A New Economics – the economics of trivia

Economics, Politics, society, , ,

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Economists I feel have been missing the point for far too long, they always study the grand, society as a collective never the individual components that go to make up society. They will claim that they do so in the study of micro economics, the theory of the firm etc., however the study is so abstract that it has no connection to reality. Perhaps this is a fault I also share in with my fellow economists. Here I am sitting in my favourite coffee house, drinking coffee and quite self absorbed in my task of writing this abstract analysis. Sharing this space with me are two women, they are having a lively discussion about the events of the weekend. There is a gaiety and liveliness in their conversation that compares favourably with my brooding intensity. They live life in a different way to me. Am I as with all economists detached from the gay daily round that others enjoy. I am a poor and reluctant dancer, yet my brother in law (who is an English teacher) is a good dancer and a master of the ballroom. Is it possible that the aversion to the daily round makes economists bad dancers or do bad dancers and the most unsociable of men gravitate to the dull subjects such as economics as they mirror our personalities?

This diversion into the personality of economists does have some relevance as I think our relative social isolation inclines us to think of society and the economy in abstract. What we need to do is reorient ourselves, study the reality in which we are immersed. I want to invent a new concept for this study, an ‘economics of the trivial’. Not that I think the majority of human behaviour is trivial but I want to distance myself from the grandiose theories of the economic masters. Economics lacks humanity, I want to bring that humanity into the centre of the subject. It is in those behaviours that economists consider trivial that can give us the best insight into the nature of the economy. Can I suggest that from the behaviours of young people dancing, celebrating their break from work as much can be learned about the working and nature of the economy as from the actions of a trader in the foreign exchange market. Unfortunately economists would only regard the latter of any economic significance, so failing in their analysis because a whole set of economic behaviours are considered too insignificant to be worthy of study.

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Does the hedonist lifestyle of so many young not reveal something about the nature of the economy? I know that young people has always attracted the ire of the old because of their seemingly irresponsible lifestyle, but has there not been a change within youth culture. Sociologists now speak of adolescence extending into the 30’s. Seemingly self destructive behaviours seem to be on the increase, binge drinking and drug taking seem to be on the increase. The authorities are struggling to keep pace with the consumption of the new legal highs. The drugs culture hosts an innovative and enterprising industry whose entrepreneurs show an enterprise lacking in so much of the mainstream industrial sector. However this exuberant youth culture is a symbol of significant changes in the wider society and economy.

Youth culture was formerly limited in its nature and impact on the wider society. It was a culture adopted by young people in their formative teenage years, a transitional phrase before the emerged as fully formed adults. What youth culture represented to the wider society was a marketing opportunity for the clothing and leisure industry. The revolutionary rhetoric of the flower people and the hippies was no more than a protest against the young’s exclusion from the power and privilege of adulthood. Hippie culture with its rejection of the existing society was not a realistic alternative, it was but a magical solution to the problems of youth. No more realistic that the magic in children’s stories. Now I would suggest youth culture is representative of something more significant, it is the most visible of examples of the change in society and the economy that have occurred in recent years.

This seemingly frenetic activity is but the new economy writ small. A greater part of the new economy mirrors this frenetic social life of the young, it is an economy in which there is rapid change in turnover, so many of the new products have a limited shelf life, manufacturing industry becomes increasingly like the fashion industry, highly volatile with those being behind the trend rapidly being left behind. Market giants such as Nokia, Blackberry, Microsoft (?) merely have to miss but one change in the market and they get swiftly left behind by market rivals. While the dominance of the new market leaders is measured in years, the dominance of market leaders in the old industries is measured in decades. Exxon, Shell and BP have been dominant players in the oil industry since the late decades of the 19th century. Companies have always risen to dominance in a market only to decline and disappear, what is different today is the speed at which this happens and the much larger segment of the economy which is dominated by these ephemeral companies. In part is it explained by the rise of the service sector which includes the IT sector in which companies have a notoriously short shelf life.

Britain is the one economy in which this effervescent economy predominates. The economic and social climate from the night time economy to the ‘City of London’ is sympathetic to this frenetic economy. The trading floors of the City epitomise this new economy. Millions of rapid deals involving vast sums of money made during a day, but which at the end of the day leave the stock of physical assets that make up the economy unchanged. A monetary froth which leaves the real value of the nations wealth unaltered. Financiers have a preference for the effervescent economy, as the companies in which they invest rise quickly within the market earning the initial investors good returns but companies which have such a limited shelf life they have to be disposed of before the market turns sour. Examples are companies such as Friends Reunited and My Space which were sold when their market valuation was at its peak. A market which suits the new world of financial speculators, the private equity companies and the hedge funds. Such a market is hostile to the long term investments that advanced manufacturing industries require, which in part explains the long term decline of British manufacturing industry.

A better understanding of the financial markets can be gained from understanding the society that gave rise to them. What informs behaviour in these markets is it the culture of the social group from which they originate or the mainstream culture. Traders to use the popular term are ‘chancers’, they make bets on currency movements, what is it informs this trader culture? They come predominantly from those upper middle class groups that affected to dispose trade. Certainly there is no chance of these traders dirtying their hands in trade. Are these traders the lineal descendants of the great 18th century aristocrats who gambled fortunes at the gaming tables? The mainstream culture expresses an effervescence, things bubble to the surface in great excitement only to later burst and disappear. The night time economy best expresses this effervescence, clubs open and become the place to go, only to be surpassed by a newer club and so the process continues. Clubs rapidly change hands, the new owners giving them the frisson that pushes them to the top of the popularity stakes. Traders express the same excitement as clubbers, they get an adrenaline surge from their activities. Currency trading is a young person’s activity as with clubbing, the youthful surge of energy that makes both possible is soon lost. Currency speculation has always existed but I don’t think it would have gained its predominance in the financial services sector, if it did not reflect social reality.

Going back to my first example, the forms that the social interactions take in wider society change that plasticity that is the human society. Human personality and it’s associated behaviours are infinitely malleable. What matters most to people is their friendship groups, their out of work activities, their extended families, all of which affect and change people’s behaviour. It is wrong to assume these learnt behaviours are not carried into the workplace. Observing people in the small scale social interactions, that make up the rituals and routines of daily life can give an insight into that human construct, the economy. I shall keep observing the regulars, staff and customers in my coffee shop to give me an understanding of human behaviour and the insight which it gives me into the economy.

The Great Pensions Con

Economics, Politics, , ,

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Daily Express was lauding the government’s action to reduce the charges companies can levy on pensions as a great a great deal for pensioners. Taking the government’s figures at face value, The Daily Express seems right, if a fee of 1% reduces a savers’ pension pot by £130,000, capping that fee at 0.75% will greatly increase the value of their pension. However while action to tackle the high fees levied on pensions is very desirable it is ignoring the real problem with British private sector pensions. What matters is not the money value of the pension in 40 years time, buts it real value, can that pension sustain the pensioner in their desired standard of living in forty years time? Unfortunately given the way the pension industry is run run at present for most people it is very unlikely that will happen.

What the government fails to understand is that pensions that are paid in forty year’s time are paid out of the national income in forty years time. If the economy has undergone a period of sustained and real growth pensions can be quite generous, if however the growth is largely illusory, that is an inflationary expansion in national income, even the most generous of incomes will be quite miserly in terms of their purchasing power. Pension fund managers unfortunately aim for the rapid illusory short term monetary increase in the fund as it is this that determines their bonuses and income.

Rather than being put into investments that will increase real economic growth, pension funds are invested in a whole host of short term speculative ventures. Whenever there is a takeover mooted, one large source of funds is always the pension funds. Evidence shows that takeovers yield little real growth but a instead a source of funds for the buyer. One example is the former electrical giant GEC that squandered its cash on buying over priced technology companies that proved worthless when the dot com bubble burst, leaving GEC bankrupt. More usually the profitable assets in the taken over company are sold off which increases the money value of the pension fund but it is not matched by any increase in real income. There is another illusory source of pension fund growth. Fund managers lend to private equity firms, who are brilliant at maximising income for themselves but not there clients. They operate a ‘2 and 20’ rule. A fee of 2% is levied on the money handled and of the venture is profitable they take 20% of the profit made. Pension funds being a convenient cash cow for everybody but pensioners. There is not one speculative venture that is not funded without pension fund money. Consequently these funds can show rapid growth in their monetary values, but which is not matched by any real growth in national income.

Perhaps the most pernicious of fund managers practices, is their habit of lending their shares, for a fee of course, to speculators these speculators can then sell these borrowed shares to force down the price of the shares in the company they borrowed. They then buy shares at the new lower price to sell on in place of those they borrowed. Their profit is the difference between the price at which they sold and that at which they bought. Why fund managers do what is obviously an action detrimental to the fund is a mystery. Obviously they hope in some way to make a profit from this speculative venture. Do they mimic the actions of the ‘naked short seller’? This speculative activity does not represent a responsible investment policy to maximise future returns for the fund. Playing silly games with money is not a sensible investment strategy.

Lending the funds shares to financial traders for speculation, does not suggest that pension funds are in the best of hands.

A responsibly managed pension fund would be an asset to the British saver, whereas an irresponsibly managed one is not. There are examples of well managed pension funds but few are British. Although it not called such the responsibly managed Norwegian sovereign wealth fund is an example. In Norway the government has invested the proceeds from oil into a fund which invests in real as opposed to money assets around the world. Some of this money is invested in the British infra structure, investments that will continue to earn money for the Norwegians into the indefinite future, money that will finance Norwegian spending on welfare. Dubai has invested its money into buying real assets the British ports and the P&O shipping line. Assets that will continue to earn money when their oil incomes diminish. There is very little such foresight shown in the British pension industry.

One of the main reasons for both the Labour and Coalition governments promoting these new workplace pensions, is the prospect of being able to reduce the cost of the state pension. What they hope is that an increased workplace pension will increasingly supplement an ever diminishing state pension. There is nobody so naive or foolish as the British politician who believes in the promises of the finance industry. Despite all the scandals and failures within this industry they continue to believe that they will deliver on private pensions, when evidence demonstrates the contrary.

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Why London so resembles 18th Versailles. The danger of an over large and over powerful courtier class.

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When I think of courtiers I always think of the court at Versailles of Louis XIV, a glittering assembly of notables that led 18th century France into ruin and revolution. The courtier in the medieval kingdoms had a role, they were the intermediary between the absolute monarch and the people. They were the conduit between the king and people. If you wanted to access the king it would be through one of the notables at court. These notables would keen the king informed of events in the country so enabling him to effectively react to unfavourable events in the country, forestalling foreign invasion threats. The same notables, as trusted confidents of the king, could be employed in key administrative posts to ensure the effective governance of the country. Under kings such as Richard I, Edward III and Henry V the system worked well. It was the notables who made the personal governance of one man effective. The one flaw in the system was the dependence on personality of the king, a king such as Edward II who chose his courtiers badly could bring the country into chaos. Rule by courtier was perhaps the only effective means of governance in the largely illiterate and divided countries of the medieval era, but in the modern complex society of countries such as late 18th century France, it had become dysfunctional.

The noble courtiers of late 18th century France who demanded and got a monopoly of governance prevented effective governance of that country. Despite their vast wealth they resisted any tax on their wealth, which would have solved the chronic budgetary crisis’s, resulting from a century’s long warfare with most countries in Europe. Not unlike the super wealthy in today’s Britain they demanded exemption from tax on themselves, instead preferring to shift the burden of taxation on to the less well off majority. Courtier governance inevitably failed and the revolution of 1789 initiated a new era of governance. It is to this class of dysfunctional courtier class that the current class of consultants compare.

What they both share in common is the belief in their right to direct government policy and the right to exact a large fee for the privilege of employing them. Possibly the best example of the new courtier class in action can be taken from the privatisation of Royal Mail. Numerous investment banks advised on the privatisation of Royal Mail, luminaries of the financial world such as Goldman Sachs and Lazards. Estimates for the charges made by these banks are £30 million. Not only did the banks profit from the charges made for their financial advice but they also benefitted from being awarded 30% of the initial share offer. Since the banks that advised on the price for the sale of the Royal Mail were also those entitled to the right to buy a significant part of the shares in the newly privatised Royal Mail they were not going to set a share price that would involve them in a loss. One estimate in The Guardian newspaper suggested that these companies made a gain of £28 million on the shares they purchased, in the initial days after the sale. While Lazard’s advised the government that a valuation of £3.3 billion was the right price at which to privatise the Royal Mail another bank J.P. Morgan had suggested a valuation of £10 billion. All that can be said that at a valuation of £3.3 billion the advising banks made a substantial profit.

It is not unfair to suggest that the class of consultants as with the courtiers at Versailles are an expensive hinderance to good governance. Governments have acquiesced in the demands of the various classes of consultants to have an increasingly large say in government policy making. It is impossible to think of a single policy that does not bear the imprint of the various members of the class of financial and political consultants. The construction of HS2 has not started but already millions has been paid to financial consultants on the project. In a written reply to the MP Cheryl Gillan, the Minister for Transport admitted that £253.23 million has already been spent on the project. While no figure is given for the cost of consultant’s fees, it is right to assume that they accounted for a substantial part of the £1/4 billion costs. This is on a project that may never even be started. The 19th ‘railway king’ and fraudster George Hudson, who was responsible for constructing much of the railway system in the middle nineteenth century, at least in return for his thievery left behind at least a 1000 miles of railway. He would if alive today would be admiring of the inventiveness of the way in which the class of consultants can legitimately make rip off the state and yet give so little in exchange for their services.
The aristocrats of the Court of Versailles effectively obstructed any policy measures that were not in their interest so obstructing the effective governance of the country. What happened was bloody revolution in which some members of this class lost their lives and most all their wealth. A dysfunctional group such as the consultant class which acts as an increasing expensive barrier to good governance should not be able to continue to dominate the process of government policy making. However this is to ignore the nature of financial consultancy. Although they are courtiers who dance attendance on the courts of Westminster and Whitehall, unlike the notables at the court of Louis XIV they have real power as they are the financial ‘shakers and movers’ who dominate the contemporary political scene.

The influence of these financial ‘courtiers’ is best seen in the government’s policy towards tax avoidance. Governments have constantly called on the investment bankers for financial advice, including revenue collection. It is hard to avoid the view that much of this advice is self interested. George Osborne recently had a statute put into law which made it much easier to avoid tax. If the business claimed that the money earned in the UK was really revenue earned by a subsidiary company in a tax haven, they could avoid tax on those earnings. What can never be known is when does advise giving slip over into policy making. The relaxed attitude that HMRC has towards tax avoidance by powerful business corporations, suggests that these financial advisers do more than just advise.

Effective governance can only be restored as in 18th France with a political revolution. Such a revolution need not be bloody, it could be a constitutional revolution. A start could be made in the insistence of transparency in government policy making. All these policy decisions that seemingly are designed to be of benefit only to the class of consultants would be open to scrutiny and as such likely to be less damaging to the public interest. This should only be a start what is further needed is a reform of the system of choosing government so independent minded politicians are chosen as our leaders. What is needed is an end to the love affair between Westminster and the City of London.

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The Cart Tracks of History or why Social Democracy in Europe was so short lived

Economics, Politics, society

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Hannah Arendt when writing about the Russian revolution, stated that societies were doomed to follow in the cart tracks of history. What she was trying to do was explain why Russia that despite the other throw of an oppressive authoritarian government in 1917, had only a brief interlude of parliamentary democracy before Russia reverted to an authoritarian government. Her answer was that Russian society had been schooled in authoritarian instincts throughout the long period of Tsarist rule. All institutions in society were structured along authoritarian lines, people instinctively looked for direction from above and these habits were not easily thrown off. It was the democratic revolution that was alien to Russian society. The seamless evolution of the Tsarist police into the communist secret police, the Cheka, demonstrates how hard it was for a reforming government to throw of the ingrained instincts of centuries.

Since reading Arendt, I have puzzled as to what are the cart tracks of history that UK society is trapped within. Our cart tracks are inequality, social inequality is hard wired into UK society. There was a brief period of Social Democracy in the middle of the twentieth century, but I fear that it will appear as fleeting as the brief period as that of Russian Social Democracy in 1917. What I mean by inequality is a society in which a small privileged group maintains it extreme wealth through impoverishing the rest of society. This group realises that only by denying the majority a fair share of national income can they reserve a disproportionate of national income for themselves.

Economists talk of scarcity when they discuss the means by which society can distribute its wealth to maximise welfare. They believe that only market economy allocate scarce resources in the way that maximises the welfare of all. In the market economy the individual can choose to spend their income as they wish and as only they know their individual wants and desires, they are best placed to maximise their own welfare. If the state interferes by providing say a national health service, it is denying the individual that freedom of choice. They may wish as in the USA to choose what part of their income they devote to health care.

However this analysis is flawed, as it ignores the unequal distribution of income which denies many people the opportunity to exercise their freedom of choice.

Inequality of incomes means more than that some people are richer than others; it means an economy that structured to meet the needs of the well off minority, not those of the less well off majority. The mechanism through which this achieved is choice or in the terms of the economist, effective demand. It is through exercising their extra or excessive purchasing power that they can ensure that the productive capacity of the country is skewed towards serving their interests. An increasingly disproportionate share of this country’s resources are being diverted into producing goods for the super rich. Rolls Royce, Jaguar businesses that supply the super rich are expanding their production, while mass market car manufacturers such as Ford are cutting theirs. It’s the zero sum game, by ensuring that a decreasing share of the national wealth goes to the majority (through falling real wages), they can ensure an ever increasing share of national wealth for themselves.

The housing market exemplifies this trend. Recently a spokesman for a country houses association, spoke about the revival of market in grand country homes. It is no coincidence that this has coincided with a marked decline in the provision of housing for the majority. In England a total 117,190 houses were built in the 12 months prior to September 2012, this compares to the high of 1968 when 425,830 public sector housing units were completed and in which the number of private sector housing units completed were 226,100. The 1960’s were a period of the decline of the grand country house. Many were sold by their owners for commercial use, some converted into flats and the best transferred to National Trust. Evidence suggests that in the UK that housing is the ultimate zero sum game, grand houses for the rich or houses for the majority, but not both.

As an increasingly larger share of national income is going to the well off minority, their refusal to pay taxes has a catastrophic effect on government finances. There are hundreds of tax avoidance schemes available to enable wealthy individuals and business corporations to avoid tax. One accountant estimated that it is possible for a business corporation to pay as little as 2% of its income as tax. Consequently the central government is facing a funding crisis, the proportion of national income that it receives as income from taxation is going down. This is worsened by there being a growing population (particularly of the elderly) which exerts even greater demands on the public sector for services. Given this funding crisis the only solution is to cut services and it is these services that are used by the less well off majority. The wealthy are unaffected by this crisis as they have chosen to opt out of public service provision. In fact it is in their interest to cut spending on health and education services, as it will make possible further tax cuts. Galbraith had a phrase which summed up the current situation, ‘public squalor’ and ‘private affluence’.

This robbery of the private and public purse has to be disguised by an ideology, an ideology that turns a series of squalid ignoble actions into the opposite. The ideology that justifies this robbery is that of celebrity and entrepreneurship, an ideology of achievement. Celebrity is first and foremost an ideology of achievement, the story of the young man from an impoverished background who achieves riches as a famous footballer or the young woman from a similar background who achieves success as a singer. Nobody can deny that they have made their success through there own efforts. However the ideology conflates these stories of individual achievement into a story of achievement which justifies the extreme incomes of the super rich The talent of these individual cannot be denied but what can be denied is their claims to excessive wealth. No individual in entertainment or sport earns the wealth they attain. Society is instead so structured to pay excessively high rewards to certain high achieving individuals. Celebrity has diminished the achievement element for high reward incomes, now it’s sufficient to be a celebrity. Entrepreneurship trades in on the achievement effort, they are meant to be the great movers and shakers who have changed society. Unfortunately all the change many of these movers and shakers achieve is to damage the host society in which they operate. Hedge funds and private equity funds often do little more than loot the company they own and manage. No matter the achievement myth justifies such excessive wealth taking.

Nothing can change without an ideology to counter the achievement myth used to justify the unparalleled wealth of these elites. Religion is one possible counter ideology, an ideology of fairness and charity. There was liberation theology of South America, which however was crushed by the Catholic Church. The social and financial elites retain their control of the Catholic Church. What is not needed so much is not a counter ideology as there are plenty circulating within society, as a social crisis which robs the dominant ideology of its legitimacy and causes a crisis of confidence in the ruling elites. One such past crisis was the Great Depression and the Second World War, which robbed the dominant elite groups of their legitimacy. Having presided over a series of disasters they were powerless to prevent the rise of social democracy. Already the current financial crisis has given rise to new political groupings that threaten the legitimacy of the ruling groups. Usually they are groups of the Far Right, but there are some of the Far Left, both of which threaten the existing order. In Greece there is ‘The Golden Dawn’ and on the left Syriza both new parties representing those excluded from the old elites. It is forgotten that in the end Hitler turned on his aristocratic allies, murdering a number of the officer corp and creating a new army the SS to replace the old aristocratic dominated Germany army.

Unfortunately the ruling elite groups in Europe have the same level of competence as those pre war politicians who were unable to prevent the Great Depression or the war. Catastrophic as both events were, they cleaned the Augean stables of power and a new generation of politicians created a better world. The crisis that is likely to overwhelm the European political leaders is the next financial crisis. Little has been done to remove the flaws in the economy that created the last crisis. London is leading the European Titanic towards the financial iceberg. Although there have been some reforms of the banking system, nothing has been done to change to the financial markets to prevent them from yet again turning a crisis into a catastrophe. New technology systems in fact make it far likelier a greater crash than that of 2008 will occur in the near future, as recent developments in computerised equity trading have the potential to turn small downturns in equity prices to catastrophic downturns.

Is it wrong to characterise the European political leadership as a group of lemmings leading their societies towards the precipice of financial disaster.

The Banality of Evil

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Hannah Arendt was great at devising pithy phrases that explained in a sentence or two, what others could not articulate in a whole book. When observing Eichmann in the dock what struck her was his lack of physical presence and his modest book keeping like demeanour. This insignificant figure was the monster responsible for the slaughter of millions of Jews. There was no charisma of evil, just a mediocrity of evil, hence she coined the phrase the ‘banality of evil’. This contrasts with the public perception of evil, which invests serial killers such as Hannibal Lecter with the charisma of fear. Even the feared leader of the SS, Heinrich Himmler was nothing more than a former butcher. The Nazi’s charismatic leader Hitler, was a disregarded nobody before his rapid ascent to power. His wartime heroics were a fiction. He worked as a messenger in the trenches a safe position which can explain why he could enjoy that war. Was his charisma only a product of the machinations of his propaganda chief Goebbels?

Blandness is never associated with evil in the popular imagination, yet as Hannah Arendt writes there is no glamour in evil. Would anybody associate the bland mediocrities who run Europe with evil. What is most notable is their projection of themselves as the family man or woman, a person just like you or me who happened to be elevated by chance to power. Yet it should be noted that all the prominent Nazi’s were able to distance themselves from their crimes and were good family men. These ordinary family men you would pass in the street without notice, there was nothing about that indicated that they were monsters. I would go further than Hannah Arendt, and say that it is the bland who are most likely to do evil. They are not distinguished by any commitment to a higher cause, they have no understanding of the great moral virtues, instead they are motivated by self promotion and material comfort. They have no problem with doing evil, if it means self advancement, as they having no understanding of public virtue or to use an older phrase the common good. It is my contention that the bland mediocrities who run Europe are the people most likely to do harm to their fellow Europeans. Their crime is the impoverishment of millions of their fellow Europeans through austerity policies designed to protect the bank balances of the rich and powerful.

This is the first time in history that the rich and powerful have not been affected by economic depression. In the great crash of 1929, millionaires were reduced to poverty, in the crash of 1990 rich property dealers became poor overnight. Only the careless few millionaires have been impoverished by the latest crash. What is more usual is the Greek situation, where the government has moved heaven and earth to protect the fortunes of the rich and powerful. What the government did by imposing a harsh austerity programme was to prevent the collapse of the banks. This gave the rich time to shift their money out of over indebted Greek banks to safe havens abroad. Keeping Greece in the Euro by not defaulting on their debts made this money transfer possible. Inevitably making a bad situation worse. A Greek debt default would have hurt the rich most because their vast fortunes locked up in Greek bank deposits and would become practically worthless overnight. For the vast majority a default would be no worse than their current situation, as losing their savings would have been preferable to being thrown out of work and losing their incomes and homes.

Why are the bland and mediocre so more likely to do evil? Lacking any well defined moral instincts, they do not recognise any wrong doing in their actions. Therefore they recognise no wrong in their actions which impoverish the many and make the lives of many others a misery. Politicians have always been motivated by self advancement, so why do today’s politicians not link their self promotion with the advancement of the interests of the people?. Post war Europe was dominated by the ideologies of Social and Christian Democracy. These two similar ideologies saw the goal of political activity as the maximisation of the welfare of the people. It was a British conservative politician, Harold Macmillan in the 1950’s who promised to build 300,000 homes a year, it was Konrad Adenauer’s Christian Democrat government which introduced Germany’s generous welfare system. A system incidentally which the party he founded is now dismantling. With the collapse of these ideologies, politicians increasingly identified their self advancement with allying themselves to powerful corporate interests. A political system in which politicians are increasingly front men for powerful business interests will not attract the best and brightest. One businessman recently remarked that it would be hard to staff the board of a mediums sized public company from the limited talents assembled in the House of Commons. Therefore it should not be a surprise that the mediocrities who occupy Europe’s elected assemblies, should not venture to undertake any policies that would promote the common good but which could be seen harm the interests of the rich and powerful.

Possibly it’s too harsh to identify the the mediocrities that run Europe with the ‘banality of evil’, but they are on that spectrum, they have impoverished not killed millions. Instead should they not be called the ‘banality of lesser evils’?

Housing: an example of the misuse of government policy

Economics, Politics, society, , , , , ,

I realised that on reading my essay through there was a repetition of themes in my writing. It is not the bad behaviour of the banks that drive me to write, but the attempt to explain why, in spite of the economy growing have we all become poorer, that is apart from a tiny elite. When I started work in the 1960’s there was full employment and everybody had the benefit of being housed well. Now that world has disappeared and neither of the last two statements are true. Why? I think an analysis of the housing market explains how this change occurred. When what was once seen as a necessity of the good life housing, is now seen as a commodity to be exchanged on the money markets. There has been a devaluation of human life.

After years of housing booms and busts it is impossible to believe that governments once took action to suppress house price bubbles. Their intention was to keep house prices at affordable levels. All these controls on the price of houses were scrapped by the Conservative governments of 1970 and 1979. Now the governor of the Bank of England is talking again of reintroducing such regulations to rein in future housing price bubbles.

The ending of any controls was in part a consequence of a long campaign by the banks and the rest of the financial community that chafed at any controls that limited their ability to make money. They could guarantee negative press headlines about credit squeezes, so making their cessation much easier. one phrase coined at the time of controls, was mortgage famine. The public were easily persuaded to that credit controls only had a negative impact. At the same time Social Democracy was going out of fashion in the political classes. This meant that controls and regulations that were an integral part of social democracy had to go. It was easy to claim that al the crisis’s of the 1970’s were consequent on having a Social Democratic system and the system that was the source of all our problems should be replaced by something better.

Why did the banks so hate directives and all the other controls that limited price inflation in the housing market? These self same banks at the same time campaigning for a control of inflation in the wider economy. The reason is quite simple, money was the asset in which bank’s traded and they wanted some stability in that commodity. Also inflation in the wider economy added to their costs, unlike house price inflation from which they could directly benefit.

What the banks wanted was the freedom to manipulate the housing market to benefit themselves. They wanted a rapid turnover of the housing stock at ever increasing prices. It was the activity of the usurer, buying and selling the same product over and over again at higher and higher prices. More houses were built each year but the number built fell far short of the ever increasing demand for them, so in it seemed as if same house was sold over and over again. The demand for houses was constantly pushed ever upward by the banks providing more and more money for ever higher mortgages. If this seems to be an over statement consider this example. I lived as a teenager in a small Sussex village and I can remember being told by an awestruck fellow villager in the mid 1960’s that certain new build houses were now selling for prices in excess of £3,500. Now such houses are selling for prices in excess of £250,000. The house in which I lived as a game keeper’s son was sold recently for a £1 million. I do not know how many times the houses on the village green changed hands.

Unfortunately the bankers greed led them to taking a series of foolish actions that led to the crash. In what were now the outdated building societies it was the savers money that was lent to out borrowers, but unfortunately relying upon savers meant that the money for loans was limited, much more was needed to finance the house price bubble. The banks had the solution which was to borrow on the wholesale money markets. If it had not been taken to extremes it would not have been a sound policy. The money borrowed had to be at a lower rate of interest than that lent out for mortgages to be profitable. Cheap money is that lent for short periods of time, sometimes for as short as overnight. To finance the ever expanding mortgage market the banks borrowed increasing large amounts of money from the short term money markets, while the banks lent out the same money for periods of up to 25 years. The banks were reliant on the short term money market to constantly replace the loans they repaid to finance their mortgage lending. Surprisingly this is not as irresponsible as it sounds, what was irresponsible was borrowing such disproportionate amounts in this way. The problem with financing mortgages in this way was that the profitability of such transactions is dependent on the price differential between money borrowed and money lent. The narrower the differential the less profitable was the mortgage business. At the height of the housing boom I was told by a banker that the banks did not make much money from the mortgage business. At first I was baffled, but I realised that the banks profit margins were being squeezed in two ways; first the huge demand for short term loans were forcing up the price (interest rates) of these loans and that competition in the mortgage market meant the banks could not increase their mortgage rates to compensate for higher loan charges for fear of losing customers to other lenders. Banks such as HBOS were having their profit margins squeezed and were at the same time over dependent on borrowed money. They were a catastrophe waiting to happen.

Banks such as HBOS depended for their survival on their ability to borrow billions on the short term finance markets to finance their mortgage trade. If they were denied those funds the bank would collapse. This happened in the period 2008 to 2009. The housing bubble burst and banks were suddenly unwilling to lend to each other, as they did not know which banks were financially viable. In the event no British bank was viable, but none were so indebted as HBOS. The rest of the story is well known, the government rescued the banks by giving them billions to keep them viable.

For the millions already impoverished by the banks playing the housing market it was a double whammy. Now not only did the ‘excluded’ have to pay exorbitant private high rents but they were further impoverished by the government’s austerity programme that reduced their incomes.

Having a nominally Social Democratic Party in power made no difference as Neo-Liberalism was so firmly entrenched as the governing political philosophy. Any action to regulate the banks to put them on a sound financial footing was deemed much worse than almost bankrupting the nation to bail them out. Without any justification the latter was deemed the better option as the default assumption is that the government is incompetent in economic matters and management of them such be best left to those ‘who know’, the bankers. It was no surprise when Gordon Brown appointed a banker, Lord Myner to clear up the mess left by other bankers.

Given that the financial sector seems to have effectively bought up Parliament; E.P. Thompson’s words are very prescient. He thought contemporary politicians are as corrupt and self interested as those of the eighteenth century. Parliament then was was part of the ‘old corruption’ in which the landed interest purchased control of government and he thought current parliaments should be viewed as part of the ‘new corruption’, as control of Parliament has been purchased by the financial interest, ‘the City of London’.

Unlike the majority of my fellow economists I believe than the solutions to economic problems lies with politics not economics. What is needed is political reform that removes the hands of ‘the City of London’ from around the throat of government.

Osborne-oenomics explained

Economics, Politics, society, , , , , , , , ,

Nietzsche’s dictum is that philosophers are in error because while they write about man they never study real man, only their idealised construction of him. They construct ethical systems but never look at the source of those ethical systems, man. He demonstrates how the concepts free will and moral responsibility are of little use in explaining human behaviour. His psychology demonstrates that much of human behaviour is pre-determined, it is their physiological makeup that determines people’s actions not rational thought. Criminal behaviour is more likely to derive from an individual’s biological drives which they cannot control than from conscious decision making. Commentators would do well when commenting on George Osborne’s economic policy to observe Nietzsche’s dictum. Most would see his policy being derived from his reading of the Neo-Liberal commentators of whom they assume he is familiar with. This ignores two key facts, one is that he studied history and probably had but a nodding acquaintance with Hayek etc. and that he is a son of a baronet and it is this latter fact which provides a key to understanding George Osborne.

The baronet is at the lowest level in the aristocratic pecking order and being aware of their nearness to the masses, they have always been the most zealous in defending their privileges of social rank. They are all too aware of what a fall from social grace means. It is these people who have provided the backbone of the Conservative party. The defence of their position often led them to developing the most reactionary of principles. Any improvement in the lot of the servile classes is a threat. A guest at the dining tables of the baronetcy would be aware of the servant problem. The insolence of the lower orders making them such poor servants and the difficulty of recruiting servants as most of the lower orders rejected a life of servitude.

The greatest threat was progressive taxation, particularly taxes on capital. The latter threatened their holdings of wealth and they saw around them the break up and disappearance of many large estates. The social order of which they were part seemed to be disappearing. Since social democracy is dependent on progressive taxation to fund its activities; they hated social democracy as it was that progressive tax system that threatened their existence. They also hated the public services which made such taxation necessary. One service that attracted their ire was the National Health Service. Why should they make such a large and disproportionate contribution to a service that they use but only occasionally. As they would resort to private health care so as to avoid contact with the masses. Is it at wonder that coming from such a background the guiding principle of all George Osborne’s policy is the destruction of what remains of the social democracy of former years? The privatisation and destruction the NHS being the iconic government policy that by which it will be known in history.

Self interest lies behind the desire for a small state, rather than the desire to free enterprise from the the burdens and regulations of the nanny state. A small state does not require large tax revenues to fund its activities. Any policy which shrinks the tax burden on the better off will meet the approval of a baronet’s son. Is not likely a man from his cultural back ground would want to cut taxes? It is no coincidence that one of the first acts of this government was to let Vodaphone of it’s £6 billion tax bill and it is now letting the self same company avoid tax on the multi billion profit from the sale of its shares in Verizon. Tax avoidance is no longer an activity to be discouraged by government but one to be encouraged by the Chancellor. He has decided that multi-nationals that have off shore subsidiaries can channel any profits they make in the UK through these subsidiaries to avoid tax.

One cannot underestimate the impact of the culture of the baronetcy on George Osborne’s thinking. Some members of this social grouping in the heyday of the Social Democracy feared their extinction through a loss of their wealth and position because of what they saw as a penal tax system. Growing up in the sixties on a country estate with family friends in service; I could not but be aware of how this group saw the state as the author of their misfortunes. Any society will suffer periodic crises and the UK society suffered from an economic crisis in the 1970’s culminating in the extraordinary high annual inflation rate of 1974 which topped 27% . It was the OPEC inspired rise in petrol prices which largely caused this spike in commodity prices which caused the high level of inflation. Taking advantage of the weakness of the state in this crisis, the political right forced/persuaded the government to adopt Neo-Liberal policies that would ultimately lead to the demise of the social democratic state.

It is probably no coincidence that the doyen of Neo-Liberals Joseph Schumpeter was an aristocrat. Neo-Liberalism as espoused by George Osborne is the guise through which the baronetcy and others wreaked their vengeance on social democratic state.

Why Ed Milliband will continue to disappoint

Economics, Politics, society, , , , , ,

Why Ed Milliband will continue to disappoint

This week at theTUC conference Ed Milliband promised to take action to end the blight of zero hours contracts which cruelly impact so many people’s lives. It was a speech of good intent which revealed little of specifics of any future policy. How did Ed propose who was going to end this problem? No specific details, just another promise left floating in the air not anchored in the firm ground of policy detail. The problem being for Ed is that he is part of that broad Parliamentary consensus that seeks to combine right of centre economic policy with a left of centre social policy, a tendency that can be identified as starting with John Major.

These politicians believed supply side economics, or what is more popularly called Neo-Liberalism, was necessary if Britain’s moribund economy was to be revived. He recognised that by adopting such a brutal free market economy there would be losers, but in order to create a flexible labour market the protections that secured fair wages and security of employment would have to be removed. This would mean that there would be a large part of the work force that would experience a combination of job insecurity and low wages, combined with a future of low wage employment punctuated by periods of unemployment. Essentially low cost workers who would be willing to work for whatever wages the employer was willing to offer. However he did recognise that there must be a social policy in place to pick up the pieces, that is a welfare state. A state that would offer unemployment and housing benefit for the losers in the labour market. It is this policy that made zero hours contracts possible.

A policy of ‘tough love’ was adopted to ensure that the low paid or unemployed would be willing to take whatever work was available. Benefits were to be so low as to make any work attractive and sanctions were introduced to make people work. This policy has been adopted with enthusiasm by Ian Duncan’s Smith Department of Work and Pensions. Recently it has been suggested by them, that the low paid will be penalised by further benefits cuts if they don’t make sufficient effort to secure a higher wage.

As if to add insult to injury, when elected New Labour promised to continue the policies of the consolidators but with more efficiency and fairness. One of the first acts of the Labour government was to introduce working tax credits, to top up the wages of the low paid. This wage subsidy enabled companies to keep costs low by continuing to pay wages that were so low as would otherwise have left workers in poverty. They also believed in the ‘stick’, they introduced welfare reform by setting up an assessment scheme run by Atos whose main purpose was to reduce the numbers on benefit by defining many of the formerly disabled as fit for work.

This unforgiving social policy is Ed Milliband’s heritage, the inheritance of an inhumane economic and social policy whose sole aim was to keep large numbers of people in poverty and living lives of misery. While he seems genuinely appalled at the misery and despair government policy creates, he realises that there is little he can do about it. He has inherited the belief that the British economy needs to be regenerated through free market reforms which will create millions of losers and few winners; so there is little he can do about ending the misery of zero hour contracts. While Andy Burnham has said that he will end the use of zero hour contracts in the NHS. There has been no such promise from Ed Milliband, he remains trapped within the cruel brutal Neo-Liberal ideology that allows him to make no more than gestures to improving the lot of the great mass of the British population. Yesterday’s debate in Parliament demonstrates this when he failed at Prime Minister’s Question Time to quiz David Cameron on the very critical report made by the UN Rapporteur on the impact of the ‘bedroom tax’, as Observers commented because he did not want to make a commitment to repealing it. While Ed Milliband remains committed to supply side economics and all the indifference to human suffering that implies, he will do little more than offer some amelioration of zero hours contracts. Whatever he might say, little will change.

Student loans, the bleak future for higher education

Economics, Politics, , , , , , , , ,

Self financing has become the big principle that guides university education. Rather than the state funding higher education, it will be the students who will do so by paying fees. These fees to be financed by loans from the state. The constant background noise that accompanies these ‘new’ policies is that after years of overspending, the government has become so indebted that what has to be done is to cut government spending to balance the books. It has been stated so often and by so many authoritative people that it has been become one of the accepted truths of our culture. However it is not true, it just that a series of misapprehensions of the recent past have been manipulated by powerful groups in society to produce a climate of opinion that makes possible a remaking of the social order in their interest. They want a small state, whose relatives low cost will enable them to minimise their tax burden and use their huge tax free incomes to indulge in conspicuous over consumption.

Part of that remaking of society is the introduction of student loans. It is so familiar that it hardly needs repeating, but with increasing numbers of students attending university the old system of financing higher education was said to unaffordable. When Lord Browne in his report recommended increasing student fees to £9000 per annum, his understanding of the situation was never queried. Why did nobody see the fault in his analysis which implied that a system in which all tax payers contributed a small sum each to higher education was less affordable than a system in which a much smaller group (all current undergraduates) would each pay a much larger sum to finance higher education. Logic suggests that this policy might be fallacious, why can a few afford what the nation as a whole cannot?

Much was made of the fact that under this new system even these much larger monthly payments would be reasonable and easily affordable. Modest is one of these words which can mean many things to many people. Modest for an oil executive or well paid cabinet minister is not the same as modest for a young professional. Those I know repaying their loan would not use the word modest to describe their repayments.

The phrase ‘smoke and mirrors’ comes to mind when describing the governments student loan policy. It will be many years before student loan repayments make a substantial contribution to the funding of higher education. Total government spending on higher education will not decrease for many years as the increase in loan repayments will take a number of years to take effect. Will it be twenty or thirty years before we see student loan repayments making a substantial contribution to higher education funding? When will break even point be reached? Even the government recognises that there a problem and is increasing the interest payments made on new loans so as to increase the graduate contributions to funding education. What matters is not that it will take decades for the policy to become self funding, if ever, but that the government says it will happen. Appearance counts for everything, reality can be safely ignored. Particularly as an overwhelming right wing media are conveniently myopic when it comes to the implementation of their favourite policies.

With the increasing commercialisation of the university sector it is unlikely that £9000 pa will remain the maximum fees for university. Foreign students pay in excess of £20,000 per annum in fees. At this level of payment the universities earn a surplus/profit on each student; it cannot be long before the universities find some new reason to negotiate a further fees increase. Only the most naive can believe that fees will remain at this level for any length of time. Universities as they become increasingly commercialised will increasingly behave any other business. Can we expect the annual announcement of a fees rise as occurs in the rail industry?

There is another possibility and that is that the universities will cut costs to squeeze as much of a cash as they can out of each student. As the main costs faced by a university is staff costs, there is for the less scrupulous Vice Chancellor lots of opportunities to do this.They can reduce staff student contact time, increasingly using IT as a staff free teaching resource or increasing staff student ratios (given the possibilities offered by IT the 1000 plus lecture is feasible). For the enterprising Vice Chancellor the possibilities are endless. Less prestigious universities will possibly lower fees to attract students to keep up numbers so as to keep them viable. However the price to be paid for such low cost universities will be horrendous. Their financial viability will only be secured by economising on all those things that make university education desirable. Financial objectives will increasingly come to dominate in universities at the expense of educational objectives.

Of concern must be the fact that the new system of university finance will be managed by for-profit businesses. Already it is reported in the press that the government is considering selling off its student loans book to a private provider. These loans are at present interest free, to make them more attractive to a potential buyer the government is considering adding interest to these loans. The costs of administering the student loans system will be considerable. In the past the American health care system was considered as an example of how not to manage a health care system, as 40% of health care costs went into the management of the system. Now any cabinet minister would tell you that it was a price worth paying for the efficient delivery of health care at the point of delivery. What share of the proceeds of loan repayments will go to the managers of the student finances? Whatever it might be, it will diminish the contribution of loan repayments to the financing of higher education.

When the government sells student debt to for profit companies, it will have to do so in way that guarantees these companies a profit. The obvious way to do that will be to sell it at a discount. If the private company pays less than the market value of the student debt, it is guaranteed a profit in the event of a shortfall in repayments. Whatever deal the government has with private companies it can only diminish the contribution of loan repayments to the financing of higher education.

No mention has been made of the difficulties of collecting these loan repayments. Many graduates are highly mobile in terms of jobs and location. A maths graduate from Oxbridge might decide to work for a New York finance house, only returning to the UK at retirement age. Such a person would given the current rules avoid repaying any of their student loan. The commercial organisations managing the repayments system would be under an obligation not only to remain viable but to make a substantial return on their investment. The only way this could be achieved is to increase the costs of loan repayments on those who cannot avoid making repayments, that is those residing in the UK. The government has shown that it is not adverse to such an arrangement, as it is considering charging interest on what were formerly interest free loans.

The change in funding is claimed to be a revolution, as universities will now be independent of the government as they will depend in future from their income from their customers the students. What can be best described as the ‘free market fallacy’. With the universities no longer dependent on government funding, they will be free it is said from government dictates on curriculum and be able to set a curriculum that needs the needs of their students and the UK economy. There is the sting in the tail, they must meet the needs of the UK economy. Universities will be obliged to provide those courses that will guarantee the employability of their students. This explains why there is a large increase in business and business related courses and a decline in the humanities, the range of modern languages on offer is rapidly diminishing and subjects such as philosophy which have no business application are disappearing from the curriculum altogether. It is an attack on the enlightenment project, that of education for education’s sake.

The strings by which the government puppet masters control the universities will no longer be visible, but they will remain in place never the less.

This ‘realist’ government has said it is prepared to accept that universities may be allowed to go bankrupt, it wants the stiff winds of competition to weed out those weak universities that provide a poor quality education. One suspects that what the government means is those new universities that attract large numbers of non traditional lower income students which instead of teaching them useful vocational and employment skills teach subjects that fall within the ‘liberal education’ ethos. Government boasting about the opening of private universities that focus on providing vocational education at lower cost than traditional universities show the direction in which the coalition government want higher education move.

The change in the attitudes university education is reflected in the views of two contrasting philosophers. Michael Oakshott writing on education in the 1960′ s defined education as the initiation into new areas of experience and knowledge which was in contrast to Keith Joseph who 20 years later saw education as being limited to those subject areas that had economic utility. Rather than opening up young minds to new experiences Keith Joseph wanted to limit the experiences of young people to those that had economic utility. Fine arts to be replaced by accountancy etc. It is Keith Joseph thinking rather than that of Michael Oakshott that has dominated government policy towards the universities.

Government policy is characterised by naivety and ignorance of the world beyond the confines of Westminster and dining rooms of Notting Hill. They foresee an exciting future in which the universities freed from government control will compete against each other and that competition will drive up standards as the universities compete for students. Any cursory examination of the economy will demonstrate that free markets are dominated by a few big firms. There are not numerous suppliers engaged in fierce competition with each other. We speak of the ‘big four or five’ when speaking of the banks, supermarkets, energy suppliers etc. not the numberless independents. One of the economists claimed by the government to provide the evidence for their policy is J S Schumpeter, but one suspects that their reading of his books has not been very thorough. He writes that although markets start as competitive they end up as monopolistic, that is dominated by a few large suppliers. The most successful firms eliminate competition by either driving out of the market their less successful competitors or by absorbing them into their business. By freeing the university sector from government control and opening it up to market forces, there is no reason why the university market should not follow the pattern outlined by Schumpeter.

Already the government has unwittingly made moves to reducing competition in this sector. They have suggested that the most successful universities should set up an external degree system whereby their students study for their degrees in local outreach institutions, such as further education colleges. This outsourcing of degrees will undermine smaller local universities that lack the prestige and resources of the major universities resulting in a consolidation within the university sector as universities close.
The government has said it is prepared too see universities close. The assumption being that the high quality universities will prosper and expand. However this is to misunderstand the market system. One factor in attaining market dominance is quality of the product, others equally important factors such as cost efficiencies may have little to do with the quality of the product. What will happen is that the new private universities will be best placed to take advantage of the new opportunities. They are the most cost efficient, they offer the least cost degrees and have the marketing skills of a successful business institution. It could well be that they supplant Oxbridge and the Russell Group as the dominant players in the university market. What we are looking at to borrow an analogy from the grocery trade is a future dominated by the ALDI university.

If cost is to be the deciding factor university education for the majority of students will be changed. It will no longer be the three year course at some hallowed institution but a low cost course lacking most of the features associated with a high quality education. An out sourced degree course at an FE college will be considerably inferior to one undertaken at the well resourced home university.

Is ASDA another precursor of the future? It is planning to offer degree courses to its own staff. These degrees will be both vocational and low cost. The two criteria which the government believes are the two key criteria for university education.

What the government and its supporters fail to realise is that the market has its own logic. If the government is responsible for the direction of education that direction is open to debate and it is likely that university education will be directed towards achieving a variety of desirable goals, which at its best is education for education’s sake. However a market dominated system directed to maximising profit will focus on a narrow range of courses that maximise returns. If profit maximisation is to be attained by cost cutting all innovation will disappear as new ideas cost money and would be contrary to the least cost consensus that prevailed in universities. Already such changes can be seen in the university sector with the increasing proliferation of business studies courses, increasingly universities will teach ‘to do’ rather than ‘to think’. The uniform mediocrity imposed by the market will be a more successful suppressor of free thinking that any of the repressive institutions of the past. Cost is a far better censor than the Inquisition.

Fed up with misguided economic analyses

Economics

A recent commentator on television commented that its was necessary to cut jobs in the public sector as the real economy was not creating sufficient wealth to support the public sector in its current size. The public sector is seen as is an unproductive add on whose services are a luxury which can be dispensed with in a period of austerity. One such luxury is health and safety. What helps a business most in a struggling economy is to cut its over heads, which includes those expensive measures undertaken to improve health and safety. If those costs are cut, the struggling business will survive and more people will be in employment.

However this is to commit the fallacy of confusing what is unquantifiable with what is non-productive. The former applies to the public sector but not the latter. When I was working as a teacher I wondered why people thought I was of less value to the economy than a maker of Christmas cards. The answer lies in the commonly accepted understanding of economics. A simple example can demonstrate this. If a maker of Christmas cards could produce 10, 000 Christmas cards in a year and if they sold at a £1 each he would add £10,000 to the stock of national wealth. I as a teacher could show nothing at the end of the year for my efforts. If I was paid £30,000 a year and income tax was 20% of income, it would take the efforts of 15 card makers to create enough taxable income to pay my wages. No wonder so many private sector workers, resent the comfortable drone like existence of teachers such as me. Going back to my previous example if taxes were cut those workers would be better off. Yet if I am so valueless, why bother to have any teachers at all Even the most Neanderthal of politicians have not suggested that the teaching profession should be dismissed wholesale.

Consider my example from a different perspective, it is the teacher that gives the child the skills and knowledge that enables them to become a productive member of society. If the average wage for an employed adult is £26,000 and a teacher teaches on average a 100 pupils a year in a career of 35 years, they are contributing to the creation of £26,000 x 100 x 35 or £91,000,000 of national wealth throughout their teaching career. Actually this example is nonsense because there is no possible way of knowing the value of the individual teacher’s contribution to this £91,000,000 of wealth creation. What it does demonstrate is the fallacy of relying on statistics to judge the value of an individual’s work. Yet it is the ‘bean counter’ approach that dominates government policy making.

There are the intangible benefits that education gives a student, which are never counted in the evaluation of a teacher’s worth. When I was 15 I was a working class boy with a farming background, whose only knowledge of the theatre was the Christmas pantomime. Our English teacher Mr Wright had high aspirations for us horny handed sons of the soil, he wanted to show us something different. He took my class to see a production of Hamlet at a local theatre. I was entranced and ever since have had a love of the theatre. What about the music teachers who impart a love of music. One of my teaching colleagues helped a student develop the playing violin playing skills that enabled him to pursue a career in folk music. A simple cost benefit valuation so favoured by the government ignores the true benefits of education.

The simplistic economics that undervalues the public sector has had dire consequences for the housebuilding industry. Common sense (all be it a self interested one) tells us that if only the house builders were freed from all the red tape that’s limits where they can build houses and what they can build, many more houses would be built. However this simple analysis ignores the reality of the housing market and the self interest of builders. When New Labour removed many of the restrictions on the design of houses, the consequence were the construction of many ‘miniature’ houses. The shrinking of the size of the house means the builder can get many more houses on the same plot and make more money. A whole new industry has sprung up to make small furniture for these houses. Sofa’s are now sold in 3/4 sizes. These new dwarfish homes are becoming the industry standard, forcing young and growing families to live live in what are very cramped conditions. What the governments’ have done is encourage a race to the bottom amongst builders, to see who can produce the cheapest yet habitable houses.

By freeing the market of almost every government control, it has left the housing market prey to manipulation by the house builders. The major house builders have large land banks, that is sites they own for which they have planning permission, but on which they choose not too build, until prices for houses rise. By restricting the supply of houses, house builders are able to force up the price of houses and maximise the profits on each house sold. Ken Livingstone stated that the average London house builder made a profit of 26% on each house sold. At the time he made this remark a profit margin of 10% profit was considered exceptionally good for any business.

Rackman was a notorious landlord of the 1960’s who treated his tenants badly. Rackmanism became a by word for bad landlords. Now Rackmanism has almost become the accepted standard for many landlords. Practices in the past that would have been frowned on are now almost universally acceptable. When many East End landlords evicted their tenants to make way for better paying tenants wanting to see the Olympic Games; it had implied government approval as it was seen as making the most efficient use of scarce housing stock. No minister spoke up on behalf of those tenants made homeless, they did not matter.

The planning departments of local and central government are better understood not as a cost to the community but a benefit that can increase the welfare and standard of living of all. Regulation would prevent prevent house builders from profiteering by selling sub standard houses made on the cheap. How many millions would benefit if they were not compelled to live in substandard housing stock? If regulations required houses to be carbon neutral or constructed to a higher standard that could enable them maintain a higher internal temperature in winter, it would reduce the consumption of scarce resources and limit the amount of warming gases pumped into the atmosphere. Local government could plan and build social housing, so alleviating the housing crisis.

The introduction of rent controls could be hugely beneficial to British society. Assume the average rent paid by private tenants is £500 per month in London and there are 500,000 such tenants. If those rents were reduced by £100 per month, it would free up £50,000,000 to be spend on other products and services in the London economy. What a boost it would be for struggling London retailers. Landlords would immediately claim that such controls would make it uneconomic for them to rent out houses and discourage new landlords from entering the market, so reducing the the supply of private rented property in the market. The only landlords that would suffer would be those that had over borrowed to buy their houses and who can only prosper by charging exorbitant rents. Why should tenants be forced to subside such landlords by paying excessively high rents? It would also take some of the heat out of an over heated London property market. Prices might even stabilise or fall giving a chance for some to buy their own homes for the first time. Whatever the cost of employing additional staff in planning or housing regulation, it would be more than offset by the benefits financial and otherwise that would accrue to the community.

There is no such term in conventional economic analysis as social profit. The nearest term that comes to mind is public goods, which means that the market cannot profitably supply some goods that are necessary for common welfare. What might be a public good be is very much open to debate. On the right those goods are defence, law and order and not much else, on the left they are welfare and a publicly funded health service. Social costs are a concept accepted by economics, an example is pollution that can be a by product of industrial processes, yet there is no term or concept that equates to social profit. Never in any economic textbook is there any mention of the benefits accruing to society from public administration. Since politicians, if they have studied economics have done it at the elite universities, that only teach alternative economics as a discussion point in seminars to highlight the superiority of the free market system. One senior Liberal Democrat politician described the Treasury as being populated by free market fundamentalists. While there is no understanding of the notion of social profit amongst the governing classes, the public administration will be continually run down to the detriment of the welfare of the wider society.

This essay should not be understood as justifying any activity under taken by public administrations, they as with any business corporation can make mistakes. What I object to is the unwillingness of the current and former administrations to understand that a strong public administrative sector is an essential part of the good society.

One solution is to go back to a politics of value, not calculation. Harold MacMillan (housing minister in the 1950’s) saw there was a desperate need for more housing and pledged to build 300,000 houses a year. Today such a policy would be hedged with a proviso, if … The if being the most important factor, is their not a shadow cabinet spokesman that qualifies any pledge to do good, with the proviso, if we can afford it. Only if politics is based on values are politicians better able to judge the value of the unquantifiable. It is the unquantifiable that is the product of the public sector. Yet this is in some small way done now, the possibility of nuclear annihilation is unquantifiable and yet the government is prepared to invest billions the nuclear deterrent to make this unlikely possibility even more remote. What I am arguing for is policy makers with imagination, which unfortunately is absent from the minds of our leading politicians.