Economic theory keeps changing even as we are often told that the latest version of capitalism is here to stay. The world today is a more uncertain place.
Geopolitical tensions are increasing, cyberthreats not just from criminal organisations but also state-sponsored and lone-wolf hackers disrupting people’s and businesses lives, and pandemics threatening economic prosperity force the public to demand more involvement from their governments.
The Keynesian economic theory that was so popular after World War II was blamed for high inflation, weak corporate profitability and a loss of business dynamism in the 1970s. Neoliberalism became dominant thanks in part to the economic theory promoted by Austrian-British economist Friedrich von Hayek.
In his inaugural address in 1981, Republican president Ronald Regan declared, “government is not the solution to our problem; government is the problem”. His views were echoed 15 years later when Democrat Bill Clinton argued: “The era of big government is over”. Of course, like the rest of us, neither of these presidents had the gift of foresight.
A significant blow against the failures of neoliberal economic theory was dealt just after the great financial crisis of 2008. Economic orthodoxy insisted on austerity and balancing the books of the state. Countries like Greece that had ignored fiscal rectitude for decades were humiliated by the IMF, the ECB and the European Commission that wanted to set an example for those countries that ignored good fiscal governance.
The unforeseen result of austerity has been weak growth, low investment, stagnating living standards and a political backlash from voters. Central banks had to resort to using weapons in the armoury that came with severe safety warnings. Interest rates remained at their rock-bottom levels because large numbers of people were barely surviving on low incomes and relied on debt to get by.
Insecurity at work, increasing financial and social inequality, and an inept political class lacking leadership skills remain severe threats to a new beginning
These weapons, as many predicted, had some nasty, unintended effects on society. Corporate and personal taxes were cut, helping the rich to become richer. Big tech giants used their market power to prevent new start-ups from posing a threat.
Unfair trade practices were allowed to increase, making the export of jobs from western economies to the Far East that much easier. Many voters felt disenfranchised and gave their support to populist politicians, many of whom demanded the return of state capitalism.
So it was not just COVID that signalled the need for a change in economic thinking. The pandemic is both a propellant and an accelerant to so many changes in society. Most people turn inwards to their governments for answers to the multitude of tough questions for which they have no answer.
People want economic support to survive not just the effects of the pandemic but the adverse effects of globalisation, climate change, inequality, digital giants, data privacy and geopolitical threats. Perhaps more important, they want competent and honest leaders to lead them out of the economic wilderness.
Different segments of society want more government intervention in the form of new regulations, public spending, taxes, laws and international agreements to promote more social equity. COVID forced governments to act and act fast.
Taxpayers’ money was used to pay wages for furloughed workers; businesses were kept afloat through grants and loans; landlords were prevented from evicting their tenants. Helicopter money was used to stimulate economic activity and fiscal caution was thrown to the wind.
US President Joe Biden declared war against tax evasion and avoidance. At least 130 countries signed up to plans for a minimum global corporate tax that many consider does not go far enough but is a significant shift from the status quo.
Big government is back on the saddle. The building blocks of a new version of capitalism are being cut. Governments will continue to tax more and spend more. They will also use their regulatory powers to weaken the grip of large monopolies on their economies.
But it would be wrong to believe that we have found the elixir to guarantee good economic health for all. Many critical issues arguably created by neoliberalism remain unaddressed. Insecurity at work, increasing financial and social inequality, and an inept political class lacking leadership skills remain severe threats to a new beginning.
It would be naïve to argue that the solution to the current economic challenges are a return to the way governments managed their economies in the three decades after World War II. Many still believe that a mixed-economy model with the active participation of the state and private enterprise is anathema as state intervention is unnecessary and harmful.