Markets & the Public Interest: Towards a new economic vision

Graham Larcombe
Will US financial capitalism collapse on Tuesday next week or will it rebound? I don’t know. Does anybody know? No. But does it matter? Yes it does.
Markets & the Public Interest: Towards a new economic vision

The US administration and the Federal Reserve in the US have done something Ben Chifley was never able to do in Australia. They have socialised the losses of the financial sector with the bailout of Bear Stearns, Fannie Mae and Freddie Mac. US$5.3 trillion – I can’t get my head around that number. The American International Group, which was set up to perpetrate fraud on an unwitting population, got US$1 trillion. This public outlay is on top of massive US public sector debt (US$500 billion) and war in Iraq (Nobel prize winner Joseph Stiglitz puts the price for the American people at US$3 trillion). This will put the current population of the US in debt for life. But wait there’s more, what about the next generation? Now, there’s a discussion to establish a state agency to buy all of the bad debts of the US financial system (NB now committed), currently they say around $1 trillion but who can value these assets?

Will US financial capitalism collapse on Tuesday next week or will it rebound? I don’t know. Does anybody know? No. But does it matter? Yes it does.

This is the end of the neoliberal economic nightmare that has been imposed on economies over the last 25 to 30 years but unfortunately many of the costs will be imposed on those least able to afford it. Some economies sought alternatives to neoliberalism, ranging from social democratic versions of the Scandinavian countries like Sweden and Norway and some of the Asian tigers that rejected the neoliberal prescriptions around market oriented reforms and survived much better (they may be in a position to survive this crisis much better as well).

But I can also say, as well as an economic crisis, is it not a great political crisis for the champions of neoliberal economic policies in Australia? And particularly I would have to say for the social democratic party that advocated and implemented these policies. I remember Paul Keating saying that the Tories would not have the guts to deregulate the financial system whereas he did. One of the tragedies is that with destruction of independent thinking in the economic faculties (with exceptions such as the Political Economy group at Sydney University) we have a generation of highly trained economists who haven’t a clue why finance markets can create chaos through the global economy.

So, we’re going to be living in a very different world over the next two weeks, over the next two years and over the next 20 years and it’s those who understand this reality and organise in accordance with it that are most likely to make a significant difference.

But let’s have a quick look firstly at the relationships between markets and planning and how we got ourselves into this situation. Of course, there are alternative models of cooperation and coordination around the economic, social and environmental outcomes that we’re discussing today. At one end of the spectrum, we have the view of the orthodox socialist approach that led to a dead end impasse around the nationalisation of all the means of production, distribution and exchange, and the inequities and inefficiencies associated with that. At the other end of the spectrum we have the reliance on the free market mechanism to drive all outcomes. The latter are based on the premise that there are forces working towards equilibrium if we let markets operate unfettered by intervention. The simple views of the ‘invisible hand’ and supply and demand will clear markets and bring about the best of all possible worlds. I remember in Economics 101 how we laughed at this and dismissed it. Little did I know that these gospels would come to monopolise economic policy making in so many countries and imposed on populations around the world.

Planning, on the other hand is really about mobilising resources towards specific goals, whether it is focused on achieving full employment, environmental protection outcomes and/or social equity. Of course, there are a range of planning mechanisms and approaches. Central planning is one. Strategic planning and indicative planning are others.

Take strategic planning of a city as an example. We can actually investigate different future outcomes including where an economy is now and what is likely to happen under a number of scenarios including economic turbulence, demographic change and socio-economic transformation. We can identify planning and infrastructure priorities to meet alternative outcomes. Unfortunately, this model fails under the neoliberal paradigm because we have this absurd AAA credit rating system preventing us from borrowing a cent of public funds to support infrastructure, particularly transport infrastructure. On his election as Premier Nathan Rees stated he was going to guarantee the State’s AAA credit rating. Do you know what this fraud is? Moody’s, Standard and Poor’s and Fitch. These are the people who contributed to the financial crisis in the US by rating junk bonds AAA on behalf of their corporate clients. But if the government borrows $100 million to try to support a public transport system then they may lose their AAA a rating. There is something fundamentally wrong with this logic.

The social democratic approach – and I’ve always thought there was a lot of scope to bring about progress through income distribution – is focused on how do we generate growth using the forces of the private sector and then how do we use the benefits that come out of growth to allocate more resources for social welfare and to support outcomes in relation to macroeconomic goals, such as for employment. But what happens when this model falls apart? What other things do we have to look at?

The key points that I want to raise are about markets.

Markets can play an important role in working out what is produced, where it is produced and how it is produced. We’ve seen some of the economic benefits in our society in relation to markets. In the industrial age (up to the victories of Reagan and Thatcher) the financial system was designed to mobilise savings and channel them into predominantly profitable and productive investment opportunities. The introduction of neo-liberal economic policies was associated with an increasing rise in finance capital – with profits generated for some from the circulation of fictitious capital without having much to do with the real economy. New financial instruments based on hedging and securitisation were developed to secure a greater share of profits from currency changes, movements in commodity prices and passing on risks to others in a hot potato manner. As the brilliant and much under-rated economist Hymer Minsky has shown, the stability of financial markets creates the seeds for financial instability through the expansion of credit in a growing economy.

It must also be emphasised that markets and capitalism are not the same thing. Capitalism is a system that is driven by accumulation that must continually grow. If capitalist economies can’t accumulate capital at an exponential growth rate then the result is economic crisis. It’s not only the Marxists who had insights into this but many great conservative economists of the 20th Century such as Keynes and Schumpeter. They understood that the expansion of capital needs to be managed because of the inherent instability of capitalism.

People talk about the need for a low growth economy because of the looming disaster of climate change. But this is exceedingly difficult or indeed not possible to achieve because of the fundamental features of a capitalist economy. The instability of modern capitalism remains, regardless of what mainstream economists such as Nobel Prize winner Paul Samuelson has said about the end of business cycles. We’ve also had the neoliberal view that there will be a trickle down to end inequality at a time when we’ve witnessed over the past 25 years the greatest increase in wealth and income inequality the world has ever seen.

In my view the last 25 years have been about the great redistribution from working people and low income earners to the major global corporates, particularly the financial institutions. We’ve also seen substantial increases in global inequalities, except in those countries that rejected the World Bank and the IMF and other ‘Washington Consensus’ prescriptions to structure their economies around market oriented reforms. And one would have to say that many of the economic benefits that have benefited western consumers over the past 25 years have been due to what David Harvey termed “accumulation through dispossession”, the outsourcing of production to low wage countries often associated with exploitative working conditions.

Let’s look at the great thinkers that have dealt with this issue of what happens when capitalism is in crisis. Well, Marx argued that we should nationalise the means of production, distribution and exchange. We saw what happened, in countries like the Soviet Union, when economic policy was based on a centralised approach and associated with centralised political power. Fabians and the social democrats of course for much of last century were much more pragmatic. They argued that what was needed was to control the commanding heights of capitalism to be able to influence economic outcomes. The greatest conservative economist of the last century, Joseph Schumpeter, believed that socialism was necessary. He didn’t like it, but believed it would happen because of the greater efficiency of great bureaucracies that would emerge leading to a socialist economy that would deliver better outcomes. Keynes believed that capitalism would virtually collapse unless we started talking about the socialisation of investment.

Were they right or were they wrong?

We don’t know because at the end of the 1970s capitalist economies embarked on a new course. This was to dismantle the welfare state and restrict the power of workers through unions to increase wages. The gains of the post-war era threatened profitability by pushing up business costs. Economic advisers to Margaret Thatcher such as Walters and Eltis recognised that the future of their class based society was dependent on how successful they were in restoring corporate profitability through pushing down real wages, de-industrialising manufacturing, and reducing real social expenditure. The conservative vision, or perhaps more correctly the propaganda, was that we would become shareholding democracies, based on isolated and atomised individuals surviving by themselves because there is “no such thing as society.”

The point here is there’s been a fundamental change in relation to the way that economies function, particularly in the Anglo-Saxon economies, and this has massive implications now that it’s worked its way through this logic. It has economic and political implications. I believe there will be a severe economic recession next year. Is there going to be a depression over the next two to three years? I would put a high probability on that. So the implications of this are that we will face higher unemployment, inflation, a depreciating currency and rising interest rates. The latter is due to the fact that people and businesses will find it difficult to get access to money because the credit system has dried up.

The political implications of this are immense. The end of the US as an economic superpower is most likely though its military superpower status ensures some disturbing possibilities. The US will not be able to fund the wars that they’ve been fighting. They cannot buy their way out of the debts that they have accumulated. They can turn to the printing presses and unleash massive inflation on the rest of the world. This political crisis, in my view, is also a failure of representative democracy, which has become increasingly associated with close relationships between dominant political parties and big business.

Finally, I now want to talk in skeletal form about what the economic and political options that we have. And there are five of them I want to talk about. Firstly, I think this crisis is Labor’s chance. If Labor does not recognize that the neoliberal economy is dead, then the ALP will be defeated at the next election and probably for a long time after that. The Government needs to talk about getting a national economic summit together to get us out of this and find a way of seeking broader advice than from the usual summiteers and the irrelevant Treasury advisers. We have to go back and reverse the long income redistribution of the last 25 years, develop policy to increase pensions and provide citizens with a guaranteed minimum income. We need to implement policies to minimise income differentials between the highest paid and the lowest paid as a way of stabilising the economy and providing economic justice.

We have to have a national debate about new regulatory reforms to bring about stability in relation to the economy. We have to identify, at last, what is a real economy in relation to innovation and infrastructure requirements and how we can develop a transport system where the trains run a little bit faster than 1950. We have to dump the discredited AAA ratings and begin talking about fiscal and monetary policy in a post-neoliberal world.

Secondly, we will have to talk about how we regulate the financial system. In the lead-up to financial deregulation, the Fraser Government initiated the Campbell Inquiry but didn’t implement it. The Hawke Government initiated the Martin Inquiry and implemented it. The Rudd Government needs to initiate an inquiry into the financial system focused on what type of financial system will underpin Australia’s economic, social and environmental goals in a turbulent age. State equity and government owned financial institutions may become a reality. We need to dampen speculation. The imposition of a financial transaction tax I think would be a good, modest starting point that really acknowledges the speculative economy as being at the heart of the bankrupt system. We have to look at the reforms of super funds to ensure people don’t lose their lifetime savings through super funds.

The third point I want to make is in relation to planning for a sustainable economy. There is a central role for public investment in this. I do not have great optimism that markets will deliver the solutions we need in relation to the transition to a sustainable economy. For example, we could simply make a national decision that we’re going to build no more coal-fired power stations. We could make a national decision to build no more freeways and then look at other options in terms of sustainable transport systems. We have to look at the successes of our technological leadership in relation to sustainable technologies and rebuild and finance our building stock, public transport stock and our energy systems.

Fourthly, we need to have a national debate about a genuinely new federalism. For the first time in my life I agree with the irrelevant Michael Costa (but for different reasons) when he asks “why do we need a State government”? We’re not going to be able to abolish the State government but we should still have the debate now about how 152 councils in New South Wales, for example, could be brought down to 50 within five years and 25 within 10 years. This would involve devolution of more resources and responsibilities based on models of local community participation and models of local democracy. Specifically, larger and well resourced councils would take on new responsibilities in relation to climate change, local economic development, public transport, affordable housing and so on. I do not see that the current federal system can deliver these things. The community has much more knowledge than it has been given credit for and we need to engage new forms of participatory democracy in difficult times. And that to me is a desirable reform of the state, not centralised planning.

Fifthly, and most importantly perhaps, we need to rebuild our own political alternatives. The crisis in social democracy is relevant here. Look at the discredit that Blair brought to the social democratic model in England. We could even look back at advisers to President Clinton such as Robert Rubin, the head of Citicorp. We need to look beyond the two-party system and towards a much broader role for community democracy.

We also need, in my view, much more of a focus on relationships with Third World movements. We have ignored social movements emerging right throughout the Asia-Pacific region.

We also need to put a lot stronger emphasis on economic theory and policy in Australia based on building up outstanding, independent and progressive economic schools and think tanks that see economics as contributing to society’s welfare. We have to support the growth of a rigorous intellectual environment in developing a new, humane and more realistic economic paradigm, not one based on free market ideologies. I believe it’s not just a matter of theory but a question of organising people and this means building a much stronger community presence in relation to having more people participating in the processes that determine our future.

Graham Larcombe
September 21 2008