The three events of the past 20 years in the economic history of this globe are the rise of China to a $4.3-trillion economy, the halving of poverty in India changing the aggregate well being of a quarter of the world population and the meltdown of the year 2008, which brought USA to its knees, the richest nation the world has ever seen. While there have been others like the Asian crisis, the dotcom bubble and others, none have shaped global economic forces as big as these three have.
Of these, the first two were clearly the product of the philosophy of economic liberalisation. The two countries in their own ways let a thousand flowers bloom and are still pretty much pushing ahead in the same direction.
The last one could have developed even in a relatively more closed economy, as it did in the savings and loan crisis of the 1980s in the USA, which is why the rest of the world did not notice it then. The difference this time was the open and massive global financial system that transmitted the virus, much like the Sars or the swine flu across the globe, and with far more vicious results.
When Joseph Stiglitz says ?the rules of the game have changed globally too?, one, therefore, wonders for whom and how. Despite the crisis, the Asian economies as a bunch have not done too badly in 2009-10 than previous years. These economies matter, as outside the EU and the North Americas, they have the strongest links with the rest of the world. Instead, compared with the 1997 episode, they have come off better, which could be construed as an evidence of having learnt to handle the risks of navigating the seas of globalisation better. Employment, exports and growth went down, but have begun to turnaround too, and in the case of India and China, rather fast.
These are subjects that do not seem to find a place in Freefall. The most trenchant critic of the Pax Americana, Joseph Stiglitz has instead brutally laid out the mistakes pliant Washington made over time to successive lobbies from oil, coal, pharmaceuticals and finance. ?It will be hard for America to achieve whatever vision it sees for itself when it is so blinded by campaign contributions and lobbyists and its system of revolving doors. Perhaps we will be able to muddle through, but at what costs to us today and what costs to future generations? This crisis should be an awakening sign: the costs can be high, very high, beyond even what the richest country of the world can afford.?
The Nobel laureate is at his harshest in dismissing the monetary economics of the Chicago school. He says the approach has to be given ?failing grade?. He also says the Keynesians by sometimes accepting the wage price rigidity were also responsible for developing a monetary policy that brought the crisis to a head.
Stiglitz goes like a knife into the combination of, as he calls, loosening of prudent regulation, financed as he said by those who would benefit from them and the consequent financial models that were not too different from the jailed Bernie Madoff, who ripped off $60 billion through his Ponzi scheme. ?(His) scheme was not all that different from the schemes of others who undertook high leverage.? These are strong but pretty appropriate words.
But what lies thereafter? Freefall gives you the best possible view of all the available literature on the subject so far and then stops there. He describes the need to develop a new capitalism, but the menu he serves up is a bit bland. The choice, he says, is to decide the extent to which the government and the markets should go. Whichever way it goes, it has to become bigger. In the 21st century, as innovations become the key to prosperity, markets will not often support basic research, at least not to the extent that is needed to. ?The fact that many of the advanced industrial economies have become innovation economies has profound implications for the nature of the market.? And in such economies, the central role of the government is to ensure competition has a free role, unhedged by the interest groups that would like to move the ball only their way.
These do not sound too novel. For India, these are the stuff which is part of the economic policy debate. Much as the USA grapples with the excesses of the market-led economy, both India and China are still battling a government that is still the arbiter in significant parts of the economy. Where it has eased up, growth has moved up. Which is why Freefall is not the economic tract for the global economy post the 2008 Great Recession, which rewrote economic theory.