Martin Wolf of the Financial Times predicts an inevitable crash, but fails to draw the necessary conclusions from his analysis, says Stephen Hallmark
IT’S not often I find myself chuntering in agreement with economists at the Financial Times, but Martin Wolf’s analysis offers further proof that we are living through the most turbulent of times.
The paper’s chief economics editor has just penned a tome documenting the 2008 crash. Given that Wolf is based at a paper which is hardly sheepish about its support for the economic system which plunged the world into financial meltdown, what prompted his critique is almost as striking as is his failure to address what needs to be done to address it.
Martin’s argument is that the chain of events triggered by Lehman Brothers declaring bankruptcy, in September 2008, was the product of two things which happened simultaneously and then reinforced each other.
He writes:?“The first is a set of huge economic shifts: globalisation; the entry of emerging economies; most importantly China, onto the world scene; changes in income distribution; all reinforced by liberal economic ideology. The second element is the quite extraordinary development within the financial system: liberalisation and the technological developments driving what was effectively the creation of a new sort of financial system.”
Wolf explains how the bubbles which the economy had witnessed — and which he readily admits he failed to foresee — were far from mad aberrations, but rather were essential because the?liberalised “world economy needed the bubbles to absorb all the supply that was being created.”
Or more bluntly, the precariousness of the financial system was the price of continued economic growth.
Wolf’s book — The Shifts and the Shocks — has much to commend it. Quite rightly, he stresses the good things which economic developments during the last 25 years have created, such as the “biggest decrease in mass poverty in history.” But he says this doesn’t do away with the threat posed by economic mismanagement and he fears for the future.
“Once you realise the scale of the disaster and of the forces driving through the system, we’ve even greater imbalances now than before 2008...?There’s an unbelievably small amount of equity that banks are required to have. The Bank of England recommends a rate of 4 per cent.
“That means if banks lose 4 per cent from their balance sheets then they are bankrupt. If that doesn’t frighten you, what does?”
So the FT’s top economist has no faith in Britain’s banking sector, believes economic bubbles and crises are inevitable and that another collapse is around the corner. But what Wolf shies away from are the political implications of the criticisms he is so ably levelling against the economic structure.
Interestingly, Wolf dismisses the term neoliberalism in favour of current economics being an “attempt to go back to the 19th century.”
There was another noteworthy economist who wrote a few books criticising classical economic liberalism during the 19th century. Karl Marx showed that the free market views espoused by contemporaries, far from creating growth for all, would create a class-riven society, rampant inequality and periodic crises.
Marx wrote a great deal about the uneasy relationship between production and credit — “the purest and most colossal system of swindling and gambling.”
He viewed those who specialised in credit as “simple adventurers,” and in words which ring very true today, noted that financial crises were a “powerful means of centralising money wealth.”
He also believed that the “ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”
During a recent Radio 4 interview Wolf dismissed Marx for the German’s penchant for surplus value, and left it at that. But Marx, like Wolf, thought that one of capitalism’s fundamental contradictions is that if growth continues, how is the surplus value to be absorbed?
What Marx also brings to the table is a much broader appreciation of what capitalism is and how it behaves — good and bad — and how political struggle is central to the issue of creating a fairer system.
For feted financial commentators such as Wolf to so closely echo Marx is now commonplace. Thomas Piketty’s aptly named Capital, which attacks the yawning Victorian inequality separating us from the 0.1 per cent, is another case in point.
But crucially what Piketty, Wolf and their pack lack are coherent answers as to what do about it. Piketty’s plan focuses on implementing a global wealth tax to correct the inequality. A brilliant idea, but the current world order will no sooner deliver it than Cameron will introduce a policy supporting poverty-stricken single mums.
Political change is required, but who is going to deliver this? Piketty has no answer.
And this is why Piketty’s pronouncements about not having read Marx are so sad. This shouldn’t be something to brag about but a cause of regret, because what both Wolf and Piketty would benefit from would be a more profound understanding as to why inequality is something which capitalism will always throw up. It will be ever thus in the absence of political change.
Wolf adds: “It’s extremely likely that there will be another crisis and I want my book to be seen as an analysis of what we should do if what we are doing now fails.”
It is a shame his book fails to deliver on this promise, and that during this ripest moment of potential for struggle, all that’s seemingly on offer is Nigel Farage. And it is a crying shame that the left has so far failed to benefit from what should be the most fruitful of periods for attracting the disenchanted to a viable alternative.
It is in our power to change this, but not if we fail to learn from the past.