December 2023 – thinking liberal

The forces of darkness are weaker than they seem

The fall of the Berlin Wall in 1989 was not predicted.
Picture:Raphaël Thiémard from Belgium., CC BY-SA 2.0 https://creativecommons.org/licenses/by-sa/2.0, via Wikimedia Commons

My last post was a bit gloomy – and indeed there is a lot to be gloomy about at the end of 2023. But you can overdo it, as amid the darkness there is hope. That hope does seem rather remote, but we must hold onto it.

What I want to reflect on today is something that I will call liberal capitalism, a system that is often referred to as liberal democracy – but I wish to emphasise that capitalism is at its heart. It is a system based on democracy, tolerance, respect for individual rights, a system of law and justice separated from political control, freedom of speech and news media, free commerce, and the private ownership of capital in a mixed economy. The system is often referred to as Western, but there is nothing inherently Western about it – and indeed Japan, South Korea and Taiwan have all found their own versions.

Liberal capitalism is under siege. The Chinese and Russian political leaderships in particular, having started an embrace of the system, are turning hostile. They point to the hypocrisy of Western governments and politicians, and resent the way that they, or we, espouse universal values and seek to undermine systems that are perceived to be corrupt or oppressive. Chinese leaders point to the chaotic ways and allegedly short-termist policies of democratic systems. Russian ones prefer to talk about the erosion of traditional values – by which they mean the advance of such things as gay rights, feminism and multiculturalism – although the Chinese leadership has similar views.

The Chinese and Russian leaderships are not alone; there is also an Islamist line of attack – though there is nothing inherently un-Islamic about liberal capitalism, once you have resolved the issue of debt and interest (where, incidentally, I have much sympathy with Islamic scholars – they have spotted a real moral problem). Iran is the leading state to push this line of thinking, as do a number of violent, and some non-violent, non-state movements. It differs from the Chinese and Russian critiques in propounding universal values, and very much seeking to interfere in the political systems of others (including those of Russia and China, as it happens). Beyond China, Russia and Iran, there are any number of states who reject critical aspects of the liberal capitalist systems, leading to criticism and worse from Western states.

And there is opposition to liberal capitalism from within liberal capitalist states. I frequently read from leftist authors that capitalism has failed, and needs to be replaced; others equate liberal capitalism with colonialism. And on the right populists say that the superstructure of democracy and the independent judiciary is simply a plot by liberal “elites” to impose their values on an unwilling majority. These populists have an admiration for the Russian system, with its espousal of traditional values, buttressed by a corrupt elite (though they aren’t explicit about the corruption, of course).

Often it seems as if the forces of opposition are winning. This partly stems from the way democracy and a free press works. Threats and danger make for more saleable publicity than optimism, which in any case reeks of complacency. Right up to the fall of the Berlin Wall you could read commentary that the USSR was winning the Cold War because Western democracies didn’t have the spine to resist. Even after the fall of the Wall, many westerners could not believe that the USSR was so rotten that it was fated to collapse under its own weight. But in 2023 there are indeed many worrying developments, and liberal capitalism seems to be on the retreat in many places. Across the world many accept Russia’s assault on Ukraine with a shrug; anti-democratic coups are becoming the norm in Africa; China’s diplomatic influence has grown immensely; populists (though not leftists) are doing well electorally in liberal capitalist systems.

But look again at the forces of darkness. What is it that they are offering? China and Russia celebrated the fall of the Western-backed regime in Afghanistan. But have they offered to replace the flow of Western aid? And as American interests come under threat in the Middle East, China and Russia are mere onlookers, their recent diplomatic advances proving to be weightless. Many states have welcomed the political neutrality of Chinese aid, but find this is linked to the use of Chinese contractors, and that Chinese creditors are less flexible than Western ones when things start to go awry. Debt forgiveness in developing countries has now become almost impossible due to Chinese obstruction. Russia extracts a heavy price for its aid, with ruling elites required to pay off the support of Russian thuggery with corrupt contracts for natural resources. Russia and Iran do not look like good places to live, though better than North Korea. China offers something a bit more appealing, but the costs are becoming increasingly apparent, as the state has to expend more and more effort in suppressing dissent, while managing a faltering economy and a shrinking workforce. And a closer examination of the Chinese system reveals striking degrees of racism, and at the fringes of its empire, such as in Inner Mongolia, Tibet and Xinjiang, it looks distinctly colonialist – not that you will hear Western leftists complaining.

Also on closer examination, ideas of political non-interference proposed by China and Russia turn out to be not quite what they seem. Russia has a very flexible idea of what the boundaries of its state actually are. The Chinese are slightly better, but not much. The idea of self-determination for the peoples of the empire’s further reaches is treasonous – even though these places were once outside its borders; the country has laid claim to the South China Sea without any internationally recognised legal basis. And there is Taiwan. Neither China nor Russia hesitates to interfere in other states’ affairs if they feel their interests can be advanced that way. Their covert operations are massive. For them it is simply enough to deny anything that is inconvenient. Western states may not be good at respecting the truth in their pronouncements; non-Western ones are much worse.

Liberal capitalism’s internal critics are no better. They are better at stoking feelings of victimhood than of offering constructive alternatives. Leftists may claim that capitalism has failed, but their alternative ideas are weak at best. On the few occasions they have been tried in practice, they have collapsed into economic weakness and political despotism, and, eventually to cronyism. The right evokes an unachievable past golden age; the closer they get to actual power, the weaker their ideas look.

Against all this the liberal capitalist system has much to offer. No other economic system has produced such serious advances in popular wellbeing, or driven back poverty so far. China’s highly impressive impressive economic achievements precisely follow its adoption of liberal capitalist policies. As it turns against those policies, its advances flag. Supporters of liberal capitalism say that you can’t cherry-pick aspects of it and expect to succeed in the long term. China has sought to contradict this by adopting the economic side of liberal capitalism, while standing against tis political one. This is at last being tested. Russia has also shown some economic success from its adoption of liberal capitalist economics, although the exploitation of natural resources has an added dimension there. It has a largely capitalist economic system, but it has institutionalised cronyism and corruption. This may prove attractive to other country’s ruling elites, such as in Victor Orban’s Hungary, but this system only works as long as there is enough meat on the carcass to go round. It does not maximise economic efficiency and is doomed to eventual decline.

Liberal capitalism does face important challenges though. Charges of hypocrisy made by its critics are often well-founded. But for these critics, or the state ones anyway, their point is that we are all hypocrites, so let us be openly cynical in the way we advance our interests; that is not a message of hope. They may complain that Western support for Israel is inconsistent with its attitude to Ukraine – but nobody else is offering more than token support to the Palestinians, who will receive more external aid from Western countries than they ever will from China, Russia or Iran – though the Gulf Arabs will hopefully contribute even more. The rationale for when Western states intervene militarily, or with military aid, and when they don’t is far from clear. The comparison of Ukraine with Palestine is a deeply flawed one; that with Iraq in 2003 is less so. The West’s universalist rhetoric is tying it in knots (non-Western liberal capitalists tend not to make this mistake). I believe this needs to be tempered with a proximity principle, which shows why Ukraine is different from Syria, say. Alas that invites many questions of definition.

There are more substantive challenges. One is economic. Liberal capitalism was once associated with high economic growth, but in the more developed countries this has come to an end. This is not a failure of the system, as some suggest, but a feature. Liberal capitalism delivers to its people what they want as revealed by their consumer and democratic choices. These choices now favour lower growth, and that is exactly what the system is delivering. The priority now is to advance wellbeing through the use of technology and scientific knowledge without this being tied to ever-increasing consumption. Liberal capitalism can do this, though its political leaders have for the most part failed to see how the game has changed. Environmental sustainability, including the need to be carbon-negative, is another, more widely recognised challenge. Migration and cultural integration is also widely recognised as an issue. In less developed countries adopting the system, law and order and the rise of gang culture is a further challenge for the restrained systems of law-enforcement associated with liberal capitalism.

But in the end people will recognise that liberal capitalism offers the only real path to achieving a better world – the sort of place in which most people want to live. Because they can’t deliver this, its opponents are weaker than they look – like the USSR in the Cold War.

Higher interest rates would be good for the UK economy

In my last post but one I discussed how Britain’s politicians are in denial over the hard choices that need to be made over taxation – evidenced by a fatuous Autumn Financial Statement from the Chancellor of the Exchequer, and the inadequate opposition response. Now The Resolution Foundation has published a new report: Ending Stagnation: a New Economic Strategy for Britain, based on a substantial amount of research, and again we are coming back to the growth problem.

Unfortunately I haven’t read this worthy and weighty contribution to the debate. It is nearly 300 pages long and describes itself as a “book”. Instead I have read the Executive Summary and some of the commentary, including from Torsten Bell, the Resolution Foundation’s Chief Executive, amongst other reviews. These leave me a bit confused, and clearly a lot of the devil (and perhaps some angels too) is in the detail. Given my substantial reading list, getting round to reading the detail will take some time.

Mr Bell has been trying to paint an optimistic picture – that Britain has the opportunity for catch up growth based on its weak performance: something that I have mentioned, amid my rather dismal assessment of longer term growth prospects. He points to two opportunities in particular: strengths in service industries which can be an engine of export growth, and the ability of Britain’s weaker regions to narrow the gap with the prosperous London and South East.

The point about services is an interesting one. It flows from two propositions that I agree with. The first is that manufacturing is yesterday’s story; it has become so efficient that there are few jobs in it, and besides there are saturation effects as the link between consuming quantities of stuff and improving wellbeing weakens. The second is that export industries are critical to most models of economic growth. Most successful economies in Europe and the developing world run trade surpluses. The US is an exception, but it is also an export powerhouse – it is just an import powerhouse too. The position of the US in the global economy is unique, however, and it doesn’t offer Britain any kind of hopeful model.

Why should exports be so important? That is a bit harder to answer. The explanation often advanced is that export industries are usually highly efficient (especially if they are not about mining and natural resources), partly because they have to be globally competitive, and partly, doubtless, because supplying things across borders requires a degree of efficiency anyway. There is doubtless a lot of truth to this. And this is linked to another truth, which is that exports and investment go together. This is in turn is linked to basic macroeconomic dynamics. A country with an export surplus consumes less than it earns – otherwise all the exports would be balanced by imports. And that usually means that such a country has high investment levels, as that surplus needs to be spent somewhere. That oversimplifies things quite a bit, of course, and disentangling cause and effect can be hard. But if Britain is going to play the catch-up game I am sure that it means three things that are very closely linked: better balanced trade (currently there is a 2.9% current account deficit – one of the largest amongst bigger economies, though America’s is close at 2.8%); greater levels of investment; and a higher rate of personal saving (currently 9.1%, actually relatively high compared to the pre-covid period, but still much lower than the EU average of 18.2%).

The first two parts of this trilogy are uncontroversial. Pretty much any commentary you care to read on the UK economy mentions the need for more investment, both private and public. People are less explicit about the need for more balanced trade. Back in the 1960s and early 1970s, before floating exchange rates and free capital flows, this used to be a matter of high political drama. Since then it has dropped from the conversation; Britain seemed to be doing just fine in spite of regular and large negative balances. But conversations about growth often turn to greater export volumes, and that implies more balanced trade. But surely something else is true: the country needs to import less if it is to save more and provide the funds for investment. And that means consuming less. There is a strikingly similar conversation to be had about tax. Higher public investment, and better quality public services, and a more adequate social safety net, imply higher taxes… and less consumption.

Looking at the graph of Britain’s savings rate over the last 70 years (above) it is hard not to see the supposedly economic golden years of new Labour, from about 2000 to the crisis of 2007-09, as a bit hollow: a consumption boom based on reduced savings levels. It was linked to a consistent current account deficit (the last surplus was in the mid-1990s). I have always thought this economic achievement was less than it appeared, driven as much of it was by the spurious profitability of the banking sector, which was reversed in the financial crisis. One important aspect of the decline of personal savings in this period was the reduction of corporate pension schemes. I witnessed this at first hand as a finance director in the first part of the 2000s, with presentations from consultants offering to reduce the costs and risks of pension schemes for employees. Final salary schemes were replaced with money-purchase ones, which almost always entailed a simultaneous reduction in contribution rates. This was sold as an advance for personal autonomy over the patronising ways of the past. In truth the potential liabilities associated with final salary schemes, or more correctly defined-benefit ones, were quite scary, and they gave employees who changed jobs a rough ride. Also the general decline in interest rates made those promises more expensive to keep. But now the collapse in pension funds as the source of UK business investment is much remarked on, though people tend to blame the post-crash flight to safety in pensions regulation; its roots are much deeper. Attempts to revive domestic business investment by the Chancellor look puny by comparison with the larger economic forces in play.

How might the savings rate be increased? The best way surely is for the current rise in interest rates to be sustained. This will deliver higher returns on new savings, even as it damages the capital value of past savings. There is a paradox here. It is often claimed that lower interest rates are required to stimulate business investment, but reducing the costs of finance. But the finance director in me says that cheap finance means poor-quality investment. There is nothing like a higher target rate for return on investment to focus minds on the best way to structure an investment project. I have seen it time and again.

Another problem with higher interest rates is that, all other things equal, it will drive up the exchange rate. This would make exports more expensive and imports cheaper – working against reducing the trade deficit. it would tend to make the country less attractive for foreign business investors. But part of the attraction of raising domestic savings is that it reduces the dependence on foreign capital, which is less reliable for a medium-sized economy like Britain’s. Many of Britain’s most successful businesses are foreign-owned and based on foreign investment. And yet, in spite of a relatively cheap pound, these foreigners have not invested much recently, especially since Brexit.

Unfortunately there is no guarantee that higher domestic savings would lead to more productive business investment. The old defined benefit pensions were a particularly effective channel for this purpose, and they are gone for good. More money could be pushed into domestic property – though some funding for this sector would be a good thing, so long as it just isn’t a matter pushing up land prices. Funds could be swept up by government debt, if budget deficits are not also brought under control. But buy and large a higher interest rate environment is more conducive to productive investment, rather than fuelling speculation. High interest rates are not good for the property market, which in current conditions is a good thing. Serious thought needs to be given to pension reform so that there is greater level of collective investment – as this is most likely to be channelled productively. There are examples from other countries of ways that this might be done (the Netherlands and Australia come to mind).

So my recipe for getting the British economy onto a healthier path includes higher taxes and higher interest rates. This is not going to be taken up by any political party – but parties in government might be forced into that route anyway. The Conservatives seem the least likely to do so – with their agenda of tax cuts and supporting property prices. My favoured option is for a Labour-Lib Dem coalition – which would require a hung parliament, and both parties having the stomach for a coalition. On present evidence neither proposition is looking likely. A large part of Britain’s lacklustre performance comes down to our prioritisation of personal consumption. Changing that is a hard road.

A second Nakba looms for the Palestinians

As 2024 draws to a close I’m not in an optimistic mood. Britain is stuck a low-growth rut, with crumbling public services and with politicians and public unable to face up to the difficult choices needed to climb out. Western support is crumbling for Ukraine, meaning that the war will degenerate into a never-ending frozen conflict until the Putin regime collapses, and probably long after that. Necessary steps to save the world from ecological and climate catastrophe are subject to endless push-back. Western paranoia over China, compounded by China’s own victim mentality, makes things worse. And then there is the Gaza war.

My thoughts on this topic have been crystallised by two recent articles. The first was in The Economist exploring the two-state solution, suggesting that it is the only solution to the conflict, because all the others are impossible. The second was by Janan Ganesh in the Financial Times, in which he suggests that the British prime minister Rishi Sunak’s business background leaves him unprepared to deal with extremists, who don’t compromise and don’t stick to any deal they might appear to accept.

I have commented a few times on the Israel-Palestine conflict here. I have much more sympathy with the Israeli side than many. Indeed I am instinctively closer to liberal Israelis than I am to any other faction in the conflict. But I have always been troubled by the influence of Israeli extremists – to the extent that I have sometimes upset liberal Jewish supporters of Israel. These maintain that the extremists are a minority who will not dictate Israeli policy in the long term. And yet these liberals remind me of the one-nation Conservatives in Britain’s parliament (or “wets” as they are often known), who may be passionate in their defence of decency and international law, but cave in rather than press a confrontation with their party’s extremists – in the hope that they will win through on another day. The trouble with Tory wets, as Guardian columnist Polly Toynbee has said, is that they are wet (or I think it was her – I can’t find the reference). Mr Ganesh makes his point well. Tory wets are often businessmen (and women) who assume that there is always a deal to be done, and can rely on any deal being ultimately enforceable. Political extremists are playing a different game.

The Economist suggests that there are two alternatives to the two-state solution. One is the one-state solution, where the two communities co-habit with full rights in a single state; the other is apartheid and ethnic cleansing. It describes both of these as “non-starters”. They are right about the one-state solution, which has few serious sponsors anywhere. Apartheid and/or ethnic cleansing are simply dismissed as “abhorrent”. And yet this is the approach advocated by the Israeli extremists, and they are working towards it much as Brexiteers worked towards Brexit in Britain against a hostile establishment. This solution is also advocated by Palestinian extremists (“from the river to the sea, Palestine shall be free”) and their supporters on the western political left. These latter extremists have nowhere near enough power to make their wishes come true, but they do help build the conditions in which the Israeli extremists can have a prospect of success.

The Hamas-led attacks of 7 October, and the appalling atrocities they perpetrated, are an excellent example of this. Israelis are united in horror, and quickly agreed that military action was required both in vengeance, and to destroy the perpetrators to prevent future attacks. The government framed the objective of military action as the destruction of Hamas, to make it incapable of holding power in the future. All Israelis could agree on that, and so military operations started. But there the agreement ends. The world has been shocked by the level of violence and the number of civilian casualties resulting from Israeli action. The Israeli government and military have responded with a combination of denial and obfuscation, and constant reference back to the original atrocities. It is true that their tactics are less indiscriminate those used by Russian-sponsored forces in the various Middle Eastern civil wars, which specifically targeted hospitals, for example. But the level of destructive power available to them is much higher. I have followed military matters since boyhood, and I would certainly question whether such destructive tactics are militarily all that effective. It is in fact easier to defend rubble than intact buildings, where defenders suffer a constant risk of being cut off and trapped. Having said that, the Israeli military, which doesn’t seem to controlled by extremists, are leading this, and military men usually have a predilection for blowing things up. What is clear is that the political leadership is not holding them back. The soldiers don’t see it as their job to give serious thought to how to manage the civilian needs.

The result of this is not just high civilian casualties, but a wider disaster beckoning, due lack of food, water and medical faculties, to say nothing of protection from the elements. The Israeli government seem to think it is enough to let a few extra lorry-loads of aid through the controlled border. Meanwhile the Hamas fighters will simply follow their usual tactic of hiding amongst the civilian masses, wherever they might be. The logic seems to be that the population of Gaza, or a substantial proportion of it, will be forced to flee into Egypt, whether the Egyptian government likes it or not. The Israeli government is not offering an alternative Hamas-free civilian infrastructure within the territory as an alternative. What is clear to everybody is if Gazans escape to Egypt, they will not be allowed back.

Because that is what happened after the 1948 Nakba, or catastrophe, when Arab refugees fled their homes into neighbouring territories, for what they thought would be a temporary respite. This is what the Israeli extremists want, and nobody else will stop them. More liberal Israelis may not want to admit this explicitly, but they are worried about their future security. The 7th October attacks fell particularly severely on liberal Israeli families.

Israeli extremists have particular power because they form part of the current government, and the prime minister, Benjamin Netanyahu has made it his life’s mission to covertly ally with them. That’s perhaps a bit too strong – Mr Netanyahu has always undermined anything resembling a long-term solution, and simply let Israel’s control of the territory it occupies expand incrementally, and the rights of their non-Israeli inhabitants to be marginalised. But recently he has been in hoc to extremists because he needs their help to block court cases against him.

Mr Netanyahu’s political career will end eventually, and the extremist parties may be ejected from power – they have never had majority support. But the extremists are armed and very determined to advance their agenda. They are strong in settler communities in the West Bank. If a two-state solution is to be implemented, many of them will have to be forcibly removed. This could spark a civil war. But, if my understanding of the Israeli psychology is right, that is unthinkable. Ultimately the country survives through a strong sense of solidarity. Turning on each other to advance the interests of Arab inhabitants and refugees is beyond imagination. Enforcement of laws against unruly settler communities is at best half-hearted as it is because of this sense of solidarity. It is much easier to blame the Arabs for their difficulties. Especially when they behave as Hamas have done.

Perhaps I’m wrong about the second Nakba. Perhaps the Israeli government will be able to allow a stable civilian infrastructure to support Palestinians resident in the Gaza Strip. But there is no two-state solution, just as there is no one-state solution. There is either catastrophe or a never-ending semi-frozen conflict. And that adds to my depression over political affairs at the end of 2024.