The great dividing line in economics – ever since its birth – is how to think about money. Are money and the financial systems through which it flows essentially irrelevant, no more than lubricants of the real economic business of producing and distributing goods and services? Or do they instead change everything?
The great crime of the rise of free market economics is that it took the first view. Free up markets for goods, services, labour, land and property, argued the self-styled economic counter-revolutionaries, reduce or eliminate the role of the state, and capitalist economies will self-ignite. The same goes for finance: remove any regulation that gets in the way of a free market for money and credit, and similar wonders will be worked for banks. The only worry about money is that the state prints it, and states are not to be trusted. Control the supply of money, and let the market do the rest.
Today, apart from a handful of economic zealots who support Brexit, almost no economist takes that view. Whether you are on the right or left of the debate, it is clear that today’s financial systems, far from being neutral economic lubricants, transform the performance of economies for the worse. Deregulate them at your peril. Contemporary capitalism generates too much credit and debt; financial crashes have become endemic and destabilising; and many of the ills that disfigure our economies and societies – notably inequality, crazy house prices and stagnating wages – result. There needs to be change. The question is not whether this is the case but what to do.
“Neoliberalism and Chinese communism, even among its modernisers, are alien bedfellows”
Paper Dragons is a book written very much in this vein, suggesting with its subtitle – China and the Next Crash – that the financialisation virus is now so far advanced that it is undermining China. I read it eagerly, hoping that Walden Bello – one of the leading figures of the anti-globalisation movement – would unmask how China’s financial system is running amok, and how its connections to world finance could potentially trigger the next crash. I was sorely disappointed. Bello may passionately share the general concern about the threat of deregulated global finance, but he knows next to nothing about China. In fact this is a serious case of literary mis-selling. In a book of more than 300 pages, I counted only one section of 14 devoted to China – and even that is confused and under-researched. Compared with Adam Tooze’s magisterial Crashed or Adair Turner’s Between Debt and the Devil – both in the same territory and neither of which Bello cites – this is thin gruel.
The problem, common to an influential section of the left, is that Bello thinks in slogans. His anger is admirable, but it is not enough to describe economic and social phenomena as “neoliberal” and regard the label as completing the diagnosis. Rather, it gets in the way of really understanding what is happening.
The debate in the Chinese communist leadership is not between neoliberals and a spectrum of true, however misguided, socialists. Neoliberalism and Chinese communism, even among its modernisers, are alien bedfellows. The emergent financial crisis in China is not because it gave way to a variant of neoliberalism. The issue is much more fundamental. From the revolution in 1949 right through to today, the communist leadership has used China’s state-owned banks to direct credit to domestic enterprises and regions to achieve political ends. Because the regime dare not increase tax for the general population for fear of social unrest (given its lack of legitimacy), spending objectives are achieved through bank loans – so that total bank debt is approaching three times GDP. Very few loans are repaid: interest is only paid on half of them. In western terms, they are non-performing. If the bad debts were ever crystallised, the resulting losses would overwhelm the banks – and the scale of the necessary recapitalisation of the banks to put them back on their feet would overwhelm the state. Chinese communism would collapse under its own contradictions, and the consequent continental economic calamity would have global consequences.
Bello gets near little of this. Of course some in the leadership want to clean up the banks’ balance sheets before the crisis hits, and by quoting them on the Hong Kong stock exchange start the long and painful business of recapitalising via whatever source. Others are more conservative. But this is not a debate within the parameters of neoliberalism, as Bello tries to characterise it. This is about hard-headed realpolitik and regime survival – about how to escape from 70 years of using the banks as surrogates for public spending.
Bello at least points to the emergence of a fast-growing shadow banking system, and China’s real estate bubble – but even here he tries to box the credit creation process into his neoliberal labels. It is not neoliberal capitalism as such that incentivises making money from money: it is how easy it is to create credit in any banking system, socialist or capitalist, in which banks are allowed to operate with only tiny amounts of their own capital. “Fractional reserve banking” in any economic order, unless tightly regulated, has a proclivity to create excess credit, which then spills over into rising asset prices in general, and house prices in particular. China has had to allow a shadow banking system to emerge to cater for the demand for mortgage credit because its stricken state-owned banks just can’t do the job. Yes, it is running out of control. But once again it is not neoliberalism to blame but the political economy of China.
Bello’s larger point, of course, stands. It was neoliberalism that argued that money is no more than an economic lubricant, with disastrous consequences for the western banking system. But everyone knows that – even rightwing central bankers. The potential insight would have been in revealing the dynamics of Chinese finance: its instability and fragility, and how a potential crash is being hastened by Trump’s trade war. That task will fall to someone else. It’s a wasted opportunity. The left needs to abandon sloganising and start thinking.
Will Hutton is Principal of Hertford College, Oxford, an Observer columnist and co-author, with Andrew Adonis, of Saving Britain (Abacus)
• Paper Dragons: China and the Next Crash by Walden Bello is published by Zed (£18.99). To order a copy go to guardianbookshop.com or call 0330 333 6846. Free UK p&p over £15, online orders only. Phone orders min p&p of £1.99
Will Hutton
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