The 20th century Polish economist Michał Kalecki noted an apparently perplexing trait of business leaders and their bought “experts”. One would expect such people to oppose public investment much more vehemently than subsidizing mass consumption because the former contains the possibility of competition from state enterprises. But such expectations are misplaced. “Indeed”, said Kalecki “subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ – unless you happen to have private means”.
Kalecki was writing in the 1940s with an eye on the previous decade. But his observations are particularly apposite to our own era.
Boris Johnson revealed the lingering mind-set of conservatism when he justified ending the £20 uplift to Universal Credit by citing his “strong preference” that people see their wages rise “though their efforts” rather than by welfare.
The same mentality was at work in the pervasive uneasiness around the now defunct furlough scheme which was only introduced under pressure from lame duck Labour leader Jeremy Corbyn and the unions. It can still be seen in the ‘get back to the office’ propaganda that conservatives and business executives – supported by the media – routinely dish out.
The anxiety – verging on horror – that these schemes provoke in conservatives stems from the fact that, in Kalecki’s words, “a moral principle of the highest importance is at stake”. That principle is the maintenance of work discipline. The sanctions regime at the heart of Universal Credit exemplifies the edict of conservatives – big C conservatives and those who go by other nomenclature – that no money be given to ordinary people without stringent conditions. “Please keep on cracking the whip,” exhorted Good Morning Britain host Richard Madeley earlier this week in true conservative style.
But note Kalecki’s caveat – “unless you happen to have private means”. In which case, all qualms instantly vanish. In fact, regarding the lack of actual work undertaken by the ultra-rich, a veil of silence reigns.
So what do you do?
The existence of huge swathes of people who receive large amounts of money without doing anything to earn it is capitalism’s dirty little secret. “What do capitalists actually do?” asks mathematician David Schweickart in his 2002 book After Capitalism. The answer is very little. They have an entirely passive role. “The capitalist” he says “engages in nothing that can be reasonably regarded as ‘productive activity’. Workers produce and distribute goods and services. Salaried managers coordinate production. Entrepreneurs and other creative personnel develop new products and techniques of production. The capitalist qua capitalist does none of these things.” In sum:
In a capitalist society, enormous sums are paid to people who do not engage in any entrepreneurial activity or take on any significant risk with their capital. Trillions flows to shareholders who make an entirely passive contribution to production.
Some have tried to quantify the enormity of these “enormous sums”. According to economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman, around 30% of all income produced in the United States is paid out as “capital income”. These payments, in the form of interest, rents and share dividends, are “entirely passive”. They comprise “income divorced from work”.
But conservatives are, to borrow a phrase from Peter Mandelson, “intensely relaxed” about this form of unconditional basic income. In fact, they’d rather not talk about it if you don’t mind.
Capitalism, but not as we know it
However, this was the income distribution under capitalism. The past tense is not a typo. Because under the state capitalist system we’ve inhabited since the financial crisis – one vastly ramped up by the Covid pandemic – the passive income of the ultra-rich has been multiplied many times over by the actions of the state.
This process goes by the name of Quantitative Easing (QE) – so-called because it increases the quantity of money in, putatively the economy, but in reality swishing around the financial system.
QE is an extension of practices undertaken by central banks before the financial crisis over a decade ago – known as Open Market Operations – but one that vastly changes their nature. Central banks used to buy assets from commercial banks in order to ensure they had cash in order to settle their day to day transactions with each other, but these purchases were only very short-term. The assets would usually be sold back after a week.
However, under QE the central banks uses the money only it can create to buy assets – government bonds, corporate bonds or mortgage-backed securities usually – outright. Not temporarily. That why, under QE, the balance sheets of central banks have grown exponentially.
As a result of QE the bank or corporation that sells the assets suddenly has an enormous amount of cash to spend. The volume of financing under QE is astronomical, amounting to $834 million an hour by central banks worldwide. By buying the assets, the central bank causes their prices to rise and their yield to fall. The sellers – the banks and corporations – are therefore ‘incentivised’ to put their new money elsewhere, for example into shares or property or acquisitions. Thus, synthetic ‘asset booms’ are generated and the prices of assets rise. In theory, QE is meant to generate a ‘wealth effect’ in the ‘real economy’ by stimulating investment and lowering the borrowing costs for corporations. But there is no evidence this actually happens.
What there is evidence of is an immense, artificially induced, increase in the wealth of the ultra-rich. The combined wealth of US billionaires, for example, has risen by 70 per cent (!!)* since the beginning of the pandemic, a stretch of a little more than 18 months. That is, during a period of severe economic contraction – not to mention prolonged suffering endured by many people – billionaire wealth has leapt from just under $3 trillion to over $5 trillion. In addition, the number of billionaires in the US has risen from 614 in March 2020 to 745. According to Ruchir Sharma of Morgan Stanley Investment Management (and he should know) “the fundamental driver … of the billionaire boom” is “easy money [QE and ultra-low interest rates] pouring out of central banks.” For a sense of perspective here, a billion is a thousand million.
That’s capitalism folks. Except of course it isn’t just capitalism. Pure capitalism, inequality generating machine though it undoubtedly is, does not increase billionaire wealth by 70% in a year and a half all by itself. In essence, the passive wealth accruing nature of capitalism – the ‘normal’ workings of the market – has melded with the passive wealth accruing intervention of central banks – the abnormal workings of the state capitalist regime. But about both unconditional fountains of income for the rich conservatives are, almost universally, mute.
Drop the Pilot
However, the deafness is not limited to conservatives. Leftists also seem unable to grasp the nature of QE. Often the only problem they have with the “easy money” regime is that they think it should be redirected. The authorities, it is said, seem peculiarly oblivious to the unsuccessful nature of QE: that – despite the vast sums involved – it doesn’t actually seem to stimulate the economy.
As an alternative, many advocate cutting out the middleman and instituting so-called “helicopter money”. This involves the metaphorical ‘dropping’ (the term was coined by right-wing economist Milton Friedman in 1969) of large amounts of free money into ordinary citizens’ bank accounts. The theory is that this will actually stimulate the economy as poor (or not rich) people, unlike “high net worth” individuals, are liable to spend the money rather than save it. And it can achieve this at a fraction of the cost of QE.
The problem is that helicopter money flagrantly transgresses Kalecki’s “moral principle of the highest importance”. It doles out unconditional income to the multitude. Therefore, whatever its economic rationality, it won’t be allowed to happen. QE only appears unsuccessful. It wasn’t ever seriously intended to stimulate the economy. QE has served – and continues to serve – its real purpose. It preserves the existence of large corporations and banks and bolsters the wealth of the mega-wealthy.
For conservatives, that is justification enough. As for the rest of us the whip needs to keep being cracked, as it has been for centuries past.
*Elon Musk, CEO of electric vehicle manufacturer Tesla and potential coloniser of Mars, tops the list. He has seen his wealth grow from a mere $24.6 billion in March 2020 to $209.3 billion in October 2021, a rise of 750%. Indeed, he subsequently saw his fortune increase by another $36.2 billion in one day in October. You could argue that this latest alignment of cherries has something to do with the ‘natural workings’ of capitalism. Rental car firm Hertz placed an order for 100,000 Teslas. But even here the fingerprints of the QE regime are all over the deal. Last year Hertz declared bankruptcy but under the strange conditions of QE infinity its share price surged and it issued $1 billion worth of new shares. If the ‘laws’ of capitalism existed anymore, Hertz wouldn’t be around to wave a magic wand over Elon Musk’s wealth.
A key point you appear to have omitted is that the real aim of QE is to hold down interest rates by driving up asset prices, since otherwise soaring market interest rates would quickly bankrupt banks, govts, the lot. Hence, as you may have noted, attempts to sell newly acquired central bank assets back to the market (quantitative tightening) tend to result in "panic" selling and more QE instead . This is the clue to understanding why the whole house of cards must ultimately collapse, though such is the conspiracy to keep markets liquid this may not happen in my lifetime!
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