I don't think this is a new idea, but I can't remember where I read about it. Hopefully someone in the comments will come up with a reference.

Anyway, to explain a bit, let's divide the economy into 3 parts:

1) Public sector:

Typically very stable - the political process can fund public sector organisations in a stable manner even while the rest of the economy gyrates. "A week is a long time in politics" but it's very rare that funding decisions in politics change so quickly, at least on the grand scale. Large public sector organisations have a lot of momentum and it usually takes 10 years or more for consensuses to build around change.

Of course - typically - their flexibility of action also runs on a 10 year time scale. Getting a body like a national health care system to change it's philosophical approach to something often seems to take a decade.

2) Large oligopolistic corporations - or as some might term them Galbraith-style planning organisations. These operate in the private sector. They tend to be very large and have a market position that insulates them from immediate fluctuations in the market - giving them some stability. To emphasise, this is not just due to size, but to a market position that allows them to make more money than is typical and prevent others from competing with them. Often a combination of "early mover" advantages with the intersections of regulation, or the sheer costs of getting started in some industries.

Typically they show some more flexibility than public sector organisations. Cultural change in a large organisation is always slow, public or private sector, but where a public sector organisation might not actually respond to a change in the world until "after the next election" (which could be 4 years away) a private sector organisation can start changing sooner.

This middle category is actually a broad one. Some of the largest private companies have survived a very long time (GM, IBM, etc.) and others last only around 10 years. Likewise, there's variation in the flexibility, some (GM springs to mind) don't seem to change very well at all, others (IBM?) do better. Also, the smaller organisations tend to be more flexible - as befits their lesser stability.

3) Unplanned private sector - this is a huge field of the market economy. Some organisations last quite a long time, some evolve out of this sector into the middle sector, but typically this is the region of greater flexibility and lesser stability.

The implications of this are widespread, the individual worker will tend to see job security highest at the public end, lowest at the unstable private end. The inverse tends to be true for wage inequality. And so on.

I would like to concentrate on the macro-scale, these notions of "stability" and "flexibility." I think it's reasonable to suggest that a fully public sector economy loses flexibility to the point where society stagnates. And that a totally "unplanned private" economy tends to have repeated failures of basic infrastructure - as when your water company keeps going bust, the reservoirs stop getting proper maintenance. This tends to lead to serious problems.

So I think it's quite reasonable to assert that a functioning society tends to lie in the middle somewhere - and various societies have found different balance points.

And - in effect - we spend lots of time arguing about micro instances of the "balance point" discussion. (e.g. does energy investment need to be public or private - or some mix - what mix? - etc.)


So what?

Well, there we come to the question of deregulation and privatisation - and what I see as the overview effect.

Privatisation is about taking public sector organisations and pushing them into the private sector.

Some privatisations just create huge oligopolistic private companies, astride relatively captive markets. Obvious examples would be many of the telecoms companies created through privatisation, or other infrastructure - like transport, electricity or water.

Others are less obviously in such a safe position, but a government contract tends to be paid even in recessions, tends to be quite long term and not everyone can bid...

So, Privatisation shifts organisations from (1) to (2).

Deregulation operates in many ways. Often, with the appropriate lobbying it simply acts to reinforce the dominance of a huge multinational. So often, no effect.

However, historically, the claim for deregulation as a positive force is that it does undermine some oligopolies, either by opening out the "market" (Southwest Airlines vs Pan Am?) or by encouraging the development of new technologies that reduces incumbent advantages. (Perhaps telecommunications is an example here?)

Thus, the theory of deregulation is that it shifts organisations from (2) to (3).

Of course, this flow from (1)->(2)->(3) is described as a trend towards "unfettered markets" and it is claimed that the trend automatically produces "greater efficiency" that translates into greater prosperity.

We spend a lot of time debunking the realities of all of this, we know that on the ground, this shift doesn't always produced the advertised results.

However, what the "financial crisis" should highlight is the structural trade off which (imperfectly) is occurring. Flexibility in the economy probably has increased somewhat and thanks to the economists we've got lots of ways of measuring that. Some of that even does lead to greater efficiency and maybe even some greater production of prosperity.

Unfortunately, at the same time, the tradeoff is working in the other direction, stability is reduced not only for individual workers, but for society in general. We've purposefully reduced the stability, the resilience of our economic organisations.

As we look at society as we face some impressive economic volatility and downward trends, we might come to think that maybe if our economy had more stable/resilient organisations in it, we might weather the storm more easily.

(And that's putting aside how much of the volatility and downward trend was created by reducing the stability of our organisations.)

However, what it reminds me of the most is that we have an entire academic discipline devoted, in essence to finding measures of "efficiency" (and by proxy - flexibility).

But - it seems - we have few measures for quantifying stability, let alone the value of stability, or even really the prosperity destroyed when stability is reduced. Economics as a discipline doesn't seem to care to think about it and I'm not sure who has picked up the ball.

And that to me is the root of the Washington consensus - and why it's hard to see our politicians overturning it.