For two centuries, there has been a power struggle over which force should drive economies—governments or free markets.
Although markets reign today, Paul de Grauwe says that the forces of government control are strengthening. De Grauwe is one of Europe’s leading economists, now at the London School of Economics, and his book The Limits of the Markets (Oxford University Press) was recently translated into English from Dutch. In the book, de Grauwe warns that the nature of swings in “the pendulum between government and market” can be dangerously disruptive.
Early in the 19th century, economic liberalization came into fashion, with free-market theories dominating for more than 100 years. Then, the Great Depression in the 1930s pushed power back to governments. People put their faith in large-scale government interventions from Roosevelt’s “New Deal” to the Nazi’s uncompromising economic program. Governments tightened their hold after the Second World War, but as the Soviet Union and other centrally planned states struggled, free marketeers once again held sway in the 1980s.
Faith in free markets was later shaken by the 2008 global financial crisis, and governments are now steadily wresting power back from the markets. This includes leaders once committed to deregulation, like the UK’s Conservative party, which is now promising to cap energy bills, and the US Republican party under Donald Trump, who is hectoring companies into keeping high-cost workers in the US.
De Grauwe spoke with Quartz about the threats to the market system, the environment, the euro and much else besides. The conversation has been edited for length and clarity.
What do you mean when you say that markets have reached their limits?
When markets grow they don’t take care of two things, both of which are external costs. One is the environment. Without government control, the markets will lead to so much destruction of the environment that people will reject it—that’s when the market hits its limit. We can already see it today in the extreme levels of pollution in China and India.
The other external cost has to do with inequality. What do you do with a market system that creates great benefits for many people but also hardship for those in society that lose? We can’t let this happen because it will lead to political instability. We have to be willing to tell the rich, “you will have to contribute more and we will have to tax you more.” Unfortunately, we don’t do that.
You say we heading back to a point where governments take more control. How does that play out?
That’s one of the things that frightens me. When governments return it’s very traumatic because it’s likely to lead to authoritarian systems that destroy much of what we have built up in terms of democracies and the markets. We either get the kind of systems we know, like the communist system, but I don’t see that much on the horizon. Or, we get the crony capitalist system where authoritarian figures use the markets to enrich themselves and you get vast corruption. That’s the big danger but quite inevitable if we are not capable of solving these environmental and inequality problems.
So how do you judge which is better? A government-led system or market-led system?
In the 1980s, I was very much among those who believed that market systems were superior and that governments simply profited from the productivity of markets. But at a certain point I realized these were not appropriate views. We should stop thinking in terms of hierarchies—they are equally important. Markets can’t create value if there are no public goods; if there is no infrastructure, no good educational system. We need governments and public action to do that.
Speaking of public goods, the environment isn’t always central to economic policy discussions. What are the risks our treatment of the planet pose to the market system?
You can already see the impact. Look at what happens with the flow of people between Africa and Europe. In the north of Africa, climate change leads to vast areas becoming totally inhabitable, creating huge hardship. Climate change can also lead to huge political disruption, fighting and dispute over land that could lead to wars and vast movements of people we can’t contain. It’s already starting, but we don’t make the link to the environment.
On the other limit to the market—inequality—you share some ideas and principles with Thomas Piketty on things like a progressive wealth tax.
Like Piketty, I do believe that we can’t allow wealth to become too concentrated, not only for ethical reasons but also for reasons of democratic decision making. In the US, where wealth concentration has become quite excessive, the wealthy have so much power and you can see it in the political system. A president has come to power representing the wealthy and they have their own agenda. They want even more wealth, even more power, and this we cannot accept. It will destroy democracies and, in the end, the market system.
That’s why it is essential to save capitalism—we have to save it from capitalists. Capitalists, who in their drive to accumulate so much wealth, will destroy the market system. In order to maintain the market system you will have to introduce some limit on wealth concentration and this can be done by a progressive wealth tax.
How would it work?
The tariffs you apply increase with the size of the wealth. That’s the principle. Of course, I’m aware that this is going to be very difficult to apply because—as in the case of the environmental control and CO2 emissions—you need international cooperation. If just one country introduces a progressive wealth tax, the rich will move to other countries.
In the Brexit negotiations, the UK has threatened the EU by saying it will cut taxes if it doesn’t get what it wants, essentially turning Britain into a tax haven.
The forces today aren’t going in the right direction. Clearly the wealthy and multinationals know how to exploit the situation and set one government up against the other by threatening to leave. As a result they get their way.
Speaking of Europe, one of the chapters in your book addresses the notion that the euro is fundamentally flawed. Others, like Joseph Stiglitz, come to a similar conclusion. What’s wrong with the euro?
My view is similar to Stiglitz’s view. What I say is that the euro was a beautiful idea but now we are seeing the real implications. One of them is that we have taken away the responsibility of national governments in the euro zone to stabilize their economy and maintain social security systems that will protect people who are hurt by the cyclical movements of capitalism. Meanwhile, we have not been willing to create a European government that will take over that responsibility. It’s eroded the legitimacy of national governments. In the end, we’ll have to either move forward into creating a European government or go back to national governments and national currencies.
The euro wasn’t envisioned as reversible, so there doesn’t seem to be a way to return to national currencies that won’t be incredibly disruptive.
It could really lead to the destruction of the EU. Today, the euro isn’t that popular and in many countries people say they have had enough of Europe. But in a way I think we are condemned to go forward.
You were a member of the Belgian parliament when the euro was being created. (De Grauwe was a member of both houses of parliament between 1991 and 2003. The euro was introduced in 1999.)
I was one of the European economists that was skeptical right from the start. I published an article in 1998 (pdf)—which was also the time of the financial crisis in Asia and in Russia—where I asked if this could also happen in the euro zone that we are going to create? Yes, of course, it could happen. In fact, this is even more likely to happen in a monetary union because all this capital can flow very freely within it. I was saying we are starting something that is a high-risk adventure and we haven’t created the institutions to deal with it. And, in fact, the crisis I described happened.
Do you think capitalism is more under threat in Europe than elsewhere because of the euro?
Yes, because we have created in the euro zone free movement of capital that is quite disruptive when there is a crisis. Each time there is going to be a recession—which will happen again—we will see capital fleeing one country, rushing to another and destabilizing the whole system. We cannot afford this happening again.
I would retitle this article “Hoggish Are Destroying Capitalism. They Must Be Stopped.”
The capitalism practiced today is what, for a long time, I have termed “Hoggism,” propelled by greed and the sheer love of power over others. “Hoggism” institutionalizes greed (creating concentrated capital ownership, monopolies, and special privileges). “Hoggism” is about the ability of greedy rich people to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success — always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.” It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.
What we really need is a national discussion on the topic of the importance of capital ownership and how we can expand the base of private capital ownership simultaneously with the creation of new physical capital formation, with the aim of building long-term financial security for all Americans through accumulating a viable capital estate.
We need a recognition in America that we should deliberately begin to broaden the capital ownership base in a way that is consistent with the laws of property and the Constitutional safeguards of the rights of men and women to own property and be productive.
What needs to be our focus is to adjust the opportunity to produce, not the redistribution of income after it is produced.
The government should acknowledge its obligation to make productive capital ownership economically purchasable by capital-less Americans (the 99 percent) using insured, interest-free capital credit, and, as binary economist Louis Kelso stated, “substantially assume financial responsibility for the economy through establishing and supervising the implementation of an economic, labor and business policy of democratized economic power.” Historically, capital has been the primary engine of industrialization. But as used, as Kelso has argued, has, as well, “been the chief cause of the institutional deformities that have created and maintained two incompatible classes: the overcapitalized and the undercapitalized.”
We need to arrive at a new market economy structure in which on one level the employees of a corporation could walk into management and demand, in collective bargaining, the use of a justice-based managed (see http://www.cesj.org/?s=Justice+Based+Management) full-voting, full-dividend-earnings-payout ESOP — not just to trade a single block of stock for wage concessions, but to redesign the future of the corporation and its employees. We need, as a society, the assurance that as a corporate employer grows, it builds ownership into its employees. All of them as individuals, not just the upper management, and not collectively! When people are in a position to earn the income produced by their physical capital as well as the wages of their labor, their company is in a position to be more competitive through lower labor costs and increased technological invention and innovation, while achieving higher employee incomes through the employee-owned productive capital.
Once this goal becomes the national political focus we will see an unbelievable discussion of workable plans to realize the goal. Remember that planning begins with a vision and a goal. This is not rocket science but it does require national leadership. Implementation requires amending a few laws that basically authorize the transactions that will broaden capital ownership paid for with the future earnings of capital investment. Allowing such transactions will provide incentives for profitable opportunities to employ unused capacity and promote stable and robust economic growth.
Still, after a half-century, we have no leaders with a growth strategy that could restore the economic productiveness of the American economy. The growth strategy I have presented is not new, though relatively obscure It has not yet registered in the minds of leaderless politicians and their advisors from the left to the right of the political spectrum and a population of people who have been mis-educated and misled by conventional economists from all the conventional schools of economics. This will require a personal commitment to acquiring this knowledge and thinking in new ways.
It is imperative that leaders seeking new solutions cease the opportunity to implement effective programs for expanded ownership of productive capital, and address the problem of education on this subject.
One of my favorite Kelso quotes is: “The low credibility of government and of all lesser institutions in America today is a consequence of our own increasingly hollow democracy. It is reflected in the rising domestic crime rate and the social and political alienation of people in all walks of life, except for the rich and their sycophants. The real collapse of American ideological leadership in the world can best be seen in the feebleness and confusion that characterizes American foreign policy. The handwriting on the wall is clear: America must rethink the meaning of democracy and set about within its borders to rationalize its economic policy into one that synchronizes the shift from labor intensive to capital intensive production, with universal capital ownership and the payment of the full wages [earnings] of capital to capital owners, so to restore economic democracy to our economy. We should democratize our plutocratic capitalist economy before we preach democracy to others.”
At one point in 1976, the discussion led to The Joint Economic Committee of Congress endorsing the two-factor policy to broaden capital ownership as an economic goal for America. The 1976 Joint Economic Report stated: “To provide a realistic opportunity for more U.S. citizens to become owners of capital, and to provide an expanded source of equity financing for corporations, it should be made national policy to pursue the goal of broadened capital ownership. Congress also should request from the Administration a quadrennial report on the ownership of wealth in this country, which would assist in evaluating how successfully the base of wealth was being broadened over time.”
Unfortunately the Congress or any President has never paid any attention to this policy, and the goal has subsequently been unacknowledged and unheeded by our plutocratic political leaders.
The stark reality is that we are in a depression reflected in rising “real” (not statistical) unemployment and underemployment and instability that we will never escape from until we change our economic policy. Increasingly, more Americans will not be able to ever purchase a home, due to the packed inflationary wage and welfare base factored into the cost of building homes, which inflate prices, and will be forced to rent their entire life or depend on government living assistance — not able to accumulate equity that can help to sustain them in their retirement years. And this is the new reality now facing people in the middle class. The uncertainty of holding onto a good job is frightening to an increasingly wider base of middle-class working citizens. When you factor in the average non-salaried worker, even with a government-mandated minimum labor wage rate of $10.00+ per hour in some states and cities, the outcome is grim. Never mind that consumer demand continues to dwindle because of insufficient income, solely tied to labor worker wages. The impact of the decline in consumer demand due to declining labor worker wages is that production will decline or desist without sustainable consumer demand. Furthermore, those corporations growing the economy, both nationally and globally, will expand globally with investment in new productive capital projects and seek “customers with money” abroad.
This is all coming about because we have severely mismatched the power to produce with the possession of unsatisfied needs and wants. Those capital owners who have unsatisfied needs and wants have ready access through conventional finance to get as much or more productive capital as they want. Our tax laws are designed to further benefit the 1 percent by providing enormous write offs and credits to producers (corporations) who are owned by the few, who already produce more than they can consume. Those who have only their labor power and its precarious value held up by coercive rigging and who desperately need capital ownership to enable them to be capital workers as well as labor workers to have a way to earn more income, cannot satisfy their unsatisfied needs and wants. With only access to labor wages, the 99 percenters will continue, in desperation, to demand more and more pay for the same or less work, as their input is exponentially replaced by productive capital.
But if we change direction and systematically build earning power into consumers, we have the opportunity to reverse the depression perpetrated by systematically limiting the 99 percent to labor wages alone and through technology eliminating their jobs. We need solutions to grow the economy in ways that create productive jobs and widespread equity sharing. We need to systematically make insured, interest-free capital credit to purchase capital accessible to economically underpowered people (the 99 percent) in which the income from the capital investment is isolated until it pays for itself, and then begins to produce a stream of dividend income to the new capital owners. This can only be accomplished by enabling every person to have access to capital ownership and purchase the capital, and pay for it out of what the capital produces. It’s time good and well-intentioned people woke up and adopted a JUST Third Way paradigm (http://cesj.org/learn/just-third-way/) beyond the greed model of monopoly, “hoggist” capitalism and the envy model of the traditional welfare state. This will promote peace, prosperity, and freedom through harmonious justice.
CESJ’s (Center for Economic and Social Justice — www.cesj.org) Norman Kurland argues, “The haves represent a tiny fraction of humanity. Our ideas will split them between those who see our point and understand that they would benefit everyone without taking anything away from them during their lives, and those who want to keep ownership in an exclusive club. The latter cannot publicly attack the institution of private property without threatening the legal foundation that gives them their monopoly over the money system and the ownership system.”
We need leadership to awaken all American citizens to force the politicians to follow the people and lift all legal barriers to universal capital ownership access by every child, woman, and man as a fundamental right of citizenship and the basis of personal liberty and empowerment. The goal should be to enable every child, woman, and man to become an owner of ever-advancing labor-displacing technologies, new and sustainable energy systems, new rentable space, new enterprises, new infrastructure assets, and productive land and natural resources as a growing and independent source of their future incomes.
On the basic issue of economic empowerment of each individual, the essential goal needs to be economic democracy, which will finally make political democracy a meaningful reality.
As Kurland points out, the emphasis on the systemic injustices of monopoly capitalism can only be addressed by comprehensive reforms to the tax, monetary and inheritance policies favoring the top 1 percent at the expense of the 99 percent. The current system perpetuates budget deficits and unsustainable government debt, underutilized workers, a lack of financing for financing advanced energy and green technologies, and outsourcing of U.S. industrial jobs to low-wage countries, trade deficits, shrinking consumption incomes among the poor and middle class, and conventional methods for financing productive growth that increase the ownership and power gaps between the top 1 percent and the 90 percent whose combined ownership accumulations are already less than the elite whose money power is widely known as the source of political corruption and the breakdown of political democracy.
The unworkability of the traditional market economy is evidenced by the diverse and growing deficits — federal budget deficit, trade deficit, city, county and state budget deficits — which are making it increasingly impossible for governments at every level to function. The increasing deficit burden is the result of the growing numbers of people who cannot earn, from legitimate participation in production, enough income to support themselves and their families. Thus government is obliged to “redistribute” to starve off economic collapse. The key means of redistribution is taxation — taking from the legitimate producers and giving to the non- or under-producers — to make up the economy’s ever wider income and purchasing power shortfalls.
The fact is that political democracy is impossible without economic democracy. Those who control money control the laws that foster wage slavery, welfare slavery, debt slavery and charity slavery. These laws can and should be changed by the 99 percent and those among the 1 percent who are committed to a just and economically classless market economy, true equality of opportunity, and a level playing field in the future for 100 percent of Americans. By adopting economic policies and programs that acknowledge every citizen’s right to contribute productively to the economy as a capital owner as well as a labor worker, the result will be an end to perpetual labor servitude and the liberation of people from progressive increments of subsistence toil and compulsive poverty as the 99 percent benefits from the rewards of productive capital-sourced income.
The question that requires an answer is now timely before us. It was first posed by Kelso in the 1950s but has never been thoroughly discussed on the national stage. Nor has there been the proper education of our citizenry that addresses what economic justice is and what ownership is. Therefore, by ignoring such issues of economic justice and ownership, our leaders are ignoring the concentration of power through ownership of productive capital, with the result of denying the 99 percenters equal opportunity to become capital owners.
The question, as posed by Kelso is: “how are all individuals to be adequately productive when a tiny minority (capital owners) produce a major share and the vast majority (labor workers), a minor share of total goods and services,” and thus, “how do we get from a world in which the most productive factor — physical capital — is owned by a handful of people, to a world where the same factor is owned by a majority — and ultimately 100 percent — of the consumers, while respecting all the constitutional rights of present capital owners?”
Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/. See the article “The Absent Conversation: Who Should Own America?” published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/who-should-own-america_b_2040592.html and by OpEd News at http://www.opednews.com/articles/THE-Absent-Conversation–by-Gary-Reber-130429-498.html.
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.
Also see “The Path To Eradicating Poverty In America” at http://www.huffingtonpost.com/gary-reber/the-path-to-eradicating-p_b_3017072.html and “The Path To Sustainable Economic Growth” at http://www.huffingtonpost.com/gary-reber/sustainable-economic-growth_b_3141721.html. And also “Second Income Plan” at http://www.huffingtonpost.com/gary-reber/second-income-plan_b_3625319.html
Also see the article entitled “The Solution To America’s Economic Decline” at http://www.nationofchange.org/solution-america-s-economic-decline-1367588690 and “Education Is Critical To Our Future Societal Development” at http://www.nationofchange.org/education-critical-our-future-societal-development-1373556479. And also “Achieving The Green Economy” at http://www.nationofchange.org/achieving-green-economy-1373980790. Also see it complete with the footnotes at http://foreconomicjustice.org/?p=9082.
Also see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624 and “The Income Solution To Slow Private Sector Job Growth” at http://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.