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!

Further Disintegration: Mrs May's Government Shambles

I have met Damian Green a few times, mostly in his capacity [when the Tories were in opposition] as a director of his regional water company. I would be very surprised indeed if he wasted his time, or risked his reputation, using an office computer to spend 'many hours' watching soft porn. If his computer was used in that way, by one of the staff in Portcullis House or possibly by an intern, then it is no part of the role of the police to make accusations against Mr Green on national television. The fact that the credibility of the First Secretary is being challenged suggests that there are indeed dark forces at work, with the intention of bringing about the end to the agony of failure of this government.

The precarious state of our national politics is again emphasised by the letter to the Prime Minister [which has, of course, been released to the press] from Nigel Lawson, John Redwood, Jacob Rees-Mogg and others who seem to want the nation to be quite sure of their guilt if the economy hits the disaster to which their demands would drive it.

I find it difficult to concentrate on other issues - of which there are many - when the key elements of national sustenance and security are being knocked away. The people, whether the they voted to stay in or to leave the European Union, deserve a better politics than they are offered at present. The entire political class, including McDonnell and Corbyn no less than Mrs May and the Thatcherite dinosaurs who have just sent her a 'nudge' towards ruin, have forfeited the trust of the electorate; but we are left with no better choice, no alternative that could achieve any degree of visibility to the electorate before March, 2019.

If, in the coming days, there is real news about the economy or our society - or about Economics - I will not be able to restrain myself from blogging about it; otherwise, I shall go off-line for a period and try [yet again] to set out my current understanding in a longer piece of continuous text.

Some Distinguished Economists

I remember a time when the Econocracy had not yet emerged. Economics was beginning to flounder, as the NeoKeynesian orthodoxy that had been established in the nineteen fifties  began to reveal its fallibility in the emergence of excess inflation in the 'sixties; which was to lead to the chaos of the 'seventies and the rise of Monetarism that paved the way for the free marketeers who were the founders of the Econocratic hegemony that currently prevails.

For any reader who might happen upon this blog, and wonder what planet I am writing from, I explain that the term Econocracy has been created by the Post Crash Economics Society, a Manchester-based student movement that has successfully challenged the prevailing orthodoxy in formal Economics that has given us the 2007-9 crash, declining living standards, decayed industry, an intractable balance of payments deficit, austerity and [in a public backlash] the Brexit calamity. The Econocrats are the professors and established lecturers, senior lecturers, readers who demand of their students credulous adherence to the dogmas that have led to the ills in society and the economy that have just been listed. The Manchester group have produced the book - Econocracy -in which they explain the term in its context. They have also published research that shows how closely most university courses follow the 'official' line.

I was fortunate to pass through a university system that was vastly smaller than it is today: fewer than forty fully-fledged UK universities, and many of them had only one professor of Economics and up to six other teachers. I find it astonishing now to look back into old university Calendars and find that whole degrees were delivered by teams as small as four academics. The Great Man of the 'Economics profession' was Sir John Hicks [the first British recipient of the pseudo-Nobel prize], but the dominant individuals who decided who got appointed to which vacant chair in Economics were Lionel Robbins [Lord Robbins of Clare Market] the unchallenged boss-man of the LSE and Charles Carter, founder VC of Lancaster University and editor-in-chief of the highly influential Economic Journal.

Typically, syllabuses contained an element of Economic History [which would greatly benefit the students of today] and also a paper on the History of Economic Thought. Mathematical aspects were not prominent, and could often be avoided: in my own university it was even possible to evade the simple Statistics course by opting for Ethics. By 1945 all universities [so far as I know] had supplanted JS Mill as the basic source text by Alfred Marshall's Economics,  and they all taught about Neo-Keynesian macroeconomics. Paul A Samuelson and JK Galbraith were the best sellers among a raft of fat textbooks that combined those two syllabus areas; and when I joined the University of Sheffield as a research fellow there was a well-established game by which students tracked Prof JC Gilbert's lectures through the textbooks.

One great characteristic of the small number of leading professors of the subject was their difference in emphasis and research orientation. Bob Black at Belfast, Terence Hutcheson at Birmingham, and Ron Meek in Leicester provided a choice of interpretations that is painfully lacking today. Mark Blaug, though he went through much of his career in the shadow of Lord Robbins, was a good independent scholar. It is very sad for the subject and for the country that such a range of talent is not available today.

Disrupting the Econocracy? Thaler's Prize

The mutual admiration event of the Econocracy's year is the award of the 'Nobel Memorial Prize in Economic Science', which is announced at about the same time and in the same sort of way as the real Nobel prizes. But this prize was funded by Scandinavian banks, many decades after the original Nobel benefaction; before the absolute triumph of the 'rational expectations' dogma but well into the era when Economics had been captured by the neo-Keynesians who were about to show the dangerous impact of their views as applied [on their advice] by governments when the inflation that was the inevitable result of the flawed dogma began to bite into individuals' welfare and to undermine government strategies. Through the later nineteen sixties and into the 'seventies a back-catalogue of economic writers from the previous forty years were rewarded with the new prize, which was often split between two or more winners [thus quickly building-up the list of 'Laureates'] . After that the prize has been awarded to a mix of writers who have [in general] more or less closely subscribed to the increasingly tight dogmatic requirements of the Econocracy as they have tightened their control of the standard syllabus in Economics for students [as explained in the text Econocracy, frequently mentioned in the blog and created by the Post-Crash Economics Society at Manchester].

There have been occasional exceptions to this command of the prize by the dominant faction of Economics grandees, achievable because the electors' view of the world from the expanses of Scandinavia is broader than from Chicago, Princeton, the LSE or Cambridge; and thus other points of view have had a look-in from time to time. But those individuals have deferred, in general, to the overriding assertions of 'scientific' rigour, purity and authority that has been claimed by the Econocrats.

Thus this year's prize has been hailed as a novelty, a breakthrough; maybe as the gateway to a new era. This is the award of the prize to the hugely respected Richard Thaler, best known as the advocate of the 'Nudge Theory': a psychological insight that can be said directly to contradict the assumptions about humans' behaviour that lie at the heart of Econocratic dogma. Thaler has drawn on psychology to suggest that people do not behave as Alfred Marshall assumed in his Principles of Economics [1890] and which subsequent authoritative figures have built up constantly as the core of current theory. The critics have been delighted to welcome this award to Thaler as evidence that even the committee awarding the pseudo-Nobel Prize are open to the view that homo economicus - 'economic man' - is not a true or fair representation of real, living and breathing human beings.

The entire modus operandi of the Econocracy is based on the assertion that people will act 'rationally' if they have enough access to the facts on which they should reach economic decisions. Individuals will allocate their scarce resources to those purchases that will maximise their welfare over their lifetimes; thus dividing their spending between present needs and the demands of the future [such as providing for pensions and medical care in old age]. Recognising that resources are scarce, economic man will always buy what will do him most good and and least harm: always assuming that sufficient evidence of potential outcomes is available to him.

A few minutes' observation of real humans gives the lie to this daft assumption. Stand in any street and watch the obese people waddle laboriously along, eating something from a packet. Look at the flashy cars that young men can only afford to hire-purchase at the cost of making no provision for the future [and often not insuring the vehicles]. Look at the drunk, drugged young women in the gutters in any major city at weekend. Read the data on early deaths and completely burnt-out people still in their twenties.

Since real people behave so irrationally, it cannot be expected that whole communities whose coalmine or steelworks is closed down on the basis of fake data by a Thatcherite government [whose real objective is to eradicate the trade union that is embedded in the 'redundant' plant] will abandon their community, their homes and their connections, and migrate as individual families to places where there may or may not be new jobs for them. How do five hundred redundant miners assess such a situation? They can't: and anyway even a Thatcherite government is subject to the 'irrational' need to win the next election: so they maintain the denizens of the pit villages in situ with social security payments, early access to pensions and other means by which no 'rational' economic decisions need to be taken by the population. Hence both people and their political systems can be seen to be 'irrational' every day.

Thaler does not approach the issue as I do in this comment; but he suggests means by which people can be 'nudged' more constructively to react to the situations in which they find themselves. In doing this he has performed a major service: not just to 'economic science' but potentially to humanity. But this does not rescue Economics from its guilty hold on the essentials of human interaction: Thaler has cast light, and proved that his theories have traction in reality: which is great. But much more is needed to smash the Econonocracy; who can choose to teach their students that real people can be nudged to behave more like homo economicus: which would be the worst outcome of all.

Why Blog?

For some months I have maintained a daily post on this site. Sometimes I have reiterated a broad point of principle, at other times I have drawn attention to an emergent fact [such as point protectionism as a major factor in the Brexit debate], and on few occasions I have enunciated a new principle; but more often I have merely commented on the recent news. I have found it enjoyable - sometimes even cathartic - to have got my reaction down in writing and thus 'off my chest'; but in taking that route I have departed from the main reason for starting the blog. So I will go back to the beginning, then state my plan for the near future.

I had the immense good fortune to go up to Durham University, and specifically to the Durham Division of that university when King's College, Newcastle and the Medical School were fully parts of one federal university. Had I gone to Newcastle I would have been able to study Economics as a single subject, and my entire career would have been different. In the Durham Colleges at that time there were well under 2,000 students, which meant that teaching resources were limited. Thus the only social sciences honours degree was in Politics and Economics; and furthermore the Economics syllabus had a heavy component of Economic History, while first year students also had to study Ethics or Statistics and a modern foreign language. This meant that we had a broad introduction to the field which has made me sceptical of the inner dogmatics of Economics ever since. We were well taught in Economics: my first year tutor became a distinguished regulatory knight under the Thatcher regime and the most of the rest of the staff were comparably competent and qualified.

By the time I graduated I had become so sceptical about Economics that I applied for - and, to my eternal surprise, got - a research place to study how Economics had evolved into what it was. At that time successive governments were keen to expand the university system and money was no problem; there was a shortage of able and willing graduates [this was long before the massive influx of overseas students provided an over-supply of good graduates alongside the growing cohort of UK students]. Hence, via scholarship funding and a research fellowship I was able to complete a Masters degree and a Doctorate: and I was invited to take up a lectureship before my doctoral thesis was completed. As a teacher who rose through the hierarchy of a good university to become Dean of Social Sciences and Pro-Vice-Chancellor I maintained my agnostic approach to Economics as the neoKeynesians urged governments into the inflationary spiral that undermined the entire system after 1973. I was PVC at the time of the first imposition of Monetarist-inspired cash limits on university spending, and was instrumental in getting a cash bonus for the university as one of the few that believed what the politicians were reciting from their Monetarist mentors and capped its spending plans accordingly. By that time the amiable notion that academics had 'tenure' of their posts for life, however ineffectual they proved to be, was ended; and the state funded a round of redundancies that marked the opening of a new era of 'efficiency' that covered a reorientation of Economics towards the free market dogma. It took a few years to impose the predominance of that doctrine: the first Thatcher cuts were opposed by 364 Economists who signed a letter to the Times which was ignored by the new establishment, and within a generation their opinions were either consigned to retirement or radically revised in accordance with the new dogma.

I saw no place for myself in that world, I so moved with modest success to the City of London where I found significant fulfillment. But I have constantly developed my contrarian views on Economics; which I expressed at length in the book that is advertised on this page: The Brexit Vote and Economics. In June, 2016, I took the view that the rejection of the government's advocacy of the Remain side in the EU Referendum was also, implicitly [and perhaps more importantly] a rejection of the underlying orthodoxy that gave us Thatcherism,the financial bubble and the inevitable crash of 2007-9, austerity and widespread disillusion and cynicism to the political class. I stated my own conclusions. Then I took the decision that instead of constantly trying to issue updates of the self-published text, I should make a constant commentary on my views and on the real-world events that I believe my text illuminates. This week the Tory Party Conference is likely to provoke some splenetic reactions on my part, so I have decided to take a more cerebral line, with less frequent but deeper ruminations on the site. We'll see how that goes....

Ten Years After the Northern Rock Crisis: and the Economy is in a Worse Condition

We are now ten years away from the date when a still-under-rated minister, Alastair Darling, took the decisive steps that 'rescued' Northern Rock; and, with it, the economy. I referred yesterday to the fact that some five years after the crash a few students in the University of Manchester dared to challenge the fact that their teachers in Economics classes could not explain [within their own intellectual universe] how the crisis happened, precisely what constituted the crisis, and why they had not adjusted their 'analysis' of the economy in the light of a shattering, cataclysmic event. A second set of questions, soon to be posed and left unanswered, was how and why all these clever professors had not seen the disaster approaching.

Off her own bat, the Queen posed the same question on a visit to the London School of Economics, and received no immediate response. A few weeks later a group of professors sent her a totally unsatisfactory sequence of exculpatory piffle, which satisfied no-one. The Queen later put the same question on a visit to the Bank of England; and because they had no answer to the challenge why they had not anticipated the crisis - and thus been able to avert it, or mininise it - they could not give any sort of satisfactory response.

The Econocracy, the Manchester students' term to describe the wrong-headed devotees of free-market Economics, cannot formulate an answer within their terms of reference: I have frequently damned them in this blog, and set them aside again today as being potentially part of a solution to the mess that their dogma created when it was embraced as deep state policy by the Thatcher gang. To anybody who questions the use of the term 'gang' I respond that the tight group of people who advised Mrs Thatcher and her guru Keith Joseph, several of whom were ex-communists, intended their ideologically-driven policies utterly to destroy the mixed economy no less completely than the Bolsheviks had planned to destroy capitalism.

I have perhaps not stated this point strongly enough in this blog so far. It lies at the root cause of the crisis of 2007-9, and thus it still overshadows the British economy, and damns millions of people to diminishing real incomes as they drag out their days on minimum wages in jobs with barely measurable productivity and negative productiveness. Behind the relatively few specific policies that are still recognised as having been 'Thatcherite' [such as selling council houses] there lay a serious ideology which informed the 'deep policy' that lay behind everything that they did. This dogma is the unconditional belief that 'free markets' release the inventiveness of the brightest and best of the rising entrepreneurial cohort: and that their spontaneous actions would give sufficient positive momentum to the economy that hundreds of thousands of redundancies and billions of poundsworth of plant and equipment that were scrapped [or just left underground] could simply be ignored. If you believed this fervently enough, no specific policy and no government investment would be needed to free self-centred components of the economy to expand at an unprecedented rate.

Of course, this ideology comes up against a mass of real-world inhibitions: laws against defrauding or cheating fellow-citizens, laws controlling dangerous substances, the requirements of national defence, the absolute belief of the public that there must be a national health service, the entrenched tradition that children should attend school, and many more. While telecommunications, gas, water and electricity supply were privatised quickly, many areas of the economy could not directly be attacked in the first wave of Thatcherism. Meanwhile the flow of taxation and government spending had to be maintained to keep the publicly-recognised essentials in being; though plans could be made to privatise hospitals and schools; and other public services were required to cut their real cost to the state. The government made a virtue of shutting down the most heavily-invested material industries [where the state had been the prime investor for decades: in some cases for centuries] such as shipbuilding, iron and steel, shipyards and coal mines, regardless of the damage that was done to the economy.

Much of the material economy went into a state of shock, as protections against competing imports were removed and supply chains from foreign countries had to be accessed because British suppliers had disappeared. When the mines and shipyards and steelworks closed, their suppliers were ruined also, and many supply-chain firms failed; which meant that across much of industry there arose   a need to import components that had previously come from the British firms whose major customers had been taken out in accordance with the prevailing ideology.

The one area where buccaneering entrepreneurs could thrive was in banking and finance, where many controls were removed precisely at the time when the emergence of sophisticated computers became available to firms; while the regulators [most notably the Bank of England] did not develop the means to understand what was happening. That was the fruitful field on which the the crisis, to be recognised by ministers in 2007, was developed over twenty years from 1986.

[Next installment tomorrow]

Rethinking Economics and the Econocracy

Yesterday, after I had issued my lament for society on this blog: in which I specifically deplored the large number of students who receive degrees in Economics, I opened my TIMES to find a piece by Richard Barwell and Anthony Yates in which the 'basics' of Econocratic dogma are defended against the relative attractiveness of 'fashionable concepts'. Yates is a professor of Economics in Birmingham and Barwell is 'senior Economist' in a bank, and the article makes it pretty clear that students in Birmingham are not going to be encouraged to dabble with the growing international network which sometimes uses the descriptor Rethinking Economics. 

Yates and Barwell deny that Economics has become a narrow programme of dogma, which takes comfort in adapting simplified versions of mathematical models that have been tested and proven in Physics and Engineering, apparently to vindicate their assertions about how aspects of the economy can be understood. They refer to awards of a pseudo-Nobel Prize [called the 'Nobel Memorial Prize in Economics', and endowed by a group of bankers many decades after the real Nobel Prizes were set up] to individuals in various 'applied' areas of Economic comment and research. The Times writers imply that students can - if they so wish - divert their attention to the byways around Economics that have been explored by some of these pseudo-Nobel 'laureates' [this is my summary of their point] but such deviant study does not help them to become Econocrats.

To be gazetted as an Economist, apparently, the student must accept that the models developed by their teachers upon the work of their teachers are uniquely logical because they are mathematical. This is a re-run in these depressing times of economic failure of the argument that was first advanced in the eighteen-sixties, a period of great economic optimism, by one of the first Economists. William Stanley Jevons who held the professorship of Political Economy in Owens College, the forerunner of the University of Manchester, wrote that if Political Economy was going to be developed into a real science it must become mathematically based. He had himself come to Political Economy from a base in science. As a young man he had experienced the thrilling period of the Australian gold rush when - as in California and the Yukon - the news that gold nuggets were to be found lying on the ground and at the bed of streams brought a rush of hungry, ambitious men from all over Europe to try their luck. Jevons went to the gold field as an assayist, verifying gold discoveries and frequently disappointing those who had not found the real thing. He had plenty of time to observe the weather, the sky and the common astronomical phenomena. At that time, there was a high level of sunspot activity; which was very visible from Australia. Jevons was not the first person to form the notion that the level of sunspot activity affected the amount of solar radiation coming to the earth, and that this must surely affect the weather; but he extended the notion to become a putative explanation of the trade cycle. He wrote extensively on the applicability of statistical data to the economy, and thus earned his professorial chair. He even caused the creation of a Royal Commission - the highest level of government inquiry - by his publication of The Coal Question a book in which he declared that the entire prosperity of the United Kingdom since the first stirrings of the industrial revolution had depended on the development of steam power [both in locomotives and ships, and in stationary engines in mines and mills]. Steam power was derived from coal. Coal was still abundant in Britain in the middle decades of the nineteenth century, but demand was increasing and Jevons recognised that if the coal ran out, the economy would come to a full stop. Thus he tried to calculate the nation's coal reserves, set this against expanding demand, and concluded that well before the date when the lines expressing the depletion of reserves and the rising demand for coal converged, the national debt must be paid off and a whole new energy basis for the economy would have to be found. The Commission took evidence, cogitated, and decided that the crisis was far enough in the future not to be bothered with the issue in the short term. Jevons' two most significant attempts to cause the economy to be managed according to statistical data to which he had access were unsuccessful, but as the university system expanded teachers of Political Economy preferred to be called Economists, and tried better to develop Jevons' insight that their subject could gain credibility if it was shown to align with statistical data and mathematical models.

The first half of the twentieth century was disfigured by two world war and the removal of Russia from the normal world economy. The half-century after 1950 saw a divided human community, where the 'capitalist' states tried the flawed 'neo-Keynesian' model for economic management until it led to the chaos of the seventies, then the 'rational markets' [monetarist] model which gave the world the crash of 2007-8 [which the Econocracy did not foresee]. Economics has never given society at large any models that align with reality and with political imperatives. Thus the assumption by Barwell and Yates that the way for students to gain a broad understanding that will help them to serve humanity usefully is by learning the models that the professoriat have a vested interest in, carries no credibility. Hence contemporary students from Jevons' old stamping ground of Manchester began the challenge to the Econocracy which is simply based on the assumption that 'enough is enough'.

The Tragic Triumph of the Econocracy

'The Bank', with a capital letter, means the Central Bank in any country or community: in our case, the Bank of England; and 'the banks', as a collective, means all the other firms and partnerships that the Bank recognises as legitimate banks and thus it is authorised to give them instructions and to trade with them. Specifically, it will sell them bonds and other debt certificates [from a list of approved categories] and lend them money at a publicly announced rate of interest called 'base rate'. A large proportion of the Econocracy [the prevailing rat-pack of professors of Economics] argue that if the management of the banks by the Bank is perfectly calibrated the economy can operate perfectly. If the money-managing institutions work perfectly, the whole economy can achieve 'equilibrium': a state where all the resources available to the human race are allocated to their optimum uses.

This is a model of perfection. The realities of human existence make it a total nonsense: but the Econocracy currently has control of the channels of advice to governments, and most of the economic commentators in the media, in banks and investing institutions are required to parrot the prevailing orthodoxy: though there have always been some brave spirits who have the wit and the integrity to deny the validity of the whole structure.

So-called Monetarism, a package of ideas formulated by Econocrats in terms that could be explained to politicians and to students, was introduced in the USA in the later nineteen sixties, when the flaws in the attempt at practical neo-Keynesianism had generated a disastrous wage-price spiral as trade unions demanded pay increases to match price increases [as reported on official indexes of 'inflation']. In the early nineteen seventies the major oil-exporting countries tripled the royalties that they charged for access to their oil and natural gas; and this sent up the prices of all goods and services because of the universal impact of the costs of fuel for vehicles to deliver goods and people to where they were wanted, and the price of fuel for the provision of energy to heat homes and schools and to power factories. Additionally, petroleum was a vital ingredient in many plastics and polymers. So all prices were rising, hence wage demands took on a new stridency: and governments tried to stop the 'spiral' going out of control.

The Monetarists argued that if real control was given to the Bank and the government backed up the Bank in issuing stringent instructions to banks as to when and on when terms they could lend money to whom, that would strangle the spiral of rising wages and prices. Employers would not be able to borrow from their banks on affordable terms: so instead of borrowing to pay workers inflated wages, they would have to tell them "take what is on offer, or we'll have to close down and sack you all". Similarly, consumers would be told that they could only stay in the homes on which they were servicing mortgages provided they paid penal interest rates which went as high as 15%: which left them with little to spend on other things. So if they kept the house and the car, paying high mortgage interest and high interest on their car loans and the loans against which they had bought their fridges and TV sets, they had to reduce consumption of everything else.

The Thatcher government adopted their own version of this policy straight after their election in 1979, and by 1992 they were well on the way to implementing it. Economic growth slowed dramatically; and wage growth slowed even more. Then the government itself stopped creating money with which to maintain activity in the coal mines and the shipyards. They compensated for the loss of income that they suffered as the real economy declined from the tax revenue that they received on North Sea oil and by the sale of the privatised industries. They cut back heavily on government spending on defence and in support of industries that had previously been considered essential for national survival: steel, shipbuilding, aerospace and coal. The economy was dramatically changed, as the 'real' material productive sectors were decimated and the financial services - notably 'investment banking' - began to predominate: and that sector of the economy was supposedly susceptible to refined control by the Bank.

Thus, by 2005 the 'real' - the material - economy on which human animals depend for their continued existence and comfort was utterly denigrated and largely despoiled; and the finance sector was put in a position to undermine the entire economy through its greedy overindulgence in speculative deals that the Bank did not even understand. This is the achievement of the Econocracy. The real incomes [money wages adjusted so that their current purchasing-power can be computed] of the mass of the British population have been static for a decade. Over those years, 2007-2017, plenty of jobs have been created; almost all of them in activities that do not result in any substantive increment to the real economy. There has been a spectacular degree of material stagnation which, set alongside the government's obsession with 'austerity' [in which they have been mentored by the same Econocrats] leaves almost everyone with an awareness that the economy is not "working for me". That is because the economy is being driven in obedience to an abstract model. The fundamental reality, that the economy should be the mechanism that serves material, living, aspirational individuals, has no place in contemporary Economics. That is why Economics must be brought down from its high place in academic temples, and opened up for radical restructuring.

Economics - Again

A few days ago, I had a brief discussion with a student of History about my views on Economics and the Econocracy, referring him to the website of the Post Crash Economics Society where I first saw the very apposite term, Econocracy. On our next encounter [in the pub where he earns a crust as a part-time barman] he told me that he had mentioned my stance to a friend who is studying Economics; and the friend had vehemently disagreed with me. Perhaps we will be able to have a face-to-face discussion some time. In the mean time, I will post here today the briefest summary of my views.

I had the great good luck to go up to university when classes were small - my year in Politics and Economics comprised just 12 students - but teachers were good and libraries well resourced. The era of electronic access to data had not yet arisen, so we had to read: and we read voraciously.

At that time what we now call neo-Keyesianism was in the ascendancy, and models of the entire economy had been constructed in the National Institute for Economic and Social Research [NIESR], in the Treasury and in various universities. Given the state of development of computers at that time the models were crude and simplistic, and they could only be manipulated laboriously. Nevertheless, estimates could be made of the impact on the modeled economy of the policy options that were available to governments. These options came in two categories, monetary policy and fiscal policy. Monetary policy involved the creation of money; implicitly by the Bank of England on behalf of and with the authority of the government that owned the Bank. Banning the creation of money was a means of limiting the rate of growth of the economy; and encouraging the Bank to create money to lend to the trading institutions in the economy was a way of stimulating the growth of the money supply more generally. It was taken as a sign to the commercial banks that they could risk making more loans of their own money [deposited by their customers] whenever the Bank of England was stimulating the money supply; thus the amount by which spending could increase was very much greater than the amount by which the Bank increased the supply. Any commercial bank could borrow money from the Bank of England at a 'bank rate' [later called the 'base rate'] which was publicly announced; and lending by commercial banks was made at rates higher than the bank rate. The banks charged their customers rates of interest that varied according to the perceived riskiness of the loan. When the Bank of England had the nod from the government, it lowered bank rate; which was a clear indication to all the banks that they could drop the rates they charged to their customers, and perhaps risk extending the range. Thus a drop in bank rate, accompanied by an increase in the Bank of England's willingness to lend, signaled that banks and their customers should invest to expand the economy; thus expanding trade generally and stimulating economic growth and job opportunities in many sectors of the system could be increased.

However, at that time there were major constraints on the expansion of credit extended by banks. Their customers were required to pay cash deposits on durable consumer goods, and were only allowed to borrow a set percentage of the purchase price. Thus the spread of TV sets, washing machines and other desirable consumer goods was slowed down by the legal requirement for would-be buyers to save up for the deposit before they could enter into a hire-purchase agreement under which [having paid the deposit] they could pay off their borrowing while they had the use of the device. The firms that made the television sets were protected from foreign competition by import tariffs and controls on the amount of foreign currency that businesses could buy: so the system of monetary policy operated within a physically controlled system of protection. The present situation, where consumers can borrow huge amounts of credit and thus create the 'consumer demand' that 'drives' the economy was unthinkable. The world in which neo-Keynesiansim appeared to thrive was utterly different from the world in which we live now; and over the next few days I will outline how that change happened.

I try to keep my blogs at a modest length, and hope that anyone who becomes interested in my ideas will word-search through the archive.

The Inevitable Collapse of the Thatcher Legacy

Margaret Thatcher was a forceful woman; but I have heard or read no suggestion that she was an especially intelligent person. She gained an Oxford degree, in Chemistry, when most men in her age-group were on active service; so there were plenty of places for girls from provincial grammar schools to read for degrees. Margaret Roberts - as she then was - was guided to her modest achievement in the examinations by a postgraduate tutor whose war-work was the important search for inert gasses that could be used to fill fuel tanks on aircraft after the fuel was used, thus reducing the very high risk of the tanks catching fire and taking the 'plane down. Forty years on, Margaret Thatcher rewarded him with a peerage. He was a man of the highest non-religious integrity, and I was privileged to know him modestly well.

I begin with that reminiscence because I think it important to recognise that the concepts that Thatcher espoused in her mature political career were not hers. The came from others who were prepared to share her political agenda: and, indeed, to push it further than she would naturally have been inclined to take it. Prominent among these were the several economic advisers who progressively led her into the set of ideas that are still characterised as 'Thatcherism'. The core of all the thinking that she accepted was the idea that markets are 'rational': the notion that the economy is a natural system that operates according to its own natural laws [just like the material universe is subject to Newton's laws - except where it is not]. Those who advocated this principle, of whom the first in Mrs Thatcher's environment was Keith Joseph, argued that the manifest weaknesses that had engulfed the British economy in the nineteen seventies were the inevitable outcome of decades of the 'mixed economy' in which both Labour and Conservative governments had been prepared to over-rule market forces in order to achieve social and political priority objectives. Thus when Mrs T became the Prime Minister the economy was completely disoriented from what would be achieved if it was working 'properly'.

It was inconceivable that half a century of state direction could all be removed at once, so a progressive pattern of removal of the state from the economy was initiated. A major component of this project was privatisation of the major utilities. Water, gas, electricity, airlines, railways, telecommunications, radio and TV and a huge range of other supplies and services were predominantly controlled [and owned] by the state. The clever new idea was that they should be sold to the people, who would become active shareholders who would hold the boards of the privatised companies to account, thus ensuring that they competed openly and fairly in an efficient market. That didn't happen; large swathes of the shares were bought by financial institutions when they were first offered for sale; and the hundreds of thousands of citizens who did buy such shares happily sold them on to institutions at prices higher than they had paid for them: so in a short time institutions owned virtually all the shares. In many cases the utilities were then sold on to foreign investors.

Later, particularly under the Cameron governments, it became clear that the supposed 'markets' were not functioning at all well. Customers of the gas and electricity retailers did not spend many hours every year deciding which company to use for the coming period, as the Economists' market model demanded. Very recently, the May government has indicated that it will 'cap' prices - because competition has failed to keep retail prices 'competitive' or affordable.

Behind this retail market failure is an even more fundamental failure of the market in supplying 'wholesale' electricity. In total defiance of market Economics, successive governments have opted to subsidise 'green' energy, notably windmills, in order to meet arbitrarily assessed targets for the reduction of emissions of the gasses that are said to cause global warming. In principle, that can only be a 'good thing'; but when the cost of it is laden on the customers' bills, the pretence of creating a 'market' in energy is exposed as mere rhetoric. When customers are additionally laden with the forward costs of the 'most expensive structure in the world' - the Hinckley Point nuclear power station [that may never work] - the whole myth of rational markets is destroyed.

Point-by-point, the Thatcher legacy has unwound; and as relief  from the current election rhetoric, I will extend the point of today's message over other sectors of the economy.

Leaving Politicians To It

A Greek journalist faces arrest and imprisonment for publicising a list of reputed avoiders of foreign-exchange regulations, with the imputation that many of these people were corrupt and/or tax evaders. Successive Greek governments have held, and apparently ignored, the list. A new super-tough budget has been laid before the parliament which will further impoverish the residue of the middle-income groups and increase unemployment throughout the age spectrum. Yet the challenges to the government come as ritualistic strikes and occasional riots, rather than as any movement with the potential to bring down the government. The so-called 'technocrats' [some of whom are classic eurorats] will continue to perform the charade of compliance with German demands for austerity that does not affect their own caste.

The British parliament last evening voted to demand that the Prime Minister should use his entire power and influence to bring about a real-term reduction in the European Union budget. A significant minority of the Conservative Members of Parliament voted for the motion; which nobody expects will have any effect other than to deepen ancient fissures within the tory party. Earlier in the day the government had orally accepted and institutionally shelved a Report by Lord Heseltine that proposed a reversal of forty [or more] years of centralising bureaucracy which was dedicated to the systematic destruction of industry around the country. Some parts of the former deputy prime minister's Report will receive some lip service: the Prime Minister may attend one or two meetings of a National Growth Council before it is handed down to Clegg and allowed to run into the sand; and there may be announcements - vitiated in the event - about the manner in which flows of funds already announced to support 'investment' will be publicised so that they can appear to be responding to the Heseltine proposals. As usual, the politicians will ignore the best advice and steer a course that avoids obvious day-by-day responsibility for company failures and the increasing dependency of the economy on imported manufactures. The process that Harold Macmillan condemned as "selling the family silver" back in the nineteen eighties continues, as beloved brands [most recently Branston Pickle] follow the utilities into alien ownership so that an outflow of revenue to brand-owners augments the flood of payments for imports.

Britain desperately needs a growth policy: but even more it needs a capitalist policy. The term capitalist is massively misunderstood. One of the most capitalist regimes in world history was that run by Stalin; in that no regime has comparably sacrificed human living standards, human rights and human lives in the interests of investing in the growth of industrial production. Since the invention of Economics, with its atomistic obsession with transactions and its determination to submit transactions to 'free market' conditions, 'capitalism' has been retained only as a term of political abuse. One needs to go back to the Political Economy that pre-dated Economics, as exemplified in the school textbook by Millicent Fawcett that featured in my last blog, to get an  understanding of why the concept of capitalism is a good and necessary central feature of economic thinking.

Heseltine's plan, even if it were to be adopted, would be useless without a monitoring organisation to ensure that all the investments that it supports are capitalistic. Heseltine comes close to recognising that it is essential to rebuild and consolidate the nation's capital; its capacity-to-produce material things. To do that the system needs to deliver the services [appropriate education, excellent workplace training, access to applicable research, real-world banking, positive and powerful trade unions, supportive planning rules and flexible trade regulations] that conduce to making things. In one of the last textbooks of sensible political economy Mrs Fawcett emphasised that a country will fail unless its economy maintains and develops - continually - enough capital to provide all that people demand [and can pay for]: either by producing the required commodities and services within the country or by selling exports that directly pay for the things and services that are imported. It will be a hugely difficult and prolonged task, to compensate for half a century of borrowing [both within the economy and from foreigners] and asset sales to pay for imports. It has seemed comfortable to generations of politicians to observe reports of a growth of transactions - which have increasingly represented statistics of material imports and of contracts that simply churned debts - and accept a delusion that the economy was growing. In a world where 'capitalism' and 'capitalist' have been terms of abuse, a concern with material reality became an irrelevance.

 In future bank lending, government investment, and investment by the few valid pension funds that survive, and all other flows of investment should be steered towards investments that really do strengthen the nation's capital. That requires not merely a radical shift of policy but also an intellectual revolution. The renewal of the economy cannot be entrusted to machine politicians. British politics will go the way of Greek, unless the inexorable decline into poverty is halted. Capitalism is the only way out of the crisis.

Millicent Fawcett: Political Economist

Over the past few weeks I have been analysing Political Economy for Beginners [1870] by Millicent Fawcett, who is now famous as one of the originators of the modern feminist movement. While it is the modern myth that these women were all militants, hostile to the political system as it was before the enfranchisement of women, the history of Dame Millicent [as she became] was very different from that model. The little book on which I have been working was published in the year when primary education was made available at the state's expense to all children: compulsory attendance quickly followed. Millicent was at that time married to Henry Fawcett, a remarkable man who was Professor of Political Economy in Cambridge University, a Member of Parliament and a minister in the Liberal government. Although blinded in an accident in his 'twenties he pursued both his academic and political careers with great effect: so it is almost unremarkable that he married an exceptional woman. After Henry's relatively early death she continued to research and to write on economic and social issues, and earned huge respect in political circles and in society.

When the British government came under heavy international criticism for confining women and children in concentration camps during the Boer War, Mrs Fawcett was invited to go to South Africa to inspect the camps and to comment. She was chosen because of her reputation for integrity with intelligence. Her report was devastating and led to a rapid change of policy. Her example was heavily quoted as evidence of the worthiness of women to participate fully in the political process; and I believe that she would be astonished if she could see that even today women are heavily unrepresented on the judicial bench, in the cabinet and in the boardrooms of major businesses. There is plenty of work for the Fawcett Society still to do!

It is an incidental tragedy that the Governor of German South-West Africa [now Namibia] was called Goering: in the nineteen thirties his son Hermann, Hitler's closest associate, attributed the concept of Nazi concentration camps to the British original which Millicent Fawcett had condemned.

The full text of her first book is available on line, thanks to the University of California Library. I think that it is extremely important, both because of the authority and distinction of its author and because of the exact time when it was written and developed through a large number of successive editions. Mrs Fawcett was convinced of the validity of basic doctrines in nineteenth-century 'classical' Political Economy that were soon to be set aside by the new wave of Economists. The leader of the new movement in the United Kingdom [and, indeed, the entire English-speaking world] was the man who was appointed to the late Henry Fawcett's professorship in 1884, Alfred Marshall. There had been two strong candidates for the job: Marshall, who wanted to present the new 'Economics' as a 'science'; and William Cunningham who had effectively invented analytical Economic History. Cunningham would have been very firmly an exponent of Political Economy [as was Mrs Fawcett]: elucidating the principles that politicians should understand and incorporate into public policy in order to create the framework within which the economy could thrive and grow. Marshall shared with several thinkers of his generation a belief that Marxism was a real and present danger to the existing social, political and intellectual order, and since Marx had used selected principles from Political Economy to formulate his hostile analysis of 'capitalism' Marshall was determined to present a wholly different view of the economy.

During the past 150 years Economics has dominated thinking and policy about economic issues in the west; and its accumulated effect - especially in the United Kingdom - has been catastrophic. Economics has concentrated on refining a normalised model of market processes, combined with an increasingly frenetic assertion of the dogma that free markets are the ideal structure of an economy while all the evidence of the real world has indicated precisely the opposite. The ultimate catastrophe to which the Economic establishment made a major contribution was the rapid growth of markets that the impotent and uncomprehending regulators simply did not attempt to understand. Those markets - mostly in intangible 'products' which, in some cases, defied clear definition -  produced the ultimate [almost terminal] market failure in 'finance' that came within an ace of undermining the entire Atlantic Economy. Firms passed from being notionally untrammelled entities to being nationalised or subject by government and state agencies to forced mergers into entities that were abjectly dependent on government and central bank funding.

If the regulators, central bankers and ministers of finance who held office between 1980 and 2007 had been educated in the principles that Millicent Fawcett elucidated they would have prevented the banks and securities firms from doing what they did. In the aftermath of the crash one leading British regulator said that a significant proportion of the activity that had gone on in the City of London and in other financial marketplaces was of no material benefit to the real economy: and he attracted a chorus of approval. Mrs Fawcett had been explicit on the differentiation of productive from unproductive labour.

While the essential principles of Political Economy, as elucidated by Millicent Fawcett, can be applied directly to the contemporary economy, some of the expression and most of the examples are incomprehensible except to expert historians. For example, her analysis of money supply was set in the context of the full gold standard, which has no relevance to the post-1931 world. I have therefore constructed a guide to the text, with extensive quotations that elucidate all the key principles in Millicent's words. I am now checking the guide for errors; and would welcome any offer to do some proof-reading or reality-checking.
Publication on-line soon!

Money and Value

It is a key principle in my text Personal Political Economy - PPE [see link from this blog] - that while value is a common noun in everyday speech, and to value is a verb that matters hugely to anyone who is contemplating selling a house or an antique cabinet, the search for a comprehensive 'theory of value' has been one of the most useless components of academic Economics. Sometimes a chapter heading on the lines of The Theory of Value appears in a textbook above an exposition of the idealistic, mechanistic, normative model of Supply and Demand that has only ever applied to any real-world situation by chance for a very short period in specific circumstances. The concept that the untrammelled operation of Supply-and-Demand would 'in the long-run' produce an equilibrium, under which the optimum distribution of the available resources would be achieved throughout the economy, is utterly impractical and unconvincing.

In examining what is the 'optimal' allocation of wealth, Economists have no concept of justice that they assume to underpin their value theory. Tutored in Economics, the contemporary pack of machine politicians present voters with promises that they will promote fairness, which boils down to a variant of the package of trivial changes in taxes and benefits that the civil service Grauniadistas consider to be feasible. Fairness is one of the woolliest slogans that can be devised; but in contemporary politics it is a descriptor of a mixture of policies that intrude into the economy, and divert the patterns of payments, to achieve social objectives that might satisfy naive concepts of 'justice'. The dogmas of Market Economics that drove politics in Britain and the USA from 1980 to 2008 are in direct conflict with the 'fairness' agenda, which implies increasing transfers of wealth from those who generate it to the mass of dependants of the state: requiring more taxes from the diminishing minority of the population who can be classified as 'productive', and more government activity. While the Obama administration has increased state spending, especially through benefits and by funding projects that would not attract market investment in current circumstances [if ever], the UK government is committed to containing government spending and - in particular - capping benefits. The US economic data appear to show modest recovery [but not enough to pay for the increase in borrowing]: the UK data show less certainty of growth and increasing state borrowing. Benefits have been restricted for many tens of thousands of people, who will experience real hardship, while spending on benefits in total is still increasing.

Tens of thousands of immigrants are admitted every year to the UK who have no prospect of employment, and often a positive intention not to work. These people are admitted as asylum-seekers and as 'family members' of settled immigrants and as 'students' [notwithstanding efforts by the underperforming UK Border Agency to stem the flow]. These new migrants, and the children of settled immigrants, increase the total cost of benefits plus social housing plus schools plus health care: while the government attempts to reduce the rate of increase in spending on all those services by reducing eligibility to indigenous British subjects, many of whom have become retired or redundant after a lifetime of taxpaying employment. The resentment that has built up is not simply directed at the Conservative-LibDem coalition; voters recognise that a Labour government would not depart significantly from these policies, whatever the windbags say in their tedious speeches where attacking the coalition is much easier than making convincing policy proposals.

Economists [who are still being over-produced by the bloated university system] are now finding employment as 'valuers' of medical treatments, environmental 'assets' and other assets and actions that nobody considers can be traded on a basis of market Economics. The Health service evaluates treatments by setting the improvement in patients' lifestyle, or the prolongation of their lives, against the price of the medicine and the wages of the staff who administer it and the estimated cost of space and supplies in the hospital. It is impossible to 'value' a human life, and it is mere charlatanry to purport to state a 'benefit' that is equal to, or superior to, the computed cost of the treatment. Similarly any attempt to state the 'value' of a clean river or pollutant-free farming in money terms is simply voodoo Economics since nobody ever would, or could, set a price on such 'benefits' that the public would be willing to pay. There are areas of life where most mature people would agree that those who want to consume a product should be free to do so if their earnings enable them to afford the price. There are many other areas, such as healthcare and the preservation of parkland, where the vast majority would agree that the cost should be met from taxation. Whether it is local taxation or national taxation, whether it falls on income or spending [or whether the taxation is disguised as levies on water companies or petrol sales, so that the consumers paying the tax do not even recognise it] it is a societal levy. The more that deluded politicians follow the Economists' advice to 'privatise' public assets, the more they promote either the degradation of the environment or of health care or of education or the concealment of taxes within the prices that people pay for the output of the privatised businesses. The whole thing is a con: and the proof of that is that there is no credible system for the valuation of the 'benefits' that can be claimed to offset the costs of providing these services. The outcome is diminishing credibility for politics.

Gold and Value

When a group of aspirant 'scientists' developed modern Economics, between 1860 and 1875, they were not able to dream up any alternative to the monetary system that was endorsed by the precursor Science of Political Economy. So in tandem with their normative [and highly imaginative] concept of 'perfect' results being achieved by the free operation of their theory of supply-and-demand, they accepted the definition of money as a special commodity, recognised and often managed by the state, that served the functions of:
          a medium of exchange
          a means  of making deferred payments
          a measure of value
          a store of value.
In retrospect, these attributes only applied to money that was based on a Gold Standard; and by coincidence the spread of Economics through the world's universities was accompanied by the spread of the gold standard. Between 1870 and 1914 a succession of countries adopted the principle that the national currency was pegged to gold, so that at the start of the first world war a British Pound or a US Dollar was defined in terms of equivalence to gold: so-many dollars for one ounce of gold, so many pounds to an ounce of gold. Anyone who held pound notes could go to the Bank of England and demand [and receive] gold - in the form of sovereign coins, which were legal tender; and similar rules applied in the USA and Russia and France and most other advanced economies. Just a few states maintained a 'silver standard'; and a few, mostly the imperial possessions of western states, had a gold-exchange standard that seemed to work but no Economist clearly understood it until a bright young man presented a brief, brisk and profound account of how it worked: this was the serendipitous first publication by John Maynard Keynes.

It was serendipitous because within just a few months of the start of the war all the combatant European countries had to abandon the 'Old Gold Standard' and move uncertainly each to their own gold-exchange standard.   Britain had the one global expert on the subject, and Keynes was drawn into the centre of the government to lead a new way of managing the unprecedented amount of payments that passed through the Exchequer to pay for the war. He recognised at once that the massive creation of paper money made any return to the old system impossible: and that the attempt to equal the inflation of the money supply with the issue of government bonds that were notionally equivalent to gold reserves was pure fantasy. The idea that war-loan would be redeemed in the postwar world by payments of gold-standard money was absurd: but it was built into the unprecedented system of war propaganda which most government ministers allowed themselves to believe. The United States kept its gold standard, and required its allies to pay gold-standard money or gold-standard guaranteed bonds [denominated in dollars] for the supplies that they necessarily bought from the USA.

Thus at the end of the war the victorious allies recognised their obligations to pay each other immense sums of 'money'. To make this easier for them, they demanded vast reparations from Germany, and those payments were written in to the Treaty of Versailles. The Austro-Hungarian monarchy had collapsed into a significant number of separate new countries that acknowledged no obligation for the debts or other obligations of the former empire: so no reparations could be expected from there. The collapse of the Russian monarchy also meant that the massive holding of Russian state and corporate debt, that were due to be serviced in gold-standard roubles or pounds, had become worthless. Thus most of the load was dumped on Germany, which was obliged to deliver gold, coal, steel and other commodities free of charge, principally to France and Belgium, so that the 'victors' could meet their obligations to their own people and to foreigners in gold-standard money . Keynes had been taken to the negotiations as an economic adviser, and he resigned in exasperation when it was clear that even if Lloyd George understood Keynes's advice the Prime Minister would not act on it. Keynes came home and set out his objections in the prophetic tract on The Economic Consequences of the Peace. As the inflation that Keynes had predicted to be inevitable gathered pace in the ensuing years, the government forged ahead with its plan to restore the monetary system and in 1925 Winston Churchill as Chancellor of the Exchequer proudly announced the 'restoration of the Gold Standard' [which was in fact a variant of the gold-exchange standard]. Keynes published his reckoning of the inevitable Economic Consequences of Mr Churchill and pressed on with his main work; which resulted in 1929 in the publication of the Treatise on Money.

Since then 'money' issued by governments has gone through many redefinitions, has been subject to massive manipulation, and has been subjected to assorted 'analyses' by various schools of Economists whose only common link is to have been wrong in their predictions and disastrous when they have become policy advisers. Their 'profession' has avoided open acceptance of Keynes's Treatise; and the International Monetary Fund - of which Keynes was one of the founders - has still not adopted his concept that world financial stability can only be achieved if they create a global reserve currency [bancor] to which national currencies relate in a disciplined order. Exactly a century has been lost since Keynes wrote on Indian Currency and Finance and there is still no sign of his plain solutions being adopted.

In a world of ill-managed currencies, reckless debt creation and the inevitable consequential inflation, it is obvious that money is NOT a 'measure of value'. After the default of Greece we are all reminded that money is NOT a stable means of making deferred payments; and it would be a very poor joke for anyone to suggest that money is a 'store of value'. It is a 'medium of exchange' simply and solely because the law demands that prices are quoted and debts are denominated and settled in the national currency. Money is used because it has to be used: it is an imposition of the incompetent state, and the one certainty is that it loses purchasing-power: the longer you keep it [whether as banknotes or on deposit] it looses 'value'.

In future blogs I will develop this simple story that Keynes's genius is better appreciated when he is recognised as an authority on money, instead of being misrepresented as an inflation-inducing proponent of 'big government'. Over the recent past hundreds of millions of lives in the postindustrial countries have been conducted under a massive cloud of monetary delusions in an environment of debt; a system that is becoming unsustainable. Keynes warned what would happen if such fantasies were pursued: it is now sensible to return to what he wrote, on the record, and to understand his theories in the context of the pre-Economics science of Political Economy on which he built.

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.

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.

Democratic Deficit

One of the discredited Rating Agencies has downgraded Belgian government debt: apparently on the grounds that they have not had an established government for well over a year. The cause of the bickering between political parties arises from an excess of democracy, that pretty well ensures that there is never a predominant party with a parliamentary majority. Belgium's policy options are restricted by the fact that the state is a member both of the European Union and of the euro: the national capital, Brussels is overshadowed by a few buildings within that city from which the EU is run and by Frankfort where the European Central Bank is located. Every opinion and brand of Flemish nationalism is represented in the Belgian Parliament; as are all the factions and aspirations of the French-speaking Walloons. This wonderfully democratic outcome is impotent: the politicians can't agree formally how to share out ministerial posts, so they have just shuffled the pack and carried on from week to week as 'caretaker' ministers; and operationally it doesn't matter. But cosmetically it looks untidy, so Standard & Poors have chosen to give Belgium a kick by reducing their rating from AA+ to AA: this will license market traders to have a whirl at making a bit more money by selling Belgian debt short: a great game for the insiders, and a worry for ordinary folk, who know that policy on trade and industry is made by the EU, and well understand that the euro is completely beyond influence from any Belgian government.

A Belgian is President of the EU Council of Ministers, but he has no power: he can merely try to co-ordinate 27 heads of state and heads of government. The EU Parliament remunerates it members exceptionally well, in the combination of salary [related to the local parliamentary salary in the members' home countries] and EU expenses; but they have no real power. The Commissioners are nominated by the governments of the member states without any convincing pretence of democratic consent. Britain's Commissioner is a Labour Party hack who has never held national elected office, was totally unknown to the public on her appointment [made in haste when the sitting Commissioner was recalled to serve in Brown's despairing government], and whose rare appearances on the British TV News cause a surge of national embarrassment.The democratic deficit on the EU probably exceeds 100%.

The new Italian and Greek Prime Ministers are described as 'technocrats'. The 'technology' that they are supposed to understand is Economics, the discredited subject whose practitioners sanctioned and applauded all the excesses that have created the crises in business and in personal and in governmental debt; that none of the 'Atlantic economies' has yet begun to addressed effectively for the long term. They personally applied their Economics in bringing their countries into the tissue of lies and false hopes that enabled a very disparate group of countries to create the euro. They went on to occupy cushy roles in the unaudited EU mechanism and now have been set up as proconsuls for their cronies. They are part of the problem, not of any radical solution.

Germany has a carefully drafted democratic constitution, with a special court to protect it and a Chancellor who grew up as a subject of a militarily occupied satellite state. She is committed to democratic principles  and is accutely aware of the fraud that was committed by the founders of the euro. She is reported to be viscerally unwilling to legitimate the lunacy that has created the state debts of those eurozone countries that have systematically [and knowingly] lived beyond their means by 'monetising' those obligations under a German guarantee. So she is pressing for something like a democratic structure to be created, within which at least part of the eurozone can move close to fiscal union [a united tax and budgetary system]. Ms Merkel is not prepared to guarantee past follies and frauds in the mean time.

The EU has never been even slightly democratic: the 'European project' is the imposition of an elite who have drawn on the widespread fear of European wars to justify their own job-creation machine. Any currency zone that adopts Merkel's principles will certainly be smaller that the eurozone of seventeen states that is just about surviving into another week. A German-led outcome may be a eurozone shorn of the weaker bretheren, or it may be a Neumark zone comprising Germany, Austria, Croatia, the Netherlands, Luxembourg, Slovakia, Finland and Estonia, probably Belgium, and possibly France, Poland, Latvia and Lithuania. The Czech Republic, Hungary and the Scandinavian EU members would probably be welcome to apply to join once the system were up and running. The 'Club Med' countries would not be considered for candidacy until their devalued euro - or their separate currencies - had well stabilised and their balance of payments was restored.

Britain's desperate imbalance of payments and its structural budget deficit would become even more conspicuous when it drew comparison with the Neumark bloc. It would become clearer that party politicians cannot solve the problems, and the yaa-boo antics of the House of Commons and in the TV  'question' programmes would move from being a national joke to become recognised as evidence of the failure of the entire political structure. The British situation is worse than that of the EU: it is worse than a democratic deficit: it is an advanced case of defective democracy. This tragedy has been developing for several decades: in Can Britain Survive? [1971] Ken Watkins and I wrote:
"...there is a kind of auction of popular programmes carried on by the major parties, in which the highest bidder tends to win the lot. Since the parties do not wish to commit political suicide they are, willy-nilly, compelled to act accordingly. The fact that this inhibits them from tackling the fundamental structural weaknesses in the in the economy can be seen from the study of the elections since the end of the Second World War."
The same political auction game has continued unabated for forty more years! The deep defects of democracy, British-style, will not easily be corrected; and yet only when that correction has taken place can a rational economic strategy be formulated: then implemented over several decades. If the democratic defect is not corrected by completely fresh democratic means; a less democratic solution is quite likely to intervene.

The oldest current Constitution in the world, that of the USA, is not directly under threat. But American commentators from all segments of the political spectrum are worried about a failure of their institutions to provide clear policy in a very grave national crisis. Franklin D Roosevelt was - in effect - given exceptional powers to lead the economy out of depression, and he continued to exercise exceptional powers, sanctioned by Congress and unimpeded by the Supreme Court, for the Second World War. Harry S Truman had barely begun the process of surrendering the special powers when the emergence of the Cold War brought the Marshall Plan. Then came the Korean War, then the long stalemate of the nuclear confrontation. After 1991 the US was the unique superpower and the Clinton presidency was the first 'normal' incumbency since the mid-nineteen-thirties. It led to impeachment proceedings and a reassertion of party politics over constitutional propriety. George W Bush was continuing with the diminished role when 9/11 created a crisis and led to two overseas wars. The role of the Commander-in-Chief was once again unquestioned, and guided by the Vice-President and Secretary of Defence it transcended constitutional propriety. The limits to US global power were challenged and the end of hegemony was slowly acknowledged. Obama came into office in a diminished power and he has faced the full force of a resurgent, if uncomfortable, congressional democracy. His fluency became his greatest failing: he was unable to listen to and to interpret the diverse dialogues that had been unleashed by the collapse of the financial system and the weakening of the military-industrial complex. The attempts at bold initiatives to deal with the human consequences of the crisis that he has promoted seem to be based on the European welfare state from the nineteen-fifties: which the Europeans themselves are having to abandon under the burden of debt with which it saddled them. The result is that the USA has its own, very specific demcratic deficit: it is a real and urgent stress-point, that has been confronted by a dialogue of the deaf in a polarised Congress that exactly mirrors the depth of division in the country. Meanwhile, the prophets of economic Armageddon are having a bonanza.

Eternal Truths?

Having deferred the publication of its report on morality in the [business] City of London, the Saint Paul's Institute is now issuing it. A large sample of employees in financial institutions were asked basic questions: and the majority answered that the existing distribution of incomes was unfair, in their favour, and they saw no particular reason to do anything about it. There is no surprise there: but confirming common assumptions is a valid outcome of research.

The development of electronic trading in cyberspace is a huge source of earnings for the City workforce, and a lesser source of profit for their firms [where typically the firm is responsible for any losses, while staff take more than 90% of the return in salaries and bonuses]. This is a totally different market from the old-fashioned face-to-face dealing of the Stock Exchange before the 'big bang' of 1986. The occasion for the Saint Paul's report is the twenty-fifth anniversary of the loosening of market controls, which made possible the expansion of trade [especially of socially-useless churning of contracts] and the invisible evolution of electronic markets. The pre-big-bang markets could not possibly have run up the liabilities that almost sunk the economy in 2008; which could still cause huge problems if the running-repairs that were made in haste should be unsustainable in the long term.

 Despite the unimpeachable evidence that Economics is a failed subject, with no scientific validity, Economists continue unabashed to draw large salaries for analysing City events, 'products' and firms. Little of what they write directly refers to the Economic theory that still has a monopoly of university syllabuses: much of their output is common sense, exposition of statistical data and the repetition of market folklore. But behind all of that their mental world is at least partially structured around normative theories that are at best unhelpful to any attempt to understand what actually happens in the economy, and at worst have served as the sanction for ruinous excess.

The Bishop of London has invited a retired banker - and active churchman - called Ken Costa to lead a new study of the relationship of humanity and morality to business. In an interview on the Radio 4 Today programme he proclaimed himself open to any new idea, he spoke of Ethics as a separable aspect of human cerebration, and he took it for granted that human business relationships exist in a 'market economy'. Perhaps due to the constraints of time, there was no exploration of what a market economy might be or how it may be improved, dismembered or renewed. Costa commented that views for and against 'capitalism' were polarised: that no side to the dispute was intrinsically right, and that any dialogue must accept points from both sides. Most ecclesiastics who have made any comment on these issues, especially in the context of the naive claims made by the campers at Saint Paul's, have been couched in soft-left platitude. As such, they have failed to resonate in the media and in bar-room discussions.

Historically the emergence of capitalism has been linked to Protestantism, with its tradition of encouraging individuals to implement their own interpretation of biblical teaching on morality; while Catholicism and Islam have been much more explicit in outlining an official interpretation of scriptural guidance on business matters. None of these streams of dogma has pronounced capitalism to be 'evil'; while socialism - especially explicitly-atheistic Communism - has been anathemised. John Wesley, the founder of Methodism, said that "the making of money is a worthy and a Godly pursuit": but he, like all other significant religious leaders, also argued strenuously for the 'right use' of money and the obligation of the faithful to support the poor and needy.

 Markets are merely social media: their purpose, structure, processes and rules are made by human beings who participate in markets on their own account or as agents of firms. Those individuals cannot avoid making their decisions in markets in the light of their understanding of their function; and of their personal needs, beliefs, prejudices, and judgements. These may or may not include religious aspects and ethical consciousness. Personal charity is still significant; but most of the care for the poor and needy - as for the sick - has been appropriated by the state. To pay for it, the state taxes firms and persons who participate in economic activity; and taxes are broadly proportional to turnover.

People decide on a daily basis whether to put a coin in a rattling collecting-box, as they hurry along carrying newspapers that show more and more 'gaps' in provision by the 'welfare state'; and most people are becoming more and more concerned that they will personally fall into some of those gaps. The perceptual separation of markets from society, with the political system taxing markets to maintain society, was slowly developed between 1870 and 1980, sanctioned by Economists: and now it is busted. A wholly new basis for understanding these relationships is essential. With the best will in the world, Saint Paul's Institute and Ken Costa will not resolve the dilemma with their existing intellectual resources.