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Letter from an Economist – 29th October 2008
John Birchall
29 Oct 2008
UK economist John Birchall wonders what the next major contribution will be to economics and how the world will cope with a real recession.
''Interesting times''
In the mid 1980s I sat on Oxford railway station and tried to debate with fellow examiners waiting for their train what the next major contribution to economics might be.
Who would be the author of such a work and what would be its main theme? I was not very successful, which may have been my fault but now, some twenty years later, I am about to begin the debate all over again.
Free market
In the mid 1980s we were all watching as the radical right supply-side revolution took over from naked monetarism. I was concerned by the death of Keynesian economics and by the arrival of de-regulated markets, privatisation and the return to much freer ''market'' economics.
Despite several letters to The Guardian and some quite heated debates with those who would listen to me the age of growth leading to greater material wealth for all was upon us.
Now, as the dust of the credit crash begins to clear and the real recession starts, the ideologues of capitalism are beginning to look rather scared. Some even talk of a re-appearance of Marx!
Grateful banks
To be fair sales of Das Kapital have increased recently but I doubt if this means a return to command economies and central planning. No, one major change that has taken place since my appeals on Oxford station has been the collapse of Communism and I can’t imagine anyone suggesting that the re-nationalisation of prime assets is the route out of this particular downturn – though the banks may be grateful that the part state ownership (which does actually mean all of us) came to their rescue when it did!
In what are the early days of a world-wide debate as to which direction ''new'' economic ideas will take it is interesting to note The Economist writing that ''liberty is under threat'' and their editorial concludes with a plea for those ''who believe in capitalism to fight for it''.
One has to wonder if the mood of writer was just a little hysterical but it shows how much economic theory has been thrown into turmoil by the recent events.
Political elite
Let’s take a more sober look at just what has happened since the first leaves of autumn began to fall. In reality deregulated capitalism has, and not for the first time, allowed the greedy to exploit the vulnerable and now the political elite is clambering to describe such individuals (and all organisations are controlled by individuals and do not have a personal identity) as inept and in need of some serious regulation.
This might be pleasing to read but one has to wonder who it was who devised such ''soft'' regulatory environments in the first place.
In France, President Sarkozy pronounced that ''laissez faire is finished'' and at least in the short term saw Keynes as the direction in which to move. Mr Darling has been heard to say that ''much of what Keynes wrote remains sensible'' and that is pleasing to hear as it was the late Jim Callaghan, when Prime Minister who accepted monetarism in 1976 - three years before the election of Margaret Thatcher and just six years after Richard Nixon had declared that ''we are all Keynesians now''.
Spend, spend, spend
For those who are relatively new to the confused world known as economics Callaghan went onto to say that ''we used to believe that we could spend our way of a crisis but I tell you … it is no longer possible''.
Now Gordon Brown, who seems to be gently guiding other world leaders in the direction of more intervention (not socialism, even he can’t quite say that) is telling small business and anyone who will listen that a substantial increase in public borrowing is the only sensible thing to do. So, are we about to spend our way out of a recession?
Is this the death bed of capitalism and is some modernised form of neo-socialism about to be uttered through the gritted teeth of David Cameron? Somehow I doubt it and the current fragility of the economic system does not, in my opinion, offer the ''left'' much room for manoeuvre.
Economic stability
No, it may be the ''right'' who will benefit from the supposed demise of the free market. Mass unemployment has led to a growth in the support for rightwing parties before. But if more ''Keynesian'' ideas on protecting the most vulnerable can be successfully introduced then any lurch to extremist politics that would use race, ethnicity and pure self interest as the route back to economic stability will have been defeated before it really developed any genuine momentum.
A crisis of this magnitude is calling for a new economic model and one that can be seen to rise like the phoenix from the current system which is increasingly delivering more inequality, greater environmental damage and devastating instability.
Challenge
The challenge we face must also be reviewed with the awareness that many in the free market corner would note that the twenty five years of the use of their model of economic welfare has seen hundreds of millions lifted out of poverty.
But a deeper look at the figures shows that a large proportion of this number has been achieved in China, which is still largely publicly-owned. India, which has also undergone considerable economic growth, remains hugely unequal and some 47% of its population are malnourished.
In Europe and the United States the growth has tended to be clearly focused on specific groups and it seems that greater equality was achieved under the post-war decades of Keynesian policies than during the free market era.
Opportunity
Whatever one's political opinions it is plain to see that an opportunity exists for world leaders to reshape the economic system that has evolved since the 1980s.
In reality no economic model comes fully prepared for use in all circumstances. Each has been adapted to suit the changes that have arisen during its lifetime. Indeed, Marx never wrote a single paper that had ''the outline for economic success'' written across its front page!
The world has done it before with the New Deal of F D Roosevelt and the Marshall Plan of the immediate post-war era, so surely those elected to lead can now settle down, remove pure national interest from their deliberations and devise a way back to wealth creation which will deliver a less unequal outcome for the majority of their populations.
New form of capitalism
We are heading into a new form of capitalism and with these will come the need for more far-reaching social alternatives. In what form these new ideas eventually appear will depend upon clear leadership and much greater public participation in the process of decision-making.
It will be interesting to see what happens in the US if Obama is elected. McCain warns of creeping socialism, whilst the Senator from Illinois simply says ''change''. Somehow I feel I am back to Oxford Station again, only this time the numbers are bigger!
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