Capitalism is an indulgent mistress, but a cruel master. For fifteen years, the world enjoyed globalisation. Lives were transformed across the globe. We all had our mobile telephones of three generations, our laptops and our ATMs. We overindulged in buying property, and the incomes and house prices acquired extra zeros every five years. Previous booms were confined to the developed world, the Golden quarter century of Keynesianism, for example. But this was the boom of the emerging economies in Eastern Europe and Asia. More people came out of poverty during the long boom?perhaps 700 million to a billion- than ever before in the history of the world.
Of course, the longer a boom lasts, more people develop amnesia about history. Pundits begin telling you that this time it is a new paradigm. Old rules, indeed all rules , are out. Also, we do not lose our parochialism. Each country thinks its growth performance is due to its own clever policies . Greenspan thought it was he who was delivering the miracle of low inflation , ample credit supply and sustained growth. He did not see that the Chinese were keeping world manufacturing prices low and the Indian were cheap exporters of services. Chinese even lent back to America its twin deficits, since that is what helped China build up a surplus. It was like a drug dealer lending cheap heroin to a drug addict.
Happily for India, Manmohan Singh?s 1991 reforms came at the start of the boom. After that for fifteen years, India sailed under a fair wind. India prided itself that its path was different, its banks better regulated (though grossly inefficient and not able to compete globally). Canute like it believed that the tides won?t affect India.
Then it all fell apart. Those with long memories or at least a smattering of knowledge of Marx, Hayek or Keynes or even Charles Kindleberger and Hyman Minsky would know that capitalism has cycles of irregular length. Every boom breeds bad investments, over expansion of credit, over spending by consumers, acquisition of increasingly risky and dubious assets. Every system of regulation is only designed to prevent the previous crisis. Starting from August 2007 , there was disbelief, denial, and delusion that the latest quarter point cut in bank rate would solve the problem. Then on September 15, 2008 , Lehmann Brothers shut shop, and the dream was over. Not only was the cycle back, but this time it was more complicated by its global nature and the large number of financial innovations, which had propelled the boom on by telling banks how to economise on cash and gorge on debt.
Now we don?t know how much longer the downward spiral is going to be. After massive recapitalising of banks to help in detoxing as well as strong doses of fiscal stimulus in many economies, we wait to see if the packages will work. Not as yet, since banks remain as excessively cautious as they were foolish in risk taking. The consumer has sensed that even if the governments and banks hand over money, they better not spend; sooner or later the Keynesian phase would pass and the taxman will be back.
The cruel master that capitalism is it wreaks its revenge on us all for our forgetfulness of the wheels of commerce, which turn and turn inexorably. Detroit will have to go since it failed to innovate. Anyone who thinks growth is automatic or a result of government policies should recall how Japan used to be a miracle economy propelled by MITI its policy arm. Growth comes from selling cheaper or better products to people, who have not bought from you before.
The missing element is not money, but confidence. No world leader can reassure the public that the good times will be back. We are all waiting for Obama . He needs to spin the web, which will expel fear. If confidence is back, then the logjam will break. Credit will flow again between banks, and, then on to consumers. If so, by the last quarter of 2009, we should be turning around.
If it does not work then we need a new economics. So far the boom has been a product of the sweetwater economics of Chicago and the cure will come from the saltwater Keynesians of the East Coast of USA. The rest may mutter about market failure or Lenin , but they don?t have any new answers. New economics will require some economist(s), who can think dispassionately, and rigorously leaving sentiments aside. John Maynard Keynes was one such. Another one will come along. How do I know? I know there are cycles in economic ideas just as much as in capitalism.
?The author is a prominent economist and Labour peer