Livingstone's economics

Ken Livingstone advocates that new investment in the Tube be financed by selling bonds (bits of paper entitling the owner to a regular fixed percentage payment, e.g., £5 every year on a £100 bond). The Blair Government and Frank Dobson insist it be done by paying private contractors to take over the tracks and make the investment (the so-called Public-Private Partnership, PPP).

As Livingstone says, his formula is cheaper. Both formulas amount to London borrowing money from capitalists for the investment, and paying them well for the favour, but on bonds London would have to pay the average rate of interest - maybe not much more than 5% - while on PPP London would have to pay the average rate of profit, at least 12%.

The other advantage of bonds, probably a more important one for workers, is that the Tube workforce would still be one unit, under one employer, instead of many Tube workers being transferred to private contractors. Ken Livingstone is right that bonds are much used in other countries, for example the USA, to finance local government spending. They are also much used by central government in the UK. In any period when central government spending outruns income - it often does, because spending and income do not vary at the same rhythm - the government sells bonds to cover the gap.

The Treasury does not want Tube investment financed by bonds because it is fanatical about keeping control over the total amount of public-sector bond-selling (borrowing). The theory here is that public-sector bond-selling siphons the top off a more-or-less fixed pool of cash available to be lent for investment (building, re-equipment, and so on).

Money-men will prefer to lend to the public sector because it's safer - when they lend to a private capitalist company, there is always the chance that it will fail or disappoint. Thus, expanded public-sector bond-selling "crowds out" private capitalist investment. By taking cash from previously idle holdings - in exchange for bonds - and spending it straight away, public borrowing may also "heat up" market and push up prices.

And, for central government, a bond issue by London would be a dangerous precedent. Other local authorities would want to do the same. The tight web of financial controls by Whitehall over local government - which the Tories greatly tightened, and New Labour does not want to loosen - would begin to unravel.

A bond issue would certainly be better than PPP. But it is not a socialist policy. The socialist policy would be to get the resources to expand public services by taxing - or expropriating - the rich, not by paying them to lend the cash. The fact that bond issues by cities are so standard in the USA should be proof enough that they are not socialist. There is more freedom for local government in the USA - but it is the freedom to compete or die in the capitalist jungle, rather than the freedom of a community organised for the common good. In the USA, cities can go bust. New York City nearly went bankrupt in 1975-6, extricating itself only after cutting no fewer than 65,000 city jobs. Orange County, California, went bankrupt in 1994. Cities have to fit their policies to what the "markets" will accept: hardly less oppressive than British local authorities having to fit in with the cuts programmes of central government.

Unfortunately, the whole of Ken Livingstone's output as a self-promoted expert on economics is in the same vein as his bonds scheme. It is a collection of quick-fix formulas designed to make capitalism work better. Many of his proposals can be supported as far as they go - but where they go is nowhere near socialism.

His chief ideas, as summarised in the comments of his Socialist Economic Bulletin on the 1998 Budget and in later articles (e.g., The Independent, 11 August 1999 and 18 August 1999) are as follows. Cut interest rates. Devalue the pound (i.e., shift its exchange rate, so one pound is worth fewer euros or dollars or yen). Increase taxes on incomes over £40,000 a year, on dividends, and on short-term profits. Keep business tax breaks for investment. Cut military spending to the average West European level. What all this will do, according to the theory, is "tackled the crippling distortions of the UK economy", distortions which arise from excessive resources going into consumer spending (especially on imports) by the rich and into military spending, while not enough goes into investment. Livingstone's policies, so he says, will lead to capitalists investing more (building more factories, introducing more new machines). Then the government could "eventually raise" wages and social provision "through the extra resources that economic growth created by investment will create". (SEB, November 1995).

The obvious question is why the more "undistorted" capitalist economies of other countries are not workers' paradises! "Undistorted" capitalism is not necessarily any closer to socialism, or to workers' interests, than "distorted" capitalism. There is no guarantee at all that capitalists would respond to such measures by investing more. They might take their cash overseas, or just hold it tight for better days. Many mild-left governments that based their hopes on pushing and pleading the capitalists into investing have in fact been met with "investment strikes". The only decisive way through is by taking the big banks, financial institutions, and industrial giants into public ownership, under workers' and community control, so that socially-planned investments can be directly carried out as public policy.

Even if capitalists do invest more, there is no guarantee that "the extra resources" will "trickle down" to wages and welfare. More investment, in a capitalist economy, means more capital. More capital means more power for the wealth-owners over the workers.

But for Livingstone, "the key to understanding the present situation", the major "distortion", "the real problem", is "a world, and UK, shortage of capital" (SEB, March 1996). We must get more capital created (that is, as Marx would put it, more alien wealth that dominates the workers) before we can seek real improvements!

In fact, both Britain and the other major capitalist countries are full of idle factories, unused capacity, and vast capitalist cash-hoards. The evidence for a "shortage of capital" is extremely elusive, because the whole idea is a product of unclear understanding of the concept of capital. In a crisis, industrial capitalists have both an "excess of capital" (more productive capacity in their factories than they can use profitably) and a "shortage of capital" (insufficient stashes of cash, or access to credit, to meet their bills). The socialist answer is not "more capital", but to abolish capital through a democratically-controlled co-operative economy.