This piece by Ha-Joon Chang and me appeared in various places last week, including South Africa’s Business Day (under the title 
‘Financial tax not the death knell of capitalism’ ). It was pegged to the G20 finance ministers meeting, which turned out inconclusive on the FTT – the Robin Hood caravan now rolls on to the G20 summit in Cannes in early November.
With European Commission president Jose Manuel Barroso putting his weight behind it, a generalised financial transaction tax (FTT) — once a pipe dream of the radical fringe — has become an imminent reality. Several of the most influential countries are expected to endorse the idea at the Group of 20 (G-20) finance ministers’ meeting today and tomorrow and at the G-20 summit next month. The Republic of Korea, South Africa, Brazil and India should be among them.
The critics are howling that this will hurt all of us, by reducing our ability to generate wealth and employment. They say we cannot afford this at a time when we are suffering from one of capitalism’s biggest crises. We say these people should have more faith in capitalism.
Despite all its faults, capitalism has proved the most resilient economic system humanity has invented. It has survived numerous changes, many of which people believed would destroy it. It has disappointed its left-wing critics by surviving the rise of the dispossessed working class and three centuries of cyclical economic crises, which Karl Marx predicted would grow bigger until they finally destroyed the system.
But, more interestingly, it has also baffled its supposed defenders by its capacity to survive threats they thought would be terminal. They include the eight- hour day, minimum wage, regulation of child labour, progressive income tax, the welfare state, mass nationalisation of industries, trading standards, environmental standards, and even the introduction of the limited liability company (which many early free-market economists, including Adam Smith, denounced as a dangerous licence to take excessive risk).
In fact, capitalism has not only survived these changes but often improved itself by upwardly adjusting to them. So, for example, while many people warned that the abolition of child labour would, by eliminating nearly half the labour force, spell doom, it has actually made capitalism more dynamic by generating a healthier and better educated workforce.
The FTT is not some arbitrary tax on, say, white asparagus or Henning Mankell novels, which has no compensating benefits. Yes, there will be some immediate costs of the FTT, in terms of particular trading activities “migrating” to other jurisdictions with no FTT and thereby reducing tax revenue and employment. However, in the long run, the compensating benefits will be far greater.
The FTT is meant to clamp down on the most speculative elements of the global financial system, which has become the proverbial tail wagging the dog of the global economy. The tax will reduce the systemic instability created by big finance, thereby encouraging long-term investment and more stable consumer demands, not to speak of reducing unnecessary economic dislocation. It will make capitalism better.
Of course, the introduction of the FTT is only the beginning. First, we need to decide how to use the money. The European Commission’s initial effort to grab the lot to fund its own operations raised howls of protest, and the latest proposal backs down somewhat, leaving the matter open. Bill Gates argues for “a substantial allocation for development”, as well as pushing G-20 governments not to backtrack on their aid promises. “Rich countries’ fiscal books cannot be balanced off the backs of the poor,” he says. Emerging powers should be making these arguments even more forcefully. The FTT should not be seen as just an easy way to collect more taxes, exploiting the public sentiment against the financial sector.
Moreover, the introduction of the FTT, even if it can be done globally, should not be the end of attempts to regulate global finance in a way that encourages economic dynamism and stability. We have made progress raising capital requirements for banks but we still need to properly regulate derivative products, change rules on corporate takeovers, better supervise rating agencies and accounting firms, and clamp down on tax havens.
The FTT’s time has come. Those who try to argue against it on the grounds that it will do more harm than good, or even cripple the capitalist system, are either ignorant or self-serving. If capitalism has survived, and often flourished, with the help of all the changes listed above, it will shrug off the FTT with ease. In fact, it is most likely to use the FTT as an incentive to improve itself. The defenders of capitalism should have more faith in it.]]>