When the pie starts shrinking

29 March 09

Let’s face it squarely: the whole notion of the organising genius of the “invisible hand of the market” has taken a horrible beating. People are being laid off everywhere, businesses are closing down, imported cars are lying around unsold, empty shipping containers are piling up at the wharves. A weird kind of fatalism is settling over society. Things have gone so horribly wrong that long-term enthusiasts for neo-liberal free markets – people like Thomas Friedman – the batty bard of globalism – and our own Kevin Rudd are now talking like they were doughty critics of market fundamentalism all along.

But all those folk suddenly advocating a return to the economics of John Maynard Keynes should think about this: the bloke never really went away. The origins of Keynesianism lay in the fear of social unrest and even revolution that followed the First World War, the Russian Revolution and the Great Depression. The old Keynesianism of the years from the Depression to the late 1960s had the government stimulating the economy by investing in big projects. The idea was that these directly and indirectly generated employment and the results spilled downwards into the rest of the economy. In the new Keynesianism – which segued in after the end of the gold standard and was generally dubbed neo-liberalism – the whole project was outsourced to deregulated banks … which handed out cheaper and cheaper credit to anybody with a pulse.

Where getting a loan from the bank was once a really serious business in which you put on your best clothes and sought an appointment with an elderly anally-retentive manager, the final incarnation of Keynesianism was the bank employee with acne driving round to your place to ask you how much cheap money you wanted and whether you wanted fries with that. It worked for a while, but the inevitable collapse was more catastrophic.

The last thirty years have been privatised, turbocharged, leveraged, Keynesianism. Where can capitalism go after that?

If the Rudds and Browns and Obamas do, somehow, manage to reflate the economy, demand for oil will take off again and the price will escalate out of control and trigger another crisis.

And, of course, on the oil front, things aren’t standing still. Even in these depressed times, oil is still steadily depleting – although at a reduced rate. The price at the pumps remains stubbornly above $1, typically almost $1.20 and in the bush it’s pushing $1.30.

If you ain’t got a job, or you’ve now got only half a job, petrol at $1.20 is pretty much the same as petrol at $1.70 if you were drawing full pay. That’s why the fall from last year’s highs has done bugger-all for the economy. Nobody in the mainstream media talks about it much, but in NSW last year, petrol sales fell 9 per cent. Strangely, diesel sales rose by 2 per cent, but diesel is the minority fuel, so at a rough guess, driving – or vehicle kilometres travelled, as it’s technically known – probably fell, overall, by about 8 per cent.

The free-market geniuses who ‘manage’ our economy haven’t yet noticed we have a problem with oil, or at least they won’t admit it. The underlying, unsung, economic driver of the last century’s relentless economic expension has been the windfall of ultra-cheap flexible, energy provided by oil, and lately, gas.

They’re living in fantasyland if they think that the invisible hand of the market is going to seamlessly provide some sort of alternative to oil as supplies dwindle and prices skyrocket. Floating uphill on a rising tide of cheap energy is a very different matter to sliding downhill trying to make up an increasing energy shortfall with very expensive alternatives. The only remotely viable alternative to petrol vehicles on the horizon is electric vehicles, and if ever there was a serious take-up of them, we’d need dozens of new coal-fired or nuclear power stations clustered near our capital cities, with all the environmental mayhem that that implies. Plus, of course, we don’t have the funds for a crash program of power station construction and in any case we’re supposed to be trying to reduce greenhouse emissions, not ramp them up.

And then, of course, there’s Greenhouse, which is trashing our old agricultural arrangements. You can’t have Queensland under water and threatened by cyclones, chronic drought conditions in NSW, the Murray-Darling system drying up and huge bushfires in Victoria without losing a big slab of your agricultural production. Add that to the peaking of oil and gas production and likely world food production has already peaked.  

In short, everything is getting more expensive, difficult, chaotic and dangerous and the old shibboleths of free-market capitalism are being swept away.

Think of the last half-century as a gigantic economic experiment. The market fundamentalists argued that the invisible anarchic hand of the market guaranteed an orderly world. As the size of the economic pie increased, resources would trickle down to the folks at the bottom of the pile and everybody would be better off without the need to disturb the power and wealth of the capitalist class. They got their way and we’ve seen the result. The pie has started shrinking and the whole game is shifting back to redistribution, rationing of resources and rational economic planning.