Western governments must replace their redundant inflation targets with a target for the growth of the value of the goods and service they produce
Great news. All three party leaders are now talking about responsible capitalism. But we need much more than invocations to John Lewis (Nick Clegg), a boost to the Co-operative movement (David Cameron) or a redress against predatory pricing (Ed Miliband) – welcome though these words are.
Central should be the question of how capitalism deals with unknowable risk; this gets to the heart of why the system is so seriously malfunctioning. The Conservative, free-market view is that capitalism can deal with unknowable risk all by itself and that rewards will always be proportional to risks. But if this is not true, as even David Cameron began to recognise in last week's speech, though he quailed before the full logic of his new position, then everything changes. .
For the big point that Cameron still cannot acknowledge is that if capitalism is to deliver the high levels of innovation and investment that propel wealth generation, it cannot deal with unknowable risk by itself . It needs government to share the risk; this is precisely where a debate about responsible capitalism must begin.
It is not as if the situation lacks urgency. When the 11 leaders of the world's top multilateral institutions, including the IMF and World Bank, issue an unprecedented joint warning about the acute economic danger of extreme global austerity measures, everybody should take note. In the absence of an action plan, they fear a global economic and social calamity.
But what should inform such a plan, at home as much as abroad? It must offer a new approach to capitalism and its management. It's obvious that banks everywhere, with British banks in the forefront, lent trillions more than they should have done in the decades up to 2008. As a result, the world is encumbered with a vast overhang of private debt that cannot be repaid in any reasonable time-frame. This implies a near-permanently wounded banking system and the semi-bankruptcy of many governments if they put the state's balance sheet behind their banks. Events in Greece, where the state and the banking system are pulling each other down, dramatise the general menace. There has to be a fundamental change.
Shadow chancellor Ed Balls may have invoked Keynes last week, but by confusing necessary financial discipline over public sector pay with the right economic strategy he made a sad concession to today's wrong orthodoxies. For Keynes's message is brutal. Capitalism is permanently destabilised by the reality that markets swing violently because of trying to deal with unknowable risk. It's in the financial system where the effects are felt first – banks hoard cash and don't lend. So it is the financial system where policy-makers have to prioritise their actions.
They have to offset the consequences of rampant and destabilising fears. The state borrowing money from the financial system in order to spend it is but one means to a bigger end – mitigating risk and retriggering investment flows. There are other ways, in extremis, to achieve the same end: guaranteeing new bank lending, printing money or even socialising investment. But at base what the state is doing is helping capitalism out of the hole into which it will fall from time to time because it cannot handle unknowable risks of the type that so overwhelm us in 2012.
Government must therefore set a policy framework that forces the close collaboration of monetary, financial and fiscal policy to induce a sustained rise in credit from our very wounded and risk-averse financial system. The British government, along with other western governments, must replace its redundant inflation target with a target for the growth of the value of the goods and services we produce – the growth of GDP in cash terms. It should say that every instrument of policy – quantitative easing, interest rates, government borrowing, guarantees for new bank lending – will be used to sustain the growth of money GDP by 7% a year for the next five years.
Imagination and daring will be required. I favour offering a free Treasury indemnity of up to a third of every new loan made to a small or medium-size enterprise. In the early years of the programme, there will have to be big increases in infrastructure spending: the Treasury, pending the creation of an infrastructure bank, should issue infrastructure bonds and instruct the Bank of England to buy them with its quantitative easing funds. As money GDP starts to rise, so the public deficit and real burden of private debt will fall. The state will have lessened the risk that capitalism cannot do on its own.
It is the same story with innovation and investment. Britain needs vastly more innovation, but if companies are asked to handle the risks of the commercial unknown by themselves, as free market economics insists, then there will always be inadequate levels of innovation and investment. The state has to stimulate an entire innovation ecosystem that will soak up and share the risk of new innovative investment, even making substantial grants and investment on its own account.
It is not so much industrial as ecosystem policy and where it has been tried it has never failed. Hence the Japanese car industry, the American IT industry and the City of London – where successive governments have created the ecosystem for its growth. Now we need the same approach for the wider economy. Here, the Department of Business has crossed a Rubicon; last December's innovation strategy paper talks in precisely these terms. But absurdly it has been given no cash to back the vision.
And it is the same warped view of risk behind the explosive rise in executive pay. Corporate bureaucrats pay themselves the fortunes they might deserve if they took genuine risks and created genuine wealth as the free market doctrine says they do. But they do not and their shareholders connive in the excess. Again, the remedy is state stewardship.
The answer is not just the mandatory tracking of pay over time (using the ratio of top pay to the middle earner) and workers sitting on remuneration committees. Executives who want to be paid capitalist rewards should be required to take capitalist risk, putting a proportion of their base pay at risk to be earned back by performance. Only then should they get any bonus. Reward, if it is to be fair, must be proportional to risk and the result. Otherwise it is just swag.
Responsible capitalism has been my preoccupation for the last 20 years – witness the books The State We're In and last year's Them and Us. But delivering it requires very much more than what our politicians offer. It is a revolution in values, policy and practice. We still have a long way to go.