WHY ARE THESE PROBLEMS OCCURING?

The separation of the Market from Society

The underlying reasons lie in the enactment of theories which separated the economy from society. The belief that the market could replace civil society has wrought untold damage. Margaret Thatcher's belief that “there was no such thing as society” was based on the common belief that peoples' obligations were to their families and relations - and not to the wider society of strangers. This was typical of market fundamentalist thinking. Some of the results in the Anglo-Saxon world were a loss of concern for others, a blame culture, an obsession with self-fulfillment through consumption - and a serious decline in trust and social cohesion.

Many economists became consumed by free-market zealotry, lost sight of the fact that their discipline was a social science, primarily concerned with the influences on and consequences of human economic behaviour individually and en masse. Instead, they migrated to applying mathematical and physical science principles to a human sphere and thus lost touch with reality.

A third and quite fundamental reason seems to be that many economists and politicians are self-interested, blinded by dogma and unable or unwilling to learn from experience. Politicians have found it convenient and lucrative to listen to the siren voices of big corporations and banks advocating deregulation and weak government. There still seems to be a deep-set belief on the part of many politicians, especially in Britain and America, that reducing the role and strength of government is the solution to the problems - and it was over-intrusive governments that caused the current malaise. In fact, it is almost certain that weak government caused the banks to get out of control in the first place, and it was over-reliance on the finance sector as the economic golden goose that is actually at the root of many of Britain's problems, especially when it comes to balance in the economy.

The inability to learn from experience and to keep on repeating the same policies that caused the problems, believing that something different will happen next time is a serious issue. Unless politicians, banks, economists and others involved in economic strategy learn to clear their minds of failed dogmas, the world, especially the “Anglo-Saxon” world, will not escape from the spiral of decline that besets us all.

The results of these fundamental misapprehensions are plain for those with eyes to see:

First: Economic instability

The creation of virtually unregulated financial markets in the “Anglo-Saxon” economies has caused repetitive bouts of instability - booms and busts, which are ruinous for industry and consumers alike. To make matters worse, the magnitude of speculation in basic commodities such as food has massively inxreased, resulting in unstable and often soaring costs to consumers in poor countries, followed by periodic slumps in prices, leading to disaster for producers in developing countries.

The European Union allowed countries like Ireland, Greece and Spain to indulge in economic policies that they could not afford and that would cause economic and social collapse.

Free market theory has it that markets have inbuilt self-correction mechanisms which mean that they will recover from ups and downs by themselves. This may be correct in theory, but theory doesn't allow for the fact that succeeding ups and downs become more violent, resulting in successions of ever higher booms and lower busts with terrible human consequences. And the idea that markets work from perfect information ignores the basic human fact that many people are ignorant, or lack judgment - and a minority can accumulate enough wealth and power to manipulate markets to their own advantage if there is no powerful external agency to regulate them.

Second: Austerity - primitive medicine, akin to bleeding the patient - and not tackling the underlying malaises which caused the problems.

The responses in Britain and many parts of Europe to the problems caused by rampant consumerism, high levels of personal and public debt and unregulated financial markets have been driven by one overriding concern: pleasing the financial markets and their high priests, the ratings agencies.
Whilst there is no argument that indebtedness caused by irresponsible lending, cheap credit and in some cases, sloppy and inefficient governments has to be dealt with in the medium to longer run; it seems that the dynamics of austerity and the assumptions that seem to lie behind it are ignorant and economically illiterate. They seem to be:

• The financial markets are all-powerful, and no other agencies can ever moderate their effects
• Government debt is the crucial and overriding problem. It must be reduced speedily or the Markets will punish countries with high debt by raising the costs of borrowing to impossible levels.
• Once debt is substantially reduced by radically cutting the size of the public sector, public services and wages; the private sector will move in to fill the hole left by a diminished public sector and economic growth will resume.
• The proponents of austerity are generally vague about how the good times will flow once debt is reduced - their hopes seem akin to a childlike belief in magic.

Unfortunately, their assumptions of the wonders to come do not seem to be justified. In countries most affected by austerity, the situation appears to be seriously deteriorating. Radical reductions in expenditures have increased unemployment to high levels; the inability of companies to borrow to sustain their businesses has caused increasing rates of failure and low levels of confidence about the future, thus leading to low investment and increasing the unemployment already caused by public sector cuts. Welfare and unemployment costs go up, public dissatisfaction leads to civil unrest, and the revenue to pay down debt decreases, thus leading to a spiral of decline.
In Britain, the coalition government seems also to believe that when government spending ceases to “crowd out” private sector investment, then the private sector will ride in to save the day.
But it is a fact that the levels of private sector investment in Britain were at seriously low levels even in times of plenty, so why they should increase in times of austerity is difficult to understand. And in fact, there is no sign of this happening. Further increasing British woes is the fact that the nature of employment is changing radically, so apparent increases in employment during austerity are mainly increases in part-time, temporary and lower paid work, causing a rapid growth in the numbers of working poor (the government heralds increasing part-time work as a portent of a recovery to come - why??). Real wages for many have declined, except for those of the already rich, who are also able to avoid paying much tax. So, benefits are going down, public revenues are decreasing, causing further poverty, and the vitality of the economy overall is seriously sapped. And indeed this is what seems to be happening in several economies - causing the ability to pay down public debt to decrease. Thus a further cycle of increased austerity is necessary, causing more decline and misery for most.
At last, the IMF seems to be having second thoughts about its previous attachment to the free market. For example, it said it “underestimated the effects that austerity would have globally”. It said it did “not believe tax increases and spending cuts would have cost so many jobs”.

Third: conflict rather than collaboration between key stakeholders

Anglo-Saxon societies seem to have a history of political and social division and conflict that is not seen in many other societies. This phenomenon probably has its roots in social and economic inequality.
In America this was ameliorated by the “American Dream”: that everybody had an equal chance of moving up the ladder through hard work, education and self-help. Alas, evidence shows that some in society, such as African Americans in certain states, never had those chances - and now it seems that the divide between rich and poorer people has become a permanent feature and social and economic mobility have declined. Now, the divide between right wing and more liberal members of society has almost reached a state of open warfare, opening the way for social schisms and the almost complete inability to reach political accord on any matter of national importance. American democracy seems to have become seriously plutocratic. No candidates can hope to reach senior office without millions of dollars, which opens the way for the very rich to buy political influence and thus disenfranchise poorer members of society.
In Britain, the same effects are also manifest, but for different reasons. Britain, with its resilient class system, never really became a society with equality of opportunity. At certain times, it appeared that change was beginning to occur, but since the 1980's inequality and privilege have reasserted themselves. Now, a small portion of the population from privileged social and economic backgrounds have hogged top jobs in the professions. The design of the political and economic systems, from parliament down, emphasise conflict. The opposition is bound to oppose, bodies representing labour and industry never meet in any kind of collaborative settings, and many citizens are completely alienated from “the establishment”. Social trust is at almost historically low levels.

Fourth - tackling the wrong problems - short term economic fixes rather than fundamental reforms in society.

Current actions in the US and UK are aimed at fixing the economies by tinkering with the banking system and reducing spending on the social security system, apparently on the assumption that normal service will eventually be assumed and everything will wind back to pre-financial bust conditions. In fact, it is almost certain that the same old problems will recur, each time with more and more dire consequences.
What is required is action to address the fundamental problems embedded in Anglo-Saxon societies. Gross inequality and unfairness, social conflict, lack of trust across different strata and classes leading to weak social cohesion - and the inability of different stakeholders in society to even communicate with other are all root causes of the economic woes that are less obvious in more cohesive societies.