In the first of a series exploring post-2008 economic realities, Richard Murphy analyses the failure of the financial system to invest in productive and sustainable development, and what incentives could transform it
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Left-of-centre thinking has only dominated the economy for one period in history. The post-war consensus was built on the ideas of social democracy. That consensus collapsed in the 1970s.
The rigidity of the post-war international economic architecture that initially underpinned the prosperity of that era could not withstand the pressures of an increasingly global world where imperialism was ceasing to play a role. In addition, the command and control approach to macroeconomic management within governments, learned by so many politicians of the era from the wartime economy, fell into conflict with people seeking greater economic freedom.
The failure of the left to adapt opened the door to neo-liberalism. That led parties of both left and right to the era of non-government, where light-touch regulation was the creed and the 2008 financial crisis the consequence. It is only the absence of an alternative vision that lets this vision stagger on. That vision is that:
“Neo-liberalism offers economic growth through a faith in market solutions.”
It is my suggestion that the left should replace this with a new ethos:
“The left wants to create a sustainable economy by putting all the resources available within society to best use, including those that the market fails to use to best effect.”
In doing so I draw on some serious changes in economic understanding over the last decade or so.
A Revolution in Economic Thinking
Neo-liberal dogma might have survived the 2008 financial crisis, but the practice of government and its financing since then has suggested that much has changed. The idea that governments cannot create money to fund their own activities without dependence on either taxpayers or borrowing has been shattered by quantitative easing.
That governments can increase inequality by use of this new funding mechanism has also become clear, although nothing is being done to tackle it, resulting in growing tensions within society. And throughout this era, the disconnect between people’s savings, stock markets, bond markets and the financing of the needs of society has become apparent as corporations fail to respond to the crisis of climate change and ask for government support to do so despite ever-increasing apparent financial wealth within the economy as a whole.
Government claims as to its own inability to act due to the retention of the neoliberal demand that it balances its books are creating a tension that needs resolution. The opportunity to resolve this crisis comes from new economic thinking that has developed over the past decade:
Money is Made by Lending, not Saving
We now know that all bank-made money is created by lending. As a result, we know that no bank lends savers’ funds. They are not the intermediaries that they were once supposed to be. The reality is that cash savings in banks are macro-economically inconsequential because they almost never create new employment or jobs in the way they are saved at present;
Government Doesn’t Borrow: It Provides Opportunities for Savers
We know that the government creates new money via the Bank of England literally every time it spends. As such tax does not fund government spending, nor does borrowing. Instead, both are funded by government money creation. Tax exists primarily to control inflation as a consequence, by cancelling the money the government creates through its spending (in the same way as loan repayment cancels bank-created money). What has been called government borrowing is nothing of the sort but is instead an incredibly secure savings facility offered by the government largely as a favour to the banking sector who need it to underpin their operations;
Company Shares Do Not Finance Investment
Based on research colleagues and I have been doing at Sheffield University and elsewhere, we know that FTSE companies do not rely on or need new share issues to finance their investment activity. In fact, they are repurchasing shares faster in most cases than they ever issue them. What that means is that saving in shares also rarely if ever creates new investment or jobs now. This is as true of property companies as any other quoted company;
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Financial Services Do Not Provide Capital
The conclusion is that as things stand, the whole edifice of the financial services industry has ceased to be an intermediary between savers and investors, which was once its raison d’etre. Instead, it merely