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Guided by an invisible hand

The bank meltdown marks a turning point in our thinking about how the world works writes the Nobel L

Make no mistake: we are witnessing the biggest crisis since the Great Depression. In some ways it is worse than the Great Depression, because the latter did not involve these very complicated instruments - the derivatives that Warren Buffett has referred to as financial weapons of mass destruction; and we did not have anything close to the magnitude of today's cross-border finance.

The events of these weeks will be to market fundamentalism what the fall of the Berlin Wall was to communism. Last month in the United States almost 160,000 jobs were shed - making more than three-quarters of a million this year. My guess is that things will get considerably worse. I have been predicting this for some time, and so far, unfortunately, I have been right.

There are several reasons for my pessimism. The extreme credit crunch is a result of the banks having lost a lot of capital. And there is still uncertainty about the value of the toxic mortgages and other complex products on their balance sheets. The US economy has been fuelled by a consumption binge. With average savings at zero, many people borrowed to live beyond their means. When you cut off that credit you reduce consumption. This, in turn, will dampen the US economy, which helps keep the global economy growing. The American consumer has not only sustained the US economy, he has sustained the global economy. The richest country in the world has been living beyond its means and telling the rest of the world it should be thankful because America fuelled global economic growth.

There are further reasons for my pessimism about short-term economic prospects, in America and Europe. In the second quarter of this year, growth in the US would have been negative were it not for the growth in exports. But with the slowdown in Europe and problems in Asia it is difficult to see how we can maintain net export growth. The strengthening of the dollar - due not to greater confidence in the US but to reduced confidence in Europe - will make matters worse. The fall of energy prices will help a little, but not enough.

Treasury Secretary Hank Paulson has now come up with a new bailout scheme. The original plan - buying up the thousands of "troubled assets" (read: bad loans and complex products based on them that Wall Street created) - was badly designed and rife with problems. How would they have been priced? Call in the same Wall Street experts who got us into the mess and mispriced risk before? It is a heads I win, tails you lose situation.

The worry is that the taxpayer will be left holding the short end of the stick.

The British approach, which Paulson seems to be following, is far better, involving capital injections into banks, with preferred shares to protect against losses and warrants to share in some of the upside potential. This is the approach that I - along with most US economists and people with good street sense, like George Soros - had been saying America should adopt.

Ironically, though Paulson wouldn't listen to us, he seems to have listened to Gordon Brown.

Many of the problems our economy faces today are the result of the use of misguided models. Unfortunately, too many took the overly simplistic models of courses in the principles of economics (which typically assume perfect information) and assumed they could use them as a basis for economic policy. Many central banks use the notion of inflation targeting - that they should focus exclusively on inflation, raising interest rates when inflation increases. But I would argue that central banks have a broader responsibility; they are supposed to ensure the stability of a country's economy. While monetary authorities in the US and elsewhere focused on price stability, they allowed the financial system to undertake risks that put the whole economy in jeopardy.

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner

This article first appeared in the 20 October 2008 issue of the New Statesman, My year with Obama

Grammar school in 1962. Getty
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What I learned about class after my twin brother and I were separated by the 11-plus

When my twin brother went into a secondary modern school, and I went to a grammar, something more than a private rift opened up: we were assigned to different social classes. 

The cultural schism exposed by Brexit in Britain and the election of Donald Trump in the United States has been a long time in the making. It goes deep, and for many it has been not only a bleak social ­phenomenon, but also a profound personal experience.

When my twin brother went into the C stream of a secondary modern school in the 1950s, and I passed the examination for Northampton Grammar School, something more than a private rift opened up: we were assigned to different social classes. Apprenticed to a carpenter at 15, he did national service, while I remained at school until I went up to Cambridge University. By this time, the breach had become irreparable. Our separate lives were emblematic of divisions in Britain which have only recently been officially acknowledged. My brother made a success of his life restoring historic buildings, but many others did not, consigned to failure at 11, or subsequently ejected from employment that they had imagined would last a lifetime – work scornfully dismissed now as “jobs for life”, as though heavy manual labour were an idle sinecure.

 

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Why do we recognise the true nature of the society we live in only when it is on the verge of dissolution? Perhaps its passing shows up its certainties for the brief, shadowy arrangements that they are. Yet while it remains, it is life itself, the only possible way for human beings to be. No society is exempt from the cycle of ascent, momentary stability and decay, and this is as true in Britain of the industrial era as it was of a declining agrarian society in the 18th century.

In An Essay on the Principle of Population (1798), Thomas Malthus, echoing the French physiocrats, declared that manufacturing would never increase the wealth of the nation because food production was its primary economic purpose. The industrial worker “will have added nothing to the gross produce of the land: he has consumed a portion of this gross product, and has left a bit of lace in return; and though he may sell this bit of lace for three times the quantity of provisions he has consumed whilst he was making it . . . he cannot be considered as having added by his labour to any essential part of the riches of the state”.

Rarely can such predictions have been so swiftly disconfirmed. Industry was already sweeping up people in its compulsions, as Oliver Goldsmith had lamented of a wasting rural life in his poem “The Deserted Village” (1770): “Far, far away, thy children leave the land.” Industry effaced the sensibility of country people and remade it in the image of the rigid discipline of manufacturing, mining and mill. A new kind of human being came into existence: the industrial worker, whose disposition, mutinous and refractory, was observed by the rich with suspicion, as they could not assess its potential for disaffection and tumult. Little was known of the “alien” mentality of the people; as little, perhaps, as that revealed to an astonished establishment by the unanticipated result of the EU referendum.

No wonder the working class became a central preoccupation of governments, reformers and politicians. There was controversy from the beginning over the “true” temper of the worker, then predominantly male, engaged in the making of things, useful and necessary to the prosperity of Britain. Did the workers want a fairer share of the wealth of the country? Did they seek to overthrow the established order? What was simmering in their mysterious, impenetrable communities of poverty?

Researchers ventured into darkest England – to places frequently likened to sites of imperial conquest – and returned with lurid tales of squalor and discontent; at the same time, trade unions and friendly and burial societies were growing, the co-operative movement evolved, and eventually a Labour party emerged which at last appeared to be a definitive expression of the psyche of the working class.

Strengthened as the 20th century dawned, but weakened by war and the Depression, Labour gained new vigour after the defeat of Nazism. With the coming of peace in 1945, both the spread of communism and the dissolution of the European empires made it timely, just and prudent for ruling elites to make concessions to the working class. Hence the marriage of unequals between capitalism and welfare, which at the time promised to be a permanent settlement.

What was regarded as the enduring sensibility of the industrial worker was doomed to follow its agricultural predecessor. It, too, became fully defined only when close to disintegration. When E P Thompson published his splendid Making of the English Working Class in 1963, signs of its decomposition were already detectable. Similarly, The Uses of Literacy, Richard Hoggart’s tender depiction of working-class culture (first published 60 years ago this year), was based on his experiences as a child in the 1920s and 1930s. The historians Eric Hobsbawm and Raymond Williams also framed what looked like a definitive version of the ­working class even as workers from the Caribbean and south Asia, recruited for a waning textile industry and transport and health systems, were transforming it.

Similarly, the consolation that the gritty north was the true source of Britain’s wealth, in contrast to a soft, self-indulgent south, left a long afterglow; it persisted long after the factories had collapsed in clouds of brick dust and splinters of glass and the south, with its financial services and advanced technologies, had become the principal generator of wealth.

 

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Social class was always inflected by individual circumstances. There were other elements involved in the separation from my twin. Our mother’s husband was diagnosed with tertiary syphilis in 1939; at the time, this was curable only by prolonged treatment with injections of arsenic and mercury. Our mother, who looked after the butcher’s shop that we lived above, realised that there would be no children in the marriage. A strong and resourceful woman, she met an engineer working on a construction site near the butcher’s shop she ran while her husband drove his lorry, carrying timber, bricks and glass all over the Midlands. He also carried more tender cargoes, with whom he spent nights in the back of the truck under a tarpaulin intended to protect merchandise from the rain. From one of these cargoes he contracted the disease, the sibilant syllables of which struck terror into those touched by it, much as HIV/Aids was to do half a century later.

Our mother became pregnant with my brother and me. Perhaps it was a fear that the two men in her life might gang up on her that impelled her to keep me and my brother apart, distributing roles that would ensure we never learned truly to know one another, even though we lived in the same house, with its frozen atmosphere, numb with secrets, for the first 18 years of our lives. My brother was practical and good-looking, docile and sweet-tempered; I was clever and fat, demanding and devious. Our schooling played a secondary role, but it did succeed in driving us further apart. Class was only one element in the hidden geometry of kinship.

 

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Even in the 1950s, when the effect of ­prosperity on the working class was discussed in The Affluent Society by John Kenneth Galbraith and The Status Seekers by Vance Packard, it was difficult to sustain belief in the existence of a homogeneous class. In 1959, after three consecutive Conservative electoral victories, even the Daily Mirror doubted whether a Labour party had a future.

Writing In Pursuit of the English in 1960, Doris Lessing described her “search” for the working class as “a platonic image, a grail, a quintessence, and by definition, unattainable”. Having been assured in her native Southern Africa that black workers were “not working class in the true sense”, she came to Britain, where, after encounters with the Communist Party (“not typical”), miners and dockworkers (“very specialised” labour) and workers in a new town (“tainted by capitalism”), she was advised that the true working class could be discovered only somewhere like South Africa, where “the black masses are not yet corrupted by industrialism”.

The erosion of identity of the working class, as it existed between the mid-19th century and the end of the Second World War, went largely unrecognised by its defenders and representatives. It was certainly apparent in Blackburn in 1969, when, for my book City Close-Up, I recorded a torrent of racism and prejudice in working-class areas: this was the outrage of people who had never been consulted on the social and economic mutation of their world. Barbara Castle, the energetic and radical MP for the town, suggested I play down race, because “in a few years it will burn itself out”.

 

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Class itself was already in flux as a result of the unprecedented affluence of the time, and class consciousness was dissolving in the mild acid of consumerism. The differences between my twin and me appeared to be influenced by culture rather than class, because he was economically more successful than I was. This faltering of a sense of class was perhaps a symptom of the triumph of market-based relationships over those that are socially determined; and perceptions of the world had shifted in accordance with this reality.

 

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Distance grew between the way people actually were and an embalmed version of the working class which continued to animate the left. In 1977, I published What Went Wrong?, subtitled Working People and the Ideals of the Labour Movement. In the US the subtitle was presciently amended to Why Hasn’t Having More Made People Happier? – in that advanced country, ideals and the labour movement had become unintelligible concepts.

I interviewed hundreds of elderly Labour activists who, looking at a world changed beyond recognition, spoke of their younger selves with the sad detachment with which people usually speak of the dead; their tone bore the melancholy regret of In memoriam notices.

It was clear four decades ago that the northern industrial towns were “wanting in purpose, looking for the meaning they once derived from their role in producing goods”. In the 1970s the feeling was that immigrants from Asia had somehow usurped the people’s way of life: they lived in houses lately vacated by millworkers; they had a strong sense of family and neighbourhood, as well as powerful cultural and religious traditions – all characteristics supposed to “belong” to Lancashire.

During the economic restructuring in the 1980s, I compared (in my book Unemployment) the experience of being out of work in those days with that of the 1930s, with its poignant tales of officials from the ­Unemployment Assistance Board, sitting in the balcony at the Rialto Cinema to see who was in the stalls when they should have been pounding the pavement looking for work; or Means Test men compelling families to sell an upright piano or a wedding ring before they could receive a penny of state charity. In the 1930s, no one doubted work would return; in the 1980s, industrial work was vanishing.

It seemed the working class in Britain had attained quietus after the miners’ strike in 1984. High unemployment was said to be “frictional” as we moved between epochs, a “creative imbalance” that would one day make us all richer and happier, though not quite yet. The working class was eliminated from the very history that, in some versions of prophecy, was to have ensured its ultimate triumph. Had the working classes died and gone to a heaven shaped in the image of expropriated socialist utopias? Had they been drowned in prosperity or assimilated into an expanding middle class? Whatever their fate, they were no longer of any account in the version of society disseminated by the media. This was reinforced by the collapse of the USSR, and there ceased to be any interest in what might be happening to them. Their sometime heroic role had been unceremoniously annulled.

In the absence of the working class, the rich were transformed: employers no longer exploiters of labour, but philanthropic providers of work. Those amassing fortunes became authors of the doctrines of wealth creationism. The working class, far from the gravedigger of capitalism, was merely a transient irritant. The class reached its zenith, faltered and fell back; and the ­liberatory power once attributed to it was appropriated by the warriors of wealth, who assumed the mantle of destiny of those they had displaced.

The working class was fragmented and dispersed, like the migrants who now constituted such a significant segment of it. New generations grew, not as citizens of this or that town, with its place in a national division of labour, but as dependants of a global market. If “globalisation” is to the 21st century what industrialisation was to the 19th, its significance lies in its disarming of people, no longer able to answer basic needs in the places where they live, but compelled to buy in what they need from countries whose names are only a vague echo of forgotten geography lessons. As the market colonises society, we become subjects of a curiously dematerialising topography: Theresa May could not have expressed it better when she said that “if you believe you’re a citizen of the world, you’re a citizen of nowhere” – although this was not her ­intended meaning.

As the (welfare) state shrank, the market dilated, invasive and predatory. Our lives are so penetrated by its “values” that these now appear in our most intimate relationships – we speak of emotional investment and interrogate our deepest attachments, asking what returns we will get; should we cut our losses; what are our best assets; are we in the market for a new relationship; shall we take a gamble; what is to be gained out of profitless attachments; will it pay dividends; what will it yield? Just as “human nature” serves as a cover for the nature of capitalism, so society provides an alibi for market-induced disorders – obesity and pathologies around eating, unquiet addictions to alcohol, drugs, gambling, celebrity, sex, food; all facilitated by what money, in its own right the most addictive substance known to humanity, can buy.

No wonder this age is characterised by nostalgia for coherence and purpose. It focuses on the recent manufacturing era, even if this was shadowed by grim institutions of factory, chapel, pub, workhouse, cinema and cemetery and the oppression of women and children – just as the Industrial Age directed its yearnings towards a past of sunlit field and flower-filled hedgerow, despite the omnipresence then of overseer, magistrate, bailiff and parish pay-table.

 

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Despite a sense of continuous change, the wounds of social class continued to influence even those to whom it no longer appeared as a force in their lives. My twin brother paid for his early membership of the working class with his death 12 years ago from mesothelioma: his early construction work had exposed him to the baleful effects of asbestos.

 

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The disorientation is profound: demolition of the old workplaces also suppressed the way of life and sensibility that accompanied them. Progressives, no less alarmed by these developments than the reactionaries, applauded them, turning to the growing diversity and pluralism of the labour force. They welcomed the shifting composition of the working population, in which women, ethnic minorities and LGBT people were moulded into a fragile coalition for social progress. That such an alliance contained factions and some incompatible objectives (say, respect for same-sex relationships, at odds with many Muslims and evangelical black churches) was not its greatest failing. This lay in the elevation of social equalities over economic equality, which continued to get worse, even for most of those in the groups favoured by progressives. Moreover, “mobility” was interpreted as a one-way street; few considered the downwardly mobile, many of whom proudly acknowledged their working-class roots. Poverty, too, was redefined: no longer concerned with unanswered need, it was now measured against unattainable wealth.

 

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Personal relationships – which for most people are now more powerful than any sense of social influence – also help to conceal patterns of class and what in 1993 Richard Sennett called its “hidden injuries”. Our mother revealed to my brother and me the secret of our paternity only when both men were dead. This also exposed unsuspected inherited features: my brother had acquired from our biological father his love of restoring buildings, while I had the questionable gift of his radicalism. He had been a member of the Communist Party in the 1930s.

 

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The fluid nature of class complicates the re-emergence of a working class in its new, emancipatory alliance with the super-wealthy – Trump and the funders of Brexit. Its sudden resurrection is attended not by the solidarities of belonging, but by those of a graveyard ideology of hatreds thought to have been conquered. This is a gift to demagogues and “strongmen”, as it enables them to perceive once more the “true” nature of a class whose heart still beats to rhythms of imperial nostalgia and aggressive nationalism.

Perhaps, following the precedents of agrarian and industrial cultures, the cult of the market is finally being acknowledged, just as it, too, is on the point of eclipse. Beneath the chaos of a culture where even truth has become a kind of consumer choice, new patterns of resistance are forming: commitment to a more just distribution of the goods of the Earth and respect for a planet ransacked by an omnivorous market; a rejection of robotics displacing humanity; a rediscovery of our capacity to do and make things freely for ourselves and each other.

But the savage regressions of our time may be not just a momentary disturbance, any more than agrarian and industrial society were. The cycle may have to play itself out, in who knows what ugly and distressing scenes, before the time for remorse comes round once more; then, appalled by our destructiveness, we shall repeat the constantly broken resolution: Never Again.

The great Spanish humanist Juan Luis Vives, whose influence helped shape the Elizabethan poor law, wrote, in On Assistance to the Poor (1526): “. . . the poor are cast out of the churches and wander over the land; they do not receive the sacraments and they hear no sermons. We do not know by what law they live, nor what [are] their practices and beliefs.” After five centuries of upheaval and driven change, and in a radically altered context, his words still have a haunting, prophetic relevance.

Jeremy Seabrook’s most recent book is “The Song of the Shirt”, published in India by Navayana and in the UK by Hurst

This article first appeared in the 06 April 2017 issue of the New Statesman, Spring Double Issue

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