As
the financial crisis that erupted in 2007 unfolds
in an economic cataclysm which, it is now clear, is
unprecedented in the history of capitalism, world
leaders without exception reveal themselves as politically
and ideologically bankrupt in their efforts to bring
it under control. This is most obviously demonstrated
by their insistence on the need for individuals and
enterprises to boost their levels of consumption and
fixed investment - with the aid of new loans from
the financial sector - even though it is obvious that
the immediate cause of the crisis has been the creation
of excessive credit leading people (and businesses)
to spend well beyond their means.
The implication of this manifestly perverse official
response to the crisis is that the world economic
system has become fatally dependent on the need endlessly
to expand production (of goods and services) at the
fastest possible rate without regard to the ability
of the market to absorb them. It is the compulsion
to feed this addiction to rapid growth - in the face
of long-term decline in the rate of global GDP increase
since the 1970s - which has driven the credit bubble
(or, as we should rather say, series of bubbles) that
has now finally burst with such devastating effect.
The logic of this strategy of trying to revive the
level of consumption and investment (total final expenditure)
at all costs is that it is necessary in order to overcome
the shortfall in demand relative to productive capacity
(of capital and labour), thereby increasing the rate
of capacity utilisation. Clearly, however, the same
objective could in principle be achieved by allowing
productive capacity to shrink - through the natural
process of capital destruction brought about through
the classic business cycle. But equally clearly, since
this would also mean putting tens of millions of surplus
workers into unemployment as well as the obliteration
of scores of trillions in market value of financial
assets. allowing the cycle to run its course in this
way would impose unacceptable economic and social
disruption on a global scale.
The evidence of the last 30 years points unambiguously
to the conclusion that it is not possible to avert
such a disaster by artificially boosting demand to
fill the ''output gap''. For we have known at least
since the 1970s that ''Keynesian'' policies cannot
indefinitely stave off or reverse such downturns -
and also risk inducing unacceptable levels of inflation
- while the three subsequent decades of neo-liberalism
have equally failed to stop global growth rates from
continuing to slow - despite a massive boost to indebtedness
in an increasingly desperate attempt to keep people
spending.
Now that this strategy has inevitably collapsed in
a morass of unpayable debt it is striking that the
entire global leadership have nothing to propose but
a rerun of the failed Keynesian agenda of yesteryear.
Yet they must be aware that the danger of this approach
is that levels of public debt (as a proportion of
GDP) are already at least twice as high as 30 years
ago, limiting the scope for further borrowing or money
printing without risking Weimar / Mugabe-style currency
collapse. Furthermore such an attempt to revive demand
for both capital and labour will be rendered even
more futile than in the past by a shift in a) the
pattern of demand away from manufactures towards services
(which are less capital-intensive) and b) technological
change (so that less capital and labour are now needed
per unit of output). At the same time other factors
(health consciousness, environmental constraints)
are tending to limit or even reverse consumption growth.
Despite these constraints all governments - and most
economists - are seemingly committed to this strategy
which is bound to fail.
Given this unanimity it seems inevitable for the moment
(as of January 2009) that such a strategy will continue
to be pursued until it is shown to be unworkable (perhaps
by an outbreak of hyperinflation). It is important
to prepare for this eventuality and face the reality
that we are long past the stage where it is possible
to avoid a calamitous contraction in global production
by artificial stimulation of demand. At that point
it should also become inescapably self-evident that
such a contraction is the only way that the crisis
of overproduction can be resolved under the capitalist
system. Yet since this would be intolerable it follows
that
- drastic measures must be taken by the
authorities (including where necessary the expropriation
of private sector assets) to minimise economic disruption
and social distress;
- the system itself must be fundamentally reformed
so that it can no longer inflict such harm on the
community in future.
It likewise follows from the preceding analysis of
the weaknesses of the existing capitalist model that
maximising GDP growth is no longer tenable as the
supreme public good of economic policy makers - as
it has been at least since World War II. By the same
token an economic system that is dependent on high
growth - based largely on profit-maximising shareholder
companies - must be seen as outmoded. In trying to
develop a more functional and sustainable economic
model we shall need to return to first principles.
Back
to first principles
It must be recognised that the essentially Ricardian
theoretical basis of conventional economics, which
has predominated since the Industrial Revolution,
is fundamentally flawed and designed primarily to
serve the interests of owners of capital in that
- It prioritises targeting the level
of production so as to bring it in line with the
available or potential capacity of productive factors
rather than adjusting capacity to the actual or
potential level of need / effective demand;
- It assumes that under conditions of more or less
free competition markets will always tend to equilibrium
at levels consistent with the full employment of
productive factors.
Little attention has been given to the fact that
Ricardo’s own contemporary Malthus exposed the central
theoretical weakness in this model in that it ultimately
rests on the very primitive Say’s Law - ''supply creates
it own demand'' - which underpins Ricardo’s Labour
Theory of Value. The fact that the latter was uncritically
adopted by Marx and his followers is perhaps ascribable
to their close identification with another producer
interest - labour - whose leaders may have seen it
as conveniently aligned with their own narrow objective
of maximising the numbers employed (potential union
members / political supporters). Although Keynes and
his followers recognised the importance of Malthus’
critique and insight that overproduction was not only
possible but chronically inevitable, they were and
are overwhelmingly supporters of the same producer
(capitalist) interests favoured by Ricardo.
It follows from the above that a more rational, sustainable
and politically acceptable economic model needs to
shift the emphasis away from prioritising the interests
of producers (owners of capital and labour) - including
the insatiable demand to devote an ever greater share
of value added to maintaining the rate of return on
accumulated capital - to giving primacy to the interests
of the far greater number of consumers and taxpayers.
By moving in this direction we should give ourselves
the chance better to respond to what should surely
be the basic purpose of a rational economic system:
to provide people with what they need and want to
the maximum extent possible with the available resources.
(This might be seen as consistent with the old Utilitarian
ideal of ''the greatest good of the greatest number'').
Advocates of market capitalism have long claimed that
it meets this criterion by forcing enterprises to
adopt the principle that ''the customer is king''.
In reality we know - on the authority of Adam Smith
himself as well as from our own experience - that
entrepreneurs are naturally motivated by a desire
to maximise profits above all other concerns[1],
and that meeting the demands of consumers - not to
mention workers and taxpayers - has to be subordinated
to that priority.
Alternative
vision for the future
Key principles and features
of this would be:
- Downgrade / abandon the growth objective. This
would inevitably mean placing more emphasis on income
redistribution both within and between nations (recognising
that ''trickle down'' is a myth).
- Give priority to stability and security (economic
and social) consistent with equity and maximum economic
efficiency (long-term lowest economic cost[2]).
- Subject the corporate sector to proper public
accountability. Since the self-regulated profits
system has proved unable to deliver general economic
prosperity - rather the opposite - it is no longer
tolerable that it should enjoy the privileges and
protection conferred by the state (including limited
liability) without the attachment of stringent conditions
- e.g. effective public veto over key decisions
(investment, pricing etc.). This would obviously
tend to restrict returns on capital (ROC) and lead
over time to the public (at national or local level)
owning as well as controlling most key enterprises
as private investors sold out because of inadequate
rewards relative to risk.[3]
- Explicitly jettison the ever more meaningless
goal of ''full employment'' - often used to justify
support for maximising growth (albeit long tacitly
abandoned by governments) in favour of a radically
different system of income distribution. This would
be based on a) universal entitlement to a citizen's
income (at a flat basic ''survival'' level) regardless
of means or employment status and b) more regulated
labour (and product) markets designed to prevent
any groups or individuals gaining an unfair share
of national or global value added in a world of
more limited growth.
- Abandon ''free'' trade in favour of explicitly
managed trade. Scrap the WTO system in favour of
regulated multilateral structures - and severely
restrict the free movement of capital. A key principle
here would be that - in a world of more limited
scope for growth - investment, production and trade
must be organised so that value added is redistributed
in favour of the most disadvantaged (particularly
in the Third World). (It should also be noted in
this connection that another Ricardian shibboleth
cherished by mainstream economists which needs to
be jettisoned is the idea that maximising the growth
of world trade is a public good - all the more so
now that this objective is seen to conflict with
that of minimising carbon emissions. This would
clearly imply that the full economic costs of transporting
goods should be taken into account, thus favouring
more emphasis on local sourcing of goods, other
things being equal).
- Initiate international action to stabilise commodity
markets and limit price fluctuations - in place
of the present laissez faire régime (which
benefits only rent-seeking speculators). This applies
most obviously to foodstuffs, where we must now
re-learn the once familiar lessons of the destructiveness
of uncontrolled commodity markets and the disastrous
effect of crop price cycles on consumers and small
farmers alike; but also notably to energy, where
the recent grotesque gyrations of oil and gas prices
have a) wrought economic havoc in both exporting
and importing countries and b) undermined the confidence
of potential investors in both conventional and
renewable production.
Crucially any alternative system must be geared to
determining economic priorities and allocating resources
based on criteria other than the highest rate of ROC
(profit maximisation) as determined by the market.
This must imply reaching such decisions based on politically
determined selection - derived in turn from democratic
processes defining greatest (social) need. Once the
requirement to maximise returns to shareholders is
removed - along with the bias in favour of the most
capital-intensive forms of fixed investment - it will
become apparent that a huge share of economic value
added that is at present wastefully diverted to serving
the priorities of the owners of capital[4]
can be more usefully devoted to serving the needs
of the wider public as briefly outlined above.
It is self-evident that the transition to such a collectivist,
more humane economic model cannot occur overnight.
Thus in order to avert the most dire consequences
of the ongoing collapse of the existing model it will
be necessary to maintain and extend the kind of emergency
state intervention and support already being provided
by governments since 2007 (although it would be quite
feasible to adopt measures such as the reintroduction
of exchange controls without delay). What is important,
however - if recurrent disaster is to be averted -
is to set a course now to a more sustainable model
for the future, and to discredit the widely held fantasy
that we shall be able to return to ''business as usual''
once the crisis is over.
January
17, 2009.
[1]
Indeed company law effectively requires them to make
this their overriding purpose in the interests.of
their shareholders
[2] This means taking account of all
''externalities'' not normally accounted for in commercial
cost / benefit calculations (e.g. environmental damage,
loss of amenity to the public / consumers)
[3] In the case of financial institutions
their collective failure (central to the present crisis)
- and their inability to meet the public need in terms
of sustaining the productive sector now threatened
with collapse - means that they should be brought
under full public control without delay.
[4] Such as the British government's
profoundly perverse recent decisions to support investment
in uneconomic and anti-environmental projects such
as the massive expansion of nuclear power generation
and the construction of a third runway at Heathrow
Airport.
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