The real-life economics of the twenty-first century appears to be completely different from what is found in the textbooks of academic economics. Many basic results of economic analysis, some of which are claimed to be extremely robust, are never observed in real life. It is all about markets and how the system based on free markets is stable and beneficial to all participants. The conservative view is that the system self-corrects to rectify situations of shortage or surplus through simultaneous changes in prices and quantities transacted. Real market systems, however, tend to veer off when left to their own devices. The ideological divide on this issue is somewhat akin to the need to take medications when we are struck with, say, a mild bout of flu. Some strong believers argue that the body (like the market system) has its own corrective mechanism and, given a bit of time, will heal on its own. Others, with equally strong beliefs, would argue that it is too dangerous for deviations from normal health to be neglected without taking medications prescribed by professional experts.
Over the last six to seven decades, governments have experimented with standard responses to economic downturns or upswings according to the beliefs of those in power and their economic advisers. For instance, the self-healing group believes that government budgets should be balanced, taxes kept as low as possible, and borrowing restricted to the bare minimum. Taxes are supposed to distort individual incentives, borrowing increases debt and the future burden of repayments, and too much public spending crowds out the private sector, making the government appear too overwhelming and unwieldy. This group also believes that monetary policy should be focussed on inflation control, and money supply should be just adequate to meet the transaction requirements of a growing economy. This is, very roughly speaking, the conservative view of the economic world. International exchange should be unfettered and free from tariffs and other restrictions, and financial capital movements should be allowed unhindered across the world. Indeed, it is shown in textbooks that free trade across the world increases the level of global output, and the location of production of goods and services is determined by cost-efficiency. Output is further increased when capital — and labour? — is allowed to move freely across international borders.
The liberal (nowadays what is liberal is strangely also referred to as the Left) view is different. Taxes allow the redistribution and the creation of a social safety net. Public borrowing can stimulate demand and growth. If the rate of economic growth is robust, public borrowing can be managed well, without creating any onerous fiscal burden. Money and credit are important requirements for production, and hence monetary policy should be a tool for providing adequate credit at reasonably affordable interest rates. On the international trade front, there is greater affinity with the conservative view of free trade, though there are some considerations for deviating from this norm, with tariffs and other policy measures that promote domestic industries by restricting international competition, at least for a temporary phase to protect an infant-industry from competition.
Hence, economic policies have always been constrained by the dominant beliefs of policymakers. Decision-makers are also handicapped by the lack of accurate numerical analysis of live economic data. One instance will suffice: a government might nurture a belief that by spending more on infrastructure, private investments would be stimulated by increasing economic opportunities. However, what is not known is by how much investments are expected to rise when spending increases by a given amount. Only very inaccurate estimates would be available for reference. Hence, over the past decades, governments have overshot policy targets. In trying to reduce credit costs, policymakers have injected too much money and fuelled the unintended consequence of high inflation. Or, increased fiscal deficits have not promoted economic growth to the extent expected, but have enhanced the perceived risk of a future debt crisis. Promoting international free trade by reducing cross-border restrictions has improved the global production of goods and services, but only through major relocations of international production and the forging of interdependent supply chains where most goods are not entirely manufactured in one nation — different parts in different locations and then assembled in yet another country. This process is, as the textbooks suggest, not free from costs. As production and jobs get reallocated globally, some win through the opening up of new opportunities and jobs. There are losers as well, as industries are relocated and hence jobs and livelihoods are lost. Textbooks suggest that the winnings, in such cases, are more than the losses incurred in any economy. Therefore, the losers can be compensated with a suitable redistribution of earnings from the winners, without making the winners worse off than before. This win-win redistribution, however, is politically extremely tricky.
During the post-World War II period, economic policy stances shifted from those who believed in active management of the market economy to those who believed that markets are best left to themselves. The lessons seem to suggest that capitalism is rarely controlled by policy interventions alone. However, without interventions, market capitalism tends to create problems through persistent unemployment, inflation, and rising economic inequality. Indeed, it has been the political system that has been crafty enough to control the fallouts of these recurrent crises. An open political system allows for frustrations to be vented. It also allows governments to pass on some relief to those who feel neglected and deprived.
In the last decades of the twentieth century and the early years of the twenty-first century, the world saw the domination of the conservative economic view. This was the period of globalisation based on the Washington Consensus under the ideological banner of neoliberalism. Free international trade, deregulated industry, low fiscal deficit with low taxes, and inflation-targeting by the monetary authority were supposed to be the four pillars on which this wisdom rested. The sheer strength of the United States of America’s hegemony embedded in academia, government policy circles, as well as in corporate boardrooms, was powerful enough to dramatically change the world. The economic profiles of nations changed quite fast, many of them beyond recognition. This new wealth of nations created new shining sectors. There were the losers too, but they were somehow hidden under the bright lights of globalisation. For instance, in the US, a nation that led the sprint for economic change in the Eighties and the Nineties, the losers were hidden beneath the woodworks of the great ‘tech’ revolution in Silicon Valley.
What we are now witnessing in the US is unprecedented. The losers have got together and found a messiah in Donald Trump. The message, perhaps unintended, is one of anarchy. Economic policies have been upended: governance is irrational, unpredictable, incoherent, divisive and, above all, hell-bent on disruptions rather than the establishment of a new rule of law. There appears to be a lightning transformation of the US economic order with the arrival of a new political leadership. The state and economy are under a Kafkaesque assault. There are disruptions that are affecting every corner of the globe.
Was Karl Marx right after all? Capitalism ultimately cannot be managed through policies alone. And that the deepest crisis is emerging from the most developed citadel of capitalist prosperity and development. The legitimacy of the system is in doubt.
Anup Sinha is former Professor of Economics, IIM Calcutta
