What 1973 can tell us about today's economic crisis
The collapse of the postwar golden age has led to four decades of slower growth, higher debt and more frequent boom and bust
The war began on 6 October 1973 when Israel was celebrating the holy day of Yom Kippur and was over by the end of the month, with initial gains by the coalition of Arab states quickly reversed. The oil cartel Opec announced supply restrictions leading to energy shortages in the US. In Britain, the Yom Kippur war added to the problems of a Conservative government trying to control an already overheating economy with a prices and incomes policy. By Christmas, Britain was preparing for a three-day week.
The Yom Kippur war lasted less than a month but its effects lasted four decades. It marked the end of a certain way of looking at the world, namely that the problems of production had been resolved and that policymaking was about how the fruits of growth were shared between capital and labour, between private and public sectors, and between consumption and investment.
In truth, there had been signs of problems well before the autumn of 1973. One critique came from the fledgling environmental movement, which said the fixation on growth was dangerous. The bible of the movement, Small is Beautiful by Fritz Schumacher, was published in 1973.
The other critique was from those who said the golden age was something of a historical aberration made possible by the massive scope for expansion from the output losses in the second world war. Free-marketeers argued that higher spending on welfare, excessive pay awards demanded by organised labour and punitive taxes were stifling capitalism. This critique was provided with real traction by the oil crisis of 1973.
Cheap crude had been a key factor in the long boom and the Opec embargo increased oil prices fourfold by the end of the year. Dearer energy pushed up business costs and reduced the disposable incomes of workers. Simultaneously inflationary and deflationary, it resulted in a new word entering the lexicon of economics: stagflation.
Initially, there were attempts by politicians of the centre right and centre left to keep the show on the road. This group – Jim Callaghan in Britain, Helmut Schmidt in Germany, Gerald Ford in the US, Valéry Giscard D’Estaing in France – had come of age as statesmen in the good years but developed a more muscular approach to economic management as a result of the oil shock. Callaghan’s repudiation of Keynesianism and the shift at the Treasury to an early form of monetarism were examples of the new mood.
This, though, proved to be a staging post – in the US and Britain at least – to a wholly different way of looking at the world. Margaret Thatcher in Britain and Ronald Reagan in America believed in market forces, financial deregulation, lower taxes, weak trade unions and less intrusive government.
Yet the results of this revolution have been distinctly mixed. Not only has growth been slower than it was in the so-called golden age, it has been less evenly distributed. Boom and bust has been a feature of the past four decades in a way that it wasn’t in the quarter century from 1948 to 1973. And while the assault on trade unions certainly weakened the power of organised labour, the upshot has been that workers have struggled to secure as big a share of growth as they did in the 1950s and 1960s. Consumption patterns have become more dependent on easy credit from deregulated finance generating higher asset prices. Until the recent crisis, this ensured that there was no repeat of the falling living standards seen in the mid to late 1970s.
Nor is it entirely obvious that market forces reign supreme or that government has become less intrusive. It is perhaps more accurate to say that public sector monopolies have been replaced by private sector oligopolies that can fix prices and rock the consumer. And while the government no longer owns a large chunk of British industry, it has found other ways to be intrusive. The surveillance state is alive and well.
In his new book, the investment banker Daniel Alpert says the world is suffering from oversupply. This has been generated from the biggest change of all in the past 40 years: the spread of the market economy to all corners of the globe; to China, to India and to the former Soviet Union.
The world economy has more than enough labour, productive capacity and capital to meet current levels of demand. The result has been downward pressure on wages in developed countries and financial bubbles caused by the huge current account surpluses of developing countries being recycled through western financial markets.
Alpert argues that unlike in the aftermath of the second world war there were no new institutions developed to manage a changing global economy, nothing to resemble the United Nations, the International Monetary Fund and the World Bank. Nor has there been any significant change in economic thinking.
The crisis of 2008-09 demonstrated the deficiencies of the model that emerged from the wreckage of the golden age in the 1970s. In 1973, the symptoms of trouble were falling profitability, industrial unrest and a rising cost of living. Today they are falling real wages, excessively high levels of debt and a dysfunctional financial system.
Policymakers have been struggling for five years to put the show back on the road. There is a growing sense of public unease that things are not as they should be, although there has been no swing to the left in the way that there was a swing to the right four decades ago. The half decade since the collapse of Lehman Brothers has been chastening for those who imagined the near-collapse of the world’s financial system would lead to a seismic shift in the political landscape. In part, that’s because support for the status quo is stronger than it was in 1973, since those at the top of the pile have most to lose from change. In part, it’s because there was an ideological vacuum when the financial markets crashed.
So instead of a fundamental rethink of how to manage the age of oversupply, the approach is to assume nothing fundamental is wrong and that given time and a bit of luck the good times will return. Pretty much what every England manager since Alf Ramsey has said, in fact.
