The financial crisis: Blame it on the collapse of Communism

Why did the global economy collapse so suddenly, seemingly without warning? Economic experts and political analysts continue to offer explanations, but sometimes an outsider’s viewpoint can be especially illuminating.

John Lanchester is a British novelist (The Debt to Pleasure) who stumbled on his insights into the financial collapse while researching a novel. The result is I.O.U.: Why Everyone Owes Everyone and No One Can Pay. (In the UK the title substitutes Whoops! for I.O.U.)

One of his theories about the collapse involves the relation between the fall of communism and the political/economic climate that led to the financial crisis. Before the Berlin Wall came down, East and West were engaged in an “ideological beauty contest”: Which system has the better theories, ideas, and practices. The USSR was portrayed in the West as brutal and hard-hearted. Capitalist countries (not just the US) hoped to maintain public affection by offering, in contrast, liberal social welfare programs.

Once the Wall came down, however, maintaining a benevolent image was no longer necessary. Pure, unrestrained capitalism could have its way with the world, ordinary homeowners and economic inequality be damned.

The ugly side of unbridled capitalism

There’s a nice statement of Lanchester’s argument in a review by Benjamin M. Friedman, who quotes from I.O.U. (emphasis added):

Lanchester believes that the “essential precursor” to what happened was the collapse of international communism, including in particular the demise of the Soviet Union:

“The way in which the financial sector was allowed to run out of control … took place not in a vacuum but in a climate. That climate was one of unchallenged victory for the capitalist system, a clear ideological hegemony of a type which had never existed before.”

Lanchester argues that the West’s decisive victory over communism finally removed the political restraints that had, for nearly a century, held capitalism in check. The ugly side of unbridled capitalism now no longer needed to be hidden. Widening inequality and the increasingly visible excesses of the fortunate few were no longer a problem:

“The good guys won, the beauty contest came to an end, and the decades of Western progress in relation to equality and individual rights came to an end …. The Wall came down, and, to various extents, the governments of the West began to abandon the social justice aspect of the general postwar project.”

Greedy bankers vs doctors with dirty needles

Such satisfying generalizations have great appeal to those (like me) who enjoy the frisson of intellectual history. As several nitpicking reviewers point out, however (here and here), the chronology is far from perfect. The popularity of conservative political and economic ideas began with the stagflation of the seventies. Deregulation — of the financial industry and most other industries — began with Reagan and Thatcher, long before the Berlin Wall fell in 1989.

Lanchester’s book is, nonetheless, highly informative and a great pleasure to read. I liked, for example, his colorful contrast between greedy bankers and doctors. Bankers, with the help of their accountants and lawyers, are intent of finding ways around financial regulations as soon as they become law. Lanchester: “Doctors don’t, for the most part, pride themselves on saying ‘What the hell, nobody’s looking, so I’m just going to reuse this dirty needle.’”

Unfortunately, based on what we know so far, that just about sums it up.

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