We can't reboot the economy without sacrifice

Before the financial crisis too many people arrogantly assumed that capitalism's inherent instability had been tamed. They foolishly believed there would be no more boom and bust. After all, the inflation genie – the cause of so much trouble in the 1970s and 1980s – had been banished. Globalisation, meanwhile, pointed to higher living standards for all. Nothing, it seemed, could go wrong.

This was another example of the triumph of hubris over hard-nosed reality. Policymakers too often pretend that they've mastered the vicissitudes of economic life. We've lived through all manner of regimes designed to bring us ever-rising prosperity: the Bretton Woods exchange rate system, money supply targeting, the ERM and the latest, inflation targeting. None has prevented the UK economy from falling flat on its face.

This latest collapse is particularly worrying. Boom and bust is bad but boom and bust followed by enduring stagnation is worse. Until the latest episode, the UK's deepest postwar downswing was in the early 1980s. Despite the concerns of 364 economists – including Mervyn King, now the Governor of the Bank of England – who wrote in 1981 to The Times to argue that we were doomed, the British economy staged an impressive rebound. By the third quarter of 1983, national income had exceeded the pre-recession peak recorded in the second quarter of 1979.

A stagnant economy is, by definition, one in which one person's income gain must be another's loss.

The chances of a repeat performance are remote. National income peaked in the first quarter of 2008 so, to duplicate the recovery of the early 1980s, we'd need to return to the pre-crisis level of economic activity by the second quarter of this year. At the end of 2011 we were still 3.8 per cent adrift. With little in the way of remaining policy ammunition – interest rates are already at rock bottom while George Osborne, the Chancellor of the Exchequer, remains committed to fiscal austerity – it's hard to see why there should be an imminent bounceback. Admittedly, the same conclusion was reached by the 364 economists. They couldn't see the green shoots then and perhaps I can't see them now. It's safe to say, however, that the forces that contributed to the 1980s rebound – a big drop in inflation (from above 20 per cent to below 3 per cent), a substantial fall in interest rates and a huge increase in the availability of credit thanks to financial deregulation – are no longer available.

Stagnation, meanwhile, creates its own difficulties. A stagnant economy is, by definition, one in which one person's income gain must be another's loss. It is too easy to switch focus from the politics of opportunity to the politics of envy or blame. The incentive to innovate – to take risk – is curtailed. And debt, including government debt, becomes less and less digestible.

We are caught in a trap. Is there an escape? At the macroeconomic level, there are only crumbs of comfort. While the Bank of England will offer more quantitative easing, this is more to keep the patient alive than to produce a lasting recovery. A rebounding US economy could offer succour and the Asian economies might expand quickly enough to offer opportunities for Britain's exporters.

Yet it's difficult to see why pressing a few policy buttons – or relying on a rebound in faraway economies – will make all the difference. The UK, like many other developed nations, has been through a collapse more familiar to those in the emerging world.

Think back to the 1997-98 Asian crisis: Thailand, South Korea, Taiwan and others imploded. They had no buttons to press. As international investors headed for the exit, people had no choice but to knuckle down, reassess and rebuild. There was no possibility of a bailout. The IMF would not help, one reason why it still has a tarnished reputation in Bangkok, Seoul and Taipei.

Blaming each other for a crisis that ultimately represents systemic failure may only prolong our difficulties or make them worse.

In response to the crisis, Koreans made impressive personal sacrifices, giving up their wedding rings, their medals, their trophies in an effort to bail their economy out by the sale of gold to foreigners. It may not have made a great deal of difference but the symbolism was nothing short of extraordinary. And it wasn't just individuals. Some of Korea's biggest companies, including Hyundai and Samsung, helped to co-ordinate the effort while the notoriously belligerent unions restrained industrial unrest. Koreans recognised their collective vulnerability rather than blaming each other. They put differences to one side and opted for national unity.

Perhaps that model cannot apply to Europe and the UK. Nowadays the personal interest of the individual is typically more important than the collective interest of society. Creditors in countries such as Germany are unwilling to make sacrifices for debtors elsewhere, delaying any resolution of the eurozone crisis. Admittedly, the Greeks may have their own financial foibles but the Irish, despite having done everything asked of them, still face painfully high borrowing costs.

Blaming each other for a crisis that ultimately represents systemic failure may only prolong our difficulties or make them worse. Asia's crisis was hardly pleasant – and it triggered a huge debate about the weaknesses of 'crony' capitalism – but you could never accuse Asia of surrendering to stagnation. Then again, Asians realised early that there was no quick fix. The rest of us, in contrast, somehow think our economies can be rebooted without any sacrifice, personal or collective. And when the recovery fails to materialise we surrender to the politics of blame.

Stephen King originally wrote this article for The Times newspaper, published on 7 February 2012.