In this recent post I outlined some of the ideas in Grace Blakeley’s new book Stolen – How to Save the World from Financialisation. Her answer to the apparent political, social and economic problems with financialisation under capitalism is a transformation towards democratic socialism, starting in the UK and spreading across the world.
In the book she describes a range of policies that would, she hopes, encourage such a trend: a Public Investment Bank; a People’s Asset Manager to encourage the spread of public ownership; an ambitious Green New Deal; changes to corporate governance so that a much wider range of stakeholders are more closely involved in decision-making, not only in non-financial corporations, but also in banks and including the Bank of England. She also argues for the restoration of trade union power and influence, the refinancing of private debt and much tougher regulation of private banking, to encourage definancialisation domestically and ultimately globally.
Some of this is certainly radical. For Blakeley, the general aim of such a path is to shift the balance of power in the economy and society away from capital and towards labour, away from private ownership and towards collective ownership. Society should then prioritise the collective and the public over the individual and the private, and cooperation rather than competition. Marxists such as SOAS’ Costas Lapavitsas in his Profiting without Producing, and Michael Roberts, who blogs here, are two vocal proponents of a socialist society that they argue would not only be more efficient than capitalism, but also more just and more democratic.
I have to admit, to a degree I find the analysis of a number of Marxist political economists very interesting and in many ways richer than much mainstream thinking in their evaluation of the flaws of capitalism, as well as its strengths, both of which are in the spirit of Marx himself. But when it comes to how to respond to these flaws, I find the arguments for socialism to be a little thin and unconvincing. I don’t think that society can be fully and rationally planned, however knowledgeable and intelligent those in charge might be. Clearly, while there is much planning under capitalism, in corporations or government for example, it has its limits in coordinating a complex modern economy. Financialisation has damaging effects, but we must look to reform to combat them.
The feasibility of socialism
Heterodox institutional economist Geoffrey Hodgson, who blogs here, also has a new book out, Is Socialism Feasible?, which conducts a thorough analysis of the meaning and practice of socialism, drawing on a range of theoretical and historical evidence, and also making a strong case for what he calls ‘liberal solidarity’. The latter is along the lines of social democracy or a reformed and evolving capitalism.
Marxists and socialists often argue that there are serious limits to reforming capitalism, and that only socialism can allow for a truly democratic and just society. Hodgson argues just the opposite, that abolishing markets and making socialism nation-wide (what he calls ‘big socialism’) tends to produce stagnation and despotism, even among well-meaning people who believe that things can be better ‘this time around’.
As Hodgson points out, the financial crisis of 2008 and its aftermath have increased disaffection with capitalism and support for socialism. It is therefore important to define and debate socialism, what it might mean and how it would work as a politico-economic system in ways which avoid the problems of previous attempts to establish it.
From Labour Party leader Jeremy Corbyn in the UK, to presidential candidate Bernie Sanders in the US, self-defined socialists have, perhaps grudgingly, accepted a role for markets, but they have not made a positive case for them, as well as private property, alongside state regulation and intervention in a complex, modern economy.
Hodgson also argues that capitalism and private ownership are compatible with a mixture of self-interested and cooperative behaviour, as well as morality, all of which have evolutionary functions and have evolved with the progression of humanity. For him, a significant increase in democratic control in all sorts of institutions throughout society, with the aim of establishing democratic socialism, would likely mean, to echo Oscar Wilde, too many meetings, and these would often lack a necessary expertise. This is not to argue for wholesale technocracy instead, as this represents another undesirable extreme.
On the contrary, liberal solidarity or social democracy allow a significant role for markets and the private sector, as well as a role for the state, a strong welfare state, democracy and some redistribution.
The theoretical extreme of atomistic individualism ignores social institutions and contexts which shape individual behaviour: individual freedom is sustained by institutions. One such institution is the market, shaped by rules and norms, and sustained by the state. ‘Free’ or ‘unregulated’ markets are misleading terms, are probably infeasible in practice in their pure form, and ignore the realities of politics, power and social structure in general.
Small socialism and big socialism
In the book, Hodgson explores case studies of what he calls ‘small socialism’, which have been established in small communities, and ‘big socialism’, which have involved, as far as possible, nationwide planning in the place of markets. Both conceive of common ownership and the abolition of private property and markets.
Historically, experiments with small socialism have tended not to last for long, particularly where collective decision-making has had a primarily rational basis: this has typically led to much dispute between community members over the details of organisation. Socialist communities with a religious basis seem to have lasted longer. However, small socialism requires either frugality or a role for markets. In the absence of some market exchange with external organisations, they tend to lead to isolation and come at the cost of losing the benefits of the national or global division of labour in production, and have to be self-sufficient.
Some worker-owned cooperatives have been successful within capitalism, among a plurality of forms of enterprise, if they have had supportive legal, political and financial institutions, as well as some market discipline which provides incentives to install and observe internal rules.
So small socialism is possible, but the transformation to nationwide big socialism and abolishing markets and private property have historically required centralised state coercion. Market incentives are needed to encourage cost-cutting, efficiency and innovation, and these are lacking under big socialism. They penalise inefficiency and promote efficiency. In addition, the centralisation of political and economic power seems to be inevitable under big socialism and leads to authoritarianism and the undermining of democracy. In order to be sustained, democracy and human rights require countervailing powers such as independent judiciaries, trades unions, employer associations, consumer associations, and other lobby groups.
Direct democracy, which if taken far enough could mean voting for everything, is simply not viable in a complex economy. Compared with state socialism, capitalism does a better job of sustaining a more dispersed concentration of power and ownership, perhaps not automatically but with the right institutions and policies.
More problems with arguments for pure socialism or individualism
A common trait in arguments for socialism is their ‘immunology’: proponents compare an imagined ideal society with an inevitably flawed capitalism. In fact, a modern complex economy, however labeled, has a need for a mix of hierarchical organisations, markets and other institutions, and a culture of ongoing practical experimentation rather than top-down, centralised, ‘rational’ planning.
Knowledge and skills are often necessarily tacit and socially embedded, as well as fragmented and dispersed. While there is certainly a role for planning on the part of the state, as well as in all sorts of organisations, system-wide planning of everything is either impossible or fails to achieve its goals. A lack of prices and competition prevent the necessary incentives required for improving performance, since they play a key role in communicating information for the ongoing dynamic coordination of different plans by entrepreneurs and consumers in a large-scale economy. Here Hodgson draws on ideas from the Austrian School. However, while Ludwig Mises and Friedrich Hayek emphasised the importance of private ownership and market competition, they ignored the possibility and potential of a mixed economy.
Theories of atomistic individualism and big socialism both contain serious flaws. The practice of the former tends to allow the individual to be “swayed by powerful corporate, media and other organised interests”, which in excess is counter to the tenets of a healthy democracy. In this case the institutions that support a meaningful freedom of choice would be undermined. Big socialism centralises political and economic power and undermines pluralism and civil society. Neither atomistic individualism nor big socialism address the complexities of modern capitalism and the need for pluralist solutions to solve key social problems.
The need for states and markets
As already mentioned, the state and the market need each other to function well under capitalism, alongside a range of other institutions. Property rights are buttressed by institutional, legal authority. Hodgson shows in the book that regulation has grown steadily under capitalism, even in the neoliberal era. An important reason for regulation is to remove harmful choices which are too costly for every individual to investigate. Ironically, many libertarians prone to argue against much state regulation end up being against the inevitable harmonised regulation that governs ‘free’ trade. Since markets are social institutions, growing trade requires the growth of commonly accepted rules.
Of course, markets cannot solve every problem, and neither can a centralised state authority. There is a need under all versions of capitalism for state intervention to provide public goods, counter externalities, provide strategic leadership in innovation, promote strategically important sectors, and maintain political legitimacy and stability by redistributing wealth and income.
The author therefore makes a strong case for the benefits of an experimental mixed economy, with cooperation between public and private institutions to enable a dynamic and relatively just capitalism.
People and profits?
Another socialist shibboleth that Hodgson argues against is the refrain of ‘people before profits’. This oft-repeated phrase on the left makes the assumption that profits do not align with people’s interests, so that their abolition would free us all to focus on caring for the whole of society and solving its problems. It also assumes that we can all extend caring beyond our friends, family and community. While this may be possible in some cases, it is perhaps far from universally achievable.
Varieties of capitalism
Hodgson goes on to examine the question of whether different national capitalisms are converging economically and institutionally, due to globalisation for example. If they are, then this implies a considerable restriction of choice in the political, social and economic spheres, or the ‘end of history’ as Francis Fukuyama once put it. For Hodgson, the evidence is that continued uneven development as the global division of labour and specialisation increase means that economies can remain structurally different, particularly at varying levels of development, but also at similar levels. There remains a significant variety of forms of capitalism in terms of the degree of democracy, the effectiveness of law, levels of taxation and public spending, levels of corruption, culture and religion.
He focuses on the Nordic model, often admired on the centre-left for its mix of relative economic dynamism, high quality public goods and services, relatively low inequality and social well-being. He makes the salient point that their small, relatively ethnically homogeneous populations help to provide and sustain a consensus for high levels of tax and public spending, significant redistribution and a strong welfare state. They also have stronger trade unions than many of their rich neighbours, which help to support a progressive politics without being socialist revolutionaries.
So what of the left alternative to the utopias of atomistic individualism and big socialism? Hodgson spends some time outlining his case for liberal solidarity, which could also be called liberal social democracy or solidaristic liberalism. It draws on the liberal tradition which rejects atomistic individualism and embraces a broad conception of liberty, not simply the absence of coercion or negative liberty.
The principles of liberal solidarity, which remain open to debate and degrees of emphasis are as follows:
- A commitment to representative liberal democracy.
- Some degree of emphasis on economic equality.
- Possible limits to choice and markets.
- State intervention and a welfare state to support individual self-determination and flourishing.
- A certain balance between self-interest, and cooperation and morality, so that there is a place for selfish motivation, but also for morality, justice and duty.
- Consideration of attitudes towards the modern large corporation, to counter problems of excess market power and lack of accountability, despite its potential success in innovation and growth.
- Some balance between nationalism, and internationalism and openness.
Of course, all of these are subject to change and need to be managed and the positives promoted over time. There is no final utopia, rather it would perhaps be better to accept an ‘evotopian’ future of relying on experience and experimentation, rather than centrally conceived and imposed blueprints.
Further key points supporting liberal solidarity
For Hodgson, both classical Marxism, despite its nature as interdisciplinary political economy, and neoliberalism, tend to reduce everything to market relations and the economistic, despite being at opposite ends of the political spectrum. There is a need to move beyond ideas of statist socialism on the one hand, and the celebration of unbridled individualism and greed on the other.
A major flaw in the marginalism of neoclassical economics arises from the interdependence of inputs and their combining in particular activities, for example in the production process. Individual contributions to the social output are hard to measure or separate in reality. The private income received by individuals in society is thus not wholly commensurate with their individual effort and contribution to the social product. This allows a good case to be made for social contributions via taxation while preserving some degree of inequality in order to provide incentives. Thus we can argue for redistribution to promote economic and social justice.
Another justification for redistribution lies in the debt owed to past generations. In economies with an improving standard of living, we are all to some extent ‘standing on the shoulders of giants’. The current population of individuals do not have the rights to all the revenues generated from current resources, including what we might call ‘nature’s bounty’ and historically provided resources.
It is also vital to tackle economic insecurity, which if left to fester can undermine democracy, breed intolerance and extremism, as well as a loss of faith in elites and mainstream political parties, as we are witnessing today in many countries.
Democracy itself may also be threatened by ‘over-zealous globalisation’, politically powerful corporations, irresponsible media giants, reckless financial institutions, and proliferating supra-national organisations with limited democratic accountability.
For me, one important consideration that is missing from Hodgson’s book is a developmental perspective on the emergence of a social democratic capitalism and the particular balance of power in society which can support and sustain his liberal solidarity. To be fair, some of this may be covered in his previous book Conceptualizing Capitalism, which I do not have space to examine here.
In sum then, Is Socialism Feasible? is a fascinating and sweeping critique of the case for socialism in today’s world economy. It is also an informative and persuasive polemic on the need for an alternative alternative that has much to offer those seeking greater social justice and freedom in a prosperous and liberal society. There is much more covered in the book than I can include here, so I recommend that you read it. I hope it will change some minds.
Another recent publication making the case for social democratic reform is Rethinking Britain: Policy Ideas for the Many. Written by a number of progressive academics, it covers a range of ideas for policy to reform capitalism rather than overturn and replace it.
Without going into laborious detail, the policies aim to restore full and decent employment, sustainably raise living standards for the widest possible majority, reduce inequality, substantially increase investment in physical and social infrastructure, increase the competitiveness of the UK economy through industrial and technology policy, make the financial system work for society rather than the reverse, restore collective bargaining in the workplace, and shift in the direction of the mixed economy, for example by renationalising the railways and, gradually, the utilities.
The specific policies are not all compatible with each other, but can be drawn on by progressive policymakers. Much of this sounds similar to Grace Blakeley’s ideas for democratic socialism, but she has a different end in mind and is more ambitious in her desire to abolish private property. Modern social democracy maintains a substantial role for it.
Taming finance – the post-Keynesian solution
Post-Keynesians tend to be highly critical of capitalism, but still believe in reformism as opposed to socialist revolution. Alongside some Marxists, they have been instrumental in analysing the increasing power and influence of finance in today’s capitalism, its damaging effects, and the prospects for reform.
So while the work of Hodgson makes a powerful case against socialism, the need for dealing with finance remains. Post-Keynesians have argued for a range of typically social democratic policies at the national and international level, including much tougher financial regulation. Both for them and for thinkers such as Michael Pettis, redistribution of income and wealth and a faster growth in household income and wages relative to GDP are vital to a peaceful and socially just restoration of successful economic performance in many countries. This would boost sustainable consumption and aggregate demand without the need for ever-increasing public and private debt-fueled growth and also help to sustainably lower unemployment. Global coordination of macroeconomic policy is also highly desirable but tends to require more cooperation between states than is feasible, other than in the midst of a serious crisis.
The lure of socialism and the case for social democracy
In the aftermath of the 2008 crisis, which has variously been called a crisis of financialisation or of capitalism itself, socialism has seemed increasingly appealing to many. At least idealistically, it could involve caring more for others, reducing injustice, getting rid of volatile markets and enabling greater control of the economy. But we have been here before. As Geoffrey Hodgson puts it: if only the resistance of the rich could be overcome and we could take advantage of new technologies and build on the planning that already exists in large scale corporations and other organisations, we could be on the brink of dramatic change to a socialist system. For some Marxists, this is historic destiny. But it ignores lessons from history which to date have demonstrated that the path towards socialism is one towards stagnation and despotism.
Perhaps no less radical, certainly in countries such as the UK, a left path of reform, embracing a cautious experimentation which defends democratic and liberal values, and rejects populist and extremist threats on all sides, is more feasible. To return to our original brief, financialisation has caused real problems in its scale and embeddedness in modern capitalism, but reform is possible with sufficient mobilisation and political will. We live in unsettling times, but such a direction might just be the best we can aim for.