Crisis Without End?

The Unravelling of Western Prosperity

Andrew Gamble

• Publisher: Bloomsbury Academic
• Year: 2014
• Print ISBN:
  9780230367081
• Edition: 1
• eBook ISBN:
  9781350311763
• Topic: Economics
• Subtopic: Political Economy
• Index: Economics

This major re-assessment by a leading political economist shows that the 2008 financial crash was no ordinary crisis, but the harbinger of a much deeper convulsion comparable to the major past crises of capitalism. While it is still uncertain whether it will become a transformative crisis for the international order, what we do know already is that:

- While the crash particularly affected western states, and those unevenly, no part of the international economy is immune from its effects.
- While the immediate crisis was contained, its magnitude is shown by how long it has taken western economies to recover, and by the need for exceptional measures, such as near-zero interest rates over a prolonged period.
- There is not a single crisis, but a series of crises, highlighting in particular a deeper set of dilemmas about western leadership, democracy and prosperity which unless addressed, will preclude sustained recovery and pave the way to new and deeper crises.

Andrew Gamble maps out likely scenarios in a turbulent world in which the weakening of the old western international order as a result of the decline in the capacities and will of the United States combine with internal deadlocks in both the US and the Eurozone over the management of austerity and debt and in many of the rising powers, especially China, over the management of growth and rising expectations. The path to a new era of prosperity depends on a reformed international order, solutions to budget as well as fiscal deficits, and new forms of sustainable growth. But these demand a political will so far notable by its absence at all levels without which there is little prospect of escape from a future of crisis without end.

Chapter 1

The New Stagflation

The crash of 2008 presents a paradox. If it was such a cataclysm, why five years later has so little apparently changed? The basic structures of the political economy are still in place. There have been some reforms, most notably in financial regulation, but banks are still paying bonuses, corporate power is unruffled, key international institutions are still unreformed, international negotiations on climate change and on trade are still deadlocked on the big issues, and the dominant ideologies of the last 30 years – the various strands of neo-liberalism – remain dominant and for the most part unchallenged. Despite the extraordinary state rescue of the financial system, states are still in retreat, shrinking their spending and their employment in accordance with the dictates of the new austerity. The G20 has emerged as an important international forum, eclipsing the G8, but most countries are still excluded from it. Parties belonging to the political mainstream and accepting the political orthodoxies of the last 30 years still rule in all the centres of western power. The neo-liberal order seems resilient and secure. In which case, should we speak of a crisis at all? Were the events of 2008 nothing more than a blip, similar to the stock exchange crash of 1987, a brief interruption in the otherwise smooth upward path of the neo-liberal era?

The evidence is contradictory, but in this chapter I will make the case that the crisis of 2008 was not a blip, and that what it signalled was the beginning of a prolonged period of contestation over the basic issues of political economy at both the national and international level. The contest is driven by conflicts of interest between different states, groups, classes and organizations, framed through different ideologies and sometimes different cultures. Conflicts of this kind are nothing new, and are inseparable from politics. During crises, however, they become much more intense and can trigger major changes, sometimes deliberately, sometimes inadvertently. The conflicts are open, there is no certainty about the outcome, but the participants in the conflicts come with specific resources, capabilities, knowledge and beliefs so that the odds are weighted in favour of particular outcomes.

Times of crisis often encourage radicalism, a proliferation of new ideas and the polarization of political opinion around strongly contrasting alternatives. Political imagination comes alive. Radicals of all shades of opinion start to believe that the dreams they have entertained for so long might be realized, either in whole or in part. To be radical means to take things by the root and to imagine something different from the established order and the present way of doing things. Radicals flourish during times of crisis precisely because things do not seem to be working in the old way, and many more people than in normal times can be persuaded that something fundamentally different should be tried.

But radicals never have it all their own way. They are opposed in every epoch by pragmatists and realists, who dislike thinking about politics in terms of fundamentals, whether this means going back to old certainties or creating new ones. They seek rather to keep afloat what already exists, to use existing institutions and approaches, to repair and patch where necessary, to experiment and improvise – but not to alter radically either institutions or policies. It is the realists and pragmatists who are most often in power, and who often come to power after revolutions. As that supreme realist, Prince Tancredi, observed in The Leopard: ‘everything must change so that everything can remain the same’.

It is an open question whether radicals or realists will prevail after a crisis. There is always a contest to define the crisis, what caused it, who is to blame for it, whether it was a crisis at all and what the response should be. In the fluid state of politics after the 2008 crash it seemed possible for a while that radicals might seize the initiative and start to reshape and reorder international politics and the international economy, as they had done in a number of countries after the 1929 crash, most notably in Germany and the US. The events of 2008 were dramatic and at first it seemed they might also be cathartic, purging and purifying the system of the financial toxins which had so damaged it, and heralding major shifts in the international political economy. The dominant doctrines of the political economy of the previous 20 years appeared for a time discredited, and there was talk of the need for new frameworks and the recasting of the assumptions on which the economy had been based. But once the immediate crisis had passed the feeling that nothing would ever be the same again soon gave way to an old conservative refrain: why not leave it alone? The old doctrines and the old ways began to reassert themselves as if nothing had happened. In 2010 and then again in 2013 confidence rose that the worst was over and that the world would soon return to business as usual. Normal service could be resumed, with only minimal changes necessary in the way that economies were organized. The storm had been weathered. Only minimal adjustments had proved necessary. A few new precautions against a financial collapse had been put in place but nothing too burdensome that might cramp the style of the financial sectors which were so central now to their national economies and to prospects for recovery and growth.

The case that nothing fundamental has changed

The argument that the 2008 crash did not change anything fundamental does not dispute how serious the crisis was but points to specific features which allowed its effects to be contained. First among them is that the emergency measures did stabilize the economy. The crisis was successfully managed; disaster was averted. As a result confidence has slowly revived that the Anglo-American financial growth model is still viable, and that the crash was a one-off event which will not be repeated. The recovery from the recession was slow and painful, but after five years there were signs that it was on track. The contrast with the 1930s is most stark here; there is greater similarity with the 1970s, when again the crisis was successfully managed, although out of that crisis a new order did ultimately arise, the neo-liberal order (Helleiner 1996; Frieden 2006; Glyn 2006).

A second reason is that there has been no change in the hierarchy of states. The US remained the dominant power within the international market order. The contrast here is both with the 1930s, when the crisis exposed Britain’s incapacity to remain the leading power, and with the 1970s, when the US used the opportunity of the crisis – which it partly precipitated when it unilaterally withdrew from the fixed exchange rate system agreed at Bretton Woods – to reshape its own role in the system and the rules which were to be imposed on everyone else. Since 2008, the US has so far proposed only minor changes to the way the international system is governed (Germain 2009; Payne 2010; Wade 2011).

A third reason is that there is no significant bloc of business interests pushing for an alternative policy and that countervailing forces to business, such as trade unions, have been seriously weakened over the last 30 years. Although there are divisions within business, it no longer faces significant opposition outside itself. This was not the case in the 1930s and 1970s. The space for policy alternatives has shrunk. The privileged position of business which Charles Lindblom analysed in the 1970s, which resulted both from its ability to shape the political agenda through the deployment of its superior resources and from its structural power as the source of employment and growth, has become significantly more privileged in the neo-liberal order (Lindblom 1977). There are major civil society pressure groups which harass business, but it no longer has to contend with a major organized opposing interest (Crouch 2011).

A fourth reason is that there is little appetite in the political class or in the state agencies for radical experiments. Mainstream political parties in the western democracies have become increasingly interchangeable in the eyes of their electorates as a single political class. Voters find it hard to discern major differences in the policies they pursue in government. State agencies, particularly regulators, are sometimes more interventionist, but many of them are successfully captured or neutralized by business lobbies. An example of this was the light-touch regulation enjoyed by the financial services industry in the runup to the crash. The symbiotic relationship between business and government makes the power structure increasingly monolithic. It has become a single enterprise. In the neo-liberal era the international system has achieved a new level of interconnectedness through globalization and liberalization, and awareness of this complex interdependence has made mainstream political actors aware of their limited scope for departing from the mainstream consensus. This consensus is technocratic, cosmopolitan and liberal. The opposition to it tends to be populist, nationalist and authoritarian – but so far, as I show in Chapter 3, these forces have not become majority ones (Eatwell et al. 2014, ch. 9, part I).

A fifth reason is that neo-liberal ideas have become hegemonic to a much greater extent than liberal ideas achieved in earlier times (Schmidt & Thatcher 2013). Neo-liberal ideals have become embedded both at the level of common sense, helped by the modern media, and as operational codes through the influence of modern economics. There are no longer many political economy alternatives to the neo-liberal model (the Nordic model of the Scandinavian states is one), and there is no alternative international order or alternative socio-economic system, a role that was filled by the USSR in the two earlier structural crises of the international market order. Since 1989, the western international market order has had no challengers (Fukuyama 1989). The contrast with the 1930s and the 1970s is marked.

These five reasons help to explain why the neo-liberal order has been so resilient. Big as the crash was, it has not yet led to the emergence of new interests or new alternatives. Muddling through in any case is always the default policy stance. On this reading the fallout from the crisis was just not big enough to galvanize radical action. If it ain’t broke, don’t fix it has always been a powerful slogan, and by 2013 the bulk of business and political opinion was coming round to the view that the economy was not broke after all. The western economy did not experience a 1930s slump. The crisis response was enough to prevent that. The crisis was certainly a moment of danger, but the patient survived, and no great shift in direction has so far taken place. The politics of the first five years after the crash were taken up with deciding how much damage there had been to the relationships which existed before the crash, and how quickly confidence could be restored to allow a return to business as usual. Realists point out that the show is still on the road, and that the worst has so far not happened. The US survived its fiscal cliff in 2013, and the eurozone survived a succession of near-death experiences in 2011 and 2012. David Runciman (2013) has argued in The Confidence Trap that democracies when pushed generally do just about enough to stay afloat. The structural aspects of the crisis may not have been fixed, but realists argue that in time they will become less relevant and so can be ignored.

The strongest evidence that nothing has changed is the resilience of the dominant framework of institutions, policies and ideas which existed before the crash and, though briefly shaken, was still largely intact five years afterwards (Engelen et al. 2011; Schmidt & Thatcher 2013; Grant & Wilson 2014). There have been a number of reports about banking reform, and some legislation, notably the Dodd–Frank Bill in the US passed in 2010, which introduced new rules for the operation of banks, as well as the international agreement in the G20 to establish a Financial Stability Board and to introduce a new set of rules for financial regulation which became the Basel III rules. But although these measures have tightened financial regulation, the changes look rather modest compared to the uncompromising reforms of the 1930s, such as the US Banking Act of 1933 (the Glass–Steagall Act) which split retail and investment banking. It lasted until 1999 when it was repealed by the passing of the Gramm–Leach–Bliley Act, just in time for the final irrational exuberance of the great financial boom.

The same is true of international financial regulation. The G20 summit held after the crash, in London in 2009, held out the hope of a radical agreement on international financial regulation to curb the excesses of the international financial system and re-establish some control over financial flows. But despite the personal commitment of some leaders, particularly Gordon Brown, and despite important changes, including the establishment of the Financial Stability Board run by the central bankers (Mackintosh 2013), agreement on a comprehensive set of rules has proved elusive (Baker 2010, 2013; Engelen et al. 2011) and has disappointed some of the original protagonists (Brown 2013). The Basel III rules in particular have attracted many critics. The financial sector remains almost as large, almost as unregulated, as ever. The talk of a new Bretton Woods quickly faded (Helleiner 2010), and little attempt has been made to reassert political control over financial flows, apart from the addition of a few extra safeguards which are unlikely to prevent the next bubble and the next crash (Stiglitz 2010). The banks have recovered their confidence and have been lobbying hard against new measures of financial regulation. As the recovery takes hold there will be pressure to relax the rules of Basel III, or allow the banks to circumvent them. It will be said that they were appropriate for the period immediately after the crash but not now that the economy is back on its feet. Politicians on both sides of the Atlantic have been voicing concern that the banks should not be hobbled and that a flourishing financial sector is essential to the recovery. Unpopular though banks and bankers have become, the Anglo-American financial model of growth which flourished so strongly in the two decades before the crash has not been abandoned, partly because no clear alternative to it has yet emerged. If all countries followed the export-led growth model of Germany and China it would be self-defeating and lead to competitive devaluations and trade wars. The willingness of some countries to run debt-fuelled import-led growth models was essential in the last period to underpin growth. All politicians have talked of rebalancing their economies to promote more exports and more manufacturing, but the actual rebalancing that has occurred is small.

Colin Crouch (2011) has written the most persuasive account of why this is so in his book The Strange Non-Death of Neo-Liberalism. The previous boom depended on what he calls ‘privatized Keynesianism’. The neo-liberal turn in public policy in the 1970s and 1980s had discredited ‘public’ Keynesianism, which had advocated using public spending to boost demand in the economy and return it to full employment. The solution adopted by neo-liberalism using the financial sector was to rely on a huge increase in private debt. The US as the leading economy and in control of the dollar could afford to run both public and private deficits, but in other countries public deficits were kept under tight control through EU and IMF rules, and it was private debt, for both households and companies, which increased dramatically and fuelled the boom and the asset bubbles associated with it. There was always a risk it might get out of hand, but the prevailing wisdom was that the markets themselves would be able to sort it out by pricing in all risks and steering the economy away from the cliff, helped by some discreet central bank intervention if necessary.

Privatized Keynesianism, the encouragement of a steady increase in the indebtedness of private households through the encouragement to borrow through mortgages, credit cards and bank loans, became addictive. As Crouch shows it served everyone, but most of all it served the interests of the corporate sector. The flow of easy money was essential to enable them to sell their goods and services and make profits. In this process most large companies have become major financial players themselves, dependent upon the banks but also taking full advantage of the financial opportunities which the banks were creating for them. Crouch’s point is that in modern political economies business interests have become hard to disentangle. There is no manufacturing sector yearning to be free of finance. In the Anglo-American heartland of the modern capitalist economy finance is the driver of everything (Gowan 2009; Baker 2010; Green 2013). The complex of interests which has been formed in the modern corporate sector and its symbiotic relationship with the state means that there is no appetite in the business community for a drastic restructuring of the economy or the direction of policy. The 2008 crash was a huge shock, but it has not fundamentally shaken the belief in the indispensability of the financial growth model. The addiction to rising asset values, from property to shares, as the driver of the economy remains as strong as it ever was, and recovery is still measured in the old terms (Hay 2013).

The burden of adjustment during the recession has fallen mainly on the public sector. House prices have declined, particularly in the US, but much less so in some other western economies, including the UK, and by 2014 a new housing bubble was under way. Tentative steps were being taken to start a new consumption-led boom in Anglo-America, sustained by another big increase in credit in the absence of a surge in business investment. In contrast, the main drive of austerity in Europe has been to cut public spending and shrink the size of the public sector. The economic contraction of 2009 meant that public sectors overnight represented a much larger proportion of economic output, and the primary effort was put into scaling them back. They were also swollen by the cost of the bank rescues and the bailouts. But although public sector deficit reduction became the test of a sound fiscal policy, regarded as essential for laying the basis of recovery, it became clear that there could be no recovery unless a way could be found for consumers to start taking on new debt again. Only then might companies have the confidence to invest. The economy in most western states has proved resilient in the sense that it has at last recovered. But it remains very fragile (Wolf 2013).

The case that something fundamental has changed

In the last six decades there have been a great number of financial crises affecting various national economies and regions. The Asian crisis in 1997/98 for example was a severe check to the rapid growth of many emerging economies there, but its effects proved temporary (Haggard 2000). It is possible to see the 2008 financial crash in the same way, as a crisis mainly of the OECD or North Atlantic economy (although not all its members were equally affected). This is discussed in Chapter 4. What makes the 2008 crisis different is firstly that the financial centres involved were the leading financial centres of the international economy in New York and London (Gowan 2009); secondly that large parts of the liberalized international financial system were caught up in the backwash of the crisis and this ultimately affected all parts of the international economy; and thirdly there was no quick bounce back as there was after the Asian crisis. The overhang of debt and the uneven and subdued prospects for recovery persisted in many western economies.

There are many forms which crises can take. One of the most important distinctions, explored further in the next chapter, is between an existential crisis and a deep or structural crisis. The first is a critical situation, an emergency, a moment of danger, a climax, in which the intentions, the choices, the decisions and the responses of agents are crucial. The second is the product of slow-moving forces and trends, which although constituted by human actions and choices, appear often to constrain human agents rather than to be under their control. There is not much doubt that the 2008 crash was an existential crisis, a real moment of danger. The financial authorities were blindsided, caught unawares, and although they reacted in time, it was a close call. There seems little doubt that if the crisis had been handled differently there would have been a financial meltdown in 2008 on the scale of 1929, with far-reaching political and economic consequences, including a slump of 1930s proportions. This was averted, but only narrowly (Paulson 2010; Darling 2011). The events which led up to 2008 represented a major failure of regulation and oversight, a loss of control which almost precipitated the kind of classical capitalist crisis which it was thought had been banished since the experience of the 1930s.

Was this simply a temporary existential crisis, a short sharp shock ending in a return to normal, to business as usual, or did it signal instead the presence of a much deeper crisis, whose resolution requires a lengthy period of adjustment and reconstruction? If it is the latter then the 2008 crash may come to be viewed as inaugurating another great upheaval in the history of capitalism. An upheaval can mean both a sudden convulsion and a fundamental reordering. The 2008 crash was certainly a sudden convulsion. The dispute is over whether it will lead to a reordering – and, if so, what kind.

The first reason for thinking that something fundamental changed with the financial crash was the scale of the events themselves. Many commentators argued in the immediate aftermath that the assumptions which had guided policy for three decades had been overturned. The long retreat of the state was over. In the emergency it had had to ride to the rescue of the markets. All the nonsense that had been spouted about efficient markets was revealed to be just that – nonsense...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Preface and Acknowledgements
• Introduction: Living in a Neo-Liberal World
• 1 The New Stagflation
• 2 Understanding ‘Crisis’
• 3 The Crash and the Recovery
• 4 The Global Shift
• 5 The Governance Conundrum
• 6 The Growth Conundrum
• 7 The Fiscal Conundrum
• 8 Paths to the Future
• Guide to Further Reading
• Bibliography
• Index