One of the greatest of follies is the excitement that is generated over the Bank of England’s announcement of interest rates. Once a month the monetary policy committee meets to decide the bank rate, that is the rate of interest the bank will charge on loans it might make. This committee of the great and good holds the nations future in their hands, holding rates steady as they have done yet again, brings great relief to the nation’s borrowers. In a nation that is as over indebted as the UK even small changes in the interest rate can be of great significance to borrowers, particularly those with large outstanding mortgages. Yet this is an illusion as so much economic policy making is a matter of smoke and mirrors. What matters is what people believe, if they think, as do the nation’s politicians and financiers, that such rate changes are of great importance, they are of great importance. However in moments of great crisis when events spiral out of control, they are almost useless. On Black Wednesday bank rate went up to 15%, 30 times today’s rate of 0.5%, yet it did little to halt speculation against the pound in the financial markets. The speculation was only ended when the pound was effectively devalued by Britain leaving the European Exchange Rate Mechanism and accepting a low market valuation for the pound. Raising interest rates did not stop financial speculators bringing the Bank of England to its knees.
While focusing on bank rate politicians and central bankers can pretend that they are in control of events. Stagnant incomes, over indebted banks (whose debts in 2013 were approximately 500% of GDP or £6.7 trillion), low productivity and spiralling trade deficit (now the highest in the developed world at 5% of GDP) are problems that can be ignored. At least until some future crisis reveals the fault lines in the UK economy. Incompetence in managing the economy despite popular misconceptions to the contrary never results in a lost election, unless it impinges on the popular imagination as in the form falling house prices.
There is another misconception that a dysfunctional economy such as that of the UK is self correcting or pressures from within society will lead to a correction of the failures within the economic system. Nothing of the kind is true,dysfunctional economies such as the UK’s can function as they are for many years unless some internal or external shock forces traumatic change in society. If the political classes can somehow convey the impression that they are in control of the economy nothing will change. Nonsense if dressed up as sound economic policy will be accepted by the people as a whole in an economically illiterate society. Strangely enough for a subject whose practitioners claim to subject the economic to forensic analysis, artifice and appearance are often what matters.
I am not alone in my analysis as today one economics commentator described the policy of the central banks as applying cosmetics to the mummified economy.
Spoken or written truths are not welcome in such situations as this when the political,class and the supporting cast of economists are all desperately reassuring us that everything is well. The shrillness of the abuse with which they shout down proponents of alternative strategies is an indication of weakness of their grasp of the truth. They are aided in the suppression of the truth by their media allies who through controlling print and media outlets can prevent any alternative strategies being published or becoming known. What matters is that only the same story is told by politicians, economists, industrialists, the media etc.
What should not be underestimated is the staying power of the fictional story that by manipulating the bank rate the government is in control of the economy. Fortunately for all in the governing classes economics is going through the ‘dog days’, when all pretence of critical objective analysis of economic affairs has been abandoned, in favour of just telling the one story. If it is possible to describe one of the social sciences as a dead science, that description is true of economics. There will never be a university economist who will state that the emperor has no clothes.
Given my interest in theology, I can cite a similar example. Belief in the Gods of Olympus persisted for hundreds of years, even through the late days of the Roman Empire, when the educated classes had long since abandoned such a belief. Conservatism and the usefulness of such beliefs to the government, who could manipulate the fears of the population through supernatural portents gave belief in Jupiter and the other Olympian Gods an exceptionally long life. Belier in the efficacy of manipulating bank rate to control the economy started in the 19th century and despite a few short periods of disrepute it continuing to be the main measure of government economic policy.
There will be another financial crisis possibly worse than that of 2008/9 and again economists despite all the evidence too the contrary will again say that it was an event that nobody could have predicted. Policies that were adopted in 2008/9 despite their evident failure will be used again, as to do otherwise would be an admission of fallibility among the ruling class of politicians, bankers, industrialists, economists etc. What is needed is a new governing class with a new set of stories about the economy, hopefully stories that are grounded in reality. That will only result from a major trauma within society that destroys the myth of infallibility that cloaks the governing classes. The last time this happened was after World War 11 when a series of military disasters destroyed the credibility of the governing classes, when they were replaced with a middle class imbued with the ideals of social democracy.