LONDON – Bad economics breeds bad politics. The global financial crisis, and the botched recovery thereafter, put wind in the sails of political extremism. Between 2007 and 2016, support for extremist parties in Europe doubled. France’s National Rally (formerly the National Front), Germany’s Alternative für Deutschland (AfD), Italy’s League party, the Freedom Party of Austria (FPÖ), and the Sweden Democrats have all made electoral gains in the past two years. And I haven’t even mentioned Donald Trump or Brexit. To be sure, this explosion of political extremism cannot be explained by economic distress alone. But the correlation between bad economic events and bad politics is too striking to be ignored. By bad politics, I mean the xenophobic nationalism and suppression of domestic civil liberties seen in countries with populist governments. By good politics, I mean the internationalism, freedom of expression, and accountable governance that prevailed during the post-war era of prosperity. Let’s call them illiberal and liberal democracy for short. By bad economics, I mean allowing financial markets to dictate what happens to the real economy. Good economics, by contrast, recognises a government’s duty to protect its constituents against distress, insecurity, and calamity. It is very hard for liberals to accept that bad politics can produce good economics, and that good politics can produce bad economics. And yet Hungary offers a clear example of the former. Under Prime Minister Viktor Orbán, the country has become increasingly authoritarian. But the government’s economic program, “Orbánomics,” has a sound Keynesian footing. By the same token, good politics can certainly coexist with bad economics: Former British Chancellor of the Exchequer George Osborne’s austerity policies condemned the United Kingdom to years of stagnation. Between nationalists and liberals, it is easier for the former to pursue policies of social protection. Historically, that of course includes the Nazis, who were National Socialists, and Mussolini, who began his political life as a socialist activist. Liberals, meanwhile, advocate the free movement of goods, people, and information, whereas a nationalist politics seeks to restrict all three. True, far-left parties have also made advances since the post-crisis slump. But history suggests that nationalists have the most to gain from episodes of political and social breakdown. It is easy to see why. Classical socialism is the progeny of liberal internationalism, which is to say that it is a globalising creed; in principle, it knows no national frontiers. Yet in the face of large-scale economic crack-ups, internationalism becomes precisely the point at issue. Untethered as it is from national politics, it is accountable to no one. So, when the international system collapses, nationalists can present themselves as the only alternative. Owing to this dynamic, the left has few good options. It can no more tap into popular hostility against immigrants and refugees than the liberal center can. On the other hand, if the left tries to play up the benefits of immigration, it might drive more people into the arms of anti-immigrant parties. There could be no objection to economic liberalism if unimpeded markets fulfilled their promise of satisfying individual preferences through the operation of Adam Smith’s “invisible hand.” The problem, as Joseph Schumpeter understood, is that even if markets often do “work” the way they are supposed to, they are also highly disruptive and prone to periodic breakdowns. Moreover, while the technological innovations that markets promote bring real benefits in the long run, they tend to leave much economic and social wreckage in their wake. And besides, market choices are not people’s sole concern. A life entirely dictated by markets would be bereft meaning. Some commentators today think that we are witnessing the second coming of fascism. I myself would not venture such a prediction. The so-called Great Recession was not nearly as bad as the Great Depression of the 1930s, and it did not follow a devastating war. What I will say is that bad economics makes it more likely that bad politics will move from the fringes into the mainstream, as German National Socialism did between 1928 and 1930. Whether the bad parties make it to power – and how they wield that power – depends on many factors. The degree of economic distress certainly matters. But so does the legitimacy and adaptability of the established political system, the scope of welfare provision, electoral politics and political leadership, and the international context. The rapid rise of extremism today should serve as a wake-up call. We must uncouple the good politics of liberalism from the bad economics of neoliberalism that produced the disaster of 2008. That means reinstating the kind of economics that prevailed from the 1940s to the 1970s, until it was swept away by President Ronald Reagan in the United States and Prime Minister Margaret Thatcher in the UK. Friedrich Hayek was wrong to argue that Keynesian social democracy is a slippery slope to serfdom. On the contrary, it is the necessary antidote. A good economics in our own era would do three things: It would take precautions against 2008-level collapses; it would muster a robust counter-cyclical response to any collapse that does happen; and it would heed popular demands for economic fairness.2 Likewise, preserving today’s good politics also requires that we give urgent attention to four topics: the political and social limits of globalisation; the financialisation of the real economy; the role of fiscal and monetary policy; and the delinking of rewards from work in an era of accelerating automation. Proponents of liberalism – and those to their left – neglect these issues at their peril. The author, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. Copyright: Project Syndicate.
