Spanish version
The two previous great economic crises of the Western World both ended in a radical change of policy paradigms. The current crisis, not any less profound, does not promise to generate anything similar. Why?
The "Great Depression" of 1929 led to the emergence of what became known as the "Keynesian welfare state": a combination of the belief that economic crises can be counteracted by anticyclical policies with the belief that social policies increase productivity. The "Keynesian revolution" (term coined by Lawrence Klein in 1947) rested on the idea that capitalist economies can be controlled by an active state. Governments learned that they could counteract economic fluctuations by managing aggregate demand; that by providing public goods and infrastructural investments, correcting for externalities, and regulating natural monopolies, they can compensate for market inefficiencies; and that by subsidizing some investments and protecting some industries they can promote growth. In turn, the founding assumption underlying the expansion of social policies was that they enhance labor productivity: social expenditures are not consumption but "an investment in the most valuable productive instrument of all, the people itself" (Bertil Ohlin).
The major innovation of neoliberals was the claim that markets spontaneously maximize the welfare of society, or at least "efficiency," with only a minimal regulation. Neoliberals believed that the state is "too big", that private ownership is more efficient than other forms of property, that macroeconomic balances drive investment, and that anticyclical policies only increase inflation, without having an effect on employment. Hence, they deregulated, privatized, reduced public expenditures, and let "the market" do the rest.
These two policy revolutions suggest that conditions are conducive to a major innovation when (1) the status quo is bad, (2) there is a party which in the past behaved "responsibly," as evidenced by the fact that it proposed or implemented the same policies as its opponents, (3) this party has new ideas and believes these are good ideas. Which of the ingredients is missing today?
(1) A crisis is here: this much is obvious. What is less clear is what it is a crisis of. The standard reference in the United States is to "financial crisis," which spilled over to the real economy by reducing asset values, increasing saving rates, and lowering demand. In Europe, however, the sharp economic downturn is interpreted as an "Euro crisis", due to the differences of productivity among countries sharing a currency. But the fact that the stagnation spans the United States, the Eurozone, as well as European countries outside the Eurozone and Japan, may indicate that the causes are common and perhaps deeper. Without a clear diagnosis, remedies can be only haphazard.
(2) "Responsible" parties are also here. Each faces the choice of either continuing with old policies, same as those of other parties, and winning or losing the election by some small accident or of proposing a new policy which may distinguish it but may fail. This choice is best exemplified by two speeches at the 1932 Congress of the Swedish Social Democratic Party: "It is better to sit and do nothing than to do something silly" (Per Edvin Skold) and "If we could create certainty regarding the paths, we could also create the selfconfidence that is needed for our victory" (Ernst Wigforss). And it is obvious that the established parties opt for the safe alternative: Social Democrats have even abandoned any references to social policies. As a result, rejection of established political parties and even of political institutions is widespread. Because the established parties offer no real alternatives, mass protests are increasingly directed at the entire political class: one is reminded of the Argentine slogan of 2001, "everybody out."
(3) Both in the early 'thirties and the late 'seventies, the ideas that drove the respective innovations had been around. Keynes, Kalecki, and Wicksell systematically formulated the abstract ideas in terms of which the "Keynesian revolution" could be justified. The monetarist views, in turn, were not only formulated within the technical cannon of the time, but were being vigorously promoted by a propaganda machine financed by rightwing interests.
What I find striking is the paucity of new ideas. As Krugman and Wells ("The Slump Goes On: Why?" New York Review of Books, September 30, 2010, page 57.) observed, "the relative absence of proposals to deal with mass unemployment is a case of 'selfinduced paralysis' .... There is room for action, both monetary and fiscal. But politicians, government officials, and economists alike have suffered a failure of nerve...." Even Stiglitz has nothing new to say in a chapter grandiosely entitled "A New Capitalist Order": the role of governments should be increased, governments should maintain full employment and a stable economy, they should promote innovation, and provide social protection. A Swedish Social Democrat could have written the same in the 1930s. And while several left parties in France talk of "alternatives to market economy," everyone knows that it is just a slogan devoid of any content or prospect.
The intellectual, as well as the political debate, is reduced to arguments whether to stimulate demand or to observe fiscal discipline. The originally loud calls for increasing regulation of financial institutions have been muted. The general desire is to restore things to what they were before the crisis, to "normalcy," so that we can go on as we did. After all, life in a bubble is opulent and carefree.
Was there a window of opportunity? Imagine that the Obama administration had allowed large financial companies to fail. Imagine that the administration had purchased some part of equity from those homeowners who could not afford their mortgage payments. Finally, imagine that the same amount of money that was used to bail out the giant financial institutions had been infused into the banking system through local banks which did not hold the subprime loans (All these measures have been suggested expost by Stiglitz). And now imagine the rhetoric in which these measures could have been posed: "The government must assist the middleclass families that fell victims to irresponsible and unscrupulous practices of big finance. Taxpayers' money must go to taxpayers, not to speculators. The financial system must be regulated to protect consumers and to assure efficient flow of resources to productive investments." Could it have happened? Would it have worked economically? Would it have been political successful? If yes, would have an ideological breakthrough followed? I fear that these questions are unanswerable, but I do not see it as impossible.
Una crisis sin ideas
In conclusion, while the crisis is profound, no big idea is on the horizon. Indeed, no one not the Left, not the Right, not professional economists, not intellectuals, and not the young people on the streets has any idea what to do about it.
---------------------------Adam Przeworski is Professor of Political Science at New York University. His latest book is "Democracy and the Limits of Self-Government".
Spanish version