The economic and financial crisis has shaken up the world and the world is looking for the guilty parties. Some are accusing unbridled capitalism and its sibling excess greed. Others are pointing to governments and central banks, suspecting their complicity with those wielding financial power. The truth is that everyone is to blame. As we seek to accuse, we come face to face with our own fears and resentment. The crisis is a moment of doubt and rupture; but it is also an opportunity to rediscover and regain our identity.
Those who have, since the summer of 2008, heralded the glorious return of the state in the wake of “capitalism run amok” are living in a dream world. Their excitement is a form of revenge against an ideology from the late seventies, incarnated in Thatcherism and Reaganism: an ideology of “extreme liberalism” which could be mistaken for the “laissez-faire” policy of the nineteenth century. This ideology thrived on the idea that the market can solve all problems – obviously economic problems but also – and I am not really jesting - complex geopolitical problems, like, for example, the Israeli - Palestinian conflict. The French have name for this: “ultra liberalism”. It must noted here, in passing, that if the author of these lines considers himself a liberal, he is certainly no “ultra” liberal.
The ideology in question dovetailed with the rise of globalization. Some top economists endorsed it by attacking the notion of public goods; we shall come back to that later. Milton Friedman, in his writings and his lectures, always ignored this concept, and Nobel laureate Ronald Coase developed a definition of public goods that was very close to that of privategoods. All this converged in a belief that the planet was finally a more or less homogenous group of individuals, individual entities and corporate entities. Policy was thus less and less important; the economy of trade governed the world, and frontiers became inexorably blurred. What remained was a vast global market governed only by commercial relations. It was this very belief, this naive faith in the power of the market, which brought us to the current crisis.
How did this grand illusion take shape? No doubt, it has its origins in the 1980s, but it came into full force in the 1990s with the fall of the Soviet Union. The first misconception was that the fall of the USSR sounded the death knell of not only communist ideology, but also that of all ideologies. This misinterpretation of the end of the USSR was coupled with the conviction that total openness in economic information – let us call it “total transparency” - would henceforth be the norm all over the world and that we were close to the conditions of pure and perfect competition, as per economic theory. For the devotees of this dogma, this “total transpareny”, combined with the investment opportunities offered by the market and the unlimited guarantees against risk, would abolish economic cycles. Add to this technical progress and the information technology revolution, and we end up with people like Alan Greenspan – according to me the person most responsible for the current crisis – promising infinite growth. Greenspan went to the extent of denying even the possibility of systemic risk. Without wishing to be controversial, lets not forget the intellectual roots of those managing the economy. Ben Bernanke, the current president of the Federal Reserve, is a well-known academic specialist in the great depression of the 1930s. Greenspan is, what we call an “applied economist”.
This false belief in growth everlasting was based on developments, which were, in effect, quite real. Let us remember that at the end of the 20th century there were steady gains in productivity, openness, abolition of borders, and flexible monetary policy. This lead to a belief in a “brave new world” of steady economic growth, without inflation, and without cycles. This captured peoples’ imaginations. It was Greenspan, with his absolute faith in technological innovation, who embodied this belief. He denied the possibility of the existence of long lasting bubbles. He thought that these bubbles would dissolve on their own, harmoniously. I am more circumspect. Compared to the myth of infinite growth, I prefer, like many economists, Kondratieff’s theory of long cycles, a theory which links these cycles to major technological developments. In this case, it concerns the information technology revolution. It started in the military in the 1970s, continued in the private sector and became a mind-blowing success story in the 1980s in the financial and industrial sectors. For all that, this revolution did not change the fundamental rules of the economy.
The myth of infinite growth had a partner, the myth of the “global society”, a world liberated from political and trade barriers. This second myth of course was based on a large dose of self-delusion at the highest decision-making levels. Indeed, the world is not a unified whole. It is still fragmented in distinct political entities. And these barriers are putting up resistance. The French are different from the Americans, who are different from the Chinese, who in turn react very differently from the Indians.
Public goods do exist in the sense that people fall back on their “tribe” in times of crisis It is a basic instinct to seek refuge in the nation-state; bad news for those who had consigned this idea to an early grave, but a dose of reality. Public goods are thus at the heart of the debate about how to get out of the crisis. Why were they the favorite target of the ideology of globalization? Because they incarnate distinct local identities.
At this point, we need to be precise about what we are talking about. Let us start, by defining private goods. They are goods, which, once consumed by an individual, will not be consumed by another. Common goods can be consumed by everyone, simultaneously, no restrictions, no barriers to consumption. When the “common good” referred to is a state, the goods are known as “public”. For example, a terrestrial state-owned television broadcast is a public good. An encrypted broadcast on a private channel is a private good. The real public goods, security for example, are by nature not measurable.
Thus, in the final analysis, is globalization compatible with public goods? The answer is ambiguous. In a country united around a state, the real public goods, the ultimate public good is this unity itself. Through the idea of public goods, we thus venture into an extraordinarily complex debate between individuals in a given community. The biggest mistake of the naive globalist is to argue the existence of a political entity called the world. Perhaps that will come in the next three hundred years, but certainly not now. People are concerned with their immediate surroundings, their own common goods. And international relations exist to ensure the compatibility between the different public goods of all the countries. Globalization stumbles across this reality as this naturally reins in and slows down its deployment. The proponents of globalization want to believe in the existence of global public goods. But the current crisis, like all other crises, proves this wrongheaded. Unhappy people, plunged in the crisis, are rediscovering their history. The myth of “harmonious globalization” has led us to deny these histories but, when a crisis strikes, all of a sudden, we rediscover our history, our roots, our differences, our borders. We rediscover our public goods and their guarantor, the state. Provided, off course, that the state honors this confidence.
Unfortunately, if capitalism has drifted off course, states are not above blame. During the entire Reagan-Thatcher era, states did not oppose the dash to globalization. They embraced it. Even in France, up to the 2008 crisis, the “ultra” liberal discourse dominated. One has only to recall the rhetoric of Nicolas Sarkozy during the 2007 campaign.
Now that the crisis has hit us, should states make a comeback? Yes, but provided they admit that they share responsibility for the disaster, either because of their actions or their acts of omission. And that they must change. Weak states are dangerous. We need strong states, which use their power for managing public goods. This power is in essence the power to reform. Reform is essential to ensure good relations between states. Poor management of public goods and poor cross-border relations make cushioning crises impossible. The challenge is to fill the governance gap between internal reforms and external adjustments.
Action, followed by reaction. In the case of the United Kingdom, it is fair to say that Thatcherism was a necessary and healthy reaction to the stultifying tradition of the Labour party, which had led to a sprawling and paralyzing socialism. Then we have the beginning of the Reagan era, which coincided with the intellectual construct of the decline of America and the rise of Asia, at that time the rise of Japan. It was the hey-day of great writers like Paul Kennedy who denounced the isolationism and fossilization of America.
The Reagan–Thatcher reaction was necessary, but it went too far, ending in the crisis of the summer of 2008. At each swing of the pendulum, the tendency is move further towards the extreme. Today, the risk is that some states are tempted to respond to the crisis by an excess of regulation. A striking example is the hyper Keynesianism, which was suddenly lauded in 2009 by the Anglo-Saxon world. The continental Europeans are a little more prudent. It all depends on the dosage. Beware of the Keynesian remedies. They are necessary for the time being, but beware of wastage, beware of the bureaucratic creations, of the “overly complicated systems” and of indebtedness. Beware, mainly of the return of inflation. Most importantly, we must not to overact, pile up debt and time bombs. We must be wary of the return of the state if it is a bad state.
We cannot talk about the crisis without mentioning the emergence of mathematics finance. In this case, we have witnessed a kind of epistemological inversion, a fascinating – if I may say so – return to values. In economics, it may be recalled, models are drawn to exaggerate certain traits in the real world, similar to, in some ways a caricature. A model is an intellectual expression of reality. We use it by going backwards and forwards from model to reality to better understand reality, using the brain’s ability to imitate and to reason logically. Models mainly serve to forecast. However, a model, one should never forget, is not reality. It is a model of some aspects of reality. By alternating between model and reality, economic science makes headway by testing the validity of the model. To take a familiar example, the Keynesian economic model completely neglects the concept of indebtedness. It is just a model, not reality.
The problem is that finance has ended up thinking that the model was reality. What does the famous Black-Scholes formula say about this? It provides a mathematical model of the value of an option, in which the price of a share obeys a stochastic process. It leads to the idea that, thanks to computers and sophisticated quantitative manipulations, we can invent more and more complicated options. An option gives the right to buy such and such product at a price fixed in the future, according to terms that can be increasingly elaborate and more and more indirect. The Black-Scholes formula allows us to value the option, depending on certain mathematical hypotheses regarding the changes in pricing of the securities underlying these options. Finance veered off course when we started treating these formulae as a definition of the real value of the assets rather than an approach to valuing the asset. The value was therefore calculated without reference to the complex hypotheses on which the formula was based. But who can understand these hypotheses and formulas, except a few mathematicians? Only those who are aware of the way these options have been built, understand what is inside them. The vast majority buys and sells these options without either knowing what they contain, or on what basis the price they are paying is calculated. Everyone, not only the financiers, are now all paying for the mistakes that lead to these systematic and systemic failures
Could this have been avoided? I am not sure. According to the standard sociological phenomenon, it serves no purpose to be proved right too soon. Even large financial institutions, which were aware of the systemic risks hanging over global finance, went with the flow. Those who knew what was happening and acted as if the system was about to explode – that is selling in a rising market – risked self-destruction. This is the sad truth about crises: true prophets keep to themselves.
As for the historians, they have to wait before answering the major questions posed by the crisis. Is the current crisis a crisis of ordinary credit, as happens about every ten years, or is it unique, a historical exception? Each financial crisis, despite its common roots with all other crises, possesses its own characteristics. It is not a mechanical, automatic phenomenon. Each crisis has its own personality. This time, the answer is not clear-cut. On the one hand, this is a bigger crisis than we saw during the last two decades of the twentieth century because the bubble that burst in 2008 was bigger and more global. On the other hand, if we compare this downturn with that of the 1930s, it is clear we are not in a real depression.
Ultimately the main questions raised by the 2008-2009 crisis are not new. The theme of bungling of the instruments of credit is classic. Jacques Rueff has already written about“real rights” and “false rights”. The multiplication of credit by decentralized agents – we always come back to it – again raises the fundamental question of monetary creation. The debate about salaries is also a long-standing one. It started in the United States many years ago. It is the age-old liberal debate between “earned” and “unearned” income. But liberalism, the real kind, pins its hopes on these debates. Authentic liberalism, in which I believe, has always rejected laissez faire. It has always demanded regulation. It was this liberalism that invented regulation.
One thing appears certain: the current globalization has reached its limits. If we want to go further we will need to develop new modalities of both economic and political governance, as they are related. Thus, we come back to the problem of regulation both globally, and closer to home, as it relates to political unity within the European Union. One has seriously to consider the problem of the future of the Euro zone. It has become quite conceivable that a member state could collapse, i.e. not honor its debts because it is forced to borrow at much higher rates. In order to avoid such explosive situations, member states must have reasonable economic policies and learn to coordinate, or at the very least have an understanding of, the principles that lie behind their actions.