Social democrats' structural failure

Janan Ganesh says, rightly I suspect:

Lehman’s collapse did not whet people’s appetite for the left’s creed. Any loss of faith in the market was not matched by a revival of faith in the state.

There are plenty of bad reasons why this should be so - among them a fear of government debt and the belief that Labour got banking regulation wrong (hint: hindsight bias). But there's one justification I'd like to highlight. It's that the collapse of banks brought into question governmental structures as well as private sector ones.

By this I mean two things.

First, banks' losses show that large complex organizations cannot be run well by centralized hierarchies; to what extent this is because of principal-agent failures and to what extent because of bounded information and rationality needn't worry us in my context. But this is true of governments as well as mega corporations. The claim "CEOs can't know enough to manage banks well" is very similar to the claim "government ministers can't know enough to manage public spending well."

In this sense, banking failures should have reduced faith in top-down management - and this naturally undermines statist social democracy.

Secondly, the banking crisis was a failure of networks. There's one fact about the crisis thast isn't emphasized enough. It's that banks' losses were rather small in a macroeconomic context. The ten US banks that lost the most had combined losses of $127bn. But this is only a fraction of the $6.8 trillion investors lost when US shares fell during the bursting of the tech bubble. Why, then, should massive losses have led to only the mildest recession, when much smaller losses caused depression? One reason, arising from my first point, is that banks' were highly leveraged whereas most equity investors' weren't. Another reason - described (pdf) by Haldane and May - is that banks were so densely interconnected that losses in some led to widespread liquidity hoarding, so that the impact of individual losses were magnified in a way that didn't happen in the tech burst. 

This represents another structural failure. Tight, interconnected networks are vulnerable to a common failure in a way that looser ones - what Haldane calls "dissociative structures" - are not.

Again, this represents a challenge to statist social democracy. Policy is traditionally formed and delivered by tight, closed networks - a handful of close colleagues (often from similar backgrounds) make policy, and a few agencies deliver it. The danger of groupthink and system-wide failure is thus high.

In this sense, the left has missed an opportunity - but then, the history of the left is one of missed opportunities. It could have used the crisis to develop ideas of non-hierarchical, decentralized, open networks - and in fairness, the Occupy movement was edging towards this. But statist social democrats missed this chance. They still seem to think that the problem with politics and business is simply that the wrong people are in charge, when in fact the problem is (also) that the wrong systems are in place. 

Comments

[FromArseToElbow]

You make sound points about statism and groupthink, but you're stretching it to imply that such abstract critiques are central to most people's limited "appetite for the left's creed".

Without going to the other extreme and blaming it all on ideological hegemony or a change in human nature, it's pretty clear that most people's attitude towards the utility of the state is ultimately pragmatic.

The social democratic moment in 1945 was heavily influenced by the state's recently-proven ability to advance the interests of the many rather than the few (which contradicted the claims of what was possible that the right had made in the 30s).

The problem for the left across Europe is that neoliberal-infected social democratic governments have failed to sufficiently protect the interests of the many and have instead advanced the interests of the few. Faced with a choice between liars and crooks, most people seem to prefer the latter.

[Samuel Conner]

It might be of interest that there are Progressives thinking about decentralisation in the (seemingly paradoxical) context of state macroeconomic policy. The "Job Guarantee" proposal of US-based MMT thinker Randall Wray (U Missouri, Kansas City) and his colleagues would devolve the details of spending decisions for national funds allocated to employ job-seekers to the local level, but would have funding centrally provided by the national fiscal authority, with the total level governed by macroeconomic considerations of output gap, etc.

[Phil]

"They still seem to think that the problem with politics and business is simply that the wrong people are in charge,"

And not only social democrats. I heard this quote this afternoon & could hardly believe my ears:

- Do you think [what's happening with the BBC Trust] is mainly a system problem, or is it a people problem?
"In my view it's always about personalities. You can have structures till you're blue in the face, but it's the personalities that actually run them that make them work or otherwise. And I think we have problems with personalities, and I think we have problems with the way the people who are on the Trust are selected"

So that would be a problem with the system that selects the personalities? Or just having the wrong people there right now? Probably the latter. I'm reminded of how Angus Deayton covered the appointment of Graham Taylor on HIGNFY - "Let us be the first to say, Taylor Must Go!"

[LateAgitations]

Slightly off the point - but related: For the ordinary joe in the street like myself, truth is almost always concrete. I offer as case study an elderly alcoholic relative of mine. Her plight has highlighted for me the limitations of statist social-democratic interventions. The latter can only operate via systems of rules, regulations and budgets. Devising such systems - ones that are adequate to addressing millions of different, complicated and highly idiosyncratic individual cases, is almost impossible. For my aunt the looser dissociative and non-hierarchical structures of traditional social support - neighbours, friends etc - have proved much more flexible, humane and helpful. In the absence of any groupthink or possibility of career advancement, but motivated only by that gloriously gratuitous traditional attribute 'conscience', people have gone to extraordinary lengths to protect from harm an unattractive, smelly and bad-tempered old lady. Of course, even these paragons cannot completely triumph, and you will no doubt be able to adduce many an example of lonely isolated individuals to counter my aunt's case. Nevertheless,experiences like these do come the way of many millions of UK citizens all the time and, as long as they do, huge numbers will continue to view State interventions as decidedly second-best to other more organic and private possibilities. Basically, I'm with Burke.

[George Carty]

FromArsetoElbow, one of the reasons for the failure of social democracy since 1980 is that they underestimated how much damage financialization was doing to the fabric of society, and were willing to let Big Finance run rampant as long as it paid plenty of taxes to fund the social programmes.

At the Kreisky Forum: Why have Europe’s social democrats surrendered to the toxic logic of current policies?

[George Carty]

Oops, that was meant to be a link:

http://yanisvaroufakis.eu/2012/12/07/at-the-kreisky-forum-why-have-europes-social-democrats-surrendered-to-the-toxic-logic-of-current-policies/

[Ralph Musgrave]

Chris,

Your point about the $6.8tr lost in the tech bubble collapse causing little disruption compared to the huge disruption caused by the relatively small $127bn lost by banks in the recent crises and consequent huge disruption is VERY SIGNIFICANT.

It supports the argument made by Positive Money, Laurence Kotlikoff and others namely that if all bank creditors are loss absorbers or quasi shareholders, all that happens when banks get into trouble is in effect a fall in the stock market. And stock market collapses cause very little disruption compared to bank insolvencies.

Mervyn King made exactly that point in his "Bagehot to Basel" speech. He said "...we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis. Equity markets provide a natural safety valve.."

PLEASE, PLEASE, PLEASE.. where did you get those $6.8tr and $127bn figures from??????

[chris]

@ Ralph - the $127bn comes from here:
http://en.wikipedia.org/wiki/List_of_writedowns_due_to_subprime_crisis
That $6.8trn is the drop in the Wilshire 5000 from 2000 to 2003. I got the data from Datastream; I can't find an online source that goes back that far (St Louis Fred's index numbers don't seem to correspond to Wilshire's own).

[Roy Lonergan]

Here's another slightly bigger estimate for US bank losses - €815bn (gross of tax):

http://www.businessinsider.com/identifying-us-banking-losses-for-the-crisis-they-helped-create-2013-2

A bit higher than the wikipedia table, but within an order of magnitude and still much less than the dot bomb losses.