(This is the text of a talk I gave for a workshop organized by the International Network for Democratic Economic Planning. The video of the conference is here.)
The starting point for this conversation, it seems to me, is that planning is everywhere in the economy we already live in.
There’s a widespread idea that production today is largely or entirely coordinated by markets. This idea is ubiquitous in economics textbooks, of course; it also forms a major part of unspoken economic common sense, even for many socialists and others on the left politically. But it seems to me that when you look at things more critically, the role of market coordination in the economies that we live in is in fact rather limited.
Within the enterprise, markets are almost nonexistent. Production is organized through various forms of hierarchy and command, as well as through intrinsic motivation — what David Graeber calls everyday communism or what we might call the professional conscience — the desire to do one’s job well for its own sake.
The formation, growth and extinction of enterprises, meanwhile, is organized through finance. People sometimes talk about firms growing and dying through some kind of Darwinian process, but the function of finance is precisely to prevent that. By redistributing surplus between firms, finance breaks the link between the profits a firm earned yesterday and the funds available for it to invest today.
The whole elaborate structure of banks, stock markets, venture capital and so on exists precisely to make funds available for new firms, or firms that have not yet been profitable. We see this very clearly in Silicon Valley, as in the current boom in “AI” investment — this is as far as you can get from a world where growth is the result of past profits.
On the other side, institutions like private equity, and the market for corporate control, ensure that that the surplus generated in one firm need not be reinvested there. It can be extracted — consensually or otherwise — and used somewhere else.
In both cases, this is not happening through any kind of automatic market logic, but through someone’s conscious choice.
Once we think of finance as a system of planning , it is natural to ask if it can be redirected to meet social needs, such as addressing climate change. I want to make four suggestions about how we can pursue this idea most effectively.
First. We need to think about where financing constraints matter, and where they don’t.
Many firms do fund investment largely from their own profits; in others, investment spending is modest relative to current costs. In both these cases — where investment is internally financed, and where investment requirements are low relative to costs of production — finance will have limited effects on real activity.
Where finance is most powerful is in new or rapidly growing, capital-intensive sectors, especially where firms are relatively small. Green energy is an important example — for wind or solar power, almost all the costs are upfront. Housing is also an area where finance is clearly important – while this is of course, a very old sector, firms are relatively small, capital costs are large, assets are very long-lived, and there is a significant lag between outlays and income. It is clear that booms and busts in housing construction have a great deal to do with credit conditions.
Labor intensive sectors like care work, on the other hand, are poor targets for credit policy, since costs and revenues occur more or less simultaneously, and capital needs are minimal. Subsidies or other “real” interventions are needed here.
Large, established firms are also likely to be fairly insensitive to credit policy. There’s a great deal of evidence that the internal discount rates corporations use to evaluate investment projects are not tightly linked to interest rates. At best, financing may relax an external constraint where decision makers already operate with long horizons. But what we know about corporate investment decisions suggests that they are not much affected by credit conditions — something that thoughtful central bankers have long understood.
Second. Channeling credit to constrained areas will have a bigger impact than penalizing credit to unwanted areas.
This seems like an important limitation on the types of green policies adopted by the ECB, for example. For firms that issue bonds, the interest rate they face is not likely to be a major factor in their investment decisions. Where credit matters most is for smaller, bank-dependent firms and households, which face hard limits on how much they can borrow.
This is even more the case for the stock market. Firms for which stock issuance is a significant form of financing make up a very, very small group. In general, changes in stock ownership will have no effect on real investment at all.
Related to this is the question of rules vs discretion. It is relatively easy to write rules for what not to invest in. Targeting finance-constrained sectors requires more strategic choices. So this is an instrument that is state-capacity intensive. In a setting of limited capacity, credit policy is unlikely to work well.
Similarly, if we want to see across-the-board changes, as opposed to fostering new growth in particular areas, credit is not the right tool. In that case it is better to directly regulate the outcomes we are interested in. If you want higher wages, write a minimum wage law. Don’t tell your central bank to penalize holdings of shares in low-wage firms.
Third. We need to think carefully about what parts of finance we want to socialize, and where new institutions are needed and where they aren’t.
Various financial institutions offer funding to real activity (directly or indirectly) on their asset side, while issuing liabilities that some particular group of wealth owners wants to hold. In the case of many institutions — banks, insurance companies, pension funds — their social value comes as much or more from the distinctive liabilities they issue, as from the activities that they finance.
It’s natural to imagine public finance in similar terms, and think of a public investment authority, say, issuing distinctive liabilities that are somehow connected to the activities that it finances. I think we need to tread very cautiously here. The connections between the two sides of private balance sheets are largely irrelevant for the public sector.
The public sector already finances itself on the most favorable terms of any entity in the economy. The private sector’s need for retirement security and other forms of insurance can be addressed by the public sector directly. Public provision of new assets for retirement saving would be a step backward from current systems of public provision.
There is a case for a larger public role in the payments system, and in the direct provision of banking services to those who currently lack access to them. But there is no reason to link this service provision to public credit provision, and a number of good reasons not to.
The stronger arguments for socializing finance, it seems to me, lie on the asset side of the public-sector balance sheet. We don’t need to find new ways of financing things the public already does. We do need to bring public criteria into the financing of private activity.
It’s worth emphasizing that what matters is what gets financed, and on what terms. Who owns the assets has no importance in itself. Setting up a sovereign wealth fund does nothing to socialize investment, if the fund is operated on the same principles as a private fund would be.
I observed this first-hand some years ago, when I worked in the AFL-CIO’s Office of Investment. The idea was to use the substantial assets of union-affiliated pension funds to support labor in conflicts with employers. But in practice, the funds were so constrained both by legal restrictions and by the culture of professional asset management that it was effectively impossible to depart from the conventional framework of maximizing shareholder value.
Fourth. We need to link proposals for socializing finance to a critique of conventional monetary policy. We need to challenge the sharp lines between planning, prudential regulation, and monetary policy proper. In reality, every action taken by the central bank channels credit towards some activities, and away from others.
One important lesson of the past 15 years is the limits of conventional monetary policy as a tool for stabilizing aggregate demand. But central banks do have immense power over the prices of various financial assets, and monetary policy actions have outsized effects on credit-sensitive sectors of the economy. A program of using credit policy for what it can do — fostering the growth of particular new sectors and activities — goes hand in hand with not using credit policy for what it cannot do — stabilizing inflation and employment. In this sense, socializing finance and developing alternative tools for demand management are complementary programs. Or perhaps, they are the same program.
It’s worth noting that Keynes was very skeptical of the sort of fiscal policy that has come to be associated with his name. He did not believe in running large fiscal deficits, or boosting demand via payments to individuals. For him, stabilizing demand meant stabilizing investment spending. And this meant, above all, reorienting it way from future profitability, which is inherently unknowable, and beliefs about which are therefore ungrounded.
This is a key element in the Keynesian vision that is often overlooked: Our inability to know the future matters less when we are focused on providing concrete social goods. It may be very hard, even impossible, to know how much the apartments in a given building will rent for in thirty years, depending as it does on factors like the desirability of the neighborhood, how much housing is built elsewhere, and the overall state of the economy. But how long the building will stand up for, and how many people it can comfortably house, are questions we can answer with reasonable confidence.
Wouldn’t it be simpler, then, to stabilize private demand in the first place, rather than try to offset its fluctuations with changes in the interest rate or public budget position? From this point of view, our current apparatus of monetary policy would be rendered unnecessary by a program of reorienting investment to meet real human needs.
UPDATE: I have added a link to the video of the conference.
