FLORENCE – The nineteenth century was mesmerized by the cyclical behavior of business. The French economist Clement Juglar became famous for establishing that business cycles ran for around nine or ten years. We have recently had our own cycles of exuberance and disintegration. But they are very different.
In the nineteenth-century world, people rapidly picked themselves up after downturns and went back to business as usual. In that sense, the phenomenon of the business cycle looked relatively permanent and unchanging. Nowadays, however, a cyclical collapse comes as a great surprise. In its aftermath, we start to reinvent our view of economics. Every ten years or so, we think that a particular model of growth is so broken that it cannot be resurrected. The world needed to be rethought in 1979, 1989, 1998, and 2008.
Keynesianism definitively ended in 1979, following the second oil-price shock of the decade. The coincidental combination of the election of Margaret Thatcher in the United Kingdom and Federal Reserve Chairman Paul Volcker’s interest-rate shock of October 1979 ended an era in which inflation had been seen as a solution to social problems. State action and monetary expansion as a means of buying off discontent were discredited, as was the West European welfare state.
The association of Europe – and of European social democracy – with Keynesian demand stimulus was more than a little unfair, in that the greatest proponent of the Keynesian view was the Republican American President Richard Nixon. But the political shift of 1979-1980, culminating in the election of Ronald Reagan, brought about a new opposition of the free market and innovation to social-democratic corporatism and centrism.
Ten years later, in 1989, the Soviet model of economic planning and modernization through centrally directed growth was discredited. In its last phases, it had taken on large quantities of foreign debt, and over-indebtedness finally sunk a model that had fundamentally failed long before that.
The next beautiful idea that failed, in 1997-1998, was the concept of a particular “Asian miracle” (as it had been dubbed in the title of an influential World Bank publication). Asian economies were supposedly better coordinated because of strategic interventions by the government along the lines of the initial postwar practices of Japan’s MITI. But, like the Soviet Union and its satellites, the smaller and dynamic Asian economies had taken on too much debt.
The response to the economic crisis in Thailand and Korea in the late 1990’s was emphatic preaching about the inherent superiority of the so-called Anglo-Saxon economic model. But this vision, in turn, also became problematic, and it was unambiguously discredited in 2007-2008, amid a massive outbreak of European and Asian Schadenfreude .
Then it became clear that the rest of the world was badly affected by the fallout from the financial crisis, and a more sinister interpretation became popular. Many people in many countries interpreted a crisis that unambiguously began in the United States, but affected some other countries more harshly, as evidence of a fundamentally malign US plan. The Chinese search for a replacement of the US dollar by a synthetic reserve currency is driven by a political backlash against the perceived iniquities of US financial and economic preeminence.
The cycle in which political models are torn up appears to be accelerating. The emerging-market boom already looks as if it is the next vision to be cast in the garbage can of history. The ratings agency Moody’s is preparing warnings about the extent and quality of Indian private-sector debt. Chinese investors are worried about inflationary overheating.
The phase of revulsion and rejection is never complete, but the bold visions never recover their original splendor. The European social-democratic model survived the 1970’s in a bedraggled form. The idea of strong Asian economic growth as a permanent feature of the world economy returned with a vengeance only a few years after the Asia crisis. If the major English-speaking economies remain open and do not close themselves off to trade and immigration, they will also see a return to growth.
But each wave of collapse breeds a greater degree of disillusion about particular institutions, which are blamed for the outcome. It may be the welfare state in the 1970’s, the Communist Party apparatus in the 1980’s, the Asian industry and trade ministries in the 1990’s, or the nexus of the US Treasury and Wall Street in the 2000’s.
As each institution is eroded, there is less and less left in the way of alternatives. That is also true of currencies.
The dollar has been knocked off its pedestal by the crisis, but any conceivable substitute is obviously even more flawed and more problematical. The euro is the composite currency of an area with a poor growth record and an inadequate response to the economic crisis. The renminbi is still non-convertible. So there is no master currency at all any more.
The dissident Chinese artist Ai Weiwei sums up the new mood of universal and unmitigated cynicism. To make the point that all institutions are equally suspect, he created an exhibition entitled “Fuck off,” in which he shows photographs of himself with an obscene hand gesture in front of famous monuments: the Doge’s palace in Venice, once the commercial capital of the world, the Eiffel Tower, the White House, and the Forbidden City in Beijing. His latest exhibition’s title mocks the recent (and almost universal) tendency of governments to offer meaningless apologies for past mistakes: it is called “So sorry.”