As we saw in Chapter 1, the post-war development of core capitalist countries – particularly in Europe – was based on extensive industrial policy. Not only did the state heavily support private firms through financial and investment aid, R&D funds, public procurement, market protection, consortiums, public education strategies, telecommunications, transport and energy networks, etc. National policy tools also included the creation or expansion of a vast array of state-owned firms in strategic industries, key infrastructures and natural monopolies. France was probably the most significant example of this strategy. The centrepiece of France’s post-war reconstruction effort was a massive nationalisation programme, put in place by Charles De Gaulle’s government, which saw the state take ‘control of businesses in energy, transportation, and finance’.1 Paul Cohen, who teaches history at the University of Toronto, notes that in 1946 the French state directly controlled 98 per cent of coal production, 95 per cent of electricity, 58 per cent of the banking sector, 38 per cent of automobile production and 15 per cent of total GDP.2 State-owned firms at the time included EDF (electricity), France Télécom (telecommunications), Renault (auto) and Aérospatiale (aerospace). Moreover, under the direction of Jean Monnet, the first director of the General Commissariat for Planning, the government started ‘draft[ing] five-year plans in order to shape long-term economic development’.3 Cohen concludes that the French experience was, by all measures, ‘a great success’:
Nationalised industries and five-year plans may transgress the treasured tenets of neoliberal orthodoxy, but they didn’t stop France from enjoying three decades of sustained economic growth and prosperity. In the period between 1950 and the first oil shock in 1973, recalled in France today as les trente glorieuses (the ‘thirty glorious years’), its economy grew at the impressive clip of 5 percent a year (while United States growth averaged 3.6 percent), unemployment was virtually unknown (2 percent in France, compared to 4.6 percent in the United States), and French women and men experienced dramatic increases in their standard of living.4
Moreover, the French state ‘used planning as a flexible tool to restructure companies and save jobs, to create new industries from scratch and promote job growth, to soften deindustrialisation’s blow to workers and their communities, and to orient transportation and energy policy onto more sustainable pathways’.5 Then, in the 1980s and 1990s, the economic policy debate in France and elsewhere started being dominated by neoliberal views that argued that industrial policies – and particularly state-owned firms – are inefficient and inappropriate. The argument was (and still is) that markets are able to operate more efficiently both in the short term and in the long term.
As a result, in recent decades state-owned firms have been privatised in most countries, ‘leading to extensive closing down of capacity, foreign takeovers and greater market concentration’ – a process that continues to this day.6 Public assets put up for privatisation around the world included: state banks, publicly owned airlines and airport infrastructure; state prison systems; energy generation, distribution and retailing; public transport systems; public hospitals and healthcare facilities; public employment services; public telecommunications; public water and sewerage utilities; and public postal services, among others. As we saw in Chapter 4, the long-term process of privatisation of the French state’s once-large collection of public assets commenced under Mitterrand – following his government’s ‘turn to austerity’ in 1983 – but reached its pinnacle in the late 1990s under the Socialist-Communist-Green coalition led by Lionel Jospin, which ‘undertook the privatisation of Crédit Lyonnais and other corporations, as well as selling minority stakes in Aérospatiale, Air France, and France Télécom’.7 Cohen notes that ‘these wide-ranging privatisations represent[ed] nothing less than a rejection of the postwar edifice of French capitalism that De Gaulle helped erect’.8 He further notes that ‘[t]he move away from state ownership was not in fact born of a rational economic calculus but rather of specific political choices.’9
Privatisation promised to deliver lower costs and prices, improved services and better working conditions. Moreover, it was argued that privatisation would simply shift workers from the public to the private sector and thus would not lead to an overall loss of jobs. The reality is that some 40 years or so into the privatisation experiment, none of these claims have been realised: on the contrary, there is a litany of evidence to show that the experience of privatisation ‘has been one of poor performance, under-investment, disputes over operational costs and price increases … monitoring difficulties, lack of financial transparency, workforce cuts and poor service quality causing public health risks and creating environmental problems’.10 Especially when it comes to utility companies, the effect of privatisations on the product price has proven to be extremely negative. In the 34 OECD countries, for example, the average price for energy charged by private companies is 23.1 per cent higher than the price charged by public companies.11
Moreover, in many cases the wage losses, redundancies and erosion of labour rights that have resulted from privatisation have further exacerbated the recent economic crisis and led to increased levels of inequality. All in all, the evidence suggests that none of these transfers to private ownership have resulted in improvements to societies’ well-being. Meanwhile, research by the IMF and by European universities shows that there is no evidence that privatised firms are more efficient.12 In fact, in many cases privatised firms rely on higher public subsidies than they needed when they were in public hands. To add insult to injury, despite the rhetoric in favour of private management, many of the firms involved in the acquisition of privatised assets are, in fact, other countries’ state-owned companies: Chinese, German and French state-owned companies, for example, own large stakes in Europe’s formerly public utilities.
Arguments that the public sector could fund enterprises more cheaply (both because it could borrow more cheaply and because it didn’t need to generate profit) were dismissed by proponents of privatisation. The privatisation lobby claimed that the difference in funding costs lay in the fact that the private sector would now explicitly assume the risk of the enterprise – a factor they said was buried in public accounts but was ultimately a liability to the ‘taxpayer’. It was a lie. In many cases, the privatisation failed outright and the asset was returned to public ownership (Swissair, for example) because the state maintained the risk of the activity, despite the claims by proponents of privatisation to the contrary. The indelible fact is that in the case of large-scale national infrastructures and systemically important industries – such as the financial sector – the risk can never be shifted from the public to the private domain. For these, private ownership amounts to little more than a case of privatisation of the profits and socialisation of the losses.
Even more crucially, privatisation and the abandonment of national industrial policies have meant that governments have voluntarily constrained their ability to determine the level and composition of investment, demand and production. This can be considered one of the root causes of the massive (and interrelated) social, economic, political and ecological crises that the world is facing, since it means that crucial decisions about the future of biological life on earth – such as what is produced and consumed and how – are essentially left to the private sector and to the financial markets, which have repeatedly proven themselves unable to determine prices efficiently and allocate resources between the various sectors of the economy, fuelling the cancerous growth of socially and environmentally destructive (but very profitable) industries and practices. Private markets inherently prioritise private profit over societal and environmental well-being. All studies show that solving the ecological crisis requires a radical and profound socio-ecological transformation process. A recent report by the New Economics Foundation notes that:
despite the slowdown of economic activity … the environmental crisis is becoming more severe. The recent human made greenhouse gas emissions are the highest in history, the earth’s temperature is increasing and natural resources are continuously deteriorating. These crises have called into question the sustainability of our societies. They cannot be tackled in isolation, as has mostly been the case so far. Any attempt to deal with the economic crisis by using the traditional growth policies will lead to more pollution and a higher use of natural resources, risking further economic and financial crises. Any attempt to deal with the environmental crisis by ignoring the potential adverse effects on unemployment and inequality will damage our societies and lead to more severe economic and financial crises. And any attempt to regulate the financial sector without transforming the way that it interacts with the ecosystem and the macroeconomy will fail to ensure financial stability in the long run. There is, therefore, a clear need for a new approach that will promote policies capable of dealing with all these crises simultaneously.13
Clearly, we cannot expect markets, with their focus on short-term profits, to lead this transition. This requires a drastic expansion of the state’s role – and an equally drastic downsizing of the private sector’s role – in the investment, production and distribution system. A progressive agenda for the twenty-first century must thus necessarily include a broad renationalisation of key sectors of the economy and a new and updated notion of planning. The case for state ownership is particularly strong in those sectors that are characterised by a so-called natural monopoly. A natural monopoly arises when a certain industry’s infrastructure costs of setup are very high and the resulting market can only support one supplier, which thus gains an overwhelming advantage over potential competitors. Examples of natural monopolies include telecommunications, mass transport, postal services, highways and public utilities such as electricity and water services. These industries often produce essential goods and services that should be available to everyone, irrespective of income, and thus cannot be run according to a strict profit-based logic. Therefore, when transferred to private ownership, they need to be heavily regulated and subsidised to ensure that they deliver socially beneficial outcomes. Moreover, many of these industries create what economists call ‘negative externalities’ – such as pollution – that are much easier to control when they are under public control. In common parlance, negative externalities mean that ‘the market’ has failed; even mainstream economists accept that in these instances government intervention is justified (in the form of regulation, etc.).
The experience of France’s state-owned industries illustrates many of the benefits of renationalisation. Paul Cohen writes that ‘successive governments used their stakes in France’s traditional smokestack industries to guide industrial reorganisations’, shifting from coal-powered electricity generation to nuclear power without loss of employment or regional dislocation.14 Public ownership thus allows the government to shift technologies within the energy sector more easily than if the sector is privately owned and operated. This is particularly relevant for progressive aspirations for a green, sustainable energy sector based on renewables. Public ownership also allows governments to manage the transition from labour-intensive coal- and nuclear-powered electricity generation plants to less labour-intensive renewable energy plants with less cost to workers and their families, given that the public sector can absorb the displaced workers more readily. Cohen compares the gradual and relatively painless shift away from coal in France with ‘Thatcherite Britain’s brutal mine closures and bloody union-police confrontations’.15
Publicly owned firms can also ride out economic cycles more easily than profit-based firms. The subsidies to keep a public operation functioning in bad times are typically lower than those needed to socialise private losses. During the financial crisis, many governments effectively had to nationalise several large banks in order to protect depositors. The fear of collapse would disappear if these were held in public hands – a point we will return to. This raises the question of the rate of return. As a general rule, state-owned firms and particularly those that deliver essential public goods should not be expected to earn commercial returns: a currency-issuing government should not concern itself with the monetary return on its investments – given that it faces no financial constraints – but should rather focus first and foremost on the social return. However, Cohen provides evidence that, even in commercial terms, publicly owned enterprises that produce for a consumer market can be very successful. He cites the example of Renault, fully state-owned up until the 1990s, noting that ‘[s]tate management is no small part of the reason why France today is home to profitable automobile manufacturers whose product lines are focused on small, innovative, fuel-efficient cars’.16 This shows ‘public investment to be an invaluable tool for creating new industries and stimulating growth’.17
In today’s context, renationalisation thus means using the state to promote new environmentally sustainable, knowledge-intensive, high-skill and high-wage economic activities – and more generally to promote the wider socio-ecological transformation of the current system of production and consumption. Specific activities that could be targeted include: (i) the protection of the environment, sustainable transportation, energy efficiency and renewable energy sources; (ii) the production and dissemination of knowledge, applications of ICTs and web-based activities; (iii) health, welfare and caring activities, and much more.
To be clear, we are not trying to paint an idyllic picture of state-owned firms – in France or elsewhere. In Chapter 1, we analysed in detail the many problems that plagued the state-heavy economies of the Fordist-Keynesian era. The growth of heavy industry was encouraged without any real understanding of the long-term consequences for the natural environment. Work was, in many instances, repetitive and mind-numbing, and often conducted in unsafe and harsh conditions. In many cases, state-owned firms were riddled with cronyism and nepotism. Some were utter disasters. But these problems were (are) not exclusive to the public sector. The financial crisis is a testament to the colossal inefficiency of the private sector – and the cost that its failures impose on society and the economy, which surpass by far any cost that may derive from the well-publicised failures of the public sector (corruption, excessive bureaucracy, etc.). The point is that the ownership status of an activity is not the reason for its success or lack thereof. A public enterprise can be as well or as badly managed as a private enterprise, with the crucial difference that the former allows for a degree of democratic control and oversight over key sectors of the economy. This, in itself, justifies reversing the privatisation process of recent decades, particularly where key public utilities are concerned – the appalling track record of privatisation notwithstanding.
Renationalisation and planning could also be used to promote a greater degree of national self-sufficiency and reduce a country’s dependence on imports. Keynes himself famously wrote that the he sympathised ‘with those who would minimise, rather than with those who would maximise, economic entanglement among nations. ... Ideas, knowledge, science, hospitality, travel – these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.’18
However, such a programme must take into account ‘the (merciless) fact that the average product today is much more complicated and diverse in components and origin(s), and is much more knowledge-based’, as Trond Andersen of the Norwegian University of Science and Technology writes.19 In other words, the global economy today is much more ‘entangled’ than it was at Keynes’ time. To overcome this problem, Andersen outlines a series of tasks that a government could undertake:
• Charting the domestic and import share of production of different categories of goods, to establish whether the import content could be reduced.
• Charting where the imports come from, and researching the possibilities for cooperative agreements with well-reputed and global suppliers, so that they could help set up manufacturing plants for domestic manufacture of their products, in exchange for which they could, for instance, receive a licence fee for every unit sold. The agreement could also contain clauses prohibiting export of the same product. Andersen notes that ‘the main point of the idea is import substitution, but not by inventing the wheel anew and forcing an inferior “people’s tractor no. 1” on an unwilling population. Instead this would mean that a modern, high-quality product that the domestic market already desired, would mainly be made domestically.’20 Intermediate goods and components for the plant could be supplied by the foreign partner.
• Charting where the need for new employment is largest, and locating plants there.
• Planning for and building energy, transport and communications infrastructure to service these new manufacturing plants.
We have thus examined very broadly the question of renationalisation in the context of the production and supply of natural monopolies and vital public services. However, we have left out the industry where renationalisation is most urgent and necessary, since all the other sectors of the economy arguably depend on it: the banking sector. Today, over 90 per cent of the money in circulation is created out of thin air by private banks. When a bank makes a new loan, it simply makes an entry into a ledger – Keynes called this ‘fountain pen money’; nowadays it usually involves tapping some numbers into a computer – and creates brand new money, which it then deposits into the borrower’s account. In other words, contrary to popular opinion, loans lead to newly created deposits and not the other way around. The money supply is therefore largely controlled by private banks, not central banks. The ability to create credit (and money) – in effectively unlimited amounts – gives banks an incomparable power over the rest of the economy. That is because banks don’t simply control how much money is created; they also control where this money goes – that is, who can access credit and who cannot. This gives banks the power to determine, to a large degree, the level and composition of investment, demand and production within the economy and thus its overall direction; it also gives them the power to engineer credit-driven booms at will, which in turn leads to soaring prices (especially in the housing market). When these booms inevitably go bust, triggering a crisis, the banks attempt to repair their overleveraged balance sheets by engaging in excessive deleveraging, cutting off credit when households and businesses need it the most, and further exacerbating the post-crisis recession.
A Federal Reserve Bank of New York paper notes that the impact of banking shocks on aggregate lending and investment is further exacerbated when ‘a few banks account for a substantial share of an economy’s loans’21 – a reality that today characterises all advanced countries. By their very nature, financial markets pursue short-term profit, which is why, in the years leading up to the financial crisis, banks pumped huge amounts of money into the most profitable sector of all, the housing market. This pushed prices up year after year, at the expense of all the other sectors of the economy, laying the ground for the financial crisis of 2007–9, which had such a devastating impact on the living conditions of millions of people around the world. As Adair Turner writes, ‘[b]anks which can create credit and money to finance asset price booms are thus inherently dangerous institutions’.22 Moreover, by having commercial banking and investment under the same roof, the money-creation process inherent in commercial banking enables the development of investment banking, as the newly created money can then be used to feed speculative banking activities. It should also be noted that none of the underlying problems that caused the 2007–9 financial crisis have been resolved. In fact, the situation has got worse in many respects, with the post-crisis restructuring of the financial sector having led to an even more concentrated financial landscape marked by even larger banks that continue to expose the economy – and, more importantly, millions of citizen and workers – to huge systemic risks.
Given the crucial and systemically relevant role that banks play in the economy, for all intents and purpose they can – and should – be considered public institutions. In many ways, both de jure and de facto, they already are: not only are bank deposits formally guaranteed by governments, but financial institutions also have access to almost unlimited public funds when faced with bankruptcy, as the recent financial crisis vividly demonstrated. Even worse, today the financial sector is essentially dependent on continuous state support simply to stay afloat, as we saw in Chapter 5. This creates an unresolvable tension, where banks are not allowed to fail by dint of government support (implicit or otherwise) yet at the same time behave just like any other risk-taking, profit-seeking firm, paying exorbitant salaries and bonuses to management and skewing their operations to the interests of their shareholders. Most progressives would agree that radical financial reform – breaking up the big banks, separating commercial and investment banking, etc. – is necessary. However, this is not enough. As Eric Toussaint and others argue, even if these measures were applied, ‘capital will do everything possible to recover part of the ground it will have lost, finding multiple ways of getting around the regulations, using its powerful financial resources to buy the support of lawmakers and government leaders in order to deregulate, once again, and increase profits to the maximum without regard for the interests of the majority of the population’.23
This means that the fundamental incompatibility between the essentially public nature of finance and the profit motive intrinsic to the private ownership of the banks – which has led to the global financial crisis and its very destructive aftermath, and results in a continuous privatisation of profits and socialisation of losses – needs to be addressed head-on. The only structural solution to this incompatibility – which represents a huge impediment to the construction of a society ‘guided by the pursuit of the common good, social justice and the reconstitution of balanced relations between human beings and the other components of nature’24 – is the nationalisation (socialisation) of the banking sector. As Frédéric Lordon proposes, nothing less than a ‘total deprivatisation of the banking sector’ needs to be carried out’.25
Simply put, banks should be publicly owned and democratically controlled. Toussaint and others note that socialising the banking sector means: (i) expropriating the large shareholders without compensation; (ii) granting a monopoly of banking activities to the public sector, with one single exception – the existence of a small cooperative banking sector (subject to the same fundamental rules as the public sector); and (iii) creating a public service for savings, credit and investment. Public ownership in itself is no panacea, of course. There are countless examples around the world of public banks that behave no differently than their private counterparts. Therefore, measures should be introduced to ensure that the public system does not replicate the profit-seeking model of the private banks. In terms of operational guidelines, the only useful function that a bank should perform is to participate in the payments system and provide loans to creditworthy customers. In other words, banks should return to their original purpose: allocating money to businesses and families and aiding the growth of the economy.
So how might we ensure that the operations of the public banking system satisfy our conception of social/public purpose? First, the newly nationalised banks should only be permitted to lend directly to borrowers. Attention should always be focused on what is a reasonable credit risk, with the aim of avoiding some of the Minskian fluctuations in credit availability over the business cycle. Moreover, all loans should be kept on the banks’ balance sheets. This would stop all third-party commission deals that might involve banks acting as ‘brokers’ and on-selling loans or other financial assets for profit. Banks should not be permitted to speculate as counter-parties with other banks. Moreover, new social, labour and environmental criteria, such as the working conditions that business borrowers provide to their workforce, should be introduced to determine how the banking system allocates credit. Second, banks should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully. One of the factors that led to the financial crisis was the increasing inability of the banks to appraise this risk properly. Further, the foreclosure scandal that followed the financial crisis would not have occurred if these stipulations had been in place. Third, banks should be prevented from having off-balance sheet assets. Fourth, banks should never be allowed to trade in credit default insurance. Fifth, banks should not engage in any other commercial activity. Sixth, banks should not be allowed to underwrite contracts in foreign interest rates nor issue foreign currency-denominated loans. There is no public benefit achieved in allowing them to do this. The result of these suggestions would be to render illegal a huge raft of transactions that are currently considered part of normal banking. On the question of bank governance, bank management should also be restructured to include representatives of unions, community and social movements, and elected officials. More generally, a new bank charter should be democratically drafted, with citizen participation, laying out the wider societal goals that the public banking system should serve. Steering the activities of banks towards the advancement of the common good would go a long way towards eliminating the dysfunctional, antisocial nature of private banking and ensuring that these ‘public’ institutions serve the public purpose. The socialisation of banks should thus ‘be part of an expansive vision that reshapes the practices and uses of credit along egalitarian lines’.26 In this regard, Toussaint and others write:
Because banks are today an essential tool of the capitalist system and of a mode of production that is devastating our planet and grabbing its resources, creating wars and impoverishment, eroding, little by little, social rights and attacking democratic institutions and practices, it is essential to take control of them so that they become tools placed at the service of the greater number of people.27
The case for bank nationalisation is also based on an acknowledgement of the fact that the fundamental responsibility of government macroeconomic policy is to maximise real national output in a way that is sustainable (socially, economically and environmentally). This in turn requires financial stability. An economy’s financial system is stable if its key financial institutions and markets function ‘normally’. To achieve financial stability two broad requirements must be met: (i) the country’s key financial institutions must be stable and engender confidence so that they can meet their contractual obligations without interruption or external assistance; and (ii) the key markets must be stable and support transactions at prices that reflect economic fundamentals. There should be no major short-term fluctuations where there have been no changes in economic fundamentals. In other words, the stability of financial institutions requires them to absorb shocks and avoid potential widespread economic losses, while the stability of the financial system as a whole requires levels of price volatility that do not cause widespread economic damage. Prices should move to reflect changes in economic fundamentals. The essential requirements of a stable financial system are: clearly defined property rights; central bank oversight of the payments system; capital adequacy standards for financial institutions; bank depositor protection; an institutional lender of last resort that can intervene when private institutions refuse to lend to solvent borrowers in times of liquidity crisis; an institution to ameliorate coordination failure among private investors/creditors; and the provision of exit strategies to insolvent institutions. While some of these requirements can be provided by private institutions, they all fall within the domain of government. As a consequence, there is nothing intrinsically ‘private’ that has to be present in the banking system for these requirements to be met. The stability of the financial system is fundamentally a public good and should thus be the legitimate responsibility of government.
The reforms to the ownership and operations of the commercial banking system that we have outlined only go so far. By forcing the banks to return to a retail focus and preventing them from operating as casino players represents a considerable improvement over the current situation. However, there is a vast array of financial institutions that would fall outside the prudential regulation dragnet and which account for the bulk of global financial transactions. These include large investment banks such as Goldman Sachs and other Wall Street institutions. Throughout the neoliberal era, as a result of financial market deregulation and lack of supervision of financial flows from authorities, the volume of global financial transactions increased from 15.3 times nominal world GDP in 1990 to 73.5 times by 2008.28 Stephen Schulmeister notes that ‘the overall increase in financial trading is exclusively due to the spectacular boom of the derivatives markets’.29 In other words, most of the financial flows comprise wealth-shuffling speculative transactions which have nothing to do with the facilitation of trade in real goods and services across national boundaries. One might characterise these transactions as being simply unproductive. Yet, as the global financial crisis demonstrated, they have the capacity to derail the entire real economy when their engineered speculative bubbles burst.
It would be wrong to consider all hedging and speculation to be damaging. When it accompanies trade flows and provides security to a trading concern that has cross-border exposure (either in revenue or costs) to exchange rate fluctuations, it can be beneficial. When we talk about hedging in this context we are referring to a strategy that aims to avoid foreign exchange risk. By entering forward contracts, the producer of real goods and services (for export) or an importer can transfer the risk of unforeseen exchange rate changes to a speculator, and it is likely that such arrangements increase the volume of international trade. But these types of transactions are a tiny fraction of the total volume of financial transactions, which are dominated by a few large multinational firms that have no other motivation than to expand their reach and profits. As Matt Taibbi argued, financial firms like Goldman Sachs are ‘huge, highly sophisticated engine[s] for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth – pure profit for rich individuals’.30
The robber barons of the industrial era have been replaced, in the era of financial capital, by the banksters. The question that arises is how a progressive state should deal with this destructive influence. In the same way as the basic income guarantee has become popular among progressives as a solution to income insecurity arising from mass unemployment (see Chapter 9), the idea of a Robin Hood or Tobin Tax is today championed by progressives as a means of addressing the unfettered greed of these large investment banks and the destruction they wreak, especially among poorer nations. Neither solution is desirable; they both reflect a failure to understand the intrinsic capacity of the sovereign state.
The idea of a Tobin Tax (named after the Nobel Prize-winning economist James Tobin) is simple. It involves imposing a small tax on foreign financial transactions. Part of the motivation relates to the increasing awareness that short-termism or high-frequency trading is now becoming dominant in global financial markets. High-frequency trading is driven by computer algorithms, automatically programmed to follow rules that can generate a multitude of (usually small) trades per second. The resulting asset prices that emerge have little correspondence to any economic fundamentals. Rather, they reflect speculation, herding and ‘technical trading’, which can erode the long-term fortunes of companies and economies in general.
It is argued that a Tobin Tax would discourage these short-term hot capital flows but not interfere with long-term investments, because a small tax would be relatively minor compared to the total scale of these projects. Short-term speculators who move in and out of a currency, sometimes within hours of taking their positions, would be more exposed to the tax. By discouraging these short-term capital flows, it is argued that exchange rate volatility would decline and significant revenue would be raised, which could be used to alleviate poverty and improve public services and make national economic policies less vulnerable to external shocks.
Why is this approach an inferior option for progressives to adopt? First, it would be futile to deter speculative behaviour that assists international trade in goods and services. Second, an important question that is begged by the discussions about the Tobin Tax is why should we allow these destabilising financial flows to occur in the first place? If they are not facilitating the production and movement of real goods and services what public purpose do they serve? It is clear that they have made a small number of people fabulously wealthy. It is also clear that they have damaged the prospects of disadvantaged workers in many less developed countries. More obvious to all of us now is that, when the system comes unstuck through the complexity of these transactions and the impossibility of correctly pricing risk, real economies across the globe suffer. The consequences have been devastating in terms of lost employment, income and wealth. So there is no public purpose being served by allowing these trades to occur even if the imposition of the Tobin Tax (or something like it) might deter some of the volatility in exchange rates. Third, the progressives who focus on the funds such a tax would provide for governments fail to understand the spurious nature of these arguments when applied to a currency-issuing government.
A superior progressive option would be to outlaw all non-productive financial flows. As part of a more general reform of the international institutional architecture, governments should agree to make all financial transactions that cannot be shown to facilitate trade in real goods and services illegal. Speculative attacks on a nation’s currency would be judged in the same way as an armed invasion of the country – illegal. This would smooth out the volatility in currencies and allow fiscal policy to pursue full employment and price stability without destabilising external sector transactions. This would also have the benefit of ensuring greater food security for the poorer nations. One of the most hideous aspects of the speculative mania is the way in which large investment banks reap huge profits by betting on food prices on financial markets. This drives up food prices and creates shortages, leaving millions going hungry and facing deeper poverty. There is no justification for allowing these transactions to take place.