Re-engineering our fragile economy and democracy

Geoff Crocker is an economist and editor of ‘The Case for Basic Income.’ He is the author of ‘Basic Income and Sovereign Money – the alternative to economic crisis and austerity policy.’ He is also a partner on the IPR research project ‘The economics of basic income.’

In a recent essay on the future of democratic capitalism, the Financial Times’ chief economics commentator Martin Wolf offers an excellent and timely reflection on contemporary political and economic philosophy. Owing to his personal background – a family history of escape from the Holocaust and the experience of living through the Cold War – Wolf has a deep appreciation of democratic capitalism. As he writes, ‘today’s liberal democracies are the most successful societies in human history in terms of prosperity, freedom and the welfare of their peoples.’ Key to this success, in Wolf’s view, is the separation of wealth and power: politicians are elected by everyone, not just the privileged few, but powerful business leaders are appointed only by their shareholders.

However, Wolf shares a widespread concern that the system is now very fragile. Rentier capitalism has fuelled huge inequality globally. UK growth has been stunted by economic crises and a succession of systemic shocks, from Brexit to Covid-19 and the war in Ukraine. The dysfunctionality of the current economic paradigm is extensive, resulting in pervasive poverty, low-pay-low-satisfaction jobs, repeated austerity policies, and ecological damage. The phenomenon of in-work poverty demonstrates that work and wage are no longer a reliable source of adequate income. The economic system is structurally defective and needs radical re-engineering.

The democratic system is equally deficient. The political elite has lost trust and needs to regain it. In the UK, political parties quickly become oligarchies which control candidate selection and elected MPs. Party leaders announce policy unilaterally. Conservative and Labour each insist on retaining a first-past-the-post system which disenfranchises swathes of voters. Representative democracy is overturned by a Brexit referendum where misinformation funded by powerful lobbies swings the outcome. Wealth is buying power.

In both economics and politics, large groups feel excluded, giving opportunity for demagogues, dynasties, and populist politicians to gain power. Having opened a much-needed debate, Wolf inevitably raises more challenges than solutions. Democracy and populism are unfortunately not mutually exclusive opposites. Democracy produced Trump, Putin, Erdoğan, Orbán, and Johnson. The fault lies not simply with the design of our current economic and political systems but also with the values that underpin them.

We need a global ethical debate, and a new focus on virtue. Wolf touches upon this issue briefly, when calling upon leaders to demonstrate moral integrity to regain trust. However, there is a broader conversation to be had – one that engages with a deeper question of neglected spirituality, whether atheist or religious. Church, mosque and temple have failed to engage in this debate, due to their focus on creed, miracle, ritual, and power. Secular atheism tends to reduce to physicalism with no account of the metaphysical, or of virtue, with some notable exceptions. Values can be determined politically and enforced legally, but the real question is one of individual but shared personal embrace of, and commitment to, virtue.

André Comte-Sponville, in his ‘Short Treatise on the Great Virtues’ offers a start, as does Simon Blackburn in his ‘Being Good.’ Comte-Sponville discusses 18 virtues of politeness, fidelity, prudence, temperance, courage, justice, generosity, compassion, mercy, gratitude, humility, simplicity, tolerance, purity, gentleness, good faith, humour, and love. Christ’s famed Sermon on the Mount offers a similar celebration of virtue. The apostle Paul lists love, joy, peace, patience, kindness, goodness, faithfulness, gentleness, and self-control, succinctly saying that ‘against such things there is no law.’ Some shared agreement on virtue has to underlie social, economic and democratic systems.

The economic model needs radical redesign. Competition has advantages, but settles over time to high levels of market concentration. The Resolution Foundation’s 2018 UK report found an average 5-firm 43% market share across all industry sectors, rising to 74% in the supermarket sector. Someone wins the competition, so the system defaults to regulation. Structural failures were also at the root of the 2007 financial crisis. While the finger has often been pointed at irresponsible banks and negligent governments, such blame games threaten to distract from deeper causes, including a structural technology-led shift to inadequate household income and increased household debt. With technology sucking income out of the economy, whilst simultaneously accumulating debt at both household and government levels, our structurally dysfunctional economy creates the urgent twin needs to get income to people, and to get debt out of the economy.

Universal basic income (UBI) offers an important contribution in tackling this challenge. UBI also addresses ethical issues of income inequality, gender inequality, precarity, and security. Wolf addresses the basic income proposal, but prefers targeted benefits. Targeted benefits, however, suffer from huge effective marginal tax rates when withdrawn as a recipient gains work, leading to familiar poverty and unemployment traps. They inevitably require means-testing which is intrusive, humiliating, and leads to low take-up rates, particularly among elderly groups. Jobs cannot provide a full solution, given rampant automation of everything. All political parties push well-paid work as the economic solution and the provider of household income. Welfare benefit systems, such as the UK’s Universal Credit are fundamentally based on the obligation to work. Retirement age is constantly lifted in the mistaken belief that the workplace, specifically the product price, can provide income via wage, which society thinks it can’t afford as pension. The determining worry is that basic income or other welfare benefits are unaffordable, since they lead to government deficit and unsustainable government debt. A more comprehensive coverage of UBI is available in my book ‘Basic Income and Sovereign Money.’

Wolf is right that we need to reduce debt in the economy. National debt in developed economies typically runs close to, or in excess of, 100% of GDP, rising in Japan’s case to 265%. Such debt is unsustainable and unrepayable. But it does impose huge interest costs on the economy, and acts as an argument to limit government expenditure, and impose socially harmful austerity. A major way to limit the accumulation of this debt is to accept central bank monetary funding of government expenditure, or ‘debt-free sovereign money’, by which the central bank would directly credit the government account with money it had created. Though easily derided, and proscribed in most jurisdictions, direct money financing is in fact the reality when central banks, which are owned by government, buy huge shares of government debt, rendering it zero net debt. It’s how the £69 billion cost of the Covid furlough scheme was funded. It’s the way to fund basic income.

The debate we need has to be fundamental and radical, and grounded in a deeper appreciation of virtue.

All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.