The ‘disciplining role of markets’ should be replaced by the disciplining role of democracy

When we elect governments we should expect that they will do what they promised and represent our best interests. We don’t expect them to represent a small, privileged sector of the economy at the expense of the rest of it. The problem is that we overlay these aspirations onto an economic ownership system which has a different logic to our understanding of the operations of a democratic state. And mainstream economics gives reverence and priority to the logic of capitalism rather than ensuring that the quality of democracy is maintained. Which reflects its origins – as an apologist for the unequal ownership of the material means of production and the consequences that arise from that inequality. We keep seeing a restatement of that priority from prominent policy makers and while that generation is in charge it will be hard to really shift the paradigm.

Late last year (November 5, 2020), the head of the Bundesbank, Jens Weidmann gave a speech in London to the Official Monetary and Financial Institutions Forum (OMFIF) – Too close for comfort? The relationship between monetary and fiscal policy – which exemplifies the sort of ideological resistance that is going on among mainstream policy makers to the more pragmatic choices being made by governments facing catastrophic consequences arising from the pandemic.

It highlights the contradictions of our lives.

On the one hand, is global capital, which reflects the inequality in property ownership that defines capitalism.

Its strategic plan is to harness the capacity of the state, to reconfigure it, to ensure that the policy space provides the least resistance to its ambitions to maximise profit.

Only the smallest proportion of its operations relate to anything that advances well-being of the people in general.

The wealth shuffling creates massive wealth for a tiny few in relative terms.

It will engage in widespread fraud, lie, bully and more to achieve its objectives.

We could eliminate the vast majority of the financial sector and most of us would be better off.

When capitalist hegemony was dominated by industrial capital – the robber barons – it was easier to control the capitalist lust because the surplus value production required reaching agreements with industrial labour.

And through our governments, we could strive for social democratic goals using interventionist fiscal policy, because capital required production of things for it to prosper.

That is not to say that the state didn’t provide substantial support for the surplus generating machine.

Of course it did. It developed mass education and training systems, public health, public transport, public infrastructure and all sorts of advantages that capital could leverage off at no expense.

State procurement contracts were essential and we developed an understanding of the military-industrial complex which grew out of the benefits derived from fiscal policies that ensured full employment and strong growth.

There was always a conflictual distributional struggle – bosses wanting more and paying less, workers want higher pay for less work – but, mostly, this was mediated by the role of the state.

But neoliberalism changed all that.

The state abandoned its role as a mediator of the conflictual goals of labour and capital, and, instead, began to operate as an agent for capital.

In that role, the state started to use its legislative and regulative power to reduce the capacity of trade unions to achieve wage gains, to protect workers, to even represent workers as the concept of ‘independent contractors’ emerged to avoid statutory minimum labour conditions and more.

The state privatised public entities, putting more wealth into the speculative domain, which meant, for example, that essential public goods (telecommunications, energy, water and more) became objects of financial speculation, which distorted and, as we have seen, compromised their original purpose.

Think Texas at the moment.

The state also embraced the emerging Monetarist doctrines which also resulted in reduced employment growth and elevated levels of unemployment and reinforced the attacks that were made in the industrial relations domain that reduced wages growth and redistributed national income towards profits.

This was going on at the same time as global supply chains were widening and the narrative in the 1970s conflated the opening up of trade and supply across borders with the emerging Monetarism and its microeconomic expression in the form of deregulation, privatisation etc.

That conflation, promoted by the pro-capital interests on the Right, completely fooled the progressive forces of the Left, and social democratic political forces were coopted into becoming part of their own destruction.

Thinks British Labour mid-1970s, French socialists 1980s, Australian Labor Party 1980s and beyond, New Zealand Labour Party 1980s – and a whole raft of progressive parties all around the world.

They were compromised and became neoliberal machines because they failed to differentiate between the rise (and advantages) of global supply chains and the shift in ideology towards neoliberalism.

We can have the former without the latter.

But the conflation gave global financial capital the freedom to proliferate and that made the link between profit and production less obvious.

And capital through its lobbying power has also meant that there is now democratic deficits rising all around the world. So, we don’t even get to express our political choices on an even playing field.

But the incompatible logic between democracy and capitalism and the compromise of the former by the latter has brought the world to its knees.

Why? Because capitalism has always required the state to attenuate its tendency to crisis.

Crisis creates social havoc and that, in turn, makes the voice of the people stronger – such that governments cannot blithely ignore us.

And the pandemic has meant the capitalism is now on state provided life support. Without the state support, substantial proportions of capitalist enterprise would fail now and that has meant that the pro-capital apologism of mainstream economics is being (termporarily) ignored in favour of fiscal dominance and the use of monetary policy to support that dominance.

This is a major shift away from the claims that monetary policy has to be independent of the political aspirations of the nation – that is, the democratic expression – which for several decades has been the way neoliberal ‘depoliticisation’ has operated to allow elected politicians to use fiscal policy in an irresponsible way (austerity bias), but, at the same time, shift the responsibility for that destructive conduct to external bodies like the IMF and so-called ‘independent’ central bank boards.

The mainstream macroeconomists claimed that we should ‘assign’ the macro policy instruments towards monetary policy and away from fiscal policy – which is just fancy terminology to say that fiscal policy would no longer target full employment and ensure that non-government spending gaps were more or less continually closed and that central banks would use unemployment as a policy tool rather than a policy target.

They asserted that this policy regime would make us all be better off.

That hasn’t happened. We are, in general, worse off, while a small proportion of people have gorged themselves on massive wealth creation at the expense of the rest of us.

More people are starting to realise that.

But the mainstream won’t give up to easily.

Jens Weidmann’s speech exemplifies that resistance – he was particularly focused on “the problem of fiscal dominance”.

He admits that during the pandemic that:

… fiscal policy has taken the lead. And quite rightly so. It has both the democratic legitimacy for heavy interventions and the custom-fit instruments.

So acknowledging two important factors:

1. Fiscal policy is a flexible instrument which can be targetted spatially and demographically and impacts directly on the spending and income stream, whereas standard monetary policy (interest rate adjustments) is a blunt (indirect) instrument with ambiguous effects.

2. Fiscal policy discretion is directly tied to our notion of democratic participation and responsibility, while monetary policy is the domain of unelected, and, largely unaccountable board members.

So by supporting a regime that prioritises monetary policy over fiscal policy, one is using an inferior macroeconomic policy tool which expands the democratic deficit.

Weidmann then moved on to discuss the “risk of fiscal dominance”.

He said:

1. “government bond purchases … [by central banks] … risk blurring the line between fiscal and monetary policy” – this is the usual claim that the two arms of policy should be independent of each other except that fiscal policy should be subjugated to monetary policy under this New Keynesian mainstream consensus.

The fact is that the two arms of policy can never be independent. Fiscal policy directly impacts on bank reserves, which require monetary policy liquidity management operations to take into account or lose control over interest rates.

The two arms have to work in a coordinated fashion – on a daily basis.

2. “The problems are particularly pronounced in a monetary union with fiscally autonomous member states. Here, such purchases involve the fundamental risk of mutualising sovereign liability risks through the central banks’ balance sheets” – so a commentary on the Eurozone.

The reality is that the ECB is funding fiscal deficits across the 19 Member States despite all the denial about that.

If the ECB didn’t, then the common currency system would have collapsed in 2010 with the insolvency of several nations, given they surrendered their currency-issuing capacity.

Such behaviour is thus endemic or intrinsic to the maintenance of the currency because the founders’ design was deeply flawed and unsustainable.

It doesn’t mean that misery has been the norm. But in an existential sense, if the ECB does “mutualise sovereign liablitity risks” the system collapses.

3. “Decisions on the redistribution of liability risks should be taken – if at all – by parliaments and governments, not by central banks” – again about the Eurozone.

This statement is true but the reality that it is the ECB that is sustaining the system is just a statement of the reality that the fiscal autonomy of the 19 Member States is so compromised by the fiscal rules that they are unable to defend their own economic and financial systems.

That is where the democratic deficit arises in Europe. It is by design. The states will never be able to redistribute liability risks effectively because they cannot.

4. “the Eurosystem central banks have become the Member States’ biggest creditors – and that was the case even before the current crisis” – which is just a restatement of my point under (2 above).

The central banks are the biggest creditors of the Member States because otherwise many of these states would have gone broke during the GFC because bond markets would have refused to fund them on viable terms given the expanding credit risk.

All the result of a dysfunctional monetary architecture.

5. Then he makes the fundamental point:

For the part of sovereign debt that is on our books, funding costs are decoupled from the capital market. The interest on those bonds flows to central banks, which distribute them back to their treasuries as part of their profit. That weakens the disciplining role of markets. Thus, the incentives for sound budgeting diminish, especially as the EU’s fiscal rules are weak.

This is the mainstream position.

It is taught to university students all around the world as if it is truth. It appears in textbooks (not mine). It is pushed in the financial media.

It is a basic denial of democracy and reveals clearly the role the economic profession plays in supporting that denial.

Why should the ‘capital markets’ have some priority over making judgements over government policy?

The answer economists will give is because they fund the government spending over tax revenue.

Of course, once you blow the cover on that lie – that bond investors are funding the government deficits – then the question I posed starts to bite.

Why indeed?

There is no reason for maintaining a system where bond investors have the discretion to express their own ideological preferences by punishing governments that deviate from those preferences.

That is a neoliberal contrivance to compromise democracies and tilt the capacity of government to benefit the top-end-of-town.


The “disciplining role of markets” should be replaced by the disciplining role of democracy.

We vote.

If we don’t like what government is doing with its fiscal policy interventions then we vote them out in favour of an alternative.

A government cannot do that much damage in one electoral cycle.

We will not break out of this destructive neoliberal era until we abandon the idea that the ‘capital markets’ should in some way be the arbiters of responsible policy settings.

The ‘markets’ are always self interested.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 17 Comments

  1. Wow! There’s a whole bunch to get my head around!

    “Thinks British Labour mid-1970s” – I was in my teens then, finishing school and ‘entering the labour force’… via a British Government Jobcentre. And I recall the “Three-Day Week” and the power cuts, and the unions’ lightning strikes, and the general strikes, and the militant unions that wrecked the nationalised companies – British Leyland, British Rail, British Steel, British Airways… Britain was “the sick man of Europe”. Were those unions actually co-opted by what was the then Callaghan Labour Government? What then caused the “Winter of Discontent”? Not neoliberalism it seems to me. It was the likes of Arthur Scargill who so angered the British public that, despite the millions of union members at the time, Margaret Thatcher was elected in 1979. To cast those union activists of the day as somehow unwitting victims of a malevolent capitalism is pulling a bit of a long bow. That is not to say that Thatcher’s monetarism was the right answer for Britain, but it was an answer. And it was good enough to see her remain in power for 11 years.

    If I can re-write Bill’s conclusion in this context, if we like what a government is doing, we vote them back in against any offered alternative. Even if I personally don’t agree. That’s democracy, isn’t it?

  2. A government cannot do that much damage in one electoral cycle.

    I’m sorry but have you not seen what Johnson is doing to the UK? By the time we next get a chance to vote democracy will be totally dead and buried. He will have tied the hands of all future governments. Game over, I would say.

  3. I think there is already a significant democratic deficit in the UK. The media openly displays political bias – even in mainstream media outlets, such as the BBC. Progressive or left wing political interviewees can expect significantly more hostility and interruptions from their interviewers. George Monbiot writes all too frequently on how our political system serves the interests of wealth and power. Our FPTP system creates a further democratic deficit where a minority vote grants an overwhelming Parliamentary majority.

    Neoliberalism is not the cause of democracy’s demise, rather it is the tool by which wealth and power have captured our democratic systems, rendering our politicians powerless – or rather convincing our politicians that they are powerless.

    The reality is that people in the UK generally favour individualism over collectivism. If you listen to ordinary people talk, you hear individualistic neoliberal explanations and solutions, you rarely hear collectivist explanations and solutions. Despite belonging to a trade union being in the general interest of workers, the numbers of people belonging to one is declining in the UK in every trade apart from retail.

    Political party membership has also massively declined. The Conservative party boasted nearly 3 million members in the 1950’s, and now they have less than 200,000. Labour have also experienced large declines. The party of Government are directly supported by a tiny number of people – a massive democratic deficit.

    Seems to me when it comes to a democratic deficit there is rather a lot to do – and I don’t believe that an emphasis on democracy disciplining the markets is going to happen without a conscious legislative effort to protect our democratic institutions from capture by those with wealth and power.

  4. Off topic.

    The good news is that the dole will be increased (to be announced Tuesday morning). The bad news is that it won’t be raised by enough. I have argued for a further $150 per fortnight, but currently this doesn’t look like getting over the line.

  5. I love this – but not read it all yet. I shall be posting to TU leaders on my LP National Policy Forum Economy Commission. I’ve already sent them JG stuff (plus yours on UBI v MMT – because UBI came up at last meeting) and got a positive response from Unite Ass General Secretary. Another meeting at 12, so have to go.

  6. “I’m sorry but have you not seen what Johnson is doing to the UK? By the time we next get a chance to vote democracy will be totally dead and buried. He will have tied the hands of all future governments”

    No parliament can bind a successor. So this belief would be up there with the ones from Anti-Vaxxers.

    Anything Boris does can be reversed by the next parliament – if it so chooses. In fact that’s how the UK works. Progress isn’t what a parliament does, it’s what the next parliament chooses not to undo.

  7. The working class struggle is economic, political, and theoretical.

    If we accept mainstream political science and economics then the working class will remain in destitution forever.

    I think a concerted movement (led by working people and its allies) to criticize and demolish mainstream academic theories will be something that we need to do in the future.

    Only when their theories are demolished can we move forward. I recently read Paine’s Common Sense and a bit about Women’s bible during the women suffrage movement in the US.

  8. “The state abandoned its role as a mediator of the conflictual goals of labour and capital, and, instead, began to operate as an agent for capital.”

    To be honest, I have never heard this beyond the professor’s blog.

    If it is true that people back then had this clear thought in their heads, then the post-WWII social contract has degenerated.

    Above all, can we not explain the post-WWII social contract as an anomaly in the grand record of capitalistic exploitation caused by the bloodiest war in human history?

  9. “Above all, can we not explain the post-WWII social contract as an anomaly in the grand record of capitalistic exploitation caused by the bloodiest war in human history?”

    Add in the Great Depression just before WWII and that explains it for me Tom. At least as far as the US is concerned. Before that the government was almost always quite clearly on the side of capital. For a while after government was more neutral, but has been shifting back again quite a bit.

  10. @Neil Wilson

    “Anything Boris does can be reversed by the next parliament – if it so chooses”

    I was curious about this… So I went to check if the Withdrawal Agreement could be annulled. This was the subject 2019 amendment proposal which wasn’t adopted.

    Apparently according to the Commons own research, it would actually be very difficult to annul the withdrawal agreement. While there are a limited set of circumstances under which the UK could do so, the main bar is the withdrawal agreements dispute mechanism which the UK Government would be required to follow.


    It appears that not everything Boris does can be reversed by the next Government.

  11. @Mark Redwood

    Who is going to require the UK Government to do anything? There would be some angry voices from the EU but it’s not like there’s any threat of invasion or overthrowing the government. Look at the ease of which the US under Trump withdrew from international treaties left, right, and centre.

  12. @matt B

    I have merely restated the opinion of the commons research department. The bar is the legal requirement in the withdrawal agreement to follow the dispute mechanism.

    It has nothing to do with how angry the EU gets, it’s about the requirement for the UK to follow its own laws which it has enacted.

    I don’t know what your expertise is in UK constitutional law, I personally have a limited understanding, so I rely on the expertise of others, in this case the commons research department. I assume they have the necessary expertise.

    Neil Wilson made a sweeping claim about how the UK democracy works. It turns out that things are more complicated, and that Neil’s assertion has limits. Not everything enacted by one Parliament can be reversed by the next.

  13. “When we elect governments we should expect that they will do what they promised and represent our best interests.”

    Certainly not in the U.S.?

    “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
    Martin Gilens and Benjamin I. Page
    Each of four theoretical traditions in the study of American politics-which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism-offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “

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