Rorotoko

In a nutshell

The Creation and Destruction of Value focuses on parallels and differences between the current financial crisis and the Great Depression, and asks whether today’s crisis—like that of the Great Depression—might lead to a reversal of globalization, or a significant change in globalization. The Great Depression not only produced a renationalization of politics and economics, but it also led to profound changes in the global geo-political balance.

Almost every contemporary use of the depression analogy takes the year 1929 as a reference point. But there are really two completely different pathologies during the Great Depression, which involve different diagnoses and different cures: they can be labeled in shorthand as 1929 (the Wall Street crash and the beginning of a bad downturn in the U.S.) and 1931 (a banking and financial crisis in Central Europe and South America, which through contagion spread to the U.S. and tuned a bad downturn into the Great Depression).

1929 has been popular with academic and political commentators since it provides a clear motive for taking particular policy measures. Keynesians have been able to demonstrate that government fiscal demand can stabilize the expectations of the market, and thus provide an overall framework of stability. Monetarists have an alternative but rather parallel story of how stable monetary growth means that radical perturbations are avoided.

But there are no obvious macro-economic answers to financial distress of the 1931 kind. As a consequence, the effects of this type of crisis are much longer-lived. The answers, if they exist, lie in the slow and painful cleaning up of balance sheets; and in micro-economic restructuring, which cannot be simply imposed from above by an all-wise planner but requires many businesses and individuals to change their outlook and behavior. The improvement of regulation and supervision, while a good idea, is better suited to avoiding future crises than dealing with the consequences of a catastrophe that has already occurred.

The wide angle

Ten years ago, I began writing a book on the phenomenon of globalization, in part in order to try to understand the bitter debate which pitted globalization protesters against international institutions that were attempting to manage the inherently chaotic process of increased flows of goods, capital, and labor. How permanent and how stable was globalization?

The book that resulted from my reflections then, The End of Globalization, also published by Harvard University Press, in 2001, suggested that globalization was reversible, and that indeed in the interwar period the Great Depression had finally ended the sustained era of globalization that opened up with the steamship and the transatlantic cable in the second half of the nineteenth century.

In that book I also suggested that the anti-globalization protest movement had no widely appealing ideology that was capable of creating a new model of order supplanting globalization. In that sense the anti-globalization protest movement around the turn of the century was not analogous to the anti-system movements on the left and right that marked the interwar era, those of communists and fascists.

Ten years later, there is an obvious urgency about the crisis. The complaint against global institutions is not that they are too strong or too interventionist, that they detract from national sovereignty, but that they are too ineffective in the face of a financial crisis of a magnitude whose only precedent is in the Great Depression.

the anti-globalization protest movement around the turn of the century was not analogous to the anti-system movements on the left and right that marked the interwar era, those of communists and fascists