Where does capitalism go from here?


9:57 am - December 18th 2008

by Jon Cruddas MP    


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David Cameron was right to call the bankers to account earlier this week. But his ‘day of reckoning’ does little more than tinker with the problem. As the recession hits home, we need a national debate about how we build a new kind of pro-social economy.

It is the tax payer who has stood between capitalism and its self-inflicted collapse. With credit frozen and the banks unwilling to lend, the government is being pushed toward the role of sole lender. Capitalism has been rescued by people’s taxes and it will be dependent on them for its survival. It’s time for capitalism to be made accountable to democracy, and it’s time for democracy to renew itself and make itself fit for the challenge.

This is the great challenge of our time and it will shape our society for future generations.

To begin, the Government needs to dispel the idea of a quick return to business as usual. There is no going back to the old order of free market capitalism and a micromanaging, centralist state. That way lies market failure and a risk averse culture.

We must tackle the recession by laying the foundations for ecologically sustainable and equitable economic development. It will mean creating a democratic and responsive state, devolving power to local government and renewing our civic institutions of social trust and security. Society needs to reassert itself over the market economy.

The government’s bank bail-out scheme is not working. It sends out too many contradictory signals. The government needs the confidence to assert its leadership over the economy and to use its stake in the banks to become an activist investor. Taking ownership of the banks will enable it to seek a good return on taxpayers’ investment over the longer term while allowing the banks to rebuild their balance sheets.

Public ownership will ensure that the banking sector develops new kinds of corporate governance and business models that are geared to longer term economic development. The shadow banking system has to be de-leveraged. Global institutions of financial governance have to be reformed and created.

A regulatory framework must be put in place before the sector is returned to private ownership. Only the government with its authority, global alliances and its tax revenues can achieve this kind of reconstruction.

We will need a national strategic investment bank to build a sustainable economy. This could fund infrastructural development and coordinate a series of regional banks that devolve economic decision making and investment to regional manufacturing and business. Living on the thin air of the knowledge economy is not enough. The fundamentals of the economy need rebuilding and rebalancing.

The house building market must be regenerated as a priority. New green markets and a renewable technologies industry need developing, both for a carbon neutral economy and for energy security. The countryside exists in a state of economic deprivation and our agriculture needs radical reform.

The bank could partner with mutuals and pension funds to help build up the growing fair trade economy, cooperatives, Community Interest Companies and voluntary sector activity. Local government bonds could be used for financing local development initiatives.

A new pro-social economy won’t work if it means a top down, domineering politics. The focus must be on the local level by politically reengaging with people and rebuilding institutions of local civic authority.

A strategic investment bank could work with the post office as a people’s bank, providing retail banking facilities and incorporating a reformed social fund to provide micro credit as an alternative to exploitative door step lending. By operating at a neighbourhood level it has a role to play in local collective regeneration and community development, funding small scale social and for profits enterprise.

This kind of financing is already being undertaken by credit unions and by Community Development Finance Institutions. There are numerous local initiatives like Surrey Save and Partners Credit Union in Liverpool. Essex County Council has discussed a ‘Bank of Essex’ working alongside the European Investment Bank. Democracy needs finance. It is the key to economic and social development and we need a coordinated and devolved public infrastructure of lending, savings and investment opportunities.

The recession is a frightening prospect, but it is creating opportunities for social change and economic development that would have been unthinkable even six months ago. The Conservatives are floundering. The opportunities belong to the left. It is a matter of seizing these opportunities and galvanising people’s creativity.

If we fail then we risk the alternative of a shrill and authoritarian politics that will scar the country for decades.

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About the author
This is a guest article. Jon Cruddas is MP for Dagenham, East London.
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Story Filed Under: Blog ,Economy ,Our democracy

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Reader comments


This crisis has taught us a lot about the dangers inherent in the financial sector as was: I’m not sure it has taught us anything about the wisdom of having a state run ‘strategic investment bank’. There is a case for strategic state investment in energy and infrastructure – it is not a new idea that the government has a role in national investments of this nature, it has nothing to do with microcredit, and state directed infrastucture investments are quite possible under capitalist ‘business as usual’. The idea of a state run bank with political instructions to lend to ‘collective redevelolpment at a local level’ sounds disasterous. If we want to subsidise such things, then subsidise them via taxation, don’t pretend it’s banking. Why the focus on microcredit? It is already pretty easy to get a loan in this country. Do you think a lack of access to credit for low income individuals is the burning economic problem that this crisis gives up an oppotunity to address? You are barking. What do you think loans like that finance? They mainly finance consumption. Brilliant. How on earth do you get from the idea of ‘strategic investment’ to subsidised lending to low income individuals? Lord only knows what loopy ideas you have for agricultural reform. What’s regional manufacturing? Is manufacturing in Dagenham ‘regional’? Where are the non-regions? Ok, you want to subside manufacturing in, I don’t know, Swansea, Liverpool and Middlesborough? Well that’s an exciting and radical new departure for left wing economic policy. “Living on the thin air of the knowledge economy is not enough. The fundamentals of the economy need rebuilding and rebalancing”. Lord save us. You have decided that some categories of economic activity are more worthy than others, and you want to redirect us towards doing wholesome things like making steel and flat screen televisions. How are we going to compete with China? Ah yes, import tarifs. Holy crap.

I love how you think you are forging and radical new path, when you’re really just wheeling out the same old rubbish.

The house building point is an interesting one. With somewhere between 500,000 and 1mil homes empty in the UK, some owned by Government and governmental organisations, it’d be interesting to actually get an idea of what Labour would propose to do about this situation, given that it makes up a hefty chunk of the housing numbers expected to be needed by 2020.

But also, in the light of the recession, isn’t it time to revisit the whole “multiple properties” issue that strangles local rural communities by tying housing up for those that want a few weekends in the countryside a year?

3. Mike Killingworth

Perhaps someone could identify those areas of economic activity in which the UK enjoys a Ricardian comparative advantage. (Oh yes, and what proportion of the workforce they employ.)

This incoherent rubbish really makes a poor blog post. There’s about a billion ideas in here (and why do politicians always couch these things in the passive voice, eh?), none of which are developed in any substantive fashion. To pick out just a few points, though:

There is no going back to the old order of free market capitalism and a micromanaging, centralist state. That way lies market failure and a risk averse culture.

I thought that the whole problem with the existing financial system was precisely that it was not risk averse, and that’s what led to all the problems we are having…?

Public ownership will ensure that the banking sector develops new kinds of corporate governance and business models that are geared to longer term economic development.

Isn’t it more likely that public ownership will ensure that banking becomes intensely politicized? And if there’s one thing you can’t accuse politicians of, it’s of taking a measured long-term view that stretches past the next election.

Living on the thin air of the knowledge economy is not enough.

Actually, it is. Out entire civilization is built on knowledge and technological advance. We wouldn’t even have a manufacturing industry at all without the rise of the industrial revolution. And isn’t our manufacturing industry turning over more now than ever before? We haven’t experienced a collapse in manufacturing, we’ve had a collapse of employment in manufacturing, which is different. We’re using that knowledge economy to make more stuff using less people. Some might call that efficient.

If we fail then we risk the alternative of a shrill and authoritarian politics that will scar the country for decades.

Labour have already brought us a shrill and authoritarian politics for the last decade. ID cards? ASBOs? Anti-terror laws? Any of this ringing a bell at all?

‘A new pro-social economy won’t work if it means a top down, domineering politics. The focus must be on the local level by politically reengaging with people and rebuilding institutions of local civic authority. ‘

*PUNCHES THE AIR* Yess!

Someone needs to be making this point – we’re facing a crisis of localism AND a crisis of social and financial inequality, and a redistributive government does not have to be one which centralises obsessively.

I’m fangirling both the Jons quite hard right now.

Do you think, though, that one way to do this is to encourage localised internet activism? If so, you might want to get involved with LeftNewMedia, John McDonnel’s new project, which I’m also on the steering committee of – email jonesop@parliament.uk for details.

Laurie, I marvel at you. When I read a sentence like “‘A new pro-social economy won’t work if it means a top down, domineering politics. The focus must be on the local level by politically reengaging with people and rebuilding institutions of local civic authority.” I fail to see that it means anything at all. It says: vague good sounding thing won’t happen if vague bad sounding thing, we need vague good sounding thing. But it has you punching the air with delight. What on earth is a new pro-social economy? Don’t tell me “one organised for the social good” or such like, I mean what is it actually – shorter working hours, more jobs, higher wages? But how will local political re-engagement, say, raise wages better than, say, a national minimum wage? “Top down, domineering” sounds bad but a great many of the useful things a goverment can do, regarding economics, require centralisation – you don’t want citizen comitteees to build a new intelligent electricity grid or have local authorities write their own carbon tax legislation. What is this crisis of localism? Low voter turn out in local elections? What is political re-engagement, higher turn outs? What are the insitutions of local civic authority that need rebuilding? This is an article about economics not the merits of local politics in general; what are these local institutions going to do to the economy (if only we can achieve local “political re-engagement)? Allocate subsidies? Allocate loans? Direct infrastructure investments? Doesn’t local government and regional authorities already do some of this stuff? What is the great radical economic vision, having an economy with more subsidies, more soft loans, and having allocation decisions taken by what grass roots local committees? You must have a great deal more faith in the economic competency of local politicians and citizen’s commitees than I do. Can you at least see how badly wrong it could go? Try reading the Private Eye ‘Rotten Boroughs’ column, never mind the socialist calculation debate. Oh dear, I like to think of myself as a lefty, but the thought of the local council running the economy has made me come over all small goverment libertarian. I think I need to go and lie down.

7. Jonathan Rutherford

Luis, your criticisms end up without any kind of coherence. It’s not a thesis its a 700 word article so things get truncated. But taking up a couple of your criticisms. Micro credit does matter. There are millions who don’t have access to a bank account and rely on door step loans at huge interest rates – people are borrowing £100-200 to get by. That’s a consequence of the decline in welfare. It means necessary consumption and bill paying to survive. Yes I agree a national investment bank isn’t revolutionary but after the last thirty years of market fundamentalism it’s a not insignificant proposal – it has all been said before in the Alternative Economic Stratgegy of the early 1980s and then in Bryan Gould’s more watered down version. It’s not about taxation, its about using finance for economic development not maximising a return on the equities or debt securitisation market .

sanbikinoraion, yes knowledge and technology have been central to economic activity for centuries but the ‘knowledge economy’ thesis developed by the world bank and leading industrial nations became a major debate in the 1990s and was taken up by New Labour – Peter Mandelson in particular – and was central to New Labour’s ‘industrial’ policy from 1997. It was also incorporated into the Lisbon Treaty which governs the EUs economic strategy . As for your final sentence I completely agree with you.

“Luis, your criticisms end up without any kind of coherence.”

Not that certain people responding have necessarily engaged with you here, but this is a bit pot calling the kettle black really…as you yourself go on to admit in a round about way.

I suppose the biggest question here is how do you expect Labour to make this jump into your land of many wishes, and given you agree with sanbikinoraion’s last sentence do you not see the danger of this all sounding like justification for the “better of two evils”

But you’re right, things are terribly skewed to disadvantage the poor here, not so much that they can’t get along just so that it costs them disproportionately to do it. I’ve argued here and elsewhere in the past about the way we price energy for a start, but can we realistically see (coming out of this climate) ways being made to help those who really need the money to get it without being fleeced on the smallprint? Especially after Purnell’s paper?

I don’t know about coherence, but my criticisms certainly have a common theme … and anyone that can segue from ‘strategic investment’ to low income consumption financing has some coherence issues of their own.

Your proposals also have a common theme: they involve getting the state to do something the private sector does not currently find profitable to do, whether it is high street banks lending to low income individuals at ‘normal’ interest rates or funding manufacturing in ‘the regions’. It might surprise you to hear that I think of myself as a left winger and think the state should be doing all sorts of things the private sector doesn’t do, but that doesn’t mean that I support all possible state interventions in the economy, especially not lazy left wing assumptions that all that’s needed is to set up some local political entity and give it tax payers’ money with the command “invest in more manufacturing!” and everything will turn out alright.

Let’s take microcredit. The Joseph Rowntree Foundation estimate that 750,000 people in the UK use a high cost lender. As they point out, repayment rates are low and the amounts borrowed small, with lending having relatively high fixed costs, private sector lenders charge very high rates. I presume you want the state to supply credit on lower rates. Now a state entity with a social remit will be less willing to enforce collection than existing providers, so repayment rates will fall. There is no way lending will be profitable, so this will amount to a large state subsidy for consumption spending in low income households, and while interest rates might be lower the amounts borrowed will rise and the ability to repay will fall. Now I seem to recall reading somewhere that excessive consumer debt might not be a good thing. It might not be the wisest use of tax payer money, perhaps raising welfare payments or providing training might be more sensible, and it certainly does not amount to ‘strategic investment’. Microcredit became fashionable as third-world development policy with the aim of lending to credit constrained entrepreneurs, for business investment. You aren’t confusing that with what lending to low income individuals in the UK would be like are you?

Now, briefly, take your plan for regional authorities to invest in manufacturing. Now again, you are talking about incremental investment over and above the level the private sector currently wishes to provide. This means subsidies or protection (import tarifs, price controls). You have considered that haven’t you? That means taking money from somewhere else in the economy, so while you create with one hand, you destroy with the other. There might also be retaliatory action by other nations, cutting off our access to export markets. How good to you think the allocation decisions made by your new political regional investment vehicles will be? There are lots of things the state can do to help businesses create jobs and raise national productivity, but I don’t think that your ideas are them. I don’t get the impression you have thought them through, of even that you have more than a passing acquaintance with economics. I bet you have read lots of books full of slogans about market fundamentalism though, haven’t you.

Luis++

Agree with Luis. The problem, of course, is that this is a short article written by a politician (and a professor of cultural studies) neither of whom seem to know much about economics.

It does read very much like the AES of 20 years ago – although that is not necessarily a criticism – and it would be good to see the proposals unpacked a bit (rather than wrapped up in lots of flowery language).

Clearly there is a crisis of capitalism – caused by free market failure – and so a prime facie case for a more interventionist state. Probably there is a case for having a national state-owned bank (and lots more regulation of the financial sector) although plenty of countries have such banks. They are not a panacea and are prone to political interference (come to Brazil).

It would be good to have a bit more detail on what such a bank might do (presumably invest in projects which are not profitable in the short-term). I like the idea of large investment in renewable energy (since it fits this criteria) but am a bit wary of any talk of ‘picking industrial champions’ or ‘supporting micro-finance’ for the reasons given above.

As far as I (also a non-economist) can work out we hit the current problems for two unrelated reasons: one was the boom and crunch of credit (following bubbles in first the stock market and then housing) while the other was to do with a rebalancing of the world economy due to the economic rise of the BRICs relative to Europe and the USA.

Current western economic strategy seems to be chuck everything at the recession by reflating the economy (which at some point must just create a new bubble) and just ignore the other issue. I agree with the authors in pointing out the flaws in this strategy, but I am not sure that their alternative is that through on these two problems either.

12. Luis Enrique

The discussion of Paul Krugman’s new edition of The Return of Depression Economics at TPM is worth reading, especially the two entries by Mark Thoma Depression Economics: Normal Rules don’t apply and How Should Non-Depression Economics be changed. The only thing that needs bearing in mind is that when he uses the world ‘stablization’, he is talking about the short-term goal of arresting the vicious downward spiral of a recession, rather than just making the economy ‘stable’ in some more general sense. .

The banks that didn’t take dangerous risks were the mutuals – building societies and the Co-op Bank, which are owned by their customers. However this is obviously not enough as staff don’t have a voice and customers are not as empowered as they could be. So rather than returning the banking sector back to a joint-stock form of ownership after reforming and restructuring it, perhaps it might be better if the government helped to democratise the banking sector, retaining a stake but encouraging ownership and control by staff and customers.

14. douglas clark

It seems to me that money, the ownership and exploitation of it anyway, is a Class A drug. And that the addicts should be treated in exactly the same way as any other abuser. Preferably by a complete withdrawal of their drug of choice.

The law already has rules about expropriation of ill gotten gains. Perhaps it should be applied to everyone who thought up, say, debt bundling? Just as much as herion barons.

15. Mike Killingworth

[14] It’s very tempting, Douglas. The problem is in your “say” – which bankers behaved well and which badly? And shouldn’t those political leaders who signed off “light touch” regulation and turned our economies into casinos have to carry the can, too?

It would be nice to believe that there’s entrepreneurship over here and the criminal mind over there. Reality, however…

16. douglas clark

Mike,

See my post as a poor writers’ version of ‘A solution to the Irish Question’. It was written with that intent, anyway.

The point, if there is a point, is that we are not suitably angry about all of this. We are, if you like, intellectualising white collar theft. Excusing it, even.

I feel I should be knitting in front of the guillotine and watching heads roll, when I am in fact watching Robert Preston boring me to death about the sub prime bubble. As if making it boring makes it excusable.

17. Mike Killingworth

[16] Absolutely. A marxist would argue that bankers being above the law is a state of affairs built into capitalism.


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