Tag Archives: Gresham’s law

The Economic Devil

There is one great flaw in economic analysis and that it that it has no theories that explain generalised wrong doing within the economy. Instead it recognises that there may be individual wrong doers but that wrong doing can be systemic throughout a particular sector the economy. Unlike Christianity it lacks a devil, Christians can account for wrong doing by referring to the malign influence of the devil, whereas in economics the assumption is that there are only occasional examples of wrong doing. There is on earth an economic Garden of Eden that is the free market system ensures no evil practices will prosper. Competition will force all businesses to adopt the highest standards of conduct through fear of losing sales to more ethical competitors.

Christians would have no difficultly in understanding that the greed of bankers was a key factor in precipitating the crash of 2008/9. It was their desire to accumulate larger and larger bonuses that encouraged them to undertake increasingly risky investments, investments that offered the possibility of greater and greater profits and bonuses. Self restraint was a characteristic absent from the traders and bankers money in the City of London. When it is phrased in these words the Christians seem to have a better explanation for the crash of 2008/9 than do economists. Fundamentalist Christians might suggest that the devil who had corrupted the behaviour of bankers and that this corruption directly led to the crash. Faust sold his soul to the devil in exchange for the love of Helen of Troy and as such was committed to a life of sin. It could be argued that the bankers sold their souls to the devil in exchange for untold wealth. Certainly there behaviour in that time suggested that they were little more than the servants of the devil.

Fortunately economists don’t have to re-invent the devil to explain the wrong doing that takes place within the economy. The corruption of the spirit comes from the belief that the main purpose of all human activity is the accumulation of wealth. It is the quest to maximise income and profit that will lead to the adoption of unethical behaviour. Adam Smith (The Wealth of Nations 1776) stated that when a group of businessmen are gathered together their purpose is not to promote the common good but to further their own selfish interests. He was familiar with the practices of 18th century merchants who would divide a market between themselves; where each would be guaranteed a local monopoly so they could charge the highest possible price for their goods without having to worry about being undercut by a low cost rival.

Today there is a report in the newspapers that house builders are restricting the supply of houses so as to force up the price of houses. The former Mayor of London Ken Livingstone produced a report that claimed that house builders in London made a profit of 26% on each house sold at a time when the average company profit was 10%.

While there is no devil in economics but there is the devil like ethos which is summed up in the words profit maximisation. Any behaviour is deemed acceptable if it results in increased profits for the business. A practice demonstrated when international firms operating in the developing countries hire mercenaries to eliminate local politicians and trade unionists that might campaign for better wages or environmental protections that would increase their operating costs.

Bad behaviour amongst business executives is not unknown to economists, its just that the current generation of economists assume that such behaviours have only a small impact on the economy and its host society. Yet a recent writer on the Italian mafia asserted that London was responsible for facilitating the activities of the various Italian drug cartels through money laundering, which gave the gangs clean money with which to finance their corrupt practices in Italy and other European countries. The very opaqueness of the banking system makes it impossible to know the extent to which such bad practices are common in the London financial markets, whether it is one or two bad apples or the whole barrel that is rotten.What evidence there is suggests the latter.
What I am arguing for is a recognition that there is a devil in the economy, there is an ethos that perverts its workings so as to favour the selfish interests of small groups at the expense of the majority. I would suggest that Gresham’s law needs updating, in its original form it states that bad money drives out good. Gresham was thinking of Henry VIII and his constant debasement of the currency. A contemporary Gresham’s law would state that bad economic practices drive out the good. I do have some experience of this as when I worked in the City of London in the 1960s, new sharp practices began to creep into the city. At first the old established city firms resisted employing these sharp practices, but when it was clear that these new practices were very profitable the old ethical behaviours were soon abandoned.

The old city insurance firms were very conservative in their practices they never employed aggressive selling techniques, such as cold calling. New comers to the market employed much more aggressive tactics and took an increasing share of the insurance market forcing the old established insurers had to follow suit. This had one unfortunate consequence as life insurers competed with each other by offering more and more generous end of term policy benefits. To finance these generous payouts the insurers had to raid their cash reserves. This had two effects the first was to reduce the viability of the company forcing a wave of mergers as these firms sort tried restore their viability through consolidating into a few large companies so building up their depleted reserves. The second was that the life insurance industry was unable to pay such large end of policy benefits and were guilty of overselling their products. This led to the pensions scandal when it was revealed that the many millions who had on exchanged their occupational pension for one provided by an insurance company believing that their promises of a much higher pension, discovered that their private sector pensions generated a pension far less than that offered by their former occupational pensions. What has happened is that the old conservative but financially sound companies of the past have been replaced by more aggressive but less viable businesses. The trusted figure of the man from the Pru is now a figure from the past as he has been replaced by the salesman eager to win your custom.

Christianity has another lesson for economics, according to Christianity mankind is tainted by original sin and only an outsider untainted by human corruption can save them, that is God. Similarly the market system is tainted by an original sin, greed or perhaps more accurately original greed. The economic devil an integral part of the free market, this devil is ever ready to corrupt the participants in the market with the promise of riches. The business ethic, that is the desire to maximise profits is all too often little more than a disguise for this primal greed. Personalising the faults of the market system in form of the devil (even if it’s a metaphor for greed) has one important role it will constantly reminds politicians that the free market is not the solution to all problems, but is yet another flawed human creation that is corrupted with all the sins of its makers. The unregulated free market is a threat to social order as all manner of unethical behaviours are made possible, if there are no laws or regulations to prohibit them. The behaviour of the bankers and traders in the financial markets in 2008 and since demonstrates the folly of leaving the market and its members to set their own rules. Once this is accepted the government will return to its former function of legislating to stop powerful players in the market from abusing their power at the expense of other members and outlaw the most undesirable of economic behaviours. What politicians fail to realise just are there are crimes against the person and property, there also the economic crimes, which are also a threat to the person and property.

Note. A more sophisticated version of the threat that an unregulated market poses to the social order is to be found in Michael Polanyi’s ‘The Great Transformation’.

Britain’s policy towards its ageing population, an example of the inhumanity of current economic practice.

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Cassandra by Evelyn De Morgan (1898, London); Cassandra in front of the burning city of Troy at the peak of her insanity.

Being an economist you are given an insight to society’s social and economic problems denied to others. There are times when like Cassandra you regret that insight, as apart from feeling anger there is nothing that you can do to prevent the disasters you foresee happening. Cassandra could not prevent the fall of Troy and alternative economists such as myself are powerless and are unable to change the foolish or cruel economic policies of governments.

One of the problems obsessing the current generation of politicians is how to afford the pensions and care demanded by an ever growing number of elderly people. Given the predominance of Neo-Liberal thinking, the only option considered is how to reduce the cost of incomes and care of the elderly. What is never considered is how to enable the elderly to maintain a reasonable standard of living and to enjoy a reasonable level of care when they become physically frail. As a consequence, the current generation of politicians have decide to reduce the cost of pensions by increasing by stages the age at which state pensions will be paid until it reaches the age of 70. They are at the same time freeing employers from their obligations towards their employees, which includes paying a pension. Only one option occurs to this current generation of politicians, which is to reintroduce poverty as a necessary accompaniment to old age.

Increasing the pensionable age to 70 is promoted as a positive change as most people will live to an increasingly old age and their years enjoying a pension will remain unchanged. However this ignores the problems of old age; while medical,advances have extended the life span, what they have not done is abolish physical frailty. Given the arduous physical nature of much work there are many occupations in which work is not practicable beyond a certain age. In the building trade it has been the custom that once a worker through ageing becomes to infirm to work as a bricklayer or labourer, they are given the job of tea boy. There are only a limited number of such tea boy type jobs available. No politician has considered the cost of transferring the burden of income from pensions to welfare payments. Although to be fair to the government welfare payments are considerably lower than pensions and are discretionary, so their is plenty of scope to refuse or reduce payments to reduce the cost of the elderly.

When Bismarck the German Chancellor was faced with the demand for pensions from the veterans of the 1870 Franco-Prussian war, he asked at what age do the veterans die? When he was told 65, he said that will be the age at which pensions will be paid. Similarly when in the 1960’s most male teachers who retired at 60 died at 63, there was no concern about paying pensions. The government was making a healthy profit out of the public sector pension scheme, as payments into the fund greatly exceeded payments. Increasing the pension age to 70 has the unspoken intention of decreasing the number of claimants. The average age of death for men is 78, which means 50% of men die before the age of 78. Increasing the pension age to 70 will deny an increasing number of the elderly of a pension. It is no surprise that given these figures there are a number of politicians arguing for the pensionable age to be increased beyond 70. To put it simply if the pension age is increased to an age at which the majority of an age cohort do not live to collect them, the government pension fund will be in surplus.

Unremarked on by commentators is the other approach to reducing the cost of pensions and that is to reverse the trend toward an ever ageing population. If there is a gradual reduction in the average age of death, the cost of pension provision will be much reduced. Rather than an explicit policy, this is one British governments have drifted into unconsciously, through their indifference to the welfare of their people. There are precedents for this most notably in post communist Russia, where in the chaos of the post Soviet years the life expectancy of men fell. There the average life expectancy of men has fallen to 64 years and of those men that die before the age of 55, 35% die of alcohol related illnesses. (BBC News 31 Jan 2014). In Britain the government has stumbled into a social experiment in which the people are now subject to unrestricted alcohol sales. Alcohol sales have increased and anecdotal evidence suggests that the British are the binge drinking champions of Europe. Excessive alcohol consumption is damaging to health as alcohol includes a toxin (ethyl alcohol). There is evidence for the damaging effects on health, but it’s effect on life expectancy have not yet become evident. There is one tragic victim of the British booze craze, the child that suffers foetal alcohol syndrome. These children suffer brain damage and possibly physical disfigurement. Government estimates suggest that there may soon be a million such children in the UK. None of these damaged children will live to the average British life expectancy of 81 for men and women (World Bank 2012). While the numbers in Britain that have similar drinking habits to the Russians is still relatively small, the number is growing and will impact negatively on life expectancy. A government that is indifferent to the welfare of its people, but overly concerned with the welfare of the private alcohol business (doing all they can to facilitate their profit making) can expect to preside over a declining life expectancy.

Glasgow is notorious the heavy drinking of its male population and in 2013 the average life expectancy of the Glasgow male was 72.6 years, six years less than the UK average. (The Guardian. 16.04.2013) Obviously with the English drinking habits increasing resembling those of the male Glaswegian, the government will get a bonus when having increased pension age to 70, an increasing large minority of the age cohort never claim their pensions.

The main factor in increasing life expectancy has been the improvements in the standard of living, which was particularly marked in the years of social democracy. I as a one of the many ‘baby boomers’ benefitted from this benign period in British society and it is us healthy sixty year olds that are pushing up the average life expectancy. However Britain has embarked on a policy of reversing the rise in the standard of living for an increasing large minority of the population. If the current impoverishment of the middle classes continues it could be the majority that experiences a decline in their living standards. Governments have adopted the policy of making Britain the low cost or low wage capital of Europe. This has involved the deregulation of industrial practice allowing businesses to only have minimal regard for the welfare of the workers. Gresham’s law states that bad money drives out good money, but it should be better applied to British business where bad employment practices drive out the good. This is illustrated By this example, Sir John Randal announced the closure of his department store in Uxbridge. One of the main reasons for closure was his inability to compete with other retail outlets that used all the unfair working practices of low cost Britain, zero hour contracts, split shifts etc. His business was penalised for treating its staff well. In low wage Britain poor diet and poor housing will lead to an increase in poor health and a consequent reduced life expectancy.

While it would be wrong to accuse our leading politicians of deliberately embarking on a policy to reduce the life expectancy of many British people, they cannot be excused from not knowing the malign effects of their policy decisions. They as a group have opted out of any responsibility for ensuring the welfare of the people. What they are collectively guilty of, is desiring a return to the society that prevailed in the 1930’s one of low wages, poor health economy and a limited lif expectancy. In the Britain of this time it was regarded as a boost to health, as if all teeth were removed when w person in their twenties still had healthy test, they would avoid all the problems of bad teeth in later life. Politicians may use words that minimise the inhumanity of their policies, removing labour protection legislation is renamed the creation of a flexible labour market. Just like the American politicians who during the Vietnamese war called civilian deaths collateral damage, so in modern Britain the collateral damage of our leaders economic policies are poor health and a reduced life expectancy. I can find no other words for it that as a social experiment in the practice of ‘cruel economics’.