OCCASIONAL PAPER No. 4
WHY NEW ECONOMICS?
What Went Wrong?
Margaret Legum
(This contribution is intended as a chapter in a forthcoming S A N E book)
Economics describes the way that human beings relate to each other through producing, allocating and exchanging the Earth’s resources. Economics is about people, therefore, not primarily about resources. It is understandable by any reasonably thoughtful and informed person. It is not the preserve of economists - though like any discipline it has its internal language which can be used to obfuscate. The forthcoming book is for lay readers.
The South African New Economics (S A N E) Network was formed to explore and circulate new ideas about the conduct of humanity’s economic relations with each other. It comprises a network of people deeply concerned that current trends are destructive in a number of ways. Those trends are international. While S A N E centres its work in South Africa, seeking to influence the body politic here, we are part of a world in which global forces are powerfully at work. It is no exaggeration to suggest that, since its accession to power, our own government has been severely hamstrung by world economic trends.
This article sets the scene by describing world macro-economic forces giving an overview of how we arrived where we are, and indicating the main areas that need reform. The body of the forthcoming book offers some potential solutions.
An expensive education through the Economics Tripos at Cambridge University was not followed for me by a lucrative career as an expensive economist. Like John Stuart Mill and other fathers of the discipline of economics I saw economics as a branch, and a servant, of politics and the welfare of people. This may surprise people today: Mill and his colleagues are thought to have laid down some immutable laws, which whether we like it or not, determine how the world of goods and services, money and people interact.; Not so. They described their work as political economy, very much part of an ethical system. So when I left Cambridge I did not pursue a career in economics because it seemed to most of us then that John Maynard Keynes had made the kind of theoretical breakthrough that would enable politicians to control economic relationships to suit the political purposes for which they were elected. Broadly, that meant that economic relationships between peoplecould be determined by directing resources within a macro-economic framework in which government intervention prevented violent economic swings between depression and inflation. Thus people like me, essentially interested in social justice, threw our weight into the political arena where values and ends were being discussed - in the confidence that the economic means were available to effect the political ends chosen through the electorate.
In other words, economics was seen as value-based, not value-free. You could direct economic forces within wide limits to achieve the ends you wanted. It is only very recently that human helplessness has entered the thinking of economists and politicians. Margaret Thatcher introduced the idea that "There Is No Alternative" (TINA). Faced with the result of her policies - a decimated industrial base, grossly inflated incomes for some and deepening poverty for others, new levels of long-term unemployed, homelessness, beggars, a rise in the rate of bankruptcies, repossessions, crime, domestic abuse, TB and infant mortality - faced in other words with the evidence that her monetarist policies had left the economy weaker and not stronger, and people more and not less insecure, Thatcher claimed that humanity is in fact the inevitable victim of economic laws. Her medicine, she implied, was essential for future economic health in conditions over which politicians had no option but to comply or uselessly resist.
Of course Thatcher - and the wider Washington Consensus which colonised the ideas of all the international financial institutions - including the World Bank/IMF - did not arise in a vacuum. Keynesian theory had shown itself incapable of dealing with two unexpected factors: the sudden traumatic rise in the price of oil; and the exponential rate of technological advance - the electronic revolution. The first of these might have been digested in time, but the second meant that, unlike during the first Industrial Revolution, the machines now lost more jobs than they created. That meant it was possible to have unemployment and inflation at the same time - a circumstance to which Keynesian theory had no ready answer. It was time for new thinking.
Since economics is not value-free, there were many paths the world could have taken after the rethink. Not surprisingly, that new thinking was in fact based on the values and interests of the people with the power. In that sense, with hindsight, it was probably inevitable. The radical new Conservatives of the late 70s in Europe and America created not simply new policies but a new ideology. Helped by the fall of the Soviet Empire they fell for an illusion as old as humanity - that the forces of history, fickle as they sometimes seem, were at last demonstrating their alignment with ourselves. This had the added advantage of freeing them from the accusation that the new ideology was a cover for the promotion of their own interests. If there was no alternative, there was no shame in profiting from them.
Ironically the last previous proponents of this illusion were the Marxists of this century. Their demise provoked a triumphalism in the Conservative West which found its apogeein the Japanese-American economist Fukuyama’s book The End of History.
Let us imagine for a moment the alternative. It is not difficult; for a while it filled our imagination. Remember the fifties and sixties when we first grasped the significance of the radiant blossoming of technology? Tiny silent clean machines would take over the work, take the grease and sweat out of life, and produce unimaginable abundance. Not all of us would be needed to operate the machines; so we should divide up that work. Three-day weeks seemed within our grasp. The major challenge would be about using leisure time people would have to be educated to be creative and not destructive when not at work.
Alternatively, we thought, five day weeks would continue, but with a decreasing proportion of us working with the machines. Instead we would transfer some of the surplus created by the machines to employ the rest of us in activities using our humanity - teaching, counselling, nurturing, child care, social work, writing, painting, thinking, visioning, inventing - which could not be done effectively by machines.
Put differently, economics would be about distribution of the fruits of technology, because production - indeed abundance - was now assured. The dilemma would be how, since machines do not go shopping, we could get purchasing power into the hands of people rendered unemployed by technology? How could we transfer resources from the profit sectors to the public arena so that human welfare could be enlarged? At first the service sector seemed to be one answer at least to the employment problem; but even there technology shed jobs hand over fist.
The focus on distribution of wealth was, tragically, stillborn. On the contrary. A visitor from Mars today might assume that our planet had suffered an appalling catastrophe which had destroyed our resources, leaving us starting from scratch. They would notice that such of us as make a living work all the hours that God made, in a desperate attempt to increase productivity. If we don’t we join the growing millions without a regular livelihood. They would notice the expanding mass of people living and dying in absolute poverty - destitution and starvation.
So what happened to what we might call the technology dividend so optimistically anticipated in the sixties? The simple answer is that it went into the cheapening of consumer goods and reward for capital. It remained in the private sector. As consumers we now have a wider range of cheaper things to buy than ever before. The search for price competitiveness, and not the distribution of income, became the major economic driving force.
That search has two inevitable results: constantly updated technology and expanding, hence globalised, consumer markets. You can be wiped out as an entrepreneur if your competitors employ later machines and less workers than you do; and to keep up you must find expanding numbers of buyers to keep your machines at work. You cannot afford to fall behind or to experience shrinking markets.
The implications of this trend to globalisation and capital-intensiveness must be squarely faced. First, tariffs between countries must come down to create the global markets the process needs. That means that all countries, whatever their state of readiness and ability to compete must open their markets to international competition. The protection of enterprise, infant or not, must be ended. Niger and Lesotho must compete with Japan and the United States. If they do not, they are refused the capital they need to develop.
But history shows us that all successful economies - there are no exceptions - have developed with state subsidy or behind protective barriers - whether created by tariffs, by wars or by economic isolation such as sanctions. Even today powerful countries protect parts of their economies, if necessary in defiance of international rules. A few years back Japan and America were close to trade war over the former’s determination not to remove tariffs on cars until it was good and ready. The EU’s subsidies on its agricultural sector is another example. But none of that is being allowed the poorer developing countries, whose infant industries are being decimated by enforced tariff abolition.
A South African case in point was the 1999 dispute over tariffs on poultry cuts which resulted in American products threatening the entire industry in South Africa. A distressed Zach Coetzee, of the SA Poultry Association, pointed out that a 3% surplus in the US is enough to replace total local poultry production. He asked for anti-dumping measures, but that is difficult to prove because the prices at delivery in SA were the same as those in the US - due to the huge economies of scale in that country. The system works inevitably in favour of the already capitalised and developed countries.
Some of this is now being recognised, but not, so far, corrected. Paul Collier, World Bank research department head, has noted that Africa is already globalised, but in the wrong way. Its trade has become even more concentrated in primary products. And its integration into the global capital markets has been the result of an estimated 70% of Africa’s private wealth being invested outside the continent. His solution? Attracting foreign investment by taking steps to diminish the perception of risk and reassuring investors of the sustainability of government policies. How? By putting in place external and internal agencies of restraint, which would make (government) policy reversals more difficult, and the development of arrangements that placed constraints on national policy makers. So much for democracy if it conflicts with World Bank policies.
The second implication of the globalised market is that people become consumers first and producers last: that is, it is their buying power that is most sought, their labour decreasingly valued. The prizes of the system go to consumers, in the form of cheaper prices, not to people who sell their skills and labour, which become increasingly redundant. The problem is that most people are both.
Unless, that is, they live on capital. The third and most devastating implication of the free global market is its application to capital. The purists of the current system think it should be moveable, unfettered and untaxed anywhere in the world at the tap of a computer button, and that ideal is close to complete. The freedom of capital to roam internationally is both cause and effect of the perception that capital is by far the most important factor of production. That is because its mobility ensures it benefits most from the simplest laws of supply and demand.
Labour is by definition less mobile - even if it were not to encounter the xenophobia rife in all relatively rich countries. Imagine the effect if workers could similarly transport themselves from one continent to another - perhaps at the rap of a space capsule button. I won’t be in next week: I understand they are paying more in Bangkok. Might it do something for their power where they are? Imagine the outcry about labour holding employers to ransom.
The result is an exponential increase in the rewards for capital. People who are mobile because they move with capital are paid galactic incomes, share options, perks and bonuses. The globalisation process is most refined in the capital sphere. In practice it is financiers who have become the arbiters of investment. It is the financial economy which determines the rules of the game. Governments and companies are obliged to win their confidence by meeting their requirements for quick return and minimum risk. That has profound implications for the setting of standards of work and environmental protection.
More money is involved in speculative capital movements around the world than in any other area of the world economy. In 1971 the daily volume of foreign exchange transactions worldwide was $10-20 billion. By 1983 it had risen to $60 billion; by 1995 to $1.3 trillion. Today it is over $2 trillion. (Daily Total Foreign Exchange Transactions, by the Bank for International Settlements)
This is over 150 times the total international trade in all commodities. It is about 100 times the daily trading in equities in all stock markets. Most important, it is some 50 times more than all the goods and services produced each day by all the industrialised countries. The volume of foreign exchange transactions grows at a rate of 20-25% per year, compared to an annual average of 5% in global trade. (Bernard Lietaer: The Future of Money )
Twenty years ago, 95% of money which moved around the globe financed real trade or real investment (some will have trade in money as trade, and investment in stock exchanges as investment). Today the proportions are reversed: 98% is purely speculative, 2% finances trade. Just twenty investment banks have twice as much money to move about the world than are in the reserves of all central banks. This capital originated in the productive sector, where goods are made and exchanged; but it is best rewarded in buying and selling currencies, shares and options.
Over fifty years ago, Keynes wrote: ‘Speculators may do no harm as bubbles on a steady stream of enterprise’. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes the by-product of a casino, the job is likely to be ill-done.
Where is all this money coming from, since it is not connected to the world of production? It is created by the action of banks, credit companies and such, as futures markets in creating credit. When money is lent it remains part of the assets of banks, and can be used for further credit creation. Hence the terrifying current pyramid of money without real backing. If governments had the task of creating money as a means of exchange for goods and services they would limit its total amount to that production. That is the rational way to expand the supply of money. Instead we have privatised that process, allowing banks to make a business out of what should be a calculated matching of production to the means of exchanging it.
Up there, in other words, in the world of speculative financial trading, is a gigantic dangerous virtual economy having hardly any productive connection with the real world of creation and exchange of goods - but capable of seriously destabilising it. Globalised capital creams profits from below and moves off in search of more. It requires the real economy to play to its rules in terms of tax regimes, lack of controls, deregulation, repayment of debt however incurred, freedom from trade union activity and state expenditures, government policies on worker protection and hence levels of profit. It punishes rebellion severely.
It is as if a giant suction effect were in operation extracting resources from below to the upper echelons - the people with capital. The result is that governments can no longer afford the welfare provisions that were taken for granted thirty years ago. The slowly expanding civilising processes of public provision - from health to transport to environmental standards, from education and the arts to prisons and criminal rehabilitation - have been halted and reversed. The support of poor, disabled and old people is now relegated to charity. The irony is that we are now incalculably richer; but we now shave our public welfare provision to the bone.
If any illusions remain about the trickle down effect of wealth we have only to consider the following facts about the rate at which wealth is being concentrated in the hands of the few.
The World Bank’s World Development Indicators in 1999 reported that levels of inequality have increased universally. The trend is most severe in the former Soviet Union. The number of Russians living in poverty is now 66 million, having risen from 2 million in 1987. The report said that South Africa is one of 34 countries where the poorest 20% received less than 5% of the country’s income; while the richest 20% get more than half. But it is not only the countries in violent transition or early stages of development which have suffered this trend. It is most marked in the United States, the epicentre and supposed exemplar of the benefits of the globalised economy. Since the mid-1970s the top one per cent of households has doubled its share of the national wealth, and now controls over 40%. That one per cent owns more than the bottom 95% - up from 90% only three years earlier. The majority of households have a lower net wealth - adjusting for inflation - than they did in 1983, having lost 80% of their net worth in that period. Average weekly wages in 1998 were 12% below those of 1973; and average hours of work rose by 163 days a year for the same pay. During that time productivity rose by 33%; so all of its fruits went to the holders of capital. (Economist Edward Woolf of New York University. Also Federal Reserve Survey of Consumer Finance, quoted by Jeff Gates)
If you had been following conventional academic and media economists you may have the impression that the American economy, unlike others, is flourishing. But household debt, as a percentage of income, rose between 1973 and 1998 from 58% to 85%. Today nearly one in five households have zero or negative net worth - more debt than assets. In 1997 1.4 million Americans filed for personal bankruptcy - roughly 7,000 an hour.
Perhaps the most telling description of growing inequality is that in 1980 top executives earned 42 times the average wage of a blue collar worker. By 1998 this had risen to 326 times, and one year later to 419.
All of this runs counter to the theory which justifies the present system - that the process of capital flows will create more equality by bringing poor and marginalised people into the world economy. The opposite has happened. Poverty, not wealth has been globalised. It is true that investment capital - rather than speculative capital - has flowed to where workers are poorest and least powerful, and in that sense has taken capital to the poor. But it remains there only as long as they remain poor. Employees internationally must compete for capital by a race to the bottom in terms of conditions, wages and standards.
Inequality is not only about wealth and poverty. Recent research shows that inequality - as well as absolute levels of poverty - is the main predictor of human illness. (Rachels Environment and Health Weekly, June 10, 1999). Class as measured by education and other status markers predicts health standards more powerfully than genetics, exposure to carcinogens, even smoking.
The fourth result of the globalised market is to undermine independence, both for individuals and for governments. Your job in Johannesburg depends on what is happening in Mexico; mine in Chicago is not safe, however well I work, if a cost breakthrough happens in Dacca. We may be a wonderfully efficient firm but if our shareholders decide people in Oslo would do it even cheaper we are out in the cold. If governments in distant parts collapse we will totter no matter how sound our policies. Herd psychology in speculative markets can dislocate whole regions. Neither we as individuals nor our governments are in control of our fate. We are all interconnected; and must be constantly on our guard against giving offence to the unforgiving markets.
An IMF report - summarised in the EU’s journal Courier, August 97 - makes the point. The North American Free Trade Agreement (NAFTA) works well, it said: jobs lost through relocation of US industries are compensated for by the creation of jobs elsewhere. The report indignantly rejects the idea that liberalisation of trade results in a loss of economic sovereignty. There is no limit on government autonomy, only a restriction on making economic policy errors (my emphasis).
Fifth, the current system raises serious questions about what constitutes work and how it should be related to income. Through the ages mankind has assumed that income must be the result of work for which someone else is prepared to pay. But finding work is no longer an obvious process. Not only was it separated since the industrial revolution from the homestead, it is now at the mercy of international forces and globalised capital. Even if we assume every person can be an entrepreneur, their efforts are linked to events and trends over which they have no control.
Yet we still punish people who cannot find employment. We know that full employment in the old sense - a paid job for anyone who can and wants to have one - is a thing of the past. Technology has ended the era of full employment. But we have not worked out how to distribute income if employment is not available and feasible. Even minimum welfare benefits during unemployment are frowned upon in the present dispensation.
We need also to face the psychological and social effects of this kind of economy. Political leaders battle to support family values against economic imperatives that extol competitiveness, create unprecedented financial insecurity and demand as price of survival long hours of work by both parents. Experience as well as research teaches us this is a recipe for family instability, child neglect, delinquency and mental illness. Add unemployment and fear for self and family survival - and crime must increase.
Cold New World: Growing up in the Harder Country, a new book by William Finnegan, describes young people in a variety of American settings and what the current socio-economic climate has done to them. In a middle class suburb he found a war raging between gangs alienated from their society by the incoherence of their society’s ideals and the physical, psychic and psychological poverty around them. Black, White or Latino, they share the idea that the world is a casino where the games are rigged. In the city that is home to Yale University, a third of all children in kindergarten have cocaine-addicted mothers. America now spends more on prisons than on secondary education.
The by-now-chronic scale of social destruction is not unique to the US. The globalisation of crime syndicates has raised the efficiency of crime in South Africa, since Russian as well as the conventional European Mafia have noted the fertile soil of desperate poverty and inequality.
The acclaimed modern sociologist, Manuel Castells, points out that one striking example of the loss of control is how global crime networks are taking over whole systems of government - Mexico, Colombia, Russia, Ukraine, parts of Italy. Organised crime uses hi-tech networks and financial markets: it has become impossible to track money. The UN has estimated that $750 billion is laundered through the financial markets. The traffic in drugs is worth the same as the trade in oil. Castells concludes that this network society, by combing the globe ceaselessly for things of value, excludes everyone and everything not of value. And those excluded are not just in third world countries: they are in South Bronx, in Tower Hamlets, in Naples. It has the potential to become one the most exclusionary systems in history, while also the potential to be the most productive.
Castells puts some faith in the decentralisation of power to regional levels, so that a new politics of the local can gain substance.
The rising threat of neo-nazism throughout Europe is a direct result of insecurity and alienation. History shows that letting the wealth gap widen brings hooliganism and the politics of scapegoating. Today, as people are edged off the ladder, they become fuel for fascism and hate leaders. The rise of religious fundamentalism is a manifestation of that fanaticism and projection of blame. The same applies to nationalisms and xenophobia.
When people have to compete for wholly inadequate resources they form gangs and creeds and nations to effect their raids. Abundance may have its downsides, but these do not include people fighting like packs of wild animals and slaughtering others without remorse or mercy. We have seen the phenomenon in Yugoslavia, in the former South African< homelands, in the former Soviet Union, in parts of the Sahel region of Africa and in the demoralised wastes of European, British and American slums.
And always, everywhere, poverty and marginalisation and demoralisation hits the most vulnerable first - the children and the women. In poor areas women are most likely to be abandoned by the fathers of their children. Noeleen Heyzer, director of the UN Development Fund sums up: "When societies, communities and families collapse … women are expected to be the extraordinary heroes of everyday life…Yet they are the first to be hit by an economic crisis and the ones to feel immediate effects of cuts in basic services".
The question is: How can all this change? There are some encouraging signs of rethinking at the heart of the current establishment of beneficiaries. George Soros, master global financier, says: "The international financial system is suffering from systemic breakdown, but we are unwilling to acknowledge it… The prevailing system of international lending is fundamentally flawed, yet the IMF regards it as its mission to preserve it… The private sector is ill-suited to allocate international credit… it is not concerned with macro-economic balance…" He argues that the movement of international funds needs to be regulated by a new international authority.
Soros’ message is reinforced by Jeffrey Sachs, influential head of Harvard’s IID. He rejects the idea that the Asian crash had fundamental economic causes which were in fact financial panic itself. He says: "Asia is reeling… from a self-fulfilling withdrawal of short-term loans… Since short-term debts exceed foreign exchange reserves, it is rational for each investor to join in the panic." He is highly critical of the IMF - for its failures to analyse and predict, and for its solutions which make the problems worse.
The 1998 meeting of the World Bank and the IMF heard the former’s President, James Wolfensohn, declare "We have been too narrow in our conception of the economic transformations that are required." He agreed with many Bank critics, and concluded: "We have not thought sufficiently about the vulnerabilities or sustainability…. We may build a new international financial architecture. But it will be a house built on sand." At the same meeting, Michel Camdessus, IMF head, unfortunately showed no signs of such doubts, simply repeating the old formulae for recovery.
Lionel Jospin, French Premier, described the current system in 1998 as "structurally weak". As it creates wealth it concentrates it to excess; as it ensures that production rises, so it tends to exclude more men and women from the world of work. (It) carries disequilibrium within itself.
Meanwhile the World Trade Organisation, successor to GATT, widely seen as the international police service for trade and investment deregulation and privatisation, has aroused an international popular movement in opposition. London’s select St James Square, site of the Royal Institute of International Affairs, endured a hail of custard pies when WTO head Renato Ruggiero left after a speech. The WTOs 1999 meeting in Davos experienced a new mood of insecurity. The top leaders had no solutions to the facts there recorded: that in the previous year growth in world output was halved; that over 40% of Latin America’s population lives below the poverty line; that 3.65 million Koreans are newly unemployed, and the like. Although President Clinton persists with the old solutions - tear down barriers, open markets and expand trade - the demand for capital controls was expanding. Egyptian President Mubarak summed up the mood of South countries: "There is a bitter sentiment of injustice. A sense that there must be something wrong with a system that wipes out years of hard-won development. Our global village has caught fire."
Seeing the positive side of the insecurity felt at Davos, the South African economist Hein Marais, who attended the meeting, concluded that it served as a kind of wake for the neo-liberal consensus - providing opportunities for countries like South Africa to contest the international economic regime through issue-specific alliances among particular blocs of countries.
But some think humanity under its present leadership will not act in time. They suggest we will be overtaken by a financial crisis caused by the overpricing of stocks especially in the US. In the 1920s, just before the Crash, the ratio between the value of shares and the assets which supported them was (to come); today it is (?) The present bubble has the potential to destroy millions of lives if (when?) it bursts.
For example, the results of the Asian financial meltdown was that huge numbers of their assets were bought at basement prices by American banks. In Thailand, for instance, 56 domestic banks were closed and unemployment virtually doubled overnight; in Korea there were some 15 000 bankruptcies resulting from the liquidation of merchant banks. Japan’s financial collapse left the American financial centres in even more control. A collapse on Wall Street would make volcanic waves.
Whether the current system ends in financial collapse or through sensible changes made by agreement at the international level, it is clear that radical solutions are needed in each of the following areas:
These areas of reform are the subject of different chapters in a forthcoming book.