Quality | 2008.11.25
Will Hutton: The fallacy of the fix
Recession, depression and deflation are depressing and deflating, hence their name. The daily rollcall of bad economic news starts to get under our collective skin. Our confidence about the future evaporates - and that, in turn, becomes part of the self-feeding downward vortex.
It is obvious that the old order and the ideas that underpinned it are broken, and that there is nothing to replace it. Even the G20 communique after the Bretton Woods two summit last weekend was remarkable for its acceptance that the entire international financial system needs comprehensive reform. Given the situation, it could hardly say less.
But it is shutting the stable door after the horse has bolted. It is not reform that is required in order to return to the status quo ante, it is the reconstruction of the global banking system, and beyond it the way we do capitalism. The London-New York financial axis no longer functions, nor do most of the institutions within it. It is not just that the business model of the UK\'s demutualised building societies or the US\'s investment banks is broken. It is that there is hardly an institution capable of lending in scale or of taking significant risks.
The idea that this system has any potential to return to the days of pre-2007 is for the birds. Unless there is a robust story about how the UK economy is going to grow in future accompanied by decisive action, there is little chance of quickly turning round shattered business and consumer confidence.
The starting point has to be a jettisoning of the pre-2007 assumptions about the boundaries and capacities of state and market. It is no longer plausible to argue that markets as systems do not make mistakes, or that governments are condemned to fail. The assumptions that allowed such conclusions - that individuals can rationally calculate and pursue self-interest, and that governments get in the way of that process - are wrong. In a paper Philippe Schneider and I have written for the National Endowment for Science, Technology and the Arts, we argue that individuals\' capacity for rational self-interest is limited, and that human beings are as much altruist as inherently selfish. Moreover democratic deliberation is as successful way of arriving at good collective decisions as markets are.
This is not a call for a new statism. There is genius in markets\' capacity for innovation, but society gets the best out of markets not when it sets them "free" but when they work with government in an interdependent relationship. What this means is that wealth generation is founded on innovation and invention across the real economy.
Fortunately the pace of invention in general-purpose technologies like the internet is accelerating, providing opportunities for new firms and jobs. But innovation is a delicate phenomenon. It thrives when there are imperfect markets that provide the chance for the innovator to collect above-average returns, compensating for costs and risks - a challenge to policymakers to chart a course between too much and too little competition. Almost no sustainable business model has been developed without government support.
Wealth generation cannot be driven by financial services. Rather, because of its complexity, it is more susceptible to herd effects and irrationality than other parts of the economy. Consequently it constitutes an existential threat to capitalist wealth generation. It must be effectively regulated and strong lending and investment institutions created to compensate for inherent weaknesses.
An intensification in the rate of disruptive, rapid technological change is best handled by a capitalism rooted in fair societies that limit inequality. Capitalism itself depends on trust and a willingness to stand by handshakes. Equally, ordinary citizens will only embrace change and potential loss of jobs if they have fair opportunity to benefit and to acquire assets to cushion themselves, and a strong welfare state to compensate them for financial risk. The evidence is overwhelming that trust and reciprocity are best fostered where reward and risk are distributed fairly.
An innovative, responsive public sector is not a contradiction in terms. Government failure is correctable, and democracies are good at eliciting information and deliberating on courses of action, and are correlated with high growth. For instance, regulation often drives firms to make good decisions - like the German car industry investing in energy-efficient engines - or helps firms to avoid bad ones, like the trust gap that has opened up between the UK public and its weakly regulated financial institutions. It is these principles that will underpin economic growth in future. The best way to fight a recession is to convince business and consumer alike that there is a road map for a prosperous future, and that measures taken today are part of building a viable tomorrow. The government should start with its pre-budget report on Monday.
• Will Hutton is chief executive of the Work Foundation. The Failure of Market Failure: Towards a 21st Century Keynesianism can be read at www.nesta.org.uk
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]nomic-reform-capitalism-budget
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