Just What Do We Mean by Capitalism?
The New Right view of 20th century history might run as follows:
Capitalism, expanding from its original base in Britain, was liberating humanity up until 1914, when it suffered from an inexplicable outbreak of Trench Warfare.
It bounced back, but then a fairly normal economic slump at the end of the 1920s caused unjustified panic and capitalism was in the 1930s replaced by capitalism.
After World War Two, in excessive admiration for the Soviet Union after it had merely saved the West from Nazism, there were still more drastic change and capitalism was replaced by capitalism.
But in the 1980s, Thatcher and Reagan rescued us by replacing capitalism with capitalism. Of course there is still much more that needs to be done to replace capitalism with capitalism in the West.
China, while owing all of its successes to capitalism, faces all sorts of disasters unless it urgently replaces capitalism with capitalism.
They don’t put it like that, obviously. But the label ‘capitalist’ is stuck onto almost all of the various political-economic systems that the West has had in the 20th century. It is also applied to the post-Mao system in China, which has actually been changing continuously and has always been massively dominated by central, regional and local government.
All successes are credited to capitalism, but at the same time each of the actually-existing systems is condemned for deviating from the ideal capitalism devised by Adam Smith in The Wealth of Nations. And they slide different bits of history from ‘capitalism’ to ‘socialism’ and back again for different parts of the story.
The 20th century actually saw a number of alternative and rival economic systems. Most included a strong element of capitalism: the exceptions were the Soviet Union under Stalin and China under Mao. All without exception put curbs on capitalism, to differing degrees. But if you view them as different and alternative systems, you’d conclude that heavily regulated capitalism tends to work better than capitalism unleashed.
Let’s try giving names to the main alternatives, arbitrary names that avoid the half-theological question of whether a particular system is or is not capitalist:
- System A, from Britain 1760s up to 1914, fairly smooth-running but based on a dominant ruling class that believed itself to be above capitalist values. It was also very slow by modern standards, with an annual growth-rate of 1% to 2%.
- System B, Bolshevik alternative. Shifting from War Communism to the semi-capitalist New Economic Policy, and then Stalin’s highly successful planned economy. The first two kept things together but failed to raise the economy above its pre-war level. Stalin’s work produced the massive economic base that produced the war machine that did at least two-thirds of the work in the war that broke Nazi Germany.
- System C, Original Mixed Economy, as practiced by Fascism in Italy from the 1920s and Germany from the 1930s. Fairly successful, and Hitler’s power and prestige rested on his success in getting Germany working again after the Weimar system had led to stagnation and slump.
- System D, USA, the New Deal copied Mussolini’s Mixed Economy model within the existing multi-party and pluralist system. This got the USA working again, after speculation had jammed the economic system.
- System E, an expanded New Deal system and with a military-industrial complex that was highly successful economically, whatever you think of it morally. This was the system that gave the West its key advantage from the 1940s to 1970s. The system that successfully incorporated former foes in West Germany, Italy and Japan and enabled the West to pull ahead of the Soviet Union economically.
- System F, the replacement for System E promoted by Thatcher and Reagan when System E was in trouble in the 1970s. It was sold as a return to solid “System A” values. In fact it keeps the substance of System E, just adjusts it to give most of the benefits [to the rich.]
System F has no less tax-and-spend than System E. But the bias is to tax the working mainstream and spend as much as possible on things valued by the rich, armaments and warfare and bailing out failed banks.
System E favoured the utterly simple concept of welfare based on need regardless of income, and tax based on income regardless of need. This has been complicated on a pretext of fairness, and is now much more of a muddle. Tax avoidance is a big part of the success of the current business class. And they are moving towards a poor-law system that will keep the bottom of the society quiet and letting it offend the working mainstream.
(With all the talk about ‘scroungers’, you might wonder why it’s never been fixed. It’s not been fixed, firstly because a lot of it is exaggerated, and second because the dominant Overclass find it useful for keeping the working mainstream irritated at those below them rather than those above them.)
What about the Soviet failure, which gave a big boost to the credibility of “System F”? Stalin’s system was highly successful and could have been continued with some relaxation and reform. Khrushchev got greedy, he tried to change everything and create a Soviet version of “System E”, but messed it up. In China, Deng did something similar but succeeded, creating what might be called System G, a successful variant on System E that keeps Leninist politics. Note also that Mao’s version of System B had managed to get China modernised, tripling the economy during his quarter-century of rule, after China being invaded by System A had failed to do so.
One major difference between Khrushchev and Deng is how they understood the success of the West’s System E. Khrushchev was one of the first believers in the “miracle of the market”, only he believed that this must be a market operated by state entities. Deng allowed actual private enterprise, but believed that markets were not to be trusted, and proved correct.
In China nowadays, the central government can stop anything, and a foreign investor needs to first check that whatever they plan is acceptable. But the successful foreign investor will then talk to lower levels of government at the provincial and county level, get them positive about whatever it is that is being planned. And it seems also that China is increasingly able to do it all for itself.
From Newsnotes, December 2012.
Thatcher the Conservative Terminator
Austerity Britain. Outsized war-machine and gigantic financial parasite to support. Please give generously. Cut back on little things like health, education, libraries and public safety.
Most British Prime Ministers get a private funeral and minimal publicity. There was a conscious decision to bang the drum for Thatcherism. It should have been opposed much more vigorously than it was.
Classical Socialism was in trouble by the start of the1970s and well before Thatcher or Reagan. Brezhnev in 1968 had crushed the Czechoslovak attempt to take European Leninism in the direction later taken by Deng in China. He thus delayed the collapse by 21 years and made it truly disastrous. The Solidarity movement among workers was growing in Poland well before Thatcher. Meantime Deng allowed elements of capitalism, but never allowed it to run free. The Wise Men from the West never stop telling him off for this, even though his system worked while they failed in Russia and have now delivered a seemingly endless recession in the West.
Thatcherism initially sold itself with the promise of Trickle-Down. Remember Trickle-Down? We were promised that if entrepreneurs were released from stifling state controls, they would boost the economy so much that the rest of us would be better off, a smaller share of a much bigger cake.
It was all nonsense. Instead of Trickle-Down, we have had Hoover-Up, the rich grabbing more of the common pool of wealth without improving their contribution. They have slowed Britain’s decade-by-decade growth. The “brilliant” Thatcherite 1980s was no better economically than the “disastrous” 1970s. It was much worse than the Corporatist 1950s and 1960s, decades in which almost everyone had a job.
Note also that Thatcher had the enormous windfall of North Sea Oil, some 69 billion extra income for the nation. But the nation as a whole didn’t get it. Some went to the rich and the rest was squandered in an attempt to return to Classical Capitalism. And she ended the role of Toryism as a British party, reducing it to be a party of the richer half of England. It was already going that way, but she was both a product and a confirmer of that trend.
Without North Sea Oil, the Thatcher Decade would probably have seen less economic growth than the “disastrous” 1970s. Far from saving Britain, she began a process that has made life worse for the majority, and in which it is no easier to enter the elite than it was before.
But Thatcherism didn’t exist in isolation. After Thatcher, New Labour chose to take her policies further and things slowed even more. It has also somehow slipped out of memory that there was widespread expectation that Thatcher would lose the next election, if she had not been ousted.
John Major delayed the election till 1992 and then won it. Seemingly he had reverted to One Nation Conservatism. But meantime Blair replaced John Smith, who had replaced Kinnock after the 1992 defeat. John Smith’s death from an unexpected heart attack was a tragedy: he had adjusted Labour to meet what the electorate wanted, and would have been unlikely to have invented New Labour.
But why was New Labour possible? As I said, Thatcherism didn’t exist in isolation. Back in the 1970s, the naïve and hopeful radicalism of the 1960s had been replaced by a cynical trend, something you could call the “Extremely Popular Front for the Liberation of Selfishness“. It tapped into the weaknesses of 1960s radicalism, that it was sometimes selfish and often not concerned with the wider society. Blair could not have acted as he did without a whole host of 1960s radicals who had been co-opted by the new elite that had emerged under Thatcher. Jack Straw is a notable example, but there are many more.
People nowadays depend on fashion and are mostly overawed by whoever is currently rich and powerful. Assume that their extra talents must be proportional to their wealth and power. I don’t see it so. It’s more realistic to credit them with a lot of luck, some cold ruthlessness and talents that are high but not unusually so.
As for being the first female Prime Minister in Britain, that was coming anyway. Indira Ghandi had been a decisive Prime Minister well before Thatcher. So had Golda Meir, who was also the first female leader since ancient times to be there on an individual basis, rather than inheriting power by being linked to former male rulers by blood or marriage. And Thatcher failed to promote any other women within Toryism. That happened after her, and they are not notably worse than the men, but it seems she was only concerned with her own position.
Labour should have had someone like Thatcher? Labour had at least one, Barbara Castle. She’s had a wider range of important jobs than Thatcher, who was bumped up from being Education Secretary. She had the right ideas for reforming Trade Unions with her scheme, In Place of Strife. And was rejected by both Labour Right and Labour Left, sad to say.
From Newsnotes, April 2013
How Finance Soiled Itself
Thanks to Thatcherite deregulation, Temples of Commerce became Dens of Thieves. There had always been sleazy areas of finance, just as you’d find sleazy districts in even the most respectable cities. But it used to be a fringe on a massive body of sound finance. Nowadays, one wonders just what is still sound.
Deregulation justified itself by the convenient doctrine that they were helpfully ‘unlocking’ the untapped value in conservative institutions. What this amounted to was running risks that had previously been avoided. What was rejected were the key element of stability and predictability that was needed to keep finance connected to the real world.
Vast amounts of effort have drained into parasitic finance. This has been accepted by the working mainstream, who were persuaded that they were hideously burdened by welfare, even though their income after tax grew steadily in the Keynesian era. (Has continued to grow in the UK, whereas the Rugged Individualists of the USA have gone on resenting tax and welfare even as their position got worse.)
It’s been an immense success for the New Right strategy of making people hate and resent each other. But where does that lead? We’ve seen a considerable degradation in the society, without improvement the long-term economic performance.
Thatcher put an incompetent ruling class back in a position of strong authority, no longer scared of Old Labour values. It helped that much of the Left concentrated on discrediting every form of socialism that had dared be successful, on the grounds that limit success was almost the same as hideous betrayal. But a loss of faith in the successful post-1945 solutions did not change the reasons why the old ruling class had been kicked out of power in the first place. The Tory hard men are broadly the same sort of poeple who took the greatness out of Britain in the first place. Given an immense opportunity by the Soviet collapse, they bungled it away.
Labour is making some timid noises about more tax. They need to go a lot further. Tax should be applied where the wealth is produced, not where the owner chooses to declare their income. That would stop a “flight of the rich” – they are welcome to live outside Britain, but if they make their money within British society, they should pay their fair share of the cost of keeping that society in being.
From Newsnotes, October 2012
Real Capitalism and Transcendental Mammonism
The true explanation of capitalism’s success can be found in the Communist Manifesto. You have to extract it from a mass of separate observations, some of which are exaggerated or wrong. But Marx was the first to notice that the harmonious vision of Adam Smith had nothing to do with actual capitalism. That it was a deeply radical process, despite being operated by individuals who are mostly very conservative.
To be more exact, capitalism is operated by individuals who are mostly very conservative, except when something radically new will make money for them. And unlike the older ruling classes, they are deeply unwilling to make any sacrifices to preserve small property and existing relationships.
Marx drew attention to the tendency of money and capitalist production to disrupt the society that it occurred within. This may have been a standard complaint about money from almost the first appearance of money: we find it in the Hebrew scriptures, certainly. But Marx also recognised the truth in the other side of the argument, the pro-money wing of radicalism that pointed to economic benefits. He combined these views with the general Progressive view of history to conclude that capitalism was helpfully demolishing the old order and paving the way for a Proletarian / Communist future.
In 1848, the European norm was what was later called ‘Distributionism’. Small property based on individual families. Even most larger companies were often ‘family firms’, run by a small group related by blood and marriage. Marx was making a grand speculation in supposing that big corporate entities would take over – but he was right. And he was also right in supposing that ordinary employees of such entities would start asserting themselves. Would question why enterprises that depended on many people’s work needed to be privately owned for the profit of just a few.
Where Marx misread the trend of history was in his dislike of both state power and the mass of constitutional safeguards that both the ruling class and the bourgeoisie had erected around this growing state power. His vision seems to have been of a very small number of individuals overseeing a society run by the majority for the majority. Such a system would need no particular safeguards.
Marx had a point when he sneered at ‘Parliamentary Cretinism’ and pointed out how often the ruling class and the bourgeoisie broke their own rules. But he simply ignored the possibility that ‘proletarian government’ might become tyrannical. Did not mention the risk that in a socialist system, people in authority might abuse power for purely personal advantage.
Marx also missed the possibility that existing states might notice the same trends he drew attention to and take measures to survive. Restrict Free Trade to build up national industries, and also foster a sense of a common national interest of all classes in one nation-state against all classes in another nation-state – which is what Britain had actually done in its own rise. Or that the state might see extensive welfare as a sensible answer to the disruptions caused by new industries.
The existence of a capitalist sector also ensures that new technologies get turned into useful products, with existing industries overturned in the process. That was the big problem with the Soviet Union – having built an efficient industrial machine in the 1930s, the people who ran the machine were reluctant to change. A Mixed Economy – the system the West ran in a whole-hearted fashion from the 1940s to 1970s and also encouraged in non-Communist East Asia – lets enough of economy run unplanned to allow for new emergences.
Capitalism includes what Marx called the Anarchy of Production, which is much the same thing as the current idea of ‘Creative Destruction’. But if you can’t get rid of large bureaucratic state structures – and no modern society has actually managed to do this – then a balancing area of anarchic economics is needed. But it needn’t be large, and cannot safely be unleashed to go wherever it will. In particular the financial sector must be kept safe and boring, because it is all too easy for people who trade money for money to get sucked into a pattern of speculation, gambling and outright fraud.
If someone influential had set out such a view back in the 1970s, this would have provided a logic to the Mixed Economy and suggested that it was basically sound, though certainly open to sensible reforms. We had it to a degree in BICO, along with the notion of Workers Control. But we had little influence and Workers Control was blocked by a mix of working-class conservatism and the loud-voiced and ineffective politics of Trotskyism.
Separate from Trotskyism but an influential Marxist voice was Ralph Miliband, father of David and Ed. He shared with the New Right the view that the modern state was some sort of bizarre perversion that had grown up for no good reason and badly needed to be curbed. But in its left-wing form, this sort of politics led to nothing very coherent. Almost every specific idea the Left had required a bigger and more interventionist state, which they had to argue for by devious logic from a world-view that said that the state should be much smaller. The mainstream of the Moderate Left was left confused and way open to the seemingly coherent logic of the New Right.
Trade Unions also tended to oppose all attempts at Incomes Policy and to insist on Free Collective Bargaining. Which Thatcher was quite ready to grant, only with extra rules that gave employers a massive advantage. The idea of Workers Control was allowed to fade and die, even though there was a time when most business people were resigned to accepting it. All of that perished with a resurgent New Right.
The alternative view could be called “Transcendental Mammonism”. Adam Smith and others would have called it ‘rationalism’, the idea the unrestricted cash-based exchange would lead to the best possible solution. People would act in their own best interests, or else hold back. So everything would work out for the best, and all the government need do was maintain law and order to prevent coercion and threats.
A traffic jam is a fairly simple example of a mass of independent ‘agents’ interacting freely and getting a result that none of them want. It’s actually the norm: only occasionally does unregulated self-interest produce an optimum.
In the real world, people can’t give up the habit of eating. When work is scarce then those with some property can force the rest down to the minimum level for survival, often stripping them of what little property they had in the process. If workers could hibernate for a few years when times were tough, a labour market might self-regulate. The reality in early 19th century Britain is that working people were forced to work long hours for smaller wages, as market forces took hold.
‘Rational Economists’ also assume that all participants in a market can perform instantly judgements that might strain a trained accountant. Or rather, though this is obviously not literally true, there is a helpful Invisible Hand that ensures the right result
Adam Smith also assumed that the cash return that any individual might receive would be a good measure of the amount of real wealth that they had created. It was already known within the developing science of Political Economy that this was not so. Diamonds as gemstones were of no real use: as cutting edges they were marginally useful but not critical. Water was essential, but freely available and so tended to be cheap.
Money is a social creation. A set of agreed social relationships, and also a generalised ‘right to consume’. A capitalist enterprise is out to multiply its share by its operations. This is very different from normal life, where the ‘right to consume’ may be peripheral and people may not even want more,
The New Right view depends on what one might call the “Adam Smith hypothesis”, that an increase in an individual’s money or ‘right to consume’ is identical with increasing the wealth of the nation. This is arrived at by Logomancy, verbal trickery. The term ‘productive’ is applied to whatever is profitable.
The evidence is that profit-equals-wealth is not even a good approximation. When the economic role of the state expanded in the 19th and 20th centuries, this went along with increasingly fast rates of economic growth.
States have an unlimited ‘right to consume’, though whoever is in charge may choose to limit this by laws and regulation that the state chooses to obey. But the ‘right to consume’ can go as far as forced labour of an unwelcome sort, most notable military conscription. The right to send young men off to a war they didn’t care about or didn’t agree with was upheld by both sides in the US Civil War, and retained up to the Vietnam War. It remains legal (though inoperative) in the USA.
A war also gives the government an excuse to throw money at all sorts of projects aimed at turning interesting scientific ideas into products useful for war. Radar developed simultaneously in several states, but the USA with its vast resources did best. It also developed atomic weapons, long speculated about but not thought likely to happen soon.
Both microchips and the internet came out of Cold War projects. The post-war US economy depended heavily on government funding if things that were later transferred to the wider society. President Eisenhower denounced this as a ‘Military-Industrial Complex’, but it was this new social formation that won the Cold War. And has successfully started some new wars to justify continuing spending.
Governments also tended to rely on welfare to keep society calm, while allowing capitalism to slowly undermine their way of life. ‘Distributionism’ became a creed when it ceased to be the unchallenged norm, but it never really got its act together.
After the traumas of the 1930s economic slump and then the Second World War, people played safe for a generation or so. The 1960s changed all that.
Basic banking functions are necessary for a money economy. But banks have shifted their attention to gambling on a grand scale.
People who never gambled or who never risked more than they could easily lose now find that the savings they entrusted have been used for gambling on a grand scale. This includes people who wanted a safe investment for retirement and find that they were steered to something highly unsafe and also profitable to the advisor. ‘Respectability’ vanished and it became a question of ‘My Pay-Cheque Right Or Wrong’. Large bonuses – a brilliant idea if “Transcendental Mammonism” had been true – meant that managers had a strong incentive to overlook corrupt practices and also dubious investments that might look good for long enough to shift the blame to someone else. Or for the manager to depart with a secure few million and no need to worry if their employer collapsed later on. With the removal of the idea of a secure ‘job for life’, the idea of loot-and-move-on became much more attractive.
In Britain, many Building Societies with 19th century roots turned themselves into banks, ran into trouble and are now branches of a Spanish company called Santander. Thankfully some had the sense to stay mutual.
Another problem – some British banks cut back on computer staff, meaning that when a midnight crisis occurred, there was no one experienced on hand to avoid a disaster that disrupted people’s lives. They’ve been losing customers to Mutuals, Building Societies that stuck with what they knew.
The regular banks have got such a reputation now that the goblin Gringotts Bank from Harry Potter from could probably win customers. “The least bad bank you could find”? Or “We’re not human, and don’t pretend otherwise”?
The big problem with banking was deregulation, which removing safeguards that had been put there in the 1930s, after the last big financial crash. This began in the 1980s and 90% of the crisis was caused by things that were perfectly legal.
(It would still be a good idea to lock up the bankers and accountants responsible for the other 10%. The financial crooks must have been encouraged by a legal system that found it impossible to convict people guilty of blatant dishonesty. Or gave them sentences so light it was an encouragement to further crime, as with the Phoenix Four. But the major problem arose from stuff that was decriminalised by believers in “Transcendental Mammonism”.
Social conservatives up to the 1970s were rightly suspicious of capitalism and eager to contain it. Some of their measures overlapped with socialism, but a continued hierarchy was assumed. Their viewpoint also varied between ‘we must be fair to the poor’ and ‘we have to give up something to keep the rest”. But this didn’t stop traditional values being undermined in the long run. By the 1980s, they were dispirited and willing to believe promises that the state was the main enemy and that unregulated capitalism would restore the social values they cherished.
Thus perished authentic conservatism in Europe and the USA. It amounts to nothing much now, just a convenient herd of voters who can be led to vote for very different values. The current batch of ‘conservatives’ are anti-social, dysfunctional.
Permissive economics grew along with the relaxation of hierarchies and sexual behaviour. There was even a certain harmony. Many hippies were anti-communist and only a minority were socialists. Those who were socialists were made ineffective by their suspicion of state power. The Green Movement, the Feminists and the Gay Movement tended to ignore the wider ideology when it came to their specific needs, where more state enforcement of their ideas were an obvious need and a large achievement. But on the wider economic issues, confusion reigns.
The Night-Watchman State
Industrial capitalism in Britain rose alongside the growth of a strong centralised bureaucratic state funded by taxes. Adam Smith chose to treat this as an accident: economic growth had happened despite the state rather than because of it. But every other successful move to an industrial society has also involved a strong and growing state. Many have limited the freedom of action of capitalists and some have outlawed capitalism for a time, while still growing strongly.
Industrial-scale production occurs only within a strong state system. The exchange of goods can happen without the state. People may trade goods produced elsewhere, most notably the Silk Road that stretched across Central Asia, mostly run by nomadic tribalists. Or they can trade the surplus in goods that have to be produced regardless: nomads die without animals to feed them and do a lot of the work. If there is a chance to sell surplus animals, that is a bonus. The same applies for crops, most agriculture is subsistence.
Tribal systems can distribute but are weak in production, with the non-subsistence stuff occurring under the patronage of the chief, the minimal state structure that exists. They can also have a rich cultural life, but the histories of most of those peoples is lost. You could argue that the tribal way of life was better. Maybe it was, but it could not hold its own against other ways of life. Big states absorbed the tribes, but tended to stabilised as rich and sophisticated states depending mostly on agriculture and small-scale handicraft production. China was the height of this, and was in many ways more sophisticated than 19th century Europe. But it also had no change its way of life. And it was also one of the best developed version of the Night-Watchman State, the state that maintains security but does little else.
The phrase was coined by German socialist Ferdinand Lassalle in a 1862 speech in Berlin. He criticized the ‘bourgeois’ liberal ideal of a limited government state, comparing it to a night watchman whose sole duty was preventing theft. The phrase quickly caught on as a description of limited government, even as liberalism began to mean a more interventionist state.
Advocacy of a night-watchman state is known as minarchism. Minarchists argue that the state has no right to use its monopoly on the use of force to interfere with free transactions between people, and see the state’s sole responsibility as ensuring that transactions between private individuals are free. Minarchists generally believe a laissez faire approach to the economy is most likely to lead to economic prosperity.
This doesn’t correspond to actual history. It is true that you could have a strong state and a static society. Industrial capitalism as it has historically developed also needed a government committed to ‘improvement’ as a virtue, or else as a necessity for matching foreign power. Britain’s 17th century civil wars ended indecisively and in a way that made no sense to believers in the rival creeds. ‘Improvement’ became the shared creed of the ruling class that emerged out of the 1688 compromise. The drift to an ever-larger state was unwelcome but found to be unavoidable.
If government ministers believed in leprechauns, that might not spoil their ability to do their job. But a belief in night-watchman state is different, and tends to disastrous. What’s happened with the New Right going against the trend of history has been quite different from what they promised. The police and army under their rule have more thuggish and alienated from society. (It’s a thugs life in the British Army.) The state has not in fact shrunk, and small property and independent producers have continued to decline.
From Newsnotes, September 2012
The Myth of Crony Capitalism
[Socialists should demand that we] restore the Mixed Economy as the official economic wisdom. In real terms it has never gone away, but Thatcher and Reagan were successful with a demand to restore Primitive Capitalism, with a hope beyond that of running the economy on the basis of the Imaginary Capitalism of right-wing economic textbooks.
The Mixed Economy is a system whereby the state aims to dominate and regulate the economy, owning large chunks of it, while accepting that private businesses should flourish within this framework. Primitive Capitalism was the 19th century system whereby the state stuck to a narrow range of functions and let business do what it pleased within a loose framework of law, except where business people positively asked for regulation. Imaginary Capitalism is the system dreamed up by Adam Smith, whereby the state should do as little as possible and the world is supposed to consist of independent individuals who would each attend to their own selfish concerns, except when they chose to support private charities. The Primitive Capitalism of the 19th century tried to remould the flourishing Gentry-Capitalism of the original Industrial Revolution to this ideal, but never really succeeded.
The crisis of the 1930s convinced most people that Primitive Capitalism had outlived its usefulness. Parasitic finance and speculation was correctly blamed for the Great Slump, and for a long time it was curbed, with the Bretton Woods system of fixed exchange-rates tying all Western currencies to the US Dollar, which in turn was tied to gold. This was officially ended by Richard Nixon in 1971, when the dollar and many other currencies became free-floating. This had short-term benefits, but long-term costs that we are only now paying. There was also a general move to liberate finance, resulting in a gigantic growth of speculation and a shift in benefits to the rich.
The Mixed Economy never in fact ended, but in the West it became a kind of ‘Secret Vice’, the squalid reality behind the rhetoric of Imaginary Capitalism. This was never the case in the economies of the Asian Tigers, nor in People’s China when it opened up after Mao. All of them follow the rules of Mixed Economy, with China as the most regulated of all. But rather than being noted as proof of the merits of a Mixed Economy, it gets sneered at as Crony Capitalism.
So what is Crony Capitalism?
Having studied the matter, I’ve concluded that Crony Capitalism is ordinary routine capitalism when practiced by people you dislike or can’t get on with. The notion that personal contacts are less important in business in Britain or the USA than in the Republic of India or People’s China is simply nonsense. The big difference is that an Anglo business person will find it relatively easy to join such networks in another Anglo society, and may well have been born into them in their own society. In an unfamiliar society it will be hard to access such networks and probably impossibly to become fully a member. Naturally they complain to anyone who’ll listen, including authors and journalists who will repeat this viewpoint without noticing how subjective it is.
The 20th century’s most successful system was Mixed Economy, yet it has very few friends among economists or other intellectuals. Possibly this is because it tends to be pragmatic and offers few opportunities for grand theorising without reference to the specific realities of any particular industry. Yet it is the system that works in the long run.
Full state control of the economy can also work well, at least for a decade or three. Both Stalin’s Russia and China under Mao were highly successful in producing basic industrialisation in a largely agricultural economy, but there was trouble building on this and in fact a complete failure to move on in the Soviet Union. If one accepts the viewpoint of German economist Friedrich List, who wrote before Marx, then both Mao and Deng Xiaoping were right for their own era, while the post-Stalin leadership bungled their own transition in the 1960s and 1970s.
The Republic of India managed to industrialise an agricultural economy with its own version of a Mixed Economy, but actually at a much higher human cost. You hear much less about it because life was very much more congenial for middle-class intellectuals able to speak articulately in English and get through to a global audience. I’ve detailed before how at the end of Mao’s rule, China had a much stronger economy than India, and also a much higher life expectancy. Had China in 1949 somehow acquired a multi-party system and a successful economy – itself a pretty unlikely outcome – then there would have been considerably more premature deaths, even supposing that there would not have been the same sort of mistakes that happened in the Great Leap Forward.
Mao never put forward ‘Move Fast and Break Things’ as one of his slogans: that’s actually the philosophy behind the remarkable rise of Facebook. But the general rule is the same: moving fast and accepting some failures is likely to work better overall than doing everything cautiously.
China would never have liberated itself without taking chances. The rise of the East Asian Tigers and India’s success might not have been allowed had the West not seen them as lesser threats than Global Communism. Cold War victory led to an attempt to win back North Atlantic dominance, one that is likely to end with ignominious defeat in Iraq and Afghanistan. But it seems unlikely to end without at least one more spasm of violence, perhaps a war against Iran.
North Atlantic dominance has been of benefit just to a small elite, not to the working mainstream. People should remember what Brooker T. Washington said: ‘you can’t hold a man down without staying down with him’. The US South, sadly, was sufficiently vain and narrow to choose to stay down rather than accept equality. Only during the Cold War were the pressures great enough for formal racism to be ended. Informal racism was then rescued by the US Republicans and their ‘Southern Strategy’ of picking up white racist voters for what became the New Right in the USA.
Hopefully Britain and the rest of Europe will be wiser.
[The original article began by noting the re-election of George Galloway in 2012, and the hope he might persue some such line. Not what happened, unfortunately.
From Newsnotes, April 2012
Pensions not a burden
If the same society is producing the same wealth with fewer workers, then there is no reason why pensions shouldn’t stay at the same level. Or even increase, given that retirement pay is always less than pay in work.
The ‘problem’ is only a problem from the viewpoint of the richest 1%. In their eyes, pay for ordinary workers is an unwelcome expense, but mostly unavoidable. They also get better workers if they pay above the average rate, worse if they pay less. But from their viewpoint, pensioners are a pure burden, not needed and not contributing to the profits of the 1%. (Or not unless they are lured into foolish investments.)
Employed workers are fools if they see pensioners as a burden: they can reasonably expect to end up as pensioners themselves.
A great many of them are fools, sad to say.
Myths of Self-Employment
For most of human history, most people have had control over their own work, with a minority working for the rich. The Industrial Revolution changed that, gradually turning the bulk of the population into employees.
After World War Two, people mostly thought of themselves as employees and saw that their own interests were looked after through state power. Thatcher persuaded them to fear the Big Bad State, drawing on a general discontent that many leftists had fuelled in a short-sighted manner.
Thatcher’s promise was more economic independence, and it wasn’t met. Ideas like forcing big businesses to pay their bills on time get floated but never get anywhere. The rich get to evade most social controls and tax, the small businesses get squeezed. They get seen as an anomaly, “self-employed”, an oddity between being an employer or an employee.
“Since the middle of the last decade, the number and proportion of self-employed Britons has been increasing, and the drastic events of 2008 did not slow the rise….
“‘The additional self-employed are unlike self-employed people as a whole in terms of gender, hours of work, occupation and sector of employment,’ says the CIPD’s report. Tellingly, of those who make up the net rise in self-employment since 2008, 90% are part-time…
“All this has been boiled down to talk about a new crop of ‘odd-jobbers’ – but there’s something more important going on, so far undocumented in official statistics: the accelerated conversion of proper jobs into a mess of ‘self-employment’ that’s completely fraudulent. Eighteen months ago, two Daily Mirror journalists began a brilliant campaign on this issue titled ‘Gizza Proper Job’, and exposed such firms as Ryanair and the minicab firm Addison Lee; it has also been touched on by BBC1’s Panorama. That it remains a political non-issue says a lot about the current debate about the supposed fundamentals of the economy: politicians and the press will happily fume about either overpaid executives or ripped-off customers, but thinking about the nitty-gritty of working lives is still somehow beneath them.
“‘We are looking for a number of door supervisors, security guards and CCTV operatives,’ says one typical online job ad. ‘You will be employed on a self-employed basis’. This from the suburbs of Bristol, and another trade long steeped in such sharp practice: ‘Self-employed hairdressers are required for a busy, newly opened and re-vamped Beauty Salon.’ A lot of ads predictably push the supposed merits of ‘being your own boss’ – but in most cases the boss is where he’s always been, only he’s found a neat new way of paying you less.” [C]
It’s not always like that. One commentator summed it up nicely: “If you have a difficult to find skill then ‘self employed’ is not a bad crack as you can charge almost what you want. However for the average worker ‘self employed’ is a ticket to poverty as your employment can disappear overnight.” [C]
The bulk of the ‘self-employed” are actually day-labourers. They work for someone else but have no security. This suits the Thatcherite ‘entrepreneurs’, who mostly have no particular skills beyond squeezing money out of ordinary workers. Pre-Thatcher, foreign observers and especially the Germans said that British workers were fine and the management useless. More power to the managers has confirmed this.
Adam Smith on Usury and Interest
“In some countries the interest of money has been prohibited by law. But as something can every-where be made by the use of money, something ought every-where to be paid for the use of it. This regulation, instead of preventing, has been found from experience to increase the evil of usury; the debtor being obliged to pay, not only for the use of the money, but for the risk which his creditor runs by accepting a compensation for that use. He is obliged, if one may say so, to insure his creditor from the penalties of usury
“In countries where interest is permitted, the law, in order to prevent the extortion of usury, generally fixes the highest rate which can be taken without incurring a penalty. This rate ought always to be somewhat above the lowest market price, or the price which is commonly paid for the use of money by those who can give the most undoubted security. If this legal rate should be fixed below the lowest market rate, the effects of this fixation must be nearly the same as those of a total prohibition of interest. The creditor will not lend his money for less than the use of it is worth, and the debtor must pay him for the risk which he runs by accepting the full value of that use. If it is fixed precisely at the lowest market price, it ruins with honest people, who respect the laws of their country, the credit of all those who cannot give the very best security, and obliges them to have recourse to exorbitant usurers. In a country, such as Great Britain, where money is lent to government at three per cent. and to private people upon a good security at four and four and a half, the present legal rate, five per cent, is perhaps as proper as any.
“The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.”
That comes from The Wealth of Nations, which right-wing economists treat like the Bible – quote the bits you like and ignore the rest. The whole Thatcher / Reagan project has indeed shifted investment to “prodigals and projectors”, people who spend money foolishly and people who borrow a lot of money for highly dangerous business plans.
Labour could demand that the concept of boring respectability be restored to banking. People should be told, if you need advice on investing you shouldn’t be investing. And that there are no longer any trustworthy sources of financial advice – if indeed there ever were any. But it looks like Ed Miliband dare not do anything beyond mildly moderate New Labour doctrine, just as New Labour did not dare not do anything beyond mildly moderate Thatcherism. Even though the whole system is visibly falling apart, they do not dare.
From Newsnotes, February 2012
Austerity for the 99%
People in Western Europe and the USA lost confidence in state power in the 1970s. This was an odd thing to do, since increased state power after World War Two had given them an unprecedented run of prosperity and a lot of personal freedom. The West was in a certain amount of trouble in the 1970s, in part because the Arabs realised that they were selling their oil far too cheaply. But this was no reason to abandon a successful system or to sneer at it as wicked “Corporatism” with overtones of fascism. It was actually the system that prevented a re-growth of fascism, by accepting that there had been some justice in both the fascist and communist criticism of old-style liberalism. It also showed that social justice and employment could be produced in a tolerant society with open politics. It had succeeded for a quarter century.
It needed to be fixed, not broken.
Actually the system of state management and tax-and-spend was fixed and not broken, but it was fixed for the benefit of the rich. The rhetoric of ‘free markets’ has gone along with more and more regulations, and a tougher climate for small business. State spending was denounced as a burden, but the state budget has not shrunk at all. Taxes were denounced as robbery, but ordinary people still pay them, only the rich can afford complex work-rounds that mean they pay very little tax. And to make up for tax evasion by the rich, governments were encouraged to run up debts, with full knowledge that this would cause trouble in the long run.
The crisis of 2008 saw the whole edifice of speculative finance come close to collapse. Government money was pumped in to keep the system afloat. Government debts had nothing to do with it. But the massive distrust of the state, which applies right across the political spectrum, meant that there was no question of reacting by nationalising of banks or disentangling honest savings from speculation. The profitable parts of entities like Northern Rock were sold off as soon as possible, with the state left with all the bad debts. This was then seen as requiring austerity and cuts in state spending, overseen by people who already viewed all cuts in the civil and welfare sections of the state as a welcome improvement.
Austerity has meant dampening down the real economy by cutting state spending, rather than raising taxes on the rich. It means giving priority to reassuring financiers – but they long ago ensured that pension funds would be lured into this ‘web of sin’ so that ordinary people also have a stake in it.
All of this was justified as necessary for ‘Capitalism’, identified as the only possible source of wealth. Actually the system that grew up in the 1980s is completely different from anything that existed before, and represents a capitalist extreme.
Britain’s Industrial Revolution happened under broad state supervision. Nothing in the 18th century in Britain grew faster than the state, and the Victorian state was bigger again. But those were the years of success, though they broke all of the current conventional wisdom and people insisted all along that tax was ruinous and collapse immanent.
There is a big difference between tolerating small enclaves of capitalism, allowing it widely but under rules, encouraging it in areas or else placing extensive trust in it. Or keeping a superstitious devotion to ‘Free Markets’ even when they are visibly not delivering their promise.
Riding Both Sides of a Bubble
Society needs markets and money to be stable and trustworthy. But the class of speculators who rose in the 1980s thrive on instability and uncertainty. And persuaded politicians to let them create chaos.
“It is no exaggeration to say that since the 1980s, much of the global financial sector has become criminalised, creating an industry culture that tolerates or even encourages systematic fraud. The behaviour that caused the mortgage bubble and financial crisis of 2008 was a natural outcome and continuation of this pattern, rather than some kind of economic accident…
“Total fines on the banks for their role in the Enron fraud, the internet bubble, violation of sanctions against countries including Iran and money-laundering activities appear to be far less than 1% of financial sector profits and bonuses during the same period…
“There have been very few prosecutions and no criminal convictions of large US financial institutions or their senior executives. Where individuals not linked to major banks have committed similar offences, they have been treated far more harshly…
“When did Wall Street insiders know there was a really serious sub-prime mortgage bubble, and that they could game it? Many of the clever ones knew by about 2004, when Howie Hubler at Morgan Stanley first started to bet against the worst securities with the approval of his management. But you can only make money betting against a bubble as it unravels. As long as there was room for the bubble to grow, Wall Street’s overwhelming incentive was to keep it going. But when they saw that the bubble was ending, their incentives changed. And we therefore know that many on Wall Street realised there was a huge bubble by late 2006, because that’s when they started massively betting on its collapse…
“To begin with, a number of big hedge funds figured it out. Unlike investment banks, however, they couldn’t make serious money by securitising loans and selling CDOs (collateralised debt obligations), so they had to wait until the bubble was about to burst and make their money from the collapse. And this they did. Major hedge funds including Magnetar, Tricadia, Harbinger Capital, George Soros, and John Paulson made billions of dollars each by betting against mortgage securities as the bubble ended, and all of them worked closely with Wall Street in order to do so…
“As we saw, Morgan Stanley started betting against the bubble as early as 2004. Conversely, JPMorgan Chase mostly just remained prudently above the junk mortgage fray. Goldman Sachs, though, was in a class by itself. It made billions of dollars by betting against the very same stuff that it had been making billions selling only a year or two before.” [A]
It’s not much different in the UK;
“Hedge fund boss Alberto Micalizzi has been fined £3m and banned from working in finance by the City regulator, the Financial Services Authority (FSA).
“The penalties are for concealing losses of $390m (£250m) and lying to investors in late 2008.
“Mr Micalizzi and DDCM are referring the decision to the FSA’s Upper Tribunal, which may overturn it…
“The FSA’s ruling said: ‘Mr Micalizzi’s behaviour is amongst the most serious that the FSA has encountered,’ describing him as demonstrating ‘a total lack of honesty and integrity’.
“It said that Mr Micalizzi’s fund hid its losses by buying a bond and then artificially revaluing it to create a $400m gain.
“It also said that Mr Micalizzi deliberately concealed the true value of the fund from a new investor who had invested $41.8m.
“The fund was liquidated in May 2009 with $10m left in its kitty and no payments have been made to investors since then.”[B]
Paying For Praise
“Over the past 30 years, significant portions of American academia have deteriorated into ‘pay to play’ activities. These days, if you see a famous economics professor testify in Congress, or write an article, there is a good chance he or she is being paid by someone with a big stake in what’s being debated. Most of the time, these professors do not disclose these conflicts of interest, and most of the time their universities look the other way….
“In November 2004 Hubbard co-authored an astonishing article, jointly with William C Dudley, then chief economist at Goldman Sachs. The article, How Capital Markets Enhance Economic Performance and Facilitate Job Creation, warrants quotation. Remember, this is November 2004, with the bubble well under way: ‘The capital markets have helped make the housing market less volatile … ‘Credit crunches’ of the sort that periodically shut off the supply of funds to home buyers … are a thing of the past.’
“Hubbard refused to say whether he was paid to write the article. He also refused to provide me with his most recent government financial disclosure form, which we could not obtain otherwise because the White House had destroyed it. Hubbard was paid $100,000 (£63,000) to testify for the criminal defence of two Bear Stearns hedge fund managers prosecuted in connection with the bubble, who were acquitted. Last year, Hubbard became a senior economic adviser to Mitt Romney’s presidential campaign…
“Most of our information about Summers comes from his mandatory government disclosure form. Summers’ 2009 disclosure form stated his net worth to be $17m-$39m. His total earnings in the year prior to joining the government were almost $8m. Goldman Sachs paid him $135,000 for one speech.
“Summers is a compromised man who owes most of his fortune and much of his political success to the financial services industry, and who was involved in some of the most disastrous economic policy decisions of the past half century. In the Obama administration, Summers opposed strong measures to sanction bankers or curtail their income.” [C]
But universities have become dependent on corporate funds, mostly because a large section of the working mainstream decided that they were too expensive to fund out of taxes. Letting them be financed some other way seemed easy. But it’s cost ordinary people a lot more in the long run.
“Britain’s economic model – based on an inflated housing market, ever rising consumer debts and freewheeling financial services – is broken. It is unable to re-generate growth even four years after the financial crash, and is unlikely to do so for at least another couple of years.
“The bankruptcy of the existing model has prompted talk of ‘rebalancing’ the economy through the revival of the manufacturing sector. Even the chancellor, George Osborne – not known for his love of industry – talks of the need for a ‘march of the makers’. Unfortunately, after three decades of relentless de-industrialisation, Britain’s manufacturing base is hopelessly weakened, and its revival is going to be a long, hard slog.
“Some people have found solace in the fact – brought to attention by Peter Mandelson – that Britain is still the sixth largest manufacturer in the world. But this is essentially on account of Britain having one of the largest populations among the rich countries. In terms of per capita manufacturing output, a more accurate indicator of a country’s prowess, Britain ranks only about 20th – behind even Luxembourg and Iceland, not to mention South Korea and Taiwan…
“Despite all this, the government’s approach to renewing the sector is to repeat the same old, failed strategy of cutting (personal and corporate) taxes and ‘red tape’. The theory behind it is that wealthy people and corporations need to be given more incentives to invest and create jobs by making it easier for them to do business (deregulation) and to keep more of the income they generate through their businesses (tax cuts). If only it were that simple…
“Things like growth prospects, technological progress, quality of labour force and infrastructure are far more important. The truth is that, if there is money to be made, businessmen will invest regardless of the level of regulations. This is why the 299 permits that were needed to open a factory in South Korea in the early 1990s did not prevent the country from investing 35% of its income and growing at 10% per year at the time.”[D]
This is from Ha-Joon Chang, an economist of South Korean origin and author of 23 Things They Don’t Tell You About Capitalism. He’s got it pretty much right: strengthening the bosses has made the bosses richer but no more competent.
What should also be said is that South Korea and other success stories had no choice except to produce useful products. Parts of Britain have been able to flourish as a global financial parasite: a bloated financial sector that really produces nothing and is gambling on a gigantic scale. This sector has been protected at the cost of all else.