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Friday, 24 February 2012

Stupid Liberal Democrats

The Liberal Democrat Party in the UK had never been in government until it made the coalition agreement with the Conservatives in 2010, after the Conservatives had failed to win the election on their own. Because the continuance of government depends on their parliamentary votes, the Conservative leadership repeatedly infuriates its own Members by allowing the LibDems to dictate policies that are alien to conservative thinking. It is recognised that the LibDems have damaged their future electoral chances by reneging on firm promises: notably by agreeing to triple university fees when they had individually sworn not to allow any increase [and thereby at a stroke revealed the cynicism that pervades the political class to a new generation]. So the Conservative leadership tries to give the LibDems a few little 'wins'.

One quid-pro-quo of the coalition, which the Conservatives have not yet delivered, is the LibDems' demand for a 'mansion tax'. This would be an annual levy on houses with an estimated value above one million - or maybe two million - pounds sterling: the level to be decided. It is assumed that a new bureaucracy would be created to determine the value of houses and to administer the tax. This idiocy is a perfect example of politicians building waste - and jobs for the boys and girls in the public sector - into a system that could probably cause a collapse in top-tier house prices.

All residential properties are already liable to pay a council tax which is collected and administered by local authorities. This tax is charged in 'bands' that are broadly dependent on the value of the premises. If some properties are considered an appropriate target for extra taxation, why not set a higher top rate of council tax?  The central government makes an annual settlement every year with every local authority, giving differential levels of  subsidy to authorities according to their income from council tax and other sources. Such a subsidy can be negative: the local authority can be charged by the government which can then allocate the receipts to its general budget. That system could easily cope with an extension of the scope of the council tax.

If such simple sense prevailed, the LibDems would be deprived of the 'triumph' of imposing an identifiable new tax [diddums!] and they would not create a new bureaucracy [so no new jobs for their chums] but exactly the same revenue impact would be achieved. Some of the allegedly better-off would pay more tax, that would become revenue available for distribution in benefits and in subsidies for fake jobs. Many thousands of people of modest means whose homes have  notional sale prices that have been inflated by reckless monetary policy over the last thirty years would be screwed by a mansion tax. Mechanisms for modifying the impact of council tax already exist, so the LibDems would not need to set up new benefits offices for mansion tax payers if the proposed tax was replaced by a new top-tier council tax [so another chance to make jobs would be removed].

Given the idiocy of the political class, look out for a mansion tax!

Tuesday, 21 February 2012

Tragically True: The Political Economy of Population

Sincere people have launched a new campaign which is intended to focus the affluent world's attention on the growing global problem of children who are physically and intellectually stunted by insufficient food in the first two years of life. Causes include the undernourishment of pregnant and breast-feeding mothers, as well as a lack of food and milk ingested by infants themselves. The number of children already exposed and likely to be exposed to these conditions in the next couple of years is being assessed at half-a-billion, five hundred million, 500,000,000. So many children are in this position because so many have been born, and have survived up to now, through an explosion of medical care and in particular of preventative medicine which has issued drugs and supplied vaccines on an unprecedented scale. The medication is also more effective than in earlier decades, though the fecundity of this process is in some cases being challenged by the build-up of resistence by the diseases to the drugs that are in use. There are clear signs that the battle between the mutation of diseases and the development of treatments for those diseases has become increasingly costly.

The vast majority of the population explosion is occurring in less-developed countries where religion is strong, such as the Muslim world, in Catholic [and increasingly evangelical Christian] Latin America, in parts of Africa and in India. Hitherto both the development of drugs and funding programmes for their distribution have been based in the most developed countries. There has been a significant net transfer of resources from the relatively-rich to the relatively-poor: but although the lives of hundreds of millions of people have beneficially been prolonged, and their fertility has been enhanced, the most conspicuous net returns are the catastrophe of physically and mentally stunted young lives and massive unemployment among young adults.

The idealists who have volunteered to lead the new fundraising campaign have ascribed the intensification of the problem of infant malnutrition to short-term factors: referring specifically to the impact of rising global energy prices and the increasing demand for food from the emerging consumer class in China. These market pressures are asserted to be leaving too little affordable food for the poorest families in less developed countries.

The countries that house the majority of the poorest people cannot produce enough food for their population from their own resources, even in years when there is adequate rain and no significent pestilence. Yet rampant population growth continues in those countries as more millions of babies who were saved by international aid agencies reach adulthood and exercise their right themselves to produce babies.

The simple Malthusian principle - that population increase has a tendency to exceed the growth of production of the means of subsistence - appears to be working through in the most brutal form. Millions of people are breeding children for whom they cannot provide enough food, and they live in societies which do not teach parental responsibility for the succour of children; and their rulers do not accept an obligation on the state either to promote population control or to invest sufficiently to provide adequate food for the whole population.

The crucial perception that is explained in PPE [see the link from this blogsite] is that the outputs of human intelligence, applied as ik [protected intellectual property], are capable of transcending Malthus' Principle of Population and any immediately adverse operation of the Law of Diminishing Returns. But it is apparent now that humans' unwillingness to recognise the obvious arithmetic of population growth is the most massive threat that the species has ever faced. Science has been applied to create cures for diseases; and philanthropy has brought the fruits of that science to most groups of the human race, so that the number of humans has expanded to over five billion. Humans must now confront the challenge of how to reduce the rate of growth of the population to that which can experience a good lifestyle given the limitations of the world's current, degenerate economic and political institutions.

Profoundly reconstructed systems of Political Economy and of Government are needed to ensure that the full range of accessible technologies is engaged and optimised to support human beings and to invest for their future. This extent of change will take a long time to implement, even if the principles for reconstruction could be agreed. Naive concepts of equality - either in the demands that will be made on different people in their capacity as producers or in the distribution of rewards to consumers - have given rise to a dangerous delusion that many democratic politicians are still propagating. Those individuals who have most to contribute to a new technological revolution will require - and deserve - exceptional rewards. The creators of the ik that alone can allow humanity to survive and to progress in civilisation must be recognised, protected and rewarded. Many politicians, and even more commentators, baulk at such a simple principle. They avoid quoting the pristine Leninist slogan "From each according to his ability, to each according the his needs!" but Obama's rhetoric of 'change' is based on both psychological and sociological assumptions that have significant traction only among those who feel they are 'disadvantaged' and would benefit from the distribution of more money by the state [from higher taxes on the 'rich']. No credible school of Political Economy - or even of Economics - would advance such a proposition now.

This is not to say that altruism has died: far from it. Bill and Miranda Gates have allocated the bulk of their wealth - that Bill's inventions have fairly and properly generated - to their Foundation. That money has been so well-used [according to fashionable doctrine] that other megarich individuals - led by Warren Buffet - have either pledged funds to the same Foundation or have set up their own. This will accelerate the growth of population in the areas where the Malthusian effect is most conspicuous.  Tragically, infants who have been kept alive by the application of drugs and disinfectants are now at risk of malnutrition: and each individual who grows to adulthood through the involuntary support of foreign taxpayers and the spontaneous generosity of charitable foundations is set to breed children who will themselves present demands to the international community. If the current fashion for taxing the 'rich' until it hurts is enacted, there will be less money available for charitable donation. If unemployment remains high and rates of growth remain low in postindustrial countries, the ability and the willingness of taxpayers to support 'International Development' will decline and eventually disappear. Yet the global problems of poverty, malnutrition and starvation will continue to grow. The reduction or withdrawal of the flow of funds from the relatively affluent parts of the world will cause far more resentment than past and present donations attract gratitude. The simplistic explanation for the antipathy that some British tourists receive in France - "they'll never forgive us for helping them" [in two World Wars] - will apply on a massive scale as the global flow of benefactions is reduced.

It is urgently necessary that the world order is given proper consideration in international institutions. Unless the truths of Political Economy are central to the deliberation, the future phases of the crisis will be far more profound  than the present tragedy of malnourished children. Unless humanity thinks past the immediate problem, we will all become hopelessly mired in it.

Friday, 17 February 2012

Eurorats Defend Their Fantasy

The tragedy of the new poor in Greece is being intensified by the continual ratchet of pressure from the rest of the eurozone and it is still unclear whether or not there can be an 'orderly' end to the present crisis. I reckon that it is possible, provided that they first settle their debts to the alien markets and then make as smooth an exit from the euro as can be arranged.

Between 1975 and 2009 many Greeks - including a smattering of the now-impoverished - enjoyed a standard of living that was much higher than they could rationally afford. Tax evasion was a national pastime, where those who had discretion to declare their income were [in their hundreds of thousands] recklessly cavalier: while those less-well-paid people who were taxed the due proportion of their incomes more systematically were hugely disadvantaged.

Despite the Greek middle classes' well-known chicanery and abuse of the tax system, and notwithstanding false declarations made by Greek ministers, and ignoring the fact that a US financial firm had provided the Greek balance-sheet with a massive nominal value of essentially-mendacious 'instruments' that were cynically represented as secure assets, the progenitors of the euro were happy to welcome the Greeks into the new currency system.The whole tissue of Greek lies and trickery was welcomed by the even more cynical gang of Euro-fanatics who concentrated on building a completely federal European Union. Abstract logic and historical experience agree that a single currency is only sustainable in a single state, which can be either unitary or federal: knowing this, the eurorats regarded the establishment of the euro as an immense step on the route to establishing a single government over the whole European Union. They knew that it must sometime be shown to be unworkable to control a modern monetary union on a basis of consensus among national governments. By that time, the credit and the commerce of the EU would be so heavily dependent on the euro that states would surrender sovereignty in order to maintain economic stability and save face. No politician with any understanding of democratic accountability should have taken so reckless a decision as to bring his or her country into the euro: in the UK even Balls and Brown recognised that, and were able to compel Blair for once to miss an opportunity for being filmed at the middle of the in-crowd at the treaty signing.

In most EU countries a clique of civil servants have manoeuvred themselves into the posts that advise ministers on European policy, and such cliques typically behave as informal embassies of eurorats rather than as advocates of the national interest. Very few European states have constitutional arrangements whereby ministers coming newly into office can change their senior civil servants to reflect any 'deviant' policies on which the government was elected. Usually an incoming minister is surrounded by a pre-packed cabinet who have 'gone native' as aspirant eurorats, and if the minister is to any degree eurosceptic she or he is subjected to a barrage of 'education', information and intimidation with the intention of turning him or her into an evangelist in the 'European' cause. They provide speeches full of carefuly selected data for the minister to read, they flatter their victim on their 'growing understanding'; and they fill her with Belgian food, French wine, extravagant flattery and biassed commentary during their frequent visits to Brussels. Intimidation is a crucially important tactic in all Eurofederal politics. There is very rarely a perceptible advantage to the general electorate in any EU country from new policies that emanate from the Commission, so such policies are whenever possible presented as 'tidying up' existing rules and practices. Many rules and practices of the Union are absurd, oppressive, inept and open to corruption. Perfect examples of this are fishing quotas, and the market for authorisation of medical devices  that enabled the scandal of unacceptable silicon breast implants to occur.

Politicians who challenge such arcane and  corruptible devices are told that the matrix of measures by which some countries sought to gain from some sections of a Directive by letting others derive advantage from other provisions of the Directive is so finely balanced that the whole Union could unscramble if some palpably unsatisfactory provisions were challenged. The provisions of a Directive can only be changed by consensus of all the contracting parties: and [of course] this is usually impossible to achieve in the time that is made available under idiotic meeting protocols. In this way, slippage towards fuller union is taken under the pretexts of simplification and clarification and under pressure of time; and no steps in the reverse direction are tolerated.

The consequent 'democratic deficit' has been much discussed, especially in the peripheral countries of the Union: but there is no evidence that the inner coven in Brussels have become concerned at the rumblings of discontent. The recent riots in Greece are regarded rather as demonstrations of contumacy by the lower orders than indicators of absolute despair by ordinary, honest people. The eurozone finance ministers have been trying to tie down the entire Greek political class into promises of what they will do and say during and after the forthcoming election. The eurorats are demanding that all Greek politicians undertake to be accountable to Brussels bureaucrats and not to offer the people any option to vote against whatever impositions are to be required. This negation of democracy is especially offensive in the context  of  Greek history: the founding of a form of democracy - and the formulation of that word in ancient city-states, the fight for independence in the early nineteenth century, occupation in the Second World War, the rule of the colonels and the restoration of democracy. Since achieving independence Greece has defaulted on its debts half a dozen times and the eurozone finance ministers have all been briefed on this track record: they are right to be cautious; but they should not be so foolish as to demand the impossible.

Behind all this bluster lies the essential truth: if Greece exits the euro the momentum towards integration of  the EU will stop dead. The illogic of pressing forward with a false dream, erected on a raft of lies, will be inescapable. Doubts will lead to questioning, questions will produce painful answers. The European myth will falter: and then, then there could be hope of some honesty and common sense ventilating the corridors of Brussels: whether it gets into the meeting rooms depends on whether the politicians are scared enough to rediscover their primary duty of accountability to their home electorates.                              

Tuesday, 14 February 2012

China Checks Out the USA

Xi Jinping, the man tipped to be the next President of China, is to spend the best part of this week inspecting the USA. Having been a member of a trade delegation a couple of decades ago, he is sensibly retracing his steps to see what has visibly changed and what is the same: including a small-town sample of middle America.

With the possible exception of Australian Labour's rejected Kevin Rudd, no party leader in the 'western' states would have a chance of making an equivalent comparison in middle China on the basis of personal experience.

The significance of such an occasion is easily underestimated. Simplistic westerners still think of China as having only recently and partially emerged from centuries of dormancy, followed by decades of communist isolation: if they think about such things at all. The emergence of China as an industrial exporter has been sufficiently blatant for a majority of newspaper readers to have some awareness of the point: and perhaps 20% of Europeans and 10% of Americans [but at least 50% of Australians] know that China has recently become recognised as the second-biggest economy - by turnover - in the world. Speculation is rife among the chattering classes as to when China will overtake the USA in Gross National Product: which will occur several decades before most forecasters reckon that income per capita in China comes close to equality with that of the USA. It is to be expected that this week's Chinese visitors will be interested to check out these perceptions while they gain a visual impression of the conditions in the fourth year of the Obama presidency. They will have done more preparatory study than their American hosts will have devoted to them: and they will be looking for hard evidence; while the Americans will be primed on the finer detail - so far as it can be ascertained - of the visitor's curricula vitarum. A dozen US agencies will record what the Chinese say, and where they go, what they eat and drink, and what they appear to be looking at; but they don't yet have any technology that enables the hosts to see actually what the visitors are seeing.

The disparities between the USA and China are increasingly significant. Today it has become known that NASA is withdrawing from a planned series of visits by unmanned spacecraft to Mars, leaving the exercise to the Europeans, because of financial stringency which is becoming greater despite Obama's profligate deficit spending. China is constantly expanding its advanced programme of space exploration. As the USA continues the withdrawal of 'advisers' from Iraq and prepares to withdraw its fighting forces from Afghanistan, China is continuing its peaceful capture of resources in Africa. The pundits reckon that there is a diminishing chance of China contributing to any bailout of the Euro, while Chinese interests are taking over European firms especially in fields of advanced technology. The sophistication of Chinese policy on all fronts is of the highest importance.

The Chinese are not technologically backward. They do not need to buy foreign firms to access technology; but they sometimes find it convenient to acquire comparators from the USA and Europe and to have the experience of marketing advanced products to the world's most sophisticated consumers. The best British universities had significant cohorts of students from 'mainland China' back in the nineteen-sixties. I have a clear recollection of Chinese students waving the 'Little Red Book' of Mao's 'philosophy' as they disrupted a lecture by Professor Bernard Crick to announce that they were abandoning their 'corrupt' and 'decadent' academic study of Politics in a doomed system, to return to China to participate in the Cultural Revolution. As soon as the trauma was over, Chinese names again appeared in the class registers of British science and technology - and social sciences - departments. Chinese students also appeared in increasing numbers in American, Australian and European universities. Chinese graduates have been taking western best practice into higher education back home for more than forty years as the student cohort within China has expanded dramatically.

Observation of the relatively poor domestic circumstances in which the great majority of the Chinese live should be balanced against the fact that millions of modern flats have been bought by consumers who have had access to credit in the past decade. Tens of millions more flats and houses are needed: and will be constructed. Financing and managing such a massive construction and sales programme in a liberalising economy is bound to be uneven: there will be an alternation of relatively easy money with hardening rates of interest, and sometimes control of monetary and credit expansion is bound to be less than perfectly efficient. In rural areas there is constant regeneration of the housing stock as village families vie with each other to ugrade or replace their houses and this process seems to be less dependant on the banks' ability to lend. Outside commentators who optimistically see calamity emerging from each adjustment in this area of policy will have a long wait for fulfilment of their direst prophesies.

Even more importantly the typical Chinese consumer who has not yet been rehoused has already moved beyond the stage of just acquiring necessities. The near-universality of mobile phones and the spread of the internet have a much greater impact in empowering consumerism than they do in fostering democracy: there is not an inevitable equivalence of rising access to mobile media and an increase in political dissent. The limited means that dissident groups had of communicating with each other in earlier generations were much more susceptible to maintain secrecy than are tweets, blogs, texts and phone calls. The most serious political and social dissentients will continue to be the most cautious users of the new media for theuir secret purposes; and they may well be heavy users of games, marketing sites and music downloaders to sustain a deceptive profile.

Consumers need to be told what is available for them before they begin to work out whether they want it and - if so - how they could afford it. The web as an advertising medium, as a proponent of fashion and a source of information on the availability for preferred brands is immeasurably powerful; and it can sweep to prominence in China way ahead of commercial television, wall posters and advertising in the press. The ability of millions of interested readers to check for consumers' comments on products and services that the potential buyers have not yet even seen - although many posts are set-up by the providers - gives the individual an unprecedented freedom of information on the basis of which she or he can decide how to spend a small surplus on wages. It is only a matter of time and learning before the squalid underground lending market is transformed into a regulated nexus of credit unions and savings-and-loans firms that can advance cash to reliable employees who will thus be able to pay for expensive quons by instalments over many months.
The spread of high level consumption - of quons [in terms of PPE: see the link from the blog] - will be far more profound and extensive in China in the next few years than any consumer enfranchisement has been in the past, anywhere in the world. China will shift from an emphasis on simple manufacturing to the assembly and marketing of sophisticated quons, not primarily for export but to enhance the standard of living of the domestic population. Those Chinese  quons that compare with the best on the world market will be bought wherever free trade is permitted: and in the period while that situation is being prepared China will continue to export simple mass-produced goods around the world and thus maintain a balance of payments notwithstanding the country's voracious demands for commodity imports.

The visitors to the White House this week will be lionised by the man whom a consensus of Chinese pundits are reported to regard as a lame-duck president: in response they will be polite, reflective and cautious. There is not much that their hosts can teach them: and the reassurance that they will get for themselves from their own observation of the condition of the United States will influence China's approach to global Political Economy through the next decade.

Sunday, 12 February 2012

Rational Markets?

The degeneration of Economics in the nineteen seventies was accompanied by an unprecedented elevation of the worst aspects of the subject as a new philosophy in politics. Economic theory moved increasingly away from common sense, into a model-world where relationships could be made 'perfect' through the power of 'the market'. Every aspect of life could be imagined as a trade. A cohabiting couple of human beings engages in a mass of interactions for which no payment is offered or received, but it is arguable that the benefits and costs that are accepted by either party tended to balance-out; and if that were not the case, the relationship would end. In an even more extreme case, over a very long term, it can be postulated that the care and money that parents levy on a child over many years balances broadly with the care that the parents received from their parents plus any benefits the parents receive in later life from their children. For some people the nuclear family turns out to be a very bad deal, and as society has become less constrained by traditional and religious rules there are more cases of parents abandoning children [or accepting the children being taken from them] and young adults severing contact with their parents.

In countries where monetarism and the dogma of rational markets dictated policy, family life responded to the withdrawal of state spending from social and peripheral educational services [such as libraries and Darby and Joan Clubs] by taking on more of the aspects of a market. The perceived lack of an acceptable trade-off between the parties in a cohabitation could easily lead to a rupture: and nobody seemed to care. Religion had less and less influence on personal behaviour as the church leaders treacherously followed secular intellectual fashion: the Bishops acquiesced as the law was changed to facilitate the new fashion. Social norms by which people had for centuries recognised that some relationships - especially the most intimate - were not conducted on a market basis were abandoned. Margaret Thatcher declared that "there is no such thing as society". The next generation of politicians who have accepted Thatcherism as positive reform movement affect to be surprised at signs of absolute societal failure, reflected in child abuse and child neglect and the riots of summer 2011; whilst such societal failure is obviously the outcome of policies that were wantonly adopted by the patrons and exemplars of the pathetic crew of politicians who sit on the front benches of both sides of the House of Commons.

Thatcher's nominally 'conservative' cohorts, who discounted traditional morality and loyalty, also supported deindustrialisation as a manifestation of modernity and applauded the emergence of the cyberspace excrescences of so-called 'financial services' which they patently could not understand. 'New Labour' went along with the fashion and repudiated its roots in trade unionism; with the exception that it was still prepared to take the unions' donations while ignoring their members' interests. Now the breakdown of social cohesion [exemplified in the disappearance of the symbols of trade union autonomy such as bands, clubs, benevolent funds and rest homes] is causing acute concern all across the political spectrum. Applied Thatcherism has undeniably ended in something much worse and more far-reaching than the 'market failure' that collapsed the financial services boom.

Since the financial services collapsed in 2008 firms in the sector have survived only under huge governmental subsidies and an outpouring of money from central banks: but the firms continue to exploit practices that politicians and bureaucrats still have not understood. The profundity of that incomprehension is evident in the political nonsense that has been spoken about 'bankers' bonuses' in recent weeks, to which reference has several times been made in this blog.

Meanwhile it remains painfully obvious that markets do not behave according to any version of equilibrating supply and demand modelling that has featured in Economics since the eighteen-seventies. Trade in even the most simple material commodities that cross the boundaries of states [or of economic communities] is hamstrung by taxes and tax reliefs or rebates, quotas, tariffs, currency manipulation, prejudicially applied safety regulations and a host of other influences which ensure that asking prices are by no means the outcome of open competition. Demand is similarly affected by tax and regulatory interventions and while people grumble about the price of petrol they buy it to enable them to go shopping for quons which they know are priced at several times more than the cost of the materials of which they are constructed.

In share and bond markets the disparity of reality from Economists' models is even more stark. Very few commentators even pretend that share markets, bond markets or any form of 'casino banking' establish prices according to 1870s supply-and-demand models. Speculative Economists still make good livings from advising the economic regulators of  privatised utilities [and the firms they regulate] on the fantasy of 'rational' pricing, but otherwise the notion lives on only in academe. Government bonds are priced according to what interventionist central banks will pay for them, and shares even in successful companies are sold according to the decisions of corporate strategists in investment institutions for whom the revenue-generating potential of the shares is a minor issue - if it is considered at all. The current hoo-ha about the 'premium' above market price that should be offered by Glencore for the mining corporation Xstrata is a case in point. There was a price for Xstrata shares that had been set more-or-less by supply-and-demand on the date when the bid was announced, and the potential buyer offered approximately 8% above that price. The stage army of analysts and representatives of shareholding organisations declared that the premium should be more: the consensus settled around 30%. This was based on the sort of premium that had been offered for very different companies - in disparate sectors of the economy - during the previous few weeks. The only way a really worthwhile valuation can be established for any share is by looking back to today from the future. What a share is really worth today depends entirely on what will be paid out in dividend to the shareholders in future years, and whether the sale price of the share will increase or diminish - relative to overall price inflation - in future.

Nobody investing an insurance company's reserves, or future pensioners' savings, or child trust funds, should follow short-term movements in the prices of even [relatively] secure investments: the investments for which they are Trustees must be made for the long term. Thinking about such investment must transcend short-term conditions. The 'rational' behaviour of a hedge-fund manager who dives in and out of asset ownership with a view to profiting instantaneously from momentary juxtapositions of market positions and the availability of purchasing-power is wholly inappropriate for long-term investing institutions. Those pension funds and similar organisations that have tried to square the circle by investing a segment of their portfolio in shares in hedge funds have taken a massive gamble that could work adversely for the funds that they manage.

There is no 'right answer' to the question of how any buyer of bonds or of shares can optimise the security and the profitability of their investments in the future. But it is glaringly apparent that any suggestion that 'markets' are innately 'rational' on a day-by-day basis is nonsense. Economic theory implicitly requires participants in the market to anticipate the next move before it happens, and to back their hunch with significant trading activity. That moribund Economic theory has taken its final refuge in the universities where its aficionados still delude students whose challenges to the dogma will soon force it into its ultimate dissolution.

Pragmatism and cool thinking are of supreme value to long-term savers at this time: Economists' versions of 'rationality' bring nothing useful to the matter.


The Greek parliament is required - by a consortium of EU and Eurozone institutions and the IMF - to vote today on a package of measures that would commit Greeks to a miserable lifestyle for at least a generation. If they vote YES there will be a very short-lived extension of the bailout. If they vote NO - or equivocate - the EU will be faced with an instant dilemma: will they maintain their hard line, or should they temporise? If they weaken their hard line in any way they will undermine confidence in the euro. Financial markets will expect the other relatively weak eurozone states to temporise on the tough measures that they have imposed and the position of the single currency will be made much worse.Borrowing costs to the Italian, Spanish and Portuguese governments will rise quickly to 'unaffordable' rates: France will face difficulties because the frontrunner for the forthcoming election has adopted policies that are contrary to the prevailing trend in the Union; and if France ceases to back the Germans' hard line then the future of the zone must be plunged into question.

How toughly Greece will be 'punished' if the parliament does not give an unequivocal YES is yet to be decided, but the requirements will become unsustainable. Greece will have to opt out of the euro and default on its debts almost immediately.

If the parliament does vote affirmatively by a sufficient margin the next tranche of funds will be released: probably into a special bank account from which money will be decanted only when Germany is satisfied that the conditions Greece has accepted are being met in full. A settlement with private-sector creditors of Greece can then be agreed: but it will only exchange new debt certificates for old, and those new debts will become unsustainable if/when Greece eventually leaves the euro and announces a new default.

If the parliament accepts the legislative and policy package it can endure only until the forthcoming election. Parties opposed to the infliction of pain will inevitably gain seats: so some politicians who vote for the package today will seek an electoral mandate to overturn it. Acceptance of the austerity demands of the eurozone will only be followed by a demonstration that the people will not accept it. Maverick police officers have promised to arrest EU and IMF officials if they come into the country: that may become a majority view. Policemen and soldiers will not shoot at their mothers and sisters if they are marching for bread and affordable rents. Mass protest will become unquenchable: perhaps even before the election. Greece has had a fake living standard based on debt for far too long. Hundreds of thousands of people have had well paid non-jobs and similar numbers have pensions derived from past tenure of such employment contracts. To force the nation to shift almost instantly from false prosperity to excessive real penury is too much to ask. It will not be tolerated.

Parliament may vote for what they know is impossible, to buy time and and stave off the inevitable day when Greece must leave the euro. The vote today will not be decisive.

Tuesday, 7 February 2012

The Other Silly Milliband

The British political class has almost eliminated 'real people' [such as miners, dockers and self-made businessmen; who formed significant cohorts of MPs even within living memory] from Parliament. 'Unreal' people who have no attachment to any identifiable strand of British society have come to the fore; especially in the Labour Party. Even in the bizarre firmament of Westminster the Milliband brothers are an unusual component of the prevalent class. Their immigrant academic father became influential in the left of the Labour Party which has always preferred intellectual games to any engagement with ill-spoken vulgar working men and women. The boys followed the path that their parents' patronage made available to them: to a carefully exceptional 'comprehensive' school that actually enabled its pupils for university entrance, to read subjects in elite universities where the admissions tutors knew their father from his writings and in many cases personally. On graduation they slid into to jobs that were recognised preparatory steps to adoption as Labour parliamentary candidates.

Both were elected to parliament, as candidates handed down from Party HQ to take over constituencies that may as well have been in another continent in terms of the brothers' experience and empathy. Both reached the 'New Labour' cabinet and David Milliband, once he was appointed Foreign Secretary, was tipped as a future leader of the party. After the electorate decisively rejected Gordon Brown's highly personal general election campaign in 2010, Brown stood down and in the subsequent election for a leader the younger Brother - Ed - shocked the faithful and delighted the media by competing against his sibling. As the campaign proceeded it became clear that the trade union component of the electorate had been encouraged to think that Ed Milliband was more sympathetic to 'old Labour' and more likely to repudiate the perceived ineptitude of Brown and the reviled warmongering of Blair than were the other candidates: and so against all expectations of commentators outside the party Ed won the leadership. His performance has rarely rated above 'embarrassing', despite the best efforts of the array of minders and scriptwriters, psephologists and policy analysts that surround any contemporary party leader. The recognition that a forced resignation of the new leader, followed by another election, would earn disastrous media attention for the party forced all factions of the party to coalesce in a show of support for a leader who was popularly likened to a cartoon character who displayed neither intelligence nor social grace.

In these circumstances the older brother has kept his parliamentary seat, but stood aloof from the shadow cabinet; repeatedly insisting that his sole political intention was to stand in his constituency at the next General Election as a back-bencher who was wholly loyal to his leader. He took on various tasks outside parliament: notably as a well-paid director of a local football club in his constituency, and as chair of a group to study unemployment among 18-24 year-olds. The report of the group has now been published. It strongly advocates the more extended use of artificial apprenticeships and fake jobs, subsidised by the state, to give the victims of these devices material to pack their curricula vitarum; data whose lack of applicability to what used to be called 'habits of industry'  will be glaringly apparent to employers who need to ensure that every employee is able to deliver full value for every pound spent on wages. The report refers to the scandal that recruits even to simple jobs like serving in Pret a Manger or McDonald's are much more likely to be immigrants than native British [of any ethnicity]. The report does not emphasise the very much higher educational standards [especially in numeracy and rhetoric] that are achieved in many foreign countries as compared to the UK. Employers constantly point to appalling ignorance, illiteracy, innumeracy and lack of articulateness in British school leavers. Their lack of social graces sits uncomfortably alongside the limited knowledge and exiguous understanding that is represented by spoon-fed passes in mechanistic GCE examinations, to make tragically immature young men and women undesirable as employees.

With the publication of his report David Milliband has become a significant advocate for doing more of the costly lifetime-wasting fakery that began with the Thatcherites' YTS [Youth Training Scheme] in the 'eighties, was resurrected under Gordon Brown and is now a major aspect of policy under the Cameron-Clegg regime. It indicates a thoroughly bankrupt mental landscape, and goes some way towards vindicating those who preferred Ed over David as party leader. David has dug this neat new hole for himself: how very sad!

Sunday, 5 February 2012

Old-World Political Stasis and US Democracy

There is a huge difference between British and Chinese politics, on the one hand, and US democracy on the other. The difference  is stark, but its fundamental nature is often unrecognised even by students of politics, and it does not usually feature in economic discourse. That difference is, however, very important in the formation of economic policy: and it is even more important in the political rhetoric that wraps around the economic data.

The partisanship and pettiness of American politics shock unsuspecting foreigners when they are first exposed to it. While the vituperation against President Obama that has characterised almost the whole of his presidency is somewhat more vicious than in any previous incumbency, it is merely the latest stage in a progressive demystification of the office.Nixon became reviled, Ford was pitied and Carter became despised; then Reagan - with superb showmanship and a well-practised voice - raised the prestige of the office and forced his many opponents to raise their rhetoric against his policies while treating the President with almost old-time deference. The first Bush began in office with Reagan's legacy, but his relative lack of showmanship and his bad luck [largely the consequence of poor decision-making] set him up for defeat by the exceptionally able and charismatic Bill Clinton. William Jefferson Clinton was conscious of the dignity of his office: to a degree that allowed him the hubris to assume that the media would turn a blind eye his exploitation of the White House for sexual adventurism. Instead the press and TV channels reverted to the mode that had brought down Richard Nixon and Jimmy Carter: and only the self-interested loyalty of the Democrats in Congress saved Clinton from impeachment  As with all known sexual predators who also have political charisma and real power, Clinton was hugely popular and it is widely reckoned that he would have won a third term if that were constitutionally possible. It was not allowed, so his party selected a candidate for the next election who lacked both the charisma and the racy reputation: who duly lost.

When Clinton left the White House, the whole staff left; except for the housekeeping team. To show their hostile contempt for the incoming President - George W Bush - the members of Clinton's court removed the 'w' keys from keyboards. The entire archive from the Clinton Administration had been removed. The whole cabinet and many other offices in the state were vacant, and the new incumbent had to present all his new senior ministers for confirmation by the Senate. Each new President brings in a total new Administration which [at least in principle] can set its own policies in each area: and drop any programme from the former Administration that they do not wish to keep. The Administration needs congressional assent for new expenditure and to make [or repeal] laws, but otherwise it has a free hand.

In China, by contrast, any change in the personalia at the top of the government is always presented as a means of continuing and refreshing the status quo. The Communist Party has led the state in unbroken succession since 1948 and it is presented as the carrier of a single and unchanging truth, Chairman Mao's enhanced version of Marxism-Leninism. Everyone in open political life and in journalism is required to adhere unconditionally to the myth that everything that happens is in a continuum. The wild changes that occurred under the 'Great Helmsman' from mass nationalisation to the 'great leap forward' [which set the economy back for more than a decade] to 'let a thousand flowers bloom' to 'cultural revolution' to the reviling of the 'gang of four' to the cautious introduction of Deng's liberalising reforms and on to the recent amazing success of industrialisation and export-led economic growth are simply not admitted in any official record. Children learn about the truth anecdotally in the family circle or from friends whose families are more frank, but they also learn the unwisdom of denying the official line in public. Through most of 2012 the party will be finalising the distribution of authority between the present high officers of state, who will step away from centre-stage at the end of the year, and the rising stars who have been prepared to follow. There is a great deal of speculation whether the balance of the new front-of-house team will be more or less liberal than its predecessors'; but it is unpredictable how far the new leaders will feel able - or be willing - to signal significant changes in direction that could unleash unrealistic expectations among business managers, bankers, local government officals or the tiny minority of advocates for more western-style democracy and human rights.

The Chinese Communist Party has managed a phenomenal task of socio-economic change without surrender of any political muscle; and naive commentators in other parts of the world have vainly hoped that the system would eventually implode. Economic risks such as allowing banks to fund a property boom have been greeted cheerfully by doom-sayers as 'unsustainable'; yet so far control has been maintained, often by the deployment of significant devices that have been used effectively by western monetary and fiscal authorities. The great majority of intelligent western-educated Chinese claim to be broadly satisfied with the lack of western-style human rights so long as it is in combination with the success of the economy.

It is likely that Chinese party officers have taken comfort from the British example; and understood it better than British commentators recognise the context in which the embarrassing idiocy yaah-boo political gaming takes place. The ruling power in Britain is not Parliament, and does not attribute authority to politicsl parties. The Council - usually meeting as the Privy Council - has continual succession since 1661 and its role was consolidated after the Glorious Revolution of 1688. All acts of state are executed by - or with authority of - the Crown in Council. Any level of emergency powers can be created and enforced by Order-in-Council and most routine legislation [which is only granted parliamentary time by assent of the Council] demits to the Council the authority to modify, extend or defer its provisions. The Cabinet is a committee of the Council; and however different one government's policies may be from its predecessor's, after an election has changed the ruling party, the new Cabinet must work on the basis that it is continuing consistently to give advice the The Queen. Even if a new government wants fundamentally to change major policies, they must proceed slowly and continue with all existing laws and regulations. King George V was keen to bring in a minority Labour government after the collapse of the Lib-Con coalition after the First World War, provided its members took the Privy Council oath [and leading ministers even kitted themselves out in antiquated Council uniforms]: and it worked so well that no group of politicians with any chance of power has subsequently questioned this bizarre system of rule. The rhetoric in parliament and in the media may be extreme and contrarian but the reality is that all the Civil Servants [from the Clerk to the Privy Council and Cabinet Secretary downwards] continue in office regardless of the change of Cabinet level personnel. The populace are deluded by myths that play up the pretended power of the electorate to 'change' the political map; in fact, the British almost certainly have less influence over the direction of policy than do the Chinese.

The British system is suddenly placed under threat, however, by the egotistical master-tactician Alex Salmond of the Scottish National Party. He is sworn of the Council - he would not have been allowed to become Scottish First Minister without that - but he now appears to seek a popular mandate to create a new constitution. It will be fascinating to see how the Privy Council - as such - will react to this potential threat to its hegemony.

Wednesday, 1 February 2012

No Crisis of Capitalism

Fashionable babbling in the media and among politicians has now fixed on the vague idea that that there has been a crisis or even a failure of capitalism. So what is Capitalism?

By 1800 Political Economy taught that there were three factors of production without which economic activity could not occur:
land: which means both the site where production and/or trading takes place, and all the natural resources that are needed as direct and indirect components of the process;
labour is all the manpower and womanpower that has to be brought to bear to start and to maintain the production of the output and of all the components that go into making it, including the management of all stages of the process;
capital is the accumulated saving from the output of past times that is deployed to meet all the costs of running a business until an exchange of output for revenue to take place. The capital must cover rent for the site, the cost of the materials, and the wages of people who build and equip the factory and start production; it must also fund the original marketing of the output.

In a quest for transparency between 1800 and 1860 Political Economists developed the concept that there was a symmetrical means of computing the fair return to each factor:
Land was remunerated with rent which was the price that had to be paid for the use of the land for this purpose rather than for any alternate use. Landowners could chose to keep their estates undeveloped, for hunting; but they can optimise their income by farming it for crops [or leasing to tenant farments], or by letting sites for all sorts of purposes, including urban property which is most lucrative.

Labour was remunerated with wages that must be sufficient to attract the necessary labour, with the necessary skills and experience [where relevant]. The vast majority of people who are not peasants need to earn a living, and they learn that location, luck, experience, skill and physical fitness can attract differential wages. There are differing wage-rates for different jobs, and for the same job in different locations even within a small country. Intellectually able, fit, skilled people who are able and willing to migrate can maximise their earnings.

Capital was rewarded with profit which must be sufficient for the capital to be allocated by its owners for one selected purpose rather than for any possible alternative use. Instead of being invested in business, with all the risks that follow from such an investment, capital - in the form of cash - can be lent to the government [whose borrowing was believed to be absolutely guaranteed for the lenders]: so money will only be invested in trade and industry if it is at least likely to produce a return to investors that is greater than the rate that can be got from the government.

Political Economy earned the nickname 'the gloomy science' [or 'the dismal science'] because of the stark realities that it exposed [notably the Law of Diminishing Returns, the Iron Law of Wages and the Principle of Population]. Attempts to make aspects of the subject look more humane produced more confusion than clarity; and when clever concepts like the Labour Theory of Value were brought to bear in an attempt to explain wage differentials the oppotunities for reductionist quibbling became infinite.

After reading about these issues in depth, the young Dr Karl Marx declared that all the theorising masked one essential fact: that the system of production was not fair and was programmed constantly to become less fair. Progress in industry and in agriculture was derived from the application of ideas and of human ingenuity, but these natural resources - which brought about all the progress for mankind - could not be employed without capital and unless access was granted to land. Land was controlled by landlords, often aristocrats, who could demand increasing incomes for letting their land be used for factory and housing sites, and/or for growing crops more intensively, or for allowing quarrying and mining on and under their land. Even more outrageously unfair, to Marx's perception, was the fact that operators of factories and of rented modernised farms captured the surplus value that was generated in the process. The owner-managers of factories paid the lowest wages that could be forced on uneducated and anxious people, selected factory sites where they would pay as little in rent as possible [which is why so many works and mills were built in grim Pennine valleys] and bought raw materials from the cheapest sources: and then they sold the produce at the highest possible markup. The difference between what the output cost to make and to deliver and the price that was received at the point of delivery, was surplus value. The chap who took the money that represented the surplus value put the greatest possible amount of his takings into his firm as additional capital: which was used to expand the factory, increase the stock of raw materials and take on more labour. He squeezed costs as tightly as possible, and sold his produce for the highest possible price: so that he could invest even more in the next period and appropriate even more surplus value. The purpose was not to feed or clothe or otherwise benefit human beings: the sole objective of the new dominant class - the capitalists - was to accumulate more capital through the expansion of the system of production.

Marx constructed a political ideology based on the concept that the community must capture the control of economic activity from the capitalists: hence his system adopted the name communism: which had a special resonance with radicals after the experience of the Paris commune in 1870.

Transcending the Teutonic complexity of his formal writing, Marx and his associate Engels used journalism and pamphlets to popularise his message and to report on the obviously detrimental conditions in which many wage-earners lived, especially in the most industrialised areas of England. Anyone who combined Marx's explanation of the depredations of capitalism with the Laws of Political Economy was drawn to the conclusion that the outlook was bad. Capitalists controlled the system, and they faced diminishing returns; so they would demand even more surplus value proportional to the falling prices for which output could be sold. In an attempt to preserve their income they would reduce costs by cutting wages and demanding more work from their employees: the workers would have to take that, or become unemployed with a risk that they and their children could starve. The capitalists would also use their power vis-a-vis the landlords to reduce the prices they would pay for materials; and they would eventually dispossess the landlords either by buying them out or by the exercise of political power.

Capitalist and capitalism were created as terms of opprobrium, characterising a class and a mode of economic organisation that had emerged with modern industry and was perceived by the inventors of the concepts to be essentially inhumane. At the same time as Marxism became the ideology of the political 'left', between 1860  and 1900, successful businessmen in North America and Europe came to accept the term capitalist as a description of themselves. In the twentieth century as communism became more oppressive and inefficient after Lenin had grabbed power in Russia, the more businessmen and politicians in the 'free world' became proud of being 'capitalist'. The doctrine that a free market enabled investors of capital to maximise economic growth came to a shuddering check in the early nineteen thirties. Politicians and the few perceptive Economists [most notably Keynes] recognised that only government action could recalibrate the system. Capitalism - of a new kind - was able to survive in parallel with an interventionist state.

The resulting 'mixed economy' of the post Second World War era was very little like Marx's capitalism, but at its best it fostered the development of investor-funded businesses which provided employment, taxes and innovation that were the main contributors to economic growth. Even social democrat governments worked closely with 'civilised capitalism' and after 1970 they followed  right-wing parties in privatising nationalised and state-created industries. It became the fashion to argue that this variant of capitalism was the best form of economic organisation. But - unfortunately for the long terms health of the economy - this heavily regulated and highly-taxed market economy became less and less like Marx's capitalism. Far from being concerned obsessively to invest in the expansion of productive facilities, Thatcherite capitalism became a system from which spending power could be extracted for taxes, for dividends [returned to collective investment funds: investment and unit trusts in the 'sixties, then pension funds in the 'seventies, then venture capitalists in the 'eighties, now hedge funds] and for increasingly inflated remuneration packages for directors, managers and star traders. That system of chaotic and inflationary economic disorganisation was not capitalism: nor was it anything like Leninism although it was controlled by the state through regulatory regimes, licensing systems, discretionary taxation, procurement policy for the overweening public sector, and the manipulation of monetary and fiscal policy.

The growth of the chaotic real-world business system was funded by the emergence of the parallel system of credit expansion in cyberspace that enabled firms and individuals - and governments - to borrow money to spend greatly in excess of what they earned. The gross overexpansion of that fantasy universe led directly to the credit crunch and to the slow realisation in the countries that were most affected by it that their economies had been despoiled of any solid foundation.

Some individuals have recently become rich by manipulating shareholdings and by creating or capturing intellectual property. Only a very few of them have behaved like classic Marxian capitalists and put their profits back into their real-world businesses as new investments; and even those few have realised that taxation will destroy their personal business empires on their death [if not before]. The portion of the economy that is controlled by individual capitalists [and by capitalist dynasties] is trivial; and the real economy is overshadowed by the nexus of fantasy businesses that is called casino banking.

We live with a systemic crisis: but it is decidedly not a crisis of capitalism: it is crisis caused by the absence of any system to ensure that the investment that is necessary for the future survival of the economy is being made. The present standard of living of every nation in Europe, except Germany, and of the USA is only maintained as it is by borrowing: most notably the borrowing that governments undertake to subsidise the welfare state. However incoherent, incomplete and insensitive the welfare state may be, it still maintains millions of people. The decisions about this system are taken, always have been taken, and always will be taken by politicians. Contemporary politicians have no serious business experience, no knowledge of Political Economy, no recognition of the nature or depth of the crisis that it is their duty to resolve. The mess was created by politicians, with the enthusiastic support of would-be capitalists who have been encouraged to 'go for it'. Few non-politicians believe that the political class have the intellectual power, or the integrity or the guts to meet these challenges. Recently the media have followed politicians in using diversionary tactics by decrying and individuals who can be characterised as 'fat cat' capitalists. But it is impossible to sustain the assertion that a predator class  of 'bankers' is exclusively responsible for the recent crisis. The pseudo prosperity of the era from 1980 to 2007 was achieved by the symbiosis of the human economy with the finance generated in cyberspace: that was not  capitalism.