"Crisis? Did you say 'Crisis'?"

I went to a fascinating lecture by Daniele Archibugi yesterday at Birckbeck who argues that the prospects for global democratic institutions are actually quite good. The essence of democracy, he argued, are non-violence, public control and political equality. The first is about some sphere of social change being outside the realm of might; the third is the principle that those affected by an action should have a say in the action. The second is the one where Daniele mentioned the financial "events" of the past few days---when the G7, IMF and various finance ministers have met, we have known nothing of their actual deliberations. The degree of public accountability is very tenuous. In all three cases, Daniele thinks that the international system shows signs of beign able to grow in the right direction: the strengthening of the ICC; the accountability mechanisms we do see; the growth of the EU as a systematic experiment in "accountabiltiy beyond borders".

I asked Daniele in the question session afterwards whether the hopes might be misplaced that the financial crisis would be the sort of moment to bring about pro-democratic reform at the global institutional level---after all, the muddling along of ad hoc groupings is coping (...so far...); and if they are misplaced, what sort of crisis is that will actually bring about the democratisation that he is talking about?

At first, I did not understand his response. He said: "Did you say "crisis"?" (I nod). "Which crisis? There has been no crisis." Still puzzled, he went on to clarify:  "... This is somewhere Schumpeter was right and Keynes was wrong: capitalism moves in waves of creative destruction, and the moments of destruction are necessary and part of the system. There is no system crisis here."

This is very persuasive. Schumpeterians have been in the ascendant in economics recently, with theories of growth explicitly relying on the idea that the culling of inefficient, non-innovative firms and the liberation of resources for new ones is what sets the scene for economic growth. Creative destruction and its dynamic are asumed by capitalism, and will not be the conditions that rock capitalism. For Schumpeterians, business cycles are like the evolutionary force of selection---who makes it through? Daniele was contrasting Schumpeter to Keynes who "saw nothing good in the business cycle"and hoped his general theory would help to eradicate the cycle. The Schumpeterian view is given full treatment by Edward Chancellor in the FT yesterday, where he rattles off all the recent historical examples of crisis to point to their systemic nature.

But even if Schumpeter is right about the links between creative destruction at the firm and industry levels, the business cycle,  and the "evolutionary strength" of capitalism, there still seems much to explain. Is the psychology of boom and bust created within the system---the overconfidence, the resilience to criticism, the in-group mentality that create exuberance, as much as the fear and self-loathing that perpetuate depression---or are they caused elsewhere? Despite economists' imperial urges to make everything determined within their system, I suspect the "elsewhere" is important.