Tag Archives: J.K.Galbraith

The Dead Economist’s Society*

Politicians have constantly complaining about economists, usually for not giving them the answers they want. Only recently Michael Gove a leading Brexit campaigner complained that the people were fed up with experts. What he was complaining about was the fact that economists who had previously supported the government weren’t making the upbeat predictions about Brexit that he expected. The loss of these expert cheer leaders must have been galling.

Michael Gove is typical of many politicians in their misunderstanding of economics. While throughout the course of his political career economists tended to speak with one voice, that of the Neo-Liberal free marketers. Free market economists of the Chicago school dominated the universities and the professions and maverick economists were marginalised or silenced. Economics Journals now refused to print articles that did not fit in with the mainstream view. Only by exposing free market economics could academics hope for preferment in their profession. However that did not mean that economics had completely lost their integrity, all economists still believe that their subject is an evidenced based one. Surprising to the Brexiteers these economists could not agree that leaving the largest and most prosperous free market in the world was a good idea. Only the most ideological and extreme of economists could believe in the Brexit fantasy.

What economics has lost is it’s robustness. Although economists have as a profession tended to be of the right and free marketers, they have in the past accepted that there is a space in their subject for alternative voices. Unfortunately in the 1980s these alternative voices were suppressed. Their books disappeared from the university curriculum. Now these alternative voices are needed as the government seems to have emptied the basket of free market policy measures and needs an alternative approach to policy making. If only government ministers and their civil servants were familiar with the writings of the non free market minority of economists of the past they would not be short of policy alternatives.

One such past economist is Michael Polanyi. Michael Polanyi argued that the unregulated free market was the worst possible of economic systems. What he suggested was that the state could be better at second guessing what people wanted, than did the market. In a free market the rich and powerful have undue influence over how the goods and services that the economy produces are distributed amongst the people. Not only could they claim the lions share of the wealth, but they could also deny the majority a fair share of the nations wealth. The health care system in the USA provides an example of his thinking. There the well off can have access to the best health care in the world, but also deny access to adequate health care for the less well off majority. Health care in the USA is run by for profit health care providers. The poor have the most health problems but they are the least able to pay for treatment. Since the provision of health care to the less well off is a loss making service, it is not provided. The poor and less well off instead have to rely upon the health care provided by those hospitals run by charitable institutions. These institutions are poorly funded and cannot provide the best of care. Michael Polanyi would argue that health care is a universal good, as all have a right to good health care only a state run health care service can provide health care for all.

When only one voice is heard the result is bad policy making. Michael Polanyi has long since been forgotten and the government only gets policy advice from free marketers of the school of Friedrich Hayek and Milton Friedman. (However today’s politicians are ignorant of the latter’s seminal work ‘Monetary theory and the Trade Cycle’. A book which if they read, they would realise that he would regard their current policy of quantitive easing and low interest rates as wrong headed.) Now all too often government policy has been that of trying to fit square pegs into round holes. Every government embarks on a new policy to make health care more market efficient, each reform costs billions, yet is considered as necessary by each new government. Never does any health minister ever stop to think that their policy might be wrong and that there are alternatives to remaking the NHS into a faux free market, by continually dividing and re-dividing health service care providers into competing groups of buyers and sellers. Never do they consider that each new bureaucratic structure they impose on the NHS, is yet another costly diversion of resources away from front line services.

What economists know but politicians do not is that evidence demonstrates that a health service run by health care professionals is more cost efficient that its for profit alternative. For example health care professionals might adopt some wasteful practices such as the over ordering of medicines, but this is less costly than its alternative. If this over ordering is to be eliminated a new and expensive bureaucracy of stock controllers, accountants and financial controllers is required to take over the purchasing and distribution of medicines. The cost of these bureaucrats far exceeds the cost of any over ordering of medicines. In the well managed private hospitals of the USA administrative costs account for 40% of the costs of running the business. Unfortunately in the U.K. the government with its various reforms is trying to divert an increasing share of the health care budget to these financial controllers in the name of cost efficiency.

Although Michael Polanyi was once was a well known economist, he is now virtually unknown. Contemporary economists are overwhelming free market economists and little is published that is contrary to their consensus view. What is now needed is a ‘Dead Economists’ society. A society that will popularise the policy prescriptions of these long dead and forgotten economists. There are a number that I can recall such as Michael Polanyi, J.K.Galbraith, Piero Staffa and John Maynard Keynes. If politicians were familiar with Friedrich Hayek’s work other than his short populist text, ‘The Return to Serfdom’, they would realise that he would have been critical of much their ill thought out policy making. There are numerous economists who have written about solutions to many of the now problems of facing the U.K. economy, but ignorance of them means they are never considered. What politicians want are the simple easy to under policies of the type offered by the free marketers, they have little patience with good economic practice, as it can be difficult to understand and ones that do not provide the simple answers that make good headlines in the popular press. Donald Trump is not a maverick politician contrary to the mainstream, but rather the exemplar of a mainstream politician that has little time for the different reality that is the real economy.

What adds urgency to my writing is an article published by the Institute for Public Policy Research that the Bank of England which states that the government is ill prepared for the next recession. They have exhausted all the possibilities that can derived from expanding the money supply, through a policy of quantitive easing and low interest rates. What they state is that the government’s policy cupboard is bare and they now lack the anti recessionary policies to deal with any future economic downturn.

* I don’t wish to claim originality for my title. It is one that I have borrowed and adapted from Larry Ridener’s website, Dead Sociologists Society, one which I used to good effect during my teaching career.

Brexit myths 1 -that the rich well off campaigners for leave have nothing to fear from leaving the EU

What the financiers, right wing politicians and business who have backed Brexit believe is that they are immune from any of adverse consequences that might result from Brexit. A belief that can be rephrased as follows that, ’bad things don’t happen to the rich, only to the poor’. Only a person completely ignorant of the past and past economic crisis can believe such nonsense. These people  are of a generation that has no knowledge of the great economic depressions and financial crashes of the past. My generation of economists were told stories of financiers jumping out of the window of their offices to their death, as they could no live with the consequences of their business  failures and lost fortunes. Although this was a popular myth as Galbraith writes in his book on the great crash of 1929, what it does is through a popular myth convey a truth, there were many rich man who saw their fortune disappear with the financial crash of 1929. The Joseph Kennedy’s who had the foresight to get out of the stock market before the crash, where few and far between. After the crash there were many millionaires reduced to relative penury. A fact disguised by the terrible suffering of the less well off who lost homes and jobs, a fact which tended to dominate the popular imagination.

The misplaced confidence of the many rich right wing politicians is in part due to the fact that the crash of 2008/9 left them with their fortunes largely intact. The action of the government and the Bank of England prevented these people from suffering any real adverse consequences from the crash. When banks failed, the government through the Bank of England invested billions in the weakest banks to maintain confidence and preventing  a run on the banks developing and causing a more general  collapse of the market.  All banks and financiers had over invested in the property and equities markets and were at risk of seeing their assets fail catastrophically in value. As a consequence only the most reckless and unluckiest of banks failed, most were left relatively unaffected by the crash. A serious and catastrophic financial crash was averted  through the government being willing to back the banks with whatever money was needed to maintain the banks solvency.

What is not understood is that at the height of the crash the government was willing to pledge most of the country’s wealth to support the banks. Fortunately the credit of the British government was sufficiently high in the eyes of the banks major creditors that this money was never called on. If it had been the British population as a whole would have been reduced to abject poverty as major creditors would have wanted their money and it could only have been provided by taking it from the incomes of the people. The only consolation would have been that if the British economy crashed because the bank’s creditors doubted the credit worthiness of the banks, the world economy would have crashed because most of the developed world’s banks were as unsound as those of the British.

The world economy is subject to regular cyclical downturns, which seem to occur at intervals of every nine years. If this cycle continues as normal, the next downturn is due in 2017. In 2017 negotiations to leave the EU begin and the uncertainty generated by these negotiations will worsen any economic downturn.It is unlikely that the UK will go through 2017 without a significant downturn in economic activity, especially as now the leaked Treasury report on the negative impact of leaving the EU has been published, a report which confirms the fears of those doubting the wisdom of leaving the EU.

Many of the rich Brexiters have invested considerable proportions of their wealth into high paying and high risk financial investments. The high risk element is concealed by the continued upsurge in asset values, which makes all investments appear sound. When interest rates are low and prices are constantly rising it is possible for even the worst of investment managers to make money. What matters is belief or confidence, in 1928 investors bought into a project which promised to build houses on swamp land in Florida. They did not worry about the soundness or otherwise of the project, as they believed that they would be able to sell their investments in the scheme for a  sum higher than that which they invested. The financial markets today are brimming with misplaced confidence so that investment managers are making many investments that are ill advised. Unfortunately the opaqueness of so much financial accounting makes it almost impossible to judge which investment funds are the ‘dogs’ in the market.

Next year if not sooner such financial dogs will be revealed. The bull market will turn to a bear market as the fear regarding the when uncertainty about the future of the economy grows  when it becomes obvious that the Brexit negotiators have no realistic plans for offsetting the negative impact of leaving the EU. The negotiators at present are literally conjuring markets for British goods and services out  of nowhere and when the markets see that there is no substance to the optimism of the politicians prices of all assets will tumble. Then in a falling market the financial dogs will be revealed, some will inevitably be unable to meet their obligations and will collapse. Those unlucky wealthy politicians that have invested heavily in these companies will face substantial losses.* While I can  be very confident that next year, if not this will be one of financial crisis, it is impossible to predict how severe the crisis will be. If the crisis reveals that there are only a few dogs in the market it can be contained. What matters is how the collapse of a number of investment and property funds affects the confidence of the market. In a volatile market which is the financial market,falls can be substantial before the market recovers its nerve. All that can be said is that there will be a number of rich politicians next year who having lost substantial sums of money will be regretting their decision to campaign for an exit from the EU.

* The compensation schemes exist will be insufficient to compensate these rich investors for their losses, particularly as the government will need to spend its money elsewhere to minimise the negative impacts of Brexit.

The Economics of the Titanic or a comment on Larry Elliot’s article on Brexit economics

When reading today’s Guardian I was struck by an article written by Larry Elliot. It was mocking all the doomsayers who predicted dire economic consequences if Britain left the EU. He quite rightly wrote that since the vote to leave the EU, the economy has  been doing quite well. Unemployment is down, economic growth is higher than expected and sales in the retail sector are as buoyant as ever. There seems to be no evidence of the economic disasters that would occur if Britain left the EU, as claimed by the Remain campaigners. However, he does in his thoughtful article explain that there are still unresolved problems that threaten future prospects of the UK economy, such as the appalling low productivity levels of British workers and the large trade deficit. He does suggest that these problems do have solutions and that the shock of exit will force the government into tackling these problems in the economy that have been ignored by politicians for decades, as they wish to minimise the negative effects of EU exit.

There are just one or two caveats that I would wish to make. He as did I would have read J.K.Galbraith’s “The Great Crash”* when a student studying economics. He would have read that one of the prime factors in causing the great crash was an unsustainable boom in asset prices. One these prices moved downward all the flaws in a weak financial sector were exposed and a panic would set in forcing a crash sale in assets such as shares with the consequent bankruptcy of many business enterprises. There is plenty of evidence of there being a speculative and unsustainable boom in asset prices within the UK economy at present. Despite a few blips property prices have reached new highs. While it is not clear when the downward in the property market will occur it is likely to be sooner than later. Given the natural turn of events financial downturns occur every nine years, 1990, 1999 and 2008, which means that if this cycle continues there will be a crash in 2017. Leaving the EU has created an aura of uncertainty which not only undermines market confidence making a financial downturn more likely but means when it does occur it will be worse that otherwise would be expected.

If I could use a metaphor to describe the foolish actions of our political leaders, I would see it in the actions of the captain of the Titanic. The captain of this ship overestimated the soundness of the construction of this liner. He believed that if the ship collided with an iceberg, the nature  of its construction would mean that any collision will result in minimal damage to the ship. As a consequence he sailed too far north, to close to the area of the Atlantic in which the icebergs where situated and the resultant collision with an iceberg sunk the unsinkable ship. The attitude of the politicians who campaigned for Brexit mirrors that of the Titanic captain. They vastly overestimated the soundness of the UK economy and its ability to withstand economic shocks. Instead of there being a small hole below the economic waterline, caused by exiting the EU which can soon be fixed, there is a much larger one that is capable of sinking the UK economy.

One of the flaws never mentioned by Larry Elliot and the Brexiters is the massive over indebtedness of the British economy. Consumer indebtedness is moving rapidly towards a total of 200% of GDP and the debts of our banks are far in excess of 400% of GDP. Much of this debt, particularly that of the banks is owed to overseas investors. Even in normal times this represents a problem for the UK economy, but in a time of uncertainty it becomes a far more serious one. The value of the pound sterling has fallen since Brexit, this has meant that the holdings of British currency in British banks by overseas investors has decreased in value. At the moment the fall in the price of sterling has stabilised and there has been no rush by overseas investors to withdraw their money. They judge that the advantages of investing money in Britain outweigh the disadvantages. However in a time of uncertainty there is a possibility that the value of sterling will fall further, which will probably occur when the exit negotiations hit some difficulties. Then these foreigner depositors will not be willing to see their cash deposits shrink further in value and so will begin to withdraw their funds from the UK. This can easily develop into a panic and the consequence will be a run on sterling. The UK government would have to apply to the International Monetary Fund for emergency funding to tide it over the crisis. Quite possibly the European Central Bank would be involved as many large European banks are located in London. In this event the price for these loans would be the imposition of a Greece like austerity programme. Such a programme of austerity would devastate the British economy as massive cuts in public spending would be required. One casualty would be the National Health Service as one of the first casualties, as the Greek experience shows that any national system of healthcare is regarded as a luxury that an indebted nation cannot afford.

If Larry Elliot’s memory had served him better he would have remember that Galbraith wrote that there was a relatively long lead in to the crash in 1929. The signs of the impending disaster were visible  long before the crash occurred. Then it was the evidence of the foolish speculative spending made by investors, they would invest in anything in the hope of making a profit. One story sticks in my mind and that is the one property developer marketed Florida swamp land as a desirable housing investment. This obvious fraudulent nature of this development mattered little to investors as they believed what they bought for $1 in the morning they could sell for $2 at the end of the day to some sap. Obviously this could not continue and it would end in heartbreak for many.  A minority of investors got out early recognising that there would  be a stock market crash, investors such as Joseph Kennedy. The soon to be multi millionaire father of JFK. Similarly in Britain there are signs of problems ahead. There has been a marked fall in business investment as manufacturers are unwilling to commit to a future which is so uncertain. A collapse in business investment is as any economist knows is the mechanism which starts a downturn in economic activity and possibly a recession. There was also the short panic that occurred just after the Brexit vote when a number of property investment funds had to temporarily stop withdrawals as they had not the funds available to met the demands for cash withdrawals made by panicky investors. The omens for the future are not good, despite current appearances to the contrary.

Whatever happens in the coming years all that can be said it that they will be years of difficulty for the British people. Years of difficulty brought about by the foolish actions of our political leaders who demonstrate a flawed understanding of the UK economy.

* J.K.Galbraith ‘The Great Crash’ an account of  the Great Depression which started in 1929