economic crisis that originated in US financial markets has now generated a
global recession that seems certain to be the longest and deepest since that of
the early 1970s. Economic events on this scale have significant ideological
implications. The inflationary recession of the 1970s saw the failure of
Keynesian economic management and the asso, and its replacement by monetary
policies directed at stabilising inflation rates.
implications went much further this. Full employment, guaranteed by government
policy was a crucial element in the social-democratic settlement that emerged
after World War II. It ensured that governments could act independently of the
views of business in general, and the financial sector in particular.
end of full employment and came a resurgence of free market ideas and policies,
beginning with massive deregulation of the financial sector. Will Hutton describes the
process in detail. This was the beginning of the era of what has been variously
described as Thatcherism, economic rationalism or neoliberalism.
implications of the current crisis seem likely to be equally profound. While
most political discussion is premised on the assumption that this is a
temporary emergency, to be followed by a return to ‘normal’ conditions as soon
as possible, the changes that have already taken place make this assumption
Image: New Statesman
disappearance, rescue or nationalisation of large parts of the banking
sector will result in a fundamental change in the political landscape.
Joe Stiglitz observes, Wall Street has lost public trust and the
financial system is now viewed as necessary but dangerous. The financial system
that emerges from the crisis will be smaller, less powerful and more tightly
regulated than the one that is now failing.
implications go much further. The whole intellectual structure supporting
neoliberalism has been shown up as fundamentally flawed, as Madeline Bunting observes.
core of the problems is the efficient markets hypothesis (EMH), which states that the
market price of a financial asset is the best possible estimate of its value.
The crisis has left the hypothesis in tatters.
EMH is abandoned, it seems likely that markets will do better than governments
in planning investments in some cases (those where a good judgement of consumer
demand is important, for example) and worse in others (those requiring
long-term planning, for example). The logical implication is that a mixed
economy will outperform both central planning and laissez faire, as was indeed
the experience of the 20th century.
this mean the end of neoliberalism, and if
so, what will replace it? It’s too early to say for sure, and much will depend
on the policies of the incoming Obama Administration and the success or failure
with which they are attended. Still, it seems most unlikely that neoliberalism
can survive in anything like its current form, and highly likely that its
replacement will restore important elements of the mixed economy and the
associated social democratic settlement.
Who to read on the GFC and economic philosophy:
Will Hutton: ‘This terrifying moment is our one chance for a new world‘
Joseph Stiglitz: ‘The fruit of hypocrisy‘
Madeleine Bunting: ‘Faith. Belief. Trust. This economic orthodoxy was built on superstition‘