Capitalism, Socialism and Democracy in the Twenty First Century

good evening thank you all very much for coming my first duty is to make sure that we can be heard in the back row as it can you hear me in the back row upstairs oh very good that's one anxiety resolved the lecture tonight are you getting feedback here I'll try to stand a bit further away when I first started lecturing here in the 80s we used to do it without microphones so you just had to learn voice predict projection but this is a series in the LSC university of melbourne series the University of Melbourne is a partner of the LSE in Australia we value the partnership greatly the universities have a great deal in common including a devotion to excellence internationalism and and public policy how many people in the audience from Australia well very good you're welcome it's a special pleasure for me to introduce ross garner ross has been a friend for some time now and he is a man of quite extraordinary distinction first and foremost in our subject of economics itself where he's played a leading role in Australian academic life including being head of the Economics Department and head of the division of the research school Pacific and Asian Studies at the Australian National University he is absolutely prolific I think the book count is approaching 50 and goes on goes on rising I won't go through all the academic achievements but I wanted to emphasize the achievements outside academic light he's the only first-class economist I know who has also been an ambassador to China and he was in Australian ambassador to China in extraordinarily important years 1985 to 1988 and along with there's so many other things but let me just mention one more because on this one we had a close affinity Ross published the Garneau review on climate change and just after there was a stern review on climate change and I have to say I learned a great deal from reading the Garneau review on climate change including after having written the Stern Review on climate is a very important document and I would urge those of you who are interested in a subject to go and have a look at it now his topic today is capitalism social in the socialism and democracy in the 21st century as the feedback stopped it's still on the case yeah ok thank you Ross I'm not going to try to prolong the introduction until the moment when the feedback stops so that I do hope that by the time I get off this it has stopped I just wanted to I haven't said this to you Ross but I just wanted to refer to capitalism social democracy because I decided after degree in mathematics I decided to do economics because I thought it'd be a good idea to try and change the world because it was an unpleasant place of course the world has a tendency to push back and be ungrateful but I went to I was 21 I went to outstanding mathematical economist in Cambridge Jim murli's who subsequently won Nobel Prize and said I want to do economics and he said you sure and I said I'm sure and he said well I'll take you on as a student the following year he won the Nobel Prize the cause and effect wasn't that tight so I should say the following year he wrote the paper for which he later got the Nobel Prize I said what shall I read during the summer before I start doing formal course and he gave me two things to read he said you better read Keynes's general theory and you better read Schumpeter's capital him socialism and democracy and those two books have stayed with me throughout my academic career so I was particularly touched by your choice of title Ross it's a it's very important and I'm looking forward very much to hearing what you have to say we will listen to Ross and then we'll have a chance to have a to-and-fro well there will be a question-and-answer session so Ross you're enormously welcome to the London School of Economics thanks Nick it's a great pleasure to be here and especially a great pleasure to be here with you we've shared a number of applications including a Chinese launch of my climate change review which was published in Chinese way back in 2008 of the Academy of Science in China well three weeks ago I was back in China I caught the train from Beijing to Shanghai and they in preparation for this lecture I took along with me karl popper's the open society and its enemies but there regrettably Shandong and jung-soo spit past too fast to complete papa's book between Beijing and Shanghai so there's some left over well a week ago I was in Indonesia and I got onto a new tall way and Surabaya to drive to John Agora in East Java Shanghai Beijing is about 1300 kilometers 215 kilometers to Jonah Goro and I could have comfortably read Papa's book on the road to Jonah Goro on the tollway for 10 kilometers of the journey we crawled along and at the end of the 10 kilometers so he saw that the bottleneck was one small shop with the owner of which had refused the government's compensation offer and so he was holding up the tollway we're in between China and Indonesia back in Australia that we were having an argument about whether to build 13 kilometers of slow rail from the Sydney suburb of Epping to the Sydney suburb of Parramatta and we'd been having that argument for all of the chart time the China taken to build 13,000 kilometers of fast rail but between its great cities well the the preoccupations of political discourse in the three countries were were more different than the preoccupations of about transport Indonesian discussion of politics last week was consumed by a popular reaction to a decision of the Parliament that was dominated by supporters of the losing candidate in the presidential elections general proble connected intimately to the old Suharto military regime the new law into direct elections prevented provincial and local governments it would block the repetition of the success of jokowi the charismatic president-elect who had risen from being mayor of Jakarta through his popular appeal over the heads of the large established parties and the business elites which funded them I've got a cartoon from from compass the popular Indonesian daily now I haven't been instructed on how to change this over I'll try something that's the cat eye that's the cartoon in the paper bill cada 2005 2014 elections on the left hand side bill cada Twp lung song elections not direct is the right hand side and that cartoon made of powerfully one of the points I want to make this evening I'll leave that there for a moment and you can absorb it the Chinese in Beijing when I was there talked about politics who are interested in politics mainly talked about the arrest of yet one more leader of a state-owned corporation for corruption general secretary the Chinese Communist Party sujin poem has been striking out boldly to strengthen the capacity of his party and government to deal with the challenges of the 21st century and the first of those challenges is to clean up the relationship between the market and the state business and the policy-making processes of the state and Australia in between was absorbed by the consequences of a new balance of power in our Senate decisions on the future of carbon pricing and mining tax and many fiscal measures were hanging on the votes of a new political party that had funded a massive election campaign from wealth created recently by its founders privilege participation in Australia's China resources boom Melbourne provides two distinctive stand points from which to look at the topic this evening the evolution of economic and political systems one point of distinction is that antipodean economic and political systems have evolved differently from those of the other old developed democracies and many of the modern institutions of democracy had their their origins or their first trials in Australia and New Zealand Keynes recent important book on history of democracy documents that and demographic evolution of the colonies of Australia and New Zealand in the 19th and early 20th century was less constrained by inherited wealth and privilege than the political systems of Europe including United Kingdom the United States shared that characteristic with Australia but Australia was different from the United States not having the the legacy the history of slavery and the immense social shadow from there the Australian New Zealand labour communities were well labour was more scarce it was more self-confident and the democratic polity was more assertive than in the United States from the beginning and as a result Australians used their early democracy to modify the distribution of income that emerged from the untrammeled workings of the market economy William Pemba Reeves description of these innovations in state enterprises in Australia and New Zealand book at the beginning of the twentieth century set up his long foundational leadership of the London School of Economics the Frenchman made turns description more than a century ago of the social and economic order of Australia and New Zealand as socialism without doctrine evokes a reality that has helped to shape today's political culture and institutions Australian and New Zealand democracy has avoided the articulation of policy within an elaborate and consistent set of ideas poppers open society and its enemies with its praise for pragmatic democracy was influenced by being written during his antipathy and exile immediately before joining the staff of this school he went straight from New Zealand to here in 45 those roots contributed to the distinctive character of market area oriented policy in a remarkable period of reform from 1983 to 2002 deep recession in 1991 which was partly a consequence of taking time to learn how to manage the deregulated financial system Australia has enjoyed the longest economic expansion unbroken by recession in its history or for that matter the history of any developed country except by a small margin that might soon disappear the Netherlands during the North Sea gas perm life has been harder since the chyna resources boom came off its peak in 2011 it will get hard to still over the next few years as Australia grapples with economic challenges within a less suitable political culture that is the story of my recent book Dog Days Australia after the boom the Australian reforms coincided in the beginning with the deregulatory initiatives of Thatcher and Reagan and from a distance were conflated with them but Australia's market or in reform was within a social democratic framework there was a downside to the absence of doctrine in the late 20th century reforms critics who disliked the larger role for markets were able to set up a caricature of policy as if it had no social democratic content and to condemn the application of policymaking of economic analysis as economic rationalism it became a pejorative term I was a bit sensitive about it myself as I was the Prime Minister's economic adviser at the time but I actually came to think there was nothing particularly wrong with being called an economic rationalist that opened the way for people who favored the market orientation but not the social democracy to claim the success of the reforms over the next quarter century as their own and to present economically irrational deregulation as a continuation of the policy approach of the reform era this is a hugely important development in the 21st century world of uninhibited engagement of business interests in the policy process as independent application of economic analysis to policy choice is crucial to the defence of the public interest against sectional claims the absence of doctrine in early state policy in Australia contributed to the avoidance of extremes or almost avoided them there was doctrine in the early 20th century antipathy and insistence of the good life being built within a young democracy was for a small part and not the whole of humanity and that's the story of the White Australia Policy the exclusion of most of humanity from early concerns for equity was part of a more general exclusion from conceptions of economic development this is a fundamental flaw in almost everything written about economic growth in the distribution of income until the last half century with the work of Australian economist Colin Clark being the most important exception the discussion of the distribution of income in the developed countries today is still sometimes conducted as if it could be separated from the plight of the rest of humanity prosperity has helped to delay Australians curiosity about weaknesses in modern democratic capitalism we have been late to ask the questions that have attracted interest elsewhere in the developed world about where our political and Eakins economic systems are taking us questions that were last so prominent in the 1930s and 1940s 70 and 80 years ago we were challenged by economic decline and hopelessly high unemployment and then by the capitulation of continental Europe to Nazi so me while Keynes in the 1930s and Hayek Schumpeter and popper in the 1940s were all strongly committed to personal freedom and the advantages of the market economy they had different hopes and fears about what was possible for the future and about the greatest dangers to our civilization Keynes essay the economics of our grandchildren as well as the concluding chapter of the general theory saw the inexorable accumulation of capital and increases in productivity as leading over a hundred years to material abundance the continued accumulation of capital would eventually reduce the rate of return on low-risk investment to negligible levels bringing about the euthanasia of the Ron T a some income differentials would remain to ensure that the wheels of the economy kept turning but taxation could safely be more progressive as the jobs will be done well enough for less the remaining inequality was unimportant as everyone with the kaepa to enjoy the good life would be living well far from leading to the plutocracy anticipated in peccatis recent work the abundance of capital would make its own us left less influential and important just as abundance would make economists as boring as dentists Skidelsky and Skidelsky in the recent book have examined some of Cain's prognosis against what is now historical experience the expectation of productivity and incomes growth has been met more or less precisely but people have chosen to take much less of the new abundance as leisure than Keynes had anticipated Hayek at this school went from mark that Keynes lacked curiosity about anything that had not been written in English the most important gap in Keynes curiosity however was the consequence of extending modern economic development to the whole of humanity Hayek's warning against central planning was justified by the subsequent evolution of Soviet central planning in its echo in China from 1949 both had been confined to the dustbin of history by the early 1990s while Hayek's Road to Serfdom became a revered text for those who sought to push back the boundaries of the democratic capitalist state in the late 20th century its actual content is helpful today to people seeking to preserve the role of the mixed economy that had been so successful in the post-war decades irrelevance to contemporary debates Hayek acknowledges roles amongst much else for a social security net including provision of health care and for systemic intervention to avoid external environmental costs from private economic decisions as Keynes noted at the time once the case for intervention has been made in principle the question is where to draw the line the answer is not found in doctrine but in analysis case by case Schumpeter in capitalism socialism and democracy and now Nick I've mentioned both of books that murli's gave you to read was at once convinced of the great merits of traditional unrestrained capitalism and doubtful about its survival in a democratic polity Schumpeter used Napoleonic examples to show that good non democratic leadership could produce government for the people he could as easily have taken the example of Bismarck but in the end effect of leadership for important change required an appeal to the people that pushed to society towards government acceptable to the people and by implication in the end by the people of special interest to the 21st century discussion Schumpeter thought that the means of the disposal of private interests in democracy a rough quote are often used as to what the will of the people people and to interfere with the working of the mechanism of competitive leadership popper was less impressed than Schumpeter both by the pure form of traditional capitalism and by marxist logic a more comfortable with the messy reality of democracy and its inevitable tendency toward social democracy the open society might get many things wrong but it had a capacity for self correction and for improvement over time that was more valuable than the occasionally more precise correctness of its enemies pablor is interesting also for his vilification of Plato as the original source of ideological opposition to the open society this was ethnocentric in Papa's time Confucian political philosophy incidentally developed at the same time almost almost the same years that Plato or Socrates was on earth had said as much about the advantages of leadership by an elite that was aware of the responsibilities of its responsibilities to the wider community the case for Plato's general importance in global political thought is stronger now than in the 1940s the current leaders of the Chinese Communist Party were taught at university in the party school that their version of socialist thought had beginnings in Plato Plato general-secretary CM Punk's herculean or Sisyphean efforts to purge corruption from the Chinese Communist Party can be seen as seeking longevity of party rule through government by platonic Guardians the cautionary words from the troubled years assisted the developed world to avoid some traps this and the favorable experience of the post-war decades focused the spotlight on more mundane questions the best of modern economics as much that is valuable to say about the boundaries between activities that are most usefully undertaken through unrestrained market exchange those that require regulated markets for good outcomes in the public interest and those that are best provided directly by the statement it was influential mainstream economics on these matters in the North Atlantic in the golden post-war years and in Australia in the reform period 83 - the end of the century the stagnation and in the United States the decline of Labor incomes are more generally the large increase in the dispersions of the distribution of incomes and wealth in the late 20th and early 21st century have renewed discussion of where our political and economic systems are taking us a mainstream economists in the United States Sachs Stiglitz Krugman have become critics of the way the Democratic system is working and focusing especially on the role of corporate money in the policy-making process caddies recent book has become the focus of much of the recent discussion pakodi highlights the challenge to the future of democracy from widening dispersion of the distribution of incomes and wealth he print presents in an engaging way immense information on the distribution of income and wealth at various times since the 18th century focusing almost exclusively on France will most intensively on France the United Kingdom in the United States he touches upon other countries mostly developed and mainly in Europe it describes a simple economic model within which we can understand part of the change in the distribution of incomes over time that part which derives from changes in the distribution between labor and capital he discusses eclectically a range of other influences on the distribution of income and wealth he applies insight from the model and the eclectic discussion to suggest that in the absence of political upheaval or new policies inequality were widened to and perhaps beyond levels known in Europe before World War one he comments that this is likely to be inconsistent with the ethos good health and perhaps survival of democratic institutions and societies finally he suggests policy reform that could avoid the excesses of growing inequality and preserve democracy vachetta catches our interest by observing how the novels of Austen in Britain and Balzac in France describe how a young person may find the material foundations for a satisfactory life in theft or in marriage into a large inheritance but not in the but not in the application of youthful intelligence and energy to study and professional achievement not good for our business connect his data established that inequality in the distribution of wealth and income in France the United States in the United Kingdom and the United States tended to grow wider in the early stages of modern economic growth shrink decisively from the outbreak of war a century ago until the 1970s and grow wider again over recent decades there was once much less inequality in the United States than in Europe but now much more as wide in the United States now as in Europe in the Belle époque the economic model the Pippa Katy uses to explain growing inequality is built on the simple reality that when the return on capital exceeds the growth rate of the economy income from capital tends to increase over time relative to income from labor he expects the rate of return on capital to remain more or less steady over future time as it has done in the past and the rate of economic growth to fall over time with the slowing of growth him population and productivity it follows that expects the share of capital in national income to rise over time the book makes strong points about the relationship between the distribution of income and wealth on the one hand and Democratic policymaking and political stability on the other he notes that the policy progressive income and capital taxes and expenditure policy was important in the lessening of inequality in the mid 20th century that wealth is highly influential in the political policy process and has become more so as disparities have increased and that inequality of the dimension that is likely to emerge over the 21st century is inconsistent with democracy piketty's preferred policy response to preserve democracy and a market economy is for all countries to introduce a progressive annual global wealth tax he acknowledges that for the time being international agreement on introduction of a progressive wealth taxes utopian bending such agreement he suggests that developments within the European Union could tighten things quite a long way I see merit in the baquette ewwww eclectic discussion of sources of inequality in his views about the effects of inequality on the health of and prospects for democracy and in his main suggestions for policy but there's a big problem in the central analysis of the prospects for inequality and now I'm going to discuss that problem his canes or Paquette are you wrong about the rate of return the kiddies conclusions depend on his view that the rate of return on capital will not fall much from past levels and certainly will not fall below the rate of growth he makes a great deal of the historical tendency for the pre-tax rate of return on capital to hold up at about four to five percent per annum that's all those quotes from Austin and Balzac he calculates rates of return in a particular way and concludes by implication that Keynes was wrong not so fast forget his calculations on returns depend on the continuing boost the falling interest rates as has given to capital values of assets since the turn of the century sovereign bond rates are now extraordinary low by historical standards I wrote this as I was coming over here at the weekend and I said I wrote that last Friday in London two point three nine percent for ten years sovereign bonds three point four three percent in Melbourne with our currency risk and inflation expectations two point four three percent in New York naught point nine two percent in Frankfurt and Tokyo naught point five two percent that was last weekend I just took a glance at the Bloomberg screens as I was coming here today and these rates would have to be just a downwards by 17 basis points for the United Kingdom fourteen basis points for the United States the contemporary real rate of return on low-risk investment in the developed countries is substantially lower that than it has ever been the fall to these levels through the early 21st century has spurred the boom in real asset values obviously bonds but also real estate equities long-term interest rates can't keep falling from current levels and so they'll soon cease to be a source of rising asset values was one of the things that piketty's data was picking up the general presumption is that the low bond yields are a temporary phenomenon associated with the aftermath of the Great Crash of 2008 if the presumption were correct we could expect to fall in asset values as interest rates rise there's another possibility that historically low interest rates are the new norm for the 21st century this is suggested by the persistence of low rates through the admittedly weak recovery that is currently proceeding in the United if so we are already out of Austin's and Balzac's worlds worlds of comfortable Ron tears beyond piketty's fears of yields on investment persisting near the levels of the 19th and 20th centuries and into one dimension of the world that Keynes envisaged for the 21st century the incipient business investment in the developed world since the financial crisis may reflect the low returns on investment available in contemporary circumstances and the slow adjustment of business expectations of returns on investment to the new realities that just may not be so many investments around anymore that can earn those high rates of return what one were once expected and we can see possible reasons for that in the higher savings rates in the developed countries associated with the ageing of the populations the shift of the center of gravity of world economic growth to developing countries especially China that happened to have very high savings rate the absolute level of savings in China today is as is bigger than Europe and the United States together and as China becomes bigger that high savings rate becomes more influential globally if the Keynesian euthanasia of the R on ta is with us already in the early 21st century it has arrived surprisingly early given the globalization of economic activity one would expect that the globalization of economic activity moving outside the the narrow developed country world of Keynes of Hayek of popera of Schumpeter would hold up to some time the rate of return on investment and and hold up the global rate of economic growth it probably has so it's surprising that there's other influences I've talked about should be so large that they can overwhelm that effect of globalization so let's have a little look at the impact of global economic development on on global inequality and to do this I use a distinction between developed countries that already enjoy a high living standards and everything that goes along with that developing countries which are on the path of modern economic development living standards productivity rising fertility falling and underdeveloped countries where productivity and incomes of most people are low and stagnant and infertility and population growth high people in the developed countries already enjoy a standard of living that any early generate any earlier generations of humanity would regard as an abundance in a longer version of this presentation that later will be available on the LSE whereby I talked a little bit about some of the reasons why that might be served and those reasons I discussed a greater length in the schedule ski and scheduled ski book that I've already mentioned the tough old mover of economic reform in China dong sharpen will be disappointed by the insatiability of Chinese desires for improvements in material standards of living he said to me in a conversation in 1986 they look forward to the Chinese people on the mainland enjoying by the middle of the 21st century the superior living standards then experienced by people in Taiwan and Korea then he said they should be satisfied well already long before the middle of this century of Chinese people on the mainland enjoying material standards of living much higher than people in career in Taiwan enjoyed in 1986 and they're not the least bit satisfied done could at least take comfort that they the Chinese people on the mainland express happiness with their current lot to pollsters in higher proportions than people elsewhere for all the instability of desires the developed countries are having difficulty in maintaining effective demand at levels that secure high employment for the developed world as a whole government intentions of investment decisions of citizens fall short of their of their intentions to save government deficits make up some of the shortfall in demand but not enough to secure full employment this is the background to the exceptional monetary policies that you hear about in Europe UK u.s. and Japan it is doubtful whether private sector savings and investment decisions will be consistent with high levels of employment after the withdrawal of exceptional monetary policies in the foreseeable future or ever in the absence of other sources of stimulus Dermott demand what might provide an additional stimulus well it could be investment public investment in infrastructure and the IMF has just come out with a paper a couple of days ago supporting that idea but that's not very palatable to most governments at the moment who are scared of the deficits that are still there from a global financial crisis another approach would be for developed countries deliberately to increase income earning investment abroad in ways that accelerate incomes growth in developing countries a substantial part of the increase would need to be public investment the private sector can be expected already to be investing abroad most of what seems to be justified by its perceptions of commercial opportunity the capital outflow will be associated with lower real exchange rates larger net exports and higher production of trade goods and services the income-earning abroad income any investment abroad would reconcile high savings in anticipation of retirement requirements of an aging population with high employment in the developed countries income from or sale of the assets that accumulated abroad would provide resources when required to support expenditure in an old population these considerations support high levels of contemporary abreast investment abroad by Chinese official agencies and the recent Chinese efforts to lead the building of a BRICS bank and an Asian infrastructure bank I think we need other institutions more institutions or the existing institutions to carry a heavier load in promoting that that capital flow into income raising investments especially in infrastructure in the developing countries China is moving so swiftly through the middle income range of development that only a political Cataclysm would block its attainment of developed status within a decade or so incidentally the graduation of China to develop status without transformation of his political system would change the political complexion of the developed world the addition of China with its present political and economic systems would make a substantial majority of the developed world's people citizens of a platonic market economy now that's a new world the underdeveloped countries roughly correspond to Collier's bottom bottom billion and certainly today they include all of Australia's Island neighbors in an arc of instability intensifying poverty and high fertility and population growth through papua new guinea at least of Fiji my observation from a lot of experience with those countries broadly support those of kaalia after his lifetimes work in Africa the problems are problems of governance they're extremely difficult the magnitude of the problems does not mean the progress is impossible just difficult requiring institutional stability wisely directed institution building over long periods and often intrusive external support and a number of bottom billion African countries are making headway in the 21st century so far interestingly led by Ethiopia with its remnant linen estate and large Chinese support for infrastructure and agricultural and industrial development the bottom billion are more important than their current numbers suggest because much higher fertility makes them a rapidly increasing proportion of humanity unless there is early progress in bringing the bottom billion into the process of modern economic development then we face a risk of the world staying in a Malthusian bog in which even the success of large numbers of people in the developing countries may not lead to a reduction in the number of people on earth living in poverty or even a reduction in the proportion living in poverty the outlook for income inequality for all of humanity differs from the main piketty's story which is based on data from the old developed countries and I think we should look separately at what's happening inside major countries but also have an eye to what's happening in the world as a whole Hetty's focus is on what's happening in the old developed countries and there there has been an increase in the dispersion of the distribution of income and wealth but in the world as a whole the fact that most people on earth live in Asia and Asian incomes incomes of ordinary people in Asia are growing much more rapidly than the incomes ordinary people in the world as a whole mean that a Gini coefficient for the world as a whole will be demonstrating falling inequality especially in the period since 2005 when labor start to become scarce in China and real wages grow much faster than aggregate economic growth but that's not to say that income distribution in the old developed countries doesn't matter even if you care mainly about income distribution in the world as a whole the reason why that's the case is that the fate of democracy will be determined by the success of the old developed countries the old developed countries will be the models for democracy and judged well or poorly depending on their performance and a period of a political failure associated with widening income distribution in the developed countries would would have damaging consequences for the standing and perceptions of democracy what lot can be done within nation states about the income distribution even in a globalizing world but probably not unless there is cooperation amongst large economies developed countries in China in in the taxation of high incomes and capital this might not be utopian is the drag of increasing use of tax havens the drag of difficulties of of taxing capital income is now seriously corroding the revenue base of developed countries enough for that to have become that issue to have become a major element on the agenda of the g20 for example in the meetings in Brisbane that will take place next month with within China itself income distribution in the last few years is at last becoming less unequal after a long period in which it became wider and wider that's partly a function of policy it's partly a function of the stage of development and the China's Aarthi it reached the turning point of economic development when labor becomes scarce real wages start to rise rapidly almost a decade ago and since then our growth has been associated with compression well especially the last few years with compression of living stems more complicated in Indonesia partly because growth has not been quite as strong since the the Asian financial crisis their financial crisis is 97-98 not 2008 2009 that was the crisis that destroyed the military government and brought in democracy the slower rate of growth in in income since then is associated by some people with with the new style of government democracy in that long traffic jam that I was caught in between Surabaya and Reggiano Goro there was some bumper stickers that couldn't help noticing especially one and kara right in front of me saying it was better with some Suharto and democracy has a short memory of course it was so hard her government that led Indonesia at the time of Indonesia's Great Depression 98 which saw as big a fall in GDP as as Germany had during the Great Depression but but the general story is not a bad one in in Asia and continuation of today's levels of economic growth would lead to greater scarcity of labor and compression of income distribution income inequality in due course so I don't think that there will be greatly better opportunities for ordinary people in the developed countries in the market economy until there are better opportunities for all people on earth the fiscal interventions can modify the outcome of of the market economy but labor incomes the what one might call the primary distribution of income are going to be under or distribution of income is going to be under stress until labor in the worlds as a whole is a good deal less abundant than it is now and that means the movement of the increasing scarcity of labor that we now see in China through much of the developed world but we can alleviate some of those effects with this fiscal interventions and cooperation between countries in the intervening period so I I don't think we should lose sight of the possibility of success with modern economic development what I call the maturation of modern economic development the extension to all people on earth of high living standards of the living standards currently - enjoyed in the developed countries the bottom billion is one heck of a challenge but I don't think it's an impossible one and the payoff for that in terms of global income distribution the prospects for democracy will be great of course there are many barriers to the maturation of economic development one is that we will need high quality International Cooperation the delivery of international public goods on a number of met I've already mentioned the cooperation that's required on bringing the the bottom billion into modern economic development our chair this evening will I'm sure concur in my view that another precondition for the maturation of global development is the world dealing effectively with the problem of anthropogenic climate change I don't see the problem here for all the difficulties as being impossible either we've actually made a fair bit of progress on international cooperation on this since the diplomatic Fiasco in Copenhagen in nineteen in 2009 most importantly that we become more realistic about what is possible in terms of explicit international agreement we're now working within a new framework that I call concerted you know unilateral mitigation with each country taking its own decisions affected and take into account what other countries are doing and not relying on a legally binding international agreement which i think is not feasible for the foreseeable future we can get quite a long way with that in what's happening in China right now and the United States right now is represents a big change in trajectory that should give us all some hope now you know concerted unilateral mitigation will only work if all countries cooperate and unfortunately there are a couple of developed countries that are not cooperating Canada in my own country Australia Australia was actually making quite good progress faster progress than other developed countries for a couple of years but in the past year we've gone backwards in a rather messy way so some concluding remarks many of the questions about where our political and economic systems are taking us that were discussed Keynes Hayek some Pater and Papa 780 years ago had been answered by experienced central palings something we don't have to worry about now we don't have to worry very much about the merits and demerits of traditional capitalism because the progress of the mixed economy in the post-war period settled that question however grotesque mutations of Schumpeterian ideas on democratic capitalism live on their revival in the late 20th and early 21st centuries as libertarian ideas for deregulation especially of finance and lower taxation have created large problems for managing modern economic systems the mutations turned Schumpeter's support for unbridled competition and creative destruction on its head by preserving and extending monopolies Schumpeter always saw the potential for money corrupting democratic policymaking and who would recognize his fears in recent developments keynes and Papa would not be surprised or terribly uncomfortable with a rather messy social democracy which has emerged in all of the open societies keynes will be telling us that we were wasting a lot of our state intervention on matters that don't matter much and neglecting other interventions that would have a bigger payoff Hayek would think that government had strayed too far but he would have to acknowledge that the path to which the developed countries had strayed was not toward serfdom at least not on these matters all of the big minds on capitalism socialism and democracy from the 30s and 40s would have been amazed by the successful emergence of China as the largest economy the IMF says yesterday and of Indonesia as a dynamic democracy is extension of modern economic development to the developing world in the last quarter of the last century is the most important development in the world economy since modern economic began on this island a quarter of a millennium ago weirdoes plutonic market economy go next if if tea champagne succeeds in cleaning the Aegean stables a barrier will have been removed from the emergence of China as a developed economy that must be the more likely if not certain outcome if he fails we can expect disorder that is deeply disruptive outside as well as inside China there's a widespread view in the West that the emergence of developed market economy will be accompanied by movement towards democratic capitalism in China there will be political change no doubt as China becomes richer but will it be changed in the political superstructure that people in the West would call democratic continues success in raising material standards of living continuing the reversal of the early 21st century increase in equipment inequality allowing people to travel across and between the great cities rapidly and in comfort cleaning the air and leading the world's mitigation of climate change will all give the Guardians more time for the large number of people of young people on the hong kong streets in recent weeks reminds us that it won't be only these things that determine the evolution of the Chinese political structure events will force responses to pressures for political change from time to time the idea the guardians at those times will be one of the influences of on events but only one large numbers of Indonesians are deeply committed to their democracy and excited by their choice of a new president from outside the old day leads but they fear that money and the forces of the closed society will find common cause and take it away current discussion of limits on campaign funding and introduction of public funding of election campaigns are on the front line of the defense of the open society in Indonesia Australia was also at an historic point on the future of capitalist democracy old democracy that we are corporate money has played a direct role in Australian policy making an electoral competition of the past half dozen years in a way and on a scale that has no precedent climate change mitigation is simply the most important of the issues on which this has had important effects in the 2013 election the new party to which I've already referred took the new political culture to new depths there's one source of hope however and that is partly a reflection of how bad things have become the state of New South Wales our most populous state has a strong and effective Independent Commission Against Corruption and it's been conducting series of hearings that have shocked Australians about many aspects of the character of relations between business and and political decision making in Sydney and once what is actually happening has hit the open air being aired in the Commission and in the newspapers straitened have made it very clear that they don't like it the Premier of New South Wales has resigned a dozen several of these ministers have designed a dozen members of parliament for the governing parties have moved to the crossbenchers and a new premier has said that he will clean up the system end corporate donations to political parties limit private donation personal donations and and increased public funding therefore for political parties we'll see how he goes they'll be strong opposition to it but success would be an important step forward in reviving a democratic culture in Australia so in Australia as well as Indonesia and China the influence of vested interests in the policy-making process has emerged as the most important battleground over which the future of capitalism socialism and democracy will be fought this seems less grand than the clash of ideas involving Keynes Hayek some Pater and popper or before that of Reeves and Shore and the webs or earlier still of Lincoln at Gettysburg maybe it is less grant but it will be no easier to win than old battles for democracy and what is at stake is as grand as anything ever was such simple things will determine where the government buy as well as of and for the people will be the main vehicle on which we travel to the maturation of modern economic development or parishes from this earth thank you is this one working yes so I'd like to start by thanking Ross very much for a very deep lecture which expresses in a very strong way not only scholarship whether deep understanding of the world and the world from different geographical perspectives it's I hope that many of you will be able to read this lecture because it puts together an enormous sweep of intellectual history when I started economics in the sixties it was almost at the end of the period when people were looking at the evolution of the capitalist system and asking about its implications for democracy it was almost at the end of an argument that had gone on for a hundred years at least since Marx and dust capital and of course it was there also in David Ricardo and what we saw in the period after the sixties was of quite a strong focus on arguments the other way around what was the effects of democracy on economic growth and economic performance and what Ross and others have brought us back to is that very classical and important question the relationship between economic performance and democracy for Marx it was the falling rate of profit leading as the reserve army ran down leading to a very strong effort to push down wages and the ultimate revolution of the workers that was a very powerful story of the way the falling rate of profit would change the political system with Keynes it rather went the other way he thought the falling rate of profit would as it were lead to less strain on the system but you can see there was a very long period ranging from Marx to Keynes and Beyond really into the 50s and 60s when people saw the worries about democracy as coming from the economic system and then we had perhaps 40 years or or so from the 60s onwards - a very different kind of argument and people trying to tell us that democracy was necessary for economic growth and much of the story ran the other way and I think Ross has brought us back in a very powerful way to questions about the relationship between the economic system and democracy and I was very struck by his quote and I do hope you're gonna read this paper which is the one that he ended with I'll just read this one paragraph it's very short especially interest to the 21st century discussion Schumpeter thought that the means at the disposal of private interests in a democracy are often used to swauk the will of the people and interfere with the working of the mechanisms of competitive leadership thus I think instead of going on and on about the falling rate of profit or the non falling rate of profit as Marx and Keynes and more recently Piketty is done what Ross's Boris back to his a different question about the relationship between the functioning and economic system and democracy the one about the special interests essentially shaping and many of us would regard as perverting the course of democracy and I have to say I share with Ross the idea that that's the place to look for the worries about the relationship between the form of capitalism we have and democracy rather than agonizing endlessly about what we think is going to happen to the rate of profit so what we heard tonight was a very important statement of the way to think about the relationship between economic performance and democracy one that certainly as I was listening made me think again about some of the discussions and some ways brought me back to the arguments we had in the 60s as that era of thinking about the flow of causation from economy to democracy was ending and the arguments were starting to build about relationships between democracy and economic performance so it's very good to be brought back there but brought back there in a way that shows this deep scholarship of economic and political thought and indeed of the world and Ross like myself has worked very hard to try to change the world and like myself he has gray hairs the partial outcome of these attempts but Ross I do hope you keep on trying because what you said this evening is extremely important and it certainly moved me to think in ways I hadn't thought about some time so I'm very grateful to you for that well that was a bit for me it wasn't a question now we've got about 25 minutes for questions and I hope there will be many I'm going to take three at a time to try and get as many possible in I hope you will not follow my example and make speeches so try to make them questions and keep them short please so I'm going to start at the top and then go down the questions at the top yes gentlemen just there please first of all Thank You professor for the experience speech my name is Mohan had just graduated from LSC you mentioned a lot about the developed countries and the developing countries and it seems to me that the major tension is not between the capitalism socialism and democracy it's a tension between the developed countries and its contenders the catching-up countries well the one could argue that the establishment of the BRICS Bank and the Chima initiatives are a kind of fight back from the developing countries to the brand Branton world architectures so I'm wondering how can you comment on this tension inevitably tension and competition between the advanced countries and the contendere countries thank you thank you very much and take one down here gentleman in the Hat there he was give me the address of your milliner hi there thank you for the talk we we don't live in a democracy here in this country or America's so I don't send how other countries are meant to be driven towards a goal that people say is called democracy when so obviously doesn't live here and I think that capitalism is like a parasite that sits inside it every time somebody tries to create a democracy it sits in there and it devours every hope and aspiration for all those people because capitalism is not an economic model it is a project to destroy the majority's opportunity to have a democracy thank you thank you thank you very much any more questions and down in this level it's gentleman here please yeah thank you very much for the talk I was very struck by your comment about economic growth actually driving a compression in living standards and I just wondered if you could expand on that because that seems extremely significant thank you so roster some big big deep questions there could you respond to those three and then we'll I hope we'll have a chance released another three on the first question Thanks the developed countries and the successful developing countries although one man must acknowledge that globalization of world economic activity has been one source of pressure for wider dispersion of the distribution of income in the developed countries but that hurts laboring comes in they developed countries it doesn't hurt capital incomes in the developed countries in fact it holds up rates of return so that's not a conflict with the society as a whole and my suggestion there is that that should be a reason for doing everything we can without getting in the way of economic development to to reduce those that widening distribution of income in the developed countries and I think there are quite a lot of things we can do although we do have to have the International Cooperation on the on the question of taxation of capital for these purposes I think we should be thinking of China as a developed country it will soon be a developed country by any standard it huge capital exporter its role in the BRICS Bank in the infrastructure bank is very similar to to the role of about the developed countries through other institutions including the institution that Nicholas sir chief economist off so let's think of China for these purposes as a developed country I think the problems of the developed countries now would be much easier easily managed and that's a problem of deficient aggregate demand which we're trying to cure with this exception or monetary policy in this experimental monetary policy I think we'd be much better off systematically promoting capital inflow into the developing countries of in ways that promote economic development and in and that is what times doing with the BRICS back then the infrastructure bank but I think that for the developed countries that would be a much better strategy than experiments with monetary policy the end point of which are unknown to us so I think there's a basic complementarity of interest there and China's interests are the same as the developed countries in all of that on the doubts about whether capitalism is a good thing I think there's good else qian's Cadell ski book is very interesting on this it goes through the history of ideas ethical ideas about market exchange Gaddafi as the the well-known Skidelsky who did the biographies of Keynes has the great advantage of a son who's a philosopher so together they put together an engaging book that discusses these questions at great length and and the school skis talk about a Faustian pact that the capitalism does give us abundance but it takes away a lot of the the moral value is that that traditional societies once thought life was all about and the question is how you manage that if you like without the intention between the source of the abundance and and the moral implications of that and I must say that I am on the side of Keynes in those great debates about where it's all leading us I think that abundance will be helpful in the end to the moral order as well as other things but it's a complicated question and this this Goodell skis are worth reading about it third question compression of living tears I was caught talking about the compression of the dispersion of the distribution so talking about leading to greater equality now that is what we saw in the developed countries through the period of successful growth the fifties sixties early seventies it's what we've moved away from since then within the developed countries for complicated reasons that I don't think are inevitable but for the world as a whole I don't think there's any doubt that they that wants the big Asian countries and there's three very big ones China India and Indonesia join the process of modern economic growth that we started to see globally some of the distribution of income greater equality on a global scale now we to keep that going we've got to make sure that more and more of the world participates in modern economic development but but I think that the experience since China especially China but China India and Indonesia entered modern economic development confirms the view that that this has this process of modern economic development is helpful to compression of global inequalities if this time you can come back but I'd let other people have a go first and lady just here please hi I'm given the current government in Australia's almost refusal to implement an emissions trading scheme do you think that there's any scope to reach the conservative targets that were met to reduce Australia's emissions to emissions you are you talked about some of the challenges that the world is facing from climate change to some of the the tax policy on tax havens and all of that and you expressed a little bit of optimism in the short term on on sort of unilateral fixes to that but in the long term do you think that the institutions that we currently have at the global scale and the conception of democracy that we have at the national level is sufficient to address these challenges or do we need to talk about reforms to democracy you know sort of the the core foundation of from deliberative democracy to more participatory forms what are your thoughts on that if we if we move fairly fast Ross we might get three more in hello I think my question is actually about the topic itself of this opening chair this morning I heard a rumor that the stuff from the London Underground are planning a strike next week so I open the wote on land for my friends which underground which underground system in which city I mean in the world is a most reliable and most of my friends that they chose Beijing actually because the possibility of successfully holding a strike in Beijing it's zero even China it's a socialist country so my question is actually is a do you have any comments on the description see between China's social or socialist ideology and they saw capitalist style economic development and do you think this discrepancy will cause this order in the sinking of Chinese people and do you think this will leach problems in the future after China's the democracy improves and more rights are offered to Chinese people that's it thank you thank you again three big questions if you could be fairly quick Russell we just have to try and get we'll try to get in three more honest area submissions targets where our targets as communicated to the United Nations and as supported by the then of position the current government in Australia and not all that conservative the target is not a five percent reduction in total emissions it's five percent reduction in absolute level emissions if the rest of the world does nothing that's unconditional and quite explicitly if the rest of world does nothing it's 15 percent if the other developed countries are doing something comparable and developing countries are doing something quite explicit and 25 percent in the context of the of the world taking decisions that that give us reasonable chance of holding temperature increases to two degrees since the election the government's only mentioned the 5% that the straight his commitment to the United Nations is the whole lot and during the election campaign in a meeting at Melbourne University the the current environment minister was asked that question and confirmed that they then opposition's policy was to support the the whole set of targets not just the 5% and 5% for Australia is different from 5% for other countries we've got 1.6 percent per annum population growth when the developed world has little on negative population growth and and through the period this century up till now we've had a minimum of a couple of percentage points of economic growth average of about three so they said the implications are different now the government is not taking he's not mentioning the wider targets which I see as part of our commitment to the international community and I think that is a breach if they don't stand by those it's a breach of an election commitment but but where will current policies lead us well Australia was making very large progress under the set of policies that were legislated in a series of steps 2010 20 or 2011 in fact measured his emissions intensity which missions relative to the size of the economy there were only two countries during that period in the world that were reducing emissions fast enough to give them that if the whole world was doing it and kept area would get us to two degrees and they would China and Australia we're reversing that now we got rid of carbon pricing so through a strange and accidental process we will keep the renewable energy target whether we will keep it with current parameters or I mentioned how the partner neither party has voted in the Senate to support the government for appeal of carbon pricing but it has it has rejected it a vote voted with the Labour Party in the Greens to reject the repeal of other parts of the carbon package so that probably means that we will continue to decarbonize our electric electricity sector with quite a rapid rate more rapidly than other developed countries so that's it's a fascinating outcome where it gives us very strong momentum in in reducing the largest bloc of emissions but it doesn't do anything about emissions in the rest of the economy and for Australia what we call fugitive emissions is huge and that's emissions from coal mining and not from combustion of the coal which is from opening up the book the coal mine which leads to a lot of methane emissions and from liquefied natural gas where the compression of the natural gas and the general freeze carbon dioxide necessary injected will will lead to large emissions that these two things are huge in Australia well not having carbon pricing leaves the has this huge area of emissions growth unsupported and and it's relatively cheap to handle emissions from coal mines and from LNG projects but it but it's not as cheap as just letting the carbon dioxide of the methane go up into the air so in the absence of carbon pricing that's gonna be a big problem I think that will probably stop asperity meeting even it's 5% unless new elements are added to the package unless China's action on climate change becomes so strong that's very strong recently that we we find that a lot of the the coal projects that were anticipated don't into production which would help us meet our targets as well as the Chinese made their targets on the question about our our current institutions global and Democratic in domestic domestic the Democratic adequate to the task well no I I myself am not terribly attracted by participatory democracy looking first at systems within countries I've been pretty close to policy-making process in Australia a long time and I think we can make our democracy work I was very close to the government it was responsible for the reform period 83 to the end of the century and a lot of hard things were done in the public interest and that worked was also very close to the governments that introduced carbon pricing and that's all being dismantling and dismantle said depends on what I wake up worrying about whether I'm optimistic or pessimistic but but I think that the big weakness of our system is the influence of corporate donations on the policy-making process and my own view is that if we clean that up we can make our democracy work on the international institutions obviously some of these problems would be better if we had stronger global institutions and one day we will have them on this island how a legal system developed how the legal reach of Westminster expanded was through necessity more and more problems actually requiring a national government same thing in the United States the antitrust laws that gradually developed a national set of regulatory arrangements out of the old arrangements of the states something somewhere in Australia we will have pressures for that in Australia the problem is in in the world problem is the natural processes will generate solutions rather slowly so I think we have to economize on what we focus on for International Cooperation prioritize just identified the very most important things I think I'd put right at the top doing something about the bottom billion doing something about climate change doing something about at the international taxation problem and obviously there are others I don't think there is any way of handling I have the bottom billion problem that doesn't give a stronger role to the Security Council and and and just looking at it and through modernize the idea of having two nation-states from Europe represented on the Security Council just as anachronistic in the idea of not having India on the Security Council the veto is is anachronistic so that's a very simple step that I think could be taken to to modernize the Security Council I think we have to be realistic about the range of issues that could be handled by international bodies and we do need change and reform on climate change I think it's better to make progress through through the new system that's emerged a concerted unilateral mitigation for the time being now that won't get us all the way that we need to two tons to a person to holding I'm attracted to degrees but we need a period of progress to show that we can do it and I think that will be the mechanism through which stronger International Cooperation becomes possible and I'm not sure that I got all of the the last question certainly the the Beijing underground works very well for a lot of points of view it's now the most widely used to in terms of number of people who use it every day - biggest in the world and how Beijing and Shanghai ten million a day in Beijing 10 million 9 million in Shanghai much about reliability in the circumstances you're talking about but where does the tension between growing inequality for a long period in China and and Marxist and communist ideology how does that work itself out well there was a big problem in China within the Chinese Communist Party about modern economic development because almost anything you did to accelerate economic growth after the new power structure emerged in 1978 was going to involve increased inequality for a while and that was the source of problems for the party until jazzy young who as a young age was premier and then general secretary of the party and purged put under house arrest for the rest of his life in 1989 when he had a different view from dung shopping on what should happen to the student demonstrations but in an obituary for jay-z and I I wrote that of many people all it's been my privilege to meet in my life his was the the mind with the greatest computing power of any mind I'd ever interacted with and Desi I mean entered a Marxist idea which became communist party policy in 1987 he said that China is in the primitive stage of communism and in the primitive stage of communism the priority is the development of the productive forces of the economy and and so everyone could get on with the job once that was accepted now there can't last forever but it can last for a very long time and and China is still within that period lots of Chinese people a lot of conscientious members of the Communist Party in China 80 million members of the Communist Party in China with worried about worried a great deal about growing inequality during the period of rapidly increasing inequality which was basically from 84 until a few years ago several decades I want to ask Pucci Lee very thoughtful member of the Standing Committee of the Politburo back in 86 I asked him what does socialism mean to you today in this early in the period of reform and and he said well two things that we can't lose sight of one we would never be acceptable to us to have the extremes of income inequality that you have in capitalist developing countries well actually in the next several decades China did have that and he said we will never accept dismantling state ownership in may in some of the big sectors of the economy of of infrastructure and heavy industry services definition then and on the second of those they've stuck by that through the 90s we saw privatization of small and medium businesses until the private sector became bigger than they the state-owned sector but but but they didn't privatize the big infrastructure companies they the big heavy industry companies I there's no sign that they they will on income distribution we've seen equity questions become more and more important in party and state policy and strategy in the last decade and the new that what I've been describing for the last few years says the new model of economic growth in China was built into the new into the 12th five-year plan from 2011 to 2015 and equity and income distribution and doing something about the environment have became high priority questions those two issues were actually quite closely interrelated bit and China since then each year has gone further in new policy on both of these questions equity and income distribution and and the environment at the the first year not much happened 2012 you started seeing change on both these things in the statistics and the changes gathering momentum the standard statistics show that the Gini coefficients are pointing to a reversal of the growing inequality in the last three years now it's a big gray economy in China a lot of a lot of undeclared income so one has to think about whether that's changing as well very clever Chinese economist one shallow back in Beijing now a very long time ago he was a student of mine he's been measuring the gray economy and I had dinner with him and with that I found the vice-president of the Chinese Academy of Social Sciences a few weeks ago and they said that that the improvement of the Gini coefficient is there whether you look at the whole economy including the grey economy or just the official data so I'm pretty much satisfied that that's turning around so I think that that it was none too early whatever the Communist Party thought was okay I think the Chinese people were deciding that the growing inequality wasn't okay and this would have been a source of political instability if it hadn't been corrected we're starting to see signs of it being correct the same structural change in the economy that's necessary to deal with that problem is also helpful to the environmental problem Roset thank you very much we do have to stop now but I think we've had a treat this evening that there very few economists in the world and perhaps certainly one who can bring that great sweep of intellectual history around the arguments about the economy and democracy that could illustrate that with deep knowledge of China and on top of that bring into the discussion the interactions you had with dung shopping and Josh young Lee not many people say well I did discuss this matter with so we heard a very special talk tonight do please read it when it will go up on the web I hopes to fall before long or that's up to the LSE okay well soon because the LSE is quite spectacularly efficient and but it remains for me to thank you Thank You Ross for a very special evening thank you

Channel: LSE

Views: 15,530

Rating: 4.7852349 out of 5

Keywords: LSE, London School Of Economics And Political Science (College/University), University Of Melbourne (College/University), Economics, Capitalism (Political Ideology), Socialism (Political Ideology), Democracy (Quotation Subject)

Id: LDsoxtDSudM

Length: 92min 54sec (5574 seconds)

Published: Fri Oct 10 2014