Larry Elliott, writing in the Guardian this week, said:
Keynes said that finance should be the servant not the master, providing a steady and reliable source of funds for investment and not much else. In the decades after the second world war strict capital controls usually ensured that was the case.
The opposite now applies. Finance is the master not the servant. It decides what governments are free to do; it sets the terms of the debate; it shapes and dominates the economy.
Too bad, you might think. That's the way it is. But the reality is that, without curbs on finance, governments are severely constrained in what they are able to deliver, even if they have a powerful mandate. The triumph of finance has not been good for democracy. It has not been good for the economy either.
So, is Larry right? Is finance now the master?
There can be little doubt that within the neoliberal mindset he is. That mindset was created by Hayek and Friedman to establish the hegemonic power of wealth and, as a consequence, of finance, which is its chosen mechanism for delivery of that power. Larry‘s article suggest that this agenda has won the battle between the government, people, and financial elites. However, even if this is the case at present, neoliberalism can, like all human constructs, fail.
There are a number of ways in which that failure might happen. For example, war could upset the financial power of the elite and reinstate power in favour of the state. In a different era this did, of course, happen after the Second World War.
It is also, of course, just possible that people will have enough of the abuse that they are suffering from hegemonic financial interests, which abuse is denying them all prospects of hope. This trend is now being seen, very markedly, amongst younger people, many of whom now recognise that a supposed market economy is never going to offer them a chance of their own home, or the possibility of affording to have a family or to have secure employment and economic prospects. As a result, it is something they do not wish to engage with. Outright rejection of the economic model is, therefore, quite possible without even taking into consideration the issue of climate change.
Regarding climate change, there will at some point in time be an event which means that the inevitability of climate change can no longer be denied, whilst revealing that it is global financial interests that have prevented us addressing this issue. What will that event be, and when? I do not know, but that it might happen seems to be inevitable. Then, this power relationship might need to change.
So, too, and perhaps most likely in the short term, is the chance of a major financial crisis changing this relationship. For all the attention given to supposed national debt, it is personal and corporate debt that is the real risk in the modern economy, and the expectations are that both will grow considerably in the future. Finance does, after all, want to increase the wealth of the wealthy and the biggest asset they now have is the debt owed to them by those who need to borrow. So hooked are they on their asset accumulation that they will not know when to stop debt creation - and households and businesses cannot create money to repay those debts when they are stressed, unlike sovereign states. So, this bubble will burst just as surely as it did in 2008, and then, I hope, the questions will be asked about why it was created.
It is easy to be fatalistic about the rise of the power of finance. I also accept that, at present, it is undoubtedly winning this battle. Without a tipping point event change is also unlikely to happen. But I think a tipping point event is likely.
Of those, I note, which is most likely? In order, a crash, a major climate event, a rejection of the current economic model by younger generations who will make its operation impossible, and war. None of them is attractive as all involve risk. But that risk is being created by the subjugation of the world to the power of debt-driven finance, from which many already see no escape.
There will be stress, but change will happen.
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I think Abbas Lerner got it right when he talked about “functional finance”: “government should finance itself to meet explicit goals, such as taming the business cycle, achieving full employment, ensuring growth, and low inflation”.
More information
“Functional Finance and the Federal Debt” (1955) Abbas Lerner
https://public.econ.duke.edu/~kdh9/Courses/Graduate%20Macro%20History/Readings-1/Lerner%20Functional%20Finance.pdf
Functional Finance: A Comparison of the Evolution of the Positions of Hyman Minsky and Abba Lerner (2018) by L. Randall Wray
https://www.levyinstitute.org/pubs/wp_900.pdf
Thanks
[…] to their jobs to service their debt obligations? There is very little chance at all. But when I said this morning that at some time, there is going to be a massive rejection of this economic model, fuelled maybe […]
I was reflecting on this at Derby railway station this morning.
It was raining this morning so even though this smart new station has canopies on all the platforms, they were wet and slippy as the rain was blown in. I thought – an overall canopy like they used to do would be better – it would keep the platforms safer, less slippy.
But no – when they designed this, I bet they were thinking of reduced maintenance costs because perhaps they were envisaging that it would be privately owned one day and an over all roof on one of the major inter-regional stations would be too costly and put investors off. Forget safety and passenger comfort.
I also reflected on the public sector and the changes to terms and conditions that have been reduced considerably, combining authorities – again with an eye to making the bottom line for any privatisation more attractive.
When you think about it, our world is set up and deeply influenced by everything being convertible to private ownership to the point where what it is there for becomes not even secondary.
So my view is that finance is calling the shots, and just enabling money that could provide and maintain better facilities, create more jobs etc., go into the pockets of fewer people.
This moving money around to the rich is the only efficient process in this whole damned lie we are made to live.
Much to agree with
I’ve just read “How Infrastructure Works” by Deb Chachra, and can’t recommend it highly enough. Author is engineering professor in the US. Makes me weep for this country. But others are doing better, so it is possible. Not explicitly about finance, but about the mental transitions we need to make to get to sustainable, resilient world.
“In order, a crash, a major climate event, a rejection of the current economic model …..”
We have had powerful examples of most of these in some form (and others, like Covid), with no effect; indeed the stranglehold of the financial sector has only become stronger. This problem is psychological and ideological; and underpinned by the fact that money buys people. Nobody bothers to disguise selling themselves any more; it is the currency of all value. The language of politics in Britain now is of people being the servants of business. You are born to pursue greed for yourself, or if you find that distasteful, to labour to serve the greed for others. There is nothing else.
Rise of a new left wing party? Now looking less likely than war, alas.
But some are trying
If you look at left political wins, either revolutionary or electoral, the fact is that they tend to follow catastrophe… the Russian and Chinese revolutions would not have happened outwith the World Wars; FDR in the US would not have been elected, or acted in the revolutionary ways he did, without the Great Depression; the left governments in Western Europe that built their welfare states came out of fascism, war, holocaust… Even in more settled times, say the Labour governments in the UK in the 60s, which were pretty radical (Equal Pay Act, Race relations Act, ending capital punishment, Comprehensive Education, Open University) came out of the social disruption of the 60s counter-culture, civil rights movement, ‘women’s lib’…
So I think we can expect things to get a lot more hairy before the left (other than an impotent centre-left) wins the power to actually deliver real change.
But I also think that if you step back a bit things are very much in favour of the left/green. There are no answers in the political centre (continuing the status-quo with a bit of tinkering) nor, for long, on the right (scapegoating minorities, more oppression and exploitation, warmongering) – although that will unfortunately come/continue in some places in the short term. But in the propitious alignment of left and green thinking (capitalism is at the root of the problem so we have to transition to new economies and lifestyles) there really is the prospect of building a better world for our children.
Yes Geof, Green is the new Red, indeed Labour’s GE17/19 manifestos posited eco-socialism as the only relevant option that allowed ‘a better world for our children’ to be acknowledged (never mind, built). Sadly, a powerful corporate print and digital media, dysfunctional voting systems, controlled party systems, etc., make this seem unachievable.
Interesting times or just the start of a new world order where peace, justice, democracy and freedom are all “at the pleasure” of a new world elite?
Just looking at this morning’s newspaper headlines……the Financial Times states that the World is now over £100 trillion in debt????What on earth does this mean? Who does Earth owe this “money” to? Mars, Jupiter….
The finance industry…
The world’s banks
Its pension funds
And life assurance sectors
All of whom are desperate to own this debt
There is no crisis….
There is certainly a crisis if (like most people) you can’t afford to pay the interest or if you think there are better things to spend the money on – schools, hospitals, welfare rather than interest costs.
Do you think that debt interest is a productive use of government money?
No, I don’t
That’s why I call for rates to be cut
I also read Larry Elliott’s column and was disappointed by his pessimistic, fatalistic conclusion – as if he was saying that there is no solution to the problem of the dominance of finance and its ability to control, or at least delimit, the workings of our democracy.
He referred to the abandonment of capital controls way back in 1979 as the key moment enabling the rise of international financialisation. But there is still much that could be done through our existing institutions – as you have frequently argued.
You’ve also spoken of the need for “courageous politicians” who are determined to use the powers already available to them to set an entirely new agenda and who are determined to face down financial institutions in order to implement it. I agree.
There must be hundreds of Labour MPs sitting in Commons who are wondering why on earth they are there. We have to keep the pressure on them – keep badgering and shaming them into forcing a radical change of direction.
My information says those who know anything about economics know there will be a crash, and then there might be a chance of a new leader – who may be almost unknown right now.
“There must be hundreds of Labour MPs sitting in Commons who are wondering why on earth they are there.”
They should have thought about that a great deal harder, before they signed up for sitting there, wondering. Which brings me to the other two obvious conclusions that follow from that fact. First, it is reasonable to deduce that they were carefully chosen by the Labour Party, precisely for their inability to think for themselves, and settling for “wondering” as their great contribution to public life . Second, it follows from the these two observations that these MPs are the wrong people, in the wrong place doing the wrong job. What you are saying is – they aren’t up to it; but here we are, only four years (at least) of this to suffer. Then you have to ask about the basic sense or judgement of those who voted for them, to sit there wondering.
We really do not have the time for all this “wondering”.
Much to agree with
It’s the victory of the banksters over the human mind, where most of us are unable to even imagine another way of doing things. How did it come to be that numbers on a computer screen dictate what we can and cannot do? That “fiscal responsibility” is more important than human rights? That debt bondage is the human condition? Boggling.
The gnawing, twisting pit of dread
Felt in the guts
But in my head
Swirling darkness obscuring sight
Pain by day
Despair by night
Because all I’ve done is not enough
Gone like that
I’m not so tough
The corporate carapace smashed to pieces
Search now for what
My true face is
Soul solace the land, the sea, the sky
Nature’s balm for one
Who cannot cry
From Hayek’s world I now must flee
My only hope
Of finding me
Thanks
Well said, Richard, re Finance Master or Servant, and your reckoning a special event needed to bring Finance into our service . . . .but it’s happening right now and its either “sixth extinction” by climate catastrophe or nuclear war ? . . . .still difficult to chose though and I can’t see either a capitalist or socialist world making a jot of difference and I don’t suppose Planet Earth will care a jot either ?