First and foremost, before we can proceed with the post crash lessons for business, there is the question of the capacity of business to learn lessons. If we are holding a class we may like to make sure that there are some students in it and they are not all gallivanting on their jets or partying in their yachts. The history of western capitalism, replete with its booms and busts, is not very reassuring on the capacity of business to learn lessons. So much the better Schumpeter may have argued that, at the formative core of every business, big or small, lies a process of innovation, a kind of unlearning or de-learning or even anti learning. Business does not do business as a class. Booms and busts are intrinsic to the process of creative destruction in a market economy. Each bust prepares the ground for innovations leading to the next boom. To put it differently, there is a creative part of business, which challenges established learning. Let me hope that, that creative part of business survives, not only the events of 2008-09, but also this session of the summit.
Secondly, let us remind ourselves that the crash refers not to a single event, as crashes often do, but comprises a multitude sub-prime crisis, financial meltdown, credit freeze, regulatory omissions and so on. We have been more used to the word economic crisis so far to describe the situation. If the word crash catches on, it may well augur an important lesson in how the taxonomic shift from crisis to crash came about. One may ask for instance, if the word crisis has served its purpose with the bail outs. I recall a series of business conferences from late 2007 onwards, which warned of the impending crisis and the stalwarts of the financial world arguing in favour of rescue packages for the beleaguered entities. The rescue did happen which saved some businesses, but for the business as a whole, it might prove a lesson worth learning, even against their better instinct, that if one cries wolf, one may stand in good prospect of being saved by the tiger.
On the other hand, the G-20 Summit noted in their statement at Pittsburgh over a month ago that we, that is they, agreed to do everything necessary to ensure recovery and it ‘worked’. So it is all over now. To call the episode a crisis is an unnecessary lengthening of the pain and reminder of the shock that we have put behind us. No it was no crisis, Papa tells the family, it was just a blur, a momentary and isolated lapse. Of course, I should never have let big brother finance be at the wheel, but wasn’t I quick to take over as soon as he yelled for me. So, we are all safe and it is going to be fine. Just a scratch on the bonnet, but there have been scratches before. It never was so beautiful a vehicle anyway. It is the one that escaped being fossilized.
The point is whether ten, twenty or many more years later these events if not forgotten altogether, get described as a crash, crisis, collapse or something different, would be determined by a headcount of a multifaceted warfare that we haven’t survived well enough as yet to begin.
The third thing that the events in question highlight is our collective failure to predict the consequences of our own actions. The crash or crisis is not an act of god. Some might even go further and argue that there are limits to the ingenuity of god in wreaking havoc and here is a department in which Wall Street brains are smarter. A collective failure to predict the consequences of our own actions is not just a characteristic of this crisis. It is constitutive of the crisis. So perhaps, one goes too far looking for villains either in the corporate boardrooms or bedrooms where the search is now headed. If there was excessive leverage, part of the problem lay with savings glut and easy money. Part of the problem may also be said to lie with the privileges accorded to a class of financial institutions called banks. Some businesses had no option but to be excessively leveraged in order that they could stay in business.
Next, an issue about economic management. Following Keynes, there has been sanguinity about implications of fiscal deficit especially in times of lack of aggregate demand to absorb the output. Simply put, the logic is that it is possible that private consumption and investment demand are insufficient to absorb the output. If it so transpires, then finding lack of support for the existing output, in the next round, investment demand adjusts downward. This reduces the aggregate demand further which leads to a further contraction in the investment demand. This causes a downward spiral. The downward spiral can be arrested if the government steps up its own demand to fill up the gap. It is by no means certain that the Keynesian prescription of stepping up government demand works at all times. Stagflation in the 1970s is often cited as evidence that they don’t. However, even if the Keynesian prescriptions do work, they may yield result only in the short term. They would not work on assuaging the long term trend rate of growth but only on the blips along the curve. The long term trend has more to do with productivity or demographics than the level of government spending. Hence, I hope that Keynesian prescriptions which have called forth an effort amounting to more than 10% of world GDP in the form of additional government spending over the last one year, do work. However, we should not be surprised if they do not.
The last point is, that as President Bush noted in his address earlier this morning, the balance of power in the world in tilting back to the East. The events of the recent past would hasten that process. As a result, the hegemony of the US dollar as the medium of exchange and store of value is bound to get progressively undermined. Getting a currency elected as an international currency gives the government of that country tremendous power as the evidence of UK in the past and US at present shows. However, if one wishes to succeed in installing one’s currency as an international medium of exchange, it requires an institutional credibility which is much more than just economic size or military might. I wish the governments in the east realize the opportunity knocking at their doorstep. One may then see as a consequence of the recent events, these governments working for a time to reduce the repression of their own people and the possibility of war against their neighbours. Thank you
Written by: admin 11/3/2009 3:05 PM