Tag Archives: The Old Testament

New Economics – a new approach to policy making

As a sceptical economist it is all to easy demonstrate the failings of contemporary economics, what is much harder is to suggest an alternative to the current practice of economics. However it is not so difficult as it appears as history suggests an alternative approach to economics.

Economists generally take the individual as the basic building block from which society is constructed. In most textbooks there is a very tedious chapter on how primitive man built up a chain of exchange networks that were to become the rudimentary economy. From this starting point economists develop a theory which demonstrates the superiority of the free market. However this is erroneous as the basic building block that makes up the economy is the community, it is communities that exchange goods and services. In Celtic Britain it was the local top man (as representative of the community) with whom traders from the Mediterranean dealt. They exchanged their goods for British tin but it was a very ritualised transaction. Obviously there was bargaining but not as the economists imagined, there was no protracted bargaining to establish the equivalence of one unit of tin for one amphora of wine. Even the local market where individuals exchanged goods was not as one as economists imagined where individuals freely bargained for goods, it was a market that was regulated by the community. The local rulers realised how disruptive an unregulated economy could be, as traders would seek to exploit times of famine or shortage by pushing up the exchange value of their goods and so leaving the poorer members of the community to go hungry. The anger this generated could lead to food riots and threats to the established order. When the Bible explains that Joseph built store houses in which to keep grain in the years of surplus for distribution in years of shortage, this was not as the Bible suggests an unusual practice, but one common to all established societies of the time. Rulers were above all interested in social stability and maintaining social order.

There was discovered in Babylon the code of Hammurabi (1157 BC). It was a pillar which set out the prices of the goods to be exchanged in the local markets. Economists have claimed that it would be honoured more in the breach than in practice, as its impossible for the state to control prices, as these prices would fluctuate of their own accord with changes in the market. In years of plenty prices would fall and in years of shortage prices would rise. However this is to misunderstand Hammurabi’s intent he wanted to ensure a reasonably equitable distribution of resources to maintain social order. There would have been a number of inspectors to check that traders were abiding by the regulations and failure to abide by them could result in severe punishment. What economists fail to understand is that economic power must always take second place to political power as the latter has the monopoly of violence. Threats to life and limb would ensure that Hammurabi’s traders observed the law.

Today societies in the Middle East have continued this practice by supplying their peoples with supplies of cheap flour. Economists deplore this wasteful habit, but what they fail to understand is that cheap flour is the means by which the governments of these countries maintain social order. Without the cheap flour there would be food riots and regime change. When economists from the International Monetary Fund and the World Bank try to force these governments to put into policies that end the practice, they are forcing on these governments politics that will lead to widespread discontent. What these economist fail to see is that in these poor economies the economy does not work as is described in the textbooks and the same is true of advanced economies.

Hard as it must be to accept the Arab strongmen that distribute free or cheap flour to their people have a better understanding of economics that most economists. Economist tend to believe that the free market is the best mechanism for ensuring a fair and equitable distribution of resources. However this is fallacious as it ignores the existence of power and how the powerful can abuse the market to best benefit themselves. Hammurabi recognised that the great landowners if given the opportunity would manipulate the market by holding back supplies to increase their price and so to maximise their income. He denied them this opportunity by threatening those that tried to manipulate the market in their own interests with dire punishments. In such societies it was easy to attract the anger of the government and suffer severe consequence which would include bodily mutilation or death. Our current leader David Cameron has a much more naive view of the economy he does not believe that those with the most economic power will abuse that power to benefit themselves at the expense of the majority.  Instead he believes that those businesses that conduct such abuses will be stopped from abusing that power by the market. If there prices are too high or they withhold supplies to the market consumers will switch to other suppliers so forcing the abusive business to mend its ways. This view ignores the realities of power, the abusive supplier has the power to manipulate the market so that consumers are forced to buy their goods. They can use a variety of means to deny entry to the market to alternative suppliers. David Cameron is not alone in his naive view of the economy, it is shared by the political class as a whole.

The iniquities of the free market are best demonstrated by the private rental market in the UK. In this market there is a great inequality of power, there are the tenants who if they cannot find accommodation will be forced on to the street and the landlords that can choose who if anybody shall be a tenant. The desperate tenant is forced to accept the price for tenancy chosen by the landlord, so now there are many examples of well paid professionals being forced to pay up to 50% of their income in rent. The landlord can choose not to let his property until he finds a tenant willing to pay the high rent he wants for the property. The tenant only has a choice between paying the high rent or homelessness. One consequence is that there is an increasing proportion of the population that is homeless or forced to live in inadequate, squalid and unhealthy living conditions. The only response by the political classes to this crisis is to promise to build more houses sometime in the future. It goes without saying that governments have promised this for the past twenty years but there is little evidence of a substantial increase in the number of houses being built. Not one British politician has the wit of a Hammurabi.

What economists and politicians must recognise is that the free unregulated market works to the benefit of the most powerful players within the market. The market left to its own devices will always leave many people hungry and poorly housed, if housed at all. From the view of the majority the free market system is dysfunctional it works to deny them a good standard of living and instead works to keep them poor. Until a government legislates to prevent the abusive practices of the most powerful players in the market the people will continue to suffer a decline in there living standards. Now in Britain for the first time in decades the young will experience a poorer standard of living than their parents. The economy is just not working for the majority of the people.

This is a truth largely unrecognised by the political classes. Discontent so far has been limited to supporting the few politicians that recognise this truth. Politicians that are on the fringe of the political class. In Britain it is the former back bench MP Jeremy Corbyn and in the USA Donald Trump and Bernie Saunders. However if politicians continue to fail to recognise the failings of the current system the discontent won’t be limited to voting for politicians but it will take a more serious and aggressive form. In the last century troops appeared on the streets of Britain and the USA to maintain order. The first combat that the commander in chief of land forces in Europe, General Eisenhower experienced was when he commanded troops to shoot at unemployed ex soldiers protesting in Washington.

What politicians don’t understand is that the economy does not work as described in the textbooks. The unregulated free market rather than deliver the greatest possible wealth to the community, functions instead to meet the demands of the most powerful players, the business corporations. The free market is a dysfunctional economic system in that it fails to maximise the welfare of the people. Hammurabi was right in 1157 BC the market needs regulating so it operates in the best interests of the majority. The state has to ensure a reasonably fair distribution of wealth and to do this must prevent the abuse of power by the most powerful players the big that will prevent this happening. While inflicting bodily harm on the corporate offenders is inappropriate in the 21st century there have be legal sanctions to ensure that company bosses don’t abuse their power. A start would be a recognition that there is such a thing as economic crime and for which the most appropriate sanction is a prison sentence. Why should it not be an offence when company bosses take money out of a failing company to ensure that when it fails they will have a substantial nest egg to cushion them during their brief period of unemployment.

Economists complain that government regulation impedes the workings of the free market, while ignoring that this is precisely what the large corporations do. Microsoft, Apple and Google have all exploited their monopoly power, to rig the market it their favour. The same applies to the privatised transport and energy giants in Britain. Perhaps the best example is the energy company EDF securing a deal that will guarantee them energy payments which most experts agree will be three times the average price paid for energy from their proposed nuclear power station at Hinkley Point.

Economic policy making should be based on the recognition that the market fails to deliver. The priority for government policy should be that of Hammurabi and the various Middle Eastern dictators  and the Social Democrat states of the Europe of the 1960s that is to ensure a reasonable distribution of economic wealth.  A distribution policy that would ensure that even the poorest paid are not short of the essentials needed for the good life. Such a policy would require state intervention in many forms to achieve this end, it might for example involve competition regulation* that would prevent monopolies from abusing their power or changes in the law that equalised the power relationship between employee and employer. Governments must realise that their role is to ensure that the economy is run for the benefit of all not a small minority. They cannot claim as they do at present, that this is an unrealistic aim as history is full  of examples that prove the contrary.

*Britain does have a competitions policy but it is so ineffective that is fails to prevent monopolies or cartels abusing their power. It is as effective as the human rights laws in the old Soviet Union, which failed to prevent millions being sent to labour camps.

Scapegoating the dominant economic policy of our times

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There is a difference between the economics practised by politicians and the economics taught in the universities. One commentator has called the former macromedia (Professor Wren-Lewis) meaning that politicians have developed their own unique understanding of economics. The politician’s economics is a mish mash of economics, common sense and prejudice. While the economy is doing well this misunderstanding of economics matters little, however the problems occur when this misguided economics is the basis of policy making in the time of crisis. This is seen in the various crisis that have afflicted Europe since the crash of 2008/9. Greece is perhaps the most notable policy failure, although even the one self proclaimed success story the UK, if far less successful than claimed by its leaders. The Central Bank interest rate remains at crisis level of 0.5% as even a modest increase will derail the recovery.

The consequence of this misguided economic practice is that all governments can now do is hope that the next crisis will not occur on their watch, as they have little clue as to how to tackle it. Political economics is informed by prejudice as with many a primitive religion and always looks for scape goats to blame for provoking the anger of the Gods. If they can identify those who have angered the Gods, they can deflect blame from themselves. This policy means the government won’t have to undertake of those difficult policy measures that would mean taking on those powerful interests that would oppose change. In Europe a convenient scape goat has been found in the people, much as in many a fundamentalist religion it is the misdeeds of the people that has brought suffering on them. God punished the people of Sodom and Gomorrah by turning their cities into salt, while the God of the market punishes the people by making them poor. In the case of Sodom and Gomorrah it was the sexual licence that brought down on them the punishment by God. In Europe it was the greed of the people. They were not content with the modest income the market allocated them, they wanted more. More generous wages, sick pay, benefits of all kinds, the greed of the people know no bounds and forced the governments into borrowing more and more and forcing the government into greater and greater debt. The God of the market punished the people with the great crash of 2008/9 and his angr could only be appeased through an act of penance. This penance was to intended to get the people to reject their greedy lifestyle by embracing austerity. Since the people would not willing do this themselves government would have to act to compel them to do  penance. Penance was enforced through cutting people’s incomes, such as by welfare cuts, wage cuts or wage freezes Once people had learnt the error of their ways after a period of suffering, prosperity would return.

(Using ‘The Old Testament’ to explain the practices of contemporary politicians might seem strange. However once it is realised that the sophistication of policy making by the political leaders has advanced little since the time of ‘The Old Testament’; this use of ‘The Old Testament’ stories as a metaphor to explain contemporary political behaviour is  valid.)
One consequence of this is that it is hard to make a reasoned defence what is an irrational policy so the opponents of the austerity programme must be labelled as deviants, to prevent their policies being given a hearing. Politics can be divided into the sensibles and the foolish. The upholders of the agreed of consensus of policies are the sensibles and their opponents are as but foolish children, who know no better. One notable sensible is Christine Lagarde of the IMF who described the Greek politicians who opposed austerity as children. In Britain since the Labour party members elected a leader opposed to austerity he has been subject to a constant stream of abuse by the media and the austerians of his own party. This last group have pledged that they will do all in their power to prevent a move away from the agreed policy consensus. In terms of ‘The Old Testament” metaphor the guilty people are asking to practice again those bad habits that got them into trouble in the first place. Only the superior people that is the austerians in parliament understand what is best for the people.

When the next crash occurs the austerians will tell the people it is because they did not willingly embrace poverty. They again are at fault and the only solution is to subject more of the people to increasing poverty so they learn the error of their ways. Only in that way can the God of the market be persuaded to relent and ease the suffering of the people. How long this policy approach will work is unknown. It will at some stage be challenged by an equally irrational ideology or belief system that cannot be discredited by upholders of the dominant austerian ideology. Perhaps the ideology of the Neo Fascist Golden Dawn in Greece will be that of the group that successfully challenges the dominant irrational belief system with that of a more compelling narrative, but one that is equally irrational.