David E Bland

China Checks Out the USA

2012-02-14T03:54:00.000-08:00

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 bog] - 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.

Rational Markets?

2012-02-12T13:27:00.000-08:00

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.

Greece

2012-02-11T23:40:00.000-08:00

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.

The Other Silly Milliband

2012-02-07T13:45:00.000-08:00

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!

Old-World Political Stasis and US Democracy

2012-02-04T23:37:00.000-08:00

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.

No Crisis of Capitalism

2012-02-01T03:43:00.000-08:00

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.

Sad Tidings

2012-01-27T02:30:00.000-08:00

Since the summer of 2008 central bankers, finance ministers and government spokesmen from all over the world have been saying that they understand how the world sank into depression in the nineteen thirties, and they have offered reassurance that they would ensure that such behaviour was not to be repeated now. Yet now we see serious signs of a slide to depression in Europe, despite the strong growth in emergent economies and tentative signs of recovery in the USA.

One small but glaring example of political stupidity has recently being enacted in the daily news in the UK. Politicians and journalists demanded that the board of the Royal Bank of Scotland should renege on the contract that they made with their chief executive, which was approved by the then Labour government. The failed bank had been nationalised and Stephen Hester accepted an offer to manage it as a patriotic duty: the remuneration was well below the norm for bank CEO jobs. He has performed at least satisfactorily. On his appointment the bank's board set a salary-plus-bonus package; but now the woodentops have questioned whether the bonus is 'earned' and whether the concept of a bonus is acceptable in principle. The screeches of politicians and the media eventually had their perverse effect, and Hester agreed not to take that which he was contractually entitled to receive. This furore demonstrates astonishing ignorance of the scandal in finance: the so-called bonuses that are in fact commissions on turnover for gambling in derivatives, futures and swaps. The traders constantly expand the coverage and range of the 'products' that they devise in cyberspace, finding new markets and discovering - sometimes creating - new counterparties. Before the crunch their daily trading exceeded months of material world trade, in nominal value; and bizarrely they have continued 'developing' the market since the crisis began. After the crunch the real-world-related trade done by the retail banking subsidiaries of the finance conglomerates was restricted by new capital requirements and constrained by the caution that is endemic in a recession; and their merchant banking activities [managing new issues of companies' shares and bonds, facilitating mergers and acquisitions of businesses, and offering analysis of firms and of markets] were all constrained by the cautious mood of investors. Therefore in providing notional profit for the conglomerates casino banking became even more important than it had been during the boom. Some of the notional profit from the traders' activity could be used to bolster the conglomerate's consolidated balance sheet; but most of it had to be paid the the traders in their 'bonuses', according to their contracts. The many successful traders were paid far more than the senior executives of the firms for which they placed their bets but it was considered normal that the executives' pay should be bolstered to reflect the size of the consolidated balance sheet that they were responsible for; and on that scale Mr Hester's £1million salary plus £1million bonus is peanuts. The fuss has completely misdirected mass anger and perverted public perception: and this is a typical of political rhetoric about the economy, which apparently follows the press in regarding contracted rights as subject t withdrawal on whim.

Political posturing and point-scoring are having even worse and more durable effects on the European mainland. In recent days the Greek government has refused another 'final offer' from non-governmental holders of Greek debt; and a further last chance is anticipated this weekend. Greece has promised to arrange billions of euros-worth of debt settlement by the middle of March, which it will only be able to do if the other eurozone countries and the IMF lend it the money. The other eurozone governments, orchestrated by the Germans, Dutch and Finns, have indicated that they will not provide the loan unless the Greeks settle the 'private' debts. A suggestion from Berlin that economic discipline might be imposed on Greece by a Commissioner who would control all state spending and oversee taxation has provoked fury in Greece, and embarrassment elsewhere in the EU. Propaganda and graffiti all over Greece have already harked back to the occupation in the Second World War: the appointment of a Commissioner [presumably controlled from Frankfurt] could well provoke revolt. The mere expression of the idea makes an eventual Greek exit from the eurozone more probable. It will make life simpler for the Greeks if they can first settle with their private sector creditors as a member state of the euro, then exit the system to manage their own restructuring of the economy

Angela Merkel's speech to the Davos assembly last Monday clearly implied that a Greek default is preferable for her to any toleration of demands for an unlimited bailout from Germany. The Germans' reluctance to risk their own prosperity has been increased by the antics of hedge funds. These professional chancers have bought Greek debt at significantly discounted prices. In many cases they have also bought Credit Default Swaps [CDSs] created by financial buccaneers, some of whom work for subsidiaries of the financial conglomerates. If the Greek debt is restructured the hedgies will profit by selling the assets for more than the knock-down prices at which they bought them. If Greek debt can be consolidated the CDSs would not be activated and the premiums that the hedge funds have paid for the swaps would go into the top line income of the firms that sold them. So the huge lobbying power of the financial conglomerates can be put behind the opportunistic option that the Greek debt will first be restructured [with the financiers taking a 'haircut' that they have already allowed for in the business plans] leaving them with some value, expressed in euros, before the Greeks slink away from the eurozone. The odds are that the lobbying will be successful: while the politicians' blustering about keeping Greece in the eurozone will ultimately be nugatory.

Chancellor Merkel has also repeatedly stated that the problems of the eurozone would be speedily resolved through closer integration of the member states. But her vision of integration would focus on establishing discipline over the finances of all the member countries: it would not entail Germany opening up her reserved to support the debts of other countries' governments: and still less t support the debts to which their banks have exposed themselves. Her argument is exactly contrary to what bankers based in London, New York and the far east want to hear: so they assume that the current state of the EU and of the eurozone economies is unsustainable, consequently they discount the euro in global markets where it it traded against the yen, the pound and the US, Canadian and Australian dollars. The weaknesses of the EU and especially of the euro are increased by the political rhetoric which follows the ideological basis on which the EU institutions have developed. Besotted politicians ignore the corruption that is endemic in the unaudited and unaccountable Commission; the obvious lies on which the euro was floated; and the counter-intuitive Franco-German policy of giving even more powers over member states to the sclerotic Brussels bureaucracy.

Now, to add to the mess, the probable winner of the coming French presidential election has come up with a Manifesto - a long list of policies that he promises to introduce if he wins - including a strong counter-Merkel bias and attacks on the finance sector [with scarcely-veiled threats specifically to undermine London's leading role in financial markets. M Hollande proposes to reverse all the measures of economic discipline that have been introduced by the Sarkozy regime: which would further put him at loggerheads with Germany and would undoubtedly lead to a major [further] downgrading of France's debt by the rating agencies. His election would undermine the current consensus, and thereby threaten the future of the euro as French debt joined Italian, Spanish and Portugese debt as 'junk'.Sarkozy has responded by announcing the unilateral imposition in France of a tax [0.01%] on 'financial transactions': it is not yet clear [and may never need to be clarified, if Sarkzy looses] as to what range of transactions the tax will apply to. Whichever candidate wins the French election will be at loggerheads with Germany, or with the UK, or both. Sarkozy will support the new EU treaty today - in principle - but by the time that the deal is formally due for ratification [probably in March] the divergence of his policy from Germany may stymie the completion of the new deal.

Britain's tentative planning to cope with a eurozone collapse needs to be beefed-up, urgently: as does contingency planning for that scenario in China and the USA, and all their trading counterparties.

Back to Basics: Political Economy 2: Maribou Weed

2012-01-24T00:11:00.000-08:00

The Maribou weed was introduced to Cuba for use as a hedgerow plant: to mark the boundaries of fields and gardens. The plant thrived excessively, it has spread wildly over the landscape. It is a very hardy growth with woody stems: and it has proved very hard to eradicate. The story has been unrelievedly depressing for several decades.

However, very recently, researchers from the University of Strathclyde [in Glasgow] have found that when it has been burned to produce charcoal the wood forms an amazing form of carbon. On early examination it appears to have the capacity to store electricity more effectively than Lithium batteries - at a fraction of the cost. The discovery will take a considerable time to verify, and applications can be developed only step-by-step; but it is so far an extremely promising concept. A huge range of applications, not least more practicable electrically-powered vehicles, can quickly be envisaged for new cheap super-batteries and by exploiting the carbon's high conductivity. .

Such an example shows that no possibility should be ignored in looking for uses for the most unattractive forms of waste and for the most damaging weeds [a weed having been described as any plant that is in the wrong place]. Innovative experimentalists must be allowed - and, where feasible, funded - to pursue hunches. For many centuries British innovators [often solitary part-time inventors] have produced new products and concepts in profusion: yet nowadays only a very small proportion of the new ideas are funded in a way that enables the product to be sold to the world as a British-made quon [defined in my book, PPE, accessible via the link] that purchasing managers all over the world will need to buy. Many new concepts are stillborn because the inventor lacks capital to implement them. In other cases inventors and their families and friends invest in the development of the product but do not generate enough revenue and publicity to fund viable growth so that their investment is lost, the idea is shelved and the family and friends are worse off than they were when the business was started. Not infrequently, bold risk-takers lose the homes that they have pledged against business loans. Almost equally dispiriting from the perspective of the national economy are instances where a new concept attracts sufficient publicity to interest overseas investors who buy the intellectual property vested in the concept: which takes the potential profits into another state's balance of payments. Athough the inventor who sells her patents may be left with a pot of money to spend within their home economy the major part of the benefit from the invention is lost; and demand may develop so that importing the product becomes another strain on the national blance of payments.

The political class frequently say that they have got the message: that investment in new products must be encouraged. Modest tax concessions are offered for investors in start-up businesses. But the prospect of some future tax relief might not be enough to encourage an innovator to risk his family's comfort by depositing his house deeds with a capricious bank in order to secure a short-term business loan. Attempts by politicians to force banks to lend money to small and start-up enterprises invariably fail, because the banks' responsibility to avoid excessively risky lending is paramount in the perception of the bank's owners and of its regulators. This inhibition applies especially in the current circumstances when all banks have been ordered to build up secure reserves to meet tightening regulatory standards. In addition to that general limitation on banks' lending there is the structural factor that banks no longer employ authoritative local managers who could make lending decisions on the basis of the family history, career record and reputation of customers requesting business loans. The majority of lending to small and medium-sized businesses in Britain in recent years has been to roll forward existing loans to firms that have shown themselves reliable in servicing their debt, often from a lacklustre but solid performance in distributing imported brands or in providing entertainment, catering and other leisure services.

The discoveries about Maribou weed by the Strathclyde team have relatively good chances of attracting investment, compared to inventions or discoveries by English individuals, for a clutch of special reasons. The University in question is a mature and respected research institution with special strength in applied sciences and engineering: and as such it is geared up for providing 'seed corn' funding for promising innovations. Universities are also sufficiently media-savvy to publicise discoveries, after the crucial itellectual property has been secured. Secondly the Scottish government is willing to use its powers to provide extra resources for Scottish innovation, over and above those that are available for regional development throughout the UK. The essential task facing the university is to create some product or process that can quickly become the subject of a patent application. The wood is found in Cuba, and other countries but not the UK. Therefore the way a British academic team can turn the discovery into a marketable asset is by creating intellectual property in the means of converting the raw material into desirable products that can be protected from competitors.Thus there is going to be a period of stressful competition between scientific teams trying to capture the potentially huge value of the patents that may be capable of development.

What has this tale to do with the basic facts of Political Economy?

As has been stated often in this series of blogs, one of the two Laws of Political Economy is the Iron Law of Wages: the proposition that a nation cannot distribute for consumption more than the net output of the economy, after allowing appropriately for capital investment and the legitimate costs of government. Imports must be balanced by exports. If the country owes debts accrued in past years, these must be repaid and the cost of doing that is automatically deducted from the amount of wealth that is available for distribution to the population in the years while repayment is going on. If the country cuts investment in order to maintain or increase consumption that inescapably results in the national product being lower than it should have been in subsequent years.

Higher technology products and highly fashionable brands earn the most income to the companies that supply them, compared to the material costs incurred in producing the goods. So a country that exports highly priced goods and services, and imports only cheap commodities and products, is most likely to be able to repay debts [or to avoid becoming indebted] to foreigners. The potential earning power of technologies exploiting maribou carbon is immense, and could give a significant fillip to the balance of payments of a country that was able to enforce the exclusivity of its ownership of the relevant ik or intellectual property. A constant flow of highly valued inventions was the basis on which Britain gained global economic leadership between 1780 and 1850: since 1870 there has been a pattern of relative decline that has now reached its nadir. 1870 was the marker year for the replacement of Political Economy by Economics, which marked the beginning of the obfuscation of the basic truths that formed the core of the older [and sounder] subject. The truth must now be confronted, as the central concept on which economic recovery can be based; and opportunities such as may be offered by maribou carbon must be optimised. By such means, real economic growth can be consolidated.

Vigorous Capitalism

2012-01-20T23:59:00.000-08:00

In another brilliant instance of intelligent capitalism in operation, Warren Buffet has taken advantage of herd irrationality by so-called professional investors in the UK. He has bought another 2% of the shares in Tesco [increasing his holding to 5%] at a time when the shares had fallen by around 15% in price because of a single set of bad trading results.Buffet is famous as a long-term investor in companies whose future prospects meet criteria that have been formed in his extremely well-developed mathematical brain. Most of his punts have been proven successes; and sometimes the success has been secured by him reinforcing his investment by buying shares in a company, or lending money to it, when it has hit a temporary bad patch on its growth path.

Who are the idiots who sold shares in sufficient numbers to depress the price by a huge percentage, on so thin a pretext? Not small-scale personal investors: most such people take a similar long-term view to Buffet's. They are mostly professional investors, buying and selling shares for institutions - pension funds, insurance reserves, investment trusts, charities etc - who possess degrees and professional qualifications [many of them in 'actuarial science'] and supposedly have experience that enables them to make intelligent decisions. Why, then, did a large number of them offload shares in Britain's most-successful-ever retailer in huge volume on a single report, and despite the fact that the company made clear that it understood and was already addressing the causes for the relatively poor performance? Some did so like automata because the funds that they managed were committed to 'track' the stock-market index. Some saw the price going down and joined the rush. A few may have been quick-moving opportunists who sold as soon as the price began to fall so that they could use the money to buy more shares at a lower unit price in a few days [or even a few hours] time. The combined effect of their selling was to give Buffet a great opportunity.

Friday's news also included the item that the Chinese sovereign wealth fund has bought 8.68% of the shares in Thames Water. This means that users of water and sewerage supplied by Thames will be paying tribute to investors in China, as well as in Abu Dhabi and Australia; who will also be able to exploit loopholes in UK water regulation to increase the dividends that they receive by increasing the debt that the water company and its customers will have to carry in future and cashing-in on such deals.

In the first case supposedly clever professional investors were the mugs, in the second a massive disadvantage to British consumers was created by Parliament and its advisers when they privatised the water industry. In both cases intelligent foreigners took advantage - quite legally - of dysfunctional systems.

Also on the same day the press reported a speech by a senior Bank of England official who suggested that international accounting standards [that were created by a forceful Scottish 'expert'] had not 'stood the test of time' and had almost certainly added to the misunderstanding of the credit bubble and the exaggerated assessment of the calamity that followed the crunch. This is because the standard assumed that there was a 'fair value' of any asset that was magically equal to the market price of the small sample of similar assets that were actually sold on any day. The sublime idiocy of such a notion was unnoticed all through the process by which it was adopted by international regulatory structures. Hence it was strangely appropriate that on the same day both the British Prime Minister and the Leader of the Labour opposition should make speeches on how to transform a much-criticised form of capitalism into a 'responsible' system that would guarantee prosperity and 'fairness' for all. The both suggested [in different terms, but with similar aspirations] that markets were the best way to generate wealth and to distribute it fairly among the population, provided that markets were regulated properly. There is a germ of truth in this assumption.

No market has ever succeeded in a vacuum: markets only work if they are interconnected with the rest of the economy: they need buyers to enter with purchasing power that was gained outside that market, and in it the sellers offer produce which incorporates components [including inputs by autonomous human beings] that are attracted from outside the market. No market has ever been free of crooks and liars and predators: people who decide that they can gain personal advantage by bending or breaking the rules that the other buyers and sellers assume everyone in the market is following. No market has ever been composed - and no market will ever be composed - of participants with exactly equal intelligence, the same ethical principles, identical capital resources, and identical access to all the same data as all the others [about their specific market and about the prevailing economing conditions and about prospective changes] which they all interpret in exactly the same way. So the assumptions about 'perfect competition' that set the criteria for formal market theory in Economics are utter balderdash; and any attempt to regulate markets as if they can be compelled to conform to the theory are doomed to fail.

So when the politicians step down from their podiums and ask their civil servants how on earth they can give effect to the high-blown [loudly applauded] rhetoric about 'responsbile capitalism' they get an answer in two parts: both of which are wrong.

The first part of the answer is to look for some well-publicised cases of 'unfairness', some individuals who are paid vastly more than the norm for employees in the country, and suggest that their income should be capped - or even reduced - at source, and then subjected to confiscatory taxation. In the last couple of days the media and some politicans have picked on Stephen Hester, the Chief Executive of the Royal Bank of Scotland; and they have suggested that he should not receive the income to whch he is entitled under his contract. He was brought into the bank, from a good job elsewhere, to pull it away from the catastrophe into which its former managers had dragged it. Because it was a state-supported institution in crisis, Hester patriotically accepted an unusually modest salary for a bank Chief Executive, to which was attached a bonus scheme if he achieved certain steps to assist the recovery of the business. Now the 'gutter press' and some policy-making fools are suggesting that the state should order the Royal Bank of Scotland to welsh on the contract, to appease public anger at the fact that some people in other banks whose functions are not understood by the policy advisers [and even less by the press] are getting much more than Hester; mostly as bonuses for proprietary trading.

The second string to the advice offered to politicians is much more long term than the scalp-hunting of individuals. It is to 'enhance' the system of regulation within which markets should be constrained. The phrase 'risk-based regulation' has recently been in high fashion but very few people in business have understood the concept. Business men and women well understand risk: they take risks on their own behalf and that of their firms every day: those who have the sharpest appreciation of both opportunity and risk are usually the most successful in planning investments and avoiding losses. It is now considered necessary to determine what categories of risk the regulators should require companies to avoid, or to mitigate if they cannot be eliminated if they must necessarily be accepted to enable the operation to continue. Some policy advisers have reached deep into formal Economics and suggested that regulators should compute the future long-run average cost of producing the output and require the price regime to converge with the assumed future cost. Provided the generality of firms in the market are moving towards convergence of prices around equality with the average cost at a selected future date, the market should be allowed to operate freely. The theory predicts that firms whose prices rise above the trend will fail to secure customers because rational consumers will buy cheaper alternatives. Similarly the theory predicts that firms that charge below cost price will bankrupt themselves. The firms that charge prices broadly in line with average cost of production [including a fairly-calculated 'cost of capital' that is the same for every firm] are good: the market will eliminate the others.

Such a model ignores branding, and therefore ignores the predominant determinant of 'value' in the perception of the vast majority of global consumers. Any attempt by regulators to impose such a naive theory would be ruinous to the real economy. But the concept of regulating to aim for average long-term cost pricing is presented on the political agenda because it is the one idea that people trained in Economics can think of in the present circumstances: old-hat Victorian marginalism is presented as the new panacea. My simple text PPE explains this point in depth. Such regulation as is now being advocated would transform the present economic crisis into an unmitigated calamity.

Back to Basics: Political Economy [1]

2012-01-17T14:01:00.000-08:00

As an independent backstreet blogger I am fascinated to observe the clouds of intellectual debris that flit through the internet in thousands of blogs written by people who desperately want to be regarded as innovative mainstream Economists. Most of them are academics who have contracted duties in a university or a research unit; and some - especially those who produce branded research for a bank or a commercial think tank - have a direct business interest in publishing their opinions. The academics are desperately keen to be quoted by other bloggers and their output is already systematised so that those with academic ambitions cite the number of references to their output that are made by other participants in the racket, just as they do in respect of the 'peer reviewed' academic journals. Soon indexes of citations will list references to blogs alongside references to more formal articles; and citations in blogs written by senior professors will have a higher allocation of points.

The most tragic aspect of this ballooning exocrescence of academic blogging is that almost all the participants display the usual sycophancy to the seniors who can help their careers, who might deign to mention the mini-bloggers in their own blogs.Therefore they are anxious not to step outside the orthodox boundaries of the subject as it is set out by the dominant professors. The majority of the bloggers also display a painfully serious intent to classify themselves in sub-schools within the ever-more-diffuse 'discipline' of Economics, built on phrases like dynamic stochastic general equilibrium that attracted well-deserved ridicule when it was uttered in the House of Commons: but are commended in the hypoxic atmosphere of an academics' conference.

The more intelligent mainstream Economists are forced to realise that Economics fuelled the hubris that caused the credit crunch, but they cannot yet face the fact that the 'discipline' itself has failed. Such an admission would require them to admit that they have spent their careers on presenting doctrines that have condemned their fellow citizens, and themselves, to a lower standard of living in future than should have been available to them.

Economics fails most obviously at the interface between macroeconomics and microeconomics. In principle, socialist planning is a system for directing firms' and individuals' activities day by day, with the intention that each participant delivers outputs that serve as inputs to a planned macroeconomic aggregate. Keynes was in his prime precisely at the time when Stalin's Soviet Union was claiming success for its planning mechanisms: while the world became aware of the brutality with which The Plan was enforced and the disasters [including deaths through famine] that were caused by its inefficiencies. Keynes's wife was a Russian refugee, whose table-talk frequently included information and anecdote about Soviet repression. In The Economic Consequences of the Peace [1919] he had forecasted a strong reaction in Germany to the way the country was treated by the victorious allies at the end of the First World War, and fourteen years on he took no pleasure in seeing the fulfilment of his prediction by Hitler's National Socialists. The Nazi's economic programme was built onto a Four Year Plan controlled by a Commissioner, Goring, who took draconian powers over businesses and the trade unions. The principal objective of that Plan was to prepare the economy to support an aggressive war in Europe.

Keynes was a Liberal who deplored the emergence of tyranny in Europe and during the nineteen-thirties he was concerned that Britain must avoid an economic collapse that would allow communist or fascist ideas to capture any significant proportion of the electorate. Keynes's mentor, Alfred Marshall [1842-1924], was the great founder of authoritarian academic Microeconomics: within a decade of his death it was painfully clear that his Economics provided no prescriptions for solving the practical problems that were causing mass unemployment in democratic societies. Keynes recognised that the macro-economy, the environment in which firms and the buyers of their produce operate, must be managed actively by the state. He suggested techniques for creating employment by government intervention through taxing and spending, and by adjusting the supply of money and by manipulating the factors that determine the rate of interest.

Keynes was crucial to the management of the command economy that supplied the country and its armed forces during the Second World War, and he worked hugely hard at international negotiations in planning for the postwar settlement. The extreme demands that were made on his mind and body were at least contributory to his death from heart failure very soon after the war. Had he lived for another decade he may have addressed the mechanisms by which macroeconomic devices could be made to articulate efficiently with microeconomic systems; but posterity was denied that guidance.

The lack of effective articulation between macroeconomic interventions and the achievement of intended outcomes by firms and people has been ducked by the entire 'Economics profession' through the six decade since Keynes died. Whenever the data disclose a trend that the government decides must be addressed by a shift in macroeconomic policy, it increases or reduces the money supply, raises or lowers rates of interest, increases or reduces taxation, increases or cancels government orders to firms, and/or to increase or reduce the number and rates of pay for state employees. Recently in Europe restrictive policies have been imposed on the economies of Greece, Ireland and other heavily indebted states. Within the eurozone, in cases where the elected governments have hesitated to act in the required manner, a change of government has been imposed; composed of technocrats: - which means Economists.

Because it is outside the eurozone, Britain still has monetary independence and control of most taxation. The current coalition government came together [and will probably stay together] because the party leaders recognise that the economy is in a very perilous situation. The government is taking radical steps to reduce the rate of increase in state spending to a level where - in an ideal world - the economy in total would be growing faster than state spending, so that government spending and borrowing would become smaller percentages of the gross national product. The appearance of 'stable economic growth' that was delivered by the Blair-Brown regime was derived from increased direct spending by the government and by increased consumption by the increasing numbers of employees who were taken on in the civil service and in state agencies: supported by strong but ultimately unsustainable growth in demand arising from the bubble in the financial services sector.

De-industrialisation had been occurring by default in Britain since the collapse of traditional textiles in the nineteen-fifties: But after Mrs Thatcher came to power in 1979 it became deliberate policy. Coal mining, railways, shipbuilding, steel making and heavy engineering were regarded as the natural breeding grounds for militant trade unionism, so it was fashionable to argue that they should be cleared away like mosquito-breeding swamps. When the Second World War ended significant sectors of UK industry were old-fashioned and inefficient compared to newer factories in the USA and to the newly reconstructed plant in Germany. Rather than direct the bulk of the nation's disposable income into re-equipping the world's leading shipyards, aircraft factories, motor plant, electronic and chemical industries, successive Labour and Conservative governments raised taxes from industry to support the welfare state. While Germany developed the regional banks that supported the development of the Mittelstand of small and medium firms that supplied specialist products and services for industry and commerce, British banks took an increasingly dim view of industry. Within a democratic structure, Germany provided means by which firms could be funded to deliver desired growth. Britain had no such system; but nevertheless enough of industry survived, and new industries grew up - without government support - such that even now manufacturing is still a greater contributor to net national income than financial services ever could be.

Under the 2010 coalition government state spending is being held in check and employment in the public sector is being cut. Ministers talk often and grandiloquently about how the country will achieve macroeconomic salvation through the growth of real-world enterprises: but they become increasingly vague when pressed for details, and show that they are ineffectual in directing funds from state-controlled banks to promising businesses. This is the nub of the present problem: how are individual firms to be enabled to deliver the contribution that they can - and must - make to recovery? What policies can build a proper articulation between the macro-economy and the firm? This vital topic must be the subject for further bogs in the coming days.

Rating the Eurozone - Again!

2012-01-14T14:16:00.000-08:00

One of the most depressing items in the British press this past week was a full-page advert from 'the Actuarial profession' announcing the huge number of people who have qualified by examination to join the ranks of those who have ruined private pensions and now threaten the future viability of general insurance. Actuaries can also find employment in Rating Agencies, those widely-despised institutions that did so much harm to the global financial system when they allowed their greed for fees to outrun even vestigial common sense.

Despite the bad publicity that they have received - and largely thanks to actuaries' nostalgic determination to give undue weight to Agency ratings [because there is no alternative to what they used to purport to do] - the Agencies continue to publish ratings; and often this has an impact that is disproportionate to its validity. But in some cases Agencies, desperate to rehabilitate their reputation and to rebuild their revenues, explain a rating change in terms that display insight and good observation of reality. Yesterday's downgrading of nine countries' sovereign debt was a fair commentary on the state of those economies in the context of the eurozone.

Cyprus is in some ways a Greek dependency and though its economic situation, notably the state debt as a percentage of Gross National Product, is less stressed than that of Greece the interdependency of the two economies [and especially of Cypriot banks with Greek banks] makes the smaller country's finances very weak because Greece is chronically weak. So it is appropriate that Cyprus joins Italy, Portugal and Spain in being down-rated by two notches on the Standard and Poor's scale. This downgrade, the most recent of a significant series, reduces Portuguese state bonds to 'junk' status. Italy, Spain and Portugal have recently had new governments which are pledged to enforce whatever packages of restrictive measures are necessary to secure continuing support from the eurozone and from the IMF [the International Monetary Fund]. It is utterly impossible to predict how far the populations of these countries will tolerate the high taxation and the worsening standard of living that will have to continue for an indefinite future period if the deficits are to be eliminated.

Slovakia, Slovenia, Ireland and Austria join France in having their state debt de-rated by one grade. Austria and the two states that were parts of Hungary for centuries before 1919, Slovenia and Slovakia, have deep economic ties with Hungary which is outside the eurozone and has recently conducted policies that are on [and sometimes beyond] the boundaries of democratic acceptability. Austrian Banks, in particular, have lent heavily to Hungarian banks - borrowing that was largely used to fuel a housing bubble - and the chances of repayment in full have become negligible. So downgrading those three countries' state credit ratings is entirely reasonable. Ireland is managing the macroeconomics of crisis very well, but the depression is becoming more intense, emigration is rising and the banks [which are mostly state-owned] are having to accept larger and larger losses on bad loans that were made in the years when Ireland claimed the nickname of The Celtic Tiger.

France is the greatest casualty of the downgrading, and the most appropriate. President Sarkozy has tried hard to persuade Chancellor Merkel to use Germany's accumulated reserves to support the debts of all the governments whose countries are in the eurozone. Aware that German voters deplore the idea of covering feckless southern peoples for their foolish economic management, and for lying abut the liabilities that they have accumulated, Markel has tried to cap the commitment that Germany would make to bail-out funds. At the same time, Germany and France have led the eurozone [as such] in demanding that the most indebted states in the system must adopt strict austerity. Looking at this scene, Standard and Poor's analysts have built forward projections for what might be the economic future for each eurozone country: and the result is that the countries that are being compelled to restrict their state spending while maximising taxation cannot be expected to grow their national economies fast enough to begin to generate earnings that will enable them both to carry on servicing their debts and to invest in new industries, in high technology and in innovative business structures. The more successfully the austerity measures bite into the economic system, the less resilient and dynamic the economies of the chronic debtor states will be.

The only means open to a Rating Agency to issue a practical warning in support of such an observation is to downgrade their rating of the debt issued by the countries concerned. That makes it more expensive for them to borrow money, so it reduces the chances of the government adopting Keynesian methods to revitalise the economy. It makes a self-fulfilling prophesy of the Agency analysis: and the predicted negative outcome has a high probability of eventuation. Lower [or negative] growth in much of Europe will further imperil the collective viability of the eurozone: and it could possibly undermine the European Union as such. The very policies that are being imposed on eurozone countries in the cause of responsibility and stability may well cause greater chaos, despair and socio-economic dissolution than has yet been imagined. In this context, S&P's small adjustment to sovereign debt ratings may well be a harbinger of a very nasty future. In earlier centuries Europeans of all traditions accepted the validity of cautionary tales like the Prodigal Son, of axioms like 'waste not, want not' and of adages such as 'you will reap what you have sown'. In the last third of the twentieth century clever fools thought that they could defy both traditional morality and simple arithmetic. They were wrong, and the price that future generations might have to pay for that folly remains beyond computation.

In short-term practical affairs, what will be the impact of Standard and Poor's downgrading of all those countries' state debts?

For the British, it is a hopeful sign that the Agencies continue to shrug off demands from some downgraded eurozone states for Britain's debt also to be downgraded; but that happy state will not continue unless the maintenance of austerity in state spending by the UK is balanced by economic growth and a marked reduction in the balance of payments deficit. Positive growth of the UK economy has to be seen by the middle of 2013 - at the latest - or downgrading will be inescapable.

Meanwhile, the eviction of Greece from the euro is unavoidable: the key question is, whether France and Germany choose to continue supporting Greek governments until the whole eurozone collapses, or whether Greece will be expelled [or allowed to slink away] soon, enabling the rest of the system to avoid a general implosion. If Greece is put out of the system quickly, the euro can probably survive as the common currency in sixteen enfeebled countries; but even then the subsequent three years will be a precarious period. Standard and Poor's may have the French spitting venom in their direction just now, but they gain brownie points for being of sound judgement on his point, this time round.

The Truth About Immigration

2012-01-10T13:10:00.000-08:00

Today's UK media carry stories that disclose - yet again - the infinite capacity of Economists for earning the contempt of the public. A think-tank, the National Institute of Economic and Social Research [habitually described by economic journalists as 'the respected NIESR' ] published a paper that asserted, unequivocally, that there is "no association" between higher immigration and the rise of joblessness in the UK.

Within a few hours the government's Migration Advisory Committee published a paper which declared that one Briton lost their job for every four non-EU migrants arriving over the past five years, which put 160,000 workers onto benefits. It also found that wage-rates for less-skilled jobs were pushed down by immigrant labour: while wages of higher-paid employees seemed to rise with immigrant numbers. This paper also indicated that further pressure would be put on living standards, particularly for the lowest-paid, because the inflow of immigrants would compete for housing [especially in London and the south-east] and cause upward pressure on rents and house prices.

Yesterday MigrationWatch - a pressure group opposed to 'excessive' immigration published its own findings, which were that: "Youth unemployment in the UK increased by almost 450,000 from [the first quarter of] 2004 to [the third quarter of] 2011. Over the same period, numbers of workers from the A8 countries [the new entrants to the EU, who became free to enter the UK in 2004] grew by 600,000". MigrationWatch made the caveat that "Correlation is not, of course, proof of causation," but went on to make the crucial point that "given the positive employability characteristics and relative youth of migrants from these countries, it is implausible and counter-intuitive" to draw a conclusion that "A8 migration has had virtually no impact on UK youth unemployment."

Readers will have noticed that the data sets taken by the three reports are different. MigrationWatch focuses primarily on youth unemployment and the relative attractiveness to employers of the work ethic and numeracy displayed by continentally-educated people, compared to the low literacy, negligible numeracy and unpreparedness for employment displayed by a very large proportion of young Britons [broadly regardless of ethnicity]. The government's committee compares total unemployment with the number of immigrants from outside the EU. The NIESR took all migrants who were issued with national insurance numbers [which are a necessary condition for gaining legal employment] and compared their numbers with the pattern of unemployment among the pre-existing population. The NIESR noted also that the growth of juvenile unemployment in the UK had begun before 2004 [when A8 citizens gained full rights of entry] and reached greater heights after 2008 although east European immigration was reduced and some Poles and Slovaks went home.

Recruitment to jobs in general diminished during and after 2008 as the recession intensified. Reliable, hard-working east Europeans generally kept their jobs in greater numbers than did Brits, and the number of east European arrivals tailed off when the word reached potential migrants that opportunities in the UK had diminished.

Political correctness forbids 'decent' researchers from ascertaining which specific categories of immigrants get well-paid jobs, badly paid jobs or no jobs; beyond the differentiation between EU and non-EU that is sanctioned by the Brussels bureaucracy and the European courts. Since increasing numbers of immigrants from outside the EU obtain citizenship in other EU countries, then come to the UK, there is no implicit ethnic connotation to the EU non-EU differentiation even though the overwhelming majority of A8 migrants were white Europeans. Consequently bar-room assertions about some ethnic groups 'coming here for benefits and free houses, with no intention of working' remain untested, but the legends fester with repetition: and the political class avoid mentioning the matter even though it is a widely expressed concern 'on the doorstep' to political canvassers.

The net effect of the three reports is to serve no useful purpose: they present no clear guide for policy-makers and their different selection of data contributes to a confused cacophony that has long been characterised by the lack of any agreed basis for comparison. On this issue, quintessentially, the disparity between the dialogue that emanates from the political class and the dialogue that rumbles on among the electorate has become extreme and will some time soon create a major political problem that will tax the present generation of politicians to the all-to-apparent limits of their competency.

The Paradox of Sovereignty

2012-01-09T00:45:00.000-08:00

Today's news media carry strangely contrasting stories. The UK Cabinet is to discuss terms on which the people of Scotland should vote in a referendum on independence for their country, while President Sarkozy will be in Berlin plotting with Chancellor Merkel how to reduce the sovereign powers of states in the eurozone so that they are less able to decide on their own taxation and spending. Some stories refer to the situation in Canada where two referenda have been held on the independence of Quebec which have been challenged, after the event, as to what the question actually meant.

There was little doubt about the question in Sudan last year, when the south of the country voted very strongly in favour of independence from the north; which was then granted: now the world's newest country is torn by tribal conflict which its security systems are ill prepared to deal with, even though the problem was highly predictable. In other parts of Africa, from Nigeria to Kenya, religious affiliation has transcended tribalism as a cause of conflict which includes a tendency towards political separation. Campaigners for autonomy in Tibet and other Chinese regions occasionally get their message into the global news nexus; while the continued separation of the two Koreas is widely deplored. The ambiguous suzerainty of China over Taiwan is a constant problem, while the separation of Singapore from Malaysia was the start point for a massive success story. The saga of separation of the Faeroe Islands from Denmark is worthy of Nordic myth, while the needs of 'homeland security' have given a renewed emphasis to the ambiguities of the residual sovereign territories of Native Peoples in the USA. The collapse of communism in Europe led to reunification of Germany which was more than counterbalanced by the separation of more than a dozen ethnic groups into sovereign states.

Globally there is still a momentum, originating from the nineteen fifties, for states to coalesce in continental common markets even while more and more ethnic groups and geographic regions seek independence as internationally-recognised sovereign states; which could then take their own decisions on how far they commit to their regional common market and any other regional treaties [such as NATO]. Especially in the eurozone, key powers of sovereign states are being surrendered to the community while newly-independent states stand patiently in the queue to be admitted to the common currency. The dichotomous tendency of new states surrendering portions of their sovereignty will continue intermittently through this century.In several ways, sovereignty for new states is much more restricted than it was in the post-second-world-war period when India, Indonesia, and scores of other states emerged in full sovereignty.

It is not likely that the trading blocs will make warlike preparations against each other, as such: the EU is not likely to mutate into an armed alliance against North America or ASEAN [the Association of South-East Asian Nations]. It is long established states, notably the USA and China, that seem currently to be shaping-up in a way that is reminiscent of an early twentieth-century arms race. It is against the interests of neighbouring states who form a free trade association to extend their partnership into a regional miltary alliance with their partners that is hostile to some of their trading partners in a global economy. Economic unions and free trade areas are essentially pacific structures: they reduce the risk of war between the members of the union; and the different global trading interests of the member states in any such community are antithetical to collective chauvinism directed against states on other continents.

The creation of new sovereign states and the consolidation of economic communities of states alike create a massive number of well-paid jobs as ambassadors and representatives. It is simply daft that the United Kingdom maintains twenty-six embassies in European Union countries. It has become clear that no UK government could pull out of the EU, even though there might be more political separation within a 'two speed' Union; so the need for representation in the EU countries is going to be at the consular rather than the ambassadorial level, in perpetuity. So Britain [and all the other EU states] should downgrade their internal embassies immediately, save a massive amount of money [and even more flummery] ,and allocate the reduced number of diplomats to the posts where they could be more useful.

Two Twerps and Silly Milliband

2012-01-06T04:14:00.000-08:00

On the morning of January 6 I heard an embarrassing interview between David Cameron, the British Prime Minister, and Evan Davies, a particularly drippy favourite of the current regime at the BBC who is often presented as an Economics expert. Davies's style is that of an insouciant fifth former from some long-vanished County Grammar School; including a tendency to ride hobby horses.

Today's spat was about the old chestnut of bankers' bonuses. The Prime Minister may not be as ill-informed on this issue as he routinely appears to be, but again today he spoke as if the core of the issue was bonuses paid to Directors - and particularly chief executives - and to senior managers of conglomerates that include banking divisions. In the USA and the UK, in particular, in banking as in businesses in many other sectors of the economy bonuses exceeding the nominal salary have been paid to such individuals, and many bonuses reached extreme levels during the bubble years before 2008. In retrospect it is clear that a significant minority of chief executives led their companies down routes that eventually proved to be disastrous: shareholder value was reduced - sometimes obliterated - yet it was palpable that the shareholders had not acted to curb the excess when the time was right. What Americans call "compensation" and Brits call "remuneration" has been determined [in most cases] by sub-committees of the board of directors who pay expensively for advice from specialist consultancies that compare top salaries over companies and sectors, looking at factors like the number of staff on the payroll as much as on the quality of thinking [which is almost impossible to assess] and profitability where the present strategy will only produce results in a few years time [so that present profits owe more to past managers and policies rather than to the present lot]. Shareholders [which includes investment trusts and pensions funds, with highly specialist and well-paid managers] let themselves be led by the consultancy reports; with the result that the gap between top salaries and "ordinary" employees' remuneration increased to a degree that most people thought was obscene.

There is now a battery of propaganda urging shareholders to recapture control of compensation [or remuneration] and to narrow the gap between top and bottom salaries. Governments have been put under pressure to use taxation and regulation to diminish the purchasing-power of top people's pay packages. An additional measure that has been used widely for more than ten years requires companies to pay a proportion of the bonuses in shares in the company rather than in cash, and to put restrictions on when the shares may be sold so that the recipients cannot just cash-in quickly. For those employees who are continuing to work for the company and who have already accumulated such a heap of shares there is a huge incentive to work effectively and so increase the value of the shares; and this fact is adduced to argue that bonuses positively help to drive progress and profitability for the business. Against it is ranged the fact that the average tenure of chief executives gets shorter and shorter so that it is rare for a boss to be in post to reap what he has sown.

Control of relatively 'transparent' remuneration packages for directors and top managers never was the biggest problem, and it is now obvious that that range of stipends will be brought under control: and may even gain public acceptability.

The bigger and more scandalous problem has been accidentally and partially addressed by the imposition of temporary taxes on bonuses, and it has been mitigated massively by the recession in the world economy which has cut back the trades for which the biggest bonuses were paid during and after the bubble. I was emphasising this problem by 2005; while most commentators - even many of those who predicted the crash - appear still to be as oblivious to it as David Cameron and Evan Davies appeared to be today.

The biggest bonuses, ranging to thousands of per cent of notional base salary in the most extreme cases, were available in what has - quite rightly - come to be called casino banking. But even those who coined the phrase do not seem to have grasped fully what it means, as I tried to express the matter in my Fellows Lecture to the Insurance Institute of Ireland early in 2007. Very able people, mostly graduates in mathematics, pure science or sophisticated engineering, and often with doctorates in those disciplines, were taken into the proprietary trading subsidiaries [or sections] of companies that had taken on a complex of traditional 'financial' transactions: stockbroking, jobbing [holding stocks and shares for brokers to buy from them], corporate analysis, financial advice to businesses, assistance in issuing new shares or raising loans, facilitating mergers and takeovers, and a series of specialist services. Having brought them together, as was permitted by the relaxation of market regulations in the nineteen 'eighties [the British 'big bang' was in 1986], their bosses were greedy for growth: to be achieved by the conglomerates competing with each other for established classes of business and by developing wholly new products and the markets in which to place them. The latter area was where the brilliant scientific minds could most profitably be brought to bear. People grounded in the old skills worked in close collaboration with lawyers who could draft the terms of new contract types, and auditors who could find ways of validating the reported outcomes, and rating agencies that claimed to be able to evaluate the contracts, they developed new ways of securitising loans that had been made to 'real world' people and firms; and ways of gambling against possible outcomes in 'real' markets without ever actually buying or selling commodities or company bonds or shares or insurance policies.

Futures had been available for centuries: for example, a biscuit manufacturer could enter into a contract to get grain next year at a determined price from a merchant who bought and sold grain and believed that [to some modest extent, but better than others] they could guess probable future prices. If the merchant guessed wrong, and had to pay more to get the grain that was needed to fulfill the contract price that he had promised to sell it for, he took the loss: but if he had guessed right and the open market price for the crop on the day when he had to buy to meet the contract [the spot price] was below the level at which he would sell the grain to the contracted buyer, he made a gain.

Copying the 'real' futures market, the new wave invented financial futures. These were betting slips by which a punter [often a trader working for another conglomerate] would place his bet as to what movement would take place in the price of some share or bond with another trader who had a slightly different expectation. No shares or bonds were involved between the parties: they simply had a bet on how much the price of the bonds or shares [that were being held and traded by participants in the 'real' market] would rise or fall in a set period. If the seller of the betting slip was proved more accurate in his guesswork, he had nothing to pay out and he kept the fee for which the slip had been sold. If the issuer of the share or bond was a worse forecaster, in this case at this time, than was the holder the issuer had to pay to the holder whatever sum had been specified in the contract. This principle was extended to a vast range of derivatives and other instruments or products that were progressively dreamed -up. These creations existed only in cyberspace, as promises between firms, which had notional values when the contracts came to maturity. Many did not run their full course, where get-out clauses were exercised as external conditions and the internal needs of client firms changed.

Settlement had to be made periodically between the conglomerates and this was done by transfers of cyberspace credit: and trades between firms largely evened-out over the years. Nothing of value to the material world was generated as a result of trade in the more esoteric 'products': but the immense scale of the leading firms' balance sheets that resulted from totting-up the notional value of all the contracts they had bought was accepted to have justified them in increasing their securitisation of loans to people and firms in the 'real economy'. The success of the imaginary trade sanctioned an increasing use of securitisation to expand credit to 'real' householders and factory owners, and hence the credit bubble was fuelled despite minimal [or even negative] growth in the productivity of the material economy.

Massive imaginery profits were made from the imaginative trades: so the traders and product designers and lawyers - and, above all, the inventors who constantly created new species and variants of the contract types, were paid huge 'bonuses' which were volumetric commissions on turnover achieved by the skill and imagination of the team leaders and their clever supporters. The amounts that the best such people earned took the bulk of the real-world cash that was earned by the banking and advisory sections of the conglomerates. As the bubble grew in 2003-7 the banks did not have enough basic cash to pay the bonuses in full; but their directors were keen to go on expanding their cyberspace balances, for which they had to encourage the deal-makers and the secondary traders who backed-up the markets in the transferable slips. Pro-rata bonuses were paid to the creators of, and traders in, more spectacularly imaginative 'products' that were traded with ever-greater notional values. The conglomerates paid an increasing proportion of bonuses in shares: because the cybertrades delivered no significant cash earnings to the firms whose brightest and best were dealing in them. Until bonuses became a source of mass public concern the dealers could cash their shares by seling them on the open market. But the shares were becoming relatively less attractive because the comglomerates were using most of their net cash [real world] income to encourage their dealers to expand the scope and size of the unreal universe. The conglomerates didn't have sufficient cash left over to pay higher dividends: so firms like Barclays - which changed from being primarily bankers to being phenomenally bigger proprietary traders - did not significantly increase dividends and consequently their share prices did not grow significantly through the bubble period.

When the crash came, trillions of dollarsworth of the notional value of cyberspace contracts ceased to have calculable prices. The aftermath is still being felt, and many situations are unresolved; but it seemed obvious to the boards of the conglomerates that they had to earn what they could where they could: so they retained their dealers in the market segments that survived, encouraging them to maximise their turnover; and thus they had to continue to reward them in the way that had been evolved in the good times. The 'banks' had an intractible image problem that sat uncomfortably alongside their systemic business problem. The remuneration of the cybertraders was competing for cash earned by 'bog standard' banking with the regulators' demand that they had to keep more cash in their reserves [proportionally to their retail banking business].

To the public- including [apparently] the Prime Minister - bonuses are the income supplements paid to top directors, which have in some cases been stigmatised as 'rewards for failure'. On that assumption it seems obvious to put a cap on bonus payments in 'banks': but as has been shown above the bulk of 'bonus payments' have really been turnover commissions to dealers who are far removed from the sort of banking that involves the voting citizenry.

The simple solution to this dilemma [and a large part of the answer to the Merkel-Sarkozy nonsense of the Tobin Tax] is to classify all the problematic businesses as what they are - gambling. Take them out of the 'financial services' arena and stick them under the regulation of the Gambling Commission, with the appropriate regime of taxation. The banks can still own such firms, if they want to take the reputational and financial risk of doing so; but the true nature of the business and the proper explanation for its remuneration system would be apparent. One cannot expect Evan Davies to get the point, but there might be somebody in Whitehall who can coach the Prime Minister into an element of common sense.

UPDATE
On February 3 the Leader of the Labour party joined in the display of ignorance. He too berated "bankers'" remuneration packages withour recognising the differential between traders' commissions for turnover and directors' pay that is loosely related to the general level of 'compensation' in the business. This is another display of the fact that a well-chosen comprehensive school and Oxbridge can produce a result similar to a product of Eton and Oxbridge in becoming a clot who can join in the yaa-hoo 'debate' that is a natural development from the example set by the minority who have passed through the Bullindgon Club.

Not a New Year Economic Review

2012-01-03T23:50:00.000-08:00

Thousands of Economists have written millions of words in forecasts for the performance of the economy in 2012; globally, country-by-country, through individual business sectors and from various perspectives.

Very few of the pundits are predicting that the eurorats can relieve the eurozone of the crippling problems that arise from the falsification and fudges that marked the establishment of the single currency. The European Union was founded on a fervent hope: that war in Europe could be prevented, permanently, by drawing all the potential belligerents into a single economic and political entity. Once in the Union, it was hoped that it would effectively be impossible for any state to leave it. There have been endless moves to lock member countries into an 'ever-closer Union': which is interestingly different from the historic US aspiration to create a 'more perfect Union'. European integrationists have been content to drive through notably-imperfect measures provided each fudge received the assent of the member states, however reluctantly the consent was conceded. Once the deal was done the outcome was regarded as irreversible. The creation of the euro was the most significant single step in that direction. It went spectacularly adrift in 2010, then it continued to be an unsolved crisis through 2011. 2012 will be the year in which reverse gear is likely to be engaged; and at least one of the members of the eurozone who have been strapped into ejector seats may actually be parachuted out of the system.

At the end of 2011 China reaffirmed its aspiration to put a man on the moon by 2020, which implies leapfrogging the USA and Russia and the EU in the application of complex and significant technologies. A reconditioned Soviet-era aircraft carrier has taken to the high seas under the Chinese flag. Chinese agencies are buying huge areas of farmland in Africa, to add to their mineral rights and construction interests on the continent; and while China refused to take any direct part in a eurozone rescue fund their central bank has boosted its contribution to the IMF [which may be used to assist the European Central Bank. on appropriate terms] and it has frankly been admitted that Chinese agencies will be happy to buy European companies that control significant ik [see my book PPE]. Alien commentators who predict worsening conditions for the Chinese economy in the coming years should take note of the extent of the 'unnecessary' spending that the Chinese state is making on strategic and prestige projects that will deliver only long-term dividends, if any. China can cancel or defer a huge range of massive discretionary spending if the more short-term interests of economic and social stability call for such retrenchment; so China is unlikely to experience any shock to the system that cannot be compensated by easily deliverable actions.

India has much less flexibility over budgetary allocations because of the immense complexity and confusion within the social and economic structures where thrusting modernism contends with ruthless traditionalism. Publicly announced plans are never fulfilled on budget and on time, and only very rarely is legal action taken against corrupt politicians and administrators [in sharp contrast to China where dozens of death sentences each year ensure that most party figures and administrators are cautious not to get caught: often by committing no offences].

Very broadly, Latin American countries are consolidating their improved political situation. Venezuela has a very uncertain future which may partially be resolved by the election that is due this year, and the uncertain health of the President adds a further imponderable. The most significant headline in the continent is probably the relative success of Brazil's measures to limit the destruction of rainforest: and this achievement has not significantly been at the expense of economic growth which is taking Brazil higher among the 'top ten' global economies. Democracy is not fully consolidated in depth throughout the continent but blatant abuse is rarer than at any time since the expulsion the Spanish governors early in the nineteenth century.

The Islamic world has been intrigued by the 'Arab spring' which began last year, but it is far too soon to jump to any conclusion that democracy must develop and become entrenched in countries where closed systems of government have been disrupted. It has proved naive to assume that the momentum of progress will spread to unseat other oppressive regimes. Iran continues to make bellicose gestures which are partially generated for the age-old reasons of distracting the population from domestic oppression and partially in reaction to aggressive murmurings from Israel and the United States. It is widely assumed that the USA is not capable [either logistically or psychologically] of waging a full-scale war with Iran, while Washington shares the Israelis' determination to do what can be done to prevent Iran from being able to wage nuclear war on Israel. The presumed progress of the Iranian weapons programme, and of the related missile development, will determine whether Israel is able to hold off from intervention of the sort that has already caused delays to the project. The stand-off between Israel and Iran is an important component of the 'Palestinian question', even though Iran is not an Arab country. As Zionist settlements continue to be developed in occupied territory, and the rhetoric arising from the settlers [and from their supporters in Israeli politics] becomes more strident, the chances of a 'two-state solution' diminish and the relevance of Tony Blair's hugely overstated role as a peacemaker is more conspicuously diminished. Israel will continue to be the most important external influence on US politics, less because of the power of the conspicuous 'Jewish lobby' within the USA than because of the the increasingly clear parallels between the fate of the Palestinians and that of the 'Indians' who were dispossessed and allowed to die as the Frontier was pushed out over the lands that became the continental USA. If West Bank settlements are offensive to human rights and probably contrary to International Law, so was the establishment of most of the towns and cities of the USA. Nobody should be surprised if the vast majority of Americans have no wish to contemplate the similarities of the two situations [see my book Fundamental Tensions]. The longer the standoff between Israel and the Palestinian Authority continues, the more the settlements will grow and the self-confidence of the settlers will increase. The harrassment and alienation of Palestinian families will increase and lead to demands for more vigorous reactions from the Authority [or from rival structures if the Authority continues to accept American money and influence]; and self-selected surrogates for the Palestinian cause - including Iran and terrorist groups - can cause a great deal of damage. This problem will not be resolved during 2012, and at worst it can disrupt many aspects of world business by restricting the open market supply of oil, by creating instability in various Gulf states, and through the damaging potential impact of random terrorist attacks on worldwide targets.

The simple term 'Sub-Saharan Africa' has implicitly confirmed an impression in other parts of the world that the continent was somehow subnormal in economic performance, and in democracy, in legality, in culture and social cohesion. The nineteenth century concept that Africa was [or contained] a 'heart of darkness': of cults, primitive religion, tribalism, low intelligence and slavery continued to be quoted. Positive developments over recent years have done very much to make traders in the other continents aware of the economic opportunities, and of the increasing legitimacy of some governments that have reasserted the rule of law and even suppressed corruption. In some part-Muslim countries violence against Christians is increasing; but such incidents are being reported internationally. The depressive mood of crisis that infests Europe is sharply in contrast to the optimism that has been spreading across Africa. Despite the awful failures like Somalia and Zimbabwe there is very much positive thinking in and about Africa: which is really good news.

These pointers to the prospects for the world in the next few years all pivot on political data, and the key fact that the economic prospects of the various countries are heavily influenced - if not absolutely determined - by their politics. But these signs do not point down any single path. In Latin America the strongest economic growth is apparent in countries with the best achievements in democratic politics, while in Africa the maintenance of the rule of law - which is essential for secure growth - is less closely associated with electoral democracy and constitutional legitimacy. India is proudly [and genuinely] the world's biggest democracy: but the institutions of the state are as much inhibitions on growth and development as they are supportive of progress. The European Union is recognised to have a 'democratic deficit': most voters resent the loss of powers by their state parliaments even though they recognise that significant benefits derive from a common market and a commitment to peace. There is a great and growing tension between the eurorats of Brussels and the mass electorate, which is not articulated adequately at the interface of the European Council of Ministers and the Commission of the EU. Japan is publicly a chaotic democracy, and works efficiently because there is an effective, secretive Imperialist elite that can get things done regardless of the apparent weaknesses of the official government; while in China omnipresent [and unabashed] manipulation by the Party also makes the formal constitutional institutions irrelevant. These Asian models have been successful. Japan's much-described 'decade of stagnation' has been statistical rather than experiential, and there is little doubt that most Chinese welcome economic development and would not swap it for democratic stagnation.

The world is a patchwork of different political models, each of which serves some economies better than others. There seem to be no general rules: the American belief in the universal export of Democracy is not generally accepted, especially by people who prefer improving living standards to the irregular opportunity to have a negligible impact on the outcome of an election. The unedifying state of US politics in this election year is likely to be the worst possible advert for democracy: Brazil's economic success is a shining example of it. We face interesting an uncomfortable times!.

Manning Democracy

2012-01-02T00:14:00.000-08:00

Democracy has many weaknesses, some of which have recently become apparent.

Greece and Italy have had 'technocrats' slotted in as Prime Ministers, because their constitutional procedures did not deliver people for the top jobs who were acceptable to those who control the two national economies.

Politics in the USA are more bitterly polarised than at any time since the US became a global power. The Democrats are obliged to support their incumbent president, though it is doubted whether he will carry mass support into the next election to match the pile of money that has been promised by both loyalists and those who judge it a worth-while investment in the incumbent standing for re-election. His Republican opponents [who absolutely loathe Obama] are bitterly divided, with a leading candidate suffering the almost terminal disability of being a Mormon: this division is so profound that the 'Grand Old Party' has been seen as a probable looser since long before the General Election campaign begins. Meanwhile the debt and the deficit are increasing enough to improve the prospects for Prophets of Doom; who are probably the only group of Americans who can look forward with confidence and are able to ignore the undoubted underlying strength of the economy.

Angela Merkel knows that she would face electoral suicide if she promised any significant amount of real support over the long haul to Greece and other struggling eurozone states. No significant commentator, and no opinion poll, indicates that Nicholas Sarkozi will be re-elected in this year's French election; leaving the field open to a Socialist machine-man and a woman from the far right. Vladimir Putin has massively lost support ahead of this year's election, entirely due to his own actions, but there is no credible opposition candidate: so Putin will almost assuredly win: but the lesser a proportion of the vote he gets, the more chance there will be of his taking notice of his need to project a different image.

Elections in Egypt will be a test of whether the Muslim Brotherhood and their allies really do aim to achieve "one person, one vote, once"; followed by a very different regime.

In China almost excessively elaborate succession planning will produce a hugely different array of personalia in the top political posts by the end of 2012, but they will be expected to continue with an agreed evolutionary programme. The names that appear to be in the frame for advancement include some that are associated with dogmatic assertions of communist - basically Maoist - principle who counterbalance the Party's willingness to continue with sophisticated macro-economic management of a rampantly capitalist economy. The percentages may change from year to year but spectacular economic progress is essential: if growth falters too much the Party's monopoly over politics will be challenged.

Nowhere is politics likely to produce genuinely popular outcomes that could give people new confidence in the direction that the country will take in the coming years. Charismatic leaders who become self indulgent and wilful are a danger to their own people, and often disastrous for their neighbours. Dull politicians who keep to the constitutional rules and who try to implement the policies on which they stood for election remain dull; but if they try to perpetuate their tenure they can mutate into oppressive dictators More and more obviously politics produces unimpressive governments, precisely at the time when the consequences of the failure of Economics have matured into a new crisis of sovereign debt which can only be resolved through appropriate Political Economy applied by confident and competent governments. This big issue will be of major concern to this blog throughout 2012. On early signs, China will probably manage the political succession most effectively in 2012, and again western doomsters who predict catastrophe for the Chinese economy will not be vindicated.

Energy in the Grand Strategy

2011-12-31T12:28:00.000-08:00

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

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

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

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

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

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

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

Old and Useful?

2011-12-29T13:12:00.000-08:00

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

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

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

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

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

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

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

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

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

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

Grand Strategy for Britain

2011-12-27T23:44:00.000-08:00

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

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

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

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

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

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

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

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

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

Two basic problems: Energy Supply and 'Banking'

2011-12-26T13:48:00.000-08:00

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

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

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

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

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

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

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

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

Christmas Shopping

2011-12-23T13:09:00.000-08:00

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

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

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

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

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

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

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

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

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

Why So Few 'Great' Women Economists?

2011-12-20T23:57:00.000-08:00

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

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

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

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

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

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

AND AN AFTERTHOUGHT....

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

Globalism and Money

2011-12-18T23:46:00.000-08:00

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

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

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

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

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

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

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

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

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

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

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

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

Demography, Democracy and Drink

2011-12-15T23:45:00.000-08:00

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

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

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

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

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

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

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

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

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

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

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

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

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

Money, Democracy and Economy

2011-12-12T15:38:00.000-08:00

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

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

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

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

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

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

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

Global Accord on the Climate

2011-12-10T23:49:00.000-08:00

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

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

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

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

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

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

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

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

The EU and the Eurozone. What Should be Done Next?

2011-12-09T14:49:00.000-08:00

Superficially, the easiest thing that could have been done by the EU in the last 24 hours would be to force Germany to open its coffers to 'save' the euro by buying all the bonds that may be issued or guaranteed by the puppet governments that have been installed in Greece and Italy, and may be installed in other economically failed countries. The spokespersons for the 'markets' - and representatives of the Obama Administration - will continue to press for a 'solution' on these lines whenever it appears that the new solution to the euro crisis is open to question.

In the 'markets' so-called hedge funds and other speculative investors have been stockpiling at-risk bonds when they could buy them cheaply, in the expectation that Germany would eventually be forced to 'support' them at higher prices. Germany has declared its commitment to the European Union, and to the euro, for decades and the marketeers think that pride and stubbornness will not let them back off from supporting the new dispensation. The Obama team of died-in-the-wool pre-2008 bankers have done pretty well to consolidate the position of their former employers since the big bail-out of the rationalised banks that were cobbled together in 2007-9.But they are well aware that the ramshackle result could begin to crack if the euro was disrupted, causing the US banks' holdings of euro debt to loose value. The US has been calling-in the moral obligation that is supposedly owed by Europe for US investment in defence during the cold war of 1947 to 1991. Time has moved on. The sensibly selfish basis for US policy, past and present, is clearly recognised and contemporary Europeans do not recognise a continuing obligation.

Germany in 2011-12 does not recognise an ongoing obligation specially to assist European countries that suffered occupation or destruction during the second world war. Huge reparations have been paid, the balance sheet has been cleared, and the anti-German current within Greek protest against financial stringency is self-defeating.

Germany should in no way feel obliged to assist a bankrupt state that got itself into the mess that its proconsular ruler is trying to resolve. Greece is uniquely in that perilous situation at this moment. The Greek people will suffer dramatically lower living standards for an indefinite future because Greek governments doled out more resources than the country had generated continuously for the past three decades. Though different parties won elections from time to time, each government had a popular mandate; and it is the misfortune of modern citizens in any state that they collectively carry responsibility for the accumulation of debts that the elctorate consented to being accumulated.Any Greek could have discovered that their huge salaries, early retirement ages and evasion of taxation were not only exceptional but also blatantly unaffordable when set against national economic data. The typical citizen may have chosen not to take cognisance of the facts: that dereliction alone stimulates fair-minded aliens to inhibit any sypathy for the unfortunate elderly who now have dramatically reduced living standards and no prospect of mitigation in their lifetime.

Economists have been allowed to dominate economic policy with the assertion that 'markets' are efficient. They have handed it down as 'scientific fact' that governments should so arrange affairs that markets are the drivers of the economy. This is utterly ludicrous. Markets are creations of human beings, and only have any life to the extent that human beings take part in them. The people exist under the protection of the state, they can make contracts because the state and its courts-of-law recognise them as legal persons. The companies that exist in markets are licensed to exist by the state. The contracts that people and companies make are only enforcible if the state's courts recognise them to be valid. The state has an unqualified precedence over any business structure and this is an inescapable fact: for Economists and their dupes to presume otherwise is profoundly dangerous.

People have an infinite capacity for cheating, crookery, and fraud; as much as they have the capacity to be creative in the arts and sciences. A few hundred people - mostly science graduates, many with PhDs - have become adepts in black arts that enable them to create derivatives and credit default swaps. They can - and some of them do - set up deals that are designed deliberately to exploit other market participants. They invent and trade in fantastic 'instruments' such as 'shadow shares' that enable a pension fund to put its money into bonds but in parallel with that to buy notional shares, with a promise that if the 'real' bonds fail and the notional shares retain value, then the firm that has sold the shadow share package is contractually obliged to give the pension fund value equivalent to the gap between the value of the bonds that they hold in comparison to the then value of the notional shares. The idea that any financial firm would be able to deliver on such a promise in the event of systemic market failure, without the sort of government support that the banks were given in 2008, is absurd. The contract - and the pension fund with it - would most probably be wiped out. But while the contract is operational [and untested] fees are paid to the conjurers, the pension fund managers get their salaries and the Trustees draw their fees or allowances: only the fund members stand to lose. The financial services providers have become even more blatant than they were before 2008 in the absurdity of the 'products' that they have offered; and the gullibility of their clientèle seems to be undiminished. The providers made Greek and Irish state debt appear to be sounder investments than they were, by enabling the holders of the bonds to 'hedge' those purchases with derivatives or ghost shares.

Markets that include such cajolery and sheer brass cheek among their trading methods, selling 'products' on which millions of peoples' future incomes depend which have no substance, are profoundly 'imperfect'. It is blatant that knowledge and understanding of the products and of the risks that are inherent in them are not equally understood by purchasers and the people who unknowingly depend on the outcome of the contracts. Essential rules of the system must be defined by the state, the traders must continue to be licensed by the state and the products must be subject to classification by the state. The infantile version of the Tobin Tax that has been proposed in the EU would have no significant impact in regulating the markets as they have evolved in London and New York. It would primarily be a regressive imposition on the day-to-day bank and insurance transactions of the mass of the population. If 'complex products' are to continue to be regulated as financial assets, much more intrusive regulation - more comprehensive than what is currently being proposed by the EU financial regulator - is needed.

But a completely different approach would be more sensible. At the very least, derivatives and most 'swaps'.and many futures and other 'asset classes' should be classified as betting slips; which is the simple truth. As bets, they should be regulated in the UK by the Gambling Commission, not the Financial Services Authorities. They should be subject to gambling tax and not susceptible to regulation by the EU Financial Services Commissioner and his empowering legislation. By trying to exempt Britain - specifically the 'City' - from any new restrictive EU financial services regulation David Cameron has had a Pyrrhic victory. He has not got any significant exemption for British financial services [which he repeatedly points out is 10% of the economy] and he does not have any inkling of the basic fact that much of the 'industry' that he is trying to protect is not finance, but gaming. The appropriate regulatory change should speedily be implemented: then the EU system of financial regulation would not apply.

It would make an amazing positive change to the continentals' perception of Britain and of the activities of the City if the suggested reclassification were to be carried out. If the British Treasury and Cabinet Office will ever be capable of taking this point, they can frame a regulatory regime that will be seen by the rest of the EU as exemplary. Britain's detractors would be wrong-footed and the rehabilitation of the UK would be facilitated. The City need not suffer any great loss of business, insofar as the players can convince their clients that the betting slips that they have been buying to hedge their investments will still serve the same purposes under a more appropriate and honest regulatory regime. I have only a scintilla of doubt that the City lobbies will oppose any reclassification of their 'proprietary' activities because their pride will be offended by their being classified as bookmakers and their greed will baulk at paying higher taxes on a different basis and possibly experiencing some loss of business. But the City and the government have a golden opportunity to escape the very real threat that the new Europe will much more massively deflate the City's income under its tightening and uncomprehending regulatory regime.

Away to the west Dublin has developed huge 'financial services' expertise that is currently underemployed. A swift-footed Irish government - safe within the carapace of the revamped eurozone - can go a significant way to develop a high-level bulk betting regime that could capture a great deal of the market that the City of London stands to loose. That threat [and the possibility that the Swiss may dabble in these markets] may help to persuade the City that here is a way forward.

Politicians: Out of their Depth?

2011-12-06T14:16:00.000-08:00

Witty people who have never borne political or business responsibility can be highly vocal in expressing their criticism - and their ridicule, quickly descending into contempt - for office-holders who are struggling to pursue their ends in difficult, unpredictable and often adverse conditions. There are a large number of leaders at the present time who seem to have a limited [or even obtuse] perception of the situations that they are attempting to manage.Critical opposition is very often easier to mount than is reasoned presentation of feasible alternative options. Let us take a few examples that are in the News this evening.

In Moscow and other Russian cities there are small but significant demonstrations against the continuance of Vladimir Putin in office: either as Prime Minister or as President. These are at least matched numerically by demonstrating supporters of Putin's party; but it is notably oppositionists who are being arrested. In recent months, around the time of his announcement that he will again run for the Presidency of the Russian Federation, Putin has presented himself as a fitness fanatic, and a game hunter, and a supporter of the Arts, and a politico-economic polymath, and a populist who was astonished to hear boos directed at him when he came into the arena during a recent sporting event. He has done enough positive things for the country to enable him to seek re-election on the basis of that healthy record; but he seems to be unable to believe that. He also appears to lack any vision about how he can increase genuine popular support by tackling endemic problems that have emerged in a rapidly developing and changing socio-economic nexus. He has tried to project a 'personality' that is so multi-faceted as to be unsustainable, as well as fundamentally incredible; while he has been notoriously indulgent to corruption. He will never convince the punters that he is Superman; and by every device that he uses to try to demonstrate the impossible he increases the opportunities for satire. Even his fiercest critics have conceded that he has had every chance to gain the presidency by a real electoral majority: but now he is threatening his chances both by inviting ridicule at his antics, and by his toleration of cronyism and corrupt business practice, and by the exploitation of political and bureaucratic processes by venial officials who he retains in post. This is very sad for him [and it could be terminal, if he allows his personality to sink into megalomania] and it is tragic for Russia which he has demonstrated the ability to serve so well.

President Obama's gift, which is also his curse and his potential doom, is his fluency. He can be highly articulate both in set speeches and in off-the-cuff utterances; but the more he says off-script, the more apparent it is to the growing army of his critics that his understanding of issues is incomplete [at least], his power to analyse complex data appears to be exiguous, and he appears to have no attainable plans for delivering benefits to voters, despite the release of many billions of dollars by his administration and by the Federal Reserve system acting in cahoots with the federal government. The more Obama takes centre-stage and holds forth, the less credible he appears to be; the more money his administration spends, the less relevant he seems to be in the legislative process and yet he carries the primary blame for the lack of impact of the limited policies that are adopted.

The remarkable Prime Minister of India, Manmohan Singh, is constantly criticised for doing too much and to little to grow the economy, for obstructing measures of liberalisation and for letting in too much alien capitalism, for tolerating the residual curse of the caste system and for indulging capricious [and probably crooked] untouchable politicians, for being locked-in to party-political croneyism and for being meritocratic. All of which adds up to showing balance, moderation, and a positive skill in directing a cabinet of more than thirty ministers and in getting responses out of an immense, inert bureaucracy. This is an outstanding political achievement that is working to the economic and social benefit of a massive and fast-expanding population.

No such single figure prevails in China. The complex hierarchy of past, present and future holders of the highest posts in the echelons of the Communist Part - and thus of the state- is partially understood by foreign commentators; though all assessments of power shifts and secret alliances are subject constantly to revision. No system that channels humans who are heavily endowed with ambition and personality through the corridors of the Great Hall of the People and the courtyards of the Forbidden City can work as smoothly as the Chinese authorities would have one believe: but their system has responded remarkably well to the complex processes of liberalisation and hugely rapid economic change and development, delivering 9%+ economic growth despite the turmoil in global capital markets and its impact on American and European buyers of Chinese goods. In recent days various Chinese ministers and bank officials have popped up as expert spokespersons on the specific issues of the day; talking truth to the diminishing western powers, asserting China's independent assessment of policy options, emphasising that their country is now a responsible global superpower and demonstrating that this truly is the case.

The different modes of success of Indian and Chinese leadership do not betoken a general superiority of Asian political models, or of Asian politicians over the rest of the global crop. I have lost count of the succession of ineffectual Japanese Prime Ministers who have come and gone since I first had the privilege of being a visiting professor there; and the politics of South Korea hardly bear forensic examination. Thailand has a Prime Minister who was elected solely because she is somebody's sister; and the entire country is scared of what will happen when the revered King dies and his heir - generally regarded as a wastrel, or worse - claims the inheritance. Sri Lanka is a military dictatorship, Pakistan is prey to factions that assemble and undermine sullenly-consensual governments that exist by striking compromises with the military. Politics in Indonesia and Malaysia is being edged slowly in the direction of 'moderate Islamism', which also seems to be the trend is the Arab world from Saudi Arabia to Morocco. Iran is suffering an attempt at permanent revolution that could be ridiculous if it were not armed to be dangerous to its neighbours; while Iraq is the agonised outcome of more than half a century of conflict.

We have not yet glanced at the prevailing political mode in most Asian states, nor any in Latin America: so there is much of the world left to review in future blogs. One area that must briefly be mentioned in this wide-ranging look at the political effectiveness of various people and situations is Europe. Two countries - Italy and Greece - are directly ruled by EU Proconsuls; and half a dozen are constitutional monarchies where the party-political mix in government is pragmatic and is not existentially important. In France, Germany and the United Kingdom, despite very different rhetoric surrounding the relative position of the state government to the EU, it is clear that their politically-insecure leaders see the maintenance of the Union as the key priority. The original purpose of the Union was to prevent a third 'world' war: now it is seen as potentially [though not yet actually] an entity big enough to allow the European economy that is being overtaken by emergent powers to have a chance of survival on the world stage. The political leaders in the predominant EU member states, and [often more so] in the smaller states that follow them, are focussed on what Europe can do for the economic environment, and thus enable growth to return and eventually generate enough new wealth to transcend the present gloomy prospect. That was the proposition on which Heath 'sold' the EEC to the British Parliament and people, and Cameron and Merkel and Sarkozi are relying upon the same hope today. Not much fruit has sprung from Heath's planting of forty years ago and the politicians of 2011 understand that they cannot get away for long simply by saying that the long-term gains [when we are all dead] will make the short-term pains [that will be felt for several years of the immediate future] worth while. The message is impossible to deliver in a positive package, but that is the message to which the inescapable impact of the Iron Law of Wages has driven them. For European connoisseurs of politician rhetoric, if for nobody else, interesting times lie ahead.

For an explanation of the Iron Law of Wages, see Personal Political Economy which is accessible from this site.

Rating the Eurozone

2011-12-06T00:04:00.000-08:00

Even the most despicable people can make intelligent remarks and display real understanding. The same is true of organisations, even Rating Agencies. These firms made a huge amount of money by kitemarking gambling slips that they did not understand, as being investment-grade 'assets'; and thereby they contributed crucially both to the 'banking crisis' of 2007-8 and the crisis of government funding that is reaching a new crescendo.

Back in the nineteen-eighties, long before the financial innovators had started gambling in cyberspace, the Rating Agencies were taking fees and 'research funding' from companies to whose bond issues they then gave a positive rating. Directors of firms that administered pension funds, insurance reserves and investments charities used ratings as a way of justifying their allocation of the investments that they made. The national financial regulators accepted ratings as valid measures of the worth of different promises-to-pay in the future [which is what bonds are]. So banks accepted government bonds on the strength of their ratings; and governments accepted corporate and other governments' bonds on the strength of their ratings. We all know where that led the western world; and that the problem is still grinding on.

But now Standard & Poor's has stated a simple truth; If Germany and France commit all of their treasure into a support fund for junk and near-junk bonds that have been issued by lying governments [as 'the markets' have been demanding] they will have to give so much money to the market players [such as 'hedge funds'] that have stockpiled bonds at knock-down prices that their economic strength will be sapped. The way a rating agency expresses this is by reducing its rating of a government's debt. So they have said that if Germany opens its coffers to the rogues, then the rating of Bunds [German State Bonds] will fall: and this applies to at least five other Eurozone states' debt. That is simple sense!

Whose Century?

2011-12-04T09:40:00.000-08:00

In announcing her decision to propose that India should become an approved customer for Australian uranium, the Prime Minister said that it was appropriate for Australia to become more accommodating towards India in this "Asian Century". China is already a huge customer for Australian minerals, and India buys significant quantities of those that are not subject to export constraints. It is very much in Australia's interests for everyone in the emerging regional economies to be allowed to bid competitively for supplies. Uranium is a special case among industrial materials, because it is exceptionally important in the replacement of fossil fuels as well as by reason of the risk that the mineral may be processed for weapons.

The involvement of Australian forces in Afghanistan must be taken into account in a decision to supply the aboriginal enemy of Pakistan with uranium. India and Pakistan have been at loggerheads since the calamitous decision was taken by Earl Mountbatten [as the final Viceroy, endowed with absolute dictatorial power] to allow the creation of an Islamic state within the dissolving imperial India. Tens of millions of Muslims remained in India where they have not notably been oppressed: while millions of Hindus died in partition and afterwards, and they have virtually been eliminated from Pakistani territory. Pakistan has nuclear weapons, and has exported the technology to make them to North Korea and to other rogue states; and elements in the Pakistani military are reported increasingly to be supporting Australia's opponents in Afghanistan. The only power with the means and the will to contain Pakistan is India: while India is hesitant to be placed in that position, not least because this could cause China to strengthen its ties with Pakistan and create two power-blocks in Asia. The geopolitical background is inescapable in this consideration of the implications of the opening of trade in uranium from Australia to India.

In speaking of an Asian Century Julia Gillard was not referring primary to actual or potential patterns of military alliance and engagement. She was expressing the conventional contemporary view that the growth of major Asian economies will mean that by 2099 China and India and Japan and probably Indonesia will be economic powers at least equal to the European Union and to the North American free trade area. Brazil and other economies off the Eurasian landmass will also be major powers; but the largest shift in global economic focus is already well advanced from the North Atlantic to the Indian Ocean and the west Pacific. Australia is near the hot spots, and is well resourced with minerals. But water is short in many parts of Australia much of the time; as it is becoming extremely hard to obtain water in large parts of China and in swathes of India. Pakistan's problems of governability have been enhanced in recent years by random assaults of drought and flood which have also affected neighbouring provinces of India.

Industrialisation and a high consumer living standard depend crucially on there being a high availability of potable water, washing water, plant-watering water and water of the quality appropriate for a huge range of industrial purposes. Cities, even more than rural communities, depend for their survival absolutely on the efficient disposal of human, animal and industrial waste; much of which is in the present phase of technology most effectively transported in water through sewerage systems to the appropriate treatment plant. This will only be an Asian Century - or an Australian Century - if the issues or water supply and sewage disposal are mastered proportionately to the level of population and to the operative mix of economic and social activities. This requires huge ongoing investment. A superabundance of people, ideas, techniques, minerals and sustainable energy sources will founder if the supply of water fails, or if sewerage is swamped.

So what of tired old Europe, and of the no-longer-so-super USA today? Will the gods of water treat them kindly? Not so far! Texas and neighbouring states have had record-breaking drought and heat last summer, and now air currents [most notably the Jet Stream] that normally track well to the north have in recent days brought exceptional snow and cold to the south-central USA and then proceeded south of their usual route to Europe, resulting in a record drought in most of the western continent. The Alps are almost without snow [such that my Club is contemplating cancelling their annual expedition], while the eastern Rockies in North America have an early abundance of the stuff. The Danube and the Rhine are at unprecedentedly low levels for the time of year, with ships grounded at several points along the Danube; while half the City Of Koblenz on the Rhine was evacuated today [December 4] for the disposal of a huge world war two bomb that had been exposed by a remarkably low flow on the river. In legendarily wet little Britain there are floods in the west, early snow in the north and intensifying drought in the south and east.

Nature usually corrects - and frequently over-corrects - for exceptional events such as storm, drought, forest fire or deep freeze: but there are no guarantees. Large areas of Africa have passed under desert in the past half-century: conservation was not helped by local agricultural practices but desertification was certainly not caused primarily by human agency. The historically massive Lake Chad has virtually disappeared. The climate-change lobby report each and every datum that contributes to a mass of evidence that the earth is warming; and spin it with the assertion that human agency is the primary source of the warming. The geological record shows constant change: hot and cold periods have alternated over millions of years, without previously having had the assistance of mankind.

In the absence of sufficiently satisfying scientific predictions as to the impact of the predicted climate change on humans, science-fiction writers have supplied scenarios; and those that have had the greater credence tend to be the most pessimistic. Against this background speculation about an Asian Century becomes more complex and broadly less optimistic. Water, alongside energy, has to be factored into all economic planning options. But there has always been a problem about prices:Adam Smith [1776] wrote of the 'paradox of value': diamonds - which then were ornamental only, they had no industrial uses as they do now - were highly priced, while water -which was absolutely essential to support life - was a free good for the farm-based population. Water is now rapidly becoming expensive, worldwide. It has been delivered to cities at huge cost since ancient times, and in this century as cities demand more water for direct human consumption [and for thousands of other purposes] the cost of supplying and removing it are increasing: and more and more often the cost is no longer picked up by the government: the charges are imposed on the users by creating a 'market' in water supply. The cost of installing abstraction, transport and storage facilities for 'wholesale' water, added to the cost of piping the water to millions of 'retail' users in homes and businesses, means that deliverers of water supplies are natural monopolies..The creation of a wholly fictitious 'market' in these circumstances, with shares issued to real investors and a regulator [in the UK this is OFWAT] makes pricing water a fabulous piece of fantasy: yet every human's need for water every day makes water supply a fundamental reality.

The Economics and the Politics of water [and of sewerage] present an increasingly important set of considerations that should influence all economic planning and projections. "The rain falleth upon the just and the unjust" and "the wind bloweth where it listeth", according to the oldest surviving religious texts. The availability of water will determine whether economic plans succeed, or are made nonsense. Schemes to ensure the future availability of water are phenomenally expensive in both monetary cost and in the toll on human, animal and vegetable ecosystems: and on the human psyche. The global economy would be hard pressed to address a hemispheric drought: yet in most economic planning an abundance of water is taken for granted. That is foolish.No modelling that I have ever seen, for example a projection of the future trend of the euro against the US dollar, has ever made allowance for a catastrophic long-term failure of the water supply. Recognition of this basic fact calls into question the whole apparatus of economic forecasting: so who can now show that this is definitively the Asian Century?

Conservatives and Europe: More of the Same

2011-12-02T23:54:00.000-08:00

Jacques Delors - one of the all-time heroes of the European Project - has taken the opportunity of a press interview to damn the present condition of the EU, the establishment of the euro under a fake prospectus with a plenitude of false data, and the dangers of the 'Germanic view' of financial discipline.

Meanwhile the German view is absolutely prevelant in negotiations on the future of the whole project: in the absence of the current expectation by market participants that Germany would in the end 'rescue' at least a core of the present eurozone there could not be any 'value' in the euro or in any bond issued in euros. The immensely effective and intellingent - though often obtuse - French state machine that Napoleon established on the remnants of Louis XIV's omnipotent bureaucracy has failed to marshal arguments that can trump Bundeskanzler Merkel's simple housekeeping economics [which is massiviely supported in Germany]; so France will agree to a German plan, with minor modification. The full concept of fiscal union will take years to implement, and will probably cause the eurozone to shed up to a dozen member states on the way, but it will eventually come about.

The little-used second verse of the British National Anthem says:
"May She defend our Laws,
And ever give us cause
To sing with heart and voice
God save The Queen."
Successive premiers have advised the Queen to breach that sentiment, and probably her Coronation Oath; to which she has dutifully acquiesced in line with her clear understanding of her constitutional duty. It is probable that her Diamond Jubilee will be accompanied by the increase of the power of Brussels over Britain, even though the UK will not be joining the euro and may even be repatriating trivial aspects of labour law. In those terms it is a sad thought that in the jubilee year there will be almost no reference to the third verse of the anthem, in which is a plea that the Almighty will deal with those who would undermine the Monarchy:
"Confound their politicks," and "Frustrate their knavish tricks."

Cameron will not see his policy as a knavish trick. He will be persuaded - as his predecessors were - that there is no future for the United Kingdom outside the EU. So he will risk his already-tenuous popularity, and probably his position, in the pursuit of what he will perceive to be the national interest. It is not easy to imagine such a smooth operator adopting the role of a martyr, but it is probably going to be his fate; and his Liberal Democrat allies will do nothing to save him from the dilemma that will send him down that path.

Tory Eurosceptics demand 'repatriation' of powers from the eurorats of Brussels. This is such an arcane demand, in the current situation of the European Union, that the British Prime Minister can only make himself a figure of ridicule in his peers' eyes if he does anything significant to pursue their demands.This incredulity would apply not just to the leaders of the other EU members, but to Putin and Hu and Singh and Obama who are all being advised that a stable Europe is necessary for their own countries' economic success. So Cameron will go the way of Heath who lied systematically about the implications of EEC membership; of Thatcher, who talked tough yet signed up to the EEC becoming the EU; and of Major who flannelled and equivocated while he squeezed the UK into the Maastrich Treaty. Blair's 'offence' in agreeing to the tidying-up excercise of the Lisbon Treaty was relatively trivial and was popular in his own party. The last three Tory Prime Ministers eventually ignored grassroots opinion in their party to drag the United Kingdom more inextricably into the European system [whose surviving founders, not least Delors, now regard with despair]. Cameron will continue in that tradition, whetever rhetorical devices he may deploy while he diminishes his credibility among his rank-and-file as he is pushed along the lonely and painful route that lies ahead.

Leading Europe

2011-12-02T00:04:00.000-08:00

On this day -2 December - in 1804 a man originally called Nabuleone Buenoparte crowned himself Emperor in the Cathedral of Notre Dame, Paris. He grabbed the crown from the Pope, who was about to place it on Napoleon's head, on realising that he did not want even symbolically to receive the crown from anyone else. His empire was delineated as an enlargement of the monarchical France that had been toppled in 1792, but it effectively held sway over continental Europe from Gibraltar to the Russian border. After the fall of Napleon, in 1815, the old monarchies re-established their states under the tutelage of Russia at the Congress of Vienna; and in the revivified 'Congress System' that assembled in Paris in 1919 under the tutelage of the US President Woodrow Wilson a new and more subdivided set of sovereign entities was confirmed in the Treaties of Versailles and Trianon.

In 1935 Adolf Hitler began his campaign to reverse the Treaties. The Rhineland was remilitarised and Saarland was reincorporated into Germany. Attention was then focussed on incorporating Austria into 'Greater Germany' and thereafter in bringing the scattered German-speaking communities in Europe, and the territories where they were settled, also under rule from Berlin. The indigenous inhabitants who were not German would become subject peoples; and anthropological devices were bent to asserting the 'inferiority' of such people. After absolute defeat in a devastating war Germany was shrunk in size, and the scattered Germans who were able to reach the four zones of occupation - however grim the conditions in which they found themselves - were the lucky survivors.

With this experience behind them, the governments of the northern European monarchies and new regimes in the formerly fascist states that operated new Constitutions that were authorised by the victorious allies [US, the UK and France] faced a difficult future. Soviet communism had become established behind the 'iron curtain' in the middle of the continent. Defensive support from the US, and to a lesser but significant extent from the UK, was essential and came at the price of persevering with democratic institutions. Germany, in particular, took the message to heart and has developed into a genuinely democratic state whose citizens' views really counted. Thus in the euro crisis the German electorate has made clear the limits to which they are prepared to pay for the past profligacy of countries that never met the criteria for membership of the eurozone.

The German Chancellor is called upon to lead the resolution of the euro dilemma, with foreigners asking her to lead in a direction that is not wanted by her people. She grew up in occupied East Germany; battered in school by the Communist version of German history. She has transcended those experiences and embraced democracy: and she is not prepared to impose intolerable burdens on German taxpayers at the behest of Obama, Cameron or anyone else outside the eurozone. Nor will she allow the fellow-members of the eurozone to despoil the assets that Germany has painfully accumulated since the nineteen forties. Germany wants to be a good democratic partner in Europe, not a new Reich with a wish to dominate.

A new settlement is needed for the euro: with or without retaining the fringe of spivs as members. Cameron is to visit Sarkozi today, to put down irrelevant markers: he is an impotent petitioner in relation to eurozone politics. Then over the weekend the serious talking that is scheduled to take place is likely to produce the basis for a new treaty by which the eurozone can be made manageable. That which will be defined as manageable, will probably be affordable. If Germany is to fund it, Germany must be satisfied by the new settlement. The crisis - for the moment - is a crisis of the euro: non-members depend on there being a solution that they cannot significantly influence. Eurozone members need a solution; and Germany needs it to be a democratic solution, so it must have a constitutional basis - a new Treaty. The odds are that Angela Merkel will take a modest place in proving that democracy can deliver success: that would be real leadership!

Meanwhile yesterday the Governor of the Bank of England has advised British banks to be ready for rough weather if either the success or the failure of the euro has adverse effects on non-eurozone countries. He suggested that banks should not pay bonuses, but hold the cash in their reserves. This shows a sublime ignorance that was repeated by the former Labour City Minister on the Today programme this morning. The overwhelming bulk of bonuses in 'banks' are not paid to managers or 'executives': they are paid to dealers, broadly in proportion to the purely notional return that they deliver in return for gambling in cyberspace. The more inventive and arcane are the contracts that they devise, in general, the less understood are the risks that the gambles might bring on to their firm's balance sheet. The bonuses are partly paid in shares - removing a proportion of the ownership of the firm from the other shareholders - and partly in cash that is taken from the regular business turnover of the firm. The cost of the bonuses is 'real' and obvious; the risks that the dealers' gambling incurs are unquantified and dangerous: but billions in taxation has been levied on the notional turnover of the gambling, and on the bonuses, so governments have not had any interest in terminating the problem.

Central Banks to the Rescue: Again!

2011-12-01T00:41:00.000-08:00

In a significant concerted move a consortium of central banks [the currency-issuing banks of major countries] have jointly offered funds to the International Monetary Fund [IMF] which it will lend to central banks that decide they need it to lend to banks within their jurisdiction. This seems arcane to ordinary people who are only conscious that the purchasing power of their wages and/or benefits is going down while credit is getting harder to get and more expensive.Having urged people to borrow on their credit cards and in enlarged mortgages over many years of apparent prosperity, the banks are now notably unaccommodating to families and to small businesses. So if the banks are 'helping' people less, how can it be that they need to borrow more? And why should their central banks - which habitually lend to banks in their countries - want to borrow money from the IMF? If most of the major central banks have money to lend to the IMF, why are they not just lending it to banks in their own territory?

The US Federal Reserve [supported by other central banks] will indirectly give limited but significant support to the euro. International banks have begun to show their lack of confidence in the durability of the euro by selling bonds denominated in euros and buying US dollars and assets denominated in dollars. Despite the deficit on US finances, the size and strength of the US economy can still be trusted; while nobody can say how great would be the chaos that would follow if the euro collapsed. What would French government bonds be worth, in yen or pounds sterling, after a collapse of the euro? Anybody's guess is as good as anybody else's; but most commentators would reckon that French bonds would be worth more than Greek bonds, when most euro-denominated bonds were catastrophically devalued. German bonds might increase in value after a euro collapse; but the whole scenario is beyond anyone's capability accurately to forecast. So governments and central banks have adopted the view that everything must be done to prevent it happening. This is understood to mean that the European Central Bank must have enough dollars to be able to buy enough bonds to keep the market going. If the dollars are made available by the IMF, there will be strings attached: IMF loans are always conditional on the assisted country [or economic union] maintaining agreed economic policies. So the European Central Bank will be required to enforce discipline on member states' governments, or refuse to buy bonds that they have issued and let them be bankrupted. This suits the Germans very well, and worries the French who do not want the European project to be fractured by some of the reckless Club Med states dropping out of the eurozone [and maybe out of the EU as well].

So the new funding via the IMF is another step in the pathetic saga of governments and central banks making up new policy and risking inflationary pressure on the whole economy in order to 'calm the markets'. This determination to propitiate the financial trading corporations - generically known as 'banks' - shows that the governments are still scared by bankers' behaviour.

Yet the banks are created under the company law of individual countries, and are granted licenses to trade in other countries under each nation's laws. Their units of account are currencies issued by the central banks of sovereign states. Sovereign states can give instructions to central banks and central banks could enforce much greater discipline on banks than they have done in the past couple of decades: if that control was applied, and looked like failing, new rules could be imposed by governments. There is a fear that some countries would adopt new rules and others would not [or would apply them in a non-standard way], to their short-term advantage and to the disadvantage of other countries' economists. So there is to be a new round of buying the banks' quiescence while the political negotiations about the future management of the eurozone drag on. The stock markets globally rose on the news: and a superficial, brittle sort of 'confidence' returned; notwithstanding the increased risk of worldwide inflation.

The Chinese central bank took separate synergistic action to increase lending to the faltering manufacturing and property sectors. So the real confidence that has very slightly been increased by the central banks' actions on November 30, 2011 is that the political masters of all the major economies are capable of working together. There is no indication that the beggar-your-neighbour policies that intensified the global depression in the early nineteen thirties will be allowed to emerge. There is a good chance that governments will eventually become scared enough to act on Franklin D Roosevelt's most famous dictum, that "the only thing to fear is fear itself": it is especially true of the fear of bankers, but it seems that things will have to get much worse before the politicians grasp the nettle.

Weasly Georgie and Blustering Balls

2011-11-29T23:26:00.000-08:00

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!

Market Failure and Democratic Deficit

2011-11-28T00:25:00.000-08:00

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.

Democratic Deficit

2011-11-25T23:43:00.000-08:00

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.

Tragic Youth

2011-11-24T23:51:00.000-08:00

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!

2011-11-24T14:08:00.000-08:00

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.

Old Allies

2011-11-23T00:23:00.000-08:00

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.

Gift of the Gab?

2011-11-22T00:12:00.000-08:00

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.

The Taxpayer Cheated - Again

2011-11-20T21:29:00.000-08:00

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.

Work and Wages

2011-11-18T23:39:00.000-08:00

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

2011-11-18T00:11:00.000-08:00

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.

The First Million

2011-11-17T00:14:00.000-08:00

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.

Water

2011-11-16T00:08:00.000-08:00

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.

China, Europe and Quons

2011-11-14T07:13:00.000-08:00

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..

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

2011-11-13T10:31:00.000-08:00

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.

Public Property,People and Interest Rates

2011-11-11T23:36:00.000-08:00

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!

Nudges, Bribes and Good Sense

2011-11-10T23:40:00.000-08:00

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.

Markets and Memories

2011-11-09T23:24:00.000-08:00

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.

A Better Life...or a Bitter End?

2011-11-08T23:57:00.000-08:00

"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.

Mastering Markets

2011-11-08T00:21:00.000-08:00

Media commentators, and the tame Economists who provide them with sound-bites, continue to talk of 'the markets' as independent entities that have the power to undermine national economies and even multinational agencies in their endeavours to stabilise the prices of currencies [against each other] and national debt [quoted in an external currency: e.g. US bonds priced in the Yen or the Euro]. A market is merely a social structure. The dealers in markets are companies that are registered [and taxed] under the laws of specific countries, so the implicit assumption that they somehow exist as agents over which states have no control is a silly outcome from economic theory. Market participants are susceptible to government control at work, no less than they are subject to regulation when they drive home in their cars. If governments opt not to control the behaviour of marketeers, or use arcane and ineffectual methodologies that are concordant with Economists' theorising, any resulting detriment is their responsibility.

Back in the simple world that existed before the Big Bang of 1986, banks [which were then recognisable as a specific group of trading businesses] were subject to the corset. Just as a material corset pinches in the waistline of a person who is embarrassed by obesity, so the banking corset limited the extent to which each bank could expand its business. Banks were told the limits, and they obeyed: sort of, for a time. But then the Bank of England, as the regulator, allowed the rule to be 'bent': the Bank turned a blind eye to window dressing. The banks were required to demonstrate that they were keeping to the rules on one date each month; which allowed them to manage the timing of loans and repayments so that they went significantly about the permitted level for most of the month. It was by making and all-but-breaking such rules as the corset that old-style regulation became discredited. But if the rules and the methodologies had been imposed effectively they need never have become discredited. The supposedly gentlemanly banks of the pre-big-bang era slid around the rules: and their successors have continued to do so.

The present situation in both global finance and in domestic stock markets requires control. History shows that market players ignore rules that are not enforced, and try to manipulate rules and principles that are enforced; so we should be prepared now to treat market participants with firmness - and no exceptions - if rules or precepts are broken.Then new, simple rules can be made and new precepts for the conduct of market operatives can b established.

Within share markets, rules should specify that only registered owners of shares could ever vote on those shares: and company secretaries [or equivalents] should be required to certify compliance [with draconian penalties for breaches]. A corset can be applied to movements in the valuation of shares, such that sales and all other types of transfers of shares are frozen after the price has moved up or down by more than 1% in a day, or 2% in any three-day period. The period of the freeze would then be announced by the regulator, and would not be less than the time necessary for the buyers to pay for the last shares sold and register their new ownership. Exactly similar rules could apply to sales of state bonds and other financial instruments. Derivatives, swaps and other gambling slips that are created and traded as 'hedging' instruments should be subject to gambling tax of at least 10%, and subjected to gambling laws and the regulation of the Gambling Commission. The Commission could establish its own corset on the creation of each class of betting instrument.

Market participants and their conduct can be controlled - and should be controlled. The control need not be complex: just the opposite. The best control would be simple control, and breaches of both the rules and the principles must be punished by both financial levies and penal servitude.