Steering Wheel Stuck on the Left

15. 3. 2017

Some notes on the debate on the current economic crisis

The USA, (Central) Europe AndTheir Intellectual Underpinning.

The liberal Slovak weekly týždeň has recently published an interesting probe into the thinking of a few local intellectuals. It examined the way their views of the role of the market and the state have shifted over the past 10 years. And the result? Nearly all of those included in this mini-sample felt closer to the ideological centre today than they had a decade ago. Interestingly, they had all converged towards the centre “from the right.” In other words, their faith in the market used to be greater or significantly greater than it is now.

Should this finding surprise us? Probably not. It’s just that in the post-communist world the pendulum of intellectual debate continues to swing to the centre or to the left following the (unfortunately) unbalanced and inexorable— albeit quite logical, from a historical perspective—swing to the right immediately after the end of communism.

Central Europe in particular and Europe in general has clearly never been and probably never will be a long-term paradise for liberal economic policies since that does not correspond to the long-term mentality of its population or, indeed, its elites. In this respect, a glance at Austria, the Czech Republic, Bavaria or Slovakia reveals quite a few rather similar details in support of this argument.

This is natural, since it was precisely this region that spawned the neo-Austrian school of thought—the intellectually unsurpassed shop window for the glorification of the market, freedom and spontaneous order and for the dismissal of the tyranny of the state and all forms of deprivation of freedom—so these ideas ought therefore to exert a stronger influence on practical politics in this part of the world. However, this argument fails to pass muster. For the ideas of such intellectual giants as Mises and Hayek would never have emerged had it not been for the day-to-day bureaucracy and etatism prevalent in this part of the world at that particular time. Their ideas were antithetical to the reality of the day, the Realpolitik and to course of everyday events.

It is worth noting in this context that in the United States things actually work the other way round. Due to the often (and justly) tough reality of spontaneous market forces—even though, admittedly, this can no longer be taken for granted in the US either—universities, which usually generate intellectual opposition to the established order, tend to be strongly liberal in the American sense of the word, i.e. left-leaning. In this kind of environment, the neo-Austrian school would have been highly unlikely to emerge.

Econ Journal Watch has recently conducted an opinion poll of a sample of economics Nobel Prize winners that was quite similar to the Slovak poll mentioned above but with a rather different outcome. But that does not, in fact, contradict the argument about the intellectual underpinning of the US and European debate. Quite the opposite. Most Nobel prize winners are US-based; having started from markedly etatist and anti-liberal positions, in the course of their careers they have come to champion the market, sometimes even turning into classic liberals. This would confirm the claim by the 1982 economics Nobel Prize winner George Stigler, who said that studying economics makes people naturally conservative (as well as confirming the justified suspicion that among social scientists economists are the most pro-market oriented intellectuals), but it confirms no more than this.

In particular, it offers no additional arguments for the claim that it is easier for liberals to discuss economic and political responses to crises in some countries than in others, or that it makes such discussion easier in general. All that it demonstrates is that people living in different countries might reach similar positions (a kind of intellectual “center”) from very different starting points and for very different reasons.

1. The “Sheriff” and Economic Cycles

However, in terms of the debate as to what constitutes a desirable intellectual, economic and political response to the current crisis, all of the above also means that nothing extraordinary or exceptional is to be expected because, well, that really does happen only in exceptional cases. However uncomfortable a liberal may find this, calls for state intervention and for “someone to do something about it” tend to intensify in times of crisis. And in public discourse “someone” often means the government. It is, after all, a well-known fact that wars and post-war periods also push the majority towards more radically targeted and etatist policies. Prolonged periods of weak economy are only a mild variation on the same story.

So far, nobody has come up with a reliable, convincing and definitive answer to the fundamental economic question, which is: why does the normal market economy basically behave in a cyclical manner? Why is it that manic periods of shopping fever and bubbles alternate with depressed periods of panic and hasty sell-offs? To present the range of theories and hypotheses shedding a light on this question would go beyond the scope of this piece, as would an attempt at explaining how economic policies try (or rather, are supposed to try) to moderate these swings—since they are incapable of putting an end to them. Admittedly, a liberal might object at this point that it’s not the job of economic policies to try anything or do anything, since the most they can achieve is to make things worse or, indeed, that they are in fact the very cause of these cycles and upheavals.

Either way it holds true that in good times people demand less from the state, require less support and hand-holding and want more freedom, whereas the minute crisis strikes and the cycle changes, suddenly everyone, including some tough market players, clamors for a “sheriff with a gun” to bring the whole “saloon” under control from one day to another, restoring “order” and days of prosperity by firing his gun a few times. It is a sad and frequently overlooked fact that the sheriffs—the governments—often behave similarly to other players. And by taking part in the pro-cyclical behavior, they tend to worsen the problem. They impose additional restrictions and regulation at the very time when that is most harmful, thereby hampering the normal cleansing market mechanisms or exacerbating existing and already quite serious problems or, in the worstcase scenario, doing both. Moreover, this is often applauded by an audience that is ultimately most adversely affected by all this.

In the current, post-2008 crisis, central banks appear to be an exception to this rule. As I have often emphasized, we may have been foolish enough to repeat the 1930s experience in many ways (for instance, by repeating the mistake of increasing the regulation of the financial sector at this difficult time, we have managed not only to weaken it but also weaken the entire real economy) but the central banks have done a 180 degree policy turn, staying in a “permanent state of emergency,” constantly ready to use quantitative easing to stabilize entire economies.

Is that a good thing? Let us consider a comparison: the gold-standard currency policy during the period of the so-called Great Depression era required a radical and rapid elimination of old debts and imbalances. As a result of this policy banks collapsed, unemployment rose and economic output shrank overall. Nowadays, the impact of the crisis on the real economy has been mitigated thanks to central banks’ interventions. However, rather than fundamentally resolving the problem of debt burden, we have only extended it in time and space. Nor have we shut down failing banks either. What is better? The choice is yours, as the history of economics is still waiting for the definitive answer. However, in the developed world the “sheriff” in the shape of a central banker, unlike many others, at least doesn’t do more harm than good, although this claim is fiercely contested too.

2. The Misery of Liberal Revolutions

Given all the territorial, intellectual, historical and cyclical limitations mentioned above, can you really mount a reasonable defense of the liberal, pro-market response (one that is favorably inclined to spontaneous forces at that) to any crisis, including the current one? Especially if you are a central banker, i.e. a state employee? I still believe that you can.

First of all, it is evident that for decades the entire developed world has been affected by what we might call the “steering-wheel stuck on the left” effect. So far every crisis, whether economic or of any other kind, has resulted in the economic and political steering wheel being turned towards a greater state role in the economy, towards more comprehensive regulation, the creation of new public institutions, and frequently to higher taxation and eventually to an increased redistribution via state budgets— the last being the ultimate indicator of everything listed above. However, once the crisis is over, the steering wheel never fully returns to its original position, always remaining at least slightly stuck on the left. This tendency has been evident for decades in every developed country of the western world. For example, at the beginning of the 20th century Belgium redistributed some 14 percent of the overall product via the public purse, while comparable data for 2011 show that the redistribution exceeded 54 percent. In Great Britain, the figures are 9 percent and 47 percent respectively, in Germany 10 percent and 48 percent.

It is worth noting that no conservative or liberal revolution has managed to make a dent in this long-term trend. Although in Great Britain Margaret Thatcher managed to create a small temporary downward “ripple,” even she wasn’t able to come anywhere near significantly changing, let alone reversing, the overall gradient of the curve. The pendulum swung back again. In the US, Ronald Reagan did not fare much better either. The only positive exception in the developed world might be Switzerland, where redistribution has also increased but markedly less so. However, the world is not based on exceptions. What is evident is that throughout the entire period the developed world has not been gaining global significance (except, maybe for the US for a while). Rather, the share of its global economic product has been slowly diminishing. We do not yet have any reliable information that might help explain why, after attaining a certain level of wealth, people tend to be increasingly less concerned about the fact that the state keeps shaving ever larger layers off the additional wealth for its own use. Nevertheless, this tendency does not seem to positively affect the ability of the Western world to generate wealth or to dominate in both political and economic terms.

Certainly, we can say that we are sufficiently wealthy to have to keep multiplying our wealth. But that is quite a weak argument, one that makes a virtue of necessity. After all, it is well known that increased wealth generally helps to make a country and its economic players more civilized.

Thus what the anti-liberal trend in general and in times of crisis in particular chiefly does is that it destroys the very foundations that had made the Western world an attractive, strong and prosperous place. It destroys the motivation to look for the best possible solution and best possible course in spontaneous market forces. By contrast, it encourages all the symptoms of societies that are headed towards collapse in the long term: excessive administration, continuously rising taxes, a growing proportion of society dependent on others, a culture of fare-dodging or seeking annuities instead of engaging in productive activities.

Of course, these long-term trends are not visible in normal everyday life, hidden as they are under the surface and working as the proverbial subtle tightening of screws. That is what makes them especially dangerous. In democratic and open societies, these tendencies are to some extent counterbalanced by normal spontaneous market forces but they are made to carry an ever-increasing burden and face an ever more arduous struggle for survival. Nevertheless, it is only their increasingly limited existence that keeps the whole system going, even though the etatists are successfully trying to convince all of us (including the market forces themselves) that it is the additional curbing of the remaining spontaneous processes that ensures the working of the system. The car engine is treated as a necessary evil rather than the very thing that makes the vehicle move forward.

It is almost tempting to suggest that perhaps one shouldn’t try to maintain the fragile balance by fighting for liberal principles and instead let the etatists carry their ideas to fruition as rapidly as possible. There is a chance that hitting the wall might facilitate a speedier change of course.

Nowadays these tendencies are most marked in the European integration process. In difficult times etatist and excessively regulatory tendencies have grown quite strong in the European Union, both on the part of the European Commission, a body with a high concentration of individuals who sincerely believe that the world can be governed by decree (for example, the Internal Market Directorate might as well be renamed, more aptly, the Regulation Directorate), and at the level of individual countries that are often keener on integration the weaker they feel in economic terms, trying to gain confidence by “leaning on the others.” Incidentally, this is the weakest of all arguments in favor of closer integration, for it ultimately results in making countries inward-looking and in cultivating a sense of “greatness” based on membership and population numbers rather than on the growth of wealth based on principles that encourage this kind of growth.

In fact, it has long been a proven fact that it is not the largest and most populous countries that are economically strongest in the long term (the US may be an exception) but rather the small, liberal, open economies that have to compete for capital, taxpayers and investors. It is no accident that global competitiveness and wealth rankings tend to be dominated by the “usual suspects”: Hong Kong, Singapore, Luxembourg, Bermuda, and so on.

If, therefore, anti-liberal intellectual tendencies end up locking the European Union (and with it the Czech Republic) into destructive thinking along the lines that “what really matters is size,” never mind gradual impoverishment, this, in addition to the present crisis, will provide further confirmation of the unfortunate trends outlined above. And that is something that all, at least mildly liberal, thinking people should be concerned about, regardless of any mystical “naturalness” of the development described above.

Mojmír Hampl

 is a Czech economist, banker and commentator with academic degrees from the University of Economics in Prague and the University of Surrey in the UK. He has spent most of his working life at the Czech National Bank (CNB), which he joined as an analyst after defending his thesis before the then CNB Vice-Governor Pavel Kysilka. After a break of four years working as an economist at Česká spořitelna and later as a member of the management of the Czech Consolidation Agency, he returned to the CNB in 2006, when he was appointed to the Bank Board. From 2008, he held the post of CNB Vice-Governor. His term expired in 2018. Throughout his working life he has repeatedly revisited the topic of money, currencies and central banks. He is known for his outspoken views on the euro and European integration. He has published more than 300 popular and academic articles on a wide variety of issues – from macroeconomics through economic history to cryptocurrencies.

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