Tag Archives: economics

Alice in Wonderland Economics

The book that I would recommend to anybody wishing to understand the economy is Lewis Carroll’s ‘Alice in Wonderland’. Not as a book to replace all the books that can be found in the economics section of any library, but as a first text which to give a good grounding in all things economic. What any budding economist needs to know about the economy is that things are not as they appear.  Alice is able to get through a door for which she is to tall by drinking from a bottle labelled ‘drink me’. After drinking that she shrinks in size to such an extent she is now able to walk through the door. She can be both giant and of normal stature in Wonderland. Later in the book she meets the Cheshire cat, who not only can become invisible but is able to become visible in place other than that in which he first appeared.  What the good economist should do is to be prepared to surrender their belief in a world of common sense. Just as for Alice the rabbit hole is a portal to another world, so a public corporation can equally be a portal to a world in which strange behaviours predominate.

One good example of this strange new world of economics is the strange behaviour of Starbucks. I was puzzled when I read that Costa Coffee a British coffee shop chain was more profitable than Starbucks. Starbucks seemed to be everywhere and I could see no evidence from what I observed that the business was doing badly. Then on reading more I realised that is was yet another example of a company not wanting to earn profits. Yet all the textbooks state that all businesses are profit maximisers. Profits earned are subject to corporation tax, so companies will do all they can to minimise their profits and tax bills. This is usually done by having a head office located in a low tax country such as Eire and that head office then imposes such a high level of charges on the business (for services provided) that the profits are reduced to such  a low level that the company is either ceases to be liable for tax or it only has to pay a minimal amount.

However the process becomes stranger and stranger the more it is examined. Usually the ‘charges’ that are paid to the Head Office are through a chain of offshore companies remitted to the multinationals homeland. Yet the profits declared then are only small part of the companies income. Such companies sit on vast cash piles which are located in various tax havens. This cash pile increases the companies wealth and the price of its shares. Shareholders are in many cases happy to have a reduced dividend but a reduction more than balanced by an increase in the value of their shareholding. Banks recognise that the shares held in such as Starbucks, Apple. Google etc. are extremely valuable assets. They will then lend large sums of money to these people against the security offered by there shares. These loans which are rolled over from year to year and which can be increased in line with the increase in the value of these shares. Loans have the advantage of not being income and are therefore exempt from tax. Many shareholders are content to enjoy their income in this way. Although there are a significant number who would still want to enjoy a cash return from their investment.

There is a passage in ‘Alice in Wonderland’ where Alice comes across a group of the Red Queen’s servants painting white rose red. This because the Queen wanted red roses and they mistakenly planted white roses. They hope that the Queen won’t notice the red paint. Similarly there is the many thousands of financial advisers who role in life is to paint earned income as anything but earned income. Anything that is either not liable for tax or which is taxed lightly. Unlike the Red Queens gardeners they are very successful in that the tax authorities never see through the disguise.

Apple is described as the world’s largest business. Although they are  the company with the largest sales revenue are not necessarily the most profitable. Much of the profit earned is changed into something quite different, such as a charge to Head Office at least in all the European countries. What profit Apple declares is largely resting in some offshore tax haven beyond the reach of the US tax inspector.

What any economist needs to realise is that to understand the behaviour of multi-national companies,is that the economics textbook is of little use. The book describes the behaviour of an ideal and imagined company, not a real one.

I could go further and relate other features of the book to the real economy. There are frequent examples in the book of nonsense verse, such as the song of the Walrus and the Carpenter. What the economist needs to know is that in the real world economy there are plenty such similar examples. All too often when a company goes bankrupt it is usually one that has received a successful audit. The auditors seem unable to notice those gaping black holes in the company accounts. This is because they use a set of industry agreed accounting conventions when analysing the companies accounts, conventions that serve to conceal rather than reveal mismanagement and a shortage of funds. While company accounts are not nonsense verse, they are often intended to deceive as often as they are intended to reveal the true state of a company’s affairs.

Politicians come the nearest to uttering nonsense verse on the economy. They are found of uttering what seem to be profound mantras on matters of the economy, but which are in fact meaningless phrases. Phrases such as the country has ‘maxed out its credit card’ a phrase uttered by a politician, when his government was doing all it could to encourage a borrowing binge to kick start the economy back to life.

Why I recommend Lewis Carroll’s book for any budding economist is that it reveals to the reader a strange world that is and is not ours. It prepares for them recognising the unfamiliar and strange amongst the familiar and it is often the strange and unfamiliar that make seemingly inexplicable behaviour explicable. Conventional or bad economists are unable to see beyond the fog that is the received economic wisdom. This is why these economists were unable to see the financial crash of 2008 looming in front of them, when all the danger signals were showing red.


Why we need economists

Being a former social worker and state secondary school teacher I am used to belonging to a profession that is disparaged in the media. Now I find that being an economist means that I am subject to similar vilification. What made economists (or rather the good economist) so disparaged is that they tell inconvenient or awkward truths about the economy and society. When faced with such truths politicians and the powerful will resort to abuse to silence the truth tellers. What is remarkable is that we have a parliament dominated by graduates from our elite universities and yet they are in greater ignorance of the world around them, than the parliaments of the past! Parliaments that were mocked for having too many of trade unions and country squires, men supposedly lacking in education and knowledge of the world around them.

Having made this declaration I must now produce the evidence to defend my assertion. These awkward truths usually are warnings about coming troubles that politicians would prefer to ignore. When the great crash occurred in 2008/9 politicians claimed that it was a once in a lifetime event that could never have been predicted. An economic act of God. The truth is that all the warning signs were there and instead of acting on them politicians refused to act, as any action taken would have been cutting spending and that would have been unpopular with the electorate. There were two causes of this crash were the banks irresponsible lending policies, such as 125% mortgages. The other guilty party were the governments and central bankers who rather than regulating the market for the greater public good, preferred to turn a blind eye to the irresponsible behaviour of the bankers. Their justification for their inaction was the doctrine of neoliberal economics, which states that economic well being is maximised under the free market economic system.

I suspect that those trade unions and squires of the past would not have been so gullible, as they had a superior understanding of human nature. They from their dealings with bankers would have known that these men were not the giants of the financial world but men as fallible as themselves. These men would have recognised that greed for ever greater and greater financial rewards motivated these bankers.

Awkward truth warning – little has changed since 2008 bankers are still lending irresponsibly and the government is still turning a blind eye to such behaviours. One area of concern is car finance, it is suggested that car dealers in their desire to sell more and more cars are not paying sufficient attention to the ability of their customers to fund their repayments and the risk is that these buyers will default in the future on their loans. This will cause the defaulting customers to return their cars leaving the dealers with an unsold mountain of cars other hands. This would in itself be sufficient to cause another economic downturn. The banks who source the funds which enable the car dealers to offer generous financial terms to buyers, rather than offering a word of caution or refusing to increase there lending to the dealers just continue to shovel cash in their direction.  Other forms of bank lending such as to the property market suggest that bankers have not learnt the lessons of 2008 and unfortunately neither has the government.

As an economist you learn to read the runes, in my case as I have no access to government statistics, it is those short comments in the financial section in the newspapers that give the game away. In this case it was a short piece of no more than three or four lines. A financier was asked if the Bank of England was now cracking down on irresponsible lending to prevent a repeat of 2008/9. His answer was no, as the governor knew that if he reduced borrowing he would cause an economic slowdown, which would increase unemployment with all its associated problems. If I read the article correctly little has changed since 2008.

I also realise that the banks have fought tooth and nail to stop the governments of Europe and the USA to make them resilient in the event of any future crisis. British banks have successfully persuaded the government that reserves of 3% are sufficient to enable them to ride out any future crisis. European banks have even smaller reserves. These reserves are either cash or assets that can be easily turned into cash to meet the demand for cash from their customers. (A greater ratio of assets to lending would limit the money banks could lend and in consequence reduce their profitability.) The suggestion is that in an event of a repeat of the financial crisis of 2008 the banks will lack sufficient reserves of cash to enable them to meet their customers demands for money. In a crisis customers fearing the future will withdraw their savings from the bank, either because they doubt the loudness of the bank or they want money in hand to deal with any future crisis. It will only take one bank to close its door for a general panic to ensue with the consequence that the government yet again will have to step in to bail out the banks. If the banks held greater reserves as have happened in the past such temporary crisis could easily be resolved  The banks would have sufficient quantities of cash in reserve to be able to pay those panicking customers who wanted their money back. Once it was seen that the banks had plenty of money the panic would cease. However if banks have insufficient cash reserves the whole system is liable to collective failure. If only one bank has to close its door, because it cannot meet its customers demands for cash, the contagion will spread and there will be a major run on the banks. Yet again the government would have to rescue the banks from their follies of their own making.

However we tellers of awkward truths have a problem. We cannot predict exactly what will happen or  when. We are tellers of possibilities and probable truths and us such we can be easily discredited. Economist predicted that a vote to leave the EU would have a negative impact on the economy. Then when in the days after the Brexit vote, the economy failed to collapse the naysayers could claim that they were wrong and that the collective opinion of economists was worth no more than that of the collectivity of politicians. What these naysayers overlooked was  that the Governor of the Bank of England being all too aware of the negative impact of a Brexit vote took immediate action to offset its negative economic impact. He simply increased the amount of to the nations borrowers enabling them to go on spending spree which prevented the economy from taking a nose dive. What the naysayers don’t realise it that it is a crisis postponed  not as they believe an imaginary economic ghoul or nasty conjured up from the feverish imaginings of the economists.

There is one prominent economist or truth teller who has consistently, warned of the impending credit crisis but is consistently ignored by governments and that is Anne Pettifor. She is never called to sit on the committees that governments set up to advise them on matters economic, as they don’t want to hear her truths. She has written extensively about the impending first world debt crisis, yet like some unheard of  Old Testament prophet her writings remain in obscurity.

Our one weakness as economists is that we cannot say exactly when or how or what we predict will happen. Even more frustratingly we can be right but events prove us wrong. There are no economists that can accurately predict the future, we are the scientists of the possible or the perhaps. The economy is such a volatile and complex construct that sudden and unexpected changes can make fools of us. This is why a leading politician* can say with confidence  ‘we have had enough of experts’ (meaning economists) and be praised in the media for his sagacity and foresight.

Yet our awkward truth remains the economies of Western Europe and the USA are over indebted and not one government has taken any realistic debt reduction measures. The fact that Britain with Japan shares the unwanted title of the most indebted of developed countries has passed our politicians by. They will speak endlessly about the public sector or government indebtedness, but they are focusing on the mice in the room while ignoring the elephant that is private sector indebtedness. Prior to the crash of 2008 government debt was less then a tenth of private sector debt. While great pains have been taken to reduce government debt little has been done to reduce private sector indebtedness*. This indebtedness will possibly rise to unheard of levels as the Governor has said that he is relaxed about the possibility of banks increasing their assets to nine times the size of GDP. Banks assets are loans, so he is relaxed about the banks increasing the nations debt to nine times the total of its wealth!

*Michael Gove a prominent politician who campaigned for Britain to leave the EU

* A policy practice that is common to all Western European governments.

Why economists would benefit from a little Christian sensitivity

Why do economists need a Christian sensitivity? The obvious answer would be to instil in them a sense of compassion, while the suffering caused by economics does not compare to that caused by the most brutal of political ideologies it is on the same suffering causing spectrum. The spirit of the Reverend Malthus has always inspired economists and never more so than today. Population growth he believed would always tend to outstrip the resources needed to food, clothe etc. the ever growing population. Therefore his first conclusion was that there must always be the poor, as there was never sufficient wealth in any economy to enable all to have an adequate standard of living. He also saw disease, famine and war as the saviours of mankind as they kept the population within bounds. While economists particularly those in the British Treasury have persuaded politicians of the need for the first, they have not yet tried to persuade of the need for the second. There is another answer and that is economics is one of the best examples of arrested thinking, so common in contemporary Britain. What concerns me is the immaturity of thinking of contemporary economists, their overly simplistic reasoning.


The inspiration for my reasoning is Kierkegaard (Fear and Trembling), in that book he bemoans the practice of Christianity in 19th century Denmark. He writes that the Christian intelligentsia regarded an afternoons reading as sufficient to acquaint them with the essentials of Christianity. This he compares unfavourably with the Christian Fathers who spent a lifetime trying to understand Christianity and who even at the end of there life said their understanding was limited and flawed. Just like Kierkegaard’s Christian intelligentsia economists suffer from the same intellectual arrogance. They just know, they have at hand the answer to all society’s problems. The comment that the answer was worked out on the back of an envelope is intended as an insult but with economists as a statement, the truth of economics can be distilled down to a few sentences that could be written on the back of an envelope. The best metaphor that describes contemporary economics is that it arrested thinking that has never really progressed beyond that if the schoolboy. This school thinking is demonstrated in the words of the Shadow Chancellor, who spoke with glee when he said his cuts to public spending would leave the public sector reduced to its bleeding stumps. As with a schoolboy no thought of the consequences of his actions for the people of an austerity hit economy. Military terminology can be applied as for the modern economist the people are unfortunate collateral damage, who suffer for some greater good.

Economics unlike contemporary theology is a closed subject, the truths are already known and its the work of the economist to apply those known truths correctly in their analysis of any given problem. In a closed subject such as economics, no new thinking is needed because all the fundamental truths have been discovered, all that is required is some tinkering to achieve perfection. Theology by contrast is an open subject, all the truths are not known and those that are are but imperfectly known. It would be ridiculous for any theologian to claim to know the mind of God, yet Christianity has been a closed subject many times in the past, when it claimed this knowledge. It has an unfortunate past record of persecuting and killing those who did not accept the acknowledged truth. Galileo Galilee was silenced by the church for challenging the prevailing orthodoxy, that the earth was the centre of the earth, by the simple expedient of showing him the instruments of torture. Unlike my predecessors as a theologian I claim to know little about God, I am a negative theologian a theologian who admits that God is unknowable. However this does not mean negative theologians have no knowledge of God. They have knowledge of the presence of God in human society, the means by which the unknown makes themselves known. They can glimpse aspects of God’s nature and explain it to others. The aspect of God that I know is the good, the good that characterises all good actions. Good can never be explained except through good actions and as a Neo-Platonist I believe that within all these good actions, there runs an indefinable good. It is a good I know but whose essence I can never adequately explain. All I would claim is that I know something of God’s nature as in is known through the medium of human existence. I am looking through a very dark glass which obscures most of the truth, what a much better theologian than myself called the ‘cloud of unknowing’. What I do know is the limits of my knowledge. I only know a little of one aspect of God’s nature and I shall spent a lifetime trying to develop that understanding.This is unlike an economist who does know and they even know what forms of economics are in error, something I would never claim about other religions. To paraphrase Uriah Heep, I am ever so humble, whereas the good economist possesses the arrogance of truth.

A negative theologian such as myself is keenly aware of the limitations of their knowledge, whereas all economists are positive theologians, who are aware that they know everything and have little if anything to learn about the world. Whereas the truth is the opposite the theologians have spent centuries studying the nature of God and the few truths they know are greater than the imagined truth of economics. Economists have discovered one economic truth, the market and having achieved that they think they know all economics. What they need instead is the perspective of the negative theologian, which one of ignorance. The truths of theology are but a small part of the truths of Christianity, and therefore they are open to any approach that might shed new light on the ultimate truths. Economics needs similar enlightenment it needs to seek new ways to go beyond the few truths it has discovered. When doing a thousand piece jigsaw I always try to fit together first the pieces that make up the edge of the jigsaw and give it its shape. Having put together the outline it is tempting to think that the main task has been done, yet the jigsaw remains a hollow square, with most of the content missing. Economists are in the same position they have some awareness of the outline of the economy, but they are largely ignorant of its content. The pieces that make up the content are missing from the jigsaw economy. Only arrogance prevents them from seeing the truth. What economists lack is humility, if they acquired this very Christian virtue the practice of economics would improve immeasurably.