The state won’t be the saviour of the economy
Having spent 30 years depoliticising economic issues, state institutions are now spearheading an apolitical form of nationalisation.
It seems likely that the problem confronting society today is not that of a recession, but a more fundamental disruption to the workings of economic life.
The massive expansion of state control over the banking system may counter the powerful forces threatening to destabilise the financial sector and the currency markets. But, at best, all that the government-led rescue packages can achieve is a framework for managing the imminent decline of economic activities. Banks may have been rescued, but at present there is no strategy for re-engaging them with the rest of the economy.
It is evident that there is a lot more pain to come. Existing levels of state expenditure cannot be maintained without unleashing massive inflationary pressures, the outcome of which will be cuts in living standards. In any case, the choice is not between inflation and deflation. We are likely to see both as the contraction of credit forces numerous businesses to cut investment and production. Nor will it be easy for companies to export their way out of the predicament. There is now the danger that the global flows of goods, like capital investment, will decline.
The fact that the different government rescue packages have been coordinated has helped to minimise the destructive impact of the collapse of the banking system. However, despite high and unprecedented levels of international cooperation, governments are forced to pursue a national agenda. Not surprisingly, international coordination has coincided with the emergence of national tensions and rivalries. The EU has found it very difficult to speak with one voice, highlighting the potential for national conflicts to become more destabilising. The row between Britain and Iceland may well be a sign of far more ominous conflicts to come, once some of the smaller and weaker economies begin to spiral out of control (see Britain vs Iceland: the Wad Wars, by Brendan O’Neill). There is little doubt that the degree to which international coordination can be maintained will have a significant influence on how the crisis unfolds. One of the most interesting issues thrown up by the crisis is how the state will act to prevent the recession from turning into a depression.
The role of the state
Numerous commentators claim that, with government rescue packages leading to the ‘nationalisation’ of so many banks, we have entered a new era of regulated capitalism. There is little doubt that the massive bailout of the financial sector marks an important departure from the previous phase of deregulated finance markets. But the idea that we have moved from a neo-liberal global economy to a state-interventionist era is overdone.
The neo-liberal era initiated in the 1980s was never as liberal as many claimed. Despite the Reaganite commitment to rolling back the state, this was a period in which there was a rise in large budget deficits in the US. Throughout the 1980s and 1990s, the state was used pragmatically to manage interest rates and the value of the dollar. Nor was the US administration averse to saving ‘toxic’ banks. In 1984, the Reagan government believed that the Continental Illinois was far too important to be allowed to fail, so it spent an estimated $1billion buying up its bad debts. A long time before the ‘credit crunch’, the state had adopted a highly interventionist role in the economic life of mature capitalist societies.
Historical experience shows that a global economic crisis invariably invites new forms of state intervention. This was evident during the first Great Depression of 1875-1895. The state played an active role in encouraging the establishment of trusts and cartels and in coordinating world trade and capital exports. During this period, governments adopted an expansionist foreign policy in order to improve the competitive positions of their nations.
In succeeding decades, governments were actively engaged in industrial policy and finance. The depression unleashed by the 1929 stockmarket crisis also led to the further expansion of state intervention in economic life. At the time, the emergence of a new regime of regulation was perceived by many to be the beginning of the socialisation of the economy. One Labour Party thinker predicted in 1935 that the adoption of planning by the then beleaguered government may ‘accelerate the transition to socialism’ (1).
Since the 1930s, state intervention in economic life has often been described as ‘antithetical’ to the workings of the free market. Reality, however, is far more complicated. The issue is not whether or not the state plays a role in economic life but the form that its intervention takes. The deregulation of finance and the various privatisation initiatives in the 1980s coincided with widespread state-led intervention in economic life. The rhetoric of liberalisation was not entirely without content; but the deregulation of parts of the economy went hand-in-hand with growing regulation in other sectors. Indeed, the two processes were closely linked. The constant expansion of new derivative-led financial instruments actually provided the government treasury with some of the funds for large state budgets.
The distinctive feature of the so-called neo-liberal era was the tendency to de-politicise economic life. Since the 1980s there has been a self-conscious attempt to distance political policymaking from economic affairs. The very meaning of TINA – There Is No Alternative – was to detach economic life from public policy. TINA meant that in the absence of alternatives, politics had no place in the managements of markets. One consequence of this de-politicisation of economics has been the marginalisation of strategies that aim to harness economic forces towards political objectives. Even the environmental critique of consumer capitalism has adopted the premise of TINA: instead of elaborating an alternative political economy it puts forward a moralistic critique of excess and ambition.
The de-politicisation of economics in the 1980s ran directly counter to the previous 50 years. Throughout the interwar and postwar periods, politics was principally linked to competing visions of economic strategy. The economy became politicised, linked to issues relating to welfare, redistribution, employment and industrial strategy. By the end of the 1970s, however, the politicisation of the economy had reached a dead end. It had become clear that the economic realities of the late 1970s had undermined the case for an activist interventionist state. From that point onwards, economic problems were increasingly perceived as technical rather than political in nature.
The legacy has been the demise of political debate about the big economic issues. Periodically the discussion of taxation becomes political, or at least takes on a political language, but most economic issues have been regarded as technical subjects that need to be managed by experts. That is why the response to the current economic upheaval has so far been distinctly apolitical. The so-called ‘political response’ to the crisis amounts to little more than a frustrated denunciation of greedy bankers and their high bonuses. It is as if politicians and public figures cannot bring themselves to use political language to interpret this economic crisis. That is why counter-crisis measures, like the nationalisation of finance, are rarely justified politically. This is state intervention without purpose.
The most important consequence of the economic crisis is likely to be the re-politicisation of the economy. This could lead to more demands for extending and deepening the system of financial regulation, and for the state to adopt a greater role in economic affairs. In one sense, such a re-politicisation of the economy would not be a negative development. It may well encourage a more serious public debate about issues that are fundamentally important to people’s lives. However, the downside of the re-politicisation of the economy is likely to outweigh the benefits. After the rescue of the banking system, the state will be under pressure to adopt a more active role in the economy – and the current pragmatic approach of the state may well give way to a more statist tendency towards micro-management and the bureaucratisation of economic affairs.
In the current climate of political confusion, there is a danger that hopes will be invested in the role of the state as an economic saviour. But the institutions of the state, which are already dominated by powerful bureaucratic impulses, are in no position to play a positive role in the area of economic management. We should remember that these institutions are no less responsible for the current predicament than are the greedy market makers with their large bonuses. Replacing an unrestrained derivative market with unrestrained state intervention will make a complicated situation even more difficult to sort out.
A major shakeout and restructuring of capital markets and businesses cannot be avoided – and nor should they be. But instead of dwelling on the losses brought about by the downturn, we should be discussing about how this crisis can be turned into an opportunity for innovation in both economic and political life. Instead of a fruitless debate about the markets vs the state, the focus should be on what can work.
Frank Furedi’s Invitation To Terror: The Expanding Empire of The Unknown is published by Continuum Press. (Buy this book from Amazon(UK).) He is speaking in the session Capitalism – what is it good for? at the Battle of Ideas festival at the Royal College of Art, London on 1&2 November. Visit Furedi’s website here.
Against austerity, by Brendan O’Neill
There Is (still) No Alternative, by Mick Hume
Congress bales out, by Brendan O’Neill
Scapegoating the spivs, by Tim Black
It’s the politics, stupid, by Phil Mullan
Lehman Brothers: when confidence runs out, by Rob Lyons
Five myths about the Wall Street crisis, by Daniel Ben-Ami
From the politics to the economics of fear, by Mick Hume
Fannie, Freddie and the ‘economics of fear’, by Sean Collins
The truth about the ‘credit crunch’, by Phil Mullan
(1) Hugh Dalton (1935) Practical Socialism For Britain, Routledge : London, p.248.