Abstract
The global financial crisis that started at the end of 2007 has sprouted a plethora of literature on its causes, with a particular focus on unbridled credit expansion and global imbalances, the supremacy of the financial markets and the greed of their actors. At the peak of the crisis in early 2009, the authors of this book met high-level experts from banking, finance and business in Frankfurt, Germany’s financial centre, at a seminar organized by the Friedrich Ebert Foundation (FES) to assess their views of what might have gone wrong and what remedial action was necessary. Set up in 1925, the FES is particularly qualified for this type of analysis, as its institutional memory covers the impact of the Great Depression and Germany’s post-war reconstruction and social rehabilitation. The seminar clearly showed that there was no awareness among the outside experts for any need to regulate the financial sector and improve its governance in order to avoid further risks and reduce instability of financial flows.
The FES then asked the authors to come up with a blueprint for Decent Capitalism that could lead to a different balance between various markets and between markets and society. The authors start by asking whether capitalism can actually be improved. Though they see this as being the case, they acknowledge that the resulting new economic model would call for radical social, ecological and democratic reforms reconciling economic growth and social development. The model, they argue, is not only theoretically possible but, more importantly, politically feasible. It would address the two dimensions of instability that go beyond the financial system: sectoral imbalances within national economies, and international imbalances between countries. These international imbalances have increased in the wake of market liberalization and globalization, resulting in rising income and wage disparities and growing inequality within and between societies.
The model thus aims at ensuring social justice and environmental sustainability while at the same time maintaining a high level of prosperity. It requires a new balance between the state, markets and society, in which the weight attached to the state and society needs to be increased, though without reverting to the interventionist policies of the 1950s and 1960s.
Decent capitalism can come in many guises, reflecting different traditions and political constellations, different stages of economic development and different relations between the state and markets. To illustrate these different contexts the authors analyse the situation in the US, China and Europe. While many policy components of the proposed model are attainable at national level – such as reducing wage disparities and the number of precarious jobs, addressing current account surpluses or deficits, improving the provision of public services such as education, health, research facilities or public transport – several other components are beyond the reach of a single country and could be better achieved through regional blocs like the European Union. Fundamental measures to address global warming and preserve natural resources require both national and international action.
The book consists of two parts. Part I looks at the roots of the crisis of capitalism, starting with the rise of market-liberalism and deregulation that led to the decline (or end, as the authors see it) of the Bretton Woods financial institutions in the early 1970s, in turn giving rise to ‘stagflation’ and the ‘conservative revolution’ (Chapter 1). This was followed by the emergence of global financial markets and shareholder-capitalism replacing post-war stakeholder-capitalism based on a compromise between owners, managers, employees (represented by trade unions), creditors, suppliers and local authorities. Shareholder-capitalism resulted in a deliberate strengthening of the role of capital and financial markets in company financing, asset management and social insurance in both the US and the EU, focusing on short-term strategies for maximizing profits. This in turn often led to low investment and low growth (Chapter 2). The resulting global imbalances were accompanied by increased international capital flows destabilising the US, Chinese and European economies (Chapter 3) and eroding labour market institutions while at the same time increasing inequality (Chapter 4). These developments culminated in the latest global financial and economic crisis, triggered by household and banking debts and now extending to sovereign debts. Economic growth has been stifled, leaving open the question of who can now rescue the rescuers (Chapter 5).
Part II elaborates on the possible paths leading to decent capitalism. It starts by describing the main features of the new model, notably increased demand – public and private – and a Green New Deal, accompanied by a growth- and innovation-oriented financial system and more equitable income distribution, balanced state budgets and enhanced regulation (Chapter 6). The authors argue in favour of resurrecting the public sector beyond the ‘automatic stabilizers’ applied in times of crisis. They consider that a well-functioning social security system (covering the risks of sickness, unemployment and old-age poverty) is essential for stable growth and should be regarded as a public good unlikely to be adequately provided by the private sector, be it for health, unemployment or pensions, and in particular for people with a non-standard career path or employment status. The private sector does not protect pension savings from financial markets’ vagaries, nor does it ensure intergenerational sharing of the pension burden, which pay-as-you-go public pensions do (Chapter 7). The market-liberal revolution of the past few decades also drastically deregulated labour markets in most advanced economies, arguably to remedy the prevailing high unemployment considered to be primarily due to labour market rigidities. The authors, by contrast, argue that high unemployment results from inadequate demand for goods, as low wages discourage consumption, while the recent over-reliance on credit-driven consumption has clearly shown its limits and dangers. The authors consider that stable and rising aggregate demand should be based on an active wage policy providing decent wages for all, rather than on growing household indebtedness. This implies a more inclusive labour market and greater income distribution, with the value of labour and wages being upgraded via collective bargaining and higher minimum wages. Wage levels should increase in line with medium-term productivity development and the central bank’s inflation target (Chapter 8). Global monetary and financial systems as well as corporate governance should be further reformed, especially in the US and the EU, where adopted or planned reform packages still fail to provide regulators with adequate instruments to control pro-cyclical lending patterns, counteract macroeconomic imbalances or restrict financial innovations (which in many cases are only identified once a new crisis is imminent or a bubble has burst …), besides failing to sever the links between commercial banks and speculative activities. As regards international capital movements and foreign exchange operations, determined central bank intervention is required together with a revived and reformed role for the Bretton Woods system. Given the crisis-prone dual role of the US dollar as a national and international currency, the authors support the call for expanding the role of an IMF-created international currency – the Special Drawing Rights (SDRs) – for central bank reserves in place of the dollar and euro. SDR reserves could be increased annually in line with the needs of the global economy. 1
The excesses of the shareholder model call for improved corporate governance, in which dividend payments and management remuneration packages reflect entrepreneurial success and profits from actual market performance rather than accounting techniques (mark-to-market accounting) or artificially inflated share prices, let alone where no profits are made. Improving the quality of work and addressing environmental concerns can also increase companies’ ‘social productivity’. The authors welcome the recent adoption by several US states of stakeholder laws obliging company managers to provide an impact assessment of their decisions on stakeholders other than the financial markets, including employees, customers, suppliers and communities (Chapter 9). Finally, the authors call for a new growth paradigm reconciling economic growth, ecological sustainability and improved overall social welfare and individual well-being (Chapter 10).
The authors conclude by stating that decent capitalism has the potential fully to release innovation and efficiency potential by enabling markets to be sufficiently free and dynamic for the benefit of society as a whole. Moreover, compliance with government regulations would minimize the frequency of failures, in particular through addressing the ecological challenge and avoiding financial excesses or dramatic international imbalances. Markets can be instruments of emancipation, offering a better framework for self-realization than societies without them, and allowing individuals to decide which goods to consume, how long to work or whether to start a business, but they exclude those without income or a job. Financial and labour markets may cause socially undesirable outcomes, resulting in the state having to step in with corrective measures. In the absence of remedial action, the authors warn, the current crisis could release political forces with the potential of dismantling the world economy, be it via protectionism, competitive devaluations or worse.
Though a timely and interesting essay, the book focuses too much on the causes of the current crisis, paying too little attention to convincing strategies for actually implementing the reform blueprint, especially with regard to the Green New Deal.