Current Economic Crisis--A Commonsense View


An Uneducated Man's View of Political Economy

Posted on 1-November-2008

     Ever since the beginning of the current, increasingly world wide, financial crisis, which looks almost certain to lead to a deep economic crisis, some people, especially in the Third World, have pronounced either the end of American power or the end of capitalism or of both. Such opinions represent in reality no more than a strange tendency--born out of envy? or of the psychological insecurity of Third World intellectuals?--in sections of Third World intelligentsia to look with secret and not so secret pleasure at every discomfiture of the West, particularly of the USA. To hastily pronounce the end of American power is to misunderstand its nature--the Bush administration has foolishly made it appear that it consists mainly of military power. To pronounce the end of capitalism is to forget that there is in fact no other viable, alternative economic system. Lenin's experiment of building an alternative economic system, based on his ideas about revolutionary Marxism and state ownership of all means of production did not work. As a result, much as people may dislike the inequities of capitalism, we are all stuck with it.

     We are also all part of a progressively integrating world-wide financial/economic system. Before the financial crisis assumed its present full blown form, it had festered for about one year. First of all there was a credit crunch in the banking system in the USA and Europe requiring sizable interventions by central banks and the introduction later by the US administration of a 150 billion dollar stimulus package. Then came the problems of Bear Stearns in the USA and Northern Rock in the UK, inviting, once again, government intervention. The effect of these earlier problems on stock markets in Asia remained negligible, leading some television experts to talk of a final decoupling of Asian economies from those of the West. Others in Asia organised seminars about the present century being the century of Asia--another side of the Third World mirage about the decline of the West. As the crisis developed into what another television expert recently called a tsunami, so all talk of decoupling and of the rise Asia was swept away.

     Such distractions apart, the present financial/economic crisis is not the product of a cataclysmic event such as the Black Death or an asteroid hit but has arisen out of factors within the normal workings of the capitalist system. Questions are naturally being asked about the causes of the crisis. The villains  most often named are: excessive faith in a free self correcting market, deregulation, reliance especially of Wall Street bankers and insurers on the ability of geeks to invent increasingly opaque instruments of debt to be traded for ever greater profits and the irresponsibility and greed of the heads of financial institutions. To a smaller or greater extent all the four villains have taken a beating in the last six or seven weeks.

     One of the most memorable images from the current discussions about what led to the present crisis will remain that of a tired, sad looking Alan Greenspan--no less!-- telling a committee of the US Congress that he had been mistaken about his economic model, about his belief in a free market with its own self-correcting mechanism. Deregulation went out of the window--though not yet fully in the USA--with the injection of huge amounts of public money into the capital stock of banks in the USA and Europe. The instruments the geeks created are now called toxic assets and though nothing much seems to be on the way for penalising heads of financial institutions whose greed and irresponsibility led to the present mess, there is palpable and rising popular anger against them.

     There are two seemingly separate beliefs that go together: one, free markets and free enterprise engender economic growth and all round prosperity and two, government intervention in the workings of the market causes rather than solves problems. An exaggerated version of this second belief was recently put forward by the Republican Vice Presidential candidate in the next week's US Presidential election who said that government is part of the problem and not the solution to the problems of society. It is perhaps time to look at these two propositions from the uneducated man's--uneducated, that is, in the verbiage of much of discussion in economic theory--perspective.

     Markets, free markets, were not created by Milton Friedman and other supply side economists, nor by Margaret Thatcher or Ronald Reagan. They have been around ever since people started producing agricultural surpluses which is roughly thirteen thousand years ago. They have over the millennia become more complex with the increase in the number and varieties of goods and services exchanged and the number and geographic spread of participants. This increase in their complexity has not changed some of their basic characteristics: in a market everyone tries to maximise his advantage; some people will always try to cheat; some participants will use the power that comes to them from their capacity to hold in order to stifle competition and eat up the competitor. If there was perfect competition, a measure of self-correction would work. But just as perfect competition is a myth, so is self-correction. So, it should now be clear, is trickle down.

     Governments in early agrarian societies arose around the same time as markets. Exchanges among non-kin, and the rise of agricultural surpluses necessitated a mechanism for managing surpluses, protecting them from predators and settling disputes among the participants in the increasing number and variety of exchanges. Early rulers were, as Jared Diamond says in Guns, Germs and Steel, kleptocratic--an idea echoed in a Vanessa Redgrave film, Fever --in the sense that rulers would take away large portions of the surpluses for their own benefit. A little reflection will show that even after thousands of years, governments everywhere have retained all these attributes of their early life. Societies have tried with varying degrees of success to institute mechanisms for keeping the kleptocracy of rulers--should we include modern CEOs in the category of rulers?--in check. A vigilant citizenry will insist that governments work for the benefit of people and that it acts as a protector of public interest against private greed. That rulers and governments have a taste both for corruption and abuse of power takes nothing away from the fact that in a modern society government is the most important, even pivotal institution, which ideally should function as the guardian of public well-being. To pretend that the best government is a do nothing government is to create a bad and eminently discardable myth. The best government is one that is willing to legislate and act for the well being of all the people for whom it works.

     One probable outcome of the current financial/economic crisis is that for some years supply side economics, "free market fundamentalism", and minimal government will be out of favour as guides of public policy. But as soon as the markets have stabilised, pressures will rise for taking governments out of the banks and institutions in which they have just become part owners. Gordon Brown, the British Prime Minister has already, within days of his government acquiring shares of practically every important bank in the United Kingdom, said in an interview that his government will sell those shares to the public as soon as the economy settles down again. Government interventions to deal with the current crisis are not the first of their kind and are unlikely to be the last--Roosevelt's New Deal was an even more massive intervention in proportionate terms and practically every major West European country had nationalised large chunks of its economy in the aftermath of the Second World War, until privatisation set in towards the end of the 1970's.

     Commonsense would tell us that the present financial crisis--call it flood or tsunami--could not have come with the suddenness of a meteorological phenomenon but had to have been in the making for some time. Yet not many voices of warning were heard from economists--all major modern governments have councils of economic advisers. Perhaps economists just did not know. At the height of the southeast Asian economic crisis of one decade ago, the British newspaper, The Economist said in an article that economists were said to be people who after a crisis started discussing why their forecasts went wrong; or there is the quip of John Kenneth Galbraith that the only purpose of economic forecasting was to make astrology look respectable. Or, is it that most of modern economics is nothing more than snake oil?

     I have another view to propose. That politics is driven by the economy anywhere seems to  be self-evident. It seems to be equally true that politics not only drives economic policy of the moment but also determines the dominant economic theory of the moment. I was in Paris, serving as a diplomat, when in 1977 and 1978, a few years before Ronald Reagan and Margaret Thatcher, the French Government headed by Raymond Barre launched upon its policy of deregulation and privatisation. It was a striking departure in a country with such a long tradition of dirigisme --two decisions that caused some French eyebrows to be raised then were about freeing the price of the baguette and of books--and where since the Second World war Coal, Steel, Electricity Distribution, three of the largest banks and Renault Motors had all been state owned. Thereafter, privatisation and deregulation became essential components of economic policy in many Western countries. I did not understand what had changed to make the policy of the earlier generation of state ownership of important industries unacceptable. A dozen years or so later, in 1990 or 1991 I asked that question of an eminent economist teaching at an Ivy League university in the USA, a man who believes in a large social welfare role for government. He gave me no answer. Perhaps for him, after eight years of Ronald Reagan and two years of George H.W. Bush (George do nothing Bush, according to a friend, a Democrat, in New York at that time) my question was too absurd to be answered. More likely than not a government will surround itself with economists who will find the best theories to support its policies.

     We shall all survive the present economic crisis. There will be a time when regulation of financial services and a large role for government in the management of economic life will be the guiding principles for policy makers and then there will come a period when free marketers and debunkers of government will run policy. Thus will policy oscillate till mankind reaches some dreamed of stage of higher consciousness. But each oscillation costs money. The management of the present crisis will cost national exchequers massive amounts of money. When free market principles and supply side economics return owners of private enterprises will receive tax incentives. That will also cost money. My question is: who bears these costs? My tentative answer: the weak and the poor.


 Also on this site:               Introduction to The Waste Sad Time             The Waste Sad Time

 Linked articles:

 Money, Money!

 Changing Capitalism



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