In the midst of the worst economic crisis since the Great Depression, a whole generation of Australians, myself included, are considering things we have previously taken for granted. The last 17 consecutive years of economic growth created a great number of opportunities for Australians, in terms of employment prospects and wealth creation, across a broad cross-section of the community. Full employment and high salaries have enabled people to cherry-pick the very best job opportunities and, consequently, allowed us to create the experiences and lifestyles of our choosing.
The last 17 years were not just about strong economic growth in Australia. Globalisation, through trade liberalisation and technologies like the internet, has brought increased wealth to developing nations; particularly those in Asia, South America and Eastern Europe, while developed nations have also continued to prosper. The proliferation of the internet and increasing air travel have allowed people across the world to communicate and forge relationships that were previously thought impossible or impracticable.
The basis of freedom
Freedom is a result of two components. The first is the availability of choice; the number and variety of choices that are available in a society. This component of freedom is most abundant in open societies (the openness of a society should be judged very broadly to encompass political, social, artistic and cultural openness) with efficient market-based economies. A society that allows each member to freely pursue whatever he or she chooses will create the most choices for its members generally.
By people exercising their free will, they give rise to new thoughts, actions and wares, which once created may be embraced by other members of society, if they so choose. Efficient market-based economies encourage the proliferation of new goods and services, as well as competition between providers of those goods and services, with the end result being more choice for everyone.
The second component of freedom is the capacity to choose; the capacity of each member of society to pursue any number or variety of informed choices. Those choices may concern matters that are entirely personal, may be choices made available by society to its members, or they may be the result of a group of people coming together in a common pursuit.
A capacity to make informed choices and, in so doing, exercise freedom depends on the capabilities of the person exercising the freedom, including their level of education, social networks and wealth. A wealthy, well-educated society will typically create people with a strong capacity to make informed choices and, provided the society is an open one, those people will be able to exercise considerable freedom in those choices.
The Global Financial Crisis
The GFC includes the sub-prime mortgage crisis, the series of financial crises beginning around September 2008 in the USA, and the broader economic turmoil that has spread across economies generally.
The GFC is a considerable threat to the freedom of people across the globe. As the world’s economies slow and unemployment increases, the jobless suffer a marked loss in wealth and face constrained choices. In the poorest countries, unemployment can result in a stark lack of choices, a loss of access to essential services, and abject poverty in many cases. In Australia, unemployment and underemployment is on the rise and will increase dramatically this year. Those affected will have lower incomes, which makes for fewer choices, and will experience considerable changes to their lifestyles. For retirees and people close to retirement, the stock market crash and the current global cycle of asset price deflation has resulted in considerable wealth destruction, which has narrowed those people’s choices in retirement.
The GFC is the product of a number of regulatory and market failures as well as global imbalances. Access to cheap credit, fueled partly by currency imbalances between China and the USA, resulted in consumers and businesses becoming highly leveraged. Cheap credit was also made possible through the prolonged mispricing of risk by financial institutions, which itself arose from the use of imperfect information. Both financial regulators and credit rating agencies were responsible for the spread of imperfect information about financial products. Governments relied too heavily on the market to self-regulate. Quasi-private regulators like stock exchanges are expected to enforce regulations against the same companies that fund their actions; they are expected to prosecute their own clients. In the private sector, credit ratings agencies were the gatekeepers of objective financial analysis, yet they used a business model that was riddled with conflicts of interest.
Once the financial crisis hit, other market and regulatory failures became apparent. Accounting rules based on mark-to-market pricing have been found to be pro-cyclical and have exacerbated the boom and bust. Concentrations of market power, in companies that are considered “too big to fail”, has compounded the impact of poor decisions made within those companies and created relationships between business and government that are prone to moral hazard.
The global response
What makes crises like the GFC so difficult to control is globalisation and the interconnectedness of global markets and economies. In today’s economies, the actions of a few people in one part of the world, seemingly unconnected to matters or people on the other side of the world, can have profound consequences for everyone across the world. The same global linkages that have transmitted wealth and opportunities to so many people across so many countries prove disastrous when things go wrong, because a failure in one link of the chain becomes impossible to quarantine.
The GFC has left the private sector so crippled that any recovery will have to be government led. However, the response from government presents its own challenges to freedom. Will governments respond with increased protectionism like after the Great Depression? Will governments overreact with onerous and ill-conceived regulation that stifles future growth or can they get the balance right?