The Rudd Essay & the Global Financial Crisis

Kevin Rudd's essay makes two major contributions to the debate on the present world crisis of capitalism, which is now recognised to be the major breakdown of the economic system since the Great Depression after 1929. It recognises clearly that the market fundamentalism of 1973 to 2008 has failed utterly and cannot be restored, a significant statement coming from the prime minister of Australia. It also recognises the irrelevance of ideological arguments about "the nomenclature" of the system that will succeed it. This is a welcome sign that the politico-economic debate is at last entering the twenty-first century, although Kevin Rudd's own sketch of the post-crisis system almost certainly underestimates the scope and need for future state or other public action.

In the twentieth century, for historical rather than logical reasons, this debate was dominated by the opposition between only two types of economy: socialism, which was identified with centrally planned state economies of the Soviet type, and capitalism, which covered the rest. It was either the one or the other. This binary opposition, between a system that sought to eliminate profit-seeking private enterprise (the market) and one that sought to eliminate all restrictions on it, was never realistic. All economies combine the public and the private. The crucial difference between economic systems lies not in their structure, but in their social and moral priorities. As Amartya Sen has pointed out, even in the era of ultra-liberalism the economic systems of "the affluent countries ... have depended for some time on transactions that occur largely outside the markets". The two attempts to live up to the full binary logic both crashed: the state-planned command economies of the Soviet type and the market fundamentalism of the era 1973 to 2008.

Nobody is likely to revive the Soviet version of socialism, but it is equally important to avoid dreaming of a return to anything like the pathological "market supremacy" of recent decades. It was, as was always evident in Friedrich Hayek, based not on economic considerations, but on an a priori belief in a concept of individual freedom which by definition excluded the public pursuit of social welfare ("The economic freedom which is the prerequisite of any other freedom cannot be the freedom from economic care which the socialists promise us," Hayek wrote in a jacket note to the first edition of his The Road to Serfdom, in 1944). As Milton Friedman said, "the social responsibility of business is to increase its profits." This was justified by a theory of a world of competing individuals seeking to maximise their benefits by rational choice and with rational expectations, feeding into an invariably efficient market that set prices accurately and therefore produced better results than any other form of judgement - including, it was assumed, in human welfare. But for government and other outside interference such a system, it was supposed, would produce a continuous maximum growth of the world's wealth, even allowing for occasional yet, thanks to good economics, manageable market volatility. In short, once the "invisible hand" ascribed to Adam Smith was allowed full freedom of action, we would be living in the best of all possible worlds.

The combined doctrines of rational choice and efficient markets allowed neo-liberal economists to insulate themselves from the very different realities of the world economy by constructing sophisticated mathematical models of how countries' economies would operate under these assumptions. In doing so they flew in the face of these realities, and indeed their own predictions. Economic growth in the OECD in the era of market fundamentalism was slower than in the post-1945 "golden age" of mixed economies. It was far lower than in the dynamic but distinctly un-Hayekian Asian economies which became the main engines for the growth of global production after the '70s. In the US the mean income of the bottom 40% stagnated, while even among the middle classes of most of the countries of Atlantic capitalism the "golden age" adult generations (who once marvelled at how much better off they were than their parents) sympathise with the uncertain economic prospects of their children.

So far from smoothing growth, from the '70s global market fundamentalism made the fluctuations of the economy more jagged, potentially catastrophic, and - by the criteria of orthodoxy - unpredictable. From 1980 on this was obvious in Latin America, South and East Asia, and the post-communist Soviet region, where the installation of a free market produced social and economic cataclysm. It could be mistakenly dismissed by theorists, even after 1998, when it led to the collapse of Long-Term Capital Management, a huge American hedge fund which had been assured that its operations were virtually risk-free by its managers, including two Nobel-Prize-winning economists. This and the collapse of the dotcom bubble in 2000 and 2001 should have been enough warning, but nothing is more impervious to realities than theological certainty armed with algorithms. It took the crazy boom of the 2000s and the crash of 2008 to demonstrate the suicidal nature of market fundamentalism. Paradoxically, some intelligent practising businessmen, more firmly in the real economy than ideology-bound economists and politicians, anticipated trouble. After 1998 they even rediscovered the relevance of Marx.

This is now obvious to everybody, although it is worrying that governments, and notably President Barack Obama, still rely for guidance on the former economic apostles of the free-market gospel - unlike the "brains trust" of adventurous outsiders in 1933, which helped to make Franklin D Roosevelt's first hundred days more memorable than Obama's look like being. Today's priority is not to minimise government intervention in the economy in defence of the free market. Even capitalists can wonder, as the investment editor of London's Financial Times put it, "how confidence can return to markets or the banking system without a period when governments exert control more explicitly than they do now", up to and including "the n-word", nationalisation, which "seems to be just as taboo in the UK as it is in the US". But what are they to do? Governments today are faced with several questions to which the past provides no answers.

The first is how to get out of the present global economic crisis - the greatest since 1929 and one more universal in its impact, but quite different in its procedure. No government knows where we are in this depression, how long and deep it will turn out to be, how far it is affected by or affects the current massive shift in the centre of gravity of the world economy away from the Atlantic. We only know the traditional tools of monetary and fiscal management have not so far had much effect. The problem would be hard enough if the present were like the post-1929 Great Depression, which was only finally overcome by that most terrible, and today inconceivable, mega-investment program, World War II. But that depression did not suffer from anything like the gigantic overload of financial claims - 450% of GDP in the US at the outset of the current crash, as against 215% at the depth of the crisis in 1932 - which calls for Saskia Sassen's "definancialisation of the major economies", rather than feeding more government funds to a grossly overgrown (and overpaid) financial sector. So far the G20 has taken the only positive steps towards global economic management, but even many of its statements are expressions of hope rather than action.

Nor do we know how the framework of the post-theological world of interacting mixed economies can come into being. Such things are not and cannot be designed like airports, even by determined governments with a clear program. Last time round we could rely on a surprisingly wide post-1945 consensus: "Never Again". The main incentives were political (the shift to the Left during the war, followed by the Cold War), structural (the need to plan war economies, even under capitalism) and ideological (the slump had entirely discredited laissez-faire capitalism). Only one of these looks like being available today.

There remains the crucial problem of the environment, which must imply a major shift, at least for a substantial period, from an economy moved by the market to one directed by the priorities and imperatives of public interest. In the short and medium run this cannot be tackled by the profit-seeking market any more than the development of nuclear energy or the conquest of space could be - which does not mean that private business cannot be mobilised for, and make good money out of, the vast public social and technical investments that such socially initiated projects require. In the long run it is incompatible with the unlimited and uncontrolled growth that is central to a system of profit-seeking enterprise. Controlling growth already implies a steep rise in the regulation of ordinary profit-making and consumer preferences: for instance, in the construction of houses and motor vehicles.

Fortunately, the systematic and necessarily gigantic public investments to take on the world's environmental crisis offer a more civilised equivalent to World War II, which made it possible to overcome the heritage of the last Great Depression. Whether and how it can be effectively pursued should determine not only how the world economy recovers, but the future of humanity in the twenty-first century.