From Lenin to Lehman - the big lies

Two anniversaries we mark this year - the centenary of the Russian Revolution and the decade since the start of the global financial crisis - have more in common than is apparent at first sight.

Both events are self-evidently momentous. The October Revolution ushered in a dictatorship that would loom over the 20th century as one contestant for hegemony against fascism (in the first half) and democratic market liberalism (throughout). The global financial crisis, meanwhile, shook to its foundations the model that had emerged victorious from the Cold War.

The stultifying communism that the Soviet bloc had evolved to by the 1980s collapsed under the weight of its own economic and political contradictions.

The political turmoil of the last year demonstrates that we are now watching to see whether open-market economies will suffer the same fate.

But the similarities run deeper than merely the historic scale of the two events. The content, too, of the current threat to democratic market liberalism is the same as that which felled its rival.

Communism failed because it committed two types of lies. The first was to betray the dream that had originally attracted so many millions to it: A society of equality, solidarity and self-realisation through collective purpose. Belief in this dream lived on longer than could be justified even in communism's heartland - and longer still in the West. It was eventually ground down by reality.

The second lie was an economic system based on deceit and self-delusion. It is mostly forgotten, but a real debate raged for a good part of the 20th century over whether central planning or decentralised markets would secure the most efficient allocation of resources. The case for state control of the means of production was that only planning could overcome the clear waste of resources involved in capitalism's mass unemployment and recurrent demand deficiencies causing recessions.

In practice, of course, actual central planning has been awful at producing and allocating the goods its citizens wanted. But instead of correcting itself, the planned economy would turn the plan into the great lie around which everyone's public beliefs had to align, even as they privately knew better. "You pretend to pay us and we pretend to work" was a joke from Rostock to Vladivostok, but also a statement of reality.

Only late in the day did the intellectual consensus endorse Friedrich von Hayek's insight that flexible market prices contain more information than any planning mechanism can hope to gather centrally; and that dispersed decision-making, therefore, acts more efficiently than state authorities can do.

This insight goes a long way towards explaining the growing prosperity gap between the capitalist and the communist world towards the end of the Cold War. Yet it had a rude awakening in the global financial crisis, which undermined any claim of Western financial capitalism to being the best way to organise an economy.

The Hayekian epiphany about the price mechanism is not wrong, but incomplete. Market prices of goods and services are indeed a more powerful informational device than any central plan. But the crisis showed the same cannot be said for the prices of assets.

If the five-year plan was the Soviet bloc's grand lie, here is that of capitalism: That the market values of financial and other assets accurately reflect the economic value they represent.

What happened 10 years ago this month was the horrifying realisation that financial claims accumulated over the previous boom years did not add up, that the future economic production which they were claims on was insufficient for them all to be honoured in full.

In brief, the wealth that people thought they possessed did not in fact exist. When enough people saw that their perception of their wealth was untrue, the system unravelled. The disorientation and distrust that followed in both markets and politics was just what one would expect when millions realise they have been living a lie.

One lie spawned another, as market liberalism, in its turn, betrayed the dream it had promised. Western economies are today far poorer than the trend before the crash predicted. The crisis and its aftermath have left the young, in particular, with little reason to hope for the same opportunities to prosper as their parents and grandparents.

Those who want liberal democratic capitalism to thrive again must heed two lessons from this comparison.

First, a social system can survive disillusion for a long time. Communism showed this; as indeed does capitalism, whose promise was broken decades before the crisis for some groups. But when people can no longer count on their livelihoods, support snaps. Even so, the most resilient societies are those that know the truth about themselves. Deceit makes for brittleness. Market liberalism is in peril because its financial system allowed us to tell ourselves lies, and did not reckon decisively with the losses once they were undeniable.

Left and right populists traffic in nostalgia for the heyday of the mixed economy. They are right that the contest between planning and laissez-faire must be resolved by a mix of the two. The biggest lesson from that contest is that any social and economic system must be kept honest - not just fair, but truthful. And that is a radicalism the populists are singularly unqualified to provide.

FINANCIAL TIMES

A version of this article appeared in the print edition of The Straits Times on August 17, 2017, with the headline 'From Lenin to Lehman - the big lies'. Print Edition | Subscribe