The unhappy marriage of democracy and capitalism

Most Western countries, including Greece and Australia, have a system of democratic-capitalism. It marries a democratic political system with a capitalist economic system and they are perceived as being well-matched because both are founded on philosophies about individual freedom. It is, however, not necessarily a happy marriage. In the current Greek situation, it is very clear that capitalism is abusing its spouse democracy, and capitalism is dominating the marriage. What does that mean for the future of democracy? Can the marriage be saved? Or should democracy move out and find a new partner?

In January 2015, the people of Greece expressed their democratic right and elected a leftist government — a reaction to austerity measures that had been imposed on the people by previous governments since 2010.

Admittedly, Greece had been living beyond its means, accumulating mounting deficits each year, but as part of the euro-zone had no control over its own currency. With such control it could have devalued its currency or, if floated as an individual currency, it is likely that it would have been sold down well before the situation became as bad as it did. Germany, however, is the heart of the euro and its economic performance tends to drive the relative value of the euro on the world’s currency markets: so Greece was always going to end up in trouble and did so when the GFC hit.

But austerity measures made the situation worse, not better. Unemployment rose, reaching 26.8% in January 2013 and by April that year youth unemployment was 60%. Overall unemployment continued to rise, to 28% in February 2014, no doubt helped by the sacking of 15,000 public servants during 2013. Three-quarters of the unemployed were then long-term unemployed (longer than 12 months). The latest figure I was able to find shows unemployment has fallen slightly but is still at 25.3%.

GDP has been in ‘negative growth’ (that is falling rather than growing) for most of the time since the GFC in 2008, dipping to ‒8.9% in 2011 and was still at ‒3.3% in 2013. By 2013 GDP per capita had fallen to 2004 levels (GDP per capita is often a proxy for standard of living). In all, Greece’s GDP has slumped by 25% since 2008. In 2010 the government’s revenue was €97.2 billion but had fallen to €78.1 billion in 2014 (this for a population of about 11 million). And yet it is the revenue side of the equation that has been Greece’s main problem: its historic spending levels, around 50% of GDP, are similar to many other European governments but its revenue (around 40% of GDP) has been lower. If revenue had not fallen so disastrously (largely a result of the austerity measures), it could have achieved a balanced budget in 2012 or 2013 with no further cuts to spending. It is little wonder that Greek people took to the streets in reaction to the waves of austerity that were introduced. Apparently, Greece now has a ‘primary surplus’, meaning revenue can meet government expenditure, but it is the interest on loans and repayment of loans that is causing the problem, as the total government debt is now 170% of GDP.

There was a glimmer of hope in 2014 when GDP grew marginally but as successive presidential elections late in the year failed to achieve a clear outcome, and then the election of the leftist Syriza government in January 2015, GDP began falling again as financiers and big business pulled money out of the country (I have read estimates ranging between €40 billion and €55 billion). With the uncertainty, including the prospect that Greece may withdraw from the EU, people also began withdrawing their money from the banks, threatening the stability of the banks. The banks had been able to support themselves by borrowing money from the European Central Bank (ECB) using Greek government debt (bonds) as collateral but in February this year the ECB said it would no longer accept Greek government bonds — leading to more money being withdrawn (€23 billion so far this year). Despite that announcement, the ECB has made a €1.9 billion profit from trading Greek government bonds: it has agreed to pay that to the Greek government but has not yet done so. Greek government bonds are now considered ‘junk’: the rate demanded on the financial markets has varied between 19% and 25% to cover ‘risk’ — that is the sort of rate charged by ‘loan sharks’ and means the value of an initial loan would double in 3‒4 years. Borrowing at such rates would create an impossible situation which is why the Greek government is now mainly reliant on loans from the ECB and the IMF. Many of the private financiers were paid off in earlier bail-outs in 2010 and 2012 when they also took a 20% ‘hair cut’ (in other words, they were paid 80 cents in the dollar on what they were owed).

The new government has been trying to renegotiate the loans from the IMF and the ECB. It wants an easing of the austerity conditions. It does not want to undertake any further labour market reform (at least in the short term); it wants to rehire 4,000 public servants; and is refusing to make any further cuts to pensions although it is open to reform of the pension system. The government recently said that if forced to choose between repaying loans and paying the pensions, then it would pay pensions — in other words it would default on its loans.

The people have spoken in the home of democracy but the bankers aren’t listening.

Mark Weisbrot from the US Centre for Economic and Policy Research said of the move by the ECB to refuse to accept Greek government bonds:
“They are trying to force the government to abandon its promises to the Greek electorate, and to follow the IMF program that its predecessors signed on to. … The ECB should be ashamed of its latest assault on Greek democracy. And they should not be able to get away with disguising it as anything less than that.”
And Joseph Stiglitz wrote:
Seldom do democratic elections give as clear a message as that in Greece. If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics.
It fits with a common criticism of our society since the 1980s: that the ‘economy’ has come to dominate political debate rather than debate about ‘society’; that we have become an economy, no longer a society; that dollars, not people, now rule and determine the actions of governments.

While money may be an essential part of our system, allowing exchange between people who do not know each other, for items that may be made by someone else, it appears to have also become a tradeable item (a commodity) in its own right. Capital markets do allow for borrowing for genuine purposes, like banking needs and productive activities, but they have also become, like stock markets, a source of speculation and profit making. In Australia we know that banks are amongst our most profitable institutions and, in Greece, banks are among the biggest private companies in the country. How have we allowed that? Money is meant to be a servant, a medium of exchange, but it has become so much more.

Consider who benefits from bail-outs to countries. A country may borrow funds to meet the normal activities of government, particularly for public infrastructure, but if the government cannot repay the loan when it falls due it may be bailed-out. That bail-out is not to help the government directly but to allow it to pay the original financiers. It is done because a ‘default’ is considered a threat to the international financial structure — why? One reason is that if one or two countries are allowed to get away with defaults, then others may follow suit, lenders would no longer feel confident about lending if they weren’t going to get their money back and lending could dry up. With no capacity to borrow, governments would have to print their own fiat currency — which they can do anyway — and there would be no need for international financiers! (And, of course, they can’t allow that to happen.)

We also saw during the GFC that the Wall Street banks were bailed out — they were ‘too big to fail’ — while ordinary people lost their homes. Why couldn’t people have been paid that money to pay out their mortgage and thus save their home? — the money would have gone back to the banks in payment of the mortgage. The government could make the payment as a loan, even at concessional rates (though given that US interest rates are so low it wouldn’t matter too much). As I understand it, the housing bubble burst, house values fell, so people owed more than their house was then worth and many just walked away. The government could have paid people to buy their houses at the lower price, saving the government money, and the banks would take a ‘hair cut’: they would get some money back but not the full value of the original loan. What’s wrong with that? Isn’t that just allowing normal operation of the market?

The banks had created the problem by buying and selling debt as a means to make a profit. They had mixed risky debt with a small amount of ‘safe’ debt and sold the entire package: they were making a ‘killing’ until it unwound. But still they were bailed out with taxpayers’ money.
Whatever regard they [the banks] may claim to pay to the wider concerns of the nation, their policies are dictated in the last resort by the desire to make profits and to secure the value of their own assets.
That was said by Ben Chifley in 1947 and nothing has changed.

Yes, we need a financial system but it has gone way beyond its original purpose, which was to support the operation of the market, and has become a market in its own right. Traders buy and sell currencies, not just to make necessary international transactions, but to speculate on a currency’s rise and fall and make a profit. Such speculation may even impact the value of a currency. Is that a valid use of the financial system? — I think not, but that’s only me.

I do not propose that we should go to a socialist system as that certainly didn’t work, as least as it was pursued in the Soviet Union, but governments should, at the least, be playing the role of arbiter between the market and society and not simply supporting the big end of town because of its economic power. Governments in a democracy are elected by the people and are meant to represent the people but too many seem bent on putting the economy, and the companies allegedly contributing to the economy, first.

As Eva Cox wrote in a piece for The Conversation:
… mainstream centrist parties’ economic emphases are struggling to engage voters as their policies are failing to respond effectively and acceptably to GFC-damaged market models.

A consistent trend is voter concern about public spending cuts and economic priorities that promote markets as the means to cut “excessive” public costs.

Questions need to be asked about why there is little or no serious discussion on the relative roles of government, markets and communities in delivering goods and services for the nation. [emphasis added]
The emphasis on the ‘free’ market that arose from the rise of neo-liberalism in the 1980s may have contributed to increased overall wealth but at the cost of greater inequality. Even the IMF has raised concerns that increasing inequality is leading to public distrust in the political process and greater social instability. In essence, the system is failing to support democracy and the people are realising it.

Is China the modern example we should be following? — a form of guided capitalism. We may not adopt its political system but a system where the government exercises greater control of the economy. There would be an outcry that that is against individual freedom as embodied in the free market but capitalism, in practice, already undermines the individual freedom of the majority as rising inequality makes clear (and according to Piketty that is inherent in the capitalist system).

I found it passing strange that Catherine Livingstone, President of the Business Council of Australia (BCA), told the National Press Club:
As it stands in Australia ... the gap between the digital literacy of our young people and that of our competitor nations is increasing.

If we want increased productivity and participation, we need urgently to embark on a ten year plan to close that gap. [emphasis added]
I didn’t think we were allowed to mention 5 and 10 year plans: aren’t they something associated with socialist systems? But perhaps now that those systems no longer exist we can talk of such plans without the Cold War political implications. If even the BCA can be talking about 10 year government plans, then there is a case that business recognises that the market cannot provide everything that makes the market work. Governments still have a key role and should be fulfilling that role, not simply dreaming (as our current government does) that the market is capable of doing everything ‘better’ and more efficiently. Without that ‘10 Year Plan’, the BCA is well aware that efficiency and productivity may become historical constructs that we can only recall with fond memory. (It is also of more than passing interest that Bill Shorten’s emphasis on science, technology and maths education in his Budget Reply speech is exactly what the BCA asked for.)

The Greek situation has, in my mind, brought this tension between capitalism and democracy into sharper focus. But governments are in thrall to the big capitalists and the financial institutions and are yet to acknowledge it. They will not recognise it while they remain blinded by the ‘free market’ philosophy of neo-liberalism, and refuse to see that it is not only the market but also governments and communities (as Eva Cox said) that have a role in ensuring a country gets the goods and services it needs and wants.

Is it time that ‘democracy’ sought a divorce from this domineering and aggressive ‘capitalism’ so that governments again understand that the ‘demos’ in democracy means ‘the people’, not markets and money?

What do you think?
Who is really running the nation? The government or the bankers and capitalists? And where do we, ‘the people’, fit in that? While Syriza in Greece is trying to redefine and reassert the government’s role in the economy, and a similar party, Podemos, is gaining popularity in Spain, should the people of Australia, as Ken suggests, also be demanding a change? Or are most Australians too apathetic to care? Is Labor offering an alternative or not? Ken’s piece raises many questions and we will be pleased to share your views on those questions.

Next week we return to budget issues when 2353 discusses ‘The $19,990 special’.

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7/06/2015Ken What a magnificent discussion piece you have written. You challenge the supreme power that neoliberal thinkers ascribe to 'the markets', and to financial institutions, which you point out have become prime movers in the economy rather than the servant of the people, thereby eroding democracy itself. It is a piece I shall re-read several times. As I'm on tour in Queensland, I'm restricted to responding by way of an iPad. So my response is short, but full of admiration for you for gifting us with this learned treatise on a crucial economic and political issue.


8/06/2015Thank you Ad. It is only a discussion piece in the sense that to do full justice to the topic would require a piece two or three times as long - perhaps room for a couple of follow-up pieces. :-) As you point out, the key argument is that our current emphasis on matters economic, following a neo-liberal (IPA) agenda is undermining democracy and making 'the people' less relevant in government decision making.


8/06/2015Ken: your basic thesis is correct. It is NOT "the economy stupid". It is the people that count and the economy should serve their interests. Once we get that right, things begin to fall into place. Economic "growth" has no meaning if it is restricted to just 1% of the population, and even the IMF and World Bank are coming to this conclusion (rather too late after all the damage they have done).


9/06/2015Human Rights Commissioner Gillian Triggs has been looking out for the welfare of others, it has been alleged. Gillian Triggs Accused Of Human Rights The Shovel on June 8, 2015 Immigration Minister Peter Dutton has laid out damning evidence that suggests Professor Triggs has a long history of human rights. As recently as last week it is claimed she spoke out on behalf of a minority group. If found guilty of human rights, Professor Triggs could be forced to step down from her role as Human Rights Commissioner.


9/06/2015totaram Thank you and I agree completely with your comment. Governments are supposed to be focused on the well-being of society, not the well-being of the economy. The economy is important to allow governments to act but, as you say, it really requires politicians to have a different mind-set where the economy is used to support the needs of the people rather than wringing their hands and saying we can't do anything for the people unless we get the economy right. As you say, the economy will follow if the people are allowed to drive it.


9/06/2015Ken Ad astra already said it perfectly, 'magnificent discussion piece', but let me add, you have provided us an awesome explication of the dilemmas facing governments, most pressingly in those countries with large sovereign debt, but in fact everywhere, including Australia. I use the word 'awesome' quite properly here, meaning I can only appreciate and acknowledge your essay, without being able to contribute much at all. Poor Greece, what a problem it has, yet as you say it has brought sharp focus to the situation, and it may in fact force the international community to finding new behaviours, including the willingness to take "haircuts" in order not to lose their heads! Totaram You're right, (and Abborrrtt's fixation on Debt is dead wrong), Government's primary responsibility is to its constituents, not just the 1%. It's gone far too far the 1%'s way already. Casablanca That sounds serious for Gillian Triggs! Going to your link now. All Murdoch's minions And All Abborrrtt's clowns Can't force our Gillian Triggs to stand down!


9/06/2015thanks TT Yes, we can only hope that 'the light' starts shining; that governments and large institutions start realising that there is something inherently wrong with the system at the moment - or, perhaps more correctly, the way the system is being used and managed at the moment. As I suggest, I think people in western economies are beginning to realise that there is something wrong (when all this increases wealth is going disproportionately to the 1% as you say) and, hopefully, that pressure on 'democratic' governments will lead to a reassessment of where we are going and of government's role in the economy. The extreme neo-liberals would have us believe that there is no role for government in 'the market' but, I think, the reality suggests otherwise - and that was why I quoted the BCA President as an indication that even business recognises a role for government. Now governments have to realise it.

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11/06/2015Casablanca What a delightful slice of satire you point us to at The Shovel. Gillian Triggs is a resolute person, who will not be intimidated by the likes of George Brandis and Peter Dutton, the Coalition's bully boys. It will be fascinating to see her on Q&A next Monday, and to observe how the audience reacts to her.

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11/06/2015Folks There seems no end to Joe Hockey's economic ineptitude and confusion as his continuing foot in mouth episodes demonstrate. On the one hand he insists that there is no 'housing bubble' in Sydney or Melbourne (despite authoritative evidence to the contrary), and asserts that all that is needed to buy a house in those markets is a 'good job with a good income'. He accuses Labor and Bill Shorten of wanting to 'smash house prices' (another Abbott three word slogan), and offers his answer to declining housing affordability: increase the supply of land and houses. Applying the 'supply and demand' principle, would increased supply drive house prices down, which on the face of his assertion seems to be his reasoning? If that were to occur Joe, would that 'smash house prices'? If so, how would your smashing of house prices be different from Bill Shorten's?

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11/06/2015Folks Now Tony Abbott has joined Joe Hockey in describing wind turbines as 'visually awful'; he tells Alan Jones that 'his government is working as hard as it can' to reduce the number in Australia! Does he consider the power pylons and wires that festoon countless kilometres of roads in Australia 'visually awful'? I do. He should drive along the Monash Freeway and see how these structures, which carry power from coal-fired power stations in the Latrobe Valley to Melbourne, appeal to him. I have not heard him or Hockey describe them in pejorative terms. Nor do sensible people complain about their 'visual awfulness' because they realise they are an essential part of our power grid. What is it about wind turbines, which use a renewable energy source, the wind, that makes them such an assault on our visual senses, yet makes power pylons and wires, that transmit mostly coal-generated energy, visually acceptable? I find wind turbines visually attractive, and pylons and wires grotesque. Why am I so different in my visual aesthetics from Abbott and Hockey? It wouldn't have anything to do with political orientation, would it? Anyway, it's delightfully warm up here in Bagara. The sun shines and warms. There's no need for power to warm me at all.


11/06/2015I'm sure Mr. Abbott finds power station chimneys and cooling towers much more visually appealing than wind turbines! Especially if the chimneys are belching black smoke.


11/06/2015Abbott must have paroxysms of rage when he visits the UK. Wind turbines are commonplace throughout the country and along the coast - including just off-shore. Perhaps we can send Abbott 'home' to England and he can express his frustration with wind turbines there instead of inflicting it on us. He will have many more to complain about. As Ad, pointed out, it is just a continuation of Abbott's real approach to climate change. Although he occasionally claims that he accepts human-induced climate change, every opportunity he gets he reverts to 'climate change is crap'. I just heard that he is again linking the Lindt Cafe seige with IS when all the available evidence shows no such link and that Monis was basically a "nutter" seeking attention. It was not a terrorist attack in the true sense of the term but Abbott never lets the truth get in the way of what he wants to say. Really, the two issues just stress how far removed from reality and evidence Abbott is. He has a set of pre-determined positions (even if occasionally pretending not) and given half an opportunity reverts to his true position completely disregarding any evidence to the contrary.


11/06/2015An interesting piece on Iceland's approach to the GFC and the banks. And how, with its alternative approach, it is now doing better than most European nations. Admittedly, it still had control of its own currency but it does show that there was a way to get through the crisis without bailing out the banks.


11/06/2015I forgot to add: how lovely is the sight of an open-cut mine! It is rumoured that some of these amazing sights will even be visible to settlers on the moon!




12/06/2015Geoffrey Robertson in The Age And Casablanca & Ad astra, I haven't been able to get through to The Shovel, I keep getting message that the site is unavailable, though I've tried several ways to get there including one that Jason sent me. I have a new laptop, some things seem iffy but I don't know why I can't get The Shovel at all. I'm about to try Totaram's link now.


12/06/2015Good piece by Lenore Taylor at The Guardian. Abbott is really ramping up the rhetoric of fear and national security. As David Horton said in his piece 'Green paraols' last year, the conservative side of politics resort to war to win elections. If Abbott can't have a real war he will create the atmosphere of one. Even 'people smugglers' are 'enemies', not just criminals. Monis was an IS terrorist not just a lone "nutter". He can't rule out that we paid people smugglers to turn back their boats because it involves 'national security', not just breaches of immigration rules. The rhetoric knows no bounds and we 'elected' this imbecile to run our country (well, we - readers of TPS - didn't).


13/06/2015Ken, The methods used to 'stop the boats' could be the undoing of Abbott (if the other political parties play it well). The payment of people smugglers is apparently abhorrent (if not illegal). I'm sure the Indonesians have some evidence to back up their claims. If the evidence is given some media coverage (even NewsCorp can only ignore a story for a while) and the opposition parties capitalise on the media coverage - anything could happen. Abbott has been using the end to justify the means for a long time - it would be funny if it comes back to bite him.


13/06/20152353 I'm not sure that Labor will do much with the 'payments to people smugglers' unless there is enough proof that it did happen AND that it can be shown to be illegal. Otherwise, as Lenore Taylor said, Abbott will beat them over the head for being weak on national security and again allowing the boats to come, whereas he has 'stopped the boats' as he tells us twenty times a day. Even Marles, for Labor, was emphasising that the payments may be a 'pull' factor: ie people smugglers get paid by the people they're smuggling and then can be paid again by the Australian government. Labor is trying to avoid being 'wedged' on security issues but I think it is trying too hard and so looks ineffectual and weak. It is also weak in terms of accepting Abbot's view of what constitutes 'national security' instead of coming out raging that people smuggling is not a security issue but a crime. I fear that they are allowing Abbott to control the agenda on this issue and then meakly going along with his extreme measures so as not to appear 'weak' on security. Labor needs to create an alternative view of 'national security' and how it can be achieved - but I won't hold my breath waiting for them to do it. Perhaps there's a piece to be written about this.:-)

As astra

13/06/2015Good Morning Folks from Bargara What a week! Just when it seem impossible for our PM and his henchmen to behave any more grotesquely, along comes Hockey with sage advice for poor people who can't afford a house in Sydney; along comes Abbott tilting at windmills; along comes Dutton and Bishop in full denial of the story that the protectors of our borders now pay people smugglers to take their pitiable cargo back to where the came from; then along comes Abbott refusing to back his ministers and deny the truth of the 'paying the smugglers' story thereby confirming its veracity. All the time this is going on, Abbott and Brandis are dog whistling the threat of terrorism within our borders, the purpose of which is to drum up political support that will serve the government when the election comes, as Lenore Taylor points out so well, yet with no formulated legislation that could protect us from this'death cult' threat while preserving the rights we have under the Magna Carta, which Geoffrey Robertson describes so lucidly and warns against any assault on it. Abbott and his government become more and more discredited by the day, yet with so much of our media too timid to call them for the disreputable ratbags they have become since the election, how can they be called to account in the eyes of the voters? When will they finally realize what a dangerous mob they have elected, and be determined to throw them out?

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13/06/2015TT I hope you have been able to log into The Shovel. It really is a delightful site with its irresistible satire, expressed so deliciously in just a few succinct phrases. I hope you are breaking-in your new device and bringing it under control.


13/06/2015Ad Had to use Google maps to find Bargara. I didn't remember Bargara although I have been to Mon Repos. Pleasant place to be this time of year. I don't hold out much hope of the media calling Abbott to account, although The Guardian and Fairfax are raising some issues. The problem is that many voters still get their news from the 'telly' or Murdoch papers, neither of which will promote Abbott's failures. We can only hope that Labor's strategists are saving all this mis-steps for electoral advertising.


13/06/2015A late PS to my piece. I have only just heard a commentator on radio say that a large part of Greece's current debt comes not from its own profligacy but the contribution it had to make (as part of the Euro-zone) to the funding of the bail-out of European banks after the GFC. If that is true, then my comments are even more valid. It would mean the bankers are now attacking Greece as a result of Greece having helped bail them out in the first place. If that is the way bankers operate (effectively biting the hand that fed them), then they don't deserve to be part of a democratic system.
T-w-o take away o-n-e equals?