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It’s not just the Banks

April 3, 2014


There is too much debt, and not just government debt; that at least is commonly agreed. Money reformers and others such as Richard Werner think this is the fault of banks creating too much money in exchange for loans. This is only partly true.

It is true that banks create the money they lend and do not wait for deposits. This means that they can ration the volume of lending. It is better for the banks to advance loans secured on the asset (such as a house) which the borrower is buying. Unrestrained bank lending can push up house prices and prices of some other assets and that needs to be checked. It does not help first time buyers if mortgage terms are too ‘easy’. House prices rise and so they are saddled with bigger debts.

But many people are now borrowing because they don’t earn enough to pay for day to day expenses, and certainly not for unexpected things like car repairs, house repairs, losing jobs or benefits etc. This is happening because of rising inequality. Prof. Richard D Wolf offers an excellent analysis of the reasons for rising inequality in the US this in ‘Capitalism hits the Fan’, see for a short summary or for a 1 hour 45 minute video. There is also a book.

Since the 1970s there has been a major shift from wages to profits in the way in which company revenues have been shared. Wolf attributes this to a combination of productivity improvements resulting from technology such as computers, and moving production offshore. I well remember the debate in the 1970s about whether the effect of computers would be to shorten the working week. It hasn’t worked out that way of course. Those who have work, are working harder than ever for less pay in real terms. The combined effect of productivity increases and offshoring has been to reduce the demand for labour and so allowed employers to pay less in real terms and impose harsh conditions. Paradoxically it has forced people to take on second jobs, for more women to work etc. to maintain their standard of living. By 2008 this had got to the point where the demand for ‘stuff’ had started to drop thus feeding into the crisis.

Wolf does not believe that government regulation will reverse this. Corporate lobbying and buying of politicians will always undermine effective regulation. His remedy is that boards of companies be made up of workers rather than shareholder nominees. Such boards would adopt more socially responsible policies. My question is how is this to happen? Wolf seems to think it can happen without any legislation or government intervention. People can set up producer co-operatives, and he points to silicon valley as providing examples.

The issue as I see it is financing. Although at times a company might be able to finance capital expenditure from retained earnings, at other times it will have to issue shares and /or arrange loan finance. A worker controlled company might not look a good investment, especially at start up. Both shareholders and banks are likely to insist on representation on the board. The silicon valley start ups are (I think) rare examples of very high tech. industries where the employees are specialists who have previously been very highly paid and can presumably provide much of start up capital. In Britain there are two well known examples of producer co-operatives, the Scott Bader Commonwealth and the John Lewis partnership. Scott Bader was well established before the family donated 90% of the shares to the Commonwealth. John Lewis was also fairly well established before it became a Partnership, and seems to have kept its leveraging low. [ in July 2013, Retained earnings £1.9 bn, current liabilities £1.4 bn, non current liabilities £1.9 bn. ]

An example of how the concept of worker control might be more widely spread is given by the Mondragon Corporation (revenue 14 bn euros in 2012). This started in the Basque town of Mondragon as a network of producer co-operatives, technical colleges and banks. A key factor must have been a strong sense of community, and relative isolation and self sufficiency. However Noam Chomsky has warned:

Take the most advanced case: Mondragon. It’s worker owned, it’s not worker managed, although the management does come from the workforce often, but it’s in a market system and they still exploit workers in South America, and they do things that are harmful to the society as a whole and they have no choice. If you’re in a system where you must make profit in order to survive, you’re compelled to ignore negative externalities fixed on others.”

I believe however that we should not dismiss the producer co-operative model. In this context it is worth noting that Prof. Richard Werner of Southampton University and others are trying to establish a network of local banks, along the lines of the German Sparkassen, [ and ] and it would be logical if producer co-operatives became part of that network. If such a network were established it might help to generate the political pressure for government to support it in some way.

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