Tag Archives: Occupy

Capitalism, crony capitalism and neoliberalism. What’s in a word?

Are the Occupy protesters on to something?  Or is theirs just a hopeless battle against abstract nouns?

I have been rather exercised about some abstract nouns recently.  First was the word “Neoliberalism” selected by Simon Titley of the Liberator as one of three Bad Ideas to have infected British politics over the last 30 years, sweeping along the Liberal Democrat leadership with the rest of the mainstream.  The other ideas were the “Westminster Bubble” (the idea promoted by a lazy media that only ideas that have taken hold in Westminster matter), and that the Westminster elite have a monopoly of political wisdom (expressed by contempt both for grassroots activists).  Neoliberalism had a starring role in the previous month’s Liberator when Mr Titley and David Boyle roped it into their narrative of what went wrong with British politics in their article “Really Facing the Future”.  Mr Titley felt he had written enough already on the subject to explain what he meant by neoliberalism – unfortunately before I have been subscribing to Liberator.

Another tiresome abstract noun has been even more prominent: “Capitalism”.  This has been the main target of Occupy.  It was recently brought into further focus by Tory MP Jesse Norman in an FT article based on his pamphlet “The Case for Real Capitalism“.  This pamphlet is not a particularly coherent or convincing piece of work, though to be fair he does say that a longer, and presumably better argued, version is in preparation.  But by harnessing a couple of qualifiers (“crony” and “good”) he tries to make sense of capitalism, and brings neoliberalism into the picture too.  It’s good place to start a probe into whether these words have any useful purpose.

In Mr Norman’s picture the world has been suffering from “crony capitalism”.  He identifies various strands (e.g. “narco-capitalism”, taking it well beyond what I would call “crony” capitalism, which should really involve cronyism – business leaders being too close to political leaders.  Still he does offer a workable definition of bad capitalism:

Crony capitalism is what happens when the constraints of law and markets and culture cease to be effective.  Entrepreneurship and value creation are replaced by rent-seeking, and certain groups become enormously wealthy without taking risk. These factors in turn lead to long-term economic underperformance, and sometimes to social unrest.

Apart from the use of “crony” and the economics jargon of “economic rent” (which means profits accruing to a business over and above the opportunity costs of inputs) this is quite useful.  Something that is recognisably capitalism – an economy based mainly on private enterprise – can look like this, and when it does, it is bad.  But capitalism doesn’t have to be this way – hence Mr Norman’s employment of “good capitalism”.  This version emphasises the need for free competition and the consistent application of the rule of law.  But that by itself is not enough.

Mr Norman contrasts “good capitalism” with our friend “neoliberalism”, which does not have a moral dimension.  Like Mr Titley, he does not bother to define neoliberalism.  But from context I can identify it with what the FT writer and economist John Kay called “the American Business Model” in his 2002 book The Truth about Markets which was part of my Christmas reading.  This elevates the simplifying assumptions of classical economics (rational behaviour, consistent and stable preferences, perfect competition, and so on) into a moral value system.  In particular it idealises a ruthless focus on maximising personal gain in the framework of impartially enforced rules (property rights in particular).  This way of thinking remains very popular in America, with the Chicago School giving it considerable intellectual heft.  But it has never taken off in Europe, and Britain is very much part of Europe on this issue, as in so much else.  The emphasis on personal gain – greed – and antipathy to social solidarity are too much for all but a lunatic fringe to accept.  And that includes Conservatives like Mr Norman.  Good capitalism has a moral dimension – and one that celebrates the virtues of hard work and social responsibility.

Meanwhile the use of “neoliberalism” on the British left (including Mr Titley) clearly does not conform to the definition that Mr Norman uses.  Within its scope are swept Margaret Thatcher, Tony Blair, Gordon Brown and the “Orange Book” Liberal Democrats such as Nick Clegg.  But none of these are or were Chicago School types.  Apart from Mrs Thatcher, maybe, all see a huge role for government in our society and would expand its remit.  But they have criticised the way producer interests have captured public services, profoundly undermining its quality.

Another issue needs to be mentioned here: and that is financial explosion in the UK and US that occurred in the period 1997-2007, and which ended so badly in the current crisis.  This is closely associated with greed in the public’s minds, of bankers mainly, but also chief executives and (whisper it) all those ordinary members of the public that racked up credit card and mortgage debt.  This is swept into the general idea of “capitalism” and “neoliberalism”.  And indeed neoliberal ideas were used to justify the behaviour of many of the more egregious participants.  But true believers in neoliberalism have little difficulty in shrugging such criticism off.  To them what caused the crisis was excessive government intervention (e.g. by encouraging subprime lending in the US)  and the failure to uphold proper open markets (through the implicit government guarantee of banking activities, for example).

All of which renders the words “capitalism” and “neoliberalism” as useless abstract nouns.  There is little consistency in their use between the different political factions; their use by one faction is misunderstood by the other in an endless cycle of talking at cross purposes.  The Occupy movement seems particularly bad at this.

To make headway in the political debate we need to move on from the abstract to the practical.  What is the best way of providing health and education services?  What should the scope be of social insurance?  How can we get private businesses to invest more in the future and distribute their profits (or economic rents if you prefer) more equitably?

 

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The equality problem

A nasty problem stalks those who think about public policy, especially here in Britain, and in the US.  It goes under the general name of “inequality” and is mainly about the growing disparity between the very rich and everybody else.  There is a lot of anger (think of the Occupy protests) and shaking of heads, little convincing analysis and and even less in the way of convincing policy ideas.  It’s worth everybody taking a few steps back and asking themselves what is going on.

Of course the debate about the justice of inequality is as old as political philosophy. But two new factors have changed the whole nature of the debate.  The first is that the people in the middle of the wealth distribution are getting left behind.  Depending on the stats and country the median family’s wealth is hardly growing at all, or stagnating, even as the economy as a whole grows (well, until 2007 anyway).  So long as the median family is doing nicely the political heat can be contained – people can ask whether the problem really matters.  But these stats make it appear that the country is being run for the benefit of a tiny elite – which makes it politically much more awkward.

The second new fact is that mobility between different levels of wealth appears to be declining.  If you start life wealthy, you are increasingly likely to stay that way, and if not, you are less likely to break the barrier into a wealthier world.  The traditional divide between those who are concerned about equality of opportunity and those who worry about equality of outcome is becoming a lot less significant.  Both lots are angry.

There remains much to debate about how bad for us all this growing inequality really is.  But you don’t have to be an equality extremist (like, or so I’m told, the authors of the popular book, the Spirit Level, which I’m afraid I haven’t read) to be worried about all this.  The political consent upon which our democratic society is founded is being undermined – and indeed the extreme polarisation of US politics is perhaps one aspect of this.

Why is this happening?  For all the quantities of research poured in to economics and the social sciences, there is rather little that is known.  Economists don’t like thinking about the distribution of wealth as opposed to those comfortable aggregates that conceal so much.  Mathematically it is an entirely different type of problem to the ones they are used to dealing with.  I have seen one valiant attempt to grapple with the maths, under concept of “wealth condensation“, which did a good job of modelling the sort of power distributions so characteristic of wealth patterns, but this was not by an economist.  Professional economists preserve their elite status through the gratuitous use of advanced mathematics; no doubt they feel very uncomfortable in dealing with problems that require sorts of maths they aren’t good at, or even no maths at all (e.g. through the use mass agent computer modelling).  What we get is some rather airy stuff about the impact of technological change and immigration, with the former usually being fingered as the more important baneful influence.

One fact is quite well understood, though, which is the winner takes all effect of mass communications.  Thus entertainment stars tend to win big or not at all – and similar can be said of sports stars.  The mass market seems to concentrate its attention on a small world elite, ignoring anybody that hasn’t quite made it.  This, of course, will increase inequality.  But it is a retail phenomenon which ill explains why bankers and big corporate execs do so well.

Because we so ill understand it, it is unsurprising that our solutions seem so inadequate.  In Monday’s FT the prominent American economist and policy person Larry Summers (paywall), after moaning about the problem, was pretty lame about what to do next.  He suggested looking at three things: challenging the privileged status of the well off (especially the effects of the massive lobbying power of big corporations), a bit of tax reform (which is as much about not making things worse by rolling back estate taxes, etc) and state intervention to even things up, especially through education funding.  All worthy, but it is difficult to think that it would have anything more than a marginal effect.  The anti-capitalists aren’t any more convincing, of course.  It’s the baby and bathwater problem.

Politically there seem to be two distinct poles of argument.  The right wing idea is that it is the excesses of the state that is holding back the middle, and if we taxed and regulated more lightly an entrepreneurial boom would help the middle catch up with the top.  I have to admit I haven’t seen this line of argument clearly articulated anywhere, but some such logic must lie behind the popularity of the American Tea Party, whose appeal goes well beyond the elite.  On the left people seem to think the answer is in a bigger state, which intervenes to help the less well off, cracks down on excessive wealth, and drags pay up by creating masses of comfortable public sector jobs.  A bit like Sweden before its economy collapsed in the 1980s.  Neither course looks very encouraging to a liberal.

So what to think?  I am not really any further forward than Mr Summers.  But it would help if we better understood why so many in our society are being left behind.  I shall return to the topic

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Occupy: a difficult bandwagon to ride

There was a strained moment at last night’s dinner at the National Liberal Club for the London Liberal Democrats, when the party was challenged by a member over the Occupy protests at the City of London.  Both the guest speaker, Paddy Ashdown, and the Mayoral candidate, Brian Paddick, said that the act of protesting was a wonderful, liberal thing to do, and that the party should engage with the protesters (and indeed has), but that there was too little in  the way of constructive proposals for the party to take on.  Given that the anger that drives the protests is shared widely across the population, this seems a rather inadequate response.  But politicians of all stripes struggle to say much more.

The Labour leader, Ed Miliband, has tried to ride the bandwagon.  It chimes well with his appeal for greater morality in commercial life.  This line seems to play quite well with policy wonks and political professionals, but just seems to underline Mr Miliband’s lack of grounding in the gritty “real” world – a lack which, of course, he shares with most politicians of all parties.  His ideas share with David Cameron’s “Big Society” a complete inadequacy when faced with the big issues highlighted by the protesters.

It is easy enough to accept the core of what the protests are about.  There has been a lot of irresponsible behaviour in world finance which has helped bring about the current economic crisis; these financiers still seem to be attracting outrageous levels of pay; and taxpayers still underwrite the whole show.  After this, however, practical politicians have to deal with four difficult facts in the search for policies.

First: world finance may have failed, but capitalism hasn’t.  To many of the protesters world finance is simply the purest form of capitalism and its failure represents the failure of the whole capitalist system.  Well greed and profit seeking, familiar parts of the capitalist way, had a lot to do with it – but as much of the problem was uncapitalist politics.  Governments borrowing too much money to develop public services; interfering with the market to extend home ownership (especially in the US); China’s distinctly uncapitalist but de-stabilising trade policies, to name but three factors.  The real problem was politicians trying to tilt capitalism to their own ends, even if these ends were quite laudable.  There is in fact no substitute for capitalism if we are to maintain the living standards in the developed world, and to roll back poverty in the devloping world.  Interfering with the workings of free markets is likely to make matters worse, not better.

Mention of politicians brings in the second awkward fact.  The public (especially in the developed world) is at least as much to blame for the economic crisis as the bankers.  Excessive borrowing was widespread, as was pressure on politicians to ride the boom and expand government.  It wasn’t only the bankers that were being greedy.  It is natural enough to blame the bankers, saying like children, “It wasn’t my fault, he made me do it!” – but this isn’t very helpful in the search for solutions.

And a third awkward fact is that banking and finance, apart from the greed and the excess, carry out a vital world function.  The process of linking savers to borrowers, which is essentially what finance does, is vital for economies to develop and poverty to be fought.  It is absolutely no coincidence that the growth in world finance in the last couple of decades happened at the same time as the biggest progress against world poverty that we have ever seen.  And the beneficial effects of world trade that finance facilitated completely dwarf the well well-intentioned works of government aid and charities.  The problem is that the bankers simply creamed off too much of the benefit for themselves.

Which leads naturally to the fourth, and awkwardest fact of all: the bankers are holding a lot of hostages.  We need bank lending to keep productive industries going.  Governments needs finance to keep public services going.  In the UK, and especially London, world finance includes many perfectly productive jobs which we can ill afford to lose.  Vindictive policies will hurt us all.

But finance does need to be tamed.  But doing so is a slow process which requires a great deal of patience.  There are two key sets of reforms, neither of which are quick:

  1. Separate investment banking from utility banking.  There are many abuses in utility banking, but the really dangerous stuff is in investment banking, and allowing investment bankers to run utility banks is a recipe for total disaster.  The Vickers Commission’s reforms are an excellent start here – and seem to be leading the way globally.  The investment bankers are patiently trying to undermine them – but politicians and the public need to stay on their case.
  2. Make investment banking much less profitable.  It is the profits that drive the excessive pay – and policy needs to focus on the causes of the disease rather than wasting time on the symptoms.  There are two main causes of excess profits: lack of competition and the failure of organisations to bear public costs (for example of the public’s underwriting of the banking system).  In investment banking, it is the second of these that is the most important (in retail banking it is the first…), and the most effective way forward is raising capital requirements.  This is being done, and banking profits are duly under a lot of pressure.  At first it will be the shareholders who feel the pain – but in due course it will be bankers pay, as shareholders get fed up with their overpaid servants.

Actually progress is rather good.  We don’t need gimmicks like the “Tobin Tax”.  we need vigilance and patience.  I am proud of the way the Liberal Democrat ministers have been keeping the pressure up (Vince Cable is the star, but Nick Clegg is clearly on side).  The bankers are waiting for the Occupy bandwagon to move on.  It will, but I hope and trust that the Liberal Democrats will still be on their case.

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