Free market economics created a world fit for multinationals. But we need less frictionless trade and more local control, argues Larry Elliott.
It all seemed so simple back in the 1990s. Barriers were coming down, the free market was advancing to all corners of the world, and in return for production being shifted to low-cost countries, consumers in the west were getting cheaper clothes and gizmos. Globalisation was said to be unstoppable. The end of history was nigh.
The financial crisis and its aftermath have changed the political weather, with a decade of low growth, unevenly distributed pain and business as usual prompting a backlash. Voters in the west have started to focus on globalisation’s dark side: the multinational companies that avoid paying tax; the towns hollowed out by de-industrialisation; the loss of democratic control over market forces; the uneasy sense that the entire edifice is poised precariously on a mountain of debt.
Somewhat belatedly, the politicians and officials who are responsible for running the show have woken up to the threat. As Mark Carney, the governor of the Bank of England, rightly noted earlier this week, trade tensions and Brexit are manifestations of fundamental pressures for a different form of globalisation, perhaps even deglobalisation. Britain’s departure from the EU, according to Carney, is “an acid test” of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability. Put simply, can you have your globalisation cake and eat it?
The answer is that cake-ism won’t be remotely feasible until the basic assumption that has underpinned economic policy for the past four decades – freer markets are always better markets – is challenged, and there is no real evidence that it has been. The direction of travel in trade deals, for instance, is for governments to press for the things that business groups want – protection of intellectual property rights and investor-state dispute settlement clauses that allow companies to sue governments for alleged discriminatory practices – rather than changes that benefit workers.
Consider, too, the way in which MPs of all stripes have been obsessing about the need for frictionless trade with the EU after Brexit, to ensure that there is no disruption to the supply chains of multinationals. The benefits of just-in-time production are seen as more important than the environmental costs of shipping parts and semi-finished goods backwards and forwards across Europe. Frictionless is good.
Make capitalism compatible with democracy
It is curious to hear centre-left politicians talking in these terms, because progressive politics for the past two centuries has traditionally been about the need to inject friction into markets, in order to soften the impact of capitalism and make it compatible with democracy. The economy of the early industrial revolution was as close to frictionless as you could get. There was no collective bargaining, so wages were set by the interplay of demand and supply of labour. There was no welfare state, so those who fell on hard times went to the workhouse. There were no health and safety regulations to protect workers or the environment, so industrial injuries and pollution were rife.
It eventually became apparent that this model of capitalism was sowing the seeds of its own destruction, and that there would have to be reform if the revolutionary outcome predicted by Karl Marx was to be avoided. The century from 1850 to 1950 saw the birth of the trade union movement, public provision of education, the development of a redistributive tax system and the creation of a welfare state. Social democracy, Keynesian demand management and full employment all interfered with the workings of the market, and when James Tobin first proposed a financial transaction tax in the early 1970s to curb currency speculation, he talked explicitly about throwing sand in the wheels of the foreign exchange markets.
Generally, though, reformers talked about injecting fairness rather than friction into the system – and were wise to do so. Language matters a lot, which is why, when the counter-revolution began in the mid-1970s, the talk was of economies becoming freer. Frictionless sounds so much more attractive than friction, in the same way that flexible sounds preferable to inflexible.
But the past decades have shown what frictionless or flexible markets are like in practice, and it’s really no surprise to find that voters don’t like them very much. Abolishing the Glass-Stegall Act – which separated investment from commercial banking in the US for more than half a century – removed friction from the financial markets but at the expense of an orgy of speculation that led to the biggest economic crisis since the 1930s. The neutering of trade unions and the decline in collective bargaining made labour markets more flexible by allowing firms to hire workers on zero-hours contracts, to fire them more easily and to secure a bigger share of the gains of growth for themselves. Employers’ organisations are the biggest champions of free movement of labour because it allows them access to an unlimited supply of labour, holding down wages.
The quest for a frictionless economy has its supporters, and they like to cite the fact that, since the current era of globalisation began in the early 1990s, a billion people have been lifted out of poverty. What they don’t say is that most of them live in China, which has grown rapidly because it has chosen a development path that is far from frictionless.
Carney is no free-market utopian, but it is a lot easier to talk about a new form of international cooperation built on a better balance of the local and the supranational than it is to bring it about. A good starting point would be to rediscover the joys of managed markets, to recognise that a frictionless economy is like a car without brakes, and that the right amount of friction makes countries fairer, safer and happier.