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.