If the inflation doesn't get you, say the experts, the deflation will. Phil Mullan asks why they are always looking on the dark side of economic life

Economists in depression

So, when the London and New York stockmarkets plunged briefly last October, there was much talk of collapsing share prices, of a knock-on crisis in industry, even of a return to the 1930s. Yet the markets quickly stabilised - City prices hit new peaks in February - while the real economy of goods and services continued to grow.

No sooner had the expert predictions of a transatlantic meltdown proved unfounded, however, than the doom-mongers turned their fearful eyes towards Asia. When financial turmoil spread through the Asean countries into Korea and Hong Kong late last year, many authoritative Western voices forecast disaster. They announced the end of the Asian dynamic, predicting that the Asian 'flu' would soon lay low America and Europe. Some even warned of systemic collapse and of a new world slump. (And some still do.)

Certainly, life will be tough for many East Asian people, financial institutions and companies for a year or so. There will be a boom in bankruptcies. But these economies will likely come through a period of shakeout and forced restructuring with an even stronger productive base. No pain, no gain has always been the way in the market economy. But the Western pessimism about the Asian crisis has been grossly exaggerated, not least because the affected economies represent less than four per cent of world output.

No sooner does the Asian spectre fade a little, than a new focus for Western anxieties emerges. Now it is the fear of deflation - falling prices - which has quickly taken over from its polar opposite - the fear of inflation, or rising prices. So fast has this transition occurred, that senior economic observers seem not to know whether they are coming or going.

Take Alan Greenspan, chairman of the US Federal Reserve. As guardian of the most important central bank in the world, Greenspan has often held forth on the dangers of inflation. However, at the turn of this year, the same Alan Greenspan could be heard warning against the onset of deflation. By the start of February, Greenspan had changed his tune again, now arguing that the process of disinflation could be too rapid. Within a few weeks, a respected figure like Greenspan can veer from a fear of rising prices, to a fear of falling prices, to a fear of too fast a fall in the rate of price increases. This fickleness must raise doubts that any of these concerns are grounded in real developments. Prices cannot be rising and falling at the same time.

To date, none of the dire predictions has come true. So how are we to account for the propensity to talk up economic problems and talk down capitalism's prospects?

The world economy is not on the edge of a precipice. The major industrial economies have certainly seen much better days of growth in the 1950s and 1960s, but the prospect for some major synchronised recession and breakdown is slim. If anything the USA and Britain could slip into mild recessions within the next couple of years while Japan, Germany and much of the rest of Western Europe are expanding.

Far from a no-brakes descent into crisis, the most striking feature of recent economic history has been the remarkable record of the major powers in intervening to keep the system stable. From the Third World debt crisis at the turn of the 1980s, to the stockmarket dives in 1987 and 1989, to the Mexican crisis earlier this decade and the latest Asian turmoil, potentially serious shocks to the world economy have been successfully contained.

Capitalism has proved adept at fashioning all sorts of financial and other tools to compensate for the long-term weakness of the productive economy: corporate restructurings, downsizing and cost-cutting operations, mergers and acquisitions, strategic alliances, international capital flows, bonds, derivatives and other financial instruments. These measures have underpinned economies that could no longer rely on their production departments to sustain them.

Armed with this new box of tricks, capitalism has been able to take advantage of the historic situation it finds itself in today - the first time in almost 200 years that there is no serious political or intellectual challenge to the market. Advanced capitalist economies remain in a depressed state of production. But it is more accurate in these unique circumstances to describe our era as one of contained, or stabilised, depression.

So the widespread fear of impending economic crisis is not a direct reflection of the contemporary prospects for capitalism. Instead, it is symptomatic of an anxiety that informs more and more discussion these days. This mindset has turned many of the old text book assumptions of the capitalist ethic on their heads. For capitalists, risk has become a problem to be limited, rather than an opportunity to be pursued for profit. Risk management is one of the fastest growth areas in business consultancy this decade.

The notion of socially responsible companies has taken over from the goal of profit maximisation. Instead of focusing solely on the bottom line, companies are expected to invest in social audits and ethical codes. 'Caring' has replaced 'ruthless' as the desirable label for businessmen. The campaign against Bill Gates and Microsoft, reaching as high as the US Department of Justice, is symptomatic of the low regard for entrepreneurial success. Here is a company that has gone from nothing to being the third or fourth largest in the world in less than two decades, only to find itself vilified from quarters far beyond its market competitors.

Overriding all these recent shifts in capitalist thinking is the notion that economic growth is more of a problem than a prize. In the past, nothing was more important than growth targets and expansion plans. Today economic booms are to be avoided because they are said to always result in busts. This is the mentality that teaches you should never enjoy yourself in case you get indigestion or a hangover. Meanwhile the merits of 'sustainable development' - aka limited development - have been taken on board at all the major economic gatherings and summits.

All the symptoms of market weakness and failure that in the past were seen as linked to inadequate levels of growth are today blamed on too much growth and too rapid expansion. What causes government budget deficits? Too rapid a rise in spending. What causes unemployment? Too much investment and too much technological innovation. The East Asian difficulties are blamed upon these countries growing too fast. Inflation is blamed upon too rapid growth in the West. Deflation also is attributed to too rapid growth and an oversupply of goods pushing prices downwards.

Capitalist thought has been turned on its head. Take the issue of the so-called over-production of goods. In the past the answer was seen as boosting demand, by raising people's purchasing power. Today the conventional refrain is to restrict supply, by cutting back on production. Instead of growing out of problems the instinct now is to pull back. Whatever the perceived problem, it seems that limiting growth is the right answer today.

It seems that capitalists have lost faith in their values of growth and profit, undermining the impetus to move the economy and society forwards. Instead we have entered a world in which moderation, restraint and caution are the new watchwords. This makes any 'event' - real or perceived - an occasion for a new outpouring of anxieties.

Reorganising society and restructuring the economy around the new culture of limits can provide capitalism with a breathing space, and maybe a lengthy one at that. But it also threatens serious problems somewhere up ahead. After all, how can a system, whose life blood is accumulation and the expansion of value and profit, reconcile itself to a new situation in which expansion and growth are derided, while profit-making is frowned upon as risky, socially irresponsible and even sinful?

Gloom and doom at the United Overseas Bank in Singapore