Larry Elliott
It was 25 years ago this month that communism ceased to
be a threat to the west and to the free market.
When sledgehammers started to dismantle the Berlin Wall in November 1989, an experiment with the command economy begun in St Petersburg more than 70 years before was in effect over, even before the Soviet Union fell apart.
The immediate cause for the collapse of communism was that Moscow could not keep pace with Washington in the arms race of the 1980s.
Higher defence spending put pressure on an ossifying Soviet economy. Consumer goods were scarce. Living standards suffered.
But the problems went deeper. The Soviet Union came to grief because of a lack of trust.
The economy delivered only for a small, privileged elite who had access to imported western goods. What started with the best of intentions in 1917 ended tarnished by corruption.
The Soviet Union was eaten away from within.
As it turned out, the end of the cold war was not unbridled good news for the citizens of the west.
For a large part of the postwar era, the Soviet Union was seen as a real threat and even in the 1980s there was little inkling that it would disappear so quickly.
A powerful country with a rival ideology and a strong military acted as a restraint on the west. The fear that workers could “go red” meant they had to be kept happy.
The proceeds of growth were shared. Welfare benefits were generous. Investment in public infrastructure was high.
There was no need to be so generous once the Soviet Union was no more.
What was known as neoliberal economics was born in the 1970s, but it was not until the 1990s that market forces reigned supreme.
The free market spread to poorer parts of the world where it had previously been off limits, expanding the global workforce.
That meant cheaper goods but it also put downward pressure on wages.
What’s more, there was no longer any need to be inhibited.
Those running companies could take a bigger slice of profits because there was nowhere else for workers to go.
If citizens did not like “reform” of welfare states, they just had to lump it.
And, despite some grumbles, that’s pretty much what they did until the global financial crisis of 2008. This was a blow to the prevailing free-market orthodoxy for three reasons.
First, it was the crash that should never have happened.
Economists had constructed models that showed markets were always rational and self-correcting. It was quite a shock to find that they weren’t.
Second, the financial crash made countries poorer.
Deep recessions have been followed by historically weak recoveries characterised by falling real wages and cuts in benefits.
Finally, the crisis and its aftermath have revealed the dark side of the post-cold war model.
Instead of trickle down, there has been trickle up. Instead of the triumph of democracy, there has been the triumph of the elites.
In their way, the City scandals have been as corrosive of trust as the sight of apparatchiks parking their Zil limos outside the Gum store in Red Square in the dying days of the Soviet Union.
Last week provided fresh evidence of the cost to the banks of the mis-selling of payment protection insurance and of the rigging of the Libor and foreign exchange markets.
The real cost, though, is to the reputation of business caused by this corruption.
What’s remarkable is the resilience of the status quo.
Sure, voters are disgusted by the antics of the bankers. No question, they are unhappy about the state of the world.
But they are looking for an alternative to the model that crashed and burned in 2008. The parties that are gaining support are Ukip, the Greens and the SNP.
Their critiques and solutions are all different, but they share two characteristics: they want to bring control of economies back from the global to the local; and they think there are more important things in life than increasing gross domestic product.
It was clear during the Scottish referendum campaign, for example, that many voters either did not believe they would be worse off after independence or did not care.
Nigel Farage is supremely indifferent to studies showing that immigration leads to higher levels of growth.
The Greens speak to those who, like the character in Edward St Aubyn’s novel Lost for Words, say it is easier to envisage the destruction of the planet through climate change than it is the end of free-market capitalism.
The emphasis placed by the Greens on the notion of the “common good” is one shared by the Catholic church.
In a report published by the Theos thinktank, Clifford Longley says neoliberalism is the “heresy of our age” and that it is a fallacy that economics has no need of morality.
“Catholic social teaching,” says Longley, “can be traced back to ancient Greek philosophers such as Plato and Aristotle as well as Judaeo-Christian scriptural sources.
“It proposes correcting the way market forces work so that they serve the public interest and the common good. It is not anti-business, but pro-human.”
The pamphlet takes up the point made this year by Mark Carney, the governor of the Bank of England, when he said:
“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”
Longley puts forward 10 principles to protect social capital, including defence of workers’ rights and priority for the poor and disadvantaged.
Catholicism, of course, has its own dogma. There is something a bit odd about the pope leading the charge against fundamentalism of any sort [Is there? Why?].
But the insistence by the Vatican that markets must be underpinned by morality is not a new one.
What has changed is the scope of the market economy.
Modern capitalism can be dated back to the Reformation of the early 16th century and for five centuries it was organised within the confines of increasingly powerful nation states.
Politicians did not need priests to tell them how to put constraints on capitalism; they were capable of doing so themselves.
The rules of the game have changed since markets went global at the end of the cold war.
What the world needed more was a vigorous opposition to neoliberalism and the misguided notion of the end of history.
What it got was the collapse not just of communism but also of social democracy, which is why there has been so little fundamental change since the global financial crisis.
An ideological vacuum was created when the Berlin Wall came down and it is slowly being filled.
But it is being filled by nationalism, environmentalism and religion.
When sledgehammers started to dismantle the Berlin Wall in November 1989, an experiment with the command economy begun in St Petersburg more than 70 years before was in effect over, even before the Soviet Union fell apart.
The immediate cause for the collapse of communism was that Moscow could not keep pace with Washington in the arms race of the 1980s.
Higher defence spending put pressure on an ossifying Soviet economy. Consumer goods were scarce. Living standards suffered.
But the problems went deeper. The Soviet Union came to grief because of a lack of trust.
The economy delivered only for a small, privileged elite who had access to imported western goods. What started with the best of intentions in 1917 ended tarnished by corruption.
The Soviet Union was eaten away from within.
As it turned out, the end of the cold war was not unbridled good news for the citizens of the west.
For a large part of the postwar era, the Soviet Union was seen as a real threat and even in the 1980s there was little inkling that it would disappear so quickly.
A powerful country with a rival ideology and a strong military acted as a restraint on the west. The fear that workers could “go red” meant they had to be kept happy.
The proceeds of growth were shared. Welfare benefits were generous. Investment in public infrastructure was high.
There was no need to be so generous once the Soviet Union was no more.
What was known as neoliberal economics was born in the 1970s, but it was not until the 1990s that market forces reigned supreme.
The free market spread to poorer parts of the world where it had previously been off limits, expanding the global workforce.
That meant cheaper goods but it also put downward pressure on wages.
What’s more, there was no longer any need to be inhibited.
Those running companies could take a bigger slice of profits because there was nowhere else for workers to go.
If citizens did not like “reform” of welfare states, they just had to lump it.
And, despite some grumbles, that’s pretty much what they did until the global financial crisis of 2008. This was a blow to the prevailing free-market orthodoxy for three reasons.
First, it was the crash that should never have happened.
Economists had constructed models that showed markets were always rational and self-correcting. It was quite a shock to find that they weren’t.
Second, the financial crash made countries poorer.
Deep recessions have been followed by historically weak recoveries characterised by falling real wages and cuts in benefits.
Finally, the crisis and its aftermath have revealed the dark side of the post-cold war model.
Instead of trickle down, there has been trickle up. Instead of the triumph of democracy, there has been the triumph of the elites.
In their way, the City scandals have been as corrosive of trust as the sight of apparatchiks parking their Zil limos outside the Gum store in Red Square in the dying days of the Soviet Union.
Last week provided fresh evidence of the cost to the banks of the mis-selling of payment protection insurance and of the rigging of the Libor and foreign exchange markets.
The real cost, though, is to the reputation of business caused by this corruption.
What’s remarkable is the resilience of the status quo.
Sure, voters are disgusted by the antics of the bankers. No question, they are unhappy about the state of the world.
But they are looking for an alternative to the model that crashed and burned in 2008. The parties that are gaining support are Ukip, the Greens and the SNP.
Their critiques and solutions are all different, but they share two characteristics: they want to bring control of economies back from the global to the local; and they think there are more important things in life than increasing gross domestic product.
It was clear during the Scottish referendum campaign, for example, that many voters either did not believe they would be worse off after independence or did not care.
Nigel Farage is supremely indifferent to studies showing that immigration leads to higher levels of growth.
The Greens speak to those who, like the character in Edward St Aubyn’s novel Lost for Words, say it is easier to envisage the destruction of the planet through climate change than it is the end of free-market capitalism.
The emphasis placed by the Greens on the notion of the “common good” is one shared by the Catholic church.
In a report published by the Theos thinktank, Clifford Longley says neoliberalism is the “heresy of our age” and that it is a fallacy that economics has no need of morality.
“Catholic social teaching,” says Longley, “can be traced back to ancient Greek philosophers such as Plato and Aristotle as well as Judaeo-Christian scriptural sources.
“It proposes correcting the way market forces work so that they serve the public interest and the common good. It is not anti-business, but pro-human.”
The pamphlet takes up the point made this year by Mark Carney, the governor of the Bank of England, when he said:
“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”
Longley puts forward 10 principles to protect social capital, including defence of workers’ rights and priority for the poor and disadvantaged.
Catholicism, of course, has its own dogma. There is something a bit odd about the pope leading the charge against fundamentalism of any sort [Is there? Why?].
But the insistence by the Vatican that markets must be underpinned by morality is not a new one.
What has changed is the scope of the market economy.
Modern capitalism can be dated back to the Reformation of the early 16th century and for five centuries it was organised within the confines of increasingly powerful nation states.
Politicians did not need priests to tell them how to put constraints on capitalism; they were capable of doing so themselves.
The rules of the game have changed since markets went global at the end of the cold war.
What the world needed more was a vigorous opposition to neoliberalism and the misguided notion of the end of history.
What it got was the collapse not just of communism but also of social democracy, which is why there has been so little fundamental change since the global financial crisis.
An ideological vacuum was created when the Berlin Wall came down and it is slowly being filled.
But it is being filled by nationalism, environmentalism and religion.
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