I read two articles on economics, the left, and the need to embrace real and co-ordinated economic reform yesterday. The first was by Danny Blanchflower in the New Statesman and the second by Stewart (Lord) Wood in the Guardian. Danny is one of John McDonnell's advisory team. Stewart was a key adviser to Ed Miliband.
I saw some negative feed back to both articles on Twitter. The reason was that both clearly accept the role for markets. As Danny put it:
The new Labour leaders are not economists and are going to have to learn fast. They will have to accept the realities of capitalism and modern markets, like it or not.
Stewart expressed it differently:
If we want to reform the way our market economy works — to channel the public's anger about Google, Fred Goodwin, energy company profits, zero-hour contracts and inequality into real change — we need answers that match the scale of the problems.
The implication is obvious in both cases: they both see markets as a continuing part of our economy, and so accept private ownership of companies.
For the record, so do I. That's what belief in a mixed ecnomy, which I have often made clear I have, means.
And in practice my desire for tax reform woukd be largely meaningless if I thought that we should have no private ownership or wealth: tax is almost irrelevant when the ownership of the entire surplus from an activity already belongs to the state. By implication tax justice necessarily embraces the mixed economy.
It's how we think about that economy that matters in my opinion. My problem with too much of the politics we have had is its ability to build artificial divides. The neoliberal logic that markets are good and states are bad is just wrong because clearly each has merits and weaknesses and the real world choice is to use the right one at the right time.
Undoubtedly errors have been made in that process of choice in the past. I very much doubt that the UK government did need to own British Leyland. Equally, it does need to own our railways. Car manufacture is not a natural monopoly; from the very onset of the railway era it was recognised that they always had that characteristic and had to be regulated to prevent abuse.
The first aim of economic reform is, then, to simply get this narrative of necessary and appropriate partnership between the public and private sectors into normal discourse. It is not, and never will be, the case that one is inherently better than the other. It is actually the case that to get the best out of the economy you need both.
I often explain this using the metaphor of a cappuccino. The espresso on the bottom is the state. It shapes and moulds the whole thing. If it is good, then pretty much the whole thing will be, and vice versa. The frothy milk is the private sector that builds on the foundation of the state. And on the top is some chocolate or nutmeg which is the thing we all see, and because in real life this represents the frivolities that feature in Sunday colour supplements we think that the private sector, that almost always produces them, is the source of the fun things in life when in fact without the state, and the mundane functions of the market, they would not be possible.
A cappuccino stands or falls as a whole. It's hot frothy milk without the espresso. It is just an espresso without the milk. Both are acquired tastes for some. But many think the compromise - with the fun bits on top - is best. My observation of cafe life suggests that (and I drink a lot of coffee - always black, I admit, but read nothing into that: metaphors have their limits).
Let's, again, not push the metaphor too far, but the task we face is to actually find politicians who, like a skilled barista, can blend the right product for our economy that delivers the appropriate mix of state and private where each recognises the role of the other and is willing to support the role the other has to play.
Paying appropriate tax does, of course, fit into that.
The quid pro quo is that the private sector can, when it accepts and fulfils its obligations, make reasonable demand on the state which many would support, for things like appropriately trained people, for example. This is what partnership is about.
The problem in our current economy is that we do not have politicians who are, as yet, showing those barista skills. Far too few underhand the role of the state. We have too frothy an economy as a result that is too volatile to be durable. And we also have a private sector that is refusing to recognise it is even in partnership. The result is quite reasonable anger from many about what it is doing: Google please note.
My aim is for a cappuccino economy: one where state and private sectors both flourish because each is allowed to do what it does best. We're a long way from being there right now. And in my opinion that's because the espresso is too weak right now.
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Thus, I wish my fellow-capitalists on the trading floor: “May the Froth be with you”.
Like all good analogies, your capuccino economics has more in it than you might’ve intended: we would do well to relect upon the history of the Capuchin Friars, whose brown and white habits lent the name ‘capuccino’ to the coffee – their formation is a history of rejection and suppression, division, schism, expulsion, personal failure, error and heresy; and none of the founders lived to see the eventual success of their new Order.
Personally, I found both articles uninspiring and lacking in imagination. And just to be controversial, I prefer tea to cappuccino, because when you mix the milk (money) in with the tasty water (people) it spreads itself around evenly and doesn’t leave all the creamy froth (profits) at the top!
For another analogy, it was like watching a group of car mechanics discussing the merits of the internal combustion engine and whether the fuel mix should be adjusted or an extra filter put on the exhaust to reduce the pollution a little.
Capitalism is failing to support the worlds growing population and leave them feeling good about life. Just like tribalism, feudalism and imperialism failed to support their people after many years of creating growth and human development.
It is time to move on and develop the new alternatives that the world needs. Just like it is time to move on from the internal combustion engine and develop sustainable alternatives before we are all polluted by its negative effects.
Capitalism will still exist for a long time to come, but hopefully in a much reduced state. There is still some tribalism, feudalism and imperialism (even some slavery) in the world, but they are no longer the dominant forms of production. Why – because people no longer accept their relations of power and wealth. In the same way the current concentrated and corrupted ownership of economic capital as well as political power must be democratised.
We need more vision in economics and politics to help take the world in a more democratic, less capitalistic world and not just to explain how to tinker with the current outdated machinery.
Just my opinion of course!
Interesting TED talk from Mr Varoufakis..
http://www.ted.com/talks/yanis_varoufakis_capitalism_will_eat_democracy_unless_we_speak_up#t-220747
Capitalism, the Market and Enterprise are not interchangeable entities. It would be good if there were more discussion about this.
You can have social drinking without alcoholism and hopefully therefore enterprise without capitalism.
The David Blanchflower article is a strange one as it appears to have been written by two different people… it starts and ends really well and then there is a rogue paragraph in the middle about “having to accept the realities of capitalism and modern markets, like it or not”. David then suggests that the Labour policy is to refuse to let companies pay dividends “unless they do X and Y”. But this isn’t (as I understand it) the policy – John McDonnell has suggested creating a right for workers to own companies, something completely different. David then says “markets work and price controls don’t work”. That’s news to anyone who’s done empirical work on the minimum wage, a price control which (most empirical researchers agree) has raised wages for low earners without any adverse impacts on employment. I would argue that significant extra scope for controls on prices and wages in the UK economy as an option for achieving distributional objectives, although they are only one option and they may not be the best option (for example, in the housing market a big expansion of low-cost social housing may be a preferable alternative to rent controls in the private sector).
But apart from that paragraph, the article was good….
Dear Richard
A very good metaphor that I will use and credit to you. It astounds me that so many politicians are ignorant of the fact that government expenditure is part of GDP. They even ignoring economic liberals like Sam Brittan who writing in the FT in 2009 stated that” with anaemic consumption, huge corporate savings and a large BoP deficit, government is the only game in town”. I find it equally depressing that many in the PLP still accept that fiscal policy has no impact on output and employment.
I think the shorthand of neo-liberalism has become vapid and denuded of meaning in its universal useby too many other commentators . I still hold that the neo-liberals are the OrdoLiberalen of the Freiburg School that stood behind the Social Market Economy of Germany: as much markets as possible as much government as necessary. They called Hayek a paleo-liberal (a throwback). The illiberal and over-use of the term reminds of Charles Laughton as the Hunchback of Notre Dame constantly chanting ‘molten metal”
best wishes
Thanks Leslie
That point in GDP is astonishing: there really is a belief by many that somehow everything spent by the government is a burden on society
There is certainly an argument at large which would classify State expenditure on bailing out the too big to fail banks, along with the high bonuses for the spoilt little brats who caused that situation, and the amount of QE/creating money which effectively subsidises and guarantees profits and continued bonuses for those entities, as a burden.
And we have not even mentioned the burden of the levels of direct and indirect subsidies of State largess to favoured parts of the private sector in the forms of tax and enterprise breaks (all of which at some time or another have been spelled out in detail on this site) along with input to tax and trade legislation and sweetheart tax deals. I caught a quick glimpse of a (so called) newspaper headline from the Mail in the co-op this morning about some trip made by a Government Minister to the US to assure US multinationals that the UK aren’t interested in enforcing UK Sovereignty over the tax they should be paying on their activities in the UK market.
However, as I have argued previously this is a two way street. The politicians making these calls are merely doing the bidding of their sponsors on the basis of he who pays the piper calls the tune. In which case the maxim of the late Upton Sinclair comes into play and all the barista skills in the world within the political classes will be insufficient without a) the necessary willingness to apply those skills and more important b) a proper quid pro quo in which the private sector as a whole also develops and applies those barista skills and recognises it has also responsibilities to society directly also did and indirectly through the State.
At present we are a long way from such a position as far too many within the different levels of the private sector only recognise the legitimacy of the State inasmuch as it is there to serve their narrow insatiable and in some cases sociopathic wants and demands.
On the subject of wants it has to be recognised that we may not always get what we want. Whilst my personal view on the matter and desirability of a balanced mixed economy is congruent with that expressed on this blog site looking at where we are at present I am not convinced it is going to happen, at least not with the ingredients we are currently talking about. In terms of balance the cappuccino metaphor is apt and by definition applies both ways. The private sector/market needs the State but the State also needs a private sector/market for a mixed economy, which worked well for around three decades after WW2, to be effective.
And, reluctantly, this is where, it seems to me to break down. Blanchflowers argument of “having to accept the realities of capitalism and modern markets, like it or not” is naive to the point in which it becomes the caricature of the oft misquoted tale of Canute trying to hold back the tide. Those who take such a simplistic view need themselves, whether they like it or not (and if they don’t they will just have to lump it or get washed away by reality) to accept the realities that the operational functioning of capitalism and modern markets
are dependent on a finite resource base which will, unless innovation keeps up with previous waves, cease to operate in the way in which the proponents of current forms of economic activity are familiar and comfortable with to the point in which they suffer the delusion the current moment can be set in aspic and last forever.
As previously pointed out, Paul Mason makes a compelling case that the regeneration cycle of Capitalism we have got used to over the past couple of centuries or so is not doing what it should. The next expected innovation cycle necessary to drive the engine has not materialised and is well overdue. Moreover, the depression of wage levels and the widening wage/profits gap has and is depressing economic market activity which has only been held together by the sticking plaster of unsustainable debt levels, particularly in the private sector, which will come back to bite people like Blanchflowers et al in the backside in the not too distant future.
Put together with dwindling resource bases; the stalled innovation cycle required to get a quart out of a pint pot and create the necessary jobs with wage levels to re kick start the demand activity cycle in which money circulates and drives this modern market economy; and the debt time bomb which is set to go off; one key part of the cappuccino necessary for a balanced mixed economy is looking extremely sick, anaemic and likely to expire in the form in which it has existed.
Whatever a balanced mixed economy might look like given the current context and present realities, it certainly will not look like the model and template we enjoyed after WW2 before the neo liberal feudalist rent seekers took over the engine room a buggered up the system. It is highly probable that the ingredient that those like Blanchflower think represents the future reality we are heading into will not exist in the form it has, if at all. In which case, to get that cappuccino we are likely to need at least one replacement ingredient.
Accepting the role for markets is one thing, but it is not the same as accepting ‘The Market’ as if it were some God made given, and I think that’s what makes some people jumpy. Markets can be modified and that is all some of the Libor rate fixers were trying to do. It needs to be accepted that governments can, with legal authority, also modify markets. Indeed this is part of their enforcement of the rule of law. In fact I think it is true to say that no economy (and indeed probably no society) has ever existed without markets. Perhaps it might be better to think of markets as an expression of the law of supply and demand – which I used to be told was the only law nobody had ever managed to break…
A very good point MayP. There are many benefits of fair markets and fair trade in the private sector of the economy, but these will always require effective regulation to avoid abuse and excess.
But that is not what we have any more because any concept of fairness has been removed by the financial markets – which are neither good or positive for society.
Multinational corporations, banks, hedge funds, lawyers, accountants etc, etc (and the politicians that support them and are funded by them) are the greatest expression of unfairness in today’s world that I have ever seen.
Greater clarification of economic terminology and meaning (especially when used in the public domain) is essential to differentiate the good things that the private sector can offer, from the bad things that can result if left to its own devices.
On the subject of analogies, how about a circuit theory where the state is the battery, essential for circuit to work, tax havens and billionaires are big capacitors that impede the flow, and the poor are good conductors that recycle their charge almost immediately?