Major economic crisis are also crises of economic policy. Orthodox policy fails to gain traction as banks collapse and unemployment grows. At such moments new policy, like new industry, emerges onto the main stage.
The current crisis is being met with the economic theory and instruments forged during the crisis of the 1930s. Analysis has been largely confined to problems in the financial system. The remedies have been to get the banks back on their feet, restore demand through government spending, and tighten financial regulations. After the typhoon, the ship must be repaired so that it can sail on as before.
None of this touches the structural issues that underlie the storms of the financial markets. There are three principal ones. First, the loss of the dynamism of mass production. From the early 1970s, this led to a downward pressure on productivity and profits that has been mitigated but not resolved by counter currents – globalisation, Japanese-style just-in-time production systems, and a shift of income from wages to profit.
Second, this distributional shift – the share of earnings in OECD national income fell from three-quarters in the mid-1970s to two-thirds in 2005 – poses a problem of demand. In the US, where the share of wages fell to 1929 levels, who was to buy increased production? The answer was consumer credit, that corporations and banks were only too ready to extend, and consumers only too ready to borrow.
Third, national imbalances have been globalised. New low-cost Asian economies selling to narrowing western markets also turned to credit, in the form of accepting and holding dollars in payment for their goods.
Taking the long view, the crisis has been brewing since the early 1970s. It cannot be resolved until the underlying issues are confronted. A macro-economics of the 21st century will have to go beyond the monetary aggregates that suited the mass production era and incorporate the material economy, an economy with its own storms – technical revolutions and seismic social and political shifts.
An economist who did so was the Austrian Joseph Schumpeter. Like John Maynard Keynes he wrote amidst the economic debris of the 1930s. His thesis was that business cycles were closely connected to bursts of technical change. Fifty-year slumps reflected the exhaustion of an old dominant technology and opened the way for the expansion of a new one.
From a Schumpeterian perspective, the question for the UK now is not how to revive mass production and all the institutions that go with it, but how the new paradigm of information and the internet will spread. What will healthcare and education be like in the age of Google? Will cars become electric and be refuelled by the wind? Can new distributed systems help resolve the major contemporary issues of climate change, chronic disease, social care, and national and international polarisation?
We need a view of the post-crisis landscape that can be integrated with macro-economic policy. The counter-recessionary state spending can then be directed not at re-enforcing old forms of production (the car scrappage scheme) or consumption (the cut in VAT) but creating the infrastructure and the conditions for the new economy – its new forms of production and consumption, of transport and energy, of property and finance and of welfare and tax.
The required narrative of the future is not one of business-as-usual, but of unusual business. Without it public debt appears as a dead weight on the shoulders of the future. That shadow is shackling the current political debate. It underpins the drift towards premature cuts, a policy that promises to repeat the mistakes of the US in 1937 and Japan in 1997 and only intensify the recession. But public debt in context is different. It provides the future with the wings to fly. For this Keynes is no longer sufficient. We need a Schumpeter, in modern dress.