by Tim Hayward edited by O Society August 1, 2019
This post introduces some central arguments of my book Global Justice and Finance.
In a world where extreme inequality consigns many millions of the least advantaged to conditions of crushing poverty, there is an evident case of justice for some redistribution of income and wealth. Thinkers about justice put forward various proposals for how best to raise and distribute funds to redress radical global inequalities. Questions about how funds might be transferred, however, have not been foregrounded. These are tacitly assumed to be technical matters of implementation rather than of any particular principled concern.
Yet how finance actually works is itself a concern for justice, and the aim of understanding this is central to the book. For money, in a given social order, exists in a determinate form, and this affects what it can be used for, how, and by whom. Thus questions of principle arise not only from the presumptively unjust distribution of monetary assets in the world but also from the conditions of their production.
A distinctive feature of money in its various forms as created by banks and other financial institutions today is that it involves a considerable amount of leverage: the amount of tangible assets held by the issuers represents a tiny fraction of the sums created as credit. The power to affect the supply of money – i.e. the terms and conditions of its availability – is inherently a power to affect its value too. If one understands the value of money to be determined at least as much by decisions of those with command of the financial system as by the material value to human beings of products it can be exchanged for, one has reason to be cautious about thinking that money can necessarily be regarded as a reliable proxy for the material things humans value. It could therefore turn out that ambitious redistributive proposals, if and when implemented, do not achieve the goal envisaged.
There is especially good reason to be cautious about the assumption I refer to as that of benign leverage. This is the assumption, common in Western liberal thinking about global justice, that, by doing relatively little, the affluent of the world—individually and collectively—could, if only they had the political will, achieve a great deal of good for the mass of the worst off people in the world.
For instance, Thomas Pogge calculated that $312bn per year could eliminate global poverty by lifting everybody above the $2 a day threshold, which would involve a transfer in the order of just 1 or 2 per cent of total global annual income. Peter Singer makes similar calculations to show ‘how easy it would be for the world’s rich to eliminate, or virtually eliminate, global poverty’ – the amount involved requiring a relatively modest monetary sacrifice on their part.
When we seek to understand how benign leverage is possible, however, we encounter something of a paradox. For in order that only a little effort by the affluent might suffice to lift a great many people out of poverty, it has to be the case the affluent are well off and the poor are very badly off; yet, as soon as imbalance starts to be redressed, the ratio of effort to outcome also starts to shift. Given money transferred to the very poor only results in tangible benefits where there is production of the goods and services it is needed for, and while it can stimulate demand for them, their material supply has still to be organised. The productive processes involved are likely for various reasons to shift the ratio of costs and benefits. An implication is on making clear progress towards achievement of the goal, the goal becomes harder to achieve.
This paradoxical aspect of benign leverage is not necessarily a fatal flaw, since the amount of effort that it is feasible to make could conceivably be sufficient to alleviate severe poverty. However, for what is conceivable to become a reality, there are two further potential problems to be taken into account.
One is that the possibility of applying an economic surplus of the affluent to meeting the needs of those worse off is limited by ecological constraints on the sustainable scale of total economic growth. This problem cannot be circumvented by schemes involving the ‘offsetting’ of ecological ‘costs’ of some kinds by ecological ‘benefits’ of other kinds. Such schemes are often proposed by those who are keen to develop financial instruments in innovative ways, but by misrepresenting the fundamental problem they can contribute to exacerbating it.
The real situation is humanity collectively needs to control the demands it places on resources. If the deprived are to have a greater share, this means the advantaged may not be able to continue enjoying such a globally disproportionate share. The possibility of benign leverage might therefore be not so much a solution to the problem of radical inequality as a symptom of it.
If that first potential problem highlights the risk of a disconnect between financial representations and ecological realities, the second concerns a disconnect between financial representations and the economy itself. This is due to the fact that the prices of money bear no inherent relation to the value of goods. Money prices, moreover, can fluctuate, sometimes wildly and rapidly. This is a crucial reason why the nature of the monetary system that is presupposed cannot be ignored when thinking about global economic justice.
Thus the problem to consider is even if there were the political will and technical means to transfer income or wealth in the order of the 1–2 per cent deemed necessary to alleviate severe poverty globally, the real economic effects of so many people undergoing such a significant change in circumstances would be great enough to register in the calculations entered into market decisions affecting the prices of money. The risk then is a global redistribution of an order of magnitude of 1–2 per cent could prompt reactions in the financial system that would cause counter-distributive effects—potentially annulling any gain to the worst off or even exacerbating the initial injustice.
This concern lies at the heart of the book, which seeks to take account of how global transfers aimed at achieving greater justice could be undermined by counter-reactions of actors in financial markets. For the workings of the global financial system today appear to be both dysfunctional and unjust. While the purpose of finance—viewed in terms of substantive aims of human social cooperation—is to facilitate projects that build the economic basis upon which people may pursue a good life, the ways finance now works tend to incentivize short-term profit taking over longer-term wealth creation, and, in the process, make life worse for many people.
As the global financial order continues to generate debts for the greater mass of human beings, a grotesquely disproportionate holding of credits among a tiny elite is enabling them to gain effective control over the world’s real assets. As a further consequence, our treatment of the nonhuman world is being pushed to harmful extremes. People are driven to ever more desperate measures in attempts to wrest value from the world’s natural resources. In short, we seem to be headed towards a ‘perfect storm’ of economic unproductivity, gross social inequality, and ecological catastrophe.
Global finance appears to be overrun by what Susan Strange called ‘mad money’—money backed by little real collateral but having a very real capacity to increase indebtedness around the world. This is something that would need to be brought under political control and accountability in order for anything approaching justice to be possible in relation to global finance. The issue is about who controls the monetary system. Money is a crucial public good, and yet it is not under public, political, control.
With an increasingly globalized financial system that is expanding in scale and power relative to institutions of politics, economics, and law, there has developed, largely unannounced and entirely unaccountably as far as the global public is concerned, what amounts to a privatized global constitution. A set of binding legal arrangements that bypass and transcend sovereign jurisdictions and even other aspects of international law has been building up in support of the global financial system. Its transnational character is so strong that even at times of war between states, the close cooperation of its members is maintained.
The fact that financial relationships can be maintained even during times of war demonstrates that human beings have collaborative concerns that rise above the conflicts that can occur. It also serves to point up a bitter irony. Of the billions of human beings on this planet it is doubtful that very many actually desire ever to have a war, but few have any opportunity to ‘rise above’ a conflict if it is generated in their vicinity or in their name. The further a person is from the apex of the financial system, the less chance they have of escaping the effects of war when it comes. They are also the people with the least power to decide whether or when there should be a war in the first place.
A fundamental problem is that the profit-driven global financial system geared to the interests of owners of capital has been organized more quickly and completely as a normative framework for global order than any political arrangements aimed at promoting the public interest. It runs counter to the imperatives of seeking justice, ecologically sustainable productivity and peace. Its radical transformation is therefore evidently required.
Because the financial system developed something akin to a privatized global constitution, to secure conditions of social justice for the people of the world and ecological sustainability for the planet requires the constitution of a global normative order guided by public and political decision-making. The achievement of a publicly accountable and responsive constitutional order superordinate to the organizations of finance, as these have developed in the service of a global capitalist economy, would amount to a revolutionary transformation.
(artwork by Sandi Baker)