Most people thought that the economic policy regime that succeeded Keynesianism in the late 1970s—usually called neoliberalism—was an attempt to get as close to the free market ideal imagined by neo-classical economics as possible. We now know that it wasn't that; a part of what passed for a market system was in fact irresponsible risk trading that embodied important corruptions of the neoclassical model.
Nevertheless, the system of mortgage, credit card and other debt, backed up by secondary and derivatives markets, did also have a positive function. It enabled many people on low incomes, particularly in the US, to continue consuming and purchasing even when their jobs were insecure and wages static. This in turn kept demand stable at a time of global economic uncertainty. People in countries like the US, Britain and Ireland, with rising property markets and easy credit, benefited most directly. But they, in turn, helped Europe, Japan and the emerging economies by buying their exports. Without gross irresponsibility in the financial markets, we would all be poorer today than we are—though there is now, of course, a big correction under way.
I call this phenomenon privatised Keynesianism. Under true Keynesian policies, government took on the obligation of stimulating demand during periods of low confidence in private markets (and of doing the opposite during inflationary periods). For the past two decades this has been replaced by poor people engaging in their own deficit financing, replacing government debt with private debt. Making people with weak financial resources play a role previously carried out by governments served a useful collective purpose. But it did so because of unsustainable market distortions.
The answer to the riddle of how such a thing could happen lies in the weak incentives the markets gave traders to acquire full information. As is now well understood, participation in secondary markets requires concentration on the prices that traders expect those buying from them will expect those buying from them to expect those buying… and so on through an indefinite chain. In principle what individuals in this chain expect those buying from them to estimate should be based on the original monetary values of the assets; in practice they became detached from them. Discovering exactly what was contained in a bundle of mortgage debts would take time, and time was an expensive resource when earnings depended on the velocity with which one could make transactions. (By making transactions so much faster, IT raised the opportunity cost of any detailed searches for information.) Further, it seemed that risks were so widely shared that little was likely to come home to roost even if things did go wrong.
When the secondary markets collapsed no one had any real idea of exactly how much money had been lost or where it had gone. If the only information that counts is totally reflexive and cannot be validated outside itself, then information cannot play the role that the market needs it to play. But for so many years no one holding power within or over the system paid any attention to this, despite the strong warning that had been sounded only a few years before when the dotcom bubble burst. Here too asset values had become based on what people thought other people thought other people would think an asset would be worth in an almost infinite regress, gradually losing all touch with what the actual products of internet-based companies might be.
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The market is a worthy ideal if, through the price mechanism, it ensures that a mass of uncoordinated actors pursuing their selfish ends produce a collective good. It can do this only when it possesses certain characteristics, including decent information flows and low entry and exit barriers. But the idea of the market that became politically embedded in the neoliberal revolution ignored this. Intellectually the dominant concept in political economy was not that of the market, but the lone actor exercising rational choice. The market was celebrated as the way in which individuals could pursue their aspirations without reference to collective ends. If a public interest was perceived, it was in the idea that the wealth of the very successful would trickle down to the rest of us; or that successful entrepreneurs would make better use of resources than their competitors or the public sector, such that we would all gain if more resources were handed over to their care.
A genuine market economy should see recurrent rises and falls in inequality. That the inequalities generated in and by the Anglo-American financial sector continued to grow should have signalled that these were not sound markets, with low barriers to entry and exit. And yet, as we have seen above, in a curious way the financial system did help to maintain consumer confidence among people with insecure labour-market situations. But this could not provide a true market equilibrium; it operated only because an important requirement for market functioning—accurate information—was degraded; the pursuit of important collective goals became dependent on market distortions.
This is now a serious policy bind. Trying to move to a purer market system would run the risk of removing from the modern capitalist economy its ability to sustain the consumption of ordinary people who have to bear the uncertainties produced by various external shocks. Do we therefore need a new Keynes, as so many commentators are suggesting? Why not simply revamp the old one? The Keynesian system has to be seen not just as a system for interference in markets, as it came to be depicted, but also as a form of intervention that enhanced the market. If government intervened to sustain overall demand, it would leave the rest of the economy clear for market transactions, smoothing out shocks that would otherwise produce recessions and inflations.
The original Keynesianism failed for two reasons. First, the oil price shock of the 1970s proved too great for demand management to finesse. Second, the accumulation of labour market and social policy rigidities produced ratchet effects that made it harder to reduce demand than stimulate it, producing the inflation bias in policy that eventually became a phobia for policymakers. The first problem is less important. All policy regimes get blown off course by unanticipated shocks; they are not discredited by that fact alone. The second is more worrying, but could be less important today. Since the 1970s many blockages in labour and welfare systems been reduced by neoliberal reforms, and they are unlikely to return so easily. A globalising economy requires labour competitiveness. The Nordic countries, which continue to use Keynesian policies over the long term, often successfully, have long understood this. Dependent on export markets because of their size, they have also had to be inflation-averse. That is now the case for larger economies too.
However, as the Nordic experience also shows, Keynesianism by itself is not enough. How does an obligation to be inflation-averse work in an economy of selfish actors seeking their own advantage, unless strict market discipline enforces collective interests on them? The policy answer there has been to give employers and trade unions a powerful role engaging in dialogue with each other and with government. This model, known as neocorporatism, was thought to have declined during the 1980s, but still plays an important part in a number of smaller European countries—the Nordics, Austria, the Netherlands, to some extent Belgium. (Their elites have tended to be ashamed of these approaches because they are inconsistent with the neoliberal orthodoxy. After recent events they may be appreciated more.)
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In many other countries, including Britain, associations of both employers and employees have declined so much in the past 25 years that it is doubtful that they could play any such disciplining role. (In Britain they were poor at it even when they were stronger.) Business associations have now been replaced by individual large corporations. This is partly due to the rise of the global economy, with an increasing number of companies not belonging to or identifying with any particular nation, and therefore uninterested in joining national-level associations or concerning themselves with national interests. Also, as global concerns they have an influence over governments that comes from the opportunity to go "regime shopping." Further opportunities for big companies to interact with politics derive from the privatisation and sub-contracting agenda. Big advantages flow from being well connected in political circles.
The individual large corporation has therefore become politically important, not only in countries like France with a tradition of national champions, but even—possibly especially—in more market-oriented countries like Britain. It is yet another way in which the market economy incorporates features that contradict the terms of the market. Nothing would make Adam Smith turn in his grave more than the installation of corporate worthies in the heart of government that has taken place in Britain in recent years.
Whether this process helps to produce outcomes that markets by themselves could not attain, or merely corrupts them, is difficult to resolve. But it has important political implications. When companies become actors in the public realm as organisations, and not simply as participants in the market, they are not restricted to trying to influence governments. They themselves become targets of political demands. Green issues have been at the centre of this new politics of the corporation, as have labour practices in poor countries. The behaviour of banks is now being added to this agenda.
Smart businesses do not wait to be the targets of hostile campaigns, which can damage their reputations with consumers and even investors, but review their operations to minimise negative attention. This is known as corporate social responsibility (CSR). In the hands of far-sighted corporations in sensitive fields—such as many of the large European oil companies—this is a matter of thinking ahead about issues on the horizon, and even of trying to shape what these issues might be. Such firms become political actors in a sense that is not encompassed by the idea of lobbying. As governments and political parties have become wary of upsetting big companies for fear that they might relocate, political conflict around business is shifting from parliament towards the companies themselves and the social movements and campaigns that track, criticise and sometimes even negotiate with them. We see this, for example, with some of the big clothing companies with famous brand names and supply chains reaching into the emerging Asian economies. Campaigners that draw attention to sweat shops and child labour can embarrass companies, leading them to regulate behaviour in their supply chains in a way that official regulation cannot.
This is becoming a very lively political arena, but it is not a democratic one in any true sense. Where it is vibrant it represents the optimistic face of what is becoming our post-democratic society—a society where the formal institutions of democracy survive, but where true political conflict is minimal and increasingly trivialised. But the new politics can itself become dominated by corporate wealth and PR, with either weak or co-opted civil society groups.
Today neoliberalism is in retreat, and there is a new appreciation of the role of government in regulating imperfect markets. One could assume therefore that the political power of big corporations will decline. In some countries it may, and in the immediate future there will be tougher government regulation of banking behaviour almost everywhere. But in countries like Britain that have come to depend on mass borrowing to maintain consumer confidence, and that have little prospect of a recourse to neocorporatism, there will soon be a hankering after the good old days of house-price boom supported by extended risk markets. Gradually the banks will convince governments that regulation is restricting their enterprise—and governments will listen to such arguments. "Get the show back on the road—but just a little more carefully," is what governments really want to say to the banks. Further, there is no sign yet that the major parties in Britain have started to question their now entrenched belief that private companies are always likely to be more effective than government. Indeed, the only practical alternative to New Labour is a Conservative party that is even more deeply committed to this view. For all these reasons, government will become more dependent on informal, voluntary regulation—in other words, on financial sector CSR.
We can expect a range of political outcomes in the developed world in the next few years, including a re-invigoration of neocorporatism and classical demand management; a political contestation between corporations and their social critics; and an enhancement of the political role of giant financial sector firms as they develop their own codes. The last might seem strange: why should a crisis of legitimacy of the banks lead to a growing political dominance on their part? In several countries, such as Britain, they remain the most powerful institutions: they have inter-penetrated governments; we are even more aware of our dependence on them; and it is difficult to discern any important alternative power bases that can challenge them. Trade unions remain weak, while the new social movements are capable of bold action and often have access to well informed expertise, but lack resources and deep roots in society.
None of these alternatives makes for a pure system. But the complexity of life prohibits purity. True, sooner or later the internal contradictions work out their destructive tendencies. There is no end of history—but we can debate earnestly the choices of temporary alternatives that confront us.
