In the over 250-year-old history of modern capitalism, the economic output of the West has consistently ticked upward, with just a few deviating blips from the dominant trend of growth. Even the greatest crisis of capitalism, the Great Depression of the 1930s, looks on paper to be no more than a brief interruption to the historic course of Western economic expansion. It is hardly surprising, therefore, that any sign of forward spurt from the Great Recession of 2007-09 and its economically anaemic aftermath is greeted with optimism that the historically proven resilience of capitalism is fuelling regeneration.
The trouble is that for every step forward, there is also a step backward. Even in the U.S., which has enjoyed the strongest recovery of the old industrial nations, economic growth only averaged 1.6 percent in 2012, thanks largely to a dismal fourth quarter, compared to 2.4 percent in 2010 and 2.0 percent in 2011. That only looks good in comparison with what's going on in Europe. Britain’s stuttering recovery is possibly slowing into a triple-dip recession, and things are just as bad -- or even worse -- in other large European economies like France, Spain, and Italy. All this suggests that cyclical bounce back is being hampered by deep structural problems in the Western economies.
Five preconditions enabled modern capitalism to be successful. The first was stability, which was necessary for entrepreneurs to engage in risk and found clearest expression in the steady returns delivered by a well-managed financial system. The second was the legitimacy derived from the broad distribution of the fruits of prosperity, whether achieved through unions and collective bargaining or the redistributive activism of the state. The third was sustainability, so that capital was not being used up faster than it was being replenished, debt -- whether on the part of business, consumers or governments -- was not excessive, and nations did not operate unsustainable trade surpluses or deficits. The fourth was creativity, whereby new industries rose as old ones declined. Lastly, new production systems underwrote profitability and represented the greatest contrast with the subsistence system that had generated very slow expansion of wealth in the previous millennium.
In many respects, the post-1945 quarter century was the golden age of capitalism in the West. Macroeconomic policy underwrote prosperity and financial stability. Welfare state expansion and full employment strengthened legitimacy. Consumers and governments funded their outlays out of rising income rather debt and the Bretton Woods system largely ironed out the problems of excessive trade surpluses/deficits among nations. The record on creativity and profitability was more ambiguous, however. For the likes of Friedrich Hayek and Milton Friedman, the emphasis on stability, legitimacy, and sustainability eroded the innovative strength of Western capitalism, thereby leaving it unprepared to face the end of the post-war boom and of cheap energy in the 1970s.
Accordingly, the late twentieth century was characterized by greater emphasis on creativity and profitability, but at cost of downgrading the other requirements for successful capitalism. Governments shifted emphasis from fiscal to monetary instruments for macroeconomic strategy to achieve inflation-free rather than full-employment-creating growth. The capacity of unions to protect workers’ rights and income was neutered by the combined assault of business and conservative governments in the U.S. and U.K. in particular. Creativity and profitability were aided by the rise of new technologies that especially benefited the financial sector, services, and high-end manufacturing.
The combined effect was a sharp reversal in the post-war trend towards greater economic equality. The very rich substantially increased their share of wealth and the rest of society increasingly relied on credit to finance their consumption. Meanwhile, the decline of manufacturing industries opened the way for cheap-labor nations in the main in Asia to build up huge trade surpluses, particularly with the United States.
All this poses a question as to what kind of recovery the West can hope for. If the U.S. is the most successful example of cyclical recovery, the country still hasn't dealt with the structural weaknesses that led to the crisis of 2007-09. Corporate profitability has improved, but mainly by shedding jobs and holding wages down rather than through creativity. Meanwhile, there is precious little sign of enhanced legitimacy and sustainability. The greatest success story has been the restoration of a degree of stability through macroeconomic policy. However, the austerity program currently being practiced in Britain -- and prosthelytized by Republicans in the United States -- does nothing to enhance the legitimacy of the economic system. Meanwhile, reliance on quantitative easing and low interest rates have seemingly become permanent fixtures to rescue capitalism, but they do little to produce the global rebalancing needed for sustainable recovery.
At least the U.S. private sector created 192,000 jobs in January 2013, higher than the consensus expectation among economists of 165,000. Such figures would be a cause for celebration in many E.U. countries. In Spain, for example, the unemployment rate is 26 percent, roughly akin the U.S. during the Great Depression, and there is little hope of a return to growth in the coming year as government austerity bites ever deeper. A lost generation of college-educated youth is increasingly looking abroad to make a living in emerging economies with skills shortages. U.K. expats used to consist largely of retirees looking to soak up the sun and cheaper real estate in France and Spain, However, of the 4.7 million Brits who currently live abroad, 93 percent are of working age (on a personal note, my 27-year-old son has worked in Vietnam for the last year).
A historical analysis of recovery prospects from the Great Recession offers little grounds for optimism that the West will soon turn the corner to revitalized prosperity. The structural weaknesses of their capitalist economies show no signs of being resolved and are being exacerbated by the excessive focus on debt control as the sole issue of reform. Being in the business of understanding the past, historians should be wary of predicting the future, but it seems safe to conclude that austerity has failed to generate economic renewal is failing.