21st Century Vision

Spend, spend, spend

In the topsy turvy world of an economic downturn, it is interesting to see that the leaders of the major economies are turning to the poor to save them from the consequences of their incompetent management. Thus the G8 morphs into the G20, and countries such as Mexico, Indonesia, Turkey and Argentina suddenly find themselves placed solicitously at the top table. Are they being offered a free lunch?

Far from it. The Titanic has hit the iceberg that wasn't supposed to exist, and what the newly cosseted guests are asked to do is provide fuel for the engines needed to refloat it. That means a massive splurge of spending - delicately called an economic "stimulus" - to create the demand that will turn the mighty engines of global production once more, and with them the somewhat less tangible components of the financial system. As if debt were not already a big enough problem, they are being asked to take on more, and the cure for the world's financial problems looks very much like more of the behaviour that caused it in the first place.

All this affects the poorer participants in the global economy, in two ways. First, the countries which are being asked to take the strain are themselves massively unequal, which large populations living at the margins of subsistence in India, Brazil, South Africa and many others. Secondly, within the rich countries, policymakers have woken up to the Keynesian wisdom that putting money into the hands of the have-nots generates more immediate demand than putting it into the hands of the wealthy, who don't need to spend it immediately: our good old friend a differential "marginal propensity to consume".

In the UK increased state spending is seen as too slow a method of increasing demand - it takes several years to plan and build a school or hospital. Even tax cuts for the poor won't do, because they won't get the money until next financial year. No, the poor have got to get on with the job of saving the economy immediately, meaning a hike in benefits and pensions. Of course that sounds like generosity - nothing to repay - until you consider that it is in fact the state which is proposing to take on the debt on everyone's behalf. Later on, when it comes time to repay the state's debt, the economy will be motoring again, and the rich will be claiming they can't be taxed for fear of destroying their incentives. Meanwhile those public sector goods like schools and hospitals will not have been built, and given the state of the government's finances are never likely to be.

And therein lies the point. As Bush, Brown and the others appeal to the second and third tier economies to save the day, and promise to reform the IMF to improve stability and revive the WTO negotiations on freeing trade yet further, and as they impose consumption on their own poor in the interests of economic normal service, who will make the simple points in return?

From the states being asked to help: Yes, we will co-operate, on condition of permanent democratisation of the management of the world economy, with fair representation in the IMF, World Bank and WTO. And from the poor themselves, the condition of a permanent shift to a more equal pattern of income distribution, within nations and worldwide, including the construction of the sustainable public goods which only the state can provide.

Old gods, new heroes

Two recent news items tell us something is afoot. The Yorkshire-based furniture chain Roseby's has collapsed with the loss of 1,200 jobs, but its Indian avatar is launching four Rosebys Interiors stores in Punjab. Meanwhile the Indian firm Tech Mahindra is opening a call centre with 500 jobs in South Tyneside. Even two years ago the talk was of the booming UK consumer economy fuelled by ever more house-price driven borrowing, while outsourcing service jobs to the Far East was seen as a major threat to British employment. What a difference a crash makes.

But perhaps the time has arrived to peer into the impact of a fracturing economy not just on mortgages and dole queues but on the way people react to frightening changes in what until recently had seemed the natural order. Part of the problem is that an unprecedented period of expansion has undermined every form of authority, as markets appeared to demonstrate that they were the only reality. Nearly 50 years ago That Was the Week That Was shocked the establishment by presenting religious faith as a consumer choice, concluding if memory serves that Buddhism was the "best buy". Today, only evangelicals and fundamentalists seem to regard faith as a guide to public conduct, and are treated as cases of overstated brand loyalty.

In a world dominated by technology, it is even more startling to contemplate the weakening of the scientific outlook. The more that is learned about the history of the universe, the physics of our own planet and the mechanisms of heredity based on DNA, the less of it penetrates public understanding. Space exploration is reduced to "Is there water on Mars?", the Large Hadron Collider to "Will it create another Big Bang?", and heredity to "Are there genes for obesity?". Meanwhile climate change denialists have flourished and academy schools are handed over to wealthy individuals interested in promoting creationism. No doubt the Royal Society has a good deal to answer for, but how was it or anyone to foresee that commercially-funded modern media would reduce the physical world to the realms of magic?

Now the authority even of markets has gone: not only has their brutality been revealed (it should never have been forgotten), but it is still only vaguely understood that they are the creature of society, which can trim them or to a large extent dispense with them if it wishes. We get the markets we vote for (and therefore deserve).

So the world is on the lookout for new sources of certainty. Part of the rapturous response to the election of Barack Obama is his articulation of an intelligent discourse founded on human values; though in truth it is not easy to discern what practical break he proposes with the past. In the UK the Glenrothes byelection win is represented as Gordon Brown's Obama moment, notwithstanding airport expansion, nuclear power and immigration crackdowns. Something of much greater substance is required if democracy is to be refounded.

The risk is that disenchantment with the old gods will trigger a flight to new and nastier ones. We are already seeing a semi-fascist resurgence in Europe. Stefan Zweig, observing a parallel moment in the Austria of the 1920s, remarked that Austrians had never paid so much attention to art as during the hyperinflation: "seeing that money was betraying us, we felt that only the eternal within us was truly to be relied upon". The Anschluss followed some years later.

The crash: who's set to benefit?

There is a paradox in the current economic crisis. Some think the drive towards free markets, which has been the unquestioned given of almost all political thinking for thirty years, has at last got its comeuppance: Nemesis may have been slow to show her hand, but has acted all the more decisively to bring devastation to the pretentions of a theory that was never more than a combination of ideology and greed. Others are not quite so sure.

How else can we describe the humiliation inflicted on the bankers? The exposure of their venality and incompetence, leading to the nationalization of some banks and the spectacle of state-dependency for the survival of others, leaves nothing to add. Their dominance is over, and to the spectacle of economic power lurching from North America and Europe to India and China is added that of a massive shift in influence from markets to the state. Regulation, regulation, regulation is the new orthodoxy as governments scramble to protect voters from the worst effects of the crash and to assure them of a stable future.

As theories go, the crisis theory of political change has much to recommend it. The 1917 Russian Revolution reflected the unwillingness of the soldiers, sailors and urban workers to accept the horrors and privations of the first word war. Fifteen years later in Germany mass unemployment created fertile ground for agitation against the injustices, real and imagined, of the Versailles settlement, and paved the way for the Nazi ascendancy. Modern Japan was born as a democracy out of the radioactive ashes of a ruined imperial state. Are we not seeing in rather less dramatic form the destruction and replacement of a discredited order?

Since the 1950s, however, crisis theory has taken a new turn. As Naomi Klein brings out in The Shock Doctrine, economic and political crises have been repeatedly used to impose allegedly free market orthodoxy on populations disoriented by violence and impoverishment. Chicago School economists - imbued with the free market doctrines of Hayek and Friedman - would descend upon military dictatorships and ex-communist countries to write their rules of economic conduct, essentially removing price controls, downsizing the state (i.e, sacking every possible public sector worker), privatising public industries at knock-down prices and awarding the resulting opportunities to snap up industries and services to western corporations. O yes, and doing so with the right to repatriate 100% of profits.

Later, as the Chicago School infiltrated the IMF, the US Treasury and what was then GATT, crises facilitating these demands were not so much exploited as precipitated. In yesterday's Guardian Madeleine Bunting reports Korean economist Ha-Joon Chang as pointing out that in the 1997-98 Asian crisis, "not only did the US and IMF stop the Asian countries from implementing a state bail-out, they took advantage of the desperate situation to force South Korea and other Asian nations to adopt further financial deregulation".

And herein lies the problem. What crisis theory tells us is that while crises are relatively unpredictable, the forces shaping the solution are the ones best organized well before the breakdown: the Russian communists in 1917, Hitler's storm troopers in the 1930s and the US occupation in Japan.

Who is best organized to benefit from the dislocation we are experiencing today and the steep downturn to come? Is it the forces of enlightened social democracy, green, egalitarian and sensitive to liberties? Or is it, once again, the forces of neoliberalism, emerging from the wreck to claim that it happened - and this is what Chicago theory would claim - because markets were not free enough, governments were too intrusive and citizens too protected from market disciplines?

The Shock Doctrine: The Rise of Disaster Capitalism by Naomi Klein (Penguin 2007)

Bowler-hatted bankers

So that’s it. Not only has Britain propped up its banking system to the satisfaction of the markets (the FTSE is up 4.4% at the time of writing), it has conducted a dazzling master class in state intervention which the Eurozone and the US itself can only admire and strive in their way to emulate. Gordon Brown is saved – indeed, to quote one particularly effusive commentator, he can “stand tall” again.

OK, there are undercurrents of discontent: “Banks Nationalized”, claims the headline in The Times, while as in America there is grumbling resentment that the government is bailing out the rich at the expense of taxpayers and those reliant on incapacity and other state benefits. On the whole however the government is basking in the glow of a threefold achievement: saving the major banks in a form which promises to allow them to reassert their independence later; reassuring the middle class that their savings and (to a lesser extent) pensions will not disappear; and even titillating the old left with a flash of public ownership – goodness, the government may be taking voting shares in the banks it is rescuing!

Then there is the sheer daring of it all:  the flutter on the future health of the banking system is enormous – it is definitely down to the family silver, an unrepeatable gamble. Of course the fact that it has to work is one reason it is working. Even market traders know when to swallow their scepticism, for a day or two.

But none of this is really the point. The prime minister talks about protecting “hard-working families” and “small businesses”. It is as if the agriculture, motor manufacturing, chemical, drugs and oil industries – and many others – did not exist. The same point emerges from the constant repetition of the mantra that solving the credit crisis means “getting the banks to start lending to each other again”. And herein lies the issue the government really does not want to discuss.

What is the function of the banks? As we have been pointing out here for several weeks, it is not to lend “to each other”, but to allocate capital to the most productive uses. That means that we need to ask a double question –

• Why did the neoliberal approach to capital allocation so comprehensively fail (at the same time as vastly enriching its operatives, of course)? One answer is that to the markets “most productive” means “most immediately profitable in terms of share values”. On the trading floors the time frame became shorter and shorter, the risks greater and greater. Eventually dealers were punting on activities about which they knew almost nothing.

• The government itself now has to make judgments about what “most productive” means. The question is, what criteria will it adopt? Civil servants sitting on the boards of banks will have to do more than bear down on executive pay: they will have to make assessments of the social and environmental costs and benefits of the loans they approve.

The debate now, parliamentary and in the wider community, must be about how the government redefines “most productive”. The signs so far are that it hasn’t a clue, and doesn’t want to admit the existence of this unavoidable question.

The power of the banker - and its limits

Whatever their relationship in the middle ages and the early modern period, the industrial revolution ushered in a long struggle between industrial and financial capital. As industrial capital accumulates it generates funds for which the owner has no immediate use. He may wish to expand, but he cannot buy a fraction of a machine or half of a new factory. He must amass a considerable volume of capital from profits before the great day comes. The same goes for depreciation: write off the machine over five years and save one fifth of its replacement cost every year. That leaves cash in the safe.

Soon there appears the figure of the banker. At one level she will keep your money secure until there is enough to invest in expanding the enterprise. But she can – and must – do more. Instead of making a charge for looking after it she will pay interest on the sum borrowed. She will do this because for her it represents the opportunity to lend at higher rates than she pays. For the industrial capitalist, production begets money; for the banker, money begets money.

To whom does our banker lend? Perhaps householders need domestic loans, perhaps landowners need to repair buildings. But it is not here that the peculiar power of the banker resides. The point is that by pooling the temporarily surplus funds of many industrial capitalists she can award one of them the privilege of expanding not in 5 or 10 years but immediately. Not only that but the new machine or even entirely new plant so acquired will be more modern, more productive than the old one, so allowing the borrower to cut production costs and prices. True, he must pay the banker interest, but what is that compared with the opportunity to increase his market share and drive his competitors to the wall?

So now the industrialist seeks out the banker, who henceforth dominates him socially as well as financially. But the dominance of the banker does not end there. Even governments are in thrall to her, because after all our banker is not obliged to lend to any particular enterprise, however politically or electorally convenient. She is not even required to lend to home industry at all. Finance capital is not patriotic: in its pursuit of profit it has a global perspective.

Until the 1970s governments more or less knew this. By means of exchange controls, manipulation of interest rates and (usually ineffective) appeals to patriotism they sought to clip the wings of that most footloose of economic beasts, funds in search of a profitable investment opportunity. But then came the neoliberal catastrophe.

En masse governments and the economists who were their faithful retainers accepted the argument that open capital markets were by themselves the most efficient mechanism for shifting funds to where they were most needed and most productive. Free capital markets at home, free capital markets in the developing world; indeed free markets everywhere.

Today we are looking at the wreckage of that outlook. What is needed is not a rebooting of the financial system such as envisaged in the Washington bail out or the British bank nationalizations. On the contrary we need to rethink fundamentally the relationship not only between economy and state but between bank capital and an industry constrained by social goals.

Economic Blairism

The style of Tony Blair's speeches to Labour Party conferences, particularly on foreign policy, is unforgettable. You know the sort of thing -

Because from hope comes change
So the United Nations route
And there is only one answer
I only know what I believe

In short, often verbless, always breathless and largely meaningless: but received with uncritical adulation none the less.

In the fevered world of Blair's overblown rhetoric, Britain seconded the mighty US to bring democracy and development to a world unable to solve its own problems -

Our friendship with America is a strength
The US is the only superpower
And it's not so much American unilateralism I fear. It's isolation

Blair sold conferences a sanitised version of Britain. Gone was the ruthless imperial past with its legacy of bad government and underdevelopment. Gone too was the role of British companies in reinforcing that underdevelopment through exploitation of the resources and labour of weak economies. There was no mention of the baneful effects of arms sales, or agricultural subsidies or over-restrictive patents. Instead we had a vacuous, context-free picture of a benevolent Britain as faithful squire to the US paladin, whose Sixth Fleet and Marine Corps were bringing freedom to the benighted.

If you thought we had done with all that, think again. Having presided as chancellor over the most unbridled decade of capitalist greed since the nineteenth century, our new prime minister emerges as if from a chrysalis and on cue for conference as the leading advocate of - guess what - global market regulation. Indeed we in Britain, and he as its leader, are to ally ourselves with the collective wisdom of the US financial establishment to deliver nothing less than a reformed global capitalism. This stronger international regulation will be based in the IMF, that same IMF savaged by Joe Stiglitz in Globalization and its Discontents for its role in bailing out Western banks which had made unrepayable loans to developing countries, leaving the locals with economies in ruins.

The best of it is that this conversion comes immediately after the US authorities have sent an unmistakeable message to the capital markets. By purchasing the banks' ill-judged loans they are excusing and mitigating the consequences of past excesses and foisting the bad debts not only on to today's taxpayers but on to future generations. It is the poor who will pay through underfunded or absent services while the financial dance floor is cleared for the ball to start all over again.

Maybe there is something about Labour Party conferences that brings out the folie de grandeur in its leaders. But perhaps they ought to pay heed to the steadily eroding respect at the UN and elsewhere for empty Western good intentions, whether on human rights or the subordination of financial markets to social goals.

Respect for the West on human rights? Click here

Cry havoc

It seems only yesterday (actually two weeks ago) that we were writing of the duty of British forces in Afghanistan and Iraq to supply a "continuous stream of headlines" justifying our involvement in these unwinnable wars, while a couple of months ago we noted the tendency for others to see us as "dreaming of the lost grandeur of empire". In the last few days it was as if all the symptoms of our national self-deception condensed into one image, that of Harry Windsor as soldier prince.

Everything was thrown indiscriminately into this last hurrah for national greatness: the young avatar of Henry V crying "God for England, Harry and St George", trumping Laurence Olivier with his royal blood and actual presence. Helmand was Agincourt and the Taliban were somehow identified with the eternally wicked French, who continue to this day to thwart our aspirations in Europe. Not only that, the modern Harry is the son of the People's Princess, and like her apparently of the people with his accurate televised portrayal of that other Shakespearean stereotype, the soldier "full of strange oaths, and bearded like the pard". What brought this whole media spectacular to life was of course the genuine courage he showed, so allowing him unwittingly to feature as the signifier of an immense falsehood.

What are the realities wished away by this piece of military mise en scène? Apart from the dying of the light of western internationalism, the economic dimension becomes clearer by the week. The fact is that the financial burden of the wars in which we are engaged is radically tipping the international balance against the US and its major allies.  We have referred before to the march of the sovereign wealth funds accumulated by oil-rich states and dynamic manufacturing powers like China and South Korea, already valued at $2.2 trillion and projected to reach $13.4 trillion by 2010 (A new (economic) world order?, 24th December; Guardian, 1st March). Along with their acquisition of assets in western economies brought low by unsustainable credit will eventually come a power that will one day be wielded.

Meanwhile Joe Stiglitz and Linda Bilmes* have been doing the accounts of the Iraq war, and conclude it will cost a deeply indebted US at least $3 trillion, with similar bills falling on its allies and through rising oil prices (partly due to the war) on developing countries. So much has been borrowed (Bush cut taxes at the same time as invading Iraq) that they might be called the hire purchase wars, with the repayments falling on future generations. Here the government's failure to meet its child poverty reduction targets further illustrates the distortion of priorities.

One of the ironies of our national fantasy is that whatever Henry V's victories at Harfleur and Agincourt, they were part of a doomed campaign to re-establish English dominance in France and more widely on the continent. Though in the mythical history evoked by images like Harry in Helmand such realities are rigorously suppressed, defeat in the Hundred Years' War led to a marginalization in Europe from which Britain still suffers. Are we about to repeat the mistake on a worldwide scale?

*The Three Trillion Dollar War, by Joseph Stiglitz and Linda Bilmes, Allen Lane 2008

Hasn't this been sorted?

After Northern Rock we are all suddenly aware of debt in the developed world. For years the stable growth economy of which our prime minister is so proud has been kept going only by individuals and governments taking on more and more debt. Debt, it appears, has been most heavily oversold in the housing market, so much so that a small downturn in employment could lead to large scale repossessions as overextended households find themselves unable to meet repayments. Falling house prices could then lead families facing negative equity sharply to reduce expenditure, so creating a decline in retail sales and employment in the household goods and related sectors. It's already happening in the US, and no one really knows to what extent your friendly neighbourhood listening or otherwise caring high street bank is committed there. The fear is of a classic downward spiral which may devastate lives and prospects until the economy reaches a new balance between production and consumption at a perhaps far lower level of activity.

With so much at stake in the developed world, it's good to know that the 2005 Gleneagles G8 - that's right, the one with "Make Poverty History" written all over it - dealt with the problem of international debt in the developing world. Thanks in large part to the efforts of Gordon Brown, then chancellor, a huge debt relief programme was initiated by the developed countries. A dark cloud lifted from the poorest countries, and their incorporation into the expanding world economy was henceforth only a matter of time.

Why then has October 17th-24th been designated by the Jubilee Debt Campaign (JDC) as "Global Debt Week"? Why are we being urged to lobby our MPs to put the case for debt relief? Hasn't it all been sorted?

Well despite the achievements of campaigners, developing world debt is still astronomical, while relief schemes are slow, inadequate and conditional. According to JDC the total external debt of the very poorest countries (with an annual average income of less than $875 per person) was $412 billion at the end of 2005. In that year these countries paid nearly $43 billion to the rich world in debt service. For all developing countries, total external debt owed at the end of 2005 was $2.8 trillion, and over the course of that year they paid $511 billion servicing it.

And remember where it came from. In the 1960s and 1970s banks in rich countries were flush with cash generated by rising oil prices. Having to find willing borrowers, they lent and lent again to poor countries whose long term prospects of repayment were nebulous (rather like "sub-prime" mortgage lending more recently). Meanwhile many governments in the rich developed world were, as JDC delicately puts it, "keen to support countries that they saw as potential allies in the cold war – so they lent them money regardless of whether that country was being ruled by a corrupt or oppressive regime."

OK, you may say, but after Gleneagles things are moving in the right direction - and now we've got problems of our own. Well let's take Kenya, potentially one of Africa's success stories: in 2005-06 Kenya's budget for debt payments was as much as for water, health, agriculture, roads, transport and finance combined. Kenya's debt was incurred by corrupt elites spurred on by self-interested lenders. Now its people pay the price.

Kenya is not alone: a recent study suggested that 107 countries need debt cancellation to guarantee an "ethical poverty line" of $3 a day for their people.

Click here for more on Global Debt Week