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Saturday, 31 December 2011

Energy in the Grand Strategy

The populist President of Argentina has launched another propaganda attack on the Falkland/Malvina Islands. This announcement - made in concert with fellow-members of a Latin American Union - is a reaction to the news that there are now positive results for oil exploration in the islands' territorial waters. If these discoveries are sufficient for commercial exploitation in  that harsh environment, then the islands become more significant as sovereign territory whose resources can be supervised and taxed by their government. Argentina claims sovereignty on the basis of the relative proximity of Argentina to the islands [compared with the UK]; and responds to the fact that the population are deeply hostile even to negotiations on the sovereignty of their territory by asserting that the islanders are relatively recent settlers who have colonised the area under the protection of the Royal Navy. The new year is the thirtieth anniversary of Britain''s reassertion of sovereignty - by force of arms - following an Argentinian occupation.

With or without oil, the Falklands issue is unique due to the geographical and historical position of the islands. Most of the other island territories under the Crown are more remote from any other state's sovereign mainland. Indeed, the advantage of Diego Garcia and Ascension Island to the US military is that they provide bases and refuelling points for aircraft that are remote from the continents. Other outlying British territories have long ago lost the reason for their original settlement: as Saint Helena ceased to be needed as a watering place and coaling station for ships once the size and range of cargo vessels increased as welding techniques improved, and most passengers crossed the oceans in aircraft. Throughout the twentieth century nobody thought it worth the cost to build either a military airfield or a refuelling airport for civil use on Saint Helena, which meant that tourism could not be developed on the island even though it had a benign climate and the unique Napoleonic legacy. The recent British decision to fund an airport offers the island a new opportunity for a positive economic future in tourism. It would be absurd to wreck the nascent tourist trade by surrounding the islands with [intermittently] whining windmills. It could greatly facilitate economic development of the island if both tidal power and solar energy were developed - unobtrusively - on a sufficient scale to obviating most of the need to import fossil fuels.

None of the small island territories is a sensible candidate for afforestation: so they will be spared the idiocy that has recently been publicised in Britain by which the construction and adaptation of power stations to burn 'biomass' has already led to a timber shortage; as well as raising suspicions that climatically important natural forest is being destroyed to create plantations for fast-growing vegetation, typically on a monoculture basis that has calamitous effects on indigenous species.The small island territories could in principle be suitable locations for nuclear power sources on the scale used in submarines, but this raises security issues and staffing demands that would probably be disproportionately burdensome. Devices to exploit tidal/wave energy carry all the risks of operations on the open seas; but thereafter maintenance demands are relatively low.  Solar panels raise aesthetic challenges and very large arrays are greedy of land: which is why solar power from the deserts of the western USA  has become attractive to Warren Buffet, among a queue of eager investors. But the concept of floating solar panels on the sea opens up an interesting challenge of creating viable and durable installations that capture both wave and solar energy within the same structure, thereby optimising on the significant cost of transmitting the electricity to land.

Simple consideration of the options that are now available for providing energy to support major bases for the development of oceanic and seabed resources shows that Britain has not sufficiently developed the necessary applications of technology. Workshops producing devices to capture tidal [wave] power are few and under-resourced: but the underlying applied  science has been well developed over many years by several high quality research teams who could - if funded - be reconvened [often including retired colleagues] to carry the work through to implementation of their devices on a production scale.

The challenges that will arise in developing a Grand Strategy for the development of the marine resources that are accessible in British sovereign territories will have a huge reflexive impact on the restoration of lost capabilities in pure and applied science, technology and manufacturing. In sharp distinction from the non-jobs and fake apprenticeships that are established under the cheapskate schemes for the statistical reduction of 'unemployment', the jobs that can be created to meet the challenges of the high seas strategy will be real and thus those who are selected for them can be convinced of their importance. This will give validity to the learning that is required to do the jobs, and make acceptable the discipline of learning the proven methods that traditionally-trained artisans can impart to a new generation. It will percolate throughout the economy and all layers of society, and encourage lateral thinking about options that have been ignored within the United Kingdom.

On my regular visits to Derbyshire I travel either by the A6 [road] of the Midland main line [on the railway]: in both cases the route follows the rivers, and the entire course of every river is littered with hundreds of weirs that used to capture water power for corn mills, metal works, silk factories and cotton mill. The relics of obsolete river exploitation occur all the way north through Cheshire, Lancashire, Yorkshire and Cumbria and on into Scotland. Thousands of remnants of mill races could be reinstated to drive generators; but very few people have bothered. Similarly, old maps of Wapping - my London base - show tidal mills as major features of the landscape: a technology so glaringly crying out for use on the Thames - a powerfully tidal river - that I blush every time I recall my own lack of energy in agitating for this to be exploited. I am similarly embarrassed at my lack of energy in campaigning for every pylon that is sunk into the seabed to support an inefficient windmill should be the anchor-point for an installation usefully to capture wave power that could constantly be transmitted by the existing power lines to the national grid.

I am one of the many Brits who have been daunted by the fact that each small proposal for a green energy capture scheme within the UK- even one that re-establishes an historic watermill - is the subject of tedious planning discussion, subjected to environmental audit, opposed by nimbys and counter-productively supported by people who the generality of the neighbourhood regard as nutters. This is attributable to a lack of perspective. The activities subsumed under the control of the Department for Climate Change and Energy [or whatever it is called this week] are seen as bureaucratically controlled and costly to the taxpayer: they appear to be burdensome rather than empowering. Tinkering initiatives cannot change the established mindset; but if there is a Grand Strategy for the UK and all its island territories, that could become inspiring as people could link local opportunities to a grand plan. This concept of changing minds, influencing the national mood, might seem to be pie-in-the-sky: but it is feasible. Nothing on the agenda that is handed down by the political class [even concepts mooted by their sandal-wearing gurus] has shown the slightest sign of making the big breakthrough. Merely offering 'something different' is not enough: it must be something really big, with a make-or-break challenge that can readily be understood; then, as in wartime, people can feel genuinely that 'every little helps'.

Thursday, 29 December 2011

Old and Useful?

Britain has passed half a century dismantling industry, and pensioning-off the people who understand it. I spent almost half of that time in Sheffield, mostly when it was still a city that provided jobs for more than 75,000 highly skillied artizans and several thousand of the world's leading metalurgical, ceramic and glass scientists. To see that accumulation of expertise dissipated was as big a tragedy as it was possible to experience in any economy. The world continues to need those skills: demands are growing for expertise in using old and new materials for ever more challenging applications in millions of structures and machines that are required to operate in space, in deep mines, under the oceans, in radioactivity and within the human body. A profoundly ill-advised view that 'smokestack industry' was a thing of the past prevailed, most notably in the nineteen-eighties. The twerps who adopted that view assumed that Lancashire mills which operated on the unsustainable [and always incredible] business model of importing raw cotton for processing and re-export were on a par with innovative firms that developed new forms of special steels or carbon fibre: the whole range of industries was considered dispensable. That delusion cost the country dear as the immaterial business of casino banking took pride of place in the limited perspective of the government, taking precedence over the solid virtues of the world's leading insurance market and the world's most effective system of commercial law. The City of London is important because it is of huge value to the real economy, especially for the things that it did well in 1700 and 1800 and 1900 and even in 2000: though by then sleight-of-hand betting had taken the top fashion spot and was by far the most lucrative area of 'finance' which attracted very clever people who made bonuses on the turnover that they could conjure into being; literally without the use of any material commodity other than computers and electricity.

While 'the City' only ever accounted for around the same proportion of the turnover of the economy as the construction sector, it was much more highly rated by bedazzled politicians: most notably Gordon Brown and his acolyte - who was duly promoted to be 'City minister' - Ed Balls. Having thrown off the image, and most of the substance, of being a trade-union dominated organisation the 'new' Labour Party embraced the adventurism of those who were later to be reviled as 'casino bankers'; while it still depended on finance from the unions. Tony Blair escaped criminal investigation into the means that had been used by his agents to obtain donations from people who were coincidentally ennobled, but when he had gone from office and his peculiar means of funding dried up almost completely the unions conspicuously remailed Labour's major funders. But these latter-day unions were very different from the unions that had ineffectively opposed de-industrialisation and the destruction of their own members' jobs in the 'eighties. Between 1985 and 2005 trade unionism ceased to be a significant force in the private sector even while the former nationalised industries passed into the private sector.

The new area of strength for 'organised labour' was in the expanding public sector, where [unlike most firms owned by shareholders] government departments and state agencies provided accommodation for union officers and allowed staff time off work for union activities. The coalition government has decided - probably correctly - that the future economy will not be able to bear the cost of the pension payments that had been provided for in state employees' contracts; so those entitlements are being reduced and the unions are planning to defend their members' contractual rights. This campaign by the unions attracts minimal sympathy, and virtually no support, from the mass of the population who are experiencing declining living standards while they learn that part of the increased cost of living is raised taxation from which [among many other things] civil service pensions are funded.

When trade unionism was based in industrial plant pretty simple arguments could be advanced about the division of the income that the operation generated. Political Economy taught that there were three factors of production: land, labour and capital. For industrial production, for wholesale and retail trade, and for catering and entertaining establishments, land was bought or rented by the providers of capital for the business and the cost of land was accounted as part of the fixed cost of the firm [which varied with the location, so that operators of shops on Oxford Street in London paid vastly higher rents per square metre than did the owners of wareouses on the fringes of Pennine mill towns]. Once the site was paid for the construction and adaptation of the buildings on it were components of the capital stock that the owner had to provide, along with the machinery inside and around the premises, the materials to be worked on, the fuel to power the operation and the services [such as water supply and lighting] without which it could not operate. The vast contribution that capital made to any business i the real economy was visible and could be recognised. But that investment was useless unless people possessed of the necessary skills, experience and strength made themselves available to work there. By an iterative process of debate, dispute and discussion -sometimes involving strikes, lock-outs, mass sackings, reinstatements, arbitration and intervention by the courts - mutually tolerable rates of pay to employees and rates of return to capital were settled. Workers realised that capital equipment and investment were necessary, even if the plant was owned by a socialist system, and they conceeded that any capital stock must be maintained by constant refreshment. Capitalism - as a system of economic organisation - recognised that a willing workforce was best to manage and so employers were in broad terms willing to agree with unions on fair terms and conditions of employment in that place at that time. The skilled gained relative to the unskilled, the fit relative to the less fit. The physically weak who were not able to compensate by developing intellectual skills were ill cared for by the system, as were the mentally less able. There was much unintended cruelty in the operation of the system, but there was also an opportunity for the majority to find a level of remuneration that they deemed acceptable.

In the present postindustrial era pay [for the employed] is the outcome of various forms of negotiation and 'comparison' of one category job description with another. It is widely accepted that jobs in the public sector are generally better paid that those that can be said to be broadly their equivalent in the private sector: and all sources agree that pensions expectations for public sector employees are better at almost all salary levels [except the most highly paid categories of business executives] than in the private sector. There are a few tens of thousands of people in Britain, a few hundreds of thousands in the European Union, perhaps a couple of million in the world, whose transcendant skills, talents and experience enable them to command whatever remuneration they demand. There are many others who are almost as well talented as the topmost elite, who are able to demand superior pay for their work. There are others who have created inventions or works of art that become so popular that the creators are massively enriched by the proceeds from their willing users: and yet others who have seized  the ownership of capital and access to natural resources by political manipulation [or even criminal activity that no state can prosecute] that legitimate commerce and industry need to buy from, to the enrichment of the owners. Much 'unfairness' is evident in the contemporary distribution of incomes and of wealth, especially in instances where executives fail to deliver the expected results for their employers and still walk away with huge remuneration. The widespread awareness of indefensible income differentials has created a sour mood through almost all of society, to a degree that it can poison progress in economic development.

The point to which this argument is trending is that if Britain is to adopt the one big Strategy that is readily accessible to the economy, it must recruit the people who can manage the greatest leap forward in marine technology in human history and it must take the risk of paying them whatever is necessary to engage them in the task.

My last blog set out trhe bare bones of the Strategy. Britain has the opportunity uniquely to exploit - in a sustainable manner, for the indefinite future - the massive surface area of the earth's oceans that are currently recognised internationally as the coastal waters surrounding the imperial lagacy of oceanic territories. To vindicate this Strategy The UK needs first the naval and military forces that can enforce the assertion of sovereignty, over the long term.  Then it would be absolutely essential to build the industries and develop the technologies on which the Strategy absolutely depends  for economic viability. It is inescapably necessary to recall scientists, engineers and artizans who were dumped unceremoneously from their careers up to four decades ago. To attract people from their retirement, or from the alternative careers into which they have settled, or to bring many back from the foreign states that benefit from the skills that Britain spurned, will require payments up-front from the hard-pressed national budget; of salaries and potential bonuses that are enough for the purpose. Some patriotically minded individuals  might chose to return some of their remuneration to the state; but that option should be left to them, it cannot be assumed that people who have been rejected will suddely embrace the political class who will be bidding for their skills.

Unless the nation can be motivated to recognise and to support the proposed Strategy, the concept does not have a hope of taking off. A first step in demonstrating that it can be implemented is to show that Britain's Got Talent: not just in ephemeral popular entertainment but in all the areas that must be drawn in to the greatest and most grimly serious venture in the nation's history. The young have been denied most of the skills and all of the experience that existed on the shop floor and in the works laboratories in Sheffield, Birmingham, Glasgow and hundreds of other urban centres throughout the United Kingdom. One motivation for Scottish Nationalism is a reasonable desire to cut free from the corpse of a failed state: and the best motive for Scots to remain in the United Kingdom would be the probability of benefit from participating in the Strategy.

I have been privileged for several years to support a charity called Age Exchange that [among other things] brings elderly people into contact with the young, including many who have no extended family and therefore no familiar folk traditions or reference-points outside their immediate experience, to let them begin to understand what life was like within living memory in the places they now inhabit and thus open up some perspective. Something similar needs to be done on a national scale to enable depressed young adults to believe that the capable and experienced people exist who can help them to develop themselves as contributors to a technical wonderland that can be the envy of the world: while it brings them a world class standard of living.

This is all feasible technically and organisationally. The political will to bring it into effect is much more problematic.

Wednesday, 28 December 2011

Grand Strategy for Britain

Until  very recently one of the great British events, The Last Night of the Proms on BBC television and radio, featured two  great patriotic tunes: Rule Britannia and Land of Hope and Glory. The first of those became popular in the period of Britain's naval ascendency in the eighteenth century and the latter caught the national mood in the first decade of the twentieth century. Last year, in line with the Grauniadista welcome for the delusion that concentrated national defence is no longer appropriate, the flag-waving component was reduced to an exiguous addendum to a dreary programme. It is unfashionable to discuss the defence of the realm: yet the determination of this ultimate national interest is the primary duty of any political system. It is a centuries-old truism that military planning is always geared to 'the last war', with the result that today's orders for upgrading military and naval supplies, and manuals for training personnel, will not be appropriate for the next demands that are made of them. So when the next - unexpected - campaign begins there is a rush programme as the generals rethink their tactics, and otherwise-preoccupied politicians try to get their heads around a new strategy.

Sometimes in a misconceived plan to get ahead of events, bureaucrats and desk-bound military advisers may decide to develop a procurement strategy that is 'flexible', so that the members of the forces and their equipment are reconfigured supposedly to deal with any contingency. Such flexible planning gives critics a field-day every time the march of events shows that purchasing decisions were erroneous. Constant battering from opposition politicians, and from disappointed supporters of the government and from the media drives the defence establishment into a small world of their own where they discount the criticism that is coming at them inconsistently from many - often conflicting - points-of-view. The over-riding pressure that the defence establishment cannot resist is that which comes onto the state budget from social parasitism: the growing cost of benefits, subsidies for fake jobs, stultified bureaucracy, failed schools, 'Micky-Mouse' university programmes [funded by the state through the Student Loans Company], tax credits, bail-outs of 'bad' banks, overseas aid, net European Union contributions, NHS administrators and all the other Aunt Sallies which, for all their familiarity, are genuinely eligible for reform. Each increase in social spending stimulates a call for retrenchment somewhere else in state spending: and the constantly-criticised defence budget is a prime target. Hence a backward-looking but intellectually flabby programme of procurement, maintenance and human resources management looks ripe for pruning; and is often chopped back. Such a programme of slash and burn is under way at present and only the sleaziest careerists make any pretence that there is a rational strategic concept to the absurdly misnamed Strategic Defence Review that covers a craven and inconsistent bundle of false economies.

The 'right' policy for procurement and training can only be formulated when a country is prepared to plan for the next war to a degree that implies being ready to define the terms on which the next war - if war becomes inevitable - will be fought. This way of thinking was defined by US Admiral Alfred Thayer Mahan [1840-1914] in his magisterial and hugely influential book The Influence of Sea Power Upon History, 1660 - 1783. If he had taken a longer period he would have reinforced his point by assembling an even greater mass of historical evidence. Rome built its empire on seapower and almost all its successful cities were sea or river ports: the empire was most vulnerable away from sea and river routes, and was finally destroyed by the combination of inner rottenness and the incursion of uncontrollable peoples from deep in the Eurasian landmass. Before the rise of Rome Europe had been 'saved' by Greek seapower that was brought to bear at Salamis as much as by the heroes of the battle of Marathon. In the sixteenth century Europe was 'saved' again by a massive combination of Christian fleets to defeat the Turks at Lepanto. The loss of the majority of the settled North American colonies to the USA made Britain more keen to develop a 'second empire' in India and a chain of new colonies spread around the globe. This commitment to seaborne trade and settlement could only be viable if it was protected by overwhelming naval power. Britain's navy was so well developed between the loss of the USA in 1783 and 1804 that Nelson had the resources with which to smash the combined French and Spanish fleets at Trafalgar. For a century thereafter it remained British policy to have a big enough navy to destroy any combination of potential enemy fleets in a 'decisive battle'. In the light of Mahan's book the USA adopted a blue seas policy that has been maintained in the huge fleets and nuclear submarines that can intervene significantly anywhere on the globe.

After 1870 newly-unified Germany decided that it could only be a global power if it could take on the British Royal Navy. This led to the 'naval race' in which both countries committed huge technological resources and a mounting proportion of national income to building ever more massive and powerful warships. So closely balanced were the British and German fleets that they evaded having any decisive battle between 1914 and 1918. In a reversal of the Nelson tradition the British admirals were in shock after the indecisive confrontation off Jutland in 1916, which had indicated that German ships and gunnery were superior to the Royal Navy. The  British Grand Fleet skulked in Scapa Flow while the German High Seas Fleet passed time in home bases and  the German U-boat campaign forced food rationing on the United Kingdom. The First World War was won on land by a Franco-British alliance with US support: which was not what naval grand strategists on either side had foreseen. Only the 'eccentric' old soldier Lord Kitchener saw how the war would shape up: on being asked to become War Minister as the German army marched through Belgium in August 1914 he declared that the war would last for four years and he would start building the necessary army of more than a million men.

The 'investment' by both sides in their Grand Fleets was so much waste. During the war vastly greater sums of money had to be spent on the army and the anti-submarine campaign, especially by the British. For the second round of the European conflict that began in 1939 [a few years earlier than Hitler had planned for] the cost of fielding largely mechanised armies was augmented by huge expenditure on aircraft. Surface naval forces were much less significant to Germany, which concentrated on U boats even more than in the first world war; but the Royal Navy was still necessary to maintain seaborne trade against the U boat threat and to deliver the army and their supplies to their battlefields.

Japan decided very soon after centuries of national isolation ended in the eighteen-seventies that Mahan's new book had a special message for their imperial archipelago. If Japan was to be a power it must be a naval power. By 1904 the Imperial Navy had the means to score a decisive victory over the Imperial Russian Navy at Tsushima and as they built a land empire in Korea and China they plotted to achieve a similar strike against the USA. They saw their opportunity when the US had committed significant resources to assist Britain to defy Hitler in the European war. The plan was to achieve a decisive victory in the Pacific by destroying the US fleet at Pearl Harbor. The raid [in December 1941] was a partial success, but it missed the aircraft carriers. Much more significantly the Japanese strategy stupidly discounted the ability of the US economy to generate enough ships, aircraft and other resources to smash the Japanese Empire within a very few years. The atom bomb cut short the time that the war needed to continue, and then began the Cold War era where Mahan's concept of 'decisive victory' was trumped by the horrific prospect of mutually assured destruction under which combatant countries equipped with hydrogen bombs could utterly destroy each other, with a potential incidentally to destroy civilisation all over the world.

Compared to these massively significant historical episodes, the present status of Britain and its armed forces seems a first glance to be irrelevant in world-historical terms; but that is far from the truth. Britain's forces are rated highly within the world's top ten for effectiveness and scope. Britain has nuclear weapons-carrying submarines, so can cause massive destruction in the territory of any enemy state: this is enough to ensure that Britain's sovereignty will not be challenged - as long as it is unequivocally believed that the British government would actually use the weapon in extremis. Britain in uniquely advantaged in the world - still - in the amount of ocean over which it claims [and can assert] sovereignty. A recent conference in London of the territories under British sovereignty reminded the few observers who bothered to take notice that The United Kingdom and its Dependencies comprises all the British Islands, South Georgia, The Falklands, Tristan da Cuhna, St Helena, Ascension, several Caribbean territories, Diego Garcia and other Indian Ocean outposts, and a sprinkling of points of land in the Pacific.

A strong fleet of nuclear-powered submarines equipped with nuclear weapons can ensure that this scope of sovereignty is maintained. A force of commando carriers can bring forces to support airborne troops on the ground in any threatened territory; and small ships - corvettes and sloops and patrol boats - can do the dogged detailed defensive work while advanced destroyers prepare to check potentially hostile forays.Alongside this mass of resources there is a need for an excellent army that can draw at need on large, well-trained Territorial soldiers. With the assurance of these resources, the United Kingdom can embark upon the essential project for this millennium: the conservation, farming and mining of the hundreds of thousands of square miles of sovereign territory and ocean This immense, mostly unexploited and largely unexplored environment can sustainably deliver up real resources for the indefinite future. No other country is richer in natural assets per capita of population: though Russia and Canada and Australia are comparably endowed.

The greatest issue in Britain today is not the parlous state of economic statistics, or the national debt, or the risk posed by the banks, or the potential impact of a collapse in the eurozone, or crime, or poverty, or unemployment, or the failure of schools, or the problem of funding and managing the NHS, or immigration, or racial tensions, or energy supplies, or pensions, or the failure of the political class, or inflation, or the ageing of the population or any combination of the well-known list of national woes. The greatest issue that underlies all the others is the lack of any national aspiration: the absence of anything for the broad mass of the people to believe in and to aim for. Britain has immense advantages over other countries, and these benefits have been retained by the sheer luck of the Queen's role as a coherent force which has held firm through the decades when the Empire was being thrown away and the painfully accumulated national stock of capital was being squandered through the elections auction game. The mood in the public has already changed, from disillusion with politicians to disgust at the vile egocentricity of the entire naive and ignorant political class [which includes  most of the specialist radio, TV and press commentators as well as the lifelong politicians]. The nation is looking for something new, and deserves something different. To grasp what we have, develop it and give thanks that we have not yet lost it, will be a good first step.

Monday, 26 December 2011

Two basic problems: Energy Supply and 'Banking'

Supplies of electricity and of money are alike invisible, dangerous to tamper with and essential for modern life. The costs and benefits of both supplies are of huge concern to everybody, are regulated under the government and yet seem to elude effective overall management.

On December 23 the Church of England published a letter to the Ministers in the Department of Energy in which they challenge a shift in policy. Publication of the letter was coordinated with one from the National Trust so it must have taken many hours to prepare, during the period when churchpeople should have been focussed on making spiritual preparations for Christmas, which used to be one of the two greatest festivals of the year before the Grauniadistas secularised the organisation. The issue raised in the letter was economic: churches have installed hundreds of solar panels, and the National Trust has also invested significantly in the fashionable technology. The UK government provided subsidies to people and to institutions who install solar panels at their premises, and suddenly realised that these handouts were going to cost far too much. The previous Labour administration developed the scheme, under which an unrealistically high price was to be paid for any solar-generated electricity that is received by the national grid.

Either through their electricity bills or their taxes, buyers of electrical energy were expected to pay the miscalculated subsidies to the property-owners who opted to install solar panels. The customers also have to pay for the availability of alternative electricity supplies, when there is no sunshine; plus the generation cost whenever any alternative source is used. Windpower is similarly subsidised; and both solar power and windmills need to be fully backed-up by more reliable alternatives.  The more that energy policy focusses on 'investment' in windmills and solar panels, the more need arises for parallel investment in alternative nuclear or 'clean' fossil-fuel using power stations, and this need is urgent because entirely serviceable coal and oil-fired stations have been scheduled for demolition within a few years. The more money is thrown at on wind and solar systems, the higher the cost of the power supply  will be, due to the need to multiply supply facilities. The sleight-of-hand by which the excessive cost of this programme is split between taxes and the prices charged to users is further obscured when poor [and elderly] customers' bills are partially offset by payments through the state benefits system or by 'social tariffs' that further overcharge other customers to mitigate the cost for others.

The most absurd assertion that emanates from the green lobbyists in this connection is that solar and wind energy are 'free': with an implication that oil, coal and natural gas are not similarly free gifts to humanity from nature. Most members of the lobby also share an essentially-irrational opposition to nuclear power generation  The raw materials for all these sources of electrical energy are 'free': but due to both institutional reasons [taxes, patents, planning constraints, investment fashions, land ownership etc] and the limitations of all technological systems the price of electricity varies from time to time and from place to place. Oil prices in particular are volatile due to mismatches of supply and demand, to political interventions, to currency movements and to speculation: so the exploitation of alternatives to oil often seems attractive.

But investment choices by the energy industries are subject to constant political interference. Coal mining in Britain was devastated by the war between the Thatcherites and big trade unionism [which had fallen under the control of Marxist ideologues] in the early nineteen-eighties, to be almost totally wiped out subsequently by the influence of the greens. The abandonment of coal was accepted despite the massive investment that had been put into the extraction of a free resource that is still abundant beneath the British Isles; and the same sort of irrationality in energy sourcing has recently reached a new apogee where the small cost of building 'clean' coal-burning power stations was struck out of budgets that are still set to throw billions into windpower whose uncertainty is becoming ever more apparent while the durability of structures and moving parts in extreme oceanic settings is not proven.

Britain is merely one of many adherents to the irrational approach to energy sourcing. The lack of sense is blatant in both economic and political terms: the costing and pricing of energy is not consistent with any sane economic theory and the rise in bills is politically threatening. Germany is not notably subject to earthquakes and has no modern history of tsunami: yet in an infantile over-reaction the normally steady Angela Merkel announced the closure of all nuclear power stations following the incident in Japan. This lurch in energy policy incurs huge cost in decommissioning and demolishing the existing nuclear installations, the wholly-unnecessary cost of erecting alternative power sources and the compounded ludicrousness of buying-in Polish and French nuclear-generated electricity. Japan is still smarting from the recognition of failed risk-management in the siting of power stations and has hesitated to formulate a long-term energy policy. China and India have accepted dangerously increasing levels of air pollution and the odium of massive carbon dioxide emissions as part of the price to be paid for economic development. In all these cases - and in virtually every other country - energy supply is seen as being too important to be left to a market mechanism. In areas where a form of 'competition' is allowed, as in sales of electricity to firms and households in the UK and the USA, the 'market' is so heavily controlled that no pure-market theorist would pretend to recognise it. The regulations are manipulated to ensure that most suppliers in most years make 'profits' about which  opposition politicians and consumerist lobbies can inveigh to the limits of their loquacity. Energy supply is charged for at the point of use: so to that limited degree there can be said to be a market; energy supply is also accepted as a social, economic and military necessity and hence policy has to be made by government. Under the system of uncertain and constantly changing overall policy in uneasy alliance with the default option to allow suppliers to maintain a form of fake competition that enables them all to be profitable; and consequently prices have risen drastically. 'Fuel poverty' is affecting more households every month as the economy displays continuing weakness, with wages failing to keep up with the rise in prices. Governments have got their energy sectors into a real mess, all over the world: and none of them sees 'the market' as a route to solving it. So the lobbyists' field-day continues...

As it does in 'banking', where it is proposed to ring-fence 'necessary' banking [personal and corporate accounts, and payments into and out from governments] from 'casino' banking which leaves everything else lumped together. It is more important to distinguish essential finance: the issuing and exchange of shares, finding finance for 'real' businesses by issuance of bonds and other means, providing currency to fund transactions over frontiers and dozens of other economically essential processes, from the gambling known as derivatives, swaps and many forms of futures. 'Separation' of essential banking from 'the rest' will go a long way towards sparing individuals and firms from the risk of their banks failing. The assumption that it also reduces to insignificance the risk of a government being obliged to bail-out reckless financial institutions is unfounded. Separation combined with 'risk-based regulation' of non-core banking cannot stop trade and industry being disrupted, jobs being lost and economic growth being reversed when indefensible [but permitted] 'risk-taking' in derivatives or swaps will be the cause of a collapse in cybermarkets. A greater necessity than the separation of Mister Mainwaring banking from the rest of financial trade is a hitherto ignored, but essential, rigorous enforcement of a clear differentiation between gambling [casino] contracts and the necessary trade in financial assets that represent fractions of ownership of commercial and industrial and agricultural and mineral assets [which has featured in several earlier blogs in this series].

Neither electricity supply nor the management of financial instruments can be entrusted to uncontrolled market mechanisms: but it is blatantly clear that politically devised controls over both systems are pathetically inadequate. A new Political Economy is needed, and this blog will offer some signposts to the way forward in 2012 over the next few days.

Friday, 23 December 2011

Christmas Shopping

There are many millions of Christians in Asia, and more in Africa, but the heartlands of surviving Christian belief remain in Europe and the Americas; and it is in Europe, particularly, [and as much among non-believers as among the Faithful] that the pre-Christmas period is the season in which it is conventional for people to buy both special food for the feast and presents for family and friends. The United States has its own earlier orgy of retail indulgence in the Black Friday weekend after Thanksgiving, to which Christmas - usually referred to as 'the Holidays' - is secondary as a market event.

Black Friday is reckoned to be a good indicator of the strength [or otherwise] of US  consumers' confidence in their personal economic future. This year the Black Friday trade was good, but then sales slumped below the average for the last few Decembers; indicating that consumers wanted to make a brave show on the big day, then immediately began more cautiously to allocate their pennies. In Britain the pre-Christmas shopping spree is traditionally followed by the January 'sales' [now beginning at the end of December] and the whole season from late November to mid-January provides a significant proportion - in some segments, a majority - of the annual turnover of non-food retailers. The indications in the UK this year are similar to those in the US: people still want to do some seasonal shopping, but they are more careful to buy just what they can convince themselves they need. Most households are conscious that the cost of living - including increased sales tax, which is ludicrously misrepresented as 'value-added tax' - has risen by significantly more than have personal incomes. Retailers are expecting trade after Christmas, probably including the sales, to be below the level of former years; and to stay muted for much of 2012. There is likely to be a small spending spree around the time of the Queen's Diamond Jubilee, as there was around the William and Kate wedding last year, but this will be on party ingredients, bunting and distractions from harsh reality rather than on high-ticket durable items. Professionals in the catering and tourism businesses are predicting that the Olympic Games will not bring a surge of visitors to London: the expectation of huge disruption to transport, and the threat of terrorism, are significant deterrents and tourist trade for 2012 is widely expected to be below that of a 'normal' year.

Economic uncertainly in continental western Europe and in Ireland is having a similar dampening effect on spending patterns, which extends to the Ukraine. Russia is experiencing relative boom conditions, but the communists destroyed the festive tradition of Christmas - focussing instead on an alcoholic New Year bonanza, illuminated by brilliant fireworks - so will see good business-as-usual. For most of the continent, any extra spending over the festive season will be compensated by lower retail turnover in the New Year.

There are several new features in seasonal shopping, which will have a huge impact when all-of-year distributive trade is analysed. In much of Europe 2011 has been the year when on-line shopping has really come-of-age. Amazon leads the field but the on-line business of other major retailers [such as John Lewis in the UK] represents a percentage of their turnover that would have been difficult to imagine even two years ago. Electronic trade in recorded music, both legal and pirated, has taken the predominant market share; leaving traditional music shops fighting for survival with few weapons left in their locker. The predicted level of business will not keep market-town music shops in being, selling sheet music and pianos, guitars and other instruments. Already for two generations musical instruments have only been accessible locally because the shops earned enough to keep going on the revenue from record sales. Now that the tangible record trade is vanishing, the availability of musical instruments around Europe will end; and, insofar as they are sold at all, pianos and trombones will be on-line purchases that will be delivered by carriers from centralised warehouses. Ancillary supplies such as reeds for woodwind instruments, and bow-wax for string players, will be delivered by the postman among a household's on-line purchases. Services that have been provided through local music stores, like piano tuning, will be cottage trades run - usually on a part-time basis - from the providers' homes, where they are able to survive. Financial stringency on customers is cruelly accelerating these shifts in behaviour; and those who blather on about reviving the High Street are challenged to find businesses that can survive in the new environment. Pubs, cafes and restaurants are under threat, too, in a decade of austerity: and the rise of supermarket home deliveries of foodstuffs bought online, at specific times, means that the fishmonger and the greengrocer are less convenient for many householders than are their massive competitors. Little-used local shops often more expensive than supermarkets because they have to levy the overheads from their material business premises and their taxes onto a declining cohort of clients.

Old folk with long memories and fixed habits, and children who delude themselves that they can spend their pocket money outside their parents' ken, want to have local shops available. But the shops' survival will be subject to constant challenge; though considerable publicity has been given to developments in which relatively small  shops and stalls, local delivery rounds and specialist mail-order outlets provide local meat, milk, eggs, fruit, vegetables and cheese from named farms to discriminating householders. Those with the necessary money and leisure to assess the market can combine purchases of local in-season vegetables and meat [which are sourced from modernised local distribution networks] with the option to buy out-of-season produce from Spain and Kenya that are delivered to the consumer  from the supermarket. The availability of all these foodstuffs is announced on the internet; which means that even a small-town market stall or a farm-based butchery needs to have invested in a reasonably sophisticated web site; and that investment is invalidated if the site is not updated constantly. Investment of time in marketing, including the acquisition of skills in information technology, are the most basic survival strategies alongside maintaining the quality and hygiene of the product.

Set against this picture of modern convenience shopping, the poor are increasing in numbers and their lack of means is becoming more painful to chronicle. They are not able to access fashionable brands, even of simple everyday items: in general they have to buy the cheapest that is available. Nevertheless peer pressure and television advertising make all children aware of brands, such that the young demand parity with their schoolfellows in having clothes and gadgets bearing expensive labels. The more a hard-pressed parent succumbs to such demands [which are made in sublime ignorance of the implications on an exiguous parental budget] the less that the household has for other things, so the pressure to buy food that is beyond its sell-by date increases. No aware citizen can ignore the rise of 'pound shops' in the UK and their equivalents elsewhere, the emergence of itinerant sellers of almost any product - including supposedly-fresh food - from the back of unmarked vans, and other signs of the emergence of a cult of cheapness to match the situation of those who are coming to accept that they are the poor. The 'abolition of poverty' was a pipe dream of most democratic political parties in the twentieth century. Right from the start of the present century the focus has rather been on addressing 'child poverty', which instantly translates into giving the carers or parents of the children whatever sum of money is considered necessary to give each child a 'fair' living standard with an appropriate range of educational and cultural opportunities.

At worst, the monetisation of child poverty has made the feckless single mother of three or more children a highly desirable partner for an unskilled shiftless yob who tolerates a low standard of dress and diet, and puts up with the noise and nuisance of children [to which he may intermittently react with violence], to gain a share of the family's income to fuel his habits. More metaphorical bread is 'taken from mouths of poor children' by parents and their parasitic partners than by exploitative capitalism or by the taxation system from which the families' benefits and credits are funded. The eighteenth-century concept of the perfectibility of man, which has been implicit in social and educational theory, is a proven nonsense. Throwing money at social problems raises at least as many issues as those that it was meant to resolve, and some of them - such as hard-drug addiction and commercialised child abuse facilitated by the internet - are at least as horrible as any from past ages. The whole agenda for social construction, reconstruction and adhesion over the whole income range is in most urgent need of revision.  The poor are the most exploited segment of society: primarily by each other.

The situation of those fellow-citizens who have been characterised as an underclass is highly germane to the topic of seasonal shopping with which this blog opened. The poor are defined by their exclusion from the uplands of consumerism: they are 'poor' relative to those who have more. Politicians, journalists, sociologists, social psychologists and others who express opinions about poverty have a standard of living that is notably superior to that of the underclass; and they would not contemplate surrendering the differential voluntarily so that the poor - thereafter including themselves - could have a little more.

One of the features of the current 'festive season' is that millions of people are apprehensive that in the proximate future there is a perceived risk of their own living standard moving further away from that they have enjoyed hitherto and closer to that which they assume characterises the poor. So in the apprehension of worse times to come they have resorted to the only behaviour they know, to which they became accustomed through the long years of the delusory boom: to spend all they could afford, and borrow what they could in addition to their actual means. In doing this at Christmas 2011  the odds must be that by so doing they accelerate their own candidacy for impoverishment relative to their former selves. The psychological, social and political aspects of this situation will prove to be far more serious than will be indicated by economic statistics.

Wednesday, 21 December 2011

Why So Few 'Great' Women Economists?

Women, in general, are not conned by academic Economics and its notion that markets are inherently 'rational'. The reason why women occupy a small percentage of professorial chairs in Economics was perfectly summarised by an intermittently strident feminist politician in the context of the banking crisis of 2008: would the crash have occurred if Lehman Brothers had been Lehman Sisters?

Women are just too damnably sensible, in general, to be deluded over the long term by the normalist  models that form the bedrock of twentieth-century Economics. The sole woman winner of the pseudo-Nobel Prize in Economics, Elinor Ostrom, is a Political Economist: not an expositor of simplistic and unrealistic models. The first woman to receive a Fellowship of the British Academy as an 'Economist', Professor Joan Robinson, set out on her career teaching  mainstream Cambridge Economics: but she evolved into a critic of the content and methodology of the subject in such works as Economics, An Awkward Corner and in her querulous reviews of the history and evolution of Economics. Joan was married to Austin Robinson, a mainstream Cambridge professor of Economics and a contemporary of John Hicks, who was a professor first in Manchester and then in Oxford. Sir John was the first Briton to receive the newly created 'Nobel Prize' on the basis of a huge output of elaborate theory that was published over many decades. His wife Ursula was herself a highly-regarded figure, known as an Economist but actually a practitioner of Political Economy, with her best-regarded publications on the reform of taxation and the processes of economic the real world. Joan Robinson and Ursula Hicks were held in great esteem from the nineteen forties for the next four decades, though Joan Robinson's increasing 'eccentricity ' - signalled by her turning away from 'high theory' - could not be denied. No British woman has been held in similar eminence among academic Economists since them.

Nevertheless, one British woman stands out now as an economic commentator of immense authority. In 2006 Gillian Tett foretold the impending crash in financial markets that materialised the next year and she explained the whole thing in 2009 in Fools Gold, a book that deservedly brought her a sheaf of prizes and awards. She understands the economy and Economists; because she sees them from the perspective of a Ph D in Social Anthropology. Currently she is working for the Financial Times in New York, where she makes shrewd observations on the morass of data, dogma, pragmatism and irrational optimism that keeps the US suspended over the deep black sea of the debt that has been accumulated by Federal, State and municipal governments. Healthy scepticism enabled her to see through the financial phlogiston that had supposedly created a firmament in cyberspace much earlier than most observers. The financial services created increasingly insubstantial 'products' which others bought as 'assets'; and they accumulated invisible intangibles to hold as hedges against the supposedly-exiguous risk that any of the AAA-rated assets could fail.

In a much-misquoted phrase Keynes wrote that people in markets act quite irrationally when they are taken over by 'animal spirits' in a wave of 'irrational psychology'. Tett's background in social anthropology was the perfect base from which to view the most spectacularly successful indulgence in irrationality in modern history: and to analyse exactly what it was. She was not alone in making those observations, but she was bold in asserting where it must end up. No first-class degree-bearing Economist of her age [of either gender] was able to match her prediction; not that many tried: most of them accepted the dogma about 'rational markets' that they had regurgitated to gain their high marks in examinations. Interestingly, however, the majority of the creators of the new immaterial 'products' were graduates in natural sciences [who alone were able to do the necessary Maths] and in History, Languages and even Moral Sciences [who were able to think 'outside the box'], rather than Economists. Economists were not particularly good operators in those markets, unless their Maths was strong enough to cope with the algorithms on which the 'products' were based.

Everybody is said to have a 'female side' and a 'male side' to their personality; with most men having a preponderance of testosterone-influenced masculinity [some much more overtly than others] and most women displaying the characteristics of  practical common sense and the ability to multi-task [which is eclipsed only in love and in the shops]. Some women are reckless gamblers, careless drunks or uncaring parents; but they are clearly in the minority. Some men are steady, sensible and critically analytical at all times; and they are an even smaller minority in their gender. Economics as it has been developed since 1870 is based on irrational 'analysis' of impossible situations which are considered 'normal' for textbook purposes. Many women and men find Economics opaque, often incomprehensible, and they opt not to continue with studying it: they are not thick, but sensible.

Everybody in the 'west' is going to suffer disruption to their economic environment for years to come  due to the collapse of the fantasies that were sanctioned by Economics that was produced by men. A female French lawyer [not an Economist] - Christine Lagarde - has been put into the pivotal position in the global mechanism - the IMF - on which the stabilisation of the system depends. If she bases her work on Keynes's template for the Fund she will have a high probability of success. Keynes's contemporaries emphasised his prominent 'feline' or 'feminine' attributes; in equal measure they envied and lauded his ability to assess changing situations and his apparently-intuitive formulation of relevant theory to underpin emerging policies. Those characteristics were absent from the male 'neokeynesians'  who created the nineteen-seventies inflation which gave Margaret Thatcher her opportunity to find 'alternative' - male - Economists who found new ways accidentally to undermine the economy. A new science of the economy is needed. Traditional Political Economy offers still-effective fundamental Laws but it is not sufficient. New understanding is needed, and a strong element of feminine insight will be indispensable in its formulation.


The lore and legend of Wall Street tells us that one of the most 'toxic' products that emerged from the phoney boom of the cybertrade era, Credit Default Swaps, was invented by a woman in the early 'nineties. That may well be the case, since the product was introduced selectively. The accumulation of a huge concentration of such risk on its balance sheet - via a London subsidiary - was sufficient to ruin the world's greatest insurer, AIG. This was entirely a masculine achievement. No other major insurer was even seriously stressed by the credit crunch, which was a crisis of banking-based financial services, because no insurer [as such] would be such an idiot as to commit his - or her - reserves to such quantities of unquantifiable liability. A minor London market financial organisation, owned by an insurance conglomerate and staffed with  greed and recklessness, was subject to grossly inadequate oversight both by corporate bosses and by regulators; which allowed an 'impossible' situation to be engineered; in a man's world.

Monday, 19 December 2011

Globalism and Money

The impending admission to membership of the Russian Federation - the world's eleventh-biggest economy on the currently accepted statistical formulae - will bring over 95% of world trade under the auspices of the World Trade Organisation [WTO]. The eagerness of the emergent countries to be members of this organisation indicates that there are significant benefits that attach to membership; but a quick check on recent press coverage indicates that the WTO is a faltering set-up.It has never quite delivered the hopes that are routinely expressed by the member states' negotiators as they enter the conference room at the start of each of an endless series of 'rounds' of deliberation which have been intended to improve the openness and proper reporting of world business. Yet the WTO is nevertheless recognised that it is the best mechanism that is available for fostering relatively free trade around the whole world.

The predecessor of the WTO was established in parallel with two new institutions for managing the world's monetary system: technical devices which could support statesmen in their effort to establish an open world economy, starting at the end of the Second World War. The International Bank for Reconstruction and Development [commonly called the World Bank] was designed to raise capital in the relative rich areas of the world to lend to governments and agencies which could invest in damaged or underdeveloped regions and industries. The International Monetary Fund {IMF] was intended to serve as a Central Bank for the world economy.

To a limited extent, the World Bank has performed the role that was allocated to it; though from the very early days after its foundation the refusal of the then-USSR to participate in World Bank activities, or to allow its satellites to join, meant that between1948 and 1992 its loans were confined to the de-industrialising powers and the non-communist post-colonial countries. In many instances the political affiliations of undemocratic 'pro-western' regimes enabled them to get World Bank loans and technical support. The USA - including the 'military-industrial complex' - had the predominating influence over the Bank because the US was by far the greatest contributor as well as the host to its head office.

 The IMF was also barred to the communist world by Stalin's decree. Thus until the nineteen-eighties the IMF was an organisation of the 'capitalist' world; though most of that zone adopted the aspirations of the 'mixed economy'. Following the second world war the majority of democratic governments significantly increased the services and benefits that they provided for their citizens, at a rate far greater than the rate of growth of their economies. They were enabled to achieve this apparently impossible trick of stretching consumption ahead of production through adopting a bizarre combination of bowdlerised Keynesianism with massive financial manipulation by the state.The inevitable consequence of this self-deception was the great inflation of the nineteen-seventies; which was followed by the adoption of monetarism, under which regime state spending continued to run in excess of the taxation yielded by the economy in many countries. Alongside excessive state spending - which was matched by an increase in the public debt - private spending was also allowed to rise above earnings at the cost of increased individual and household indebtedness. The United States edged towards its own version of the welfare state in very small steps throughout the postwar years, increasing the pace when European and Australasian governments began to reduce and remove some elements of social provision as the impossibility of perpetually expanding the deficit became apparent. The cost of welfare and health care to the US authorities become a notable drag on the national economy only under the Clinton Administration. Thereafter it proved intractable under George W Bush as he accepted the necessity to keep social stresses at a minimum within the USA as it engaged in the overseas adventures by which the Administration responded to the attack of 11 September 2001.

 The Vietnam War had stirred huge protests in the US, where domestic socio-economic disasters - especially the racial divide - had created a huge segment of the population who were profoundly and personally disaffected, and the anti-war movement had provided them with an urgent moralistic focus for their dissent. There was no similar opposition to the Iraq or Afghan wars, though their cost to the US Treasury was colossal. The US government was able to sell all the debt it created, largely to China and to other emergent powers, while US consumers cheerfully bought imports that were cheaper than US-made products: which increased unemployment and welfare dependency in the USA and reduced the potential growth of the taxable capacity of the economy; while public and personal indebtedness increased. The Obama presidency heralded a massive expansion of spending on healthcare: offset only to a small degree by the termination of the Iraq war and a general cap on defence spending. A huge programme of public works, designed to slow that rate of growth of unemployment, was funded by selling yet more debt to the new industrial powers and to the oil exporters: whose investments in US stocks was so great that the US Administration was unafraid of the lenders ceasing to support the finances of the USA.

Since 1945 several governments have become incapable of perpetually convincing the holders of their debt certificates that they were safe assets: so the market in that state's debt collapsed. Countries including Argentina, Mexico and [in 1976] the United Kingdom needed the assistance of the IMF to stabilise their finances. It did not serve any good purpose for the rest of the capitalist world if a country was allowed to fail economically. In cases where default was iminent the IMF tried to strike a deal with the existing government if it was considered to be able to maintain law-and-order and to enforce austerity measures on the population. If the pre-existing regime could not meet that specification a government had to be set up in which the IMF had some confidence before a deal could be done, as has been seen in Italy and Greece in recent weeks. Greece and Italy are unusual among petitioners to the IMF in that they are parts of a common currency zone: their deals with the IMF had to be brokered and supported by the EU and the eurozone, which made the negotiations more complex and the issues involved less easy for outsiders to assess.

Nevertheless the essential components of every IMF 'rescue' have been the same: the country concerned is required to apply  strict controls to its spending and borrowing, to reduce its welfare state [and usually its defence spending as well], and in some cases it is encouraged to default on part of its debt. In that eventuality the government issues replacement debt certificates that are expressed in devalued currency units and/or for fewer units of currency. Such measures are justified by the assumption that the creditors should have recognised that the debt certificates that they were holding could not possibly be paid off in full by the debtor state. If banks, other businesses and individuals were holding debt certificates that had lost value, from greed, stupidity or inertia, they deserved to 'get a haircut'.

The IMF reconstruction loan came in the form of another currency - usually US Dollars - which boosted the reserves of the Central Bank of the state that was restructuring its economy and its debt. In exchange for giving 'assistance' the IMF was able to impose a degree of discipline on the defaulting state, and to check that the restrictive policy was more-or-less being followed by the government until the internal finances and external balances were in an acceptable condition. This last-resort enforcement role of the IMF was a far cry from what Lord Keynes had proposed during the second world war. He suggested that they way to avoid any repetition of the depression of the nineteen-thirties was to have an international monetary agency that issued its own money - bancor - that would be recognised by all states and controlled by global consensus. Countries would settle their debts with each other by making transfers of bancor at the IMF, and if a state had a good reason to run a deficit for a period  - usually to finance a promising major investment - it would borrow bancor to make the necessary settlement: and duly repay the debt to the IMF in bancor over an agreed timescale.

As the major contributor to financing the war that was coming to its conclusion, and in the expectation of gaining massively by trade with war-torn countries, the US did not agree to Keynes's model. Its negotiators insisted that the US Dollar must remain unconditionally under US sovereign control, and should maintain its 'real' value as being exchangeable for one thirty-second of an ounce of gold [i.e. one ounce of gold was - notionally - exchanged for $32]. Hence the IMF was set up with the dollar as its unit of account and all the other member countries had to fix their currency at so-many dollars and cents per unit. The British pound sterling entered the system at $4.

Under the original rules of the IMF, when a country ran up an excessive balance-of-payments deficit it was compelled either to impose financial discipline that brought payments and receipts into balance and instituted a plan to pay down the accumulated deficit, or it had to obtain the consent of the IMF to devalue its currency formally; which resulted in the cost of the debt being reduced in terms of foreign currencies. As Britain's welfare state repeatedly led to excessive consumption vis-a-vis economic output, the pound was devalued from $4 to $2.8 after only three years, and was devalued to $2.4 in the 'sixties. Then in 1973 the USA was not able to maintain the parity of the dollar: Richard Nixon abrogated the gold valuation of the dollar and since then countries have engaged in a process of devaluations by default: they have allowed inflation to take place, enabled borrowing to run ahead, and granted the masses living standards that were not sustainable in the long term. Commentators with limited historical understanding have expressed concern that countries and currency zones could now engage in devaluation competitively with other countries, in the hope of exporting economic stress; as was tried with disastrous consequences in the early nineteen thirties. Such expressions of concern miss the simple truth, that competitive devaluations have been taking place since 1973. If there is an intensification of the process in the near future this will exacerbate the already-obvious danger that world trade could grind to a halt.

None of the weak eurozone countries can devalue the euro unilaterally and the IMF is keen to keep the eurozone in being to serve as a co-disciplinarian over the member countries that are at-risk of default. A common argument being voiced in Britain is that the IMF is constituted to help countries, not currency zones; so the UK should not provide extra funding for the IMF to support the euro even though the lack of such support might destroy the common currency. Despite British hesitation it appears that China and the USA are willing for the IMF to take a punt on the euro, in the interests of stabilising global trade and employment and business: so it is likely to continue with its efforts. The eventual outcome is unpredictable; but the extent of the disaster that would follow a failure of the euro will increasingly be emphasised.

How different things would have been over the past helf-century if Keyenes's version of the IMF had been operational since 1945! Bowdlerised Keynesianism would have been impossible to apply within any country; so in the absence of rampanty inflation monetarism would never have arisen. Living standards and benefits systems would have remained more modest and affordable, de-industrialisation would have been dismissed as an absurd  notion and industrial innovation would have been encouraged in the absence of casino banking. It is highly desirable that the International Monetary Fund should look at options for fundamental reform of its structure and its policies, which could enhance its role as a global economic provider and - when necessary - as a monetary and fiscal police force. It should begin by dusting-down Keynes's propositions from 1944 and assessing how much a modern version of them could serve the world far better than the current arrangements.

Friday, 16 December 2011

Demography, Democracy and Drink

Demographers have several attributes in common with actuaries: they rely on estimated historical statistical data to make statements about the present structure and the future prospects of human populations and they generally adopt a group of simple central inferences to which they adhere until some disaster in real life brings ridicule on their pretensions; at which point they make a series of over-compensatory revisions to their models. The ruinous folly of British actuaries became widely apparent around 1992, when many employers who funded pension schemes for their staff had 'contributions holidays' because actuaries reckoned their schemes were 'over-funded'. On the basis of mortality tables   [summary statistics stating how long, on average, men and women lived in past generations] multiplied by the expected pensions to be payable to the members of any particular scheme on which an actuarial opinion was being given, the funds were said to have had excessive assets.

The Thatcher government decided to tax employers' payments-in to 'overfunded' pension schemes, so such firms stopped contributing even if their management was sceptical of the actuaries' argument. Then such doubts were vindicated when two fundamental errors in the actuaries' assumptions became apparent. First, the professional classes who had the highest expectations for the pensions they were due to draw had a significantly longer life expectancy than the norm for all members of schemes; and that wider group had  longer life expectancy than people who had no private pensions: so the actuarial tables understated the funding needs of schemes that included higher-paid employees. Second, after almost half a century of the National Health Service and of unprecedented developments in medical science whole populations had much longer average mortality that the tables showed. By 2002 when the 'dot-com' share bubble had collapsed, it was painfully clear that many pension schemes were seriously underfunded against the expectations of their members: and this problem extended to the actuarial expectations on which state pensions schemes had been forecast to make demands on the public purse.

This scenario was made massively worse by a decision of Chancellor Gordon Brown to tax the investment income of pension funds by some £3bn a year and by the daft notion of actuaries [lambasted elsewhere in this blog series] that pension funds' assets should predominantly be held in bonds as their maturity values were 'certain' in money-unit terms, though not at all in purchasing-power parity. The pensions awarded to retirees after 2007 were a third or less of the return for a given size of 'pension-pot' compared to 1997; and the situation has continued to worsen notably since then. Actuaries have failed in their narrow sphere of so-say expertise at least as much as have Economists who confront a massively more complex data set.

Demographers use similar techniques to predict [from the same data as actuaries are now using] that the populations of the EU and of China will have a higher proportion of pensions receivers, and a lower ratio of children and of workers to pensioners among the indigenous population, for the foreseeable future: a situation that Japan has experienced already for several years. Japan has an extremely hostile tradition to immigration, and an even deeper antipathy to allowing foreigners to aspire to Japanese citizenship; so the ageing of the population is accepted as an inexorable prospect. China's one-child-per-couple policy has been applied to the great bulk of the population, enforcing a future demographic profile similar to - and possibly ultimately more extreme than that in Japan.  Chinese demographic pressure is politically induced; in Japan the ageing trend in population began in the boom years of the nineteen-seventies and 'eighties when housing remained scarce after post-war reconstruction, largely due to idealistic restrictions that were fixed on the allocation of land for non-agricultural purposes. This had the consequence that millions of multi-generational families were cramped into small houses where large numbers of children would have been unmanageable. Couples who could afford to move away from their parental homes into tiny apartments were so stressed by the confined living space, for which they were very heavily committed financially, that the idea of having a large family was a strain too far.

Western Europe and the USA have experienced a pretty constant decline in the fertility of now-indigenous peoples [i.e. the average number of children born alive to each female] since the depression of the nineteen thirties. This trend was broken only by a short-lived breeding frenzy in English-speaking countries that was indulged by the men and women who had to a large extent been celibate for the duration of their war service. Peacetime access to socially approved sex, especially within marriage, generated a baby boom that quickly replaced the people who had been killed in the war and produced net growth of the population. In Germany and Russia, where wartime destruction had been more massive in scale and where postwar living standards were very low, the equivalent to the baby boom came much later and was much less of a peak above the half-century trend than in the USA, UK, Australia and Canada. As the baby-boomers retire from work with many of their parents still alive in their nineties, it is obvious to anybody who tots-up the published data that the reduced number of the boomers' grandchildren will be expected to support an economy that feeds, clothes, medicates, nurses and entertains a vast number of aged dependants.

The demographers assert that, despite this simple extrapolation from past experience, all is not lost for the post-industrial countries! Into Europe there is a huge influx of migrants from Asia and Africa, with millions more wanting to follow. Into the USA there is an equally vast actual and potential flow of Hispanics and lesser flows of West Indian, African and Asian immigrants; recently joined by disillusioned, well-qualified Irish and other young Europeans. The fact that these mass immigrants are culturally distinct from the indigenous populations is ignored in demographers' aggregated statistics. Demography ignores the facts that most Hispanics are Roman Catholics, brought up in the denial of 'artificial' birth control. While they are unmarried [or temporarily separated from their partners] Hispanics' rate of breeding is low; but they aspire to a North American lifestyle with large families. Recent immigrants to Europe are overwhelmingly Islamic in religion, and though they come from diverse cultures they share an increasingly assertive dogmatism that declares that Koranic Truth transcends science. They learn to recite old Arabic sentences while refusing in universities to believe teaching of evolution and the standard models of geological time. A minority of medical practitioners who enjoy high repute among religiously-diverse patients openly declare adherence to the Genesis account of the creation of humans and of the world that we inhabit. Those mores and attitudes will not change and are likely to become more prominent as the settlers gain increasing confidence.

 There is no scrap of evidence from anywhere in the Islamic world that the same pattern of an ageing population and low fertility that affect white Europeans will come to be adopted by people who cling to a totally different religious and social grounding. Demographers equate an eventual decline in fertility with the maturing of a consumer society, because the is what has happened in the post-Christian 'west'. In the last third of the twentieth century despicable Christian leaders dropped any obligation for adherents to assent to doctrines that are incompatible with modern science, while Islamists became more assertive of the primacy of religious precepts over all terrestrial interests and concepts. Meanwhile, the economic pressure on some European economies - notably, to date, Greece and Portugal and Ireland - is causing a significant percentage of young adults [many of whom have advanced qualifications] to seek migration to the Americas, to Australasia and even torformed colonies such as Angola. Forty per cent of Portuguese under the age of thirty have been reported to be actively interested in emigration;  which massively exceeds the rate of Asian and North African immigration to the European Union: if this emigration materialises a fundamental shift in the balance of the ethnicity of Europeans will become closer.

There have been, and will continue to be, cases where individual Muslims exploit what they perceive to be the institutional immorality of western society. More commonly, millions of Muslims take advantage of the secular dogma of 'human rights' to build up the numerical strength of their colonies by immigration, including the systematic importation of marriage partners under the 'right to a family life' with support from a universal benefits system. By this recruitment of mostly-young adults who have not experienced the school and street life on the host country, the cultural communities in which an increasing proportion of the Muslim population lives are able to maintain - and in some cases to introduce - the languages, customs and costumes of their ancestors. In some countries of the European Union this has become a political issue, with a defensive segment of the indigenous population becoming susceptible to the argument that 'this must be stopped before it gets too far'. This emergent movement is a challenge to democracy as it has been practised since the nineteen-forties.

European History - and even more so US History - has until recently treated European colonisation of the whole of the Americas and of Australasia as benign. Only a minority of the population of those territories yet recognises the force of the issues that are dealt with in my Fundamental Tensions [accessible from this blogsite]. A probably larger minority of the now-indigenous population are becoming susceptible to the argument that 'Muslim colonisation' of Europe, and Hispanic infiltration into the USA, are 'threats to the way of life' of the diminishing majority of the population. The improvement of the age structure of the aggregate population, which demographers present as a welcome corrective to the rising infertility and longevity of the majority population, may become very differently perceived when the different lifestyles of a declining European population and a growing cohort of Muslims delivers an increasing Muslim majority in the schools system. At that point, the secularist core curriculum and - in particular - conventional science teaching will be challenged; which can become a threat to innovation and to economic development. At the extreme, one can see a possibility of a rapidly-growing population that is in denial about crucial areas of medical understanding and scientific principle.

Democracy is ill-equipped to deal with these issues: which may come to matter more to the electorate than the 'distributive justice' that has characterised democratic statecraft since the nineteen-thirties.

Where does Drink come into this picture? Good Muslims do not take alcohol. Drinking alcohol - beer and wines and spirits - is integral to European tradition. In Russia and Scotland, with some urban areas of Scandinavia and Canada, as well as among indigenous Australians, Inuit and tribally-segregated indigenous Americans, alcohol is a recognised source both of crime and of high mortality: especially, but not exclusively, among men. Alcohol often combines with drugtaking to create an a-social and semi-criminal 'underclass' to which mentally ill and disturbed and depressed people can easily descend. In every town and city in the post-industrial world indigenous children fleeing from broken and abusive homes are especially vulnerable, as are adults whose home lives and self-respect collapse under the depression of unemployment. Everybody has had access to these facts, which have been blazoned in all the media for at least a couple of decades, and still the problems are seen as intractible: especially while lawyers can draw fees or stipends from the state 'for protecting the human rights' of such people. Once they have descended to an abject condition they are held to have the right to stay there, if they ask to be let alone to get on with their self-destruction.

A concerned medical lobby is demanding that the price of alcohol should be raised; defying the fact that higher prices would force victims of the downward spiral into accepting more risky propositions as prostitutes and undertaking more crimes to feed their habits; as occurs when black-market drug prices are increased.

As Muslim communities grow and become more distinct from the European host population in dress and behaviour, they become more confident of the moral superiority of their lifestyle and of the religion that drives it. Secularism has taken Europe into a very dangerous place, which the present Pope is eager to address: it is not yet perceptible that his target audience is listening. The USA retains a public religiosity that defies the constitutional separation of church from the state, and so has much less of a stench of decay than pervades European society. But the certainties that gave the allies their strength in the second world war and through much of the cold war have been eroded with remarkable speed and comprehensiveness. The consequences will come home to roost: suddenly and without warning

Monday, 12 December 2011

Money, Democracy and Economy

Evidence is accumulating that the International Monetary Fund [IMF] is preparing to work closely with the European Central Bank [ECB] to prolong the survival of the euro for long enough to allow Greece to demonstrate whether or not an austerity regime can be imposed with sufficient rigour to allow the country to remain in the eurozone. Whether or not the Greek economy meets the challenge under the very difficult current circumstances, it is highly probable that Chinese resources will also be transmitted via the IMF and the ECB to prop up the rest of the eurozone. Chinese government deposits with the IMF are extremely secure, and China is happy to take a greater share of control of the IMF which is a corollary of increasing its deposits. The USA is watching this situation jealously: so the Americans will most probably also agree to support the ECB to prevent the Chinese becoming too influential.

This set of moves will help to offset the risk of an intensification of the recession that is already gripping the whole of the EU. The recession is already set to last through most of 2012, and could go on longer. Trade between Europe and North America is important on both sides of the Atlantic so it is a direct US interest that Europe will be a good customer for US commerce and industry in a presidential election year. Both China and the sovereign wealth funds that are held by oil-exporting states and by Singapore are looking for businesses in Europe that will be a good buy during the recession. China will gain both the turnover and the institutional experience of the European firms that they may come to own; and - more importantly - they will take control of the intellectual property that the companies have accumulated. They will own the speculative research and the design capabilities of their European subsidiaries, which they can carry forward in China or in Europe as they see fit. They will be able to put their European brand-names on products made in China, greatly increasing the value-added to Chinese industrial output. The Chinese owners will be free to decide whether or not to run-down their European factories, and they will have the option to make their brands in China and sell them at European prices.

Such takeovers, followed by technology transfer to China, will mean that European consumers will still have access to the same brands; but employment and production in Europe will decrease and profits will be exported, so European spending-power will permanently be diminished. The de-industrialisation that has been undermining Britain and the USA for the past half-century will spread rapidly in Europe, even in Germany, unless specific measures are taken to prevent the alienation of ownership.

The massive middle classes in India, China, Brazil and other leading emergent economies are the most avid buyers of quons - brands - [see PPE via the link from this site] and an increasing mass of the population aspire to follow them. Exporting leading brands will be a huge boost to the national balance of payments of the countries that will have bought the brands, and will give them increased profits to apply to new investment. This is the outcome of the operation of the Iron Law of Wages. The EU as a whole has broken the law for decades and the inescapable payback is now being taken by the rest of the world. Proper, provident Germany has not participated in the profligacy; but is straight in the firing line now that redress is being taken. Because of their loyalty to the European fantasy Germans are now at risk of losing some control of their own economy and of the technology in which they have led the world. They have deferred - perhaps permanently - the day on which they would have to open their currency reserves ad lib to bail-out the most profligate members of the euro. But because of their loyalty to the EU they have placed at risk their control of technology and of the brands that they have exported so successfully over recent decades.

Meanwhile there is a daft shouting-match developing in Britain, between those who think that David Cameron has in some degree 'saved' the City of London by declining to support the implementation by the EU Commission and the Court of the Merkel package of financial stringency that has been endorsed by the other 26 member states, and those who argue that Cameron has damaged the vital interests - and the prestige - of the United Kingdom. The Deputy Prime Minister expressed both views, in a perfect vignette of Liberal Democrat policymaking. It is not clear how the new eurozone agreement will be 'policed', and most probably some fudging mechanism will be cobbled together in the drafting of the Compact that is now to begin. It is expected that most of the 26 'inner European' states will agree to impose a Robin Hood Tax, or Tobin Tax, on financial transactions. Britain could veto a tax change, under the Lisbon Treaty; but the veto power would not be applicable to a regulatory change under which the EU might apply service charges or other 'penalties' to the financial services sectors of the UK economy.

The sound and fury of the debate will help nobody. It is, however, incontrovertible that the United Kingdom is again offering itself as a test-bed for seat-of-the-pants economic policy experimentation. Unlike the bowdlerised Keynesianism that was tried in the nineteen-sixties and the crude but clearly articulated monetarism of the nineteen-eighties, the present experiment in austerity management has no underpinning economic theory and no ideology. It stems from a naive pragmatism that was hastily cobbled together by professional politicians from the fundamentally incompatible Conservative and Liberal Democrat parties. It has nothing substantial to contribute to a global dialogue on responding systematically to a crisis which is has reached its high pitch of intensity because the world has allowed the postindustrial countries to breach the Iron Law for almost half a century. The resulting pain is being felt intensely in Greece, and is beginning to cause serious stress in most member countries of the European Union, not always in proportion to the extent to which individual countries breached the Iron Law. It is impossible to predict where this will lead in terms of socio-political tension, but it is inevitable in conventionally democratic societies that the complacency of the democracy itself will be challenged. Nothing can be taken for granted but it becoming common to question whether democratic principles have failed, or whether the disaster is the product of a perverse and irrelevant political class that has emerged in separation from the rest of society.

China has a huge political caste, who have been segregated for the entire length of their careers from the toil and economic stress of life as it is experienced by the vast migrant working class and by both the megarich and the tens of millions of middle-class consumers. There are great hazards in attempting to climb the greasy pole of party hierarchy, and even greater risks if party apparatchiks dabble corruptly with business; but the people who reach the top are generally of the highest quality. The near-miracle of economic and monetary management that has been accomplished over the past two decades is the best evidence of this. Western commentators have regularly predicted disaster, from hyperinflation through 'stagnation' in the property sector to mass unemployment, while standards of living have risen consistently. Democratic rights as defined in Magna Charta or the US Constitution and Bill of Rights have not been matched in China, and the lack of such rights is probably to the detriment of the Chinese people; but it seems generally to be accepted in the country that it is fair enough to concentrate first on economic development, and then to allow for the development of more open institutions. Dissent in China is very much a minuscule minority activity and is often ethnically based or specifically aroused by corrupt land seizures. The internet and mobile technology ensure that dissent and repression are more widely reported when it occurs; and the government is increasingly open to treating the dissentients more fairly. But the western model no longer looks like an inevitable endgame for Chinese youth to aspire to.

Sunday, 11 December 2011

Global Accord on the Climate

After extended talks, all the 'major polluters' have agreed that there will be a 'legally-binding accord' on the control of greenhouse gasses and deforestation by 2020. We have heard most of this before, most notably from the Kyoto Convention; though the two biggest economies and greatest emitters of greenhouse gasses - the USA and China - stood aloof.

The agreement may be 'binding' with 'legal force': but there is no power to enforce it. The greatest agitators for the protection of the planet are the most perverse, in that they oppose the utilisation of atomic energy in the face of massive evidence that nuclear power generation alone could pretty well guarantee a sufficient supply of power to maintain anything like the present structures for production, transportation and consumption. The entire pattern of information technology depends abjectly on the availability of electricity. Urban living relies on the availability of electricity for lighting, cooking and home entertainment. Trade depends on oil and electricity. The growth of China has been facilitated only by a massive construction of basic power sources using coal, hydro-electric power and nuclear fission.

Heavily subsidised windmills can notionally reduce carbon emissions, but that argument lost some of its tiny residue of credibility in Britain when a perfectly predictable gale caused spontaneous combustion in a wind turbine in Ayrshire a few days ago. A few days earlier a wholly sensible decision by the British government to reduce the extremely large taxpayer subsidy to solar panel installers has caused screams of protest from 'the industry', which would be a much louder shout if similar strictures were applied to the windmill business. Yet even the most ardent exploiters of the taxpayer and power-buyer in the windmill lobby acknowledge that their system depends on there being in existence a parallel capability to generate power from other sources, because windmills don't work when there is no wind - which tends to happen in the periods of coldest weather with steady high pressure and thus no wind. Wind generation of power can only be used in parallel with equivalent reserve capacity in the nuclear or fossil-fuel sectors.

Ordinary folk have to pay for power and power stations, through electricity bills that they must meet from their wages and through the fact that their employers have to pay higher taxes and energy charges and thus have less to allocate to the wages or welfare that they can offer to their employees. People who live on pensions and benefits have less available to spend on everything else as they must pay more for power, both directly in what they consume in the home and as a component of making and moving everything else that they buy.

The capital cost and ongoing subsidy of 'green energy' is a terrifying future demand on the economy. It is extremely doubtful that the gap between the available sources of power and the ideal that is demanded by green campaigners can be afforded, in full, even by the most affluent economies. Not only have the so-say mature postindustrial economies lived beyond their means for decades: they have also allocated far too much to consumption and too little to investment. In terms of classical Political Economy societies have broken the Iron Law of Wages [the fact that an economy simply cannot consume more than it produces without eventually having to face the need dramatically to rectify the resulting imbalance]; and that fact has become partially recognised. But they have forgotten to combine this recognition with the equal force of the Law of Diminishing Returns: no economy can expect indefinitely to receive constant or increasing returns on investment in any given technology. The  more that is spent on windpower, traditional nuclear fission, gas-fired 'clean' power stations or any other technology [whether yet discovered or still awaiting revelation] at some point in the intensification of investment the output per unit of investment perceptibly declines: and if the investment continues thereafter, the decline in productivity will eventually become catastrophic.

The optimisation of investment in power generation in accordance with the basic Laws of Political Economy requires a specificity of planning that is not yet in any government's agenda, though its importance is undeniable. Behind this point lies another, even bigger issue: the competition of investment with consumption. It is already accepted by theoreticians and by many commonsense citizens that living standards cannot rise, and may have to fall, just to rectify the past breach of the Iran Law. If the general level of consumption is to be reduced in order to fund the most expensive forms of investment in green energy, that will cause strains in civil society. If the pressure is increased to give subsidies to less-developed countries to enable them to conform with a new standard for green energy and to cease deforestation, there will have to be an even greater raid on the living standards of everybody in the relatively-declining economies in the formerly-affluent world. There is one partial experiment going on, in reducing living standards dramatically to meet basic economic principles: in Greece. The political implications of the debt-correction mechanism are highly problematic; and interestingly the Greek government has attempted to enforce property tax by billing citizens for that tax with their electricity bills. They risk loosing their energy if they decline to pay the additional tax. The world is faced with the prospect of reversing that situation: they are being asked to pay an energy tax both through the tax system and in meeting energy bills at the petrol station and through their meters at home.

If the new Accord on green energy and deforestation holds up, there are huge tax and price implications for everybody, in hard times. A new political prospect opens up: the world becomes ever less predictable. Which situation is complicated - and potentially could temporarily be resolved - by the discovery that massive quantities of natural gas are to be found in deep deposits of shale that are predicted to exist in the geology of many areas in the world.  Exploratory workings in shale deposits in my native Lancashire earlier this year caused two minor earth tremors; and in the USA there have been reports of household water taps producing flammable gas and of serious disruption of aquifers that provide mass water supplies. If the process of 'fracking' the shale to release the gas is found to be safe for use in the British Isles, China and other territories where the shale has been found in abundance, investment in nuclear power and in windmills can be set aside for at least half a century. Extracting the gas from the shale is far from cheap, compared to allowing oil that is under pressure in near-surface rocks in Russia or Saudi Arabia  to be released into the pipelines for conveyance to the refinery; but the shale gas is likely to be cheaper than most other 'green' energy sources. It can give  space and time for the beneficiary economies to make appropriate long-term investments in energy supply for the longer-term future; but I fear that it is more likely that their governments will conspire with their people to continue in the defiance of the Laws of Political Economy.

 The discovery of exploitable shale-oil and gas will provide an excuse for the governors of some economies to avoid setting out a comprehensive energy strategy that will be affordable to people of modest means a century hence. That deferment  can be helpful for politicians in terms of short-run electoral game-playing, but it will do little for the survival of the species. The story of shale-oil and gas reminds one that there are always options that do not feature in the most simply stated scary accounts of the prospects that face the economy; but it does not supplant the issues that have led to the new decision of all the world's economies that there should be an energy strategy by 2020. .