David Smiley
(To palliate: to relieve a disease without curing)
David Smiley analyses the debate started by Kevin Rudd’s essay entitled ‘The Global Financial Crisis’.
While the world’s experts are arguing about how to relieve the pain of recession, few are diagnosing its fundamental cause and fewer still are prescribing a fundamental cure. Let us start in Australia.
THE GLOBAL FINANCIAL CRISIS was the title of an essay by Kevin Rudd in the February issue of The Monthly. Rudd’s essay was largely ignored until Robert Manne explained some of its terminology in the March issue and then opened it up to debate in a symposium of international experts in the May issue. Rudd’s essay argued for the replacement, by social democracy, of the free-market and neo-liberal philosophies of some outgoing administrations in the English-speaking world. It contained a powerful critique of the outcomes of these philosophies, and an argument for market regulation to correct market failure in the financial sector. Though this central thesis was extensively set out, quite crucial aspects of method and of scope were mentioned but, regrettably, not developed. For example, the methods for correcting market failure go far beyond market regulation. And the scope of the problems now facing social democracy goes far beyond the financial sector. Regrettably, there were very few references in the essay to the housing market where the meltdown started. And, though this meltdown will have very large impacts beyond the OECD economies, there were only passing references to the threats to the Millennium Development Goals, protection, climate change, and to emerging poverty-driven conflicts.
THE SYMPOSIUM, published in the May issue, contained an introduction by Robert Manne to five world experts asked to comment on Rudd’s essay. This advice was inconsistent and, in some places, badly confused over the nature of land, capital, and the institutions that use them. Since this confusion is of extraordinary importance I will summarise the five contributions and then pose questions that Kevin Rudd should try to answer.
Eric Hobsbawm starts on firm ground, reminding us that monopoly capitalism and monopoly socialism have both crashed in the past and that all economies now combine the public and the private. The rationale for this combination is already well established in the constituents of market failure theory such as monopoly, externalities, merit goods, rent seeking, and non-monetary components of utility such as the environment. However, in a single paragraph, the fourth, Hobsbawm makes four serious mistakes that compromise the remainder of his response. One: that the higher growth rate of the post-1945 “golden age” was due to the remnants of war-time central planning. No, it was due to massive infusions of Marshall-plan capital into war-torn Europe, with results predicted by the theory of marginal returns in situations where the capital base is seriously depleted. Two: that subsequent slowing growth in the OECD was due to market fundamentalism. Partly true, but during that period accelerating real estate speculation was already dragging investment away from the productive towards the unproductive. Three: that the Asian economic miracles rested on “distinctly un-Hayekian” principles. No, “In all three of Asia’s biggest successes – Japan, South Korea and Taiwan – the groundwork for both fast growth and the income equality that eased the social strains of development was laid by a radical land reform.” (The Economist, 29 June, 1991, p. 16). Four: that Atlantic capitalism was responsible for the economic stagnation of the bottom 40% of the US population. No, that stratum was a class that, until tempted by Fanny Mae and Freddy Mac, rented housing from a land-owning class whose wealth was rapidly increased by a raft of tax breaks, remorselessly increasing real rents paid and implicit rents received in huge un-taxed capital gains.
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