Make finance the servant, not the master

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By CraigNewby

In her first big party conference speech, Britain’s new prime minister rode the wave of populist revolt that swept Britain before 23 June, 2016. “This is our generation’s moment” she said: “To write a new future upon the page. To bring power home and make decisions…here in Britain. To take back control and shape our future…here in Britain.”

But the prime minister only went halfway to meeting the concerns of more than seventeen million British ‘leavers’. For May’s vision is not just to “bring power home and make decisions…..here in Britain”. It is also “of a confident global Britain that doesn’t turn its back on globalisation but ensures the benefits are shared by all. And that Britain” she said emphatically “the Britain that we build after Brexit – is going to be a Global Britain.” (My emphases).

The prime minister’s approach builds on Tony Blair’s view that there was no need to stop and debate globalisation: “you might as well debate whether autumn should follow summer” he said to the Labour Party Conference in 2005. Or Gordon Brown’s recent Guardian plea that “we need a national conversation, and a national commission, on making globalisation work for Britain.”

Like her Labour predecessors, the new prime minister clearly signalled that she will do nothing to tame the global financial tail that wags the British economic bulldog. While she was willing to acknowledge that ‘global citizens’ are ‘citizens of nowhere’, her government will not address the much deeper economic and political malaise facing Britain – namely, financial globalisation.

Financial globalisation is the system whereby ‘citizens of nowhere’ – active in global capital markets – determine the life chances and living standards of citizens around the world. In other words, the system which permits financiers to use capital mobility to enjoy absolute advantages over all other sectors of a domestic economy, and which thereby elevates financiers to the position of masters not only of economies like Britain’s but also of the global economy. Capital enjoys this power because unlike trade or labour, flows of capital face very few barriers to movement, and can therefore quickly migrate to where returns or capital gains are highest. By contrast, flows of trade and labour face geographic, political, regulatory, physical and even emotional barriers to movement. It is this that makes capital dominant over trade and labour in the global economy, and increasingly so in a domestic economy like Britain’s.

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And it is this dominance of finance over the real economy that has persuaded many industrial capitalists that if ‘you can’t fight ‘em, join em’. The result is that the economy has become increasingly financialised; Capitalists have tried to find ways of mimicking the finance sector’s ability to make gains effortlessly from debt and speculation. They make large amounts of their profits by accumulating unearned income from ‘rent’ on pre-existing assets, including land, houses, commercial buildings, vehicles, databases, brands, works of art, yachts etc. Those that do not own pre-existing assets that can be rented out are obliged to earn income – invariably from their labour.

We should be mindful, as ecological economist Herman Daly once remarked, that policy-making in taxation, greenhouse gas emissions, pensions, criminal justice, welfare, etc, requires boundaries. British pensions and benefits are not payable to e.g. Brazilian citizens. Criminals could render the justice system meaningless if there were no barriers set by borders. HMRC cannot tax South African citizens resident in South Africa. However, while policy requires boundaries, global finance abhors boundaries.

We can be almost certain that Mrs May’s finance-friendly government will not bring offshore capital back onshore – to operate within the boundaries of British government law and policy-making. There will be no substantial re-structuring of Britain’s finance sector.  On the contrary, it is very likely that British taxpayers will be expected to continue to finance and subsidise the footloose activities of these ‘citizens of nowhere’, and to bail out the City of London’s institutions in the event of failure. Contrary to the fine words in Mrs May’s conference speech, there is even talk of taxpayers footing the bill for the City of London to continue operating within the EU, when other traders will be excluded from access to the Single Market. If the British government persists in this deference to the City, both the government and voters can look forward to a continuing decline in real living standards while global elites deploy mobile capital, new technology and algorithms to gouge rent from every conceivable British asset – and from British workers in a range of sectors, and in their homes.  The income from these ‘rents’ will not be reinvested in the British economy, but will be channeled to wherever tax and regulation are lowest, and wherever in the world speculative returns are highest.

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While the recent fall in sterling may be welcome relief for exporters, its rapid decline is nothing less than a defiant reaction by financiers in global capital markets to the Brexit vote. It is but the latest manifestation of the power of these financiers to dictate political preferences and to act, in effect, as masters not just of the economy, but of British democracy.

Financial globalisation has weakened and unbalanced the British economy, and that in my view, explains more fully the Brexit vote. For it is my contention that financial globalisation has led to the decline of British industry, the decline in investment, the rise in unemployment or insecure employment, and to the fall in labour’s share of the economy. Above all, it is financial globalisation that has caused regular, overlapping and increasingly catastrophic crises.

Key decisions by Britain’s public authorities to re-regulate (not de-regulate) the British economy in the 1970s had the express purpose of advantaging the City of London and disadvantaging industry – especially the export sector, as Davies and Walsh explain in their 2014 paper ‘The role of the state in the financialisation of the economy’.

One of the most significant of the changes was the removal of controls over capital flows in and out of the country. A second change was the transformation of banking to allow bankers to lend, not on the basis of the value or viability of a project, but instead on the basis of whoever was willing to pay the highest price (or rate of interest) on a loan. As a result, borrowing for investment became prohibitively expensive, afforded only by the few.

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In addition as Davies and Walsh demonstrate, other changes were made to advantage finance:

“Stamp duty on the purchase of shares and bonds was cut in stages from 2 to 0.5 per cent. Dividend payment controls were abolished in 1982. In contrast, although corporation tax was cut for all businesses, this was paid for specifically by removing capital investment allowances for machinery and plants – measures which primarily hit manufacturing. There were steady value-added tax (VAT) rates rises on goods and services, but financial and insurance services were made VAT-exempt. This doubly disadvantaged industry next to finance as the former made much greater use of real world goods and services than the latter.”

As its architects intended, these changes to the financial system took place without much public or academic debate. Partly as a result of this stealth, the process of financial globalisation was not, and is still not well understood by either economists, or politicians – a fact that reflects badly on the mainstream economics profession. Aeronautical engineers have an understanding of the climate and engineering conditions that affect the safety of passengers. By contrast, economists, especially microeconomists, do not share the same concern for the safety and wellbeing of citizens operating within market economies. Whereas no aeronautical engineer would abandon passengers to the vagaries of the weather or to untested technology, economists breezily delegate management of the financial system and of the British economy to ‘the invisible hand’.