Stephany Griffith-Jones, Michael Lipton and Robert Wade, guest bloggers
What should protesters protest for? They rightly oppose the many faults of the current economic system, but what is the alternative? What ground should occupiers occupy? What can politicians who reject corporatist politics-as-usual, and economists who reject wrong economic thinking do in response to justified protest? How can the economy be transformed to serve the 99%, instead of the 1%?
Capitalism can work if reformed, and history can teach us much. In the period 1940-80, the Keynesian, mixed-economic models of north-west Europe, North America and many developing regions delivered to the poor and weak, while not frightening the strong. The financial sector was fairly small, well-regulated and simple; it financed the real economy, as it is supposed to. Growth, employment and security were high, poverty was reduced and liberty preserved, partly because social democracy helped both to moderate capitalism and to oppose communism.
From this experience, we know that reversing the huge growth of inequality can raise fiscal revenues, for use in job creation and investment, helping the many countries now needing to create employment without excessive government deficits. We also learned in that period that smart, accountable financial regulation impedes re-creation of crises. When in the 1980s finance was deregulated, both nationally and internationally, crises became the new normal, first in much of the developing world and then in the developed countries. The process of extreme liberalisation also contributed to growing inequality.
The mentality for re-civilising capitalism must be created, and we know how. The collapse of communism and the rise of unfettered finance were accompanied by the triumph of a dogma: “new-classical” economics. This new “opium of the intellectuals” captured first the economics profession, then opinion-formers, media and politicians; first the traditional right, then liberals and even much of social democracy.
The crisis has exposed as worthless the predictions of new-classical economics – and, with them, its “state can do nothing” dogmas (efficient markets, rational expectations). But that will not suffice to get the new-classical rot out of economics, philosophy and politics. We must turn to first principles – drawing on history of thought as well as of facts – to replace the new-classical edifice and provide a better, more equalitarian and sustainable alternative. Marxism has a role, but a modest one: the key economists include classical ones (like David Ricardo), liberals and social democrats (like Alfred Marshall, Keynes and Hyman Minsky) and modern successors (Nobel laureates Paul Krugman, Amartya Sen, Joseph Stiglitz and James Tobin).
With that in mind, here is a short-run programme for effective protesters, economists, and progressive political parties.
1. In the next few months, restrict tax loopholes for the rich and the financial sector, including via tax havens. Tax evasion and insufficient tax on the rich, as well as on large corporations, prevent equalisation, impoverish welfare states, and contribute to unsustainable debt. Tax havens not only facilitate tax evasion but, more important, regulatory avoidance. Britain controls havens with over half this money and can lead on this. Increasing taxes on the wealthy in general, and spending them on job creation, will be valuable.
2. In the next year properly regulate, nationalise or break up large systemic banks. This is not socialism. It is saving capitalism from crisis by returning to the 1930-80 “Bagehot Glass-Steagall compact” that private banks, if big, can secure themselves from illiquidity crises by a lender of last resort, only by accepting strict regulation in exchange. Then they cannot bet our money on rescue from insolvency at public expense.
This earlier compact had prevented the emergence of banks “too big to fail”, which maximised short-term profits and bonuses in boom, feeding off taxpayers in recession. Thus banking served the real economy fairly well in 1940-80, and still does where undestroyed, in China, India, Brazil and much of the developing world. However, the OECD cannot just go back to pre-1985 banking. The big bang made big banksters.
Large banks – fat on asymmetric risk and herd incentives – are strong and uncontrolled. They try to limit, or kick into the long grass, relatively modest efforts at re-regulation. Such efforts are limited, because path-dependent on power structures destroyed in the 1980s as a result of financial deregulation. Systemic banks should be brought into public control, if they cannot be properly regulated. For most large banks that may imply a long period of public ownership – facilitating lending to small job-creating and innovating enterprises, and financing major green infrastructure, to support sustainable growth. The even larger shadow banking sector must be regulated in an equivalent way to banks, to limit systemic risk and reduce speculation as much as possible.
3. In the next five years, raise by half the income share of the poorest 10% (via labour income, not benefits), and reduce by a quarter the income share of the richest 10% (while shifting tax away from enterprise and labour, towards “churning” financial transactions, land, and inherited wealth). This will only partly restore income distribution as in the 1970s, but it is feasible politics and economics. Also, cut inequality and we need not cut health and education: as the very rich are taxed, government income revives and the deficit falls. Meanwhile, the poor spend extra income, demand revives and slump is escaped. Reducing inequality cuts deficits and raises demand.
On these points Britain should co-ordinate – with the EU, US, Japan and increasingly with developing countries – but not delay.
In the long run our ills are traceable to the monster of new-classical economics, as well as the power of vested interests. Economists, by putting these ideas in historical perspective, can show how they have been proved wrong again and again. By curbing unfettered finance and making it support, instead of undermine, the real economy, politicians can lay the foundation for more stable and inclusive growth.