The Corrupted Human Spirit

economic history, Economics, Education, Philosophy, , , , , , ,

What economics lacks is the space to include other human sciences such as philosophy in the scope of its subject matter.  Philosophy has the grand vision that is usually lacking in economics, which is all too often a science of the minutiae of life. One concept outside the understanding of economists is Hegel’s zeitgeist or the spirit of the age. What Hegel means by this is that there is one overall idea that animates a period of human history. It is an idea which expresses the characteristics of an age, such as the ‘bélle époque’ of 19th century Paris. A Paris of the freeing of human spirit, painting was freed from the old conventions demonstrated in the art of the impressionists, the vitality of popular culture was epitomised by the exuberance of the ‘Can Can’ yet this was a freeing that also allowed the darker side of the human spirit, corruption and venality to thrive. French politics of this time was characterised by a series of corruption scandals. As a believer in the zeitgeist, I wondered what was the spirit of this age? What was the spirit that informed human behaviours in our contemporary world?

Usually this is seen as the age of Neo-Liberalism ,  yet that phrase needs explaining. According to its advocates the freeing of the markets will lead to a freeing of the human spirit. Yet the art of the age does not seem to embody the freedom of the human spirit, rather it embodies the spirit of reproduction or copying. One art work that epitomises this spirit of reproduction is an art work by Damien Hirst, it was a series of dots on a white background. These dots varied only in colour but not in any other way. They seemed to have been placed in lines on the screen only the colours of the dots seemed to be chosen at random. I as a viewer could see little creativity at work, it was a machine like picture, a picture that for me could only be produced by a machine. What it lacked was the spark of human imagination. Damien Hirst work demonstrative of an age that is lacking in originality and creativity.  A lack of originality that can be seen on any new housing estate, which consists of houses which are copies of those built for generations by the builder’s predecessors. They are inferior copies of the house of the past as they are being built of inferior materials and to much smaller dimensions. Houses that were built according to a least cost formula, a least cost that necessarily implies a lack of originality. Why go for the expense course of employing an architect to create a contemporary house incorporating new materials and bold design, when it is cheaper and easier to copy an old design?

What Neo-Liberalism has given to the age is a dominant mode of thought. Policy decisions are not to be made of according to values or any grand vision but according to a cost benefit calculation. A government project such as the High Speed Rail link from London to the North is made on this basis. Do the demonstrated costs outweigh the benefits in cash terms? This leads to all sorts of strange calculations to render values such the enjoyment of living in the undisturbed countryside in cash terms. Decisions can only be made on quantifiable or cash terms, this thinking leads to a diminution of the human spirit, as decision making is reduced to a process of calculation.  Human values have been reduced to a simple cash nexus, it is a corruption of the human spirit.

It is a world in which the heroes are the bankers and speculators, those who are the masters money. There heroic status derives from the fact that they handle vast quantities of money, money a product which is the holy grail of contemporary society, in that those who are greatest possess the most of this asset.  We know a footballer is a footballing genius as much through the income he commands as for his skill on the football pitch.

There is embodied in Neo-Liberal philosophy a realism of the most naive form. What is valued is what is tangible, what can be counted and weighed, not abstraction? There is the belief that abstract universal values have no place in contemporary society. What counts is the practicality of a belief or ideology. Neo-Liberalism is the most practicable of beliefs in that only those outcomes that can be quantified, the benefits be counted, are valued. Only those practices that have a quantifiable end result matter. The result is the target culture in the public sector, where performance is measured in terms of targets achieved. The emphasis is on ‘through put’ not on quality. In hospitals the target culture has damaged good practice. What matters is that the target is met, not the quality of service. This results in some bizarre practices, because there is a time limit set for treating patients in Accident and Emergency (A&E), patients will be deliberately kept waiting in ambulances, as by so doing the patient has not yet been admitted to A& and is not counted as an in patient. This means that the time they spent waiting in the ambulance does not count when it comes to measuring how successful the A&E department has been in meeting its  performance targets.

One of the most damaging aspects of the Neo-Liberal zeitgeist is to found in our schools. What is causing great excitement is the new stem subjects, the officially defined list of subjects in which students are expected to do well? These stem subjects are little more than a sophisticated version of the 3 r’s ‘reading, ‘riting and ‘rithmetatic’ that formed the curriculum of many state schools in the 19th century. Dickens’ Wackford Squeers would feel very much at home in the new academies. This change has happened because schools are now measured by output. The output that matters is in that of the skills that business wants. Businessman want employees that are competent in the 3 r’s, if they do want painters it is a painter who can paint a wall, not an artist. There is in our schools a deskilling and narrowing of the curriculum. A deskilling in all that matters is those skills that can be quantified and measured, so creativity achieves a zero score while the rote repetition of the agreed answer gets the highest score.The narrowing the curriculum is caused by the downgrading of the creative arts, that is art, music and drama get few marks in the current system, so headteachers that wish to do well, discourage their brightest students from doing anything but the stem subjects.  There cannot have been a curriculum more designed to create a dull, boring and miserable education for children than the current one.

When economists look for reasons for the poor performance of the economy, the look the reasons that do not relate to the human spirit. The reigning zeitgist is one that is unimaginative, it only values the measurable and is one of uninspiring dullness.A corruption of the human spirit, one that discourages all that is best in the human personality. Are not some of the failings of the British economy to be found in a zeitgeist that discourages innovation and creativity. If economists raised their eyes from their desks they might see that there are studies pointing them in this direction. A recent study of the booming computer software industry in East London showed that one of the reasons for its success was that it was perceived as a ‘cool’ place to work and live and as a consequence attracts some of the best computer software engineers in Europe. Rather than worrying about how to make workers more productive, perhaps economists should look more to creating a zeitgeist that encouraged creativity and innovation. A zeitgeist that would drag the society out of its current doldrums.

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

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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 Return of Serfdom to Britain

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Friedrich von Hayek published in 1944 his very influential book “The Road to Serfdom,” a book which is the mainstay of today’s policy makers. He warned of the dangers of an over mighty state, one in which professionals such as doctors gave up their independence as private practitioners to become servants of the state. The doctors would no longer be able to practise medicine freely but have to follow the dictates of their employer, the government. He warned of the same trend happening to all professions whereby independent lawyers etc would be giving up their freedom to become to be subject to a new form of bondage which denied them the freedom to practise as they wished, they would become the new serfs, bound to the new state. However he was living in the age of totalitarianism and he feared what he saw the makings of a new totalitarian state in Britain. Britain did not become a totalitarian state, in fact the totalitarian state that Hayek so feared, the Soviet Union collapsed in 1990.

  
Image of Chinese serfs working in a field taken from http://www.chinadaily.com

This was a prophetic book in that it was right to predict a new serfdom, but wrong in predicting the source of this new serfdom. He believed that the free market was the organisational mechanism best designed to ensure freedom, as in the free market the individual was free to make their own choices, as there was no powerful over arching organisation making the choices for them. However what Hayek failed to realise that the free market would be a source of the new serfdom. What he overlooked was the inequality in power relationships, in free market it the most powerful players have the most influence. The most influential players are the big business corporations, they determine the conditions under which the free market operates and these are often detrimental to their employees and customers. What Hayek failed to realise was that the state could be a liberating factor as much as an enslaving one. He failed to see the wood amongst the trees, he could not envisage alternate model of the state, for him the state was an authoritarian organisation,one that always threatened to take away an individual’s freedom. Given that he was a refugee from Nazi Germany this misconception as to the nature of the state is understandable. 
Perhaps the best understanding of the role of the state as a liberating force comes from the writings of the 19th century sociologist Emile Durkheim. He explained that the state in the 19th century through introducing laws to protect the citizen from oppressive landlords and employers was liberating the individual from these many local tyrants. Legislation to protect employees from unsafe working conditions, working long hours and being given the right to form associations (Trade Unions) to protect their interests gave people a freedom that they had never enjoyed before. Throughout the 20th century developments in legislation gave rise to the welfare state, in which the individual was guaranteed freedom from want and protection against the evils that can result from individual misfortune. The significance of this freedom from want was never understood by the intelligentsia, the freedoms they valued were the political freedoms, freedom of expression, freedom from excessive state control. Economists overwhelming came from the privileged classes, two of the 20th century greats Hayek and Schumpeter were aristocrats and for them what mattered was being free from an oppressive government, not from want.
Hayek despite witnessing the horrendous poverty that he saw in Europe in the period of the Great Depression, never ceased to believe that the free market was the best means to solve these problems. State control and intervention in the economy he associated with the totalitarian states of Nazi Germany and Communist Russia. He saw freeing the economy from state control as the only way to ensure the survival of the democratic state, for him there could be no democratic state without the free market. It was from his work that the Neo-Liberal economic and political philosophy of developed. This has become the dominant philosophy of the political classes, but its adoption as the practical philosophy of government has not lead to greater freedom and a more democratic society, but a new subtle form of serfdom. 
What the Neo-Liberals with their demand for a small state and minimal interference in the economy were creating was a society for most that has less freedom than its predecessor, as it was the state that guaranteed so many freedoms. It was these freedoms that were attacked by the Neo-Liberal economists, as they saw them as an obstruction to smooth running of the free market. Labour regulations restricted the hours for which businesses could employ staff, placed limits on how they could be used and made workers more expensive by imposing payroll taxes to finance social welfare benefits. Successive Neo-Liberal governments removed these restrictions and cost impediments on how employers could use their workers and have created what is called a flexible labour market. However this market has created by removing all the protections that labour enjoyed from abusive employment practices. What the Neo-Liberals have created a new social system that has many aspects of the old feudal system, such as being bound to one employer.

Our leaders in Britain boast that they have created the most flexible and competitive labour market in Europe, ignoring the many abuses practices in this new labour market. The most obvious abuse is the practice of zero hours contracts, where workers are contracted to work for an employee, but are not given any fixed hours of work or even guaranteed any minimum hours of work, instead they must be ready to work when the employee needs them. There is a clause in these contracts that forbids them to look for alternative work in the hours when their employer does not need them, as that would prevent them being free to work for their employer when needed. They as with the feudal villein are bond to their employer, the first could not leave their village to find work elsewhere and the zero hours worker is forbidden to find any additional work with a new employer. This new serfdom is a little more humane as employees are free to change employers, not a right enjoyed by medieval serfs.
However this right is severely limited as the new serf must have found a job before they leave. They don’t have the option of leaving an abusive employer, unless they have alternative work as the new benefits system will deny benefits to any claimant they deemed to have made themselves intentionally unemployed. 
Then there are the workers of split shifts, usually this is in the retail trade. Workers are expected to work two short shifts a day, when the shop is busy or the employer needs them. Again they cannot look for alternative work for those hours of the day when they are not employed in the shop, as they must leave themselves free for the unexpected call from the employer who might need them if a staff member is sick. Again they as with the zero hours employer are bond to their employee.
Britain can boast of one of the highest employment rates in the European Union but this is because labour in Britain is cheap and employers are free to employ workers using the most exploitative labour practices. Is it really a success story when a postgraduate student from Spain comes to London to find work as a barista?
Initially this practice was confined to the fast food outlets but the practice has become widespread within the services industry and has begun to spread to the professions. Increasingly new staff at the universities are employed on these contracts as are some technician posts within hospitals.
What the proponents of the free market have failed to understand is the inequality of power relationships within the free market. The market is not a meeting place of equals but of unequals, and the latter will if not constrained by law exploit their power. Unequals are the rich and powerful and the big business corporations. Freed from the law restricting how the business can use it staff, it will use them in the ways that suit them best and that best is treating the staff badly. It should be of no surprise that slavery is now a concern in modern Britain. At present it is foreign residents importing bringing in domestic staff with them who are largely responsible, but there are disturbing cases of it happening with exploitative UK employers who force vulnerable people into what can only be described as slavery. When the law is removed from the from market employers can behave as badly as they please. Even those agencies that are supposed to enforce the few remaining employment laws are reduced to ineffectiveness through constant staff cuts.
The Neo-Liberals failed to realise a free the market in which there is freedom of choice, frees people to behave badly as there is no sanction on bad behaviour. Perhaps it is not unfair to compare the big corporations with the medieval robber barons as both sought to enrich themselves at the expense of the wider community. While the medieval baron would levy a charge on goods passing through his territory, a more sophisticated robbery is practised today. One example of this is the pharmaceutical industry. There a small company will discover a new drug but lack the resources to market it. They then enter into a marketing relationship with a large company to market and distribute this drug, usually this relationship becomes a takeover and by the larger company. However this large company adds a further cost onto the price of the drug, which they call development costs and then sell it at many times its original price. These new robber barons rob both their staff (through paying them minimal wages) and their customers by overcharging for their products. 
What Britain as do many other Western countries seem to be doing is to be lurching into a Neo-Medieval society which is dominated by the business corporation. A glance at the last election demonstrated this when all the parties claimed to be busy friendly, the people barely got a mention. Despite the dire housing crisis in London caused by lack of affordable accommodation not one political party in the election proposed any measure that would put have effectively ended the crisis, as that would have threatened the income of the large property companies that dominate the housing market. 
History never repeats but older historical patterns can reoccur in later historical periods. Contemporary serfdom is not as cruel or restrictive as that of medieval Britain, but it is similar in its essentials, that is the great corporations can as did the medieval Dukes freely dispose of the people at their command. While the medieval Dukes could direct the lives of their serfs in a number of ways, they for example could compel them to join their armies, transfer villages and the people that lived in them to another lord without any regard to the villagers wishes and could in addition control most aspects of their lives, today the great corporations can exercise similar powers over their workers. In today’s Britain the government can decide to transfer a public service into private ownership, usually with the consequence of a worsening of working conditions for the existing employees. In the name of cost efficiency wages are reduced, pension schemes terminated or emasculated and employment protections removed. All these negative changes occur without the workers being allowed to voice their opposition to these changes. Also the new privatised owner is free to dismiss any number of existing staff. These new petty tyrants have a similar decree of control over their workers lives as did the medieval baron. The withdrawal of the state has meant any pressure to ameliorate or remove the most abusive of employment practices has been removed. Now increasing the British people are entering into a new form of servitude quite alien to the freedoms of a modern democratic society.

The Lazy Greek A Contemporary Myth

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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.

Can democracy survive in Free Enterprise Britain?

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The collapse of the Soviet Union and the Communist bloc of Eastern Europe was greeted with a sense of triumphalism in the West,  which was marked by books such as that Francis Fukuyama (The End of History and the Last Man) in which he stated that human development had reached its apogee in the development of the free enterprise liberal democratic state. Amongst the rubble of the collapsed state Soviet politicians, businessmen and writers were eager to learn from the West how to remake Russia as a successful nation state. In response academics and businessmen rushed to Russia to help remodel the state into one similar to those of the successful West. Rather than these reformers helping Russia to rebuild they precipitated an economic collapse. A collapse only halted by the return to authoritarian rule and I will argue that the free market reforms are more likely to result in an an authoritarian state than a democratic one. 

It was not only the old Soviet Union that suffered from this enthusiasm for the free enterprise liberal democratic state. Surprisingly one of the victor states, the United Kingdom has suffered from an excess of the same excess of enthusiasm. Whether it is in the financial markets and the service sector or manufacturing, all have suffered from the malign practices engendered by the free market. 

The ‘hands off’ state has created an economy in which ‘the dog eats dog’ market but not as Neo-Liberal economists envisioned . Markets are not dominated by the most efficient companies who grown to dominance through outperforming their poorly performing rivals, but they are dominated by the most rapacious of businesses.  Poorly performing banks such as National Westminster and the Midland Bank were swallowed up by predator rivals, The Royal Bank of Scotland and HSBC. Instead of the banking market being dominated by a group of super efficient banks, it was dominated to large to manage corporations that monopolised the banking market. The rapacious nature of these monsters was demonstrated by huge salaries they paid their senior staff. These cumbersome financial giants inevitably failed in the crisis of 2008/9, but rather than being allowed to fail they were either taken over by the state or survived through an implicit state guarantee, that it would do whatever was necessary to ensure the survival of these banks.  The state mortgaged itself to enable these too large to fail banks to survive. Even after the failures of 2008/9 these banks remained powerful enough to fight off any significant attempts at banking reform.
One criticism of the Russian Federation is that the chaos that followed the collapse of the Soviet Union, made possible the rise of the Mafia state which now effectively controls the economy. Vladimir Putin is described as the boss of bosses within this Mafia state. Something similar has happened in the UK, which while it lacks what can be termed a criminal Mafia, business enterprise is in the hands of a non homocidal Mafia. In a market from which law has been effectively banished (in the name of free market reforms), it is not the most efficient that thrive but the most ruthless and rapacious. These rapacious business corporations exploit their customers and staff, by overcharging customers for their services or products and by condemning their employees to low pay and insecure working conditions. Other better run businesses are forced to follow suit if they wish to avoid going out of business. Also these rapacious businesses treat the state as an ever open purse to be raided when needed. 
There is hardly a sector of British business that does not benefit from generous state handouts. The government facilitates the poor treatment of employees by giving a cash handout (tax credits) to those employees of firms that pay less than the living wage.
Much as with Moscow’s much criticised government, the UK government collaborates with these Mafia like bosses. The Westminster government has legislated to destroy labour protection laws, I think this must be the only country in which it is legally permitted to dismiss an employee because their face does not fit. In Russia the state either collaborates with local mafia’s to destroy the opposition or uses its own security services to do the job. Similarly the British state has worked to undermine and emasculate any organised opposition to corporate Britain. Legislation has made it very difficult for unions to organise effectively on behalf of the workers, huge fines can be imposed on these unions. When the trade unions in Scotland organised against threatened wage cuts in an oil refinery, they found that not only did they face a hostile employer, but a hostile government and media. Even the Social Democratic Party in parliament refused to lend their support to the strikers. Legislation has also been introduced to make protests against corporate Britain difficult or impossible. Legislation that was intended to control stalkers is used against individuals protesting against business corporations. Even the courts do as in Russia work to support the limit the effectiveness of the opposition, any business corporation guilty of wrong doing can use the law to silence their critics. The libel law and the super injunction are the means by which they are achieved. When comparing the UK and the Russian confederation the difference is in degree as in both the government and legal system combine to hide the failings of the corporate state by silencing their critics and by destroying the opposition.
Freedom of speech has not yet disappeared in the UK, there is considerable opposition to the over mighty state and its business friends. Unfortunately as the UK government becomes more and more authoritarian the scope for the freedom of speech and organised dissent will become increasingly restricted. The opposition tends not be to within parliament but outside it, which makes it easier to criminalise it as extra parliamentary opposition. The convergence that Francis Fukuyama predicted between the old Soviet Union and the West, has in the case of the UK been a matching convergence movement towards a more authoritarian state. 

The Deceivers

Economics, Philosophy, society, , , , , , , ,

 Theology with its emphasis on ‘other worldly’ experiences appears to be at the opposite end of the spectrum of thought to economics which deals with the mundanity of every day existence. It’s a science of facts far removed from the speculative thinking of the theologians. Yet this is a false understanding of theology, as it can be as every day as economics, the only difference being the approach to life. A theology that had no relevance to daily existence would be pointless subject of study. Adopting something of the perspective of theology would be of benefit to economics.


What I intend to do is demonstrate how an analytical framework taken from St.Augustine’s Fifth Century classic, “The City of God” can be used to explain developments in the economy of today.

  

The City of God & the City of Man | Koinonia palamas.info

Although  Augustine’s book is primarily intended to explain why the eternal city of Rome fell to foreign invaders, what interests me particularly is Augustine’s account of the role of its Gods in Roman society. The Roman’s assumed one of the reasons for their success was their fidelity to their ancient Gods. Castor and Pollux the heavenly twins were thought to have intervened in a crucial battle to assure the Roman army of victory. In gratitude to the two Gods the Romans constructed temple in the forum for their worship. When Rome fell it was thought by some that the cause was the abandoning of the worship of the old Olympian Gods, the Gods who had always stood by Rome and ensured its survival and success. Augustine suggested a very different Christian version of Roman history


The Olympian Gods were for Augustine not Gods but demons who lead mankind astray. Stories about these God’s such as Zeus’s rape of Europa in the for of bull demonstrated their demonic nature. The nature of these Gods was capricious and cruel.  Apollo was for instance challenged to a music contest by the satyr; unfortunately for Marsyas he was judged the loser and for having had the impudence to challenge a God  Apollo hung him upside down and flayed him alive. Roman cities that had temples of Mars, chained the statue to the temple in the hope that the God would not wander  and provoke war with a neighbouring city. 


Augustine saw these God/demons as having bodies of air and circulating around the earth in the atmosphere waiting for the opportunity to intervene in the affairs of men and cause mischief. Misleading mankind was not difficult for them as all men were corrupted by original sin and easily corrupted. Despite pretending to be protectors of Rome, they had according to Augustine in fact allowed it to be sacked in the past by the Gauls; so the sacking of Christian Rome by the Visigoths was little different from the sacking of pagan Rome by the Gauls in earlier centuries. The visions and dreams that Roman’s had of the God’s which they thought gave them insight into future events, were nothing more than trickery intended to mislead the dreamer. On innumerable occasions Roman Emperors and Generals made sacrifices to the God’s to ensure victory. Yet on so many occasions instead leading their armies  to victory they led them to defeat.


The Gods for Augustine were the deceivers of men, leading them into error from their own sense of mischief. This concept of a group of deceivers leading mankind into error by making deceptive promises is a useful concept when it is shorn of its supernatural context.  I would like to recast Augustine’s concept of a world of men mislead by a race of demons into a more human form. Rather than seeing original sin as the corrupting element in mankind, I see ambition as the corrupting element, something best expressed in the term vainglory. Leaders wish to be remembered in history as men and women who changed the world for the better. While this is a laudable ambition it can led them into following certain practices or beliefs which they believe will improve the lot of mankind, but which in fact does the reverse. Unlike the demons of Augustine these deceivers often deceive themselves as they really do believe that they have discovered the holy grail of human betterment. The current race of deceivers are not demons but Neo-Liberal economists and philosophers. 


These philosophers and economists have been campaigning actively since the 1970’s for the adoption of Neo-Liberal economic policies and the creation of a free market society, one largely free of government intervention. The argument in the 1970’s by these economists was that by freeing markets to find their own equilibrium there would no longer be any foreign exchange crisis, as currencies would freely move up and down to their natural level. (This was a time of crisis when the IMF was constantly having to bail out countries such as the UK which were experiencing such crises.) Despite that the world has not seen an end of foreign currency cries. However Neo-Liberal economists would assert that these have been due to governments not wholeheartedly adopting the Neo-Liberal agenda. 


The UK is one of the countries that have most wholeheartedly adopted Neo-Liberal economics, through the practice of supply side economics. Supply side economics stated that the cause of economic under performance were the various restrictions imposed the markets that supplied the factors of production, in particular labour. Following these policy prescriptions the government almost completely destroyed the powerful trade union movement and removed most of the employment protection measures that previous governments had imposed on the  labour market.  The UK now has one of the most flexible labour markets in the developed world, a market in which employers have few restrictions on how they use labour. Yet the UK is not an economic success story, 1 in 3 workers in the UK are receiving less than the living wage, having to rely on government handouts to held them pay for their accommodation, food and clothing for their families. The trade deficit also has spiralled out of control, in the 1960’s it averaged 0.2% of GDP, whereas today it is 30 times larger at 6% of GDP. Despite all the increased flexibility in the labour market, the productivity of the average British worker is significantly less than in our European partners such as Germany or France. However Neo-Liberal economists continue to assert that the economy is healthier than ever, usually citing some statistics to prove their point. They are self deceiving as many of the statistics that really matter show an economy that is performing badly.


However the self deception is largely that of the politicians, as economists have always known that changing to a Neo-Liberal economy would create a substantial group of losers. The deception has been in that they have always dismissed the losers as a small and insignificant minority. Those British economists asking for reform in the 1960’s argued for an unemployment level of 3% and for those  economists this would be made up largely of those people temporarily unemployed and who were between jobs. However the more influential have been the public choice theorists and Neo-Liberal philosophers such as Ayn Rand, who have argued for a more social Darwinist approach to public policy making. Ayn Rand argued that the poor had little place in society as they contributed little to it and saw starvation as one means of reducing the number of useless mouths. (Atlas Unshrugged). She has been extremely influential in British political circles and her followers have been effective in creating a society wide contempt for the poor, which has led to a whole series of measures directed against them. These politicians have never gone so far as advocating the starvation of the poor, but they have implemented policies that have impoverished them. What these deceivers have been successful in doing is portraying the poor as the OTHER, a group to which the majority never belongs. They have successfully concealed from the public imagination that disabling illness is not confined to the poor, but it can affect anybody and only the richest can avoid being driven into poverty by disabling illness.


Perhaps the worst of the deceivers are the public choice theorists who pretend that privatising public services will only create winners as we all will benefit from cheaper public services. However these are labour intensive services and cheaper services can only be delivered through reducing the incomes of the people working in these services and through worsening their conditions of service. One very effective way of doing this is to abolish extra payments for working outside normal hours, or by using zero hour contracts, by rewriting the terms of employment or using temporary agency staff. All of which enables the employer to get more for less.  Today my dustbin was collected by the refuge service on a day which for most is a public holiday. In past I had to wait until the day after the public holiday. While most people will probably appreciate the fact that there is no break in the service; I am concerned that the families of the three men on the lorry are deprived of their company on a holiday. Am I in a minority in preferring to have my bin collection delayed by one day so these men could have a day with their children?


These Neo-Liberal deceivers have succeeded in portraying those who lose as a consequence of their reforms as the losing OTHER. Yet there is a danger that this other might become the majority should society move backwards in recreating the widespread hardship and misery of previous eras. These economists, philosophers and politicians have successfully deceived the majority by portraying their changes as necessary if society and the economy are to prosper and that the only losers will only be the insignificant OTHER, not them. Yet the purpose of a Neo-Liberal agenda is to create a large impoverished serice or underclass to service the deserving better off minority(?). In fact in 2011 a group of politicians published a book which blamed the poor for their plight, they were poor because they lacked the work ethic. I don’t think it’s wrong to compare the Neo-Liberal deceivers of today with Augustine’s demons, as both promise a better tomorrow, while in fact intending the opposite.

 

A good lie told well, the secret of managing the economy

Economics, Politics, , , , , , ,

  

Image courtesy of randalrauser.com

What every economics student used to learn at university was how difficult it was for leaders to make policy decisions on the economy. The effectiveness of policy measures were uncertain and the time lag in implementing these measures meant that when they came into effect they were often  addressing yesterday’s issues. What we learnt was how difficult it was to understand and manage that highly complex human institution, which is the economy. In one of our seminars it was decided that there were no economics was not a science comparable with physics and that economic  theory was at best a good guess as to how the economy worked. Consequently economics  for the student in the 1960’s was very much a work in progress. It was Churchill who said that if you asked four economists for a solution to a particular pressing economic problem you would get five answers and two of these answers would be from Keynes. (Keynes was the outstanding British economist of his  generation. This humility did no fit well with the demands from politicians for policy solutions, as exemplified in the words of Margaret Thatcher who said she wanted answers not problems. There was a group of economists responded eagerly to such requests and began to supply answers that were not hedged about with caveats about what might possibly make the policy ineffective. 
Economists had to know and there was a school of economists that knew. These new economists where named variously as the Chicago School of Economists, Monetary Economists, Free Market Economists or Neo-Liberal Economists. They took inspiration from the economist Milton Friedman the doyen of the Chicago School, who in turn was inspired by the economist Friedrich Hayek. What this group offered was a solution to the one problem that dogged the Western economies of the 1970 and that was inflation. They offered two solutions to the problem of inflation, they said that inflation could be controlled by controlling the money supply and by supply side economics.  
Monetary economists could supply answers to for example that of inflation, which reached 27% pa in 1976. Politicians could understands that if the money supply increased faster than the supply of goods, more money would be chasing relatively fewer goods and so prices would be pushed up. If money supply was cut inflation would fall and the economy would continue to grow on a smoother trajectory. What they did not want to know was as any non monetarist economist could tell them demonstrated a relationship between increased money supply and inflation is not the same as demonstrating a cause. 
However once politicians began to follow the policies advocated by these new economists, it became obvious that these new economists did not know. Britain was one of the first countries to practice monetary economics as suggested by Milton Friedman. In doing so one huge problem was discovered no Treasury economist was able to define what made up the money in circulation and what was the total money supply. The government came up with five possible measures and from this they selected one as their preferred measure which they called M3. M3 was chosen which was the total of currency in circulation plus bank deposits. They chose this one because it was the easiest to measure, after all the banks regularly published accounts showing their total bank deposits. They then made one huge assumption that all other measures of money supply would change in the same way as their preferred measure. However there was no evidence that all the other possible measures of money supplies the bank identified, would change in the same way as M3. It was a hope that all the unmeasured changes in money supply would follow M3, but the evidence for this was lacking. 
In desperation the Treasury and Bank of England gave up trying to account for changes in money supply and instead adopted a new practice. Admitting they could not count the money in circulation they opened for controlling the demand for money by changing interest rates. They believed that the supply of money was determined by the demand for money, therefore by controlling the latter they would control the first. Ever since the 1980’s changes in interest rates have been the main instrument for controlling the economy. Nobody today every mentions that the central plank of government economic policy is based on a theory for which evidence is lacking, simply because they cannot identify or correctly measure the key determinant, money supply.
Something very similar happened after the great financial crash of 2008/9. There were three deficits that could make recovery difficult the government or public sector debt, the private sector debt and the banking sector debt. The smallest was the government debt amounting in 2009 to about 60% of GDP and the largest was the banking sector deficit of 540% of GDP(as identified in a report by Paul Tucker, Deputy Governor of the Bank of England.) It is obvious that the debt that is in most urgent need of attention was that of the banking sector, yet the government of the day and succeeding ones chose to ignore it and focus instead on the government debt. The latter is the easiest to reduce as all the government had to do was cut its own spending, whereas the more serious bank debt was much harder to tackle. The government would have to take on the big banks and the City of London, very powerful opponents of whose power the government is in awe. Also if the government was serious about reducing bank debt it would negatively impact on the property market, as cutting the debt would be achieved by reducing the loans the banks could make in total. If there was less money available for house purchases, prices would fall. It is a truism of British politics that the easiest way to achieve electoral unpopularity is to preside over a fall in house prices. Consequently Britain remains with Japan one of the most indebted of the developed nations.
While these facts are known amongst the community of economists there is a conspiracy of silence in parliament about the true nature of Britain’s debt problems. There is no leading political figure that wants to be responsible for the painful economic adjustment that would result from putting the bankers house in order. Instead they focus on how they will reduce the least significant of the three debts and the noise of the debate on government debt crowds out any possible alternative debate on the real nature of the debt problem. 
The economic debate as understood by politicians is what matters, as they determine economic policy. The fact that the economic debate is founded on on misinformation and lies is irrelevant. What matters is that the economic lie is the one that every one accepts. In consequence the economic debate is about the wrong debt and the government has pursued the unnecessary austerity programe that impoverishe  an increasing number of people, while turning a blind eye to the excesses of the financial industry. Lies matter because they can be based on simple easily understandable untruths, whereas the truth about the problems of the economy is complex and hard to understand. To admit to truth would deny the politicians the opportunity to offer simple policy solutions that they could sell to the electorate. As the political debate of today is conducted in the simplistic language of the tabloid newspapers the truth about the real nature of Britain’s economic problems will remain concealed. Concealed that is until some major economic crisis forces the political and media classes to recognise the true nature of the problems facing the British economy.

The Forgotten Art of Managing the Economy

Economics, Politics, , , , , ,

  

Economics is also assumed to have originated with the great British Economists of the 19th century, such as David Ricardo; whereas the truth is that it has been practised since human beings first began to live in communities. Then, if it was written about it would have been under the guise of writing about the domestic economy, such as the Classical Greek philosophers Aristotle and Xenophon. Since all manufacture and agriculture was conducted as a family business it was correctly regarded as a topic that should be addressed to householders.  Pliny one of the great Roman scientists  wrote about the management of slaves and as the Roman agriculture and manufacture was undertaken by a slave labour force, this should be regarded as a text on economics. There is a probably apocryphal saying attributed to Aristotle who complained that as an economist people kept asking him how to become millionaires, when they would never consult him in his role as a botanist on how to achieve eternal life. Aristotle if he said this was making the all too familiar complaint of all economists that people have to high an expectation of what there subject can do.
Perhaps the best known account of the early practice of economics is the story of Joseph and the Pharaoh’s dream in Genesis. Joseph was asked to interpret the strange dream of the Pharaoh in which he had dreamt that he first saw seven health cows grazing contentedly, whose grazing was interrupted by seven gaunt and ugly cows. These thin cows then eat the fat cows, and the dream continued in a similar manner. Joseph correctly interpreted the dream to mean that there would be seven years of plenty followed by seven years of famine. He then constructed warehouses in which he stored the surplus grain from the good years from which to distribute surplus grain from the good years to the people in the years of famine. There is evidence that societies such as Ancient Egypt did store grain in this way. Economics for people constantly be threatened by famine  and other natural disasters economics was a practical science whose good practise was necessary for the their survival. If economics had remained a subject of domestic or household economy and not become a subject of high theory some of the recent disasters of mismanagement of the economy would have been avoided. 
There is another historical comparison that is informative. In classical Rome the development of the slave economy led to the impoverishment of the majority of the people, as the small traders and farmers were undercut by the large slave owning farms and manufacturers. The most unfortunate of which had to sell themselves and their families as slaves to survive.  This created a large number of discontented people and Rome was torn apart by social friction. The aristocrats in trying to contain the anger of the plebs (people), resorted to repressive measures but these alone were not sufficient. The only viable solution was ‘bread and circuses’.  The Roman Emperors imported corn from the conquered African provinces which they distributed free to the Roman populace. They also organised festivals and circuses to distract and entertain the people. When the system worked well Rome was peaceful, when it broke down there were riots. 
What the rulers of these societies realised what that the economy was too important to be left unregulated. If the Roman emperors had not intervened to control the corn supply, Roman society  would have been riven by constant food riots and would inevitably it collapsed as a consequence. Securing the food supply meant the Roman Emperors had a secure base from which to embark on a campaign of world conquest. However the understanding that an unregulated economy can be a threat to the social order has been forgotten by contemporary Western governments. These governments put the needs of the economy above those of the people. Neo-liberal economic theory teaches that the unregulated free market is the best social mechanism for maximising the welfare of the people. Therefore when the market is visibly failing, for example the housing market in the UK the only policy offered by the government ‘is to do nothing’ and wait for the market to find a solution, which it does not. What policy there is towards the housing market is mere tinkering at the edges, finding some funds to make it easier for first time buyers is no solution to the housing crisis. 

It is surprising for a government so obsessed with economics, one that is constantly obsessing over the size often the government debt, that it misunderstands the need of manage the economy for the common good. If Joseph has not intervened in the grain market the supply of grain in the time of famine not only would their have been a shortage of gain, but what grain there was would have been in the hands of the grain merchants. These people given the worldwide shortage of gran would have maximised their profits by selling what grain they had to the highest bidder, leaving the poor hungry Egyptians to starve. Something similar happened in Ireland in 1845/6 when the potato harvest failed and millions of the Irish were threatened with starvation. Instead of the the  Irish grain merchants distributing their grain to the starving Irish, they exported it  for a high price to foreign buyers. Consequently thousands if not millions of Irish starved to death. The Great Irish famine would never have been the catastrophe it was if the government had intervened effectively to help the starving Irish, similarly today the housing crisis would not exist or at leat greatly ameliorated if the government intervened to correct the failures in the housing market. Unfortunately as with the British government of 1845/6 it does not believe that it is its role to intervene in the markets when they fail. The 11 million Britons that live in private rented accommodation, much of it inadequate will only grow in number with a government of ‘do nothings’. Unlike the Pharaoh they are indifferent to the suffering of these people.

NONSENSE AND THE PRIVATE HOUSING RENTAL MARKET

Economics, Politics, , ,

  

While watching television last night I briefly caught an announcement  by a newscaster about the leader of the opposition’s policy towards the private rental market. Apparently he had announced that his party would if elected, would  impose some modest rent controls in the private rental market. This in the interests of balance was countered by the newscaster saying that this was contrary to the advice of an esteemed economist, who said that such a policy woukd be self defeating as would reduce the supply of rental property. Today on  a politics programme I saw the panel of politicians as a body denounce this policy as being contrary to economic common sense, as everybody knows that if rents are controlled landlords will withdraw from the property market.   Today every politician, journalist and most economists have come to believe that the only role for government is to remove those restrictions that impede the working of the free market, not add restrictions that do the reverse. What the opposition leader had stated was free market heresy, the free market is sacrosanct and nothing should be permitted to interfere with its workings no matter how well meaning. To parody the lines of an old song, it was like the man who turned up to a funeral in brown boots, showing a marked sign of disrespect as everybody knows that only black boots should be worn at a funeral, and he was showing disrespect to the free market.
What really puzzles me is the assumption made by economists that landlords will automatically leave the rental market if they are faced with rent controls.  At present landlords particularly in London because of the shortage of housing can almost charge whatever they want. If any restrictions reduced the present exorbitant rents to a lower but still profitable level, what incentive would landlords have to leave the market? Given the relatively modest levels of profit  in other sectors of the economy, it is unlikely that they would find any other sector of the economy that would offer anything similar in terms of profit.
Implicit in the thinking of the anti rent control politicians and economists is the notion of a landlord’s strike. The assumption is that on the announcement of a policy of rent controls thousands of landlords will exit the private rental market, leaving a shortage of such properties. All these landlords have outgoings, usually quite considerable, particular their mortgage payments. Quite often these payments particularly if the property was bought recently they have high mortgage repayments to finance. It strikes me as strange that these landlords would sacrifice the income they receive from their tenants and risk not being able to make their mortgage repayments in a fit of pique. It seems to make little sense that landlords would sacrifice a substantial income to make a point.
The defenders of the sanctity of the market do not seem to realise that they are portraying landlords as the most despicable of people. They suggest at the merest hint of rent controls they will protest by making thousands homeless by emptying their properties. I cannot think of a better argument against the free market, if landlords are really that cruel and callous they should not be owning that most precious of assets person’s home? How can the defenders of free markets claim moral superiority, when any threat to the possibility of profitability is meet the threat to make thousands homeless?

‘And you thought the economy was safe in their hands’

Economics, Politics, , , , , , ,

One of the dominant  issues of this election campaign is the fitness of the contending leaders to manage the economy. Quite rightly people complain of this being a boring election campaign, as the big issues that concern us are largely ignored. Given the superficial nature of the campaign what is never mentioned is the incompetence politicians of all parties have demonstrated when managing the economy. Although my essay is about the UK, the issue of economic mismanagement is a characteristic of all governments of the Western world, there are no politicians of the calibre of Franklin Roosevelt or George Marshall. Instead we have a Rand Paul, David Cameron and Angela Merkel none  of whom have an understanding of the current economic crisis. 

When I was a teenager the recurrent problem was the balance of payments deficit, there were continuing runs on the pound sterling and the government was constantly having to change  policy to deal with this problem. Now I am in my sixties the problem of the recurrent trade deficit seems to have disappeared, sterling crises are now a thing of the past, although in fact nothing is further from the truth. In the last quarter a balance of payment deficits was recorded that equalled 6% of GDP, whereas in the 1960’s the deficit averaged 0.2% of GDP. Now the deficit is 30 times greater there is no problem! When a senior politician was questioned about this he said ‘times have changed’ and having the largest (in percentage terms) trade deficit in the Western world no longer mattered. Has the world really changed that much or was the senior politician being hopeless naive about the problems of the current trade deficit?
  
Any reference to an economic textbook will appear to explain this miracle. Today we live in a world economy with freely floating exchange rates. If a country is in deficit the value of its currency will fall (currency traders mark down what they see as weak currencies) making its exporters cheaper and its imports more expensive, so its exports will increase and its imports decrease until the balance of payments is once again in surplus. However this automatic self regulating mechanism has not worked in the case of the UK, as the trade deficit has continued to grow. At one stage the pound sterling had fallen 20% below its 2008 peak and yet the trade deficit continued to grow. Despite the failure of this automatic stabiliser and the growing trade deficit there was no sterling crisis. Foreigners did not clamour to sell devalued pounds on the foreign exchange markets. In fact the growing trade deficit coincided with a increase in the value of the pound sterling.
How has the UK got away with running the world’s largest trade deficit?

Politicians would claim it due to their superior  economic management that there have been no crisis to resemble those of the 1960’s or that of 1976. Whereas in reality they have ignored the growing problem that could provoke a crisis greater than that of 1976. 
The UK is at the heart of the world’s financial system and as such it is able to use the foreign currency deposited here to finance its trade deficit. Quite simply the UK is recycling the foreign currency it receives to pay the country’s debts. One economist has quite rightly called it a ‘ponzi scheme’, as to pay our way the UK has to attract an increasing amount of foreign currency  to finance its ever growing trade deficit. If the flow of funds ever slowed down or stopped the UK would be in serious trouble. This is one reason why all governments have made it their priority to ensure that the city of London remains the chief financial centre in Europe. Their greatest fear, if they would have the courage to admit it, is that Frankfurt might come to rival London as a financial centre which would undermine  their current economic strategy.
What are the politicians doing?

Nothing would be one answer, but the truth is that they actively pursuing policies that make the situation worse. Instead of taking on the really difficult task of eliminating the trade deficit, they are promoting the British ‘ponzi’ scheme. Politicians realise that they must continue to keep the funds flowing into London, if they are to avoid being forced into making the difficult decisions that would make them unpopular. Gordon Brown when Chancellor of the Exchequer went out of his way to attract foreign funds to London. He introduced the ‘light touch regulation’ which made London an attractive destination for those foreign depositors that wanted a safe haven for their money, but one from which they could easily withdraw it when needed. Yet it also made London at the same time the world’s largest tax haven. It should be explained that the so called tax havens of the Caribbean and the Channel Islands are only nominally the countries where the offshore money is banked. What they really are accounts held in London but spuriously named as accounts held in Bermuda etc. Consequently London has not only become the home for legitimate investors but also the place which at one remove is the destination for the world’s illegitimate funds. 
  

City of London (Wikipedia)

British governments have a long record in aiding the world’s undesirables. When the European Union (EU) proposed stringent measures to control money laundering in banks, Britain opposed the measure and succeeded in preventing their introduction. 
George Osborne the current Chancellor has been working hard to persuade the Chinese to allow London to become the official foreign exchange centre for the trading of the Chinese renmibi. If he succeeds there will be all those renmibi’s deposited in London that could be used to pay for our imports from China. 
Why is this policy so foolish?
Obviously any policy that depends on the rest of the world depositing ever increasing amounts of their money with us is foolish. There will inevitably be other financial centres developing that attract the world’s funds, London cannot for ever be the world’s number 1. Foreign investors are not  the foolish suckers that are  attracted to ponzi schemes, they can read the market as well us any London banker. It has been forgotten that in 1990 one astute fund manager (George Soros) almost bankrupted the UK with his astute speculation in the foreign currency markets. The UK will be the recipient of the world’s funds as long as it suits the rest of the world, but that won’t be forever. Unfortunately the government and all the leading politicians have never considered this possibility and prepared for that eventuality.
The UK being the world’s foremost banker is very susceptible to changes in the world’s currency markets. Any large outflow of funds would be catastrophic for the following reason. London borrows short and lends long, what this means is that money that is deposited in London on short term notice is then loaned out  for longer periods time. At the height of the property boom 80% of the  bank’s loans were made to the property market. Not only is it difficult to get money back quickly which has been invested in bricks and mortar, but the value of those loans is subject to market volatility fall rapidly in  a crisis. The prices in the British property market are subject to a speculative surge that can easily reverse itself. In consequence not only will the banks have trouble repaying those loans, but the value of those loans will have decreased, making it impossible for the banks to repay their foreign depositors. To repay these loans the banks would have to rely upon the Bank of England drawing on its foreign currency reserves to bail them out. History demonstrates that those reserves can soon be exhausted and in such a scenario the UK would need the largest loan in the IMF’s history.

Mark Carney (Governor of the Bank of England) has imposed reforms on the banks making them hold greater reserves to fund a run on them in a  crisis. However it has been suggested that in a crisis of the type that occurred in 2008/9 these measures would be inadequate.
Perhaps the worse consequence of this policy is that the government will be tempted to implement more and more foolish policy measures in a desperate attempt to attract more and more funds to this country. This is why the UK is always the one country no matter which party is in power to oppose any meaningful reforms of the worlds financial markets, as they are terrified of any change that might reduce the flow of foreign funds to London.