In the tumultuous days of autumn 2008, as the Western banking system’s clogged arteries precipitated a financial heart attack that sent the world economy reeling toward the abyss, newspaper op-ed pages and TV studios were gripped with giddy talk of the end of free market capitalism. One sober voice contradicted this view, predicting the future we now find ourselves in – just over a year later – with impressive accuracy. Naomi Klein said:

“[R]est assured: the [free market] ideology will come roaring back when the [bank] bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalization for deep cuts to social programs, and for a renewed push to privatize what is left of the public sector.”

Sure enough, here in Britain, political discussion on the state of the economy this past year has focused squarely, not on the financial system whose reckless dealings caused the banking sector to collapse, but instead on the national debt, and the tough medicine that the public will be forced to take, in terms of government spending cuts, to pay off this debt. That is to say, our politicians have decided to talk about the effect of the economic crisis rather than its cause, resembling fireman trying to blow away the smoke rather than put out the fire itself.

Watching politicians debate the economy in Britain, you might be forgiven for thinking that the country is in recession because of excessive public spending; the state living beyond its means. A breathtaking denial of reality is taking place, and it almost defies belief that the need should arise to point out the true cause of the economic crisis.

Setting the record straight

The crisis sprang from the deregulated financial markets on Wall Street and in the City of London, wherein unrestrained greed drove debt to be managed in a way that became increasingly reckless and, in the end, unsustainable. When the major banks and financial firms fell to their knees, putting the entire economic system at risk, the government was forced to run up a record deficit both to bail out the bankers and to mitigate the effects of their irresponsible behaviour on the wider economy. The crisis, in other words, was the result of deep, systemic problems with the way in which financial markets had been allowed to operate.

Obviously these events contradict the central economic arguments made by leading policymakers and opinion-formers over the past 30 years. The actions of rational people in a free economic market will not necessarily result in goods and assets being priced correctly. The bubble in house prices that played such a large role in the crisis raises serious question marks about that assumption. The idea that we shouldn’t concern ourselves with increasingly extravagant pay at the top end of the income scale, because high-pay simply reflects the societal value of the person receiving it, looks pretty threadbare in light of the way in which spiralling bonuses incentivised the very recklessness that caused the crash. Indeed, a recent study by the New Economics Foundation shows that, taking the impact of the banking crisis into account, elite City bankers destroy £7 of value for every £1 they create, while tax accountants destroy £47 of value for every £1 they created. This only underlines the point made last summer by Lord Turner, chairman of the Financial Services Authority, that much of the City’s activities are in fact “socially useless”.

Nobel economics laureate Joseph Stiglitz was clear about the lessons of the crash. The fall of Wall Street was to “market fundamentalism”, he said, what the fall of the Berlin Wall was to Communism. “With the collapse of great banks and financial houses”, the idea that “democratic market capitalism [is] the final stage of social development” and “that unfettered markets, all by themselves, can ensure economic prosperity and growth” is now “over”. “Today only the deluded would argue that markets are self-correcting or that we can rely on the self-interested behavior of market participants to guarantee that everything works honestly and properly”. Elsewhere, another Nobel economics laureate, Paul Krugman, said that the scholarly discipline of economics would now, as a whole, have to face some brutal truths about how many of the ideas and assumptions it had generated in recent years had played out in actuality.

So, a section of the economy whose activities are often useless to society, which often destroys far more value than it creates, which pushed the economy to the edge of a full-blown depression and forced the taxpayer to prop it up with a large chuck of national debt, has been allowed to acquire these dangerous, system-threatening characteristics by an economic model built on assumptions that leading economists now say have been thoroughly and conclusively discredited. That being the case, one might then expect policymakers to make far-reaching financial reforms their top priority. However, as the governor of the Bank of England, Mervyn King noted last autumn, the massive societal costs of the crisis have been met by a decidedly weak response. “Never in the field of financial endeavour”, he said, “has so much money been owed by so few to so many. And, one might add, so far with little real reform”.

Why the reluctance to deal with the causes of the greatest economic downturn in generations? The short answer is that what rules our democracy, in the end, is not the merit of ideas but the strength of socio-economic power centres. Policy is ultimately designed to serve those best placed to influence it, and in practice this has meant that ‘free-market’ ideology has only ever been applied in a very selective way. Where necessary, the rigours of the market are quietly avoided and the state called upon for assistance. Think no-bid contracts for Halliburton in Iraq . Think of the UK arms industry’s incestuous links with government, where ministers on overseas trips (including the Prime Minister) practically act as salesmen for the likes of BAE. Think of how the US economy boomed in the post war era, in no small part due to government defence budgets socialising research costs for technologies that were subsequently turned over to the private sector for profit; like aeronautics, computers and even the internet. The real story is not of a free market but one of corporate power, where costs and risk are socialised by the nanny state while profits are privatised. The bailout of the financial industry, and the absence of any serious subsequent reform, is entirely consistent with this picture.

Changing the subject

Hence British politicians, with the Conservative Party’s David Cameron in the lead, have changed the subject from the financial crash to the deficit caused by the financial crash. It is important to note that attacking the deficit too soon is likely to choke off the economic recovery. It was the public sector that kept the economy running when credit lines dried up as the banks ceased fulfilling their societal function, and removing that form of life support from the patient could have devastating consequences, as Ireland is now discovering. It is also important to note that the extent to which the national debt threatens economic stability has been hugely overstated, and that government spending to drive new forms of sustainable growth, together with progressive tax rises aimed at bringing the considerable social benefits of a more equal society, represent a far more productive approach than a narrow focus on cuts in public spending. But while these arguments are ones that certainly need to be made, it is also important to go further and consider why this discussion, rather than the more important one about financial reform, is the one we’ve been having in the UK for the past several months.

Concentrating discussion on the painful spending cuts that we’re told the general public must endure to deal with the deficit suits those who effectively defend the power of corporate interests in a number of ways. First, it ensures that the costs of the banking collapse are paid for by society, rather than by the perpetrators. Second, as Naomi Klein pointed out, it provides an excuse to attack “big government”, i.e. programs that benefit the population, rather than economic elites, and which therefore, by definition, are seen as wasteful. Third, by ignoring the vital role played by government action in preventing a recession from becoming a full-blown depression, it ensures that people do not get the wrong idea about the potentially positive role that a democratic government can play in economic affairs, and start thinking of more radical interventions that could be made to protect their interests in the future. And fourth, it avoids too much uncomfortable talk of how the power of the financial sector might be broken up and diminished, with finance redirected to better serve the public interest.

The inability, or refusal, of the Conservatives to so much as discuss the financial crash was made evident to me at the recent Fabian Society conference. Given the extended opportunity on one panel to set out their new, radical, progressive agenda, Tory MP Nadine Dorries, blogger Jonathan Isaby and influential policy wonk Douglas Carswell between them offered not a single word on financial reform, instead serving up reheated right-wing clichés about the horrors of big government. Dorries found excessive public sector pay “obscene”, Isaby found inheritance tax “immoral”, but neither had a word to say about bank bonuses or bailouts. Carswell railed against public sector “elites”, but was silent on those in the City. When asked about the Tories’ “rabbit-in-the-headlights” reaction to the banking meltdown of autumn 2008, Carswell mumbled something about everyone being surprised by those events, and then quickly changed the subject. The sad truth is that the right-wing has neither produced an original economic idea nor re-examined its economic thinking in decades. It is true that the old anti-state agenda of David Cameron’s ‘new’ Conservatives will serve corporate power very well at this point in history. But it is probably also, in any event, the only agenda that the party is intellectually capable of having.

Hope and change?

If the idea of social democracy being forced to pay the costs of ‘free market’ failure is a depressing one, then it is not one we are forced to accept, as recent events in the United States may indicate. The lack of serious financial reform during the first year of the Obama administration may be attributed, in part, to the massive donations made by that sector to the President’s 2008 election campaign, as well as the overall political power the financial industry is afforded by its massive wealth and prominent position in the US economy. But the palpable anger felt by ordinary Americans on unemployment, the state of their economy, the role played by financial elites in causing the recession, expressed most strikingly in the dramatic loss of the Massachusetts Senate seat to a Republican, appears to have forced Obama’s hand, with apparently far-reaching banking reforms announced a few days ago. The lesson from this episode seems reasonably clear. While economic elites may have the power to influence public debate and government policy, that power is not theirs alone. Ostensibly centre-left governments, like Obama’s and Gordon Brown’s, may be unable or unwilling to take the measures progressive people would wish them to take, but pressure from below can alter that equation. The temptation, as the economy unravels and politicians conduct policy debates apparently in a parallel universe, is often to simply shake one’s head in dismay. The better option for the majority of the public, standing in the crosshairs of the incoming Tory government, is to become active and defend our economic interests, just as elites have aggressively been pursuing their own.

David Wearing is researching for a PhD in Political Science at the School of Public Policy, University College London. His articles have been published by The Guardian and Le Monde Diplomatique. He is one of the organisers of the New Left Project.