Tag Archives: economic growth

The ‘sky cannot fall in’ school of economics.

There is an economic school of thought commonly held by politicians and journalists, which can be best described ‘as the sky won’t fall in’ economics’. What the practitioners of this economics believe is that the economy is a thing that just goes on delivering whatever politicians might do. There foolish decisions have some negative impact on the margins, but come what may the economy will still working as well as ever tomorrow. Such people described the financial crisis of 2008/9 as a ‘once in a lifetime affair’, it was what insurers call the unexpected, an ‘act of God’. What it was not was a crisis brought about by the foolish behaviour of bankers and politicians. The cause of the crisis was not the foolish speculative behaviours of the banking community or in the naivety of politicians in believing that the financial market could regulate itself, no the causes lay elsewhere.

Similarly in the U.K. we are suffering from a surfeit of ‘the sky won’t fall in’ economics from the Brexiteers in the politics and the media. Warnings of the dire impact that a hard Brexit will have on the economy are dismissed as ‘Project Fear’. One leading politician when warned of the damaging impact of a premature exit from the European Union (EU) on manufacturing industry, said that it won’t matter, as manufacturing only accounts for 10% of U.K. output. Only a person completely ignorant of economics could make such a foolish statement.

Yesterday a journalist who normally displays the utmost scepticism about politicians and politics revealed themselves as a member of this school of thought. He in his articles has on numerous occasions exposed the follies of politicians; yet he takes the word of these self same politicians that a premature rupture in trading relations with our biggest trading partner will have minimal impact on the economy. He writes that the day after Brexit the economy will be functioning as normal, planes will still be flying and there will be food in the supermarkets.

Yes the economy will still be there and it will be functioning, but the question he fails to ask is how well will it be functioning. To take his first example, yes the planes are likely to be flying, as it’s inconceivable that the British and European politicians can’t come to some agreement on airlines flying rights. (One must mention a proviso, politicians are just as likely to come to an agreement which is detrimental to the interests of our airlines, as beneficial. He assumes a competence which our politicians in the Brexit negotiations, have been singularly lacking.) What he fails to understand is that whatever results, the British government is exchanging an agreement about rights to fly over Europe that is highly beneficial for our airlines for one that is much less beneficial. What we do not as yet know is how much more difficult will it be for Britons to fly in and out of Europe. Obviously the uncertainty generated by Brexit will the day after Brexit lead to some cancelled or delayed flights. All that can be said is that British airlines won’t enjoy the same access to flight space over Europe than they had before. However what will obvious is that flying from Britain to Europe will become more difficult.

Journalists and politicians of the Brexit persuasion hide behind this uncertainty. I as an economist know that Brexit will be damaging to the British economy and society. Just because people such as myself cannot spell out in accurate statistical format the exact damage that Brexit will inflict on the economy, Brexiteers claim that we should not be believed as we really just don’t know. However to put it in its simplest terms believing the Brexiteers is asking the people to accept that there uninformed guesses are as good as my informed guess of myself and other economists.

John Maynard Keynes was once the doyen of British economists, but he is now so out of favour that his economics has been banished from the Treasury and political circles. As a consequence politicians lack an understanding and knowledge of his great insights to the workings of the economy. What all in politics and most in journalism have forgotten is his insight that the capitalist economy is inherently unstable. In his books such as ‘What is to be Done’ he demonstrated how the misguided decision making of the politicians had brought about the worst of all possible economic circumstances. The Peace Treaty of Versailles might have delivered peace but it also delivered a Europe wide economic recession. Imposing punitive sanctions on Germany wrecked the economy of what before 1914 had been Europe’s largest and most prosperous economy. The knock on effect was Germany no longer bought the goods it had previously, so spreading the misery of slow growth and high unemployment throughout Europe. Added to this British politicians made a series of decisions which worsened the impact of this depression on the U.K. The 1920s in terms of economic growth was a lost decade.

What cannot be stated often enough is that the economy is not a thing that will constantly deliver, regardless of the poor decision making of our political and business leaders. Just as with any human construct it has flaws and one flaw is its propensity towards instability. This unstable economy can be as easily pushed into recession, through the follies of our leaders as it can be thrust into exuberant growth through the ingenuity and good decision taking of the same people.

Bill Gates, Steve Jobs and all the other entrepreneurs of Silicon Valley kickstarted the information technology revolution, which led to a sustained period of economic growth. One only temporarily halted by the bursting of the dot.com bubble. A bubble caused by foolish speculators bidding to much for dot.com businesses. When it became obvious that these companies would never earn the expected profits, it became obvious that these companies had been overvalued, so there share prices collapsed, causing a loss of business confidence and a recession.

To this economist one the main causes of sudden changes in the business cycle are human folly and ingenuity. The economy is not a perfect construct it has weaknesses and foolish decisions made by politicians and businessmen can expose those flaws which leads to economic collapse. Similarly it has strengths which men and women of ingenuity can exploit to create immense wealth, which benefits all.

In answer to Michael Gove and Simon Jenkins, despite what you think, the ‘economic sky can fall in’. It’s the actions of men such as you that make this more likely to happen than not. Unfortunately the leading politicians in Britain at present seem to lack amongst them, people of realism and ingenuity that could prevent ‘the sky from falling in’.

The Insurgent Economy


What we call the economy the economy is but a shifting powerhouse of competing and conflicting forces. The two most significant being the dominant and the insurgent economies. The former consists of the most powerful social groups in society, while they are have the power to distort and bend the economy to service their needs, they also through the exercise of power provide those services that hold the wider society together. While the 7% of wealthy public school educated men may hold the most powerful positions in society and abuse their power to serve their own interests, they do give society its system of governance. A system of governance that at its most basic consists of public administration, law and order and defence. No matter how exploitative their behaviour they hold society together. The Mongol warlord’s Genghis Khan and Timur the Lame were cruel abusive tyrants. Timur the lame making mountains of skulls out of his slaughtered enemies . Yet they provided a superb system of administration that held together an empire that stretched from Europe to the shores of the China Sea. However as both empires were over dependent on the the skills of the individual at the centre of government, they fell apart on the death of these men. Or to put it a different way the subject people’s were unwilling to pay a disproportionate share of their incomes to governors who could not provide an effective system of governance.


While the social group that controls the dominant economy in the UK are less brutal that the Tatar Emperors, they also use their control of the services essential the maintenance of good society to exact an onerous return for their services. In the 18th century the landed aristocracy effectively controlled the governance of Britain and in return this service they exacted from society huge sums of money with which to build the great country houses such as Blenheim Palace and Chatsworth House. While the landed aristocracy lived in grand houses the impoverished majority lived in hovels of mud and straw, few of which survive until today. When the landed aristocracy of France offered increasing little in return for the disproportionate share of national income that they rewarded themselves, they were overthrown in bloody revolution.

There is opposed to the dominant economy an insurgent economy peopled by those people excluded from the dominant economy. They threaten to take control of the economy from the dominant social grouping. In the 18th century this was the non-conformists, people from outside the dominant Anglican landed hegemony. People such as Josiah Wedgewood and James Watt, industrialists whose rapidly growing factories and the wealth they created enabled them to challenge the landed aristocracy for power.

The one way the members of the dominate economy can control the threat to their position was by denying or limiting resources available to members of the insurgent economy. In a largely agrarian economy of the 17th and 18th century Britain where most wealth was invested in land they were able to minimise this threat as they owned most of the nation’s land and were not willing to allow the control to pass into other hands. However this landed aristocracy while on the one hand tried retaining control of the nation’s wealth through a corrupt political system and by excluding people of dissenting views through from public office or the universities, did through their incessant wars with the French aid the rise of the insurgent economy. The suppliers of war material were the very people they wished to exclude from power. Men such as John ‘iron mad’ Wilkinson, who made the machinery that bored cannon barrels from blocks of iron. These manufacturers were so successful that even the French army that invaded Russia in 1812 wore British made great coats and uniforms. These industrialists benefitted from government largesse put their way. Such a large transfer of wealth inevitably affected the distribution of power in society and in the nineteenth century these industrialists effectively gained their merited share of power.


Not all the members of the insurgent economy gained their wealth from government funding. Entrepreneurs such as Josiah Wedgewood created a new market for high class porcelain through developing new technologies and imaginative marketing. He displayed in London for several months the dining service he made for the Tsar of Russia. This public display of his wares won him customers from the middle classes who wished to emulate the nobility. The threat they posed was recognised by the landed aristocracy. Joseph Priestly scientist and friend of Joseph Wedgewod was driven out of his home by a mob (whipped up to a frenzy by the local nobility) who regarded him as a dangerous radical.

What I wanted to demonstrate by my foray into economic history was to give an indication of how the tension between the insurgent and dominant economy affects economic development and growth. Today this tension is demonstrated through the bid by the American pharmaceutical giant for the British pharmaceuticals company Astra Zeneca. It is a deal that will inevitably go through as it will have the support of the City of London. Predatory financiers will buy shares in Astra Zeneca and when they believe the market has reached its peak, they will through manipulation of their dominant shareholding force a sale. In the meantime they would have bought and sold the shares many times to make a profit of millions or for the City as a whole billions.

There can be no doubt that the dominant economy today is that focused on the City of London. Parliament is but a creature of the City, as demonstrated by George Osborne’s opposition to the proposed Tobin Tax from the EU on financial transactions. A position given tacit support by Labour’s silence on the issue. The takeover of Astra Zeneca demonstrates the dominance of the ethos of the financial sector in the economy. Investment in research into new drugs is expensive and the results uncertain, a far more certain way to make profits is to takeover a rival company and realise (sell) its assets. Already there has been talk of the new merged company needed to rationalise research and development by cutting down on duplicate research facilities. Astra Zeneca holds plentiful real estate which could be sold to generate profits for Pfizer. Then there is the cash rich pension fund. Pfizer by cutting back on pension liabilities (reducing pensions or increasing retirement ages) gives Pfizer access to funds that could be used profitably to boost the value of shares through a buy back scheme. There are numerous ways Pfizer could use the assets of Astra Zeneca to increase its profits. All the talk of creating a new mega pharmaceutical company which will use its funds to develop lots of exciting new drugs is just PR guff, needed for the politicians to justify their acquiescence to the purchase by yet another British company by a foreign buyer, who sees the acquisition of a British company a increase profits by selling off its assets.

What matters is the balance between the dominant and the insurgent economy. If the dominant economy is over powerful it can deny resources to the insurgent economy and as the insurgent economy is the generator of economic growth it can diminish, if not destroy the prospects for growth. The members of the dominant economy must be willing as with political parties in a democracy be prepared to see the other side win, not destroy any possibility of that happening. Members of the financial elite must be prepared to cede or share power, as did the landed elite of the 19th century, when they shared power with the industrialists. Cadbury’s, Astra Zeneca are all witness the dominance of government by the financial elite. The hedge funds, investment banks that have financed the Conservative party will not be wiling to let government veto the opportunity to make vast profits on the proposed Astra Zeneca deal. It is no coincidence that the decline of manufacturing industry has coincided with rise to dominance of the financial elite. Perhaps the clearest example of this the closure of Rootes Hillman factory at Linwood and the car making machinery sold to Teheran. It was a standard joke that if you wanted to buy a Hillman Imp, the place to go was Teheran. There must be hundreds of factories using machinery formerly used in British factories worldwide having been sold at knock down prices by the city. Former manufacturing giants such as Dunlop (tyres) and Pilkington (glass) have been sold by the city to foreign owners.


The old manufacturing industries in UK would probably have declined but the actions of the city accelerated their decline. Unfortunately the dominant ethos of the financial sector is for short term speculative gain. Possibly this is why 80% of all bank loans are made to the property sector. This means the growth of the new rising insurgent industries have been choked off. Briefly Britain made computers but the only large scale manufacturer of them ICL was sold to the Japanese firm Fujitsu. The city having no interest in long term uncertain investments. This is why in the UK development in the new technologies has been confined to small software companies mainly based in the Thames valley area. Businesses that don’t require large scale city funding. There is hope that these new industries are beginning to make sufficient funds to finance expansion through reinvesting their own profits. Something that the iron masters and mill owners of the 18/19th century were forced to do, as all the traditional sources of finance went into land investment or the colonies.

A successful economy maintains a creative tension between the dominant and insurgent economies. The dominant economy is committed to social stasis to preserve the wealth of its members but in so doing it provides the social stability necessary for social order. Without that social order the insurgent economy would find it hard to develop. While the dominant economy is committed to no change, the contrary is true of the insurgent economy. Within the dominant social order there must be scope for the development of the insurgent economy, as that it the mechanism for future growth. This means the members of the dominant economy must be prepared to accept change and the loss of power. Not as in the UK where the city has systematically destroyed any threat to its power by disposing of new technology companies to foreign rivals.

There is hope in the new internet funding schemes which by-pass the banks. Crowding funding on the internet may hopefully develop as did 19th century joint stock company as a way getting funding for new businesses which are denied funds from the traditional sources.