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Issue #1476      13 October 2010

Capitalism worn out

“States can no longer satisfy an advanced society’s complex demands for health care, education and personalised retirement planning” – a strong and telling statement about the capitalist state from Anatoly Kaletsky, editor-at-large of The Times magazine. In a two-page feature article in The Australian Financial Review (10-09-2010) entitled “Old certainties are worn out”, Kaletsky points to what he calls a new version of capitalism.

Kaletsky speaks in terms of global capitalism having undergone three systemic transformations: “the great inflation of the 1970s, the great depression of the 1930s and the period of geopolitical turmoil that culminated with Wellington’s victory over Napoleon in 1815.” He asserts a fourth, “new politico-economic system” is emerging from the global financial crisis.

He defines these transformations of capitalism in terms of the relationship between government and “markets”, the latter meaning private enterprise. During the “Capitalism 1.0” version, as he calls it, relations between government and private enterprise were “largely confined to raising military revenues and protecting powerful vested interests”.

The second “version” of capitalism following the Great Depression (1930s onwards) “was characterised by a distrust of markets and a faith in benign, omniscient leadership – the new deal, wartime faith in ‘heroic government’ and the postwar paternalism of ‘Whitehall knows best’.” (His focus is on the US and UK, but is just as relevant to Australia.)

The third phase was the “Thatcher-Reagan revolution” which “exactly reversed those prejudices”. It became a case of “the markets were always right and governments were universally distrusted.”

We are about to embark on “Capitalism 4.0” which “will be marked by a new recognition that market economies cannot function without competent and active government.” It has also become evident from the crisis that “Governments and central banks must now actively manage economic cycles, because inflation targets – the main tool of macro-economic management in recent decades – are not enough.

“The dominant economic theories of the 1980s, which assumed rational expectations and efficient markets, left only one important role for government economic policy: to keep inflation under control.

“… governments and central banks must again accept responsibility for managing growth and employment and maintaining financial stability that they abandoned in the 1980s.”

Kaletsky also notes that “market forces cannot always be trusted to create price signals consistent with broader social objectives”, which means governments “will play a greater role in setting energy prices, managing currencies and creating the right environmental incentives.” But he is not proposing “bigger government”, quite the opposite. Despite what he says about not trusting the markets to deliver social objectives, his new capitalism would have government abandon its role in education and health – i.e. hand it over to the markets! Governments, of course, would not stop subsidising them!

In an attempt to justify his agenda, Kaletsky cites three reasons for the government abandoning its responsibilities in the areas of health, pensions and education.

“Run out of money”

“The most obvious reason,” he says, “is that governments have run out of money”. He cites the enormous loss of tax revenues caused by the recession, and says spending commitments made by governments on health and pensions “have become unsustainable”. He refers to the ageing baby-boom generation, noting “a fiscal crisis would have occurred sooner or later even in the absence of the 2008 meltdown. But the credit crunch brought forward this fiscal crisis by 10 or 15 years.” He shrugs off the cost of bank bailouts as a “drop in the ocean by comparison”.

“Fiscal crisis” is a reference to accumulated government debt and budget deficits. Kaletsky fails to question the neo-liberal gospel of budget surpluses and zero government debt, let alone examine whether the debts are unsustainable or alternative budgetary measures such as tax increases could meet them and future outlays.

Kaletsky also fails to examine why many governments of industrialised states (developing countries are largely ignored) such as the UK and US have debts. He fails to mention several decades of income tax cuts for the rich and the corporate sector or the billions of dollars lost to the public purse from the profits of privatised enterprises.

Instead he says, “The only scope for debate about the long-term fiscal outlook, therefore, will be over the nature and speed of reductions in public spending.”

He neatly side-steps and insulates US military spending from the equation. “… the biggest challenge facing every government: how to reduce the core entitlements to health, pensions and basic education that consume about 70 percent of tax revenues in all advanced nations.”

The figure of 70 percent does not stand up to scrutiny. US military spending, direct and indirect, consumes anything from 38 to 50 percent of tax revenues. It has been growing at a rate of around nine percent per annum annually since 2000. But what if they did consume 70 percent of tax revenues? Would that be a crime?

Private health and education, with their layers of profit and inefficiencies would cost far less in public hands and deliver better outcomes for all. The US private health system is the most costly of OECD countries, and delivers some of the poorest outcomes.

Yet Kaletsky sings the praises of “market mechanisms” for education, “with schools trying out different approaches and with successes distinguished from failures through the trial and error of consumer choice.” So the pubic education of working class children will be will be replaced by a “trial and error” system, while the rich continue to send their heirs to elite private schools costing $20,000-$30,000 a year.

“Distrust of government and markets”

Kaletsky’s second reason for the state withdrawing from the provision of education and health services is that “the crisis has aggravated the public distrust of government as well as of markets”. So he suggests “a larger role for government in managing the economy and regulating finance which needs to be accompanied by the state’s withdrawal from other areas of activity…”

Kaletsky makes no attempt to explain why handing over education and health to the markets or giving governments a great role in economic management would be acceptable to “sceptical voters”! How does that sit with public distrust? An opinion poll of voters would soon reveal that the majority of people oppose privatisation and support governments re-regulating financial markets and trade. Surveys in Australia have shown that people would be prepared to pay higher taxes for better public health and education – but higher taxes are not on Kaletsky’s agenda.

On health he says: “In Britain it is far from obvious whether the public is right to view medicine as a public good, to be provided equally to all citizens by the government like law enforcement, or whether it should be treated as it is in the US - as a private purchase, not very different from the consumption of food, clothes, or housing, which are left to private enterprise even though they are essential human needs. But such theoretical and moral issues will no longer be the driving forces of health reform as governments start to clear up the fiscal debris of the crisis.”

It will be necessary “to redraw be boundaries between the market and the state.”

Government cannot provide

His third reason equally lacks any credibility: “… the reassessment of the relationship between government and business demanded by the new capitalist model will reveal that states can no longer satisfy an advanced society’s complex demands for health care, education and personalised retirement planning – and that the pre-crisis government dominance of these vast sectors is incompatible with long-term prosperity and growth.”

Strong assertions about the state, but what are they based on? Why is government dominance incompatible with long-term prosperity and growth? No evidence or explanation is provided. Anyone studying the recent performance of the markets – the financial sector in particular which manages private retirements savings – could hardly have confidence in it! Pension funds in OECD countries lost US$3.5 trillion in market value during the global financial crisis and are still to fully restore savings to their 2008 levels.

Kaletsky refers to how successive governments in the UK have “quietly monopolised the commanding heights of the future economy – health, pensions and education. Reversing this process, in a socially just manner, is the biggest political challenge of Capitalism 4.0.” The political challenge is to convince voters of something that is not in their interests. The idea the private sector will do it in a “socially just manner” is nonsense – such outcomes fly in the face of profit making and monopoly pricing of services by the corporate sector.

Next week: Industries of the future.  

Next article – Germans fight nuke plants, railroads stations, Nazis

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