Making the same mistake again--or is this time different?

Abstract

The world faces an economic crisis of unprecedented proportions. But much of the policy response has certainly not lacked for precedent. National governments and international organisations, including the International Monetary Fund (IMF), have looked to crises of the past for solutions to the present—and austerity has become a familiar theme. The inability to effectively resolve the current crisis, however, gives rise to the question: ‘Is this time different?’ This article provides a broad overview to the origins and development of the recent economic crisis and the resort to policies of austerity. Although there is historical precedent for the resort to austerity—such as the UK ‘Treasury view’ during the 1920s and 1930s—this time, things are different. Many of the current problems are deeply rooted and reflect the impact of the shift towards free-market economics that started in the 1970s. Since the beginning of the 1970s, the private sector—finance, in particular—has reorganised on an increasingly global scale. It has innovated in terms of both structure and products, and it has experienced significant growth. As Tridico (2012, this issue) shows, this ‘financialisation’ was characterised by a ballooning of stock exchanges, as many firms decided not only to list their shares but also to become involved in speculative finance. In response to pressures on firms to maximise shareholder value, together with the progressive erosion of worker and trade union rights and influence, labour markets became more flexible and real wages stagnated. Concurrently, profits rebounded, leading to burgeoning inequality. In this context, aggregate demand and consumption were bolstered by easy credit and the wealth effects of speculative bubbles—first in stocks and shares, and then in housing.

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