During the financial crisis of the 1930s unemployment was rampant and many banks were driven to a state of collapse, losing millions from the savings accounts of depositors. The crisis was overcome in time and as a result governments introduced strict regulations designed to ensure that banks had adequate funds and would not engage in high risk ventures for the sake of profits. And so, the resultant political economic strategy was to ensure that government-owned savings banks were available for low income savers.
From the mid 1970s until quite recently we have witnessed a government romance with markets, due to its alleged efficient and systematic responses to political economic stimuli. Thus, privatisation and deregulation of the banks, and the finance sector more generally, effectively removed the safeguards that had been put in place after the 1930s crash.
During this period it became sensible for banks to merge: this helped create giant global banks focused only on short term profits. In turn this led to an economics focused the “financialisation” of the economy - a new science - in which the finance sector as a whole has grown faster than the rest of the economy. It has been driven by highly profitable but complex financial products that derive from currency trading, futures markets and the management of corporate and consumer debts.
And now we have had to face the recent global financial crisis, which has put an end to the political economic romance with free markets. We seem to have entered a new social democratic era. Thus, latter-day reformers tend to agree about the nature of today’s global economic crisis and the place of the emerging market and developing countries within it. The new and updated social democratic agenda claims to have already instigated significant changes for the better in the global political economy. Such reforms, it is said, have been enough to counter balance and reverse the damage created by financial markets, which are susceptible to market failure.
The processes that we call globalisation have once more proved productive in developing widespread community debates among regions and across the world concerning the way current political and economic policy ought to be formed. Many people are suggesting that the current global financial crisis has helped develop a wisdom and logic about economics and its relevance as a social science. Reliable sources acknowledge that the global financial crisis has everything to do with the market failure of “financialisation” - the attempt to turn finance itself into a consumer item.
Scott and Wood, in their article "Keynesian, monetarist and supply-side policies: an old debate gets new life", believe that the situation that pertains in the current global political economy has inspired policy debate once more. As they put it:
Debates over how to promote a healthy economy are pervasive once more, after decades when it seemed such debates had been put to rest. The market meltdown of 2008 ended a long string of years in which monetary policy reigned supreme. Monetary policy is the regulation of money and the banking system to influence economic variables. Its adherents, the "monetarists," had faced little challenge as they de-emphasized the role of fiscal policy, defined as the control of taxes and spending to influence economic variables.
In 2002, Nobel laureate Gary Becker, in the debate between Keynesian and Friedmanite economics was reckoned it was a victory for the Friedmanite monetarists. Today Stefan Collignon believes differently, noting in his article "The Dawn of a New Era: Social Democracy after the Financial Crisis", that in 2009 the tables have finally turned. We now understand that politicised economics has an intrinsic social cost.
Can social democracy on its own harmonise globalisation?
John Quiggin in his recent article (PDF 615KB) for The Whitlam Institute argued:
A social democratic response to the crisis must begin by reasserting the crucial role of the state in risk management. If individuals are to have security of employment, income and wealth, governments must establish the necessary legal and economic framework and enforce its rules.
The global financial crisis has created and developed the conditions in which a new social democratic agenda can be realistically put forward. That is, the new system of social democracy will be changed to incorporate global complexities, while maintaining the political, social and economic logical standpoint that has emerged as a result of global financial meltdown.
Unlike the failed Third Way version of social democracy this new form will not have to align itself with a neoliberal political economy. Thus, the social democratic tradition can draw upon valid and socially beneficial reasons for reform as we face new challenges and constraints, after the collapse of economic order that for three decades was said to replace everything that had preceded it.
I would like to thank Dr Bruce Wearne, Professor Frank Stillwell and Richard Dent and dedicate this paper to the one who has supported me in so many ways - my attendant carer Debbie Mackenzie.
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