This chapter is being written in the early stages of what is likely to become the biggest financial crisis in human history. The COVID-19 pandemic is disrupting the most fundamental economic institution – the labour market – and from this disruption, all other crises follow: the collapse of demand and extraordinary decline in GDP; the rolling crises of bankruptcies and failed investment; and of course a global financial crisis. Unlike the crisis of 2008–9, sometimes used as a benchmark, this is one that begins in the ‘real’ economy, before spreading to the financial realm.
This inversion should shift the focus of attention. COVID-19 requires the immediate winding back of much economic activity, alongside the provision of protections to allow people to cease their activities safely, while organising essential services such as food supply, healthcare and broadband. This is not so much a wartime economy as an anti-wartime economy: a grand demobilisation in the interests of public health. COVID-19 will be a transformational event in global economic history: it is a crisis sui generis; there is simply no comparable moment in the history of capitalism. But it is possible to discern, already, some of its impacts: an acceleration of ‘deglobalisation’, as finance, trade and perhaps travel retrench behind national borders; the continued expansion of the state in economic life; and the expansion and reinforcement of the data economy in all aspects of our lives.
As Grace Blakeley has recently highlighted in Stolen (2019), but as radicals have warned since the late nineteenth century, the position of the financial system in Britain creates a specific set of strategic, long-term problems for any project seeking to make the country even a little fairer. At least since the end of the 1970s, the problem of how to manage a globalising financial system has occupied the left’s strategic horizons: on two occasions in Europe, great hopes were raised by would-be reforming governments – François Mitterrand’s presidency in France in 1981, and Syriza in Greece in 2015 – only to be seemingly dashed by the machinations of international finance.
This reading of events is, in fact, a little confused: in both cases, political considerations relating to the demands of European integration did far more damage. For Mitterrand, reneging on domestic reflation (increased public spending, nationalisation, wage increases) was the price to pay for retaining a strong franc and charting a course towards a single currency; for Greece, the far tighter bind was euro membership and the European Central Bank’s effective control over the monetary system. It is hard to attribute either to ‘global finance’. Domestic considerations mattered more, even if these were directed towards international goals.
The critical issue for the left, at least in larger developed economies, has always been the requirement to deal with the domestic impact of finance and the international political relationships it imposes, rather than ‘financial markets’ as such. For New Labour, a ‘light touch’ approach to financial regulation allowed its leaders to ignore these challenges. While the credit still flowed, this seemed to work, and New Labour in office became a reliable cheerleader for Britain’s financial services industry. Once that flow of credit had dried up, as the monstrous credit bubble of the 1990s and the 2000s burst in the great financial crisis, the entire New Labour project was sunk. The financial system reached a globalised high in 2007: cross-border financial flows are down nearly 65 per cent on that year’s peak volume, probably never to return. By failing to address issues of domestic political economy within a large and internationalised financial system, New Labour worsened the impact of a global crisis over which it fundamentally had no control.
But the crash revealed two further unpleasant facts about Britain’s financial system. The first is one common to all countries where the financial sector has become large relative to the rest of the economy. When finance becomes too big and powerful, it tends to distort economic decision making. In conventional economic parlance, it leads to a ‘misallocation of capital’, as credit gets steered away from longer-term investments in, for example, growing businesses, in favour of short-term easy returns into assets such as London property.*
The second became apparent only in the teeth of the 2008–9 crisis: the dependency of a very large and internationalised financial system on the ready supply of dollars. When these dollars dried up, the Federal Reserve – acting, in effect, as a global lender of last resort – opened ‘swap lines’ to the major central banks of the world, granting them fast, reliable access to cheap dollars that could be supplied to their own banking systems.* By allowing the UK’s financial system to grow unfettered, and extend itself across the globe, New Labour created a major political dependency on decisions taken in the US. Without the swap lines, the UK banking system would have collapsed.
A distorted British economy and a deepening dependency on the US were the domestic consequences of the ballooning financial system. These two problems have political solutions: in both cases, the requirement is both to shrink the size of finance relative to wider economic activity, and to restructure it, breaking up large institutions and creating an ecosystem of different financial institutions.
The 2017 Manifesto contained some proposals for the transformation of the financial system: breaking up the mostly public-owned Royal Bank of Scotland; promoting a wider ecology of smaller financial institutions; and expanding state financing itself, in the form of a £250 billion National Investment Bank and the essential regional development banks. It did not amount to a comprehensive programme for finance, but it set a clear direction of travel. The manifesto identified that it was necessary to think about how to reshape the private sector banking system, and that establishing a diversity of institutions was an essential part of this.
Between 2017 and the 2019 Manifesto, two outstanding back-ground papers were produced – ‘A New Public Banking Ecosystem’ and ‘Finance and Climate Change’ – by independent researchers commissioned by the Shadow Treasury team. But the first concentrates only on creating a public banking system, and the second proposes technical modifications to the existing banking and finance regulations. The wider strategic imperative raised in the 2017 Manifesto – of a structural change encompassing the whole of banking – had been dropped. The major changes were to be made solely on the public sector side, through institution building.
In this sense, the 2019 Manifesto – expansive as it was – was significantly less radical than the manifesto of just two years before. It was utopian, in the double sense that it proposed an alternative world but also offered few ideas on how it could be achieved. But relative to this dual-use utopianism, the manifesto’s actual ambitions were modest. The scheme to decarbonise the economy, for example, was impressive in its policy detail, but sorely lacking in its political strategy, above all on the question of prioritisation: how was the civil service to do all this while ending austerity, repairing the NHS and building council homes to the value of £70 billion?
The de-prioritisation of finance reflects the nature of the political period: the further we move from the great financial crisis of 2008–9, the less pressing the issue seems to be; and the sector has gone through a genuine, and important, shift in the intervening years. Campaigning front and centre on the issue of finance would have been a peculiar choice in 2019. But its absence weakened the manifesto, reflecting a weakness that developed in Corbynism over the period from 2017 to 2019: the substitution of government action and bureaucratic fixes for a political strategy aimed not only at winning an election, but at implementing meaningful changes once there.
The latter issue is not simply a managerial problem – a question of ensuring that plans handed to the civil service are prioritised and followed through. Rather, it is a question of what action can be taken before entering government, such as building alliances, creating a broad social consensus around the changes needed and immediately implementing changes on the ground where possible – whether by local authorities, including moves to set up local authority banks, or in wider civil society. In short, effective strategy involves working towards a genuinely hegemonic conception of how social change might be won in conditions where the left’s traditional bases of social support are weakened.
There is an unresolved tension here between what we could think of as centralising or decentralising tendencies – or, perhaps, ‘socialism from above’ versus ‘socialism from below’. What we might call a Keynesian economic strategy – making the state bigger, with the post-war consensus as a reference point – became, over time, the dominant element in Labour’s economic programme, to the detriment of the more politically fruitful decentralising elements.
As Boris Johnson’s programme – even before COVID-19 – has demonstrated, Keynesian interventions, up to and including the suppression of finance, can lead us further and deeper into an authoritarian future. There is no necessary contradiction between combining stricter controls on trade unions and the deregulation of labour markets on the one hand, with raising government investment and pushing industrial policy on the other. The intellectual error would be to maintain that the expansion of the state necessarily represents a positive alternative to capitalism as such and that the suppression of finance necessarily represents a progressive moment.
With state functions so whittled away that, at the time of writing, public health services stand on the brink of coronavirus-induced collapse, the desire to demand that government undertake the necessary action to secure the continued functioning of civil society is understandable. But these demands represent the bare minimum; and they come at a price. The price of a decidedly Keynesian intervention imposed by Conservative chancellors in the immediate wake of the financial crisis was a decade of the worst austerity this country has known for generations – and, via the overhaul of the regulatory regime, the securing of the financial system’s pre-eminent position inside the British economy. States and banks across the developed world became intertwined in the post-crash period, forming a ‘sovereign-bank nexus’.* Often, the tools of financial repression most beloved of reformers – macroprudential regulation, for example – have simply served to stabilise and preserve the status quo. Deliberate government action – for instance in cutting the bank levy to favour a separate profits tax – similarly shifted the balance of power in favour of the larger banks, while effective sector lobbying helped defang even the fairly mild recommendations proposed by the Vickers commission.
The point here is not merely that finance is a powerful lobby that continues to shape government policy; it is that the post-crash balance between state and finance was one not of simple opposition, but of mutual reinforcement. Further regulation has not resulted in the diminution of the power of finance, but something like its preservation in aspic. It has taken two events to shift that: Brexit, and now – on a vastly greater scale – COVID-19.
We do not know what price the Conservative government will place on the current round of Keynesian interventions it is undertaking. It is possible that a period of accelerated austerity will be imposed, with the Economist among those already arguing for a winding back of the state once the immediate crisis has passed. The French government has proposed abolishing various labour protections. By far the most significant longer-term outcome, however, will be the deepening and extension of the data economy. The need for testing and monitoring as part of a suppression strategy to contain the virus has already led to the appearance of more intrusive data collection methods in China and South Korea. Early on in the crisis, Dominic Cummings hosted a Number 10 meeting with leading data companies, including Facebook, Google and Peter Thiel’s security-focused private enterprise, Palantir.
There will be distinct challenges to finance from a post-COVID-19 world: the elevated costs of environmental risk, including further epidemics and pandemics (what the Bank of International Settlements labelled ‘green swans’), but also the potential challenge posed to Big Tech incumbents’ business models by their desire to move into financial services. Slowly emerging in front of us is a combination of state, finance and data that could easily accelerate a decline into authoritarianism. A Keynesian response to this, which sought simply to expand the size of the state further, would be obviously inadequate. The left must return to its decentralising and democratic roots, promoting wider forms of common ownership across the economy, including in the finance sector.
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* Resource misallocation is estimated by the International Monetary Fund to have been substantially worse in the UK, post-crash, than in other European countries. See Anna Bordon, Mico Mrkaic and Kazuko Shirono, ‘United Kingdom: Selected Issues’, IMF Country Report 16/58, February 2016, p. 22.
* Adam Tooze’s Crashed (London, 2018) provides the best single account of this episode.
* Giovanni Dell’Ariccia, Caio Ferreira, Nigel Jenkinson et al., ‘Managing the Sovereign-Bank Nexus’, ECB Working Paper Series no. 2177, September 2018.