The Institute for New Economic Thinking (INET) 7th annual conference Reawakening gathered Nobel laureates, leading academics, policymakers and public officials in Edinburgh between the 21st and 23th October 2017. The conference purpose was to re-evaluate economic theories and practices that led to the financial crisis, Brexit and the American presidential election so ‘to envision a more socially, economically and environmentally sustainable path forward’.
Regarding economic stagnation, failures of free trade agreements, rising inequalities and the growth of dual economies, numerous economists at the conference pointed out rentier capitalism as the mother of these problems. In other words, the monopolization of access to property and the derivation of income from the ownership and control of property, rather than from innovative, entrepreneurial use of economic resources contributing to society.
The session on economic stagnation challenged the idea that the current stagnation period is to be attributed only to a sudden fall in aggregate demand triggered by the financial crisis. Instead, they argued that the fall in aggregate demand was the result of a secular process caused by long term factors. Since the 1980s the wealth income ratio decreased, real wages declined pushing numerous people to gradually sell their assets and finance their consumption by taking up debt. People cautious to respect the moral virtue of parsimony gradually decreased their consumption. At the same time, increasing value of land and returns on real estate increased the extraction of profits from the economy while reducing incentives for purposeful innovative investments.
In addition, Adair Turner, former chairman of the Financial Services Authority noted that today’s fastest and most profitable technology sector employs very few people while its huge profits are distributed among only few. He argued that the increasing consumption of positional goods (goods valued only by how they are distributed among the population, not by how many goods there are in total) by the rich enriches the rich themselves. This leaves us in an economy he said with the demand of the affluent for their own goods as the main driver of growth and prosperity.
Guy Standing, Professor in Development Studies at the School of Oriental and African Studies (SOAS), University of London, said that while few benefit from today’s rentier capitalist system, numerous are falling into the precariat. This stands for the people who lack labor-related security, face unsustainable debts and suffer from economic instability while having no occupational identity.
It was argued that adjusted versions of the model of “dual economies” that economist W. Arthur Lewis developed in 1954 to analyse economic growth in developing countries now worryingly describe the world’s most advanced economies. Peter Temin, Professor of economics at MIT, stated that dual systems could be seen in justice, education and the treatment of debt. An example he gave was that one in every three black Americans will go to jail. Standing noted that in the UK, the commodification of education and replacement of student maintenance grants with loans renders poorer students access to education, leaves graduates over £50,000 of debts while the Student Loans Company makes profits.
Joseph Stiglitz, former chief economist of the World Bank, casted doubt on the ability of today’s free trade agreements to increase global prosperity. He noted that their justification of being the most efficient way to create wealth which eventually trickles down making everyone better off is based on a model of general equilibrium which “leaves out everything that is important”. Uncertainties, redistribution and labour reallocating costs and imperfect competition are ignored. He explained that the restricted movement of knowledge across boundaries due to various forms of intellectual property (IP) rights, assuring profit for rentiers, went at the expense of developing countries’ prosperity. He linked this to the drug patents that enable big pharmaceutical industries to extract rent out of life saving drugs while preventing their access to millions. Today he said, more money flows from developing countries to the US in form of returns on IP rights than in the other direction of development aid.
The actual economic system where a few extract massive amounts of rental income from land property, detention of debt and ownership of ‘intellectual property’ is unhealthy. It drives inequality, creates dual economies and does not do justice to the enlightenment’s liberal open world ideal. Keynes predicted eighty years ago that as capitalism spreads ‘it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.’ Eighty years down the road rentiers are flourishing at the expense of many others. It is urgently time to revert this and create a better and fairer society.
Marina Mazzucato, director of the UCL Institute for Innovation & Public Purpose, proposed in the session on ‘Reversing Dual Economies?’ that public investments be used at creating and shaping markets to achieve ‘the co-production and fair distribution of economic value’. Indeed, she added that public policy’s role is not one of solely ‘correcting’ the failures of otherwise free markets but of creating a positive direction of change. In her latest book Rethinking Capitalism, she argued that ‘economic performance cannot be measured simply by the shot-term growth of GDP, but requires better indicators of long-term value creating, social well-being, inequality and environmental sustainability’.