In the last discussion, some consideration was given as to how economics might affect politics, while we might now give some further consideration as to how politics might affect economics. Clearly, people and institutions can be driven by ideology, based on a mixture of economics, politics and sometimes religion, which then shapes the identity of a nation-state. Of course, for many people, possibly the majority, the issue of prosperity, if not survival, is often an issue of more importance than ideology.
Note: As a generalisation, the state of the economy is often the key factor that affects the prosperity of the majority, while for some, usually a small minority, politics is seen as the means by which the economy might be changed, if not controlled. However, the makeup of this smaller minority does not simply represent the left-right of the political spectrum, but also a wider range of equally conflicting self-interests.
After the 2008 financial crisis, it was generally assumed, and accepted, that in order to restore growth, the national deficit and, in turn, the total national debt had to be reduced by cutting public spending, i.e. austerity was required. However, a wider assessment of the 2008 crisis might suggest that private debt was possibly a bigger problem than public debt. In hindsight, it is now recognised that simply imposing austerity onto the wider public, while bailing out the financial sector with billions of dollars of quantitative easing (QE) has failed to restore economic growth. From a historical perspective of economic policy, it might be recognised that public debt has been an essential component needed to finance many key areas that underpin economic growth, e.g. education and research. Therefore, we possibly need to consider whether it is not necessarily the total size of the public debt, but its ratio to the national GDP and how this debt is being used to stimulate future economic growth. However, the impact of rising private debt should not be ignored at this point – see debt dynamics for more details.
Note: At this point, some reference to the idea of ‘
Whether the increase in wealth inequality really supports the idea of ‘trickle-down economics’ might be debated, for we might question whether the implementation of QE was the best approach to recover economic growth – see Currency Dynamics for details. As such, might we attempt to consider an alternative approach to this problem, where public debt might be better utilised to restore economic growth rather than simply assuming that austerity is the only answer in conjunction with traditional fiscal and monetary policy mechanisms.
Note: Monetary policy of a central bank involves changing the interest rate and influencing the money supply, i.e. QE. Fiscal policy involves the government changing tax rates and levels of government spending to influence demand in the economy. However, recent history suggests that such strategies now only have a limited ability to stimulate a stagnant economy, when interest rates are already near zero and both public and private debt is high, especially if an initial recession develops into a longer-term depression.
Of course, resorting to spending more public money to facilitate future growth in the economy is not without its problems, e.g. if the public debt is already too high and it is doubtful that government has the knowledge in what best to invest. However, in times of financial and economic crisis, public money may be the only form of investment available that will support any necessary long-term recovery strategy, especially if the private sector has become risk adverse. We might first characterise the debate about austerity around two simplified positions:
- The more conservative want to limit public spending and desire
a reduced role of the state.
- The more progressive want more public investment that requires an increasing role of the state.
It needs to be clarified that the descriptions above do not necessarily align to any specific assumptions being made about left-right politics, although it may reflect how people react to change and their own individual assumptions about financial prudence. However, we might attempt to clarify the direction of this discussion in terms of a quote by John Maynard Keynes:
“The important thing for governments is not to do things which individuals are doing already, but to do those things which at present are not done at all.”
Of course, in the end, decisions have to be based on whether public spending will actually help maintain or restore economic growth. In this context, we might cite China as an example of central government that has controlled public investment in its national infrastructure, which appears to have been effective over the last 30-years or so, while a similar central influence in Russia has been less so. Therefore, we need to question whether the issue of public investment is not only a matter of its scope, but the quality of its management. Clearly, anything done badly will invariably fail, which then leads us to the issue as to whether the public sector has the necessary entrepreneurial skills to manage strategic investment. Of course, today, most governments do intervene, in varying degrees, in the management of the underlying economy within the limits of fiscal and monetary policies.
Note: In the case of China, central government appears to want to control almost every aspect of their economy, including what people are allowed to say. However, despite reservations about freedom of speech issues, it appears that China now recognises the need for some entrepreneurial scope in its private sectors to work in partnership with the public sector. While western economies are not controlled to the extent of China, it would be naïve to assume that the private sector is simply controlled by free-market capitalism.
As a generalisation of modern ‘economic wisdom’, especially in the West, it is often assumed that governments should intervene only in the event of ‘market failure’, although after the 2008 financial crisis, many might now question whether prevention rather than cure would have been a better strategy. Likewise, in many western economies, the scope of fiscal and monetary policy available to most governments has appeared ineffective, especially after billions and billions of dollars have been pumped into the financial system via various central banks in the form of quantitative easing (QE). As such, many now question the scope of governments, both in terms of its ability and experience, to manage the economy, especially when its ‘vision’ can be distorted by the belief in some form of ideology, i.e. political or economic. However, as already indicated, this is too much of a naïve assessment of the role of government, as it has been recognised since the time of Adam Smith that free-market capitalism cannot be allowed to be driven solely by self-interest without its excesses being kept in check.
Note: If we accept that the future of political economics cannot be based on the totalitarianism of ‘state communism’ or the self-interest of ‘free-market capitalism’, what form of national or global governance might evolve that is capable of ‘better’ controlling the economy and society.
The word ‘better’ has been highlighted in the note above based on the assumption that any idea of utopia is unachievable in practical terms and probably undesirable to the collective aspiration of any society. As such, the scope of any new form of political economics will be constrained to what might be practically achieved in the near-future, before any of the possibilities outlined in the ‘Brave New Worlds’ discussion might overtake all other considerations.
So what might be achieved?
If we reject state-communism and unconstrained free-market capitalism, we might for lack of a better description, consider two other forms of capitalism previously outlined, i.e. state-capitalism or social-capitalism . However, we are going to avoid these descriptions because they come with too many preconceptions about the role of the state and the scope of capitalism as far as social inequality is concerned. For this reason, we shall use a relatively conceptual term ‘economic democracy’ to describe a more equitable, but not necessarily equal, distribution of wealth within an economy and without any initial reference to political democracy in the form ‘ of the people, by the people, for the people’ .
Note: Within the scope of this outline, economic democracy would recognise the requirements of Maslow’s hierarchy of needs , such that it would prioritise basic survival needs. From an economic perspective, this might be best quantified in terms of the GDP per capita and the wealth distribution within a given society. Again, wealth distribution may be described as equitable, not equal, because it would continue to recognise the scope of individual abilities to contribute to society. Therefore, the competitive success of the economy would still of key importance, but would attempt to be more responsive to overall social needs.
Based on the limited outline above, it might appear that ‘ economic democracy’ may not be so different from the normal assumptions about ‘ social capitalism’, such that some further differentiation is required. First, as already outlined, the scope of democracy does not necessarily infer political democracy in the usual sense, but simply aspires to act in the interest 'of the people’. As such, China could move towards a form of economic democracy from its current position, which might now be described as a form of state-capitalism. However, the use of the term ‘democracy’ would also imply a recognition of the right to free-speech, with the caveat that it must be used responsibly, such that it could not be suppressed on the subjective criteria of ‘unacceptable or offensive’ as defined by some political or religious ideology. Of course, the previous position would also apply to any nation-states that might already describe themselves in terms of social-capitalism, but then attempt to suppress free-speech on the ground of political correctness regardless of facts. However, returning to the idea of democracy in economic terms, the concept of ‘freedom’ and ‘fairness’ would support the idea that an individual has the right to a ‘freedom’ from poverty and to be treated with ‘fairness’ regarding the general distribution of wealth within a given nation-state. However, accepting this to be an evolving process, economic democracy would recognise the right of self-determination of a nation-state to protect its own national, cultural and religious identity, while still trying to forward the idea of the ‘Universal Declaration of Human Rights’ of any individual. While the ideas outlined above might differentiate economic democracy from state-capitalism in terms of social justice, it might also attempt to differentiate itself from social-capitalism in terms of the role of the government within the economy.
Note: As already been highlighted, it is a general ‘economic wisdom’, although not shared by all, that governments should not interfere with free-market capitalism unless something goes wrong, e.g. self-interest and greed results in some form of financial crisis. While economic democracy might not be able to prevent the cyclic dynamics of boom and bust, it might help facilitate a fairer recovery of an economy, either at the national or global level.
However, this will require some further discussion of the economic details, which the reader might wish to initially review in terms of a video entitled The Government as an Entrepreneur featuring Mariana Mazzucato . Mazzucato is a professor of Economics of Innovation and Public Value at University College London (UCL) and also the founder and director of the Institute for Innovation and Public Purpose, who has forwarded some alternative ideas concerning the role of government within the economy. Basically, the Mazzucato video forwards an argument that governments need to stimulate innovation as a ‘lender of first resort’ rather than always acting as a ‘lender of last resort’ at times of financial and economic crisis.
Note: By way of commentary, it is estimated that $20 trillion may have been printed in terms of QE worldwide over the last 10 years, most of which has been issued by central banks and transferred to private financial institutions in the hope that it would ‘trickle-down’ into the wider economy. Unfortunately, many of these institutions simply used this money to deleverage risk on their own balance sheets and route the money into safe-haven investments, i.e. property and stock markets, which then increased in value above inflation. As such, this recovery mechanism was undemocratic because ‘trickle-down’ been seen as unfair and only led to a further increase in wealth inequality.
While recognising that some of the references made to economic theory in the video is beyond the scope of this discussion, the following links are made simply by way of further cross reference: Public choice theory , New Public Management , Cost–benefit analysis , Innovation economics and Economic Competition . Within the general scope of these various economic theories is the suggestion that the scope of government should be limited to fixing problems, de-risking private investment and, levelling the playfield, i.e. governments should only enable and facilitate rather than participate. However, Mazzucato highlights many historical examples of how governments, mainly in the US, have acted as an initial investor for some highly speculative innovation in a broad range of technologies, which eventually had significant impact on economic growth. However, she then questions whether governments have maximised their return-on-investment (ROI) in the form of investor equity or patents and whether government policy should require the beneficiaries of government investment to re-invest their profits back in to R&D rather than share buyback. Mazzucato also outlines that Venture Capitalists (VCs) invariably amortise their investment risks across a portfolio of new innovative developments within a relatively short period of time, i.e. 3-5 years, while many technology innovations of the past, i.e. the Internet, have required much larger and longer investment strategies that only governments have been able to support.
Note: While the idea of governments acting as strategic long-term investors of innovation that might lead to economic growth might appear to be a good approach, there is still the issue of whether governments have the ability, both in terms of qualifications and experience, to successfully determine the best technology innovations in which to invest. Of course, it is not unreasonable that governments might developed this expertise in-house or simply work in partnership with private enterprises and, like VCs, amortise the risk across a broad portfolio of innovative investments.
However, it was also recognised that the process of innovation investment might be developed in terms of a wider collective process involving small, medium and large private enterprises along with public organisations, which also consider the wider impact of innovation on society. For example, it might be recognised that private enterprises might only prioritise investment towards innovation that deliver short-term profits, while governments might expand this scope to consider innovations required to solve longer-term strategic problems in society at large.
Note: Again, despite the idealised goals of public investment, it is assumed that long-term sustainability of government investment would still have to be reconciled in terms of the government’s balance-sheet. As such, we might assume that some form of ROI has to be achieved in terms of the value of equity and patents held or the growth in the economy leading to more tax income and less welfare costs linked to employment.
While some reservations have been raised, there is clearly some wider scope for governments to participate in this type of innovation investment, which may then stimulate future economic growth, as might be highlighted by China’s political economy. Of course, it might also be realised that the success of this idea might be limited to just a few nation-states with the necessary resources, both in terms education and finances, to compete on a global stage. As such, it is unlikely that the idea of winners and losers is simply going to disappear unless ‘economic democracy’ also has some global objectives. This position does not necessarily infer that more globalism is the only solution, especially in light of all the divisions now appearing in the European Union, but simply a recognition for a degree of democracy in economics, such that wealth might be more equitably, not equally, shared across national boundaries. If not, governments may simply consider its own strategic innovation investments simply defined by its own national interests, which might again simply lead to an entrenchment of the ‘fortress world’ concept.
Note: Within the conceptual scope for what has been described as ‘economic democracy’, we might ask what are the real things of value, especially within the wider scope of society.