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The coming crisis; the gathering storm

The case for economic pessimism.

Colin Hay
5 April 2016
Georges_Michel_-_Gathering_Storm_-_Walters_371991.jpg

Georges Michell, gathering storm

That economists tend to optimism whilst political economists tend to pessimism is something of a truism, albeit one that often goes unacknowledged. The reason for this bifurcation in psycho-analytic temperament is simple. Economists tend to think in equilibrium terms because most of the time the world appears, on the surface at least, to exhibit equilibrium tendencies. They comfort themselves with the following thoughts: (i) that, although disequilibrium scenarios exist, they are inherently difficult to understand; (ii) that there are a relatively small numbers of cases and such cases as one can find are sui generis (in that they probably need to be understood in their own terms anyway); (iii) that, as such, these exceptional events do not avail themselves readily of mainstream economic modes of analysis; and, (iv) given that they are rare anyway and that one has to concentrate on something, having a good appreciation of the 99.9 per cent of the time when things are stable provides at least decent compensation for blanking the difficult 0.1 per cent that remains. Appropriately reassured, they turn a blind eye to disequilibrium even whilst they acknowledge its possibility. In short, they model the world as if it were in a natural and benign condition of equilibrium not 99.9 per cent of the time, but all of the time.

By contrast, political economists are almost naturally suspicious of equilibrium and no less naturally fascinated by disequilibrium – the moment, indeed the moments, when it all goes wrong. They justify their suspicion and their fascination very differently from their economist counterparts. Yet they typically also appeal to four factors in so doing: (i) crises, though rare, are (or tend to be) genuinely transformatory and cannot simply be dismissed as complicating aberrations; (ii) impressions of equilibrium are typically misleading in that the seeds of crisis, if one is of a mindset to look for them, are invariably present even in contexts which might appear superficially placid and benign; (iii) it is almost impossible, without the benefit of hindsight, to differentiate between self-equilibrating processes and cumulatively destabilising processes (such as the inflation of an asset-price bubble) – and it is naïve and dangerous, to mistake the latter for the former; and, consequently, (iv) one should always be on the lookout for disequilibrating tendencies even in ostensibly equilibrium scenarios.

It is probably clear by now that we, the authors of this new SPERI blog series on ‘the coming crisis’ are not economists but political economists. As such, if I am right, we are natural pessimists – the Cassandras of modern day economic analysis. But our pessimism now seems more widely shared. For, today, even the economists worry.

There are two rather obvious, though very different, interpretations of this. The first is that, chastened perhaps by the crisis that engulfed the world economy in 2008 (and their blithe overconfidence that it couldn’t and wouldn’t happen), they have become (for now at least) rather less naturally optimistic than they were. The second is that the world has indeed become a rather more dangerous place.

There is surely some truth in both. Here and in this new series of blogs we are rather more interested in the second. Our aim is to explore the hunch in a little more detail. Over the next fourteen weeks, in weekly instalments, fourteen seasoned SPERI commentators will offer their own distinct perspectives on the pathological symptoms of the present conjuncture – reflecting and speculating on the extent to which the world economy has, indeed, become a more dangerous place (less not more stable) in the years since 2008.

What is clear is that there is certainly plenty to concern the pessimist. In the UK, and despite the rhetoric, there has been no ‘rebalancing’ of the domestic economy; it remains stubbornly dependent on credit and an overgrown financial sector; growth only seems attainable in and through the periodic pump-priming of the housing market; the housing market, itself, now seems more dependent on overseas demand and that, of course, is now threatened by the depreciation of the currency associated with the economic uncertainty surrounding the possibility of ‘Brexit’.

At a European level things are certainly no better. ‘Brexit’ is again a genuine threat. If Ricardo taught us anything (and here the economists would surely agree) it is that a worsening of the terms of trade between partners hurts both sides. Self-inflicted ‘Brexit’, in other words, cannot be a victimless crime. Yet the very possibility of ‘Brexit’, whether realised or not, feels like part of a wider dynamic – a tipping-point, perhaps, in which European integration starts to give way to a no less protracted but rather different process of European disintegration. What is also clear – indeed, rather more clear (for very little about ‘Brexit’ is clear at this point) – is that austerity is ravaging Southern Europe and, in combination with the migration crisis, is contributing to the resurgence of a political right likely to accelerate the pace of European disintegration, not just economically but also socially.

And on a global stage there is little to lift the gloom. The period since 2008 is likely to be remembered as one in which the opportunity for global financial market re-regulation and genuine governance was missed. Our banks remain too big or too interconnected or too correlated in their behaviour to be allowed to fail and yet too big, too interconnected or too correlated to bail. What that means is that a second crisis is certainly no less likely – indeed, for many it is now inevitable. But what we also know is that the capacity to deal with such a crisis has been significantly eroded by the nature of the public response to the first crisis – to the point where it is no longer clear what the response to a second crisis might now be.

All of this, of course, must be set in the context of the wider global environmental crisis. And when you put the pieces together the coming crisis looks all too real. It is beginning to look like a big one. It is beginning to look like the perfect storm.

But then we, of course, would say that. For we, after all, are the pessimists …

This piece first appeared on the SPERI blog.

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