Finance at the Threshold (Transformation and Innovation)

Finance at the Threshold This book is dedicated to the late Freya von Moltke. Finance at the Threshold Rethinking t...

Author: Christopher Houghton Budd

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Finance at the Threshold

This book is dedicated to the late Freya von Moltke.

Finance at the Threshold Rethinking the Real and Financial Economies

Christopher Houghton Budd

© Christopher Houghton Budd 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Published by Gower Publishing Limited Wey Court East Union Road Farnham Surrey GU9 7PT England Gower Publishing Company Suite 420 101 Cherry Street Burlington VT 05401-4405 USA www.gowerpublishing.com Christopher Houghton Budd has asserted his moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. British Library Cataloguing in Publication Data Budd, Christopher Houghton. Finance at the threshold : rethinking the real and financial economies. -- (Transformation and innovation) 1. Global Financial Crisis, 2008-2009. 2. International finance. 3. Interbank market. 4. Economic policy. 5. Economics--History. I. Title II. Series 338.5'43-dc22

ISBN: 978-0-566-09211-4 (hbk) 978-0-566-09212-1 (ebk) I

Library of Congress Control Number: 2010940026

Contents

List of Figures Acknowledgements Foreword Prologue PART I ��

vii ix xi xiii 1 3

1

Why Nobody Saw It Coming

2

When the Banks Stopped Lending to One Another

25

3

2007 – A Threshold in Financial Evolution

67

4

It’s the Epistemology, Stupid

91

PART II ��

�� 117

5

Rudolf Steiner’s Conception of Society

119

6

Rudolf Steiner’s Monetary Analysis

139

PART III ��

�� 151

7

The Twentieth Century

153

8

Keynes vs. Friedman – A False Debate

163

9

The Flattened Economy

177

PART IV ��

�� 183

10

Beyond Banking

185

11

Deep Accounting

195

12

Banking on Youth and Trade

219

13

From Threshold to Bridge

225

Bibliography Index

227 231

Transformation and Innovation Series Series Editors: Ronnie Lessem, University of Buckingham, UK Alexander Schieffer, University of St. Gallen, Switzerland

This series on business transformation and social innovation comprises a range of books informing practitioners, consultants, organization developers, and academics how businesses and other organizations set in the context of whole economies and societies can and will have to be transformed into viable 21st Century enterprises. A new kind of R&D, involving social, as well as technological innovation, needs to be supported by integrated, active and participative research in the social sciences. Focusing on new, emerging kinds of public, social and sustainable entrepreneurship originating from all corners of the world and from different cultures, books in this series will help those operating in the area of interface between business and society to mediate between the two in the way that business schools once did until, as is now argued, they lost their way and business leaders came, in many cases, to be seen as at best incompetent and at worst venal and untrustworthy. Published and Forthcoming Titles in this Series: Transformation Management Ronnie Lessem and Alexander Schieffer Integral Research and Innovation Ronnie Lessem and Alexander Schieffer Integral Economics Ronnie Lessem and Alexander Schieffer Finance and Society in 21st Century China Junie Therese Tong African Economic Humanism Mfuniselwa J. Bhengu Spiritual Capital and Economic Transformation Samuel D. Rima Culture and Economics in the Global Community Kensei Hiwaki Islamic Values and Management Practices Maqbouleh M. Hammoudeh Transforming Trade Policy in an Arab State Mohammad Al-Zoubi

List of Figures

Figure 2.1 Figure 2.2 Sketch 6.1 Sketch 6.2 Sketch 6.3 Chart 8.1 Sketch 10.1 Sketch 10.2 Sketch 10.3 Sketch 10.4 Sketch 11.1 Sketch 11.2 Sketch 11.3 Sketch 11.4 Sketch 11.5 Sketch 11.6 Sketch 11.7 Sketch 11.8 Sketch 11.9 Sketch 11.10 Sketch 11.11 Sketch 11.12 Sketch 11.13 Sketch 11.14

An Aristotelian taxonomy Two aspects of money Gold standard Bretton Woods Federally co-ordinated economies Monetary aggregates Credit as a sub-set of cash Cash as a sub-set of credit Cash and credit in reflexive relationship Cash and credit as a resolved polarity Two different logics From ‘me’ to ‘we’ Two orders; two lower modalities Keynes’s thesis – I Keynes’s thesis – II Modern central banking (and the global financial architecture) Functions of money Kinds of money Deep accounting The structure of accounting Counterpart accounts Cross-sectoral accounting Profit and capital as flow The nature of exchange

29 29 149 150 150 171 189 189 189 190 196 197 197 199 200 201 202 203 204 212 212 215 216 217

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Acknowledgements I have to thank Ronnie Lessem for asking me to write this book and Martin West for guiding me through the production processes. Many others have provided crucial stimulation, though they may not be aware of this. The result is something of a synthesis, bringing together a diverse range of views and experience, including life-long ideals and reactions to recent events. Thanks are due, too, to Anita Isherwood Murphy for faithfully converting page upon page of faxed scribblings sent from far-flung corners of the world into intelligible copy then promptly emailing it back to me. And to my wife, Tessa, who continues to be the supportive wife of an often intemperate author. But I have dedicated this book to Freya von Moltke because of her unswerving conviction that the fate of mankind depends on its future generations. This is not a tautology or a platitude. In economic life, especially as regards the thinking on which it is based, very much depends on the experiences, notions and habits of thought one develops in one’s formative years, most of which, economics today being what it is, are reinforced by practical life. If there is anything awry in economic life, and it would be unwise to suggest otherwise, the starting point for lasting change must be with young people, and with the subtlety of thought they bring to bear on economic events, their own lives in particular. Throughout my life, I have been certain that what matters is that young people develop a sense of their purpose in life, and that this depends to no small degree on the acquisition of financial literacy, along with being provided with the finance that can give credence to this sense. Rather than indebting students, for example, I believe they should be capitalised in ways appropriate to their life paths but so that the funding they receive puts air beneath their wings. In ancient Samothrace the statue of Nike once adorned the prow of a ship in a specially created lake. It is usually said that this represented a naval victory, but I am not convinced. For me, the ‘clue’ to understanding Western civilisation, which owes so much to Aristotle who sojourned on Samothrace, is that, however down-to-earth, our thinking does not spring from there. It knows itself to be self-supporting. The initiative of youth, if it is not hopelessly overlain by a culture that does not, at bottom, believe in it, and if it is not directed away from a sense of itself by the many distractions on offer today, needs to spread its wings, Nike-style, and prevail victorious over the circumstances of existence. In this, especially in the future, the financing of youth has the most important part to play. Christopher Houghton Budd Centre for Associative Economics, Canterbury, England


Foreword When I first met Christopher Houghton Budd he was writing a PhD at Cass Business School. I followed his work closely, for though his views on monetary economics were unconventional they were also both interesting and, it seemed to me, of possible practical importance. Further, even if I had thought everything he said or wrote was wrong, he was invariably stimulating and concerned to advance understanding – so under any circumstances I would have been interested in his work. The high regard I had of him from early in our acquaintance has been reinforced by this book. The world has been through a major financial crisis. Indeed, it is through it only in the sense that the acute phase is past. Many economic and political struggles lie ahead before the world will once again be fully restored to financial stability. Why did this crisis occur, and what can we do to diminish the likelihood of such events occurring again? In Chapter 2 Christopher gives a good and very fair summary of the conventional account of the crisis. Banks stopped lending to one another because each bank realised that it had on its books many debts that were unlikely to be repaid, and feared – indeed, realised – that other banks were in the same situation. This suddenly halted bank lending not just among the banks themselves but to non-banks also. In effect there was a sudden monetary squeeze, the world was plunged into recession, and many banks were at risk of failure. This conventional account neglects a great deal. It treats the crisis as an event that can be studied in isolation, and looks entirely at the event itself. That is of course perverse. No physician would treat a patient’s heart attack without knowledge of how other heart attacks had been treated in the past, and if advice were to be given on how to prevent the patient having another one then it would be manifestly necessary to look at the known causes of these past attacks, and perhaps to consider seldom used preventative measures and remedies. It should not be forgotten that every previous banking crisis, whatever its particular circumstances, had two features in common with every other financial crisis, including the most recent one. Every crisis has been preceded by a period of excessive monetary ease, and by ill-thought-out regulatory changes. To these points, which should be made by any careful economist, this book adds several insights. Economists’ modelling their subject on the physical sciences is misleading – of economists as well as others – for it ignores the changing interactions among individuals, the complex nature of expectations, and not least the in general rather poorer quality of the data. Christopher emphasises, too, that money is a social construct, and that different kinds of societies may well require therefore different kinds of money. In developing this argument and its implications the book builds on the work of Rudolf Steiner. Steiner is well known for his ideas on education. Very much less well known are his ideas on the economy and on money. On the basis of these most interesting ideas Christopher Houghton Budd argues that many of the differences between Keynesians and Monetarists, even those few differences that now remain, are based on misconceptions about the nature of the world. We would gain, he suggests, by changes

xii


in the nature of banking systems, by a depoliticisation of money and indeed perhaps its internationalisation, and by changing accounting, so that it ‘ceases to afford hiding places for uncertain transactions’. This well-written and thought-provoking book will prompt its readers to reconsider their ideas on money, on credit, on banking, and on the role of government. Even if it does not change the mind of a single reader, all readers will go away with a deeper understanding of why they hold the ideas they do. Geoffrey Wood Professor of Economics, Cass Business School, London

Prologue How integral is this book? It is not easy for an English economic historian, writing from an English perspective, to accept an approach that does not place Anglo-Saxonism centre stage. I do not mean it is not easy for me personally because, as I point out in the beginning of the book, I have always ‘gone native’ when outside England and have spent my life studying all manner of economic philosophies and indeed being active in their terms. Whether it be Marxism or green economics, being in business on my own account (thus learning that most crucial but least known skill of all economics, surviving a negative cash flow) or participating in Local Exchange Trading; whether it be serving in school finance and governance, becoming an academic among City and central banking economists, working in the ‘less developed world’ (as we so unfairly and inaccurately call it), consulting in a slum one day and interviewing investment bankers the next; whether it be researching the economics of Rudolf Steiner, who was no Anglo-Saxon, or learning about accounting, a schooling in numbers far more real and effective, both practically and theoretically, than the usual numbers of mathematics and econometrics – I have spent a lifetime studying economics from all angles. Because I never subscribed to the idea of shouting louder if not understood in a foreign country, I have also worked in several languages and various cultures. As a result, I do not in fact regard myself as an example of unintegrated economics. Yet I am Anglo-Saxon! Or at least English. One of the those Englishmen, moreover, who thinks that Jeremy Paxman, in his book, The English, pretty much got it right when describing who we are. I have been to many parts of the world and spent little time in ivory towers. Having always been self-employed, I have also had to live from what I say, teach or advise, and thus been entirely dependent on my wits, as the English language understatingly puts it. Much of what I do outside England begins or is prefaced by deconstructing the role of narrow-mindedness, whether in economics or on the part of the English generally, in order to find the way to the essence of the country I find myself in. This is not always easy as many cultures are overlain, even enthusiastically so, with an Anglo-Saxonism of their own devising. How often, when visiting another country or culture and feeling the need to lessen Anglo-Saxon hegemony, one meets people going the other way! They are wanting to get to the US or the UK, not merely as economic migrants, but because for them ‘the west’ or the American Dream has genuine allure. Indeed, there are places in the supposedly Anglo-Saxon world, like the Bay Area of California, or the US as a whole, and even England, that are like melting pots for all the world’s cultures. There is also English, which is one of the most mongrel of languages imaginable, and for that very reason all the more easy to acquire. The Anglo-Saxon may have a special relationship to it, but it is hardly ‘his’ any more. Yes, there has been a history of domination, often negative, unkind and ill-intended. And, yes, there is a dangerous reliance on mathematics. That, in point of fact, is why I studied economic history rather than economics per se. I am a ‘plot’ person, needing to know the place of what I am doing in the larger picture, both in space and over time. Those who rely on mathematical models do not need to do this; in fact they part company

xiv


with ‘plot’. Plotting is more what they do, be it sales graphs, marketing strategies or even interference in sovereign states, which is what such policies as ‘structural adjustment’ often amount to in my mind. The English have a special relationship to Anglo-Saxonism and to how to overcome its narrowness. By definition, our part in achieving an integral economics cannot be that of critiquing ourselves from another point of view. It can only be changing our own view of how we are and how we behave. I call this being english with a small ‘e’. Where we have a history and even a psychological tendency to lead or dominate we need to become hosts, facilitators, accompaniers instead. Where we have laid down the law or dragged whole peoples overnight into a stage of development that took us centuries to develop, we have to know the moral responsibility this brings, and discharge that responsibility properly, not walk away from it. It does not bother us that in 1947 we gave a man three weeks to demarcate the western boundary of the imminent Indian republic, to cite but one example of the way we let go the Empire. Or that we ascribe so many of today’s problems to the ‘immature cultures’ we left behind, when the real immaturity lies in our continual interference in the affairs of sovereign nations that often passes as foreign policy. Similarly, we think any and every person and culture on the planet has to be like us – ‘blessed’ with parliamentary democracy, an industrial revolution and abstract finance. We never stop to think that, for example, bi-party, first-past-the-post, adversarial governance may not be the height of parliamentary evolution, but its caricature. Or rather we do think about such things but then insist that all is as it should be. How, then, does an Englishman make the ‘e’ a small one? The answer is not easy and not obvious. At least, not to my mind. If, rather than by being shoved there by others, we are to move ourselves from centre stage to a point on its edge, to join hands, as it were, with the rest of humanity – I call this going from imperialism to partnership – then our task is of a subtler, more transformative kind than adopting outwardly imposed changes. Like all real transformation, it has to be self-willed and directed by the one who would be changed or needs to change. If the Anglo-Saxon-dominated world is to not be such, the challenges we face are not those that confront non-Anglo-Saxons. They anyway also have in their own way to resist such things as market philosophy, Darwinist explanations of behaviour, the plausibility of supply and demand thinking, and any number of other concepts that trip as readily off the lips of non-Anglo-Saxons as Anglo-Saxons, and often with greater fervour and less criticism. An Englishman may revere or be steeped in Newton, but he does not necessarily admit him to his heart. We also have to manage a problem that non-Anglo-Saxons do not. There are many in the Anglo-Saxon world and especially in finance who believe very genuinely in what they call ‘the white man’s burden’. This dangerous notion underlies much behaviour – from past colonisations, to hemispheric pacts, to Bilderberg gatherings and similar. Even, perhaps especially to global finance. This is a huge and fraught topic, which I am only touching on to signal the fact of its presence. Finding a way past such a reality – better still, enabling us to let go such dangerous predilections – is by no means easy. Career and funding prospects can be affected. Connections can simply not happen or be ‘unhappened’. It is not just a fascination with and dependence on mathematics that bedevils modern economic life and the way it is understood. In one sense, that is precisely the means that Anglo-Saxon dominance took up when outer domination had been achieved or run its

Prologue

xv

course by the late nineteenth century. Our true economic identity does not consist in manufacture or, in Napoleon’s quaint image, being a nation of shopkeepers. It is to be tracked in matters financial, above all finance as conceived in and centred on London. The very nature of modern economic orthodoxy has two consequences that, for me as an Englishman, are quite clear. One is that Anglo-Saxon dominance causes an external antagonism: people want to supplant or at least pluralise the prevailing paradigm. But that can really only be the position of a non-Anglo-Saxon. For an Anglo-Saxon it is a matter of seeing through illusions, overcoming myopia in thinking, refining one’s concepts so that one gets beyond what, in this book I call the propensity to divide, so as to arrive at the propensity to unite which can readily follow on but needs a degree of will and interest in one’s fellow men that dividing does not. We, the English at least, are lamed by this incompleteness on our part. Our task cannot be simply to give way to other points of view, even if we are inclined to do so. We cannot just share the stage but have first to make it sharable. But that means we have ourselves to overcome the dead end that mere market economics can entail. Whether we break through the wall at the end of the cul-de-sac, or back up and find a path in the maze of human history that leads us further, time will tell. But the key to doing so will be to revisit cherished assumptions, redesign policies, take up different habits. What do I mean by that? In the book I give details, but examples would be to study Islamic finance in order to see there arrangements that we could as easily arrive at, but out of the anarchy of individual freedom and responsibility, rather than in compliance with an external code of behaviour. Or we could overcome our fascination with real estate as an asset to be kept permanently in play and whose value is to be constantly increased – a practice that does not come out of any real economics, however, for an asset is by definition a means of production and is thus always being used up and never for sale (unless it is inventory). It comes rather from the Englishman’s deep need to be connected to the earth, to things material. This is not unique to us but we are its ‘best’ exemplars. The English, perhaps the Anglo-Saxons more widely, have a need to find their identity through what they evidently achieve. They cannot depend on an idea, but need to be pragmatic. From this simple piece of inner fact, call it psychology if one resists anything deeper, derives much else. To begin with, our fascination with and even authorship of the materialist philosophies that underpin modern economics. Then there is the idea, as false as any idea could be, that economics starts with Adam Smith rather than Aristotle (at least as far as ‘the west’ is concerned). Next, those things that go to the essence of the Anglo-Saxon psyche – for example, the need to see one’s home as one’s castle. Or that an important person is said to be ‘somebody’, as if the deepest aspect of a human being is the skin and bones that clothe him. If the Anglo-Saxons are to let go their hegemony, without which act there can be no integral economics, no sharing of the stage with other points of view, this is the problem that has to be addressed and addressed somewhat urgently. That, if it is not too pompous a thing to say, is what this book attempts. To lead the Anglo-Saxon mind out of its imprisonment. Out of the labyrinth of solitude, to remind us of Octavio Paz; back from the slain minotaur (thanks to Ariadne’s string) but without forgetting to raise the white sail; beyond the confines of ‘the box’ (for which read brain) within which we have learned to think but outside of which lies the next step in intellectual development; to lift our gaze from its fascination with the ground, as if transfixed by the stare of a snake,

xvi


towards the blue sky and even beyond – to the world of blue birds also. To look up at a rainbow, as Dorothy did, or to fly up to it as the Wizard of Oz may well have done, is not an unimportant thought. But how about going to the other side, then turning to look down into the rainbow and to the earth beneath? Of course, such poetical whimsy has no place in economics, or so we assume. But maybe that is the problem. We make the mistake that science has no link to poetry, to intuition. Yet whence comes a research question? What is a hypothesis if not a form of poetry, a formulation of something that initially no one else can see, but that one hopes can be gradually brought to others’ awareness and recognition. The syntax and the articulation may become more prosaic in the process, but real prose never loses its link to poetry. Prose is not the antithesis of poetry so much as its generalisation, the transposition of leading thoughts from lofty heights to accessible foothills, the filling out and grounding of what first appears as sketch and intuition. In short, the pathway to integral economics for an Englishman, who in a sense is also the epitome of an Anglo-Saxon, is to pass through what others would come up alongside. To release from his capture things which have in fact a universal quality and belong to humanity generally, not to any one group in particular, least of all his own. This is why all eyes for me are on accounting and on how one capitalises initiative. For whether it be the ‘voice of the people’ one is listening to, the deeper intent of an entrepreneur whose balance sheet currently belies the opportunity he has in mind, the health of the economy (which is what central bankers attune their ears to), or the as-yet-unformulated goal of an otherwise behooded hooligan whose chances in life, above all his chance to see himself as someone who matters, have been close to nil – everything depends on how a person or a nation expresses its deepest destiny and sense of itself. In a globalised economy, moreover, such things are necessarily affected very directly by whether, at that moment, the capital implied by an initiative is made available on the terms of the borrower rather than the lender. In the first place, outwardly, structurally nothing, but nothing needs to change in such a situation. But paradigmatically everything changes. It is not easy, but not impossible, for a provider of capital to realise that it is not his possession of it that makes it grow, but the use made of it by the person he lends it to. At that point, however, is he in fact lending it or transferring it? Capitalism could overnight become what I have for many years called ‘capital economy’ if we would just see through the illusion of the idea that capital ownership brings capital growth. What matters is the circulation of the means of production, the circulation of capital. Not who possesses capital, but who is using it. And not even that. What matters is whether the use is fruitful in a wide sense and whether, above all, the distinction can be made between what part of the fruits of capital belong to the various ‘stakeholders’ party to its use. Above all, can each of those parties further discern when more is allocated to their account than should be? For in this is the clue: can the lone, self-interested individual know by his own divining when he has taken to his balance sheet, as it were, an amount that does not belong there. Of course, if he were awake and financially literate he would be able to see this very precisely in the balance sheet itself, for a balance sheet cannot in fact be over-capitalised. But where is this sense to come from in a world steeped in or saturated by AngloSaxonism, by too close a fascination with one’s earthly existence? For my money, the answer is simple and universal, though boring and anti-climactic. It is to be found in looking directly into one’s accounts (which exist irrespective of the currency one uses and

Prologue

xvii

whether or not one is in a monetised or ‘cashless’ economy), for these in their essence are but a mirror of one’s actions and therefore of the ideas and motivations, conscious or otherwise, that underlie one’s actions. In a global economy, if allowed to unfold its inherent nature, accounting necessarily takes on this character. For all mankind there can be nothing else that does this. Accounting therefore has the power to bring Anglo-Saxon dominance to its Waterloo. But what enables a human being to see this in accounting? It is one’s deep, hidden, even long forgotten and seldom used but nevertheless existent, sense of right. This shines as a beacon across the last two millennia, despite the whole of modern history culminating in non-integral economics; a light lit or a tone sounded by Aristotle when he spoke of the need to know the mean in life. To paraphrase his eloquent words from the Ethics: a liberal man is the man who knows how to give the right amount of money to the right person in the right way at the right time. Neo-liberalism, which seems to forget that it takes its cue from the towering presence of Aristotle, would do well to give thought to its own etymology. How, if it does, does neoliberalism relate to this sense of right, of knowing when excess arises and how to ensure one does not privatise it? How does it square its belief in the importance of individual freedom with the need to include the context of that freedom, namely, all the other individuals on the planet? On the other hand, is it compatible for the Anglo-Saxon to conform to external codes? The Koran, for example, can be explicit in terms of riba, and one can create all manner of government regulations, but the Anglo-Saxon can never go this path. He has to find within himself what he has in fact banished from his vocabulary and code of conduct. Despite himself, he has to make clear what is new about Aristotle’s dictum. The new thing, in my view, is that what has for ages been there as the insight of a genius, as a guiding light, has now to become the basis of everyday conduct in monetary affairs. When that happens, when the Anglo-Saxon, now the possessor of all the world’s capital, realises how he can give it away to humanity as a whole, himself included, in the right way at the right time and to the right amount, then, but not until then, can the Anglo-Saxon of his own volition, and therefore with all the future forces at his command, take a place on the edge of the stage rather than occupy its centre. (This is by no means easy, however, because he knows well enough how to be at the centre even if he seems to be at the periphery. The British, for example, have no need to be part of the euro or the European Central Bank in order for both to serve British interests. They just need to have been in on their design.) In fact, the biggest challenge for Anglo-Saxonism, whether on the part of the English or anyone else, is not initially an outer event at all. It is to still one’s egoism, to know its bounds, the limits of its social legitimacy. Obfuscatory? Lacking in external drama? Sheer nonsense? Maybe. But I think not. To be Anglo-Saxon is not in the end to be of a particular ethnic or cultural provenance; it is to have one’s mind focused on a particular destination, a particular mode of consciousness, the consciousness that comes with being self-aware. For then it becomes crucial not only to know why one is trying to do something and that one can achieve it, but also that one has access to the credit on which, in a globalised, monetised, self-conscious world, the fulfilment of any and every sense of one’s purpose in life depends. It is as if the role of Anglo-Saxon culture is to kill off all cultures (itself included!), so that they might create themselves anew, giving life to their latent but yet-to-emerge

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potential, unfolding their re-discovered genius. It is to subject all cultural development to date to self-consciousness so that each culture can give bold expression to its future instead of merely reinventing or reiterating its past. New Africa is what we should be scanning the horizon for, New China, New Arabia, New Brazil, New Columbia (with apologies to Vespucci). And, of course, New England. These are the single members of what I call the choir of cultures. The challenge they face, the challenge we all face, is to pass from cacophony to unison. But that is something we will never be able to do if we continue to take our cue from the dirge-like drone of Anglo-Saxon economics as it has become to date. We could do worse than to heed the words of Alfred Tennyson when he wrote: Unfaith in aught is want of faith in all, It is the little rift within the lute, That by-and-by will make the music mute, And ever widening, slowly silence all.

At its ‘height’, Anglo-Saxon economics epitomises this thought, because, for all its bombastic certainty about itself, it risks separating human beings from economic reality, for which fact today’s rift between the real and financial economies surely gives warning.

part

I Loose funds may sweep the world disorganising all steady business … – J.M. Keynes


chapter

1 Why Nobody Saw It Coming

This book offers a radical view of the global financial crisis. After describing its methodology, including its reasons for using Rudolf Steiner as a main reference, it provides first a chronology of the global financial crisis and, second, various explanations of it, before proceeding, third, to its technical details. It then identifies its own, one hopes unique, guiding intuitions, prompted in part by Steiner’s socio-economic analysis, in order to present its own theses. Their ‘political impossibility’ apart, the book culminates in outline policies capable of practical implementation. Its aim is to lead the reader into a new landscape – the world we in fact occupy but not as we currently conceive it. Spanning the wide gamut of current thinking, the book argues that we need above all to overcome the Left–Right divide, so much taken for granted today, and to promote financial literacy on the part of young people.

1.1 Themes This introduction serves a number of purposes. The first is to introduce the main themes with which this book is concerned and which will serve as its base narrative. The second is to outline its methodology. Third, to provide a preliminary reference to associative economics, as the perspective adopted here is known. Fourth, to contextualise the use of Rudolf Steiner as a main reference. Fifth, a word is needed to explain what is meant by ‘innately English’, which is what the author claims to represent. Last, because it is a feature of associative economics to use plain English and avoid jargon and mystification as much as possible, certain terms will be new or have meanings other than are usual. Where these terms are deemed fundamental to the book’s treatment of the global financial crisis they are made clear at the outset. Less crucial terms are dealt with as they arise. In the course of writing this book a number of themes kept presenting themselves, either in the research material or in the author’s mind. Although they are reiterated and elaborated as the book unfolds, it feels right to draw attention to them at the outset.

1.1.1 ‘Crisis, What Crisis?’ The first of these is ‘Crisis, what crisis?’ Writing in the second half of 2009 on the topic of the global financial crisis did not prove easy. Was the crisis still happening? Or was it over? Indeed, had it ever existed? When in the spring and early summer of 2009, Goldman Sachs and other Wall Street firms posted their highest ever profits, what, one

See 2.3.5: Goldman Sachs, p. 41.


wondered, was the US government’s September 2008 $700 billion bank bailout all about? And if what one writes in late 2009 is not to be published until some time in 2010, would it be worth the paper it was printed on? Presumably not if the crisis had passed, or if one’s analysis of it proved defective. But definitely if the crisis, as this book contends, was not really financial so much as epistemological; not really of a moment, but ongoing. Chronic rather than acute.

1.1.2 An Epistemological Challenge If colossal government intervention to prop up the balance sheets of banks and car makers (and in Australia, more intriguingly, school buildings) in fact did nothing to address the epistemological challenge, would it not therefore be reasonable to expect the ‘crisis’ to continue, albeit in metamorphosed form? Of course, ‘crisis’ is not a word one rushes to use in the world of finance, lest it exhibits that most typical of financial characteristics – recursive causality – and indeed makes critical what might, if less dramatically described, have remained only a ‘blip’. Great care has been taken in the literature to define the term. There is, for example, a distinction made between a banking crisis, which is about a loss of liquidity and often prompts government intervention (though conventionally this ought not be for a single bank unless it threatens to bring the system into collapse), and a financial crisis, which entails a breakdown of the payments system. In Anna Schwartz’s well-known definition (1986: 11), ‘a financial crisis is fuelled by fears that the means of payment will be unobtainable at any price … [Its essence] is that it is short-lived ….’ By this definition, however, it is not clear that the global financial crisis is properly named on either count, since it has more to do with banks’ fear of non-return of loans. One of the reasons for the careful definition is to ensure that such an event can be quarantined in the country of its origin. In a study made at the end of the 1990s, topical then because of the collapse of the Thai Baht, the demise of Asian ‘tigers’ and so on, Williamson and Mahar (1998) surveyed 33 countries which had experienced crises since they had been financially liberalised. Two-thirds of these crises were attributed by the authors to financial liberalisation. In these terms, Long Term Capital Management (LTCM) in 1998 was not a crisis, but Argentina in 2001 was. Neither, however, was global in scale or scope. To speak of a ‘global financial crisis’, therefore, marks something of a threshold in our understanding of economic and monetary evolution. If it does warrant the title, matters are immediately made more complex because one has also to ask whether such an event can happen more than once. In October 2008, Bank of England deputy governor, Charlie Bean, warned that the pain is just beginning, calling the situation the ‘largest financial crisis of its kind in human history’. Whatever its ‘status’ in the annals of human experience, one certainly needs to ask whether it will, indeed can, be a historically ‘overnight’ affair or ought to be seen more realistically as a protracted occurrence both beginning before and continuing after its more obvious expression.

In this book, whether the billion references are US or UK is a function of the citation since the quantities are arguably so great as to make the difference between the two immaterial to the discussion presented here.


1.1.3 The Future of Finance Accordingly, the book has been written for those who are concerned where the future of finance might lie. Professionally, the readers held in mind when writing it were those in such policy and practical areas as are covered by the wide-ranging categories of finance, investment and accountancy, business transformation, sustainability and social responsibility. Especially included were academics linked to financial districts (e.g. The City, Wall Street), policy analysts and central bankers and their advisors. But there is another group of readers, those, namely younger people, who are seeking fresh perspectives and wanting a less bewildering sense of history and thus of the forward prospects of global finance than many economists seem able currently to provide. The book’s main thesis is that current developments – not only the so-called global financial crisis – are far more readily understandable and even predictable than many commentators would have one believe. When Queen Elizabeth asked on her November 2008 visit to London School of Economics, ‘Why did nobody see it coming?’, she may have been being polite to her hosts or even exercising extreme constitutional caution. For there are many who were not in the least surprised – witness Dirk Bezemer’s 8 September 2009 letter to The Financial Times (see 2.3.8: Dirk Bezemer).

1.1.4 Predictability Predictability is the bedrock of economics. It cannot be treated lightly therefore. Either we can or we cannot foresee economic events. It is not just a matter of the psychology of addiction, the well-known difficulty of leaving the gaming table when ‘on a roll’, herdism in markets and any other number of relatively banal explanations of human behaviour. Nor does it help much to remind ourselves that mortgages issued at more than three times income entail well-known risks. Or that real estate values bid up by speculation beyond their cash-rentability would normally be discounted by the prudent. If we know this but ignore it, was greed the reason for dispensing with conventional practice, as many claim, or has some event of a fundamental nature taken place in our times, and maybe still is taking place? The prospect should at least be entertained, because, if so, getting the genie back in the bottle by returning to time-tested prudent practice may not be so easy.

1.1.5 A Single World Economy Simply stated, this book’s thesis is that humanity has crossed a threshold into a single world economy but one comprising more than one polity and to be shared rather than fought over or ‘colonised’ by the most powerful. A single global economy that we simply have to learn to conceive and conduct as if it were a global commonwealth. As Keynes (1919: 11) famously said at Versailles: The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide

Finance at the Threshold to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend …

1.1.6 Choir of Cultures Such an economy entails a severalty of all the world’s peoples* now brought together in one economy such that no one of them can control, ransom or fight over it. It will be (already is?) an economy that depends on each people identifying its global comparative advantage, meaning what it can especially, even uniquely, bring to humanity’s table. More than this, the huge diversity of the world’s peoples will act, as does individual diversity, as a kind of perpetually functioning difference in levels on which forward movement of economic life depends (or will come to depend). Put poetically, the concomitant of a single global economy will be a choir of cultures, each able to sound its own note but able also to include the tones of all the others. The case is made that this circumstance has obtained ever since World War 1 and that overlooking (or avoiding) it has been the cardinal feature of humanity’s economic affairs ever since. We have overlain this basic fact with all manner of theoretical and geopolitical constructs that would have us continue to believe that economic life is not all-of-a-piece and so can continue to be understood by ideas that are essentially atomistic. A part can never become the whole, however. It can only ask what is its contribution to the entirety. One cannot speak any longer of a national or a nation’s economy (e.g. the British economy). One can only ask what is the role of Britain (or any country) in the world economy. Nor can the answer be to take it over, reign supreme or beggar one’s neighbours. In a world economy we are our own neighbours.

1.1.7 Denationalised Economic Life Unexpectedly, perhaps, the globalisation of finance has itself brought us to this point. While it may have been thought of as a way to give preference to an essentially AngloSaxon* economic modality over all others, its real effect is to denationalise economic life, emphasising the one-worldness of modern economic history. The global financial crisis is in principle not that at all, therefore. It is primarily an epistemological crisis. Once we understand that, overcoming it is immediately in our gift. It is no longer unpredictable or undoable. Indeed, it moves from being a crisis to an event, one moreover that entails conceiving modern economic life as a partnership, not a quest for supremacy. This shift in our mindset, but also in our behaviour – learning to walk a different talk – is where we should put our focus. Then we will step into a vital, if to-date little-credited stream of history; one that issues from the future, where in reality we already are, rather than from the past, where we fancy economic events always have their origin. Then, instead of looking perplexedly at economic history as if it were a fait accompli of which we are the victims, we will regard it as something ever-becoming of which we are the authors.

For the meaning of starred (*) words see 1.5: (Re)defining Terms, p. 19.


1.1.8 Associative Economics and Rudolf Steiner The thesis of a single global economy as represented here belongs to the nomenclature of associative economics and is borrowed from Rudolf Steiner, but its elaboration is the author’s own. Moreover, it is one that pretends to be quintessentially English. A particular eye has been put to a particular lens. While this will entail divergence from conventional perspectives, there is no intention to diverge from the events they seek to explain. On the contrary, the aim is a convergence of phenomena and explanation of them.

1.1.9 Innately English Written in an accessible style and designed to treat the global financial crisis in a manner that will continue to be of relevance and interest even after its current intense topicality has evaporated, the book takes an approach that aims to be innately English – that is to say, not English-speaking generally and not American, but standing in the stream of English economic history with its central concern being, to quote Hartley Withers (1909: 294), to act as the City of London’s ‘monetary physician [whose patient] cannot afford, under any circumstances, to be sick’.

1.1.10 The City of London Citing the City of London is a metaphor for standing at the centre of both the British economy and that of the earth as a whole. Here two important worlds coincide. For it is fanciful to equate Britain’s economy with manufacturing, important as that has been and in certain respects still is. Britain was far more, and far more consistently, the entrepôt port of the world than its workshop. Especially the entrepôt of finance. ‘Greenwich Meantime’ says it all. London is located midway between the beginning and end of the world’s day. The most crucial policies will continue to be those that maintain London – in the eyes of the world – as the deepest, broadest and most effective pool of world liquidity. Losing that status is the greatest risk run by advocates of abandoning sterling in favour of either the euro or the US dollar. Not for nothing, perhaps, is the former ‘pool of London’ now the locus of global financial markets. Indeed, if, as suggested by Elisabeth Gilbert in her novel, Eat, Pray, Love (2006), important cities can be summed up in one evocative word, such as ‘success’ for Los Angeles and ‘achieve’ for New York, then perhaps London’s synonym is ‘liquidity’.

1.1.11 At the Threshold – Between the Real and the Financial Economies Maintaining the patient’s health remains paramount, but this means that the monetary well-being of the world is a function of Britain’s. And vice versa. In the realm of finance, Britain and the global economy live in a symbiotic, even osmotic, relationship. Quite where the one stops and the other begins is not easy to tell. Likewise, how can one tell where the ‘real economy’* stops and the ‘financial economy’* begins? It is by no means easy to occupy that most crucial of all monetary places – the threshold between two distinguishable yet not actually separable realities. This is the problem that this book explores.


1.1.12 New Financial Instruments At least, it is written from that place. It considers the global financial crisis as something paradigmatic, arguing that global finance has brought us to the limits of what mechanistic economic explanations can capture. New ideas and above all new instruments are needed, so that financial innovation can turn its attention to new, more fertile ground. We have become accustomed to linking such innovation with its dexterous (to date!) exploitation of the inefficiencies consequent on the discrepant relationship between state and economy and between national and global economics. But it is in the nature of such activities to cause the world to shrink, resulting in a reduced field of endeavour for innovation. Innovation thus turns to the invention of what one might call surreal products, such as high-frequency trading and the like. Once the condition of a single global economy has been achieved, however, such innovation necessarily rebounds on itself, at which point we need to give thought to the one place that new value can really come from – not from capital doing business on its own account, as it were, but from the uncollateralised capitalisation of fresh initiative, especially on the part of young people.

1.1.13 Investing in Youth This culminating focus on young people has three grounds: (a) that today’s youth needs the orientation of a clear financial paradigm, (b) that they are less hide-bound and more able to grasp new thinking, and (c) that the time and energy needed to adjust to the new circumstances humanity now faces are generational. We need to be brought up differently, both as to the way we think about finance and the way we behave in regard to it. In short, we need to equip future generations with an understanding of finance, both technically and in its deeper aspect, that previous generations lacked.

1.2 Methodology In finance, methodology – that is to say, the way one organises one’s thinking, orders one’s thoughts and ideas – is especially crucial because in finance thoughts are as things. Finance occupies an invisible realm in which what we ‘see’ are the ideas by which we comprehend (or try to comprehend) processes and events that have no ‘hard’, that is, physical existence. In fact, we do not so much see as imagine or make an image to ourselves. From this point we then have to choose between two paths. We can either deepen our imagination to ensure that our images correspond with reality, or we can assume our initial images are correct and force reality to comply with them by means of policies from which in turn practice derives.

Soros once said of his ‘attack’ on sterling in 1992, for example, that he did so because it was refusing to lose itself in the wider concept of the euro, thus going against the trend to reduce the number of currencies in the world. It is not only young people. At any age, one knows that if one is capitalised in recognition of the intuition behind what one wants to do, and in support of the initiative one has to give it effect, not against some real assets provided as collateral, this can make the difference between succeeding and failing, between making something youthful, along with the entrepreneur representing it, and making it feel old, already at inception.


For some, the global financial crisis is a straightforward problem of the banks having stopped lending to one another. The solution, therefore, is to find out why so that one can convince, prompt or, at worst, cajole them to start again. All will then be well. But if that is all the global financial crisis amounts to there is little point writing a book such as this one. Its existence therefore presupposes that the global financial crisis is a more complex, less readily resolved matter than mere bank lending. In fact, much of today’s preoccupations entail technical matters that for most are difficult to comprehend and for many border on the unethical. This, of course, has long been the fate of finance. Because it is often outside our normal understanding it is assumed to be a questionable world inhabited by questionable people with questionable motives. ‘Why did the banks stop lending to one another?’ is a question readily formulated but by no means as readily answered. The facts of the matter will often be muddled up in one’s mind with one’s opinion about them, and this will often be tinged with moral indignation, political or ideological persuasion, envy and much else. Sifting the facts out from these other aspects is no easy task.

1.2.1 The Nature of Proof As a point of method, the more precisely one can describe both events and the thinking, or at least theory, that underpins them, the closer one comes to their exact nature. However, one has always to bear in mind that in economic affairs event and related idea are not readily separated, unlike in the ‘hard’ sciences,* where the facts of the matter are discernible apart from one’s reaction to them. Because in economics thoughts are as things, so one needs to include one’s reactions, as also one’s biases, in the data – something that takes special effort and requires stringent methodology. If successful, however, one’s research can go ‘one level up’ to where both the thing observed and the thoughts of the observer come within the researcher’s purview. Here intuition can play its part. Thoughts can occur to one that, though initially not proven, can become guiding intuitions. The genesis of such thoughts is not unimportant. Of course, the subjective needs to be rendered objective, not left unspoken; but not banished absolutely either. To this end, one’s intuitions need to be in link with data, both of which in regard to one another can occur either ex ante or ex post. They have then to be verified. In matters financial, however, proof cannot be of a hard science kind. Instead, it takes more the form that ‘correct’ intuitions will lead to policy formulations that, vested interests of all kinds notwithstanding, are capable of displacing discredited or outmoded policies, along with their associated theories. Such policies are suggested in Part 4 of this book.

1.2.2 Data and the Owning of Bias Seen from a physical point of view, the data in this book are ephemeral, soft.* But such is the nature of all financial data. To talk of ‘hard facts’, meaning statistics or balance sheet information, is fair enough at the level of colloquial English, but it is epistemologically imprecise. A ‘hard’ fact is a physical phenomenon perceptible to one of the five senses. There are no such phenomena in finance, or in economics for that matter. Who has ever touched a financial instrument or product, a market, or the relationship between finance

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and the state? Who has ever seen a price or smelled a level of inflation? Such terms are but pointers to something invisible. For this reason, the data in regard to the global financial crisis are only ever ‘soft’ – but they are of two kinds. There is the information that comes from ‘outside’, such as news that a company is insolvent. And the data that come from ‘inside’, such as the reaction one has to such news, the picture that arises in one’s mind because of it, even the decision one then takes in regard to it. Thus, the just-mentioned link between external data and intuitions, and vice versa, is crucial. An important part of the methodology of this book, therefore, concerns the owning of its author’s biases. It is an illusion to think one can be without bias. Even the claim to be bias-free expresses a bias. Objectivity does not come from excluding human beings but from asking everyone to be conscious of his biases – to declare, describe and even defend them, so that they can be gone beyond.

1.2.3 Englishness In this book, two main biases are present. (There may, of course, be others the author is not aware of.) The first is the Englishness of the author. Even if one is much travelled since an early age and for that reason conscious of being English, one cannot escape deep embeddedness in one’s own culture, with its myriad daily references to histories, philosophies, events and so on that mean nothing to those brought up in other cultures. This is true of all cultures, of course. The particular problem for an Englishman is that English is the primary language of economics. Most of the philosophical underpinnings of economics come from the likes of Hume, Smith, Ricardo and Mill, not to mention Jevons, Marshall and Keynes. This is further supported by Britain’s central role in bringing about a world economy (a development that had both positive and negative aspects), her continuing presence in world affairs, be it through foreign policy or the working and effects of The City, and the unspoken assumption that to think in mainstream economic terms is to accept (consciously or otherwise) the paradigm that underlies it – one that gives to the English a certain primacy in economic affairs. It is especially difficult for an Englishman to remember, for example, that the axioms of modern economics have an Anglo-Saxon bent. They are ‘natural’ to an Englishman, but people from other cultures have, in some sense, to adopt this perspective. For the most part, in doing so, one does not see that one has adopted a way of looking at economic life, not the way. Yet we, the English, allow the unspoken thought to exist that our view is universal. In the course of this book the endeavour has constantly been made to maintain awareness of this particular bias. One cannot, of course, use a style which continually qualifies everything with the phrase ‘bearing in mind these are the ideas of an Englishman’, or some such; but this consideration does need to be kept in the forefront of both the reader’s and the author’s mind. When it comes to economics and economic affairs, those who are innately English have a comparative advantage of a higher order than usual.

1.2.4 Rudolf Steiner The second bias, which is made as explicit as possible, concerns the author’s reference to the work of Rudolf Steiner as regards economics. Steiner (1861–1925) is well-known


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as a ‘Renaissance man’ and as the inspiration in many practical areas of life including education, special needs care, farming and medicine, but hardly at all for his contribution to economics. Steiner was a Central European who was active at the time of World War I. As such, his ideas, though not unknown, were no more admitted into the future scheme of things – as determined by the Treaties of Versailles – than those of anybody else whose lineage was not part of the Anglo-American heritage. Germany had lost the war (for which at that time it was held culpable), France was intent on avenging the earlier events in Versailles in 1870/71, America had now embarked on its world role, and Britain continued as ever quietly to secure its place through participation in the arranging of future economic affairs. Though not a German (he was born in Kraljevic and brought up in then Austria), Steiner belonged to a recently vanquished world, Central Europe, from which nothing was to be countenanced or heeded (hence the need for the Battenburgs to change or ‘anglicise’ their name to Mountbatten). His ideas about economic life have received scant attention, therefore, and when mention is made of them it is all too easy to categorise them as ‘Central European’, which contains the subtle message: ‘Therefore, not English. Therefore, not part of economic evolution.’ This is unfortunate in that, whether Central European or not, Steiner’s ideas have a universal quality. To that extent they challenge the unspoken, though very definite, hegemony of Anglo-Saxon, Newtonian thought habits, with their subtle claim to be also universal. Anyone, therefore, who represents Steiner’s views, especially perhaps an Englishman, has to reckon with this fact and consider how to treat it. In this case, the treatment is deliberate. It is a simple matter of autobiographical fact that the author has long concerned himself with Steiner’s contribution to economics, although not in any blinkered sense, but because of its (in the author’s view) explanatory power. Whether or not one is comfortable with any explanation, or has any intention of following up its implicit policy recommendations, ought not prevent one from considering it. This is true also of Steiner’s view of things. They are not presented in this book other than to make a bias clear; namely, the influence they have had on the author’s view of events, especially of the global financial crisis. It would be churlish and dishonest, not to mention plagiarist, not to share this fact. One is aware that for Steiner’s views, at least as represented here, to get a hearing, let alone influence policy in financial circles, is a very big ‘ask’. But that is not the intent. The intent is very deliberately simply to introduce them into the debate about the future of finance, from which, for whatever reason, they have to date been absent. They are not advanced in any zealous mood, however, but in the spirit of the following comment Steiner made in an essay published in 1898: In my view everyone should stand up wholeheartedly for his own convictions with all their implications and consequences. There is nothing to lose, for should they turn out to be wrong then another one is bound to win anyway. The question on whether [one’s] views will win the day we must leave to the future to decide. (Steiner 2003: 38–9)

There is no proselytising intended here, therefore, only clear exposition. It is indeed for larger history to decide our fates! There have been isolated instances, such as the work of Guido Preparata at Washington University, but these often have a left of centre approach that does not necessarily do Steiner justice.

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1.2.5 (Mis)description and Imagination A further methodological dimension is that much of economics is animated by a wish to know in order to control, rather than the aim of perceiving in order to know. As a result, in its tenor and practice economics often tends to be more prescriptive than descriptive of economic events and processes. This fact underlies the mood and effect of many key concepts, concepts that would benefit from some fresh scrutiny. This is not to say that our normal concepts or modern economic life for that matter are unreal (though many think they might be). But one needs to be aware that the reflexive nature of financial and even economic causation means that almost any idea can be given formal expression and made the basis of policy and thus practice. In economics we do what we think. That does not mean, however, that our actions prove the objectivity or veracity of our ideas. This leads to three essential epistemological considerations that affect economics generally, and characterise associative economics in particular: 1. 2. 3.

the need for description rather than definition, for good or ill, the vital part played by imagination, the possibility of misdescription, of a ‘wrong’ image giving rise to a fictitious, but nonetheless socially real, circumstance. At its worst, this leads to forcing reality to comply with a picture of events known to be false.

1.3 Associative Economics and Rudolf Steiner This exposition approaches the global financial crisis from the point of view of associative economics. While the fuller meaning of associative economics will become apparent as the book unfolds, a preliminary reference is warranted at this stage. Deriving mainly from lectures given by Rudolf Steiner in 1922, associative economics is an approach that is little known in general economic history. In consequence, its propositions are scarcely known, let alone tested.

1.3.1 Introducing Associative Economics Fundamental to associative economics is that it seeks an understanding of modern economic life that is true to economic, as distinct from political reality. This entails significant challenges, given the normal tenor of twentieth-century economic thinking and its generally accepted ground of an intermingling between state and economy. One readily admits that in the general way of today’s world such a distinction is usually greeted with scepticism and may have little prospect of realising itself; but that does not invalidate and should not deter one from the analytical exercise. After all, to paraphrase the British economist, Tim Congdon, whose work is featured later in this book, it is While these lectures have as their wider background the world view known as ‘anthroposophy’ (from the Greek, ‘wisdom of man’), suitably edited they can be taken as a stand-alone discourse that is capable of being considered in everyday terms. Indeed, their significance can only perhaps be fully grasped if one enters into their content strictly on that basis. That is to say, not treating them as representative of a world view (although of course they are), let alone with the intent of proselytising, but as a basis for examining the ability (or otherwise) of modern consciousness to grasp the deeper nature of economic life, not only in its technical aspects (how it ‘works’) but why it is ‘there’ in the first place.


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neither the number of people who believe in an idea nor the length of time they cling to it that makes it true. Indeed, one can take heart from Geoffrey Wood’s words in the September 2009 edition of the Institute of Economic Affairs journal: ‘Some of [one’s] proposals may appear politically impossible. But as the history of the UK alone shows, few sensible proposals remain politically impossible for ever’ (Wood 2009: 4). Though Wood was not referring to the thesis of this book, the point still stands. One can further characterise associative economics by mentioning three of its key elements not generally found in other perspectives: the deliberate endeavour to enter into the thinking of as many schools of thought as possible in order both to appreciate their differences and to identify common ground, 2. the inclusion of the work of Rudolf Steiner qua economist (see below), 3. the strong link to accounting in terms of its inner logic, rather than convenient use (or abuse) – see Chapter 11. 1.

The novelty of its perspective notwithstanding, this book treats associative economics as a formal discipline. It does so for three reasons. Firstly, to throw a light on the global financial crisis from a new angle. Secondly, thereby to conduct an examination that is also expository as regards the associative economic approach. Thirdly, to ask the questions: does associative economics have a link to current developments? And is now the time to give it serious consideration? It should be added that one is not looking for a ‘yes’ or ‘no’ answer to this question. One is not craving recognition, nor wanting to be à la mode. In economics there is no merit in ideas that do not accord with reality. Our only question is whether the book’s conclusions contribute in any way to improving our understanding of global finance, not only at this currently critical stage, but also in a more stable, enduring sense. If they do, and if, in fact, this is because of the associative economic approach, any influence they have will be found in their nuancing of the quiet ongoing march of economic development, not displayed in flashing lights above history.

1.3.2 Rudolf Steiner qua Economist Concerning the book’s substantial reference to Rudolf Steiner, it is part and parcel of economics that it is a domain in which we all find ourselves and need all to be able to take ‘ownership’ of. In such a world what matters is not the who of economics, but the what, and whether a person’s contribution serves our overall understanding. Modern economic life is characterised by people lining up behind Milton Friedman or John Maynard Keynes, for example, usually in expression of a bias. Yet what matters is whether an individual economist bequeaths ideas we can all recognise. It is of set purpose in this book that Friedman and Keynes are not systematically opposed because in respect to monetary economics, at least, their ideas coalesce, making it a matter of political contrivance or intellectual laziness if one builds separate universes around the individuals concerned. In similar vein, Rudolf Steiner’s reputation varies depending on how one relates to the extensive range of material he covered. It is not usual for one person to be knowledgeable in the many fields in which Steiner was versed, ranging from medicine to architecture, agriculture to pedagogy. Few if any seers, for that is a significant aspect of Steiner’s

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biography, also taught double-entry bookkeeping. One should be wary, however, of regarding Steiner as a dilettante, a jack-of-all-trades but master of none. Many a critic has come to grief on the supposition that Steiner’s knowledge was hearsay! Here the reference is not to Rudolf Steiner as a person, however, nor to his wide field of activity, but to Steiner the economist and in particular to his economic and monetary analysis, with such contextual sociological commentary as seems warranted.

1.3.3 Six Problems Therein lie difficulties enough, because to the English mind Steiner’s economic analysis presents a number of problems. One is its absence from general economic discourse, hardly figuring even among ‘alternative economics’, where some – but not this author – would locate it. Even those banks that claim their lineage in Steiner’s oeuvre seldom make overt reference to his analysis to the full extent and depth they could, in part perhaps because it implicitly refers to a world beyond banking as we know it. A second problem is that Steiner stands outside the Anglo-Saxon tradition, to which, thirdly, certain of his key ideas – e.g. that money is not a commodity – present too direct a challenge. If money is not a commodity, how can there be a market in it? (To which question Steiner would reply that what we call a money market may in fact be something else; not that it does not exist, but that it masks some deeper economic meaning and possibility.) Fourthly, there is Steiner’s explicit questioning of Newtonian thinking. Building on the work of the German poet, statesman and scientist, Wolfgang Johannes Goethe, Steiner’s approach has greater affinity with German idealism, and thus, in the British tradition, with the likes of Samuel Taylor Coleridge. In all these respects, however, one should guard against the premature conclusion that Steiner’s ideas are foreign to modern economic life, least of all on the grounds that Steiner was an esotericist. Later in the book, attention will be drawn to the fact that Newton was also an esotericist, and that many today think economics, and especially financial economics, needs to find a link to Romanticism, precisely because the global financial crisis has shown its epistemological foundations to be weak. A fifth problem is that many advocates of Steiner’s economic ideas interpret and represent them as finance-averse and with an NGO, third-sector or left-of-centre bias. Yet, many of his ideas overlap with neo-liberalism in fact (see 1.3.6: Steiner and The Austrians), a thought that is difficult to accept for many people familiar with Steiner’s work – even though ‘liberal’ is an allusion to Aristotelian economics, a genesis Steiner would in no way disavow. Sixth, there is the awkwardness that Steiner’s ‘spiritual scientific’ (a combination of terms usually kept far apart in the Anglo-Saxon mind) view flatly contradicts positivism, though such a stark opposition could perhaps only occur to what Owen Barfield, an early proponent of associative economics and one of the original translators of Steiner’s economic texts into English, called a ‘naughty materialist’. Barfield (1944) distinguished between true materialists, for whom the non-material world does not not exist, but is all that is left over, all that, while we might experience it, cannot be explained materially. Most well-known are Triodos Bank, based in Holland, the GLS Bank in Germany, RSF Social Finance in San Francisco and Prometheus Finance in New Zealand.


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[English philosophy] seeks the material everywhere; it deals with the material, with the physical, in which it feels itself at home. That is one side of the picture. On the other side we have – what is left! If you laid your finger on everything that is material, wherever it is to be found, it follows that whatever is left is non-material. You have detached the material from the immaterial, and the immaterial that is left rejoices, as it were, in its freedom. And such is indeed the gift of English philosophy to Europe – the license for free speculation in the realms of pure thought, unhampered by disguised forms of materialism. One cannot of course say that the English philosophers had any such purpose in view; but there are other purposes besides conscious ones. In the light of the whole history of western consciousness it is very clear that English philosophy proper … was engaged on a definite task. It sought for matter everywhere – in order not to confuse it with Spirit. And by doing so it detached ‘what is left’ from the cosmos and made it free. (90–91)

Untrue materialists, ‘the ‘naughty’ ones, are those who, being amateur or inconsistent in their thinking, argue that because matter cannot explain the non-material, the latter does not exist.

1.3.4 And a Seventh … This brings one to the last of the problems that Steiner presents to modern economics: the fact that his manner of expression is seldom hypothetical. To an English mind this can amount to a sin against science and rational thought – a ‘sin’ that has to be atoned for if Steiner’s ideas are to be given serious consideration. This last point is perhaps the most crucial. By way of atonement on his behalf (but not disavowal), where in this book Steiner’s economic and monetary analysis is treated it is done so in a hypothetical, even counterfactual spirit. That is to say, it invites consideration of his views divorced from one’s opinion of them or any changes in behaviour they might imply. It is not about proselytising or peddling his perspective, but asking for a fair hearing. In Steiner’s words, ‘One does not by any means wish to agitate that this or that must be done ... [Economic] science, after all, has only to indicate the conditions under which things are connected’ (1996b: Lecture 6: 83). It is in this spirit that Steiner is taken as a reference; because, in short, he has some interesting insights to share. It is in this spirit, too, however, that this book neither intends nor pretends to offer a systematic presentation, let alone defence, of Steiner’s ideas. References to them appear as and when they are pertinent to the author’s exposition of his own lines of thought or enquiry, and where in the author’s own experience they have served as valuable (and usually valid) propositions for understanding events, good servants in a life-long endeavour to understand the deeper trends of modern economic life.

1.3.5 Rudolf Steiner and Geo-politics To these difficulties needs to be added another, the somewhat delicate matter that Steiner’s analysis entails the end – or at least, conscious recognition – of geo-politics. He considered, for example, that the main effect of the Treaty of Versailles was that global economic affairs after World War I would fall under the dominion of the Anglo-American peoples, who would in consequence have to bear the responsibility ‘going forwards’. Here is not

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the place to go into this matter in any detail, but awareness of it is necessary, otherwise one would be perceived as historically naïve. It is for this reason that Philip Bobbitt’s image of the future is included in this book (5.3: The Market State), a future based on market states because we face a period of generalised terrorism. Its self-confessed lauding of Anglo-American concert and its sad and pessimistic view of humanity’s potential notwithstanding, Bobbitt’s book nonetheless provides an important foil for sensing the importance and salience of Steiner’s views for the simple reason that part of the global financial crisis entails the question: where to after the US dollar? Is the world’s future currency really to be the yuan, or the yuan-euro-dollar, or even some mix of yuan-rupeereal? Or should it not become something above and beyond all nations and all parts of the world economy, a single world currency in fact (see 5.4: A Single Global Economy), belonging to a civilisation that knows how to share the world’s economy because it also knows how to celebrate its diversity? Does it have to be about terror, in other words? This, at any rate, is a central image of this book – a single global economy shared and mutually governed by a choir of the world’s peoples. This gesture is expressed in the wellknown Hymn for the Russian Earth albeit of uncertain provenance: If the people lived their lives As if it were a song For singing out of light Providing music for the stars To be dancing circles in the night.

Intriguingly, a similar gesture seems to inform Milton Friedman’s famous dictum (from which Keynes would not distance himself) concerning monetary policy: Flexible exchange rates are a means of combining interdependence among countries through trade with a maximum of internal monetary independence; they are a means of permitting each country to seek for monetary stability according to its own lights, without either imposing its mistakes on its neighbours or having their mistakes imposed on it. If all countries succeeded, the result would be a system of reasonably stable exchange rates; the substance of effective harmonisation would be attained without the risks of formal but ineffective harmonisation. (1966: 200)

Naïvely perhaps, the thought thus occurs that precisely where Keynes and Friedman are of one mind associative economics finds its interface with current conventions.

1.3.6 Steiner and The Austrians Though his formative years and early twenties were spent in Austria-Hungary and Vienna, Steiner cannot be described as an ‘Austrian’ in the sense that has in the history of economic thought. Although the economic philosophies of both Steiner and the Austrian school esteem the free, creative individual, this can also obscure the differences between them. Owen Barfield’s characterisation of Steiner’s general philosophy as ‘romanticism For this section, a debt is owed to Mark Arnold, lecturer in economics and philosophy at Oxford and Cherwell Valley College, England, who provided the ‘ghost’ text.


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come of age’ (see later discussion) indicates a very different orientation compared to the Austrian school. The holistic traditions of the German Historical School with its roots in Hegel were formative for Steiner, whose cosmology is framed in terms of evolutionary consciousness, a social philosophy which speaks of the ‘souls of nations’ and society characterised as organic, described later. These and other themes such as ‘historical stages’ and notions of ‘social wholes’ are alien to Austrian metaphysics, witness the Austrians’ three main arguments: Ludwig Von Mises argues that socialism, which would abolish such institutions as money and private property, will find it impossible to carry out economic calculations with the consequence that it simply defaults into planned chaos. 2. For Friedrich von Hayek (1945), socialism’s problem lies in the fact that knowledge of particular circumstances exists only as the widely dispersed, personal possession of a multitude of different individuals, and consequently it is ‘practically impossible’ to assemble and process all the actual existing knowledge within the mind of a single central planner. Decentralisation of the use of knowledge is capitalism’s strength. 3. Murray Rothbard advocates a natural rights theory which justifies the ownership of private property attaching to the first appropriation of unused resources. It is the duty of government to protect such private property rights. 1.

In contrast, the focus for Steiner is on recognising and gradually improving the working of and between society’s three autonomous yet interdependent economic, political and spiritual sub-systems (see Chapter 5, Rudolf Steiner’s Conception of Society). He is also averse to dressing up in complex abstractions what is in fact aggregated human behaviour, if that is a fair description of ‘Austrian’ economics. And he is less concerned with who owns capital than that it finds itself in the ‘hands’ of people with appropriate capacities to use it and make it good in service to their fellows. Austrian and (some) associative economists recognise the importance of utilising accounting models in decision-making; however, financial information needs to be supplemented by discursive space within the wider economic sphere. Steiner himself proposed institutional arrangements (‘associations’, hence associative economics) which bring together producers, traders and consumers whose task is to co-ordinate economic life. Von Mises would be critical of such institutional arrangements, arguing that it is unlikely that consensus will emerge between economic actors and that the state will have to intervene in order to sort out the mess. Von Mises also cautions that no one should be allowed, especially in a globalised economy, to represent the consumer except oneself. Effectively, therefore, Steiner challenges the Austrian notion of ‘the market’ as the ultimate arbiter of how economic values are to be allocated. Firstly, ‘the market’ is to be contained by limits given by the environment, rights, and traditional ways of life. Secondly, it is to evolve into a confluence of individuals acting in conscious association with one another, rather than, as now, in relative alienation. In saying this, aspects of Steiner’s approach to economic life are touched on that will not in fact be elaborated. Our attention will be confined to such of Steiner’s ideas as strike the author as directly related to the global financial crisis in its more ‘practical’ aspects. The aim, as already stated, is not to provide a comprehensive exposition of Steiner’s work directly, but to include it in general financial discourse

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1.4 Innately English The Englishness of the writer of this book has already been referred to. Biographically, that simply means he was born and brought up in England and that his mother tongue is English. However, when learning languages, as also when travelling from a young age, he found an affinity with the non-English cultures he visited, which, while contributing in his view to the development of a cosmopolitan outlook, also meant that he found himself looking in on his Englishness. By ‘going native’, trying to speak the local language rather than merely shouting more loudly in English, he began to appreciate his Englishness rather than take it for granted. This led early on to his awareness that English is the language of navigation, both sea and air – even ‘Mayday’ is an Anglicised version of m’aider – but also of business and economics. And thus the experience that people the world over are happy to speak English in these areas at least, not to mention popular music. The challenge is not to take advantage of this fact, but to ask why it should be. To be sure, Adam Smith was a Scot, as has been many an important economist ever since, but the medium used is Englishness – not only linguistically, but institutionally, historically and geo-politically. The formative effects on world historical and economic development of the Bank of England, the Industrial Revolution and the British Empire are so well known as not to warrant further comment here. But these influences are ongoing through the relationship of London to the rest of the world. Not just the docks of the entrepôt port that was, but its replacement by London’s financial district down river from its original locus in The City. Midway between the start of the world’s day ‘across’ the dateline in New Zealand and its end, Greenwich Meantime continues to have an effect, as does the provision of worldwide liquidity. ‘Big Bang’ originated in London in the 1980s, along with the introduction, initially as domestic policy, but then taken up worldwide, of the many policies and practices originally associated with right-wing groups but now, for better or worse, generalised and not easily described as on one side or other of the political divide. Few today, for example, question the merits of price stability or central bank independence. It is in this sense that one points to England, rather than Britain. But rather than the United States also. Even though the two countries share a language and enjoy a ‘special relationship’, this does not make the US innately English. Its population is decidedly not so, with an increasingly greater number being from other cultures, notably Hispanic. But nor is its constitution. It is a quirk of history that Thomas Paine, an Englishman, did not prevail in his own country, that the US has a written bill of rights but that Britain, more specifically England, does not.

1.4.1 From Empire to Partnership One can make of these facts what one will, and have views about what ought to happen. For example, that the UK ‘should’ have a written constitution. But that is not the point. By ‘innate’ we do not mean that a feature of history could not be replicated elsewhere or got rid of, but that different peoples have different sensibilities and that these play an important part in the way the peoples of the world conduct themselves and, in this instance, relate themselves to economic affairs.


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The thought here is that somehow the English way of being plays a crucial part in economic development in terms of the way economic life is both understood and conducted. The liberalisation of the 1980s is a case in point. But where to go next, now that that enterprise has achieved its goal of opening up national economies to the world? In many ways, the global financial crisis is a child of the 1980s. What should be the next ‘big idea’ and where should it arise and enter into economic evolution, if not in England and in London specifically? But no longer as an instrument of world domination (or major market share, if one prefers the euphemism), but as the instrument of partnership between former rivals, as the means to give expression to the inherent dynamic of a single global economy, rather than exploit it to one’s own ends. In a word, to promote a new dimension of that very English idea, commonwealth.

1.4.2 Of Newton and Coleridge To be precise to the epistemological theme on which this book turns, can we nuance ourselves away from Newtonian to Coleridgean thinking? More precisely still, can the propensity to divide, discussed later, which entails separating opposites so that they compete with one another, give way to understanding the polarities or contrasts in economic life in such a way that they speak to one another instead, giving rise to a mutual but higher synthesis? It is this quality that is suggested as being innately English, but also innate to the exigencies of a single world economy.

1.5 (Re)defining Terms It goes without saying that in any discussion the meaning given to the words used cannot be left uncertain. Also, the author’s meanings may differ from those of the readers. The problem is compounded by the fact that although certain meanings may be deemed generally agreed, that does not mean they are clear or precise. Because the argument of this book places great emphasis on epistemology, where terms are used that are in general parlance but not, in the author’s view, clear or precise, those terms are here (re)defined. It is all too easy to use insufficient precision, in the field of finance especially. The effect, however, is like throwing the points on train tracks, so that the locomotion of consciousness is sent on a detour or, worse, into a siding or, worst of all, put in reverse. Meanwhile, life moves ahead along quite other lines. It goes without saying that ‘(re)defined’ means no more than ‘as meant here’. While one has a duty to be clear as to what one means by the words one uses, one does not thereby claim them to be ‘correct’ or aim to impose those terms on others (except for the duration of the exposition).

1.5.1 People By ‘people’ is meant something close to a nation in cultural rather than political terms: for example the Welsh or the Basques. That is to say, an identifiable group that enjoys or expresses or seeks a degree of autonomy from the nation-state it is otherwise supposed to be part of. The point is that, since the Treaty of Versailles (see later discussion) nations can have an arbitrary status. Red lines in the desert delineate sheikdoms, for example. Many boundaries have been created or moved, as have whole peoples. If there is to be a choir

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of cultures, the point at which a people feels itself to be one needs to be identified, but not in strident, political terms. Deeper yet, recent history has seen peoples lost beneath all manner of ideological overlays or, on first release from oppression, referring to some ancient image of themselves. What is meant here, however, is the raw people, especially as defined by the future they see for themselves.

1.5.2 Rights Life A term that embraces all matters political and legal provided they are not used to force into being any particular spiritual or cultural modality or to interfere with or conduct economic life. The sphere in which human relationships are cultivated and ordered, but not cultural or economic pursuits.

1.5.3 Local, Global These can be imprecise terms, often in reaction to globalisation and therefore asserting some protection from it. However, if one assumes humanity has entered a cosmopolitan era, or achieved some degree of cosmopolitanism, this would manifest in two ways. Firstly, as an assertion of the individual. Secondly, as a need to find and meet the rest of the world. Or a degree of self-centredness, matched by a sense of being a world citizen. Or a looking out from oneself onto the world and a looking in at oneself (at one’s effects and motives) from the world’s point of view. In this sense, ‘local’ is the individual’s sense of and relationship to his own identity; ‘global’ is his belonging to the rest of the world and to humanity as a whole. The two terms represent a twin experience, the double condition of modern existence, not conflicting aspects of it.

1.5.4 Taxpayer The term ‘taxpayer’, especially as used in ‘taxpayers’ funds’, is slippery. On the face of it, it simply describes the funds that taxpayers have provided and that are administered by the state on their behalf. In reality this is not so. First of all, if they were owned by the taxpayers, the state’s role would be no more than that of a fund manager. It would have no right to override or supersede the taxpayer’s wishes anymore than a fund manager can do beyond the exercise of his professional judgement and duty. Second, if they belonged to the taxpayers they would not be tax! That they are tax means they belong to the state. It is, therefore, disingenuous and even fraudulent to refer to such money as taxpayers’ funds, for they are not. Like it or not, the state is charged to carry out various functions which we agree to fund via taxation. The reason for the term, especially in its more recent usage, is to take into the state’s remit something that in fact does not need to be taken over by the state – charitable work, collective endeavours that serve a cause or purpose other than ‘private interest’. If a community jointly funds a village hall by way of a tax exempt entity (tax exempt because it is fulfilling a task that the state does not need to do, as also funding it), there is no reason to describe these people as agents of the state or, worse, civil servants, or to refer to the assets thus funded as state assets.


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1.5.5 Anglo-Saxon The word is perhaps imprecise in ethnic terms. What is meant is a penchant for rationalism; in Keynes’s language ‘cold, untinctured reason’. This means also a bias towards material explanations of the world and therefore economic life, and a shortcircuiting of inquiry because one accepts plausible though only partial explanations of phenomena rather than waiting for the phenomena to speak for themselves, as it were. Newton’s light theory looks at the ray of light; Goethe observes the light in the context of darkness. It is not a question of right or wrong, but partial or complete understanding. This can be naïve; there are many non-Anglo-Saxons who think in this way. But it can become consciously crafted so that no one any longer sees the problem. Two examples: the language of economics pretends to be scientific, when in fact it is attempting to be so. It allows an aura of universality, when in fact it has definite biases – to positivism, for example. It suggests that ‘value free’ is not a value-laden concept. The gold standard of the nineteenth century was, and still is, described as if it were a scientific technique and therefore apolitical and objective, which can only be partly true since the background to the creation and use of the gold standard was the clear intent to promote the interests of Britain and even to marginalise bimetallism. In the bigger picture of history these may prove to have been right things to do. One does not mean to impute nefarious or negative intent. But we would understand history very differently if, when looking at something like the gold standard, we described it as foreign policy dressed up in scientific-sounding economics. A case in point is Newton’s 1717 calculation that gold should be at 20s 8d, but parliament’s deliberate adjustment of that to 21s. The difference of £1 2s 11d per 22 carat gold was a conscious one, the effect of which was that science took a back seat to politics.

1.5.6 Hard/Soft Science ‘Hard’ and ‘soft’ are ways of avoiding an issue, namely that the human being has two modalities – a relationship to the world accessible to or perceptible by his senses, and a world, equally real to him, that is known other than through the senses. We can see a chair, for example, and even sit on it. But who has ever seen, let alone sat upon, a value or a price, or anything that economics is concerned with? Modern science grew up in link with intense observation of the physical world and thus has become associated only with the modality of that world. But the scientific method exists independently of its subject matter. One needs to distinguish between the scientific method used to understand physical phenomena (natural science) and the same method when used to comprehend supra- or non-physical phenomena, such as inflation. In Steiner’s nomenclature this is the difference between sensible and super-sensible science. Whereas the German language is upfront and calls such science Geistenwissenschaft, (spiritual science), the English typically do not like to be so direct, which does not mean they do not recognise or know about such things. Rather, they prefer their expression to be poetic rather than scientific, implicit rather than explicit, thereby hiding the problem in such euphemisms (or poetry) as ‘hard’ and ‘soft’. That is fair enough as long as we do not delude ourselves into thinking that ‘soft’ is a lesser version of ‘hard’. But it would be clearer, for example, to say ‘physical’ and ‘ephemeral’. Better yet – though admittedly too direct – ‘sensible’ and ‘super-sensible’.

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In its wish to emulate physical science, economics has become ever more mathematical, the more so as it endeavours to capture the complexity of its subject matter, essentially an economic life that has gone global, outgrowing the nationalistic concepts of economics by which we usually try to apprehend such phenomena. But if aping the physical sciences is not the way forward, what is? What models are we to use? Should they be based on theoretical propositions about equilibrium, for example, or on analogies to engineering systems? Moreover, when we use the term ‘system’ to which world are we referring − a mechanical world or one that is dynamic? A central heating system is clearly mechanical but hardly so an ecological system, and debatably so the human being. Indeed, for some the nature of economic life is autopoietic (self-organising), an ontological implication that many economists find too challenging. Originating in the early 1970s with the Chilean biologists Maturana and Varela (1980), the term refers to ‘organisations that live [and whose] main purpose is to self-reproduce and to survive.’ In this sense, can we even be sure that ‘system’ is the best term? ‘Organism’ or even ‘being’ might be more apt.

1.5.7 Real and Financial (see also Hard and Soft Science) Finance is perhaps one of the most abstract fields we can experience. Any serious study of finance, especially in regard to its ‘plot’ aspect rather than just its techniques (why finance is the way it is and does what it does) necessarily involves ontological and epistemological considerations. Indeed, one could argue that they are crucial for the very important reason that when one comes into finance the possibility arises of separating the abstract from the real, so that what is not real is somehow suspect. Conversely, we try and make finance fit the way of thinking peculiar to the real world. How different things would be if we could accept that something abstract may yet be real but in quite other terms and according to a logic that we have perhaps yet to discover. This problem is basic to economics and to understanding the global financial crisis, regarding to which many people convey a sense of preferring the first and disparaging the second, much like Aristotle and many since. Because people are not comfortable with twin realities, let alone different in kind, they prefer the easier option of describing the physical as real, while casting the other, at best, as derivative, at worst inimical. Thus, by ‘real economy’ most lay people and not a few experts mean physical; chairs not options. By ‘financial’ they mean speculative; not necessary, even parasitic. A trade in the derivative markets cannot be real. Real is buying and selling things; better yet, making them, manufacture. But any trade is real in economic terms, only it also has its monetary reflection, unavoidably so in today’s highly monetised world. The problem is that once one has a monetary expression for something the thing it stands proxy for disappears from view and money can begin to be seen as existing unto itself, autonomously, as it were, in regard to what it represents. There may be a good historical reason for this. Before insurance, a farmer had no option but to rebuild his neighbour’s barn when it burned down. One was socially obliged to do so. By monetising the relationship, division of labour enters in and one becomes free to do something else when a neighbour’s barn burns down because one has already paid for that task to be done by others, firemen. All monetisation, and by extension all finance, has this twin character. It arises because of the emancipation of the individual who is then free to follow a calling born, one could


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say, of the future not the past. But it brings with it the danger that, in the hiatus between the two, one forgets this larger story and simply ‘does one’s own thing’, thinking only of oneself and acting accordingly. Real and financial should never be opposed, therefore. The true contrast is between the economics of the sensible world – the transformation of resources into things – and the economics of the super-sensible – the fact that the simplest of ideas can have huge consequences. Neither is more real than the other and both have a financial aspect or reflection. In this book, therefore, ‘physical economy’ is often used where others might have real economy.

1.5.8 Western One frequently refers to ‘western finance’ and ‘western economics’. But where is the West to which western refers? The term is imprecise since it really means Anglo-Saxon (see above), if not indeed Anglo-American. Much of the economics used in Germany, for example, Japan, Latin America, Africa and even in Islamic contexts is western, meaning derived from Adam Smith, Ricardo, Mill, Marshall, Keynes, Friedman, and so on. If one were to differentiate between Anglo-Saxon and the narrower term, Anglo-American, one would need to see that the latter is western economics admixed with Anglo-American interests, as implied, for example, in the idea of ‘a special relationship’. Throughout this book the word is used without quotation marks, but should be read in the sense qualified here.


chapter

2 When the Banks Stopped Lending to One Another

In the course of 2007 the banks stopped lending to one another. Why was this? Usually a technical answer is given to the effect that the banks began to realise that the counterpart of much of their lending was unsure or unidentifiable. The sub-prime market, especially in the USA, plays a large part. Loans had been made to people who by traditional measures could illafford to borrow on houses that were speculatively rising in value. However, that was but one example of credit being provided without constraint. Credit cards were being issued liberally with 0 per cent transfers giving everyone the chance to ‘kick the can down the street’, to use a typically glib financial colloquialism for delayed debt settlement. The risks of such lending are obvious, as is the response that we should return to prudent practice. But is this explanation really convincing?

2.1 Preamble Whereas many argue that it is time to get ‘back to basics’, these may no longer obtain. To paraphrase an old Turkish proverb, a more apt thought might be to return to the fork in the road where one took the wrong turning and take the ‘right’ one this time. Some would have us identify culpability and apportion blame, but this may well be impossible in the glass house that is the global financial system. For who is to throw the first stone in so fragile an edifice – founded as it largely is on the dangerous and, from any normal financial point of view, extraordinary idea of ‘risk-free’ returns – the financial institutions that earn their shareholders profits thereby, the governments that enjoy the tax revenues, or the millions of people who directly or through their agents seek to avail themselves of the gains such products bring? Who today does not ‘work’ the housing market, or ‘play’ the stock exchange, or rely on a pension fund? The purpose of this chapter is to look close up at the world of finance in order to get a sense of what, should it prove not to be mere a hiccough in monetary history, the global financial crisis might entail. To understand the global financial crisis, one needs to begin by describing it phenomenologically, in order (a) to avoid or overcome moral indignation and (b) to intuit what, if anything, ‘should’ have happened or, more crucially, could yet happen. The three sections of this chapter look at the global financial crisis in terms of its chronology, the way it has been described by key commentators, and the technical details these

Although not the earliest event, the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from the French bank BNP Paribas triggered sharp rise in the cost of credit and made the financial world realise how serious the situation was.

Other such terms include ‘haircut’, ‘the pain trade’, ‘liar loan’, etc.

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accounts yield. Insofar as the chosen commentators are for the most part also important players in the financial community, these sections also serve as a literature review, but of a particular kind, in that it is deliberately random, even to the extent that the views featured were not sought out by the author but came to his desk unsolicited and by persons unknown to one another. Moreover, the views expressed are not theoretical in any ivory tower sense, but born of their authors’ experience and, most crucially, of how they interpret and articulate that experience. This experience, moreover, combines, in most cases, both ‘real world’ postings and academic qualifications. Information gleaned in this way stands independently of its sources, providing data that serve as an objective point of investigative departure, as also for pointing up vital considerations for our later epistemological discussion.

2.2 Chronology The aim of the following chronology is to present the historical data without bias or opinion, simply as incontestable fact – information free of normative comment. Though it may not be as detailed or comprehensive as some might like, the endeavour has been made to provide as complete a picture as possible so that the orientation given to the reader is neutral. The presentation is deliberately both long- and short-run because the global financial crisis is seen to be not only of recent genesis, but rooted in a long evolution. Without the context of a serious span of time, one is likely to understand the global financial crisis as a technical hitch rather than as something more deeply seated and even pivotal to economic history. The chronology of the global financial crisis could have many starting points. For our purpose, we begin at the end of the Napoleonic wars with, in Rudolf Steiner’s words (1920), ‘the emancipation of the money-market from the goods-market, dating roughly from the period 1810 to 1815. It was then for the first time that the earlier, purely economic, conditions governing public life, gave place to control by the money-market; the time when the banking system first really became the dominant factor in economic life’ (1996a: 74). Until then the capital aspect of economic life had taken its cue, as it were, from the goods aspect. Capital was invested in order to finance production, not for the sake of a return only. The financial economy was in service to the real economy, as one would say today, not in opposition, as some aver it has now become.

2.2.1 Individuation, Emancipation and Financial Liberalisation For Steiner this is simply a reflection of humanity’s increasingly abstract relationship to life, a deepening of individuation and the continuation of our emancipation from deism and pre-rational forms of consciousness. This gives the context to the beginning of the spike that has culminated (or so it seems) in the global financial crisis. To this development other authors contemporaneous to Steiner but better known than him have also borne witness, notably Hartley Withers (1909), with The Meaning of Money, and Ellis Powell (1915), with The Evolution of the Money Market, 1385–1915. With the dawning of the nineteenth century, therefore, capital became a category independent of labour, challenging the, till then, predominance of the labour theory of value. Thus arose marginal utility theory, which is capital preferring. What the market


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will bear became the wiser approach to pricing than cost-plus. Margin not mark-up. Marginal utility theory is in effect a capital theory of value. Importantly, too, it looks at economic life from outside, as it were, from the consumer’s point of view. It is therefore the opposite of an economics based on physical or labour theory of value, which stands within and looks out. With this development, the financial economy having been for long ages held in check by moral injunctions, broke its bonds (pun not intended!), a process that has culminated in the recent ascendance of financial liberalisation. For many this has gone beyond our normal awareness and ought to be put back in its traditional, pre-fractional reserve banking, place. This is epistemological Luddism, however. The clock cannot be set back. What is needed is a leap, even a quantum leap, in our understanding. We need to enlarge our consciousness in order to embrace the new development; not demand that it remain within the confines of old habits of thought. In the sense of associative economics, for example, capital, especially in our time, refers to human ingenuity, ideation, hunches, intuition, even initiative. All these aspects of the human condition appear in economic life as capital. When someone asks the bank for a loan, the lender ‘banks’ on the borrower’s idea and his ability to realise it – both ephemeral, non-physical categories. Of course, the entrepreneur uses the capital to buy means of production or even pay himself in order to realise his scheme, but strictly speaking ‘capital’ is an economic reference to the borrower’s aims and capacities.

2.2.2 Aristotle This long historical process has clear milestones beginning far back with Aristotle, who first cautioned us against money on account of its ‘improper, secondary’ nature. In A History of Economic Thought (1992), the late Eric Roll – one of Britain’s foremost economic historians who in turn relies on two other eminent researchers, A. Monroe (1924) and R.H. Tawney (1929), so that his account is in fact highly synthetic and representative of more views than his own – describes Aristotle as ‘the first analytical economist … It was he who laid the foundations of science and who first posed the economic problems with which all later thinkers have been concerned’ (20). For Roll, Aristotle’s main analytical ideas were the scope of economics, an analysis of exchange, and a theory of money: According to Aristotle, economy is divided into two parts: economy proper, which was the science of household management; and the science of supply, which was concerned with the art of acquisition … In discussing the science of supply Aristotle is soon led to analyse the art of exchange through which the needs of the household are increasingly met. Here he distinguishes between a natural and an unnatural form of exchange. The former is merely an extension of the economy of the household designed for the satisfaction of men’s natural wants; it arises from the existence of varying stocks of goods and the enlargement of the association of men beyond the confines of the household. It is from this simple form of exchange that a more complicated and unnatural practice arises. (21, referring to Aristotle’s Politics (Jowett’s translation), Book I, 9)

Aspects of this discussion are taken from Houghton Budd (2006).

The author is also mindful of the work of the Association of Social Economists, who have a special affinity with the works of Aristotle and Aquinas.

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Roll is worth citing further on this point, partly because of his authority in this field and the representativeness of his views, partly because of the exposition his commentary affords of his own understanding of the subject: ‘Of everything which we possess there are two uses: both belong to the thing as such, but not in the same manner, for one is the proper, and the other the improper or secondary use of it. For example, a shoe is used for wear, and is [also] used for exchange …’ He continues: Aristotle seems to say that the secondary value of an article − as a means of exchange − is not necessarily ‘unnatural’. Men may exchange without being engaged in the unnatural form of supply, the art of money-making. They would in that case exchange only until they had enough; but barter does not stop there. Men become more and more dependent upon exchange for the supply of their needs and they develop a medium of exchange. They make a convention to use an article useful in itself, such as iron or silver, for the purpose of facilitating exchange. Thus Aristotle carries a little further Plato’s definition of money as a symbol for the sake of exchange. He shows how the inconveniences of barter lead to the development of indirect exchange, how measurement by size and weight is replaced by coinage, and how trade for its own sake, the pursuit of money-making, arises. The natural purpose of exchange, the more abundant satisfaction of wants, is lost sight of; the accumulation of money becomes an end in itself. The worst form of money-making is that which uses money itself as the source of accumulation: usury. Money is intended to be used in exchange, but not to increase at interest; it is by nature barren; through usury it breeds, and this must be the most unnatural of all the ways of making money. (22)

One needs to proceed with great caution at this point. Many a modern mind would understandably bridle at this line of reasoning. Usury is a comprehensible response on a moral level, but technically it is not good enough. One needs to ask where does the increase in value come from? Clearly not from not trading; then from somewhere else. In that event, even though it ‘reads’ as an increase in the money lent, interest is but a method for allocating that increase to the provider of credit rather than, for example, the creator of the increase, namely, the borrower. In this sense, one can see that Aristotle seems not to grasp or give credence to the deeper reality that lies behind exchange, namely, the release of capital. It is as if this aspect is behind a veil that he cannot quite penetrate. As if he is aware of it, but cannot discern it clearly and, therefore, does not accord it the positive status he gives to physical human needs. He alludes to it in the idea of accumulation, but does not seem to sense that this can mean more than wealth acquisition. Moreover, this hidden dimension is regarded as suspect in some way, as not worthy of man, even though Aristotle seems to recognise the value to society of accumulation giving way to public works. In this respect, Aristotle reminds one of those who, because they either do not have or do not understand wealth, tend to disparage it and those connected to it. But also of Adam Smith and others who refer to anything other than self-interest as somehow of a ‘public kind’. In neither case, does the analysis penetrate or expand to include what individuals may collectively do for the common wealth. That, it seems, cannot begin until the process of individuation has eclipsed all forms of togetherness, of society. That is to say, until more or less ‘now’.


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Figure 2.1 lists the main features of Aristotle’s taxonomy, contrasting needs and exchange, but not mentioning capital.

Needs

Exchange

Proper Household Natural Satisfaction of wants Use Value Primary Fruitful

Improper Acquisition Unnatural Money making Exchange Value Secondary Barren (Usurious)

Capital

|

Figure 2.1 An Aristotelian taxonomy How different it would have been, and would still be today, if this hidden dimension had been understood as connected to capital in the sense of capacities (Figure 2.2), an economic category that is equally real, but of a different nature and order? In that case, money would have been seen, and could yet be seen, as having two aspects − material needs and the goods produced to satisfy them, and capacities and the capital that is or enables their expression − and it would not have been necessary, or even possible, to explain money by reference to only one of them. The lopsidedness of Aristotle’s analysis (as of all subsequent theory reliant upon it) would then not have arisen, or could now be overcome. We would also think very differently, as the arrows in the figures illustrate. Instead of thinking from needs to exchange and seeing some uncertain reality on the other side of trade, we would look towards exchange from two distinct points if view, with each one secondary to the other:

Needs Needs/Goods

Exchange Goods-money

|

Capital-money

Capital Capital/Capacities

|

Figure 2.2 Two aspects of money

2.2.3 Thomas Aquinas Long ages passed before any serious restatement of Western* economic thought took place through the work of Thomas Aquinas. However, according to Roll, the economic theory of Thomas Aquinas is not original, nor does it add anything new. It is essentially a reiteration of Aristotle’s ideas and their accommodation to Church doctrine as it was

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at that time (the thirteenth century). Aquinas accepted Aristotle’s proposition that trade is unnatural, while adding that those who engaged in it risked falling from Grace (Roll 1992: 34). It could only be justified if the profit from it were ‘just’, implying that it not be ‘privatised’ to the individual but devoted in some way to public benefit. Aquinas accepted, too, that the price of something was inherent to that thing; an assumption linked directly to Aristotle’s cost of production theory of value, to use a modern term (though in doing so it shows how modern Aristotle was or, conversely, how little economic understanding has advanced beyond his seminal notions). Aquinas’s opposition to usury also relied on Aristotle’s earlier described theory of money, namely that, while goods were fruitful, being the means of satisfying human (material) needs, money (understood as proxy for goods) was barren (Roll 1992: 36). It produced nothing. ‘Making money’ − the characteristic of trade − was therefore usurious. By the same token, Aquinas regarded money as consumptible but not fungible, not usable as a substitute. The reason for Aquinas’s lack of addition to economic theory was in part due to the fact that so little had changed in the way of economic life prior to his time. But change was on its way. An incipient mercantilism was making its presence felt, which Church doctrine sought to resist. ‘Just price’, for example, itself derived from Aristotle’s concept of the ‘mean’, was part of an attempt to prevent trade becoming respectable because trade implied an individualism that directly challenged Church (i.e. papal) authority. Indeed, the defence of ‘just price’ entailed a degree of complex argumentation that puts one in mind of the difficulty Islamic economists have even today in achieving any interface with western economics that does not in fact amount to an abandonment of Koranic principles. The fact is that Aquinas – along with the Scholastics generally − stood at the threshold of a new age, the modality of which was to be very different. In Roll’s words, his positivist bias notwithstanding, ‘Canonist thought was essentially an ideology, in economic matters it was an illusory representation of reality [that was destined to give way to] a secular science of society’ (40–41)

2.2.4 English Experience In direct English experience, this threshold is later clearly represented by Shakespeare in The Merchant of Venice as a whole and in the cautionary remark he places in the mouth of Polonius in Hamlet, Act I, Scene III: … Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry. This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man…

The more accurate term would be ‘releasing surplus value’, see discussion in 11.5.

In economics, an example of fungibility is a bank note that can be swapped for coins. Fungibility, that is, is not synonymous with tradability, where the bank note is swapped for a good. In this sense, by extension one can also say that something is fungible if it can change its character.

Witness, ‘Allah has permitted trade and forbidden interest’ (II.275). See Houghton Budd (2002).


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Such commentaries show how perennial is the notion that money is somehow a problem, a challenge – if not anathema – to our moral natures. The Enlightenment, needless to say, represents a wholesale moving on from such strictures of yore. Similar can be said of the loss of guilds. All solidarity is swept away before the process that Galbraith (1987) called ‘the separate personality of money’, Polanyi (1944) referred to as ‘dissassociation’, and many others have identified as some kind of culmination. Only that is not certain. During the twentieth century the onward march of what today would be called financial liberalisation was resisted and obviated by statist economics of various shades. Against this resistance, however, there grew the arguments of the likes of Keith Joseph and Ralph Harris, who, while biding their time, honed the arguments and crafted the policies that found their moment in history in the period that will probably be forever associated with Margaret Thatcher. In this way, a crucial British component of modern economic history became the basis of worldwide changes in economic life. Financial liberalisation then moved centre stage as the driving concept of all economic policy, both domestic and foreign. Markets were opened up, unions ‘tamed’, socialist governments marginalised and central banks made independent. The stage was now set for the 1990s, when hardly any constraints were left on finance. If limits were to return (although there is no historical necessity entailed in such a sentiment) they would have to be those that finance itself gave rise to.

2.2.5 Beyond Central Bank Independence There will be those who say this is not a neutral description of events; that it favours the outcome and the prevailing arguments that made it possible. It is, however, possible to describe such developments clearly without thereby endorsing them. The point of the description is not to tilt against the history of finance, but to ask if, once liberated, it will be able to continue in the manner it had developed when struggling to become free. With the field left to itself a different dynamic than antithesis or even antagonism will need to operate. It is one thing to advocate price stability in a world not used to it, but once price stability becomes generalised, once every central bank has become or been made independent after the example of the New Zealand Reserve Bank – once, that is, one loses the marked variations in inflation rates that result in external pressure to compete while at the same time serving as the crucial driver of the foreign exchange market on which many markets in turn depend – the landscape goes flat. Other things then have to happen if the discrepancies and opportunities on which financial trade (whether one likes the idea or not) depends cease to arise. For the paradigm to continue, trade in finance needs to continue. And so one arrives at May 1997, by which time finance had become extensively deregulated, along with much else in economic life. Credit was readily available, most people had their houses ‘in play’ (even if they were living in them) and the idea had established itself in the public mind that real estate and share prices could go ever upwards, no matter how often reminders were given to the contrary, and whether in small print or large. At that moment in history, Britain’s Labour Party gave immediate effect to a plan long previously prepared. Responsibility for financial regulation was transferred from the Bank

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of England to the Financial Services Authority (although the people in it were largely exBank), creating a tripartite arrangement with the Treasury. For better or worse, general financial behaviour in the decade following owed much to this regime (and others like it). During that period credit became increasingly issued against rising real-estate values, Britain’s 1988 negative equity experience having quickly faded from active memory. While it is important not to moralise or pontificate about the practice, the fact remains that borrowing against rising real-estate values can result in unaffordable rents and/or unaffordable interest levels. This fact of life can readily be lost from view, however, when such transactions become at a remove. When Abbey National in the winter of 2006 offered mortgages at five times income to ‘only carefully selected customers’ and when mortgages became ‘liar loans’, traditional caution was overridden by the seemingly healthy information. In this context sub-prime mortgages are a wholly understandable, even predictable development, though this does not mean they are prudent, necessary or beyond question.

2.2.6 The Global Financial Crisis Begins But by April 2007 sub-prime defaults in the US had reached 13 per cent. A limit, seemingly, had been reached and, the world of finance having become a global affair, the effect was to send a signal far and wide. Any financial institution with funds collateralised, whether directly or, as often, indirectly, in sub-prime markets drew the obvious conclusion. Interbank lending and, more crucially, wholesale money markets began to freeze up, all the more quickly because uncertain counterparts had become part of normal business. Northern Rock, in the UK, became the event it did because of the reliance of its business model on money markets rather than members’ savings. But Northern Rock served only to amplify the signal. It was only a matter of time before one part or another of the global financial system could not substantiate its balance sheet. In mid-March 2008, the Bear Stearns hedge fund collapsed (into the Fed-orchestrated arms of J.P. Morgan Chase) and on 4 April Halifax-Bank of Scotland (HBOS) ran out of road. Five months later, on 11 September 2008, Lehman Brothers collapsed and the western financial system froze. Overnight the LIBOR went from 2.15 per cent to 6.44 per cent. The UK’s Financial Services Authority (FSA) issued a temporary ban on short selling (see 2.4: Technical Details) on the grounds that this technique was thought to have at least exacerbated if not caused the crisis. The US Treasury under Hank Paulsen then created the Troubled Asset Relief Program (TARP) which would provide the banking system with an unprecedented $700 billion. Then on 14 September the world’s largest insurance company, American International Group (AIG), failed and was bailed out by the Fed to an amount of $180 billion (see 2.3.4: American International Group). At the same time, Merril Lynch came to the rescue of Bank of America, whose bailout had been advised against by Chris Flowers, an influential voice in the private equity sector. From then on, events gathered pace. On 8 October the UK government provided the banking system with £50 billion capital, £200 billion short-term funds and £250 billion Self-assessed mortgages where the borrowers were charged extra for lending against undocumented (or falsified) income information.

It is to be doubted how even-handed this arrangement was. (See 2.3.5: Goldman Sachs.)


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in guarantees. A watershed of sorts was thought to have been reached with the £37 billion provided to Royal Bank of Scotland and HBOS, except that in November Citibank was in a ‘death spiral’ and many big names were in trouble. On 16 January 2009 British bank shares plummeted (shortly after the lifting of the earlier-mentioned FSA curbs on short selling) and on 19 January the UK government promised to insure bank losses (estimated at £585 billion) combined with a new £50 billion initiative designed to prompt reissuance of credit. By March, the financial crisis had become an economic crisis. Recession was in process, possibly of the ‘double dip’ variety; governments were effectively giving citizens grants to go out and buy new cars (later, household boilers); consolidation was widespread, as was home repossession; and the Bank of England had introduced ‘quantitative easing’,10 a term that fools few people, being little more than a volte face on the part of ‘the authorities’. The ‘hands-off’ arrangements achieved under central bank independence (operational independence and ‘signalling’, to use Friedman’s (1999) term) are overridden by open market operations whereby the central bank, not the markets, becomes the source of essential capital. ‘Quantitative easing’ is meant to say ‘a temporary step backwards before the onward march of financial liberalisation can be resumed.’ And, indeed, by April 2009, thanks no doubt to massive state intervention, calm had returned, and word went out that ‘bonuses are back’. In June Goldman Sachs reported its biggest profits ever, and in August 2009, Barclays Bank quietly announced first half profits of £4.2 billion, an average of £191,780 for each of its 21,900 employees. Much more detail could of course be added, but sufficient has been recounted to justify the question, ‘Crisis? What crisis?’ By the autumn of 2009, the storm was thought or said to have passed and everywhere, in officialdom and on the lips of ordinary citizens, one could hear the hope expressed that conditions would return to those before the crash, so that real-estate and stock values could continue their ever-upward journey, albeit at a reduced pace. To know how ‘real’ all this, however, it would be prudent to watch a place like Dubai.

2.3 Commentaries Where is the best place to begin discussion of the global financial crisis? At its centre? At its height? It is not easy to locate a global financial crisis. Where exactly is it? And where is one in relation to it? For some, those who have not been caught short in their real-estate gambles or who in regard to their pensions, incomes and wealth levels were not trading on margin, as it were, it is but another storm to weather, the time not to sell, panic or take one’s eye off the long term. For others, both in regard to their circumstances and their reactions to them, events are simply now taking place outside their comprehension. A frequent explanation is that banks stopped lending to one another in the course of 2007, causing a generalised contraction of credit which in turn precipitated the failure 10 The term ‘quantitative easing’ describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero. Normally, a central bank stimulates the economy indirectly by lowering interest rates but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing. In practical terms, the central bank purchases financial assets (mostly short term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing). This process is called ‘open market operations’.

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of several substantial financial institutions. As a further consequence, the non-financial economy has been severely impacted implying the (real or imaginary) prospect of recession. In an endeavour ‘to get the economy going again’, inter alia, governments have provided huge tranches of capital to banks, but also to certain manufacturers, notably car makers, although, as observed by Simon Jenkins, ‘Quite why cars were considered good for demand but other forms of consumption bad was never explained’ (‘We are Paying an Enormous Price for the Myth that Banks are Too Big to fail,’ Guardian, 16 October 2009). The hope is that these are medium-term measures, the general thought being to return to business as usual, meaning (a) banks lending to one another again, albeit on less risky grounds, and (b) real-estate values returning to summer 2007 levels, from whence they can continue their ‘upward-only’ trajectory (albeit less spectacularly than prior to 2007). In other words, the hiatus in inter-bank lending is thought to be but a blip. Enormous in size and global in scope, but a blip nonetheless. The question asked here, however, is not only why did the banks stop lending to one another, but why at this moment in history? Is the problem merely a matter of over-loose credit due to the relaxation of traditional prudence? Or did global finance find itself at its limits, both technically and epistemologically? Have government bailouts saved the day, therefore, or merely ‘kicked the can down the street’? Finance being often considered as ‘unreal’ – even by academic minds – the best place to begin a review of both chronology and technique is arguably with what one might call primary players – central bankers, regulators and those most closely in touch with financial institutions. But also financial commentators because their utterances have huge influence on the way people generally not only understand economic events, but above all on how they behave in regard to them. In the autumn of 2008, for example, the BBC’s Robert Peston was held by some to have been responsible for grave circumstances because he leaked information about Northern Rock’s situation. Likewise, public opinion and whether or not to join a deposit withdrawal queue are heavily influenced by the press’s view of events, but also by whoever it was that converted so complex and vulnerable an event as a global financial crisis into the simple sound-bite of ‘credit crunch’, in antithesis to which, to be consistent, ‘credit binge’ ought to have been in coinage during the ten or so years prior. In this section a range of commentaries, chosen at random, is rehearsed in order to guard against the author’s own biases. The initial survey begins at the relatively superficial level of commentary, because that is where many people begin and end their understanding of finance. Trusting that its intricacies are appreciated and managed by experts, they do not go deeper. Although Chapter 3 considers the ideas that underpin modern finance and is thus more academic, less anecdotal, no apology is offered for this approach because its aim is to replicate the way we generally think about financial phenomena. The commentaries have been kept as brief as possible but endeavour to be faithful to their authors’ intents. To a certain degree, the overall story the accounts tell from their various perspectives is corroborated and also statistically supported by the work of Norman Gall of the Fernand Braudel11 Institute in Sao Paulo, Brazil, on whose work a certain reliance has been placed, in particular, Millions, Billions, Trillions (2009). Gall’s writings tend to be highly researched 11 Fernand Braudel (1902–85) was the foremost French historian of the post-war era, and a leader of the Annales School.


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and even-handed, albeit an at times odd mixture of representing at the same time as being critical of mainstream views. Thus, they have a certain objectivity and provide a valuable overall perspective. Though it does not affect their content, the commentaries are presented in chronological order, beginning with a seminar held at London School of Economics by its Financial Markets Group in October 2007. Next is Will Hutton’s account, included because it is not untypical of many whose position as regards finance tends to be left of centre, even though they may not be averse to ‘working the housing market’ at the same time as criticising it.12 Hutton is followed by the autobiographical experience of Edmund Andrews, whose experience is probably not unique. It is worth recounting because he was both a commentator and a player. He knew – or supposed he did – what he was doing. That means, if ever it was a question, that he knew what was possible, if, not probable, indeed inevitable, and therefore predictable. This makes claims of ignorance on the part of financial experts difficult to credit. If they were to admit they were deliberately running high risks that would be fair enough, but to claim they did not know what was at risk is at best disingenuous. The next vignette concerns American Insurance Group, a case in point as regards Andrews’s explanation of events. Though a journalistic account, Tim Rayment’s description of the AIG situation should not be regarded as merely anecdotal. Rather it is a close-hand description of what happened. It should be pointed out, however, that sections of the article that focused on who, if anyone in particular, was to blame, and what, if any, remedy in that respect is needed going forwards, have been ignored in order not to be distracted from what seems to be a crucial characteristic of the global financial crisis, namely, the techniques used and the meta-economic assumptions they presupposed (see 4.1.6: Meta-economics). It is not part of this book to consider the role of greed, for example, or to voice any moral concerns. Not because such considerations are not, in a general sense, unimportant, but because few people if any are without financial sin and thus entitled to throw stones. Better to spend the energy one would use moralising on devising new instruments that presuppose, prompt and reinforce human virtues rather than human vices. It is for the individual to discipline his conduct. The economist’s task is to help this by conceiving economic and financial processes more clearly. Goldman Sachs is next considered, perhaps the most contestable, not to mention contentious, aspect of the global financial crisis on account of the evident proximity (to say the least!) of Wall Street to the US government (but not only).13 Whatever one’s opinion of Goldman Sachs, the relationship of fox to henhouse is crucial here. The view of Alistair Milne provides a typical banker’s apologia, meaning that in a neutral sense. It is important to articulate the view from within banking, as it were, notwithstanding the possibility (discussed later in Chapter 10) that banking per se, and therefore any apologia of it, may have become anachronistic and thus be part of the problem.

12 This is not a comment on Will Hutton, of course, but on the now generalised ownership of property that, ideologically speaking, ought to be outside the pale of socialist-minded people but which, thanks to such schemes as Wider Share Ownership in the 1980s, by no means is. 13

The British government and doubtless others are not without links to Goldman Sachs.

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Next is something of a composite perspective provided by the September 2009 edition of Prospect, which featured a discussion involving Adair Turner, chair of the FSA, John Gieve, former deputy governor of the Bank of England, Gillian Tett of the Financial Times and Paul Woolley, a senior fellow at London School of Economics, concerned with capital markets, who were quizzed by Reuters’s Jonathan Ford. Again, the reason for including this element is the critical feature of modern finance – the fact that it is ‘managed’ by people who combine academic credentials with direct proximity to ‘real world’ events, with real here meant to include financial! Alongside the generally mainstream views there runs the continual and consistent critique of economists such as Dirk Bezemer. His ‘creditary’ view warrants rehearsal here because it shows that the global financial crisis has not arisen for want of rethinking the foundations of economics but to a certain extent because of its focus on (some would say capture by) the too-narrow, so-called ‘orthodox’ point of view. Of pithier tone was the noted spat between Paul Krugman and John Cochrane in September 2009, in which the former sought to unseat the supremacy of the efficient markets hypothesis, while the latter cried ‘foul!’. The final sub-section concerns alternative perspectives, the chief ones being Islamic economics and monetary reformism. The latter is a catch-all term for those who essentially argue against private credit creation and so-called debt-based money issue and for stateengendered finance instead. If we deal somewhat summarily with these perspectives it is because our concern here is to focus on how capitalism and western finance ought to and could transform themselves in ways that would overcome the argument made by their critics that they have become morally and technically bankrupt and have therefore forfeited any claim they might make to being ethical.

2.3.1 London School of Economics Early on in the global financial crisis, the Financial Markets Group of LSE held a seminar (1 October 2007) at which several of its ‘interdisciplinary and intercollegiate group of experts specialising in financial regulation’ sought to characterise events. In his introduction, Charles Goodhart drew attention to the fact that, with the real liquid assets of financial institutions having fallen from 25 per cent in the 1960s to 1 per cent nowadays, there is too great a reliance on wholesale markets, short-term interest rates and the ‘put’ of central banks. In such a situation, when the inter-bank market ‘dries up’ there is little central banks can do except exercise their lender of last resort role but so massively that they risk contradicting their price stability responsibilities. LSE-based economist Wilhem Buiter pointed to the presence of excess global liquidity which ‘gobbles up’ the official bank interest rate, the focus of its monetary policy mandate. Financial Times journalist Brandon Davies was very clear that banks did not believe the credit rating agencies. He also expressed the view that in August 2007 someone (at Barclays Bank?) chose not to provide liquidity. Another LSE economist, Jon Danielson, highlighted the dangers of model dependency (e.g. Basel II) and of regulation that is too narrow and over complicated. The last is to question the 1997 tripartite arrangement. Gillian Tett sounded an interesting note, such as only a financial journalist rather than market participant might sound, when she wondered if transparency did not inhibit profitability so that, perversely, the financial sector ‘needed’ obscure instruments.


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Ross Altmann, a pensions expert, was emphatic. ‘Our once great savings culture has been decimated.’ Because, since 1997, of a government bias in favour of borrowing not saving, it is not in the banks’ interests to increase savings, thus reliance becomes placed on money markets. Northern Rock, which failed so spectacularly, was money-market dependent; Britannia building society, by contrast, had 100 per cent retail deposits. This, of course, points also to demutualisation, the release of ‘suppressed assets’, Big Bang, securitisation and all the many related developments of the mid 1980s, both intellectual and practical. Finally, Matt King, credit products strategist at Citigroup, pointed to the role of the ‘carry trade’ which can readily go in reverse.

2.3.2 Will Hutton According to Hutton’s commentary in his Dispatches programme for Britain’s Channel 4, ‘Crash – How the Banks went Bust’, China’s colossal US dollar holdings, consequent on its trade surplus, were invested in Wall Street, which then reinvested them in the so-called ‘subprime’ mortgage market, taking US house values to a 60-year high. This rise, significantly, has been continuous; giving life to the idea that ‘ever upwards’ is both healthy and sustainable. This process has been accompanied by the appearance of all manner of exotic financial instruments, such as collateral debt obligations (CDOs), which, originating in the very late 1980s, were sold to insurance companies, resulting in a 1:40 pyramid centred on London. Claiming to be without risk (causing practitioners to feel silly if they wondered how) they were fostered by the tripartite regulatory framework introduced in May 1997. A ‘party’ then got into full swing, underpinned by the assumptions of free market ideology (which could do no wrong), but by April 2007 the situation had begun to unravel. In the US, sub-prime defaults (quaintly, euphemistically, and even clinically, called ‘delinquency’) reached 13 per cent, with a consequent falling in house prices. Matters were compounded by several other problems. Firstly, although there is in effect only one (international) financial system, it is regulated in London and New York as if there were two. Secondly, Gordon Brown’s light touch regulatory approach preferred the financial over the real economy. As a consequence of the events of spring 2008 (the collapse of Bear Stearns hedge fund, etc.) cash became king, causing an inter-bank lending freeze. The party14 having got out of hand, the state stepped back in, only too welcome on the part of some failing banks. As Alistair Darling put it at the time: ‘There are moments when financial stability trumps anti-competition.’ In other words, in extremis the positivism of competitive economies cannot be relied upon.

2.3.3 Edmund Andrews Writing in the Guardian on 11 July 2009, New York Times journalist Edmund L. Andrews spoke for many when, referencing his book Life inside the Great Meltdown, he summed up his experience in the manner of the following extracts: I wrote several early-warning stories in 2004 about the spike in high-risk mortgages. Yet in the same year, I joined millions of otherwise sane Americans in what we now know was a catastrophic binge on overpriced property and reckless mortgages … 14 An allusion to William McChesney Martin’s famous quote when chairman of the Federal Reserve that the job of the Federal Reserve is ‘to take away the punch bowl just as the party gets going’.

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Finance at the Threshold Nobody duped me, hypnotised me, or lulled me with drugs. Like so many others, I thought I could beat the odds. Everybody had a reason for getting into trouble. The brokers and the dealmakers were scoring huge commissions. The ordinary homebuyers wanted to own their first houses, or bigger houses, or holiday homes. Some were greedy. Some desperate, some deceived ... American Home Mortgage had become one of the fastest growing mortgage lenders in the country. Its speciality was people like me: borrowers with good credit scores who wanted to stretch their finances far beyond what traditional banks would allow, and who were prepared to pay slightly higher rates for the privilege of concealing our financial weaknesses. [For such companies] if I wanted to buy a house, it was my job to decide whether I could afford it. [Their] job as to make it happen … They were betting that a default would be much more painful to [the borrower] than to them … What mattered more than anything was a person’s credit record? Investors had become steadily less interested in the details of a person’s financial position. If you had always paid your debts on time before, the theory went, you’d probably do so in the future … [Moreover, as AHM’s agent, Bob Andrews, put it]: ‘… don’t worry, the value of your house will be higher in five years. You’ll be able to refinance.’… I take some pride in the fact that I outlasted two of my three mortgage lenders. One was shut down by federal regulators in early 2007. Its loans were so bad that it became a catalyst for the panic that kicked off the broader financial crisis that August. Another collapsed overnight… It will take years to make up for the costs of our15 misadventure. I have no idea when I might be able to get credit again, much less retire … [but] we are not victims, because we knew we were taking a huge gamble. My hunch is that a large share of the people who are now in trouble knew in their gut they were taking unreasonable risks, too. But our misjudgements, however egregious they have been, pale in comparison with the self-enriching recklessness of those at the top of the financial ladder. They knew their loans were absurd. They knew, they knew, they knew.

2.3.4 AIG16 AIG is the world’s largest insurance company. In March 2009, it reported a quarter(!) loss of $61.7 billion, the biggest in corporate history, and was rescued by the US government using resources that exceeded the value of the gold reserves in Fort Knox, making it one of the greatest bailouts in history. On the day after Lehman declared bankruptcy, the U.S. authorities virtually nationalized the American International Group (AIG), the world’s biggest insurance company founded in Shanghai in 1919, with 116,000 employees in subsidiaries operating in 130 countries. The government initially made available $85 billion to AIG, at a punitive 14 per cent annual 15

Referring to himself and his wife.

16 These paragraphs are largely based on two sources: the earlier-cited article by Norman Gall (2009) and Tim Rayment’s (2009) article. All main quotations are from Gall.


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interest, to pay its creditors in complex derivatives deals and took 80 per cent ownership of the company, the first stage of a federal commitment that since has grown to $182 billion. It was the price of terror. An even greater bankruptcy, only days after Lehman’s collapse, simply could not be absorbed by financial markets. Fortune magazine reported that ‘the government realized by Tuesday that it had erred grievously by letting Lehman go down and knew that it could not compound the error by allowing AIG to fail a day later.’ Terror arrived with the Black Swan. In the now-fashionable lingo of financial markets, a Black Swan is an event that was not supposed to happen. In his book, The Black Swan: The Impact of the Improbable (2007), Nassim Nicholas Taleb, a trader and professor of risk engineering at New York University, called it a rare event ‘nobody talks about, since they escape models – those that you would feel ashamed discussing in public because they do not seem plausible.’ In this vein, some mathematicians at Financial Products, an AIG subsidiary, concocted a model that showed a 99.85 per cent probability that AIG never would have to pay anything on the debts it insured with CDSs. So AIG charged a tiny fraction of a penny ($0.0002) annually for each dollar of credit protection on its first big CDS deal proposed by J.P. Morgan to insure some of the bank’s loans. If $0.0002 is multiplied by hundreds of billions of dollars, a CDS could produce a large yearly cash flow over several decades. Because AIG was an insurance company, not a bank, and enjoyed a AAA credit rating, its Financial Products subsidiary escaped government regulation and was not required to set aside capital reserves to support the CDS risk it was assuming. Tom Savage, former president of AIGFP, said that the U.S. economy would have to disintegrate into a major depression to trigger events requiring AIG to cover defaults. ‘The models suggested that the risk was so remote that the fees were almost free money,’ Savage said. ‘Just put it on your books and enjoy the money.’ (Gall 2009: 13)

AIG was a hedge fund on top of an insurance company, selling derivative products to banks all around the world. One such product was a type of derivative called a creditdefault swap (CDS), ‘which allowed banks to buy risky debt without attracting the attention of regulators. AIG took the fees, but did not have the money to pay up if the loans went bad. By the time the music stopped, European banks had protected more than $300 billion of debt with this bogus “insurance”. And that is just one corner of a web of risk extending to over 1,500 big corporations, banks and hedge funds’ (Rayment 2009: 47). One of the causes of what some (using a derogatory image) call today’s ‘Frankenfinance’ is the predicating of economics on physics, only it is a faux physics. By showing in the 17th century that the universe conforms to natural laws, Isaac Newton encouraged our age to see money as a branch of physics. Starting in 1952, two generations of economists worked to show that people are like molecules, whose behaviour can be predicted in ways that are stable over time. Science then infected everything, from how much capital banks need to protect themselves against insolvency, to the risk in credit-default swaps. But there was a flaw: the City’s faux physicists never go back far enough in their analysis, because the data on the Bloomberg terminal cover a tiny period of history. ‘Real scientists tend to be much more sceptical about their data and their models,’ says William Janeway, an MD of the privateequity firm Warburg Pincus and a Cambridge University lecturer. ‘They had all of the maths, but none of the instincts of (real) scientists.’ (Rayment 2009: 49)

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The starting point of such things is as innocuous as that of a water-spout. It begins as a whisk on the sea’s surface that is suddenly pulled up to the cloud level, then, spinning at a great rate, races uncontrollably across the ocean. The image is deliberate: does the tower of water push itself upwards, or is it sucked up? Faux finance similarly begins innocently enough. In AIG’s case, a trader, Howard Sosin, had the idea to buy financial risk from people who did not want it, then sell the risk to others in a series of ‘hedges’ so that AIG kept the fees but not the risk. Risk transfer, the counterpart to which is liquidity transfer, is always the characteristic of a futures market. Great care needs to be exercised in judging such a thing. If a farmer, in need of liquidity until his crop matures, can be harvested and then sold, forward sells his crop to someone who has liquidity (cash) which earns him nothing, where is the untowardness? Both take a gamble on the price, discounting it, but they do so with their eye to the future. (Hence the name.) A future crop of potatoes gives such a transaction some semblance of normality, but one needs to observe the process, not the form of the collateral. Because the one holding the right to the crop then sells it forward (the right to the crop now being the equivalent to the crop itself). And so on. The AIG case also raises the issue of light-touch regulation, in this instance of a degree that defies belief. America has an Office of Risk Assessment, set up in 2004 to co-ordinate risk management for the main regulator, the Securities and Exchange Commission (SEC). Jonathan Sokobin, its director, says it is charged with ‘understanding how financial markets are changing, to identify potential and existing risks at regulated and unregulated entities’ (Rayment 2009: 49). According to its website, it also helps to ‘anticipate, identify and manage risks, focusing on early identification of new or resurgent forms of fraud and illegal or questionable activities … across the corporate and financial sector’. By early 2008, the office was reduced to a staff of one. ‘When that gentleman would go home at night,’ says Lynn Turner, the SEC’s former chief accountant, ‘he could turn the lights out. We had gotten down to just one person at the SEC responsible for identifying the risk at all the institutions’ (Rayment 2009: 49). The $596-trillion market in unregulated derivatives, including $58 trillion in credit-default swaps, was being watched by one person’ (Rayment 2009: 49). As a result, ‘any bank that thought it was protected by credit-default swaps with AIG would have been exposed from the start, putting taxpayers at risk. The banks’ credit traders would – or should – have realised that AIG was never likely to pay out. ‘The key point that neither the public, the Fed nor the Treasury seems to understand,’ says Whalen, ‘is that the CDS contracts written by AIG were shams, with no correlation between fees paid and the risk assumed. These were not valid contracts but acts to manipulate the capital positions and earnings of financial companies around the world’ (Rayment 2009: 53). Clearly in evidence in the AIG case, but also more widely of course, is, on the one hand, the intellectual capture of the Establishment, so that everyone – politicians such as Gordon Brown, regulators such as the SEC and the FSA, and academic and media commentators – is persuaded that ‘a new way of thinking is in the public interest.’ On the other, there is exploitation of this circumstance (Rayment 2009: 53). It cannot be said that no one saw it coming, however. Charles Bowsher, for instance, head of the US government’s General Accounting Office, testified as long ago as 1994 that ‘the sudden failure or abrupt withdrawal from trading’ of large dealers in derivatives ‘could cause liquidity problems in the markets and could also pose risks to others, including


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… the financial system as a whole’. It took another 13 years, but that is exactly what happened (Rayment 2009: 49). ‘From 1973 to 1985,’ says Simon Johnson, a former chief economist at the IMF, ‘the financial sector never earned more than 16% of [US] corporate profits. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%.’ The whole point of financial companies is to allocate your savings to those who can use the money best. If they are taking 41% of the profit in an economy, something is out of balance. These figures reveal an enormous transfer of wealth. (Rayment 2009: 53)

Although such analogies cannot be spread too thinly, the problem with water-spouts is that they can spend their energy as quickly as they accumulate it. In the case of AIG, more specifically its London financial products division under Joseph Cassano, as house prices fell, credit ratings were cut and bankers began to panic. At this point other problems set in. AIG was then bailed out by the US Treasury under Hank Paulson, an ex-CEO of Goldman Sachs. He received tax benefits of about $200 million (£133 million) for taking on a government role. When the US decided to bail out AIG, the chief beneficiary of the rescue was Goldman Sachs, which received $12.9 billion of public funds via the insurer. The new CEO, Edward Liddy, whose task is to wind down the company and to close $1.6 trillion in trades that are still outstanding from the Cassano era, is ex-Goldman Sachs. He even has $3.2 million in the bank’s shares. One could go on, except that it begins to sound like a litany of woe. Important, however, is the observation of Simon Johnson that ‘all the technical details – light regulation, cheap money, the promotion of home-ownership – have something in common: they all benefit the financial sector’ (Rayment 2009: 53).

2.3.5 Goldman Sachs Norman Gall (2009) sets the stage for consideration of Goldman Sachs: These troubles threatened losses for Goldman Sachs, AIG’s biggest trading partner, whose success as Wall Street’s premier investment bank inspired in rivals what is known as ‘Goldman envy.’ In 2007 Goldman made $11.6 billion in profits, unprecedented among investment banks, with its 30,522 employees, including secretaries, averaging $600,000 in pay, including $69 million for its boss, Lloyd Blankfein, the Bronx-born son of a postal clerk who drove Goldman’s trading strategy. Despite its $20 billion exposure to AIG in derivatives, Goldman claimed ‘no material exposure to AIG’ at the time of the federal bailout, having already received $7.5 billion from AIG in collateral against the declining value of securities that Goldman marked down as the crisis deepened. But early in 2009 the New York Fed’s Maiden Lane III vehicle, created to absorb AIG’s bad debts, bought $14 billion of Goldman’s $20 billion in outstanding derivatives contracts with AIG at face value. ‘This was a sweet deal for Goldman and the other counterparties, a deal only available from the government,’ The Wall Street Journal observed. Goldman acquired other privileges as the crisis developed. These included investment banks’ access to cheap money from the Fed’s discount window after Bear Stearns’ failure in March 2008 and to deposit insurance and federal guarantees as a result of their being granted commercial bank charters as part of their flight into protective custody during the convulsions that followed the collapse of Lehman and AIG in September. Without this

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Finance at the Threshold protection, Goldman may not have survived instead of announcing $3 billion in profits for the first quarter of 2009. (Gall 2009: 14) Talent and success turned Goldman into a political heavyweight. Two of its bosses, Robert Rubin and Henry M. Paulson, served as Treasury Secretary since 1995. Paulson was recruited for the job in July 2006, just as the credit boom was peaking, by President George W. Bush’s chief of staff, Joshua B. Bolten, a former Goldman executive. Several former Goldman executives occupy other key posts at Treasury. When AIG was bailed out in September 2008, Paulson chose a Goldman board member, Edward M. Liddy, to run it. Geithner was chosen as president of the New York Fed by a board headed by Stephen Friedman, a former Goldman chairman. The Wall Street Journal remarked: ‘Half of the financial world already thinks Goldman runs the U.S. Treasury and Fed, however unfairly. The American public is furious about the bailouts of AIG and the banks, engineered by the Fed and the Treasury, that have helped the likes of Goldman Sachs. And guess who Mr Friedman’s search committee picked as Mr Geithner’s successor when he left to run the Treasury? Another Goldman alum, William Dudley.’ At Treasury, Geithner named a former Goldman lobbyist, Mark Patterson, as his chief of staff. (Gall 2009: 14)

This credible mainstream account is important because it makes more ‘palatable’ the challenging commentary by Matt Taibbi (2009), a contributing editor to Rolling Stone, who marshalled the following facts. While not everyone’s choice of words, his account reflects well-known facts and expresses the views of many ordinary citizens, that is to say taxpayers. He points to the changes that took place at the end of the 1990s, a decade in which finance had begun to act untrue to type. [The banks] changed the rules of the game … by setting up what was, in reality, a two-tiered investment system – one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational ... [With] the housing bubble [came] a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that out the window ...

This sounds all very neutral, as if financial evolution proceeds as an event of nature, which, indeed, is how most economists do understand things. Regarding human beings as noisy disturbers of otherwise neatly balanced equations, they do not hold them culpable for events. The close-knitted nature of the financial community can therefore be seen either as normal, if one is part of the specialist profession, or untoward, which is more Taibbi’s view. The history of the recent financial crisis [reads] like a Who’s Who of Goldman Sachs graduates. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the ... chief of Merrill Lynch, a


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former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York – which, incidentally, is now in charge of overseeing Goldman.

It is indeed difficult not to wonder at such circumstances. One understands, as Paul Volcker once opined that finance is a technical matter that has first to be explained to one’s inquisitors, for example at a Congressional hearing, but even so the strong links that characterize the financial relations between Wall Street and Washington seem designed to bewilder and anger the ‘man in the street’. What they then do smacks all too easily of the worst cronyism and disregard bordering on contempt of many outside their world. [In September 2008], although he had already engineered a rescue of Bear Stearns … and helped bail out … Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers – one of Goldman’s last real competitors – collapse without intervention... The very next day, Paulsen greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

But that was small beer compared to one of Paulsen’s last acts under the outgoing Bush administration: Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds... [Moreover] immediately after the AIG bailout, Paulson announced his federal bail-out for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. [Then], in order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank-holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding – most notably, lending from the discount window of the Federal Reserve.

Who knows? Many moons hence, when history has run its course, perhaps so much interconnectedness and self-interest will be thought benign. Perhaps there is a rightness to the ‘banks are too big to fail’ argument, on which such behaviour relies. Even so, one understands the incredulity of Taibbi, who is but one of many such critics.

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2.3.6 Alistair Milne To the question, ‘How and why did all this happen and what needs to be done to prevent a new Great Depression?’, Alistair Milne, author of The Fall of the House of Credit (2009b), writing in Cass Business School’s InBusiness (Milne 2009a), answers as follows: The ‘how’ is the easiest question to answer. From the initial slowdown in the US housing market in late 2006 until the global banking run of late 2008, economies around the world have been struggling to adapt to the growing global current-account imbalances, with savings from China, Japan, Germany and other surplus countries recycled to finance the consumer credit and housing boom in the United States, the United Kingdom and other deficit countries. The business context was the rise of a system of parallel banking, with credit intermediated not through traditional retail deposits but using new, innovative credit instruments, held by banks and financed through short-term wholesale money markets. The ‘why’ and ‘what’ are more difficult. The unsustainable boom of credit and house prices that preceded the crisis had its roots in psychology and culture and what has been aptly called the madness of crowds. Many others have written about the role of euphoria and of self-reinforcing beliefs when the banks were building up their large exposures to household and risky corporate debt. The controversial argument is that psychology, culture and crowd madness are playing an equally important, if not bigger, role in the crisis itself. What has been pushing many banks to the wall is not poor lending decisions but a blind panic, an overreaction to mistakes made during the boom – a panic made possible by the reliance on highly unstable short-term funding, in which professional investors are fleeing from any form of bank exposure. (2009a: 21)

Milne concludes that ‘Consumers and governments, especially in the English-speaking world, have borrowed far too much. There is nothing else to be done except cut back on our spending and sell off all our assets to reduce borrowing. Banks’ assets are worth far less than the banks pretend and they may be hiding even worse problems. They must reveal the full extent of their holdings of toxic assets and revert to being cautious, riskless utilities.’ Then he asks the question many ask: ‘Should government and the financial authorities stand aside and let private businesses and individuals suffer the consequences of their own actions? Or should public funds be used to protect borrowers and investors from the consequences of their decisions?’ (22). His answer, which surely ranks high on the scale of moral hazard, is that it is ‘The duty of government … to provide that leadership, to demonstrate that, even if right now no one else does, they still support the banks. Money, if necessary extraordinarily large sums of taxpayers’ money, must be made available to support banks and enable them to start lending again. [Furthermore,] ‘central banks, government and, ultimately, the taxpayer will have to take responsibility for economy-wide disasters, providing insurance against extreme systemic risks’ (23).

2.3.7 Adair Turner and Colleagues The September 2009 issue of Prospect featured an edited transcript of a conversation between Adair Turner, Paul Woolley, Gillian Tett and John Gieve. The title of the article was ‘How to Tame Global Finance’, an image also used by Rudolf Steiner in regard to


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modern finance.17 It covered many topics, which have here been regrouped according to subject area rather than the sequence of the discussion. The first, and one of the most crucial, concerns epistemology – the challenge the global financial crisis represents to our understanding of finance to date and from now on. For Adair Turner, The more fundamental thing, especially for regulators like me, is to realise that what has occurred has imposed huge economic harm throughout the world and so we really do have to work out how to stop it happening again in five or ten years’ time. And that requires a very major reconstruct of the global financial regulatory system, and I don’t mean a minor adjustment. (Prospect 2009: 34) [We need a major adjustment because there has been] a fairly complete train wreck of a predominant theory of economics and finance. For the regulators of the world, once you’ve accepted that you don’t have an intellectual framework of ‘more market is always better,’ you’re in a much more worrying space, because you don’t have an intellectual system to refer each of your decisions, and that requires more judgement and therefore confidence. (Prospect 2009: 36) The wreck is very specific, namely the reliance of macro policy and indeed macro economics on ‘light touch’ regulation considered viable because of the efficient markets hypothesis. There are two particular areas where we know the direction of travel but turning it into concrete analysis is tough. First of all, this whole area of macro-prudential policy, the importance of seeing the big picture and having the right levers to pull – we all recognise that we need levers other than micro-prudential ones or other than interest rates alone. There’s something that resides in the middle there, economy-wide capital or liquidity measures which make the system more stable. But one issue here is do we try to hardwire things into the system so that when you go into a boom an automatic formula demands of banks, for example, that they squirrel away more capital? Or should such decisions reside within a body of wise people, some financial stability committee? Second, we have had a very fundamental shock to the ‘efficient market hypothesis’ which has been in the DNA of the FSA and securities and banking regulators throughout the world. The idea that more complete markets and more liquid markets are definitionally good and the more of them we have the more stable the system will be, that was asserted with great confidence up to three years ago. But what precisely we do as a result of the collapse of that approach is unclear. Does that mean that we as regulators have to sometimes ban new products and say, ‘I’m going to ban that unless you can prove to me that it is socially useful’? The whole burden of proof in the past has been the other way round – an organisation like the FSA has worked on the assumption that it has to define that there is some specific market failure, or else our intervention is not legitimate. We have not felt it sufficient to say, ‘Well, there’s not a market failure here, but the management of this bank is completely out of control, and therefore we’re going to tell them to slow down.’ We have not felt the ability to act against market volatility

17 ‘Think how long a horse has to be tamed before it can be used. Think what would happen if we did not tame our animals, but used them wild. Yet we let money circulate quite wildly in the economic process’ (1996b: Lecture 12: 150).

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Finance at the Threshold for reasons of financial stability; we’ve only felt that we can act on it for reasons of market abuse. (Prospect 2009: 36)

A related theme, again both conceptual and practical – the unity between idea and action seems particular to finance – is the further reliance placed on agents, with its attendant problem of the opportunity this provides for self-serving behaviour. In the view of Paul Woolley: The crisis, as you say, has served to discredit mainstream finance theory, and especially its key idea, that capital markets are efficient. The idea that prices are always right and that capital markets exert their own self-discipline – the so called efficient markets hypothesis – has received a deadly challenge. Some commentators now argue that if markets are inefficient that must be because investors are irrational. The way forward, they argue, is to understand finance based on psychological biases and irrational urges, the so called behavioural model, to better explain the erratic performance of asset prices and capital markets. But people in the financial markets are not all acting irrationally. The real key lies in understanding a crucial mistake that economists have been making. Their theories are based on the assumption that there is an army of private investors who invest directly in stock, bond and derivative markets. They have ignored the real world complication that investors delegate responsibility for financial matters to banks, fund manager, brokers and so on, and it is these intermediaries who determine asset prices. Delegation creates an ‘agency’ problem in that the agents have better information than their customers and, moreover, the interest of the two are rarely aligned. Bringing agents into the analysis helps us to understand how bubbles form, why equities are so volatile and the forces behind these ‘momentum’ surges and collapses in so many markets. (Prospect 2009: 36) There are some products which should be offered but aren’t because although they are very attractive to long-term investors they are bad for ‘agent’ business because they are buy and hold investments with low price volatility – I’m thinking of, for example, GDP bonds, bonds that give a return equal to the increase in nominal GDP each year, thereby capturing the three things that many investors want: some growth, inflation protection and price stability. (Prospect 2009: 40)

Central to the experience of the global financial crisis has been the part played by the tripartite arrangements set up under Gordon Brown’s chancellorship immediately when Labour came into power in May 1997 whereby the financial supervision role of the Bank of England alongside the Treasury was hived off to the FSA. In Adair Turner’s view, The way that the tripartite system worked post 1997, and especially the relationship between the Bank of England and the FSA reflected a particular philosophy of the time, and in retrospect, I think everyone recognises that a different approach would have been better. The Bank was focused on its monetary policy mandate. The FSA focussed on micro-prudential supervision on an institution by institution basis, and on an interpretation of that which was fairly legalistic and focused on systems and processes. Somewhere between the big picture got lost; the overall trends in credit extension across the economy and in assets prices were not put together with certain business developments to sound a warning. To be more concrete: back in 2005, there was not a process between the Bank and the FSA of saying look we have a large current account


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balance of payments deficit requiring the outflow of capital, rapid credit growth, rapid growth of securitised lending to mortgage markets, rapid development of some go-getting mortgage banks – HBOS, Alliance & Leicester, Northern Rock and so on – which were heavily reliant on both the ability to sell mortgage securities through to US mutual funds and the ability to borrow money wholesale in the inter-bank market… there was a failure to put all of that together and say, ‘faced with this, we want to be imposing levers on the liquidity or the capital policy of HBOS or Northern Rock.’ There wasn’t the philosophy that this was really part of either institution’s job. There was no definition of the levers to pull if you decided there were problems – no concept of counter-cyclical capital and so on. (Prospect 2009: 35)18

But if the tripartite system is to be replaced, by what? John Gieve, now out of the Bank and in the City, asks: do we need a different sort of regulation for finance? When we regulate the electricity or the telecoms industry what we’re talking about is economic regulation, which looks at industrial structure, pricing and market power – but apart from occasional forays by the OFT we don’t do that in finance. Perhaps we should take that sort of economic regulation into finance – and the Conservative proposal, which has had less attention than the breakup of the FSA, is to bring the OFT and the consumer bits of the FSA together which might give you something which could be the basis of a new form of economic regulation. (Prospect 2009: 37)

For Adair Turner, however, [Concerning] the size and profitability of the financial sector you must separate out the retail activity and the wholesale. On the retail side there is no evidence that it is too large in terms of employees or in terms of margins – the margin between what you get on a deposit and what you pay on a loan hasn’t gone up over the last 30 years. And the CEOs of the major retail banks are paid what the CEOs of the major retailers are paid. What is surprising is when you go to the wholesale side, and you see the enormous amounts of money that are made out of the provision of liquidity or the provision of complicated products or bits of the asset management industry or the hedge fund industry – those are activities that have ballooned in size, appear to be making hugely more money than 20 years ago, and where you end up with levels of personal remuneration which are just stunning. And the trouble is that the sort of economic regulation that John is talking about is hardest to do where it is needed most, on the wholesale side. Why? Partly because prices are opaque so that there’s nothing you can actually get your arms around and regulate. Secondly, it is truly global, and unless you can get a rigorous global agreement, there’s a problem. (Prospect 2009: 37)

A chief case in point is banking, concerning which Paul Woolley raises a crucial question, the answer to which goes to the heart of the global financial crisis and beyond. Banking and finance has become by far and away the largest global industry in terms of revenue, long-term profitability and share of GDP. It is strange that an industry whose function is the quite utilitarian one of converting savings into real investment should have become so 18

For a consideration of the idea of cycles see 11.2: Beyond Cycles.

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Finance at the Threshold dominant. We need to ask how it has come about that this intermediary role is being performed at such high cost to society, with such complexity and capacity for systemic collapse. There are several explanations. One is the so-called ‘agency problem’ which I just mentioned and which confers on banks, fund managers and so on, the power to capture a disproportionate share of the returns from the productive economy. (Prospect 2009: 36)

In recognising that the banking and finance system is ‘larger than is socially optimal’, Adair Turner adds: Now, unless you’ve got a theory that explains why financial intermediation suddenly needs all this extra resource, there is something of a conundrum. Is it really the case that financial intermediation today is a more complex thing than a decade or two back? At a pinch you could argue that as people get richer, they recycle more money from one bit of their life to another bit of their life … But you still have to say that a lot of the increase of the balance sheets of the banks was derived from activities internal to the banking system. And you have a financial system that creates products which at one level help you to hedge volatility but which can also be used in ways that create more volatility. It is hard to distinguish between valuable financial innovation and non-valuable. Clearly, not all innovation should be treated in the same category as the innovation of either a new pharmaceutical drug or a new retail format. I think that some of it is socially useless activity. On the other hand, I don’t know whether that means the world would have been better off without any credit default swaps, or simply some credit default swaps. I just think it’s difficult to work out where one can draw the line with this. And that leads me away from the idea that regulators should be saying: product X bad, product Y good, and more towards a set of mechanisms such as high capital requirements which create hurdles19 for new products, but do not stop those that are of obvious value. (Prospect 2009: 37)

Then there is the vital [practical] question of the role of London as a financial centre. According to Adair Turner, Moreover, there are many good economists, for example, who work for investment banks yet none of them are likely to write papers that suggest the financial sector has got too large. And also the fact that in Britain the financial system is very big and was a large source of taxation revenue – both through corporation tax and income tax – was bound to reinforce the political idea that a relatively light-touch regulatory regime must be a good thing, and therefore we should not just be regulating for the competitiveness of London as a financial centre. (Prospect 2009: 40) I think London will continue to be a major financial centre and I say that despite agreeing that the whole financial system has grown bigger than is socially optimal. There will still be the process of researching, distributing and trading equities, there will still be Lloyds of London doing wholesale insurance, there will still be ship-brokers and so on, and I think the

19 A Swiss colleague, and fellow author, Marc Desaules (2004), suggests a different picture. Imagine one is walking across a room with a tray of water. Any movement will set up a surge, which will easily get out of control. One can mitigate this problem by placing bulwarks (rather than hurdles), as in ships that carry liquid cargos.


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concentration effects in financial services are very strong – London is a classic cluster and it will remain the dominant time zone centre in Europe. From the point of view of Britain as a whole we have over-relied on the City and we need other dynamic sectors, but in 20 or 30 years London is not going to have shrunk to the equivalent of Rome. There will remain four or five global financial centres, and it is almost certain that one will be London. (Prospect 2009: 40)

Finally, in response to Gillian Tett’s question: ‘If you look back has securitisation been a good thing for the financial system or not?’, Adair Turner said, ‘That’s a good question, and the answer is that I don’t know. The complex form of securitisation which grew in the past ten years was a bad thing. I think it is possible that the original developments of it were a good thing, but we just don’t know what is the optimal form of credit intermediation. The basic arguments for it are sound ones [but] the problem was that it became over complicated, we had securitisation and re-securitisation, we had the over development of the credit-derivatives swaps market – somehow we just created this empire of activity. We need to create a stable and sensible form of securitisation rather than the monster of the past five years’ (Prospect 2009: 39).

2.3.8 Dirk Bezemer One who claims the global financial crisis was not a surprise is Dirk Bezemer. In a letter entitled, ‘Why Some Economists Could See It Coming’, published in the Financial Times on 8 September 2009 (Bezemer 2009a), he claimed that ‘many had seen it coming for years. They were ignored by an establishment that [relied on] a model world where debt does not exist.’ Referring to a study he had made (Bezemer 2009b), he cited Kurt Richebächer, an investment newsletter writer, Wynne Godley of the Levy Economics Institute, and Michael Hudson of the University of Missouri to support his argument that, given that ‘the economy’s assets and liabilities must balance, growing financial asset markets find their counterpart in a growing debt burden … [users of] flow-of-funds models [can] foresee when finance’s relation to the real economy turns from supportive to extractive, and when a breaking point will be reached. [Yet] such calculations are conspicuous by their absence in official forecasters’ models in the US, the UK and the Organisation for Economic Cooperation and Development.’ He ended by observing that since ‘the financial sector is just as real as the real economy … policymakers, and the analysts they rely on, ignore balance sheets and the flow of funds at their peril – and ours.’

2.3.9 Krugman vs. Cochrane In September 2009, two well-known American economists – Paul Krugman of Princeton University and John Cochrane of Chicago’s Booth School of Business –locked horns on the question of ‘how did economists get it so wrong?’ In a New York Times piece, ‘How Did Economists Get it So Wrong?’, dated 6 September 2009, Krugman (2009) commented as follows: Macroeconomics has divided into two great factions: ‘saltwater’ economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and ‘freshwater’ economists (mainly at inland schools), who consider that vision nonsense. Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile

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Finance at the Threshold economic analysis starts from the premise that people are rational and markets work, ... saltwater economists [are] pragmatists. In the saltwater view, active policy to fight recessions remained desirable and economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. In the 1930s, financial markets, for obvious reasons, didn’t get much respect … [but by] 1970 or so, however, the study of financial markets seemed to have been taken over by Voltaire’s Dr. Pangloss, who insisted that we live in the best of all possible worlds. Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse. The field was dominated by the ‘efficient-market hypothesis,’ which claims that financial markets price assets precisely at their intrinsic worth given all publicly available information … And by the 1980s, finance economists were arguing that because financial markets always get prices right, the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices … The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward is wonderfully elegant. And if you accept its premises it’s also extremely useful. [But] finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices.

To this Cochrane (2009) provided the following riposte: Krugman’s attack has two goals. First, he thinks financial markets are ‘inefficient,’ fundamentally due to ‘irrational’ investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge ‘fiscal stimulus’ provided by multi-trillion dollar deficits. It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer. Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and Black-Scholes model, but not this.) There is nothing about ‘efficiency’ that promises ‘stability.’ ‘Stable’ growth would in fact be a major violation of efficiency. Efficient markets did not need to wait for ‘the memory of 1929 … gradually receding,’ nor did we fail to read the newspapers in 1987. Data from the great depression has been included in practically all the tests. In fact, the great ‘equity premium puzzle’ is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on ‘fat tails’ in stock returns. It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time,

When the Banks Stopped Lending to One Another and is sharply lower in bad economic times. As Gene Fama pointed out in 1972, these are observationally equivalent explanations at the superficial level of staring at prices and writing magazine articles and opeds. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of ‘optimism’ and ‘pessimism,’ can vary, you know nothing. No theory is particularly good at that right now. Crying ‘bubble’ is no good unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row. But this difficulty is really no surprise. It’s also the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what ‘fundamental’ or ‘hold to maturity value’ is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked. More deeply, the economist’s job is not to ‘explain’ market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? ‘A wave of positive sentiment.’ Markets went down? ‘Irrational pessimism.’ (And ‘the risk premium must have increased’ is just as empty.) Our ancestors could do that. Really, is that an improvement on ‘Zeus had a fight with Apollo?’ Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far. But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse. Free markets are the worst system ever devised – except for all of the others. Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital. He can’t quite come out and say this, but he does say ‘Keynes considered it a very bad idea to let such markets … dictate important business decisions,’ and ‘finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’’ Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind. To reach this conclusion, you need theory, evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market. Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment? As David Wessel’s excellent In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts. In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants. If bankers are, in Krugman’s words, ‘idiots,’ then so must be the typical treasury secretary, fed chairman, and regulatory staff. They act alone or in committees, where behavioral biases are much better

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Finance at the Threshold documented than in market settings. They are still easily captured by industries, and face horrendously distorted incentives. Careful behavioralists know this, and do not quickly run from ‘the market got it wrong’ to ‘the government can put it all right.’ Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book ‘Nudge’ go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.

2.3.10 Alternative Perspectives The global financial crisis is an occasion for other paradigms to argue their case, each of them in their own way claiming to represent a path away from or beyond capitalism’s supposed impasse. Often their approach is self-described as ‘ethical’ or ‘social’, a tag that more than implies a view that ‘normal’ finance is both unethical and unsocial. To be sure, one can distinguish between a financial and a social profit, for example, but these do not necessarily mean different things. They could be two ways of looking at the same thing. It would be more useful and accurate to distinguish between embedded and emancipated or abstract finance, than to assume that what is abstract is also unethical and unsocial. It may simply refer to leaving behind one version of ethics and social before another is discovered. It is in the nature of abstraction that it repudiates or eclipses the matrix (or matrices) from which it has abstracted itself. This is what adolescents do when they deem themselves more important than their parents or teachers. But once one has put oneself on the map, claiming to be the centre of the universe, the question arises: how is one, with all one’s uniqueness, to serve humanity? Few people are paid just for being unique: they are paid because their uniqueness enables them to bring something to the table that the rest of us need. Modern capitalism, along with abstract financialism, can be seen as an adolescent phase of development. Its purpose is to eclipse all other value systems in order to bring the whole of humanity to a spiritually neutral place in which no one version of spirituality holds sway over any other, but in which everyone mutually recognises everyone else. One needs to ask, therefore, when a form of finance or economics claims to be ethical or social, exactly what is the value system it refers to and could that not also be achieved by a metamorphosis of capitalism. Indeed, at the end of the day, if one makes a list of all the criticisms that non-capitalist perspectives proffer one has the equivalent of a photographic negative of what capitalism has yet to address. Opposing shareholders to stakeholders, for example, is too simplistic. In a global economy, a business that ignores the profits it makes because it has been able to socialise costs would be unwise to bank on such profits permanently. It is similarly old hat to oppose the long term to the short term. Many do, of course, and yet in September 2009 an important BBC Radio 4 broadcast featured many people from finance saying it was almost amateur to think in such terms. Better is to think of both, not to prefer one over the other.


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Admittedly, on the road to abstraction finance does prefer the short term to the long term. Unlike classic German banking, British banking does prefer to stay ‘out’ of the enterprises it lends to. But once abstraction is complete, re-embeddedness becomes a necessity. The concern is mainly that it should not entail a walking backwards in history, a return to unconsciousness. But the problem with many alternatives is just that, namely, they require us to accept an ideology or religion or given set of values, rather than discover any universal value within finance. Thus, monetary reformists rely on statism, especially state-issued credit; Japanese, Korean and Chinese economics rely on forms of corporatism (as does the American business model); Islamic economics relies in fact on Shari’a law. Islamic economics in particular has long been critical of western finance and sees the global financial crisis as an opportunity to argue its case. In this author’s opinion, however, the issue is whether the claimed discrepancy between ideals and behaviour is overcome by adherence to an external moral standard (in Islam’s case the Koran and Shari’a law) or by recourse to state subsidies of one kind or another, ranging from deposit insurance to fullfledged bail outs. Or whether we may yet arrive at universal precepts, albeit anarchically or, better put, autopoietically, achieved, which is what western economics is presumably counting on. And it is worth pointing out that Islamic economics nevertheless looks to England and London. To quote Mushtak Parker, writing in a special issue of The Times on 27 November 2008: ‘Most Islamic bankers would agree that London and English law is their preferred jurisdiction when structuring international deals. British financial expertise … is arguably the best in the world.’ It is only capitalism that risks all on the individual, that looks to the individual as its essential ‘motor’. The problem therefore is almost as simple as figuring out how one goes from ‘me’ to ‘we’ (to use John Davis’s (2004) formulation) in the way we behave economically and financially, from asserting oneself above the community, to being recognised by the community. In this regard, a further dimension needs to be reckoned with, namely the technical basis of economic life. Whatever one’s philosophy or uniqueness, it cannot today entail its imposition on or required acceptance by anyone else. When a loaf of bread is exchanged for some money the parties to the trade cannot be required to be of one religion. Trade necessarily entails a moral no-man’s land. That does not mean it is immoral or even amoral. In fact, it calls on all moral perspectives to enhance themselves by including rather than negating the others. The fact of financial history is that the more cultural diversity is to thrive, the more must the technicality of economic life become the same. And it is far from clear or certain that ‘ethical’ or ‘social’ financial systems are technically so different to ‘unethical’ and ‘unsocial’ systems. The responsibilities of a fiduciary agent, for example, do not operate in the one but not the other. ‘Creative’ accounting is not a phenomenon only to be found in western finance. To focus alternative economics on food and localisation is understandable enough, but one needs also to explain how the world’s airlines are to be organised, or global car production. It is also quietly insulting, if not arrogant, to claim the moral high ground in finance. There are many people in finance and much in its techniques that is of a high moral order, or presupposes such. Central bankers, for example, see themselves as ‘enlightened princes’ in matters of price stability, possessing, or at least representing, a state of awareness in advance of the population generally. Such has always been the responsibility of an elite

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in the strict sense of the word. An elite is required to bring ‘the rest’ of a population up to its level, not ‘privatise’ the information they have. ‘Elitism’ is a reference to the latter. The term is not a description of the nature of a true elite, but of a failed elite. Furthermore, nowadays citizens generally ought to be able to match the consciousness of the elites of old, demonstrating ‘enlightened’ behaviour born of their own literacy and sense of social responsibility. That is why, in this book at least, the emphasis is on the adult phase of capitalism, the awakening of every individual to his effects in economic life so that he can become aware also of his motives. For the most part we remain just actors, using the economy without consciousness of doing so. But if we can take this step we will discover in our own behaviour the well-springs of all those aspects of life, so-called ethical and social, that immature, adolescent capitalism leaves out of account. If one becomes a Buddhist and so practises Buddhist economics, for example, it comes down to compassionate behaviour, suffering with the others, not just letting the devil take the hindmost because ‘world prices’ have moved against the coffee market. Similarly, just as Islamic economics does not hold an individual entrepreneur responsible if the conjuncture is the cause of a problem, so western finance does not have to foreclose on a business at a moment of weak balance sheet. It chooses to do so because of a narrow mindset. And yet, what is the rationale of saving a bank if it threatens systemic collapse, except a sense that some businesses are crucial to the wider economy? Is it such a huge leap to see that every business is in fact linked to the wider economy in this way. Moreover, what, economically, is achieved by selling someone’s house out from under him when he cannot meet his mortgage payments? The individual is ‘punished’, but at what waste? What costs are unnecessarily incurred? What opportunities thwarted? If it is going to do anything with taxpayers’ money, why could a government not simply provide mortgage relief to the individual against a pay-back scheme where he ‘learns’ the lesson (if that be the point) of playing loose with credit and real estate. It does not always do us justice to cry ‘moral hazard’, to default to negative scenarios just because in the back of our minds we have a low opinion of human nature. We could equally invent ‘moral literacy’, or some such term, and devise schemes that encourage alertness rather than sleep. If in this book we have not given serious space to the alternatives to capitalism and financialism, the reason is specific. In their different ways, they suppose western finance is unable, out of itself, to engender ethical conduct. This is not an assumption we make. Indeed, if the many things capitalism is accused of leaving out of account are to be addressed they will require a going through modern finance, not a going round it. Others have extensively and eloquently argued the case for non-capitalist perspectives, so the focus of this book is elsewhere. It is not that one is unaware of or unsympathetic towards the many critiques of capitalism. The point is that they arise because capitalism is failing to undertake its own further development, to include what it has necessarily to date excluded. To internalise what it has externalised. But a single global economy will not allow this to continue. Rather, therefore, than look to other economic paradigms, preferring, for example, Islamic economics (to mention the most powerful), why not ask how can capitalism on its own terms address the problems its critics point out? Clearly if it cannot or will not then we have a serious problem on our hands. But this judgement cannot yet be made because the debate is still framed in terms of preserving or replacing capitalism rather than guiding it through a metamorphosis, a metamorphosis


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that, if it is to be truly grounded, has to pass through the individual’s own awareness and behaviour. In this regard, it is telling that in an age when the individual could and should become the locus of economic and financial evolution, one so often refers (and defers) to ‘the authorities’, instead of seeing one’s own behaviour as capable of being authoritative. Authoritative in both senses – that we can be the authors of more conscious finance, and that were we to become so our behaviour would evince inherent morality. It would be moral by dint of consciously directed behaviour, not because it conformed to some external religious or political edict.

2.4 Technical Details The sequence of events and the myriad processes that culminated in the global financial crisis, along with practitioners’ explanations of them, is one aspect of the story. Another is what one might call the ‘technical details’, of which the following list, while not claiming to be exhaustive, is very representative of today’s financial system.

2.4.1 List of Technical Details Epistemology Faux physics Modelling Computer modelling Model dependency Interdependence via IT Human Weaknesses Greed re. fees Liar loans Dishonesty Conflict of interest Fraud Cronyism Ephemera Confidence Moral hazard Obscurity Reversed Causation From savings to money markets Consumer over-borrowing followed by government rescue Consumer debt Precarious information Asset price funding returns liquidity to financial sector

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Theory Efficient markets failure? Intellectual capture Free market ideology Macro Policies Central bank independence Role of London Regulation Regulatory avoidance Over-complex regulation Light touch Split regulation Financial deregulation Repeal of GS Act Tripartite Rules and Practices Ignored high risk mortgages Changed rules (IPOs and mortgages) Sub-prime Ignored warnings Products Derivatives CDSs CODs Techniques Short selling Presounding Leverage Hedge funding (Re)securitisation Future markets Agencies Agencies Credit rating agencies Carry trade Single individuals Threshold Economics Excess liquidity Ever-rising real-estate values Global chasing of real-estate markets


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Banking Parallel (shadow) banking Short-termism Beyond banking

2.4.2 More on Methodology The list was initially derived from the commentaries presented in the previous section. It was then organised firstly so that each detail is only mentioned once (even though it may have been identified more than once, e.g. conflict of interest), and secondly to introduce some degree of categorisation. The categories are those that the data themselves seemed to suggest. Doubtless such triage could be undertaken differently, but the point here is not to define what is or should be in the world of finance, but to describe and characterise that world in a way that is reasonable. That said, whether the categories used here, the way they have been sequenced and the story they purport to tell are convincing to the reader is for him or her to decide. The purpose of the list is to do no more than provide (a) an overview of the complexity of finance and (b) a sense for what seems to be its obvious gesture, namely a strong degree of abstraction. Again, before one says life should not be so abstract and begins to pine, and even opine, for a return to earlier times, the question needs to be asked: ‘Maybe we have extricated ourselves from the mores of yore in order to enter into a new reality, one we consciously author rather than inherit from the gods or monarchs in exercise of their divine right?’ In this sense, the list and the brief descriptions that accompany it are like the unfamiliar language of an equally unfamiliar world as it comes towards us from out of the future. We are inclined, of course, to explain this new landscape and its terminology in the terms to which we are accustomed. But the challenge is to still this inclination in order that a more refined sense of finance may appear, both in our minds and in our behaviour. So that finance may speak to us, rather than we to it. As with the chronology, the list aims at neutral exposition. By ‘technical details’ one means a range of topics: how the banking system works, the role of monetary policy, the concept of financial stability, the nature of financial ‘products’, the place of agents, the psychology of investing, and so on. Of these, however, as well as for the reasons given earlier, the last shall be excluded as outside our province, partly on the grounds of lacking competences but also because one wonders if behaviour would have been as it was had there been more awareness of the fuller nature of financial techniques. The list is deliberately random, even arbitrary, except that the all-of-a-piece nature of global finance hardly allows one the luxury of separate elements. While one may wish to pick and choose, attributing culpability to one aspect or another, the likelihood is that this is a technical impossibility. The underlying question has to be: which came first, the techniques or the ballooning of finance? Again, the answer is likely to exhibit reflexive causation. Finance is more membrane or organism than machine. To a certain extent, therefore, one can begin the list anywhere and reshuffle it as one’s fancy takes one. The question to ask is: ‘Could any one of these techniques be given up without deflating the balloon, bursting the bubble or collapsing the system?’ More to the point, despite intense scrutiny and critique, what part, if any, of the global financial

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system has in fact been got rid of? Since such technical details are an integral part of modern finance, their continued presence presumably means the global financial crisis has gone quiet rather than gone away.

2.4.3 A Story (of Abstraction) Emerges The chosen triage does of course reflect the author’s sense of things. Since bias is often better expressed than suppressed, made conscious rather than hidden, the following story of emerging abstraction is what the details seem to illustrate. It is for the reader to decide how real or convincing is the linking narrative.

Epistemology Faux physics An essential and rational starting point for understanding modern finance is the thoughts we have about it and whether these thoughts comport with or distort reality. Economics by and large models itself on the ‘hard’ sciences, because it imagines it can approximate normal physics, even though nothing in its purview is sense-perceptible. One could therefore begin with epistemology and faux physics in particular.

Modelling Computer modelling/Model dependency/Interdependence via IT From this it follows, as night does day, that one has then to model the economy as if it were something real, so that this model, albeit an approximation of reality, is assumed to be reality. Now one is at a remove, for we are not in the world of testing against external givens, such as the speed of an apple when falling to the ground. We are testing against assumptions and using computers and mathematics to do so. Mathematics, notably, operates independently of external sense data. A model might not fully represent reality and in that sense not be ‘good’, but it must exhibit internal logical consistency if it is not to be ‘bad’. The problem is clear already, we begin our reasoning at a remove and at that point what we think has no less reality than what we are trying to approximate. We run two important risks here, that our models are not a match for reality (though a reliance on mathematics may obscure this) and that, adrift in the realm of reason, we become dependent on our models. We prefer them over reality and go on, in fact, to change reality to match our model. Economics has the power, in other words, to make its equivalent to apples (i.e. values) fall faster or slower.

Human weaknesses Greed regarding fee /Liar loans/Dishonesty/Conflict of interest/Fraud/Cronyism In such a world, once the Pandora box of finance is opened all manner of problems put in an appearance – of a kind which would have the ancients saying ‘we told you so’. The most important thing here is that once the ages-long constraints on human behaviour fall away, we become exposed to predictable human weaknesses that it takes considerable personal maturity and discipline to master.


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Ephemera Confidence/Moral hazard/Obscurity Another is that ephemeral (or subjective) factors come into play that physical economics does not admit because it does not need to. The laws of physics pass outside the human being. Not so, those of finance.

Reversed causation From savings to money markets/Consumer over-borrowing followed by government rescue/ Consumer debt/Precarious information/Asset price funding returns liquidity to financial sector With finance come all the problems associated with reflexive causation (discussed in detail later), problems that cannot be understood, let alone remedied, if we insist on normal causation.

Theory Failure of efficient markets hypothesis?/Intellectual capture/Free market ideology The greatest risk is that we will lose our bearings and find ourselves all at sea. In such a situation, try as we might, it is not easy to capture in our mind’s eye all the factors at work, let alone devise a cogent explanation of them. Much then depends on the theories with which we underwrite our ideas and even policies. Chief among these has to be the efficient markets hypothesis and its cousins or supporting cast, such as rational expectations, BlackScholes, and so on. One might not like or agree with such theories but when it comes to modern finance who can better them? Who, also, can avoid becoming spellbound by their explanatory power, especially when advanced in the wider context of free market ideology?

Macro policies Central bank independence/Role of London If it were only a question of contemplating the economy, such things might not matter. But the economy has to be managed and so no theory can exist except that it is at the same time the justification of policy, especially macro policy. In particular, the global financial crisis can in no wise be disassociated from the global financial architecture, and also the global financial geography with London at its centre.

Controlling regulation Over-complex regulation/Split regulation/Tripartite All-pervading, the global financial architecture is an admix of regulation and free markets (which is a form of regulation itself, of course). The way in which regulation is conceived, organised and applied is thus crucial to the way human beings behave both individually and in aggregate (markets).

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Enabling regulation Regulatory avoidance/Light touch/Financial deregulation/Repeal of GS Act/Ignored high risk mortgages/Changed rules (IPOs and mortgages)/Sub-prime/Ignored warnings But regulation should not be thought of only in terms of external imposition or control. It can as easily be enabling or prompting. That is to say, just as it can constrain behaviour, so it can set it free by, for example, relaxing, ignoring and even contradicting the norms of traditional prudence.

Products and techniques Derivatives/CDSs/CODs/Benefits to the financial sector benefits us all/Short selling/Presounding/ Leverage/Hedge funding/(Re)securitisation/Future markets Whether deliberately or accidentally, once regulation is relaxed the constraints of yore no longer operate and – seen from the ancient past – our ever more abstract way of being and behaving becomes reflected in products and techniques that are all at a remove from a physical/real economic point of view.

Agencies Agencies/Credit rating agencies/Carry trade/Single individuals Such remoteness from ‘normal’ reality is further reflected in the use of agencies – the dangerous split between being responsible for something, detailed knowledge of which one depends on others for. More dangerous still, information gaps can open up and be exploited. Worse, global-scale events can become vested in the actions (or inactions) of single individuals.

Threshold economics Excess liquidity/Ever-rising real-estate values/Global chasing of real-estate markets Finally, our alienation undermines our ability to observe the true nature of processes that are central to modern economic life and which in many ways give rise to its financial aspect. Two deserve special mention because they are also key to how one can go, not backwards from abstraction to earlier forms of stability, but forwards beyond abstraction, to a stability that appears to be inherent rather than created from outside. (See Chapter 11: Deep Accounting.) They are the fact that the individuation and emancipation of humanity yields ever-greater amounts of surplus capital, excess liquidity. This is a source of great value that cannot be stopped up. But nor, to mention the second example, can it be rerented back into the physical economy (and real estate in particular) beyond a certain amount? To use an image from Steiner, every wheat harvest of, say, 100 sacks of corn only needs one sack to be held back in order to produce the next 100. The other 99 must be used up. This is the nature of economics at the interface between the real and financial economies, the nature of threshold economics.

Banking Parallel (shadow) banking/Short-termism/Money markets/Beyond banking Very finally, the entire nature of banking becomes transformed by the onward march of financial


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history from being embedded in and dependent upon the physical economy, to being an autonomous, shadow or parallel operation. At this point the cry goes up to distinguish between retail and wholesale, for example, which is understandable enough. But it will be of no avail to try and make wholesale behave as if it were retail. At best, the banking system, to the extent that it continues to exist in its conventional sense, can be confined to retail banking; but the wholesale needs to be conceived as part of a process rather than a system. Then it will not be described as a shadow, but as belonging to a different order of things. At which point an intractable problem begins to become tractable, because the ideas we form about it will become a fit for what lies behind it, not a straitjacket we would impose upon it.

2.4.4 Products and Techniques The list of technical details included a number of products and techniques, some of which merit, if only briefly, further focus in order to underline the abstract nature of modern finance that is being stressed in this account. Our purpose, to repeat, is to acquaint one with this abstraction before one reacts to it. Moral indignation seldom advances objective inquiry. The examples below are baldly stated on purpose. The examples are baldly stated on purpose. Others could be mentioned, but those cited serve the purpose here, of illustrating abstraction.

CDOs Collateral debt obligations (CDOs), for example, were sold to insurance companies, resulting in a 1:40 pyramid centred on London. Claiming to be without risk (causing practitioners to feel silly if they wondered how), they allowed the normally tenacious link between the two sides of a balance sheet to become tenuous. Not unconnected, but reliant on an element outside normal view. For example, McKinsey’s accounting of global financial assets excludes derivatives.

Derivatives Derivatives are agreements to shift risk among market participants in exchange for a fee. This feature of making the real basis of transactions remote is worth noting.

Computer modelling Financial firms have come to rely heavily on ‘value at risk’ computer programs using past experience to anticipate possible losses. These methods provided reassurance to investors following the 1987 stock market crash and the rescue in 1998 of Long-Term Capital Management (LTCM), a big hedge fund guided by Nobel prize economists. In a pattern repeated in the 2007–2008 sub-prime/derivatives crisis, LTCM employed portfolio theory in using $2.2 billion in investors’ funds as collateral to buy $125 billion in securities and then pyramid this paper as collateral in exotic transactions worth $1.25 trillion. The methodology gained prestige during the decade October 1998 to June 2007, when banks’ share prices rose by nearly 60 per cent and their business volume tripled.

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The consequence, according to Andrew Haldane (2009), Executive Director, Financial Stability, Bank of England, was that ‘many risk management models developed within the private sector during the Golden Decade were, in effect, pre-programmed to induce disaster myopia.’

Short selling (source: Investopedia) Short selling means going long on an investment because one buys a stock believing its price will rise in the future. Conversely, to go short is to anticipate a decrease in share price. But ‘short selling’ refers to the selling of a stock that the seller does not in fact own directly but has promised to deliver. When you short sell a stock, your broker will lend it to you. The stock will come from the broker’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds credited to your account. Sooner or later you must ‘close’ the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money. Here again remoteness (or super-abstraction) is a feature. As is the danger of [exponential] events if the practice of an individual becomes that of a ‘herd’, let alone of the system as a whole.

Presounding (source: Financial News) The ‘presounding’ of deals in the bond market is legal and involves an investment bank approaching an investor with basic and often vague details of a potential transaction to gauge demand. In and of itself and in ‘normal’ conditions it can be seen as benign, notwithstanding the potential it affords for unscrupulous trading. But when turmoil occurs in credit markets the number of deals involving presounding is likely to escalate.

Agencies It is part and parcel of modern finance to use and become reliant on agencies; that is to say, to share awareness of a transaction. This can be as dangerous as sharing a car when it comes to knowing if there is oil in the engine. The one hand may not know what the other is doing. Moreover, agents have their own interests in mind. They may not downgrade credit ratings, for example, if their own turnover and/or reputation will be adversely affected. They may not be able to keep apart auditing and consulting roles. Their appointment to or away from government posts, even after a due period, may not break the link between their now-public, now-private allegiances. Principal-agent concepts may theoretically address such problems, but people are, after all, only people.

Repeal of Glass-Steagall in 1998 The 1933 Glass-Steagall Act was introduced because at the time financial regulation was a nascent science and the financial community seemed unable to distinguish between wholesale and retail banking. Nowadays it is thought that both the science of finance and


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the behaviour of players have matured and that open, competitive environments keep everything in view. It is to be wondered, however, if we are, collectively, as grown-up and disciplined as we might like to be.

Central bank independence The general acceptance and therefore reinforced ascendance of operational central bank independence, more technically, operational independence, has been a feature of the 1990s. The argument ran that central banks should be freed from the political imperatives of governments on the grounds that financial market competition is both a better allocator and a better regulator. People needed to be free of nanny state economics and the risk had to be run that, when left to their own devices, they would not dare behave imprudently.

Confidence One might not normally think of confidence as a technique. But techne refers to action and action in finance is ephemeral. Confidence extends maturity; loss of confidence extinguishes it. Confidence, however, is a form of financial doing, as can also be talking the market up or down. Meta-confidence, if you will.

Moral hazard The concept is a classic of monetary theory. Instances of the potential for it are equally well known. To name a few: bank deposit insurance, known governmental willingness to rescue a bank, taxpayer funding of what would otherwise be shareholder losses, the idea (even if disowned in small print) that house values can go ever upwards, the notion of ‘super-profits’ as if they were legitimate economic events rather than warning signals, etc. (Under this heading one should also include conscious and therefore deliberate imprudence, such as self-certified mortgage applications being known in the trade as ‘liar loans’.)

Leverage This is a crucial concept. Borrowed from physics, it has the ‘reputation’ of requiring mass in order to have effect and in the physical world, of course, one can only move the fulcrum so far towards the mass or downward pressure before no further upward movement becomes possible. However, finance is not physical and it is recursive. While we imagine some kind of downward pressure is applied in order to leverage a product, it may well be that the product, so to speak, lifts itself off the ground, thus exerting downward pressure on whatever it is linked to. This is or should be par for the course in our abstract stage of economic and financial evolution, only it seems not to be understood as such. As a result, many practices today exhibit a behaviour which is not truly explained by physical leverage and therefore in themselves constitute a danger if other realities are at work, such as in particular the credo that financial liberalisation is tantamount to, and even a proxy for, human freedom. The point is not made negatively, but it is deliberate because many financial conceptscum-techniques can arguably be understood to belong to such a world. To name some:

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Hedge funding – the borrowing of money to multiply positions (more unkindly, ‘bets’). (Re)securitisation – the selling away of repackaged debt for a fee. Future markets – discounting for projected risk.

Excess liquidity Last but by no means least in this glossary of potential untowardness is the concept of excess liquidity and the knowledge that it (a) exists and (b) is increasing. It surely should set bells ringing when, rather than inhibit or in some way lessen the presence of excess liquidity, one tries to invest it for a fee if not a return. Liquidity, by definition is inactive, non-productive money normally known as cash to gamer to income. If one derives an income from it, let alone a full livelihood, let alone a substantial Christmas bonus, should one not wonder what is going on (even as one spends the money)? Is there not some contradiction of financial principle involved? The question is not a moral one. It is technical. If the apogee of humanity’s long journey of emancipation is worldwide excess liquidity is there not a message to be heard here? Liquidity might exist in excess while emancipation has yet to be achieved. But afterwards? In other words, is ‘excess liquidity’ the right name for the phenomenon, or is it masking some other reality?

High-frequency trading Definitions differ, but at its most basic, high-frequency trading implies speed: using supercomputers, firms make trades in a matter of microseconds, or one-millionth of a second. Goals vary. Some trading firms try to catch fleeting moves in everything from stocks to currencies to commodities. They hunt for ‘signals’, such as the movement of interest rates, that indicate which way parts of the market may move in short periods. Some try to find ways to take advantage of subtle quirks in the infrastructure of trading. Other firms are ‘market makers’, providing securities on each side of a buy and sell order. Some firms trade on signals and make markets.

Off-balance sheet Buckle and Thompson (1992) define off-balance sheet business as that which ‘guarantees a contingent commitment and generally an income to the bank without … being captured on the balance sheet under conventional accounting practices’ (73). Typical examples are: non–activated loan commitments, guarantees, swaps and hedges, securities underwriting, and foreign exchange dealings. Such business is accompanied by ‘[a] desire to escape capital adequacy controls,’ (78) which, especially since 1988, has in turn invited ongoing efforts to harmonise capital controls. Off–balance sheet business is characteristically fee-generating, enabling those concerned ‘to earn income without having to source funds or set aside capital or reserves.’ (Khoury 1990: 195). Swary and Topf (1992) attribute the rise in off-balance sheet business


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to ‘the development of [the derivatives] markets since the late 1970s … Financial futures … exist for a wide variety of instruments – debt, equity, currencies, and even indices … They have revolutionised risk, for example, by vastly increasing the importance of off–balance sheet assets as opposed to traditional assets’ (276). They point out, however, that ‘off-balance sheet activity, by its very nature, is difficult to capture accurately in traditional financial statements … greatly complicat[ing] the task of financial reporting …’ (344). Khoury addresses this in the following way: At issue here is the definition of what constitutes adequate capital because no capital ratio is adequate if the decisions on the asset side are substandard or if a bank run hits … The other issue is the definition of capital. Today it includes perpetual bonds, perpetual FRNs and perpetual preferred stock. This most liberal of definitions is troubling indeed because it creates an ‘equity illusion’ and increases the probability that creditors can force banks into liquidation … What should be considered is some form of netting schemes in which the natural hedges that off–balance sheet items provide for on–balance sheet items is accounted for. (1990: 228)


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3 2007 – A Threshold in Financial Evolution

Was 2007 just one year among others? Or does it have deeper economic historical significance? Could the problem have happened earlier? Will it be repeated? Or is it a one-off in monetary evolution? The background was widespread financial liberalisation, a movement that culminated inevitably in the creation of a seamless, single world financial circumstance. Previously, financial crises were quarantined. What then changed? Traditionally, the extent of credit is governed by ability to repay, affordable rents in real estate, interest rates that stay well away from zero per cent, and all manner of regulation. With the financial liberalisation of the 1980s came the removal of many such constraints, largely on the grounds that economic life should be conducted by and between individuals, not their governments. Was this merely the ascendance of right-wing politics, or did it portend a new kind of economic consciousness?

3.1 Preamble The thesis of this chapter is that at some point in its history humanity was bound to arrive at the threshold of a new kind of economic reality. In short, the global financial crisis is a defining moment in human history, if not evolution. Humanity finds itself at the threshold of its future, at the brink of an abyss, at the edge of a precipice, confronted by a yawning gap, a break in continuity, beyond which lies the future. It has been brought to this pass by recent financial developments, the nature of which are highly abstract. Many recoil in moral indignation at this circumstance for which they hold nefarious groups and bankers generally accountable. Others see it as the ultimate pain before the ultimate gain. At last, the shackles of deism have been thrown off and even thrown away. It is time to see what the market will reveal to us. What is certain is that few people take it lightly. And yet, whatever their persuasion, whether of the Left or the Right and most points in between, most people see the global financial crisis as a quasi-natural event, a problem to be fixed. Unpredictable, perhaps, but ultimately manageable. One would like to think so and much is riding on that being the case. But it can be seen in quite another light – as a break from the past into a future that may not, in the fullness of time, allow persistence in the ways of thinking and behaving that have been valid until now. To wonder in this way is not to make a mountain out of a molehill. It is to share a question which, if subsequently found to have been useful, it would have been irresponsible not to articulate. This chapter therefore looks at the global financial crisis not in order to explain it, to say what it is (or was), but only to describe what it might represent.

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‘What ifs’ are the stuff of economic and financial planning. This chapter is a ‘what if?’ that no one else may have contemplated. No insistence is made on the hypothesis it puts forward; nevertheless, one hopes that it will provide some aid to understanding and indeed navigating future economic life. Having profiled, hopefully faithfully, the global financial crisis in outer terms – its chronology, technical details and the way it is generally understood by financial professionals of various kinds and of various schools of thought – it is clear that, whatever their differences in regard to it, everything turns on whether the efficient markets hypothesis (and all that lies behind it) has had its day. In this chapter we change tack and consider the global financial crisis in the light of one of Rudolf Steiner’s key ideas, namely, that human history to date has been marked by the emancipation of the individual from all manner of previous social matrices – tribe, family, nation, etc. We have trodden this long road out of deism because we are on an even longer journey towards freedom (a term which, for Steiner, should never be spoken without its concomitant, responsibility).

3.2 The Long Road to a Single Global Economy This basic process informs many details – freedom of expression, democracy and property rights being obvious candidates. It also has a very evident counterpart in economic history, namely that initially local economies have been compelled to open up to and coalesce with their ‘surroundings’. Thus one can see that local economies melded into regional and countrywide economies, that these eventually took the form of national economies (several of which behaved as empires) until, towards the end of the nineteenth century, they were bound to coalesce yet further into a single global economy. This, the underlying fact and presence of a one-world economy, has been the cardinal feature of economic life ever since, despite the persistence of economic nationalism and even economic imperialism throughout that time. Such a condition, however, entails a fundamental problem that is both epistemological and geo-political: a single, world economy cannot be severally explained or severally operated. That means it needs to be understood in its own terms, that is to say, economically, and not in terms of how it might be used to serve other purposes – principally ideological or political. But what are those terms and can they be identified in and among the current, albeit competing explanations that otherwise prevail?

3.2.1 Two Strands in History This problem will not be noticed, let alone resolved, however, unless two strands of history, mistakenly now entwined with the economy, are discerned and given their proper status. One is the implication of the state at the moment that national economies arose – the idea that the state should have macro-economic responsibilities rather than private individuals collectively (not using the term in any soviet sense). This will not be resolved unless and until the rightful jurisdiction of the state is seen to be what Steiner calls the rights life* which for him moreover should remain nation-based. An example is property rights, on the clear enunciation and upholding of which economic activity depends.


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The second is the transposition of freedom and responsibility from a spiritual or cultural key to an economic one. Individuation presupposes, even begets, the division of labour, the overarching fact that all economic life is ultimately the joint undertaking of humanity as a whole, with every individual included because of his comparative advantage, what he can contribute to society that no one else can. Understood in the first place not as economic concepts, but as images of mutual sovereignty, their true meaning is deeply historical, not merely technical. There can be nothing dismal about an economics that celebrates the entire family of man by celebrating the individuality of each member of it. This is where division of labour is leading us, to a world in which every human being recognises and hallows every other human being.

3.2.2 The Shell of a Nut For such a history to make sense, however, one needs to have a feeling for how economic life is at bottom a spiritual event; it is whatever it is because of the image we have of ourselves. For Steiner (1996a) the matter was clear: The economic life of a particular time, and the spiritual life of a particular time (the times are not quite identical), hold the same relation as a nut to its shell; the economic life is invariably the shell which the spiritual life has thrown out. It takes its cast from the spiritual life. Today’s abstract economic life is, therefore, the product of an abstract spiritual life. That is why today we are in an age of abstract thinking, of life-remoteness – unreal conjunctures and such things.

Individuation brings abstraction, and in an abstract civilisation, finance follows suit. It reflects back the way we have become. If we would that finance were otherwise than it is, we need to envisage ourselves differently, not hold the mirror to account. This we will not be able to do, however, unless economic life and rights life are allowed their distinct, but interwoven jurisdictions. Nowadays and even more so in the future, just as a nation cannot go global except that it becomes megalomaniacal, so the economic life can no longer remain in the confines of nations, not even nations in cohort. Once this is understood the economy as a whole and its abstract representative, ‘the market’, will be seen to be the place in which the enormous diversity of mankind becomes conscious of itself but needs to do so on a global, universal scale. Diversity becomes in fact the ‘driver’ of economic life, in lieu of inter-nation trade. As a concept, diversity, of all kinds, ought to have a place in the economic heavens as exalted as division of labour and comparative advantage.

3.2.3 Excess Liquidity Now – the period of the global financial crisis – is not the time to be financially Luddist. But nor is it appropriate to press on regardless as if finance were the new deism. Finance is both hiatus and awareness, a yawning gap and the bridge across it, the vestige of outmoded meanings and the dawn of new ones. Like its little brother, arithmetic, it can link us back to Abraham, the father of arithmetic, as surely, presumably, as it can cast our minds equidistant forwards! It is for this reason that, in terms of Steiner’s analysis, one can expect, as the crucial mark of our times, the phenomenon of burgeoning surplus capital. In that perspective,

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a moment is bound to arise in history when there will simply be too much capital in the world for its (capital’s) own good. If one accepts Steiner’s thesis, or at least a clear implication of it, this is a foreseeable, predictable event. It belongs to the logic of economic history. The question that needs to be asked, therefore, is whether this is what is behind the presence in today’s world of ‘excess liquidity’, that being the other main phenomenon to which our various commentators drew attention. The excess liquidity of today is not a phenomenon in the abstract. It is the crown or flower of processes that have been long in train, culminating in the financial liberalisation of recent times. Much of modern economic life is the way it is because it is predicated on the concept of free markets and free competition, above all competition in finance. The idea of financial liberalisation is to open, by financial force if necessary, all the markets of the world so that the cold wind of price-driven efficiency may blow freely through them. This is the last stage in a long process intended to rid humanity of its ancient constraints, rigidities and inefficiencies. That is the logic of ‘outgrowing’ guilds, of enclosures, of undermining the power of unions, of lifting restraints in the movement of capital, and so many other aspects of Anglo-Saxon economic history. Like it or not, right or wrong, progressive or socially reprehensible, reformist or ruinous, once this has been achieved, so the argument runs, humanity will find itself in a brand new landscape in which the wisdom of the market will lead us forwards to our future. What that future is, none can, or should, tell. It will be revealed to us once we let go our preconceptions of or pretentions about it. It is part of this philosophy and outlook to break down, remove or subvert all boundaries until the economic life of the world is fully open. But open to what in the end? Trade with non-terrestrial partners? If not, and the prospect seems slim or at least remote enough not to be relied upon for immediate cash flow purposes, then the worry is that the opening up of markets will lead to there being no boundaries, save those of the world as a whole. This is why the global financial crisis is an epistemological event: it leads us to an unbounded world, the match for which, presumably, has to be unbounded thinking. But what does that mean in fact?

3.2.4 From Competition to Competition Not unsurprisingly, the literature on financial liberalisation, central bank independence, et al. is characterised by frequent recognition that supranational finance implies coordination and co-operation, rather than endless competition. The more central banking operates apolitically, for example, the more it acts in the best interests of the economy it represents. This does not necessarily mean acting in competitive mode, so much as out of a sense of global economic partnership, or, to put it in more usual language, in the spirit of internationally co-ordinated monetary policy. Although it was some 30 years ago, Gordon Richardson, when Governor of the Bank of England, gave a lecture in which he spoke clearly of this important dimension, using words that have lost none of their relevance. ‘It is, I think, difficult to believe that over the longer term so large a proportion of the world’s currency reserves will be willingly held in one national currency … There are two possible ultimate destinations of such a development. Either we move to a world in which there is a single reserve asset, but in place of a national currency we have a man-made multinational ‘outside asset’; or we move to a world in which there are several major reserve currencies …’ (1979: 13).


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This is still the situation, only it is not clear what should play the role of ‘outside asset’. The idea harks back to Keynes’s ‘bancor’, but still the discussion remains predicated on a replacement national currency, such as the yuan instead of the dollar. In a phrase reminiscent of Friedman’s earlier quoted paragraph, Richardson went on to say: We live in a world … [in which] each individual nation will continually be attempting to carry out more or less specific monetary or exchange rate policies and is likely to have … a specific balance of payments objective. These aims and policies will not automatically be mutually consistent. At the same time there exists neither the safety valve of the asymmetric accommodation of the dominant single reserve centre; nor an agreed set of rules of the game, nor a general willingness to abandon one of the policy objectives, namely any management of the exchange rate. It does not require much imagination to see the dangers and potentialities for tension in so over-determined a situation… We should see that our best hopes of success are to accept, indeed to develop collaborative arrangements. (Richardson 1979: 15, 16)

Notwithstanding the difficulty in bringing it about, international collaboration in the field of monetary policy should not be deemed irrelevant. It is a clear concomitant of a globalised economy, witness the Labour Party’s (1995: 17) statement that ‘[t]rue national sovereignty will involve a sharing of sovereignty within the realities of the international economy.’ Indeed, and as discussed later, the widespread assumption that central banks should become independent and give prominence to price stability makes no sense other than as a homogenous – i.e. shared – approach. The more global the economy becomes, the more similar will be the approach to finance, with national differences giving way to international similarity and channels of communication becoming reversed. As Mervyn King (2000) notes, there was a time when ‘the traditional channel for conveying City opinion to the government was through the Governor of the Bank of England … [but] this pattern of representation changed due to the internationalisation of financial services which led to the decline of “esoteric politics”.’ Much as a caterpillar changes into a butterfly, it is as if at the moment of its ‘triumph’ over ancient mores and practices, so competition changes into worldwide global cooperation – or at least a sense for it. In practice, this global dimension is often resisted or contradicted because, once there is only one economy (with, very importantly, its corollary of only one currency) how can competition between entities operate or even make intellectual sense? Finance, it seems, is a phenomenon in which the way the world ‘works’ and the way we think about it coalesce. Most people, even professionals and academics, think via their national language, placing more reliance on the £ or $ sign than the numbers that accompany them in order to know ‘where’ they are. It is perhaps only foreign exchange dealers who stay forever ‘aloft’ or undomiciled, reporting only minimal taxation in some ‘offshore’ jurisdiction. In the foreign exchange markets to identify too strongly with any one currency would be to sport an Achilles heel or wear an Icarus wing. Either way, the mortality of the dealer would be all too obvious in the amorphous world of global finance, where not only do esoteric distinctions, masquerading as ‘products’, keep its various elements distinct from one another, but so does knowing when those distinctions are operative and when not.

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3.3 Deeper Considerations The accounts included in the previous chapter under ‘Commentaries’ (Section 2.3) were not rehearsed in order to endorse the points of view they express, but in order to provide various perspectives on the one event, the global financial crisis. Precisely because the global financial crisis is a global phenomenon it is all-of-a-piece, making finding one’s place or ‘locality’ in it difficult to identify. Being ‘here’ rather than ‘there’, for example, or safe ‘inside’ the ‘British economy’ rather than on the ever-changing oceans of the world economy, is no easy matter. Whether one begins to the ‘Left’, where Will Hutton arguably sits, or on the ‘Right’ where Tim Congdon can be found is of no consequence. Ultimately, though it must admit various perspectives, the global economy cannot admit more than one paradigm, which is the one that ‘belongs’ to it, emerges from it. Insofar as they differ, the points of view presented do so for the most part because they are related to pre world economy ideologies. As such, each has a recognisable if partial claim to the ‘truth’ but none can lay claim to its entirety. We need a way of understanding modern economic life that all can own.

3.3.1 Methodology The preceding chapter yielded a considerable amount of information. The question is what to make of it all and whether associative economics can offer any insights not already known. Building on what has already been said, the aim of this section is to contribute to a furthering of cogent comprehension, this being the ‘test’ of all economics, associative economics being no exception. To this end, two particular tasks suggest themselves. Firstly, to consider the intellectual underpinnings of the global financial crisis – the theories by which people seek to explain or ‘justify’ it. Secondly, to identify the thoughts and ideas that arose when undertaking such a review, and that then serve as this study’s guiding intuitions. (Thoughts, to remind, that derive from the idea that for over 100 years now humanity has been within a single global economy, the underlying reality of modern economic life that is held back in perception and realisation by the propensity to divide (see 7.2: The Propensity to Divide).

3.3.2 Relationship to Finance Before proceeding to these tasks, our chosen methodology behoves us to hint further at the relationship to finance adopted in this book. As already touched on, when it comes to matters of finance human beings have for ages been given to scepticism, to seeing the devil at work. Many today are those who use an indignant tone when referring to modern finance, as if there is something by definition untoward associated with it. That is as may be, but ‘untoward’ presupposes a judgement of some kind, a judgement that may be precisely the element that prevents clear understanding of finance. Stilling this judgement, at least when premature, ill-informed or merely reactionary, is part of the challenge – if not indeed technique – needed to comprehend modern finance. Linked to this is the central thesis advanced in this book, namely, while the physical economy is subject to ‘normal’ cause and effect, the financial economy comprises countless intangible aspects, all of them subject to what Soros describes as reflexivity


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(see later discussion). As Mayer (1999) once put it, credit comes from all over. So much so that one cannot tell what causes what. For example, if one asks whether it is increases in excess liquidity that cause the invention of derivative products or the invention of derivative products that increases liquidity, the answer is probably ‘both’. There is also the special difficulty of not quite knowing whether the global financial crisis is real or not. Will the challenge it represents be smoothed away by the artifice (from a strictly financial point of view) of governments mortgaging future taxpayer revenue? Or will it be subject to be a recurrence or continuation – in soundbite terms, a so-called double dip or ‘w’ recession – because its deeper nature has neither been plumbed nor addressed? We may have been pulled back from the abyss, to paraphrase Larry Summer’s description of the crisis when speaking at the Petersen Institute, Washington, 17 July 2009; but brinks are not always to be avoided. Indeed, whether the global financial crisis is over or not may be a matter of the wish being father of the thought. As already noted, an important aspect of its genesis were the techniques, ranging from the rise of securitisation in the early 1980s to the (temporary) suspension of short selling in the autumn of 2008. The run-up to and character of the global financial crisis is impossible to separate from modern financial practices, themselves the result often as not of serious – in some cases Nobel prize-winning – intellectual underpinnings. Whether the global financial crisis can disappear or be overcome if such techniques, together with their conceptual justifications, remain in place must be a moot point. More critically, if they are to be replaced, then by what? To put the point somewhat crassly: is there life after the efficient markets hypothesis? This is a question it would be rash to answer in a hurry.

3.3.3 Hiatus Might it not be the case, as hinted earlier, that the global financial crisis represents a hiatus in human history, a stepping out of ourselves or out of the economy in order to step back in? If that were the case, before one theory could be replaced by another, especially if the future is to supersede the past, as seems likely – that rather than the past prolonging itself into the future – the experience has to be undergone of mores of yore, externally decreed values, losing their validity. More than that, we must also silence any indignation at this development and restrain the wish on the part of everyone to fill the seeming void with his own value system, foisting it in the rest of us. For example, many today regard terrorism as part of modern life (see later section 5.3 concerning Philip Bobbitt), but they conceive it in essentially geo-political terms. However, if one wants to speak seriously about terror as a human condition, as distinct from a pretext for all manner of militarist agendas, one needs to recognise that for the human being individually to lose his bearings is a terrible thing, a terror that becomes greatly magnified if humanity as a whole loses its bearings also. The separation of capital from all social matrices is surely the certain sign that this is what is happening at this juncture in history. If the global financial crisis warrants that title it is because it refers to a crisis in orientation and the presence of a vacuum such, perhaps, as has never before occurred in human history; a vacuum that it is surely too early to avoid, gloss over or fill with ‘law and order’, or certainty that one’s particular way of life – be it western or Islam, for example – is the way of life and that therefore one is justified in breaking the dread silence by insisting on or seeking to universalise one’s own paradigm.

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We need to endure the silence a little longer. Then, precisely because we do not individually shout into it, we will be able severally to hear what it wishes to say. Finance, in other words, is not merely about money (indeed, ‘money’, ‘capital’, ‘funds’ and so on are all the words we need to comprehend the financial world); it is about the human condition. The global financial crisis, the ‘failure’ of the global financial system, is a reflection of humanity’s deep alienation, our estrangement from one another and from ourselves. This is not just about the ‘psychology of investing’ and related considerations, important though they are. It is about something deeper. Some would say humanity faces a spiritual crisis, which may well be true. But such language is not necessary. If the global financial crisis is a reflection of such things, then careful understanding of it is the way, or at least a first step on the way, to overcoming them.

3.3.4 Aptness It will have been noticed that the chronology presented earlier paid scant attention to finance-adverse, Marxist or Keynesian critiques. Not because one is without an ear for the concerns they represent, or because one believes that modern finance is some godly event to which proper conduct requires us to be blindly deferential, but because there is something about finance which calls for a kind of sophistication (with all the challenges that can bring) beyond that of our everyday understanding. It simply cannot be understood as one would understand the physical economy. That does not mean it is ‘wrong’, only that we should find a level of understanding that is true to finance. It is a question of apt economics and we only need to realise that what is apt in one area may not be apt in another and we will find ourselves ‘one level up’. Just as if you want to convey something in French you do not do it using Russian, and vice versa, so the true locus of economics is not found when the discipline is made synonymous with its use in physical economics but in its effort to be apt to its different subject matters. Finance, clearly, is of another order than the physical economy, so it should present no conundrum to us to realise that the way we comprehend finance may not, probably will not, be the way we understand the physical economy. What is more, there is no reason why the one should be understood in terms of the other. We should no more confine finance to the narrow (by comparison) world of the physical economy than we should allow the physical economy to expand beyond its true nature. The finite and the infinite, the tangible and the intangible, should not be conflated. Because most critics of finance, as also most defenders of it, do not allow such separate logics, the debate becomes forever snarled up in a struggle (directly expressed or sublimated) between the two, with each trying to second the other to itself. For some, cash is a sub-set of capital; for others capital is an abstraction from cash. Yet every balance sheet tells us that cash is, in one world or on one side, what capital is in or on the other. There can be no debit without a credit, no left leg without a right, or left brain without a right. So what is the point in one side of a coin seeking to trump the other?

3.3.5 Finance Friendly If we can allow that finance presents us with a challenge but that we have yet to grasp fully what this challenge is, we will not snag our quest to understand it on divided


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opinion about the merits and demerits of capitalism. This book would serve no purpose if it merely sided with one view or another. Indeed, an important part of its methodology is to ‘comb the data’ provided by a range of views to see if overlaps can be identified and, thereby, common ground established. For much will depend on whether the global financial crisis exacerbates or leads to an overcoming of what in this book is called the propensity to divide. One is not so naïve as to think humanity will behave as of one mind economically in any historically near timeframe, but in its thinking, especially its monetary thinking, this is definitely possible. As just noted, there is already a substantial literature on international monetary co-operation and more of it occurs than one night think, albeit in the field of central banking rather than financial markets. From an associative point of view, however, it is often treated as a political affair, advanced or retarded by ‘political realities’, when it ought to be merely economic. In that sense, much of modern economic life is being held back from its true historical expression because of mindsets and political frameworks that insist on looking backwards rather than forwards. One needs also to be very clear that finance bears no relationship to the past, to what has been. It is the outer surface or skin of the future as it comes towards us, never a sloughed-off past. Thus, our purpose is to portray finance, and the global financial crisis, as a development that is the culmination of individuation and emancipation, at which point the question is not ‘who does capital belong to?’ but ‘how best to put it to use?’ Once capital has reached the height of disembeddedness, of which phenomenon the global financial crisis is perhaps the clearest symptom, whether one is for or against capitalism becomes anachronistic. Whatever activity one seeks to undertake, the question is will it ‘make good’ the capital implicated by it? Is it, to coin a phrase, finance friendly? All activities are a call on worldwide liquidity and what is needed is a technical understanding of finance that allows us to palpably experience economic activity and global liquidity needing to breathe together. This will never be possible as long as capital is subject to capture by, and therefore liable to become the handmaiden of, any particular ideology.

3.4 Intellectual Underpinnings As regards the intellectual underpinnings of the global financial system, it might be thought that the efficient markets hypothesis is the crucial thing to consider. While it clearly figures large, it itself relies on habits of thought and ways of behaving, especially economically, that most people subscribe to. Our survey of the intellectual underpinnings needs to begin with a wide lens setting, therefore. We have already seen, or at least sensed, the overall abstract relation to life that characterises our times. The ‘technical details’ that belong to this phase of monetary evolution also show how myriad and inter-causative are the elements that make it up. We have also offered preliminary commentary; mainly to the effect that abstraction is not remedied by moralism. One has to see the future peeking, as it were, through modern financial terminology, or over its topography. It is as if it was the loom of a distant event, the details of which will only become clear and appreciated as and when one nears it; but not if one resists or refuses it. Back-pedalling in history is seldom if ever achievable.

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This leads to our next theme: how to approach the future, how to go to the edge of our understanding without taking fright at the unfamiliar or insisting on old but defunct mores, yet not rushing forwards all ‘wide-eyed and bushy-tailed’ with all exercise of discretion suspended.

3.4.1 Beware Moralising To suit ourselves to understanding finance we must be careful not to allow a glaze of moralism to cover our minds. The AIG affair, for example, may well involve dishonesty, conflicts of interest and quite possibly fraud. While such things are reprehensible and not to be excused, before sanctions are declared it is important to remember that money has always brought with it the possibility of discrepant behaviour. Who, finding a small amount of money on the ground, bothers to take it to the police station? Pragmatic considerations easily trump principles. How much greater must be the chance of discrepant behaviour when the sums become unimaginable and the context almost completely remote and abstract. The global financial crisis has prompted much moralising and seeking to apportion blame. It is convenient, for such purposes, to forget that financial institutions and the justification given for them are in large part creatures of all of us. It is at best imprecise, at worst disingenuous, therefore, to hold the financial sector to account for processes and products on which we all depend. Why? Because all those dependent on a pension or required to contribute to a pension fund, all those relying on the supposed equity in their house to cover credit card borrowings, and any business that covers losses on trading by the risen values of its real estate – in short, many if not most people today – are the ultimate beneficiaries.

3.4.2 The Disintegrity of Banking There are, however, practices that merit questioning, chief among them being the disintegrity of banking, if one may be permitted to invent a word. Why, for example, does Alistair Milne name as ‘extreme systemic risks’ the implicating of the worldwide economy in the extreme risk-taking of particular institutions and, most importantly, individuals within them? How does that send any cautionary message? How is that any different to giving golden handshakes for failure, such as in the case of Sir Fred Goodwin’s pension? And why does Milne assume that governments have the right to commandeer taxpayers’ funds for such purposes? Surely, if taxpayers want to run such risks they should invest directly in the concerns that behave in that way? Why, moreover, should depositors be state-insured? Why not collateralise their deposits on the banks who receive and make use of them? Milne claims such help is not a bailout, because it is an investment for a return, which only poses the question why do the banks and the private sector more generally not see things that way? Does such help not, in effect, give the banks access to taxpayer revenue streams? Which business would not like to be able to derive its income or capital in that way? Milne argues that state funding will ‘reverse the cumulative erosion of confidence

The chairman of RBS, who resigned with a pension for life (at the age of 50) of £1.2 million per annum.


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in the banking industry.’ But surely that would also be the effect if banks simply mended their ways? Milne’s argument totally accepts that it is part of the state’s role to pick up the pieces after a ‘market failure’. Why, though, should the market not be left to do this? It would surely be a better constraint on profligacy to locate the responsibility for failure with the agencies that fail. Milne’s approach is that of many who regard the banking system as somehow above normal considerations. Of course, though one could as well wonder the same of the supply of bread or water, in a strongly financial world we rely heavily on the smooth functioning of credit. That is precisely the primary task and social responsibility of the banking community. Does it not therefore amount to dereliction of duty on their part to involve themselves in – let alone invent – instruments that in providing credit also jeopardise it? Either, or so it seems to this writer, the banks remain within the traditional, prudent constraints of their business or they admit that conditions have changed, making this impossible. This would be a much more constructive course of action than state rescues which effectively hide this circumstance from view. Why not, for example, make a clear distinction between traditional, deposit-taking banks, which could retain use of the appellation ‘bank’, since that is what most people think banking means, while those which are, for example, reliant on money markets or hedge funds should be named differently. That way, the whole world would know and pay attention to the different workings, risks and contexts of the different institutions. This, of course, was the raison d’être of the 1933 Glass Steagall Act, repealed in 1998. Should some modern equivalent have been devised instead?

3.4.3 Causation Maybe. But how are we to comprehend the changes since the 1930s? In the realm of finance, a great deal depends on our understanding of causation, above all the fact that in a single global circumstance that unto itself recognises no national jurisdictions (except as challenges to innovation and regulatory avoidance), the epistemological counterpart necessarily is that atomistic, compartmentalised thinking becomes passé. The main challenge is to figure out which way causation runs between all manner of exotic financial instruments and the global financial crisis. George Soros has consistently answered this question with ‘neither and both’, because in financial realms causation is not one way, or even merely recursive. It is reflexive. Similarly, it belongs to the problem of conceiving economics when its subject is not sense perceptible (as is the case with finance) that it becomes difficult to distinguish between different financial ‘products’, Again, this is as much, if not more so, an epistemological as a financial problem. It is a matter of keeping one’s thoughts clear and not being tempted to blur their edges or meanings, a process in thought not so different from accounting where differentiation in the generality of amorphous money, e.g. cash, relies on consistent application of clear analysis. Or, to give a very basic example, considered in depth later, not using borrowed money to fund consumption, but only investment.

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3.4.4 Imagery It is not only a matter of thoughts. Much also depends on the images we use for it is these that fill or bridge the void of non-perception. We cannot see a price, but we can see our idea or image of it. It is in fact our images that lead us to (or away from) reality. Images play an important meta-economic role. For example, although not meant as a considered argument, but all the more telling for that, is the image from Adair Turner of price as something ‘one cannot get one’s arms around’. What does this mean except that price is not physically apprehensible, and that therefore the very crux of economic life, price, is as much an epistemological problem as it is an economic one – a point taken up in 11.5.8: A Word About Price. There is the added problem that, the link between idea and practice being so strong, ideas can be born of practice as readily as the converse. The more so if an institutional framework is involved and if, as seems likely, those institutions are the outcome and repository of long-held habits of thought.

3.4.5 Materialism and Imagination Imagery and imagination are thought to have no part in our rational economic outlook, which is based on economic materialism or, rather, ‘naughty’ economic materialism. One only has to observe the reliance on the image of an invisible hand to know that the argument that economics and imagination do not belong together is disingenuous. This mention of materialism is deliberate and necessary to avoid it becoming an elephant in the room. In terms of intellectual history, it is the task of modern, Anglo-Saxon-dominated economics – both as regards its philosophical and imperialist foundations dating from the sixteenth century onwards – to reduce the entire meaning of life to homo economicus. All wider or different images have, as it were, to die into this impossibly narrow view. It is the eye of the needle. Detractors would say it is too tight to get through (forgetting that it could be because they are too fat!). Nevertheless, the future is on the other side. Even so, getting there will entail imagination. Strange as it may seem, imagery is a necessary foil to the dry, technicalities of which much economic description consists. It serves to remind us that the global financial crisis may not in fact be a technical hitch, with normal service resuming as soon as possible. Far more might be at stake. If, as discussed later, Ayn Rand is right – and there are very many in finance who think she is – money is seldom about money. It is about unseen, deep-running currents of history that in our time must come to the surface; there, however, to flow together into one, at least as regards economic life. Much depends, therefore, on whether that forward flow will be inclusive of all humanity and whether, to allude to a well-known metaphor, all boats will be able to float upon it. It is indeed the main criticism of modern finance that the answer to both these questions is thought, by detractors, to be negative. (Proponents usually say the wait needs to be longer.) To stay with the water image a little longer, economic life in the near term is likely to be more akin to white water rafting, however, and much will depend on whether, to allude to the discussion concerning the efficient markets hypothesis, the water turns out

The one no one wants to talk about, not the blind economists’ image of the economy!


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to be fresh or salt – as the Keynesian:monetarist or Princeton:Chicago divide is nicknamed in the US. Brackish is perhaps not to be contemplated, though a higher synthesis would be welcome. This short detour into the imagination will not be prolonged. Its purpose has been one of deliberate methodology. Economics always pretends it is a hard science, yet it is entirely dependent on ideas that evoke strong images – ‘the invisible hand’, ‘liquidity’, ‘cycles’ and so on. It is as if the human mind needs reassurance that, after all, economics is not all hard. To this end, we need reminders that it can admit to a poetic dimension, some escape from absolute rationalism, just in case it anyway proves not to be as absolutist as our initial fervour led us to believe. (Irony, too, is a type of poetry, and one has always to bear in mind that we overcame deism in economics only because of the impartial observer and the invisible hand.) It is also a form of poetry, much loved in economics, to think hypothetically. Though the tone and even content of their rhetoric may often suggest otherwise, few economists seriously claim to have understood or explained things completely. Most would say, even of the efficient markets hypothesis, that it is the best approximation yet. Even capitalism’s strongest proponents, the more educated of them at any rate, do not claim this is the end of the journey. They only claim that it is the best of existing alternatives. Moreover, being hypothetical not only belongs to the craft of economics. It is essential to the English mind which needs to refrain from saying what is; if only because once one knows (or even thinks one knows) how the world works, one can no longer merely contemplate it or think one’s own deeds do not count in it.

3.4.6 Efficient Markets or… On the topic of hypotheses, the Krugman–Cochrane discussion is interesting because it illustrates yet again the main fault-line in modern economics but also shows that, in Cochrane’s view at least, it would be premature to give the efficient markets hypothesis the last rites. Be that as it may, one of the consequences of the global financial crisis is that the primacy and even validity of the efficient markets hypothesis has been ‘trainwrecked’, to quote Adair Turner. The efficient markets hypothesis has been one of the main tenets (or group of tenets) supporting the proposition that government intervention is not, indeed cannot be, efficient. Only ‘free’ markets can achieve that. In many respects, the efficient markets hypothesis is shorthand for the Chicago Business School, insofar as that appellation connotes the positivist, Anglo-Saxon, socalled Washington Consensus, a consensus that is hardly surprising given the strong links with governments and such bodies as the IMF, IBRD and WTO ‘enjoyed’ by Chicago economists, Wall Street bankers and so on. That this approach to economics and indeed to economic life itself has had enormous (and many would say untoward) influence on society and global economic development ever since its ascendancy during the Thatcher–Reagan years can hardly be doubted. And yet it is something of a contradiction: while Chicago economists are against the state’s intervention in economic affairs (an idea difficult to reconcile with the facts of modern economic life), they do not seem to think the opposite should also be true – that economists should not interfere in political life. The main ‘casualty’ of Chicago’s prevalence has been Keynesianism, in the sense of those who perceive Keynes as the patron saint, so to speak, of state-managed economic

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life. This is an understandable view if one makes Keynes synonymous with his The General Theory of Employment, Interest and Money (1936), but not if one looks at his monetary works or at something like the International Clearing Union. While Keynes was not averse to government intervention on occasion and in certain circumstances and is clear that unbridled financial markets imperil humanity, it would be truer to say that his ‘tenor’ is neither statist nor monetarist, but some sense that the economy should not be captured either by the state or by the financial community. Cassidy (1996) refers to the need to fulfil ‘the succession of Keynes’, meaning that we need to solve the central problem Keynes sought to address of understanding how the economy works as a whole. One might characterise Keynesianism as people-centred and monetarism as thingcentred, but it would be more precise to say that Keynesianism would constrain money, monetarism would let it lead. It is to be doubted, however, that either approach represents Keynes’s own view (see Chapter 8: Keynesians vs. Friedman – A False Debate). Keynes exists rather at the interface of these two elements, making it difficult to locate him in the economic heavens, though most would like to avail themselves of his reflected glory (this author being no exception!). It is clear that an effect of Chicago economics has been socially destructive, but this is in the context of two particular phenomena. The first is that it sees itself as one of two protagonists in the Left:Right divide and feels duty-bound to prevail. This is also the view of Keynesians, necessarily so; the propensity to divide requires it. The second is that it is a part of Chicago thinking that there can be no gain without pain; that where, for example, the state has created morally hazardous arrangements, such as deposit insurance, these bring with them lax attitudes and false comfort. Overcoming this is the pain; the gain is the ‘improved’ or at least changed situation that results. One does not mention this in support of (or against) Chicago. It simply shows a consistency of paradigm. And yet not really. For why would any Wall Street bank or Chicago economist allow himself to be party to government support – least of all by working for an administration that proffered state bailouts to investment banks (and selectively at that)? This inconsistency is the thing to focus on – the epistemological bankruptcy, if that proves to be the case, of the efficient markets hypothesis and all that it entails. This is a very serious problem, however. It is easy enough to point out what is wrong; less so to see where next to go. After all, positivism and its predominance in economics is the result of an ages-long development dating back at least as far as Aristotle, regarding to which one’s sense of economic and monetary history needs to be a match. It might not be too fanciful to claim that the global financial crisis is today’s equivalent in historical significance to the transfer of the locus of consciousness (and therefore understanding of subsequent events) from Plato to Aristotle, from the Ancient East to the Modern West. The question would then become, however, where to next?

3.4.7 … Accounting The challenge is not to describe and even bemoan the, to our mind, predictable eventuality that positivism in current conditions works in what for many is a socially exclusive and even destructive manner. Rather, it is to take note of the phenomena that give rise to this outcome – again, two in particular. The first is that positivism has as its historical task to render economic life amoral, that is to say, free of external moral information. The question is whether this is a stage in human evolution or the destination. Positivists


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would claim it is a stage, preceding what the market can then tell us. This is not so different in gesture to Marx seeing the need for socialism as the forerunner of humanity’s eventual ideal social condition. From the point of associative economics, however, having reached the stage of no moral imperative from outside, human beings should begin to unfold morality from within. This will not be the organised morality of old, however. It will unfold anarchically, better put, chaordically or autopoetically, from individuals. It will be something that, whatever its individual expression, all other individuals can recognise and respect. It will cohere anew the economic life but on inherently economic, rather than religious or quasi-deist grounds. The second is that positivism set the stage for economics to join forces, as it were, with mathematics, a development reflected in the change of name from political economy to economics, a possibility afforded by the genius of the English language that it is almost impossible to replicate in other languages. This occurred when, arguably, the discipline ‘should’ instead have made a link to the more truly numerate aspect of economic life, accounting. Treated in depth in Chapter 11, this is one of the main precepts of associative economics: that economics, going forwards, needs to link itself to accounting. It is because this is not (yet) the case that economics has become so abstract. The question would then become whether accounting represents an hypothesis capable of replacing that of efficient markets (again, a point taken up in 11.5.8: A Word About Price). Of special interest here is the observation, as regards future frameworks, of Gillian Tett when referring to Blythe Masters, J.P. Morgan executive and attributed as the inventor of credit default swaps: ‘one former true believer, a woman called Blythe Masters who said that she realised belatedly that their wonderful models had treated things like accounting issues and regulation stuff as the noise, when in fact they were the model’ (Prospect 2009: 36). Modern economics does not take its cue from accounting, of course, for which reason the idea of an accounting analogy may seem out of place. Even so, it is not a fanciful notion. Hanke (2001) draws particular attention to it when, invoking the memory of Sir John Hicks, he discusses its importance in evaluating central bank balance sheets. Hanke’s comments are linked to remarks made by Hicks in conversation with Arjo Klamer (1989) just before Hicks’s death: Klamer: It seems to me that you think very much from an accounting point of view. When I read your work, I see balance sheets, income statements … You also seem to think like an accountant about capital … Hicks: Yes exactly. I mean, after all, I did that little textbook, which was called ‘Social Frameworks’, but which ought to have been called ‘the social accounts’ … Klamer: Would you like to be remembered as the accountant of the economics profession? Hicks: I would not in the least mind … I have actually seen business decisions being made on the basis of projected balance sheets. I think that is the rational way to make a business decision. A lot of these mathematical models, including some of my own, are really terribly much in the air …

Economics is also similarly associated by the genius of the language with mechanics and physics.

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As Hanke adduces, ‘for Hicks, the balance sheet was the key to understanding how decisions are made and what their expected consequences would be.’ (2001: 99) In this, he seems to echo Pepper and Oliver’s claim that ‘financial crises usually occur after banks’ balance sheets have been allowed to grow at an unsustainable rate for many months’ (2001: 84). Their argument is that there is no economic constraint on the ‘manufacture’ of liabilities by the central bank. Hayek also gives accounting important status when describing how the economist’s task, of making money stable, is, and is best judged by, the need ‘to ensure that the stock of capital of a business is not eaten into and [that] only true net gains [are] shown as profits available for disposal …’ (2001: 69).

3.4.8 Concerning Positivism Another aspect of our situation concerns the stage of world economy. When positivism became supreme in the 1870s, economic development was already in a proto-global stage and rapidly became truly global in the run up to World War I. Because this fact was not recognised, a myopic situation developed. Humanity entered into a single global economy, but it did so without its crucially important corollary – the need, as the economy becomes global, not only for governments and nations to confine their remit to politics and legislation on a national albeit co-operative or harmonising basis, but above all for every culture, every people* to identify its unique contribution to humanity’s overall development. There needs to be a ‘choir of cultures’ if a single global economy is not to become a negative experience. This would have two main consequences in terms of how things are currently conceived and organised. No one country or people or way of life should impose itself on any other, meaning that Anglo-Saxon dominance would need to give way to promoting economic partnership between peoples, but also that the peoples of the world would have to identify a future true to their own development but do so neither in reaction to domination nor in assertion of past histories and traditions. Important as such things are, it is the future of every people that needs to declare itself, not the prolongation of its past. And this future will necessarily have a universal element to it. Every people on the earth will recognise and respect every other people. That is the true hallmark of human freedom. Not a mono-culture of any kind. Unless this is understood and until this historical circumstance is realised – both things that could yet happen – the Chicago influence, whatever one thinks of it, has and will even continue to have a certain ineluctability. Equally ineluctable, however, is uncertainty as to what can challenge its hegemony.

3.4.9 New Financial Instruments From an associative point of view what needs to develop is not only a choir of peoples, a choir of cultures, but the instruments that give such an idea reality. These require two things above all – freely chosen monetary policy and the creation of new financial instruments specifically intended to capitalise the initiatives of individuals, peoples, and even countries, so that they can unfold the destinies and therefore the economic


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development of their own choosing. It is this that ‘autonomous development’ must mean if it is not merely to be an empty Wilsonian phrase. Without this it can hardly be otherwise than that finance will manifest as a phantom economy. Herein lies the essential transformation, even metamorphosis, that modern economic life needs to experience – the unfolding from within finance of new financial instruments (see 12.2: Super-production/Hyper-production). It is this – not government intervention or taxation – that will ground finance in a higher reality and prevent any deleterious effect on the ‘real’ economy. Without this, the driving force of a choir of cultures will not gain traction, because individuals and peoples will not be able to unfold – from wherever they are in their development and history, what one might call the ‘local’ dimension – an economic life that allows them to embrace and therefore condition the global development that has currently stolen a march on humanity’s overall cultural development. In an associative paradigm the individual person, or the individual people, necessarily sees every other person or people as a trading partner, a neighbour, a fellow traveller. Associative economics is avowedly inclusive of all humanity, just as is (or should be) any truly economic concept, such as division of labour, comparative advantage and the newly elevated diversity, to name perhaps the most noble. Positivism is a genie that cannot be put back in the bottle. What is needed is to manifest its twin or foil, as it were. Positivism’s goal of taking external mores out of human behaviour, a goal that cannot but belong to the economic life of our times, must be matched by an equally powerful goal – human beings everywhere need to give true expression to their deeper destinies and purposes. By unfolding a truly free spiritual life, a spiritual life that unfolds according to its own imperatives, today’s globalisation (in the pejorative sense) will meet its match quite naturally. The link is that the first will consume the excess capital of the second. Thus, an inherent regulation of the financial markets will become possible. It should be added that in such a choir of cultures it will nevertheless be the feature of the English contribution that it will appear in economic form. In particular, it will appear as shifting from possession of the global economy to partnership in economic life. In this, Keynes would find his greatest reflection.

3.4.10 Diversity, Aspiration and the Future of Capital The global financial crisis represents an opportunity to ‘de-ideologicalise’ modern economic life, to rest it on clear economic foundations, something that cannot happen, however, unless a choir of humanity’s cultures comes to expression. It is in this sense that, instead of treating modern economic life in terms of the Left:Right divide to which we have become habituated, we need to perceive that the true twosome is not an antagonism but a partnership – liberated global capital and a choir of cultures. Human diversity, if honoured and taken seriously, has the same economic effect as a difference in levels in the physical world, only now in the manner depicted in those well-known, optical

It will be a further challenge for several independent initiatives to cohere within the one global economy, of course. Thus sounding a shared tone, as well as their individual ones. The converse thought, of course, is that the absence or weakness of a free spiritual life is the ‘cause’ of over-reaching finance, which might merely be expanding into an historical vacuum.

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illusion drawings of M.C. Escher such as Waterfall. The lowest points being at the same time the highest, one has the notion of a perpetual flow not subject to gravity. Every such difference in level, every nuance of human diversity, results in trade or, in accounting terms, profit moments. If trade were made consequent on human diversity, the entire economy of the world would be seen as an endless series of profit opportunities, endless moments when capital, for all our sakes, can be made good. From this point of view, the global financial crisis is about finance being ahead in its development of our culture. It is looking for a choir of cultures. Were the latter to become seen, finance would immediately appear as something that is friendly to human life, not inimical. At the same time, the need we have to endow it with godliness would evaporate. For if one can earn a living doing what one is best at and most enjoys doing, why would one turn to capital as a surrogate form of income? It is this circumstance that, when generalised, leads us to play lotteries, bet against the value of our houses, work the stock markets or simply wait for granny to die. These things amount to an unspoken transposition of aspirations. If these could be met out of income then capital would return to its traditional role of serving economic activity. Paradoxically, perhaps, this will only be possible if instruments can be created, the purpose of which is to capitalise such aspirations.

3.4.11 London’s Role In such a world, the question arises: what would London’s role be? Having long been a centre, if not the centre, of the world’s economy (seen not from Britain outwards, but from the point of view of worldwide liquidity), London has been the locus of huge influence in humanity’s economic development. Whether for good or ill is not here the point. Britain’s empire was a proto-global economy. Her dominions and colonies became the Commonwealth, a worldwide partnership if only we could find our way back to free, albeit mutually so, trade arrangements and away from supernational political federation; back to general agreements and away from global trade jurisdictions. From England has come an endless stream of concepts and policies, running uninterruptedly from Adam Smith (and earlier) to privatisation – concepts and policies the world generally has also adopted. This does not make them true, right or benign, but it does show that england (if it could be conceived with a small ‘e’) and london (also small ‘l’) have a place in economic evolution that is perhaps unique. It was in England, too, that Marx developed his ideas, so that Marxism can also be seen as a product of Marx’s time in London. Engels and Manchester are also ‘English’ events. Could it be, therefore, that London could also influence the world with new concepts of finance related to humanity’s diversity and aspiration? Could it engender its own foil to abstract capital and financialism?

3.5 Guiding Intuitions So far we have been mainly concerned with marshalling and then drilling into the data in order to see what, if any, insights arise and what themes present themselves, especially across the data.


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3.5.1 The Abstract Nature of Modern Economic Life The most obvious and over-arching impression is of a high degree of abstraction, of a kind that would have appalled Aristotle were he alive today. Or at least the Aristotle that looked askance at ‘money-making’. It is a long way and a long time from Aristotle’s day when humanity first set out on its journey of individuation and emancipation. In many ways, today’s financial liberalism represents the apogee or zenith of that process, so we should not be surprised if modern finance is abstract and reflects an abstract, alienated relationship to life. In Steiner’s shell-nut image, however, that means that economic life is a reflection of the way we think and behave; meaning in turn that if we do not like the way things are we need to begin to think then act and behave differently (thinking being primary). In the image described by a Brazilian financial colleague, Carlos Jaime Loch, it serves little purpose to dislike what one finds at an estuary. Better by far to find or create a different source and begin a new flow with different outcomes. The problem is not how to escape history or how to turn back the clock, but how to pass from abstraction and alienation to a new, future-oriented and more embedded relationship to life. It stands to reason, however, that the point of incising oneself into history can hardly be elsewhere than the very abstraction of modern finance.

3.5.2 Too Much Capital But what does that mean? A clue lies in the second main phenomenon that ‘shines’ through the data, the presence of excess liquidity. Indeed, much of what have here been called ‘technical details’ are the manifold manifestation of precisely that, as if designed to facilitate the phenomenon, if not augment it. To repeat Adair Turner, ‘What is surprising is when you go to the wholesale side, and you see the enormous amounts of money that are made out of the provision of liquidity or the provision of complicated products or bits of the asset management industry or the hedge fund industry – those are activities that have ballooned in size, appear to be making hugely more money than 20 years ago …’ (Prospect 2009: 37). From an associative point of view, this is not in the least surprising. Though the translation may not be appreciated because the formulation is too direct, excess liquidity can also be described as ‘too much capital’, too much in the economic and functional, rather than moral, sense. If that is the case, it follows that if excess liquidity is an expression of today’s high degree of abstraction the question is not how to rid the world of capitalism, but how to rid the world of too much capital, too much even for its own collective good; ‘collective’ meaning overall. Indeed, how else is the global financial crisis to be understood? From an associative point of view, ‘excess liquidity’ today is bound to show itself as ‘too much’ capital accumulating in one part of the world economy, China, for example. As Rayment put it:

For an interesting perspective on Aristotle, see Pack (2008).

We may overall recognise the problem but be hard put individually to address it by being the first to move. It is the classic self-fulfilling excuse of herdist behaviour that no one wants to act unto themselves. No one wants to be the first to seek a lower return on capital, for example.

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Finance at the Threshold If 150m people – 2½ times the British population – stops tilling the land and starts making things, as happened in China between 1999 and 2005; if the Chinese recycle their export earnings into cheap credit; if interest rates stay low for reasons that seemed important at the time (the millennium bug, the tech-stocks crash, 9/11); if new ideas allow you to spread financial risk … well, by now you know the explanations. It became easy to imagine that the world was growing rich because we understood the universe better than our ancestors, until we didn’t. (Rayment 2009: 47)

It is axiomatic, that the riches of one part of a world economy, any one country’s surplus dollars, only have value if they can be used elsewhere. But if they are not needed, or if people are not willing to lose them consciously – preferring to risk ‘market corrections’ rather than deliberately spending them away, which is the age-old remedy for ‘correcting’ overall surplus – such capital will be invested in real estate or stocks, the value of which will simply rise to match the amount of capital credited into it. Where then is the surprise when people ‘release equity’ by borrowing against risen real-estate values from banks who are dependent on money markets, rather than savings?

3.5.3 Perennial, Systemic Jubilee This problem is not new, however. Throughout history there have been moments of excess capital that has had to be got rid of. In Steiner’s metaphor (1996b: Lecture 12: 154): ‘Irregularities will undoubtedly arise, and having arisen they must correct themselves, [just as] when the stomach is full digestion has to follow.’ Admittedly, the image presupposes the world economy is an organism, not a machine, but that is part of the point. Not for nothing does Andrew Haldane (2009) argue that it is in the direction of virus behaviour, not mechanics that we now need to look to understand global finance. The problem is, as ever, largely epistemological. Steiner argued that the ancient Hebrew institution of jubilee, a form of debt forgiveness, had the economic purpose of removing excess capital (in his terms, too much ‘loan money’) from a closed economy. In the time when national economies were the main modality, this function was met by balance of payments and specie flow between them. But in a world economy, where we now are, it has to change yet again. In Steiner’s view, this can only be done if excess capital is given away in order to be spent. It is the refusal to recognise or allow this that underlies today’s financial markets and the need from time to time for them to be ‘market corrected’. [In a closed economy] we ought not to let money merely flow into circulation and give it freedom to do what it likes. For we thereby do something very peculiar in economic life. If we require animals for some kind of labour, the first thing we do is to tame them. Think how long a horse has to be tamed before it can be used. Yet we let money circulate quite wildly in the economic process.

It is easy to see. Take a piece of land, say 100,000, and the cost of building a house on it, 50,000. The asset (land and house) will have cost 150,000, the liability. Both are then bought by a third party for 200,000 who sees in his accounts that his house and land are worth 200,000 which is represented by his investment. He has simply capitalised the higher value by paying cash for what, on the vendor’s balance sheet was a hoped for value. He thinks this proves his asset is worth the money he paid; it only proves the logic of a balance sheet!


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As things are today, the function of money has constantly to be corrected. By letting money function in a wild unguided way, without bringing any intelligence into the process, a national economy may easily find itself in a disastrous position with regard to the price of some or other thing that is required. So long as the national economy is one among others (and no repressive measures are adopted), people will simply import the article in question. Imports will increase. For world economy, however, no such correction is possible. We cannot import things from the moon. This is precisely today’s great question: What becomes of economics through the fact that the world itself is now a single closed economic domain?’ (1996b: Lecture 12: 150) [What is needed is] a world economic form of the ancient Hebrew custom of cancelling debts at Jubilee Year that removed all harmful loans and investments. Admittedly, it was fixed a priori – as befits a patriarchal age and society – and that would not suit world economy, but it corresponds to a life reality nonetheless – the life-span of the human being. Gift capital in youth, loan capital in productive life, and trading capital in retirement; reflecting the fact that in youth the human being consumes, in middle life he produces and in old age he graces. [Money should follow suit.] In world economy a priori arrangements would not be possible, of course. But it should be clear that money’s devaluation would be effected gradually through economic intercourse itself. In real economic circulation the older money becomes the less its use-value (but not its purchasing value), and this converts it into gift money, to be re-issued as young – that is, ‘new’ – money again. In terms of what I said yesterday (see above quotation), such a thing as a state bank would not arise. A form of bank would arise between those who have received gift-money and those who create new funds through their work on nature. This process would be removed from the state. The economy must administer itself on a basis of such laws as the rejuvenating of money. That is, on a basis of laws belonging to the economic life, not those belonging to the state. (Steiner 1996b: Discourse 6: 220)

This introduces some Steiner-specific language that merits consideration insofar as he has the idea that the economic life should somehow be self-administering. And yet, while resisted in general idea terms, what else is central bank independence but a step in that direction? What else would it mean if banks were to get their house in order without government bailouts, other than that those who were responsible for the conduct of economic life did so inherently and did not let their excesses spill out onto the public balance sheet – a procedure, which at the very least is a blatant contradiction of the free market paradigm and a case, surely, of having one’s cake and eating it. Thus Steiner places great emphasis on the need for a modern equivalent of jubilee or cathedral building (arguably, the medieval equivalent for spending away excess capital), namely, some form of what today one might call ‘perennial systemic capital write-down’. If this is not to be left to the occasional, usually spectacular ‘market correction’, we need to do it consciously by creating instruments that transmute excess capital into something economically useful. Either way, the reality will out, that in a single global economy excess capital will burgeon, ultimately putting itself at risk in its own terms. To allude to Norman Montagu’s (in)famous remark, the dogs may have cause to bark, but the caravan ought to have its own reasons for questioning the future viability of its modus operandi.

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This is the threshold we have been brought to, but from which we have neither been brought back nor found the means to cross. This is the point of this book, therefore: to articulate how the threshold we are now at can be traversed not by mortgaging the future to finance by bailing out banks with taxpayer funds, but by transferring a crucial part of today’s excess to fund freely the initiative of those, especially young people, on whom, arguably, the future really depends. Thereby, a healthy balance between the real and financial economies can be restored and subsequently maintained. To use an Aristotelian word, the amount of capital in the world must be ‘proportionate’, not excessive, not existing in the absolute or abstract, but not none either.

3.5.4 I am the Locus of History These are not political thoughts, though their political consequences are recognised. It is not a matter of agitating against or gainsaying capitalism. Rather the idea is that capitalism needs to undergo, indeed is already undergoing, a transformation or metamorphosis. This is an idea that may not find favour either with those who believe we should be rid of capitalism or with those who relish and indeed rely upon its persistence in its current form; but our argument is not against capitalism per se, so much as against it remaining in an outdated form. For it is the myopia or one-sidedness of capitalism that is its Achilles heel. It has already begotten the Marxist response and it matters little socially if, as in this author’s view, Marx’s analysis was originally flawed and is now historically outmoded. Now capitalism, become triumphant, has begotten fundamentalist Islam, insofar as that movement is rooted in its perception of what it regards as the moral bankruptcy of the west. Both are genies that will not be readily returned to their bottles no matter how often Marxism is declared a bankrupt ideology or how much effort is expended on the ‘war against terror’ – a war that is nowadays almost synonymous with a war against Islamic fundamentalism. (Whatever its (de)merits, the generally negative view of Islam this development is creating is a tragedy almost beyond words. Was ever a more sorry harvest sown?) Next, a Chinese ascendancy can be anticipated in the sense, at least, that, possessed of much cheap labour and consequently global reserves, it has become the world’s ‘motor economy’. Or we might turn our growth-addicted eyes to India or Brazil. But do any of these approaches broach the key question raised by this book: does economic history not now call for the locus of responsibility for economic events to be the individual human being, rather than nations or governments or their agencyinstitutions?

3.5.5 Avoiding Rupture Whether understood or not, considered benign or untoward, or seen as the inventiveness of man or the devil’s handiwork, the discussion so far has shown widespread agreement as to both the chronology and technical details of the global financial crisis. Blame and remedy is another story, however; one that divides along well-worn lines, essentially Left or Right, Keynesian or monetarist, statist or free market, ‘salt’ or ‘fresh’ water. This propensity to divide has the unfortunate effect of stalemating policy, so that the future will probably continue to be a hotch-potch of market triumphalism punctuated by market failure.


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Perhaps that is our perennial fate – to live forever in disagreement about the purpose, function and proceeds of economic life. Such fatalism is hardly edifying, however; the more so if one has ever caught a glimpse of what lies beyond our current condition if only the propensity to divide could be overcome. The key, perhaps, is the coincidence of a general recognition that there is too much capital (or excess liquidity) in the world and the ineluctability, per Steiner’s analysis, of this circumstance occurring now. A dead end? More of the same, with real-estate values regaining their summer 2007 levels and then continuing their rudely interrupted but ever-upward journey, albeit less intensively so? Or do the global financial crisis and especially excess liquidity represent what Steiner would call ‘masked relationships’? That is to say, far from humanity finding itself in a cul de sac, its way is blocked only by its inadequate explanation of the problems that confront it. In a word, is there a way to lessen the amount of capital in the world without rupturing the steady progress of history?


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4 It’s the Epistemology, Stupid

Economics as a discipline loves to model itself on the physical sciences, yet nowhere does its gaze rest on physical phenomena. Price, value, inflation, while they have great effect on the physical economy, are not in themselves physically perceivable. Thus economics in fact relies on the images it makes of how economic life works – the ‘invisible hand’ being perhaps the most famous. From its ideas about economic life it then derives policies which indeed shape the way we behave. In a world of more than one economy, this can be done even if the outcome is fictitious. However, once the world becomes economically one, this reality will force itself to the surface of events and any epistemology that resists, refutes or denies this circumstance will be found wanting.

4.1 Thinking with Levity The thesis of this chapter is that at some point in its history humanity was bound to arrive at the threshold of physical thinking and its corollary, national economics. Beyond that threshold lay world economics and a kind of thinking that comprehends but is not synonymous with the physical world, as evidenced by the very nature of our brain: On its own the human brain weighs about 1,400 grammes. Were the weight of these 1,400 grammes to press on the veins and arteries, which are situated at the base of the skull, it would destroy and kill them. You could not live for a single moment if the human brain were pressing downward with its full 1,400 grammes. It is indeed a fortunate thing for the human being that the principle of Archimedes holds good …, that every body loses as much of its weight in water as is the weight of the fluid which it displaces. If this is a heavy body, it loses as much of its weight in water as a body of water of equal size would weigh. The brain swims in the cerebro-spinal fluid, and thereby loses 1,380 grammes: for such is the weight of a body of cerebro-spinal fluid of the size of the human brain. The brain only presses downward on to the base of the skull with a weight of 20 grammes, and this weight it can bear. But if we now ask ourselves: What is the purpose of all this? Then we must answer that with a brain which was a mere ponderable mass, we could not think. We do not think with the heavy substance, therefore, but with the buoyancy. Substance must first lose its weight. Only then can we think. We think with that which flies away from the earth. (Steiner 1996b: Lecture 1: 36)

Was this threshold reached in the course of 2007? Did we cross it – albeit unconsciously – rather than fall into some unspoken abyss? Or did we pull back, baulk at the moment and retrench into old habits such as reliance on the state and on taxpayer money? When

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Larry Summers said, ‘we have walked some substantial distance from the abyss,’ which direction did he have in mind?

4.1.1 The Limits of Comprehension If, as argued in Chapter 3, the global financial crisis is not just an outer event, even if its initially convulsive state becomes smoothed into a hiccough, then alongside its financial effects on social life generally will be an epistemological event of equal significance. In a word, we will have arrived at the limit of our ability to comprehend economics by way of physical thinking. Is it any wonder, therefore, that Alan Greenspan said ‘I have found a flaw,’ referring to his free market philosophy, or that he was ‘very distressed by that fact’? When Bill Clinton became president of the USA in 1992, James Carville’s famous soundbite told everyone, ‘it’s the economy, stupid!’ Today, faced with a worldwide crisis that is clearly also about the economy, how now are we to understand things? In the intervening 16 years, economic life has been on a roll in the sense that credit has been cheap and property values have risen seemingly without limit. As we have detailed, all sorts of techniques have been developed that are part and parcel of this situation. That one of these, short selling, having been accused of bringing down the likes of Bear Stearns and Lehman Brothers, was only temporarily banned, shows that no one intends to outlaw such things permanently. In fact, everyone is holding his breath, waiting, not just hoping, for values to rise again. And yet … This is possibly the first truly global crisis, meaning the first time such a problem has not been able to be quarantined. So, while there is a lot of talk of getting back to regulated reality, it remains to be seen whether that is possible. Governments can only operate where there is a national jurisdiction. Today’s financial markets by definition recognise no such limits – except as stimuli to ‘innovation’. Governments may try to preserve their position by combining and creating enlarged jurisdictions, such as the European Union, but the logic of separateness remains and will do so until a single global polity is organised – which, of course, is what many anticipate or deem to be a right destination for humanity. Meanwhile, from the point of view of worldwide economics, so what if a few banks are recapitalised by states using ‘taxpayers’ money’? It is not as if the taxpayers had any volition in the matter! The main thing from a corporate point of view is that governments do not take control, that is, nationalise the banks. The rest is so much circulation of shareholder capital, because dollars, when they congregate in China or Dubai, for example, have to spill out from there to somewhere else if they are to retain their value.

4.1.2 Capitalising Real Estate One should beware the thought that re-regulation of the banking system will solve the problems we face. Superficially, these are only the predictable ‘kick back’ of lending money to people who could not afford it, against assets that were not really there. Such investments must rebound on the investor very fast. But the problem does not reside therein. It resides in the assumptions that underlie such behaviour. In particular, that real estate can have value above its ‘means of production’ value; above, that is, what the user of it can afford to pay out of the profitability of his activity. Beyond that, the value of

I t ’s t h e E p i s t e m o l o g y, S t u p i d

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real estate is fictitious, at least as regards the means of production. Financially, the value of a building may be said to be a function of what someone is prepared to pay for it or invest in it. But economically, it can only be a function of what the user of it can afford to rent it for. When we capitalise real estate (or share companies) beyond their economic rentability, we need to ask ourselves if we are doing so because of a mistransposition of modern humanity’s huge capacity for aspiration, but aspirations that, for want of being understood as a symptom of a deep yet unidentified potential, become falsely expressed in terms of amassing wealth. Linked to this is the secondary, but nonetheless real phenomenon that people or businesses, for want of cash income, believe they can derive income from increased capital values. This, as any accountant or tax official will concur, is an illusion. By all means effect a capital gain and draw down against it in order to cover expenses, but do not think that a drawing down of capital is income. The other assumption is that the behaviour of recent years, which is possible only as long as there is thought to be more than one economy, can continue unmodified. We think, or rather hope, that we can go on locating transactions ‘overseas’, ‘off’ balance sheet, ‘offshore’, in ‘foreign’ accounts, and so on. But is this really so once national economies coalesce into one, which is the sure end result of globalised finance? Once the borders of separate economies have been crossed and we enter the landscape of a single global economy, externalities of any kind return whence they originated, and often with a vengeance. The language tells it all. ‘Foreign’, ‘offshore’ – these terms only make sense if they mean outside a given jurisdiction. Once that jurisdiction is the world as a whole, where do we think ‘outside’ is?

4.1.3 Beware Institutional Solutions In a single economy nothing works the way it used to. There are no fences beyond which to throw one’s rubbish, export one’s inflation, hide one’s cash, and so on. The problem is not only the technical one of figuring out how can there be more than one currency in a one-world economy (let alone over 180 or thereabouts!). In particular, what would be its name and what its cover? The problem is also, if not primarily, epistemological – it depends on how we think and how we understand our thinking. In other words, even in its practical aspect, which is largely finance-driven these days, economic life is about the way we think. If economic life is faltering, therefore, we ought to review the way we think about it, not continue with the thoughts we had before. It will not solve anything at root if the state bails out the private sector, least of all the banking system. For there is really no system there any more. We live in times of a banking process, and merely institutional solutions will not serve any real purpose. At least, not the purpose they are intended to serve. People’s habits will not change when banks are bailed out by the state, neither at the board level, nor at the level of the ordinary person. For why are states bailing out banks, except to maintain upward-only growth in real-estate values and similar expectations? They do this because it is the borrowing against these rising-in-value assets that in turn maintains the consumption levels that today’s over-production (relative to real needs) requires. It is a function of our abstract relationship to life that the role of capital in service to production becomes reversed. This

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is the risk we run when money markets separate from goods markets. Rather than work alongside the goods markets (instead of being dependent upon them), they act as if they can lead a life of their own. Except that they cannot! The result is borrowing to buy – a contradiction in economic terms. It is not true and, therefore, not fair to say we borrow to buy ‘because of greed and desire’. At bottom it is not that. At bottom, modern economic life is so distorted that few people, few businesses can derive sufficient income from what they sell – that is, from the price of things. They have to resort to ‘working their assets’, therefore. Why is that? Because money is treated as a commodity like any other when in fact it is not. It becomes an ‘unfair competitor’, which drip by drip over time and across the whole world economy results in its effective withdrawal as a counterpart, so that all other prices have to rise in compensation.

4.1.4 Topsy-turvy The real effect of government bailouts is simply to mortgage the future, solving nothing, therefore. They amount to a relocating of deckchairs, for which reason, of course, they are also a major instance of moral hazard, as the chairman of HSBC has pointed out. Hauling Alan Greenspan over the coals serves no purpose in this regard. For what did he do other than perceive that things were no longer operating according to normal? How did he cause anything when all he did was respond to the general expectations of people everywhere? There was a time when central bankers took the punch bowl away when the party started to get going, but not for years has that been a wise move. No one wants the party to stop because no one knows what to base modern aspirations upon if not on inflated values of real estate or dot.com businesses. Anything that promises serious gain, no matter how unreal the counterpart. The need is to understand what those aspirations are all about. What is it that is trying to happen in the deeper levels of modern human existence? If we can touch on this, then the constant pressure to create artificial values will be able to find truer expression. The pressure will then abate and the famed, but long in coming, ‘soft landing’ will become a possibility. Most importantly, it will then be of our own making; not an act of gods, governments or recalcitrant financiers.

4.1.5 A Matter of Will To speak in this way, however, entails taking seriously the factor of human will, something we normally ignore in economics for fear that it is synonymous with subjectivity or anarchy of some sort. And yet we do not hesitate to claim laissez-faire economics as an expression of free will. It is therefore time to look at the question of will in economic life and most fitting to do so in the midst of an economic crisis which so severely affects what we do and will do in the future. This, rather than constantly speaking of external events, cycles and market forces, as if the whole of economic life were merely a piece of nature, rather than an expression of human activity. Herd-like, collusive, manipulated

One investor in Dubai was seeking to get back the $1 million he had paid for an apartment. When asked by his lawyer for the relevant paperwork, the investor produced his cheque stub only. In fact the apartment was non-existent because the building it was in did not exist either (CNN news report, 28 November 2009).


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– human will is all those things for sure, but humanity is also blessed with the capacity for individual will and for concerted action to achieve greater goals where the legitimacy of narrow self-interest runs out of road. Modern economics assumes that cycles, for example, a concept to which it seems to be enslaved, ineluctably exist as do cycles in nature, so that one can only try to turn them to one’s advantage or ameliorate any untoward effects they may have by ‘countercyclical’ activities, such as a central bank might undertake. The aim is to stay on or close to ‘trend’. Based on Steiner’s comments, however, associative economics does not avail itself of cyclical concepts. In describing the 1907 stock market crash, for example, he implies that such an idea, having the aura of a natural event, masks the working of human will, whether conscious or unconscious, individual, collective or aggregated. It is deduced from the mind rather than the facts, which for him were the more unpalatable ones concerned with market manipulation: What do the economists and those who heed their counsel do, when they want, for instance, to study something like the economic crisis of 1907? They first begin by studying the economic conditions that went before it, in 1906, finding there a year of favourable conjuncture. They then attempt to find in these prior conditions, the origin of the economic collapse that followed. If one follows this procedure, one is apt to confuse one’s mind with all sorts of nebulous notions, and become in the end altogether incapable of thinking straight in social matters. Whereas, if one examines the actual economic facts, one discovers something different. (1996a: 71)

Displacing the idea of cycles with human will is, or at least appears to be, a major disparity with conventional economics. But might not cycles be an idea, like Newtonian light theory, that appears to explain events but in fact does so only partially? The challenge, surely, is that the nature of human will cannot be left unexplored. Heilbroner and Milberg (1996: 79) similarly point to the need to include the ‘entirely human categories of purpose and will.’ This is why for them in paraphrase, for example, as an existential metaphor, rational expectations is not acceptable because for all practical purposes, it has eliminated the individual himself. The many references to animal behaviour – bull, bear, herd, etc. – hint at a need to know better how the human will works, the more so if ‘free will’ is held in high esteem, as by and large it is today. Yet how can the will be free if knowledge of its workings, especially as regards economic behaviour, passes us by? Or if, when exercised, the reference is in fact to animal behaviour? Convenient though it might be to suggest otherwise, the events of history pass through our will and do not circumvent it. The most they can do, along with explanations such as ‘credit crunch’, ‘forthcoming recession’ and ‘death spiral’, is put the will to sleep, lulling us into unconsciousness and sapping us of the forces necessary to confront life and to build it anew out of our own actions. This reference to will is not meant as an excursion into psychology. It is a matter of epistemology. When we need to understand something complex, like the global financial crisis, it is not enough to think superficially, relying on habitual ideas and expressions. One has to revisit assumptions, questions, long-cherished beliefs, stare into uncertainty, scan the horizon while in uncharted waters. All this requires a great deal of effort, even courage. In a word, will – a perfectly normal word referring to a straightforward fact of human life. As the saying goes, where there is a will there is a way.

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Our will works in the background, for the most part, like the involuntary nature of breathing or the functioning of the heart. When things go wrong, however, we need to pay attention to this unspoken ground on which we rely. This is the task of epistemology. To know what and how we know is to bring will to bear on our thinking. If, as many suggest, the global financial crisis is an event that is not behaving as it should – that is, in accordance with our explanations of economic life to date – the solution to it, the real challenge it represents, is to widen our understanding, to look afresh at the way we think about economic life. And to be prepared, if new ideas imply different behaviour, to act differently. In the end, economic life is possibly nothing other than will – what we will to happen, whether we have the will to change, whether we are able to show good will to one another, let alone allow it to be an item on the balance sheet.

4.1.6 Meta-economics When there is no will in our thinking it becomes habitual, dull and predictable, our ideas become terse, dry and dismal, and our words become technical and lacking in poetry. When we reflect on our thinking, however, when we challenge it, it is as if lifted up, becoming full of images. Ideas occur to us, images arise that buoy us along as well as – seemingly at least – explaining things to us. How else is one to understand such an image as Adam Smith’s invisible hand? Or that financial markets never close? Or ‘blue sky thinking’? To suppose that imagination plays no part in a rational society is a serious error on which, however, both the epistemology and techniques of financing have come to depend. Working as it does 24/7, global finance lifts us into a world beyond our normal ken. We have to find our way into and learn to be at home in that world before we can return from it to our specific (local) circumstances in order to understand them afresh – no longer from our private point of view, so to speak, but from the world’s point of view. We have, in other words, to visit the realm of what E.F. Schumacher (1974) called ‘meta-economics’, a set of ideas or assumptions about, or even an image of, the nature of existence that underlies what is said about it. Such meta-economics may be obvious or unspoken, explicit or implicit, but its existence should not be forgotten. The future of finance in particular will place great reliance upon it. Why do we speak, for example, of an ‘ideal’ inflation rate? To what reality, set of assumptions, or even world view does such an ideal refer? Quite apart from how we achieve price stability, why is it so important to us? Why is it so important to master the economy, if not the universe (the masters of which seem to have gone silent for the moment)? Surely it has to be admitted that economics would not exist or have any purpose were it not an endeavour to understand economic life such that it might be conducted to some ideal – even imagined – end. Whether the ideal is this or that, capitalism or socialism, political or economic, ‘good’ or ‘bad’, is, at least to begin with, secondary. But that economics unfolds in pursuit of something ideal and imagined is surely a universal statement that few would quarrel with. Their differences notwithstanding, human beings

The treatment of good will was one of the sticking points in reaching agreement between the US and British conventions in the process of arriving at international accounting standards, as recounted by IASB chairman, Sir David Tweedie, in his Sir Thomas Gresham Docklands Lecture on 27 September 2005.


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seldom if ever seek to understand something except that thereby they can give effect to some ideal, some image of the world they feel they should be living in.

4.1.7 The Objectivism of Ayn Rand It is, therefore, a fundamental problem when imagination and flights of fancy are thought by economists to have no part to play in any serious understanding of how economic life works. All is supposed to be reductionist, formulaic, modellable and quasi-mechanistic. At the extreme, it is precisely the supposition that economics should rid itself of unconscious motives that Ayn Rand with her philosophy of objectivism so set her face against, as also that of her fictional hero, John Galt in Atlas Shrugged (1957), but also much of the American financial community, including, of course, Alan Greenspan, who wrote for her magazine, The Objectivist (1966). For Rand, and those who share her view, humanity has not come as far as it has in order to succumb to subjectivity and thinking of the other (altruism), but in order to rid itself of such predilections once and for all. As Galt was made to put it at the end of his speech (in Part 3, Chapter 7 of Atlas Shrugged): ‘I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for the sake of mine.’ Ayn Rand called her philosophy ‘objectivism’, which she described as ‘the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute.’ The only social system consistent with this morality, Rand insisted, is pure, unfettered capitalism, and the only function of government is the protection of individual rights. She rejected religion. Altruism, in her view, was evil. Rand attracted a group of disciples, known (with self-conscious irony) as ‘The Collective’, which included Alan Greenspan. Indeed, his 18-year reign as chairman of the Federal Reserve, during which he presided over the unprecedented growth and deregulation of the US economy, was arguably the apogee of objectivism.

4.1.8 The Propensity to Divide One of the problems (if not the problem) of a single global financial system is the challenge it represents to the tendency of the English mind (but not only, of course) to divide the world in order to understand it. The problem, stated very loosely, is that little attempt is made to ensure that a thus-divided world is made whole again by the two parts giving way to a synthesis. Instead, the idea is that one of the two sides has to prevail over the other. This is a propensity, rather than a conscious intent, but it plays havoc with social life. It works especially through sloppy, incomplete thinking, and in particular through epistemological weaknesses – meaning ideas that, however plausible and no matter how widely held, are nonetheless untrue or at least only partially true. To paraphrase Goethe, it is by way of half-truths that untruth enters the world, and one should not in our times underestimate the untoward effects on general human consciousness that such influences can have.

Background source for this paragraph: The Week, 28 March 2009.

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Some of these weaknesses are at first sight innocent (even doubtful) and, one presumes, unintentional. They work their mischief even so; that mischief consisting in giving rise to ideas that require us to choose one side or other of a divide, in contrast to those that could lead to its being overcome. They tend to invite either-or thinking, when what is needed is either-and or both-neither. For example, did the suspension of the gold standard in early August 1914 result from or condition World War I? Surely the latter, since it preceded the inflation caused by its suspension (in order to print money for the war). Similarly, does peace stem from stable finance or stable finance from peace? And does money supply precede or follow events? More complex and more far-reaching, the split between macro and micro economics suggests that the economic world needs to be and can be understood differently depending on whether, for example, one is a business, especially a small business (which is what much of the world economy comprises certainly as regards new thinking) or a government or ‘official’ institution like the IMF. To quote J.K. Galbraith, this is ‘one of the intellectually suffocating errors of modern economics’, which, however, we owe to Keynes (1987: 295). Another is the clear division between the rich and the poor or, as modern sociology brands them, the ‘haves’ and ‘have nots’, or ‘North–South’. What is meant by these terms is honest and well intended, but they hardly suffice to explain the circumstances to which they refer. What do the rich have that the poor do not? Happiness? Excessive wealth? More than one house? Power? One needs to be precise and precision in economic affairs seldom allows for one-liners. If ‘North’ means Anglo-Saxon mindset (for which mindset ‘south’ is also a pejorative term for falling sales!), fair enough. But beware if it is geographic because many people in the geographic south, where society is vertically divided or stratified, enjoy the riches of the ‘North’, to which, geographically speaking, they also often export them. If what is meant is the inequitable (which does not mean unequal) distribution of wealth or the phenomenon of exploitation, here associative economics would point to an aspect of modern economic life that is near-universal and is the direct cause of this problem. The point, originally observed by Rudolf Steiner in 1906, is that the most effective form of exploitation is that practised by every human being against every other human being when one does not pay the ‘true’ price for something, anything. When, that is, the price paid is less than the costs incurred to produce a like product or service in the future. In 1922 he formulated this idea as follows: A ‘true price’ is forthcoming when a person receives, as counter-value for the product he has made, sufficient to enable him to satisfy the whole of his needs, including of course the needs of his dependants, until he will again have completed a like product. (1996b: Lecture 6: 83)

The effect of ‘untrue’ prices is that, bit by bit, purchasing power, more accurately money as a means of exchange (per Steiner, ‘purchase money’), is reduced relative to the capital in the world economy. This links directly to one of the central themes of this book, namely, that there is too much capital in the world for its own good as also for the good of the real economy. The balance between money and capital, means of exchange and store of value, cash and credit is now out of kilter; considerably so.

It is ironic to be writing this in a park in the centre of Geneva’s private banking quarter!


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The most powerful of all dichotomies affecting modern economic life, however, is the continuous use of the Left:Right divide, of which more anon. Presumably it is representative of some deeper cultural division. Even so, the damage wrought by it is enormous.

4.1.9 A Question of Causation The propensity to divide is a critical problem because implicit to it, embedded in it, are questions of causality which always reveal the type of consciousness at work. PostRenaissance and more specifically rationalist causality is often one-way and usually runs from the material to the non-material. However, modern economics (i.e. since Adam Smith) is not only subject to two-way causation, recursiveness, but also, in the view of George Soros and others, reflexivity, discussed shortly. So that ‘where’ one is when thinking economically becomes a crucial, if moot, point. In such matters the need is not to come out in favour of one point of view or another, but to be aware that today many perspectives can be had on the one ‘event’ – and by the same person – so that what matters is that one knows what point of view is being used at any one moment. Subtler still, is the ability to consider many points of view and thus not be wed to any one in particular, at least not consciously so. The ‘trick’, if one may call it that, is not to believe that because one understands how the world ‘works’, especially meaning how the material world works, that it is therefore primary. Positivism would that we understood the world ‘objectively’. This is perfectly understandable given its place towards the end of what one might call atavistic, unconscious history. But does that in fact mean life is to be devoid of ideals, founded on a self-subsisting realm of matter? Or does it not simply mean, less controversially, an end to atavism? After all, positivism is itself an ideal, certainly in the eyes of its protagonists. Atavism means one is not aware of what informs one’s ideas and even actions. One remains a creature of the gods. There is a certain nobleness to the aim, therefore, insofar as it represents an escape from deism of all sorts. Only that is not as easy as one likes to think. Economics in particular seeks to escape deism by explaining the world mechanistically. Indeed, it imagines the economy to be a machine. Not only does one try and model it physically, as in the case of the Phillips Machine, but modelling as such is mechanistic (no matter how informed it may be by econometrics and the alluringly selfsupporting logic of mathematics). But where is this machine to be beheld other than in a museum or behind a curtain in a Cambridge college? The fact that we think mechanistically, or at least use mechanistic images such as ‘the price mechanism’, does not prove such machinery exists. Supply and demand theory, at least in heuristic exposition, is equally mechanistic, yet it is held together by unseen categories such as ‘forces of the market’ and an invisible hand (no less!). Despite its pretensions to the contrary, in such respects, economics remains decidedly deist.

Phillips was in the first place an engineer, who, like many economists who were engineers, was disposed to reduce economic life to a ‘meccano’ construct rather than to imagine and depict it by way of an optical illusion in the manner of Escher.

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4.1.10 Reflexivity If we would really transcend deism, we need first to think like the gods; that is, think outside our brains, beyond the world of simple cause and effect, reflexively. There can be few better expositions of this view than that of George Soros. ‘Better’ because he combines theory and practice between which any divorce should be avoided, at least when it comes to finance, as distinct from physical commodities or goods. Although, presumably for want of a more accurate term, we speak of financial ‘products’, implying physical things made, wrought works, the substance of finance is scarcely sense-existent and has more kinship with such ephemera as thoughts (even thinking), expectations and biases. Even ‘instrument’ connotes the world of mechanics, unless and until it is meant in the sense that accounting is, or can be, a means of perception (see later discussion). Even so, it might advance our understanding if the one word ‘instrument’, for example, were not used to cover both sextant and balance sheet. But ‘better’, too, because Soros seems at home in both finance and economic theory, not more at home in one than the other. Despite its critiques, what he wrote in The Alchemy of Finance (1994) remains eminently thinkable. Whether one agrees with his thoughts – still less whether they amount or lead to inconvenient truths from a policy point of view – is neither here nor there as regards their validity as thoughts and indeed as an endeavour to understand. If one thing characterises the global financial crisis and global finance generally, it is the reflexive nature of its causation. Such things as ‘bad news’ from PNB Paribas notwithstanding, there is no one event or locus where the process begins (or began) and therefore no one event that can be introduced to prevent its continuation (albeit in changed form) or repetition. The luxury of a fixed point of departure is the main victim of the epistemology of a single global economy. Everything becomes reflexive. In Steiner’s image, this makes the economist, qua social scientist, part and parcel of what takes place in the retort: Economic processes are distinguished by the fact that we ourselves are within them; therefore we must see them from within. We must feel ourselves inside the economic processes, just as a being would do who was inside the chemist’s retort where, with a great generation of heat, something is being concocted. The being in the retort, whom I am now comparing with ourselves, cannot of course be the chemist. It would have to be a creature taking part in the heat, boiling with it, as it were. The chemist cannot do this; to him the whole thing is external. In natural science, we stand outside the process. The chemist could not take part in it, with the temperature in the retort far above boiling-point. (1996b: Lecture 4)

It is the reflexive, indeed alchemical nature of global finance and thus of an economy heavily influenced by finance, that gives to economic life itself a reflexive nature. As long as goods and finance are not conceived as distinct – meaning, note, that money cannot be regarded, let alone treated, as a commodity! – the economy of goods will never survive the impact of the economy of finance. Reflexive causation includes linear causation, but the converse is not true. Thus, Soros’s reflections go a long way to explaining how finance is an epistemological event as well as, if not before, an economic one. Get the epistemology wrong, and the chances are great that finance, because it can come to rest but is never at rest, will always

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trump the ‘real economy’, so-called, which is thought to be in or tending towards equilibrium, with disequilibirum seen as an aberration. The reflexive nature of the financial economy is crucial because it means that finance is a match, if not indeed a reflection, of thinking itself, which is also reflexive. This is alarming for those reliant in their economies on cause-effect thinking, but not for those who can think properly! But it does create a number of problems, chiefly our dependence on Newtonian thinking and the need to conceive and therefore manage an economic life not made up of ‘separate’ elements, but seamless. In practical terms, how to move from a severalty of national economies, and their related currencies, to one.

4.1.11 Beyond Newtonian Thinking As concerns Newtonian thinking (at least the Newton of public and popular lore), can one reliably liken the economy and its processes to a mechanical world of linear, oneway causation, such as terms like ‘equilibrium’, ‘transmission mechanism’, ‘closed circuit’ and ‘circular flow’ all call to mind? Are these concepts factual (that is, is the economy really a machine?) or are they pro-tem, best-yet approximations of a more complex world which our normal, Newtonian consciousness cannot in fact grasp directly but the explaining of which it is understandably loathe to leave to mere faith, belief, tradition or superstition? Even so, rather than liken economic circulation instead to a central heating system or building museum models, why not choose a meteorological analogy, as in the rain–rivers–ocean–evaporation sense? To probe more deeply, could circulation be an expression of respiration, as it is in the human being, where the circulation of blood is linked to breathing? This is not to advocate economic Luddism or to wax heterodoxical in the sense that term has when referring to those who decry a maths-only approach to economics. When Haldane wrote his paper likening the behaviour of the financial system to that of the internet, or SARS, and even HIV in Australia for some reason, his point was that continuing to liken the global financial crisis to a physical mechanism or even a computer model is as much faux economics as economics is faux physics (referring to our earlier discussion). Congdon (2007), for example, envisages the economy as a closed circuit within which its various constituent elements are rearranged, but not added to or subtracted from, by a ‘sharp jump in money balances.’ He then describes a series of transaction rounds, which result in a new equilibrium being engendered. But how can a closed circuit include a jump? Alternatively, why could equilibrium not be restored by an ‘unjump’? If, in our economic consciousness, we are ‘here’ then the need to be ‘inside the box’ (or equivalent expressions) is understandable. But suppose we are ‘there’, then we would not think in closed circuit terms. This does not mean that Congdon cannot think non Isaac Newton was a man of science and finance, whose name is forever associated with falling apples, light theory, the gold standard and the Royal Mint. He is for many a paragon of rationalism. In fact, according to his ‘secret’ papers, he was also an esotericist and of a particular persuasion, namely Unitarian rather than Trinitarian – something that as a Fellow of Trinity College Cambridge he felt obliged to keep under his hat, as detailed by John Maynard Keynes in a lecture entitled Newton the Man, given by his brother, Geoffrey Keynes, shortly after his death, at the Royal Society’s delayed Newton Tercentenary in July 1946. Perhaps because he was lecturing to students in Amsterdam. More seriously, whether a financial system ‘behaves’ or not is a moot point because that would suggest it exists unto itself, apart that is from the human beings without whom it would not exist.


Newtonially, witness ‘the trouble with a line of analysis [predicated on constraints in nature] [is] that it overlook[s] that money and banking are human institutions …’ (2007: 254) The difficulty is that when looking at human institutions we have necessarily to look at ourselves, something we can no more do directly than can the eye see itself.

4.1.12 The Nature of Knowledge With this thought we touch on the nature of knowledge and whether we think because or despite of the brain, to refer again to Steiner’s ‘1400 – 1380 = 20’ image of the brain. This deliberate piece of physics is axiomatic for Steiner. But it also provides a link to the oftheard, albeit colloquial, remark today, that one has to think ‘outside the box’ or use ‘blue sky thinking’. What, however, is being alluded to? What is ‘the box’? Where is the sky? Or the ground, for that matter? Surely, the references are to the brain and brain-bound thinking, the very things that rationalism regards itself as having used to overcome the atavism, speculation, mysticism and naïvety of pre-Enlightenment existence! The deeper question here is not, however, whether we can do this but how we do it and what is the resulting nomenclature? This is not a non-rational, let alone irrational, question to ask. At the base of all economics in our time lies the assumption that to be rational is to govern one’s behaviour by thoughts, whose genesis one can know. In other words, to be conscious of what we are doing and why. This implies that we are able to observe our thinking. And yet what else is economics if not the practice and observation of our thinking, albeit reflected before us? And why should that not be a rational thing to do? Indeed, it is a prime example of the propensity to divide that when claiming one’s thinking to be rational one knows the unspoken suggestion this makes that the ideas of other people are irrational. How less divisive it would be to talk, for example, in terms of consistency and inconsistency. The latter can hardly be used as an epithet. Admittedly, this idea brings one into conflict with positivist notions of the division of knowledge, but therein lies a crucial topic of central relevance to associative economics. Hayek (1945: 78) maintains that no one person can know all the ‘data’, nor can all persons together: ‘[The problem of economics] is a problem of the utilisation of knowledge which is not given to anyone in its totality.’ We each have partial knowledge, some we can only overcome, Hayek argues, by competition, although not as an end in itself but as a means of discovery. Steiner also recognises that as regards economic events the individual cannot have a full picture: ‘it is necessary, by direct human experience, to take hold of the economic process, as it were, in its nascent state – to be within it all the time. However, the individual alone can never do this’ (1996b: Lecture 7: 102). But Steiner’s solution to this conundrum is to seek ‘x’, to work together (hence, ‘associatively’) to approximate what we cannot see either individually or collectively, but which can become known to us through the ‘wrong’ price. Thence, we can seek to change economic fundamentals so that the ‘right’ price subsequently arises. A price, however, is a moment of equilibrium, a striking off, and is both preceded and followed by disequilibrium. Steiner’s concept of ‘true price’ is hardly strange. The entirety of monetary policy, and therefore, by extension the whole of practical economic life, is predicated on the quest for price stability, a desired ‘right’ outcome that, however, follows in due course as a consequence of immediate or near-immediate changes in behaviour.


Hayek and Steiner both see the problem as epistemological, therefore, and due moreover to the fact that in economics we cannot merely transpose the thinking with which we are used to looking at nature. However, where Hayek would overcome this by getting human beings to compete against each other but ‘within’ their ordinary consciousness, as it were, Steiner would have us all go ‘one level up’ – the author’s not Steiner’s expression – and there cohere our activities in service to something higher than ourselves, for the sake, as it were, of the economy as a whole, not only our individual interests in it. Importantly, Steiner arrives at the idea of ‘x’, meaning a sense for the world economy as a whole, by way of the following commentary on Adam Smith and supply and demand theory: The important thing is this: supply, demand and price are three factors, every one of which is primary. We cannot merely write: ‘Price is a function of supply and demand,’ or – to speak mathematically – treat S and D as variables, and P, the price, as a third magnitude resulting from the other two, i.e. P = f (S, D). No; we must regard all of them, S and D (supply and demand) and P (price), as mutually independent variables and by that means arrive at another magnitude, X. You see, we are coming to a formula. We must not merely suppose that S and D are independent variables and that price is a function of the two. All three are mutually independent variables, and their mutual interplay gives rise to something new: X = f (S, D, P). The price is there between the supply and demand, but in a particular way. The fact is, we must approach this whole line of thought from another angle. If we do see supply and demand, at any given point in the market, in the relationship in which Adam Smith saw them – if it really is so in any particular domain – then it is so only for the circulation of commodities as seen from the standpoint of the trader, although even here, it is not entirely the case. And it is absolutely not the case from the standpoint of the consumer, nor from that of the producer. For the consumer something quite different is true. The standpoint of the consumer is conditioned by what he has. Between what the consumer has and what he gives, a relationship arises, similar to that which arises for the trader as between supply and demand. The consumer has to consider the mutual interaction between price and demand. He demands less when for his pocket the price is too high; he demands more when it is sufficiently low. As a consumer he confines his gaze altogether to price and demand. We may say, therefore, that in the consumer’s case we must observe rather the interaction of price and demand; in the trader’s case, the interaction of supply and demand. Lastly, in the producer’s case, between supply and price, for he will seek to arrange his supply of commodities according to the prices that are possible in the whole economic process. Thus, we may call our first equation the trader’s equation: P = f (S, D). It is this that Adam Smith applied it to the economic system as a whole. But thus applied, it is incorrect. For we can also form a second equation, that of the consumer, with supply, S, as a function of price and demand: S = f (P,D). And thirdly, we can indicate demand as a function of supply and price. In this last equation we shall have: D = f (S, P) – that is to say, demand is a function of supply and price. This is the producer’s equation. P = f (S, D)

Trader’s equation.

104 F i n a n c e a t t h e T h r e s h o l d S = f (P, D)

Consumer’s equation.

D = f (S, P)

Producer’s equation.

Please note, these equations are also qualitatively different, inasmuch as here (in the consumer’s case) the supply is a supply of money, in the producer’s case it is a supply of commodities, and in the case of the trader something between the two. (1996b: Lecture 8: 106)

4.1.13 In or Out of the Box? As touched on earlier, many of these issues can be summed up by whether we are able to think ‘outside the box’, which in reality means beyond the brain, or at least its logicrelated hemisphere only. If we are able to practise ‘blue sky’ thinking in our economics, by, to use Steiner’s equally poetic thinking, ‘that which flies away from the earth’, we will not prefer one of two opposites – cash or capital, goods or finance, material or nonmaterial, for example – but simply recognise which reality is relevant in any case, and that often both are operative. It is crucial, too, to realise that when thinking ‘inside’ the box it is ourselves that come to the forefront, whereas ‘outside’ it is humanity as a whole, or, rather, ourselves as representative of humanity. In economic terms, this marks the difference of focus as between self-interest and the world-economy-as-a-whole. It is surely this one has in mind when furthering the concept of ‘economic health’ (meaning full employment and price stability) and for which Steiner’s ‘x’ – another supra-divide term – can also be said to stand representative. Indeed, the fact that economists may dispute how full employment and price stability are related, thus leading us to a divided world, does not negate the ideal as one they have in common. The question of where we are when thinking economically is most crucial, because most existential, at the ‘level’ of global economics; that is to say, outside national economies and the economics that goes with them, but outside, too, any severalty of nations. How is it in fact at the ‘level’ of humanity-as-a-whole? To be specific, all exchange rate policy comes to nought at this point because for the world economy as a whole there can only be one currency, not more than one. This marks the epistemological limits of conventional economics, insofar, as the Irish might say, that we think it starts from ‘here’ rather than ‘there’, whereas one could argue that today ‘there’ is where we need to begin. ‘There’, however, is both where ‘you are’ and ‘I am’.

4.1.14 Co-operation without Collusion Of a similar order, though the thought connection may be implicit rather than explicit, is the commonly implied idea that the division of labour only began when Adam Smith spoke of it, rather than at the dawn of human history. Granted, it may have quickened and become generalised since the Enlightenment and with the rise of individualism, but it hardly began then. Clearly, therefore, we need to take care that our epistemology does not artificially constrict our understanding. For example, while it may well be that human Though in the anecdotal category, evidence of this phenomenon is perhaps found in HSBC’s persistent airport advertising where a series of paired things is described from opposing points of view.


beings ‘default’ to being self-serving, are they, thereby, congenitally unable to act in the interests of others or of humanity generally? Quite apart from Ayn Rand’s injunctions and the continual iteration by economists that they should not do so, can human beings never co-operate for purposes other than connivance and self-interest? Can there never be co-operation without collusion? When liberals speak of ‘economic freedom’ do they really mean that or are they conflating two things – the co-operation implicit in division of labour and arguably the true hallmark of economics, especially at the global scale, and the need for the individual not to become subsumed in an amorphousness of altruism or some such? Could the problem not as effectively be described as needing a form of economics which does not divide into pro- and anti-individualism, but recognises that self-interest and working together each have their place? Rudolf Steiner speaks of a ‘fundamental sociological law’ operating throughout history whereby originally communitarian existence, in which the separate individual did not count, gave way (witness the rise of capitalism and rational consciousness) to assertion of the individual over against his tribe, etc. (2003: 32–3): [There is] a fundamental sociological law governing the development of mankind … which I would like to express as follows: In the early stages of cultural evolution mankind tends towards the formation of social units; initially the interests of individuals are sacrificed to the interests of those associations; the further course of development leads to the emancipation of the individual from the interests of the associations, and to unrestricted development of the needs and capacities of the individual … As soon as the state no longer considers itself an end … all arrangements will be made in such a way that the individual receives the greatest scope.

Although the persistence of the Left:Right divide suggests otherwise, the next stage is not a reversion to a communitarian modality (e.g. socialism), nor yet an intensification of individualism (e.g. triumphant neo-liberalism). It is a society in which the individual human being is celebrated and recognised and therefore given the property rights, for example, that he previously obtained by assertion. After all, in law ownership means exclusive right of use granted by the community, whereby the individual is given charge of the means of production. In short, going forwards, property rights will be predicated on recognition of the use made of the means of production by the individual accorded their exclusive use. An immediate riposte might be that that is precisely the merit of capitalism, but the question is worth asking nonetheless because the continuance, or otherwise, of capitalism is hardly a matter of historical indifference. To paraphrase French philosopher, Bernard-Henri Levy, we need to know if capitalism has failed us or if we have failed capitalism. More concretely, does the global financial crisis mean, as some wish, an end to capitalism? Will it be ‘solved’ by, in effect, a compounding of capitalism’s deficiencies? Or does it portend the metamorphosis of capitalism?


4.2 The Alchemy of Finance In the previous section much mention was made of Soros. In this section Soros’s arguments are presented in his own words. The purpose is simple, to take the reader into the mind of a man whose activities, for better or worse, are directly representative of the modern financial system. Our methodology being neutral, there is no intent here to endorse Soros’s thinking or even to defend what he does. The aim is merely expository. That said, Soros’s remarks provide an effective summation of the conventional economic ideas now being called into question by the global financial crisis. In the preface to the 1994 revised edition of The Alchemy of Finance, in which Soros reflects on and modifies or refines his earlier thinking, his characterisation of science and economics is both informative and telling. In most phenomena investigated by scientific method, one set of conditions follows another irrespective of what anybody thinks about them. The phenomena studied by social sciences, which include the financial markets, have thinking participants and this complicates matters [because] the participants’ views are inherently biased. Instead of a direct line leading from one set of conditions to the next one, there is a constant criss-crossing between the objective, observable conditions and the participant’s observations and vice versa: participants base their decision not on objective conditions but on their interpretation of those conditions. This is an important point and it has far-reaching consequences. It introduces an element of indeterminacy which renders the subject matter less amenable to the kind of generalizations, predictions, and explanations that have given natural science its reputation. Exactly because it is so disruptive, the social sciences in general and economic theory in particular have done their best to eliminate or to ignore the element of indeterminacy. I have taken issue with that endeavour and tried to develop an alternative approach which takes the participants’ bias as its starting point. [Although] I may have overstated my case [because it] is only in certain respects and in certain special circumstances that the indeterminacy becomes significant, [for example] in financial markets. The message of my book is usually summed up by saying that the participants’ value judgements are always biased and the prevailing bias affects market prices. If that is all I had to say it would be hardly worth writing a book about it. My point is that there are occasions when the bias affects not only market prices but also the so-called fundamentals. This is when reflexivity becomes important. It does not happen all the time but when it does, market prices follow a different pattern. They also play a different role: they do not merely reflect the so-called fundamentals; they themselves become one of the fundamentals which shape the evolution of prices. This recursive relationship renders the evolution of prices indeterminate and the socalled equilibrium price irrelevant. (6–7)

It is not that Soros is ‘out to get’ conventional economics in its attempt to be scientific by ghosting the natural sciences or the logical consistency of mathematics. His point is that such science is not a match for finance. Science, in other words, should never be equated with its subject matter. It is a method of thinking clearly about things, becoming one with them through thinking. Because the way one understands a rock is not the same as the way one understands a ‘put’, does not mean the former is scientific, the latter not. Moreover, in Soros’s view, the science of economics is particularly challenged because:

I t ’s t h e E p i s t e m o l o g y, S t u p i d 107 Equilibrium is the product of an axiomatic system. Economic theory is constructed like logic or mathematics: it is based on certain postulates and all of its conclusions are derived from them by logical manipulation. The possibility that equilibrium is never reached need not invalidate the logical construction, but when a hypothetical equilibrium is presented as a model of reality a significant distortion is introduced. If we lived in a world in which the angles of a triangle did not add up to 180 degrees, Euclidean geometry would constitute such a misleading model. (27) If the process of adjustment does not lead to an equilibrium, what happens to the conclusions of economic theory? The answer is that they remain valid as deductions but they lose their relevance to the real world. If we want to understand the real world, we must divert our gaze from a hypothetical final outcome and concentrate our attention on the process of change that we can observe all around us. (31)

This is a tall order, made taller by Soros’s questioning of key tenets to which economics, along with all those who depend upon its utterances, tenaciously clings. The crowning achievement of the axiomatic approach is the theory of perfect competition. Although it was first propounded nearly two hundred years ago, it has never been superseded; only the method of analysis has been refined. The theory holds that under certain specified circumstances the unrestrained pursuit of self-interest leads to the optimum allocation of resources. The equilibrium point is reached when each firm produces at a level where its marginal cost equals the market price and each consumer buys an amount whose marginal ‘utility’ equals the market price. Analysis shows that the equilibrium position maximizes the benefit of all participants, provided no individual buyer or seller can influence market prices. It is this line of argument that has served as the theoretical underpinning for the laissez-faire policies of the nineteenth century, and it is also the basis of the current belief in the ‘magic of the marketplace.’ (28) Let us examine the main assumptions of the theory of perfect competition. Those that are spelled out include perfect knowledge; homogeneous and divisible products; and a large enough number of participants so that no single participant can influence the market price… The assumption of perfect knowledge is suspect because understanding a situation in which one participates cannot qualify as knowledge. That was the assumption that I found so unacceptable as a student. I have no doubt that classical economists used the assumption in exactly that sense in which I found it objectionable because nineteenth century thinkers were less aware of the limitations of knowledge than we are today. As the epistemological problems began to surface, exponents of the theory found that they could get by using a more modest word: information. In its modern formulation the theory merely postulates perfect information … [Even so,] this assumption is not quite sufficient to support the construction of the theory. To make up for the deficiency, modern economists resorted to an ingenious device: they insisted that the demand and supply curves should be taken as given. They did not present this as a postulate; rather, they based their claim on methodological grounds. They argued that the task of economics is to study the relationship between supply and demand and not either by itself. Demand may be a suitable subject for psychologists, supply may be the province of engineers or management scientists; both are beyond the scope of economics. Therefore, both must be taken as given. (28)

108 F i n a n c e a t t h e T h r e s h o l d [But] this assumption is untenable. The shape of the supply and demand curves cannot be taken as independently given, because both of them incorporate the participants’ expectations about events that are shaped by their own expectations … Nowhere is [this] more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn, are contingent on present buy and sell decisions. To speak of supply and demand as if they were determined by forces that are independent of the market participants’ expectations is quite misleading. The situation is not quite so clear-cut in the case of commodities, where supply is largely dependent on production and demand on consumption. But the price that determines the amounts produced and consumed is not necessarily the present price. On the contrary, market participants are more likely to be guided by future prices, either as expressed in futures markets or as anticipated by themselves. In either case, it is inappropriate to speak of independently given supply and demand curves because both curves incorporate the participants’ expectations about future prices. (29) The trouble … is that there can be no assurance that ‘fundamental’ forces will correct ‘speculative’ excesses. It is just as possible that speculation will alter the supposedly fundamental conditions of supply and demand. (30) …such paradoxical behaviour is typical of all financial markets that serve as a discounting mechanism for future developments, notably stock markets, foreign exchange markets, banking, and all forms of credit. Microeconomic theory may continue to ignore it, because there are large areas of economic activity where it occurs only occasionally or not at all; but we cannot expect to understand macroeconomic developments without taking the phenomenon into account. A world of fluctuating exchange rates and large-scale capital movements is characterized by vicious and benign circles in which the ‘normal’ pattern of causation, as defined by classical economics, seems to be reversed: market developments dictate the evolution of the conditions of supply and demand, not the other way around. (31) In a sense, the attempt to impose the methods of natural science on social phenomena is comparable to the efforts of alchemists who sought to apply the methods of magic to the field of natural science. But while the failure of the alchemists was well-nigh total, social scientists have managed to make a considerable impact on their subject matter. Situations which have thinking participants may be impervious to the methods of natural science, but they are susceptible to the methods of alchemy. The thinking of participants, exactly because it is not governed by reality, is easily influenced by theories. In the field of natural phenomena, scientific method is effective only when its theories are valid; but in social, political, and economic matters, theories can be effective without being valid. Whereas alchemy has failed as natural science, social science can succeed as alchemy. (38) [Finally,] when it comes to financial markets, the distortion is more serious. The participants’ bias is an element in determining prices and no important market development leaves the participants’ bias unaffected. The search for an equilibrium price turns out to be a wild goose chase and theories about the equilibrium price can themselves become a fertile source of bias. To paraphrase J.P. Morgan, financial markets will continue to fluctuate. (45)

When it comes to finance, as a knowing doer, Soros is in the rare company of people such as Edwin Lefevre, author of Reminiscences of a Stock Operator, and John Maynard


Keynes, to whose investment and speculative skills Cambridge and the Arts Council to this day owe a debt. That does not, however, make Soros’s words any easier to read, let alone their implications any more readily digestible. To allude to Keynes’s (1923) A Tract on Monetary Reform, it is as if the fixed point has now become a moving one. Stability, sense, orientation is no longer a matter of preferring one’s own starting point, but the meeting place of all our destinations. The bellwether phenomenon used to be the gold standard, of course, until it proved impossible to return in 1918 to the parities of 1914. For all manner of reasons, by the end of World War I gold had become an unreliable reference. A hitherto supposedly static and therefore objective reference point had become alterable, if not by government interference then by gold discoveries. In Keynes’s words at the time: ‘the point about which the exchanges fluctuate, and at which they must ultimately come to rest … is not itself a fixed point …’ (1923: 89). This entails a fundamental problem for modern economics, which Steiner, commenting contemporaneously to Keynes, described thus: All economic theories of modern times … try to hold fast that which is really fluctuating … to observe at rest things that are always in a state of flux. In observing nature one can and often must proceed in this way … [but] we must … detach our thinking from familiar habits and ready it for a comprehension of wider issues. Losing its hard-and-fast outlines in the process, it then gains the power to grasp what is for ever fluctuating. We can only grasp in sharp outline that which lies close to us. However, our task is to achieve real insight, yielding mobile ideas, which never correspond to those derived from our immediate neighbourhood … [because] the economic process is built up little by little of the most manifold factors. (1922: 50)

4.3 Romancing Economics It belongs to the enthusiasm of the Enlightenment that rationalism saw imagination in an antithetical light, forcing it to take refuge in the likes of William Blake, whose poetry and images are a challenge to rational thought if ever there was. And yet, as noted elsewhere, imagination has always played an indispensable part in economics, including perhaps the ultimate contradiction of an imagined machine. It is perhaps time to rethink our ill-disposition towards it. This is not a fanciful notion. Such a discourse is beginning to appear precisely at the moment of the global financial crisis. The hitherto inconceivable thought that economics and Romanticism might have something to do with one another seems to be under review.

4.3.1 Angels, Lucifer and Satan In daring to link so dry a subject as economics to so vibrant a one as Romanticism, one may be thought to have parted company with rational thought. Though contestable, the convention has established itself that serious economics occupies a universe distinct from that inhabited by angels and their like, and accessed via mathematics rather than imagination. So, why do economists describe unforeseen and, therefore, unpredictable events with the felicitous (rather than derogatory) term ‘serendipity’? Is there some ‘quadrant of angels’ in the back of their minds where intuition and unpredictability are


the chief characteristics? Why then, too, did The Economist (18 December 2008) give such space to so imaginary a thing as angels? An article entitled ‘Angels – Messengers in the Modern World’, began with mention of William Blake’s ‘bespangled boughs’ and Cecil Collins’s counter-scientific, not to mention ‘counter-Thatcherite’, belief in angels as ‘part of the transforming process of the universe’. Angels, it seems, have survived the onslaught of the Enlightenment, performing ‘their age-old function as messengers and mediators between the seen and unseen, or material and spiritual, worlds.’ The article, author unknown as per the publisher’s policy of anonymity, was replete with a panoply of heavenly beings more usually found in theological than economic literature: ‘At the top of the nine medieval orders … are those who stand closest to the throne of God: Seraphim, Cherubim and Thrones. Then come the outer ranks: Dominations, Virtues and Powers. The last three orders alone have regular dealings with mortals: Principalities, Archangels, Angels.’ Even Lucifer is mentioned, somewhat crossplatformly, as ‘that great outlier’. All-knowing and ongoing, the place of angels in human evolution is defined by reference to Thomas Aquinas no less, though what Bagehot would have thought of the topic is anyone’s guess. The writer likens their nature to the world of the internet, computers and never-closing financial markets; so much so that one wonders if Soros’s earlier-discussed concept of ‘reflexivity’ might be code for angelic consciousness, to use the writer’s term, albeit not one much loved by economists. The article becomes even more intriguing when it says: ‘[The] sense of vital two-way communication, still not wholly explained by the synapses of the brain, is the chief reason that angels keep intruding into the 21st century.’ Even though the reference may have been innocent, mention of the synapses of the brain could not be more precise. Here in the biology and anatomy of the brain itself one finds the equivalent to the essential epistemological problem that this book is about. Space does not allow fuller treatment of the topic, but suffice it to say that the synapses of the brain (and of the nervous system more generally) are as mysterious as – or no more mysterious than – the closing entries in accounting (see 11.1.6) which take place after the end of one year and before the start of the next. Both phenomena share the characteristic of discontinuity. As if all that were not ‘bad’ enough, the Summer 2009 issue of Britain and Overseas, published by London’s Economic Research Council, included a review of Jonathan Black’s 2007 book, The Secret History of the World which the reviewer, Jim Bourlet, concluded as follows: The growth of human consciousness down the ages is a story of new thinking facing roadblocks thrown up by the institutions of power. Each age fights its own challenges – often secretly for fear of retribution. Open minded and far seeing individuals have to encode their thoughts in poetry, in plays, in pictures with hidden meanings. These are conspiracies for truth rather than evil. And as each hurdle is overcome mankind’s consciousness grows wider and wiser. Except that Lucifer seeks always to beguile us into false alleys and Satan sets us false goals. The modern materialistic world would have us diverted by baubles and separated from the divine – a new dark age where the spiritual world lies hidden from us.


4.3.2 The Romantic Economist As further evidence that economics would gain greatly from a rapprochement with Romanticism, consider Richard Bronk, who spent 17 years in the City and was impressed by the role of imagination, intuition and creativity in the financial markets, notwithstanding their reliance on mathematical modelling and mechanical language. In The Romantic Economist (2009) he argues that the ideas of Romantic poets and philosophers such as Wordsworth and Coleridge can give a new perspective on economics and create a more nuanced understanding of the field in practice. The following is an abridged transcript by Arthur Edwards of an interview of Richard Bronk by Andrew Marr on Britain’s BBC Radio 4 programme, Start the Week, 2 February 2009, talking about his book. Q: Just explain to us what you think the main problem is with traditional classical economics. A: Many years ago, when I was in the City, it struck me that there was a complete mismatch between the way that economists largely think about economies, which is through static equilibrium models with rational optimising individuals and so on, and the sort of markets and economies that I was looking at as a fund manager that were dynamic and creative systems. Q: Built by people with all sorts of personal agendas, which economics doesn’t include. A: Absolutely, and driven by relentless innovation, by perpetual novelty and very often by the self-reinforcing emotional spasms of euphoria and despair that we see at the moment. And at the individual level it always struck me that entrepreneurs and consumers are driven as much by imagination and sentiment, as they are by reason. If you think of the entrepreneur, he is forever creating new goods, imagining new options, devising new strategies ... At some level economics has to come to grips with this dynamic and creative aspect of what is going on. Q: It’s a problem partly then with the metaphors that are used for economics. A: That’s exactly right. The other key theme that I talk about is that the metaphors, the models, the theories that we use as scientists and as economists structure the way we look at the world. So what I am essentially suggesting is that for some of the time economists need to switch the metaphors they are using, switch the models they are using to those derived from romanticism to help them understand the romantic creative and imaginative aspects of economics. Q: How would a romantic economist have viewed the last 18 months? Would he have done any better? In other words, you can talk to lots of people in the City, and they will all say yes we knew something was wrong … and yet we couldn’t do anything. Could your perspective have been applied more successfully? A: Well I think it would have helped in the sense that there was a very deep intellectual failure, among economists and bankers, to understand what was going on. Both economists using the efficient markets hypothesis, and bankers implicitly assuming they could turn uncertainty into measurable risk (based on systematic regularities in the past telling you what is going to happen in the future) both of them were underestimating the extent to which creativity and

112 F i n a n c e a t t h e T h r e s h o l d innovation actually creates uncertainty that if you think of a new idea it injects novelty into the equations of life and it breaks that link between the past and the future … Q: Is there a democratic point here, that the rest of us hear a great wash of abstruse and abstract language coming from City types and economists, and therefore assume that these uncertainties and instabilities have somehow been understood and taken care of because of the language. A: I think that’s partly right. The language is a mechanical language that gives us the impression that we can predict what’s happening. … everyone wants to consult the economic model to tell them what’s going to happen in the future, just as ancient Greek generals used to consult the Delphic oracle to tell them what was going to happen … The chief metaphors drawing from Romanticism that I suggest are better to explain what’s going on are organic ones that look at the economy as either a weather system or an eco-system or whatever. … [But] there is one other imaginative attribute that we can bring to bear here, called by John Keats ‘negative capability’. If we are willing to remain in uncertainties without an irritable reaching after fact and reason as he puts it, if we are content to remain in half-knowledge then we are much more imaginatively receptive to any emerging patterns. And using the kind of models that you can use from complexity theory to simulate the tipping points and so on that we might hit, you can actually intuitively grasp emerging patterns rather better than if you pretend you can genuinely predict what’s going to happen.

4.3.3 Poetry and Science While it would be tempting to say the Romantics went one way while Newton went another at a critical junction in the history of thought; high road and low road might be a better metaphor. It is not easy to widen one’s mind at the same time as narrow it; perhaps we need to begin with the second, in order to find the ‘place’ where the first can be undertaken. It would certainly not do to prefer Coleridge over Newton unless research can unearth the Coleridgean equivalents to the gold standard or mastery of the mint. Coleridge may have spoken of ‘the despotism of the eye’, meaning our fascination with the physical world and the ‘lethargy of custom’ or lazy thinking that follows from it, but Newton was well aware that outer explanations of the world comes after one’s intuition about it. Coleridge (1983: 95) wrote ‘All the organs of sense are framed for the corresponding world of sense … All the organs of spirit are framed for the correspondent world of spirit; tho’ the latter organs are not developed in all alike’, an explicit reference to both the duality of the human being and the spiritual nature of the non-sense world (how typical of the English language to also have the disparaging word ‘nonsense’ ready to hand!). Yet one should not think too lowly of Newton too quickly for not using such language. In the lecture on Newton given posthumously by his brother, Keynes said of Newton: ‘[He] came to be thought of as the first and greatest of the modern age of scientists, a rationalist, one who taught us to think on the lines of cold and untinctured reason. [But] I do not think that any one who has pored over the contents of his box [of unseen writings] can see him like that … He was the last of the magicians …’ Owen Barfield, a scholar better known in US academic circles than in Britain, identifies the essential epistemological problem facing economics (inasmuch as it a direct child of the Enlightenment) in the following way:

I t ’s t h e E p i s t e m o l o g y, S t u p i d 113 It has already been emphasized that the rational principle must be strongly developed in the great poet. Is it necessary to add to this that the scientist, if he has ‘discovered’ anything, must also have discovered it by the right interaction of the rational and poetic principles? Really, there is no distinction between Poetry and Science, as kinds of knowing, at all. There is only a distinction between bad poetry and bad science. That the two or three experimental sciences, and the two or three hundred specialized lines of inquiry which ape their methods, should have developed the rational out of all proportion to the poetic is indeed an historical fact – and a fact of great importance to a consideration of the last four hundred years of European history. But to imagine that this tells us anything about the nature of knowledge; to speak of method as though it were a way of knowing instead of a way of testing, this is – instead of looking dispassionately at the historical fact – to wear it like a pair of blinkers. If we must have a fundamental dichotomy, how much more real it is (though even this is properly a division of function rather than of person) to divide man as knower from man in his other capacity as doer. Then, as knower, we shall find that he always knows by the interaction within himself of these poetic and logistic principles; and so we can divide him again, according to which of the principles predominates. If the poetic is unduly ascendant, behold the mystic or the madman, unable to grasp the reality of percepts at all – a being still resting, as it were, in the bosom of gods or demons – not yet man, man in the fullness of his stature, at all. But if the passive, logistic, prosaic principle predominates, then the man becomes – what? The collector, the man who cannot grasp the reality of anything but percepts. And here at last a real distinction between poet and scientist, or rather between poetaster and pedant, does arise. For if the ‘collector’s’ interests happen to be artistic or literary, he will become the connoisseur, that is, he will collect either objets d’art or elegant sensations and memories. But if they are ‘scientific’, he will collect – data; will, in fact, probably go on doing so all his life, to the tune of solemn warnings against the formation of ‘premature syntheses’… That the idea of Poetry and Science as two fundamentally opposite modes of experiencing life should have taken firm hold of a generation which honours Aristotle, Bacon and Goethe, will, I believe, be as much a matter of wonder to our posterity as it will – if not re-adjusted – be a matter of tragedy to ourselves. (1928: 38)

The tragedy can be averted if only we would readjust our economics to embrace what Coleridge long ago (he died in 1834) articulated. As summarised by Barfield: Polarity is dynamic, not abstract. It is not ‘a mere balance or compromise,’ but ‘a living and generative interpenetration.’ Where logical opposites are contradictory, polar opposites are generative of each other – and together generative of new product. Polar opposites exist by virtue of each other as well as at the expense of each other; ‘each is that which it is called, relatively, by predominance of the one character or quality, not by the absolute exclusion of the other.’ Moreover each quality or character is present in the other. We can and must distinguish but there is no possibility of dividing them. But when one has said all this, how much has one succeeded in conveying? How much use are definitions of the undefinable? The point is, has the imagination grasped it? For nothing else can do so. At this point the reader must be called on, not to think about imagination, but to use it. Indeed … that the apprehension of polarity is itself the basic act of imagination. (1971: 36)


Reconciling opposites is the key to understanding modern economic life – whether those opposites be Newton and Coleridge, the real and financial economies, monetary policy and financial stability, cash and credit, goods and creativity, wrought work and aspirations. This would be a real, genuine and constructive response to the more searching questions posed by the global financial crisis. On this point, writing about and at the time of the Great Depression, Barfield said the following: The economic life is today the real bond of the civilised world. The world is held together not by political or religious harmony, but by economic interdependence; and here again there is the same antithesis. Economic theory is bound hand and foot by the static, abstract character of modern thought. On the one hand, everything to do with industry and the possibility of substituting human labour by machinery has reached an unexampled pitch of perfection. But when it is a question of distributing this potential wealth, when it is demanded of us, therefore, that we think in terms of flow and rate of flow, we cannot even begin to rise to it. The result is that our ‘labour-saving’ machinery produces, not leisure, but its ghastly caricature, unemployment, while nearly every civilised and half-civilised nation of the world sits helplessly watching the steady growth within itself of a malignant tumour of social discontent. And this increasingly rancorous discontent is fed above all things by a cramping penury, a shortage of the means of livelihood, which arises, not out of the realities of nature, but out of abstract, inelastic thoughts about money! (1944: 64)

‘Inelastic thoughts about money.’ That speaks reams. What would elastic thoughts about money look like, one wonders? What, indeed, would money then look like?

4.4 Twin Hemispheres With these examples, one is intending to infect the reader’s mind in two ways. By inviting him, on the one hand, to doubt the certainty of mechanics in which economics places great store. On the other, working with the idea of polarities that converse rather than compete. In this way, perhaps we can begin to realise that today’s crisis is not only technical or a matter of confidence or liquidity. It is epistemological in the deepest sense. Our brains may only weigh 20 grammes, but that is not the end of the story. They also have two hemispheres – one scientific, so to speak; the other poetic. Central to understanding the global financial crisis, therefore, is to recognise the impossibility, in fact, of divorcing economics from imagination. Not only are its key ideas in fact images, to wit an invisible hand! Not only are its central concepts wholly invisible to the senses – who has ever seen a market force? – but it is known that the information on a foreign exchange dealer’s screen is meaningless (or means the same to everyone), so that it is the image he makes because of what he sees, providing it differs from all other players, that is the basis of his actions. Perhaps, therefore, it is time to let go the pretension that economics is a purely rational affair. If nothing else, the use of clearly irrational terminology in finance would then be understandable. It would move from the bizarre and anachronistic to the telling and of the moment such contradictions of rationalism as ‘money created out of nothing’ (as claimed by critics of the banking system), ‘In God we trust’ rather than the US Federal Reserve; the endorsing of British coinage with ‘defender of the faith’, and,


when wishing to capitalise a perceived risky business, seeking out ‘angel investors’. Far from being nonsensical, this might restore to reason some of the attributes rationalism has robbed it of. It would be all too easy to write off the citations in Section 4.3 as tongue-in-cheek exercises or lapses from type. But who knows what will inhabit our minds if, like the financial markets, they never close? Is the blue sky in fact full of messengers calling on us to question the assumption that rationalism is the only way we think, rather than an aspect of the way we think?

4.4.1 Two Kinds of Cognition In fact, we would help ourselves greatly in economics were we not to oppose the two kinds of cognition but to allow each its reality. The brain is now known (assuming it was not in the eighteenth century) to have two ‘sides’, left and right, scientific and imagining, that speak to one another. We may refer to people being more artistic than scientific and thus more right brained than left. But this is lay talk. In a healthy human being both play their part, for the divide between poetry and science is more notion than fact. Here is not the place for a discourse on the brain, but this two-sidedness is mentioned because it is emblematic of the central problem in economics, indeed thinking generally, that we divide and separate in order to understand (and thus reunite). Two aspects of economics, at least associative economics, are related to the phenomenon of the brain’s two-sidedness. Firstly, the reliance in double entry bookkeeping on the left–right orientation for debits and credits respectively (see later discussion in Chapter 11). The fact that the one side reflects the other either means nothing happens, as it were, and, therefore, so what? Or it means that by this very fact we insert ourselves into the process. What it does not mean is that one can prefer a debit to a credit, the left to the right, or vice versa. If only we could see that such a thought is as sociologically pointless as it is in terms of accountancy. In similar mood, it is often said by those who do not like the mathematical bias of modern economics that it is time to let go the quantitative in favour of the qualitative. The idea has a certain allure, but is also a trap if by it we mean to escape the numerate dimension of our understanding. One of Steiner’s key thoughts, for example, is not that one should prefer the qualitative over the quantitative, intuition over labour, the financial economy over the real; but that just as the real aspect of economic life requires labour, so the inventive aspect saves or obviates labour. Indeed, the qualitative can only be measured by its effects, by the labour it obviates. The sermon of a village pastor in olden (that is, unmonetised) times would have to be valued as inspiration by his flock at least to the value of whatever food they gave him during the preparation of his sermon, while they were away tilling the fields. The value of art – economically speaking, not in terms of the art market or entertainment – is the productivity engendered by the inspiration it gives rise to or the release it provides from stress. The one side of economic life cancels out or matches the other, so to speak. There is no more reality in preferring the real to the financial, therefore, than to wishing one did not have one side of one’s brain. Even that colloquial metaphor for left and right brainedness, the choice between a PC or a Mac, is not as black and white as one likes

For a fascinating account of the role of imagination and reason, see Wright Mills (2000 [1959]).


to think it is, or as it perhaps was. There are now many cross-platform applications and it is well known that many of the programming staff at IBM, for instance, are active participants in open system communities. What matters is not which side of the conversation one is on, but that one undertakes the conversation. One is able to pass from one modality to another and know in which one is at any point. More specifically, one knows where the difference, the interface, the threshold between them lies. For this is not ‘out there’, objectively existing. It is in the act of discernment itself. In monetary policy, it is easy enough to aver rule or discretion, but both have their place. The key is always the unseen but pivotal role played by discerning the relevance and appropriateness of each, as also how they are related. If rule is preferred because, analogously, it is a form of automation, one ought not to forget that automated procedures are usually subject to manual override, although the reference should not be to the hand but to the consciousness that activates it.

part

II An excess of energy which can find no lawful outlet tends to become destructive … – D.E. Faulkner-Jones


chapter

5 Rudolf Steiner’s

Conception of Society

Ever since the 1980s, the normal framework for understanding and conducting modern economic life has been a mix between freely unfolding economic activity and the context provided for this by the state. Thus markets are left free until they fail. The talk may be of a stateless economy, with regulation given over to market forces. The reality seems to be boom then bust, partying until the punch bowl is removed or runs dry. Are we really unable to behave without foresight and maturity, however? Can we not govern our conduct consciously? In 1919, Rudolf Steiner argued that by then society had evolved to the stage where the state and the economy need to be understood according to their different purposes: the one to engender rights, the other to produce goods. In his view, these are contrasting social realities which should be allowed to develop autonomously so that a conversation between them can result rather than a contest. Vis-à-vis the economy, it is not about the state intervening or being obviated, but about knowing the place of each.

5.1 The Relation Between State and Economy The story of this book so far is that the global financial crisis is both a technical and an epistemological event, but that at a certain level these two aspects – the way we think about economic life and the way we behave – are in effect two sides of one coin. We have also pointed to the reflexive relationship between the two. Simply said, or at first sight, the problem is chicken–egg. But close-to it seems more the case that the way we think is primary, or rather the images we use are. When looking at socio-economic conditions in the nineteenth century, for example, it would have been simple enough, surely, to reduce adverse conditions by increasing wages, or to see that capital, while it might appear to belong to a particular class in society, technically has nothing to do with social status. But this is to look at those times with the benefit of hindsight and, it has to be said, of the considerable social evolution since those times. The point is that, whether rightly or wrongly, such an economic approach was not taken. The ideas that we now are able to have, thanks to universal suffrage and much else, simple did not exist, aside, that is, from such ‘enlightened’ people as Robert Owen and the Quakers (to keep a British focus). Far more powerful were the ideas that came from two quite different quarters. The one was the gradual unfolding of economic theory from Smith to Ricardo to Mill to Jevons to Marshall (again, to stay with Britain). In the course of the nineteenth century, economics was given the tone of mechanism in the way it portrayed economic life. The other was Karl Marx’s analysis. In general terms, these two perspectives live on today as the main but divided view of the world.


Both look at the same set of circumstances – modern economic life – so it cannot be those circumstances that inform our disparate images of it. Those images must come from elsewhere. It need not concern us where from precisely; the point is that they then overlay economic life with an image of it. It is from this image, or these images, that we then go on to fashion, shape and organise economic life itself through the enactment of policies.

5.1.1 Images are Primary From this point of view, images are primary and what the global financial crisis has done is to call into question the way we understand economic and financial events. It is easy enough to say that the ‘efficient markets hypothesis’ has (or has not) failed. That discussion is likely to serve little purpose, however, other than to keep alive the Left: Right divide on which it is predicated. The efficient markets hypothesis presupposes a more general, and more generally accepted, set of ideas, namely that markets, not the state or any other agency, are the primary modality, the stuff even, of economic life and that these, when allowed to follow their own logic, can perform ‘perfectly’. They succeed (though one seldom uses the term) when perfect competition obtains, when, that is, the myriad players in a market cancel out each other’s ability to corner it. In acting in this way, they are motivated by short-tem profitability, this being the way they increase the return to (or the efficiency of) their capital. When, for whatever reason, this ‘ideal’ condition does not arise, markets are said to have ‘failed’ and it is in order for some other agency, usually the state, to step in, on the assumption that it, however, presides or claims to preside over all our interests. Though they are difficult to see because of the seemingly objective and quasi-scientific vocabulary of economics, two images lie behind this way of looking at things. The first is a negative view of human beings – they can only serve themselves, never one another. (If this were the case, there would be no charities, however. But no jobs either because in economic life one cannot do anything except for other people. No one made a living from building his own house or eating all the meals he cooks in his restaurant.) The second is that, humanity being held in such low esteem, we cannot ourselves overcome our egoism and self-interest, but rely on a Leviathan to do it for us. Whether the Leviathan is a figment of some pre-Enlightenment novelist or the state bailing out private banks, the image is the same. The message given is the same. The behaviour encouraged is the same. Namely, do not believe that ordinary human beings, ordinary citizens, can act otherwise than out of blind egoism. The idea that, alongside our selfinterest could be, let alone is, another dimension to human existence, namely enlarged egoism, the ability to take others into account, is not admitted. And yet how much simpler life would be if we recognised that human nature is not essentially selfish, but only partially so. The other part concerns itself with earthquake victims, the poor of the world or the starving. We need but elevate this aspect of ourselves to the level, accorded in economics so far only to egoism, and we would right our ship, re-balance our economy, solve our crisis. For to what else do government injunctions or central bank admonitions make appeal than to the part of us which does not think short term or only of itself?

R u d o l f S t e i n e r ’s C o n c e p t i o n o f S o c i e t y 121

The English at best often call this an appeal to enlightened self-interest. Only that is imprecise. We do not touch solid ground until we refer to ‘awakened other interest’ – the more so if ‘other’ is a reference to the health of the worldwide economy as a whole.

5.1.2 Beyond ‘the Market’ Why this monologue? In order, hopefully, to call into question the language of ‘perfect competition’ and ‘market failure’ insofar as they are the unconscious surrogates for acting individually and acting collectively. With ‘perfect competition’ and ‘market failure’ one has no clue that the human being has any part to play, because the very ideas preclude him on the ground of his supposedly subjective nature. Acting individually and acting collectively, on the other hand, are themselves a picture of the two-sided nature of the human being. This places human beings at the centre of economic affairs, but calls on them to discern within their behaviour which side of their being is active at any one time or in any one transaction. For there are things we do individually in economic life – like eat or buy a pair of shoes. But there are other things we do collectively – like pay our share of the local fire service (because to do so is more not less efficient). The idea that only individualism connotes efficiency has to be overcome. Likewise, that collective connotes socialism (in the pejorative Randian sense of the word). If we could look afresh at the human being and overcome the myopia of modern economics in that regard, life would seem very different. And not only seem: it would be very different. The way we felt about economic life would change, becoming less contentious. And economic life itself would be perceived as a field of active mutual endeavour, rather than a battleground full of herdish behaviour and quasi-military terminology, such as ‘strategy’ and ‘banks leading the charge’, as one business editor described the way out of the global financial crisis. Then, too, we would begin to see that by ‘perfect competition’ we need not only mean all actors behaving atomistically in ignorance of and in competition against one another. It could equally mean they work together to the same end, for example, price stability, so that the value of money equates with the value of available goods and so that financial behaviour is inherently stabilised rather than after the event. In that sense, the future lies not with any form of class warfare, whether overt or sublimated, but with ‘citizenised central banking’, to refer to a topic taken up in Chapter 10. And by ‘market failure’ we can come to mean that when our economic actions, whether individual or collective, overstep their bounds, when for example, we pollute or use child labour (in the negative sense) we are able to adjust the context, the property rights, the laws within which our otherwise ‘free’ economic activity is nevertheless conducted. In short, ‘perfect competition’ and ‘market failure’ understood as external agencies can give way to something very different, much more concrete and close to the human being – a sense for the free play of initiative in economic life and, alongside but not in antithesis to it, a sense of right or of when such free play exceeds its healthy limits. It is this sense of right, after all, that is alert when we seek to maintain clear property rights and the law of contract, without which no economic activity can be ‘safely’ undertaken. This sense of fair play, to use an English term, is not the same as the sense that one needs to be free in one’s initiative. They are different senses, but they belong together. Once we know this, we would rather not speak in terms of an opposition between ‘perfect


competition’ and ‘market failure’, but speak instead of the contrasting natures of economic life and rights life, and of the need for them to work together, not for one to ‘trump’ the other, to use Alistair Darling’s expression.

5.1.3 Steiner and Bobbitt All this has been a prelude to the two remaining sections of this chapter – Rudolf Steiner’s socio-economic analysis and, its foil in our times, Philip Bobbitt’s concept of ‘market state terrorism’. In the twenty-first century, after the global financial crisis, everything will depend on the images we make of the future. In particular, whether they are linked to fear or courage, above all courage in one’s conviction, especially one’s conviction concerning human nature. Egoism necessarily links one to the edge of the world. Once that edge is reached, however, what then happens? Or, to change the metaphor, when people set out from their different sides of a mountain to reach its summit, at which point by definition all territory comes to an end, whose flag is planted there? That of one part of the human family, or one that we can all own? Similarly, does one fight blindly against others for market share or work together so that the market serves all our purposes?

5.2 Threefold Society Though its focus is on matters economic obviously, associative economics presupposes a wider conception of society, also taken from Rudolf Steiner (1977), in terms of which the economic life is one of society’s three main aspects; the other two being spiritual or cultural life, comprising education and justice, for example, and rights life, comprising legislation and matters of polity (democracy, politics, etc.). The conception is based on the idea, hardly new in history, that society is threefold in nature. Plato, Montesquieu, Comte and many others have all said as much. In this respect, Steiner’s image of the threefold nature of social life is not so much new, as updated. Steiner’s particular observation is that the evolution of society’s threefold nature is now such that the three spheres need to each find their own locus and from there cohere through ongoing ‘conversation’ between them. Otherwise each will vie to dominate the other two. Though not widely known, Steiner’s analysis of society as having three interactive elements merits detailed attention. That cannot be our purpose here, however, except to suggest that associative economics arises where the state and the economy, having each found its rightful locus or ‘centre of gravity’, cease to be muddled up with one another. The aim of the preamble of this chapter was to come up inside this idea, rather than approach it from outside. To show that it is not foreign to an Anglo-Saxon mind and that in fact something of this already exists in the perfect competition:market failure construct, the reliance in conventional political and economic life on a working relationship, conversation even, between the state, on the one hand, and the economy (albeit in the form of markets), on the other. In neo-liberal thinking, one also has a sense of the need for economic life to find and follow its own logic. Ostensibly, at least. That is why one seeks to get the government or the state out of the economy. The conceptual reasons and underlying motivation may not be those of a threefold society, but the overlaps are real enough.


The converse or corollary tends to be absent, however. Few voices cry out for parliament to concentrate on rights matters, legislation and so on, and reduce its direct involvement in economic life. The reason why the converse of neo-liberalism is absent is because the state is seen to fulfil the ‘other-oriented’, distributive function that an economic paradigm focused exclusively on egoism or self-interest leaves to such images as an invisible hand, all boats floating on a rising tide, and ‘trickle down’ (though some might think ‘scraps from the table’ more apt).

5.2.1 Central Bank Independence Is the idea of a working relationship between the state and the economy so far-fetched? What else is it when, at the moment of a major market failure by the banks, states come to the rescue? Maybe they ‘shouldn’t’. Maybe free marketeers should be made to lie in the bed of their own making and be consistent to their philosophy. But such sentiments tend to keep alive the rivalry between two elements, now understood as rights life and economic life, when the need is for them to comport their different natures and not each try to subject the other to its own. How else is one to understand the deeper significance of ‘central bank independence’? Admittedly, the layman may not appreciate that central bank independence only means ‘operational independence’, the use of an independent monetary policy committee to set interest rates, and not ‘goal independence’, the right to set its own inflation target, which remains a task of government. The effect of this partial independence, however, is to leave the central bank caught between the state and merchant banks, when in its ideal form central bank independence would mean independent of both – operational and goal independence. The idea of such double or full independence can be traced at least as far back as Henry Thornton, possibly earlier. An MP in 1782 at the age of 22, Thornton rejected any party connection, preferring to champion ‘civilising influences’. When he spoke in parliament it was mainly on topics of finance, and then, to cite Anna Schwartz, in the spirit of multum in parvo – much in little. Nothing is perhaps more ‘Thorntonian’ than the following paragraph: To limit the amount of paper issued, and to resort for this purpose, whenever the temptation to borrow is strong, to some effectual principle of restriction; in no case, however, materially to diminish the sum in circulation, but to let it vibrate only within certain limits; to afford a slow and cautious extension of it, as the general trade of the kingdom enlarges itself; to allow of some special, though temporary, enquiries in the event of any extraordinary alarm or difficulty, as the best means of preventing a great demand at home for guineas; and to lean to the side of diminution, in the case of gold going abroad, and of the general exchanges continuing long unfavourable; this seems to be the true policy of the directors of an institution circumstanced like that of the Bank of England. To suffer either the solicitations of merchants, or the wishes of government, to determine the measure of the bank issues, is unquestionably to adopt a very false principle of conduct. (1978: 259)

Quoted in Capie and Wood (1989: 2).


These observations draw attention to what, ideally at least, the central bank does. It seeks to match the availability of money to the waxing and waning needs of the economy in a more sophisticated way than a mere gold constraint allows, but to the same effect – that is, to provide a matching amount of money. Because Thornton’s eye was on price stability and the management of inflation, his remarks remain apt today when financial stability, which under modern conditions central banks have difficulty ensuring, threatens to undermine price stability. Although not in general use, inasmuch as full independence refers to the central bank as an ‘above the fray’ institution, the concept is neither new nor unknown. Consider Goodhart (1988: 104) when he says that already by the dawn of the twentieth century central banks had ‘[metamorphosed] from their involvement in commercial banking, as a competitive, profit-maximising bank among many, to a non-competitive non-profit maximising role that marked the true emergence and development of proper central banking ...’ Full independence is also implicit in Churchill’s idea of ‘a non-political body free altogether from party exigencies, and composed of persons possessing special qualifications in economic matters’ (see 6.1.6: Full Central Bank Independence), and it is a frequently-found image in the context of the Federal Reserve System of the USA. McChesney Martin, Chairman of the Federal Reserve Board from 1951 to 1970, put the argument for independence as follows: ‘an independent Federal Reserve System is the primary bulwark of the free enterprise system and when it succumbs to the pressures of political expediency or the dictates of private interest, the groundwork of sound money is undermined.’ Blinder, too, is clear about the need for distance from the financial markets in order to avoid the temptation of ‘[delivering] the interest rate path that the markets have embedded in asset prices’, (1995: 55) and to counter herdism in speculative markets, faddish bubbles, and the short time horizon of traders, even those dealing in long-term instruments. But he also claims ‘there is no more reason for central banks to take their marching orders from bond traders than to take their orders from politicians’ (1995: 76). Thus, the debate over whether central banks should be independent of governments is more sophisticated than many recognise, and serves to show that central banks can be understood as societal, meaning neither agents of the state nor markets, but of society directly. Before any cry goes up of unelected representation or democratic deficit, it would be well to reflect on what happens when a central bank governor attends a hearing at parliament. He does so to account to parliament for his actions, actions usually conducted in the context of a very clear remit, but not always technically understandable to MPs, who, for the most part, have a lay understanding of this field. What other agency is required to report to parliament in this way?

The image is from Capie, Goodhart and Schnadt (1994: 91): ‘Central bankers are, perhaps, seen as having more in common with the judiciary, than with politicians or commercial bankers; and are perceived as both technically expert, above the fray of self-seeking, and a necessary agent (of democratic government) for imposing order on a potentially unruly financial system.’

Quoted by A. Jerome Clifford (1965: 18).

Academic and sometime board member of the Federal Reserve Bank.


5.2.2 From Imperialism to Partnership To return to Steiner’s threefold image of society, to say that such a view of things, let alone any modality based upon it, has been conspicuous by its absence these past hundred years, and even deliberately resisted, is to state the obvious. Steiner’s analysis was lost to view as part of the seemingly wholesale discarding by western economics of anything that hailed from Central Europe (except the Austrians!). For better or worse, twentieth-century events were dominated by that ‘special relationship’ between Britain and America, a fact to which Keynes gave eloquent first-hand witness in his 1919 book, The Economic Consequences of the Peace, and with which he had to contend for much of his professional life, from his writing of A Tract on Monetary Reform in 1922 to his proposals at Bretton Woods in 1944. Mention is made of Steiner’s wider social conception not only because of the context it provides for his economic ideas, but because it would demonstrate naïvety or a feigning of ignorance not to recognise that the global financial crisis raises the question of global economic governance. In accordance with what paradigm, frame of reference or value system is global finance, and thereby, global economy to be conducted? When devising international accounting standards, which mindset is to be embodied? Usually the AngloSaxon. Likewise, one hears little talk of so ‘southern’ an idea as inflation above 2.5 per cent being a paragon of economic virtue. To date, the evolution of finance up to the global level has been an essentially AngloAmerican affair, not only in terms of geo-political realities (which it is not the intention of this book to comment on other than to note their existence) but because so-called mainstream economics is essentially an Anglo-Saxon construct, carefully honed and developed to ‘prefer’ the value system of those from colder climes (or air-conditioned offices) where such concepts as price stability are so natural a fit as to give rise to the idea that they are universal truths for all humanity, and therefore justifiably pressed upon the world above all through global finance. For one thing has to be said about global finance – it cannot abide a severalty of cultures. Global capital cannot operate unless, wherever it operates, price stability is regarded as a virtue. The question posed by the global financial crisis in this regard is whether, once gone global, the paradigm that prevailed up until that point continues to be world-dominating or becomes world-recognised, the instrument of a rarefied and unspoken imperialism, or the modus operandi of a worldwide spirit of partnership.

5.2.3 The Metamorphosis of Capitalism The relationship between state and market is of the same kind as that between failed and perfect markets. The same thought underpins the two. They are instances of the same epistemological problem – a seeming inability to distinguish in our minds between things of very different characters without assuming that the world will thereby be rent in two. This problem is addressed fully later (see 7.2: The Propensity to Divide). At this point it is only touched upon because an aspect of financial evolution that is often overlooked is the way it is accompanied, at least in the financial community, by deeply influential books. Ayn Rand has been mentioned in the previous chapter for this reason. But mention ought also be made of Huntington’s Clash of Civilisations (1992 lectures that became a book in 1997), which for many provided a rationale for all that unfolded after the fall


(lifting?) of the Iron Curtain. That book had a deeply divided world as its image, as does its ‘sequel’, Philip Bobbitt’s Terror or Consent (2009), considered shortly. Attention is drawn to this aspect of the global financial crisis because it is all too readily omitted (indeed, many will say it is beside the point), and yet the effect of such works is to marginalise points of view other than the Anglo-American one. This is not to say that this is right or wrong, enlightened (as those who represent it think it is) or nefarious. It is only to say it is so, in order that one can understand why it is that any other world view that sees the global financial crisis as an opportunity for it to come to the fore – Keynesian, Islamic, Thai Happiness, Baha’i; the list is quite long – is likely to be disappointed. This is why this book only makes passing mention of the many alternatives that exist to capitalism. The gesture of this book is not to point to the deficiencies of capitalism and then rest content for social agencies other than markets to ‘pick up the pieces’. But nor is it to advocate its overthrow. The gesture here is metamorphosis. Capitalism is well able to recognise its shortcomings – the question is whether we will find the way to overcome them, capitalistically, as it were. Meaning: can we link capital to something other than real estate and stock markets without crashing the global economy? The question is neither naïve nor rhetorical. It belongs to the irony of global finance that the more it conquers the world, the more pyrrhic its victory becomes. When all inflation rates are flattened as a consequence of central bank independence and the related raft of financial liberalising techniques, what will happen other than that foreign exchange differentials will disappear? In 1992, when ‘breaking’ the Bank of England, George Soros said (in a televised interview with Timothy Garten Ash) we face a choice in monetary history – either to arbitrate between currencies and exchange rates in order to arrive at a single global currency or to legislate to that end. The euro, after all, had the effect of removing 11, then 16, eventually 27 currencies from the mix. The project may be political, but the effect is a well-known piece of economics – forever fixed exchange rates. That was why, Soros said, he bet against sterling rather than the franc or any other European currency.

5.2.4 Concerning Power The ‘problem’ with a financially flat world is that it provides no vehicle for rivalry, that is to say, power. In principle, the rise of a single global economy requires power to become yesterday’s story. In practice, of course, it continues. Which is why Steiner’s idea of a threefold society and its ‘child’, the interdependent autonomy of the economy and the rights life, has been introduced here. The use of capital for power is what has to go if capitalism is to undergo any serious and lasting transformation. But this is also why Bobbitt’s Terror and Consent is highlighted. It portrays a world in which the existing, dare one say, pre global financial crisis, paradigm continues unaffected. As long as its imagery and thesis have the influence they clearly have, life after the global financial crisis can only become more tension-ridden.

That said, interestingly enough, though outwardly pointless, every invoice in France still reminds one of the French franc value pre-euro.


5.3 The Market State As we have seen, the global financial crisis belongs to a time when, in the views of many, the nation state has passed its sell-by date, outlived its historical validity. For many, typically those from the foreign relations community, such as Philip Bobbitt, this validity expired at the end of ‘The Long War’ (1918–1990). In terms of Steiner’s world economy thesis, however, the nation state should have already changed at the time of World War I. In Steiner’s social analysis, this was when the nation state should have confined itself to rights life, which should remain national. For Rudolf Steiner, an international rights life is problematical. International rights should be a harmonising of independent polities, not the result of a supernational polity. Again, the gesture of Friedman’s ‘own lights’ dictum comes to mind. Instead, the nation state, via Woodrow Wilson and the Treaties of Versailles, has had its existence prolonged through economic means, which can only give rise to all manner of complications. Now is not the time to retrench on a basis of power and reified conflict.

5.3.1 Terror and Consent The clearest, and probably most influential, exposition of this view is that of Philip Bobbitt in Terror and Consent. The book begins as it intends to go on, with an unnecessary and, because it is one of only two pictures, gratuitous photograph of a summary execution in Iraq. What role does this have other than to impress terrorism on the mind? The argument Bobbitt makes, introduced as a footnote on page 4, is that ‘The emerging constitutional order that promises to maximise the opportunity of its people, tending to privatise many state activities and making representative government more responsible to consumers is contrasted with the current nation state, the dominant constitutional order of the twentieth century that based its legitimacy on a promise to improve the material welfare of its people.’ Throughout, Bobbitt’s thesis, as summed up on page 458, is ‘The threat that terror, rather than consent, will be the basis of the new market state.’ This threat rests in no small part on the supposition that weapons of mass destruction will pass beyond the control of the UN’s permanent five. We will move from provision of prosperity via the nation state to the protection of its citizens and the maximisation of their assets by the market state. Bobbitt had already described the market state in his 2002 book, Shield of Achilles, in which its characteristics are described as follows: ‘[In] contrast to the nation state [the market state] does not see the State as more than a minimal provider or redistributor. Whereas the nation state justified itself as an instrument to serve the welfare of the people (the nation), the market state exists to maximize the opportunities [of its citizens]. Such a state depends on the international capital markets and, to a lesser degree, on the modern multinational business network [including the news media and NGOs]… in preference to management by national or transnational political bodies. Its political institutions

Also this author’s view, but only as a vehicle for economic life.

The other being Guy Fawkes’s signatures before and after being racked!


are less representative (though in some ways more democratic) than those of the nation state’ (44). In contrast to Steiner’s earlier described image of economic evolution from local to national to global economy but without the state implicated in economic life, Bobbitt’s historical analysis is princely state to nation state to market state, in all cases wedding the modality of the time to the state. The result is that ‘Market states … have interests that range far beyond their national territories but are not in any sense incorporated into the state…’ (61). ‘Markets,’ he says, ‘unlike nations, are often global’ (83). Of particular note is the incessant and insistent link of the market state to terrorism. (Most of the index references to the market state are in fact to ‘market state terrorism’.) Indeed, the chapter in which Bobbitt sets out what he means by the market state is entitled ‘The Market State: Arming Terror’, and begins: ‘The emergence of the twenty-first century market state is the principal driver of the Wars against Terror. The same forces that are empowering the individual and compelling the creation of a state devoted to maximizing the individual’s opportunity are also empowering the forces of terror, rendering societies more vulnerable and threatening to destroy the consent of the individual as the essential source of state legitimacy’ (85). Why this insistent link to terrorism? Why default to the negative in humanity? Why treat as ineluctable future historical fact what need not be? Instead of basing society on protection against a phenomenon, terrorism, that arguably derives from abdication of individual and collective responsibility, why not unfold a mature form of capitalism in which individuals have a thought directly for the overall economic life as well as their own narrower interests? In principle at least, this would address the claim of Islamic fundamentalists and others that the west is morally bankrupt and has forfeited any right to manage economic affairs.

5.3.2 Courage and Partnership If, as Bobbitt argues, terror is a category or event above and beyond individual terrorists, and if terrorism is a response to perceived oppression, which it is in nearly every case, surely we need to envisage then enact a quite different scenario, one that passes from respect for one another to partnership to courage, which, given today’s circumstances, the first two in fact presuppose? How different things would (and could yet) be if Steiner’s threefold analysis were adopted. Thereby, the nation state would confine itself to rights life, economic life would become associative, and sovereignty would become that of the individual. Not the assertive individualism of before, but society’s celebration of the individual in the sense of the earlier cited fundamental sociological law. At that point, consent between sovereign individuals becomes the basis of political sovereignty also, if only because one would no more violate another’s space than have one’s own space violated. Bobbitt writes of sovereignty: Thomas Jefferson and the editorial committee to whom he grudgingly submitted his draft of the Declaration of Independence wrote the following immortal passage in the convention’s open letter to the king of England: ‘We hold these truths to be self-evident: that all men are created equal: that they are endowed by their Creator with certain inalienable rights; that among these are life, liberty and the pursuit

R u d o l f S t e i n e r ’s C o n c e p t i o n o f S o c i e t y 129 of happiness; that to protect these rights, governments are instituted among men, deriving their just powers from the consent of the governed.’ The Declaration directly addresses the British sovereign and is, in fact, an attempt to redefine the sovereignty of states. To understand ‘sovereignty’ it is helpful to remember the origin of this concept in the body and will of the prince. Just as a man’s will is sovereign as to the conduct of his body, so the prince (and later the State) were thought sovereign as to the instruments of government, that is, its internal law and external strategy. (243)

But that was 1776. Nowadays, state sovereignty ought to become passé, except as deriving from and in support of individual sovereignty.

5.3.3 America and Britain The very premise of Bobbitt’s book leads to, even creates the landscape he describes. It is a good example of how whatever we think today can become reality, not only because of the power of thought, but because thoughts can transpose quickly into policy, or better put, geo-policy. For it is surely misleading to use the term ‘foreign policy’, when the dedication of Terror and Consent includes the words: ‘Law and strategy, American and Briton: strongest and wisest when in concert.’ How can that not be a dignified way of saying brawn and brains? Rather than celebrate its market state idea, still yet critique Bobbitt’s book at any length, the following passage serves to give a more detailed image of the market state and the case made for it: Market states say: Give us power and we will give you new opportunities. In contrast to the nation state, the market state does not see itself as more than a minimal provider or redistributor of goods and services. States used to run airlines, telephone companies, and cable and wireless monopolies. Market states abandon these enterprises and see their role as enabling and assisting rather than directing the citizen’s interaction with choice. For example, poverty is to be alleviated by providing the poor with education and job retraining sufficient to permit them to participate fully in the labor market rather than by giving them welfare payments. Pension funds move from defined benefits protocols to defined contribution models – putting more responsibility on, and providing more opportunity to, the individual. Armies are to be raised from volunteers, compensated on a basis competitive with non-military employment, rather than by mass conscription. The total wealth of the society is to be maximized, which will enrich everyone to some degree, rather than enlarging the wealth of any particular group (like the poorest) through interventions in the market that tend to depress total economic performance and can sometimes bring impoverishment for all. (88)

Again, the contrast to Rudolf Steiner’s analysis is interesting. Instead of Steiner’s rights life and economic life in interdependent autonomy, Bobbitt talks of the nation state versus the unfettered market. In its extreme, the market state provides the citizens with the means to acquire, via state-provided funds, known as ‘conditional cash transfers’, the ‘freedoms’ they cherish. Bobbitt’s view is stark, dreary and Hobbesian. The reason for representing it, albeit briefly, is to show how different it is to the idea, central to this book, of a choir of cultures.


A single global economy may of course be the arena for the kind of strife that Bobbitt converts from unfortunate, though hardly innocent, development to foundation of the future, but surely humanity can do better? It would be sad indeed if the global financial crisis were the prelude, not to mention pretext, for the sort of scenario Bobbitt envisages, and the foreign policy considerations that would give it expression.

5.4 A Single Global Economy 5.4.1 Choir of Cultures A choir of cultures stands in marked contrast to such things as the League of Nations and the United Nations. The Council of Europe might be a closer example of what one has in mind. To be clear, the choir of cultures is not an idea from Steiner, but a figment of this author’s own imagination, in whose mind, however, it arises as if by inevitable logic. How can the economy of the world be shared or perceived as something in common if any one part of humanity calls the shots? Unless every people, regardless of its economic ‘size’ has a seat at the table’? But what global number or Gn would that give rise to? Hardly 20, let alone anything as low as eight or less! In fact, the number should be as many peoples as there are on the planet. A choir of cultures is not nonsense. Put poetically, every people or nation shines a light peculiar to it. Practically, however, as a polity each would also need to be free to pursue a monetary policy that all other polities respected. This was known to Keynes, who wrote about it in 1923 (see 11.1.3), and echoed by Milton Friedman when he brought poetry and practicality together in the one well-known sentence cited at the beginning of this book. If we could find our way to a choir of cultures, even if only as an image, things would look very different. The image is as potentially powerful as that of an invisible hand – only the invisible hand alludes to an unseen force making everything come right while a choir of cultures implies that such processes have become conscious or, to refer to Keynes, deliberate and scientific. We now know how to behave economically and are no longer in thrall to financial markets or those whom we suppose (often without grounds) understand them. It is as if we have all become Dorothy when she saw through the humbug of the Wizard of Oz.

5.4.2 Single, Closed, Global Economy From that place – of mutual identification and respect for one another’s comparative advantage, of heightened awareness of the ultimately unifying effect of the division of labour – the need for, underlying presence and indeed immanence of a single global economy would be obvious. We would, so to speak, have arrived on the other side of the global financial crisis, from which vantage point we would be looking back at it. From that place (remember this entire account is presented hypothetically) the features of such a single world economy would be evident, whereas before they may not The reference is to Hugh Rockoff’s well-known study of the Wizard of Oz as a monetary analogy which in part inspired this author’s book, Rare Albion (2005).


have been. These features, however, are those Steiner’s economic and monetary analysis either directly or impliedly points out. They are, in effect, the furnishings or hallmarks of an associative economy. To repeat, however, they are articulated strictly on the grounds that this author thinks they merit considering in terms at least of their explanatory power. Beyond that no claim is being made on the reader’s time or credulity except as his own curiosity determines. As we have seen, Steiner’s basic premise is that by the time the twentieth century dawned, economic evolution had arrived at the stage of a single, closed economic domain – in terms of which neither the way we act nor the way we think can be explained, understood or even predicated on atomistic thinking. For example, where there is more than one economy, that is, where there are national or supernational economies, we think and act via such concepts-cum-practices as specie flow or balance of payments. Or, more crucially, competition. But in a single, closed economy – if that be the world – no such thoughts-cum-techniques can operate. Instead, in reverse sequence, one needs to think and act in terms of association (cooperation without collusion), the three functions of money (albeit updated to three kinds of money in conformity with the dynamics of a single global economy – see next chapter) and a universal point of reference that is neither gold nor yet the world’s ‘strongest’ currency (or the economy to which it belongs). Each and every idea – as these three show – confronts one today with considerable challenges in terms of both the way we think economically and the way we behave. However, that is not grounds not to consider them. But nor is it grounds to advocate them in zealous mode. Steiner’s point is fairly simple. If his hypothesis is correct, all description, explanation and conduct of modern economic life that is less than global will be but an overlay or continuation of old realities over the new. But it is the latter that will out in the fullness of time. If this point is not appreciated or given a fair hearing there is no prospect of it being taken seriously – neither as an analytical tool nor as a guide for policy. The purpose of this section therefore is to pause for thought to ask whether Steiner’s ‘hypothesis’ does not merit consideration after all. It is certainly not part of this book’s purpose to advocate it in the abstract. Its initial merit must reside in its perceived explanatory power. What, then, does a single global economy look like? The answer offered to this question here will begin with the lens pulled back as far as it will go, in order to get a master, panoramic shot – to borrow an image from cinematography. It will then zoom progressively in on details. We have earlier outlined Steiner’s view of economic history in terms of a progression from local (or private) through national to global, and how this relatively straightforward evolution is readily understood but subject to two processes that are perhaps less easy to grasp. The first, which is expressly described by Steiner, is the distortion of the straight line of economic evolution by the involvement of the state in economic life. When today’s economics was founded, that particular stage had already been reached. National economies had developed out of the private economies. This must be borne in mind if we wish to understand the economic ideas of Ricardo or Smith, for then we can understand the thoughts they evolved about ‘political economy’, as they called it. It was this working together of private economies which they actually saw and upon which they based their views. In Adam Smith you can see it again and again – how he thinks from the point of view of private economy or business and thence draws his conclusions. At the same time he has before him the picture of

132 F i n a n c e a t t h e T h r e s h o l d their joining together into a national economy. Yet even in their ideas about this latter process the older economists retained to a large extent a way of thinking based on private business. They treated national economy on the analogy of private economy. Thus the fertility, the prosperity of a national economy, as they conceived it, lay in this – one national economy would exchange with another, would come into mutual intercourse with another and would thus derive profit and advantage. The ‘Mercantilist’ school, for example, was based on the advantages arising from such exchange between national economies. Now already at this early stage there is sure to arise a kind of leadership. In effect, the most powerful of the private economies which have merged into a larger complex will naturally assume the leadership; and this would undoubtedly have happened at the transition from the stage of private economy into that of national economy. But it was masked and hidden; it did not come fully to expression, because the State undertook the leadership. If this had not happened, one private economy – the most powerful of them – would naturally have been the leader. So in effect it happened that the single private economies actually passed imperceptibly into the form, not of national, but of state-economy. (1996b: Lecture 11)

The second, a thesis advanced by this author, rather than Steiner, is the ultimately (post global financial crisis) unifying but initially (ante global financial crisis) appropriating role of banking and finance.

5.4.3 Sovereignty and Democracy This, as already noted, turns on our notions of sovereignty, the equivalent term of which, it is worth noting, is at the heart of central banking – seignorage. All economies revolve around some form of sovereign. Since one of the arguments of this book is that sovereignty has passed from gods to temple priests to kings to banks, and ought to end up with the individual citizen, at the extreme, this would also mean each individual should emit his own money and create his own credit, but with their values a function of the rest of humanity’s estimation of them (see 10.3.1: Citizenised Central Banking). Both Bagehot and Hayek have the image that a currency is validated by the user of it, not the emitter. It would again be naïve not to see the events in Iraq and Afghanistan as in part a shoring up of the US dollar by military means. Never has the dollar been given such a ‘run for its money’ as that entailed by the introduction of the euro. Challenging as this may be to our democratic mind, the passage of sovereignty from the gods to the individual is a tenable thesis. Indeed, it is a very precise response to democracy, the future of which could be said to depend, in turn, on how it responds to the way in which sovereign but separate individuals relate to one another. This, whatever outer form it takes, will have to be predicated on respect for and non-invasion of individual sovereignty. (In Steiner’s terms, the cultivation of a free spiritual life.) One should not be naïve, however. The fact that much in finance dismays the democratic spirit does not necessarily mean finance is anti-democratic. It could as easily mean democracy is not the right watchword when it comes to finance; or that our understanding of the place or even idea of democracy in modern society is deficient. An aspect of the Argentine crisis in 2001 was that the Argentine peso was linked to the US dollar constitutionally, but the Federal Reserve Bank would and did not share the seignorage earned by this extension of its currency area.


Sovereignty, of individuals as of nations, both inner and outer, is as real a concern and in these respects may prove to be the better guide. For some this is a future prospect, but for this author it is a fact of life already. Only it is obscured because of its confusion and conflation with the two larger historical processes already touched on – the intertwining of the state in economic affairs, and the eventually unifying but first appropriating consequences of banking and finance. If Steiner’s approach is of use today it will be because it can at least explain how to overcome these influences. Whether or not the courses of action implicitly recommended are followed up is a matter of political will, the absence of which, however, in no way disproves Steiner’s theory or invalidates the extrapolations of it that this book puts forward. This is an epistemological point that is not peculiar to Steiner’s view, of course. It holds for all economic thought. The fact that human beings are disinclined to follow the promptings of their heads with their feet, to walk their talk, to put their money where their mouths are, to match their rhetoric with their deeds, is a general problem for humanity as regards economics. Indeed, in certain respects this is the problem of economic life, the eye of the needle of history: can human beings overcome the separation of thought and will? This, too, is not as complicated a matter as it may at first appear. We have already elsewhere noted that economics is characterised precisely by the fact that whatsoever we think becomes policy, then deed, social fact. This is as true of Marxist economies as of capitalist ones, as indeed of green economies. As long as there is more than one economy, however, this fact stays in the background. Our attention stays on comparing the different ideologies and their expressions. And every ideology tends to claim the other is bankrupt when it points to the discrepancy between what the others claim they will achieve and what they in fact do. In 1989, many spoke of capitalism’s triumph over the ‘proven unviability’ of Marxist economics. Nowadays, the same is being said of the efficient markets hypothesis. The problem today, however, is not which ideology is supreme, but where to go once (a) all other ideologies have been chased from the field probably never to return (if only because wider share and home ownership, individualised pension plans and so on have compromised the socialist psyche), and (b) the till-now predominant ideology is found wanting (should that prove to be the case).

5.4.4 One World Polity This way of interpreting the global financial crisis may understandably be regarded by more polite readers as speculative, and by the less polite as a case of inventing a problem in order to write a book about it! Such charges are anticipated, and may indeed become validated by future events, but the interpretation arises as a result of considering the two processes mentioned earlier. The first is that, per Steiner, the state, rather than confining its remit to national rights life, will seek to outflank an economic life gone global by creating first supranational polities (e.g. the EU) and then a single global polity. That many serious minds expect there to be a world fiat currency (and therefore a world central bank and therefore a world polity, albeit beyond the direct reach of the electorate) by 2020 or thereabouts shows how probable this outcome is. For example, not only is the topic of growing interest in the


fringes of economics, such as the deliberations of the Single Global Currency Association that are held annually at The Mount Washington Hotel in Bretton Woods; but it is also in the forefront of IMF considerations. The second is that the banking system, rather than giving way to a banking process predicated on individuals using electronic media (QuickBooks, PayPal, etc.), which would then enable them to become conscious emitters of money and creators of credit, will somehow deny these possibilities by continuing to portray and position itself as the locus of both these processes, while the worst outcomes of this way of conducting economic life, of which the global financial crisis is a clear instance, will be bailed out by the use of ‘taxpayers’ funds’.

5.4.5 Delinking State and Economy As we have seen, Steiner’s analysis points to quite other possibilities than these, however. Rather than becoming compounded and justified by increased regulation, for example, the remit of rights life should be confined to nations, on the one hand, which cannot be done unless, on the other, the economic life is given its own governance, but a governance not predicated on power or politics. So, no longer based on the strongest economy because in a single global economy that is nonsense. How can the USA, for example, be the strongest economy if the larger part of its currency is outside it or if it is a major debtor? How can China be the strongest economy if it depends on unsustainable consumption or the export of its huge accumulation of US dollars, not to mention the regimentation of its population? That power and politics will continue is not being questioned. One cannot afford to be naïve. But that they are necessary or inevitable, that is being questioned. At this stage in history nothing is inevitable except that what lives in our will tends to be stronger than what lives in our thoughts. Much depends therefore on whether we can become conscious of the ideas at work in our will life and whether if we do not like those ideas – for example, if we have a problem with inequitable wealth distribution – whether we do anything about this (such as the Fair Trade movement aims to do). This is not to speak about a future day. It is about current reality. Humanity is more evolved than it gives itself credit for. By the same token, it has opted to compromise its true potential far more than it likes to admit. For example, while many bridle at the idea of economic life having its own governance, even if a single global economy requires it, the fact is that a form of this is already present in such institutions as the IMF and the World Bank, but especially the replacement of GATT by the WTO. None of these constructs, however, could exist except that they involve ‘official’ funding and such quasi-democratic assumptions as inform the membership rules of the IMF or the G20. These institutions are not in fact examples of economic governance, but of political control of global economic life. True global economic governance would be very different. To give one example, if it became clear that there were too much capital in one part of the global economy, it would be disbursed to other areas that were in need of capital. Or else spent away. For example, the Australian government would not initiate economic activity by building schools itself. It would require financial institutions to ‘correct’ their balance sheets by investing in school buildings. That is to say, governments would require free market consistency.


The one line of thought, therefore, is to undo the muddling up of rights life and economic life. For Steiner, this is not a matter of getting the state out of economic life in an absolute sense (although there are overlaps with such a philosophy). Steiner is not a libertarian. It is a matter of confining the state to its proper realm – governance of rights life. In this regard, very crucially, one cannot speak of state sovereignty. The passage of sovereignty from the gods, through priests, through kings to the individual does not pass through the state. From a financial point of view at least, wherever the state seeks to be sovereign the individual cannot be. And vice versa.

5.4.6 Beyond Banking The second line of thought is that true self-governance of economic life relies on individuals becoming jointly and severally responsible for finance.10 The technical and historical possibility that we now have to do this we owe, not to the thread of sovereignty, but to what we call banking. Modern banks came into being in large part because of the surplus engendered through trade. For Steiner, surplus capital, excess liquidity, comes to expression though the agency or function of trade. For him it would be no surprise that financial evolution is led by merchant banks (even if renamed ‘investment banks’) because they are representative of this fact of economic life. Wherever capital emerges in trade it has become emancipated from economic life generally. It is liquid by definition. Which is why an opening balance sheet always comprises ‘cash’ as the asset and capital as the liability. Conversely, to know the value of the capital in any balance sheet all other items in it have to be cashed out or evaluated as if they had been. Very precisely, therefore, investment banks represent the emergence of trade capital. But that means that (a) their first allegiance is to global economic life, not to any particular location, and (b) the form of trade capital becomes ever more abstract, until it becomes the most rarefied transaction possible – the profit on a fee charged on fictitious transactions, to make euphemistic reference to such a case as AIG. Historically, of course, the emergence of banking – even the word – was linked to trade very directly. It is indeed a monetisation of trade between traders, where money not goods changes hands. Such people, the luckless moneychangers of old, sat behind tables (bancas) and when they came unstuck their table was unceremoniously broken in two (hence ‘bankrupt’).11 As is the way with monetisation, however, the thing or event for which it originally stood proxy becomes eclipsed, disappears from view and becomes forgotten. Something comes to expression that forgets its representational function and believes itself to exist in its own right. At which point all economic causation becomes recursive. Trade, actually the context of banking, comes to dance attendance on it. In the further evolution of economic life, individual banks increased in number and as a further step in abstraction or monetisation traded among themselves. Thus, individual banks became part of a banking system. Thus also, the argument, especially heard today,

10

This is an allusion to ‘joint and several liability’ in partnership contracts, it being their counterpart.

11 Shakespeare’s Merchant of Venice is as good a portrayal as any of the origin and dynamics of this development. Its enduring modernity also says much.


that one only saves an individual bank if its demise cannot be contained to its own balance sheet. If it cannot be made to fall within its own ‘footprint’, to coin a phrase. Where systemic collapse is thought possible, the banking system will be maintained. But the banking system entails a process between banks which ultimately exists independently of them. At that point, it becomes anachronistic to maintain the banking system. Where one does so, something other than the banking system will be maintained. Put another way, the banking system will move from being in service to general economic life to requiring the economy to serve the banking system. This will be required and reinforced by the fact that the banking system itself will have become essentially dependent, not on savings and such traditional functions as intermediation and relational finance, but on an abstraction – the money markets. At this juncture – the high point of financial evolution – the question becomes: what is the economic counterpart to the money markets, for they will now have abstracted themselves completely from the ‘real economy’, the economy of goods and physical life?

5.4.7 Finance – a Part or Apart? This is what is meant by the appropriating effect of financial evolution. Finance comes to regard itself as more real than the so-called real economy, a reality apart. The cost to the real economy of this development eventually becomes an impossibility. Profitability, even revenue, is undermined by finance costs, rates of return speed up, performance becomes measured on a quarterly basis (or more frequently than that), the markets never (are able to) close. They function 24/7, a feat that none of the human beings ‘in’ them is able to match, no matter how wide-eyed their annual bonuses make them. This is the threshold that banking and finance bring us to. Relative to the real economy, finance is always a thing apart. But is it a reflection or a reality in its own right? Is it an abstraction of the real economy and therefore subject to the latter’s logic, however extended? Or does it have its own logic? And if so, should this remain the province of experts (bankers, in particular) or become generalised to every human being? At this point it is crucial to observe that, just as individual banks gave way to the banking system, now the banking system has given way to what one might call the banking process – and with that the need for everyone to understand how finance operates. In a word, financial literacy (and its primary instrument – accounting) becomes the new banking. (See 10.3.1: Citizenised Central Banking.) From such commanding or, better put, rarefied heights, finance, especially global finance (finance unto itself, so to speak) has the, perhaps unexpected, power to provoke a consciousness of the role of the individual in economic life. At this point it will seek, but in a new way, to unite itself again with the real economy which it has so recently obviated. Thus, it can begin to unify what it has sundered and reconnect to that from which it has separated itself. Such is the nature and latent promise of all abstraction.

5.4.8 Overcoming Abstraction ‘Local economies’ are defined by the currency that belongs to them and that in reality identifies their boundaries (which are by no means always contiguous with political, language or other considerations). National economies likewise come into being when local (or sub-national) economies elect or are required to use the same currency. It is well


known that monetary union can provoke political union. But with local and national economics the unifying effect is always linked to the fact that one’s economy is distinct from, and in that sense unified against the others. In a global economy, such as has implicitly obtained since the late nineteenth century, the unifying effect of finance also operates, but not by way of competing against another economy. Instead, competition gives way to partnership, joint and several responsibility. The irony of economic competition is that it ultimately nullifies its own rationale; elements that compete against one another begin to compete with one another (com-petere). This is the meaning of ‘association’ when first glimpsed. This dynamic – of passing from competition to association – already exists. Max Havelaar, Fair Trade, community-supported agriculture, even Local Exchange Trading Systems, all provide evidence of this new understanding. But if it is not given clear macro economic expression, it will become a caricature of itself. The past does not prolong itself. It metamorphoses. Moreover, once the stage of a global economy has been reached the future is more important than the past. The past always has the signature of thoughts, ideologies, value systems seeking to condition the way we behave (educating our will life) and especially the way others behave. The future, however, which is the primary reality in a global economy, has the signature of the will life, now educated, giving expression to the thinking embedded in it, with the primary question being whether ideological distinctions can nevertheless cohere within or be cohered by the fact of one, not more than one, economy. In psychological terms, the individual passes from assertion of his own will to facilitation of the will of others. The financial concomitant of this is that we begin to see the importance of uncollateralised capitalisation of initiative.

5.4.9 Joint and Several Responsibility In short, will finance in its forward journey be able to favour any particular ideological perspective? Or does it not, out of its own nature, call for a paradigm of which it is in fact also the harbinger, a paradigm all of its own? Does modern finance not bring us to the ultimate in social atomism, at which point all ideologies have run their course. Can a single global economy be ‘capitalist’ or ‘socialist’ or ‘green’, or anything of so overtly a one-sided and political nature? This is why policies have in the end to be cross party if they are not to be disruptive. This is why governments of all persuasions today have to be ‘financial market friendly’? Capital, in other words, cannot be subject to political capture. It belongs to wherever there are profit opportunities. Yet ‘profit opportunities’, though they may be called different things in different regimes, are everywhere. Along with capital, they are a universal phenomenon. All this means that, quite technically, finance, in accordance with its own logic, cannot be a function of the state with its passé sovereignty, nor of the banking system, which has also served its historical purpose. It must become grounded on the joint and several responsibility of sovereign individuals. Indeed individual sovereignty will not be a reality if it is not also financial sovereignty. The individual is, or should be, responsible for his own economic behaviour both real and financial. He should not want to hide behind ‘agents’ or ‘authorities’ other than himself.


chapter

6 Rudolf Steiner’s Monetary Analysis

In Rudolf Steiner’s view, by the time of World War I economic life had become global with the implication that there should only be one currency in the world, of which the gold standard prior to World War I was a prototype. Since then, we have created a plethora of national currencies. Rather than giving way to a world currency, such as Keynes’s bancor, the pound yielded to the US dollar, around which ‘sun’ the foreign exchange markets have orbited ever since. But the need remains to conceive a single world currency, something which would have far-reaching consequences for the nature of economic governance, the role of central banking and our general monetary understanding but something the global financial crisis is prompting us to look at more closely.

6.1 Economic Governance As argued so far, the point d’appui of associative economics begins in the big pictures of a single global economy, autonomous economic governance and the expectation precisely at this juncture in history of too much capital, with its remedy of perennial, systemic jubilee. The stage is now set to proceed from the ‘big picture’ to the details of associative economics, especially to Steiner’s monetary analysis, for it is here that a way opens up for the exercise of individual financial sovereignty, in which we place such store. To this end, today there is a need for everyone to become conscious of accounting since it, rather than old fashioned, externally operating money, will more and more govern our behaviour. The fact is that with such technology as computer accounting programmes and online ‘banking’, which is really a form of electronic accounting, the tools are there, and are being increasingly made use of, to use accounting as the modern form of money, and as the means for governing one’s day-to-day life. Once one knows the techniques required to generate and maintain positive cash flow (more so than positive net worth), one realises how relatively easy it is to be free of governments, agents, banks and even market forces. Moreover, such things notwithstanding, one also sees that economic life is born of the endless, countless, continuous transactions of all human beings, no one of which can be carried out except with a partner or counterparty. The nature and context of the transactions, as also their modality, may become never so abstract as today, but the essence of trade remains: it needs two parties, both must profit from the deal (otherwise they would not enter into it), and because of their mutual profiting surplus value is generated, surplus to both parties. It is then a matter of becoming clear on two points: (1) in an abstract, financial economy how does one identify the counterpart, and (2) to whom or, rather, to what use should the surplus value, excess liquidity, be put?


6.1.1 Money = Accounting These are two sides of the one coin. By definition, liquidity, cash, is not doing anything and so cannot be the source of new value or, therefore, interest. It is also by definition emancipated from all economic and, indeed, financial processes. A starting balance sheet, whether in the obvious sense of a year beginning or the almost invisible but nonetheless present sense of a high frequency transaction, always comprises capital on the liability or passive side, and cash on the asset or active side. The capital represents what is specifically expected of the business; the cash is amorphous. Until it is used, to buy a machine for example, its purpose is unidentifiable. It is but a part of world liquidity, part of humanity’s surplus. Conversely, the same can be said of capital. What appears on a balance sheet is the way an individual (or group of individuals) has in effect allocated a part of the world’s capital to itself. The confluence in our times of the form of money and the form of accounting has made them synonymous. One may think this is a brand new development but it is not really. Prior to World War I, in the ‘heyday’ of the gold standard, gold operated via sterling as a world currency, more precisely a world reserve currency. One is aware that the gold standard, for all its portrayal as an instrument of objective financial economics, can in its conception and use equally be described as an instrument of British imperial policy. Be that as it may, its validity nevertheless came to an end with World War I, the moment when all imperialisms, whatever their genesis, ought to have been consigned to history. In fact, it was clung on to by America until Nixon ‘closed the gold window’ on 15 August 1971, during which time the US dollar took over that role. But reserve currency is a misnomer. It suggests a back-up to the dominant national currency, when in fact for many people it is the preferred currency and is used as if it ‘belonged’ to them. To this day the larger share of US dollars are not ‘inside’ the USA.

6.1.2 One World Currency A world reserve currency is a proto-global currency. We may baulk at the idea, but it is there to be seen and is not an unknown topic, witness the work, for example, of Ratnam Alagiah (2008) in Australia. But it can also be seen in current events. Two examples suffice: the diagonal line of 1s in a foreign exchange chart and the existence of international accounting standards. In both cases the national or sub-global aspect is seconded to something higher. But the ‘higher’ element does not have, nor does it need to have, a denomination. The world’s currencies are in effect an articulated (as distinct from fiat) world currency, which exists without the artifice of a world central bank. In other words, a world currency needs no world polity, no supranational construct of any kind. Likewise, the international accounting standards need no denomination. They simply require that one accounts (and therefore behaves) in accordance with a standardised concept. For example, the way the asset side of a balance sheet is organised in terms of ascending (or descending) liquidity speaks a language that is over and above that of the person or business or even country whose balance sheet it is. At most, the £ or $ or € sign at the top of the column indicates the location of the trading entity.

R u d o l f S t e i n e r ’s M o n e t a r y A n a l y s i s 141

6.1.3 Financial Literacy To the ‘big pictures’ are therefore added the enabling technology. Many people use such technology to manage their individual affairs. But, so too, in the conduct of mutual affairs. There is any number of local trading schemes, local currencies and alternative money concepts operating in the world today – from the very local or more folksy, but now defunct Canterbury Tales, to the long-standing, very professional WIR (in German, an acronym for ‘we’) in Switzerland. The only things that hinder such developments are a refusal to trade 1:1 with ‘official’ currencies, usually because those involved have an anticapitalist or finance-averse attitude. The Lewes Pound and similar schemes do not feature this problem, however. But the point of such schemes is that they demonstrate that the macro processes of economic and financial life today do not need to be vested in official or large institutions or managed by experts. Any individual can conduct his economic life today; he only needs the will to do so and a modicum of financial literacy. He does not even need to know the intricacies of double entry (though it can be inspiring to do so) because these are taken care of invisibly by the accounting programme, the designer of which, however, must have understood double entry. If one remains financially illiterate, if one does not know how to read (and therefore write and speak) accounts or to organise one’s cash flow, then one will feel, as also probably be, at the mercy of financial institutions, tax authorities and all manner of agents who know, or give the impression of knowing, more than one does oneself. But if one is financially literate the mystique that shrouds such institutions and those who represent them evaporates, along with the power they were thought to have. Nothing can be more sovereign than the financially literate individual. One thing the global financial crisis ought to result in, therefore, is an explosion of financial literacy, a huge increase in the education of everyone, but especially young people, in how finance works.

6.1.4 Keynes and Steiner Such developments may seem radical but they really only have the effect of bringing our understanding and behaviour in line with the single global condition, together with its consequences for money, that has obtained ever since 1914. Already by then the various ‘concerts of powers’ between empires that characterised the nineteenth century had led to a coalescing of separate national or imperial economies into one global situation. Keynes’s Tract was all about that: where to go once gold, or rather the gold standard, has become a barbarous relic? It is interesting to note that while Keynes was writing his Tract, Steiner was giving his seminal course of lectures on economics. Also that Steiner was very attentive to Keynes who, it will be remembered, was closer than most to the time line, pulse and locus of economic evolution throughout the first half of the twentieth century. Steiner said of him:

For a spirited treatment of this topic, see Turk (2006).

142 F i n a n c e a t t h e T h r e s h o l d the way Keynes developed his assessment is very significant and provides a valid basis for everyone today. His assessment is based on calculation. Indeed, only those people should be heeded who have a certain sense or instinct for coolly calculating the future based on forces still at work now. We have good reason to listen to them because most of the contemporary opinions are based on nationalistic and chauvinist or other prejudices. There are only a few people, of whom Keynes is one, whose opinions are dictated by the objective facts. Keynes reflected on what would result, particularly for the economy, from the treaty being concocted at Versailles. He looked at what would gradually have to happen in the European economy if the forces that were brought to bear at Versailles were to work without any interference. And Keynes calculated – I choose the word expressly – that nothing but the economic ruin of Europe would result from this peace treaty, accompanied of course by cultural and political disintegration. (1996a: 63)

When one goes into the details of history, it is as if Steiner and Keynes were speaking to one another and were of one mind. Admittedly, they belonged to quite different realities and more should not be made of the confluence of their ideas than is warranted. But when it comes to monetary history and monetary economics, they were both very clear that beyond gold lay a very different landscape. Keynes’s work always has the characteristic of an active, lively and insightful mind tracking and seeking to influence policy, the policy, moreover, of two countries with great day-to-day influence on world affairs – Britain and the USA. But his life was such that he was embedded in the circumstances of a dying empire that refused to recognise the fact. He was always having to couch his language and frame his arguments in terms that comported with political realities, chief among them the power of governments and the intent of the US to displace the UK as the motor of the world’s economy. This is evident in his deference to the dollar in the 1923 Tract and his losing out to Congress in 1944. Steiner, in contrast, was free of such things. As a consequence, what he said about monetary evolution may be thought to be to one side of political realism, but this can hardly be said of his sense for economic reality. If there is an observation to be made, it is that he spoke ahead of his times. But once the world has become one, economically speaking, what Steiner has to say becomes immediately relevant, especially technically. One way to understand the global financial crisis is that by now it should be very clear to everyone that, like it or not, understand it or not, deal with it or not, there is now one single global economy. And with this development everything changes. Above all, all rivals become partners. Everything that thought it was a separate element, such as a national economy, becomes part of a greater single whole. In such a world balance of payments between countries no longer obtains. Regulation has to be an economic not a political enterprise. Just as you cannot prescribe a person’s blood pressure or heart rate, but you can only address the conditions that would change it, so you cannot change the temperature in a room by interfering with the mercury in the thermometer. Prices will be what they will be; if they are thought to be awry then one has to understand and affect the economic conditions they reflect. Unfortunately, though they claim otherwise, politicians and parliament are no more equipped to do this than are business people equipped to adjudicate rights or pass laws.


6.1.5 Full Central Bank Independence Emblematic of this, the epi-phenomenon of the relationship between state and economy, rights life and economic life, and of the need to distinguish them (which does not mean to separate them in any abstract sense) is central banking. If we could allow goal independence as well as operational independence, we would bring our institutional arrangements in line with economic and monetary evolution. But if we refuse to do this we leave the central bank betwixt and between, an agent of government but the plaything of financial markets. A dog without a bark, to refer again to Montagu Norman. The fear is that the central bank will become an adjunct of the financial markets and that financial markets will lose their ‘stroke oar’ (the image is from Gordon Richardson) and be unable to refuse yet another glass of punch. Yet 2.5 per cent inflation (price stability) is not a political concept. It is the adoption by politicians of what economists tell them. Politicians have no idea what it means to run a central bank. To report to parliament (or its equivalents) is a democratic, political duty, not a meaningful economic exercise. The glossary used is known only to the reporters, not to those being reported to. And if what is reported is not liked the remedy is not for one of the committee to take on the job, but to find a replacement expert. At the very least we would help ourselves if we agreed to some halfway-house arrangement, an organisation of economic governance that was a subset of parliament. Churchill long ago argued such a case: It would seem therefore that if new light is to be thrown upon this grave and clamant problem, it must in the first instance receive examination from a non-political body free altogether from party exigencies, and composed of persons possessing special qualifications in economic matters. Parliament would therefore be well advised to create such a body subordinate to itself and assist its deliberations to the utmost. The spectacle of an economic sub-parliament debating day to day with fearless detachment from public opinion all the most disputed questions of finance and trade, and reaching conclusions by voting, would be an innovation easily embraced by our flexible constitutional system. I see no reason why the political parliament should not choose in proportion to its party groupings a subordinate economic parliament of say one fifth of its members, and composed of persons of high technical and business qualifications. I see no reason why such an assembly should not debate in the open light of day and without caring a halfpenny who won the General Election or who had the best slogan for curing unemployment, all the graves issues by which we are afflicted. I see no reason why the economic parliament should not for the time being command a greater interest than the Political Parliament; nor why the Political Parliament should not assist it with its training and experience in methods of debate and procedure. What is required is a new personnel adapted to the task which has to be done and pursuing that task without fear, favour or affection. The conclusions of such a body although themselves devoid of legal force might well, if they command a consensus of opinion, supply us with a comprehensive and unified view of high expert authority, which could then be remitted in its integrity to the political sphere.

An extract from Churchill (1930); see also Churchill’s evidence before the Select Committee on Parliamentary Procedure, 15 June 1931.


None of this is new or rocket science. The problem is that it entails a review of how we are related to the world, both individually and nationally, how we understand the workings of a single global economy, the necessary context of a single worldwide financial system, and whether we have the will to modify our behaviour, and with that the way we think. Luckily, however, because of the ontology of economics, one can begin the process by thinking it. Indeed, it is precisely our ability to rethink things that makes the global financial crisis tractable, something we can ‘get our arms around’. Or, to use Keynes’s felicitous expression in regard to Newton’s prodigious mind, it provides an opportunity to exercise our ‘muscles of intuition’.

6.2 Trade and Surplus Value There are certain details consequent on Steiner’s monetary analysis that we will come to shortly. But it will serve as a good example of muscular intuition if at this point we deepen our sense of Steiner’s understanding of trade and surplus value – at least, as understood by this author. This version of events is an extrapolation. It is offered at this point because how we understand the global financial crisis, and with it our general situation, depends on our picture of such things. Presented somewhat in the manner of a set of propositions, the picture underlying the arguments of this book is as follows:

• • • • • • •

• •

Every transaction presupposes that both parties to it, not only one of them, profits or intends to profit from it otherwise he would not enter into it. Every trade results in a surplus over and above the needs of those party to it. The surplus flows away from those who give rise to it. The individuals’ profits and therefore the general surplus released through trade arise because every human being seeks to better himself. This process is true of all trades throughout time and space and whether real or financial. This surplus will increase as individuation increases, accumulating over time, giving rise to so-called ‘capital markets’. At the point of maximum individuation (i.e. ‘now’), the Marxist–capitalist divide notwithstanding, humanity’s accumulated surplus value will belong to no one in particular and will become disassociated from general economic life. It will then threaten the real economy, to which it is not connected, unless (a) it can be written off or (b) be linked to clear, and economically meaningful, counterparts. Those counterparts are the unfulfilled, because uncapitalised, aspirations of countless individuals and peoples.

6.2.1 Aspirational Capital The thesis, in short, is that human beings, both individually and collectively, aspire to goals (rather than things) that were previously unarticulated or thought to be beyond their reach. The purpose of surplus value, in the sense used here, is to finance such aspirations. The aspirations one initially has in mind express themselves in the simple quest for better living conditions, health care, education. But these are only sought because of what a


healthy, educated person believes he or she can then do. It is a commonplace, but none the less important for that, for people in ‘undeveloped’ economies, for example, to get a qualification in order to serve their communities rather than themselves. If only there was a similar attitude in the ‘developed’ world. Even so, most people today want to ‘become something’ or to fulfil a dream, rather than spend their working lives in a job earning money for the weekend or retirement, when they will do what they really feel they should be doing. So ephemeral and, indeed, idealistic is this idea that it is easily ignored, denigrated or simply not noticed. And certainly not capitalised. All too easily, what then happens is a process of mistransposition whereby the acquisition of things acts as a surrogate. Consumerism arises where aspirations go unrealised. Indeed, consumerism could not exist otherwise – its very nature is to satisfy aspirations. Whether it does or not, whether it ‘should’ or not is not the point.

6.2.2 All of a Muddle But the phenomenon does not only manifest as consumerism. It has a corollary, namely, borrowing to buy. More concretely, capital which used to be accumulated before it was spent, is now spent before it is accumulated. The relationship between capital and revenue has become inverted. And in so doing all manner of subsidiary problems arise. Chief among them is the conflation of revenue and capital. Houses cease to be homes and become ‘assets in play’, capital is scarcely available for ideas or initiatives purely and simply, but readily available for real estate directly or if real estate is provided as collateral. People start to look at capital and assets on their balance sheet as sources of income, rather than as the basis of that income, even though it is the bread he bakes in his oven, not the oven itself, that is a baker’s source of income. We release equity by borrowing against risen real-estate values when in fact equity can only be released when an asset is sold for cash, and profitability so. By conflating and then investing capital and revenue, a further process is set in train which goes to the heart of the global financial crisis. Ever so smoothly, the idea gains ground that capital can exist into itself, that to invest one’s money in the markets is to do something economically. To be sure, one provides liquidity thereby, but liquidity in the abstract is meaningless. In any economy, the counterpart of liquidity is the person whose activity requires it and can afford to pay for it. By definition, we cannot all be providers of liquidity. We cannot all live from lending, from working our balance sheets. Ultimately, revenue and profitability derive from the using up of assets, not from increases in their value. A farmer, having bought a tractor, may be approached by someone who will buy it from him at a higher price, but how then will he farm? If everyone goes down the path of deriving their wealth from excusing themselves from real income where else will we find ourselves than in a world that, seen economically, is all capital and no income? One can defend such processes, ‘justify’ them in complex language and indeed continue with them. Or one can rail against them and pontificate as to how people ought to behave, whether bankers should have bonuses, and so on. If one is serious about the global financial crisis as a historic event, however, and not convinced that business can be as usual, one has little choice but to opt for an approach to economic life that does not rely on such processes, that relies instead on quite other possibilities, even engendering them through this very reliance.


6.3 Key Precepts of Associative Economics It is in this way that one can approach certain key precepts of associative economics. They are identified here because of the twin ground of the approach taken by this book – they lead beyond the Left:Right divide and suggest the possibility of a metamorphosis rather than overthrow, collapse or blind persistence of the prevailing paradigm. They have not been identified in any a priori sense, but as issues central to modern economic life. Moreover, they go together: none of them makes sense without the others.

6.3.1 Asset Price Buoyancy The fate of the value of assets is crucial to modern economics, which hopes they will remain ‘buoyant’. What is meant is that, when money is ‘easy’ people readily pay more for assets. It is axiomatic to associative economics, however, that one should be careful when doing this. If the ‘too much’ capital or excess liquidity is used in this way, it can (a) inflate asset values in an illusory way while (b) starving the productive economy of investment capital. In combination, these twin effects can render economic life quite unmanageable.

6.3.2 Capitalising Real Estate Modern finance is frequently and especially predicated on real-estate values, but such values are subtle. The value of a house, for example, bears little relationship to the cost of constructing it and few people depreciate such an asset. By ‘asset’, moreover, people tend to mean asset net of liability; that is, their eye is on the equity gain from owning it. The rising value of real estate, though argued as a function of demand, can nevertheless be fictitious relative to the affordability of renting it. Owners, forgetting they are both landlord and tenant, often capitalise their rent against rising values, making themselves, but also the wider economy, dependent on ‘upward-only-ness’. This is reinforced if credit is issued against such values. For then something happens that can perhaps be likened to the bow water pushed up front of a ship by its own movement. Though there may well be ‘drag’ effects and even a financial analogy to sailing into the wind, one needs to be careful not to think the phenomenon has reality in itself, still less that it pulls the ship along. Associative economics, therefore, makes a sharp distinction between the capitalising of real estate where the real estate acts as the direct means of production and real estate that is used to take advantage of ‘bow water’ values. The point is technical, not moral. If the real-estate backing of credit evaporates, everything depends on whether the credit has been spent on consumer goods or invested in a performable asset, including for example skill acquisition. In the first case, the credit has gone for good and has no counterpart. In the second, it has been ‘lost into’ – even parked in – a skill or some other category capable of earning income, albeit later. One can, of course, think in terms of overstated values falling back, but this may be untrue to history. If the ‘bow water’ were a function of something aspirational, for example, it would be better to link the financial markets to that. Indeed, aspirations tend to be unlimited and thus may be the unspoken explanation of the ‘growth, growth, growth’ mantra in economics, real enough in the world of aspirations (and thus linked to expectations), but unattainable in the physical economy. Those who argue that it is time


to return to ‘normality’ or to put the genie back in the bottle may simply have mistaken the genie’s identity. The question ought to be what is behind so much aspiration in our times?

6.3.3 Differentiation The importance of distinguishing between financing the initial cost of real estate linked to its rentability (in turn a function of the profitability of the renter) and exploiting its nonproductive value is axiomatic to associative economics, but also crucial to understanding current events. It is also emblematic of the epistemological challenges facing modern economics in that it relies on and requires a similar ability to distinguish at the macro level between two contrasting aspects of economic life – the physical economy, where the paradigm associated with the Industrial Revolution has its place, and the invisible or ‘new’ economy where values are born of efficiency (labour organised by human ingenuity or Geist, in Steiner’s terminology). This distinction rests in its turn on a corresponding monetary conception, meaning a concept of money that itself distinguishes between and does not conflate these two dimensions. In a word, there is a need to understand that money today is or ought to be of two kinds, as detailed in the later discussions on ‘differentiated money’. The language may be unfamiliar, but is it so far removed from current experience? Physics, no less, faces the conundrum of needing to reconcile contrasting realities, so why not monetary economics also?

6.3.4 Money wears out The idea here is that money reflects and is, therefore, neutral to economic events. But that means that, when representative of goods, which wear out, money also needs to wear out. This is hardly controversial. Accounting knows this as depreciation. Implicit in this rethink is a further problem, already alluded to. Goods wear out, depreciate. Not so aspirations, whose nature is to become fulfilled. The argument being advanced is not against values reflecting or embodying aspirations, but that one should be careful when defining their effective cover. Differentiation in regard to money would allow goodsbacked money to be subject to depreciation in its operation, monetised demurrage; but not so aspirational money. It is when these two worlds become conflated that today’s greater presence of aspirational money acts against the logic of demurrage. The need, therefore, is to remove any ‘external’ link between the two monies, so that neither cash nor credit, for example, is treated a sub-set of one another – a substantial topic treated more fully later (see 10.2: Delinking Cash and Credit).

For example, the contrasting physics of the quantum descriptions of subatomic realms and the classical, causal descriptions of the macroscopic realm. They are not reconcilable into a unified model but must be held in tension, both applicable in their respective realms but not to each other. Or the particle-wave theory of energy radiation which still plagues modern physics, where, depending on the experiment, light can manifest as travelling in waves or as particles. Modern physicists must hold these two incompatible notions as equally descriptive of a single phenomenon observed under different conditions, as, inter alia, in Niels Bohr’s ‘Theory of Complementarity’.


6.3.5 Auditorial Central Banking This idea was originally developed as part of the author’s exploration – under the heading of auditorial central banking (Houghton Budd 2005a) – into the complex relationship between central banks and the financial markets, especially once gold has been relegated to ornamentation. (The fact that gold is still regarded by many as having a monetary role maybe real enough socially, but in economic reality it is anachronistic.) Not the most elegant of expressions, auditorial central banking is the author’s term for a further step on from full central bank independence. The term was invented to express the need of the central bank, having moved from pulling levers to sending signals, to take the further step from uttering to listening. The central bank changed from enlightened prince to constitutional monarch. Discussed in more detail later, the point is that globalised finance, as Keynes long ago argued in his Tract, requires the ‘controlling authority’ to represent something ‘higher’ than itself, but more economically real than the state acting through the government of the day.

6.3.6 Rethinking Accounting and Profit As mentioned earlier, associative economics understands that, as regards their form, money and accounting have coalesced, an idea that is surely more intriguing than contentious. Mathematicians and econometricians may not relish losing the ground of economics to so prosaic a discipline as accounting, and, indeed, the accounting profession may wriggle at the thought, to be developed later (see 11.5), of accounting as an instrument of perception, but this is hardly justification for not investigating the possibility. Such a concept also goes a long way to taking politics out of economics. For most people accounting is used to report to outside parties (e.g. the tax authorities or shareholders) where the focus, however, is essentially on the fact and scale of profitability. Fair enough, but profit is by no means the only consideration of accounting. One needs to have regard to the entire context in which profit is generated, both the internal and external contexts, if profit is not to be called into question either ideologically or practically. The more global finance becomes, the more does profitability depend on attending to its context, in order to make sure, for example, that ‘financial profit’ and ‘social profit’ do not become divergent or contradictory concepts. At the same time, the different concepts of accounting around the world, the result of different national, cultural and juridical contexts, will need to give way to something generic and universal. But this will be seen to require accounting to become an instrument for perceiving an activity’s relationship to economic life generally; not merely for reporting profitability and therefore taxability.

6.3.7 A Question of Variables We have earlier touched on the idea of ‘x’ as a sense for the overall economic health. This, indeed, is the aim of all economics, though opinions may differ as to the meaning of health. The quotation provided earlier concerning Adam Smith and supply and demand It is interesting that we use the word ‘audit’ when scrutinising accounts, for example. To or for what are we listening?


theory included an observation on Steiner’s part that goes to the heart of the global financial crisis when understood as an epistemological event: ‘We must not merely suppose that S and D are independent variables and that price is a function of the two. All three are mutually independent variables, and their mutual interplay gives rise to something new: X = f (S, D, P)’ (see 4.1.12). Mention of this is made again now because the thinking that underlies modern finance, as also the global financial architecture, does not accept the possibility. In an important paper written in 2000, but timeless insofar as it exemplifies a way of thinking that persists to this day and can persist for much longer still, Dani Rodrik described ‘a hypothetical perfectly integrated world economy … in which national jurisdictions do not interfere with arbitrage in markets for goods, services or capital. Transaction costs and tax differentials would be minor, [and] convergence in commodity prices and factor returns would be almost complete …’ (181). He then argued that, because of the assignment problem, namely, that ‘countries cannot simultaneously maintain independent monetary policies, fixed exchange rates, and an open capital account …’ (180), ‘the most obvious way we can reach such a world is by instituting federalism on a global scale [after the US model] … [aligning political] jurisdictions with the market, and remov[ing] the “border” effects’ (181). The following images illustrate Rodrik’s point. The terms used are capital mobility (CM), floating exchange rates (FR), and monetary autonomy (MA). Rodrik’s thesis is that because one cannot think with more than two independent variables, which give the third (depicted by the bold upper arrow and shown in square brackets), one has to choose between three different scenarios (see Sketches 6.1–6.3). (MA)

FR

CM

Sketch 6.1 Gold standard The prospect of a global federation is no minor matter, yet it arises only because Rodrik ignores the possibility of monetary autonomy, capital mobility and universally floating exchange rates. One understands this from the point of view of the US, but can the prospect be dismissed forever? Inasmuch as the auditorial central banking concept relies on it, one could argue that auditorial central banking is politically naïve – except that it is meant as a theorem and does not pretend to be a description of current political realities! And yet is not the granting of operational independence to central banks a step in this direction? The concept of auditorial central banking (entailing both goal and


(CM)

FR

MA

Sketch 6.2 Bretton Woods (FR)

CM

MA

Sketch 6.3 Federally co-ordinated economies operational independence in a context of universally floating exchange rates) simply takes this further. As a geo-political statement, Rodrik’s advancement of the US model is telling, of course, but more important is the illustration it provides for Hayek’s observation that any real change in the monetary landscape is bound to involve socio-political change also (1990: 83–4). The point is that we can pick all three elements if we accept universally floating exchange rates. But that means, in epistemological terms, thinking with multiple independent variables, while in geo-political terms, letting go any paradigm of dominance. In this author’s image, this would result in all arrows being of equal value, representing the choir of cultures of the world’s peoples, expressing itself through generalised central bank independence and output gap monetarism, because in a global economy such things lose their political ground and become the means for managing, even conceiving, the economy of the world. They would allow each people to harmonise its place in the overall common wealth of mankind, each according to its own light.

part

III The challenge is to keep international financial markets stable enough to make capital controls unnecessary … – George Soros


chapter

7 The Twentieth Century

For whatever reason, Rudolf Steiner’s ideas enjoyed little or no reception. Instead, a world was created based on national economics yet overarched by all manner of global or supra-national institutions – UN, IMF, World Bank, WTO, etc. – predicated on nation state economies. The credit crunch, precisely because it is a supra-national, worldwide event, has returned us to the circumstance of 100 years ago, when the universal gold standard needed to give way to economic conduct based on deliberation and science, that is to say based on conscious actions and visible events, rather than surrogate or agency actions and invisible forces. This presupposes the ability to create a whole out of its parts. Partnership not dominion, commonwealth not empire. This directly challenges the propensity, especially among AngloSaxons, to divide the world in order to understand it, but then having so divided it, to prefer one or other of two poles rather than their synthesis. Thus, capitalism:communism, private: public, Left:Right constructs that keep our economic minds incomplete, inadequate and inapt to the circumstance of a single global economy.

7.1 The Great Detour This section presents the first of two related themes characteristic of the twentieth century – The Great Detour. The second section will concern itself with the propensity to divide. As already intimated, Rudolf Steiner’s ideas about the shape of society from World War I on have had little hearing in the west, indeed in the world generally. The reasons are fairly clear. His proposals, which were in fact made to the German high command and especially through an appeal to Prince Max von Baden, Germany’s representative at the time of the Armistice, fell on deaf ears. By the end of the war, the processes were in train that resulted in the Treaties of Versailles, which became the basis of ‘The Peace’, known by Germans as ‘Der Diktat’. This event is arguably the fulcrum of modern history. Prior to World War I, Britain, in the form of its empire, had created a proto global economy and the gold standard in link with sterling operated as a proto world currency. The empires of the nineteenth century had expanded alongside each other and were now crunching against one another like tectonic plates, with ‘no place left in the sun’ for the German empire, newly created under Bismarck out of a raft of principalities. Quite apart from the awful events of the war itself, which it cannot, however, be part of our task to comment on here, there was the underlying fact that world economic relationships had changed for ever. Only, those in ruling positions were either reluctant or unable to see this. Britain, for example, was intent that the prewar exchange parity between the pound and the dollar should continue as before. And Woodrow Wilson’s autonomous development of peoples had become the claimed basis for national development thence forward.


7.1.1 A divided World There was no thought of a single global economy, except as a market to conquer, no rights life based on the peoples or nations of the world, and no choir of cultures. Old imperialisms were to live on and above all the twentieth century was as if destined to live itself out under the image of a divided world. First that between the east and the west, capitalism and communism; then between Islam and the west. The effect of such an image of the world, let alone that of living in a social and political architecture based upon it, ought never to be underestimated. Of course, one can say that it represented a reality, in both cases. But would there have been a Bolshevik revolution if Lenin had not been smuggled into Russia? Did the red lines in the desert really represent nations? Were Ho Chi Minh and many other nationalists naïve in thinking that autonomous development was more that treaty-speak? Would there have been Islamic fundamentalism if the Iranians (then called Persians) had been left to their own devices? This is not the place to discuss in depth the geo-political nature of the twentieth century, but it is surely the oldest trick in the book to create a problem then feign innocence in regard to it, so that the problem appears to exist independently and provides the pretext for combating it. The ‘national interest’ and ‘public opinion’ will be invoked in defence of one’s actions, but they, too, are twentieth-century abstractions. The stage was set in Versailles when the Four Powers met to decide on the terms of The Peace, and to decide on how to structure the post-war world. To this day, the result of their deliberations – The Treaty of Versailles – continues to be a major element in our lives. As Keynes put it, ‘if it is to understand its destiny, the world needs light, even if it is partial and uncertain, on the complex struggle of human will and purpose ... which, concentrated in the persons of four individuals in a manner never paralleled, made them in the first months of 1919 the microcosm of mankind’ (1919: 1). What did these men do? To begin with, they exacted revenge on the vanquished German people, making them pay for the war. The French had their opportunity at Versailles to remind the Germans of the indignation caused to France by the reparations of 1871. However, the level of reparations decided on in 1919 were not of the same magnitude. In 1871, it took France but three years to make reparations of £200,000,000. The amounts demanded of Germany were £8,000,000,000 and were the substance of a policy ‘of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness ...’ (1919: 2).

7.1.2 Capital vs. Labour Apart from the reparations, those who created the treaty placed the economy of the world on a basis that was untrue to economic facts. The economy of the world had become a totality, transcending national boundaries. Moreover, the events of World War I left the world in ruins. Prices had trebled in England and hyperinflation developed in Germany. The boys came home from the war to claim the houses promised them and walked straight into 20 years of chronic unemployment. No one quite knew what was going on. The world was on new bearings, but what these were no one could make out. Those responsible for the economy were

T h e T w e n t i e t h C e n t u r y 155

floundering about trying to find fixed land, to return to the stable pre-war conditions of seemingly immutable exchange rates and negligible inflation. Britain, for example, pegged the pound at pre-war parity with gold and the dollar – a disastrous move by Churchill and a classic example of the economy being run by people not suited to the job. As Galbraith put it: ‘ under the aegis of the then Chancellor of the Exchequer, Mr. Winston Churchill, Britain returned to the gold standard at the old or pre World War 1 relationship between gold, dollars and the pound. There is no doubt that Churchill was more impressed by the grandeur of the traditional, or $4.86 pound than by the more subtle consequences of over-valuation, which he is widely assumed not to have understood. The consequences, nonetheless, were real and severe ... [It] began the long series of exchange crises which ... are now an established part of the British scene [and it] led to the general strike in 1926. (1954: 193)

Several years later, on Thursday 24 October 1929, the Great Crash began. At twelve thirty the officials of the New York Stock Exchange closed the visitors’ gallery on the wild scenes below. One of the visitors ... was the former Chancellor of the Exchequer, Mr. Winston Churchill. It was he who in 1925 returned Britain to the gold standard and the overvalued pound. Accordingly, he was responsible for the strain, which sent Montague Norman [Governor of the Bank of England] to plead in New York for easier money, which caused credit to be eased at the fatal time, which … in turn caused the boom. Now Churchill, it could be imagined, was viewing his awful handiwork. There is no record of anyone having reproached him. Economics was never his strong point, so it seems most unlikely that he reproached himself. (1954: 122)

But it was not only non-economists like Churchill who were hard put to understand and order events, for life had developed contrary to the way people had been used to expect. Events were outgrowing traditional theories. Processes were in train, which did not fit the nineteenth century laissez-faire scheme of things. The Bolshevik Revolution, loaves of bread costing wheelbarrows full of money – these things were not contemplated by classical economists. Their ideas had developed in more ordered times, far removed from the chaos of post World War I. Every effort needed to be made to find new explanations to fit the new facts. However, for all the energy applied to this task, one piece of traditional economics was to stay. Of the three ‘factors of production’, labour was singled out for special treatment. Not land or capital, but labour was described as having lost its ‘elasticity’. Wages had traditionally been elastic; that is to say, in the past it had been possible to offer the job of a worker seeking higher wages to his neighbour. There was always a reserve army ready to replace dishonourable or unpatriotic soldiers. And so it was thought that wages should remain elastic. However, the unions had developed in strength. Wages had ceased to be ‘elastic’. Labour stood opposed to capital. It did not occur to anyone to make rent and interest elastic instead, and, clearly, to have actually got rid of the worker–capitalist social structure would have meant taking seriously the events of the previous 70 years in Germany, Russia and elsewhere.


7.1.3 Labour – a Moment of Capital Our economic life and the economic science that has grown up with it refuse to deal with the relationship of labour to capital. Under the influences of materialism, it cannot conceive of labour as anything other than a moment of capital and of capital as money. The value of both, moreover, are expressed in material terms – wages and private wealth – so that the idea that both labour and capital have any deeper and shared meaning is scarcely considered. Instead, the two ‘sides’ remain locked in battle, not only in terms of political governance, but also the structure and vocabulary of economics. Conventionally, low inflation is predicated on low wages, not on money as a thing unto itself as described earlier. While the rationale for this is understood, it relies on the conceptual basis built up in the nineteenth century, the two main features of which, from the point of view of the history of economic thought, were the events associated with the Industrial Revolution especially as interpreted by Marx and Engels; and the mechanistic mindset of economists. On one level, the global financial crisis marks a stage in history when neither has validity. The world’s financial system is clearly not a machine, more an organism (perhaps even a sick one). Though die-hards hope that Marxism can return to the world stage, few regimes exist of a truly socialist nature. The world is better understood as one that is being conducted more and more by leaders remote from their citizens. Whether rightly or wrongly, many a socialist is only so in thought. In his finance he is a capitalist, working the value of his real estate, buying stocks and shares, either directly or through agents such as pension fund managers. As far as Britain is concerned, the removal of Clause 4 from the Labour Party’s constitution effectively put an end to socialism in any pure sense. In Latin America, there is talk of a ‘pink revolution’, meaning not really red. But that is so much soundbite. In reality, every government today has to dance attendance on the financial markets. Venezuela is not so much an example of socialism, as deft use of oil reserves. Cuba soldiers on valiantly, but many deem it ‘ripe’ for a return of capitalism. North Korea is an aberration, but also another example of the propensity to divide, now in the form of split countries, such as Vietnam was before. China has long been playing with capitalism and it would be an illusion to think that its socialism is unenforced and ‘bottom–up’, which is arguably what a true, lasting socialism would need to be. One does not say this from lack of sympathy with the human concerns that socialism theoretically addresses or the good heartedness of many who adopt its doctrines, but from a realistic appraisal of today’s conditions. The world’s financial system, and with it the global financial crisis, is also linked to this history of a divided world and to foreign policies masquerading as economics. Whatever one thinks of it, and there is much that is positive, the liberalisation of the past 20 years or so is inconceivable other than as a programme of ‘the Right’, the triumph of monetarism over Keynesianism, in popular terms. This has been the culmination of a long journey throughout the twentieth century marked especially by the dance between monetarism and Keynesianism, a topic to which we will return. If one looks at twentieth-century history one can see how economic life arrived at the threshold of the twentieth century in a condition of expansion. The British Empire was in its heyday; the German economy had come of age, industrially speaking; France was holding exhibitions; and America was sufficiently cocksure of itself to start to carve up the world as it saw fit through such things as the Monroe Doctrine. Left out of account, of


course, was the fact that all this expansiveness presupposed a high degree of exploitation of the rest of the world economy, achieved by all manner of political and other means. It was a myopic view of the world that recorded its economic assets without recording its social liabilities – a world that Keynes once well characterised when he said in: ‘For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still’ (Keynes 1931: 329). The expansive conditions of the early twentieth century also took no account of two other factors – the indignation suffered by millions of people under wagery and the fact that the major nations of the world were entering a condition of closed economy (albeit worldwide) under the influence of ideas that did not contemplate sharing this economy, but fighting over it. An optimistic feeling at that time about the future could only have arisen in men who were unheeding or ignorant (whether willingly or otherwise is not important) of social unrest, the diseconomy of materialism and the theoretical nature of economic science which provided the setting of imperialist capitalism, ‘imperialist’ in the strict sense that most countries at that time considered themselves to be and acted as if they were empires.

7.1.4 East and West, but No Centre Then the world slipped into an abyss from which it would have to climb, restoring itself and finding a new basis for stability. What took place does not inspire confidence or beget optimism even today. For the economy was hauled out of the abyss of World War I by the abstractions of Woodrow Wilson. In the process it was placed on the very foundation that the war had shown to be untenable – that of nationality. The difference lay in that, under Wilson, the nations of Europe were wrested from Hapsburgian dominion and brought within Anglo-American dominion. If Europe before the war had come, so to speak, out of the east, after the war it came out of the west. That it had a centre was beside the point. The treatment of Germany, deemed only until recently responsible for the war, was such that no one was minded to see that it had fallen on its path, so to speak, and that its belligerence was, as belligerence often is, noise to cover up a failing of one’s higher purposes. In his Appeal to the German people and the Civilised World (1977) and elsewhere, Rudolf Steiner describes that the German Empire failed to find its true mission, a mission that would have been unifying of Europe. Its failure in this respect brought the west upon it, causing the bath water to be swept away without a thought for any baby that might be in it, in particular German idealism and Goethe, the cousins, if not brothers, of Romanticism and Coleridge. The ‘Peace’ was concluded under the influence of the ‘special relationship’ between America and Britain, represented at Versailles by a proud Woodrow Wilson and a canny Lloyd George, the latter a past master at getting his own way, The world economy was born into the confines of the dictum ‘to each nation its nation state’. Like the Romans who put jugs over the heads of children to create freaks, the world economy was forced into a form that belied its true nature and denied its healthy development. As if to further contort its features, other events took place. Reparations were demanded of Germany that were of a kind that made her bankrupt. Hyperinflation occurred, with two consequences. Germany defaulted on her payments and the social conditions were generated which provided the embryonic Nazi movement with a perfect


seedbed. The latter consequence was to return in economic form in the late 1930s with colossal economic cost. The former was more immediate in its effects. The default of Germany in 1926 threw a spanner in the crude works of the post-war western economy. America had advanced Britain and France funds, pending receipt of reparations. The default of Germany put the Allies debt to America under severe constraint. To make matters worse the return of sterling to pre-war parities (already mentioned) over-valued the pound. Britain had to import but could not export. The ‘inelasticity’ of wages, combined to create high levels of unemployment, resulting in the General Strike of 1926 which was summarily dealt with in a way that to this day has not been forgotten. But by then a process was in train. The unemployment did not decrease. The problem was defying all traditional remedies. It got worse. At the same time and in direct relationship, the economic conditions of America began to wear thin. Short-term loans to Europe had become lengthened. And a strange mood had come upon Wall Street, where an astounding development of illusionary economics had begun. The ‘pursuit of effortless riches’ had led Americans to Florida. In 1925 the Florida land boom began. Land prices rocketed and people made fortunes overnight by dealing. An inflated economic condition was created, which lasted only two years before it crashed. When the music stopped, interrupted by two powerful hurricanes, there were no chairs left. I mention it here merely to illustrate a phenomenon. The same phenomenon reappeared on Wall Street. Share prices began to increase, despite signs of depression in the real economy. A process then took place the means of which was hardly appreciated. In 1924 Britain, France and Germany were helped in their plight by a reduction of 21 per cent on American money. In Galbraith’s account, The rediscount rate of the New York Federal Reserve Bank was cut from 4 to 3.5 per cent. Government securities were purchased in considerable volume with the mathematical consequence of leaving the banks and individuals who had sold them with money to spare ... [These] funds were either invested in common stocks or (and more important) they became available to help finance the purchase of common stocks by others. So provided with funds, people rushed into the market. From that date ... the situation got completely out of control. (1954: 6)

To put matters plainly, mathematically existent money set out to increase itself. The result was a mathematical increase, which, so long as it remained mathematical and did not get cashed in, presented no problem. Even to cash it in would have presented no problem provided the increase represented an increase in real economic wealth. In August 1929, the mathematics of speculation reached nonsensical dimensions. Whether one describes the Blue Ridge/Shenandoah operation as the epitome or the epitaph of the share boom is a matter of choice. The facts tell their own story. The Wall Street activity had sucked much of America into itself when the Shenandoah Corporation was launched on 25 July 1929 with an issue of $102,500,000. It was over-subscribed sevenfold. The stock opened at $17.50 and rose immediately to $36. By the end of the year it had fallen to $8 and later fell to 50 cents (July 1932). The Board of Shenandoah comprised prominent businessmen, who were adept, or so they thought, at the techniques of leverage. Of the five million non-preferential shares, four million were bought by the Goldman Sachs Trading Corporation and Morrison Williams – companies run by members of the Shenandoah Board and which had set up the Shenandoah Corporation. A month later,


20 August 1929, the same people established the Blue Ridge Corporation with a capital of $142,000,000, sponsored by Shenandoah, with the same board and with an 85 per cent Shenandoah holding. ‘Leverage with a vengeance’, as Galbraith put it. Alongside this the real economy was in difficulty and had begun to slump. Then in September 1929 signs began to show of a break in the ‘bull market’. For various reasons, people began to want to get off the bandwagon, despite or perhaps because of the speed of its momentum. Why this happened is probably more a concern of psychology than economics but not so the consequences of such decisions. When the music stopped the relationship between margin trading and cash trading became apparent, as well as the relationship between cash trading and real economic activity. Common-sense observers could see that the number of players in this particular form of musical chairs was in astronomic ratio to the number of chairs available, while more astute observers also noticed the chairs were riddled with woodworm. The magic of leverage went into reverse on Blue Ridge/Shenandoah when, on 29 October, the orders went out to sell. Their stock value fell to 3 and 35 respectively. Speculators jumping off skyscrapers provided as metaphor for plummeting values and falling illusions. (Considerable space has been given to describing this episode because of the evident similarity of its gesture to that of the global financial crisis.)

7.1.5 Leaving Gold Behind The 1930s brought with them the next major economic problem. What happens when the economy goes off the gold standard? What does it go on to? ‘Going off the gold standard’ epitomises the cardinal question for modern economics: on what is the world economy to be based – on what values and on what actions? Above all, to what is the value of money to be related? What actually determines this? By the time the depression was over the Second World War was upon us. Figuratively speaking, the men who returned from the First War only to stand in the dole queues returned again to the battlefield. At the end of the Second World War history did not repeat itself exactly; it did so in a metamorphosed form. Instead of the Treaty of Versailles, there was the Bretton Woods Conference. Instead of reparations, Marshall Aid and the World Bank. Instead of the League of Nations, the United Nations. The world tried again to reconstruct itself economically. It failed for three reasons. Firstly the reconstructed world did not include the Communist Bloc – by then extended to embrace China. Secondly, it did not include in its thoughts what we have come to call the Third World, a sanitised concept that hides from view the colonialism, liberation movements and frequent dictatorships that characterise the post-colonial history of the countries concerned. Thirdly, we failed to take seriously the disappearance of depression and unemployment and the appearance of persistent inflation in their stead. From 1945 to 1970 the inflation rate in Britain ran at approximately 4 per cent per annum. But in 1970 the rate began to climb until it passed 20 per cent. Inflation rates in other countries were far worse. Even West Germany, which had come to pride itself on its inflation-proof nature, received a few shocks. Then, by the end of the 1970s another problem showed itself – the return of unemployment on a large scale. This was the cue for the Thatcher–Reagan era, and the sweeping away of Keynesianism by monetarism, albeit an impossibility without the political patronage of the time. From then on, financial liberalisation took to the


stage, bringing with it outsourcing, privatisation, removal of foreign exchange controls, ‘taming’ of unions, central bank independence and all manner of other policies to which we are now very accustomed. Alongside these developments there was also the major event of the ending of Bobbitt’s ‘Long War’. In 1989, the ‘Iron Curtain’ came down and socialism was declared a spent force, in its soviet form at least. A year later came the first Gulf War and the announcement of the New World Order, followed by a decade of strife in the Balkans. At the same time, the division of the world into communism and capitalism, was replaced by another, the ‘clashing civilisations’ of Islam and the west.

7.1.6 The 1990s Throughout the 1990s price stability became generalised and interest rates headed for zero; those who could not make speculative gains in such environments turned instead to real estate, stock markets, and dot.coms. The entire period, was punctuated by major ‘shocks’, as Asian tigers imploded and major banks such as Barings came to grief on the activities of backroom boys, from which they tried to distance themselves, but on whose gambling they relied. Not a few huge companies – Enron, WorldCom, Parmalat, the list is quite long – fell at the hands of managers who were insider dealing, faking the books or acting in other reprehensible ways. In the background, gold had been let go, exchange rates had been allowed to float, then not allowed to. The European project (with its fixing of exchange rates) was launched. If one word were to describe these events and, indeed, those of the opening decade of the twenty-first century, and if that word were not ‘dreary’, it would be ‘febrile’. It is amazing that humanity’s show is still on the road! Stability may be the goal, but it is scarcely reality when seen from a full-lens perspective. Much of this recent history has been conducted under the rubric of globalisation, the recognition that modern economic life is global in scale. But the journey taken to this point is tantamount to a great detour. We have taken an extraordinarily contorted route to arrive at a condition that was already present 100 or so years ago. Even now, for many globalisation is a pejorative term, because they do not start from the idea that economic life is global, but that it has been made global. Albeit late in the day, perhaps the global financial crisis will mark an awakening to this difference. Perhaps we will then also discover some wisdom behind so delayed an understanding of modern economic history. Time will tell, and it won’t be long telling us. It will be evident in the way we manage economic life from here on. One is not so naïve as to think there will not be a lot of regulation introduced to tame recalcitrant markets and remorseless bankers; or that that will do very much, other than fill the world with red tape. Nor is Bobbitt’s image of the human condition to be ignored, however much one may not share it. From a worldwide point of view, there is also much further room for capitalising real estate, once we have got our collective breath back, while ingenuity and innovation are not about to desert the financial markets. Moreover, as the administration of Lehman Brothers revealed, it is not simply about lone or egotistical operators. When a big company or a market gets into trouble, one has to ask what was Referring to a talk by Adrian Teng, one of Lehman Brothers administrators, given at Kent Business School, Canterbury, 24 November 2009.


the board of directors doing or not doing, thinking or not thinking. One also has to ask what were the shareholders or pension fund members doing, since most financial activity is done in their names and at their behest. Hide though they may behind agents of all kinds, the fact remains that very few people really question the paradigm they now bemoan. Who, in ‘the west’, at least, does not have an eye on the value of his real estate or is not looking forward to a (well-earned) pension?

7.2 The Propensity to Divide How different things would have been, and could yet become, if the ideas presented here had been the basis of policy. For that to happen, however, we need to overcome the propensity to divide, which infects everything. We have already noted the geo-political divisions between east and west, capitalism and communism, and now Islam and the west. The point is not so much the geo-politics involved as the fact of an overarching image of division. This sends a powerful and permanent subliminal message about our opinion of ourselves. We may seek to unite through the UN or even football, but the reality is far from it. And yet for all his duality, the human being is one thing. If only one could reflect this in our outer circumstances, which are themselves born of the human being but seem unable to get beyond the duality. On the fact of the unity of the human being, however, one can and should place reliance. It shows the problem is tractable and by no means ‘out there’ where we cannot get hold of it.

7.2.1 Public:Private The same propensity to divide exists in our more immediate social environment in the form of the public:private divide, the idea that economic life is split between the state and markets, between collectivist and individualist behaviours. But this is an economic nonsense. The reality is that we cannot but do some things unto ourselves, such as eating or buying a pair of shoes. Other things we cannot but do collectively, such as provide a fire service. This is a topic already touched on, but it warrants repeating. If we could see that human life naturally has two sides to it, one social the other self-centred, we would then go on to describe things more accurately. Production, undertaken necessarily for others, and consumption undertaken necessarily for oneself, for example. With distribution in between, reconciling their opposing natures. By ‘private’ we may mean something one does alone and/or for oneself and by ‘public’ the things one does with and/or for others. But both these types of activity could be conducted within the same type of organisation, namely, a corporation. And in fact they are by and large, because any activity when constituting itself starts out as a company or corporation and only secondly has to decide its tax status and thus choose between commercial and charitable. Nor is it necessary, though we have become used to thinking it is, to think that things we do for and with others need to be done via the agency of the state. Adam Smith, John Stuart Mill and many others were well aware of the self-centred side of human nature but also of its ‘other-minded’ side. Only they did not ascribe this to deliberate shared behaviour, but saw it as a function of the state. Education and health in particular were placed there. But why do we need to think in this way? Why can we not conduct


certain aspects of economic life collectively but without that meaning lacking in financial discipline, ignoring the need for profit and believing anything other than real production or speculation are valid candidates for investment of capital? In reality, there is no business that is not a collective operation. Rather than private:public therefore, why not private alone:private together? ‘Public’ could then become an overarching, higher order concept, not the supposed antithesis of ‘private’.

7.2.2 For-profit:not-for-profit The public:private divide is an albatross about our collective necks. It further weighs us down when we think in terms of ‘for-profit’ and ‘not-for-profit’ enterprises. Any set of accounts will show that this is an unreal distinction. From an accounting point of view, all organisations are expected to make a profit. The only difference is that in a ‘for-profit’ the funds are distributed to private individuals and in a ‘not-for-profit’ they are devoted to a ‘cause’. (See Chapter 11.) Behind this schizophrenia is the unspoken view that there is something wrong with profits, or that only capitalists make them. Or that through profits surplus value is allocated to the capitalist not the worker. And yet no business, not even a socialist one, could exist were it not to make profits. If those profits were not used to support its capitalisation, there could be no business. So it is a red herring to divide the world in this way. The problem at the base is that we are fighting over whether the capitalist or the workers should own the surplus value, whether labour is the source of value or something else. If we could get clear that value is born both of labour and of ‘Geist’ we would then see that the surplus belongs to no category, group or class. It is there for those things which are neither private alone nor private together but affect and benefit us all, such as education or earthquake rescues. (Keynes’s International Clearing Union is a wonderful example of this.) Through trade all nations meet one another’s needs and the surplus that is engendered above and beyond that, for this phenomenon will always exist, is devoted to humanitarian causes without the need for ‘official’ funds. Instead of taxation, which gives the state a pretext for determining economic life, there would be a growth in charities and the like, not, however, as government agencies or regulatory bodies, but as the expression of co-operative endeavour.

7.2.3 Dispensing with Leviathan Left:Right tells the same story – of the prevalence of Anglo-Saxon habits of thought, including the propensity to divide, not only as they influence social life generally, but especially economic life. The propensity to divide is unavoidable. Distinguishing things from one another, including ourselves over against the world, dividing the world in two, is how we understand the world. But then we need to put the separated parts back together again, not with some externally unifying element, but by realising first that polarities speak to one another and that from this a synthesis results, which we need then to express structurally. Outer arrangements there will then be that express this restoration, but they will not be experienced as impositions. Not the instruments of some unspoken Leviathan who knows best.

chapter

8 Keynes vs. Friedman – A False Debate

Emblematic of the propensity to divide is the false debate between the work of John Maynard Keynes and Milton Friedman – a debate on which much of modern economic life continues to be predicated. It does not take much to see that Keynes and Friedman were monetarily of similar mind, so the fact that the one is favoured by ‘the Left’ and the other by ‘the Right’ serves only to falsify both policy frameworks and practical arrangements. Seeing beyond this ‘cracked mirror’ of modern history is the key to rethinking our circumstances. In the undivided world that then comes into view, monetarism, which predates Keynesianism, needs to be understood in quite a new way. It is a world in which ‘output gap monetarism’ in particular has a special, even apolitical relevance. Output gap monetarism and its proponents may be out of fashion in a world now subject to a credit crunch and state bailouts of banks, but it would be unwise, especially at this juncture, to forget its counsel, apt as it is, to an undivided, autonomously conducted and global economic life.

8.1 Overcoming the Keynesian: Monetarist Divide It is one of the historical assumptions of associative economics that, had economic life developed a governance true to its own nature, among its many travails, the roller-coaster of twentieth-century employment levels (especially the Depression) could have been avoided. In other words, if full employment cannot be achieved and sustained alongside price stability, then there is something awry with the governance of the economy. That recent economic history has been and continues to be subject to a Left:Right divide is a tragedy, therefore. All the more so because it may be unnecessary. If for the purposes of the argument of this book one accepts Rudolf Steiner’s thesis that post World War I humanity could have given rise to a threefold society grounded on an autonomous economic life, the question arises: where would we stand in regard to the two main schools of thought that have ever since vied for policy supremacy – monetarism and Keynesianism? Modern western economic life is largely defined in terms of its affliction by (addiction to?) the Keynesian:monetarist divide, meaning essentially the opposition between fiscal economic policy and more or less independent monetary policy. In Congdon’s words, ‘Monetarists think that national income is determined by the quantity of money and believe in the primacy of monetary policy [while Keynesians hold that] national income is a multiple of investment and government spending, and believe in the primacy of fiscal policy’ (2007a: 5). The divide is enhanced by corresponding oppositions between the concepts of public and private sectors, the strong political affinities of Keynesians


with the Left and monetarists with the Right, and the related antagonism between statist and free market concepts of economic life. Controversially perhaps, as will have been noted, the following account takes much of its cue from Tim Congdon’s version of events, especially as set out in his 2007 anthology, Keynes, Keynesians and Monetarists. His evident pro-City bias notwithstanding, Congdon’s views are shadowed precisely because they lie with the grain of the prevailing paradigm during the two decades of financial history that culminated in the global financial crisis. Relying on Congdon’s interpretation is deliberate method that does not necessarily entail agreement with the views rehearsed.

8.1.1 Monetarism Historically, monetarism (as also Keynes, of course) precedes Keynesianism. Its genesis can be traced back to the Napoleonic Wars, when two ‘revolutionary ideas’ arose. Firstly, that of a general price level as the numerical expression of ‘a reliable monetary unit and standard of value’ (2007a: 59), originating, according to Schumpeter, with George Evelyn in 1798, who ‘used an index number … for measuring the “depreciation of money”.’ (See 6.3.4: Money Wears Out.) Secondly, ‘the inflationary process was radically changed by the introduction of paper money’ leading, as already noted, to what could be termed the central bank independence literature beginning with Henry Thornton in 1802, passing through Keynes’s 1923 Tract and on to the modern-day ‘operational independence’ of most central banks in the ‘free’ world. This ‘pedigree’ passes through Irving Fisher’s 1911 study on The Purchasing Power of Money, Keynes’s critique of it notwithstanding. Although critics, in particular Keynesians, dispute any ‘meaningful role for monetary influences on asset prices and demand’ (2007a: 229), nowadays ‘most economists agree with the proposition that in the long run inflation is … associated with faster increases in the quantity of money than in the quantity of goods and services’ (2007a: 281). Proof of this relies on the so-called ‘transmission mechanism’, the three key features of which according to Fisher are: (i) stability of the desired money-to-expenditure ratio; (ii) the distinction between ‘individual’ and ‘market’ (all individuals) behaviour; and (iii) lack of reference to ‘the interest rate’ when adjusting expenditure to money holdings. In Congdon’s view, though it has variants, monetarism is generally understood as the recognition and articulation of ‘a straightforward link between money [supply] growth and inflation’ (2007a: 3) of the kind Milton Friedman and his Chicago colleagues, along with researchers at the St Louis Federal Reserve, long ago propounded. In this view, ‘inflation is a purely economic problem’ (2007a: 4) ‘[so] commercial banks, and the broadly defined money aggregates, play a significant role’ (2007a: 13).

8.1.2 Keynesianism Keynesianism believes governments should not balance their budgets but run a deficit or surplus in order to affect economic life generally. This is the departure from the tradition of governments balancing their budgets that Keynesians justify by Keynes’s General Theory

Keynesianism, note, not Keynes himself.

K e y n e s v s F r i e d m a n 165

(Keynes 1936). It gives rise to (what seems to be) an intractable problem because, while monetarists allow a role to fiscal policy, Keynesians allow no role to broad money. For Keynesians, Keynes is a major advocate of statist economics generally on account of the arguments in its favour advanced in his General Theory in 1936, which, once accepted some 10 years later, became the basis of western economic governance for most of the post World War II period until the late 1970s. It is, however, a moot point whether Keynes would have put his name to this episode. True enough, Keynes can largely be credited with the revolutionary effect of his General Theory which did much to legitimise large-scale government intervention in economic life. But this he did as the ever-active thinker responding to a problem and as one who was pragmatic as to the political realities of public service. Despite his use, and even capture, by statism, Keynes was more world and monetary in his economics than national and political. His International Clearing Union and contribution to Bretton Woods, both post General Theory, would be truer epitaphs.

8.1.3 Keynes the Monetarist To speak of a Keynesian:monetarist divide, as many frequently do, is something of a historical distortion, therefore, in that it implies Keynes was not a monetarist when the reality is otherwise. First of all, he was an active and influential economist long before the doctrines named after him arose. Secondly, he was a champion of monetarism in his own right, and thus an important patron, witness the discussions in his Tract and Treatise on Money. Indeed, although for many no doubt controversially, Congdon, in company with Milton Friedman and others, regards Keynes as one of the main architects of monetarism. He goes so far as to describe latter-day monetarism ‘not as an assault on Keynes’s work, but as an attempt to rescue it from his successors’ (2007a: 132). His reasons include the observation that not only did Keynes oscillate in his Tract ‘between two views, one that the size of banks’ balance sheets is a multiple of their cash reserves, which can be determined by open-market operations, and another that “adequate control … can be obtained by varying the price charged, that is to say, the bank rate”’ (2007a: 62), but for most of his life Keynes preferred a floating exchange rate and ‘a managed currency’ to a fixed exchange rate and the acceptance of an external monetary discipline’ (2007a: 9). Even in the General Theory, ‘the key ‘rate of interest’ was the yield on long-dated bonds … determined by the interaction of the demand to hold a broad measure of money (dominated by bank deposits) with the quantity of money created by the banking system [rather than] the money market rate set by the central bank’(2007a: 13).

8.1.4 False Dichotomy Though it is a huge statement to make, the Keynesian:monetarist divide needs to be overcome above all because in economic terms it represents a false dichotomy, the result of political rather than economic divisions. It is unfortunate if political divisions, and the cultural ones that presumably lie behind them, give rise to a split economy if in fact economic life could be shown to admit to one treatment, to which potential consensus

It is worth keeping in mind that Keynes was also an experienced, and successful, investor.


on the importance, if not yet the ‘mechanics’, of full employment and price stability attests. To this end, a way needs to be found in which economic life does not have to be predicated on what in reality is an impossible choice, namely, between labour and capital, between full employment and price stability. Surely the greatest historical achievement would be a cross-party understanding of how economic life works. Of particular importance is it, therefore, to note Congdon’s view that from 1992 onwards, albeit in its ‘output gap’ variant (discussed next), monetarism has proved to be cross-party. Indeed, within three days of coming into office in 1997, it was Labour who granted the Bank of England operational independence (more recent reservations about the tripartite arrangement notwithstanding). Crucial to this was the dropping by the Labour Party of Clause 4, which some would argue was the end of Labour. But this happened in order to make Labour electable; that is to say, because all political parties nowadays, whatever their traditional ideological differences, need to comport with the exigencies of global finance.

8.1.5 Output Gap Monetarism When the relationship between Keynes and monetarism is seen in this light a new landscape reveals itself, in which what is known as ‘output gap monetarism’ comes to the fore, meaning that inflation is a function of the difference or ‘gap’ between actual and trend levels of output, expressed as a percentage of the trend level. That is, inflation matches, follows or ‘accompanies’ the output gap. Britain – pre global financial crisis at least – is therefore very much ‘on message’ in this respect since ‘the heart of the current system is that the Bank of England varies short term interest rates in order to influence the rate of growth of demand and to keep the level of output roughly at trend’ (Congdon 2007a: 11). Technically expressed, output gap monetarism comprises three main factors: (i) stable demand-to-output ratio (GDP); (ii) a stable money-to-goods relationship, or price stability (RPI(X)); and (iii) stable interest rates (T-bill rates). The point of output gap monetarism is that unless one prints money in the economic abstract, as governments are wont to do, ‘in the long run real output must depend primarily on real considerations, such as the number of working age people and their degree of skill’ (2007a: 317). It is on these grounds that, if this writer has understood him correctly, Congdon advocates output gap monetarism. Because, apart from government interference, the main influence that can muddy the economic waters is the broad, not merely the narrow, money supply, especially the issue of credit. ‘[While] the so-called ‘narrow money’ measures have some information value, [they] have little or no causal role in the economy [because narrow money] is only a subset of money as a whole’ (2007a: 319).

‘Impossible’ in the sense that, while one can discuss the nature of the relationship between labour and capital, that they have a relationship is not to be discussed, unless one thinks that one can have an economic life with either one absent.

Per the author, ‘the value of available money = the value of available goods’.


8.2 Output Gap Monetarism and Associative Economics 8.2.1 Cross Party Economics The aim of the foregoing discussion was to show that monetarism can be seen as a technical expression rather than as a political bias. From that point of view, the idea of an economic life divided between Keynesianism and monetarism is a major instance of the propensity to divide; one, unfortunately, that does both Keynes and economic history an injustice. To right this particular wrong, the approach of this book in regard to this topic is to consider monetarism, not only as preceding Keynesianism, but as an approach compatible with the here-claimed underlying reality of a single global economy requiring economic life to be autonomously governed, meaning obeisant to economic realities but in a clear rights context that prevents economic logic overspilling its rightful and proper bounds. Further, if output gap monetarism is indeed cross party, then a major if historically belated step has been taken. The tortoise will have outrun the hare. But the step will only have been taken if it remains cross party, that is, if it finds a general constituency at peace with its precepts and practices. Necessarily so, even if somewhat ambitious, ‘cross party’ includes not only the policies of the Labour and Conservative parties in the UK (and their counterparts elsewhere where bi-party democracy operates), but those of the Green Party, environmental economics, Islamists and monetary reformists. While one recognises their different, even divergent, cultural ‘lights’, in a single global economy those cannot be transposed to the monetary dimension. That would be like driving a car with four different-sized wheels each with its own version of suspension and speed and direction of travel. It is on our understanding of monetary policy that the focus of attention needs to go, therefore. If economic life generally remains stable and without a serious ‘downside’, the chances are that output gap monetarism will have won the day. But this sentence is being written in ‘Meltdown Monday’ week and it would be unwise to claim that the debate is now over. Monetarism when defending itself against Keynesianism, free markets when opposed by statism, and central bank independence when not generalised – all those things become very different once they have the field to themselves. Understood not as precepts of the political right, as many see them, but in their ideal sense, namely, as policies designed to free economic life from unconscious motivations, their import can be seen as something quite other than even their protagonists might have in mind. Indeed, by the method chosen here – that is, by a close and empathetic critique of output gap monetarism – one of the most interesting questions that arises, at least from the point of view of associative economics, is that, while output gap monetarism can lead us into a landscape understood in economic rather than political or moral terms, it is not clear that that is enough. Output gap monetarism throws light on crucial phenomena which are at the same time key precepts in associative economics and may thus represent an interface (or a bridge) between associative economics and current thinking.

21 September 2008.


8.2.2 Beyond Left:Right From the point of view of post World War I history, it is surely worth pondering how humanity would stand today if output gap monetarism, under Keynes’s patronage, had been generally adopted in 1922 rather than 1992. If output gap monetarism is really cross party, that is halfway to saying it is apolitical, which is halfway again to saying it is truly economic. A problem only arises if one assumes that what is truly economic is also, by definition, politically on the Right. But if the idea, which is basic to associative economics, is to conduct economic life and political life (more precisely rights life) autonomously of each other, then things look very different. For then there can be no question but that the entire conduct of economic life (not only partly so, which tends to be the Rightist perspective) needs to be de-politicised. Such a step cannot be taken, however, unless the role of money as it affects modern economic life is fully recognised, understood and worked with. That means, however, that we have to get beyond the situation in which Keynesians shut out money, thus goading the Right, while monetarists have a reputation for focusing on it in absolute terms, thus goading the Left. Since it makes no sense to choose which of one’s two legs one will use when walking, it is precisely this Left:Right framework that prevents us from entering a landscape that is truly economic. The merit of output gap monetarism, if it is indeed cross party, is that the debate moves from a false dichotomy between Keynes and Friedman to a quite differently framed discussion: If output gap monetarism is not in fact a triumph of the Right over the Left, does it mark the end of our divisive thinking about economic life, and the prelude, therefore, to a more socially cohesive financial and economic future?

8.2.3 Output Gap Monetarism Up Close In this section, the aim is to consider this possibility by the somewhat complex path of examining Congdon’s exposition of output gap monetarism in close detail and then critiquing it from an associative economic point of view. The exercise risks giving rise to a contorted discussion because the way Steiner looks at economic life is markedly different to the standard approach and may, indeed, not be capable of being overlain, as it were, for it may be too divergent. The exercise is worth doing, however, because, while views may vary about how to explain the workings of economic life, there is only one economic life to explain, so the thing being observed is constant to all observers. That there was a collapse of inter-bank lending in the course of 2007, for example, is an event that none can dispute, though explanations of it may come from different parts of the universe. In theory, therefore, even views as different as those of Congdon and Steiner ought to be at least analytically reconcilable. The differences will presumably be in the assumptions on which the different analyses are based and, therefore, the policy recommendations they give rise to. In certain respects, this part of the book will require the greatest effort of thinking, and, in all probability, the greatest suspension of disbelief insofar as it aims, having risen above the propensity to divide, to enter into a landscape that marks its sequel, our equal propensity to unite, to put back together the elements we have sundered. Congdon focuses on the relationship between money and income (or expenditure) and the long-running debate whether money as such has any influence on the economy.


In setting out his stall, so to speak, he begins by providing a condensed summation of what is now regarded as conventional monetary theory. In paraphrase: modern economic analysis centres on the notion of supply and demand, whose interaction determines quantity and price in both single product and individual markets (partial equilibrium) and for all products or the economy as a whole (general equilibrium). This heuristic concept is then applied to money as if it were a product like any other, except that unlike other goods, it has a fixed and therefore arbitrary nominal value due to legal tender (fiat) laws. Congdon’s argument takes this as a given, and yet the fact that a government (via the central bank) can fix the value of money is surely a substantial problem both conceptually and in real-world terms? Does it in fact comport with economic reality? Is this not why the Argentines ran into trouble in December 2001, for example: because their currency was fixed by their constitution to the US dollar? Quite apart from the dangers this brings of being too linked to the US dollar – and without any corresponding access to seignorage, what is more – is this not like saying that one’s face must comport with an image in the mirror, rather than be a sovereign albeit mutable thing, whose existence and every changing nuance is reflected in but not determined by the mirror? The point cannot be skipped over. Since Congdon’s analytical gaze, as also that of monetary economic theory generally, is confined to a world in which fiat money is the only money, the qualification needs to be added that such money only has a fixed value in ‘places’ where the fixer of it has jurisdiction. But, again, is this state of affairs a match for the real events of a global (that is, non-national) economy and is it not also now theoretically anachronistic? Moreover, might it not be that the twin anomaly – of a somewhat forced scientific, that is, heuristically convenient, explanation and the severely reduced role of fiat money – muddies our understanding of monetary processes? While it is usual to analyse economic life on essentially political lines, giving rise to a predictable, and predictably insoluble, debate, might the real problem be that the protagonists allow an insufficiently sophisticated concept to govern their image of economic life? To make matters worse, fiat money’s fixed value is made even more anomalous and complicated by the fact that it is said to comprise two ‘assets’, notes plus coin in circulation, M0 (see Chart 8.1), and sight, but not time, bank deposits (when taken together, M1). Calling these two elements ‘assets’ rather than, say, components, tells a further story in that by ‘asset’ people today mean something held with a view to its value rising, whereas cash, M0, which is also an asset, by definition cannot have this attribute. Nor in effect can sight, as distinct from time deposits. This point is explicitly recognised by Congdon (albeit not for the same reason) when he says that, although bank deposits may be denominated at a fiat rate, their value also depends on the solvency of the deposit holder. This remark prompts the further observation that the value of M1 is not so much a fixed thing as a non-discrepant proxy for the so-called ‘real economy’, while the value

Fiat effectively means national (sub-global) currency, of which there are currently approximately 180.

This may be a case of economics having to choose between insisting on a heuristic device because of the convenience it gives to exposition and devising a more comprehensive, but possibly heuristically less convenient, explanation of events. Congdon estimates that bank system assets in government instruments are today 1%, compared to 80% in the late 1940s.


of M2-and-above-minus-M1 is both mutable and capable of being discrepant precisely because it comprises assets, which Congdon defines in terms of shares, houses and commercial property. Being in effect balance sheet items, in contrast to goods, which belong in the income and expenditure accounts, the value of such things is typically in the eye of the beholder rather than inherent.

8.2.4 Two Kinds of Money What this makes clear is that money can relate to two distinct categories:

• •

the flow of trade of goods and services (transactions or narrow money; M1) the stock of assets that survives from period to period (savings or broad money; M2and-above-minus-M1) .

Elsewhere Congdon states that conventional thinking holds that ‘inflation is caused by the quantity of money being in excess of the quantity of goods and services’ (2007b: 20), although so simply stated this surely cannot be true. It needs to be both more precise and more complex, such as: inflation is caused by the quantity of money of a particular denomination being in excess of the value (in this case a value close to price because of their imminent sale) of the goods and services in the same currency jurisdiction. Nevertheless, this is the ground on which Congdon, on behalf of output gap monetarism, claims that ‘national income and asset prices are in equilibrium when the demand to hold money balances matches the quantity of such balances [in existence]’. (2007b: 20), And that, therefore, if money rises there is an effect because the extra money, which has to go somewhere, goes into ‘expenditure, causing prices to rise and/or assets, causing values to rise’. (2007b: 20), In Keynes’s nomenclature this is described as ‘industrial circulation’ and ‘financial circulation’; in output gap monetarism terms, narrow and broad money. Of these two aspects, Congdon remarks: ‘It may be heuristically convenient to think of them as separate and distinct, but in the real world they are interrelated’ (2007b: 21). His comment is aimed at those who disbelieve in the money effect, but it also has a deeper, if by Congdon unintended, significance that warrants closer examination. First of all, is money thought to be merely a reflection (the left-of-centre view) or a thing-in-itself (the monetarist view)? Or is it a reflection that can have the effect already mentioned, namely, that on not liking one’s face in the mirror it is automatically reconfigured? It may well be this latter prospect – even if a riddle to the modern mind – that those left-of-centre baulk at because it implies an extra-political relationship, something a government cannot in fact, not even via ‘its’ central bank, affect or control (or less and less so given today’s realities). The phenomenon under discussion is surely, however, nothing other than what George Soros has in mind when in his various writings he speaks of ‘reflexivity’. It is a process that ought not to be feared and demonised but understood and grasped. Secondly, do we in fact ‘swap’ the one money between consumption and savings, as Congdon states, or are there two monies, albeit intermingled? The idea of two distinguishable monies may be resisted on the grounds that the distinction is thinkable but not doable, but is this really so? If a person refuses to borrow money to pay for his An admittedly clumsy expression, due in part to the incomplete homogeneity of definitions of monetary aggregates (see Chart 8.1).


daily food, for example, ensuring instead that he meets such commitments out of income (not savings past or savings future) is this not both a real and a conceptual act? M4

Cash outside banks (ie. in circulation with the public and non-bank firms) [M2] + private-sector retail bank and building society deposits [M3] + Private-sector wholesale bank and building society deposits and CDs.

M3

All other CDs + eurodollar deposits +repurchase agreements.

M2

Time deposits + Wholesale deposits + most savings accounts, money market accounts + CDs under $100,000.

M1

Vault cash + current accounts (Sight Deposits)

M0

Coins and notes + 'genuine' banks' accounts at the central bank

(Light grey = UK; White = US)

Chart 8.1

Monetary aggregates

8.2.5 Two Monies Need Two Banks Admittedly, to act in the manner of the above example is not easy in today’s circumstances, when income often does not cover expenditure, but that does not make the possibility of doing so conceptually or practically ‘unreal’. Indeed, if one sets out on such a path, it stands to reason that one will find oneself being led from the conceptual distinction between two types of money out into their differing real economic hinterlands – the physical economy that underpins cash, and the economy of ingenuity, innovation and initiative to which assets implicitly refer, for what is the point of a piece of equipment except that the entrepreneur uses it to provide a service or make a good? This is implied in Keynes’s reference to industrial and financial circulation, already mentioned, and is what Steiner calls, in German, Natur and Geist – ‘land’ and ‘capital’. If one then speaks the languages appropriate to each hinterland, then out of their very distinctiveness one sees anew their connection. It is in this sense that they need to be de-linked (see


later discussion), so that the individual, by this very epistemological deed can become monetarily aware of his actions, and thus supersede the state, as also the market, as the agent of monetary cohesion. But there is also a third point. The effect of a rise in money that Congdon describes (and that this writer does not dissent from) is not just due to a rise in money, but to a prior preparedness on the part of agents to pay more for goods and assets and to borrow the extra from the banking system. The rise, in other words, is not an act of God or a natural event, but the result of deliberate decisions by human beings – a view, of course that proponents of ‘the market’ other than as a heuristic device may find difficult to countenance. To raise these points is not to contradict Congdon or to take an anti-monetarist stance of some kind. It is to refine Congdon’s argument and also by extension the monetarist analysis generally. Indeed, if this further dimension can be achieved, it promises to overcome the stalemate of the ‘money effect’ debate by lifting it beyond political affiliations of the traditional and endemic, but ultimately irreconcilable, ‘labour-versuscapital’ kind. Then – and without thereby meaning that the phenomenon is right or wrong, benign or malign – the fact can be embraced that, because of the triviality not only of M0 but also of M1 in today’s economy, the main ‘event’ we face is precisely that disputed by leftof-centre economists, namely, the role of the financial system. To get beyond disputation, the need is not to resist this phenomenon, but to pass through it, as it were, to which end one needs to make the important distinction between ‘genuine’ banks (with vault cash and an account at the central bank) and non-banks without these links. This difference is operational, not merely regulatory, as there is a world of difference between clearing in cash in the case of genuine banks and clearing across a bank account as with non-banks.10

8.2.6 Rudolf Steiner’s Conception of Money Insofar as the above paragraphs provide a faithful outline of Congdon’s ‘proof’ of the monetary effect, their aim is to show a way beyond the insoluble dilemma this topic has so far amounted to in economic and monetary history. However, the approach taken has been to ‘shadow’ Congdon’s reasoning on the basis of insights gleaned from the author’s study of Rudolf Steiner’s ideas but interpreted and used here on his responsibility only. It behoves us, therefore, to make this background thinking more explicit by looking more directly at Steiner’s version of events, not in order to advocate it in the abstract but to enquire into its relevance and explanatory power and the potential contribution it can make to rendering today’s problems tractable. The first point concerns Steiner’s threefold concept of money, here stated as succinctly as possible. Money emerges as a surfeit of goods relative to needs. This initial form emancipates itself so that money in the shape of coins, then cheques, then bank entries, becomes an abstract proxy for real events. But the very process of monetisation obscures the differences previously obvious – as between goods and capital in particular. Therefore we need to distinguish between the money counterpartied by goods – purchase money – and the money counterpartied by the capital born of trade – loan money – which is 10

In Congdon’s essay, footnotes 15 and 29, pages 15 and 18, are important in this connection.


then extra to goods and needs to become linked to initiative and investment. For Steiner, the highest form of trade capital is financial capital, but this is tantamount to too much loan money. The excess, identifiable as that part which is invested merely for the sake of a return, ‘should’ be used up by being spent, rather than reinvested, for example, by being transferred through the funding of education, principally by way of teachers’ remuneration. This is the function of gift money.11 Secondly, for Steiner, money-as-a-thing-in-itself does not exist, or rather should not be so regarded. It ought only be a proxy for real events. What he calls purchase money, for example, is the monetary reflection or expression of trade; its cover. It does not therefore cause or impede trade, but waxes and wanes in ‘quantity’ as trade does. By this definition, of course, there can be neither inflation nor deflation. That is, although prices and values may rise (or fall) consequent on a preparedness to pay and borrow more (or less), the value of money can never be other than the value of goods available or traded. By Steiner’s analysis, therefore, if there is any discrepancy it is due to one or both of two factors – either money itself is being traded and/or something other than purchase money is at work. As regards the first, Steiner’s view is that money itself is not in fact a commodity and that when treated as such, both conceptually and in practical life, it acts as ‘an unfair competitor’ (1922: 148). This seems to be linked to the difficulty many economists have in accepting that money can play a ‘mono-causal’ role in economic life. Concerning the latter, Steiner would argue this is loan money, and in particular too much loan money, meaning capital in excess of the means of production.12 Thirdly, notwithstanding the intellectual allure and widespread acceptance of Partial and General Equilibrium Theory, are we certain that what one might call the conventional but narrow image of supply and demand represents reality? Moreover, what precisely is included in the concept of ‘product’? Concerning the first, we have already seen that Steiner regards supply and demand theory as too narrow because based on the assumption that one cannot think with multiple independent variables. As regards the second, for Steiner four things in particular do not belong in the category of product or commodity, if by that we mean something wrought by human beings: land, labour and capital (which he also calls factors of price formation rather than factors of production), and… money! Lastly, concerning monetary aggregates, it seems reasonable to suggest that M1 is equivalent to Steiner’s purchase money, whereas any larger measure, because it includes time deposits, etc., is related to (though not synonymous with and therefore not equal to) loan money.

11 A simple way of seeing this is to note how in accounting the profit leaves the income and expenditure statement and is transferred to the own capital account on the liabilities side of the balance sheet. But so too do reserves leave the entity in which they arise and pass by way of loan or investment to other entities. 12 Indeed, this seems to be what Congdon is describing when he says: ‘Finally, quite unlike households and companies, the financial sector appears to be seriously misbehaved. Over the 43 year period under review, financial institutions’ money holdings exploded by more than 1,400 times. The compound annual growth rate of almost 20% was markedly higher than that of national output, while the variation in the growth rate from year to year was much higher than for households and companies. The claim that velocity can change ‘without limit’ appears to have worthwhile supporting evidence in this part of the economy’ (2007: 9). And: ‘financial institutions and companies play a far more important direct role in the determination of asset prices (except house prices) than the personal sector, and the volatility of nonpersonal money holdings is associated with the volatility of asset prices’ (26).


8.2.7 A Polar Continuum Along this path we have seen that for both Congdon and Steiner economic and monetary affairs are not all of one kind. They are, rather, built out of a twin reality. The comparison below is an attempt to organise this polar-dimensional nature of modern economic life using various terms generally found in monetary economics, but also those of Steiner. The important point is to illustrate the degree of consensus that exists concerning the twin nature of economic life. Though depicted as two columns, the exercise can also be envisaged as a continuum,13 along which the nature or counterpart of money alters: ECONOMICS

Means of exchange

Store of value

Land

Capital

Income

Wealth

Flow

Stock

(per Keynes)

Industrial circulation

Financial circulation

(per Hicks)

Involuntary

Voluntary

––––––––––––––

––––––––––––––

FINANCE

M1

M2-and-above-minus-M1

Cash

Deposits

Outside money

Inside money

Narrow money

Broad money

Transactions money

Savings money

––––––––––––––

––––––––––––––

ASSOCIATIVE ECONOMICS

Purchase money

Loan money

(per Steiner)

Labour working on land Ingenuity organising labour Labour requiring

Labour obviating

The references to Steiner relate to what one might call his twin value theory, the central thesis of which is that there are two streams of value – one born of human effort (labour) expended on the material world (land), the other born of human ingenuity organising 13

Or should that be a spectrum? Or even a rainbow, in which case, viewed from below or above?


human effort and thus having an efficiency, or more precisely a labour-obviating, effect (capital, in Steiner’s usage of the term). Steiner styles these two value-creating streams V1 and V2 and says it is their interaction that results in prices. In Steiner’s terms, therefore, to deny the money effect is like saying that loan money has no effect on purchase money. One may opine that there ‘should’ not be such an effect, but there can be and is, especially if there arises too much loan money, M2-andabove-minus-M1, relative to purchase money, M1. ‘Too much’ means the component of loan money that should be converted into purchase money, the process Steiner means when he speaks of gift money, or the problem that can result if there is excess liquidity. The problematical connection between purchase money and loan money, between M1 and M2-and-above-minus-M1, and therefore the need to de-link them, is evidenced in the fact that, as expressed by Congdon in terms of normal monetary parlance and analysis, a narrow money measure does not capture money-into-money transactions.

8.2.8 Gateway to a New Landscape Complex and even cryptic though it may be, one can see that by coming alongside it from an associative economic, supra-political perspective (rather than seeing it as the clothing of a right-wing point of view), output gap monetarism can change from being a victory of the Right over the Left, to become the gateway into an economic landscape which we can all co-habit despite contrasting political views. Indeed, our political gaze will at the same time come away from trying to capture economic life to one-sided ideological ends, and turn instead to how we can severally understand and improve our rights life, also to the end that parliament fulfils its promise of being an ongoing conversation, rather than an adversarial battleground. It is the propensity to divide that relishes the two-sided debating chamber of the Houses of Parliament, for example. Most modern parliament buildings are circular, as, indeed, was one of the designs for the rebuilding of the Houses of Parliament after the fire of 1834. This does not make Congdon’s view ring any less true, that in the UK resistance to an analysis that includes and sees as significant the banking sector is probably due to ‘the widely-attested association between an interest in monetary economics and support for the free market, which upsets the high proportion of British economists with leftof-centre political tendencies’ (Congdon 2007: 13). But from an associative perspective, this merely underlines the need to separate economic and political life, so that monetary economics can stand in its own right. Indeed, since in many ways associative economics rests on a monetary analysis, this is probably the area in which it can make one of its most important contributions, not to mention challenges, to the development of economic thinking. It would do so because its effect would be to ‘stabilise’ (meaning to engender agreement among) often-opposing pictures. As Arthur Edwards observes: ‘Differentiation inevitably follows thought. Integration requires a unifying insight of a different order. To distinguish without dividing (after Coleridge) allows categories of “kind” to be used, which, without touching the phenomenon itself, should articulate one’s understanding of it’ (2009).


chapter

9 The Flattened Economy

Output gap monetarism and central bank independence are key phenomena with the potential to overcome the Keynesian:monetarist divide. But they have significant consequences. Their aim is generalised low inflation. This, however, denies the essential dynamic of the foreign exchange markets, the institution most crucial to and symptomatic of a mindset that refuses global economics, in that were there only one economy, along with its concomitant, a single world currency, there would be no foreign exchange markets. Conversely, maintaining the foreign exchange markets masks the underlying reality of modern economic life. Not surprisingly, therefore, the ‘success’ of output gap monetarism and central bank independence in recent decades has resulted in a ‘flattening’ of economic life the world over. That cannot be the end of the story, however.

9.1 What Happens Next? The argument advanced so far claims that, had there not been the Great Detour of the twentieth century and were social life not lamed by its constant division into Left and Right, itself the result of the Anglo-Saxon propensity to divide, we would long ago have pursued the kind of monetarism outlined in Keynes’s 1923 Tract. A depoliticised, single global economy would, in the first instance at any rate, exhibit something close to the monetarism that would prevail were economic life able to follow its own logic, free of political interferences of all kinds. The closest we have to this in actual conditions is output gap monetarism with its associated central bank independence. However, output gap monetarism working alongside (partial) central bank independence has flattening consequences. From the point of view of the proponents of output gap monetarism, the main challenge in recent times has been to achieve its general recognition (a task by no means fully complete and now somewhat complicated by the global financial crisis). However, from an associative economic point of view recognising the significance of output gap monetarism is but the beginning. The assumed background of output gap monetarism is that of a free market, a world in which governments do not interfere with the free play of market forces. But the period 1992–2007, to which Congdon (2007) refers as one of unbroken stability, has now been punctuated (punctured?) by ‘credit crunches’, financial market meltdowns and state bailouts of commercial banks and financial institutions on a scale never before known. What has happened? And why is the market not being left to sort itself out?

9.1.1 Beyond Generalised Price Stability The stability since 1992, while clearly associated with output gap monetarism and central bank independence, also relies on the ever more abstract nature of finance (abstract


meant in a technical and descriptive, rather than pejorative, sense). Price stability and the output of the real economy are reliant on financial stability, but the science of ensuring this seems somewhat less advanced. It is the thesis of this book that globalised finance in particular is an epistemological ‘event’ that calls on us to change the locus of our consciousness, to encompass rather than be encompassed by finance. Clearly, the problem has to do not only with output gap monetarism – that is to say, accepting that the broad money supply can affect the ‘real economy’ and do so in ways that are beyond the reach of fiscal, and therefore national, as distinct from supranational (e.g. the EU) or international (e.g. talk of a global monetary authority), policy. It also has to do with whether predicating monetary policy on operational central bank independence is enough. It is arguably one thing to do this in a world not generally informed by central bank independence, but another when it becomes the norm and price stability is also generalised. For generalised price stability, meaning the adoption and achievement of price stability in all countries of the world, has the important consequence of ‘substantive harmonisation’. This is one thing when advocated in a world of (often markedly) varied inflation rates; quite another when, because of it they all tend to zero. For what, then, happens to the ‘driver’? How can the process go forward if there ceases in effect (if not yet in name) to be more than one currency? For, surely, this must be the result if policy is generalised in the direction of output gap monetarism? Put another way, if the private:public divide is overcome (see earlier discussion) – bearing in mind that thereby the state would also be required to behave in a ‘private sector’ manner, having the constraint of a proper balance sheet, in particular – there will be a major epistemological effect. The thinking provoked by rivalry between separate entities or ideas will become obsolete and will need to be replaced by a kind of thinking (together with its counterparts in financial and economic life) that works instead with the dynamics within the one economy or paradigm, no longer the dynamics between separate economies. Key to the achieving of generalised price stability is generalised central bank independence, which is also a powerful concomitant (arguably the concomitant) of output gap monetarism. In other words, output gap monetarism and central bank independence are conceptual and policy twins, even though their epistemological effect is obscured, as long as statist regimes continue. Were the latter to universally leave the stage, however, output gap monetarism and central bank independence would need to identify their next phase. It is one thing to include and give special emphasis to broad money in a world where alternatives operate, namely regimes that exclude or deny its effects. But were statism to leave the field, the question would arise what lies outside a now globalised economy conducted according to a uniform set of precepts? At that stage of economic history, national denominations mean as little as did the gold standard when it became a ‘barbarous relic’, precipitating the question: what at the level of the world economy replaces the domestic:foreign divide on which national economic consciousness relies?

It is crucial to remember that, economics being the enactment of what we think, ‘epistemology’ here not only refers to how we know, but how we organise. There is no economic institution which does not first, and perhaps only, exist in the human mind, albeit collectively, that is, in all our minds.

T h e F l a t t e n e d E c o n o m y 179

9.1.2 Differentiated Money This problem has both a monetary dimension – whether money is seen in unitary or differentiated terms and its equivalents, the relationships between cash and credit, price stability and exchange rates – and an institutional dimension, the functioning generally of auditorial (or at least full) central banking. The monetary aspect can be expressed in terms of ‘differentiated money’, the idea that not only are there two main kinds of money, but that they need to be de-linked. Few seem to have anticipated this second aspect, however, and many, including Tim Congdon, seem not minded to countenance it. Even output gap monetarism rests firmly on the idea of a unitary concept of money, hence its focus on the transmission mechanism between broad money supply and output. A unitary concept of money (even if ‘explained’ in terms of ‘the multiplier’) presupposes and requires a range of monetary aggregates from M0 to M4, from the narrowest to the broadest of money definitions. How these different aggregates interact is then, of course, crucial. But the problem is that at one end of the range (M0) the continuum is related to the finiteness of the ‘real’ economy, while at the other end it is linked to infinity (or its financial equivalent). Real output comes from somewhere specific, but credit, as Mayer noted earlier, has long since ‘come from all over’. This gives rise to a ‘struggle of logics’ – the remedy to which, like the earlier discussed distinction between the natures of rights life and economic life – is to allow for two kinds of money, such that when they interact they do so in conversation not in antagonism. Moreover, the two kinds of money, once recognised, must not be allowed to invade one another’s space. In associative economic terms, the question is whether the narrow money measures of M0 and M1 approximate or are equivalent to what Steiner calls ‘purchase money’; and whether the broad money measures of M2, M3 and M4 are equivalent to ‘loan money’. In a word, does associative economics ‘understand’ (and embrace) broad money?

9.1.3 One-world Money Two monies is shorthand for three in fact, the third being knowing how to keep the balance between them. This threesome has a macro-economic equivalent in terms of the two ‘instruments’ of any central bank today, price stability in the ‘domestic’ economy and a viable exchange rate in the ‘foreign’ (that is, rest of the world) economy. The generalising of central bank independence means these two aspects are treated the same regardless of national boundaries. If one envisages universally freely floating exchange rates and full, that is, operational and goal central bank independence, then exchange rates act as reciprocators of one another, not competitors. As a consequence, national currencies cannot thenceforward be distinguished in regard to the way they are ‘managed’. In effect, they coalesce into one world currency, albeit articulated in n national denominations. Once statism is overcome, what matters are the ‘economic fundamentals’, but these are intimately linked throughout the global economy, making it even more all-of-a-piece, and thus intensifying the essentially epistemological problem that this book consistently refers to. This has a further corollary, the need to harmonise accounting standards worldwide, so that one can compare ‘investment performance’, something difficult to do once national differences no longer obtain. Today there is the work of the IASB (see 11.4), but the assumptions underlying its standards remain subject to discussion, perhaps because they have a certain bias in them and because the IASB has yet to demonstrate


freedom from political interference, witness interference by the European Commission in October 2008. Quite what happens next remains to be seen, but it is worth remembering that associative economics is predicated on the further insight of Rudolf Steiner, that by the time the twentieth century dawned the form of money and the form of accounting had become one, so that money (albeit differentiated) can nowadays be seen as accounting and vice versa. Again, the specific epistemological equivalent here is the threefold structure of accounting, comprising the contrast between the Income and Expenditure Account and the Balance Sheet and their resolution via the Closing Entries. Explained later, this topic hints at the near-to-hand tractability of the many issues touched on in this book.

9.1.4 Beyond Output Gap Monetarism Challenging as all this might be, even to those at the forefront of monetary evolution, does it not make sense? For example, it would mean that monetary policy would bear on narrow money (‘goods money’), while broad money would be linked to investment, more specifically what we earlier called ‘aspirational money’. To say that is not to take a Keynesian view on broad money, but to articulate, albeit counter-intuitively, the effect were output gap monetarism to be universally adopted. As we have seen, it also means that three problems in particular have to be recognised, addressed and overcome, but as a matter of economics, not politics or morality. The first is the use of one money to buy both goods and ‘assets’; rather than confining each of the two monies to their particular domains. The second is that the possibility of there being ‘too much capital’ has to be admitted and that this problem could be avoided before the event, rather than ‘market corrected’ (or state rescued!) after it goes awry. This leads in turn to the third problem, the idea that too much capital is a result of (a) more capital being credited into real estate (‘land’) than is necessary to finance the outputrelated means of production, and (b) the predicating of much of the value (and indeed existence) of financial markets on the investment of capital for a substantial return, when in economic fact a significant part of it needs to be written off, lost into activities whence new values derive. To say this is not to attack modern finance but to attempt to describe the limits it must in the end meet – even though it may be claimed that there are no such limits. This is not a matter of political point-scoring or of ‘doing a moral number’, but of asking a simple technical question: can modern economic life continue on the basis of a unitary concept of money? Were it to reign supreme, would not output gap monetarism itself give rise to differentiated money? While output gap monetarism, if universally accepted, would clearly mark the end of a very long debate, it would also mark the start of a new phase in economic understanding. To be precise, it would not call into question market economics per se, but ask if the somewhat narrow analytical basis given it by Adam Smith is sufficient to grasp current developments (other, that is, than using policy and financial instruments to force events to comport with an a priori concept). In Steiner’s view, Smith did not use his analysis comprehensively enough, adopting only the view from a trader’s perspective and not even both traders to a transaction either. He did not, therefore, take the point of view of supply of goods for money and supply of money for goods. He also did not consider supply and demand (in both senses) from the point of view of the producer, consumer

T h e F l a t t e n e d E c o n o m y 181

and distributor. With his focus on mercantilism, Smith was representative of his time in history, but his ideas are generalisations from one set of data, so to speak, rather than triangulations from various sets. And mercantilism is not today’s issue.

9.1.5 From Polemic to Conversation Essential in all that is here being said is the need to understand today’s abstract finance. For Steiner, the shape and content of economic matters mirror, as a shell does its nut, the general relationship humanity has to life. The more abstract that relationship, the more abstract economic life, especially finance, becomes. ‘Abstract’ in this sense is not a pejorative term, but it does prompt the question: how do we make finance concrete in our general understanding? Suppose output gap monetarism and central bank independence are likened to a cantilever bridge as it leaves one side of the river. If it is not to be washed away by global statism, the counterpart coming to meet it needs to be identified in ways that meet today’s understandable concerns about deregulation but do so by providing for inherent rather than external disciplining of the rarefied financial-economic behaviour that modern existence nevertheless entails. In a word, if sufficient tact, combined with some courageous thinking, can be summoned, the delicate challenge of reviewing the prevailing market paradigm without thereby going backwards in history can perhaps be met. In the process, the polemic implicit in the Left:Right divide has the potential to give way to a conversation born of contrasting views. Conversely, such a conversation may well serve to overcome the epistemological blockages that everywhere confront us, and which this book attempts to address. A naïve enterprise? Perhaps. But surely one worth hazarding.


part

IV The international monetary system remains [disordered] and the way forward unclear … Where do we go now from this? – Forrest Capie, et al., The Future of Central Banking


chapter

10 Beyond Banking

If there is a problem with banks today it is that they, along with the banking system, have become anachronistic. We have arrived at the banking process, for which the individual, and therefore each one of us, is the locus. On the monetary stage, as also in the back of our minds, two things need to become de-linked – cash and credit. For the first time in history, citizens generally can conduct monetary policy and control credit creation by the very way they behave with regard to money and credit, goods and innovation. We issue money when we buy things and create credit when we borrow.

10.1 Our Aristotelian Myopia 10.1.1 The Death of Money Over 15 years ago, Joel Kurtzman wrote that: the ‘financial economy’, is somewhere between 20 and 50 times larger than the real economy. It is not the economy of trade but of speculation. Its commerce is in financial instruments. And while its ultra high-tech infrastructure straddles the globe and moves several trillion dollars a day between the major and minor ‘nodes’ of the network, it is largely unregulated. Few people realize that money, in its traditional sense, has met its demise. Fewer still have paused to reflect on the implications ... (1994)

Kurtzman’s tenor and conclusion are understandable, but possibly misplaced. To say the financial economy is 20 to 50 times the size of the real economy is extraordinarily imprecise and what is at issue is not so much the death of money as the death of our normal understanding of money. Like many people, Kurtzman wrote shockingly of modern finance, describing its highly abstract nature in somewhat pejorative terms. In doing so, he voiced the views and concerns of many, the literature concerning which stretches back to Aristotle, who, looking at it from the point of view of the ‘real’ economy, see finance as an extrapolation or extension of and away from reality, ultimately acting negatively, recursively, if not cancerously, upon it. The global financial crisis provides much grist for this particular mill, and many are those who claim it is time to return to reality, to reconnect finance to the real economy. This is an understandable concern, but it is essentially quixotic. It would be more effective to recognise that finance can be understood not only as an abstraction from the real economy, but as the expression of a quite different, but as yet not fully comprehended, logic.


Our normal thinking speaks of derivatives, implying the financial economy derives from and is stacked up on the real economy. The talk is of anchors and landings, as if the primary reality is the ground. Aspirations, expectations, intuitions and so on do not derive from the ground, however, even though they impact upon it and have to pay attention to its constraints. It is but a bias to consider the real or physical economy as primary and finance as secondary. From the point of view of an idea or a hunch, the opposite is true. We simply have to get over this Aristotelian myopia. That does not mean preferring the financial over the real economy. It simply means according to each its reality and particular nature. This, clearly, is the same epistemological problem as distinguishing between rights life and economic life, or achieving full central bank independence. When Kurtzman said that ‘money in its traditional sense, has met its demise’, he meant money as predicated on the material world, on goods and physical production. Such money has not died, of course. The problem, to speak monetarily, is that narrow money has been subverted by broad money. The thesis of this book is not that finance should re-second itself to traditional money, but nor that non-traditional money should become our only or default reality. Each needs to find its own locus. Insofar as the Chicago Business School is the origin of much of the thinking that animates modern finance, this will undoubtedly prove challenging to Chicagoans, but throwing epithets at them will not help. There are reasons for championing the cause of broad money, as we saw in the discussion on output gap monetarism. One of these has been persistent refusal of it. Once that historical tension has been relieved, which is in part what the last 30 years have been about, we will be able to look again in a less charged but nonetheless urgent way at the relationship between narrow and broad money.

10.1.2 The Twin Nature of Economic Life Many of the topics included in Kurtzman’s account, already nearly two decades old, read as a further detailing of abstractness: the neural network of money; spending big on technology; a network of financial networks; adventures in cyberspace; derivatives make their debut; building a market around an equation; options trade; the growth of portfolio insurance; markets that are too efficient; shrinking time horizons; invisible trades. An abstraction can be an exploding beyond prior connections or an opening up to new ones. But we will not know which until we discern, right into our institutional structures and, indeed, into our behaviour, that there are two kinds of money in the world. Not one. And not one being supplemented by another. But two. This, in the first place, is an assertion, even simply an idea, an exercising of ‘the muscles of intuition’. The proof, as Newton said to Halley, will come along later. In what follows, there is no intention to prove anything, however, only to describe a possibility. The question is does it stand to reason? Does it make any sense? Not, can it be theoretically proven? The epistemology is Coleridgean, not popular Newton. We take our start from the simplest of financial realities, but one that is as true of real economic activities as financial, and is in that sense of a higher order than both – accounting. Any balance sheet at inception, whether on day one or at the start of every

B e y o n d B a n k i n g 187

transaction, comprises two distinct elements – cash and credit. They are not sub-sets of each other, however, but two worlds that meet or match one another. The same can be said of a long list of modern economic categories: Cash

Credit

Money

Capital

Goods

Creativity

Agriculture

Culture

Real

Financial

Physical

Ephemeral

Tangible

Intangible

Finite

Infinite

Growth and decay

Growth, growth, growth

From the dawn of the west with Aristotle, to Adam Smith with the Industrial Revolution, economics has been subject to a bias to the left column, all attributes of the physical world. Capital, though always implicitly present and obviously so from the time of the Medici family (and even earlier) onwards, was always held askance. Yet we think and behave with a preference, in Barfield’s terms, for science rather than poetry, as if the two cannot cohabit. One might as well choose to walk on one leg rather than the other, or use one side of the brain rather than the other. Right into our natures, and so also reflected in our social life, human beings are built out of a duality that is then centred at a higher level. I walk, not my legs. I think, not my brain. We need but find the equivalent in outer economic and financial affairs. If we could but let go the Left:Right divide we would see a very different polarity is before us at every turn and thus step into the reality that we are seeking. For human beings, that is to say, financially literate human beings, are the missing element.

10.1.3 Concerning Nation States We would also then see that insofar as all countries adopt and use this new terminology and the institutions that belong to it, one can no longer talk of separate national economies. So what if the nation state is marginalised or rendered economically insignificant in the process? That is not the problem. The problem is that the nation state economy has had its day, not the nation state per se. If we would give the nation state a new lease of life we need but distinguish political life, which is or ought to be national in character, from

The terms are from Keynes’s Tract.


economic life, which is global. That would mean, however, resting nationhood on the culture and values of specific peoples, and not on such high-sounding and well-meaning, but nevertheless socially abstract, constructs as the League of Nations, United Nations, WTO and other supranational institutions. It is precisely such institutions that leapfrog the national jurisdictions that people tend to experience as human and natural. To remind, associative economics belongs to two other conceptions – a rights life predicated on nations, and a spiritual life characterised by a choir of cultures. It is this macro image that belongs inwardly, and even structurally, to the Coleridgean imagery presented above – of a polarity synthesised at a higher level. It is this possibility that is closed off as long as cash and credit (as also any of the polarities listed) remain directly linked in our minds and therefore in our ‘outer’ arrangements. By becoming monetarily awake, however, we can insert ourselves into the equation.

10.2 De-linking Cash and Credit What in outline does de-linking cash and credit mean? Basically, it means letting go the idea of the multiplier, by which the creation (or destruction) of ‘fountain pen’ money is explained. Better put, seeing the multiplier as an intellectual construct that renders an essentially autopoietic process mechanistically understandable. In doing so, it cuts out the myriad responses and actions of human beings, rendering them mere automatons who have no choice but to borrow when money is (made) ‘easy’ and repay when it is (made) ‘tight’. At its simplest, this technique is one whereby, for example, given a ratio or factor of proportionality, banks issue credit by n times the amount of money deposited with them, a process that is magnified by inter-bank deposits. It also means understanding that fractional reserve lending, scathing condemnation of it by its many detractors notwithstanding, originated with the goldsmiths as a reflection of reducing rates of withdrawal by depositors, who were thus the real authors of the process. One needs to be wary, therefore, of seeing banks as the originators of processes, which in reality they reflect. Banks may seem to issue credit in the abstract, but they do so in response to demand. In recent centuries this process has been located in the banking system as the main medium for credit creation, making the banking system’s role to date crucial. However, under modern conditions, if the supply of credit becomes restricted, credit seekers go outside the banking system, prompting financial innovation on all sides. The continuing relevance and effectiveness of the money multiplier – both as explanation and technique – must, therefore, be at issue in an increasingly virtual financial world. Having their origins in conditions that obtained 300 years ago, both practice and concept belong to the world of diminishing returns, another basic concept of economics that pretends to be general but in reality belongs in the left-hand column only. In the argument of Roger Bootle, however, today’s conditions are those of ‘weightless economics’, characterised by continually increasing returns (to consumers, what is more,

Rowbotham, for example, describing the goldsmiths’ activities as ‘the antecedent of today’s financial system’, says ‘its historical origins [are those] of pure deceit and counterfeiting’ (1997: 178).

Founder of Capital Economics Ltd, speaking to the Economic Research Council, London, 8 December 1999.


rather than producers), and calling for a corresponding change in concept and practice as regards processes outside the banking system. The following sketches illustrate a crucial epistemological consideration in this regard. (The solid points and arrowed lines represent the essentially cause–effect nature of modern economic thinking.) Descriptions of the money multiplier usually see the causality originating in the deposit (cash), which is then multiplied by the banking system (credit), thus:

Cash

< Banking System >

Credit

.

Sketch 10.1 Credit as a sub-set of cash But the process can also work in the other direction, bringing with it the risk that uncontrolled credit creation can inflate the amount of cash:

.

Cash

< Banking System >

Credit

Sketch 10.2 Cash as a sub-set of credit Combined, one has an image of Soros’s reflexivity, discussed earlier, in which it is not easy to distinguish cause from effect and which would seem truer to current circumstances:

Cash

< Banking System >

.

Credit

.

Sketch 10.3 Cash and credit in reflexive relationship Reacting to unregulated financial markets, there is a growing body of opinion that argues for the first of these cases, namely, that credit should be a ‘sub-set’ of cash, that money should have ‘real’ backing and even, in the case of the monetary reformist movement, that fractional reserve lending should be abandoned as anti-social. This view contrasts directly with conventional understanding, which, like Keynes’s 1930 concept of ‘money of account’ or ‘proper money’, sees cash as a sub-set of credit.


The reality, of course, involves both, but if financial evolution is not to continue to be beset by an either/or debate, let alone an actual struggle between pro-banking and ‘bank-bashing’ sections of the community, it is crucial to move the discussion to another level, to access another dimension. And one in which the locus of decision-making moves out of the banking system into the actual behaviour of economic actors. More precisely, to conceive the banking process as distinct from and of a higher order than the banking system, just as the banking system is distinct from and of a higher order than the individual banks. In terms of one of the themes central to this book, the de-linking of cash and credit (money and capital) is the praxis moment for mutual autonomy between state and economy, on which development depends alike a matching of our understanding to current underlying developments and a maturing of our monetary behaviour. This topic is too vast and controversial to elaborate further here, yet too crucial to ignore altogether. Suffice it to say that, seen as a sketch, the ‘next level up’ entails a decoupling of cash and credit, so that, by accepting two dissimilar starting points we will arrive at their meeting point or interface. In the view of Peter Andrews at the Bank of England, decoupling is already present ‘because cash, the creation of which is a statutory activity, is prescribed by various Acts and credit creation is a private sector activity. We do not, of course, regulate the quantum of credit, and neither does the Financial Services Authority, although capital adequacy ratios no doubt influence that and so does liquidity policy, and so, indirectly, does monetary policy.’ And even Hayek seems to allude to it: ‘So far as people want more liquid assets solely to hold them but not to spend them, they can be manufactured without thereby depreciating their value. But if people want more liquid assets in order to spend them on goods, the value of such credits will melt between their fingers’ (1990: 106). In this way, one can see the difference between ‘weightful’ and ‘weightless’ economics, thereby distinguishing between two realms, which the multiplier concept, by keeping the two aspects connected, regards, and therefore treats, as one.

Cash

< Individual >

.

Credit

Sketch 10.4 Cash and credit as a resolved polarity

10.3 The Demise of Banking It is not the demise of money we are experiencing, so much as the demise, or outmoding, of banking. We have already described this in very general terms but, it is important to amplify what we mean. In ‘big picture’ terms, one can describe how banking has ‘descended’ from the gods to temple priests and then to kings. Naming coins as ‘sovereigns’ tells this story. Any reputable economic history will provide evidence – whether we credit it or not – that money has moved from a sacred origin to today’s profane existence. (See, for example, Bernard Laum’s 1924 work on sacred money.)

Interviewed by the author in 2000 when conducting doctoral research.


As capitalism came to expression – always the agency of merchants and individuals – the ‘divine’ aspect of money met a very human dimension. One sees the struggles this entailed in the discussions on usury that preoccupied Thomas Aquinas, for example, which, in a word, arose because the locus of judgement in such matters was passing from the universal edicts of the Church to the individual’s own sense for such things. Then, in Renaissance times, in Lombardy, banking began to take on its modern appearance, until with their further evolution banks began to work together and the banking system came into being. Today, however, the emergence of the banking process carries with it the implication that banking need no longer be the preserve of banks. Anyone who understands the banking process can ‘operate’ it. And many do. We may need their continued presence in order to maintain a backward-looking consciousness, but mature economic behaviour – self-management of finances, internet banking and computer-based accounting – render banks as we know them obsolete. It is backward-looking to think that only bankers or experts can understand the way money is emitted and credit created, or how money moves. Any serious entrepreneur knows this, though he or she may not make it conscious. And there are many businesses who provide bank-like services but without saying so, because overt banking is a regulated field. They do it internally, inter-departmentally and among subsidiaries, but also externally, as when a firm issues credit cards.

10.3.1 Citizenised Central Banking It is not just a matter of the proliferation of computer accounting packages, online banking and people generally conducting their ‘banking’ affairs autonomously and virtually. Much more importantly, people are realising that, in doing so, they are carrying out the macroeconomic functions of money emission and credit creation that to date have been understood to be the remit of the ‘controlling authorities’, to use another term from Keynes’s Tract. It only needs one to understand the practical implications of money and accounting becoming synonymous in order to see that money emission and credit creation have their direct synonyms much closer to hand in the form of trade and capital, and income and expense accounts and balance sheets. But that means that banking and, by inclusion, central banking, can now take the next step in their evolution, becoming the direct tools and responsibility of citizens generally. If one understands what a central bank expects of one in terms of non-inflationary behaviour, for example, one can behave in such a way before the central bank signals how. The central bank will then see the reflection of such citizen-originating behaviour on its monitors. It will then pass from signalling or uttering to listening, reflecting the citizens’ behaviour back to them, rather than prescribing it. In a word, if we are concerned about the role of banks today, we need only increase our financial literacy and we will find ourselves on the other side of our bank dependency. It is convenient to criticise the banks, but they exist and behave as they do only as a reflection of our own awareness. In a sense, they are simply a measure of our financial illiteracy. In demonstration of this potential shift, many projects exist all over the world that in effect amount to citizens taking banking and monetary processes into their own hands. Three are profiled here in their own words and because they are typical of the ideas behind such schemes and the way they operate.


Zopa Zopa is a marketplace for people to lend and borrow money with each other, sidestepping the banks. It is a smarter, fairer and more human way of doing money. It is like borrowing and lending with your friends and family – except there are thousands of people you can lend and borrow with. Both lenders and borrowers get better rates, because Social Lending is more efficient than the traditional banking model. Banks have massive overheads, with thousands of employees to pay and hundreds of branches to maintain. So they have to take large margins on the money that passes through them. There’s no smoke and mirrors here. Banks use your money to make even more money for themselves. They lend some of it out, gamble some of it on the price of tin or the Yen depreciating, and invest the rest in any other money-making schemes they can think of. Whereas at Zopa, people who have spare money lend it directly to people who want to borrow.

How it works: –

We look at the credit scores of people looking to borrow and work out whether they fit into the A*, A, B, C or Young market. If they are none of these, then Zopa is not for them. Lenders make lending offers – ‘I’d like to lend this much to A-rated borrowers for this long and at this rate.’ Borrowers size up the rates offered to them, and snap up the ones they like the look of. If they don’t like the rates today, they can come back tomorrow to see if things have changed. – To reduce any risk, Zopa lenders only lend small chunks to individual borrowers. A lender lending £500 or more would have their money spread across at least 50 borrowers. Borrowers enter into legally binding contracts with their lenders. – Borrowers repay monthly by direct debit. If any repayments are missed, a collections agency uses the same recovery process that the high street banks use. – Zopa earns money by charging borrowers a £118.50 transaction fee and lenders a 1% annual servicing fee. (From uk.zopa.com website.)

Local Exchange Trading Systems (LETS) Local Exchange Trading Systems are local, non-profit exchange networks in which goods and services can be traded without the need for printed currency. In some places, e.g. Toronto, the scheme has been called the Local Employment and Trading System. Michael Linton originated the term ‘Local Exchange Trading System’ in 1983 and, for a time ran the Comox Valley LETSystems in Courtenay, British Columbia. The system he designed was intended as an adjunct to the national currency, rather than a replacement for it. LETS networks use interest-free local credit, so direct swaps do not need to be made. For instance, a member may earn credit by doing childcare for one person and spend it later on carpentry with another person in the same network. In LETS, unlike other local currencies, no scrip is issued, but rather transactions are recorded in a central location open to all members.


As credit is issued by the network members, for the benefit of the members themselves, LETS are considered mutual credit systems. The time-based currency mentioned in United Nations Millennium Declaration C6 to Governments was a UNILETS United Nations International & Local Employment-Trading System to restructure the global financial architecture. (Author’s summary.)

Kiva Kiva is a person-to-person micro-lending website, enabling individuals to lend to unique entrepreneurs around the globe. Its mission is to connect people through lending for the sake of alleviating poverty by lending to low income entrepreneurs. The people you see on Kiva’s site are real individuals. When you browse entrepreneurs’ profiles on Kiva, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6–12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend it to someone else. Kiva partners with existing microfinance institutions. In doing so, we gain access to entrepreneurs from communities world-wide. Our partners are experts in choosing qualified entrepreneurs. That said, they are usually short on funds. Through Kiva, our partners upload their entrepreneur profiles directly to the site so you can lend to them. When you do, not only do you get a unique experience connecting to a specific entrepreneur on the other side of the planet, but our microfinance partners can do more of what they do, more efficiently. Kiva provides a data-rich, transparent lending platform. We are constantly working to make the system more transparent to show how money flows throughout the entire cycle, and what effect it has on the people and institutions lending it, borrowing it, and managing it along the way. To do this, we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive. Kiva creates an interpersonal connection at low costs due to the instant, inexpensive nature of internet delivery. (From kiva.org website.)

Such projects come under the heading of social lending or peer-to-peer finance, whose proponents believe it has changed the financial sector for good, creating a financial category of genuine and increasing importance. They provide a telling contrast to the kind of financing associated with the global financial crisis. They are, however, as global and as financial. For many they are the kind of thing one should be supporting instead of conventional finance. That is to say, they require no revolution, no ideology and no organised movement. Just a change in behaviour.


chapter

11 Deep Accounting

None of the changes envisaged in this book – be they epistemological or institutional – can be given effect unless and until there is a universalising of accounting practices, which thereby also become the means to effect change. This not only entails depoliticising the IASB, for example. It also means a rebasing of accountancy on virtues, so that accountancy stands free of its clientele. As a consequence, accounting will cease to afford hiding places for uncertain transactions, but by the same token it will become the instrument on which the consciousness and institutions of tomorrow’s economy will be built.

11.1 The Epistemological Challenge To appreciate the point of financial literacy, on which note the last chapter ended, we need to look at accounting in some detail in terms of both its monetary and its epistemological significance. Once money and accounting are understood to be synonymous, it is not only that banking passes into history, at least in the sense that it comes into contact with money flows, deriving an income from the turn on interest and so on. True banking, essential banking, becomes accounting. The banks collectively do nothing more than act as a worldwide bookkeeping system. The future lies not with banking, therefore, but with accounting – and with ‘deep accounting’ especially. The purpose of this chapter is to come up inside accounting in a way that both meets the epistemological challenge this book is all about and gives a practical basis for managing economic affairs ‘after’ the global financial crisis. Our train of thought so far culminated in the claim that we need to learn to think in two ways, then we will enact a higher level of thinking, which is the origin of the unifying aspect that follows on from division into two. Instances are easily found; several are given below in the twin column format introduced in Chapter 10, the purpose of which is to provide a visual expression of the polar nature of life on our first observation of it. In considering the difference between closed and open systems, for example, the following comparative taxonomy (borrowed freely from Chick 2003) can be described:

CLOSED

OPEN

--------------------

---------------------

Definitional

Descriptive

Isolated

Contexted

Fixed

Malleable


Constant

Fluctuating

Self-contained

Other-centred

Unaffected by outside forces

Open to, determined by outside forces

All information contained within

Information outside

‘If x then y’ causality

Recursive, reflexive

Passive agents, unable to learn

Active agents, learning

Static model/mindset

Dynamic (autopoietic)

Local

National

The idea, as illustrated by the following two sketches, is that the left-hand column is linked to thinking from the centre outwards, as it were, whereas the right-hand column requires us to think from outside in. The point is that we can do both and the epistemological challenge we face is not to prefer one to the other, but to recognise the different logics by which each operates. As Chick puts it: ‘Closure and openness in this sense are a matter of degree’ (2003: 5). It is a question of knowing when it is appropriate to use one or the other. Closed

Open

Sketch 11.1 Two different logics Davis (2004) pointed to similar problems when discussing the need in our times to pass from ‘me’ to ‘we’ economics, including the rest of the world en route. In terms of the heuristic device used here, linked to the economic history mentioned earlier – of the journey from local through national (but not statist) to global economy – Davis’s argument can be illustrated as shown below. Here the two lower elements are the different logics from the previous sketch; the upper element shows them combined, synthesised.

D e e p A c c o u n t i n g 197

‘We’ Global

‘Me’ Local

Sketch 11.2

‘Rest of World’ National

From ‘me’ to ‘we’

Stylistically, this can be reduced still further to give expression very importantly, to the idea of an upper and lower order of things, with the lower order featuring different modalities:

Sketch 11.3 Two orders; two lower modalities

11.1.1 The Use of Sketches There is a reason for using such sketches. Much of modern economics relies on mathematics because the economist seeks internal consistency. And yet the contradiction between the


emergent global stage of economic life and economic theories linked to the national stage means there is no internal consistency to be had in the closed system approach that typifies national economics. Either one has to adopt open-system thinking and find internal consistency by convergent rather than determinative means (for example, discovering that human beings everywhere are happy to adopt a zero inflation stance regardless of their culture, whether capitalist or worker, Anglo-Saxon or of southern climes); or we take refuge in the given internal consistency of mathematics. The former precludes prior knowledge of one’s destination, however, denoting an intellectual enterprise or voyage of the mind characterised by inquiry and discovery, while the latter leads to ‘structural adjustment’ in its widest sense, fitting circumstances to conform to an ideology or prior idea. While useful to economics when in narrow prescriptive mode, mathematics may therefore not be up to the real task we face. Its ‘abstruse manner of expression’ may derive from its attempt to encompass the inherently dynamic rather than static or mechanical nature of modern economic life. Alessandro Vercelli has alluded to this by suggesting that mathematics may be challenged to capture the data of open systems in a meaningful way. Mathematics also entails the risk that we will become detached from the real economic world, which may well be why John Nash, in the film A Beautiful Mind, ruined the library window at Princeton. And yet how else are we to think in an abstract way? Sketches, at least the kind used here, can offer a remedy to this problem because they, too, can orient one’s thinking in an abstract realm. They can help us picture to ourselves what we are trying to do when, faced with economic phenomena of an increasingly single global rather than separate national nature, we are called on to overcome our nationalistic, closed-system thinking. Here the challenge is to pass from an understanding of economic life as it appears first within our national boundaries (i.e. domestic monetary policy focussed on the interest rate), then as it is affected by the rest of the world (i.e. exchange rate policy), and then, as is increasingly necessary today, as seen from an overall point of view (‘one level up’). The above references to monetary examples are deliberate. For it is in this field that one finds striking instances of the problem being treated here, a problem at the heart of the global financial crisis despite the focus being on banking, namely, how is one to reconcile the imperatives of one’s domestic economy and those of the world economy? If they are not to be in a conflated relationship, addressed only by the somewhat crude methodology of letting ‘each dog have his day’, to use an expression from central banking circles, how are they to be synthesised? Is one to prefer one’s own but closed economy or open up to that of the rest of the world? Or can we find a ‘higher’ point of view wherein this conflict is resolved?

11.1.2 Keynes’s Monetary Reform Thesis We have already cited Milton Friedman’s formulation of this problem: flexible exchange rates are a means of combining interdependence among countries through trade with a maximum of internal monetary independence; they are a means of permitting In a talk at LSE on December 2005, based on his paper, Rationality, Learning and Complexity: From Homo Economicus to Homo Sapiens.

D e e p A c c o u n t i n g 199 each country to seek for monetary stability according to its own lights, without either imposing its mistakes on its neighbours or having their mistakes imposed on it. If all countries succeeded, the result would be a system of reasonably stable exchange rates; the substance of effective harmonisation would be attained without the risks of formal but ineffective harmonisation. (Friedman 1966: 174)

But in this he was anticipated some 30 years earlier by Keynes, who took just this problem as the focus of his Tract. When it was published in 1923, the central economic problem, as noted earlier, and the one Keynes directly treats, was how to understand and manage an economic system that has outgrown the remit of any one country. Of course, one cannot rehearse the entirety of so important and complex a book, but its essence implies a line of reasoning directly salient to the topic under consideration here. Though of the writer’s devising, not Keynes’s, Keynes’s thesis can be represented by way of sketches akin to those used to illustrate, and thus to test, this present book’s epistemological argument. Stripped of its original contextual remarks, Keynes’s thesis is disarmingly simple: ‘[production and saving] cannot work properly if the money, which they assume as a stable measuring-rod, is undependable’ (1923: v). Production is here the primary modality in most people’s understanding of economic life; savings is secondary. Keynes also spoke of industrial and financial circulation. Thus:

Stable Measure

Production Industrial

Sketch 11.4

Saving Financial

Keynes’s thesis – I

Keynes goes on to state that ‘there is no historical warrant for expecting money to be represented even by a constant quantity of a particular metal, far less by a constant purchasing power’ (9). This means that the successful ongoing management of the economy as a whole needs to be a conscious act – ‘deliberate and scientific’. Moreover, his thesis rests on a specific conception of money: ‘[Currency] has no utility in itself and is completely worthless except for the purchasing power which it has as money’ (75). Keynes’s concern is how to make this nature of money conscious by fashioning monetary policy in its likeness by pursuing price stability and subordinating all other factors to this one objective. This goes for real factors, such as employment and productivity, and financial ones, such as the influence of the exchange rate. In Keynes’s words, this amounts


to: ‘a method for regulating the supply of currency and credit with a view to maintaining, so far as possible, the stability of the internal price level, and … for regulating the supply of foreign exchange so as to avoid purely temporary fluctuations … not due to a lasting disturbance in the relation between the internal and external price level’ (177). Thus:

Stable Money Supply

Internal Price Stability

Sketch 11.5

External Floating Exchange Rates

Keynes’s thesis – II

11.1.3 Modern Central Banking (and the Global Financial Architecture) While one side of Keynes’s treatise concerns the nature of money and monetary policy, another important aspect considers the forms and structures that express this nature. Keynes is unequivocal. Under single objective monetary policy, ‘the actual trend of prices … should determine the action of the controlling authority’ (188). ‘Actual price movements must of course provide the most important datum … The main point is that the objective of the authorities, pursued with such means as are at their command, should be the stability of prices’ (189). This reference is important because it includes two important ideas – firstly, the need to think in terms of prices, discussed later. Secondly, the reference to what today is called ‘central bank independence’ − the task of central banks (Keynes’s ‘controlling authorities’) to maintain domestic price stability against the influences of credit that now issues increasingly from outside the banking system. Since overissue of credit can devalue cash – that is, price stability can be eroded by financial instability – the problem becomes one of controlling credit issued by the financial markets. Keynes’s thesis in fact becomes a theorem, namely, that unless all countries adopt floating exchange rates and what is today called central bank independence there cannot be price stability on a universal basis. This in turn implies the emergence, as primary, of the international dimension to monetary affairs. ‘We have reached a stage in the evolution of money when a ‘managed’ currency is inevitable, but we have not yet reached the point when the management can be entrusted to a single authority. The best we can do, therefore, is to have [more than one] managed currencies …, with as close a collaboration as possible between the aims and methods of the managements’ (1923: 204).


‘Each [country] should choose freely, until, with the progress of knowledge and understanding, so perfect a harmony had been established between the two that the choice was a matter of indifference’ (205). In modern parlance, this requires central banks to act in three areas. From their overview of the economy as a whole – a view they alone can have because they are ‘above the fray’ of the market − they receive information and give effect to their judgements by indirect (signalling) means, seeking thereby to maintain systemic economic health by reconciling the contrasting worlds of trade and financial markets by way of equally contrasting means, monetary policy and transparency and capital adequacy requirements.

Central Bank Systemic Health of Economy

Trade Monetary Policy

Sketch 11.6

Financial Markets Transparency, Capital Adequacy, etc.

Modern central banking (and the global financial architecture)

11.1.4 Functions of Money But the story does not end there. The standard definition has money fulfilling three functions – means of exchange, store of value and unit of account (MX-money, SV-money and UAmoney). However, such definitions of money are unitary in that they tend to regard MXmoney as the real money, with the other functions having a secondary role. Thus, Begg, Fischer and Dornbusch (1991) make the following textbook statement: ‘the key feature of money is its use as a medium of exchange. For this it must act as a store of value as well. And it is usually, though not invariably, convenient to make money the unit of account and standard of deferred payment also’ (403). In this conception, the means of exchange function is primary, as in Gormez and Capie (2000: 20): ‘Money may be best defined as

It is this sentence that shows how Keynes anticipated by some 30 years the well-known ‘own lights’ dictum of Milton Friedman, cited earlier. In the original, Keynes refers to the £ and $ and the currencies of other countries. The text has been generalised, however, because the point seems to be generic. The image is from Capie, Goodhart and Schnadt (1994: 91): ‘Central bankers are, perhaps, seen as having more in common with the judiciary, than with politicians or commercial bankers; and are perceived as both technically expert, above the fray of self-seeking, and a necessary agent (of democratic government) for imposing order on a potentially unruly financial system.’


generally and immediately accepted medium of exchange. In societal terms, the main function of money is to sustain the division of labour by allowing goods and services to be exchanged in a more convenient and efficient way compared to barter.’ Likewise, Brunner (1986) defines money as something that, ‘[provides for] the coordination of economic activity in a complex economic organisation … [by way of] a transactions dominating asset, [or, again,] a generally accepted and dominantly used medium of exchange’ (199–201). At the level of what he calls ‘international money’, however, Cohen (1971: 6) claims that to describe money in this way can be ‘downright misleading’ in that it refers to ‘partial money’ (having only one or two functions) and not ‘fully developed money’ (fulfilling all three functions). For Cohen, means of exchange money can only be seen as fully developed money if it also fulfils the other two purposes. He warns that the fact that in practice means of exchange money sometimes equates with unit of account money should not lead one to think they are one and the same, a point also made by Hayek (1990: 73). Space does not permit exposition of the whole of Cohen’s argument, but it should be noted that his concept of ‘full money’ has important implications for central banking and monetary policy. Chief among them is the implication that the functioning of money needs to be differentiated. The functions are not all of the same order. The question here is not so much which form of monetary regime should prevail – central banking or something else – but what arrangements accord with today’s underlying historical and economic realities? In other words, how should the three functions of money find their institutional expression? The epistemological approach being taken here suggests what a sketch-response to this question might be. It assumes, in particular, that UA-money exists through the other two – MX-money, referring to a defined world of completed transactions, and SV-money, reserved or saved capital, the value of which is always vulnerable. Again, the ‘upper’ function, UA-money in this case, has no existence in itself but exists ‘through’ the other two functions: Unit of Account

Means of Exchange

Sketch 11.7

Store of Value

Functions of money

11.1.5 Three Kinds of Money By way of incorporating Rudolf Steiner’s monetary conception into the discussion, one can add an illustration of his particular thesis (already described) concerning the three kinds


of money. The first, ‘purchase money’, is the cover of goods, the second, ‘loan money’, is the nature of capital, and the third, ‘gift money’ entails knowing how to maintain a right balance between the other two. (It is this problem that the global financial crisis represents – the balance between the real and financial economies is awry.)

Gift Money The balance between goods and capital

Purchase Money Goods

Sketch 11.8

Loan Money Capital

Kinds of money

11.1.6 Economists and Accounting All these examples are of a macro-economic kind. Their purpose, however, is to show that macro economics needs to and can shift its foundation to think on the basis of multiple independent variables, as discussed earlier. At that point, a line of thought and therefore of outer economic formulation becomes possible of the greatest significance; namely, the epistemology advocated is a match for that of accounting itself. That such stress is now being put on the role of accounting may seem odd. Except that the idea has some notable adherents. Hayek, for example, describes how the economist’s task, of making money stable, is, and is best judged by, the need ‘to ensure that the stock of capital of a business is not eaten into and [that] only true net gains [are] shown as profits available for disposal …’ (1990: 69). Hanke (2001) also draws particular attention to this as regards monetary analysis of currency authorities and related matters. He does so, because in his view, ‘To obtain a true picture of a central bank’s operations … a current consolidated balance sheet is essential. It contains the information required to determine the basic health of the central bank, the general soundness of a currency and the sustainability of an exchange rate’ (99–100). The link between economics and the so-called ‘real world’ seems, therefore, to be accounting. This sets the stage for one final consideration and its corresponding sketch. Just as one can see a threefold nature in the global financial architecture (central banks, trade and the financial markets) and in the construct of a modern central bank, as also in the functions and kinds of money, so, too, accounting comprises three main elements – the income and expenditure account, the balance sheet and the closing entries.


Closing Entries

Income and Expenditure

Balance Sheet

Sketch 11.9 Deep accounting The fact of a single higher and twin lower ordering is again present, as well as the lower two being different in kind. At the end of the year the Income and Expense Account is closed off and set to zero again for the following period. The Balance Sheet, though ‘photographed’, stays open because it is affected all the time by a continuous stream of events and modifiable values. The Closing Entries are then made between midnight on 31 December and the start of January; that is, they are made outside of time and space and are expressed only through their impact on the Income and Expenditure Accounts and Balance Sheet, depreciation being the simplest example.

11.2 Beyond Cycles In the preceding section, a threefold concept of epistemology was outlined that is at one and the same time true to real world processes, at least as these take place in the monetary aspect of society, and to the changing nature of modern economic inquiry. Like the multiplier, however, this approach entails another conceptual casualty, the idea of cycles. In economics today, much of the business aspect of life is treated in terms of cycles, but this idea originated at the time in the mid nineteenth century when economics seems to have distanced itself from the balance sheet tracking of economic affairs and began its ‘love affair’ with mathematics and modelling. Like the multiplier, cycles is a classic example of Anglo-Saxon thinking, the ability to explain a phenomenon, or what one thinks is a phenomenon, in a way that is plausible, albeit, as regards economics, not entirely provable. But that does not matter because economics being wrought ideas, thinking made policy, whatsoever we think can be made to exist.

11.2.1 A Need to Foretell It is to be noted that economics, in its quest to be scientific, is drawn as if by a magnet to the idea of predictability. Its reputation and, indeed, usefulness, hinge on its ability to foretell events. Within this, the idea of periodicity has the almost irresistible allure of a siren call. Thus, any number of cycles have been discovered or, better put, proposed, for


they are by no means universally agreed to in the sense that the speed of a falling apple is. Witness Kitchin (3–5 years), Juglar (7–11), Kuznets (15–25), Kondratiev (45–60). It is not that the idea of cycles is without reality or does not have explanatory power. It is that economics and economic life do not proceed in the manner of natural science and nature. If they did the cycles one would need to follow would be those of the seasons or of drought. But even to these, while they may present recognisable patterns over time, one should be careful not to become enslaved. Like sailors, economists need to beware rogue waves. An idea such as cycles is not verified simply because we behave in accordance with a literature that speaks of cyclical and counter-cyclical behaviour. Indeed, it is noticeable that at the moment free will became championed (in the form of laissez-faire economics, the free trade movement and so on), economics took a cue from the opposite, from ideas that, often hastily described as laws, pass outside the conduct of human beings. The problem is that conscious human will is obviated or by-passed by such an idea. The fact is missed that one is not bound to act cyclically, but chooses to do so at every moment. So the argument is not against the idea as such, but against overlooking that economic life proceeds from what we do, as governed, or at least accompanied, by what we think. The idea of cycles can act as a form of deism, therefore, an absence of our own consciousness. In contrast, one way of describing the concepts of associative economics is that they derive from following out the working of human will, not ignoring it. This, too, is why associative economics finds a strong link to accounting, especially if one would profile economic activity. Roll (1992), for example, cites Veblen (1857–1929): [His] explanation of the business cycle follows logically from his argument [that] fluctuations in economic conditions are simply the expression of the excessive inflation or deflation of capital values above and below the income-earning capacity of the assets which these values are supposed to represent. The tendency is for capital values to be increased out of all proportion to physical assets. A process of liquidation, of ‘writing down’, must follow, which, because of the highly artificial and tenuous relation between physical and pecuniary capital, will again tend to go too far. This may, in itself produce a turning-point and so start a fresh upward movement of business conditions. (413)

It is certainly the case that, whatever may be said to be going on in the macro economy, the only way a business can manage its existence is through its balance sheet, through bringing its many and varied links to society into balance. For all the movements there are in the ocean, the sailor is an element against which all waves of predictability crash.

11.2.2 Inherent Regulation To the degree that economics joins forces with accounting, which is another way of describing associative economics, the possibility of inherent regulation then arises, that the economic events could be regulated in accordance with their own logic, but not in socially contradictory ways. Inherent regulation is not the same as ‘self-regulation’, which is notoriously fickle, nor is it external regulation or state interference. Inherent regulation means that money, now synonymous with accounting, can indeed yield a new kind of behaviour, one that matches rather than banishes older value systems and one that we can all ‘own’. It does so, as we have seen, by differentiating in thought between three aspects of our thinking – especially as regards money.


The starting point is to differentiate money, beginning with the standard definition of money as having three functions as outlined above – means of exchange (MX), store of value (SV) and unit of accounts (UA) – but then perceiving them as qualitatively different from one another and thus needing to be conceived and thus used according to their different logics. That means that money qua means of exchange acts as a proxy for goods and services, facilitating the buying and selling of them (hence the term). Only, a proxy has no existence of its own. MX-money does not do anything to create value. It cannot carry interest, therefore, and so should not be issued at a cost higher than its manufacture and distribution, which in an electronic age is negligible. Here, therefore, there is a clear overlap with those who argue that money should be issued interest-free, a characteristic, however, that we regard as valid only for MX-money. The store of value function has a different logic. Even though we may use the same medium for it (the British pound or the US dollar, for example) when money is invested it is lost into the activity of those who borrow it and is reborn, as it were, only when the borrower’s activity bears fruit. SV-money has nothing to do with the trading of goods and services, therefore; it is the medium for financing economic innovation and its cover is the creativity of those who borrow it – at most, therefore, their means of production, but never goods and services. This money can earn interest provided the creativity is fruitful. In principle, therefore, it should be interest-bearing, not interest-free. But that means, of course, that at times it may even bear negative interest. The third function of money is to serve as a unit of account – a function that obeys yet another logic. One does not use the unit of account for trading or investing; it merely serves to denominate the other two monies. This not only expresses a different logic but one of a higher order, for UA-money exists through the other two.

11.2.3 Two Long-cherished Axioms The fact that UA-money works through the other two is of immense, if as yet little recognised, importance. It provides us with a means not only to relate the two different logics of MX-money and SV-money, but also to use this relationship to balance financial and economic life. To understand this point, it is necessary to describe a specific and ineluctable consequence of the foregoing discussion, namely, that the different logics are not synonymous, interchangeable or all-of-a-piece. This means that not only does UA-money act through the other two, but also that MX-money and SV-money have different natures. They represent different aspects of economic life and cannot, therefore, be linked directly, let alone connected by a construct such as the money multiplier. Rather, they represent the meeting of two worlds, the interface, or threshold, between the real and the financial. The money multiplier needs to give way to a separation or distinction, also in practice, between MX-money and SV-money. Restating an earlier point, this in turn requires the abandonment of two further concepts-cum-techniques that are axiomatic to modern finance and yet provide the main transmission paths of what many today describe as ‘unethical’ finance:

•

The idea that money is a commodity. If money is treated as a commodity it becomes an unfair competitor because it is not subject to the deterioration that all other


•

products suffer. This makes money qua commodity a main cause of inflation in the domain of MX-money (rising prices). The idea that assets are not to be used up but traded. This leads to their use to cover losses and thus, conversely, to encourage false expectations. The trading of assets is thus a main cause of inflation in the realm of SV-money (rising debt).

One recognises that, merely baldly stated, this thought lays an axe to the two basic assumptions that modern finance holds most dear. The thought arises here, however, out of the process of our enquiry, and not as a political statement, therefore. More than that, it arises at a stage in the process where a viable alternative is being proposed, not in their stead in absolute terms, but as their own metamorphosis; as something they could become.

11.2.4 Accounting as Science So far, the discussion has taken place in somewhat macro-economic terms. But the same problem and the same response to it occur at the micro-economic level; in terms, that is, of day-to-day accounting. Notwithstanding the ‘bad press’ that accounting gets from the likes of Enron, Parma and many other cases, these are aberrations not the norm. Indeed, the very fact that they can be seen as examples of false accounting means there is a true, or at least ideal, accounting logic, in terms of which any aberrations are identified and assessed. It is this inherently ethical nature of accounting that is referred to here, together with the fact that it can guide human behaviour. By the same token, clear and true accounting presupposes and encourages clear and true human conduct. Like banking, it mirrors human behaviour and is not a category or event apart. Moreover, accounting is a universal phenomenon, that exists independently of all particular cases or circumstances. It cannot, in other words, be ‘captured’. It is a paradigm unto itself. As such, it is able to act through all ‘lesser’ monetary constructs – global, regional, national or local. Accounting is in fact a worldwide money, even language. It is also a science or means of perception, so that it can reveal to us what needs to be done. Very crucially, for example, and of the essence in terms of the global financial crisis, accounting can show how to convert too much capital (excess liquidity) into the two things it ‘ought’ to become: conversion into revenue within an entity, capital transfer between entities.

11.2.5 Human Beings as Monetary Agents The point of making the analogies between macro and micro aspects of economic life is to get beyond the separation of economics into two disciplines, that most ‘intellectually suffocating error of modern economics’. Whatever its author’s intentions, a main effect of a construct that divides the economy in two in this way is to give rise to the idea that whatever individuals do or think is not really important. Indeed, macro economics deliberately aggregates and simplifies this element, encouraging the belief that the big picture has to be left to governments and experts, and behind them the wondrous workings of the invisible hand. We should, rather, see the macro and micro as two ends of a spectrum or continuum. Far from referring to separate worlds, they are two ways of addressing the one reality. However, we thereby deny ourselves the excuse of non-


responsibility, and place human beings centre-stage, but as monetary, not political actors – as agents for good through the way we use money. Once we understand that inherent regulation and differentiated money can be given practical expression in the way we account for our economic activities, it follows that we can organise our activities in the light of accounting. We can act to ensure that our individual transactions are equilibrating and not distorting to the wider global economic world. To date, for example, the balance between capital and money had been seen as a problem belonging within the remit and requiring the expertise of central banks and global financial players. In fact, it is not theirs alone. Modern techniques of finance and accounting, strongly influenced by ‘electronification’, make each and every one of us both central banker and important financial player. In this view, the very processes of money emission and credit creation (the monetary policy equivalents of MX-money and SV-money) have become the responsibility of individuals acting singly or collectively. In principle, therefore, we can supersede by our own actions those societal agents that do this on our behalf, namely central banks and financial regulators. This is too large a topic to address here, but it means that we are also responsible for the so-called global financial architecture. What is usually thought of as an abstract way of describing an inaccessible level of social life, to be solved only at the level of international institutions, can more simply be understood as the reflection or agglomeration of the way we all do business on a day-to-day basis. If this basis can be changed by our own actions, so, too, will the global financial architecture change.

11.2.6 Ethical Financialism It is the chief task of the central bank to keep the monetary system stable by ensuring an equilibrating relationship between trade and finance. This task nowadays is understood to be achieved by central bank independence, but it has been the aim of this section to suggest a way beyond this. In this respect, the approach to finance described here is not only conceptually viable and capable of micro-economic application, it places the human being at the very centre of modern economic life rather than at the periphery, requiring heightened responsibility on his part. One can call this approach ‘ethical financialism’. Ethical because it requires us not only to differentiate between the several functions of money in conceptual terms, but also in practice – and not only in a remote macro-economic way, but also in terms of our general daily conduct, the way we do business. This requires an orientation to modern economic life that is not self-serving and is thus ethical in that it calls on human beings not only to act out of the nobler, higher part of themselves, exhibiting what one could call enlarged egoism, but to do so by disciplining (or modelling) their economic activity in accordance with the logic of differentiated money. Financial because, given that ethics and finance are in danger of parting company nowadays, it surely behoves us to consider that modern finance may yet admit to an ethical interpretation. Notwithstanding the powerful extent to which finance today can ride roughshod over the real economy, in the end it remains related. So a way simply has to be found to rebalance the relationship between money and capital, otherwise the financial world itself will begin to unwind – witness the growing phenomenon of unviable pension funds, faltering insurance markets, worldwide low interest rates, the rising gold


price, and so on. Taken singly, these have always been seen as manageable, unconnected events. In a global economic life, however, and one made global by finance especially, the reality is that they are interlinked. Their imbalance thus threatens continual systemic disturbance. In the future, if not already today, the management of global economic processes will require a change in human awareness and a concomitant change in our financial behaviour. Irksome as this may be to an economic culture predicated on self-interest, this may yet be the pathway from narrow to enlarged egoism that it needs to find. The whole ‘story’ is a subtext, of course, for embedding individual economic activity within the wider, now global, economic whole. In this sense, globalisation can be understood as calling for consideration for others, even if only to safeguard financial stability. However, in a global economy, where there are no national boundaries and ‘real time’ operates, it is extremely difficult for the human being to master his behaviour for he loses the normal points d’appui for doing so. It is a fascinating feature of accounting, as described here, that it provides us with a virtual means to take hold of our actions. It is, therefore, a key to transformative economic endeavour.

11.3 Ethics and Accountancy If reliance is to be placed on accounting, a word is needed to counter any negative reputation it may have, as ‘merely numbers’, for example, or as a means of subterfuge and deceit. Of course, accounting can be used nefariously; as can nuclear power. Like money, however, it can never be ‘fautive’, but what it does do is reveal the moral behaviour of the one using it. To get a good sense of the challenges facing accounting, or rather the accountancy profession, one could do worse than consult Mark Cheffers and Michael Pakaluk. In Understanding Accounting Ethics (2005), they identify a number of problems, chief of which is its gradual undermining in recent decades by the conversion of the profession into a business. That is to say, its gradual move from serving the public interest by adhering to an ideal, to acting on behalf of and at the bidding of customers (14). Their aim is ‘to rearticulate the ideas of the profession and to show how they may be practiced with complete clarity and integrity…’ (9). Obviously mindful of Enron, WorldCom and similar, they nevertheless regard such cases as spectacular instances of a more general problem, namely, the erosion of ethics as the foundation of the accountancy profession, the loss of north in the accountant’s world compass. If ethics is made to take a back seat, the Enrons of this world are more or less predictable events. Strongly rooted in Aristotelian scholarship, they rigorously and relentlessly champion principles before rules, ethics before Machiavellism, and scruples before profit. They accept that in today’s circumstances there is a need for external regulation, such as the 2002 Sarbanes–Oxley Act and the creation in the US of the Public Company Accounting Oversight Board. But their main argument is that whilst external constraints may require or presuppose ethical behaviour, they cannot beget or guarantee it. Thus the crisis facing accountancy ‘calls for a commensurate, serious response ‘from the inside’ of the profession itself’ (11), and a return to the Three Ps of Reform: principles, professionalism and pride.


This will not be possible, however, unless there is a wholesale return to and appreciation of ‘character’, meaning an innate sense of what is right that is able to prevail over pragmatism (or consequentialism). And character is not possible other than by unswerving adherence to an inviolable, and non-reversible, sequence: virtues | ethics | principles | rules | application. Virtues and ethics, objectivity, integrity and independence must prevail over moral relativism: ‘sound ethics on average, and in the long run, leads to business success’ (23). Taking a swipe at Kant’s ‘Categorical Imperative’, they claim that, ‘all ethical deliberation, because it is practical, is ultimately directed to particular causes, not general principles’ (26). It never for a moment allows values to ‘trump’ ethics. Rules exist between the principles of which they are an expression and the idealisations by which they (the rules) are interpreted. The authors’ reasons for thinking in this way are clearly and emphatically given. Aristotelians to the end, they distinguish between ‘intellectual virtue’ which can be taught and ‘character’ which has to be inculcated. But to inculcate means that the naïve accountant must learn to resist, and be rewarded for doing so, all opportunities to put greed above probity. Beginning at the articled or junior level with the treatment of a client’s petty cash account! The ‘tone at the top’ must teach by example. So, there can be no question but that ethics can and must be taught. How so? Firstly, ‘the most important action that we engage in is thinking … Accurate and truthful thinking … is not carried out with a view to consequences’ (63–4). Secondly, being or becoming ethical is a matter of will and of being ‘concerned enough’ (172–3). To paraphrase St Augustine, it may be that some in the profession pray for ‘virtue, but not just yet,’ but that should not be the watchword if accountants are to lead their calling out of the dangerous waters it now finds itself in. When a country shy of fighting inflation hopes to be allowed a bit of inflation, central bankers call this being half-pregnant. Analogously, for Cheffers and Pakaluk accountancy does not have the option of being half-ethical.

11.4 The Role of the IASB As important as the ethical dimension is the practical side of accounting. The importance of the recent development of international accounting standards cannot be understated. According to its website, the IASC Foundation (after International Accounting Standards Committee), which hosts the International Accounting Standards Board (IASB), is an independent, not-for-profit private sector organisation working in the public interest. Its principal objectives are:

•

• • •

to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standardsetting body, the IASB; to promote the use and rigorous application of those standards; to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and to bring about convergence of national accounting standards and IFRSs to high quality solutions.


The governance and oversight of the activities undertaken by the IASC Foundation and its standard-setting body rests with its Trustees, who are also responsible for safeguarding the independence of the IASB and ensuring the financing of the organisation. The Trustees are publicly accountable to a Monitoring Board of public authorities. The aim, then, is to enable investment performance worldwide to be subject to the same considerations. But it has other consequences. Like central bank independence and output gap monetarism, the more a standardised way of doing accounts arises, the more does a single global paradigm come into being. The ideals, mores and even practical considerations that underpin it have to be the same. And so all other or previous modalities ‘die’ into the one. Again, as long as there is more than one modality, it can be that one of them will prevail – typically the US–UK, especially Britain. But once there is one modality then three things result. Firstly, the question arises whether the international standards are true to accounting’s inherent logic and structure, or a tool of foreign policy. Secondly, do they exist without political interference and without their clients leaving a thumb on the scales? Thirdly, they will have the effect of creating a single world currency. For once the currency symbol is dropped in front of a set of numbers, one can only make sense of them by knowing how accounts are structured and why. In particular, one needs to know the principle of double entry bookkeeping.

11.5 Practicalities To speak of meaningful practicalities in terms of accounting is to take one’s cue from Cheffers and Pakaluk. The most or first level of practicality is clear thinking, the least or last level is technique. If one cannot think straight, one’s accounting will likely be confused. But to think straight in the face of one’s accounts – a direct reflection of one’s behaviour – is not so easy, for one will be also looking at one’s will life. If one did not meet a certain sales target, for example, were outer circumstances to blame, or was it because of something one did, or did not do, oneself? Is one’s profitability thanks to the conjunction of one’s position vis-à-vis ‘the cycle’, or due to one’s management skill and use of the balance sheet to steer one’s course, rather than merely leave a trace of it?

11.5.1 Reflecting Reality For most people, also many professionals, accounting is simply a necessary chore, the main purpose of which is to report profitability to shareholders and taxability to the government. At least that is the role of external accounting. Internally there is greater sophistication in that management accounts, for example, yield a great deal of information about the state of the business, both internally and externally, and especially about its cash flow, so that it remains liquid. The following icon (Sketch 11.10) captures the essence of the logic and structure of accounting, namely, that income is expected to be in excess of expenditure so that the difference (the profit) is expended internally into the ‘own capital’ account on the balance sheet. Similarly, the asset side of the balance sheet is expected to exceed the debt part of the liabilities side, so that there results a positive ‘own capital’ (or equity) amount. This, too, however, is a liability; it has to go away from the activity.


Income Expenses Profit

Assets Liabilities Own Capital

Sketch 11.10 The structure of accounting By means of this recording and representation of itself, a business can make conscious all aspects of itself and how it is related to the world at large and to itself. In cash-based accounting, the accounts are at the same time a representation of cash flow and thus liquidity. In accrual accounting, specific adjustments are made to monitor this aspect.

11.5.2 One Never Trades unto Oneself Accounts are often put together by someone other than the entrepreneur, whose activity they record, and often after the event. But there is no reason why an entrepreneur could not acquire this skill himself or avail himself of it alongside rather than after the event. Nor is there any reason why he needs to wait for an external audit in order to sign off on his accounts. Anyone who is really skilled, or just diligent, can keep his accounts in a condition that will survive an audit. He need not await the auditor’s visit, but simply adopt the auditor’s point of view. This will require him to take two points of view in fact, neither of them normal to him, but both of them possible. Firstly, he will look at his activity or business from the rest of the world’s point of view. He will be accustomed to presenting his accounts from inside out or from the point of view of the active party, but it is easy to see that no business takes place unto itself.

Sketch 11.11 Counterpart accounts No sale is made or loan provided except that there is a customer or lender. Thus every sale is an expense of the rest of the world (expressing the matter as a theorem), every


expense is a sale for the rest of the world; likewise every asset is a liability in the rest of the world, every liability an asset. If the world economy comprised only two traders (which, in fact it does – every individual and the rest of humanity) and their separate accounts were combined, they would net out to zero. Even one’s riches or net worth would be seen to be a liability and thus an asset of one’s fellow human beings. It is only because we exist and are active individually that we split the world into two. It is also for this reason – our individual existence – that we need a metric, some evidence that we have achieved something; that metric being profit on one’s activity which is then added to one’s capital. But it is because of our individual existence also that we delude ourselves when we think that that increase is ‘ours’ in any absolute sense. When we look at the capital reserves in a balance sheet we forget that they represent in the first place only an entitlement to the money shown. Whether the money is available or not is a different matter, depending on where it is and what it is doing. Two things thus come together – one’s link to the rights life and one’s link to economic life.

11.5.3 Our Shared Brain Thus, it is readily understandable that accounting in and of itself provides a means to make tractable and thereby resolve two of the most important aspects of the global financial crisis. Firstly, simply through consciousness of accounting’s structure, we can match the fundamental epistemological challenge we face, namely of dividing the world into two in order to reunite it. Secondly, we can give expression to the distinction between rights life and economic life, our ‘replacement’ concept for the erstwhile distinctions between state and economy and market failure and perfect competition. Accounting in this respect changes from being an instrument for reporting to become an instrument of perception, which for the taxman it always has been of course! Accounting is like a glass box around an activity, a transparent description of that activity. The more its inherent logic and structure come into play – the more, that is, accounting becomes universal – the more transparent the description becomes. But that means that accounting is a science, and of a high order in that it spans two different modalities – the real economy and the financial economy. It is a matter of indifference to accounting whether the subject of a transaction is an apple or a put option. Deeper still, that means accounting as a science operates in both physical and ephemeral, sensible and super-sensible dimensions. This means, yet deeper, that accounting is linked to our rational natures. It is not prescientific or mystical, though it may also be and in its origins clearly was. Moreover, it is an instrument we all have in common. But that means that it provides a medium between our separate consciousnesses, our separate existences. It is therefore also a kind of shared or social brain between us. There can be no greater rationality than this – a rational instrument that overcomes what it divides.

In the mid 1990s the Reserve Bank of New Zealand, a mainly glass building, replaced its internal walls with as much glass as possible, an architectural metaphor for transparent central banking.

This is another idea from Marc Desaules.


11.5.4 Macro-economic Considerations This level of practicality has yet other implications for macro-economic life, implications in terms of both policy and practice. Insofar as when someone buys something with money he does so because he values the thing bought, at that moment three events occur. Firstly, the sale would not take place if either party did not regard it as equitable, satisfying one’s sense of right, be it ethical or contractual; secondly, the price paid reflects and confirms that the value of the money and the value of the thing exchanged are identical. In other words, it expresses price stability. Thirdly, money emission is embedded in exchange and only appears to be a function of the banking system. The same holds for credit creation. When a business is capitalised three things also occur: (1) the investment is deemed equitable (that is the moment to decide its ethical and contractual merits); (2) the manner of capitalisation, how the liability side is related to the asset side of the balance sheet, is the basis of subsequent stability and the value of the capital so invested; and (3) credit creation is embedded in the act of investment and only appears to be a function of the banking system. It is for these reasons that we have earlier claimed that the means to get ‘our arms around the markets’ is already known to us, and that this same means – accounting – makes achievable the next step in monetary evolution, so-called citizenised central banking.

11.5.5 For Profit and for a Purpose Two further considerations will complete this section. They bring the practical aspect of accounting ever more down to earth, closer to our known social reality. Any presumed intractability on the part of the global financial crisis accordingly diminishes. The first is what accounting says about the for-profit/not-for-profit divide. Structurally, the accounts of any organisation or activity anticipate a profit on the activity, which will then be added to the ‘own capital’ account on the balance sheet. This is as true of a not-for-profit, a charity or ‘third-sector’ activity, as a for-profit. It would also be true of governments if they ran proper balance sheets. From an accounting point of view the differences between a for-profit and not-forprofit entity are that the one describes its income as ‘sales’, the other as ‘grants’; the one typically expects income to precede expenditure, the other thinks in terms of revenuedeficit funding; the one allocates and/or disburses any gains to private individuals, the other is required to devote them to charitable objects. The last of these three examples is a function of the tax regime, a regime that can only conceive of ‘private:together’ activity having to pass its gains via the state (something that is economically and financially wholly unnecessary). The first two have considerable consequences in terms of the way we think, or rather mis-think, about such things both from within and without. Thus, we expect different kinds of behaviour, namely commercial and cultural, first and third sector, business and charity, and so on. From an accounting and also from a financial point of view, this bifurcation is irrelevant and quite unwarranted. It is in our minds, not in the facts. We choose to divide a world into two that is not in reality so divided. If we thought instead of activities that we undertook privately alone and privately together we would see that they would not be accounted for any differently.


Charitable Object

Private Individuals First Sector Business For-profit

Second Sector Government

Third Sector Civil Society Not-for-profit

Sketch 11.12 Cross-sectoral accounting More than that, the idea would disappear that in for-profits there is no higher purpose than serving private individuals, as would the notion that in not-for-profits private individuals with initiative and tasks ought to receive no benefits by way, for example, of remuneration. In fact, were accounting and finance our guides there would only be one kind of company or corporation (see author’s The Right On Corporation, 2005d). What would then shine through would be the difference in economic kind between, say, a hospital and a restaurant, a farm and a foreign exchange dealer.

11.5.6 Self-balancing Economics Yet further, just as the accounts of the world sum to zero, the one side has to match the other; so would the many kinds of economic activity amount to a whole, above all those that manifest as requiring liquidity would match exactly those that manifest as having liquidity. In such a world there could be no financial crisis except that it was an epistemological crisis – epistemological in the sense meant here: that in economic life what we think is what we enact. It would take us into too great detail, but in saying this, one is close to understanding and thus realising the intense practicality of double entry bookkeeping, based as it is on the simple principle of never a debit (always shown on the left) without a corresponding credit (always on the right). To refer back to 4.4: Twin Hemispheres, if this is not a picture of the two sides of our brain reconciled, working together, then nothing is. Like the helicopter, it may have been thought of long ago, but the technology has also to exist. When Leonardo da Vinci was making his improbable sketches, Luca Pacioli was giving formal expression to double entry bookkeeping. This, too, like so much from the Renaissance was ahead of its time in that such an arcane science was traditionally the preserve of monks and has only since become the preserve of the accountancy profession. Even there, however, most people know that debits are always on the left and credits on the right, but often have no idea why, although, like electricity or global capital movements, one needs to neither know nor care for it to work. And yet deeper meanings are there to be found: for example, ‘left’ and ‘right’ and even ‘balance sheet’ impliedly refer to the uprightness of the bookkeeper, which anciently was always presupposed of anyone dealing with accounts.


At this point, accounting, as well as being a science, becomes poetry, a shared language.

11.5.7 Concerning Profit and Surplus Value The final consideration for our purposes concerns what accounting, any accounting, has to say about profit and surplus value. These topics are also of intense practicality in that on them turns the whole of history. The propensity to divide, and therefore the Left:Right divide in all its variants, thrives on our false interpretation of profit and surplus value, their purpose and ownership. As we have seen, profit is an expense that does not go ‘outside’ the business, but is transferred to the own capital account on the balance sheet. The ‘own capital’ account, in money flow terms, also represents money that goes away. It is on loan to the rest of the world, to other enterprises (albeit via the banking system). Further, all accounts show that the capital invested as an activity is lost into its assets, which are then in turn used up in carrying out its activity. It is this activity which, if successful, engenders profits which are the source of new capital, not a return of the old. This new capital is allocated to the providers of the original capital as a function of agreed entitlements, not as a function of economics. The capital they get back is not the capital they put in. Implicit in what has just been described is a flow of money into and then again out of the activity concerned. It retains nothing. Rather the accounts show that every business is located, is a point in the circulation of trade, on the one hand (represented by the income and expenditure account) and the circulation of capital, on the other (shown in the balance sheet). No activity exists unto itself, therefore, nor does it retain its profits. These, the emergence of capital out of trade, pass away from it.

Sketch 11.13 Profit and capital as flow Profit in this picture is a function of being economically active. The structure of accounts expects profit, not losses. What matters is not in whose ‘pockets’ they go, but what use is made of them. The emergence of capital out of trade, out of every exchange between human beings, also means that profits, capital and surplus value have their origin in neither labour nor capital and so belong to neither so-called class. All that matters in social fact is that the human beings involved in their different ways in an activity, indeed the stakeholders generally, are remunerated in ways and to levels commensurate with the contribution they have made, on the one hand, and their particular needs on the other. Whether one says one’s income is a multiple of so many hours’ work, or any other


concept one likes to use, from an accounting and financial point of view is irrelevant. If one follows the money flows, all that accounts show is (and can only be) an endless transfer of values as humanity jointly and severally creates and exchanges the things it needs. Whether this flow is conducted equitably is an important but distinct question, the answer to which will be significantly affected by the way we understand so-called surplus value. Here we come to a mystery in life. What has been said so far has been in reference to one person’s or one entity’s accounts. Namely, the profit that arises in it flows away from it. But there is no exchange without two parties, and so every exchange results in both parties engendering profit which flows away from both of them.

A B + ------------0

A B + + ------------+

Sketch 11.14 The nature of exchange It is not that one party (A) gains at the other’s (B) expense (left hand of Sketch 11.14); but that both gain (right hand of Sketch 11.14). It is not that A therefore owes anything to B but that together they have given rise to a value that neither of them, economically speaking, need. The fictitious fight between Left and Right over the ownership of surplus value thus gives way to the realisation that it ‘belongs’ to all of us, yet none of us need it. Here, in perfectly normal universal accounting, we see the equivalent to what Steiner means by gift money as the balancer between purchase and loan money, and to what Keynes had in mind with the International Clearing Union. Every exchange results, as it were, in an amount of money that none of us need in any personal or private sense. It belongs to humanity generally and its counterpart would be to be used up in ways that benefit us generally, education and humanitarian catastrophes being the two obvious examples championed in this book. Clearly, if this is the underlying economic and financial reality one can see two of today’s primary economic phenomena as direct caricatures of this process. Firstly, an enormous amount of wasteful activity, from planned obsolescence to armaments (seen economically). Secondly, the accumulation over the ages, and accelerating in our time, of global, humanitywide capital that does not know what to do with itself except preserve itself. If the world’s economy were looked at as a set of accounts, the solution would be simple. The amount of reserves held beyond the capacity of the balance sheet to justify them would have to be written off in one or other of the only two ways possible – by being spent within the activity or being given, that is transferred, to another activity. This, though, is the choice facing one with each and every set of accounts regardless of the type or scale of activity. Our own accounts become instruments of macro-economic policy, elements of the global financial crisis, alternatives to the banking system.


11.5.8 A Word about Price One final aspect of accounting needs mentioning. The figures in any set of accounts represent prices paid. Whether these prices were fair or not, fixed or free, market or prescribed matters a great deal. When a price is agreed two worlds coincide and for the price to be true economically each of the parties to it needs to be sure that by agreeing to it true economy remains viable. For all sorts of reasons a price may not be ‘true’ in this sense, but economically speaking this remains the key concept. Anything that prevents a price from enhancing the viability of both parties can be said to be uneconomic in the technical sense. Central to Rudolf Steiner’s economic thinking is the idea that such a consideration has, or ought to have, the status of a theorem. To restate it: A ‘true price’ is forthcoming when a person receives, as counter-value for the product he has made, sufficient to enable him to satisfy the whole of his needs, including of course the needs of his dependants, until he will again have completed a like product. (Steiner 1996b: 83)

This leads to the following consideration. If accounting as outlined in this chapter, especially this section, is the practical answer to the global financial crisis that we claim it to be, does this have any consequences for the efficient markets hypothesis? (See discussion in section 3.2.) A tentative response to this would have to be, yes, in the sense that, in the same way that the efficient markets hypothesis has free market ideology as its frame of reference, so accounting, at least deep accounting, would have the true price formula as its corresponding hypothesis. This is not to say other than that a thought so central to associative economics merits at least consideration as an hypothesis. Research should at least be done to see if it holds water.

chapter

12 Banking on Youth and Trade

Whether overtly described or merely implied, the changes contemplated in this book will mark a transition from anciently rooted ideas and practices to those that belong to (because they derive from) the future. They will not take place overnight, though they might. It will take a generation before the first true leaves of the new paradigm will be assured. Much therefore depends on the way young people are educated as regards economic theory, but above all on the way they behave financially, monetarily. Will they be the first generation to be generally financially literate? How else can we avoid visiting the sins of yesteryear on the generations to come?

12.1 In a Nutshell In a nutshell, one could sum up the interface between the global financial crisis and associative economics – as also the interface or threshold between the real and financial economies – by reference to the following essential propositions that have both conceptual and practical dimensions: 1.

2. 3.

4. 5.

6.

In order for finance not to lead a life unto itself (to do business on its own account, in Steiner’s image) a clear distinction is needed between money representing goods and money representing creativity, ingenuity and so on; with the latter better described as capital, rather than money. There is a great deal of unspoken aspiration in social life today. This is matched by the existence of excess liquidity, too much capital. As long as the first phenomenon (aspiration) is not recognised, the second (excess liquidity) cannot be seen in link with it. As a result, the excess tries to lose itself in real estate and other surrogates for its true counterpart, which is to become aspirational capital. Aspirational capital is the idea behind super-savings and hyper-savings. Super-savings and hyper-savings cannot come into being, however, unless their counterparts appear and who, except the next generation(s), that is, young people, can inhabit or be exemplars of those counterparts? This requires education to that end – not only school-based but also through the way young people handle money (the kind of accounts they are offered by banks, and so on). The consciousness they have of money and the consciousness they bring to bear on it.

This emphasis on youth is intended as a very deliberate call to the financial community to create new products deliberately designed with the above propositions in mind. And the main purpose of this chapter is to outline what such products might be.


12.2 Super-production/Hyper-production So, what are these ‘new products’? It is standard thinking in economics to regard the counterpart to savings as productive assets – factories, and so forth – in which ‘real’ economic values are created. But this is yet another example by reference to the physical economy of a principle that exists independently of it, and so can have various manifestations. The essential idea is that one side of economic life has its counterpart in another. It does not require much imagination or effort in thinking to elaborate this idea beyond the physical economy (chairs, food, etc.) to the supra-physical economy of ideas, intuitions and so on. The first thing is to extend the idea of savings to super-savings and then hyper-savings. The words are intended to suggest that the counterpart of such savings are super- and hyper-productive assets. A super-productive asset would be a school building or an opera house. It is as real an asset as a factory (that is, it has balance sheet validity), but what is ‘produced’ therein is not chairs or cars but the next generation of educated human beings. Regardless of what they eventually undertake, the ‘outcome’ of the skills they acquire and the talents they unfold will be ‘sold’ to humanity (in exchange for income) and thus have economic value. The value will be the greater, the better the education. And the education will be the better the more it follows, rather than conditions, the unfolding aspirations of an individual or a people. Just as super-productive assets are characterised by a degree of emancipation from the real or physical economy, so hyper-productive assets are characterised by their complete emancipation from the physical economy. Accordingly, their counterpart is not even a school building or opera house, but education per se. If the IMF, for example, regards the number of MBA students as a positive indicator of the level of education in a country, it follows that the level of education more generally (for MBAs are, of course, a narrow frame of reference) says much about society’s future economic prospects. Not just MBAs but the number of trade diplomas and all manner of certified qualifications represent the corresponding asset for which hyper-savings are a liability. They do not, however, have balance sheet validity in the usual sense. If it cost 10,000 to get a doctorate, for example, while one can make the argument that the expense has been capitalised and will be recouped from the earning power consequent on the doctorate, accountants and tax officials will not readily allow its treatment as an asset. The closest one normally gets to booking such costs is research and development where there is no immediate expectation of income from the discoveries made.

12.3 Of Costs and Benefits The idea that production is the counterpart to savings is an accounting idea: there can be no credit without a corresponding debit. The chief problem we face today is identifying the counterpart to more and more rarefied transactions. While it serves a useful purpose to point out that the ratio of real economic trade to financial is 2:98 per cent, it does not help to regard, as many do, the first as moral and the second as not. If true, it would be more scientific, and therefore less moralistic, to say that while the counterpart to the 2 per cent is obvious and understandable to our normal thinking – namely, physical

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trade – the counterpart to the 98 per cent is not. That does not mean there is anything untoward going on. It simply means we have yet to identify the counterpart to rarefied savings, which will require in turn a widening of our thinking horizons. Here accounting concepts can again be of use. The characteristic of the physical economy (making chairs) is that the costs and the benefits both occur with the producer. With super-production, however, we should expect the link between costs and benefits to be broken in a direct sense, albeit remaining in an economically ‘spatial’ relationship. (Free rent on an already capitalised property, for example.) Likewise, we should expect hyper-production to break the link completely, both spatially and temporally. The cost of an education cannot be recouped while it is being undertaken. The benefit cannot arise let alone accrue until later. This is hardly rocket science. How many colleges ask alumni to donate to bursary funds? It is surely no great accomplishment to make this a societal rather than an individual or entity concept. We could all, for example, contribute to such a thing as the (now defunct) Funding Agency for Schools, provided the income so governed were distributed as portable, curriculum-neutral capitation. That is to say, the presence of a child in a school (regardless of curriculum) ought to entitle that school to a capitation amount. This only needs to be adjusted as necessary by some index to result in society as a whole pre-funding its children’s education. The costs would then occur here and now; with the benefits arising there and then. With such ideas one could then say, to create an arbitrary example, that 2 per cent of trade is physical and normally productive, 38 per cent is super-productive and 60 per cent is hyper-productive, and a negative picture of current developments becomes transformed into a positive one. The 98 per cent of ‘financial’ trade becomes linked – in the mind at least – to human potential, rather than wrought goods. It is as if the financial markets mask this fact. Because we do not have a proactive sense of the economics of creativity, we ‘park’ surplus capital pending a market correction, rather than consciously writing it off.

12.4 Freely Capitalised Initiative We have already hinted at what super-production would amount to – essentially the infrastructure of education and culture, school buildings, theatres, sports centres, and so on. Even village halls. Hyper-production is more ephemeral, giving a more direct experience of saying ‘goodbye’ to money, the very experience we need to now have, with hyper-production as one of the best ways to have it! Simply stated it would manifest as the provision of uncollateralised capital to finance the initiative of young people, giving them air beneath their wings. In short, we need to bank on youth and trade. We need to capitalise the initiative of young people, in effect by writing off a (possibly small) portion of global capital in favour of nascent enterprise – the undertakings that will result when someone becomes a Seen independently of its political purpose of marginalising Labour-controlled education authorities, the Funding Agency for Schools pooled funds nationally for schools to draw down on in accordance with a capitation formula.

These ideas are more fully described in Freeing the Circling Stars (Houghton Budd, 2005b).

One could, of course, add that the costs are funded out of earlier benefits.


doctor, farmer, carpenter. If this were done on a conscious, regular and professional basis, it would amount to what we have called perennial, systemic jubilee – the writing off of ‘old’ money born of past values in favour of ‘new’ money, the counterpart of which will be new values. As any set of accounts will show, this is in fact how economic life works. Capital (liability) is ‘lost’ into the means of production (assets), which are then in turn used up producing the goods for which they are the source of income. Providing the price of the resulting article is not driven down below its costs (on the misguided notion, for example, that low pricing is de facto synonymous with efficient resource allocation), its income counterpart then includes an element for amortisation so that the means of production can be replaced. The process is permanently moving forwards.

12.5 Curriculum Essentials The form of uncollateralised capitalisation would depend on what the recipient intended to do. As would the amount, of course. But the amount would not be arrived at in the abstract or naïvely. It would be linked to a relevant and appropriate financial plan, the proof and indeed fruit of having been taught financial literacy, comprising economic and monetary history as well as double entry bookkeeping and basic accounting. All nonelectives. More specifically, any serious financial literacy curriculum would need to cover at least the years of ages 14–18, and include practical experience in three main aspects:

• • •

financial planning and annual budgeting maintaining income and expenditure accounts and a balance sheet cash flow management.

Especially important is it that, as part of a year-by-year deepening experience of these things, capital is placed at the disposition of young people in real ways. Depending on the project and on the ‘calibre’ of the person, as also on age, so the way this capital is provided would determine whether it was savings, super-savings or hyper-savings. This will also be evident in the terms and rate of interest if a loan, or the choice and type of shares if direct investment. It is also, through financial planning, in particular, that one learns to fly one’s plane, to arrive on time and land safely at one’s intended destination. To guide one’s life, in other words. To achieve what one wants to achieve.

12.6 Why the Focus on Youth? It may seem anti-climactic, even preposterous, to turn all eyes to the financial literacy of young people. The work of the Prince’s Trust says not, however. As do the restaurant academies of celebrity chefs. The Bank of England also thinks not. Together with The Times, it has for several years run a monetary policy committee competition for schoolleavers. Likewise, financial literacy has increasing presence in secondary education. Business studies enjoy growing popularity. But also many young people sideline their

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education in order, first, to have an income of their own. Admittedly, much of the ethos of such education is of the go-getting entrepreneurial kind, suggesting as virtuous making your fortune by the time you are 40 so you need not work for the rest of your life; but the technique (and therefore the deeper, more wholesome aspects) of finance can well survive such a bias. But there is one further, subtler point. Young people are an instance of youth. Youthfulness can also arise in any person when he can fulfil his aspirations. So much tiredness in our times has surely to do with people not leading fulfilling lives. It is one example of the deep alchemy of finance, deeper perhaps than George Soros has in mind, that it can give encouragement to the young; but another is that it can awaken youthfulness in older people also. If the emphasis here has been in favour of young people it is simply because the chances are that they are less hide-bound by habits of economic thought from pre-global times and because one sees a generation becoming more and more wasted because of an economic paradigm in which they see little merit and which sees little merit in them. After all, fulfilling an aspiration entails ‘having a job’, but the reverse is not also true.


chapter

13 From Threshold to Bridge

What is one to conclude from this discussion? One may think that the global financial crisis should not have been allowed to happen, or that it will be prevented from continuing or repeating itself in the future. Or, like the respected London economist, Andrew Hilton, and others, one may suspect that the really serious recession has yet to come, though much depends on how one defines and measures such things. But once the soundbite has passed, the ‘official’ funding has become yesterday’s news and the balance sheet manipulations have bedded down, it may be that people will wonder if there ever was a crisis. The thought underlying this book does not operate on this level, however. The modern economy, precisely because it is so value-creative, has much room for manoeuvre, for absorbing ‘shocks’, as the mechanical image has it, or accustoming itself to ‘surprises’. Most economists trust that serendipity will come to their aid when their explanations are found to be wanting. Life can indeed go on as before. Whether to does or not depends in part on where one is standing when making the conclusion. Behind a computer screen in an air-conditioned office in a ‘Third World’ country things look very different than if one steps outside the building. IMF officials rarely leave their five-star environments, except perhaps to tell a farmer the problem is that his cows are a cost too many. Politicians always have the get-out that they can resign or be voted out and that in any event no policy can be binding on a successor. Such is the nature of politics, but it is a bad fit for economic life, for financial continuity. How different things would be, could be, if every major finance house partnered with a slum project or a Rwandan coffee farmer in order to provide both financial literacy (of the kind meant here) and uncollateralised capital. How different if a coffee shop in the City of London would simply contract to buy all the coffee from such a farmer at the price he needed in order to stay viable, feed his family and educate his children. Any extra cost would be unnoticed in the foam, that great source of coffee shop profits. But the ethos would have to be a matching of the development of which the producer and his farm and circumstances were capable; not abstract balance sheet growth. How different if peasant farmers in the southern Philippines could be taught balance sheet management, not just how to keep expenses below income. Then they would escape their dependency on external capital, and realise they are their own source of capital. The loans come as a reflection of their ability. Everyone of these instances, which could be multiplied a thousand-fold, every time an individual seeks to take responsibility for his own economic life, is an opportunity for aspirational capital to come into being, for the financial markets to be given a fresh focus. Access to markets or credit is never so free and self-directed as when based on financial literacy; finance is never so stable as when it provides the wherewithal for an initiative rather than trying to exist unto itself. There would be casualties along the way. Extortionate local lending would have to stop. World prices in food would become a thing of the past, for they are economically


nonsensical. Local ‘mafia’ would have to stop exploiting their fellow citizens as they begin to wake up. Well-meaning westerners would have to ease back on their intent to westernise the economics of everyone they come into contact with. Fijian islanders will have to learn not to put a real-estate value on their exotic villages as collateral for ‘inward investment’ from thrusting foreign tourism entrepreneurs. The list is extensive and becomes dirge-like. Many would rather leave things as they are than take on the world. But there are those who know that the forces needed to bring about real change arise when one undertakes the change, not when one contemplates it. There are many examples of people acting out of a new understanding, a wider understanding of finance. Grameen Bank, microfinance generally (though why the money has to be lent rather than invested or given is a moot point), Fair Trade, Transition Towns, online investment schemes for ‘poor’ people, and much more. There is much good news. And the examples are everywhere, not just in the so-called Third World or with a Third World focus. And not just in connection with food, important though that is. Other books in this series, as indeed beyond it, detail and chronicle these developments. What is missing, perhaps, is a match for such developments at the level of ‘official thinking’ and in the business schools of the world. But this may be a matter of time only. One thing is certain, however, that the interface, the threshold between the real and financial economies, between the past and the future, has another form of expression, namely, the continuing disregard for finance on the part of many social changers and the ‘outlier’ status, at best, of the existence of such people in the mind of the financial community. This book hopes to have helped overcome this phenomenon by wandering, as it were, in and out of those worlds, indeed by wandering in and out of various dimensions. To that extent it is autobiographical and may therefore be idiosyncratic. But the experience of going from a slum in an old car in the morning, dressed in slacks and no tie, then switching cars and clothes to have lunch in a golf club ‘where the money is’ or to interview a central bank president leaves its mark. As does spending a weekend in a field in Kent at a Green Party monetary policy conference then the next day heading for a meeting at the Bank of England. The main impression is that, while many people experience the threshold between modern finance and the real economy, most choose to be on one side or other of it. Few walk along it, thereby bridging it.

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Index

Bold page numbers are used for illustrations. 20th century. see twentieth century 1930s depression 155, 158

A abstraction 52–3, 58–61, 85, 136–7 accounting banking as 195 ethics and 209–10 for/not for-profit divide 214–15, 215 IASB role 210–11 international standards 140 as link between economics and real world 203–4, 204 link to economics 81–2 link with associative economics 205 macro economic considerations 214 practicalities of 211–18, 212 price 218 and profit 148 profit and surplus value 216, 216–17, 217 as science 207 as synonymous with money 140 universal consciousness of 139 use in global financial crisis 213 agencies dangers of reliance on 62 use of 60 Alchemy of Finance, The (Soros) 106–8 Altmann, Ross 37 American Insurance Group (AIG) 35, 38–41 Andrews, Edmund 35, 37–8 angels 109–10 Anglo-Saxon bias 10 defined 21

Appeal to the German People and the Civilised World (Steiner) 157 aptness in finance 74 Aquinas, Thomas 29–30 Aristotelian taxonomy 27–9, 29 aspiration 84, 94, 144–5, 147 assets price buoyancy 146 as source of income 145 trading of 207 associative economics accounting and profit 148 asset price buoyancy 146 capitalising of real estate 146–7 from competition to cooperation 136–7 and cycles 95 differentiation 147 epistemological considerations 12 exploitation 98 as formal discipline 13 inclusive of all 83 interface with crisis 219 key precepts of 13, 146–50, 149, 150 knowledge, nature of 102–4 link with accounting 205 and output gap monetarism 167–75 and Rudolf Steiner 7, 12–17, 12n7 threefold society 122–6 wearing out of money 147 atavism 99 Atlas Shrugged (Rand) 97 Austrian school, Steiner and 16–17

B Bank of England 46–7 banking as accounting 195 changes in through history 60–1 citizenised 191–3, 207–8

232 F i n a n c e a t t h e T h r e s h o l d crises 4 delinking of cash and credit 188–90, 189 demise of 190–3 disintegrity of 76–7 going beyond 135–6 links with trade 135 modern central 200–1, 201 banks, states’ bailing out of 93–4 Barfield, Owen 14–15, 112–14 Bean, Charlie 4 Begg, D. 201 Bezemer, Dirk 35, 49 biases in the book 10 in data 9–10 blame for financial crisis 25, 88 Blinder, A.S. 124 ‘blue sky’ thinking 104 Bobbitt, Philip 16, 126, 127–30 boundaries and liberalisation 70 Bourlet, Jim 110 Bowsher, Charles 40–1 brains, two-sidedness of 115 Bronk, Richard 111–12 Brunner, K. 202 Buckle, M. 64 Buiter, Wilhem 36

C Capie, F. 124n2, 201, 201n3 capital Aristotelian taxonomy 27–9, 29 excess liquidity as too much of 85 as independent of labour 26–7 relationship to labour 156–7 removal of excess 86–8, 89 as source of income 145 use of for power 126 vs. labour 154–5 capitalising of real estate 146–7 capitalism as in adolescent phase 52, 54 metamorphosis of 125–6 transformation, need for in 88 cash, delinking from credit 188–90, 189

causation and propensity to divide 99 reflexive 59 understanding of 77 central banks as auditorial 148, 149–50 independence of 63, 87, 123–4, 143–4, 178 and international cooperation 70–1 in modern banking 200–1, 201 Cheffers, Mark 209 Chicago Business School, economics of 79–80 Chick, V. 196 choir of cultures concept introduced 6 and defining a ‘people’ 19–20 as governing single world economy 16, 82 market state view compared to 129–30 need for in single global economy 82 new financial instruments for 82–3 power of as image 130 chronology of global financial crisis Aristotelian taxonomy 27–9, 29 goods-market to money market, move to 26–7 liberalisation in England 30–1 Thomas Aquinas 29–30 trade/mercantilism, rise of 30 Church opposition to rise of trade 30 Churchill, Winston 124, 143 citizenised banking 191–3, 207–8 Clash of Civilisations (Huntington) 125–6 closed/open-system thinking 195–8, 196, 197 Cochrane, John 49, 50–2 cognition, left-right 115–16 Cohen, B. 202 Coleridge, S.T. 112, 113 collaboration in single world economy 70–1 collateral debt obligations (CDOs) 37, 61 commentary on global financial crisis Adair Turner 45–6, 46–7, 48–9 Alistair Milne 44 alternative perspectives 52–5 American Insurance Group (AIG) 38–41

I n d e x 233 Dirk Bezemer 49 Edmund Andrews 37–8 Goldman Sachs 41–3 John Cochrane 49, 50–2 John Gieve 47 London School of Economics seminar 36–7 Matt Taibbi 42–3 Norman Gall 34–5, 38–9, 41–2 Paul Krugman 49–50 Paul Woolley 46, 47–8 summary 33–6 variety in 72 Will Hutton 37 computer modelling 58, 61–2 confidence as a technique 63 Congden, T. 12–13, 101–2, 163, 165, 166, 168–70, 170, 172, 173n12, 175 cooperation from competition to 136–7 as consequence of single global economy 70–1 without collusion 104–5 coordination as consequence of single global economy 70–1 costs and benefits of education 220–1 ‘Crash - How the Banks went Bust’ (TV programme) 37 credit, delinking from cash 188–90, 189 credit-default swaps (CDSs) 39, 40 crises, financial 4 see also global financial crisis cross party economics 167 currency single world 16, 104, 126, 140 world reserves 70 curriculum for financial literacy 222 cycles 95, 204–9

D Danielson, Jon 36 data, bias in 9–10 Davies, Brandon 36 Davis, J. 196 deep accounting 203–4, 204 definition of terms 19–23 delinking of cash and credit 188–90, 189

democracy, sovereignty and 132–3 denationalisation of economic life 6, 134–5, 187–8 depreciation 147 depression of 1930s 155 derivatives 61 differentiation, money 147, 179, 206 disintegrity of banking 76–7 diversity global consciousness of 69 trade consequent on 83–4 divided world in the twentieth century 154 division, propensity towards 97–9, 102, 161–2 Dornbusch, R. 201 double dip recession, likelihood of 73 double entry bookkeeping 115, 215, 215n6 dual nature of economic life 186–7, 195

E economics, biases of 21 education for young people 220–1 Edwards, Arthur 175 efficient markets hypothesis 50, 59, 75, 79–80, 120 embedded finance 52–3 employment levels 159, 163 Englishness 7, 18–19 ephemera 59 epistemology 58 considerations for associative economics 12 constriction of understanding through 104–5 and finance 100–1 and financial crisis 114–15 problems of facing economics 112–13 role of 96 weaknesses in 97–8 ethics and accountancy 209–10 financialism 208–9 perspective on crisis 52 excess liquidity 64, 85–6 removal of 86–8 as result of trade 135 in a single global economy 69––70


F faux physics 58 finance aptness in 74 and the real economy 136 relationship to in this book 72–3 financial crises 4 see also global financial crisis financial economy, intangible aspects of 72–3 financial instruments need for innovation 8 new for choir of cultures 82–3 Financial Services Authority (FSA) 46–7 financialism, ethical 208–9 financial/real economy 7, 22–3, 136 First World War I, events following 154–5, 157–9 Fischer, S. 201 forecasting of crisis 49 freedom economic 69 Friedman, Milton 13, 16, 130, 164, 168, 198–9, 201n2

G Galbraith, J.K. 155, 158 Gall, Norman 34–5, 38–9, 41–2 General Theory (Keynes) 164–5 geo-politics 15–16 Germany 157–8 Gieve, John 47 Gilbert, Elisabeth 7 Glass-Steagall Act, repeal of 62 global economy. see single global economy global financial crisis alternative perspectives on 52–5 blame apportioning 25 complexity of 9 defining 4 as defining moment in history 67, 73–4 double dip likelihood 73 as epistemological 114–15 forecasting of 49 implications of global nature 92 institutional solutions 93–4 interface with associative economics 219

moralising on 76 as physical mechanism 101–2 products and techniques involved 61–5 reality of 73 reflexive causation 100–1 technical details 55–7, 55–61 understanding of 92 see also chronology of global financial crisis; commentary on global financial crisis globalisation 160 see also global financial crisis global/local defined 20 gold standard 21, 98, 109, 140, 159 Goldman Sachs 35, 41–3 Goodhart, C. 36, 124, 124n2, 201n3 goods-market to money market, move to 26–7 Gormez, Y. 201 governance by choir of cultures 16, 82 delinking of states from the economy 134–5 economic 139–44 global economic 125 Great Detour of the twentieth century 153–61 Greenspan, Alan 97

H Haldane, Andrew 86, 101 Hanke, S. 81–2 hard/soft science, defined 21–2 Hayek, F. 17, 82, 102, 103, 132, 150 Heilbroner, R. 95 hiatus in history, global financial crisis as 67, 73–4 Hicks, John 81–2 high-frequency trading 64 History of Economic Thought, A (Roll) 27–8 human nature as essentially/partially selfish 120 human weaknesses 58 human will 94–6, 205 Huntington, S.P. 125–6 Hutton, Will 35, 37

I n d e x 235 hyper-production costs and benefits of education 220–1 education of young people 220

I imagery meta-economic role of 78–9, 96 as primary 120 imagination, role of 78–9, 96–7 inflation 1945-70 159 causes of 170 innate Englishness 7, 18–19 innovation in financial instruments 8 integrity of banking 76–7 International Accounting Standards Committee (IASB) 210–11 intuition 9

J Johnson, Simon 41 jubilee 86–8 just price 30

K Keynes, J.M. 5–6, 109, 201n2 monetary reform thesis 198–200, 199 on Newton 112 and Steiner 141–2 on Treaty of Versaille 154, 157 Keynesianism 79–80 as basis of western economics 164–5 monetarist:Keynesian divide 163–6 Khoury, S.J. 65 King, Matt 37 Kiva 193 Klamer, Arjo 81–2 knowledge, nature of 102–4 Krugman, Paul 49–50 Kurtzman, Joel 185, 186

L labour loss of elasticity 155 relationship to capital 156–7 vs. capital 154–5 left:right divide 162, 168

leverage 63 liberalisation, financial 156 beginnings of 27 moves to centre stage 31 unbounded world as consequence of 70 Liddy, Edward 41 light-touch regulation 40 literacy, financial curriculum for 222 need for 141 Local Exchange Trading Systems (LETS) 192–3 local/global defined 20 London as financial centre 7 as a financial centre 48–9 future role of 84 London School of Economics seminar 36–7 Lucifer 110

M macro policy 59 Mahar, M. 4 marginal utility theory 26–7 market failure, new sense of 121–2 market states 127–30 Masters, Blythe 81 mathematics 198 Maturana, H.R. 22 McChesney Martin, William 124 mercantilism, rise of 30 Merchant of Venice, The (Shakespeare) 30 meta-economics 96 metamorphosis of capitalism 125–6 methodology 8–12 Milberg, W. 95 Milne, Alistair 35, 44, 76–7 Mises, Ludwig Von 17 modelling the economy 58, 61–2 monetarism compared to Keynesianism 79–80 genesis and development of 164 Keynesian:monitarism divide 163–6 output gap 166–75 money as a commodity 206–7 delinking cash from credit 188–90, 189

236 F i n a n c e a t t h e T h r e s h o l d differentiated 179 differentiation between types 147, 206 functions of 201–2, 202, 206 narrow subverted by broad 185–6 one-world 179 Steiner’s threefold conception of 172–3 as synonymous with accounting 140 three kinds of 131, 172–3, 179, 202–3, 203 two kinds of 170–2, 171, 186–7 money market, move from goods-market to 26–7 moral hazard 63 moralising on the crisis 76

N nation states. see states nationality, economy based on after WWI 157–8 Newton, Isaac 101–2, 101n6, 112 Newtonian thinking, going beyond 101–2

O objectivism 97 off-balance sheet business 64–5 Office of Risk Assessment 4040 Oliver, M.J. 82 one-world economy. see single global economy open/closed-system thinking 195–8, 196, 197 output gap monetarism 166–75, 177, 178, 180 ‘outside the box’ thinking 104

P Pakaluk, Michael 209 Parker, Mushtak 53 partnership, economic life as 6 Paulson, Hank 41 people defined 19–20 Pepper, G. 82 perennial systemic jubilee 86–8, 222 perfect competition, new sense of 121–2 periodicity 204–5 poetry and science 112–14 polar continuum of economic life 174–5

policy, macro 59 polity, one world 133–4 positivism 80–1, 82, 83, 99 power, use of capital for 126 predictability of economic events 5, 204–5 presounding 62 price 218 price buoyancy of assets 146 price stability 177–8 private:public divide 161–2 products and techniques agencies 62 central banks, independence of 63 collateral debt obligations (CDOs) 61 computer modelling 61–2 confidence 63 derivatives 61 excess liquidity 64 Glass-Steagall Act, repeal of 62 high-frequency trading 64 leverage 63 moral hazard 63 off-balance sheet business 64–5 presounding 62 and relaxed regulation 60 short selling 62 profit and accounting 148, 216, 216–17, 217 for/not for enterprises 162, 214–15, 215 proof in economics 9 public:private divide 161–2

Q quantitative easing 33, 33n10

R Rand, Ayn 78, 97 rationalism, Anglo-Saxon as 21 Rayment, Tim 35, 39, 40–1, 85–6 readers of this book 5 real estate, capitalising 92–3, 146–7 real/financial economy 7, 22–3, 136 redefinition of terms 19–23 reflexive causation 59, 100–1 regulation as crucial 59

I n d e x 237 as enabling 60 inherent 205–6 responsibility economic 69 joint and several 137 reversed causation 59 Richardson, Gordon 70–1 right:left divide 162, 168 rights life 20, 68, 69, 122, 123, 126, 127, 128 risk transfer 40 Rodrik, Dani 149, 149–50, 150 Roll, Eris 27–8, 30, 205 Romantic Economist, The (Bronk) 111–12 Romanticism and economics 109–14 Rothbard, Murray 17

S Satan 110 Schnadt, N. 124n2, 201n3 Schumacher, E.F. 96 Schwartz, Anna 123 science accounting as 207 hard/soft , defined 21–2 Second World War II, events following 159–61 Shakespeare, William 30 Shenandoah Corporation 158–9 Shield of Achilles (Bobbitt) 127 short selling 62 single global economy as Anglo-American 125 choir of cultures, need for 82, 130 closed 131 from competition to cooperation 136–7 coordination and cooperation as consequence of 70–1 delinking states from the economy 134–5 diversity, global consciousness of 69 division, propensity towards 97–9 economic governance 139–44 excess liquidity 69––70 features of 130–2 financial literacy 141 implication of crisis in 92

interdependency of all nations 6 need to understand 68 one world polity 133–4 sovereignty and democracy 132–3 spiritual, economic life as 69 and state jurisdiction 68 threshold crossed to 5–6 variables, scenarios concerning 149, 149–50, 150 world currency 16, 104, 126, 140 sketches, use of 197–8 Smith, Adam 180–1 social lending 192–3 socialism 156 society, as threefold in nature 122–6 soft/hard science defined 21–2 Sokobin, Jonathan 40 Soros, George 8, 72–3, 77, 106–9, 126, 200 sovereignty and democracy 132–3 spiritual, economic life as 69 states bailing out of banks 93–4 delinking from the economy 134–5, 187–8 interdependency of all 6 jurisdiction in single global economy 68 market 127–30 role of after market failures 76–7 validity of outlived 127 Steiner, Rudolf on Adam Smith 180–1 associative economics 7 and associative economics 12–17, 12n7 and the Austrian school 16–17 compared to Bobbitt 129 on and compared to Keynes 141–2 and cycles 95 excess liquidity as result of trade 135 and geo-politics 15–16 ideas on polar continuum of economic life 174–5 image of the brain 102 interests of the individual 105 invention as saving labour 115 on jubilee 86–7 knowledge, nature of 102–4

238 F i n a n c e a t t h e T h r e s h o l d minimal impact of ideas 153 mission of the German Empire 157 money, threefold concept of 172–3 prices 218 problems presented by analysis of 14–15 reflexive causation 100 reputation 13–14 shell of a nut metaphor 69, 85 single, closed global economy 131 sovereignty and democracy 133 threefold society 122–6, 128 trade and surplus value 144 treatment of in this book 10–11 true price of products 98 stock market crash of 1907 95 sub-prime mortgage market 37 super-production costs and benefits of education 220–1 education of young people 220 surplus value and accounting 216, 216–17, 217 and trade 144–5 Swary, I. 64–5

trade essence of 139 excess liquidity as result of 135 rise of 30 and surplus value 144–5 Treaty of Versailles 154, 157–8 Turner, Adair 45–6, 46–7, 48–9, 78, 85 twentieth century 1930s depression 155, 157–8 1980s onwards 159–60 1990s 160–1 capital/labour relationship 154–7 divided world in 154 division, propensity towards 161–2 threshold of 156–7 World War II, events following 159–61 twin nature of economic life 186–7, 195 two-sidedness 115–16

T

V

Taibbi, Matt 42–3 taxpayers defined 20 technical basis of economic life 53 technical details abstraction, emergence of 58–61 list of 55–8 products and techniques 61–5 Terror and Consent (Bobbitt) 126, 127–30 terrorism 73, 128 Tett, Gillian 36, 81 themes of the book 3–8 theory, reliance on 59 Thompson, J.L. 64 Thornton, Henry 123–4 threefold society 122–6, 128 threshold economics 60 threshold of physical thinking 91–2 Topf, B. 64–5 Tract of Monetary Reform (Keynes) 199–200

Varela, F.J. 22 variables, scenarios concerning 149, 149–50, 150 Vercelli, Alessandro 198 Versailles, treaty of 154, 157–8

U Understanding Accounting Ethics (Cheffers and Pakaluk) 209–10 usury 28

W Western defined 23 ‘Why Some Economists Could See It Coming’ (Bezemer) 49 will, human 94–6, 205 Williamson, J. 4 Wood, Geoffrey 13 Woolley, Paul 46, 47–8 World War I, events following 154–5, 157–9 World War II, events following 159–61

Y young people financial literacy, curriculum for 222

I n d e x 239 focus on, grounds for 8 focus on, need for 222–3 investment in, need for 221–2 new products for, need for 219

production of education 220

Z Zopa 192

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