Mark Blyth: Capitalism Is Crashing Again and Politics Isn’t Ready | Global Macro | Ep.94

Episode Overview

• Understanding the "Crash" of Neoliberalism: The episode frames economic history as a series of operating systems that eventually bug out and crash. We are currently living through the failure of the "Neoliberal" era, moving from a time of high efficiency and low inflation to a new, volatile period of supply shocks and populism.
• The Disconnect Between Elites and Reality: A central theme is the dangerous gap between the "administrative class" (economists/politicians) who look at aggregate data, and the working class who experience a permanent loss of purchasing power. This disconnect is the primary engine driving modern political instability.
• The End of Market Efficiency as a Strategy: The discussion argues that the era of outsourcing critical needs to the private sector (like food security and energy) is over. To survive future challenges like climate change and geopolitical conflict, governments must abandon "efficiency" in favor of "resilience" and active state intervention.
• Demographics and the Wealth Trap: The episode explores how aging populations and the concentration of assets in older generations prevent necessary economic reforms, creating a political deadlock where essential changes (like housing reform) are viewed as threats to existing wealth.

Key Concepts

• Capitalism as a Laptop (Software vs. Hardware): Economic systems function like computer operating systems. The "hardware" (institutions) remains, but the "software" (the governing economic philosophy, like the Gold Standard or Keynesianism) inevitably develops "bugs" and crashes. We are currently rebooting after the crash of the Neoliberal software.
• Levels vs. Deltas (The Inflation Fallacy): There is a critical flaw in how economists view inflation versus how citizens experience it. Economists celebrate when the rate of inflation drops (the delta), but citizens remain angry because price levels are permanently higher. This 25% permanent increase in the cost of living, without matching wage growth, is the root of current social unrest.
• Asset Inflation vs. Wage Stagnation: For decades, policy has prioritized protecting asset prices (stocks, housing) over real wage growth. This has led to a fragility where the majority cannot afford basics without debt. When interest rates rise, this debt-dependent model breaks, shattering the social contract.
• "LLTT" (Let's Leave It To Tesco): This concept critiques the neoliberal tendency to outsource strategic national needs (food security, energy) to private markets for efficiency. While cheap in the short term, this creates extreme fragility during crises (like war or pandemics) because the state has hollowed out its own capacity to respond.
• The Supply Shock Illusion: The "Great Moderation" of low inflation wasn't due to brilliant central banking; it was a positive supply shock from 500 million Chinese workers entering the global market. Current inflation is a structural reversal (deglobalization) that cannot be fixed simply by raising interest rates.
• The Return of the "Project State": The "neutral" regulatory state is obsolete. To handle modern threats (climate, defense, re-industrialization), governments must become "Project States"—actively directing capital, picking winners, and building domestic capacity, regardless of deficit concerns or market inefficiencies.

Quotes

• At 0:07:20 - "Economics isn't just a camera passively recording events. It's an engine driving them." - Explaining that economic theories don't just observe the world; they shape policy and outcomes, often creating self-fulfilling prophecies.
• At 0:09:50 - "Think about capitalism as a laptop... Just as computers over time have bugs in the software if you run them long enough, so does capitalism as a computer. And the bug in the software in the gold standard was deflation." - Blyth’s core analogy for understanding historical economic shifts and why systems inevitably crash.
• At 0:27:21 - "L-L-T-T: Let's Leave It To Tesco. That's the food security... If you're in a world whereby [you think] markets are amazing... it's like central banks and inflation control. 'We have anchored people's expectations.' No, 500 million Chinese people joined the global labor force and prices collapsed. That's what happened." - Explaining how policymakers mistake structural luck for their own competence.
• At 0:28:02 - "The administrative class, of which I am part, we no longer live near normal people. We don't send our kids to the same schools as normal people... We think we have a crisis if our income falls below 300,000, and there are people trying to get by on 30. And that's the vast majority of people." - On why the ruling class fails to understand the severity of the cost-of-living crisis.
• At 0:28:19 - "A grocery basket going up 25% with stagnant wages is a huge societal problem... We're just blind to the fact." - Identifying the core reason for current social unrest: the permanent increase in the cost of living versus the economist’s focus on temporary inflation rates.
• At 0:28:57 - "If you continue to run this for another five years and you start to have food riots and you're talking about deficits... they will come and burn your house down with justification." - A stark warning that prioritizing fiscal abstractions (deficits) over human survival needs will lead to violent social upheaval.
• At 0:35:52 - "An economy, stripped down to zero... is the number of people, the number of hours worked, and the quality and quantity of capital they work with... Unless you want AI to replace a third of all jobs because you're running out of workers, your productivity is going to crash." - A fundamental definition of economic growth that highlights the danger of demographic decline.
• At 0:50:56 - "Not one central bank raised their policy rate above the actual rate of inflation... The idea that the signals from the central bank credibly reduced inflation [is wrong]. No, the supply chains came back and you found Qatar." - Debunking the idea that rate hikes solved the post-COVID inflation; it was supply chains healing, not monetary policy.
• At 1:17:17 - "Merkel did this thing: 'stability.' 'I'm going to stay, nothing changes.' You know what a situation where nothing changes is called? Being dead." - Criticizing the European obsession with fiscal stability at the expense of necessary investment.
• At 1:21:55 - "In the morning... the Chancellor gets a call from the Treasury saying, 'This is how much you can spend today,' as if they're running a corner shop... Our job then is to sit and adhere to the fiscal rules. And these are rules that were written for a high-growth, low-volatility environment." - On the paralysis of economic governance due to outdated rules.

Takeaways

• Differentiate between "Inflation" and "Price Levels" in analysis: When evaluating economic news, recognize that a "drop in inflation" does not mean prices are coming down; it just means they are rising slower. Acknowledge that the cumulative price hike is permanent.
• Prioritize resilience over efficiency: In business and personal planning, move away from "just-in-time" optimization. Build buffers and redundancy, as the era of cheap, reliable global supply chains is ending.
• Invest in "real" assets over financial abstractions: Given the shift away from financialization toward the "Project State," value will likely shift toward tangible assets and industrial capacity rather than purely financial instruments.
• Recognize the necessity of government spending: Understand that in a deleveraging or stagnant economy, government austerity is counter-productive. Support or anticipate policies that involve direct state investment (infrastructure, defense, green tech) to keep the economy moving.
• Prepare for increased volatility: The "Great Moderation" is over. Expect economic cycles to be shorter, sharper, and more driven by supply shocks (weather, geopolitics) than by demand management.
• Look for "Project State" opportunities: As governments are forced to pick winners in sectors like defense, energy, and re-industrialization, align career or investment strategies with these state-backed sectors rather than consumer services.