As the world goes through messy divorces in Brexit and the US-China trade relationship, there is considerable angst whether we are moving into a period of disorder. This month will witness these relations can be patched up, but it is already clear that Brexit will happen, deal or no deal, and even though there may be a detente on US-China tariff negotiations, the damage in relations will take a long time to repair.
Foreign Affairs magazine this month asked, “Who will run the world? America, China and Global Order”, lamenting the fact that “both order and sponsor are in crisis, and the future is up for grabs.” The hard reality is that, stability today is no longer the dictat of a single hegemony, but the messy outcome of games of contending thrones, disrupted by technology, human migration, climate change, competing religions and ideologies amidst worsening social inequality and injustices. If you believe in astrology, even the blood moons, earthquakes and tsunamis are signaling the messy change in world order.
The person who predicted the demise of the self-regulating market order was the Hungarian historian, sociologist and economist Karl Polanyi (1886-1964). His book, “The Great Transformation: the Political and Economic Origins of our Time”, came out in 1944, the same year as the Austrian economist Friedrich Hayek’s (1889-1992) book, “The Road to Serfdom”. Hayek was founder of the Mount Pelerin Society in 1947, which had great success in pushing for the adoption of neoliberalism around the world on the premise of free markets, free trade, free capital flows, rule of law, primacy of individual freedoms and electoral democracy. Hayek, rather than Polanyi, was the intellectual father of the current order.
Even though the socialist experiment in economics failed in 1989 with the collapse of the Berlin Wall, the neoliberal order stumbled after the Global Financial Crisis of 2008/9, and began to crumble in the face of a lost decade of growth, widening social inequality and the resurgence of populist sentiments against globalization and free trade.
Polanyi presciently pointed out that “the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness.” In short, “to allow the market mechanism to be the sole director of the fate of human beings and their natural environment…would result in the demolition of society”.
Polanyi’s thesis rests on four crucial insights.
First, the market economy is “embedded” in society, which is itself embedded in nature. To claim that the market is self-regulating completely dehumanizes society, treating the market as a mechanical system, in which human beings and mother nature are robots and cogs to be exploited. The populist rebellion against the cruelties of the market and the “revenge of nature” in climate warming suggest that the “free market view” is too idealistic, at best a theory, at worst bad ideology that should be discarded in the rubbish bin of history.
Second, Polanyi argued that to treat land, labour and capital as commodities to be exchanged, traded and valued is fiction. Land is produced by nature and not to be treated as individual rights – witness how GDP calculations does not take into consideration the costs of non-renewable natural destruction and pollution. Human labour cannot be bought and sold as if they are slaves without human dignity. Money “is merely a token of purchasing power which ..,.comes into being through the mechanism of banking or state finance.” What is the true value of money, when central banks can create conditions of negative interest rates?
Third, Polanyi considers that “the social history of our time is the result of a double movement: the one is the principle of economic liberalism, aiming at the establishment of a self-regulating market; the other is the principle of social protection, aiming at the conservation of man and nature as productive organization.” In other words, one movement generates a counter-movement – markets create the need for the state to regulate the market and vice versa. It is not a matter of either/or, but both state and market co-exist to balance each other out.
Fourth, the gold standard was a key invention that anchored the idea of a self-regulating market. Gold imposed a “hard budget constraint”, forcing people and states to live within their means, but it was precisely the pain and rejection of huge deflation, unemployment and social distress (caused by the mistaken return to the Gold standard) that created the conditions for the rise of fascism in the 1930s.
Modern central banking, on the other hand, is a “soft budget constraint”, in that every time the market tries to impose pain when individuals, firms and states want to live beyond their means, the central banks are asked to print more money. The fact that the markets have jumped up just because the Fed has promised to slow down on interest rate increases shows that the “Greenspan Put” is widely believed. Every time the market wobbles today, central banks are in the markets either lowering interest rates or increasing liquidity.
Free markets cannot exist in practice, as long as central banks are willing to inject $14 trillion into global markets since 2009 and today hold more than their fair share of sovereign debt, equity and even non-performing assets in the name of monetary and financial stability. Central bankers are no longer independent if they perceive their job is to maintain stock market indices at stable levels.
We cannot therefore talk of the new global order without having a hard look at the total state of the world in human, financial, political, social and ecological terms. Economics can no longer be independent of politics, sociology, demography, technology, but also national security and ecology. The parts simply do not add up.
Polanyi was correct that there is a Great Transformation ongoing in the 21st century, but what is happening instead is a Grand Delusion of order that is no longer here.
(Andrew Sheng writes on global issues from an Asian perspective.)