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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

Photo: Getty Images
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It's time for the government to think again about Hinkley Point

The government's new nuclear power station is a white elephant that we simply don't need.

Today I will welcome Denis Baupin, Vice President of the French Assembly, to Hinkley.

His own choice to come and visit the site of the proposed new nuclear power station reflects his strong desire to prevent the UK disappearing up a dangerous dark alley in terms of energy policy. It also takes place as France takes a totally different path, with the French government recently adopting a law which will reduce nuclear energy in the country.

Greens have opposed Hinkley ever since the government announced its nuclear strategy. Hinkley, with its state aid and an agreed strike price of £92.50 per megawatt, has always been financially and legally suspect but it is now reaching the level of farce. So much so that George Osborne is required to be economical with the truth in front of a House of Lords committee because he cannot find anything honest to say about why this is a good deal for the British people.

Mr Baupin and I will join hundreds of protestors – and a white elephant – to stand in solidarity against this terrible project. The demonstration is taking place under a banner of the triple risks of Hinkley. 

First, there are the safety and technological risks. It is clear that the Pressurised Water nuclear reactor (EPR) – the design proposed for Hinkley C – simply does not work. France’s nuclear safety watchdog has found multiple malfunctioning valves that could cause meltdown, in a similar scenario to the 1979 Three Mile Island nuclear accident in the US.  The steel reactor vessel, which houses the plant’s nuclear fuel and confines its radioactivity, was also found to have serious anomalies that increase the risk of it cracking. Apart from the obvious safety risks, the problems experienced by the EPR reactors being built at Flammanvile in France and Olkiluoto in Finland have pushed the projects years behind schedule.

Secondly, Hinkley poses risks to our energy security. Hinkley is supposed to produce 7% of the UK's energy. But we now know there will be no electricity from the new nuclear plant until at least 2023. This makes power blackouts over the next decade increasingly likely and the only way to avoid them is to rapidly invest in renewable energy, particularly onshore wind. Earlier this week Bloomberg produced a report showing that onshore wind is now the cheapest way to generate electricity in both the UK and Germany. But instead of supporting onshore wind this government is undermining it by attacking subsidies to renewables and destroying jobs in the sector. 

Thirdly, there is the risk of Chinese finance. In a globalised world we are expected to consider the option of allowing foreign companies and governments to control our essential infrastructure. But it is clear that in bequeathing our infrastructure we lose the political control that strengthens our security. The Chinese companies who will be part of the deal are part owned by the Chinese government and therefore controlled by the Chinese Communist Party. What a toppy-turvy world globalisation has created, where our Conservative British government is inviting the Chinese Communist party to control our energy infrastructure. It also seems that China National Nuclear Company is responsible for the manufacture of Chinese nuclear weapons.

Of course it is the Chinese people who suffer most, being at the hands of an oppressive government and uncontrolled companies which show little respect for employment rights or environmental standards. By offering money to such companies from British consumers through their energy bills our government is forcing us to collude in the low human rights and environmental standards seen in China.  

Research I commissioned earlier this year concluded we can transform the South West, not with nuclear, but with renewables. We can generate 100 per cent of our energy needs from renewables within the next 20-30 years and create 122,000 new quality jobs and boost the regional economy by over £4bn a year.

The white elephant of Hinkley looks increasingly shaky on its feet. Only the government’s deeply risky ideological crusade against renewables and in favour of nuclear keeps it standing. It’s time for it to fall and for communities in the South West to create in its place a renewable energy revolution, which will lead to our own Western Powerhouse. 

Molly Scott Cato is Green MEP for the southwest of England, elected in May 2014. She has published widely, particularly on issues related to green economics. Molly was formerly Professor of Strategy and Sustainability at the University of Roehampton.

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What Jeremy Corbyn can learn from Orwell

Corbyn’s ideas may echo George Orwell’s – but they’d need Orwell’s Britain to work. It’s time Corbyn accepted the British as they are today.

All Labour Party leaderships since 1900 have offered themselves as “new”, but Tony Blair’s succession in 1994 triggered a break with the past so ruthless that the Labour leadership virtually declared war on the party. Now it is party members’ turn and they, for now at any rate, think that real Labour is Jeremy.

To Keir Hardie, real Labour had been a trade union lobby expounding Fellowship. To the Webbs, real Labour was “common ownership” by the best means available. Sidney’s Clause Four (adopted 1918) left open what that might be. In the 1920s, the Christian Socialist R H Tawney stitched Equality into the banner, but during the Depression young intellectuals such as Evan Durbin and Hugh Gaitskell designated Planning as Labour’s modern mission. After the Second World War, Clement Attlee followed the miners (and the London Passenger Transport Board) into Nationalisation. Harold Wilson tried to inject Science and Technology into the mix but everything after that was an attempt to move Labour away from state-regulated markets and in the direction of market-regulated states.

What made the recent leadership contest so alarming was how broken was the intellectual tradition. None of the candidates made anything of a long history of thinking about the relationship between socialism and what the people want. Yvette Cooper wanted to go over the numbers; only they were the wrong numbers. Andy Burnham twisted and turned. Liz Kendall based her bid on two words: “Have me.” Only Jeremy Corbyn seemed to have any kind of Labour narrative to tell and, of course, ever the ­rebel, he was not responsible for any of it. His conference address in Brighton was little more than the notes of a street-corner campaigner to a small crowd.

Given the paucity of thinking, and this being an English party for now, it is only a matter of time before George Orwell is brought in to see how Jeremy measures up. In fact, it’s happened already. Rafael Behr in the Guardian and Nick Cohen in the Spectator both see him as the kind of hard-left intellectual Orwell dreaded, while Charles Cooke in the National Review and Jason Cowley in the New Statesman joined unlikely fashion forces to take a side-look at Jeremy’s dreadful dress sense – to Orwell, a sure sign of a socialist. Cooke thought he looked like a “burned-out geography teacher at a third-rate comprehensive”. Cowley thought he looked like a red-brick university sociology lecturer circa 1978. Fair enough. He does. But there is more. Being a middle-class teetotal vegetarian bicycling socialistic feministic atheistic metropolitan anti-racist republican nice guy, with allotment and “squashily pacifist” leanings to match, clearly puts him in the land of the cranks as described by Orwell in The Road to Wigan Pier (1937) – one of “that dreary tribe of high-minded women and sandal-wearers and bearded fruit-juice drinkers who come flocking towards the smell of ‘progress’ like bluebottles to a dead cat”. And though Corbyn, as “a fully fledged, fully bearded, unabashed socialist” (Huffington Post), might make all true Orwellians twitch, he really made their day when he refused to sing the National Anthem. Orwell cited precisely that (see “The Lion and the Unicorn”, 1941) as an example of the distance between left-wing intellectuals and the people. It seemed that, by standing there, mouth shut, Comrade Corbyn didn’t just cut his wrists, he lay down full length in the coffin and pulled the lid shut.


Trouble is, this line of attack not only misrepresents the Labour leader, it misrepresents Orwell. For the great man was not as unflinchingly straight and true as some people think. It is impossible, for instance, to think of Orwell singing “God Save the King”, because he, too, was one of that “dreary tribe” of London lefties, and even when he joined Labour he remained ever the rebel. As for Corbyn, for a start, he is not badly dressed. He just doesn’t look like Chuka or Tristram. He may look like a threadbare schoolteacher, but Orwell was one twice over. Orwell was never a vegetarian or a teetotaller, but, like Corbyn, neither was he interested in fancy food (or drink), he kept an allotment, drove a motorbike, bicycled, cared about the poor, cared about the environment, loathed the empire, came close to pacifism at one point, and opposed war with Germany well past the time when it was reasonable to do so.

In Orwell’s thinking about socialism, for too long his main reference point was the London Marxist left. Not only did he make speeches in favour of revolutions, he took part in one with a gun in his hand. Orwell was far more interested, as Corbyn has been far more interested, in speaking truth to power than in holding office. His loyalty was to the movement, or at least the idea of the movement, not to MPs or the front bench, which he rarely mentioned. There is nothing in Corbyn’s position that would have shocked Orwell and, should they have met, there’d have been much to talk about: belief in public ownership and non-economic values, confidence in the state’s ability to make life better, progressive taxation, national health, state education, social care, anti-socially useless banking, anti-colonialism and a whole lot of other anti-isms besides. It’s hard to be sure what Orwell’s position would have been on Trident and immigration. Not Corbyn’s, I suspect. He was not as alert to feminism as he might have been but equally, few men try to write novels from a woman’s point of view and all Orwellians recognise that Julia is the dark hero of Nineteen Eighty-Four. In truth they are both austere types, not in it for themselves and not on anyone else’s expense account either. Corbyn won the leadership because this shone through from the very beginning. He came across as unaffected and straightforward – much as Orwell tried to be in his writing.

Except, as powerfully expressed in these pages by John Gray, Corbyn’s politics were made for another world. What sort of world would he need? First off, he’d need a regulated labour market: regulated by the state in partnership with a labour movement sensitive to what people wanted and experienced in trying to provide it. He would also need capital controls, a manufacturing base capable of building the new investment with Keynesian payback, an efficient and motivated Inland Revenue, a widespread public-service ethos that sees the country as an asset, not a market, and an overwhelming democratic mandate to get things done. In other words, Corbyn needs Orwell’s Britain – not this one – and at the very least, if he can’t have that, he needs the freedom to act that the European Commission forbids.

There’s another problem. Orwell did not trust left-wing intellectuals and spent half his life trying to work out their motivations as a class who spoke for the people, went in search of the people, and praised the people, but did not know them or believe in them. True, Corbyn says he wants to be open and inclusive, but we know he can’t possibly mean it when he says it will be the party, not him or the PLP, that will decide policy, just as we knew it couldn’t possibly be true when he said he’d turn PMQs into the People’s Question Time. Jeremy hasn’t changed his mind in forty years, appears to have great difficulty (unlike Tony Benn) in fusing socialism to national identity or experience (Hardie, Ben Okri and Maya Angelou were bolted on to his Brighton speech) and seems to think that not being happy with what you are given somehow captures the historic essence of socialism (rather than its opposite).

Granted, not thinking outside the ­circle is an inherent fault of the sectarian left but some of our most prominent left-wing journalists have it, too. Working-class support for nationalisation? Good. Right answer! Working-class opposition to benefit scroungers and further mass immigration? Bad. Wrong answer! Would you like to try again? In his essay “In Defence of Comrade Zilliacus” (1947) Orwell reckoned that left-wing intellectuals saw only what they wanted to see. For all their talk of representing the people, they hated the masses. “What they are frightened of is the prevailing opinion within their own group . . . there is always an orthodoxy, a parrot-cry . . .”

The game is hard and he may go down in a welter of knives, yet Corbyn still has time. He may go on making the same speech – on the benefits of apple pie to apple growers – but at some point he will have to drop the wish-list and get on the side of the British people as they are, and live with that, and build into it. Only the nation state can even begin to do the things he wants to do. The quicker he gets that, the quicker we can see if the latest incarnation of new Labour has a future.

Robert Colls is the author of “George Orwell: English Rebel” (Oxford University Press)

This article first appeared in the 08 October 2015 issue of the New Statesman, Putin vs Isis