20th September, 2008
In the midst of all this tragedy and chaos, one has to savour the moment. The sight of all those free-market capitalists, trained by economists at the Chicago School of neo-liberalism, handing over to ‘big government’ the financial system of the biggest free market economy in the world.
And in the midst of what will prove to be a prolonged period of economic failure, one must be allowed to indulge just one feint sense of satisfaction. For only a couple of weeks ago (see below) Jim O’Neill chief economist at Goldman Sachs, advised me, and a BBC World Service audience that this financial catastrophe was no big deal, ‘just another periodic crisis’….. like five that he had already lived through. (He was referring, I believe, to crises such as that of the US stock market of 1987, the South East Asian crisis of 1998 and the Dot.com crash of 2001.)
It is now pretty clear that I, without the data, research back-up and infrastructure that supports Jim O’Neill’s analyses – already knew that this was not at all like the previous ‘periodic crises’. With my background in Keynesian monetary theory, I had a more sophisticated and accurate view of the gravity of this crisis than Goldman Sachs’s neo-liberal economists. Regrettably my foresight and wisdom did not extend to earning Goldman Sachs-like fees. More fool me.
Last year, at a seminar in Cambridge, a prominent economist with a column on one of Britain’s most prestigious newspapers, argued to me that managing the distribution of money was a little like managing the distribution of bread. He gaily recounted the story of Kruschev visiting New York in the 1950s – when he asked to be introduced to the man who so miraculously distributed bread throughout that city. His American hosts replied that bread was distributed not by a man or a company, but by ‘the invisible hand’. In just the same way, argued this orthodox economist, money is distributed effortlessly, and above all efficiently by financial markets. Despite the ‘debtonation’ of 9th August, 2007, he argued, the management of finance could be trusted to Adam Smith’s terminal, prehensile limb.
It now turns out that Adam Smith’s invisible hand was not quite up to the task.
Money is not like bread, or wheat, I argued. Why? Because it is not a commodity that can, like wheat, or oil or gas, become scarce. It is not dug up from the ground like potatoes or oil. Above all, it does not grow on trees. It cannot become scarce, because it is something created by man – it is a social construct.
As such it is a very powerful tool in making economies work, and its abuse and misuse can lead to the kind of catastrophic events of the 1930s and the ones we are now witnessing.
The distribution and management of money and credit, i.e. the regualtion of capital; the price we pay for money and credit (interest rates) and the flows of money across the world – are all so vital to the functioning not just of the economy, but also of society, that it must therefore be governed and managed prudently. Above all, money, this social construct, must be governed and managed in the interests of the whole of society – not just bankers and the finance sector. What has happened under the dominance of orthodox economics and the de-regulation of finance, is that the finance sector now controls the movement of capital, the setting of interest rates and the creation of credit. And they do so in the interests of – you guessed it – Finance.
Society must now transform this way of managing our financial sector. Money, credit and capital flows must in future be governed and managed to serve the interests of all who need it – both those we would broadly define as ‘Labour’ and those we would broadly define as ‘Industry’, which includes agriculture of course.
And orthodox economists must be shunted to the margins of history.