The contours of the change post the financial tsunami have still to be fully delineated but some lines are beginning to take shape. A culling of comments by academics and informed journalists and a review of the decisions taken or under consideration by various governments suggest five emergent trends.
The first trend: We are all Keynesians now. John Maynard Keynes was the most influential voice in economic circles for perhaps the first three decades after World War II. Most governments accepted his prescription of tax cuts and expansive public expenditure to secure growth and low unemployment. But then Margaret Thatcher came to power. She blamed Keynesianism for the inflation of the 70s and jettisoned the prescription. She put her economic eggs into the basket of minimal government and the ?invisible hand? of the market. Her success and that of the other countries that followed her lead in generating non inflationary growth put paid to Keynesian economics. But that was until the present crisis. Today the Keynesian prescription has been resurrected. Most governments are looking to pump state funds into public projects and lower taxes not so much to resolve the banking crisis but to break out of the trough of a deep and enduring recession. It is the ?fierce urgency of the now? (Martin Luther King) that has turned economic ministers into latter day.
The second trend: We are all socialists now, comrade. A typical exaggerated caption from the UK?s Daily Telegraph. It does however highlight the shifting boundaries of the relationship between the State and the market. Francis Fukuyama shot into the public limelight a few years back with his book The End of History. His central message was that the collapse of the Berlin Wall symbolised not simply the end of communism but also the conclusive superiority of the liberal democratic and laissez faire capitalist model of political economy. To the extent that post war ?history? could be defined as the clash between Marx and Adam Smith, the fall represented (metaphorically at least) its end. Today however with the de facto nationalisation of some of the largest financial institutions in the US and Europe; the Fukuyama prognosis is not compelling. The pendulum has not of course swung to the extent suggested by the caption. But that said the proponents of unfettered market power have certainly had their wings more than just clipped.
The third trend: We are all multilateralists. ?Bipolarity? defined the international order during the cold war. ?Uni-multipolarity? was one academic?s catch phrase for the post Berlin Wall world system. The Americans dominated but within a framework of emergent and multiple economic superpowers. Today ?multilateralism? is the word in vogue. A differentiating feature of the current crisis is that it has its core in the epicentre of capitalism. The causes lie in the mistakes of US mortgage institutions; the ingenuity of Wall Street whiz kids and the policy blunders of the Western regulators. Of course there have been global financial problems in the past but they have all originated in the periphery of the capitalist heartland. And they have never been so severe as to call for a broadening of the existing institutions of ?multilateral? economic decision making. All that is now in a state of flux. The crisis has spread so quickly to the emerging economies that it is clear that the problem cannot be resolved without the concerted and synchronous effort of all economies?Western and non Western. Multilateralism is acquiring a new meaning.
The fourth trend: We are all coupled. The communication and the IT revolution have connected the world. But it has not staunched the debate on whether economies are coupled or not. ?Decoupling is no myth? wrote The Economist in March. The argument has been that large economies like India, Russia and China are insulated from the financial tremors because of the size of their domestic markets and the inherent conservatism of their regulators. They can continue to grow even if the West falls into recession. This argument must now be put to bed. The speed with which the financial tsunami has engulfed the currency and stock markets of the non-Western countries and put a choke on their rate of economic growth is strong evidence that in this globalised and connected world we are all inextricably ?coupled?.
The fifth trend: We are all fundamentalists?clearly not in the religious or political sense. But as economic agents. The world is paying a high price for ignoring a fundamental truth. There is no free lunch. The US consumer went on a binge on the back of cheap credit and leverage. He got so greedy that he forgot that the bills would have to be paid one day. Similarly, the bulls in the oil market who predicted that prices would scale towards $200/barrel ignored the fundamentals of demand and supply. They too must be ruing their cavalier stance. There is an underlying lesson to be learnt from today?s situation. Fundamentals cannot be bucked.
?The author is chairman of the Shell Group of companies in India. These are his personal views
