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Tuesday, 29 November 2011

Weasly Georgie and Blustering Balls

The big stories in the world today are the EU, Iran in the wider context of the Middle East, and the election in the Democratic Republic of the Congo; but I begin with the concerns of little Britain with Northern Ireland. This is because of the United Kingdom's significance as an example of Economics-in-action. For good or ill Britain has been a global leader both in the formulation of economic theory and in the implementation - often badly - of some of those theories.

Chancellor of the Exchequer George Osborne yesterday pushed his reedy, waspish voice to the limit in presenting his latest policies to the House of Commons: and met with a blustering blast of crude propaganda from one of the major authors of the British aspect of the western world's crisis, Ed Balls. Balls' line was to forget the history of the past 15 years - during which he has had a uniquely powerful influence on bullying Gordon Brown - and to mock the easy target of silly Conservative propaganda that had cited passing incidents such as the royal wedding as explanations for announced economic targets not being met. This was a continuance of the despicable tradition that was identified by Watkins and me in Can Britain Survive? [published 1971]. For more than 50 years the political parties have maintained a pointless game in which they offered increasingly convergent, but argumentatively-differentiated, policies for handing to the electorate wealth that the country did not have. Meanwhile the country has wantonly been deindustrialised and governments dominated by both major parties  have sold much of the national infrastructure [which has largely been alienated to foreign owners] to be operated at a profit that is taken from fees and fares paid by the lower-paid majority of the population.

As long as party politicians continue speciously to denounce each other in a singularly unedifying political Punch-and-Judy show there is no hope that the country can begin even to plan to recover from more than two generations of despoliation.Nevertheless the basic principles that Osborne seems to be adumbrating would be essential components of a Grand National Strategy to address the problem. Expectations of standards of living must be depressed from what had appeared to be available under the Blair-Brown-Balls government; but the pain must not be crowded on the labouring poor. The authors of the disaster - Economists, politicians of all parties who have ever cheered their leaders in the Hee-Haw show at the House of Commons, journalists, senior civil servants, 'bankers', and exploitative executives - must bear their share of blame and a due proportion of the cost of the rescue [though we must accept the old adage that the seizure of the whole wealth of the rich would not keep the poor in bread and cheese for a year: while it would devastate future national product]. Osborne's little steps to create a positive start to infrastructure development, to enable banks to maintain some of their loans to small businesses [even as they build up their balance sheets to meet regulatory requirements] and to encourage 'industry' are so small as to be trivial relative to the glaring need.

The suggestion that a significant programme of infrastructure construction should be funded by the private sector, therefore run for profit, is plainly regressive: the mass of the users will be the people who are already experiencing declining living standards. In keeping the cost off national balance sheet the Chancellor hopes to maintain the security of the public sector deficit management plan [it is no longer a deficit-elimination plan]; but this is clearly a short-term device. In  the longer term some capital assets would have been created; but they will be private and not public goods; so politicians should not expect that the electorate will rise up to applaud them. It is envisaged that pension funds should be major investors in new infrastructure projects; which means that they cannot invest the same money in state bonds or in commerce or in industry. It is implicit that most of the investment would come from private sector pension funds. As Osborne now anticipates the government needing to borrow more than expected for longer, it becomes problematic as to who the buyers of that debt will be, and which price the government will have to offer the possible buyers to persuade them not to invest in the favoured infrastructure schemes instead. The lack of joined-up-ness in the 'strategy' is painful to observe. The debate has been put on a new footing by the pessimistic data that were reported in the Autumn Statement, but the parliamentary name-calling that followed today shows that the big lesson is still not recognised. Politics remains on its ruinous repetitive path to oblivion.

In the wider world the Congolese election has begun: that it is happening at all is pretty wonderful. In almost half a century since independence from Belgium this massive territory has been despoiled by tyrants and ravaged by warlords both natives and those making incursions from neighbouring states. The world has sold arms to any group that had the cash to buy them, bought commodities from both legal and illegal sources, and blamed the benighted people for their misfortunes. The oxymoronically designated Democratic Republic has wallowed in its own sovereignty to the mighty disadvantage of the majority of the people: but it has huge known resources and doubtless massive natural assets yet to be discovered. It has a relatively low density of population compared to Europe or Asia. The long term prospects for those who can survive into the next generation are potentially among the best in the world: but little of that potential is accessible now to the mass electorate who face a bemusingly complex voting system. Europeans can pity them; but they can have higher hopes based on real resources than can any European nation west of Russia.

Iran periodically allows 'demonstrators' to sack an embassy chancellery. The victimised state makes a fuss, and the windbags of friendly chancelleries and the United Nations get camera-time to denounce the 'outrage'. The possibility of an American-equipped and authorised Israeli 'strike' on some Iranian installation is canvassed: and in all such circumstances to date the Israelis have been wise enough not to indulge in indecent exposure. So the net result is that the UK may have a small short-term saving on diplomatic representation. There may be some more nominal 'sanctions' on Iran which some states will be prepared to breach and the world will carry on undisturbed for the time being. So the story is not so big, after all.

What, then, about the EU and the eurozone? Stock markets have risen today on the back of rumours that the International Monetary Fund will join with the European Central Bank in 'partially insuring' eurozone member states' debts. There is absolutely no evidence that such a scheme would prove to be robust if it was called upon to 'rescue' Spain or Italy. So the shadow boxing between markets, states and European institutions slightly changes focus. There is no substantive development there.

What has seemed a very news-filled day is really very ordinary. Back home in the UK the one-day strike by teachers and other public sector workers turned out to be more of a jolly - an interesting alternative experience for some of the participants who did not just stay at home - than a significant event.Nobody really cares how many people went on strike, and very few people believe that the average public-sector pension is £4,000 a year as the unions have said, without any evidence of how that 'average' has been computed. But there is really big news lying behind this: alongside the warnings that the economy is entering a second phase of 'recession' there is an unprecedented social mood of depressed acquiescence. If some group were to set themselves up as a militant 'vanguard' of a revolutionary mass movement 'against the cuts' they would find that everyone else shrank away from them. A depressive psychosis is already well established. Society and polity are, if anything, ahead of the economy in accepting the inevitability of depression. Yah-boo politics can only make this worse; but that is all that Clegg and Cameron, Balls and poor little Milliband know: primary-school playground behaviour prevails when the country needs - at the very least - a Grand Coalition. This may be all that the machine politicians can comprehend: but the decent majority of the citizenry deserve better!

Monday, 28 November 2011

Market Failure and Democratic Deficit

Adam Smith has been identified as the 'father' or the 'founder' of Political Economy [and of its more modern aberration, Economics] since soon after he produced his most famous book, An Inquiry into the Nature and Causes of the Wealth of Nations, which was published in 1776 - the year of some British American Colonies' Declaration of Independence. It was - and it remains - a campaigning book. He opposed the 'Political Economy' that prevailed at the time [as recently systematised by a fellow Scot, Sir James Steuart], which assumed that the government had a duty to support, control and regulate the economy. This well-established doctrine followed the political philosophy that had been set out in the previous century by Thomas Hobbes, who had argued that when there was no political system the life to which primitive men and women were condemned was 'nasty, brutish and short'. Unless there was a power that could compel all humans to behave according to common rules there could be no security for people's bodies and no guarantee that any preservable asset that anybody created would be safe in their possession: so neither civilised relationships nor the economy could develop.Hobbes assumed that at some time enough people would have recognised the gap between human creative abilities and the life that people lived while they remained in a 'state of war' with each other. So they had elected a Sovereign: to whom they gave the right to 'make war' against everybody else whenever violence may be necessary to establish and preserve the rule of law and order.

Adam Smith did not dispute the need for a government and he explicitly recognised that some non-military public works such as coastal defences could only practicably be afforded by the state; and he became a Commissioner of Customs. But his core argument about the creation of  material assets [and of the intellectual capital that supported the creative process] was that state interference and the government's protection of interest groups - such as closed trades and merchants who were granted monopolies - usually restricted economic growth and the beneficial spread of wealth among the community at large. Karl Marx was to build on that proposition, which he extended into an assertion that monopoly capitalism would so develop that it would become a system of total oppression of the proletarian majority of the population.His Communist Manifesto, published in 1848, brought global attention to the ideas that he spent the next few decades elaborating.  

After the publication of Smith's book formal Political Economy accommodated the 'Principle' that Free Trade should be supported by governments, in preference to monopoly, whenever feasible. But the professors stressed that governments, businessmen and commentators on the economy should always recognise Malthus' Principle of Population and the two Laws of their science: the Law of Diminishing Returns and The Iron Law of Wages [for definitions see blogs passim or my Personal Political Economy]. When these laws were combined with Marx's predictions  the resulting scenario was alarming: productive technologies would inescapably reach an entropic inevitability as output-per-input of additional capital declined. If the Law of Wages was maintained, so that the government insisted that the total economy must always remain in balance [and could not indulge in net borrowing], and the capitalists were demanding ever more of the national output to put into additional equipment that was achieving only diminishing returns, the increasing population would face declining living standards - reaching starvation-point - and the crisis of capitalism would explode into revolution.


This prospect scared the professors of Political Economy, so by the middle eighteen-sixties advanced thinkers in several countries started presenting a new approach that treated Marx in the same way as Adam Smith recorded he dealt with Steuart: they tried to demolish Marx's intellectual system "without once mentioning him". Their alternative involved shelving the Iron Law of Wages, pushing the operation of the Law of Diminishing Returns into the indefinite future, asserting that Malthus' Principle was unproven [and may be invalid]; instead emphasising Smith's proposition that competitive free trade optimised economic growth: this led to a theory of market Economics. Until the nineteen thirties that form of Economics became increasingly prevalent in the universities, worldwide: then in the depression protectionism - interventions by governments to protect their economies, at the expense of firms and individuals in other countries - became significant. It was ruinous for everybody because it just made the depression more intense as world trade slumped further. In these circumstances Keynes's timely publication of his propositions for macro-economic intervention by the state became popular, and was adopted by democratic governments during the second world war as one of the promised methodologies by which a better world would be built on the fruits of victory.

The crass adaptation of Keynes's principles after his death led through increased indebtedness to the nineteen seventies that were characterised by inflation, the risk of collapsing currencies and the possibility of hyperinflation. Keynes had attacked the behaviour of people in the stock and bond markets, and in banks: he referred to them making decisions on a basis of 'animal spirits' rather than of reason, which led to irrational herd behaviour triggered by 'waves of irrational psychology'. People who were supposedly developing and implementing his ideas could not ignore those assertions, so alongside macroeconomic intervention it was dogma between 1940 and 1970 that markets [and especially financial markets] must be controlled. Once Bowdlerised Keynesianism had been proven not to be the panacea for perpetual prosperity, an alternative set of ideas was adopted. At rock bottom, behind obfuscatory argument and seductive mathematical models, the new core proposition was that [though people in markets were, indeed, prone to irrationality] markets themselves were rational entities. Instead of being seen as dangerously constructed creations that were likely to be abused, to the disadvantage of outsiders and of the economy at large, rational markets were presented as intrinsically beneficial. Therefore all restraints on markets would serve as limitations on the optimisation of wealth.

This was the leitmotiv of the Reagan-Thatcher era, which briefly seemed to offer perpetual prosperity. But reckless market behaviour far worse than Keynes had condemned was unseen by the majority of Economists and commentators, who were beguiled by the figures that governments chose to collect and publicised. The Clinton-Blair-Brown-Chirac period seemed prosperous: but alongside de-industrialisation there were massive and unsustainable increases in personal and public indebtedness, uncontrolled and incomprehensible developments of money-markets in cyberspace, an appalling expansion of international trade in sex  slaves and indigenous exploitation of child prostitutes, the unrestricted growth of a vicious drugs trade; and - largely funded by those outrageous activities - the gap between the incomes of rich and poor became more significant than that between peasants and feudal aristocrats.

That was the final, abject and total failure of academic Economics: and over the four years since it became obvious I have not noticed any press reports of ritual suicides, formal statements of regret or self-conscious resignations from professorial chairs. It is a well-used adage that con-men can only succeed if they con themselves first: and by extension the professors could be those who were so deluded by their studies that they have not yet seen the scope of the disaster that they have collectively produced. After all, they are the girls and boys who faithfully learned what their professors taught them; and got their promotion by peer-reviewing each others' fantasising within an intellectual bubble that has not yet been burst by reality. If that is a fair assessment, the professors are to be pitied: but their time has come!

And the politicians just followed them. They swallowed Rational Market theory hook, line and sinker: though it is unlikely that many of them ever really understood it. By adopting an appallingly limited and profoundly defective version of Economics they ensured that whatever was delivered would not be beneficial to the people at large. Thus they engineered a simultaneous failure of Economics and Politics. The public justification for both Politics and Economics is that they should serve the common good. In the 'democratic west', they have not done so.

Friday, 25 November 2011

Democratic Deficit

One of the discredited Rating Agencies has downgraded Belgian government debt: apparently on the grounds that they have not had an established government for well over a year. The cause of the bickering between political parties arises from an excess of democracy, that pretty well ensures that there is never a predominant party with a parliamentary majority. Belgium's policy options are restricted by the fact that the state is a member both of the European Union and of the euro: the national capital, Brussels is overshadowed by a few buildings within that city from which the EU is run and by Frankfort where the European Central Bank is located. Every opinion and brand of Flemish nationalism is represented in the Belgian Parliament; as are all the factions and aspirations of the French-speaking Walloons. This wonderfully democratic outcome is impotent: the politicians can't agree formally how to share out ministerial posts, so they have just shuffled the pack and carried on from week to week as 'caretaker' ministers; and operationally it doesn't matter. But cosmetically it looks untidy, so Standard & Poors have chosen to give Belgium a kick by reducing their rating from AA+ to AA: this will license market traders to have a whirl at making a bit more money by selling Belgian debt short: a great game for the insiders, and a worry for ordinary folk, who know that policy on trade and industry is made by the EU, and well understand that the euro is completely beyond influence from any Belgian government.

A Belgian is President of the EU Council of Ministers, but he has no power: he can merely try to co-ordinate 27 heads of state and heads of government. The EU Parliament remunerates it members exceptionally well, in the combination of salary [related to the local parliamentary salary in the members' home countries] and EU expenses; but they have no real power. The Commissioners are nominated by the governments of the member states without any convincing pretence of democratic consent. Britain's Commissioner is a Labour Party hack who has never held national elected office, was totally unknown to the public on her appointment [made in haste when the sitting Commissioner was recalled to serve in Brown's despairing government], and whose rare appearances on the British TV News cause a surge of national embarrassment.The democratic deficit on the EU probably exceeds 100%.

The new Italian and Greek Prime Ministers are described as 'technocrats'. The 'technology' that they are supposed to understand is Economics, the discredited subject whose practitioners sanctioned and applauded all the excesses that have created the crises in business and in personal and in governmental debt; that none of the 'Atlantic economies' has yet begun to addressed effectively for the long term. They personally applied their Economics in bringing their countries into the tissue of lies and false hopes that enabled a very disparate group of countries to create the euro. They went on to occupy cushy roles in the unaudited EU mechanism and now have been set up as proconsuls for their cronies. They are part of the problem, not of any radical solution.

Germany has a carefully drafted democratic constitution, with a special court to protect it and a Chancellor who grew up as a subject of a militarily occupied satellite state. She is committed to democratic principles  and is accutely aware of the fraud that was committed by the founders of the euro. She is reported to be viscerally unwilling to legitimate the lunacy that has created the state debts of those eurozone countries that have systematically [and knowingly] lived beyond their means by 'monetising' those obligations under a German guarantee. So she is pressing for something like a democratic structure to be created, within which at least part of the eurozone can move close to fiscal union [a united tax and budgetary system]. Ms Merkel is not prepared to guarantee past follies and frauds in the mean time.

The EU has never been even slightly democratic: the 'European project' is the imposition of an elite who have drawn on the widespread fear of European wars to justify their own job-creation machine. Any currency zone that adopts Merkel's principles will certainly be smaller that the eurozone of seventeen states that is just about surviving into another week. A German-led outcome may be a eurozone shorn of the weaker bretheren, or it may be a Neumark zone comprising Germany, Austria, Croatia, the Netherlands, Luxembourg, Slovakia, Finland and Estonia, probably Belgium, and possibly France, Poland, Latvia and Lithuania. The Czech Republic, Hungary and the Scandinavian EU members would probably be welcome to apply to join once the system were up and running. The 'Club Med' countries would not be considered for candidacy until their devalued euro - or their separate currencies - had well stabilised and their balance of payments was restored.

Britain's desperate imbalance of payments and its structural budget deficit would become even more conspicuous when it drew comparison with the Neumark bloc. It would become clearer that party politicians cannot solve the problems, and the yaa-boo antics of the House of Commons and in the TV  'question' programmes would move from being a national joke to become recognised as evidence of the failure of the entire political structure. The British situation is worse than that of the EU: it is worse than a democratic deficit: it is an advanced case of defective democracy. This tragedy has been developing for several decades: in Can Britain Survive? [1971] Ken Watkins and I wrote:
"...there is a kind of auction of popular programmes carried on by the major parties, in which the highest bidder tends to win the lot. Since the parties do not wish to commit political suicide they are, willy-nilly, compelled to act accordingly. The fact that this inhibits them from tackling the fundamental structural weaknesses in the in the economy can be seen from the study of the elections since the end of the Second World War."
The same political auction game has continued unabated for forty more years! The deep defects of democracy, British-style, will not easily be corrected; and yet only when that correction has taken place can a rational economic strategy be formulated: then implemented over several decades. If the democratic defect is not corrected by completely fresh democratic means; a less democratic solution is quite likely to intervene.

The oldest current Constitution in the world, that of the USA, is not directly under threat. But American commentators from all segments of the political spectrum are worried about a failure of their institutions to provide clear policy in a very grave national crisis. Franklin D Roosevelt was - in effect - given exceptional powers to lead the economy out of depression, and he continued to exercise exceptional powers, sanctioned by Congress and unimpeded by the Supreme Court, for the Second World War. Harry S Truman had barely begun the process of surrendering the special powers when the emergence of the Cold War brought the Marshall Plan. Then came the Korean War, then the long stalemate of the nuclear confrontation. After 1991 the US was the unique superpower and the Clinton presidency was the first 'normal' incumbency since the mid-nineteen-thirties. It led to impeachment proceedings and a reassertion of party politics over constitutional propriety. George W Bush was continuing with the diminished role when 9/11 created a crisis and led to two overseas wars. The role of the Commander-in-Chief was once again unquestioned, and guided by the Vice-President and Secretary of Defence it transcended constitutional propriety. The limits to US global power were challenged and the end of hegemony was slowly acknowledged. Obama came into office in a diminished power and he has faced the full force of a resurgent, if uncomfortable, congressional democracy. His fluency became his greatest failing: he was unable to listen to and to interpret the diverse dialogues that had been unleashed by the collapse of the financial system and the weakening of the military-industrial complex. The attempts at bold initiatives to deal with the human consequences of the crisis that he has promoted seem to be based on the European welfare state from the nineteen-fifties: which the Europeans themselves are having to abandon under the burden of debt with which it saddled them. The result is that the USA has its own, very specific demcratic deficit: it is a real and urgent stress-point, that has been confronted by a dialogue of the deaf in a polarised Congress that exactly mirrors the depth of division in the country. Meanwhile, the prophets of economic Armageddon are having a bonanza.

Thursday, 24 November 2011

Tragic Youth

Having been cheated of education-for-life in a schools system fudged by government of all parties over the past four decades, the unemployed million in the United Kingdom are now to be presented with a fake solution to their dilemma. The Tories' favourite fall-guy, the Deputy Prime Minister, is put forward to announce 'training opportunities' and 'apprenticeships' for about a third of the estimated number of unemployed people under 24 years of age. In the largest number of cases there would be a short period of 'work experience', perhaps combined with some hastily-cobbled 'training' whose relevance to the 'work' done under the scheme would at best be tendentious. For minorities of unemployed young, who meet firms' own selection criteria, slightly more realistic short-term jobs could be provided: if employers are prepared to take the risk of bringing possibly-disruptive ill-prepared employees into the workplace for a measly grant of £2,000 a head. In addition pseudo-apprenticeships are supposed to be offered by firms for a subsidy of just £1,500 for a few months.

Real apprenticeships are extremely rare in contemporary Britain. They are granted to young people who are genuinely keen to follow a trade or profession for at least a decade, who have clearly defined qualifications and accept having to combine intensive workplace practice - under tight supervision - with demanding college courses in the science that underpins the process that the apprentice is working on. Employers only create apprenticeships that last from two to four years [even with modern technology to ease tedious requirements like engineering drawing]  if they genuinely believe that they will have a need for the resulting skilled workers for a sufficient number of years to have reasonable confidence of a return on their investment in human resources. There is no such concept implicit in Clegg's announcement: it is merely a statistical game in which the maximum number of young people are to be reclassified into employed or being-trained  categories  at the least possible cost. The estimated cost of the scheme, if enough employers agree to create enough non-jobs - one billion pounds - is a lot to pay for a publicity stunt.

But it is worse than just that. The demoralising effect of being dragooned into taking on such a post - on the human specimen who is being set up for statistical tabulation - is most unlikely to be favourable; either in short-term psychological impact or in the acquisition of life or work skills. The irrelevance of politics to the lives of cheated youth will be highlighted. And the Labour Party is adding to the nonsense, by suggesting that many more young people could be exposed to a similar charade by levying a new [or renewed] tax on bankers. The vacuity of such a concept is painful. Bankers' turnover is not 'money': the trillions that they trade in cyberspace are just electronic emanations. Most of the bonuses that they get for maximising this gambling are handed out in shares: electronic credits. Only the part of their bonuses that they get in bank credit can be exchanged for money: and that is taken from the cash-flow that banks take in from their dealings with people and with firms that exist in the real world. So a tax that is collected in credit from banks comes from the real economy: and Labour say they would raise it and then use it to to deceive the public by putting young people in spurious situations. Real poiticians' fantasy!

Not Another Crisis, Surely!

On this date - November 23 - 1714 the River Thames froze right over by London Bridge and a few weeks later a Frost Fair could be held on the ice. To contemporary Britons in 2011 such an event is unthinkable, at the end of a mild autumn. But the fact is that extreme events occur in nature frequently; and humans are just part of nature so we should expect extreme events to occur in society and in the economy seven though most of us cannot anticipate what extreme events will occur
.
Crises are not only foreseen, by at least a percipient minority of the population [including speculators who both anticipate and exacerbate such events], but many unexpected consequences stem from deliberate actions by worldly-wise decision takers. The present crisis in the eurozone was inbuilt into the system from its foundation; and it was foreshadowed by the behaviour of the members of the ERM - the exchange rate mechanism - that preceded the foundation of the euro. Regardless of what German ministers said, in 1992 the President of the Bundesbank actively encouraged speculators to bet against the British pound with such effect that Britain had to withdraw from the mechanism. Germany thereafter acquiesced in the lies and deceit by which the weaker states from the ERM were enabled to join the euro, once the UK was safely excluded. The Germans hoped that the rules of the EU and the operation of the eurozone would impose sufficient discipline on the member states to ensure that the zone became more integrated and stable. Now Germany is in dispute with France and most of the other still-viable eurozone countries about the next steps that are needed to 'save' the euro. The majority of eurozone members want Germany to guarantee the debts of all the others: the Germans refuse to contemplate any such policy, that would threaten their hard-won recovery from the devastation of 1945. The Germans are right to resist; but they do not really understand why they should resist. That is because their universities long ago ceased to teach sound Political Economy, which rests on just two Laws and one Principle. The Law of Diminishing Returns and Malthus' Principle of Population can be the subject of other blogs: the Iron Law of Wages has several times been mentioned previously and is again the central fact in this discussion. The Law says that no economy may consume more than it produces [net] over a series of years without catastrophic consequences. In controlling its economy every state must seek to limit the total that its people consume plus what is invested by individuals and by firms and by the state to what that economy produces. It need not limit consumption to goods and services that are provided within the economy: it can swap items in international trade, and thereby its exports can pay for imports both for consumers' and for firms' use. It is even permissible in some years to have a trade deficit, provided that is offset by balancing surpluses in other years.The founders of the euro refused absolutely to test whether candidates for membership were in breach of the Law: and thus the failure of the system was inevitable.

The US, British, Irish, Greek and other economies have systematically devoured more than their real national product for several decades: the Germans and a very few other European countries have not been profligate in that way. The present German government appears to be convinced that the recalcitrant states within the eurozone can be commanded to live within their means, and repay debts, over a long enough period to solve the crisis without Germany having to bale-out anybody else to its own detriment. This would require strict discipline to be applied by the indigenous governments over public and private spending, and rigorous tax collection. The prescription would have to be imposed for two or three entire decades without remission. Meanwhile the ridiculously self-important President of the EU Commission has demanded that his unaudited, corrupt bureaucracy should be empowered to oversee the budgets of the member states to ensure that this demand is met: a pretension that Germany treated with the contempt that it deserved.

The eurozone is in crisis: and it will break up.Germany may bounce out of the top, with a select group of viable satellites including Austria, Slovakia, Finland, France [if they recognise the necessity of taking the only good offer in town] and maybe post-Berlusconi Italy: this group could create a new super-euro. Alternatively the weakest euro economies could fall through the bottom of any safety net and be left to work out their own salvation. Either way the fragments of the eurozone will find their own level in the global money system and within the European Union. Meanwhile both France and Germany are telling Britain's Prime Minister to shut up interfering in their business as the UK opted not to participate in the euro. Cameron is sufficiently vain and silly to persist in  telling others what to do, while he has had negligible impact on Britain's vast propensity to break the Iron Law [to which he remains oblivious]. By being outside the euro Britain has escaped one manifestation of the crisis, but along with the USA it will have to face up to a catharsis comparable with that to which the majority of eurozone countries are now just beginning to accept. Whether democratic institutions, which cradled the crisis, can survive the catharsis only time will tell.

I recognise that this has been a rather obscure presentation leading to a plain and simple conclusion. It aims to illustrate the mental confusion that prevents machine politicians form a clear understanding of the conditions in which they are attempting to capture and control.

Wednesday, 23 November 2011

Old Allies

The generally negative view that is taken of Queen Mary I of England - "Bloody Mary" [Tudor] - does not readily accommodate the range of her interests and activities. My own perspective on her reign was dramatically developed in the still-communist Moscow Kremlin when I saw a magnificent exhibit of English silver, diplomatic gifts from the Queen to the then obscure and isolated emergent state of Muscovy. English navigators had made their way to the northern port of Murmansk, then Russia's only outlet to the seas. Mary's sister and successor Elizabeth intermittently pursued trade and alliance with Russia; while ducking a marriage proposal from Ivan the Terrible. The travails of British politics in the first half of the seventeenth century weakened the political aspect of the interaction, but that did not inhibit the development of the 'English village' outside the walls of Moscow. The inhabitants of that settlement represented the first 'window to the west' that was accessible to the young prince, then co-Tsar Peter.

When Peter manoeuvred himself into the sole sovereignty, and had established his autocracy absolutely on the state, he travelled west to test the tales that he had heard of western society, civilisation and - above all - technology. He visited all the major west-European states, and spent long enough in each to gain an image of its military preparations and its specialist skills in science and manufacturing. In several cases he demanded to be put through a crash apprenticeship in a skill that appealed to him; in between talks with monarchs and challenging private seminars with such luminaries as Isaac Newton. Besides huge height and outrageously greedy manners [for experiences, food, drink and sex] he impressed everyone with his intelligence and his grasp of concepts.He returned to Russia stuffed with data, plans and the ambition to make Russia an advanced western power. Successful military action secured him a toehold on the Gulf of Finland, and there on a collection of sandy islands he set about building a great capital city. St Petersburg  was typically described as Peter's 'window to the west' but more importantly he saw it as the exemplar for what he hoped to make the whole of Russia. Right down to the Revolution of 1917, though it grew as a European city [albeit with an extreme climate and a restrictive police regime] of great distinction.

Trade and technology transfer with Britain, and west Europe generally, remained very important to imperial Russia; but a specific and unique role for Britain arose when Tsar Alexander I split from Napoleon's hegemonic European empire and reopened the Tudor route from Britain to the Russian northern ports. Wellington and Kutusov defeated the French and their satellites starting from two corners of Europe, and they eventually met in conquered Paris. The obvious synergy of Britain and Russia wore thin during the 'great game' when Russia advanced its frontier through central Asia towards Afghanistan, where the British Raj in India repeatedly failed to capture control. The absurd Crimean war was the only open conflict between the two and by 1900 Russia and Britain were moving towards an alliance to stem the perceived Napoleonic ambitions of the Kaiser, who was a first cousin both the the Tsar and King George V. The war undermined the monarchy and Russia passed into the purgatory of 'permanent revolution' which was interrupted by the second world war.

The old alliance of convenience [and necessity] was reactivated for the war period, then was quickly abandoned in the cold war. Since the collapse of communism Britain has been at best half-hearted in its attempts to develop effective links with the Russian Federation. Some British firms including  farm management companies have done very well in Russia, as have  relatively few providers of financial services: but the British government has been overcautious in its engagement with  the regime. This is stupid. Incidents where Russian agencies have acted in a pre-liberation manner against opponents of the regime on British soil have been outrageous and demand a powerful reaction: but not self-harming, po-faced  isolationism. Putin is going to win the forthcoming election, and it will be a genuine result from a flawed system. Whether he will thereafter undermine his position by megalomaniac self-advertisement, or learn to present himself in a more statesmanlike manner, will be more important to the British press than it should be to the Foreign Office.

It is worth reflecting that democracy has been economically disastrous for Britain; while Putin and his cronies have stabilised the chaos to which their predecessors had brought the country as Boris Yeltsin sank into alcoholic incomprehension.Western Economists had applied their naive models of markets to the crisis of the economy that Gorbachev had been unable to rescue. Privatisation was a disaster: at first. It enabled sharp elbowed fixers to become the 'oligarchs' who personally controlled huge industries and agglomerations of financial power. Cometh the hour, cometh the man. Putin worked out a unique route to controlling their firms in the public interest. To take the businesses back into soviet-style state control would be a disaster: the Gorbachev experience proved that. To nationalise them and re-sell them could either be a re-run of the Yeltsin disaster or hand the facilities over the foreign corporations. So it was preferable to make the oligarchs keep control - and responsibility - for huge industries; and lock them in to the state. Some have been required to serve as provincial governors, some in other state service; some have been allowed to live abroad provided their firms conform to government requirements; and the recalcitrant few who challenged the system have been deprived of their assets and in some conspicuous cases of their liberty.

It is not a pretty system; it is not democratic in the 'Anglo-Saxon' sense; but it serves its purpose. Russia can build nuclear power plant: by contrast Britain sold Westinghouse and refused a modest loan to Forgemasters. Russia can design and build military aircraft; Britain takes a diminishing role in precarious international projects and has destroyed the independent civil aviation sector. Russia can build warships and submarines: so can Britain - now - but that capability is under threat. Russia develops its plant in steel, aluminium and other sectors; alien owners are reducing the capacity of their shrunken British equivalents. Russian organisation and management are still crude and inefficient; but business education and management training are spreading rapidly. The educational system is conservative, but young adults are highly literate, articulate and numerate; as are graduates over the whole age spectrum. Pensions are modest, but pensioners are protected and caring interpersonal relationships predominate. Alcoholism is a national crisis and the low birth rate is a cause of alarm. Medical facilities need massive investment and the training of appropriate staff: but everything in slowly and patchily improving. Everybody knows what destruction communism wrought; and they also know how ruinous their crash-course in market capitalism was: they did not starve under post-war communism, but millions came close to that in 1991-2.

The British people is instinctively reluctant to surrender sovereignty to a 'Napoleonic' European Union. When asked 'what is the alternative to subjection in the EU?' there are several potential responses: a return to Commonwealth preference, maybe: or membership of an 'outer circle' of the European Common Market, around the core Union, with Norway, Switzerland, Russia: and maybe Turkey. That prospect is as promising as subjugation to the EU is unpalatable.

Tuesday, 22 November 2011

Gift of the Gab?

The few students in my generation who learned some German were intrigued to find that Gift in German means poison in English. It is the sort of arcane fact that occurs to one in later life when someone who has made a reputation by oratory overexposes their acquired facility to a degree that becomes damaging. The most conspicuous case in recent British history is Neil Kinnoch who talked Labour out of credibility in the high Thatcher years and then lost the election that followed the fall of the Iron Lady in a single inarticulate wail at a premature celebration rally in Sheffield. In explaining the Tories' surprise victory academic analysts emphasised the fresh simple honest image projected by the new Conservative leader, John Major [hard to believe that now, is it not?]; and the refusal of the Labour shadow  Chancellor, John Smith, to answer any direct question as to what taxes he would impose if he was in a position to do so. Analysts in the saloon bar had not doubt that the 'Welsh windbag' had simply got his cum-uppance. He was rewarded with a role as an EU Commissioner and a peerage, after which he was paid to pose as an elder statesman.

The most remarkable windbag - or oratorical genius, depending on the commentator's point of view - now active in the global political system is the current President of the United States. Obama appeared from nowhere to serve two years on the US Senate and went straight into the race for the Democrat presidential nomination. He talked himself into it, and into the White House, where he has continued to talk with remarkable facility. His many enemies claim that he was not born in the USA, that no school friends have been identified, that his income in significant periods of his life has not been attributable and that his university grades seem to be inaccssible: these and many even more far-fetched accusations have been brushed aside. He talks on: about anything and everything. The less impact his admonitions and assertions have, the more assertively he talks on. Meanwhile the United States has marched steadily towards an economic precipice as the public debt [just of the Federal Government] has reached $15 trillion: fifteen thousand billion. The Democrats have cheered Obama on as his adherents have brought in massively costly schemes for universal medical care and have maintained social welfare spending at the same time as they have approved massive spending plans for infrastructure investments designed to stimulate economic growth. The Republicans have become increasingly intransigent in opposing the government's plans.

American politics have reached a stalemate that is potentially ruinous in the current world context. The European crisis is apparently worsening. The dominance of the west is widely proclaimed. The west is patently incapable of addressing its problems with efficiency and intelligence: and the great stumbling block is democracy. The US Constitution and the people it has placed in office have combined to make a complete impasse. The ambiguities of the Treaties that bind the European Union, and the fudges and half-truths by which they have been implemented, have created a morass through which no known path exists. The USA and Western Europe have proclaimed the advantages of democracy as a universal exemplar for the rest of the world: and it has produced the toxic combination of economic disaster and political impotence. When the causes of this fiasco are analysed it becomes clear that is has obviously been accumulating for at least forty years. The shining success of Canada and Australia is not sufficient to justify democratic economic policy to a sceptical world that is doing better with different political structures.

The reasonably articulate Prime Minister of the United Kingdom made his excuse for his own incomprehension of the surrounding reality at the Confederation of British Industry conference yesterday. He declared that nobody had foreseen in 2010 how bad the economic situation would be in 2011. This was his excuse for the fact that his government could not now meet its schedule for reducing the rate of annual aggregation of national debt. The carefully chosen gang of Economists who staff the shiny new Office of Budget Responsibility predicted that the situation was to be eased by economic growth that is patently not happening. They predicted that the private sector would quickly offset the loss of jobs in the public sector, which has not occurred. Cameron and Osborne [the Chancellor of the Exchequer] have spent a year and a half bumptiously parroting those failed predictions. Their opponents in the Labour Party have also seen 'growth' as the panacea, arguing the absurd might-have-been that more growth would have happened if the government had not made the modest reduction that it has implemented in borrowing. It is more likely that higher borrowing by the British state would have brought forward the date when it has to offer a higher interest rate on its borrowing. Cameron's admission that the economy is not delivering the hoped-for growth is a belated recognition of the cor-blimey-obvious that the people who spend less that they used to in the saloon bar have been saying throughout the wasted year of coalition fudge.

Cameron is wrong to say that the better-informed counter-view to the official line was not available when he came into office. I am an outlier in having made the point in my small corner for more than forty years; but I have never been alone and will soon be in the majority. None of us wants to gloat over the abject national failure that democracy has brought upon us. Democracy is still the least-bad form of government;  but is now in the painful situation that extra-democratic measures may be necessary to address the economic crisis: and that could put the future of the free society in unprecedented danger.

Sunday, 20 November 2011

The Taxpayer Cheated - Again

The sale of the 'good' successor of Northern Rock to Virgin Money is just the latest in a long series of cases where the institutional incomprehension of the Treasury has played strongly against Britain's national interest, to the disadvantage of taxpayers. A 'price' of some £750 million has been set on the sale, of which roughly one third will be plundered from the company's balance sheet; and a comparable additional sum has been supplied by an American business venturer. So for a net £300 million - or rather less - an asset that cost the taxpayer well over a billion pounds [and over a thousand people their jobs] Virgin have gained a profitable business that will repay the investment in a couple of years. Bully for Branson! The Treasury excuses this outrage by asserting that the European Union requires the sale, according the a set timetable.

Eurorats are arrogant, but they are not idiots: they know how unpopular their vampire squid is to the British public, and they would surely have been willing to accept the deferment of a date that is anyway months in the future; especially in the knowledge that if the UK had simply told them to 'sod off' there is very little effectual that they could have done about it. The blame for the sale must fall on the Chancellor of the Exchequer, in whose name the decision was announced, and on the civil servants who advised him. Blame does not attach to the bankers who advised the Treasury, as such consultants normally deliver the advice that the customer wants. The incident may lodge in the mass memory, alongside Gordon Brown's idiotic sale of gold reserves at the bottom of the market. But there are other aspects of the situation that can be used to illustrate a long running saga of misreporting.

There is no gain to the economy from this sale. The country has 'lost' more than half a billion poundsworth of 'value' from the national balance sheet, because around £500 million has gone from the 'value' of the banking sector and a further £250 million has been taken over by a foreign investor. The national accounts should be adjusted to show these facts: which amount to negative economic 'growth' of around £750,000,000.

I have been a connoisseur of this sort of misrepresentation for many years. When Dr Beeching was axing thousand of miles railway, nobody was interested in the extent to which the value of national assets was being diminished. All attention was focussed on the running-costs of infrastructure that was abysmally ill-managed. To my best knowledge, nobody but me was pointing out that to construct a mile of railway - even of rural branch line -  even then cost many millions of pounds. So the opportunity-cost of every mile closed should be deducted from that year's GNP  [Gross National Product] figures and from future estimates of the 'value' of the nation's assets. Any cash returned by UK-based buyers to British Rail or to the government from the sale of rails, sleepers or land was an internal trasfer: it was turnover within the year but it was not an addition of value. Any structure built on the site, or with the use of former railway materials, was a subsequent addition to the nation's assets: but in very, very few cases was the 'value' of replacement land use the same as its occupation by a railway. Similar considerations can be applied to dockyards, airfields and other assets that have been sold at knock-down prices, often after large expenditure by the government on site clearance. Although such assets require large expenditure on routine maintenance, and intermittent upgrading, they are of permanent value to the state; especially when they are constructed to support the national defence. Military technology changes, so assets to support the current shape of the forces must constantly be adapted, but the gaderene rush that has taken place since the second world war to dispose of assets that would be useful in the event of war long ago passed the point where the competence of the state to defend its people was devastated.

Industrial plant such as a steelworks can be kept running for a century or more, if it is properly upgraded; but it is eventually in a position where newer technologies make it comparatively uncompetitive. At that point it should be decommissioned; and its 'value' as a national asset should be written down over the years so that its net worth is recorded as zero even while it is producing output. Then the real and the notional loss to the national asset register can both be recorded as zero. Most industrial plant lasts much less time, and is written-off accordingly; and IT equipment and software is normally depreciated over a very short term. In most routine situations in business and in the public sector accountancy is effective in recording and reducing asset 'values' in a sensible and comprehensible manner. But strategic assets, such as the whole defence estate and infrastructure such as railways, roads, IT networks, power grids, reservoirs and flood defences stand outside the easily-accountable business arena; even if they are administered for the public by business corporates. The fact that they are enabled to exist only by legislation [or by legislatively authorised decree] and are regulated in their pricing and operations by criteria quite separate from those that are applied to 'normal' business shows that the state is fully aware of the distinction, of the public interests that are involved, and of the political sensitivity that can arise from mismanagement.

The Northern Rock incident is relevant to this whole discussion because the crisis of 2007-8 [and its long prehistory] shows that banks are quintessentially strategic assets, albeit they are in the main appropriately run as business entities. The whole world community, led by the G20, is busily setting new rules for the banking sector: and is unnecessarily drawing insurance into the same regulatory framework. But this has not yet tackled the issue that is exemplified by the sale of Northern Rock. What is the 'value' of a bank to the country in which is is domiciled? How is that 'value' calculated, reported and adjusted? It is a key part of the wider question as to how strategic assets are recorded and revalued in the computation of national assets and net national income. These are vital matters and I will revert to them in the coming days.

I will also return to the reason why I put a single inverted comma around the word 'value' in this [as in some other] postings to this blog. The issue is vitally important to any right understanding of the economy and it is a major underlying theme in my Personal Political Economy; see the link from this site.

Friday, 18 November 2011

Work and Wages

With total unemployment in the United Kingdom well in excess of six million, including one in five of under-twenty-fives, the cost of maintaining them all - even at a low standard of living - is a major cause of the still-growing budget deficit. It is highly desirable that at least two million of those people should get jobs, raising their standard of living and paying taxes. There is much talk of creating those jobs; but staff are being shed from the civil service, the armed services and the health service, so it is hoped that other sectors of the economy should generate employment. The private sector - business - is showing little sign of major job creation. In the few segments of the market where there is opportunity for employment there is an evident employer preference for immigrant labour. The available jobs are mostly in entertainment, hospitality and services, where emphasis is placed on personal attributes of clean appearance and willingness to work hard at peak periods. Native British unemployed products of comprehensive schools are perceived by employers not to possess these characteristics. It is even reported that many graduates do not meet employers' requirements for literacy, articulateness. smartness and diligence.

Manufacturing industry has been through half a century of decline: many skills have died out and 'habits of industry' that used to be cited as a great attribute of British artisans have become extinct. There is a fashion for people to be given 'apprenticeships'. For many centuries apprentices used to work alongside craftsmen and learn skills on the job. In the twentieth century industrial apprenticeship took on a more institutional form, where apprentices [including graduate apprentices] were put through a sequence of jobs in the works in parallel with study part-time of relevant technical subjects. As industry diminished the good schemes attracted more applicants and now the few surviving exemplars [like that at Rolls-Royce] stand out as remarkable opportunities for employment. The 'real' schemes are highly competitive and attract excellent candidates: they bear no relationship - other than the use of the word apprentice - with the charade that is in mind for the masses. Without access to the appropriate industrial plant, or to experienced trainers, or to skilled supervisors the new apprenticeships will largely be classroom based, with simulated work situations and rare factory visits. Candidates will recognise it as a sham, and there is no chance of such a scheme creating a mass supply of skilled women and men who could operate new factories: even if the necessary capital and desirable patented product concepts could be conjured into existence.

The present government is following its predecessor in looking to 'the third sector' - not-for-profit firms, and charities - to create jobs, with financial assistance from the government. At a cost of billions of pounds, this will enable a few people to get useful job experience; and it will condemn hundreds of thousands to disillusion and cynicism. Unemployment is a horrible experience, even for a few months: when it lasts for years its psychologically and morally destructive. If the surrounding circumstances include fake apprenticeships, subsidised non-jobs in charity and a penal attitude by the state to claimants for benefits, the destructive impact of unemployment is enhanced. Only 'real' jobs in 'real' industry and commerce - and genuinely useful roles in charity and the public services - give job satisfaction. Such jobs are only created by the investment of capital and the engagement of protected intellectual property ik as defined in Personal Political Economy. Tragically, there is no sign that this is in the offing for the British people.

The USA also has a huge problem of unemployment, and many failed schools. Hundreds of thousands of the unemployed are dysfunctional from an employer perspective. But most of the employed in the USA work hard: and those who are seeking employment expect to work hard. The average US employee has many fewer days per years of annual holiday than do Britons or continental Europeans; and the torrent of Latino immigration ensures that employers can expect to get a full days work for the pay that they offer. Despite very significant de-industrialisation, the US remains a formidable centre of manufacturing, especially in high-value-added sectors. Nobody on the eastern shores of the Atlantic should read into America's unemployment statistics the same dire picture as is to be inferred from British data. The relationship of work to wages in the USA is an example from which Britain can learn beneficial lessons: any idea that 'they are in the same boat as we are' is deeply mistaken. Americans are right to be deeply concerned about the current state of  work in their country; but they have the means to ameliorate their relatively benign situation far more readily than we do in Britain.

Betting on Berlin

David Cameron is off to Brussels and Berlin, with his forked tongue especially honed for the trip. At the Lord Mayor's Banquet earlier in the week he declared himself to be Eurosceptic: but he resolutely opposes the Europhobes in his party. In Brussels he will demand that Britain remains at the top table in all discussions on the future direction of the European Union and of the Euro, while opposing the demand of the EU Parliament and the Commission for a 5% increase in the EU central budget [which would enable them to extend the area over which the Commission controls both capital spending and restrictive regulation within the member countries].

Then in Berlin he will ask Germany to open its reserves [and indeed it national revenue] to bail out the profligate mendacious members of the eurozone. Deploying carefully controlled phrases that may loose a little in translation he will also decline to support the idea of a Tobin tax [see blogs passim] and try to insist that Britain must have a veto on any institutional changes in the European Union. Having had experience of Hitler ruling by decree, the founders of the German Federal Republic built into the Constitution provisions that any constitutional change must be approved by due process. The Constitutional Court has taken the view that EU constitutional  changes that apply to Germany must be carried by due process throughout Europe; and it is generally agreed in Germany that any moves to further integration of the eurozone must be treated as fundamental constitutional matters. That is likely to mean that the changes would be subject to referendum in those countries that have such a provision.

 Cameron is saying that Britain should be a party to any rule changes, even in the eurozone of which it is not a member. His party have promised their electorate that there would be a referendum on any significant change in the rules of the EU. Everybody in the UK knows that the result of any referendum on 'Europe' - whatever the actual question - would be a massive majority against. Since the Liberal Democrats are europhiles - led by an extremist of the kind - the coalition government could collapse  if the Tory partners insist that there must be a referendum. So Cameron is hooked on the dilemma of his own wishing: he must either make himself a liar by refusing a referendum while signing up to constitutional changes or endanger his government. If the government falls there is a good possibility that the dysfunctional Labour Party would emerge from an election as the biggest single party, without a majority over a Parliament in which minor parties were all stronger that they are just now. The spectre would arise that there may not be a majority government for decades: with even less chance of there being a Conservative majority government.

As if that spectre is not enough to make Cameron a very frightened negotiator in Berlin, he also faces German pressure for the Tobin tax to be imposed on all financial transactions. France and Germany see that tax as a way of reducing the predominance of the City of London in European and world financial markets. The more Cameron and Osborne say they will not countenance the tax, the more observers fear that it will be imposed anyway.  If it happens, the turnover - and taxability - of the City will be hit, possibly devastated.

If the government were to see sense, and reclassify all of casino banking as betting [which it is], the Tobin tax would then fall most heavily on retail banking, and thus  have a negative impact on the standard of living of  the already hard-pressed taxpayers. By reclassifying derivatives and other classes of instruments as bets - and subjecting them to UK betting tax - a precedent would be set for other countries to follow, to their own advantage. The present EU proposals would bring the take from the Tobin tax into their coffers at Brussels; which would further fuel euroscepticism in Britain, especially if it was the direct cause of mayhem and mass unemployment in the City.

Germany and the UK are on a collision course: nobody with worldly wisdom would expect Cameron to win. Cameron has some appreciation of the risks, and he will bet on Germany politely seeking a verbal compromise whilst not changing its stance by one iota. In short, he is betting on flying back to London with fine words wrapped around a failure to affect the situation; while hoping that he can buy time to avoid any of the crunch decisions that will crowd in on him within a few months.

A former Prime Minister flew back from Germany brandishing a meaningless set of words and a signature on a piece of paper. Cameron must hope that not many people see the parallels.

Thursday, 17 November 2011

The First Million

UK government figures released yesterday report the number of unemployed young people in the country to be in excess of one million. Labour politicians have made ludicrous attempts to attach the blame for this to the present government. Anyone who has followed this blog knows that the responsibility lies with the entire 'political class' and over forty years or even longer. The story is not just the lack of jobs: the greater crisis centres on the absence of productive jobs in agriculture, industry, education and healthcare; and it applies to all age groups and  it is a part of the contemporary paradox that a significant and growing proportion of the people who carry on working after reaching the age of 65 are in productive activities.Industrial skills, in particular, are held by a smaller proportion of the people in each successive generation.

Between 1945 and 1980 a slow process of deindustrialisation happened spontaneously, despite half-hearted government policy in favour of expanding material exports. Policy was dominated by Keynesian ideas that the system must be fine-tuned to ensure that people were 'fully employed'. In practice this worked out as a series of inflationary 'stimuli' interspersed with periods of raised interest rates and restricted credit. Industrial investments take place over several years between design and the operation of new plant: every time that market conditions and the costs of investment were arbitrarily worsened by the government at the time when investment decisions had to be taken, companies were likely to cut their losses on the design of plant and just shelve the project. This happened again and again. Then from 1980 the Thatcher government had a deliberate policy to rid the country of 'smokestack industry' by removing all protective measures that had been maintained even during the supposed free trade era of the nineteenth century and declining to subsidise 'failing firms' or under-funded start-ups. What Thatcher began, Blair and Brown enthusiastically followed.

There was also a cross-party consensus that state schools should be funded to adopt educational theories that  stressed that 'students' experiences' should take overwhelming preference over orderly instruction. Ignoring the axiom "those who can, do; those who can't do, teach; those who can't teach train teachers'. 'Educationalists' in the latter category developed the theories that supported the comprehensivisation of schools on the cheap. The order and discipline of the Grammar Schools were ditched, together with the emphasis on practical technology - which requires workshop health-and-safety discipline - that had characterised technical schools and the good secondary-moderns. Margaret Thatcher as the education minister in the Heath government [1970-4] was an enthusiastic comprehensiviser and she never showed any subsequent awareness of the ruin that she had wrought. Thus there has been a multi-decade dumbing-down of education precisely where it hurts most: both in intellectual and industrial disciplines. This progressed step-by-step with deindustrialisation and the increase of manufactured imports.

With both industry and education lain waste, high unemployment among young adults is an inevitable consequence: and it is unsurprising that those employers who still have jobs available to fill prefer people from countries where the educational system has been less undermined. Within the UK there is an increasingly conspicuous differential in employability between products of state and private schools.  Parents who can afford to exercise choice in their children's education buy schooling that is anathema to the theorists: schools with order and discipline, pupils sitting in rows for class, plenty of sport and a concentration on 'hard' subjects. What a shock! How dreadful, so to privilege some children over others.

This is very much a British story; no other European country has so recklessly undermined its educational system [though some have gone quite a long way in that direction]; and no other country has so persistently suppressed industry. In the USA there are great doubts about the state of the educational system, and youth unemployment is close to the British level [with very much higher peaks among some ethnic groups in some states] but industrial development has continued across the board, and especially in the higher technologies, despite the collapse of some sectors of low-value-added manufacturing. Rebuilding the US economy can be accomplished within five years: the ruin of the British economy will take at least three times as long to replace.

Wednesday, 16 November 2011

Water

For eastern England, today is another dry, bright day: cool, but not cold for the time of year. Good weather.

But it masks a problem. The autumn of 2011 has been unusually dry in eastern England, as in various areas of Europe. In England, the relative drought, as compared to annual average rainfall figures, affects mostly the parts of the country where the public water supply comes largely from aquifers. Aquifers are large areas of soft rock, deep underground, that can hold copious amounts of water that cab be accessed by means of boreholes. So it is essential that rainfall is at least equal to the long-term annual average to enable the aquifers to recharge and be able to supply the farms and the cities with sufficient water even in periods when there is a period of a few months with little or no rain. If the aquifers do not get the recharge, the reserve disappears.

In a drought that begins when the aquifers are full, first the rivers begin to fall so that abstractions of water from them are limited - and ultimately forbidden - to protect the ecosystem as far as possible. Once that has happened, water for humans is supplied from deep below the earth; while farmers are told that their supply is reduced, and may be cut off if the drought is prolonged. If the drought continues the supply to urban areas is limited: first hosepipe bans, the ultimately stand pipes in the streets. The prevailing British climate usually brings rain before the standpipe stage is reached: but there could come a time when this historical rescue fails to happen. The whole of civilisation, beginning with drinking and washing and the disposal of bodily waste, would become laborious and eventually precarious. Fresh vegetables would disappear, then bread and meat.

Meanwhile the southeast of England remains a magnet for migration by people from the whole of the British Isles and much of the rest of the world: the population is increasing and so the demand for water is growing and the supply cannot be assured. This is seen as a problem beyond the competence of water companies, government, or even the controlling ambitions of the eurorats. In drought Europeans turn to prayer, sorcery and other external sources of assistance for impotent humanity.

These speculations are not extreme imaginings: prolonged drought is a real and present danger: and it is way beyond the powers-that-be. Some water can be pumped through the pipes from water companies in the north and west to those in the south and east on a small scale and at a huge cost in pumping fuel; but not enough. Other ideas include bringing water in by tanker - also at immense cost - or even towing icebergs from the poles: none of these can be seen as a viable long-term solution. Suggestions to pump water short distances between rivers are anathema to naturalists who consider each fluvial ecosystem to be unique and very delicately balanced. The use of old canals raises less objection, but cost projections for a canal-based national water grid do not cover the whole country and are very significant: and there are no obvious funders for such undertakings.

This British problem is potential rather than actual; but it should be planned for, more than it is now in informal contacts between regulatory bodies and the water companies. But Britain does not yet recognise a need to address the problem as a high national priority.

By contrast much of India and of China, as of sub-Saharan Africa have already depleted massive aquifers to a depth that implies that recharge would be improbable even from a century of heavy rainfall. Well-meaning charities that provide wells for villagers exacerbate the problem, while bringing short-term gains to the current generation of Kenyans whose beans and tomatoes appear in European supermarkets. It is a commonplace for apocalyptic environmentalists to assert that the wars of the next generation will be fought for the control of water resources. It is indeed possible that governments may fight to control the flow of water down rivers or aquifers; but such control does not exempt them from the problem of how to pump such a mass of a heavy substance to the people and the farms, or how to move millions of people from their homes to the places where the captured water supplies can be accessed. War can gain territory - which means depriving others of that territory - but that does not answer to problem of bringing water into use.

These are issues that deserve much more attention than individual governments and international organisations than they have had; and public education on this issue is a major global necessity.

Monday, 14 November 2011

China, Europe and Quons

Over the past month Chinese ministers and bankers have been quoted a lot in the European press as they have used increasingly uninhibited terminology in which to decline the privilege of putting billions of their dollars into various bail-out funds for the euro. It has been 'understood' that Chinese see many Europeans as workshy, many European products as imperfect or outdated, and European standards of living as excessive when set against national productivity and per capita output.

Economists, bankers and politicians have reportedly bought-in to the 'idea' that Britain and other laggard countries in the EU should increase their exports to China. More nuanced thinkers among these elites have particularised that the exports should be of 'manufactures': perhaps of the kinds that Germany's successful sales to China have comprised for the past few decades. The primitivism of that thinking is pathetic to behold. China has been the global powerhouse in manufacturing for two decades: it has no need to import those commodities that it has been so successful in exporting. On the basis of that success China has grown thousands of billionaires and hundreds of millions of 'middle class' consumers. These people don't think in terms of consuming 'manufactures': they want brands. 


Economists' models of markets have never coped with the concept of brands: with the palpable fact that capable buyers do not haggle about prices for those consumer experiences that are most highly desired. The dogmatic theoretical framework that was developed in Europe [and adopted in the USA] between 1863 and 1875 - and is now seen by the Chinese as the flawed and failing 'European business model' - is a huge inhibition on the post-industrial economies in trying to plot a course for the future. Although they do not yet know the term, the Chinese know that they want to buy quons: more quons per head per year as their purchasing power increases. To find out what quons are, and to see that they are the key to Europe's recovery, read Personal Political Economy: accessible by the link from this blog..

Sunday, 13 November 2011

The bankers are the beneficiaries, not the causes of the problem

Fund managers, and creators and traders in derivatives and in swaps and in futures, are lumped together with manager-underwriters of corporate mergers and with buyers and sellers of 'money' under the blanket designation as bankers. A significant majority of participants in those trading activities [including the huge volume that are simply gambling] have been content to receive incomes that are multiples of industrial wages for playing their market games under the delusion - shared by governments and stimulated by Economists - that 'markets' should predominate over the economy.

Economists have asserted - contrary to all the evidence - that 'markets' behave 'rationally'. Rationality is a function of human intelligence. It is not an emanation that emerges within inanimate trading spaces, which is what markets are. Markets have an immense range and diversity, from fish markets on riverbanks and at the side of harbours through the pre-1986 Stock Exchange to the complex interactivity that takes place in cyberspace. In recent days the media have been replete with repetitions of Keynes's dictum that both in periods of euphoria and of stress [such as is being experienced now in Europe] markets are dominated by 'animal spirits'. If any conventionally-qualified Economist can tell us how animal spirits - which Keynes also linked to 'waves of irrational psychology' - can be presented as an epitome of rationality in the contemporary context they should rush forward to do so. The proponent of any superficially plausible explanation will be a prime candidate to receive the pseudo-Nobel prize that Economists have handed to each other annually since the nineteen-sixties.

After the big bang of 1986 the bankers were freed to gamble and to gather their bonuses because politicians - on the recommendation of Economists  - created regulatory bodies that facilitated their fantastical creations.

 We are told that the fallout from the 2007-8 credit crunch is an unprecedented situation. It is generally presented as being the outcome of modern inventions in monetary policy, in regulation, in consumer empowerment and [above all] in computerised deployment of algorithmic methodology. But these are merely phenomena. Within the human beings who participate in markets - from fishmongers to creators of Credit Default Swaps - there exist the same abilities, tendencies, ambitions, urges and complexes as have existed in humans for the last dozen millennia. We don't have detailed records for the banking activities that almost certainly existed several centuries BC, but we do have Assyrian and other tax records and businessmens' notes on clay tablets which show that trade had become sophisticated before Roman times. We also have the comments that were made on people who became powerful in markets; and many of those observations fit with the attitude to 'bankers' that purportedly animates the sad crowd beside Saint Paul's Cathedral.

The Jews who established their first state under Saul, David and Solomon almost a thousand years BC inherited texts from their.own ancestors and from the surrounding [more mature] cultures, and one of the most marvellous products of the resulting culture is the Book of Psalms. One psalm, in particular - Psalm 73 - is an exposition of a decent human being's reaction to seeing:
"the wicked.......in such prosperity".
 Like the bankers of 2006:
"they do even what they lust......therefore fall the people unto them [and the mortgages and credit cards and derivatives and Credit Default Swaps that they provide] : and thereout suck they no small advantage. These prosper in the world, and these have riches in possession":
But they inevitably get their cum-uppance:
 "Oh how suddenly do they consume, perish and come to a fearful end!.......even like a dream, when one awaketh: so shalt thou [God]  make their image to vanish out of the city".
[Quotations from the Book of Common Prayer]

Religious belief is not necessary for a person to recognise that throughout history forces that exist deeply within the human spirit react as the psalmist did when the behaviour of self-identifying elites become seriously deviant from what is sensible. The crazy trading practices of 2001-7 have been allowed to continue until now, in the residual financial market that was patched together after governments had rescued most of the component firms. People in Greece and Italy are being forced to recognise that they have been set 'in slippery places': the economy has been 'cast down and destroyed' by what the regulators allowed the bankers to do. But it is not the regulators or their Economist cheerleaders who are being 'cast down and destroyed': the casualties are the politicians, the group under the media spotlight who are susceptible to democratic accountability.

In Greece and in Italy Economists - proven delusionists - have been given power without democratic responsibility. Their priority will be to support the core fantasy promulgated by their 'profession', the efficiency of autonomous 'markets'. Their first steps in power will be to squeeze living standards; which will work regressively, with the least articulate and least skilled people suffering the biggest proportionate attack on their standard of living. When the combination of increased rates of taxation, increased collection of taxes, frozen or reduced public sector salaries and pensions, failed firms and rising unemployment are seen to have worked adequately they will seek permission in European institutions to loosen the squeeze on money creation. Bankers will be encouraged to dissipate inflation through the economy, which will reduce the perceived 'value' of the debts that the bankers and the governments owe, while further reducing the real purchasing power of wages. Whether or not they will be allowed to get away with it is highly problematic: demos - the voters - must be allowed to decide whether or not they accept such a programme, both at its inception and as its impact becomes apparent. If the democratic sanction is not applied, riots and insurrections can confidently be predicted; even revolution. It will matter less what the revolutionaries promise than how effective they are in exposing the fallibilities of the Economists' policies.

The politicians are falling, the Economists will have their day and may succeed or not: the bankers will sail serenely on, providing essential services and engaging in their self-centred gambling. The people who take most of the blame from the populist media will bear the least of the pain.

Friday, 11 November 2011

Public Property,People and Interest Rates

Deluded politicians, from BF [before Thatcher] to Cameron, have readily been persuaded that sales of public assets are a means of reducing 'the deficit' on the state budget. Superficially and in the short term this works, in the right circumstances. When the government is keeping state spending in check so that the current budget is close to balancing income with spending, the money recieved from selling railways or gasworks can be used to purchase state bonds which can then be neutralised. But when the government is spendthrift - as in the latter half of Gordon Brown's period of control of the state finances - any sale of public assets trivially reduces the rate at which the public debt is recorded to be increasing. Even in the early days of Brown's tenure his notorious sale of gold held by the Bank of England, at the bottom of the market, meant that the UK did not benefit from appreciation in the market price of that gold that accompanied his subsequent profligate state spending - and the consequentil fall in the value of the pound, as against gold - and this meant that the state's aggregate assets relatively were diminished by the sale.

The sale of electrical power distribution, waterworks and railways creates a long-term dilemma for governments. They may in the first instance be sold to a mass of small investors, but quickly most of them sell out to companies. Alternatively, in Russia and some other ex-communist states, the small stakeholders didn't understand what was happening and sold the vouchers that the government gave to them to 'oligarchs'. Russian billionairs have been more likely to keep their ownership of businesses than were indigenous British companies, whose shareholders have been free to sell the assets to international companies. In the British case, it then falls to the government - or to an 'arm's-length regulator' establishd and appointed by the government - to establish the price range in which electricity, water or rail travel are sold to consumers. The price must be high enough to keep the foreign investors sweet; and this is ensured by a process in which the regulator agrees with the company what its costs are likely to be for the next few years, then adds an allowance for inflation, then adds an allowance for the 'cost of capital' - the guaranteed minimum rate of profit to go direct to the owners. If the operators can make the company more efficient, they can take the extra profit; and if they can squeeze costs in the event of inflation to raise input prices by less than the inflation allowance they can add that profit to their take as well. So Canadian and Australian pension funds do well as owners of shares in British utilities: while British consumers are compelled to pay whatever prices are set by the regulator. Then the profit is exported, increasing the deficit on the balance of payments. So a short-term 'gain' for the government in the year of privatisation is followed by gains for the small shareholders who sell their shares [and the brokers who manages the sales] and then by gains from the shareholders in indigenous companies who sell to foreign investors [and the brokers who manage the sales, and the brokers who put together groups of pension funds when they buy the shares].

Just now the media are gloating that Greece and Italy are to be required to do the same. The unabashed Economists still tell the politicians that privatisation will create 'open markets' ['rational' markets]. But in the event, along with reduced pensions and frozen salaries, Greeks and Italians can expect to be taxed with higher prices for utilities that will be at the mercy of 'international investors' for the indefinite future.

Those 'international investors' mostly have good credit ratings, so they can borrow money at very favourable rates [especially while official interest rates are virtually zero]: while the customers of the services have to pay much higher prices, based on the 'cost of capital' set by the regulators on a quite different basis of reckoning, related to the 'average' cost of borrowing for a range of firms in the domestic market where small and medium-sized companies can only borrow at a high multiple of the rate that is available to AAA-rated global investors.

Well done the Economists and the gullible politicians: and well done the bankers and brokers who will manage the privatisations and the resales of privatised-industry shares! The policy of privatisation is part of the privation that the Greeks and Italians, Irish and Portugese [and maybe Spaniards and even French] will suffer. Yes, admittedly the private citizens, and especially the pensioners, cheerfully consumed beyond their collective means; as was arranged for them by their governments during the fake-boom years. Those politicians [and the former central bankers who now lead 'governments of national unity'] are likely to have invested their personal 'pension pots' in precisely the sort of international businesses to which the citizenry will be paying tribute for the rest of their lives.

I have no empathy at all with the reckless vacuity of the anti-Wall Street protestors, such as those who are shaming the environs of Saint Paull's Cathedral at present; but I fully share the public anger at the sort of depradations on the people that have been perpetrated by bankers and brokers - at the behest of politicians who are intellectually in thrall to the Economists. Let us be sure where the responsibility should be distributed!

Thursday, 10 November 2011

Nudges, Bribes and Good Sense

The UK government has announced the imminent reduction of subsidies to installers of solar panels on houses. The subsidies have created thousands of jobs in a new 'market' that has been totally phoney. The government gives a guaranteed price, over several years, for electricity delivered from their homes to the National Grid, to households that install the panels. Such a large number of people opted to take the money, that it became unaffordable. Now 'industry leaders' are moaning that halving of the subsidies will 'cost' many of the jobs that would never have been created in the sort of 'market economy' that features in Economics textbooks.

Since 2007 the banking business in Europe and the USA has been in a similar position to the UK solar panel business. It has been subsidised by governments and Central Banks. Governments have bought shares in banks to save them from bankruptcy. Central Banks - led by the US Federal Reserve and the Bank of England; and now followed by the European [Eurozone] Central Bank - have created 'money' to buy bonds from banks, enabling them to meet their obligations: on the assumption that if this did not happen the banks would be bankrupted.

The difference between the two situations is that the solar panel business has been doled out tens of millions, while the banks have had tens of billions. So the British government feels able to pull the plug on the solar panel business, but not on the banks.The relatively modest bribes to encourage people to install 'green' energy cost too much on the scale that is applied to that sector: by contrast it would appear that the bribes required by the banks are apparently infinite.Since subsidies do not put any constraint on the  banks, governments have tried 'nudges': hints, guidance, threats of organisational changes and the threat of a 'Tobin tax' [previously examined in this blog]. None of that has worked. So the time has come - is long overdue - for sensible direct oversight of banks' activities.

Governments are not subject to the banks: the banks depend on the state. The contracts that banks make, and the debts that people and firms owe to them, are only enforceable under the law that is provided by the state. The money in which banks trade, in which they record their assets and liabilities, is the property and the creature of the state. Governments try to tinker with the 'markets' in which the banks gamble with the 'money' that states and Central Banks have given them. They are wasting their time.

Markets have no ultimate power: their existence depends on governments. Yet the traders in the markets are arrogantly telling countries 'to get their act together'. This is a totally wrong perspective. Governments need to recognise their powers and the markets' weakness; and begin to  protect the savings and the jobs of the people they purport to represent.

Wednesday, 9 November 2011

Markets and Memories

Twenty years ago Britain was struggling to retain membership of the European Exchange Rate Mechanism [ERM]. Ministers railed against pessimistic forecasts from market analysts, whom they stigmatised as 'teenage scribblers' - people whose exposition of the current market situation was uninformed by memories of previous difficult periods for the value of the British pound. The struggle was lost: Britain had to withdraw from the ERM and George Soros came away from his speculative involvement as a much richer man.

Italy stayed within the ERM: as a very specially privileged member. Under the rules of the System the other member countries had to take action to ensure that the market 'value'of their currencies remained within 2.5% of the median value of all the members' currencies: except the Italian Lira which was allowed to deviate from the median by 7.5% [and was informally allowed to get worse than that]. So the strongest currency - often the German Mark - could be 2.5% above the line, while Italy was [officially] 7.5% below: that was a 10% gap in Italy's favour.

It was therefore to be expected that when the Euro was  created the other members of the old ERM club were habituated to turning a blind eye to detailed deviation by Italy from the strict entry criteria that were notionally imposed. Given that Italy was allowed to do this, the Greeks considered themselves licensed to take the trickery further. The manipulators of 'The European Project' carried with them huge optimism bias. They convinced themselves that all would be best in the best of all possible Europes if an all-inclusive Euro drove forward continental prosperity.

The teenage scribblers of 2011 have no significant historical awareness and no relevant understanding; consequently they have advised their clients to make the Eurozone situation much worse. When the dust has settled on the slowly developing crisis of 2007 to 2014 the memory will fade; and the next panic will collapse .

Germany needs an explanation for Hitler. One of the strongest is the idea that the hyperinflation of the early nineteen twenties caused the economic and social chaos that made even Nazism seem preferable. So millions of Germans are well primed to vote against any policy that could lead to excessive inflation, including 'quantitative easing' by the European Central Bank. Hence Chancellor Merkel has stood out against the ECB following the line taken by the US Federal Reserve and the Bank of England. So in this context selective historical recollection is of very dubious value; but it is very powerful. Whether or not it is more powerful than 'the markets' we will son see.

Tuesday, 8 November 2011

A Better Life...or a Bitter End?

"They don't come to integrate: they've come to rule us!" I heard this again yesterday, in respect if Islamic immigrants to the United Kingdom; and one hears similar comments on a daily basis.

Such assertions are unprovable, even if any of them is true: but such comment is most probably not true in respect of 99% of all migrants. A few men who wear tribal [not 'religious'] dress do appear to intend to implant their tribal lifestyle [including 'arranged' marriages, religious schools and hierarchical political fixing]; and host governments are challenged to prevent any such development becoming abusive of members of such 'communities' or disruptive of the wider civil society. If distinctive 'communities' are allowed to expand by immigration [including the importation of spouses] as well as by breeding, a laissez-faire reaction by the body politic will lead to a backlash on both sides of the barriers that are being erected. Hitherto far-right political movements have gained no traction in British politics; but across continental Europe such movements are attracting much more effective leaders than formerly and this leads apparently inexorably to electoral support. Britain could be next: the time for  preventing such a development is short.

Demographers tell the British that they will not have such a 'problem' of an ageing population as Japan already has, and as China and most of Europe will have [on the basis of predicted human fertility] within three decades: because of the higher fertility of immigrants. This reassurance is an alarm signal to the many ordinary folk who are genuinely afraid of social division growing into political strife and the subjugation of the people whose ancestors provided the legal and social structures that have made Britain such a pleasant place to live, and whose labour created the economic infrastructure that recent governments have allowed to decay as spending has been concentrated on welfare benefits. Until all political parties allow these issues frankly to be discussed, the threat of extreme politics emerging is growing: and if Fascism raises its head, Islamism will be a natural reactive force.

Most immigrants say they have come 'for a better life': and most of them mean just that. But any sensible examination of Britain's economic prospects shows that living standards will go down over the next decade, and probably beyond then. If more people are allowed to enter the country as settlers - whether or not they work productively - there will be more people to share a net national product that is projected to grow only very slowly. If the minority of the population who have creative ideas, and who risk their own resources to invest in economic growth, are rewarded appropriately [and why should they contribute exceptionally other than for reasonable reward?] there is relatively less for the average other person. If the old are to be provided with more heat and medication and care than the middle-aged, there is less of the finite national wealth for the workers. If children are to have an optimal start in life, should that be at the cost of lower living standards for adults?

There are huge distributional problems in any given, relatively homogeneous population. If such issues are bedevilled by questions of the relative entitlement of ethnically defined or religious groups the political situation becomes seriously fraught. The economic problem is bad enough: the issues around immigration can only make it worse - if they are allowed so to do. The best way to allow the problem to get out of hand is to ignore it: as the political class have done for far too long: and I challenge anyone to find a mainstream Economist who has commented usefully on the matter.