Modern Political Economics

Making Sense of the Post-2008 World

Yanis Varoufakis, Joseph Halevi, Nicholas Theocarakis

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136814730
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor and a puzzled public strains its antennae in every possible direction, desperately seeking explanations for the causes and nature of what just hit it. 2008 was such a moment. Not only did the financial system collapse, and send the real economy into a tailspin, but it also revealed the great gulf separating economics from a very real capitalism. Modern Political Economics has a single aim: To help readers make sense of how 2008 came about and what the post-2008 world has in store.

The book is divided into two parts. The first part delves into every major economic theory, from Aristotle to the present, with a determination to discover clues of what went wrong in 2008. The main finding is that all economic theory is inherently flawed. Any system of ideas whose purpose is to describe capitalism in mathematical or engineering terms leads to inevitable logical inconsistency; an inherent error that stands between us and a decent grasp of capitalist reality. The only scientific truth about capitalism is its radical indeterminacy, a condition which makes it impossible to use science's tools (e.g. calculus and statistics) to second-guess it. The second part casts an attentive eye on the post-war era; on the breeding ground of the Crash of 2008. It distinguishes between two major post-war phases: The Global Plan (1947-1971) and the Global Minotaur (1971-2008).

This dynamic new book delves into every major economic theory and maps out meticulously the trajectory that global capitalism followed from post-war almost centrally planned stability, to designed disintegration in the 1970s, to an intentional magnification of unsustainable imbalances in the 1980s and, finally, to the most spectacular privatisation of money in the 1990s and beyond. Modern Political Economics is essential reading for Economics students and anyone seeking a better understanding of the 2008 economic crash.

1 Introduction

1.1 The 2008 Moment

Once in a while the world astonishes itself. Anxious incredulity replaces intellectual torpor and, almost immediately, a puzzled public trains its antennae in every possible direction, desperately seeking explanations of the causes and nature of what just hit it.

2008 was such a moment. It started with some homeowners finding it hard to make their monthly repayments somewhere in the Midwest of the United States, and graduated to the first run on a British bank for 150 years. Soon after, the five grand American merchant banks that were capitalism’s pillars had disappeared. Financial markets and institutions the world over were plunged into what was euphemistically termed ‘chaotic unwinding’. Governments that had hitherto clung tenaciously to fiscal conservatism, as perhaps the era’s last surviving ideology, began to pour trillions of dollars, euros, yen, etc. into a financial system that had been, until a few months before, on a huge roll, accumulating fabulous profits and provocatively professing to have found the pot of gold at the end of some globalised rainbow. And when that did not work, presidents and prime ministers with impeccable neoliberal credentials, following a few weeks of comical dithering, embarked upon a spree of nationalisation of banks, insurance companies and automakers. This put even Lenin’s 1917 exploits to shame, not to mention the modest meddling with capitalist institutions of mid-twentieth-century radical social democrats (such as Clement Atlee and Ben Chifley, the post-Second World War prime ministers of Britain and Australia respectively).

What had happened was that the world had finally woken up to the brittleness of its financial system; to the stark reality of a global economic system that was being held together with sticky tape and that most precarious of materials: self-reinforcing optimism. From Shanghai to New York and from Moscow to Pretoria the world came face to face with the awful realisation that the 1929 crash was not just a worthy subject for economic historians but, rather, the sort of calamity that constantly lurks around the corner, scornfully laughing in the face of those who thought that capitalism had outgrown its early childhood tantrums.

While these words are being written, the Crash of 2008 has not, as yet, played itself out. While the first two years after it proved that governments can arrest the system’s free fall when they concentrate their minds and loosen their purse strings, a new crisis is looming. For as the public sector takes on its shoulders the sins of the private sector, the latter turns on its saviour with new financial instruments with which to gamble that the saviour will buckle under its new burdens. Thus, the aftermath will remain unknown for many years to come.

What we do know is that tens of thousands of American and British families lost, or are in fear of losing, their homes daily. Migrants abandoned the Meccas of financial capitals, such as London, returning home for a safer, more stolid future. China is in a bind over the trillion plus dollars it holds and seeks new ways of securing its dream run, now that the West has turned inwards and reduced its imports. More than 50 million East Asians have plummeted below the poverty line in a few short months. Countries that thought themselves immune to the ‘Western’ economic disease, for example Russia and Iran, are perplexed when their own banks and enterprises are stressed. The job centres and social security offices in Western Europe, just like the famine relief agencies in sub-Saharan Africa, are reporting unusually brisk business. The recession ‘we had to have’ is upon us. It threatens to mark a new, depressed era.

A world in shock is always pregnant with theories about its predicament. The time has come for political economics to return to a world that had thought it could account for itself without it.

1.2 Why Economics will Simply Not Do

Few sights and sounds are less impressive than those emitted today over the airwaves, and in the pages of respectable newspapers, by the privileged commentariat. Having spent the past 30 years confidently informing the world about some ‘paradigmatic shift’ which, supposedly, had put capitalism on an irreversibly steady growth path, the very same commentators are now gleefully, and equally confidently, ‘analysing’ the Crash of 2008, exuding the air of self-aggrandisement befitting its prophets.

There is nothing new here. Evans-Pritchard, the renowned mid-twentieth century anthropologist, unwittingly pinpointed with brutal clarity how economic commentators weave their narratives. In his 1937 account of how the Azande soothsayers dealt with significant events they had failed to predict, Evans-Pritchard might as well have been writing about contemporary commentators of the Crash of 2008 (just substitute ‘Azande’ with ‘economic experts’):

Azande see as well as we that the failure of their oracle to prophesy truly calls for explanation, but so entangled are they in mystical notions that they must make use of them to account for the failure. The contradiction between experience and one mystical notion is explained by reference to other mystical notions.

(Evans-Pritchard in his Witchcraft, Oracles and Magic among the Azande, 1937, p. 339)

Making a living out of forecasting is, of course, a risky business and we ought to be sympathetic to those who, on the morning after, find themselves with egg on their face. A wise econometrics professor once advised one of us: ‘When forecasting some economic magnitude, give them either a number or a date. Never both!’ However, there is a difference between forecasters who simply can get it wrong and forecasters who, like the Azande priests, can only get it right by accident.

On the eve of 15 October 1987, four months after Mrs Thatcher’s third electoral victory, which was fuelled by widespread optimism that privatisations and the new spirit of financialisation emanating from the City of London would be leading Britain to a new era of prosperity, Michael Fish, an amiable meteorologist with BBC television, read a letter during his weather section of the evening news. It was written by a concerned viewer who had a premonition that a tornado might hit southern England. Mr Fish famously poured scorn on that suggestion, emphatically saying that Britain had never experienced such a weather extremity and it was not about to. Five hours later, in the thick of the night, a tornado gathered pace in the Bay of Biscay, raced across the English Channel, violently pushed its way across southern England, flattening in the process a significant part of it, including London’s splendid Kew Gardens.

A few days after the October 1987 tornado, another calamity hit London. Only this one was not felt on its streets and gardens but in the City, the Stock Exchange and the corridors of Whitehall and of the great financial institutions. The calendar read Monday 19 October 1987, when the world’s stock exchanges suffered the worst one-day loss in their history. Originating in Hong Kong, the financial tornado raced across time zones to reach London first before hitting the New York Stock Exchange, shedding just over 22 per cent of the Dow Jones industrial average in a single session.

The hapless meteorologist would have been excused from thinking that economists must have been feeling on 20 October just like he was four days earlier: humbled. He would have been terribly wrong for a second time. For unlike him, economists are so steeped in their own ‘mystical notions’ that every observation they make is confirmation of their belief system. Look at what is happening today. Even though, yet again, the economics profession singularly failed to come even close to predicting the Crash of 2008 (indeed, poured scorn on economists such as Professor Richard Dale, formerly of Southampton University, who had issued warnings about an oncoming collapse), economists have issued no mea culpa, have offered no apologies, have not rewritten their textbooks in light of these momentous events, have not even had the good form to hold a conference on what went wrong with their ‘science’ (as opposed to what went wrong in the financial sector). Instead, they appear on radio and television, or are invited to speak as ‘experts’, to explain the Crash of 2008 using the very same methodology that had failed to predict it.

In one sense, this might be admissible. One might legitimately, for instance, want to hear Mr Fish explain the formation of the 1987 tornado even though (or perhaps because) he failed to predict it. Meteorologists remain uniquely able to explain their own predictive failures. Who else could do it better? Astrologists? It is in this sense that economists may argue that, though they failed to predict the Crash of 2008, it is they who must comment on its causes and nature. So, why be indignant towards economic ‘experts’ and sympathetic to Mr Fish? One obvious reason is their evident lack of humility. But it is not the main one.

The reason for rejecting the economists’ commentary on their own predictive failures goes deeper. The economists’ lack of humility is not due to a failure of character. It is rather a reflection of the fact that they have no useful theory of crashes to offer. It is the subconscious realisation of that vacuum that results in their hubris. After all, nothing causes scornful self-adulation as surely as deep-seated ignorance. Economists live in a mental world in which capitalism seems like an inherently harmonious system. Their narratives derive from a mystical belief in a providential mechanism that dissolves conflicts automatically, just as the gigantic counter-opposed gravitational forces in the solar system surreptitiously beget equilibrium out of potential chaos. In that worldview, a crash is an aberration that is best kept untheorised; something akin to a rogue comet destroying planet Earth.

Mr Fish was guilty of failing to predict a tornado, yet the physics on which he relied has the only sensible story to tell about tornadoes in general and the one that destroyed the Kew Gardens in particular. In sharp contrast, conventional ‘scientific’ economics, as practised in the economics departments of our great universities, simply has nothing meaningful to say about tumults like that which brought us the Crash of 2008.

1.3 The Return of Political Economics

Along with the financial bubble, which eventually burst in 2008, another bubble had been brewing since the later 1970s: a bubble of economic theory founded on the certainties of neoliberalism and propagated by the dynamics of university life. We shall refer to it, for short, as the Econobubble. The crisis of October 1987 had played a crucial role in fostering the certainties that led to the Econobubble’s growth. The fact that the stock markets recovered quickly after Black Monday was seen as evidence that the new economic order could take in its stride even the most precipitous fall in the price of stocks. The ensuing recession of the early 1990s was blamed on the decline in house prices, following their sharp rise during the 1980s; a mere ‘correction’ that was nowhere near as poisonous as the crisis of the early 1980s, which had preceded the privatisations and deregulation of the markets (and the Big Bang in the financial sector) whose raison d’être was to end such crises by liberating the markets from the shackles of government.

More poignantly, it was not long before the early 1990s slump gave place to a long, glorious boom that was only punctuated in 2001 with the collapse of the so-called New Economy (Internet-based, dot.com companies, Enron, etc.). That collapse was also short-lived and came with a useful silver lining: while countless IT firms folded, exasperating millions of people who had invested good money in them, the collapsing outfits had bequeathed the world a spanking new high-tech infrastructure, in the form of optic fibre cables that crisscrossed the earth and the oceans, and huge computer storage ‘spaces’, making a new wave of innovation possible.

In short, the early 1980s inaugurated neoliberalism’s golden era, built on a sequence of speculative bubbles leaping from one market to another (as we shall see later in this book). The Econobubble was its theoretical reflection and fuel. The new era was, after all, initially spearheaded in the 1970s by a generation of economists (e.g. Milton Friedman and Robert Lucas in the United States; Sir Alan Walters and Professor Patrick Minford in Britain) and political scientists (such as Professor Robert Nozick) who had been canvassing powerfully for a brave new world of liberated markets only lightly overseen by a minimalist, night-watchman State. The adoption, at least in theory, of these policies first by Mrs Thatcher in Britain and soon after by President Reagan in the United States, and the eventual overcoming of the early 1980s recession (which was credited to these policies), led to a new conventional wisdom that swept the planet. Its highest form was that which, in this book, we term the Econobubble.

Underpinning these views was the conviction that, though markets occasionally fail, government meddling in ‘our’ business must be feared more. The market-based world we live in may not be perfect but it is: (a) good enough; and (b) bent on conspiring to defeat all our democratically agreed efforts to improve upon it. Journalists, academics, private sector economists and government officials embraced the new creed with panache. To those who protested that this meant free market policies which stimulate great inequalities, the answer was either that only ‘good’ inequality was thus caused (while ‘bad’ inequality was repressed by market pressures) or that, given enough time, the infamous ‘trickle-down effect’ will eventually sort that problem too. Economists who resisted the Econobubble were sidelined, of ten edged out of the profession. Aided and abetted by financial flows that punished any government that delayed the surrender of its economic power to the markets (e.g. that failed to march to the quickstep of privatisation, deregulation of the banking sector, etc.), governments the world over (some of them led by reluctant social democratic parties) adopted the new mantra.

Back at the universities, the Econobubble’s dominance spread like an epidemic. Economics syllabi and textbooks were undergoing a momentous transformation. Its greatest victim, after the earlier demise of political economy, was macroeconomics. Indeed, we of ten heard top economists proclaim the end of macroeconomics, either as we know it or altogether. The idea was that since we now live in a stable world in which all that is required is some intelligent micromanagement, both at the level of firms and in the corridors of government, macroeconomics is passé. The fiction of the End of History, which was reinforced by the Soviets’ collapse, meant also the end of any serious debate on the dynamics of world capitalism. Whereas in previous epochs, not that long ago actually, economists of all persuasion would debate the state of the world, the wisdom of markets, the importance of planning in developing countries, etc., once economics was taken over by the Econobubble they turned away from all that, confining themselves to ‘focused’ technical subjects such as Game Theory, the design of auctions and statistical models of movements in exchange and interest rates that lacked any monetary theory behind them which acknowledged (let alone analysed) capitalism’s peculiarities.

Thus the ‘competitive’ economics departments were steadily depleted of anyone who was interested in researching the reasons why labour and financial markets may be onto-logically distinct from other markets. Since macroeconomics (the ‘holistic’ study of an economy) can only be meaningfully distinguished from microeconomics (the piecemeal modelling of individual choices) if labour and finance markets differ from the market for carrots, macro-economic debate was effectively expelled from the academy. Discussing the Great Depression as a source of interesting insights for today’s reality was positively frowned upon, unless confined to economic history seminars for the technically challenged. In fact, reading any article more than five years old was deemed a sign of scientific slippage. Books were only to be used as repositories of already published, recent technical articles. As for macroeconomics, it was kept on the curriculum either out of inertia or only after all real macroeconomics content was bleached out (and replaced by models containing a single person who saved when young and spent when older, before being reborn again to start the ‘dynamic’ process...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Table of Contents
• List of tables
• List of figures
• List of boxes
• Three Authors, Three Forewords
• BOOK 1 Shades of political economics : seeking clues for 2008 and its aftermath in the economists' theories
• BOOK 2 Modern political economics: theory in action
• Notes
• Bibliography
• Index