John Hayward: George Osborne is right - debt is a recipe for inevitable disaster

Dr John Hayward is the executive director of the Jubilee Centre, a social reform organisation established in 1983 to explore an alternative social paradigm to capitalism, socialism and other ideologies from a distinctively faith-based perspective. He regularly blogs on a wide range of social, economic and political issues on the Jubilee Centre website.

If anybody still doubts whether the Conservative Party can be trusted with Britain’s economy, they should listen to today’s warning by the Shadow Chancellor George Osborne of the need to “confront some uncomfortable truths”.

Mr Osborne told a Birmingham business audience today:

“The unsustainable debts in our banks are a reflection of unsustainable debts in our households, our companies and our government. Our economy is broken and we need a new model of growth.”

Crucially, rather than seeking to find a scapegoat for the current global crisis - such as bankers, the Government, or America - he identifies the problem as the debt-based finance system that we all take for granted:

“We need to change from an economy built on debt to an economy powered by savings and real returns on effort. Increasing profits through ever higher debts is not a sustainable way to build a business.”

He is right. Debt is not a basis for growth. In fact it is a recipe for inevitable disaster.

More than three decades ago, in a book entitled Biology: Its Principles and Implications [my PhD was in genetics!], Garrett Hardin and Carl Bajema noted how

“An economic system that includes the positive feedback of compound interest can only endure if it also includes a counteracting force such as inflation, bank failures, confiscatory taxes, robbery, bankruptcy, revolutions or repudiations of debts. Conventional wisdom considers these events are pathological. Understandable they may be: but at least one such force must be included... if the system is to endure.”

The accumulation power of compound interest is unsustainable without serious correction events because other things don’t grow at an exponential rate.

As Tarek El Diwany, founder of Islamic Finance, observed on the Today programme at the start of last month, in a discussion with the Right Reverend Peter Selby, the former Bishop of Worcester, on religion’s contribution to the financial markets:

“For hundreds of years they had very advanced economic systems, hospitals, universities, welfare, international trade — all of the signs of an advanced economy, and they didn’t use interest-based finance. It is an economic lie that we need debt at the heart of our financial system. Empirically, history shows that we don’t.”

Yet, because in recent years we’ve moved away from any notion that credit needs to be regulated and have delegated to banks the job of creating money, we find ourselves in our current financial mess.

So, unique among politicians in recent months, Mr Osborne has finally settled on the correct diagnosis when he points out that “increasing profits through ever-higher debts is not a sustainable way to build a business.”  He might also add that the use of ever-higher debts is not a sustainable way to run a national economy either.

Of course, making the correct diagnosis is but the first step in applying a long-term cure. However, his proposals to rebalance the system of corporation tax paid by business so that firms no longer have a financial incentive to go deeper into debt suggest the right course is now being pursued by the Conservatives to avoid another global economic disaster.

Further steps will probably need to be even more radical and will require even greater leadership. We will, for instance, need to protect current accounts from other parts of bank operations and the risk of bank failure. However, removing present encouragements to leverage within tax and regulatory systems truly represents not just a ‘new capitalism’ but a whole new economic model - one that builds for long-term stability rather than short-term profits; one that seeks to replace interest-bearing loans with either profit-share financial partnerships, rental charges for the use of physical property, or charitable, interest-free loans; one that considers the impact of our financial decisions on the prospects and well-being of others.

Some might call it community-friendly capitalism; at the Jubilee Centre, we call it relationism.