Paradigm Shift The “Third Way” After the 2008 Financial Crisis

The end of the Cold War was cast as a watershed moment in global history. Not only did the crumbling of the Soviet Union defuse nuclear tensions between the United States and the Soviet antagonist, but also ushered in a new political and economic order. The absence of the Soviet counterpart left US-based intellectuals to claim an unparalleled victory for capitalism (at the expense of communism), best illustrated in Francis Fukuyama’s claims to an “end of history” and the universalization of the American liberal economic system (Fukuyama 1989). Despite subsequent bubbles – such as the “dot com” bust – US free-market capitalism, advanced through the “Washington Consensus”, was assumed to be the preeminent economic system; however, questions emerged as to the viability of free-market capitalism in the aftermath of the 2008 global financial crisis as so many financial institutions were granted a bailout..While the end of the Cold War marked the fall of Communism, the 2008 global financial crisis similarly demonstrated the limits of free market capitalism (Birdsall and Fukuyama 2011). Therefore, this paper poses the question: how doe the 2008 global financial crisis demonstrate the limits of free market capitalism? Moreover, what type of economic system emerged in the post-crisis paradigm?

This paper argues the post-crisis paradigm is defined by a “third way” between the absolutist interpretations of communism and capitalism, and the aim of the paper will be to flesh out the core characteristics of the prevailing paradigm.

Interpretive Issue Scheme: Capitalism Versus Communism

The essence of these competing ideologies is best captured by early ideologues. First, the central elements of the work of capitalist theoretician, Adam Smith, are explained. Smith outlined the core tenets of capitalism – or capitalist economic theory – in his seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Smith’s notion of the “invisible hand”, as a self-correcting and regulatory mechanism, serves as a fundamental component to this treatise. According to Professor Joseph Persky, Smith aligns individual self-interest with those of “the public interest,” in that the latter corresponds to the industrial strength of a nation, and by extension, employment of the population (Persky 1989). For Smith, this employed population was thought to distribute wealth through the transfer of accumulated capital to purchase goods and services, and thus channel capital to lower classes for the benefit of the whole of society (Persky 1989). For Smith, the transactions at the core of the capitalist system benefit both the individual and the wider society, but importantly, the state remains largely absent in those transactions, meaning fewer taxes or regulations. In other words, the consumer is the key unit of capitalism, and the assumption is the market is self-correcting and defies regulatory frameworks.

Laissez-faire economics envisioned by the likes of Smith are juxtaposed with the “heavy hand” of the state in Communism, best described by Karl Marx and Friedrich Engels in their 1848 work, The Communist Manifesto. This piece critiqued the classism at the core of the capitalist system. For Marx and Engels, the bourgeois, the owners of the means of production, and their employees, the proletariat, or the working class, are the two groups in the class struggle. Bourgeois exploitation of the proletariat fostered capital accumulation of private property – or the means of greater production – and thus further entrenched structural inequalities between the two parties. Therefore, Marx and Engels proffered the centralization of all means of production in the hands of the state as a way to emancipate the proletariat and to end their exploitation by the bourgeois (Engels and Marx 1848). In other words, the management of the national economy lies squarely in the hands of the state in the communist system.

Historic Event: 2008 Global Financial Crisis

The 2008 global financial crisis offers an important event to demonstrate the limits of free market capitalism, but this is not to suggest Communism as a viable alternative. Rather a “third way” to manage a national economy is in order. The capitalist versus communist framework grants a valuable lens through which to examine the global financial crisis, and to tease out the core elements of this “third way”.

Utility of Interpretive Scheme

The interpretive scheme – capitalism versus communism – will be used to extract dimensions of the emergent post-crisis paradigm or the characteristics of what will be referred to as the “third way”. This “third way” eschews absolutist interpretations and relies on a blend of communist and capitalist tenets. The hope is this examination will illustrate the ways the two economic ideologies are blended in the emergent paradigm.

References

Birdsall, N. & Fukuyama, F. (2011). The Post-Washington Consensus: Development After the Crisis. Foreign Affairs. 90 (2), 45-53.

Engels, F., Marx, K. & Hobsbawm, E. (2012). The Communist Manifesto. Verso Books.

Fukuyama, F. (1989). The End of History? The National Interest, Summer 1989.

Persky, J. (1989). Retrospectives: Adam Smith’s Invisible Hands. Journal of Economic Perspectives. 3(4), 195-201.