World improvement reloaded

Many people have lost the belief that the world can be put on a better track. Since the Enlightenment, people or groups of people – political parties, revolutionaries, subversives, utopians or reformers – have tried again and again, but often not much good has come of it. In this respect, we are once bitten, twice shy.

Of course, when we consider the history of our world, we know that political engagement has also very often done some good. African-Americans in the USA would not have won their civil rights had people not joined together in a movement. In Austria and Germany, universal suffrage was pushed through by labour movements, which also fought for better labour laws, the eight-hour working day, fair wages and proper social insurance. This was only possible because people banded together in large numbers and formed political parties, which in turn exerted extra-parliamentary pressure and influenced the political process. However, we also unfortunately know that today hardly anyone cares about these parties – and that what their leaders want is above all peace and quiet. They like activists, provided that they help them with their canvassing, but they don’t want starry-eyed idealists bothering them while they are “professionally” politicking.

Basically, we can’t see how improving of the world is supposed to work on a practical level. Even if we have a rough idea about what reforms, laws and measures would make our society that little bit better, more just and more efficient, in a political system characterized by bloodless careerists or old-style apparatchiks hijacked by powerful lobby groups, it seems unthinkable that these could be implemented in the foreseeable future. That’s why it seems more obvious simply to be “anti”. And occasionally, in a very vague way, “anti it all”. Or to cynically avoid the whole game entirely.1

I can also think of a hundred reasons to join in the lament. For more than two years, the global economy has been mired in the deepest economic crisis since the 1980s, an economic crisis provoked by mistaken deregulation in the financial sector, and still no noteworthy regulatory measures have been introduced that could famish the financial beast. Our national economies are as rich as never before, but young people can’t reckon with attaining a level of prosperity even close to that of their parents’ generation. Wealth is becoming increasingly concentrated, yet many firms pretend not to be able to guarantee young trainees even a minimal income. There’s enough money around for every imbecility, but still we have an education system that spits out more than eight per cent of our children onto the labour market without a school-leaving certificate. In the countless TV talk shows, the same old purveyors of neoliberal sophistries proclaim that we need more egotism and “self-responsibility” – except the banks, which pay their bonuses from national bailout money. Savings are supposed to come from employment benefits and social services. The bankers, meanwhile, have gone back to gambling – with the cheap money pumped into the markets by the central banks and the bailout billions “donated” to them with our tax money. In brief: things go on and on and on.

This won’t change as long as people are given the feeling that, even though they know what they are against, it’s virtually impossible to improve anything. That’s why it’s necessary to strike a blow for progressive reforms in our time. Central are proposals for a progressive economic policy. Absurdly enough, although it is the recipes of market fundamentalists that have brought capitalism to the brink of collapse, the preconception stubbornly persists that it is economic liberals and conservatives who “understand the economy”, while all the Left does is pile up debt and strangle growth. Yet an economic policy with a fairer society in mind is also a better policy in an economic sense: the economic incompetence of the conservatives consists precisely in the fact that they have no understanding of this whatsoever. The reason is not even that they are especially stupid. Rather, as Upton Sinclair put it: “It is very difficult to get a man to understand something when his salary depends on him not understanding it.”

Economic fairness and a reasonably equal distribution of income not only make the economy more stable, they also make societies more liveable as a whole. The social stress that goes along with large discrepancies in wealth causes unhappiness – while more equality makes people happier, as Richard Wilkinson and Kate Picket have proven in their groundbreaking study The Spirit Level: Why Equality Is Better for Everyone.2

The defensiveness trap or Why it’s necessary to think about the future

Progressive reform also means setting our sights on the future. Formerly, the Left naturally saw itself as the force of progress while conservatives were perceived as backward-looking. However this distinction has long ceased to be clear-cut – one can even argue that progress has switched sides. Now it is conservatives and neoliberals who are for the whirlwind of change – though now, the “reforms” they plead for make the lives of ordinary people more difficult. The result is that many on the Left have been put on the back foot, defending existing social-welfare standards against the sustained attack of market fundamentalists.

Imagining themselves to be in league with the zeitgeist, the world-improvers once assumed that societal change, though not automatically and in every detail, would on the whole move in the direction of more justice and social progress. This certainty has begun to totter in a big way. Today, “progress” is often flatly equated with business-friendly innovation, which causes normal people more stress and certainly doesn’t make them any happier. This has forced the Left onto the defensive mentally.

This is a trap, however. On one hand, because it is impossible to restore past conditions; the clock can’t be turned back. On the other hand, because we need new answers to new challenges – to problems such as ecological crisis, climate change, the finiteness of fossil resources. The same holds true for the inner emaciation of democracy, the frustration with political parties, the disinterest in politics. These can only be countered with more democracy in Democracy. All these things demand not defence but improvement. Many on the Left have lost their orientation on the future, and their optimism along with it. This is no small matter: hope results from optimism and, from hope, resolution and the will to take a stand. It has always been the optimists who have changed the world, never the pessimists, with their serene certainty that everything will get worse – or at least remain as bad. The Left, in other words, must reclaim progress.

And they have to know what they are standing for. For fair social welfare for everyone and against the undeserved privileges of those who monopolize all the opportunities and most of the riches, power and influence, who block important reforms and corrupt politics and media to protect their advantages. For a world in which a great diversity of people can develop their different talents, but in which all have the same chances and a sufficient degree of security. For a society that is equal again. It’s that simple. If these aren’t the terms that leftwing or social democratic parties are talking in, then something has gone seriously wrong.

Of course, there are no shortages of explanations for why “the Left” – the left-liberal milieu, progressive NGOs, parties of the democratic Left – is in the state it’s in. However, to paraphrase Karl Marx: it is not enough to interpret the political forces of the Left. The point is to change them.

Prosperity for all: The economic competence of the Left

A society that shares its prosperity with all its citizens also functions better economically. The economic competence of progressives consists in their understanding this.

In practice, however, others have been calling the shots in the last thirty years. Neoliberal economists have brought into the world the thesis that says that the more freedom one concedes to the markets, the more wealth will be created. “Behind every cynical (or merely incompetent) banking executive or trader sits an economist, assuring them (and us) from a position of unchallenged intellectual authority that their actions are publicly useful and should in any case not be subject to collective oversight”, notes the great social democratic historian Tony Judt, who died prematurely in 2010.3

With puffed-up chests and more than a dash of arrogance, neoconservative and free-market politicians influenced by these economists have insisted on their “economic competence” and brushed off all those who dared point out that unregulated markets not only produce social injustice but also massive instability. These politicians cultivate the impression that they understand a thing or two about “the economy”, conceding to progressives “expertise on social matters”, at the most, as if the latter only wanted to redistribute wealth without knowing how to produce it.

The new world economic crisis has shown yet again that one can’t leave it to the market to provide for a strong economy. In any case, it is a truism that a community with a certain quality of life depends to a great extent on resources that the market does not produce – or that it even destroys; anyone not totally ideologically bull-headed must immediately comprehend this. “Markets, of their own accord, produce too little of some things that are useful for society, such as research, and too much of other things that are harmful, such as environmental pollution”, as the American Nobel Laureate for Economics, Joseph Stiglitz, has put it.4

For this reason alone, an important task of the state must be to regulate things in the interests of society. This includes an education system that gives everybody a chance; a public transport system whose primary goal is not profit but mobility for all; a police force that guarantees public security for everybody and not just for those who can afford to live in “gated communities”.

The necessity of the state

With a view to the well-known responsibilities of the state, which the private sector does not or cannot carry out, Keynes once wrote that “the important thing for government is not to do things which individuals are doing already and to do them a little better or a little worse; but to do those things which at present are not done at all.” State responsibilities, according to Keynes, are those that lie beyond the zone of the market that markets do not carry out.

However state policy also has a responsibility in the core area of the economy. While the game of supply and demand and price-formation on markets might be the most efficient way to produce goods, the market’s short-term perspective always also produces systemic malfunctions. Left to its own devices, the market leads to dead ends that an astute economic policy can anticipate and avoid.

In the crisis, everyone suddenly became a Keynesian again; the crisis was, to a certain extent, a “Keynesian moment”. However caution is required: this doesn’t mean that instinctive adherents of free-market ideology came to their senses overnight. For them, Keynesianism is an economic policy “for bad times”, whose insights one relies on when the economy crashes, but which one forgets again as soon as things start improving.

The result is that injustice is common – which in turn often has economically adverse consequences. Justice – i.e. the fair involvement of as many citizens as possible in wealth – is not a dreary moral injunction that runs counter to the demands of the market economy. Justice is useful economically.

Why injustice is harmful

Chronic injustice is harmful, essentially for four reasons. First: prosperity for everyone bolsters purchasing power and domestic demand, stimulates the economy and makes a national economy less dependent on export demand. This is also the case in an open, globalized world. Second: if all people live in materially secure conditions, then all people are also able to develop their talents and contribute to overall prosperity. Leaving people on the fringes of society, so that their opportunities waste away, isn’t only unjust, it’s also inefficient. Third: if citizens get the feeling that things aren’t fair, they will engage less. If young people from lower social classes don’t see a chance, they won’t make an effort to do something with their lives. Experience shows that people try harder if they feel they’ve got a fair chance and that it’s worth the effort. Fourth: being underprivileged is hereditary. Whoever is born in poverty gets a worse start in life. Children who have fallen behind by the age of six often never succeed in catching up in adulthood. They are born losers. This isn’t only unjust, it also wastes the potential of people who could contribute something to wealth and prosperity.

Good social policy is therefore also good economic policy. Among the most fatal aberrations in the past decades has been that laissez-faire meddlers, these fiscal war-mongers with their cut-and-thrust arguments for more mettle in economic life, for downward “flexibility” in wages, for cutting loose the “social hammock” of the welfare state, have been able to claim “economic competence”. At the same time, they have portrayed progressive forces as social Romantics who want to distribute the fruits of prosperity fairly but have no idea how to generate wealth. “Correct” economic management is identified with the kind of simple budgeting a Swabian housewife would understand: save dutifully, since that’s the only way one gets rich. [Swabians have a reputation for being spendthrift – ed.]. Whoever spends too much, possibly out of misconceived humanitarianism, or allows others to get too much, can’t manage money and is ruining themselves.

However this is only true in the world of the Swabian housewife, and perhaps in the small world of the honest-to-goodness tradesman. For such a complicated and multiply entwined thing as a national economy, not to mention the global economy, it is not true. If too many people try to rip-off as many others as possible, they trip themselves up. Those who want to gain advantage at the cost of others might be successful in the short term, but in the long run they make us all poorer. The economic competence of progressives consists precisely in their understanding this. The dangerous political-economic incompetence of neoliberals and neoconservatives consists precisely in their not understanding this. Microeconomic thinking is beneficial only from the perspective of the individual business; if a whole national economy adopts this logic, it leads to a dead end and a downwards spiral that leaves many people worse off.

For a small factory owner, reducing employees’ salaries and producing as cheaply as possible may bring a competitive advantage. But if all factory owners did this, none of them would be happy: they all need consumers who can buy their goods. If people don’t have any money, companies don’t have any customers. Not only that: because every manager has to keep production costs in mind, proper wages are also an incentive for rationalization, for inventing better machines and so on. Even if this brings job losses, the productivity of the whole national economy grows, so that those who are made redundant don’t fall into an abyss but can find new jobs in an economy that constantly produces more wealth. Higher wages constitute an implicit incentive for technological progress; low wages, in contrast, are often responsible for a national economy falling behind.

The neoliberal downward spiral

In Germany – and to a lesser extent in Austria – a dangerous strategy has been pursued in recent decades. Under the influence of economically liberal doctrinaires, the upwards trend in real wages has been reversed and a low-wage sector has been established. Germany’s “competitive position” has “improved” in the past years by 14 per cent; Austria’s by 6 per cent. “Improved” of course sounds like a good thing, but means nothing else than that unit labour costs in both countries have dramatically decreased in comparison to their economic partners – precisely because wages have fallen, or risen more slowly, in relation to increases in productivity. “Altogether, gross and net earnings per employee in 2008 in comparison to 2000 dropped in real terms by 2.3 per cent and 2.2 per cent respectively”, calculates Peter Bofinger, Professor of Economics at the University of Würzburg, and one of the five “economic wise men” appointed to assess Germany’s “macroeconomic development”.5

At the same time, income inequality has skyrocketed. In 1987, a board member on average earned 23 times more than an employee; in 2007 it was over 109 times more. The size of the underclass has also risen sharply, increasing from 19.2 per cent to 24.2 per cent of the population. The Organization for Economic Cooperation and Development (OECD), whose members are all “developed” countries with high per capita incomes, came to the withering conclusion that, “since 2000, income inequality and poverty have increased more sharply in Germany than in any other OECD country”.

The fact is that fairer distribution of wealth leads not only to more demand, but to greater economic activity. Moreover, it has a range of other consequences that make society more just and at the same time more productive. First, stable prosperity results in more people having jobs and more people having good jobs. As a rule, this doesn’t only mean that people receive their pay on the first of the month. They also learn something and are able do something; they develop abilities and generally go through life more optimistically. Plainly and simply, fewer people live in poverty. Children who grow up in poverty have lower school marks and fewer life chances than children who live in materially comfortable conditions. If they receive a better education they will have a productive impact in fifteen to twenty years. There will be fewer social problems and more people with valuable skills and proper incomes, who in turn have an important function in the market economy as consumers.

In other words: economic fairness triggers a series of win-win effects, while economic unfairness brings with it a series of lose-lose effects.

If, for instance, a company opts for low wages, it will have to deal with a demotivated, poorly qualified workforce. If many companies do this, the productivity and wealth of the national economy at large will soon begin to sink. No only that: if wage dumping is permitted, productive companies with good economic management and innovative business models – if they are to afford good wages for their employees – are “punished”. They have to compete with companies that are less economically efficient and that possibly offer worse products, which can only keep pace on the market because they pay their workers miserably. A society that permits low wages thereby subsidizes ineffective, regressive companies to the disadvantage of progressive ones. Not only is this questionable for reasons of fairness, it is also preposterous for economic reasons. Ultimately, it is a false and static presumption to believe that a commodity can only be manufactured in a certain fashion and that, if the wages are “too high”, it can no longer be produced. As a rule, companies adjust themselves to the wage level of a society. If that is higher, they have to produce more efficiently in order to remain cost-effective.6

An economy is dynamic, not static. If one allows for more just distribution – and does what hasn’t been done for a long time, namely distribute from the top to the bottom – generated wealth will be distributed differently. But – and this is a big “but” – if a national economy becomes more productive as a result, it will also become richer as a whole, meaning that generated wealth will grow. In short: a dynamic society is not a zero-sum game. Not only are egalitarian societies more liveable societies, they are also more productive. The slogan “prosperity for all” is a guideline for a fairer distribution of wealth as well as for the production of greater prosperity.

Inequality produces (financial) crises

Unjust societies are, in contrast, often more unproductive: they subsidize unproductive sectors through cheap production and they forego important domestic demand by failing to let the large share of the population participate in the prosperity. They are inefficient simply because a large number of people are either unemployed or perform unqualified functions, and because unequal distribution then leads to economic instabilities that harm longer-term prosperity. Instabilities in financial markets, which, as in the recent crisis, can lead to (near) collapse, have a lot to do with inequality. The circle is complete.

Wealth inequality also means that big financial players on the markets search for investments, while the real economy grows only slowly. The temptation arises to obtain financial returns not sustained by any real increase in prosperity, by means of elaborate financial instruments, gambling, speculation and fraud. To put it as simply as possible: if banks, investment funds, hedge funds and so on promise returns of 15 or 25 per cent, while the world economy grows at only three per cent, then such profits are only possible if something is taken away from someone else. If one gives someone something one has diverted from others. If one talks citizens into mortgages or certificates with astronomical fees, if one redistributes wealth from the recipients of wage income to the recipients of financial income. And high financial profits are only possible if one takes massive risks. This is one of the backgrounds of the financial crisis.

There is another way in which the massive increase of inequality has contributed to instability and, ultimately, the collapse of the financial system. The fact that the lower classes and large sections of the middle class have been increasingly excluded from increasing prosperity has created a slump in demand. Different national economies have reacted to this in different ways. In the US, the “basic trend towards stagnation resulting from increasing inequality has been compensated by the rise in the indebtedness of private households”.7 In other words, while the national deficit rose, American citizens were at the same time madly plunging themselves into debt in order to maintain their level of consumption. Financial risk-taking and huge levels of private debt were, together, what caused the massive deficit in the American national budget – the country borrowed money from the whole world in order to buy up the whole world’s goods.

The European and Asian countries reacted differently to the growing inequalities: because domestic demand did not suffice, Germany, for instance, but also China, exported much more than they imported. They built up massive export surpluses. The different ways various countries have handled increasing inequality has, in other words, “reciprocally intensified” and led to massive imbalances – an instability that erupted in the crisis.

A “good capitalism” is possible

Some diehard leftists will at this point probably shrug their shoulders and say that all of this only shows that capitalism is “principally evil”. However, things aren’t that simple. It is possible to make the market economy more just – and in doing so, make it function more efficiently. This is the gratifying lesson to be learned from what a group of German economists has called “good capitalism”, in contrast to earlier and later predatory forms.8

Sure, one can’t stop the march of time – and hardly anyone would want to. The fifties, sixties and seventies weren’t entirely “golden”: although processes of social modernisation indeed made western industrial societies freer and more colourful, they also contributed to societal inequality. In many cases, the liberalisation of markets for products and services was the driving force for innovations that boosted productivity and living standards. It cannot be about “returning the economic system to the level of regulation that existed in the sixties and seventies,” write the authors of the manifesto for a “good capitalism”. “Instead, governmental intervention needs to obey the principle of preserving the emancipatory elements of the liberalisation of the past decades while roping in the destabilising elements of deregulation.”9

Such a capitalism cannot, however, be one in which “the markets” are simply left to their own devices. The financial markets in particular require a tight regulatory framework. A “good capitalism” is not one in which the “law of the jungle” determines income distribution, and where governments increasingly become “night watchmen” that save bankers when they run the system into a brick wall but otherwise keep out of long-term investment decisions.

Societies need to set ambitious goals in order to manage their economies more fairly and more sustainably. These goals are not set by “the markets” and by companies, who think only in terms of their own economic benefits. Market players don’t think long term; for them, all that’s important is today and tomorrow’s profits, not sustainable economic management in twenty years’ time. Even if one assumes, as the free-market faithful do, that markets provide the best “information signals”, it is also clear that “people not yet born are also not market participants – they send no market signals whatsoever”.10

According to Joseph Stiglitz, “the most important production factor of a country is its people, and if a high percentage of people does not realize its potential […] the country as a whole cannot realize its potential”.11 A more just society that achieves more equality and enables its citizens to participate in prosperity is also a society that functions more effectively at the economic level. The economic competence of progressives lies in the fact that they understand this. This is a decisive point that the forces of the Left have failed to make sufficiently clear in past decades. Much will depend on changing this in the future.

This is a translated excerpt from Robert Misik’s book, Anleitung zur Weltverbesserung, Berlin 2010.