Tag Archives: EU

Fake Economics and the Great Shock Theory of Economics

This is the age of fake news it is also the age of fake economics. One such is the Big Bang or Great Shock theory of economics. It is the policy preference for those politicians that have a disdain for the facts. They have an impatience with the world of fact or reality as it does not fit with their view of the world. In a very prescient film ‘Who Shot `Liberty Valance’ , John Ford has one memorable line in the film in which the news editor states that ‘when the facts become legend, print the legend’. This very much describes today’s politicians who have a preference for their ‘legend’ or story over reality. One consistent and common story is that by administering some great shock to the economy they will shake it out of its torpor and kick start a new dynamic economic era.

Believers in fake economics or the story predominate in the politics of the Anglo Saxon world whether its in the form of Donald Trump or Theresa May. The latter believes the necessary shock treatment that will revive the UK economy is the leaving of the EU. Once firms are deprived of their cosy relationships with the European market, they will be forced to find new markets outside Europe (or go out of business). The necessity of finding new markets for their products will inject a new dynamism into business, so transforming British businesses into world beaters. Businesses will now put a premium on those leaders who are doers and the influx of doers into the top levels  of business will have this transformative effect. The proponents of this shock therapy do admit that some businesses will fail to adapt and have to close, but these failures will be more than made up for by the new enterprises that will replace the old failing businesses. However what the proponents of shock theory fail to admit is that the shock is as likely to kill as cure. Evidence from the past suggests whenever the government administers shock therapy to the UK economy it kills more than it cures.

The classic shock treatment occurred in 1981, when the government decided to introduce the reforms that are associated with Neo-Liberalism. The shock killed of 20% of UK manufacturing industry and unlike the theory suggests new businesses did not develop to replace them. One consequence is that the UK now has the largest trade deficit of any developed country (as a proportion of GDP). Good fortune has enabled the UK so far to escape the consequences of this folly, but that good fortune cannot last forever.

Much as in a John Ford movie legend has replaced fact. Politicians generally accept that despite the evidence to the contrary the 1980s were a success story. With such a complex institution as the economy it is always possible to find evidence for your own good story and even when there ar plenty of bad facts, as their existence can be conveniently ignored. Ignorance of the workings of the economy is so widespread amongst the political classes and the media that its easy to sell the fictitious ‘good story’.

One consistent story coming from the government is that British business can find new markets to replace those lost through leaving the EU. India is one of the most populous of Asian nations and it is home to one of the world’s fastest growing economies. This is claimed by government ministers to be one of the new markets British business can exploit.This year India has been the subject of two trade missions to India, one led by the Prime Minister and another by the Chancellor of the Exchequer.  What India requires from the UK is an easing of restrictions of Indian migrants coming to Britain and until that is granted it will not consider a new trade deal. This government has made its priority restricting immigration into the UK and this means that all those trade missions have been in vain. Until Britain makes some concessions on immigration, India will not open up its markets to UK business.

Trade deals with other nations are also fraught with problems that make any negotiations fruitless. Brazil and Argentina are the two largest economies in South America and as such should be a potential markets for UK exports. However there is one issue that prevents a new trade deal being negotiated. These two countries both have a large beef industry and would love to export beef to the UK. However in these two countries the cattle diseases such as foot and mouth are endemic. If the UK accepted imports of beef from these countries it would possibly be importing disease into the country. Then the UK would lose its status as possessing a disease free cattle industry. British beef farmers would then be prohibited from exporting their beef to such as the disease free countries of the European Union. The powerful UK farmers union would prevent such a trade deal, particularly as the governing party is the party of the largest of agricultural landowners. Economic realities mean this is yet another potential market that is closed to UK exporters.

However for the practitioner of fake economics none of this matters. When one of the most significant purveyors of false economics said that the public were tired of experts, what he meant was that they were tired of hearing the difficult truth. They like their political leaders want believe the easy to fictions of fake economics. What fake economics does convey is the false story that the political leaders of this and other countries know what they are doing and that they are making those policy decisions that will be of benefit to the economy and the people. Nobody wants the truth which is that our political leaders have only the vaguest grasp of economic realities and that are doing the equivalent of shooting in the dark.

There is one other great advantage of fake economics. When the train wreck of the great shock inevitably materialises the politicians can claim that is not their fault. They have done their bit in that they  have administered the correct medicine, the failure now is with the patient for not taking the medicine correctly. Business leaders and workers have failed to respond in the correct way, the failure lies with them, not with the government. When one of the major purposes of a policy is to transfer blame to some other party than the policy maker it is always going to be the wrong policy. Being unwilling to take responsibility for one’s actions suggests that at least sub consciously the policy maker knows that they are in the wrong.

A reply to Michael Gove and all those who think the study of economics is of little value

What prompted this post was a comment from a friend to whom I was talking to over coffee. He informed me, politely of course, that my opinion as an economist on economic matters was of little value as it was no better than the common sense opinion of the man in the street. I was as an economist a self interested individual who was only interested in advancing the truths of my subject regardless of the truths of the real world. This friend I should add was a distinguished retired academic from one of our most prestigious of universities. Without trying to sound too paranoid it does seem to be open season on economists. We are one of the most discreditable of professions it seems. Whatever we do we cannot distinguish truth from the fiction.

This discrediting of the profession of economics was set in train by Michael Gove, a former senior politician in the UK and now a columnist. He said in reference to economists in the EU referendum debate ‘that people were fed up of experts telling them what to do’.  He was referring to a Bank of England report which stated that leaving the EU would have a substantial negative impact on the British economy. A report that was considerably over egged by his opponent George Osborne to discredit the pro-leave campaign. Whatever Michael Gove’s reasons, his was essentially a statement of British philistinism something which never lurks too far below the surface in any public debate.

What I will do is accuse Michael Gove and all his like minded followers of hypocrisy. This I can sum up in the following phrase, ‘they are happy to have Barney the Bear managing the nations finances but not managing their own’. Michael Gove as a MP and journalist has an income of several hundreds of thousands a year. Although I don’t know him, I imagine he invests part of his income in various fund management schemes. He will no doubt have a financial adviser who recommends the best possible schemes in which to invest. These various investment funds will be managed by people who employ economists. Investment funds and banks of various kinds vie to employ the best and brightest economists who leave our universities. They employ these economists to inform them about matters economic and more importantly to predict future trends in the EU and world economy. Then with this information they are best informed as to where invest their clients money. Michael Gove would expect his fund managers to be the best informed of people, yet he believes that being well informed on economic affairs is not a necessary qualification for a politician who manages the economy. For him as with many of his colleagues all that is required is old fashioned British common sense for the post of Chancellor of the Exchequer. I imagine my friend who although he disparages me for being an economist, does defer to experts such as myself when it comes to investing his savings.

I should add that this nation has a habit of employing Barney the Bear to manage the nations finances. A knowledge of economics is not required of those who become Chancellor of the Exchequer. In the past these Barney Bears were well informed people who took advice from the economists employed by the Treasury before making any decision. Now these Barney’s are likely to be single minded ideologues who having read Hayek and Ayn Rand at university believe that they have acquired the essentials of economic knowledge. Any further that knowledge of economics is a mere ‘gilding of the lily’ and unnecessary for a successful career in politics.

Some economists who have contributed to this disparaging of the profession, through their own arrogance and overestimation of their abilities. These are those economists who can be best described as the ‘forever after economists.’ Just as in the children’s fairy tale where the participants will forever live in a state of happiness and bliss, these economists believe that if their economics is adopted the people will forever after live in a state of happiness and bliss. I can identify three such economists who fit this category, Friedrich Hayek, Milton Friedman and the novelist Ayn Rand. While the latter never called herself an economist, she is seen by many contemporary politicians as written the Bible of Economics. What these three people have in common is the failure to recognise that the economy is a human construct which is as fallible as its makers. By ignoring this most basic of truths they could claim that if politicians followed there prescriptions they would create the ‘best possible of all economies’. The very many failures of the economies in which their ideas have been adopted, has demonstrated that the falsity of their ideas.

What is lacking in Britain is any real understanding of the economist and their work? If I was asked to describe what I thought was the role of the economist, I would say it is the reading and interpreting of the economic runes. Reading the economy is much like reading the runes, although the individual symbols are understood  there is some uncertainty about the exact message conveyed by the runes. Uncertainty because a contemporary historian cannot exactly replicate the in themselves the thinking of the rune carver. All of us are aware the individual happenings in the economy, such as increases or reductions in unemployment, businesses closing and opening; but only a specialist in economics can put all these individual happenings into context and explain their meaning. Since economics as with rune reading is subject to some uncertainty individual interpretations can differ, although not usually to any significant extent. Economists after reading the economic runes largely agree that Brexit will have a negative impact on the economy, what they disagree about is how great will be the negative impact. There are always a minority of economists who will misread the economic runes and give a very different interpretation of the message. They should be given exactly the same credence that those very few scientists who deny the reality of global warning are given.

Michael Gove will seize on the fact that a minority disagree with the large majority to say that are no economic truths as economists disagree as to what they might be all they can do is to state their own opinion which may have more or less value.  However as with climate change denying scientists very compelling evidence can be produced to prove them wrong. Similarly there is compelling evidence to suggest that those economists claiming that Brexit will benefit the economy are wrong. What Michael Gove needs to understand is that knowledge, even some knowledge is better than none. Ignorance is never bliss even in politics

Warning signs

Sometimes as an economist you notice things that others don’t. Today I visited the centre of the city in which I live and for the second time this week, I noticed that the cafes and shops were relatively empty. One reason is the belt tightening that invariably happens after the Christmas shopping spree. The other reason is more ominous and that is that the uncertainty generated by fears about Brexit which are causing people to be more careful with there spending. In times of uncertainty it is sensible to be cautious about spending, it makes sense to increase one’s savings to protect against future uncertainties. All the extra spending on credit cards that was recorded last year will come to a halt once people start to fea the future. They won’t want to saddle themselves with extra debts.

While the evidence I present is only anecdotal this is how economic downturns start. Consumers become more and more cautious with their spending  because they fear for the future. This action becomes something of a self fulfilling prophecy as failing consumer spending means that firms cut back on there spending on staff and purchases of stock. Gradually at first but then more rapidly people become poorer, because of falling spending by businesses and the down turn in economic activity can  within a short time develop into a recession.

These downturns occur because of flaws in the economic system,  as happened with the financial crisis of 2008/9 or because of misguided economic policy making. The second is happening now. There should be a golden rule in politics, that governments never take action that might be detrimental to economic welfare except in the most extreme circumstances. The problem about such actions is that there is no way of foretelling whether the action taken by the government will lead to an uncontrollable downturn in economic activity or whether it will result in a more modest adjustment.

There is a terrible warning that all politicians regularly fail to heed. When the Prime Minister Jim Callaghan returned to the country in 1976 from an overseas trip, there was a crisis developing in the financial markets. He made a foolish remark in response to a journalists question about the crisis, he said ‘what crisis?’ This gave the impression that the government was not in control and the financial crisis rapidly got out of hand.

Yesterday the Prime Minister Theresa May had her Jim Callaghan moment. She stated that Britain will be leaving the single market, giving the impression to informed observers that she had little grasp of economics. The EU is the largest market for British exports and announcing that she intends to make it more difficult for British firms to access that market, is an act of supreme folly. Today two banks announced in response to her speech that they are moving some banking operations to Europe. There will be many more such announcements in the following weeks and months. This will generate fear and uncertainty amongst British consumers, leading to large cuts in there spending, as they save more and more for the expected rainy day. The consequence is that it likely that later this year  that the economy will tip into recession.

Unfortunately the folly of her decision is compounded by the school boy howlers  made by her ministers. Today the Foreign Secretary compared the attitude of the French President to Brexit to that of a Second World War prison camp guard. Such remarks will merely serve to convince the financial markets that this government has little understanding of the economic reality and has but a very weak grasp  of the essentials of policy making.

As I said in the second paragraph my evidence is anecdotal but the incompetence of this government makes me fear for the future.