You studied mainstream economics, which is often made out to be “ideology-free” and treated like a branch of mathematics. Yet your new book, No Way to Run an Economy, discusses figures such as John Maynard Keynes and Karl Marx. How did you end up there?
I did a degree at City University in London which was heavily steeped in monetarism. Then I went on to do a postgraduate degree that was far more pragmatic and non-ideological at the University of Toronto. I came back from Canada to get my first job in the City and worked in London for Japanese banks throughout the 1990s.
Monetarism – the notion that governments should steer the economy by regulating the money supply – was all the rage in the early 1980s. We had high unemployment, which was deemed by monetarists as the way to keep inflation down, but it struck me as a brutal way to do it. During the 1990s I had a bit more opportunity to figure things out for myself, and it became increasingly clear to me that the monetarists could not explain boom and bust.
This became particularly clear with the outbreak of the Asian crisis in 1997, which was a classic Marxist crisis. I didn’t realise that at the time, but I certainly understood it was being driven by over-investment and a collapse in profit rates. At this point someone suggested I should start looking at Marx. So I did – and it made a lot of sense to me.
For me the long-term tendency for the profit rate to fall, which Marx discussed, has been self-evident from the mid-1990s onwards. The dotcom boom was a manifestation of that. Here we had a situation where companies were driving down wages in an attempt to boost profits and creating a boom that was clearly unsustainable. We all knew the boom was going to end in severe rupture, and so it came to pass. But few people imagined how the US authorities would create and sustain another boom this time through the housing market.
During the 1990s the Japanese government basically followed what many would consider to be the classic Keynesian policy – allowing a big budget deficit to try to stop the economy slipping into depression. And if you read some books today, for example Richard C Koo’s book, The Holy Grail of Macroeconomics, he claims that Keynesian policies worked in Japan. It was my view that Keynesian policies didn’t work, mainly because people didn’t understand what such policies really meant.
You wrote a well regarded book very early in the current crisis called The Credit Crunch. That book looked at Keynes’s ideas.
I definitely delve into the idea of Keynesian economics in more detail in my new book. Keynes was about much more than getting interest rates down. He was more about quantitative easing and having tight control over the financial sector than he was ever about big budget deficits. I’ve gone into this in detail in the second book because then you can understand how we got to the point where both the US and Britain have enormous budget deficits.
In fact they haven’t followed the Keynes prescription. In the 1930s they sorted out the system through a massive programme of quantitative easing, which was very effective. Today the financial system has been stabilised, for the moment, but at what cost? There’s going to be a terrible price to pay for so-called Keynesian policies.
Many people who have claimed to have learnt the lessons of the 1930s really have a very shallow understanding of what went on then. Equally they seem to misunderstand what went on in Japan in the 1990s, because there they ran massive budget deficits and yet still ended up with intense deflation and repeated recession.
I argued in the last chapter of The Credit Crunch, that if you wanted to ameliorate this crisis then you had to get cracking on quantitative easing.
Your new book has the subtitle “Why the System Failed and How to Put it Right”. Do you think the current crisis is due to policy failures or are there structural problems with capitalism?
You have to look at the structural problems as well as the policy mistakes. I go through the policy mistakes in the new book in some detail but specifically I look at the mistakes made after Bear Stearns failed. For me it is incredible that after Bear Stearns was forced into the hands of JP Morgan central banks went back to worrying about inflation. Yes, the oil price was going up, but it was quite evident to me that the bigger problem was the housing bubble. So there were big policy mistakes made. Obviously you have to understand the roots of this crisis go a long way back. Marxist economists say it’s about the long-term difficulty of sustaining profit rates. I agree with that and delve into it in some detail.
Marx offers a valuable insight when he talks about understanding labour as the source of profit. Many people in the system thought the economy was sound. Profits were high and they didn’t understand that, in reality, a growing proportion of profits were being derived from the finance sector; in other words they were fictitious.
So deep structural problems led us to where we are. There is also the question of why they made mistakes. I don’t think it’s good enough to say they were stupid or naive. I think the Marxist critique offers something more valuable.
Can the system be “put right”? What would it take?
Again the Marxist critique is invaluable here – there are attempts to stabilise the system by forcing people to pay a heavy price. We’re going to see this particularly in 2010 with the threatened public sector cuts. This is not “putting it right”. This is a short-term set of policy initiatives, a stopgap if you like, in the face of a long-term structural crisis. Ultimately to be put right it has to be dealt with politically.
People with vested interests are digging in deep to preserve their position. This is illustrated by the way the media have used the rise in the government deficit as an excuse to argue for an attack on public sector workers. We’ve got an enormous deficit, which has clearly been caused by the credit crunch and the collapse of tax revenues, but the conclusion we get from the right wing media is that we’ve got to cut public spending because it’s out of control. There’s no connection between the two, but politically they’re seizing their moment. This is an outrageous position and shows that the left has a lot of work to do.
One of the things I touch on in the book is this issue of wages being cut. We may find that cutting wages will not lead to the economic recovery that people on the right assume it will. Their traditional argument has been that if you cut wages, profits go up, the stock market goes up and the economy recovers. History shows that this only works if central banks are able to keep cutting interest rates. What happens if the central banks have used up all their policy options and you’ve already got zero rates yet wages keep going down?
We haven’t actually been in that situation before, not even in the 1930s. So I think the right are going to be in for a shock at some point. If you keep cutting wages, how can you expect company revenues to go up? Without wages going up, and with consumer credit contracting now at a rapid pace in the US, Britain and much of Europe, there’s going to be no increase in demand. The right’s policies are self-defeating.
To answer the question of what we are going to do about it, I think the organised resistance breaking out in some places in recent months is absolutely spot on. We need more of this because we need a rebalancing of power between capital and labour. What’s shocking about the credit crunch is that it seems to have made the power of capital stronger.
Unemployment is still marching upwards in the US and it will probably keep rising quite sharply in Britain. So this crisis has a long way to play out yet.
I think the governor of the Bank of England hit the nail on the head when he said it is going to be a slow recovery and it won’t feel like one. It will still feel like a recession for many people. So organised resistance is more critical than ever.
The mainstream press is telling us that we’re out of the crisis now. What do you think?
People keep forgetting how far output has slumped and how deep the recession is. The decline in economic activity that we saw was far greater than even the economists had expected when Lehman Brothers collapsed. It was bigger than I expected – and I consider myself at the pessimistic end of the spectrum.
The numbers coming in were quite jaw-dropping, and almost every economist I’ve spoken to over the past 12 months has been of the same opinion. In Europe, for example, manufacturing output is down 20 percent. Even on an optimistic scenario it’s going to take many years to get back to where we were in the summer of 2008. But as I say, the danger is that if we keep on cutting wages, you won’t get there, even in a few years. This is what mainstream economics completely misunderstands.
My book explains why it is economically right to resist, but I also raise the moral argument – why do people deserve job cuts when they’ve done nothing to create this credit crisis?
You deal with the relationship between Marxism and Keynesianism. Do you think Marxists should pay more attention to Keynes’s work?
I stress they have to appreciate the difference between the Keynes of the 1930s and the Keynesian policies pursued in the 1950s, 1960s and 1970s, and I certainly don’t agree with people who say Keynesian policies ultimately failed during the inflation of the early 1970s. That wasn’t Keynesian economics. Some people say Keynes didn’t pursue his own logic to its ultimate conclusion because he wanted to preserve the capitalist system. I agree. There are grounds for criticism of Keynes, but there’s an awful lot Keynes can teach us.
You can take a lot from Keynes and from Marx, and I don’t think it’s like wearing a football shirt where you have to support one team or the other, which is sometimes how its portrayed. Is that sitting on the fence? I don’t necessarily think it is, because in order to understand when this crisis is going to end you still need to have a good understanding of Keynes’s policies. You need to understand whether or not what they’ve done thus far is likely to succeed. My view is negative. I don’t believe running up big budget deficits is the solution, as I’ve already explained.
But ultimately I do come down on Marx’s side in terms of the structural causes of crisis. Also the environment was something Marx talked about, so he was far-sighted in that. The biggest criticism of capitalism could be that it does irreparable damage to the planet.
The point I ultimately make in my book on the way to run the economy is that if they can screw this up with the credit crunch, big time, then that is perhaps the biggest indicator of their inability to tackle climate change.
How do you think that the changes to capitalism since the 1930s have altered the dynamic of the system – particularly the growth of multinationals and the expanded role of the state?
I think it’s damaging that governments have failed to challenge multinationals. This is where the power invested in banks is so destructive, because they fuel the growth of mergers that creates these multinationals. Multinationals do huge damage, not just to the planet, but also by incessantly driving wages down. And the credit crunch has done nothing to dent their power.
So the contradictions of capitalism, if you like, just seem to get worse.
When the queen went to visit the London School of Economics, she asked why nobody saw the crisis coming. What do you make of the responses by mainstream economists? Are there any signs that they are changing their approach?
The queen was badly advised. There were lots of people who saw the crisis coming. It shows the sort of circles she’s mixing in! It comes back to Marx’s critique. Why do these people make policy mistakes? It’s because they believe somehow that they’ve created an economy that is sound.
Marxist economists should be given a much greater role in explaining the contradictions in capitalism. Chris Harman’s book Zombie Capitalism is really important because it explains the long-term crisis and there’s not enough of that sort of explanation around. It’s too easy to just dismiss Marxist economics, as people do, without fully understanding it. I don’t see a significant shift in mainstream economics. If anything, people are digging in their heels, saying that the market works although we’ve had a bit of a blip. That seems to be the prevailing view at the moment, which is obviously inherently depressing.
What about the policy responses by our rulers? There seems to have been a sharp turn towards state intervention. Is that a good thing?
There has been a sharp turn towards state intervention to preserve the status quo, not to roll back the market. They always talk about more regulation – it’s similar to what happened after the dotcom boom. Then people said we need to tighten up the rules. But the moment the cycle appears to turn the banks start to exercise their lobbying power to ensure that regulation is not nearly as tight as politicians initially planned.
We can’t go down the road of believing tightening up on regulations is going to solve this crisis. It’s simply is not good enough at all.
No Way to Run an Economy is published by Pluto, £12.99 and available from Bookmarks.
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