to dodge the normal limits imposed by state management. As Martin Wolf puts it, the finance industry looks peculiarly like a utility with a casino attached. The utility has been quite carefully regulated by the government, but some rather clever operators have found a way of building a casino on the side.

SB: Keynes got into that even before Martin Wolf. Keynes said that if the investment activities of a community are carried out as a by-product of a casino, they are not likely to be carried out very well.

There are some people saying that everything that is going wrong now with the credit crisis is not due to the excesses of laissez-faire but to earlier state intervention. Now you can make a perfectly good case that the populist measures of Bill Clinton and others, who were trying to get people to own houses who were in no position to pay for them, may have sown the seeds of the present problem, but to pretend that this is the only thing wrong is a kind of a priori-ism. You can always show, if you have a sufficient a priori belief, that what seems to be wrong with working capitalism is too much regulation. On the other side, the dirigistes can always show that the problem is not enough regulation, and you have to be a bit empirical. If Clinton had never lived and Reagan had been there another eight years we would still have the present problem.