|New world disorder
It's 30 years since oil prices soared and monetarism triumphed - and there
could be more upheaval to come
Larry Elliott, economics editor
Thursday October 9, 2003
Some say the 1960s ended with Woodstock in August 1969. Others date the
decade's demise to the break-up of the Beatles eight months later. Both
are wrong. The 60s died 30 years ago this week when, on October 6 1973,
Egypt and Syria chose Yom Kippur, the holiest date in the Jewish calendar,
to launch a surprise attack on Israel.
The twin offensive was quickly halted so, in response, the Arab-dominated
oil-producers' cartel, Opec, announced price increases, production
cutbacks and an embargo on Israel. If the intention was to inflict pain on
the west, it worked. By early 1974, oil prices had risen fourfold and a
golden age of prosperity came to a halt.
The Yom Kippur war thus provided a hinge between the two halves of the
post-1945 period. Up until 1973 came the era of social democracy; years of
expansion in which governments, armed with Keynesian economic ideas,
pursued full employment. After 1973, the pendulum swung to the right in
favour of governments wielding free-market policies aimed at tackling
As the recent Israeli strike on a Palestinian base in Syria illustrated,
the underlying conflict shows no sign of being resolved. The oil wealth
for the Gulf states proved a double-edged sword: the windfall has allowed
them to spend in the arms bazaars, but has acted as a disincentive for
autocratic regimes to embark on reforms.
Instead of putting their petro-dollars to good use at home, oil states put
them on deposit in the world's money markets. From there, they were
recycled as loans to poor countries eager for capital to finance
development. The result was not economic take-off but - thanks to reckless
lending, corruption and a stagnant global economy - a debt crisis that is
still burdening poor countries.
Shockwaves from the Yom Kippur war were equally strong in the west. The
first-wave effect of higher inflation was followed by a second wave of
higher unemployment, as companies faced spiralling costs. The third-wave
effect was the triumph of a right that was committed to shifting the
balance of power in favour of capital. Egalitarianism, tax-and-spend and
nationalisation were out; trickle-down, balanced budgets and privatisation
More than 20 years of full employment had allowed pay bargainers by the
early 1970s to negotiate deals in excess of productivity gains, with
profits squeezed as a result. By the late 1970s, high unemployment had
undermined the power of labour, bearing down on wages and pushing up
profitability. The fate of the National Union of Mineworkers illustrates
the point. In the months following the Yom Kippur war, the NUM humbled the
Heath government. Little more than a decade later the pit strike ended
with victory for Margaret Thatcher.
The seeming impotence of Keynesianism to come up with solutions for a
cocktail of rising unemployment and higher inflation validated the
monetarist ideas that had been nurtured by free-market thinktanks from the
1950s onwards. To this day, central banks and finance ministries remain
obsessed with price stability.
Likewise, the political thrust of the right's post-1973
counter-revolution - curb union power, cut taxes, set markets free - has
not been seriously challenged. Centre-left politicians claimed their
"third way" would steer a path between those who, in Bill Clinton's words,
"said government was the enemy and those who said government was the
solution". Yet in some key areas of policy - welfare reform, for example -
Clinton went even further than Ronald Reagan.
The assumption is that the post-1973 consensus will last indefinitely.
That is precisely what social democrats assumed in the early 1970s.
Indeed, even when the collapse of the Bretton Woods system of fixed
exchange rates in 1971 was acting as the harbinger of the crisis to come,
Richard Nixon was insisting "we are all Keynesians now".
Similarly, just as the postwar golden age was undermined by rising
inflation and the combined cost to the US of the Vietnam war and Lyndon
Johnson's great society programmes, so there have been signs of strain for
the new world order promised by George Bush senior after the Berlin Wall
came down. For the collapse of Bretton Woods, read the succession of
financial crises since 1992. For the hubris of organised labour, read
corporate corruption and greed. For the diminishing returns from
public-sector pump priming, read the diminishing returns from a build-up
in private sector debt. For a world struggling to cope with inflation,
read a world struggling to cope with deflation.
There are three ways of looking at all this. The first is that any
comparisons between 1973 and 2003 are pointless because history doesn't
repeat itself. The second is that we are suffering from the birth pangs of
what the economist Joseph Schumpeter called creative destruction - the
transition to a technological paradigm that will restore capitalism to
good health. The third is that Argentina's collapse, the Enron fraud and
the self-delusion of the dotcom bubble are warning signals of a political
and economic paradigm running out of juice.