Depressed capitalists

'Crisis awareness' among the business and political elite is now a bigger barrier to growth than any prospect of actual economic breakdown, argues Phil Mullan

The fact is that, as argued before in LM, the problems were never as bad as they imagined. It was always an absurd scenario to see financial crises in relatively small economies triggering the collapse of the world's major economies. Behind the headlines, however, the doom-mongering pundits have not really changed their tune. They talk of 'a fortuitous narrow escape from disaster'. But few are prepared to admit that their gloomy forecasts of last year were an overreaction. Instead, while welcoming the current breathing space, they are anxiously waiting for the next disaster to strike.

Some possible candidates to cause the crisis next time are already pencilled in. It could be a credit crunch, as the heightened aversion to risk leads Western banks and financial institutions to withhold new overseas lending. It could be the unsustainability of the trade imbalance between the USA and most of the advanced economies, perhaps exacerbated by creeping US protectionism as seen in the transatlantic 'banana war'. Or a 'correction' in booming internet shares might end the US stockmarket boom and precipitate a deflationary downturn. Then there is always the spectre of impending millennial doom. If the Y2K computer bug doesn't get the economy, then the boom-bust cycle of IT spending to deal with it might. If the world economy survives the pre-millennium 'party', we are warned, the inevitable hangover will surely soon follow.

All of this speculation about where the next economic disaster is coming from reveals that the attitude of 'crisis awareness' within world capitalism is still there, as strong as ever, awaiting its opportunity to make a public comeback. The commentators are articulating the new mood of caution and restraint which runs through the business and political elites. Today the reaction to any perceived threat betrays a loss of confidence in the market system. Sometimes this expresses itself in fearing the worst, in dire warnings of impending collapse. More generally it is about counselling caution, and encouraging restraint in an uncertain world. The tendency is always to turn everything into a problem. And the solution to every perceived problem is to hold back and batten down the hatches. The consensus demand for a new 'financial architecture' with more controls and restrictions on capital flows is just one expression of this new attitude.

Market practitioners today express no enthusiasm about the market economy. With the apparent demise of all practical and intellectual alternatives at the end of the Cold War, they do not feel any need to. The market is just the way of the world. But attitudes have moved even further in recent years, as a passive lack of enthusiasm for the free market has turned into an active sense of disenchantment. Not only do businessmen and politicians no longer need to defend capitalism against its critics, but they have now become the critics of their own system.

Listen to conservatives and capitalists talk, and many sound like Marxists of the past who emphasised the intrinsic crisis tendencies within capitalism. Past supporters of the free market are now the ones preaching the limits of capitalism. They draw attention to the market's destructiveness, to the environmental dangers of over-consumption, to the problems of excessive boom and economic overheating, to the way growth tends to exacerbate social tensions of inequality and exclusion.

The 'victory' of the market over the Red menace and the trade unions has coincided with a major loss of nerve for the capitalist elite. They do not seem to know how to cope with the new circumstances. Sensing themselves to be in uncharted territory, they have moved on to the defensive, preaching restraint and exercising self-restraint.

What does this mean for those who, in the past, attacked the restrictions that the market economy poses on the expansion of technology and production? Theoretically these restrictions remain. In practice, however, the capitalists' new approach of self-restraint renders them almost meaningless. The laws of the marketplace may still limit economic advance. But how much does that matter in practice, when the system's limits are not even being tested?

The unique thing about today is that the crisis-obsessed mentality afflicting capitalist society has, for the moment at least, become a more pressing problem than the tendencies towards a real economic crisis.

The fixation with surviving 'the coming crisis' militates against positive thinking about the future and encourages a short-termist mentality. For example, business strategy is reduced to little more than the pursuit of mergers, acquisitions and other forms of corporate restructuring. The prevailing attitude seems to be to ally with your competitors for safety rather than seek to prevail over them through the riskier road of innovation and expansion. Where in the past the elite favoured the expansion of capitalism and sought to promote growth, albeit in a one-sided fashion, today they more often seek to regulate the economy within its supposed constraints. The overall effect is to limit the pace of productive development.

The attitude of capitalist self-restraint also reinforces a wider consciousness of low expectations in society. People are now more likely to put up with a stagnating quality of life, and to tolerate things which in the past they might have resisted. Hence the relative ease with which business has reaped rewards from short-term measures such as rationalisation, downsizing, cost-cutting, longer hours, and more intense working practices.

This creates a paradox. On one hand, the lack of alternatives and low expectations evident today mean that international capitalism is more stable and less contested than at any time in the past. This has enabled paper profit rates in the West to regain levels not seen for 30 years. Yet at the same time, the fear of crisis and the dulling of traditional entrepreneurial instincts mean that the potential for real economic growth is being wasted. Contrary to the textbook assumption that stability encourages expansion, the 1990s have been a decade of dismally low productive investment.

Today's stultifying business culture holds back the rhythm of the classic business cycle. Instead of the pattern of deep recessions and sharp recoveries witnessed in the 1970s and 80s, we are now living through an era of 'restrained depression'. It is economic stability, but bought at the high price of relative stasis. This sort of stability is less a sign of good health than of a quiet drift into lethargy.

Through the 1990s economic activity has been weaker than in the previous decade, which itself showed a sharp deterioration on the boom decades of the 1950s and 60s. The boom in profits has been achieved more through cost-cutting and corporate restructuring than by improving productivity via investment - a sure sign of a short-termist mentality in business.

In America, where there has been most belief in a spurious investment boom, business investment in the 1990s has fallen by an annual average of about two percent of national output compared to the 1980s. This is equivalent to the US economy losing the investment of about 60 Microsofts each year, every year.

The economic cycle has become markedly more restrained over the past 12-15 years. Recessions have been less acute and the recoveries less buoyant. The early 1990s downturn had nothing like the impacts of the recessions of the mid-1970s and early 1980s. Despite the fears expressed last autumn, the dangers of 'hard landings' for both the American and British economies were always most evident in commentators' minds. Dismal growth reduces the scope for sharp recessions. In other words, the whole character of economic life has become much damper and flatter. The irony is that, while the nervous apologists for capitalism highlight the volatility in financial markets, the real economy exhibits less volatility than ever.

Understanding the new restrained depression has important consequences. The flattening out of the business cycle means that there is little prospect of the world economy moving into a classical, full-scale capitalist crisis. Instead society is held back most by the stultifying effects of the culture of restraint, where 'unrestrained growth' is seen as a dangerous thing, experimentation is derided, and innovation is regarded as too risky.

The implications of this negative, reactionary mood are now a bigger problem for society than any objective tendency towards a major economic breakdown. The crisis consciousness of the capitalist elite, rather than an actual capitalist crisis, is today's major barrier barring the road to a better future.

In these circumstances, what good can it do to join the chorus of business analysts and economists bemoaning the potentially destructive side of the market economy? Why bang on about the limits and contradictions of capitalism, when the mood of caution and holding back means that the economy is nowhere near touching its limits or revealing its contradictions? Emphasising the threat of a crisis to come is more than a waste of time - it can only aid today's insecure elite, by reinforcing the downbeat mood which means more people are prepared to put up with, and even feel good about, the stodgy stability of a restrained depression.

A critical approach to the economic debate today needs to begin by finding new ways to challenge the culture of limits and uphold the virtues of growth, experimentation and development. Those who want to look to a brighter future will first have to abandon the dull old arguments of the past.