Duncan’s Economic Blog

What kind of Capitalism do we want? : An answer for Open Left

Posted in Uncategorized by duncanseconomicblog on November 2, 2009

This week Demo’s Open Left project is asking 5 big questions and posting up responses by some big thinkers. Graeme Cook gives some more details over at LabourList. One question in particular caught my attention:

 Should the Left seek to shape a fundamentally different model of capitalism in the aftermath of the banking crisis and subsequent recession?

Open Left will be publishing papers from Andrew Gamble &  Maurice Glasman.

My own thoughts, briefly put, are as follows:

What kind of Capitalism do we want?

In his speech to conference this year Gordon Brown said:

Finance must be the servant of people and industry and not their master.

Perhaps unconsciously, he was echoing a Labour Party paper written in 1944.

Blame for unemployment lies more with finance than with industry. Mass unemployment is never the fault of the worker; often it is not the fault of the employers. All widespread trade depressions in modern times have financial causes; successive inflation and deflation, obstinate adherence to the gold standard, reckless speculation, and over investment in particular industries…

Finance must be the servant, and the intelligent servant, of the community and productive industry; not their stupid master.

 It is strange to think that words written sixty five years ago could have hold resonance today. Strange, and if one is honest, a little disappointing. Financial reform was an agenda pushed by the Atlee Government – most noticeably the nationalising of the Bank of England, the 1945-1947 ‘cheap money’ policy and attempted reforms of the investment market.  Despite this the trend of the last six decades has been for finance to become ever more powerful and, if anything, even more unstable. 

Before asking the question ‘what type of capitalism do we want?’ we need to ask the more pressing ‘what type of capitalism do we have?’

The answer is ‘finance capitalism’, a state of affairs whereby the economic interests of finance hold sway over not only the workers but also industry.  The Labour Party statements of both 1944 and now 2009 seem to acknowledge this and to concede that it is a problem.  The Party is in good company, as Keynes wrote in the General Theory:

Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.

The power of finance capital relies on the notion that capital is scare – because of this it can charge a rate of interest. More importantly it can choose where to allocate this capital dependent not on the needs of the wider economy but on the likely return. It is often said that Britain has a ‘comparative advantage’ in terms of financial services. It is less often noted that this implies a ‘comparative disadvantage’ in other sectors. In the new post-credit crunch world any re-balancing of the economy will require large scale investment in other sectors. It is fully possible that finance capital will resist this.

Talk of ‘taking on finance capital’ sounds radical, extreme even – the demented babblings of a ‘hard left’.  One can turn again to Keynes, the very embodiment of inter-war Liberalism:

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. …

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.

A policy of undermining the scarcity of capital through low interest rates whilst harnessing the power of finance to ‘the service of the community’ would herald the shift from ‘finance capitalism’ to the next stage of development. In many ways it represents the unfinished legacy of the Attlee Government.


27 Responses

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  1. Tim Worstall said, on November 2, 2009 at 11:51 am

    “A policy of undermining the scarcity of capital through low interest rates”

    Eh? You’re going to increase the supply of something by lowering the price?

    Interesting supply curves you’re using there.

    • duncanseconomicblog said, on November 2, 2009 at 11:57 am

      I’m arguing, with Keynes and lots of post-Keynesians, that ‘capital’ isn’t a commodity.

      It can be created almost at will by banks. Given this it isn’t scare and therefore should be cheaper.

  2. OK, OK, so I don’t do macro said, on November 2, 2009 at 12:05 pm

    […] at least I don’t do macro very well. But this seems ridiculous: A policy of undermining the scarcity of capital through low interest […]

  3. dannyboy said, on November 2, 2009 at 3:39 pm

    “A policy of undermining the scarcity of capital through low interest rates whilst harnessing the power of finance to ‘the service of the community’ would herald the shift from ‘finance capitalism’ to the next stage of development.”

    Duncan, you sound more the neo-chartalist with every post!

    Capital is already cheap. What is making it more expensive than it should be is the risk arising from interest rates being near that troublesome 0%bound. You know, where monetary policy fails? Rates have been in a downward tend since the 50s. At this point risk arises from the fact there is little incentive to invest when one can hold cash. Ok so the government can invest but long term is this a sustainable and balanced way of spending – and I’m not talking about deficits I’m talking about who decides what should be spent on what.

    Further, we’ll still be dependant on growth to provide jobs unless we’re going for the pull chartalist package of a job guarantee.

    How about we just delete the concept of cash and then let credit makets set interest rates as negative or positive as they want to be according to the supply and demand for money?

    • duncanseconomicblog said, on November 2, 2009 at 3:56 pm


      At the moment capital appears cheap (although actual lending isn’t exactly free and easy).

      What I’m advocating is a permenant policy of cheap money.

      At the moment we still need fioscal policy to get any traction.

  4. dannyboy said, on November 2, 2009 at 4:11 pm

    Sounds like china to me. Also it sounds very inflationary.

    In any case the money would only be cheap at the short end of the term structure. If significant inflation ensues then the long end will still be expensive, unless you propose public credit creation using an arbitrary and fixed yield curve.

    Also that would seem to sever the connection between savings and investment.

  5. dannyboy said, on November 2, 2009 at 4:19 pm

    Cool. However I’m skeptical that some kind of complex system (which must almost by definition include a good deal of arbitrage) is required when most problems could be sorted out by removing the existing arbitrages (i.e cash) in credit markets which create unemployment and financial instability. What do you dislike about what Willem Buiter has proposed in this regard?

  6. freethinkingeconomist said, on November 2, 2009 at 5:54 pm

    I feel slightly odd agreeing with Tim on this one. But, Duncan, could you explain why capital ought to be limitless? Is it really a monetary thing that can be created or constrained by financial actors?

    How can it be created?

    Because I always thought that capital was deferred consumption. You know, we harvest 10 sacks of grain, we save 2 of them, use them to pay a bunch of workers to do other stuff, that sort of thing. You can’t just create those 2 sacks of grain – you have to either harvest more (income) or save more.

    ‘The power of finance capital relies on the notion that capital is scare – because of this it can charge a rate of interest. More importantly it can choose where to allocate this capital dependent not on the needs of the wider economy but on the likely return.’

    I can’t see what is unfair or unnatural about this. I get some capital – say for the sake of argument by saving some of the returns of my labour. I then hawk it around, and naturally I offer it to people depending on the rate of interest, security etc on it. Without that incentive, property rights and the encouragement not to just waste it or overconsume like a primitive man with rotting apples in a strong heat . . .

    I need more explanation, sorry.

    • dannyboy said, on November 2, 2009 at 11:20 pm

      I’m thinking that duncan is thinking : ‘loans create deposits’.

      Freethinking, I agree with your sentiments but I’m interested to see what duncan comes up with.

      Also wrt deferred consumption, should the right to defer consumption always be free? After all, it is a service of kinds. What if consumption is likely to be more expensive in future than now?

    • duncanseconomicblog said, on November 3, 2009 at 8:03 am


      I feel another two or three posts on this coming on about this subject this week and next (includign a reply to Luis, who commented over at Tim’s).

      This all deserves more space than the comments.

  7. sceptic said, on November 3, 2009 at 10:03 am

    CAPITALISM??? I thought you lot were supposed to be socialists. Down with the capitalist running dogs.

  8. Chris Cook said, on November 3, 2009 at 11:31 am

    The finance capital we have is originated by financial intermediaries: interest-bearing debt created as money by credit intermediaries; equity by rentier shareholders.

    Credit intermediaries and rentier shareholders are not necessary in a networked economy of direct instantaneous connections. This will mean a transition to financial service provision, where banks do not create credit but:

    (a) manage credit created bilaterally ‘Peer to Peer’ between seller and buyer;

    (b) bring investors together ‘Peer to Peer’ with direct investment in production or use value of productive assets, using legal forms other than companies eg trust or partnership frameworks.

    In fact such a disintermediated model is in the interests of bankers because it means that the only capital they need is that necessary for operating costs.

    Government – if shoved by the financial services industry – could hinder a transition to disintermediated financial markets, but could no more stop it than the music industry can stop filesharing. In my view governments should recognise this evolution, and facilitate it as best they can.

    As Taleb and Buiter recognise, if the debt burden is unsustainable – and it is – then perhaps the solution is a new approach to equity?



    • dannyboy said, on November 3, 2009 at 2:18 pm

      Chris I’m familiar with some of your work. What does buiter have to say in regard to your model?

      • Chris Cook said, on November 4, 2009 at 1:03 am

        I doubt whether Buiter would know me from Adam.

        I specialise in Coarse Economics. 🙂

  9. […] hoping to do a more in depth post on the economy later on in the week, (in part responding to Duncan and openleft here), but until then, several people whose judgement I respect have urged me to read […]

  10. darrellgoodliffe said, on November 4, 2009 at 2:47 pm

    In many ways I agree but what your missing out is that Atlee wasn’t aiming to transform capitalism at all; he wanted to introduce a new system ie, socialism. As I have tried to say over on my blog (http://momentsofc.wordpress.com/2009/11/02/labours-left-struggles-with-its-narrative/) the whole problem with the left is it has lost even a semblance of wanting to fundamentally transform society. The real question that first needs to be asked is whether that is still our aim or not and then what direction we want to take that in comes after that.

  11. […] Shelter. Leave a Comment This post comes from a number of inspirations provocations.    First Duncan responded to Open Left’s call for a debate on the Future of Capitalism.  His view was, […]

  12. Diarmid Weir said, on November 6, 2009 at 12:58 am

    Yes, I think Labour have given up on economics. And yet there is so much interesting heterodox stuff out there now. And if the time for it is not now…

    It is of course important to get our ‘capitals’ sorted out. Firstly there is ‘physical capital’, the real goods used to produce consumption goods. Clearly these goods must be ‘saved’ from consumption, and that has an opportunity cost for their legal owners that must be compensated. Secondly there is ‘saved’ finance capital, the money we have earned but don’t plan on spending any time soon. This may be converted into less liquid financial assets, allowing the money itself to purchase production capital. Again there is an opportunity cost for the non-spending of this money by its original owners. Thirdly and most importantly, because it is the ultimate source of all money, finance capital is provided by banks in the form of new money, new money that will eventually be destroyed after the production it finances is sold and the loan that created it repaid. For this finance capital there is no opportunity cost; since it didn’t previously exist it could have no alternative use. This does not mean that it is costless to produce this money, however. Banks must administer and monitor their loans, and they ultimately pay the price, by taking a hit to their capital, if borrowers default.

    So, even if all money was produced by non profit-making state or socially-controlled banks, the correct interest rate on new loans would not be zero, but it would certainly be lower than the interest rates charged by today’s commercial banks. And given the importance of new money lending for production AND the importance of the money this creates for general exchange AND the reliance of the banks on the state financial and legal infrastructure AND the reckless incompetence recently demonstrated by the banking industry it does seem that there is a very strong case to be made for banking to be permanently under some form of social control.

    • cjenscook said, on November 6, 2009 at 11:26 am

      Banks as credit intermediaries are not the ultimate source of all money. They are merely the ultimate source of all money which is created as interest-bearing debt based upon a specified amount of capital.

      Such “deficit-based” money is mathematically unsustainable in a finite world, and any nation (such as the US now, and GB before that) which provides a global reserve currency based on debt puts itself in debt to the world – which as Triffin pointed out – is unsustainable in the long run.

      Trade suppliers can and do create credit directly to buyers, and it is quite simple – eg the Swiss WIR – for a credit clearing system/accounting system to act de facto as a monetary system which is complementary to the fiat system. Wherever there is a barter system with in-built credit, then the result is a monetary system.

      The fact is that banking as credit intermediation may be conventional, but it is not necessary. There is no reason why banks cannot – and indeed it is in their interests to do so – migrate to a role as service provider managing the bilateral (Peer to Peer) creation of credit for the circulation of goods and services.

      Sellers and buyers on credit terms would then share system operating costs, and also make provisions into a default pool owned in common, by a custodian, rather than by a credit intermediary bank.

      The long term funding of productive assets – ie investment – is another issue, and here I advocate the synthesising of the existing – conflicting – claims of secured creditors and shareholders with a new form of what I call ‘open’capital – ie proportional shares in revenues or production within a partnership-based legal framework, rather than one based upon sub-optimal and conflicted company and trust law frameworks.

  13. Diarmid Weir said, on November 6, 2009 at 11:07 pm

    In a modern monetary economy all money is created as debt. This includes that created by governments via the central bank (not all of it interest-bearing) to pay for goods and services and act as reserves for the commercial banks. As long as the debt is matched by future value that is either paid for in the market or through taxation this system is perfectly sustainable. Whether it is desirable is, of course, another question.
    This is separate from intermediation (as I believe generally understood) which involves money that already exists (the second type of capital I outline above).

    The following articles may be relevant: http://www.levy.org/pubs/wp244.pdf and http://www.levy.org/pubs/wp_580.pdf

    The role of bilateral credit is of course important, but how it can be expanded to fill the role currently played by bank credit is an interesting question.

  14. cjenscook said, on November 7, 2009 at 12:04 am

    Central banks are in fact not necessary.

    Hong Kong does not have one, and a Monetary Authority sets the parameters for credit creation by private bank only. The historical absence of a lender of last resort is probably one of the reasons why HSBC has come through so far better than most.

    But there is no need for private banks either. Putting Communist era State banks to one side, the Social Credit movement advocated credit creation directly by Treasuries, and indeed Treasury Branches

    Alberta Treasury Branches

    nominally survive in Alberta to this day as a vestige of the Social Credit government in the 1930s.

    I believe that the extension of WIR style credit clearing – within a mutual ‘guarantee society’ agreement as a framework of trust – is actually quite straightforward to achieve and would spread virally. The technology and skills necesaryu all exist in robust form.

    The reason is that for the user the value proposition is compelling: interest-free, but not cost-free ‘Peer to Peer’ credit, where system costs are shared, and a provision is made by both buyer and seller into a default pool held in common ownership by a custodian.

    For the bank, the compelling value proposition is of a move away from intermediation to service provision, and therefore the only capital requirement is that necessary to cover operating costs, since the default risk is shared by the community of users.

    Using such a Peer to Peer credit architecture, goods and services may circulate in a credit clearing union on credit terms and productive assets may be created.

    Such credit becomes immobilised in productive assets, and I think of it as being ‘tied up’ in the conflicting legal claims of conventional “Equity” (in a joint stock company) and Debt, secured by a a charge, or mortgage. Once created, the use value of such assets may instead be ‘unitised’ (through the issue of Units redeemable in use value) using legal frameworks other than Companies, and this is where ‘Peer to Peer investment’ comes in.

    The two Peer to Peer mechanisms would combine to create Peer to Peer Finance.

    I believe that new assumptions will have to be made in order for Economics to account for such a Peer to Peer architecture.

    I suggest that the WIR already disproves – by ‘Black Swan’ counterexample – the assumption underpinning conventional Economics that money is credit, when the truth is that credit is implicit in a monetary relationship.

    • Diarmid Weir said, on November 9, 2009 at 2:10 pm

      How do private banks in Hong Kong settle their mutual transfers? HSBC will have an account with the Bank of England for its UK operations.

      Similarly, complementary currency/credit systems cannot deal with each other directly.

      I think you should be clear to separate the issues of credit creation and asset ownership.

      To stick to your points about credit creation, I think that the reason the money and banking system has evolved as it has is because it has to provide credit that can be transferred (in the form of money) between producers and consumers and vice-versa. It seems to me that existing and successful independent credit networks serve either one group or the other, rarely both.

      The problem with the current system is not the mechanism itself. The mechanism of banking is just a generalisation of a ‘peer-to-peer’ credit network, where the degree of dispersion of its members (in dimensions of space, economic power, income, size, scope etc) is so great that the system comes to be dominated by the central guaranteeing body.

      Where the problems do lie are firstly in the fact that private banks have become vehicles for high returns for their institutional shareholders and senior management. This means that the social development function of credit has been subverted. Secondly, credit in the form of money becomes anonymised in the sense that individual users of the system have no knowledge or control over the purpose to which the original credit was put.

      ‘Peer-to-peer’ credit networks only avoid these problems because they are currently relatively small and lie outside the general system of exchange.

      Therefore, change should be directed firstly (now) at making the control of banks more socially representative, and secondly (maybe one day) at making credit-money somehow more transparent in terms of what the credit was originally for (perhaps including information with each currency unit in the same way that this can be done with a digital photograph!).

  15. newmania said, on November 9, 2009 at 10:36 am

    Without a price for capital there must be some other means of allocating it which will presumably be the clown show of a planned economy. Oswald Moseley might also have been quoted in your defence and the BNP are right on side following the Strasse brothers who were the socialist element of he National Socialist Party.
    Once again you are arguing that money has life outside of its value bin terms of good and services , it may appear that way but on our deserted island when you are busily trying to spend your leaves I shall still be fishing Duncan and you will still be talking magical rubbish
    Interesting that you should be lining up with Nick Griffin against usury .We are not , by the way , suffering from a lack of lending the British banks never lent much money to companies that was a myth and those companies which are surviving on absurdly geared models deserve to die . Most lending was for property.
    This myth that you could ever go into Bank pitch an idea and come out with money make me laugh . The entire political class of course know less about it than you could write on a Jew`s foreskin. And yet these are the people you think should be drawing up quids form your bottomless well .

    • duncanseconomicblog said, on November 9, 2009 at 10:41 am


      Bank lendiong to non-financial companies stands at £600bn. That’s quite lot.


      PS – This is the first comment I’ve seriously considered deleting in ages. Behave.

  16. David Heigham said, on November 13, 2009 at 3:41 pm


    I think that you need a stock-flow constrained model to expoud these ideas. The clearest of these is by Godley and Lavoie, ‘Monetary Economics’:


    Like Tily, I revernce Keynes but was never convinced by the Keynesians. On thing I specially like about Keynes writing is that it is always work in progress. His thought is always moving on ininteresting ways; and is very often incomplete.

    When I originally read the first passage you quote, I think as an undergraduate, I took it as just such an interesting and incomplete statement. It does not go on to the question of what is the proper price of capital when it is not ‘scarce’; when it includes no pure rent element.

    The second passage is, I think, really on a different subject. It is about the possibility of taxing away rents from the possession of human capital assets (or of luck). The similarity is that it skirts around the issue of the proper price needed to secure the utilization of these assets.

    • duncanseconomicblog said, on November 13, 2009 at 4:30 pm


      Thanks for the tip. I’ll have a look at Godley & Lavoie.

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