In a moment where financial markets seem to float on a cloud of cognitive dissonance, Adam Tooze challenges the very guard rails that have defined global economics for decades. He suggests that the traditional aversion to "heterodox" measures like price controls and nationalization may be a luxury the world can no longer afford, arguing instead for a pragmatic embrace of policies once considered radical. This is not a call for chaos, but a sober assessment that the current playbook is unsustainable in an era of overlapping emergencies.
The End of the Washington Consensus
Tooze begins by highlighting a warning from Gita Gopinath, the former chief economist of the International Monetary Fund, who recently urged policymakers to craft a new crisis support system. Gopinath argues that if governments cannot sustain their current fiscal paths, they will be forced into desperate measures. Tooze writes, "If a new course is not charted, governments constrained by fiscal space may rely on heterodox measures, including broad-based price controls, financial repression, nationalisations, and pressure on central banks to absorb fiscal risk." He notes that while Gopinath views these options as a failure of the system, Tooze sees them as the inevitable evolution of crisis management in a "polycrisis" world.
The core of Tooze's argument is that the "Washington consensus"—the post-Cold War belief in free markets, floating exchange rates, and fiscal discipline—is fracturing under the weight of reality. He points out that centrist politicians are often driven to these radical tools not by ideology, but by the threat of right-wing populism and the sheer necessity of "doing something." As he puts it, "It is not by accident that debts are rising in stepwise shocks." This framing is powerful because it strips away the moral panic often associated with state intervention, replacing it with a cold calculation of political survival. Critics might note that relying on such measures could erode long-term investor confidence, but Tooze counters that the alternative is a total collapse of the system.
"None of this would be good for the economy with synchronised sell-offs across stocks and bonds as markets realise that the backstop they were counting on is no longer there."
Tooze argues that the real danger lies not in the policies themselves, but in the market's reaction to them. He suggests that financial markets are currently priced for a generous, ad-hoc crisis regime that cannot last. When the "penny drops," the resulting shock could be severe. However, he questions whether markets would actually prefer a government that ignores emergencies in favor of strict fiscal rules. "Did the eurozone prosper in the 2010s? Hardly!" he asks, reminding readers that austerity has its own devastating history. This rhetorical question effectively dismantles the idea that there is a safe, conservative path forward.
Revisiting the Mundell-Fleming Model
To support his case for flexibility, Tooze draws on the intellectual history of the International Monetary Fund and the Bank for International Settlements. He recalls a shift in thinking around 2019, where these institutions began to acknowledge that emerging markets had successfully adopted tools previously deemed anathema. He cites Claudio Borio of the Bank for International Settlements, who noted in 2019 that "Emerging market economies have adopted inflation targeting but combined it with FX intervention rather than free floating - in contrast to what standard textbooks would prescribe." This historical context is crucial; it shows that the "rules" of economics have always been more flexible in practice than in theory.
Tooze further highlights a 2020 paper by Gopinath and her co-authors, which explicitly moved beyond the Mundell-Fleming model—a standard framework for open economies. He writes, "Our analysis suggests that there is no 'one-size-fits-all' response to capital flow volatility, nor is it a case of 'anything goes' or that all policies are equally effective." This admission from the IMF's own leadership validates Tooze's call for a pragmatic, context-specific approach. The argument lands because it uses the establishment's own data to dismantle its dogma. It suggests that the "dominant currency pricing paradigm," where export prices are sticky in dollars, requires tools like capital controls and foreign exchange intervention to function.
Critics might argue that embracing financial repression—keeping real interest rates negative to reduce debt burdens—could punish savers and distort investment. Tooze acknowledges this tension but frames it as a necessary trade-off in a world of "second- and third-bests." He suggests that if inflation settles at 3 percent or more, financial repression becomes a socially acceptable way to distribute the legacy burden of debt. This is a stark, unglamorous reality check for readers hoping for a return to the low-inflation, high-growth era of the past.
The Path Forward
Ultimately, Tooze refuses to give "preemptive obedience to the diktat of financial markets." He argues that the "Four Horsemen of Heterodoxy"—price controls, nationalization, financial repression, and fiscal-monetary coordination—are not the enemy, but potential tools for democratic economic policy. He admits his own hesitation about price controls but sees a clear role for targeted nationalization and increased coordination between central banks and treasuries. As he concludes, "This is a moment for constructive and empirical analysis to figure out what combination of policies offers the best chance of conducting progressive and democratic economic policy in the face of huge shocks repeatedly impacting the world economy."
The strength of this piece lies in its refusal to be ideological. Tooze does not advocate for socialism or capitalism, but for a functionalism that prioritizes stability and equity over market dogma. He challenges the reader to accept that the old rules are broken and that the new ones will be messy, experimental, and perhaps uncomfortable. The biggest vulnerability in his argument is the political feasibility of these measures; while he argues they are necessary, he offers less detail on how to build the political coalition to sustain them against market backlash.
Bottom Line
Tooze delivers a compelling case that the era of rigid economic orthodoxy is over, replaced by a necessity for pragmatic, often heterodox, crisis management. While the market risks of such a shift are real, the cost of inaction or a retreat to austerity is likely far higher. Readers should watch for how the administration and other global powers navigate the tension between market expectations and the urgent need for structural intervention in the coming years.