Breaking with Capitalist Orthodoxy

Hedge #11, 2010. © Nina Berman.

The capitalist economies of the developed world have, over the last decade, proven to be profoundly dysfunctional. Not only did the 2008 financial crash lead to the deepest and longest recession in modern history, but nearly a decade later, few advanced economies have returned to anything resembling stability. Prospects for growth remain uncertain. Even during the pre-crash period when economic growth was strong, living standards for the majority of workers in developed countries barely rose. Inequality between the richest and the rest of society has now grown to levels not seen since the nineteenth century. Meanwhile, continued environmental pressures, especially climate change, threaten global prosperity.

The financial crisis came as a shock not only because few had predicted it. It also went against the mainstream wisdom of the previous decade that policymaking had solved the fundamental problem of the business cycle; major depressions were supposed to be a thing of the past. Economic policy since the crisis, however, has been no more successful. The orthodox prescription of fiscal austerity—cutting public spending in an attempt to reduce public deficits and debt—has not restored Western economies to health, and economic policy has signally failed to address the deep-rooted and long-term weaknesses that beset them.

We need to better understand how modern capitalism works—and why, in key ways, it now doesn’t. So, first we examine Western capitalism’s failures, in particular, three fundamental problems that have led to its current weak performance: weak and unstable growth; stagnant living standards and rising inequality; and environmental risk and climate change. We then conduct a reappraisal of some of the dominant ideas in economic thought, which we believe can inform new policies that can more successfully tackle the challenges of capitalism today.

Weak and unstable growth

The scale of the 2008 crash can hardly be exaggerated. In 2009 real gross domestic product (GDP) fell in thirty-four of thirty-seven advanced economies, and the global economy as a whole went into recession for the first time since the Second World War. Between 2007 and 2009, global unemployment rose by around 30 million, over half of which was in advanced economies, including an increase of 7.5 million people in the United States.

To prevent an even bigger crisis, governments were forced to put unprecedented sums of taxpayers’ money into bailing out the banks whose lending practices had precipitated the crisis. In the United States, the Federal Reserve had, at its peak, $1.2 trillion of emergency loans outstanding to thirty banks and other companies. In the United Kingdom, government support to banks in the form of cash and guarantees peaked at £1.162 trillion. At the same time, governments undertook major stimulus measures to try to sustain demand as private spending and investment collapsed. The huge dr...

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