Why is it important to understand how crises are managed?

2. To recap what we have not learnt so far. In general, the overall approach of formal education (mainly via textbooks) bases its response to  the economic concept of crisis on the neo-liberal economic paradigm.  The market is seen as the basic self-balancing instrument which contains rational agents seeking to maximize profits and income, encouraging individualistic, utilitarian behaviour. 

In this context, crises always tend to be explained in a mechanical way, framed within various thematic concepts linked to growth and economic cycles, macroeconomics and public sector intervention, without explaining the causes of the crises or the point of contact with reality. That is, without exploring the direct effects that one or another crisis management strategy may have on our daily lives, nor questioning who benefits and who suffers in each situation.

Therefore, this dossier aims to challenge that pattern of learning, hoping to awaken the student’s critical view of the different ways of dealing with economic problems that exist in today’s world.

3. To understand the past. All throughout the 20th century, the empirical evidence portrays a highly unstable evolution of capitalist economies over time, where economic crises have occurred consistently and with increased frequency. The Great Depression after the crash of 1929, the oil crisis of the beginning of the 1970s and the 2008 financial crisis are some examples of global economic crises, albeit with different triggers (interest rate movements, changes in the costs of production, the explosion of speculative financial bubbles). What’s more, each lasted for a different period of time. 

A conservative policy response was what came to dominate political economy management of economic crises since the 1970s. Policies focused on reducing public deficits, cutting public spending, controlling wages and devaluing the national currency have constituted the basis of austerity plans implemented in many European countries after the 2008 crisis. 

Austerity means the cessation or reduction of public spending. Ultimately it means the retreat of the State as a social benefactor that injects resources into the economy. The problem is that these austerity policies have not been able to guarantee enduring stability and well-being, nor have they avoided major economic problems, such as mass unemployment, the waste of resources, poverty and inequality. Therefore, it is worth questioning to what extent austerity is the correct strategy to use in a crisis.

4. To understand the future. Currently, while this dossier is being produced, an unexpected and abrupt change in the role of the State is taking place as a result of the exceptional crisis generated by the COVID-19 virus. Governments in almost every country of the world have been and continue to be faced with difficult trade-offs between the health, economic and social challenges that arise as result of the pandemic.

Many national and subnational governments have reacted quickly to address the economic and fiscal consequences of the crisis, and countries are spending significantly more than they did in 2008-2009. Two-thirds of OECD countries have, for example, adopted measures in support of subnational government finance (OECD, 2020). 

The use of public investment across all levels of government to support a COVID-19 recovery over time represents a completely different scenario to the one promulgated by advocates of austerity that supported a  reduction in public spending and a targeting of inflation above all else. Although it is still too early to deeply understand how this crisis was managed and whether the increased presence of the State as an investor in the economy is here to stay, it is encouraging to witness how in some countries, the objectives of economic recovery are being tied to social and climate goals.