Does our zombie economy need a recession? Like all revolutions, crashes create opportunities

But that achievement may come at a cost — namely, to our future growth. Market crashes don’t just destroy wealth, they create opportunities. As marginal or inefficient firms go to the wall, their customers move to healthier survivors, which can also buy their assets at a discount, expanding rapidly. Or if rents fall, new firms can enter the market more easily.

Softening crashes may dampen such renewal. By preventing firms from going out of business, government bailouts and cheap-credit policies keep “zombie” companies alive, all while maintaining high costs and preventing new competitors from entering the market. The overall productivity of the economy is thus hobbled, which may help explain the long decline in the growth of labour productivity that has characterised developed economies over the last half century. Moreover, with weakening labour productivity diminishing returns on capital, investment in new capital formation has trended downwards, slowing the creation of new wealth.

That creates a challenge. One of the benefits of being rich, both individually and socially, is that people live longer, thanks to better lifestyles and nutrition, improved hygiene and more richly endowed healthcare systems. But longer lives require wealth to keep growing. If new wealth doesn’t suffice, other ways must be found to increase its value. This combination of factors creates an incentive for investors to pivot away from new production and towards assets whose supply can be limited, thereby creating scarcity. One consequence is that anti-competitive practices, which juice profits and inflate asset values but also slow innovation, have become more widespread.

No sector lends itself more readily to anti-competitive behaviour than real estate, where blocking new development is celebrated as a triumph of local democracy. Given the political strength of the property-owning constituency, as well as the importance of real estate to the financial system, governments and central banks can seldom resist further boosting property values, such as through incentives to buy — but not build — real estate. As a result, the share of total wealth accounted for by real estate has risen in Western countries.

Not only has that drawn capital away from more productive activities, but property itself — which, unlike factories or intellectual property, creates nothing — contributes little to raising output. So acute has this syndrome become that several Western countries are now grappling with housing crises amid moribund economies. Whereas in a functioning market, supply would rise to meet demand, that natural flow has been impeded.

This has dragged down the overall growth rate of the economy, which in Western societies has been trending downwards for decades and is now approaching zero. Here lies a curious inversion. Whereas wealth previously resulted from the accumulation of surplus income in growing economies, and so followed income upwards, today the rule has been flipped. In Western societies, wealth is now growing faster than income, driven not by new production but by policies that inflate it.

But with the growth of income insufficient to preserve wealth amid busts, it falls on governments to save the day. As a result, since the Eighties, the amount that Western governments have spent on fiscal and monetary stimulus during recessions has risen from an average 1% of GDP to 12% at the time of the 2008 financial crisis, and an astounding 35% during the pandemic. Yet while these rapid responses have made recessions less frequent, and less deep, they’ve done nothing to restore the health of the economies. On the contrary, the trend growth rate of Western economies has continued remorselessly downwards all the while.

This raises an interesting possibility. Could we ultimately reach a point where to stay rich, we actually have to block future growth and run down our wealth? Some Western countries have arguably already crossed that threshold. By selling off state assets, or letting them degrade, and then transferring resources to the private sector (largely by restraining taxes), almost all Western governments have been depleting their stocks of public wealth. In Britain, since the 2008 financial crisis, the government’s net worth has sunken steadily deeper into negative territory.

Although the preservation of wealth at the expense of its creation may be an unavoidable consequence of a society that has grown rich, it may also be that the opponents of growth have been abetted by mainstream economic theory. For all the intellectual ferment in the discipline in recent years, economic theory remains dominated by the neoclassical model, so named because of its formalisation — via applied mathematics — of the classical political economy of Adam Smith’s Wealth of Nations.

In the late 19th century, this neoclassical theory modelled itself on theoretical physics and took an atomistic view of the economy as being an aggregation of autonomous, self-interested individuals. Befitting this approach, its Holy Grail became equilibrium, towards which markets moved in small steps at the microeconomic level. The English economist Alfred Marshall declared: “Nature makes no sudden leaps… economic evolution is gradual.” Progressive, incremental and teleological, it followed that this approach would regard the destruction of wealth as a backwards step.

Since then, neoclassical theory has evolved with an admixture of other influences, and today it applies what’s called the New Keynesian economics. This approach favours targeted, temporary stimulus programmes to smooth out downturns, and celebrates as a great achievement that the 2008 crash ended up having none of the long-lasting impacts of its 1929 predecessor.

But suppose we’d let all those banks crash in 2008. And that instead of rescuing them and re-booting the stock market, the government had nationalised the failed banks and re-distributed their assets to the stronger survivors. Might a period of renewal have then followed? Because there is, in fact, a theoretical school that advocates just that sort of approach.

When economics took shape as a discipline in the 19th century, the neoclassical school was far from the universal position. Although Marshall was clearly aware of the work of his contemporary Charles Darwin, he took little interest in it and rejected biology as a basis for economic theory. But the Marxist school of thought, which Marshall saw as his chief rival, claimed economic progress did not happen in small steps but in historical crises, namely revolutions. Not the search for equilibrium, but conflict, crisis and overthrow led to economic progress.

This tradition of thought, rooted in German idealism, historicism and political economy, was shaped by the dialectic of G.W.F. Hegel and paralleled Romanticism, which itself influenced Marx’s early thought. Possibly influenced by Asian classical thought, which was then working its way into Europe, bringing with it concepts such as the duality of creation and destruction, this approach drew closer to biology than physics. By envisioning societies as living organisms, comprehensible only as wholes, it came to see cycles of death and rebirth as inherent to progress.

This idea continued to inspire economic thought in the 20th century, when Marxism was inverted by the Austrian economist, Joseph Schumpeter. He argued that the resilience of capitalism owed to its ability to create new wealth, a process which nevertheless first required the destruction of old wealth in endless cycles. But this model of economic reincarnation has since dwindled in influence. We do not live now in a world shaped by this worldview, and probably wouldn’t want to. A benefit of our prosperity is that we no longer need to live by the laws of nature. But by interrupting the natural rhythms in the economy, we may have opted for a slow death.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

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