While he doesn’t say so, the brute fact is that since the 2008 financial crisis, nearly 40% of tall the growth in the global economy has taken place in just one country: China, despite its having only 15% of the world’s population and less than 20% of its income.
In both crises, policymakers faced the triple challenge of “populism, nationalism, and economic problems that were turned into political and ideological ones.” Liu is critical of all major countries for missing opportunities and making “obvious errors” in their initial responses to the crises: “a tightening policy was pursued, while expansionary policy was necessary; protectionism prevailed while a policy of opening up and international cooperation was in need; and efforts to slash welfare programs and boost structural reforms were impeded or even rolled back.” In his view, politicians were too often “hijacked by short-term public opinion and mired in political gridlock, afraid of breaking ideological constraints,” most vividly in the case of Europe.
Prepare for “extreme cases by designing responses to the worst possible scenario.” In his view, this means not only “effectively dealing with abrupt exogenous shocks and impacts, but making long-term preparations for structural changes resulting from the crisis.”
Recognizing post-crisis strategic opportunities. Before the crisis, China’s growth was driven by overseas market expansion and internal capital flows. Now, in his view, “our strategic opportunities take the form of the domestic driving a world economic recovery, acquisition of technologies of developed countries, and investment and infrastructure.”
Generally, financial and economic crises are one of the inherent features of the capitalist system. Starting from the Industrial Revolution, crises have occurred frequently in the capitalist world. Among them, the Great Depression in the 1930s and the present international financial crisis are the 2 most widespread and disruptive examples, both of which occurred when problems in the capitalist system accumulated beyond self-adjustment.
While comprehensive and judgment with respect to natural sciences are often attained in laboratories, this is not possible in the social sciences. When statistics are scant and the subject is abstract and wide ranging, an alternative way of conducting research is to compare the subject at hand with what happened in the past. Just as there are long climate change cycles in nature, so there exist some recurrent, similar historical phenomena in economic and social fields, provided one considers a sufficient time span.
When the Great Depression hit, people were generally younger, and the middle income class was smaller with lower education levels. In the ongoing crisis, people are much older, with aging societies particularly in the developed world. The proportion of the middle class has risen and education levels are higher. The welfare system and the age factor have weakened the labor force’s market adaptability; people are more ready to keep what has been around than to change.
The practice of macroeconomic management came into being and has continued to be improved upon, and a system of stabilizers and brakes has been installed to safeguard economic and social development. In response to the recent financial crisis, major developed world governments, drawing lessons from the Great Depression, implemented direct interventions immediately, which helped reverse the free fall of their economies in a short time. For these reasons, the recent crisis has created less short-term economic and social damage than the Great Depression.
Both crises occurred after a major technology revolution. According to long-wave theory, technological innovation begets economic booms, which in turn cause depressions. A major technology revolution may lead to a big boom, followed inevitably by a great depression, in a conspicuous cyclical manner. A big technology revolution always unleashes productive potential. It not only changes the productive function and creates a “destructive”/innovative effect, but also has a far-reaching, fundamental impact on social structures, geopolitical conditions and relative national power. If adjustment of the relations of production lags behind productivity growth that was driven by technological innovation and changes in superstructure are slower than those in economic foundation, then the potential risk of crisis will certainly intensify. A lesson for us is that when a future technology revolution arrives, we must not only understand its progressive role and grasp any opportunities that come with it, but also be fully aware of its significant consequential changes and be well-prepared for its shocks and challenges.
Psychological stresses due to technological changes and widening income gaps caused public discontent. Due to their inability to reform and election considerations, governments tended to resort to populist policy announcements to appease the public. Before the Great Depression, the US president had promised “2 cars in every garage and a chicken in every pot,” while before the present crisis, the 2 presidents undertook to improve home ownership.
In both cases, people had become extremely speculative psychologically, persuading themselves that they could get rich overnight. The epic industrial growth and gargantuan gaps in incomes and distributions before the 2 crises distorted public psychology in the capitalist world. A yearning to change their social status had spurred people to dream about making huge fortunes overnight. People would easily buy various stories of speculative miracles, and their avarice and forgetfulness ballooned to an unheard-of degree.
Although these obvious errors are ridiculous from the vantage point of hindsight, it was very difficult for the policy makers concerned to implement the right policies at that time. This is because such big crises tend to happen once in a lifetime, and policy makers lacked experience and had to deal with populism, insular nationalism and economic problems with heavy political implications. Politicians were hijacked by short-term public opinion and mired in political gridlocks, afraid of breaking ideological constraints. Meanwhile, making profits from market volatility is the very nature of financial capitalists. With weak government policies in place, international financial market forces would be more than happy to take advantage of chaotic situations, and when combined with political forces in the wilderness, put the authorities at peril.
Similarly, domestic contradictions that accumulated to a certain degree would transfer liabilities abroad. New equilibrium would not be reached until the full process of a crisis wore out. Thus a big crisis is destined to be long-lasting one once it is ignited. The extreme consequences of the Great Depression were Hitler’s seizure of power through civil election and the outbreak of WW2. At this point, we must be on alert for any unexpected events that will always crop up while the crisis is still developing, as well as for a string of runaway developments and miscalculations.
Understand the changed implications of our strategic opportunities to seek the widest intersection between Chinese and global interests.
Our comparative study also tells us that putting our domestic affairs in order, no matter what happens in the international arena, is the foundation for tackling external impacts and realizing our peaceful rise in the world.