The world’s political elites are looking just a little jaundiced now that the free market god is proving to be a touch fallible. The days of free market triumphalism are long gone as our shell shocked leaders try to prevent the world economy sliding into prolonged depression. With free market solutions now dead, the big question is whether or not massive government action will be enough to avoid an economic meltdown.
And there is more bad news for those who find it just a little worrying that, with the failure of the markets, we are now being asked to rely on politicians to pull us out of the economic shit. History tells us that when it comes to governments throwing ever larger amounts of money at capitalism to save it from collapse, the record is not great. During the depression of the 1930s the US government threw just about everything but the kitchen sink at the economy to little avail. Despite the massive amounts of money injected, the US economy remained stubbornly stuck in depression mode. It took the horror of the Second World War to get the world economy moving again.
There is a more recent example of government intervention aimed at economic stimulation, which again ended in failure. In the 1990s the Japanese economy went through its very own credit crunch which, like now, was caused by a build up of bad debt in the country’s banking system. In an attempt to prevent the economy slipping into a deflationary spiral the Japanese government blew unprecedented amounts of public money on public works. It also brought forward measures that boosted consumer spending by 10%. Neither measure worked and throughout the 1990s the Japanese economy could only average an annual growth rate of less than 1%, the so called lost decade.
Not surprisingly the trauma of the Japanese economy is being studied by the great and good in the hope that lessons learned will help get us out of the current crisis. The big hope is that by responding far more quickly to the crisis government intervention will be far more effective than it proved in Japan.
This may well be the case. The Japanese government at the time were firmly stuck in the free market “do nothing” approach and delayed intervening until the economy was well and truly stuck in the deflationary crap. On the other hand the Japanese economy faced the crisis with many advantages not enyojed by other capitalist economies today. For example, Japan had no government debt and a high level of private saving, which made it far easier to stave off deflation by boosting government and consumer spending. However, by far the biggest difference was that the Japanese crisis occurred at a time when the rest of capitalism was booming, which ensured that the economy was able to keep afloat through exports.
Given the differences, perhaps the only glimmer of light to be gained from poring over the runes of the Japanese experience is that the government was able to stave off a full blown depression by spending huge amounts of money. It may well be the case that the incomprehensible amounts of money being spent now will prevent a 1930s type depression and that we will only face a prolonged period of recession.
Whatever happens we can say two things with certainty. The arrogant stupidity of Gordon Brown in claiming that Labour had cured capitalist boom and bust now looks more than just a tad silly. Capitalism is inherently unstable and boom will always be followed by bust. The other certainty is that no matter what happens it will be the working class that will pay the price of capitalism’s failings. Whether it be depression or recession it will be us who pay the cost through higher unemployment and falling living standards. And tragically it will be the low paid and casualised workers who will end up suffering the most.