Tag Archives: Immigration

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.

The Great Lie and the Rise of Trump and the alt.right

Economists have to shoulder their share of the blame for the dawning of the age of Trump, May and Farage. Their responsibility lies with the creation of the ‘Great Lie’ which led to the economic and social change which caused the current economic malaise. Governments longer seem to be in control, they seem powerless to arrest the decline in living standards. We now have government that operates on the Pontius Pilate principle, it shares the people’s pain, but it is powerless to anything to alleviate their suffering. In such circumstances when government claims to be helpless in the face of the current crisis, it is hardly surprising that those who claim to have a solution, no matter how wrong headed that solution are now gaining  power.

The ‘Great Lie’  is the one propagated by economists that they have discovered the economic model that if adopted will resolve all the economic and social problems that beset society, that is  the free market. A great lie can be easily identified, it is when economists claim that they have the answer to all society’s problems. Usually such optimistic solutions are called utopian, but economists have greater credibility and there claims are never subject to such scepticism. Economists never seem to accept that the economy as a human creation is as flawed as its makers, mankind. They will never admit that there proposed model for change is but an experiment that may contain as many or more flaws than the system it is replacing.  It is hard to explain why the free market model was so widely accepted, when the very failures of such a system had led to the Great Depression of the 1930s. Until the 1970s it had been accepted that the unfettered free market system was subject to extremes of volatility, whose worst manifestation were the periods of economic depression. Times whne unemploynent was high and people were impoverished. Overnight economists seemed to forget all the negatives of a free market economy and all began to speak from the same hymn sheet, the free market one. The deciding factor seemed to be the unending slow growth and high inflation crisis of the 1970s. A crisis whose origin lay in politics not economics, yet this fact was ignored by politicians desperate a for a solution to the current crisis. (For this particular economist the origins of the crisis were in the excessive demand for raw materials that the Americans required to fight the Vietnam war, which pushed up prices for steel to astronomic levels.)

Economics is pervaded by dishonesty, an unconscious dishonesty but dishonesty never-the-less.The free market or monetary economists never admitted that there would be any downsides to their free market model. Humility was the one quality lacking among these economists. They could make valid and reasoned criticisms of practice of social democratic economics, but were completely blind to the failures of free market economics. When such dishonesty is prevalent among government policy advisors, it should be no surpise that the dishonest claim made by the alt. right with its claim that immigration is the cause of all the problems is an acceptable a truth as the one that the free market works,when it it obvious to many that it does not. 

What these new economists failed to admit was that in creating a free market economy that the people would be exposed to the negative effects of adverse changes in the market. There would be many more losers in the free market. One such example comes from Sunderland, one of the areas that voted in large numbers to leave the EU. One of the main employers is  the Swan Hunter shipyard, which built merchant ships. In the 1970s it was failing to win orders because it could not compete with more modern shipyards in the Far East. The government realised that if it invested in re-equipping the yard with the latest in ship building technology, it could compete with other major shipyards. This would create many new jobs in an area of high unemployment. In 1979 a Neo-Liberal government came to power who thought any government intervention in the economy was wrong and they withdrew their support for the shipyard. All the new shipbuilding technology was sold to a rival shipyard in South Korea. Swan Hunter survives as a manufacturer of warships and equipment for the North Sea oil industry. However the people of Sunderland seem never to have forgotten the government’s betrayal of them and this year they could demonstrate their hostility by voting to leave the EU, against the advice of the government.

While the economists cannot be held responsible for the decisions of the government, they were the cheerleaders for the changes in economic policy making. One of the greatest of these new economists Milton Friedman supported the government of Pinochet when it tortured and killed its opponents, claiming that Chilean society would be better off without these people. A variation on the saying that you cannot make an omelette without breaking eggs, except that in this case the eggs are people.

One chilling example of the eggs being broken is housing policy. Increasing numbers of people, particularly the young are being forced into the private rental market. There they suffer from the twin problems of exorbitantly high rents and insecurity of tenure. When it has been suggested that the solution is to give private tenants security of tenure and to introduce rent controls, the social democratic party in this country has always rejected it as an unworkable solution. They claim that the introduction of such controls would reduce the number of properties for rent and so be against the long term interests of the private tenant. In reality a policy that did both things and which included measures to prevent a reduction in the number of rental properties could be devised. Yet this party clings to the Pontius Pilate principle of politics, vicariously sharing the pain of the private tenant while saying that bad as the situation is there is nothing they can do to improve the lot of the private tenant. When such is the official policy of this party it is no surprise that it is threatened with losing constituencies to the party of the alt. right that claims to have an answer.

There is little doubt that the adoption of free market economics has created an increasing number of losers in society and it is these losers that are looking to the alternatives for a solution. The only solution to the woes of society appear to be those  offered by the xenophobic right; as all the other political parties seem to adopt the same message which is that things may appear to be bad now, but they would be much worse if the government tried an alternative policy.

One solution to the current malaise is for politicians to accept responsibility for their actions, instead of looking for unreal solutions from the world of economics. While it was the unregulated financial markets that caused the crash of 2008/9 the slow recovery has been due to the governments adoption of an austerity policy. If the governments of the West had learnt anything from the 1930s it should be that adopting those economic policies to tackle non existent problems, they should take action to ameliorate the negative effects of the crash. Austerity programmes designed to do little more than cut government debt and increase and prolong the agonies of 2008/9. What is required is imaginative solutions to the crisis, usually not available from economists who are stuck with ‘Big Lie’, that the market will solve the current crisis if left to itself,when it quite obviously won’t.