From ‘free-market’ to subsidised capitalism

To deal with the climate crisis, governments must recognise that only the state has allowed the last three crises to be contained.

There has been a revolutionary transformation of capitalism, the western economic system, in just over a decade. Four extraordinary events have demonstrated that, in most countries, the relationship between the state and the market has been transformed, radically altering the economic system. The impact on politics is being felt but has it has yet to be fully recognised, especially by progressives.

The first major change was the response of nation-states to the collapse in 2008 of the model of neoliberalism—of ‘rational’ actors operating in ‘free’ markets—with the financial crisis. The state rescue of private financial companies cost taxpayers in all countries vast sums. In the United Kingdom, the National Audit Office put the bailout of the banks at £1 trillion at its peak. In the United States, among many estimates, one figure of $500 billion was advanced. As for Ireland, it cost €64 billion—more than twice total tax revenue in 2010—to rescue its banks.

The pandemic precipitated a second massive intervention by states worldwide through business subsidies. In the US, for example, in one estimate this amounted to $600 billion directly—2.7 per cent of gross domestic product—plus $1,350 billion in interest and other supports.

The third crisis, of energy, has states once more intervening in the market to spend yet more billions in supports to business and to citizens. The US and European governments have been expending vast fortunes in subsidies to companies to continue operations and to citizens to pay their bills. Governments are also spending billions in rescuing key companies, such as Germany’s gas importer Uniper.

These three huge, Keynesian-style state interventions in the market have occurred in most modern economies, under governments of right and left. They were not planned but were nevertheless executed reasonably successfully. The economic system was saved, three times. It was radically altered, but not fundamentally.

Existential threat

Capitalism has been transformed from a system in which markets are ‘free’ of intervention into one where companies are state-subsidised. It has happened three times, in rapid succession—and the fourth crisis is under way. The existential threat of climate change is already demanding even greater state-led action in the marketplace.

In the first three crises, the state took the required actions because politicians of all hues believed they had no choice but to spend big, to save companies, jobs and societies. In the fourth crisis, however, many political leaders still believe they have choices. Most do recognise that climate change demands massive state-led actions, nationally and multilaterally. But they are afraid that the necessary public-led investments at scale, the new regulatory regimes and the new taxes required to bring us through the transition to zero carbon will knock them out of power.

Conservatives oppose change and want things to remain the same. On climate, however, inaction means that things will not remain the same but will radically change—for the worse. Thus conservative politicians should join with social democrats and greens in accelerating the necessary actions to repair the ecosystem.

Governments are failing to meet targets which are already inadequate. Yet the actions of all politicians in addressing the banking, Covid-19 and energy crises show what can be done, with great success, by governments.

Deeply interdependent

State intervention is not new. In 100 years, the size of the modern state has expanded from under 20 per cent of national income in the 1920s to around half today. European Union governments’ spending averaged 51.5 per cent of GDP in 2021. It has been thus for many decades, albeit with fluctuations and with some countries, such as Belgium, France and Germany, higher and the UK and Ireland lower.

The modern economy is a mixed economy where the state and private sector are deeply, symbiotically, interdependent. The large size of today’s state is necessary for modern life and business. What has changed is that major parts of the market system have become, for periods, almost wholly dependent on the state.

The belief of the former UK prime minister Margaret Thatcher that the private sector should be dominant and the public dependent has been deeply challenged and indeed overturned by governments’ responses to these three crises and by the success of the state in maintaining—even saving—the private sector. The ambition of some on the right to shrink the state inevitably fails, because the modern state is too important in sustaining the market system. Much politics is about relatively small shifts in public spending and its allocation and in regulating the market.

Policy would be more effective if the dominant paradigm—that a dynamic private sector drives the whole economy and that public services are dependent on it—was recognised as defunct. The state is not just a facilitator of wealth generation but it too is a creator. The state has been the core driver of some of the greatest innovations in modern technology, such as the internet, the Global Positioning System and other communication technologies, as Mariana Mazzucato showed in her book The Entrepreneurial State.

Power of the state

Churchill famously said: ‘Never let a good crisis go to waste.’ While there was unprecedented state spending in these three crises, governments got little in return and did not use the crises to reduce inequality. In short, they saved the system but let the crises go to waste.

Since the financial crash, banks are better regulated and better capitalised and many taxpayer investments have been repaid. There remains though a large, unregulated shadow-banking sector where ‘financial innovation’ is still thriving, with private equity ominously even entering health and housing. Top bank salaries are soaring, with ‘incentive payments’ leading to further moral hazard and possibly even more collapses. Publicly-owned banks are again being privatised, despite their poor record in private hands, their size (‘too big to fail’) and importance.

The Covid-19 crisis briefly halted the march of unmanaged hyper-globalisation, where the winner takes almost all, as supply chains collapsed and governments intervened in markets in unprecedented ways. Now, however, there seems to be a return to the great inequalities of neoliberal globalisation. During the pandemic, governments failed to insist that subsidised companies must not engage in mass redundancies (as did British Airways and others) or share buybacks or paying dividends from these state subsidies (as did Tesco). Some opposition politicians did signal that such conditions should be imposed before the subsidies were given but they were generally ignored.

Russia’s invasion of Ukraine has however made us realise how dependent on fossil fuel we still are in Europe. With the need for rapid change recognised, the massive scale of state intervention in the energy market shows we can successfully accelerate the drive to the zero-carbon economy.

Wasting the crises

These three big Keynesian public-spending heaves have worked. They have demonstrated the power of the modern interventionist state. Thus the fourth major intervention, the climate transition to near zero carbon, can be achieved too.

Climate change is existential in that it is already beginning to damage irreparably parts of the world and could wipe out humanity. But the success of governments throughout the world in dealing with the first three crises has demonstrated clearly that it is possible to deal with the existential crisis of climate change effectively and swiftly, provided there is the political will.

The major difficulty for politicians in addressing the climate crisis is inequality. It lies in ensuring that the poor and vulnerable businesses do not suffer during this time of major economic and social change. That is why the concept of ‘just transition’, originating in the trade union movement, has become widely accepted in the EU as part of the new political narrative.

We now need a new social contract between peoples and states. Reduction in inequality should be at the core of big, state-led spending programmes to make the transition to zero carbon. That way lies the best chance of success.