Saturday, 4 April 2020

Cui bono? State capitalism comes to town

According to the investment bankers Macquarie, the “beating heart of Australian capitalism”, the reactions of world governments to coronavirus are a sure sign that “conventional capitalism” is being discarded in favour of a “version of communism”.

The view of the bank, which is famous for leaving Thames Water £2 billion in debt, seems to chime with the idea that the British government, following its promises to pay ‘furloughed’ workers 80% of their wages and support the incomes of the self-employed (in about 3 months), has undergone an overnight conversion to ‘socialism’.

In fact, if any conversion has taken place it is to state capitalism, not socialism, and it represents an intensification of previous trends, rather than their negation.

State capitalism, as a theory, is associated with Trotskyism and some anarchists and the idea that the Soviet Union, far from being socialist in any way, was actually a continuation of capitalism in which the nomenklatura extracted the wealth made by the rest of the population. Early on Trotsky predicted that, in a wave of privatisation, state capitalism would become conventional capitalism again. This is indeed what happened, though many decades later.

But I propose a simpler definition: State capitalism is using the power of the state to control, sustain, and, in some cases, own, private resources whilst leaving power and wealth in the hands of private corporations and high net worth individuals.

This can be seen in the ‘effective nationalisation’ that has occurred in the British railway system. 
While rail franchising has been ended, private train operators are being paid a management fee to continue to run services. The government is guaranteeing their income as long as the coronavirus crisis lasts.

In the health service, NHS England has temporarily assumed powers from the clinical commissioning groups set up by the 2012 Health and Social Care Act to buy services from the private sector but there is no indication that the government has changed its mind on outsourcing to the private sector or competition in the internal market. Trade negotiations with the US, in which medicine prices and the NHS are thought to be up for grabs, will still commence as soon as possible.

QE 2

However, the major way in which state capitalism is asserting its dominance in our allegedly ‘free market’ system is through quantitative easing. QE, which works by central banks buying government bonds and other debt from banks, is a form of massive state intervention which nonetheless leaves the most powerful private actors in the economy untouched – in fact it enormously bolsters their position.

Not only does QE hugely increase inequality as a direct result of government action, as economist Grace Blakeley observes, it inverts the way a free market economy is supposed to work. Theoretically a company’s share price should increase only if other people think it is a good bet to make profits in the future. QE, however, by reducing the yield on government bonds, ‘incentivises’ investors to switch their funds into other assets – primarily the stock market – regardless of whether such a switch is justified by underlying economic conditions. In other words, QE creates stock market booms – the appearance of economic health – where none should exist.

The world’s governments resorted to QE in the aftermath of the financial crisis with the desperation of an alcoholic grasping for another drink – the four largest central banks have created around $10 trillion in new money since 2010. This was an era presciently described by geographer David Harvey as defined by the “dictatorship of the world’s central bankers”. This was state control – central banks are an intimate part of national states and pan-national state organisations – but a type of state intervention insulated from democratic interference: since the 1990s central banks have invariably been made ‘independent’ of any meddling by elected governments.

However, the era we are now entering – I think it’s unarguable that March 2020 marks the beginning of new historical era – has and will see levels of quantitative easing that make the previous decade seem like the height of sobriety. And, moreover, QE that will take its inherent logic of expanding state ownership of the corporate economy to new peaks.

In Britain, £200 billion QE has been announced. The European Central Bank, which already was dabbling in QE to the tune of €20 billion a month has expanded the programme so that it will create €750 billion by the end of 2020. And the Federal Reserve in the US has unveiled “QE infinity” – unlimited quantitative easing – in addition to, for the first time, the purchase of corporate, as well as government, bonds.

In the last case, certainly, what this portends is not only the state massively intervening in the economy – in the interests of the rich and powerful – but also taking ownership of its commanding heights.

The new nationalisation

Because this is what has been happening in the birthplace of quantitative easing, Japan. Confronted since the 1990s with a stubbornly stagnant economy, the Bank of Japan has resorted to ever greater doses of QE. In 2013, it inaugurated Quantitative and Qualitative Easing (QQE), buying government bond and “other market assets” worth £1.8 trillion. In an article from last summer, entitled ‘Capitalism’s Silent Surrender”, economist Harry Shutt noted the “creeping nationalisation” occurring all over the world. The Bank of Japan, he wrote “is now estimated to own at least half both of all outstanding government bonds (JGBs) and of equities quoted on the Nikkei 225 Index of the Tokyo stock exchange”.

On the surface, Japan still appears to be a classic capitalist economy. The world-famous names of its economy – Toyota, Hitachi, Sony, Mitsubishi and so on – are all still alive and kicking and internally organised no differently to before. The country is as hierarchical as it ever was, as well as steadily becoming more unequal. But behind the scenes it is transforming, in terms of ownership, into something different. “If this trend continues,” Shutt concludes, “it is evident that the Japanese state will become the de facto owner of the bulk of what has been the hitherto privately owned enterprise sector.”

And, as current events show, this trend is continuing, in fact rapidly accelerating. If lockdown persists for 18 months, albeit with brief relaxations, it seems almost certain that the main capitalist countries of the world will follow Japan and become the effective owners of large swathes of the private sector.

State control is not socialism

But it won’t be anything resembling socialism, unless the suffix “for the rich” is added afterwards. This isn’t merely because, in the UK, Sunak’s massive package to pay 80% of employee wages will go to the companies that employ them not to the workers themselves. Or that support for businesses eclipses that for ordinary people (estimated in the US to be set at 2/3rds for business, in terms of cash and loans and 1/3rd to unemployed workers and the self-employed). Or indeed that the rescue package is conspicuously partial, passing over private renters – who can still be evicted – and benefit claimants for whom existing sanctions have not been rescinded.

It is mainly because the expansion of state control and ownership will be used to reinforce the power and control of the small minority at the top of the corporate economy. While small businesses will suffer, large corporate entities with enormous cash reserves, will survive and likely prosper, aided by state bail-outs and de facto state ownership.

As Blakeley wisely notes, the Left should not react to the massive rises in public spending in evidence across advanced economies as if its programme is being reluctantly enacted by those ideologically opposed to it. “The legacy of this crisis will be the concentration of economic and political power in the hands of a tiny oligarchy, composed of senior politicians, central bankers, financiers and corporate executives,” she says.

The question to ask is cui bono.

What Shutt said last summer in relation to another financial crisis may, in fact, be the end result of the coronavirus crisis: “… it may suddenly dawn on the public that it has already, by default, assumed ownership of most or all of what was once believed to be the private enterprise sector – without ever having taken control of it.”