Global Dimensions Of The Financial Crisis
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Tomorrow’sCapitalism
GlobalDimensionsof theFinancialCrisis ByGerryHoltham,ManagingPartner,CadwynCapitalLLP
June2009
www.ippr.org/tomorrowscapitalism
2
Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
Aboutippr TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank, producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand sustainableworld.Since1988,wehavebeenattheforefrontofprogressivedebateand policymakingintheUK.Throughourindependentresearchandanalysiswedefinenew agendasforchangeandprovidepracticalsolutionstochallengesacrossthefullrangeof publicpolicyissues. WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-based aspossible,whileourinternationalandmigrationteamsandclimatechange programmeextendourpartnershipsandinfluencebeyondtheUK,givingusatruly world-classreputationforhighqualityresearch. ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100 E:[email protected]RegisteredCharityNo.800065 ThispaperwasfirstpublishedinJune2009.©ippr2009
‘Tomorrow’sCapitalism’ Tomorrow’sCapitalismisamajorprogrammeofworkpresentedbyipprinconjunction withFriendsProvidentFoundation.Itaimstoexplorethefutureofourfinancialand economicsystem.Formoredetailsandtoaccessotherpapersfromtheprogrammevisit www.ippr.org/tomorrowscapitalism
www.ippr.org/tomorrowscapitalism
Theviewsinthispaperarethoseoftheauthoronlyanddonotnecessarilyrepresent thoseofipprorFriendsProvidentFoundation.
3
Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
GlobalDimensionsoftheFinancialCrisis Introduction Allanalysesofthecurrentcrisishavebeenincomplete.Theydealwithsymptoms,not causes.Therehasbeenafocusonfinancialsectorinstitutionsandregulation,onthe operationofmonetarypolicyandonallegedpolicyerrors.Thesethingswereimportantin shapingthewaythatthecrisisevolvedbuttheyarenotatitsroot.Thetruthisthatthe worldanditseconomyhavechangedinwaysthatarelikelytoleadtoperiodicinstability. Thechangeshavenotbeenrecognisedandassimilatedinthepracticeofmonetarypolicyor inthewaythatpoliticiansregardtheeconomy. Controlsontheinternationalmovementofcapitalweregenerallyliftedinthe1970sand 1980s.Togetherwiththecollapseofcommunism,whichreleasedmillionsofworkersintothe capitalistworldeconomy,capitalliberalisationeffectivelyrecreatedaglobal‘reservearmyof labour’.Aswidelynoted,thatdevelopmentcontributedtoariseintheshareofprofitsin worldGDP,andintheGDPofmostindividualcountries,andadeclineintheshareofwage income.Whatwasnotwidelynotedisthatsuchadevelopmenteasilyleadseithertooverinvestmentbybusinessesorashortfallofaggregatedemand.Whenwageslag,consumer spendingcanonlykeepupwithoutputthroughacontinuingexpansionofconsumerdebt. Thesetendenciesareattheheartofthepresentcrisis.
Thepost-warera Theperiodfromtheendofthesecondworldwartotheearly1970swasoneoffull employmentinthecapitalistworldand,inEuropeandJapanatleast,rapidgrowth.Capital controlswereverygeneralandremainedinplaceevenastradeingoodsandserviceswas progressivelyliberalised.Internationaltradegrewrapidly.Therewasageneralconfidencethat fullemploymentcouldbemaintainedbythetechniques‘discovered’intheKeynesian revolution.Byusingfiscalandmonetarypolicygovernment,itwasthought,couldensure thattheslumpconditionsoftheinter-waryearswouldneverberepeated.
www.ippr.org/tomorrowscapitalism
TheBrettonWoodssystemhadordainedfixed,orratheradjustable-peg,exchangerates. Givenlimitationsontheinternationalmovementofcapital,pegswerethreatenedmainlyby tradeimbalances.Sincethatimpliedlimitsonthesizeoftradedeficits,countries’ratesof investmentwerelargelylimitedbydomesticratesofsaving. Thenemesisofthesystemwasinflation.ThePolisheconomistMichaelKalecki,who anticipatedmuchoftheKeynesianrevolutioninhisownwritings,identifiedthedifficultyin maintainingfullemployment.Therewouldbeaproblemofincipientinflationasworkers pushedforhigherwagesandthesewerepassedoninprices.Hisconclusionwasthat governmentswouldengineerperiodicboutsofunemploymenttomaintaindisciplineand keepwageinflationundercontrol–inotherwordsdeliberatelyreintroduceasynthetictrade cycle.Somecountriesevolvedcorporatistprocedures,likeincomespoliciesorcentralised wagebargaining,tomaketheprocesslesspainfulbutinflationwidelybegantocreephigher throughthe1960s.Differentialinflationrates,withtheUnitedStatesarelativelyhighinflationoffender,ledtothebreak-downofthefixedexchangeratesystemin1971and generalisedfloatingofcurrenciesin1973. Thesystemwasunsuitedtodealingeasilywithtermsoftradeshockswherebythepriceofa country’simportsroserelativetoitsexportprices.Suchashockinevitablyreducesnational incomeandwouldbelikelytotriggerabattleoverwhetherprofitsorwagesborethebrunt ofthereduction.Suchabattleoverincomeshareswouldtypicallytaketheformofan aggravatedwage-pricespiral.
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
Theoilpricesurgesofthe1970swereexactlysuchatermsoftradeshockthataffectedall Westerncountries.ThefirstshockwascausedbytheactionofArabstatesaftertheYom Kippurwarof1973,whentheysuspendedoildeliveriesforpoliticalreasons.The demonstrationoftheirpower,however,strengthenedtheOPECoilcartelandpriceswere drivenhigher.Thisledtostagflation,ariseinbothinflationandunemployment.Therewas muchglibtalkaboutstagflationunderminingKeynesianeconomicsbut,onatheoretical level,itpresentednodifficultiesforKeynesianorindeedcompetingtheories.Itwassimply theconsequenceofthedeteriorationinthetermsoftradewhich,inKalecki’sterms,meanta politicalrecessionhadtobeenduredtorestorewagediscipline. Countriesoftentriedtocountertheeffectsofunemploymentafterthefirstoilshockwith counter-cyclicalfiscalpolicybutafterthefalloftheShahofIranledtothesecondoilshock in1980andinflationsoaredagain,theironenteredthesoul.Almostallcountriesvotedin governmentsthatfollowedrestrictivepolicies,drivingupunemploymentuntilinflationfell, ultimatelysharply.AlthoughnothingthathappenedwouldhavesurprisedKaleckiinthe least,theexperienceledtoachangeinthedominantviewofhowtomanagetheeconomy. Therewasanincreasingacceptanceofatheoryofinflationthatheldtherewasonlyonerate ofunemploymentconsistentwithstableinflationand,ifmonetarypolicytriedtomaintain anyotherrate,inflationwouldaccelerateordeceleratewithoutlimit.Thepromotersofthis theoryalsobelievedthatthemarketsystemwouldgenerallybestableatthatnatural unemploymentrateandsopolicyshouldsimplyconcentrateoncontrollinginflation. Byandlarge,centralbankshavecontinuedtoactasifthatworldoftheearly1980swasthe onethatstillexisted–rightuptothecurrentcrisis.Theyperceivedtheirroleascontesting wage-priceinflationbyapolicyoftargetinginflation,lettingrealactivitylookafteritself.
Theeraoffreecapitalflows
www.ippr.org/tomorrowscapitalism
Intheearly1980s,theworldbegantochange.Beforethennearlyallpost-Warrecessions hadbeentriggeredbyaburstofinflationandapolicyresponse.After1980,however,there wereseveralmoreorlessseriousrecessionsaroundtheworldandonlyoneofthemwas precededbyaseriousriseinwageinflation–intheUKattheendofthe1980s.Allothers werecausedbyadifferentmechanismentirely,towhichtheorists,governmentsandcentral bankshavebeenblind. Governmentsaroundtheworldabolishedexchangecontrolsintheliberalisingwaveofthe 1980sandallowedcapitaltoflowfreelytowhereveritcouldfindthehighestprofit.This politicalopening-upchangedthebalanceofforcesandmadelabourunionsweakerrelative tocapital.Thisbegantobereflectedinfactorincomeshares–therelativesharesofprofits andwages.TheshareofwagesinGDPhadbeenstableduringtheperiodfrom1945to 1980insomecountries,suchastheUnitedStates,orhadriseninothercountries,suchas theUK.Nowthatprocesswentintoreverse.Invirtuallyallcountriesthewagesharebegan tofallandtheprofitsharetorise. Manyattributedthisdevelopmentto‘globalisation’–thetendencyforproductionto becomefootloose.Fearingprotectionism,someeconomiststriedtoclaimitwasa consequenceofchangesinthenatureoftechnicalprogressthatwassubstitutingcapitaland skilledlabourforunskilledlabourbutthatlookslikespecialpleading.Technicalprogressdid havetheeffectofallowingmoreservicestobetradedinternationally.Thefallingpriceof communicationsmeantcallcentresfortheUKcouldbeopenedinIndiaandtheradiologist studyingX-raysofpatientsinBostoncouldbeinBangalore.Awiderrangeofjobswere therebysubjectedtointernationalcompetition.Buttechnicalprogresshasbeenpresentsince theindustrialrevolution;itwasafactorbutthekeynewelementwasthepoliticaldecisionto freecapital.
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
Thesedevelopmentswentintooverdriveafter1990withthecollapseofcommunismandthe SovietUnionandthesubsequentliberalisationoftheeconomicmodelinChina,Indiaand otherlargeless-developedeconomies.ThisdidindeedrecreatewhatMarxcalledthereserve armyoflabouronaglobalscale.Thepotentialgrowthrateoftheglobaleconomywasraised andaperiodofrapid,inflation-freegrowthensued,forwhichthecurrentinstitutionsof monetarypolicy–independentcentralbanks,inflationtargetingandsoon–tookcredit. AnotherconsequencewasasharpfurtherriseintheshareofprofitinglobalGDP. SinceKeyneshadbecomeunfashionable,andMarxunmentionable,noonethoughttoask whattheeffectofthischangingincomedistributionwouldbe.AsMarxorKaleckicould havepredicted,thefirstconsequenceofrisingprofitshareswasarisinginvestmentshare. ThisfirstbecameevidentinAsiawhererapidlygrowingeconomies,benefitingfromforeign investment,sawprofitsandinvestmentrisetoveryhighproportionsofGDP.Tothisday investmentinChinaisover40percentofGDP. Japanwasthefirsttoshowwherethiscouldlead.Inthe1980stheJapaneseeconomygrew by4percentayearinrealtermsanditsprofitsharewasashighas40percent,compared with20percentorlessintheWest.Astheeconomyboomedthestockmarketandproperty pricessoared.Assetpricesgottosuchacrazylevelthatstocksweresellingat100times earningsandthelandoccupiedbytheImperialPalaceinTokyowasworthmoreatcurrent pricesandexchangeratesthantheentirestateofCalifornia.Meanwhile,therewasnoretail priceinflationatallandtheBankofJapanwasundisturbed. In1990,thestockmarketcrashedandactivityandpricesbegantofall.Fallingprices– deflation–madedebtburdensworseandapersistentrecessionensued.TheJapanese governmentbegantorunlargerandlargerdeficits,increasingpublicspendingtotrytokeep theeconomyoutofaslump.Nothinglikethe1930scrashhappenedbutannualgrowthfell from4percenttoaround1percent,andthepublicsectordeficitbecameapermanent featureoftheeconomy. OtherAsiancountriesflirtedwiththesamefate.Theirinvestment-drivenboomendedin 1997withasuccessionofforeignexchangecrisesandstockmarketcrashes.Underpressure fromtheInternationalMonetaryFund,theyfollowedpoliciesofausterityanddevaluation. Sincetherestoftheworldcontinuedtogrow,thesepoliciesenabledthemeventuallyto exporttheirwayoutoftroubleandgetbacktogrowth.Forthattobepossible,however, demandhadtocontinuegrowingstronglyintheWest.
www.ippr.org/tomorrowscapitalism
Flawsintheglobalmodel Herewasthecentralproblemwiththeglobalisedsystem.Ifprofitsandoutput(GDP)rise persistentlyfasterthanwages,whowillbuytheoutput?Iftheansweristhatincreasingly profitablebusinesseswillinvestmoreandmore,investmentwillalsoriseasashareofGDP. AsbothMarxandKaleckiknew,thatwillultimatelyleadtoexcesscapacityandthe probabilityofadeflationaryslump.Anincipienteffectivedemandproblem,inthelanguage oftheKeynesians,isavertedforatimebutultimatelyshowsupinaproblemof‘the realisationofcapital’inthelanguageoftheMarxists. Soitproved.Althoughinvestmentinthemoredevelopedcountriesneverreachedthelevels oftheAsiancountries,itbegantorise.Inthe1990stheshareofbusinessinvestmentinthe GDPoftheUnitedStatesrosefromsome9percenttosome14percent.(SincetheUSdid notsavemore,thisextrainvestmentinvolvedborrowingfromabroadandhencealarge currentaccountdeficit.)Muchofthisinvestmentwasincomputersanditwasaccompanied byatremendousriseintheequitymarket,particularlyinstocksthathadanyconnection withinformationtechnology.Shareschangedhandsatpriceshundredsoftimesnotearnings
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
butsales.Bytheturnofthemillennium,however,theover-investmenthadbecomeevident andthestockmarketfell,embarkingonathree-yeardecline.Theeconomyfellintorecession intheUnitedStatesandelsewhere. UnlikeJapan,however,theUnitedStatesexperiencedonlyashallowandshort-lived recession.Nothingfatefulseemedtohavehappened.Wecomenowtothenewmechanism wherebytheglobalisedsystemevadedforawhilelongeritsincipientproblemofinsufficient effectivedemand.First,however,letuspayavisittoHymanMinsky,anotherrenegade economistignoredintheacademiesandlargelyforgotten. Ithadbeguntodawnonthemoreobservantcommentatorsthatthefluctuationsin economicactivitysince1980weredifferentfromthosepriortothatdate.Theywerenot obviouslytriggeredbypolicyerror(thoughsomeidealistscanbecountedontoexplainwhy theGovernmentisresponsibleforanythingthatgoeswrong);theywerenotprecededby wage-pricespiralsnorweretheytriggeredbytermsoftradeshocks.TheUShadsuffereda recessionintheearly1990sfollowingacrisisinitssavingsandloansinstitutions.Thenthere wasthedot.combubble,anold-fashionedinvestmentboomandbustofthetypethathad notbeenseenintheWestsincethe1920s,thoughitwasafeatureoftheeconomichistory ofthenineteenthcentury.WhattheJapanese,AsianandthesetwoAmericanrecessionsall hadincommonwasaboominassetpriceswhichwentalongwithaninvestmentboomina debt-fuelledbubblethateventuallypopped. Minskyhadpredictedthissortofdevelopment,claimingitwastheinevitablepatternina capitalisteconomywithliberalisedfinancialmarkets.Hisbasicthesiswasthatsuccessbreeds excess.Astheeconomygrowsandprofitsaremade,institutionsbecomeawarethatmore moneycanbemadeiftheyborrowtogearuptheirinvestments.Leverage,orgearing,the ratioofdebttoequity,thereforerisesinexorablysolongastheeconomyisdoingwell. Institutionspassfrombeinghedgers,whentheirliabilitiescanbecoveredbytheirassets,to beingspeculatorswhocannotcovertheirliabilitiesbutcanservicethemfromincome.Asthe goodtimescontinuetoroll,somepassfrombeingspeculatorstoplayingaPonzigame,in whichtheycanonlyservicetheirliabilitiesbyraisingmoredebt.Thesystemisthen vulnerabletothesmallestsetback.Asmallhesitationinthepathofrisingassetvaluesforces salesthattriggeranassetpricecollapse.Widespreadbankruptciesanddislocationensue. Itsoundslikeanutterlyprescientdescriptionofthecurrentcrisis.YetMinskywaswriting longbeforetheinventionofCentralisedDebtObligations,CreditDefaultSwapsandthe growthoftheUSsub-primemortgagemarket.Theprecisemechanismsoffollydifferevery timebutthissortoffollyisarecurrentfeatureofthesystem,hebelieved.
www.ippr.org/tomorrowscapitalism
Thecurrentcrisis In2001,theUnitedStatesappearedtohaveweatheredtheburstingofthedot.combubble withthemildestofrecessions.ThereasonwasadevelopmentunforeseenbyMarxorKalecki. ExcesscapacitymeantUScompanieswouldnotcontinuetoinvestastheyhadinthe1990s. ThewholeofAsiawastighteningitsbeltandgrowingbysavingandexporting.Households andconsumersintheWestwerenotearningenoughtotakeuptheslack.Butiftheycould beinducedtoborrow,theycouldbuythethingstheyotherwisecouldnotafford.Growth couldcontinue.Inthenineteenthcenturynoonewouldhaveconsideredlendingtoworkers sotheycouldmaintainaggregatedemand,becausetheywouldnothavebeenconsidered credit-worthy.Butinthelatetwentiethandearlytwenty-firstcenturiesworkersoftenhad assets,andthemostimportantoftheseweretheirhouses. Forvariousreasons,housepriceshavebeenrisingforhalfacenturyinmanyeconomies, particularlyintheEnglish-speakingcountrieswhereowner-occupationhasbecomeageneral
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
individualandpoliticalaspiration.Suchalongperiodofrisingprices,asMinskyknew,was suretocreatetheexpectationofindefinitefurtherincrease.Wheninterestrateswerecutto amelioratetherecessionof2000and2001,theytriggeredaboominborrowingtofuel housepurchaseinnumerouscountriesaroundtheglobe.Housepricesrose,sohousehold balancesheetsappearedtobeperfectlysound;debtsincreasedrapidlybutsodidassets. ThushouseholddebtintheUKrosefrom90percentto180percentofannualhousehold income,withonlyslightlylessextremedevelopmentsintheUS,Spain,Australia,Denmark, NewZealandandIreland.Infewcountrieswastherenoriseinhouseholddebtasa proportionofGDPandeventhosecountriesshared,viainternationaltrade,intheboom facilitatedbytheriseofconsumerdebt. Eventually,ofcourse,thisprocesshadtoreachalimit.Whenhousepricesreachedlevelsthat eventhemostimaginativeexerciseinmisplacedingenuitycouldnotjustify,theywouldbe likelytofalter.Thosewhohadtakenontoomuchdebtwouldhavetosellorbeforeclosed. Priceswouldtumble.ItwasindeedaclassicMinskyprocess,whichendedintakingdownthe banksandotherfinancialinstitutionsthathadborrowedandlenttoomuchmoneyonan inadequateassetbase. Thefirstinstinctofmanycommentatorsandcentralbankerswasdenial.Thesystemwas self-regulating.TheGovernmentshouldkeepout.Byinterferingitwouldcreatemoralhazard andpreventahealthycleansingofthesystem.However,the1930sweretoostarkawarning ofwhatwouldhappenshouldthebankingcreditsystembeallowedtoimplode.Denial turnedtoreluctantacceptanceofmassivestatebail-out. Thenbeganthesearchforscapegoats.Initially,themonetaryauthoritieswereblamed.The then-chairmanoftheUSFederalReserve,AlanGreenspan,keptinterestratestoolowafter 2002,itwasasserted,triggeringthehousingbubble.ButsomerememberedthatGreenspan inraisingpolicyrateshadbeenunabletodriveupthe10-yearbondyield,theratethatmost affectedthehousingmarket.BlamewasredirectedtotheChineseandotherAsiancentral bankswhomatchedUScreditcreationbybuyingupallthedollarsthatfloodedintotheir economyastheUSandotherWesternconsumerssupportedtheirindustry.Theyboughtthe dollars,creatingcreditindomesticcurrencyandreinvestedthedollarsinUSTreasurybonds, holdingtheirpricesupandkeepingtheiryieldslow.Theywereasmuchtoblameas GreenspanandtheUSFederalReserve.
www.ippr.org/tomorrowscapitalism
Therealcauseofthecurrentcrisis Marxobservedthatallbusinesscyclesappeartobecreditcyclesbutcreditisthesymptom, notthecause.Thatisperhapstoopolaraviewbutitcontainssometruth.Theunderlying problemfacingtheworldeconomyisanincipientproblemofdefectivedemandcausedby profitsoutstrippingwagesinaworldofglobalexcesslabour.Thatisnotboundtoleadtoa businesscycleinthedeterministicwaythatMarxthoughtbutitishighlylikelytodoso.The problemhasbeenmadeworsebecauseanimportantregionoftheworld,Asia,which sufferedanearlyexampleofaninvestmentboomandbust,wasabletoemergebybeggarmy-neighbourpoliciesofdomesticdeflationanddevaluation.Thosepoliciescanworkfor onecountryorregionbutnotforthesystemasawhole.TheAsiancountries,however, learnedamercantilistlessonthattheyhadtokeepexchangeratesdownandmaintainan exportsurplusinordertogrowwithoutrisk.Suchpoliciesencouragedcontinuedexcess investmentinproductionforexportandthrewanevengreaterburdenontheWestfor maintainingeffectivedemand. ItiseasytoblameWesterncentralbanksformaintainingtooloosepoliciesafter2002butit isnowforgottenthatatthattimetherewasawidespreadfearofdeflation.Thatfearwasnot
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
entirelymisplaced.Inthewakeofthedot.combust,aprolongedglobalrecessioncould haveeventuatedthereandthen,ifconsumerborrowinghadnotcometotherescue.The Minskyesquenatureoffinancialmarkets,andthedominantideologywhichrefusedto recognisethatnature,meantconsumerborrowingandhousepriceinflationwereallowed toexplode.Theboomendedwithabangbutthealternativewasawhimper;global growthcouldnotbesustainedbyeverrisingconsumerindebtednessanyway.
Whatshouldhappennext? Itshouldnowbeevidentthatwedonotliveinaworldofcapitalcontrolswherea domesticwage-pricespiralshouldbethesoleobjectiveofcentralbankattention.They havetopayattentiontoassetprices.Itshouldalsobeclearthatinaglobalisedworld economythereisaneedforsomeonetopayattentiontotherateofcreditcreation globally.MechanismsliketheoldIMForOrganisationforEconomicCooperationand Developmentconsultationcommitteesneedtoberevitalisedsopressurecanbebrought tobearonimportantcountrieswhosepoliciesareunbalancedenoughtodestabilisethe worldeconomy.Chinaandothers,forexampleneedtouseforeignexchangereservesto mobilisedomesticresourcestomeetlatentdomesticdemands,nottrytosubsidise exports. Internationalagreementsonfinancialregulationandcapitaltaxationarealsourgently required.Ifcapitalisfreetochasethecheapestormostefficientlabouraroundtheworld itshouldnotalsobefreetochasetaxconcessions,inducingaracetothebottomin capitaltaxation.Indeedgovernmentsshouldresolvetoshiftmoreoftheburdenof taxationtocapitaltooffsettheeffectofarisingpre-taxprofitshare.Thatisimpossible foronecountrybutcanbedonebyinternationalagreementandconcertedaction. Thecapitalistsystemremainstheonlyonethatweknowthathasresultedingeneraland sustainedrisesinlivingstandards.Buttopreserveit,andtopreserveitinaninternational formthatoffershopetothepooroftheworld,requiresstateinterventionand,whatis yetmoredifficulttoachieve,extensiveconsultationandcooperationamongstates.The alternativeisrepeatedcrisesleadingtopoliticalandeconomicupheavals.
www.ippr.org/tomorrowscapitalism
TheinstitutionsofBrettonWoods,includingtheIMF,weredesignedin1944foraneraof internationalpolicycoordinationbutthateraislongpassedandtheworldeconomyis nowverydifferent.Duringtheperiodofliberalisationfrom1980onwards,these institutionsbecameincreasinglymarginalaspolicycooperationinmacroeconomics declinedandprivatefinanceexpandedtotakeonmanyoftheirfunctions.Now,withthe crisisinprivatefinanceandanurgentneedforrenewedinternationalpolicycooperation, theinstitutionsmustberevamped. Politically,thatwillbemorethandifficulttodo.TheoriginalIMFwastheresultofthe hegemonyoftheUnitedStates,thedominanteconomyinawar-ravagedworld,with inputfromtheUnitedKingdom,thentheworld’sthirdlargesteconomy.Nowthe institutionscanonlybereconstructedbyinternationalagreementinvolvingadozenorso substantialplayersandsuccessrequiresthathithertodominantcountriesdiluteor sacrificetheirleadingroles. Ifyourtasteinhumourisblack,therehasbeensomethingamusingaboutwatching economists,punditsandspecialpleadersdenyingtheroleofmacroeconomic stabilisation,nevermindinternationalcooperationandinsistingonthedismantlingofthe fewremainingbarrierstosystematicinstability.Theyhaveextolledderegulationand flexibilityandwishedtofosterevenmorecomprehensiveuncertaintyinpeople’sworking lives.Theyassertedtheimpossibilityofanyschemetoequaliseincomedistribution‘in
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
www.ippr.org/tomorrowscapitalism
onecountry’.Thislookedcleverintheboombutbecomespoliticallyunsustainableinthe bust.Votingisstillorganisedonnationallinesand,onewayoranother,nationalismwill reassertitselfastheonlypoliticalforce,giventhedemiseofsocialism,abletodeliver peoplefrominstability.Weshallhavetorecreatethehabitofcooperationand mechanismstoachieveitmoreeffectivelythanthosethatexistedinthethirdquarterof thetwentiethcentury.Itistobedevoutlyhopedwedosowithoutpassingthroughthe horrorsofthefirsthalfofthatcentury.
GlobalDimensionsof theFinancialCrisis ByGerryHoltham,ManagingPartner,CadwynCapitalLLP
June2009
www.ippr.org/tomorrowscapitalism
2
Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
Aboutippr TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank, producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand sustainableworld.Since1988,wehavebeenattheforefrontofprogressivedebateand policymakingintheUK.Throughourindependentresearchandanalysiswedefinenew agendasforchangeandprovidepracticalsolutionstochallengesacrossthefullrangeof publicpolicyissues. WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-based aspossible,whileourinternationalandmigrationteamsandclimatechange programmeextendourpartnershipsandinfluencebeyondtheUK,givingusatruly world-classreputationforhighqualityresearch. ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100 E:[email protected]RegisteredCharityNo.800065 ThispaperwasfirstpublishedinJune2009.©ippr2009
‘Tomorrow’sCapitalism’ Tomorrow’sCapitalismisamajorprogrammeofworkpresentedbyipprinconjunction withFriendsProvidentFoundation.Itaimstoexplorethefutureofourfinancialand economicsystem.Formoredetailsandtoaccessotherpapersfromtheprogrammevisit www.ippr.org/tomorrowscapitalism
www.ippr.org/tomorrowscapitalism
Theviewsinthispaperarethoseoftheauthoronlyanddonotnecessarilyrepresent thoseofipprorFriendsProvidentFoundation.
3
Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
GlobalDimensionsoftheFinancialCrisis Introduction Allanalysesofthecurrentcrisishavebeenincomplete.Theydealwithsymptoms,not causes.Therehasbeenafocusonfinancialsectorinstitutionsandregulation,onthe operationofmonetarypolicyandonallegedpolicyerrors.Thesethingswereimportantin shapingthewaythatthecrisisevolvedbuttheyarenotatitsroot.Thetruthisthatthe worldanditseconomyhavechangedinwaysthatarelikelytoleadtoperiodicinstability. Thechangeshavenotbeenrecognisedandassimilatedinthepracticeofmonetarypolicyor inthewaythatpoliticiansregardtheeconomy. Controlsontheinternationalmovementofcapitalweregenerallyliftedinthe1970sand 1980s.Togetherwiththecollapseofcommunism,whichreleasedmillionsofworkersintothe capitalistworldeconomy,capitalliberalisationeffectivelyrecreatedaglobal‘reservearmyof labour’.Aswidelynoted,thatdevelopmentcontributedtoariseintheshareofprofitsin worldGDP,andintheGDPofmostindividualcountries,andadeclineintheshareofwage income.Whatwasnotwidelynotedisthatsuchadevelopmenteasilyleadseithertooverinvestmentbybusinessesorashortfallofaggregatedemand.Whenwageslag,consumer spendingcanonlykeepupwithoutputthroughacontinuingexpansionofconsumerdebt. Thesetendenciesareattheheartofthepresentcrisis.
Thepost-warera Theperiodfromtheendofthesecondworldwartotheearly1970swasoneoffull employmentinthecapitalistworldand,inEuropeandJapanatleast,rapidgrowth.Capital controlswereverygeneralandremainedinplaceevenastradeingoodsandserviceswas progressivelyliberalised.Internationaltradegrewrapidly.Therewasageneralconfidencethat fullemploymentcouldbemaintainedbythetechniques‘discovered’intheKeynesian revolution.Byusingfiscalandmonetarypolicygovernment,itwasthought,couldensure thattheslumpconditionsoftheinter-waryearswouldneverberepeated.
www.ippr.org/tomorrowscapitalism
TheBrettonWoodssystemhadordainedfixed,orratheradjustable-peg,exchangerates. Givenlimitationsontheinternationalmovementofcapital,pegswerethreatenedmainlyby tradeimbalances.Sincethatimpliedlimitsonthesizeoftradedeficits,countries’ratesof investmentwerelargelylimitedbydomesticratesofsaving. Thenemesisofthesystemwasinflation.ThePolisheconomistMichaelKalecki,who anticipatedmuchoftheKeynesianrevolutioninhisownwritings,identifiedthedifficultyin maintainingfullemployment.Therewouldbeaproblemofincipientinflationasworkers pushedforhigherwagesandthesewerepassedoninprices.Hisconclusionwasthat governmentswouldengineerperiodicboutsofunemploymenttomaintaindisciplineand keepwageinflationundercontrol–inotherwordsdeliberatelyreintroduceasynthetictrade cycle.Somecountriesevolvedcorporatistprocedures,likeincomespoliciesorcentralised wagebargaining,tomaketheprocesslesspainfulbutinflationwidelybegantocreephigher throughthe1960s.Differentialinflationrates,withtheUnitedStatesarelativelyhighinflationoffender,ledtothebreak-downofthefixedexchangeratesystemin1971and generalisedfloatingofcurrenciesin1973. Thesystemwasunsuitedtodealingeasilywithtermsoftradeshockswherebythepriceofa country’simportsroserelativetoitsexportprices.Suchashockinevitablyreducesnational incomeandwouldbelikelytotriggerabattleoverwhetherprofitsorwagesborethebrunt ofthereduction.Suchabattleoverincomeshareswouldtypicallytaketheformofan aggravatedwage-pricespiral.
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
Theoilpricesurgesofthe1970swereexactlysuchatermsoftradeshockthataffectedall Westerncountries.ThefirstshockwascausedbytheactionofArabstatesaftertheYom Kippurwarof1973,whentheysuspendedoildeliveriesforpoliticalreasons.The demonstrationoftheirpower,however,strengthenedtheOPECoilcartelandpriceswere drivenhigher.Thisledtostagflation,ariseinbothinflationandunemployment.Therewas muchglibtalkaboutstagflationunderminingKeynesianeconomicsbut,onatheoretical level,itpresentednodifficultiesforKeynesianorindeedcompetingtheories.Itwassimply theconsequenceofthedeteriorationinthetermsoftradewhich,inKalecki’sterms,meanta politicalrecessionhadtobeenduredtorestorewagediscipline. Countriesoftentriedtocountertheeffectsofunemploymentafterthefirstoilshockwith counter-cyclicalfiscalpolicybutafterthefalloftheShahofIranledtothesecondoilshock in1980andinflationsoaredagain,theironenteredthesoul.Almostallcountriesvotedin governmentsthatfollowedrestrictivepolicies,drivingupunemploymentuntilinflationfell, ultimatelysharply.AlthoughnothingthathappenedwouldhavesurprisedKaleckiinthe least,theexperienceledtoachangeinthedominantviewofhowtomanagetheeconomy. Therewasanincreasingacceptanceofatheoryofinflationthatheldtherewasonlyonerate ofunemploymentconsistentwithstableinflationand,ifmonetarypolicytriedtomaintain anyotherrate,inflationwouldaccelerateordeceleratewithoutlimit.Thepromotersofthis theoryalsobelievedthatthemarketsystemwouldgenerallybestableatthatnatural unemploymentrateandsopolicyshouldsimplyconcentrateoncontrollinginflation. Byandlarge,centralbankshavecontinuedtoactasifthatworldoftheearly1980swasthe onethatstillexisted–rightuptothecurrentcrisis.Theyperceivedtheirroleascontesting wage-priceinflationbyapolicyoftargetinginflation,lettingrealactivitylookafteritself.
Theeraoffreecapitalflows
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Intheearly1980s,theworldbegantochange.Beforethennearlyallpost-Warrecessions hadbeentriggeredbyaburstofinflationandapolicyresponse.After1980,however,there wereseveralmoreorlessseriousrecessionsaroundtheworldandonlyoneofthemwas precededbyaseriousriseinwageinflation–intheUKattheendofthe1980s.Allothers werecausedbyadifferentmechanismentirely,towhichtheorists,governmentsandcentral bankshavebeenblind. Governmentsaroundtheworldabolishedexchangecontrolsintheliberalisingwaveofthe 1980sandallowedcapitaltoflowfreelytowhereveritcouldfindthehighestprofit.This politicalopening-upchangedthebalanceofforcesandmadelabourunionsweakerrelative tocapital.Thisbegantobereflectedinfactorincomeshares–therelativesharesofprofits andwages.TheshareofwagesinGDPhadbeenstableduringtheperiodfrom1945to 1980insomecountries,suchastheUnitedStates,orhadriseninothercountries,suchas theUK.Nowthatprocesswentintoreverse.Invirtuallyallcountriesthewagesharebegan tofallandtheprofitsharetorise. Manyattributedthisdevelopmentto‘globalisation’–thetendencyforproductionto becomefootloose.Fearingprotectionism,someeconomiststriedtoclaimitwasa consequenceofchangesinthenatureoftechnicalprogressthatwassubstitutingcapitaland skilledlabourforunskilledlabourbutthatlookslikespecialpleading.Technicalprogressdid havetheeffectofallowingmoreservicestobetradedinternationally.Thefallingpriceof communicationsmeantcallcentresfortheUKcouldbeopenedinIndiaandtheradiologist studyingX-raysofpatientsinBostoncouldbeinBangalore.Awiderrangeofjobswere therebysubjectedtointernationalcompetition.Buttechnicalprogresshasbeenpresentsince theindustrialrevolution;itwasafactorbutthekeynewelementwasthepoliticaldecisionto freecapital.
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
Thesedevelopmentswentintooverdriveafter1990withthecollapseofcommunismandthe SovietUnionandthesubsequentliberalisationoftheeconomicmodelinChina,Indiaand otherlargeless-developedeconomies.ThisdidindeedrecreatewhatMarxcalledthereserve armyoflabouronaglobalscale.Thepotentialgrowthrateoftheglobaleconomywasraised andaperiodofrapid,inflation-freegrowthensued,forwhichthecurrentinstitutionsof monetarypolicy–independentcentralbanks,inflationtargetingandsoon–tookcredit. AnotherconsequencewasasharpfurtherriseintheshareofprofitinglobalGDP. SinceKeyneshadbecomeunfashionable,andMarxunmentionable,noonethoughttoask whattheeffectofthischangingincomedistributionwouldbe.AsMarxorKaleckicould havepredicted,thefirstconsequenceofrisingprofitshareswasarisinginvestmentshare. ThisfirstbecameevidentinAsiawhererapidlygrowingeconomies,benefitingfromforeign investment,sawprofitsandinvestmentrisetoveryhighproportionsofGDP.Tothisday investmentinChinaisover40percentofGDP. Japanwasthefirsttoshowwherethiscouldlead.Inthe1980stheJapaneseeconomygrew by4percentayearinrealtermsanditsprofitsharewasashighas40percent,compared with20percentorlessintheWest.Astheeconomyboomedthestockmarketandproperty pricessoared.Assetpricesgottosuchacrazylevelthatstocksweresellingat100times earningsandthelandoccupiedbytheImperialPalaceinTokyowasworthmoreatcurrent pricesandexchangeratesthantheentirestateofCalifornia.Meanwhile,therewasnoretail priceinflationatallandtheBankofJapanwasundisturbed. In1990,thestockmarketcrashedandactivityandpricesbegantofall.Fallingprices– deflation–madedebtburdensworseandapersistentrecessionensued.TheJapanese governmentbegantorunlargerandlargerdeficits,increasingpublicspendingtotrytokeep theeconomyoutofaslump.Nothinglikethe1930scrashhappenedbutannualgrowthfell from4percenttoaround1percent,andthepublicsectordeficitbecameapermanent featureoftheeconomy. OtherAsiancountriesflirtedwiththesamefate.Theirinvestment-drivenboomendedin 1997withasuccessionofforeignexchangecrisesandstockmarketcrashes.Underpressure fromtheInternationalMonetaryFund,theyfollowedpoliciesofausterityanddevaluation. Sincetherestoftheworldcontinuedtogrow,thesepoliciesenabledthemeventuallyto exporttheirwayoutoftroubleandgetbacktogrowth.Forthattobepossible,however, demandhadtocontinuegrowingstronglyintheWest.
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Flawsintheglobalmodel Herewasthecentralproblemwiththeglobalisedsystem.Ifprofitsandoutput(GDP)rise persistentlyfasterthanwages,whowillbuytheoutput?Iftheansweristhatincreasingly profitablebusinesseswillinvestmoreandmore,investmentwillalsoriseasashareofGDP. AsbothMarxandKaleckiknew,thatwillultimatelyleadtoexcesscapacityandthe probabilityofadeflationaryslump.Anincipienteffectivedemandproblem,inthelanguage oftheKeynesians,isavertedforatimebutultimatelyshowsupinaproblemof‘the realisationofcapital’inthelanguageoftheMarxists. Soitproved.Althoughinvestmentinthemoredevelopedcountriesneverreachedthelevels oftheAsiancountries,itbegantorise.Inthe1990stheshareofbusinessinvestmentinthe GDPoftheUnitedStatesrosefromsome9percenttosome14percent.(SincetheUSdid notsavemore,thisextrainvestmentinvolvedborrowingfromabroadandhencealarge currentaccountdeficit.)Muchofthisinvestmentwasincomputersanditwasaccompanied byatremendousriseintheequitymarket,particularlyinstocksthathadanyconnection withinformationtechnology.Shareschangedhandsatpriceshundredsoftimesnotearnings
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
butsales.Bytheturnofthemillennium,however,theover-investmenthadbecomeevident andthestockmarketfell,embarkingonathree-yeardecline.Theeconomyfellintorecession intheUnitedStatesandelsewhere. UnlikeJapan,however,theUnitedStatesexperiencedonlyashallowandshort-lived recession.Nothingfatefulseemedtohavehappened.Wecomenowtothenewmechanism wherebytheglobalisedsystemevadedforawhilelongeritsincipientproblemofinsufficient effectivedemand.First,however,letuspayavisittoHymanMinsky,anotherrenegade economistignoredintheacademiesandlargelyforgotten. Ithadbeguntodawnonthemoreobservantcommentatorsthatthefluctuationsin economicactivitysince1980weredifferentfromthosepriortothatdate.Theywerenot obviouslytriggeredbypolicyerror(thoughsomeidealistscanbecountedontoexplainwhy theGovernmentisresponsibleforanythingthatgoeswrong);theywerenotprecededby wage-pricespiralsnorweretheytriggeredbytermsoftradeshocks.TheUShadsuffereda recessionintheearly1990sfollowingacrisisinitssavingsandloansinstitutions.Thenthere wasthedot.combubble,anold-fashionedinvestmentboomandbustofthetypethathad notbeenseenintheWestsincethe1920s,thoughitwasafeatureoftheeconomichistory ofthenineteenthcentury.WhattheJapanese,AsianandthesetwoAmericanrecessionsall hadincommonwasaboominassetpriceswhichwentalongwithaninvestmentboomina debt-fuelledbubblethateventuallypopped. Minskyhadpredictedthissortofdevelopment,claimingitwastheinevitablepatternina capitalisteconomywithliberalisedfinancialmarkets.Hisbasicthesiswasthatsuccessbreeds excess.Astheeconomygrowsandprofitsaremade,institutionsbecomeawarethatmore moneycanbemadeiftheyborrowtogearuptheirinvestments.Leverage,orgearing,the ratioofdebttoequity,thereforerisesinexorablysolongastheeconomyisdoingwell. Institutionspassfrombeinghedgers,whentheirliabilitiescanbecoveredbytheirassets,to beingspeculatorswhocannotcovertheirliabilitiesbutcanservicethemfromincome.Asthe goodtimescontinuetoroll,somepassfrombeingspeculatorstoplayingaPonzigame,in whichtheycanonlyservicetheirliabilitiesbyraisingmoredebt.Thesystemisthen vulnerabletothesmallestsetback.Asmallhesitationinthepathofrisingassetvaluesforces salesthattriggeranassetpricecollapse.Widespreadbankruptciesanddislocationensue. Itsoundslikeanutterlyprescientdescriptionofthecurrentcrisis.YetMinskywaswriting longbeforetheinventionofCentralisedDebtObligations,CreditDefaultSwapsandthe growthoftheUSsub-primemortgagemarket.Theprecisemechanismsoffollydifferevery timebutthissortoffollyisarecurrentfeatureofthesystem,hebelieved.
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Thecurrentcrisis In2001,theUnitedStatesappearedtohaveweatheredtheburstingofthedot.combubble withthemildestofrecessions.ThereasonwasadevelopmentunforeseenbyMarxorKalecki. ExcesscapacitymeantUScompanieswouldnotcontinuetoinvestastheyhadinthe1990s. ThewholeofAsiawastighteningitsbeltandgrowingbysavingandexporting.Households andconsumersintheWestwerenotearningenoughtotakeuptheslack.Butiftheycould beinducedtoborrow,theycouldbuythethingstheyotherwisecouldnotafford.Growth couldcontinue.Inthenineteenthcenturynoonewouldhaveconsideredlendingtoworkers sotheycouldmaintainaggregatedemand,becausetheywouldnothavebeenconsidered credit-worthy.Butinthelatetwentiethandearlytwenty-firstcenturiesworkersoftenhad assets,andthemostimportantoftheseweretheirhouses. Forvariousreasons,housepriceshavebeenrisingforhalfacenturyinmanyeconomies, particularlyintheEnglish-speakingcountrieswhereowner-occupationhasbecomeageneral
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
individualandpoliticalaspiration.Suchalongperiodofrisingprices,asMinskyknew,was suretocreatetheexpectationofindefinitefurtherincrease.Wheninterestrateswerecutto amelioratetherecessionof2000and2001,theytriggeredaboominborrowingtofuel housepurchaseinnumerouscountriesaroundtheglobe.Housepricesrose,sohousehold balancesheetsappearedtobeperfectlysound;debtsincreasedrapidlybutsodidassets. ThushouseholddebtintheUKrosefrom90percentto180percentofannualhousehold income,withonlyslightlylessextremedevelopmentsintheUS,Spain,Australia,Denmark, NewZealandandIreland.Infewcountrieswastherenoriseinhouseholddebtasa proportionofGDPandeventhosecountriesshared,viainternationaltrade,intheboom facilitatedbytheriseofconsumerdebt. Eventually,ofcourse,thisprocesshadtoreachalimit.Whenhousepricesreachedlevelsthat eventhemostimaginativeexerciseinmisplacedingenuitycouldnotjustify,theywouldbe likelytofalter.Thosewhohadtakenontoomuchdebtwouldhavetosellorbeforeclosed. Priceswouldtumble.ItwasindeedaclassicMinskyprocess,whichendedintakingdownthe banksandotherfinancialinstitutionsthathadborrowedandlenttoomuchmoneyonan inadequateassetbase. Thefirstinstinctofmanycommentatorsandcentralbankerswasdenial.Thesystemwas self-regulating.TheGovernmentshouldkeepout.Byinterferingitwouldcreatemoralhazard andpreventahealthycleansingofthesystem.However,the1930sweretoostarkawarning ofwhatwouldhappenshouldthebankingcreditsystembeallowedtoimplode.Denial turnedtoreluctantacceptanceofmassivestatebail-out. Thenbeganthesearchforscapegoats.Initially,themonetaryauthoritieswereblamed.The then-chairmanoftheUSFederalReserve,AlanGreenspan,keptinterestratestoolowafter 2002,itwasasserted,triggeringthehousingbubble.ButsomerememberedthatGreenspan inraisingpolicyrateshadbeenunabletodriveupthe10-yearbondyield,theratethatmost affectedthehousingmarket.BlamewasredirectedtotheChineseandotherAsiancentral bankswhomatchedUScreditcreationbybuyingupallthedollarsthatfloodedintotheir economyastheUSandotherWesternconsumerssupportedtheirindustry.Theyboughtthe dollars,creatingcreditindomesticcurrencyandreinvestedthedollarsinUSTreasurybonds, holdingtheirpricesupandkeepingtheiryieldslow.Theywereasmuchtoblameas GreenspanandtheUSFederalReserve.
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Therealcauseofthecurrentcrisis Marxobservedthatallbusinesscyclesappeartobecreditcyclesbutcreditisthesymptom, notthecause.Thatisperhapstoopolaraviewbutitcontainssometruth.Theunderlying problemfacingtheworldeconomyisanincipientproblemofdefectivedemandcausedby profitsoutstrippingwagesinaworldofglobalexcesslabour.Thatisnotboundtoleadtoa businesscycleinthedeterministicwaythatMarxthoughtbutitishighlylikelytodoso.The problemhasbeenmadeworsebecauseanimportantregionoftheworld,Asia,which sufferedanearlyexampleofaninvestmentboomandbust,wasabletoemergebybeggarmy-neighbourpoliciesofdomesticdeflationanddevaluation.Thosepoliciescanworkfor onecountryorregionbutnotforthesystemasawhole.TheAsiancountries,however, learnedamercantilistlessonthattheyhadtokeepexchangeratesdownandmaintainan exportsurplusinordertogrowwithoutrisk.Suchpoliciesencouragedcontinuedexcess investmentinproductionforexportandthrewanevengreaterburdenontheWestfor maintainingeffectivedemand. ItiseasytoblameWesterncentralbanksformaintainingtooloosepoliciesafter2002butit isnowforgottenthatatthattimetherewasawidespreadfearofdeflation.Thatfearwasnot
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
entirelymisplaced.Inthewakeofthedot.combust,aprolongedglobalrecessioncould haveeventuatedthereandthen,ifconsumerborrowinghadnotcometotherescue.The Minskyesquenatureoffinancialmarkets,andthedominantideologywhichrefusedto recognisethatnature,meantconsumerborrowingandhousepriceinflationwereallowed toexplode.Theboomendedwithabangbutthealternativewasawhimper;global growthcouldnotbesustainedbyeverrisingconsumerindebtednessanyway.
Whatshouldhappennext? Itshouldnowbeevidentthatwedonotliveinaworldofcapitalcontrolswherea domesticwage-pricespiralshouldbethesoleobjectiveofcentralbankattention.They havetopayattentiontoassetprices.Itshouldalsobeclearthatinaglobalisedworld economythereisaneedforsomeonetopayattentiontotherateofcreditcreation globally.MechanismsliketheoldIMForOrganisationforEconomicCooperationand Developmentconsultationcommitteesneedtoberevitalisedsopressurecanbebrought tobearonimportantcountrieswhosepoliciesareunbalancedenoughtodestabilisethe worldeconomy.Chinaandothers,forexampleneedtouseforeignexchangereservesto mobilisedomesticresourcestomeetlatentdomesticdemands,nottrytosubsidise exports. Internationalagreementsonfinancialregulationandcapitaltaxationarealsourgently required.Ifcapitalisfreetochasethecheapestormostefficientlabouraroundtheworld itshouldnotalsobefreetochasetaxconcessions,inducingaracetothebottomin capitaltaxation.Indeedgovernmentsshouldresolvetoshiftmoreoftheburdenof taxationtocapitaltooffsettheeffectofarisingpre-taxprofitshare.Thatisimpossible foronecountrybutcanbedonebyinternationalagreementandconcertedaction. Thecapitalistsystemremainstheonlyonethatweknowthathasresultedingeneraland sustainedrisesinlivingstandards.Buttopreserveit,andtopreserveitinaninternational formthatoffershopetothepooroftheworld,requiresstateinterventionand,whatis yetmoredifficulttoachieve,extensiveconsultationandcooperationamongstates.The alternativeisrepeatedcrisesleadingtopoliticalandeconomicupheavals.
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TheinstitutionsofBrettonWoods,includingtheIMF,weredesignedin1944foraneraof internationalpolicycoordinationbutthateraislongpassedandtheworldeconomyis nowverydifferent.Duringtheperiodofliberalisationfrom1980onwards,these institutionsbecameincreasinglymarginalaspolicycooperationinmacroeconomics declinedandprivatefinanceexpandedtotakeonmanyoftheirfunctions.Now,withthe crisisinprivatefinanceandanurgentneedforrenewedinternationalpolicycooperation, theinstitutionsmustberevamped. Politically,thatwillbemorethandifficulttodo.TheoriginalIMFwastheresultofthe hegemonyoftheUnitedStates,thedominanteconomyinawar-ravagedworld,with inputfromtheUnitedKingdom,thentheworld’sthirdlargesteconomy.Nowthe institutionscanonlybereconstructedbyinternationalagreementinvolvingadozenorso substantialplayersandsuccessrequiresthathithertodominantcountriesdiluteor sacrificetheirleadingroles. Ifyourtasteinhumourisblack,therehasbeensomethingamusingaboutwatching economists,punditsandspecialpleadersdenyingtheroleofmacroeconomic stabilisation,nevermindinternationalcooperationandinsistingonthedismantlingofthe fewremainingbarrierstosystematicinstability.Theyhaveextolledderegulationand flexibilityandwishedtofosterevenmorecomprehensiveuncertaintyinpeople’sworking lives.Theyassertedtheimpossibilityofanyschemetoequaliseincomedistribution‘in
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Tomorrow’sCapitalism|GlobalDimensionsoftheFinancialCrisis
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onecountry’.Thislookedcleverintheboombutbecomespoliticallyunsustainableinthe bust.Votingisstillorganisedonnationallinesand,onewayoranother,nationalismwill reassertitselfastheonlypoliticalforce,giventhedemiseofsocialism,abletodeliver peoplefrominstability.Weshallhavetorecreatethehabitofcooperationand mechanismstoachieveitmoreeffectivelythanthosethatexistedinthethirdquarterof thetwentiethcentury.Itistobedevoutlyhopedwedosowithoutpassingthroughthe horrorsofthefirsthalfofthatcentury.
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