Monday, 22 August 2011

The Great Repetition? Karl Polanyi and today

“Some books refuse to go away” it says in the introduction to the 2001 edition of The Great Transformation by the Hungarian economist Karl Polanyi.

Painstaking research sponsored by Google reveals that those words were written by a historian called Charles P Kindleberger, who with a name like that has to be American, in 1974.

If in 1974, The Great Transformation was obstinately sticking around, by now it is snaking out of book shelves across the world, screaming “Read me!”

Written as the Second World War was raging, The Great Transformation:  the Political and Economic Origins of Our Time, to give its full title, is a book that becomes more prescient the older it gets.

The book is about another age that is frighteningly reminiscent of our own. Its subject is the creation, in the nineteenth century, of what we would call now free market capitalism, molded and justified by the ideology of economic liberalism. It shows how that free market, liberal civilisation reigned supreme for a while but then imploded in the 1930s, as Fascism took over.

In keeping with the best Hollywood tradition, the plot of the sequel is uncannily similar to the original.

Then there was economic liberalism, now there is neoliberalism. Then, Fascism and Stalinism were in the ascendancy, now there is a fear that totalitarianism will return as neoliberalism flails ineffectually, unable to deal with the consequences of the society it has created.

Polanyi says the only humane alternative to the utopian fantasies of economic liberalism and the nightmares of totalitarianism, is socialism. He defines socialism as the conscious subordination of the free market to the demands of democratic society.

As such, The Great Transformation has provided inspiration to those who want to re-regulate capitalism. Maurice Glasman, the English political thinker behind Blue Labour is a “Polanyian”. The preface to the latest edition is by Joseph Stiglitz, the American Keynesian economist, who believes that government intervention will make capitalism stable and just.

But The Great Transformation can be interpreted in more than one way. It has also influenced more radical thinkers like the libertarian socialists Murray Bookchin and Noam Chomsky, who see in the book an appreciation that for almost all of human history, capitalism was rejected as a way to run society. And why should the future not draw on the wisdom of the past?

What The Great Transformation does is to destroy the notion that capitalism is a natural way to be, that a market economy automatically emerges when the restraints are taken away and people’s innate competitiveness is allowed to surface unimpeded. On the contrary, free markets are conscious creations, dependent on the destruction of older, more stable forms of society. Human nature, according to the evidence that exists, is not naturally competitive about the means of life.

Capitalism is an artificial economic system, in exactly the same way Communism was. And what has been created, can be uncreated.

Polanyi looks in detail at the first society that experienced this “great transformation” – England during the Industrial Revolution. He was able to study this history first hand because he fled to England from Vienna in the 1930s.

A market economy was pitilessly created by systematically annihilating the old society. Peasants were forced off the land and into the ‘dark, satanic mills” by government enforced enclosure of the open common lands on which their livelihood depended. Craft guilds, which set wages and established the quality of products, were abolished. A labour market was created by repealing laws which restricted workers’ mobility, obliged employers to provide seven-year apprenticeships, and enforced annual wage assessments by public officials.

In this blog, it has been asserted that the market economy is a myth, that the economy is not the scene of an entrepreneurial, Dragons’ Den-style, battle of the fittest among individuals, but a place where large corporations, controlled by tiny elites, seamlessly work for their own advantage.

But in the eighteenth and early nineteenth centuries, the market economy was not a myth. There was a transformation from an ordered, hierarchical and static society to an immensely fluid society in which new inventions could change the fortunes of people and the society around them. Industrialists often came from ordinary backgrounds, although they were soon swallowed painlessly into the British aristocracy. Corporations did not come into being until the 1850s.

This market economy did two things that are often not contemplated together. One was to create the dependency of millions of people on the fortunes of an economic system. In pre-capitalist societies, people were not threatened by society with starvation unless they made enough money. They were economically secure, although not rich. This changed with the creation of a market economy. People’s livelihoods and, often lives, were dependent on the kind of employment they could find. In Marxist terms, masses of people were turned into proletarians, surviving by selling their labour. The Left in the nineteenth century called it “wage slavery”.

The second was to create “unheard of material welfare.” For the first time in history, production based on machines became dominant and people were compelled to work for it, on threat of starvation. This raised the possibility, if not the actuality, of material abundance for everyone. “At the heart of the Industrial Revolution of the eighteenth century there was an almost miraculous improvement in the tools of production,” says Polanyi “which was accompanied by a catastrophic dislocation of the lives of the common people.”

This feature of capitalist societies, economic insecurity in the midst of material plenty, is an essential fact of life today. Most people are in an economically precarious situation – they are one or two payslips away from insolvency - but the economy produces an immense superfluity of goods.

The Great Transformation shows how the Industrial Revolution in England, which became the model for the rest of the world, was justified and shaped by the ideology of economic liberalism. Shaped because the idea of a laissez-faire economy, in which everything was a commodity and there was no outside intervention, became the unimpeachable principle of the age. England’s cotton industry, for example, initially got off the ground with the help of protective tariffs on imports, but later in the nineteenth century, free trade was supreme.

Economic liberalism sought validation in the past. It, finally, was liberating an elemental feature of human nature, which had been artificially held down by “civilisation” for thousands of years, the desire for individual gain. Adam Smith, who inspired free market philosophers, based his thought on man’s “propensity to barter, truck and exchange one thing for another”.

But this idea, though immensely powerful as a spur to action, was a gigantic error. “No society could, naturally live for any length of time unless it possessed an economy of some sort,” says Polanyi, “but previously to our time no economy has ever existed that, even in principle, was controlled by markets.”

Primitive societies lived through reciprocity. There was division of labour – different people performed specialised tasks – but not markets. A person coming back from a hunting or foraging expedition shared their spoils. Later, they would take as others gave. There was no motive of gain, or labouring for remuneration.

Later societies, even those horribly oppressive like the despotism of Egypt under the Pharoahs, were based on distribution in kind, rationing, not markets.

In Europe after the 15th centuries, markets in towns were created, but they were deliberately prevented from trading with the surrounding countryside.

Past societies were not more altruistic or selfless, but non-economic purposes were paramount.

The historical falsity of economic liberalism means that its fabled concept of laissez-faire is also false. Laissez-faire has come to mean that if society is left alone by government, a market in which everyone competes and some people inevitably emerge victorious, will naturally come into being. Government regulation stops this natural competition happening. Much as laws against assault stop physical aggressiveness happening.

(Although notice the inverted logic, government stops market competition happening so it should get out of the way. Laws stop assaults happening, without them there would be mayhem, so they are necessary)

There is nothing natural about laissez-faire. What Polanyi shows is that laissez-faire can only happen once other ways of reproducing life, are destroyed. And then a laissez-faire, free market economy can come into being, rigorously policed by the state, so that it is not improperly interfered with. Economic liberals in Britain in the 1830s/1840s were fanatically opposed to extending the vote to the working class. And trade unions were illegal because they interfered with labour, now seen as another commodity, finding its price on the market. Neoliberals hate trade unions for exactly the same reason.

“For as long as that system [the market system] is not established, economic liberals must and will unhesitatingly call for the intervention of the state in order to establish it,” says Polanyi, “and once established, in order to maintain it.”

As the former New Labour health advisor, Paul Corrighan, put it in 2010, “The state has to actively create a market, they don’t appear of their own account.”

The experience of India under the British Empire illustrates what Polanyi is trying to get across. Millions of people died in famines in late 19th and early 20th centuries. The natural reasons for crop failures had not changed but the effect was far more devastating.

The explanation is that whereas in the old feudal arrangements of the past, there were stores of grain in case of famine, in the new market system, they were destroyed. Millions of people had to buy what they could on the market, where prices rocketed because of shortage.

“The three or four large famines that decimated India under British rule since the Rebellion were thus neither a consequence of the elements, nor of exploitation, but simply of the new market organisations of labour and land which broke up the old village without actually resolving its problems,” writes Polanyi. “While under the regime of feudalism and of the village community, noblesse oblige, clan solidarity, and regulation of the corn market checked famines, under the rules of the market the people could not be prevented from starving according to the rules of the game.”

So the great transformation was justified by piling fiction upon fiction. Humans weren’t naturally economically competitive, laissez-faire wasn’t just leaving things alone so that liberty could flourish, the power of the state didn’t diminish under the free market.

But balancing above all this was a still more fundamental fiction. Under a free market system, everything has to be a commodity and find its price on the market. Humans and nature were treated as commodities like everything else. But they aren’t commodities. They are, in Polanyi’s description, fictitious commodities.

A commodity is something – like a mobile phone – produced for sale. But human beings and the natural world are not produced for sale. They are not “produced” at all. But in the world of economic liberalism, they were assumed to be commodities, just in the same way that cotton was. Owners of land could do what they want with it. People had to get the means to live by selling their labour. If they can’t find a job or the economy goes into downturn, they can’t sell their labour commodity, and person irrevocably attached to that commodity, starves or is reduced to poverty.

Polanyi’s point, and one reason why he is extremely relevant today, is that people naturally rebel against being treated as commodities. “To expect that a community would remain indifferent to the scourge of unemployment, the shifting of industries and occupations and to the moral and psychological torture accompanying them, merely because the economic effects, in the long run, might be negligible, was to assume an absurdity,” he writes.

But as The Great Transformation shows, that rebellion can take different forms. It can be a civilised transition to what he calls socialism. But it can also entail scapegoating minorities, armed conflict and totalitarianism. In the 1930s, that rebellion meant the American New Deal but also Nazism and the Second World War.

Treating people as commodities, that periodically are not needed, has effects. What economic liberals said in the Great Depression was that if trade unions and the government stopped interfering, wages would naturally drop, in the long run, to allow profit to be made and the economy would eventually return to health. Theoretically, they have been right. But, in the long run, as John Maynard Keynes, said we’re all dead. What was said about Marxism by the Darwinist psychologist Edward Wilson, is now most descriptive of free market capitalism: “wonderful theory, wrong species”.

In part two, we will look at how economic liberalism gave way to totalitarianism in the 1930s. And what not treating human beings as commodities, really means.

Thursday, 11 August 2011

"When she went there, the cupboard was bare" the exhaustion of policy

“No policy of any kind – whether imposed by a dictator, produced by democratic consensus, or anything in between – can ‘fix the problem’” said economist Richard Wolff in 2008.  “No policy ever did”.

The world is now realising this. “Policy” is exhausted. The only company with good prospects at the moment is the one that makes the t-shirt of Karl Marx saying, “I warned you this would happen”.

According to broker Louise Cooper, “the horrible reality is that those leaders in charge of our economy have no answers”.

 If policy can’t solve anything, then it’s time to look again at economists who never believed it could, like Richard Wolff and Harry Shutt, whose books have been reviewed in this blog.

There were only three policy tricks. The first was supply-side economics. This was the right-wing idea that the reason why companies don’t expand, or individuals create businesses, is that they are taxed too much. In the UK in 1973, the corporate tax rate was 53 per cent. It will be 23 per cent in 2014. The Con-Dems’ enterprise zones, with zero business rates for five years, spring from the same contorted and remorseless logic – tax cuts will conjure up economic growth.

The problem is reality. Economic growth was much higher in the ‘60s and ‘70s before supply-side economics took hold. Attempting to answer the paradox that to open a factory in South Korea in the early ‘90s required 299 permits, while the country had grown at over six per cent for three decades, the South Korean economist, Ha-Joon Chang, said: “Strange as it may seem to most people without business experience, business people will get 299 permits, if there is enough money to be made at the end of the process … in contrast, if there is little money to be made at the end  of the process, even twenty-nine permits may look too onerous.”

For permits, read taxation. If there is money to be made, taxation, won’t deter expansion. The trouble is, there isn’t.

Trick number two, was interest rates. They are lower, in Britain, than they have been for 400 years. The United States Federal Reserve has tried to halt huge stock market falls by promising to keep interest rates at near to zero until 2013  At that miniscule level, they are meant to bring about spending and borrowing and make saving an unattractive option. But with personal borrowing at historically unprecedented levels, £1.46 billion in Britain, this doesn’t work either. And if consumer spending doesn’t rise, you can reduce corporate taxation to zero (which might well happen given the mentality of “policy-makers” in the UK and US ) and it won’t magically revive economic growth.

The last trick was the cruellest of all. Take trillions of pounds of private sector debt and transfer them to the public. In Britain, the government has a debt of £2.3 trillion and, £1.5 trillion of that stems from the banking bail-out. Gordon Brown was lauded as the saviour of the global economy. But the economy wasn’t saved from depression. Banks prospered temporarily, but the recovery didn't apply to jobs or spending. And nothing, as we are now seeing, was solved. According to the UN, $18 trillion was added to public sector debt. And just what, it will increasingly be asked, did that unprecedented spending achieve? To delay the inevitable by three years?

The reality of the exhaustion of policy is not pleasant or easy to face. In one way it is an admission of impotence. “The world is now embarked on a supposed recovery strategy that is both self-contradictory and doomed to failure,” said Harry Shutt in 2010. The only comparable experience, he says, was the Great Depression, which lasted a decade and was only ended by the Second World War.

Richard Wolff also likens what is happening now to the Great Depression. Then the reaction was far more creative. The US government employed directly 11 million people, some as singers, poets, painters to take culture around the US. But that far more interventionist policy didn’t solve the Great Depression.

“Policy” solutions are like closing the stable door after the horse has bolted. We can reject the self-imposed policy strait-jacket of western governments, and call for new ones. We can all become Keynesians again, re-regulate finance, ban derivatives or hedge funds. Corporations can be taxed properly and tax havens closed. That might conceivably help with the next downturn but we are still in the middle of this one.

“The whole idea of policy is bizarre,” wrote Richard Wolff in 2008. “The ‘right policy’ represents an absurd claim that that this or not that law or regulation can somehow undo the many different factors that cumulatively produced this crisis. Policies are ‘magic potions’ offered to populations urgently demanding solutions to real problems.”

Wolff attributes the 2007 economic crisis to the fact that US wages had stagnated for thirty years. Huge amounts of borrowing to compensate for this change enabled debt-based financial instruments to become so dominant. And when defaults began as interest rates rose, the contagion spread, causing the “credit crunch”. No government policy could “somehow undo” these trends.

Which is why Wolff’s answer doesn’t involve policy, but rather a shift out of capitalism. Only that can really “solve” the crisis. He wants workers to become their own board of directors. That post-capitalist settlement can change the factors that made the economic crisis happen in the first place.

For Harry Shutt, the problem is related but larger. Capitalist economies like ours are subject to the business cycle. The incessant recycling of profit to make more profit eventually produces more than can be absorbed by consumers.

But the downside of the business cycle – recession - has been evaded for years by government and business.  Now it is happening and will be more severe for having been eluded for so long. One consequence of the business cycle not being allowed to take its natural course, is that people, and governments, are overloaded with debt, and can’t bolster spending even if they wanted to.

Financial speculation is now more profitable than actual production. The upswings of future business cycles will be brief. So, he too, wants a transition out of capitalism, and end to the requirement that for an enterprise to exist it must make a profit, and the severing of the link between a liveable income and paid employment.

These solutions are now out of sight. But if governments have no answers to what will happen, then inevitably attention will shift to those who have some kind of explanation, and a solution, however radical it appears at the moment.

Milton Friedman, who was one of the gurus of neoliberalism, said in 1976 that “brute experience proved far more potent than the strongest of political or ideological preferences” in ending Keynesian economic policies and ushering in free market policies.

In other words, brute experience has a way of altering minds in a way that argument and debate can’t on their own. We shall see.

Thursday, 4 August 2011

What's that coming over the hill? It's not conservatism

Sometimes people who desperately don’t want something to happen are more clear-sighted than people who do. It’s like that with capitalism and anti-capitalism. Right-wingers are often able to think and speak more freely and, for that reason, what they say is more interesting and insightful. 

There was an example of this at the end of July. An article in the Sunday Telegraph by Charles Moore, for all its blind spots, displayed more of a birds-eye view, than the Left can muster.  Moore, former editor of the Spectator, Daily Telegraph and Sunday Telegraph, is a supremely confident scion of the British Right (Eton, Trinity College, Cambridge). He is writing Margaret Thatcher’s authorised biography.

The article was entitled, “I’m starting to think that the Left might actually be right". In it, he said that after 30 years as a journalist, he was now forced to ask whether the Left was correct all along and the “free market” was just a “set up”, a means for the rich to enhance their power and wealth, while everyone else, works harder and is more insecure.

One example he gives is Rupert Murdoch. “It was a great day for newspapers when, 25 years ago, Mr Murdoch beat the print unions at Wapping,” Moore says, “but much of what he choose to print on those presses has been a great disappointment to those of us who believe in free markets because they emancipate people. …. The News of the World and the Sun went out of their way in recent years to give their readers far too little information to form political judgements.”

Then there is the credit crunch – “a system purporting to advance the many has been perverted in order to enrich the few.” Banks, protected by government guarantee aren’t punished, but rather millions must lose their jobs to ensure their balance sheets are healthy.

“We are bust – both actually and morally,” Moore concludes. He ends on a note of extreme pessimism, which may be self-indulgent, but is worthy of note. He thinks something else is on the horizon, and it’s not conservatism.

One must always pray that conservatism will be saved, as has so often been the case in the past, by the stupidity of the Left. The Left’s blind faith in the state makes its remedies worse than useless. But the first step is to realise how much ground we have lost, and that there may not be much time left to make it up.”

In one way, Moore’s mea culpa articulates, but doesn’t understand, the intellectual prison in which conservatism has incarcerated itself. Conservatism was originally against concentrations of power and not automatically pro-market, but since at the least the 1970s, conservatism has welded itself to economic liberalism, the belief that government should not interfere in the economy and this will release entrepreneurial aspirations. (this economic liberalism was originally, in Britain, aimed at the Liberal Party. The intellectual spark behind it, Friedrich Von Hayek, thought of himself as a Liberal).

And, in turn, this economic liberalism has become synonymous with giving as much freedom and money to large employers, corporations, as possible. And using the state to do it, if necessary. “What’s good for General Motors is good for America”, they used to say. This was still held to after GM was nationalized. That’s not economic liberalism (or conservatism). It’s corporate capitalism, doing exactly what the largest and richest organisations in the economy want you to do.

In Britain, the same constrained logic applies. What’s good for HSBC is good for Britain. The banks were “punished” by a reduction of corporation tax to 23 per cent (it was 33 per cent in 1997). Everyone else is given a rise in VAT.  In Ireland, one thing that has conspicuously survived after the economy completely tanked, and massive bailouts financed by the taxpayer occurred, is a corporate tax rate of 12.5 per cent.

Moore relates how he was recently in the company of “intelligent conservatives” (as opposed the other kind) in the US. “Conservatives” have just forced through a package of spending cuts as a result of which, as one ex-Republican senator puts it, “the little guy is going to be cremated.” Raising taxes on corporations and the extremely wealthy is out of the question. This, after three decades of tax cuts for them and not middle or low income earners. In 1970, corporate profit taxes contributed 20 per cent of the Federal Government’s tax revenues. In the early 2000s, it hovered around 7 per cent.

This isn’t conservatism, it’s masochism.

It is also flogging a dead horse (which also makes it sadism but let’s not go there). If the basic economic problem is a lack of demand (the stock market collapse of 2000 hinged on internet companies not actually making money, and the wave of borrowing that resulted from reduced interest rates post-2001 created the housing bubble that collapsed when those interest/borrowing rates went up), you don’t solve it by cutting taxes on corporations and rich people in the hope that they will magically use the money to produce goods that people, already massively in debt because of stagnating wages, will then go and buy.

But about the Left, Moore is right, or half-right. “The Left’s blind faith in the state makes its remedies worse than useless,” he says.

Taxing and not borrowing, ending tax evasion and defaulting on debts to Goldman Sachs, is not worse than useless. It’s obvious. If the question is “who pays?” the answer should be not the majority of people.

But a blind faith in the state remains the default position of a lot people on the Left. The state is not the answer, and reason is partly given by Moore himself.

He says he believes in free markets because they emancipate people. But the market economy, which Moore has such faith in, is a fiction of academics, and politicians and journalists. As the British writer Dan Hind  points out, “The neoliberal description of society, in which self-seeking individuals compete under the watchful eye of an enabling state, is radically at odds with reality. The economy is not an entrepreneurial free-for-all but a space dominated by very large organizations, where the state uses taxpayers’ money to subsidized favoured sectors. For the most part, the individual competes with other individuals for employment and promotion.”

It follows that the consequences of this economic system that we are seeing unfold is not, as Moore believes, a “perversion” of self-seeking individuals competing with each other. But a logical and predictable result of very large organisations mercilessly pursuing their own interests, as they are legally charged to do. The outcomes for the rest of us are, quite literally, not their problem.

But it is also follows that you don’t change hierarchical organisations by merely switching their ownership to the state. A new Left should not become the old caricature that the Right is comfortable opposing.

The old social democratic compromise of a mixed economy and regulation and control of the private sector, won’t work in the future. The Left has to be about more meaningful forms of democracy, and taking democracy to places it hasn’t been before.

There’s a new interest in forms of economic democracy – Dan Hind, Richard Wolff, the Equality Trust, even Maurice Glasman of Blue Labour fame. There are limitations in this, which the economist Harry Shutt has outlined in previous comments, but it is, creditably, talking about remedies that don’t involve state ownership.

There is an ancient principle that ought to be revived here. In Ancient Athens you couldn’t be considered a citizen with a right to participate in decision-making if you were employed. In that instance, you were a client  - what you said was thought to be coloured by the need to curry favour with the person on whom your livelihood depended. You weren’t independent.

Independence, in this view, depends on material independence. A basic income paid to everyone no matter what, would be one way to ensure this independence and freedom to think and participate, in a modern context. That way, the Left could be more than about regulation and control. It could also be about liberation.