Trump's Triumph for Mercantilism

It is inevitable that the entire Economics establishment is critical of the new US tax regime that will [almost certainly] be approved by Congress today.

The package largely restores Mercantilism to fashion: that is, the idea that a country should build up its own commerce and industry, and only trade with others where there is an obvious advantage in doing so. It is significant that among the tax reductions there is a swingeing decrease in the tax on funds that are earned for the sale of intellectual property abroad. This can only strengthen the technology giants as exporters and earners, who will bring more of their overseas earnings into the USA for investment in new developments, the purchase of foreign intellectual property [UK beware!] and distribution in the USA as wages and dividend payments.

The Econocracy has been inculcated with the contrary view, that 'Free Trade' is an ideal to be pursued: as if any sane government would expose a country to imports from the rest of the world regardless of whether the prices charged are set deliberately to undercut - and ultimately to destroy - the native industry. The econocratic view has been prominent since 1766 [Adam Smith's year of publication] and predominant since 1890 [Alfred Marshall's Principles of Economics].  Britain's economic decline is pretty well coterminous with the adoption of Marshall's dogma in the universities between 1920 and 1940. That whole mindset needs to be swept away.

The great proof of the new Republican policies will be the extent to which the increasing US deficit supports growth of the US economy. If the economy is growing at a greater rate than the accumulated debt is growing, the ratio of debt to GDP will be declining, which will signify success and be the final proof of the extreme disutility of conventional Economics.

I am working slowly trough my text, and finding it a very depressing experience: the sheer pompousity of my style upsets me hugely: no wonder the last effort did not sell!

BBC Salaries and the 'Paradox of Value'

The media - not least, the BBC itself - has had a field-day taking apart the data that the BBC has been required to publish on the salaries paid to people who appear on television; if they are paid more than the prime minister. These are only partial data, because [as has been pointed out in all the reports that I have seen] those presenters who sell their services through production companies are not paid salaries as such, so do not appear in the list. Those like Graham Norton, who are part salaried and part freelance only display the salary portion of their earnings: for this, and myriad other reasons, the data are of no effective use. But that has not presented any obstacle to the pontificators who have taken politically correct positions and argued that it is 'scandalous' that men are paid more than women, and that no person from an ethnic minority is among the highest-paid.

It would be possible for the BBC to award salaries [and refuse to employ non-salaried presenters] according to a popularity poll conducted by the Guardian, which was recently shown to the overwhelmingly the Corporation's favoured 'newspaper'; but it is most unlikely that the vast mass of the population would agree with that ranking. I am constantly astonished at the vulgarity of much of the output on all channels that appears to be highly popular.

Adam Smith, the founding father of the Econocracy, wrote about a so-called 'paradox of value'. Items that are absolute necessity for the continued survival of human beings, like bread and cheese, are cheap, while essentially 'useless' objects like gem diamonds are massively expensive. Human society is paradoxical: what people are prepared to strive and compete to get seems quite irrational to other people. Once a man or a woman has enough food to eat, a place to shelter and clothing that seems to them adequate, the preferences that they display thereafter if they are able to widen the pattern of their consumption seem utterly silly to other people. There are no natural laws to direct people's choices. Various religious guidance is offered; but more often than not that steers wealth towards the religion and those who lead it, and offers no valid guidance to individuals on how to manage their own disbursement of their incomes.

The medical professions have become vocal in expressing their view as to what consumption and behaviour is healthy and what is not, and sometimes there is sufficient evidence to convince people that the advice is basically sound. Politicians are presented with speeches to read out, in attempts to steer public behaviour in directions that are seen as affordable and socially desirable; but everyone views such utterances with cynicism.

Ultimately there is no valid system for valuation of anything or anybody's action. Some things, like poisons and poisoners, can generally be condemned; but they are at the extremes of consumer behaviour and they are threatening to the majority of consumers: so collective action against them is self-defence by the majority. There will never be a definition of 'value': so there is no 'true' way of differentiating Graham Norton from Fiona Bruce. They and their agents are left to haggle; and that is the only way it can be.

Economic Literacy

The amount that has been written about the economy, over more than 2,000 years, is far beyond the capacity of any human to assimilate. Even with the most up-to-date media for abbreviation, synthesis and simplification it is impossible fully to understand Quesnay and Adam Smith and Marx and Keynes [to name just four of the most significant] sufficiently well to compare their ideas and to reach a synthesis of what can be derived from all of them together that could be taken forward as a guide for the businesswoman, the politician or the ploughman of the year 2023.

It is impossible for anyone leading a busy life in this stressful era to obtain a practical guide to navigating the economy from the great authors: or from the data published by the government's statisticians, or from the Organisation for Economic Co-operation and Development, the United Nations or the World Bank. Thus we all have to trust the simplified synopsis that each organisation produces, assuming that these public agencies retain something of their founders' mission to work to the common good of the human species; and then to apply the data as best we can.

Five years ago, the OECD [the second source referred to above] was encouraging George Osborne to press on with his destructive mission to cut government spending regardless of any potential social or political cost. Now they are singing to a different hymnsheet, whose contents are more aligned with the Labour than with the Conservative manifesto in the recent UK election. Superficially transmogrified as a 'journalist', over the past month Osborne has been one of the most trenchant critics of his own party's manifesto: thus the wheels turn to a succession of dramatically changing fashions in economic advice and in political discourse; and these do not necessarily change at the same speed or even in the same direction.

One of the great local stories of my youth in Lancashire was of the distinguished Northrop company that had produced some of the world's best weaving technology in the second great era of the cotton industry, between 1870 and 1950. Then, in the 'sixties, as Britain's competition with the Swiss and German loom manufacturers became more intense, developing countries outside Europe began to make their own machinery. Several such countries simply ignored the inconvenient fact that Northrop and Schulzer [of Switzerland] inconveniently held patents, and they pirated their choice of those patents in their own machinery. Their courts refused to enforce exploitative capitalist monopolies, when the Europeans tried to assert their rights; and that was the end of it. Northrop's market shrank fastest, and the board decided that the company must diversify to survive. Advised at great cost by an early think-tank, they bought a firm that made advanced machinery for the civil engineering and construction sectors. Then they assembled a combined team of technical experts from  the two component companies, retained expensive external consultants, and built their first demonstration equipment: a sort of primitive JCB. The contraption was first demonstrated to the board of the company and an assembly of bigwigs, including potential customers. The machine was started: and it began to bury itself. The front wheels went backwards, the rear wheel went forwards, and it dug itself into the ground, incapable moving anywhere. I have frequently recalled that incident, as a metaphor for the succession  of changes in economic fashion, which are implemented disastrously in economic policy by cobbled-together groups of supposed 'experts'

Fundamental Economic Principles and Politics

British and Northern Irish voters are about to be assailed by a wave of propaganda and comment on the major political parties' manifestos for the election next month. The idea of basing a party's electioneering on a printed document is generally understood to have originated with an open letter from Sir Robert Peel to his constituents in Tamworth, which became known as the 'Tamworth Manifesto'. Far from uniting his party - the old Tories of the eighteenth century, plus the new capitalist class - Peel's partial espousal of the popular free trade movement led eventually to the formation of the new Conservative and Liberal parties that dominated politics in the UK until the First World War; after which Labour emerged as the 'left-wing' opponents of the Conservatives, to replace the Liberals.

Now, in the second decade of the twenty-first century, we are left with the Conservative and Labour parties as the only perceived contenders to form a government; and on the basis of opinion polling it is clear that the Conservatives are most unlikely to need to ally with a minority party to have a clear Commons majority until 2022. Cynics are pointing out that parties with massive majorities - especially in highly contentious circumstances, such as the Brexit negotiations - are likely to split into factions. Chancers are hopefully suggesting that a defeat for the Labour party - if it is sufficiently overwhelming - will lead 'moderate' Labour politicians to seek to establish a new party of the 'centre left', possibly in combination with what remains of the Liberal Democrats.

The two major parties have a very clear ideological differentiation between them, which is being emphasised in the Labour manifesto and in the speeches of the Labour leader and his closet associates. A majority of Labour candidates in the election are equivocal in their support for the policies that the leader is advocating; but their futures depend on them campaigning as Labour standard-bearers: so they are stuck with the leader's rhetoric. The leader and his claque are also determined that Mr Corbyn is the elected leader of the party, and he will remain leader however disastrously the electorate rejects the party in the election. The last defeated leader, Ed Milliband, led changes to the party's rules that enabled a new cohort of members to join on very modest fees and have a vote for who was party leader. An unknown number of the new members wish the defeat of Labour and have joined as agents of disaster; and another unknown number are from the 'hard left' who have voted Mr Corbyn into his position because of his impeccably left-wing, neo-Marixt record.

The parties have made it relatively easy to explain the difference between Mrs May's Conservatives and Mr Corbyn's Labourites in terms of ideological stereotypes.

Conservative ideologues cite the eighteenth-century Scots Philosophy professor, Adam Smith, who argued that it is impossible for a government to control and economy perfectly, in the general interest; so the politicians should not try to do that. They should leave the field clear for people to follow their natural instincts in their dealings with other. Smith reckoned that there was a fundamental force in the economy: human self-interest - that provided unity and balance to the entire economy; and that politicians should just let that self-correcting mechanism work.

Mr Corbyn's critics [much more than Corbyn himself] ascribe his ideas to Karl Marx, a mid-nineteenth-century opponent of Smith's doctrine, who argued that under a semblance of free trade the system of capitalism - in which fewer and fewer people control the economy, effectively enslaving the majority of the population, whose living standards are pushed downwards - had become dominant in the world. Marx argued for the revolutionary overthrow of the capitalist
 system, and the governments that fostered it.

Nobody suggests that Mr Corbyn is a revolutionary Marxist, though he has been open to neo-Marxist opinions all his life. Nor does anybody suggest that Mrs May is an ideological devotee of the 'rational markets' nonsense that has captured the hierarchy of academic Economics. But generalised references to Smith's and Marx's arguments can be deployed to differentiate between the two major parties; and such references will be a welcome relief from the intensive propagandisation of the next three weeks.

Market Failure and Democratic Deficit

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

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

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


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

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

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

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

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