Post-COVID-19 growth recovery paths ahead

Keynes - What is economics all about?

🎙Post no 1 –  1 July 2021

There are basically two opposing paths of development ahead:

– either persist in applying the same economic policies that gave arise to accelerated corporate capital accumulation, thus furthering its speed with a likelihood of fuelling more strain on resources, greater disparities in income and opportunities, albeit with the benefits and the wonders of technology

– or opt for bold institutional changes, which would put a break on current capital accumulation and redirect the course of the economy into a different path of sustainable growth, albeit with some reduction in the modern conveniences of life (more being not necessarily better).

A slow-down in the acceleration of capital accumulation would change the course of global economic growth to a manageable level. For that to happen, however, there is need to reform the banking system and its role in money transmission, to re-examine profoundly out-dated corporation and labor laws, and to deinstitutionalize the risk factor.

Without affecting the freedom and liberties of individuals or enterprises, although some economies of scale may be unavoidable, a mere three legislative institutional reforms could create market forces which will shift economic activity from global to more local, put a cap on monopoly power and foster greater diffusion and diversification of small-scale production, especially in the service industries of retail, hospitality, and information technology. They would generate a culture of production competitiveness over speculative drive and increase the cost of capital relative to labor. This would favour labor-intensive production, direct investment toward technologies that sustain employment and participation of the labor force in the production of added value, from which its purchasing power is obtained.

Might one not have to create a different economic world after Covid?

Necessary institutional reforms to change the course of growth

The first important reform would be legislating fundamental institutional changes that demand the reconsideration and scrapping of many aspects of present yet obsolete corporate laws, laws which have now become the main cause of the distortions that aggravate disparities, by conferring, as a right, protections and privileges to some at the detriment of others. These legalised rights are perhaps the main catalyst to the acceleration of the capital accumulation that leaves the power of major investment decisions in the hands of some to determine an economic outcome not necessarily the best for all concerned.

One major change would be the elimination of the clause “limited liability” from the definition of corporation. The objective, to render shareholders liable by linking them to the fate of the corporation, would bring these investors to make decisions responsibly and to gear expectations less from short-term returns and more toward long-term gains from a sustained enterprise. Thus, in cases of bankruptcy, shareholders would not only share losses but also a portion of the monetary cost of the entity’s liquidation. Their assuming and managing the risk factor would compel caution in investment decisions and probably reduce irrational behaviour and thereby excessive market fluctuations.

The second reform relates to out-dated labor laws, not in sync with increasing de-industrialisation in the wealthier nations, demographic transformations (such as changes in the age pyramid) and a new attitude toward work and effort, which sees them as adverse to health. Given changes within the landscape of markets and labor, there is need to rethink the notions of work and leisure. ‘Work’, as characterized by economists, is ‘effort and hardship, subject to diminishing marginal disutility’; work must therefore be compensated to be performed. ‘Leisure’, as that which provides satisfaction, is that for which many are willing to pay. Unlike in the past, in the technologically advanced environment of the 21st century, not all work is no-leisure, and not all leisure, no-work. The distribution of the labor force over different sectors and trades would surely be different if occupational activities, which are seen as offering satisfaction (in that they evoke prestige and/or provide job security, perks, a pleasant work environment, etc.), are actually valued in terms of increasing marginal utility (not disutility) and thus carry a premium, when weighed against alternative jobs which are precarious, risky, uncertain and/or truly effort-demanding, or no job at all. Thus, on the receiving side, the determination of expected income could be based, on the spectrum across the active labor force, on the distribution between valuation of the premium and compensation for the alternative, rather than on relative institutional rights conferred by relative bargaining power.

The third urgent reform, more important than the other two as the one concerning finance and the banking system, is on the remitting side. Needed reform of the banking and financial system has to do with the institutional rules related to money supply and credit creation designed to limit abuses by speculators’ fleecing the nation’s purse through engineered financial manipulation of its markets. The creation of credit money is a powerful institutional policy tool. Unlike a vaccine which requires investment and effort to produce, money is created with a stroke of a pen. Like a vaccine, however, the infusion of money into the environment requires caution. The control of money creation, its circulation and the mechanisms that allow its efficacious performance have always been and still are controversial among economists.

Socially responsible management of credit can provide for a more stable, equitable distribution of income. For J.M. Keynes, who studied credit money in depth, State Money, in the form of liquidity (or credit) for industry, to buy/sell or to use in the speculative market, is vital to the functioning of a monetary economy and its financiers, laborers and entrepreneurs. Its use, when uncontrolled, can be abused. When, for example, society grants the exclusive privilege and discretion to financial institutions to manage a nation’s money supply, as if it were their property, it is no surprise that the few in charge of such wealth exploit it to their advantage. Keynes argued that it is speculation and the scarcity of liquidity that constrain productive investment and employment and allow financial rent-seekers to extract returns exorbitant relative to the remunerations of the entrepreneurs and wage-earners.

If there were a counter-balancing mechanism by which liquidity is rendered sufficiently abundant for productive real investment, it could reduce industry’s cost of acquiring its means of payments and allow production to increase. If investment were directed to labor-intensive activity, it would increase both employment and labor incomes, relative to those of the rent-seekers. The banking system, which includes the Federal or Central Bank and the commercial banks, provides for control of the money supply; it is the beating heart which regulates the working of the economy and in so doing impacts a nation’s well-being. Control of the money supply should not be left in the hands of speculators; the economy ought not be run as a casino. On the one hand, the independent Central Bank, being a non-profit Bank of Last Resort, ought to be the sole shareholder of commercial banks; its role ought to be to ensure their provision of sufficient liquidity to the productive sector. On the other hand, commercial banks, in their unique and privileged position, yet being allowed to make profits as private entities to more than cover the operational running of their business, should also be under strict obligation and regulation to lend short, to adjust liquidity to the needs of the productive sector of the economy and more importantly to not engage in speculative markets.

As well, the function of the private banks, whose role is to be the intermediary between the Central Bank and the public, should be separated from that of other financial institutions, whose realm is long-term investments, such as mortgages, insurances, pensions, commodity speculation, currencies, etc. In turn these financial institutions, free to take and assume risk with invested savings, ought to be prohibited from tinkering with credit, from creating fictitious assets, for example. Financial engineering — leveraging, securitizing or creating toxic assets for the sake of inflating corporate assets — is no different from using chemistry to debase coinage of precious metals, as was the practice in the mercantilist era, or printing technology to counterfeit bills in one’s basement. The impact of such ‘engineering’ practices is the fleecing of the collective purchasing power. They ought to be outlawed.

With financial institutions reformed, it would be difficult for corporate financial intermediaries to accrue a high concentration of capital to be channelled to the acquisition of assets and the means of funding that engenders monopoly and power domination over direct investment. Hostile take-overs, whether in industry, agro-business or information technology, that require the raising of huge amounts of money would not be possible. Firms would have to revert mostly to their savings for auto-financing, since the manner in which credit money is created and managed would not allow for expansions intended for the sake of market control.

With banking reform, in the above sense, capital would be directed whither effort and resources are put, and thus proportionally more into production and less into speculation. If, further, institutional reforms were introduced to scrap or profoundly modify corporate laws that limit responsibility and afford bankruptcy protection, then the bulk of a nation’s saving would be used differently, as collectively they put a serious brake on global corporate financial capitalism, whether of the liberal or left-leaning type. Prudence would call for diversification of investment. Concentration and market control, especially in the service industry, would be harder to achieve.

The form of the post-COVID-19 recovery is yet to be determined. The global economy is facing major challenges (sustained unemployment, recalibrations of the labor market, climate change, international economic migration, brain-drains, depletion of resources, disappearance of flora and fauna, etc.,). There are basically two opposing paths of development ahead: either persisting in the same policies that gave arise to accelerated capital accumulation, thus furthering its speed with a likelihood of fuelling more current growth, or opting for bold institutional changes which would put a break on capital accumulation and redirect the course of the economy into a different path of growth.

The first choice consists in letting the few in corporate finance be at the helm of the economic ship, letting the coffers of the monetary authorities be their bank of the last resort, and having governments focus on policies that stimulate Aggregate Demand through the promotion of spending and consumption. In such a scenario, the post-COVID economy can be summarized by the words of Jerome H. Powell, Chairman of the US Federal Reserve Bank, at the European Central Bank Forum on Central Banking 2020, when asked ‘what to expect’ or ‘what was to come next’: it will be a “different economy … a more tech-leveraged economy” in which “technological change increases productivity”; there will be an “acceleration of automation”. He did admit that with such new developments, many will be “left behind” at the bottom of the economy and “will need support”. His Central Bank colleagues, Andrew Bailey and Christine Lagarde, and the new Secretary of the US Treasury, Janet Yellen all echoed the same view. Following this path will fast-track the economies of scale and the brain-drain needed to produce a particular ‘increase of productivity’(!). There would be more pressure on the Aggregate Demand to adapt to ever more consumerism. This particular growth trend, which in the short term might be, as some predict, around 6-8%, would likely aggravate the above-mentioned challenges and increase disparities and polarization, both domestically and globally. In the meantime, big will continue to swallow smaller only to be gobbled by the yet bigger. Faster will not be fast enough. For the large numbers, there will be little need for thinking about how to manage daily life; that will be taken care of by the wonders of technology driven by artificial intelligence. Herd consumerism will continue to conform to a corporate agenda.

The second option, which rests on the introduction of the three institutional reforms articulated above, would steer the economy in a totally different direction. It would bring about change in structural social behaviour as to where and how to invest, what and how to produce, and how to adapt employment, income and consumption for paths of economic activity different from the ones that have developed in the last half century. This would yield an economic setting where the bulk of a nation’s liquidity is easily set at the disposal of firms for their running activities, but where firms’ own savings must be the source of their capital expansion. This system, where credit is geared to production needs rather than to loans for consumption, would lead to a dramatic limit on the drive to monopoly, put a break on the acceleration of capital accumulation and inevitably steer toward a reassessment of the use of resources. In many industries, smaller scale production would ensue, the relative cost of capital vs labor would be revaluated to consider the participation of the enormous labor force as renewable-energy potential. Work would be rewarded in terms of effort. Employment for the majority would mean not simply being provided with a job but rather with an occupation which makes one feel useful. The primary emphasis on productive (as opposed to speculative) investment would impact research and development. Technological change to produce what is needed for the masses would be drawn away from the current attraction to artificial intelligence back into human intelligence, to that much cheaper alternative, given its overly abundant world supply.

Such structural changes could not happen without gains and losses, among which would be a slow-down in the proliferation of robber-barons, the abolition of professional lobbyists for group interests, and the elimination of organized large-scale market speculation. The COVID-19 crisis, through a global ‘invisible hand’, has already caused structural shift. The pause presents humanity with a unique opportunity to reorient the way effort and resources are utilized to provide what is actually needed and in a less volatile economic environment. Deregulation of the financial sector under Reagan and Thatcher in the early eighties took very little time to institute; it should now take very little time to rethink regulations and reforms of the banking system to ensure that public State Money is managed in the interest of all. It will take the leadership of the United States and a few developed economies, but the rest of the world will follow.

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