This is the weekend governments around the world will hopefully begin the fight back. How can the global economy get out of difficulty? What will they do? What are the dangers? What does the experience of the past tell us?
Sometimes disaster can be a good thing. When the asteroid wiped out the dinosaurs, a gap in the market was created which got filled by the mammals. If it wasn’t for that asteroid, we would never have come into existence.
At the end of World War II many economies were effectively starting with a blank sheet. World War II wiped out infrastructure, but it didn’t wipe out knowledge. The post-war period to the early 1970s was the most successful period ever recorded by the global economy – that’s ever.
Destruction can be good. The great Austrian economist Joseph Schumpeter used to refer to great gales of creative destruction. He also feared what he called corporatism, which was a kind of collective economics in which unions, management and government work together in a cosy relationship of stability in which failure just never occurs. He said corporatism would ultimately lead to the collapse of capitalism, and presumably, wealth creation.
But there is a snag with all this. The social cost of 1930s-type failure is just unacceptable. Bear in mind, also, that World War II was probably the result of the Great Depression.
There is a good economic argument to say that banks should be allowed to collapse, that government should stand back, but the benefits won’t emerge straight away, and the hardship and dangers that could thus emerge are such that, well, you just can’t let it happen.
Then again, the Internet and other forms of mass communication are such that any recovery could be almost as dramatic as the crash.
Some people say Schumpeter was the greatest economist of the 20th century. His big rival for that epitaph was, of course, Keynes.
Capitalism in its purest form may thrive if failure is allowed to occur, but only in the long term. Keynes once famously said: “The long run is a misleading guide to current affairs. In the long run we are all dead.”
His big idea for ending economic depression was demand management. He advocated measures to boost demand through government borrowing. In the US, Roosevelt sort of half-listened to Keynes, and the New Deal was the result. But many of Keynes’s supporters argue the New Deal did not go far enough, that it was half-hearted. Ironically, they say it took World War II, and the massive government spending that entailed, to create the kind of fiscal stimulus Keynes advocated. And that was why the depression finally ended.
The other side of the argument says that the depression was ending anyway. Classical economic theory says that when demand is low, wages fall until it becomes profitable to employ people again. Give it time, goes the argument, and this will happen.
What we really need is a halfway house.
Bizarrely, the financial crisis we are seeing may well lead to the creation of a new economy that really is something special. An economy that builds upon innovation and technology, and that has learnt that economic growth is down to the goods and services we produce, not down to shuffling money – or down to booming house prices.
Frankly, we have already passed the point of complete failure. Even if Mr Brown and Co wave a magic wand, and shares go back to normal next week and credit is restored into the markets, things will never be the same. A gale of creative destruction has already blown through the financial system.
Now is the time for a global, organised fight back. It seems the US is considering introducing a Brown/Darling type scheme – in which the US government takes equity in banks. It was argued here this should have been done in the first place.
Last night, the Dutch government announced a 20bn euro plan to provide capital to firms that are “fundamentally sound and viable.”
The G7 are meeting; the IMF is pontificating; the World Bank wants action.
It is like that scene from The Life of Brian – you know, when speech after speech says now is the time to stop talking, and do something.
But action will follow; expect major announcements this weekend.
Modern technology has in many ways hastened the speed of this crisis. Rumours spread like never before. Now, technology can be used to create the fight back.
This is not the end of civilization, neither is it the end of capitalism. The global economy will come out of this stronger as a result – unless, that is, governments throw a blanket of control and regulation over the system. You can understand how Schumpeter’s corporatism will emerge from the ashes of this crisis – and that would be a bad thing.
Markets rise too high, they then fall too far. But that pattern is not restricted just to markets. It defines human nature. The real danger lies not so much in how serious this crisis is, it will come to an end. The real danger lies in the overreaction that then follows, and whether the inevitable public reaction strangles the lifeblood out of what could be the most sustainable and impressive economic boom seen yet.
Comments
Trackbacks