Common Good Economics, Seminar 1: Arguments and Assumptions
Common Good Economics: Arguments and Assumptions
The Interregnum: What’s Going On?
Antonio Gramsci, the Italian Communist theorist in the early part of the Twentieth Century, described an interregnum as a time when ‘the old is dead but the new cannot be born, when there is fraternisation of opposites and all manner of morbid symptoms pertain.’ This works as a description of our polity since the Brexit referendum, at many levels; political, cultural and economic. That is the focus of this seminar series, to offer an economic way out of the interregnum through the development of an economic model that offers an alternative to financial globalisation and central state direction.
When a theory can neither explain nor predict reality it is in a lot of trouble. When that theory remains dominant in the organisation of the economy and frames the limits of politics, we are all in trouble. And we are.
Of the 45,000 academic economists only three predicted the financial crash of 2008. And its explanatory power was as weak as its predictive prowess. They could not explain how free markets had led to oligopoly. 952 billion pounds were transferred in the bailout. As Mervyn King, the then Governor of the Bank of England said, ‘never in human history have so few owed so much to so many’.
One of the arguments developed here is that capital centralises and concentrates leading to geographic as well as class polarisation as the regions languish through a lack of financial nutrition. None of the building societies privatised in the 1980’s and 90’s exists as a local autonomous institution.
Polarisation characterises our economy and now our society.
The price of a successful change in theory is a constructive alternative and there is none. Hence the deadly destructive dominance of a failed model. Neither Keynes nor Marx offer a way out of the sullen stasis not because they differ but because they share so much with the dominant liberal model, a managerial and scientific utilitarianism that continues to treat human beings and nature as commodities.
There are distinctive failings in both. Marxism found no alternative to a price system in real commodities in determining what people actually wanted. Keynesianism found no way of explaining or resolving the co-incidence of high inflation and high unemployment.
In mainstream economics the argument between variants of neo-classical and Keynesian approaches means that place, work, institutions, tradition, virtue, corporations, vocation and ethos remain invisible. Both assume that there are only two principle actors, the individual or the state and that they will respond to the appropriate incentive structure.
The problem is that neither economic liberalism nor Keynesianism can give a primary economic value to intermediate institutions, whether they be the corporate governance of a firm, vocational colleges, regional banks or supporter owned football clubs. They can only conceptualise the state or the market and all forms of particular association as at best ‘cultural’ or at worst ‘obstructive’. Any resistance to the domination of capital and financialization is invariably described as populism, implying a lack of reason and knowledge.
In this first seminar we thought it best to present the fundamental assumptions of common good economics and how it differs from the prevailing model of rational behaviour.
Changing the Consensus
A political consensus defines what people can achieve through democratic co-operation and what has to be left to the co-ordination of the price system. Redistribution, regulation, tax revenue and interest rates have been considered to be appropriate central State functions within the economy. A market system based on fluctuating prices, in parallel, has been considered the most efficient means of signifying what people want and is the appropriate way to organise the economy. The state was not considered a rational agent within the economy and its function was regulative, administrative or security based.
This missed two fundamental truths. The first is that the economy is an eternal form of all societies as the common activity through which the satisfaction of material needs and wants can be achieved by the transformation of nature into goods through the exertions of labour and the application of skill. Labour is a necessity in both of its meanings. It is the means through which society reproduces itself through biological and cultural reproduction. Each person is constitutively dependent upon a physical environment and other people for the satisfaction of needs. This in turn requires institutions that preserve and renew knowledge as a means of reproducing the necessities of life. This intensifies in a complex society. Work has a necessity and a history that is not grasped by understanding labour as an exclusively utility maximising activity carried entirely by the individual agent. This is why human capital, is an important, but limited concept in that it assumes that each person carries it individually without adequate regard for institutional inheritance that makes skilful labour possible.
This is linked to a deeper fiction, carried by economic theory, which is that human beings and nature are essentially commodities, to be exploited efficiently by competitive markets. This is because of its tendency to turn human beings and nature into commodities when they were not produced for sale in the market and are irreplaceable. Factor markets are just another description of the substance of society, human beings and nature.
Commodities are here defined as objects produced for sale on the open market.
Commodification is defined as the transformation of something that was not produced for sale in the market into something available only through market exchange, i.e. for a fluctuating price.
The problem with the breakdown of political economy into a system of maximisation of returns within the economy and then a redistributory and regulatory state as a means of mitigating the hazards and providing collective necessities in the form of money payments and administrative service, is that it does not engage with the problem at source. It enforces the fiction and through that generates a more powerful need for a state to protect the basic conditions of life. That is the crux of the interregnum we are living through and what gives the state-market duality its dynamics. The doom loop indicates that the nationalisation of risk and the privatisation of gain are unsustainable principles of economic governance. One interpretation of the Brexit vote is that people did not accept an exclusively fungible notion of labour.
It is worth mentioning that capital, in its essential form, is promiscuous. It seeks the highest rate of return at the fastest possible speed. Once the returns begin to slow it seeks new partners that can deliver higher returns, quicker. When human beings are the commodities, this can disrupt relationships and offend against peoples sense of the sacred. It also exploits and degrades nature in ways that deplete a necessary inheritance for future generations.
Real and fictitious commodities: revisiting the socialist calculation debate.
Common Good Economics assumes that there is a distinction between real and fictitious commodities. This is expressed in the role of the price system in allocating them.
The roots of this are to be found in the socialist calculation debate in the 1920s in Vienna. On one side there was a group of socialist thinkers who thought it was possible to calculate future needs and demands without the duplication of unnecessary competition and waste. The idea was that you could build a big enough computer, input all the relevant data, and plan rationally for future needs and wants. This was the basis of a planned socialist economic system. On the other side was a group of economists around Ludwig Von Mises, including Hayek, who argued such a thing was impossible. This was because the decentralized process of the price system relied on a huge amount of information that was not calculable; price setting was a subjective process that gave a signal about what people wanted and this was essentially unpredictable and unknowable. This critique of state planning, of socialist calculation, in many ways set the terms of debate for the next 80 years. It is important to grasp the ways in which Hayek was right to appreciate the extent to which he was wrong.
What is at stake is perhaps best understood through an analysis of the difference between Hayek's economic and social theory. In his social theory Hayek proposes three concepts that characterise the emergence of the open society, or what he calls a catalaxy. These are reason, instinct and tradition. It is tradition that mediates between a self-defeating rationality that would lead to the ‘war of all against all’ and a closed community that is generated by instinct. Tradition is the idea he develops to mediate between rationality and instinct and tempers their conflicting and extreme demands. A catalaxy is grounded in certain traditions that preserve ethics, honesty, law abidingness, trust, skill and honesty that are irreducible to either instinct or reason. He considers instinct alone a terrible threat as it is essentially communitarian and atavistic. He considers rationality alone equally threatening as it is instrumentalising and self-defeating. Tradition plays a mediating role between instinct and reason.
In his economic theory, however, there is no mediating principle between the state and the market, there is no account of the institutions that uphold traditions of virtue, of excellence and of trust. We are, of necessity, interested in those institutions that uphold successful markets and the role they play in shaping and forming the factor market of labour. That is why we are interested in both universities and vocational colleges which will be discussed in the following seminars. In those decentralised intermediate institutions that uphold skills, and can translate information into knowledge. They enable people to understand and adapt to change not exclusively as an external force but also as something they can understand and shape.
This is the importance of Karl Polanyi who rejected both statist and market orders and tried to conceptualise the decentralized institutions that could resist commodification while preserving a price system in real commodities. His argument, developed in The Great Transformation, is that the economy requires social institutions that disseminate skills, distribute knowledge and preserve the status of the person as something other than a commodity. Societal institutions of a non-pecuniary form renew the cultural resources, or constituents of society from depletion and exhaustion by defying the logic of commodification and sustain the institutions which educate the person towards a notion of internal goods as well as external value. There is a connection between the ethical character of the person and the incentive structures within which they work.
Due to the fatal dualism of the individual and the collective, there is a forgetting that reciprocity is self-interest, broadly conceived. We have a mutual interest in each of us doing our work honestly which is a matter of reciprocity and not exclusively the result of contract or centralised coercion.
The subordination of reciprocity, give and take, contribution and reward, to those of contract and redistribution, market and state, has attenuated the system of reciprocity, co-ordination and co-operation that operate though decentralised institutions that uphold a good, in terms of the preservation and application of inherited knowledge and provide beneficial constraints on exclusively self-regarding behaviour through institutional enforcement rather than market self-regulation.
If the economy is understood in terms of three forms of activity, a) contract, which involves an immediate exchange of equivalents, b) redistribution, which requires a central state and the movement of things to the centre and then out again, and c) reciprocity, then we can argue that redistribution and contract (state and market) form a necessary part of any society. What is required is the ability to conceive how it meshes with the rebuilding of reciprocity. When we talk about a common good economy we are thinking about a more reciprocal and equal relationship between state, market and society, a balance of power. Society is threatened as much by an over mighty market as it is by a domineering state.
Polanyi’s thesis is that in a market storm society will resist commodification, but due to its disintegration, that takes the form of a statist nationalism. A central part of this work is how to avoid that outcome through the building of those intermediate institutions that preserve a human status for labour and which are embedded in place. The difference to an exclusively human capital approach is that we are conceptualising those institutions as an inheritance, and as a public good. Rebuilding reciprocity is necessary in order to preserve trust and the sacrifice required for complex and extended forms of co-operation within a democratic polity.
In this way there could be benefit in reconceptualising human capital as ‘labour’, environmental capital as ‘nature’ and intellectual capital as ‘knowledge’ and as different forms of an inheritance. In other words, when thinking of productivity and human capital we need more attention to be placed on the institutions and not exclusively on the individual.
In economic terms we need to look at why Germany exports twice as much to Britain as it imports, with a trade surplus of 46 billion Euros, according to the German Federal Statistical Office. One might say that the tragedy of contemporary European politics is that Germany remains misunderstood as exclusively fiscally conservative when this is only one aspect of its economic system. It is also characterized by a vocational economy in which labour market entry is regulated by self-organised institutions which preserve and renew the traditions of a particular craft, by regional banks that are constrained to lend within their region, by the significant representation of the workforce in the corporate governance of firms and by the co-determination of pensions by capital and labour. In other words a competitive economy that is characterised by the plural governance of non-pecuniary institutions that uphold and embody a virtue that is irreducible to state or market definitions.
The paradox of contemporary European politics is that the country with the greatest degree of labour representation in its corporate structure, the most intense system of vocational interference in labour market participation, the greatest degree of constraint on finance capital in its banking system generates the greatest value and is the most competitive within the international economy. In other words, the country with the least commodified markets in labour and money.
The problem, as mentioned previously, is that economic liberalism and Keynesianism can only conceptualise the state or the market, and all forms of particular association as at best ‘cultural’ or at worst ‘obstructive’. That was the limit of the Third Way which we are trying to supplant.
They can give no conceptual status to place, to the specificity of place and the necessity of institutions in generating virtue and value within it.
By placing human beings, character and institutional ethos back into the analysis we can conceptualise how important autonomous institutions such as universities, professional associations, vocational colleges, unions and other aspects of the body politic are in disrupting the joint sovereignty of exchange and redistribution. Redistribution alone, as a form of centralised state administration, denies the reciprocal dependencies and decentralised diversity that characterise complex systems of economic co-operation. Market exchange, in its turn, necessarily ignores the role of supply-side institutions that regulate the valorised supply of skilled persons required for productive labour. The Common Good requires both constraints on individual interest maximisation and the avoidance of state direction.
In the post-war economy capital has centralised with the same intensity as the state and this has left regions without autonomous financial institutions.
A plausible description of the British economy is that it is Portugal with Singapore in the south. In terms of the body politic, there are regions of the country that are suffering from malnutrition, if nutrition is measured in terms of the inheritance of a civic ecology of assets, capital and local institutions. There needs to be a greater availability of capital within the regions and endowed regional banks.
The UK financial services sector is made up of two distinct systems, a global system centred around the City of London which provides global financial services and a local system providing services to domestic companies and companies.
The global entrepot hub is the principle organising centre for global finance, the domestic and regional financial sector has been in decline for several decades and does a poor job of supporting households and firms.
The rates of return have always been higher in the financial rather than the productive sector.
An oversized financial sector is damaging to growth.
53% of UK bank branches closed between 1989 and 2016 as banks centralised their decision making.
Manufacture is far more complex and demanding than financial services. It involves the material movement of things, complex supply chains, skilled labour and is far more prone to disruption. The rates of return are lower in production than in global investment. This partly explains the extraordinary concentration of capital as was revealed in the crash of 2008.
None of the demutualised Building societies remain as autonomous institutions.
The German system has a well-developed concept of a balance of interests in corporate governance and retained the idea of the corporation as a body, requiring a workforce which has an interest in the well-being of the firm.
This requires the representation of the workforce in corporate governance.
This leads to the idea of beneficial constraints that are negotiated by the component parts of the corporate body.
It retained the idea that value is co-produced by capital and labour embedded in the institutions of society.
It developed a method of aligning interests to reciprocity through the practices of negotiation, the role of institutions and mutual incentives, including the co-governance of pensions.
A productive economy requires the active participation of the workforce.
This indicates the importance of a national system of decentralised institutions which function within the economy to strengthen reciprocity rather than contract or redistribution alone.
Productivity is linked to the skill, character and resilience of the workforce and that this requires a re-evaluation of vocation and the institutions required to reproduce skills.
The ‘knowledge economy’ was based upon a specific kind of knowledge which was general, abstract and transferrable.
State policy in regards to mediating globalisation through a national system was not based on the reproduction of skills but the generalisation of knowledge.
Vocation assumes a tradition of practice inherited from the past and transformed in each generation by changes in knowledge, technology and practice. In that sense, it is not entirely owned by the individual in the form of a career, but is joined by means of an apprenticeship and regulated by institutional association.
This embodies the principle of reciprocity through which mutual benefit is sustained over time through mutual contribution to a common institution that sustains knowledge and status.
Vocational institutions preserve bodies of knowledge and patterns of structured co-operation by adapting to the demands of external change in terms of technology, administrative rules and knowledge by translating those external dangers and possibilities into a communicable language of skills and practices. They facilitate a comprehensible adaptation to a changed environment. Vocational institutions, characterised in this way are, what Aristotle called ‘embodiments of human meaning and purpose’, an active means of integrating new knowledge with existing practice, translating information into knowledge of a specific practical kind.
Vocation is linked to virtue, defined by Alasdair MacIntyre as ‘an acquired human quality the possession and exercise of which tends to enable us to achieve those goods which are internal to practices and the lack of which effectively prevents us from achieving any such goods.’
Through the public recognition of vocational institutions which preserve and teach the practices of specialised disciplines, defined by their own internal goods of quality and expertise, the capacity of the economy to innovate and adapt to changes in its environment is enhanced. They serve as a source of ethical regulation and expertise within the economy, and thus serve as an alternative to an exclusive reliance on external regulation. The paradox is that labour market flexibility is a cause of uncompetitive production. Or, productivity is low because the status of labour is weak.
A good society, defined here as a society capable of producing goods, requires institutions within the economy that preserve the skills and practices required for concerted responses to innovation and uncertainty.
The German economy benefits from a strong artisan sector in which vocational institutions enforce their qualifications and forbid industrial firms entering the artisanal domain. Cities and municipalities actively support this through funding and endowment. Through the preservation of non-contractual organisations that uphold values other than the maximisation of economic advantage, an ethos of production has been preserved which bestowed a considerable competitive advantage in open markets. Free trade did not require a free market in labour.
It is on the basis of existing knowledge that the changes resulting from innovation can be assimilated.
Innovation is the capacity to re-order and connect received ideas in different combinations rather than an exercise in making something out of nothing.
Vocational institutions preserve good practice, or virtue, within the culture of production by upholding the authority of civic institutions and resisting the commodification of the person and of knowledge.
Institutions secure the continuous satisfaction of needs by organising and rendering reliable the human dependency necessary in order to reproduce the conditions of continued life. They have a function of ordering and rendering intelligible the dislocation generated during a period of adaption to the demands of new technologies, administrative techniques and practical rules. They are an active means of assimilation and adaptation, they preserve the patterns of reciprocity that translate external dangers and possibilities into a communicable language of skills and practices.
Virtue and vocation underpin innovation and value. Institutions which have an ethos and tradition facilitate a comprehensible adaptation to a changed environment.
There is a fundamental tension in our economy which could be conceived as a conflict between the forces and relations of knowledge. The forces of knowledge are defined by intellectual copyright, managerial prerogative and knowledge markets. The relations of knowledge are characterised by the pooling and sharing of knowledge within and between firms and the sharing of institutional support, the most important of which are vocational colleges and universities.
If an information regime is imposed that prohibits the provision of public goods and conceives of vocational practice as a constraint on trade, then the productive capacity of the economy to innovate from within is threatened.
The remaining seminars will look at banking, vocational and corporate governance reform based on the assumptions developed here and how they are linked together into an integrated economic system.