The hard truth: no one knows how to solve this economic calamity

After shutting down the economy for two years, the usual solutions won’t work. But the answer must lie in free markets, not in state socialism

Anybody who tells you that there is a readily available solution to the imminent economic crisis is either lying or delusional. Nobody in the world knows with any kind of certainty how to deal with what is coming.

Or perhaps I should say what is thought to be coming since the end of the era of mass prosperity is upon us only in anticipation. But let’s assume that the most dire speculation is accurate and that the immediate future – set to begin in just a few months – will bring life-threatening fuel poverty, unaffordable increases in food prices, and a collapse of economic growth. Although there is a term – “stagflation” – which broadly covers this sort of catastrophic condition, it does not do justice to the uniqueness of these circumstances. There may be some ingredients which are recognisable: the challenge presented by Russia’s imperialist war with its consequent threat to Ukrainian grain supplies, for example, puts a predictable pressure on food prices.

That problem is serious but not unprecedented. Wars have always caused disruptions and shortages which have had to be dealt with by more or less drastic measures – from rationing to campaigns for homegrown self-sufficiency (“Dig for Victory”). Much more critical is the Russian near-monopoly on energy supplies which is an entirely selfinflicted weakness for western European countries: a mistake of judgment so apocalyptic that future historians will be at a loss to explain it. But neither of these difficulties accounts for the terrifying unparalleled phenomenon we are confronting now. (I use the word “terrifying” to mean simply unknown in its consequences.) Because what precipitated this disaster was something that has not happened before.

Never in modern recorded history have developed, advanced, free societies put their economies into enforced hibernation – imposed an almost total shutdown of wealth production – for the best part of two years. And then, of necessity, created a simulacrum of real economic activity by simply printing toy money which was effectively handed out in the street to be exchanged for goods and services under a universally accepted agreement to believe in fairies. That is where we are – and nobody alive at this moment has ever seen anything like it.

Political leaders – or would-be leaders – talk of “getting the economy moving”, of stimulating the sectors which can produce real wealth rather than the Monopoly money we are handing back and forth now. But they are not confronting the actual problem: what was done in that terrible period of lockdown hysteria destroyed the logic of the economic cycle. The normal fluctuations of expansion leading to overexpansion, which leads to corrective contraction, then sometimes to overcontraction and recession has been the story of free market capitalism since it began.

There have been attempts to ameliorate its more brutal effects, some of which, like welfare programmes, remained indefinitely. But permanent systemic ways of altering the basic market rhythms have never succeeded (Gordon Brown used to talk about eliminating the repeated pattern of “boom and bust”) because, in truth, the dynamism of market economies depends on this fluidity which tends to mirror the fluctuations of human tastes and attitudes.

That is what most (not quite all) Western governments abolished for the duration of the pandemic: economic reality as we had known it. They replaced it with a completely artificial phantasm which looked like real life rather in the way that a film set does when you see it on screen. But, of course, we can recover from this. In fact, it is inevitable that we will do so because real people have real needs and desires, and other people will find ways to provide for those needs and desires – and that will mean that commerce of all kinds will be resumed. The processes that began with barter and ended with digitally transferred international fund management will find a way through. The crucial question is how much political damage will be done: how many of the principles that make economic freedom possible will be sacrificed on the way.

There is already – before the dire conditions have even arrived – tremendous pressure for command economy measures: permanent price controls on energy, subsidies for industries that should be viably self-sustaining, selective tax advantages to favour sectors that are politically fashionable. Some of these – particularly those that offer support to the disadvantaged – would be justifiably popular. But they would also entrench the artificial manipulation of economic life in ways that would undermine genuine recovery. A patient who has been in an induced coma for two years needs to be roused gently with careful monitoring – but not turned into a dependent addict whose life must be forever controlled by professional interventions. Somehow the natural spontaneity and responsiveness to social change which is the most extraordinarily valuable feature of capitalist enterprise has to be revived and allowed to flourish. Defending that idea will be tough if the winter proves as hard as some are predicting.

There will be a fight to the death between free market dynamism and state socialism the likes of which we have not seen since the end of the Cold War. (And how ironic it is that Russia which has swapped communism for medieval mysticism should be playing such a significant role in this drama.) Entrepreneurialism and human inventiveness will have to be unleashed and allowed to fulfil their potential because it is only that sort of energy and spirit that can save us from permanent decline. What does this amount to in terms of practical policy? At the very least, a moratorium on the persecution of the self-employed and enterprising small businesses, and a tax system that rewards risk-taking and innovation. Help and support will, rightly, be offered to people in need but the end goal must always be an economy – and a country – that can rise up from its bed and walk.

Somehow the natural spontaneity and responsiveness to social change has to be revived