If you are a farmer you may find that declining oil prices have reduced the demand for ethanol and lowered the price of corn. The prices of other crops will also fall as speculators unwind their positions. In western Canada, oil and gas exploration will be reduced meaning fewer off farm jobs in the wintertime. As consumers delay discretionary purchases, manufacturing output will fall leading to rising unemployment. Housing prices will fall and jobs will be lost in construction. If you work in the university sector (as I do) you will be faced with hiring freezes as have already been announced by universities in Miami, Boston, New York and Waterloo. If you are a small business owner and you finance your inventory with a line of credit, you may find your bank reluctant to keep lending. Any institution with significant endowment funds, like charities, schools and hospitals will be faced with reduced revenue and foundations will have less money to grant.
Some of these effects are typical characteristics of a recession and so some people interpret this as just another turn of the business cycle. However, normal recessionary cycles respond to falling interest rates and fiscal stimulus by governments. This phenomenon is not responding to such stimulus and the American Federal Reserve Board has reduced interest rates almost to zero. What’s really happening and what can we do about it?
An alternative explanation is that we’re in the middle of a global crash. The roots of the crisis are in the global financial sector and the crash is the direct result of the globalization of that sector. In this process of financial globalization, national financial markets have been linked to form a single global market for credit, debt and currency. This global market has become either unregulated or insufficiently regulated because the corporations that dominate this market are larger than the national governments that used to regulate them and we have not yet invented the new global institutions that will be required to regulate this new market. For example, Iceland has had to be rescued by the International Monetary Fund after its largest banks failed. The largest Icelandic bank had assets 6 times larger than the GDP of the whole country. Could Switzerland rescue UBS, which has assets 484% larger than that country’s GDP? Credit Suisse is 290% larger than its home country’s GDP as is ING in relation to the Netherlands. Three of the five largest banks in the world are headquartered in the UK (RBS, HSBC and Barclays). Britain has already rescued RBS. Can it afford to rescue the other two without help? (For a chart showing the relationship between the assets of banks and the GDP of their home countries, go to this website from the Financial Times).
In my last column I quoted the work of the Hungarian economic historian, Karl Polanyi, whose name is now popping up all over. In Polanyi’s most famous book, The Great Transformation, he described how the Industrial Revolution caused economic forces to become dis-embedded from feudal society. These forces now operate in their own sphere called the economy. The relationship between the economy and society was reversed and instead of society determining the nature of economic relationships, the economy began determining the nature of social relationships. Society was refashioned in the image of the economy and we inherited a market society governed by a market system. This revolution was traumatic because it threatened humanity. The Great Transformation of his book title was humanity’s response of self-protection. In order to survive we had to invent new institutions like trade unions, pension plans, and unemployment insurance. We even invented the modern nation state so that the boundaries of political regulation would correspond more closely to the boundaries of economic activity.
Today, we are living through the same kind of upheaval. The corporate agents of the national financial sectors of our economies have become dis-embedded from the regulatory frameworks of the nation state. They now exist in a new space called the globalized economy. This space is now so threatening to human society that even as prominent a champion of free market capitalism as George W. Bush is prepared to nationalize portions of the U.S. banking sector to prevent further destruction.
When economic forces are becoming disembedded from the restraints of the old society, there emerge champions of deregulation – “let the market decide!”, they cry. In the late 18th century it was Adam Smith who was arguing that if everyone was simply left to pursue their own self-interest, these actions would be guided to achieve the common good of wealth creation as if by “an invisible hand”.
The social upheavals associated with the rule of the invisible hand included market induced famines, periodic shocks of industrial unemployment, dramatic increases in the gap between rich and poor, homelessness and waves of human migration as landless farmers sought to escape their poverty traps.
In the late 20th century, at the time of the globalization revolution, it was Milton Friedman who was arguing that markets freed from regulation were a precondition to human freedom in a modern society. We are currently living through the same social upheavals as before, following once more on the implementation of policies of market deregulation. Unsurprisingly, conservative think tanks like Canada’s Fraser Institute and America’s Heritage Foundation have been celebrating Iceland as one of the freest countries of the world. The deregulation of Iceland’s financial sector was engineered by disciples of Milton Friedman, like Davíð Oddsson the Prime Minister from 1991 – 2004.
The solution to the chaos caused by dis-embedded markets is obviously the re-embedding of those markets in new systems of political regulation. That’s one of the ways an economy becomes a moral economy. The other way is by making society more just. An economy dis-embedded from society is an amoral economy because an economy left to itself has no conscience. An economy embedded in an unjust society is an immoral economy. Society supplies the conscience but in this case it is a bad conscience.
Where might those new systems of just political regulation come from? As I write this, leaders of the 20 largest national economies are preparing to meet in Washington at a global summit to plan a response to the global financial crisis. What’s symbolically significant about this meeting is that it is no longer sufficient for the leaders of the seven largest national economies (the G7) to meet, consider and decide for the world, as they have done so often in the past. It is neither politically, nor economically feasible to make decisions about world trade without China, India and Brazil being at the table – and they will not be silent. Some commentators call this meeting the new Bretton Woods, recalling the meeting in Bretton Woods, New Hampshire in 1944 when representatives of the Allied nations met to establish the institutions and rules required to re-establish world trade after the cessation of World War II. These expectations are too grand for this meeting but the hope is exactly correct. It may be that this meeting will set the wheels in motion and we may, in time, look back on it as the start of a new Great Transformation.
As for Canada, two ways we can respond to the crash and make our society more just at the same time is by strengthening our welfare system and making major investments in social housing. Increasing transfer payments to the poor will address social inequality and boost consumer demand for economic staples. Investing in social housing will boost employment in the construction sector and help make poverty history.
Posted 13 November 2008. For additional reading on the moral economy, visit www.christopherlind.ca
