Simon Zadek: Reflections for the Magic Mountain

The Davos countdown has begun, as some of the world’s most powerful embark on the ritual trek up the Magic Mountain. What should be expected from this glitzy, snowy, global dialogue in this Year of Unreasonableness? The Davos headline for this year is The Great Transformation, “…an indisputable leadership challenge that ultimately requires new models, bold ideas and personal courage to ensure that this century improves the human condition rather than capping its potential”. But can Davos offer real alternatives or will it serve up a smiling, gritted-teeth espousal that ‘business as usual’ can and should be sustained?

Martin Wolf, the FT’s economics supremo, has tried to meet expectations in his article on 7 Ways to Fix the System’s Flaws. Sadly, however, he has wasted a great opportunity in clothing a softly-softly approach in the claim to be addressing ‘capitalism in crisis’. Fixing finance, the elephant in the room, needs in his view higher capital ratios, stronger oversight, and smarter consumers. Whilst no one would disagree with such common sense advice, there are equally few who would agree that these actions will fix the problem. They leave in play perverse incentives, conflicts of interest and the entire, under-regulated shadow banking system that is busy repeating yesterday’s profitable errors. Mr Wolf’s solution to inequality is equally laudable, large-scale fiscal redistribution and investment in education for the poor. But does such fashionable moral Keynsianism, echoing the best of Victoriana, really address the economics of inequality; how best to change a system that is increasingly delivering winner-takes-all outcomes?

Mr Wolf agrees that problems with power and accountability lie at the heart of our broken economic system in highlighting the need for changes in corporate governance and the corporate financing of politicians and their parties. But again, his solutions seem at best partial. Limiting direct financing of politicians is a great idea, as would making public finance available for our noble representatives in their struggle to be elected. But how does he propose to get these turkeys to vote for Christmas? And does he really believe that closing the front door to political financing will shut down an activity that some estimate to be the most profitable game in town. And similarly for corporate governance. Mr Wolf declares the ‘corporation’, by which one must assume he means the Anglo-Saxon approach to running business, as the best we have and as good as it gets. Improvements, he pleads, need intelligent, well-informed board directors, greater transparency and no government intervention, (except for the banking system). Yet few believe that any but deeply involved (and therefore no longer) ‘non-executive’ directors can understand the complexity of today’s corporate money-making moves. Any a ‘how-many-clicks’ map of today’s non-executive directors of the world’s largest, listed companies highlight how small this club really is, and raises doubts as to whether it can support any real challenges to ‘business as usual’. Indeed, given the short-term interests of most investors, today’s dominant fiduciary approach seems unlikely to deliver anything but trouble, including lower financial returns.

Mr Wolf is one of my professional heroes, fearless, smart and vocal. But although his solutions are sensible they do not address the underlying problems.

Think first of all about what he has left off the table. After decades of crusading anti-corruption measures, there is little doubt that things are getting worse. And far from this being a problem linked exclusively to emerging economies and businesses, we see an ever-greater visibility of those on the take, flaunted cynically by politicians and businesses, in countries with mature regulations and institutions that are meant to provide oversight. Frankly, the main difference between corruption in developed economies compared to weakly governed societies is that corruption in the former has been legalised into super-profit taking, obscene remuneration, laying-off risks on the poor, and systematic under-contributions of the rich and profitable through the tax system. The inequality of outcomes identified by Mr Wolf are the manifestations of these endemic features of our political and economic system, and cannot be solved by calls for fiscal redistribution.

And what of the environment, Mr Wolf, which you get around to mentioning three lines from the end of your article, calling for “above all, protection of the environment”. Surely such trivialization is not worthy of one of today’s most visible economists. The problem here is not just that you have, or at least offer no clue as to what to do about it. It is that you appear to see no links between the state of the economy and the state of the natural ecology that sustains our lives on this planet. The real problem with the financial markets is not that they are unstable and liable to periodic implosion – it is that they are not doing their task of investing our money in creating a resilient, sustainable economy that will benefit current generations and those to come. Endemic short-termism is another way of saying that investors are disinterested in what creates real value, financial or otherwise, but have decided that competing with each other to make money out of money is a simpler way to get rich. Even if you are unwilling to value what cannot be monetised, take a look at how catastrophic last year was for the insurance business because of natural disasters, or the speculation-driven food price peaking just before the Egyptian revolution. Please, Mr Wolf, do not relegate the environment to an after-thought to your ‘serious economic analysis’.

Radical change rarely comes from the mainstream. We know all about disruption when it comes to technology. CEO’s nightmares are filled with unexpected enterprises that in short time suck the value out of their incumbent businesses. But when it comes to institutions, political systems, values and beliefs, most folks – especially economists – turn their backs. Mr Wolf has under-played himself in doing the same. He does of course mention the Occupy movement, but only in the context of a complaint against inequality, not as a source or vector for economic innovation. Surely the ‘financial transactions tax’ is worthy of mention, not because he agrees with it (which he certainly does not), but because it illustrates exactly the kind of solution that we should be debating, inventing and advancing into practice. If reform of corporate governance is part of the solution, why not consider the value of a new generation of state-owned enterprises from China to Chile that are entering the global economy with both profit and public interests in mind. Or closer to home, why not consider the merits of the so-called B Corporations emerging in the US and elsewhere as having fiduciary arrangements that allow for, indeed encourage, financial and broader interests to be taken into account.

Political Economy 101 tells us that change is unlikely to come from the dog that bit us in the first place, the politicians, businesses and classes of people in whose interest it is to change as little as possible. And that brings us back to Davos. Like capitalism, the World Economic Forum has been hugely successful in reshaping its constituencies and narrative to stay in the game. Thanks in no small part to the political intuition of its founder, Klaus Schwab, the Forum has avoided becoming the stranded asset that is the fate of most fashionable venues. Responding to earlier anti-Davos sentiments, the Forum established a public forum that allows the local community and global activists to voice alternative views whilst remaining outside of the Forum. Furthermore, as its earlier constituencies aged and perhaps got a little drab, the Forum created its own disruptors, social entrepreneurs, young global leaders and technology pioneers just to name a few. And this year, in response to the Occupy movement, Davos will sport yet another class of internalized disruptors, the Global Shapers. It is nothing short of genius, simple and effective.

Yet Davos does not seem to be able to avoid the Orwellian-type edict that inclusion in an exclusive club eventually makes for a room full of rather like-minded folks. Differences are carefully socialised, and disruption frowned upon and a cause for the removal of club privileges. This is not especially bad or mean, it is just the rule of all clubs. There may well be an expert in B Corporations at Davos, and there will certainly be folks who support the financial transactions tax and see the power of state-owned enterprises to improve the state of the world. There may even be the odd person on-site who wants to discuss the role of resource nationalism, religious fundamentalism and non-democratic political systems in saving us all. And to be fair, somewhere on Davos-campus, perhaps in one of the smaller hotels up the hill, protected from serious visitors and the media by distance, ice and a lack of prestige, some of these discussions might actually, in fact almost certainly will, take place. Yet these conversations are in Davos born to be marginalized, ridiculed, or just ignored.

It is tough to seek to disrupt the lives and livelihoods of one’s own members, sponsors and friends. That is certainly true in Davos, but is also painfully true in the inner world of international NGOs, or the bureaucracies of government and international organisations. Try supporting nuclear in a Greenpeace meeting and see how far it gets you. But it is disruption that is needed, of that there is no doubt. The Davos strapline, the Great Transformation, is not conceivable without the Great Disruption, and there are few if any incumbents that will welcome that. So Mr Wolf, thank you for your proposed seven tasks and thank you for being a wonderfully erudite economist and writer. But might I ask you to raise your ambitions, and those of your readers, by applying yourself and risking more in setting out what needs to be done to address the underlying problems of our time, and the fuller range of possible measures for doing just that.

Simon Zadek is an independent advisor and author. He blogs from Davos 2012 at http://www.zadek.net/blog/

John Mathews: What happened to the greening of capitalism?

Martin Wolf has presented a provocative diagnosis of the current flaws found in capitalism, and suggested some cures. At the same time, the World Economic Forum is preparing for its meeting in Davos, under the slogan ‘The Great Transformation – shaping new models’. The problem is that neither Mr Wolf nor the Davos organizer, Klaus Schwab, has anything to say about the biggest issue of all – how to transform capitalism so that it does not proceed along its ‘business as usual’ lines to destroy the planet.

We have to start with some common ground, and that is surely that capitalism is an amazing human invention. It started in some small city states in Europe. It then became turbo-charged with the Industrial Revolution, lifting hundreds of millions of people in North America, Europe and then Japan out of poverty. And then it became global, and now it promises to lift many billions of people – in China, India and successor countries – out of poverty as well. The Great Divergence, where the West powered ahead of the East, has been followed by the Great Convergence, with China et al catching up with the advanced countries, and even leaping ahead.

And here the common ground ends – because the western model of capitalism conveniently assumed that nature was an infinite source of resources and an infinite sink for wastes, and that the whole shebang would be powered by fossil fuels forever. As soon as China and India et al venture to replicate this model, they come immediately up against the problem that the resources are dwindling (think peak oil) and becoming scarcer and more expensive, not to say geopolitically explosive. China is seeking to avoid this inconvenient truth by developing its own ‘green development’ model – where as fast as it builds coal-fired power stations it also builds the world’s biggest fleet of wind farms and solar farms and exports green technology all around the world. And this is not even to mention carbon emissions, where China et al are scolded by the West for adding their contribution after everyone else has done so. China’s strategy will deal with carbon emissions as well – no wonder Hu Angang argues that green development is ‘an inevitable choice’ for China.

So the next ‘great transformation’ (to borrow Polanyi’s wonderful formulation) is surely going to be the greening of the system that has brought so much wealth and promises so much – if only it can be aligned with natural cycles and mimic life. China is showing the way, presenting the developing world with a model that breaks away from fossil fuel and excessive resource dependence, and from a finance system that promotes such biases. Here then are seven ways to fix the system and make it sustainable – as an alternative to what Mr Wolf proposes.

Maintain corporations earn their ‘limited liability’ by subjecting them to eco-audits (impacting on their share price); Make renewable energies the default option – with tax penalties imposed on every other source – and public procurement the driver of their accelerated uptake; Make resource circulation the default option, attaching penalties to securing ‘virgin’ resources and creating wastes that cannot be used by anyone else (China’s Circular economy); Promote eco-finance by linking financial flows to their end-products and subjecting them to the test of ecological sustainability, via differential interest rates; Stop taxing capital and labour and instead tax resource throughput and carbon build-up; Treat finance as a utility, and regulate it accordingly; Allow a stabilized green sector to grow, underpinned by green finance, setting standards for the rest of the system to meet.

Yes, this a radical diagnosis – in the sense of getting at the roots of the system – but we can agree with Mr Wolf that the system is already in crisis and begging for a new direction and new wave of sustainable investment. The program embodied in these seven points is designed to move the system towards a new pattern of alignment with the living planet, rather than being at war with the planet. It’s not meant as a blueprint or end-state. And it doesn’t need a ‘Kyoto Accord’ because it will have to be implemented country by country, region by region, city by city. The greening of capitalism will be the next great transformation, exactly what the doctor ordered.

Professor John Mathews holds the Eni Chair of Industrial Dynamics and Global Strategy at LUISS Guido Carli University, in Rome.

Christian Kellermann: Travelling on duty

Martin Wolf’s “seven ways” to fix capitalism draw the perfect line between the 99 and the 1 percent. His reform agenda would find applause at the Institute of International Finance just as it would raise some hands at the Occupy camps. Defining the “realpolitik” of economic reform in such an intelligent way is admirable, but unfortunately also dreadfully inadequate and insufficient.

Wolf touches some of the major systemic flaws, going beyond the superficial reform concessions of the direct profiteers of current crisis capitalism. He lists problems with pro-cyclicality in financial markets as well as regulation, rising inequality across the world, the incentives to manipulate and loot under current corporate governance regimes, the need for taxation in order to redistribute, to invest, to employ and provide for (global) public goods. He also seeks to protect politics from being purchased by private interests by providing more direct public financing to political actors and parties. All these ideas are spot-on. His conclusions, however, remain overly incrementalist – for good reasons, of course.

Take the example of rising inequality: Wolf lists a number of solid arguments explaining the phenomenon across the OECD-world, ranging from globalisation to the rise of unfettered finance. Politics matters, he writes, in order to correct that trend and emphasizes the immediate need to subsidise job creation or generally promote public employment. This sounds almost like the creation of a Scandinavian, ideal-type social democratic variant of capitalism. But he avoids a crucial point: Politics has lost a great deal of its influence and effectiveness! Establishing and maintaining a fair tax system that generates sufficient revenues – the precondition for state action – has become a nearly impossible task, undermining the acceptance of regionalism or globalisation as such. The rise of anti-European right wing populists, combining welfare chauvinism and nationalism on the back of immigrants is a case in point. If Wolf remained true to his analysis, he would not only demand a wealth tax and more indirect taxation at the national level, but endeavour to explain the win-win-situation of an internationalisation of some taxation in order to regain national tax sovereignty and provide for the appropriate means to generate more equality effectively. Davos would a good place to argue for such true “realpolitik”, going beyond the narrow interests of an increasingly destructive logic of “über-competition” and promoting a compelling logic designed to regain national political space by international cooperation for a better variant of capitalism.

Capitalism needs to be decent if it is to be accepted by the 99 percent. It needs more profiteers and for that it needs strong politics. Relying on capitalism’s “genius” alone to fulfil this task is an approach too close to the 1 percent and will fail. In Wolf’s world politics matters only theoretically. Most in Davos can very well live with this – for the time being.

Christian Kellermann is Director of the Friedrich Ebert Foundation for the Nordic Countries in Stockholm and co-author of Decent Capitalism. A Blueprint for Reforming our Economies. He writes here in a personal capacity.

Jeremy Fox: A little rebellion, now and then...

Martin Wolf's "Seven Ways to fix the system’s flaws” reads more like a paean to our existing economic arrangements than a serious attempt at visualizing how we might reorganize our economy so as to avoid some of the more critical ills to which they have led us: a savage increase in inequality, a financial crisis wrought by the rich and paid for by the poor, high levels of national and individual indebtedness, environmental destruction on a massive scale, and so on. Wolf recognizes many of the ills, but his solutions involve little more than tinkering.

Where he is undoubtedly correct is in pointing out the mismatch between regulation, which remains largely at national level, and the multinational reach of global business. We should remember, however, that international regulation is far from impossible, and that it has occurred before, notably at Bretton Woods following WWII, which gave rise to the IMF and the World Bank. The main reason why consensus may be much more difficult to achieve now is that there are many more significant players round the table as well as substantial differences between countries in how capitalism is interpreted.

Neo-liberal capitalism - the West’s version - gives primacy to the market, to which we are all expected to be subservient because it supposedly functions best without the malign influence of human intelligence. Its weaknesses are now widely recognized. Left to themselves, markets turn out not to work efficiently: they tend towards monopoly or oligopoly (look at the UK’s banking and newspaper industries for example), while consumers are expected to make choices based on perfect information (there is no such thing), and to be rational in their economic behaviour (when we all know that economic benefit is not the only priority in people’s lives and that decisions that may seem bizarre to an economist may be entirely rational from other perspectives). Free-trade, the neo-liberal mantra for international exchange, opens national borders to a free-for-all in which employees are reduced to the status of commodity inputs, and are as exposed to price fluctuations and as substitutable as common widgets.

State-directed capitalism of the Chinese model, or highly-controlled capitalism (the other BRIC countries) are proving successful alternatives in terms of growth and competitiveness. China’s system, in particular, rests on a strong sense of collective nationalism as distinct from the individualism of the West.

Is the difference between these models so great? Yes and no.

Yes because state involvement in the BRICs is much more overt and dirigiste than in the West.

No because much of our corporate world relies on state largesse despite a general pretence that this isn’t so and that government does not and should not interfere with the private sector. Taxpayers in the UK, for example, foot the bill for health and education, police and fire services, transportation infrastructure, bank rescue and resuscitation, incentives for new investment, etc; and they also directly subsidize a vast array of industries including rail, air travel (through aviation fuel), bio-tech (through R&D grants), and so on.

One wonders if there is any significant business in the UK that does not depend for its success to some great extent on the state. In other words - and here comes the heresy - there is no such thing as a purely private sector activity. In a modern state, all so-called private capital investments are joint ventures with the taxpayer. It follows, therefore, that the state should have a voice in how they are run. In this respect, the Chinese have got it right.

So much for the theory. What of the practice? Wolf confines himself to exhortation: “Serious mistakes must not be repeated,”…”control of executive pay and corporate decision-making (must occur) without government intervention…” His arguments are not just indelibly stained by the status quo, they are also fueled by a belief (currently finding expression in the row over RBS boss Stephen Hester’s near £1 million bonus) that if we fail to bribe the great figures of UK PLC with absurd amounts of cash and kind they will flee the nest and thereby leave us in an even worse mess than the one into which they have already led us. It’s called blackmail; and it bludgeons most of our politicians and economic soothsayers into cowardly submissiveness. What would really happen if the feared scenario occurred, if we refused to pay Stephen Hester his £1 million and the entire RBS Board subsequently resigned? The answer is “nothing very much”. The remaining salaried executives would hold the fort while a new CEO and Board were recruited; and meanwhile RBS would continue to function just as well and maybe even better. CEOs and Boards don’t run large organizations on a daily basis. The staff do that. Apple Computer hasn’t collapsed with the sad demise of Steve Jobs; and Microsoft seems to manage okay without Bill Gates at the helm. These two are undeniably great entrepreneurs. Après Hester & Co. le déluge? Don’t buy it.

Executive compensation is not too difficult to control via marginal tax rates. Currently the UK top marginal rate of 50% kicks in at a ‘mere’ £150,000. That’s loose change to top executives who count their earnings in £millions. Why not introduce higher rates for higher earnings - with a discouragingly high marginal rate for income over a certain sum (say £1.5 million)? The main arguments against such a procedure are that it would frighten away the incomparable geniuses who run our major corporations, and that it would raise hardly any revenue anyway.

Revenue raising, however, is not the point. Think of it this way. Executives who are paid at stratospheric levels earn enough in a few years not to have to work again no matter what may happen to the company they lead. Provided they do not break the law, they are thus relieved of any serious financial penalty for the outcome of their actions. Some - they do not need to be named - end up playing monopoly with the livelihoods of employees and shareholders alike. Absurdly high remuneration is a gateway to irresponsibility - even if not all recipients head through it.

One of the most serious charges against our brand of capitalism is that it fosters the privatization of profits and the socialization of losses. Corporate efficiency is all-to-readily conflated with national or regional welfare as if the two were synonymous. In fact, they are different and can sometimes be mutually antagonistic. In a capitalist economy it is always efficient for the firm to produce at the lowest possible cost, and its techniques for doing so include maximizing sales, reducing labour costs (sometimes by shifting production elsewhere), and externalizing social costs. But it is not necessarily efficient at the national level for people to buy superfluities (and create the associated waste), nor for a nation to cope with employment instability, the displacement of small farmers and business-owners by multinationals, the ravages of industrial pollution, and the societal disruptions that accompany extremes of inequality. Inequality itself is arguably a spur to capitalist enterprise, but it may also become a charge on the social fabric. We need a way to assess the cost-benefits of corporate activity and to embed them in our tax system in a way that encourages community and environmental responsibility and discourages the reverse. As others have pointed out, the survival of our species may depend on our meeting this challenge. Human welfare and care of the environment will, in the end, have to displace individual enrichment as the principal objective of economic activity.

Thomas Jefferson, in a letter to James Madison, wrote that “a little rebellion, now and then, is a good thing, and as necessary in the political world as storms in the physical.” What we need is not a little tinkering with the existing system à la Wolf, but a root-and-branch reappraisal of its fundamental purpose. A little rebellion maybe...

Jeremy Fox is a writer, businessman, and consultant.

Jakob Vestergaard: What “Great Transformation”?

The headline for the 2012 World Economic Forum in Davos called for “new models, bold ideas and personal courage to ensure that this century improves the human condition rather than capping its potential”. No sign of such achievements have yet emerged from the Swiss mountains. Martin Wolf’s essay on the seven ways to fix our economic system – which he launched in the run-up to Davos – was an omen that this was the way things would go. I am a great admirer of Wolf’s work, I read his columns week after week. He is in my view the most eminent observer and commentator of the global economy we have. Yet, I agree with Simon Zadek that while strong in its diagnosis of problems, Wolf’s essay is weak in terms of proposed solutions. The measures suggested by Wolf are sensible, but fundamentally inadequate. Even if all implemented, they would not effect a Great Transformation of the kind needed to avoid prolonged global economic stagnation, persistent high unemployment and rising social tension and upheaval.

To get serious about this much needed transformation of capitalism, we need to fundamentally rethink the creation of credit, and how it is best governed to serve the interests of citizens - and, indeed, the interests of capitalism itself, as a sustainable economic system. Only by wisely and decisively governing the creation of credit may a great transformation of capitalism be achieved – and only then may the global economy chart a new direction, towards green and socially inclusive economic growth and prosperity.

One cannot appreciate the importance of this new approach to the governing of credit creation without first understanding the severity of the current deadlock in our thinking about the governing of banks (which is where the vast majority of credit creation takes place). When the leaders of the Group of 20 first convened in the autumn of 2008, they identified the re-regulation of banking as one of the most immediate objectives, and decided that this was to take the form of a revision of the international standard in banking, the so-called Basel 2 accord. A new accord, Basel 3, was endorsed by the G20 leaders at the Seoul summit in November 2010. Although praised by many as a major accomplishment, it was in reality little short of a disaster.

In its own terms, Basel 3 achieved almost nothing. Much can be said about the insignificance of the Basel 3 accord, but I shall limit myself to three points here. First, Basel 3 raises requirements for so-called Tier 1 capital to 8.5%, which is below the 10% held on average by US banks in recent decades, as noted by Simon Johnson, former chief economist of the IMF. This modest requirement does not match well with US Treasury Secretary Timothy Geithner’s repeated emphasis on “capital, capital, capital” as the appropriate response to the crisis. Second, and perhaps more importantly, the agreed capital reserve ratios are considerably below what the emerging consensus in mainstream financial economics would suggest. Scholars and central bank analysts alike argue that between 15 and 20% Tier 1 capital should be held by banks in good times. Andrew Haldane of the Bank of England stresses that “even once Basel 3 is in place, an unexpected loss in the value of a bank’s assets of 4% will be enough to render it insolvent.”

Third, irrespective of this problem of their modest size, relying on capital reserve ratios as a measure to re-regulate banking is completely off the mark. Capital reserve ratios may be sensible as a microprudential tool in the regulation and supervision of individual financial institutions. But as a governance tool in relation to the banking sector as a whole it is completely ineffective. It’s like trying to cut your bread with a spoon. The current European predicament well illustrates the problem: Sarkozy and Merkel announced a few days ago that the modest increases in capital reserve requirements agreed upon earlier will now be relaxed – in order to not risk pushing European banking further into the quasi-insolvency mess that it’s already in. It’s not that this decision does not make sense, it does. If capital reserve ratios are not relaxed, banks will most likely meet them by cutting back their lending (rather than by increasing capital), thus adding to already strong recessionary forces in Europe. The crucial point to get across is that capital reserve ratios are completely useless as tools of banking sector regulation, not to mention macroeconomic management. The solvency of the European banking sector can only be sustainably restored by mandatory recapitalization by public funds.

And yet, such recapitalization would only take us half the way towards the transformation we need. The second big change needed would be for countries to start governing credit creation. In popular perception, banks are merely intermediaries between savers and borrowers, but in reality banks lend out many times more than the deposits savers trust them with. But more importantly, as the system is currently configured, it is the lending decision of the banking sector that determines how much credit is created, leaving central banks with only limited and indirect influence. The perhaps single most important macroeconomic relationship – namely that between credit growth and economic growth – is for all practical purposes outside the reach of central bank policy. This makes us passive bystanders to the boom and bust cycles that result from periods of excessive credit creation in the banking sector. There is nothing inevitable about this state of affairs, however. On the contrary, we could easily reform the monetary and banking system so as to achieve a serious steering capacity with respect to the relation between credit growth and economic growth. Moreover, as Richard Werner and colleagues argue, such reforms could easily be coupled with new practices for increased political influence on the direction of credit creation. In the current system, banks face such incentives that “often lead them to favour lending against collateral, or assets, rather than lending for investment in production” and – as a result – credit is “more likely channeled into property and financial speculation than to small business and manufacturing, with profound consequences for society”. In a reformed monetary and banking system, the credit creation process could be governed by political authorities to meet objectives such as macroeconomic stability, development and growth of key prioritized sectors, such as green technologies, etc.

Reforms along such lines are not on Martin Wolf’s agenda, unfortunately. In the interest of fairness, I should say, though, that Wolf has in fact persistently criticized the Basel 3 accord. It was Wolf who sarcastically discussed its key outcome as a “capital inadequacy ratio” – and ridiculed the Basel Committee as a “mouse that did not roar.” This criticism is to the point and important. But other than supporting higher capital reserve ratios, what does Wolf have in mind for fixing the problems of the banking sector? “Regulators should watch the build-up of leverage”, he says. This proposal, in my view, is desperately inadequate. No matter how intense, any amount of watching will change outcomes only marginally, if at all.

In outlining the contours of an alternative way of thinking about and governing credit creation, I have talked about a new approach. In reality, there is nothing new about it. The intelligent governing of credit has been crucial in a number of Asian ‘growth miracles’ in the post-WW2 period, not least that of Japan. I am no expert on the Chinese economy, but I would be surprised if a key element of the spectacular economic growth in China in recent decades was not also in large part related to an intelligent governing of credit. Indeed, it may be the further rise of China that will force us to, eventually, reconsider our views on the ‘proper’ relations between state, credit and business – thereby taking what is a sine qua non step towards overcoming our current refusal to grow.

Jakob Vestergaard is Senior Researcher in the research unit on the Global Economy, Regulation and Development at the Danish Institute for International Studies.

Martin Wolf proposed seven ways to fix our economic system. What do you make of Wolf’s points? Is his argument going into the right direction? Or do we need a less incrementalist, more holistic strategy? Which arguments do you think he is missing? Which would you take further?

Add your voice to the debate by commenting below.