Simon Wren-Lewis
Shortly after the full extent of the financial crisis had become clear, I remember saying in a meeting that at least now the position of those who took an extreme neoliberal position (markets are always right, the state just gets in the way of progress) would no longer be taken seriously. I could not have been more wrong. But in a way I think that the ‘surprising’ strength of the radical left (by which I mean those who are not the established centre left) in the US, UK and perhaps some European countries reflects exactly this contradiction.
We only need to consider the position of the financial sector to understand this contradiction. That sector was by far the major cause of the largest recession since WWII, and yet it is now in essentially the same position as it was before the crisis. There are no purely economic reasons why this has to be so: economists know that it is perfectly possible to make fundamental changes to this sector that could significantly reduce the chance of another crisis at little cost, but such possibilities are just not on the political agenda. For example, Admati and Helwig have convincingly argued that the problem with banks is very low capital requirements, but actual reforms have been marginal.
The reason is straightforward: the financial sector has political power. Many on the centre left seem too timid or too ignorant to talk about this power publicly, and are therefore unwilling to challenge it. The political right and it’s media machine help divert those who have little interest in politics and economics into believing that their problems are really due to too many migrants or too generous welfare payments. Those who are members or supporters of left wing political parties tend to have a better understanding of what is going on. To put it simply, a sector that caused a great deal of harm and cost us all a great deal has got away largely unscathed such that it could easily do it all again.
But it gets much worse. The right has succeeded in morphing the financial crisis into an imagined crisis in financing government debt (or, in the Eurozone with the ECB’s help, into an actual crisis) which required a reduction in the size of the state that neoliberals dream about. The financial crisis, far from exposing neoliberal flaws, has led to its triumph. Confronted with this extraordinary turn of events, many of those on the centre left want to concede defeat and accept austerity!
That is all scandalous, and if the left’s established leaders will not recognise this, it is not surprising that party members and supporters will look elsewhere to those who do. Now wise heads may warn that the radical left has in many cases not grasped the nature of the problem and are simply repeating old slogans, and worse still that voting for radical leaders may deny the left the chance for power, but inevitably this can sound just like the appeasement of many on the centre left. What Corbyn’s victory shows Democrats in the US is the power of the contradiction between the global financial crisis and where we are now.
This post was first published on Mainly Macro
Simon Wren-Lewis is Professor of Economics at Oxford University.