• 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.

  • Shifting Foundations

    As the global financial crisis unfolds, each country responds by seeking to protect its own institutions and economies. New Zealand is no exception. The steps we have taken have been sensible and – so far – effective in shoring up our economy as well as we can against the immediate prospects of worldwide recession and financial meltdown.

    Soon, however, we and others must lift our eyes to more distant horizons – not just further into the future, but across a wider spectrum. The responses that must now be made cannot be merely national in scale, but must take an international dimension as well.

    And it is when we look to that international landscape that we get a real sense of the change that has taken place. The world has truly shifted on its foundations. The agenda moving forward and the ideas now being discussed are now hugely different from anything that was thought worth considering even a few months ago.

    Three years ago, I wrote a book called The Democracy Sham: How Globalisation Devalues Your Vote. In it, I developed the thesis that the global economy had dangerously sidelined democratically elected governments who found themselves no longer able to withstand the pressures placed upon them by international capital. The result was that unregulated markets were in effect out of control, with no restraining influence exercised by those we elected to protect us from the abuses and excesses perpetrated by a greedy and powerful minority.

    I canvassed a number of solutions to these pressing problems. Some were national in scale, involving changes in national economic policy – a widening of the goals of that policy, a willingness to regulate the “free” market, a proper role for government as opposed to bankers, and a greater concern for social justice.

    Other proposals, however, addressed the international scene. New Zealand has more than most to gain from a better regulated international financial structure. We would benefit greatly from less volatile exchange rates, from some diminution in the huge daily flows of “hot money” around the globe, and from a more prudent policy on the part of those who have driven the credit creation on which the global economy has perilously – and fatally – depended.

    Many of these ideas were no doubt dismissed as irrelevant, possibly eccentric, even dangerous and misguided. What is now intensely interesting is the extent to which this kind of thinking has now – in a remarkably short time – entered the mainstream.

    A striking indicator of how the picture has changed can be found in the debate on the world economy that has just taken place in the United Nations. Some of the world’s leading economists – like Joseph Stiglitz and Prabhat Patnaik – have presented papers in which they look to a new agenda going forward and are prepared to consider proposals that only a short time ago would have been regarded as anathema by most commentators.

    They have, first of all, re-stated the fundamental dilemma identified by John Maynard Keynes, the twentieth century’s greatest economist. Keynes drew a distinction between investment and speculation. Investment took place, he said, in the real economy and produced new productive capacity. Speculation, on the other hand, was a phenomenon of the financial economy, took place on a short timescale and for short-term purposes, and was often undertaken irresponsibly. The only way, he said, that speculation could be reined in was by regulating financial markets, and this was essentially a task for national governments.

    Stiglitz and Patnaik go on to call for action, not just to deal with the immediate crisis, but to make deeper reforms. They want a reform of bodies like the the IMF and the Basel Committee on Banking Regulation, and “a new Bretton Woods” – a UN-brokered international agreement which would regulate the international movement of capital and the volatility of exchange rates. They want a new international financing facility. They make these calls in the interests of a better balanced world economy, and not least to help the Third World which has lost out as a result of both the creation of the credit bubble (in which they had no share) and now its subsequent bursting. The economists are in effect reminding our political leaders of their responsibilities, and telling them that they can no longer leave these important matters to unregulated markets.

    In placing these issues back on the agenda, these economists (who are backed up by an increasing number of leading thinkers around the world) are putting our own New Zealand leaders on notice that they, too, must respond with an increased understanding of what is now expected of them. There is a real opportunity for New Zealand to throw its weight behind, perhaps even to help lead, a drive for a new international agreement that would redress the balance of power in favour of democratic governments and against irresponsible markets and thereby protect us all against further instalments of the kind of damage we are now suffering.

    Bryan Gould

    5 November 2008