After Occupy: Economic Democracy -- Part 3: Finance and Investment

Why is private control of finance and investment undemocratic?

• It keeps the people dependent on an unaccountable minority

• It deprives the public of an active democratic say in deciding how to allocate finance and investment (and thus, how to form its own future).

What is finance and what are the main problems with it?

The lending of money; the mobilization of savings to be used as credit to firms, individuals, or governments

• Non-government sources of finance may include banks, stock & bond markets

• Financiers’ money comes from making profit

Main problems with (private control of) finance:

• Undermines popular sovereignty by restraining government policy

• Fails to provide the public with an active say over the direction of finance

• Doesn’t help democratic businesses survive much

What is investment?

The active spending of money by a firm (or individual/government) to increase or maintain its productive capacity

• i.e. purchasing buildings or office space, buying machines, or critically, hiring new workers

What is the importance of full employment and through what is it usually done?

It is the most effective way to increase wages and living conditions of the majority, as well as for empowering workers to achieve workplace demands. It also enables workers to bargain more forcefully for improved workplace conditions.

It is usually done through:

• Monetary stimulus: a Central Bank increasing the # of money in the economy and lowering short-term interest rates. 

  • This makes it easier for businesses to get loans to expand their business, hire new workers, etc.

• Fiscal stimulus: can work through tax cuts or deficit spending (which means that the government borrows money from its own citizens by selling government bonds and then spends this money in order to increase the level of demand in the economy to increase employment)

What has the open borders to capital (the elimination of capital controls by neoliberal governments) entailed and what has it led to?

• It undermines governments’ ability to use its control over interest rates to manage the economy.

  • That is to say, if a Central Bank lowers the interest rate, this can lead not to an expanding economy, but capital going outside the country as financiers seek higher interest rates elsewhere.

  • This capital flight causes the currency to go down, which makes imports more expensive.

    • Often financiers will send money outside of the country and engage in currency speculation, which is when financiers speculate against the currency by selling the domestic currency and buying a foreign one (selling the currency makes it LOSE VALUE)

  • If the country imports a significant number of goods, it can find itself with a lower standard of living and higher inflation.

• Fiscal stimulus also becomes harder.

  • Because if bondholders become worried about how potential government spending could cause inflation, they could sell their domestic bonds, which will make interest rates rise.

  • This makes it more expensive for governments to borrow the money necessary to pay for their promised policies.

What is the main problem with social democratic financing?

They attempt to provide citizen democracy through the institution of the state.

• The state tries to fix market failures so that finance will be allocated more democratically

• State politicians discuss what kind of public investment is needed

But the state is NOT an ideal institution for this.

• This means citizens have little accountability or input into these matters

• The state also lacks the necessary tools for dealing with small-scale externalities.

A more appropriate public institution would be sensitive to local accountability and have nimble tools at its disposal (i.e. to offer many different types of loans to respond to local market failures)