Rethinking Capitalism

Economics and Policy for Sustainable and Inclusive Growth

Michael Jacobs, Mariana Mazzucato, Michael Jacobs, Mariana Mazzucato

• Publisher: Wiley-Blackwell
• Year: 2016
• Print ISBN: 9781119120957
• eBook ISBN: 9781119311638
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

"Thought provoking and fresh - this book challenges how we think about economics."
Gillian Tett, Financial Times

For further information about recent publicity events and media coverage for Rethinking Capitalism please visit http://marianamazzucato.com/rethinking-capitalism/

Western capitalism is in crisis. For decades investment has been falling, living standards have stagnated or declined, and inequality has risen dramatically. Economic policy has neither reformed the financial system nor restored stable growth. Climate change meanwhile poses increasing risks to future prosperity.

In this book some of the world's leading economists propose new ways of thinking about capitalism. In clear and compelling prose, each chapter shows how today's deep economic problems reflect the inadequacies of orthodox economic theory and the failure of policies informed by it. The chapters examine a range of contemporary economic issues, including fiscal and monetary policy, financial markets and business behaviour, inequality and privatisation, and innovation and environmental change. The authors set out alternative economic approaches which better explain how capitalism works, why it often doesn't, and how it can be made more innovative, inclusive and sustainable. Outlining a series of far-reaching policy reforms, Rethinking Capitalism offers a powerful challenge to mainstream economic debate, and new ideas to transform it.

1.
Rethinking Capitalism: An Introduction

MICHAEL JACOBS AND MARIANA MAZZUCATO

IN NOVEMBER 2008, as the global financial crash was gathering pace, the 82-year-old British monarch Queen Elizabeth visited the London School of Economics. She was there to open a new building, but she was more interested in the assembled academics. She asked them an innocent but pointed question. Given its extraordinary scale, how was it possible that no one saw the crash coming?¹

Hereditary sovereigns are not normally given to puncturing the pretensions of those in charge of the global economy, or of the economists paid to understand it. But the Queen’s question went to the heart of two huge failures. Western capitalism came close to collapsing in 2007–2008, and has still not recovered. And the vast majority of economists had not understood what was happening.²

This book is about both failures. On the one hand the capitalist economies of the developed world, which for two hundred years transformed human society through an unparalleled dynamism, have over the past decade looked profoundly dysfunctional. Not only did the financial crash lead to the deepest and longest recession in modern history; nearly a decade later, few advanced economies have returned to anything like a normal or stable condition, and growth prospects remain deeply uncertain. Even during the pre-crash period when economic growth was strong, living standards for the majority of households in developed countries barely rose. Inequality between the richest groups and the rest of society has now grown to levels not seen since the nineteenth century. Meanwhile continued environmental pressures, especially those of climate change, have raised profound risks for global prosperity.

At the same time, the discipline of economics has had to face serious questions about its understanding of how modern economies work. What made the financial crisis such a shock—in two senses—was not simply that very few economists had predicted its coming. It was that over the previous decade the mainstream view was that policy-making had essentially solved the fundamental problem of the business cycle: major depressions, it was believed, should now be a thing of the past. And economic policy since the crisis has been no more successful. The orthodox prescription of ‘fiscal austerity’—cutting public spending in an attempt to reduce public deficits and debt—has not restored Western economies to health, and economic policy has signally failed to deal with the deep-lying and long-term weaknesses which beset them.

The core thesis of this book is that these failures in theory and policy are related. Mainstream economic thinking has given us inadequate resources to understand the multiple crises which contemporary economies now face. To address these crises, we need a much better understanding of how modern capitalism works—and why in key ways it now doesn’t. A reappraisal of some of the dominant ideas in economic thought is required. And in turn this needs to inform a set of new directions in economic policy-making which can more successfully tackle modern capitalism’s problems.

Each of the chapters of the book therefore addresses both a key economic problem and the orthodox economic way of understanding it. The authors offer a different and more sophisticated approach to economic analysis, and from this generate new policy solutions. To do this they draw on important schools of economic thought whose powerful understandings of capitalist systems have been largely forgotten or sidelined in mainstream debate. In each case their conclusion is that capitalism can be reshaped and redirected to escape its present failures. But this can only be achieved if the mental frameworks of economics are rethought, and new approaches to policy taken.

Capitalism and its discontents

In this Introduction we pull together some of the key ideas which animate the book. We first set out the evidence of Western capitalism’s failures, explaining the three fundamental problems which define its current weak performance. After describing the approach taken to these problems by each chapter, we draw out some of the lessons for economic theory and analysis. We offer a critique of the orthodox notions of markets and ‘market failure’. And we explain how a richer and deeper understanding of capitalism can generate more successful approaches to economic policy, aimed at achieving more innovative, inclusive and sustainable forms of growth and prosperity.

Weak and unstable growth

There is no escaping the starting point for this analysis. The financial crash of 2008, and the long recession and slow recovery which followed, have provided the most obvious evidence that Western capitalism is no longer generating strong or stable growth.

The scale of the crash can hardly be exaggerated. In 2009 real gross domestic product fell in thirty-four of thirty-seven advanced economies and the global economy as a whole went into recession for the first time since World War II.³ In a single year, real GDP fell by 4.5 per cent across the euro zone (including by 5.6 per cent in Europe’s strongest economy, Germany), 5.5 per cent in Japan, 4.3 per cent in the UK and 2.8 per cent in the United States.⁴ Between 2007 and 2009, global unemployment rose by around 30 million, over half of which was in advanced economies, including an increase of 7.5 million people in the US.⁵

To prevent an even bigger crisis, governments were forced to put unprecedented sums of taxpayers’ money into bailing out the banks whose lending practices had precipitated the crisis. In the US the Federal Reserve had at its peak $1.2 trillion of emergency loans outstanding to thirty banks and other companies. In the UK, the government’s exposure for support provided to the banks in the form of cash and guarantees peaked at £1.162 trillion.⁶ At the same time governments undertook major stimulus measures to try to sustain demand as private spending and investment collapsed. The huge drop in output and the rise in unemployment led to large increases in public deficits as tax revenues fell and the ‘automatic stabilisers’ of welfare payments and other public spending took effect. In 2009–2010 these deficits reached as much as 32.3 per cent in Ireland, 15.2 per cent of GDP in Greece, 12.7 per cent in the US, 10.8 per cent in the UK, 8.8 per cent in Japan and 7.2 per cent in France.⁷

The financial crash exposed fundamental weaknesses in the functioning and regulation of the global financial system. As former Chairman of the Federal Reserve Alan Greenspan grudgingly acknowledged in his testimony to Congress, there had been a ‘flaw’ in the theory underpinning the Western world’s approach to financial regulation. The presumption that ‘the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms’ had proved incorrect.⁸ Contrary to the claims of the ‘efficient markets hypothesis’ which underpinned that assumption, financial markets had systematically mispriced assets and risks, with catastrophic results.⁹

The financial crash of 2008 was the most severe since that of 1929. But as Carmen Reinhart and Kenneth Rogoff have pointed out, since most countries undertook financial liberalisation in the 1970s and 1980s, there has been a marked increase in the frequency of banking crises (see Figure 1).¹⁰ Globally, in the period 1970 to 2007, the International Monetary Fund has recorded 124 systemic bank crises, 208 currency crises and 63 sovereign debt crises.¹¹ For modern capitalism instability has become, not the exception, but a seemingly structural feature.

Unsurprisingly, policy-makers have focused since the crash on improving the regulation of banks and seeking to increase the overall stability of the financial system.¹² But important though this is, it does not address the more fundamental failure of modern capitalist economies to generate enough public and private investment in the real economy to fuel growth and a sustained level of demand.

The financial crisis exposed the uncomfortable truth that much of the apparently benign growth which had occurred in the previous decade did not in fact represent a sustainable expansion of productive capacity and national income. Rather, it reflected an unprecedented increase in household and corporate debt (see Figure 2). Low interest rates and lax lending practices, particularly for land and property, had fuelled an asset price bubble which would inevitably burst. In this sense the pre-crisis growth of output can be judged only alongside its post-crisis collapse.

Figure 1: Percentage of countries exper...

Table of contents

• Cover
• Table of Contents
• Title
• Copyright
• Dedication
• Acknowledgements
• Notes on Contributors
• 1. Rethinking Capitalism: An Introduction
• 2. The Failure of Austerity: Rethinking Fiscal Policy
• 3. Understanding Money and Macroeconomic Policy
• 4. The Costs of Short-termism
• 5. Innovative Enterprise and the Theory of the Firm
• 6. Innovation, the State and Patient Capital
• 7. Investment-led Growth: A Solution to the European Crisis
• 8. Inequality and Economic Growth
• 9. The Paradoxes of Privatisation and Public Service Outsourcing
• 10. Decarbonisation: Innovation and the Economics of Climate Change
• 11. Capitalism, Technology and a Green Global Golden Age: The Role of History in Helping to Shape the Future
• Index
• End User License Agreement