Consumed by growth

The seriousness and gravity of the global financial crisis (GFC) is unquestioned.

Initially, the world viewed the destruction of financial institutions as an entertaining blood sport. There was a sense of schadenfreude as the Masters of the Universe received their comeuppance. The “financial” crisis has now spread to the “real” economy — jobs, consumption, and investment. It is now everybody’s problem.

In the US alone, more than 3.6 million jobs have been lost. In Spain, unemployment has reached the middle teens. Exports and production have fallen in countries as varied as Spain, Japan, South Korea and Taiwan by amounts that beggar belief. An astonishing $30 trillion of wealth has been obliterated in America alone. Entire countries — Iceland and Ireland — have been savaged.

The GFC coincides with another crisis: the GEC or global environmental crisis. “Toxic debt” and “toxic emissions” increasingly clamour simultaneously for politicians’ attention.

Irreversible climate change, scarcity of vital resources (food and water) and falling biodiversity are not unconnected with the existing economic system.

Economists and politicians implicitly assume that high levels of growth drive increased living standards, rescuing people from poverty. No limit to economic growth is recognised.

At the launch of the “Redefining Prosperity” project, Tony Jackson, professor of sustainable development at the University of Surrey, writing in the New Scientist, noted that a UK treasury official accused the authors of wanting to “go back and live in caves”.

The project sought to raise concerns about environmental and social limits on economic growth. Ironically, the GFC has illustrated the limits and illusions of economic growth starkly.

A lower growth future has political and social implications. For example, China and India are deeply concerned about failing to provide jobs for the millions coming into the workforce each year.

One in 15 migrant workers in China are expected to be out-of-work in 2009. Chinese security leaders have warned about rising social unrest.

Demagogic debates about the ideological differences between neo-liberalism, compassionate capitalism and social democracy are unhelpful. In truth, all competing economic philosophies are underpinned by the same reliance on growth and built to fail economic models.

The world needs to adjust to a new economic order and a world of reduced expectations. In the short run, the primary focus surely should be to dealing pragmatically with the GFC and its potentially devastating human and social costs. There will be time enough for recriminations and blame.

Dead economists
At the fall of the Berlin Wall, when asked — “who won”, political scientists cited the triumph of capitalism over socialism. The economist’s response was simply: “Chicago”. The reference is to the Chicago Graduate School of Business and its unshakable belief in free markets, exemplified in the title of Milton Friedman’s most accessible work — Free to Choose (1990).

The GFC marks the end of unquestioned advocacy of free markets. Wang Qishan, vice-premier of China, tartly observed: “The teachers now have some problems”.

There is no time for “triumphalism” or “mission accomplished” speeches. The GFC brings into question much of established orthodoxy of economic models and approaches. It calls into question social and political models based on high levels of economic growth that is driven by financial growth rather than real-economy growth. It also questions mandarins’ ability to control the economic engines.

Recently in Canary Wharf, the financial district in London’s docklands, I noticed a small street stand erected by the English Teachers Union to recruit teachers. The two affable recruiters explained that they had heard that there was “a bit of financial crisis”. Well-educated and highly motivated bankers who were losing their jobs by the thousands might like to consider a new career: teaching.

I questioned the adjustment in salaries — a reduction of 60% to 95% — that the change in careers would necessitate.
One recruiter’s response stays with me: “If you haven’t got a job then it’s not relevant is it? It was never real money and it wasn’t going to ever last, was it?”

Different strategies exist for dealing with the GFC. Politicians and theoreticians are enjoying their “I told you so” moments. Crisis denial, advocated by Lars Nonbye, general manager of the Nonbye sign-making company in Denmark, places a ban on any talk about the crisis from work premises. The most productive strategy may be to use the GFC to redirect talent and resources into the real economy and adjust living standards and expectations of economic growth.

As Keynes wrote in 1933: “We have reached a critical point. We can ... see clearly the gulf to which our present path is leading….[If governments did not take action] we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what ultimate outcome we cannot predict.” 

 
The writer is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. This article draws on the ideas first published in Satyajit Das “Built to Fail” in The Monthly (April 2009).