We've
all heard a lot in the past few years about 'financial bubbles'. These are
situations in which investors become extremely confident in a particular
resource and invest more and more money into it. Prices inflate, and people
become even more confident, which leads to more investment, and so on – the
bubble inflates. There was a housing bubble before the 2008 financial crisis,
and the famous 'dot com' tech bubble of the late 90s. In truth, the confidence
was based on assumptions that proved not to be true – for example, the housing
bubble was founded on the assumption that cheap credit would be available
forever. When that stopped being true in 2008, people could no longer pay their
mortgages, and the bubble popped. When bubbles pop, it's usually because
investors start to panic, worried that the fundamentals of their investment are
not as strong as they initially appeared to be. They withdraw their money, and
the market comes crashing down. This happened to the dot coms, and also to the
Southeast Asian bubble economy in 1997.
So
financial bubbles are well known, but what about political bubbles? This is a
term suggested in a recent book by the political scientists Nolan McCarty,
Keith Poole, and Howard Rosenthal, Political Bubbles: Financial Crises and
the Failure of American Democracy. They suggest that behind every financial
bubble, there is a political bubble – a collection of policies and ideologies
that encourage certain market behaviours. Financial bubbles and the crises they
lead to are enabled by the political bubbles that grow up before them. The
comparison between the two seems obvious – political bubbles are ideologies
that people put too much faith into, without examining the underlying truth. In
this analogy, eventually people should realize the hollowness of their beliefs,
and the political bubble should pop. However, it seems to me that this last
element – the popping – does not actually happen to political bubbles with as
much regularity as it does to financial ones. The political kind seems to be
considerably more robust and able to withstand even the popping of its
financial sibling. Let me give you some examples.
It
is clear today that the belief that we have a free market in which everyone has
equality of opportunity is blatantly false – every day governments intervene in
the market through subsidies and tax breaks for corporations, and tariffs on
the import of goods from other countries, and the barriers to entry in the
economy get higher every day. But according to the political bubble of the free
market, if Bill Gates and I were to each start a new business today, we would
have an equal chance of success, and the winner would depend entirely on our
personal qualities and the strength of our product. Anyone with an ounce of
common sense knows that this is not true, because Bill Gates is starting the
game with hundreds of billions of dollars, which gives him an inevitable
advantage in our supposedly 'free' market. The idea that the free market will
lead to a 'trickle down' of wealth and make us all rich is equally discredited
by the increasing income gap we see in the world today. And yet, the political
bubble around the 'free market' is so huge that even after the unregulated,
free market system of the financial sector completely and utterly failed, we
believe the solution is to keep doing more of the same.
This
leads to another bubble – the public sector bubble. Instead of accepting the
end of the free market and putting extra regulations on the banks to ensure the
same problems don't arise again, we have become caught in a bubble which tells
us that the problem is the public sector. In this bubble, the crash wasn't
caused by the banks, it was caused by a bloated public sector that accumulated
too much government debt. Government debt is, for sure, not the greatest thing
in the world – but to suggest that it caused the 2008 crisis is idiocy of the
first order. And yet, as a society, we believe it to such an extent that
governments around the world have been given a mandate to cut health services,
education services, benefits to the disabled, and other hallmarks of a
civilized society – all while leaving the banks alone. This bubble is nothing
new – it's been building for some time. You can see it in the structural
adjustment programmes of the IMF and World Bank in the 1990s and 2000s, where
developing countries were told their problem was government spending on
education rather than the crippling debts the rich countries had forced on
them.
One
more bubble before we finish, something a little more contemporary – the
attacks on Russia that we have seen during the Winter Olympics. Certainly
Russia has its problems of autocratic leadership and a lack of civil rights for
minority groups, but much of the western coverage has been hysterical.
Everything has been criticized, from the stray dogs to the hotel rooms being
too small. The political bubble at work here also goes back a long way – to the
Cold War, and even to the attacks on Bolsheviks that were common in western
newspapers in 1917. It's a bubble that tells us that Russia is different,
undeveloped, somewhat barbaric – and it's a narrative that we lap up, as it
conveniently allows us to ignore the problems in our own societies by reverting
to a simplified, fairytale version of the world.
These
political bubbles hang around for a lot longer than the financial bubbles that
often accompany them, and are more pernicious because they are often much
harder to identify. It is easy to see when housing is overpriced, but not so
easy for any of us to sit down and think deeply about the ideologies that lie
behind our understanding of the economy or society. In many cases, these are
ideologies that we are indoctrinated with every day – through newspapers,
advertisements, universities, and so on. But it's something we need to start
doing if we are ever going to pop these bubbles and allow ourselves to think
freely.
[ political bubbles, financial bubbles, financial crisis, Noaln Mccarty, Bill Gates, Winter Olympics, Cold war, Bolsheviks, NRGLab ]
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