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

'We may have opted for a slow death.' (OLI SCARFF/AFP via Getty Images)

'We may have opted for a slow death.' (OLI SCARFF/AFP via Getty Images)


February 16, 2024   5 mins

“He’s more concerned about not losing a battle than he is about winning one,” said George C. Scott in his Oscar-winning performance in Patton, expressing the US general’s opinion of Field Marshal Bernard Montgomery. Today, the same thing could be said of economic policy: in Western countries, we’ve arguably become more concerned with preserving old wealth than with creating it anew.

Faced with the cyclical nature of capitalism, and its tendency to boom and bust, market crashes are now quickly mitigated. After the 1929 crash, it took stocks 30 years to recover; come the 2008 crash, this was down to about six years; the 2020 crash — mere months. In this context, this week’s news of a UK recession might seem less troubling.

We no longer fear busts as the big bad wolves that once threatened to wipe out our life savings. On the face of it, that’s a tremendous achievement. Not only are crashes deeply painful for the people who lose their livelihoods, but with Western countries ageing, an ever-larger share of the population now lives off accumulated wealth, most notably their pensions. A collapse in its value would sharply reduce the living standards of many voters. So it stands to reason that our economic policy-makers would determine above all to preserve what we have before turning their attention to generating yet more of it.

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.

“Market crashes don’t just destroy wealth, they create opportunities.”

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.

“Could we ultimately reach a point where to stay rich, we actually have to run down our wealth?

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.


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).

jarapley

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David McKee
David McKee
4 months ago

The reason the banks in 2008 were not allowed to fail, is that their failure would have pulled down every other bank in the world in an unstoppable domino effect.

“Only connect!” wrote EM Forster. Well, everything is connected, and in ways we barely understand. A collapse in the derivatives markets, for example, would cripple the aviation industry. Airlines use derivatives to hedge the price of aviation fuel.

When the Truss government imploded, few noticed the accelerating effect that liability driven investments had on the collapse of bond prices. The Bank of England woke up only just in time. Every other central bank in the developed world thought, “There, but for the grace of God…”

Which is why no one is wildly keen on a Schumpeterian cleansing of the Augean stables – richly though they deserve it.

Michael Cazaly
Michael Cazaly
4 months ago
Reply to  David McKee

The Bank of England is clueless and putting it in charge of interest rates was a catastrophic mistake.

Andrew Buckley
Andrew Buckley
4 months ago
Reply to  Michael Cazaly

Different view – BoE was clever! Just simply looking after their own type of people. Those people that matter, that count, that have a voice. In the period between the 2008 crash and Covid interest rates were insanely low. Those who benefitted were those who could profit from an asset price increase. Not simply the majority of us with one home and one major “asset” but those with many. Those able to borrow at low interest and take advantage for those available assets did well.
The other side to this low interest period comes with servicing debt. We had a mortgage drop for ten years of about ÂŁ10K per annum. Lovely! Spent some and saved some, got ourselves into a fairly safe financial position as retirement and downsizing loomed.
Non of this benefitted those without assets however. My son in the renting cohort saw his rents up go up and up as our “home” costs went down and down.
This is what I mean by the BoE looking after those people that matter!!

Carl Valentine
Carl Valentine
4 months ago
Reply to  Michael Cazaly

Who then, the government?!

Pedro the Exile
Pedro the Exile
4 months ago
Reply to  David McKee

indeed-but its not an all or nothing binary choice-the problems of unfettered creative destruction are exacerbated by a poor regulatory framework and consistently poor regulatory policy.You could have a more manged form of destruction ,focused on the most blatant zombie companies -however,this would require a very high level of competence from the relevant policy decision makes and politico’s -so no chance!!!

Jim Veenbaas
Jim Veenbaas
4 months ago

Thought provoking essay for sure. Added to this is the actual pursuit of net zero policies that can only lead to degrowth.

Chris Van Schoor
Chris Van Schoor
4 months ago

This TERRIFYING!

Steve Jobs
Steve Jobs
4 months ago

“Destruction leads to a very rough road, but it also breeds creation”. This first principle of human existence has been increasingly shunned over the past 50-odd years in favour of a mixed mantra of safety-ism and risk avoidance. Without the injection of energy that comes with change via varying levels of destruction and chaos – we invariably begin to stagnate as entropy sets in. The lack of courage within modern leadership has led to a fixation on maintaining the comfort and safety of the status quo – at all costs. But in the end, reality will always win. The longer we put it off, the bigger the pressure build up, and the larger the resulting destructive “reset” will be. Fun times ahead!

Bernard Hill
Bernard Hill
4 months ago
Reply to  Steve Jobs

…basically this is what happens when “Ladies Day’ becomes every day.

David McKee
David McKee
4 months ago
Reply to  Steve Jobs

Yeah, well… As the saying goes, be careful what you wish for…

Walter Marvell
Walter Marvell
4 months ago
Reply to  Steve Jobs

So true. Risk aversion is now embedded deeply in the social as well as business cultures of all EU States. The precautionary principle has seen armies of frit interfering lawyers and bureaucrats kill innovation and squeeze the very life out of a once dynamic worlds of enterprise.

Andrew R
Andrew R
4 months ago

Low interest rates and mass immigration juiced up those assets It also reduced salaries and incentives to work, destroyed innovation and placed a huge burden on infrastructure and services.

The Tories still don’t understand any of this.

Nik Jewell
Nik Jewell
4 months ago

Has anybody read/watched David Rogers Webb’s ‘The Great Taking‘? (both film and book are free). If so, what did you think of it?

Charles Stanhope
Charles Stanhope
4 months ago
Reply to  Nik Jewell

No, thank you!

Mike Doyle
Mike Doyle
4 months ago

If we significantly increased the mimimum wage, would not many ‘marginal or inefficient firms go to the wall’ giving us exactly the same benefit?

Gerard A
Gerard A
4 months ago
Reply to  Mike Doyle

In a global economy increasing the minimum wage will simply add to unemployment with no concrete prospect of new businesses taking up the slack.

One of the problems at the moment as that people on minimum wage are paying income and NI taxes, and have a marginal tax rate of 32%. Increasing tax thresholds would allow a reduction in minimum wage, making marginal companies more profitable and able to invest, and be more competitive internationally.

The Hunt/Sunak combo is of course doing the exact opposite. Freezing thresholds and raising minimum wage. Apparently so that inheritance tax can be abolished or reduced, so ensuring the wealthy get wealthier , and reducing the need for the next generation to actually do something productive.

Alex Lekas
Alex Lekas
4 months ago
Reply to  Mike Doyle

Increasing the minimum is not confined to a single sector of the workforce; raising the floor means everyone’s pay gets bumped, which leads to higher prices, and a feedback loop as predictable as night following day. In the US, at least, families are not being raised on the minimum wage. Scarcely any business pays minimum to start with those and where that is earned, it is typically first-time workers, people supplementing full-time income, or a part-timer living in a household with a full-time earner.
All that aside, raising the minimum to create a desired effect is an artificial means of doing so that brings about its own set of tradeoffs. If govt simply stayed out of the way, this ‘benefit’ would occur on its own and without the additional issues that arise from political meddling.

Walter Marvell
Walter Marvell
4 months ago

I dispute the basic premise of this interesting article. It presupposes that the nature of our State, capitalism and the enterprise culture all still exist and function in the post 90s EU Europe/UK just as they did before. They do not. Every Western State has used magic money and bailouts to try and paper over their chronic structural failure – to support growth and to deliver their populations affordable housing, cheap energy, border and food security. Our States ARE anti growth. It cannot last. We exist in a dank dark cage in which the Sheriffs are frantically plundering taxes from us to sustain a failed bloated State. The risk averse suffocating EU regulatory/legal order and madness of State endorsed Net Zero madness means we sit in a straitjacket in that cage – with a gag choking mouths. Mass uncontrolled migration is layering concrete atop our cage by smashing our already broken public services and supplying a vast army of tax takers – not contributors – to join the 10m sitting listlessly as the progressive ethos of human right entitlement gnaws at the spirit of enterprise. This 30 year old Progressive New Order is completely different to the Thatcherite Order and the nation state it broke up. And now it has now played all its cards – QE, property racket, mass migration, furlough, tax credits energy bailouts. None have worked. What follows is the payback.

Carl Valentine
Carl Valentine
4 months ago
Reply to  Walter Marvell

Too true, Thatcher and Reagan did deregulate the banking system though, allowed outsourcing to the private sector and failed to invest in our nuclear (world leading) energy, they were hardly halcyon days. I blame the malaise on western governments inability to stand up to the greedy, controlling American elites.

Jules Anjim
Jules Anjim
4 months ago

Developed western economies have been liberated by globalisation and capitalist short-sightedness of all of their inefficient and protected industries (by the world’s biggest protected economy), and plan B is a Finance/Property based economy bolstered by population growth and foreign capital to fund the debt required to maintain living standards.
Over-consumption underpins the global economic (and geo-political) framework. Our constant cycle of asset bubbles – housing or otherwise – are inevitable and necessary in most countries to fabricate the ‘wealth’ required to consume. It is no coincidence that both governments and markets are engaged in fostering them. You can’t square the circle without it. Not sure how the global economy looks without the propensity of a large part of the population to over-consume and believe it can be had for nothing.
Private debt used to fund individuals’ entitlement spending can be injudicious and excessive as long as it is secured by real estate and Bank shares, and the accordant implied support of the public balance sheet (repaired via reduction in health, education, welfare spending) and Central Banks.
Ultimately, one day, far away, there will be no avoiding the hangover from the Champagne Economic policy rationale that conservatives and Labour alike have been swilling for the past three decades. Just be grateful the plebs are too distracted to grab hold of the bottle and start cracking some skulls.
But the original architects of this plan are long gone, the current protagonists happily ensconced in a bubble of wealth and political power. They are not for changing. There is no-one to oppose them. There will be no reflection, no apologies, no retribution, no revolution. Go suck on it, you had better get used to the flavour.
So what can one do ? Borrow to buy inner-city land. Develop. Collect rent. Offset expenses against income. Wait. Leverage equity. Vote 1 Higher Immigration, Bigger Population. Vote 1, Deregulation of the Credit market. Repeat. And quietly hum to yourself â€œI Like Chinese, I Like Chinese, I Like Chinese”

Carl Valentine
Carl Valentine
4 months ago
Reply to  Jules Anjim

A slightly vicious but realistic view, shame you consider the less fortunate ‘plebs,’ perhaps that is better internalised.

j watson
j watson
4 months ago

V timely if read by sufficient. The day after an by-election kicking the Right in the UK at least is in a spasm on what has gone wrong. Inevitably it’s fixating on the wrong things. More explanation is in this Article on what is wrong with UK capitalism, how investment incentives are not working the way we need and thus low growth etc. Rather than seeking scapegoats and the blather about tax cuts a fundamental pause and thought needed.
Of course letting recessions/slumps run riot because of the potential creative forces it unleashes has considerable risk – basic fabric of society, law & order etc – which is primary reason why our predecessors sought to mitigate. It’s also electorally difficult to do little.
But we can still do better on how investment incentives work. The Author explains how the over-emphasis on land and assets rips potential from other sectors. It’s compounded by over reliance on private sector to deliver capacity/demand equilibrium in housing and related need – it wants scarcity to drive profits and will always profit maximise. Thus Govt has to act.
The game is rigged for the advantaged, and we can ‘un-rig’ without burning the house down.

Alan Thorpe
Alan Thorpe
4 months ago

What a load of rubbish. Capitalism does not create boom and bust cycles when it is based on free competitive trade. It is the creation of central banks and the printing of worthless money that creates the cycles. Politicians should be kept as far away from the economy as possible. All they have done is privatise profit and socialise debt.

Carl Valentine
Carl Valentine
4 months ago
Reply to  Alan Thorpe

Good post.

Alex Lekas
Alex Lekas
4 months ago

Alternatively, we could let markets work without the influence of central planners who have never run a business, dealt with taxes and expenses, or worried about making a payroll. Who knows. It could work. We have certainly discovered that constant tinkering and meddling by politicians and bureaucrats does not work, at least not for the average person. It works great for the oligarchs and the govt people who benefit from the oligarchs’ patronage.

j watson
j watson
4 months ago
Reply to  Alex Lekas

Left to their own devices most markets would quickly coalesce into monopoly positions profit maximising for a limited few. Your suggestion, if you really meant it, v naive.
That doesn’t mean current market interventions all been effective or warranted, nor doe sit mean that some urgent market interventions aren’t needed.

Mike Downing
Mike Downing
4 months ago

‘Nature makes no sudden leaps
’

But evolution is full of great extinctions which permit the next groups or species to prosper in the new environment.

We’ve simply lost the will to cope with
any discomfort and instead witter on about microaggressions while life still gets more precarious for those at the bottom of the ladder in any case.

One of the drivers of the disastrous response to the pandemic was this idea that every life could and should be saved regardless of the cost.

This is obviously a luxury belief of the sort that will soon finish off the current model and, probably, result in a cull of epic proportions when our exorbitant and bankrupting support systems finally run out of puff.

Douglas Redmayne
Douglas Redmayne
4 months ago

These ideas are goid ones providingbyou dont care a out mass destitution caused by the temporary unemployment and collapse of wealth which, as Keynes demonstrated 90 years ago, could metastatsise into a permanent phenomenon. There would need to be some form of minimum income guarantee operated via social insurance that would protect people from the destitution that such creative destruction woukd cause.