by Alex McKirgan
Political economy was the name given to the subject we now call Economics by the Scottish moral philosophers Adam Smith and David Hume in the eighteenth century. The name of the subject was shortened to economics by the 19th century economists Alfred Marshall and William Stanley Jevons in the hope that the subject would be recognised as a science. The term Political Economy today refers to the interaction between the economy, government and legal system. The crisis in our world that I refer to in the title is a crisis of political economy. How should our society, economy and government be organised to produce the best outcome for the majority of people? We urgently need to find answers to these questions because what we have today is not working.
I accept that market capitalism has made an amazing contribution to creating wealth around the world and has lifted hundreds of millions of people out of poverty. The 'dream' that formed the basis for mass support for market capitalism was the belief that workers would see rising living standards throughout their lives and subsequent generations would be wealthier and better educated. That dream came tumbling down in 2008 with tangible political consequences. Since then, many in the West have lost faith in the dream. From the end of the Great Depression, increases in productivity led to rising living standards for the majority, but increases in inflation-adjusted average earnings stalled around the late 1970s and have barely increased since then. Productivity has risen 300% since then, but inflation-adjusted average earnings have only increased by 8%. The share of profits going to capital has increased, while the share going to labour has decreased.
People reacted to the economic stagnation of the 1970s by voting in radical conservatives like Reagan and Thatcher. On both sides of the Atlantic, the consensus idea was that government-owned enterprises should be privatised, taxes cut and regulations reduced. Despite the rhetoric, while these policies did generate increased levels of growth, the rewards of this growth went exclusively to those at the top of the income scale. For everyone else, the only way real family incomes were able to keep rising were through increased female participation in the labour market, increased consumer debt and rising house prices. All of this came tumbling down in 2008 and real living standards are still below the pre-crisis levels in many countries. There is no credible alternative to the market system as a basis for generating prosperity. I am in no way a socialist, but I worry that the inherent contradictions of capitalism are undermining support for it.
The smarter Conservative commentators, like Tim Montgomerie of The Times and Fraser Nelson of The Spectator recognise this and agree that we need to find a new economic model or risk losing public support for a broadly private economy. It seems clear to me that the traditional Conservative/neoliberal/Chicago School response of lower taxes, smaller government and less regulation isn't the answer. Economic history from the 1920s and over the last 30 years show where these policies lead. As well as directing the economic rewards of growth to a small minority, these policies tend to lead to unstable economies and bubbles in housing and financial markets. Free movement of capital and deregulation may have some economic benefits but they significantly increase the frequency and severity of financial and banking crises. If the definition of insanity is doing the same thing but expecting different results, then this would be madness.
There is an equal challenge for the "Third Way" social democrats like the heirs of Clinton and Blair. While they accepted the neoliberal assumptions of Reagan and Thatcher, the booming economies they experienced produced abundant tax revenues that enabled much-needed rebuilding of the social infrastructure left in tatters by their Conservative predecessors. The current state of government finances would probably preclude a repetition of this era.
This economic conundrum is having a palpable effect on politics. With stagnant living standards for most, accompanied by people at the top ascending to a level of wealth beyond most of their compatriots' comprehension, support for 'politics as usual' and 'politicians as usual' has collapsed in many countries. As many people think 'the system' is not working for them, they are looking for radical alternatives. Worryingly, as often happens in times of economic hardship, people who see themselves as losing out from the globalised world have reacted by seeking to put up barriers against immigrants or outsiders and supporting 'non-system' politicians like Donald Trump. The Trump phenomenon is instructive. In an earlier Portsmouth Point article, at a time when most people saw him as a joke, I explained how he was tapping into this powerful feeling of discontent. It is stunning to see how far he has got with virtually nothing in the way of credible policies. He talks constantly about 'Making America Great Again'. He is appealing to voters who feel that they and their country have lost ground and want to turn back the clock. He talks constantly about bad trade deals leading to skilled jobs being transferred overseas. When asked how he will reverse this, he says 'I'll bring the jobs back home'. When asked HOW he will do this, he just continually responds by saying, 'I'm just going to bring them back home.' No credible policy ideas to fulfil his promise.
In the Democratic race, Bernie Sanders is making real progress by threatening to take on Wall Street and the 'Billionaire Class'. In this country, Jeremy Corbyn has tapped into a sense of despair about conventional politics and politicians, but, when asked about his economic plans, all Shadow Chancellor John McDonnell could come up with was 'I've asked a panel of experts to come up with some ideas.' Sounds to me like he has none himself.
None of these approaches stands any chance of building the kind of economy that can produce sustainable increases in average living standards. Until we can come up with a practical plan to achieve this, our political system will remain broken. So what are the pillars I believe we should start to build our new economic model upon?
1. Nothing is possible unless we can grow the economy.
2. We can't grow the economy by hiding from the world behind a protectionist wall.
3. We have to embrace technology and globalisation.
4. The taxation system needs to be highly progressive.
5. Wealth and capital should be taxed more, employment should be taxed less.
6. Government has a vital role in designing, managing and controlling markets to ensure efficient and socially beneficial outcomes.
7. We should take advantage of almost-permanently low interest rates to significantly increase investment in infrastructure and education. The low cost of borrowing makes the usual multiplier effect even greater.
I am a progressive and believe that government is, to quote, Barney Frank, 'just the name we give to those things we choose to do together.' However, to do those things you need a sustainably-growing economy. The key word here is 'sustainable'.
As I've shown above, traditional right-wing solutions fail this sustainability test. Traditional socialist policies which assume that there are plenty of resources and the argument is only about how they are distributed, fail the 'growth test'. The deficit created by the economic contraction of 2008-10 shows how growth underpins the sustainability of many social programmes.
The fundamental point of this article is that both our economic and political models are broken. They are linked. One cannot be fixed without the other. As we try to build a new economic model, we can learn from past mistakes but we also cannot hide from new realities. If we can find a broadly-based solution to the economic conundrum, we may return to an engaged, hopeful political system. However, when it comes to learning from the past, we know what can happen when there is a complete breakdown of belief in the ability of an economic system to deliver for the people. Demagoguery can lead to fascism and dictatorship, which in turn can lead to war and conflict.
At the end of the Cold War, Francis Fukuyama wrote a book declaring 'the end of history', claiming that the twentieth century battle of ideas had been settled. The declaration sounds premature. The battle was not won; it is still ongoing. However, the stakes are just as high: peace, prosperity and human development. No pressure on our generation, then.
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| Bernie Sanders and Donald Trump: signs of the economic times? |
I accept that market capitalism has made an amazing contribution to creating wealth around the world and has lifted hundreds of millions of people out of poverty. The 'dream' that formed the basis for mass support for market capitalism was the belief that workers would see rising living standards throughout their lives and subsequent generations would be wealthier and better educated. That dream came tumbling down in 2008 with tangible political consequences. Since then, many in the West have lost faith in the dream. From the end of the Great Depression, increases in productivity led to rising living standards for the majority, but increases in inflation-adjusted average earnings stalled around the late 1970s and have barely increased since then. Productivity has risen 300% since then, but inflation-adjusted average earnings have only increased by 8%. The share of profits going to capital has increased, while the share going to labour has decreased.
People reacted to the economic stagnation of the 1970s by voting in radical conservatives like Reagan and Thatcher. On both sides of the Atlantic, the consensus idea was that government-owned enterprises should be privatised, taxes cut and regulations reduced. Despite the rhetoric, while these policies did generate increased levels of growth, the rewards of this growth went exclusively to those at the top of the income scale. For everyone else, the only way real family incomes were able to keep rising were through increased female participation in the labour market, increased consumer debt and rising house prices. All of this came tumbling down in 2008 and real living standards are still below the pre-crisis levels in many countries. There is no credible alternative to the market system as a basis for generating prosperity. I am in no way a socialist, but I worry that the inherent contradictions of capitalism are undermining support for it.
The smarter Conservative commentators, like Tim Montgomerie of The Times and Fraser Nelson of The Spectator recognise this and agree that we need to find a new economic model or risk losing public support for a broadly private economy. It seems clear to me that the traditional Conservative/neoliberal/Chicago School response of lower taxes, smaller government and less regulation isn't the answer. Economic history from the 1920s and over the last 30 years show where these policies lead. As well as directing the economic rewards of growth to a small minority, these policies tend to lead to unstable economies and bubbles in housing and financial markets. Free movement of capital and deregulation may have some economic benefits but they significantly increase the frequency and severity of financial and banking crises. If the definition of insanity is doing the same thing but expecting different results, then this would be madness.
There is an equal challenge for the "Third Way" social democrats like the heirs of Clinton and Blair. While they accepted the neoliberal assumptions of Reagan and Thatcher, the booming economies they experienced produced abundant tax revenues that enabled much-needed rebuilding of the social infrastructure left in tatters by their Conservative predecessors. The current state of government finances would probably preclude a repetition of this era.
This economic conundrum is having a palpable effect on politics. With stagnant living standards for most, accompanied by people at the top ascending to a level of wealth beyond most of their compatriots' comprehension, support for 'politics as usual' and 'politicians as usual' has collapsed in many countries. As many people think 'the system' is not working for them, they are looking for radical alternatives. Worryingly, as often happens in times of economic hardship, people who see themselves as losing out from the globalised world have reacted by seeking to put up barriers against immigrants or outsiders and supporting 'non-system' politicians like Donald Trump. The Trump phenomenon is instructive. In an earlier Portsmouth Point article, at a time when most people saw him as a joke, I explained how he was tapping into this powerful feeling of discontent. It is stunning to see how far he has got with virtually nothing in the way of credible policies. He talks constantly about 'Making America Great Again'. He is appealing to voters who feel that they and their country have lost ground and want to turn back the clock. He talks constantly about bad trade deals leading to skilled jobs being transferred overseas. When asked how he will reverse this, he says 'I'll bring the jobs back home'. When asked HOW he will do this, he just continually responds by saying, 'I'm just going to bring them back home.' No credible policy ideas to fulfil his promise.
In the Democratic race, Bernie Sanders is making real progress by threatening to take on Wall Street and the 'Billionaire Class'. In this country, Jeremy Corbyn has tapped into a sense of despair about conventional politics and politicians, but, when asked about his economic plans, all Shadow Chancellor John McDonnell could come up with was 'I've asked a panel of experts to come up with some ideas.' Sounds to me like he has none himself.
None of these approaches stands any chance of building the kind of economy that can produce sustainable increases in average living standards. Until we can come up with a practical plan to achieve this, our political system will remain broken. So what are the pillars I believe we should start to build our new economic model upon?
1. Nothing is possible unless we can grow the economy.
2. We can't grow the economy by hiding from the world behind a protectionist wall.
3. We have to embrace technology and globalisation.
4. The taxation system needs to be highly progressive.
5. Wealth and capital should be taxed more, employment should be taxed less.
6. Government has a vital role in designing, managing and controlling markets to ensure efficient and socially beneficial outcomes.
7. We should take advantage of almost-permanently low interest rates to significantly increase investment in infrastructure and education. The low cost of borrowing makes the usual multiplier effect even greater.
I am a progressive and believe that government is, to quote, Barney Frank, 'just the name we give to those things we choose to do together.' However, to do those things you need a sustainably-growing economy. The key word here is 'sustainable'.
As I've shown above, traditional right-wing solutions fail this sustainability test. Traditional socialist policies which assume that there are plenty of resources and the argument is only about how they are distributed, fail the 'growth test'. The deficit created by the economic contraction of 2008-10 shows how growth underpins the sustainability of many social programmes.
The fundamental point of this article is that both our economic and political models are broken. They are linked. One cannot be fixed without the other. As we try to build a new economic model, we can learn from past mistakes but we also cannot hide from new realities. If we can find a broadly-based solution to the economic conundrum, we may return to an engaged, hopeful political system. However, when it comes to learning from the past, we know what can happen when there is a complete breakdown of belief in the ability of an economic system to deliver for the people. Demagoguery can lead to fascism and dictatorship, which in turn can lead to war and conflict.
At the end of the Cold War, Francis Fukuyama wrote a book declaring 'the end of history', claiming that the twentieth century battle of ideas had been settled. The declaration sounds premature. The battle was not won; it is still ongoing. However, the stakes are just as high: peace, prosperity and human development. No pressure on our generation, then.
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