Robert Wade on the Global Financial Crisis


  • Alex Izurieta

    1. is a Senior Economic Affairs Officer in the Development Policy and Analysis Division of UN/DESA. His area of expertise is the analysis of global economic developments and the evaluation of policy scenarios with the help of macro-economic and global models. He has contributed to the two flagship publications of the Division, ‘World Economic Situation and Prospects’ and ‘World Economic and Social Survey’, as well as to UN/DESA Policy Briefs and other official UN documents on economic and social issues. Prior to his current post, he worked as a senior researcher at the University of Cambridge, UK, and as a researcher at the Levy Economics Institute of Bard College, New York, and the Institute of Social Studies, The Hague. He has published in those institutions and in various international journals. He can be contacted at e-mail:
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Robert Wade, Professor of Political Economy at the London School of Economics, is a scholar and intellectual activist who should need no introduction for Development and Change readers. He has had a remarkably prolific career in the field of economic development, authoring numerous influential articles and books on themes as varied as irrigation and politics, industrial policy, (global) income distribution and, recently, the global crisis. His book Governing the Market, winner of the American Political Science Association's award for Best Book in Political Economy in 1992, became a life-raft for many scholars and students who opted to jump out of the single intellectual ship that was allowed to navigate in the neoclassical seas of development studies for many years. The second edition (2004) brought the story up to date, including the trajectory from ‘miracle’ to crash and from crash to recovery. Its publication was welcomed by those who, like me, found themselves reading photocopies of photocopies of heavily marked first edition originals; it was also a corroboration of the indefatigable commitment of Professor Wade. When the East Asian crisis hit in 1997–98 he wrote a series of papers about the crisis and its aftermath, which raised the bar on the political analysis of financial markets. He managed to explain the crisis in the same framework he had earlier used to explain the success of ‘governed market’ strategies in East Asia. For his work on the political economy of the multilateral organizations (WTO, World Bank and IMF), on world income distribution and on industrial and technology policies in developing countries, Professor Wade was awarded the annual Leontief Prize for Advancing the Frontiers of Economic Thought in 2008. Robert Wade has been a long-time critic of the malfunctioning of global financial markets; he recognized early on the growing financial fragility, the huge but neglected systemic risk of financial globalization and the steady build-up to a big crisis.

  • AI: Could you describe how you entered and moved through the study of economic development?

  • RW: I first encountered tropical places and very rich and very poor people as a 12-year old, when my father, a New Zealand diplomat, was posted to Sri Lanka. That encounter set the direction of my life. I began research at the hands-on end of the scale in 1964/5 while still an undergraduate student of economics in New Zealand, with a field study of the ‘economy’ of Pitcairn Island in the South Pacific, home to descendants of the Bounty mutineers (population: eighty). In 1967 I set out for Britain to do a PhD in development economics. But en route, in India, I decided that what I understood to be economics (based on microeconomics textbooks which contained virtually no word on a real economy) had limited value for understanding India's development. On arrival at Sussex University, home of the newly founded Institute of Development Studies, I announced that I wished to switch to a PhD in anthropology, a subject I had barely studied, and Sussex was flexible enough to accommodate. To the extent that I have a distinctive approach to economic questions it is because I studied economics at undergraduate and Masters level but never underwent PhD marination in it; and because as the son of dedicated civil servants, I have always been suspicious of scholars who work with models based on self-seeking as the only motive of behaviour.

    More by accident than design, I ended up doing fieldwork in the hardship post of rural Tuscany. The research started out as a study of the impact of the post-Second World War land reform (the biggest non-communist expropriative reform in the world). It morphed unexpectedly into a study of how the cleavages of Italy's ‘centrifugal democracy’, which seemed unbridgeable at the national level, were cross-cut by ties of kinship, neighbourship and voluntary associations as one came down towards towns and villages at the ‘base’; hence Italy was a much more stable democracy than it looked from the outside (Wade, 1975). The research was in effect a study of ‘social capital’, but to my regret I did not think to coin the term.

    I joined the Institute of Development Studies as a Fellow in 1972 and did research in India in 1975–80. I chose to investigate the operation and maintenance of large canal systems, on the assumption that ‘water reform’ might be more feasible than land reform. Long after starting it dawned on me that I had been taking for granted that the engineers aimed to improve farmers’ water supply but faced external constraints like tight budgets, bad communications, aggressive irrigators and the like. The dawning happened one day when I did what I should have done months before: I added up the amounts of money that farmers told me they were paying the engineers under the table for better water supply (a phenomenon I had previously treated as incidental, thinking that too much attention was focused on the epiphenomenon of corruption in Indian life). The amounts aggregated across the command area were staggering. If the engineers were receiving anything like these amounts, which dwarfed their salaries, what were they doing with the loot? And how did the possibility of such loot affect the way they operated and maintained the canals — and hence the productivity of India's irrigated agriculture?

    Maybe the better assumption was that engineers operated the canals so as to worsen farmers’ expectations about water supply, because the more uncertain they were, up to a point, the more they would pay the engineers to shift the scarcity elsewhere. This change of perspective led me to unravel a well-institutionalized system of corruption centred on the auction of the ‘franchise’ to posts (different posts had different potentials for black money), which had been under my nose from the beginning; and which turned out to operate in many other ‘wet’ (well-financed) departments too, not just Irrigation. I shall never forget the sudden chill in the room as I realized how dangerous this knowledge could be. Indeed, as I pressed my queries and the word got around among the engineers they became noticeably less keen to talk to me and threatened to cut off water to villages where they saw me visiting. Later, when I worked at the World Bank in Washington (by which time my findings about the bureaucratic corruption system had been well publicized; see Wade, 1985), the Bank's India Irrigation Division refused to allow me to set foot in the country, on grounds that my safety could not be assured. It did not help that the Bank's resident representative in India at the time was surnamed Waide, and he wanted to minimize the alarm among politicians and officials when told that Mr Waide from the World Bank wished to speak to them. In the intervening years, the Andhra Pradesh irrigation engineers (who were my prime focus) have adopted my name into the codes with which they conduct conversations about corruption, as in ‘the Robert Wades [mid-level staff] divide up the maintenance budget in such-and-such a way’. Most of them have no idea where the name comes from.

  • Meanwhile, a side study of how some villages co-operated to provide themselves with village-level public goods (including ‘village irrigators’ to spread water evenly over the land at times of scarcity, taking this critical decision out of farmers’ hands), while other villages nearby did not, yielded the book Village Republics: Economic Conditions of Collective Action in South India (Wade, 1988).

  • I moved from irrigation in India to irrigation in South Korea in 1979, and a study of a parastatal agency which operated one of Korea's biggest canal irrigation systems. I was amazed by the Korean passion for organization, expressed in a whole array of collective and individual incentive mechanisms, in contrast to bureaucratic stasis in India. This became a study of the role of the Korean state in agriculture and by extension in industry — a study of how capitalist Korea could be seen from another perspective as ‘one farm’ and ‘one capital’. A book with the clunky title, Irrigation and Agricultural Politics in South Korea (Wade, 1982) was one product.

  • From South Korea to Taiwan in 1983 and 1988, and — always moving up scale — a study of industrial development and the organization of the state for promoting industrial growth and diversification, with a particular interest in the trade and investment regime. At this time Taiwanese and foreign scholars were banging the drum about Taiwan being an exemplar of how almost all societies could achieve rapid economic growth if they invested in education and adopted ‘neoliberal’ free market policies (though the term was not yet in use). Ian Little, Hla Myint, Gus Ranis, John Fei, Shirley Kuo and many others banged out this message, and government officials handed out copies of their books and articles to visitors. I realized that these scholar-advocates were exercising selective inattention to data which would upset their way of seeing, and declared, ‘The Emperor's wearing no clothes!’. This research came together in the book Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Wade, 1990a). At a time when the neoliberal current was in full flood I was all the more delighted that the American Political Science Association awarded it the prize for Best Book or Article in Political Economy for the three years 1989–91. Taiwanese government officials have never handed out copies of the book — a nice irony, because it says that government ‘intervention’ had a strongly positive role. They prefer visitors to believe Taiwan's success was all down to the free market and ‘fair’ competition, a belief which defends them from accusations of government intervention and unfair trade practices.

  • In the meantime I joined the World Bank as an economist in 1984 to research and advise on institutional aspects of irrigation systems. The research was semi-aborted when the Research Committee declined to fund it until I had demonstrated, quantitatively, that organizational variables mattered for irrigation performance, as compared to soils, climate, prices and the like — a requirement which the Research Committee knew was impossible to meet. The committee was influenced by the Bank's irrigation engineers, who did not like my emphasis on ‘institutional factors’, especially ‘corruption’, a subject the Bank still refused to talk about, and by the Bank's neoclassical economists, who had heard — by corridor whispers — of my positive findings about East Asian industrial policy and thought I should be encouraged to seek employment elsewhere. I later moved to the Trade Policy division to write a study of East Asian trade regimes, in order to draw lessons about how other economies could emulate East Asia's trading success. But that too was semi-aborted when it became clear that the division chief — who went on to a very successful career in the Bank, achieving vice president rank — wanted me to write only on export promotion and keep silent on import controls, and I insisted that the two sides of the trade regime were like the two wings of a bird. In 1988 I left the Bank for the more honest atmosphere of the US Congress’ Office of Technology Assessment.

  • Intrigued by my lived experience of the Bank's processes of paradigm maintenance, I undertook research for the World Bank History project in the mid-1990s, treating the Bank as I had earlier treated Pitcairn Island, Italy, India, Korea and Taiwan. My topic was the forced marriage between ‘development’ and ‘environment’, as the Bank attempted to add environmental sustainability to its established objectives of growth and poverty reduction, to make a tripos (Wade, 1997; see also Wade, 2009a).

  • Then the East Asian crisis hit, and I turned to analysing it as it unfolded month by month (Wade, 1998a, 1998b, 2000a, 2000b; Wade with Veneroso, 1998). As it subsided I moved on up scale to write more papers on the governance of the international financial system and on trends in world growth, poverty and inequality. Based on this work I have been expecting a big debt crisis in the West for several years — and not just in the sense that one expects a clock to pass 12 twice a day (Wade, 2007a, 2007b, 2008a, 2008b, 2009b).

  • AI: Your book, Governing the Market, establishes, based on the East Asian experience, that capitalist states can use their power to impart directional thrust to growth and development via directed market mechanisms. Mainstream critics responded to your analysis by arguing that even if all this worked in East Asia, it has not worked and would not work elsewhere. What are the enduring general lessons for development from Governing the Market and what is your response to this claim (by the mainstream) to ‘East Asia's exceptionalism’?

  • RW: In the years since Governing the Market was published many people have reacted to the argument with some variant of ‘East Asian industrial policy was just hand waving’ (it made no difference to what would have happened anyway), or else, ‘They could make it work in East Asia [for reasons variously identified as cultural Confucionism or political authoritarianism] but no one else is like them, so no one else should try the same thing’. Then there was the senior British Treasury official, now Master of an Oxford college, who brayed, ‘We know it couldn't have made any difference in East Asia because we tried the same thing here and it failed’.

  • The World Bank's interpretation, set out in its 1993 The East Asian Miracle, was telling (see Wade, 1994, 1995, 1996). The Bank study was made in response to Japanese government pressure. The government had been stung by the Bank's criticism of its support for directed credit programmes in South East Asia, on grounds that they caused ‘distortions’— automatically a bad thing. It asked the Bank to do a study of directed-credit through the whole region, which then expanded into a request for a much broader study of economic development in the whole region, something which the Bank, with its country by country focus, had never done. The Japanese government offered US$ 1.2 million to cover expenses. It hoped, of course, for confirmation that state ‘intervention’ could promote development goals (Exhibit A being its own efforts through the 1930s to the 1980s). But by the early 1990s the Bank had neoliberal economic principles embedded in its DNA. The East Asian Miracle twists and turns as it tries to reconcile the conflicting pressures upon its authors. It concludes that (1) East Asia was successful mainly because it followed ‘sound fundamentals’ (macro stability, micro liberalization of trade and prices, and education); (2) industrial policy instruments did not work; but (3) ‘credit programmes directed at exports yielded high social returns and, in the cases of Japan and Korea, other directed-credit programmes also may have increased investment and generated important spill-overs’ (World Bank, 1993: 356). Notice something odd. Industrial policy did not work, but directed-credit did work in some places and for some purposes. Isn't directed-credit one type of industrial policy? To understand the inconsistency one has to understand that directed-credit was the instrument that the Japanese Ministry of Finance (the Bank's interlocutor) was most keen for a positive evaluation of, while the Bank was most keen for a negative evaluation of industrial policy. The inconsistency allowed both the Bank and the Japanese Ministry of Finance to declare a measure of victory.

  • Once The East Asian Miracle was published, the Bank made a big push to say, ‘OK, now we know that East Asia got rich by adopting sound fundamentals (=Washington Consensus), so we must redouble our efforts to get all our borrowers, especially in Africa, to adopt these sound fundamentals’. Suggestions from me and others that The East Asian Miracle was not the end of the story for East Asia and that the Bank should launch more research on East Asia were rejected with all the disdain the Bank could muster. By this time the articulate and energetic Japanese Executive Director who had initiated the project had gone back to Tokyo and been replaced by someone in the usual passive and inarticulate mode.

  • The Bank's position notwithstanding, there is a strong prima facie case for the government giving more support to some sectors or to some functions than to others, given market failures and acute shortage of relevant resources in developing countries. The principle can be applied pragmatically, on a smaller or bigger scale depending on the resources available and on the capacity of the state; the suit can be cut according to the cloth. Also, the government can ‘bet on success’ (bet on some private sector ventures which look as though they could be successful with a bit more support), a role which could be called ‘government followership of the market’; or it can ‘lead the way’ (commit public investment to a venture which private entrepreneurs would not otherwise want to undertake), which we could call ‘government leadership of the market’. Hence, a two by two matrix, with ‘big/small’ on one axis, and ‘followership/leadership’ on the other. Korea's Posco steel plant would be in the ‘big–leadership’ cell; but plenty of East Asian industrial policy would be in the ‘small–followership’ cell (Wade, 1990b, 2005, 2009c, forthcoming). The knee-jerkers ignore such distinctions.

  • Having said all this, I agree that quantitative tests of the impact of industrial policies, of the kind done by Howard Pack, for example, have not picked up much effect one way or the other (Pack and Saggi, 2006). The evidence I adduce in support of a positive steerage role of the state in East Asia is of a different, more qualitative kind. This is a case of paradigms talking past each other —‘parrot times’ (Wade, 1992).

  • Still, there remains much more to economists’ rejection of industrial policy and directional thrust than the lack of knock-out evidence in its favour. From my participant-observation among the economists I conclude that they operate with a cognitive map derived from engineering (two of the founding fathers of neoclassical economics, Walrus and Pareto, were trained as engineers) and based on the assumption that markets can be analysed ‘scientifically’ through the beautiful mind of mathematics, whereas unpicking the messiness of government processes is a Piranesian nightmare; an assumption which tips, quite wrongly, into the conviction that ‘markets are smart and governments are stupid’.

  • John Hicks, professor of economics at Oxford and author of Value and Capital (1946), one of the seminal works in microeconomics, made an explicit defence of a priori reasoning on grounds that it was legitimate to build a theoretical edifice on the basis of certain assumptions about firms and consumers which were chosen (over alternative assumptions) because they were necessary for mathematical models with determinate solutions:

‘[I]t has to be recognized that a general abandonment of the assumption of perfect competition … must have very destructive consequences for economic theory. Under monopoly [and oligopoly] the stability conditions become indeterminate; and the basis on which economic laws can be constructed is therefore shorn away … . It is … only possible to save anything from this wreck — and … the threatened wreckage is that of the greater part of general equilibrium theory — if we can … suppose … that marginal costs do generally increase with output at the point of equilibrium [that is, increasing returns do not generally exist]. [T]hen the laws of an economic system working under perfect competition will not be appreciably varied in a system which contains widespread elements of monopoly. At least, this get-away seems well worth trying … . I doubt if most of the problems we shall have to exclude for this reason are capable of much useful analysis by the methods of [neoclassical] economic theory’. (Hicks, 1946: 84–5, emphasis in original)

  • In other words, economists can legitimately ignore phenomena which might challenge the prior commitments to formalization and the virtues of competitive markets. It sounds like no more than an innocent application of Occam's Razor, but the argument had a profound effect on conclusions about the real world. It injected a bias in favour of the hypothesis that market failures are self-correcting and against the hypothesis that market failures are (often) self-reinforcing. This in turn supports a deeply reassuring conception of a moral social order based on voluntary exchange between self-reliant and competing individuals, bolstered by the value assumption, often disguised as a factual proposition, that the pursuit of self-interest within the rules and conventions of society also promotes the public interest.

  • This is a moral order without power. Hence the model of the competitive market is the lodestone — for in a perfectly competitive market no actor can influence the aggregate outcome. Such a conception is fundamental to the western ‘conservative’ world view — as distinct from ‘liberal’ world view, in the American sense (Lakoff, 2002) — and the resonance between the engineering conception of the economy, the notion of equilibrium, and the conservative moral order helps to explain why mainstream economics is so wedded to the idea of ‘market solutions’. It also helps to explain why mainstream economics has been so uninterested in income inequality, let alone class — for if inequality is mostly a by-product of a social order based on competition between autonomous individuals and firms, treating inequality as a ‘problem’ risks eroding the moral fibre of society. Willem Buiter, Professor of Economics at the London School of Economics, was only being more explicit than most when he declared: ‘absolute poverty bothers me. Inequality does not. I simply don't care’. He also described Europe as occupied by ‘dirigiste, stultifying, anaemic societies’ (Buiter, 2007).

  • There is a feedback loop: as the engineering-modelling techniques became increasingly complex, a high degree of mathematical ability became increasingly necessary to master them, and graduate courses lengthened and became more intellectually demanding, which led to the increasingly held assumption that only the brightest could become economists. It led to a growing recruitment into the profession of people who were less driven to try to explain how the world actually works or how policy could make it work better and more motivated to prove themselves as members of an elite group of masters of an arcane craft.1

  • Given all this, no eyebrows are raised by the prevalence of a vocabulary drenched in value judgements in support of free markets, such that a phenomenon cannot even be described without using words which imply whether it is a good or a bad thing by free market standards. ‘Price distortions’ and ‘financial repression’ are favourite examples. Also, ‘protectionism’, the ‘ism’ signalling that those who do not condemn protection out of hand treat it as a whole philosophy, a valued end in itself — a caricature deployed to make it easy to flag that the user of the word is a firm free trader. More in-built evaluation comes by equating industrial policy with ‘picking winners’, followed by the obligatory jeer, ‘bureaucrats can't pick winners’, ‘governments can't run businesses’. No more thought needed.

  • When all else fails, contrary evidence can be labelled a mystery and left at that, with minds firmly closed. William Easterly, a development economist formerly at the World Bank and now at New York University, illustrates how to do it. Acknowledging that the median economic performance of developing countries was much better in the 1960s and 1970s than in later decades, despite the earlier period being a time of bad ‘import substitution’ and other ‘government interventions’, he declared: ‘It is a bit of a mystery why they did well [in the 1960s and 1970s, as compared to later]. It surprised everybody … the question had a lot of mystery for me … . It is mysterious to those [like me] who advocate hands-off markets’ (Easterly, 2002).

  • AI: Over recent years your research agenda and advocacy work have widened considerably, going much beyond (East Asian) industrial and trade policies and industrialization. Specifically, you have undertaken a serious critique of the growing world income inequality, which you attribute chiefly to the neoliberal, pro-market strategies that have come to dominate the global political economy agenda. You have also been calling for a halt to the Doha trade round as promoted by the advanced countries on the basis that signatory developing countries would find themselves in a worse condition. Lastly, you have been criticizing the global financial architecture which you consider has given a few countries, especially the United States, too much control of global economic affairs and which has triggered the systemic instability now at the root of the current global crisis. Why have you begun to take on your shoulders such a wide spectrum of crucial issues? And how are these related to your earlier work?

  • RW: Even if no one else can detect it, I see a straight line from my research on Indian irrigation bureaucracy, to South Korean bureaucracy, to East Asian industrial policy, to global economic regimes. I started off implicitly buying into the common social science presumption that the causes of a phenomenon in unit A (India, or even an Indian village) are to be found within unit A. A lot of development studies still reflect this view. It sees development as a marathon race in which the speed and rank of each country is a function of its demography, stock of knowledge, and institutional structure, the latter providing the incentive structure that directs economic and political activity. Older modernization theory made much the same assumption: countries are travelling down the same river, in the Japanese metaphor, or through the same ‘stages of growth’, in Walt Rostow's phrase. From this perspective we can be fairly confident that by 2100 Bangladesh will be as wealthy as Holland is today, because in the end it is knowledge which counts, and knowledge knows no boundaries. Then it will make sense for Bangladesh to devote serious resources to environmental protection, argues Bjørn Lomborg of Sceptical Environmentalist fame, but not till then.

  • The World Bank and the IMF still buy into this basic idea. They pay remarkably little attention to the global economy, instead taking the country as the unit and seeing the world economy as an aggregate of countries. The whole thirty-year run of the World Bank's flagship, The World Development Report, takes the country as the unit of observation and prescription, and says very little about the international system in which countries have to operate. The recent push away from macroeconomics towards thinking small reinforces the same tendency. As Shahid Yusuf observes, currently prevailing approaches: ‘favour the framing and testing of narrow hypotheses and are greatly preoccupied with the minutiae of economic plumbing. They assume that if we can gain a better understanding of every bend and twist of the pipes that are already there and a sense for the ones that are missing, it will become easier to comprehend and to manage economic forces’ (Yusuf, 2009: 45). Indeed, neither the World Bank nor the IMF are ‘global’ organizations in the sense of taking the world economy as the unit. Amazingly, after decades of full-blown globalization we still have no global economic governance organizations with real resources behind them.

  • As I moved up scale I became more questioning of this whole way of seeing, and more interested in understanding phenomena observed in unit A in terms of the relations between unit A and other units — more interested in seeing the world economy from the moon, rather than from Britain or the US looking up (the implicit perspective of western economics). At the same time, I have tried to retain the anthropological commitment to iterating between big scale and small scale, to anchoring generalizations in micro details (as distinct from the conventional and foolish claim that only macroeconomic propositions rigorously derived from rational choice propositions about individual behaviour are valid). This means, as a matter of research procedure, seeking to understand a trade regime by spending time ‘soaking and poking’, ‘sticky beaking’ with people who operate through the trade regime — as distinct from looking at statistics and trade rules and aiming to reduce country X's trade regime to a single point on a scale of liberalization. I take inspiration from the saying, ‘In a drop of dew can be seen all the colours of the sun’.

  • Two of my leading questions have been: (1) how were East Asian states organized so as to allow them effectively to give a ‘directional push’ to their economies’ evolution; and (2) how would global regimes have to change in order to accommodate the directive role of the state in East Asia, so that present-day developing countries could use the same pragmatic approach and some of the same instruments?

  • My working hypothesis — which echoes my working hypothesis about Indian irrigation engineers — is that the developed countries see no national or collective interest in having developing countries catch up with them (in terms of achieving average incomes equal to, say, 75 per cent of theirs), although they see a strong interest in claiming the opposite (Wade, 2007c, 2008c). It says that elites in top countries promote global rules of free trade, free capital mobility, ‘most favoured nation’ and ‘national treatment’ because they see how this ‘neoliberal’ regime boosts the relative economic power of the top countries’ big industrial and financial groups by giving them easier access to new resources, markets and sources of profit. They see how these rules have cut developing countries’ negotiating power with big international firms, weakening spin-off effects on local production and making the economy more dependent on external resources — all to the good in terms of protecting the position of the top countries and their big firms (Wade, 2003). Meanwhile the top countries excuse their agricultural, steel, armaments and other high-tech sectors from the rules of free trade.

  • Moreover, the same rules have allowed the US, riding on the world's main international currency, to draw capital ‘uphill’, including from developing countries, to the extent that in 2006 it imported more than it exported by an amount equal to India's GDP, a country with four times its population. The rule of free capital mobility makes for the most ‘efficient’ use of the world's savings, says the credo, and the most efficient use is apparently to support US consumers, all of whom, even those in the bottom decile, are in the top two deciles of world income distribution. Naturally the US seeks to convince the world that free capital mobility is good for all countries, and the Clinton administration, driven by Robert Rubin and Larry Summers, made this a top priority (Ferguson, 1995; Wade, 2002). The UK is equally keen. The UK finance minister wrote to participants at the G20 finance ministers’ meeting in mid March 2009 to say that ‘Open, innovative financial markets are critical in driving forward economic growth … . Our second objective, therefore must be to retain and build on the benefits that open financial markets bring to the world economy’ (quoted in Bretton Woods Update, 2009: 1).

  • But it is misleading to talk just of countries. Within the US and other leading capitalist states the same neoliberal order has delivered a rapidly rising share of national income into the hands of the top few percentiles of the population while the rest of the population experienced more or less stagnant incomes, all within democratic rather than authoritarian political regimes. The share in disposable income of the top 1 per cent of US households went from a high of about 23 per cent in 1929, steadily down to about 8 per cent in the early 1970s, and then after the late 1970s, with the Reagan/Thatcher governments rolling out the neoliberal order, it rose like a rocket to reach 23 per cent by 2006, back to the share in 1929 (see Wade, 2008c). In the US during the seven-year economic upswing of the Clinton administration, the top 1 per cent of households captured 45 per cent of the total growth in pre-tax income, and during the four-year upswing of the Bush administration, the top 1 per cent captured no less than 73 per cent of the total growth (Palma, 2009). On the other hand, average income of the bottom 90 per cent in the US was almost stagnant after 1980 — although consumption kept rising, financed by debt, which enabled the upwards redistribution to occur without much political opposition. In Britain the ratio of CEO salary to average salary in the FTSE 100 shot from 17:1 to 75:1 between 1989 and 2007, without any noticeable increase in the value-added by CEOs.

  • The other side of the American and British ‘winner-take-all’ distributions is that the US and the UK have the lowest rates of inter-generational social mobility in a sample of eight developed countries (Blandon et al., 2005). They came at the very bottom in a UNICEF study of child well-being in twenty-one rich countries (UNICEF, 2007). The US has about the highest prison population per 100,000 national population in the world, Britain, the highest in the European Union. The British Labour government has acted as though marching to the slogan ‘Curb the people in order to benefit the market’— expanding market freedoms while, as inequality soars, tightening top-down controls in social policy and civil liberties, handing back personal freedoms only as it sees fit. Yet politicians and economists of these two countries — the hegemons of the past 150 years — continue to stride the world telling others to follow their liberal capitalist model. The US propensity for high-minded unilateral action is caught in Secretary of State Rice's statement of what she called ‘a uniquely American realism’ that teaches ‘it is America's job to change the world, and in its own image’ (Rice, 2008, emphasis added).2

  • More than other industrialized countries, the US and the UK are marked by a tiny capitalist elite which has lifted free from the rest of society, like riders in a hot air balloon, to become citizens of the world with only minimal economic responsibilities in the society of residence, seeking to homogenize the world below them so that wherever they choose to touch down they can operate with the same set of rules (the main point of the ‘globalization’ project). Or, less romantically, the US and its offshoots have experienced the ascendancy of an essentially predatory capitalist class since the 1980s, once the social discipline imposed by the threat from the Soviet Union was eased. Neoliberalism provided the policy models and the ideological justification for the upward redistribution and rendered it acceptable to the electorate — or not so much acceptable as invisible, off the radar screen of electoral politics. To engineer such a class redistribution while maintaining a stable democracy is political artifice of the highest order, and it is not surprising that the pioneers — the UK, the US, Chile and New Zealand — have been widely copied elsewhere.

  • Standard neoclassical theories of development — like comparative advantage theory — perform good service in hiding these unequalizing trends from view. The World Bank country director in Mongolia who resists allowing the Mongolian government to impose an export tax on unprocessed wool — on grounds that the Mongolians must stick to free trade and specialize in line with comparative advantage, in their own national interest and that of the world — does so genuinely believing what he is saying (or so we can presume) (Wade, 2007d). Resources released from the shuttered woollen mills will always find employment elsewhere, or so the theory assumes. Any serious engagement with ‘new trade theory’, ‘new new trade theory’, and other work on increasing returns and multiple equilibria gives good reasons to question this faith. But belief in free trade is almost a condition of membership of the American economics fraternity and a condition of survival in the economics-related parts of the World Bank; even Paul Krugman, one of the pioneers of ‘new trade theory’ and ‘strategic trade theory’, rowed back to free trade as the best practical policy, on the grounds — which he asserted rather than analysed — that anything else would be open to ‘hijacking’ by special interest groups (Wade, 2009e).

  • I interpret the Uruguay Round agreements as motivated by a concerted drive on the part of the major rich countries to institute policies in developing countries which make it less likely they will be able to challenge manufacturers and high-end service providers in the West and make it more likely that the latter can operate profitably everywhere, enlisting local firms and local labour in a subordinate role. They are motivated by a drive to ‘kick away the ladder’, in Friedrich List's telling phrase, and the drive has continued in the Doha Round. Of course, the zero-sum character of these two trade rounds is not the end of the story; there is also a positive-sum aspect, in having a multilateral forum which can provide developing countries with a partial escape from being locked-in to extremely asymmetrical bilateral deals, and in having a dispute settlement mechanism where general rules help to blunt the force of developed country arm twisting (Wade, 2004a).

  • AI: These days the assertion that the world economy is facing the most severe financial crisis since the Great Depression is nearly vox populi. In your analysis you highlight many factors that contributed, more or less fundamentally, to this crisis, such as insufficient regulation, mark-to-market accounting rules, ‘originate and distribute’ banking practices, asset bubbles and real estate bubbles in particular, excessive debt, dominance of the dollar as reserve currency, global macro-financial imbalances, etc. What is tying these factors together? Are they all part of one common unifying framework?

  • RW: I see the crisis as a strategic ‘shock’ (as distinct from ‘surprise’): a series of events which (a) is unanticipated, (b) has high impact, (c) forces a change in perceptions about threats and vulnerabilities, and (d) forces a reorientation of organizations and capabilities. But the ‘unanticipated’ point needs qualification. The financial industry and commentators close to it have portrayed the crisis as entirely unanticipated, a Black Swan event unpredictable from existing data. In fact, the crisis is less self-servingly and more accurately seen as a shock at the extreme end of a known trend line (equivalent to terrorists getting nuclear weapons), which the financial industry chose to close its eyes to (see below). But now that the crisis has hit we really are in Black Swan territory. It has been an article of faith ever since the end of the Great Depression that if another Depression were to occur the reasons would be ‘political’ rather than ‘economic’, because economists after Keynes knew the techniques for avoiding and getting out of a Depression. The current crisis challenges this assumption. We do not know what to do. We are in cognitive fog. One of Russia's biggest property developers expressed the mood in March 2009: ‘Frankly, everything is uncertain right now. We don't know whether to cut any contracts in roubles or dollars or something else. We don't know what prices for anything will be, what demand will be, what our market will look like’ (quoted in Tett, 2009). The head of a large western investment bank said: ‘You just cannot devise any trading strategy now on a concept of a reversion to the mean, and you cannot really hedge’ (ibid.). A research analyst said: ‘The current pace of decline is breathtaking. We are now falling at a near record rate in the postwar period and there has been no change in the violent downward trajectory’ (Robert Barbera, chief economist at ITG, quoted in Goodman and Healy, 2009). And in the immortal words of a British cabinet minister: ‘The banks are fucked, we’re fucked, the country's fucked’ (British cabinet minister, off the record, January 2009, quoted in Wintour, 2009).

  • It has become a crisis of the capitalist system, not just a crisis in the system like the East Asian crisis a decade ago or the Japanese crisis before that; and the first crisis of the system since the 1930s. It is now global in scope, so there are no fast-growing regions of the world to rescue the crisis-affected regions. Policy instruments seem to have little traction. As the Financial Times columnist Wolfgang Munchau says, ‘Virtually every policy response to the crisis, on both sides of the Atlantic, seems to be falling short’ (Munchau, 2009). We are caught in a vicious circle in which the giant stimulus packages are not working because the financial system is broken; and the financial system remains broken partly because the stimulus packages are not working.

  • The rumblings were going on since summer 2007 but the crisis proper began in the spring of 2008 as an unanticipated arrival at a perilous state on a known trend line — the trend line of rising asset prices and rising debt. But remarkably, no contingency plans had been made in central banks, finance ministries, or banks, because just about the whole financial industry and mainstream economics had a strongly vested interest in denying the dangers of being where we were on the trend line (hence all the cosy talk of the Great Moderation). Almost everyone was in the grip of something like an addiction — the excitement-dopamine mechanism — and those who tried to draw attention to the growing dangers were squashed or derided (for a case in point, see Wade, 2007b). Then, after mid-September 2008 and the collapse of Lehman and Congress's rejection of the first Treasury plan, extreme anxiety took hold and events jumped off the known trend line altogether. It became clear that — thanks to financial globalization — toxic assets were hidden around the world and counterparty ability to meet liabilities could often not be determined; and that the export-dependent economies, far from ‘decoupling’, were slowing sharply.

  • It is really two crises which have merged into one. In the Anglo-American heartland it began and remained until September 2008 primarily a microeconomic crisis rooted in the financial sector: at its core, the result of grossly overpaid bankers taking on ridiculous risks with borrowed money. They were aided by US interest rates kept too low through the 2000s, by the ‘originate to distribute’ business model of banks, and by the behaviour of regulators (who defined their ‘customers’ as the banks, not the taxpayers). But the microeconomic crisis occurred in an economy already made fragile by macroeconomic, ‘real economy’ causes. One was a structural deficit in the production of tradable goods and services, which raised the general level of financial fragility (1) because of the size of the deficits (remember that the US deficit equalled India's GDP in 2006), which created a currency recycling problem; and (2) because of the amount of household and firm debt corresponding to the external deficit, which created a credit recycling problem. It is the latter which erupted and then mutated into a crisis of the system. The second big driver of financial fragility was surging income concentration at the top. This raised the flow of resources into finance and raised the credibility of the neoliberal ‘efficient market hypothesis’ (and the desirability of ‘light touch’ regulation), which also raised the ability of financial interests to shape public policy, and bled resources away from investment in the goods and services of mass consumption, contributing to the structural production deficit.

  • In Japan, Germany and much of the periphery, the crisis began later, primarily as a ‘real economy’ crisis in exports induced by the slow-down in the Anglo-American heartland, and reflecting a structural surplus capacity to produce tradable goods and services relative to domestic demand, and undervalued real exchange rates. The export crisis then fed through to financial and wider growth problems. Indeed, it is Japan, Germany and some other surplus countries which have taken the biggest hit to GDP, yet they were not the obvious ones in terms of the housing market and other microeconomic variables.

  • Mainstream analysis of the crisis sees it as caused by a string of financial policy mistakes. A standard list includes the US Federal Reserve's very loose monetary policy through the 2000s in response to the tech-stock crash of 2000; the failure to regulate over-the-counter derivatives, enabling them to grow exponentially through the 2000s; the decision of the Securities and Exchange Commission in 2004 to let securities firms raise their leverage sharply (to an average of around 33 units of debt to 1 of equity, from an earlier average of around 12 to 1 around 1990); and the failure to restrain the sub-prime mortgage surge (Blinder, 2009). The implication is that if these and other such mistakes had not been made — and the choices could easily have gone the other way — then no build up of financial fragility, no financial instability, no crisis. It is comforting to think that the crisis stems from readily avoidable policy mistakes, which implies that the larger ‘system’ is sound and will remain the point of equilibrium to which the recovery tends.

  • However, if global imbalances and highly unequal world income distribution were deeply involved in the dynamics of rising global financial fragility, focusing the policy response only on financial microeconomics runs the danger of laying the foundations for a repeat crisis. And as just implied, a more plausible story brings together the financial microeconomics with the macroeconomics of global imbalances and vertical income concentration, as two sides of the same coin. Here is a summary of my attempt to do this, starting with a point I made in Governing the Market, about how East Asian economies constructed manufacturing apparatuses during the Cold War when the US had an overriding interest in fostering their state-led capitalisms; and how ‘[b]y the start of the 1980s, when the United States began to move from competing in manufactures to dominating through finance — and importing a rising fraction of manufactured goods — capitalist East Asia was well-placed to ride the surge of US import demand and even to provide out of its growing financial surpluses the savings needed to cover escalating US current account deficits’ (Wade, 2004b: xviii).

  • The story continues with the Big Push through the 1980s, coming from the US and UK above all, to get governments around the world to abolish exchange controls and other capital controls, in order to allow capital to flow freely to wherever it could find the highest profit. This weakened labour in relation to capital, resulting in a fall in the share of wages in GDP and a rise in the share of profits and top salaries and bonuses, described earlier.

  • After the collapse of the Soviet Union around 1990 and the opening to trade of China, India and other large developing countries at around the same time, the global labour force roughly doubled, almost overnight. This had four main effects. One was to raise growth rates; a second was to depress the costs of everyday manufactured goods and hence depress inflation — the combination producing fairly high and inflation-free growth (the Great Moderation); a third was to weaken further the bargaining power of labour; and a fourth was to raise the share of profits in world GDP still more. Top-level income inequality soared in most OECD countries, especially in the US and the UK, rising to levels last seen in the 1920s.

  • The advent of fast and inflation-free growth was interpreted, by those who benefited most, as the result of the adoption of neoliberal policies, especially the principle of limited financial regulation and the principle of getting other nations to open up to free trade and capital movements. They argued that the performance of the west and the wider world economy showed that (neoliberal) globalization worked for just about everyone. I am always amazed by the following statement from Martin Wolf, one of the most influential journalists in the world: ‘It cannot make sense to fragment the world economy more than it already is but rather to make the world economy work as if it were the United States’ (Wolf, 2004: 4). In other words, the goal of the globalization project should be to limit the power of nation states to influence cross-border flows and political economy arrangements within their territory to the equivalent of the state of Maryland or Vermont. Wolf's paean to globalization, Why Globalization Works, is worth re-reading today as an illustration of the ‘confirmation bias’ which blinded people, including Wolf, to the build up of financial fragility.

  • No one benefited more from neoliberal principles than the people and firms of the emerging New Wall Street System (NWSS). The system comprised commercial and investment banks which increasingly traded on their own account as well as on behalf of clients and operated the ‘originate to distribute’ model (whereby they took fees — the main source of their bonuses — for packaging debt contracts into securities and selling the securities around the world, shifting risks from their own balance sheets). The system had multiple regulators, each concerned with part of the market, divided by size or type of product; and over time all the regulators were prevailed upon to lighten up and treat the banks as ‘customers’ or ‘clients’. Hence the head of the Office of Thrift Supervision arrived at a press conference in 2003 brandishing a chainsaw and the deputy head of the Federal Deposit Insurance Company arrived at the same event waving pruning shears, the two of them flanked by beaming banking lobbyists — satisfied customers — also waving pruning shears. The photograph featured prominently in the OTS's annual report for that year in order to show their customers what they thought of regulation.3

  • The NWSS also comprised a growing unregulated ‘shadow’ banking system of hedge funds, private equity funds, Special Investment Vehicles and the like, and investment banks increasingly operated as part of the shadow system. The growth of the unregulated segment relative to the regulated one meant that the US experienced a dramatic de facto financial liberalization. Liberalization encouraged credit to take the form of securities, like mortgage securities, rather than bank loans, with no regulatory check on the selling of new financial instruments. In 1977 commercial banks held 56 per cent of all financial assets in the US; by 2007, only 24 per cent.

  • The dangers can be seen from the fact that the shadow banking system had no lender of last resort. In the absence of a lender of last resort the shadow bankers insured each other's debts with derivative contracts, which they then bundled into the aforementioned securities and sold around the world. The securities went into the capital base of the buyers, allowing them to boost their lending. Of course, when the securities plunged in value, the capital base of the buyers also plunged, forcing them to call in loans, which spread and accelerated the downturn.

  • Moreover, the US central bank made a dangerous concession to Wall Street starting in the late 1980s, when it allowed banks and other such entities to substitute ‘capital’, such as market securities, for ‘reserves’ in their account with the central bank. Earlier the central bank required banks to place legal reserves (as a percentage of total liabilities) in a non-interest bearing account, and it could vary the amount of required reserves in order to brake or expand lending. Wall Street lobbied for capital to be substituted for reserves, because reserves were a drag on profits. The substitution of course made bank behaviour much more pro-cyclical: as the value of market securities held at the central bank went up, banks’ lending capacity went up; as the value of securities went down … we know all too well. In short, in response to Wall Street pressure during the boom, the central bank undercut its ability to carry out its core task — to protect macroeconomic stability by ‘leaning against (not with) the wind’. Worse, the central bank orchestrated the move with some other central banks, and got it written into the Basel Capital Adequacy accord on the regulation of international banks.4

  • Of course, the regime under which the NWSS operated was a long way from the competitive market assumption espoused by neoliberalism, in the sense that the financial industry was in reality highly concentrated or oligopolistic, with a small number of big players who frequently colluded — and not incidentally, who became well aware that they were in the fortunate position of being ‘too big to fail’, meaning that their losses beyond a certain point would be transferred onto taxpayers. This was moral hazard paradise. But neoliberalism and the ‘efficient market hypothesis’ provided the justification for the regulators to adopt a narrow view of their function and for the US and UK governments to push the rest of the world to open up to their financial service industry. This is the short answer to why the neoliberal story was so widely and enthusiastically accepted. It provided a coherent rationale for governments to act in ways which brought hugely disproportionate material benefits to a few sectors and elites of the Anglo-American economy and elite factions elsewhere.

  • However, behind the veil of neoliberal thinking, the combination of rising share of profits, rising industrial supply capacity and relatively stagnant average and median incomes in the West posed a problem which Keynesians might describe as insufficient effective demand. In response, finance capital's search for high yields took it increasingly into asset markets, where the NWSS oligopolies discovered the art of mobilizing so much capital and directing it at particular markets as to create self-fulfilling profit prophecies. First in Japan, where asset prices soared in the second half of the 1980s only to crash in 1990 and usher in deflation and a decade long recession. Then in East Asia, where asset markets boomed through the 1990s until the crash of 1997–98. Then in the US, where the stock market boomed in the 1990s on the back of ICT technologies, followed by a crash at the turn of the millennium. All of these were debt-fuelled bubbles in asset prices and investment from which firms in the NWSS greatly profited, which then turned into what we could call ‘trubbles’, or bubbles going down.

  • We will have to wait for the release of Treasury papers to know to what extent the US Treasury encouraged foreign borrowing and bubble dynamics in East Asia in the expectation that a debt crash would allow the Treasury and the IMF to force through structural ‘reforms’ that would increase US leverage and profit opportunities for US firms. It would be surprising if not, given the Machiavellian talents of the senior Treasury people in charge. In any event, once the crisis hit, the US/IMF diagnosed it as a standard Latin America/Mexico type crisis, the solution to which was to cut back government spending. This was an obvious misdiagnosis at the time, but the misdiagnosis served an important function: it deflected attention from the real cause, which was a policy regime — much favoured by the US — of free capital mobility which had allowed a tsunami of private money to flow in and then to flow out, leaving a credit drought behind. The US/IMF did not want any interference with free capital mobility, so it said the crisis was caused by something else.

  • But once the immediate crisis was over, the strategy backfired as policy responses in East Asia took an unexpected turn. Many countries learnt that they had to build up large foreign exchange reserves to protect themselves from having to go cap in hand to the US and the IMF and be exposed to ‘conditionalities’ of a ‘kicking away the ladder’ variety. China built up the biggest war chest the world has ever seen.

  • Meanwhile, on the other side of the Pacific, the US would have contracted after the tech-stock crash. Salvation came in the fourfold combination of: (1) the Fed's sharp cuts in interest rates in late 1998 and again to ease the recession of 2000–02; (2) the Fed's ideological commitment to deregulation and innovation, and its ignoring of asset bubbles (as recently as late 2005 Ben Bernanke, now chair of the Fed, said he doubted that the US housing market was experiencing a bubble); (3) financing of US external deficits from East Asian surpluses, thanks to the dollar's role as the international currency; and (4) the credit-recycling institutions of the NWSS, which linked the capital inflows with domestic debtors.

  • The impact of the NWSS came especially through: (1) the separation between the initiation and ultimate ownership of mortgages; (2) the discovery by banks that they could make giant profits by securitizing mortgages and selling the securities around the world — which divorced long-term risk from short-term reward for the issuing organization; (3) the repeal of the Glass-Steagall Act in 1999; and (4) the failure of financial regulation, such as allowing 100 per cent interest-only mortgages against no evidence of ability to repay (as in the case of the Mexican strawberry picker doing casual work in the US, earning on average US$ 14,000 a year, who received a 100 per cent mortgage to buy a US$ 750,000 house).

  • With US house prices rising, households with stagnant incomes could run up consumption without making their household balance sheet look unsound by borrowing against the rising value of their houses. The share of consumption in US GDP jumped from 67 per cent in the late 1990s to 72 per cent in the first half of 2007, making it one of the biggest consumption booms in history (Roach, 2009). This helped to keep the US electorate less unhappy with the Bush government and allowed the upwards redistribution of income to continue without provoking a political reaction.

  • The strategy was also good for China and the other economies which had come to specialize in exporting to the US, directly or indirectly. The US consumption boom was just what East Asian countries wanted in order to build up their export apparatus and their employment and their foreign exchange reserves, and it reinforced the conviction that export-led growth was the royal route to development — an idea also propagated by the World Bank as the strategy for all countries. East Asia minus Japan pushed up its export share of GDP from 36 per cent in 1997–98 to 47 per cent by 2007. The loop was closed as the big surplus countries used their swelling surpluses to stuff themselves with US Treasury bills and other financial assets. The Chinese central bank's purchase of the bonds of the publicly-owned mortgage lenders, Freddie Mac and Fannie Mae, helped to keep the US house price boom going (Wade, 2007e).

  • However, the system looked more and more financially fragile to those not in the grip of euphoric excitement. Demand leaked from the structural deficit countries like the US to the structural surplus countries; this generated large international payments imbalances, the intermediation of which helped to fuel the growth of the inverted pyramid of debt relative to equity, or monetary assets relative to the real economy (Wolf, 2009). Financial globalization helped the New York banking model (short-termism and executive remuneration) spread to other countries’ banks, particularly European, raising the level of financial fragility in many countries.

  • Eventually the US housing bubble became a trubble, and the over-indebted had to sell or be foreclosed. Property prices tumbled. With the NWSS having sold securities containing property debt all around the world, and with these securities falling in price, banks and other financial organizations that had borrowed and lent on the basis of inflated asset valuations crumbled into insolvency.

  • This story tries to capture both macroeconomic dynamics (global imbalances, and income concentration) and microeconomic dynamics (the NWSS). The macro and the micro fed on each other. Macroeconomic imbalances and the associated currency recycling raised the level of financial fragility and hence the probability of a crash; credit recycling and the microeconomic features of the NWSS — above all, the originate to distribute business model and its new financial instruments, plus the regulators’ commitment to ‘light touch’ regulation — spread financial fragility. The outcome was a kind of global Ponzi scheme. It is striking that so far the microeconomic dynamics of the breakdown of credit recycling have dominated, in the sense that we have not had a dollar crisis — the breakdown of currency recycling — as the macroeconomics would have predicted. Indeed, the irony is that the run out of toxic assets has precipitated a run into the dollar, allowing the US to finance its gigantic deficit more easily than the European deficit countries can.5

  • AI: When the troubles had such a long gestation, why was so little done to curb the excesses, to slow down the train?

  • RW: The short answer is confirmation bias — bias in favour of conclusions one is predisposed to agree with, and absence of the ‘devil's advocate’ role in any of the relevant organizations.6 Financial assets are inherently difficult to value, as compared to physical assets or consumer goods, and their valuation is therefore prone to waves of optimism and pessimism, especially when some new instrument or technology comes along. There was a powerful ‘group think’ within the industry and government — fortified by the intellectual models of neoliberalism — that obscured how inherently unstable the basic business model of the NWSS was, with its dependence on gigantic quantities of inter-bank borrowing and ostensible ‘insurance’ instruments like CDOs.

  • There were, in fact, plenty of warnings that US credit markets had reached a perilous point, at least by 2004. Edward Gramlich, a member of the board of governors of the Federal Reserve, warned Alan Greenspan that the housing market was in the grip of bubble dynamics and that a crisis was coming in non-prime mortgages. He implored Greenspan to send examiners into the non-prime mortgage lenders and change their lending behaviour. Most of the non-prime mortgage lenders are not regulated by federal government agencies, and the Federal Reserve is the only federal agency which has authority over all home lenders. But Greenspan refused, citing arguments from compassionate conservativism and the efficient market hypothesis. On Wall Street too, a small number of insiders grew increasingly worried about future victims as they saw the sub-prime bubble growing from 2003. They formed a network to lobby senior managements; but encountered ignorance and insouciance on the part of most of the other players, including the CEOs of top Wall Street firms (Lewis, 2008).

  • Iceland is an extreme case (Wade, 2009f). An IMF mission visited the country in May 2006 for Article 4 consultations. Its draft report described Iceland's economic imbalances as ‘staggering’, which after the prime minister protested was toned down to ‘remarkable’ in the published report (IMF, 2006). In 2007 Robert Aliber, one of the world's experts in financial crises, visited Reykjavik, drove around the city counting the number of building cranes, and said in a public lecture with officials from the central bank and Iceland's Financial Supervisory Authority in attendance, ‘You have about a year before the crash’ (pers. comm.)

  • Iceland's officials and businessmen dismissed both Alibert and the IMF. They placed their trust in the report written in 2006 by Frederick Mishkin, the well-known US financial economist, and Tryggvi Thor Herbertsson, an economist at the University of Iceland, which said, ‘Although Iceland's economy does have imbalances that will eventually be reversed, financial fragility is not high and the likelihood of a financial meltdown is very low” (Mishkin and Herbertsson, 2006, emphasis added). (It was published in the same month that the IMF mission to Iceland was coming to very different conclusions.) Their report was commissioned by the Icelandic Chamber of Commerce, which paid Mishkin US$ 135,000 for little more than putting his name on the work of his collaborator, who received another fat fee.7

  • The fees paid to ideologues-for-hire illustrate the biggest reason for why people in the world's financial centres wanted to believe that there was no bubble, that the game was sustainable: the excitement of the huge profits being generated, such that few were prepared to examine the robustness of the underlying income streams, even when they could trace the income streams through the complex layers of securitized products. Moreover, the handful of big investment banks had learned that they could almost guarantee themselves returns of the order of 25–30 per cent or more in economies growing at 5 per cent or less, by investing borrowed money so heavily in a limited number of asset classes that their own decisions created self-fulfilling prophesies in the form of serial bubbles, which then pulled in other follow-the-leader players. In the oft-quoted words of Charles Prince, ex CEO of Citigroup: ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing’. The outcome of this incentive structure was pronounced herding behaviour and ‘pro-cyclical’ movements of asset prices.

  • Many governments, meanwhile, notably those of the US and the UK, stewards of the two main global financial centres, were caught up in the same extrapolative, pro-cyclical mindset, and hardly thought in terms of counter-cyclical policies. ‘Mindset’ is another word for ‘culture’ and ‘social capital’. The central banks and finance ministries of the top countries operated in the same culture as the people in the financial services industry, and shared their assumption that the financial sector was not just one sector among many but the queen of sectors, vital to be left free to do its good work of commensurating resources worldwide. They saw themselves as on the same team as the private banks. This shared culture, with its sharp distinction between insiders and outsiders, was probably more important than lobbying and financial payments in enabling Wall Street and the City to get their way. The same culture dominated the IMF, which brushed aside persistent calls from some heterodox macro economists to talk about ‘counter-cyclical macro policy’; and only recently made the concession of adopting the phrase ‘sustainable macro policy’. Strikingly, one of the few multilateral financial organizations which issued strong warnings was the Bank for International Settlements, the club of rich country central banks.

  • Further upstream, western academic economists also bear responsibility for creating a climate of ideas which justified the trends and warned against government action to rein things in. In the all too familiar quote from Keynes: ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back’.

  • For several decades an increasingly influential school of western economics developed ‘rational expectations theory’ and the ‘efficient markets hypothesis’, which together portray the economy as a predictable, comprehensible machine whose operating codes are known to all participants — and hence show that financial prices, even though they relate to the future and are obviously volatile in the short run, are highly predictable in the long run, as predictable as the earnings of a casino. On the basis of these theories financial engineers constructed value-at-risk models that predicted a Lehman Brothers collapse once in a million years, even though two similar events (the collapse of the hedge fund Long Term Capital Management in 1998 and the 1987 stock market crash) had occurred in the previous fifteen years (Kaletsky, 2009). Analysts and CEOs preferred to place their trust in the models rather than the empirical disconfirmation, because the models looked ‘scientific’ and assumed away the dangers of Black Swans at the tails.

  • More false confidence came from a premise underlying the use of securitization technology, or the ‘originate to distribute’ model of banking, where the lender sold on the loan as an asset to someone else and did not keep it on its own books, hence did not worry about doing due diligence on the capacity of the borrower to repay. The premise was that dispersion of risk equalled reduction of risk. The premise was wrong.

  • Take Northern Rock, now infamous as the site of the first run on a British bank (September 2007) for more than a hundred years. Northern Rock was a small ‘building society’ in the northeast of England which converted into a mortgage bank. It overcame the limits of a small depositor base by borrowing short-term funds on the inter-bank market, advancing the funds as mortgages, packaging up the mortgages into securities, selling the securities to investors, and using the proceeds to fund more loans (Leyshon and Swift, 2007). By the start of 2007 Northern Rock was phenomenally successful, making 20 per cent of the value of new UK mortgages. Its marketing strategy included sponsoring the local English Premier League football team, Newcastle United, in return for the team displaying its logo on the players’ shirts. The targeted audience was Asian, not British, because Northern Rock's hot market for its securities was in Asia and Asians keenly followed the English Premier League. Highly dispersed around the world though its risks were, when uncertainty about the location of bad debt caused inter-bank lending to dry up in the summer of 2007, Northern Rock's business model collapsed. Yet the UK Financial Services Authority had put Northern Rock in the ‘least risky’ category of financial entities (along with 90 per cent of the financial entities operating in the UK), had had no meetings with it in 2005, one in 2006, and seven in 2007 (five on one day and two by telephone).

  • We have to remember that the ideas or, in Keynes’ phrase, the ‘intellectual influence’ which justified such practices were of two mutually reinforcing kinds: factual propositions about the efficiency of markets, and value priorities. The commitment to neoliberal value priorities reached into every nook and cranny of factual knowledge, so that even statistics were shaped by the ‘common sense’ that markets are smart and governments are stupid, that the private sector is inherently more productive than the public. So when the Cambridge economist Michael Kitson was comparing productivity growth in the UK National Health Service (NHS) and in the private health service in the mid-1980s he found that after the early 1980s the productivity growth rate in the private sector jumped above that of the NHS and stayed a constant percentage above. Puzzled, he contacted the statistician responsible in the national statistical agency. The latter informed him — without embarrassment — that since productivity in health service was difficult to measure apart from inputs, and since it was ‘obvious’ that the private sector was more productive than the public, he had simply added a plausible number of percentage points onto growth in the private sector. The productivity advantage of the private sector had no more basis than this common sense (pers. comm., April 2009). And no doubt the same common sense helped to salve the conscience of the European Bank for Reconstruction and Development's coders who systematically biased the coding of policy reform in the transitional economies in support of the conclusion that more privatization and liberalization produced higher subsequent growth (Stuckler et al., 2009).

  • AI: Many prominent scholars, yourself included, have noticed in reviewing previous financial crises that the talk about a fundamental change fades away after the crises is left behind and it all turns into ‘business as usual’ the day after. Are you optimistic or pessimistic about this harsh and globally synchronized crisis leading to a complete revision of the free-market paradigm that brought us to this critical point?

  • RW: Will we return to a somewhat more regulated version of the global free market regime (neoliberalism), or is ‘regime change’ in store?8 Political leaders of major states assume so far that the global system is experiencing difficulties in the plumbing: it needs more liquidity, falls in interest rates, repurchase of toxic assets, and maybe assistance to some troubled industries. They keep calling for no protectionism and revival of the Doha trade liberalization round; at the same time as some say to domestic audiences, ‘Buy [our nation]’, and others covertly push competitive devaluation (such as the British, the Swedes, the Koreans).

  • The history of previous financial crises since the Second World War suggests a powerful ‘issue-attention cycle’ in financial crises, in which an initial upsurge of resolution to improve the institutional framework — including new constraints on private actors, such as lower leverage limits — gives way to calls for more transparency and (voluntary) standards of best practice, and various standard-setting bodies then set to work within the constraint of not introducing new constraints (Wade, 2007a, 2008b). This is what happened after the East Asian crisis and the tech-stock crash.

  • But these were squalls compared to today's tsunami. The events of the 1930s suggest just how big a disruption is needed before regime change happens, nationally or globally. A survey of British economists and senior civil servants in 1930 showed that virtually all agreed that, to raise British economic growth and cut soaring unemployment, the top priorities were to (a) stay on the Gold Standard, (b) cut wages, and (c) cut public expenditure (Allen, 1975). Not even by 1933, when the tidal wave of depression was coursing through the world economy and economic agents were as lost in cognitive fog as today, was there any engagement with alternatives to free markets. The agenda for the World Economic Conference, held in London in 1933 and led by the British, called for the depression to be fought by a concerted move to free market policies and for national economies to be made more ‘flexible’ (Pauly, 1997: Ch. 4). Free trade and free capital mobility were essential. Friedrich von Hayek, then teaching at the London School of Economics, helped supply the certitude that this was the right path. Yet all around, these neoliberal principles were being discredited by experience, as the most ‘flexible’ economy watched its banking sector collapse and as balanced budgets accelerated deflation. In the run-up to the G20 finance ministers meeting in mid-March 2009, the British government called for the G20 to endorse much of what its predecessor had said in 1933.

  • In July 1933 the World Economic Conference broke up in disarray, and Keynes wrote that there was ‘no cat in the bag, no rabbits in the hat — no brains in the head’. Keynes and other iconoclasts were beginning to think that the problem lay in the neoliberal principles themselves. Newly elected President Roosevelt came on side when he rejected the conference's appeal for American leadership by excoriating ‘the fetishes of so-called international bankers’. The renewed downturn in 1937, plus the crystallization of the Keynesian theory of depressions, generated more consensus behind the ideas of the New Deal. The Second World War consolidated the consensus in favour of major regime change nationally and globally around the principles that we know as Bretton Woods.9 The consensus at the Bretton Woods conference of 1944 on the need for regime change was unprecedented, before or since.

  • Let me mention just one set of factors which will shape the global response, namely the politics of the ‘indispensable nation’. The US response to the crisis is constrained, first of all, by vicious fighting between Republicans and Democrats. Rush Limbaugh, the radio talk show host who is an unofficial leader of the Republicans, declared that he would rather see the country fail than Obama succeed, and much of the Republican party agrees with him, to the point where John McCain, the Republican candidate in the 2008 presidential election, was prompted to issue the unusual statement, ‘I don't want him [Obama] to fail in his mission of restoring our economy’ (quoted in Friedman, 2009). Underlying the cleavage is a gut attachment on the part of many Republicans and even some Democrats to tax cuts at home and pre-emptive wars abroad — attachments anchored in the notion of the moral society as an aggregate of self-reliant individuals and neighbourhoods linked by a shared commitment to ‘freedom’ and the flag (Lakoff, 2002). People of this conviction are viscerally opposed to the Obama stimulus package and help for the banks.10

  • There is another, less familiar, cleavage in US politics, between the ‘oligarchic’ and the ‘establishment’ fractions of the capitalist elite, which cross-cuts the Republican/Democrat one. The oligarchic fraction seeks to protect a structure favouring upwards income redistribution, in the name of ‘free markets’. Finance has been its leading economic base in the past two decades. Prominent contemporary figures include George W. Bush, Alan Greenspan,11 Robert Rubin, Arthur Laffer and Timothy Geithner, now US Treasury Secretary, who as chairman of the New York Fed presided over the Wall Street bubble after 2002, and who earlier was the US Treasury's ‘point man’ in the US/IMF misdiagnosis of the Asian crisis. The ‘establishment’ fraction sees the government's role as being to secure a distribution of income, wealth and opportunity which protects overall stability of the system of which its members are great beneficiaries (in the spirit of Lampedusa's protagonist in The Leopard, ‘If we want things to stay as they are, things will have to change’). It uses devices like progressive taxation and a public welfare state to secure this objective; and in the past two decades has become critical of the dominance of finance and the NWSS. Leading figures include Paul Volcker, James Baker, George Mitchell, George Soros, Bill Gates and earlier the quintessential establishment figures, George Kennan and Robert McNamara.

  • President Obama's recent budget, with its emphasis on investment in infrastructure, alternative energy, human capital and a national health system, represents a victory — at least at the level of discourse — of the establishment fraction. But the oligarchic fraction, allied with a more populist elite in Congress, is focused on jump-starting personal consumption with short-term measures, largely ignoring the dangers of even higher debt. It has won a victory in the Treasury's continuing avoidance of nationalization of the big banks, in favour of the strategy of what critics call ‘zombie banks’— private banks kept alive with public funds but without public ownership. As Paul Krugman (2009a) says: ‘It's very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable’. The zombie bank strategy uses taxpayer funds to make low-interest loans to private investors willing to buy up troubled assets in the hope of boosting the price of toxic assets — letting investors profit if asset prices go up and walk away if prices fall substantially.

  • The outcome of these struggles, especially for the subsequent ability of finance to continue to dominate the US type of capitalism, is not a foregone conclusion. However, two things are clear. First, the financial sector has lost political clout, as its losses mount and as the state becomes deeply involved at the commanding heights. September 2008 was a threshold, by the end of which three of the five great investment banks — which together almost dictated public policy in the relevant domains in the US, UK and the EU — were no longer standing; and the biggest insurance company in the world, AIG, was almost bankrupt and dependent on state support. These developments have weakened the support base of the oligarchic elite.

  • Second, the oligarchic elite will fight tooth and claw to restore finance and the neoliberal order. Having accrued such disproportionate gains under the rules of this order (recall that the share of the richest 1 per cent of US households rose from about 8 per cent in the early 1970s to 23 per cent in 2006), its members oppose moves to strengthen the capacity of the state to discipline the economy. Paradoxically, the big banks can and do exercise a lot of influence derived from the perception that they are ‘too big to fail’— so the government should not do anything, they say, that might cause them to fail. The sense of entitlement to great riches embedded in the psyche of the US and UK elites is illustrated by the banks’ plans to use hundreds of millions of taxpayer dollars for bonuses in 2008; and even the UK Financial Services Authority announced plans to celebrate its worst year ever by paying out £33 million in bonuses at the end of 2008.

  • Another point which pushes towards the conclusion that the normal attention cycle will operate in this case too, with a return to something like neoliberal norms and ‘business as usual’— not anything that could be called a paradigm change — is that the broad ‘left’ has been for the most part ‘missing in action’. The dominance of the neoliberal paradigm — and its carriers in universities, think tanks, governments — has been so complete for the past two decades or more in the West that alternative ideas and their developers remain on the margins, far from good currency. A ‘backlash’ against deregulated, race-to-the-bottom kind of capitalism does not constitute an alternative model. There is no latter-day Keynes, no latter-day Cambridge, England.

  • Britain's Labour government, in office since 1997 to the time of writing (2009), bought into the bankers’ claims completely, and so did the British media. Inequality and social immobility in the UK have been so eclipsed from public discussion that people tend to be clueless about the state of affairs. When asked if they agreed that ‘In this country the best people get to the top whatever start they’ve had in life’, 49 per cent of respondents agreed and only 43 per cent disagreed in a poll in 2008. In fact, a middle-class child is fifteen times more likely to stay middle-class than a working-class child is likely to move upwards.12

  • Yet Britain's right-wing governments since Thatcher have had remarkably little effect in changing people's values. A majority remains social democrat at heart. An electoral system with no proportional representation has allowed a small rightward shift to let in unrepresentatively right-wing governments.

  • AI: What do you propose by way of policy responses?

  • RW: Here, on a postage stamp, are three steps towards a reorganized capitalism.13 First, do whatever is necessary to stop the financial implosion and protect employment, pensions and home ownership. Second, beyond the immediate crisis, restructure the financial regime so as to: (a) stabilize financial intermediation, which is a critical public good in a capitalist economy; and (b) direct finance to seek profits in the real economy rather than in ‘finance financing finance’. More broadly still, the aim is to reduce the extent to which global economic activity — global demand — depends on financialization: on house price inflation to boost household consumption, on the switch from pay-as-you-go pension schemes to funded pensions, on privatization to raise government revenues, and on innovative, complex and opaque financial instruments. Lots of measures are on the table, and here I mention only a few, of varying degrees of implementability.

  • • To reduce information asymmetry, new financial products should be required to obtain the approval of financial regulators, in order to ensure that they are not so freakishly obscure as to be illegible to buyers, regulators, and even the CEOs of the firms selling them, as a step towards domesticating the financial system.
  • • Accounting rules should be changed to disallow ‘off-balance sheet’ items; everything should be on-balance sheet.
  • • The regulatory regime should contain a system of macro prudential regulation as well as the existing system of micro regulation, in which the central bank sets bank capital–asset ratios counter-cyclically, for all entities operating in its territory (including foreign bank branches and subsidiaries).
  • • Commercial banking and investment banking should be separated, and commercial banking should be bound to ‘narrow’ banking. Commercial banks should lend primarily out of deposits, do their own due diligence, hold the loans on their own books, also hold assets of low risk securities, and not employ physicists. Both kinds would be subject to competition rules able to sanction breaking up big banks which have grown ‘too big to fail’. At least some of the big commercial banks, supplying the key ‘public good’ of stable financial intermediation, should be kept in public ownership — because the combination of incentives for private profit seeking and instant communication of confidence and pessimism across the internet can be fatal to the stability of capitalism. No amount of regulation of private commercial banks, which are necessarily fragile, is able to stop booms and busts — for nothing is more certain than death, taxes and the failure of financial regulation in the face of capital surges.
  • • Regulators should see themselves as acting on behalf of taxpayers, not the banks. On the other hand, they should not act like a Tom and Jerry cartoon, where they chase banks across the landscape. They have to forge agreement in areas of common interest, where the banks themselves need to agree to be restrained from competing in ways which damage the stability of the system.
  • The third and most challenging step relates to the real economy. On the one hand, the big surplus countries have to reduce their focus on exports and increase their focus on domestic demand. Here the good news is that the Chinese government is undertaking to develop a full medical insurance policy for the whole country, including the vast rural population. This is an important step on the way to reducing China's high saving rate and increasing consumption. The US has to increase production in import substitutes and exports, which will mean a sizable fall in the dollar. All the developed countries have to re-specialize — downsize in finance and construction and expand in other sectors, including those needed to transition to a fossil fuel-free economy. How should the state impart directional thrust? One way is for the state to support innovation especially in the new growth sectors, particularly environment/climate change, lifetime education and health care. A lot of the innovation around biotech, nanotech, new materials, new transport systems will be driven by the requirements of these sectors. Efforts to foster innovation have to be accompanied by measures to slow the rise in the share of top incomes and of profits in GDP, and keep incentives focused on innovation in the real economy. The tax regime can help, and also reforms in corporate governance to curb the extent to which boards are composed of back-scratching friends. Those who said that the Anglo–American variety of capitalism was the terminus of history now do not have a leg to stand on, and state and corporate representatives from other varieties should be confident enough to tell them so.

  • In the case of developing countries, ‘market friendly planning’ has to aim to achieve a more even spread of industrial activity across the world, less biased towards Asia. Industrial activity, and manufacturing in particular, is critical for employment growth and wage growth, and therefore for reducing migration, famine, civil wars, and the lure of messianic leaders. Yet China's role as the workshop of the world continues to knock out industrial capacity throughout the developing world (for example in Latin America), or prevent it from getting started (in sub-Saharan Africa and Central Asia).

  • This implies a rethink of the microeconomic role of government in stimulating economic activity within the national territory, and a rethink of the idea that more economic globalization — rising ratios of trade/GDP and foreign investment/GDP — is always a good thing. Some forms of trade protection may have to be deployed, not least because trade protection is easier to administer than other forms of support, and an easier way to raise public revenue. (The premise underlying trade negotiations — that countries should reduce their protection together — is nonsense, because the high-income countries can readily raise domestic revenues with which to finance compensating subsidies, while low-income countries cannot.) Protection, like any powerful instrument, can be used well or badly; the task of advisors is to show how it can be used well, rather than how it must not be used at all.

  • Likewise, capital controls should be legitimized as normal instruments of economic management. When the evidence is all around that capital markets can behave like drunken air-traffic controllers, it is amazing that we have tolerated the development of a system where prices and quantities fundamental to the living standards of billions of people are determined by the twitchy fingers of herd-following traders in their twenties in a handful of global financial centres. Legitimizing protection and capital controls as instruments of economic management can actually stimulate demand and promote trade and real investment, contrary to the assumption of mainstream economics that protection harms trade and capital controls reduce investment.

  • The broad principle is that the government has to be able to exercise enough control over cross-border flows to influence what is produced within its territory and what role its economy plays in the global economy. It has to give high priority to providing employment for rapidly growing populations, even if this means something less than free trade and free capital mobility; a priority which may also match global environmental objectives, to the extent that the energy resources which go into transport, packaging and the like are cut. We need to move away from the long-established assumption that export-led growth is the royal route to development, and emphasize more the development of domestic (or regional) demand in developing countries; for which labour standards are helpful (Weller, 2009).

  • Governing the Market illustrates how such a strategy can be designed. But the biggest issues are the political ones, not the ‘how to’ ones. Protective mechanisms and alternative growth strategies depend on the political will to implement them. Yet the structures of opinion formation are so loaded in favour of neoliberal assumptions that even a protracted crisis may not generate the political consensus for any significant reform of the right-wing model (after all, it took the Depression and the Second World War to generate the extraordinary political consensus behind the Bretton Woods regime).

  • The sales figures of British national newspapers show the problem. With the newspapers divided into ‘right-wing’ and ‘non-right-wing’ (Financial Times being in the latter), the right-wing ones account for 76 per cent of sales, the non-right-wing, 24 per cent. British citizens are surrounded by a fog-horn of right-wing opinion, reflecting the world view of the owners, for whom ‘the market’ and its allocation of rewards is the natural and the fair social arrangement. It is a fair bet that much the same balance holds in most other countries. That is why it is so difficult to have a serious discussion about legitimizing rule-bound capital controls or trade protection, even though their absence makes the world more vulnerable to crises of the current kind.

  • ‘Establishment’ elites and the broad Left around the world can make common cause to bring stabilizing and more equitable reforms onto the table; but for all the reasons noted earlier, they face intense opposition from financial interests. Already Wall Street insiders are taking the mildness of Treasury and Fed policy towards Wall Street as a sign that they will soon be able to resume business as usual. A lawyer known as a Wall Street eminence grise recently assured an audience that the future of Wall Street would be much the same as its recent past, because ‘I am far from convinced there was something inherently wrong with the system’ (Krugman, 2009b). If Wall Street is not reformed, the City of London won't be either. What about economists? Will they change their world view? The mechanisms of accountability are lacking. If a dish-washer breaks all the dishes, he loses his job; if a janitor fails to clean up a load of vomit, the same. Economists? Arthur Laffer assured the Icelandic business and libertarian community in the fall of 2007 that fast economic growth with a large trade deficit and ballooning foreign debt were signs of success. ‘Iceland should be a model to the world’, he declared (Laffer, 2007).


  • 1

    See Wade (2009d). I am struck by the similarity in thinking between hard neoclassicals and hard Marxists. Many of the latter also treat the economy as an engineering system, and deploy concepts equally tautologically (like ‘false consciousness’). They treat propositions like the declining rate of profit and the inevitability of capitalist crisis as revealed truth, and show next to no interest in ideas, coalitions, varieties of capitalism, or in policy debates beyond ‘how can we move to [undefined] socialism?’. They pity naïve positivists like me.

  • 2

    On mechanisms of US influence in the World Bank, see Wade (2002).

  • 3

    William Black (2005) describes the techniques used by deregulated bankers to rob their own banks. The spirit of the times — and the mistaking of fake capital for real capital — is caught in the story of two financiers. As they walk down the street they see a pile of dog shit, and one says, ‘I’ll give you a million dollars if you eat it’. The other accepts. They walk on, and spy another pile of dog shit. The second says to the first, ‘I’ll give you a million dollars if you do the same’. So they both eat the dog shit, and now they both feel ill — but happy, because, after all, they have just done two million dollars’ worth of trades. This is a scatalogical version of the mechanism which underpinned much of Iceland's ‘miracle’, as banks and linked private equity companies faked up each others' capital while the regulators slept (Wade, 2009f).

  • 4

    William Greider (2009), reviewing the work of Jane D’Arista.

  • 5

    If my story sounds like a fugue without the bass, the bass might come from the more systemic, longer run arguments of scholars like David Harvey (2006); Robert Brenner (2006, 2007); (for a head-on critique of Brenner see Nicholas Crafts, 2008); Peter Gowan (2009); Jakob Vestergaard (2009); Carlota Perez (2002, 2007).

  • 6

    When considering a person for sainthood the Catholic Church requires that a cardinal be chosen to assemble the arguments why that person should not be sanctified, called the ‘devil's advocate’.

  • 7

    Reported in Wall Street Journal (2008). In 2007 the Chamber of Commerce commissioned the British economist Richard Portes and an Icelandic economist to write another report, which was similarly optimistic. From the summer of 2007 onwards I gave several public talks in Reykjavik about dangers ahead, drawing on my knowledge of the build up to the East Asian crisis, and was politely dismissed (‘us, like East Asians?’).

  • 8

    For fuller discussion of points made here see Wade (2008d, 2009g).

  • 9

    For a new, more political explanation of the build up to the Great Depression see Boyce (2009); also Blyth (2002).

  • 10

    The United States is exceptional among high-income countries for the strength of anti-inellectualism, fundamentalist religion being one of the main spurs. Only 26 per cent of Americans accept some version of the theory of evolution, 42 per cent say that all living beings, including humans, have existed in their present form since the beginning of time, and two thirds want creationism to be taught in public schools with or without the theory of evolution (Pew Forum, 2003). These facts are fundamental for understanding American economics and American foreign policy.

  • 11

    Yet Alan Greenspan, the Ayn Rand-following former governor of the US central bank, has even called for the banks to be taken into public ownership.

  • 12

    See Toynbee (2008); also Irvin (2008). The UK Labour Party government's Chancellor Alistair Darling declared: ‘I’m not offended if someone earns large sums of money. Is it fair or not? It is just a fact of life’. When he was then asked to define his politics, he replied, ‘Pragmatic. I believe passionately in living in a fair country and treating people properly, with proper respect and fairness’ (quoted in Aitkenhead, 2008).

  • 13

    I elaborate this argument in Wade (2009h and 2009i).