There has been a revolutionary transformation of Capitalism, the western economic system, in just over a decade. Four extraordinary events have demonstrated that in most countries, the relationship between the state and the market has been transformed, radically altering the economic system. The impact on politics is being felt but has it has yet to be fully recognised, especially by progressives.
The first major change was the response of nation states to the collapse of the model of rational free markets called neo-liberalism in 2008, with the financial crisis. The state rescue of private financial companies cost taxpayers in all countries vast sums of money. The National Audit Office puts the UK bank bailout at £1 trillion sterling at peak, in the US there are many figures, with one figure of $500 billion; it cost €64bn or more than twice its total tax revenue in 2010 for Ireland to rescue its banks.
Covid was the second massive intervention by states costing billions worldwide in business subsidies, for example with $600bn in direct or 2.7% GDP plus a further $1,350bn in interest and other supports in the US in one estimate.
The third crisis, energy, has states again intervening in the market to spend many more billions in supports to business and to citizens, with US and European governments spending great fortunes in subsidies to companies to continue operations and to citizens to pay their bills. Governments are also spending billions in rescuing key companies, such as Germany's Uniper.
These three massive Keynesian-style state interventions in the market have occurred in most modern economies. They were not planned but were nevertheless executed reasonably successfully. The economic system was saved, three times. It was radically altered, but not fundamentally.
The state interventions in markets were executed by governments of right and left. Capitalism has been transformed from a type of free market system into one of state-subsidised markets. It has happened three times, in rapid succession and with a fourth already underway.
The Fourth Crisis - Climate
The fourth crisis which is already demanding even greater state action in the marketplace is the existential crisis of climate change. In the first three crises, the state took the required actions because politicians of all political hues believed that they had no choice but to spend
big to save companies, jobs and societies. However, in the fourth crisis, many political leaders still believe they have choices. The majority of politicians do recognise that climate change demands massive state-led actions, nationally and multilaterally. However, they are afraid that the necessary public-led investments of scale, the new regulatory regimes and the new taxes required to bring us through the transition to zero carbon will knock them out of power.
Conservatives oppose change and want things to remain the same. However, on climate, inaction means that things will not remain the same, but will radically change - for the worse. Thus conservative politicians should join with social democrats and greens in accelerating the necessary actions to repair climate.
Governments are failing to meet targets that are already inadequate. Yet the actions of all politicians in addressing a) the banking crisis; b) the Covid crisis and now c) the energy crisis, shows what can and has been be done, with great success, by governments.
The Modern Mixed Economy
State intervention is not new. In 100 years, the size of the modern state has expanded from under 20% of national income in 1920s to around half today. EU governments' spending averaged 51.6% of GDP in 2020 and it has been thus for many decades with fluctuations and with some countries, like Belgium, France and Germany being higher and UK and Ireland lower.
The modern economy is a mixed economy where the state and private sector are deeply interdependent - symbiotic. The large size of today's state is necessary for modern life and business. What has changed is that major parts of the market system have become, for periods, almost wholly dependent on the state.
Thatcher and other conservatives' idea that the private sector is dominant and the public is dependent has been deeply challenged or indeed overturned by governments' responses to these three crises and by the success of the state in maintaining, or as some would say, in saving the private sector. The ambition of some on the Right to shrink the state inevitably fails because the modern state is too important in sustaining the market system. Much politics is about relatively small shifts in public spending, its allocation and regulating the market.
Politics has Yet to Awaken to the New Economic Reality
Policy would be better informed and more effective if the dominant paradigm, that a dynamic private sector drives the whole economy and that public sectors and public services are dependent on the private sector, was recognised as defunct. In fact, the state is not just a facilitator for wealth generation but it too is a creator. The state has been the core driver for some of the greatest innovations in modern technology, such as the internet, GPS and communication technologies, as Mariana Mazzucato has shown in her book the Entrepreneurial State.
The major difficulty for politicians in addressing the climate crisis is inequality - in ensuring the poor and importantly, vulnerable businesses, do not suffer during this time of major economic and social change.
These three big Keynesian public spending heaves have worked. They have demonstrated the power of the modern interventionist state. Thus, the fourth major intervention, the climate transition to near zero carbon, can be achieved too.
What has Changed after these three crises?
Following the financial crash, banks are better regulated, better capitalised and many taxpayer investments have been repaid. However, there is still a large unregulated shadow banking sector where "financial innovation" is still thriving, with private equity ominously even entering the health and housing markets. Top bank salaries are soaring with "incentive payments" leading to further moral hazards and possibly even further bank collapses. Publicly owned banks are again being privatised despite their poor record in private hands, their size ("too big to fail") and importance.
The Covid crisis briefly stopped the strong march of hyper or unmanaged globalisation. This form of globalisation where the winner takes almost all, suffered as supply chains collapsed and governments intervened in markets in unprecedent ways. Now however, there seems to be a return to the great inequalities of neo-liberal globalisation. During Covid, governments failed to insist that subsidised companies did not a) engage in mass redundancies as British Airways and others did and b) have share buybacks and c) did not paying dividends from these state subsidies, as Tesco did. Some opposition politicians did signal that these conditions be imposed before the subsidies were given, but were generally ignored.
Putin’s invasion of Ukraine made us realise how dependent on fossil fuel we still are. We realise now the necessity for rapid change and the massive scale of the state intervention in the energy market shows that we can successfully speed up the drive to the zero carbon economy.
Churchill famously said, "never let good crisis go to waste". There was unprecedented state spending, a systemic change in these three crises, but governments got little in return and did not use the crises to reduce inequality. In short, governments saved the existing system but let these three crises go to waste.
The Fourth Crisis - Climate Change can be Different
The success by which governments throughout the world dealt with the first three crises demonstrates clearly that it is possible to deal with the existential crisis of climate change effectively and swiftly provided there is the political will. Climate change is existential in that it is already beginning to irreparably damage parts of the world and may wipe out humanity. We now need a new Social Contract between peoples and states. The reduction in inequality should be at the core of the current big state-led climate spending programmes to the transition to zero carbon - because this course has the best chance of success.
First published on Social Europe on 6th October, 2022.
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.