Painful birth of a new epoch of simplicity

Tony Curzon Price says the current surge in prices signals the beginning of a new 40-year economic cycle An unpopular, costly war; a sliding dollar; high levels of US government debt; behind us, 20 years of growth; oil and commodity prices out of control... Remember the first oil shock of 1973? Or are we looking at 2008?

Just as 1973 was the harbinger of a new political epoch — of individualism ascendant over social democracy — so 2008 will be. But this time, we’ll be trading failed liberal individualism for an epoch of restraint, regulation and simplicity. The seeds of each economic epoch spring from the understanding of the crisis that precipitates it. Social democracy came out of the Crash of 1929 because the Great Depression led us to understand the interdependencies of our economic lives. When workers are laid off, demand falls; when demand falls, factories close; when factories close, workers are laid off. This is the simple loop that taught us that the social safety net is good for capitalism. When workers are laid off but sustained by welfare, they keep spending — and factories keep investing and eventually start employing again.

The return of liberal individualism under Thatcher and Reagan came from the view that the low growth and high inflation of the 1970s resulted from everyone trying to pass the cost of painful economic change to someone else. Industrialists looked for protection, unions looked for a bigger slice of a shrinking pie and the public sector looked after itself as it printed money to keep all the other suppliants at bay.

Social democracy, went the theory, needed to rediscover the rugged, Protestant individual who had built the wealth needed for its own functioning. There are a lot of us who bought this ultimately self-serving Rawlsian Thatcherite doctrine (John Rawls was the American philosopher who defended kind, egalitarian capitalism). We liked the justice of the postwar miracle, but we believed that we needed to swallow the medicine prescribed by the anti-Keynesian, anti-safety-net economists from Chicago: ‘there was no alternative’.

In economic terms, 2008 has the feel of 1973. Bank lending has been inflating the money supply and building up pressure for a good ten years; assets all look very expensive; and commodity prices are exploding. But there is a huge difference in the climate of ideas. US-inspired cowboy individualism is in the dock this time: inflation is coming from the public-sector blank cheques that are made out to cover a financial sector collapsing under unrestrained greed unleashed by the 1980s cult of the market. All the while, demand pressures of gasguzzling lifestyles make for real price increases as the newly rich try to live an American dream that would need six planets to sustain it. The Rawlsian market fluffed its historical chance, and it won’t be back soon.

So how should we understand the current crisis, and where will that understanding take us for the next 40-year cycle of political economy? There are two components to the new inflation: let’s call them ‘Malthus’ and ‘Milton’ for short.

Malthus inflation — named after the Revd Thomas Malthus, the 18th-century economist whose concern was the overall capacity of the world to carry an ever-increasing human population — is about real supply constraints coming up against the rising expectations of the newly rich. As huge parts of the world grow out of poverty, humanity eats grain-intensive meat as never before. At the same time, food acreage is reduced because of drought (Australia and Ukraine) or diversion to ethanol production (USA, Brazil). Watch food prices rocket.

The vulnerable — pensioners on fixed incomes, the one billion people who survive on less than a dollar per day — are suffering already, while those with power are squaring up to defend their turf: road hauliers are first in line. The merger of Unite, the union that brought the Grangemouth refinery to a standstill, with America’s United Steel Workers, is an attempt to consolidate market power in an era of low income growth. Remember, the high tide of UK union activism in the 1970s came after the commodity price increases, not as a precursor — naturally, since it is once growth has stopped that the wage fight turns zero-sum.

‘Milton’ inflation — named after Milton Friedman, the Chicago economist who insisted that inflation was always caused by excessive money creation — is adding fuel to the Malthusian fire by means of the great sub prime bail-out. This is happening through oil and other raw material prices.

If you live on top of an oil well, you need to make the decision every day whether to transform some of your asset into cash, or whether to leave it where it is. For the lucky petrocrat in Moscow or Riyadh, that’s a decision about financial returns on investment more than about oil depletion or Chinese demand.

King Abdullah of Saudi Arabia said last week: ‘When they [Saudi engineers] find oil, they now keep it in the ground,’ where, in’shallah, ‘it will be there for our children.’ It is low return on cash that keeps oil in the ground.

The subprime bail-out has created money on a vast scale. Real interest rates are close to zero. Over the bankers’ barrel of a financial meltdown, our monetary authorities have conjured up so much liquidity that cash is without value. So why mine or pump? When cash just melts away in a slow inflationary drip, you might as well keep your asset where it is. Supply dries up and prices rocket to coax the commodity out of the ground.

Malthus and Milton may yet unite to recreate the conditions of the inflationary late 1970s. Will we now assume inflation in all our economic decisions? As far as possible, we will increase prices — of an hour’s work, of goods leaving factory gates — while, Saudistyle, hoarding from market real assets such as our homes. China, facing its own supply constraints, will not come to the rescue. World, please welcome back stagflation — here with us for five years at least if it does work its way into our habits.

How do we make the pain not only short but also worthwhile? Malthusian realities will lead us away from energy-intensive lifestyles and consumption-intensive values. ‘Milton’ inflation will force us to cage the financial Leviathan that demands to be fed on ultimately destructive, impoverishing and inflationary free money. These two taken together herald a profound and welcome shift in attitudes, comparable to the responses to the crises of 1929 and 1973. As at the start of those two epochal shifts, this political generation will recast the shape of the world.

1929 ushered in an era of welfarist statism that hit the inflation buffers in 1973; 1973 ushered in an era of individualism that hit the inflation buffers in 2008. There is a cycle of 35 to 40 years during which capitalism responds to deep crises by ‘kicking the ant-heap’, rebuilding and creating new elites that have their own special way of creating wealth (and eventually becoming sclerotic themselves).

1929 required 16 years of destruction, until 1945, before 28 of creation; 1973 began a decade of destruction before 25 years of creation. Here is a modest goal for the next long cycle: just five years of destruction and 35 of creation. We need to get to work on the problem fast. Obama, Medvedev, Sarkozy, Merkel, Hu Jintao, even Cameron: can this new line-up of world leaders deliver?

Tony Curzon Price is editor-in-chief of openDemocracy.net.