There’s an awful lot of guff being produced about the holy, inevitable, all-powerful markets. First, despite the evidence of this financial crisis, very few are debating whether we should continue to have our economic future determined by the direction in which trillions of pounds of complex financial instruments slosh around. Richard Murphy did so, although his piece uses the word “feral” so often that it started to look very odd to me.
Choices were made to open our economy up to volatile shareholder capitalism. It’s not some scientifically proven approach to economics, any more than it’s god-given. These choices favoured some, notably the buccaneer capitalists and pension funds whose exploits Adam Curtis set out in The Mayfair Set (Google Video). And they turned over others, most obviously those who directly faced redundancy at their hands, but also the wider set of taxpayers whose interests they undermined. We could still make other choices, or at least we could if all the parties of government weren’t utterly beholden to these modern-day Gnomes of Zurich (Westminster, primarily, not that there’s evidence the SNP would take a different economic approach if they had the levers to hand).
Second, though, markets don’t “give verdicts”. They look for margins and they put a value on risk. When interest rates are cut, you regularly hear “the stock market responded positively”, as if these reified and disembodied forces were independently assessing those cuts as indicators of a stronger economy in the future. Utter nonsense. Falling interest rates mean bonds deliver a lower return, so, relatively, the stock market becomes a more appealing place to buy. Sure, if a proposal comes forward to relax restrictions on deepwater drilling, shares in Cairn or Shell will rise, but that’s an expression of expected change in the relative return on investment, not “confidence” or somesuch anthropomorphic sentiment.
The current fiasco isn’t primarily driven by Greek debt or even Republican reluctance to raise revenue from those most able to pay. Nor is it a collective judgement on the future of the Euro (doomed as it surely is at least in anything like the current form), any more than Black Wednesday was a view that Britain’s economic interests would be better served by sterling not being pinned to a basket of European currencies.
Black Wednesday occurred because a UK Government committed itself to a particular exchange rate band despite the existence of a free trade in currencies, a trade an earlier phase of that same Tory government had opened up. That meant George Soros and the gang could freely bet against them, and the traders knew Norman Lamont would have to keep buying while they kept short selling.
Right now, what started as a similar series of minor chinks in the single currency, apparent only to specialist traders and some politicians outside the soggy centre in both directions, is becoming a series of chasms. It’s not that the markets have a view on whether a single currency would idealistically be better or worse for European economies, just that there are self-fulfilling margins to be made in the diverging rates of return on member state bonds. Traders have found a new game, and no amount of austerity, cuts to public services or privatisation (the icing on their cake) will end that game. Either the chasms get closed with a single economic and fiscal policy for the Eurozone – effectively an end to national politics – or, sooner or later, they’ll smash it like a piñata and take all the taxpayer-funded sweeties.
The American situation is a little different, largely because of the disproportionate power the Chinese hold over the US economy and policy-makers. Each month a balance of trade deficit pushes roughly $20bn from American consumers to Chinese companies, and the Chinese in turn bought US Treasury bonds – up to a peak of more than $1.1tn in October last year.
Effectively, the Chinese have been pushing home the economic advantage they hold by virtue of using cheap (or sometimes slave) labour. Not only are they draining capital from the USA, but they’re using it to gain massive leverage and undermine the US Government’s autonomy. The American economy has acted like an enthusiastic addict, welcoming the dealer’s reliability. But the signs are that the Chinese administration thinks this phase will have to come to an end. The Chinese even used the same language when upbraiding the Americans’ “addiction to debt”, in just the way I imagine some heroin dealers shake their heads sadly at their customers – “not you again – I thought you’d gone clean, man.”
The disconnect between the real economy and the tides of profit-taking and short-termism has never been larger, while the consequences of market failure for everyone outside the gilded feral elite have never been higher. The question is – will policy-makers anywhere ever be brave enough to go through the short- or medium-term pain of restraining the markets, trying to force the genie back into the bottle, and trying to build an economy where the interests of society, the workforce, and the planet come first?
Some would say it’s impossible, but read the business pages (or, increasingly, the front pages) if you want to see the kind of world they’re saying is inevitable. How far through this sequence of ever-deeper crashes and ever-shallower and more unequal recoveries will we have to go before there’s a willingness to address the real problems here? And that’s before we consider the additional risks the economy faces as oil production gets ready for the bumpy ride down from the plateau of its final peak. The signs aren’t promising.
#1 by mav on August 7, 2011 - 1:54 pm
and your solution is?
All the markets are doing is saying the obvious; that you can’t live by building up debt to pay the bills. Borrowed money is borrowed time. There are a thousand cliches, all true. Yet the western world has, over the last ten years in particular, gone debt mad and the money has run out. The banks pyramid selling scheme collapsed two years ago. Now it is the turn of the nations. For the next 30 years, we will be paying off Browns lunacy, the americans will be counting the cost of Bush (and Obama’s attempt to borrow and buy his way out of recession), and the entire eurozone will pay penance for their idiocy.
And what did the SNP ask for and get two months ago? Thats right, borrowing powers.
#2 by Jeff on August 7, 2011 - 9:58 pm
I’m afraid I have to mostly agree with Mav here James.
There’s a lot that I don’t like about the current Capitalist system, chiefly the disconnect between where a hedge fund manager (say) sits in society and where a social worker sits. The closer we can move real life to a Trumpton view of the world of peace and harmony, bakers and firemen in shiny uniforms and catchy names, the better.
In the meantime, Capitalism appears to be the least worst solution to getting through the week/month/year and the volumes of people that can afford second holidays, cars and ipods show the benefits that have been brought to the UK. Spreading that out to the rest of the world where it’s needed most, finding a way to make it all sustainable and reducing inequality to aid literacy/numeracy/living standards are the current challenges and they are significant but is there a better way than the status quo? I’ll only believe it when I see it and, as much as I liked and agreed with your blog post, I still haven’t seen it.
#3 by Indy on August 8, 2011 - 10:07 am
Surely the point is that people can’t really afford second holidays and Ipods? It’s all on the never never.
#4 by cynicalHighlander on August 7, 2011 - 9:03 pm
GrowthBusters: A Groundbreaking Documentary for 2011
The film explores the taboo around discussing population and why we have placed more value in a booming economy than a healthy, sustainable planet.
#5 by Stuart Winton on August 7, 2011 - 10:36 pm
Excellent analysis and critique, James, but on the other hand I think Jeff is bang on insofar as he alludes that in the Western world the public are largely satisfied with a market-based economic system, and it does seem to have a habit of catching on in developing countries.
That’s not to say that its excesses shouldn’t be curbed, or that capitalism will always hold sway in precisely the same form across space and time, but in large part it will survive the current crisis.
I’m certainly not its biggest fan, but over the years I’ve perhaps come to appreciate its wealth *creation* abilities a bit more – although *distribution* is a different matter – and, perhaps more importantly, I can’t really see the public *buying* anything fundamentally different, if you’ll excuse the pun.
#6 by Douglas McLellan on August 7, 2011 - 11:38 pm
I think that Jeff has it totally spot on. Capitalism is the least worse option and I dont think that it can be replaced, just better regulated.
The problem is that I think that can only happen when there is some global control of resources and a global drive to utilise those resources. Unfortunately, governments and nations have failed to achieve that and it is multi-national corporations that have stepped into to manage resources and capital across all the continents on the globe.
Until all governments unite in a benevolent manner (either of their own volition or through popular demand by their citizens) the best any nation state can do is to use the same tools that the international money markets and companies use. As you say James, any attempt to change this may well involve short & medium term pain which is not popular amongst voters.
It may be that the utopia of a world where the global economy “where the interests of society, the workforce, and the planet come first” will not happen until resources are so scarce and humanity facing extinction that working together across the globe is our only hope.
#7 by cynicalHighlander on August 8, 2011 - 11:28 am
Capitalism in crisis, a warning from history: Eighty years ago, a banking collapse devastated Europe, triggering war. Today, faith in the free markets is faltering again
When/if this gets through moderation the markets will a few more % points down.
#8 by James on August 8, 2011 - 2:12 pm
Thanks all. I guess we’ll have to part company – these are not prices I’m prepared to pay. Market failures are too widespread for me (inequality, dependence on depleting resources and climate change most notably).
#9 by Jeff on August 8, 2011 - 3:02 pm
Are you suggesting agrarian collectivism? I’m still not clear which direction you’d rather we all went.
#10 by Douglas McLellan on August 9, 2011 - 3:19 pm
As well as the direction (of which there are several possibly attractive options) I am really interested in how the transition is managed.
#11 by CassiusClaymore on August 8, 2011 - 3:37 pm
I don’t see that the market is failing. Certain market participants have failed, or are failing, and are under pressure accordingly. For example, the banks are overexposed to bad credits and their shares are being hammered. That is not the fault of the market. No-one will lend to Greece, as they are not able to pay their debts as they fall due. That is not the fault of the market.
Politicians have failed. Some corporates have failed. But the market hasn’t failed. It may have given us a message we don’t like – that we in the West cannot go on living beyond our means – but that’s not the same thing.
CC
#12 by Indy on August 9, 2011 - 1:24 pm
I know what you mean. When people say the market has failed, e.g. on housing, what they mean is that the market has failed to deliver the optimum result from a social or political point of view.
The lesson there is surely that if you want to achieve a certain outcome don’t leave it to the market – because the market doesn’t care.
But that of course requires politicians to say clearly where they do not want the free market to rule – and to set out the alternatives.
On one level that seems fairly obvious – e.g. if I want to buy a new phone I am quite happy for the market to work that out for me but I don’t want the market to decide on healthcare provision – but UK politicians have managed to get themselves into a remarkable fankle about it over the years.
#13 by Osbert on August 8, 2011 - 4:42 pm
I think James is spot on in his analysis, and his reminder that the current shape of the ‘markets’ is not god given, is very important.
I started crafting a response which grew and grew, but got too complex for a comment, and I need to do some work!
However, a couple of thoughts:
The issue of power is central, and of who bears the pain. Governments are often happy for ordinary punters to bear the pain, but not for the powerful to do so.
Jeff asks for an alternative. Here’s part of an alternative: employee owned businesses. David Erdal’s recent book ‘Beyond the Corporation: Humanity Working’ is a strongly evidenced argument of how employee owned businesses go a long way towards building “an economy where the interests of society, the workforce, and the planet come first”.
Erdal’s ‘manifesto’ is based on his own experience running and owning a multinational business and passing it into employee ownership, and a mass of research, his and other people’s, into this field.
Good interview with Erdal here:
http://living.scotsman.com/features/Interview-David-Erdal-author.6736568.jp
and his own site with excerpts from the book here: http://www.daviderdal.net
And, no, I’m not suggesting this is the answer to all the problems. But I do believe it could be one of the central planks of a campaign or manifesto for a ‘resilient’ Scotland, that reduces its exposure on volatile stock markets, creates better jobs, keeps wealth in Scotland, improves productivity and innovation.
#14 by Jeff on August 8, 2011 - 6:25 pm
Sounds good to me Osbert! A fine suggestion (and a fine book recommendation to boot).