Speech given to the Centre for Independent Studies (Sydney) on 8 December 2008, published in On Line Opinion – Australia’s e-journal of social and political debate (Fortitude Valley), 19 December 2008
Reading the news these days you could well get the impression that we are not just seeing the end of capitalism. No, what is happening in front of our eyes is the end of the world. The German newsmagazine DER SPIEGEL just had a front page with a picture of a dollar note where a bullet had been shot through the head of George Washington. DER SPIEGEL called it “the capital crime” and announced “a world crisis that has only just begun”.
Other magazines tell the same story. In October, there was a grim looking black and white picture of a queue outside a soup kitchen on the cover of TIME magazine. Apparently it wanted to prepare us for a rerun of the 1930s which TIME called “The new hard times”.
Meanwhile, the British Economist’s graphic designers have been the most creative illustrators of the economic crisis. Every week now, it seems, they manage to come up with a new way of reminding us that we are living in truly dangerous times. In September they had a picture of a maelstrom, pulling skyscrapers and banks into the abyss. The headline consisted of just two words and a question mark: “What next?” The Economist gave the answer two weeks later with the silhouette of a man looking down from a high cliff. “World on the edge” The Economist proclaimed, but this time without a question mark.
After all the doom and gloom in these magazines, there could hardly be an increase in drama although I am still waiting for the headline “We’re all dead but we don’t know it yet”.
Do these headlines remind you of something? Only a few months ago there were some similar doom and gloom stories on the covers of the world’s magazines. But they had nothing to with economics, collapsing banks and the like. Last year’s end of the world was all about climate change, of course. Soon large parts of the world would become uninhabitable, they claimed, and then followed the well-known litany of floods and droughts, rising sea levels, famines and new diseases and ultimately the end of the world. It seems as if the media only had to change the subject, but not their general apocalyptic tune. Today’s end of capitalism is yesterday’s global warming.
But climate change was not the first end of the world story, either. If we only go back over the past 20 or 30 years, we have had all sorts of things which were thought to threaten the world as we know it. Think of AIDS, SARS, BSE, asbestos, the Millennium Bug, passive smoking, radiation, the end of oil, bird flu, and the limits of growth. Looking through the archives of the front covers of DER SPIEGEL, TIME and The Economist I would estimate that at least a quarter of them have always been about some new crisis which was thought to bring disaster, if not the end of the world. If only a fraction of them had turned out to be true we probably would not be here today.
Although these scares were all quite different, ranging from salmonella in food to road safety, there were a number of features which they all had in common. They all started from some plausible assumptions, but soon they developed a life of their own. Journalists like to pick up on scares. Headlines like the classic “Small Earthquake in Chile; Not Many Dead.” simply don’t improve your paper’s circulation. “The end is nigh” is much better.
The other thing that most scare stories have in common is that in a sense it does not really matter in the end whether the threat is real or not. A catastrophe that stubbornly refuses to happen has never damaged the reputation of those who had previously warned of it. Think of the members of the famous Club of Rome who predicted in the 1970s that the world had reached the limits of growth and mass starvation and abject poverty would be the future for billions of people. What followed was quite the opposite of their predictions, but far from being discredited the Club of Rome keeps publishing its doom-mongering reports until the present day.
Ludwig Erhard, the father of the German Wirtschaftswunder (the post-war “economic miracle”), once said that it was easy to forgive false prophets if things turn out better than they had predicted. If that is true then there is no cost to making exaggerated prophecies of doom. When they are wrong we will readily forgive them, and if not then the doomsayers can always say “We told you so!” From a game theory point of view, pessimism seems to be a good strategy. You cannot get closer to a free lunch than by predicting the end of the world.
But there is another thing that most scare stories have in common. They are often used by special interest groups to promote their own agenda and increase their funding or revenue. Jump on the bandwagon of a crisis, and as a scientist you can campaign for better research grants. Applying for funds to analyse the mating behaviour of beetles in North Queensland has higher chances of success if you include a reference to the impact of climate change. Lawyers made a killing out of compensation cases for largely hypothetical damage from asbestos. Car manufacturers like Toyota have long understood that subsidies can be gained if only they claim to offer a solution to global warming. And we should not forget that governments and politicians also love these crises: “You have a problem? Let us fix it for you!”
In the observation of Christopher Booker and Richard North new threats almost never fail to increase the size of government. Wherever there seems to be a problem governments are quick to pass new laws, spend more money and establish new regulatory agencies. Surprisingly, these new institutions remain in existence even when the threat has disappeared. Remember the German Waldsterben, the dying of the forests? In the early 1980s it was believed that acid rain would kill Germany’s forests within a few years, and the German government started compiling an annual “state of the forests” report as an emergency measure. Today, Germany’s forests are bigger than ever – but trees are still being felled for new “state of the forests” reports.
You may wonder what all this has to do with our current economic crisis? Where is the connection between mad cows and mad bankers, you may ask. But I think that there are quite a number of parallels between the usual scare stories and the economic crisis. Nevertheless, let me state quite clearly that there is one big difference, too. Most other scare stories belonged to the realm of imagination. The Millennium Bug, for example, seemed to be a huge threat to mankind, but in the end it did not do any real harm – apart from the billions of dollars that were pointlessly spent to prevent planes from falling out of the sky, lifts being stuck and power stations shutting themselves down.
The financial crisis is of a different dimension and it is real. Real damage has been suffered by financial institutions around the world, and the damage is substantial. The Bank of England estimated that the crash had cost financial institutions around the globe the incredible sum of US$2.8 trillion. Other calculations show even higher figures. According to CNBC the US government and Federal Reserve have already committed more than US$4.2 trillion to various assistance schemes. How much the final bill will be nobody can say. It is clear, however, that we are dealing with a crisis of dramatic proportions and there is no point denying it.
On the other hand, however, there are some remarkable analogies between our usual scare stories and the economic crisis.
Take the media first. It is scarcely possible these days to read a newspaper, listen to the radio or watch TV without being bombarded by economic crisis stories. There seem to be hardly any other stories left that are worth reporting. And indeed, the problems of the world economy are big and the dangers real. But I cannot help feeling that the way the media have pushed the crisis has made matters worse than they should have been. Ludwig Erhard, whom I mentioned earlier, is often quoted estimating that 50 per cent of economics is psychology. Perhaps I would not go that far. But if it is true that our current economic crisis is predominantly a crisis of trust, then we can understand the significance of the media. Put simply, trust cannot be restored if the media keep frightening us. Take Northern Rock, the first British bank run in more than a century. When it happened, Northern Rock was not bankrupt but it simply could not access additional funds to continue its aggressive mortgage lending. The impression that Northern Rock customers got from a number of sensationalist reports on BBC TV programs was quite different, though, and it was this impression that triggered the run on the bank.
There is a danger that the actual crisis and the media reporting about it have now become a vicious circle. Bad stories about the economy destroy the very trust and confidence that is needed most for a quick recovery. With every new piece of bad news consumer confidence will plunge further, and what was once pessimism becomes outright panic. While the media are playing the role that they have traditionally played in all other scare stories, namely to exaggerate and frighten, in this case they are probably a part of the problem, too.
The other parallel with conventional scare stories concerns the prophets of doom. As in other crises, we are now confronted with “experts” who predict with certainty that this really is the end of capitalism. They are quick to point the finger at “neoliberalism”, deregulation and privatisation – all of which they believe are responsible for the crisis. Never mind that some of the things were clearly caused by governments rather than the absence of governments. Take this example of muddled thinking from a guest comment in the Australian Financial Review (Seismic shift in global politics, November 18, 2008). I quote:
“The global credit crisis is the product of unregulated capitalism. Governments of both persuasions in the US relaxed home-lending standards to stimulate the economy and promote home ownership for the poor. It didn’t work.”
These words of wisdom were written by Ross Buckley, a law professor from the University of New South Wales. Apparently he couldn’t quite make up his mind whether it was unfettered capitalism or government intervention that caused the crisis, but he didn’t realise it anyway. The only thing he was certain about was that capitalism did not work and that more government was needed.
The financial crisis presents the perfect opportunity to those who never thought much of markets, liberalism or capitalism in the first place. Rather than actually trying to understand what had really caused the crisis, their reflex is to proclaim the end of the free market.
But this is nothing new. In fact, the prophets of the end of capitalism have been around for as long as there has been capitalism. In every crisis of the past they came out and declared boldly that this time, really it was the end of the free market. And they were never showing signs of self-doubt in doing so. “The deep crisis in Capitalist lands is the strongest proof that the downfall of the Capitalist world is approaching!” said Valerian Kuybyshev, once head of the Soviet Supreme Economic Council. But that was in 1932. The Soviet Union is long gone, but capitalism is still with us.
Four decades later, amid the oil crises of the 1970s, seven Nobel prize-winners, including the economists Gunnar Myrdal and Kenneth J. Arrow, signed a declaration. The group condemned Western capitalism for the crisis because it produced “primarily for corporate profit” and called for developing “alternatives to the prevailing Western economic systems”. That was in 1975, but the drive for corporate profits has subsequently given us the personal computer, better cars, the Internet, microwave ovens, flat screen TVs and much more. Not bad for a system that is failing, you could be forgiven to think.
The prophets of the end of capitalism have always been on standby, ready to propagate their economic recipes of more state control, more government, and more regulation. But why would anyone still want to believe them? Their forecasts always had far less life in them than the markets they pronounced dead. The real danger is that we actually take their policy recommendations seriously.
This brings me to the final point in which our current economic crisis shows parallels with scare stories of the past. Crises are often the gateways for special interest groups and governments to pursue their very own agenda. That this is the case in the economic turmoil today is hard to deny. The best example of this was the joint testimony of the CEOs of Ford, Chrysler and General Motors to the US Senate. They blamed the failure of the global credit system for driving down car sales and plunging their firms into crisis. But this view conveniently ignored the fact that their three companies had been in trouble for a long time, thanks to bad product policies and high cost structures. It also failed to mention that there are other car makers in the US which despite the economic downturn do not need any government subsidies. But to the former “Big Three” the economic crisis presented the perfect opportunity to gloss over their mismanagement and ask for taxpayers’ money.
US car makers are not the only companies trying to make use of the crisis. In the queues for state aid are childcare centres and insurance companies, banks and building societies. While some assistance may be justified we should nevertheless be vigilant that the crisis does not become an excuse for pure and simple rent-seeking. And it should not become a fully comprehensive insurance policy against business failure, either.
But perhaps the greatest beneficiary of all crisis talk is government. As in all other crises from BSE to global warming, politicians love the opportunity to intervene and “do something”. We can see it in countries around the world that governments are now embracing a more active role in the markets. Whether it is the US government providing a US$700 billion bailout to the financial sector, the British government part-nationalising the country’s banks, or the Australian government providing $6.2 billion to car manufacturers: governments have found legitimacy for their new policies by referring to the economic crisis. And probably this was only the beginning. In Germany, Angela Merkel’s Christian Democrats are currently considering new caps on executive pay; the Australian prime minister has already said that he wants to take measures against the “culture of greed”. What we see is the typical way in which governments react to scare stories, and they are to a degree driven to their activist approach by the media exaggerating the problems and demanding solutions.
For liberals, these are difficult times. But they are not difficult because liberalism or capitalism had failed. They have not. The most important player in all markets, even seemingly deregulated ones, is government. The low interest rates that encouraged over-borrowing were not determined in the marketplace, but by central banks. Regulatory failures made it too easy for Americans to run away from their mortgages while keeping up the repayments on their credit card bills. And housing markets could only overheat because regulation prevented land supply from expanding to meet rising demand.
The two countries worst hit by the crisis, the US and the UK, are in sorry fiscal shape because their governments spent the past decade accumulating mountains of public debt. Far from practicing free market radicalism, both countries coupled big government with insufficient regulatory frameworks. Whoever wants to say that “Anglo-American capitalism” has failed should first show where we can find it. What is capitalistic about the UK, where nearly every second pound sterling produced in the economy goes through the hands of the state? What is free market about a US budget deficit in the hundreds of billions?
While there is no denying that markets have failed, there is certainly no lack of government failure either. There is a danger, nevertheless, that governments, the media and special interest groups will seize on the opportunity to use the economic downturn for their own purposes. And that is the challenge of this economic downturn.
The times ahead will be tough, there’s no doubt about it. But we will get through them and the free market will prevail once more. And then we will have time to be afraid of other things again. Who knows? We may even rediscover the horrors of global warming or bird flu.
So this is not the end of capitalism. But we have to be careful that the prophets of doom, the media or politicians do not make it feel like the end of the world.