The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [115]
EIGHT Institutions
The recent anniversary of the November 1989 fall of the Berlin Wall brought back emotional memories for Europeans of my generation. Like many children growing up in the Cold War 1960s, I had nuclear nightmares: grey landscapes of ash and devastation with no one else left alive, and the ticking of Geiger counters counting out the rest of eternity. The postwar division of Europe dominated the cultural landscape too. Literature and the arts were shaped by it, as much as politics and diplomacy. The whole of 1989 had brought a succession of dramatic and exciting events east of the Iron Curtain—the strikes in the port of Gdansk and martial law in Poland; massive and near-silent Czechoslovak crowds gathering in Prague’s Wenceslas Square in their Velvet Revolution; the opening of Hungary’s border with Austria leading to a quickly growing flood of people from east to west. The marches in Leipzig in the GDR were part of a half-continentwide phenomenon and led to the breach of the symbolic Wall in East Germany’s capital. I watched the events, holding my breath in case it all went wrong at the last minute, on an ancient small black-and-white television in the depths of the English countryside. It couldn’t have been more exhilarating. Seeing the images again, twenty years on, was still an emotional experience.
After the drama of the end of communism came the debate. Even those who found Francis Fukuyama’s famous and triumphal declaration of “The End of History” abrasive had to acknowledge that the philosophical basis of communism and economic planning was in tatters.1 In the economic sphere, the first chance people on each side of the divide had had for an honest look at each other’s way of life made it clear that the capitalist economies had massively outperformed the centrally planned ones.2 In the political sphere, there was no question about the huge costs imposed by repression, conformism, and the absence of civil liberties on countless individuals. For all the nostalgia now in the Eastern bloc countries for aspects of communism, including the social solidarity of those times, it was proved to be an overwhelming failure.
There is no doubt that the failure of communism and central planning gave enormous impetus to the West’s decisive move toward a dogmatic free market version of capitalism, spearheaded by the governments of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. The political dynamics and intellectual trends in the economics profession at the time were mutually reinforcing. This was the heyday of “new classical economics,” which made much of the merits of markets and the failures of government intervention.
As discussed in the last chapter, the recent financial crisis has drawn attention to the failures of markets instead, especially the financial markets. The outcomes delivered by a market economy might not be those corresponding to the greatest social welfare, as there are values not well reflected in market prices. The experience of a generation’s worth of policies emphasizing the role of markets in the economy has disappointed many people. More than that, I’ve been arguing that a sense of crisis in the order of the economy and society is both widespread and justified. But that doesn’t mean, as many commentators have presumed, that fixing the economy just needs the government to take a more direct and active role.
Apart from anything else, governments will not be able to spend directly as much as they have in the past, as we saw from the earlier discussion of the unsustainable debt burdens in so many countries. This chapter discusses some “government failures” or limitations on the effectiveness of some types of policy, regardless of the budget situation. It then goes on to look at how paying attention to a richer array of institutions and economic rules would improve the way our economies run, above all giving a longer-term focus to both individual decisions and policy-making. “Good governance” is the mantra in current discussions of economic