Not so new economics
Michael Roberts reports on John McDonnell’s plan to ‘transform capitalism’
Over 1,000 people packed into a London college on May 21 to take part in a day of analysis of the state of the British economy organised by the Labour Party. And hundreds had been turned away. This was a conference called by the new leftwing leadership, and the hard-working and dedicated activists who had backed Jeremy Corbyn turned out in droves to discuss with due intent what is wrong with capitalism in Britain and what to do about it. It was an unprecedented event: the leadership had actually called a meeting to discuss economic policy and were allowing party members to put their point of view.
Labour’s finance leader, John McDonnell, opened the conference by saying the aim of the various sessions was to see how Labour could “transform capitalism” into delivering a “fairer, democratic, sustainable prosperity, shared by all”. We needed to “rewrite the rules” of capitalism to make it work for everybody. He argued that British capital was failing to invest for growth and jobs. So we should break with the ‘free market’ ideology of the neoliberal agenda, and “reshape the narrative” with “new economics”.
What was this “new economics”? Well, I am afraid it was not new at all, but really a rehash of old Keynesian arguments and policy proposals. As McDonnell had made clear, the aim was to “transform capitalism” through new rules and state intervention, not to replace it.
The keynote speaker at the conference was left Keynesian Cambridge University economist Ha-Joon Chang. He delivered an entertaining and amusing presentation, the gist of which he had already written in an article for The Guardian newspaper that week.1Chang presented a compelling argument that the strategy adopted by previous governments, both rightwing and Labour, of weakening manufacturing and industry in favour of finance, property and other unproductive services (in other words, turning Britain into a rentier economy2) was a big mistake.
British capitalism was failing to compete in world markets and had a record high deficit on trade with the rest of the world.
And its people had seen no rise in real incomes for eight years since the global financial collapse. British economic strategists reckon that the UK economy did not need a thriving industrial base and could rely on its financial services - just like Switzerland. The irony was that Switzerland is actually the most industrialised economy in the world, as measured by manufacturing output per person. In contrast, British manufacturing has been in rapid decline as a share of total output among major capitalist economies.
Chang reckoned Labour should aim to boost research and investment and development, because those sectors can raise productivity for all sectors and incomes. But he did not expand on how that was to be done in an economic world where banks and hedge funds rule, while loans are made for property and businesses hold back from investment.
In the finance workshop, the poverty of analysis and policy was very evident. The main speakers were Frances Coppola, who has worked as an economist in many banks and now runs a blog on economics;3 and Anastasia Nesvetailova, who is a professor at the City of London University4 and has spoken before at the series of ‘new economics’ meetings run by the Labour Party.5 Both speakers basically told the hundreds listening that the regulation of the banks would not avoid a future financial crash - indeed by making regulation ‘too tight’, it was strangling the ability of the banks to lend. A financial transaction tax would not work either in controlling risk-taking by banks, particularly in new finance areas outside regulation. Breaking up the big banks or separating their speculative operations from basic banking would not work either. Indeed, nothing would work to avoid yet another crash in the future: “We just have to prepare for one”!
So our finance experts had not a clue about what to do. Staring them in the face was the obvious answer. If the big banks are still engaged in risk activities, in greedy laundering and in paying grotesque salaries to their top executives, despite regulation, why not take them into public ownership under democratic control, so that banking becomes a public service for the people to help investment and growth? This policy move was never even considered by these banking experts - even though the Fire Brigades Union produced an analysis showing why it was the best way forward, which was formally approved by the Trades Union Congress.6 I was told that state-owned banks would not work because they are corrupted by politicians - sure, as opposed to privately-owned banks that are as pure as snow.7
At least in the session on fiscal and monetary policy, Michael Burke8 provided a coherent account of how the weak economic recovery in the major economies, including the UK, was not due to a lack of consumer demand, as the Keynesian ‘experts’ keep arguing, but to one major factor: the failure of business to invest. The graph below for the UK shows how it was investment that collapsed in the great recession, not consumption. It was the same story in all the major economies.9
The large companies were hoarding cash, small businesses were just hanging on and governments were cutting back on public-sector investment. Indeed, British capital has the lowest level of investment compared to gross domestic product of all the major capitalist economies.
Weak and even falling investment had lowered growth rates and so held down incomes. The answer was a new plan for growth based on public investment.
The conclusion of the day’s conference screamed out to me. The capitalist sector had caused the crash, not the public sector. But the public sector had to pay with increased debt and a reduction in the role of the state as support for growth and as a safety net for those who lost their jobs, homes and incomes.
So instead of trying to “transform capitalism”, Labour needs to develop a programme to replace capitalism by bringing into public ownership the major banks and business sectors under democratic control, to be integrated into a plan for investment in people’s needs, not profit. But instead, Labour’s advisors and experts offered just some old ideas that had been tried and failed before to direct or regulate capitalism to make it ‘work better’.
No new economics there.
1. ‘Making things matters - this is what Britain forgot’ The Guardian May 18.
2. See https://thenextrecession.wordpress.com/2013/01/28/the-rentier-economy.
5. See https://thenextrecession.wordpress.com/2016/03/31/is-finance-fit-for-purpose.
8. See http://socialisteconomicbulletin.blogspot.co.uk.