Dr Adrian Pabst, Senior Lecturer in Politics, School of Politics and IR, University of Kent; Visiting Professor, Institut d'Etudes Politiques de Lille (Sciences Po), specially for wpfdc.org
In my previous essay I argued that the financialisation of the world economy has produced soaring profits for the few at the expense of shared prosperity for the many. By fuelling a bubble cycle of boom, bust and bailout, it has reduced long-term investment and undermined sustainable growth.
To rebalance and diversify the economy away from the dominance of global finance will require a wholesale transformation of the structures of thought and practice that underpin both individual actors and institutions at all levels.
In this essay I will set out some of the main tasks, starting with the question of debt before turning to new forms of investment and innovation. My argument is that finance needs to be reconnected to the real economy and that a new strategy of re-industrialisation has to overcome the false divides between goods and services, or the public and the private, or the national versus the global. We have already entered a more paradoxical ‘mode’ with all sorts of hybrid arrangements.
Crucially, the wider West – including Russia – must abandon the notion of competing with low-wage countries such as China or India in a global race to the bottom. That will merely serve to reinforce the tendency towards a low-productivity, low-innovation and low-growth economy. On the contrary, the only future is a global race to the top with competition centred on quality and ethos.
1. Dealing with debt
First of all, an alternative to neo-liberal financialisation refuses the logic of debt that characterises monetarist and Keynesian approaches, which merely differ on the relative balance of private vs. public debts. The phenomenon of ‘privatised Keynesianism’ that became the dominant policy regime in the 1990s and 2000s marked the transfer of debt from the public sector to private households.  This, coupled with new credit expansion underwritten by the state, produced the unprecedented financial bubble that burst so spectacularly in 2008-9, saddling households with unsustainable debt.
During the boom in late 1990s and 2000s, the public sector shifted the debt burden onto private household by keeping wages stagnant and forcing workers to take out ever-more debt to make ends meet. Indeed, the real costs of living have consistently outstripped official inflation, plunging more people into poverty and putting a squeeze on low- and middle-income groups.
Across the West, the politics of austerity may reduce the budget deficit but it undermines the productive economy by slashing capital spending and failing to diversify away from finance – all of which actually depresses growth and thereby increases both public and private debt over time. Crucially, this treats debt as absolute and in some sense primary vis-à-vis assets, and it also privileges the interests of creditors over those of debtors. In this manner, the logic of austerity is of a piece with the separation of profit and risk between institutional investors and managers, on the one hand, and customers and employees, on the other hand.
By contrast, the alternative which this essay develops views debt in more relational terms and argues for models whereby unsustainable debt is converted into equity and both profit and risk are shared more equitably among all the stakeholders: lenders and borrowers, investors and owners, shareholders and managers as well as employers and employees, producers and consumers and suppliers and sellers.
Key to this is to create a genuine value chain with a virtuous circle of competition in both excellence and efficiency. That, in turn, also requires a whole transformation of corporate governance – with much greater workers’ representation on company boards (Germany’s model of co-decision or Mitbestimmung).
What is needed are ways of brokering mutual benefit out of a clash of individual or group interests by promoting cooperation. If adopted and implemented, we would begin to shift the economy away from an obsession with short-term results towards the securing of long-term interests.
2. Manufacturing, Industry, Banks and Guilds
To revive manufacturing and industry across the West, new sources of finance are perhaps most urgently needed. That is because neither the bureaucratic central state nor the global free market currently provide reliable, long-term funding that privileges innovation, quality and ethos.
So the first prerequisite is to break the over-reliance of the national and the global economy on unproductive finance by establishing a national network of investment banks. Such banks could be set up with an asset base, financed by a small fraction from the proceeds of bailing out banks and then selling off public stakes. Other participation is also conceivable as long as investment is in pursuit of long-term, stable and reasonable rates of return – pension funds and other such structures come to mind.
Such new investment banks would be constrained to lend within cities, regions and sectors. They would provide loans for company creations, expansion of production, trade or project finance. Crucially, the emphasis would be on businesses that combine economic profit with social and ethical purpose – rather than seeing these as conflicting or mutually exclusive.
Linked to the establishment of new investment banks is the creation of a corresponding structure of professional associations that can offer vocational training and guarantee minimum standards of quality and ethos.
Membership in a sector-wide ‘meta-guild’ would be a necessary condition for getting a professional license. However, employers and employees would be free to choose from among the various associations that make up the guild in order to avoid a situation of monopoly.
This would also diversify the range and kind of employers’ associations and trade unions – both of which currently suffer from self-serving bosses and barons who neglect the views and interests of their ordinary members.
The natural institution to bring together local councils, regional/sectoral banks and professional associations is the guild hall (in the case of Britain) or the equivalent of chambers of commerce. In such a way, economic governance would mirror political government – with the participation of all the various stakeholders.
The principle would both location (honouring the importance of place and the needs and interests of all the inhabitants) and vocation (honouring the diversity of talents that all have an important contribution to make). Thus, democratic decision-making would be fused with a sense of hierarchy centred on professional excellent and judgement. Without such a new institutional structure, manufacturing and industry cannot thrive an increasingly globalised, interdependent world.
3. The importance of Fair wages and Just Prices
One key objection to a revived manufacturing and industrial base in the West is the argument that Western markets are too small and that export to emerging markets would be limited on account of high price of Western goods. However, neither objection holds true.
With over 500 million citizens and a high GDP per capita, the EU is still the single biggest integrated economic space. Closer economic and trade ties with Russia would by far create the largest market in the world in terms of purchasing power.
Moreover, the size of markets across the wider West makes the sale of Western manufacturing and industrial goods eminently viable and profitable. At the moment, the main obstacle seems to be deficient demand linked to low wages.
Demand deficiency in the West should not simply be addressed by either printing money (to offer cash handouts to the population) or by financing massive infrastructure projects from the centre – housing, roads, railways, broadband internet, etc.
In addition to these much-needed initiatives, the economically more sustainable and ethically more effective option is to promote fair wages and just prices. That would include not only creating ‘living wage’ cities and regions but also establishing a link between salary increases and productivity growth.
A more diversified and rebalanced economy that is not depend on finance requires more than the minimum wage because the latter is insufficient for workers to make ends meet and live in a decent life. Low-wage economies are inefficient because they involve higher staff turnover (and hence higher costs of hiring and firing), lower staff morale, lower incentives for efficiency savings and for innovation as well as lower labour productivity.
Low-wage economies also depend on state welfare, which in an era of retrenchment and rationalisation does not compensate adequately for a proper pay. Instead, it traps workers in dependency and near poverty. In the medium- and long-run, it also creates incentives for economically and ethically bad behaviour by paralysing self-help and discouraging self-improvement.
Crucially, means-tested welfare undermines individual virtue and responsibility, alongside public honour and realistic generosity.
4. Training, Innovation and Trade
All the preceding proposals require investment in education and training. The West needs to abandon both bureaucratic and commercial approaches in favour of much more critical and creative models. The aim must be to promote the imagination, a sense of innovation and a more holistic education which can form the whole person – not just harness skills for narrow state-administrative or market-commercial purposes.
In Western Europe and the USA, an impoverished utilitarianism has pervaded education and training, reducing everything to narrowly defined socio-economic efficiency and utility. In the process, we have destroyed much of the creative potential of Higher Education. Emphasizing general, transferable skills at the expense of specific, substantive skills has been a disaster, leaving students with little specific knowledge, no sense of vocation and lacking in character formation.
Universities and technical colleges require not just more investment but also a greater focus on substantive knowledge (including certain perennial principles) and hybrid pathways that fuse academic with vocational training.
Connected with this is the need to expand on a massive scale apprenticeships within and across different sectors, industries and manufacturing productions. The car industry in Europe offers a good example of how apprenticeships could allow young people to learn their ‘trade’ in more than one country. In this manner, mobility would help the spread of ‘good practice’ and create new networks of professionals.
Crucially the wider West requires a new strategy to foster innovation, including a new public ‘trust’ for the pooling of technological knowledge to replace the current patenting system. That is because at present the dominant model favours large private corporations over small- and medium-sized businesses and social enterprise.
The argument that globalisation requires a cost-centred ‘race to the bottom’ is economically and ethically nonsense, as developed economies will never be able to compete with low-wage countries such as Vietnam and Cambodia. On the contrary, the only route towards sustainable, high growth is to compete in both excellence (quality) and ethos – as I have already indicated.
As the 18th-century Italian economist and moral philosopher Antonio Genovesi showed in his seminal Lectures on Commerce, or on Civil Economy (1765-67; 2nd ed. 1768), what matters is not the absolute cost of labour or the relation between foreign and domestic production of goods. Rather, what matters is who you share your labour market with. Paying higher prices for locally produced goods not only encourages domestic manufacturing, industry and a greater division of labour within one’s polity.
And since traders are interconnected, it also raises real wages in all trades from agriculture and manufacturing upwards, promoting both higher productivity and greater justice. In this manner, we can realign fair wages with just prices and defend the interests of all stakeholders, including workers, suppliers and consumers (not just managers, shareholders and lenders) – as argued by the Catholic priest John Ryan who coined the term ‘living wage’. 
5. Better entrepreneurship
The alternative which this essay develops also promotes virtuous businesses by rewriting company to make social purpose and profit-sharing conditions for company license and also by replacing the current incentive structure with a new system of awards and rewards. At present, we have a system that incentivises the privatisation of profit, the nationalisation of losses and the socialisation of risk. A ‘virtue economy’ can mutualise profit, loss and risk by fostering greater regard for shared interest, value and relational goods and also by providing proper reward for virtuous behaviour.
Our current model is based on two elements: first, individual incentives that influence ex ante motivation – whether in the form of private sector performance-related pay and bonuses or in the form of public sector policies ‘nudging’ our behaviour towards greater efficiency and happiness; second, public prizes to acknowledge a specific contribution to society (including military medals and civilian awards for achievements in the arts, sciences, sport and public affairs).
The problem of the underlying logic is fivefold: first, it sunders ex ante motivation from ex post outcomes, which leads to the perverse situation of rewarding failure (bonus payments and golden handshakes even in case of bankruptcy). Second, it privileges private self-interest and views social benefit merely in terms of indirect, unintended outcomes. Third, it designs incentives purely in extrinsic ways and reduces the question of reward to a principal-agent relation. Fourth, it separates monetary from and non-monetary rewards, which divorces material value from symbolic worth. Finally, it privileges the individual and the collective over association, which perpetuates the primacy of states and markets over intermediary institutions.
To reward virtuous behaviour and promote an economy of both honour and regard, we need a system that breaks with the logic of private profit, national loss and socialised risk.  Here the crucial point is that virtue is pursued for an intrinsic reason, and not for the sake of personal reward. Yet at the same time, virtuous behaviour may yield pleasure or even profit while also making a contribution to the common good. Thus there are good ethical and economic reasons for practising virtues.
In turn, this means that virtue – the promotion of excellence and ethos – is part of a properly functioning market economy that produces prosperity for all. Here we need to rewrite legislation and contracts to promote virtuous behaviour by means of both awards and rewards. Awards refer to a public recognition of virtuous practices, i.e. an acknowledgement of intrinsically good activities that are not an expected (though hoped-for) counter-action within a contractual exchange where recompenses have been fixed beforehand.
By contrast, rewards denote a public recompense for virtuous behaviour that blends self-interest with social benefit, including the possibility of a monetary recompense (e.g. tax breaks, preferential treatment in terms of government procurement or public service tenders, etc.).
Crucially, virtuous businesses could be given membership in certain professional associations that uphold more stringent standards, which could in the long term give a market advantage – thereby encouraging membership based on a competition in quality, excellence and ethos.
Such a form of recognition combines immaterial awards with material rewards and overcomes the false separation of contract from gift that gave rise to the predatory economy of modern, financial capitalism.
 Colin Crouch, ‘Privatised Keynesianism: An Unacknowledged Policy Regime’, The British Journal of Politics & International Relations, Vol. 11, no. 3 (August 2009): 382-399.
 John A. Ryan, A Living Wage: Its Ethical and Economic Aspects, rev. ed. (New York: Macmillan, 1914 [orig. pub. 1906]); and Distributive Justice: The Right and Wrong of Our Present Distribution of Wealth, rev. ed. (New York: Macmillan, 1927 [orig. pub. 1916]).
 See Avner Offer, ‘Between the Gift and the Market: The Economy of Regard’, Economic History Review Vol. 50, no. 3 (1997): 450-476; Geoffrey Brennan and Philip Pettit, The Economy of Esteem (Oxford: Oxford University Press, 2004).