The clamor of economic and political events this year -- including the Arab Spring, the intensification of the Western economic crisis, the rise of the Tea Party, and the growing ascendancy of China -- has been deafening. But though most reporting has described these events as disconnected, they are far from coincidental.
The crisis of capitalism that erupted with the 2008 financial bust has very much to do with all of these seemingly disparate events. During the long boom period from 1980 to 2008, mainstream thinking ignored the principles of political economy laid out by Adam Smith, Karl Marx, and John Maynard Keynes. Instead, we got monetarism, free market ideology, Alan Greenspan's facile notions of a "new economy," and even the often self-serving hype about China's ability to rule the world and sustain global prosperity. Today, we can see better how the crisis of 2008 and 2009 marked the end of one era and the start of a new and still very uncertain one.
Smith, widely seen as the father of modern capitalism, had been convinced that public institutions were essential to a well-functioning market economy. But Marx in particular resonates today -- not for his predictions of capitalism's collapse, but for his analysis that "contradictions" between capital and labor would lead to recurrent economic and political crises, and social conflict. And Keynes continues to loom larger than life as a reminder that crises in capitalism need not be terminal.
The 2008 eruption demonstrated the hollowness of claims made by economists and politicians in the 1980s and thereafter that lasting stability and prosperity would be assured by low inflation, free markets, and unfettered globalization. The last quarter-century of faulty economic thinking has left us with a sour and acrimonious legacy, including the need to reduce the dead weight of 25 years of accumulated debt; the loss of credit creation, housing, and financial services as leading drivers of growth; rising income inequality; and a populist backlash against political and financial elites. The crisis shocked the pre-existing economic and political order on a scale unseen since the 1930s. The fabric of globalization, which had been stitched together around the so-called Washington Consensus, began to fray.
Seen in this light, many of 2011's international developments don't look so random at all. It was perhaps inevitable that the weakest links in the global system suddenly became much more vulnerable. And the Middle East certainly qualifies as a weak link, not least because the countries from the Sahara to Saudi Arabia were not strongly anchored into the globalization of manufacturing and finance, save through oil-dominated autocratic regimes supported by Western powers.
There is little question that the crisis has drained U.S. economic power and legitimacy, a dynamic that has been aided and abetted by a rising China. As the United States confronts economic, demographic, budgetary, and populist constraints over its global role and power, "American decline" has gone from fringe theory to conventional wisdom in a few short years.
This view may also be myopic, but for now the United States is on its back foot and under increasing pressure to readjust its global position. This fact was highlighted by its decision, after initial hesitancy, to lend its support to the removal of President Hosni Mubarak from power in Egypt, along with its threat to block financial aid if he did not step down. The decline in American influence doubtlessly also emboldened opponents of regimes elsewhere -- for example, in Bahrain, Tunisia, and Yemen -- to call for their rulers' overthrow.
But the conditions for the Arab Spring already existed before American decline took hold. For more than two decades, per capita incomes in the Middle East -- with the exception of those in the low-population oil states -- have been low and stagnant. Unemployment rates have averaged 25 percent in parts of the region, a statistic that masks much higher rates among those under 30. The spark for these conditions to explode into a revolution came with soaring food and energy prices. Here, too, the fingerprints of the beleaguered and debt-ridden Western economies can be found.