Financial markets need to be heavily regulated and taxed, according to London School of Economics professor of economics Amos Witztumin in an interview with The Sunday Times.
“I would go further and suggest that the government should be more involved in the financial side of our lives, offering more stable pension funds, for example, not preventing competition, but being part of it,” he says.
Prof. Witztum was in Malta to give a lecture at St Martin’s Institute of IT in Hamrun.
He believes the market regulations brought into force so far since the global financial crisis, in both the EU and US, are not enough.
“No, not at all, more regulation is needed. For example, in Britain huge bonuses are still being given out in the banking sector. The purpose of regulation is to ensure that gambling money is not available, and the fact that there are all these types of bonuses suggest that there is still a sufficient amount of gambling taking place in the financial sector.”
Prof. Witztum said many people wonder whether the financial crisis which came about after the collapse of Lehman Brothers in 2008 reflected a failure of economic thinking.
“To some extent, not really, as the fundamentals of the modern way of thinking of economics is that the social and economic spheres regulate themselves, and that the government has no role at all. Does the crisis mean this is not true? The answer is ‘of course not’. Even the physical world has shocks, such as earthquakes or forest fires. The physical world also regulates itself through crises, so it’s obviously not a failure of the system.”
He asks whether it is our choice to have an economic system that is self-regulated, saying the answer was more complicated. Economic theory teaches that from a perspective of solving economic problems, it was not, he said.
“The theory says the competitive practices and decentralisation actually don’t work. People miss this part of the theory, which says that this works, but under a set of conditions. If you start looking at these conditions you realise they do not materialise. By implication you will never really have a solution to the economic problem using these institutions. From an economic perspective there was no surprise to the crisis and it was quite natural.”
Prof. Witztum says the aftermath of the financial crisis was also remarkable, and when US President Barack Obama launched his stimulus package “everyone was at his throat”.
In Britain, he said, there was the same argument, namely that you can’t tax the rich, that there should be small government, and one should let business sort out the situation. He adds that the role of government is very important in the economy and the large government sector has over the years contributed to economic growth in a number of countries.
Regarding the economic function of financial institutions, the LSE professor believes financial markets are “inherently inefficient”. “A financial market will always fail in taking you where you would like to be. Markets do not price risk correctly, nothing is properly priced. They fail to solve economic problems.”
Prof. Witztum says the euro will survive, but adds that the eurozone’s response to this latest crisis was “too slow and too little”.
He is sceptical about the need for a European single currency. “I understand the view that irresponsible behaviour should not be supported but I am not entirely in favour of the single currency. There is enough difference of opinion across different societies in Europe to allow freedom of choice. I am not condoning what the Greeks did but I don’t think it’s right for markets to be the sole criteria of how society should organise themselves.”
He says there are entrenched cultural differences in Europe which need to be aired, and points out that if the Greeks want to have a lot of state funding it’s their prerogative, as long as they can maintain it.
“With the single currency they don’t have the freedom to do that. I can’t see how you can put everything in one pot and say all countries now have one less degree of freedom in making their economic choices. I think we should review the question whether all people share a common agenda in today’s world.”
Asked about the UK government’s economic policies and its attempts to reduce the country’s deficit, Prof. Witztum said: “It’s always a good thing to put your public finances in order, but the question is who should pay.
“I think Britain is a country with enormous inequality, where the culprits of the crisis got away with it. They are not paying anything. The rich and large corporations have ways of not paying tax. Most of the balancing act should have come from taxation on the wealthy.”
He says Britain has poor social indicators, ands asks why teachers and nurses are paid so badly and footballers and investment bankers, “who are just gamblers”, paid so highly.
“One can argue that’s how things are, but one expects a responsible government to correct these things. I understand the government’s position of believing in small government and the market, but I don’t agree with it.”
He also has problems with the Labour opposition in the UK, which says it disagrees with the Tory-led government that relies on the market, but says those things that can’t be done by the market will be done “like the market”.
“This led to a huge bureaucratic process of targets in the previous labour government, for no purpose whatsoever,” he says.