A new book called Poor Economics - dealing with economic choices by the poor - has been published by an academic who works in the USA and has his ancestry in a new-emergent economy. The text unconsciously encapsulates a clear vindication of my concept of ik: the idea that people allocate any discretionary expenditure that they can afford on buying quons - copyrighted and trade-mark-protected entertainment, branded goods and services and other consumer experiences on which a charge could be levied for enjoying access to the input of intellectual property that makes the 'good' desirable to those who buy or hire it. Give a desperately poor person [who has just enough consumption to survive] a few extra pennies and she or he is more likely to to try to broaden their range of consumer experiences by accessing some ik than they are to buy more of the food that makes up their daily diet.
This behaviour is not what typical Grauniad readers expect, and it is 'irrational' in terms of formal Economics; but it is what the evidence clearly shows. It is also the basis on which governments [from the earliest human societies] have taxed transactions in markets. While income taxes are fashionably considered 'fair' in the degenerate cisatlantic democracies, History shows that expenditure taxes come closest to being 'discretionary' in that people opt to buy things even though they know that in doing so they are paying a tax [indeed, the majority of the price of cigarettes, alcoholic drinks and motor fuel is tax in many countries]. People are more likely to opt not to earn more taxable income than they are to refuse to purchase highly desired items because of the tax imposed on the transaction.
This experience shows clearly the irrationality of formal Economics, as it has been developed since the eighteen-sixties. Economics as presented in universities and in advice to governments is not based on evidence - it is based on assumptions as to what an ideal or 'perfect' economy might look like. The aim of Economists is to make human life conform to their models: which is a fundamentally inhumane objective. There is no reason for surprise that Economics solutions to real-world issues do not 'work'. The alternative has existed for longer than Economics has been in existence: the science of Political Economy was well-developed, and realistic, well before the pioneers of modern Economics decided to create their own academic dreamland. Lord Keynes - who never bothered with a doctorate in Economics and never held a professorial chair - was deeply learned in Political Economy, and although he was loyal to the memory of his teachers [his father, John Neville Keynes and the family friend Alfred Marshall] his work was anything but mainstream Economics: which is why Economists have so imperfectly understood it, and why so many of them have tried to push it out of consideration
My simple objective is the restore Political Economy as a science that is relevant to the human condition, and perhaps to .take some aspects of the science a small step forwards. Anyone interested in this question should open the link from this blog to my text PPE: Personal Political Economy.
Showing posts with label quons. Show all posts
Showing posts with label quons. Show all posts
Wednesday, 28 March 2012
Monday, 5 March 2012
China: More Good News
China's Premier has announced his expectation that economic growth this year will fall below the amazing 8% average of the past 25 years: to about 7.5%. Behind the raw number - which is still massively greater than the world's average rate of growth - is the important fact that this is a period of consolidation and change in patterns of consumption.
In the terms of Personal Political Economy the great shift is that there is an increasing number of empowered consumers each year: people with greater disposable income [and in some cases borrowing power that enables them to make bug purchases] are able to move from subsisting only on marcoms [basic commodities that meet needs] t being able to enjoy the experience of consuming quons. Just a few western Economists, including notably Harry Johnson, recognised in broad terms the difference between quons and marcoms. Johnson called quons 'positional goods' but he did not live long enough to develop any significant theory; and it remains probable that the mainstream of his 'profession' would not have accepted the concept. In the decades since that aborted airing of the issue, naive Economists have continued to treat 'goods' as a whole; while Chinese economic planners - in particular - have recognised the significance of the differentiation and the importance of fostering a shift of consumption from having more 'essentials' [which in excess can make people obese] to being able to acquire quons which embody consumer experiences that invoke a different sense of satisfaction.
As Chinese consumers gain flexibility over spending their increased wages they acquire the power to make a different sort of choice. In their millions they have opted to acquire different sorts of meat as well as computer games and, more recently, a whole range of 'aps'. Higher up the income scale, people have bought hundreds of thousands of quintessential quons: new apartments. Financing the boom in property has led to a huge extension of borrowing, both overt and illicit, and the authorities have not been completely successful in controlling that expansion. In periods when restraints on funding property purchases have really bitten, the market has lost momentum; then measures have been found for expanding credit again and restarting the building and the sales - and confounding the western Economists who have seen the 'property crunch' as evidence of the fundamental instability of the Chinese economy and an imagined 'need' to move to a neo-marginalist market model.
China is a much more rational system than those Economists can understand. People rising from abysmally low standards of living have been brought in their hundreds of millions into a market economy, where at first they receive subsistence wages [which a majority of urban workers still receive]. Then their productivity rises to enable them to be paid enough to become highly selective consumers of quons. The first little luxuries are the most highly prized, as they open up a new horizon for the individual. The payment made for them is sacrificial, and the satisfaction received is incalculable. Of course, if the buyer is cheated and receives consumption that is not what they had been led to expect, the anger and disappointment experienced by the consumers is also incalculable: which justifies significant control of products and markets.
The best way to raise workers' productivity in an already-industrialised country is by adding quon production to marcom production. If China can produce the majority of the quons that spread over the country from its own industries, that is the best way of combining the dissemination of quons with spreading around the incme that enables more people to consume more quons. This is precisely what is happening: and the slight reduction in reported economic growth while an increasing commitment to quon .is implemented will be followed by a period of rapidly rising productivity and then of incomes. Once Chinese quons are well proven in the home markets they will be ready for export: often under established western trade marks, which the Chinese have assiduously been buying over recent years.
Those who choose not to recognise what is happening will suffer when the development of the Chinese economy faces them with further reductions in their western standards of living. The sadness is, that Economists will not bear the brunt of the impact: that fate, as usual, falls to the poor who have been so appallingly deceived by the politicians who remain deluded by market models.
In the terms of Personal Political Economy the great shift is that there is an increasing number of empowered consumers each year: people with greater disposable income [and in some cases borrowing power that enables them to make bug purchases] are able to move from subsisting only on marcoms [basic commodities that meet needs] t being able to enjoy the experience of consuming quons. Just a few western Economists, including notably Harry Johnson, recognised in broad terms the difference between quons and marcoms. Johnson called quons 'positional goods' but he did not live long enough to develop any significant theory; and it remains probable that the mainstream of his 'profession' would not have accepted the concept. In the decades since that aborted airing of the issue, naive Economists have continued to treat 'goods' as a whole; while Chinese economic planners - in particular - have recognised the significance of the differentiation and the importance of fostering a shift of consumption from having more 'essentials' [which in excess can make people obese] to being able to acquire quons which embody consumer experiences that invoke a different sense of satisfaction.
As Chinese consumers gain flexibility over spending their increased wages they acquire the power to make a different sort of choice. In their millions they have opted to acquire different sorts of meat as well as computer games and, more recently, a whole range of 'aps'. Higher up the income scale, people have bought hundreds of thousands of quintessential quons: new apartments. Financing the boom in property has led to a huge extension of borrowing, both overt and illicit, and the authorities have not been completely successful in controlling that expansion. In periods when restraints on funding property purchases have really bitten, the market has lost momentum; then measures have been found for expanding credit again and restarting the building and the sales - and confounding the western Economists who have seen the 'property crunch' as evidence of the fundamental instability of the Chinese economy and an imagined 'need' to move to a neo-marginalist market model.
China is a much more rational system than those Economists can understand. People rising from abysmally low standards of living have been brought in their hundreds of millions into a market economy, where at first they receive subsistence wages [which a majority of urban workers still receive]. Then their productivity rises to enable them to be paid enough to become highly selective consumers of quons. The first little luxuries are the most highly prized, as they open up a new horizon for the individual. The payment made for them is sacrificial, and the satisfaction received is incalculable. Of course, if the buyer is cheated and receives consumption that is not what they had been led to expect, the anger and disappointment experienced by the consumers is also incalculable: which justifies significant control of products and markets.
The best way to raise workers' productivity in an already-industrialised country is by adding quon production to marcom production. If China can produce the majority of the quons that spread over the country from its own industries, that is the best way of combining the dissemination of quons with spreading around the incme that enables more people to consume more quons. This is precisely what is happening: and the slight reduction in reported economic growth while an increasing commitment to quon .is implemented will be followed by a period of rapidly rising productivity and then of incomes. Once Chinese quons are well proven in the home markets they will be ready for export: often under established western trade marks, which the Chinese have assiduously been buying over recent years.
Those who choose not to recognise what is happening will suffer when the development of the Chinese economy faces them with further reductions in their western standards of living. The sadness is, that Economists will not bear the brunt of the impact: that fate, as usual, falls to the poor who have been so appallingly deceived by the politicians who remain deluded by market models.
Tuesday, 14 February 2012
China Checks Out the USA
Xi Jinping, the man tipped to be the next President of China, is to spend the best part of this week inspecting the USA. Having been a member of a trade delegation a couple of decades ago, he is sensibly retracing his steps to see what has visibly changed and what is the same: including a small-town sample of middle America.
With the possible exception of Australian Labour's rejected Kevin Rudd, no party leader in the 'western' states would have a chance of making an equivalent comparison in middle China on the basis of personal experience.
The significance of such an occasion is easily underestimated. Simplistic westerners still think of China as having only recently and partially emerged from centuries of dormancy, followed by decades of communist isolation: if they think about such things at all. The emergence of China as an industrial exporter has been sufficiently blatant for a majority of newspaper readers to have some awareness of the point: and perhaps 20% of Europeans and 10% of Americans [but at least 50% of Australians] know that China has recently become recognised as the second-biggest economy - by turnover - in the world. Speculation is rife among the chattering classes as to when China will overtake the USA in Gross National Product: which will occur several decades before most forecasters reckon that income per capita in China comes close to equality with that of the USA. It is to be expected that this week's Chinese visitors will be interested to check out these perceptions while they gain a visual impression of the conditions in the fourth year of the Obama presidency. They will have done more preparatory study than their American hosts will have devoted to them: and they will be looking for hard evidence; while the Americans will be primed on the finer detail - so far as it can be ascertained - of the visitor's curricula vitarum. A dozen US agencies will record what the Chinese say, and where they go, what they eat and drink, and what they appear to be looking at; but they don't yet have any technology that enables the hosts to see actually what the visitors are seeing.
The disparities between the USA and China are increasingly significant. Today it has become known that NASA is withdrawing from a planned series of visits by unmanned spacecraft to Mars, leaving the exercise to the Europeans, because of financial stringency which is becoming greater despite Obama's profligate deficit spending. China is constantly expanding its advanced programme of space exploration. As the USA continues the withdrawal of 'advisers' from Iraq and prepares to withdraw its fighting forces from Afghanistan, China is continuing its peaceful capture of resources in Africa. The pundits reckon that there is a diminishing chance of China contributing to any bailout of the Euro, while Chinese interests are taking over European firms especially in fields of advanced technology. The sophistication of Chinese policy on all fronts is of the highest importance.
The Chinese are not technologically backward. They do not need to buy foreign firms to access technology; but they sometimes find it convenient to acquire comparators from the USA and Europe and to have the experience of marketing advanced products to the world's most sophisticated consumers. The best British universities had significant cohorts of students from 'mainland China' back in the nineteen-sixties. I have a clear recollection of Chinese students waving the 'Little Red Book' of Mao's 'philosophy' as they disrupted a lecture by Professor Bernard Crick to announce that they were abandoning their 'corrupt' and 'decadent' academic study of Politics in a doomed system, to return to China to participate in the Cultural Revolution. As soon as the trauma was over, Chinese names again appeared in the class registers of British science and technology - and social sciences - departments. Chinese students also appeared in increasing numbers in American, Australian and European universities. Chinese graduates have been taking western best practice into higher education back home for more than forty years as the student cohort within China has expanded dramatically.
Observation of the relatively poor domestic circumstances in which the great majority of the Chinese live should be balanced against the fact that millions of modern flats have been bought by consumers who have had access to credit in the past decade. Tens of millions more flats and houses are needed: and will be constructed. Financing and managing such a massive construction and sales programme in a liberalising economy is bound to be uneven: there will be an alternation of relatively easy money with hardening rates of interest, and sometimes control of monetary and credit expansion is bound to be less than perfectly efficient. In rural areas there is constant regeneration of the housing stock as village families vie with each other to ugrade or replace their houses and this process seems to be less dependant on the banks' ability to lend. Outside commentators who optimistically see calamity emerging from each adjustment in this area of policy will have a long wait for fulfilment of their direst prophesies.
Even more importantly the typical Chinese consumer who has not yet been rehoused has already moved beyond the stage of just acquiring necessities. The near-universality of mobile phones and the spread of the internet have a much greater impact in empowering consumerism than they do in fostering democracy: there is not an inevitable equivalence of rising access to mobile media and an increase in political dissent. The limited means that dissident groups had of communicating with each other in earlier generations were much more susceptible to maintain secrecy than are tweets, blogs, texts and phone calls. The most serious political and social dissentients will continue to be the most cautious users of the new media for theuir secret purposes; and they may well be heavy users of games, marketing sites and music downloaders to sustain a deceptive profile.
Consumers need to be told what is available for them before they begin to work out whether they want it and - if so - how they could afford it. The web as an advertising medium, as a proponent of fashion and a source of information on the availability for preferred brands is immeasurably powerful; and it can sweep to prominence in China way ahead of commercial television, wall posters and advertising in the press. The ability of millions of interested readers to check for consumers' comments on products and services that the potential buyers have not yet even seen - although many posts are set-up by the providers - gives the individual an unprecedented freedom of information on the basis of which she or he can decide how to spend a small surplus on wages. It is only a matter of time and learning before the squalid underground lending market is transformed into a regulated nexus of credit unions and savings-and-loans firms that can advance cash to reliable employees who will thus be able to pay for expensive quons by instalments over many months.
The spread of high level consumption - of quons [in terms of PPE: see the link from the blog] - will be far more profound and extensive in China in the next few years than any consumer enfranchisement has been in the past, anywhere in the world. China will shift from an emphasis on simple manufacturing to the assembly and marketing of sophisticated quons, not primarily for export but to enhance the standard of living of the domestic population. Those Chinese quons that compare with the best on the world market will be bought wherever free trade is permitted: and in the period while that situation is being prepared China will continue to export simple mass-produced goods around the world and thus maintain a balance of payments notwithstanding the country's voracious demands for commodity imports.
The visitors to the White House this week will be lionised by the man whom a consensus of Chinese pundits are reported to regard as a lame-duck president: in response they will be polite, reflective and cautious. There is not much that their hosts can teach them: and the reassurance that they will get for themselves from their own observation of the condition of the United States will influence China's approach to global Political Economy through the next decade.
With the possible exception of Australian Labour's rejected Kevin Rudd, no party leader in the 'western' states would have a chance of making an equivalent comparison in middle China on the basis of personal experience.
The significance of such an occasion is easily underestimated. Simplistic westerners still think of China as having only recently and partially emerged from centuries of dormancy, followed by decades of communist isolation: if they think about such things at all. The emergence of China as an industrial exporter has been sufficiently blatant for a majority of newspaper readers to have some awareness of the point: and perhaps 20% of Europeans and 10% of Americans [but at least 50% of Australians] know that China has recently become recognised as the second-biggest economy - by turnover - in the world. Speculation is rife among the chattering classes as to when China will overtake the USA in Gross National Product: which will occur several decades before most forecasters reckon that income per capita in China comes close to equality with that of the USA. It is to be expected that this week's Chinese visitors will be interested to check out these perceptions while they gain a visual impression of the conditions in the fourth year of the Obama presidency. They will have done more preparatory study than their American hosts will have devoted to them: and they will be looking for hard evidence; while the Americans will be primed on the finer detail - so far as it can be ascertained - of the visitor's curricula vitarum. A dozen US agencies will record what the Chinese say, and where they go, what they eat and drink, and what they appear to be looking at; but they don't yet have any technology that enables the hosts to see actually what the visitors are seeing.
The disparities between the USA and China are increasingly significant. Today it has become known that NASA is withdrawing from a planned series of visits by unmanned spacecraft to Mars, leaving the exercise to the Europeans, because of financial stringency which is becoming greater despite Obama's profligate deficit spending. China is constantly expanding its advanced programme of space exploration. As the USA continues the withdrawal of 'advisers' from Iraq and prepares to withdraw its fighting forces from Afghanistan, China is continuing its peaceful capture of resources in Africa. The pundits reckon that there is a diminishing chance of China contributing to any bailout of the Euro, while Chinese interests are taking over European firms especially in fields of advanced technology. The sophistication of Chinese policy on all fronts is of the highest importance.
The Chinese are not technologically backward. They do not need to buy foreign firms to access technology; but they sometimes find it convenient to acquire comparators from the USA and Europe and to have the experience of marketing advanced products to the world's most sophisticated consumers. The best British universities had significant cohorts of students from 'mainland China' back in the nineteen-sixties. I have a clear recollection of Chinese students waving the 'Little Red Book' of Mao's 'philosophy' as they disrupted a lecture by Professor Bernard Crick to announce that they were abandoning their 'corrupt' and 'decadent' academic study of Politics in a doomed system, to return to China to participate in the Cultural Revolution. As soon as the trauma was over, Chinese names again appeared in the class registers of British science and technology - and social sciences - departments. Chinese students also appeared in increasing numbers in American, Australian and European universities. Chinese graduates have been taking western best practice into higher education back home for more than forty years as the student cohort within China has expanded dramatically.
Observation of the relatively poor domestic circumstances in which the great majority of the Chinese live should be balanced against the fact that millions of modern flats have been bought by consumers who have had access to credit in the past decade. Tens of millions more flats and houses are needed: and will be constructed. Financing and managing such a massive construction and sales programme in a liberalising economy is bound to be uneven: there will be an alternation of relatively easy money with hardening rates of interest, and sometimes control of monetary and credit expansion is bound to be less than perfectly efficient. In rural areas there is constant regeneration of the housing stock as village families vie with each other to ugrade or replace their houses and this process seems to be less dependant on the banks' ability to lend. Outside commentators who optimistically see calamity emerging from each adjustment in this area of policy will have a long wait for fulfilment of their direst prophesies.
Even more importantly the typical Chinese consumer who has not yet been rehoused has already moved beyond the stage of just acquiring necessities. The near-universality of mobile phones and the spread of the internet have a much greater impact in empowering consumerism than they do in fostering democracy: there is not an inevitable equivalence of rising access to mobile media and an increase in political dissent. The limited means that dissident groups had of communicating with each other in earlier generations were much more susceptible to maintain secrecy than are tweets, blogs, texts and phone calls. The most serious political and social dissentients will continue to be the most cautious users of the new media for theuir secret purposes; and they may well be heavy users of games, marketing sites and music downloaders to sustain a deceptive profile.
Consumers need to be told what is available for them before they begin to work out whether they want it and - if so - how they could afford it. The web as an advertising medium, as a proponent of fashion and a source of information on the availability for preferred brands is immeasurably powerful; and it can sweep to prominence in China way ahead of commercial television, wall posters and advertising in the press. The ability of millions of interested readers to check for consumers' comments on products and services that the potential buyers have not yet even seen - although many posts are set-up by the providers - gives the individual an unprecedented freedom of information on the basis of which she or he can decide how to spend a small surplus on wages. It is only a matter of time and learning before the squalid underground lending market is transformed into a regulated nexus of credit unions and savings-and-loans firms that can advance cash to reliable employees who will thus be able to pay for expensive quons by instalments over many months.
The spread of high level consumption - of quons [in terms of PPE: see the link from the blog] - will be far more profound and extensive in China in the next few years than any consumer enfranchisement has been in the past, anywhere in the world. China will shift from an emphasis on simple manufacturing to the assembly and marketing of sophisticated quons, not primarily for export but to enhance the standard of living of the domestic population. Those Chinese quons that compare with the best on the world market will be bought wherever free trade is permitted: and in the period while that situation is being prepared China will continue to export simple mass-produced goods around the world and thus maintain a balance of payments notwithstanding the country's voracious demands for commodity imports.
The visitors to the White House this week will be lionised by the man whom a consensus of Chinese pundits are reported to regard as a lame-duck president: in response they will be polite, reflective and cautious. There is not much that their hosts can teach them: and the reassurance that they will get for themselves from their own observation of the condition of the United States will influence China's approach to global Political Economy through the next decade.
Sunday, 12 February 2012
Rational Markets?
The degeneration of Economics in the nineteen seventies was accompanied by an unprecedented elevation of the worst aspects of the subject as a new philosophy in politics. Economic theory moved increasingly away from common sense, into a model-world where relationships could be made 'perfect' through the power of 'the market'. Every aspect of life could be imagined as a trade. A cohabiting couple of human beings engages in a mass of interactions for which no payment is offered or received, but it is arguable that the benefits and costs that are accepted by either party tended to balance-out; and if that were not the case, the relationship would end. In an even more extreme case, over a very long term, it can be postulated that the care and money that parents levy on a child over many years balances broadly with the care that the parents received from their parents plus any benefits the parents receive in later life from their children. For some people the nuclear family turns out to be a very bad deal, and as society has become less constrained by traditional and religious rules there are more cases of parents abandoning children [or accepting the children being taken from them] and young adults severing contact with their parents.
In countries where monetarism and the dogma of rational markets dictated policy, family life responded to the withdrawal of state spending from social and peripheral educational services [such as libraries and Darby and Joan Clubs] by taking on more of the aspects of a market. The perceived lack of an acceptable trade-off between the parties in a cohabitation could easily lead to a rupture: and nobody seemed to care. Religion had less and less influence on personal behaviour as the church leaders treacherously followed secular intellectual fashion: the Bishops acquiesced as the law was changed to facilitate the new fashion. Social norms by which people had for centuries recognised that some relationships - especially the most intimate - were not conducted on a market basis were abandoned. Margaret Thatcher declared that "there is no such thing as society". The next generation of politicians who have accepted Thatcherism as positive reform movement affect to be surprised at signs of absolute societal failure, reflected in child abuse and child neglect and the riots of summer 2011; whilst such societal failure is obviously the outcome of policies that were wantonly adopted by the patrons and exemplars of the pathetic crew of politicians who sit on the front benches of both sides of the House of Commons.
Thatcher's nominally 'conservative' cohorts, who discounted traditional morality and loyalty, also supported deindustrialisation as a manifestation of modernity and applauded the emergence of the cyberspace excrescences of so-called 'financial services' which they patently could not understand. 'New Labour' went along with the fashion and repudiated its roots in trade unionism; with the exception that it was still prepared to take the unions' donations while ignoring their members' interests. Now the breakdown of social cohesion [exemplified in the disappearance of the symbols of trade union autonomy such as bands, clubs, benevolent funds and rest homes] is causing acute concern all across the political spectrum. Applied Thatcherism has undeniably ended in something much worse and more far-reaching than the 'market failure' that collapsed the financial services boom.
Since the financial services collapsed in 2008 firms in the sector have survived only under huge governmental subsidies and an outpouring of money from central banks: but the firms continue to exploit practices that politicians and bureaucrats still have not understood. The profundity of that incomprehension is evident in the political nonsense that has been spoken about 'bankers' bonuses' in recent weeks, to which reference has several times been made in this blog.
Meanwhile it remains painfully obvious that markets do not behave according to any version of equilibrating supply and demand modelling that has featured in Economics since the eighteen-seventies. Trade in even the most simple material commodities that cross the boundaries of states [or of economic communities] is hamstrung by taxes and tax reliefs or rebates, quotas, tariffs, currency manipulation, prejudicially applied safety regulations and a host of other influences which ensure that asking prices are by no means the outcome of open competition. Demand is similarly affected by tax and regulatory interventions and while people grumble about the price of petrol they buy it to enable them to go shopping for quons which they know are priced at several times more than the cost of the materials of which they are constructed.
In share and bond markets the disparity of reality from Economists' models is even more stark. Very few commentators even pretend that share markets, bond markets or any form of 'casino banking' establish prices according to 1870s supply-and-demand models. Speculative Economists still make good livings from advising the economic regulators of privatised utilities [and the firms they regulate] on the fantasy of 'rational' pricing, but otherwise the notion lives on only in academe. Government bonds are priced according to what interventionist central banks will pay for them, and shares even in successful companies are sold according to the decisions of corporate strategists in investment institutions for whom the revenue-generating potential of the shares is a minor issue - if it is considered at all. The current hoo-ha about the 'premium' above market price that should be offered by Glencore for the mining corporation Xstrata is a case in point. There was a price for Xstrata shares that had been set more-or-less by supply-and-demand on the date when the bid was announced, and the potential buyer offered approximately 8% above that price. The stage army of analysts and representatives of shareholding organisations declared that the premium should be more: the consensus settled around 30%. This was based on the sort of premium that had been offered for very different companies - in disparate sectors of the economy - during the previous few weeks. The only way a really worthwhile valuation can be established for any share is by looking back to today from the future. What a share is really worth today depends entirely on what will be paid out in dividend to the shareholders in future years, and whether the sale price of the share will increase or diminish - relative to overall price inflation - in future.
Nobody investing an insurance company's reserves, or future pensioners' savings, or child trust funds, should follow short-term movements in the prices of even [relatively] secure investments: the investments for which they are Trustees must be made for the long term. Thinking about such investment must transcend short-term conditions. The 'rational' behaviour of a hedge-fund manager who dives in and out of asset ownership with a view to profiting instantaneously from momentary juxtapositions of market positions and the availability of purchasing-power is wholly inappropriate for long-term investing institutions. Those pension funds and similar organisations that have tried to square the circle by investing a segment of their portfolio in shares in hedge funds have taken a massive gamble that could work adversely for the funds that they manage.
There is no 'right answer' to the question of how any buyer of bonds or of shares can optimise the security and the profitability of their investments in the future. But it is glaringly apparent that any suggestion that 'markets' are innately 'rational' on a day-by-day basis is nonsense. Economic theory implicitly requires participants in the market to anticipate the next move before it happens, and to back their hunch with significant trading activity. That moribund Economic theory has taken its final refuge in the universities where its aficionados still delude students whose challenges to the dogma will soon force it into its ultimate dissolution.
Pragmatism and cool thinking are of supreme value to long-term savers at this time: Economists' versions of 'rationality' bring nothing useful to the matter.
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.
Monday, 14 November 2011
China, Europe and Quons
Over the past month Chinese ministers and bankers have been quoted a lot in the European press as they have used increasingly uninhibited terminology in which to decline the privilege of putting billions of their dollars into various bail-out funds for the euro. It has been 'understood' that Chinese see many Europeans as workshy, many European products as imperfect or outdated, and European standards of living as excessive when set against national productivity and per capita output.
Economists, bankers and politicians have reportedly bought-in to the 'idea' that Britain and other laggard countries in the EU should increase their exports to China. More nuanced thinkers among these elites have particularised that the exports should be of 'manufactures': perhaps of the kinds that Germany's successful sales to China have comprised for the past few decades. The primitivism of that thinking is pathetic to behold. China has been the global powerhouse in manufacturing for two decades: it has no need to import those commodities that it has been so successful in exporting. On the basis of that success China has grown thousands of billionaires and hundreds of millions of 'middle class' consumers. These people don't think in terms of consuming 'manufactures': they want brands.
Economists' models of markets have never coped with the concept of brands: with the palpable fact that capable buyers do not haggle about prices for those consumer experiences that are most highly desired. The dogmatic theoretical framework that was developed in Europe [and adopted in the USA] between 1863 and 1875 - and is now seen by the Chinese as the flawed and failing 'European business model' - is a huge inhibition on the post-industrial economies in trying to plot a course for the future. Although they do not yet know the term, the Chinese know that they want to buy quons: more quons per head per year as their purchasing power increases. To find out what quons are, and to see that they are the key to Europe's recovery, read Personal Political Economy: accessible by the link from this blog..
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..
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