A common complaint against the elites of our society (whoever they may be), is that during the Global Financial Crisis and its aftermath, they lacked sympathy and understanding for the plight of the masses, paving the way for the anti-establishment populism of recent years.
Yet, by and large, I don’t think the elites do lack sympathy and understanding: the truth is much worse than that.
In the wake of the last major financial crisis (the Great Depression of the 1930s), governments adopted the economic policies of John Maynard Keynes. Amongst other things, he argued that in times of economic difficulty, governments should not attempt to balance their budgets against declining revenues. Rather, they should spend money, particularly on infrastructure, to stimulate the economy and relieve suffering.
This philosophy generally prevailed in western economies for the next forty years. The setting up of global and regional trade and financial organisations and the growth of multinational corporations paved the way for globalisation. It was an era of prosperity, but there was a danger of stagnation setting in.
From about the 1980s onwards, philosophies changed. Economic managers adopted what was basically a revamped version of Adam Smith’s 18th century laissez-faire economics, which meant putting minimal restrictions on business operations and trade.
Competition, and the supply and demand mechanisms of the free market should ensure the optimum development of the economy, with prosperity for all – the so-called ‘trickle down’ effect. Workers displaced from less efficient industries should be picked up by the more efficient ones, as process known as ‘the Invisible Hand’.
Over the next twenty years, many western and developing nations did prosper, and the free-trade, laissez-faire system seemed to be working well. But it led, among other things, to a hyper-extension of credit. The house of cards was getting bigger and flimsier, and in 2008, it started falling down.
Around the world, governments were forced to spend trillions propping up the financial sector, because if that fell, so would the rest of the economy.
Yet the economic elites of today still seem to subscribe to the laissez-faire philosophy. They can’t understand why the people can’t see that in the long run, this is the best way to manage the economy. The reason people can’t see what might be good for them in the long run is that they are suffering now. And, as Keynes said ‘in the long run, we are all dead.’
We now have the paradox in many Western countries that their economies are doing well, yet people are working longer hours for wages that have scarcely improved in a decade. The ‘trickle down’ effect isn’t working, partly because one thing Adam Smith failed to see was the role of automation in displacing many workers from industries such as mining and manufacturing.
Clearly, our elites need to re-think their economic philosophies. Keynes may not be the answer to all our economic problems, but one hopes that his ghost haunts the elites in their dreams.