Amidst all the coverage of the financial crisis, in which very surreal statistics about the technicalities of what a recession is and when we’re in it dominate the headlines, there is one decision that will have a significant effect on the future direction of our economic system.

So far all of the policy responses to the meltdown in inter-bank lending have been aimed at increasing the liquidity of markets, at ensuring that capital continues to flow around the world with the speed and global reach that has characterised the last twenty years of capitalist growth. As the viability of this perpetual growth paradigm has unravelled over the last couple of years, and the economic interdependence of all developed economies has been shown to be a double-edged sword, individual countries have started looking at what they can do to look after number one: to ensure that jobs are created at home, and that local economies survive the turmoil.

From the perspective of dealing with climate change, promoting localisation is obviously key, and is something to be welcomed. But how to actually engineer that localisation in an economic sense is rarely addressed satisfactorily.

Since the end of the Second World War, the United States has been uniquely influential in global economic development, and since the fall of the USSR in 1989 its shaping of, and tacit collaboration with, institutions such as the IMF and the World Bank have allowed it to dictate economic policy, to the extent that pretty much every other country follows their lead (apart from random outcasts like Cuba). And the same is true when it comes to engineering the protection and promotion of local markets.

The economic stimulus package passed by Bush just before he left office was designed to get capital flowing on international markets. The idea was to inject some life into the US economy, and by extension the rest of world’s, because of how cloesly-knit all of the investments are between multi-national companies listed on American stock exchanges. But because the problems with the economy go so deep, and in fact the very success of Wall St previously was built on the high levels of incredibly over-vauled assets, trying to stimulate markets so that they went back to ‘business as usual’ was never going to work (there is no ‘business as usual’).

As this realisation has permeated the minds of US congressmen and women, and as Obama prepares to pass another vast stimulus package (which amounts to a ‘new deal’ of sorts, a fair chunk of which can be legitimately called ‘green’), a more pragmatic approach has taken hold. Domestic markets to secure jobs for domestic workers are being seen as crucial to short-term stability. This is the basis of the concept of ‘protectionism’ - using national economic and fiscal policy to protect domestic markets. Protectionism is fundamentally opposed to the idea of a ‘free market’ and for the last twenty years, the prevalent political classes have spoken out against it.

The argument against protectionism goes something like this:

Restricting foreign access to domestic markets is not fair on businesses who have potential for growing internationally because of the superiority or cost effectiveness of their products and services for end users. It shouldn’t matter where in the world goods are produced. By allowing the market to decide which ones get bought and sold, we will encourage efficiency and healthy competition. Unlike communist or socialist modes of economic organisation, capitalism was seen to consist of this fundamental freedom - the flow of goods and captial would not be restricted by tariffs being placed on imported goods, or subsidies given to domestic industries just because they happen to be based on home soil.

Now in practice, many supposedly ‘laissez-faire’ capitalist nations have historically engaged in some level of protectionism without acknowledging their hypocrisy. In the EU, the Common Agricultural Policy is an important example (those of you old enough - unlike me! - will no doubt remember the image of piles of food in warehouses in Europe juxtaposed against starving Africans in Ethiopia around the time of the first Live Aid; the reason the food wasn’t being sent to the starving masses was because it would be an anti-protectionist measure that would potentially harm European farmers, despite the obvious waste). In the US, protectionism was/is employed for the steel industry amongst others, whilst foreign economic policy and collaboration with the IMF and World Bank meant that developing countries could only access aid if they completely opened their markets.

Despite the anomalies mentioned in the previous paragraph (and there are infinite more examples where the reality of free market capitalism fails to live up to the rhetoric), in general the last thirty years or so has seen very open markets worldwide, and that’s what we mean when we talk about ‘neo-liberal economic growth’ as kicked off by Margaret Thatcher and Ronald Reagan. The last time that there was actually proper widespread protectionism was in the 1930s, following the 1929 Wall Street Crash. Back then, when the US took the decision to start protecting its home markets in response to financial turmoil, pretty much every other country followed suit in a kind of domino effect which led to lots of fragmentation, and a prolonged depression.

This week, Obama’s $800bn fiscal stimulus package is being debated by the US Senate, and the crucial aspect that relates to protectionism is the ‘Buy America’ clause. This proposal puts forward the idea that all steel used as part of construction programmes (which will be crucial to providing jobs) will be sourced from the US only, thereby also supporting ailing domestic steel industries. This is the first time since the financial crisis began that such an explicitly protectionist measure has been put forward, and if it is passed it is very difficult to see how other developed economies such as Europe can fail to follow suit. It would potentially be the end of a neo-liberal economic system, and a return to one where individual economies trade less with each other, and instead rely on their own industries. The latest from the Senate is that ‘Buy America’ is being ‘watered down’.

This is an important moment, and in what form it is passed will make a big difference to the next few years as we continue down this rocky road we have embarked on. The challenge is to identify the risks of the approach, but also to look at the difference between the ultimate objective (more stable, localised economies where people have jobs and prosper) and the means used to get there (a bold economic move that risks causing substantial disruption to international efforts to react in unity to financial turmoil). Whilst the objective is laudable (massively decreasing international trade and localising economies is good in most people’s eyes, especially when you consider the carbon savings it could bring), the means are very risky.

So what on earth is the alternative? How do we localise economies without resorting to protectionism? Unfortunately I do not have the answer. But I believe it is very important to speak in these terms, especially for those who consider themselves on the progressive left side of the political spectrum. The political spectrum itself has been shot to shit anyway in the last twenty years, and especially in recent months as banks have been nationalised all over the shop in the name of increasing capitalist liquidity. Without acknowledging the fact that we really need to think in new paradigms, and that it’s nowhere near as simple as sitting on the left (economic intervention) or right (laissez-faire capitalism), we won’t get anywhere.

If I was to try and suggest some radical alternatives to the path that Obama and the rest of the new administration seem to be considering, I would say that utilising the Internet as a way to maintain openness in as many senses as possible (even if that is not in economic terms) is important. I haven’t even touched on the currency consequences that would clearly be part of the fall-out from undertaking protectionism, but it’s become clear to me that using the dollar as the basis of global economic stability is not a great idea.

So what could take the place of the dollar? Surprise, surprise: carbon. Using carbon reduction as the benchmark on which we measure how effectively and efficiently we are localising economies will allow us to maintain a global focus. It will also help us identify which goods and services can be traded without incurring high fuel costs, and high carbon emissions. The Internet is the obvious platform to help us do this detailed bench-marking, in different ways and for different sectors. It won’t be straightforward, but it will give a clear focus for a green economic recovery.