Why ‘reforming capitalism’ matters, despite what critics say


1:59 pm - January 20th 2012

by Duncan Weldon    


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At the moment there seem to be two major debates on economic policy happening at the same time in the UK.

The first one revolves around deficit reduction and fiscal policy and the second one is focussed on reforming British capitalism.

I would argue that these two debates are actually fundamentally linked.

As I wrote in response to ‘In the Black Labour’:

Without a rebalanced economy we will never have truly sustainable public finances, a point that cannot be made forcibly enough especially as the Coalition continues to put its faith in lacklustre ‘growth strategies’ based on the old Thatcherite recipe of corporate tax cuts and deregulation.

And to me, ‘rebalancing the economy’ is part of the reforming capitalism debate.

In the past week David Cameron, Ed Miliband and Nick Clegg have spoken variously of ‘popular capitalism’, ‘responsible capitalism’ and the ‘John Lewis Economy’.

This has prompted Channel 4 to ask if any of this talk will have any impact at all.

Talk of ‘reforming capitalism’ does sometimes sound like its best left to think tank roundtables and academic seminars, not something that cuts through in the real world. And I’m also happy to agree that the language isn’t right at the moment, that to many people this seems like an arcane debate with little impact on their lives.

But I also think that this is a mistake.

Faisal Islam is onto something when he writes:

The speeches on moral and responsible capitalism are a smokescreen for a much bigger political problem for both main parties. The model of British laisser-faire capitalism that has, on the whole, delivered for the bulk of the nation for decades, may no longer be up to the job. That is not to say that British capitalism is broken, more that its place in the world has fundamentally changed, meaning that it can’t, right now, deliver for large swathes of Britain’s population. And neither political leader recognised that today.

The current cost-of-living crisis, the seeming inability of the British economy to grow at a decent clip, the still-broken state of the banks, the huge challenge of generating enough jobs – these are all things that matter to people and these are all aspects of the ‘reforming capitalism’ debate.

The problem of a declining wage share and a skewed income distribution (extensively documented by the TUC and Resolution Foundation over the past few years) and the turn by households to borrowing to make ends meet and the subsequent financial crisis (see this excellent IMF analysis) are both linked to the nature of our capitalism and probably mean more to most people than questions about the size of the government deficit.

This is all occurring against a changing international economic backdrop. The Economist today devotes a special section to the rise of state capitalism in the emerging economic powers – whatever its pros and cons, it will radically reshape how the world economy operates, possibly to the detriment of Britain.

For Britain to compete and prosper major reforms are needed – a point well made last summer by the IPPR’s ‘Surviving the Asian Century’.

To get some sense of how the changing international environment might affect the UK, it’s worth reading a very interesting speech made by the bank of England’s Adam Posen this week, entitled ‘What the return of 19th century economics means for 21st century geopolitics’.

Given the problems of the British economy, the need for a rebalancing to fix the public finances and the changing nature of the global system I don’t regard talk of ‘reforming capitalism’ as a distraction, I regard it as crucial.

What is needed now are concrete policy suggestions and a good place to start is by looking at Germany.

Now of course we can’t simply import German institutions, policies and ideas wholesale, but there are things we can learn.

  • A major new on lessons from Germany from the TUC (here, with a (shorter!) blog post by my colleague Tim Page here)
  • Gregg McClymont & Andrew Tarrant on the German banking system here.
  • Andrew Tarrant’s fascinating interview with Matthias Machnig here.

There’s more to talk of ‘reforming capitalism’ than academic and moral language. The challenge now is for policy makers to turn of sentiments and handwringing to talk of practical actions.


A longer version of this blog-post is at ToUChstone blog

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


Duncan

I totally agree, I have been mulling this over for the last few weeks.

I think we need to admit with Hindsight the adoption of the type of Capitalism we adopted in the 1980s was a mistake, and that it couldn’t be sorted by the tinkering at the edges the Third Way (Clinton / New labour) envisaged.

We need to reform Capatilism to provide the greatest good for the greatest number of our citizens.
After WWII this was done and for most of the people, most of the time life got better. Naked Anglo Saxon Capitalism doesn’t seem to be able to deliver this, we have tried it twice in the loast 100 years or so and the outcome has been the same. A massive crash and dire consequences for large number of workers.

Wages are too low for the average employee. Capitalism drove them down as a point of honour. Rents are too high. Capitalism drove them up too. Now watch for the fall out. Nobody talks about housing.

There are many varieties of capitalism: Andre Sapir on: Globalization and the Reform of European Social Models (2006):
http://www.ulb.ac.be/cours/delaet/econ076/docs/sapir.pdf

Try his typology in Figure 4 of four varieties: Continental, Mediterranean, Nordic and Anglo-Saxon

Everyone always makes the simple complicated.

Things that are wrong:

a) wages are too low
b) living costs are too high
c) frontline public services are being slashed
d) there is no growth and no growth strategy
e) related to a), too much economic power is concentrated at the top of the tree
f) the banks are bust
g) global policy is making this worse
h) after all this, we still have sod all idea of how the cut the deficit

Ways to put these right:

a) Living Wage
b) cap electricity prices; go on a massive council house building programme (and watch housing benefit bills fall); clamp down on commodities speculation and food transfer pricing scams to boot
c) got a way of funding frontline services that cost money without paying for them? No? They pay for them – you’ll find they’re a lot cheaper when you don’t pay Serco to do it
d) slash VAT; credit easing to small businesses (oooh well done George); QE to the public so the money actually gets spent – this might buy time to redevelop our economic model
e) proper worker representation on company boards; rebalance the relationship between trade unions and employers, which is currently massively skewed towards the latter
f) four years of throwing money at these tossers and they are still basically broke without government support – this is now beyond a joke, if the investment banks can’t survive let them fall and protect the retail banks; enough already, seriously
g) reverse this global austerity madness (especially in the Eurozone); get global trade talks going based on free trade among countries with minimum wage legislation to stymie the race to the bottom; start lobbying for the IMF to change from a loan shark to a less hawkish lender of last resort
h) see a)-g), sort out tax avoidance (esp in UK territories), more effectively tax wealth as well as income, and someone *please* work out that if you spend public money preventatively, you’ll spend less public money clearing up the mess

So there’s probably holes in that list but it’s more good than bad and it doesn’t require anyone to reinvent the wheel. No doubt the trolls will be along soon to spend their Friday night tearing it to shreds but they’re wrong about everything so who cares.

And rentergirl is so so so right – nobody talks about housing. I mean seriously, how hard can it be?

“And rentergirl is so so so right – nobody talks about housing. I mean seriously, how hard can it be?”

Try this plot of the ratio of average house prices to average earnings:
http://www.housepricecrash.co.uk/graphs-average-house-price-to-earnings-ratio.php

House prices were bid up by easy bank credit until the financial crisis broke in the first part of 2008.

“It seems that by anybody’s measure the UK’s household debt to income ratio is very high, both by international and UK historical standards. The OECD for example records that, as of 2009, average UK household debt was 170.7 per cent of disposable household income.”

Mr Weldon for PM!

Curiously, no mention so far of getting up schooling standards in Britain when only 50 pc of 16 year-olds are making the benchmark of 5 good GCSEs, including maths and English. With the national stagnation of low skilled manual jobs, it’s essential that we improve schooling standards – cheaper unskilled and even skilled labour can be easily hired by outsourcing work or by employers here hiring incoming EU migrants from eastern Europe.

9. Leon Wolfeson

@9 – But Bob, there’s a conspiracy to make exams easy! Make your mind up!

Leon: “But Bob, there’s a conspiracy to make exams easy! Make your mind up!”

I’ve not said anything about whether or not there’s a conspiracy to make exams easier.

What I’ve said is that because the numbers of unskilled manual jobs is stagnant, there is a national need to improve schooling standards so more than 50 pc of 16 year-olds attain the benchmark of at least 5 good GCSEs, including maths and English. Mind you, since I graduated more than half a century ago, I’m willing to be convinced about grade inflation, if presented with compelling evidence, as the implications are personally flattering. If exams are really getting easier, it’s even more important to get more 16 year-olds passed that benchmark or job market pressures will induce employers to outsource more work or employ relatively well-educated young people who come here as EU migrants from eastern Europe.

I was surprised notice the omission of schooling standards in that catalogue of the needed reforms of capitalism. While there is much discussion here of the impact of the government’s fiscal policy upon aggregate demand, there has been surprisingly little about addressing skill shortages and improving the employability of the 1 million or so 16-24 year-old NEETS – not in employment, education or training.

11. Leon Wolfeson

@10 – Fix the economy. That’s the only solution. Until then, far fewer companies will take a risk on inexperienced workers.

And the problem with schools is not capitalism – it’s something else entirely. It’s over-testing.

The link to Posen’s paper is incorrect.

The core of the system is rotten. Greed!

Wrap it up how you like it will still be bad.
.

Its got to be a fair system. We have had a countrys assets sold from under us by Thatcher and now the market is just Fiat currency. This country was almost self sufficient.
Instead of a 17 Billion Pound rail link. How about state run old peoples homes, villages etc.
Just common sense realy no semantics..
What are you Rail or Homestead?

Leon: “And the problem with schools is not capitalism – it’s something else entirely. It’s over-testing.”

That’s nonsense. Testing is the only way to ensure that schools keep up to scratch. With market capitalism and globalization, it’s crucial to to have and maintain a well-educated workforce or work will continously drift abroad to lower paid workers at prevailing exchange rates with better education and skills as online communication standards improve. Many online computer technical helpline centres are located in India and the advisers are often very good IME.

The maps on this BBC website show that there is a great lump of Local Educational Authorities in the north of England with poor attainment rates in the GCSE exams:
http://www.bbc.co.uk/news/education-12173503

Why grow businesses in those areas and keep running up against problems in recruiting new employees with basic competence in maths and English and the required technical skills?

15. gastro george

“Testing is the only way to ensure that schools keep up to scratch.”

Finland, which has one of the best performing school systems in the world, has no testing.

Given the often stated comparison between the current crisis and WW2 perhaps it’s time to start talking about nationalisation of some industries and utilities as part of the solution? Banks would be an obvious starting place.

@13 Jay,

“The core of the system is rotten. Greed!”

Can you think of a time when this could not have been said? And what does it even mean? You may as well put it in religious terms and say; the core of the system is the fallen nature of man.

@ Leon,

“And the problem with schools is not capitalism – it’s something else entirely. It’s over-testing.”

There’s some truth in this, but where does the over-testing come from? As you say, not capitalism, but the opposite – statism. Due to the statist near-monopoly, the schools are beholden to their customer; not the children and their parents, but the state which pays the piper and calls the tune. Break the state-imposed shackles, and the schools will be free to serve the children in a more humane, and a less tick-box, bureaucratised way.

@16 Cherub,

“perhaps it’s time to start talking about nationalisation of some industries and utilities as part of the solution? ”

On what grounds would it be time? Because by now we’ve forgotten what a mess the nationalised industries were? Why do you want industries nationalised? So they will keep people in jobs that a private company would get rid of? How does that make economic sense?

Capitalism has shown that when the banks should have been allowed to fail, under Adam Smith doctrine, the resulting damage was too great to be considered.

The claptrap of failure not being rewarded is now a hollow boast by the capitalist supporters. The game is rigged. Always has been and always will be.

@18 Sally,

“Capitalism has shown that when the banks should have been allowed to fail, under Adam Smith doctrine, the resulting damage was too great to be considered.”

Capitalism did not show this, and we have no way of knowing what would have happened if the government had not stepped in. The government did what it did for political reasons, not sound economic reasons. Without government intervention, the crisis would most likely have been more acute but over much sooner. Instead, through intervention we have a long-drawn-out period of stagnation and recession.

Whilst the current system of interventionism is against the long-run interests of the vast majority, but benefits certain vested interests, it must be said that politicians are driven to do things that the people demand, even when they are detrimental to our long-run interests. People want an interfering government, and if the government takes tough, but economically sound decisions, it’s likely to get replaced by another one happier to play the demagogue and run the printing presses.

@17

“On what grounds would it be time? Because by now we’ve forgotten what a mess the nationalised industries were? Why do you want industries nationalised? So they will keep people in jobs that a private company would get rid of? How does that make economic sense?”

The point is that it may be a better option than a decade or more of austerity and high unemployment, just is it was after the war.

21. gastro george

“… the current system of interventionism is against the long-run interests of the vast majority …”

I love the right-wing obsession with jam tomorrow (not).

But the simple fact is that if the banks had gone under (and it wouldn’t have just been RBS and Lloyds, without government intervention) without the government guarantee on savings (which is presumably part of the interventionism) then a large part of the population would have lost all of their savings. Yet somehow this is acceptable in the name of ideological purity.

Marx wrote in his Critique of Hegel’s Philosophy of Right:

“Religious distress is at the same time the expression of real distress and the protest against real distress. Religion is the sigh of the oppressed creature, the heart of a heartless world, just as it is the spirit of a spiritless situation. It is the opium of the people. The abolition of religion as the illusory happiness of the people is required for their real happiness. The demand to give up the illusion about its condition is the demand to give up a condition which needs illusions.”

But our political classes have long since overtaken that antiquated insight. The opium nowadays is football along with bringing the Olympic games to London, the pervasive news about celebrities, royal pageantry, the distraction of nationalism in the regions, sectarianism, alcoholism and drug abuse. Education is the declared enemy of all that.

Btw Lloyds was at least a very conservative and financially stable bank on the high streets until, in a fit of hubris, the board decided to mount a takeover of HBOS with insufficient due diligence, which GB was pleased to facilitate because that meant few headaches for the Treasury. As a result, Lloyds shareprice shrank by a large percentage so senior executives in Lloyds who had been stashing their personal retirement savings in Lloyds shares lost packets. They are not best pleased with that but then I did advise my branch manager in 2008, before the merger went through, that it wasn’t a good idea. Of course, they didn’t listen to me.

Why has no-one mentioned what the real problem is?

That growth in the western world has been predominantly driven by debt. Both governments and privately. For a very long time.

Capitalim itself hasn’t failed. All that has happened is that people have finally realised that you can’t keep borrowing forever, and there is already too much debt around. That was the principle reason for the initial crash, and is exactly the reason for the current Euro crisis.

@23: “That growth in the western world has been predominantly driven by debt. ”

It was always thus – it was so before the notorious Wall Street crash of 1929:

“A Minsky moment is the economic phenomenon that occurs when over-indebted investors are forced to sell good assets to pay back their loans, causing sharp declines in financial markets and jumps in demand for cash. In any credit cycle or business cycle it is the point when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative investments. At this point no counterparty can be found to bid at the high asking prices previously quoted; consequently, a major sell-off begins leading to a sudden and precipitous collapse in market-clearing asset prices and a sharp drop in market liquidity.”
http://en.wikipedia.org/wiki/Minsky_moment

The important issue is about what policies to apply when that happens.

Frances and I have been saying hereabouts that the sensible policy direction now is for the coalition is to slow the pace of cutting public spending plus some QE to boost demand. It matters if net exports, business investment and spending by heavily indebted consumers aren’t together rising sufficiently to make up for the cuts in public spending because that means aggregate demand for goods and services is falling bringing the likelihood of a recession or worse – deflation where the general level of prices falls on trend. It is very difficult to reverse deflation once it becomes embedded.

@ 24 Bob B,

<>

No it was not always thus. The bubble which led to the crash was driven by bank-created credit, which drives up debt, rather than thrift.

23
Consumerism has become the opium of the people, no doubt football comes under that umberella. As the financial collapse has taken away the opium, we have a very unhappy society. But it was capitalism which created the debt crisis, just consider private debt, much of it created by the false illusion of home ownership and status based on materialism. People did not get into debt in a vacuum.

21. Nails it.

According to many, All US investment banks would have gone bust. Including Goldmans. That would have taken out many high street banks wiping out their savings. The people would have lost their life savings, and who knows what damage would have been done.

When it came to the crunch all the talk about “let them go bust….failure won’t be rewarded blah lah blah” turned out to be sixth form debating claptrap held at 3 in the morning over a few bottles of blue Nun.

Interesting that this week saw General Motors returned to being the largest car company after being bailed out. Much to thr fury of the Right wing Alan Smith purists. Capitalism needs these constant crises, as Marx observed, so that new opportunities can occur. Trouble is, the damage to the majority would be disastrous.

@ Gastro George,

“Yet somehow this is acceptable in the name of ideological purity.”

It’s got nothing to do with ‘ideological purity’, it’s about economics. I know it’s virtually impossible for people like you to distinguish between economics and ideology. This is due to the marxists losing all the arguments a long time ago, and having to retreat to ad hominem.

“I love the right-wing obsession with jam tomorrow (not).”

See what I mean? It’s hardly an obsession to recognise that if you guzzle all your jam today, you won’t have any tomorrow, is it? I suppose your response will be to steal someone else’s jam – presumably an evil jam-hoarder.

@ 27 Sally,

you might have a point, Sally, but there’s one thing you’re over-looking: The Federal Reserve System, which presides over the Wall Street banks. How can you pin the blame on free market capitalism, when the monetary system is run by Keynesians through central planning?

@25: “The bubble which led to the crash was driven by bank-created credit, which drives up debt, rather than thrift.”

Leveraging in the 1920s in America, not thrift, led to the share price and property price bubbles and from there to the Wall Street crash of 1929. The Roosevelt administration had to deal with thousands of bank collapses as banks called in loans but found the collateral underpinning the loans to be little better than worthless in the market meltdown. American GDP fell by c. 25 pc as a result. Britain did comparatively well during the 1930s having experienced the depression of the late 1920s by restoring the Gold Standard in 1925 at the pre-war parity. By the 1930s, the political classes had got smarter so the Gold Standard was abandoned in September 1931 and the Pound depreciated by about 25pc in the foreign exchange markets.

Occupy news from London on last Wednesday:

Occupy St Paul’s protesters lose high court eviction battle
Court backs City of London Corporation against anti-capitalist demonstrators camped outside cathedral [The Guardian]

Compare the news from San Francisco on Friday:

SAN FRANCISCO – Hundreds of protesters clad in rain gear marched through downtown Friday evening – one of several events in a day of action organized by Occupy San Francisco and other allied groups on the second anniversary of the U.S. Supreme Court’s decision in Citizens United, which removed limits on how much money corporations could spend on political campaigns.
Multiple blocks of California Street and Montgomery Street were blocked for hours Friday by the demonstrations at two banks and the ensuing response by police in riot gear.
http://www.cbsnews.com/8301-201_162-57363303/occupy-s.f-protesters-block-banks/

@ 30 Bob B,

“By the 1930s, the political classes had got smarter so the Gold Standard was abandoned in September 1931 ”

Smarter? In the Machiavellian sense, perhaps. That act you praise was a betrayal to everyone who had believed the British government prior to that point, and played no small part in the break-down of the international trade system, which led to economic nationalism and eventually to war.

32. Paul Newman

Is it entirely a coincidence that this need to “Reform “capitalism, comes form Duncan Weldon who is the servile hireling of Unite paid in cash money to turn his masters sectional greed into some old guff you could put in Prospect.
Duncan has also been banging on about how under borrowed the country is and spent the previous period banging on about how we ought to be spending more. Never got a thing right.
The British people have had a good look at the supposedly Keynesian ideas of Labour left win leadership, and decided it s just an excuse to continue throwing money at their Public Sector supporters. Now thats called insight .
The German model is nothing fantastic it consists of having a currency tied alot of hopeless lefty basket case countries and dumping half price BMWs on the market, Switzerland is a better model.

I do agree with Bob B btw that education ( and its appalling failure under New Labout ) is something we do have to get right in the long term.

Trooper: “How can you pin the blame on free market capitalism, when the monetary system is run by Keynesians through central planning?”

That’s nonsense. Do try and get your facts correct. The US Fed wasn’t run by keynesians in the 1920s and Roosevelt didn’t understand keynesian thinking – he really believed in balanced budgets so when the Roosevelt administration attempted to balance the Federal budget in 1937, the US dipped sharply again.

The Turner Review of Britain’s Financial Services Authority (FSA), published in 2009, admitted that the FSA had fallen down on its statutory task of prudential supervision of the banks. In other words, the failure of the banks – especially the failure of those big Scottish banks RBS and HBOS – was due to too little and “light-touch” central regulation, not to too much.

In 2007, before the financial crisis broke, according to OECD figures, general government expenditure in Britain as a percentage of national GDP was a little higher than in Germany but lower than in Denmark, Sweden, the Netherlands and France. The current budget deficit looms so large because Britain’s GDP fell by 7pc from its peak in 2008Q1 to the trough in 2009, a steeeper fall than in most or all other advanced economies, most likely because financial services feature so large in Britain’s economy. And the steep recession cut government tax revenues, thereby boosting the budget deficit as a percentage of the shrunken GDP.

“The US Fed wasn’t run by keynesians in the 1920s”

No, it was run by Benjamin Strong, head of the New York Fed, who was massively inflating to prop up Sterling. Crissinger, the head of the FRB, was a totally political appointment by President Harding who knew next to nothing about banking.

” and Roosevelt didn’t understand keynesian thinking – he really believed in balanced budgets”

Holy cow! Have we slipped into a parallel universe? I know he said that to get elected, but I would suggest you look at what the fascist bastard actually did in power.

35. gastro george

@28 TT

I’m still waiting to hear how you think it’s in the interests of most people to lose all of their savings.

@23 Tyler

“That growth in the western world has been predominantly driven by debt. … Capitalism itself hasn’t failed.”

I’ll leave aside that you need to be more nuanced about what form of capitalism you’re talking about.

But the neo-liberal version of capitalism has failed. The consequences of the Thatcher revolution was a reduction of aggregate demand – squeezing the wage component of GDP reduced people’s ability to spend from their income. The result was a reduction in trend GDP growth and a reduction in profits. The neo-liberal solution to this was to restore demand through encouraging private debt. Not public debt, except where public expenditure has increased through a requirement to pay benefits to the unemployed as unemployment rose. But the expansion of private debt was unsustainable – hence the crash. Public debt is largely the result of the crash.

The only way for private debt and public debt to be reduced is to restore the wage share of GDP and reduce unemployment.

@31 Trooper: “That act you praise [the National Government abandoning the Gold Standard in September 1931] was a betrayal to everyone who had believed the British government prior to that point, and played no small part in the break-down of the international trade system, which led to economic nationalism and eventually to war.”

That’s more nonsense – do try and get up to speed with some real history of events.

The US Hartley-Smoot Tariff Act of 1930 preceded Britain abandoning the Gold Standard in 1931. By the entry in Wikipedia: “The overall level tariffs under the Tariff were the second-highest in US history, exceeded by a small margin only by the Tariff of 1828 and the ensuing retaliatory tariffs by US trading partners reduced American exports and imports by more than half.” America also abandoned the Gold Parity of the US Dollar in 1934, effectively devaluing the US Dollar by 40pc. Try the wikipedia entry on the: Gold Standard.

Check out also one of the definitive texts on the inter-war period: CH Feinstein et al: The European Economy Between the Wars (OUP 1997). Britain’s economy from 1932 onwards performed better than other industrialised economies – including the Nazi German economy. By abandoning the Gold Standard, the Bank of England could cut the bank rate to 2pc by April 1932 and keep it there until the onset of WW2. A property boom ensued in the south of England and much of the Midlands, which is very evident from looking around the many rows of 1930s semis on the then new, speculatively built housing estates and the many suburban cinemasand shopping developments – as well as the modern factories built along the North Circular. John Major was born in 1943 at St Helier’s Hospital, which had opened in 1938 to serve the largest, newly built public housing estate in south London. A comparable estate was built at Dagenham in north London.

Keynes visited Hamburg in Germany in January 1932 to lecture – Hitler became Reich Chancellor a year later. To cut a long story short, the Nazis cribbed his ideas for public works to boost a depressed economy – btw policies which Keynes had already set out in a pamphlet for the Liberals at the the 1929 election. The Nazis were very successful in cutting unemployment through a programme of public works for autobahns, stadiums and government offices

” . . from 6 million in October 1933 to 4.1 million a year later, 2.8 million in February 1935, 2.5 million in February 1936, and 1.2 million in February 1937.”
[CP Kindleberger: The World in Depression 1929-1939 (Allen Lane, 1973) p.240]

Had that policy prescription for reducing unemployment been followed earlier, there wouldn’t have been the acute social pressures in Germany which led to the rise of the Nazis in the early1930s. The Communists attracted the second largest vote at the German elections in November 1932. By then the Germans had given up on democratic solutions for their failing market economy.

@34: Trooper: Roosevelt a fascist? ROFL!

You really are a joke.

Try this illuminating entry for President Hoover, Roosevelt’s immediate predecessor as President:

“Hoover, a trained engineer, deeply believed in the Efficiency Movement, which held that the government and the economy were riddled with inefficiency and waste, and could be improved by experts who could identify the problems and solve them. He also believed in the importance of voluntarism and the role of individuals in playing a role in American society and the economy. . . When the Wall Street Crash of 1929 struck less than eight months after he took office, Hoover tried to combat the ensuing Great Depression with volunteer efforts, PUBLIC WORKS PROJECTS such as the Hoover Dam, tariffs such as the Smoot-Hawley Tariff, an increase in the top tax bracket from 25% to 63%, and increases in corporate taxes.”
http://en.wikipedia.org/wiki/Herbert_Hoover

Construction work on the famous Golden Gate Bridge at San Francisco began in January 1933 – the preparatory legislation and design work were undertaken during Hoover’s term of office. The Roosevelt administration didn’t start until March 1933. Hoover started the public works programme to counter the depression.

38. Paul Newman

Capitalism has not failed,people are slightly less well off than they would like to be but the global economy grew last year by 1.3%. Neither is private debt, for the most part, a bad thing as it is overwhelmingly in the form of mortgages and is not released into the economy as spending
The suggestion that the proportion of the GDP consumed by wages should return to the levels of the 1970s would no doubt appeal to Unite, militant supporter Len McLuskey ( and his fawning acolyte Weldon ) but would clearly add costs to business and shrink the UK economy, not to say erode supply side innovation and start ups
B yany reasonable measure, capitalism has delivered gains in prosperity for everyone since the days of high ( as part of GDP) wages. My own view is that youi have it back to front. Capitalism has delivered wealth but like any Company ( I have worked for ) when there is a period free of competition coasting high performing economies , like the Swedish ones have grown political and economic systms that parasitise it . The stronger the body the longer the deeper the parasite can penetrate and that is essentially what a high proportion of state distortion is, What is required is not an extension of the disease but a a bottom up imagining of what the state can do and should stop doing.

@ Bob B,

“That’s more nonsense – do try and get up to speed with some real history of events.”

Get up to speed? Which means what exactly? Ignoring the point, changing the subject and grabbing a couple of Wikipedia references?

As for Hoover, what’s your point? That he was a massive interventionist like FDR? Indeed so, and FDR attacked him for it, prior to being elected and then continued and expanded those policies. Why dispute he was a fascist? His whole policy was an attack on free market capitalism, in favour of state control and cartelisation of business.

@39 Trooper: “That he was a massive interventionist like FDR? Indeed so, and FDR attacked him for it, prior to being elected and then continued and expanded those policies. Why dispute he was a fascist? His whole policy was an attack on free market capitalism, in favour of state control and cartelisation of business.”

That’s more nonsense, sad to say. Roosevelt was notoriously effective at political spin and made a regular habit of pouring scorn on Republicans at every opportunity.

His differences with Hoover were more a matter of degree and sophistication than fundamental although the Hartley-Smoot Tariff Act of the Hoover Administration did enormous damage to international trade and promoted widespread retaliation by America’s trading partners thereby introducing a round of Beggar-Thy-Neighbour employment policies at their worst. The Roosevelt administration reduced the Hartley-Smoot tariffs in 1937.

The bigger difference was between Hoover and Coolidge, Hoover’s predecessor as President. Coolidge really believed that US Presidents should do as little as possible – hence Dorthy Parker’s famously sick question when Coolidge’s death was announced in January 1933: How could they tell?

Years ago, BBCTV produced a series of docs on the Roosevelt presidency. Early in the series, Roosevelt is shown saying to camera that he is doing what he believes is necessary to preserve American capitalism in which he passionately believes. That was a credible claim:

By 1933, the height of the Depression, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. GDP was cut in half, from $103 to $55 billion. This was partly because of deflation, where prices fell 10% per year. By 1933, world trade plummeted 65% as measured in dollars and 25% in total number of units.
http://useconomy.about.com/od/grossdomesticproduct/p/1929_Depression.htm

@OP, Duncan Weldon: “Talk of ‘reforming capitalism’ does sometimes sound like its [sic] best left to think tank roundtables and academic seminars, not something that cuts through in the real world.”

Bollocks. All mainstream political parties in free countries acknowledge capitalism as the engine of development; at every national election, political parties discuss how to reform capitalism in the context of a mixed economy. Do not patronise citizens by suggesting that reform of capitalism (or the mixed economy around it) is too arcane for their tiny brains.

But please help me with your particular definition of capitalism. You mention the “cost of living crisis” but that phenomenon is a combination of markets (wages, commodity prices, employment etc) and state intervention. The “huge challenge of generating enough jobs” is dependent to an extent on the state’s ability to employ people.

In the UK, talk of reforming capitalism is bonkers. Talk about reforming a mixed economy.

42. Leon Wolfeson

@14 – Of course, there must be teaching to the test. Not teaching kids to think and learn. Why, the lower classes might generate wealth for themselves, and maintain those ikky media industries which are ideologically impure!

Never mind they’re revenue positive, ideology is more important! Oh, and hey, the arms industry needs a boost!

@38 – Capitalism is doing precisely what it’s intended to, yes, help the 1%.

The last time things got this unequal we had a great recession. And this time we’re seeing very arguably worse…hopefully THIS time the market can be separated from capitalism.

“like the Swedish ones have grown political and economic systms that parasitise it .”

Oh yes, because the sight of the happy, prosperous and high-performance Nordic economies is anathema to you, because the 1% can’t loot sufficiently.

On the Nordic Model, try this about Denmark’s combination of a flexible labour market and low unemployment while being the most highly taxed country in the OECD:
http://www.da.dk/bilag/Flexicurity%20in%20Denmark.pdf

You can’t sack thousands of people in the Public Sector and expect Asda to employ them all!!!

There is a knock on effect that the remaining Public Sector Employees stop spending. Remarkably they do not live on another planet, they live and work in the UK and in many parts keep the Private Sector going with their spending.
Due to the Tories attack on this sector their confidence has disappeared and surprise, surprise the Private Sector is struggling.
I know I did economics a long time ago and the percieved wisdom back then was that a truly mixed Economy was the best sort. Neither pure Communism nor Capitalism works. This is becoming more and more clear.
What we are missing is someone with the guts to have the convictions that getting Britain on a more even keel re Public and Private sectors. Bang a few heads and get them to work together.
No chance of that then!!

45. Leon Wolfeson

@43 – The important point is the emphasis of labour value and the free market and the demphasis of capital and large corporations.

It IS a matter of emphasis and not stone-block ideology, though. Which people miss.

@ 40

“That’s more nonsense, sad to say. Roosevelt was notoriously effective at political spin and made a regular habit of pouring scorn on Republicans at every opportunity.”

Well that’s what fascist demagogues do – demonise opponents and use propaganda.

@44

“I know I did economics a long time ago and the percieved wisdom back then was that a truly mixed Economy was the best sort. Neither pure Communism nor Capitalism works. This is becoming more and more clear.”

The “perceived wisdom” was wrong. There’s really no such thing as a mixed economy. It’s either a market economy or socialism. There is no ‘third way’. If you don’t have socialism, and accept that a market economy works better (which it does), then the choice is whether you want the market economy to function as it should, or you want to empower a bunch of politicians to interfere with it. If you want the latter, and problems arise, you should be honest enough to look at the interference from the politicians as a possible cause of the problems, rather than blaming free market capitalism, which cannot exist if politicians constantly interfere.

Capitalism does work, and it is what we can thank for the fact that our country raised itself from the default position of grinding poverty. The non-capitalist elements of the economy still need to conform to market principles (e.g. to pay their workers a competitive wage), it’s just that they are backed up by a state that will print money to keep them going, something that the ordinary business does not have.

47. Paul Newman

I am having trouble understanding what reforming capitalism might mean, other than a sugar sprinkle on the usual Unite desire for higher wages for their members.The theory here seems to be to take money from people working in real jobs, give it to people in state sinecures and, for some reason, this will constitute reform. To me this sounds like something in need of reform, something more like corruption.
In theory I quite like the idea of a flexible work force but I really wonder if such an idea would work here with our special property market and regional attachments
So of what would this reform consist ? I have nothing against the state providing a safety net and infra structure of various sorts but how can it possible create any wealth? That`s like suggesting the the people who painted the caves are as important as the people who killed the woolly mammoth.They are not. Pictures are nice but eating is essential.

47
Too late, corruption has already set-in, tax credits are paid for by all of us, even the low paid, and given to a certain population of society.
Your metaphor about the pictures isn’t very plausable, perhaps those pictures guide others how to more efficiently kill the mammoth, you know, passing on knowledge.
Ah yes, teachers, they pass on knowledge don’t they, and I would suggest that such knowledge assists those receiving it to become productive.

Trooper: “Well that’s what fascist demagogues do – demonise opponents and use propaganda.”

C’mon. Calling Roosevelt – successively elected US president for four terms – a “fascist” is just laughable.

As for “demonising” opponents, try tuning into the Republican rhetoric directed at Preident Obama.

@ 49,,

“C’mon. Calling Roosevelt – successively elected US president for four terms – a “fascist” is just laughable.”

You sound like you’ve never heard the comparison made before. Mussolini himself praised the New Deal as an American version of fascism, and he knew a thing or two about the subject.

@50 Trooper: “You sound like you’ve never heard the comparison made before. Mussolini himself praised the New Deal as an American version of fascism, and he knew a thing or two about the subject.”

I knew Roosevelt was unpopular among both Republicans and American fascists but I had never encountered before a claim that Roosevelt was a Fascist. Compare this infamous speed by Lindbergh at De Moines, Iowa, on 11 September 1941:

“The three most important groups who have been pressing this country toward war are the British, the Jewish and the Roosevelt administration.”
http://www.charleslindbergh.com/americanfirst/speech.asp

There can be no doubt about Lindbergh’s genuine fascist credentials and his warm personal links in Germany with leading Nazis – but then Republican Senator Prescott Bush – GW Bush’s grandfather – also had personal links with those who helped to fund the Nazis on their rise to power.

Most observers regard almost any claims made by Mussolini as just a bad joke. We have already credited Hoover, Roosevelt’s predecessor as US President, with starting the public works programme – with projects such as the Hoover Dam and the Golden Gate Bridge in California – to boost the American economy during the depression which followed the Wall Street Crash of 1929. Sadly, the Hoover administration was also responsible for the Hartley-Smoot Tariff Act of 1930, protectionist legislation which did such immense harm to international trade.

52. Leon Wolfeson

@46 – Because of course America has less people in poverty than the Nordic Nations.

Oh wait, no, it doesn’t. But never mind the inconvenient facts.

@47 – Well of course you do. You’re utterly wedded to a very narrow dogma.

And you’re doing your best to ensure the poor CAN’T eat by continuing the present situation where their incomes are plummeting…

@50,

you’re in denial of the obvious parallels, of which Mussolini’s comments are only one indication. Lindbergh’s got nothing to do with this issue. As for the tariff law, no doubt it was a gross error, but it was only one of a number of factors which caused the economic disaster. And however much Hoover can be blamed for helping to cause the Great Depression, Roosevelt must carry the blame for extending it for so many years.

In contrast to the disastrous policies in the late ’20s and through the ’30s, you can look at the recession of 1920-21, from which the economy recovered very swiftly, due to the total absence of big government intervention.

Debating whether Roosevelt was a “fascist” is just silly and infantile.

Mussolini was a bombastic fool who even had difficulty in articulating what “fascism” was.

Roosevelt wasn’t “a keynesian” – he didn’t understand Keynes and believed that budgets should be balanced regardless, which certainly isn’t keynesian. The US economy turned down when the Roosevelt adminstration acted to balance the Federal budget in 1937.

The incoming Roosevelt administration in March 1933 reacted pragmatically in ad hoc ways to a situation in which the economy appeared to be on the verge of imminent collapse with (literally) thousands of banks failing – see the quote with link @40. The protectionist Hartley-Smoot Tariff Act of 1930 provoked widespread foreign retaliation and international trade shrank. Britain, a leading trading nation then, abandoned the Gold Standard in September 1931 and the Pound depreciated by about 25 pc. The Roosevelt administration was forced to devalue the US Dollar against Gold in 1934.

The administration was bound to react to the domino collapse of the banking system and created the (pioneering) Federal Deposit Insurance (FDI) scheme to restore confidence to depositors and thereby make bank runs appear unnecessary – other countries subsequently adopted the model, which btw created the situation for the losses of the Savings and Loan Associations in America in the 1980s and 1990s, a precusor of the financial crises of 2008.

The merits on balance of FDI schemes are worth debating but suggesting that the Roosevelt administration should have reverted to the “do nothing” policy of the Coolidge administration is just nuts – for starters, that would have made Hoover look a positive activist committed to a public works programme to create jobs.

In Germany, the Nazi government in power from January 1933 was very successful at getting unemployment down by a public works programme – see the Kindleberger reference @36. Through to WW2, Germany did not have an internal security problem – sad to say, all the indications are that the Nazi government was internally very popular with its cribbed keynesian policies for job creation.

Mussolini was a bombastic fool who even had difficulty in articulating what “fascism” was.

I don`t think thats fair. Mussolini was the editor of Avanti the premier left wing mag of the day across Europe and had plenty of intellectual resources , furthermore he was widely popular in the Liberal world in the 20s when Nationalism was not yet an evil and his agenda was quite left wing and modernising.
I wouldn`t want to go too far but he is,shall we say , my least disliked Axis leader….beat that for faint praise 🙂

@55: “I don`t think thats fair. ”

By accounts in the history books, the Mussolini administration had problems finding an Italian “intellectual” who could present a literate idealogy for the “fascism” that Mussolini had pioneered with that March on Rome in October 1922.

Hitler, with his tract Mein Kampf, and the Nazis seem to have no corresponding problems finding literate ideologues for the Nazi cause and several notable politicians in the “liberal democracies” became impressed with the way that the Nazi government post January 1933 acted to revive the deeply depressed German economy – hence that piece Lloyd George wrote for the Express in November 1936 following his meeting with Hitler at Bertesgarten in August.

I agree that initially, Italian Fascism wasn’t antisemitic in the way that the Nazi ideology was right from the very start with the NSDAP 25-point programme published in 1920. But I’ve not found notable statements of admiration over the way the Mussolini administration ran the Italian economy beyond the legendary claims that Mussolini got the trains to run on time – and even that has been questioned.

I don’t believe any of that has much relevance to the measures that the Roosevelt administration adopted in America to end the deep depression there – see the quote with link @40. Roosevelt didn’t have a consistent theoretical underpinning for those measures – he certainly wasn’t keynesian and the measures were pragmatic responses to a situation where the banking system as well as the American economy seemed to be on the verge of collapse.

No one had any clear idea of how bad it could get in an international context where other large economies were also depressed – recall that Britain’s economy performed relatively well in the 1930s, after the trough of the depression in 1931/32, compared with other industrialised economies but that “good performance” was very largely confined to the south east and parts of the midlands – note that Leicester was described as the second most affluent city in Europe in the 1930s.

It’s silly to claim all would have been well had the Roosevelt administration done nothing because the US economy revived after the 1920 recession – the 1929 Wall Street Crash had intervened, although there is persuasive academic analysis suggesting the the signs of the depression preceeded the Crash. Ben Bernanke, the current chairman of the FED board of governors, is widely rated as one of the leading authorities on the 1930s depression.

I quoted Lindbergh @51 with a link because, beyond dispute, he really was a fascist sympathiser with close personal links to leading Nazis in Germany. There are no signs that Lindbergh was an admirer of Roosevelt.

@ Bob B,

“The merits on balance of FDI schemes are worth debating but suggesting that the Roosevelt administration should have reverted to the “do nothing” policy of the Coolidge administration is just nuts”

Roosevelt’s policies, and those of Hoover before him, represented a repudiation of everything sound economics taught, and turned a recession into the legendary Great Depression. You say ‘Roosevelt had to do this’ and ‘Roosevelt had to do that’, not once considering whether he had the constitutional authority to do these things. He did not. His rule represented a massive shift in power from the legislature to the executive, which is another reason to point to his record and its fascist parallels. It is hardly comforting to know the present Fed chairman thinks himself an expert on the period, especially as I believe he thinks that more intervention should have been used.

It is clearly the case that opinion is very much divided on the causes of the Great Depression. I suspect your attitude towards any authority I may call upon would be derisive. Once I have finished Benjamin Anderson’s book on the period, I will feel more able to comment.

I do, however agree that Mussolini was none too clear about economics, and I don’t think he went very far in implementing his ideas, which were cribbed from the Webbs’ “guild socialism”.

Trooper: “Roosevelt’s policies, and those of Hoover before him, represented a repudiation of everything sound economics taught, and turned a recession into the legendary Great Depression.”

I don’t accept any of that claim. For both the governed and the governing in the 1930s, the depression in America reached its trough at about the beginning of the Roosevelt administration in March 1933 or just before. The depression was a social catastrophe without previous parallel in living memory and they had no sure way of knowing how bad it could get or for how long the unprecedented levels of unemployment would persist. The banking system was on the verge of collapse through the domino effect of successive runs on banks as depositors queued to withdraw their deposits before the banks closed their doors.

There is no factual basis for the claim that without the interventions of Hoover and Roosevelt administrations there would have been a relatively mild recession. I certainly don’t accept your implied claims about the teachings of “sound economics” and suggest you consult some current mainstream texts such as Dornbusch et: al: Macroeoconomics (McGraw Hill) and John Cassidy: How Markets Fail (Penguin Books).

Any readers interested in a concise, detached perspective on the history of the New Deal of the Roosevelt administration could try:

Eric Rauchway: The Great Depression and New Deal – A Very Short Introduction (OUP 2008)

A definitive text on Europe: CH Feinstein et al: The European Economy Between the Wars (OUP 1997)


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