The Economy the Rich Won

The two-part BBC documentary, The Decade the Rich Won, which concluded last week, made for interesting viewing. It told “the little understood story of our times” – how through the policy of Quantitative Easing (QE), the fabulously wealthy became even more fabulously wealthy and the rest of us had to make do with austerity and falling wages. But it did beg certain questions:

Why didn’t anyone say so at the time? “Full disclosure” said hedge fund manager Paul Marshall. Since the 2008 crash the world’s largest central banks (US Federal Reserve, Bank of England, European Central Bank and Bank of Japan) have created around $20 trillion which has basically gone into the already cavernous pockets of banks and wealthy individuals (like Paul Marshall’s).

In the words of Andrew Huszar, who was QE Program Manager at the Federal Reserve (and thus in charge of the entire process): “over the last 12 years, we’re talking about unprecedented amounts of money being printed and funnelled into the markets, banks being showered with trillions upon trillions upon trillions of dollars, ultimately benefiting the most privileged in our societies.” Only a fraction of the ‘stimulus’ he admits, “was actually getting out and making a difference in the lives of everyday people”.

But these mea culpas are strictly retroactive. When QE was first happening, not only politicians and central bankers – who you might expect to parrot the official line – but also media organisations like the BBC uncritically rehearsed the story that QE was providing  a lifeline to the ‘real economy’.  In 2009, the BBC likened QE to putting “imaginary petrol” in your car. 

And this isn’t of purely historical interest. The Covid shut down saw governments quickly turn to the “unconventional” (now used so much it must be thoroughly conventional) technique of QE. In Britain, the Bank of England increased QE from £495 billion to £895 billion. And the BBC was on hand to explain how this pumping of money into the economy would “help it to recover”.

So much like a war, when the controversy in question has to be implemented unscathed, critical voices are sidelined. But in the aftermath, when it doesn’t much matter anymore, they are allowed airtime and what actually went on can be safely revealed. That’s how much freedom we’re allowed.

If the economy wasn’t saved, what was? All the old familiar faces protested that they had no choice but to implement QE. It was a no brainer. “We kept the economy going,” said Alastair Darling (Chancellor in 2008). “People who’d otherwise have lost their jobs didn’t”. Former Bank of England Governor Mervyn King attested that the first tranche of QE prevented a re-run of the Great Depression. Transient Tory PM Theresa May called QE “emergency medicine”.

But if only a small amount of the QE trillions actually escaped into the ‘real economy’ – in the US mortgage lending actually went down after QE was introduced – it can’t have been the actual economy, the economy of people exchanging goods and services, that was saved. The “emergency medicine” has to have been for the conduit through which QE was implemented, the financial system. And only by QE preventing the implosion of the financial system, was the real economy rescued from oblivion.

The real question is therefore how did QE save the financial system? This is something the documentary didn’t try to explain but is actually the crux of the whole story. One means was simply by pumping huge amounts of money into the system. Thus hugely indebted banks and other companies escaped their natural free market fate.

But QE did more than supplying, in Huszar’s words, “the greatest Wall Street bailout of all time”. It also works by ensuring an ultra-low interest rate and by increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets, such as shares.

In this way, zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on. And the stock market as a whole receives a purely artificial boost. Under ‘normal’ market conditions, shares prices reflect investors’ expectations that profits will be high or low in the future. But not under QE. Thus a company such as car rental firm Hertz can file for bankruptcy and see its share price soar at the same time.

This is nothing like a free market system. More accurately it should be called a state capitalist system.

You can’t artificially hold down energy prices but you can, apparently, artificially raise share prices. Ex-banker and hedge fund manager Rishi Sunak lectured us last week on the futility of the state trying to hold down the natural, market prices of gas and electricity. But strangely this King Canute style impotence does not apply to share prices – or house prices – which through QE can be synthetically raised for years.

But what happens, you might wonder, when this outside ‘stimulus’ is taken away? When “the shot of adrenalin”– in Alastair Darling’s phrase – has done its work and we can get back to normal.  Will there be a massive market correction towards ‘natural’ share prices, precipitating widespread company bankruptcies? In 2018, US Federal Reserve started selling the bonds it had acquired under QE – a practice called Quantitative Tightening – but it had to abandon the policy after a few months owing to a negative reaction from markets.

In Britain, authorities have reached for the “unconventional” policy of QE on three separate occasions in the last decade. Currently central banks around the world are reducing the amount of QE but not stopping it altogether or reversing it which should happen under a free market system.

The documentary only nibbled at this question. “In a way markets are addicted”, said hedge funder Marshall, “and central banks have become very nervous indeed about removing the drug.”

But if QE has become a near permanent part of the economic landscape what are the consequences? Does its very existence – and the huge amount of money involved – mean that it is always accompanied by the shadow of austerity?

Or can QE be redirected to pay for essential public services like the NHS? If you can save the financial system by injecting huge amounts of money why can’t you do the same for public services millions of people depend on? This is essentially the argument of Modern Monetary Theory – that public services can be fully funded through nothing more elaborate than hitting keys on a computer. The need to amass taxpayer funds to pay for everything is a myth. Austerity is a political choice, not an economic necessity. The only constraint – MMTers argue – is inflation.

However, lack of inflation is the one sure sign that QE didn’t diffuse through the real economy, rather staying within the financial system. The classic explanation of inflation is that it is caused by too much money chasing too few goods. And the simple fact that inflation didn’t rise exponentially is a pretty strong indication that the QE trillions didn’t filter through the financial system. Inflation is rising now unquestionably, probably caused by supply chain disruptions and Covid relief spending. The Bank of England predicts it will hit 7.25% in the spring. But this is not the level of inflation that QE, if the theory is right, should generate.

However, if QE is redirected to pay for public services, all the ingredients for spiralling inflation are there. This is because the money in its entirety will enter the real economy – through spending by consumers and suppliers. And the mere existence of more money, if accompanied by rising prices, does not translate into greater value or purchasing power.

It’s also the case that QE, notwithstanding the public pronouncements, is intended to have financial effects. Through buying bonds from banks and other companies, these institutions are suddenly awash with cash which they will inevitably use to buy assets, such as shares, thus inflating their price. It is also meant to reduce interest rates on debt for vastly overleveraged companies. QE “for the people” cannot, I would suggest, use the same conduits without having similar effects which pointedly don’t benefit the people.

But the establishment’s faith in QE is unshaken. The BBC doc did reveal a certain buyer’s remorse on the part of some. Ex-Bank of England governor Mervyn King admitted, “if you’ve had the biggest monetary policy stimulus the world has ever seen and you still haven’t had adequate economic growth, maybe the answer is not yet more monetary policy stimulus.”

But there no indication that those at the helm would, in retrospect, have done anything different or, indeed, would do anything different today. Even in conditions resembling 1970s’ “stagflation” – negligible economic growth and rising inflation – alternative means of stimulus are not seriously entertained. “Helicopter Money”, for example, the crediting of ordinary people’s bank accounts with cash in the expectation they will spend it, contravenes a core principle of our political settlement, that only the financial system deserves bailing out and everyone else – especially the bottom 30% — must be kept on a firm leash.

The QE/Austerity duopoly thus reigns supreme and is, if anything, more entrenched than ever given that it is longer a leap in the dark but tried and tested policy. The Chancellor of the Exchequer, for example, hails from the finance system and has faithfully imbued its self-interested mores. The personally very wealthy Rishi Sunak used to work for Goldman Sachs and a hedge fund – the precise ‘sector’ of the economy that Paul Marshall says has “made out like bandits” because of QE.

And if that isn’t guarantee enough, Sunak’s opposite number – Shadow Chancellor Rachel Reeves – used to work for the Bank of England and is an expert – mercifully! – on QE.

So despite the enormous pile of evidence that QE just makes the rich richer and has no impact on economic growth, the establishment faith in the practice remains undimmed. The bandits have taken over the asylum.

QE’s impact on inequality is astonishing. A statistic flashed on the screen at the end of the documentary revealed just how well the bandits have done. UK billionaires (individuals who own assets of more than a thousand million pounds) are worth 310% more than in 2010. But the effect is not limited to this blessed island. According to rich peoples’ magazine Forbes, in 2021 there were 2,755 billionaires in the world, an increase of 660 from just a year earlier. “Altogether these billionaires are worth $13.1 trillion, up from $8 trillion in 2020,” says Forbes. In 2006 – just two years before the QE era began in Euro-America – there were less than 1,000 billionaires globally with a collective net worth of under $3 trillion. What explains the huge increase in a period of insipid economic growth?

Objecting to this is not just a case of the “politics of envy” as it used to be derided. Beside the fact that these individuals do not deserve their loot under any objective free market criteria, such mammoth inequality fundamentally distorts society. As I have argued in a previous post, these billions are not all spent on buying luxury yachts or even blasting into space. They are also used as capital – money invested to make more money. In areas such as housing, privatisation, fossil fuel extraction, the media and democracy the invested funds of the ultra-rich are perverting society in ways that are directly at odds with the interests and desires of the vast majority. And through QE we have, through government action, turbocharged this process.

But then that is not all that surprising as the ultra-rich basically own the government as well.

Ayn Rand v Karl Marx, part two The myth of the creative outsider

Ayn Rand’s appeal (see part one) is not merely that she supplies a patina of ideological justification for exploitation (also known as bullshit). That’s not the reason for her mysterious endurance. It is because she satisfies a deep psychological need of successful people who want to think of themselves as misunderstood outsiders. Her great conceit is to link the stubborn individualist nobly struggling against mass timidity and ignorance, with capitalism. But as Marx saw, and is becoming more and more apparent, there is no link. Capitalism is not about individualism. It’s about conformity.

In Capitalism: the Unknown Ideal, Rand writes of “the exceptional men, the innovators, the intellectual giants” “It is members of this exceptional minority,” she claims, “who lift the whole of a free society to the level of their own achievements, while rising further and ever further.”

Randian heroes are geniuses whose creations are at first not understood by the ignorant masses, and who suffer hardship but ultimately emerge victorious and vindicated.

Howard Roark, the architect hero of the novel The Fountainhead, declares: “The great creators – the thinkers, the artists, the scientists, the inventors – stood alone against the men of their time. Every great new thought was opposed. Every great new invention was denounced.”

Roark, thought to be based on the maverick architect Frank Lloyd Wright, believes in pure art and despises convention. He refuses to water down his creative impulses to satisfy approving committees and eventually blows up a building he designed, but that was compromised in its construction by other architects.

This is Gary Cooper as Howard Roark in the 1949 film of The Fountainhead:

At the same time, Rand felt she had discovered a “logical foundation” for capitalism. This foundation was all about individualism and the struggle against what she decried as “the herd instinct”. She penned a Manifesto of Individualism as a refutation of Marxism.

But the “logical foundation” was profoundly illogical and built on fantasy. Great creators ahead of their time will be shunned not only by the general public, but by business as well. Especially by business. Because their denounced inventions cannot be sold. Ayn Rand’s “innovators” make terrible capitalists.

Ugliness

A cursory look round the built environment in modern capitalist countries demonstrates that individual creative visions have not won out. Buildings are ugly and crassly utilitarian, frequently designed by computer. Rand’s Howard Roark would not prosper today, yet capitalism has undeniably triumphed over “collectivism”.

Capitalism, the accumulation of profit, is nothing to do with individualism, and not giving a fig what anyone else thinks does not make you a capitalist. As Marx said in The Communist Manifesto: “In bourgeois society, capital is independent and has individuality, while the living person is dependent and has no individuality.”

Capitalism, as Marx understood, is about perceiving and manipulating the needs and desires of consumers in order to get an immediate financial return, not nobly standing alone against the caprices of public opinion. “The entrepreneur,” says Marx, “accedes to the most depraved fancies of his neighbour, plays the role of pander between him and his needs, awakens unhealthy appetites in him and watches for every weakness in order, later, to claim the remuneration for this labour of love.”

The key word here is “pander”. The herd instinct is alive and well and living in advertising agencies the world over. The contemporary Marxist thinker Mark Fisher says the most powerful desires are precisely cravings for the strange and the unexpected. But these are needs that, whatever Rand’s belief in the lonely outsider, cannot be satisfied by a market economy.  “These can only be supplied by artists and media professionals who are prepared give people something different from that which already satisfies them;” says Fisher, “by those, that is to say, prepared to take a certain kind of risk.”

Stagnation

And risk is something that, despite the propaganda, capitalism does not nurture. What Fisher has noticed is that letting capitalism rip, Ayn Rand’s deepest desire, does not lead to innovation, but conservatism and stagnation. We live in a society dominated by fear and cynicism, he argues. “The emotions do not inspire bold thinking or entrepreneurial leaps, they breed conformity and the cult of the minimal variation, the turning out of products which very closely resemble those that are already successful.”

Of course it is not clear exactly what kind of society does enable innovation to happen, to encourage a genuine creativity which may at first baffle or outrage. But it is obvious that capitalism does not do this. “Since it is now clear that a certain amount of stability is necessary for cultural vibrancy,” writes Fisher, “the question to be asked is: how can this stability be provided, and by what agencies?”

In a sense, the Randian titans at the crest of the economy are creative. “Asset-backed” securities that sell shares, not of parts of flesh and blood companies, but of the interest payments people make on debt, are creative. Credit default swaps, traded promises to pay losses in the event of loan defaults that people know now cannot be met, are creative. Private equity “leveraged” buy-outs of companies that load firms with debt and force mass redundancies, are creative. But they are also immensely destructive. Innovations like Alan Turing’s work to create the first computer (done in the public sector, it should be said) have proved useful to billions of people. Financial innovations, the dominant innovations of the last thirty years, have benefited their architects and harvested nightmares for everyone else.

The irony of the renewed popularity of Rand’s magnum opus, Atlas Shrugged, is that what has transpired in the last five years, is the exact opposite of the scenario it sketches.

“The absurdity of this reaction lies in the fact that it totally misreads the situation:” writes the Slovenian Marxist philosopher Slavoj Žižek. “most of the bail-out money to is going to precisely those Randian deregulated ‘titans’ who failed in their ‘creative’ schemes and thereby brought about the downward spiral. It is not the great creative geniuses who are now helping out lazy ordinary people, it is rather the ordinary taxpayers who are helping out the failed ‘creative geniuses.’”

Why?

But what accounts for the absurdity, for Ayn Rand’s baffling appeal in spite of the fact that history has proved her spectacularly wrong about everything? It is, I submit, that the alternative is too painful to face. That if you don’t believe in Ayn Rand’s reassuring illusions, you will have to accept the reality of the world as it is. That you aren’t a genius and you are being continually exploited. And Karl Marx was, for want of a better word, right.

The sane response to the threat of Atlas shrugging, which is presented regularly as corporations or hedge funds threaten to relocate if they are taxed properly, is: “Shrug away, preferably on another planet because this one has had enough of you”.

Ayn Rand v Karl Marx who would you choose?

According to a 1991 Library of Congress survey no book, aside from the Bible, has influenced more American readers than the Ayn Rand novel, Atlas Shrugged.

Atlas Shrugged is a dystopian fantasy, published in 1957, about how businessmen, tired of incessant government meddling and blame for exploitation, resolve to show the world how it would fall apart without them. They go on strike. Under the leadership of a genius inventor, John Galt, they disappear into a mountain hideaway, while outside civilisation disintegrates. Then they issue demands. “If you ever again wish to live in industrial society, it will be on our moral terms.”

Atlas shrugs and millions of “subhuman creatures” realise their hopeless ineptitude.

Needless to say Ayn Rand was a believer in capitalism. She believed in it so much she wrote a book called The Virtue of Selfishness, wore a gold lapel pin in the shape of a dollar sign and claimed that “if civilisation is to survive, it is the altruist morality that men have to reject.”

Rand had acolytes, including most notably Alan Greenspan who found in Rand’s objectivist philosophy “a sense that markets are an expression of the deepest truths about human nature”.

Weirdly, although perhaps weird is the new normal, economic collapse has not dented Rand’s popularity. Indeed, according to her biographer, she is a more active presence in American culture than she was during her lifetime. More than 800,000 copies of Rand novels were sold in 2008 alone and sales of Atlas Shrugged spiked after Obama became US President.

But the fans aren’t just conservatives. Rand also has a following among Hollywood humanitarians. According to UN refugee ambassador, Angelina Jolie, Rand “has a very interesting philosophy”. The actress Eva Mendes says that any boyfriend of hers “has to be an Ayn Rand fan”. And Michael Caine is an Ayn Rand fan, though he isn’t, as far as is known, Eva Mendes’ boyfriend.

Rand’s “very interesting philosophy” has been described as “Marxism of the master class” and she quite consciously tried to be a capitalist Karl Marx. She penned a Manifesto of Individualism as an answer to The Communist Manifesto.

So it’s only fair, in this time of economic flux, to do a brief comparison of the philosophies of Rand and Marx. It couldn’t be, could it, that the reason why so many people believe in Rand’s view of the world, is that it blots out the disquieting thought that the alternative, Marxist view of reality, is basically correct? That the bearded one was right all along.

Let’s compare.

Who exploits who?

“We’ve heard it shouted that the industrialist is a parasite,” says John Galt in Atlas Shrugged, “that his workers support him, create his wealth, make his luxury possible – and what would happen if they walked out? Very well, I propose to show to the world who depends on whom, who support whom, who is the source of wealth, who makes whose livelihood possible and what happens to whom when who walks out?”

In Rand’s philosophy, the industrialists, the billionaires are exploited by everyone else. And oppressed by government.

“You have the courage to tell the masses what no politician told them,” said the free market economist Ludwig Von Mises (a contemporary of Karl Polanyi) in a letter to Rand. “You are inferior and all the improvements in your conditions which you simply take for granted you owe to the efforts of men who are better than you.”

But who really does what to who? In Marx’s conception of reality, exploitation occurs when people, seeking the wherewithal to survive, are employed by private sector firms (capitalists in other words). They work and produce more than they are paid. This extra is the surplus which goes straight into the hands of the capitalist.

Exploitation, in this Marxian sense, is not limited to labouring 12 hours a day in a sweatshop. Everyone who is employed is exploited. They have to be, otherwise they wouldn’t be employed. No employer ever “gave” anyone a job. The employee gives the employer something. If that can’t happen, neither will “job creation”.

The employer attitude is expressed by Marxist economist Richard Wolff: “You’ve got to produce more for me than I pay you for coming here to do it – and that difference is the surplus, that all capitalist employees are required to produce. If you don’t produce surplus, you don’t work and if that results in your death, ‘have a nice day’”

Here is a very clear explanation of exploitation from Wolff (from 7.17)

But in Ayn Rand’s view, there is no such thing as the surplus, and exploitation is the other way round. This leads to a feeling of victimhood on the part of “producers” but also a sense of their unappreciated power, that only they have the ability to create wealth and that scarce and much-desired resource, jobs.

Here is the Randian philosophy expressed in all its glory by a Silicon Valley executive (Silicon Valley is honeycombed with Ayn Rand fans): “Money is extracted by Silicon Valley and then wasted by Washington. I want to talk about people who create wealth and jobs. I don’t want to talk about unhealthy and unproductive people.”

In a sense, “we are all Randians now”  - at least governments in Britain and the US are. The producer class (employers) have to be coaxed and pandered to. Government and in Rand’s words “the sub-humans” (employees) can only obstruct this magical wealth and job creating alchemy from occurring. So we must de-regulate and cut taxes further even though that formula led to economic collapse just four years ago. If jobs do not appear, we must have offended the demigods in some way with too much red tape. And so onward to hell.

Blame yourself

This philosophy leads inexorably to self-blame. If you can’t blame the economic system for failing to produce the goods, the only place left to look is inwards. Here is someone from North-West England, who has just got a job after nine months on the dole, asked by a Guardian journalist if he thinks being unemployed was his fault : “Yeah,” he says. “I do. I think I should have applied for more [he applied for 25-30 jobs a week]. I should have picked myself up in the morning, got out, come to a place like this – tried more. When you're feeling down you start blaming the world for your mistakes … You feel the world owes you. And it doesn't. You owe the world.”

Who exploits who is rather an important question to answer. And a lot depends on which side you come down on.

One more thing before we leave exploitation. Marx did not just explain how exploitation produces surplus, he went on to say how the surplus is used by employers, how it creates what he called the “superstructure” of culture and controls the world of ideas. In January this year, researchers in US found that political donations from the finance sector have increased by more than 700 per cent in 20 years. The richest of the rich, one per cent of the one per cent, they conclude, act as ideological gatekeepers on the political process. In Britain, over half of Conservative party funding comes from financiers in the City of London. 

They certainly know how to use it.

In part two we will examine the myth of the Ayn Rand hero. How the misunderstood creative individualist, makes a terrible capitalist.

As Marx once said: “In bourgeois society, capital is independent and has individuality, while the living person is dependent and has no individuality.”