In-between before and after

Robin McAlpine – 24th March 2022

The old world is dead. The new world isn’t born. We live between these times. This might sound like something lefties say all the time (in fact it’s very close to the well-known quote by Antonio Gramsci), but when it comes to the global economy you’ll find it quite hard to get anyone to disagree with that statement.

The short version of this is that every-so-often throughout history there comes a rupture where we move from one approach to doing things to another. The last 100 years have already seen two of these and it is almost certain we are sitting on the cusp of the third. Which direction the new takes will define our lives for years to come.

This is not really about the war in Ukraine, though clearly that seems certain to bring big geopolitical change. It isn’t even really about the pandemic, though that is shining a light on what was already happening. And it’s not about new technologies, though they are clearly tied up with it. This is really about the banking crisis of 2007 and what it told us about the economy.

For example, before 2007 it was almost universally agreed among mainstream economists that central banks couldn’t just go around creating new money without dire consequences. But the overnight invention of ‘quantitative easing’ turned that all upside down overnight. Suddenly central banks couldn’t create enough new money fast enough.

Rounds of quantitative easing have been with us since and were very heavily relied on during the pandemic. In 2007 this was called ‘unconventional monetary policy’ but by 2021 it looked very conventional indeed. But as inflation rises in ways we haven’t seen for a generation, a fairly consistent new consensus is emerging that there are very clear limits to these new monetary policies.

But the inflation isn’t really because of money creation but because of supply chains. This is another massive shift; even five years ago you’d struggle to get anyone to really admit that supply chains could be vulnerable. The idea of ‘just in time’ supply chains is so embedded in the modern economy that it was almost unthinkable that they could break down.

This was a mistake. When people say that global supply chains are a marvel of modern technology (which they are) it is really just another way of saying ‘they’re incredibly complex and interdependent and if anything does go wrong…’.

In fact three years ago when Common Weal raised concerns about the vulnerability of supply chains as part of the Our Common Home plan it was mocked by some and the idea of ‘resilience’ or greater self-sufficiency was simply not part of any political discussion. Now? Every nation on the planet is looking urgently at resilience and over-reliance on imports.

As little as 15 years ago it would have been impossible to persuade most economists that we would very soon be using direct injections of government money to artificially inflate the value of assets (most of which are owned by the very wealthy). This would have been seen as gross market distortion and incompatible with an open global economy.

And yet now it is almost universally accepted that most asset values are being sustained not by free market interventions but by central bank (and wider political) interventions. After the financial crisis it was quietly accepted that share values would no longer be based on the market position of the businesses concerned but on the speculative value of those assets.

The rise and fall of cryptocurrencies is even more rapid than this. In early 2009 there was no such thing as Bitcoin and when it arrived it was seen by some as a possible challenge to the global economic world order, a kind of libertarian dream of money not regulated by any government.

And yes, that created the outcome that it sounds like it would create – a giant Ponzi scheme in which misinformation campaigns are allowing a few grifters to make seriously big business out of persuading others to join ‘the crypto revolution’ because that inflates their own crypto holdings.

That era is already coming to an end. Inevitably central banks saw crypto and didn’t like it. That gave rise to the rapid development of so-called CBDCs (Central Bank Digital Currencies). These are a bit like Bitcoin but created by a central bank and linked to a real-world currency.

It is here that we reach the fork in the road where it is clear that what came before is coming to an end but where we can’t see what comes next.

Because CBDCs can be a good thing. They are at least partly democratically accountable in a way Bitcoin isn’t and they are capable of having genuinely positive impacts on the economy and society. But at the same time they are a gift to anyone interested in state surveillance. If you use a CBDC then the government can trace every penny you spend, where you spend it, where that person spends it.

More worrying still, a central bank can decide where you do and don’t spend your money – they can just cut groups (either side) off from being able to use money they have. It is like the ability for government to nail closed the doors of certain shops to certain customers.

This is the point. The two periods in the last 100 years where the economy shot off in a different political direction had clear political shifts. In the 1930s the Wall Street Crash and the Great Depression required a massive and radical response and it led to the New Deal and to the stable, welfare-minded economic order that dominated until the 1980s.

Then in the 1970s there was a series of shocks (the end of the ‘Bretton Woods’ model, the oil crisis, an under-investment crisis in industry) that led directly to Thatcherism and Reaganomics which created the neoliberal economic order we have lived through since.

One of these represented a sharp shift to the left, the other a sharp shift to the right. Right now we are watching something that looks much more like an uncertain shift into chaos. Whatever you think of each, the Keynesian concepts that created the New Deal and the work of Milton Friedman on which neoliberalism was modelled were economic theories that predated the crises they were used to address.

That is not what is happening now. Frankly 40 years of neoliberalism has created a dangerous mix of chaos and certainty, a market system that is permanently vulnerable yet a ‘religion of economics’ which believed wholeheartedly that this was a perfect system which would never fail and so lead to ‘the end of history’. 

In an era with next to no alternative economics, there are no new tools at hand to pick up and use in this sudden era of perma-crisis. And so we are very straightforwardly making it up as we go along.

Something breaks and then anything possible is done to try and patch it up. Then something else breaks… No-one in 2007 would have argued for massive money-printing so rich people could buy each other’s assets to make it look like a broken system wasn’t really broken. And yet that is what happened anyway.

There are great threats in all of this, but also great opportunities. In any other period the smart money would be on a clear swing back to the left. The financial crisis, the environmental crisis, the geopolitical crises – these would traditionally have been viewed as best tackled through the kind of collectivism the left prioritises. 

But the political left has been so weak, so coopted and so hollowed-out over the last 40 years (thanks Mr Blair and Mr Clinton) that there was no real new thinking. And over the same period the academic and intellectual left was disastrously willing to give up on big, collective social solutions as it got sucked into the dangerous dead end of individualism and identity politics.

This all means that we really are in the middle of the most enormous transition in our economy but we are navigating it with a set of economic tools that were created by a group of people who fundamentally did not believe that the economy required any intervention because a perfect, self-regulating system had been achieved.

So the fight is not lost for those who hope we can turn now from the hyper-consumerism and dangerous financial risk-taking of the modern economy in time to save the planet from the environmental crisis that consumerism has caused. But the window for fighting that fight is closing fast.