It is no longer sufficient to have a public discussion about the banking system that neglects the economy as a whole, writes Jack Copley.
It is no longer sufficient to have a public discussion about the banking system that neglects the economy as a whole, writes Jack Copley
2014 has seen a range of commentators proclaim that Britain’s economy is on the path to healthy growth. The OECD estimated that this year we will outpace our European neighbours Germany, France and Italy. The IMF has made similarly positive predictions.
With business investment and consequent growth taking place at the most sustained pace since 2007, we may finally be making our way back to pre-crisis levels of dynamism.
But just how dynamic was the economy before the financial crisis? Investment as a share of GDP had been tumbling downward since the early 1970s; GDP growth fell below zero in each major recession since 1970, which never happened in the preceding 20 ‘golden’ years; and the mean unemployment rate was higher during the 2000-2007 boom than in the ‘dark days’ of the 1970s.
This picture is very similar across many of the advanced economies. In other words, there was something very wrong with the underlying global economy in the years leading up to the 2008 crash.
Recently, this has been acknowledged by remarkably centrist economists. In November last year, former US treasury secretary Larry Summers told the IMF that Western economies may have been suffering prolonged weak growth or ‘secular stagnation’ since the early 2000s.
Such weak growth in real production has provoked governments to slash interest rates in an attempt to encourage growth – the unintended consequence of this being a great increase in debt and an influx of money into financial speculation. High-risk, high-reward bubbles have given advanced economies the illusion of health. Poor economic performance fueled financial expansion, not vice versa.
The Financial Times’ Martin Wolff, former US government economist Jared Bernstein and Nobel Prize winners Paul Krugman and Edmund Phelps have all lent support to this view. Krugman went further than Summers, suggesting that this thesis has “arguably been true, although perhaps with increasing severity, since the 1980s”.
Phelps went further still: “It’s surprising when people suddenly are talking about stagnation when we’ve been in stagnation since 1972”.
Discussing the problems of our current financial system without talking about these troubles in the underlying economy can lead to very unsatisfactory explanations for the 2008 crisis. We should all be familiar with them by now: the bankers were too greedy; the financial culture too hedonistic; the regulations too lax.
Of course we shouldn’t exclude these factors, but a comprehensive explanation for the bloated state of finance today must begin with an understanding of what drives capitalist economies in the first place.
An Angry Person’s Guide to Finance starts at exactly this point. The engine of capitalism is profit. It is the sole motive of investment and a necessity for any business.
However, there is no guarantee that profitability across the whole economy will rise or even remain stable over long periods – a fact recognised by classical economists from Adam Smith to Ricardo to Marx.
In fact, profitability has been stagnating and even falling on average since the middle of the 20th century (various data is presented here). It is for this reason that we have seen a slowdown in investment, growth and employment across the advanced capitalist world. This is also the key to understanding why money has been increasingly channeled into financial ventures.
This pamphlet traces, in layperson’s terms, exactly how weak profits in the production of goods and services has led to a transformation in the workings of global banking through the processes of disintermediation, securitisation and the expansion of derivatives trading.
It then shows how headline-grabbing things like credit rating agencies and bank bailouts are linked to these important processes.
Finally, this pamphlet discusses the meager state of financial reforms and raises questions about the possibility of any real, lasting regulation of a capitalist financial system.
It is no longer sufficient to have a public discussion about the banking system that neglects the economy as a whole: finance and production. It is also no longer reconcilable with democratic principles to leave so many people in the dark about these issues by masking them in jargon.
An Angry Person’s Guide to Finance endeavors to tackle both of these problems – something that must be done if we are to avoid bringing the same man-made disasters down upon our heads time and time again.
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3 Responses to “It’s not enough to talk only about banking. We need to talk about the entire economy”
McCurry
“GDP growth fell below zero in each major recession since 1970, which never happened in the preceding 20 ‘golden’ year”.
How does this make sense? If its a recession, GDP would fall.
treborc1
I suppose it’s how damaging the recession has been in the 1960’s they tend to be blips, in the 1970’s they started to get serious and from then on they were major the last one was a depression not a recession.
Jack Copley
Check out the graph below. Britain’s GDP growth never fell below zero between WWII and the early 1970s, despite there being a number of recessions in that period. Since 1973, Britain’s GDP has fallen below zero in each major recession.
This would suggest that recessions do not necessitate an actual contraction in GDP (GDP growth slowdowns, yes) – unless you believe there were no recessions between 1945-1973? Instead, it seems that weaker economies (like Britain’s since the 1970s) are more likely to experience this negative GDP growth in recessions.