A Broken Economic System?

By James Bruges on June 9, 2012

A broken economic system?
A workshop at the Woodbrooke Quaker Study Centre: 20-22nd April 2012.
“Seeking An Economy in which Quaker Testimonies Can Flourish”
These notes were assembled by Gill Westcott and James Bruges from material presented and contributions made during the weekend.

The economy should serve the needs of people, not vice-versa.
• Manfred Max-Neef (in Economics Unmasked) defines nine basic human needs as subsistence, protection, affection, understanding, participation, idleness, creation, identity and freedom (this is not a hierarchy, for example, a millionaire may be driven to suicide if he totally lacks affection). Different cultures satisfy each in a different way. None, except possibly the first, is directly dependent on finance.
• Richard Murphy (in The Courageous State) considers that the core economic objective is the achievement of potential – in terms of material and emotional welfare, intellectual abilities and purpose in our lives.
• Schumacher’s paper on Buddhist economics shows an alternative view on the nature and value of work.

Debt and inequality.
• Debt and inequality are linked since interest on debt flows from those that need to borrow to those that have money to lend, or to those that are allowed to create money. This process concentrates wealth unless restrained. The Pentateuch recommends cancellation of debt every 50 years: the Jubilee. Extreme inequality has developed over the last 30 years.
• Individuals and businesses are unlikely to take on further debt when they do not anticipate growth in the value of their assets or their income. The financial system depends on debt-fuelled growth (the payment of interest in addition to repaying the capital requires growth) so lack of confidence could cause the present system to crash.
• When people’s mortgages fall into negative-equity and they lose employment their debt becomes an unsupportable burden giving rise to despair and alienation from society. Extreme inequality in the past has led to collapse, revolution or war.
• In the 1930s capital control of money across borders was imposed so that countries could manage their economies. Also, the creation of money was regulated to serve the real economy. In 1971 Nixon left Bretton Woods and the UK relaxed control on credit. In 1979 Thatcher’s ‘there is no society’ and the 1986 big bang brought the deregulation of banks. The present debt crisis appears to be a direct result of decisions taken by politicians in the 1970s and 1980s. Reinstating pre-crisis policies may lead to further and deeper crises. Politicians need to establish new objectives for the economy. “The future is not some place we are going to, but one we are creating. The path is not to be found, but made.” (John Schaar).
• In 1970 the UK money supply was £25bn and started to increase dramatically. Now it is £2,185bn. Interest on the whole money supply flows from society to the financial sector. It seems to us that this excess money in the economy needs to be reduced close to levels that existed before the financial explosion.
• Since the 1970s the level of personal debt in the UK has multiplied in parallel with the money supply. UK mortgage debt in 1970 was £12bn. By 2011, with credit-card debt, it had risen to £1,450bn. The cancellation of unsupportable debt may need to be considered.
• The Spirit Level (Wilkinson & Pickett) shows how inequality exacerbates security, social and health problems. It seems clear to us that measures should be taken to reduce inequality through progressive taxes.

• Growth in the use of non-renewable resources and environmentally damaging practices in a finite world is not sustainable. It is our view that economic statements about growth should be qualified to take this into account.
• The New Scientist published a two-page spread showing alarming hockey-stick graphs representing depletion of resources with the ironic caption: “Economists see no limits to growth – ever.”
• In 1972 the Club of Rome predicted that output from resources would decline dramatically in the early 21st century; their predictions appear to have stood the test of time rather well (for example about half of oil and gas resources have already been used and what remains requires increasing energy to extract; it is a similar situation with phosphorous, lithium and rare-earths). This decline may be more significant to the future economy than orthodox economic theories would predict.
• Advertising has become a major industry. Its primary purpose is to induce dissatisfaction that will lead to “increased consumption of things we don’t need with money we don’t have to impress people we don’t care about” (Tim Jackson). We wonder whether regulation could limit advertising to do little more than providing information.

• Virtually all money is created when banks type figures into the accounts of people and companies, allowing them to spend cash into circulation. The banks charge interest on all this debt, annually, so they have an incentive to increase the money supply exponentially. It is a financial system that, inevitably, overwhelms people and nations with debt. “Let me issue and control a nation’s money and I care not who makes its laws.” (Amsel Rothschild, 1838).
• We support the campaign by Positive Money to make it illegal for any enterprise other than the State to create the nation’s money. The state could then put it into circulation to benefit society.
• Banks prefer to fund assets, such as property, that can be repossessed should the debtor default, rather than providing loans for the productive sector. The New Economics Foundation says that only 8% of money received by banks through quantitative easing has been loaned to the productive sector.
• Inflation in the cost of housing – people’s biggest item of expenditure – has resulted. Those who bought early or who inherited property have benefitted. For others homelessness is an increasing problem.
• Super-inflation of prime property, aided by non-dom regulation, has been experienced in London. Some is left empty as the value rises. These properties provide assets for the super-rich from home and abroad and are a non-liquid depository for the wealth that has flowed to the financial sector. Banks will be exposed when the bubble bursts.
• We believe that there should be complete separation between retail banks and investment banks, not just a ‘fire wall’.

• We believe that the tax system could be adjusted to promote environmental sustainability and the reduction of inequality.
• Huge revenue is lost to the UK and other, particularly poor, countries through the shadow banking system. There is global pressure for a Financial Transaction Tax though our government resists it in order to give the City an unfair advantage. We heard a suggestion that financial speculation should be reduced to an absolute minimum by the imposition of a high tax, rather than being ‘milked’ for revenue.
• Land is a – perhaps the one unique – national asset that cannot be concealed or moved abroad. It was suggested therefore that the value of land should be a major focus for tax revenue. A national Land Value Tax – where the area of land covered is taxed at a rate dependent on location – would gain most of its revenue from property assets of the rich, and could reduce or replace regressive taxes like VAT. Local authorities could use a secondary LVT for local purposes, as in Austria. Estate agents already have information on the value of different locations so the information for these taxes is readily available. Owners of disused urban land would have a strong incentive to build in accordance with planners’ guidelines, or sell.

The International Financial System.
• The trade and speculation in derivatives and currency values has resulted in a ‘virtual economy’ outstripping the real economy. In 2010 the global value of goods and services produced – the real economy – was about $60 trillion. The off-exchange trading of financial derivatives was about $600 trillion. Foreign currency transactions were about $950 trillion.
• The use of secrecy locations as tax havens is a serious drain on the nation’s revenue: the Tax Justice Network estimates that the UK loses £70 billion through them annually. They are not regulated though dealing with sums many times greater than the real economy. There is little information on them in the public domain. They enable and encourage criminal activities. They enable illegal capital flows out of poor countries. Many are crown dependencies and have close links with the City of London. The City itself has been described as an offshore tax haven. Richard Murphy of Tax Justice Network recommends:
1. Tax should be deducted from all payments to tax havens where no information is provided in response to a request made by another state.
2. Multinational companies should produce accounts on a country-by-country basis.
3. Sanctions should be imposed on tax havens that do not require the disclosure of beneficial ownership.
4. Companies should be taxed in each country on their worldwide profit which it is reasonable to assume arises in a particular country.
• The free flow of capital across borders encourages capital to move to low-tax locations, companies to relocate to low-wage countries and the nation’s essential services to be taken over by overseas (often state-owned) enterprises. Corporations can play one poor country against another to reduce wages further. It seems essential that capital controls are re-introduced.
• International cooperation is essential but globalised finance makes it difficult for governments to introduce policies for their own people.

Local economy.
• To some extent localisation can combat the damage of globalisation. Regulations and tariffs could counter the harmful effects of free trade on local production and the environment.
• We believe that decision-making should be made as close to the people affected as possible, since the encouragement of local initiative fosters resilience.
• Local currencies encourage the exchange of local produce. More radical local currencies like the 1930s scrip issues and the Liquidity Exchange Network could function independently of the national currency, particularly in times of deep recession when national currency is not easily available for normal exchange processes.
• We think that wellbeing, good livelihoods and community relationships matter more than GDP.

Democratic economy.
• Currently those who can afford to fund think-tanks, media outlets and lobbyists, and who give large donations to political parties have a disproportionate influence on policy. To counteract this there would need to be limits on political donations and on the access of lobbyists to politicians.
• Co-ops, where benefits go to members or employees rather than shareholders, have better employee satisfaction, health and safety, and training opportunities, than other firms and just as good economic performance. More co-ops and social enterprises would mean economic benefits being shared more equally in society.
• As individuals we can support equality and sustainability by choosing to buy from such enterprises, or from Fairtrade outlets (often via co-ops) or from local small businesses. We can also put our savings into credit unions, mutuals (e.g. Nationwide or another of the 47, mostly local, remaining building societies) or ethical banks (Triodos or the Co-op).

2 June 2012

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