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.

Human Choice

A new book called Poor Economics - dealing with economic choices by the poor - has been published by an academic who works in the USA and has his ancestry in a new-emergent economy. The text unconsciously encapsulates a clear vindication of my concept of ik: the idea that people allocate any discretionary expenditure that they can afford on buying quons - copyrighted and trade-mark-protected entertainment, branded goods and services and other consumer experiences on which a charge could be levied for enjoying access to the input of intellectual property that makes the 'good' desirable to those who buy or hire it. Give a desperately poor person [who has just enough consumption to survive] a few extra pennies and she or he is more likely to to try to broaden their range of consumer experiences by accessing some ik than they are to buy more of the food that makes up their daily diet.

This behaviour is not what typical Grauniad readers expect, and it is 'irrational'  in terms of formal Economics; but it is what the evidence clearly shows. It is also the basis on which governments [from the earliest human societies] have taxed transactions in markets. While income taxes are fashionably considered 'fair' in the degenerate cisatlantic democracies, History shows that expenditure taxes come closest to being 'discretionary' in that people opt to buy things even though they know that in doing so they are paying a tax [indeed, the majority of the price of cigarettes, alcoholic drinks and motor fuel is tax in many countries]. People are more likely to opt not to earn more taxable income than they are to refuse to purchase highly desired items because of the tax imposed on the transaction.

This experience shows clearly the irrationality of formal Economics, as it has been developed since the eighteen-sixties. Economics as presented in universities and in advice to governments is not based on evidence - it is based on assumptions as to what an ideal or 'perfect' economy might look like. The aim of Economists is to make human life conform to their models: which is a fundamentally inhumane objective. There is no reason for surprise that Economics solutions to real-world issues do not 'work'. The alternative has existed for longer than Economics has been in existence: the science of Political Economy was well-developed, and realistic, well before the pioneers of modern Economics decided to create their own academic dreamland. Lord Keynes - who never bothered with a doctorate in Economics and never held a professorial chair - was deeply learned in Political Economy, and although he was loyal to the memory of his teachers [his father, John Neville Keynes and the family friend Alfred Marshall] his work was anything but mainstream Economics: which is why Economists have so imperfectly understood it, and why so many of them have tried to push it out of consideration

My simple objective is the restore Political Economy as a science that is relevant to the human condition, and perhaps to .take some aspects of the science a small step forwards. Anyone interested in this question should open the link from this blog to my text PPE: Personal Political Economy.

Vigorous Capitalism

In another brilliant instance of intelligent capitalism in operation, Warren Buffet has taken advantage of herd irrationality by so-called professional investors in the UK. He has bought another 2% of the shares in Tesco [increasing his holding to 5%] at a time when the shares had fallen by around 15% in price because of a single set of bad trading results.Buffet is famous as a long-term investor in companies whose future prospects meet criteria that have been formed in his extremely well-developed mathematical brain. Most of his punts have been proven successes; and sometimes the success has been secured by him reinforcing his investment by buying shares in a company, or lending money to it, when it has hit a temporary bad patch on its growth path.

Who are the idiots who sold shares in sufficient numbers to depress the price by a huge percentage, on so thin a pretext? Not small-scale personal investors: most such people take a similar long-term view to Buffet's. They are mostly professional investors, buying and selling shares for institutions - pension funds, insurance reserves, investment trusts, charities etc - who possess degrees and professional qualifications [many of them in 'actuarial science'] and supposedly have experience that enables them to make intelligent decisions. Why, then, did a large number of them offload shares in Britain's most-successful-ever retailer in huge volume on a single report, and despite the fact that the company made clear that it understood and was already addressing the causes for the relatively poor performance? Some did so like automata because the funds that they managed were committed to 'track' the stock-market index. Some saw the price going down and joined the rush. A few may have been quick-moving opportunists who sold as soon as the price began to fall so that they could use the money to buy more shares at a lower unit price in a few days [or even a few hours] time. The combined effect of their selling was to give Buffet a great opportunity.

Friday's news also included the item that the Chinese sovereign wealth fund has bought 8.68% of the shares in Thames Water. This means that users of water and sewerage supplied by Thames will be paying tribute to investors in China, as well as in Abu Dhabi and Australia; who will also be able to exploit loopholes in UK water regulation to increase the dividends that they receive by increasing the debt that the water company and its customers will have to carry in future and cashing-in on such deals.

In the first case supposedly clever professional investors were the mugs, in the second a massive disadvantage to British consumers was created by Parliament and its advisers when they privatised the water industry. In both cases intelligent foreigners took advantage - quite legally - of dysfunctional systems.

Also on the same day the press reported a speech by a senior Bank of England official who suggested that international accounting standards [that were created by a forceful Scottish 'expert'] had not 'stood the test of time' and had almost certainly added to the misunderstanding of the credit bubble and the exaggerated assessment of the calamity that followed the crunch. This is because the standard assumed that there was a 'fair value' of any asset that was magically equal to the market price of the small sample of similar assets that were actually sold on any day. The sublime idiocy of such a notion was unnoticed all through the process by which it was adopted by international regulatory structures. Hence it was strangely appropriate that on the same day both the British Prime Minister and the Leader of the Labour opposition should make speeches on how to transform a much-criticised form of capitalism into a 'responsible' system that would guarantee prosperity and 'fairness' for all. The both suggested [in different terms, but with similar aspirations] that markets were the best way to generate wealth and to distribute it fairly among the population, provided that markets were regulated properly. There is a germ of truth in this assumption.

No market has ever succeeded in a vacuum: markets only work if they are interconnected with the rest of the economy: they need buyers to enter with purchasing power that was gained outside that market, and in it the sellers offer produce which incorporates components [including inputs by autonomous human beings] that are attracted from outside the market. No market has ever been free of crooks and liars and predators: people who decide that they can gain personal advantage by bending or breaking the rules that the other buyers and sellers assume everyone in the market is following. No market has ever been composed - and no market will ever be composed - of participants with exactly equal intelligence, the same ethical principles, identical capital resources, and identical access to all the same data as all the others [about their specific market and about the prevailing economing conditions and about prospective changes] which they all interpret in exactly the same way. So the assumptions about 'perfect competition' that set the criteria for formal market theory in Economics are utter balderdash; and any attempt to regulate markets as if they can be compelled to conform to the theory are doomed to fail.

So when the politicians step down from their podiums and ask their civil servants how on earth they can give effect to the high-blown [loudly applauded] rhetoric about 'responsbile capitalism' they get an answer in two parts: both of which are wrong.

The first part of the answer is to look for some well-publicised cases of 'unfairness', some individuals who are paid vastly more than the norm for employees in the country, and suggest that their income should be capped - or even reduced - at source, and then subjected to confiscatory taxation. In the last couple of days the media and some politicans have picked on Stephen Hester, the Chief Executive of the Royal Bank of Scotland; and they have suggested that he should not receive the income to whch he is entitled under his contract. He was brought into the bank, from a good job elsewhere, to pull it away from the catastrophe into which its former managers had dragged it. Because it was a state-supported institution in crisis, Hester patriotically accepted an unusually modest salary for a bank Chief Executive, to which was attached a bonus scheme if he achieved certain steps to assist the recovery of the business. Now the 'gutter press' and some policy-making fools are suggesting that the state should order the Royal Bank of Scotland to welsh on the contract, to appease public anger at the fact that some people in other banks whose functions are not understood by the policy advisers [and even less by the press] are getting much more than Hester; mostly as bonuses for proprietary trading.

The second string to the advice offered to politicians is much more long term than the scalp-hunting of individuals. It is to 'enhance' the system of regulation within which markets should be constrained. The phrase 'risk-based regulation' has recently been in high fashion but very few people in business have understood the concept. Business men and women well understand risk: they take risks on their own behalf and that of their firms every day: those who have the sharpest appreciation of both opportunity and risk are usually the most successful in planning investments and avoiding losses. It is now considered necessary to determine what categories of  risk the regulators should require companies to avoid, or to mitigate if they cannot be eliminated if they must necessarily be accepted to enable the operation to continue. Some policy advisers have reached deep into formal Economics and suggested that regulators should compute the future long-run average cost of producing the output and require the price regime to converge with the assumed future cost. Provided the generality of firms in the market are moving towards convergence of prices around equality with the average cost at a selected future date, the market should be allowed to operate freely. The theory predicts that firms whose prices rise above the trend will fail to secure customers because rational consumers will buy cheaper alternatives. Similarly the theory predicts that firms that charge below cost price will bankrupt themselves. The firms that charge prices broadly in line with average cost of production [including a fairly-calculated 'cost of capital' that is the same for every firm] are good: the market will eliminate the others.

Such a model ignores branding, and therefore ignores the predominant determinant of 'value' in the perception of the vast majority of global consumers. Any attempt by regulators to impose such a naive theory would be ruinous to the real economy. But the concept of regulating to aim for average long-term cost pricing is presented on the political agenda because it is the one idea that people trained in Economics can think of in the present circumstances: old-hat Victorian marginalism is presented as the new panacea. My simple text PPE explains this point in depth. Such regulation as is now being advocated would transform the present economic crisis into an unmitigated calamity.