The Viable Economy serialised – About investment, money, credit and debt.

We continue the serialisation of our intervention, The Viable Economy, this time with just one section, on investment, money, credit and debt. You can download the whole pamphlet as a pdf file, here.
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7) About investment, money, credit and debt.

The problem

Investment is crucial to the way economies develop over time; we invest funds today in order to build up the sources of future prosperity.

The way in which investment functions, to which enterprises it goes and what activities it supports, determines the type of economy we will have.

Currently, dominant thinking about investment neither reflects the realities of the money system nor the use of the surplus produced by the economy. This has some practical consequences.

1) In order to attract external investment into both the national and regional economies: whilst wages are driven down ‘to compete with cheap labour economies’, there is an effort to increase the skills of the workforce. The first contributes to declining real incomes and thereby to the increase in personal debt while the second instrumentalises and narrows education so it solely serves economic interests, thereby destroying it.

2) Meanwhile, the real, productive economy is unattractive to investors, and profits are misdirected to speculative, unproductive activities such as betting on the financial markets or property price inflation both in the UK and internationally.

3) And both government and the banks ignore the potential that the creation of money (“out of thin air”) has for sourcing investment in socially and ecologically desirable programmes that could also, if properly controlled, maintain prosperity in a post-growth economy. Indeed, “Modern Money Theory”, which we draw on here, suggests that austerity is unnecessary1.

Investment in the unviable economy, then, is a process which fails to address the costs we are imposing on the future and thus undermines future prosperity rather than nurturing it. The unviable financial investment infrastructure is a de-personalised system of profit maximization which results overwhelmingly in the transfer of wealth to financiers and the wealthy through the uneconomic processes of rent extraction and ecological asset liquidation. It fails on the three criteria of economic, social and ecological viability.

The viable alternative

In the viable economy, investment comes predominantly from the following internal or endogenous2 sources:

  • surplus generated in non-exploitative ways by the local economy, including savings

  • fiat money created by public and private banks, under strict rules and regulation3

  • government-created money, as in the proposals from the New Green Deal Group for strategic, or “green quantitative easing”4. Although our view is that this needs to be within the “envelope” of the permissible size of economy dictated by ecological reality.

  • a share of the profits of industries operating in the economy, that rather than seeping out is, by agreement, utilised locally as what colleagues at CRESC call the ‘social franchise’5, a pay-back to the community that hosts and pays for the enterprise.

  • Tax revenues, or related funding streams, such as that envisaged under the ‘cap and share’ proposals6.

The viable economy will require financial intermediaries for savings and investments which do not starve communities of the affordable finance they need to invest in their futures. The monolithic and brittle ‘too big to fail’ banking system needs to be radically diversified for a resilient and viable economy. Public municipal banks with a regional remit to support their areas can help direct investment towards the basis of social and ecological prosperity.

In an ecologically viable economy returns to investors must be more modest and the cost of credit fair and reasonable.

Some viable policy ideas

  • Greater diversity in the banking system with an emphasis on locally responsive and responsible institutions that provide local vehicles for savings and investment.

  • Adoption of the principle of endogenous development to guide investment seeking and decisions.

  • Public investment in the local economy and in energy transition.

  • Private firms to be ‘called in’ to negotiate social franchise deals as a condition for favourable environment for their operations locally.

  • Attraction of foreign investment should not trump local interests.

  • The development of local currencies such as energy-backed currency as part and parcel of the ‘plugging the leaks’ and endogenous investment strategies.

  • Campaign for revenue raising powers for local/regional government.

1e.g. Cato, M. S. (2014). Can’t Pay, Won’t Pay: Debt, the Myth of Austerity and the Failure of Green Investment. In J. Blewitt & R. Cunningham (Eds.), “The Post-Growth Project: How the End of Economic Growth Could Bring a Fairer and Happier Society.” London: London Publishing Partnership. http://bit.ly/1B0dIb4 and Guinan, J. (2014). Modern money and the escape from austerity. Renewal, 22(3-4), 6–21. http://bit.ly/1xGKVm5 . While such creation of money could lead to other problems such as inflation, there are other levers available to government to manage that risk. See Lawn, P. (2010). Facilitating the transition to a steady-state economy: Some macroeconomic fundamentals. Ecological Economics, 69(5), 931–936. doi:10.1016/j.ecolecon.2009.12.013

  • 3The control over the creation of fiat (bank-created) money is essentially a public utility with a transformative potential. It could be a powerful tool in the transition to an ecologically viable economy. Some campaigners and commentators (e.g. Positive Money) suggest that private banks should be required to hold full reserves i.e. lend on the basis of deposits only, and the central bank can control the money supply directly, printing new money and granting it to public revenue for the elected government to spend in accordance with democratically elected priorities, that is social use value. We are agnostic on this idea, which has been criticised as not reflecting the reality of bank-money since its inception, unlikely to be implemented and potentially stifling of the stimulus needed for necessary investment for social and ecological benefit.

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