When things fall apart

Financial Mirror (Cyprus) - - FRONT PAGE -

All over the world today, there is a sense of the end of an era, a deep fore­bod­ing about the dis­in­te­gra­tion of pre­vi­ously sta­ble so­ci­eties. In the im­mor­tal lines of W.B. Yeats’s great poem, “

Yeats wrote those lines in Jan­uary 1919, two months af­ter World War I ended. He in­stinc­tively felt that peace would soon give way to even greater hor­rors.

Al­most 50 years later, in 1967, the Amer­i­can

year later. By the mid-1970s, Amer­ica had lost the Viet­nam war. The Red Brigades, the Weather Un­der­ground, the Ir­ish Repub­li­can Army, and Ital­ian neo-Fas­cist ter­ror­ists were stag­ing at­tacks across the US and Europe. And Pres­i­dent Richard Nixon’s im­peach­ment had turned West­ern democ­racy into a laugh­ing stock.

An­other 50 years have now passed, and the world is again haunted by fears about the fail­ure of democ­racy. Can we draw some lessons from those ear­lier pe­ri­ods of ex­is­ten­tial self-doubt?

In the 1920s and 1930s, as in the late 1960s and 1970s, and again today, de­spair about pol­i­tics was linked to dis­il­lu­sion with a failed eco­nomic sys­tem. In the in­ter-war pe­riod, cap­i­tal­ism seemed doomed by in­tol­er­a­ble in­equal­i­ties, de­fla­tion, and mass un­em­ploy­ment. In the 1960s and 1970s, cap­i­tal­ism ap­peared to be col­laps­ing for the op­po­site rea­sons: in­fla­tion and a back­lash by tax­pay­ers and busi­ness in­ter­ests against the re­dis­tribu­tive poli­cies of “big gov­ern­ment.”

To note this pat­tern of re­cur­ring crises is not to claim that some law of na­ture dic­tates a near-col­lapse of global cap­i­tal­ism ev­ery 50 or 60 years. It is, how­ever, to recog­nise that demo­cratic cap­i­tal­ism is an evolv­ing sys­tem that re­sponds to crises by rad­i­cally trans­form­ing both eco­nomic re­la­tions and po­lit­i­cal in­sti­tu­tions.

So we should see today’s tur­moil as a pre­dictable re­sponse to the break­down of one spe­cific model of global cap­i­tal­ism in 2008. Judg­ing by past ex­pe­ri­ence, a likely out­come could be a decade or more of soul-search­ing and in­sta­bil­ity, lead­ing even­tu­ally to a new set­tle­ment in both pol­i­tics and eco­nom­ics.

This is what hap­pened when the elec­tions of Mar­garet Thatcher and Ron­ald Rea­gan fol­lowed the great in­fla­tion of the early 1970s, and when the Amer­i­can New Deal and the “rough beast” of Euro­pean rear­ma­ment emerged from the Great De­pres­sion. Each of these post-cri­sis set­tle­ments was marked by trans­for­ma­tions in eco­nomic think­ing as well as pol­i­tics.

The Great De­pres­sion led to the Key­ne­sian rev­o­lu­tion in eco­nom­ics, along­side the New Deal in pol­i­tics. The in­fla­tion­ary crises of the 1960s and 1970s pro­voked Mil­ton Fried­man’s mon­e­tarist counter-rev­o­lu­tion, which in­spired Thatcher and Rea­gan.

It there­fore seemed rea­son­able to ex­pect the break­down of dereg­u­lated fi­nan­cial cap­i­tal­ism to trig­ger a fourth seis­mic change (Cap­i­tal­ism 4.0, I called it in 2010) in both pol­i­tics and eco­nomic think­ing. But if global cap­i­tal­ism re­ally is en­ter­ing a new evo­lu­tion­ary phase, what are its likely char­ac­ter­is­tics?

The defin­ing fea­ture of each suc­ces­sive stage of global cap­i­tal­ism has been a shift in the bound­ary be­tween eco­nom­ics and pol­i­tics. In clas­si­cal nine­teenth-cen­tury cap­i­tal­ism, pol­i­tics and eco­nom­ics were ide­alised as dis­tinct spheres, with in­ter­ac­tions be­tween gov­ern­ment and busi­ness con­fined to the (nec­es­sary) rais­ing of taxes for mil­i­tary ad­ven­tures and the (harm­ful) pro­tec­tion of pow­er­ful vested in­ter­ests.

In the sec­ond, Key­ne­sian ver­sion of cap­i­tal­ism, mar­kets were viewed with sus­pi­cion, while gov­ern­ment in­ter­ven­tion was as­sumed to be cor­rect. In the third phase, dom­i­nated by Thatcher and Rea­gan, these as­sump­tions were re­versed: gov­ern­ment was usu­ally wrong and the mar­ket al­ways right. The fourth phase may come to be de­fined by the recog­ni­tion that gov­ern­ments and mar­kets can both be cat­a­stroph­i­cally wrong.

Ac­knowl­edg­ing such thor­ough­go­ing fal­li­bil­ity may seem paralysing – and the cur­rent po­lit­i­cal mood cer­tainly seems to re­flect this. But recog­nis­ing fal­li­bil­ity can ac­tu­ally be em­pow­er­ing, be­cause it im­plies the pos­si­bil­ity of im­prove­ment in both eco­nom­ics and pol­i­tics.

If the world is too com­plex and un­pre­dictable for ei­ther mar­kets or gov­ern­ments to achieve so­cial ob­jec­tives, then new sys­tems of checks and bal­ances must be de­signed so that po­lit­i­cal de­ci­sion-mak­ing can con­strain eco­nomic in­cen­tives and vice versa. If the world is char­ac­terised by am­bi­gu­ity and un­pre­dictabil­ity, then the eco­nomic the­o­ries of the pre-cri­sis pe­riod – ra­tio­nal ex­pec­ta­tions, ef­fi­cient mar­kets, and the neu­tral­ity of money – must be re­vised.

More­over, politi­cians must re­con­sider much of the ide­o­log­i­cal su­per-struc­ture erected on mar­ket fun­da­men­tal­ist as­sump­tions. This in­cludes not only fi­nan­cial dereg­u­la­tion, but also cen­tral bank in­de­pen­dence, the sep­a­ra­tion of mone­tary and fis­cal poli­cies, and the as­sump­tion that com­pet­i­tive mar­kets re­quire no gov­ern­ment in­ter­ven­tion to pro­duce an ac­cept­able in­come distri­bu­tion, drive in­no­va­tion, pro­vide nec­es­sary in­fra­struc­ture, and de­liver pub­lic goods.

It is ob­vi­ous that new tech­nol­ogy and the in­te­gra­tion of bil­lions of ad­di­tional work­ers into global mar­kets have cre­ated op­por­tu­ni­ties that should mean greater pros­per­ity in the decades ahead than be­fore the cri­sis. Yet “re­spon­si­ble” politi­cians ev­ery­where warn cit­i­zens about a “new nor­mal” of stag­nant growth. No won­der vot­ers are up in arms.

Peo­ple sense that their lead­ers have pow­er­ful eco­nomic tools that could boost liv­ing stan­dards. Money could be printed and dis­trib­uted di­rectly to cit­i­zens. Min­i­mum wages could be raised to re­duce in­equal­ity. Gov­ern­ments could in­vest much more in in­fra­struc­ture and in­no­va­tion at zero cost. Bank reg­u­la­tion could en­cour­age lend­ing, in­stead of re­strict­ing it.

But de­ploy­ing such rad­i­cal poli­cies would mean re­ject­ing the the­o­ries that have dom­i­nated eco­nom­ics since the 1980s, to­gether with the in­sti­tu­tional ar­range­ments based upon them, such as Europe’s Maas­tricht Treaty. Few “re­spon­si­ble” peo­ple are yet will­ing to chal­lenge pre-cri­sis eco­nomic or­tho­doxy.

The mes­sage of today’s pop­ulist re­volts is that politi­cians must tear up their pre-cri­sis rule­books and en­cour­age a rev­o­lu­tion in eco­nomic think­ing. If re­spon­si­ble politi­cians refuse, “some rough beast, its hour come at last” will do it for them.

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