While the human cost of economic stupidity is all too visible, the world's leaders are paralysed by their dogma
by Will Hutton Guardian/UK June 3, 2012
Last week produced some brutal evidence of where we end up when we place finance above economy and society. The markets are now betting not just on the break-up of the euro but on the arrival of a new economic dark age. Policymakers are paralysed by the stupidities of their home-spun economics. It could hardly be more sobering. Signs of the crisis range from Athen's soup kitchens to Spain's crowds of indignados protesting in the streets against austerity and a broken capitalism. Youth unemployment is sky-high. Less visible is the avalanche of money flowing into hoped-for safe havens in the US, Germany and even Britain.
Virtually everywhere you look there are signs of a weakening world economy. At home, manufacturing suffered its biggest plunge for three years, and this in an economy already suffering its longest depression since the 19th century. American jobs growth is petering out. Unemployment in Europe averages 11%. Even China witnessed a sharp fall away in factory activity in May.
Yet none of this should be a surprise. We live in the aftermath of one of the biggest financial and intellectual mistakes ever made. There was a blind belief that in a free market banks could not make mistakes. Free markets didn't make mistakes – only clumsy bureaucratic states made economic mistakes. Or so they said. Financial alchemists, guided by the maxims of free market fundamentalism, could make no such errors. Except that they did. The result was the financial crisis of 2008. All the gains were privatised, and all the losses were socialised. The much-maligned state had to step in and clear up the mess left behind by the private sector.
This is no solution. Overstretched banks have become more cautious about lending new cash. So as banks stand aside from their crucial function of generating credit, governments and central banks must step in to generate the demand that has now disappeared. But they have not done so to a sufficient degree. The dominant ideology of the day – from the same roots that delivered the crisis – forbids it. A consensus continues to claim that the state is the source of economic bad. The state threatens enterprise, invites damaging taxation, and is the root cause of spreading inflation. The state must balance the books just as the private sector must.
This is a first-order moral and economic mistake. Human beings need each other for mutual support. In economic terms this means that no individual, either as a person or a company, can manage existential risk by themselves. That risk needs to be shared, otherwise the risk is not accepted. It is governments who provide the means through which we express our social obligations and pool our risks. This is the heart of Keynesian economics – a different set of moral and economic propositions than those which prevail. Today we can see an almost laboratory experiment on a global scale of why Keynes was right and his detractors wrong.
The choice is stark. To commit to decades of economic stagnation, the break-up of the eurozone, the risk of trade protection and autarchic economic policies, the dismantling of the west's social contracts, the imposition of high unemployment and the political fallout that will follow. Or to change course. The technical means are relatively simple. Governments must replace targets for inflation with targets for the growth of prices and growth of output combined. Central banks should inject money into their financial systems by offering to buy new bank loans to support new investment, new innovation or new infrastructure – helped by partial government guarantees.
Will any of this happen? The west is at a cross-roads, and although such proposals will be fiercely opposed by the British, German and American right they need to be beaten back. After all, it is their ideas that have brought us to this pass. It is not too fanciful to argue that the future of western capitalism depends upon how this argument plays out – and how quickly, if at all, there is a change of course. © 2012 [Abridged]
William Nicolas Hutton is an English writer, weekly columnist and former editor-in-chief for The Observer.