What is good capitalism

| Good capitalism?

by Sebastian Dullien, Hansjörg Herr and Christian Kellermann

The current type of capitalism produces such a degree of injustice, insecurities and ecological problems that one cannot speak of a "good capitalism". On the contrary, this financial capitalism is the worst possible counterpart to a "good capitalism". We describe the model of a »good capitalism«, with which we sketch a fair, solidarity and ecologically sustainable, but at the same time creative and productive economic model based on substantially changed degrees of freedom of individual markets.



How badly capitalism can work is shown with cynical brutality by the excesses of finance-driven capitalism, which developed from the 1970s onwards as part of the neoliberal globalization project. Incessantly bubbling millions in salaries for hedge fund managers, a rise in inequality in income distribution, state bankruptcies, a rise in unemployment and precarious employment, the homeless are an expression of this capitalism. The conservative revolution of the 1970s and 1980s found its strongest expression in the liberalization of the financial and labor markets. The last few decades have been accompanied by unprecedented ecological destruction that has once again taken on a completely new quality with global warming and its unforeseeable consequences.

Against the background of these problems, however, it would be wrong to speak of tendencies towards the dissolution of the currently existing type of capitalism or of capitalism in general. Finance-driven capitalism can also continue to exist for the next few decades - albeit with negative consequences for the vast majority of people, who are then exposed to further crisis tendencies, insecurities in their lifestyles and ecological escalation. The escalation of the economic instabilities of the neoliberal globalization project in the subprime crisis and its consequences has shown that state action is able to stabilize crises that are critical of the system. Expansive fiscal policy, the creation of liquidity by the central banks and the stabilization of the financial system through the partial nationalization of financial institutions prevented a development like the one in the 1930s. There is much to suggest that the next few years will not be characterized by rapid growth. Because consumer and real estate debt in the USA, Great Britain or some southern European countries, for example, is unlikely to continue as in the last twenty years. If there is no strong growth in these countries, then export-oriented strategies that characterize Germany and Japan among others will not work. However, by the time the next bubble bursts, some air will have been released, which will then reappear in a different place in a few years and cause another bubble to burst.

State intervention during the subprime crisis and its consequences will not primarily affect those who mainly profited from the asset market bubbles before the crisis. The top earner group and large fortunes were not used to finance the burdens of the crisis. In the future, as part of the stabilization of national budgets in many countries, it is to be expected that government spending cuts and tax increases will more likely affect the poor in society. The current type of capitalism produces such a degree of injustice, insecurities and ecological problems that one cannot speak of a "good capitalism". On the contrary, this financial capitalism is the worst possible counterpart to a "good capitalism". We describe the model of a »good capitalism«, with which we sketch a fair, solidarity and ecologically sustainable, but at the same time also creative and productive economic model based on substantially changed degrees of freedom of individual markets. [1]

It may be surprising why, despite the critical analysis of the existing type of capitalism, we advocate "good capitalism". The reason is that we are currently not seeing any draft society that does not represent, in one form or another, a regulated variant of capitalism that is socially and ecologically oriented. The planned economy and the real existing socialism, the hope of many leftists in the past, have failed as an alternative model. This model was anything but successful from an ecological point of view. In keeping with Marx's analysis, we are also convinced that a new system can only grow out of the existing one. Capitalism will therefore be with us for a while. It should also be borne in mind that capitalism has increased the productive forces like no other social system before. It is about embedding markets in institutions and policies with the aim of preventing the excesses of markets, stabilizing the system and shaping it socially and ecologically.

Correct capital errors

We see a whole range of problems with the current economic model that must - and can - be solved. The reforms of the past 40 years have been based on a belief in the market. Markets were seen as self-regulating mechanisms that inherently lead to stability including high employment and a reasonably acceptable distribution of income. Since the unleashed markets usually did not deliver the desired result, politics always gave the economy a further dose of more freedom of development.

From the 1970s onwards, an increasing imbalance developed between the global market on the one hand and the national level of regulation on the other. Without resolving this asymmetry, it will be difficult to guarantee stable global economic development. This does not mean that a number of even far-reaching reforms cannot be carried out at the national level, but the problem remains that regulations are best placed at the level at which the processes take place. This also applies to the ecological problems. A central question for a new economic model is what role the financial markets should play. The financial sector and its dynamism should not be demonized. It is true that excessive lending is seen as a central reason for the bubble in the US real estate market and thus the current crisis. But it must be remembered that credit and credit growth are not bad in themselves. Rather, credit is the fuel of sustainable innovation and growth. The financial sector thus also has an important role in a socio-ecological economy. Unlike in previous years, when business in the financial sector has often degenerated into an end in itself, the financial sector has to become a service provider for the rest of the economy again. The financial markets must provide the economy with sufficient financial resources to enable innovations, especially in the area of ​​the "green economy". But they also have to provide "patient" capital that enables companies to develop long-term strategies and plan for the longer term. The framework for investment banks, fund management companies, commercial banks and other players in the financial markets must be designed in such a way that the financial sector as a whole fulfills these tasks. In particular, credit expansion, which always has to be funded by central banks, must not flow into speculative activities. It must be ensured that loans in the corporate sector are used to finance productive activities. The financial sector can of course only take on this role as long as there is no over-indebtedness or debt crises in individual countries or economic sectors. Financial market crises lead to such disruptions in the financial system, for example through the destruction of equity, so that the financial sector can no longer grant sufficient loans to companies for their productive investments. For a new and stable growth model, it follows that rising debt ratios, be it of the state, private households or companies, are out of the question as growth drivers.

The deep crisis after the subprime crisis, which was in fact only one trigger in an overall fragile system, was preceded by glaring global imbalances, which were expressed in particular in a huge current account deficit in the USA. This indicated that the US had been hit by gigantic capital inflows, largely generated by the market, but partly also reflecting strategic foreign exchange market interventions by central banks. The latter played a role particularly in Asian countries, above all in China. Large export countries such as China and Japan benefited from the deficits in the USA. Germany also built up huge export surpluses, most of which arose within the European Monetary Union and were generated by the below-average wage increases in Germany and the resulting increase in German competitiveness. Such imbalances between countries are sustainable for a period of time, but when debt builds up and confidence in countries is lost, capital moves abruptly, with consequences for exchange rates, real external debt, growth and employment.

In this respect, beyond better financial market regulation, the economic framework conditions must be designed in such a way that demand can be created by countries and economic sectors without increasing debt ratios. In this context, the distribution of income, which affects economic demand, is of central importance. In relative terms, high income earners consume less than lower income earners. In this respect, the demand effect is greater when you top up low incomes than when you give a millionaire the same amount of additional income (not to mention questions of equity). The overall economically successful model of capitalism of the 1950s and 1960s was based on expanding consumer demand, which developed on the basis of rising mass incomes. The distribution of income was such that even poorer income groups without indebtedness stimulated consumer demand sufficiently to drive the growth process. One of the reasons the period is referred to as "Fordism" is because Henry Ford allowed his workers enough income to afford the cars that Ford produced without rising debt ratios. Investment demand and consumer demand were in a relationship that allowed stable expansion. Three factors are relevant to the distribution of income that affects consumer demand. First, the (functional) distribution of income into wages and profits, second, the wage spread, and third, state redistribution policy. In all three areas there have been developments in almost every country in the world over the past few decades that have led to greater inequality in income distribution.

Value creation and good growth

The question of "good capitalism" is about the right balance between market and state. When it comes to the question of more state, however, it is by no means a return to the old "Germany model" of the 1970s. "More state" does not mean turning back emancipatory developments in the social sphere. For women, for example, it was more difficult to work in the 1970s than it is today. The “Model Germany” of the decades after the Second World War was characterized by long-term thinking based on the close interweaving of industry and banks under the catchphrase “Deutschland AG”. This model has lost its basis in the context of European integration and the globalization of production. In addition, the model cemented dubious power structures that had to be overcome.

Many elements of better capitalism cannot be implemented nationally alone, least of all by a country that, like Germany, is a member of the EU and is economically and legally closely intertwined with its neighbors. For many ideas, the supranational level is also the appropriate level of regulation for fundamental economic considerations. This is especially true for financial markets and their actors. For example, globally coordinated financial market regulation is desirable. International coordination is also desirable on other points, such as the question of global imbalances. Nonetheless, in many areas the transition to a new economic model can begin at home. The reduction of Germany's enormous current account surplus could, for example, begin with a greater increase in wages, the introduction of statutory minimum wages, greater tax redistribution and the expansion and restructuring of social security systems in Germany. This could balance the German export model by strengthening the domestic demand components. A number of measures with international consequences can also be carried out. Offshore centers can be dried up by banning transactions with them. Despite a lot of leeway, especially for Germany as the largest EU country, the EU or EMU is the desirable level for many regulations, whereby it must be ensured that individual countries can implement stricter rules. If one speaks of "good capitalism" and value creation, then ecological problems must also be in the foreground. With all economic paradigms in different variants there is agreement that the market mechanism fails to capture nature. It can be assumed that unrestrained capitalism destroys the natural foundations of human existence. As an alternative, there is no other option than massive state intervention in the market process in order to fundamentally change the structure of production and consumption (i.e. our way of life) in an ecological direction. With appropriate changes, the conflict between growth and ecologically sensible economic activity will be defused. Growth can then also take place that does not destroy the natural foundations of life. Of course, for rich economies there is always the option that productivity gains are implemented in whatever form in reducing working hours. Ecological renovation also includes new technologies. The capitalist productivity machine has dramatically increased the productive forces. However, the technological development is not neutral, but shaped by the incentives of the market and the utilization of capital. For this reason, frameworks and interventions by the state are necessary, particularly in technological development, in order to initiate and stabilize ecological development.

Pillars of a "good capitalism"

The idea of ​​capitalism as a self-regulating system that leads to stability and welfare for all is wrong. Markets must always be integrated into institutions and regulations, otherwise they develop destructive forces. So it is not a question of whether the state should intervene in markets, but how. In order for capitalism to develop its productive dynamics as free as possible from its destructive tendencies, it must be put on a leash: by the state and society. The leash must not be too long, but also not too short. In an ideal world, global capitalism must also have global regulation or leash to stay in the picture. But a number of sensible precautions have to be taken at the national and regional level as well. There is enough leeway for a country like Germany to shape domestic economic issues and its own degree of globalization. A feasible alternative looks like this:

Pillar 1: The banks and the financial system

Financial systems represent the "brain" of the economic system. They are central to the dynamic development of economies, but they can also drive the economy to ruin. In fact, a well-functioning financial system in a modern economy takes on at least four tasks that are indispensable for a sustainable growth process. First, through freshly drawn loans, it enables companies and innovative entrepreneurs to invest and carry out production processes. Second, through the better distribution of risk overall, it helps that more entrepreneurial risks can be taken, which tends to lead to a higher degree of innovation and higher economic growth. Third, a properly functioning financial system should distribute credit to those sectors and companies that are most likely to generate sustainable growth. And fourthly, it helps to collect small amounts of money from a large number of savers and to make them available for larger investment projects.The financial system should provide sufficient credit for the corporate sector and promote innovative "green" companies and investments, including those with higher risks. However, this does not require innumerable and very similar financial products and not the scope of the gigantic escalating derivatives markets. Equities and real estate markets driven by speculation and short-term action as well as corporate strategies geared towards short-term profit do not support the long-term development of economies. Relatively down-to-earth financial systems are sufficient to finance investments and innovations through credit expansion.

Pillar 2: wages and the labor market

Purchasing power, which is the central source of demand in developed economies, should be based on a relatively even distribution of income and not on an expansion of consumer credit. A balanced distribution of income requires several measures: Firstly, the reversal of the long-term trend of a falling wage share, which is primarily due to the increase in power, the escalation and the greed for risk and return in the financial system. Second, the wage structure is to be changed through statutory minimum wages and the strengthening of collective bargaining systems in such a way that lower wages are raised. Thirdly, the state must intervene in the distribution given by the market through taxes and expenditure, including the provision of public goods. The statutory social systems play an important role, but not the only one.

Pillar 3: Public budgets

In a fundamentally newly regulated capitalism, a stronger role for the state cannot be ensured without a just and solidly financed income base that prevents an increase in the share of national debt in the gross domestic product. On the one hand, tax policy corrects the distribution of income and serves to invest in education, research, infrastructure and social security in particular. Solid state financing is a prerequisite for countercyclical stabilization of the economy through automatic stabilizers and for the provision of the best possible public services.

Pillar 4: ecological turnaround

The state has to shape the framework in such a way that an ecological turnaround becomes inevitable. Ecologically sensible technologies are to be subsidized by the state - from basic research to subsidies for ecologically sensible projects. Earmarked financial market instruments can be used to finance the eco-transition, as can a corresponding tax-based incentive system. The ecological threats provide the regulatory framework for a »green macroeconomy«, which must be a clever mix of (market-based) instruments and state control. A “green new deal” with the aim of social and ecological restructuring can combine high employment, social security and ecological production.

Pillar 5: the world

Such a model needs an economic constellation that promotes productivity increases and innovations, especially in the direction of ecologically compatible economic activity, is characterized by a stable and at the same time dynamic financial system and is based on growth in the countries of the world that is fundamentally based on domestic or regional income growth Growth in demand, thus preventing large current account imbalances. The world economy should be characterized by a system of relatively stable exchange rates that can be adjusted in the event of large imbalances. Selective controls on international capital movements are essential to stabilize exchange rates. Imbalances in current accounts should be combated through appropriate monetary and fiscal policies - within monetary unions such as EMU also through appropriate wage developments. If current account imbalances are built up, exchange rate adjustments should be made. Exchange rate adjustments are not possible in currency unions, which implies the need for greater integration and cooperation between countries belonging to a currency union.

Powerful contradictions

"Good capitalism" stands for relatively secure economic living conditions. It is unacceptable for workers or companies to become the pawn of completely destabilized markets. Precarious jobs and mass unemployment weaken unions and workers. Policies must therefore be pursued which keep unemployment low and eliminate the legal opportunities for precarious jobs. Extended co-determination and employee rights are important for the balance of power between work and capital. Even if the proposed reforms were implemented, there would still be enough room for markets, which in various dimensions are an element of the freedom of individuals. It is therefore not about abolishing or replacing markets, but about integrating markets, especially financial and labor markets, into institutions and regulations and designing incentive systems in such a way that the sustainable “green” turnaround is initiated. Such a turnaround will not work without a fundamental shift in power in favor of the state and democratic co-determination in all areas of the economy. "Good" is our derivation of justice and solidarity with our fellow human beings and nature. Building on these values, precisely because of the attested contradictions of capitalism, it is possible to create an economic model that is also highly productive due to its claim to be primarily socio-ecological.

[1] Based on the book of the same name, published in October 2009 by transcript Verlag.