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8 June 2022

Crisis calls for a new economic paradigm

Just as rising prices and flagging growth did away with Keynesianism in the 1970s, so today they are killing of neoliberalism.

By James Meadway

News from the British Retail Consortium that retail sales, online and offline, are falling more rapidly is another stark warning that the economic future looks bleak. The mechanism by which a recession happens is well-known to economics: as consumer spending falls, shops and suppliers sell less and so begin to cut costs, including staff costs. But this cost-cutting by suppliers depresses demand still further, since those on reduced hours or lower pay spend less, reinforcing the slide downwards. The whole economy tips into recession – marked by falling output and potentially rising unemployment.

Yet even as we face what looks like an inevitable slowdown over the rest of this year, conventional economic thinking has been found wanting. It is rising prices that are forcing consumers to spend less, pulling back on “discretionary” spending from Netflix to furniture so they can afford essentials like heating and food. Rapid price increases in those essentials are the fundamental factor behind falling overall consumer spending. In major developed economies, where 70 per cent or more of all activity depends on consumer spending, this is a major drag. It’s not hard to see the problem and there’s a broad consensus on the culprit.

Yet the responses offered by the economic mainstream in the past year have ranged from doing nothing and hoping it’ll all blow over (in the form of the now-forgotten debate about “transitory” inflation) to what today looks like a panicky effort by central bankers to push up interest rates, even as the more honest ones admit that this will achieve little beyond deepening the recession. The neoliberal rules for governing have made it an article of faith that only central banks, free of democratic interference by government, can be trusted to keep inflation down by manipulating the big lever marked “interest rates”. When the link between those rates and rising inflation has weakened, with inflation today the result of environmental and political shocks, there is little good central bankers can do.

Governments themselves, meanwhile, are implementing various ad hoc and temporary solutions to higher prices, typically (in the British case) while pledging undying loyalty to free markets and independent central banks. There’s no sign of any systematic thinking from them, either in Britain or elsewhere, or much registration of the fact that thirty years of neoliberal doctrine on inflation control are going up in smoke.

While it is hardly unusual – and perhaps especially with our current Prime Minister – to find governments unable to cope with the events they are buffeted by, crashing from failure to failure, the problem today is much deeper than Boris Johnson’s personal foibles. The Bank of England, charged since 1997 with managing inflation alone, has no obvious remedies to hand. The Treasury, maintaining its unfortunate monopoly on economic policymaking, continues to perversely insist that the solution to higher prices is lower wages. Proposals by the Labour Party have fallen well short too, the opposition seemingly frightened of contravening neoliberal principles.

The critical element of any adequate response to the current crisis is a thoroughgoing squeeze on profits, which have recovered sharply in Britain, as elsewhere, and are today pushing record levels in key sectors of the economy where bigger businesses dominate. It shouldn’t be too surprising that if money wages are not rising but prices are, profits (at least in those parts of the economy supplying essentials) are typically increasing. Yet this central fact of today’s inflation is scarcely addressed at the level of theory, nor does it inform government policy (such as it is).

Just as the combination of rising prices and slowing growth in the 1970s did away with the “Keynesian” consensus of the postwar years, so today the same combination is helping to kill off neoliberalism. Step by step, new conditions are pushing governments into a new mode of operating. They may continue to offer, as our hapless Chancellor does, paeans to the free markets, but their actions will often be quite different.

As our environment changes, we are approaching the end of what the economist Jason Moore has called “the era of cheap nature”. In future we should anticipate more instability and more expensive basic goods, from grain to cooking oil to natural gas; and alongside that we should expect increased political instability and interstate competition over the control of those resources, whether natural, human or – increasingly – digital.

What emerges from the present crisis – which is a long way from being resolved, if it is ever truly resolved – is likely to be a different kind of economy. What form it takes, in Britain and elsewhere, will be determined in part by the battle over economic thinking that is already underway. All the elements of an alternative paradigm are there: policies to help support higher wages, reduce prices and build an economy that is fairer and more resilient. It’s time to start organising these separate strands into a coherent whole. It’s why the think tank I lead, the Progressive Economy Forum, is putting on its first conference at Greenwich University on Saturday, to help shape the economics of the future.

[See also: What does stagflation mean for the cost-of-living crisis?]

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