A slew of flawed and incomplete ideas about the advent of a new era loses sight of the importance of the real economy - as well as overlooking the enduring stability of the global economy. Daniel Ben-Ami fillets the arguments.
In addition, the idea of an era of deregulation followed by one of reregulation does not even work as a description of the trends before and after 2008. There is a partial truth in the idea of deregulation in the earlier period in that, as already mentioned, lending rules and various other rules on financial activity were relaxed.
But in other respects regulation had already become more extensive and formalised. For example, before the “big bang” in the City of London in 1986 much financial regulation was informal. The City was a club with relatively few rules. Anyone who seriously transgressed the rules would be blackballed.
Over the years a much more elaborate system of statutory regulation emerged. The Financial Services Authority (FSA) had an extensive rulebook and staff to enforce its diktats. It is misleading to characterise it as minimal regulation in the way that it is often understood.
”It is necessary to probe deeper to ask why growth is likely to be slow. The problem is far more profound than a simple deleveraging”
The weakest pillar of the new paradigm argument is that idea that an era of free market economics has finally ended. Whatever some university economists would like to see, the workings of the western economies bear no relationship to the ideal of a minimal state.
Even in America, often viewed as the bastion of the free market, the state plays a huge role in economic activity. Total federal spending was already about 35% of GDP before the crisis struck. In addition, the authorities played an extensive role in both financial regulation and monetary policy. However desirable a minimal state, it is hard to believe that America really was one in the classic free market sense of the term.
Critics often confuse the reluctance of the state to intervene in some circumstances with free market economics. For instance, the slowness of the American authorities to act on the collapse of Lehman Brothers in 2008. But this is better seen as a reluctance of the authorities to take decisive action rather than a genuine ideological adherence to free market economics.
It should already be clear that the common characterisations of the features of the new paradigm are flawed. At best they only represent a partial outline of economic trends. Such accounts are insufficient to justify the claim that the world has entered a new economic era.
They also omit some of the key characteristics of the global economy. In particular they take its durability as given. Such commentators fail to see that there is a fundamental stability to the world economy despite the near collapse of the financial system in 2008. Nor should volatile asset prices be necessarily taken as a sign of economic instability.
Proponents of a new era forget that peculiar circumstances give the world economy far more durability than it would otherwise have. The rulers of the developed economies have more room to manoeuvre than they would have had in earlier times.
”The collapse of the Soviet Union and the eastern bloc more generally, consolidated the view that there is no alternative to the market”
International co-operation has remained strong thanks to the relatively muted tensions between the main world powers. Protectionism has been more-or-less kept at bay. Instead the leading economies have worked together, often through international institutions such as the G20 and the International Monetary Fund, to maintain stability. Such co-operation would be far harder to achieve during a time of intense inter-national conflict.
Opposition on the domestic front has also remained limited. Unemployment has risen sharply and real incomes have fallen in many cases yet there has been little grassroots resistance. Discussion has focused on how best to impose austerity, where to impose cuts, rather than resisting curbs on consumption.
Those who push the idea of a new era have forgotten the significance of a genuine watershed in world affairs: 1989. The collapse of the Soviet Union and the eastern bloc more generally consolidated the view that there is no alternative to the market. It no longer seemed possible to push for a qualitatively better society. A powerful mood of fatalism gripped the western world.
The world did not enter a new era in 2008. But it is possible to outline the key characteristics of the world economy over the past two decades.
It can still be characterised as what Phil Mullan, an economics writer, called a SAD economy in 2008. It is Stable, Anaemic and Durable. Growth is slow, productive investment is weak but there is little immediate chance of any existential threat to the system.
The economy is drifting along with severe bouts of financial instability but facing no fundamental challenges. Western governments face no determined international challenges or domestic opponents. However, in a strange paradox, they are themselves fearful of embracing growth or restructuring their own economies.
This stasis is unlikely to go on forever but there are no imminent signs of it being undermined. If forces eventually emerge that are powerful enough to break this equilibrium they could signal the start of a genuinely new era.