The free market stands at a crossroads, but only the state offers the right path

A lesson of the Brexit vote is that freedoms integral to globalisation are increasingly at odds with democracy; something has to give

Three months ago it looked like a reasonable assumption. In the light of the UK’s referendum on EU membership, the annual meeting of the International Monetary Fund would surely be a re-run of the knife-edge affair in October 2008, held less than a month after Lehman Brothers went bust and no western bank was deemed safe.

The expectation was that the Brexit vote would push the UK economy into an immediate recession, with severe knock-on consequences for the eurozone. Financial markets would be sent into a tailspin, just as they were eight years ago when finance ministers and central bank governors assembled in Washington with the global banking system hanging by a thread. Credit had dried up, trade had stopped, factories were being mothballed. Talk of a return to the 1930s was common and not misplaced.

But history has not repeated; Brexit has not proved to be nearly as disruptive to global financial markets as many feared. The strongest echo of 2008 is the speculation surrounding Deutsche Bank; but unlike Lehman Brothers, Deutsche will survive. There will be no talk this week of a second Great Depression.

Yet there is a sense in which the challenge for policymakers is even more testing than it was back then. At least in 2008, they knew what they had to do. It was obvious the banks needed a lot more capital to ensure they remained solvent and it was also clear that the public sector would have to provide it.

Instead of the normal lengthy communique, the G7 issued a succinct five-point plan designed to show that the world’s leading industrial nations would act swiftly and decisively. Recapitalisation of the banks was followed in the ensuing months by aggressive measures to boost growth: deep cuts in interest rates, quantitative easing, extra public spending and reductions in taxes.

That, in retrospect, proved to be the easy bit. Global capitalism lost its mojo in 2008 and never got it back. Growth has remained weak and fragile, even though central banks have kept monetary policy looser for longer than even the deepest pessimist expected when the stimulus programmes began. Brexit is the manifestation of a problem that surfaced in 2008 and has never remotely been solved: how to make the globalised model of finance-dominated capital work for the mass of voters in the developed world. Voters are no longer satisfied when they hear politicians say there is little they can do in the face of global forces. They think that is a cop out, which indeed it is. Governments retain enormous powers: they just have to be prepared to use them. Governments of the left have proved to be just as pusillanimous as governments of the right, which helps explain why the politics of the post-crisis period has not gone to script.

The belief on the left was that 2008 sounded the death knell for the model of capitalism that dominated the last quarter of the 20th century and the first decade of the 21st; one based around privatisation, trickle-down economics, and a shift in the balance of power away from organised labour and towards international banks. Lehman’s bankruptcy would prove to be the equivalent of the Opec oil shock of 1973, the moment the pendulum swung, only this time from right to left.

It didn’t work out like that. There was no social democratic moment because social democratic parties had largely bought into the idea that markets knew best. They had no critique of what had gone wrong so they lacked a strategy to put things right. What’s more, they still don’t, which is why challenges to Jeremy Corbyn from his Labour party rivals have been so feeble.

While the social-democratic left has been flailing around, the public mood has darkened. In Britain at least, this cannot be blamed on rising inequality because inequality as measured by the Gini coefficient has not risen since the financial crisis and has stayed pretty much unchanged for the past 25 years.

The problem in the UK has been that living standards for those on average incomes have flatlined while those of the 0.1% at the very top have continued to rise. In the years leading up to the crisis, rising living standards meant there was less anger among the workers on £20,000 at the generous pay deals being awarded to their bosses. Now there is barely disguised fury and a political backlash against globalisation that has made negotiating new trade deals a thankless task.

Individual governments can sniff the way the wind is blowing. As John Gray wrote in a recent edition of the New Statesman: “Most people are unimpressed by visions of an imaginary egalitarian capitalism. They turn instead to the power of the state to protect them from the anarchy of the market.”

Hence the appetite among voters for controls. Ask them whether they support a financial transactions tax and they answer yes. Ask them whether they support curbs on the dumping of cheap Chinese steel that is threatening jobs in Port Talbot and they answer yes. Ask them if they want controls on immigration and they answer yes.

In this, the public shows more consistency than the politicians. Conservative Brexiters are in favour of free movement of capital and goods, but not of people. The Labour party is up for controls on money and goods but supports free movement of labour. The freedoms integral to globalisation are increasingly at odds with democracy. Something has to give.

In the introduction to a recently published book of essays*, Michael Jacobs and Mariana Mazzucato say that the state has a crucial role to play in making economies more prosperous and successful, not least through the role the state can play in nurturing and supporting innovation. This runs counter to the idea that governments should limit themselves to correcting occasional and short-lived market failure, but as Jacobs and Mazzucato rightly note markets are the result of political decisions.

The past eight years have been spent trying and failing to get the pre-2008 model of capitalism back on its feet. In its recent trade and development report, UNCTAD conjured up the memory of Karl Polanyi, the Hungarian-American economist who insisted that a “great transformation” was needed to ensure that markets delivered a stable and prosperous future for all.

As UNCTAD wrote:

“Trust would have to be rebuilt, regulations strengthened, and rights and representation expanded. Western governments after the second world war were able to strike a balance between market-driven efficiency and the demands for shared prosperity and greater economic security.”

There is one big difference with eight years ago. Central banks have become hyperactive in their determination to prevent weak growth and low inflation becoming recession and deflation. Ironically, the great transformation of central banks has helped ensure that nothing else has fundamentally changed.

*Rethinking capitalism; Wiley; £14.99

Contributor

Larry Elliott

The GuardianTramp

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