CHAPTER SEVEN THE WAY FORWARD
You cannot carry out fundamental change without a certain amount of madness. In this case, it comes from nonconformity, the courage to turn your back on the old formulas, the courage to invent the future. — Thomas Sankara
In the immediate aftermath of the financial crisis, the global elite was shaken to its core. Some — though not nearly as many as you might think — had lost fortunes, others jobs, and still more their faith in the strength of capitalism. The commentariat began questioning the assumption they had taken for granted for the previous twenty years: that history was over, and that capitalism was the only man left standing. But it wasn’t long before these breathless commentaries came to an end. They were replaced by equally breathless opinion pieces about capitalism’s miraculous ability to survive, and even adapt, through crises that would break a lesser economic system.
A decade later, few are as sanguine about the fate of the free-market system. The meagre global recovery has been based on an unprecedented Chinese state stimulus programme and extremely loose monetary policy in the world’s major economies, creating instability in equity markets and inflating a new private debt bubble. Productivity — the great engine of improvement under capitalism — is stagnant. Outside of the global North, many of those countries that have been told for decades they are just one policy change away from catching up have experienced similar levels of stagnation, and now face the threat of capital flight as monetary policy tightens. In the meantime, global monopolies — particularly tech companies — have hoarded the returns from what little growth there has been in the post-crisis period, keeping their ill-gotten gains in tax havens and using their unparalleled economic power to sway the nation states that might seek to regulate them.
The rebirth of far-right populism on a level not seen since the 1930s is taking place in this context. Nationalists use dog-whistle racism to link voters’ experience of hardship and deteriorating living standards with an ill-defined “other” that can shoulder the blame. The only movements that have managed to absorb the discontent that would ordinarily fuel the far right are those that locate the blame for falling living standards where it belongs — with elites. Few traditional social democratic parties have lived up to the task, clinging instead to old narratives about a “third way” for workers between freedom and exploitation. As a result, they have been Pasokified — consigned to electoral insignificance just like the Greek social democratic party Pasok — leaving space for the far-right to take up the mantle of economic agitation.
There have, however, been some notable exceptions. Eleven years on from the financial crisis, it is no exaggeration to say that in the most heavily financialised economies — the US and the UK — the left is stronger than it has been in forty years. Partly due to the severity of the crisis in these economies, and partly due to the nature of their majoritarian electoral systems, left social movements in Anglo-America have aligned with elements within the traditional parties to disrupt politics.
This development has shocked the commentariat — perhaps even more so than the crisis itself. The Economist has written in fevered tones about the rise of “millennial socialism”; an article in the Financial Times attributed the emergence of this new phenomenon to quantitative easing’s role in driving up house prices. After decades of deriding socialism as a regressive, totalitarian ideology unfit for the liberal, networked age, defenders of the status quo have found themselves mute in response to the new wave of democratic socialists who see their project as part of the long struggle for human freedom. Why, they ask, should young people be forced to work longer hours for lower wages and fewer benefits without even the respite of knowing that they will be better off than their parents? Why should they be forced to spend the rest of their lives working as debt peons to repay the money they have borrowed simply to survive? Why, in other words, should young people support capitalism when they never expect to own any capital?
This last question in particular has the establishment worried. With property-owning democracies decaying into property-owning oligarchies all around the global North, those in positions of power are aware that the political economic settlement upon which financial capitalism is based is crumbling. But they have no answers. Restorers of the liberal order like Macron in France have burst into the spotlight promising the world, only to fail to deliver a policy agenda that addresses people’s concerns.
The death of finance-led growth is already providing plentiful opportunities for those who seek to build a new world. Those on the right will use the backlash against capitalism to turn working people against one another, in a bid to close off wealthy corners of capital accumulation. They will be encouraged by elites who would rather see the end of the world than the end of capitalism. For these people, capitalism really does represent the end of history — and from now on we can hope for no better than stagnation and decline.
But there is another way. If, as the neoliberals did during the 1970s, we can grab hold of this moment and use it to rebalance power relations and entrench a new set of institutions, we can pave the way for a new economic order. Such a project must take place on three interrelated plans: those of narrative, electoral politics, and social forces.
We must develop a populist narrative, which shows that working people are being made worse off by an exploitative and extractive capitalist model that sees wealth and power concentrated in the hands of a tiny elite, and that things are only going to get worse under the status quo. We must build an electoral coalition, supported by a strong and diverse social movement, that will allow working people to take control of the apparatus of the state. At the same time, we must transform the balance of power in society, building up the labour movement and radical social movements in order to challenge the power of bosses, landlords, and lenders. And we must use this power to institutionalise a new political economic settlement — one that operates in the interests of those who live off work, rather than those who live off wealth.
The slow decay of finance-led growth provides us with clues as to how it might be surpassed. Rising debt levels, falling wages and productivity, and impending environmental collapse all present socialists with strategic opportunities for intervention. And the best way to tackle all these issues is to strike at the heart of the system that has created them, by taking on finance capital itself. In this chapter, I will argue for a series of measures to “socialise finance” — to place our financial system under collective ownership and democratic control. This means properly regulating the banking system, building new public financial institutions to replace the private system of credit creation, and creating a People’s Asset Manager to steadily socialise ownership across the economy. Democratising our economic institutions will ensure that finance comes to work in the interests of society as a whole, rather than just a privileged elite. Socialising finance will steadily erode the distinction between owners and workers and, before long, will allow us to transcend capitalism altogether. If history has a sense of humour, then the death of capitalism will begin where it was born — in the United Kingdom.
In 2013, 146 years after Marx published his work of the same name, Thomas Piketty published Capital in the Twenty-First Century.1 It was an instant hit, though few made it past the introduction. In Capital, Piketty argued that the central problem of our time was the tendency for the returns to wealth to outstrip economic growth. Because wealth is highly unequally distributed in capitalist systems, this tendency leads to increasing inequality. The only respite was the “golden age” of capitalism during the post-war period, when the combination of the destruction of the war and the politics of the post-war consensus created a significant dent in wealth inequality. Since the 1970s, wealth inequality has risen sharply and whilst it has not yet reached pre-war levels, Piketty worries that on current trends it will not be long before it does. Effectively, Piketty has found empirical evidence of the problem identified by Marx over 150 years ago — under capitalism, profits are derived from the difference between the value created by the worker and what she is paid. Most of the time, this means that there is an inherent tendency within capitalist systems for the returns to capital to outstrip the returns to labour. These trends are accelerated when profits and income are invested in financial markets, or transferred to the rentier class, as is characteristic of finance-led growth.
Piketty doesn’t have much time for Marx. In fact, his work is highly empirical, with little reference to theory — mainstream or otherwise. Whilst this may not impoverish his analysis, it certainly does his conclusions. He argues that the rational response to these trends is to increase taxes on capital. Piketty’s wealth tax would provide the revenues necessary for the state to provide for either full employment or some form of expanded welfare state.
But Marx did not just put forward an economic framework to understand capitalism; he provided us with a theory of political economy in which economic outcomes are shaped by the balance of power between different social forces, and the struggles that take place between them. The wealthiest in capitalist societies are not just those with the money, but those with the power too. Even talking of the wealthy submitting to anything makes no sense unless we are speaking of a state that is run in the interests of workers rather than owners — why would a state captured by big business and the City of London implement policies against the interests of its core constituents? Politicians do not have the incentive — let alone the ability — to implement a global wealth tax. In fact, establishment politicians have no incentive to deal with the current crisis at all, and this is what is generating the peculiar economic and political conditions that prevail today.
Piketty’s wealth tax is a prime example of “solutionism”: a proposal intended to solve all of the world’s problems through tweaks to the current institutional architecture. He pays little attention to power, to politics, or any other drivers of change. The same can be said for a lot of other radical ideas that have recently become popular, like modern monetary theory, land value taxation, or universal basic income. These can all be understood as a kind of technocratic utopianism — they rely on the assumption that society can be transformed from above and that making one or two radical policy changes will completely transform the economy. Many of these policies are not incorrect or bad, but their adherents often prescribe them as the solution to all the world’s problems, without considering how we got to where we are in the first place. Policy prescriptions — from wealth taxes and land value taxes, to financial reform and housing reform — have to be situated within their political economic context. It is meaningless to speak of “policy” without speaking of power.
Neoliberal governments have no interest in funda- mental economic reform as their primary constituency is the wealthy elite. The coalition that supports finance-led growth is based on asset ownership. At the top end, it is dominated by those who live off wealth — those who own so much that they are able to generate a large return from investing or renting out their existing assets. These people would never abide any increase in wealth taxation or meaningful financial reform. For fear of upsetting the balance of power between labour and capital, and undermining the idea that governments are beholden to their bondholders, they could not allow any increase in state spending substantial enough to end the crisis. These people have benefitted substantially from the system of financialised capitalism brought about from the 1980s, and they will not see it end without a fight.
Whilst they represent the most powerful group within the coalition, they are not the largest in number. As described in Chapter Three, the only way to render financialised growth sustainable over the long term was to give middle earners a stake in its continuation. This was achieved through the combination of privatisation — including the privatisation of pensions and social housing — and bank deregulation, which led to an increase in mortgage lending. Maintaining this coalition required combining wage suppression with asset price inflation, the latter of which would provide the material basis for the property-owning classes continued support of finance-led growth. But today, home ownership is declining, house prices are falling, and pension funds around the world are in crisis — in other words, the bargain is breaking down. It is being held together by quantitative easing, which continues to drive unsustainable levels of asset price inflation, but which has also inflated bubbles in a series of asset markets that may soon burst. This is what a political contradiction looks like — an irreconcilable division between two constituencies, the support of both of which is required to maintain the status quo.
Implementing a wealth tax would not only alienate the most powerful element of this constituency — wealthy elites — it would also divide the electoral constituency that supports finance-led growth by politicising the ownership of capital. Taxing wealth exposes the most fundamental divide in capitalist societies: that between those who live off work and those who live off wealth. The politics of financialisation rests on obscuring this divide and, in doing so, convincing a section of working people to support a system that benefits the wealthy. Greater taxation of wealth would reveal an essential antagonism in the economy and so raise the consciousness of working people, which is exactly why a neoliberal government would never implement it.
There can be no going back to pre-crash politics, because there can be no going back to before the bursting of the housing bubble. It will never be possible to create that amount of new debt — and therefore new money — again. And without rising debt and rising asset prices, the political economy of finance-led growth begins to break down. With their living standards stagnant, people have started to question the idea that their interests are best served by the status quo. And with the environment collapsing, young people are rebelling against an economic system that would sacrifice their futures for the sake of immediate profit.
We must chart a route out of this political–economic quagmire by building an electoral coalition that unites working people against elites: those who live of work, against those who live off wealth. Any attempt to rebalance power and wealth away from the few towards the many will not be sustainable if it relies solely on redistribution. The fundamental economic battle lines are drawn on ownership. When Thatcher came to power, she set about privatising the UK’s collectively owned wealth — selling off the family silver in order to provide short-term gains to middle earners that would provide the electoral support needed to stabilise her coalition. She also removed restrictions on capital mobility, so that any attempt to reverse this model would be met with capital flight. Thatcher did cut taxes for the rich and oversaw a decline in the tax burden as a percentage of GDP, but these economic changes were facilitated by far more far-reaching policies that transformed the balance of political and economic power. The big debates about tax and spend only came later, with New Labour’s attempt to render an unstable and unequal system slightly fairer.
We must focus on shifting the balance of power in society away from capital and towards labour by expanding state, community and worker ownership. This is not simply a moral or political statement: it is a statement of necessity. Without a plan to socialise wealth, the economic contradictions of the current model — from inequality to climate change — will only continue to mount. Piketty showed that the tendency of capitalism is for returns to capital to increase faster than returns to labour. Financialised capitalism accelerated this trend for a time by inflating giant debt-fuelled speculative bubble that drained the planet of resources, only to burst in a fit of inefficiency and waste. As long as wealth is privately owned and unequally distributed, these patterns will continue to afflict our economy. What will emerge is a financialised world characterised by bubbles, rising inequality and ever-increasing levels of debt, accompanied by environmental degradation in the pursuit of profit. Such a model cannot remain stable for very long.
Some see these issues as examples of “market failures”, which can be solved through state intervention at the margins of the economy.4 For these people, changing ownership structures isn’t the answer, instead, corporations should be regulated and taxed to promote the social and environmental good. Such an outlook rests on the idea that environmental degradation, rising monopoly power, and increasing inequality are not inherent to capitalist political economy, and so can be fixed by enlightened governments operating in the interests of their citizens. But capitalist states have failed to solve many of the world’s major problems over the last forty years. Carbon pricing has not halted climate change. Competition regulation has not stopped the emergence of international monopolies. And whilst redistribution has certainly played some role in muting inequality, it has failed to prevent a situation in which the wealthiest twenty-six people have the same wealth as the poorest half of the global population, or roughly four billion people.
In truth, there is no such thing as a “market failure”, because there is no such thing as a pure market. Any market transaction — from a consumer buying an apple, to a business investing in a new factory — takes place in the context of an institutional architecture supervised by the state. States create markets and are therefore partly responsible for the problems that markets create. Modern capitalism is a joint venture between the neoliberal market and the neoliberal state — and so-called “market failures” are therefore much better understood as failures of capitalism.
Such market failures can’t be fixed from within a capitalist system. The only interventions that the state could make that might meaningfully address climate change, inequality or financial instability would threaten the power relations that underpin finance-led growth. If firms do not take every opportunity to maximise their profits today — whether by evading tax, undermining regulation or driving down workers’ pay — they may not exist tomorrow. These dynamics might not be so obvious when there is plenty to go around, but during times of crisis and scarcity, the Darwinian nature of capitalist competition becomes obvious. When the options are compete or die, nothing is too valuable to be sacrificed on the altar of private profit, not even the planet. Firms will undermine regulations, lobby governments for special treatment, or leave one jurisdiction for another, setting off a global race to the bottom on wages, tax, and regulation, and destroying the planet in the process.
Today, in the absence of the pre-2008 debt bubble, economic and political transactions have become a zero-sum game. Inequality may have risen during the 1980s, but the majority of people were also getting better off too — mainly through the expansion of access to credit. This debt bubble was never sustainable, but it served to obscure the tendency of capitalism towards stagnation — for a while. Today, we live in a world of low growth, low wages, and low productivity — all of which are impeding profitability amongst the majority of firms. Those that have remained profitable have been those that have carved out the kind of international monopoly positions that create both economic and political instability over the longer term. Meanwhile, landlords and lenders extract ever greater amounts from workers and businesses, leaving them with even less to spend and invest. In this context, as capitalists compete to increase their share of a pool of resources that is growing at slower rates every year, the rest of society experiences stagnation and decline. Even though we know we need to halt climate change, we will continue to avoid this obvious truth because fighting climate change cannot create the kind of windfall profits to which investors have become accustomed under finance-led growth.
Private shareholders will always place profit maximisation over any other social good. Even if, as individuals, they would like to promote ethical behaviour on the part of corporations, the large institutional investors who monopolise most of the world’s capital are forced by the nature of competition to invest in order to maximise their returns. Only as a collective do we have the right incentives to ensure that the drive towards profitability is tempered with a concern for the environment and society.
The response to this from those on the right — and some on the left — is that even in a socialist society, the state could not be relied upon to pursue the common good. Public shareholders and workers will use their control over corporations to pursue what they consider to be their own interests: civil servants will use their economic control to enrich themselves, managers will use their political power to build corporate empires, and politicians will begin to see corporations as an extension of the state itself. Rather than being held accountable to shareholders, managers would be held accountable to politicians and civil servants, who would demand that state-owned enterprises find jobs for their friends, invest in their constituencies, and make money for the state (and perhaps even the politicians themselves). Politicians’ parochialism would mean that wider environmental and social considerations barely get a look in. Corporate governance would remain a question of top-down, managerial control over workers, which would be just as alienating as work in a private enterprise, even if it is better paid and more secure. Meanwhile, any attempt to challenge the model would be met with staunch resistance from those who benefit from it. The familiar refrain is that socialism threatens to revive the economic problems of the 1970s: union bosses and politicians using their control over inefficient corporations to hold the rest of society to ransom.
Whilst this portrayal of 1970s Britain is something of a pastiche, it does have some truth to it. State ownership often did little to improve working conditions, corporate governance, or environmental objectives. Some of the largest state-owned enterprises in the world are also the most corrupt, extractive, and exploitative. Thankfully, the choice is not between corporations governed in the interests of shareholders or politicians. This is where the “democratic” in democratic socialism comes in — whether a company is nationalised, mutualised, or subject to any other form of collective ownership, workers must either be in charge of making decisions themselves, or rigorously holding other decision-makers to account.
The UK Labour Party has recently proposed a series of policies aimed at democratising ownership in the British economy. These range from nationalisation, to worker ownership funds, to boosting support for the co-operative sector. Key parts of the UK’s infrastructure — from transport to utilities — will be nationalised under the next Labour government, based on democratic models of corporate governance. Worker ownership funds will be established, which would see a portion of large firms’ shares being transferred to workers, linked to their profitability. Financial support for the mutual and co-operative sector will be increased, and public procurement changed to ensure democratically-owned firms receive preferential treatment. And a National Investment Bank will be created to direct finance into potentially productive parts of the economy that have been chronically starved of capital.
But there is much more work to do. As it stands, the Labour Party’s manifesto reads like a return to the post-war consensus. It seems radical from the perspective of twenty-first-century financialised capitalism, but it is really a return to social democracy. We cannot afford to be so defensive today. We must fight for something much more radical. We must fight for democratic socialism — not only because it is a better system, but because the capitalist model is running out of road. If we fail to replace it, there is no telling what destruction its collapse might bring.
The potential of democratic socialism is huge. The question is, how do we get from here to there? Why would a state beholden to the interests of asset owners socialise capital in a way that would lead to capital losses for its key constituency? Even if a new government responsive to a new group was elected, why should civil servants, public service workers, or local government officials respond to the interests of working people when their economic interests and ideological outlook are so aligned with the status quo? And even if it was possible to deal with these problems, wouldn’t a new government run the economy in its own interests, rather than those of society as a whole?
These questions are all about power — and this is what the transition to democratic socialism comes down to. Whilst utopianism can help us sketch a vision of the future, it is meaningless without a coherent analysis of the power relations that sustain the existing system. Absent such a power analysis, the depiction of democratic socialism can verge on the kind of solutionism that many liberals fall prey to. The question we must ask ourselves today is how can a left movement build a politics to underpin democratic socialist economics?
The theory of social change laid out in this book links broad, structural changes in the nature of the economy with human agency. All capitalist economic models are subject to contradictions, which eventually lead to crises. During these moments of crisis, the institutions that support the normal functioning of the system break down and society enters an extended period of systems collapse. These moments are when insurgent movements — whether on the left or right — can shift the balance of social, economic and political power and build new institutions that reinforce the influence of their group. Today, the extended crisis of Anglo-American capitalism presents an opportunity to rebalance power away from capital and towards labour.
An analysis of how similar changes have occurred in the past should inform how we seize this moment. We must learn from the transition to finance-led growth that took place in the 1980s. Learning from Thatcherism means developing a strategy for political contestation at three levels: the level of narrative, of electoral politics, and of social forces.
After decades of stagnation caused by a financial crisis, the financial elite centred in the City of London is the natural villain in any left populist narrative. Increasing our collective wealth and reducing private debt will provide an immediate increase in living standards for a large potential electoral constituency. And, by steadily tightening regulation over existing financial firms and setting up socialist alternatives, a socialist government would be simultaneously weakening the power structures that undergird the existing system of finance-led growth, whilst also helping to build up the new economy in its place. Socialising finance represents an inversion of the Thatcherite project: socialists must take on the banks the way Thatcher took on the unions.
This threefold strategy must be effected from both the bottom-up, and the top-down. The social movements that have emerged around the left in recent years, combined with the labour movement, are the core political base for socialist transformation today — much as financial elites were the core base for the creation of finance-led growth. The inevitable diversity of such movements does make building a coordinated platform difficult. It is always going to be much harder for large numbers of people to come together to demand social change than for it is for elites to work together behind the scenes. But this is also the source of these movements’ power. There are millions of activists across the UK able to organise to resist individual instances of exploitation or oppression, to campaign, and to protest. From the Occupy protests of 2011/12, to Extinction Rebellion, to the Deliveroo strikes, left social movements have, since the crisis, demonstrated their unique ability to win battles, shape wider narratives, and effect social change.
Working together, social movements of all kinds can come to form what Nick Srnicek and Alex Williams called an “ecology of organisations” that can work within and alongside political parties to challenge the narratives, electoral politics, and social forces that support finance-led growth.5 These movements can develop and disseminate a narrative that pits working people against extractive financial elites by centring this language in their campaigning at both the grassroots level and in the media. They can support the development of a viable electoral project by engaging with political parties — supporting these parties to mobilise their key constituencies and challenging them to remain accountable to their base. But perhaps the most important role for social movements under finance-led growth is to mobilise directly to disrupt the institutions and power relations that reinforce the current system — both to weaken these structures, and to build a collective consciousness that will serve to strengthen the movements themselves. Collective action in the workplace, for example, both weakens bosses and serves to build the consciousness of those engaging in the collective action.
But for this kind of bottom-up political mobilisation to be effective, it must be based on a coherent understanding of the power relations that underpin finance-led growth. Organising in the workplace will not be enough; instead, these traditional tactics must be combined with new strategies that politicise asset ownership and expose extractive rentierism. Momentum campaigners in the UK, for example, recently organised a day of collective action targeting financial institutions that invest in fossil fuels, taking the fight against climate change straight to those who control our collective resources. Renters unions around the world are organising to protect tenants against exploitative landlords, as well as fighting for policies to protect renters throughout society. In Ireland, trade unions, political parties, and community movements launched a mass campaign to resist water privatisation and won.6 Student movements all over the global North have resisted attempts to commodify higher education through the imposition of fees. Whilst not all of these campaigns have succeeded in achieving their aims, they have been integral in the building the movements that have been at the forefront of the socialist resurgence seen in many parts of the global North over the last several years.
This ecology of organisations will also come to play a critical role within established political parties by occupying an insider/outsider stance that allows them to hold these parties to account. Movements must retain strong links with key institutions and individuals, without providing unerring support, and while retaining their ability to criticise. The debates about the possibility of parliamentary socialism that have raged for the last half century hinge on whether it is possible for a socialist government to maintain its radical stance whilst in government. No matter what the individual characters of the Cabinet and leadership, it is unquestionable that that level of proximity to power changes the material incentives such individuals face. The inherent conservativism of the British state would place huge obstacles in the way of any radical programme of economic change. The “deep state” may attempt to prevent it altogether. Meanwhile, the temptation to alter the platform to appeal to the so-called “median voter” will remain significant. A strong ecology of organisations can provide the political pressure needed to ensure that parties retain their insurgent character when in government. Social movements that can operate within and against political parties are needed to build political parties that can operate within and against the state.
Socialist parties undergirded by strong social movements can also affect change from the top-down in ways that reinforce the strength of their base. These parties must develop a set of policies that will allow them simultaneously to challenge the power of private finance and promote public alternatives in its place. First, private finance must be properly constrained. The opportunities to do so are currently greater than ever, given the changing attitude towards financial regulation that has emerged amongst international policymakers since the financial crisis. It will be possible to drastically reduce the power of financial services using regulatory tools that are internationally accepted. Constraining the power of private finance would both reduce financial instability and act as a kind of Ridley Plan for finance capital.
These policies would reduce lending amongst these private institutions, so a public banking system must be constructed as the private system is constrained. The first plank of this public banking system would be public retail banking, which would offer highly competitive retail banking services available for free, to everyone. This system could then be used to enact a national programme of debt reduction, that would allow consumers and small businesses in debt distress to refinance their debt, and in some cases see large chunks of it written off altogether. A National Investment Bank (NIB), which would lend directly to businesses, should also be set up alongside this system.
This public banking system would not be subject to the regulation that governs the private system. Instead, it would be connected to the by then democratised Bank of England, which would be instructed to control the level of lending in the economy by directing these institutions to expand lending during downturns and temper it during upswings. Direct lending from the NIB could also be used in place of central bank bond purchases to boost output when interest rates reach zero and cannot be reduced any further.
But the truly transformative aspect of this plan would be to have the NIB act as the investment arm of a People’s Asset Manager (PAM). The PAM would both manage the assets of a newly created Citizen’s Wealth Fund, expanding public ownership, and invest on behalf of pension and insurance funds, socialising ownership across the whole economy. The CWF could eventually pay out a Universal Basic Dividend that would lock in support for the system by providing people with a tangible benefit from public ownership – much as the capital gains associated with right-to-buy have supported finance-led growth. The relationship would mirror that between today’s investment banks and their in-house asset managers, which allow them to invest in companies to which they lend money. The combination of a NIB and a PAM would ensure that public investment benefits society as a whole, rather than enriching private shareholders.
1. Regulating the Private Banking System
Since the financial crisis, there has been a growing recognition of the need for what is now known as “macroprudential policy” — or regulation intended to curb systemic risk in the financial system.7 Such policies aim to ensure banks do not create too much debt, either relative to the size of the economy, or relative to the amount of capital they hold. It will be important for an incoming socialist government to use these policies to constrain the power of the private banking system, reduce debt levels, and control asset prices.
The overarching regulation should be shaped around a new target for the Bank of England: an asset price inflation target.8 The Bank should use new and existing regulatory tools to monitor domestic asset prices and control the amount of credit in the system to mute the ups and downs of the financial cycle. Knowing that banks are likely to lend too much when times are good, and lend too little when they are bad, the Bank should guide the private sector’s lending behaviour by using dynamic regulatory interventions. For example, if household debt levels started to rise quickly, the Bank of England might issue guidance to private banks that they are only allowed to provide mortgages worth 80% of the value of the home. On its own, this would serve to privilege buyers who purchase homes without a mortgage, so this intervention would have to take place alongside broader reforms to the taxation of income, wealth, and capital flows to limit the distributive impact.
Another set of tools to control risk in the financial system are capital requirements that rise and fall depending on the state of the financial cycle. Depending on domestic regulation, all banks must hold a certain proportion of their lending as highly liquid capital — cash, equity, and some other assets defined by regulators. Higher capital requirements mean banks are able to lend less, limiting their profits — as a result, there has been a continued downward pressure on the quality and quantity of capital that banks are required to hold over the period of finance-led growth. Counter-cyclical capital requirements would give regulators the option of raising the amount of capital banks are expected to hold during the upswing of the financial cycle and reducing it during the downturn. The Bank should limit the definition of regulatory capital to cash or shareholders’ equity, phasing out the inclusion of other assets. This would both strengthen banks individually, reducing the likelihood that any individual bank would fail, and support the Bank of England’s ability to control lending.
Retail and investment banking should be also broken up, meaning that peoples’ deposits would not be exposed to risks taken by banks’ investment banking arms. The UK’s system of universal banking — under which commercial and investment banking are combined in single entities — has not only implicated ordinary peoples’ savings in the speculative activities undertaken by investment banks, it has also led to the emergence of giant uncompetitive monopolies that have gained a huge amount of both political and economic power. The 2012 LIBOR rigging scandal — when banks engaged in fraudulent activities surrounding interest rates — is a good example of the kind of collusion that can be expected from a system dominated by a few large players. The high rates of interest many such banks charge to lend to consumers, and the low interest rates they provide to depositors — often unrelated to the rates at which they are able to borrow from the central bank — are also evidence of oligopolistic behaviour. As of 2017, consumer and investment banking are ringfenced, but not explicitly separated, and a socialist government should completely separate them.
The UK’s shadow banking system also needs to be subject to much tighter regulation. Tentative proposals were made in the US’ Dodd–Frank Wall Street Reform and Consumer Protection Act, which aimed to subject some non-bank financial institutions to most of the regulations that govern the traditional banking system. Non-bank systemically-important financial institutions (SIFIs) would be subject to capital requirements, leverage ratios, liquidity requirements, and transparency measures. A similar approach should be taken in the UK. Any rigid regulation in this area would be evaded by financial institutions, who have historically found ingenious ways to undertake regulatory arbitrage. As such — and this should be a general principle for macroprudential regulation — the rules should be laid out in as broad terms as possible and implemented based on regulators’ and central bankers’ monitoring of risk as it arises and their interpretation of their mandate. As Andy Haldane, the Chief Economist of the Bank of England, argued in a 2012 speech, “complex environments often… call for simple decision rules… because these rules are more robust to ignorance”.9 Such an approach would, however, require regulatory institutions to be subject to continuous democratic and diverse expert scrutiny.
Taxation of the finance system also requires fundamental reform. The bank levy — introduced after the crisis — was a tax on banks’ global balance sheets, designed to rise and fall in order to bring in the same amount of revenue each year. Today, it applies only to banks’ domestic balance sheets and has fallen substantially. It has been combined with a corporation tax surcharge that doesn’t have much of an impact on big banks. The tax should be expanded to cover banks’ and shadow banks’ full international balance sheets.
These measures should be combined with transactions taxes designed to limit activity in financial markets and curb capital flows. Financial transactions taxes (FTT), which are rapidly becoming popular around the world, should be combined with currency transactions taxes (CTT), which are less in vogue. The latter would act as a form of quali- tative capital control, disincentivising capital inflows and outflows. During normal times, the CTT should operate in the same way as the FTT — levied at a low level and applied to all ordinary currency and derivatives transactions. The Bank of England should also have a remit to increase the CTT in the event of rapid capital inflows or outflows, with a view to promoting the stability of the financial system.
The collection of these interventions would limit banks’ profitability, thereby making them highly unpopular amongst key stakeholders. Central banks would therefore need to be insulated from regulatory capture. As argued above, independence for central banks has simply served to isolate decision-making from democratic accountability, leaving central banks beholden to financial interests. Central bank democratisation, discussed below, is therefore a critical enabler to these proposals.
2. Public Retail Banking
Taken together, these proposals would curtail the power and profitability of the finance sector. The leaders of these institutions would not take such interventions lying down — capital could strike or flee. Private commercial banks would be likely to reduce their lending and many investment banks may threaten to leave the country. Whilst many of the activities undertaken by the latter are socially useless, reductions in lending in an economy sustained by credit would have a significant impact. As a result, measures would need to be taken to build a public banking system that could service both consumers and businesses before such regulation was put in place.
One proposal, recently put forward by the UK Labour party, is to set up a network of Post Banks. The idea would be to capitalise a Post Bank, as a subsidiary of the Post Office, and run it as a series of decentralised local and regional banks. These banks would provide standard retail services to consumers — checking accounts, savings, insurance, personal and business loans — and be funded through deposits. But establishing a transformative public banking system requires intervention on a significantly larger scale. Establishing a network of Post Banks is a strong start for a public retail banking system. However, a socialist government should also fully nationalise RBS — rather than decreasing its stake — and turn this into another public retail bank, operating according to the same principles, whilst selling off its investment banking arm, or incorporating this infrastructure into the National Investment Bank. These banks should be capitalised as needed through bond central bank money issuance to support enough lending to absorb the impact of the macroprudential reforms outlined above.
The public retail banking system outlined here should not be subject to the same regulation as the private banking system. Public banks would not be pushed into undertaking ever riskier behaviours based on the imperative to maximise profits — and are in any case subject to much less risk than private banks because their lending is guaranteed by the state. And given the aim of this plan is to limit the size and strength of private capital, it makes sense to provide the public banking system with a competitive advantage that makes it more attractive to most customers. Over the long term, this would serve to shift consumers and businesses organically towards using the new public banking system, whilst also forcing up standards in the private banking system. This would mean that businesses and households were able to access credit more cheaply, fairly, and democratically than in the current system.
The public banking system should be used to direct investment into socially desirable areas. The Bank and its stakeholders should be able to issue guidance to these new public banks on how much they are lending, and to whom. During an upward swing in the financial cycle, lending amongst these public institutions should be limited, other than for the most socially-necessary activities. During a downswing, these institutions should fill any gaps that arise in private credit creation. The relationship would work both ways — with the public banks providing the Bank of England with up-to-date information on the demand for credit, and the latter adjusting its outlook accordingly. Priorities for lending should be determined democratically based on a) the aims of the Green New Deal outlined below, and b) consultation with the stakeholders involved in the Bank’s new democratic architecture.
3. Debt Refinancing
The above set of interventions would not reduce the existing stock of private debt and would affect asset prices. To deal with the debt problem without causing a financial crisis, the public banks should step in to allow consumers and businesses to refinance their existing debt on easy terms, or have it written off altogether. Total interest paid on loans should also be capped as a percentage of the initial value of the loan (e.g. 150% of the principal).
Those with substantial outstanding unsecured debts — debt not backed up by an asset like a house — should have the option of refinancing these debts within the new public banking system. The public banks should buy up the debt from the private banks, imposing a haircut on the private lenders, and then refinance it at much lower — and potentially negative real — interest rates. For those consumers in severe debt distress, or those who have already repaid the principal of the loan, write offs should be considered. The balance between refinancing and writing off the debt should be undertaken in consultation with the Bank of England, based on trends in current consumer and asset prices.
Falling asset prices resulting from the new limits on private lending may threaten the solvency of borrowers who have taken out secured loans. The first and most obvious market this would affect would be housing — depending on the state of the financial cycle at the time, house prices could fall, potentially pushing some borrowers into insolvency. The new public banks should stand ready to refinance consumers’ mortgages, with strict terms and conditions applied. The public bank should pay as little as possible for the outstanding mortgage without prejudicing the solvency of the private institution that owns the mortgage — banks will have to take a hit, but not one large enough to threaten their solvency. Borrowers should repay the public bank the full value of the loan at market interest rates. The option of refinancing should serve to prevent a financial crisis, without obstructing the desired outcome of a steady increase in the affordability of housing.
Over the long term, the aim of the new system would be to reduce the desirability of private home ownership by keeping house prices in line with consumer prices and improving affordability and security of tenure for private and social renters. Housing would cease to be a financial asset and would come to represent a commercial good and a store of value. Such a proposal would have to be combined with a massive programme of house building — primarily for social housing — which should be guided by an industrial strategy aiming to boost employment and output in certain industries in certain parts of the country whilst decarbonising economic growth. Such a strategy could be implemented through the National Investment Bank outlined below. This would also require sweeping reform of regulation governing the housing market to make tenure more secure.
Many British businesses are also highly indebted and may experience similar problems were asset values to fall. The public banks, in coordination with the National Investment Bank, should consider offering the most distressed businesses the option of cheap refinancing. Again, the decisions here should be undertaken based on the size and nature of the business in question, with preference given to small businesses undertaking socially-useful activities in deprived areas.
4. Empowering workers
After this series of interventions, a large amount of the stock of existing private debt will have been transferred to the public sector, with consumers and businesses paying much lower rates of interest. This would serve to limit the power and profits of private finance capital, whilst also providing an immediate boost to living standards. However, more will need to be done in the short term to lift wages and living standards in order to empower working people in place of finance capital and reduce the demand for credit over the long term.
Wages must be increased at the bottom of the income spectrum by rolling out the real living wage across the country and to all ages. Wages per hour worked should also be raised by moving towards a four-day week. The anti-union legislation of the last several decades must be removed, and mandatory collective bargaining introduced. This would have to be accompanied with reforms to the structures of the major unions to make them more democratic, and support for new and smaller unions to scale up. But work is not limited to the workplace. Our economy currently relies on a huge amount of unpaid labour like child-rearing conducted primarily by women. Carers should be given the option of being remunerated for the reproductive labour they undertake or making use of expanded free care services provided by the state.
Tackling inequality also requires root-and-branch reform of the tax and benefits system. Taxation is far too large a subject to address in full here, but promising proposals have recently been put forward by the think tank IPPR to increase wealth taxation, reform corporate taxation, and reduce the income tax burden on lower and middle earners.10 Improvements to the tax system would be facilitated by the system of capital controls outlined above, which should prevent a mass exodus of capital. More, however, will also have to be done to curb avoidance and evasion as outlined below. Cuts to social security must be reversed and the punitive sanctions regime that exists at the heart of Universal Credit should be removed. And finally, the UK should move towards providing a much wider share of public services and utilities free at the point of use. This last aim would be facilitated through the nationalisation of key utilities like transport, energy, and water.
5. A National Investment Bank and a Green New Deal
The combination of higher taxes on corporations and the wealthy, and much greater levels of collective ownership across the economy achieved through the public system of investment outlined below, would provide the revenues necessary to make such a system sustainable over the long-term. Smart investment, aimed at raising incomes, reducing inequality and greening economic growth, would also increase tax revenues as well as achieving a variety of other objectives.
This investment agenda should be undertaken under the mantle of the “Green New Deal”, involving a dramatic increase in state investment to decarbonise the economy. This would involve decarbonising transport, energy, and other infrastructures through nationalisation and a programme of green investment; investment in research and development in green technology; and investment in decarbonising production, at home and abroad. The first plank would require direct state spending, but the second two could be undertaken through a National Investment Bank. The returns from this lending could then be shared equally through the creation of a People’s Asset Manager.
The UK Labour Party has recently put forward a proposal for a National Investment Bank (NIB) that has been designed to “avoid direct competition with conventional banks”. The bank would be capitalised through a £20bn bond issuance, and then issue its own bonds on financial markets backed up by a government guarantee, to bring its balance sheet up to £250bn. The NIB would then devolve funding to a set of Regional Development Banks (RDBs) that could undertake lending on the national bank’s behalf. Rather than directly lending to businesses itself the bank will provide capital to a network of smaller banks, which will then lend on to their customers. In effect, this allows banks to lend to small businesses without the associated risks. The governance of the bank would also be orthodox. A CEO would be responsible to a board, composed of politicians, experts, and stakeholders, alongside regional directors of the RDBs.
A NIB of a sufficient scale, and funded and managed in the right way, could be a radical way to socialise capital across the whole of the economy and support the roll out of a Green New Deal, not just a mechanism to provide cheap funding for small, private businesses. An initial bond issuance to capitalise the bank by government seems sensible — though it should be larger than £20bn. But the bank doesn’t need to act like a simple intermediary — raising money on private capital markets and on-lending to other private institutions. It should be able to lend directly to businesses themselves, as well as proposing its own investments, such as in infrastructure or energy projects. The majority of the NIB’s bonds should be bought by the People’s Asset Manager, as outlined below. It should include regional and local subsidiaries, created and managed in coalition with local communities. Effectively, the NIB should become a lending arm of the state, issuing bonds that could be bought by the state and given to the PAM, with the NIB then lending this capital on directly to sections of the economy that needed access to finance.11
The NIB will not need to be constrained by the macroprudential regulatory framework outlined above that would be applied to its private competitors. Instead, it should expand and contract its lending activities counter-cyclically based on the stage of the financial cycle, directed by the Bank of England. The NIB should also be connected to a series of regional and local institutions that are able to provide loans to small businesses, based on their geographical knowledge and local relationships. Considerations of counter-cyclicality should not, however, limit investment required for decarbonisation, which must take place as soon as a socialist government comes to power, regardless of the state of the economic cycle, counterbalanced by reduced lending and investment resulting from the greater regulation of private finance.
The NIB’s governance structure should be democratic. Its board should be staffed with government ministers, representatives of labour and social movements, and some directly elected representatives. The regional and local investment banks should also have boards, staffed with representatives of the NIB, local stakeholders and directly elected local repre- sentatives. The scale of lending would be directed by the newly-democratised Bank of England, and the activities for which capital would be provided would be determined according to the democratically-determined missions.
But perhaps the most radical element of such a scheme would be to allow it to act as the investment arm of the People’s Asset Manager (PAM). Much as today’s investment banks generally also have their own linked asset managers the bank could help to negotiate investments by the PAM into the corporations for which it was providing funding. This would ensure that the finance provided by the bank didn’t simply serve to enrich private shareholders but was distributed evenly across the economy as a whole.
6. A People’s Asset Manager
If institutional investors like Blackrock, who manage billions of dollars’ worth of other people’s assets, have become some of the most powerful entities in the international economy, then the creation of a democratically-owned and run alternative could be a revolutionary project for a socialist government. I propose the creation of a People’s Asset Manager (PAM), which would act alongside the National Investment Bank outlined above to steadily socialise ownership in the economy as a whole, in the same way that many international investment banks also have asset management arms to allow them to take advantage of investment opportunities that arise from their lending activities.
The PAM should contain a Citizen’s Wealth Fund (CWF), which would be capitalised using existing collective assets, and added to through tax revenues and the profits from the system of democratic finance.12 After several decades of almost continuous privatisation, the British state is relatively asset-poor. The Bank of England, however, owns a substantial amount of assets in the form of Treasuries — these could be used to capitalise the Citizen’s Wealth Fund as the Bank unwinds quantitative easing. Building on the proposal outlined by IPPR, this fund should be added to through revenues of a reformed system of wealth taxation, as well as by transferring the Crown Estate and other collectively owned assets into the fund. When it is large and stable enough, the CWF should use its returns to pay out a modest Universal Basic Dividend (UBD) to all citizens. This UBD would boost incomes and lock in support for the system of collective ownership – just as right-to-buy locked in support for privatisation.
The NIB and CWF should then work alongside one another to identify investment opportunities that would promote collective ownership over strategic sectors of the economy, to increase investment in socially and environmentally desirable activities and, subject to these two primary goals, to maximise the fund’s returns. When the NIB lends to a promising company, it should identify opportunities for the CWF to invest in that company in order to take advantage of the growth that would be fuelled by the NIB’s lending. The CWF should also invest in other strategic sectors of the economy as part of the Green New Deal— the state could provide bonds to allow the CWF to buy up stakes in private companies if necessary. Future nationalisations could also be undertaken through the CWF. The CWF should balance its investments between domestic and international assets that support the aims of the Green New Deal with maximising risk-adjusted returns.
The PAM would also manage the private assets of domestic savers via public pensions pots, and the mutual and insurance funds that currently send their capital to private asset managers for investment. These funds would be encouraged — either via tax incentives or regulation — to allow the PAM to invest funds on their behalf. The government should also consider providing tax breaks to savers who invest their money in the PAM upon the point of withdrawal. The aim of the private fund would have to be to maximise risk-adjusted returns, with the Green New Deal coming as a secondary consideration, but this could be subject to negotiations between the PAM and the mutual and insurance funds involved and their members.
These two funds should be managed separately, and democratically, with the managers of each fund directly accountable to elected boards comprised of key stakeholders and citizens. The majority of decision makers in the PAM should be directly elected, with the remainder being selected by stakeholders including the government, trade unions, and community groups. As the PAM increased in size and importance, these elections would grow in significance, allowing working people to determine their priorities regarding collective investment.
The PAM should take up a role as an activist investor in the corporations whose stock it owns. But rather than pressuring companies to maximise shareholder value, it should use its shareholdings to support the objectives of the Green New Deal. For example, encouraging sustainable business practices, promoting internal democracy, reducing pay differentials, closing the gender pay gap, and promoting responsible tax practices. Over the long term, as the PAM increases its holdings over domestic enterprises, it could provide an important role in promoting accountability amongst state- or worker-owned corporations — both promoting efficiency and ensuring these corporations are acting in the interests of stakeholders.
7. Institutional Reform
To achieve any of these measures it will be necessary to democratise the UK’s existing financial system. The first step in such a process should be to radically transform the Bank of England. Currently, the Bank of England is an independent entity, which operates based on a mandate set by the Treasury. The Bank has a mandate to control consumer price inflation and to maintain financial stability, the former of which is achieved through controlling monetary policy via the Monetary Policy Committee (MPC), and the latter of which is achieved through monitoring, issuing guidance, and occasionally offering financial support to the private banking system via the Financial Policy Committee (FPC). The notional independence of the Bank of England has been undermined through quantitative easing, which has seen it purchase billions of pounds worth of government debt. This has both undermined the distinction between fiscal and monetary policy and, by inflating asset prices for the wealthy, proven that monetary policy has incredibly important distributive impli- cations that mean the Bank must be held democratically accountable for its decisions.
As has been argued elsewhere in this book, the removal of significant portions of economic policymaking from the realm of democratic accountability has served to facilitate policy capture by elites. In the absence of a democratic pushback, the decisions of the independent Bank of England and other technocratic institutions responsible for supervising the finance sector, have come to reflect the interests of the powerful finance sector. If the UK’s most important economic institutions are not democratised, then the powerful will use their control over our governing economic institutions to thwart a transition to democratic socialism.
The Bank of England must therefore be reformed and democratised. The introduction of an asset price inflation target for the FPC should be accompanied by a change in the MPC’s remit: rather than simply monitoring consumer price inflation, the MPC should monitor the output gap — the gap between current demand in the economy and potential supply. These committees would have to work together very closely to monitor both consumer and asset price inflation and ensure they are coordinating their interventions to maximise their effectiveness. If there is a negative output gap, interest rates should be lowered, and guidance issued to the public banking system to increase lending to strategic sectors — and the opposite guidance should be given where there is a positive output gap. The makeup of the FPC and the MPC should also be changed to include representation from the government, labour and social movements, and other stakeholders, as well as containing a majority of directly elected members. Their decisions should be scrutinised frequently by an independent panel of citizens, including some experts, who would report back to the government and, if necessary, directly challenge the Bank’s decisions.
The privileges currently enjoyed by the City of London Corporation should also be removed. The City of London Corporation is currently the only part of the UK over which the democratically-elected government has no authority, and its representative is the only unelected member allowed to enter the House of Commons. This is no accident. The City is supposed to be above and beyond democratic accountability. Governments may come and go, but the City of London Corporation remains, its authority untouched by the changes that take place around it. A socialist government must remove the City’s special position and turn it into a local authority, just like any other, with democratically-elected representatives and a franchise based on residency.
The UK should also reform its relationships with the overseas territories and crown dependencies. This should be accompanied by a sweeping reform of financial transparency regulation. All private institutions — from banks to corporations — should have to submit to the public country-by-country reports of their revenue, profits, staff, and other costs, allowing regulators to determine whether they are avoiding taxes.13 All financial institutions, and all their subsidiaries, should be forced to operate at the highest levels of transparency, making all requested information available to authorities when asked. These requirements should be extended to all of the UK’s overseas territories and crown dependencies. The UK should also unilaterally opt to share all this information with other states, in the hope that this will be reciprocated. This should be accompanied by an increase in resources for tackling financial crime and tax evasion.
Many of these proposals would represent significant constitutional changes. As such, it would make sense for the democratisation of financial institutions to take place alongside a wider set of reforms to the British state. Other necessary measures not touched on in this section include reforms to the civil service — including a substantial curtailing of the power of the Treasury — Lords reform, and a programme of reform to local and regional government, aimed at increasing local democratic accountability and decentralising the British state.
8. Definancialising the Global Economy
Many of these measures would be opposed by existing international institutions. The power of these institutions to impose sanctions on states perceived to be in breech of collectively determined rules rests firstly on those states’ membership of these institutions, and secondly the hegemonic power of the United States to enforce the rules. The first issue can be reversed by exiting these institutions, while the second must be challenged directly by moving socialist states out of the orbit of US imperial power – a challenge facilitated by the erosion of US hegemony likely to be seen over the coming decades.
Both will involve creating new international institu- tions based on alliances with states with similar interests in challenging the hegemony of finance-capital and US imperialism. Alongside other socialist states in the global North, this would have to be premised upon a grand bargain with states in the global South. Debts should be cancelled, tax havens shut down, unfair treaties renegotiated, and unequal international institutions reformed or replaced. Extractive links between north and south should be replaced with mutually beneficial trade links, as well as transfers of aid, investment, and technology.
Support should be offered to socialist movements around the world attempting to undertake similar transformations of power in their own states. Such a programme will rely on the creation of a new international economic order. This will have to be delivered through genuinely multilateral institutions that abide by the principle of one country one vote, rather than one dollar one vote. These new institutions would provide equal weight to every sovereign state and allow these states to pursue models of development that support the power and prosperity of their people.
Together, this set of interventions would serve to curb the power of finance capital, whilst maintaining — and improving — the set of financial services to which consumers and businesses would have access. Some of the interventions outlined in this chapter, such as debt refinancing, would also provide an immediate boost to living standards, shoring up support for a new socialist government. Finance capital would be likely to resist these moves, so it is critically important that these measures are prepared well ahead of any socialist government coming into power. An incoming democratic socialist government should view these interventions as a Ridley Plan for the financial system and prepare accordingly.
Beyond all this, perhaps the most important role of a British democratic socialist government would be to provide the rest of the world with a beacon of hope. A socialist government in one of the most heavily financialised states in the global economy would seriously undermine international financial capital, concentrated as it is in the City of London — but it would also rally socialists all over the planet. After decades of capitalist realism, it would be possible to imagine a world based on cooperation rather than competition, on mutual aid rather than exploitation, and on stewardship of our common resources rather than ruthless extraction.