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"Rethinking Capitalism" by M. Jacobs & M. Mazzucato (Eds)
The Political Quarterly Publishing 2016
ISBN 978-1-1191-2095-7
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If there were to be a prize for the most important futures work for 2016, this book would be a contender to win it. It is a very important book on a very pressing matter. Perhaps a little context would help to establish why this is so?
The financial crash of 2007-08 rather caught the economics profession by surprise. Admittedly, some economists saw it coming, but, in the main, most didn't. Why was that so? Economists largely failed to spot the crisis on the horizon because their models incorrectly described the way in which the economy works. Even after the crisis, the policy response of monetary expansion was condemned for it's inflationary potential. Consumer price inflation failed to take off because the monetary expansion was coupled with a fiscal contraction and there simply wasn't sufficient aggregate demand in the economy to set off inflationary forces. Orthodox economics got it wrong again!
At the time of the financial crash, a number of academic economists correctly saw that the base theory behind many economics models needed to be re-written. If economics, as a discipline, were to be more useful than an intellectual curiosity, then it needs to contain a more accurate description of the way in which the economy works. This book represents a significant down payment on the re-writing of economics. Some of the argument - such as the endogeneity of the money supply - can be a bit technical at times, but it is important nonetheless.
The book contains a sequential set of essays. The most important one, in our opinion, is the last, but the reader will be very handicapped if they skip ahead to the last essay. The argument is developed over the eleven essays in the book. The first essay sets the scene by outlining why the authors believe the economics profession managed to fail to understand the imminent crisis in 2007.
This is followed by the theme of macroeconomic policy. The second essay establishes that fiscal austerity at this point in time is a bit muddle headed, and that current conditions warrant a fiscal expansion; whilst the third essay establishes the endogeneity of the money supply where orthodox economics considers it to be exogenous. What this means in plain English is that we are currently stuck in a loop of secular stagnation, and we are unlikely to find our way out of the maze until aggregate demand recovers. The easiest way to stimulate aggregate demand is through a fiscal expansion. If we remain reliant upon an unconventional monetary expansion (i.e. Quantitative Easing), then all we will see is the further pumping up of asset prices.
The next three essays move away from macroeconomics and start to focus on the microeconomic theory of the firm. The fourth essay looks at short-termism as a feature of Anglo-Saxon Capitalism, and how the need to maintain the quarterly dividend and share buy-back has led to companies failing to re-invest in future productive capacity. This is followed by an essay on the innovative enterprise, in which the author establishes that if a firm wishes to compete in the long term, then it has to innovate, which means that it needs to invest in future productive capacity. This section is then rounded out with an essay - the sixth in the book - on the role of Patient Capital (i.e. investors who are willing to wait for the return on capital to materialise) and the role of the state as a provider of Patient Capital.
It is at this point that the contours of the book start to emerge. The economics profession has largely failed the public because the models on which policy of based are too divergent from the real world. We are currently stuck in a position of secular stagnation which is reinforced by the current policy of fiscal austerity combined with monetary expansion. In order to move forward, aggregate demand needs to grow, and the easiest way of achieving this is by reversing the policy of fiscal austerity. If austerity is to be relaxed, then public sector investment in productive capacity is likely to stimulate aggregate demand without the additional productive capital being diverted into unproductive dividends and share buy-backs. The book then continues to examine four specific aspects of this argument.
The seventh essay, using the insights of the first six essays, makes a good case for investment-led growth as a solution to the European Crisis. The European economy finds itself in a very parlous state at the moment, one that needs growth as a solution. The private sector hasn't delivered growth, so perhaps the public sector could? The eighth essay examines the link between inequality and economic growth. I found the argument to be a bit circular in that the best way to reduce poverty is growth, but also that a good way to stimulate growth would be to tackle inequality. The fact that an argument is circular doesn't invalidate it. The ninth essay examines the paradoxes of privatisation and public service outsourcing. The old distinction of private and public sectors has dissolved a great deal in the past thirty years, but our thinking in this regard hasn't. The last essay of this section - the tenth in the book - considers the relationship between innovation, de-carbonisation, economic growth, and climate change.
If the first six chapters laid out the contours of what a new economics might look like, the following four chapters lay out the contours of what economic policy might look like. Starting with a recognition that a fiscal expansion is needed to stimulate aggregate demand at the macroeconomic level, the microeconomics of such an expansion would be to focus on investment in 'green-tech', delivered by private sector agents of public sector commissioners; in tandem with policies to reduce inequality. This sounds like a winning formula!
With this thinking in hand, one is then ready to tackle the final chapter of the book, one that happily has more questions than answers. In the final essay, Carlota Perez takes a far longer perspective on the question of green-tech and helps to map out the contours of our collective future. Here, the focus moves away from the immediate and towards the more distant future. There is enough evidence presented to convince us that the next technological wave will be one based around green-tech. What isn't clear is whether this represents the deployment phase of the Fifth Wave, or the installation phase of the Sixth Wave. I am inclined to the latter view, but the chapter makes a sufficiently good case for the former view to sow the seeds of doubt in my mind. This aspect of the essay needs more thought on my part.
This is a really important book. However, it has to be remembered that it is an economics text book, which means that the style is dry and academic. The prose is turgid and, in places, downright boring. This is not bedtime reading. The book does lack the mass of higher mathematics normally associated with economics texts and, in this regard, is quite accessible. It is the content that underscores the importance of the book. This is a very significant step away from the barren territory of the neo-liberal economics that failed us all in 2007. This is why we recommend it.
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