In 2008 there was a global financial crisis comparable to the storied Wall Street Crash of 1929: some of the biggest investment banks in the world, followed by the American automobile industry, tottered on the brink of collapse. If these had gone, the entire global financial system and the heart of American industry would have gone with them. The consequences of the two crashes were, however, quite different. The 1929 crash was followed by a global depression, with catastrophic consequences in mass unemployment, poverty and social dislocation. In the United States, the New Deal brought a progressive coalition to Washington with innovative social and economic programs.

Europe witnessed the collapse of the Weimar Republic and the rise of fascism. Japanese militarism swept over Asia. The world slid into war on a scale never witnessed before or since. Only that war and its aftermath resulted in the end of economic stagnation and a new golden era of postwar prosperity. The crash of 2008 had ugly consequences, especially in unemployment which was ratcheted up to historically high post-1930s levels in North America, with only moderate relief three years later. But unlike the earlier crisis, panic on Wall Street did not automatically translate into worldwide economic Political scientist Reg Whitaker writes a political column for Inroads and is a member of its editorial board. collapse.

Emergent economies, notably China and Brazil, felt scarcely a ripple. Australia sailed through unscathed. Canada experienced far less negative impact than did the United States. By 2011 even badly affected economies, with a few exceptions, seemed to be limping back toward a semblance of recovery. For Western capitalist states, the narrow escape from a rerun of the “Dirty Thirties” rests largely on lessons learned the first time around. In addition to the huge state bailout of the banks and the North American auto industry (all “too big to fail”), a Keynesian response to the market crash was promptly instituted across the board with massive economic stimulus measures – precisely the appropriate medicine that was not followed after 1929 when governments were still prisoners to classical economic nostrums. Social safety net provisions, largely set in place after the ravages of the Great Depression, prevented the worst human costs of unemployment and economic dislocation. In other words, the Keynesian countercyclical prescriptions for saving unregulated capitalism from its own excesses – objects of bitter political contestation in the 1930s and 1940s – were shown to work relatively effectively in 2008 and after. Only days before the crash of ’29, the eminent economist Irving Fisher declared that “stock prices have reached what looks like a permanently high plateau.” Fisher not only lost most of his personal savings in the crash, but spent the rest of his career trying to repair the damage to his neoclassical general equilibrium theories caused by the brute facts of market failure. And yet, by 2008, mainstream economists had largely rejected Keynesian economics, and so-called “efficient market” theories that pronounced the definitive end of boom-bust cycles in the free market had reemerged. There were a host of Fishers in all the leading departments of economics, and even more importantly in the treasury departments and central banks of all Western countries. Keynes had long since been put in the shadow by Milton Friedman’s conservative monetarism, and at the U.S. Federal Reserve Board free-market guru Alan Greenspan had told the world not to worry unduly about asset bubbles in the market caused by what he lightheartedly referred to as “irrational exuberance.”

For Western capitalist states, the narrow escape from a rerun of the “Dirty Thirties” rests largely on lessons learned the first time around. By the time irrational exuberance nearly brought down the pillars of the global economy, some serious rethinking might have been expected. There were some efforts to bring Keynes back into the academy, and even some vague references here and there to Marx’s much more radical critique of capital. But three years on, the extent to which everything has returned to business as usual in economics and finance is quite astonishing. While academic economists may have made some minor adjustments in thinking, in the world of policy advice and business journalism it seems that the crash of 2008 never happened, nor was there ever a global financial crisis.
How else can we explain the persistence of strident assertions that only the unregulated free market can effectively allocate resources, and that governments can only make things worse by any kind of intervention? The Australian economist John Quiggin has addressed this irrational behaviour in a recent book strikingly entitled Zombie Economics: How Dead Ideas Still Walk among Us. The self-satisfied reasoning of the zombie economists contains a remarkable intellectual sleight of hand. Massive state intervention in the market actually worked so well to avert another depression that the state’s role in retrospect is simply whisked away, out of sight, out of mind, replaced by shameless reiteration of the free-market shibboleths that helped precipitate the crash and financial crisis in the first instance. Take the rescue of the auto industry. GM and Chrysler had screwed up so badly that the very core of American industry was threatened with massive meltdown, with incalculable consequences for the wider economy. The Obama administration took a controlling interest in the two corporations (critics sarcastically renamed GM “Government Motors”).

Despite right-wing alarms about government incompetence, Washington’s direction proved not only benign but also effective: the industry was put back on track with a sensible restructuring plan, government stepped out of direct management as quickly as possible, and in the end almost all the bailout funds will likely be recouped. Has this kind of successful state intervention led to any rethinking of Fraser Institute−style demands for yet more privatization and downsizing of the state? Not for a moment. In fact, launching huge cutback projects is now the rage among Western governments. The coalition government in Britain has placed cutbacks to the state sector at the very top of its policy agenda. In the United States, the Obama administration is hastily trying to cover its fiscal backside by offering to slash on a scale slightly more moderate than the Texas chainsaw massacre demanded by the Republicans. And small states in Europe badly caught out by the credit crisis face enforced cutbacks so severe that, in the case of Greece, they have already called forth widespread social unrest. This is one of the more puzzling aspects of the Great Recession. A crisis in the capitalist economy has led not to a crisis of conservatism in politics, but rather to a crisis of social democratic and left parties. Throughout the Western world, it has been parties of the centre-left that have been in retreat and disarray since 2008, while parties that profess worship of the very market that has just faltered so badly have experienced almost uniform electoral success. We should never assume, of course, that a crisis in capitalism automatically benefits the left. Credit with the public has to be earned, not scooped like a windfall. Left and centre-left parties have obviously not done enough to win the trust of voters. But this failure does not explain the vehement rejection that many centre-left parties have experienced, the “shellacking” that Barack Obama spoke about after the Tea Party onslaught in the 2010 congressional election. Like the Keynesian response to the crash whose very success caused it to disappear from view, social democratic contributions to the stability of capitalism (the welfare state; managed and regulated markets) have undermined social democratic political support. Originally dedicated to advancing the democratic citizenship of the working class and the poor, social democracy has been victimized by its own relative success. When workers are integrated into the consumer society, they become consumers as well as citizens.

Capitalism and its favoured political instruments successfully appeal to consumers, while left parties flail about trying to find a handle on their former constituencies. Right-wing parties, especially in their contemporary populist guise, have framed a simple, perhaps simplistic, narrative that seems to work better than the confused and often contradictory stories on the left. Still, ideology has its limits. The very real pain experienced by those on the sharp edge of the Great Recession is surely leading to questions about the system that has so hurt them. According to a global poll (GlobeScan), 80 per cent of Americans in 2002 agreed that the free market was the best system; by 2010, that support had fallen to 59 per cent. There is room for centre-left parties to capture this discontent. The spectacular rise of the NDP to official opposition status in the 2011 Canadian election might seem a hopeful sign. But this came at the cost of splitting the opposition vote and handing the Conservatives a majority government based on 40 per cent of the popular vote. To displace the right, centre-left parties will have to come up with their own framing narrative that is more compelling than that so successfully devised by the defenders of the indefensible.