Tag Archives: Michael Gove

The ‘sky cannot fall in’ school of economics.

There is an economic school of thought commonly held by politicians and journalists, which can be best described ‘as the sky won’t fall in’ economics’. What the practitioners of this economics believe is that the economy is a thing that just goes on delivering whatever politicians might do. There foolish decisions have some negative impact on the margins, but come what may the economy will still working as well as ever tomorrow. Such people described the financial crisis of 2008/9 as a ‘once in a lifetime affair’, it was what insurers call the unexpected, an ‘act of God’. What it was not was a crisis brought about by the foolish behaviour of bankers and politicians. The cause of the crisis was not the foolish speculative behaviours of the banking community or in the naivety of politicians in believing that the financial market could regulate itself, no the causes lay elsewhere.

Similarly in the U.K. we are suffering from a surfeit of ‘the sky won’t fall in’ economics from the Brexiteers in the politics and the media. Warnings of the dire impact that a hard Brexit will have on the economy are dismissed as ‘Project Fear’. One leading politician when warned of the damaging impact of a premature exit from the European Union (EU) on manufacturing industry, said that it won’t matter, as manufacturing only accounts for 10% of U.K. output. Only a person completely ignorant of economics could make such a foolish statement.

Yesterday a journalist who normally displays the utmost scepticism about politicians and politics revealed themselves as a member of this school of thought. He in his articles has on numerous occasions exposed the follies of politicians; yet he takes the word of these self same politicians that a premature rupture in trading relations with our biggest trading partner will have minimal impact on the economy. He writes that the day after Brexit the economy will be functioning as normal, planes will still be flying and there will be food in the supermarkets.

Yes the economy will still be there and it will be functioning, but the question he fails to ask is how well will it be functioning. To take his first example, yes the planes are likely to be flying, as it’s inconceivable that the British and European politicians can’t come to some agreement on airlines flying rights. (One must mention a proviso, politicians are just as likely to come to an agreement which is detrimental to the interests of our airlines, as beneficial. He assumes a competence which our politicians in the Brexit negotiations, have been singularly lacking.) What he fails to understand is that whatever results, the British government is exchanging an agreement about rights to fly over Europe that is highly beneficial for our airlines for one that is much less beneficial. What we do not as yet know is how much more difficult will it be for Britons to fly in and out of Europe. Obviously the uncertainty generated by Brexit will the day after Brexit lead to some cancelled or delayed flights. All that can be said is that British airlines won’t enjoy the same access to flight space over Europe than they had before. However what will obvious is that flying from Britain to Europe will become more difficult.

Journalists and politicians of the Brexit persuasion hide behind this uncertainty. I as an economist know that Brexit will be damaging to the British economy and society. Just because people such as myself cannot spell out in accurate statistical format the exact damage that Brexit will inflict on the economy, Brexiteers claim that we should not be believed as we really just don’t know. However to put it in its simplest terms believing the Brexiteers is asking the people to accept that there uninformed guesses are as good as my informed guess of myself and other economists.

John Maynard Keynes was once the doyen of British economists, but he is now so out of favour that his economics has been banished from the Treasury and political circles. As a consequence politicians lack an understanding and knowledge of his great insights to the workings of the economy. What all in politics and most in journalism have forgotten is his insight that the capitalist economy is inherently unstable. In his books such as ‘What is to be Done’ he demonstrated how the misguided decision making of the politicians had brought about the worst of all possible economic circumstances. The Peace Treaty of Versailles might have delivered peace but it also delivered a Europe wide economic recession. Imposing punitive sanctions on Germany wrecked the economy of what before 1914 had been Europe’s largest and most prosperous economy. The knock on effect was Germany no longer bought the goods it had previously, so spreading the misery of slow growth and high unemployment throughout Europe. Added to this British politicians made a series of decisions which worsened the impact of this depression on the U.K. The 1920s in terms of economic growth was a lost decade.

What cannot be stated often enough is that the economy is not a thing that will constantly deliver, regardless of the poor decision making of our political and business leaders. Just as with any human construct it has flaws and one flaw is its propensity towards instability. This unstable economy can be as easily pushed into recession, through the follies of our leaders as it can be thrust into exuberant growth through the ingenuity and good decision taking of the same people.

Bill Gates, Steve Jobs and all the other entrepreneurs of Silicon Valley kickstarted the information technology revolution, which led to a sustained period of economic growth. One only temporarily halted by the bursting of the dot.com bubble. A bubble caused by foolish speculators bidding to much for dot.com businesses. When it became obvious that these companies would never earn the expected profits, it became obvious that these companies had been overvalued, so there share prices collapsed, causing a loss of business confidence and a recession.

To this economist one the main causes of sudden changes in the business cycle are human folly and ingenuity. The economy is not a perfect construct it has weaknesses and foolish decisions made by politicians and businessmen can expose those flaws which leads to economic collapse. Similarly it has strengths which men and women of ingenuity can exploit to create immense wealth, which benefits all.

In answer to Michael Gove and Simon Jenkins, despite what you think, the ‘economic sky can fall in’. It’s the actions of men such as you that make this more likely to happen than not. Unfortunately the leading politicians in Britain at present seem to lack amongst them, people of realism and ingenuity that could prevent ‘the sky from falling in’.

Advertisements

What is required today is a return to the economics practised in 1968

The storm clouds are gathering over the economy, yet our political leaders seem oblivious to the approaching storm. These are some of the gathering clouds, inward investment has fallen 80% since 2016, the investment in national infra structure is at levels similar to Greece and in consequence economic growth fell to 0.1% in the last quarter. As a nation our trade deficit is the highest, as a proportion of GDP in the developed world. A trade deficit of 5.9% of GDP is only reduced to 2.2% through the contribution of financial services. A situation in which the U.K. is over dependent on recycling foreign cash invested in the U.K. to pay for imports. This gives an incentive to government to ensure that the City of London remains the largest money laundering financial centre in the world. Dirty money is as acceptable as clean money for paying our debts. This situation cannot continue indefinitely, if politicians cannot take action to resolve some of these problems, they will resolve themselves. This resolution will come in the form of an economic crash which will make us all much poorer.

A useful comparison can be made with the 1960s and 1970s a period of frequent balance of payment crises. In the 1960s the trade deficit never exceeded 0.6% of GDP and in the crisis year of 1976 it rose to 1% of GDP. These deficits always called for remedial action such as devaluation and economic policy measures to reduce the demand for imports. Now this ever rising import bill is never considered a problem for the U.K. Its role as one of the world’s financial centres ensures that it always has ample reserves of foreign currency to finance its debts. What never troubles the world’s governments is that one of the world’s largest financial centres lacks the strong economy to sustain it in that role. In the 19th century Britain’s strong economy enabled it to fulfil its role as the world’s banker. Now with a significantly diminished role in the world’s economy it still tries to be the world’s banker. This mismatch cannot continue, we as a country are unfortunately heading for a crash that could wreak havoc with the world’s financial system. The catalyst could well be Brexit when Britain begins to lose its role as the EU’s banker and uncertainty develops about the UK’s future this could precipitate a flight from sterling similar to that which happened on Black Wednesday. This time there will be no easy strategy for quickly resolving the situation. There is no ERM to leave and no easy currency devaluation to make. The pound will crash and the only remedy will be a large IMF loan and the imposition of a Greek like austerity programme.

Whatever criticisms the politicians of the 60s and 70s deserved, they were at least pragmatists. Unlike today’s ideologues they can recognise that there was a reality that existed beyond the world as seen from Westminster. The Labour government of 1976 could embark on an incomes policy that would alienate its supporters, knowing that this was necessary to restore the economy to health. This programme of income cuts was the only way that the government could reduce the high level of inflation and reduce the trade deficit. This programme was so successful that by 1979 the trade deficit had been converted into a surplus. These politicians were pragmatists who listened to the advice of outsiders and adopted an economic programme that was contrary to their political instincts.

Unfortunately this government of pragmatists lost the election to a party led by radical minded ideologues. They advocated a policy of Neo-Liberalism, which included as part of its policy manifesto the recommendation to adopt supply side economics. This meant freeing up resources from the less productive parts of the economy by closing them down. Capital and labour would them be freed from being shackled to old inefficient industries and be freed to be used by the new dynamic industries that would replace them. This it was they claimed would boost economic growth. What was talked about was the so called ‘weightless economy’ an economy largely devoid of manufacturing industry instead one based on the finance and industries such as the entertainment industry. These new industries would replace the jobs lost caused by the closure of the old manufacturing industries. The economy never developed in a way that these new economic prophets claimed.

At the beginning of their period in government these Neo-Liberals were warned by economists that there policies would lead to depression and the damage British manufacturing industry. Yet they were ignored by the new radicals, who knew this was outmoded thinking. The British manufacturing sector lost 20% of its capacity, with the consequent widening of the trade deficit. A deficit temporarily covered up by the wealth generated from the exploitation of North Sea oil. The old manufacturing centres declined, there was no rush of new money to so called new industries to compensate for the lost output from the old manufacturing industry.

What was damaging to the country’s economic prospects was new understanding in politics that the economy no longer mattered. Free marketers in government believed that economy was a largely self regulating mechanism that could be largely left to itself. All that was required was the occasional light touch on the tiller in the form of interest rate changes. What was once a major department in government, that of Trade and Industry now became a mere sideshow. Now industry could be left to run itself, no longer would government try to pick winners.

What these politicians had forgotten was the words of Maynard Keynes, there would be times when the government would be needed to save capitalism from itself. That happened in 2008/9 when the world financial system was only saved from the consequences of the financial crash by timely action of governments. Politicians learnt little from this crisis and continued the policy of non intervention. When I was a child one popular ornament was the China or brass three monkeys who epitomised the motto ‘hear no evil, see no evil, speak no evil’. This is the government’s current approach to all matters economic. No matter what wrong doing is practised by managers and directors, as in the example of Carillon, they do nothing. Even if individuals can do wrong, the belief is that the market as a whole can do no wrong.

In the now much discredited 60s and 70s there was a belief amongst politicians that the welfare of the nation was dependent on the well being of the economy. Whatever the political conviction of the politicians, they believed an interventionist economic policy was necessary to maintain the well being of the economy. When the economy was in danger of over heating it for example imposed restrictions on demand to prevent that happening. Perhaps the most famous is Selwyn Lloyd’s 1961 credit squeeze. Unlike today’s politicians they did not see inflation in the housing market as a good thing. This contrasts markedly with all governments of the past twenty years who regarded house price inflation as a good.

One consequence of this is the unfortunate lending programme of the banks. Today only about 6% of bank lending goes to manufacturing industry. In 2008 almost 80% of bank lending went to the property market, a figure which it is approaching today. The U.K. remains an economy in which the main driver of economic growth remains property speculation, while manufacturing industry the real creator of the wealth that matters is neglected.

Whatever experts might say or write contemporary politicians remain impervious to economic realities. Nothing of what I have written impinges on their consciousness. They now seem to inhabit a hermetically sealed world into which no outside thought intrudes. The leadership of the main parties are locked into an increasingly complex debate in which each of them strives to deliver the most authentic Brexit. That the Brexit promised by each of the leaderships is a fantasy, that fails to acknowledge any economic reality is of no concern to these politicians. In the words of one leading Brexiteer, the people are tired of experts and don’t what to hear what economists such as myself say. All that matters is the authentic voice of the people as interpreted by the Brexit politicians no matter how fantastic that interpretation.

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.

Alternative and/or Socialist Economics are overdue a revival

Politicians have constantly complaining about economists, usually for not giving them the 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 weren’t making the upbeat predictions about Brexit that he wanted. It was disappointing to him that all these economists who were backing the free market reforms of his government were no longer supporting him.

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, that resulted from the suppression of alternative economic voices. Free market economists of the Chicago school dominated the universities and the professions, maverick economists were marginalised or silenced. When he proposed that the UK leave the European Union, the largest and most prosperous free market in the world they could not support him. What he had misunderstood that while some economists were willing to ignore the evidence that a precipitate break from the EU would be bad for the EU economy, most economists subscribe to the view that there subject is evidence based and could not back a policy that was contrary to the facts. Free market economists could not support a policy that led to the U.K. breaking with the world’s largest and most prosperous free market.

However Michael Gove is not totally to blame for his misunderstanding of the nature of economics. Economists fail to recognise the divisions within society and the conflicting interests of the various groups that make up society. What they prefer is one ‘great theory of economics’, a theory that explains everything and benefits all. In the 1980s for a variety of reasons mainstream economists adopted the free market economics of the Chicago School. This is its essence stated that the free market brought about the most equitable of outcomes. The free bargaining of sellers and consumers would deliver the best outcomes for all. No longer would the state be ineffectively second guessing what the people or consumers wanted.

Contrary voices such as that of Michael Polanyi were ignored. Michael Polanyi argued that the unregulated free market was the worst possible of outcomes. He stated that the state was in effect could be better at second guessing what people wanted, than 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 majority. Health care in the USA is run by for profit health care providers. These health care businesses are usually companies owned by shareholders. Those share holders that hold a majority of the companies shares are the super rich and they are not going to permit their business to provide loss making services, as they want the best possible return on their investment. The provision of universal health care to the less well off is a loss making service, so it is not provided. The poor and less well off instead have to rely upon the health care provided by the 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 and 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. Now al 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 services more market efficient, each reform costs billions, yet is considered 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. What all ministers believe is that by dividing the NHS into competing buyers and sellers (hospitals are sellers, selling there service to the various local health trusts) they get the most efficient of health services. Never do they understand that each new bureaucratic structure they impose on the NHS is yet another costly diversion of resources away from front line services and that these expensive bureaucracies may prevent health care being provided in the most effective and efficient way.

What economists know but politicians do not. Is that a health service run by health care professionals might adopt some wasteful practices such as over ordered get of medicines, but the cure for this problem is far more costly. If the most efficient distribution of medicines is to be ensured a new bureaucracy of stock controllers, accountants and financial controllers of all kinds. The cost of these bureaucrats far exceeds the cost of any over ordering by medical professionals. 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.

Although Michael Polanyi who once was a well known economist he is now virtually unknown amongst contemporary politicians. Contemporary economists are overwhelming free market economists and little is published that is contrary to the consensus view. What is now needed is a ‘Dead Economists’ society. A society that popularises all the policy prescriptions of these long dead 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 Hayes’s work other than his short populist text, ‘The Return to Serfdom’, they would realise that he would have been critical of much ill thought out policy making. There are numerous economists who have written about the problems that face contemporary U.K. and suggest policy solutions, but all are ignored. What politicians want are the simple easy to under policies offered by the free marketers, they have little patience with good economic practice, as it is time consuming and does not offer the simple answers that make good headlines in the popular press. Donald Trump rather than be seen as a maverick politician contrary to the mainstream of politicians, should seen as representative of current political process in which politicians have a limited time span and want solutions produced within five minutes.

Why we need economists

Being a former social worker and state secondary school teacher I am used to belonging to a profession that is disparaged in the media. Now I find that being an economist means that I am subject to similar vilification. What made economists (or rather the good economist) so disparaged is that they tell inconvenient or awkward truths about the economy and society. When faced with such truths politicians and the powerful will resort to abuse to silence the truth tellers. What is remarkable is that we have a parliament dominated by graduates from our elite universities and yet they are in greater ignorance of the world around them, than the parliaments of the past! Parliaments that were mocked for having too many of trade unions and country squires, men supposedly lacking in education and knowledge of the world around them.

Having made this declaration I must now produce the evidence to defend my assertion. These awkward truths usually are warnings about coming troubles that politicians would prefer to ignore. When the great crash occurred in 2008/9 politicians claimed that it was a once in a lifetime event that could never have been predicted. An economic act of God. The truth is that all the warning signs were there and instead of acting on them politicians refused to act, as any action taken would have been cutting spending and that would have been unpopular with the electorate. There were two causes of this crash were the banks irresponsible lending policies, such as 125% mortgages. The other guilty party were the governments and central bankers who rather than regulating the market for the greater public good, preferred to turn a blind eye to the irresponsible behaviour of the bankers. Their justification for their inaction was the doctrine of neoliberal economics, which states that economic well being is maximised under the free market economic system.

I suspect that those trade unions and squires of the past would not have been so gullible, as they had a superior understanding of human nature. They from their dealings with bankers would have known that these men were not the giants of the financial world but men as fallible as themselves. These men would have recognised that greed for ever greater and greater financial rewards motivated these bankers.

Awkward truth warning – little has changed since 2008 bankers are still lending irresponsibly and the government is still turning a blind eye to such behaviours. One area of concern is car finance, it is suggested that car dealers in their desire to sell more and more cars are not paying sufficient attention to the ability of their customers to fund their repayments and the risk is that these buyers will default in the future on their loans. This will cause the defaulting customers to return their cars leaving the dealers with an unsold mountain of cars other hands. This would in itself be sufficient to cause another economic downturn. The banks who source the funds which enable the car dealers to offer generous financial terms to buyers, rather than offering a word of caution or refusing to increase there lending to the dealers just continue to shovel cash in their direction.  Other forms of bank lending such as to the property market suggest that bankers have not learnt the lessons of 2008 and unfortunately neither has the government.

As an economist you learn to read the runes, in my case as I have no access to government statistics, it is those short comments in the financial section in the newspapers that give the game away. In this case it was a short piece of no more than three or four lines. A financier was asked if the Bank of England was now cracking down on irresponsible lending to prevent a repeat of 2008/9. His answer was no, as the governor knew that if he reduced borrowing he would cause an economic slowdown, which would increase unemployment with all its associated problems. If I read the article correctly little has changed since 2008.

I also realise that the banks have fought tooth and nail to stop the governments of Europe and the USA to make them resilient in the event of any future crisis. British banks have successfully persuaded the government that reserves of 3% are sufficient to enable them to ride out any future crisis. European banks have even smaller reserves. These reserves are either cash or assets that can be easily turned into cash to meet the demand for cash from their customers. (A greater ratio of assets to lending would limit the money banks could lend and in consequence reduce their profitability.) The suggestion is that in an event of a repeat of the financial crisis of 2008 the banks will lack sufficient reserves of cash to enable them to meet their customers demands for money. In a crisis customers fearing the future will withdraw their savings from the bank, either because they doubt the loudness of the bank or they want money in hand to deal with any future crisis. It will only take one bank to close its door for a general panic to ensue with the consequence that the government yet again will have to step in to bail out the banks. If the banks held greater reserves as have happened in the past such temporary crisis could easily be resolved  The banks would have sufficient quantities of cash in reserve to be able to pay those panicking customers who wanted their money back. Once it was seen that the banks had plenty of money the panic would cease. However if banks have insufficient cash reserves the whole system is liable to collective failure. If only one bank has to close its door, because it cannot meet its customers demands for cash, the contagion will spread and there will be a major run on the banks. Yet again the government would have to rescue the banks from their follies of their own making.

However we tellers of awkward truths have a problem. We cannot predict exactly what will happen or  when. We are tellers of possibilities and probable truths and us such we can be easily discredited. Economist predicted that a vote to leave the EU would have a negative impact on the economy. Then when in the days after the Brexit vote, the economy failed to collapse the naysayers could claim that they were wrong and that the collective opinion of economists was worth no more than that of the collectivity of politicians. What these naysayers overlooked was  that the Governor of the Bank of England being all too aware of the negative impact of a Brexit vote took immediate action to offset its negative economic impact. He simply increased the amount of to the nations borrowers enabling them to go on spending spree which prevented the economy from taking a nose dive. What the naysayers don’t realise it that it is a crisis postponed  not as they believe an imaginary economic ghoul or nasty conjured up from the feverish imaginings of the economists.

There is one prominent economist or truth teller who has consistently, warned of the impending credit crisis but is consistently ignored by governments and that is Anne Pettifor. She is never called to sit on the committees that governments set up to advise them on matters economic, as they don’t want to hear her truths. She has written extensively about the impending first world debt crisis, yet like some unheard of  Old Testament prophet her writings remain in obscurity.

Our one weakness as economists is that we cannot say exactly when or how or what we predict will happen. Even more frustratingly we can be right but events prove us wrong. There are no economists that can accurately predict the future, we are the scientists of the possible or the perhaps. The economy is such a volatile and complex construct that sudden and unexpected changes can make fools of us. This is why a leading politician* can say with confidence  ‘we have had enough of experts’ (meaning economists) and be praised in the media for his sagacity and foresight.

Yet our awkward truth remains the economies of Western Europe and the USA are over indebted and not one government has taken any realistic debt reduction measures. The fact that Britain with Japan shares the unwanted title of the most indebted of developed countries has passed our politicians by. They will speak endlessly about the public sector or government indebtedness, but they are focusing on the mice in the room while ignoring the elephant that is private sector indebtedness. Prior to the crash of 2008 government debt was less then a tenth of private sector debt. While great pains have been taken to reduce government debt little has been done to reduce private sector indebtedness*. This indebtedness will possibly rise to unheard of levels as the Governor has said that he is relaxed about the possibility of banks increasing their assets to nine times the size of GDP. Banks assets are loans, so he is relaxed about the banks increasing the nations debt to nine times the total of its wealth!

*Michael Gove a prominent politician who campaigned for Britain to leave the EU

* A policy practice that is common to all Western European governments.

A reply to Michael Gove and all those who think the study of economics is of little value

What prompted this post was a comment from a friend to whom I was talking to over coffee. He informed me, politely of course, that my opinion as an economist on economic matters was of little value as it was no better than the common sense opinion of the man in the street. I was as an economist a self interested individual who was only interested in advancing the truths of my subject regardless of the truths of the real world. This friend I should add was a distinguished retired academic from one of our most prestigious of universities. Without trying to sound too paranoid it does seem to be open season on economists. We are one of the most discreditable of professions it seems. Whatever we do we cannot distinguish truth from the fiction.

This discrediting of the profession of economics was set in train by Michael Gove, a former senior politician in the UK and now a columnist. He said in reference to economists in the EU referendum debate ‘that people were fed up of experts telling them what to do’.  He was referring to a Bank of England report which stated that leaving the EU would have a substantial negative impact on the British economy. A report that was considerably over egged by his opponent George Osborne to discredit the pro-leave campaign. Whatever Michael Gove’s reasons, his was essentially a statement of British philistinism something which never lurks too far below the surface in any public debate.

What I will do is accuse Michael Gove and all his like minded followers of hypocrisy. This I can sum up in the following phrase, ‘they are happy to have Barney the Bear managing the nations finances but not managing their own’. Michael Gove as a MP and journalist has an income of several hundreds of thousands a year. Although I don’t know him, I imagine he invests part of his income in various fund management schemes. He will no doubt have a financial adviser who recommends the best possible schemes in which to invest. These various investment funds will be managed by people who employ economists. Investment funds and banks of various kinds vie to employ the best and brightest economists who leave our universities. They employ these economists to inform them about matters economic and more importantly to predict future trends in the EU and world economy. Then with this information they are best informed as to where invest their clients money. Michael Gove would expect his fund managers to be the best informed of people, yet he believes that being well informed on economic affairs is not a necessary qualification for a politician who manages the economy. For him as with many of his colleagues all that is required is old fashioned British common sense for the post of Chancellor of the Exchequer. I imagine my friend who although he disparages me for being an economist, does defer to experts such as myself when it comes to investing his savings.

I should add that this nation has a habit of employing Barney the Bear to manage the nations finances. A knowledge of economics is not required of those who become Chancellor of the Exchequer. In the past these Barney Bears were well informed people who took advice from the economists employed by the Treasury before making any decision. Now these Barney’s are likely to be single minded ideologues who having read Hayek and Ayn Rand at university believe that they have acquired the essentials of economic knowledge. Any further that knowledge of economics is a mere ‘gilding of the lily’ and unnecessary for a successful career in politics.

Some economists who have contributed to this disparaging of the profession, through their own arrogance and overestimation of their abilities. These are those economists who can be best described as the ‘forever after economists.’ Just as in the children’s fairy tale where the participants will forever live in a state of happiness and bliss, these economists believe that if their economics is adopted the people will forever after live in a state of happiness and bliss. I can identify three such economists who fit this category, Friedrich Hayek, Milton Friedman and the novelist Ayn Rand. While the latter never called herself an economist, she is seen by many contemporary politicians as written the Bible of Economics. What these three people have in common is the failure to recognise that the economy is a human construct which is as fallible as its makers. By ignoring this most basic of truths they could claim that if politicians followed there prescriptions they would create the ‘best possible of all economies’. The very many failures of the economies in which their ideas have been adopted, has demonstrated that the falsity of their ideas.

What is lacking in Britain is any real understanding of the economist and their work? If I was asked to describe what I thought was the role of the economist, I would say it is the reading and interpreting of the economic runes. Reading the economy is much like reading the runes, although the individual symbols are understood  there is some uncertainty about the exact message conveyed by the runes. Uncertainty because a contemporary historian cannot exactly replicate the in themselves the thinking of the rune carver. All of us are aware the individual happenings in the economy, such as increases or reductions in unemployment, businesses closing and opening; but only a specialist in economics can put all these individual happenings into context and explain their meaning. Since economics as with rune reading is subject to some uncertainty individual interpretations can differ, although not usually to any significant extent. Economists after reading the economic runes largely agree that Brexit will have a negative impact on the economy, what they disagree about is how great will be the negative impact. There are always a minority of economists who will misread the economic runes and give a very different interpretation of the message. They should be given exactly the same credence that those very few scientists who deny the reality of global warning are given.

Michael Gove will seize on the fact that a minority disagree with the large majority to say that are no economic truths as economists disagree as to what they might be all they can do is to state their own opinion which may have more or less value.  However as with climate change denying scientists very compelling evidence can be produced to prove them wrong. Similarly there is compelling evidence to suggest that those economists claiming that Brexit will benefit the economy are wrong. What Michael Gove needs to understand is that knowledge, even some knowledge is better than none. Ignorance is never bliss even in politics

Why economics fails

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

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

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

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

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

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

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