Relaunching Western Economies: The Case for Regulating Financial Markets

Will Hutton

From Foreign Affairs, November/December 1996

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Summary:  So long as international financiers can demand high interest rates, unemployment and inequality will rise, fiscal policy will remain shackled, and protectionist pressure will grow. Dethroning finance is essential for rekindling growth.

Will Hutton is Editor of The Observer and author of The State We're In.

Across all classes and in all countries in the West, people feel a growing sense of being at risk. The shape of this "risk shock" varies, obviously, given the wide variety of welfare and employment structures among these countries, but the phenomenon emerges everywhere in one form or another. There is a process of marginalization and social exclusion in train that is reproducing some of the worst features of the nineteenth century in terms of both inequality and poverty. The United States has had rising income inequality since the early 1970s, and in Western Europe structural unemployment has forced a reconsideration of some aspects of the welfare state. All Western nations have suffered from a slowdown in growth. There have therefore been calls for an activist response -- both for more international policy coordination and for increased spending on education and worker training at home.

This approach is rooted in a proper concern for the dangerous social potential of current trends and represents an effort to face up to the problems. Yet while it is ambitious, in some respects it would not be ambitious enough. For what is driving the current process is now intrinsic to capitalism, and its solution requires something more dramatic. That is not to argue for old-fashioned, unworkable attempts at central planning and government ownership, but it is to insist that the economics of Keynes be revisited and updated in contemporary conditions. Western countries must attack the forces driving the current world economic order rather than simply manage their consequences.

The answer is not protectionism; in some respects aggressive free trade is good. Busy sea-lanes and teeming ports are the handmaidens of prosperity for all, not its enemies, although in some sectors, international competition causes profound dislocation, and part of the downward pressure on wages of unskilled workers is explicable in these terms. But there are areas of the international economy that do require active supervision and control. Regulations must be put in place to slow international financial transactions and reduce their destabilizing effects. International trade and investment grow best during a careful process of long-term planning and prediction. Uncertainty such as the current turbulence in the enormous currency markets and the high interest rates they cause are anathema to costly investment. Moreover, those same markets swiftly punish efforts to reduce the resulting unemployment and its attendant protectionist pressures through expansionary fiscal policy.[1]

Recasting the world financial system is therefore absolutely central to any program for relaunching Western economies on a rapid growth trajectory. The freedoms celebrated by the extraordinarily well-paid denizens of the international dealing rooms now threaten the capacity of the world to sustain a free trade regime and promote economic growth. Here, not in free trade, lies the cause of current high levels of European unemployment.

THE REAL CAUSE OF THE DEPRESSION

We have embraced one lesson from the 1930s -- the malign impact of protectionism -- but discarded the other, the case for regulated currency markets. The case against protectionism is ...

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