The debate on the alternatives to the current failed economic policy of the government has intensified. The renewed downturn in Europe, a British government Budget whose cut in the 50p tax rate underlined the class interests it represents and the slip back into ‘double-dip’ recession have all heightened interest in alternatives to ‘austerity’.
Socialist Economic Bulletin has consistently argued that the appropriate
response to the current crisis is investment, not cuts. A number of readers have
expressed interest in a Frequently Asked Questions, addressing some of the main
points of this. These are set out below.
What do you mean by investment?
What we mean by investment is investment in machinery, transport, technology,
housing and hospitals and similar things. This is not the speculation, sometimes
wrongly called ‘investment’, which is often spoken of in relation to the stock
market and other financial instruments.
All economic output is either consumed or set aside in the form of savings by
households, companies or the government. This saving can sit idle in a bank, be
used for speculation, or used for investment in building houses, infrastructure,
transport links, education, health care, and so on. It is this latter type of
investment which creates prosperity and jobs as well as improving productivity.
It is what is meant by the term investment.
From a socialist point of view, investment is about ‘the means of
production’. The question of who controls the means of production and how they
are developed is the most important issue in the economy. Most of the time this
issue appears abstract, but in a big economic crisis such as the present the
question of who will control, or set the policy of the means of production, is
an immediate issue.
Why has the question of investment become so important currently?
The fall in investment (gross fixed capital formation) in the OECD group of
industrialised countries from 2007 to 2010 was approximately US$963bn in real
terms. This is vastly more than the total decline in GDP, which was US$220bn.
This was because other components of GDP, such as household or government
spending as well as net exports to the rest of the world all rose. In order to
reverse the slump, there must be a recovery in investment.
Is the same true for Britain?
It was. Until the Tory-led government came to office the decline in
investment was the biggest contributor to the British recession and accounted
for approximately 80 per cent of the decline in GDP. Declining investment also
led the recession, beginning to fall before the economy as a whole contracted.
How has the recession changed since the Tory led coalition took
On the same basis as the OECD as a whole (US$ at Purchasing Power Parity),
the decline in investment now accounts for the entirety of the British
recession. The difference is that it has been joined and then overtaken by the
decline in household spending. This is a result of government policy, where wage
freezes, the VAT hike, benefit cuts and job losses have combined with higher
inflation to push real incomes down. As a result household spending has also
fallen. To get out of the recession therefore means that both people’s incomes,
which determine consumption, and investment must be increased.
If there’s no money left, how can investment be increased?
There’s plenty of money left! If wages are held down and yet prices (for
food, energy, rent, transport costs, etc.) are rising this means that the share
of national income of companies or landlords or transport operators will all
rise. Their share of national income is profits. But companies are refusing to
invest this profit.
Where they can, companies are holding down wages and hiking prices but in
general are refusing to invest.
As a result, they are sitting on a cash mountain
(held in the banks) of around £750bn. Capital is plentiful. Currently it is in
the hands of those who refuse to invest it. This refusal has led the economy
into a double dip recession. The only way to reverse this is to raise people’s
income, which means to stimulate consumption, and at the same time to embark on
a major investment programme.
But is that enough?
It is more than enough to deal with the scale of the current problem. To
restore all the lost output since the recession would require just £67bn. To
restore the British economy to trend growth, so that it would seem as if the
recession had never happened, would require approximately £225bn. Both of these
totals are just a fraction of the cash holding of the corporate sector.
How could this cash mountain be accessed?
Government policy could easily claim it, through a variety of levies,
windfall taxes and surcharges. The funds are already held mainly in British
banks (as companies become increasingly concerned about holding them in overseas
banks) and could be directed for investment purposes. RBS and Lloyds-TSB are
already owned by the state and all deposit-taking banks operating in Britain can
only do so because the deposits are guaranteed by the state. A substantial part
of this investment should be launched directly by the state in housing,
transport and other sectors. As regards private companies, a simple instruction
could be issued that the banks must provide investment (cheap loans) to all the
What are those areas?
The priorities would be investment in housing, in transport (especially much
more energy efficient rail), in infrastructure (hi-speed broadband, non-carbon
energy generation, port facilities, and so on), as well as
in education at all levels. These are the areas which have seen the biggest
falls in investment during the recession, and yet have potentially the biggest
returns on investment.
But once the bridge is built, or new broadband supplied, isn’t the money
All the money spent has very large multiplier effects. This means the money
continues to circulate in the economy long after the initial expenditure. In
addition, there are very large boosts to productivity, making it possible to
establish or expand businesses and services. The CBI now accepts that the
average multiplier for large infrastructure projects is 2.84:1, meaning that for
every £1bn initially invested, the economy is boosted by £2.84bn.
There has been a lot of recent talk from the CBI and others on the need
for investment. Isn’t this the same as SEB’s policy?
No. The CBI and others represent the business interests that have
participated in the investment strike which is the cause of the crisis. Now,
because demand generally is falling once more (investment, household spending,
government consumption and exports) they are suddenly concerned about current
and future profits. They have also benefitted from lower wages and falling
corporate tax rates. Yet they continue to refuse to invest.
Instead, they demand that they be given further subsides, handouts and
guarantees (even guaranteed profits in the case of the nuclear industry) in the
hope they will graciously deign to invest at some point in the future when
profits are certain.
Worse, they also demand further cuts in wages and employment rights, and
further cuts in government spending on welfare. This is indefensible morally but
it also runs counter to the needs of the economy as whole, where falling
household incomes is now also driving the recession.
But wouldn’t those business subsidies be worth it, if it led to a
Private businesses are driven by profit, and in aggregate they will make no
large scale investments without an increase in profitability. As this is a
generalised crisis in the industrialised countries, autonomous large scale
private sector investment can be ruled out because no sufficiently large
recovery of profits is in sight.
Therefore all attempts to bribe private
businesses to invest, such as the government’s ‘credit easing’ are likely to
prove extremely costly or fail, or both.
Then how can investment recover?
The state is not driven by profit and so has the capacity to make rational
economic decisions, based on what is required to optimise sustainable economic
activity. The mechanisms for the state to access the private sector’s cash hoard
have already been identified. It is a relatively simple matter to achieve it.
If this were so simple, why hasn’t it been done already?
In Keynesian terms, this would amount to a ‘somewhat comprehensive
socialisation of investment’. The state would be taking over functions that have
been ceded to the private sector, such as house building, and would derive the
surplus generated by it in the form of rent.
It would begin to reverse the decades of privatisations begun in earnest
under Thatcher. In Marxist terms it would mean some portion of the means of
production passing from private to public ownership. This is not therefore
acceptable to the current owners, and the political forces which support them.
But surely this is Utopian, talking about the state taking over the means
Across the world, the efficacy of all stimulus or bailout measures was in
direct proportion to the involvement of the state, which is why China’s
investment stimulus was the most successful of all. Even in the US currently, it
is the state-owned agencies Freddie Mac and Fannie Mae which are keeping the
housing market going as private banks have exited the US housing market. All
across the world, including Britain, it was the state which supported the
failing private sector banking system. It is the state, in the form of EU
subventions, which is funding rapid recovery in the Baltic states and which
allowed Poland to avoid recession altogether.
The state is a more efficient provider of many large scale goods and
services. If its weight in the economy overall is sufficiently great it can also
have the levers to regulate the level of investment, which is decisive for
What about other alternatives, like taxing the rich?
Britain is a very unequal society, made more so by the Tory-led coalition’s
policies of reduction in real wages and cuts in welfare entitlements. A more
redistributive tax system, and closing tax loopholes to pay for it, would be
beneficial. But tax increases alone are not sufficient for reviving the economy.
In the last financial year the public sector deficit was over £124bn. Even the
most ardent supporters of increasing taxes do not suggest that the full armoury
of tax increases could match this total.
Other schemes, based on further monetary interventions or quantitative
easing, or increased wages, while all useful in themselves, do not address the
central issue that significantly increased investment is required to revive the
economy and that the only agent that can lead an investment recovery is the
A leaflet version of this article Questions and answers can be downloaded here.