The attacks on the World Trade Centre and the Pentagon seem certain to have profound effects on the US economy as well as the world. This is not because the direct economic effects in terms of property loss are especially major or that the share or futures markets have had cataclysmic falls. A 10 per cent net fall for the Dow Jones Index is serious, as is the almost immediate loss of jobs in the airlines and related tourist industries. But the impact upon the economy cannot be gauged by these immediate consequences. The likely war gains a reflection in this economic crisis. Just as it will be like no other war, this will be like no other economic crisis. Indeed this is not an economic crisis as conventionally understood.
The challenge carried in the attack on the United States is cultural rather than economic — it is a challenge to a way of life and a realm of assumptions that support the high-tech economy. The innocence and glitter of the high-tech supported media lifestyle has suffered a terrible blow. The loss of confidence evident all around the developed world is not a loss of confidence in the economy. It is primarily a loss of confidence in the inviolability of a high-tech way of life and it is this that will have profound economic effects. In this respect the crisis can be seen as one of a distinctive type that opens the door to a future of new possibilities. Some are especially bleak, but there are positive possibilities here too.
None of the basic elements of the high-tech economy that have taken shape since the computer and communications revolution of twenty years ago are directly affected by this crisis. The global financial system, the transformation of productive activity by computerisation, the potential of internet-based e-commerce, or the longer term potential of bio-technology: taken in their own right none of these processes, with the possible exception of e-commerce, are under threat. All offer ways of producing that are stunningly productive. The well-known collapse of the dot com bubble related to over-exuberance towards the possibilities of e-commerce and a serious underestimation of the problems of stabilising consumption through such abstract means. But a phase of over-exuberance is one thing. E-commerce is still likely to re-emerge with a new vigour in one form or another. The main crisis a high-tech economy now faces lies elsewhere.
High-tech economies are rather special in the way they, unlike their modern predecessor, combine cultural assumptions and economy. A high-tech economy assumes, for example, that a self that is radically mobile, open to re-construction and largely self-referential can be formed to complement an orientation towards consumption. These cultural assumptions actually amplify the implications of such an attack. All of the above elements of the high-tech economy are situated within assumptions like these that are much more problematic than the economy proper. It is largely, if not exclusively, at this level that one must assess the significance of the crisis.
The shock of 11 September was a massive blow against the innocence, the apparent political and cultural neutrality, of such constructions. It has pierced a process of reality construction that had become so self-referential that it sustained a fantasy that the ‘common sense’ of the media-based lifestyle could not be challenged. Confidence that these highly individualistic lifestyles were the wave of the future was a foundation stone for the high-tech economy. Now they have been shown to be especially fragile. While it is wrong to see the crisis as one of the West versus Islam, it is one that implies a challenge to the culture of the high-tech society. In that sense the crisis is an expression of a cultural conflict, one that arises out of the cultural impoverishment that for very large numbers of people is the other side of high-tech development.
There are, of course, other more immediately economic effects of the shock which seem open to straightforward economic analysis. Yet many of these also conceal assumptions about the high-tech reconstruction of social life. Take the crisis in the airline industry and tourism. Their prospects are inseparable from assumptions about radical mobility, promoted by the process of globalisation. Will these reassert themselves after a settling down period or does the challenge go deeper? Certainly their prospects are not very positive in the light of a new type of war. The risk associated with air travel is now very much higher. The likelihood of being hijacked is not especially high, but the chances of survival if hijacked are now about zero, as planes will be shot down in the United States. In this way the war upon terrorism is absolutely negative for any general economic recovery. No doubt that there will be significant productivity losses due to the need to handle widespread uncertainty about security in the new environment.
It is widely agreed that the US economy was on the brink of recession before 11 September. This had little to do with a basic challenge to the assumptions of the high-tech economy and more to do with its internal workings, having over-stretched itself in the boom and bubble especially related to the internet, e-commerce and high-tech generally. It would be astonishing if the economy did not now succumb. This is not to deny that confidence may recover some of its vibrancy. The re-assertion of ‘normality’ could be expected as an aspect of a very powerful on-going cultural process. But with the fragility of global lifestyles revealed, any confidence about the high-tech way will be deeply qualified.
One area of the new economy appears to be especially vulnerable in the circumstances of the outbreak of this cultural conflict. In specialist circles it is well known how, over a period of twenty years, the whole sphere of insurance, futures and risk has grown exponentially to play a central role in the functioning of the world financial system.
This growth has been premised on developments in the evaluation of risk whereby risk is said to be able to be given an objective measurement. Complex mathematical algorithms are employed using powerful computers and it is these processes that have supported the immense growth of hedge funds and the future markets generally. These markets are based on options to buy or sell assets rather than holding assets in their own right. This leverage allows the control of assets by investing only a small proportion of their actual value.
The growth of the sector has been such that it could easily overwhelm the power of a central bank, even one as large as the United States Federal Reserve. Size is one thing. The other factor, so critical at this time, is the way the sector depends on the objective measurement of risk. Such a measurement is probabilistic, it must rely on assumptions about the risk environment, ruling out certain possibilities and allowing for others. The degree to which assumptions of risk can have a devastating effect on profits and losses was illustrated recently by the loss of $3 billion by a mortgage subsidiary of the National Bank. In this case the subsidiary relied on software that had risk assumptions built into it relating to the movement of interest rates. The sudden and sustained fall in rates in the United States over a period of ten months since late 2000 was sufficient to break through the risk assumptions of this organisation and literally brought it to its end.
If the falls in official interest rates are sufficient to invalidate the assumptions of at least parts of this sector of risk management, what can one say about the exceptional attack on the United States? Shocks have always played a role in economic crises. One need only go back to the oil price shocks of the 1970s to see how the economy can be thrown into turmoil and serious recession. Now a sector built on massive calculations of risk all of a sudden finds that its assumptions no longer have any basis.
The consequences of this are not necessarily immediate. The vast network of transactions that make up the futures or derivatives markets, where risk is offloaded to other players who then offload again, allows significant time lapses before the situation becomes clear.
Calculation of risk occurs within the economy as such. It proceeds by means of assumptions that measure the risk of situations changing. What cannot be predicted for purposes of day-to-day transactions is the singular event, like an earthquake. We have just experienced an earthquake, although this one is not from the realm of nature. It is a culture war and as such it is all the more disconcerting. With a shock of this scale no one knows how the world of risk management will bear up. But there should be no doubt that the road is downhill. It could be quite steep, and a shock in its own right.
The larger question is how to rebuild economies that are not so tied to a high-tech way of life. For the moment very few people are asking the question, but soon enough it will be firmly on the agenda. How else can we construct a stable future?
John Hinkson is an Arena Publications Editor.