We should be challenging finance capital, not trying to save it.
The current financial and economic crisis has, thankfully, not been as severe as the great depression. Lehman’s bankruptcy in September last year had the potential to be a Creditanstalt moment, heralding a wave of bank failures and complete economic collapse. Swift action from policy-makers in finance ministries and central banks has averted this. Despite this, however, unemployment in some countries (Spain, Ireland, vast swathes of Central and Eastern Europe) is reaching depression-like levels. Even in Germany, now enjoying its second quarter of successive GDP growth, unemployment is at 8.1 per cent. What is to blame?
The left has been here before. In the 1930s the Labour Party grappled with these issues after the deeply scarring experiences of its time in office between 1929 and 1931. It drew on ‘city opinion’ through the XYZ club and young, radical economists such as Joan Robinson, Evan Durbin and James Meade, and was heavily influenced by Keynes. Party commissions under Hugh Dalton came to the conclusion that the problem was ‘finance capitalism’. Crucially the party in the 1930s was prepared to think outside of the then dominant economic paradigm of ‘classical economics’. And even more importantly, it was prepared to think not just in terms of ‘economics’ but in terms of ‘political economy’. The 1944 paper ‘Finance and Full Employment’ resonates today:
‘Blame for unemployment lies more with finance than with industry. Mass unemployment is never the fault of the worker; often it is not the fault of the employers. All widespread trade depressions in modern times have financial causes; successive inflation and deflation, obstinate adherence to the gold standard, reckless speculation, and over investment in particular industries …
Finance must be the servant, and the intelligent servant, of the community and productive industry; not their stupid master.’
‘Finance capitalism’ represents the subordination of production (and hence much employment) to the pursuit of money profits in financial markets through trading in stocks, bonds and other instruments. This can lead to the ‘real’ economy being starved of the investment it needs. One of the largest drivers of the current recession is a collapse in investment levels – at least partially driven by the failure of finance capitalists to supply credit. We are in now a perverse situation whereby banks that were for a decade prepared to lend for consumption and speculation on property and financial instruments are currently not prepared to lend for the financing of the necessary rebalancing of economies towards greener, sustainable growth.
The radical agenda of financial reform pushed in the early years of the Attlee government (most notably nationalising the Bank of England, the establishment of the Industrial & Commercial Finance Corporation and Dalton’s 1945-47 ‘cheap money’ policy) represented a direct challenge to the economic structure. Social democrats now must embrace a similar programme based around one of Keynes’s fundamental insights – that there is no necessary reason for the scarcity of finance capital:
‘Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.’
As Keynes went on to argue:
‘we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and … [Finance capital will be] … harnessed to the service of the community on reasonable terms of reward.’
Keynes was a liberal aiming to save capitalism from itself, but Dalton recognised that his methods could be used for ‘socialist ends’.
A deliberate policy of low interest rates, aiming to increase the volume of financial capital and fund the ‘green stimulus’ that we desperately need, is achievable. But simply giving money to finance capitalists – essentially the current policy of quantitative easing – will achieve nothing more than supporting asset prices. What is called for is Keynes’s ‘somewhat comprehensive socialisation of investment’, with the ultimate goal of the ‘euthanasia of the rentier’. A social democratic economy requires that finance is challenged directly.