Crystal-Ball Capitalism

“There’s no point protesting against globalisation because globalisation is a process, not an ideology”. That was one of the more interesting establishment responses to protests against international summits (WTO Seattle etc.) In response, some groups have said that they are not anti globalisation but for “alternative globalisation” based on “fair trade” rather than “free trade”. Another response is to say that it is not globalisation but “neoliberalism” that is the problem: a combination of deregulation and privatisation which leads to power and wealth being transferred from governments to corporations. However, sticking the label “neoliberalism” on this process is not enough to explain its failures. In particular, it fails to specify how neoliberalism differs from the 19^th century laissez-faire approach, and how existing critiques of classical free-market economics should be adapted to the current situation.

One notable difference is the burgeoning of financial derivatives such as stock options and hedge funds. Most of these were originally designed to protect businesses against future market or exchange rate fluctuations over which they had no control. Yet they have since become a sort of global mega-casino in which vast sums of money - far more than needed for international trade in goods and services - are transferred electronically around the world each day. What these financial instruments have in common is a sort of guessing game in which financial experts try to predict the future.

Problems arise when this “crystal-ball capitalism” is seen to be more profitable than trade in real goods and services. Over-optimistic prediction of the future is another problem, as seen in the bursting of the dot.com bubble. It can also lead to “financial engineering” in which tinkering with a company’s figures is seen to be more profitable than traditional business expansion strategies. And there is only a thin line between “financial engineering” and fraud, as seen in scandals like Enron and WorldCom.

Privatisation in the crystal ball economy

One interesting aspect of “crystal-ball capitalism” is that in some circumstances it can destroy the claimed benefits of privatisation. A classic argument for privatising public services is that they can be carried out more efficiently and therefore more cheaply in the private sector. This often results in people losing their jobs, so that the government has to pay out more in unemployment benefits, wiping out the savings from cheaper services.

In the crystal-ball economy, there is another factor. A privatised company may need to use derivatives to hedge itself against exchange rate fluctuations or other external risks over which it has no control. Without this, it may fail to achieve the credit rating necessary for it to borrow money at favourable rates on financial markets. Governments, however, nearly always have stronger credit ratings, and their treasuries often already hold enough foreign currency reserves to avoid the need for hedging risks. This provides a financial incentive to keep public services in the public sector.

Neoliberals do not like this, so when a state-owned corporation makes use of the government’s good credit rating to obtain low-interest loans or avoid hedging, they claim that this is unfair competition for the private sector. If, in response, the state-owned corporation is forced to pay more interest to the government for its loans, this only serves to make public ownership of public services more attractive by generating more government revenue. This in turn discourages privatisation, achieving the opposite of what the neoliberals intended.

Short-circuiting globalisation and the crystal ball economy

When corporations encumber themselves with derivatives and “financial engineering”, one obvious response is to eliminate them. Richard Douthwaite, in his book “Short Circuit”, showed that small businesses producing locally to meet local needs can compete effectively against multinationals by cutting out items such as transport costs. They can also cut out the use of derivatives and “financial engineering” providing they can obtain access to credit on favourable terms.

However, recent trends in international banking legislation favour big business when it comes to access to credit. The new “Basel II” banking principles are likely to make things worse for small and medium-sized enterprises by forcing banks to introduce a more complex (and expensive) system of credit ratings. The danger is that banks will refuse to make loans to small businesses because it will cost too much to evaluate their creditworthiness.

One possible response might be to finance business expansion by using venture capital rather than loans. However, Basel II might in fact produce the opposite effect, making things harder for venture capital, according to the European Private Equity and Venture Capital Association.

Fortunately, some of the methods in Douthwaite’s book can be used to “short-circuit” the Basel II rules before they are fully introduced. For example, if businesses can obtain goods by bartering rather than cash payment, this could reduce the need to borrow money for working credit. Under the JAK system, businesses can obtain interest-free loans in return for receiving no interest on positive bank balances for an agreed period. Another option is social and ethical investment.