Tag Archives: European Union

My missing medicine and Brexit

Yesterday I was confronted by the reality of what will be the post Brexit world. I went to the pharmacist to collect my prescribed medication for treating my high blood pressure. Instead of the expected two packets of pills I received one. The pharmacist said that I should come back in two weeks for the other packet as there were problems with the supply of this drug. When I asked why there was a problem he sad it was the manufacturer, what he suggested was that they were not producing this drug at the moment. This I found very surprising as it’s a very common drug for which there is a constant and high demand. Then I realised its Brexit, we are not beginning to enter the world in which the essentials are in short supply.

One obvious problem it appears is capacity. Uncertainty about the future has discouraged business investment. (Something that in more honest times was termed an investment strike.) I assume that the pharmaceutical company was unwilling to invest in new machinery has they felt little confidence about the prospects for the economy in the future. Politicians are unable to offer any clarity what will be the post Brexit settlement. Correctly businesses assume that confusion amongst the political leadership as to what Brexit means and how negotiations should be conducted means that post Brexit Britain will be an economic mess. Why invest in expensive new machinery if the manufacturer believes the future is bleak. Therefore what prevails in industry is a culture of make do and mend. Under such circumstances there will be recurrent shortages of supply.

This suggests many possibilities such as that one of the machines making this drug has suffered a breakdown and the manufacturer is waiting for the necessary part to repair the machine. The past will probably be coming from abroad as the British machine tool industry has shrunk so much that it is unlikely that there is a British company making the required part. Obviously if the key part is being imported this will add to the delay. Although it is more likely that the manufacturer has delayed the costly repair work and is content to let stocks run down, hoping that when that point is reached economic circumstances are more propitiate and then they will feel the outlay on repairs is justified. One frightening alternative is that the manufacturer of this drug has decided not to manufacture it any more as it takes a gloomy view of the future economic prospects.

In such lean times as the present it is quite possible that the manufacturer has shut down one production line to keep costs down. If the drug that I use offers only a low profit margin to the manufacturer, it will be one of the first to be shut down. If a number of such drug manufacturers take the same attitude a shortage of this drug will soon develop.

There is one further complicated factor, all businesses now operate a just in time policy. This means that they only have enough stock in hand to met immediate demand. Keeping large stocks is expensive and cost conscious firms prefer to keep the minimum stock in hand. When the economic future is so uncertain these just in time stocks will be reduced to the barest possible minimum to reduce costs. If all firms are doing the same shortages will develop and pharmacists will be forced to shop around to find the drugs they need. The pharmacy that I use is part of a large chain and it is quite likely that they also are minimising their costs by holding a minimum of stock in there warehouses. What this means is shortages and delays in obtaining medicine are going to become more common.

When the railways were privatised in Britain it was so poorly managed that Britain became a case study for economists in how not to privatise a transport service. Similarly Brexit will provide a case study for economists as to how a successful economy was turned into a basketcase through the mistaken actions of a group of incompetent politicians.

 

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The nonsense politicians speak on economic matters (a decoding of politician’s economic speak)

What people don’t realise is that when politicians speak on economic policy matters, they don’t really know what they are talking about, its just a glorious pretence of a speech. Their speeches are usually peppered with phrases supplied by their speech writers to create the impression that speaker is knows what they are talking about. Often this is done through the spurious use of statistics and handy method of knowing when a politician is pretending to a knowledge they lack is the number of times they refer to statistical evidence in their speech. The more statistics in a speech the more likely the politician is totally ignorant of the issue they are discussing. Politicians differ from economists in that economists know that they know something about the economy but the not everything and the speech of a good economist is cautious. Economists don’t wish to claim a knowledge they lack, whereas a politician would never admit to their ignorance.  Their sense of amour propre would never allow them to appear as lacking in knowledge. They are the solvers of mankind’s problems and unlike the common run of mankind they never admit to any failings.

What I hope to do is this essay is reveal some of the real thinking that underlines much of policy making.

The most common policy is  the ‘wishful thinking’ economic policy. This policy making is usually to be associated with the new right, although the new left can also be guilty of the same. Wishful thinking policy making is based on a wilful ignorance of economic realities or to put it more succinctly a wishing away the facts of economic life. Of all the developed countries Britain has the largest trade deficit as a proportion of national GDP. The simplest and most correct explanation is that the country is no longer producing the goods and services that other countries want. The solution would usually be to develop an industrial strategy that encouraged businesses to focus on producing those very goods and services that other countries want. This is wrong according the EU leavers as what is preventing our exports abroad is EU regulations, which prevents us exporting to countries outside the EU. However there is nothing in EU regulations that prevents the UK exporting to any country in the world. This analysis would only have any validity if there are as yet undiscovered countries to which the UK can export, as all the known and existing countries are already free to buy our goods if they want them.

Another common form of economic policy making in the UK, is that it will be all right on the day policy. This thinking can be summed up in a few words, in the past many serious crisis which have occurred and yet the nation rose to the occasion and survived relatively unscathed. If it had not we would not be enjoying the level of prosperity that we do today. Why look for trouble when it can be avoided. Mrs May’s government will not put into practice any serious measures to prepare the economy for Brexit, as there is the belief that the country which managed the 1940s existential crisis  will somehow manage the 2020s EU exit quite comfortably. Complacency might be another word to characterise this policy. The Chancellor’ claim that his was a budget that prepares for Brexit will be shown be meaningless. No action is proposed to counter any negative impacts of Brexit and the so called reserve to cushion the economy through Brexit will be shown to be largely a figment of the Chancellor’s imagining. Another phrase to describe this type of policy making would be hoping for the best policy making.

Big gesture little action the policy making of fear, the fear that any policy introduced could make things worse. Nothing scares a politician more that being blamed for a bad policy. To be fair to politicians rather than do nothing, they do tend to produce distractors which are small easy to make policy changes, which function to distract from the real problem. This is why the budget is always about small changes in tax and never about big policy measures to tackle the real problems afflicting the nation’s economy.

Elephant in the room economics (very similar to the previous policy), this is when the politician ignores the real problem and instead focuses on a smaller less significant problem which they believe will focus attention away from the major problem. The annual budget statement is a conjuring trick in which the government produces lots of small policy measures that capture the attention and distract from unpleasant reality. The one great problem of today is the growing level of household debt which reached the level of 160% of GDP prior to the crash of 2008 and is today nearing the same levels. Rather than take action to reduce this debt which would in effect make people poorer and be very unpopular, the government prefers to do nothing. It is sleep walking into yet another financial crisis, a policy which also has the advantage of postponing the coming crisis into the future and making it the responsibility of a future government.

I could make this an endless list but my intention is to introduce some scepticism about the grand policy claims of our political leaders on matters economic. There was a famous American journalist Louis Heron, who said his approach to interviewing politicians, was to think ‘why is this lying bastard lying to me’. This `i would rephrase as why is this ignorant bastard trying to pretend to me that they know what they are doing.

Why economics fails

There is it seems a present a desire to doubt the validity of economics and the skills of its practitioners.  Just yesterday there was Chief Economist at the Bank of England issuing a mea culpa on behalf of the profession, in which he apologised for his and their failings and said that economists must do better in the future. He is just another ‘failing expert’, as Michael Gove would have said. When Michael Gove said in the EU referendum debate that the people were fed up with experts and were best of without them, one assumes that he was speaking about economists. However Michael Gove as with many politicians is adept at deflecting the blame for their own mistakes on to others. Politicians are those in charge and they make the decisions on matters of economic policy and not the economists. Yet whatever failures of government policy that occurred in the period 2010 to 2016, Michael Gove and his colleagues will never put there hands up and accept their share of the blame. Politicians such as him have a list of scapegoats to use to disguise their failings and another such favourite is the  EU. Teresa May’s disparaging comments about citizens of the world being citizens of nowhere can be paraphrased to describe contemporary government ministers, they are the ‘ministers of nothing’ knowing and caring little about their departments. Just sitting out their ministerial brief waiting for an upgrade to a more high profile ministry.

While it is the politicians that have been responsible for the disasters of recent policy making, economists still share some of the responsibility, in that they have encouraged politicians to develop an almost papal like sense of infallibility. Neo-liberal or free market economists claimed in the decade 1970-80 to have discovered the holy grail of economic policy making. They claimed that at the heart of any economy there was a self regulating market which when left to itself produces the best results for all. This market mechanism was capable of outthinking any politician. If  left to itself it would settle on the natural equilibrium levels of growth, employment and inflation, which would in turn mean society would enjoy a level of prosperity that it would otherwise never achieved if the economy had been managed by politicians. All the politicians had to do was to create the optimum conditions in which to enable the market to work unhindered, which was quite simply a bonfire of regulations. They can maintain an Olympian disdain knowing that they know  the answers to everything and have to hand the one key policy measure, impose the free market on the seemingly intractable problem.

One thought  that never occurred to these politicians or economists is fallibility of human thought, never in history has mankind ever succeeded in creating the perfect social organism. They seem to have forgotten such schemes are referred to as utopian in the history books, because they are always hopelessly impracticable.

What cannot be said is that there were no warning signs. When with great enthusiasm the Conservative government of the 1980s followed the policy prescriptions of Milton Friedman, failing to notice that his major policy prescription was unworkable. He said that the government should be regulate the economy through control of the money supply. Unfortunately he had not done his homework, as in practice it proved impossible to define what exactly was money supply. The Bank of England came up with at least five possible descriptions of money supply. There preferred choice was description number 3, what was known as M3. The only reason for choosing M3 was that it was easier to calculate than the other possible choices. Then having settled on M3, they realised that it would be extremely difficult to devise ways of controlling this money supply. All possible solutions would involve interfering in how the banks managed their finances. Instead the government opted for controlling by money supply by controlling demand for money. If they changed interest rates this would either or lower the price at which people could borrow, so if they put up interest rates people would borrow less and the amount of money (bank deposits) in circulation would fall. Never once did it occur to the government that controlling interest rates was not the same as controlling the money supply. Interest rate changes could change the supply of money held but it was a very indirect and imprecise control. Unlike what Milton Friedman desired what the government used as a very rough and ready measure to control money.

Politicians were obvious to the problems of implementing this policy, is it because the economics of the time was encouraging them not to think and question. They cannot claim not to have any warnings of the volatility of the free market as there were many financial crashes from the period 1979 to 2008.Yet these politicians believing they possessed the holy grail of policy making were  able the collapse of the Asian tiger economies or the dot com crash.  In consequence the great financial crash of 2008 which should have been foreseeable became the catastrophe that came out of nowhere, a veritable economic tsunami.

What economists should also be blamed for is there willingness to overstate their abilities and knowledge of all things economic..The economy is one of the most complex of mechanisms developed by mankind and yet economists all to often suggest that they really do know, when they don’t. I as an economist take my lead from Socrates. The oracle at Delphi told him that he was the wisest of men, yet this was a man who claimed to know nothing. Was not the oracle stating that Socrates was wise because he was the only man prepared to acknowledge his ignorance? I always wished that as a teacher I had told my students that I really knew nothing about economics. Yet as an economist I know a thousand times more things about the economy that any politician. What I see Socrates as saying is not that he lacks knowledge but answers. He was I believe using his ignorance as ploy to unsettle  his rivals, as a reading of any of Plato’s dialogues does demonstrate that Socrates knew quite a lot. Any economist when faced with a problem should be prepared to state his ignorance, as with a rapidly evolving and every changing economy, yesterdays’ knowledge is never sufficient to provide today’s answers. As  an economist what I possess is a knowledge of problems that have occurred in the past which appear to have some similarities with the problem at hand. Using that knowledge I could suggest a variety of policy solutions and recommend that which I think would be most effective. However I know that in what is an ever changing economy events may happen to make my policy recommendations ineffective. Humility should be part of the economists weaponry. I know that I can’t give Michael Gove the definitive answer he craves, the world is much more complex than the one viewed from Westminster or his newspaper column. I do know that my answers are better than his on all matters economic, as some knowledge of the economy and its workings are always better than none.

The last word I leave to Erasmus, ‘only a fool boasts of their ignorance’ or should it be ‘that only a fool takes pride in their ignorance’. A faulty memory prevents me recalling Erasmus’s exact words.

Xenophobic and racist behaviours as understood by an economist

Neo-Liberalism or the practice of free market economics is claimed to be responsible for the decline in living standards, but it is not usually blamed for the decline in public behaviours. In the UK ever since the vote to leave the EU there has been an increase in racism and xenophobic behaviours. (A policy decision desired by NeoLiberal and Libertarian politicians.) What I want to suggest is that the adoption by Western European governments of Neoliberalism and in particular by Britain, has been one of the main contributory factors in the increase in racism and xenophobic behaviours.

One of the great economists but who is rarely read today gives an insight into the processes by which the practice of Neo-Liberalism gives rise to anti social behaviours. This economist is Micheal Polanyi and any reader of his book ‘The Great Transformation’ on reading the first chapter would think that he is describing today’s society, whereas in fact he is describing that of the 1930s. The great insight that he reveals in this book is that the unregulated free market is destructive of social order. He demonstrates that this was a fact known to rulers in the past who insisted on regulating the market to minimise its most destructive effects. Although he does not quote this particular example, the biblical story of Joseph shows that the Pharaohs of Ancient Egypt were all to well aware of the destructive effects of an unregulated market. Joseph interprets Pharaoh’s dream to as a warning that there will be seven years of plenty followed by seven years of famine. Then Joseph and the Pharaoh store grain during the good seven years to distribute to the people in the years of need. The Pharaoh’s understood the importance of controlling the market, they knew that food shortages and their exploitation by the merchants who took the exploit the situation to raise prices for the scarce  supplies of food could lead to food riots and possible threats to the rule. A careful reading of folk tales shows that good rulers regularly opened the warehouses of the greedy merchants to the hungry people.

Evidence seems to suggest that the great Greek dynasties of the era of the Trojan wars and Agamenon, were overthrown by internal revolt. One possible cause is the shortage of food caused by adverse climatic changes, a problem worsened a self indulgent aristocratic elite failing alleviate the hunger of the poor and preferring to spend the wealth of their society on conspicuous consumption by creating ever grander palaces.

When reading Polanyi’s book I noted uncanny resemblances between the England of today and that of the 18th century. He writes about the plight of the workers in the cottage based textile industry, as they lost work and income to the large cotton manufacturers who employed the latest technology in weaving and spinning. These people were reduced to a life of misery, having to rely upon handouts from the parish  to feed their families. Their contemporary counterparts are those workers in the so called ‘gig economy’. The development of the mobile phone has made it possible employers no longer to have workers on site or in situ, as its possible to call them in for work when they are needed. No longer does business have to keep a large staff team on site to deal with those busy periods, instead they can be called in when needed.

These workers are also disadvantaged by the lack of employment protection legislation, as ever since the Neo-Liberal revolution of the 1980s, successive governments whether of the centre right or left have seen as it as their task to remove as many as possible of the labour protection measures. These measures it was believed hampered the efficient operation of the labour market. What this legislation did was to leave the worker increasing defenceless against the actions of the exploitative employer. The gig economy is made possible by two things, the mobile phone and the lack of legislation to protect the rights of the worker.

Not surprisingly this was paralleled in the 18th century when legislation removed workers access to common land. Prior to the 18th century workers in the countryside had access to the common land on which they could keep cattle and raise crops. This meant that in time of hardship they could rely upon this as a source of income and food for their family. These people were often the workers in the cottage based textile industry, who when trade was bad could rely on the produce from the common land to keep the family fed. A series of enclosure acts deprived rural residents of their rights to common land. When the collapse of the home based textile industry happened these people were deprived of two sources of income and reduced to abject misery. (These hungry and desperate people were the workforce of the new textile mills willing to endure the most dreadful of working conditions as the alternative was going without.).

When society falls to deliver people look to alternatives. In the 18th century  it was to France where the  revolution had otherthrown the old exploitative landlord class and promised a fairer society. In England many revolutionary societies were formed and the aristocratic government was in constant fear of revolution. They were only able to suppress the revolutionary instincts of the poor through repression and through a system of regional handouts (the Speenhamland system) which prevented workers being reduced to that state of despair that would make them resort to dangerous measures. The Speenlandham system was not unlike our current tax credits system.

The depressed poor not only turned to thoughts of revolution, but also to xenophobia. There is the story of the monkey that was cast ashore from a shipwreck in Yorkshire. This unfortunate monkey was then hung as a French spy. Whatever the truth of this story xenophobia thrives when people are in need and society appears to be failing them. They look for scapegoats to blame for their misery, then it was the French, now its immigrants. When resources such as housing are scarce, its easy to see it as being caused by the foreigner who has taken the house that by rights should have gone to a native born citizen. Politicians have used this xenophobia as a means of winning popular support. They have constantly used the EU as a convenient scapegoat to blame for the nations economic and social ills, ills which were often of there making and so it was no surprise that when people were given a choice they would opt to leave the EU.

Now there is a situation in which a government refuses to acknowledge its culpability for the increasingly dire economic circumstances, and instead relies on scapegoating the other (the foreigner) to distract from its failures of governance. It has boxed itself into a corner and now the only policy measure that it can offer to alleviate the misery of the people is the limiting of  immigration.They promise that no longer will the European immigrant take the council house or job that should have gone to the native born Englishman or woman. What they fail to realise or the brightest and most cynical politicians fail acknowledge, is that their anti immigrant policies will make the situation much worse for the so called ‘just managing class’. Even when the negative effects of abandoning the EU become apparent the politicians will be unable to acknowledge there policies are failing. What instead they will do is to to adopt more and more extremist language to disguise their policy failings. Economic decline will be blamed on those opponents of Brexit who have talked down the economy. Already one Conservative party councillor has suggested that the people and politicians that oppose Brexit should be charged with treason. The only hope for a xenophobic government is to turn up the volume of abuse directed at their opponents in the expectation of silencing them. This of course is the policy pursued by the current government, when any reasoned criticism of Brexit is answered with abuse. The opponents are the ‘Bremoaners’ or whatever catchy phrase of abuse that they can conjure up.

When the government’s sole claim to legitimacy is that it embodies the xenophobic instincts of the people, it language will be that which both implicitly and explicitly gives sanction to racist and xenophobic behaviours. The government will not act effectively to discourage such behaviours or to  condemn them without fear of alienating its most xenophobic supporters. Next year when the negotiations start in earnest and the impact of the uncertainty accompanying those negotiations will cause increasing unemployment, increasing inflation and falling house prices, what can be expected is an increase in the abuse directed at those who dare to suggest that these are a consequence of Brexit. Incidences of racism will increase as the government’s abusive language towards its opponents will seem to give a green light to their extreme behaviours. A government that suggests the actions of its opponents is bordering on the treason will be seen to sanction violent racist actions, as they can be described helping the government cleanse the nation of that element that is responsible for the ills that beset society.

The Demise of the Liberal Democratic State and the rise of the Corporate State

Francis Fukuyama was wrong the 1990s did not herald the triumph of liberal democracy, but its showy demise. George Bush’s attempt to impose democracy on Iraq by force demonstrated the folly of this premise. Even the democratic programme that he sketched out gave a dominant role to the business corporations that would effectively control the new Iraq. Giving lie the all the claims about remaking Iraq on democratic lines. Prior to the invasion there was a quarrel between two of the main participants in the invasion over the distribution of the spoils  between the victors. British oil companies believed that the post invasion constitution gave too much to American and too little to British oil companies. The chaos of the post invasion Iraq denied the business corporations the influence and income they expected. Although the part of the profitable oil industry that is not under the control of Isis, is run by American oil corporations.

  
Perhaps it is in Europe that the evidence of the new nation state is best demonstrated. What is developing in Europe is a new corporate state, a state which functions primarily for the benefit of the business corporations? The financial crisis of 2008/9 illustrates this all too clearly. Due to irresponsible lending practices the banks failed, even if only a few crashed all threatened by the crash. Rather than let the banks fail the governments of Europe injected cash into the banks to prevent them failing. In Britain the bailout was equivalent to 10% of GDP, although given the huge size of the banking deficit the government was effectively mortgaging the countries assets and wealth to save the banks. It was not the banks that had to pay the price of their failure but the peoples of Europe. Europe wide austerity was regarded as necessary to reassure the banks creditors of the financial worthiness of the nations that were the guarantors  of their debts. A government with small debts would be regarded as a better guarantor of the banks credit than one with large debts. Surprisingly the banks got of almost scot free apart from a demand that they increase their cash reserves to 3% of total liabilities and ring fence retail banking, on which the banks are stalling. The Banks are now asking for the government eforms of an increasingly dysfunctional financial sector. In response to the pleas of the banks the demand to increase their cash reserves to their required total has been constantly put back, nowhere more so than in continental Europe. Despite claiming a government of financial prudence Germany has been one of the worst offenders. Only the other week the government in Britain refused to renew the contract of the chief executive of the Financial Conduct Authority as the banks had accused him of being to hard on them. In Britain as in Europe, what the banks want the banks get.

There are many serious problems that the government in Britain needs to tackle but one of them is not the reform of the state funded broadcaster the BBC. The agreement under which the BBC is funded is up for renewal soon and the government has used this as an opportunity for root and branch reform of the broadcaster. One of the main backers of the winning Conservative party was News International, the largest shareholder in Sky TV. The directors of this company has long argued for a change in the nature of the BBC, a change that would make it less of a competitor to Sky News. Its former Chief Executive James Murdoch argued for a change that would benefit Sky TV. He said in a lecture that the BBC  had a role as an innovative producer of TV programmes but it was not its role to exploit those innovative programmes. Once those programmes had been developed they should be given to the commercial broadcasters as the role of the BBC was to experiment not create popular TV. Unsurprisingly the main conservative spokesman on the media has echoed these views. He wants to end the BBC’s role of producer of popular programmes that compete with those of Sky TV. There is little doubt that one of the priorities of this government is to repay its corporate sponsors with favours.

Rather than continue with list of items that illustrate the increasing corporatisation of Britain, I want to compare the British governmental system to that of Russia. The Russian system of governance is often referred to as a mafia run oligarchy. All these commentators that do so fail to recognise the similarities between the Russian and British system of governance. Probably the only difference is in the level of criminality of the oligarchs in each country.

When the Soviet Union collapsed in 1990 the reformers in charge of the country wanted to adopt the free market of the West, so as to enjoy a similar level of prosperity. However they rushed into privatising their stated owned industries, without realising that the free market economies of the West were only successful because the market operated within a strong legal system that prevented the many abuses that occur in an unregulated market. Given what was literally a ground zero, the oligarchs were able to remake the Soviet economy to their own liking. They bought up the businesses at bargain prices and controlled the various sectors of economy, however for complete control they required control of the governmental system. This they achieved through bribery, intimidation and violence. Now President Putin runs a collective oligarchy, an oligarchy that exploits Russia wealth largely for its own ends. Opposition to the oligarchy is suppressed in ways similar to the former communist system, critics are subject to intimidation, often including violent assaults, and if that fails they are sent either to a mental asylum or camp where the mistreatment continues.

The oligarchs in Britain and Russia believe in a similar free market system, that is a free market in any obstacle to the free operation of business enterprise is removed. Obstacles such as trade unions, labour protection legislation and government interference. In Russia there was little too prevent the rise of the oligarch as in a ground zero economy (one in from which the state was largely absent) there could be no effective opposition and by controlling the government they can ensure that none arises. The task for the British oligarchs was much harder they had to create a society that was favourable to the free market (as they saw it). This meant they had to capture government and ensure that it introduced measures to remove all the obstacles to the smooth running of the market. Chief of these is the trade union movement and not surprisingly one of the first measures of this new corporate friendly government is legislation to further emasculate the trade union movement, so as to ensure that it cannot interfere with the smooth running of the market. The proposed legislation will effectively prevent trade unions from striking, so removing the  threat they pose to employers.

There is however one significant difference between Russia and Britain. Elections in the former are largely controlled by the state and there is never any likelihood that the opposition can come to power. In Britain elections are open and fair and the opposition can become the government. However the two main political parties are coming to resemble each other, when the opposition criticises a government policy, it is not so likely that they disagree with the policy as believing that they could implement it better. Increasingly the two main parties are becoming the mirror image of each other, but are committed to the philosophy of Neo-Liberalism. Unfortunately elections are increasingly becoming a competition between the groups  competing to be the representative of corporate Britain. One of the main concerns voiced by competitors for the leadership of the opposition party is that the previous leader was too distant from the corporate interest. Unfortunately too many politicians now see politics means to win a seat on the board.

The recent history of the Greek crisis shows how dominant is the corporate interest in Europe. When the Greek crisis caused by the nations over indebtedness occurred, the European policy makers could have agreed to a restricting of the Greek debt. This restructuring would have either involved pushing debt repayments in some time in the distant future or forcing the nation’s creditor to take a ‘hair cut,’ that is force them to accept a downsizing of the Greek debt. Either of these policies would have hurt the corporate interest, that is the banks would have lost billions of Euros in the ‘write down’ of the loans that they had made to Greece.  Instead the European politicians forced on to the Greek government a programme Neo-Liberal market reforms. These policies were intended to make the Greek economy more competitive and boost exports. The surplus earned on the export trade could be used to pay of the Greek debts. Unfortunately this Neo-Liberal experiment failed and after five years of austerity, economic growth has stalled and GDP is down 25% making it increasingly unlikely the debt will be paid.The International Monetary Fund states that payments on Greek debts should be deferred for thirty years, as only then will the economy have grown sufficiently to enable the Greeks to begin to pay off their debt.  Despite the urging of the USA the European politicians stubbornly support the banks cause and refuse to allow the Greek nation any debt relief.

Quite possibly the triumph of the corporate state is best demonstrated by the proposed Trans-Atlantic Trade and Investment Programme (TTIP). When this treaty comes into force any business corporation that believes government policies have caused it a loss, can refer their case to an international arbitration panel. This means that if government legislation aimed at limiting the harmful effects of tobacco restricts the sale of this product, the tobacco company can go to the panel asking for compensation or a revoking of the act. There is one such dispute between a South American company and an American Tobacco giant. Soon such actions will become common place  and the sovereignty of European governments will be undermined. In Britain at least too many politicians are in favour of this policy, as they believe their support for TTIP will earn that a well paid position with one of the business corporations, they will willing surrender power for cash.

There is one failing of the corporate state and that it is remarkably incompetent, in that it lacks the competence to deal with a major crisis. The banks only survived the crisis of 2008/9 because they were supported by the government. There will be other such financial crisis in which business corporations will only survive with the support of government. There is in Europe the unresolved debt crisis, not the one of popular imagination but the combined private sector banking debt. A debt that in Britain exceeds 400% of GDP and in Germany 324% of GDP.

These business corporations have only a narrow minded view of the world a view one that is focused on their own self interest. The banks in Britain have been campaigning successfully for an end to restrictions on their less desirabale activities and the government has complied. It has largely passed unnoticed but at a recent City of London banquet the governor of ‘The Bank of England,’ said he saw no reason why banks should not be allowed to increase their assets to 900% of GDP.  The majority of a banks assets are loans which are funded by borrowing from others, so if Mark Carney has his way the debts of British banks will rise to astronomic levels. There will at some time be a crash that in scope will exceed that of 2008/9. A crash of these dimensions would force  a collapse of the corporate state as the government will be no only body with the authority and power to avert the collapse and rebuild the damaged society. One economist Anne Pettifor has written a book called ‘The First Word Debt’ crisis, a book which is ignored by all European politicians. Rather than act on the basis of the precautionary principle, the European politicians seem to act on t’he eyes firmly shut’ principle.

All political systems contain within themselves the seeds of destruction, in the social democratic society of the past it was the conflict between the major business corporations and society. A conflict that the former won. The corporate state is more unstable than other political systems as there is no great vision or commonality of view that unites the community of business corporations. The only commonality is their hostility to any regulation of the free market and in reality they are a number of social units all pursuing their own self interest. This means that the corporate society lacks the strong mechanism for directing society to towards a greater end other than mere self interest, lacking this overarching powerful body, society can only fall apart in the event of being struck by an economic or social tsunami.

The great floods that devastated New Orleans demonstrate how the new corporate state fails to cope with  crisis. Cuts made to the emergency and environmental services made at the behest of a business dominated tax cutting government had left these services unable to respond adequately to the floods and their inaction prior to the flooding worsened the devastation. The levies that protected the town were in a state of disrepair and unable to resist the tidal surge and broke. All the world could do was watch in horror as the American government failed to halt the destruction of New Orleans.

The failure to resolve the Greek crisis points to a future crisis in Europe. Greece is but a small country accounting for but 3% of the European Union’s GDP, yet the European Union struggles to find a solution to its problems. It’s only success is in replacing the various democratically elected governments that are hostile to its austerity programme. Greece only rid itself of the military junta popularly known as the Greek colonels in 1974. The Greek army is the one institution that has not been devastated by the Neo-Liberal reforms imposed by the EU  and it may be the only body that is capable of eventually restoring social order after the havoc caused by the latest austerity and reform programme. Possibly this is the future for us all as the failures of the Neo-Liberal or corporatist state can only result in its replacement by authoritarian state supported by the military. The pro business agenda so having hollowed out the democratic state its institutions lack the resources to respond to a major crisis. This is demonstrated by the financial crash of 2008, the Chancellor of the time commented in a newspaper article that the crash was imminent. Yet despite this knowledge the government and Treasury were incapable of taking any action to avoid the crash, much like a rabbit that is frozen by fear when faced with the headlights of an oncoming car.

Greece and the Sceptical Economist

Three kinds of economics

http://www.neuerope.eu

From a glance at the media it would seem that there is only one economics, usually what is now termed free market or Neo-Liberal economics. People are familiar with the mantras of these economists whether it spoken by them or a politician. Mantras such as a country must live within its means and it must reduce its debts to a sustainable level as is constantly repeated in the debate on Greece. However economics can be divided into three separate schools, Neo-Liberal economics being but the most dominant strand in but one school of economics. What ever school economists belong to will determine their approach to the crisis such as that in the Eurozone and Greece?

Neo-Liberal economics derives from the school of economics that sees the economy as an integrated system that when working well maximises the welfare of all. Economists from this school will see their role as to explain how the system works and how to make it work better. Changes such as removing restrictions or impediments that prevent the free market from working at its optimum. This has lead to the emasculation of trade unions and worker protections,as each are seen as an impediment to the smooth working of the free labour market. A loss it is believed that will be offset by higher incomes the now more efficient workforce. Ideally there should be no restrictions on how and where individuals choose to work and how employers choose to use them.

There are other schools of economics within this school that sees the economy as an integrated social system that can be made to work for the benefit of all. Although disregarded by policy makers today, they are the Keynesian economists who believe that through intelligent government intervention the economy can be made to work for the benefit of all. Their concern is ameliorating the damaging effects of the trade cycle, that is the economy goes through a repeated series of bans and busts. In the upswing period they are determined to stop the worst effects of the boom,  which is inflation, by regulating credit; similarly they wish to avoid the worst effects of a recession which is unemployment by using various measures such as increasing public spending to stimulate economic recovery. This school is anathema to the Neo-Liberals who believe that any government intervention in the economy can only have a malign effect.

Next there are a group of economists who see the economy as working for only one privileged group and merely providing the majority with the means of survival. These are the Marxist economists of whom there are few today. At the core of Marxist economics is the labour theory of value. This theory at its simplest states that it is labour that in the production process that adds value to the product, but that added value is skimmed off by their employers the bourgeoise. This group take a disproportionate share of the added value (profit) leaving the worker with only the minimal means of income. Marxist economists advocate measures to reduce or eliminate the power of the bourgeoise to take a disproportionate share of national income to achieve a more equitable sharing of that income.

There is a third school of economics of which I am a member, we are probably the smallest of all the economic schools. These are the sceptical economists who believe that seeing the economy as an integrated social system that works as fallacious. (I use the term sceptic after the sceptical school of philosophy, whose most prominent recent exponent of whom was Nietzsche, from whom I take my understanding of scepticism.) This is not to deny that the economy does not produce goods and services that add to the sum of human welfare, but to see it as working mechanism or a well functioning social system is wrong. There was a film realised  in the 1965 about an air race from London to Paris that took place in 1910.  In it there was song about ‘Those Magnificent Men in their Flying Machines’ which included the words if my memory is correct, that these machines fly but I do not know how they stay up in the air. A sceptical economist has this view of the economy, we know that somehow the economy works but not exactly how. Parts of the system we do understand but not the whole, we even doubt if it correct to describe the economy as a system, we only use the term system to imply a something. What we deplore is seeing the economy as a mechanism that is capable of being perfected, that can be made the best of all possible economic systems, as is the claim of Neo-Liberal economists. Not that we don’t believe that changes cannot be made to improve the working of the economy but those changes will have only a limited impact. The revolutionary economics of the Marxists or Neo-Liberals who claim to have the ability to transform society and its human members we see as misguided. Economics is the science of small changes that have been proved to work not the messianic social science promising a better future for all.

Greece and the sceptical economist

Greece provides the perfect example of the fallacious nature of much of economics. When the financial crisis of 2008/9 came it exposed the frail nature of the Greek economy without its over dependence on foreign loans. The European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB) provided the loans Greece needed on the condition that it adopted a programme of austerity and embarked on a series of Neo-Liberal reforms. These reforms were to cut welfare spending, remove labour protections and embark on a large scale privatisation of state owned assets. After five years debts have increased to 177% of GDP, youth unemployment has reached 50% and many individuals especially pensioners have been forced into poverty. Despite the disaster that is now the Greek economy the EU insists that Greece most continue to follow the programme of austerity and Neo-Liberal reform. Even the election of a government opposed to austerity and the issuing of an IMF report saying that the continuation of the current policy will make it increasingly unlikely that Greece will ever repay its debts,has failed to make the EU change its policies. The Neo-Liberal politicians and economists that control policy making at the EU believe that in spite of the evidence to the contrary that the Neo-Liberal reforms imposed on Greece will eventually deliver. It is a matter of holy writ for these people that only the truly free market can deliver the best of all possible worlds.

A sceptical economist such as myself might point out to the failure of a similar radical Neo-Liberal programme in the former USSR. This programme of radical reform had such disastrous effects that some Russian nationalists believed that it was a programme implemented to deliberately weaken the Russian economy and nation. There was in the 1990s after the collapse of the communist system, the wholesale privatisation of state run businesses. The least efficient were closed for lack of buyers so creating large scale unemployment and poverty.  Those businesses that were bought were purchased at knock down prices from the state by the oligarchs (often former officers of the KGB), with the result that control of the economy was transferred from the state to the oligarchs to the detriment of the Russian people. Economic reform was introduced by a government that had no real understanding of Western society and economy and into a society that lacked the social institutions to make the reforms work. Instead of the free market reforms creating a new Russian liberal democracy, they created a new authoritarian state. All the old methods of repression are returning, political dissidents are confined to mental institutions or imprisoned. Poverty is still persists and it is no coincidence that Russian men have the lowest life expectancy in Europe.

Perhaps a phrase for describing the policy towards Greece would be Iraqi economics. When George Bush successfully conquered Iraq he ordered the destruction of the existing governmental system. He intended to create a liberal democracy out of the ruins of the old Baathist political system. Instead this overly optimistic programme created a political wasteland which has lead to a decade long period of internecine warfare, as the authoritarian government that existed was replace with nothing more than misplaced optimism that once freed the Iraqis would by themselves create a democratic state. The radical Neo-Liberal economic policies that have introduced to the former USSR and Greece have created an equivalent economic and social wasteland.

At some subconscious level of thought it does seem that the European politicians do seem realise that radical Neo-Liberalism can only be imposed by an authoritarian government. They have been trying to remove the democratically elected Syria government and replace it with one of technocrats that will do their bidding.

What the sceptical economist would have done is to work within the existing political system and with its leaders to adopt a gradual reform programme, consisting of those measures that would bring some amelioration to suffering of the Greek people.  The obvious one is some measure of debt relief, this would mean that the European banks that made irresponsible loans to the Greek government would suffer financial loss as their would the Greeks would be defaulting on their loans. However they would be paying their price for their irresponsible lending, which is what should happen in a free market economy. There would be no ‘big bang’ reform of the economy but a series of negotiated and sensible reforms. Reforms that would be made with the consent of the Greek political leadership and people. There would be sufficient incentive to reform as the downgrading of Greece’s credit status, would make raising international loans difficult and costly until the Greek economy showed signs of recovery. The reforms would be modest in scope, there would be attempt to destroy Greek ‘clientelism’ as it is one of the key elements of the existing society. Reform certainly of its worst features but recognition that it is part of the unique nature of Greek society. No attempt would be made to make it a southern European equivalent of Germany or free market Britain.

What I am trying to say is the politicians and economists of the EU should recognise the limits of their knowledge. They are the last people that should claim to have a knowledge of the ideal society and economy, as people in glass houses should not throw stones. One of the criticisms is that the Greek tax collection system was ineffective, as one writer stated it was as if the state was putting out a collection plate. Yet these European critics are in their own countries encouraging rich individuals and business corporations to avoid tax. Many business corporations locate their head quarters in Luxembourg, Ireland and the Netherlands to avoid tax. Soon the UK will be added to their number as our government is developing new tax avoidance schemes to encourage business to locate in the UK.

The sceptical economist has no one big answer to the problems of managing an economy, instead they have a series of small answers. These small answers are to be tried and if fail to be replaced by alternate measures that might work. What the sceptical economist recognises is the uniqueness of different societies, which come up with different solutions to solve common problems. Is the Greek system of ‘clientelism’ really much worse than the employment practices of the United Kingdom? If clientelism produces over employment, the Anglo Saxon free market produces under employment. Government departments in Greece may have been over staffed with political place men, but British business corporations such as supermarkets are staffed with the under employed, that is workers working on split shifts on low incomes, who desperate for extra hours of work  to boost their incomes. The Greek practice of clientism is far from perfect but so are the practices of the Anglo Saxon free market. What I want but don’t see is a recognition of the fallibility of social institutions and that what might work in one society does not necessarily work in another.

Fairy dust the magic ingredient that makes for successful policy making

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fairy dust – Fairies Photo (17694885) – Fanpohttp://www.fanpop.com


Economics is a subject that is never related to the childhood world of fairy tales, yet Tinkerbell* and her magic dust is a useful concept to use in economic analysis. I can illustrate this with reference to the financial crisis of 2008/9. Everybody knows that the government borrowed the billions of pounds to bail out the banks, but very few understand how the government borrowed that money. It was in the borrowing process that drops of magic fairy dust were applied, it might seem strange to apply such childish concepts to economic policy making, but they are apt.

When the government borrows money it does it by issuing government bonds, which are then bought by members of the financial market. Those members of the financial markets which buy these bonds are the banks and those banks included the those that are receiving the bail out funds from the government. It may seem surprising that banks such as the Royal Bank of Scotland and Lloyds which were literally bankrupt could buy these bonds, however virtual bankruptcy is not quite the same as actual bankruptcy, so there was no bar on them buying bonds to raise the money, which would then be given back to them as part of the bail out loan. This is where the magic comes in, when a bank uses its bad money to buy government bonds, what it gets back in return is good money. It as if the government had sprinkled fairy dust on to the bad money to transform it into good money, much as Cinderella’s fairy grandmother turned the pumpkin into the coach.
Just as Tinkerbell only comes back to life when all the adults in the audience shout out that they believe in fairies, the government’s magic only works as long as the people  believe in it. This financial sleight of hand only works as long as the public believe.  In countries such as Greece where this belief has long since disappeared this type of conjuring trick would be impossible.
What is little realised is how important ‘fairy dust’ is in economic policy making. A good example is the bank rate. Bank rate is the rate of interest which the Bank of England charges on loans that it makes to other banks. It is the rate at on which all banks base their interest rates, their rates are the Bank of England rate plus a percentage add on. This way of calculation interest rates seems very sensible as it is common sense to add a mark up to a loan to cover the cost of borrowing money in case of trouble from the central bank. However most financial institutions are ineligible to get loans from the Bank of England, so it’s a convention or a fiction, but one which is widely believed. The belief in this fiction is so strong that the monthly setting of the bank interest rate once a month is believed to be the key determinant of the level of economic activity. If the rate goes up it is believed that this will effectively slow down the level of economic activity and prevent the economy overheating. As if this one key rate goes up all other interest rates go up so borrowing becomes more expensive, so individuals borrow less and demand falls and so in consequence does inflation.
However some doubt must be cast on this policy as Bank rate has been at near zero for the past five years and economic level has been at its lowest level for decades. Yet cheap money should mean demand rises, as money is cheap to borrow and the economy should be experiencing record rates of growth. Obviously something is missing and that missing item is economic fairy dust, businesses and people have stopped believing in the magic practised by the economic policy makers.
Perhaps the best illustration of this is Black Wednesday in 1992, when the Chancellor of the Exchequer North Lamont increased the central bank interest rate from 10% to 12% and then to 15% in an attempt to stop the speculators from selling the pound. These speculators by selling the pound were trying to force the pound down in value to make a profit. He lacked credibility as there was no ‘fairy dust’ making his policy credible. All he achieved was to nearly bankrupt the UK. By the end of the day he admitted defeat and said that the pound sterling would leave the European currency union and no longer be fixed in value in relation to the German Deutsch mark. The pound fell like a stone in the money markets and the speculators were able to buy cheaper pounds in exchange for the dearer pounds they had sold earlier. (The government had guaranteed the value of the pound sterling in terms of Deutsch marks, so all the speculators had to do was sell their holdings of billions of pound sterling at the rate guaranteed by the government, forcing it dispose of most of its holdings of foreign currency to pay the speculators. If the trade in pounds had gone on for much longer the countries foreign currency reserves would have been exhausted and it would have been bankrupted.) The point I am trying to make is that is not the policy that matters but the belief in the efficacy of the policy and the policy makers. If the market does not believe that the policy makers possess economic ‘fairy dust’, the policy will not work. 
Giving a more contemporary example Britain’s economic growth rate is well below its trend rate only averaging 0.7% a year. If Britain’s manufacturers really believed that the Chancellor possessed that economic magic miracle maker fairy dust the economy would be booming. Last week 100 top industrialists wrote a letter to The Daily Telegraph, stating how important it was that policies of the coalition government were continued because it was the road to economic recovery. Yet there very actions demonstrate the reverse, investment in British industry is at a record low as is productivity, by any rational measure of economic success the UK economy is still failing. Business leaders whistling in the dark will change nothing.
Our political leaders lack the skills that successful politicians need, that is the ability to make people believe in them. The mockery with which our politicians are subjected to in the media is not a product an age that  believes in nothing but the product of any leading politician to give the people anything to believe it. They offer various varieties of the same story to a sceptical public who sees it not working, yet politicuans believe that by endlessly repeating the same formulas people will believe and things will improve. In desperation the British people are turning to political mavericks such as Nigel Farage in the belief that they possess the magic. Unfortunately success only comes from good policy plus magic not magic alone.