John Naughton in The Guardian
Those who cannot remember the past,” wrote the American philosopher George Santayana in 1905, “are condemned to repeat it.” And now, 118 years later, here come two American economists with the same message, only with added salience, for they are addressing a world in which a small number of giant corporations are busy peddling a narrative that says, basically, that what is good for them is also good for the world.
That this narrative is self-serving is obvious, as is its implied message: that they should be allowed to get on with their habits of “creative destruction” (to use Joseph Schumpeter’s famous phrase) without being troubled by regulation. Accordingly, any government that flirts with the idea of reining in corporate power should remember that it would then be standing in the way of “progress”: for it is technology that drives history and anything that obstructs it is doomed to be roadkill.
One of the many useful things about this formidable (560-page) tome is its demolition of the tech narrative’s comforting equation of technology with “progress”. Of course the fact that our lives are infinitely richer and more comfortable than those of the feudal serfs we would have been in the middle ages owes much to technological advances. Even the poor in western societies enjoy much higher living standards today than three centuries ago, and live healthier, longer lives.
But a study of the past 1,000 years of human development, Acemoglu and Johnson argue, shows that “the broad-based prosperity of the past was not the result of any automatic, guaranteed gains of technological progress… Most people around the globe today are better off than our ancestors because citizens and workers in earlier industrial societies organised, challenged elite-dominated choices about technology and work conditions, and forced ways of sharing the gains from technical improvements more equitably.”
Acemoglu and Johnson begin their Cook’s tour of the past millennium with the puzzle of how dominant narratives – like that which equates technological development with progress – get established. The key takeaway is unremarkable but critical: those who have power define the narrative. That’s how banks get to be thought of as “too big to fail”, or why questioning tech power is “luddite”. But their historical survey really gets under way with an absorbing account of the evolution of agricultural technologies from the neolithic age to the medieval and early modern eras. They find that successive developments “tended to enrich and empower small elites while generating few benefits for agricultural workers: peasants lacked political and social power, and the path of technology followed the vision of a narrow elite.”
A similar moral is extracted from their reinterpretation of the Industrial Revolution. This focuses on the emergence of a newly emboldened middle class of entrepreneurs and businessmen whose vision rarely included any ideas of social inclusion and who were obsessed with the possibilities of steam-driven automation for increasing profits and reducing costs.
The shock of the second world war led to a brief interruption in the inexorable trend of continuous technological development combined with increasing social exclusion and inequality. And the postwar years saw the rise of social democratic regimes focused on Keynesian economics, welfare states and shared prosperity. But all of this changed in the 1970s with the neoliberal turn and the subsequent evolution of the democracies we have today, in which enfeebled governments pay obeisance to giant corporations – more powerful and profitable than anything since the East India Company. These create astonishing wealth for a tiny elite (not to mention lavish salaries and bonuses for their executives) while the real incomes of ordinary people have remained stagnant, precarity rules and inequality returning to pre-1914 levels.
Coincidentally, this book arrives at an opportune moment, when digital technology, currently surfing on a wave of irrational exuberance about ubiquitous AI, is booming, while the idea of shared prosperity has seemingly become a wistful pipe dream. So is there anything we might learn from the history so graphically recounted by Acemoglu and Johnson?
Answer: yes. And it’s to be found in the closing chapter, which comes up with a useful list of critical steps that democracies must take to ensure that the proceeds of the next technological wave are more generally shared among their populations. Interestingly, some of the ideas it explores have a venerable provenance, reaching back to the progressive movement that brought the robber barons of the early 20th century to heel.
There are three things that need to be done by a modern progressive movement. First, the technology-equals-progress narrative has to be challenged and exposed for what it is: a convenient myth propagated by a huge industry and its acolytes in government, the media and (occasionally) academia. The second is the need to cultivate and foster countervailing powers – which critically should include civil society organisations, activists and contemporary versions of trade unions. And finally, there is a need for progressive, technically informed policy proposals, and the fostering of thinktanks and other institutions that can supply a steady flow of ideas about how digital technology can be repurposed for human flourishing rather than exclusively for private profit.
None of this is rocket science. It can be done. And it needs to be done if liberal democracies are to survive the next wave of technological evolution and the catastrophic acceleration of inequality that it will bring. So – who knows? Maybe this time we might really learn something from history.
Showing posts with label destruction. Show all posts
Showing posts with label destruction. Show all posts
Sunday 7 May 2023
Sunday 10 September 2017
After Irma, let those who use our tax havens contribute to the repairs
The Caribbean poor might have been devastated by disaster, but their islands also host huge global wealth
Mariana Mazzucato in The Guardian
Did you see the image of Richard Branson, hiding with his friends and family in his expensive wine cellar on his private Caribbean island, tweeting that it felt like a fun slumber party from his youth? This while Hurricane Irma tore through the houses and lives of others in the region, offering a stark illustration of the way so-called natural events affect people of different socioeconomic classes in radically different ways.
Architects and urban planners call this “spatial inequality”. People living close to each other, whether in New York, London or on a Caribbean island, will experience life completely differently depending on the resources and opportunities they have available to them, determined principally by their economic and class background.
Mariana Mazzucato in The Guardian
Did you see the image of Richard Branson, hiding with his friends and family in his expensive wine cellar on his private Caribbean island, tweeting that it felt like a fun slumber party from his youth? This while Hurricane Irma tore through the houses and lives of others in the region, offering a stark illustration of the way so-called natural events affect people of different socioeconomic classes in radically different ways.
Architects and urban planners call this “spatial inequality”. People living close to each other, whether in New York, London or on a Caribbean island, will experience life completely differently depending on the resources and opportunities they have available to them, determined principally by their economic and class background.
Indeed, modern inequality increasingly reveals itself through the divergence of income and opportunities at a local level: the inequality between people living across London postcodes can be almost as large as those between average incomes in developed and developing countries. So a “natural” disaster (worsened by climate change factors) becomes a socioeconomic one, in the same way that the banking crisis, a manmade disaster, affected people differently.
Last week, after Hurricane Irma stormed the Caribbean, Gaston Browne, the prime minister of Antigua and Barbuda, appealed to the world, saying that 90% of buildings had been destroyed and 50% of the population was homeless. He criticised those “irresponsible leaders” denying climate change, when it was obvious to him that it was a key factor in the severity of the recent hurricanes. Now a second hurricane, Jose, is coming his way and he is trying to force residents of Barbuda to evacuate. Similarly, the French part of Saint Martin has been virtually destroyed, while two-thirds of the population of Puerto Rico is without power and 17% without water. Although it was slow to respond, the UK government has contributed £12m to the relief effort in the Caribbean, including a naval ship.
Browne called me in 2016 because he had read my book, The Entrepreneurial State, and wanted to know more about the various instruments that might be used to get back some value from investments that the Antigua and Barbuda government had made in the tourism industry. And would it be possible, he asked, for such future public investments to be conditional on the tourism industry ploughing back profits into public funds used for development? In this way, the taxpayers who propped up tourism could also benefit from reinvestments into areas such as health, education and transport for all.
While some may cynically dismiss this question, raising concerns about corruption of public finances in poor countries, the question Browne asked, even before the hurricane hit, was a good one: how should those extracting value from a place contribute to it?
But the questions are complicated and perhaps even uncomfortable for those asking them. The relief efforts needed are larger than they should be due to how these countries have been starved of tax revenue precisely because they have chosen to be tax havens.
The simpler question is to ask those “elites” who save billions by using tax shelters in the Caribbean, and the Big 4 accounting firms that enable their transactions, to contribute to the relief funds. The more difficult question is how to change the status quo and make sure that these companies actually contribute to the resources they take advantage of, both at home and abroad.
It’s more difficult because it requires admitting that the governments offering tax shelters, which today might be appealing for relief, are also extracting value from the governments of the foreign companies they host. So, for example, the UK taxpayers pay for infrastructure and education in the UK. British-based companies benefit from that. If they then benefit from havens to avoid paying tax to the UK, the tax shelters are, of course, a key part of the problem.
Clearly, a priority should be for companies, operating in countries offering tax havens in British Overseas Territories and the Commonwealth (or, indeed, elsewhere, such as Switzerland or Monte Carlo), to be more transparent. As argued by the Tax Justice Network, this would mean that countries in the Overseas Territories should “provide free, online and publicly accessible registers of all companies and trusts” located there.
In particular, it argues that this information should include which individuals own more than 10% of the shares in each company registered in the location; the names of the directors and the various locations where the companies have offices. The Network also argues that the cost of UK aid should be matched by revenue from the companies benefiting from the tax shelters and that full annual accounts should be prepared in accordance with a recognisable set of accounting standards. A modest proposal would be for the countries to raise money from the companies by increasing, for example, the charges they make for offshore services, or by charging tax on the companies based in these places.
But if the whole point was to avoid tax, would this cause the companies to leave? This gets us to the core of the problem. It is impossible to have real growth, and a reduction in inequality, through policies that are in the end just part of what we might call the “global value extraction business”. The real questions are exactly those that Browne asked me.
Governments need to make critical investments that transform their societies in ways that create capacity, knowledge and long-run growth. This will be expensive, but possible, if arrangements are put in place so that those benefiting from the common resources also plough their profits back into those very resources. This, however, requires moving away from the “us v them” mentality and recognising that the problem rests just as much on the forces causing inequality at home as on the tensions between the rich and poor countries. It’s more than just an argument about who has to pick up the bill for the mess, disaster after disaster.
Last week, after Hurricane Irma stormed the Caribbean, Gaston Browne, the prime minister of Antigua and Barbuda, appealed to the world, saying that 90% of buildings had been destroyed and 50% of the population was homeless. He criticised those “irresponsible leaders” denying climate change, when it was obvious to him that it was a key factor in the severity of the recent hurricanes. Now a second hurricane, Jose, is coming his way and he is trying to force residents of Barbuda to evacuate. Similarly, the French part of Saint Martin has been virtually destroyed, while two-thirds of the population of Puerto Rico is without power and 17% without water. Although it was slow to respond, the UK government has contributed £12m to the relief effort in the Caribbean, including a naval ship.
Browne called me in 2016 because he had read my book, The Entrepreneurial State, and wanted to know more about the various instruments that might be used to get back some value from investments that the Antigua and Barbuda government had made in the tourism industry. And would it be possible, he asked, for such future public investments to be conditional on the tourism industry ploughing back profits into public funds used for development? In this way, the taxpayers who propped up tourism could also benefit from reinvestments into areas such as health, education and transport for all.
While some may cynically dismiss this question, raising concerns about corruption of public finances in poor countries, the question Browne asked, even before the hurricane hit, was a good one: how should those extracting value from a place contribute to it?
But the questions are complicated and perhaps even uncomfortable for those asking them. The relief efforts needed are larger than they should be due to how these countries have been starved of tax revenue precisely because they have chosen to be tax havens.
The simpler question is to ask those “elites” who save billions by using tax shelters in the Caribbean, and the Big 4 accounting firms that enable their transactions, to contribute to the relief funds. The more difficult question is how to change the status quo and make sure that these companies actually contribute to the resources they take advantage of, both at home and abroad.
It’s more difficult because it requires admitting that the governments offering tax shelters, which today might be appealing for relief, are also extracting value from the governments of the foreign companies they host. So, for example, the UK taxpayers pay for infrastructure and education in the UK. British-based companies benefit from that. If they then benefit from havens to avoid paying tax to the UK, the tax shelters are, of course, a key part of the problem.
Clearly, a priority should be for companies, operating in countries offering tax havens in British Overseas Territories and the Commonwealth (or, indeed, elsewhere, such as Switzerland or Monte Carlo), to be more transparent. As argued by the Tax Justice Network, this would mean that countries in the Overseas Territories should “provide free, online and publicly accessible registers of all companies and trusts” located there.
In particular, it argues that this information should include which individuals own more than 10% of the shares in each company registered in the location; the names of the directors and the various locations where the companies have offices. The Network also argues that the cost of UK aid should be matched by revenue from the companies benefiting from the tax shelters and that full annual accounts should be prepared in accordance with a recognisable set of accounting standards. A modest proposal would be for the countries to raise money from the companies by increasing, for example, the charges they make for offshore services, or by charging tax on the companies based in these places.
But if the whole point was to avoid tax, would this cause the companies to leave? This gets us to the core of the problem. It is impossible to have real growth, and a reduction in inequality, through policies that are in the end just part of what we might call the “global value extraction business”. The real questions are exactly those that Browne asked me.
Governments need to make critical investments that transform their societies in ways that create capacity, knowledge and long-run growth. This will be expensive, but possible, if arrangements are put in place so that those benefiting from the common resources also plough their profits back into those very resources. This, however, requires moving away from the “us v them” mentality and recognising that the problem rests just as much on the forces causing inequality at home as on the tensions between the rich and poor countries. It’s more than just an argument about who has to pick up the bill for the mess, disaster after disaster.
Wednesday 3 May 2017
Calling true conservatives: stop the fake ones from destroying Britain
George Monbiot in The Guardian
Conservatism takes three main forms. Inclusive conservatism seeks to protect objects of value for the benefit of everyone. These might include great urban vistas, or national parks, or wildlife, or works of art, or great institutions, such as the NHS and the BBC. This is the conservatism governments invoke when a nation goes to war.
Exclusive conservatism, by contrast, resists change that would assist the great majority, on behalf of a privileged elite. This is the form – fighting the universal franchise, workers’ rights, progressive taxation and the welfare state – that has prevailed in the United Kingdom for most of its history.
Then there is a third form, which calls itself conservatism but is nothing of the kind: tearing down everything to clear a path for capital. This is the form that prevails today in Britain, in the United States and across much of the world. Its mission is the destruction of the norms, the values, the institutions, the public properties and the public protections that impede the scope for profit-taking.
Capital knows only the future, never the past. It rushes towards the prospect of future gains. All that lies in its path must be swept away, regardless of the value people might attach to it. Modern conservative governments see their mission as facilitating this process. If Theresa May’s government is re-elected, its opportunities for doing so will exceed those that Donald Trump is discovering in America.
The reason is as follows. In converting European law into UK law through the so-called great repeal bill, the government will grant itself the power, as its white paper states, “to correct the statute book where necessary”. “Correcting the statute book” will come to be seen as one of the great political euphemisms of our time.
The corrections will take the form of secondary legislation, which means using something called a statutory instrument. The government estimates that 800 to 1,000 of these instruments will be required – on top of the usual total – and their impact will be profound, as they are dealing with huge issues. In practice, there is almost nothing parliament can do to challenge them. As the Brexit analyst Ian Dunt points out, the bill is “shaping up to be the single biggest executive power grab in Britain’s postwar history”.
Protesters are removed from Solsbury Hill in 1994, to allow the Batheaston bypass to be built. Photograph: Adrian Arbib
Statutory instruments cannot be amended. Due to a combination of government control over the parliamentary timetable and a number of arcane and archaic procedures, hardly any have been blocked in the 70 years of their existence. Already their power is freely abused. They are supposed to be reserved for technical matters: straightening out laws in ways that don’t alter our relationship to the state. Increasingly, they are used to sneak more significant changes through parliament. As the journalist Jane Fae reports, 1,900 a year were used, on average, by the last Labour government (a high enough number, which probably incorporated plenty of abuses); under the Conservatives this has risen to more than 3,000.
After promising “an outright ban” on fracking under national parks, David Cameron’s government reversed the promise by smuggling a statutory instrument through parliament. This is likely to set the pattern, in a new Conservative government, for “correcting the statute book”, not least because, May’s administration explains, parliamentary scrutiny will have to be “balanced” by “the speed of this process”. Dunt observes that “nearly half a century of workers’ rights, environmental standards, health and safety laws, consumer protections, animal rights, and countless other areas are now at the mercy of Conservative ministers, who can use a rainy Friday afternoon, when everyone is down the pub, to finally start rubbing out bits of law they never liked”.
The promise of Brexit was that we would regain sovereignty over our affairs. But May’s plans will achieve the opposite. Sovereignty will reside in the executive, while parliamentary scrutiny is curtailed. Nothing will be safe from what modern conservatives gleefully describe as creative destruction.
We can see where this is going. The billionaire press pours scorn on environmental and workplace legislation. The National Farmers’ Union, in its election lobbying document, demands that the neonicotinoid pesticides linked to the wiping out of bees and other wildlife – and currently banned by EU law – can be used here again. The government sees planning laws and wildlife havens as impediments to business. It uses every possible excuse not to act on air pollution: any concession must be extracted with the pickaxe of European law. Prominent Conservatives ridicule those who try to protect the character and charms of the nation as “the Green Blob”.
In pursuit of ever closer union with Trump’s America, the government is likely to offer up any national standards and peculiarities it deems necessary to secure a trade deal. This is why it chose as trade secretary Liam Fox, who represents in its purest form the Conservative urge to smash the crockery.
I remember being struck by the thought – when lying with a group of dreadlocked anarchists at the foot of an iron age hill fort in 1994, in the path of an earth movercommissioned by John Major’s government – that we were the conservatives and they were the destructives. We were seeking to defend the fabric of the nation while they, with their road schemes joining the dots between scheduled ancient monuments, chalk downlands, water meadows and woodlands, were trying to pulp it. They claimed to be patriots, but we loved this country more than they did.
There is no incompatibility between an inclusive conservatism and the defence of public investment, public services, workers’ rights, gender equality and the interests of ethnic minorities. Indeed, I find it hard to see how anyone can love people without also loving the living world that gave rise to us, or can love our civilisation without loving what remains of those that came before.
If Theresa May wins, hers will not be a normal Conservative government, even by the weird and ever-shifting standards of 21st century normality. Through the powers she grants herself, it threatens to become a maelstrom of destruction on behalf of the party’s funders and associates. Unlikely as our prospects are, we must do all we can to stop her from regaining office. Conservatives arise, and defend your country from those who abuse your name.
Friday 9 December 2016
Wolfgang Streeck: the German economist calling time on capitalism
Aditya Chakrabortty in The Guardian
Decadence… Caravaggio’s Boy Bitten by a Lizard. Photograph: The National Gallery London
You don’t merely look at a Caravaggio; you square up to one. The scenes are tightly cropped, with characters that jostle and stare at the viewer. Their mordancy is a tonic to Streeck, who laughs with delight. He pauses in front of Boy Bitten by a Lizard and admires how the lizard clings on with its teeth to the boy’s finger. At a scene of cardsharps he exclaims, “Feel the decadence! The threat of violence!”
He notes how many paintings date from just before the thirty years’ war: “They’re full of the anticipation that the world is about to fall apart.”
Then comes The Taking of Christ, a dark, dense painting that shows Jesus just after his betrayal by Judas. Gripped by his treacherous former disciple, Christ looks down, ready to be bundled off by the armoured Roman centurions. “Caravaggio is always there just before the explosion,” Streeck observes. “This morning might have been a Caravaggio moment: just before the election of Trump.”
Like Caravaggio before the explosion, Streeck has been hanging around this crash scene for years – long before the plane came hurtling down and the centrist politicians and pundits began rushing around.
At a time when macroeconomists have failed and other academics have retreated into disciplinary solipsism, Streeck is one of the few (other exceptions include Mark Blyth, Colin Crouch and the Centre for Research on Socio-Cultural Change) to have risen to the moment. Many of the themes that will define this year, this decade, are in his work. The breakup of Europe, the rise of plutocrat-populists such as Trump, the failures of Mark Carney and the technocratic elite: he has anatomised all of them.
Why should oligarchs be interested in their countries’ democratic stability if, apparently, they can be rich without it?
This summer, Britons mutinied against their government, their experts and the EU – and consigned themselves to a poorer, angrier future. Such frenzies of collective self-harm were explained by Streeck in the 2012 lectures later collected in Buying Time:
Professionalised political science tends to underestimate the impact of moral outrage. With its penchant for studied indifference … [it] has nothing but elitist contempt for what it calls “populism”, sharing this with the power elites to which it would like to be close … [But] citizens too can “panic” and react “irrationally”, just like financial investors … even though they have no banknotes as arguments but only words and (who knows?) paving stones.
Here he is in 2013, foreshadowing the world of LuxLeaks, SwissLeaks and the Panama Papers and their revelations of a one-sided class war – by the 1% against the rest of us:
Why should the new oligarchs be interested in their countries’ future productive capacities and present democratic stability if, apparently, they can be rich without it, processing back and forth the synthetic money produced for them at no cost by a central bank for which the sky is the limit, at each stage diverting from it hefty fees and unprecedented salaries, bonuses, and profits as long as it is forthcoming – and then leave their country to its remaining devices and withdraw to some privately owned island?
And in a 2015 essay, he warns that resentment against such elites will not be wholesomely Fabian but will instead take the form either of “public entertainment” or “some politically regressive sort of nationalism”. It will look less like Hillary than Donald:
Politicization is migrating to the right side of the political spectrum where anti-establishment parties are getting better and better at organising discontented citizens dependent upon public services and insisting on political protection from international markets.
In such long, precise, comfortless sentences, Streeck sets out the crises facing Britain, the US and the continent. His diagnosis is both political and economic, and it makes him what Chris Bickerton, a lecturer in politics at Cambridge, thinks might be “the most interesting person around today on the subject of the relationship between democracy and capitalism”.
Lehman Brothers headquarters in New York’s Times Square, 2008. Photograph: Mark Lennihan/AP
Which makes him the most interesting person on the most urgent subject of our times. Eight years after Lehman Brothers keeled over and nearly took the entire banking system down with it, capitalism remains broken. British workers are suffering their most severe pay squeeze in at least seven decades. And even though politicians and the policymakers have pulled on every lever – cuts, investment, housing boom, hundreds of billions pumped into the markets – still the engine refuses to purr. The failure is international: the Bank of International Settlements, the central banks’ central bank, warned a few months ago that “the global economy seems unable to return to sustainable and balanced growth”.
Not for the first time, the sandwich board-wearers are declaring the end of capitalism – but today Streeck believes they are right. In its deepest crises, he says, modern capitalism has relied on its enemies to wade in with the lifebelt of reform. During the Great Depression of the 30s, it was FDR’s Democrats who rolled out the New Deal, while Britain’s trade unionists allied with Keynes.
Compare that with now. Over 40 years, neoliberal capitalism has destroyed its opposition. When Margaret Thatcher was asked to give her greatest achievement, she nominated “Tony Blair and New Labour. We forced our opponents to change their minds.” The prime minister who declared “There is no alternative”, then did her damnedest to extirpate any such alternative. The result? The unions are withered, the independent tenants’ associations have disappeared along with the stock of council housing, the BBC is forever on the back foot, and local, regional and national newspapers are now the regular subjects of obituaries. A similar story can be told across the rich world.
Public discontent is fitful and fragmented, ready to fall into Trump’s tiny hands. Meanwhile, capitalism – unrestrained and unreformed – will die.
This isn’t the violent overthrow envisaged by Marx and Engels. In The Communist Manifesto, they argued that capitalism’s “gravediggers” would be the proletariat. Nearly 170 years later, Streeck is predicting that the capitalists will be their own gravediggers, through having destroyed the workers and the dissidents they needed to maintain the system. What comes next is not some better replacement but is more akin to the centuries-long rotting away of the Roman empire.
And, yes, his latest book is out just in time for Christmas. Not so long ago, such catastrophism would have been the stuff of Speakers’ Corner. Today, it goes right to the brokenness of politics.
Streeck is admired by the team around Jeremy Corbyn and John McDonnell, and was invited to this year’s Labour conference in Liverpool (work commitments forced him to decline). One senior adviser described his relevance to British politics thus: “He is pretty blunt about how serious the situation is, for social democracy and capitalism.”
That we could modify capitalism towards equality and tame the beast – now those are utopian ideals
What gives Streeck’s analysis extra force is that he comes from the very establishment he now attacks. He has played many key roles: joint head of Germany’s top social science institute, an adviser in the late 90s to Gerhard Schröder’s government, one of Europe’s most eminent theorists of capitalism. While never a Third Way-er, he was friendly with David and Ed Miliband.
“I spent a long time in my life exploring the possibilities for an intelligent social democratic solution of the class conflict,” he explains over lunch. “The idea that we could modify capitalism towards equality and social justice. That we could tame the beast. Now I think those are more or less utopian ideals.”
He is thus a case study in the very thing he writes about: the demoralisation of centrist politics – and its radicalisation.
The great disillusionment came upon returning to Germany in 1995, after years teaching industrial relations in the US. It was the era of Germany being labelled “the sick man of Europe”, when one in five east German workers were unemployed. Through the metalworkers’ trade union, Streeck was invited to join a committee of trade unions, employers and government. Called the Alliance for Jobs (Bündnis für Arbeit), its task was to reform labour laws. Streeck believed this was “the last call for trade unions and social democracy”: the final chance to get more people into work without stripping workers of their rights.
“We came up with a good model, but everything we proposed was blocked – not just by the employers but by the unions, too.”
The Alliance fell apart and within a couple of years, Schr̦der had brought in the Hartz reforms Рpolicies drawn up by a former Volkswagen executive that set up a new regime of workfare and benefit sanctions, and kicked the bottom out of the labour market.
A member of the Social Democratic Party, Germany’s counterpart to Labour, since the age of 16, Streeck finally cancelled his subs a few years ago. Would he still place himself as a social democrat? He quotes Keynes: “When the facts change, I change my mind.” In another interview he has described “the most urgent task for the left” as “sobering up”.
The constant sobriety might prove wearing, were it not for his easy companionship. Listening back to the recording, the primary sound is Streeck’s laughter – that and “Jajaja!”, a Bren gun enthusiasm for any new idea or argument.
He also gives good gossip. A “power breakfast” with financial policymakers and investment bankers is dismissed as “clueless and so stereoptypical. They complained about the stupidity of the masses who didn’t understand the expertise that someone like Alan Greenspan was able to bring to central banking.” This is the same Greenspan who, as head of the US central bank in the bubble years, believed financiers could regulate themselves.
On this trip he went to a conference on Brexit. “I was shocked by the unanimous sense of guilt.” One former British ambassador “began by saying we have to apologise to our foreign friends for the vote to leave Europe. I said, ‘You ought to be happy to have sent a warning to the European Union.’”
He sees the support for Brexit and Trump as stemming from the same source. “You have a growing group of all people, who, under the impact of neoliberal internationalisation, have become increasingly excluded from the mainstream of their society.
Visions of London wealth … Canary wharf financial district. Photograph: DBURKE / Alamy/Alamy
“You look out here,” He gestures out of the windows of the National Gallery, at the domes and columns of Trafalgar Square, “And it’s a second Rome. You walk through the streets at night and you say, ‘My God, yes: this is what an empire looks like’.” This is the land of what Streeck calls the Marktsvolk – literally, the people of the market, the club-class financiers and executives, the asset-owning winners of globalisation.
But this space – geographic, economic, political – is off-limits to the Staatsvolk: the ones who fly yearly on holiday rather than weekly on business, the downsized, the indebted losers of neoliberalism. “These people are being driven out of London. In French cities it’s the same thing. This both reinforces them as a political power structure, and puts them completely on the defensive. But one thing they do know is that conventional politics has totally written them off.” Social democrats such as the outgoing Italian prime minister Matteo Renzi are guilty, too. “They’re on the side of the winners.”
International flows of people, money and goods: Streeck accepts the need for all these – “but in some sort of directed, governable way. It has to be, otherwise societies dissolve”.
Those views on immigration landed him in another fight this summer, when he wrote an essay attacking Angela Merkel for her open-door policy towards refugees from Syria and elsewhere. It was a “ploy”, he said, to import tens of thousands of cheap workers and thus allow German employers to bring down wages. Colleagues accused him of spinning a “neoliberal conspiracy” theory and of giving cover to Germany’s far right. Streeck’s defence is simple: “It is impossible to protect wages against an unlimited labour supply. Does saying that make me some proto-fascist?”
What gives this back-and-forth a twist is the little-known fact that Streeck is himself the child of refugees. Both 25 years old when the second world war ended, his parents were among the 12 million displaced people to arrive from eastern Europe in West Germany. Streeck was born just outside Münster in a room requisitioned by the state from a shoemaker. His parents were poor. “I remember they stole vegetables from the fields and coal from passing trains.”
His mother was a Sudeten German in Czechoslovakia, who was given 24 hours’ notice to leave when the war ended, taking only what she could carry. After Streeck left home she began to study the Czech language. “It was a sense of ‘If I can’t go back there I at least want to speak the language of those people who now live where I used to’.”
Her son went to a grammar school founded by Martin Luther, where he was taught Greek and Latin and expected to become a theologian. Instead, he fell in with the then-illegal Communist party. Aged 16, he was in charge of organising the reading circle – “suppressed literature such as the Communist Manifesto and Rosa Luxemburg” – and held it at the local employers’ association “because no one would ever suspect”.
In 1968, he was a student radical at Frankfurt, “but I never had any truck with the ‘marijuana left’. I felt closer to the working class than to the pot-smoking classes”.
Now he lives with his wife in part of a farmyard of a castle in Brühl, a small town just outside Cologne. The retiree is still up by six every morning and at his desk for 8.30. “I have learned to write only till 1pm. After that I give myself over to academic intrigues.” And to novels: when we meet, he is reading I Hate the Internet, by Jarett Kobek, a Silicon Valley engineer who claims that the internet has “fucked up” his life.
After lunch, we cross the Thames to King’s College where Streeck is to deliver a lecture. There is more gossip, this time about Greek politics and the hollowing out of the Syriza government. As teenagers, Streeck’s class travelled to Greece to look at antiquities. Instead, he began reading local newspapers on the king’s attempts to chuck out prime minister Georgios Papandreou. “I wrote a report in the school newspaper that was almost entirely concerned with the emerging military dictatorship.” Sixty years later, he is working on a book about democracy in southern Europe.
The lecture room is packed, students spread across the floor and peering around the wall at Streeck, absent-mindedly playing with a paperclip and quoting Gramsci: “The old is dying and the new cannot be born. [pause] In this interregnum a great variety of morbid symptoms can appear.” In the lecture’s interval, a variety of students buy his books and hover about for him to sign them. At the end, a student asks: “what should the left do?”
Occupy protest in Frankfurt, 2011. Photograph: Arne Dedert/EPA
It is the same question I’d put a few hours earlier. Both times, Streeck warns he is about to disappoint us. To me he cites an Occupy protest in Frankfurt. Days before that, he says, thousands of police were deployed to Germany’s capital of finance. “The authorities were scared shitless. I think more such scariness must happen. They must learn that in order to keep people quiet they need extraordinary effort.”
No mention of ballot boxes; nor of any need for a bigger vision “because the others don’t have a blueprint”.
But, I say, Nigel Farage and the rest are at least pretending to have an answer.
“And we should criticise them.” The press always talks of a lack of business confidence, he says; now is the time for the voters to demonstrate a lack of public confidence.
The analogy doesn’t work and, listening back to the tape, I can hear agitation in my voice. A businessperson can go on an investment strike; he or she can hoard cash. Even if voters sat out an election, they would still face the consequences. Muslim mums would get their headscarves ripped off, a Polish man could get stabbed to death for going in the wrong kebab shop.
In a phone call a couple of weeks later, I press Streeck again. “If I look 10 or 20 years out, I don’t like what I see,” he says. Nor is he alone: he quotes a new book by the former head of the Bank of England, Mervyn King, and his projection of “great uncertainty” ahead.
But doesn’t he want something better than a new dark ages for his grandchildren? “If I am honest, now I am thankful for every passing year that is good and peaceful. And I hope for another one. Very short-term, I know, but those are my horizons.”
Outside was panic. Barely a couple of hours after Donald Trump had been declared the next president of the United States and even the political columnists, those sleek interlocutors of power, were in shock. At the National Gallery in London, however, one of the few thinkers to have anticipated Trump’s rise was ready to see some paintings. Over from Germany for a few days of lectures, Wolfgang Streeck had an afternoon spare – and we both wanted to see the Beyond Caravaggio exhibition.
Nothing in his work prepares you for meeting Streeck (pronounced Stray-k). Professionally, he is the political economist barking last orders for our way of life, and warning of the “dark ages” ahead. His books bear bluntly fin-de-siecle titles: two years ago was Buying Time, while the latest is called How Will Capitalism End?(spoiler: not well). Even his admirers talk of his “despair”, by which they mean sentences such as this: “Before capitalism will go to hell, it will for the foreseeable future hang in limbo, dead or about to die from an overdose of itself but still very much around, as nobody will have the power to move its decaying body out of the way.”
What does such gloom look like in the flesh? Small glasses, neat side parting and moustache, a backpack, a smart anorak and at least a decade younger than his 70 years. Alluding to Trump’s victory, he cheerily declares “What a morning!” as if discussing the likelihood of rain, then strolls into the gallery.
Nothing in his work prepares you for meeting Streeck (pronounced Stray-k). Professionally, he is the political economist barking last orders for our way of life, and warning of the “dark ages” ahead. His books bear bluntly fin-de-siecle titles: two years ago was Buying Time, while the latest is called How Will Capitalism End?(spoiler: not well). Even his admirers talk of his “despair”, by which they mean sentences such as this: “Before capitalism will go to hell, it will for the foreseeable future hang in limbo, dead or about to die from an overdose of itself but still very much around, as nobody will have the power to move its decaying body out of the way.”
What does such gloom look like in the flesh? Small glasses, neat side parting and moustache, a backpack, a smart anorak and at least a decade younger than his 70 years. Alluding to Trump’s victory, he cheerily declares “What a morning!” as if discussing the likelihood of rain, then strolls into the gallery.
Decadence… Caravaggio’s Boy Bitten by a Lizard. Photograph: The National Gallery London
You don’t merely look at a Caravaggio; you square up to one. The scenes are tightly cropped, with characters that jostle and stare at the viewer. Their mordancy is a tonic to Streeck, who laughs with delight. He pauses in front of Boy Bitten by a Lizard and admires how the lizard clings on with its teeth to the boy’s finger. At a scene of cardsharps he exclaims, “Feel the decadence! The threat of violence!”
He notes how many paintings date from just before the thirty years’ war: “They’re full of the anticipation that the world is about to fall apart.”
Then comes The Taking of Christ, a dark, dense painting that shows Jesus just after his betrayal by Judas. Gripped by his treacherous former disciple, Christ looks down, ready to be bundled off by the armoured Roman centurions. “Caravaggio is always there just before the explosion,” Streeck observes. “This morning might have been a Caravaggio moment: just before the election of Trump.”
Like Caravaggio before the explosion, Streeck has been hanging around this crash scene for years – long before the plane came hurtling down and the centrist politicians and pundits began rushing around.
At a time when macroeconomists have failed and other academics have retreated into disciplinary solipsism, Streeck is one of the few (other exceptions include Mark Blyth, Colin Crouch and the Centre for Research on Socio-Cultural Change) to have risen to the moment. Many of the themes that will define this year, this decade, are in his work. The breakup of Europe, the rise of plutocrat-populists such as Trump, the failures of Mark Carney and the technocratic elite: he has anatomised all of them.
Why should oligarchs be interested in their countries’ democratic stability if, apparently, they can be rich without it?
This summer, Britons mutinied against their government, their experts and the EU – and consigned themselves to a poorer, angrier future. Such frenzies of collective self-harm were explained by Streeck in the 2012 lectures later collected in Buying Time:
Professionalised political science tends to underestimate the impact of moral outrage. With its penchant for studied indifference … [it] has nothing but elitist contempt for what it calls “populism”, sharing this with the power elites to which it would like to be close … [But] citizens too can “panic” and react “irrationally”, just like financial investors … even though they have no banknotes as arguments but only words and (who knows?) paving stones.
Here he is in 2013, foreshadowing the world of LuxLeaks, SwissLeaks and the Panama Papers and their revelations of a one-sided class war – by the 1% against the rest of us:
Why should the new oligarchs be interested in their countries’ future productive capacities and present democratic stability if, apparently, they can be rich without it, processing back and forth the synthetic money produced for them at no cost by a central bank for which the sky is the limit, at each stage diverting from it hefty fees and unprecedented salaries, bonuses, and profits as long as it is forthcoming – and then leave their country to its remaining devices and withdraw to some privately owned island?
And in a 2015 essay, he warns that resentment against such elites will not be wholesomely Fabian but will instead take the form either of “public entertainment” or “some politically regressive sort of nationalism”. It will look less like Hillary than Donald:
Politicization is migrating to the right side of the political spectrum where anti-establishment parties are getting better and better at organising discontented citizens dependent upon public services and insisting on political protection from international markets.
In such long, precise, comfortless sentences, Streeck sets out the crises facing Britain, the US and the continent. His diagnosis is both political and economic, and it makes him what Chris Bickerton, a lecturer in politics at Cambridge, thinks might be “the most interesting person around today on the subject of the relationship between democracy and capitalism”.
Lehman Brothers headquarters in New York’s Times Square, 2008. Photograph: Mark Lennihan/AP
Which makes him the most interesting person on the most urgent subject of our times. Eight years after Lehman Brothers keeled over and nearly took the entire banking system down with it, capitalism remains broken. British workers are suffering their most severe pay squeeze in at least seven decades. And even though politicians and the policymakers have pulled on every lever – cuts, investment, housing boom, hundreds of billions pumped into the markets – still the engine refuses to purr. The failure is international: the Bank of International Settlements, the central banks’ central bank, warned a few months ago that “the global economy seems unable to return to sustainable and balanced growth”.
Not for the first time, the sandwich board-wearers are declaring the end of capitalism – but today Streeck believes they are right. In its deepest crises, he says, modern capitalism has relied on its enemies to wade in with the lifebelt of reform. During the Great Depression of the 30s, it was FDR’s Democrats who rolled out the New Deal, while Britain’s trade unionists allied with Keynes.
Compare that with now. Over 40 years, neoliberal capitalism has destroyed its opposition. When Margaret Thatcher was asked to give her greatest achievement, she nominated “Tony Blair and New Labour. We forced our opponents to change their minds.” The prime minister who declared “There is no alternative”, then did her damnedest to extirpate any such alternative. The result? The unions are withered, the independent tenants’ associations have disappeared along with the stock of council housing, the BBC is forever on the back foot, and local, regional and national newspapers are now the regular subjects of obituaries. A similar story can be told across the rich world.
Public discontent is fitful and fragmented, ready to fall into Trump’s tiny hands. Meanwhile, capitalism – unrestrained and unreformed – will die.
This isn’t the violent overthrow envisaged by Marx and Engels. In The Communist Manifesto, they argued that capitalism’s “gravediggers” would be the proletariat. Nearly 170 years later, Streeck is predicting that the capitalists will be their own gravediggers, through having destroyed the workers and the dissidents they needed to maintain the system. What comes next is not some better replacement but is more akin to the centuries-long rotting away of the Roman empire.
And, yes, his latest book is out just in time for Christmas. Not so long ago, such catastrophism would have been the stuff of Speakers’ Corner. Today, it goes right to the brokenness of politics.
Streeck is admired by the team around Jeremy Corbyn and John McDonnell, and was invited to this year’s Labour conference in Liverpool (work commitments forced him to decline). One senior adviser described his relevance to British politics thus: “He is pretty blunt about how serious the situation is, for social democracy and capitalism.”
That we could modify capitalism towards equality and tame the beast – now those are utopian ideals
What gives Streeck’s analysis extra force is that he comes from the very establishment he now attacks. He has played many key roles: joint head of Germany’s top social science institute, an adviser in the late 90s to Gerhard Schröder’s government, one of Europe’s most eminent theorists of capitalism. While never a Third Way-er, he was friendly with David and Ed Miliband.
“I spent a long time in my life exploring the possibilities for an intelligent social democratic solution of the class conflict,” he explains over lunch. “The idea that we could modify capitalism towards equality and social justice. That we could tame the beast. Now I think those are more or less utopian ideals.”
He is thus a case study in the very thing he writes about: the demoralisation of centrist politics – and its radicalisation.
The great disillusionment came upon returning to Germany in 1995, after years teaching industrial relations in the US. It was the era of Germany being labelled “the sick man of Europe”, when one in five east German workers were unemployed. Through the metalworkers’ trade union, Streeck was invited to join a committee of trade unions, employers and government. Called the Alliance for Jobs (Bündnis für Arbeit), its task was to reform labour laws. Streeck believed this was “the last call for trade unions and social democracy”: the final chance to get more people into work without stripping workers of their rights.
“We came up with a good model, but everything we proposed was blocked – not just by the employers but by the unions, too.”
The Alliance fell apart and within a couple of years, Schr̦der had brought in the Hartz reforms Рpolicies drawn up by a former Volkswagen executive that set up a new regime of workfare and benefit sanctions, and kicked the bottom out of the labour market.
A member of the Social Democratic Party, Germany’s counterpart to Labour, since the age of 16, Streeck finally cancelled his subs a few years ago. Would he still place himself as a social democrat? He quotes Keynes: “When the facts change, I change my mind.” In another interview he has described “the most urgent task for the left” as “sobering up”.
The constant sobriety might prove wearing, were it not for his easy companionship. Listening back to the recording, the primary sound is Streeck’s laughter – that and “Jajaja!”, a Bren gun enthusiasm for any new idea or argument.
He also gives good gossip. A “power breakfast” with financial policymakers and investment bankers is dismissed as “clueless and so stereoptypical. They complained about the stupidity of the masses who didn’t understand the expertise that someone like Alan Greenspan was able to bring to central banking.” This is the same Greenspan who, as head of the US central bank in the bubble years, believed financiers could regulate themselves.
On this trip he went to a conference on Brexit. “I was shocked by the unanimous sense of guilt.” One former British ambassador “began by saying we have to apologise to our foreign friends for the vote to leave Europe. I said, ‘You ought to be happy to have sent a warning to the European Union.’”
He sees the support for Brexit and Trump as stemming from the same source. “You have a growing group of all people, who, under the impact of neoliberal internationalisation, have become increasingly excluded from the mainstream of their society.
Visions of London wealth … Canary wharf financial district. Photograph: DBURKE / Alamy/Alamy
“You look out here,” He gestures out of the windows of the National Gallery, at the domes and columns of Trafalgar Square, “And it’s a second Rome. You walk through the streets at night and you say, ‘My God, yes: this is what an empire looks like’.” This is the land of what Streeck calls the Marktsvolk – literally, the people of the market, the club-class financiers and executives, the asset-owning winners of globalisation.
But this space – geographic, economic, political – is off-limits to the Staatsvolk: the ones who fly yearly on holiday rather than weekly on business, the downsized, the indebted losers of neoliberalism. “These people are being driven out of London. In French cities it’s the same thing. This both reinforces them as a political power structure, and puts them completely on the defensive. But one thing they do know is that conventional politics has totally written them off.” Social democrats such as the outgoing Italian prime minister Matteo Renzi are guilty, too. “They’re on the side of the winners.”
International flows of people, money and goods: Streeck accepts the need for all these – “but in some sort of directed, governable way. It has to be, otherwise societies dissolve”.
Those views on immigration landed him in another fight this summer, when he wrote an essay attacking Angela Merkel for her open-door policy towards refugees from Syria and elsewhere. It was a “ploy”, he said, to import tens of thousands of cheap workers and thus allow German employers to bring down wages. Colleagues accused him of spinning a “neoliberal conspiracy” theory and of giving cover to Germany’s far right. Streeck’s defence is simple: “It is impossible to protect wages against an unlimited labour supply. Does saying that make me some proto-fascist?”
What gives this back-and-forth a twist is the little-known fact that Streeck is himself the child of refugees. Both 25 years old when the second world war ended, his parents were among the 12 million displaced people to arrive from eastern Europe in West Germany. Streeck was born just outside Münster in a room requisitioned by the state from a shoemaker. His parents were poor. “I remember they stole vegetables from the fields and coal from passing trains.”
His mother was a Sudeten German in Czechoslovakia, who was given 24 hours’ notice to leave when the war ended, taking only what she could carry. After Streeck left home she began to study the Czech language. “It was a sense of ‘If I can’t go back there I at least want to speak the language of those people who now live where I used to’.”
Her son went to a grammar school founded by Martin Luther, where he was taught Greek and Latin and expected to become a theologian. Instead, he fell in with the then-illegal Communist party. Aged 16, he was in charge of organising the reading circle – “suppressed literature such as the Communist Manifesto and Rosa Luxemburg” – and held it at the local employers’ association “because no one would ever suspect”.
In 1968, he was a student radical at Frankfurt, “but I never had any truck with the ‘marijuana left’. I felt closer to the working class than to the pot-smoking classes”.
Now he lives with his wife in part of a farmyard of a castle in Brühl, a small town just outside Cologne. The retiree is still up by six every morning and at his desk for 8.30. “I have learned to write only till 1pm. After that I give myself over to academic intrigues.” And to novels: when we meet, he is reading I Hate the Internet, by Jarett Kobek, a Silicon Valley engineer who claims that the internet has “fucked up” his life.
After lunch, we cross the Thames to King’s College where Streeck is to deliver a lecture. There is more gossip, this time about Greek politics and the hollowing out of the Syriza government. As teenagers, Streeck’s class travelled to Greece to look at antiquities. Instead, he began reading local newspapers on the king’s attempts to chuck out prime minister Georgios Papandreou. “I wrote a report in the school newspaper that was almost entirely concerned with the emerging military dictatorship.” Sixty years later, he is working on a book about democracy in southern Europe.
The lecture room is packed, students spread across the floor and peering around the wall at Streeck, absent-mindedly playing with a paperclip and quoting Gramsci: “The old is dying and the new cannot be born. [pause] In this interregnum a great variety of morbid symptoms can appear.” In the lecture’s interval, a variety of students buy his books and hover about for him to sign them. At the end, a student asks: “what should the left do?”
Occupy protest in Frankfurt, 2011. Photograph: Arne Dedert/EPA
It is the same question I’d put a few hours earlier. Both times, Streeck warns he is about to disappoint us. To me he cites an Occupy protest in Frankfurt. Days before that, he says, thousands of police were deployed to Germany’s capital of finance. “The authorities were scared shitless. I think more such scariness must happen. They must learn that in order to keep people quiet they need extraordinary effort.”
No mention of ballot boxes; nor of any need for a bigger vision “because the others don’t have a blueprint”.
But, I say, Nigel Farage and the rest are at least pretending to have an answer.
“And we should criticise them.” The press always talks of a lack of business confidence, he says; now is the time for the voters to demonstrate a lack of public confidence.
The analogy doesn’t work and, listening back to the tape, I can hear agitation in my voice. A businessperson can go on an investment strike; he or she can hoard cash. Even if voters sat out an election, they would still face the consequences. Muslim mums would get their headscarves ripped off, a Polish man could get stabbed to death for going in the wrong kebab shop.
In a phone call a couple of weeks later, I press Streeck again. “If I look 10 or 20 years out, I don’t like what I see,” he says. Nor is he alone: he quotes a new book by the former head of the Bank of England, Mervyn King, and his projection of “great uncertainty” ahead.
But doesn’t he want something better than a new dark ages for his grandchildren? “If I am honest, now I am thankful for every passing year that is good and peaceful. And I hope for another one. Very short-term, I know, but those are my horizons.”
Tuesday 2 July 2013
Schumpeter's long revenge
By Chan Akya in Asia Times Online
News about major retail chains such as HMV and Blockbuster closing shop inevitably attract greater than usual attention because they sell media content and therefore operate on the edge of the world of entertainment. That said, the demise was fairly obvious to anyone who had read their balance sheets, which have been decimated by technological changes led essentially by Apple but more generically by the broader applications of the Internet and improved hardware.
Selling and renting films respectively, HMV and Blockbuster were a key part of all retail malls and "high" streets in the UK with similar brands in other countries including in Hong Kong and Singapore. The advent of amazon.com was the first shot across their bows; one that both chains failed to heed. As the business of selling books through bookstores evaporated in the late '90s, the retail chains selling and renting movies and music failed to make the connection between the physical world and the augmented reality shopping of the Internet.
The process was to accelerate with improved software - Apple's iTunes comes to mind - even as hardware continued to provide an underwhelming experience. The inability to bridge the quality gaps in films and music (or else apply them to an environment where more people were using crummy mobile devices for enjoying the same) simply meant that all competition ended up being about price. This was the wrong battleground and, much like Napoleon's forces marooned in the harsh Russian winter 200 years ago, the retail chains were destroyed.
Oddly enough, HMV also played a small part in the global financial crisis; one of the largest lawsuits from that era pertained to Guy Hands' private equity firm Terra Firm filing suit for misrepresentations against its banker, Citibank, over its purchase of EMI from which HMV had been spun off to a separate listing in 1998.
Although the suit was pretty quickly dismissed, opportunities for mirth abounded from the materials provided as part of the proceedings. Such large leveraged buyouts generated billions in loans that were purchased by collateralized loan obligation vehicles, which in turn were partly funded by the shadow banking system that helped to fell the global economy in 2007-08.
In any event, the various reorganization plans filed by HMV management provided fodder for private equity firms on its own; in parallel, Blockbuster went through its own interaction with the forces of competition. While the global business of Blockbuster went into administration in 2010, the company continued to operate in many parts of the world. Last week's closure of the UK business is a continuation of the global process.
The circle of stupidity
On the other end of the scale from market forces is the circle of stupidity that underpins global monetary policy today.
An industrial version of the HMV/ Blockbuster process of creative destruction is Japan, an article about which I wrote late last year, touching upon the effects of competitive landscape changes ushered in by the pincer grip of South Korea and China at the branded and generic ends of manufacturing respectively; even as sclerotic politics and inane monetary policies end up accelerating the decline. (See The end of Japan as we know it, Asia Times Online, November 27, 2012).
Following the elections, Japan's monetary policy impetus has moved into aggressive easing as the government and the Bank of Japan attempt to push the yen sharply lower by easing quantitative policy and accelerating the purchase of bonds issued by the US and European governments (the Italians and the Spanish sent a couple of "thank you" notes to the new government, presumably).
Meanwhile, other Asian countries - primarily Korea and China - are increasing their own purchase of Japanese government bonds to offset the effect of a falling yen on their own currencies. And all along, Federal Reserve chairman Ben Bernanke and European Central Bank president Mario Draghi are cheerfully printing money by the trillions to support yawning fiscal deficits and to keep their currencies from rising.
Think of the average pensioner anywhere in the Group of Eight leading industrialized nations and the picture is downright depressing. With regular income from bonds and bank accounts whittled down to barely nothing, they are being forced to take on financial risks by purchasing "high dividend" stocks or worse, corporate bonds. These are not folks who are equipped to analyze such risks, let alone manage them.
Businesses go bust when they run out of liquidity, not when they run out of "capital" or any such esoteric concept. Granted that HMV and Blockbuster were so bad that not even all the money sloshing around the global financial system could save them, but that also raises the question of how many companies and governments survive today because of the excess money sloshing around.
At the very least, we know that interest rates and risk premia are severely depressed in G-8 countries and, as a result, across much of the financial world. There are countries that would be considered borderline default where government bond spreads are trading well under 5%, an anomaly that makes no sense irrespective of the "base" funding rate. Similarly, equity markets are getting record inflows at a time when valuations aren't exactly cheap anywhere in the world.
Such conditions are usually spelt b-u-b-b-l-e; and I entirely hold Bernanke, Draghi and their kin responsible for this state of affairs. There will be time of reckoning later, but for now we will have to live with all the Keynesian rationalization.
Why is Schumpeter important
One of the key defenses used by those seeking to broaden the ambit of monetary policy whilst emptying government coffers is that corporate closures are bad form and cause disruptions for employees and other stakeholders alike. This is indeed true over the short term, but over the longer term the truth is perhaps in the opposite direction and in line with the views of Austrian economist Joseph Schumpeter on "creative destruction".
Systems that weed out inefficient capital users end up deploying funds to more deserving users thereby reducing the overall risk of the system and increasing the gap between risky and less risky ventures; this extra compensation therefore ends up attracting more robust capital - and perhaps more appropriate capital for risky ventures.
In contrast to this, folk who lend money to French companies - typically only other French folk - see their risk analysis dulled by constant government intervention and corporate subsidies (internally) to their worst divisions. When the car firm Peugeot decided to shutter some plants and fire workers recently, the howls of protest were loudest from the country's socialist government, which may however not have quite realized that by denying the company such internal efficiencies they inevitably put the firm at a longer-term disadvantage that increases the chances of a comprehensive collapse at a later date.
Investors in such countries will also be confused as to the correct risk premium for a loss-making company compared to that for a profitable company; because debt is about getting one's funds back, the question becomes academic if loss-makers are routinely bailed out. This dulls the calculation of risk, inevitably driving inappropriate funds - pension funds and the like - towards risky assets.
That is the reason why the HMV and Blockbuster stories are important. By providing a timely reminder that bad businesses will not survive even the easiest of monetary conditions, they have served to remind all of us of events likely to unfold when the price of money starts adjusting towards more appropriate levels.
Sunday 8 April 2012
Post Soviet Privatisation - A policy of mass destruction
http://www.cam.ac.uk/research/news/a-policy-of-mass-destruction/
A new analysis showing how the radical policies advocated by western economists helped to bankrupt Russia and other former Soviet countries after the Cold War has been released by researchers.
The study, led by academics at the University of Cambridge, is the first to trace a direct link between the mass privatisation programmes adopted by several former Soviet states, and the economic failure and corruption that followed.
Devised principally by western economists, mass privatisation was a radical policy to privatise rapidly large parts of the economies of countries such as Russia during the early 1990s. the policy was pushed heavily by the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development (EBRD). Its aim was to guarantee a swift transition to capitalism, before Soviet sympathisers could seize back the reins of power.
Instead of the predicted economic boom, what followed in many ex-Communist countries was a severe recession, on a par with the Great Depression of the United States and Europe in the 1930s. The reasons for economic collapse and skyrocketing poverty in Eastern Europe, however, have never been fully understood. Nor have researchers been able to explain why this happened in some countries, like Russia, but not in others, such as Estonia.
Some economists argue that mass privatisation would have worked if it had been implemented even more rapidly and extensively. Conversely, others argue that although mass privatisation was the right policy, the initial conditions were not met to make it work well. Further still, some scholars suggest that the real problem had more to do with political reform.
Writing in the new, April issue of the American Sociological Review, Lawrence King and David Stuckler from the University of Cambridge and Patrick Hamm, from Harvard University, test for the first time the idea that implementing mass privatisation was linked to worsening economic outcomes, both for individual firms, and entire economies. The more faithfully countries adopted the policy, the more they endured economic crime, corruption and economic failure. This happened, the study argues, because the policy itself undermined the state’s functioning and exposed swathes of the economy to corruption.
The report also carries a warning for the modern age: “Rapid and extensive privatisation is being promoted by some economists to resolve the current debt crises in the West and to help achieve reform in Middle Eastern and North African economies,” said King. “This paper shows that the most radical privatisation programme in history failed the countries it was meant to help. The lessons of unintended consequences in Russia suggest we should proceed with great caution when implementing untested economic reforms.”
Mass privatisation was adopted in about half of former Communist countries after the Soviet Union’s collapse. Sometimes known as “coupon privatisation”, it involved distributing vouchers to ordinary citizens which could then be redeemed as shares in national enterprises. In practice, few people understood the policy and most were desperately poor, so they sold their vouchers as quickly as possible. In countries like Russia, this enabled profiteers to buy up shares and take over large parts of the new private sector.
The researchers argue that mass privatization failed for two main reasons. First, it undermined the state by removing its revenue base – the profits from state-owned enterprises that had existed under Soviet rule – and its ability to regulate the emerging market economy. Second, mass privatization created enterprises devoid of strategic ownership and guidance by opening them up to corrupt owners who stripped assets and failed to develop their firms. “The result was a vicious cycle of a failing state and economy,” King said.
To test this hypothesis, King, Stuckler and Hamm compared the fortunes between 1990 and 2000 of 25 former Communist countries, among them states that mass-privatised and others that did not. World Bank survey data of managers from more than 3,500 firms in 24 post-communist countries was also examined.
The results show a direct and consistent link between mass privatisation, declining state fiscal revenues, and worse economic growth. Between 1990 and 2000, government spending was about 20% lower in mass privatising countries than in those which underwent a steadier form of change. This was the case even after the researchers adjusted for political reforms, other economic reforms, the presence of oil, and other initial transition conditions.
Similarly, mass privatising states experienced an average dip in GDP per capita more than 16% above that of non mass-privatising countries after the programme was implemented.
The analysis of individual firms revealed that among mass-privatising countries, firms privatised to domestic owners had greater risks of economic corruption. Private domestic companies in these countries were 78% more likely than state-owned companies to resort to barter rather than monetary transactions. This was revealed to be the case after the researchers had corrected the data for firm, market and sector characteristics, as well as the possibility that the worst performing firms were the ones privatised.
The study also revealed that such privatised firms were less likely to pay taxes – a critical factor in ensuring the failure of the policy, which western economists predicted would generate private wealth that could be taxed and ploughed back into the state. However, firms that were privatised to foreign owners were much less likely to engage in barter and accumulate tax arrears.
“Our analysis suggests that when designing economic reforms, especially aiming to develop the private sector, safeguarding government revenues and state capacity should be a priority,” the authors add. “Counting on a future burst of productivity from a restructured, private economy to compensate for declining revenues is a risky proposition.”
A new study reveals how a radical economic policy devised by western economists put former Soviet states on a road to bankruptcy and corruption.
A new analysis showing how the radical policies advocated by western economists helped to bankrupt Russia and other former Soviet countries after the Cold War has been released by researchers.
The study, led by academics at the University of Cambridge, is the first to trace a direct link between the mass privatisation programmes adopted by several former Soviet states, and the economic failure and corruption that followed.
Devised principally by western economists, mass privatisation was a radical policy to privatise rapidly large parts of the economies of countries such as Russia during the early 1990s. the policy was pushed heavily by the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development (EBRD). Its aim was to guarantee a swift transition to capitalism, before Soviet sympathisers could seize back the reins of power.
Instead of the predicted economic boom, what followed in many ex-Communist countries was a severe recession, on a par with the Great Depression of the United States and Europe in the 1930s. The reasons for economic collapse and skyrocketing poverty in Eastern Europe, however, have never been fully understood. Nor have researchers been able to explain why this happened in some countries, like Russia, but not in others, such as Estonia.
Some economists argue that mass privatisation would have worked if it had been implemented even more rapidly and extensively. Conversely, others argue that although mass privatisation was the right policy, the initial conditions were not met to make it work well. Further still, some scholars suggest that the real problem had more to do with political reform.
Writing in the new, April issue of the American Sociological Review, Lawrence King and David Stuckler from the University of Cambridge and Patrick Hamm, from Harvard University, test for the first time the idea that implementing mass privatisation was linked to worsening economic outcomes, both for individual firms, and entire economies. The more faithfully countries adopted the policy, the more they endured economic crime, corruption and economic failure. This happened, the study argues, because the policy itself undermined the state’s functioning and exposed swathes of the economy to corruption.
The report also carries a warning for the modern age: “Rapid and extensive privatisation is being promoted by some economists to resolve the current debt crises in the West and to help achieve reform in Middle Eastern and North African economies,” said King. “This paper shows that the most radical privatisation programme in history failed the countries it was meant to help. The lessons of unintended consequences in Russia suggest we should proceed with great caution when implementing untested economic reforms.”
Mass privatisation was adopted in about half of former Communist countries after the Soviet Union’s collapse. Sometimes known as “coupon privatisation”, it involved distributing vouchers to ordinary citizens which could then be redeemed as shares in national enterprises. In practice, few people understood the policy and most were desperately poor, so they sold their vouchers as quickly as possible. In countries like Russia, this enabled profiteers to buy up shares and take over large parts of the new private sector.
The researchers argue that mass privatization failed for two main reasons. First, it undermined the state by removing its revenue base – the profits from state-owned enterprises that had existed under Soviet rule – and its ability to regulate the emerging market economy. Second, mass privatization created enterprises devoid of strategic ownership and guidance by opening them up to corrupt owners who stripped assets and failed to develop their firms. “The result was a vicious cycle of a failing state and economy,” King said.
To test this hypothesis, King, Stuckler and Hamm compared the fortunes between 1990 and 2000 of 25 former Communist countries, among them states that mass-privatised and others that did not. World Bank survey data of managers from more than 3,500 firms in 24 post-communist countries was also examined.
The results show a direct and consistent link between mass privatisation, declining state fiscal revenues, and worse economic growth. Between 1990 and 2000, government spending was about 20% lower in mass privatising countries than in those which underwent a steadier form of change. This was the case even after the researchers adjusted for political reforms, other economic reforms, the presence of oil, and other initial transition conditions.
Similarly, mass privatising states experienced an average dip in GDP per capita more than 16% above that of non mass-privatising countries after the programme was implemented.
The analysis of individual firms revealed that among mass-privatising countries, firms privatised to domestic owners had greater risks of economic corruption. Private domestic companies in these countries were 78% more likely than state-owned companies to resort to barter rather than monetary transactions. This was revealed to be the case after the researchers had corrected the data for firm, market and sector characteristics, as well as the possibility that the worst performing firms were the ones privatised.
The study also revealed that such privatised firms were less likely to pay taxes – a critical factor in ensuring the failure of the policy, which western economists predicted would generate private wealth that could be taxed and ploughed back into the state. However, firms that were privatised to foreign owners were much less likely to engage in barter and accumulate tax arrears.
“Our analysis suggests that when designing economic reforms, especially aiming to develop the private sector, safeguarding government revenues and state capacity should be a priority,” the authors add. “Counting on a future burst of productivity from a restructured, private economy to compensate for declining revenues is a risky proposition.”
Wednesday 7 December 2011
The true costs of Keynes
By Martin Hutchinson
Adolf Hitler, Joseph Stalin and Mao Zedong each killed tens of millions of people, and John Maynard Keynes was a pacifist who never fired a shot in anger. However, economically, when the billions come to be totted up, it may well be the case that Keynes was the most destructive of the four.
He cannot entirely be blamed for mistakes in monetary policy, which he never understood, and even his "stimulus" ideas owed much to those who came before him - for example Arthur Pigou - and after him - for example Joan Robinson. Yet the other value destroyers had their henchmen too, in Heinrich Himmler, Lavrenti Beria and Jiang Qing. Overall, when henchmen are added in, Keynes runs the other value destroyers close, and may in the future surpass them as his value-destructions continue. Truly, persuasive but misguided economic theories can be much more damaging than they appear.
This is not to claim that big government per se is value-destructive (it is, but that's a separate issue.) The right size of government is a matter for legitimate debate, and successful societies such as Sweden and Singapore can be built with very different sizes of government. Personally, I would rather live in Singapore than Sweden, and I would expect Singapore to exhibit markedly faster long-term economic growth than Sweden, but both societies run their finances in a responsible manner and are models of governmental integrity.
Since both Sweden and Singapore currently have modest budget surpluses and have kept control of their currencies and avoided excessive monetary stimulus, they are in the modern debased sense of the term non-Keynesian, even if the managers of Sweden's economy might well describe themselves as Keynesians for the sake of harmony at international gatherings.
The Keynesian fallacy is in essence one of getting something for nothing. By Keynesian fiscal stimulus, normally involving spending more money though occasionally through tax cuts, providing they avoid the annoyingly savings-prone rich, we are supposed to produce additional economic output whenever there is an "output gap" from full employment, that is, in all conditions save those of a raging boom, when resources are scarce.
Keynes himself recommended such stimulus only at the bottom of deep recessions, and suggested that it should be balanced by running budget surpluses in times of boom. Needless to say, his disciples have neglected the disciplines he recommended.
Similarly, the analogous monetary policy (which Keynes personally did not advocate, since he believed that interest rates had no effect on output) pushes down interest rates and indulges in ever-more lavish bouts of monetary "stimulus" in the belief that by doing so the economy can be persuaded to expand more rapidly.
It's fair to claim that monetary stimulus does not derive directly from Keynes (though it is not new - it was a policy advocated by Keynesians in the 1960s Lyndon B Johnson administration, for example.) However fiscal stimulus is a direct product of Keynes' 1936 General Theory and both forms of stimulus derive from Keynes' overall approach of flouting economic orthodoxy and using ingenious paradox to propound unorthodox policies.
Keynes was the origin of the "stimulus" approach; its central idea that by manipulating monetary or fiscal policy we can get a bigger government than we pay for is his. It is thus fair to blame the costs of that approach on him.
Those costs are considerable. In the 1930s, US president Herbert Hoover's reckless expansion of government spending, including loans to cronies through the Reconstruction Finance Corporation, caused further slowdown in the economy, which was exacerbated by his dreadful early 1932 increase in the top marginal rate of tax from 25% to 63%.
Then, as I discussed a few weeks ago, Franklin Roosevelt's New Deal deficit spending, combined with his reckless "set the gold price in my pyjamas" monetary policy prolonged the Great Depression far longer than would naturally have occurred, delaying full recovery from 1934-35 to 1939-40.
In the recent unpleasantness, fiscal stimulus worldwide initially appeared merely ineffective. By diverting resources from the productive private sector to unproductive public sector boondoggles it reduced long-term output. In the US case, the Barack Obama stimulus converted a vigorous recovery into an anemic one; only in the third quarter of 2011, after the effects of stimulus had begun to wear off, did output begin to accelerate and unemployment trend down (in this case we should celebrate public sector job losses and declines in public sector output, since they free up resources for healthy private sector growth!).
However, with the euro crisis it has become clear that fiscal stimulus, if excessive, has an exponentially adverse effect. By increasing deficits to unsustainable levels, it precipitates bond market fears about the state's credit risk. Naturally, that strangles credit availability to almost all entities domiciled in the country concerned.
Thus while a mild fiscal stimulus in a country that before recession was running a surplus might be mildly beneficial (because the differential between private sector savings rates and the 100% stimulus spending rate outweighed the inefficiency effect of diverting resources to the public sector), a large fiscal stimulus, or one incurred in a country like Greece or the 2009 US that was already dangerously in deficit, will cause economic damage rising to many times the value of the stimulus itself, persisting for years or even decades to come.
Monetary stimulus is similarly damaging. As Walter Bagehot remarked over a century ago, the correct response to financial crisis is to lend on top quality security at very high interest rates. This was notably not done in 2008; instead the injection of liquidity to favored companies was accompanied by pushing interest rates far below inflation. Repeating the monetary stimulus in 2010 and again in 2011, when in the United States at least the financial crisis was over, was inexcusable.
Monetary stimulus causes structural damage to the economy in the following ways:
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As recent events have overwhelmingly demonstrated, both fiscal and monetary stimulus are highly addictive, since they appear to provide something for nothing and the cost of reversing them appears unpleasant to the Keynesians who control the levers of policy. As to their cost, the current Congressional Budget Office projections suggest that there is at present a 5% output gap below full employment, and that the output gap will disappear only in 2016. The cost of current Keynesian policies over 2009-16 can thus be conservatively estimated at about 15% of GDP, or $2.2 trillion in today's dollars. To that we can add very roughly 50% of one year's 1929 GDP, for the output lost through Keynesian policies in 1932-40, or another $500 billion, for a very conservative total of $2.7 trillion all-told in the United States alone. That may not sound sufficient to counterbalance the tyrants' depredations, but consider: 1930s Germany, 1940s Russia and 1950s China were all much poorer countries than the modern United States. Very roughly, Germany's 1936 GDP and the Soviet Union's 1940 GDP were both about $500 billion modern dollars, while China's 1955 GDP was about $1,500 billion. Thus Hitler and Stalin could have destroyed their entire output for more than five years, and Mao for almost two years, before doing as much economic damage as Maynard Keynes has wreaked in one country. It's a rough calculation, but illuminating - and while Hitler, Stalin and Mao are long gone, Keynes' depredations continue. Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions. |
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