Spies, Cash and Conspiracy Theories

The similarities between the current global economic crisis and that of the 1930s has led many more thoughtful commentators to re-evaluate the importance of history to the development of policy. A striking recent example, which has been poorly trailed but is well worth watching, is Stephanie Flanders recent series Masters of Money. The link with the Open University shows, but isn't it time we all knew a little more about the variety of economic theories? Flanders makes a sterling effort to explain the thinking of three 20th-century giants - Keynes, Hayek, and Marx - none of whom, interestingly are being paid much heed by contemporary politicians.

I revealed my own interest in economic history in a recent article that was posted on the New Statesman economic blog Current Account. What perked my interest was the revelation that Harry Dexter White, Keynes's sparring partner at the Bretton Woods negotiations and effectively the architect of the post-war global financial settlement, was in fact a Soviet spy. As I point out in the article, in 1944 the US and Soviet Union were still allies, so this is not such a bizarre situation as it might have been by 1948, but none the less it does raise questions about exactly what the negotiators at Bretton Woods were seeking to achieve.

Perhaps the most touching lesson from history is that 100 or so years ago key figures in public life made it their life's work to understand the complexities of the economy. Their objective was not self-aggrandisement or self-enrichment but the impulse to make life better for their fellow citizens. While I find Hayek's idea that politicians should never intervene in markets to be utterly misguided, I can understand how he learned this lesson during the hyper-inflated Vienna where he was a young man, and that his scholarship was dedicated to preventing the same sort of suffering from occurring again. How distant and quaint such motivations seem today, when the highest aim of most authors is to be granted the accolade of a TV series.

As I conclude in my article about Bretton Woods, both the authors of the compact appear to have died of broken hearts: Keynes was dead within two years of the ending of the conference, worn out by his attempts to ensure peace in his time and ours. White outlasted him by two years but could not survive the pressure of the McCarthy era. He suffered a heart attack shortly after giving evidence to McCarthy’s House Unamerican Activities Committee in August 1948.
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The Road to Serfdom

When Hayek wrote The Road to Serfdom in 1944 it was one of several books reacting against the collapse of liberal values in Europe and the continent's descent into fascism. Hayek's argument was that an over-powerful state repressed the individual and that a system of markets, operating freely, and companies in competition with each other would best guarantee individual liberty.The organisation of the Olympic Games is a clear illustration of the way in which it is the private, corporate economy that is turning us into serfs, rather than the overweaning state that Hayek feared.

Those who have bought the expensive tickets to the Olympic venues will be prevented from taking in their own food and drink. The corporate sponsors have bought exclusive rights to advertising, meaning that small businesses will be prevented from using the games to increase their sales. Today we hear that a whole range of words are to be expunged from our vocabulary, since they remain the preserve of corporate marketeers who wish to use them to ensure that the Olympics and all words associated with it, bring profits to only the exclusive companies that have paid for the privilege. We are to be deprived of our freedom of speech. The fuzziness between public and private sectors also erodes our rights as citizens. As a trivial example, how are those with Olympic tickets to know, whether they are being searched by police officers, solidiers, or private security guards? And how are they to know whether they are being searched for weapons or sandwiches?

Karl Polanyi's The Great Transformation was also published in 1944, and like Hayek, Polanyi was a refugee from fascism who also studied and wrote in London. The current failures of democracy and erosion of individual rights have arisen as a result of policies designed in response to Hayek's vision. Polanyi would agree with Hayek about the dangers of an over-powerful, centralised state, but his target is the market system itself, which turns people into the 'ficitious commodity' of labour and ignores the primal value of the land itself. Hayek's vision of the market as a system of competing firms was always a theoretical fiction, since in reality consolidation leads to domination by corporations, against whom our primary defence must be the government.

The green vision of the economy accepts the need for individual liberty but balanced by our role as citizens and the political power operated on our behalf by democratic institutions. We would also emphasise the importance of scale. Whether public, or private, an institution that operates at national or international level will always be oppressive of the individual merely by virtue of its size, and therefore the power it can wield.

As the Olympic Games loom nearer, for the UK citizen it is hard to see what they offer. Our rights to choose what we buy, where we go, and even what we say have been sold to corporations that are becoming as threatening to individual liberty as the powerful states that inspired Hayek's wrath. Through Hayek and Thatcher our civil and political liberties have been sacrificed on the altar of free-market capitalism.

George Orwell produced a review of The Road to Serfdom on its publication that foresaw the more threatening tyranny of the unconstrained privatised economy:

'in the negative part of Professor Hayek's thesis there is a great deal of truth. It cannot be said too often — at any rate, it is not being said nearly often enough — that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamt of', but he was also able to see that 'a return to "free" competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the state.'*

*Review of the Road to Serfdom by F.A. Hayek, etc" As I Please, 1943-1945: The Collected Essays, Journalism & Letters, vol. 3, quoted on Wikipedia.
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Strange Fruit

I think it was Arthur Scargill who said that if people start attacking you, you are obviously shaking the right tree. The interesting thing is that when you post a plan to stabilise the global financial system it is Austrians who fall out of the tree. They feel duty bound to contest the fact that politicians can have any kind of positive impact on the situation.

I have some time for the Austrians because at least they are intellectually consistent. Their position appears to be that banks should be free to make money in a money market system with no inteference from politicians. If the banks fail, those foolish enough to deposit money with them lose it. Similarly, those who in vest in duff businesses lose their investment. The market is ruthless but fair, as are the Austrian theorists themselves.

The problem with this view of the world is that it is ethically, socially and politically untenable. What Hayek learned from the financial chaos of the 20s and 30s was that politics and economics did not mix. What he failed to learn is that unmitigated market chaos generates extreme politics, of both right and left. The role of politicians in a democracy is to mediate that, and they cannot do this without involving themselves fundamentally in the economic framework within which market transactions take place.

My ten-point stabilisation plan is no doubt flawed - and I am grateful to initiate a debate to identify and remedy those flaws. For fear of being seen to be fools, politicians are singularly failing to rush in and sort out the financial crisis. At the risk of appearing a fool I have made a proposal for others to support or attack.

Lee the Austrian makes some points typical of his intellectual wordview. However, when he responds that 'Suspension of government bond trading would push lending costs through the roof, bankrupting all world governments and ending the welfare state for good' he seems to miss my point about suspending such trade in sovereign debt. Perhaps he cannot imagine a world without markets, but I see this as analogous to the situation when a company is going bankrupt and trade in its stock is suspended. So there is no market and hence no price - so there cannot be an increase in the price of lending.

Tim Worstall raises another point that is worth debate in his comment that 'If we stop trading currencies then we've got to stop trade'. This suggests that most of the trade in foreign exchange is directed to settle external trade balances, rather than for speculative reasons. I don't have the proportions to hand, but the residual quantity of exchange between, say, pounds and Ukrainian Grivnya that relates to exchange of goods could surely be suspended for the six-month period, held as an external trade debt? Alternatively, IMF special drawing rights could be used for the purposes of external commitments, until a new global reserve currency has been negotiated.

The tone of the Austrians' comments is harsh, to match their philosophy. I would invite those holding other positions to join the fray. Surely it is worth the risk of appearing a fool!
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How can we solve the crisis in the Eurozone?

The growing tension in the Eurozone is matched by a total failure by the media to give space for alternative views of how our economic lives, and especially our monetary policy, might be determined. Last night's Radio 4 debate, hosted by the well-meaning and well-informed Paul Mason, Economics Editor of Newsnight, fell into the trap of setting up a false dichotomy between Keynesian and Hayekians. Three conclusions emerged: the audience was partisan and wholly unrepresentative, the two iconic figures around whom the debate revolved both had some arguments on their side, and none of this has anything to do with how our governments make policy. Plus, of course, the obvious fact that neither Keynes nor Hayek could imagine a world where ecological limits mean that economic growth can no longer happen.

Green Economics grows in strength and confidence: we are growing clearer about the design of our alternative future, and the expanding evidence of the failure of globalised capitalism adds to this confidence. An example is the new work by James Robertson, a book addressing the question of money to be published by Green Books next year. The publisher is allowing us all a sneak preview of Robertson's proposal for managing the national money supply.

James Robertson has been right about money for years. He has a claim to be one of our leading economists, and yet his work is excluded from the public debate. In this chapter he provides an excellent critique of what is wrong with a money system based on bank debt and, more importantly, cogent proposals for an alternative system.

It is important that we know where we are going, and all those who support a just and sustainable economy should read and understand the Roberthttp://www.blogger.com/img/blank.gifson proposal. But it does not help us with the transition. We cannot be naive about the vested interests dedicated to maintain the current system in place, and the courage required to politicians to stand against them.

What would a transitional policy look like? Presumably politicians would have to secretly agree to simultaneously suspend trade in the national debt of all the leading economies, and exchange transactions between their currencies. The moratorium would allow breathing-space for a new international agreement between nations to be drawn up: this would be a democratic agreement based on national control of sovereign debt and currencies exchanges: Bretton Wood with knobs on, as this blog has been arguing for since the beginning of the crisis. The market has no solution: only by taking political action can its destructive consequences be forestalled.
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