Governments As Banks
The G20 summit seems certain to demonstrate that for most world leaders the conversion to Keynesian economics is no more than skin-deep. The global crisis may have compelled some re-assessment of the “free” market doctrines previously thought to be unchallengeable, but many of those attending the summit are reluctant to accept the responsibilities that a Keynesian approach would require of them.
It is worth rehearsing therefore what the global recession now demands of governments if we are to avoid a further plunge into full-scale depression. Like so much of Keynes’ approach, the prescription rests on common sense rather than ideological prejudice or mathematical models.
The key feature of a recession is a shortage of demand or purchasing power in the economy. The danger is that, once that condition applies, it feeds upon itself. Despite the urgings of politicians, individual actors in the economy – both in their personal lives and in their businesses – understand that times are hard and that the economy is flat or shrinking, and they act accordingly in their own self-interest. They cut their personal spending and their business costs. They employ fewer people and they invest less. Their concern is entirely for their individual or family or business interests.
They cannot be criticised for this. Their behaviour is entirely rational. The problem is that the sum total of all these individual decisions is that the economy shrinks further – a kind of multiplier in reverse.
An economy left to resolve this for itself will take a long and damaging time to come right. If the process is to be short-circuited, and depression is to be avoided, there is only one agency that is capable of taking effective action. That agency is the government.
Only governments have the capability and the duty to act in the wider interest, to take decisions that would be directly contrary to their self-interest if they were individuals or businesses, and to act consciously to defy market logic by spending when others can and will not. Governments can afford to do this, if they choose, because their ability to borrow to fund investment for the future is – by the standards of any other agency – virtually unlimited, and their responsibility is not to particular economic actors, like banks or shopkeepers, but to the economy as a whole. They alone can afford to take a long view – long enough to live with a growing deficit while the economy regains its buoyancy.
It is governments in the end, not banks, who are the funders of last resort. If there was ever any doubt about this, it must surely have been put to rest by the collapse of the banks in most parts of the world, and the taxpayer-funded bail-outs that governments have had to organise. Why, then, are political leaders still so reluctant to recognise that is they, not the banks, who must provide the kind of stimulus to spending that is needed if we are to turn the recession round?
The reason is that they are still prisoners of the same intellectual straitjacket that created the crisis in the first place. Despite all the evidence to the contrary, they are still convinced that the major decisions in the economy should be taken by banks – or the private sector more generally – rather than governments. Even when they have spent billions on bail-outs, and the billions have disappeared into the banks’ balance sheets, they still somehow expect that the banks’ self-interested pursuit of their shareholders’ interests will revive the economy as a whole.
Old habits die hard. Privately owned banks have been allowed to develop a virtual monopoly of credit creation for more than 200 years. It is such a familiar feature of our landscape that it has been scarcely remarked, even when bank credit became by far the most significant element in the rapid growth of the money supply – and therefore the greatest factor in inflation. The banks’ impact on monetary policy – and the exclusive focus on that monetary policy – was itself a huge abdication of responsibility in favour of private interests. But just to make absolutely sure that the banks would not only monopolise credit creation but would also control monetary policy itself, governments surrendered the task they had been elected to fulfil by handing monetary policy over to an “independent” central bank.
Our politicians are still at it. We are told that we must give the banks some “breathing space”. That is after they have walked away with billions of our money. It does not seem to have occurred to our political leaders that it was not the interests of bank shareholders and the survival of banks as institutions that mattered. The focus of policy should have been, first, the security of deposits, and secondly, a re-thinking of whether the banking function should remain a private monopoly or should be seen properly as a public responsibility – as, de facto, it has become. If governments – for which read us – have had to put up the money, why should we not call the shots?
Bryan Gould
30 March 2009
This article was published in the online Guardian on 30 March
Constructing A Left Politics
As the global economic crisis gathers force, it sweeps before it not only the flotsam of discredited economic doctrines; it also demands a complete reappraisal of how economies and societies work. It poses again the great questions that underlie all political debate, and it poses them in the certain knowledge that the answers given over the past thirty years – and so widely accepted – must now be rejected.
This is, in other words, one of those rare moments when it is not only possible but positively essential to go back to first principles. We must ask again, what is the purpose of politics, what is the role of government, does democracy matter, and – for those who see the need and seek the opportunity for reform – what does it mean to be on the left in politics.
Those questions must be asked, of course, at a time when – in Britain at least – left politics has run into the buffers. The concessions and subterfuges that were thought to be necessary to win power and then to hold it are now unmasked as not only craven but also totally destructive of anything that could have been legitimately regarded as the true purpose of left politics. If there is one incontrovertible lesson to be learned, it is that a left politics that is disconnected from principle and analysis will lead to failure and defeat.
The opportunity is, then, to think again about that body of principle and structured analysis that should underpin any left approach to politics. Our starting-point for such an inquiry must surely be a recognition that, since the late 1970s, and with the often unstated acquiescence of the left, the political agenda has been dominated by neo-liberal thinking.
The dominance of this self-serving doctrine has been a huge achievement for those who already exercised great economic power, but felt their privilege threatened by the political power of democratic electorates. They feared, correctly, that elected governments, accountable to the widest range of interests, would not tolerate a system which unfairly favoured the rich and powerful by allowing them to rig the contest for power in their favour.
The powerful responded to this threat by bringing about changes, around the end of the 1970s, which negated the power of democracy – changes whose significance was hardly recognised at the time. They made elected governments irrelevant, by acquiring a degree of economic power that would allow them to face down and blackmail all but the most powerful democratic governments, and then by using their economic power and invulnerability to political pressure to bend even the most powerful governments to their will.
The individual steps by which this was achieved need be only briefly rehearsed here. One of the earliest was one that masqueraded as a purely technical change that would help international trade and investment, and that was sold to the ordinary citizen as a welcome reduction in bureaucracy. That change was of course the removal of exchange controls by Reagan and Thatcher so that international capital was free to roam the world in search of the most favourable investment opportunities.
In one step, the rules of the game had changed hugely. Investors no longer had to comply with the requirements of elected governments. Instead, governments found themselves played off against each other by investors who commanded greater and greater resources as the now global economy was funnelled into fewer and fewer hands.
Now, it was governments that had to sue for terms, and who would lose out in the competition for investment if they did not comply with the demands of the multinationals. The investors, on the other hand, now understood that they could exercise their power quite irresponsibly; it was, after all, governments – not the investors – that had to answer to their electorates. The investors answered to no one but their shareholders. Most costs could be “externalised” or passed on to taxpayers who no longer had a voice. And, as voters began to understand that their governments could no longer protect them, confidence in the democratic process began to weaken.
At around the same time, monetarism – the doctrine that managing the economy was a more or less technical exercise in controlling inflation (the only goal, it was said, that mattered) by regulating the price of money – became the accepted wisdom, on the left as well as the right. This technical task could safely be entrusted to unaccountable officials – bankers no less – so that, in one simple step, democratic government was excluded from perhaps the central function for which it was elected.
These ground-breaking changes were reinforced by re-shaping political structures in the image of international capital. Multi-national investors found it increasingly irksome to have to deal with national governments, each with its own set of requirements, each reflecting the particular interests and priorities of their own voters. They insisted that economies would function more efficiently if those controlling investment capital could deal with authorities, like the European Union, that matched their own multinational structure and scale – and that were not democratically elected, but were instead multinational bureaucracies whose goals coincided with their own. So powerful was the momentum towards the integration of national economies in the name of greater economic efficiency that no one seemed to notice that the long-term consequence was not only an actual reduction in economic efficiency but also a political loss of a most serious kind – the replacement of democratic governments as the ultimate authority by multinational capital.
The ability of multinational capital to set the political agenda meant that a doctrine that could never have been directly sold to voters in individual countries – the view that markets are infallible, that they must not be regulated or interfered with in any way, that the interests of shareholders and the bottom line are all that matters, and that governments must step aside while market forces have their way – became the dominant driver of the world economy.
Few seem to have understood – not even politicians supposedly of the left – that an “infallible” market and democracy cannot co-exist. The whole point of democracy, after all, is that ordinary people can use the political power of democratic legitimacy to offset what would otherwise be the overwhelming economic power of the privileged minority. If even democratic politicians accept that they are not only powerless to intervene in the market, but that it would be literally improper and counter-productive for them to do so, then the powerful are unconstrained in their ability to impose their will on the rest of society.
We can now see the inevitable consequences of that extraordinary concession by democratic politicians – one that is even more incredible when made by politicians of the left. Unrestrained markets will always threaten, as even Adam Smith pointed out, a conspiracy against the general interest. They will always lead to excesses. They will always, as a consequence, destroy themselves in the end. The global recession was the direct and inevitable consequence.
We can also see how and why the New Labour government lost its way. Its fascination with the rich and powerful, its acceptance that the unregulated market must always prevail, its belief that market solutions will always be best, and its embrace of a global economy dominated by international capital all meant that it opted out of the role that most of its supporters expected it to fill – the diffusion of power in society so that the less powerful were protected and treated fairly.
Tony Blair seems to have believed that he could take the pain out of politics – and even the politics out of politics. But politics in a democracy is the means by which we resolve issues that would otherwise be settled by less acceptable means; we wouldn’t bother with the messy business of politics if it were not preferable to brute force or the victory of the most powerful. And those issues – arising as they do from the ever-present needs to allocate scarce resources and to reconcile conflicting interests – cannot be wished away. Their resolution will shape important issues such as fairness, opportunity and accountability – crucial determinants of how well society functions and how comfortable individuals feel within it.
All politics in the end is a response to a fundamental characteristic of social organisation. All societies demonstrate an inevitable tendency for power to concentrate in a few hands. The power may be physical, economic, or social – but at its most fundamental it is power to make choices, the freedom to choose, even at the expense of and against the interests of others.
In any society, those who are stronger, cleverer, or luckier, or who enjoy some other advantage, will inevitably acquire more power than others. They will then, with equal inevitability, use that power to enhance their advantage, accreting to themselves differential privileges which will make them yet more powerful, allowing them to entrench that advantage and defend it against attack, and by doing so to reinforce the disadvantage of others. The response that should be made to that intensifying concentration of power is the central and defining issue of politics.
The dictator will say that there is nothing wrong with power being concentrated in a few hands, as long as those hands are his. Patrician conservatives argue that it is inevitably a permanent feature of any social organisation, and that the stability it provides is on the whole beneficial. They will say the emphasis should be on making the disparity in power acceptable, by requiring the powerful to exercise their power humanely and with some kind of social conscience – a kind of noblesse oblige. The less powerful, on the other hand, should be conditioned by social pressures to accept – through a well-developed social hierarchy – their inferior lot in life and the deserved superiority of their betters.
The liberal (or, according to taste, the social democrat or proponent of the “third way”) will also accept that a substantial degree of inequality is inevitable and must be tolerated, but will argue that it can be made more acceptable and even positively beneficial provided that everyone has a fair chance of winning, or at least doing well, in the contest for power. Provided that everyone lines up at roughly the same starting point, no one can complain if the race goes to the fleetest of foot. The harsher edges of the neo-liberal winner-takes-all approach can be softened, it is fondly hoped, if those who bring up the rear are guaranteed some minimum standards of social support, through some redistribution of wealth and income and an acceptance of community responsibility for basic services.
The neo-liberal, on the other hand, will regard the concentration of power as not only inevitable but positively desirable. According to this view, those who gather power to themselves will be the most able and deserving. The fact that society is led by the most able will mean that everyone benefits; even the disadvantaged and least powerful will benefit as the rising tide lifts all boats. The possibility, too, that the least powerful can contest for power, and that the exceptionally able or lucky individual might make the breakthrough will ensure a degree of social mobility and contestability that will maintain the vitality of the system.
According to this view, it will be literally counter-productive to try to counteract the concentration of power by ensuring that it is more widely distributed and equally shared. The only consequence would be to drag everyone down to the level of the least able. Contrary to the delusions of the “third way”, the dice must be allowed to lie where they fall. To try to alter the outcome of the game would be to deny the beneficial potency of allowing the winners to prevail.
Historically, the left has shared much of the liberal or social democratic agenda, but has evinced less tolerance for the degree of inequality that is inevitably tolerated by that approach. Crucially, only on the left has substantial, entrenched, and often inherited inequality been seen as a straightforward negative, an affront to notions of justice or fairness, a gross limitation on the freedom of the less powerful and therefore of society as a whole, a drag on economic efficiency, a dagger driven at the heart of social cohesion. Only on the left is there an imperative to address the way that power is distributed – and not just redistributed – and the social and economic price that everyone – including the most powerful – is required to pay for a substantially unequal distribution of power. It is that imperative – to achieve something near equality, not identity – that is the defining characteristic of left politics.
If this is what left politics is really about, what should the left response produce by way of a policy agenda? The first part of the answer to that question concerns the relationship between the market and government, between economic and political power.
No government – of any persuasion – should delude itself as to the critical and irreplaceable role of the market in a modern and democratic economy. At its best, the market allocates scarce resources, empowers consumers (through what might be described as economic democracy), stimulates efficiency and innovation, and rewards the most productive and creative.
The market is, however, a valuable servant but a dangerous master. It is the elevation of the market to the status of a moral force that cannot be challenged that enables the powerful to by-pass democracy. That view must be contested. If democracy is to mean anything, government must be ready to intervene in the market so that its outcomes are acceptable and sustainable, both politically and economically. The deliberate aim of a left government must be to utilise the market so as to optimise its great strengths, but to make sure as well that the market does not prejudice – through entrenching and extending the power of the privileged – the wider goal of diffusing power as widely and as fairly as possible throughout society.
So, good government matters. It is the means by which the market is restrained so that the full resources of the whole of society are deployed to the widest advantage, by which essential services are provided, by which the economy is managed and directed for the general good, by which the benefits of citizenship are fairly and productively shared, by which the cohesion of society is effectively developed.
This is of course at odds with the right-wing doctrine that government should limit itself to a minimal responsibility for maintaining the value of assets – and particularly the currency – and should otherwise merely hold the ring while market operators are allowed to get on with it. The left, on the other hand, has always taken the view that governments are inevitably major players in the economy. They are the most important investors, customers and employers. They influence events and behaviour through policy decisions. As a result, they should accept responsibility for the overall context in which economic activity takes place. They should properly be concerned with the appropriate level of demand, the provision of gainful employment opportunities for all citizens, and the fair distribution of the fruits of economic activity. It was the abandonment of these responsibilities, particularly by the left, that has contributed so greatly to the global crisis.
A proper balance between the roles of the market and the government, between economics and democracy, is essential. It need not – as is often argued – require a sacrifice of economic efficiency for the sake of social outcomes or political principle. The lesson of the last thirty years is that “free- market” economics do not lead to efficiency – great riches for a tiny minority, yes, but sustained and equitable economic progress for all, no.
The case for diffusing power throughout society is as much economic as it is social. We make the most efficient use of our resources, and particularly of our human resources, if everyone has the chance to make their most appropriate contribution to wealth-creation, if that contribution is fairly recognised and rewarded, if everyone’s potential is properly recognised and not suppressed, if we understand that no individual is so talented as to merit rewards hugely greater than those enjoyed by others when it is the cumulative effort of the whole of that society that is overwhelmingly responsible for the progress we have made.
A similar argument can be made concerning the proper use of our natural resources and the sustainability of our environment. If decisions on these matters are taken by democratic agencies answerable to the widest possible constituencies, rather than by a handful of self-interested operators in a short-term market which they dominate, we have a better chance of managing our natural resources to the greatest possible advantage for all of us and of our planet.
These economic and environmental arguments reinforce the great social case for a wider diffusion of power. Freedom in society is not to be measured by the level enjoyed by that powerful minority that benefits from the greatest freedom of choice. Freedom exercised by denying freedom to others – even indirectly, through the supposedly value-free operation of the market – is not the mark of a free society. Only by diffusing power, by breaking down concentrations of power, can we optimise freedom for everyone. The supposed antithesis between freedom and social justice dissolves away when the goal is to allow everyone the maximum level of freedom that is commensurate with a similar level for others.
A society in which power is fairly shared, in which everyone has the opportunity to contribute and where that contribution is valued and rewarded, where the benefits of living in society are treated as social goods to which everyone is entitled, will be a society which is cohesive and integrated, which feels good about itself, and which is less likely to display the anti-social behaviour that characterises those marked by alienation and growing inequality.
These principles of democracy, social justice, and community – and the analysis by which those principles are derived – provide us with the basis for deciding an appropriate left political agenda. On issues such as who owns, controls and benefits from the economic process, what is an appropriate level of guaranteed provision of the basic requirements of a civilised life, what attention should be paid to the interests of others beyond our shores and beyond our lifetimes, how important to social cohesion and unity is a sense of fairness, we should be clear what the touchstones are.
The demands of practical politics will inevitably require compromise and trade-offs. But each policy, each new initiative, should meet a sort of health check provided by the touchstones. The alarm bells should ring if the policy agenda is seen to fly in the face of the basic principles. If only New Labour had heard them toll!
Adherence to a body of principle and analysis does not dictate, as is sometimes suggested, a static or backward-looking stance. It will suggest and require adjustments to existing policies as circumstances change. It will inform and stimulate new policy to deal with new issues. It will urge us on to meet the future.
A left agenda framed in this way will exhibit many familiar features and is none the worse for that. Policies for increasing the stake of ordinary people in wealth-creation, for ensuring through redistribution that wealth is shared more fairly, for using the public purse and community responsibility to guarantee the delivery of basic services should all feature prominently.
But we should also expect some new thinking to address new issues. A good example is the reappraisal now needed of the value of labour in the economic process. The new reality of labour’s declining importance in wealth-creation by comparison with capital-hungry technological advances means that labour by itself is no longer an adequate basis for a claim to a fair share in society’s riches. It may be that it is citizenship, not labour, that should form the basis of that claim, and that we need a new concept of citizenship to help us sustain it. Citizenship is already the basis for a large number of claims on society – equality before the law, the right to vote, and the whole range of human rights; it is not so revolutionary to propose that those basic claims should include a right to a fair share of society’s resources.
We will also need a longer timeline and wider horizon than the market can provide if we are serious in our concern for the preservation of our environment and natural resources. Government intervention on behalf of the community is inevitable if we are to inhibit climate change, maintain a fresh and clean water supply, encourage the biodiversity on which our future may depend and establish a new relationship between humankind and our planet. We need to re-think patterns of land use, methods of food production, and the production and uses of energy. The market can help, but it will be a market that is rigged to produce particular outcomes in the public interest.
In economic terms, we should reclaim economic policy (including monetary policy) as the proper responsibility of democratic government rather than of bankers and a proper subject for public debate. We should recognise that economics is a behavioural science and does not lend itself to mechanistic solutions. In particular, we should re-examine the role of the privately owned banks in the light of the current debacle and question whether they should ever again be allowed a virtual monopoly of credit creation. In view of the burden that bank failure has imposed on the taxpayer, should the banking function not be seen essentially as a public responsibility?
The roles of limited liability and the joint-stock company should be re-examined, in view of the irresponsibility and disregard for the public interest that they have demonstrated. New models of industrial ownership and control should be explored, including those that would give working people a stake in their own enterprises.
A left government should take the lead in negotiating new agreements to reform international financial and economic arrangements so that multinational capital takes a more responsible attitude to the communities in which it is invested, the volatility of foreign exchange markets and the flows of “hot money” are restrained, and global imbalances between rich and poor and between debtor and creditor nations are addressed effectively.
In social terms, a left government should recognise the over-arching importance of making whole again a society that has been fractured by class, economic circumstance, ethnicity and religion. An inclusive society based on fairness and tolerance and one that placed a value on all its citizens would not only be the most effective antidote to crime and other anti-social behaviour but would also provide the conditions for improved economic performance. Making full employment again the prime goal would be important. An attack on economic inequality through a combination of integrated tax and income support policies would produce a more cohesive society. Health and education services that reflected the public service ethic rather than the profit motive and the market mechanism would also be helpful.
Overseas, a return to Robin Cook’s ethical foreign policy would help to restore Britain’s standing as a force for good in the world – and the world might follow suit as a result. The same tolerance and inclusivity as was shown domestically would produce similarly constructive results internationally. We should have no more complicity in illegal invasions and torture, or in denials of human rights at home.
Proposals like these are, of course, no more than signposts. They do not by themselves constitute anything like a comprehensive programme. Rather, they indicate the kind of new – and not so new – thinking that a left agenda that is true to the analysis offered here might encourage. We have the chance to return to our core values and goals, and to update them in the light of events that can now be seen to underpin and validate our approach to politics. We should not miss that opportunity.
Bryan Gould
15 March 2009
This piece will be published in the next issue of Soundings in the UK. A shortened version is published on 27 March in an online book called The Crash, edited by Jon Cruddas MP and Jonathan Rutherford. It can be accessed at http://www.lwbooks.co.uk/ebooks/crash.html.
Who Is To Blame?
As the true scale and nature of the global crisis becomes apparent, the blame game is under way with a vengeance. Not surprisingly, those who find that it is their jobs and homes that are now at risk are keen to identify those who can be held responsible.
It isn’t just those – like Bernard Madoff – who have now been unmasked as criminal fraudsters that they have in mind. They want to dig deeper for answers to the question reportedly put by the Queen – why did no one see it coming?
Politicians, as usual and with some justice, are the first in the firing line. Even those, like the British Prime Minister, Gordon Brown, who have apparently experienced an overnight conversion to policies they had scorned for 25 years, do not seem to have earned forgiveness for their recantation. And If George W. Bush were still in office, one shudders to think how low his already abysmal approval rating would have fallen by now.
Internationally, much of the anger felt by ordinary citizens is of course directed at the banks and at the unbelievable stupidity and greed shown by senior executives who are still paying themselves huge bonuses and pensions at the same time as receiving billions of taxpayer dollars to save their institutions from bankruptcy.
Economists, too, or at least some of them, are being held accountable for propagating and endorsing doctrines which even Alan Greenspan now says were fatally flawed. Accountants who failed to audit, and lawyers who turned blind eyes, also come in for their share of bitter criticism.
One group, however, who have so far escaped relatively unscathed are the media. In a democracy, as the media themselves frequently tell us, we should be able to rely on reporters and commentators to ferret out wrongdoing and to warn about unsafe and destructive policies and practices. So, where were the media over thirty years, while the excesses and stupidities of an unregulated market moved to their inevitable conclusion?
There have been honourable exceptions, of course, but the media have too often been the loudest voices in support of the whole ramshackle structure of greed and irresponsibility that has now come crashing down. We can only conclude that they have been so keen to promote their own prejudices – or at least those of their owners – that they have allowed judgment to fly out the window.
One of the most prominent cheerleaders has been The Economist – a weekly journal enjoying an enviable reputation for sound judgment and insightful commentary. Yet, for The Economist, no reward has been too great, no excess too outrageous, as long as it was ordained by the “free” market.
The broadcast media have been just as bad. CNBC, a business channel claiming to be the only channel “with the information and experience you need”, has gone one better – or worse. Its so-called “experts” advised investors to trust – in turn – Bear Stearns, Lehman Brothers, and General Motors just weeks and months before they demanded billions from taxpayers as the price for staying afloat.
Little wonder that, with “expert” advice like this, the ordinary investor was led astray. But the failure of the media was more often of the “head-in-the-sand” variety, offering assurance that the authorities had everything under control. Add to that the constant treatment of the rich as demi-gods who could do no wrong and we can begin to see the responsibility that the media must bear for the failure to sound the alarm.
And they are still at it. We were treated a week ago to an article in the Asian edition of The Wall Street Journal, reporting an interview with our Prime Minister, John Key, conducted by one Mary Kissell. Ms Kissell was given generous air-time by our broadcast media and was widely reported in our press. The Prime Minister cannot be held responsible for the views of his interviewer but he may have jibbed a little at the cold water she poured on the efforts made by governments around the world to restore a broken financial system and to help the global economy re-establish a level of demand that had dropped like a stone.
The value of Ms Kissell’s views may be judged by the potted history she gave her readers of New Zealand’s recent economic history. Our “island nation”, we were told, “grew smartly” following the “reforms” of Rogernomics. Growth had, however, stagnated in the last nine years when “free” market policies were not maintained.
Even a cursory examination of our GDP statistics would reveal what a gross misrepresentation this is. New Zealand GDP growth was virtually non-existent in the seven years following 1984, and reached its highest sustained level from 1999 to 2008. Where were the New Zealand commentators who could surely have pointed this out, and judged the Wall Street Journal article for what it was – a piece of special pleading by a mouthpiece for institutions that had been thoroughly discredited by recent events?
Bryan Gould
13 March 2009
Lessons from the Crisis
As the global crisis unfolds, the great gurus of the world economy – those who have presided over its fortunes for much of the last two or three decades – have largely ducked for cover. Some – like Alan Greenspan – have had the courage to admit that there was a “flaw” in his thinking. Others – like Gordon Brown – have made an apparently effortless overnight conversion to Keynesian economics after decades of monetarist orthodoxy. A few – like Bernard Madoff – have been unmasked as fraudulent, as well as foolishly irresponsible. But most have watched from the sidelines, silent and confused, as the results of their handiwork have become apparent.
The immediate task and focus of governments around the world is, of course, to put in place measures which will limit the damage, avoid a depression, and restore the world economy to some semblance of health as soon as possible. In this endeavour, the supposed experts of yesterday necessarily have little to say. It is, after all, their nostrums that have driven us to this point, and the crisis has cruelly exposed the limitations of the monetary policy which they said was all that was needed. What does liquidity matter if no one wants to borrow and spend?
But, once the authorities have done their best, and the course to recovery of a sort is (hopefully) set, the debate will move on. The issue then will be not so much the steps needed for recovery as the lessons to be learned if the disaster is not to be repeated in the future.
At that point, we can expect the champions of “free” markets to re-enter the debate. The battle will then be on to write (or re-write) history, and what now seems undeniable will again become hotly contested. There will be no shortage of explanations and excuses for what has happened, ranging from the nonchalant (the crisis was a minor blip in what has otherwise been a triumph for the “free” market) to the aggressively ideological (it was the failures and mistake of governments that frustrated and distorted legitimate market operations).
It is vital, therefore, that – while reality still imposes itself on perceptions – an account is drawn up of the lessons we must learn from this disastrous episode. Some of those lessons will be widely accepted, but others – even for those who are most critical of the errors of recent times – will be more difficult to digest.
The crisis has been so damaging and so all-engulfing that it might be argued that virtually nothing of past doctrine can survive. There are some particular lessons, however, that absolutely demand attention. I would select six leading contenders.
The first and most obvious is that “free” or unregulated markets are extremely dangerous mechanisms which inevitably go wrong. All markets, left unregulated, will produce extremes, and that is particularly true, as Keynes pointed out, of financial markets, because of their inherent instability. The case for regulation cannot be disputed, but even so, the counter-attack will certainly come. The merits of self-regulation, the salutary effects of competition, and the advantages of a “light hand” will again be rolled out in order to deflect any real attempt at disciplining market operators. That is when our public authorities must be strong-minded, and remind themselves that is their responsibility to the public interest that demands effective regulation.
The second lesson is that government involvement in the management of the economy is essential. After decades of being told that the only thing we should ask of government is that it “get off our backs”, we can now see that it is governments – not banks or the private sector – that, as the authority of last resort, maintain the value of the currency, guarantee appropriate levels of liquidity and credit, and make irreplaceable investments in essential infrastructure. We must not wait again until the eleventh hour before we deploy the power, responsibility and legitimacy of government to keep the economy on the right track.
The third lesson is that fiscal policy, decided by governments, is more important and effective than monetary policy. We have again been told for decades that monetary policy is all that is necessary, and indeed all that is effective, both in controlling inflation and in setting the real economy on a sustainable course. We now know that using monetary policy to ward off recession is no more effective than pushing on a piece of string and that an exclusive reliance on monetary policy to restrain inflation is just another reflection of the view – now surely discredited – that the markets always get it right.
My fourth inescapable lesson is that gross imbalances in the world economy will inevitably cause it to topple off the high wire. The growing gap between rich and poor nations is bad enough, from both an economic and moral viewpoint. But the imbalance between surplus and deficit countries is equally damaging as a strictly economic phenomenon. The surpluses drive us toward recession because they represent resources that are hoarded rather than spent, while those countries with deficits are likely, as Keynes pointed out, to try to control them through deflating their economies, thereby reinforcing the deflationary bias. To the extent that others are willing to finance the deficits (as, for example, China’s financing of the US deficit), this simply encourages uneconomic production and an excessive reliance on credit, meaning that the world economy wobbles perilously on an unsustainable foundation.
A related and fifth lesson is that the freedom to move capital at will around the world has exacted a heavy price. The total removal of exchange controls meant that international investors could ignore and, if necessary, blackmail national governments; this became a major factor in allowing market operators to escape and defy any attempt at regulatory controls. We have to make up our minds whether we trust accountable governments, with all their imperfections, or the unrestrained and totally irresponsible market. Our recent experience surely makes this a no-brainer. What we now need is a new international regime, negotiated between governments, to regulate exchange rate volatility, international lending practices, and the obligations of international investors.
My final lesson is that bankers should not be trusted with the most important decisions in economic policy. No policy measure was more widely welcomed than the handing of monetary policy over to “independent” central banks. We now have good reason to know that their decisions are not only likely to be wrong, but will certainly be self-serving – no more reliable or impartial than those of casino operators who will always set the odds in their own favour. If we are truly to grapple with the lessons set out above, we need to restore the main decisions of economic policy, including the effective regulation of markets, to democratic control.
Bryan Gould
18 January 2009
This article was published in the online Guardian on 19 January and the New Zealand Herald on 26 January.
Politics Not Economics
As Keynes’ biographer, Professor Robert Skidelsky, says in the British Sunday papers, “it is not surprising that the old Keynesian tool kit is being ransacked” in response to the global economic crisis. After decades of being assured that “there is no alternative”, and that Keynesian economics is a dead duck, we now find that Keynesian remedies are all the rage. Without government intervention to bail out failed banks, measures of counter-cyclical demand management, and the resurgence of fiscal policy, the world would be facing an even grimmer future than it currently is.
But we need not wait long for the failed nostrums of recent orthodoxy to re-surface. Already, the George Bush’s of this world are trying to re-write history. The crisis, they say, was not caused by the failure to regulate the “free” market. There is nothing wrong, they maintain, with the basic model of unregulated capitalism. All that is needed, once the current crisis is overcome, is a little tweaking here and there before business as usual is resumed.
These apologists for our current travails make it clear that the measures that their failures have made necessary are absolute anathema to them. According to them, the best thing that can now happen is that decisions on major economic issues should be returned as soon as possible to those who are accustomed to taking them – that is, to those who made these catastrophic mistakes in the first place.
What all this shows is that the response demanded by the crisis is as much a political one as it is economic. The economics are pretty straightforward, as Keynes himself would have argued. In his view, economics was not an arcane science but largely a matter of common sense. It does not require a genius to understand that short-term markets are inherently unstable and, without proper regulation, will topple over into disaster. Nor do we need to look far for the obvious (even if – to some – unpalatable) remedies for the financial meltdown and the imminent global recession.
What we do need to understand is that what creates a crisis of the kind that now engulfs us is not economics but politics. The triumph of the global “free” market which has dominated the world over the last three decades has been a political triumph. It has reflected the dominance of those who believe that governments (for which read the views and interests of ordinary people) should be kept away from the levers of power, and that the tiny minority who control and benefit most from the economic process are the only people competent to direct it.
This band of greedy oligarchs have used their economic power to persuade themselves and most others that we will all be better off if they are in no way restrained – and if they cannot persuade, they have used that same economic power to override any opposition. The so-called “economic” arguments in favour of “free” markets are no more than a fig leaf for this self-serving doctrine of self-aggrandisement.
It is that political stance that must now be challenged if we are to learn the real lessons of the current crisis and defend ourselves against a repetition of the disaster that has now overtaken us. What we must understand is that what has happened is not the consequence of some technical failure in economic management. It has happened because we allowed democratic forms of government to be sidelined and subverted by the economic power of a minority.
The uncomfortable truth is that democracy and “free” markets are incompatible. The whole point of democratic government is that it uses the legitimacy of the democratic mandate to diffuse power throughout society rather than allow it to accumulate – as any player of Monopoly understands – in just a few hands. It deliberately uses the political power of the majority to offset what would otherwise be the overwhelming economic power of the dominant market players.
If governments accept, as they have done, that the “free” market cannot be challenged, they abandon in effect their whole raison d’etre. Democracy is then merely a sham. The dice must then be allowed to lie where they fall, and no amount of cosmetic tinkering at the margins will conceal the fact that power has passed to that handful of people who control the global economy.
The challenges facing the world are now so great – the threat to our environment, the huge imbalances between rich and poor, the energy crisis – that they dwarf even the economic power of the high priests of the global economy. If the current crisis is to be overcome successfully, it must set us on a new course, not just to restore prosperity for the already well-off, but to confront these global challenges before it is too late – and that is a task not just for the economists but for the politicians – and all of us – as well.
Bryan Gould
24 November 2008
This article was published in the online Guardian on 26 November.