Productivity: No Puzzle

Since the Budget in the middle of this week, the media have been vociferous about the desperate prospects for British lining standards in the coming decade, all emphasising the predictions [based on recent past records] of low economic growth which is primarily ascribed to low productivity.

I have several times in this blog - as in my book - emphasised that low productivity follows from the low productiveness of the British economy: which is the direct consequence of underinvestment linked to the leeching of wealth from industry and commerce.

Share prices are high because the payout from businesses to their shareholders and bondholders is high. The payout comes in three forms: dividends on shares, interest on bonds  and share buybacks whereby the company uses some of its income to buy some of the shares from the shareholders [which it then cancels, so that there is notionally more capacity of the company to pay even higher dividend per share on the reduced number of shares]. The consequence of this massive flow of payments to the owners of companies is that the companies retain very little income for investment. The long-term consequence of this dearth of investment is that the products will become out-of-fashion, probably on the same timescale as the factories, shops and other installations owned by the company become decrepit due to lack of investment in their maintenance. Future income for shareholders will be shrunk: but by then the shareholders who have enjoyed the high dividends and the share buybacks will have sold their shares in the failing company.

While this process is going on the executive directors can be paid massive salaries to keep the show on the road. As the company is not progressing to the next stage of technology in either products or the plant with which they are made, the workforce needs to be maintained in high numbers [relative to the number of people who would be employed in up-to-date plant] so a large workforce is retained on low wages. There is no mystery here.

There are, of course, many companies that have not succumbed to this depressing slide into decay, which contribute positively to the expansion of national productive capacity and higher-paid employment; but they are no sufficiently prominent in the economy to be dominant.

There is a huge cultural issue here, which can be tackled by education and by adjustment to the tax system. But so long as our pathetic politicians and misled by the Econocracy, that process cannot begin.

The Budgetary Pantomine

The media have given a generous response to the Chancellor's Budget, emphasising that the grim assessment of the prospects for the British economy supplied by the 'Office for Budget Responsibility' gave the Treasury team very little leeway to take any risks.

The torrent of publicity and public pressure that must have made the Chancellor's life quite unpleasant ever since he accepted the job came to a peak in the days before the Budget was announced; and many 'leaks' and hints and briefings had already made it clear what the principal elements in the speech would have to be. If no more money had been allocated to the National Health Service the fuss would have been intolerable for the whole government: though exactly how much more is being given than had previously been announced is obscured by the possibility of double counting. The relative regression of the British educational system, compared especially to those in emergent countries, has been shaming for many years; so small steps to tackle the issue are the least that could be done.

As founder of a housebuilding firm, Mr Hammond can be assumed to have a direct and personal grasp of the issues about housing which had to be addressed. While still fiscally cautious, the measures announced to increase construction and to begin to restore the dream of a 'property-owning democracy'.

The intrinsic theme of the Budget, as had long been foretold, was the desperate state of the British economy: most especially the deplorable level of productivity and the yawning north-south divide. In the past year, plans to electrify the main line to Sheffield and a transpennine route have been axed, thus the lie is given to the words about redressing regional inequity. Still the government is pressing on with HS2 and Hinckley Point, which will do no good for anybody but will take up both engineering capacity and money.

Nothing will be done about productivity until radical change is introduced to the economy at large. That will be my theme for the next few days, when I will be based in Derbyshire and thus can probably have a better perspective on things.

Budget Lobbies

A British Government Budget is due to be presented to the Commons next month, therefore the lobbying has begun. Besides the usual sectoral claims from welfare interests and business, a whole range of Brexit-related fears and expectations are being pressed for the Chancellor to take note of.

The situation is bedevilled by the Brexit situation - which no-one, inside or outside government has any grip on - and further complicated by the fact that the Chancellor's 'responsible' stance [largely what the business community have demanded: to keep as far in to the European Economic Area as possible, after formal withdrawal from the EU] is under vicious and sustained attack by the headbanging Brexiteers.

Behind all this, lie crucial social and economic facts. There is no doubt that the National Health Service, the schools, the police and the armed forces are grossly underfunded. This is not simply an issue of how many billions of pounds are spent on those services: nobody can deny that aggregate allocations by the government are increasing [though some services, like the police and prisons, are struggling with the effect of previous real-terms cuts]. The essential point is that what the government has allocated is much less that is needed to meet the expectations of the changing population.

Osbornian austerity has been in force for seven years, during which the economy has stagnated. Real terms economic growth, especially in material output from factories and farms, has in most sectors declined. There is now a major milk shortage in western Europe, including the UK, because the supermarkets drove down the price of raw milk so far that hundreds of farmers went out of the business [at huge personal loss, with the slaughter of thousands of specially-bred animals]. More conspicuously, manufacturing output has declined, and productivity in most sectors of industry is at best the same as it was in 2005. Since the population is larger than it was in 2005, including more school-age children and over-seventies, the needs of education, health and welfare are growing: and the state's spending on educational and social services has not kept pace. Meanwhile, the capabilities of the health service improve and extend life have greatly advanced: if only those improving resources and facilities can be afforded, with people trained and available to provide them.

The state should be spending massively more than it is. The Chancellor and his team know this all too well; but they are steeped in the Osbornian dogma that extra spending can only come from extra taxation or extra government borrowing. Extra taxation will reduce the money that people and firms can spend on their items of choice, so 'demand' will decline; so the private sector of the economy will decline in total turnover. Extra borrowing will give the government and taxpayers higher interest bills to pay in the future: so it is an imposition on future generations that would be inexcusable to impose it. So the Treasury team is stuck with the existing austerity mantra.

This is not the whole picture, however. It is unfortunate that the deeply untrustworthy John McDonnell has been the cheerleader for an alternative proposition that really should be implemented.
In the medium term, the only way of paying for increased and improved public services is by getting more tax from the whole economic system because it is growing. A really growing economy can both pay more wages to employed people and yield more taxes for pensions, benefits, hospital, schools, police and the other essentials.

This policy option does require the government to borrow massively more money: earmarked for investment programmes of improved infrastructure [roads, railways, hospitals and housing] that provide economic returns by providing a healthier and happier and less-stressed workforce.But the government should foster much more borrowing and spending for investment in industry, agriculture and offshore activities both around the British isles and around all the UK's overseas territories [which have been wasting assets since they ceased to be needed as coaling stations and watering points for historic commercial shipping]. It is clear that robotics, 3-D printing, artificial intelligence etc are major components of the future pattern of industry; and that Britain is still a major contributor of new ideas. These are both in microprocessors and in new and improved materials that can stand the more extreme demands of the new era. The government should foster at least a dozen of the  technologically fruitful universities as hubs around which other universities, research associations and individual firms can gather their work on new things. There will always be depressives who say that you cannot guarantee which ideas will be successful and which not; so you should do nothing. That is not how the great achievements of the past were made. Bold ventures must take bold chances, and expect some failures: while experienced managers can spot cases where the money is running away faster that output is developing. And the state should provide a lot of money [from borrowing] to float the whole thing.

Companies have built up the biggest reserves ever, and have paid large dividends while not investing in new plant or higher productivity in their existing plant, and they have bought-back shares; or they have bought other companies [usually proving the old adage that the sum of the returns from two merged companies is rarely more than half of the combined return before the merger]. They should be taxed on what they hold in reserve, taxed more on what the declare for dividends, and given massive tax relief on genuine material investments. It is all so simple, so obvious!

New and improved plant is the only way to enhance productivity. Enhanced productivity is the only way to get substantive economic growth. Economic growth is the only way to get more taxation painlessly out of an economy. Taxation is the only way for governments to get the money they need to spend. Simple!

A Macron-Merkel Plot to 'Destroy' London?

The world has been so intrigued by the bizarre conduct of President Trump that far too little attention has been paid to the oddity of the French president. Mr Trump has been ridiculously intrusive in sharing his rapidly-changing views with the media and in the Twittersphere: M Macron has been tight-lipped to an unusual degree; and there have been many reports of his contempt for the media. He has been reported as saying - to his own staff - that there is no point in him giving interviews and press conferences because his intellect is so far superior to the norm that people simply will not understand his statements and his answers to questions. His path to office has been engineered by the old establishment of the 'higher schools', who experienced the agony of the Hollande regime and were determined to seize upon the national consensus that politics had reached a nadir. Thus they presented a new sort of candidate from a new generation: a man with few friends and a most peculiar private life. His allies engineered a parliamentary landslide, and he appears to be in an unassailable position with a clear popular mandate - to be 'different' - backed by a parliamentary majority.

With these assets, he is attempting - as half a dozen of his predecessors did - to attack the established position of the trade unions and of the farming interest, and to try to change the culture of work generally in France. Given the fact that recorded French 'productivity' is very much greater than the British, and not far inferior to the German, it is unclear why he thinks that such disruption is desirable or necessary; but he is having a go anyway: and it fills column inches in the press.

His career record includes a few years with a major international bank, where he greatly refined his spoken English and learned how far ahead of French practice in banking and finance are the systems in new York and London; and how much bigger are the financial markets in those centres - and in Singapore - than in Paris. He also gained a perspective an the depth of support that the London finance sector has, from a huge array of specialist lawyers and a raft of support professions such as actuaries, arbitrators, loss assessors and adjusters. Some English-speaking critics reckon that he has developed a profound envy of these markets, and that he came into office with a determination to push Paris as a rival to those centres even though the ancillary trades there are massively under-developed.

Doomsters in London have now come up with the idea that he has decided to use the Brexit opportunity to diminish London massively: and that he has enlisted Angela Merkel and the gnomes of Frankfurt to his plot. This is seen as the hidden agenda behind the determination of a loyal, ambitious and deeply egocentric Frenchman, Michel Barnier, to use his role as EU negotiator with the UK to delay and diminish whatever settlement the UK can achieve with the EU. This sort of conspiracy theory can be very powerful in times of massive uncertainty; and the absence of any such plot  - as with any negative argument in politics - is ultimately impossible to prove.

Mrs Merkel grew up, graduated and worked in the German Democratic Republic, and presumably had to learn Marxist dogma sufficiently to be allowed into university and into a research post. There is very little evidence that her education since 1990 has included any significant familiarisation with serious political economy. Her chancellorship has been supported by strong and well-informed ministers who have dealt with economic affairs and with business: she has read appropriate speeches, but no significant initiative has been attributed to her [other than the catastrophic decision to open Europe to mass immigration, which will mark her rule throughout future history]. It is possible, but improbable, that she has actually committed to any scheme systematically to attempt to smash the London market which - as is being stressed today - is an irreplaceable asset to world trade that even Germany and France rely upon heavily.

As a boy growing up in Lancashire, I became used to hearing older people say: "The French will never forgive us for saving them in two world wars", whereupon a minority said: "the First World War, yes: they don't like admitting that they needed us. But in the Second they hated us for disrupting their comfortable collaboration with the Nazis: remember, we bombed them and fought our way through France. DeGaulle was very much in a minority until the Americans put him in power."

It would be no surprise to discover that Macron grew up surrounded by the French mirror-image of such sentiments.

Back Again To Productiveness

There has been serious panic in the Treasury, which has resonated round other government departments, about the latest 'findings' of the Office for Budget Responsibility [OBR] on the basic facts about the UK economy. With no evidence in the raw data to support the supposition, it has been assumed that the productivity of the economy is increasing. If it were true, it would mean that on average, across all sectors of the economy, the output per worker per day is increasing. For half a century until 2007, year after year, on average productivity was increasing by around 2%. This constituted the strongest evidence that the output in the economy was growing and that there was more output to provide investment in  new plant in industry and commerce, and to renew the economic infrastructure, and to improve welfare services and education, and still to afford more wages for most of the employed people year after year.

It is now admitted, rather shamefacedly by the government ministers and officials who have assumed that productivity 'must have been' rising since 2010 at something close to the historic norm of 2%, that this has not been the case. The financial crunch of 2007-8 was a huge shock to the whole economy; but it has optimistically been assumed that things have been returning to 'normal' since 2010. It is also noted that the entire world economy suffered a shock in 2007, and that most  'mature' economies' growth since 2010 has been less than the pre-crunch norm. Nevertheless, the USA, Canada, Australia and the Eurozone all have experience increasing productivity in recent years: while India and China have continued to make massive strides forward [though at an irregular rate year-on-year].

I am not alone in having banged-on since 2007 about the fact that productivity in the UK is abysmal because the people who control the country - grossly misled by the Econocracy [the professors of Economics] - are totally unaware that productivity is always dependent on the productiveness of the system; but not many people have been saying it, and nobody has been listening. Productiveness is the capacity of the system to deliver increased productivity; and it can only be increased by well-targeted investment. Karl Marx was at one with the other nineteenth-century Political Economists who saw that industrial progress [and the development of the infrastructure of railways, ships and ports, postal systems, banking and the telegraph] was entirely dependent on a surplus being accumulated from the sales of current output and withheld from consumption by the people so that it can be converted into new and improved means of production. Marx thought that he had made the discovery of the age by claiming that the accumulation of capital had been captured by a 'class' of capitalists, who were taking over the levers of economic power from the landlord/aristocratic class who had dominated Europe since the dark ages. Other Political Economists saw that the development of shareholder capital allocated the profits that were derived from from industrial and commercial activity between the controlling shareholders in firms [who could decide how they divided the dividends and wages that they received between their own consumption and re-investment of the profits to produce even higher returns from the business in future years] and the other shareholders who would decide for themselves how much of their dividend income they would apply to their own consumption and how much they would spend on buying more shares. Investors in shares could choose between all the shares and bonds that were on offer in the stock market: so provided those investors were reasonably sensible the majority of buyers would opt for putting their investment into firms that were effective and innovative: those that were enhancing the productiveness of the economy, whose fruits would be seen in terms of higher productivity and high future dividends. Workers could be rewarded with high wages [or even profit-sharing schemes] and thus the entire economic ans social systems would be strengthened.

Obsessed Marxists gained control of Russia in 1917 and it took their successors seven decades to prove decisively that a simplistic Marxist regime does not work. Mao tried the same, and drove China into even deeper poverty than had been achieved in Russia; only for China to be restored by pragmatists who know better than capitalists the importance of concentrating on the productiveness of all sectors of the economy.

Britain's 'productivity problem' arises from the failure of industry and commerce to invest since the 2007 crunch. Companies have built up cash piles, some of which has been distributed to shareholders through devices such as share buy-back; while consumers have increased their borrowing to carry on buying goods as prices rise faster than wages.

Now the Chancellor of the Exchequer has been driven into a corner by the productivity data: the entire nation is heartily sick of 'austerity', but output is [at best] stagnant. Hospitals and prisons are in crisis, schools are increasingly stressed, the police has been cut back too far. What can he offer in his autumn Budget?

Jeremy Corbyn's almost pristine Marxism cannot be any sort of solution; but at least he has adopted more reasonable rhetoric for the purposes of getting elected. Provided Labour produces - and adheres to - a rational Manifesto, they offer the best bet for the nation in the coming years. But the trust problem is probably unsurmountable. 

Productivity, Productiveness and Personnel

One of my professional institutes, the Chartered Institute of Personnel and Development [CIPD], is holding its annual bash in Harrogate: a sign that the nights are drawing in and Christmas preparations should be made, Among all the stalls promoting clever systems for improving the efficacy of the personnel function and the the productivity of workers there will be the usual mix of 'motivational' and 'experiential' presentations from the stage. Employers will be encouraged to mobilise the funds that are grabbed by the government in the tax called the Apprenticeship Levy, and no doubt that will push along the trend to encourage 15-21 year-olds to undertake pseudo-apprenticeships as provided for in the state's heavy handed allocation of resources. Meanwhile the government remains deaf to requests that the support for vocational programmes that are actually sought for by people over 24 years of age, who have had time to learn on-the-job about work, and assess what they need to know and to understand to move to a better position for themselves and for their employers: a place where their productivity can really improve.

This whole structure of wasteful spending allocations and cuts is deeply depressing, and I have railed about it on many past occasions.

All I want to do in this piece is to reiterate a frequent assertion: that in Millicent Fawcett's brilliant little book Political Economy for Beginners [1870] the point is made, very clearly, that there is a link between productiveness and productivity. Productiveness is the capability of an installation - one work place, or a whole factory, or anything in between - to deliver output. Productiveness is increased by making relevant investment: in machinery, in staff training and development, in the selection of superior input materials etc. Productivity is the measure of the resultant output, stated in the cash return from the sale of the output as compared with the cash expended in wages [of management and of operatives] to achieve the output. It stands to reason that productivity can be increased by offering higher wages: sometimes. Or productivity can be increased by penalising 'slackers', as under some dictatorships: sometimes, for a short time. Or productivity can be increased [or be reported to have been increased, for propaganda purposes] by Stakhanovites: so called after a Russian worker called Stakhanov who was held up as an example by Stalin's publicists because he was alleged to have increased his effort and effectiveness out of sheer enthusiasm for the regime and its targets under the five-year-plan. The whole of the proletariat was urged to emulate him, and thus bring on the socialist paradise much quicker than could otherwise be done; and, of course, eventually the whole thing was exposed as a sham and was quietly shelved.

The most consistent and effective way to raise productivity is by increasing the productiveness of the plant that is provided for the workforce to work with, and by raising their own ability and willingness to use the a resourcesvailable optimally.

It is patently obvious that in many democracies, and especially in Britain, productivity has 'flatlined': it has hardly increased across the whole of industry and commerce, for the past decade; and, if anything, it is declining. This is because - again, over almost the whole economy - serious investment to improve the productiveness of plant and people has simple not taken place. Fake apprenticeships do nothing to relieve this situation: and companies sit on billions of pounds of profits because they do not have enough confidence in the future to apply that cash to new machinery and really deep improvement of their processes and their people.

So: what can be done about that? More next time...

Labour Luddites and a Prime Minister as a Poodle

Jeremy Corbyn has gained a new measure of popularity in recent months, largely because he has become popular. He has changed from being a crabby, obsessed 'leftie' to being an almost-charismatic emblem of popular disgust with boring, respectable politicians. In his speech yesterday his main task was to transmit some of the enthusiasm that was being shown - to excess - in the hall at the Labour Party Conference to the wider population; while combining it with a measure of responsible policy that can be presented to the electorate. Much of what he has recently advocated has my strong endorsement , based on half a century of intensive study of the history and effectiveness [or, as usual, ineffectiveness] of economic policy: especially when derived from economic theory. A modern country needs a mixed economy, with a large amount of state investment and public ownership of natural monopolies [which must, of course, be at least as well managed by the public sector as the private sector: which would be hard to achieve, but is doable].

One aspect of his speech, however, verged on the cretinous. That was his apparent Luddism in suggesting that action should be taken - including punitive taxation - to prevent human beings' jobs being taken over by robots; presumably at the behest of wicked capitalists. Virtually every forecast for the medium term future of the economy envisage huge benefits [not least, massive gains in productivity and in the range of products and experiences that will be available] due to innovations where human ideas are made into products and experiences to be enjoyed by everyone by the combined action of people and machines drawing on intensified robotics and enhanced artificial intelligence [AI].

The origin of the term Luddism comes from the mythical character Ned Ludd, the supposed organiser of the gangs of handicraft workers who broke into premises and smashed machines that were capable of replacing old-established crafts [because they greatly enhanced productivity] in the new factories, particularly in textile manufacture in the period 1790-1820. Individual employers were ruined by the Luddites, and a few workmen were penalised when they were caught in the act [or betrayed by colleagues]; but over a couple of decades the machines prevailed, and employment increased [though this often included child exploitation, until that was banned by laws that were enforced by inspectors who actually entered the employers' premises]. The ban on child labour, the ban on womens' night work, bans on the use of dangerous chemicals and processes need to be enforced in a civilised society: the state must be active in the economy to promote and preserve human rights and humans' health. One result of recent laissez-faire attitudes in society at the start of this millennium is the rise of 'modern slavery' [though I cannot detect anything notably modern about it]. The government's obsessive austerity has reduced the numbers of police officers, while terrorist threats have reoriented the work of many officers: with the result that offences like internationally-traded forced prostitution and domestic service have grown almost uninterrupted.

This is the background against which - so it is promised - Mrs May is to utter a peon of praise to the 'free market' as the central point of her speech to the Conservative Conference which opens today. This will be contrasted by the press [which is predominantly pro-Conservative] with the backward-looking old socialism and Luddism of the Corbyn effort yesterday. Mrs May will utter this claptrap in between calls to the US president asking for his intervention in a trade war with the US over the fate of the Bombardier aircraft factory in Belfast [and three other plant in Northern Ireland, as described yesterday in this blog]: a prime example of point protectionism which makes nonsense of the hard Brexiteers' vision of the future. Mrs May has to press this case, in defence of free trade ideology, despite the fact that her parliamentary majority depends upon taking a chauvinistic stance on the Bombardier issue. She lost the recent general election, and clings on to power with the votes of the Democratic Unionists. All the Bombardier plants are in constituencies held by the DUP: and the Bombardier jobs are of such importance to Catholic as well as Protestant workers that Sinn Fein's leader has signed a joint letter with the DUP leader to send to the US Vice-President. Hostilities at Stormont have been transcended by this issue; and Mrs May is compelled to make a nonsense of her free market rhetoric even as she utters it. Nevertheless, as a poodle of the Northern Ireland politicians she has no option but to demonstrate in the clearest way that her rhetoric is claptrap. Thus the Tories will be diminished by the inconsistency and infighting that will be in full view in the coming days: yet they all know they must hang on to office, or Corbyn will have the chance of his lifetime.

Jim O'Neill Tilts at Productivity

Lord O'Neill, formerly the bank Economist who coined the term BRICS to characterise the main emergent markets of the millennium period, and then went to the Lords as one of Osborne's Treasury Team to be minister for the chimerical 'Northern Powerhouse' and then had the sense to resign, is now participating [as a judge] in a competition to find somebody - presumably an 'Economist' - who can re-work the data on input-output ratios in the services sector of the British economy with a view to making the data on productivity look a bit better than they do.

Almost 80% of the economy falls into the broad category of services, from financial services to waste disposal. While it is broadly possible to work out the costs of running a factory: maintaining it, depreciating the buildings and machinery, employing the staff, buying materials, warehousing incoming and outgoing commodities etc, and to set that figure against the prices received for the output, it is much harder to do this for a bank or even a hairdressing salon with the many ancillary 'treatments' that many such establishments offer. Thus the 'productivity' of manufacturing activities can superficially be assessed with more apparent assurance that applies to services.

However, I have shown a few times in this blog that the higher 'productivity' that is reported in French and German firms, relative to British equivalents, is largely related to the incorporation of intellectual property within the prices that the firms can charge. In the many cases where firms in continental countries have the huge advantage of being recognised as the national leader in the field, they have the capability to charge premium prices and still get the demands of the public in preference to cheaper alien products. This applies to coffee grinders and to banks, as much as to car makers and washing machine suppliers.

Of course, the Germans have the advantage of the brilliant meister system of operation within companies, just as American forms benefit from massive intellectual property and a strong work ethic among the workforce [far exceeding UK norms], but many of the aspects that cause higher productivity in this country rather than that are intangible. I hope that Lord O'Neill will winkle out someone who can really provide the way to an answer; but I will not hold my breath.

Neither Econocrats Nor Brexiteers Understand Productiveness

The Archbishop of Canterbury had significant business experience in a major company before he was ordained, and can therefore speak on economic matters with at least equal authority to most Members of the House of Commons. As a member of a commission whose interim report has just been published, he has issued his own statement that declares the British model of managing the economy to be 'broken'. Living standards for the mass of the population have been static [on the average] and declining [for many] since the financial crisis ten years ago; and this is noted to be the longest period of stagnant earnings since the 'great depression' around 1870.

The interim report highlights the fact that has frequently been referred to in this blog: this issue of productiveness. It is well understood that productivity in British companies is some 20% below the more advanced European economies, and a greater productivity gap exists between the UK and the USA. Successive government members have wailed about it, and promised to do something about it; and they have not done so. The more important fact about productiveness has been ignored: and it is brilliantly summed up in the commission interim report. The British economy as a whole is recording more depreciation of productive resources than investment in new plant and equipment: if you tot up the notional 'value' of the  amount of equipment that is abandoned or accepted as becoming obsolescent [and thus recorded in company and government accounts], that total exceeds the total spend on new equipment.

In real terms, in its capacity to support living material human beings, the British economy is shrinking: FACT!

But the government asserts that there is constant economic growth. Only a couple of years ago Britain's reported growth was boasted to be the fastest in the group of advanced economies. This blog pointed out that what is recorded in these figures is the fact that more money is spent on more transactions, at higher prices; and an increasing majority of these transactions that include a material component in the goods traded are handling imported commodities. Thus the balance of payments deficit increases.

Confronting the evidence accumulated by the commission, Treasury spokespersons affirm the growth rate, the fact that on the basis of national income figures the UK still is the 'fifth largest economy in the world', and the assertion that 'inequality' between socio-economic groups is reducing. You can claim anything with statistics, of course: but the issues of productivity and productiveness are fundamentals to an understanding of the economic system: which is certainly failing in Britain.

Two groups of people who ignore the concept of productiveness are the Econocracy - the professors of Economics, as characterised by a group of dissident students - and the 'hard Brexiteers' who lurk within the Conservative Party. These are they who encourage each other to believe that the economy will automatically grow much faster if Britain is freed from the constraints of the European Economic Area.They are utterly wrong. The world does not conform to Economists' models: all countries and communities are heavily protectionist when it suits them, not least in their protection of agriculture. All the evidence of real-world activity by human animals, as opposed to the specious models that can be produced from statistics of turnover in a UK economy whose money supply has massively been inflated by a decade of Quantitative Easing, is of dereliction, decay and decline.

Regrettably, this truth has to take a major part in the blog. One could hope that things were different: but they aren't.

The Very Basics

It is some time since I simply stated the basic assumption on which this blog is based. Although it was one of the earliest principles of Political Economy to be established, I have repeatedly cited Millicent Fawcett's introduction to the topic in her Political Economy for Beginners, which was published for use in the elementary schools which all children were legally enabled to attend under the Education Act of 1870. The book can be accessed on line via the Library of the University of California. I recently commented that it is highly appropriate that Mrs Fawcett is to become the first woman honoured with a statue in Parliament Square, Westminster.

It is a truism today that when the British economy comes under examination, there is a focus on the deplorably low productivity of employment in this country. Just scratch the surface of any such discussion, and the shocking fact emerges that productivity has scarcely improved [and in some sectors of the economy it has declined] since the financial crisis took hold in 2007.

When she mentioned productivity, Mrs Fawcett also dealt with productiveness; which is virtually never mentioned at all in the current discussions. Yet for Mrs Fawcett - as for me - it is the very key to understanding the basic economic problem that bedevils the country.

Productiveness means the extent to which any economic activity yields a surplus [of output, that can be converted to cash] that is used for investment. The investment may be applied to expanding or updating the plant that yielded the surplus, or to training the people who work there, or to recruiting better-skilled people; or it can be invested in other sectors of the economy. There are three main ways in which such cross-economy investment is facilitated:
1. by firms transferring profits from one part of the complex organisation to another, or
2. by the surplus being given to shareholders or bondholders as dividends or bonuses, which they can reinvest at their discretion,or
3. by firms that retain some profit as reserves or receivers of dividend depositing the money with banks, which the banks then lend to firms with ideas for expanding or improving production.

In any of the above circumstances, there is a realistic prospect that many [though not all] of the investments will improve the productivity of the sector in which the investment is made. Sometimes an investment fails, because it is wrongly timed, or a mistaken choice of technology is selected, or inept individuals are selected to manage the investment; or for a dozen other reasons: and the more risky the investment is, while it may yield spectacular returns, it also carries a higher degree of probability that it will fail.

The crucial fact is that the only way to raise productivity [and production] in general is if the productiveness of the system is properly understood and a sufficient proportion of the surplus that is generated sector by sector is applied optimally to investment in those sectors that will contribute most to the  productivity and productiveness of the economy in the future. In simple terms, unless investment is the absolute focus of business thinking and of economic policy, the economy can not succeed optimally: because everybody in a decision-making role is looking in a wrong direction. Warren Buffet has become an international celebrity by persuading people to let him make investment decisions with their money; and by delivering excellent results [overall] for decades on end. Mrs Fawcett would have approved of him, strongly.

In Britain, especially since the crisis of 2007-8, profitable businesses have been piling up cash reserves and returning cash to investors [through special dividends and share buy-backs]. In the current circumstances, shareholders who receive these cash bonuses use them to meet current spending because real earned incomes have been tightening; rather than making their own independent investment decisions for the future. This situation has greatly been exacerbated by the combination of institutional and policy disasters that have meant that major investing institutions [such as pensions funds and insurers] are discouraged from making equity investments.

Economic policy has become a conspiracy against productiveness, rather than a stimulus to investment. That is contrary to the basics that Mrs Fawcett set out for elementary schoolchildren in 1870: and the shocking fact that cabinet ministers have no notion of the concept of productiveness is a wonderful measure of the intellectual regression through which Britain has descended since the nineteen-twenties, when fantasy Economics was allowed to supplant the truths of Political Economy: because simplified mathematical models were easier to teach than the complex inter-relationships that are exposed in Political Economy.

What Is the Point?

I often ask myself, why do I make a daily post on this blog when virtually nobody reads it?

The answer is always the same: I can prove that I expressed my thoughts and views on specific dates. So, just as I can prove that I laid out exactly why there must inevitably be a crash in the global financial market [and especially in New York  and London], over several months before it eventuated in 2007, I will be able to show how the failure of Mrs May's hubristic election campaign was predictable stage-by-stage over the past eight weeks.

Mr Corbyn showed a remarkable capability to stick to a script that was profoundly unlike his utterances over the previous four decades, and his party was rewarded with a mass of under-thirties' votes. It was essential that Corbyn kept to that brief - and wore suits and ties as he did so - and he obeyed advice [most likely, from his chum the Shadow Chancellor] to insist that the programme in the Labour Manifesto was 'fully costed', even though the possibility that their funding plan would meet the spending promises was nonexistent.

I now predict that we will not be entering a period of two-party politics such as is presented as the norm in simple textbooks on the British non-constitution. Instead, it will increasingly become clear that a majority of Brits would vote to separate the country from the political institutions of the EU - the Commission and the Parliament, where the UK has been treated with contempt since the Brexit vote. On the other hand, the more the implications are understood, the more idiotic Mrs May's talk of a 'hard Brexit' becomes. The idea that she could walk away from a 'bad deal' [which she has never defined, due to her lack of vision] and take the whole country into an economic wilderness - where she could be accepted as the New Mrs Moses - is very sick fantasy. Britain must remain within the European Economic space, preferably within EFTA which the UK helped to create while deGaulle was keeping us out the the then-EEC.

The Tories will have to show formal loyalty to Mrs May in the period during which she tries to bring solidity and stability to her shattered party.

Thus it falls to the other parties to seize the opportunity to shape a new consensus for the UK. They should not be embarrassed about proposing some of the same things as Donald Trump has offered Americans, especially massive investment largely funded by state-guaranteed borrowing. It the is underlying mantra of this blog that production of wealth in this country can only increase if we improve the productivity of our jobs, and that rising productivity can only be stimulated and sustained by emphasising the need for greater productiveness in all sectors. The majority of Conservative MPs are not idiots: they will recognise sense if it emerges through consensually agreed policies brought forward by other parties.

The key policies include:
Leave the EU political institutions.
Stay in the European Economic Area, preferably within EFTA [The European Free Trade Area].
Replace the Cameron-Osborne-Clegg austerity programme by a bold national investment and expansion plan.
Move towards a consensus on pensions, welfare and social care that is rationally affordable.
Move towards a national consensus on the funding and management of education: no new grammar schools, no more racketeering chains of academies, no tolerance of 'schools' where dogma is substituted for learning, and rigorous oversight of failing schools - combined with adequate funding in each case. Review the purpose of higher education, what is should provide, for whom, at what cost to the state and to individuals.
Fund the NHS properly, with rigorous accountability.
Restore adequate police and military protection for the nation.

A Board of Trade?

Fifty hours before the polling stations open for the General Election, I first heard the suggestion from the Tory party that the Board of Trade should be revived, with the intention to drum up trade for the UK after Brexit.

A Liberal Democrat source was reported to have given the snap reaction that this was a seventeenth-century 'solution' to a twenty-first century problem. That was a clever comment, and it shows a fair knowledge of history; but it also shows that that source has not yet caught up with President Trump's thinking. As I have pointed out in this column recently, the policies that secured Mr Trump's election victory can be characterised as reminiscent of some that flourished in the seventeenth-century. I have suggested that Mr Trump has thought on parallel lines to those of the great J-B Colbert, who built up in the French economy massively in the reign of Louis XIV. But I explicitly said that I had no apprehension that Mr Trump was consciously citing mercantilist writers: my view is that in the present conditions of global trade and technology it is entirely rational to form policies that have resonances similar to those that worked triumphantly in the mid-seventeenth century; and through the eighteenth century, in those countries where they were intelligently applied.

Britain had a Board of Trade for centuries. It was allowed to become dormant - as a committee - in the very early twentieth century, though it was not abolished; and successive Archbishops of Canterbury were surprised to find that they were members of the Board which never met. The title President of the Board of Trade was given to a member of the government who bore some responsibility for trade matters|, including the supervision of the insurance industry until Gordon Brown's restructuring of financial services when he was Chancellor of the Exchequer. Ancient titles, including Chancellor of the Duchy of Lancaster and Lord Privy Seal, remain to this day to be allocated to 'spare' ministers whose duties are determined on a short-term basis by the Prime Minister.

The new Board of Trade, if it is established, is seen as a body which will find customers for British products and services in the post-Brexit world; and seek 'inward investment' to the UK. The second of these objectives indicates that the little thinking that has been applied to the concept follows on from the second most destructive of the policy imperatives that was laid down by George Osborne. The ruinous policy of austerity [which Mrs May implemented at the Home Office in the reduction in the police force] was Osborne's number one priority. Osborne's number two objective was to attract 'inward investment' to the country; and its consequence was to sell infrastructure and the companies that operate it [such as water, power supply and railways] to foreigners. For a one-off sum flowing into the British economy, control of the firms and the income streams that they attract go to foreigners; and thereafter British consumers pay tribute to the alien owners. Even more damaging was the succession of innovative firms that had established now intellectual property that were sold to foreign owners before they had even begun to make significant profits for UK investors. Those investors, and the inventors themselves, were well-paid for surrendering their rights to future returns from the companies that could make vast amounts of money for their owners: to whom British users of the products and services would have to pay high retail prices.

Even the Econocracy* have recognised that Britain's economy is blighted by low productivity. This blog has repeatedly emphasised that productivity follows on from productiveness. As was emphasised in Millicent Fawcett's Political Economy for Beginners [1870] productiveness is the situation where firms make profits which they can invest in improving their products and processes and thus raise the productivity of their businesses. That key fact has been ignored by Economists since 1890, to the massive detriment of the economy. Selling the profit stream that comes into a business to a foreign firm gives the aliens the option to invest where they see fit, and often does nothing to enhance British productivity. So it looks as if the Tories have found yet another way of despoiling the economy, at no benefit to the population.

* For an explanation of ECONOCRACY, refer to the website of the Manchester Post-Crash Economics Society.

Productiveness, Science and Politics

In the book that is promoted in the strapline of this blog, I emphasise the difference that several great nineteenth-century political economists made between productivity and productiveness. Millicent Fawcett, whose statue will soon be unveiled at Parliament Square [the first woman to so be honoured] was an advocate of the distinction, though it is not for her achievements in economic science that she is to become a permanent feature of Westminster.

Productivity means the measured output achieved in a set time from a defined economic activity, set against the cost of the measured inputs: for example, the cost of one hour of one worker's time, plus all the resources required to enable that worker to be effective, set against the estimated 'value' of the output achieved in that hour. I have often pointed out, that a high level of productivity can be achieved by workers who unpack and sell cheap imported clothing: but their work serves to increase the balance of payments deficit and, insofar as the shop's customers borrow money to buy the clothes it increase net personal debt. The turnover of the business that employs these people is included in the national income statistics, and if that turnover increases year after year this shows 'growth' of the business [and is a potential contributor to claimed overall 'economic growth'] while its long-term detriment to the economy is obvious.

Many modern Economists argue that it is not detrimental to an economy if the country buys cheap clothes from other countries, provided it sells them high-tech exports: and that can be true, provided the overall balance of trade is favourable. When the balance of payments is adverse to a country, however, as is the case of the UK, every extension of the deficit is potentially painful [and eventually some trivial import could trigger a catastrophic recognition by global commentators - perhaps in a rating agency - that the country's situation is irrecoverable under the present regime].

Hence comes the importance of productiveness, the business outcome that meets all the costs actual production, plus providing a significant surplus to fund expansion of the factories that produce the surplus, and/or t fund research to devise even better and more innovative products by the firm, and/or to pay high returns to banks and other investors in the firm who can allocate their enhanced income flow to investments in other firms that can have innovative new products and techniques to offer, and/or some of the surplus can be paid as higher workers' wages and increased shareholders' dividends, giving individuals the power to buy the new and improved products. The more money consumers can use at their discretion to buy the products that they most prefer, that will help to steer the next generation of investment into the most lucrative channels, leading to the most successful firms in the market to have the highest level of productiveness.

Most innovation requires scientific input: new applications of proven techniques, modification of techniques, new computer applications, and new materials. A country must have a sufficient output of science graduates and high-level technical experts to serve these activities; and that must be backed up by the highest level of research.

In the current UK election, some lip-service is paid in passing to a perceived need to maintain the science base on which much of Britain's surviving material export industry depends [and which could be threatened by massive tax increases on both firms and on key employees]; but there is a tendency by politicians of all parties to put in the 'too difficult' tray the whole issue of how badly the scientific community can be harmed by a crass approach to Brexit. This key aspect of achieving greater productiveness is not at all understood, anywhere in the political class. Oh dear!

Economic Blindness

The start of 2013 has brought more mild, cloudy and [here in the Peak District] drizzly weather. Just a dawn on which to take the BBC's TODAY Programme with the morning tea.
One of several depressing items was a discussion by Economists about the phenomenon that is thrown up by British economic statistics. Employment is at its highest level in recent decades: but perceived productivity has declined and the national product is not increasing significantly [indeed, it may just have 'flatlined' over the whole of 2012].
Wages are increasing overall at less than the government's indexed figure for 'inflation', and a high percentage of the workforce are attending their workplaces for less than the 35 hours a week that sensibly can be classified as full-time employment. Some firms have put reliable, trained employees on 'short time' to keep them on-side in case business improves; but the majority of part-timers are engaged on that basis. Many of the part-timers receive only the statutory minimum wage per hour; and for the majority there is no pension provision. The new catch-all pensions legislation will draw many such people into basic schemes: which implies that a further deduction will be taken from their wages and put into a pot with a promised yield in retirement that will be derisorily small. The loss of even a couple of percent of an exiguous wage will have a depressing effect on overall 'cansumer demand' in the economy, when multiplied by millions of affected individuals; but the sums gathered for investment by the pension providers will not be sufficient to create investments that will absorb significant numbers of the unemployed into new jobs and thus increase demand through their enhanced spending.
Wage-earners are still buying imports on an heroic scale: everything from East African fruit, veg and flowers to web using technology from the Far East.
Any increase in the real wages of empoyed people, or in the number of employed people, would most likely increase the deficit on the balance of payments: so in a seriously depressing sense the government is contributing to its target of deficit reduction by keeping a pretty tight cap on incomes.

This is the context in which the Economists this morning discussed these recent economic data. One of them had recently publiched a Paper with a mind-blowingly complex title, replete with pseudo-scientific terminology adding up to zero usefulness. They spoke of productivity as if there was no qualitative difference between the various categories of output: as if it did not matter what was the level of notional value-added by different firms' plant. This is in line with the textbook assumption that all output is of widgets: it is almost impossible for non-Economists to understand the primitivism of this lack of thinking.

To say that "the productivity of the British economy is declining" is to say that products and services are sold for a declining number of money-units per unit of output. This means that prices of goods made in British factories are falling. This does not necessarily mean that fewer units of output are being sold; it can equally mean that goods are being sold for lower 'factory gate prices'. How could such a thing occur?
A] It could mean that global competition is forcing factory owners to lower the prices at which they sell their branded goods Or
B] it could mean that firms have been bought by foreign owners who buy the output as being part-processed [though it is physically complete] and then ship it to the export markets where it will be sold, and the magic transformation by which a pile of coats or a cartoon feature film becomes a branded commodity [in the terms of my own analysis, a quon] takes place outside the UK - it may even notionally be reinported to the UK as a quon - so that the final, most significant 'addition of value' is ascribed not to the UK factory but to the corporate owner's success in transfer pricing the product offshore. Or
C] it could mean that rising wages and other industrial costs in China are making it viable to start or restart or increase the output of basic industrial products in the UK; which only have modest price tags such that an increasing proportion of British factory output is of modestly  priced goods [what I describe as marcoms].

All those three possibilities point to a sharp decline in the profitability of British industry, and in the taxes that firms can pay to the state, and the level of wages they can pay to employees: all of which presage declining investment, declining public and social services, and diminishing real wages.

The policy options that are being presented to the government, and to the opposition, and to the Bank of England display the economic ignorance of Economists.

Hard times are ahead of us: and mitigation will only become feasible when the proven principles of Political Economy are reinstated as the basis of policy.

Burma, Globalisation and Automation

Yesterday by-elections were held in Burma for fewer than 5% of the seats in the parliament that is still under the absolute control of the military junta. Reports that the government was determined to permit [if not to 'manage'] the election of leading democrats appeared highly credible, and appropriate results - thought genuinely to represent the votes cast - are likely to lead quickly to some reduction in sanctions against trade with Burma and investment in Burma.

China and other south-Asian countries have ignored the sanctions in making their significant investments in the country: mostly in infrastructure [ports and highways] and in exploiting natural resources, but some factories are also appearing. The po-faced powers that have enforced the sanctions have exempted themselves from taking part in such activities: they have passively supported the cause of democracy, which gives their Grauniadistas a feelgood factor but adds nothing to their national balance of trade. By giving the democracies the opportunity to withdraw the sanctions the junta has given itself a wider range of firms who will tender for major contracts and bid for licences to export timber and minerals. A wider range of firms will also offer to open factories, providing employment for the increasing population. New factories have the highest productivity: after a century of 'automation' computer-controlled mass production can be planted anywhere in the world, and firms locate their newest plant where rents are low, where planning and pollution controls are minimal, and where labour is both adaptable and cheap. Burma can easily meet these desiderata: and so long as the regime is basically unchanged, so that alien investors can be sure of the security of their plant, the investment will come.

This paradox needs carefully to be noticed: the token acceptance of movement towards democracy will reduce the external sanctions, while the continuity of governance internally gives confidence to investors. Any move towards a socialist democracy would deter the investors. The junta have seen how China has delivered growth and prosperity without democracy; they have also experienced pressure from the democracies to allow limited access to the political process for essentially conservative indigenous campaigners for liberal ideals. The junta hope to achieve their own balance for Burma, which will enable employment and wealth to grow - making the regime less unpopular - without any lurch towards what the generals perceive as a threat of anarchy. It will be interesting to see how far the currently recognised advocates of democracy feel able to co-operate in the junta's aims without risking the loss of younger and less patient supporters.