Tag Archives: Astrology

Astrologers, soothsayers and pseudo economists

All political leaders share one common weakness and that is desire to know the future so as to be one step ahead of their rivals. This makes them susceptible to the practitioners of the various pseudo sciences that can give them both a knowledge of future events and how to use that knowledge to their advantage. These pseudo scientists that in the past practiced this spurious futurology were the astrologers and soothsayers, today these people are more likely to be economists and psephologists. It is the lust for power that makes politicians so susceptible to the machinations of soothsayers of various kinds. There is not one political leader today who does not have an in house psephologist on hand to read the political runes. This is a common practice that runs through the ages, as one contemporary leader Tony Blair had the psephologist Phillip Gould to hand while Elizabeth I had  the astrologer and alchemist John Dee.However I intend to focus this essay not on psephology but on the new pseudo economics.

Soothsaying and astrology as with pseudo economics claim to know the future and can offer policy prescriptions to obtain the best possible future outcomes. These economists claim to possess a unique knowledge of the world, a knowledge that only they understand. Soothsayers or astrologists could state from there understanding of the future when it would be a propitious time for action. There knowledge of the future and future events came from they understanding of the fundamental forces that determined the course of human history. Pseudo economists also claim a knowledge of those planetary forces of economics that will determine the future. In this case it is rather than the movements of the planets determining history it is the movement of market forces that determine history. They will claim that communist leaders wilful ignorance of these market forces will resulted in the collapse of the Soviet Union. Following the lead of these economists historians began to see the future as being one in which the capitalist liberal democratic model was dominant. Possibly the most notable was Francis Fukuyama was perhaps the most notable with his essay and book entitled ‘The End of History and the Last Man’. In both the essay and book he predicted that history would end in all countries becoming capitalist liberal democracies.

Nostradamus pales into insignificance in comparison with these pseudo economists, he could only predict the collapse of great empires in the most elliptical and obscure of terms, he was not granted the knowledge that enabled him to name those empires that would collapse. Economists had a more secure knowledge they knew exactly which empires would collapse, that is the Soviet Union and the China of Mao. If economists know the future and they have the means of introducing the future now, they will do so. They have persuaded politicians throughout the Western World that the future is the free market capitalism system and their role is introduce the reforms that will make the future happen now. This all political leaders have done through a series of measures known as supply side reforms. All regulations such as employment protection laws have been removed because they prevent the free operation of the labour market, similarly health and safety regulation has been emasculated because that also prevents businessman doing what is best. There is an underlying and naive assumption that businessman are well intentioned and will work for the good of all. However the various scandals in the food supply industry show that this is not true.

The apparent success of those societies economists that follow the new free market system as compared to the old communist command economies has led to an over claiming of the success of the new economics and their over confidence has resulted in the practise of the worst kind of pseudo economics. These new economists and the politicians are guilty of creating a new economics that is almost childlike in it’s understanding of the economy and the wider society.

Evidence of this child like science is the introduction of simple moral terms into economics analysis. In its most simplest this new economics states that all government actions are bad, while all action of the free market are good. Obviously it is usually disguised by more complex language, as is demonstrated by the economics of the British Treasury. All economists of my generation that is the ‘Old Keynesians’ understood that all spending by the government increased demand in the economy and the level economic activity. Therefore in a recession the obvious policy was to increase government spending to stimulate economy. Old economists called this process by which spending increased the multiplier as government spending would lead to an increase in spending which was a multiple of the original sum spent. Now the Treasury has decided this no longer happens as it cannot conceive of any situation in which government spending is beneficial, instead it has decided that all government spending reduces overall demand and the level of economic activity. The Treasury has given the multiplier a negative value of 0.6 so if the government spends an additional £100 million pounds it will instead of increasing spending reduce it by £40 million, the Organisation for Economic Development gave the multiplier a value of 1.5, so that the same spending would increase demand by an additional £50 million. When economic policy is determined by such a child like morality such as this it becomes bad economics.

Why I prefer to call bad economics pseudo economics is because it is science that is as fallacious as astrology.

There are some disturbing consequences of the practice of pseudo economics, perhaps the worse is the belief is that governments should give up on most areas of governance in society and transfer their role to the private sector and the market. A belief that the economy works best when left free of government controls and regulations had disastrous consequences the manifested themselves in the great crash of 2008/9. Banks by this time were no longer subject to controls that required them to hold large reserves to protect themselves against a possible bank run that could occur in a financial crisis. Consequently when the crisis happened the banks held such small reserves of cash that they struggled to pay their customers who wanted to withdraw their money. Northern Rock was the first to fail and only a massive injections of government money prevented the failure of two of the big four banks, that is NatWest and Lloyds. Now eight years after the crash the banks are still largely unregulated and hold cash reserves that are again likely to prove inadequate in the event of another financial crash, so that they are likely to again need government cash to fund bail out. Their reserves are now 3% of assets as opposed to 2% of assets at the time of the crash.

Banks have resisted increasing their reserves to what many would regard as a safe level, that is 5% of assets, because money held as cash earns nothing for the bank. Keeping their reserves as low as possible enables them to maximise their profitability but at the expense of security of the institution.

When the government withdraws its governance from the various sectors of the economy it allows bad behaviour to flourish. The banks are not alone in behaving badly, many other sectors of business show evidence of wrong doing.

Despite the evidence politicians remain believers in the new pseudo economics, whenever its suggested that the imperfect markets of the real world need regulation the politicians throw their collective hands up in horror and resist any attempt at regulating these markets. They seem to be in thrall to the contemporary economic Nostradamus’s that believe they have discovered the secret to the future well being of the country is in free market system. If we want a good tomorrow all we have to do is let the markets work unhindered and they will deliver the good tomorrow. However as housing provision is increasingly being transferred to the private sector, the market seems increasingly distant from delivering that good tomorrow. The economic soothsayers are the many consultancies that advise the government. Unfortunately our political leaders are unable to see that these soothsayers and astrologists of the economic world are as misguided and ill informed as their medieval predecessors.

There is a hint of bitterness in my essay as I am a believer in good economics, the practice of which brings benefit to society not the pseudo science of today for most creates insecurity, misery and impoverishment in the name of creating a better tomorrow.

The Philosopher and the Economist

Over the last twenty plus years their have been a series of financial crisis each inflicting damage worse than the previous on the world economy. Yet economists see no need to change there understanding of economics as they believe that in the years before 2008/9 they had discovered the ‘holy grail’ of economics, that is the free market economy. The two schools of British economics Neo-Liberalism and its free market cousin, New Keynesian have an enthusiasm for the largely unregulated market system, seeing it as the best possible of all possible economic models. Yet evidence suggests otherwise and as an avid student of philosophy I would say that all understandings of human behaviour and society are imperfect and that no one understanding of the nature of the economy is without significant flaws. 

 
Image taken from drury.edu

John Locke in his discussion of the nature of philosophy (Essay on Human Understanding) makes what I believe the most compelling case for the inclusion of philosophy in the economists tool box. He compares the role of the philosopher to that of the under labourer. The under labourer on the 17th century building site cleared the ground in preparation for the building work to come. Similarly the philosopher clears and tidies up the area of study for others, they clear the intellectual clutter from the site making clear to other, making clear the areas of study and highlighting the key questions to be answered. Their role is to dismiss all those questions that prompt research that hinders or obstructs the progress of research. In the science of the 17th century this would mean excluding astrology from the in study of astronomy, as the study of this distracted from the real science of the universe. While it might be argued by economists there is no equivalence of astrology studies in economics today, their still practise their subject in a way that prevents real solutions being found to the current economic malaise.

As a Lockean philosopher I would ask why do economists not recognise that the economy is an integral part of the wider social organisation that is society. What they should be asking is how does the wider society impact on the economy? What are the consequences for the economy in changes of human behaviours and attitudes, do these changes contribute to the current economic malaise? Why leave the builders out of the study, after all the economy is but a human construct?
Just as with the fashion in clothes it is at affected by changes in people’s tastes and attitudes.

Perhaps the most significant change in people’s attitudes and behaviour is the shared undertandin of the purpose of the legal system. Initially lawsand the legal system were seen as indispensable to the working of society, as they prevented those disruptive behaviours that would prevent a settled society from existing. These crimes when committed could attract severe sanctions, in the most extreme cases a life sentence. However there has developed in recent years a new understanding of the role of law. Law is now seen as a means of facilitating certain approved behaviours which are known by the generic term entrepreneurship. Laws aimed at eliminating bad behaviours by this group have been removed or emasculated, as it is believed that the free market is the best means of regulating such behaviours. The assumption is that competition in the market will drive out bad entrepreneurs and the law that by intervening in this Darwinian market will result in interventions that damage the economy. Consequently laws on employment protection and the governance of companies are either abolished or have their impact minimised. Now the legal profession is tending towards the belief that the free market and not law is the best guarantor of good behaviour in business and that their role is to stop groups such as environmental activists interfering in the market. In Britain there any many legal restrictions that can be imposed on such awkward groups.

One such consequence is that company law has been rendered largely ineffective. Originally the public company was developed as a means of enabling businesses to raise large sums of money from the public to finance large scale business investment. This organisation has now evolved primarily into a means of tax avoidance or for the owners a means of avoiding legal responsibilities and liabilities. When companies go bankrupt through mismanagement ,the directors are free to walk away from the company free from any legal sanction. No blame attaches to them. It is the legal entity the public company that has gone bankrupt, not the directors. The structure of the public company encourages irresponsible and reckless behaviour by company directors, as was demonstrated during the crash of 2008/9 when no senior banker was held to accountable for reckless or irresponsible behaviour.

This widespread practice of wrong doing throughout the corporate sector has had very negative consequences for the economy. Increasingly people come to distrust the large business corporations all they see is a group of greedy individuals exploiting their customers for their own benefit. Such people have achieved the impossible in making people yearn for a return of the once much derided nationalised industries. The directors of the privatised rail industry have been responsible for massive increases in rail fares making British railways the most expensive in Europe. Fares on British trains can be six times the price of their equivalent in Italy. This behaviour is producing a reaction in the community at large, in Western Europe groups such as Momentum in Britain or Podemos in Spain are campaigning to end this abuse of the system.

However my intention is to demonstrate how the tolerance of widespread mismanagement, corporate greed and wrong doing impacts on the economy as a whole.This is most clearly demonstrated in the finance industries. In the days of my childhood one of the most trusted figures was the ‘man from the Pru’. He called every month to collect a small payment from my parents for life insurance, savings and house insurance. My parents knew that a reputable firm such as the Prudential would always pay out whatever the circumstance, they had faith in the company. The first sign that all was not well in the finance industry was when England’s oldest insurance company ‘The Equitable Life’ went effectively bankrupt, as it lacked the funds to pay the pensions it had promised. There then followed a long series of scandals in this industry due largely to a combination of mismanagement, individual greed and irresponsible behaviour. The consequence was the development of a widespread distrust of the financial services industry.

This justified widespread distrust of the financial services sector has led to some unfortunate consequences. People began to look for alternatives to saving their money with these institutions; they looked for investments that would offer far better and safer returns than those promised by the financial institutions. The one alternative for most people was property, asset prices rose more rapidly in the housing market than in any other alternative market, so any investment in property appeared to be a win, win situation. There is no other market in which the value of the initial investment would increase so quickly. Many entered the rental market as the returns on rental properties were astronomic, it was a market in which it seemed nobody could lose, except they did. There is the now forgotten property crash of 1990 and the more recent one of 2008/9. The problem was that the increase in house prices was due to a speculative boom, caused by more and more money chasing an ever more slowly increasing supply of homes for sale. A market based on speculation will always be subject to booms and busts. The supply of money for this speculative investment will always slow at some stage, usually due to some downturn in the economy or the realisation that much of the property in which the money is invested is not worth the money paid for it, as in the sub prime market in the USA. Such as downturn is occurring now and there will be a crash in the property markets in either 2016 or 2017. What cannot be predicted is the scale of the crash.

Unfortunately this rise of the property market has coincided with the decline of the manufacturing sector. Manufacturing now only generates 10% of UK’s national income. In the housing market much of the investment is recycled money as the same properties are sold over and over again at ever increasing prices; whereas the manufacturing industry creates new products for sale, which generates ‘real’ extra’ income. With the decline of manufacturing people could look less and less to an increase in income, as most new jobs created were in the less productive service sector. As people could no longer rely on ever increasing incomes that looked to speculative returns to boost there spending. The market that offered huge speculative returns was the housing market.

There are two negative impacts on the economy from the growth of the housing market. Funds are attracted to the higher speculative returns in that market, rather than the lower returns from investment in manufacturing industry. At the time of the crash in 2008 over 80% of bank loans where made to the property market. A manufacturing industry starved of investment funding can only decline. The consequence is that Britain has become increasingly dependent on foreign manufacturers to supply the goods it needs. Britain now has the largest trade deficit as a percentage of national income for any developed industrial country.

This has resulted in a disastrous change in government economic policy. Now as so many people are dependent on speculative booms in the housing market for extra income (loans secured against the increase in property values), the main role of government economic policy is to support the speculative boom by adopting a series of policies that constantly increase house prices. What never occurs to the government is that this is a foolish policy that can only end in tears,as happens when the market crashes. No government minister or Treasury official seems to have noticed that each successive crash requires greater and greater sums of government money to bail out the losers in the crash. Figures for the money used to bail out the bank’s etc in 2009 are notoriously opaque. One figure I came across was that in 2009 the government pledged £1.2 billion to support the bank. This figure was about a 100% of national income, fortunately it was no called on, it remained just a pledge. If the bank creditors had demanded that the money be paid into the banks coffers, Britain would be in a far worst situation than is Greece.

What I am trying to say is that as a philosopher I look beyond the current economic toolkit to try to understand the nature of our current economic malaise. It is by asking different questions that I arrive at different conclusions to those proffered by orthodox economists. The main solution to our problem is to stop the speculative frenzy that is the property or more accurately the housing market. If the banks and other lends could not increase by astronomic sums the amount they lend to the property market, there would be no money to fuel this frenzy. This could be done quite simply by increasing the reserves the banks hold, one economist has suggested that the bank’s reserves should be increased to 10% of total assets (or loans). If this happened banks would have to go to the market to raise huge sums of money to increase their share capital. It would not happen and banks would be forced to withdraw funds from the housing market. There would be a painful crash in that market, but once that the effects of that crash had receded the economy could be rebalanced towards manufacturing. An increase in manufacturing activity would have many beneficial effects, one of which would be the reduction of our horrendous trade deficit, as people rather than buying imported goods bought domestically produced ones.

There would be a price for making this change, there would be a fall in the incomes of many people, as they could no longer rely on loans to boost they’re spending. It is quite likely that there are a number of senior politicians that are aware of this and for that reason they are afraid to end the speculative housing boom. Conventional knowledge states that any government that presides over falling house prices is committing electoral suicide. Instead they hope the great crash will happen on somebody else’s watch. To put it another way fear of electoral suicide makes cowards of all politicians.

What I am saying is that while economists fail to consider factors such as a change in the attitudes and behaviours in the population at large and in particular that of the political and cultural elites, they will never come up with solutions to the current economic malaise. This type of thinking that does take into account these cultural changes was known as political economy, yet this school of economics has long been abandoned by practising economists.

Returning to my initial thoughts on Locke and the under labourer, perhaps what really needs to be cleared away is the current economic orthodoxy, which acts as an intellectual road block to prevent the development of any new approaches to solving the current economic malaise.