Responding to the Crisis

Ben Spies-Butcher, Macquarie University

Martin Large Common Wealth: For A Free, Equal, Mutual And Sustainable Society, Gloucestershire, Hawthorn Press, 2010 (256  pp). ISBN 9-78190345-898-3 (hard cover) RRP $39.95.

Philippe Legrain Aftershock: Reshaping the World Economy after the Crisis, London, Little, Brown, 2010 (448 pp). ISBN 9-78140870-223-9 (paperback) RRP $35.00.

The Global Financial Crisis (GFC) is now barely a blip on the Australian radar. It must seem another universe to those travelling from the United States or Europe. As they arrive, in the midst of a federal election campaign, they hear claims that the government is recklessly spending money, running up an enormous debt that will never be paid back. How much?, they would ask. As high as the US debt at 50 per cent of GDP. No, maybe the 75 per cent of GDP raked up in the United Kingdom. Surely not the 125 per cent of GDP that now threatens to crush Greece. No. Australian debt is likely to reach less than 10 per cent before beginning to fall (Treasury 2010, p. 4). It’s about the lowest in the rich world, with one of the fastest growing economies. How is it that the Australian government’s stimulus measures, internationally applauded for preventing mass unemployment, have somehow been transformed into an electoral liability?

Information about debt levels in other rich countries puts Australian discussion of the GFC in some context. Here we see the election campaign that happens when the crisis does not hit. Somewhat reminiscent of early Seinfeld episodes, it is an election about nothing. The government boldly promises to set up a year long consultation process on climate change, while the Opposition boldly declares it does not have a policy, and never will, on industrial relations. Indeed, the post-crisis debate here could really be the pre-crisis debate. If anything, Australia’s resilience seems to have only strengthened belief that our economy is sound. There now appears to be less concern about the prospect of falling house prices or rising unemployment; or about the general weakness of the financial system. But elsewhere the response has been much more interesting. In the United States, President Obama has succeeded in getting through substantial reforms to the finance sector. In Europe ballooning deficits are threatening the Euro zone and are being used to justify austerity measures that are reshaping work and welfare, such as restrictions on accessing pensions and public sector pay freezes in Greece (Papachristou 2010) and higher taxes and pay freezes in the United Kingdom (Desal 2010).

Outside Australia the GFC has triggered enormous debate. Some contributions have focused on explaining the crisis, whose origins lie in complex financial markets (for example Lanchester 2010; Foster & Magdoff 2009). However, the GFC was not only the most serious threat to market economies since World War Two, it was also one of many recent financial collapses, including the East Asian and dot com crises. This has led many, like Aftershock author Philippe Legrain, to argue that broader changes are necessary to prevent its repeat (see also Krugman 2009).

Outside Australia, discussion after the GFC has some genuinely radical tinges.

Outside Australia, the crisis has also restarted a wider discussion about the direction of the economy and society more generally, and this discussion has some genuinely radical tinges. But, if the two contributions by Martin Large and Philippe Legrain, both coming out of the United Kingdom, are any guide, the spectre of Third Way reform remains with us still. That is not to say that the proposals made by Large in Common Wealth or Legrain in Aftershock are not radical. Substantial achievement of either agenda would mean very significant restructuring of the economy. Rather, the nature of the proposals, and the context in which they are put, continues to reflect a Third Way approach.

Large draws inspiration from the grass roots movements that formed in response to corporate globalisation, and from key figures associated with these movements such as Naomi Klein (2001) and David Korten (1995, 2009). He is strongly critical of ‘neoliberal capitalism’, of growing inequality and of privatisation. He argues we need to rebalance our society to give greater weight to community and cultural norms in particular, and less to the market and business. Nevertheless, Large continues to see an important role for the market and for business, and he criticises the state and its bureaucracy, although a little less stridently than he does corporations. His is an alternative vision based in the third sector, of community trusts, mutuals and co-operatives. It is blended with an older Georgist tradition, now melded with environmentalism, that taxes land and other commons, and which uses the revenue generated from this ‘common wealth’ to fund a universal citizen income sufficient to maintain a decent life.

Large makes a radical proposal. Banks and corporations are largely to be displaced by community trusts, run on principles of public interest rather than profit. And his book is concrete, giving real world examples of small scale co-operative ventures that citizen/activists can practically take up. This is the book’s real strength, and Large suggests that it be used as a kind of manual, with the reader dipping into those sections that are useful, rather than necessarily reading it cover to cover.

But the radicalism of substance is mixed with a communitarian rhetoric that downplays conflict. For all the discussion of collective endeavour, there is no talk of unions—which are, after all, the largest currently existing collective organisations in many rich democracies—and the potential class conflict they suggest. Indeed, Large extols the virtues of the Swedish model of social democracy, but attributes this to the power of social liberal ideas, rather than mentioning the crucial role of organised labour. His book is also local in focus, with relatively little discussion of institutions like the IMF or the web of relationships in the international financial system that helped generate the crisis. It thus reminds me of Blairite rhetoric with its talk of social capital, the third sector and social inclusion (Mandelson 1997; Szreter 2001). This is not to suggest that Large’s proposals are simply more of the same: he is overtly critical of the New Labour project, and his proposals are more radical and more substantive. The practical nature of the book is also more genuinely activist and community-centred.

Large is overtly critical of the New Labour project.

The problem is that the book shies away from discussing the very real conflicts involved in progressing the agenda it puts forward, particularly beyond the scale of a cottage industry in a few local communities. For those of us in Australia who have just witnessed the mining industry so aggressively pursuing its interests—and winning substantial concessions as a result—we might need a little more convincing that Large’s approach is likely to make any real or significant gains.

In contrast, Philippe Legrain’s book is mainly a defence of the international market integration that Large, Klein and Korten have campaigned against. Legrain is concerned that the crisis is leading (or will lead) to countries pulling down the shutters—to trade, investment and migration. The book is eloquent and engaging, and largely accessible to the non-expert (the chapter on restructuring international finance aside). While Legrain is a market advocate, his pitch is to cosmopolitan, progressive types. He spends considerable time outlining why freer trade and investment rules have lifted millions out of poverty in the Big Emerging Economies (or BEEs as he calls them). Of course, China, India and Brazil—the main BEEs—are not necessarily case studies in free market economics. Legrain acknowledges that some currency controls have continued (and indeed have been wise, given the problems of international financial markets), but he glosses over other government controls or incentives and argues that exchanges rates should eventually be floated.

Legrain also argues that migration should be the right of all, not just those with a rich country passport. His previous book, Immigrants: Your Country Needs Them (2007), focused more specifically on migration, particularly from the emerging economies to the rich world. And in the context of the current Australian debate on ‘population’, I must admit I was quietly cheering him on when he says in Aftershock that ‘The only migrants that ought to be blamed for the crisis are international bankers’ (p. 12). But this will be a frustrating book for those engaged in the complexity of the globalisation debate. Its approach assumes markets are remarkably robust institutions: it was imperfect financial markets that did the damage, other markets seem to work just fine. While extolling the virtues of mobility, Legrain has little to say about the planning and costs of that process. As Australians increasingly realise, not having a policy on developing public infrastructure and industry policy to match population movements does not make for the best outcomes.

Legrain is a global optimist who truly believes in open borders.

Of course, simply reciting the benefits of free markets sounds a little hollow in many parts of the world right now. In response to the collapse of financial markets the first part of the book deals with finance reforms. It treads a careful line, arguing simple bailouts create moral hazard by letting bankers off the hook, but also acknowledging that letting big firms collapse, as in Lehman Brothers, generates further crisis. The solution, Legrain contends, is to separate out the bank from banking. Banking is an essential service, he claims, and like electricity or water, we cannot simply turn the service off because the company is performing poorly. Instead we should force those lending to banks to take the risk of a collapse, by converting their debts into shares. Effectively, this would see the financial institutions that loan to each other bailing each other out. Only after the banks have lost their money should public funds be used to keep banking services alive. The result, Legrain argues, would be a smaller, less risky, finance sector.

There is another problem, too: the huge deficits that have been accumulated by the rich world. Here Legrain says the finance system is also to blame. By allowing financial crashes such the East Asian and dot com bubbles, the international finance system has severely punished poorer countries, whose economies feel the brunt of capital flight. As a result, emerging economies have stockpiled enormous surpluses to protect themselves, often in US bonds that help support the ballooning US deficit. That is a logical response, Legrain claims, from countries that have experienced the pointy end of currency collapses, and IMF intervention. The solution? To make it safe to invest and trade across borders, by fixing the financial system. This is partly done through reforms to banking, and partly by increasing the role of a restructured and democratised IMF to issue a default currency, gradually taking this function away from the US dollar.

These are quite radical solutions, proposed by a global optimist who truly believes in open borders. Achieving anything like this would be a rocky road. The United States would not easily give up its hegemony; emerging economies would likely lose considerable sums as the dollar depreciated; the IMF is not easily reformed; and making it clear that banks would be allowed to fail and lenders lose their money would increase interest rates and possibly raise new problems of liquidity.

While very different to Large’s communitarian vision—indeed strikingly so—Legrain’s thesis also has resonance with the Third Way project. In fact the commonalities between Legrain and the Third Way are, if anything, more substantive. Much like Labor in Australia, Legrain is convinced that open borders and free markets are the only real way forward. The main job of government, then, is to make those markets work properly. Think of Labor’s promised Petrol Watch and Grocery Watch, or indeed Lindsay Tanner’s Department of Deregulation.

In both these books there’s an absence of politics, of conflict and of interests.

The fact that banking is an essential service was once used by progressive economists to argue that the public sector should control finance. Now it’s used to argue that there should be better separation of the components of the industry—much in the way state Labor governments argue for privatising parts of the electricity industry, or federal Labor argues for the structural separation of Telstra. The idea is to maximise the extent to which the market can operate and to keep to an absolute minimum the role of the state, so it is confined to ‘steering, not rowing’ and to only the very essential aspects of direct provisioning.

This approach represents a much more pure commitment to neoclassical market principles than the practice of many conservative governments. Expand the market (and quasi-market), but regulate to ensure neutrality and genuine competition. Legrain is now adding: let people make profits, but also let them face the full risk of going bust. It is a nice idea in theory, but living in Australia, where the Third Way commitment to markets has been pursued vigorously, you sometimes wonder at the results: the most concentrated media ownership; the most concentrated retail sector; and four big banks that are now more powerful and more profitable than before the collapse. Of course, all these are areas where the reformers, too, are dissatisfied, and where more should and could be done to make markets competitive. But that is just the thing. It often seems in practice that the reforms only ever work where big interests are not already established to oppose them—when they are, well, the reformers never quite seem to get their way.

In a sense, that is what most reminds me of the Third Way in both these books. It’s an absence of politics, of conflict and of interests. Sure, there is talk of evil corporations—or just banks. But there is no genuine account of how things came to be this way, of why it is that despite massive public support for radical reform of finance around the world, virtually nothing has happened, or of why it now seems so much easier to cut wages and pensions in Europe than to write off debts to foreign banks. This is not to dismiss the arguments in these books. Large provides genuinely useful insights for those wanting to take local, communal action to make their community more humane—and for those wanting to reassert an ethic of mutuality rather than competition. Legrain is witty, insightful and compelling in his assessment of how finance needs to change, and of the benefits of open borders. But I cannot help but wonder where is the politics in all this?

REFERENCES

Desal, S. 2010, ‘Budget slashes spending, raises VAT and taxes banks’, Reuters, 22 June [Online], Available: http://uk.reuters.com/article/idUKTRE65H28G20100622 [2010, Jul 30].

Foster, J.B. & H. Magdoff 2009, The Great Financial Crisis: Causes and Consequences, Monthly Review, New York.

Klein, N. 2001, No Logo: No Space, No Choice, No Jobs, Flamingo, London.

Korten, D.C. 1995, When Corporations Rule the World, Kumarian Press, West Hartford, CT.

Korten, D.C. 2009, Agenda for a New Economy: From Phantom Wealth to Real Wealth, Berrett Koehler, San Francisco.

Krugman, P. 2009, The Return of Depression Economics and the Crisis of 2008, Norton, New York.

Lanchester, J. 2010, Whoops! Why Everyone Owes Everyone and No One Can Pay, Allen Lane, London.

Legrain, P. 2007, Immigrants: Your Country Needs Them, Princeton University Press, New Jersey.

Mandelson, P. 1997, Labour’s Next Steps: Tackling Social Exclusion, Fabian Society, London.

Papachristou, H. 2010, ‘Details of Greek austerity deal with EU/IMF’, Reuters, May 2 [Online], Available: http://www.reuters.com/article/idUSTRE6411WS20100502 [2010, Jul 30].

Szreter, S. 2001, ‘A new political economy: The importance of social capital’, in A. Giddens (ed.), The Global Third Way Debate, Polity, Malden.

Treasury 2010, Budget Overview Australian Government, Canberra.

Ben Spies-Butcher is Lecturer in Economy and Society in the Sociology Department at Macquarie University. He is a Fellow of the Centre for Policy Development and a Member of the Centre for Research on Social Inclusion.