The development of open-source software and blockchain technology has enabled people to ‘hack’ capitalism – to present and provide alternatives to traditional modes of production, consumption and exchange. This has enabled more effective markets in second-hand products, new environmentally-friendly technologies and by-products that otherwise would have been negative externalities. Cryptocurrencies are increasingly providing the medium of exchange in such markets.
In a BBC podcast, Hacking Capitalism, Leo Johnson, head of PwC’s Disruption Practice and younger brother of Boris Johnson, argues that various changes to the way capitalism operates can make it much more effective in improving the lives of everyone, including those left behind in the current world. The changes can help address the failings of capitalism, such as climate change, environmental destruction, poverty and inequality, corruption, a reinforcement of economic and political power and the lack of general access to capital. And these changes are already taking place around the world and could lead to a new ‘golden age’ for capitalism.
The changes are built on new attitudes and new technologies. New attitudes include regarding nature and the land as living resources that need respect. This would involve moving away from monocultures and deforestation and, with appropriate technologies (old and new), could lead to greater output, greater equality within agriculture and increased carbon absorption. The podcast gives examples from the developing and developed world of successful moves towards smaller-scale and more diversified agriculture that are much more sustainable. The rise in farmers’ markets provides an important mechanism to drive both demand and supply.
In the current model of capitalism there are many barriers to prevent the poor from benefiting from the system. As the podcast states, there are some 2 billion people across the world with no access to finance, 2.6 billion without access to sanitation, 1.2 billion without access to power – a set of barriers that stops capitalism from unlocking the skills and productivity of the many.
These problems were made worse by the response to the financial crisis of 2007–8, when governments chose to save the existing model of capitalism by propping up financial markets through quantitative easing, which massively inflated asset prices and aggravated the problem of inequality. They missed the opportunity of creating money to invest in alternative technologies and infrastructure.
New technology is the key to developing this new fairer, more sustainable model of capitalism. Such technologies could be developed (and are being in many cases) by co-operative, open-source methods. Many people, through these methods, could contribute to the development of products and their adaptation to meet different needs. The barriers of intellectual property rights are by-passed.
New technologies that allow easy rental or sharing of equipment (such as tractors) by poor farmers can transform lives and massively increase productivity. So too can the development of cryptocurrencies to allow access to finance for small farmers and businesses. This is particularly important in countries where access to traditional finance is restricted and/or where the currency is not stable with high inflation rates.
Blockchain technology can also help to drive second-hand markets by providing greater transparency and thereby cut waste. Manufacturers could take a stake in such markets through a process of certification or transfer.
A final hack is one that can directly tackle the problem of externalities – one of the greatest weaknesses of conventional capitalism. New technologies can support ways of rewarding people for reducing external costs, such as paying indigenous people for protecting the land or forests. Carbon markets have been developed in recent years. Perhaps the best example is the European Emissions Trading Scheme (EMS). But so far they have been developed in isolation. If the revenues generated could go directly to those involved in environmental protection, this would help further to internalise the externalities. The podcasts gives an example of a technology used in the Amazon to identify the environmental benefits of protecting rain forests that can then be used to allow reliable payments to the indigenous people though blockchain currencies.
Podcast
Questions
- What are the main reasons why capitalism has led to such great inequality?
- What do you understand by ‘hacking’ capitalism?
- How is open-source software relevant to the development of technology that can have broad benefits across society?
- Does the current model of capitalism encourage a self-centred approach to life?
- How might blockchain technology help in the development of a more inclusive and fairer form of capitalism?
- How might farmers’ co-operatives encourage rural development?
- What are the political obstacles to the developments considered in the podcast?
In a series of five podcasts, broadcast on BBC Radio 4 in the first week of January 2021, Amol Rajan and guests examine different aspects of inequality and consider the concept of fairness.
As the notes to the programme state:
The pandemic brought renewed focus on how we value those who have kept shelves stacked, transport running and the old and sick cared for. So is now the time to bring about a fundamental shift in how our society and economy work?
The first podcast, linked below, examines the distribution of wealth in the UK and how it has changed over time. It looks at how rising property and share prices and a lightly taxed inheritance system have widened inequality of wealth.
It also examines rising inequality of incomes, a problem made worse by rising wealth inequality, the move to zero-hour contracts, gig working and short-term contracts, the lack of social mobility, austerity following the financial crisis of 2007–9 and the lockdowns and restrictions to contain the coronavirus pandemic, with layoffs, people put on furlough and more and more having to turn to food banks.
Is this rising inequality fair? Should fairness be considered entirely in monetary terms, or should it be considered more broadly in social terms? These are issues discussed by the guests. They also look at what policies can be pursued. If the pay of health and care workers, for example, don’t reflect their value to our society, what can be done to increase their pay? If wealth is very unequally distributed, should it be redistributed and how?
The questions below are based directly on the issues covered in the podcast in the order they are discussed.
Podcast
Questions
- In what ways has Covid-19 been the great ‘unequaliser’?
- What scarring/hysteresis effects are there likely to be from the pandemic?
- To what extent is it true that ‘the more your job benefits other people, the less you get paid’?
- How has the pandemic affected inter-generational inequality?
- How have changes in house prices skewed wealth in the UK over the past decade?
- How have changes in the pension system contributed to inter-generational inequality?
- How has quantitative easing affected the distribution of wealth?
- Why is care work so poorly paid and how can the problem be addressed?
- How desirable is the pursuit of wealth?
- How would you set about defining ‘fairness’?
- Is a mix of taxation and benefits the best means of tackling economic unfairness?
- How would you set about deciding an optimum rate of inheritance tax?
- How do you account for the growth of in-work poverty?
- In what ways could wealth be taxed? What are the advantages and disadvantages of such taxes?
Each year the BBC hosts the Reith Lectures – a series of talks given by an eminent person in their field. This year’s lecturer is Mark Carney, former Governor of the Bank of England. His series of four weekly lectures began on 2 December 2020. Their topic is ‘How we get what we value’. As the BBC site states, the lectures:
chart how we have come to esteem financial value over human value and how we have gone from market economies to market societies. He argues that this has contributed to a trio of crises: of credit, Covid and climate. And the former Bank of England governor will outline how we can turn this around.
In lectures 2, 3 and 4, he looks at three crises and how they have shaped and are shaping what we value. The crises are the financial crisis of 2007–9, the coronavirus pandemic and the climate crisis. They have challenged how we value money, health and the environment respectively and, more broadly, have prompted people to question what is valuable for individuals and society, both today and into the future.
The questions posed by Carney are how can we establish what is valuable to individuals and society, how well are such values met by economies and how can mechanisms be improved to ensure that we make the best use of resources in meeting those values.
Value and the market
In the first lecture he probes the concept of value. He explores how economists and philosophers have tried to value the goods, services and human interactions that we desire.
First there is ‘objective value’ propounded by classical economists, such as Adam smith, David Ricardo and Karl Marx. Here the value of goods and services depends on the amount of resources used to make them and fundamentally on the amount of labour. In other words, value is a supply-side concept.
This he contrasts with ‘subjective value’. Here the value of goods and services depends on how well they satisfy wants – how much utility they give the consumer. For these neoclassical economists, value is in the eye of the beholder; it is a demand-side concept.
The two are reconciled in the market, with market prices reflecting the balance of demand and supply. Market prices provided a solution to the famous diamonds/water paradox (see Box 4.2 in Economics (10th edition) or Case Study 4.3 in Essentials of Economics (8th edition) – the paradox of ‘why water, which is essential for life, is virtually free, but diamonds, which have limited utility beyond their beauty, are so expensive.’ The answer is to do with scarcity and marginal utility. Because diamonds are rare, the marginal utility is high, even though the total utility is low. 
And because water is abundant, even though its total utility is high, for most people its marginal utility is low. In other words, the value at the margin depends on the balance of demand and supply. Diamonds are much scarcer than water.
But is the market balance the right balance? Are the values implied by the market the same as those of society? ‘Why do financial markets rate Amazon as one of the world’s most valuable companies, but the value of the vast region of the Amazon appears on no ledger until it’s stripped of its foliage and converted into farmland?’ – another paradox highlighted by Carney.
It has long been recognised that markets fail in a number of ways. They are not perfect, with large firms able to make supernormal profits by charging more and producing less, and consumers often being ill-informed and behaving impulsively or being swayed by clever marketing. And many valuable things that we experience, such as human interaction and the beauty of nature, are not bought and sold and thus do not appear in measures of GDP – one of the main ways of valuing a country.
What is more, many of things that are produced in the market have side-effects which are not reflected in prices. These externalities, whether good or bad, can be substantial: for example, the global warming caused by CO2 emissions from industry, transport and electricity production from fossil fuels.
And markets reflect people’s biases towards the present and hence lead to too little investment for the future, whether in healthcare, the environment or physical and social infrastructure. Markets reflect the scant regard many give to the damage we might be doing to the lives of future generations.
What is particularly corrosive, according to Carney, is the
drift from moral to market sentiments. …Increasingly, the value of something, some act or someone is equated with its monetary value, a monetary value that is determined by the market. The logic of buying and selling no longer applies only to material goods, but increasingly it governs the whole of life from the allocation of healthcare, education, public safety and environmental protection. …Market value is taken to represent intrinsic value, and if a good or activity is not in the market, it is not valued.
The drift from moral to market sentiments accelerated in the Thatcher/Regan era, when governments were portrayed as inefficient allocators, which stifled competition, innovation and the movement of capital. Deregulation and privatisation were the order of the day. This, according to Carney, ‘unleashed a new dynamism’ and ‘with the fall of communism at the end of the 1980s, the spread of the market grew unchecked.’
But this drift failed to recognise market failures. It has taken three crises, the financial crisis, Covid and the climate crisis to bring these failures to the top of the public agenda. They are examined in the other three lectures.
The Reith Lectures
Questions
- Distinguish between objective and subjective value.
- If your income rises, will you necessarily be happier? Explain.
- How is the concept of diminishing marginal utility of income relevant to explaining why ‘A Christmas bonus of £1000 means less to Mark Zuckerberg then £500 does to someone on a minimum wage.’
- Does the use of social cost–benefit analysis enable us to use adjusted prices as a measure of value?
- Listen to lectures 2, 3 and 4 and provide a 500-word summary of each.
- Assess the arguments Mark Carney uses in one of these three lectures.
Since the financial crisis of 2008–9, the UK has experienced the lowest growth in productivity for the past 250 years. This is the conclusion of a recent paper published in the National Institute Economics Review. Titled, Is the UK Productivity Slowdown Unprecedented, the authors, Nicholas Crafts of the University of Sussex and Terence C Mills of Loughborough University, argue that ‘the current productivity slowdown has resulted in productivity being 19.7 per cent below the pre-2008 trend path in 2018. This is nearly double the previous worst productivity shortfall ten years after the start of a downturn.’
According to ONS figures, productivity (output per hour worked) peaked in 2007 Q4. It did not regain this level until 2011 Q1 and by 2019 Q3 was still only 2.4% above the 2007 Q4 level. This represents an average annual growth rate over the period of just 0.28%. By contrast, the average annual growth rate of productivity for the 35 years prior to 2007 was 2.30%.
The chart illustrates this and shows the productivity gap, which is the amount by which output per hour is below trend output per hour from 1971 to 2007. By 2019 Q3 this gap was 27.5%. (Click here for a PowerPoint of the chart.) Clearly, this lack of growth in productivity over the past 12 years has severe implications for living standards. Labour productivity is a key determinant of potential GDP, which, in turn, is the major limiter of actual GDP.
Crafts and Mills explore the reasons for this dramatic slowdown in productivity. They identify three primary reasons.
The first is a slowdown in the impact of developments in ICT on productivity. The office and production revolutions that developments in computing and its uses had brought about have now become universal. New developments in ICT are now largely in terms of greater speed of computing and greater sophistication of software. Perhaps with an acceleration in the development of artificial intelligence and robotics, productivity growth may well increase in the relatively near future (see third article below).
The second cause is the prolonged impact of the banking crisis, with banks more cautious about lending and firms more cautious about borrowing for investment. What is more, the decline in investment directly impacts on potential output, and layoffs or restructuring can leave people with redundant skills. There is a hysteresis effect.
The third cause identified by Crafts and Mills is Brexit. Brexit and the uncertainty surrounding it has resulted in a decline in investment and ‘a diversion of top-management time towards Brexit planning and a relative shrinking of highly-productive exporters compared with less productive domestically orientated firms’.
Articles
Paper
Questions
- How suitable is output (GDP) per hour as a measure of labour productivity?
- Compare this measure of productivity with other measures.
- According to Crafts and Mills, what is the size of the impact of each of their three explanations of the productivity slowdown?
- Would you expect the growth in productivity to return to pre-2007 levels over the coming years? Explain.
- Explain the underlying model for obtaining trend productivity growth rates used by Crafts and Mills.
- Explain and comment on each of the six figures in the Crafts and Mills paper.
- What policies should the government adopt to increase productivity growth?
The monetary policy mandates of central banks have an impact on all our lives. While the terminology might not be familiar to many outside economics, their impact is, however, undeniably important. This is because they set out the objectives for the operation of monetary policy. Adjustments to interest rates or the growth of the money supply, which affect us all, reflect the mandate given to the central bank.
Since 1977 the mandate given to the Federal Reserve (the US central bank) by Congress has been to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. This mandate has become known as the dual mandate because it emphasises both employment and stable prices. Since 2012, the Federal Reserve’s Open Market Committee has issued an annual statemenent of its long-run goals. The latest was published in January 2019. Since this time, the Federal Reserve has explicitly set the ‘longer-run goal for inflation’ at 2 per cent. It has also emphasised that it would be ‘concerned’ if the inflation rate was persistently above or below this level.
In November 2018 the Federal Reserve began a review of its monetary policy strategy, its tools and how it communicates monetary policy. The review is being conducted within the guidelines that its statutory mandate gives and as well as the longer-term inflation goal of 2 per cent. However, one of the issues being addressed by the review is how the operation of monetary policy can avoid the rate of inflation frequently undershooting 2 per cent, as it has done since the financial crisis of the late 2000s and the introduction of the 2 per cent inflation rate target.
Chart 1 shows the annual rate of consumer price inflation in the US since 1998. It helps to illustrate the concern that low inflation rates can become entrenched. The chart shows that, while the average inflation rate from 1998 to 2008 was 2.7 per cent, from 2009 the average has been only 1.6 per cent. Interestingly, the average since 2012, when the explicit 2 per cent goal was introduced, to the present day is also 1.6 per cent. (Click here to download the PowerPoint chart.)
The concern going forward is that the natural or neutral rate of interest, which is the policy rate at which the rate of inflation is close to its target level and the level of output is close to its potential level, is now lower than in the recent past. Hence, when the next downturn occurs there is likely to be less room for cutting interest rates. Hence, the review is looking, in essence, to future-proof the conduct of monetary policy.
Chart 2 shows the Federal Fund rate since 1998. This is the rate at which commercial banks lend to each other the reserve balances they hold at the Federal Reserve in order to meet their reserve requirements. The Federal Reserve can affect this rate through buying or selling government securities. If it wants to drive up rates, it can sell holdings of government securities and reduce the money supply. If it wants to drive rates down, it can buy government securities and increase the money supply. The effects then ripple through to other interest rates and, in turn, aggregate demand and inflation. (Click here to download a copy of the PowerPoint chart.)
We can see from Chart 2 the dramatic cuts made by the Federal Reserve to interest rates as the financial crisis unfolded. The subsequent ‘normalisation’ of the Federal Funds rate in the 2010s saw the Federal Funds Rate rise to no higher than between 2.25 and 2.5 per cent. Then in 2019 the Federal Reserve began to cut rates again. This was despite historically-low unemployment rates. In November 2019 the unemployment rate fell to 3.5 per cent, its lowest since 1969. This has helped fuel the argument among some economists and financiers, which we saw earlier, that that the natural (or neutral) interest rate is now lower.
If the natural rate is lower, then this raises concerns about the effectiveness of monetary policy in future economic downturns. In this context, the review is considering ways in which the operation of monetary policy would be able to prevent the rate of inflation consistently undershooting its target. This includes a discussion of how the Fed can prevent inflationary expectations becoming anchored below 2 per cent. This is important because, should they do so, they help to anchor the actual rate of inflation below 2 per cent. One possibility being considered is an inflation make-up strategy. In other words, a period of below-target inflation rates would need to be matched by a period where inflation rates could exceed the 2 per cent target in order that the long-term average of 2 per cent is met.
An inflation make-up policy would work like forward guidance in that people and markets would know know that short-term interest rates would be kept lower for longer. This would then help to force longer-term interest rates lower as well as providing people and businesses with greater certainty that interest rates will be lower for longer. This could help to encourage spending, raise economic growth and prevent inflation from overshooting its target for any extensive period of time.
An inflation make-up strategy would, in part, help to cement the idea that the inflation target is effectively symmetrical and that 2 per cent is not an upper limit for the inflation rate. But, it would do more than that: it would allow the Fed to deliberately exceed the 2 per cent target.
An inflation make-up strategy does raise issues. For example, how would the Fed determine the magnitude of any inflation make-up and for how long would a looser monetary stance be allowed to operate? In other words, would an inflation make-up strategy be determined by a specific rule or formula? Or, would the principle be applied flexibly? Finally, could a simpler alternative be to raise the target rate itself, given the tendency to undershoot the 2 per cent target rate? If so, what should that the rate be?
We should know by the end of 2020 whether the Federal Reserve will adopt, when necessary, an inflation make-up monetary policy.
Articles
Questions
- What do you understand by the monetary policy mandate of a central bank?
- Explain the ways in which the monetary policy mandate of the central bank affects our everyday lives.
- Why are inflation-rate expectations important in determining actual inflation rates?
- Why is the Federal Reserve concerned about its ability to use monetary policy effectively during future economic downturns?
- Discuss the economic arguments for and against central banks operating strict inflation-rate targets.
- Does the case for adopting an inflation make-up monetary policy mandate show that the argument for inflation-rate targeting has been lost?
- What do you understand by the idea of a natural or neutral policy interest rate? Would the actual rate be expected to be above or below this if the rate of inflation was below its target level?
Hacking capitalism