The centrally planned socialist alternative has been tried and didn’t work. Even without the bureaucracy and corruption enabled by the communist system, central planning could never be as efficient or effective as a real market. But, as we are currently experiencing, unregulated markets can also lead to disaster. Most of our current trouble lies in the changed role of the financial sector.
When the 18th century canals were built it took on average over seven years from the start of construction to the first revenues being generated, seven years in which huge and not risk-free expense was incurred. Shares, bonds and bank credit were the means of raising the necessary money to get the industrialisation project going. So the financial sector was brought into existence to support the real economy. And it grew in importance, supporting the progress of industrialisation for over two hundred years. But since the 1980s computerisation and deregulation of financial markets, it has been possible to make substantially higher returns from speculation than from the real economy. Consequently the sector no longer supports the real economy with any real enthusiasm. Instead, when it invests in the real economy, more often than not, it does so to extract value, destroying real jobs, purely for its own benefit. It is not just, as Adair Turner once described it “socially useless”, but is actually working against the interests of ordinary people.
Anger caused by the pain and suffering of ordinary people, magnified by the obscenity of financial sector bonus payments, is just beginning to surface, as in the “Occupy” protests. The justification for such inequality used to be based on the idea that the wealthy would invest their surplus funds long term in the real economy with due benefit for all. Today surpluses are vested with professional fund managers whose fight up the trader league tables, drives them to speculative investment rather than long term support for the real economy. Inequality no longer works. And, as The Spirit Level analysis showed, it is actually counterproductive to a successful economy.
Steps to making capitalism work would involve restraining speculative activity and defending the real economy. Steps toward these goals are quite specific and do-able. For example, restraining speculation could involve the following:
· Separate retail from investment banking and cease any central bank support for the latter – if they get into difficulty (unlike with ring-fencing) they are allowed to go bust.
· Break up any banks which are deemed too big to fail and require liquidity at traditional levels if central bank support is to be agreed.
· Remove limited liability partnership status – partners accept liability or convert their firms into limited liability companies taxed as such.
· Impose financial transaction tax.
Defending the real economy could involve:
· Delaying accrual of voting rights till company shares owned for minimum of 12 months.
· Giving employees votes at company general meetings on changes of ownership (mergers and acquisitions) and executive remuneration.
· Protecting competition energetically – more than 20% of any market treated as monopolistic
· Grant tax benefits for start-ups and small companies.
· Give public investment support for all private investment in R&D and innovation and co-ownership schemes.
· Grant tax benefit to co-owned firms.
Achieving these aims may well be frustrated by the intimate connection of the financial, political and corporate domains, which co-operate for their own interests, rather than those of the population at large. They are what Keynes referred to as the “madmen in authority”.
Achieving such outcomes in the UK would be more difficult without international agreement to pursue the same route in America, Europe and elsewhere. But, the anger and frustration of people starting to be seen in the “Occupy” protests is truly international. And therein lies hope for real change.