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Aftershocks: Economic Crisis and Institutional Choice

Anton Hemerijck
Ben Knapen
Ellen van Doorne
Series: WRR Rapporten
Copyright Date: 2009
Pages: 288
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  • Book Info
    Book Description:

    Aftershocks was written in the midst of the deepest economic crisis since the Great Depression. Although it would be premature to presume to identify the repercussions of the crisis, it is clear that it will have profound aftershock effects in the political, economic, and social spheres. The book contains essays based on semi-structured interviews with leading scholars, European politicians and representatives from the world of business. They reflect on the origins of the crisis as well as the possible social, economic, and political transformations it may engender. This title is available in the OAPEN Library -

    eISBN: 978-90-485-1185-3
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. 1-4)
  2. Table of Contents
    (pp. 5-8)
  3. Preface
    (pp. 9-10)
    Wim van de Donk
  4. Acknowledgements
    (pp. 11-12)
    Anton Hemerijck, Ben Knapen and Ellen van Doorne
  5. INTRODUCTION The Institutional Legacy of the Crisis of Global Capitalism
    (pp. 13-52)
    Anton Hemerijck

    Two years into the first economic crisis of 21st-century capitalism, policymakers everywhere are anxiously awaiting signals of whether or not we have passed the nadir of the global downturn. Is the economy finally gaining traction after the worst economic crisis since the Great Depression? Will the ‘green shoots’ observed in global trade and US and EU equity markets, Chinese investments in public infrastructure, and Brazilian exports prove to be harbingers of a sustained economic recovery? As this book went to press in September 2009, economists from the Organisation for Economic Co-operation and Development, the World Bank, and the International Monetary...


    • [1 Introduction]
      (pp. 53-54)

      For many, the crisis was a double surprise. Not only did the collapse of the financial sector happen overnight, the spread of the crisis to the real economy took shape at an amazing speed. Now that the dust of the first shock is starting to settle, it is time to trace the roots and origins of the crisis in an attempt to determine its causes. That is the purpose of this part of the volume. Diagnosing the crisis will proceed along various lines of enquiry, addressing global macro-economic instabilities, the role of financial institutions, the absence of regulation, and dominant...

    • A Tale of Two Crises
      (pp. 55-66)
      Barry Eichengreen

      With the failure of Lehman Brothers, the financial system was brought to the verge of collapse. As economic activity imploded in the 2008 Q4 and 2009 Q1, analogies with the Great Depression no longer seemed exaggerated. If anything, focusing exclusively on the figures for the United States, as many observers did, caused one to understate the severity of the contraction. The drop in output was even severer in 2009 Q1 in Germany and Japan than in the United States. Looking globally, the downturn in the year starting in April of 2008, where Kevin O’Rourke and I put the business cycle...

    • A History of Profligate Lending
      (pp. 67-73)
      Charles Maier

      The current crisis was triggered by the rapid realisation that the vast amount of debt which banks and securities dealers had taken on, sliced, diced and repackaged as derivatives, and sold to other financial intermediaries was probably hugely overvalued. Paper claims amounting to hundreds of billions, perhaps trillions of dollars or euros, confidently marketed as assets now appeared to be mere liabilities. The credit default swaps or insurance policies that might supposedly hedge against these risks also threatened to collapse. The sense of panic naturally enough impacted the equities markets, as it appeared that consumer demand for real products must...

    • The Problem of Social Deflation
      (pp. 74-81)
      Jean-Paul Fitoussi

      The crisis has structural roots. The potential aggregate demand deficiency actually preceded the financial crisis - the crisis simply made it apparent. This lack of demand was due to structural changes in income distribution. Since 1980, the median wage in most advanced countries has stagnated and in some cases even declined. Inequalities have grown as, at the same time, high levels of unemployment were tolerated, above all in Europe. This situation has no historical equivalent in times of peace. These trends have a variety of causes, including asymmetric globalisation (with greater liberalisation of capital than of labour markets), deficiencies in...

    • The Crisis as a Paradigm Shift
      (pp. 82-90)
      Paul de Grauwe

      When Lehman Brothers and Northern Rock collapsed, citizens were shocked by the risk-taking in the financial industry. They should not have been. Popular surprise was a consequence of silence from an indoctrinated academic community, whose role should have been to question and critique the actions of businesses and the state. Instead, since the 1980s, the intellectual community had dogmatically paid tribute to the infallibility of financial markets. They trusted that prices reflected fundamental values, and that markets were efficient self-regulating machines. Throughout this period, markets were systematically deregulated, and financial innovations evolved unchecked; insufficient institutional space was reserved for government...


    • [2 Introduction]
      (pp. 91-92)

      Although the crisis is a global phenomenon, policy responses to the crisis are largely structured by domestic institutional arrangements. The contributions to this part of the volume explore the margin of national institutional capacities for the post-crisis era. The economic and political context of the future is, however, dramatically different than before the crisis, as growth is likely to be slow and protracted.

      Both Suzanne Berger and David Soskice underscore the extent to which national institutional arrangements remain the locus for economic and social reform, as well as market regulation under low-growth conditions. Stephen Roach focuses more on the essential...

    • The Significance of Politics
      (pp. 93-102)
      Peter A. Hall

      In order to understand what the economic crisis will mean for the future, some analysis of history is in order. Although the crisis is economic in nature, the significance of economic developments cannot be understood separately from the political context that brackets them. Historically, the post-war period can be subdivided into three distinct periods: an era of embedded liberalism, the transitions of the 1970s, and a period of neo-liberalism. Only by understanding each period as one marked by distinctive formulae designed to respond to the economic and political challenges of the period can one fully appreciate how political economies change....

    • Troubleshooting Economic Narratives
      (pp. 103-109)
      Suzanne Berger

      The crisis has cast many old assumptions about the economy into doubt. Neo-liberalism no longer seems a body of self-evident truths; market fundamentals are being overturned; and the appropriate role for politics in markets is once again open for debate. It’s time to go back and rethink some assumptions about the foundations of post-war economic growth and stability. Specifically, in light of the crisis, misunderstandings about the embedded liberalism of the 1950s and 1960s as well as of the globalisation period starting in the 1980s have been exposed. It has become apparent that our models of globalisation were limited to...

    • Leadership Imperatives for a Post-Crisis World
      (pp. 110-121)
      Stephen Roach

      Like all crises, this too shall pass. But the severity of the current debacle points to a very different post-crisis healing than that which has taken place in the past. Most importantly, over the foreseeable future, the macro-economic environment is likely to be characterised by the combination of lingering problems in a damaged financial system together with an unusually anaemic recovery in the global economy.

      Tensions will undoubtedly persist in such a tough post-crisis climate. In sharp contrast to the V-shaped recoveries of yesteryear, when relief was quick and powerful, the next several years are likely to reflect a persistent...

    • Establishing a New Macro-economic Policy Regime
      (pp. 122-132)
      Willem Buiter

      Every crisis is in many ways the same: there is excessive growth and an asset market boom. A sense of euphoria emerges, and everybody becomes convinced that this time they have truly invented the elusiveperpetuum mobile. The fact that society suffers from such periodic bouts of insanity must be taken as a given. They have happened before and will surely happen again. The important question is whether the given regulatory arrangements and macro-economic policy arrangements lean against or feed the inevitable credit and asset bubbles that accompany these bouts of insanity. In this case, policy arrangements undoubtedly fed the...

    • Varieties of Capitalism; Varieties of Reform
      (pp. 133-142)
      David Soskice

      The varieties of capitalism approach is a framework for understanding the similarities and differences among developed economies. This firm-centred political economy differentiates between two varieties of capitalism: liberal market economies and coordinated market economies.

      Liberal market economies include the US, the UK, and other economies where firms coordinate their activities primarily via hierarchies and competitive market arrangements. In these economies, competition and formal contracting characterise market relationships. Actors adjust supply and demand in response to price signals, often based on the types of marginal calculations emphasised by neo-classical economists. There is general education, a flexible labour market, dispersed shareholder corporate...


    • Social Discontent in European Welfare States
      (pp. 145-154)
      Mark Elchardus

      Northwestern Europe is unique in the non-Asian OECD region (i.e. Europe and North America). It has its own political structure, economic system, cultural traits, and historical narrative. Politically, it is unique in its development of a strong welfare state. Claims that the welfare state is declining in this region are largely over-exaggerated. However, this is not the case for the rest of the non-Asian OECD region: these states never developed welfare systems to the same extent that Northwestern European nations did, and those elements that they did create suffered under neo-liberal policies during the last quarter of the 20thcentury....

    • A Crisis of Consumerism
      (pp. 155-162)
      Amitai Etzioni

      With the economic crisis currently at its peak, the time is ripe for a moral conversation on what defines a good society. Is a society governed by consumerism desirable? Can material objects be used to express affection and to seek self-esteem? How can self-actualisation best be realised? Is society ready to face the consequences of utilising a different – more transcendental and communitarian – definition of a good society? Do we dare to ask ourselves not only whether we think our children will be better off than we are, but also what exactly it means to be better off?


    • The Moral Bankruptcy of New Capitalism
      (pp. 163-168)
      Richard Sennett

      The dominant narrative of the economic boom and its recent bust has been told from the perspective of intellectual and societal elites. These people have largely ignored or even misinterpreted the role played by the mid-level workers in society. As such, the dominant narrative has grossly distorted some of the underlying causes of the crisis, specifically the story of American profligate lending and spending. Rather than truly exposing underlying economic distortions and imbalances, many elites have contented themselves with blaming the consumerism of the middle and lower-middle classes for the downturn.

      Intellectuals study inequality; they look at Gini coefficients and...

    • Transcending the European Nation State
      (pp. 169-174)
      Dominique Moïsi

      The world is currently changing, and with the economic crisis, many of Europe’s presumed strengths have actually been proven void. In this new context, Europe must develop a new narrative of comparative advantage. It must develop its strengths and cover for its weaknesses in order to stay competitive and relevant in a shifting world. Strong winds of change are blowing, and in order for Europe to resist this wind, it must readjust the position of its body.

      Unlike the collective hope currently experienced in the US, the EU suffers from a collective moroseness. Ideally, to overcome this, Europe should focus...


    • [4 Introduction]
      (pp. 175-176)

      The economic crisis presents enormous challenges to policy repertoires and the architecture of international organisations. In addition, as pressing global problems such as climate change, energy scarcity and water management gain in urgency, this has consequences for strategies of concerted supranational action.

      André Sapir considers the crisis as the end of the second wave of globalisation. Just as the world wars of the 20th century ended the first wave of globalisation and ushered in a moment of global institution-building, so too does the current crisis present a window of opportunity for institutional recalibration. According to Sapir, addressing the crisis requires,...

    • The Crisis of Global Governance
      (pp. 177-184)
      André Sapir

      Understanding the challenges that Europe and the world face today is aided by turning our vision to the processes of globalisation that have characterised the last 150 years. Essentially, the world has witnessed two successive waves of globalisation: the first from the mid-19th century until World War I, and the second one starting at the end of World War II, taking full flight after the crisis of the 1970s and perhaps ending with the advent of the current crisis.

      The first wave of globalisation was the product of the second industrial revolution in the mid-19thcentury. During this period, industrial...

    • Capitalism 3.0
      (pp. 185-193)
      Dani Rodrik

      Over time, the basic tenets of capitalism have changed and evolved, interacting with shifting global trends. Since the 1900s, there have been three broad models of global capitalism, the latter two of which are extensions of one another. They will be referred to here as Capitalism 1.0, 2.0, and 2.1. The current economic crisis provides a valuable opportunity to reinvent these past models and develop something superior: a Capitalism 3.0.

      The key element distinguishing these models from one another is the way that the international community has managed the most fundamental tension of an international market system: the balance between...

    • The Global Development Agenda
      (pp. 194-200)
      Nancy Birdsall

      The economic meltdown was caused by the interaction of two factors. There was the imbalance in the global economy between China’s savings surplus and the US’s consumption profligacy. The large inflow of capital coupled with expansionary monetary policy made credit too cheap; banks and other creditors took increasing risks in order to stay ahead of the competition with high returns. Plus there were the regulatory failures. (Ironically, in the aftermath there is some risk that the wrong approach to tightening regulation, e.g. on securitisation, could increase the costs of capital in emerging markets.)

      Unfortunately, the international community failed to foresee...

    • The Economic Crisis and Climate Change
      (pp. 201-206)
      Anthony Giddens

      The world is at the brink of a new era. Many challenges have come to a head recently and have culminated in three potentially devastating crises that will together change the face of the future: the economic crisis will impact future financial capacities, the climate change crisis will impact future business possibilities, and the energy crisis is already fundamentally shifting the world’s resource priorities.

      The crisis necessitates a new responsible brand of capitalism.

      First and foremost, in the upcoming period the state and the markets will need to negotiate a new relationship. Recovery from the economic recession necessitates more than...

    • A Stress Test for the Welfare State
      (pp. 207-211)
      Tony Atkinson

      The crisis has revealed that much of the growth of the last 20 years, both in the UK and elsewhere, was in fact illusory. This is the consequence of the fact that growth was mostly driven by one sector: the financial industry. There were simply few other growth drivers outside of financial innovation and credit creation. Sadly, much of the growth that was created in this sector was simply reinvested in the financial sector, and little of it found its way into the real economy. The national accounts showed households as having increased their use of financial services by 65...

    • The G2 and the Crisis
      (pp. 212-218)
      Amy Chua

      The economic crisis that began in the United States has spread globally. However, as the world’s previously unrivalled economic superpower, the US is still in many ways seen as being at the centre of the current crisis. Many still look to the United States for indications of change or reform. However, the US has a distinctive historical tradition with a specific value system that makes many dramatic types of reform quite unlikely.

      For example, although the crisis has brought to light the gross inequalities in American income distribution, this has sparked only limited public outrage. Recent Gini-coefficient readings have been...


    • [5 Introduction]
      (pp. 219-220)

      As an integrated political economy, it is to be expected that the global economic crisis also affects core EU institutions. This particularly applies to the ECB and Eurozone group, bound together by a single currency.

      The concluding part of the volume focuses entirely on the ramifications of the crisis in Europe, the EU, and its member states. The interviewees range from fearful to hopeful. European coordination and intervention may have mitigated the initial blow of the crisis; however, at the same time, the crisis did reveal a fair number of shortcomings in the EU edifice. Moreover, the crisis could easily...

    • A New European Contract
      (pp. 221-227)
      Loukas Tsoukalis

      The financial crisis that erupted in 2007 and quickly developed into a full-scale economic crisis has laid bare three colossal failures: the failure of the economics profession, the failure of markets and the failure of politics. Of course a failing market is in itself nothing spectacularly new, but it has been forgotten that booms and busts appear to be an inherent feature of financial markets. For years, the economics profession was dominated by hypotheses of efficient markets, rational choice and perfect information. These were the key elements of an economic theory that purported to explain the functioning of our economic...

    • Europe’s Neo-liberal Bias
      (pp. 228-234)
      Fritz Scharpf

      Policy responses to the current economic crisis have clearly benefitted from lessons learned from the past. In contrast to the crisis of the 1970s, the present one had its origin in the financial system, rather than in the real economy. Whereas the financial crisis of the early 1930s was driven into a worldwide depression by government policies of fiscal and monetary retrenchment, modern governments have generally adopted policies of monetary and fiscal reflation, and they have intervened directly to bail out faltering banks and to save important industrial firms. As a consequence, the economic decline is unlikely to be as...

    • Beyond Lisbon
      (pp. 235-244)
      Maria João Rodrigues

      As is becoming increasingly clear, the current crisis is a systemic crisis much like the crisis of the 1930s. Its origins lie in a particular breed of short-term capitalism based on shareholder value. This yardstick became dominant in all key areas of economic decision-making, from financial decisions to creating jobs. Although this analysis particularly applies to the so-called Anglo-Saxon type of capitalism, a similar trend could be identified in Continental, Southern, and Nordic models.

      A systemic crisis demands a sustainable, systematic response, which means both direct and structural reforms. These reforms should not only apply to the financial system or...

    • The Quest for Vision
      (pp. 245-251)
      Helmut Schmidt

      The economic crisis brought to light the dangerous extent to which national economies have become globally interwoven. This far-reaching interdependence not only caused the economic crisis to spread quickly across the globe, but will simultaneously be one of the biggest hurdles during the crisis recovery period.

      Large and small countries alike are profoundly dependent on world markets for their economic survival. Germany epitomises this reality; in 2007, exports as a percentage of GDP were up to nearly half of all domestic production. Although the majority of this was exported within the European Union, a large share also went outside of...

    • Rekindling the Spirit of Cooperation
      (pp. 252-258)
      Jacques Delors

      The roots of the crisis lie in a global paradigm shift in political economy which began in the early 1980s. This shift is expressed by three macro-economic changes. First, the traditional link between salary and productivity was broken. Up until the 1970s, the financial reward for work was based on real output. However, with the advent of neo-liberal economic principles, these factors were no longer necessarily linked. It should be noted that this trend was often politically encouraged; many countries established policies of reducing the cost of labour. The effects of severing the link between salary and real output is...

  11. EPILOGUE Towards a New Agenda
    (pp. 259-266)
    Ben Knapen

    We predict the future every day; we have no choice. We often get it wrong, but wrong predictions are also part and parcel of expectations. In fact, some predictions have been so spectacularly wrong that they actually brought the unfortunate writer eternal fame: British economist and politician Norman Angell was the author ofThe Great Illusion. He argued that worldwide economic integration had made war futile, counterproductive, and outdated – something of the past that mankind had overcome. Published in 1910, this book was a huge success, and ironically became even more successful after the Great War.

    But financial and...

  12. Overview of the Interviews
    (pp. 267-268)
  13. Biographies of the Interviewees
    (pp. 269-281)
  14. Biographies of the Editors
    (pp. 282-283)
  15. Back Matter
    (pp. 284-284)