When The Facts Change?

Maurice Glasman is very well worth attending to:

A debate is finally taking shape around the kind of political economy we need to rebuild our country. Starting with John Maynard Keynes is not a bad idea: his support for a cap on interest rates – so as to curb the predations of creditors on debtors – is still important and relevant. Arguing for a limit on the power of money, he was faithful to a long tradition of political economy that was concerned with the balance of interests and the dangers of financial domination.

But Keynes perhaps also gets more credit than he is due today. The practice of counter-cyclical public spending on public works in order to protect the real economy, the status of citizens and the institutions of society, goes back, as does so much else these days, to Athens. It has been a fundamental tool of statecraft for as long as democracy and markets have been negotiating their tortuous settlement. There is nothing distinctively Keynesian about public spending in a recession. What is distinctive is the reliance on the Treasury to achieve this, on taxation and centrally administered spending as a method of generating growth.

Apart from the odd flashes of ambiguous insight in chapter 12 of The General Theory of Employment, Interest and Money, there is not much going on in Keynes concerning regional, sectoral or vocational institutions within the economy, or any mediating institutions between the individual and the state. No theory of the firm, and what a good firm might be; no balance of power in the governance of the firm. There is no theory of value and the institutional conditions under which durable economic growth is possible.

Above all, there is no insight into the logic of commodification that underpins capitalism and the decentralised democratic institutions required to preserve knowledge, trust and innovation. Keynes gets as far as the public interest but falters in sight of the common good. What is needed is not another discussion of the real Keynes, but a better theory that can learn from the successes and failures of Keynesian policy over the past 60 years.

The practices and institutions of the social market economy in Germany and the theoretical framework given by Karl Polanyi in The Great Transformation are perhaps a better guide to action. Aristotle and Catholic Social Thought turned out to have more durable value in their political economy than was considered the case before the crash.

The practical predicament we confront is that the combination of finance capital and public administration – the dominant drivers of employment and growth over the past 30 years – has not generated very much value. Of the £1.3 trillion lent by banks in the British economy between 1997 and 2007, 84% was in mortgages and financial services. Debt was the great growth area. In the combination of household debt and those held by UK financial institutions, Britain is indeed a world leader, and this comparative advantage has been building for a long time. Private indebtedness was the most recent method by which we borrowed against our future to serve the present – it has now reached its limit.

The theoretical predicament is that on their own, neither a Keynesian nor a neoclassical approach can grasp the importance of institutions; of vocation, virtue and value in generating competitive advantage, reciprocity as the foundation of good practice and the importance of long-term relationships between capital, labour and place in generating growth and innovation. It sounds like a foreign language but ethos, virtuosity and leadership are fundamental to a firm's success in contemporary capitalism. The ugly economic phrase is "value added". The importance of these institutions and practices is the lesson of the comparative strength of the German political-economy, which did not pursue a Keynesian model after 1945, but one based on worker representation in firms, a vocational economy and robust regional banks constrained to lend within the region or the sector. The importance of the body politic as well as of the administrative state is one way of describing this.

Another way of saying all this is that if a stimulus package is conceived without embedding that investment in a strategic plan that will lead to the creation new institutions, then we have a fundamental problem: we are generating debt, not value. It is the economic equivalent of Viagra, so to speak: what happens when the external stimulus wears off?

If, however, a stimulus package is embedded in the generation of a different type of economy, characterised by strong firms, embedded regional banks, vocational institutions and land trusts, a living wage and an interest rate cap – then value can be generated in areas other than rationalization and financialisation. Decentralised vocational institutions is the way ahead and that involves statecraft rather than statism. Capitalism cannot be regulated at arms length – it needs to be domesticated at source. That is the lesson of the crash.

Keynesians have an instinctive preference for the big bazooka over the guerrilla army, for the centralised state rather than the small platoon, the coup rather than the insurgency, the stimulus package over the long-term relationship. This hints at its lineage in the liberal colonial state, rather than the Labour tradition which prioritised democratic governance, vocational sectoral institutions and land reform. Many of those insights were blocked out by the emergence of Keynesian macromanagement, which effectively excluded worker participation, local ownership or strong regional democracy from the postwar settlement. No one considered that tradition might be an aspect of modernity. Building up locational and vocational democratic institutions was not part of the Keynesian tool kit.

So what can be done? The lack of capital in the regions requires not simply the establishment of one big industrial bank, but regional banks and sectoral banks that can build long-term relationships with local companies and their specific needs. One other obvious measure would be the immediate endowment of Dover port in trust to the people of Dover, so that capital, labour and town can forge a common good together. The redistribution of power is as important as the redistribution of wealth.

Keynes' General Theory was published in 1936, seven years after the Wall Street crash. It provided the framework for a new economic consensus that endured for 30 years across divided political systems, in war and peace. The consensus eroded due to inflation, a lack of growth and public deficits and was superseded by a strategy of private debt, initiated by Thatcher but continued by New Labour. That's where we are now, and it's a very bad place. Let's hope that we don't have to wait another five years for a new paradigm to emerge which can break the debt and deficit cycle. The Labour tradition, and the labour theory of value, rather than liberalism, political or economic, offers the resources best suited for the task ahead.