Tag Archives: Bull Markets

The Economy does not Exist

Perhaps now being in my eighth decade I can look back with some perspective on society. While I must admit that wisdom does not necessarily come with age, one’s vision and understanding does sharpen over time. What becomes increasingly evident is the follies of mankind and in particular the politicians. One often repeated folly occurs when politicians say that … must be done for the sake of the economy. To their listeners it sounds impressive, but it is just yet another must say meaningless phrase that politicians say. The economy does not exist, it is not a thing as such. It is merely a word that economists give to a series of activities that create wealth, and the means by which that wealth is distributed. The crofter the Outer Hebrides and the investment banker in London will be included by the government statistician as being part of the British economy, but the link between the two is tenuous. Rather it is better to say that the economy is lots of different things that involve wealth creation and distribution, but it is no more than that.

There is a very simple example that illustrates this point. Government ministers take policy decisions that they claim are for the benefit of the economy, but which in reality damage significant sectors of the economy. British governments have pursued policies designed to keep the exchange value of the pound high. The reasoning being that as so many of our goods are imported from abroad, if foreign currency is relatively cheap compared to the cost of the pound, imports will be comparatively cheap. As over 50% of our food comes from abroad, it makes the fruit and vegetables in the supermarket cheap to buy. However this same policy is damaging to our domestic manufacturing industry. If the pound is expensive in terms of foreign currencies, it makes British exports expensive and foreign imported manufactured goods cheap. Consequently British manufacturers are hit twice, their expensive imports are hard to sell abroad and they are increasingly undercut in the domestic market by cheap foreign imports. This is why British manufacturing industry only accounts for 10% of national output (GDP) and why of all the developed countries the U.K. has the largest trade deficit as a percentage of GDP.

What I am trying to say is that by treating the economy as one thing, rather than several things, government economic policy making is condemned to be both wrong headed and damaging. Anyone looking back over government economic policy, will see a series of constant policy errors and misjudgements.Observing this record of failure politicians came to believe that a policy of doing nothing or as little as possible was the best policy option. From this came Neo-Liberalism and free market economics. There was an equally obvious conclusion that politicians could have drawn and that was that governments had been using the wrong economic policies or applying them correctly, which they preferred to ignore. Also it was a terrible misreading of history, a recovery from the ravages of war in 1949s and 50s was only made possible by the government regulation of the economy. Money was directed towards rebuilding the economy away from consumption. Rationing of goods was very unpopular, but it made possible the post war economic recovery.

Today the only economic policy measure used is monetary policy, the government believes that by controlling the supply of money they can best manage the economy. One way they control the money supply is through varying interest rates. Their reasoning is that of interest rates are low people will be encouraged to borrow more and the increase in the amount of money in circulation will increase the demand for goods and services so increasing economic growth. What they don’t understand is that a policy of cheap money can be bad for the economy. Interest rates are the price paid to borrow money and as such the price at which money is borrowed should be high enough to discourage foolish and silly investments. Unfortunately when money costs next to nothing to borrow it encourages many foolish speculative investments. As money borrowed today can buy shares that can be sold tomorrow at a profit. If only a higher price was charged for borrowing money such speculative punts would be discouraged.

Government ministers need to realise that a booming stock market is not the economy, but only one part. The froth on the coffee. When money is made so easily by speculating, why bother with the long term investment that business desperately needs. Such investment does not deliver the quick and astronomic returns of speculation, it only delivers in the future. Why wait several years for a return on your money when a speculative will deliver a profit tomorrow or the day after. Consequently the UK’s investment in infra structure is as low as that of the European basket case, Greece.

South Korea offers an instructive comparison. After the Korean War in 1951, it was a basket case. The country’s economy had been devastated by war. Now South Korea is one of the world’s major manufacturing nations. This was a country which the government actively interfered in the economy. What it employed was sectorial economics, in which the government decided on which industrial sectors to promote and how to support them. Samsung was originally a manufacturer of agricultural machinery, who following the dictates of the government concentrated on the manufacture of electronic goods. Samsung is now one of the world’s leading manufacturer of electronic goods. Neo-Liberal Britain’s last major manufacturer of electronic goods GEC disappeared long ago, after its directors made a series of foolish acquisitions.

The only large British owned and managed manufacturing industry is in engineering, where there are two remaining industrial giants. BAE and Rolls Royce. It is no coincidence that these two companies have been in receipt of government largesse in the form of defence contracts. Sometimes politicians cannot see what is in the front of their noses.

Obviously South Korea is not without its problems, it does as does all developed countries have a severe youth unemployment problem. However in ten years time South Korea will still be a major manufacturing nation of hi-tech goods, the same cannot be said of the U.K. Quite possibly it will continue on the path of slow decline, which has been its history this century. Only if politicians stop believing that there is an economy and instead acknowledge the economic reality, they might develop policies that promoted economic growth and welfare and not the reverse.

*This essay owes a considerable debt to Markus Gabriel’s book ‘Why World does not Exist’

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