The economic fallout from the global crisis has been immediate, extensive and severe.  It has been felt in the shock delivered to our financial institutions, in the balance sheets of our major corporations, in growth rates around the world.  More damagingly still, it will take its toll far from the City of London or Wall Street - on the jobs, homes and lives of perhaps billions of ordinary people in all parts of the globe.

Among the many casualties, and in one of the most important, has been the belief- virtually unchallenged for thirty years - that we had, on the basis of the market’s infallibility, solved the problem of how to run the economy successfully.  That conviction has surely been shaken to its core.  The simple confidence that the market could always be relied on to deliver the best outcomes can no longer stand in the face of the meltdown produced by market forces that were allowed to run riot.  The widely accepted assertion that markets, left to themselves, are self-correcting cannot survive the recession.

We can now see what had once been known but had been lost sight of - that when markets operate without any restraint they will inevitably lead to excess and eventually to self-destruction.  Even Adam Smith had accepted that markets could and would become the means by which dominant market operators were empowered to act against the general interest.  And Keynes had warned that this tendency of markets more generally was exacerbated in the case of financial markets.

This was because, he maintained, of the inherent instability of financial markets and their excessive reliance on opinions and sentiment – not to say guesses and hunches – rather than on real things with well-established values.  We have seen exactly what he meant.  An unregulated market in financial assets was permitted to create and put a price on new kinds of assets which had no more than a speculative value.  As long as those assets – futures, securitised debt, credit default swaps and so on – were accepted at face value, they could be offered as security for debt which could then be used in turn to underpin the creation of a new swathe of assets.

Those who manipulated these money-making mechanisms must have felt as though they were living the alchemist’s dream.  Those who watched from the sidelines – including our political leaders who might ordinarily have recognised their responsibility to provide some safeguards - could only marvel, lost in admiration and envy, dazzled by the riches being generated.  And as long as the asset values kept growing, the fact that they were underpinned in real terms only by debt mattered little.  It seemed to be a fail-safe operation; no great skill was required, and the mechanisms and processes – novel and untried as they were - were apparently supported and validated by complex mathematical models.  Even substantial operational errors, such as the gross over-valuation of assets, could be quickly washed away by the rising tide of asset values right across the waterfront.  Even the unskilled could make fortunes – to say nothing of the opportunities offered to fraudsters on an unprecedented scale.

But it needed only a scintilla of doubt to creep in about the value of these new assets for the whole ramshackle structure to come tumbling down.  When the confidence bubble burst, assets lost their value, but debt did not.  The result was – as we have seen - the collapse of the whole financial infrastructure of the world’s major advanced economies.

In New Zealand, with our relatively undeveloped financial sector, we have tended to congratulate ourselves on escaping the direct consequences of the financial meltdown.  But that was to live in a fool’s paradise.  It has not taken long for the financial collapse to have its effect on the real, productive economy, and for the hit taken by our export markets and commodity prices to be added to the impact of the home-grown recession we had entered at the end of 2007.

Some of the immediate global lessons to be learned from this experience have been applied quickly, albeit belatedly.  The new regulatory regime for financial markets and institutions introduced by President Obama is a recognition that we should never again entrust our economic future to unregulated markets.    His example will no doubt be followed by other, but by no means all, governments.  President Obama at least seems to understand that we cannot correct and prevent egregious errors by handing back control to those who committed them in the first place.  Effective regulation is now surely the name of the game.

The plunge into recession has illustrated beyond peradventure what happens when market operators become so powerful that governments are unable to restrain market excesses.  But the response that is now needed to limit and shorten recession delivers a further lesson - that governments must bear a responsibility not only for allowing the recession to develop but also for the measures needed to counteract it.  Governments can and must act to correct market failure in ways that the market, left to itself, cannot.  Economies are robust things.  They would recover sooner or later without intervention.   But – as all but the most purblind now recognise – it is the responsibility of governments to hasten the recovery process, and thereby limit the misery that recession inevitably brings about.

It is vital to understand that this is a lesson of more than purely economic import.  The damage that has been done by the unrestrained market has, after all, been more than merely economic.  By the time the crash came, thirty years of unrestrained global markets had done largely unrecognised damage on a much wider scale.  Not least, the so-called “free” market had converted the world to a new culture of greed and excess.  No reward was too outrageous for those who could claim that it was ordained by the market.  The huge fortunes “earned” by successful market operators were regarded – by themselves and by cheerleaders such as The Economist - as a proper reward for their brilliance.  Self-aggrandisement was treated as the mainspring of all economic progress.  Greed was good.  A New Labour government in Britain, we were assured, was “intensely relaxed about people getting filthy rich.”  The values of those who grew rich by exploiting others were held up by the world’s media for admiration and emulation.

The consequences for both our economy and our system of values were certainly deleterious, but the debit side of the balance sheet is further burdened when we can add in the social outcomes.  Across the globe, and especially in those countries (such as New Zealand) where the “free” market and the culture of greed were allowed free rein, there was a rapid widening of the gap between the rich and poor – not surprising given that the billions gouged from the economy by the manipulators of financial markets were not new real resources but were filched from the pockets of the rest of us.  The result has been societies that are less integrated and more divided – societies increasingly marked by alienated and disaffected minorities who feel that their interests are quite separate from those of the increasingly triumphant, visible and eulogised “rich and powerful”.

If we widen our perspective even further, to take account of the threat to the global environment which many believe to be an underlying and developing crisis of even greater dimensions than the global recession, we can again see a prime example of market failure.  Global warming, the exhaustion of natural resources, the despoliation of our ecology, the energy crisis, the pollution of water and air, are all consequences of a short-sighted and narrow market-based approach to the interaction of economic activity with the natural world.  It is the inevitable outcome of a dogma that says that the bottom line of individual corporations is the only number that matters, and that the shareholders’ interests must necessarily prevail over those of the wider community and humanity as a whole.

This barely remarked reversal has removed from the left any identifiable ground on which to stand.  All politics in the end is a response to a fundamental characteristic of social organisation.  All societies demonstrate an inevitable tendency for power to concentrate in a few hands.   The power may be expressed in physical, economic, social or hierarchical terms – but at its most fundamental it is power to make choices, the freedom to choose, even at the expense of and against the interests of others. 

In any society, those who are stronger, cleverer, or luckier, or who enjoy some other advantage, will inevitably acquire more power than others.  They will then, with equal inevitability, use that power to enhance their advantage, accreting to themselves differential privileges which will make them yet more powerful, allowing them to entrench that advantage and defend it against attack, and by doing so to reinforce the disadvantage of others.  The response that should be made to that intensifying concentration of power is the central and defining issue of politics – and the key characteristic of the left response has been, traditionally, to resist and counteract it.

A society in which the market dice are allowed – indeed, must be allowed - to lie where they fall is inevitably one in which power concentrates in fewer and fewer hands.   A government supposedly of the left that feels unable to challenge market outcomes can have nothing to say  - however it is dressed up, whatever cosmetics are applied – to those who look to it for social justice and a more integrated society.

How and why did this flip-flop occur?  How did these free-market doctrines become so dominant?  Why did governments – even those of the left - not ensure that market forces were tempered by a concern for the interests of the majority?  The answer lies in a single word – globalisation.  It was the development of the global economy which incapacitated governments and which left the field uncontested to market forces.

The individual steps by which this was achieved need be only briefly rehearsed here.  One of the earliest was one that masqueraded as a purely technical change that would help international trade and investment, and that was sold to the ordinary citizen as a welcome reduction in bureaucracy.  That change was of course the removal of exchange controls by Reagan and Thatcher so that international capital was free to roam the world in search of the most favourable investment opportunities.

In one step, the rules of the game had changed hugely.  Investors no longer had to comply with the requirements of elected governments.  Instead, governments found themselves played off against each other by investors who commanded greater and greater resources as the now global economy was funnelled into fewer and fewer hands.

Now, it was governments that had to sue for terms, and who would lose out in the competition for investment if they did not comply with the demands of the multinationals.  The world’s major corporates could, in effect, set the political agenda in each individual country.  The price they demanded for what was seen as essential foreign investment was a menu of measures drawn from the text-books of right-wing ideologues and familiar to any observer of the New Zealand scene.  That menu included a “free-market’ (or monetarist) economic policy, low business tax rates, accommodating rules about the repatriation of profits, industrial relations laws that reduced the power of trade unions, health and safety legislation that was not too onerous, a regime that allows the “externalisation” of costs to the environment (or, in other words, the transfer of those costs to the public purse), and labour costs aligned to the lowest international benchmarks.

The investors, on the other hand, now understood that they could exercise their power quite irresponsibly; it was, after all, governments – not the investors - that had to answer to their electorates.  The investors answered to no one but their shareholders.  Most costs could be “externalised” or passed on to taxpayers who no longer had a voice.  And, as voters began to understand that their governments could no longer protect them, confidence in the democratic process began to weaken.

It is no accident that, with the rise of the global economy, voter apathy is an endemic problem in the older democracies.  Voter turn-out in the leading democracies, and particularly in the United States, is notoriously low, and it is on a downward trend in most countries.  Even in a country like New Zealand, where there has traditionally been a commendably high participation rate in general elections, voter interest is declining.  In the United Kingdom, while the turn-out in the 2005 general election showed a tiny improvement on the 2001 figure, both results - at just over 60 per cent - were at historically low levels.  And the numbers voting in the recent European elections were shamefully low.

At around the same time, monetarism – the doctrine that managing the economy was a more or less technical exercise in controlling inflation (the only goal, it was said, that mattered) by regulating the price of money – became the accepted wisdom, on the left as well as the right.  And, in a development introduced in its modern form in New Zealand, this technical task could safely be entrusted to unaccountable officials – bankers no less – so that, in one simple step, democratic government was excluded from perhaps the central function – the management of the economy - for which it was elected.

These ground-breaking changes were reinforced by the re-shaping of political structures in the image of international capital.   Multi-national investors found it increasingly irksome to have to deal with national governments, each with its own set of requirements, each reflecting the particular interests and priorities of their own voters.   They insisted that economies would function more efficiently if those controlling investment capital could deal with authorities, like the European Commission, that matched their own multinational structure and scale – and that were not democratically elected, but were instead multinational bureaucracies whose goals coincided with their own.  So powerful was the momentum towards the integration of national economies in the name of greater economic efficiency that no one seemed to notice that the long-term consequence was not only an actual reduction in economic efficiency but also a political loss of a most serious kind – the replacement of democratic governments as the ultimate authority by multinational capital.

The ability of multinational capital to set the political agenda meant that a doctrine that could never have been directly sold to voters in individual countries – the view that markets are infallible, that they must not be regulated or interfered with in any way, that the interests of shareholders and the bottom line are all that matters, and that governments must step aside while market forces have their way – became the dominant driver of the world economy.

The concession that it is the market that is the only legitimate and effective determinant of economic activity, and that government has only a limited role to play in holding the ring, is not a matter whose effect is limited to the management of the economy. The implications go much wider. If the left concedes that, on the central question of economic policy, decisions can safely be left - indeed, must be left - to the market, then what case can be made for saying that the market cannot be trusted in important but less central matters such as the delivery of health, housing or education? If the market is infallible or at least unchallengeable on the most important issues, then the rest of the game has also been conceded.

And if the fundamental question of managing the economy is to be handed over to unelected officials, and thereby removed from the democratic control of voters so that they no longer have the opportunity of expressing a view or choosing an alternative, how could it be argued that it is essential that other, less important, matters should be subjected to democratic control? Are democracy and the responsibilities of government to be limited to the detail and the trivia, while the essential issues are decided by unaccountable experts?

To accept these propositions, even implicitly, is entirely destructive of any political position that treats democratic control and government responsibility as the central features of a proper system of government. It is because the left has indeed accepted those propositions that it has found itself intellectually bankrupt and lacking in confidence. Very few left politicians have analysed their situation in this way, preferring to persuade themselves that they are merely acknowledging the - largely undefined - inevitable (in matters like central bank control of monetary policy) and pretending that this central concession leaves intact their political positions on other issues.

The abdication of the left has been more than just a failure of omission.  The democratic state that exercises its traditional concern for all of its citizens, and in particular for those who need its help, has not simply ceased to exist; it has been turned against itself.  The revolution that has occurred under the influence of the global economy has not meant that the activist state has disappeared; it has merely changed its role and focus, and operates in a different interest.

Hence, the modern state is increasingly activist in the causes of producing more police and prisons, in treating views at variance with orthodoxy as subversive, in regulating the labour market so as to force people to work for lower wages, in making life difficult for immigrants and other non-conformists, in restructuring the agencies that deliver public services, and in redefining the concept of public service virtually out of existence so as to ensure that private interests can pursue profits across the whole economy.  As a consequence of globalisation, the state has been recruited as just one more soldier to the cause.  It has become just one more mechanism for ensuring that the prescriptions of global investors are followed faithfully.

This is not just a matter of the freedom to debate and choose different political systems, remedies and approaches. It is also a real loss of freedom to act and to govern one's own life. The loss of economic power, accompanied by the closing off of the political escape route and safety valve, means a real loss of freedom for the majority of people. The test of a free society is the degree of freedom enjoyed by the least free.  Freedom is not an absolute; it is the degree to which one is free to act and choose in relation to the same power exercised by others. If power is concentrated in fewer hands, so that they have comparatively more power of decision and choice, then by definition others are less free. Those societies that are part of the global economy can therefore be said to be less free than when they decided - however imperfectly - their own affairs and futures.

It may be questioned, however, as to how far the problem is unwelcome to those who now control and dominate the political debate.  Voter apathy might be seen as encouraging evidence that the real political debate is now over – that we have reached the “end of history” and that, for the first time in the modern era, there is no longer any real challenge to the views and interests of the rich and powerful.

It is no accident that the constant mantra of political leaders like Margaret Thatcher was that 'there is no alternative'. It is very much in the interests of the purveyors of the new orthodoxy that dissent should not only be discouraged but be convinced that it is pointless and hopeless.

This victory is all the sweeter because it can be represented as the proper and defensible outcome of the democratic process. The voters are apathetic, so it can be argued, because they no longer have anything of substance to concern themselves with or to contest. Apathy is, in fact, contentment and an endorsement of the dominant orthodoxy. All the processes and trappings of democracy are, after all, in place. The opportunities are there for the expression of different or contrary views. If they are not taken up, surely that is evidence that those views no longer have traction?

This is the final irony. When the democratic process has been hollowed out so that there is little of substance left, the mere - perhaps only apparent - existence of that process can be used to silence the critics.  A victory won by force or overtly in the face of democratic process would be hard to justify or defend. But a victory that appears to have been secured in accordance with democratic process can not only be justified but celebrated.

28 August 2009

This article appeared in the August edition of Watchdog, the journal of CAFCA (the Campaign Against the Foreign Control of Aotearoa)