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24 April 2000

A moment of truth for the centre-left

Putting all your money in shares is risky. Yet our rulers encourage us to do it

By John Gray

When Wall Street is hit by panic selling, a huge political investment in the global market begins to slump as well. Throughout the world, centre-left parties have mortgaged their future on the market’s capacity to deliver growth without crises. Scaling back the protective functions of the welfare state, they have encouraged voters to look to the stock market for security in old age. Now the millions who have entrusted their fortunes to the gyrations of the Dow and the Footsie are starting to feel distinctly queasy. They are beginning to wonder if relying on global capitalism is as safe a proposition as they have been told.

One of the oddities of the past few years has been the ease with which parties of the left have come to believe that global capitalism has been tamed. They have persuaded themselves that – so long as they are not unduly interfered with by meddling governments – global markets will lead us all onto sunlit plateaux of never-ending prosperity. The founders of social democracy did not share this faith. They knew all too well that capitalism is an unruly beast. Booms and busts are not aberrations in the behaviour of markets. They are at the heart of how markets work.

The more realistic social democrats never imagined that governments could eliminate crashes. But they did believe that governments, through strong public services and state pension schemes, could shelter ordinary people from the devastating effects. Social democracy has been described as the project of harnessing the market to public purposes. In practice, it was something a good deal more modest – an attempt to protect society from the market’s worst excesses.

Today’s centre-left parties are inheritors of an altogether more utopian creed- the faith in the free market that dominated political life during the 1980s and much of the 1990s. It is a faith that works fine as long as markets are buoyant. But it has nothing much to say when they stumble. Free-marketeers are fond of quoting the great Austrian economist Joseph Schumpeter to the effect that unfettered capitalism brings a gale of creative destruction to the economy. They never tire of reminding us of its stupendous capacity to create new industries and jobs; but they are curiously silent about the havoc it wreaks in times of downturn. Schumpeter’s warning that we cannot enjoy capitalism’s creativity without experiencing its powers of destruction has been consigned to the memory-hole.

Like the Clinton administration, the Blair government seems to believe that the gale of creative destruction has been transformed into a gentle breeze. Longbridge and Dagenham have already dented that faith. A protracted slide on Wall Street would destroy it.

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A slump in stock market prices is bound to impact savagely on the US economy. In the speculative fever that has gripped them over the past two or three years, millions of Americans have not only stopped saving for their retirement. They have borrowed recklessly in order to purchase overvalued stocks that they could not otherwise afford. With their paper fortunes going up in smoke, along with any prospect of a secure retirement, many Americans could lurch from a spending binge to saving as much as they can from what they have left. A climate of frenzied opulence reminiscent of the era of The Great Gatsby could be followed by something more akin to the lean and tacky times portrayed in Busby Berkeley’s film Gold Diggers of 1933.

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The markets may well recover from the latest crash. Even so, the speculative excesses of the past few years will have to be unwound one way or another. Yet the government seems to have no contingency plans. Its approach to the economy seems to be predicated on the boom lasting for ever.

It is true that new technologies are transforming the economy out of recognition. The growth of e-commerce is exerting a powerful deflationary pressure on business. That is only the beginning. Spurred by technical innovation, economic change is now so swift that the old idea of a lifetime career makes little sense. In these and other ways, we are indeed in a new economic era. But it is not one in which the business cycle has disappeared and market bubbles no longer burst. As in the 19th century, when economic life was transformed by canals, railways, and the transoceanic telegraph cable, we are in a time of profound change. This is not the end of economic history, but simply another phase in it.

The flaw in recent centre-left thinking is not its claim that the social-democratic strategies of the past are no longer viable: that is largely true. It is in imagining that a never-ending market boom can absolve us from thinking of durable replacements for them. Nothing in existing policies equips people to cope with a prolonged economic downturn. Instead, by encouraging the majority of people to hitch their fortunes to the stock market, they willy-nilly make them speculators. People have been given bigger tax breaks for making risky investments in equities than for traditional savings in building societies and banks. Current government policies compel people to risk their money on the markets, through private pension funds, to avoid the near-penury of life on a state pension.

The result is that the country has turned into something akin to a vast hedge fund, in which all of our fortunes now hinge on the fluctuations of global markets. Real hedge funds are designed so that their shareholders profit as much from downturns as from booms. By contrast, UK plc runs the constant risk of a period of buffeting by world markets for which it is wholly unprepared.

The writer is Professor of European Thought at the London School of Economics