Common Weal Versus the Virus: The virus is exposing the reality of the weaknesses in our economy, society and democracy. Over the last six years Common Weal has been showing that the weaknesses can all be fixed. Over the next few weeks Common Weal Director Robin McAlpine will write a series of columns showing how Common Weal policy is the best way to survive this virus and then rebuild when its over. Today – the light at the end of the tunnel.
I KNOW this may sound counterintuitive-going-on-nuts at the moment, but I’m actually really pretty positive about the post-virus economy – but only if certain things happen.
Prior to the present crisis, there was a giant looming crisis approaching which we were virtually ignoring; this may, I hope, stimulate the change we need. Minds are certainly being focused.
There is a terrible version of the future in which – once again – disaster capitalists pick over the ruins of the economy and ‘in it together’ turns out to be ‘you suffer together, we pocket the proceeds’. The difference between this future and the one that give me hope is the potential shift that could take place after lockdown.
At Common Weal, we’re working on a paper (we’re calling it Shift) which explains how economic theory has to adapt to what comes next. I hope it will be ready really soon, but in the meantime, this is the drift of it.
The end of ‘stretch and extract’
If you want to know why our current economy creates so many problems in a crisis, you need to get familiar with the concept of ‘stretch and extract’. This is the fundamental principle of neoliberal capitalism.
Stretch and extract is a term used by venture capitalists and restructuring consultants, and it refers to taking over a business, looking where all its embedded wealth is – like buildings or intellectual property – and then ‘stretching’ it (striping it of assets as far as it can survive), so that embedded wealth can be taken out.
The standard practice is to sell off all the property, pay out all that money to shareholders (i.e. themselves), lease the buildings back to the same businesses and then let them run with the debt overhead until they fall apart (by which time you probably sold them on anyway). It is what happened to Boots the Chemist, and you can read the sorry story here.
However, this is just a distillation of the precept of current market capitalism – everything is an asset to be stretched, especially staff. If staff can be made to work for less and with less security, that is them stretched and the wealth extracted.
Under this approach, everything becomes a source of money; Gordon Brown’s PFI wheeze wasn’t some kind of mistake. He let the market in everywhere – especially the health service, especially in England – and so stretching and extracting became the order of the day.
This is the global problem with long supply chains; the more you’re willing to accept giant distances between the suppliers you need to make your product (goods and labour), the more you can ‘stretch and extract’. As a result, any worker that wants decent pay can be undercut by one thousands of miles away. Any nation which wants to steward its natural resources well can be undercut by any which doesn’t. Stretch your supply chains, make everything ‘just in time’ so you don’t carry the risk, definitely don’t worry about secondary impacts such as climate change and poverty, but definitely do take out the profit.
People think they get cheap goods out of this. They kind of do – but they pay for that twice over. First, in their wages (which, on average, will have fallen substantially) and then in taxes to mitigate the resultant problems.
Amongst these problems is the fact that much of the economy has been so stretched, extracted, financialised and hollowed-out that it is no longer resilient. ‘Just in time’ doesn’t work if there are global disruptions, casualised workforces starve quickly, and public services littered with private contractors are managed like businesses so don’t prepare for health emergencies.
Under this neoliberal approach to capitalism, what you don’t do is manufacture, because that’s hard to stretch and extract due to its need for serious fixed capital (such as machines) and skilled labour; neither is disposable. In contrast, retail proliferates because it’s brilliant at extracting wealth, (banks providing cheap debt is the stretch part).
Add it all together and you’ve got a wold economy which turns a health emergency into an existential economic crisis. Stretch and extract was hitting the buffers already – you can’t extract wealth twice, and those with it can’t find anything useful to do with it. As it stands, there’s a high likelihood it’s about to fall apart.
Shifting
Throughout history, most economic orders have survived a big hit and a few small ones. They don’t tend to survive two giant hits in quick succession. That’s where we are now – 2008 and 2020.
So what happens next? First, great pain as denial reigns and everyone fights the last war instead of the new one for a while. Then, economic theories change and a whole new model of economics begins.
In the 1930s, a war and a stock market crash had created a depression which shifted economics from the Gold Standard model to Keynesianism. This underpinned the long growth in the post-WW2 period, but it hit a series of consecutive crises including endemic underinvestment, ‘stagflation’, the Vietnam War and the Oil Crisis. That ended Keynesianism and introduced neoliberalism.
That is where we stand now – an unregulated free market has been virtually unchallenged since the Chicago School of rightwing economists got the ear of Regan and Thatcher.
This ideology should have been seriously reformed (at the very least) after the 2008 financial crisis, but instead things were patched up with a ‘keep stretching, keep extracting’ sticking plaster – in effect, free money for bankers to make it look like the wheels hadn’t come off.
Right now, some people are telling you ‘we’ might recover from this. They mean neoliberalism as is – and it can’t. The question is not will there be change, but what kind of change?
The following are some key shifts to hope for.
Deglobalisation
Trading over long distances has been happening since at least the Bronze Age. Long distance cultural exchanges were utterly normal by the time of the Ancient Greeks. Internationalism (people from distant places interacting) is old as the hills.
Globalisation is a completely different phenomenon. This is a system of supra-national rules which are beyond the power of any one nation-state to change. They are always about ‘liberalising’ – which is to say deregulating and removing democracy from the economy – and such practices are now roughly 40 years old.
I was an ardent anti-globaliser in the 1990s. It was the rallying cry of most of the serious Left. International trade deals were stretching and extracting the whole bloody world and all its natural resources.
Yet in the aftermath of 9/11, the Left went after (sequentially and mostly ineffectively) the Iraq War, the post-2008 financial crisis and the austerity it brought with it. Much of the Left regrettably seemed almost to throw in the towel on globalisation and accept that it ‘just happened’.
Suddenly, Germany is putting export bans in place lest Italy buys protective masks from it. That is the definition of globalisation falling apart.
The assumption is that this is replaced by isolation and protectionism – but it doesn’t have to be. It could easily be replaced with (real) internationalism and resilience. Internationalism would mean real democracies, free to deal with each other in a democratic manner without seeking permission from corporations. That would be a wonderful thing.
We’ll move to resilience economies
It’s that second shift which is more important – the shift away from imposed free markets. This can happen in one of two ways. One is that everyone starts trying to establish a position on the ladder which is far enough up to not be the ones getting screwed over by those at the top (i.e. standard trade war protectionism).
The other is that we move to a resilience focus. I’ve been in this camp for a long time now, but felt unable to say it because I was so far off the economic orthodoxy.
It became my conclusion a while ago when looking at environmental economics. The fundamental problem with neoliberalism and the environment is that there is an enormous gap between those exploiting the natural environment and those living with the consequences. In essence, globalisation forces you to eat pesticides by international law.
Consequently, there is never any incentive to steward natural resources responsibly because the people in whose interests this would be (citizens) are precisely the people who have lost the power to do anything about it through globalisation.
So, I became convinced that we need to divide goods and services into two – things you can sensible make for yourself and things you cannot. The point about what it means to be ‘sensible’ is that it must be viewed from a natural resource standpoint, not a neoliberal one.
For example, it doesn’t make sense for Scotland to make its own furniture under neoliberalism. On the other hand, it makes absolute sense for a country with massive forestry resources to make its own furniture – it is globalisation which means it doesn’t. Likewise, it doesn’t make sense for Scotland to make a mobile phone on its own.
Frankly, if it can be made out of wood Scotland should make it itself (with modern tech that’s a great many things); much the same can be said of what we can grow ourselves. In that scenario, we would have a clear incentive to manage the production process in a way that sustains our environment, while focusing on importing only what we don’t produce (coffee say, or those phones).
I became convinced that every nation should do that – look to its resource first, create national resilience and then cooperate fully on all the rest. It now looks like by far the most attractive of the options ahead, so this is me coming out as nakedly anti-globalisation once again.
It should also be noted that it’s pretty difficult to find a nation in the world more capable of domestic resilience than Scotland. The case for a nation-state with incredible domestic land and sea resources and virtually limitless energy is beyond robust.
But for resilience you need a firm foundation
Deglobalisation is a key economic concept that offers hope, but it needs to be build on a proper understanding of Foundational Economics. This is a new strand of economic thinking that differentiates between what it calls ‘optional consumption’ and ‘non-optional consumption’.
It says that you can live without a sports car, so you can just make a decision about that yourself – but you can’t live without food and shelter, so those are parts of the economy which need to be seen as a foundation for the rest of it.
Neoliberalism claims that profit enables society, but that is completely the wrong way round: a modern economy stops working without housing, food, education, health services, law enforcement, electricity, roads and so on. These are existential, and so cannot just be left to ‘choice’. Instead, democracy has a duty to ensure these necessities are managed for the public good because that is their prime purpose.
Foundational Economics proposes that a spread of approaches is taken from full public provision (policing, health services, education) and nationalisation (electricity and communications) to effective market intervention and regulation (food, housing).
If you treat economics like that, identifying not ‘too big to fail’ but ‘too important to fail’ and developing a strategy for ensuring democratic resilience in these areas, the rest can be built on that firm foundation. Free markets leave no firm foundations.
Resilience works – inside a Circular Economy
Circular economics is really easy to get your head round. Think of nature – there is no such thing as waste. Everything exists in a cycle, round and round. There is no ‘end point’.
That is how environmental economics thinks of these things – the output from one cycle must also be the input for another. Unfortunately, we still have a take-make-sell-dump-repeat economy. It is spectacularly wasteful and harmful.
There are two particularly important parts of circular economics to learn from if we want to go down a resilience route rather than facing a trade war race-to-the-bottom. The first is time. If markets are good at efficiently allocating resources over space (which is debatable), they’re terrible at allocating resources over time. Markets always work in the short term, hence the waste and the constant scramble for new resources.
A moment’s consideration reveals the ridiculousness of this. We build worse quality which can’t be repaired, so to save us money now we pay much, much more over the long term. I always put it like this; you shouldn’t own two washing machines in your life. If you do, there was something very wrong with the first one.
If we build to last – and be repaired – then we’re less involved in the scramble to secure Africa’s dwindling mineral resources. And if we remanufacture and recycle everything then we are no longer so dependent on imported materials.
Resilience economics becomes easy when you don’t waste your resources. It has the handy side effect of not destroying the environment.
Shop less, borrow less – and diversify
There are a couple of economy sectors that are in particular trouble – retail and finance. Right now, ‘blank cheque’ doesn’t begin to cover what central banks are promising the banking sector, but it’s just postponing the inevitable. Meanwhile, no-one knows how to save retail.
So what is the solution? Don’t rescue them; diversify away from them – not least because both lie at the heart of stretch and extract.
As I pointed out above, cheap consumer loans stretched the life out of you and then retail (and the housing markets) extracted all of that wealth from you. You know you buy things you don’t even nearly need and barely want. You know they’re designed to be thrown away.
You even know this is just a wheeze to take your money away because retailers and government talk openly about that being the plan. ‘How do we keep people spending?’ they ask, as if that’s always a good thing.
It isn’t if you’re trying to make stuff rather than extract money. We should simply move away from retail as the heart of our economy, and if we do we can stop worrying about finance so much. A solid reliable high street bank for customers (as Common Weal has been campaigning for) is all most of the economy needs.
Such a transition can help us shift away hard from the debt-consumption mess we’re in. There are simply better ways to live than to be constantly chasing yet one more purchase in the hope that it will improve our social status and so make us happy.
There are many, many more productive things we can all do with our labour time than the low-pay retail sector and many, many more rewarding things to do with our leisure time than shop.
To pursue a resilient economy model based on Foundational and Circular Economics in a post-globalised world should be a cause for optimism. There is every reason for hope – if we have the right leadership.
Next up – what might a post-virus economy look like in practice?