Governments and Markets
As the global recession takes hold, governments around the world have – with varying degrees of reluctance or enthusiasm – found themselves taking centre stage. This is usually seen as a case of dangerous times requiring special measures. Many commentators and practitioners impatiently await the opportunity to return to what they see as business as usual, so that governments can safely be put back in their boxes.
This is, however, to misunderstand what has happened. The current role of government is not an unfortunate aberration. The recession has revealed an abiding truth – that the market can deliver its unmatched benefits only if governments are there when needed to make good its deficiencies and act against its excesses.
The plunge into recession illustrates what happens when market operators become so powerful that governments are unable to restrain market excesses. And the response we now see to recession shows that governments can act to correct market failure in ways that the market, left to itself, cannot. Economies are robust things. They would recover sooner or later without intervention. But – as all but the most purblind now recognise – governments can significantly hasten the recovery process, and thereby limit the misery that recession inevitably brings about.
The reason for this is that only governments can counter the inevitable tendency of recessions to feed on themselves. For most actors in the economy, the demands of self-interest mean that, in a recession, they spend less, invest less, cut costs, employ fewer people. Each individual decision may be rational and justified, but the cumulative effect for the economy as a whole is that recession is intensified.
There are those who say that governments should act as though they were individual people or companies. According to this view, governments in a recession should also cut costs, spend less and lay people off. But if governments behave like everyone else, the economy is condemned to a deeper and harsher recession than needs be. Those holding this view are so blinded by an ideological hostility to the very idea of government as to deny Keynes’ statement of the obvious – that governments have a unique responsibility to act counter-cyclically.
Only governments have the capacity and the duty to defy market logic. Only governments have the resources to over-ride what would normally be market-based self-interest and to substitute for it the wider interest in getting the economy as a whole moving again. Only governments can afford to live with long-term indebtedness if that is what is required in the interests of their shareholders – for which read everyone.
Government intervention, whether to underpin the liquidity of the financial sector or to stimulate demand in the real economy, may well be necessary if recovery is to be hastened, but it is – importantly – more than a singular response to a singular problem. It is a statement of a wider and ever-present relationship between governments and markets. Markets function best – indeed only function properly at all – if government is ready and willing to second-guess market outcomes. What is true of the economy as a whole and of financial markets is equally true of markets in general. If, for example, we are to save the planet, market regulation will be needed in place of the unrestrained exploitation of natural resources.
There are of course those who would at this point throw up their hands in horror. For them, the debate is about absolutes. The alternative to the unfettered market is state socialism. They do not see that to recognise and correct the deficiencies of the market is the best guarantee that a market economy can sustain itself efficiently and beneficially.
The recession has laid bare and illustrated in other words that the readiness of government to intervene is the essential condition on which the market can be made compatible with democracy. The whole point of democracy, after all, is that it ensures that the wider and longer-term interest is brought to bear so that the often harsh and unfair outcomes of unfettered market operations are softened and made more acceptable. That is what governments are for. If the market is infallible and must never be challenged, there is no role for democracy. Governments are then merely bit players and democracy merely a sham – a cosmetic trick to provide the illusion that the rich and powerful can be made to account for themselves.
As Rahm Emanuel remarked, a good crisis should never be wasted. We can profit from this recession if we draw from it the important lesson that the legitimacy conferred by the democratic mandate empowers and requires government to ensure that personal and sectional interests must not prevail over the general interest. There can be no return to the fallacy that the “free” or unfettered market establishes a kind of economic democracy that renders democratic politics irrelevant. The recession and the need for a government response to it may be, one hopes, an exception, but the value of the proposition that democracy rules is a constant.
Bryan Gould
17 April 2009
Constructing A Left Politics
As the global economic crisis gathers force, it sweeps before it not only the flotsam of discredited economic doctrines; it also demands a complete reappraisal of how economies and societies work. It poses again the great questions that underlie all political debate, and it poses them in the certain knowledge that the answers given over the past thirty years – and so widely accepted – must now be rejected.
This is, in other words, one of those rare moments when it is not only possible but positively essential to go back to first principles. We must ask again, what is the purpose of politics, what is the role of government, does democracy matter, and – for those who see the need and seek the opportunity for reform – what does it mean to be on the left in politics.
Those questions must be asked, of course, at a time when – in Britain at least – left politics has run into the buffers. The concessions and subterfuges that were thought to be necessary to win power and then to hold it are now unmasked as not only craven but also totally destructive of anything that could have been legitimately regarded as the true purpose of left politics. If there is one incontrovertible lesson to be learned, it is that a left politics that is disconnected from principle and analysis will lead to failure and defeat.
The opportunity is, then, to think again about that body of principle and structured analysis that should underpin any left approach to politics. Our starting-point for such an inquiry must surely be a recognition that, since the late 1970s, and with the often unstated acquiescence of the left, the political agenda has been dominated by neo-liberal thinking.
The dominance of this self-serving doctrine has been a huge achievement for those who already exercised great economic power, but felt their privilege threatened by the political power of democratic electorates. They feared, correctly, that elected governments, accountable to the widest range of interests, would not tolerate a system which unfairly favoured the rich and powerful by allowing them to rig the contest for power in their favour.
The powerful responded to this threat by bringing about changes, around the end of the 1970s, which negated the power of democracy – changes whose significance was hardly recognised at the time. They made elected governments irrelevant, by acquiring a degree of economic power that would allow them to face down and blackmail all but the most powerful democratic governments, and then by using their economic power and invulnerability to political pressure to bend even the most powerful governments to their will.
The individual steps by which this was achieved need be only briefly rehearsed here. One of the earliest was one that masqueraded as a purely technical change that would help international trade and investment, and that was sold to the ordinary citizen as a welcome reduction in bureaucracy. That change was of course the removal of exchange controls by Reagan and Thatcher so that international capital was free to roam the world in search of the most favourable investment opportunities.
In one step, the rules of the game had changed hugely. Investors no longer had to comply with the requirements of elected governments. Instead, governments found themselves played off against each other by investors who commanded greater and greater resources as the now global economy was funnelled into fewer and fewer hands.
Now, it was governments that had to sue for terms, and who would lose out in the competition for investment if they did not comply with the demands of the multinationals. The investors, on the other hand, now understood that they could exercise their power quite irresponsibly; it was, after all, governments – not the investors – that had to answer to their electorates. The investors answered to no one but their shareholders. Most costs could be “externalised” or passed on to taxpayers who no longer had a voice. And, as voters began to understand that their governments could no longer protect them, confidence in the democratic process began to weaken.
At around the same time, monetarism – the doctrine that managing the economy was a more or less technical exercise in controlling inflation (the only goal, it was said, that mattered) by regulating the price of money – became the accepted wisdom, on the left as well as the right. This technical task could safely be entrusted to unaccountable officials – bankers no less – so that, in one simple step, democratic government was excluded from perhaps the central function for which it was elected.
These ground-breaking changes were reinforced by re-shaping political structures in the image of international capital. Multi-national investors found it increasingly irksome to have to deal with national governments, each with its own set of requirements, each reflecting the particular interests and priorities of their own voters. They insisted that economies would function more efficiently if those controlling investment capital could deal with authorities, like the European Union, that matched their own multinational structure and scale – and that were not democratically elected, but were instead multinational bureaucracies whose goals coincided with their own. So powerful was the momentum towards the integration of national economies in the name of greater economic efficiency that no one seemed to notice that the long-term consequence was not only an actual reduction in economic efficiency but also a political loss of a most serious kind – the replacement of democratic governments as the ultimate authority by multinational capital.
The ability of multinational capital to set the political agenda meant that a doctrine that could never have been directly sold to voters in individual countries – the view that markets are infallible, that they must not be regulated or interfered with in any way, that the interests of shareholders and the bottom line are all that matters, and that governments must step aside while market forces have their way – became the dominant driver of the world economy.
Few seem to have understood – not even politicians supposedly of the left – that an “infallible” market and democracy cannot co-exist. The whole point of democracy, after all, is that ordinary people can use the political power of democratic legitimacy to offset what would otherwise be the overwhelming economic power of the privileged minority. If even democratic politicians accept that they are not only powerless to intervene in the market, but that it would be literally improper and counter-productive for them to do so, then the powerful are unconstrained in their ability to impose their will on the rest of society.
We can now see the inevitable consequences of that extraordinary concession by democratic politicians – one that is even more incredible when made by politicians of the left. Unrestrained markets will always threaten, as even Adam Smith pointed out, a conspiracy against the general interest. They will always lead to excesses. They will always, as a consequence, destroy themselves in the end. The global recession was the direct and inevitable consequence.
We can also see how and why the New Labour government lost its way. Its fascination with the rich and powerful, its acceptance that the unregulated market must always prevail, its belief that market solutions will always be best, and its embrace of a global economy dominated by international capital all meant that it opted out of the role that most of its supporters expected it to fill – the diffusion of power in society so that the less powerful were protected and treated fairly.
Tony Blair seems to have believed that he could take the pain out of politics – and even the politics out of politics. But politics in a democracy is the means by which we resolve issues that would otherwise be settled by less acceptable means; we wouldn’t bother with the messy business of politics if it were not preferable to brute force or the victory of the most powerful. And those issues – arising as they do from the ever-present needs to allocate scarce resources and to reconcile conflicting interests – cannot be wished away. Their resolution will shape important issues such as fairness, opportunity and accountability – crucial determinants of how well society functions and how comfortable individuals feel within it.
All politics in the end is a response to a fundamental characteristic of social organisation. All societies demonstrate an inevitable tendency for power to concentrate in a few hands. The power may be physical, economic, or social – but at its most fundamental it is power to make choices, the freedom to choose, even at the expense of and against the interests of others.
In any society, those who are stronger, cleverer, or luckier, or who enjoy some other advantage, will inevitably acquire more power than others. They will then, with equal inevitability, use that power to enhance their advantage, accreting to themselves differential privileges which will make them yet more powerful, allowing them to entrench that advantage and defend it against attack, and by doing so to reinforce the disadvantage of others. The response that should be made to that intensifying concentration of power is the central and defining issue of politics.
The dictator will say that there is nothing wrong with power being concentrated in a few hands, as long as those hands are his. Patrician conservatives argue that it is inevitably a permanent feature of any social organisation, and that the stability it provides is on the whole beneficial. They will say the emphasis should be on making the disparity in power acceptable, by requiring the powerful to exercise their power humanely and with some kind of social conscience – a kind of noblesse oblige. The less powerful, on the other hand, should be conditioned by social pressures to accept – through a well-developed social hierarchy – their inferior lot in life and the deserved superiority of their betters.
The liberal (or, according to taste, the social democrat or proponent of the “third way”) will also accept that a substantial degree of inequality is inevitable and must be tolerated, but will argue that it can be made more acceptable and even positively beneficial provided that everyone has a fair chance of winning, or at least doing well, in the contest for power. Provided that everyone lines up at roughly the same starting point, no one can complain if the race goes to the fleetest of foot. The harsher edges of the neo-liberal winner-takes-all approach can be softened, it is fondly hoped, if those who bring up the rear are guaranteed some minimum standards of social support, through some redistribution of wealth and income and an acceptance of community responsibility for basic services.
The neo-liberal, on the other hand, will regard the concentration of power as not only inevitable but positively desirable. According to this view, those who gather power to themselves will be the most able and deserving. The fact that society is led by the most able will mean that everyone benefits; even the disadvantaged and least powerful will benefit as the rising tide lifts all boats. The possibility, too, that the least powerful can contest for power, and that the exceptionally able or lucky individual might make the breakthrough will ensure a degree of social mobility and contestability that will maintain the vitality of the system.
According to this view, it will be literally counter-productive to try to counteract the concentration of power by ensuring that it is more widely distributed and equally shared. The only consequence would be to drag everyone down to the level of the least able. Contrary to the delusions of the “third way”, the dice must be allowed to lie where they fall. To try to alter the outcome of the game would be to deny the beneficial potency of allowing the winners to prevail.
Historically, the left has shared much of the liberal or social democratic agenda, but has evinced less tolerance for the degree of inequality that is inevitably tolerated by that approach. Crucially, only on the left has substantial, entrenched, and often inherited inequality been seen as a straightforward negative, an affront to notions of justice or fairness, a gross limitation on the freedom of the less powerful and therefore of society as a whole, a drag on economic efficiency, a dagger driven at the heart of social cohesion. Only on the left is there an imperative to address the way that power is distributed – and not just redistributed – and the social and economic price that everyone – including the most powerful – is required to pay for a substantially unequal distribution of power. It is that imperative – to achieve something near equality, not identity – that is the defining characteristic of left politics.
If this is what left politics is really about, what should the left response produce by way of a policy agenda? The first part of the answer to that question concerns the relationship between the market and government, between economic and political power.
No government – of any persuasion – should delude itself as to the critical and irreplaceable role of the market in a modern and democratic economy. At its best, the market allocates scarce resources, empowers consumers (through what might be described as economic democracy), stimulates efficiency and innovation, and rewards the most productive and creative.
The market is, however, a valuable servant but a dangerous master. It is the elevation of the market to the status of a moral force that cannot be challenged that enables the powerful to by-pass democracy. That view must be contested. If democracy is to mean anything, government must be ready to intervene in the market so that its outcomes are acceptable and sustainable, both politically and economically. The deliberate aim of a left government must be to utilise the market so as to optimise its great strengths, but to make sure as well that the market does not prejudice – through entrenching and extending the power of the privileged – the wider goal of diffusing power as widely and as fairly as possible throughout society.
So, good government matters. It is the means by which the market is restrained so that the full resources of the whole of society are deployed to the widest advantage, by which essential services are provided, by which the economy is managed and directed for the general good, by which the benefits of citizenship are fairly and productively shared, by which the cohesion of society is effectively developed.
This is of course at odds with the right-wing doctrine that government should limit itself to a minimal responsibility for maintaining the value of assets – and particularly the currency – and should otherwise merely hold the ring while market operators are allowed to get on with it. The left, on the other hand, has always taken the view that governments are inevitably major players in the economy. They are the most important investors, customers and employers. They influence events and behaviour through policy decisions. As a result, they should accept responsibility for the overall context in which economic activity takes place. They should properly be concerned with the appropriate level of demand, the provision of gainful employment opportunities for all citizens, and the fair distribution of the fruits of economic activity. It was the abandonment of these responsibilities, particularly by the left, that has contributed so greatly to the global crisis.
A proper balance between the roles of the market and the government, between economics and democracy, is essential. It need not – as is often argued – require a sacrifice of economic efficiency for the sake of social outcomes or political principle. The lesson of the last thirty years is that “free- market” economics do not lead to efficiency – great riches for a tiny minority, yes, but sustained and equitable economic progress for all, no.
The case for diffusing power throughout society is as much economic as it is social. We make the most efficient use of our resources, and particularly of our human resources, if everyone has the chance to make their most appropriate contribution to wealth-creation, if that contribution is fairly recognised and rewarded, if everyone’s potential is properly recognised and not suppressed, if we understand that no individual is so talented as to merit rewards hugely greater than those enjoyed by others when it is the cumulative effort of the whole of that society that is overwhelmingly responsible for the progress we have made.
A similar argument can be made concerning the proper use of our natural resources and the sustainability of our environment. If decisions on these matters are taken by democratic agencies answerable to the widest possible constituencies, rather than by a handful of self-interested operators in a short-term market which they dominate, we have a better chance of managing our natural resources to the greatest possible advantage for all of us and of our planet.
These economic and environmental arguments reinforce the great social case for a wider diffusion of power. Freedom in society is not to be measured by the level enjoyed by that powerful minority that benefits from the greatest freedom of choice. Freedom exercised by denying freedom to others – even indirectly, through the supposedly value-free operation of the market – is not the mark of a free society. Only by diffusing power, by breaking down concentrations of power, can we optimise freedom for everyone. The supposed antithesis between freedom and social justice dissolves away when the goal is to allow everyone the maximum level of freedom that is commensurate with a similar level for others.
A society in which power is fairly shared, in which everyone has the opportunity to contribute and where that contribution is valued and rewarded, where the benefits of living in society are treated as social goods to which everyone is entitled, will be a society which is cohesive and integrated, which feels good about itself, and which is less likely to display the anti-social behaviour that characterises those marked by alienation and growing inequality.
These principles of democracy, social justice, and community – and the analysis by which those principles are derived – provide us with the basis for deciding an appropriate left political agenda. On issues such as who owns, controls and benefits from the economic process, what is an appropriate level of guaranteed provision of the basic requirements of a civilised life, what attention should be paid to the interests of others beyond our shores and beyond our lifetimes, how important to social cohesion and unity is a sense of fairness, we should be clear what the touchstones are.
The demands of practical politics will inevitably require compromise and trade-offs. But each policy, each new initiative, should meet a sort of health check provided by the touchstones. The alarm bells should ring if the policy agenda is seen to fly in the face of the basic principles. If only New Labour had heard them toll!
Adherence to a body of principle and analysis does not dictate, as is sometimes suggested, a static or backward-looking stance. It will suggest and require adjustments to existing policies as circumstances change. It will inform and stimulate new policy to deal with new issues. It will urge us on to meet the future.
A left agenda framed in this way will exhibit many familiar features and is none the worse for that. Policies for increasing the stake of ordinary people in wealth-creation, for ensuring through redistribution that wealth is shared more fairly, for using the public purse and community responsibility to guarantee the delivery of basic services should all feature prominently.
But we should also expect some new thinking to address new issues. A good example is the reappraisal now needed of the value of labour in the economic process. The new reality of labour’s declining importance in wealth-creation by comparison with capital-hungry technological advances means that labour by itself is no longer an adequate basis for a claim to a fair share in society’s riches. It may be that it is citizenship, not labour, that should form the basis of that claim, and that we need a new concept of citizenship to help us sustain it. Citizenship is already the basis for a large number of claims on society – equality before the law, the right to vote, and the whole range of human rights; it is not so revolutionary to propose that those basic claims should include a right to a fair share of society’s resources.
We will also need a longer timeline and wider horizon than the market can provide if we are serious in our concern for the preservation of our environment and natural resources. Government intervention on behalf of the community is inevitable if we are to inhibit climate change, maintain a fresh and clean water supply, encourage the biodiversity on which our future may depend and establish a new relationship between humankind and our planet. We need to re-think patterns of land use, methods of food production, and the production and uses of energy. The market can help, but it will be a market that is rigged to produce particular outcomes in the public interest.
In economic terms, we should reclaim economic policy (including monetary policy) as the proper responsibility of democratic government rather than of bankers and a proper subject for public debate. We should recognise that economics is a behavioural science and does not lend itself to mechanistic solutions. In particular, we should re-examine the role of the privately owned banks in the light of the current debacle and question whether they should ever again be allowed a virtual monopoly of credit creation. In view of the burden that bank failure has imposed on the taxpayer, should the banking function not be seen essentially as a public responsibility?
The roles of limited liability and the joint-stock company should be re-examined, in view of the irresponsibility and disregard for the public interest that they have demonstrated. New models of industrial ownership and control should be explored, including those that would give working people a stake in their own enterprises.
A left government should take the lead in negotiating new agreements to reform international financial and economic arrangements so that multinational capital takes a more responsible attitude to the communities in which it is invested, the volatility of foreign exchange markets and the flows of “hot money” are restrained, and global imbalances between rich and poor and between debtor and creditor nations are addressed effectively.
In social terms, a left government should recognise the over-arching importance of making whole again a society that has been fractured by class, economic circumstance, ethnicity and religion. An inclusive society based on fairness and tolerance and one that placed a value on all its citizens would not only be the most effective antidote to crime and other anti-social behaviour but would also provide the conditions for improved economic performance. Making full employment again the prime goal would be important. An attack on economic inequality through a combination of integrated tax and income support policies would produce a more cohesive society. Health and education services that reflected the public service ethic rather than the profit motive and the market mechanism would also be helpful.
Overseas, a return to Robin Cook’s ethical foreign policy would help to restore Britain’s standing as a force for good in the world – and the world might follow suit as a result. The same tolerance and inclusivity as was shown domestically would produce similarly constructive results internationally. We should have no more complicity in illegal invasions and torture, or in denials of human rights at home.
Proposals like these are, of course, no more than signposts. They do not by themselves constitute anything like a comprehensive programme. Rather, they indicate the kind of new – and not so new – thinking that a left agenda that is true to the analysis offered here might encourage. We have the chance to return to our core values and goals, and to update them in the light of events that can now be seen to underpin and validate our approach to politics. We should not miss that opportunity.
Bryan Gould
15 March 2009
This piece will be published in the next issue of Soundings in the UK. A shortened version is published on 27 March in an online book called The Crash, edited by Jon Cruddas MP and Jonathan Rutherford. It can be accessed at http://www.lwbooks.co.uk/ebooks/crash.html.
Not In My Name
Those, like me (and almost everyone I know in the Labour Party), who have been critical over the years of New Labour and its record in government might have expected that the passage of time would bring with it a kinder judgment. And in my case, in particular, it might have been thought that – twelve thousand miles away – distance would lend enchantment.
How, then, to explain that the more we take the long view of the Blair and now the Brown government, the sharper seem the contours of its failures and betrayals? How is it that the features of its landscape that grow – as our perspective lengthens – in shocking, anger-making prominence are those shameful episodes at home and abroad which cumulatively are a complete denial of what a Labour government (or any British government) should have been about?
There have been of course many good and decent day-by-day achievements of this government. Across the whole range of political issues, I do not say that Britain did not do better under Labour than it would have done under most alternatives. But these achievements have been molehills, judged against the towering peaks scaled by New Labour in its rejection not only of Labour, but of any decent and civilised values.
The first – and for that reason perhaps most unexpected – contravention of civilised norms was the Iraq war. The damning judgment of that doomed enterprise has been repeatedly rehearsed, but to read the charge sheet again is still a shocking experience. A British Prime Minister, claiming the right to moral leadership and an almost religious duty to confront evil, sucked up to a soon-to-be discredited US President and helped to launch an invasion of a distant country – an invasion based upon a lie, and one that flew in the face of international law, undermined the United Nations, alienated the whole of the Muslim world, seemed to validate the claims of terrorists and those who recruited them, destroyed the country that was invaded and killed hundreds of thousands of its citizens, took many young soldiers to unnecessary deaths, and rightly reduced Britain’s standing in the world.
The New Labour government still refuses to acknowledge that any of this was wrong. It will not even countenance an independent inquiry into how such a fatal mistake was made.
It may seem improbable that the scale of the Iraq calamity could be matched in any other area of government. Yet, as the reasons for and scale of the global recession become clear, it is also increasingly apparent that another global (as well as British) disaster can be laid – substantially if only partly – at the door of the New Labour government.
It was, after all, that government which enthusiastically endorsed the virtues of the “free” market, which turned its back on the need for regulation, which celebrated the excesses of the City, which proclaimed that it was “intensely relaxed about people becoming filthy rich”. The government that should have protected the interests of ordinary people was dazzled by the super-rich; unsuspecting Labour supporters found themselves thrown on the tender mercies of a market-place that was cleared of any limits that might have restricted the rich and powerful. There have been no more enthusiastic cheer-leaders for the culture of greed and excess than New Labour ministers.
On the central issue of politics – the willingness of government to use its democratic legitimacy to intervene in the market in order to restrain its excesses – the New Labour government ensured that the dice lay where they fell and applauded as they did. It was Tony Blair who, standing shoulder to shoulder with Rupert Murdoch, proclaimed that the future lay with the “globalisers” and that those who wanted to reclaim some control over their lives were “Isolationists, nationalists and nativists”. It was Gordon Brown who removed the major economic decisions from democratic control and handed them over to unaccountable bankers.
That betrayal of those who looked to a Labour government to help them has seen a rapid widening of inequality and a sharp intensification of social disintegration. It is the jobs, homes and lives of ordinary people that have borne the brunt. The country is a weaker and poorer place as a result.
But even that failure pales by comparison with the latest revelations about the abandonment by New Labour of any pretence to civilised standards. We now know that this government connived with the Bush administration to hold people illegally, to kidnap them in secret, and to torture them while in custody – all in the name of a war against the forces of darkness. The perpetrators of these outrages seem to believe that they can be washed clean by simply declaring their superior morality.
Nothing more clearly distinguishes those beyond the pale than their willingness to use the secret, illegal and cowardly infliction of pain to terrify, cow and bend to their will helpless people being held without charge or trial or legal redress. It beggars belief that any British government could, in a supposed democracy, do so, and not even bother to respond to its critics. It is simply incredible that a Labour government claiming to represent the values of the Labour movement could believe in these circumstances that it has any right to remain in office.
For me, this is too much. I am sick to the stomach. I disown this so-called Labour government. I protest.
Bryan Gould
20 February 2009
This article was published in the online Guardian on 22 February.
Don’t Leave It To The Bankers
As Gordon Brown’s tribulations mount, prompting amongst other things a reappraisal of his time at the Treasury, it is perhaps not surprising that even his most widely celebrated policy innovation – the “independent” central bank – should come under scrutiny. What is even more surprising, however, is why it was almost universally believed to be such a good thing in the first place.
The independent central bank was of course seen as an important weapon in the monetarist armoury. Monetarism is, after all, an expression of an extreme belief in the infallibility of the market – an article of faith for New Labour. Governments cannot be allowed to intervene since any such intervention will frustrate the market’s unfettered operation. What could be more natural, therefore, than to ensure that elected politicians are excluded from the formulation of monetary policy?
This is not, of course, quite how the independent central bank is presented to the public. The public have been sold on the idea that an independent bank is necessary if inflation is to be controlled, since politicians cannot be trusted to take the hard decisions that are necessary. But a careful study of the recent history of the battle against inflation suggests that it has very little to do with the independence or otherwise of the central bank. Inflation in the 1970s was a world-wide phenomenon, but by the mid-1980s – reflecting world conditions – it had largely been brought under control. The claim that an independent central bank is essential if inflation is to be controlled in any case looks less convincing today, with inflation running at over 4%.
But what is really remarkable about an independent central bank is that it is a major step away from democratic government. The price we pay, in other words, is not just an economic one, but is a significant weakening of our democratic institutions. What is identified as the over-riding issue in economic policy is now the exclusive preserve, not of elected governments, but of unaccountable officials.
How this has been accepted is even more of a mystery when one considers that the “independent” central bank is in no sense objective or neutral. It is a bank. Its main clients are banks. It is staffed by bankers. It can be relied upon always to put the interests of the financial establishment ahead of those operating in the rest of the economy. Our economic policy is, in a very real sense, made in the interests of the holders of existing assets rather than of those who live and work in the real economy where new wealth is created.
This bias seems more extreme the longer one looks at it. Not only has the Monetary Policy Committee ensured that the productive sector should bear the burden of its counter-inflationary measures. It seems also to have deliberately averted its gaze from the factor that really is the primary cause of inflation – the huge rise in bank lending.
How have we arrived at this remarkable situation? It is not surprising that the bankers themselves should support and welcome it. Economists, too, will naturally feel that the authority and credibility of their profession have been underpinned by this recognition that it is only the high priesthood that is competent to address these important issues.
But why have politicians so readily accepted this substantial diminution of their powers? The answer is that it is very convenient for politicians to be able to contract out the most difficult decisions they are faced with. How useful it has been for Ministers to be able to pin responsibility on the Bank and to claim that the travails of the economy are caused by the mechanistic workings of the market and of essential monetarist disciplines rather than actual policy decisions.
But is it not time that we reminded them of their responsibilities? If they want to exercise power in a democratic society, they should not be allowed to pick and choose which responsibilities they accept.
There is of course an important role for an effective central bank. A central bank is essential to maintain a proper prudential supervision of banks and of the financial sector more generally – something that has been sadly missing from the scene over recent years. A central bank will regulate and enable the banks to interact in an efficient way that benefits the economy as a whole. The central bank will be an important source of advice on financial matters. But none of this requires the central bank to be immune from challenge or that its actions should be free from debate and discussion, particularly when it is uniquely entrusted with the power to give expression to a narrow and bank-dominated view of the true purpose of economic policy.
The growing economic crisis demands that sacred cows should no longer be immune. Even in New Zealand, where the modern fashion for an “independent” central bank first surfaced, the debate is being re-opened. If we want an economy that more faithfully serves the interests of all of us, and not just those of a small self-interested minority, economic policy should be restored to the democratic arena.
Bryan Gould
4 September 2008
This article was published in the online Guardian on 6 September.
My Vision for New Zealand
The following article is a commissioned contribution to be published in a book edited by Dave Breuer of Anew New Zealand.
As most New Zealanders are quick to acknowledge, New Zealand has established – in its relatively short history – one of the most effective democracies in the world. The record is indeed a proud one. Universal suffrage, votes for women, equality before the law, the welfare state, human rights, race relations, are all areas where New Zealand has been amongst the pioneers of reforms which the rest of the world has been keen to emulate.
Yet even this proud history is not sufficient to guarantee to us a fully functioning democracy, one capable of equipping us to face and overcome the increasingly evident and serious challenges to our well-being and even survival, both here in New Zealand and across the globe. My fear is that without that robust and effective democracy, we – and others – will fail those challenges. My vision, on the other hand, is that New Zealand – true to our distinguished traditions – will find the means to restore a democracy effective enough to ensure that the challenges are met, both for ourselves and for others to follow.
The essential value of a democratic system of government is that it counteracts the natural tendency of all societies to allow and indeed promote the concentration of power in just a few hands. Left to themselves, most societies will operate so as to advantage the strong, the wealthy, the intelligent, the well-born, or even the plain lucky, who will then use that advantage to entrench and increase their power still further, to the detriment of others. The crucial decisions that are then taken will be made in an increasingly narrow sectional interest – that of the rich and powerful – rather than in the wider interest of the whole of society.
The great virtue of democracy is that it provides a counterweight to this natural tendency, by ensuring that political power at least is more fairly and evenly distributed, and that there are therefore certain limits as to how far the powerful can pursue their own limited interests without regard to the interests of society as a whole.
But what should we make of an apparently democratic system of government where power has indeed concentrated in just a few hands and where that concentration has occurred in places that are beyond the reach of our elected government? Should we say that we are content that we have the forms of democratic government, even though the substance has been hollowed out so that our elected government cannot ensure that they take important decisions in the general interest and are accountable for those decisions to the whole of society?
My contention is that this is exactly the dilemma we face, and that neither in New Zealand nor elsewhere do we have a functioning democracy such as to protect the wider public interest – now and into the future – against the accumulation of power into fewer and fewer unrepresentative hands. This is a situation fraught with danger. How has it come about?
It has happened because the wealthy and powerful have discovered a means of circumventing elected governments. Whereas once, an international investor (and in a global economy, it is the international investor who holds the most important purse strings) would have to comply with the requirements of the government of a country in which it wished to operate, now – by virtue of the unlimited movement of capital across national boundaries – the boot is on the other foot. A government which does not toe the line, in terms of what is wanted by a potential investor, will simply be told that the investment will go elsewhere.
Few governments have the power or will to defy this blackmail. Most will meekly comply, to the point that a measure that is regarded as likely to deter overseas investment will never see the light of day, let alone be put in place. The result is that the ability of governments to protect and advance the interests of their citizens has now been significantly diminished. And, as people sense that their governments have lost power, they in turn lose faith in democracy.
So, economic policies are framed to satisfy current orthodoxy, so that central economic decisions are taken out of the hands of elected governments and handed over to unaccountable bankers and officials. Policies are shaped to meet the needs of big business, tax rates for the wealthy are progressively reduced, spending on social and environmental issues is pared back, rules restricting the repatriation of profits are relaxed, the protections provided to workers are weakened, the fruits of prosperity accrue largely to the already wealthy, rules to protect the environment are bent, restrictions on cross-media and foreign ownership of the media are abandoned.
None of this happens openly – as an acknowledged consequence of the preponderance of one interest over all others – but is done piecemeal, each step part of an inexorable reduction in democratic protections against the overweening power of international capital.
Without our realising it, the political landscape has changed. A political revolution has taken place without a single vote ever being cast for it. The choices offered to voters have been narrowed. It is now the undemocratic global market, not political democracy, that makes the important decisions. A single global economy and market is, by definition, one in which there is no role for government, democratic or otherwise, since government intervention would mean that the market operated differently in one country as opposed to another, and there would no longer therefore be a single market. The danger is that – left unregulated – that single market does not recognise the public interest. It rewards instead the greedy and short-sighted minority.
It is not only the domestic political agenda that has been transformed. The dominance of increasingly unrepresentative and powerful international investors – narrowly focused and short-sighted enough to believe that their wealth and power allows them to ignore the threats that assail the rest of us – means that the undemocratic distortion of the political process now has wider and wider consequences and increasingly affects global issues. In matters like global warming, or religious tolerance, or third world debt – all arguably central to our very survival as a species – it is not humanity’s, but international capital’s interest that prevails.
This barely remarked yet profoundly threatening development presents all of us with a huge challenge. New Zealand, which has so often led the way to democratic reform, has the chance to fight back, not just in the interests of our own democracy, but as a beacon light for others to follow. Never has the need for democracy, for the broadest possible basis for critical decisions, been so pressing.
So, what can we do? Our main task is to restore a fully functioning democracy. We can begin by raising the level of awareness, so that people understand what is happening, and how high the stakes are. We can then demand from our politicians that they reclaim for us all the power that they currently pretend they have – the power to make the important decisions in our interests – and that they meet the obligation to be held accountable for those decisions. We should assure them that they will have our support if they have the courage to take on these challenges.
We should consciously rebuild a sense of the value of our democracy, not in the abstract but as a practical guarantor that decisions will not be taken over our heads by distant, unrepresentative and irresponsible forces. That means, among other measures, having the courage to insist that our governments restrict the freedom of overseas investors to buy up whatever they choose, so that we cease to have any say over what is done in our own country. It means reclaiming the freedom to set our own requirements as to how and in whose interests our economy should be run, and what laws should protect our citizens, so that those wishing to operate here comply with our wishes rather than the reverse.
It means placing economic policy under the control of our elected governments rather than bankers. It means acknowledging that governments have a vital role in identifying important issues and acting to deal with them, rather than leaving them to the global market to decide.
As we begin the fight-back at home, we should also work with other like-minded countries and governments to change the way in which international financial institutions work, to establish rules to govern international investment, and to control the flows of capital so that the power of international capital to defy and override elected governments in their quest for profit at any cost is limited.. We must ensure a fairer distribution of capital around the world and promote international cooperation in the interests of humanity rather than of maximising profits for a few.
My vision for New Zealand is not a pipe dream. It is rooted in our history and in our attachment to democracy. What is needed is the political will – and a sense of urgency.