Exactly 21 years ago yesterday, the Dow Jones Industrial Average lost 22 per cent of its value in the biggest single-day stock market sell-off in US history. Black Monday, as it was quickly dubbed, ended a five-year bull run that was fuelled largely by leveraged buyouts, heavily margined public listings and exotic derivatives that defied the comprehension of most investors.Black Monday was a milestone in America's twilight as a global power, or so argued the British academic Paul Kennedy in his book The Rise and Fall of Great Powers, which was published just in time for the crash.
The US, Kennedy wrote, was falling prey to "imperial overstretch" and would soon be replaced by Japan as the world's pre-eminent democratic leader. Economists praised Japan's emphasis on savings and export-led growth, particularly as the US asphyxiated itself on debt. Zaibatsu, the country's massive industrial conglomerates, and the trade barriers that insulated them, were considered the way of the future. Vertical integration and mercantilism were hot, outsourcing and open markets were passť.
Ten years later, emerging markets were in crisis, having built their economies around the by-then repudiated Japanese model. It took a series of emergency bailout packages administered by the International Monetary Fund (IMF) - conditioned, of course, on the recipients' embrace of neoliberalism as proselytised by the Clinton administration - to save the day. Free-market capitalism was back.Another decade, another wrenching role reversal. Having righted its books under Mr Clinton - owing in part to the collapse of the Soviet Union, which neither Kennedy nor the CIA anticipated - as well as some old-fashioned fiscal restraint, the US went on another borrowing bender. The reckoning that is now upon us has once again revealed "democratic" capitalism as a viral agent of financial ruin. President George W Bush's "ownership society", the notion that the cornerstone to civilisation is a home mortgage - preferably a fixed-rate one - is in tatters.
The question is: what will take its place? Until now, the failure of one economic model always made way for something else. It was the scandalous consumption of the Gilded Age, for example, that transformed Marxism from an abstract theory into a worldwide movement. Only the speculative excess that led to the Great Depression could have turned a wanton speculator like Joseph Kennedy, the father of former president John F Kennedy, into a New Deal regulator as head of the newly established Securities and Exchange Commission.
What is so conspicuous about the exhaustion of laissez-faire economics - this time, at least - is the lack of a viable alternative. A wholesale repeal of the Reagan-Thatcher revolution is unlikely. European leaders last week seemed genuinely reluctant to re-nationalise their economies after nearly three decades of privatisation and deregulation, however mixed the results. Japan remains a couch potato, having failed to make the transition from top-heavy, highly regulated industrialised economy to a more nimble service-based one.
The abrupt drop in oil prices has shown how vulnerable massively subsidised petro-economies like Russia and Venezuela are to fickle commodities markets. The IMF, which was so prolific during the currency crises of the past decade, has been largely absent amid the current one, in which its most powerful shareholders are complicit.That leaves China. Given its sustained growth and rising income levels against unprecedented demand for jobs, capital and energy, China should rank as one of the best-managed economies in the past quarter century. Its foreign exchange reserves have swollen to nearly US$2 trillion (Dh7.3 trillion) at a time when the rest of the world, the US first and foremost, is starved of liquidity. Despite complaints from its trading partners, Beijing has methodically and deliberately opened much of its domestic market to foreign goods and services while lifting foreign exchange controls to encourage investment outflow.
China is also authoritarian, corrupt, polluted and opportunistic, having partnered with odious regimes in exchange for access to petroleum and natural gas reserves. The Chinese Communist Party, like any political machine, is little more than a dispenser of patronage. It can persuade and coerce, but it cannot inspire. Having vaulted from destitution to prosperity in such a short period of time, the Chinese seem to have bypassed the euphoria that often accompanies economic modernity for a dreary, collective cynicism.
As an example of fiscal prudence and restraint, the Chinese growth model has merit, but it comes at too high a cost. Democratic capitalism may have been consigned to yet another stint in history's dustbin, but there is a reason why it keeps popping up for a fresh turn. The system that can more efficiently indulge our best and worst instincts - innovation, ambition, greed, recklessness - has yet to be invented. One way or another, the free market, with its duelling capacities to build and destroy, will reappear for another wild ride.