| Spotlight on Keynesian Solutions to the Financial Crisis |
|
|
|
Deep structural causes based on free market principles and an addiction to economic growth underpin the global economic crisis. How do we explain these causes - and does the renewed fixation with the policies of John Maynard Keynes offer an adequate solution? When world leaders meet later this month to discuss solutions to the profound economic crisis, there will be much discussion of short-term causes of the financial meltdown with a focus on credit derivatives, high-risk investments and excess deregulation. The use of complex terminology in highlighting short-term policy problems will inevitably mask the deeper crisis facing a global economic system based on the unbridled profit motive. So what next? In previous eras it has taken war, revolution or prolonged recession before political leaders established new institutional structures. Rather than wait for another cataclysmic historical event, Mary Kaldor argues in an article below that we need a global effort to prioritise poverty eradication and climate change mitigation in order to overcome the limits to sustainable growth. Instead of following an impulse to get the finance system ‘off the respirator’ as soon as possible and return to the status quo, Paul Mason says political leaders should abandon the idea of high-economic growth and ‘re-found capitalism on the basis of ethics and hard work.’ As background, an original prognosis for the Bretton Woods Conference by John Maynard Keynes highlights 'fear and greed, duplicity and incompetence, but above all conventional thought and feeling' as the cause of economic disaster in the 1930s. With an eery echo of current times, he says; 'So long as the Conference deals with symptoms and not with causes, the shadow of futility will lie across its path.' Crisis as a Prelude to a New Golden Age, by Mary Kaldor ''The Delegates Should Assemble in Sackcloth and Ashes, with Humble and Contrite Hearts'', by John Maynard Keynes 6th November 08 - Paul Mason, New Statesman The giant video screen at 745 Seventh Avenue, in Manhattan, is still lit up: only now, instead of the old Lehman Brothers promo, with its tossing oceans and desert sunsets, it projects the ice-blue bling of Barclays Capital, five-storeys high. The problem is, though the lights are still on for finance capital, ideologically there’s nobody home. Lehman's bankruptcy marked the end of a 20-year experiment in financial deregulation. But it was Alan Greenspan's congressional testimony, a month later, that marked the collapse of something bigger: the neoliberal ideology that has underpinned it all. It was Greenspan who had begun ripping away restrictions on financial speculation and investment banking in 1987. Last month, he said: "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact . . . Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself especially, are in a state of shock and disbelief." The belief in self-interest as the guiding principle of commerce is as old as Adam Smith. What happened with the Anglo-Saxon model of capitalism was something different: the principle of rational self-interest was elevated to replace regulation and the state. Selfishness became a virtue. Inspired by Ayn Rand's credo - "I will never live for the sake of another man, nor ask another man to live for mine" - the giants of global finance revelled in amoralism. Morgan Stanley boss John Mack's legendary trading-floor motto - "There's blood in the water, let's go kill somebody" - sums up the era. But the theory was flawed. Instead of safeguarding the property of shareholders, self-regulation drove the system to the point of collapse. Trillions of dollars worth of capital has been destroyed. "My view of the range of dispersion of outcomes has been shaken," Greenspan conceded. That's a logical response when the range of outcomes is clustered around the collapse of the savings system, the evaporation of global credit and the bankruptcy of most banks. But selfishness was not the only tenet of neo-liberalism. Any definition of the term would include: a belief in the market as the only guarantor of prosperity and democracy; the futility of state intervention in pursuit of social justice; the creative destruction of cherished institutions and stable communities; the shrinkage of the state to regulatory functions only, and then as minimal as possible. And the problem for the G20 leaders who will assemble at the Washington summit on 15 Nov ember is this: every single one of them has, to a greater or lesser extent, bought into the neoliberal ideology. It has dictated the direction of travel even in economies such as Brazil, India, Indonesia and China, classified as "mostly unfree" on the neoliberal league table. The summit's most pressing task is to come up with a co-ordinated crisis response: for all the rhetoric, this is a firefighting operation not a second Bretton Woods. In the end, the route to a Bretton Woods-style settlement may be impassable for the weakened, multi-polar capitalism represented by the G20. But, even to begin that journey, there must be an honest reckoning with neoliberalism. An ideology does three things: it justifies the economic dominance of a ruling group; it is transmitted through that group's control of the media and education; and it describes the experience of millions of people accurately enough for them to accept it as truth. But it does not have to be logical. For this reason, picking logical flaws in neoliberalism has been an exercise with diminishing returns. For example, Milton Friedman's assertion that free-market capitalism and democracy are mutually reinforcing always looked a non-sequitur after he hotfooted it to Chile in 1975, personally urging General Pinochet to inflict a neoliberal economic "shock", even as the secret police were administering electric shocks to the genitals of oppositionists. But his theories continued to inspire policymakers. Instead of logic, any balance sheet of neoliberalism has to begin from its outcomes. I will list five negative outcomes for countries following the Anglo-Saxon model: In the first place, rising inequality. Between 1947 and 1973 the income of the poorest fifth of US families grew 116 per cent, higher than any other group. From 1974 to 2004 it grew by just 2.8 per cent. In the UK, the share of national income received by the bottom 10 per cent fell from 4.2 per cent in 1979 to 2.7 per cent in 2002. Second, the replacement of high wages by high debt. The real wages of the average American male worker are today below what they were in 1979; and for the poorest 20 per cent, much lower. In 1979, personal household debt was 46 per cent of America's GDP; now it is 98 per cent. In the UK, real household incomes grew, but slower than in the postwar boom, until early this decade, since when they have fallen. The debt pattern, however, followed the US; 30 years ago British households were in debt to the tune of 20 per cent of GDP, now it is 80 per cent. Third is the redistribution of profits from non-financial companies to the finance sector. In 1960s America, the pretax profits of financial firms made up 14 per cent of corporate profits; now they make up 39 per cent. Most of this profit is not generated from financing productive business: the world's total stock of financial assets is three times as large as global GDP. In 1980, it was about equal to GDP. The new power of finance capital not only creates asset bubbles, as with the dotcom, housing and commodity bubbles of the past decade, but it allows speculative capital to descend on individual companies, countries and industry sectors, smash them and move on. I present the current economic plight of Hungary as Exhibit A. Fourth is the growth of personal and financial insecurity, the destruction of social capital and the resulting rise in crime. If you want data, then the four stark pages of membership graphs at the end of Robert Putnam's celebrated book Bowling Alone show the decline of almost every voluntary association in America during the neoliberal age. If you prefer qualitative research, walk the streets of any former industrial city at night. Fifth is the relentless commercialisation of all forms of human life: the privatisation of drinking water that provoked the people of Coch abamba, Bolivia to revolt in 2000; the creation of a private army of 180,000 military contractors in Iraq, unaccountable to international law. In these and many other instances, the functions of the state have been turned over to private companies to the financial detriment of taxpayers, the material detriment of consumers and the loss of democratic accountability. But there is a plus side. Since 1992, there has been stability and growth across the OECD countries and beyond, albeit lower than the average growth achieved during the postwar boom years. There has been a marked fall in absolute poverty, with the number of people living on less than $2 a day falling by 52 per cent in Asia, 30 per cent in Latin America (though rising by 3 per cent in Africa) between the years 1982-2002. And though the data is mixed, many of neoliberalism's critics accept that inequality declines as per-capita GDP growth improves. There has been a huge movement of humanity from the farm to the factory, and 200 million people have migrated from the poor world to the rich. Access to the financial system has brought rising liquidity: access to homeownership and overdrafts for families on low pay was real, whatever its macroeconomic outcome. And above all, the musty cultural and institutional barriers that made life a misery for the young in the 1960s and 1970s are largely gone; the flipside of commoditisation has been the decline of dependency and paternalism in social life. And this has been the source of neoliberalism's strength as an ideology: borrow big-time, negotiate your own salary, duck and dive, lock your door at night. That is the new way of life for the world's workforce. My father's generation, the generation of organised workers which saw industry and social solidarity destroyed in the 1980s, could never really accept it. But hundreds of millions of people under the age of 40 know nothing else. And if you live in a Kenyan slum or a Shenzhen factory, you have seen your life chances rise spectacularly higher than those of your father's generation, even if the reverse is true in, say, Salford or Detroit. Until 15 September 2008 (the day Lehman Brothers filed for Chapter 11 bankruptcy protection, the largest bankruptcy in US history), the left and the right were engaged in a political debate that revolved around the balance of these positive and negative impacts. Today that debate is over: we now know that neoliberalism nearly crashed the whole financial system. I will repeat, because the adrenalin rush has subsided and it is easy to forget: neoliberalism brought the world to the brink of an economic nuclear winter. Not by accident but because of a flaw in its central mechanism. It is for this reason that President Sarkozy (once labelled "Monsieur Thatcher" by the French left) declared it dead - not flawed - but dead. "The idea that markets were always right was mad . . . The present crisis must incite us to re-found capitalism on the basis of ethics and work . . . Laissez-faire is finished. The all-powerful market that always knows best is finished," he said. So what comes next? Though governments are scrambling to deploy Keynesian anti-crisis measures - from George Bush's tax cut to Gordon Brown's borrowing hike - it is axiomatic that the developed world cannot return to the way things were before the 1980s: the Keynesian model broke down spectacularly, and could cure neither high inflation nor economic stagnation. It is clear, from the sheer level of pain and trauma inflicted by the changes of the past 20 years, that we have lived through the birth of something. Its founding ideology was neoliberalism; its most tangible result was globalisation; and it was achieved through class struggle by the rich against the poor. But none of these facts can encompass the scale of change. Because none of them allows for the most fundamental change - that information has become a primary factor of production. Computing power has doubled every 24 months; the internet and mobile telephony have, in the past ten years, altered the patterns of human life more profoundly than any single economic policy. Info-capitalism has been inadequately theorised: call it "post-Fordism", techno-capital or the knowledge economy, whatever the label it remains the central fact of the early 21st century. If you accept this, then the experience of neo- liberalism looks less like the dawn of a free-market empire, more like the period between the invention of the factory system and the passing of the first effective factory legislation: between the establishment of Arkwright's mill at Cromford in 1771 and the Factory Act of 1844. For much of that period, the pioneers of industrial capitalism believed that any regulation would kill the dynamism of the system. They too had a celebrity economist to justify their actions, namely Nassau Senior, the author of the theory that all profits were made in the last hour of the working day. The fate of capitalism, quipped reformer William Cobbett, depended on 300,000 little girls in Lancashire: "For it was asserted, that if these little girls worked two hours less per day, our manufacturing superiority would depart from us." Child labour was abolished; minimal standards of order and humanity were imposed on the factories. But capitalism did not die - it took off. It is no accident, incidentally, that 1844 was also the year Britain, traumatised by recurrent financial panics, enshrined the supremacy of the central bank and the gold standard in legislation. If the parallel is valid, then the new regulations and institutions under discussion in Washington stand a chance not of killing info-capitalism but of unleashing it. What are the intellectual sources for the system that will replace neoliberalism? Most of the prophets of doom in advance of the credit crunch were survivors from the Keynesian era: Paul Krugman, Joseph Stiglitz, George Soros, Nouriel Roubini, Morgan Stanley economist Stephen Roach. But with the partial exception of Stiglitz, they remain dislocated from the grass-roots opposition to neoliberalism. In turn, this opposition, dominated by the principles of anarchism and charity, has revelled in its own diversity and lack of engagement with state-level solutions. As for the world's policymakers they, for now, resemble the Hoover administration in 1930, or if you are feeling really unkind, Chamberlain's British government in 1940. They are confronted by a crisis they did not think would happen. They are approaching it with the only tools they have - but they are the old tools: the old alliances, the old experts, the unreconstructed ideas and plans: Doha, Basel II, the Lisbon agenda. The IMF's conditions for bailing out eastern Europe - public spending cuts, interest-rate rises, privatisations - confirm the pattern. The aim, made explicit during a speech on 28 October by Catherine Ashton, the EU's new trade commissioner, is to enact crisis measures while explaining to the public that "interventions and excessive use of public subsidies - while attractive today, will damage us tomorrow". This does not match the rhetoric coming out of Paris and Washington about the "end of trickle-down" and the death of laissez-faire; and it tends to ignore the fact that the most fundamental problem created by neoliberalism was not deregulation but the replacement of high wages by high debt. In other words, it is not the policy framework that is in trouble, it is the growth model. There are three possible ways out. First, the revival of neoliberalism in a hair shirt: less addicted to the celebration of greed; with government spending temporarily replacing consumer debt as the driver of demand; and with some attempt at co-ordinated re-regulation. That is the maximum that can come out of the Washington summit. Second, the abandonment of a high-growth economy: if it can't be driven by wages, debt or public spending then it can't exist. And if it can't exist in America, then Asia's model of high exports and high savings does not work, either. In previous eras the proposal to revert to a low-growth economy would have been regarded as simply barbarism and regression. Yet there is a strong sentiment among the anti-globalist and deep-green activists in favour of this solution, and it has found echoes in mass consciousness and micro-level consumer behaviour as the world has come to understand the dangers of global warming. Even a mainstream corporate economist, such as Morgan Stanley's Roach, has called for "a greater awareness of the consequences of striving for open-ended economic growth . . . This crisis is a strong signal that [high-growth] strategies are not sustainable." The third alternative is the Minsky option. Hyman Minsky (1919-1996) was the godfather of modern financial crisis theory: his works, while largely ignored by politicians, are revered by both Marxists and hedge-fund managers. The "Minsky Moment" - a systemic financial crisis that crashes the real-world economy - was not only predicted in his work but theorised as a natural and intrinsic feature of capitalism. What we are going through now, Minsky argued, is the normal consequence of achieving growth and full employment through an unfettered private financial system. But he had a solution - outlined in the chapters the hedge-fund managers skip and the Marxists dismiss: the socialisation of the banking system. This, he conceived, not as an anti-capitalist measure but as the only possible form of a high- consumption, stable capitalism in the future. Minsky argued: "As socialisation of the towering heights is fully compatible with a large, growing and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure." Minsky never bothered to spell out the details of how it might be done. But there is no need to, now. Stumbling through the underground passageways of 10 Downing Street on the morning of 8 October, I saw it done. Tetchy and bleary-eyed, fuelled by stale coffee and takeaway Indian food, British civil servants had designed and executed it in the space of 48 hours. Within days, much of the western world's banking system had been stabilised by massive injections of taxpayer credit and capital. The problem is, though they have now been there, done that, the G20 politicians have no desire to get the T-shirt. The G20 summit will meet in the context of a global finance system on life support. Their impulse is to get it off the respirator as quickly as possible; to put things back to normal. But the ecosystem which sustained global finance in its previous form is also in crisis: easy credit and speculative finance were the oxygen, and they have gone. The policy challenge, in short, is much more fundamental than is being recognised in the run-up to the G20 summit. Gordon Brown speaks of a "new global order" emerging out of Washington. But in reality he is talking about multilateral crisis-resolution mechanisms, not a rethink of the relationship between finance capital, growth and debt. If the world's leaders seriously intend to "refound capitalism on the basis of ethics and work", there is plenty of source material to start brainstorming from. I would throw this into the mix, from Franklin Roosevelt's Oval Office in January 1934: "Americans must forswear that conception of the acquisition of wealth which, through excessive profits, creates undue private power over private affairs and, to our misfortune, over public affairs as well. In building toward this end we do not destroy ambition . . . But we do assert that the ambition of the individual to obtain a proper security, a reasonable leisure, and a decent living throughout life is an ambition to be preferred to the appetite for great wealth and great power." Paul Mason is economics editor of BBC Newsnight; his book "Meltdown: the End of the Age of Greed" is published by Verso in April 2009. Crisis as Prelude to a New Golden Age 7th November 08 - Mary Kaldor, openDemocracy.net Underlying the financial crisis is a deeper structural crisis in the real economy. It has to do with the mismatch between our social and political institutions and the profound changes in society wrought by the so-called `new economy.' This is why the solution goes well beyond a bank bail-out. Sustainable economic growth and stability can only be achieved again through a `new deal' at a global level that includes addressing climate change, poverty reduction and human security. Indeed, the present crisis is one of those epochal moments in human affairs. How we act now will have implications far beyond the present turmoil. It will shape the lives of future generations. The best book to explain all this is Carlota Perez [3] Technological Revolutions and Financial Capital: the Dynamics of Bubbles and Golden Ages. Perez can be described as a neo-Schumpeterian (a strand of economic thought developed in the Science Policy Research Unit at the University of Sussex in the 1980s and 1990s, under the inspiration of Christopher Freeman [4] ). Their argument is based on the idea of long waves in the history of capitalism, as a consequence of the bunching together of technological innovations, which they call a `techno-economic paradigm [5] '. Each wave is characterised by some critical invention that leads to a new set of technologies and infrastructures that all are interlinked, and a new type of `best practice'. Since 1771, when Arkwright's Mill was opened in Cromford, there have been five great surges of development: 1. the industrial revolution characterised by the mechanised cotton industry, factory labour, and the spread of canals; 2. the age of steam and railways; 3. the age of electricity and steel; 4. the age of the car and mass production and 5. our own era the age of information and telecommunications technologies. Each era is characterised by some defining moment like Ford's Model T first mass produced in 1908 or the discovery of the microprocessor in 1971; by its own core factor of production such as oil (the age of the automobile) or the chip (the age of information technology). The epoch is also defined by a core economy - Britain in the first three waves with the US and Germany catching up in the third wave, and the US in the two most recent waves, spreading to Europe and Asia. Each era goes through an installation period that ends in a financial collapse and a deployment period when all conditions are there for taking full advantage of the new technologies across the whole economy and the benefits are more evenly spread throughout society. This ends in a phase of maturity and eventually saturation when the techno-economic paradigm is diffused throughout the economy and society and when technological progress slows down, the core factor of production is no longer plentiful and when protest about established ways of doing things develops.. Perez's contribution is two fold. First she demonstrates the importance of the institutional framework. She explains crises and depressions in terms of a mismatch between social and political institutions and the techno-economic paradigm. She accounts for `golden ages' in terms of contrasting periods of harmony. The depression of the 1930s is explained [6] in terms of the mismatch between financial and regulatory arrangements, which were an expression of the social and political institutions, largely established by Britain in the late nineteenth century and the huge potential for economic expansion resulting from the marriage of oil and mass production pioneered in the United States known as Fordism. These new technological discoveries had resulted in massive productivity increases that were not matched by the pattern of demand. The `new deal' and the war led to redistribution of income and the construction of the Bretton Woods system, through which sterling was supplanted by the dollar, that enabled the rise and spread of mass consumption in the West (and in the East, mass armaments) and that led to a new Golden Age in the 1950s and 1960s. But already in the late 1960s the productivity gains of the mass production era began to slow down and workers and students began to rebel against the tedium of mass production routines. The stagflation of the 1970s and 1980s was the result of the maturity of those technologies, when it became harder and harder to innovate within the existing paradigm, when markets became increasingly saturated and when the key factor of production, oil, became much more expensive. The developed economies revived in the 1990s. Not only was there intense investment in information technology itself which was beginning to weigh more significantly in growth and employment but we also witnessed the modernization of the mass production industries with computerized equipment, the internet and the new organizational models. At the same time and thanks to the global reach of telecommunications, massive production capacity was created across the world, and especially in Asia [7] . The rapid growth of information and telecommunications technologies and their application to a range of industries in the last two decades has, however, largely taken place within the pattern of demand established during the Fordist era, based on consumption and, to a lesser degree, military spending. Cars and consumer durables have greatly improved. The Internet has made possible cheap air travel. New consumer goods like ipods or video games have been invented. New more precise aircraft, missiles and tanks have been developed in the military sector. Above all, similar patterns of consumption have reached millions of people in places like China or India. But all the same the new paradigm is coming against limits - limits imposed by existing patterns of income distribution, limits resulting from the saturation of consumer markets in the West and, perhaps most importantly the economic and environmental limits that are the consequence of the dependence of this pattern of growth on carbons, especially oil. What is needed now are a new set of institutions capable of shifting the pattern of demand so as to allow the new paradigm to diffuse through out the global economy in a sustainable way. Perez's second contribution is to explain the role of finance capital in these great surges of development. Finance is critical for the spread of innovation. Schumpeter [8] defined capitalism as that `kind of private property economy in which innovations are carried out by means of borrowed money.' Each wave is also characterised by financial innovations - joint stock companies in the railway age, hire purchase in the automobile age, or plastic and e-banking or hedge funds in the current era. In the installation phase, finance capital starts to fund the new technologies and big profits are made. Indeed, many of the new financial innovations have made possible the increase in real consumption; for example, credit cards and new types of mortgages. This is the period when deregulation becomes fashionable and when free markets are seen as the mechanism for addressing the sluggishness of the old paradigm. But because the spread of the new paradigm comes up against limits, the installation period ends in a frenzy phase when the `new economy' is not yet large enough for sustained investment but when finance capital has got used to making big profits. `In order to achieve the same high yield from all investments as from the successful new sectors' says Perez `finance capital becomes highly `innovative'. Imagination moves from real estate to paintings, from loans in faraway countries, to pyramid schemes, from hostile takeovers to derivatives or whatever.' This is the moment when greater risk is licensed and when a mountain of paper wealth is created masking the mismatch between the new economy and the social and political institutions. This is a period of extreme social polarisation when the gains from economic growth are not redistributed. It is a period that celebrates making money, in which selfishness is considered `good'. And it is in this context that financial schemes become increasingly wild. At the same time, the financial architecture, along with the institutional framework, also inhibits the channelling of capital into productive growth. In each wave, financial architecture has been centred on the core country. The dominant currency was sterling in the first three waves. After Bretton Woods, the dollar became the international currency and the federal reserve the lender of last resort. For the first twenty five years after Bretton Woods, the system, based on fixed exchange rates tied to gold and the dollar, worked rather well; this was a period of harmony, the Golden Age of the automobile era. The United States provided massive economic and military assistance to the rest of the world (except the Communist bloc), which returned to the US in the form of purchases of American goods. But as other countries caught up, US trade surpluses vanished. The turning point was the high cost of the Vietnam War and the collapse of the Bretton Woods system in 1971, the same year that Intel invented the microprocessor. In the subsequent era of floating exchange rates and neo-liberal prescriptions, the dollar remained the dominant currency. But instead of stimulating the rest of the world, the American financial system sucked in money from the rest of the world through massive borrowing. Much of this money came from the so-called emerging markets and oil states via what are known as sovereign wealth funds. But it also came from poor countries who borrowed when economic aid dried up and who continue to be net lenders to the United States. The trillion dollar war in Iraq and the Bush era tax cuts for the rich has taken US borrowing to new heights; as of September 2008, overall US debt was 350% of American GDP. The borrowing was, of course, a stimulus to the world economy. China and India grew dramatically through exporting to the indebted West. But both because of exchange rates and because there were no limits to US borrowing, most of the current account surpluses ended up inflating Western assets rather than improving infrastructure and reducing poverty. As long as the world had confidence in the United States (and Britain) and as long as assets continued to inflate thus generating high returns from lending, the debt could keep growing. The current crisis is the end of the frenzy phase of installation -the moment when the bubble has burst. Of course the immediate crisis is the consequence of short term factors (weak financial regulation, securitisation, excessive risk-taking, etc.) whereas the underlying structural problems are long-term. While the argument about the mismatch between institutions and the techno-economic paradigm suggests that a crisis is inevitable, the theory cannot predict when the crisis will happen or how. The risk is that ameliorative measures are taken now to restore trust in the financial sector without addressing the long term structural problems that result from the dismantling of many of the institutions of the automobile era, through deregulation, and the absence of an appropriate institutional framework for the new information era. The problem is that patterns of demand and the habits formed by political and social institutions tend to be much more resistant to change than economies. Or to put it in another way, economic change is a consequence of market relations, whereas institutions and culture change through various forms of social and political contestation. In previous eras, it has taken war and revolution as well as prolonged depression before a new institutional framework was established. After all, the Wall Street crash took place in 1929 and it was only after the war and fascism, that the conditions for a new golden age of the automobile era were established. The point, of course, is that the crisis [13] is a turning point when the challenge is to establish a new global regulatory framework that can channel the new innovations into economically and environmentally sustainable economic growth. We need a new global financial architecture-, based on a combination of the dollar, the euro and the yen and a new exchange rate mechanism - in short, a new Bretton Woods. We need new methods of financial regulation as well as access to liquidity for poor countries. But above all, we need a new global stimulus package that will facilitate the spread of the information era and the growth of productive capital in sustainable ways so that lending does not continually increase debt but also creates sufficient income based on productive work to repay debt. Otherwise, the global economy is likely to limp along and we are likely to face more crises (both economic and political) in the future. Such a package could involve large-scale redistribution to developing countries [13] , allowing them to build the critical infrastructures of the information era, and to increase the consumption of poor people by providing jobs so that consumption is financed by productive income rather than debt. But it would also need to involve energy saving innovation, recycling especially waste, and the development of renewables, especially solar power, so that increased economic growth does not come up against the limits that could result from the high price of carbons and environmental degradation including global warming. It must be possible to spread the benefits of development without killing the planet. The package would also need to involve a restructuring of the security sector away from the Fordist preoccupations with state security and sophisticated weapons platforms powered by combustion engines to providing the everyday security [13] that could enable economic development in large parts of the world relying on to a much greater extent on improved communications than improved weapons. This is what is needed to initiate the transition from installation to full deployment, to promote the golden age of the information era. In many of the commentaries on the crisis, there are calls for a new Keynes. Others insist that Keynsianism never worked and that neoliberalism should not be abandoned. What these two views fail to take into account is that the appropriate remedies depend on the phase of the long cycle. In the installation period, liberalisation frees up finance capital to invest in the new paradigm and to finance big increases in productivity. But in the deployment phase, some sort of stimulus is needed to channel finance into sustainable outlets and to develop appropriate markets. The new Keynes has to be [13] a Neo-Schumpeterian. Neo-Schumpeterianism is both supply side and demand side; it is about matching the social and institutional framework to the techno-economic paradigm. Keynes thought it was enough to dig holes within a national context if that would stimulate the economy and, indeed, that was the solution in a mass production era. But in the current era, any stimulus has to be directed towards structural sustainability on a global basis. This is Keynsian in the sense of stimulating demand but it is neo-Schumpeterian in so far as it matters how money is spent, in the insistence that any stimulus must provide a sustainable outlet for the extraordinary gains in technological know-how of the last thirty years. A global effort [13] to eradicate poverty and tackle climate change world-wide would be the best way to overcome the limits to productive and environmentally sustainable growth and spread the new techno-economic paradigm. Mary Kaldor is professor of global governance [1] at the London School of Economics (LSE), and convenor of the human-security study group that reports to the European Union's foreign-policy chief Javier Solana References
1. http://www.lse.ac.uk/Depts/global/ ''The Delegates Should Assemble in Sackcloth and Ashes, with Humble and Contrite Hearts'' 24th December 1932 - John Maynard Keynes, New Statesman In the first six months of 1933 the world will be wondering between two alternatives; and until doubt is resolved it would be vain to expect genuine decisions from an International Conference. The alternatives are these. Will it be apparent by the middle of 1933 that this slump is the same in kind as past slumps though so violent in degree, and is gradually working itself off by the operation of natural forces and the economic system’s own resiliency? Or shall we find ourselves after a modest upwards reaction and dubious hopes of recovery, plunged back again into the slough? So long as there is any prospect of our realising the first alternative – and its realisation is not impossible – we may be certain that the International Conference will confine itself to pious words. Only in the other event, with hopes dashed and the oppression of renewed and universal despair terrifying the delegates, will there be any chance of action commensurate with the problem. It is easy to predict the agenda of the Conference. A number of resolutions will be passed declaring that many things ought to be changed, but without a serious intention of changing them. Exchange restrictions will be denounced, but those countries where they exist will regret that they are in no position to abate them. It will be said that debts should be written down when they are beyond the capacity of the borrower, but no individual creditor will offer to write them down. The Conference will declare that there should be a general return to the gold standard as soon as possible, but those countries which have gained their liberty in this respect will not surrender it except on conditions which they do not expect to see satisfied. The Conference may agree, even with French acquiescence, that prices should be raised. But will it offer any plan for raising them? So long as the Conference deals with symptoms and not with causes the shadow of futility will lie across its path. Its first task therefore should be to distinguish one from the other. The trouble began with something that is best described as "a state of financial tension". In the United States the causes of tension were internal; elsewhere they were in their origins mainly international. These initiating causes are well known - on the one hand a frenzy of speculation in the United States, on the other hand a cess ation of the international lending which had been off-setting the disequilibrium of the balances of payment between countries which war debts and tarriffs would have already produced otherwise. A state of financial tension means that individuals and communities suddenly find much increased difficulty in putting their hands on money to meet their obligations, with the result that they take various measures to reduce their purchasing. There is one, and only one, genuine remedy; namely to increase demand - in other words to increase expenditure. As the slump progresses it becomes more difficult to do this. At first a relief in the financial tension would have been enough by itself. But when the decline of prices and profits has gone beyond a certain point, the incentive to produce, and not merely the financial ability, has disappeared. At this point, the State itself must, in my judgement, start the ball rolling by deliberately organising expenditure. The essential task is to divide measures for the direct relief of financial tension between nations. Our plan must be spectacular, so as to change the grey complexion of men's minds. It must apply to all countries and to all simultaneously. Each at the same time must feel able to remove barriers to trade and to purchase freely. If we all begin purchasing again, we shall all have the means to do so. The appropriate stimulus to the activity of trade will vary from nation to nation; in some a relief from taxation, in some a programme of public works, in some an expansion of credit, in some a relaxation of exchange and import restrictions, in some a repayment of pressing debts, in some the mere removal of anxieties and fear, in some the mere stimulus to the lords of business to be courageous and active again. What is the charm to awaken the Sleeping Beauty, to scale the mountain of glass without slipping back? If every Treasury were to discover in its vaults a large cache of gold proportional in size to the scale of its economic life, would not that work the charm? Why should that cache not be devised? We have long printed gold nationally. Why should we not print it internationally? No reason in the world, unless our hands are palsied and our wits dull. The plan would be as follows. An international body – the Bank of International Settlements or a new institution created for the purpose – would be instructed by the assembled nations to print gold certificates to the amount of (say) $5,000,000,000. The countries participating would undertake to provide a lawful ratio of equivalence, though not necessarily an unchangeable one, between gold and their national moneys. The gold certificates would then be distributed to the participants in proportions determined by a formula, based on their economic weight in the world . . . I see no disadvantages in [this plan] and no dangers. It requires nothing but a little more elastic than usual. The delegates to the World Conference should assemble in sackcloth and ashes, with humble and contrite hearts. It is, I suppose, well nigh the fiftieth of post-war Conferences. Fear and greed, duplicity and incompetence, but above all conventional thought and feeling, have brought their collective performance far below the level of the participants regarded as human individuals. But here is a last opportunity. Finis Coronat opus. Paradigm Reclaimed: A Finance System that's Fit for Purpose - 4th November 08, Dr. Stephen Spratt Transforming the Global Economy: Solutions for a Sustainable World - 7th October 08, Susan George Keynes, Inflation and the Green New Deal - 2nd September 08, Anne Pettifor We're all Keynesians - Again - 20th February 08, Mark Weisbrot Return of the State - 28th October 08, Prabhat Patnaik Link to STWR's Global Financial Crisis page Link to a Spotlight on Bretton Woods II Keynes and the Crisis - a brief by Axel Leijonhufvud, Centre for Economic Policy Research (CEPR) |
The Issues
 |
Share The World's Resources |
Phone |
A not for profit organisation with Consultative Status at ECOSOC. |
|
|