Crack in the consensus, Tim Hazledine

The Democracy Sham: How Globalisation Devalues Your Vote
Bryan Gould
Craig Potton Publishing, $29.99,
ISBN 1877333506

“Nobody told us we could do that!” So said the Fabian Sidney Webb in 1931 when the new National government of which he was a part confounded Bank of England orthodoxy and took Britain off the Gold Standard. Free from the burden of an over-valued currency, the economy began its recovery from depression that, as Bryan Gould tells us in his excellent new book, provided the industrial strength that enabled Britain “to fight and win” WWII. With a little help from their friends, we could add.

The Sidney Webb story is instructive. It doesn’t just provide a good historical example of TINA (There Is No Alternative) turning out to be a blustering bully – backing down when confronted – but it should warn us about the likely impermanence of all orthodoxies. Gold standard? Wot that? Economics is not physics; it’s more like fashion, with fads that come and go. The current fashion, of course, is for a hard-line monetarism in the cause of globalisation – the doctrine of tough macro-and slack micro-economic policies that has famously been encoded as the “Washington Consensus”. But could a belief in the sanctity of “free” movement of international capital and the impossibility of an ecumenical monetary policy soon become as outdated and unfashionable as the idea that your currency had to be backed by vaults full of gold bullion?

Gould believes that free-market monetarism is basically a political ideology in the service of international capital, and that it can, should and must be exposed as such, and replaced with a renewed social democracy programme. This is big stuff, but Gould is definitely an author to be taken seriously. He is a man of varied and impressive accomplishments – a New Zealand Rhodes Scholar who became a British diplomat and then Labour Member of Parliament, reaching the opposition front benches and getting as far as a leadership challenge in 1992, when it took the late lamented John Smith to beat him. Two years later he quit the shadow cabinet in a dispute over Europe, and returned to New Zealand to be Vice Chancellor of Waikato University, a job from which he retired in 2004, presumably to write this book.

This is his thesis. The “central element” of the global economy is the freedom conferred on international capital to roam the world without control or regulation. A big ancillary role is played by monetarism, being the doctrine that low inflation is the only macroeconomic policy goal that matters, because international capital doesn’t like the uncertainty that goes with differing and unstable price regimes across its territories. So, inflationary pressures must be contained by the only instrument now made available to the central banks – raising interest rates – even if, as in New Zealand in 2005, high interest rates are, as Gould puts it, “literally counter-productive” in the harm they do to the local economy, both directly by making investment more expensive, and indirectly by propping up the exchange rate at a level harmful to exporters.

And to whom the benefit? Well, it is those multinational corporations and financial institutions, and the politicians they support. It certainly is not the mass of the people. Overall economic performance in the monetarist era – ie since 1980 – has been poorer than during the Keynesian golden age of postwar economic growth. And the most striking feature of post-1980 economic performance is not the overall slower growth  (it was actually the postwar quarter-century that was unusually high-growth, from an historical perspective), but the brutal hollowing out of the income distribution. The gap between richest and the rest has increased in just about all the developed economies, and especially in those where the monetarist program was taken furthest.

The economies which have been particularly hard hit by monetarism and  free market “reform” programmes – in Latin America, Eastern Europe, and, of course, New Zealand – have performed particularly badly, and the success stories – China, East Asia, now India – have deliberately adopted or retained many ideologically impure interventionist institutions and policies. Indeed, the dogmas of unregulated financial markets and “stable” prices have actually resulted in dangerous instabilities, most destructively manifested in the 1997 Asian crisis, when the speculative hot- money investments collapsed contagiously, just as Keynes would have predicted.

The few countries that were bold enough to impose controls to limit the flight of foreign funds – Malaysia and Chile – suffered less than the others, despite the outrage their actions provoked in Washington and Wall Street, and therein perhaps lies the key to a new policy approach. Gould wants (as do many others) democratically elected governments to have the guts and the gall to take charge of their national economies again, releasing monetary policy from its self-imposed straitjacket of inflation-obsessed “independence”, being able to adjust their exchange rates to help maintain full employment, and being willing to regulate flows of international capital, in particular with a “Tobin Tax” on transactions which would just about wipe out the incredibly huge international flows of short-term or hot money, while not discouraging productive long-term investments. And this is not isolationism: there should be a new Bretton Woods agreement between countries, setting out the treaties and protocols of a new international regulatory order.

Is this programme feasible? As an economist, I have little doubt that it would work. However much they whine and lobby, modern multinational corporations are actually very good at making the best of situations (as they do, for example, in the still very difficult regulatory environment of China). They would adapt, fine. But is it desirable? Of course monetarists don’t think so, but now, with books like this one, and, of course, the lengthening trail of evidence in support, the Washington Consensus is really starting to crack. It seems that there is indeed an alternative.

The Democracy Sham singles out for special attention the two economies Gould knows best – Britain and New Zealand. To deliver the impact it deserves, the book needs to be read in at least both these countries; preferably, of course, more widely. At time of writing, Amazon.co.uk does not list this book, although it does present an impressive array of other works written or co-written by Gould, including a 1995 memoir, Goodbye To All That – “Be the first person to review this item” offers Amazon – and, to my surprise, a book on economic policy apparently co-edited with my PhD thesis supervisor, the University of Warwick economist Keith Cowling.

The new book is well written and not too long. But it is very dry (in the literary not political sense, of course), with no jokes or even personal anecdotes. Perhaps these were all used up in the memoir, and of course Gould has not actually held the reins of political power, but even so this total self-abnegation of the author is a bit surprising, and quite unusual in the How-to-Save-the-World genre of literature. It certainly contrasts with the almost comical self-importance of some of the other recent writers on globalisation – Stiglitz, Sachs, Soros, Friedman, John Gray, Will Hutton – whose books tend to be peppered with passages like: “I immediately demanded a private audience with the President. He listened to me attentively.”

Gould briefly lists some of these writers (not Sachs and Thomas Friedman), each of whose work is “of great value” in the evaluation of the merits and demerits of globalisation, but each being “only a part of that overall picture”. I am sure the author does not intend the inference that his book does paint the whole picture – it doesn’t – but we can be grateful to him for a lucid and compelling deconstruction of the, by now, somewhat shaky apparatus of monetarism and the neo-liberal ideology it underpins, along with proposals for capital controls and truly independent national economic policies that deserve to be taken seriously by economists and politicians alike.

 

Tim Hazledine is Professor of Economics at the University of Auckland.

 

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