From Adam Smith to Duncan Smith

Keynote to the Glasgow Economic Forum 2016, Adam Smith Business School, Glasgow University, Sunday 20 March 2016

Neoliberalism is broken. Thats the title of the first chapter of my book. But it’s become the unstated theme of all central bank statements in 2016. Listen to Mark Carney in his Shanghai G20 speech:

“The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.”

Listen to Claudio Borio, chief economist at BIS:

“ Debt too high. Productivity growth too low. Policy room for manoeuvre too limited…We need to abandon the debt-fuelled growth model.”

Listen to Mario Draghi, who warned Europe risks “disastrous deflation” unless the second round of quantitative easing kicks in.

Listen to Larry Summers, former US Treasury Secretary, whose suspiction that the world faces secular stagnation has turned to near certainty.

“Inflation for the entire industrial world is expected to be close to one percent for another decade and … real interest rates are expected to be around zero over that time frame. In other words, nearly seven years into the U.S. recovery, markets are not expecting “normal” conditions to return anytime soon.

These admissions are welcome but inadequate. Of the people I’ve just quoted only Borio and Summers admits that part of the problem might be, as Borio puts it, a “faulty analytical lens” — bad economic theory leading to misguided policy that makes the crisis worse.

In general policymakers are floundering because the cure prescribed by neoclassical economics is worse than the disease. It is killing the patient.

Once it renounced Keynes, neoclassical economics became a perfect theory for describing a capitalism which a) crises are accidental b) there are no further structural mutations beyond a freemarket globalised system c) a capitalism that lasts forever.

So the challenge for your generation is huge. Even if you listen to the heterodox economists, Steve Keen, Varoufakis etc, they have no complete theory that can replace the neoclassical model. Their models may be based greater realism, agency, class, behaviour — but nobody right now claims to have a heterodox working model you can either teach or use to test policy.

If you agree with me, the problem for economics is even more challenging. The central idea of my book is that:

  • information technology has paralysed capitalism’s capacity to adapt
  • information technology creates a short-cut to abundance
  • the root cause of the boom-bust cycles, collapsing productivity, stagnation and policy paralysis is that the markets are sending us a signal that there’s not enough value in a high-tech economy to justify current valuations — of debt, equities or derivatives
  • we are in a long transition beyond capitalism, in which the state, the market and a non-market sector based on collaborative production will jostle and coexist
  • and that the only theory that can encompass all of these facts is the one originated by the man quoted on the poster behind me [Adam Smith] — a modernised form of the labour theory of value.
The theory that can absorb the greatest number of facts, and persist in doing so, generation after generation, through all changes of opinion and detail, is the one that must rule all observation. (Smith)

Of course, as I will outline, the labour theory of value — effecively abandoned by the right and left in economics after the marginalist revolution — has none of the “gubbins” of a developed economics: you can’t run Tesco according to the LTOV. You can’t audit Tesco according to it.

But the LTOV I argue is the only theory that can provide a measuring stick to compare a market economy with an economy in transition beyond the market.


But first let’s survey the present some more. Neoliberalism is broken because four things that enabled a “heroic period” of growth, stability, global development and technological innovation have turned against the dynamism of the ssytem as a whole.

The first is FIAT MONEY. If you detach money from both metals and real economic activity, and incentivise money creation as the driver of growth, then growth will happen; and financial complexity will increase; and asset wealth will begin to take over from wealth derived from productivity. And if you — as we did in the last 15 years — create a derivatives market several times the size of the economy, you create a finance system that must — by logic — at some point become too big for the physical economy that’s supporting it.

The second problem is FINANCIALISATION. Neoliberalism is the first mode of capitalism in which the capitalists decided they could not tolerate organised labour. The resulting collapse in wage bargaining power, aided by the doubling of the number of salaried workers in the world in 25 years, means wages have stagnated in the developed world. If you then replace wages as the driver of consumption with mass access to credit you create a mechanism whereby the collapse of an investment bank in Manhattan can empty a pub in Lambeth the next day.

The third problem is the GLOBAL IMBALANCES. By neoliberalism I mean the whole global system: the system whereby the USA borrows, China lends; the USA consumes; China produces. During the pre-2008 boom everybody suddenly got very worried about the imbalances, because the gross financial imbalance in the world economy was clearly the source of excess money that allowed cheap money plus financialisation. The 2008 collapse, in this sense, was a partial correction — but it still leaves the entire world economy trapped within the more fundamental imbalance — which has grown: the large cross-border holdings of unpayable debt, increasingly yielding negative returns, and destined to be wiped out in a spectacular cathartic moment.

The fourth problem is FALLING PRODUCTIVITY. This is a multicausal secondary effect of the other problems:

  • stagnant wages make it easier to open a coffee shop than invent a new process or machine
  • the boom-bust cycles seriously mis-allocate capital, funneling it towards speculation rather than innovation
  • consumption driven by cheap lending requires the creation of millions of bullshit jobs so that people can remain on the edge of the credit system, not excluded from it

Stagnant wages combined with cheap money policies in the face of every cyclical downturn creates, in the space of 20 years, three spectacular boom-bust cycles. In the first it was equities that were overvalued; in the second it was securitised financial instruments based on housing; in the third it is government debts. So that when you come later in your careers to write the history of these 20 years I predict you will remember the dotcom crash for Enron; the 2008 crash for Lehman Brothers; the next crash for China.

Each of these crashes wipes some more value and dynamism out of the economy. The dotcom crash destroyed the company pensions system; the 2008 crisis put the banking system on permanent life support, plunged an entire generation into lifetime debt, and took a chunk out of the welfare state; the next crash will involve debt write downs paid for out of the savings of ordinary people.

The outcomes? One, that the system holds together and the world’s households, workers and consumers are forced to pay, over a lifetime of indebtedness and low wages, for the dysfunctionality of the system. But you’ve seen this weekend the limits of that, with the resignation of Iain Duncan Smith. The entire 6-years fiscal framework of the British government has been founded on an arbitrary cap on welfare spending that one of the toughest conservatives of his generation found impossible to implement.

Duncan Smith faces the same problem Xi Jin Ping faces, and the hapless mandarins of the Republican and Democratic centre ground face. People are mad as hell and won’t take it much longer.

Carney, Draghi, the Banks of China and Japan are all engaged in one last round of monetary easing, but they are flashing up the warning cards: unless some kind of structural reform or debt write-off happens, monetary policy is running out of steam.

So what to do?

There’s plenty of tactical and partial remedies, and you’ve heard some of them this weekend.

For me the answer has to be framed around a wider problem.

In 1990 Paul Romer formulated the basic challenge of information technology. Digital information has a near zero reproduction cost and under conditions of a free market and competition its price will fall close to zero. The non-rivalry inherent in information goods means that, once produced, they are abundant.

You can only maintain price, and therefore the price mechanism, by accepting something neoclassical economics says should be impossible: the permanent existence of market distortions: monopolies, patents, copyrights, the capture of positive externalities by corporations.

So when iTunes has 95% market share of online music the price of a track is 99p irrespective of supply, demand or quality. The price is set by Apple’s monopoly pricing power and both the producer and consumer must take the downside of an essentially rent-seeking monopolistic distribution platform.

The only problem is, competition and innovation will happen, so now we have Spotify: £9.99 a month for all the music you can listen to. If you want to make the minimum wage as a solo artist you need 1,500 plays on iTunes, but you need 1.1 million plays on Spotify.

Once you can reproduce someting via “command C, command V” you are in a post-marginalist world. Because the tenet of marginalism is that everything economic is scarce, and that anything abundant is beyond the frame of economic thinking.

Put simply: information corrodes the price mechanism and the defensive walls — monopolies, IP, encryption etc etc — are always corroded. If you don’t believe me look up the market share of a company called Blackberry.

That’s problem number one. The second challenge is: information corrodes the link between hours of work and wages. It makes high-value work modular, driven by targets; and it makes low-value work difficult to place a market value. Millions of people’s wages in the developed world are determined not by the market but by an artificial floor placed under them for the purposes of a) social cohesion b) inclusion in the financialised consumption system.

Challenge number three is we already have a growing, dynamic post-market sector. Wikipedia — a £3bn minus sign on the global advertising economy, powered by 27,000 regular writers, produced for free, consumed for free; Linux, which runs the top 500 supercomputers in the world; Apache which runs half of all web servers. And numerous quietly spectacular good enough tools and solutions produced and maintained for free.

Alongside them we have the growth of behaviours that look like an informal economy, or simply charity: lending at zero interest to non-family members; time banks; parallel local currencies; co-ops; highly distributed and non-managed enterprises in which the quality of employment is a greater reward than money wages.

Right now everybody is worried about the impact of robotics and AI on the mass employment model — and I will come to that. But the challenge to capitalism is deeper than that. It is that the machines we already have are producing products that should be free, could be free, and could be very easily repurposed towards a low-work society, with high information abundance, if we could only solve the problem of consumption.


What does this mean for the strategic debates around restructuring that are being urgently asked for in policy circles?

First, that you have to frame the debate around the possibility of a long interaction between the market, the state and the emergent sector or segment where collaborative production of free stuff is happening.

Second that you have to understand capitalism is trapped in a depression; the end of a long-cycle where it should be adapting rapidly to deploy new technologies but in fact cannot because the need to keep people inside the finance system — which is vritually synoymmoius with citizenship — requires you go on creating more and more low skilled, precarious jobs.

Thrid — the neoliberal remedy — more precarity, a smaller state, more financial complexity — will just go on producting boom bust cycles and retarding the deplohyment of innovative new technologies to replace work.

If I am right, the strategic issue for governments — alongside the post-carbon transition — is managing the transition to a situation where the price mechanism is no longer the main allocator of goods; and that a large part of production — not just of ideas but of things — follows the dynamics of abundance rather than scarcity; and the state is positioned in the middle — managing the process but dwindling in economic size.

The key to that transition is the creation of a low-work economy through the rapid, pro-active deployment of automation technologies and the delinking of wages from work, and the provision of basic necessities and services.

This is not science fiction. The recent breakthrough by Google’s DeepMind technology, in winning the Go game, means something like this:

A human controlled orchard relies on labour, skill, senses, traditions going back 10,000 years. An automated orchard hands the whole process over to drones and sensors: they fly along, mimic the softness of a human finger as they pluck the apple, sense when it is ripe through better sensors than we have; and its all controlled, monitored, built and designed by humans. An orchard run by Google’s DeepMind runs like this: you ask the computer a single question: what’s the best way to produce apples. It works it out, learns from its mistakes and builds the orchard. Instead of machine minders we become question askers.

For you, a generation of economists who will grapple with the fragmentation of neoclassical orthodoxy, stagnation, the emergence of a non-capitalist sector as dynamic and amazing as the first banks and currency exchanges seemed to feudal Europe… here’s the challenge.

You need to work on theories that can explain the dynamics of an economy where some work is done to market dictates, and some commodities exchange at costs determined by scarcity; and where some work is done voluntarily and its products are free, or shared.

Ludwig von Mises, in his 1920 contribution to the so called calculation debate between the Austrian school and the socialist left, admitted that there is no “calculation problem” if the labour theory of value is right.

The Austrian school assumed the labour theory of value was wrong because so did their opponents market socialists led by Oscar Lange. Both sides accepted some common misconceptions and internal contradictions in the LTOV that proponents of it believe are easily refuted.

I think a theory that predicts, as Smith did, that commodities exchange according to the amount of labour embodied in them — living and previously done — can be used both to describe and manage the transition I’m talking about.


But what possibe relevance can all this — which may seem to some of you speculation — have to the concrete crisis we are trying to deal with?

It is that we have to pursue a different kind of structural reform: if the state provided basic necessities at cost price or for free, it would have the same impact as an increase in money wages. It would free up wages for consumption and at the same time allow the economy to be partly definancialised: that is — limits on rents, on speculative investment and derivatives markets.

If, on top of that, you protect and nurture the collaborative, peer-to-peer economy as ruthlessly as the state protected the early factory system — preferring the free collaborative solution to the rent-seeking platform; you would speed things up.

Likewise if, out of taxation, and with heavy modelling and trialling, you adopted a universal basic income, which would subsidise the rapid automation of work.

These three things: the state replaces the market as service provider, hothousing a collaborative sector and underpinning the whole thing with a basic income, are — for me — the building blocks of a new social democracy and a beyond-Keynesian programme of transition.

This, in turn, shapes what I think we need in terms of anti-crisis measures now.

More QE is on the way: qualitative quantitative easing — that is buying troubled debt; the debt of Greece, the debt of Volkswagen, maybe even equities. That is preferable to a burst of helicopter money which will have no structural impact whatsoever.

But we need to democratise monetary policy: since it now interacts clearly with fiscal policy and industrial policy it cannot be the preserve of technically indepdent, neoliebral minded central bankers.

If we can bail out Volkswagen by printing money, we can make higher education free by the same instrument. We can build a railway tunnel from here to Orkney (if we think it’s a good idea), issue the bonds, print money to buy them and bury the debt for 100 years.

The point is, we have to use the next round of QE to shape structural change and not just buy time for the zombie to flail around while more of its limbs fall off.

With fiscal policy, the looming queston is debt — not deficit. We’re going to have to find a means to write off debt or inflate it away or grow — and I think monetary easing has to do some of the heavy lifting. You can print money and use the £25bn Bank of England windfall to write off debt, or pay for services; you can simply monetise the debt.

Yes all this is going to have a currency effect, and probably stimulate some kind of currency war: but the question for the world’s politicians who keep calling for yet more stimulus is where are the multilateral mechanisms for organising it? There aren’t any: the G20 was blocked from making a co-ordinated call for stimulus by Germany, whose deluded political elite is determined to drive capitalism towards a stagnation point represented by the figure zero.

But in the end you need a programme of structural reform that cuts with the grain of history. It’s no use simply banging on about a high-skill high, wage economy if technology is reducing that possibility for most people — or to put it another way: if the adaptation process of capitalism is exhausted.

I think we’re going to need a very high skill workforce that is small, and we need new social institutions to share out avaliable work; and we’re going to need the organised — rather than disorganised — use of collaborateive unpaid work to provide certain things. The main skills we are going to need are to be survivors in a high-leisure economy, and question askers in an AI world.

The Treasury Committee chief, Andrew Tyrie this week asked Jeremy Corbyn:

“I wonder whether he now accepts that a capitalist economy, properly regulated, is the most powerful source of prosperity and growth yet invented.”

It’s a silly question. Of course it is. That’s what the entire first chapter of the Communist Manifesto says.

The sensible question is: where’s the dynamism, where’s the prosperity and where’s the growth? And what do we have to do to capitalism to make them return?

My answer is: radical structural reform, stimulus now, debt restructuring on a heroic scale, profound redistribution, democratisation of institutions.

And admit there may be another kind of economy in formation — with a different kind of prosperity and a different measure of growth. And you’re the first generation of economists in 250 years that will have to grapple with that.

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