Financial Times economic analyst Martin Wolf gives an overview of global economic forces, and looks at Britain’s economic and political chaos.
It’s the great chicken-or-egg question of our time: Does economics drive politics or does politics drive economics? Whatever the answer, we are seeing its impact domestically, in the United Kingdom, and throughout the world.
On this week’s WhoWhatWhy podcast, we put this question to one of the world’s most respected economic journalists, Martin Wolf, associate editor and chief economics commentator at the Financial Times. He is the author of several books, including Why Globalization Works and Fixing Global Finance. His most recent book is The Crisis of Democratic Capitalism.
Wolf examines how the world got to its present economically precarious state, and details what he sees as the most important economic trends since the end of World War II. Prominent among these is the deindustrialization of the West, which led to both its higher productivity and declining employment, market-driven outcomes that he views as historically inevitable.
Wolf explains why globalization is really not new. Geographically interconnected economies have long been absolutely necessary for growth and prosperity. By the same token, the problems that arise from market forces are not isolated, but stem from the failure of governmental institutions to properly balance these global forces.
Wolf takes us to his home country, the United Kingdom, to look at the problems brought on by Brexit, how Boris Johnson screwed up his signature policy initiative, and why the short-lived Truss government made it even worse. The one silver lining that Wolf points out is that the UK has lately become far more accepting of immigration, while remaining perhaps the only Western nation not plagued by a growing fascist right.
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(As a service to our readers, we provide transcripts with our podcasts. We try to ensure that these transcripts do not include errors. However, due to a constraint of resources, we are not always able to proofread them as closely as we would like and hope that you will excuse any errors that slipped through.)
Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. More than politics, more than the cultural debates, it’s money and economics that makes the world go round. It is often the destabilizing impact of any financial crisis that leads to political instability. As economic gaps grow wider, as trust in institutions, political and financial decay, it’s clear that the path leading to anger, populism, and authoritarianism is widening.
As James Carville said during the Clinton campaign in 1992, “It’s the economy stupid.” As we deal with the overhang of the pandemic, the shutting down of the global economy, the monetary and fiscal stimulus pouring huge sums into the economy to try and fix it, the still pent-up demand from the lockdowns, and now the war in the Ukraine, it’s no surprise that liberal democracy itself is under siege.
Add to this, technology, the global interconnectivity of markets, deindustrialization, and it’s a miracle that our financial or political system survives at all. The efforts to curtail inflation here in the US and to reinvigorate the economy in the UK are both profound examples. And few understand all of this better than my guest Financial Times associate editor and chief economic correspondent Martin Wolf.
He is one of the world’s most respected economic analysts and influencers. In addition to his journalism, he participates in various international forums. He’s the author of numerous books including Why Globalization Works, Fixing Global Finance, and most recently, The Crisis of Democratic Capitalism. It is my honor to welcome Martin Wolf here to the program. Martin, thanks so much for joining us.
Martin Wolf: Pleasure.
Jeff: Well, it’s great to have you here. I want to start first with this chicken or the egg idea that comes up repeatedly of late. The degree to which it is our political institutions that are driving economic chaos or that it is the economy and movement in the markets that is responsible for lots of the political instability that we see today.
Martin: Well, I suppose my answer really is chicken and egg because they’re so interactive. Politics shapes economic policy and economic policy choices which then affect people’s lives in many different ways, which then falls back onto politics. At the same time, there are economic forces which are, to a significant extent, beyond political control which are just within the economic system, which affect people’s lives and then affect politics.
So, it’s very complicated, but let me just try and separate out two different ways of thinking about this. So, it’s pretty clear that there have been some underlying, and I believe, basically, uncontrollable forces over the last, let’s say, half-century, in our economies, which have reshaped economic life in ways that were very disadvantageous to a substantial proportion of our population. And this was reinforced by policy choices made, at the same time.
And that together has led to where we are. And without going into the crisis events, think, in the two different buckets or two different categories, the following. So there are two things that have very clearly happened in our economies of great importance in the last 40, 50 years, which were underlying economic forces.
The first is deindustrialization, namely the reduction in the proportion of the labor force that is employed in large-scale industrial activities, which were the cornerstone of our mid-20th century economies, which are associated with very large labor forces, which had [a] great deal of hold up power in their enterprises vis-a-vis their employers, which could force through the trade unions which were easy to create in those sorts of industrial organizations.
Through these trade unions, they could exert political influence and also raise wages. They created what is sometimes called a labor aristocracy. Now, over the last 50 years, as I said, in basically every – not basically – in every high-income country, the proportion of the labor force employed in large-scale manufacturing has declined very significantly because productivity growth in that sector has been so high. This has been reinforced, but it’s a less important factor than most people think by trade.
But that’s certainly part of it. But the biggest factor is, the way I put it, is manufacturing or industries becoming like agriculture: [a] highly productive sector which doesn’t employ anybody. And this has reshaped our labor force in a profound way and moved very many people into easily casualisable, horrible word, workforces. And this is reinforced by another huge shift which is skill bias in our development.
The demand for and wages are relatively skilled people, university graduates with useful skills, the most valuable skills, the demand for these people has risen. Their relative pay has risen, and it’s fallen for the less skilled. And on top of that, then we get to policy choices. We made a series of policy choices which radically increased the role of finance in our economies and the opportunities for profit from finance in our economies, creating a new plutocratic elite.
So partly policy and partly underlying forces. And these were, I think, in very large measure, very difficult to contain, to prevent. And then, on top of all this, as this shift occurred, we also had ideological shifts towards very strong pro-market views, sometimes called neoliberalism. And that was reinforced by the rising power of the newly successful plutocratic class, if you like, an elite worker group who did so spectacularly well. They dominate our politics to a significant degree.
And then there were a whole other set of changes in our social composition I can’t go into which reinforced this general shift. And the biggest part of this is there was downward mobility and increasing anxiety in what you and [other] Americans call the middle class and we would call the upper working class and the lower middle class. And these people, as they became more anxious and less satisfied with their position, became increasingly populist looking for outside leaders, populist leaders who promised to fix all this for them. And mostly they don’t do anything except aggravate their anger and anxiety against outsiders, both foreigners and people even below them.
So, that, in a very brief nutshell, incredibly brief, is my sense of what’s been going on for the last 40 years or so, perhaps a bit longer. And the truth is nobody knows what to do about this, but my own sense is that the countries with well-established welfare states and very strong commitment to social cohesion in countries like Germany, the Netherlands, [and] Scandinavia have done relatively well.
Some of the smaller countries which really take account of the position of their citizens like Switzerland, [a] very good example, Austria. And also in a completely different way, but of course, authoritarian places like Singapore have done better in managing these shifts with all the problems than we, the old established democracies, particularly in the English-speaking democracies like America and Britain, have done.
Jeff: A large overlay to this seems to be the degree to which global markets are so deeply interconnected. The butterfly effect, the idea that what happens in Singapore can affect economies in the UK or economies in the US. Talk about that interconnectedness as an overlay to those broad themes you’ve just talked about.
Martin: Here, I think one must insist this isn’t new. A very, very great American economist-cum-economic historian, Charles Kindleberger of MIT, wrote about this in his seminal work on how financial crises operate. And he basically pointed out that integrated financial markets, and for that matter, integrated labor markets, have been a feature of our economies at least since the 17th century: boom and bust in stock markets, a financial crisis propagating across the whole world. And there’s never been one more devastating than the Great Depression which was a financial crisis-cum-real economy crisis propagated across the whole world. But there are many other examples in the 19th century. We had a free trade area era in [the] 19th century, and that tended again to propagate disturbance across the world. And in addition, we had massive labor movements in the 19th century, much bigger actually relative to world population than now.
And all these cause huge disruptions and backlashes of various kinds. And the mid-20th century relatively controlled economy, which we look back to it with nostalgia, is actually a bit of an exception to the general rule that market economies in different ways naturally tend to go across frontiers. There’s no natural boundary for them. And while for the US a huge continental power, which has historically been relatively self-sufficient, the idea that it could do without all this international connection, it at least has some sort of credibility for every other country in the world, even China, just as incredible.
You have to integrate because it’s the basis of prosperity. So what you refer to is a permanent problem. The problem is that the institutions we established to check this, to control this, after the Second World War and to manage this, and the institutions we created domestically to cushion the adjustments and support people who were in difficulty economically as a result of shifts of this kind. And the institutions we created to manage the financial system above all, basically ceased to work or didn’t work well enough.
And we haven’t done a very good job. There have been efforts, but we have not done a very good job of making these institutions work well again, and it’s something I discuss in my forthcoming book, which you mentioned, though inevitably cursorily because it’s such a huge challenge, but I would stress this really isn’t new. And the problem is that we didn’t refurbish and update our institutions, domestic and international, to manage these more or less inevitable consequences of economic integration better than we have.
Jeff: In a way, it’s like Hayek on steroids. It’s the markets controlling everything, but now they’re global and interconnected.
Martin: Well, I would say they always have been. The labor market of the world was integrated in about 1900 to a simply amazing degree. The amount of immigration from the rest of the world to the Americas, the new world, was simply colossal. And that was linked, by the way, in the 19th century with the opening up of the new lands of the world to agricultural production. That prairie is most notably in North America, but also South America, Argentina, and so forth. Australia, where they’ve started producing wool and meat, just to look at that issue, and that the labor went out.
The people started producing all these products, which were then sent back to the developed world in the late 19th century causing agricultural crises everywhere. The common agricultural policy we think of as a recent invention, protectionist agriculture policy, was actually basically the grandchild of the protectionist policies against American wheat in the 19th century.
So this really isn’t new. That world broke down in the Great Depression and the Second World War, but most people don’t think that that was very sensible, complete self-sufficiency for most countries was impossible. They had to start reintegrating, and they started after the Second World War already doing this. So, I would say it isn’t new. What we forgot, crucially, is that to make this consistent with a democratic political order, you need institutions that manage the domestic economy and cushion the international processes I’ve described. Manage them too, if you like, working side by side and people forgot the latter.
Now, is this easy? No, it can’t be because the economy is naturally and has been, ever since modernity began, let’s say two centuries ago, powerfully international. It can’t cease to be so. But [in] most countries there’s simply no choice.
But that creates the danger of wild markets. It creates the danger, if you don’t manage it, of huge financial crises, it creates the danger of radical shifts in income distribution. All of these can be dealt with, but it requires effort and will to do so. And the problem, I think, is we’ve got what you call hierarchy in markets – I would just call world markets – while we have decided, particularly in our countries, to reduce the role of and effectiveness of government. And that creates this wild and unstable process, I think, now, that we have been seeing.
Jeff: Speaking of wild and unstable processes, maybe this would be a good time to talk about what’s happening in the UK right now, because I think that a lot of the American audience follows it and really doesn’t have a good grasp of what’s transpiring there. Talk a little bit about that, Martin.
Martin: I think we need to put this in a longer-term context. The UK has had substantial difficulty in managing well, the more recent processes of economic development and avoiding falling behind. And that’s really, you might say, is the whole postwar period. So in 1950, the UK was one of the richest European countries, and now it’s not at the bottom – I’m thinking of Western European countries – but it’s probably ranked about 15th or below in GDP per head. I haven’t looked at that detail, but it’s fallen many, many places in that ranking.
And that’s because of a whole series of problems in the British economy. Margaret Thatcher came along in 1980 promising to solve that problem by moving radically to the market. And there were some improvements, productivity growth seemed to improve, but the economy became substantially more unequal. Our industry was very badly damaged, and that created large areas of our country which were poor and remaining poor. They weren’t getting any better. You’ve got similar problems, of course, regionally in America too, high levels of regional inequality. And very unhappy people.
But this was sustainable until the financial crisis because everybody was growing. But since the financial crisis, 2007 to ’09, GDP per head in the UK has been more or less stagnant because productivity growth has more or less ceased. Nobody fully understands why it’s been so bad, but it has been. We’ve had a conservative government which promised to fix this and failed signally.
And as people got angrier, more upset, people had to find a scapegoat. And the European Union was the scapegoat: the European Union’s bossiness and its regulation and all the rest of it, all these foreigners who were pushing us around, as it were. And that generated the pressure on the right for a vote on leaving the EU. And that, in turn, and that by a whisker, as it were, won.
So we went off in a wild, very damaging policy direction at the behest of a relatively small number of zealots who had persuaded the vast majority of people that what was ailing them, the things that were wrong for them was something to do with the European Union, which was simply a lie. And ever since that revolutionary proposition that we must transform ourselves to justify this huge leap into the dark has become the dominant push motive, the force in British politics, at least in this government.
And we saw it with the exit deal we had from the EU. Very bad one, a very controversial one. We saw it in the raising of Boris Johnson, [a] wildly unsuitable person to be prime minister. And then Liz Truss, an even more wildly unsuitable person, and they’re there only because of this Brexit fantasy. And what’s happened in the last month is that the most zealous believers [believe] that if only we deregulate, slash taxes, do Reaganomics, deregulate as if the EU didn’t exist, can we transform the economy into something exciting, dynamic, [and] revolutionary.
And they tried this in the middle of a world crisis. This is a world crisis. They decided to do this and they destabilized markets because people thought that investors who had to finance the British government and finance Britain, which runs a huge current account deficit, they decided obviously that this was no longer a soundly managed country, was a country managed by wild risk takers. And that led to a crash in, first, Sterling, and then our government bond market, which is called the Gilt market. And this was such a disaster with this soaring long-term interest rates, which affect mortgage rates. We have variable rate mortgages mostly, and forced the Bank of England to intervene. It was a massive crisis. It was, obviously, that these people had overreached insanely, and the chancellors had to go, and the prime minister had to go. And with luck, but I stress with luck, we will have reached the limit of the Brexit fantasy.
And the advantage in Britain is we have two advantages over the US. We can’t go as far in the wrong direction as the US because we simply don’t have the same weight and power to do whatever we want. That’s quite good. And the second, I think, while these Brexiters are pretty crazy in many ways, there isn’t the social authoritarian, social conservative, and if I may use the word racist element on the scale I think we see in the US.
So, I believe [and] hope that this will be a temporary madness, and we will go back to a more reasonable sort of politics. But that does depend on getting a decent government, which deals with a lot of our deeper problems. And now that will fall on [the] Labour [Party]. I think it’s almost certain to win the next election and we will have to see what happens. I’m less pessimistic now than I’ve been for a while, but I would stress I’m not wildly optimistic. The problems we’ve had in our economy, very different from yours but with some similarities, are deep-seated and they are social as well as economic by now. And it’s difficult to run the country in a coherent and sensible way in this context.
Jeff: I know you have to go. One final question with respect to that. Did Brexit, at least, diffuse some of the populist rage that we see in other places in Europe right now?
Martin: I think it has, in the following respects. It’s been tried, and people increasingly realize that it hasn’t worked, and that we are not better off as a result, but we are worse off. And people increasingly realize that the people who promoted this most actively are incompetent and foolish. And the thing that most encourages me is, right now, so this is a contrast, say, with the US, the Labour Party is expected to get about 50 percent of the vote in the next election and the conservatives 25 percent, that’s what the polls are showing.
The conservatives have never polled so low. It’s just incredible. So, a very large proportion of the population seems to have decided these people are crazy and they made promises that they couldn’t keep and perhaps never intended to keep. This is encouraging. And in addition, I would suggest that the core political institutions of our country have continued to work in the sense Boris Johnson was a liar and a rogue, and we got rid of him.
Kwasi Kwarteng was an incompetent finance minister. We got rid of him at record speed. And the same with Liz Truss. And no one out there in British politics is successfully trying to mobilize public opinion around a strategy like Donald Trump’s. So, that sort of hyper-conservative policy is not actually one that we are seeing. So, I am moderately optimistic that the basic social stability of Britain will remain.
One of the more striking things is that, in Brexit, one of the big issues with stopping or controlling immigration, but the British public seems to have decided that immigration isn’t such a terrible thing after all. And it seeks to be a front-rank issue in British politics, which, in many ways, are different, or every country is different.
So, I’m modestly optimistic that that fever, which was captured by the Brexiters, and the anger captured by the Brexiters with the promises they made, which have so obviously proved false, that fever may now break, and we will get back to something more normal, and really and truly unlike, say, in France or Italy and elsewhere, there are really no obvious fascistic, anti-democratic, authoritarian tendencies as far as I can see in our politics.
No one imagines we won’t have a fair election. Nobody imagines that we won’t be able to get rid of leaders who misbehave and that’s at least modestly encouraging.
Jeff: Martin Wolf, his latest book is The Crisis of Democratic Capitalism. Martin, I thank you so very much for spending time with us today here on the WhoWhatWhy podcast.
Martin: I enjoyed it very much. I’m sorry it couldn’t be longer, but the conversation was very rewarding for me too.
Jeff: Thank you very much, and thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another radio WhoWhatWhy podcast. I’m Jeff Schechtman.
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