Madman Economics

From​ the 1920s until the 1990s, as Quinn Slobodian describes in Globalists (2018), his history of neoliberal thought, Austrian and German free-market thinkers had a common ideal of legally ‘encasing’ the market, in order to leave it safe from political harm. Price signals could be compared with an electrical current flowing down copper wires at lightning speed. To function effectively and safely, the wires must be sealed in plastic, thus protecting them from external interference. As Slobodian shows, after 1945 this legal encasement was attempted through the establishment of international regulators and trade areas, such as the European Economic Community, which placed key areas of economic policy – the defence of property rights and competition, for example – outside national political control and insulated them from democratic interference.

What were these intellectuals so afraid of? Principally, it was the threat that socialists might usurp the spontaneous logic of the market with national economic plans. Such figures as Friedrich von Hayek saw the spectre of socialism everywhere. But there was also the threat from nationalism, especially in the formerly colonised territories that won independence in the postwar period. The risk, as early neoliberals perceived it, was that the retreat of empire would open up space for national economic projects oblivious to the merits of capitalism or the free market. But if the market could become a global institution, defended by law, then no degree of national, democratic autonomy would enable its discipline to be escaped.

This project of market encasement had its greatest successes in the quarter-century between the collapse of state socialism and the populist triumphs that disrupted Europe and US politics in the mid-2010s. The European Union was founded in 1993, Nafta in 1994, the World Trade Organisation in 1995 and the euro in 1999. China’s admission to the WTO in 2001 was arguably the most consequential event in this sequence. In the years of the Washington Consensus before this golden age of multilateral market rule, the US government had seized the latent potential of the World Bank and the International Monetary Fund (IMF), both headquartered in Washington, to force pro-market policy reforms on the Global South as a condition of access to credit.

Meanwhile, national politics in this era was conducted as if every move, every utterance by a public figure, would be judged by ‘the markets’, by which was meant the international financial markets. When Bill Clinton was told in 1993 that, if he pursued his full package of spending commitments, the Federal Reserve would simply raise interest rates to protect the value of government bonds even at the risk of recession, his response was: ‘You mean to tell me that the success of the programme and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?’ The Bank of England was granted independence by the Labour Party in 1997 in a bid to convince ‘the markets’ that interest rates would no longer be set to curry favour with voters (or any other political client), but instead to guarantee the most stable currency values for international investors. Numerous self-imposed fiscal ‘rules’ and ‘pacts’ were introduced by governments during this period, all aimed at reassuring the financial markets that politicians remained conscious they were under supervision.

In the aftermath of the Global Financial Crisis of 2007-9, conservative politicians like George Osborne and Wolfgang Schäuble continued to insist that the space of democratic decision-making was, whether people liked it or not, tightly constrained by what the markets would permit. One of Osborne’s first acts on entering the Treasury in May 2010 was to establish an in-house Office of Budget Responsibility, a kind of financial superego that would judge whatever fiscal announcements emanated from Whitehall. When Osborne told the Conservative Party conference in 2012 that ‘We’re all in this together,’ he was interpreted as promising that the pain of austerity would be shared equally, but he might just as well have been implying that we are all bound together under the ever watchful eye of an unforgiving market. The markets aren’t just legally encased via law and regulation, but psychically encased within the political imagination.

Neoliberals may have feared that the principal threat to their designs came from the left, but with a few exceptions, political events since 2015 have demonstrated that it’s the right who are serious about throwing off (or simply ignoring) the shackles of international regulations and market discipline. Slobodian interpreted Trump’s interventionist trade policies as a backlash against globalisation ‘from above’, serving elite interests such as US steel manufacturers. Brexit was an explicit assault on the constraints of European regulation, incubated on the right wing of the Conservative Party from the late 1980s onwards. Euroscepticism has become a central feature of nationalist policy platforms across the Eurozone.

The political outbursts of the right may be directed outwards at international regulators and ‘global elites’ (with or without a whiff of antisemitism), but they tend to bring chaos to domestic politics. Three years ago, the Supreme Court found that Boris Johnson had illegally prorogued Parliament in an effort to thwart legislation against a ‘no deal’ Brexit. The stand-off gave Johnson the veneer of populist legitimacy he was after, as conservative newspapers and Brexit ideologues were able to paint Parliament, judges and the Labour Party as conspirators against the implementation of the ‘will of the people’ as expressed in the 2016 referendum.

That constitutional crisis was heightened by the economic danger posed by the possibility of a ‘no deal’ Brexit. While such a prospect may have excited accelerationists, libertarians such as Steve Baker and even the odd Marxist, most observers reacted with dread. Surely Johnson was bluffing. Could any prime minister deliberately invite economic disaster on such a scale? Speculation lighted on Johnson’s strategist, Dominic Cummings, whose well-known enthusiasm for game theory and ‘rationalism’ may perhaps have led Johnson to adopt a ‘madman strategy’, in which a competitor seeks to dominate rivals by demonstrating that he is willing to blow himself up. But in the end, three weeks after the Supreme Court decision, Johnson made the Brexit deal on the back of which he won the 2019 general election. The economic emergency was averted.

Three years later, the British government has a ‘madman’ strategist in power: Kwasi Kwarteng. Within three weeks of taking office (during half of which the political process was effectively suspended following the queen’s death), Kwarteng had managed to drive sterling down to its lowest ever level against the dollar, the cost of government borrowing up to a level higher than in Greece or Italy, and projected interest rates to double the rate they had been a few weeks earlier. The UK’s credit-rating was given a ‘negative outlook’. The OBR had been muzzled and the highly regarded permanent secretary to the Treasury, Tom Scholar, sacked. Economic policy elites, usually in fierce disagreement over questions of policy design, were suddenly united in alarm. Denunciations poured in from such neoliberal technocrats as Larry Summers, and there were expressions of concern from the IMF and the US Treasury secretary, Janet Yellen.

Amid all this, the Bank of England kept its counsel, issuing vague assurances that it would act as needed to restore the credibility of sterling, before suddenly embarking on an emergency bond-purchasing programme. This, it emerged, was to prevent a potentially catastrophic run on pension fund assets, which could have triggered a rerun of the crisis of September 2008. In the tax-cutting ‘mini-budget’ of 23 September that caused this frenzy, Kwarteng reaffirmed that the bank’s independence was ‘sacrosanct’, but that didn’t mean monetary policymakers felt free to speak their minds about the carnage he had unleashed. A statement issued by the Bank on 26 September, confirming that it was ‘monitoring developments in financial markets very closely’, also contained a lengthy digression on the merits of the government’s ‘growth plan’, which no serious economist could honestly have believed. The Bank of England may retain its functional independence, but it hasn’t been so weakly insulated from Westminster politics at any point since 1997.

What the hell is going on? There are plenty of theories about what Kwarteng thinks he is doing. His claim that slashing taxes for people earning over £150,000 – while effectively raising them for almost everyone else by freezing tax thresholds – is a way to spur economic growth, even if he actually means it, doesn’t merit serious scrutiny. The briefest consideration of what the 1 per cent do with their money when they have a windfall should be enough to disabuse even the most dogged libertarian of this belief (one can at least expect the providers of offshore legal and tax services to do well under this government). The scrapping of the 45p income tax rate turned out to be the most politically toxic of his ‘mini-budget’ announcements (though financially it accounted for only a small proportion of the proposed cuts), and survived little longer than a week before being abandoned. Some wondered, as they did during the Brexit drama, whether the government was actively creating opportunities for its hedge-fund friends, who have profited handsomely from the collapse in the pound.

A more persuasive theory is that Kwarteng is creating sufficient market turmoil that only drastic public spending cuts will be sufficient to reassure ‘the markets’ that Britain’s currency is worth holding. He originally promised to provide a more detailed fiscal plan in late November, though it quickly became clear that this demanded more patience than either MPs or bond-traders were offering, and greater details on spending commitments are now expected sooner than that. Regardless of the timing, they are virtually guaranteed to involve cuts, in many cases through freezing various budgets in cash terms, while inflation continues to rise. It’s no secret that Truss and Kwarteng subscribe to the radical conservative notion that public spending rewards laziness and moral delinquency; it was beliefs like these that led 81,326 Conservative Party members to appoint Truss as prime minister in the first place. Less than a week after the ‘mini-budget’, Chris Philp, chief secretary to the Treasury, was hinting at a reversal of Rishi Sunak’s commitment to increase benefits in line with inflation (currently at almost 10 per cent). The degree of destitution that could result stands to make Osborne look positively empathetic by comparison.

It may also be that Truss and Kwarteng want and expect the Bank of England to push up interest rates drastically, as part of a major restructuring of Britain’s model of capitalism, no matter how much harm it does to mortgage-holders and businesses. ‘Yes, interest rates have to go up and it’s a good thing,’ Truss’s maverick economic guru, Patrick Minford, told the Times in July. ‘A normal level is more like 5-7 per cent.’ House prices are now set to fall at least 10 per cent over the next year, while anyone who took out a two-year fixed-rate mortgage in summer 2021 may find that their interest payments are about to treble. It’s hard to see how this can possibly be sold to the electorate as beneficial, but let’s see what the conjurors and hypnotists of the Daily Mail and Daily Telegraph can come up with. It is not a typical platform for a Tory election victory, and the immediate fall-out included one poll giving Labour a 33-point lead.

There is a possible logic threaded through all of this, deriving originally from the tradition of Austrian economics identified with Hayek, Joseph Schumpeter and Ludwig von Mises. Especially in its more libertarian forms, this school understands capitalism as an evolutionary system that is constantly remade by entrepreneurs and risk-takers, but which must periodically suffer periods of great crisis as a form of systemic cleansing, through which inefficient firms, outmoded technologies and bad investments are exposed and abandoned. The problem with both the welfare state and abnormally low interest rates, by this account, is that they protect people from the consequences of their own actions, allowing costly, risk-averse, inflexible economic institutions to survive, when they might otherwise be eliminated and remade in a Darwinian fashion. In Britain, where unemployment is already at historic lows due to a continuing rise in labour market ‘inactivity’ (that is, people not seeking work for reasons of ill-health, disability and early retirement), the implications of such an ideology could become biopolitical and genuinely frightening. It’s not hard to imagine (or, if one were prepared to trawl the necessary websites, to find) an ideological pipeline linking this market libertarianism with a more extreme right-wing vision, which blames the failures of capitalism on an excess of ‘decadence’ and ‘feminine’ values. One thing that obstructs such Darwinian, libertarian visions is that they are incompatible with the electoral cycle, generating far too much pain in the short and medium term for any politician to tolerate. Truss has said she’s willing to be unpopular, but there is surely a limit to that, as her £150 billion commitment to cap the price of household energy demonstrates.

Seeking​ the logic behind such extraordinary economic self-harm may be a fruitless exercise. The BBC has spent recent weeks scraping the bottom of various libertarian barrels in an effort to find politicians and commentators willing to defend and explain the Truss project, and the results haven’t been edifying. But certain things can be clarified, even in such a fast-moving environment. First, the politics. It seems unlikely that the Conservatives have enough time to recover from this episode (and what will be its long aftermath) before a 2024 election. One effect on Westminster politics will be to recreate the dynamic of the past forty years in the US, where the party of the centre-left takes on the role of cleaning up the economic messes left by the party of the right. Even if Kwarteng were to abandon his ‘mini-budget’ or Truss to abandon Kwarteng (each as a condition of holding on to their own jobs), they have already ensured that the fiscal and monetary repair work necessary to satisfy ‘the markets’ could take years. And that’s aside from the overall loss of credibility suffered by British institutions of government.

One thing that mustn’t be forgotten in the current chaos is that the reactionary ambitions of the Truss government are not limited to economic policy. As ever, an emergency in one domain can provide distraction from and cover for all manner of radical transformations in another. The foreign exchange and bond markets may be absorbing all our attention, but it would be as well to keep an eye on Suella Braverman, who has taken over the Home Office with a promise to be even tougher than her predecessor, Priti Patel, on asylum and Channel crossings. During the leadership campaign, Braverman also pledged to remove Britain from the European Convention on Human Rights. At the Conservative Party Conference she raised the possibility of banning anyone who enters Britain illegally from claiming asylum. If economic conditions worsen as expected over the next year, she may find it all the easier to pursue her agenda in the background.

Second, the relationship to and comparison with the Brexit crisis is illuminating. One way of understanding the events of the last few weeks is to see them as doing to economic orthodoxy what Johnson attempted to do to constitutional orthodoxy back in 2019. Johnson was willing to do what everyone had assumed was unthinkable: place a customs border in the Irish Sea, as a condition of getting a Brexit deal through. Ultimately this signalled that he was willing to take greater risks with the United Kingdom of Great Britain and Northern Ireland than he was with ‘UK plc’. Brexit itself was (and remains) a hugely disruptive and difficult effort to remove the UK from the legal market encasements that were imposed by Brussels. For the Tory right, it had been thirty years in the making.

By contrast, Truss and Kwarteng have unleashed something that not even the most careful reader of Britannia Unchained, the book they co-authored in 2012 with other members of the Free Enterprise Group, would have expected. By demonstrating disregard for the judgments of ‘the markets’, before which everyone from Clinton to Rishi Sunak has cowered, they may believe they have demonstrated a degree of autonomy and courage that others have been unable to muster. This is precisely what, as Slobodian shows, the mid-20th-century neoliberals feared would happen as nations acquired their sovereignty after decolonisation. Do Truss and Kwarteng believe Britain is a newly decolonised power, now that Johnson has delivered Brexit? Larry Summers’s line, that the UK is behaving like an ‘emerging market turning itself into a submerging market’ seems closer to the mark.

The difference between Britain’s new-found sovereign autonomy – if one believes in such a thing – in 2022 and that of the newly independent nation-states of the 1950s and 1960s is that Britain today confronts a global economy shaped by more than forty years of neoliberal reforms. Finance capital now moves across borders at the speed of light, and in unimaginably greater volumes than it used to. Even if it were possible to pursue a ‘madman’ strategy with institutions such as the European Commission, the IMF, the World Bank, the Bank of England and Federal Reserve (political entities that make conscious and considered decisions), in the hope that they back off, you can’t do it against ‘the markets’ and ‘the fucking bond-traders’. Backing off is precisely what you don’t want them to do. Even when financial traders act in concert (as they have done in expressing their views of the UK) they don’t do so on the basis of a collective, deliberative judgment that can be debated or negotiated with. It was the spontaneous and ‘unconscious’ nature of markets that so entranced Hayek, convincing him that they needed to be safely insulated from political interference.

The very last thing Truss and Kwarteng deserve right now is the benefit of the doubt. However, they are at least correct that the UK economy – as measured in productivity, and growth in wages and GDP – hasn’t been functioning well since 2009. This, notionally, is what they have set out to address, though in the most absurd and reckless way. As early as 2011, just one year into the coalition government, the British political economist Colin Hay published an article about the UK economy titled ‘Pathology without Crisis?’, in which he used Gramsci’s term ‘catastrophic equilibrium’ to describe Britain’s economic condition of simultaneous failure and stability, a Beckettian situation in which things can’t go on like this, but must go on nevertheless and do so, year after year. The mood of the 2010s was one of ennui, in which nothing ever got quite bad enough for the status quo to break down altogether. The nations that suffered most from the Eurozone crisis after 2009 – Italy, Greece, Ireland, Portugal, Spain – had similar experiences, of relentless stagnation and declining living standards, as they received their punishments on behalf of ‘the markets’. On some level, a genuine crisis, in the sense of a turning point, was what many yearned for.

The urge to throw off that financial straitjacket is understandable, just as the urge to throw off the legal encasements of the EU may have been, for those who believed power had become distant, unaccountable and undemocratic. But there has been no UK government since 1945 with as thin a democratic mandate as the present one. As those Austrian economists Slobodian writes about were happily aware, capitalism is a system that often rewards recklessness and destruction. Entrepreneurs, speculators and risk-takers sometimes make giant gains, but (so the theory goes) only because they are willing also to take giant losses. The task of government, from the traditional neoliberal perspective, is to stand outside this chaos, merely establishing the rules of the game. For a government to join in and start acting like one of the more outrageous private competitors in the game marks the beginning of a wholly new phase of neoliberalism. Many of the winners from Truss and Kwarteng’s gambit have already been identified. The rest of us have yet to discover quite how much we will lose.