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The Flawed Belief in TINA (there is no alternative)

August 24, 2015economic history, Economics, Philosophy, Politics#Greece, aristocratic or elite politics, Britain, inequality, Jeremy Corbyn, Labour Party, Neo-Liberalism, Podemos, Social Democrats, Spain, Syriza, TINA (There is no alternative), Tradition, Wage Differentialsangrytunbridgewells

Today there was yet another article in my daily newspaper by a prominent politicians disparaging those on the political left that fail to recognise the realities of life and want to make impossible changes in society. This disparaged group who are abused as fantasists, protest voters but never by terms that suggest that their choices are made on the basis of rational judgement. The only surprise is that he did not suggest taking the vote away from these ‘childish’ voters. Actually one former leading politician did suggest that by suggesting that the vote for the new leader of the Labour Party should be sabotaged by the other candidates withdrawing so making the contest invalid. If this had happened the same politician would have advised on how to rig the voting mechanism to ensure the right person was elected.

18th Century Aristocrats (counter-factual.net)
What is barely understood is that we are governed by an elite comparable to the landed aristocratic elite that dominated politics in the eighteenth century. This elite is composed of politicians, media persons, technocrats and financiers educated at the elite universities. (There are other groups that could be included but for brevity I have excluded them, what they all have in common is an education at one of the elite universities. It is this education that sets them apart from the rest of society.) What they practice is a policy of exclusion, only the dialogue between the members of this selected group is considered valid. They only listen to themselves, the rest of society is to be a childish rabble whose views and opinions are not worthy of consideration.

What I want to attack is the shared understanding of this group, an understanding which ‘things must be as they are’ or as it is more familiarly known TINA that is the society in which we live is the product of economic, social and technical forces that are beyond the control of individuals. What the politician must do is understand those forces making for change and work within the constraints imposed by them. Social democratic politicians recognise the pain of people working on zero hours contracts and that caused by job insecurity, but their role is not to change the cruel inequalities in society. Their task is to explain that low wages and job insecurity are a feature of modern society and must be accepted and that it is only through individual efforts at self improvement can circumstances change. The only amelioration they offer is the most modest of reforms, which will have little impact on there working lives. The social democratic party refuses to accept policies that would reduce or end job security by insisting that it is not the role of government to ensure that employers treat their employers well, what they instead offer is a way out of this appalling way of life through self improvement via education.

This new elite remains isolated by its adherence to things must be as there are ideology from the wider discontent in society. They believe that they are the ‘grown-ups’ in the words of Christine Lagarde (Managing Director of the International Monetary Fund). The new left in Greece (Syriza), Spain (Podemos) and Britain are childish fantasists trying to ignore the reality of the grown up world.

As a sceptical economist I must doubt such understanding of society I would ask why is it society is as it is? The reasons given are irreversible technological and social changes. Yet on examination they are only partial truths. Technological change has taken place but the distribution of incomes is determined by the social order. The company director in Britain earns a hundred times the salary of the average of the incomes of the employees in his business. In the 1960s the director’s salary was only 30 times greater than the average. Why the change, if the answer is that company directors have become more productive, that is open to objection. The profitability of companies as a return on capital invested in very similar to that of companies in the 1960s. The falsity of this view is demonstrated by the fact that in many failing businesses the directors are paid excessive salaries, how can huge salaries be justified for such corporate dimwits?

What as the sceptical economist I would say that there are different reasons for gross income inequality. While it cannot be doubted that some income differentials are due to technical change in that information technology has made many former skilled occupations redundant, the growing prevalence of the low wage culture has origins elsewhere. One is custom and tradition which decrees that unskilled occupations only deserving of low incomes.There is one interesting example which demonstrates this fact. When at university I read a book on applied economics by a Professor Brown and one example from that book sticks in my mind. He stated that the evidence suggested that wage differential between craftsmen and unskilled labourers had remained the same since Roman times. This suggests to me that much the justification of current income differentials comes from custom and tradition and does not reflect the real contribution each employee makes to the business. Why should the cleaner or the sales assistant be paid so little?

The other factor is power, the financial and industrial elites have cited custom and tradition as the reasons for low pay. Their mantra is unskilled staff make such a small individual contribution to the businesses profitability that they are only deserving of low pay. Yet I have never read of any study which has successfully identified the contribution to the firms productivity of say the cleaner and the financial director, yet the salary of the latter is more than that of the former. Businesses are a collaborative venture in which it is impossible to identify the contribution that each individual makes to the success of the business. Is the cleaner really that unproductive? It is the cleaner that maintains the workplace as a clean and healthy environment in which to work. Dirty toilets and uncleaned washrooms would lead to outbreaks of illnesses associated with unhygienic environments. How productive would the company director or IT specialist be if struck down by dysentery? There is good reason to suggest that cleaners are vastly underpaid, yet employers continue to pay the minimal wages.

Governments have enabled this power grab by the business elite by passing legislation to weaken or destroy those organisations that are the only means of equalising power in unequal labour market. Ever since the Neo-Liberal revolution politicians have constantly weakened the power of those groups that threaten the power of the over mighty employer. In Britain it has meant the emasculation of the one powerful trade union movement, changes in the law now make it very difficult for the unions to effectively organise industrial action. Therefore there is little restraint on the employer who wishes to pay as little as possible to his staff. It is no coincidence that some of the most profitable businesses with the highest paid directors in Britain have been the supermarkets an industry where low pay and job insecurity are endemic.

Scepticism as a philosophy is misunderstood, sceptics don’t believe are no truths, in that all philosophies or ideologies are fallacious. Instead it is the belief that in subjecting an ideology, philosophy or belief system to sceptical enquiry the truths it contains can be discovered it is the stripping away of error.

Being a sceptic is not contrary to a belief that society can be improved through reform, it is just a scepticism about the nature of such much contemporary reform, reforms whose fundamental truths are based on custom, tradition and exploitation of market power. I am a left of centre sceptic who believes in the superiority of left of centre ideology because it contains less wrongs than the alternatives and that with its emphasis on fairness those wrongs are likely to be less damaging to humanity than the wrongs of alternatives that exclude any notion of fairness. A sceptic also favours democracy as in a democracy there are always contending philosophies and ideologies as the proponents of each that will be subjecting each to scrutiny and through that many of the errors of policy associated with the mono-thought of the Neo Liberal world view can be avoided.

Unlike the interchangeable Neo-Liberals and New Keynesians who dominate the political process with their uniformity of view, I want a political culture that recognises many ideologies and philosophies as valid and that a recognition the aim of politics is not to destroy the opposition but to create a political culture in which many views can thrive. Contemporary politicians are so assured of the rightness of their beliefs that they cannot concede that they may wrong. They are as in Christine Lagarde’s word the grown ups who understand reality and who don’t indulge in childish fantasies. What a sceptic would say is that any believers in any ideology that denies it contains any errors or wrongs are the childish and naive ones.

Words of advice from a sceptical economist to any aspiring politician

August 12, 2015Economics, Philosophy, PoliticsGeorge Osborne, Missionaries, Neoliberalism, Ozymandias, privatisation, Public Sector Reform, Royal Mail, sceptical economistangrytunbridgewells

No politician has requested my advice but as so many people particularly journalists proffer uninvited advice, I feel free to offer my own. Sceptics have a special duty to offer advice as they stand apart from the common run of intellectuals who are always promoting their own ideologies and schemes, as we offer a warning as to the traps into which a politician can fall.

Any politician when entering the great Houses of Parliament or the chambers of the other legislatures will be in awe of the senior practitioners of the craft of politics who display a mastery of the chamber. This mastery only extends as far as the boundaries of the legislature. In Britain it is acknowledged that George Osborne (Chancellor of the Exchequer) is the master of the house, he dominates debates and sets the agenda for policy making. However this does not mean that this mastery is any more than a dominance of the members of the house,he like many masters of the politic art achieves his dominance through his avoidance of any of the intractable problems that face the country. The palace politics of Westminster and other chambers is dominated by series Ozymandias who pretend to a control of events that they in reality lack.

The sceptic’s duty is to remind the politician that they don’t know and not to be taken in by the many Ozymandias that dominate parliament, who show their ignorance. Greek sceptics such as Sextus Empiricus were the philosophers who claimed that the philosophies of Plato, Aristotle and Zeno were unsound and did not embody the universal truths their adherents claimed. Rather than trust to a new unproven truth of a philosopher they recommended that the people stick to the tried and tested ways of their ancestors. A contemporary sceptic such as myself would amend the original sceptic philosophy to say that all philosophies and ideologies while not containing within themselves the ‘big answer’ to life and society’s problems, do contain many partial and useful truths. It is the task of the sceptic to suggest methods by which the few partial small truths can be disinterred from the big lies contained within political ideologies and philosophies.

Sextus Empiricus Greek philosopher of scepticism a source of inspiration to the author

If the Neo-Liberal or free market philosophy that dominates political discourse really contained the big truth and not the big lie, Neo-Liberal Britain would be a prosperous and happy nation. Instead it is a nation in which there is much social division, great income inequality and much poverty. One ill is the dysfunctional housing market, a market which is making London uninhabitable for middle and low income families. Yet even within this malign philosophy there are valuable truths, which can guide good policy making. One truth is that the government cannot fine tune a complex mechanism such as the market to achieve such ends as full employment without there being adverse consequences, such as increasing inflation pressures in the economy. The big lie of Neo-Liberalism is that because the markets are so complex and incapable of being fully understood by politicians they are best left unregulated, which can result in powerful market players abusing their power to the detriment of others. Powerful players such as the landlord who can exploit their monopoly of the housing stock to force tenants to pay exorbitant rents that can equal half of the tenants income. It is the role of the politician to choose a middle position between over intervention and non-intervention to deliver legislation and policy changes that benefit the community as whole.

In today reform obsessed society it is easier to identity problems with any existing government policy or public service organisation and even easier to suggest reforms. However these reforms are unproven and are usually rushed into operation without any real consideration of their impact on society. What appears to be broken and dysfunctional may be less broken than the reformers suggest and often delivers a better service than the organisation that exists after their reforms.

Perhaps the example of the private finance market most clearly demonstrates this point. The banks and members of the financial services complained that the restrictions under which they operated in the 1950s and 60s hampered them when competing with their international rivals. What the banks complained of bitterly was the way in which the government restricted their ability to create credit (money) , the government would compel banks to limit their mortgage lending to avoid an inflationary increase in house prices. They complained that their foreign rivals were not subject to such restrictions and were able to take business that would have otherwise been that of the British banks, although there was little evidence of this happening then. A more telling example could be found in the Stock Exchange, there was an individual called ‘the government broker’,who dealt exclusively in the buying and selling of government stocks. In the morning he dealt with customers on the phone and in the afternoon he donned a top hat and morning suit and went to the stock exchange were he would conduct government business from his stand. Bankers and other financiers looked at the American financial market with its corporate giants and wanted the same freedom to practise free of regulation. In 1986 the government obliged and removed all restrictions on the financial markets in the so called ‘big bang’. Businesses merged and grew and new mega giants came to dominate the financial world. However this legislative free-for-all had a down side, with no restraints on bad behaviour either legislative or cultural the worst happened. One consequence was one financial crash after another. Lloyds Insurance market which was once the byword in financial probity crashed because of the reckless and sometimes fraudulent behaviour it’s the underwriters. Seemingly sound banks got into trouble over reckless speculation, one of the first to go was National Westminster which lost billions on foolish American purchases. It was only saved by being purchased by the Royal Bank of Scotland. Then there were the series of bank failures in the crash of 2008/9, in which the banks were only saved from collapse by government money and guarantees totalling about 10% of GDP.

What appeared in 1986 to be a cosy gentleman’s club was in fact an efficient financial system that worked, it only fault was that it did not enable its members to earn the mega bucks of the American investment bankers. This market had evolved since the 18th century from coffee houses and financial exchanges and developed a series of working practices that protected and benefitted the customers of the financial sector. The relatively small size of the members of the market meant that the collapse of one did not equate to a financial catastrophe, as it did not as today bring down with it with it the other over indebted giants of the market. When a series of fringe banks crashed in 1973, they were easily absorbed by the larger banks and their customers suffered no real loss. The separation in the Stock Exchange of the role of broker and stock jobber had prevented the manipulation of shares to the detriment of the customer. Now with the merger of the two roles there is frequent evidence of insider trading and share manipulation by the banks which are to the detriment of the customer. There was the infamous Goldman Sachs case in which company emails revealed that the bank had sold ‘crap’ shares to their customers, whose sale benefitted only the Goldman Sachs traders. The overnight scrapping of the old established practices in 1986 which ensured the probity and soundness of the financial markets, created a market in which the reverse is true and which is prone to sudden and catastrophic breakdowns. A market which is so dysfunctional that it can only continue to exist through the continued explicit and implicit guarantees of government support which will compensate all in the event of a crash.

As a sceptic I am tempted to say that all reform is misguided, but that is wrong as society is constantly changing as governments have to adapt policy to changed circumstances. What I as a sceptic say is wrong is the belief that only ‘big bang’ reforms or those starting from ‘ground zero’ assumptions are wrong, it is the nature of reform that is wrong not reform or change itself.

Only if a politician understands the character of the reformer will they be able to judge the value of any proposed reform. All reformers are either ‘missionaries’ or ‘salesmen’ which is why such bad judges of the reforms they suggest. Once that is understood many proposed reforms can be seen as unsound, as they self interested proposals that only benefit the ‘missionary’ who have their sense of being the prophet that saves society from itself confirmed or the salesman who gets a cash benefit from the successful promotion of a reform.

The reforming Neo-Liberal economists are missionaries, they are on a mission to save society. These missionaries will always claim adopting their methods will result in some desired end. In the 1960s they were campaigning for an end to government policies that ensured full employment, they argued that allowing unemployment to increase to its natural level would reduce inflation. In the 1970s they argued for an end to the managed exchange rate system which they claimed would lead to an ending of international financial crises (history soon demonstrated the fallacy of this claim). Then in the 1980s that introducing the free market into the public services would reduce their cost and improve their effectiveness (as a rail user I and many others would dispute this claim). I compare them to the Jehovah’s Witnesses, who claim that only by adopting your religion will you get to heaven, the Jehovah Witnesses among the political reformers claim that only by adopting their practice and method will the best of all possible societies be attained. What they also have in common is that both their claims are faith and not evidence based.

The best example of the salesman type of reformer are the financiers of the City of London who argued successfully for the removal of all restrictions from the financial services. They as with the successful salesman gained an increase in income from the sale of their ideas. Obviously salesman are most frequent type amongst the financiers who recommend the privatisation of various government services. These financiers will gain from the consultancy fees from advising on the sale of a public service or as in the case of Royal Mail from handling the resale of its assets. (The financial advisors were guaranteed a proportion of shares in the newly privatised Royal Mail at a price they suggested. They were then able to sell the shares they had acquired at a much higher price making a large profit.)

From the viewpoint of this sceptical economist all proposers of reform should be regarded with extreme scepticism. Those reforms proposed by the missionary or the salesman are particularly suspect.The motives of any reformer should be treated with scepticism as it is more than likely the proposed reform includes a strong element of self interest.

One final word of advice the reforms that a politician proposes to introduce will inevitably be wrong, in that it will disadvantage one group in society. The role of the politician is to choose the least wrong of all possible options, the one that will wreak the least damage on society. Hopefully the reform may even produce more benefits than injuries, although recent policy measures in Britain have tended to damage rather than mend the social fabric.

A Surfeit of reform – the mess that is the British Education System

August 5, 2015Economics, Education, Philosophy, Politics#Plato, free market economics, Nietszche, Scepticism, Schooling Crisis, Sextus Empiricus, Syracuse, The British Education Systemangrytunbridgewells

My understanding of economics is derived from scepticism, the philosophy of Sextus Empiricus and Nietzsche when at his most lucid. The sceptic knows that nothing is true that there is no certainty in human knowledge. What ever the answer posed to a problem at the best it is but a partial answer. Sextus Empiricus was sceptical of human knowledge that he thought it best society continue in the same old tested and proven ways, as given the limitations of human knowledge any reforms proposed by the philosophers would inevitably worsen the human condition. This is illustrated by the probable apophrical story about Plato. Dion the tyrant of Syracuse invited the philosopher Plato to advise on improving Syracuse society. His reforms proved to be totally impractical and caused nothing but discontent among the people so much so that an angry Dion ending up selling Plato into slavery. However I would not go as far in my scepticism as Sextus as society is constantly changing and keeping things in the time honoured way is impossible. However a sceptic such as myself knows that all the grand theories of economics are untrue, they only contain at the best only partial truths.

Syracuse, Sicily

Economists have observed that if a good is in short supply its price rises so encourages producers to produce more in the expectation of increasing their income. This is an indisputable truth but the free market theorists develop this further claiming that changes in price will cause the market to move into an equilibrium where supply equals demand. It is this last statement that as a sceptic I would contest. There is no evidence that markets ever move into a state of equilibrium, as demonstrated by the housing market where demand has exceeded supply for decades. All that can be said is that market theory which states that price is the means through which supply and demand are brought into equilibrium is unproven.

There is one good example of the Plato school of economics in action and that is the mess that is the British education system. Concern was expressed in our governing circles about the poor quality of the British schooling system in the 1980s. A model for reform was found in public choice theory which is the application of market principles to public services. The local covered market in my city in which there are competing fruit and vegetable stall holders is a good example to explain the purposes of the reform. If one stall holder in the market sells produce that is of a poor quality or too high a price, they will lose sales to their rivals. Consequently competition between stallholders ensures that only good quality produce is sold at he lowest prices. Reforming politicians decided that the system that worked so well in the market would work well if introduced into the provision of public services. All that had to be done was to convert schools into the equivalent of competing fruit and vegetable store holders. Legislation was passed to achieve this and now there are a variety of competing state schools, academies, technical colleges and free schools to name but a few.

However this new market system of education has one huge flaw. There is no central co-ordinating authority to ensure that supply of school places matches the demand for school places. The problem that arises is that it is impossible to organise all these independent competing school to provide the number of school places needed. All the government can do is to encourage or cajole these competing schools into providing the required number of school places. However each school is responsible for its own finances and is not invest in providing the facilities for extra students unless they can be sure the places will be filled. They will respond after the event when there are a surplus of children unable to get into schools, once it is obvious that there is a need for places the school will respond. However there is one other caveat it takes time to create additional school places, it will require investment in buildings and new teaching staff and the consequence is that there will always be a time lag between demand for school places and the provision of those places. Leaving school provision to a market comprising several independent competing schools only ensures that demand will never match supply, so the provision of schooling for each child takes second place to preserving the integrity of the market, though a policy of non interference.

What I would say as a sceptical economist is that what is a proven truth in one sector of the economy cannot be easily or effectively transposed into another different sector, which may effectively run better on different principles. The free market principle of herding cats is not the best principle on which to organise the provision of school places and schooling in general.

Unfortunately the belief in the beneficial effects of the free market is so deeply imbedded in the political culture of the country that even the free market reforms produce some obviously dysfunctional results they are ignored.

Machiavelli and the Madness of Politicians

July 17, 2015Economics, Philosophy, Politics#austerity, #Freemarketeconomics, European Commission, Greek Crisis, IMF, Machiavelli, Madness, Neo-Liberalism, Syriza, Troika, Tsiparasangrytunbridgewells

What puzzles me is why when we have the best educated politicians in history, the governments that they lead are so abysmal. At least one European leader has a doctorate and most were educated at the elite universities in their own countries. Why are these so well educated leaders so awful at the business of government? The only plausible answer that I can find plausible is that they are affected with a degree of madness in that they consistently mistake the world of their fanciful imaginings for reality.

Perhaps this is best demonstrated with the current crisis in Greece. The leaders of Europe insist on repeating the changes they have forced on the Greek economy which rather than solve Greece’s debt crisis has worsened it. The programme of imposed austerity and so called structural reforms pushed Greece into a situation which resembles the Great Depression of 1929 to 1939. Obviously a country in suffering an economic recession is less able to pay its debts than one that is booming. Yet the so called Troika (the European Commission, the International Monetary Fund [IMF]) and the European Central Bank) insist that the Greeks must accept even greater levels of austerity if they are to receive the bailout funds necessary to keep their banks open. It is obvious to all that this a policy that won’t work, yet our European rulers insist that it must continue.

Reading this it seems that there is a hint of madness in the decisions of the European policy makers. They were all the time confusing the world of their imaginings with the Europe of today. Anybody can misunderstand the reality they face yet to consistently do so suggests madness. The IMF has twice produced reports saying that Greece is incapable of repaying its debts, the latest report suggests that Greece should be granted a moratorium of 30 years before it has to repay any of it debts. Yet despite the evidence from the Greek economy demonstrating that the policy forced on it by the Troika has put it into long term decline making it less likely to the economy will ever achieve a level of growth that will enable it to repay its debts, they continue to insist that the policy must not change. While it is possible that the European leaders directing the policy of the European Commission can be deluded as to the effectiveness of their policy, what is most surprising is that Christine Lagarde as managing director of the IMF is supportive of this failed policy when her own organisation is writing the reports stating that the policy is wrong headed. Why this level of delusion, why do these politicians fail to see what is in front of their eyes? Why are so self evidently mad?

The best explanation for the behaviour of our contemporary leaders comes from the writings of Machiavelli. In ‘The Prince” there is a chapter in which the following scene is described. The son of one of the Greek tyrants is accompanying his father on a walk. Then as they are walking past a field of wheat, and the son he asks how is it possible to remain in power when their are so many potential enemies in society. Rather than answering his son directly this man picks up a stick and knocks of the heads of the tallest stalks of wheat. European leaders in their dealings with Greece have adopted a similar policy. Whenever a Greek leader appears who might threaten their policy of austerity, they destroy them. The greatest threat the European leaders have faced is Tsiparas so they had set about undermining him and destroying his power base. In denying the Greek banks access to much needed Euros they have reminded him that they possess the power to close the banks and with that wreak havoc on the Greek economy and society. Rather than risk chaos, Tsiparas has capitulated. The leaders have calculated that the terms that they have forced him to accept will force his eventual resignation and destruction of his radical Syriza party. Not only these politicians cut down the tallest wheat stalk in Greek society, they have made it clear that they will do the same to any other wheat stalks in any other European country that might threaten their authority.

This leadership style that Machiavelli demonstrated is not a style of leadership appropriate for a democratic society, which depends on political dialogue and consensus to function effectively. If the opposition is destroyed or emasculated the political dialogue becomes extremely limited, as all the potential leaders realise that only by following the accepted script can their careers advance. Consequently there is a political echo as what leaders hear from the political dialogue is but an echo of their own views. ‘Yes’ men and women become the vogue in politics, individual thinkers self exclude, as they must pursue careers outside politics as the system penalises individual thinkers. They realise if they entered politics would be marginalised in the political set up or more likely as in the Greek example have their political reputation and career destroyed by a hostile elite of non thinking conformists, who hate any threat to their authority. This gives leaders a sense of omnipotence as all they ever hear is their words repeated back to them. Political difference is viewed in the words of Christine Lagarde, as not being ‘adult’ and not worth consideration. The views of Tsiparas and the Greek leaders were not worth considering as they were not spoken in the language of the elite. They were children who failed to understand the grown up world of the political elite.

Never having to engage in serious dialogue with your rivals and their alternative views, leads to an arrogance of power. By never facing contradiction these leaders cannot but believe in the rightness of their views. These leaders have been driven mad by power, they believe the acquisition of power sanctities the rightness of their views. What they say is true, anything else is heresy. They are like so many Kim Jong-uns who don’t have to pay regard to any view but their own. Kim Jong-uns that will resort to any tactic to destroy the reputation and career of rivals.

There is one great failing in Machiavelli’s book ‘The Prince’ he failed warned leaders that acquisition of power does not equate with greatness of mind. What we have in the West is a series of mediocre leaders who have attained power by Machiavellian means, but who lack the greatness of mind to govern effectively. In Britain and Europe the means to power is also the means by which great individuals are excluded from power. Mediocre thinkers who have attained power by manipulating the political system overestimate the significance of their success, playing the system well does not equate with greatness. The technocrat governments appointed in many southern European countries are not experts in economic management but timeservers willing to do the bidding of their political masters. The technocrats that Europe will put in charge of the running of the Greek economy, will be no more successful than their predecessors. The misery and damage they inflict on Greek society will be hidden behind a serious of dubious statistics that appear to shw success. Britain and Europe are ruled by a number of petty Napoleons who are blinded by power and in the madness, they believe that their insane visions represent what is best vision for humanity. We are ruled by the self deluding inhabitants of a political madhouse.

Greece and the Sceptical Economist

July 7, 2015economic history, Economics, Philosophy, Politics#classical greece, #economics, Anglo Saxon Free Market, Baathist, European Central Bank, European Union, Greek Crisis, International Monetary Fund, Iraqi Economists, Keynesian Economics, Neo-Liberal economics, Putin, Sceptical Economics, Soviet Unionangrytunbridgewells

Three kinds of economics

http://www.neuerope.eu

From a glance at the media it would seem that there is only one economics, usually what is now termed free market or Neo-Liberal economics. People are familiar with the mantras of these economists whether it spoken by them or a politician. Mantras such as a country must live within its means and it must reduce its debts to a sustainable level as is constantly repeated in the debate on Greece. However economics can be divided into three separate schools, Neo-Liberal economics being but the most dominant strand in but one school of economics. What ever school economists belong to will determine their approach to the crisis such as that in the Eurozone and Greece?

Neo-Liberal economics derives from the school of economics that sees the economy as an integrated system that when working well maximises the welfare of all. Economists from this school will see their role as to explain how the system works and how to make it work better. Changes such as removing restrictions or impediments that prevent the free market from working at its optimum. This has lead to the emasculation of trade unions and worker protections,as each are seen as an impediment to the smooth working of the free labour market. A loss it is believed that will be offset by higher incomes the now more efficient workforce. Ideally there should be no restrictions on how and where individuals choose to work and how employers choose to use them.

There are other schools of economics within this school that sees the economy as an integrated social system that can be made to work for the benefit of all. Although disregarded by policy makers today, they are the Keynesian economists who believe that through intelligent government intervention the economy can be made to work for the benefit of all. Their concern is ameliorating the damaging effects of the trade cycle, that is the economy goes through a repeated series of bans and busts. In the upswing period they are determined to stop the worst effects of the boom, which is inflation, by regulating credit; similarly they wish to avoid the worst effects of a recession which is unemployment by using various measures such as increasing public spending to stimulate economic recovery. This school is anathema to the Neo-Liberals who believe that any government intervention in the economy can only have a malign effect.

Next there are a group of economists who see the economy as working for only one privileged group and merely providing the majority with the means of survival. These are the Marxist economists of whom there are few today. At the core of Marxist economics is the labour theory of value. This theory at its simplest states that it is labour that in the production process that adds value to the product, but that added value is skimmed off by their employers the bourgeoise. This group take a disproportionate share of the added value (profit) leaving the worker with only the minimal means of income. Marxist economists advocate measures to reduce or eliminate the power of the bourgeoise to take a disproportionate share of national income to achieve a more equitable sharing of that income.

There is a third school of economics of which I am a member, we are probably the smallest of all the economic schools. These are the sceptical economists who believe that seeing the economy as an integrated social system that works as fallacious. (I use the term sceptic after the sceptical school of philosophy, whose most prominent recent exponent of whom was Nietzsche, from whom I take my understanding of scepticism.) This is not to deny that the economy does not produce goods and services that add to the sum of human welfare, but to see it as working mechanism or a well functioning social system is wrong. There was a film realised in the 1965 about an air race from London to Paris that took place in 1910. In it there was song about ‘Those Magnificent Men in their Flying Machines’ which included the words if my memory is correct, that these machines fly but I do not know how they stay up in the air. A sceptical economist has this view of the economy, we know that somehow the economy works but not exactly how. Parts of the system we do understand but not the whole, we even doubt if it correct to describe the economy as a system, we only use the term system to imply a something. What we deplore is seeing the economy as a mechanism that is capable of being perfected, that can be made the best of all possible economic systems, as is the claim of Neo-Liberal economists. Not that we don’t believe that changes cannot be made to improve the working of the economy but those changes will have only a limited impact. The revolutionary economics of the Marxists or Neo-Liberals who claim to have the ability to transform society and its human members we see as misguided. Economics is the science of small changes that have been proved to work not the messianic social science promising a better future for all.

Greece and the sceptical economist

Greece provides the perfect example of the fallacious nature of much of economics. When the financial crisis of 2008/9 came it exposed the frail nature of the Greek economy without its over dependence on foreign loans. The European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB) provided the loans Greece needed on the condition that it adopted a programme of austerity and embarked on a series of Neo-Liberal reforms. These reforms were to cut welfare spending, remove labour protections and embark on a large scale privatisation of state owned assets. After five years debts have increased to 177% of GDP, youth unemployment has reached 50% and many individuals especially pensioners have been forced into poverty. Despite the disaster that is now the Greek economy the EU insists that Greece most continue to follow the programme of austerity and Neo-Liberal reform. Even the election of a government opposed to austerity and the issuing of an IMF report saying that the continuation of the current policy will make it increasingly unlikely that Greece will ever repay its debts,has failed to make the EU change its policies. The Neo-Liberal politicians and economists that control policy making at the EU believe that in spite of the evidence to the contrary that the Neo-Liberal reforms imposed on Greece will eventually deliver. It is a matter of holy writ for these people that only the truly free market can deliver the best of all possible worlds.

A sceptical economist such as myself might point out to the failure of a similar radical Neo-Liberal programme in the former USSR. This programme of radical reform had such disastrous effects that some Russian nationalists believed that it was a programme implemented to deliberately weaken the Russian economy and nation. There was in the 1990s after the collapse of the communist system, the wholesale privatisation of state run businesses. The least efficient were closed for lack of buyers so creating large scale unemployment and poverty. Those businesses that were bought were purchased at knock down prices from the state by the oligarchs (often former officers of the KGB), with the result that control of the economy was transferred from the state to the oligarchs to the detriment of the Russian people. Economic reform was introduced by a government that had no real understanding of Western society and economy and into a society that lacked the social institutions to make the reforms work. Instead of the free market reforms creating a new Russian liberal democracy, they created a new authoritarian state. All the old methods of repression are returning, political dissidents are confined to mental institutions or imprisoned. Poverty is still persists and it is no coincidence that Russian men have the lowest life expectancy in Europe.

Perhaps a phrase for describing the policy towards Greece would be Iraqi economics. When George Bush successfully conquered Iraq he ordered the destruction of the existing governmental system. He intended to create a liberal democracy out of the ruins of the old Baathist political system. Instead this overly optimistic programme created a political wasteland which has lead to a decade long period of internecine warfare, as the authoritarian government that existed was replace with nothing more than misplaced optimism that once freed the Iraqis would by themselves create a democratic state. The radical Neo-Liberal economic policies that have introduced to the former USSR and Greece have created an equivalent economic and social wasteland.

At some subconscious level of thought it does seem that the European politicians do seem realise that radical Neo-Liberalism can only be imposed by an authoritarian government. They have been trying to remove the democratically elected Syria government and replace it with one of technocrats that will do their bidding.

What the sceptical economist would have done is to work within the existing political system and with its leaders to adopt a gradual reform programme, consisting of those measures that would bring some amelioration to suffering of the Greek people. The obvious one is some measure of debt relief, this would mean that the European banks that made irresponsible loans to the Greek government would suffer financial loss as their would the Greeks would be defaulting on their loans. However they would be paying their price for their irresponsible lending, which is what should happen in a free market economy. There would be no ‘big bang’ reform of the economy but a series of negotiated and sensible reforms. Reforms that would be made with the consent of the Greek political leadership and people. There would be sufficient incentive to reform as the downgrading of Greece’s credit status, would make raising international loans difficult and costly until the Greek economy showed signs of recovery. The reforms would be modest in scope, there would be attempt to destroy Greek ‘clientelism’ as it is one of the key elements of the existing society. Reform certainly of its worst features but recognition that it is part of the unique nature of Greek society. No attempt would be made to make it a southern European equivalent of Germany or free market Britain.

What I am trying to say is the politicians and economists of the EU should recognise the limits of their knowledge. They are the last people that should claim to have a knowledge of the ideal society and economy, as people in glass houses should not throw stones. One of the criticisms is that the Greek tax collection system was ineffective, as one writer stated it was as if the state was putting out a collection plate. Yet these European critics are in their own countries encouraging rich individuals and business corporations to avoid tax. Many business corporations locate their head quarters in Luxembourg, Ireland and the Netherlands to avoid tax. Soon the UK will be added to their number as our government is developing new tax avoidance schemes to encourage business to locate in the UK.

The sceptical economist has no one big answer to the problems of managing an economy, instead they have a series of small answers. These small answers are to be tried and if fail to be replaced by alternate measures that might work. What the sceptical economist recognises is the uniqueness of different societies, which come up with different solutions to solve common problems. Is the Greek system of ‘clientelism’ really much worse than the employment practices of the United Kingdom? If clientelism produces over employment, the Anglo Saxon free market produces under employment. Government departments in Greece may have been over staffed with political place men, but British business corporations such as supermarkets are staffed with the under employed, that is workers working on split shifts on low incomes, who desperate for extra hours of work to boost their incomes. The Greek practice of clientism is far from perfect but so are the practices of the Anglo Saxon free market. What I want but don’t see is a recognition of the fallibility of social institutions and that what might work in one society does not necessarily work in another.

The Real Significance of Contemporary or Modern Art

June 30, 2015UncategorizedCarol Bove, contemporary or modern art, Damian Hirst, Duchamp, Maurice Saatchi, outrage, social exclusionangrytunbridgewells

There is always a sense of outrage associated with modern art, the most outrageous exhibition being when Duchamp unveiled his display of urinals as art. However while contemporary art has never lost its ability to shock and outrage, the shock has diminished with repetition. Recently a representative of an artist group called the ‘stuckists’ presented the winner of the Tate prize with a cheque for £50,000 as the winner of the alternative bad art award ward. The winner had exhibited a concrete mould made from the interior of a demolished house as her exhibit. However the award was for bad art, not for outrage. I think that much to the dislike of contemporary artists the reaction now to their art is not outrage but boredom. This was certainly my feeling when I saw a sculpture consisting of torn cloth on ropes in the Serpentine gallery, I skipped through the gallery merely glancing at the items on display eager to get back out into the summer sun.

What prompted my writing was my visit to view a display of the art of Carol Bove at one of the local art galleries. One of the exhibits was a piece of drift wood, a piece of wood that the artist visualised as representative of a something that was beyond my understanding. The same applied to her installations of glass containers on trolleys. While I understand that the art lies in the conception or construction of the image, I failed to appreciate this in the art I viewed. The overwhelming feeling I had after viewing the art was bafflement. All the installations on view had been borrowed from various galleries, which meant that they were highly valued within the artistic community, yet I could get no pleasure from viewing them. This feeling of bafflement soon left me when I realised that the art on display was not intended for such as me, but for the cognoscenti. It was an exclusive art form that excluded the uneducated or uninitiated.

My nephew is part of this cognoscenti as an artist, while he can go to an exhibition of contemporary art and appreciate it, the art he produces is not intended for him and his artist friends. What they all desire is the sale of their art which they price in hundreds or thousands of pounds. Prices which put their work out of the reach of most the population, it is art for the well off. This is not to decry the price they charge for their work and even the simplest art installation is the product of several hours work in the studio. They are merely charging a fair price for their work. However it is the very priciness of their work that changes its nature. They are producing exclusive artefacts for the rich. Anyone could buy a porcelain urinal but only the very richest amongst us could buy Duchamp’s urinal.

Some of the super rich who buy these contemporary works of art don’t understand them either but there is a whole army of experts willing to explain the art to them. In the case of my nephew the buyer will have either the artist or the gallery owner on hand to explain his art work to them. They are enabled thereby to experience the beauty that the artist sees in their creation, while the uninformed such as me remain in ignorance. This is an experience that only the rich can enjoy the artist can transform an everyday object into something beyond the comprehension and understanding of the majority. Although my nephew would deny it he and his friends are creators of artefacts for the very rich, artefacts that enable them to emphasise their exclusivity, an exclusivity that makes them different from the rest of us.

I should add that many of the super rich purchasers of art do not appreciate the works they purchase but they do have the knowledge that the common mass has even less understanding of the works they own than them. However more usually the collector is a Maurice Saatchi a wealthy individual with an acute appreciation of contemporary art, who owns the world’s largest collection of Damien Hirsts.

The irony of Duchamp’s work is that he and others intended to bring art down from its pedestal to make it accessible to all. Instead he and others have rendered it even more inaccessible, people such as myself will always be denied the education that enables the minority to see everyday objects as items of beauty.

Superstition not reason is the basis for much government economic decision making

June 25, 2015Economics, Politics, religion, Uncategorized#austerity, #classical greece, #Freemarketeconomics, Banking sector deficit, superstition based economicsangrytunbridgewells

The English have any good luck mannerisms which are intended to ward off bad luck. One which I particularly do is crossing my fingers when I mention something dreadful, to prevent it occurring to me. Another is touch wood, as in I have not caught flu this year touch wood. Surprising this superstition is the basis of much economics practised by this government and to be fair many others.

Economists claim scientific status for their subject on the grounds that it based on quantitative analysis, analysis from which predictions can be made about future events. They will admit that in their predictions they cannot match the accuracy of those of a physicist, but the difference they claim is one of degree not nature. Governments invest billions in IT programmes that use the tools of economic analysis try to predict future events in the economy. It is telling that the most accurate predictions about the economy are made after the event, when there is more reliable information about the event that has taken place. Unfortunately the errors in these programmes have caused real problems in the past, as in 1976 when government statisticians calculated that the country was experiencing a horrendous balance of payments crisis; yet when later revisions of the figures showed that the initial calculations were inaccurate the damage had been done. The revisions came to late to avert a financial crisis which included a large outflow of currency and forcing the government into borrowing from the IMF and the introduction of an austerity programme which effectively ended social democracy in the UK.

However past history demonstrates that this attachment to facts and figures is more apparent than real. One of the theories underlying the initial Neo-Liberal free market economics, (practised by all British governments since 1979) was the quantity theory of money. This theory states that if money supply increases faster than productivity, inflation will result as their will be more money chasing the same number of goods. The control of inflation that as now was one of the chief concerns of government policy. In the 1980’s when this theory took hold one of the first policies that the government’s introduced was a policy to reduce the money supply to cut inflation. This in Britain caused the recession of 1980 and the loss of 20% of it’s manufacturing base, and this was decreed a good result, as in the new low inflation economy, growth would soon compensate for the losses of 1981/82. However after several years in power politicians of the Neo-Liberal persuasion seemed to forget about the quantity theory of money, despite it being the guiding principle of their policy decisions in the early 1980’s.

If Neo-Liberal economists wanted a demonstration of the truth of this theory, it is in their actions over the past thirty years. Politicians in Britain and Europe have overseen a huge rise in bank credit with a consequential inflation in asset prices, particularly in housing. According to the latest figures the debts of the UK banks total 340% and 324% respectively of the nation’s GDP in Britain and Germany respectively. Instead of the politicians reacting negatively to this huge rise in bank credit and the inflation that it induces, they have done all they can to keep that inflationary spiral going ever upwards. When in the crash of 2008/9 these over indebted banks should have experienced a painful devaluation of their assets, as many of their debtors defaulted on loans. Instead the governments of Europe pumped money into these banks to prevent any real deterioration in their loan books. Consequently the banks have continued with their irresponsible behaviour and their loans spiral ever upwards, pushing up house prices. The politicians believe that the inflation in house prices contributes to the ‘feel good’ factor and that any downward movement in house prices would mean instant unpopularity and losing office, which would result if they reduced money supply through a reduction bank credit. Foolishly the Neo-Liberal politicians and economists put electoral popularity above a painful restructuring of the economy, which would mean no longer using inflation as a driver of growth.

Recently the governor of the Bank of England announced that he was happy to see bank deposits (largely loans) to increase to 900% of GDP. Sometime in the future there will be a painful awakening for the over indebted Western European economies. All this is detailed in painful detail by the economist Anne Pettifor in her book “The First World Debt Crisis’.

There is a blindness in economists and politicians to real nature of the problems of debt. Never in any debates in parliament will the huge private sector debt be mentioned. Policy is based on the hope that the problems that this huge debt will cause will never happen. It seems to be if you ignore the problem and hope for the best the debt problem can be wished away. Whether I call it crossed fingers or touch wood policy, it is a very naive belief by economists and politicians that all will be well in the future. It is economics as superstition in that if the real crisis is never mentioned it will never happen.

Going even further I can suggest that there is an element of voodoo about government and inter government policy making. They seem to think if they sacrifice one element of debt it will appease the Gods of economics and prevent them from causing the house to fall down. Rather than sacrifice a chicken they sacrifice public spending. They seem to hope that the misery inflicted on those dependent on welfare will appease the Gods of the economy. If the bankers are the Gods of the economy it has worked, as there have been no adverse movements in the financial markets against the pound sterling. They certainly are satisfied with the sacrifices made by the poor. However they are not the Gods, as is demonstrated by their failures in 2008/9, the Gods (if they exist) are much more abstract figures not to be appeased by minor sacrifices, inevitably they will visit punishment on the foolish and naive governments of the West.

The Lazy Greek A Contemporary Myth

June 14, 2015economic history, Economics, Politics#austerity, #Freemarketeconomics, #liberty, Cafe culture, Coffeeangrytunbridgewells

The Myth

When I first went to Greece several years ago I bought like many visitors a guide book. There was in that guidebook a picture of a group of Greek men at a table in a cafe idling away the time and playing back gammon and drinking coffee. I imagine that image or similar appeared in several guide books and is responsible for the image that most northern European’s now have of the Greeks, that is a people who spent hours idling their time away gossiping.

There are many erroneous stories circulating in the press about work shy Greeks, but I intend just to focus on one, that is the pensions story. This one unlike many others appears to have an element of truth.One the reasons the International Monetary Fund (IMF) has given for pulling out of the current negotiations is that the Greeks extend further financial support to Greece is their refusal to reduce the size of their pension bill. At present the pension bill accounts for 10% of GDP, while the average for European member states is 2%. It seems from this that the Greeks are molly coddling their pensioners by paying than far more than other states pay. However this ignores two key facts and the first is that the austerity measures imposed on Greece have reduced the size of the economy by 25% which means if the economy shrinks and the pension bill remains the same, it will become a proportionately greater share of the GDP. If this is taken into account in pre austerity Greece the pension bill would have been about 6.5% of GDP, a figure not too different from that of the UK and Germany. Also this 2% average is a figure much reduced by the minimal pensions paid in many of the new Eastern European states. These states pay minimal pensions or none to their retired and this drags down the European average. It does seem that the EU and its member states want to push Greek pensioners not poverty through reducing their pensions to a nearer the Bulgarian average . Any astute observer would have noticed that reports in the newspapers that pensions in Greece had been reduced so much in response to the demands of the EU that most represented more than the lowest of living wages.

What the EU seems to doing is using Greece as a template for a Europe that is fit for bankers and big corporations but unfit for people. This is not to deny that there is much that is wrong with the Greek economy, but that the wrong problems are identified and the solutions that are imposed to solve the problem are the wrong ones because they are addressing the wrong problems. The austerity programme can be best explained by the use of metaphor, the programme has wrecked a badly built but functioning house and left it its place nothing but some waste land.

In Praise of the Greeks

What economists particularly those in government employ forget is one of the first lessons they learnt, which s that wealth is anything that is valued by people. Economists much prefer wealth that can be measured in monetary terms and don’t factor into account in their calculations, wealth that lacks monetary values, yet this wealth can regarded as equally valuable by its receipts. If out of work time was not valued, people would want to work as many hours as possible. Instead much to the frustration of employers they want time at home with family or friends or just leisure time to enjoy. In consequence there has been a move in northern Europe to increase the economic cost of out of time work to high as possible, so as to discourage workers from taking it. This has been achieved by reducing wages (particularly in Britain) so employees are forced to work for many more hours to earn a living wage. Employers have persuaded successive governments to weaken all the protections that workers formerly enjoyed at work. This means that workers with insecure employment, who are in fear of losing their jobs are much more willing to sacrifice their out of work time to meet the employers demands. Workers for instance on zero hours contracts in Britain risk not getting work ,if they refuse their employers request to come into work, no matter how unreasonable the request. Greece represents a throw back to the time when workers had rights, the right to refuse to adopt modern flexible working practices.

It looks to the politicians of Northern Europe and the USA that Greek society as a whole is conspiring to prevent the obvious and much needed structural reforms, most especially in the labour market. Labour flexibility means in simple terms that workers are at the disposal of their employers, who can use them in what to the most efficient ways, unrestricted by trade unions, politicians or culture. This can mean as in Britain that a split shift system is employed, so staff are only called in at busy times, times such as early morning or evening when the family needs the working parent most. Therefore in a low productivity society such as Greece it was obvious that it would incur debt problems, as it was paying its workers too much for too little work. Greece needed to be carried kicking and screaming into the modern age. Once Greece had adopted the reforms so desired by the Northern Europeans it’s newly productive workforce would produce the surplus goods for export which would reduce the deficit.

Part of the same story was that as the Greeks were paying themselves too much and as the local economy did not produce enough to satisfy their demand, they turned to buying goods from abroad. This obviously created a trade deficit, and the solution to the problems of debt addicted Greeks was to cut their incomes. Incomes were reduced by cutting average wages, reducing pensions and welfare payment and finally the cruelest measure reducing people’s income to poverty levels through unemployment. This shock treatment was deemed essential to reduce the deficit.

There goes unremarked another story, that a large part of Greece’s debt problems had little to do with Greeks over paying themselves or doing too little work. German and other European banks had huge surpluses of cash and rather than invest those funds in industry with it’s relatively long pay back time, they wanted an alternative that generated quick returns. Only speculative investments in property and other assets can earn the big returns, so the German banks in particular made huge speculative investments in the Greek property market . When the financial bubble burst in 2008/9 these banks had potentially lost millions of euros in foolish property investments. They were saved by the European Central Bank who lent millions of Euros to the Greek government to bail out is stricken banks, who were holding millions of euros of worthless investments. Then through a clever sleight of hand these debts were no longer those of the banks but those of the government, as the European money was given to the banks to bail them out, but it now counted as a government debt. This made it much easier to portray the Greek problem as that of feckless Greeks and not foolish German bankers.

While it is hard to argue that the austerity imposed on Greece which has caused national income to fall by 25% and increased youth unemployment to 50% has been a success. What matters is how this story is portrayed, which is that if you give the workers too many rights and privileges they will abuse them and the economy will lapse into chaos. This is why it matters that British newspapers print nonsensical stories about young women marrying old men so as to earn an entitlement to a lifetime income. There are many similar stories in the British media about the feckless Greeks, which have convinced the British that the problems of Greece are all its own fault. Greece is a useful horror story to be used by employers and governments when workers claim addition rights and protection against abusive employers. They can claim that when workers get too many right they abuse them and the result is national bankruptcy. If workers are given few rights and protections they must understand it is in their own interest and they won’t use them responsibly. In Britain all three major parties accept this mantra and when the last government restricted workers access to employment tribunals on the grounds that all these needless appeals against dismissal were costing the employers millions of pounds, this change was understood as necessary by all three main political parties.

Why a paean of praise for the Greeks, a country with one of the worst performing economies in Europe even before the financial crash? One reason they put a higher valuation on non monetary wealth, workers did retire early but this was symptomatic of a country that valued its people above its output. The patronage system did lead to abuses such as over employment, when too many party loyalists were employed in public sector jobs. Yet for whatever its faults it valued its people, compared to their British counterparts they had security of employment and could look forward to a well paid retirement.

Human society is not a perfectible creation, whatever the society there are always problems. What I am stating is that Greek society for all its faults found one of the answers to the problems that society faces. It was a society that attained a more equitable division between non monetary or material wealth and material wealth. Greeks because of the unique nature of their society were able to enjoy a much higher standard of non material wealth than their Northern European counterparts. It is perhaps no coincidence that Greece as with the southern European nations family relationships flourish they are the nations of the extended family. Only in the Anglo-Saxon country such as the USA could somebody write a book called “Bowling Alone” a book about the loneliness of contemporary life. In Britain the nation of overwork and underpay family breakup is at record levels, with some estimate suggesting that under current trends 1 in 2 marriages will end in divorce. Countries such as the USA and Britain that put little value on non monetary or non work wealth have some of the most serious problems of social disharmony.

Fairy dust the magic ingredient that makes for successful policy making

April 5, 2015Uncategorized#BlackWednesday, Black Wednesday, European Union, George Osborne, Norman Lamontangrytunbridgewells

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fairy dust – Fairies Photo (17694885) – Fanpohttp://www.fanpop.com

Economics is a subject that is never related to the childhood world of fairy tales, yet Tinkerbell* and her magic dust is a useful concept to use in economic analysis. I can illustrate this with reference to the financial crisis of 2008/9. Everybody knows that the government borrowed the billions of pounds to bail out the banks, but very few understand how the government borrowed that money. It was in the borrowing process that drops of magic fairy dust were applied, it might seem strange to apply such childish concepts to economic policy making, but they are apt.

When the government borrows money it does it by issuing government bonds, which are then bought by members of the financial market. Those members of the financial markets which buy these bonds are the banks and those banks included the those that are receiving the bail out funds from the government. It may seem surprising that banks such as the Royal Bank of Scotland and Lloyds which were literally bankrupt could buy these bonds, however virtual bankruptcy is not quite the same as actual bankruptcy, so there was no bar on them buying bonds to raise the money, which would then be given back to them as part of the bail out loan. This is where the magic comes in, when a bank uses its bad money to buy government bonds, what it gets back in return is good money. It as if the government had sprinkled fairy dust on to the bad money to transform it into good money, much as Cinderella’s fairy grandmother turned the pumpkin into the coach.
Just as Tinkerbell only comes back to life when all the adults in the audience shout out that they believe in fairies, the government’s magic only works as long as the people believe in it. This financial sleight of hand only works as long as the public believe. In countries such as Greece where this belief has long since disappeared this type of conjuring trick would be impossible.
What is little realised is how important ‘fairy dust’ is in economic policy making. A good example is the bank rate. Bank rate is the rate of interest which the Bank of England charges on loans that it makes to other banks. It is the rate at on which all banks base their interest rates, their rates are the Bank of England rate plus a percentage add on. This way of calculation interest rates seems very sensible as it is common sense to add a mark up to a loan to cover the cost of borrowing money in case of trouble from the central bank. However most financial institutions are ineligible to get loans from the Bank of England, so it’s a convention or a fiction, but one which is widely believed. The belief in this fiction is so strong that the monthly setting of the bank interest rate once a month is believed to be the key determinant of the level of economic activity. If the rate goes up it is believed that this will effectively slow down the level of economic activity and prevent the economy overheating. As if this one key rate goes up all other interest rates go up so borrowing becomes more expensive, so individuals borrow less and demand falls and so in consequence does inflation.
However some doubt must be cast on this policy as Bank rate has been at near zero for the past five years and economic level has been at its lowest level for decades. Yet cheap money should mean demand rises, as money is cheap to borrow and the economy should be experiencing record rates of growth. Obviously something is missing and that missing item is economic fairy dust, businesses and people have stopped believing in the magic practised by the economic policy makers.
Perhaps the best illustration of this is Black Wednesday in 1992, when the Chancellor of the Exchequer North Lamont increased the central bank interest rate from 10% to 12% and then to 15% in an attempt to stop the speculators from selling the pound. These speculators by selling the pound were trying to force the pound down in value to make a profit. He lacked credibility as there was no ‘fairy dust’ making his policy credible. All he achieved was to nearly bankrupt the UK. By the end of the day he admitted defeat and said that the pound sterling would leave the European currency union and no longer be fixed in value in relation to the German Deutsch mark. The pound fell like a stone in the money markets and the speculators were able to buy cheaper pounds in exchange for the dearer pounds they had sold earlier. (The government had guaranteed the value of the pound sterling in terms of Deutsch marks, so all the speculators had to do was sell their holdings of billions of pound sterling at the rate guaranteed by the government, forcing it dispose of most of its holdings of foreign currency to pay the speculators. If the trade in pounds had gone on for much longer the countries foreign currency reserves would have been exhausted and it would have been bankrupted.) The point I am trying to make is that is not the policy that matters but the belief in the efficacy of the policy and the policy makers. If the market does not believe that the policy makers possess economic ‘fairy dust’, the policy will not work.
Giving a more contemporary example Britain’s economic growth rate is well below its trend rate only averaging 0.7% a year. If Britain’s manufacturers really believed that the Chancellor possessed that economic magic miracle maker fairy dust the economy would be booming. Last week 100 top industrialists wrote a letter to The Daily Telegraph, stating how important it was that policies of the coalition government were continued because it was the road to economic recovery. Yet there very actions demonstrate the reverse, investment in British industry is at a record low as is productivity, by any rational measure of economic success the UK economy is still failing. Business leaders whistling in the dark will change nothing.
Our political leaders lack the skills that successful politicians need, that is the ability to make people believe in them. The mockery with which our politicians are subjected to in the media is not a product an age that believes in nothing but the product of any leading politician to give the people anything to believe it. They offer various varieties of the same story to a sceptical public who sees it not working, yet politicuans believe that by endlessly repeating the same formulas people will believe and things will improve. In desperation the British people are turning to political mavericks such as Nigel Farage in the belief that they possess the magic. Unfortunately success only comes from good policy plus magic not magic alone.

What you thought about globalisation is probably wrong.

December 10, 2014Economics, Politics#globalisation, Argentina and Uruguay, British third world living standards, cattle barons, European Union, footnand mouth, poverty, pricing workers out of jobs, South American beef trade, worldwide minimum wageangrytunbridgewells

What you thought about globalisation is probably wrong. Globalisation is associated with a race to the bottom with employers cutting wages, so they can compete with producers in the third world. Employers have been so successful in Britain that they have made Britain the low wage, low cost capital of Northern Europe. Many of the conditions that are associated with third world economies are now to to found in Britain. Millions now receive inadequate wages, live in squalid accommodation that was last seen in the slums of the Victorian era, children malnourished and many thousands forced to rely upon charity handouts to survive. The justification for this imposition of mass misery, is that to compete in the world market Britain needs cut to costs, better to have a poor wage than no wage at all. However the prevailing view is wrong, it need not be a race to the bottom.

The advocates of the globalisation theses conveniently ignore world agriculture, which demonstrates the contrary of the usual globalisation argument. Probably because much agricultural land is owned by big corporations or the super rich. The example I want to use is the beef trade. In the nineteenth and early twentieth century Argentina and Uruguay grew rich from exporting beef to Europe and the USA. Now that trade is effectively prohibited and the reason given is disease control. Beef imports are prohibited from countries that lack effective controls on cattle diseases, that is Argentina and Uruguay. The disease they fear in ‘foot and mouth’, a disease which if it got established in the UK would decimate the British cattle herd according to the farmers union. In fact it does something much worse than killing cows, it is a flu like disease from which the cattle recover but with a permanent weight loss. As beef cattle are sold by weight it means less the cattle would sold for less than they would otherwise. Cattle barons would lose thousands of pounds when selling their vast herds, therefore extreme measures have to be taken. I don’t wish to go into detail about agri-business and its pernicious effects on the world economy, but want I to do is demonstrate that world trade even in an era of globalisation can be regulated for the benefit of European and American producers.

The case for paying low wages has many flaws. One is that many low wage occupations in the service industry don’t have any real foreign competition. Services such as hairdressing and coffee shops are not going to disappear abroad if the wages of hairdressers and baristas are increased. Starbucks cannot relocate from Britain to a foreign location to avoid higher wages.

Some of the worst abuses of the free movement of labour could be stopped with effective legislation and law enforcement. The current system encourages employers to use foreign agency staff, who can be paid less than the minimum wage. As the workers are employed at arms length from the company they do not have to take responsibility for the wages paid to them. They therefore ‘unknowingly’ pay workers at less than the minimum wage, pricing British workers out of a job. Making large companies responsible for the conditions under which agency staff are employed would end this abuse. Particularly if large fines were imposed on firms that tolerated such abuses. This would discourage firms from hiring agents to import low cost workers from Europe, it would reduce the pull factor which attracts the low paid to work in Europe.

While there must inevitably be the move of some manufacturing to the low cost economies of the third world. The race to the bottom could be minimised if there were regulations about unfair competition imposed on third world suppliers. Why should there not be a world wide minimum wage for all workers? It need not be so high that it would put third world producers out of business. A doubling of the wages of garment workers in Bangladesh would only have a minimal impact on prices paid for clothes in Britain as the wages of such workers form only a small part of total costs. What it would do is reduce the excessive profits of the Bangladesh garment markers and the various traders in cotton goods.

The advantage of paying a worldwide minimum wage is that it would discourage the default setting in the mind of British businessman, that the only way to increase profits is to relocate abroad. There has been a steady flight of manufacturing and service industries from Britain to the third world. The move to low cost locations cannot be justified if the only reason is to exploit the lowly paid in a third world country.

This could be achieved quite simply by making use of the current organisations that regulate trade. In Europe at present the European Union regulates trade within Europe but that regulations n has been to the benefit of large corporations. It has opened European markets to the low cost out of Europe subsidiaries of large business corporations to the detriment of Europeans. Instead the European Union could work to the benefit of the population by ensuring that all imports from third world countries are from importers that adhere to fair market competition. This would benefit the Italian clothing industry which is struggling to compete with low cost out of Europe producers. Perhaps even encourage the revival of the much decimated British clothing industry, as clothing manufacture becomes more profitable. Slowing the gadarene rush to the exit would enable European industry to adjust to changing market circumstances and maintain the employment of local labour. Globalisation cannot be stopped but it cannot be allowed be imposed in terms that penalise the people to the benefit of large corporations. Why should not European manufactures have the same rights as farmers?

Britain provides one of the best examples of how not to manage globalisation. The Labour government of the 1970’s financed the equipping of the Swan Hunter shipping yard at Sunderland with the most modern of shipbuilding equipment, so it could compete in the international markets. The incoming conservative government thinking only in the short term and ignoring the long term prospects, shut yard. All they could see was the costs of supporting this ship building yard, not the long term benefit from ship sales. The ship building equipment was sold at a knock down price to Korea. No doubt the Korean ship builders used that equipment to make ships to sell to Britain. It is such short sighted action that makes globalisation so unpopular.

One objection to my proposals is that insisting on high standards of manufacture in third world countries would interfere with their sovereignty. The right to national sovereignty does not override the right to fair treatment at work. Why should not Europe insist on that countries which trade with it uphold the universal right to a fair wage? With Europe being one of the largest importers of goods from the third world, this action would lead to rise in living standards there, not a perpetuation of misery.

Globalisation cannot be halted but for the benefit of the people’s of the world it must be regulated. There is little benefit to be gained from an unregulated market in global trade, that is run in the interests of big business. There is no reason why globalisation should mean the reduction in living standards in the West. What is required is some protection for European industry from unfair competition. Competition which is dependent on paying poverty level wages to workers. There is no logic in Britain readily embracing third world standards in its desire to remain competitive. Making people poor is rarely a solution to any problem.

An Unusual Economist

After the crash of financial 2008/9, it was obvious that the current model of economic analysis was broken. I want to develop a new approach to economic analysis.