#48. A world without trousers?

Considered logically, a capitalist economy which offers zero returns on capital is a contradiction in terms. Businesses add value when – and only when – returns on investment exceed the cost of capital. Reducing interest rates to zero makes a nonsense of any such rational equation.

Pursuing this thought just a little further suggests that reducing interest rates to zero – let alone turning them negative – amounts to the abdication of the capitalist system. Capital is consumption foregone or, rather, is consumption today surrendered, in return for enhanced consumption later. To render saving pointless is to slam the gates on capital formation. How on earth have we reached a situation where returns on debt capital have disappeared, and even the risk-premium return on equity has become derisory? Is the age of investment over? If so, can capitalism still be said to exist?

Of course, the official view would be that the Age of ZIRP (zero interest rate policy) is a temporary intermission, and normal service will in due course be restored. Perhaps, but this has already become rather a long intermission. The economy will, we are assured, one day become sufficiently prosperous to service its own debts, and thus restore incentives for saving and investment – but for how much longer can a supposedly capitalist system continue in the absence of returns on capital?

If, like me, you believe that the economy is fundamentally a surplus energy equation, and that an age of cheap energy and easy growth is drawing to a close, it will seem perfectly logical that we are on the cusp of profound change, not just in economic affairs but in society and politics too – after all, economic transformation almost always revolutionises society as well.

Even if, on the other hand, you are a “cornucopian” – a believer in perpetual abundance – I think you would have to accept that something profound and disturbing is happening, not least because debt continues to grow much more rapidly than economic output.

However you look at it, growth has become hard to find, and there is something distinctly unorthodox about an economy in which interest rates have been locked at close to zero for a very extended period, with still, it seems, no end in sight. After all, interest is supposed to incentivise saving and the formation of capital, as well as acting as a disincentive to excessive borrowing, so it is hard to see how a debt-based economic system can be sustainable in a zero-interest environment.

This has set me wondering about the viability of an economic model whose very foundation has become consumption funded by borrowing, yet which cannot afford to pay lenders any rate of return at all.

As I’m sure you know, the Islamic faith imposes an outright prohibition on lending for interest, which is known as “usury”. You might not know, however, that the prohibition on usury is just as strong in Christianity as it is in Islam. Jesus was not prone to taking violent action, but even He overturned the tables of the money-lenders in the Temple.

For much of recorded history, usury simply wasn’t allowed. Indeed, in England, until the time of Henry VIII, usury was punishable by death. Henry may have removed the death penalty – except where interest exceeded 10% per annum – but it remained impossible to enforce debt obligations in law. If you lent money to someone, and he refused to repay it, that was your problem, and there could be no recourse to the courts.

Though this situation changed long ago, today’s “anything goes” attitude to debt is a comparatively recent innovation. Credit controls were in widespread use until the 1980s, whilst the ability to enforce international debt obligations is a post-1945 phenomenon.

One problem with debt, you see, is that it hands to the lender power over the borrower. Should international institutions really be allowed to force third world borrowers to divert resources from education and health, simply in order to keep paying interest to affluent Western creditors? Should the need to service debts be allowed to transform a country’s agriculture from the delivery of food to the production of exportable cash crops, again just to please foreign lenders? More fundamentally, should the owners of capital be given a right to levy tribute on the poor?

In a world in which indebtedness has become the norm, these may seem strange questions, but I believe that these very questions are likely to be posed with ever greater urgency as the next economic chapter opens. As recently as the 1970s, the debtors tended to be the poor countries of the global South, whilst the prosperous Western economies were the creditors. Back in 1945, the United States was the world’s biggest creditor, and most European nations were big creditors too.

All of that has changed, basically on the back of two fundamental shifts in the global economy. For a start, the West became far more relaxed about debt, and deregulated lending whilst also stripping away capital controls.

This was compounded by globalisation, which I’m not alone in regarding as a gigantic heist. The logic of globalisation was and is that, whilst the West would offshore production to the cheapest locations, it would sustain (and indeed increase) its propensity to consume. As high-skilled, well-paid jobs disappeared, and were replaced by lower-paid service jobs, access to borrowing was made easy, simply because consumption could not be sustained in any other way.

If you have read Life After Growth, you’ll know that I devoted a whole chapter to the globalisation folly, showing how, in the United States, output saleable on global markets has been displaced by output that Americans can sell only to other Americans, and how this process has paralleled an explosion in levels of indebtedness.

By the early years of this century, borrowing had become the norm, not just for third world governments but for the majority of Western households as well. Two vast and hugely profitable networks have been created to promote the logic of borrowed consumption – global finance is one of these, of course, and the advertising industry, in its role as propagandist-in-chief for consumerism, is the other.

I doubt if I’m alone in recognising lending and advertising as the principal tools of the corporatist system, a system whose sheer resources enable it to bend governments to its will. This cannot, realistically, be changed politically, certainly unless we can block all of the “revolving doors” between government and big business. The likelihood of political activity undermining the corporatist behemoth is pretty remote, since the corporatists hold almost all of the aces.

Instead, it seems far likelier that the corporatist edifice will be brought down by its own internal contradictions. Thus seen, the current state of the global economy is highly instructive. The combination of consumerism and easy borrowing has mired the world in debts of a scale that, in the absence of super-robust growth, simply cannot be serviced (let alone repaid). The only feasible response to this was – and has been – ZIRP, but even this has failed to revive growth to anywhere near the levels that the corporatist-consumerist system requires. Latterly, we have seen a global recourse to “monetary activism” as a desperate – and final? – attempt to keep the system from toppling over.

I’m not saying we haven’t been here before, because I think we have – or, at least, France has. By 1789, the French state was bankrupt, government was hopelessly corrupt, rentiers ruled the roost and the advertisers’ motto seems to have been “let them eat brioche”. Is there something increasing familiar about this?

The revolutionaries were dismissed by the defenders of the old order as “sans-culottes”, which loosely translates as “people too poor to own trousers”.

If belts have to be tightened any further, we may need to remember that it was the trouser-less who triumphed in the end.

#47. Britain – the dangerous democratic deficit

You really, really couldn’t make it up. Just months ago, the Scottish National Party (SNP) was urging Scots to leave the United Kingdom. By May, the SNP could be running the whole thing.

According to seemingly well-informed observers, the movers-and-shakers in Britain’s establishment parties may even be giving serious consideration to something that hitherto has been unthinkable – a “grand alliance” between Labour and the Conservatives, designed to prevent the SNP from becoming the king-makers after May’s election.

The democratic deficit

The basic problem is a simple one. Essentially, Britain’s supposedly “democratic” political system is nothing of the sort. A skewed electoral model entrenches the power of the establishment parties, customarily enabling one or the other to form, on the basis of one-third of the votes cast, an “elected dictatorship” with a stranglehold over legislation as well as the executive. Some parties with big popular support can be left unrepresented, whilst others, with small but concentrated electorates, can garner disproportionate influence.

Two trends have compounded this constitutional weakness. First, most of the checks to power that regulated the system back in the 1950s – including mass party membership, local decision-making, local government, party conferences, the cabinet and the senior civil service – have been neutered by a relentless process of centralisation.

Second, the forces of “corporatism” have staged a coup-by-stealth, taking over almost all of the levers of political and economic power.

Smoked out by Salmond?

The electoral arithmetic shows how easily the king-making role could fall into the hands of Alex Salmond and his colleagues. Based on recent projections, Labour (with 34% of the national vote) is likely to win 301 seats – 25 short of a majority – whilst the Conservatives (32%) may secure 265. The SNP, with a projected 46 MPs, could thus put Labour into government, enabling Scots to determine government policy in a way unprecedented since the accession of James I (of England, VI of Scotland) in 1603.

Both major parties, it is said, fear the price that the SNP might demand for its support. Even if the SNP did not demand a re-run of the independence referendum, it would be certain to insist on the devolution of further powers to Scotland.

If the SNP wanted to do such a deal to put Labour in power, they could be pushing at an open door, since Ed Miliband, like David Cameron, signed up to additional powers for the Scottish Parliament during their parties’ undignified panic in the days before the referendum. Additionally, the SNP might push Labour further to the left than its leaders really want to go.

The tail wagging the dog

We need to step back here and look at what this really says about the British system of government. The very idea that the government of the country could be determined by a party with less than 4% popular support shows just how far from real democracy Britain actually is.

To win 46 Westminster seats – 78% of Scotland’s 59 constituencies – the SNP needs to secure 43% of the Scottish vote. That isn’t even a majority in Scotland – and in Britain as a whole it is just 3.7%. Yet UKIP, at a projected 14% of the national vote, can expect to win just one seat. Even the hapless Liberal Democrats, with a share of the vote projected to slump to less than 8% from 24% in 2010, could expect to hang on to 15 seats, vastly more than UKIP and the Greens (21%, 2 seats) put together.

Might it be time for real democracy?

The simple solution, of course, would be to introduce a fully democratic and proportionate system of government. This need not involve severing the valuable geographical basis of representation, since a system of single transferable votes (STV) would, in each constituency, return the candidate with the largest share of first-, second- and third-preference support.

Yet the very idea of STV is anathema to the two major parties, as well it might be – on this basis, there would have been few if any one-party majorities in Parliament since 1945. Coalitions, then, would have been the norm – and experience elsewhere (most notably in Germany) suggests that this might have been a better way of governing.

After all, the current coalition has performed pretty well in staving off the economic consequences of the last single-party administration, and is also the first government of modern times with majority electoral support (even Labour’s 1945 “landslide” fell just short of 48%).

A system subverted

Of course, the skewed electoral process – well described by one writer as a “system of government by hypocrisy” – isn’t new, and neither is the lamentable lack of a separation between the legislature and the executive.

But recent decades have witnessed the demolition of almost all of the previous checks to “elected dictatorship”. Thanks to party centralisation of policy and of candidate selection, and the stripping of decision-making powers from conferences, the multi-million membership parties of the 1950s are long gone, as is much of the autonomy of local government. In an era of spin machines and centralised “sofa government”, even the cabinet has lost most of its ability to restrain the leadership, whilst senior civil servants have been sidelined by the imposition of political “advisers”.

As I have explained before – in a mini-series beginning herethe real battleground in British politics isn’t “right” versus “left”, but “corporatist” versus “individualist”. In parallel with the relentless centralisation of power, the corporatists – in a broad sense which is by no means limited to private enterprise – have accomplished a stealthy coup, handing wealth, power and virtual immunity from consequences to the “Directorate”, that group which controls the big private- and public-sector power blocs.

This explains why no senior person ever seems to be held to account for banking, corporate or public service disasters. It also explains why the innocuous label “miss-selling” is applied to corporate actions which, if carried out by a small business, would be treated much more seriously.

Seen in evolutionary terms, then, what has happened is that a quasi-representative system, shorn of its checks and balances, has concentrated power whilst taking away many of the liberties of the individual, a process accompanied by increased surveillance and restrictions on the right of free expression.

If it were not so serious, there would be a delicious irony in the possibility of the system reaching a logical conclusion where a party with less than 4% of the popular vote dictates government policy and, quite conceivably, furthers the break-up of the United Kingdom.

The dangers of the democratic deficit

There are two main consequences which may follow from this impasse.

First, government may be rendered incapable of dealing with the most pressing problems facing the country.

The first of these problems is dealing with an economy which remains addicted to spending more than it earns, and depends on overseas borrowing, and the sale of a dwindling net asset base, to plug a 6% hole in its GDP. Obviously, this habit of living on tick is time-limited by the deterioration of Britain’s net international investment position (NIIP), which now stands at –26% of GDP and continues to deteriorate rapidly.

The second problem is a grave miss-match between the public services that people expect and the limited ability of the economy to pay for them.

The third imperative is tackling a dangerous run-down in defence, a process whose consequences are worse even than purely numerical measures may suggest. The final, related challenge is the threat posed by Islamic fundamentalism and the ambitions of a newly re-assertive Russia.

No safety-valve

If policy challenges are one consequence of the breakdown of the system, the other is the gap between governing and governed.

A truly representative democracy offers a safety-valve for public discontent, which is why Syriza was victorious in Greece, and why both Podemos in Spain and the FN in France are making major political progress. If Syriza fails, Greek voters really will have no-one (other than foreign lenders) to blame but themselves. No such logic operates in Britain.

As outlined in my final article on corporatism, a charter movement may be one way to restore accountability. A second would be for the incumbent parties to opt for a proportionate system of representation, though I won’t be holding my breath on that one.

If neither of these things happens, then the prospects – in politics, economics and defence – do not look good.