The current economic pain must result in a greater collective gain.

Noreena Hertz | December 2008 issue

We’re witnessing the death of a paradigm. As is usual at moments of mourning, such a claim is met by denial, resistance and anger from the initiators and defenders of the old faith.
But it would be parochial to think recent events just expose microflaws in the banking system and the outcome will be a tinkering with the financial system and that’s that. The dominant economic theory of the past 20 years, a theory that put liberty before equity, gave markets more power than states and saw risk as a public good that shouldn’t be restrained, is defunct. The system that not only condoned but encouraged excessive greed, the laissez-faire capitalism embraced by the U.S. and the U.K. some 20 years ago, and foisted on the poorest countries of the world by the World Bank and International Monetary Fund, has had its day. The public won’t tolerate resuscitating it.
To be clear, this doesn’t mean all versions of capitalism are redundant. It was part of the hubris of the Washington hegemony that its capitalism was the only capitalism. But capitalism has always existed in substantially different forms. The continental European form differs from the Asian, which differs from the Swedish, and so on. The differences largely depend on the extent to which a country values the state, wealth redistribution, community, culture and non-monetary measures of success. It’s only the Anglo-American “end of history” type of capitalism, a philosophy that actively discarded these other factors and decoupled the economy from social justice, that must soon be buried.
For the paradigm was inherently dishonest, built on promises that could never be fulfilled. In the past few months, its various disconnects have begun to be publicly revealed: disconnects between the real money that circulates in our economies and the Monopoly money that circulates in the financial realm; disconnects between what we physically own and what we can afford to own; disconnects between risk and reward, two things the paradigm itself supposedly traded off against each other but in recent years became perfectly correlated; disconnects tangibly manifest in unintelligible bank balance sheets, in unprecedented levels of personal debt and in hedge fund bosses earning billions annually.
Up until now, the challenge to the hegemonic position was confined to a group of thinkers, myself included, who saw the writing on the wall and published to that effect, and a handful of national politicians who were determinedly vocal in their concerns. But although we dissenters did have significant audiences, our views were never seen as mainstream, because the supporters of the hegemonic paradigm were the global business elite, the dominant economic, financial and business media and the U.S.
This will change. Now that the cracks are so clear, now that people’s jobs are in peril, in the U.K. and U.S., unemployment is rising at meteoric rates, now that the loan pushers are calling their loans in, now that we don’t have money to shop and we witness our wealth collapsing, the public is getting angry, and not just at bankers. We’re seeing a fundamental outrage at the whole interconnected mess of a system: at energy companies that record massive profits yet allow pensioners to struggle to stay warm in winter; at CEOs who can earn up to 1,000 times the salary of their average worker; and soon, any day now, at those politicians who allowed this to happen, at all those who allowed such a fundamental disconnect between how these politicos portrayed the world and how we’re now collectively experiencing it.
The public recognizes that it has the moral right and authority to damn the ideology that resulted in this. This is a fundamental change. Smart politicians will recognize this tectonic shift, this change in the balance of power from high finance and big corporations to the people, and will seek to build political capital from it. We’re all socialists now, what with mainstream politicians from left and right criticizing bankers’ irresponsible behavior and salaries, and calling for state intervention in the financial markets.
But these calls won’t get them elected if they’re addressed only in the banking sector. For the financial crisis is a manifestation of a fundamentally flawed way of thinking about the world, a flawed way of thinking that’s going to hurt real people increasingly over the next couple of years as the world enters a recession. And it will hurt not only people in countries that preached the paradigm, but those in countries that didn’t. Job cuts, shrinking growth forecasts, tumbling stock markets are already being seen in Rio de Janeiro, Bogotá, Beijing and Moscow. The poorest countries will experience the double whammy of having had to deregulate, privatize and open up their markets to be eligible for aid and seeing those pledges go unmet.
This is the first full crisis of globalization, a recognition that in a tightly interconnected world, one country’s troubles fast become each and every country’s troubles, the first collective “lose-lose” situation. That means the smartest politicians will be those who aren’t only willing to differentiate themselves from the laissez-faire past, but who are willing to engage in a transparent exchange of ideas about what kind of world, what kind of society, we want. The smartest politicians will be those who come willing to reconstruct and, if necessary, dismantle their prior assumptions, and are open-minded about which thinkers, ideas, theories to embrace and which to reject. The smartest politicians will be those who understand, and are explicit in stating, that when the facts stop fitting the world view, they have to recreate the world view, not recreate the facts.
And in that process, they can and must draw lessons from the past 20 years. No more “one size fits all” economic prescriptions. Countries must be given the freedom to determine their economic policies to meet their own needs. No more domineering, romanticized policy of deregulation. The perils of weak or non-existent regulation are all too clear. Any industry that potentially harms the public good must be fair game to regulate, with teeth. And the myth that “a rising tide lifts all boats,” at the old ideology’s core, must finally be jettisoned. For it was never true. Social mobility in the U.K. has barely improved in 40 years. In the U.S., a quarter of the cou