Could socialisation of Scotland's energy sector also be applied to banks?

Drafting a short history of economic thought, I have been reviewing how John Maynard Keynes and Joseph Schumpeter explained the Great Depression in the 1930s.

Probably for every reader who has heard of Schumpeter, at least 10 will have heard of Keynes, and perhaps even his book The General Theory of Employment, Interest and Money.

Writing in 1936, Keynes justified Roosevelt’s New Deal programmes. Young economists quickly turned Keynes’s elegant prose into mathematical models.

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Schumpeter fumed. He thought Keynes had tried to make a general theory out of England’s failures, and had pulled policy recommendations out of thin air. Overnight, he seemed to have lost his audience.

He got it back in 1943 with his book Capitalism, Socialism and Democracy. Although deeply conservative, Schumpeter had long been interested in Marxist thought, and had worked on the socialisation of German industry after the First World War.

He believed capitalism would inevitably run its course and that, once mature, social control of industry would take place. This would occur in a society in which innovation had become a bureaucratic process within large organisations possessing substantial monopoly power.

Schumpeter treated the economy as always evolving and thought deeply about how social institutions might adapt to changing circumstances. But he imagined a very rapid transition to socialism, rather than the mixed economies of western Europe after 1945. In fact, the Attlee government’s nationalisation of key industries after 1945 was consistent with much of Schumpeter’s thinking about the processes of socialisation.

Had he lived beyond 1950, he would have warned about the risks of excessive political control, and the use of nationalisation to prevent business closures. In Schumpeter’s approach, mature sectors of the economy consisted of economically viable businesses, with substantial economic development taking place within them.

Large organisations, mature technology, limited competition, with innovation taking place within organisations. Much of that fits the energy sector. Socialisation of energy supply has great appeal just now. The claim that privately owned businesses, overseen by regulators, would improve service quality and offer consumers lower prices has never seemed more risible.

Banking is also a mature sector, and it had a central role in Schumpeter’s thinking as the enabler of innovation in other sectors of the economy. He imagined organisations coming to banks with innovative concepts, and banks deciding which proposals they would support.

For Schumpeter, investment banks were the true risk takers in the economy. To succeed, they would need to choose a high enough proportion of successful innovators.

That such banks have found different ways of making money – and so are much less engaged with enabling Schumpeterian innovation than with financial engineering – is important but not the point here.

When Scotland becomes independent, it will be a small country, with a highly concentrated banking industry. Bank of Scotland and Royal Bank of Scotland were very successful innovators in the last quarter of the 20th century, finding new ways of doing business, largely by reducing costs.

Older readers will remember how branch managers would decide which customers could borrow money – as well as how much and on what terms. With the adoption of credit scoring, those jobs vanished.

Innovation also took place on the payments side, with digital systems allowing customers to do almost all their business without going into a bank branch.

THAT innovation did not involve much in the way of entry into banking. It was the result of what Schumpeter would have called bureaucratic innovation. Especially given their bailout in 2008, the two main Scottish banks seem ripe for socialisation.

Current developments in banking might make this a relatively straightforward proposal. Scotland will, of course, need to establish a central bank, which, almost certainly, will be publicly owned, and which will definitely have substantial public service obligations.

For more than a century, commercial banks have managed payment systems under the oversight of central banks. Increasingly though, digital settlement systems are routed through central banks.

In the next decade, we should expect central banks to extend this role further as they issue digital currency. Leave to one side the question of a cashless society, and the substantial questions surrounding privacy which will follow from all transactions leaving a digital trail.

In a socialised banking system, the central bank could provide most transactional services. In almost every banking system, it has also turned out to be efficient to allow institutions which offer payments services also to offer saving and lending services.

With open banking standards, that information could be shared within a socialised banking sector. The central bank could manage payments; and satellite institutions could provide savings and loans.

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Nationalisation of the largest bank might lead to the commercial banks effectively becoming the lending arms of the central bank.

Other possibilities would allow for greater decentralisation, for example by the establishment of federated co-operative banks, or credit unions, and encouraging the formation of specialist lenders, such as building societies. Local authorities are likely to have an important role to play in supporting economic development.

Underlying all this might be a principle of credit union systems: co-operation where possible (for example, through common payments systems), and competition where necessary (in making lending decisions).

It could hardly be any worse than the crash and burn of the casino economy.