The end of the end of history?

By Alan Freeman <a.freeman@greenwich.ac.uk>, 17 September 1998

I think Le Monde for 1 September best summarised the current state of economic knowledge. Its front-page cartoon featured an editor waving a manuscript headed ‘The World Crash, explained for my daughter’; “Great title,” sighs the despairing author, “but I’m buggered if I can write the first two lines.”

The economists seem to concur. “The great truth of the stock market,” says the Washington Post's Tim Smart,[1] “is that no-one knows what will happen Monday.” So much for forecasting. “The reason this is potentially calamitous,” says Jeffrey Garten, dean of the Yale School of Management,[2] “is that no one is in charge.” So much for the hidden hand. “We are already in the so-called capitulation stage,” records Christine Callies of Credit Suisse Boston,[3] “the point where people are really throwing in the towel.” So much for incisive scientific analysis. “What is happening in Russia and the Pacific Rim is unprecedented,” says Alan Sinai, chief economist of Primark Decision economics, “and the policy-makers in the United States do not know what to do.”[4] So much for the end of history.

While we’re on the end of history, Francis Fukuyama muses “The past few months have been really the first time since the beginning of the decade that I felt that I could really be proven wrong.”[5] Thanks a bundle, Francis; don’t bother calling.

More considered analyses were to hand: Die Zeit's 27 August front page led off the Doom and Gloom pack. Headlined ‘Die Grosse Unordnung’ (a citation from Mao Tse-Tung) it explained that “The world economy is upside-down. No trace is left of Creative Chaos: Asian misery, Russian disaster, and Latin American malaise have wrought a global crisis. It is up to the USA and Europe to confront the danger, but where has crisis-management fled? Who, really, concerns themselves with ordering the world anew? All year the economists told us ‘a lot more has to happen before we have need worry’. Well, it's happened.”

The ‘world has ended’ theme echoed in the Financial Times 28th August LEX column (’Das Kapital revisited’) which opens “From the triumph of global capitalism to its crisis in barely a decade?” though it stoutly, if comprehensively concludes that “Capitalism itself, warts and all, is still better than any alternative.” Hey guys, be happy: think how much worse it could be.

Though the more panic-ridden judgements receded, the Independent[6] offered a sober and enlightening balance sheet under the headline ‘The Day capitalism died in Russia’ where, it says, a ‘bastard version of capitalism, implanted at Western urging and largely on the basis of Western money, is in its death throes.”

“[T]his may be a defining moment. The steady advance of American style capitalism, led from the front by the shock troops of its capital markets and supported by the prop of the IMF, seems suddenly and decisively to have been brought to a grinding halt. All over the City and Wall Street, investment bankers are saying Russia has had it, it's on its own and we’ll never touch the place again as fast as Russia and others can impose exchange controls, its only realistic option given the scale of the flight of money, the international capital markets are in any case packing up their stall and sticking their money into Western bonds. And there appears nothing the IMF or anyone else can do about it.

“What we may be witnessing is the end of globalisation, or at least a severe setback in the process, lasting possibly many years. Globalisation is all about the free movement of capital; that's its big driving force, and over the last ten years, financial markets have pushed out the boundaries as never before, feeding the great US bull market on a wave of American triumphalism in the process.

“Is this now all coming to an end? That's the real significance of Russia. We must all pray that this alarmist take on events turns out to be wrong or exaggerated. But it's the reason why equities are plunging, bonds are soaring and the pound is once more climbing back to the tree D-Mark level. These are frightening times we live in and the end game is still a long way off. No wonder there's such a flight to safety.”

Prayer is an unusual policy recommendation for a respectable Western newspaper. It isn’t exactly clear how it will help—let alone who we should pray to, what we should pray for, or who should be doing the praying. The ‘frightening times' arose precisely when and because the world followed the IMF and American style capitalism, more scrupulously and completely than at any time this century. The most obvious cause-and-effect response is to stop following them; this needs neither God nor Economist.

This brings me to my basic point, namely, what is the use-value of an economist? We do not employ weather-forecasters to tell us it's raining. If the best advice on offer is collective prayer, we can get a priest. And if economists can neither predict nor advise, what exactly are they for, and why should the public pay any attention to them?

In this respect, any unlobotomised observer will notice a slight discrepancy. Just one week before International Business Week offered a supplement on ‘the 21st Century Economy’. “For two months,” it explained, “a team of Business Week reporters and editors has examined every aspect of the economy from technology to politics to higher education.”

“Our findings? The 90s are no fluke. Despite Asia's woes, all the ingredients are in place for a surge of innovation that could rival any in history. Over the next decade or so, the New Economy—so far propelled mainly by information technology—may turn out to be only the initial stage of a much broader flow of technological, business and financial creativity that will sweep across the world.

“Call it the 21st Century Economy—an economy that, driven by technological progress, can grow at a 3% pace for years to come—what's more, the US economy seems to be undergoing a wholesale rejuvenation. Businesses, financial service firms, and universities are re-inventing themselves. Even politicians and policymakers are starting to grasp the new technological and economic realities.”

Indeed.

The Independent for 28th August and Business Week for 24th August can’t both be right. The entire world can’t be swept by creativity at 3% per annum while it goes to hell on a bicycle.

We don’t need Harvard Graduates to tell us that technology makes social progress possible: what we need to know is whether a market society can deliver this progress to the end-user. If the answer is ‘it depends how hard we pray’ then the locker-room pep-talks from team IBW, with all its collective expertise, amount to little more than gee-whiz teenage tech-dreams, addressing none of the real practical problems facing the world in the next century. Yet world economic policy, affecting the lives of thousands of millions of people, has been informed and set precisely by such locker-room pep-talks.

Thus Nancy Dunne of the Financial Times for 10th September, quoting an anonymous Congressman on Clinton's current difficulties: “Well, at least it isn’t happening to someone important, like Greenspan or Rubin.”

Yes, bankers maybe do have more impact on the world than presidents, and probably more freedom of action. But when they impose their latest package of misery and death, instead of openly stating its political objectives and content for the public to accept or reject, they take sanctimonious cover behind an alleged economic ‘science’ which, if the informed reaction to the crash is anything to go by, has no more in common with objective human knowledge than ancient soothsaying.

Whether or not this is a defining moment for capitalism, it is for its prophets. The conclusion which ordinary people may well draw from the collective output of the economics profession, with all its prizes and professorships, its learned journals, graduate schools and business analysts, is that in the hour of a crisis which flatly refuted the received wisdom it had offered for the last two decades of the century, it was lost at sea without a compass.

REFERENCES

[1] ... an End’, New York International Herald Tribune 31st August 1998

[2] Nicholas Kristof, ‘A Scramble for Response to Crisis: weakness at the Top Clouds World's Search for Solutions', New York International Herald Tribune 31st August 1998

[3] Margaret Doyle and Andrew Cave, ‘Market fall brings fears of 1929-style recession’, Daily Telegraph September 1st 1998

[4] op cit

[5] Nicholas Kristof, ‘It's a bad time for weak leadership’, New York Times 30th August 1998

[6] “Markets hit the Russian Buffers”, Independent 28 August 1998