Tag Archives: Keynes

A new and unusual solution to economic policy making. ‘Wittgensteinian’ Economics.

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Recently I have been reading Ray Monk’s biography of Wittgenstein. In reading this book I realised that Wittgenstein’s approach to philosophy opens the possibility of there being a different approach to economics. What Wittgenstein is always criticising philosophers for is there constant search for the one grand theory, the unifying theory that answers all the questions. There was he argued no grand theory and it was pointless looking for one. This is an approach that I believe should be adopted in economics.

There is at present one theory that dominates economic policy making and that is what might be termed free market economics. One small book Hayek’s ‘The Road to Serfdom’ is the origin of all current thinking on economics. Usually today it is known as Neo-liberal economics, an economic philosophy associated with the political right. Although there is a left of centre variant, new Keynesianism. Proponents of the latter claim to have rediscovered in Keynes writings his love for the free market and put to one side Keynes radicalism.

Keynes radicalism was the consequence of his despair at the misguided policy making of the governments of the 1920s and 30s. Usually the policies of the 19th century Parisian commune are ridiculed by economists. One policy that was held up to ridicule was the policy of having the unemployed dig up the paving stones, only to replace them later. The unemployed were paid a wage for this work. Economists saw this as a foolish waste of money that did little to improve the economy. However as Keynes pointed out this created an income for the unemployed and that there spending could help bring a dormant economy back into life.

What this illustrates is that Keynes was asking a different question to that asked by his contemporaries. He was trying to find an answer to the question, how do we bring to an end the misery of mass unemployment? His academic colleagues were asking a different question, how do we restore a dysfunctional economy back to being a fully functioning one that will in the long term work to the benefit all? Different questions have different answers. While Keynes advocated greater government spending to increase the demand for labour to reduce unemployment; they wanted to cut government spending, believing that only a prolonged period of sound finance and balanced budgets could create the strong economy, an economy which would eventually generate new economic growth and so ending the time mass unemployment. All this government could say to the unemployment was to have patience, as eventually the economy would pick up and they would have jobs. Keynes had one answer to this policy and that was in the long run we are all dead. There was also the unspoken assumption that growth generated by Keynes spending policies would be bad growth, whereas the economy eventually moved into the upswing in the trade cycle that this was good growth. A set of unprovable and dubious assumptions

When George Osborne adopted a similar policy in 2010, that of fiscal consolidation, cutting government expenditure and balancing the books, he repeated all the errors of the politicians of the 1920s and 30s. Mass misery, although this time not caused by unemployment, but low wages and the insecure employment of the ‘gig’ economy.

Wittgenstein’s last book was ‘Philosophical Investigations’ crystallised my thinking on economics. Rather than believing that there was one grand unified theory of economics, there are series of economic investigations which belong to one family, as they all bear a familial resemblance. The economy as subject matter is the familial resemblance. He also writes about the grammar of philosophy, which provides the format or structure for ensuring that the correct questions are asked or the correct philosophical investigations undertaken. What is the nature of good is an incorrect question. The correct question is what actions are understood as good. Asking people what is good is silly, as anybody when asked that question could give numerous examples. They understand the concept good, what they don’t need is a philosopher telling them what good means. Philosophers when asking this question brings itself into discredit, as the answer is either I don’t or a definition that lacks application or validity to everyday life.* Politicians are also failing to formulate their questions correctly. What they ask is that asked by the politicians of the 1930s how can we the economy to health. What they should be asking is a series of questions about the economy, such as how can unemployment be reduced, when looking for policy solutions to all these individual problems they will be answering the big question, of how can we restore the economy to good health.

I can give examples to demonstrate my thinking. The British economy has a number of dysfunctions within it, but ones that the Neo-Liberals believe only require the one solution. These dysfunctions are:

• Slow and anaemic economic growth

• The highest trade deficit as a percentage of GDP for a developed country, as a consequence of a shrinking manufacturing industry

• An unbalanced economy, one in which the financial service sectors are booming and manufacturing is in slow relative decline, an economy also unbalanced in that the southeast and London are experiencing high growth and incomes while the other regions experience the reverse

• An economy that is increasingly failing to deliver for increasing numbers of people, who are denied the essentials of a good life, that is fair incomes, secure employment and good housing.

• Income inequality is now approaching those levels last seen in the dismal 1930s

• The economy is increasingly subject to speculative booms and busts in the various asset market, usually such busts originate in the property market

• A country which shares record levels of indebtedness with Japan. The majority of British debt is private sector debt, which an upward shift in interest rates could make unsustainable, as too many households would have difficulty managing their debt repayments

There are other dysfunctions that I could add to the list, however I had to end the list somewhere. Only today Areon Davis (Reckless Opportunists: Elites at the end of the Establishment) has in today’s Guardian newspaper outlined a different set of market dysfunctions, which could result in a repeat of the 2008/9 financial crisis. Yet the Neo-Liberals politicians always resort to the same set of policy options to deal with each of these dysfunctions. They are

• Vary interest rates, either lower or raise them

• Reduce regulation on business, thereby reducing the regulatory role of the state

• Cut taxes and government spending

• Recently they have added a new measure – quantitive easing, that is increasing the supply of money to the banks

What the British economy requires is a different set of policy options for each of these major dysfunctions. Why do these politicians believe that the same policy options should be prescribed for each policy? A doctor prescribes antibiotics to treat a bacterial infection, he would not use them a patient that suffered a cardiac arrest, yet this is exactly what the government does with economic policy making. It’s always the same prescription, whatever the problem.

The economy is a dynamic organisation that is constantly changing and each change in the economy offers new benefits or brings to the fore new problems. There can be no one theory of everything, while Neo-Liberalism offers some policy options suitable for some problems, that is all it can offer. If instead politicians realised that each new problem the economy threw up was asking a new question of them and not just some variant of an old question policy making would improve. To paraphrase Wittgenstein, economics is a series of investigations that ask different questions, each of which requires a different response.

*I am aware that my brief paragraph does an injustice to Wittgenstein’s thinking, as I have taken elements from ‘The Brown and Blue Books’ and ‘Philosophical Investigations’, which are dissimilar books written at different stages in the development of Wittgenstein’s thinking. However to do so suited my purposes.

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Why I am such a poor economist

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Actually I think I am quite a good economist, but I fail to match up to the standards by which professional or academic economists judge other economists to be good. This failing in my practice of economics began to develop in 1966. Then I was appalled by an article I read, which was written by two economists from my university advising the government of the island of Mauritius on how to improve their failing economy. It was a blue print for the most severe form of what today would be called Neo-Liberal economics. A reform programme that if implemented would have impoverished thousands if not millions of Mauritians. There was also a professor at my university who advocated an increase in unemployment as the best means of ending the inflation that beset the British economy of the 1960s. Today most academic economists now see increased unemployment as a useful policy tool in management of the economy. Then in the 1960s, it was heresy, as too many people remembered the misery caused by the mass unemployment of the 1930s.

Unemployment has always been seen as a necessary feature of a functioning market economy by economists. They believe that a certain level of involuntary unemployment is a required to make the market function efficiently. If there are people unemployed there will always be workers available to for expanding firms to recruit and there will always be workers made newly unemployed by failing businesses. Unemployment when explained in these terms can be seen as justified, as the free market model suggests that there is but a short time in which workers remain unemployed. Unemployment then is a short term pain suffered by a few, their temporary period of pain was for the benefit of all.

However the economy never worked in the way described by economists. There were a number for whom unemployment was a temporary situation, but there were many for whom unemployment was for the long term and who were subject to life of poverty and misery. What economists failed to take into account was there was always a mismatch between the location of  unemployed workers and the location of the expanding businesses. Large scale unemployment always occurred in areas where many businesses were failing or where many had already failed.

Economists had an answer to this problem, the unemployed workers should move to the areas in which there was work available. This is a solution of unbelievable callousness, it treats people as if there were a resource similar to other non human factors of production. One that should be used as the business though fit. Never have economist recognised the inhumanity of their policies. One can be sure that all economists are unfamiliar with Steinbeck’s ‘The Grapes of Wrath’. A book in which he describes the miseries suffered by the ‘Oakies’, the people forced off the land in Oklahoma by the Great Dustbowl and forced to look for work in California.

What makes me a bad economist is that I can’t accept the inhumanity of my subject. The golden rule of economics is that labour or humanity is just a resource like any other and should not be treated differently. This is very much the accepted rule today. It is unusual to find any economist speaking against the closure of any business and the unemployment it creates. All they see is human resources freed to work in more profitable sectors of the economy, the recent spate of closures of retail businesses to economists just part of the structural change in the economy. Put simply online competition in the retail trade has forced many high street shops to close, which they see as a consequence of the essential restructuring of the market.

One might add that in a British economy that is struggling there are few of the profitable sectors of business that will recruit these workers. Usually redundant workers find work in which they are paid an average of 30% less than in there previous work. Skilled workers are forced to take relatively low paid work in call centres and warehouses. There is no happy ending to a period of unemployment that the economist claim.

There is to an economist such as myself (one who sees unemployment as an evil to be avoided wherever possible) an alternative explanation for the closure of these high street shops. For me an equally important factor in this situation is the inflexible and dysfunctional commercial property market. The shops are always situated in central areas of towns or cities where the shop sites command premium rents. Economic theory states that when the demand for a resource declines its price should fall. Recently the House of Fraser appealed to its landlords for a reduction in their shop rentals in light of there falling profits. There landlords will ignore their plea and continue to demand sky high rents. All these city centre or high street sites are owned by large property companies whose only concern is to extract the maximum possible rent from these sites. It matters little to them if the shops fail and thousands lose their jobs. What matters most to them is the rents remain high, even it that means the site remains vacant. These people are eternal optimists and will wait as long as it takes to find a new tenant who will pay there extortionate rents. What makes me a bad economist to my peers is that I would seek a different solution to the problems of the failing high street. The solution for me is to introduce some form of rent control, there are plenty of mechanisms that can be used to ensure that a fair rent is charged for a property. This would benefit the economy as it enable many viable businesses to survive that would otherwise be put out of business through excessively high rental costs. Also it would preserve many thousands of jobs that would otherwise be lost.

Before anybody criticises me for being unfair to the commercial landlords through forcing them to let properties for uneconomic rents. It should be noted that all our city centre properties are owned by a few large property companies. These companies operate an informal cartel in which they co-operate in their self interest to maximise their rental incomes. In the past it was quite usual for such cartels to be regulated by the state to prevent them from abusing their powers.

Where I differ from so many economists is that I believe that policy measures or economic practices that create unemployment should not be a first resort. The first option businesses consider to increase profits, should not be to shed staff. The hollowing out of a business whereby labour costs are reduced to a minimum through shedding staff and premises closed to reduce costs to increase overall businesses profitability should be made difficult to undertake*. When hollowing out of a business occurs it is not just the staff who suffer, but the customers who experience poor customer service or a reduction in the quality and range of goods on sale.

The problem for me is the inhumanity of much economic theory and practice. I cannot accept economic policy and business practices that damage society’s well being as ever being justified. Not only is much of current business practice as sanctioned by economics harmful to individuals but it is also harmful to the state. When workers are paid wages that are insufficient to support themselves and their families, the state has to step in to provide in work benefits. The cost of these in work benefits are very substantial and represent a huge subsidy to bad employers, as state struggles to ensure that these low paid workers get a living wage.

What I have to answer is why economists are so indifferent to the suffering of their fellow inhumanity. Why don’t economists care? The answer I think can be found in the writings of Wittgenstein. He introduces the concept of the language game, language for him is not universal there are groups with society that have their own language or language codes which have meanings that are understood only by them. One such group are economists we use words and phrases that have no meaning to outsiders, such as monopsony, giffen goods and zero lower bound. Some I can easily explain to non economists others I would find it practically impossible so to do. Economists have their own unique language embedded in which are truths only known to economists. The supreme good in which economists believe is the free market. The greatest gift that mankind gave to itself was the creation of the free market which ensures the most efficient and equitable distribution of goods and services. All economic policy making should be directed towards ensuring the most efficient operation this free market. Other economists such as myself that don’t share this belief are dismissed as poor economists.

There is one example from the 19th century which best demonstrates how economists think. When the Irish potato famine was at its height in 1846, the government suggested that it should import wheat from Russia to distribute to the starving Irish. Economists, landowners, land owing politicians and farmers objected. It would be an interference in the free running of the market and no good ever comes from government intervention in the market. Governments they said do not understand the workings of the free market. These objectors argued it would lower the price of wheat in the British market and put British farmers out of business. This they argued it would be bad, as it would reduce the number of farmers working in the industry and reduce in the long term food production in the British Isles, so causing problems in the future. Anybody familiar with Irish history knows that the government rejected the proposal to import wheat to feed the starving Irish, preferring to let them starve. To those who would say this is an unfair depiction of the mind set of economists, my rejoinder is that they know nothing of the thinking of the economists employed by HM Treasury.

Economists always have a defence against the claims that the practice of economics is an exercise in inhumanity. They will claim that the free market will in the long term provide all the benefits and goodies that it is possible for an economy to provide. All that is required in patience however Keynes provided the best retort to this thinking he said ‘that in the long run we are all dead.’

*One easy means of making hollowing out a less popular practice, would be to reintroduce the employment protection policies of the past, such ending the practice of zero hours contracts and other short term employment contracts that make it easy to dismiss staff. Re-introducing fair redundancy payments for dismissed workers would be another.

Flying Pig Economics

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Quite possibility in twenty years given advances in biochemistry and medical science, scientists will be able to breed a race of pigs with wings. In a similar vein PwC produced a report stating the Brexit could possibly be a resounding economic success. This is an exercise in which economic forecasters regularly indulge. This is an imaginative thought experiment in which they think of a world in which all the good possible events and changes that could possibly occur have occurred creating the most desirable of future outcomes. Even the great Keynes was capable of this wishful thinking. He said that due to advances in technology people would be able to have greatly increased leisure time, because the increased productivity of the new machines would require a much shorter working week. A prediction which this century has demonstrated to be fallacious

PwC should not be singled out for blame as ‘flying pig economics’ is regularly practised by politicians, usually when they wish to be elected or in the case of the UK win a referendum. The examples of this economic practice are too well known to require repeating.

Obviously the current master of ‘flying pig economics’ is Donald Trump. He has promised to restore prosperity to the people of the USA through a number of fantastical schemes. One is abandoning free trade treaties, which he claims have encouraged US firms to move their factories to low wage countries such as Mexico, causing unemployment in the US. While he is correct to state that American have lost their jobs due to American companies outsourcing their businesses to other countries, his solution to the problem is unreal. If he does withdraw from the North American Free Trade Agreement, of which Mexico is a beneficiary, he will wreak havoc on the US economy. Mexico is the USA’s second largest export market and its third largest trading partner. The sudden ending of free trade between the two countries would lead to a dramatic drop in trade between them probably throwing both into recession. He would through this action cause more jobs to be lost through increased unemployment than he would create through forcing US firms to relocate back to the USA. It is significant that all he has so far all he proposed as President is a US Mexican wall and not an ending to free trade. Perhaps realism as regards US Mexico trade has seeped into his consciousness.

Going back to the PwC story it is quite possible to construct a number of scenarios in which Britain gains from Brexit, however these scenarios are purely imaginary and require an abandoning of any sense of reality. The following three items will demonstrate the unreality of the report.

One target for the new trade deals is China, our government claims that freedom from EU controls means that we can arrange a new free trade deal, that will more than offset our trade losses from exiting the EU. Nobody in government seems to have a realistic understanding of the situation. China is far more interested in trade with Germany from whom it buys large numbers of machine tools, rather than the UK from whom it buys little. Our exports to Belgium, one of the smallest of EU states, exceeds in total the value of our exports to China.

The other large untapped market for British goods is India. Mrs May made a great show of visiting India to conduct a new trade deal. India would be very interested in a trade deal, but for one outstanding issue. The government there wants an ending to the restrictions on Indian immigration into the UK. Mrs May has made it very clear that the last thing she will countenance is increased immigration from India, making a new trade deal highly unlikely.

Then there is the USA and Donald Trump, he has said he is eager to have a new free trade agreement with the UK. However a new trade deal could prove to be problematic. Will the trade deal be of benefit to the USA or the UK? Donald Trump has already said that Brexit gives US banks a great opportunity to win trade from the City of London. One only has to think of some of the countries that have a free trade agreement with the US such as Puerto Rico and Haiti to realise that whatever deal is reached, the primary beneficiary will be the US.

What can be said is that the PwC report was made for the highest of motives that is designed to win favour with the government and future business for the company. The ‘flying pig economics’ of both Donald Trump and that of Theresa May is far more disturbing. Obviously they both believe that there policies are right and only if there is catastrophic change in their country’s economies are they likely to rethink their policies. The question has to be asked are they both naive or stupid (although one hesitates to use such abusive terms)? I think the answer is no, they both demonstrated intelligence to win power. I think they are fantasists who confuse the world of their imaginings with reality. History demonstrates that when a powerful authoritarian ruler gets to impose their fantasies of the world the people suffer. Although Donald Trump and Theresa May are not to be compared with Pol Pot, Chairman Mao and Stalin they are at the other end of the same spectrum. People won’t die in their thousands but thousands will be poorer because politics has given Donald Trump and Theresa May the opportunity to impose there fantasies on the real world.

I realise what I call ‘flying pig economics’ is usually referred to by commentators as post truth politics. While they may both indulge in post truth politics, it is unfair to call them post truth politicians as usually they believe that they are stating simple plain and obvious truths and it’s only the misguided metropolitan elites that refuse to recognise the truthfulness of their statements.

A REPLY FROM AN ECONOMIST TO THE ANTI-INTELLECTUALISM OF DONALD TRUMP AND MICHAEL GOVE

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(There were many errors in my first draft, it was written in anger and published without  a thorough checking for error.)

Contention

Economists don’t always have the right answers, they can be wrong at times, but their answers to problems are better than those of ill-informed politicians and journalists. There are plenty of never-never land politicians selling an unreal picture of the world to the electorate. There are many fewer such economists because there work would have undergone informed scrutiny by their peers and much that is dubious would have been discarded. The overwhelming majority of economists believe that Brexit will inflict significant economic damage on the economy, while a significant number of politicians and most journalist believe the reverse (who are lacking any evidence apart from their misguided optimism in the rightness of their beliefs).

Confession of interest

I am one of those experts that Michael Gove spoke abouto he said people are fed up with and who they should be ignored by the people  when making decisions about the future, such as how to vote in the EU referendum. I am one of those people who following Aristotle’s advice  have dedicated the best part of their life to study. What Michael Gove is trashing is the value of learning, I cannot accept that my years of study have been wasted. How can such small minded person go against centuries of a tradition that values learning? He is a graduate of an elite university but he seems to dismiss the value of what he learnt there. I can say to Michael Gove that when teaching in a tough secondary school I never demeaned myself to pretending that I lacked learning. What young people can identify is the phoney, the teacher that pretends to be like them. Michael Gove’s attempt to pretend to be one of the people is as phoney as my colleagues who adopted a fake working class accents and mimicked the words and manners the young in an attempt to win their favour. Behaviour as phoney as that of the Dad who to tries to impress by claiming a knowledge of and love for garage music and rap.

The dangers of contempt for learning

If Michael Gove’s lead is followed as experts such as myself as regarded as just another self interested individual with an agenda to promote, a lot is lost. Economists such as myself are in possession of or can access a body of knowledge about the economy not available to others. Acquiring and understanding the store of economic knowledge takes years and to be honest a life time of study, because the subject is always changing and developing. What Michael Gove is saying is that my learning is of no consequence. I cannot accept that the anti intellectualism of todays politicians will stand future scrutiny. Without wishing to be too unkind Michael is an insignificant figure compared to Adam Smith, Ricardo, Keynes, Hayek, Polanyi and Robinson. With time his anti intellectual populism will be a but a minor blip in the progress of humankind. In studying economics I developed a critical faculty which makes it possible to make reasoned judgements about government policy, rather than relying up prejudice and common sense on which to found my judgements. Paraphrasing a much greater thinker than myself who used this phrase in the context of religious belief, those who don’t believe in God are likely to believe in anything; similarly those who don’t believe the truths of  economics are likely to believe any nonsense about the economy.

One such nonsense is the current belief that there is a real knowledge of the world, which is only possessed by men of business, who deal every day with the complexities of the real world, as opposed to the unreal world of academia. One such person held to possess this knowledge is Donald Trump, the next President of the United States. I would question the breadth of his knowledge, he is a real estate developer. Yet one who has failed in several business ventures and has only been saved from bankruptcy by the protection afforded by US law to such people. If you wished to buy and develop a property you would go to a real estate agent or property developer, but one with a better track record than Donald Trump. Apart from his deal making in which he has a very mixed record I cannot see how Donald Trump has a better understanding of the world than me. As a teacher I would be criticised for living and working in an unreal world, which is a silly phrase as the school is as real as the boardroom. One other silly untruth is that teachers lack the toughness to cope with the real world, all I can say is that these people who say that have little understanding of the difficulties of teaching a group of adolescents. One of the most telling examples of the falsity of this stance is a video on Youtube, where Michael Gove is addressing a group of teenagers. They show complete disdain for his lecture and indulge in all the behaviours of disaffection typical of teenagers. What I am saying is that my experience as  teacher of economics is as valid as Donald Trumps as a property developer, although if I’m honest I think mine is the superior knowledge of the world.

When politicians deny the truths of learning they became prey to the teaching of messianic and charismatic charlatans such  as the  novelist – Ayn Rand author of ‘Atlas Shrugged,’ whose followers include Sajid Javid and all politicians of the Neo-Liberal persuasion. Her book paean to billionaires who she believes are the heroic figures that make our civilisation great. The central figure of the book John Galt a man of independent means who is puzzled as to why billionaires keep disappearing from society. He is taken to a mysterious canyon remote from Washington, where the billionaires are hiding, seeking sanctuary from a rapacious Washington. These  billionaires are fed up with being oppressed by a government that so taxes and regulates them, that they are denied their role as the creative driving force of society, a rapacious government has reduced them to impotence. It does not realise that without their enterprise, society would fall into stasis and decline. When these billionaires go on strike society collapses and thousands of the useless poor die as a poor and weak government is forced to withdraw the income on which they depend for their survival. Eventually a discredited government is forced to welcome back the billionaires on their terms and these billionaires put society back on its feet and society develops and prospers. Many politicians of the new right are followers of Ayn Rand and her influence can be seen on government welfare policy. The Ayn Rands in government believe in a policy of brutalising the poor to the extent that they are forced to work at any price for anybody. It’s a cure for the wasteful culture of dependence, to such as ‘Sajid Javid’ homeless and misery is a just punishment for the useless poor. When governments ignore the truth tellers they are prey to the charlatans and other paddlers of fantasies and falsehoods.

Economists do possess a knowledge of the economy which is invaluable  for the effective running of government. One such economist is Anne Pettifor who is constantly ignored by governments because she tells them truths they don’t want to hear. Economists such as her can be compared to the Old Testament prophets who were constantly ignored by the rulers of Israel.

Anne Pettifor -is the author of ‘The First World Debt Crisis’. While most politicians are aware that economic growth is driven by consumer spending and debt, such as the popular car leasing system, they have little awareness of the dangers of this policy. The growth of consumer debt is so large that it has created a credit or debt mountain of unsustainable proportions – UK bank debt in 2009 – 586% of GDP it falling to around 400% of GDP in 2009 (Dominic Raab), but has since risen. Even Germany has similar problems the collective debts of its banks are over 300% of GDP (much of the money lent to Greece was recycled back to the German banks who had made too many ill-judged loans to the Greeks, so as to prevent them experiencing a liquidity crisis).The UK vies continually with Japan for the title of most indebted country of the industrial developed world.

David Cameron was right that Britain was maxed out on its credit card, he was just wrong about which credit card.

Rather than tackle the problem the government spends billions on quantitative easing to provide the cash to keep the banks afloat. At the height of the financial crisis in 2008/9 Gordon Brown was willing to spend a sum equivalent to the almost the total national income to keep the banks afloat. The official policy is to kick the problem can down the road leaving it to a future government to tackle the problem.

Why do governments fail to tackle this problem? They fear the electorate reaction, if they brought the credit boom to an end. Loans of various kinds account for a significant proportion of people’s spending and to reduce lending would in effect to reduce people’s incomes in that they would be unable to spend as much as previously on various consumer goods. What they are most scared of is cutting spending in the housing market which would lead to a fall in house prices. The belief amongst politicians is that falling house prices equal lost election.

The best informed of politicians know that the risk is that the whole financial house of cards will come tumbling down in a crash as bad as that of 1929, yet they prefer the risk of a future catastrophic crash to taking action now.

The right and wrong of economics

Although I can as an economist make more accurate predictions about the future than any politician there are limitations to the usefulness of my predictions. I cannot say exactly when a predicted event will occur or how great will be its impact on the economy. The economy is a dynamic social institution that is constantly changing and changes can maximise or minimise the impact of the predicted event.

Last year The Observer published one of my letters in I which predicted an economic downturn in 2017. I made my prediction on the basis that all free and largely unregulated markets are liable to exuberant booms that always end in a crash. Past history shows that such crashes occur every nine years, that is 1990, 1999 and 2008/9.

This contention is supported by the economist Hayek. What he stated was that there is a period when the benefits of innovation are exhausted and economic growth falls and the economy falls into recession. This has happened to the UK as the benefits from the mass production of consumer goods begin to tail off. Since the mid 1980s there has been too many car manufacturers in Europe, making cars that were needed. The consequence was retrenchment in the car industry and in Britain the disappearance of the native car industry. When industry fails to deliver alternative sources of income need to be found. In the UK, USA and Western Europe that has been the development of the speculative industry, increases in income no longer come from employment but from the increase in the value of assets, such as houses. A speculative economy is particular prone to booms and busts, as there become periods when it is generally believed that prices have peaked and they can only go down. These downs are quite spectacular and cause widespread distress.

However although I can predict with confidence that a downturn will occur, there are a number of proviso’s that I must make about prediction:

There is no iron law that states a downturn will occur every nine years, but evidence from the past shows that this is likely, it is events that may change the date of the crash.

Brexit – if Teresa May calls an early  election the uncertainty generated by that can bring the date of the crash forward to whatever she makes that announcement.

Events may occur that halt the downward trend – if the government panics at the thought of there being held responsible for the negative effects of Brexit and states that it will do whatever deal is is necessary to ensure that Britain remains in the single market, this could result in a boost to business confidence with businesses now rushing to make the investments that they had postponed due to the uncertainties of Brexit. This rush to investment will lead to a temporary boost to the economy that will delay the economic downturn. However it will only postpone the crash.

Conclusion – Economists are not infallible but they are closer to infallibility that most politicians. What economists possess that politicians do not is an understanding of the workings of the economy.

What skills does a good economist need?

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Humility and the willingness to change their minds

Winston Churchill when speaking of Maynard Keynes (the greatest British economist of the 20th century) said that when four economists are gathered together you will get five opinions and two of them will be from Keynes. What this  illustrates is that what the good economist recognises is that economics is dogged by uncertainty. The economy and its host society is so complex that any unexpected change can result in the policy measures undertaken producing contrary results. When Nigel Lawson in his budgets in the 1980s cut taxes he overstimulated a rapidly growing economy. All that extra money from the tax cuts had no outlet except in for investment in the property market, causing a housing boom that ended in a crash in 1990.  Policy recommendations should be made in the spirit of cautious optimism. With the recognition that policies might need to be changed if circumstances change, as there is no certainty in the practice of economics.

When Mrs Thatcher said, ‘that the lady is not for turning’, she made a terrible mistake. Her policy  of using high interest rates to squeeze inflation out of the economy through depressing demand had the unfortunate consequence of driving the exchange rate. This high exchange rate made large sections of British manufacturing industry uncompetitive. The consequence of this was that British manufacturing industry lost 20% of its capacity, which had the long term consequence of Britain developing the largest trade deficit in the developed world. A problem that still persists today.

A capacity for scepticism

There is no ‘economic cure all’ that can solve all problems, although many economists and politicians foolishly believe that there is such a policy. The latest ‘economic cure all’ is Neo-Liberal economics. In the 1970s the post war economic settlement seemed to be falling apart. In 1976 inflation hit the unheard of high of 27% in Britain. A group of economists the Chicago School claimed to have the answer, they diagnosed the problem as being one of excessive government borrowing to finance its spending programmes. This borrowing increased  demand to a level beyond that which the economy could meet and as supply could not be increased prices rose, as consumers entered into bidding war to get these relatively scarce goods and the consequence was rising inflation. This problem was made worse they said by all the restrictions on the market which prevented industry responding to change by increasing supply to meet increased demand. These restrictions were such as the managed exchange rates, trade unions, employment protection laws and health and safety legislation. If government spending was cut and the restrictions to the market were removed, inflation would fall and the economy would grow ending what was a period of ‘stagflation’. What these economists ignored was the massive increase for the world’s oil etc caused by the American participation in the Vietnam war. There was such a massive expenditure of material in this war that it seriously distorted the world economy.  More bombs were dropped in this short war than during the whole of World War II. When Nixon negotiated an end to the Vietnam War that decision did more than any economic policy measure  to end the malfunctioning of the world economy.

Whether its called the monetarist or the Neo-Liberal economic school of economics, it has failed.There have been three world wide recessions since 1990 each one worse than the previous one. Growth remains minimal, the growth in incomes has stalled yet economists (the majority in the universities and those employed by government and international institutions) and politicians refuse to change their policies. They have invested too much prestige in the Neo-Liberal revolution to abandon it now. A little scepticism about the policies of the present would not come amiss. There are plenty of alternative policies that can be used, it’s only stubbornness and ignorance which prevents them being used.

When politicians and economists state ‘that things have changed’ and that we are in a new economic paradigm, it a sign things are  going badly. It’s a weak defence offered for a policy that is failing and for which no better defence can be thought of. It is the wisdom of parrots as politicians repeat this mantra endlessly without understanding that these phrases are completely meaningless.

A good economist will be well versed in literature, in fact English literature should be an essential part of the course of study undertaken by a trainee economist.

Economics has the potential to be the dullest of subjects. I remember that in the second year of my university course all the second year students had to attend a series of lectures given by one of the world’s greatest monetary economists. They were so boring that students did all kinds of things to distract them from the tedium of the lecture. One particular incident sticks in my mind and that was when a group of bored students launched a giant paper plane from the balcony which soared over the lecture hall.

Literature should be an essential part of the course, because a great novel can better than anything else explain the impact of economic and social change on a people. One of my favourite novels is “The White Guard” by Mikhail Bulgakov. This novel details the impact on one Ukrainian family of the Russian civil war. The play on which the novel was based was Stalin’s favourite play, even although he was on the opposite side of the conflict. The reading of such novels will hopefully lead to the development of some sensitivity towards the human condition in the trainee economist  and hopefully led them when qualified and employed by government to hesitate before recommending policies that cause unnecessary economic and social hardship. One cannot impose a test on economists for the possession of those essential qualities that go to make a wel rounded human being, but hopefully immersion in a course of literature will be a good substitute.

Milton Friedman the Chicago economist provides an example of the extreme insensitivity of which economists are capable. General Pinochet launched a coup to overthrow the socialist government of President Allende. The aftermath of the coup involved the torture and killing of many of those people opposed to the coup. Milton Friedman lauded the actions of Pinochet as necessary for the greater good of society, as the imprisonment and killing of these socialists made possible the introduction to Chile of the free market economy. Only a person of extreme insensitivty would applaud the killing of people as the best means to achieve some ultimate end. I tend to agree with Ivan who at the end of the novel “The Brothers Karamazov” asks God why does he permit the death of a child. (when being shipped of the Labour camps of Siberia he witnesses the pain and a suffering of a woman holding her dead baby). Any economist should ask does my policy proposal cause unnecessary suffering and is there a better alternative that will minimise human suffering. Killing may be necessary in fighting a war but never in imposing economic change on a society.

It may also hopefully prevent economics students suffering from too many dull and boring lectures, as the lecturer will have a better grasp of the English language and human nature than would otherwise be the case.

A good economist will be schooled in philosophy

Any economist must recognise that any policy proposal will be flawed or wrong in some measure. J.S.Mill in the 19th century stated that there could be no science of the humanities because human society was so complex. There were so many possible causes of a particular social or economic event and so many possible unintended effects of a policy measure that the one essential requirement of a science could not be fulfilled and it was impossible to have a science it which it was impossible to demonstrate cause and effect. Mills’ words seem to have been forgotten in the twenty-first century. It is believed that computers that can overcome this problem, as they can make calculations involving thousands if not millions of variables. However what politicians and economists at the world’s Treasuries fail to recognise is that the output of the computer findings are only valid if the calculations on which the predictions are based are valid. What politicians fail to recognise and economist ignore, is that the model of the economy used in the computer does not work, there is something missing. Treasury economists have to insert an ‘x’ factor into the calculations,  a reality factor to enable the computer to deliver a realistic prediction. This x factor is little more than an informed guess. This is why the Treasury computer can only make a correct prediction about economic growth after the event when the necessary corrections can be made to the computer model.

Any student of philosophy learns the limits of human knowledge in the first year of their course. It was a shock to this particular student that philosophy provided few of the answers to the questions that he wanted answering. One such question is what is good, Plato tried to answer this question in this question in his book ‘The Republic’ written in 380 BC and it is a question which philosophers ever since have struggled to answer. Now analytic philosophers tend to think it is an unanswerable question and not one contemporary philosophers should waste time on answering. Instead the quests of past philosophers to understand the nature of the good are to be seen to provide a good schooling in the techniques of philosophy but little else.  Students such as myself had instead to look to theology to provide some answers. The point that I am trying to make is that philosophers understand the frailty of human nature and its limitations. A true philosopher can only laugh at the claims of Neo-Liberal economists who claim to understand the workings of the economy, as the evidence from philosophy demonstrates the continued failure of man to have a complete and full knowledge of  human nature let alone human society. The problem with so many economists today is that although they have studied PPE, they compartmentalise the philosophy they learn and think that its findings do not apply to economics.

Diogenes Laertes in his history of the philosophers recalls how visitors to Democritus frequently  found him laughing in his garden. A thing he frequently did when considering the follies of mankind. If the effects of the wrong economic policies were not so disastrous, I would join Democritus in his laughter.

A good economist is aware of the past and does not think today’s events are unique and without parallel in the past and is prepared to recognise the similarities between today’s events and those of the past.

One extreme example springs to mind, both the governments of the Roman Empire and contemporary Britain regard the provision of cheap food for the people as a priority. Rome was able to supply cheap bread to its people through conquering the countries that were the bread baskets of the Mediterranean and then by  supplying low cost labour for the farms in the form of slaves. Contemporary Britain by contrast encourages the production of cheap food through the provision of subsidies to farmers, one estimate is that now 50% of farmers incomes now comes from EU subsidies. Most of this money goes to towards subsidising what is termed industrial farming, which produces large quantities of food at low cost, but in an environmentally damaging manner. Unfortunately there is evidence that British food suppliers are adopting some of the practices of the Romans. Some of migrant workers on Uk farms  adopted in work in slave like conditions.

What the government could learn from Rome is that using low cost labour methods of production discourages investment and innovation in industry. If there are endless supplies of cheap labour employers see no compellilng reason to invest in expensive machinery, if there are endless supplies of cheap labour. Studies of slave labour have demonstrated how slave labour acted as a deterrent to industrial innovation. A government and business class that believes the only solution to problems in the economy is to make labour as cheap as possible have a lot to learn from the slave economies of the past.

While the one lessons that can be learnt from Rome’s history are negative, much that is positive can be learnt from the actions of the government in the 1930s. This government tried to stimulate an economic recovery after the devastating crash that was the Great Depression. The government then recognised the importance of getting new investment into manufacturing industry so as to kickstart a recovery. Recognising that the banks were unwilling to do this, it set up an industrial investment bank which would lend money to manufacturing industry. Today one of the issues that is delaying the recovery is the comparative lack of investment in industry and manufacturing industry in particular. A recent study showed that only 15% of bank loans went to investment in industry most when into speculative trading in property etc.  There is nothing to be lost and much to be gained by setting up a new industrial investment bank and it could be financed through a levy on commercial banks, as happened in the 1930s.

This list of criteria for judging what is a good economist is not intended to be exhaustive but suggestive.

Astrologers, soothsayers and pseudo economists

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All political leaders share one common weakness and that is desire to know the future so as to be one step ahead of their rivals. This makes them susceptible to the practitioners of the various pseudo sciences that can give them both a knowledge of future events and how to use that knowledge to their advantage. These pseudo scientists that in the past practiced this spurious futurology were the astrologers and soothsayers, today these people are more likely to be economists and psephologists. It is the lust for power that makes politicians so susceptible to the machinations of soothsayers of various kinds. There is not one political leader today who does not have an in house psephologist on hand to read the political runes. This is a common practice that runs through the ages, as one contemporary leader Tony Blair had the psephologist Phillip Gould to hand while Elizabeth I had  the astrologer and alchemist John Dee.However I intend to focus this essay not on psephology but on the new pseudo economics.

Soothsaying and astrology as with pseudo economics claim to know the future and can offer policy prescriptions to obtain the best possible future outcomes. These economists claim to possess a unique knowledge of the world, a knowledge that only they understand. Soothsayers or astrologists could state from there understanding of the future when it would be a propitious time for action. There knowledge of the future and future events came from they understanding of the fundamental forces that determined the course of human history. Pseudo economists also claim a knowledge of those planetary forces of economics that will determine the future. In this case it is rather than the movements of the planets determining history it is the movement of market forces that determine history. They will claim that communist leaders wilful ignorance of these market forces will resulted in the collapse of the Soviet Union. Following the lead of these economists historians began to see the future as being one in which the capitalist liberal democratic model was dominant. Possibly the most notable was Francis Fukuyama was perhaps the most notable with his essay and book entitled ‘The End of History and the Last Man’. In both the essay and book he predicted that history would end in all countries becoming capitalist liberal democracies.

Nostradamus pales into insignificance in comparison with these pseudo economists, he could only predict the collapse of great empires in the most elliptical and obscure of terms, he was not granted the knowledge that enabled him to name those empires that would collapse. Economists had a more secure knowledge they knew exactly which empires would collapse, that is the Soviet Union and the China of Mao. If economists know the future and they have the means of introducing the future now, they will do so. They have persuaded politicians throughout the Western World that the future is the free market capitalism system and their role is introduce the reforms that will make the future happen now. This all political leaders have done through a series of measures known as supply side reforms. All regulations such as employment protection laws have been removed because they prevent the free operation of the labour market, similarly health and safety regulation has been emasculated because that also prevents businessman doing what is best. There is an underlying and naive assumption that businessman are well intentioned and will work for the good of all. However the various scandals in the food supply industry show that this is not true.

The apparent success of those societies economists that follow the new free market system as compared to the old communist command economies has led to an over claiming of the success of the new economics and their over confidence has resulted in the practise of the worst kind of pseudo economics. These new economists and the politicians are guilty of creating a new economics that is almost childlike in it’s understanding of the economy and the wider society.

Evidence of this child like science is the introduction of simple moral terms into economics analysis. In its most simplest this new economics states that all government actions are bad, while all action of the free market are good. Obviously it is usually disguised by more complex language, as is demonstrated by the economics of the British Treasury. All economists of my generation that is the ‘Old Keynesians’ understood that all spending by the government increased demand in the economy and the level economic activity. Therefore in a recession the obvious policy was to increase government spending to stimulate economy. Old economists called this process by which spending increased the multiplier as government spending would lead to an increase in spending which was a multiple of the original sum spent. Now the Treasury has decided this no longer happens as it cannot conceive of any situation in which government spending is beneficial, instead it has decided that all government spending reduces overall demand and the level of economic activity. The Treasury has given the multiplier a negative value of 0.6 so if the government spends an additional £100 million pounds it will instead of increasing spending reduce it by £40 million, the Organisation for Economic Development gave the multiplier a value of 1.5, so that the same spending would increase demand by an additional £50 million. When economic policy is determined by such a child like morality such as this it becomes bad economics.

Why I prefer to call bad economics pseudo economics is because it is science that is as fallacious as astrology.

There are some disturbing consequences of the practice of pseudo economics, perhaps the worse is the belief is that governments should give up on most areas of governance in society and transfer their role to the private sector and the market. A belief that the economy works best when left free of government controls and regulations had disastrous consequences the manifested themselves in the great crash of 2008/9. Banks by this time were no longer subject to controls that required them to hold large reserves to protect themselves against a possible bank run that could occur in a financial crisis. Consequently when the crisis happened the banks held such small reserves of cash that they struggled to pay their customers who wanted to withdraw their money. Northern Rock was the first to fail and only a massive injections of government money prevented the failure of two of the big four banks, that is NatWest and Lloyds. Now eight years after the crash the banks are still largely unregulated and hold cash reserves that are again likely to prove inadequate in the event of another financial crash, so that they are likely to again need government cash to fund bail out. Their reserves are now 3% of assets as opposed to 2% of assets at the time of the crash.

Banks have resisted increasing their reserves to what many would regard as a safe level, that is 5% of assets, because money held as cash earns nothing for the bank. Keeping their reserves as low as possible enables them to maximise their profitability but at the expense of security of the institution.

When the government withdraws its governance from the various sectors of the economy it allows bad behaviour to flourish. The banks are not alone in behaving badly, many other sectors of business show evidence of wrong doing.

Despite the evidence politicians remain believers in the new pseudo economics, whenever its suggested that the imperfect markets of the real world need regulation the politicians throw their collective hands up in horror and resist any attempt at regulating these markets. They seem to be in thrall to the contemporary economic Nostradamus’s that believe they have discovered the secret to the future well being of the country is in free market system. If we want a good tomorrow all we have to do is let the markets work unhindered and they will deliver the good tomorrow. However as housing provision is increasingly being transferred to the private sector, the market seems increasingly distant from delivering that good tomorrow. The economic soothsayers are the many consultancies that advise the government. Unfortunately our political leaders are unable to see that these soothsayers and astrologists of the economic world are as misguided and ill informed as their medieval predecessors.

There is a hint of bitterness in my essay as I am a believer in good economics, the practice of which brings benefit to society not the pseudo science of today for most creates insecurity, misery and impoverishment in the name of creating a better tomorrow.

Is George Osborne the greatest economist of the 21st century

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Describing George Osborne as this century’s greatest economist, is to choose a deliberately provocative title. While it is intended to be a title that catches the eye, I do have a more serious purpose in drafting this essay. There from the perspective of this writer a certain admiration for George, he is the supreme Machiavellian politician. He can persuade others to accept that black is white, even if they know he is wrong. As Chancellor he has set the agenda for the political debate. Labour politicians have responded to his agenda, rather than trying to set out their alternative approach. There are differences but these are intended magnify the difference in the eyes of the beholder (electorate), for an economist they are but trifling differences. Last week’s political debate illustrates this all too clearly. George Osborne announced that because of budgeting restraints that all NHS staff other than receiving annual increments would not get an increase in their pay. In his eagerness to appear responsible he said that if he became Chancellor he would follow George’s lead and implement a pay freeze.

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There are two types of great economist, the first are economists such as John Maynard Keynes or Milton Friedman who revolutionise economic thinking and change the way governments approach economic policy. Secondly there are those such as Mao Tse Tung who set the economic agenda and policy making through sheer force of personality. (Often accompanied by the threat or use of violence.) Both are great in the sense that they revolutionise the practice of economic decision making and policy implementation. Communist China experienced several changes in the direction of economic policy under Chairman Mao. He tend to favour a razing to the ground of the economy and to be followed by a remaking of the economy in a purer communist mode. By doing so in the Great Leap Forward in 1958 he intended to take the control of the economy out of the hands of the bureaucrats and return control of the the economy to the workers and the peasants. The policy was disastrous which according to one source caused 60 millions deaths through starvation caused by reducing agriculture to a state of chaos. This use of greatness has no moral dimension, but views greatness as the power to revolutionise and change economic policy making for decades.

George Osborne is one of the Chairman Mao type economists. While knowing little about economic policy making he has through sheer force of personality changed the way economic policy making is viewed and discharged. He has made deficit reduction the central plank,of his economic policy. Unlike previous Chancellors he has made this the priority, other targets such as reducing and ending child poverty have been scrapped as being incompatible with this end. He has sold to the nation the belief that a continued and possibly constant programme of national austerity is necessary for national well being. Ed Balls I initially opposed this policy (as having a better understanding of economics he should have known that the policy was flawed from the start), yet after a few more squeals of protest he fell into line. He has promised that he will continue the programme of national austerity if Labour is elected. Quite an achievement for a ‘no nothing’ economist to dictate the direction of economic policy for at least 10 years and possibly more.
Having called George Osborne’s thinking flawed it is necessary to demonstrate these flaws. In 2009 Paul Tucker, Deputy Governor of the Bank of England produced a highly significant but little read report. He expressed concern not about the size of the government deficit but the size of the deficit in the banking sector. Then as now the deficit in the banking sector was just over 500% of GDP, while even today the government budget deficit will peak at 80% of GDP. George has closed his eyes to the potential crisis in the banking sector, where a ‘run on the pound’ will cause a catastrophic economic crisis that has the potential to reduce the incomes of British citizens to less than that of the impoverished Greeks. Is George hoping along with the entire Parliamentary community that nobody will notice this omission in his deficit reduction programme?

There other great flaw is his belief in ‘expansionary fiscal contraction’, one of the most nonsensical phrases coined in the debate on economic policy. His argument is that if the government to fund its deficit has to borrow large sums from the banks, it deprives industry of the money it needs for investment. Therefore if government borrowing is cut it will free funds for investment and the economy will grow and all will benefit. There has been no evidence of this ever happening (except in wartime), what has reduced the flow of money for investments, is the banks preference for speculative financial activities over long term investment. Banks prefer to lend money for speculation in the commodities, financial, equities and property markets. It this speculation that reduced the money for investment in industry. In fact 80% of all bank loans are to the property market, that is why they have no money to lend to industry for investment. A problem ignored by George Osborne who has preferred to give the banks £200 bn. A programme in quantitive easing, while announcing just £1 bn. for investment in the national infra structure.

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George Osborne’s success recalls to mind that other great non economist who rewrote the economics agenda and that was Ronald Regan. His rival George Bush Snr. denounced his economics as ‘voodoo’ economics, only to eagerly embrace it as Regan’s Vice President. Despite all the evidence to the contrary Ronald Regan’s economic policy was hailed as a success by politicians. He as with George Osborne preached the virtues of small government and he cut taxes and claimed to cut government expenditure. While he cut domestic spending on welfare he exponentially increased defence spending. Billions were wasted on his Star Wars programme. He funded this excessive expenditure through government borrowing and when he finally left office, the USA had its greatest budget deficit ever. George by comparison will by the time of the next election leave Britain with an ever spiralling banking deficit, leaving Britain at the mercy of predatory financiers.

However this essay is written in praise of George Osborne, so I must remain to central theme of why he is a great economist. While I could write about his Machiavellian skills in manipulating political friends and foes, there is a more interesting approach.

Economics is a subject that lends itself to charlatanry, because politicians are desperate for that one policy that will deliver success. When in conversation with economists their normal degree of scepticism is abandoned, they are so willing to believe that the proposed policy is the one that will deliver success. George Osborne must have realised early in his career that any well packaged and presented economic nonsense would sell. He would have had as a prominent politician have seen close up how the Treasury manipulated economic statistics and how whatever sleight of hand the Treasury used there would always be a coterie of economists praising the Chancellor’s policies. The reason economic charlatanry is so widespread is that economists only have the vaguest understanding of how the economy really works. To admit this as an economist would be to invite ridicule and so everybody pretends black is white even if they suspect that black really is black. Modesty is never a characteristic of any economist, bluster is the more usual characteristic. I am not suggesting that economists are ignorant of the working of the economy, so much as that they vastly overstate their understanding of the economy. If I can use an analogy into this pool of preening fish a predatory shark arrived, who realised how easy it would be to manipulate the consensus of views to suit his ambitions.

He would have found that politicians such as Ed Balls who play by the rules of the economic game were easy to manipulate. What any economist knows is that the future is uncertain, so predictions for the future have to be hedged around by ‘maybes’ and ‘perhaps’. Yet George Osborne has torn up the rule book, he knows what the future holds. He has set limits to future spending, including a welfare cap all of which Ed Balls as shadow chancellor has signed up to. If events turn out differently, George Osborne will happily abandon all his pledges giving some plausible explanation. While if Ed Balls becomes Chancellor he will be the hapless acolyte following the master, whatever happens he will stick to George Osborne’s targets.

At it’s worse economics as practiced in the UK is an invented game and those who stick to the rules in this imaginary game will always be at a disadvantage compared to those who have a complete disregard for the rules.