Painful birth of a new epoch of simplicity

An unpopular, costly war; a sliding dollar; high levels of US government debt; behind us, 20 years of growth; oil and commodity prices out of control… Remember the first oil shock of 1973? Or are we looking at 2008?

Just as 1973 was the harbinger of a new political epoch — of individualism ascendant over social democracy — so 2008 will be. But this time, we’ll be trading failed liberal individualism for an epoch of restraint, regulation and simplicity. The seeds of each economic epoch spring from the understanding of the crisis that precipitates it. Social democracy came out of the Crash of 1929 because the Great Depression led us to understand the interdependencies of our economic lives. When workers are laid off, demand falls; when demand falls, factories close; when factories close, workers are laid off. This is the simple loop that taught us that the social safety net is good for capitalism. When workers are laid off but sustained by welfare, they keep spending — and factories keep investing and eventually start employing again.

The return of liberal individualism under Thatcher and Reagan came from the view that the low growth and high inflation of the 1970s resulted from everyone trying to pass the cost of painful economic change to someone else. Industrialists looked for protection, unions looked for a bigger slice of a shrinking pie and the public sector looked after itself as it printed money to keep all the other suppliants at bay.

Social democracy, went the theory, needed to rediscover the rugged, Protestant individual who had built the wealth needed for its own functioning. There are a lot of us who bought this ultimately self-serving Rawlsian Thatcherite doctrine (John Rawls was the American philosopher who defended kind, egalitarian capitalism). We liked the justice of the postwar miracle, but we believed that we needed to swallow the medicine prescribed by the anti-Keynesian, anti-safety-net economists from Chicago: ‘there was no alternative’.