When the financial markets crashed in 2008 and western economies hovered on the brink of a financial meltdown, it seemed for a while that an era was ending, and that some things could never be the same again. At a similar moment in the 1970s, Peter Jay declared that Keynesian political economy had become an amalgam of unstable forces and could not survive. He predicted that one of the pillars of this order – full employment, stable prices, free collective bargaining or democracy – would fall. Ultimately it was full employment and free collective bargaining which cracked, as a neoliberal order took shape in the 1980s and '90s to replace the Keynesian order.
The neoliberal era saw the emergence of a different kind of economy with changed international rules. Currencies were floated and capital controls were abolished. The renewed impulse to economic liberalisation was labelled 'globalisation'. As globalisation widened and deepened, national governments experimented with policies such as deregulation, privatisation, marketisation and lowering of income and business taxes. Finance and financial services acquired an enhanced role, and manufacturing declined sharply in many western economies, while it rose in many rising economies. Universal welfare provision was weakened, and inequality soared.
Many saw the 2008 crash as a sign that the neoliberal political economy was about to experience the same fate as its Keynesian predecessor. Five years on this is still not clear.
The neoliberal order shows great resilience, and the forces pushing for an alternative in the 2010s appear much weaker than the forces that pressed for change in the 1970s. Yet it is evident that the neoliberal order has in its turn become 'an amalgam of unstable forces', and this creates both the opportunity and the need to reform it and to move in the direction of a different kind of economy. The neoliberal order faces several particular problems in the aftermath of the crash. There is firstly the problem of sustaining a liberal international political order; secondly, the problem of developing a different growth model; and thirdly, the fiscal problem of taxation, debt and the wider legitimacy of the public accounts.
The international context in the 2010s is very different from that of the 1970s, because of the impact of the rising powers and the dramatic shift in the balance of the international economy that is under way between west and east and north and south, and the long-term implications this has for the leadership role which the United States has played in the international economy for the last 70 years. A peaceful, stable and open international liberal order is one of the key conditions for achieving a new era of sustained prosperity, and for guaranteeing the past achievements of social democracy.
But the pooling of sovereignty which that implies – so that states can continue to be genuinely self-governing – requires a level of international agreement which is beyond the capacity of any one state to secure. In the aftermath of the crash the momentum is away from multilateral negotiation towards bilateral dealing, and threatens to weaken unions between states. The risk of a fracturing of the system of international rules for governing the international economy is high, unless new ways can be found to make its governance more inclusive.
The other two problems are also familiar from the 1970s but today come in new and distinctive forms. The first is growth. This may seem a peculiarly western problem rather than a problem for the international economy as a whole, because of the enormous scope for catch-up which still exists among the first and second generation of rising powers. It is certainly an acute problem for western economies, which are facing a new form of stagflation. In the 1970s, stagflation meant stagnation combined with inflation; today it means stagnation combined with deflation. Japan suffered this condition in the two decades before the crash. The causes are complex, but they include the absence so far of a major, new, basic technology capable of improving productivity across the board. ICT – information communications technology – was expected to be that technology, but so far it has not delivered.
In the absence of strongly growing productivity, growth of output and living standards has been maintained by such policies as increased immigration and by debt-fuelled private consumption, or 'privatised Keynesianism' as Colin Crouch terms it. These policies seem for the moment at least to have run out of road. Since the crash, the political hurdles of relying on either have become high. Although the growth of the last two decades was real, repeating it looks difficult. This has prompted the search for new ways to ensure growth and fresh questioning of the meaning of growth, as well as arguments that the economy needs to be rebalanced, and that a different kind of economy needs to emerge.
This problem of growth is closely linked to the third, the crisis of fiscal legitimacy. The fiscal stabilisation which followed the financial crash has been unusually severe and prolonged. In many countries, including the UK, the process is only half-complete, according to the government's own projections. The problem has been made worse because of the time it has taken for economies to recover. Five years after the crash many western economies had not achieved their pre-crash peak, and interest rates remained at unprecedentedly low levels, while quantitative easing to prop up asset prices and maintain liquidity of the financial sector was still substantial. In this situation it is not surprising that governments have found it difficult to implement austerity measures on a scale sufficient to reduce the size of government back to pre-crisis levels, after it was artificially inflated by the collapse of output in 2009. Until there is a sustained recovery, the levels of personal, corporate and public debt in many western economies are likely to remain at levels judged too high by bond traders. But, conversely, the prospects for such a recovery remain clouded so long as the overhang of debt remains.
Fiscal crises are endemic in the modern kind of political economy because governments persistently seek to spend more than they are able either to raise in taxes or to borrow. The constraints are different, but in both cases real. The expansion of an entitlement culture, particularly in relation to pensions and health, has created large future liabilities, while the security state built up during many decades is proving hard to unwind. Such commitments would be easily affordable if taxes could be raised to cover them, but governments find it increasingly difficult to increase taxes. The pressure from businesses and from citizens to reduce the burden of taxes is relentless, and governments in general have bowed to this pressure. But at the same time they face growing pressures to increase particular expenditures, often from the same businesses and citizens who demand lower taxes.
Changing entitlements in ways which would substantially reduce future liabilities is politically extremely hard. Governments are typically quite good at imposing short, sharp squeezes on spending, but much less good at sticking to long-term plans for fiscal stabilisation. They constantly postpone tough decisions, hoping that something will turn up in the meantime. Despite protestations of fiscal austerity, governments remain addicted to borrowing and to debt as a means of managing the public finances, and have become much too reliant on private debt to sustain economic growth. The neoliberal order has been built on debt, much of it private rather than public.
All the components of the neoliberal order lock together – financialisation, open economies, flexible labour markets, rising debt and growing inequality – making it seem impossible to choose a different kind of economy. In the 1970s there was a growing recognition that the Keynesian political economy had become dysfunctional, but it was thought 'politically impossible' to move in a radically new direction, such as proposing privatisation of state industries or reform to labour markets. Eventually, however, the logjam was broken and radical reforms to the existing structure of the political economy were achieved in the 1980s. These 'structural reforms' rapidly became the orthodoxy, and agreement to implement them was demanded as the price of international loans and bailouts to countries which got into economic difficulties.
The 2008 crash showed that the neoliberal political economy has become dysfunctional in its turn, but every reform is met with the argument that it cannot be done, or that the time is not ripe, or that it will have perverse consequences, or will be dangerous. The status quo has always been defended with such arguments. What the experience of the 1970s shows is that such obstacles can be overcome, but it requires a long-term strategic vision of the change that is required, the identification of short-term steps which are desirable in themselves – but which also prepare the way for bigger changes later – and the political skill to seize opportunities as they arise.
Since the crash there has been a great deal of new economic thinking, and work on a strategic vision of a different kind of economy is already quite far advanced. It will require a new moral economy as well as a new political economy. A new moral economy requires a seachange in attitudes towards cooperation, selfishness and greed, the safeguarding of the environment, the protection of the public realm and the promotion of wellbeing, as David Marquand has set out so eloquently. A new political economy will be based on principles such as pluralism, a more balanced economy avoiding concentrations of power; fairness, a less unequal and more socially mobile society; solidarity, a more inclusive society, seeking to overcome structural unemployment, welfare dependency, gender and racial discrimination; and sustainability, a more ecologically sensitive economy, devoted to human wellbeing and the protection of the biosphere.
Relating these principles to the three problems outlined above, the problem of global government means accepting that the global shift under way in the international economy requires the building of a new international order whose forms of governance are much more inclusive than the western-centric international orders of the past. The new importance given to the G20 immediately after the crash was a first step, but progress has since stalled, and many international negotiations remain deadlocked. A new era of prosperity is unlikely to be achieved on the basis of the old order, and failure to include the rising powers in the building of a new one risks fragmentation and conflict. More international cooperation and pooling of sovereignty will be needed rather than less, as well as ways of dealing with the growth of non-state actors and forces. The second problem, the problem of growth, requires a shift in the way growth is defined and measured, as well as urgent preparations for the radical transition to greener growth that climate and environmental change will necessitate if they are not to halt economic growth altogether. The third problem, the problem of fiscal legitimacy, will require new approaches to funding public services and new ways to deal with rising inequality and promote greater trust and social cohesion.
There are many ideas for immediate measures which could constitute steps towards realising the broader vision of a different economy. Some of the most promising are drawn from agendas around predistribution, corporate governance and spheres of justice. Predistribution acknowledges that distribution through conventional means of tax and spend alone is no longer working. Today, it may be easier to tackle the distribution of pre-tax incomes than post-tax incomes, because of the hollowing out of certain parts of the state and the reluctance of centre-left politicians to advocate increases in taxation to pay for public services. The tax state still remains important, and is vastly bigger than it was 100 years ago, but its limits appear to have been reached.
A focus on predistribution calls for specific policies such as minimum wages and living wages, which require the state to intervene and change the ground rules within which markets operate. Governments retain significant powers and instruments but they have often been discouraged from using them because of the ideological strength of the neoliberal model, which maintains that government intervention in markets is almost always perverse and to be discouraged. But as minimum wage legislation shows, this is not the case, and the principle can be extended to many other areas, such as the price of housing and energy. If markets are malfunctioning in terms of their distributional outcomes and their effects on economic performance, intervention can be justified. The aim of the policy of predistribution is to ensure that all citizens receive a basic income. It is very hard at the moment to imagine a basic income being funded through general taxation, so predistribution aims to move towards it through direct market interventions by government, changing the balance of the economy, and improving its fairness and inclusiveness.
A second step concerns corporate governance. A different kind of economy will require a different kind of company. This can be achieved firstly through much greater support for different forms of ownership, especially mutual, non-profit and cooperative forms. A vibrant ecology of organisational and institutional forms should be a primary concern of government. Encouraging and sustaining diversity requires strong public action, with attention paid to the legal and financial conditions for different forms of enterprise. Secondly, changes to the way boards are constituted, directors and managers are remunerated, and company success is judged are overdue. They have long been resisted in liberal market economies, mainly because of the ingrained habit of viewing companies as private associations. In the 19th century, because both companies and trade unions were regarded as private associations outside the state, the recognition of the public character of these associations took the form of granting them immunities from existing laws, such as limited liability. They were allowed to act as though they were above the law. These immunities were revoked for trade unions in the 1980s, but they have never been revoked for companies. This failure to hold companies to account is responsible for many of the defects of the shareholder-value model of the company. The kind of behaviour which this model encourages was once more on display in the run-up to the 2008 crash.
A third step is for government to think more systematically about market and non-market spheres of the economy. Apart from anarcho-capitalists, all defenders of market economies acknowledge they should have some limits. The disagreement is over where those limits should be. In the neoliberal era these boundaries have been pushed back, and more and more spheres have been subjected to market forces either through privatisation, removal of areas from public control altogether, or through marketisation, the insertion of market principles into the organisation of public services. Some of these changes have been good ones, but many have not. It is time for a reassessment and for a different balance between state and market to be forged, one which dispels the crude idea of 'markets good, government bad'. The establishment and protection of more spheres in which market forces do not rule automatically is essential to the cohesion and legitimacy of modern societies. Examples include the rules governments should apply to takeovers, and the preservation and extension of the global commons, for example in areas to do with information, and above all the environment, on which any kind of human future depends.
The difficulty many people have in conceiving how an alternative could be delivered is that the political forces pressing for change seem so feeble. The political resilience of the neoliberal order since the crash has been remarkable. Populist and antisystem parties have grown in many parts of Europe, but none have so far broken through electorally. Government has remained firmly in the hands of those pledged to a business-as-usual approach, operating within the conventional assumptions established over the last three decades, seeking to patch up and relaunch the system. Countervailing power at the institutional level to dominant economic interests weakened during the neoliberal era, which is why even after such a cataclysm as the 2008 crash, the hegemony of neoliberal ideas and institutions still appears so strong. But although business can seem monolithic, there are significant elements of business which will support a different kind of national economy, particularly if it is clearly associated with the preservation and strengthening of an open, international liberal order. There is great scope to build campaigns around issues such as the living wage, social investment, the global commons and the protection of the environment, as the rising generations find new ways to connect and express themselves. Politics constantly evolves, and the fixed and seemingly immutable positions in one era are quickly overturned in the next.
Andrew Gamble is professor of politics at the University of Cambridge.
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