Taking on 'Mafia Capitalism'

Are the Mafia Capitalists a symptom or a cause of crisis?

As much as the left loves to split to a thousand passionate opinions to confuse and confound the unwary, opposition to what David Graeber calls 'Mafia Capitalism' is proving a unifying force. As the gangstas in suits commit one act of blatant robbery after another and pass the bill to the poor, we watch in disbelief and horror as the world of 'respectable' politics and media rallies to their defence. Opposition is ridiculed and marginalised, while every law is passed needed to enable police and security services to 'manage' dissent. Such is the power deployed to constrict momentum towards reform, both mainstream media and academia are largely self-policing.

Academics though may prove to be the 'Mafia Capitalists' greatest threat, although the path of radical social scientists is far from easy in the current climate. Over the last few years, the Australian economist, Steve Keen has had a rough ride following the success of his book 'Debunking Economics'. Professor Keen modelled the idea developed in the 1950's by Hyman Minsky, that lenders become less risk averse the more stable the economy behaves, resulting in risky lending that causes the next crash. The led him to look at the historical relationships between non-government debt relative to the size of the economy. In 2005, three years before the crash, he was able to successfully support the court claim of a family in Australia that had defaulted on their mortgage, that the lenders were taking an unreasonable risk that they, but not the borrowers should have been aware of.


Steve Keen then went on to show that the neo-classical economic models not only could not predict crashes correctly, but were not suited to a predictive understanding of macro-economics as they did not take into account the effects of money, debt and banking. Abandoning the mainstream approach, Steve Keen has gone on to develop a model that draws on basic accounting techniques to look at the effects of debt on the economy. A stunning conclusion has been that if the rate at which total debt increases does not itself steadily increase, then economies go into recession. In other words, the basis for capitalist economics is the exponential increase in debt. This is another way of saying what we all know: capitalism is addicted to growth, despite our being on a finite planet. Steve Keen's observation is though, extremely important in that it offers detail to our understanding.

As we look at the criminal and near criminal activity of the finance industry and some of the largest corporations, together with the complicity of politicians and regulators, we need to consider the context in which they are operating. Is it essentially a highly corrupting environment. That doesn't justify their behaviour, but it probably explains it. That environment is about money and money, where it comes from and what it is used for is something that needs to be understood if there is ever going to be real reform that can enable us to have a better and more sustainable society.

The invention of double entry bookkeeping in fourteenth century Italy enabled one of the most significant evolutions of money: fractional reserve banking. Without fractional reserve banking (in which banks lend against the same reserves multiple times in accordance with their sense of risk, or the regulators sense of risk) there would be no modern industrial capitalism. Fractional reserve banking effectively creates money as debt. If a borrower has an idea that he or she thinks will make more money than the amount needed to repay with interest, fractional reserve banking allows the money for the investment to come into existence for as long as it is needed before repayment is due. When it is repaid, that money ceases to exist. Today in the UK, 97% of all money is created in this way. This means that if all debts were repaid, 97% of all the money in the economy would cease to exist. All that would be left would be the notes and coins in circulation plus the money used to enable banks to settle affairs between themselves.


While fractional reserve banking has, for better or for worse, enabled the development of the modern economy that has brought to the developed world a standard of living beyond the dreams of the richest medieval lords, it may now be the cause of our current 'Mafia Capitalism'. There are quite a few big problems with this sort of capitalism and the more global the economy becomes and the closer we get to resource depletion the bigger these problems become. Until the twentieth century economic growth as measured as GDP struggled to be greater than 1% a year, even in the most developed economies. This reflected the very slow rate in the exponential growth of money available for the purchase of goods and services, a key constraint on growth. However, as mechanisation brought down the labour cost of goods and governments began to use fiscal policy to increase the money available for consumption, GDP growth over 10% became possible.


Fiscal policy is essentially a form of government banking. Governments borrow money, spend it into the economy in ways they think helpful and then recover the money through taxation to pay it back. If it all works out, the benefits of a healthy and well educated population, together with the increased demand created by having more money in the system, will result in a bigger economy.


In the years following the second World War, fiscal policy was used to rebuild the economy. This left private bankers to do very boring lending. Exchange controls and banking regulations restricted their opportunities to take risks or explore new areas of lending. Although the United States had similar controls, the US dollar was being increasingly used all around the world for international trade. This created a high demand for dollars that enabled the US government to sell US Treasury bonds at high prices. This in turn enabled the US government to turn into the mighty military machine we see today. Dollars had to be kept in dollar bank accounts that were subject to US banking regulations that controlled how many times reserves could be leant out. However, in 1955, the Bank of England gave the green light to London banks offering unregulated dollar accounts. This resulted in a vast increase in the amount of US dollars over which the US government had no control. This was to result in the steady erosion of banking regulation and ultimately led to the US abandoning the Dollar's link to gold, the deregulation of consumer credit and by the 1980's, the end of exchange controls and the dominance of private banking in money creation. By the 2000's the regulation and control systems had become as lax as in the 1920's, with some important differences.


The collapse of the British Empire and the end of protected markets for British manufacturing left the UK economy in a precarious position. Competitors in manufacturing had distinct advantages in attracting new investment, not least because the UK government's key role in maintaining money supply prior to Margaret Thatcher made it highly susceptible to political pressure, both from industry and trades unions. This produced the high inflation of the 1970's. Other countries had similar pressures, but were not so burdened with complacent management, ageing infrastructure and an appalling history of industrial relations built on a history of abuse, arrogance and greed. What Thatcher and Reagan did was to transfer most of the responsibility for creating money away from the state, by deregulating finance. This allowed debt to explode and with it the corruption processes in finance to accelerate.


In its search for winners for the UK economy, a few sectors were backed. The Empire's military industrial complex was adapted to meet the global demand for weapons that was fostered during the Cold War. The UK chemicals industry that had also built up to meet the needs of the military, was adapted to meet the demand for pharmaceuticals. The Empire's oil and mineral extraction companies were also backed. However it was the Empire's finance and trading networks that were given special concessions. In the 1980's the City was given the go ahead to develop as a centre for financial piracy. A combination of deregulation and quiet collaboration with the development of the offshore secrecy and tax evasion jurisdictions in the remnants of the Empire, were used to challenge the ability of governments to operate fiscal policies or control on money created as debt. The UK was once again a world player.


As a world player, UK based corporations and banks were encouraged to see themselves more as part of a US lead global economy. In collaboration with the US, international treaties on trade, resource exploitation and intellectual property were forced on other countries. This created a reduced risk environment for banks, as well as massive lending opportunities. Some of the best opportunities were in financing the transfer of manufacturing from the developed countries to the emerging economies in the Far East.


This created a corresponding need to be able to lend to maintain demand in the developed economies. This was achieved by inflating asset values in developing countries and lending against the inflated values. Houses that forty years ago required one full time income to repay a mortgage now required two full times incomes. The effect was to inject vast amounts of money into the economy, a large proportion of which went on purchases of energy and manufactured goods from the Far East. Much of this money in turn was used to purchase assets, including shares, bonds, land and property, creating a prolonged bull market.


This of course was a one off bonanza. The UK now has the highest level of debt relative to income of any country in the world. This is not mostly government debt. The government debt problems are largely due to the UK having done so much to undermine taxation both here and abroad. The unrepayable debts associated with the UK are household and finance sector debts.


The government's response to this problem has been short sighted and unjust. To pump money into the economy has been its biggest concern, so as to keep the system from imploding as it has in Greece. To achieve this it has done everything it can to encourage increased non-government debt. Hence we have had stimulus to the housing market, student loans, and money pumped into the banking sector. The government has also tried to expand the process of privatising tax revenues, through creating private sector contracts to deliver government services and infrastructure, all of which create assets that can be used as security for borrowing. The extent to which government borrowing increases is a measure of the failure of this policy.


The government's other strategy has been to suppress wages. This has been achieved by withdrawing support for people not in employment. Suppressing wages compensates for the lower productivity resulting from decreased investment in efficiency. It also cuts the governments own wages bill. Behind all this is a desperate hope for a miracle. Without the UK suddenly finding some new industries it can become a world leader in, it is in very serious difficulty.


Trying to reform this mess is going to be extremely difficult. As part of a global economy and with the country tied into countless treaty obligations, the freedom for any government to act, while at the same time maintaining the stream of imports upon which we rely looks more than daunting. Among all the world's larger economies, none is more dependent on maintaining growth driven by capitalism and none is worse than the UK at delivering real value.


On the positive side, if it can be seen that way, this means the UK is where reform is most needed. It is not difficult to envisage the progression of the current policy leading towards our becoming dominated by an oppressive, but anonymous, international oligarchy to whom we are perpetually indebted. Indeed many of our politicians appear resigned to this. This though is not the inevitable outcome of our current situation.


Clearly the reason we are in this situation reflects some fundamental systemic problems. The narrative above is intended to promote the concern that it is money itself that is struggling to be fit for purpose. Over the millennia, money and the mathematics with which it is described and expressed has been progressively evolving. Fractional reserve banking in conjunction with fiscal policy by governments constitutes the state of the art in money and has a demonstrated history in stimulating both supply and demand. However in a world where supply and demand is generally out of balance between national economies, are these money tools appropriate?


As production efficiency rises, do we need a different way to pay for things other than using money created as debt, whether that debt is repayable to the bank or as tax to the government? How should we distribute entitlement to the products of industry? To make the challenge even more complicated, how can we make so that what we demand when spending money is closer to what we actually need when living in a finite world with a growing population and a climate at the tipping point of change? How can money be changed so that it values the present and the future more equally, when our tendency is to favour consumption in the present?


Assuming there were answers to the questions about money, what sort of political framework would be required to sustain a reformed economy? Would we need to use political power in a much more detailed way and if so what would be the compromises to personal freedom? Despite our cultural difficulties with working closely with others, would we need to empower some sort of communalism as the best way of balancing individual expression with a more constrained relationship with consumption?


At present our politicians are mostly avoiding everything discussed here. This is not because they are all ignorant, but because in times of danger it is safer to be as close to the centre of the herd, even if it is charging towards a cliff. This is not very comforting, but reflects the reality that our current system will carry on longer if no one acknowledges that it is bankrupt. If we await the systems collapse, the takeover by the international oligarchs and the emergence of fascist politics will be the most likely outcome. The alternative is to try to find some creative answers to some of the questions raised here and to at least have a political faction ready to step forward during the moment of uncertainty in crisis, with some alternative to tyranny and a courageous commitment to the future. That demands that people in reformist politics engage creatively with academics and other thinkers to develop policy. The slogans have their place, but real reform is a deadly serious business with critical outcomes for us all.