Jan. 4 (Bloomberg) -- With the world’s rich economies struggling and the leaders of the European Union intent on making things worse, the gravity of the economic crisis still confronting the West is hard to exaggerate. Nonetheless, it can be done.
According to what I read, we face not just the worst recession since the 1930s, but a challenge to the West’s entire economic order. The Great Recession exposes the poverty of orthodox economics. It constitutes an ideological crisis. It shows that capitalism itself is “fundamentally” flawed. If all this were true, I’d be a lot more worried about the coming year than I am -- which is saying something.
A new year’s corrective is in order. Reports of the death of capitalism are greatly exaggerated.
What’s surprising is just how wrong those reports have been. Perhaps, as I write, the revolutionaries are organizing in secret, but I see no signs of a popular uprising. Please don’t say Occupy Wall Street, that risible stirring of the perpetually discontented whose principal goal seems to be “a general assembly in every backyard, on every street corner” (not all at once, I assume). It is a movement, if you can call it that, without an agenda, and as soon as it tries to get one, if not before, it will sputter out.
Where’s the Left?
Where, meanwhile, is the revival of the organized Left? America’s Democrats are not exactly riding a surge of support. They are worried that Republicans -- who brought the country to the brink of default last summer, and whose contest for the presidential nomination has shown their party at its most shambolic -- might regain control of the Senate and send Barack Obama packing. Recent Gallup polls show a fall to barely 41 percent in the number of Americans who see their county as divided into “haves” and “have-nots.” Some 64 percent of Americans -- and 48 percent of Democrats -- see “big government” as a greater threat to the country than “big business,” a number near record levels.
Across most of Europe, left-leaning parties are in retreat. The rule of thumb seems to be: The worse the economic mess, the bigger the thrashing that voters hand out to the Left. The latest instance is Spain, where the ruling Socialists have just suffered their worst electoral defeat since the death of Franco in 1975.
I grant you, this trend is partly a matter of incumbents getting the boot in bad times. Voters in America and Europe may be wrong to blame their socialist, formerly socialist or tepidly anti-capitalist parties (as the case may be) for the recessions they are suffering -- but the rightward shift of electorates since 2008 rather casts doubt on the idea that capitalism is suffering a crisis of confidence. Where is the demand for a bigger state, for industries to be taken into public ownership, for domestic producers to be sheltered and imports blocked? Surging support for protectionist trade policies was widely predicted as the slump began. It hasn’t materialized.
This could change. The crisis, as I say, isn’t over. But what is already the worst recession in seven decades hasn’t destroyed or even much disturbed popular support for actually existing capitalism -- by which I mean mixed-economy capitalism, based on markets, profit-seeking and competition plus a good strong dose of state intervention. Many countries have seen a collapse of confidence in their political leaders, but not in the prevailing economic order.
In this respect, by the way, popular opinion is exactly right. It’s frivolous to argue that actually existing capitalism is fundamentally flawed unless you compare it to relevant alternatives. There are no relevant alternatives.
Cuba and North Korea leave a lot to be desired, don’t you think? Bolivarianism, the school of Hugo Chavez, lacks instant appeal. China has opted for mixed-economy capitalism, and has posted decades of miraculous growth as a result. India has done the same. The global recession that started in 2009 wasn’t really global at all: For billions of people outside Europe and North America, it was capitalism as usual -- still delivering history’s fastest-ever improvement in living standards.
Of course, there are varieties of capitalism, and choices to be made. Among rich countries, the American version stands at one extreme, parts of Europe at the other. Capitalism in America is not the same as capitalism in, say, Sweden or Canada (both of which, by the way, are currently led by center-right pro-market governments). But the differences aren’t fundamental. Disagreements about state provision of health care and other benefits are important, to be sure, but fall well within the scope of the prevailing, almost-universal and still-unchallenged ideology.
Suppose, for the sake of argument, that I’m right and actually existing capitalism isn’t going away. Is there nonetheless a crisis of confidence in orthodox economics? A much smaller claim -- laughably small, you might say -- but I question even this. Proponents of this cliche are dealing mostly in straw men.
Orthodox economics, according to recent reports, says markets are always right. Really? The economics I was taught is more or less obsessed with externalities, imperfect competition and other forms of market failure, and the policies needed to correct them.
Orthodox economics, according to its critics, says investors are rational and prices embody all information, so bubbles are impossible and the crash we just experienced never happened. What nonsense. Orthodox economics does teach that bubbles are difficult to spot in advance (which they are) and that it is hard to consistently make money by betting against the market (which it is). No economist ever denied that people make mistakes, or that markets boom and then crash.
The field known as behavioral economics, which explores patterns in mistakes and not-quite-rational decisions, went mainstream in the 1990s, long before the Great Recession. You could argue that it is already part of orthodox economics. It’s fascinating -- “Thinking, Fast and Slow” by Daniel Kahneman, a pioneer of the field, was the most interesting book I read in 2011 -- but how much it might change core beliefs about the way capitalism works remains to be seen. So far, it has been useful in designing more effective savings plans (let people opt out instead of opt in) and faculty dining rooms (make the fresh fruit easier to reach than the pastries). It’s too soon to call this a paradigm shift.
The recession made plain the need for better, and in many cases stricter, financial regulation. It highlighted the weakness of economics in designing public policy and addressing questions of fairness and burden-sharing. But here’s a surprise: For the 99 percent, ideologically speaking, the only serious framework for discussing any of these topics is orthodox economics. Whether you are a critic or a champion of American-style capitalism, you turn to the same literature and the same basic ideas to make your case.
Capitalism comes in many forms -- and orthodox economics encompasses them all. Heaven knows, we have a lot to learn and lot to put right, but this is not an ideological crisis. The West needs an intellectual revolution about as much as it needs a dictatorship of the proletariat.
(Clive Crook is a Bloomberg View columnist. The opinions expressed here are his own.)
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