Tuesday, 1 August 2017

'Most economists simply do not understand finance' - An interview with Harry Shutt

Harry Shutt is a freelance economist (he has carried out more than 100 assignments for the World Bank, the United Nations Development Programme and the European Commission) and the author of Beyond the Profits System (2010), The Decline of Capitalism (2005), which predicted ‘an unavoidable financial crisis … on a scale far greater than any previous one’ and The Trouble with Capitalism (1998). Unusually for his profession, he is no cheerleader for capitalism, rather asserting that the profit maximising corporate system is a relic from the past whose continuance is doing immense harm to public welfare. In this interview he reflects on Jeremy Corbyn, the real purpose of Quantitative Easing, why economic recovery under the present system is impossible, the necessity of a basic income and what future economic enterprises might look like in an era of the rapidly diminishing value of capital.

As unlikely as it looked a few months ago, a Jeremy Corbyn-led Labour government now seems a distinct possibility in the not too distant future. What’s your opinion of Corbyn and Labour’s social democratic programme and where do Labour’s blind spots lie?

From a Left perspective Corbyn’s election to the Labour leadership was obviously a step in the right direction, as also was his relative success in this year's general election, based on a relatively radical manifesto and a strong campaign. However, the election manifesto, which was quite widely praised, has some serious drawbacks in my opinion. One of them was on the question of social welfare, where they didn’t promise to reverse the cuts, which was pretty extraordinary. And they didn’t come out with any alternative to the Tory strategy. In that regard, there’s been a further report on the impact of Universal Credit – it’s from the Citizens Advice Bureau and they’ve called for it to be suspended. Labour ought to be calling for this. But they simply haven’t got any other ideas. Even theoretically, Universal Credit is a complete disaster and could never work in practice.

More fundamentally, there is no mention in the manifesto of the problem of the massive national debt – which has doubled since 2010 despite the desperate efforts of the present government to contain it – other than a commitment to bring it down by the end of this parliament (2022). Yet there is no indication of how this is to be done, nor any mention of the macro-economic constraints to action or of the very real threat of renewed financial crisis.

Your position differs from many left-wing economists in that you say that not only has recovery not happened since the crash of 2008, but, in the circumstances of enormous and growing debt (financial, corporate and personal) and ultra-low interest rates, recovery is simply not possible. Hence investors and entrepreneurs are forced into ‘fictitious’ areas of activity – financial speculation – in order to make a profit. But why exactly does a combination of an enormous debt overhang and near zero interest rates preclude any genuine economic recovery?

As noted by at least one other economist (Steve Keen), most economists simply do not understand finance. If they did they would realise that the prevailing low interest rates are the result of massive market manipulation officially orchestrated by the US and other leading world economies. Likewise they would recognise that the main purpose of Quantitative Easing is not to stimulate economic activity but to buy up public debt and other financial securities at prices far higher than their true market worth, thereby holding market interest rates far below what they would be if they were to reflect the true value of financial securities. In other words the current record levels of stock market prices and unprecedented low interest rates are the result of a gigantic state-sponsored fraud (probably the biggest in history). As such it must be recognised that this QE-based fraud is unsustainable and is bound to end in a monumental financial crash, with dire consequences for the entire world. What is most astonishing to me is that other economists (particularly on the Left) are unwilling or unable to recognise this.

Some left wingers regard low interest rates as an opportunity for the government because they mean it is able to borrow money cheaply and, for instance, build social housing or install ultra-fast broadband and free public wi-fi. I know you regard such thinking with disdain. What are your reasons?

Because of the existing or prospective insolvency of most of the borrowers the only institutions likely to lend at such low rates are ones associated with the government itself. So those who use this argument are simply asking for the government to borrow from itself – or print money by any other name.

The three things you mention are all desirable. But why should we borrow even more to pay for them when a) we are already in debt up to the eyeballs and b) the private corporate sector has such huge excess reserves of capital (‘surplus value’)? The LP manifesto was extremely timid in proposing higher taxes on corporate profits; note also that in 2010 the Lib Dems proposed reversing some of the generous concessions on Capital Gains Tax (CGT) given the City by the New Labour government (of course dropped when they entered the Coalition), but the LP manifesto makes only one very vague reference to reversing CGT give-aways. The general point is that there is no substitute for a huge redistribution of income and assets, whether before or after (or perhaps during?) the coming financial collapse.

An American investor said at the start of June that ‘the worst crash in our lifetimes is coming’ - Do you think that it’s just a matter of time before a seismic economic crash happens?


You’ve written that ‘there is no painless way of achieving a transition' to a new economic model. But people are understandably frightened of what a mammoth economic crash would lead to. It might usher in Fascism, war-lordism or even nuclear war. Is there any way of moving to a more rational economic system without the roof caving in so to speak?

No, the point of no return was probably passed in the 1970s.

You’re a strong advocate of a Universal Basic Income. But unlike many basic income proponents, who imagine it as kind of fall-back to enable people to navigate the ‘gig economy’, you’re adamant that UBI should be ‘the primary mechanism of income distribution in the modern economy’. If basic income will largely replace income from work for people does it therefore need to be set at a generous level – much higher than just subsistence?

Not necessarily. People will still have the opportunity to engage in paid employment / self-employment to supplement their basic income stipend. But the UBI must be sufficient to permit people to engage in non-remunerative activities without financial hardship (bear in mind they will also benefit from the NHS and other publicly financed universal services).

Your last book was subtitled, ‘Possibilities for a Post-Capitalist Era’. Under a post-capitalist economic system, if enterprises no longer maximise profit and people don’t receive much of an income from paid employment (they get most of their living costs from tax-funded UBI), how will universal services like the NHS and education be paid for? Won’t tax revenue dwindle to a virtual trickle?

The pattern of employment, value added, income distribution, pricing, taxation etc under a post-capitalist economy remains to be determined as the system evolves. But consider that (e.g.) if it costs little or nothing to produce things (as in the “Zero marginal cost society” – ZMCS) then people won't need much income to procure them. The likely knock-on effects of this on the cost of public services are obvious.

Adam Smith is commonly thought of as the father of market economics. But he was against the corporate form (he thought that ownership and management should not be separated) and advocated small-scale enterprises. Similarly, you regard modern-day corporations as huge vested interests working to the detriment of public welfare. In any case, you believe that the era of the mega-corporation – enterprises that require massive capital investment and employ thousands of people – is coming to an end. So, in future, what will economic enterprises look like?

Again it's hard to foresee. If capital is no longer scarce and its value correspondingly minimal there will be little profit in trying to accumulate it in large quantities. Likewise rapid technological change and the increasing difficulty of restricting access to it will make it hard to capitalise on “intellectual property” as mega-corporations currently do, especially with the advent of the ZMCS. In this scenario I envisage enterprises (whether community or privately owned) as mainly small-scale serving local economies. Note that Shell and other oil companies are already preparing for life after petroleum, though most are not anticipating the equally certain devaluation of most other activities of high capital intensity.