Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth

Western capitalism is in crisis. For decades investment has been falling, living standards have stagnated or declined, and inequality has risen dramatically. Economic policy has neither reformed the financial system nor restored stable growth. Climate change meanwhile poses increasing risks to future prosperity.

In this book some of the world’s leading economists propose new ways of thinking about capitalism. In clear and compelling prose, each chapter shows how today’s deep economic problems reflect the inadequacies of orthodox economic theory and the failure of policies informed by it. The chapters examine a range of contemporary economic issues, including fiscal and monetary policy, financial markets and business behaviour, inequality and privatisation, and innovation and environmental change. The authors set out alternative economic approaches which better explain how capitalism works, why it often doesn’t, and how it can be made more innovative, inclusive and sustainable. Outlining a series of far-reaching policy reforms, Rethinking Capitalism offers a powerful challenge to mainstream economic debate, and new ideas to transform it.

Rethinking Capitalism: An Introduction
Michael Jacobs and Mariana Mazzucato

In November 2008, as the global financial crash was gathering pace, the 82-year-old British monarch Queen Elizabeth visited the London School of Economics. She was there to open a new building, but she was more interested in the assembled academics. She asked them an innocent but pointed question. Given its extraordinary scale, how was it possible that no one saw the crash coming?

Hereditary sovereigns are not normally given to puncturing the pretensions of those in charge of the global economy, or of the economists paid to understand it. But the Queen’s question went to the heart of two huge failures. Western capitalism came close to collapsing in 2007–2008, and has still not recovered. And the vast majority of economists had not understood what was happening.

This book is about both failures. On the one hand the capitalist economies of the developed world, which for two hundred years transformed human society through an unparalleled dynamism, have over the past decade looked profoundly dysfunctional. Not only did the financial crash lead to the deepest and longest recession in modern history; nearly a decade later, few advanced economies have returned to anything like a normal or stable condition, and
growth prospects remain deeply uncertain. Even during the pre-crash period when economic growth was strong, living standards for the majority of households in developed countries barely rose. Inequality between the richest groups and the rest of society has now grown to levels not seen since the nineteenth century. Meanwhile continued environmental pressures, especially those of climate change, have raised profound risks for global prosperity. At the same time, the discipline of economics has had to face serious questions about its understanding of how modern economies work. What made the financial crisis such a shock—in two senses—was not simply that very few economists had predicted its coming. It was that over the previous decade the mainstream view was that policy-making had essentially solved the fundamental problem of the business cycle: major depressions, it was believed, should now be a thing of the past. And economic policy since the crisis has been no more successful. The orthodox prescription of ‘fiscal austerity’—cutting public spending in an attempt to reduce public deficits and debt—has not restored Western economies to health, and economic policy has signally failed to deal with the deep-lying and long-term weaknesses which beset them. The core thesis of this book is that these failures in theory and policy are related. Mainstream economic thinking has given us inadequate resources to understand the multiple crises which contemporary economies now face. To address these crises, we need a much better understanding of how modern capitalism works—and why in key ways it now doesn’t. A reappraisal of some of the dominant ideas in economic thought is required. And in turn this needs to inform a set of new directions in economic policy-making which can more successfully tackle modern capitalism’s problems.

Each of the chapters of the book therefore addresses both a key economic problem and the orthodox economic way of understanding it. The authors offer a different and more sophisticated approach to economic analysis, and from this generate new policy solutions. To do this they draw on important schools of economic thought whose powerful understandings of capitalist systems have been largely forgotten or sidelined in mainstream debate. In each case their conclusion is that capitalism can be reshaped and redirected to escape its present failures. But this can only be achieved if the mental frameworks of economics are rethought, and new approaches to policy taken.