After the Big Squeeze: This Is Not the New Depression, but We Are on the Way to Discovering How the New Capitalism Will Operate, Argues Irwin Stelzer

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Students at Harvard's John F Kennedy School of Government succeed as policymakers if they take away only one message: "Ask the wrong question, and you get a useless answer." That message is too often ignored in the debate about the future structure of the British and American economies as they plough through the economic downturn. Ask whether this is a recession or, as Ed Balls argues, a depression, and you waste hours comparing our situation with the often-misremembered 1930s (Britain did quite well without much government intervention, and America suffered 25 per cent unemployment in spite of huge government intervention). Since our definitions of "recession" and "depression" have all the precision of a Gordon Brown response at PMQs, there is little point to the exercise that led Balls to the erroneous conclusion that we are suffering the worst economic malady in a hundred years.

Next wrong question: Have we seen the last of unfettered capitalism? But that red-in-tooth-and-claw model never existed. Market capitalism has always been characterised by rules, or fetters. Securities can be peddled only after meeting disclosure rules; houses can be built only after satisfying planning regulations; construction workers are protected by myriad safety regulations; the quality of the air we breathe is determined by government rules. There's more, but you get the idea.

The correct question is: will capitalism survive the downturn, and the increase in the reach of government that it has engendered, not only in Britain, where the Prime Minister has undertaken the task of saving the world, but in the United States, where President Barack Obama has accepted the more modest charge of reviving the national economy?

The answer to that question is an unequivocal "yes". We are not, as Newsweek recently argued, "all socialists now". Angry British subjects and US citizens do enjoy seeing their bankers serve as pinatas to parliamentary and congressional inquisitors, the silliness of whose questions is matched only by the vacuity of the bankers' responses. But Americans still vote for middle-of-the-road candidates, and there are no demonstrations in Britain demanding the restoration of Clause Four.

The alternatives are just too grim, and anyhow no more immune to the problems the capitalist economies face. Russia, despite or more likely because of the government grab of private property and confiscation of foreign investment, is in crisis as its rouble teeters on devaluation, unemployment rises, and the new commissars who studied economics while working in the security services prove no better managers than oligarchs who made off with a large portion of the nation's wealth.

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China, its economy ruled by an authoritarian regime that controls the banking system and the major means of production, is not doing much better. Despite manipulating the renminbi to keep its value at export-subsidising levels, the regime is unable to prevent 20 million workers from disconsolately heading back to their rural homes after being cast adrift in the cities, adding to the reserve army of the unemployed. This is a combustible group of the kind that Marx envisioned would topple capitalism, not riot against its communist masters.

The final alternative to the US and UK models is typified by France, its hyperactive president an unrelenting critic of the American hyperpower, and now of Gordon Brown's decision to cut VAT, a move enthusiastically applauded by Ken Clarke, whose birdwatching skills are of little use when it comes to the hard work of analysing economic phenomena. The French electorate apparently is content to accept slow growth, protectionism and high levels of unemployment in good times to avoid some of the volatility of Anglo-Saxon capitalism. And instead of allowing market forces to correct excesses, France relies on the occasional riot to force governments to do what markets do in the US and UK to correct inflation, or wage discrepancies, or too-high tuition levels. …