Economic Literacy

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

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

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

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

Fundamental Economic Principles and Politics

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

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

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

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

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

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

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

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!

Capital, Capitalism and Humanity

No economy can function without capital: buildings, utilities, transport facilities, machinery and the cash float that is necessary for any household or firm to operate. This fact was recognised early in human history, and by 1800 it had become part of a systematic theory of Political Economy as one of the 'Factors of Production': Land, Labour and Capital.

The young Doctor Karl Marx absorbed Political Economy and combined that with a voracious acquisition of facts, and believed that he had found a more profound truth. This was his perception that a class had emerged in the modern economy who were not any part of the ancient classes of people as they had become segregated by economic role and circumstances over the centuries: farmers, handicraft workers, landlords, soldiers, priests and civil servants. This class was the capitalists. Marx reckoned that this group collectively aimed to seize control of capital and use it for their own purposes rather than for the general good of humanity. He assumed that the capitalists would use the capital that they brought under their control to expand industrial production [including ultimately production on factory farms] and that this would be taken to extreme lengths. As industry expanded and machinery improved, output would increase; but then would occur a crisis. The  capitalists would have expanded productive capacity  to a point where there was not enough demand to meet the output. So the capitalists would cut costs and, as their priority was to carry on buying more more-intensive machinery, the obvious economy that they could make would be to reduce the cost of labour. Some workers would be sacked and the others offered lower wages: there would be plenty of unemployed available to take the jobs if the remaining workers would not accept the lowering of wages. Meanwhile the natural increase of population would produce large numbers of relatively healthy young people looking for work on any terms.

Marx presented capitalism as a machine that would inevitably generate excess production, lower living standards and create a growing 'reserve army of the unemployed'. This did not happen.

For a century and a half after Marx's death economic growth produced a diversification of products and a rising general living standard in the relatively free economies of Europe and the Americas.  Owners of businesses accepted being known as capitalists, and there was a consensual acceptance of the term 'capitalism' to mean 'an economic order in which a least a major portion of industry and commerce belongs to companies and to individuals'. Meanwhile the Russian Empire was captured by revolutionaries who claimed to be Marxists [and whose dogmas spread to central Europe and China after the Second World War] and those people made a disastrous mess of managing their economy by authoritarian means that were asserted to be leading towards the blissful condition of 'communism' that Marx had envisaged. Largely because Marxism failed, the people in the [relatively] free countries accepted their environment being described as 'capitalist'. But the term capitalism has no clear meaning, other than the pejorative term that Marx coined .

The fact that the members of a 'capitalist' society have no clear understanding of what they mean by the term has had disastrous consequences. If there had been acceptance of a definition of 'good' capitalism as an economic system that recognises the importance of managing capital investment effectively the present economic crisis could not possibly have arisen. Individuals in their various roles as politicians, business leaders, investors, voters, workers, pensioners and consumers would have seen that the crazy combination of de-industrialisation with untrammelled credit-creation and house-price inflation that built up after 1980 was preventing a rational allocation of capital from taking place. The survivability of the economy was being undermined in an orgy of imported consumption funded by borrowed money. Financial phenomena - mostly invisible in the internet - absolutely dominated the economy: and the creators and managers of those phenomena included many of the brightest graduates in maths, science and engineering who could have used capital to lead into new worlds of physical output, energy generation and medical science.

It is precisely because politics and society allowed the economy not to be capitalist in any rational sense that the crisis now exists. It is not a 'crisis of capitalism': it is the consequence of the economy ceasing to be capitalist.