Download Capitalism will always have dramas. It is governments that turn them

Freedom from fear?
Sep 9th 1999
From The Economist print edition
Economists and historians are still debating exactly what
caused the Great Depression, and doubtless always will.
But most agree that government action turned what would
have been a modest recession into the most devastating
downturn of the century. Like other downturns, it certainly
acted as a purge, but ended up almost killing the patient.
Capitalism will always have dramas. It is governments
that turn them into crises
BEFORE the Great Depression of the 1930s, the
conventional view among economists, shared by
businessmen and politicians, was that recessions were
nature’s purgative. They had to be endured, but you felt
better for it afterwards. This was fine if you had a country
house in which to sit out the recession, but unlikely to
make you love capitalism if you were queuing at a soup
kitchen. This consensus view had something going for it,
but it missed out an important point: if purgatives are
made too powerful, they can be life-threatening.
The only downturn in a big country during this century to
match America’s in the 1920s and 1930s has taken place
in Japan. In 1924-29, Wall Street’s Dow Jones rose by
300%, and then plunged by 84% in 1929-32. Like America
in the 1920s, Japan in the 1980s was filled with a euphoric
sense that old economic rules no longer applied. The
Nikkei average climbed by 492% in 1980-89; property
prices trebled. But in 1990-98 the Nikkei lost 64%, and
property prices fell by more than two-thirds. Despite this,
Japan has escaped a great depression: living standards
have stayed high, unemployment fairly low.
What most people remember about the Great Depression,
apart from the Wall Street crash, the dole queues and the
Okies in “The Grapes of Wrath”, is that at first
governments sat on their hands, saying the purgative had
to be endured and they could do nothing. Then Keynes
came along to argue that, on the contrary, they should do a
lot because in a depression public spending was the only
thing capable of boosting demand. Pay people to dig holes,
if you must, and then to fill them in again. But whatever
you do, spend.
It would be premature to declare this episode closed, and
the danger passed. But some tentative conclusions can
already be drawn from a comparison of the 1930s and the
1990s. One is that the Bank of Japan copied the mistake
made by America’s central bank, though not as zealously.
Like the Fed in the 1920s, it had loosened monetary policy
in the 1980s and thus fuelled the speculative boom in share
prices and property lending. It then helped bring on the
crash in early 1990 by successively raising interest rates,
and afterwards proved reluctant to cut rates again for fear
of restarting the asset-price boom. This may well have
made the crash worse.
Like most memories, this is accurate only in parts. And it
gets the crucial bit wrong. Governments did not sit on their
hands: instead they made things worse. A lot worse.
In two important respects, however, lessons learnt from
earlier calamities prevented Japan’s drama from becoming
a crisis. One was that neither the country itself, nor its
trading partners, followed the Smoot-Hawley example.
World trade remained as open as before the crash, as did
Japan’s trade, which enabled its exports to go on growing
even as domestic activity slowed. At times, most notably
during a row with America over car exports in 1995, this
openness looked in danger, but the threat passed.
America’s central bank, the Federal Reserve Board, had
helped bring about the crash in 1929 by raising interest
rates. That may have been the right thing to do: America
had had a huge speculative boom, albeit fuelled by the
Fed’s previous loose monetary policy. But then the Fed
kept its rates high well after the crash. In 1930-31, just
when money was getting painfully short as banks cut
lending to stay in business amid a liquidity crisis, the Fed
reduced its own lending. And in 1931-32 it raised interest
rates again after Britain’s decision to let the pound break
free from the gold standard led to fears of gold outflows.
Other central banks also raised interest rates.
The second saviour was that the Japanese government
used fiscal policy to moderate the downturn. It was in
good shape to do so. In 1990 the general government
budget had a surplus of 2.9% of GDP; by the end of the
decade successive spending packages had produced a
deficit of 8.7% (and rising) of GDP, but had prevented the
severe contraction that the economy would otherwise
almost certainly have suffered.
Then, Congress and the White House joined in. In 1930,
just when trade was needed more than ever to keep
economies going, President Herbert Hoover signed the
Smoot-Hawley tariff act, ignoring formal protests by more
than 30 countries, sharply raising tariff barriers and
triggering a worldwide spate of retaliatory protectionist
measures. Chart 3, shows the terrifying result: world trade,
already shrinking in 1929, fell by two-thirds by 1933.
A third saviour, however, was luck, and it led the Japanese
government to act in a harmful way. The open and healthy
world economy, combined with rapid growth in Japan’s
nearby markets in East Asia, helped persuade the Finance
Ministry that its nastiest problem—huge piles of bad loans
at all of Japan’s banks—would in time sort itself out as the
economy revived. So the ministry chose to conceal the
problem, both in its own reports and by allowing banks to
massage their accounts.
Finally, just when extra spending or lower taxes would
have helped keep the economy going, most governments
cut spending to balance their budgets. This last error is
remembered because of Keynes and because of President
Roosevelt’s “New Deal” spending programmes (though he
was loth to borrow to finance them). But although budget
balancing was damaging, it was probably less important
than the monetary and trade mistakes, since government
spending at the time was quite small in relation to the
economy as a whole: only about 8% of GDP in America,
though already 20-30% in most West European countries,
including Britain.
In a way, it was taking on board a lesson from the 1930s:
that the government had to step in to deal with banking
collapses. But it drew the wrong conclusions from it,
denying reality and colluding with misleading accounting.
Compared with America’s, Japan’s post-war governments
have been fairly interventionist, thinking that they knew
best and that people would trust in their judgment. But in
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the 1990s Japanese people lost faith in their bureaucrats.
As people became more worried about jobs, they saved
more and spent less, so both the economy and the banks
got worse, not better.
delivered last month at a conference held by the Reserve
Bank of Australia. Three things stand out. The first is that
many of the most painful episodes, measured by the
subsequent drop in GDP in the country or countries
concerned, occurred when banking and currency crises
coincided: ie, when international and domestic woes fed
upon each other. There were nine such twin crises in their
sample of 15 emerging countries in 1880-1913, just one in
their six rich countries over that period, and as many as 14
in their sample of ten emerging countries in 1973-98. Twin
crises have become more frequent.
The Finance Ministry’s luck turned in 1997 when East
Asia had its own crash, hitting Japanese exports and
damaging consumer confidence in Japan still further. Only
since then has a depression looked a real possibility for
Japan, with consumer prices falling and banks beginning
to go under. But that threat did at last force the
government to start a proper clean-up of the banks. As
long as the world economy stays open, those measures
look likely to keep Japan away from disaster.
The second point, however, is that throughout the century,
countries bounced back from such crises fairly quickly.
The 1930s were a cruel exception. Even so, countries
bounced back more rapidly at times when they were using
a fixed and politically credible currency regime such as the
gold standard (and now, it will be hoped in Europe, the
euro). This was because even if a currency’s fixed rate was
temporarily suspended, investors expected it to be restored
at the previous rate in due course, so after the crisis came a
new inflow of capital betting on the restoration. The semifixed rates used by East Asian countries in 1997-98 did not
enjoy this self-regulating virtue. The gold standard in the
1920s and 1930s had lost the credibility it had before
1914.
So misguided governments make capitalism’s crises
worse. But what about speculators: are they not the true
master criminals? Behind most deep recessions there are
financial booms and busts. As Walter Bagehot, a Victorian
editor of this paper, wrote, “At particular times a great deal
of stupid people have a great deal of stupid money and
there is speculation and there is panic.” Surely one of the
problems of liberalism is that in these days of globalised,
free-flowing capital there is more speculation, the panics
are bigger and the chances of innocent bystanders getting
hurt multiply?
Certainly, that was the conclusion many people drew from
the crash of East Asia’s financial markets in 1997-98. And
there can be little doubt that panic among international
investors did indeed play a part, as troubles were
transmitted from one East Asian country to another, and
then, like a ghastly (if slow-moving) plague, across the
oceans to Latin America and across the steppes to Russia.
The third point is, on the face of it, less encouraging to a
free-marketeer. This is that the period when there were
hardly any banking crises, and few currency crises, was
1950-73, under the Bretton Woods regime of fixed
exchange rates, named after the place in New Hampshire
where it was agreed on in 1944, at the same time as the
IMF and the World Bank were being set up. Apart from
the fixed rates, the other main financial characteristic of
that period was that most governments imposed strict
controls on domestic and international capital transactions,
which many did not relax until the 1980s. For poor
countries, it was by no means a happy period: capital did
not (and mostly could not) flow in their direction. But for
the lucky rich it was a golden age.
It would be wrong, though, to think that the 1990s have
therefore brought in a new and far scarier era for financial
markets. Such panics are, as that quote from Bagehot
suggests, as old as the hills. They are an integral and
always disturbing part of capitalism’s instability. Nor is
international panic a novelty. Wall Street’s 1929 crash was
swiftly transmitted across borders, and the damage to the
world economy was aggravated by the collapse of Credit
Anstalt, an Austrian bank, in 1931 when foreign lenders
withdrew their funds. Many of the banking and currency
crises in Latin America at the turn of the century had an
international flavour, because Argentina and Brazil were
importing bucketsful of capital, mainly from Western
Europe.
Qüestions
1. Quina era la visió convencional dels economistes sobre
les crisis abans de la Gran Depressió? Il·lustra aquesta
visió amb el model OA-DA. Què es pot objectar a aquesta
visió? En què consistia la prescripció de Keynes en casos
de depressió? Quina és l’opinió de l’articulista al respecte?
And here is another constant. One type of financial
institution is hugely more dangerous than all the rest, even
though it claims to be the safest: the bank. Its basic danger
(though modern pressures on its profits have added others)
arises from its age-old asset-liability mismatch: it borrows
short-term from depositors and doles out the money to
borrowers on a fairly long-term basis. As deposits can
leave quickly, whereas loans stay put, when a bank gets
into trouble, it does so in spectacular fashion. Speculators
may lurk in the wings of financial crises, but banks always
occupy centre stage. This was true in Thailand and
Indonesia in 1997-98; in Sweden in 1990-91; in America
in the 1930s; and in Germany and France in 1901 and
1907 respectively.
2. Per què es critica l’apujament de les taxes d’interès i
dels aranzels a l’inici de la Gran Depressió i l’intent
d’equilibrar el pressupost públic? Quins efectes tenen
aquestes mesures sobre la producció?
3. En què s’assembla i què diferencia la Gran Depressió
als EUA dels 1930 i la situació del Japó als 1990? Quin és
el principal problema darrere la situació del Japó i com
creien els mandataris japonenesos que es resoldria? Per
què el resultat no fou l’esperat?
4. Quina anàlisi fa el comentarista sobre les causes i
conseqüències de les crisis econòmiques? Quins “fets
estilitzats” són suggerits en relació amb les crisis
financeres?
So what is new? Barry Eichengreen and Michael Bordo,
two American economists, compared the financial crises
that have taken place throughout this century in a paper
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Elementary, my dear Watson
Sep 21st 2000
From The Economist print edition
A good gauge of the pace of technological change is the
rate of decline in the cost of a new technology. Over the
past three decades, the real price of computer processing
power has fallen by 99.999%, an average decline of 35% a
year. The cost of telephone calls has declined more slowly,
but over a longer period. In 1930, a three-minute call from
New York to London cost more than $300 in today’s
prices; the same call now costs less than 20 cents—an
annual decline of around 10%.
How information technology can boost economic growth
IN THE 1940s Thomas Watson, then chairman of IBM,
predicted that the world market for computers would add
up to five; he simply could not foresee any commercial
possibilities. Today there are around 300m active
computers in the world, so the economic impact of IT will
turn out to be somewhat bigger than Mr Watson might
have guessed. But how big?
These price plunges are much bigger than those in
previous technological revolutions. The first steam engines
were little cheaper than water power. By 1850 the real cost
of steam power had fallen by only 50% from its level in
1790. The building of the railways reduced freight rates
across America by 40% in real terms between 1870 and
1913, an annual decline of only 3%. The introduction of
the telegraph hugely reduced the time it took to send
information over long distances, but the service remained
expensive. In the 1860s, a transatlantic telegram cost $70 a
word in today’s prices. Over the next decade the cost fell,
but a 20-word message still cost the equivalent of around
$200 to send. Today a 20-page document can be e-mailed
for a mere cent. Electricity prices fell more steeply, but
still by an average of only 6% a year in real terms between
1890 and 1920.
Thanks to rapidly falling prices, computers and the
Internet are being adopted more quickly than previous
general-purpose technologies, such as steam and
electricity. It took more than a century after its invention
before steam became the dominant source of power in
Britain. Electricity achieved a 50% share of the power
used by America’s manufacturing industry 90 years after
the discovery of electromagnetic induction, and 40 years
after the first power station was built. By contrast, half of
all Americans already use a personal computer, 50 years
after the invention of computers and only 30 years after
the microprocessor was invented. The Internet is
approaching 50% penetration in America 30 years after it
was invented and only seven years since it was launched
commercially in 1993.
People nowadays take it for granted that they will grow
richer year by year. Yet for most of human history, growth
in world output per head averaged little more than 0.1% a
year. It was not until the late 18th century that growth
accelerated, to an average of 1.2% a year over the past 200
years (see chart 3), thanks to a spurt in technological
innovation. Since then, the world has seen four main
waves of innovation. The first, from the 1780s to the
1840s, was the industrial revolution in Britain, fuelled by
steam power; the second, from the 1840s to the 1890s, was
the railway age; the third, from the 1890s to the 1950s,
was driven by electric power and the car. Now we are in
the information age.
People are often frightened of technological change. Yet
the world would be much more frightening without
innovation. Economies have limited resources of capital
and labour. So without better ways to use these resources,
growth would soon run out of steam.
Traditional models of growth developed in the 1950s
concentrated largely on inputs of capital and labour, and
had nothing to say about technological change. It was seen
as exogenous, something that rained down from heaven.
But a new theory, developed in the 1980s by Paul Romer
and others, put technological change at centre stage. This
“new growth theory” regards knowledge creation as
endogenous, responding to market incentives such as
improved profit opportunities or better education. Rather
than raining down at a steady rate, the pace of
technological change depends partly on governments and
firms. Mr Romer argues that the economic incentives for
innovation have strengthened in recent years. Raising
finance for innovation has become easier, and a bigger
global market has increased the likely return. Global R&D
as a share of GDP has increased. It is claimed, strikingly,
that about 90% of all the scientists who have ever lived are
alive today. The pace of innovation does not just seem to
be faster: it really has increased.
In addition to plunging prices, computers and the Internet
have four other noteworthy features:
• IT is pervasive: it can boost efficiency in almost
everything a firm does, from design to marketing to
accounting, and in every sector of the economy. The
productivity gains of steam, electricity and railways were
mainly concentrated in the manufacture and distribution of
goods. This could be the first technological revolution to
boost productivity in services, from health care and
education to finance and government. That would be no
small matter: services account for nearly three-fifths of
America’s GDP.
3
its orders used to have to be reworked because of errors in
its phone and fax ordering system. When it switched to
online ordering, the error rate fell to 2%, saving the
company $500m. British Telecom claims that buying
goods and services online reduces the cost of processing a
transaction by 90% and cuts the direct costs of goods and
services it buys by 11%.
•By increasing access to information, IT helps to make
markets work more efficiently. Economists at UBS
Warburg suggest that the “new economy” should really be
called the “nude economy” because the Internet makes it
more exposed and transparent. The Internet allows
consumers to seek the lowest price, and firms to get quotes
from more suppliers; it also reduces transaction costs and
barriers to entry. In other words, it moves the economy
closer to the textbook model of perfect competition, which
assumes abundant information, many buyers and sellers,
zero transaction costs and no barriers to entry. IT makes
these assumptions a bit less far-fetched. (However, it also
seems to increase monopoly power in some industries,
which will be discussed in a later section of this survey.)
A second possible saving is from much lower distribution
costs for goods and services that can be delivered
electronically, such as financial services, software and
music. The marginal cost to a bank of a transaction over
the Internet is a mere cent, compared with 27 cents via a
cash machine, 52 cents by telephone and $1.14 by bank
teller. Online commerce also allows more efficient supplychain management, cutting out layers of middlemen. And
lastly, better information reduces the need for firms to
keep large stocks. Dell Computer’s build-to-order model
completely eliminates inventories, and is being widely
copied.
Better-informed markets should ensure that resources are
allocated to their most productive use. Farmers can get
instant information on weather, prices and crop conditions
in other regions. Manufacturers can track changes in
demand more closely via direct links to electronic scanners
in shops.
The B2B exchanges being set up by car, steel, construction
and aerospace firms will provide a more efficient
marketplace for buyers and sellers to exchange products.
Such exchanges are likely to spring up in most industries.
GM, Ford, Daimler-Chrysler and Renault-Nissan plan to
move all their business to a joint electronic exchange with
a turnover of $250 billion and 60,000 suppliers. According
to one estimate, dealing with suppliers online could reduce
the cost of making a car by 14%.
•IT is truly global. More and more knowledge can be
stored as a string of zeros and ones and sent anywhere in
the world at negligible cost. Information technology and
globalisation are intimately linked. By reducing the cost of
communications, IT has helped to globalise production
and capital markets. In turn, globalisation spurs
competition and hence innovation, and speeds up the
diffusion of new technology through trade and investment.
The biggest savings are likely to come in procurement. A
report by Goldman Sachs, an investment bank, estimates
that online purchasing could save firms anything from 2%
in the coal industry to perhaps 40% in electronic
components. As a result of such cost savings, Goldman
Sachs reckons, B2B e-commerce could boost the level of
output in the rich economies by an average of 5% over
time. More than half of that would come through within
ten years, an increase of 0.25% a year in the rate of growth
over the next decade. Add in the potential indirect cost
savings from the Internet as firms reorganise the way they
do business, and the total gains could be considerably
bigger.
•IT speeds up innovation itself, by making it easier and
cheaper to process large amounts of data and reducing the
time it takes to design new products. Thanks to ever more
powerful computers, the mapping of the human genome,
completed earlier this year, took much less time than first
expected.
Many economists believe that although computers are
undoubtedly useful on their own, it will take the Internet to
unlock their full economic potential. E-commerce still
accounts for only 1% of total sales in America, but it is
growing rapidly. Dot.com firms, such as Amazon and
eBay, have become household names, but far more
important from an economic point of view will be
business-to-business (B2B) e-commerce, linking buyers
and sellers electronically along the supply chain. The
Gartner Group, a consultancy, forecasts that global B2B ecommerce will reach $4 trillion by 2003, compared with
less than $400 billion of online sales to consumers.
The popular distinction between the old and the new
economy completely misses the point. The most important
aspect of the new economy is not the shift to high-tech
industries, but the way that IT will improve the efficiency
of all parts of the economy, especially old-economy firms.
This distinction will be examined further in a later section
of this survey. But first those productivity gains have to
materialise—and economists find it impossible to agree on
how far IT has already started to lift America’s
productivity growth.
The best way to analyse the impact of the Internet on the
economy is as a fall in the cost of an input, in this case
information. Expressed diagrammatically, this pushes the
aggregate supply curve (an economy’s productive
potential) out to the right (see chart 4), in exactly the same
way as the invention of the wheel or electricity did in the
past. Assuming no change in aggregate demand (D1), the
equilibrium level of production rises from Q1 to Q2, and
the price level falls from P1 to P2.
Qüestions
1. Com afecta la revolució de les tecnologies de la
informació a les variables macroeconòmiques bàsiques,
segons els models IS-LM i OA-DA?
B2B e-commerce can cut firms’ costs in several ways.
First, it reduces procurement costs, both by making it
easier to find the cheapest supplier and through efficiency
gains. It is much cheaper to place an order online, and
there are likely to be fewer errors in orders and invoicing.
That may seem trivial, but Cisco reports that a quarter of
2. Quines característiques distintives té la revolució de les
tecnologies de la información respecte de revolucions
tecnològiques prèvies?
3. Quin impacte té Internet sobre l’economia?
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