The Hidden Cause of the Great Recession: Extract from ‘Realeconomik’ by Grigory Yavlinsky

In his recent book Realeconomik the internationally respected economist Grigory Yavlinsky makes a powerful case that without a commitment to established social principles in business and politics, a stable global economy will be impossible to achieve. In this exclusive extract Yavlinksy, veteran leader of one of Russia’s liberal opposition parties and recent guest on BBC’s Start the Week and HARDtalk, provides a fascinating introduction to his controversial book.

Extract from Realeconomik: The Hidden Cause of the Great Recession (and How to Avert the Next One)

It would have been pointless to write a book like this just three years ago—one simply couldn’t hope for a positive response. But the situation is different now, largely because of two changes. The first is the financial crisis of 2007–2009, which made at least some of the educated public more interested in understanding the underlying fundamental problems of the current world economy.

Second, and this could be more significant, the current debate on economic policy of U.S. President Barack Obama’s administration provides more room and opportunities for serious discussion than before. Before these changes occurred, any debate on such issues would in principle have been consigned to oblivion, so there was only one option—to wait for the opportune moment.

The title and subtitle, Realeconomik: The Hidden Cause of the Great Recession (and How to Avert the Next One), reflect the central idea of my book: the cause of the crisis is that at the core, modern capitalism is concerned with money and power, not ideals, morals, or principles. I use the word Realeconomik as an analogue to Realpolitik, a pejorative term for politics that masquerades as practicality while in fact comprising the cynicism, coercion, and amorality of Machiavellian principles.

Contemporary economists might not accept some of the ideas proposed in Realeconomik. I could not have published these ideas even in the first half of 2008 without being considered at best retrograde or at worst an ignoramus. Even now I have little hope that the opinions of contemporary trendsetters in economics and business have changed. However, it is possible that what is variously described as the “Great Recession of the early twenty-first century” or the “longest U.S. slump since the 1930s” will make at least some of these people consider seriously the argument of this book.

Unfortunately, the reasoning you will fi nd here has become unfashionable. In the 1950s, when the world was still extricating itself from the ruins of World War II, the ideas I wish to discuss were more a part of public discussion. Today, many will find them politically incorrect, if not seditious. An entire generation of Western politicians, businessmen, and economists has come of age without ever thinking seriously about the relationship between morality and economics or ethics and politics.

If we turn to eastern Europe, in particular early in the post-Soviet age, such discussions were out of the question. It was generally accepted that business should be measured only by profits. Politicians who succeeded communist-era leaders (and who largely had been a part of the communist ruling class) proclaimed the transition from totalitarianism to market democracy yet actually adopted the most unprincipled and cynical view of the nature of politics, driven by the all-encompassing conviction (learned in their communist past) that in a market capitalist society only profits mattered—the central idea of Realeconomik.

In Realeconomik I do not seek to make any moral judgments: I aim instead to be descriptive and analytical. My goal is not to moralize, but rather to indicate those areas that are usually not discussed in public—to write what many people think but may prefer to keep to themselves. I have tried to be more or less impartial, though one may perceive judgment behind many of my words. I have no intention of condemning anybody as mean or immoral: in no way do I consider myself a man who has the right to judge my fellow human beings. Anyway, that’s not my task.

I aim to formulate a number of thoughts about what I perceive to be the underlying causes of the global economic, moral, and political crisis at the beginning of the twenty-first century. Testing some of the ideas contained in Realeconomik will surely require several years of solid academic work. Nevertheless, I accepted the kind offer of Yale University Press to publish it now, because time moves so swiftly in our modern world that I feel the urgency to state clearly the things that I believe to be crucial to understanding the events unfolding before our eyes.

The underlying premise of Realeconomik is that the nature of the Great Recession is not only economic—or perhaps not even attributable mainly to economic factors. Neither is it the product of mere complacency and negligence of duty on the part of authorities and top-level managers in the private sector, as some experts insist. Rather, the underlying fundamentals and causes go deeper—to such things as general rules of society and the logic to which they are subject, encompassing the issues of individual and social values, moral guidance, and public control, as well as their evolution over the past several decades. These issues are much more serious and have a greater impact on economic performance than is customarily believed.

Academic researchers and governmental decision makers should not lose sight of the fact that even comparatively sophisticated ways of responding to this crisis, as proposed by many, such as writing new, stringent rules, exercising more public control over their enforcement, imposing taxes on some kinds of financial operations, and the like will not resolve fundamental problems, which are not simply economic. Far less will be achieved by simply “pouring money on the crisis,” even if it is accompanied by exposing the banking secrets of thousands of officials and businessmen.

There are no ready-made solutions to these problems. However, I hope tRealeconomik will provide a fresh perspective for anyone concerned about another bursting bubble, persistently high unemployment, the “new normal” (economic stagnation in a low-growth, low-inflation environment), financial volatility, sharply rising poverty rates (even in industrialized nations such as the United States), and social unrest, or the possibility of something more catastrophic.

Realeconomik is not a clarion call to change everything instantly. At the same time, the ideas discussed here could and should become the cornerstone of modern policies in developed countries that could help overcome certain disturbing political, economic, and social developments of the past twenty-fi ve years.

I have structured Realeconomik to include a number of ideas and observations that reveal the key traits of the modern Western economic and political system from the perspective of various changes of the past two or three decades, both in the essence and character of business activities and in their political and ideological underpinnings. Those changes can tell us much about the global economic decline.

I am ready to accept criticism, as some shortcomings of Realeconomik are obvious to me, too. However, the urgency of the problem persuaded me not to let perfection be the enemy of the good. Comprehension of the key provisions should not require extensive scholarly references or an array of empirical evidence.

It is difficult to talk about the economy from the perspective of morality, as the very concept of morality seems to be devoid of established content, is subject to broad interpretation, and is often rather elusive. But those difficulties seem insufficient reason to exclude morality from economic analysis and research. It is essential to treat the issue of morality seriously and extensively to provide a meaningful perspective for economic processes and their consequences, especially in the framework of longterm analysis.

I realize that treating moral sense as an economic phenomenon is a complex enterprise sure to be widely challenged, and I address this subject extensively elsewhere in Realeconomik. Nevertheless, I must begin with the premise that there exists a code of simple and well-known, almost universal, informal rules of behavior. These rules are essential to the efficient functioning of market mechanisms and need to be constantly maintained, if not enforced, by public institutions. Consequently, public neglect of these rules in business, as well as in regulating activities, may lead—and to a large extent has already led—to serious deficiencies in economic mechanisms, first and foremost in the financial sector.

I believe this premise is of utmost importance, and that may excuse my desire to share with the readers my personal impressions and findings. The latter originate not only from my research but also from daily experience of mixing with people who consider the relation of politics and business to morality an issue unworthy of serious consideration. The viewpoint of these people reflects the cynical attitudes common in the West, and it also represents a psychological vestige of the hypocritical totalitarian past in the Eastern Bloc countries. This worst-of-both-worlds combination often produces the atmosphere I call Realeconomik: undisguised cynicism that can lead to lawlessness, corruption, and even violence as a means to resolve political and economic disagreements.


Realeconomik by Grigory Yavlinsky

Certainly I understand the difference and draw a clear line between personal codes of behavior and the much more complex ethics in public policy. Nevertheless, that line is neither absolute nor insurmountable: a politician who maintains ethical principles in his private life is likelier to implement them in politics, though the degree to which he can do so may be limited by the results achievable. If sticking to principles dooms a policy to failure, that policy is flawed; achieving positive results without compromising principle is the true art of politics, an art sadly neglected.

In Realeconomik I hope to demonstrate the need to rearrange our economic mindset to allow more room for values and guidelines to govern the behavior of economic agents. If I succeed in drawing public attention to this need, I will consider my mission fulfilled.

Grigory Yavlinsky is a Russian economist and founder and member of the Russian United Democratic Party (YABLOKO). As deputy prime minister of Russia in 1990, he wrote the first Russian economic programme for transition to a free-market economy, 500 Days. He lives in Moscow.

Realeconomik: The Hidden Cause of the Great Recession (and How to Avert the Next One) is available now from Yale University Press.

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