The author’s own confusion between markets on the one hand, and capitalist accumulation on the other, is well displayed here. (Just as a quick reminder – the classical world of Plato and Caesar had markets: it did not have capitalism as such, although it did have extremes of wealth and poverty, of course.)

Either microfinance is better delivered by capitalist banks or else it is better delivered by not-for-profits. Tom seems to have no idea which of these is so, yet is reluctant to draw the obvious conclusion that he doesn’t have the evidence on which to draw any useful conclusions.

Saying that creative finance, innovation, the pursuit of profit, and a community spirit can and do mix tells us precisely nothing. They may mix in the way that human beings and swine flu do, although even I think the relationship is slightly more benign than that.

Actually, I don’t even know what Tom means by “creative finance” – presumably he wants to praise certain forms of financial instrument over others, but on what grounds I have no idea. Like many other commentators, he supposes that the only motor for innovation is the desire to create wealth – no pursuit of profit, no innovation. This is simply wrong: State action can innovate, as the 19th-century public health programmes and the US space programme clearly demonstrate. It is up to market apologists to show why the market failed to deliver these goods, or, if they prefer, to show (not simply state) that it would’ve produced even better ones if only the wicked State hadn’t got in the way.

Tom seems simultaneously to recognise that regulation is necessary but also to dislike it. The principles by which the regulators are themselves to be regulated (the mechanism presumably being democracy) themselves represent a valid and important issue. There may well be a case that such regulation is more effectively performed by regulators who think that the pursuit of profit represents a social good in its own right rather than by those of us who would relegate markets and capitalism behind community and a fair society but Tom hasn’t made it.

Your points use Sen’s logic that markets and the investment by them necessarily lead to the creation of freedoms and well-being amongst people. Yet this ignores the evidence by Thornton that this model applies to a very select few African countries (such as Botswana) and completely ignores the “Asian tiger” model of capitalism in parts of India, in Korea, in Japan, in China. You mention microfinance initiatives. Absolutely we should support them, as much as we support the co-operative movement. But these serve a tiny few of the millions kept in poverty either by inequal distribution of wealth and “sliver markets” of goods and services (such as these inititaves) that will never see them participate in them – for want of trying but kept in place by social structures and corporate hierarchies. The fact is that markets continue to fuel growth in China and elsewhere without making the poorest better off as a result. It is a simple, unavoidable, necessary fact.

No amount of regulation can force more co-operatives to start or microfinance to be available to all. They do not operate on the kinds of profit margins that make such development possible in the wider world. Your percentages are impressive but the customer base wide and the revenue shallow. It is unclear how sustainable the massive growth of EQK in recent years is, particularly as it goes into mortgages and riskier lending.

Markets are nothing more than a tool, a way of redistributing goods and wealth amongst consumers and producers. To think of them as anything more, as somehow transformative on their own, falls into the trap of both neo-liberalism and neo-conservatism.

We must be very very careful about making such assumptions. I would sincerely hope that the “liberal left” know this already!

Firstly, I really don’t get why people are using the word “microfinance” so much, it seems like dressing up what is essentially a well known financial product (a loan) in trendy new language. What this seems to be about is the development of domestic banking systems that can provide finance adapted to local needs.

I’m not sure how this relates to globalization myself, since the domestic banking system is an internal matter with little dependence on external factors. While some limited degree of foreign investment may helpful in the development of such a system, there is no reason why this is not compatible with a less globalized system where governments can restrict movement of capital.

Another issue is the role of government, there a numerous examples of strategic government intervention to aid development. A big problem that some of us on the left have is that measures such as protectionism and state owned industries are largely ignored and often outright rejected. What you call “microfinance” is useful but it seems like often it seems like the current fashionable development gimmick and seems to take precedence over other measures in policy discussions.

I also think the portrait of the Cruddas/Rutherford their anti finance/market rhetoric is seems more interested in limiting rather than eliminating markets.

An excellent piece, and a debate the left really needs to engage in. Sen is a wonderful author well worth everyone reading.
I agree that this needs to stay away from a simple left/right etc arguement. What we need is a debate on how to make markets work effectively for the people they affect, so what is the effect of unequal information or power in the market place.
We have all seen the dangers of unregulated free markets, but there is a nice long and boring debate about the detail, we have yet to see a proper alternative.

until there is a real alternative, we must harness for force of the market rather than allow it to run wild

“I agree that this needs to stay away from a simple left/right etc arguement. What we need is a debate on how to make markets work effectively for the people they affect,”

Absolutely, entirely agree. Markets are wonderful things but sometimes they do need to be adjusted or tweaked.

For example, think of Yunus’ great insight which really kick started microfinance. Traditional lenders would lend not just because the sums desired were so small. But because there was no security available to pledge against such loans. Thus no security, people would have to turn to loan sharks at much higher unsecured interest rates.

Yunus realised that by creating those groups who would sponsor the loan, most especially by insisting that only one member of such a group could have a loan at any one time, he had created security for the loan. Social pressure works just as well to maintain repayment rates as the more traditional physical security does.

That really was the great change that allowed microfinance to be launched successfully.

There is quite a bit of win in this article. It should be emphasised that no society in the world represents an ideal market democracy (as Von Mises described, a situation in which all transactions are voluntary), and so we are left picking and choosing between lots of fairly imperfect models.

Mike said:

Either microfinance is better delivered by capitalist banks or else it is better delivered by not-for-profits. Tom seems to have no idea which of these is so, yet is reluctant to draw the obvious conclusion that he doesn’t have the evidence on which to draw any useful conclusions.

And the problem with this is? I can’t prove that mutuals are better than joint stock companies. I believe it to be true. I can’t prove that mutuals and cooperatives can outcompete capitalist companies. I believe it to be true.

I don’t know that not-for-profits are better than capitalist banks. I believe it’s possible. So why not simply make sure that the playing field is nice and flat (which it currently isn’t), and let people make their own choices and see which is true?

Because Mike would rather decide everything in advance on the basis of ideology, I guess?

[7] I have no problem with that – only with the fact that Tom didn’t say it.

[8] Neither more nor less than you, at a guess.

I admire the mutual and co-operative model even more than MatGB does. I would argue the case for tilting the playing field mildly in their favour rather then just flat; but that ignores the elephant in the room, just as Tom does..

The astounding fact is that the markets in pretty full capitalist form have been lifting people out of deep poverty by the hundreds of millions. The most incredible improvements have come in China and India, but something similar has been happening from Egypt to Brasil to Indonesia and twice around the world again. The worst danger in this recession wished upon us by one-eyed Masters of the Universe is that the crisis may endanger this marvellous march away from hunger.

Diversity – Your claim that “markets in pretty full capitalist form have been lifting people out of deep poverty by the hundreds of millions” is a problem that we leftists have.

Looking at where most recent global growth has occured you can see the state playing a pretty big hand in things. China and India are by no means open free trading economies. Further to this there is little proof that the result would not have been the same had we maintaned many of the old pre 1980′s restrictions on trade and movement of capital.

Looking at the per capita GDP stats, the growth record for the world in the 1960-1980 period was pretty damn good, a good deal better in almost all areas than the growth 1980-2000. The claim that financial globalisation has led to some kind of revolution in fighting poverty is a myth.

Andreas, I have taken the odd math course, and as I recall, if something has any “proof”, that means it is known with absolute certainty. Even if it is a “little proof”…

Less pedantically, the rise of India and China has followed the conscious decision of their governments to intervene less in their economies than they did before. It is quite strange to see that rise interpreted as an argument in favour of such intervention.

Either microfinance is better delivered by capitalist banks or else it is better delivered by not-for-profits.

Mike, either source of microfinance is better than none at all. And as a general rule, organisations whose activities lead to their making a profit tend to expand faster and influence more people than organisations whose activities do not lead to their making a profit. An activity X that does not make a profit can be sustained only up to the point that someone is prepared to subsidise it. An activity that does make a profit faces no such limit.

I might add that it is always risky to be dependent on someone else’s charity. If you are dependent on someone else’s self-interest, that means they cannot remove the thing you need without also hurting themselves.

My main point is rhetoric that places markets and capitalism on opposite side of a one dimensional argument from society and the poor is simply unhelpful. As Sen points out, the most successful economies have certainly not been free-market – they have in differing forms been an arrangement whereby the state provides (or is bullied into providing) an enabling environment in which the private sector prospers, and the consequent revenues the state collects through taxation are used in part to provide a safety net for those who are left most vulnerable.

As Martin [4] correctly points out, like it or not, we are stuck with the global markets and the movement of capital across national borders. To look at banking systems from a domestic point of view only is, in my opinion, to ignore the modern day reality. I agree with Sen that the current crisis is not the end of a political or economic system but a failure of regulation. The system is imperfect in many ways, but it is counterproductive for the British left to see this as a moment in which it can reassert old leftist ideology.

I see microfinance as a fantastic example of how it could be possible to manipulate financial might of the economic north and global markets to provide the poorest people with the opportunity to lift themselves out of poverty. We have been through statist, top down development solutions and the Washington Consensus, and in both instances the people these initiatives were aimed at helping saw precious little of the benefits. Microfinance is a fantastically innovative financial product, removing the obstacle of the risk involved in loans to the poorest. There are other products emerging, such as micro-insurance and mobile savings accounts which could provide people with security and the chance to plan for the medium and longterm. The industry is relatively young, and I don’t think it will necessarily have to be provided exclusively by banks or NGOs – there are a variety of institutions that provide mortgages or loans which are not uniform in their make-up. Microfinance isn’t a complete success story by any means, but, as I point out, the potential for growth is great and it provides a different perspective of capitalism and markets to that which is being peddled by some on the left.

Jon Cruddas certainly used the “defunct market society” when he took his children out of the local schools in his rundown constituency and moved them across London to top notch schools in Kensington. What a fucking hypocrite.

[12] For the record, I think microfinance is a great idea. Your last paragraph would stand up if everyone were the rational actor that economic theory supposes them to be, but we all know that’s not how people actually behave.

ad – Not sure about India, but China although it reduced state control over industries it did it in quite a specific way in it’s factories It introduced a twin pricing system using the traditional centralised quotas system but allowing the factories themselves to produce and sell goods at whatever price the market would allow.

In addition China still maintains fairly strict controls on investment and foreign exchange and exercies a good deal of control over what industries can and can not be set up. While it’s moved to a market economy the state still plays a vital role in terms of controlling the economy in terms of high level decisions.

The problem I have is the perception that the policies that have led to China’s success are those of the right; a minimal state, deregulation, free movement of capital and such. I believe this is not an interpretation that should be applied to China’s growth.

if everyone were the rational actor that economic theory supposes them to be, but we all know that’s not how people actually behave

Well obviously Mike, Mill said as much when he first proposed it what, 150 years ago?

It’s a useful simplification in order to run analytical models. It works as an extrapolation. Anyone expecting it to always work is a fool, anyone reading the theories and assuming they’re supposed to be 100% predictive and behaviour controlling is an idiot.

I don’t think you’re either of them, so why the negativity?

I just don’t understand what “it works as an extrapolation” means. Seriously.

Mike, any political science/economic theory inevitably does not translate perfectly into practice as it is deals, as you point out, with actors that act irrationally at times and cannot be relied upon to have a uniform reaction to similar situations. This doesn’t invalidate theory altogether. You point out the past innovations that have emerged from the public sector but I can equally point to just as many occasions on which the state is a hindrance to growth and innovation. I would be interested to know, despite your enthusiasm for microfinance, whether you would align yourself with Cruddas and Rutherford in seeing the state as the best vehicle for reducing the wealth inequalities that have developed over the past 30 years and rebuilding what is increasing coming to be seen as a broken society?

Andreas, I think your analysis is slightly misleading. The case of China is an interesting one as it is in the middle of an almighty transformation. However, it is only though a liberalisation of attitudes towards the private sector that its economic miracle has come about. One only has to read Jung Chang’s beautiful wild horses to realise that the state created fear and suspicion rather than an enabling environment up until Mao’s death. There are increasing reports of dissidents and protest and at a local level, officials are elected rather than appointed due to public pressure. The point is that China’s growth is based on exploitation (as much industrialisation is) but this cannot go on forever and there will come a point where its growth slows, entrepreneurs want to diversify their activities and workers demand better conditions and attention to their welfare. To portray the economic miracle as in China as a result of state intervention and as a viable and attractive model is misleading.

[19] Tom – in a sense you’ve answered the question you ask me: I don’t think there is a single “best vehicle” for reducing wealth inequality. And that goal itself begs the question of the size of the pie. State action is inevitable, and so are markets, and the evidence is that neither of them is very good at dealing with the problem (markets because they’re indifferent to it, states because they have stakeholders who are hostile to it) so clearly there is a role for not-for-profits of various kinds too – as I have consistently argued here.

Behind all that I have a more general concern to challenge what I would call “theory seduction” – it matters not whether the theory is associated with the left, the right or neither. It’s a very human failing to seek the “quick fix” solution and I sometimes think that the reason economic theories survive (their extraordianrily poor track record is hardly a secret) is because, as Phineas Barnum once said: “there’s one born every minute”.

These days it is hardly necessary to address the failure of “state capitalism” or “actually existing socialism” (though of course it exists no more) or whatever else you want to call it. It is, however, highly desirable to pour cold water on the gung-ho tendencies of those who think that free markets (rather like Christianity and not only in a similar reverence for particular texts) have been found difficult and therefore never tried.

the reason economic theories survive (their extraordianrily poor track record is hardly a secret)

Really? Got some evidence for this? Can you point to a single instance where the entirety of the platform of a given economic theory was introduced entirely without political interference, meddling, or watering down?

Didn’t think so.

A large number of top rank economists were predicting the current problems. Included amongst them were the Cheif Economist at the IMF, the former head of the Bank of England and the most qualified economist within the UK parliament. They were told variously to shut up or merely ignored or laughed at.

But don’t let the actual facts get in the way of an anti-intellectual bias. Facts get in the way of nice little rants, don’t they?

To pretty much all:

1050 words into a comment I realised I was taking the piss and turned it into a post here.

From John Q’s post:

“We know and have known for a long time that Western-model market capitalism only works in a state of constant expansion. To succeed one needs two things to be true: a constant source of new markets for your sophisticated goods and a constant supply of new client states with cheaper labour where you can manufacture those goods and import the profits back to your home economy.”

Good grief, are they still teaching Lenin on Imperialism in Ghana?

Tim:

No, in British universities, but the fact Lenin (and Marx) were frequently wrong doesn’t undermine the fact that they were occasionally right.

The British industrial economy grew while it constantly developed new resource fields and new markets. It began to contract at around the same time this trend stopped. American industrial capitalism has grown constantly for as long as they were able to open new markets through the fall or opening of ex-Communist countries, and by investment in the Tiger Economies and the Third World. [1] The Tiger economies are continually growing because they are opening new markets: here in the West. This is still correlative; I’m not claiming to have proved causation, merely hypothesising it. I’ll only know if I’m right or not in about 50-120 years depending on what happens to Moore’s Law in the mean time. Also, on what happens to the climate.

We’ve hit the edge of the planet. Except into space, there’s nowhere left to go that there isn’t someone already there, and the world frowns on imperialism these days.

I’m not a socialist, let alone a Communist; but I am an economic historian, and if one removes the blinkers it’s hard to miss the ways you can use the British economy to predict trends in other industrialising nations. We started first; we plateaued first and now we’ve turned into a nation of tertiary industry. Everywhere else has or is following the first step; the two places which were closest behind us, the USA and the central European states, have both followed us into the second step. Why assume they will not follow us into the third?

John Q wrote elsewhere: “We know and have known for a long time that Western-model market capitalism only works in a state of constant expansion. To succeed one needs two things to be true: a constant source of new markets for your sophisticated goods and a constant supply of new client states with cheaper labour where you can manufacture those goods and import the profits back to your home economy.”

Tim W responded: Good grief, are they still teaching Lenin on Imperialism in Ghana?

—

Hardly a fact-based and intellectually convincing riposte, Tim…

A great many of us who do believe in truly free markets (as opposed to our current globalised “state capitalism”) recognise the truth in what John said, and we have several hundred years of history, and not simply economic theory, to point towards as evidence to support our position.

John Q wrote elsewhere: “We know and have known for a long time that Western-model market capitalism only works in a state of constant expansion. To succeed one needs two things to be true: a constant source of new markets for your sophisticated goods and a constant supply of new client states with cheaper labour where you can manufacture those goods and import the profits back to your home economy.”

Tim W responded: Good grief, are they still teaching Lenin on Imperialism in Ghana?

—

Hardly a fact-based and intellectually convincing riposte, Tim…

A great many of us who do believe in truly free markets (as opposed to our current globalised “state capitalism”) recognise the truth in what John said, and we have several hundred years of history, and not simply economic theory, to point towards as evidence to support our position.

[John Q got in the same point whilst I was tapping away]

“Hardly a fact-based and intellectually convincing riposte, Tim…”

But that is Lenin’s argument. And it’s not a very good one, as with so many of his economic arguments.

“The British industrial economy grew while it constantly developed new resource fields and new markets. It began to contract at around the same time this trend stopped.”

It did? British industrial production peaked in about 1999, 2000. British industrial employment peaked well before that, this is true, British industry as a percentage of the whole economy peaked well before that this is also true. But the British industrial economy was growing right the way to the turn of the millennium.

I’m surprised that an economic historian is trying to base an inevitability argument on a trend that has lasted all of, oooh, 9 years now.

“We started first; we plateaued first and now we’ve turned into a nation of tertiary industry.” Now that part I agree with. I’ve no problem with people taling about moves from an agricultural to an industrial to a services economy. But it isn’t because agriculture contracts: output now is higher is the UK than it was in 1900. Industrial output is higher now than it was in 1900. It’s just that productivity in both sectors has grown so swiftly that millions upon millions of people have been freed from those sectors so that they can work in services. And thus services have grown even faster than either agriculture or industry.

While I agree that this is near inevitable, I don’t see anything ominous about it, far from it. Ain’t it wonderful that so many are being freed from physical labour? That we have the excess labour and resources to create such life enhancers as TV, opera, a health system, further education and all those other services?

That’s the part of your argument I’m having huge problems with. This connection between imperialism and the move to a more services based economy. I simply cannot see that there is any connection at all.

[21] What’s your problem, Matt? No economic theory is ever going to be introduced without political interference (as you put it).

Economic theories are true in exactly the same sense as alchemy is true. Alchemy taught that in order to transmute base metal into gold, the practitioner must be free of all sin, including the covetous desire to transmute base metal into gold in the first place. Hence no gold from alchemists. Physics has confirmed this result by showing that it costs more to produce gold (through atomic reaction) than the gold so produced is worth.

See? Even I can find a use for markets now and then…

TimW:

It did? British industrial production peaked in about 1999, 2000. British industrial employment peaked well before that, this is true, British industry as a percentage of the whole economy peaked well before that this is also true. But the British industrial economy was growing right the way to the turn of the millennium.

Tons of steel produced/exported in 1933 versus 1999?

Cargo-ships built?

Cars built?

Moving to primary industry:

Tons of coal mined?

Net tons of wheat or barley, after deduction of importing?

Well over 60% of our population don’t make anything. We’re no longer industrial. The single largest import and the single largest export in our GDP for the last decade or so has been money, through the now-bankrupt City machine.

Claiming we’re industrial because the quantity of cash earned has a higher number than it did in 1936 is disingenuous, even if you correct for inflation which I’m fairly sure you have not.

John, on this I think you’re looking at the wrong points.

We stopped mining coal in the ’80s because strip mining and importing is more efficient. We stopped building ships because other places do it cheaper. We still make a lot of cars (at a guess, a huge number more than in 1933), but I’d also guess that we make a lot less steel.

Because a huge chunk of my car is made of plastic.

When I read your post, I did try and dig out some stats, but ONS want to tell me in value per worker and similar, not gross numbers.

But I’ve read several times that manufacturing in the UK has remained a lot stronger than people normally credit it. It’s just that a lot of it is done by robots and automated.

But it’s you that’s making an assertion, Tim’s telling you you’re wrong. You can’t prove a negative, you can prove a positive—show us a graph or a clear trend, define your terms, and then Tim can tell you what’s wrong with it.

But factory output in the UK is still fairly high, and is significantly higher now than in the 30s, that I’m sure of.

The line I hear is that we’re doing better than the French, not as good as the Germans (obviously). We aren’t catastrophically bad at manufacturing, it just hasn’t been the best area of innovation for some time.

John Q.

Your looking at tonnage or numbers of units as a measurement of output. That’s how the Soviets used to do it, remember? All that joy at Soviet steel production beating that of the US? It’s the method we now deride when we use the phrase “tractor production statistics”.

It’s not actually a very useful set of numbers. We’re not very interested in how many tonnes of steel are produced. Seriously, I mean who cares? We’re interested in how much whatever it is that we’ve produced increases human welfare. The more value has been added in the economy then the more human welfare has been advanced (by this narrow measure of course. I’m well aware that there are other things than goods and services which add to human welfare.)

Imagine for a moment. Some amount of steel used to be used to make cans for food. Much of this has been replaced with aluminium cans. We thus need less steel production. Are you saying that because we use and produce less steel and have replaced it with aluminium that we are thus poorer? That’s what concentrating on steel tonnage might lead you to think. Or that plastics and aluminium have replaced much of the steel in cars we are therefore poorer?

Keeping even with the steel numbers. You are, I assume, asking about the primary production of steel. In blast furnaces from coke, limestone and iron ore. But technology has now moved on and we produce much of our steel (this is true globally, not solely in the UK) from secondary sources, from recycling. The big breakthrough was made by NUCOR in the 1980s, when they managed to make auto steel from scrap for the first time.

This is why we measure value added. GDP is, as I hope you know, the measure of value added in the economy, not the number of things produced nor the resources used.

Sure, we produce fewer cargo ships than in 1933. Rolls Royce alone produces some one third of the world’s jet engines. A product that didn’t even exist in 1933.

Again, that’s why we measure value added.

And the measurement of value added in manufacturing is called the “index of manufacturing” (also called “index of production”) and it’s compiled by the ONS. Without lookiing it up for accuracy I think that the index was around 30 in the 1930s and 100 or so in the 90s. That is, we made three times more stuff by value.

It’s way too early in the morning for me to be digging around the ONS site but try looking it up yourself. I’m absolutely certain that manufacturing production peaked in the late 90s when measured by value. And yes, it is the value that we’re interested in, not the tonnage.

Tim wrote:

“The more value has been added in the economy then the more human welfare has been advanced… GDP is, as I hope you know, the measure of value added in the economy, not the number of things produced nor the resources used”

—

GDP is a measure of cost differentials. Not (non-monetary) value added. Not human welfare. You can have (and we do) rising GDP figures off the back of, say, increasing environmental pollution: the clean-up costs actually contribute to GDP. See here:
http://lpuk.blogspot.com/2008/08/grossly-distorted-perception.html

In the linked post I long ago promised a follow-up looking at more rational measures than raw GDP; ones that _do_ take into account human welfare. Thanks for unintentionally prompting me again to start thinking about getting that written.

I think I do address that point in the part that you didn’t quote?

“(by this narrow measure of course. I’m well aware that there are other things than goods and services which add to human welfare.)”

A disagreement on emphasis, I suspect. By popping that in brackets, you are implicitly saying that those “other things” are incidental. Others might well argue that the production of goods is an incidental contributory factor to increasing human welfare… Let’s agree to disagree.

Page 6 of this report has an interesting graph.

http://www.nzbio.org.nz/uploaded/The%20future%20of%20UK%20manufacturing%20-%20April%202009.pdf

Eyeballing it, it looks like 2007 manufacturing output (measured by value added) was about twice 1959 output. Yes, in constant pounds.