The English have any good luck mannerisms which are intended to ward off bad luck. One which I particularly do is crossing my fingers when I mention something dreadful, to prevent it occurring to me. Another is touch wood, as in I have not caught flu this year touch wood. Surprising this superstition is the basis of much economics practised by this government and to be fair many others.
Economists claim scientific status for their subject on the grounds that it based on quantitative analysis, analysis from which predictions can be made about future events. They will admit that in their predictions they cannot match the accuracy of those of a physicist, but the difference they claim is one of degree not nature. Governments invest billions in IT programmes that use the tools of economic analysis try to predict future events in the economy. It is telling that the most accurate predictions about the economy are made after the event, when there is more reliable information about the event that has taken place. Unfortunately the errors in these programmes have caused real problems in the past, as in 1976 when government statisticians calculated that the country was experiencing a horrendous balance of payments crisis; yet when later revisions of the figures showed that the initial calculations were inaccurate the damage had been done. The revisions came to late to avert a financial crisis which included a large outflow of currency and forcing the government into borrowing from the IMF and the introduction of an austerity programme which effectively ended social democracy in the UK.
However past history demonstrates that this attachment to facts and figures is more apparent than real. One of the theories underlying the initial Neo-Liberal free market economics, (practised by all British governments since 1979) was the quantity theory of money. This theory states that if money supply increases faster than productivity, inflation will result as their will be more money chasing the same number of goods. The control of inflation that as now was one of the chief concerns of government policy. In the 1980’s when this theory took hold one of the first policies that the government’s introduced was a policy to reduce the money supply to cut inflation. This in Britain caused the recession of 1980 and the loss of 20% of it’s manufacturing base, and this was decreed a good result, as in the new low inflation economy, growth would soon compensate for the losses of 1981/82. However after several years in power politicians of the Neo-Liberal persuasion seemed to forget about the quantity theory of money, despite it being the guiding principle of their policy decisions in the early 1980’s.
If Neo-Liberal economists wanted a demonstration of the truth of this theory, it is in their actions over the past thirty years. Politicians in Britain and Europe have overseen a huge rise in bank credit with a consequential inflation in asset prices, particularly in housing. According to the latest figures the debts of the UK banks total 340% and 324% respectively of the nation’s GDP in Britain and Germany respectively. Instead of the politicians reacting negatively to this huge rise in bank credit and the inflation that it induces, they have done all they can to keep that inflationary spiral going ever upwards. When in the crash of 2008/9 these over indebted banks should have experienced a painful devaluation of their assets, as many of their debtors defaulted on loans. Instead the governments of Europe pumped money into these banks to prevent any real deterioration in their loan books. Consequently the banks have continued with their irresponsible behaviour and their loans spiral ever upwards, pushing up house prices. The politicians believe that the inflation in house prices contributes to the ‘feel good’ factor and that any downward movement in house prices would mean instant unpopularity and losing office, which would result if they reduced money supply through a reduction bank credit. Foolishly the Neo-Liberal politicians and economists put electoral popularity above a painful restructuring of the economy, which would mean no longer using inflation as a driver of growth.
Recently the governor of the Bank of England announced that he was happy to see bank deposits (largely loans) to increase to 900% of GDP. Sometime in the future there will be a painful awakening for the over indebted Western European economies. All this is detailed in painful detail by the economist Anne Pettifor in her book “The First World Debt Crisis’.
There is a blindness in economists and politicians to real nature of the problems of debt. Never in any debates in parliament will the huge private sector debt be mentioned. Policy is based on the hope that the problems that this huge debt will cause will never happen. It seems to be if you ignore the problem and hope for the best the debt problem can be wished away. Whether I call it crossed fingers or touch wood policy, it is a very naive belief by economists and politicians that all will be well in the future. It is economics as superstition in that if the real crisis is never mentioned it will never happen.
Going even further I can suggest that there is an element of voodoo about government and inter government policy making. They seem to think if they sacrifice one element of debt it will appease the Gods of economics and prevent them from causing the house to fall down. Rather than sacrifice a chicken they sacrifice public spending. They seem to hope that the misery inflicted on those dependent on welfare will appease the Gods of the economy. If the bankers are the Gods of the economy it has worked, as there have been no adverse movements in the financial markets against the pound sterling. They certainly are satisfied with the sacrifices made by the poor. However they are not the Gods, as is demonstrated by their failures in 2008/9, the Gods (if they exist) are much more abstract figures not to be appeased by minor sacrifices, inevitably they will visit punishment on the foolish and naive governments of the West.