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Western capitalism is in crisis and new approaches to economics and policy that challenge conventional thinking are needed to reform it.
Dr Josh Ryan-Collins
Capitalism, as Marx argued, is prone to crises. But since the last ‘great crisis’ of 2007-08, there have been only the most meagre signs of recovery. Instead, our economic system is generating widening inequalities of wealth and income, a growing threat of catastrophic climate change and resource scarcity, under-investment in public services, infrastructure, science and innovation, falling living standards and rising private debt. The political consequences of these developments are now coming home to roost with the rise of increasingly authoritarian and populist regimes across the world.
In the face of such deep-rooted systemic failures, it is tempting to bury one’s head in the sand. At The Bartlett’s newest research and policy centre, the Institute for Innovation and Public Purpose (IIPP), we’re taking a more optimistic view. We argue that, to reform capitalism we need to start with a different understanding of the key capitalist institution: markets.
Mainstream economic theory teaches that markets are essentially neutral optimisation machines. They enable the efficient co-ordination of the needs and wants of the many millions of economic actors that make up the economy: Adam Smith’s ‘invisible hand’. But this view tells us little about where markets come from and who created the rules that govern them.
At IIPP, we argue that markets are, like buildings, designed – and that they can be designed and built well or not so well. Take the land market as an example. Land does not obey the standard rules of supply and demand. It is inherently limited in supply and fixed in location. This means its price tends to rise much more rapidly than other commodities when demand increases. In cities in particular, we have seen house prices – driven by rising land values – rise well above average incomes.
The standard policy response has been to assume that the land market is the same as any other market and try and bring down prices by increasing supply (build more houses), neglecting the fact that there isn't enough locationally-desirable land to build them on.
“A more thoughtful response would be to take a step back and consider how the design of the [land] market affects both demand and supply
A more thoughtful response would be to take a step back and consider how the design of the market affects both demand and supply. For example, is there an excessive amount of speculative demand driven by bank lending or foreign investors? Should capital gains on land be taxed in the same way that they are on stocks and shares? Does it make sense to aim for a housing market where all land is privately owned or might social and co-operative housing models create better outcomes? In other words, by taking a ‘market-shaping’ or ‘market-creating’ role rather than a more short-term, ‘market-fixing’ role, the state can help generate more sustainable outcomes that are more aligned with long-term public purpose.
To this end, in January 2019, IIPP will be launching a new module – available to UCL undegraduates as an elective and also available online – called Rethinking Capitalism, which links new economic thinking to new economic policies. The course will draw on the book of the same name, edited by IIPP Director Mariana Mazzucato and Michael Jacobs. The course will feature top economists who are challenging the status quo on the workings of capitalism, including the Bank of England’s Chief Economist Andy Haldane, Bernie Sanders’ ex-economic adviser Stephanie Kelton, William Lazonick, Carlota Perez, Branko Milanovic and Eric Beinhocker, along with IIPP staff members Rainer Kattel and myself.
Rethinking Capitalism will apply the ‘market-shaping’ lens to a wide range of topics, from fiscal and monetary policy to innovation, inequality, the rise of the digital platform economy and climate change. To give students a grounded understanding of the challenge of turning ideas into policy, these lectures will be combined with presentations by policy-makers working at the frontline of the issues under discussion, including from UK government departments dealing with finance, innovation and climate change. We hope Rethinking Capitalism will become a favoured choice for UCL students and establish IIPP as a centre for the kind of new economic thinking needed to meet the grand challenges of the 21st century.
Dr Josh Ryan-Collins is Head of Research at the Institute for Innovation and Public Purpose. He was previously Senior Economist at the New Economics Foundation.