The following is an excerpt from Martin Daunton’s new book, “The Economic Government of the World: 1933-2023,” out November 14.

‘The decadent international but individualistic capitalism in the hands of which we found ourselves after the [First World] war, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it doesn’t deliver the goods. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.

John Maynard Keynes, ‘National self-sufficiency’, 1933

This book started with the World Monetary and Economic Conference of 1933 when the world was in deep depression and geopolitical tension. It ends in 2023 at another time of great economic difficulty, in the aftermath of a pandemic and during the most serious geopolitical crisis in Europe since the Second World War. The immediate economic impact of the pandemic exceeded that of the global financial crisis, with the world’s GDP falling by around 20 per cent between January and April 2020, and around 80 per cent of the world’s workforce under restriction. In response, governments embarked on massive spending programmes to support businesses and workers, incurring levels of debt that were not considered feasible during the global financial crisis. In March 2020, investors not only sold shares; unusually they also sold United States Treasury bonds, the safe assets that provide the basis of credit, which was one reason that the financial crisis was potentially more serious than in 2008. The Fed stepped in and bought debt issued by the Treasury, which ‘monetized’ debt and allowed the government to run a deficit without raising interest rates. Despite their assertion that they were acting to preserve the financial system, the Federal Reserve and other central banks were using ‘fiscalQE’ to fund governments.

The pandemic exposed the dangers of precarious employment and economic inequality that existed during the era of neo-liberalism, and widened pre-existing health inequalities. Between March and December 2020, the number of years of life lost attributable to the pandemic varied from 916 per 100,000 people in the most affluent areas of England and Wales to 1,645 years in the most deprived areas. Similarly, in the United States in 2020, the number of years of life lost in the most affluent quintile of counties was 0.99 million and in the least affluent 1.38 million. At the same time, asset prices rose above pre-Covid levels as a result of quantitative easing so that those with property and investments gained. There were also striking discrepancies between countries as a result of levels of deprivation and health care, and the provision of vaccines. The pandemic showed the dangers of an interconnected world in which pressures on the environment and ecological stress led to the rapid spread of a disease that needed – though did not receive – a global response. It intensified calls fora new social contract based on greater equality and recognizing the worth of essential workers, for a green new deal, and for a greater appreciation of the risks of globalization. The pandemic showed the need for collective action, and many progressive commentators hoped it would achieve what the global financial crisis failed to deliver: a turn from neo-liberalism and financialization. Might Covid be an inflection point comparable to the emergence of embedded liberalism during the Second World War and neo-liberalism in the 1970s?

Peter Hennessy, a leading historian of modern Britain, hoped that the pandemic had revived the social solidarity that led to the wartime Beveridge Report and the post-war welfare state. Similarly, Adam Tooze thought ‘a turning point had been reached. Was this, finally, the death of the orthodoxy that had prevailed in economic policy since the 1980s? Was this the death knell of neoliberalism?’ Despite these hopes for a new direction, the pandemic – and then the energy crisis after the Russian invasion of Ukraine – might instead lead to the survival of the status quo. It led to vaccine nationalism, a failure to coordinate assistance to low-income countries, and potentially a backlash against the costs of the pandemic with a return to austerity. During the pandemic, presidents Macron and Biden, Angela Merkel and Boris Johnson – all centrists in different ways – drew on the ideas of a green transition, fiscal and monetary interventions, investment in the infrastructure, and ‘levelling up’ of deprived areas to counter socialist or populist alternatives. They were responding to the problems caused by the pursuit of neoliberalism that were exposed by the pandemic, but without a radical change in direction. In practice, as Tooze points out, neoliberalism was ‘radically pragmatic’ in using the state to stabilize the financial system both in 2008 and 2020, with the result that the responses to the pandemic were ‘framed by neoliberalism’s legacies, in the form of hyperglobalization, fragile and attenuated welfare states, profound social and economic inequality, and the overweening size and influence of private nance.’ These legacies of financialization and inequality threaten political and social stability within countries and contribute to international economic disequilibrium.

The outcome of the pandemic was still uncertain when Russia invaded Ukraine in February 2022. The subsequent crisis in the cost of energy led to inaction at levels last seen in the 1970s, and the threat of recession. After the global financial crisis, politicians and commentators looked to the Great Depression for analogies and lessons. In 2022, talk was of a return to the stagnation of the 1970s, with an oil shock, economic stagnation and inaction. The analogy is understandable but misses fundamental differences. Monetary policy is not likely to end inaction now as it did in the Volcker shock. The issue in the 1970s was the squeeze on profits and investment; now, it is a squeeze on labour combined with higher profits. New solutions are needed, above all to reverse the trend to inequality and economic precariousness in leading developed economies and to reduce capital’s share of income. Whether these desirable changes can be achieved remains uncertain. Sadly, the short-lived government of Liz Truss that took office in Britain in September 2022 rejected redistribution and returned to long-discredited ‘trickle down’ economics and unfunded tax cuts, which provoked market turmoil and a rebuke from the IMF. The government of Rishi Sunak adopted a more fiscally prudent policy with austerity and a failure to redistribute. In the United States, the mid-term elections of November 2022 gave some hope to the Democrats and much will depend on the presidential election of November 2024.

We are, like Keynes, perplexed. ‘International but individualistic capitalism’ of the era of neo-liberalism has failed, but what can be put in its place is not clear. In 1933, Keynes recommended a turn to self-sufficiency and protectionism; in the war, he turned to plans for a new balance between internationalism and nationalism. We are at a similar point of uncertainty and perplexity about the outcome. The problems facing the global economy are reasonably clear and arise in large part from two interconnected disequilibria. Inequality within countries threatens domestic political, economic and social stability, and in turn contributes to international economic imbalance. As we saw in Chapter 25, the low level of domestic consumption in China led to reliance on export markets, and savings were directed to housing and infrastructure which expose the economy to a risk of financial instability. The low level of savings in the United States led to dependence on debt and deficits in the budget and balance of payments that were covered by the Chinese purchase of Treasury bills and the ‘exorbitant privilege’ of the dollar. Resolution of global imbalances therefore needs national policies to remove the inequality that fuels populism and reliance on debt in the United States, and to reform China’s social welfare system and labour markets to increase the level of domestic consumption. Neither will be easily achieved.

A multipolar world creates the potential for instability, the emergence of economic blocs, and economic and military conflict. At the same time, the existential threat of climate change requires a solution to the ultimate ‘tragedy of the commons’ to prevent each nation’s pursuit of self-interest leading to mutual destruction. The IMF, World Bank and WTO were designed to deal with finance, development and trade. They now face doubts about their relevance and effectiveness in handling different, pressing, problems.  Despite their failings, they remain more powerful than other agencies of the post-war order – the World Health Organization and Food and Agriculture Organization – which are more relevant to the threats to the planet from climate change, food insecurity, and the challenge of future pandemics. This chapter aims to set out an agenda to replace neo-liberalism, avoid populist nationalism, and create a fairer and just economy. Whether it will succeed rests on the political choices we make in the next few years.

Excerpted from “The Economic Government of the World: 1933 – 2023” by Martin Daunton. Published in the United States by Farrar, Straus and Giroux, November 2023. Copyright © 2023 by Martin Daunton. All rights reserved.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.