“The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.” The words of the Italian Marxist Antonio Gramsci, written in the late 1920s, seem acutely relevant to our own time.
You would have to be basically insentient not to appreciate that there is something deeply awry with our economy. The description “financial crisis” is patently inadequate. We are in an economic crisis, whose roots stretch back decades.
But there is something immobile about our economic situation. Economic growth has flatlined and, in response, politics becomes incrementally nastier and more desperate. Change threatens - Syriza almost gets elected in Greece and the Socialist party in Holland - but it ultimately doesn’t break through the prevailing stasis.
Two English economists, Stewart Lansley and Harry Shutt, have characterised our situation as “economic paralysis”. Capitalism refuses to be restored to health, but there is not an alternative economic model that commands widespread allegiance or even understanding. The old is dying but the new cannot be born.
Both Lansley and Shutt say blaming reckless banks is inadequate. They may have provided the final spark, says Lansley, but the slow-burning fuse had been laid years earlier. Shutt says discussion of the crisis has been uniformly superficial and evades questioning how the economy became so dysfunctional.
Both claim that without sweeping transformation, we are doomed to repeat the past. Lansley says the economy is being steered towards another wave of destructive speculation. Shutt predicts an inevitable fresh financial crisis.
But, crucially, and despite definite similarities, Lansley and Shutt are advocating very different things. Lansley, who is closely associated with the Trades Union Congress in Britain, wants a new model of capitalism. Shutt, far more of a radical, believes capitalism itself is outmoded and to attempt to prolong its existence will irreparably damage society.
Stewart Lansley and the Cost of Inequality
Lansley’s fundamental idea is that the huge economic inequalities that have built up over the last 30 years - in FTSE 100 companies, the pay of the lowest earners is now one-third of one percent that of the highest – are lethal to capitalist economic health.
As with Richard Wolff in the US, Lansley describes this as a dual process. There is too much money at the top of society as well too little in society at large. The share of GDP going to wages in Britain has fallen just as the share going to profits has risen. Demand – essential for a healthy capitalist economy – would have collapsed long ago were it not for an exponential increase in consumer debt. This has been dubbed “privatised Keynesianism”.
Consumer debt is a relatively new phenomenon. Before the 1980s, when wages kept up with productivity, widespread consumer debt was not needed.
But while demand has stalled, this process of inequality has the opposite effect at the top of society. There incomes have risen spectacularly. The number of millionaires in Britain increased eight times in the decade to 2006.
The interest from consumer debt adds to the glut of money. “The squeeze on wages, rising profitability, and soaring personal fortunes all meant the accumulation of big corporate and private cash reserves across the globe,” says Lansley. This money is employed to transfer existing wealth rather than create new wealth. Companies merge or are taken over, firms are bought out by private equity groups and loaded with debt, often destroying them at the same time as makng more money for their buyers. This is exactly how Mitt Romney made his fortune.
This “money economy” says Lansley is dominant, while the productive economy is starved of investment, partly because there is not enough demand to make high returns from “organic growth”.
“The result of this imbalance is economic paralysis,” says Lansley “While the workforce is denied spending power, the leaders of corporate Britain are allowing near record surpluses to stand mostly idle.” We wait for a probable new financial crisis, while the economy cannot throw off recession.
Harry Shutt and the growth delusion
Shutt too, has described our predicament as “economic paralysis”. Like Lansley, he says there is a “wall of money” at the top of society perpetually seeking new ways to make more money. This is manifested in the growth of private equity, mergers and acquisitions of companies, and speculation in property or “commodities” like food (speculation means buying assets in the hope their market value goes up and they can be sold for a profit).
This is what the author John Lancaster has dubbed “fake growth”. It is not investment in new products or innovations (organic growth) but the buying of assets in the expectation that their value will rise. Or what Lansley calls the transfer of existing wealth, not the creation of new wealth.
But at this point Shutt and Lansley diverge. Shutt does not locate this paralysis in the growth of inequality but in a long-term decline (since the 1980s) in the demand for capital investment. This sounds a forbidding and technical term so what does it mean?
Services are replacing manufacturing and they require less capital investment than the machines of the traditional factory. In areas like online newspapers, recorded music, telecommunications, and movies, traditional corporations are finding it harder and harder to stay in business, especially as the rate of return demanded by investors has been pushed higher.
Rapid technical advance means that it is increasingly seen as too risky to invest a lot of money in new technologies, which can quickly become outdated, while new start-up companies can be created with little capital investment, using the internet for example.
The result of these processes is to drive investment into financial speculation rather than “organic growth”. Property (sub-prime mortgages and asset-backed securities), mergers and acquisitions and public services (in the latter case high returns are guaranteed by the state), are all destinations for this investment.
Lansley blames the dominance of the money economy, its “supranormal” profits, on the “perverse incentives” of personal enrichment, which neglect the needs of the wider economy. Shutt, by contrast, believes the triumph of finance is simply a result of a rational calculation of where the highest financial returns can be made. If that is true, investment cannot be diverted to more beneficial and less lucrative opportunities, merely by exhortation. But speculation also does not lead, Shutt believes, to enduring and sustainable rates of economic growth.
Future upswings in the economy will, of necessity, be brief and will primarily be based on speculation. “There is not only no chance of reviving growth for the immediate future but very little prospect of ever returning to the relatively high growth rates of the past on a sustained basis,” he says.
Lansley, by contrast, is convinced growth can be revived if the imbalance between profit and wages is redressed, and workers receive a fairer share of soaring profit in wages.
Economic growth and its evasiveness continue to dominate political debate. Jobs and growth are at forefront of the American Presidential election campaign. The right-wing, in a kind of hair of the dog that bit you approach, claims growth can be achieved through tax cuts, deregulation and people working harder. A morbid symptom if ever there was one. Back on Planet Earth, the left of centre, wants to reign in finance, restore the bargaining power of labour and encourage manufacturing.
But what if neither approach will work? What happens if growth refuses to return to the black? What are the political consequences of an entire political culture failing to achieve its objective but refusing to see that the objective may be impossible?
The old may be dying but the new is barely visible on the horizon.