2007, and the long road to recovery

Meghnad Desai used to swing Left but then gradually shifted Right. Once, when he was accused of changing his political hue, Desai quipped, “But I thought the Left always said China’s chairman is our chairman. So, I am only following China!”

Desai’s new book Hubris: Why Economists Failed To Predict The Crisis And How To Avoid The Next One (Collins Business, Rs 399) is exciting not only because it packs in the history of economics, but also because he analyses something dismal—the global downturn of 2007—with a sense of humour. Consider how he looks at the rise in prices, between 400% and 700%, across western Europe. “Was money, with its swift arrival and even quicker departure, like women who seduced by their charms and then vanished?” writes the emeritus professor of economics at the London School of Economics and member of the House of Lords for the Labour Party.

Desai’s argument is that the 2007 downturn was different. With countries such as the U.S. and Britain having “a high debt to GDP ratio, as well as large current budget deficits”, it defied “Keynesian troops” who “have been arguing the case for a stronger fiscal response. Their mantra—focus on spending the economy out of the recession now and worry about debt deficit issues later on”. Desai says this solution would have worked “if the recession were a Keynesian one”, arising from a collapse of demand due to oversaving. “But the years preceding the recession were characterised by households undersaving rather than oversaving, borrowing beyond their capacity to repay rather than hoarding or refraining from consumption.”

What Desai foretells is a long cycle of 50 to 60 years as proposed by Russian economist Nikolai D. Kondratieff. To this, Desai adds the “bursts of innovation” that the Austrian-American economist Joseph Schumpeter noticed in long cycles and which delivered periods of high growth and prosperity. Drawing not just from Kondratieff and Schumpeter, but also from Marx, Austrian-British economist F.A. Hayek, and Swedish economist Johan Wicksell, Desai predicts that “we should be now in a downward phase of a Kondratieff [long cycle], which may last anything up to 20 to 25 years”.

“The new normal,” writes Desai, especially for developed nations, “will be slower growth, though perhaps with falling rather than rising prices… As the crisis in the developed economies continues, the best that is on offer is a slow recovery; the high growth rates of 1992-2007 are not likely to return.”

Desai finds hope in relentless innovation, especially in technology. Capitalism, he says, will find its solutions to tackling this new normal. At the end of the book, he uses Marx, of all people, to underline capitalism’s refusal to die out and to find new solutions. “Mankind,” wrote Marx, “sets itself only such tasks as it is able to solve.”