UNENDING RECOVERY by Nicholas Samuel
WHAT THIS BOOK OFFERS
Written for a general audience, this book is one-of-a-kind. It rethinks the economic problem and offers a whole new line of reasoning that attributes its stubbornness to dysfunctional pseudo market conditions. These are shown to take the edge off current policy measures to render them mere stopgaps. The narrative reaches beneath the surface to get to the real problem by going beyond the centrepiece of economics to include matters from business, finance, politics, and the law.
Unending Recovery: A Fresh Look at the Economic Crisis, Neglected Issues, Real Solutions is a comprehensive work that vividly addresses issues that other books have taken for granted. It is a reader-friendly presentation that dares to be different in terms of breadth, depth, and style. It takes a breezy and sometimes satirical approach to a painful economic crisis, and offers the award-winning author’s original explanations of real causes and real solutions by fearlessly unmasking hidden truths. Packed with insight, it should appeal to anyone looking for a novel approach to a tired topic, including people interested in current affairs, economics, finance, and politics.
SUMMARY AND CONCLUSIONS
From
UNENDING RECOVERY
(For reviews and other information, or to purchase the book in printed or in electronic form go to: www.unendingrecovery.com)
1. Something Different
Finally, the pieces of the jigsaw puzzle scattered among the preceding chapters can be drawn together and fitted to form the big picture. It portrays the current economic crisis as an interwoven phenomenon, one that is broader than the central feature on the canvas, namely economics. The range of aspects spelled out shows that a multidimensional approach is useful for making perception better click into place for clearer focus on causes and solutions, vulnerabilities and opportunities. Going beyond orthodox economics has enabled reaching deep to get to the bottom of the problem, while preserving the far-ranging scope of the story – thereby enabling both a worm’s eye view as well as a bird’s eye view, for an integrated perspective. Such a vantage position has provided a fuller understanding for setting the record straight, and revealed a line of reasoning to pursue to see where things might head in the future. Accordingly, in this chapter a venturesome attempt is made to envisage that future.
By and large, visiting the past throws daylight on the future. The lingering economic downturn is no normal phenomenon, although symptoms that mimic the past can make the lethargy seem familiar on the surface. Those looking for the predictability of a comfort zone would tend to attach exaggerated importance to the superficial parallels between this and past recessionary downturns. Enough has probably been said to show why people would be deluding themselves by regarding the current downturn as just a larger version of a run-of-the-mill business cycle downswing, one that is different in size but not type, and subscribing to the romantic belief that a recuperative upswing is only a matter of time.
The world had an American recession with a European twist. Central bankers were asleep at the wheel, ignoring telltale fundamentals and being unmindful of the ability of markets to behave in a mentally disturbed fashion. The high quotient of sheer excess ensured a drawn-out field day for the grim reaper of the real economy. The tempest has passed but dark clouds remain; the crisis is gone but a robust and inclusive recovery is nowhere to be seen. Looking behind the curtain of spin reveals a condition that is wretched for the weary majority in the West. A public that has known better days is required to roll with the punches, trim its sails to suit the ill winds, and play make-believe that a recovery is happening. For the majority yearning for a better tomorrow from the proclaimed recovery there is a perpetually disappointing condition that must make pronouncements of recovery sound bleakly comical.
Although the recession looks like a duck and quacks like a duck, it is a turkey. Despite superficial similarities between this and past recessions, it is really a freak recession when an awful lot went wrong at once. This makes it thoroughly distinct from post-industrial antecedents. What took place puts previous recessions in the shade with a magnitude that dwarfs them, a persistence that tries the patience of Job, a level of corruption that was a game changer and, crucially, camouflaged causes that enable policymakers to be in a state of denial about the true state of play in economies. The bizarre scale of the pre-crisis credit expansion made asset price bubbles inflate to dimensions unprecedented for a recession. Their bursting caused Western markets to drop like ninepins, with a shattering that reverberated to rattle economies worldwide to this day. The wrenching scale has an economic recovery in its wake that is as dodgy as belief in the market is stodgy. The protracted absence of buoyancy suggests there is no knowing when the downturn will end; it is impossible to turn the corner when things are stuck in the rut of market malfunction. The best guess, in the absence of fundamental reforms to correct the corrupted market system, is when the cows come home.
Ingloriously distinguishing this crisis were countless scandals, although not of the sexy sort. A game change attributable to the scandalous scale of corruption means that the current economic downturn is not only quantitatively different from previous recession-induced slumps (i.e., different in degree), but also qualitatively so (i.e., different in kind). The synergy from the mutually reinforcing convergence of degree and kind makes this downturn an economic weirdo. Activities that were illegal were as creative as those that were unethical. These had the effect of pulling the wool over the eyes of investors who, because of the absence of accurate risk assessment, were denied knowledge of lurking horrors. Such business practices epitomize the excesses of the crisis, with the credit-ratings agencies being in the vanguard of things that went bad. Consequently, even smart investors, unable to weigh up the risks, were reduced to being not much better than dart-throwing monkeys when it came to picking winners.
Because management-driven strategic thrusts in business took the form of concealment and deception, a befitting business mission statement might have been: “Take the money and run.” The lurking presence in the economy of those with impunity from past corrupt practices is a nagging concern for future market functionality. Can corruption that goes unpunished be forever contained? The possibility of a deeper economic downturn from a replay of financial misdeeds makes holding the line on stagnation an achievement to be grateful for. The current state of abeyance would then qualify as a cause for celebration.
Finance economists were a part of the problem when they should have been a part of its prevention. Economics was the secular religion of the West and the finance economists, as the high priests of economics, became the darlings of corporate world. This new tribe of cowboy economists and fellow travelers galloped to the forefront of the profession from a murky intellectual backwater, sporting borrowed plumes and brandishing mathematical weapons. The results from their mathematical models rationalized and encouraged the process of bubble-creation, causing mathematical tools to become anti-social weapons when used for financial gamesmanship. Statistical models were regarded as spouting gospel, God’s gifts to banks and credit-ratings agencies, even though separating statistical signals from contrived noise was impractical (especially when information manipulation was integral to business strategy in markets that were stealthy, phony, and dysfunctional). The intellectual dignity from perceptual depth in the science of economics was overridden by a narrow vocationalism on the mistaken presumption that information was knowledge. This had the inevitable effect of causing mathematical nicety to be achieved at the expense of social relevance, and supposed social scientists to be laughably alienated from considerations of social welfare.
The mathematical models based on superstition introduced a dash of voodooism into the field of economics, and caused it to drift away from its social science moorings. They delivered results that had the perverse and diabolical effect of increasing business profitability at the expense of social wellbeing – thereby denying the raison d’être of the science of economics. The results from these models, which predicted the opposite of what happened, worsened the problem by throwing dust in the eyes of investors and snake oil rather than water on the speculation fire. The collapse was a painful rebuke for the finance economists’ models based on their beloved culprit theory, the “efficient market hypothesis,” which says that the current market price always reflects all relevant information about asset values. Although the resulting devastation shows that their beliefs and methods were clearly out of whack, all is not necessarily lost; the mistaken economists can have some consolation from knowing that the beauty of their mathematical formulations enabled them to be wrong in an elegant manner.
Taking stock gives us less need to wonder how we got here. Enough has been said to show that something is rotten in the state of Western economies. What we have now, besides a recession featuring a scale change and a game change, is one that exhibits system failure in key sectors. This means that the foundations upon which to build the recovery are impaired like never before. Hence, the current downturn, as bad as it seems, is worse than it looks. Having presented a synopsis of why we are here, the question of where we might be going is examined next.
2. Facets Fashioning Prediction
Big Picture Components
Playing the role of seer without the benefit of a crystal ball is hazardous for obvious reasons; prediction is difficult, especially about the future, as Neil Bohr famously observed. Trepidation from sticking one’s neck out is unavoidable, and this despite the laborious investigation that reached to some depth to get to the bottom of things in the preceding analysis. While there are no pretensions to prophecy, the predictions wrung out will have some basis in the logic of reason, and be more in the nature of educated guesses than wild ones. It is hoped that the sifted material from the preceding analysis will, when synthesized, join the dots for a better-than-ballpark perspective of what the future might hold. In other words, it is hoped that the factors identified next will help to craft a conjectural prognosis for the sickened economy.
Numerous flies in the ointment cause the economy’s woes to have several edges to it. The criterion applied for identifying each of the several facets of the problem in the economy is straightforward in concept: simply size up the extent to which each element drives a wedge between where economies are at and where we would like them to be. The gap between the actual and desired positions will then identify the drawbacks plaguing the economy. Excerpted information from the preceding analysis is gathered to profile sets of factors that bedevil the economy and shape its future within the existing dysfunctional pseudo-market setup. The facets fashioning prognosis are examined under these five labels: Institutional, Market, Business, Economic, and Policy. Take each in turn.
Institutional Facet
Financial deregulation made propriety optional. It opened a Pandora’s Box that set financial plumbers called bankers on their way to becoming masters of the economic universe, besides redefining the rules of the marketplace for a whole new ball game in banking and beyond. Western governments surrendered control of finance, not to the market, but to bankers who thereby gained a pervasive influence over it. Because financial deregulation exuded a hypnotic charm on politicians, there was remarkable sang-froid about giving near carte blanche to powerful and aggressive big banks on a roll. There was tragic policy failure to differentiate between regulations that weaken business performance and those vital for open competitive markets to properly function. Although Western policymakers gave the world the Greek gift of financial deregulation, their lasting legacy is the boost given to the plutocratic pseudo-market condition. The spin-off “butterfly effects” of financial deregulation continue to reverberate disturbingly in the relentless forward momentum of pseudo-markets. Such ongoing fallout has the incidental effect of foiling recovery. As a result, what was hailed as a victory looks a lot like defeat.
Indiscriminate financial deregulation based on slash-and-burn dogmatism gave enlightened deregulation a bad name. The crucial message is that when laws vital for the orderly functioning of open competitive markets are absent, the regulatory architecture governing the operation of businesses is weakened, thereby causing systemic conflict between business and public interests. Increases in company profitability, which are expected to engender social prosperity, have become as antithetic to public wellbeing as joy is to despair. Financial deregulation with a mild and kindly touch showed all the hallmarks of a blithe overconfidence in the haughty assumption by deluded policymakers that license was freedom and unfettered markets the pathway to free-market heaven (when the opposite destination is the likelier prospect). A stunning coup for bankers was a massive gaffe for politicians.
There was amazing obliviousness to the tectonic significance of the flawed calculus from these mistaken perceptions. Pseudo-market expansionism has shifted the tectonic plates in world markets, putting downward pressure on competitive forces, and thrusting up the pseudo-market forces of monopolization, globalization, politicization, and corruption. Consequently, the deregulation process undermined effectively competitive free markets in the name of freedom, and facilitated a slippery slope to less competitive plutocratic pseudo-market conditions in all sectors of the economy, but most dangerously in the financial heart. A hazard arises from the financial sector’s use of its pseudo-market prowess to foster pseudo-market expansionism in all other sectors – thereby draining the entrepreneurial dynamism in open competitive sectors of economies just about everywhere. The plutocratic pseudo-market condition, with its concomitant hydra traits, was shown to be as anti-social as it is anti-competitive. Financial deregulation, celebrated as a triumphant culmination of political achievement – the finest hour of free market believers and the crowning glory of policy advisors – is more appropriately mourned as the nadir of policy failure, an act of gross ineptitude and something to be to be ashamed of. It has led to anti-social shots being called by plutocrats in the spreading wild frontier of pseudo-markets. For this reason, financial deregulation could go down in economic history as an embarrassing artifact from capitalism’s misspent past.
The attempt to re-regulate the finance industry constitutes an unspoken admission of error by the previously duped. The difficulties of re-regulation suggest that most enforcement attempts that begin with hope will end as farce. The need to buyoff powerful opponents with caveats, exceptions, limitations, preferential carve outs, and loopholes, has given re-regulatory measures the raggedness of something the cat brought in. Besides, the much larger size of banks after the deregulation means that bankers not only pack a much greater market-cum-political punch, but also have wider latitude for covert action in the dungeons of internationalized bureaucracies that operate across opaque and confounding foreign jurisdictions. This is besides the murkiness of shadow banking whose history casts a shadow over the future of financial stability.
The fusion of colossal size and attendant operational mysteriousness – including from the mistiness of transnational vastness – provides titanic firms with a sizable shield against meddlesome regulatory intrusions. Regulators are easy punch bags because of the hostile attitude of banks, bank-paid solicitors spoiling for action, the unfriendly disposition of politicians, and human rights laws protecting allegedly inhumane banks. In the circumstances, it would be understandable if regulators run for cover when bankers bare their teeth, taking refuge in backrooms for closed-door deals outside the open courts system. Such action could smack of copout when negotiated fines that seem extortionist to the public leave ample net gain from stealthy practice for banks. The nature of the regulation-enforcement process gives predictable fines the status of business operational costs for banks. For this reason it would make good business sense for regulation-management to parallel money-management as a business strategy in pursuance of profit. In these circumstances, there should be nothing surprising about an institutional inclination on the part of financial firms to furtively cross the line whenever opportunity knocks. If so, it would make a mockery of regulators’ attempts to track infractions yielding payoffs to banks in magnitudes that give the seemingly hefty fines paid by banks chickenfeed status.
For those who can see behind the scenes, the bloom is fast going off the rose of financial regulation. Consequently, there is not much justification for joyous chants at prospects for bringing banks into line through re-regulation, the setbacks in this regard promising to be more painful than victories can hope to be sweet. Because regulatory efficacy is a forlorn cause, it means that, for bankers, the nexus is weakened between regulation-breaking and fitful sleeping. The situation has been helped by the penchant of central bankers for perilous bubble-fostering behavior. For these less-than uplifting reasons, the global economy seems a long way from safe.
Market Facet
Although the current economic downturn is not anywhere as deep as the Great Depression, it is probably more intractable due to plutocratic pseudo-market conditions in key sectors of the economy. This phenomenon of the plutocratic pseudo-market condition, particularly in the financial heart of the economy, makes this crisis an odd beast outside the bounds of standard economics. It has changed the face of economies and altered the balance between firms and governments, by pivoting real power toward firms and away from governments. The anti-free market effect of deregulation was a blow to those policymakers who poured their hopes into a policy for market freedom, but ended up catching a Tartar (the plutocrat in the not-so-free pseudo-market).
Plutocratic pseudo-markets are the misbegotten step-children of deregulation with traits shown to be big, bad, and ugly. Plutocratic pseudo-markets are plagued by an anti-competitive pathology of monopolistic strong-arm capability, global market manipulation, influence over political processes, and licentious-prone business practices. Each attribute is a nail in the coffin of entrepreneurs in open competitive market sectors.
The plutocratic pseudo-market condition gives rise to phony markets where firms can find funny business to be normal business. In such markets, the rent seeking manipulative hand gets the upper hand over the revered “invisible hand.” This causes the “invisible hand” of efficiency for social wellbeing through private profits, to be superseded by the hidden hand of manipulation for private profits at the expense of social wellbeing. Such deviancy incidentally causes the manipulative hand to operate a handbrake on economic recovery. Furthermore, it is not possible to follow in the footsteps of the “father of laissez faire economics,” Adam Smith, because the manipulative hand in plutocratic pseudo-market conditions has a natural tendency to erase his footprints.
Things look grim because plutocratic pseudo-market conditions are shown to have an inherent dynamism for cumulative momentum: a disposition to relentlessly spread their somewhat wild frontier in unfettered higgledy-piggledy ways. They tend to advance imperceptibly through a myriad of incremental steps that enable the spread of corporate gigantism to be, ironically, nimble-footed enough to outflank policymakers with a beguiling insidiousness. The gigantism characterizing the plutocratic pseudo-market condition is being fostered by a spate of acquisitions and mergers, many of them foreign takeovers. A merger can come in handy when corporate consolidation provides an opportunity to conceal embarrassments like a profit squeeze, operational inefficiency, or managerial incompetence. These structural developments toward corporate gigantism are radically reshaping the international market landscape – one featuring the image of a herd of woolly corporate mammoths ambling roughshod over the face of the earth.
The relentless forward momentum of plutocratic pseudo-market forces is associated with spreading atrophy in affected economies suffering the loss of precious competitive pressure. Conditions exist for a vicious circle of deregulation and a spiral of pseudo-market expansionism, causing firms in open competitive sectors to be routinely out-competed and out-bred by pseudo-market firms. The result is that plutocratic pseudo-market forces cut an insidious swath through the international economy, the silent encroachment causing effectively competitive open markets to die by inches as they lose ground to steamrolling anti-competitive forces.
In pseudo-market conditions, plutocratic influence comes with the territory – and plutocratic forces provide the wind at the back for pseudo-market advancement. The relationship between business and politics has mutated to a stage beyond informal cronyism to the institutionalized shaping of public policy by plutocrats behind a facade of democracy. This means that the leaders of pseudo-market firms are not ordinary business people because the supposedly governed are known to wield a behind-the-scenes governing influence for securing private benefit at social cost. Plutocratic influence tends to be invulnerable and growing, driven by a sense of entitlement to national resources.
Financiers are becoming the standard bearers of progress in the debt-obligated West. The diktats of global financiers can, with number-crunching acumen, fashion the economic world in their own narrow, balance-sheet-blinkered, image of it. In such a world, the gnomes of Zurich types get close and personal, causing the financiers’ ethos to hold sway, and the financial sector to win the battle for supremacy in the global economy. The financial footprint on the world economy enlarges when countries cede sovereignty in relation to socioeconomic policy and budgetary autonomy to ascendant financiers contrary to the Westphalian (1648) notion of the nation state. It seems arguable that a straitjacketing financier’s ethos has put Western economies on course to a new world order. Speculation centers on whether, given time, the evolving condition is susceptible to morphing into the running sore of a myopic plutocratic financial imperialism.
Business Facet
Gigantic firms are the hallmark of plutocratic pseudo-market conditions. In such conditions, business operations are a new ball game where unclear rules permit stealthy moves. There are several reasons why the present recovery is not a riot of business enterprise. It is because several dispiriting factors haunt the business environment. An overwhelming one is pseudo-market expansionism at the expense of competitive-market dynamism. With plutocrats in charge, opportunities for untoward practices increase, causing sensitivity to matters considered ethically delicate to decrease. Specifically, plutocrats are not known for shying away from non-operational strategies of a manipulative nature. These include strong-arm tactics against politicians, artful exploitation of jurisdictional differences and opaqueness in international environments, stand-over and strong-arm monopolistic practices, and recourse to licentious tactics like price fixing, customer hoodwinking, and rate fiddling.
Pseudo-markets are characterized by pseudo competition. What passes for free competition in such markets is mostly oligopolistic gamesmanship for a share of the spoils gained from exerting pseudo-market muscle. Pseudo-market firms earn profits not just through textbook means such as improved productivity, efficiency, and strategic marketing, but also acquire (not earn) profits through non-operational and non-marketing means (formally called rent seeking). In other words, a significant but unknown component of the profits of such firms comes from acquiring a share of what is made by others, rather than adding to the size of the pie by their own productive efforts. A few market leaders call the shots in the industry, and then attempt to outmaneuver each other for the spoils that come from monopolistic market power, plutocratic political influence, global manipulation, and newfangled corruption.
Plodding firms are fostered in plutocratic pseudo-market conditions, making zombiism fashionable when markets are dysfunctional. Hemorrhaging competitive pressures reduce the need for pizzazz associated with dynamism. Because pseudo-markets are graveyards for entrepreneurship, their firms tend to become “dead wood” in secret by using their pseudo-market traits to camouflage inefficiencies, at least in the short term. There is no reason to doubt the pseudo-market firms’ ability to protect much of their mystery. In the period before the world economy turned turtle, the projected image of corporate prosperity was a facade for atrophy; the much-vaunted record company earnings turned out to be hollow shams – a la Freddie Mac, Fannie May, Lehman Brothers, bailout recipients, and all the rest.
All this is helped by the fillip given to gigantism by a spate of acquisitions and mergers. The wave of company consolidation keeps rolling on, driven, rather than impeded, by the current downturn. It is revolutionizing the international business structure by expanding and entrenching anti-recovery plutocratic pseudo-market conditions. The blessings of togetherness from corporate marriages of convenience include being able to hide internal embarrassment (like managerial inefficiency) and dodge the emergency room (for wrenching reforms). Besides, every acquisition and merger entrenches the market position of heavy-hitting incumbents in relation to potential new entrants. The weakened competitive pressure enables incumbent firms to sit pretty in salubrious pseudo-market conditions, pampered by the rent-providing comforts of monopolization, globalization, politicization, and corruption. Under these conditions, political strategy unsurprisingly becomes a normal extension of business strategy.
Ponderous Leviathan organizations that pass for firms can use their international presence to avoid dancing to national tunes. Such sidestepping ability means that government regulatory measures aimed at banks and other multinational firms are unlikely to achieve much domestically, when company operations take place globally. Squeezing the balloon in one place can result in its expansion in another, one country’s tough measure becoming another country’s golden opportunity. Additionally, the escape hatch called shadow banking has ample space for accommodating such bulges. Financial deregulators, by tremendously boosting the plutocratic pseudo-market condition in the financial sector, have set up a fiefdom more of mammon than of angels.
The business environment is not favorable to recovery because of the smothering effects of plutocratic pseudo-market conditions; hindrances that may seem minor in isolation synergize to become major in aggregate. The several pseudo-market caused impediments are these: excluding the majority of individuals and competitive firms in open markets from opportunity and income gain (resulting in forgone consumption and investment); truncating business planning horizons for quick pay-offs (fostering a short-termism in business culture that discourages bets on long-term visionary projects for strategic competitive advantage); favoring investment in finance in preference to the real economy (limiting job creation and confining the benefits of growth mostly to investors with bundles of shares); destroying more jobs than they create (through strategies like acquisitions and mergers and the export of jobs); discouraging investment by smaller and more entrepreneurial companies, including startups (suppressing dynamism and employment creation); and using their four anti-competitive traits for pursing profits through manipulation rather than through operational and marketing acumen (fostering inefficiencies by instilling a zombie-type disposition in rent seeking firms).
The banking business strategy in vogue inhibits recovery in the real economy, but not out of spite. It makes eminent good sense for banks to play favorites by biasing their lending toward their own kind wearing the pseudo-market mantle. This means, the blue-eyed companies attracting the more favorable loans are more likely than not to be the larger and more established multinational companies – the types that export jobs as well as recovery. As a result, the bankers’ favorites can use their inside-track status with the banks to keep beefing up their plutocratic pseudo-market muscle and entrenching their anti-recovery disposition. This is obviously a sad state of affair for genuine recovery, because the competitive firms in more open sectors create most of the jobs, while pioneering startup companies are the hotbed of employment opportunities and innovative dynamism. It can never be known how many startups were denied stardom because of financial-market-caused distortion. In addition, many of the loans go to those who favor investment in buoyant finance, where the bang for the buck is greater and faster in conditions of cheap-cum-easy money and stimulated stock-cum-housing markets, than in the lumbering real economy. Banks are driving stock and housing markets wild, while grinding factories and patents to a halt – thereby dulling recovery. Most loans have gone into purchasing existing financial assets (not into new factories, offices, equipment, etc), thereby denying job-creation and driving up the prices of existing assets to levels that look suspiciously like inflating bubbles with a reputation for grisly busts. In fact, the bubbles may already be hideously overblown.
Banks are at the centre of the problem, but banks are not the problem. If banks are not doing the right thing for recovery, logic suggests that it is the dysfunctional market – not the banks – that should be in the public’s crosshairs. The broken system creates incentives for banks to unintentionally throw the aforementioned wrenches in the recovery works. Doing so is a rational response to distorted incentives; it is behavior with inadvertent side effects that happen to be of the anti-social and anti-recovery sort. Market circumstances make seemingly bad banking behavior eminently appropriate. Hence, there is good reason to question whether banking practices can be presented as a valid casus belli.
Economic Facet
Bleak is chic; confidence in the future is the key to recovery, but confidence has proven elusive in a West given to pessimism. True, optimism has trumped reality for the few speculator sorts with bullfighter nerves. But the evidence is that normal people in America and Europe are finding their confidence in the future eroded by wild cards, both domestic and foreign (as evidenced by the some $3 trillion in cash hoarded by firms as well as by the consumer inclination to tightfistedness). Western economies rank poorly on several measures, giving rise to low business and consumer confidence in the mainstream. European economies are in the dumps and the American economy is hitting air pockets for patchy growth and false dawns. A genuine upswing in the real economy is nowhere to be seen; what is regarded as just another run-of-the-mill business cycle downswing was shown to be dangerously exceptional, not reassuringly traditional.
Blooms of new investment cannot sprout when there is a drought in confidence. The economic obstacles to durable economic recovery are elusive, if only because they are shadowy: how can we turn on switches in people’s heads for a behavioral shift from “frugal” to “spend”? The hangover persists for investors and consumers trying to sober up after the pre-crisis binge, the downbeat market players being in a funk about the future of the real economy and suffering from a “bad attack of pessimism” (to use Keynesian phraseology). In practice, because the intangibility of psychology holds the key to powering authentic recovery in the real economy, the unsettling effect of business uncertainty means: ‘don’t build, don’t hire, don’t buy, just wait and see.’ Few firms are bullish enough to expand even when banks are happy to lend. It is clear that market players are not fooled by all the hype about good times around the corner; stinginess from downheartedness continues to enfeeble aggregate demand and foil recovery for the majority.
Threatening wild cards cast a shadow over both Europe and America. The trigger for the next economic collapse could come from either side of the pond, although Europe is the shakier end because of the deadly mixture comprising torpidity, debt, and deflation. Deflation will cut back consumption, dry up investment, and trigger loan defaults – for a pernicious negative spiral that will likely cause the wobbling eurozone to fall apart (unless money printing battles deflation and saves the day). The specters of European sovereign debt default and eurozone breakup are chronic swords of Damocles that loom over the American economy in particular and the world economy in general. Hope for a durable recovery in the West grows dimmer even as Europe’s political and financial dysfunction gets deeper – and hopes for vital structural reforms become dreamier.
Policy Facet
The package of policy tools available is not anything like a box of tricks; it lacks the capability of amazing everyone by triggering a recovery spurt in the real economy. Past folly foils current success; conventional economic policies have been rendered anemic or useless by blunders that have boosted recovery-undermining plutocratic pseudo-market conditions to an unprecedented extent. Monetary policy, austerity, and government spending have seen good service as the devils we know, but their reliability and relevance are in doubt because these worn measures are required to work in novel market conditions. The focus on habitual policy prescriptions from moth-eaten playbooks promise nothing better than having to muddle through a rolling series of crises. What these overworked policies can offer, at best, is an expedient palliative, not a lasting solution. It is pardonable if the bypassed majority see the unimaginative policy measures as gimmicks promising drearily predictable disappointment.
Monetary policy gets you only so far, even when the candle is burned at both ends; at one end is immoderate money printing and at the other is a near-zero nominal interest rate. Despite the open-handedness with monetary policy, few in the real economy are applauding; paradoxically, large amounts of cheap money cannot by itself buy economic prosperity for the outcast majority. Because stock markets are driven more by confidence in central banks’ supportive policies than in the economy, bad news is good news; bad news brings comforting central bank intervention for mispricing risk. Over-egging the monetary pudding makes it look good now, but taste awful later. Central banks are putting off the evil day by ignoring the cloven hoof: the grotesquely warped fundamentals of asset markets that are dire forebodings of future distress if the robust recovery they are counting on does not happen soon. In the absence of a recovery that is sturdy-enough and soon-enough, something will have to give. Near-zero interest rates, indicative of interest rate policy having run into the sand, can be interpreted as a zero mark for monetary performance, especially in deflationary circumstances – a clear fail.
Besides the overdone monetary policy, the budgetary policy scene is starkly split between two conflicting templates for economic growth that give rise to a bewildering tension. Contradictory advice from the proverbial two-handed economist probably makes economics seem like nonsense to non-economists (i.e., most people). On the one hand, there is “fiscal austerity” (cutbacks in government programs); on the other hand, there is “fiscal stimulus” (more spending on government programs). A polarized stalemate is assured because the options are mutually exclusive. One side vilifies the other and is cordially detested in return. From an ex-ante standpoint, the question of which policy is the real McCoy is a toss-up, since proof of the policy pudding is in the eating.
On the one hand, the austerity policy, dominant in the West, advocates cutting back government programs to cut deficits and repay loans. This involves tightening the purse strings for tightening belts, but not out of meanness. Harnessing austerity is seen as a virtuous means of overcoming the sin of debt and returning budgets to the holy grail of balance. There is, however, a question mark over the austerity policy approach based on the experience of the Great Depression, recent research findings by the International Monetary Fund (IMF), and the chill in the air from deflation caused by chronically weak demand. The stagnant plight of Europe may offer a case study on the perils of excessive and ill-timed austerity. Opponents of austerity claim that cutting back on government programs before the economy reaches escape velocity involves the anachronism of a cart before the horse. This means, jumping the gun with untimely and excessive austerity will make a bad situation worse by further weakening faltering demand, and have the opposite effect to that intended – drag down growth and increase the deficit. Austerity has not yet proven itself to be a groovy option. On the basis of the examined evidence it seems that what the economy stands to gain from austerity is less obvious than what it stands to lose, especially now that the specter of deflation looms. Austerity may well end up as just another name for a flop if undertaken excessively, before the economy is in full swing, and in malfunctioning plutocratic pseudo-market conditions that have the capability of subverting it.
On the other hand, the burst of government spending for fiscal stimulus is seen as a shot in the arm that is claimed to cure nervousness in spenders and perk up anemic demand to get the sick economy going, but not without the risk of side effects. This option enables governments to borrow wads of money from firms hoarding cash, and then shovel it toward roads, schools, police, parks, fire fighters, and the like. Besides handily reconciling succor with recovery, such expenditures for pump-priming are believed to spur the private sector into going great guns because of spin-off multiplier effects that are presumed will wash through the economy and generate revenue for debt service. Prudent borrowing for government expenditure cannot be such a bad idea when interest rates are at rock bottom, cash stockpiles lay idle under the mattresses of businesses, public goods like roads and schools are crying out for funding, and deflation is threatening. The best way to rapidly revive growth, it is claimed, is to plough money into infrastructure – the sound of jackhammers being music to the ears of business people wanting confidence from vitalized demand prospects.
Advocating community upliftment by a course of action that sinks indebted communities further into debt is a jittery prospect for many, and can be counter-intuitive to most policymakers. It does not make sense to many that the answer to the problem of government borrowing is to borrow more to pay it back. What is more, stimulus spending in dysfunctional pseudo-market conditions could result in the already-well-off arrogating to themselves the lion’s share of the benefits, with only the crumbs being available for the majority in the community, as happened before and continues to happen today. Even more worrying is the likelihood of counterproductive outcomes. Plodding pseudo-market firms, enriched by the stimulus money, could use their added strength to weaken or eliminate firms in open competitive sectors that are the major sources of employment and dynamism in the economy – causing the open sectors to become shrinking pools. Consequently, it is understandable if the policy of fiscal stimulus based on borrowing is a lost cause – with a pariah status to boot.
The budgetary policy options, being mutually exclusive, make rational compromise impossible. Hammering out a compromise does not make sense; it must all be one way or the other because of their cancelling-out effect. Consequently, it is understandable that fiscal policy formulation is automatically stalemated when give-and-take is sought. A fractured economics is at war with itself, with budgetary policy disagreements being hardly distinguishable from ideological scraps because of the unholy entanglement of economics and prejudice. A befuddling economics understandably flummoxes policymakers – and just about everybody else.
Conventional economic policies have not proven to be up to par; the deficit in their credibility compounds the deficit in the budget. Dogged perseverance with expedient measures that are more of the same, by those finding comfort in policies that are “the better the devil you know,” have failed to sufficiently resurrect real economies, where the majority continues to feel the pinch of hard times. If the sorry experience of the last seven years of downturn teaches anything, it is that even massive doses of conventional policy therapy have not succeeded in setting the economic world on fire. Pursing recovery with conventional policies is a wild goose chase when the policies are thwarted by impaired markets and tattered institutions. Advocates of conventional policies fail to recognize that the system is broken. Since a simulated recovery with shallow roots cannot be more than a farcical interlude, policymakers risk the charge of culpable complacency because of their reckless disdain for the truth.
If the fiscal austerity option is nicknamed “Tweedledum,” the fiscal spending option becomes “Tweedledum” (with apologies to Lewis Carroll). There is not much difference between policy options that are equally guilty of ignoring the elephant in the room; both strangely neglect to expressly consider the dysfunction of the plutocratic pseudo-market condition and its propensity to undermine the effectiveness of whichever policy option is chosen. Both options blithely assume away the very condition that needs to be centrally addressed: the challenge posed for durable recovery by the hydra-headed plutocratic pseudo-market condition, with its distinctly anti-competitive, anti-social, and anti-recovery traits. Both policy avenues confine policymakers to comfort zones, sparing them the pressure needed to force them to think outside the box. As a result, policymakers fail to notice the feeble state of the beating heart needed for true recovery, namely the impaired free-market mechanism. This suggests that the two fiscal options may qualify for the following Shakespearean condemnation: “A pox on both your houses.”
3. A Prognostication
The pulse remains weak in the ailing West; ongoing sputter is symptomatic of a dark horizon visible to business people and consumers not fooled by the everyday hype trumpeting recovery. The economy hangs in from day to day and policymakers are in public denial about a fragile and spurious economic recovery that can take a turn for the worse with narcoleptic predictability (i.e., at any time). Plausible signs of a recovery are not seen beyond the deceptively reassuring immediate vicinity. There are no signs on the horizon that the economies of the West are capable of sprinting back to pre-crisis prosperity any time soon; there can be no hope for a prolonged boom when even a proper cyclical recovery is proving elusive.
Achieving previous levels of prosperity seems impossibly distant. This is because repeated plucky attempts with the usual policy measures have mostly drawn a blank insofar as opportunity for the majority of people in the West is concerned. The hype about recovery obscures in shadow a majority struggling with a lack of opportunity. If the majority is despairing of experiencing recovery, it is because the flaunted GDP increases and falling jobless rates are average measures that are only average in their capacity for conveying a true impression of the real situation; they cloud a skewed reality featuring disparities and lopsidedness. That is besides the element of smoke-and-mirrors in the statistical methodology used for computing them. They camouflage the truth about the absent recovery for the excluded majority that includes much of the middle class, the backbone of the economy.
The feeling of exasperation at problems in the economy shows up as a chronic breach between where things are at and where we would like them to be. The somber gap between the actual and desired positions is occupied by a multiplicity of issues. These are classified within five sets of fiendishly challenging flaws that explain how it came to this: broken institutions; worrying business practices; sagging investor and consumer confidence; obstinate commitment to ineffective economic policies; and, underpinning and overwhelming everything, the monstrosity of the plutocratic pseudo-market condition in key sectors. When these failings in the economy are stacked up, they form an unwieldy heap resembling the mangled complexity of a train wreck. Dealing with the problem will involve the daunting task of cutting through the tangle of intertwined aspects. If that does not sound like much to cheer, that is because it is not. In terms of an old Austrian adage, “The situation is hopeless, but not serious,” as will soon become apparent.
Even a cautious sense of triumph is unjustified because appearances can be deceiving. Despite happy talk to the contrary, Western economies are in water that is far deeper than most governments and analysts are letting on. Telltale fundamentals speak for themselves. There are enough unpleasant signs to keep knowledgeable people worried, and one such sign is the repeated failure of conventional policies to get things going in circumstances of looming deflation and lopsided growth benefits. Worn policies have been shown to be expedient palliatives that swap immediate problems for huge chronic ones, the latter hampering a recovery that is robust and inclusive. Monetary policy-induced hallucinatory zips are a poor substitute for the genuine spark of life capable of awakening the dormant potential in the real economy for deep-rooted growth.
The currently adopted policy measures enable, at best, death by slow motion, possibly lasting several years. Some options, like lavish money printing and public spending enable a slow death (like by strangulation in the coils of a python), whereas other options, like drastic and untimely austerity, are associated with a much quicker demise (like from the bite of a viper).The slower process would better suit the three-to-five year planning horizons of elected politicians looking for politic electoral pay-offs from holding the fort. Periodically elected politicians are locked into vision-destroying electoral cycles, where success can take the form of marking time by buying time and doing so with borrowed or printed money. The downturn has shown politicians to be masters of the dark art of the classic fudge enabled by short planning horizons. Because long-term choices do not sit well with short-term perspectives, the strategic vision needed for spearheading fundamental reforms for sustained gains tends to get sacrificed at the altar of political expediency.
Simulated upticks make extrapolations rash; upbeat expectations are unwarranted optimism when based on amorphous factors and unsustainable policies. Artificially induced upticks in housing and share markets are false dawns that are widely heralded as signs of true recovery to soothe the situation, given that the whole economic edifice rests on the fragile mainstay of volatile human psychology. Good news stories have to keep being churned out to prevent a replay of hysterical market behavior that precipitates another collapse. The periodic clutching at phantom straws by those with an inclination to put a brave face on things, or have a penchant to keep deluding themselves, is a predictable pattern in a short-term future that can only promise fake recoveries in fits and starts.
Can the current recovery be taken seriously when it depends on proclamations by the very people who mistook pre-crisis bubbles for real prosperity? Analysts responsible for headlines and others who qualify as professional spin doctors could have a vested interest in using pretty talk to proclaim a “dead cat bounce” as real buoyancy; they are probably hoping that truth will catch up with hype to make the latter a self-fulfilling prophesy. When there is skewed economic growth that excludes the majority of the population from benefit, and it is based on shallow confidence and brittle expectations, it cannot be more than an apology for a recovery. Overblown recovery claims betray a sense of insecurity permeating Western policymaking and justify any reluctance on the part of the bypassed majority to uncork champagne bottles in victory celebration.
There seems to be an element of cock-and-bull in the view that America can be an island of recovery in a sea of economic torpidity. Although the American economy is some seventy-five percent domestic-demand driven, how fast can America be growing while Europe is shrinking, if not collapsing – especially when its nosedive transforms beacons of hope into places of gloom by dragging down China, Japan and, in turn, the rest of the world? This is besides the direct threat to American exports, its foreign investments, as well as to its banking system from guarantees given by American banks to Europeans against loan defaults (billions of dollars in “credit default swaps” have been written on European sovereign debt by American banks). The investment climate in America is unlikely to be immune to such developments. Enough has been said to show that the fates of America and Europe are inextricably intertwined, as they were when they rose together with the Marshall Plan of 1948 and collapsed together in the recession of 2008. This must make a sustained and full-fledged American recovery to previous levels impractical without an attendant European recovery. Economic resurgence in both America and Europe is being held back by the unacknowledged albatross of a plutocratic pseudo-market condition. If nothing is done, it could be only a matter of time before economies buckle under the deadweight of a top-heavy form of corrupted capitalism that rests on market foundations that are treacherously misbegotten.
There is every indication that, in the end, the truth will out. After repeated false dawns and failed promises, people will come to realize that a robust and inclusive economic recovery is not in the bag after all. They will stop scratching their heads once it dawns on them that an “unending recovery” signals that something is rotten in the state of the market. Making pin-up boys and girls of plutocrats riding high in anti-social pseudo-markets and pandering to pseudo-market firms through means such as generous state subsidies, more tax breaks, and greater market access, is bound to disappoint policymakers in search of genuine recovery; they have the wrong targets for largesse. Adulations and benefits of this nature can be expected to stimulate private sector activity for genuine recovery in dynamic competitive open-market conditions, but are unlikely to do so in dysfunctional plutocratic pseudo-market conditions; for the most part they are boondoggles that play into the hands of pseudo-market oligarchs.
Faith in the idea that benefitting businesses inevitably benefits the community is quaintly dated when the business operates in pseudo-market conditions. By blundering into bribes for pseudo-market firms, politicians will only harm recovery by cultivating and rewarding the very forces that impede it. For this reason, the anti-recovery blowback from mollycoddling plutocrats of pseudo-market firms would make governments architects of their own misfortune. In the end, the current short-term and unimpressive recoveries will be increasingly recognized for what they really are: nothing more than transient upticks in terminally ailing economies on life support, that need nothing less than the equivalent of a heart transplant for any hope of a lasting recovery to previous health.
Pronouncements that ignore market fundamentals only beg questions; they are, by and large, trite explanations for a recovery unworthy of its name – “the solidified commonplaces of established wisdom” (to use the words of contemporary American literary critic, John Simon).The real reason for the absence of proper recovery is less obvious and less acknowledged, because it is to be found in broken and underlying fundamentals that are disavowed. The laughable effectiveness of current economic and regulatory policies is not what should be gnawing at the West’s once boundless confidence. What should be nerve-racking is dysfunction in the very mechanism needed for powering durable recovery: the effectively competitive open capitalist market system that embodies entrepreneurial spirit. Because economies are weighed down by the plutocratic pseudo-market albatross, a business cycle upswing will need to defy gravity if it is to happen.
The growth-sapping features previously reported are the products of markets that have degenerated into farce. Unlocking the black box that is the plutocratic pseudo-market condition reveals it to be a mare’s nest, incapable of delivering valid recovery. In fact, there is every indication that the plutocratic pseudo-market condition is a formidable impediment to genuine recovery in the real economy. Markets are debased when they delink company profitability from both operational efficiency and a recovery that is sturdy and widely felt. A recovery that is robust and inclusive depends on the dynamism of markets from initiative, drive, and vibrancy and these features are associated with entrepreneurial firms operating in effectively competitive open market conditions – and not with manipulative Leviathans operating in opaque plutocratic pseudo-market conditions. Consequently, the normal course of developments is increasingly circumscribing the fertile competitive market terrain essential for the sprouting of strong recovery shoots. It appears that the fallout from pseudo-markets in stymieing recovery knows no end within the existing scheme of things.
The chances for a durable recovery dwindle with protraction; the longer it takes to materialize the less likely is it to happen. Protraction causes a doom loop when the downturn feeds upon itself to be self-perpetuating. In current circumstances, less investment now could diminish the ability of the economy to grow later. This makes indeterminate the point in time when a genuine upswing would raise the economy far enough from the bottom to enable a deprived majority to see distant blue skies. Spending cutbacks for cost savings in education, research and development, and infrastructure investments are shown to smother productivity and blunt the cutting edge of technology. These in turn dull the cutting edge of competitiveness in companies. Less competitiveness means lower sales, less profit, less investment, still less competitiveness, further cutbacks, and so on – implying economic stagnation at best, and a spiral of decline at worst.
Adding to self-perpetuation is the “paradox of thrift” from greater household tightfistedness due to the uncertainty. When consumers penny-pinch together it means less buying, lower sales, and less business profits, lower investment, and so on. For this reason consumer spending cutbacks can add to the downward spiral of investment and accelerate the doom loop. So can monetary policies that are soothing in the short-term but toxic in the long-term. Consequently, the longer the slump lasts, the harder recovery becomes.
Permanently shrunken economies in the West are not just expected; they are already here. A permanently diminished condition will result from a lower economic surface that has permanently shifted downward due to wealth destruction. A troubling possibility must be squarely faced: the majority of the population in America and Europe is all too likely going to be poorer into the indefinite future, with future income falling well short of pre-crisis levels. This means that limited opportunity and a lost American dream are a new normality for large swaths of the population in a situation where a significant component of an increasingly hard-up middle class is forced to join the ranks of the underclass. Such indefinite downtime and loss of status would mean a Spartan future for those left behind. In the absence of just the thing, namely fundamental market reform, there would need to be a quiet sense of inevitability that the West would have to cut its coat according to its shrunken cloth as it downsizes to reality and adapts to a lower level of living in a time-warped future. Where the future meets the past is where the new normality would exist. That would mean an enduring reversion to an income level of many years back for the outcast majority – implying entrenched wretchedness i.e., misery sans a silver lining.
Confounding matters is that regardless of the economic policy options chosen, authentic recovery seems to depend more on a stroke of luck than on a stroke of genius. What this means is that durable recovery depends largely on wild cards beyond the control of national governments acting alone, however brilliant their policies. Conditions are not propitious for a recovery that is robust and inclusive when account is taken of the extraordinary nature of the current condition: the lackluster, artificial, and patchy recovery in America; the backsliding in Europe; and the black boxes with regard to Japan and China – these four economies being the four rickety legs of a table that is the world economy. All it would take for the tottering table to topple is for one leg that is a mainstay to break. Except for some former banana republics that have assumed nouveau-riche respectability because of ample foreign currency reserves, a collapse of the big four will cause most of the economies around the world to tumble together for a spectacular and deadly ensemble.
It goes without saying that visitations of disaster have the status of unwelcome guests, especially when the guests have a cataclysmically unfriendly disposition. Whatever the exact source of vulnerability for the world economy may be, even a remote prospect of Armageddon is something that, arguably, should not be lightly dismissed – especially when it threatens to be of heart-breaking “buddy-can-you-spare-a-dime” proportions. Even assuming only half what is possible happens, it means “you ain’t seen nothing yet.”
The policy vacuum within the existing broken market system has set the scene for unhindered further decent into the abyss of depression. Marching down the current path is no cakewalk along a royal road. It involves soldiering along the beaten track of a long rocky road punctuated by twists and turns, humps and dips, persevering towards a distant recovery that could turn out to be a mirage. If a ghastly chasm should suddenly appear in the road ahead, the long march to recovery will become a death march to hopelessness in those Western countries that are transformed into basket cases by the further collapse. Although the casualties of such a cataclysm would be banana republics in denial, their reduced status from penury will likely be felt as wounded national pride all the same.
The wretched state of austerity-battered European economies like Greece and Spain, exhibiting stubbornly sky-high unemployment, is a straw in the wind that foreshadows unpleasantness for the lost majority in America and Europe. Despite massive financial assistance, and showing some incipient signs of improvement, Greece and Spain still have unemployment rates of US Great Depression proportions and a majority groaning on the rack. The Greek economy went from feast to famine and shrank by a quarter. If Greece was hypothetically stripped of its massive financial life-support, a third-world bellwether would be uncovered. It would be an example suggestive of what conditions could end up looking like throughout the West in the event of further collapse – justifying any uneasy feeling on the part of the bypassed majority in America and Europe.
The implied message for the bypassed majority in the West is simply this: enjoy this slump while you can and hope that it lasts forever. The present sluggishness is probably the closest thing to success within the existing scheme of things; there may be no time like the present because this is probably as good as it gets. That means: stop craving prosperity, settle for torpidity. Consequently, it appears that the chronic downturn in the economies of the West is the blue skies of a new makeshift normality for the forgotten majority. The present languorous economic condition, which has made feeling the pinch of hard times a test of endurance for the afflicted, would be cause for celebration when assessed against the worse alternative; seizing the day to stay in the sizzling frying pan of recession would be preferable to the proverbial alternative (the dreaded fire of depression). Because close shaves from near-death experiences are not prone to much repetition, gratitude for the present languid economy is a justifiable feeling for those able to read what is in the cards.
Cutting to the chase exposes inaccurate labeling. Describing this downturn as a “Great Financial Crisis” or “Great Recession” can be regarded as propagandist understatements that deserve the label: “The Big Lie.” This refers to repeated, self-serving trivialization designed to mollify the public and hide the seriousness of the condition behind a curtain of humbug. It would not be surprising if many find it hard to accept the awful truth that the old order has gone forever and that economic performance can never reach previous levels (the fallacy of perpetual growth has been explained and revealed to be a nonsensical absurdity wrapped up in an irrational fantasy). It may be even more difficult to submit to the reality that what is needed to fix things properly is a quantum leap by way of fundamental market reform to reinvent the economy
4. The Glimmer of Hope
The Needed Perception
In the absence of fundamental market reforms to revamp the economy, there arises the disagreeable condition of Hobson’s choice (meaning, a choice between taking what is there or nothing at all). The choice is between the following alternatives: indeterminate continuation of the current downturn (with an indefinitely lower quality of life for the majority of the population in America and Europe) or Armageddon (a catastrophic plunge into an unknown future). The dismaying implication is that there is no real choice because the choice is between the proverbial frying pan and fire. These unhappy alternatives serve to clear away the cobwebs and question rosy misconceptions rooted in ideology, leaving little room for putting a gloss on things. If things seem like misery to a sick-at-heart public, it is because they are. The experts cited have pronounced that the brink of collapse is now. The frustrating absence of “tidings of comfort and joy” should be enough to make grown men cry. The confluence of issues that have been laboriously delineated in this book has led to this cheerless conclusion. Nevertheless, there is no reason for anybody to slit their wrists in despair, because it is possible to take heart from the ray of hope in the information that follows; the curtain has not been brought down because the fat lady has yet to sing “Kumbaya.”
Omens need not be grim to the extent of becoming the handwriting on the wall; there has to be hope no matter how hopeless the situation may seem, and that cannot occur except by setting one’s sight on lofty goals. As economic problems cumulatively multiply from an “unending recovery,” there will be increasing realization that there is no future in the status quo. The current state of frustrated expectations would be a precursor to success if it is educational in pointing to the true cause of thwarted recovery: plutocratic pseudo-market dysfunction. The logical implication is that support for the present type of dabbling by policymakers would fade, as policymakers ease up on fantasies about markets, and recognition of the real problem finally dawns.
It should be clear by now that the nut needing to be cracked is a tough one. The difficulty stems from the fact that the basis for a durable recovery, the one that enabled recovery from the depths of the Great Depression over seventy years ago, is mostly gone. Although the present economic trough is nowhere as deep as it was then, climbing out will be much harder because of system failure – that is, market breakdown. The unprecedented entrenchment of plutocratic pseudo-market conditions in key sectors of the economy means that what worked adequately then is less able to work now. This observation finds support in the fact that all conventional policy options have proven incapable of more than scant impact in current conditions. They have not been able to do more than scratch the surface of the problem for the simple reason that the problem is unprecedentedly underpinning. The situation marks a new departure from antecedent conditions. Maltreatment of the market mechanism through ill-considered deregulation has expedited and amplified a serious nuts-and-bolts failure in the form of broken down sociopolitical institutions (impaired political systems, plutocratic influences, bad laws, ineffectual regulations, and poor business ethics) and anti-competitive industry structures (comprising anti-social transnational behemoths that are semi-political entities but considered mere firms).
Fundamental reform refers to the commonsensical requirement that the disintegrating foundations of capitalist markets must be repaired before any real recovery can be built on them. So much for theory; practicalities are another matter. Despite the horse sense in the above argument, it is a suggestion that runs the risk of being snowed under by the implied tall order. The question is: who, having entered into the spirit of such fundamental reforms, are rolling up their sleeves and getting ready to rush to action stations for undertaking the task of fixing the busted foundations of capitalist markets? Vision-driven political stirrings, for the heavy lifting that would be required if radical market reforms to reinvent the economy are to take place, are conspicuous by their absence.
The Needed Action
There is a glimmer of hope for those inclined to optimism. If waiting until kingdom come is not an acceptable option, something must be done to put things right, preferably with a suggestion that cannot be easily mocked by ideologues of whatever hue. The erosion of open competitive sectors, or even economic collapse, will not be hard to achieve: a persistent refusal to confront reality and undertake fundamental reforms to overhaul dysfunctional markets, will likely do the job. Looming adversity can be a spur to radical change; the threat of a degenerated economy demands a preemptive solution driven by sense of urgency because delay can cause the growing thorny problem to become a veritable gorse bush. Although nothing like a blueprint, leaning on generalities will enable a general configuration of what needs to be done to suggest itself.
The solutions for true recovery require reaching for stars that lie beyond the hangman’s noose. While acknowledging an improbable dream, the two “must reach” stars are the star of political reform (to ensure supremacy of the public interest over the business interest when they are in conflict) and the star of market reform (to eliminate plutocratic pseudo-markets and expand effectively competitive open markets). For this to happen it would be necessary to gain acceptance of the paradox that unfettered markets lead to the erosion of competitive free markets and a consequent loss of economic performance. Understanding that plutocratic pseudo-markets are a handbrake on recovery will enable realization that the lever to pull for getting the real economy going must shift from the heavy manipulative hand (in plutocratic pseudo-markets) to the efficient “invisible hand” (in effectively competitive open markets).This line of reasoning is based on the premise that enthroning effectively competitive open markets in economies will stir things up through the infusion of entrepreneurial spirit, and calm things down through the reconciliation of business and social interests.
Cleansing the Augean stables involves purifying corrupted capitalist markets that impede recovery. In mapping a future policy path, governments need to face up to the daunting obstacle to genuine recovery: the nasty business of plutocratic pseudo-markets, where monkey business is normal business. Although late in the day, there seems no alternative to clearing the decks with a clean sweep of plutocratic influence. And that will take a level of courage adequate for bearding the plutocratic lion in its den.
Plutocratic pseudo-markets need to be taken to task with the gloves off. That is needed because they are powerful, entrenched, and have the remarkable capacity to perpetuate their condition by feeding on their own success. They have an unstoppable momentum within the global economy, and this comes with an unkind inclination to tighten the noose around remaining firms in effectively competitive open markets. Such a threat makes protecting entrepreneurial competitive open markets cheap at any price. Courage comes from recognizing that supposed icons of the past that have bitten the dust, are not exactly missed. Take two striking examples: Enron was once revered for revolutionizing the energy business; Lehman Brothers was regarded as the smartest of the smart in business management. The demise of such hypocrites did not signal the end of the world, or even of the economy. Furthermore, battling anti-competitive practices of big business is nothing new. The American presidents Teddy Roosevelt and Woodrow Wilson did so in the early part of the last century as part of an overall effort to tame “robber barons” and improve competitiveness. The Mexican government is presently breaking up its telecoms and media cartels because they impede the efficient functioning of markets, and the Japanese government intends to break-up energy monopolies for the same reason.
The basic idea, then, is to save what is left and regain as much as possible of what is lost. It is crucial to hold the line on open competitive markets by containing pseudo-market forces so that the free market flag can be kept flying in the face of adversity. Protecting and even coddling firms in remaining open competitive markets has an obvious urgency if genuine recovery is the goal. Thereafter, taking bold steps to give open competitive markets pride of place in the economy is the be-all and end-all of measures that must define the shape of things to come. This means that a market overhaul of epic proportions is needed to save capitalism from the capitalists.
The sweep of reforms that are needed to give the economy the desired lift can be easily seen and is theoretically prosaic. Setting things straight is, however, more easily said than done considering the mismatch between the size of the task and the ambition needed to tackle it. This requires having the stomach of a Trojan to take the bull by both horns – political reform and market reform. In Gilbert and Sullivan terms, “faint heart never won fair lady”; a grave crisis calls for gutsy measures, even if it requires a lurch into dreamland. What may seem improbable does not mean that it is impossible, especially when it is essential. The daunting dimensions of the task means reformers have their work cut out for them if they are to blaze a trail.
This is where leadership comes in; leadership that is capable of putting a shoulder to the wheel with a herculean will to succeed seems the key to salvation. While recognizing that hopes for durable economic recovery rest on politically fanciful solutions, looking on the bright side reveals that great societies were built on the dreams of leaders who were are able to move mountains. This refers to leaders who are prime movers, capable of rising to the occasion by straining every nerve to pull out all the stops – then turn the improbable around to fulfill their strategic vision (like, perhaps, Abraham Lincoln and Winston Churchill). The current crisis requires leaders who can gird up their loins and go the distance to perform the class act: replace plutocratic pseudo-markets with effectively competitive open markets that embody entrepreneurial spirit, to accomplish a sturdy recovery for everybody.
When all is said and done, cutting the Gordian knot involves a paradoxical return to basics. We must reach back into history to get what is best for the future; it is an exercise in nostalgia that requires reincarnating the lost fundamentals of Western civilization as envisaged by founders such as John Locke, Thomas Paine, Thomas Jefferson, and Adam Smith. What is required to do the trick is simple in concept: hark back to better times when there was sufficient harmony between business and public interests. This goal is achieved by having an informed public, ensconced in the driver’s seat, ride to a brave new world where the glittering opportunities of truly competitive capitalist open markets await. Replacing ersatz markets with the genuine kind would be a winning solution by virtue of its near-universal appeal from transcending the bitter differences of rigid partisan ideology.
In the light of all that has been written, being over the moon about the future is undoubtedly an over-reaction; the arduous reforms needed would take years to bear fruit. But then, nobody said it was easy. We now have some idea of what a happy ending would need to look like, and that makes what it takes for successful recovery to be less of a surprise. As French minister Charles de Calonne said circa 1783: “The difficult is done at once; the impossible takes a little longer.” Hope springs eternal; Rome was not built in a day.
Meet the author
- BSc (Economics) Honours, University of London, UK
- MS (Agricultural Economics), Michigan State University, USA
- PhD Michigan State University, USA
Nicholas Samuel is a professional writer and former chair professor. He was previously research manager and senior policy analyst in the Australian government’s economics research bureau. He played a leadership role in the deregulation of Australia’s primary industries. He held the position of Chair Professor of Agribusiness at the prestigious University of Adelaide and served as the managing editor of a professional journal for several years.
Samuel holds degrees from the London School of Economics and Political Science and Michigan State University, and he has had more than one hundred articles published. His writing has appeared internationally in a variety of professional journals and has been recognized with awards for excellence, by the British Literati Club for published research and by the Chinese government for nationwide pioneering market research on behalf of foreign agribusiness.
Samuel is the author of four books, including a text on applied economics published by Macmillan. His most recent title, Unending Recovery, is simple without being superficial and scholarly without being academic; it is a breezy and sharp-witted take on the world’s current economic crisis.
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