Productivity, Productiveness and Personnel

One of my professional institutes, the Chartered Institute of Personnel and Development [CIPD], is holding its annual bash in Harrogate: a sign that the nights are drawing in and Christmas preparations should be made, Among all the stalls promoting clever systems for improving the efficacy of the personnel function and the the productivity of workers there will be the usual mix of 'motivational' and 'experiential' presentations from the stage. Employers will be encouraged to mobilise the funds that are grabbed by the government in the tax called the Apprenticeship Levy, and no doubt that will push along the trend to encourage 15-21 year-olds to undertake pseudo-apprenticeships as provided for in the state's heavy handed allocation of resources. Meanwhile the government remains deaf to requests that the support for vocational programmes that are actually sought for by people over 24 years of age, who have had time to learn on-the-job about work, and assess what they need to know and to understand to move to a better position for themselves and for their employers: a place where their productivity can really improve.

This whole structure of wasteful spending allocations and cuts is deeply depressing, and I have railed about it on many past occasions.

All I want to do in this piece is to reiterate a frequent assertion: that in Millicent Fawcett's brilliant little book Political Economy for Beginners [1870] the point is made, very clearly, that there is a link between productiveness and productivity. Productiveness is the capability of an installation - one work place, or a whole factory, or anything in between - to deliver output. Productiveness is increased by making relevant investment: in machinery, in staff training and development, in the selection of superior input materials etc. Productivity is the measure of the resultant output, stated in the cash return from the sale of the output as compared with the cash expended in wages [of management and of operatives] to achieve the output. It stands to reason that productivity can be increased by offering higher wages: sometimes. Or productivity can be increased by penalising 'slackers', as under some dictatorships: sometimes, for a short time. Or productivity can be increased [or be reported to have been increased, for propaganda purposes] by Stakhanovites: so called after a Russian worker called Stakhanov who was held up as an example by Stalin's publicists because he was alleged to have increased his effort and effectiveness out of sheer enthusiasm for the regime and its targets under the five-year-plan. The whole of the proletariat was urged to emulate him, and thus bring on the socialist paradise much quicker than could otherwise be done; and, of course, eventually the whole thing was exposed as a sham and was quietly shelved.

The most consistent and effective way to raise productivity is by increasing the productiveness of the plant that is provided for the workforce to work with, and by raising their own ability and willingness to use the a resourcesvailable optimally.

It is patently obvious that in many democracies, and especially in Britain, productivity has 'flatlined': it has hardly increased across the whole of industry and commerce, for the past decade; and, if anything, it is declining. This is because - again, over almost the whole economy - serious investment to improve the productiveness of plant and people has simple not taken place. Fake apprenticeships do nothing to relieve this situation: and companies sit on billions of pounds of profits because they do not have enough confidence in the future to apply that cash to new machinery and really deep improvement of their processes and their people.

So: what can be done about that? More next time...

People and Political Economy Versus Econocracy

Yesterday a Times leader-writer who frequently writes an Economics column for the paper recognised the Manchester action group that created the Post-Crash Economics Society, and the related movement that has spread around the world [as frequently mentioned in this blog]. He noted that a very few university teachers have cobbled-together courses that give an introduction to the different approaches to the subject that have been taken over the last couple of centuries; and that the vast majority of the established teaching cohort - the Econocracy - have adhered rigidly to the pseudo-mathematical formularies that are their only stock-in-trade. That stock is being demonstrated to be putrid. I was a university teacher, specialising in the History of Economics, for a couple of decades until 1988. During that time I assiduously researched the question of how Economics was taking an increasingly perverse approach to the world; and meanwhile my colleagues selected me to be Dean of the Faculty and eventually Pro-Vice-Chancellor, which I like to think indicates that I was taken seriously as a person.

By 1988 it was clear that common sense and Economics were becoming implacably opposed. The Thatcherites were busily destroying industry, blinded by the mantras of open competition and monetarism that undermined the traditional support from the state budget for the economy [which was repaid as economic growth produced the tax revenue that increased the state's capacity to spend on infrastructure developments, research and product development, and popular welfare]. So I bailed out of academic life, into one of the great support organisations that underpin the skills on which the City of London depends for its unique depth of resources which constantly renew its role as the world's leading financial centre. I have continued to watch the consolidation of Thatcherism into 'austerity', which in turn gives the government the ludicrous notion that state spending [on almost anything] is a 'bad thing'.

There are, of course, the glaring exceptions: of which the most conspicuous are HS2 and Hinckley Point, where the state is in for tens of billions of pounds of useless and unwanted spending. Otherwise, spending by the state is a bad thing: especially on peoples' welfare.

Today's News on the BBC is headed by the facts disclosed in a report on tower blocks that has become critical in the light of the Grenfell Tower tragedy. Sixty-eight per cent of the tower blocks in the UK have only one staircase, almost 40 per cent have some form of cladding [of which a yet-to-be determined proportion are flammable], and only two per cent have sprinkler systems. Sprinklers have been proven as a valid means of quenching fires, and thus preventing their spread, for centuries. When Britain had extensive factories and warehouses, the insurance companies employed inspectors who had the right of entry to premises to check that the sprinklers were installed and operational: if they were not, the insurance was immediately cancelled. Factory Inspectors also had to duty to check on the effectiveness of spinkler systems, and could close units that were non-compliant; and in most local authority areas buildings were only licensed for use if certified as compliant with local specifications by the Fire Brigade. The present shoddy government have made it as clear as they clarify anything - which is not very far - that they will expect local authorities to use their own resources, to the extent of using up all their reserves to begin to introduce measures to address the fire hazard in the blocks that they control.

The Econocracy supports the government line: state spending, bad. Occupiers should pay competitive prices for their flats; and if they want safety measures built in they must pay more for that assurance. If their earnings or benefits or pensions will not cover the higher rents, they must move their homes; or get better jobs. For myriad reasons, such as access to schools and hospitals, proximity to relatives who need or provide care, lack of skills or lack of drive, millions of people cannot get better jobs or pay higher rents. The Econocracy has no patience with such people: they clog up the system and prevent the 'model' from functioning as they think it should, in all its clockwork simplicity. 

We need a new Political Economy, that takes account of people as they are, and has their development and the welfare as its highest goals. The housing situation - with hundreds of thousands of households outside the tower blocks effectively homeless - is a perfect example of the Econocrats' model economy not working: because it is utterly out of kilter with the realities of human existence.

Afghanistan: Trump Digs Deeper

Donald Trump has a genius for digging holes to sink into. Amid the several areas of confusion that he has created in US politics, he has now announced the opposite of one of his most consistent campaign promises. His new minders have persuaded him that the risks in abandoning the disastrous Afghan campaign are so much greater than any potential benefits of quitting that the US must stay. And if they are to stay, they have to reinforce their resources there. Then they have to cajole their allies into helping them. Mrs May has already committed more forces, though less than 100 troops: for now. As has been noted here several times, Afghanistan has never been 'pacified' by alien forces. Alexander the Great, the great Moguls, the British Empire, and the Tsars all failed; before Brezhnev brought the USSR to bankruptcy by his attempt to subdue the country.

Ever since the US sent forces into Afghanistan in pursuit of Osama Bin Laden under the Command-in-Chief of George W Bush, many strategists have argued that the 'real' seat of terror is probably in Pakistan: which is where Bin Laden was finally tracked down. The people who were sheltering Bin laden temporarily were the Taliban, so removing them from power became objective number one. Once that was achieved, at least to the extent of having avowedly non-Taliban ministers installed in Kabul, it became clear that Afghanistan would be dangerously unstable - from the American perspective - if alien forces left. So the US and its little herd of followers stayed, and continued to loose lives and use up resources.

In the terms of western democracies, Afghanistan will never be stabilised. Trump, at least, has recognised this to the extent that he has renounced any pretension at building a democratic state: yesterday he simply said that his troops will 'kill terrorists'. How to identify an enemy or a 'terrorist' among the tribesmen of the Himalayas has never been answered explicitly. If someone if carrying a gun, it may be to protect his sheep from wolves. In such a social context, when someone is actually attacking western forces they can be regarded as legitimate targets; but not otherwise. The conflict cannot be won; but it will send a new flood of young men on the trail to Europe, hoping to join Merkel's million: some of whom will have nefarious intentions. And so the migrant problem for Europe, and explicitly for the European Union, becomes more intense.

In this one sense, Brexit might seem to provide a desirable context for the UK to strengthen its borders further. But then we came up against the problem of paying for proper border controls. To establish, man and maintain adequate borders for the UK would require a vast investment, followed up by hundreds of millions of pounds of recurrent expenditure. If that border is both a customs border and a border against the passage of people and financial assets, as Mrs May seems to desire, the cost is multiplied. Either austerity will have to be abandoned, or state expenditure in all areas but border controls will have to be cut back so far as to create intolerable strains throughout society.

So Trump's abandonment of yet another campaign commitment leads directly to a double dilemma for Britain. First comes the question, how can we meaningfully join 'the leader of the free world' in his madcap Afghan plan: if, as indicated by the government, we will submit so to do; within the present limits of defence spending? Second, how do we pay for meaningful border controls here in the UK?

Thus we come to the most consistent and fundamental issue with which this blog has always been concerned: how can we create the national income that will enable Britain to afford a better living standard for all and maintain the position of the UK in world affairs and in the world economy? The answer begins with the repudiation of the Economics that enforces austerity on the regime: we need a Political Economy that reinforces the concept of productivity by recovering from limbo the need for productiveness. I will return to this topic in the coming days: meanwhile, when you have time, do a word search in the past issues of this blog to see what productiveness means and implies.     

The Very Basics

It is some time since I simply stated the basic assumption on which this blog is based. Although it was one of the earliest principles of Political Economy to be established, I have repeatedly cited Millicent Fawcett's introduction to the topic in her Political Economy for Beginners, which was published for use in the elementary schools which all children were legally enabled to attend under the Education Act of 1870. The book can be accessed on line via the Library of the University of California. I recently commented that it is highly appropriate that Mrs Fawcett is to become the first woman honoured with a statue in Parliament Square, Westminster.

It is a truism today that when the British economy comes under examination, there is a focus on the deplorably low productivity of employment in this country. Just scratch the surface of any such discussion, and the shocking fact emerges that productivity has scarcely improved [and in some sectors of the economy it has declined] since the financial crisis took hold in 2007.

When she mentioned productivity, Mrs Fawcett also dealt with productiveness; which is virtually never mentioned at all in the current discussions. Yet for Mrs Fawcett - as for me - it is the very key to understanding the basic economic problem that bedevils the country.

Productiveness means the extent to which any economic activity yields a surplus [of output, that can be converted to cash] that is used for investment. The investment may be applied to expanding or updating the plant that yielded the surplus, or to training the people who work there, or to recruiting better-skilled people; or it can be invested in other sectors of the economy. There are three main ways in which such cross-economy investment is facilitated:
1. by firms transferring profits from one part of the complex organisation to another, or
2. by the surplus being given to shareholders or bondholders as dividends or bonuses, which they can reinvest at their discretion,or
3. by firms that retain some profit as reserves or receivers of dividend depositing the money with banks, which the banks then lend to firms with ideas for expanding or improving production.

In any of the above circumstances, there is a realistic prospect that many [though not all] of the investments will improve the productivity of the sector in which the investment is made. Sometimes an investment fails, because it is wrongly timed, or a mistaken choice of technology is selected, or inept individuals are selected to manage the investment; or for a dozen other reasons: and the more risky the investment is, while it may yield spectacular returns, it also carries a higher degree of probability that it will fail.

The crucial fact is that the only way to raise productivity [and production] in general is if the productiveness of the system is properly understood and a sufficient proportion of the surplus that is generated sector by sector is applied optimally to investment in those sectors that will contribute most to the  productivity and productiveness of the economy in the future. In simple terms, unless investment is the absolute focus of business thinking and of economic policy, the economy can not succeed optimally: because everybody in a decision-making role is looking in a wrong direction. Warren Buffet has become an international celebrity by persuading people to let him make investment decisions with their money; and by delivering excellent results [overall] for decades on end. Mrs Fawcett would have approved of him, strongly.

In Britain, especially since the crisis of 2007-8, profitable businesses have been piling up cash reserves and returning cash to investors [through special dividends and share buy-backs]. In the current circumstances, shareholders who receive these cash bonuses use them to meet current spending because real earned incomes have been tightening; rather than making their own independent investment decisions for the future. This situation has greatly been exacerbated by the combination of institutional and policy disasters that have meant that major investing institutions [such as pensions funds and insurers] are discouraged from making equity investments.

Economic policy has become a conspiracy against productiveness, rather than a stimulus to investment. That is contrary to the basics that Mrs Fawcett set out for elementary schoolchildren in 1870: and the shocking fact that cabinet ministers have no notion of the concept of productiveness is a wonderful measure of the intellectual regression through which Britain has descended since the nineteen-twenties, when fantasy Economics was allowed to supplant the truths of Political Economy: because simplified mathematical models were easier to teach than the complex inter-relationships that are exposed in Political Economy.

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'.

Capital, Labour and Donald Trump

In the long history of political economy [the science that existed before Economics was invented] the starting-point for understanding the economy was recognition that there were three 'factors of production', three inputs that were necessary to achieve any output that was useful to [or desired by] the human race.

'Land' stands for all the resources of planet earth: the surface of the earth and everything that is on it, under it or capable of capture above it [such as birds].

'Capital' is all the output of past periods of time, that people hold back from consumption so that it can be used to facilitate production in future. This came to include tools, equipment and machinery and the buildings that house them, breeding stocks of animals, stores of seeds for future crops, and [after the invention of money] a stock of money that some people accumulated with which to employ people over time to produce output in the future. Those people became known as 'capitalists' because they became the controllers of a large proportion of the capital the any nation carried forward from each period into the next.

'Labour' is the capacity of humans to work physically and mentally to extract the materials of the earth [and, in the case of capitalists, to organise the activities of other humans] so that the product of successive years could increase: subject to the risks that can arise from climate, geology and human behaviour to disrupt a smooth process of wealth creation.

After the creation of human society and political entities, some of the risk that were assumed to exist for humans in a 'state of nature' were lessened by the system of law and order. Other risks, such as subjection to tyranny and the possibility of destruction in war, were inherent in society.

From the very beginning of political entities, the people who gained control of communities, of cities and of states recognised that they could achieve a good lifestyle for themselves, and acquire the means of influencing and dominating others, by controlling and exploiting exchanges between the common people. Governors facilitated trade by creating money; then creamed off taxes from markets where exchanges took place. In early stages of social sophistication it was recognised that if some people concentrated on activities in which they had special skills or experience, or access to knowledge that was denied to other people, they could specialise in a small range of production, maximise their output and exchange some of their produce with specialists in other fields. Thus specialisation and exchange developed together, and produced economic expansion; and if the government facilitated this process there would be even more available in taxes to make for a luxurious court and a powerful military resource.

By 1700 there was a considerable literature on political economy, especially in northern and western Europe; and among the writers there was a general assumption that a 'good' government facilitated production. It was also recognised that due to climatic and other factors, no country produced everything that would satisfy the wishes - the wants - of the people and their rulers. So international trade [or the development of colonies in different climatic and geological zones of the earth] should be facilitated: provided it increased the aggregate wealth of the nation. International exchanges that led to a loss of wealth to a country were to be prevented wherever possible; except where a short-term dependence on some import facilitated an accumulation of capital that would, over a series of future periods ensure an even greater national product.

These might seem to be arcane points in terms of the second decade of the twenty-first century: except that, just last year, a man was elected to the presidency of the United States who accepted pretty well the pure understanding of political economy that I have just summarised. This leaves open the question: was the invention of Economics - foreshadowed in Adam Smith's 1776 Inquiry into the Nature and Causes of the Wealth of Nations - an intellectual aberration that has dogged humanity for 250 years?

That is a question to which I will return; not least, as relief from the depressing daily news about the UK General Election.

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!

Little and Large

There is no doubt that the USSR regarded Britain as a potent enemy during and after the Second World War. After Hitler launched his Blitzkrieg on The Soviet Union, Churchill openly said that if Hitler invaded Hell the British coalition government would make a pact with the Devil: the read-across from 'Devil' to 'Stalin' was unambiguous.

While Churchill ran the war with the support of his inner War Cabinet, the Lord President of the Privy Council - Clement Attlee, the Labour Leader - effectively ran the home affairs of the nation as Chairman of the Lord President's Committee of the Cabinet. When the war ended, Attlee became the Prime Minister, pledged to a programme of specifically democratic socialism in which he was constantly harassed by Moscow-supporting Communists who campaigned overtly and covertly, most obviously by infiltrating the trade unions which both provided funding of the national Labour Party and local support for MPs and Councillors through Trades Councils. Other significant fields of infiltration were the expanding universities and 'higher journalism': a very limited number of people wrote editorials and think-pieces in the broadsheet newspapers and in the upper-end periodical magazines. In those pre-television days the fashionable commentators also got a platform on BBC radio. Among their un-idealogical pupils and followers the 'fellow travellers' disseminated a dogma that Britain had done magnificent things in the war, but that this had been the last hurrah of an exhausted political and economic system: Britain was now finished. We should give up the Empire - let tiny cohorts of Marxist guerillas take over one colony after another, just as quickly as Moscow could train and equip them, and thereby save British soldiers from risk in confronting them. The government should reduce the defence establishment while it taxed incomes and inheritances so heavily that the aristocratic and capitalist cohorts would be squeezed out of existence in a few decades. This would leave the country to be led by a 'meritocracy' of people whose qualifications for power would be based on education and experience: assessed and monitored by the cohorts who were most heavily penetrated by the inspired left.

The political right was too powerful to be submerged. There was a strong corps of right-wing intellectuals, especially in the older universities, who could keep key posts from capture by disruptives. The military and the civil service mostly stuck to the plain meaning of their oaths of loyalty to the Crown. Religious institutions remained strong and largely uninfluenced by the left; and the most powerful trade union leaders had obtained and retained their positions by confronting assaults from the left, which left people like Ernest Bevin among the strongest and most-aware resistants to left-wing 'entryism'. This resistance did not defeat the left; it forced them to adopt Fabian tactics [named after a Roman commander who waited for the right moment to strike, despite the frustration that his approach provoked in many of his contemporaries].

The right also settled down to a long and largely unheralded strategy of defence: by a mixture of influence and 'philanthropy' conservative graduates influenced appointments in universities; magazines [most notably Time and Tide] were funded heavily by UK and US institutions to counterbalance the prevalent left tendency in 'heavy' journalism.

Meanwhile the mass of the population was presented with a policy that was essentially the Roman model: bread and circuses, paid for by exploiting the empire. As the empire shrank in area as as Britain's former preponderance in global trade shrank with it, the limits to taxing the rich were quickly exposed. Spending on investment [which had largely been paid through defence procurement] was reduced dramatically, leading to the decline of shipbuilding, aviation, computing and a massive range of other industries over four decades between the 'sixties and the 'nineties. As industry declined, the options of allowing credit inflation and 'selling the family silver' - disposing of the nationalised industries - became the preferred methods for balancing the books as the state spent vastly more than the economy earned.

This came to a head in 2007-8, but it had been inevitable since at least the mid-sixties, when the policy of handouts regardless of earning-power became evident. The major factor in making this bizarre impossibility the reality was the charade of democracy by which politicians acted out a shadowy conflict that blinded almost everyone to the economic reality. In this they were abetted by Economists, whose normative models transcended material reality. This blog has spent a lot of words on trying to present that situation in palatable doses. it has repeatedly been pointed out that a major component of the current incomprehension is the fact that the inventors of Economics progressively dropped the older and mature science of Political Economy as the fantasies supported by Economists became increasingly discordant with the truths exposed by the older science. Over the next couple of weeks I will lay out the Principles of Political Economy for the twenty-first century. People may now become willing to pay attention, as the evidence of failure of Economics and of charade-Politics becomes more blatant.

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.

BRICS Ascendant

Readers of most Newspapers in the postindustrial economies, and the wider spectrum of society that half-notice news headlines on television and radio, have been left unaware of the fact that the last days of March produced major news in the field of Political Economy, from Delhi. A meeting of the Heads of Government of China, India, Brazil, Russia and South Africa disappointed US and EU delusionists who hoped that major areas of disagreement - and different perceptions of their national interests - would cause this group of countries [commonly called the BRICS] to come to no practically-useful agreements. They instead issued their Delhi Declaration summarising a developing shared view of the state of the global economy, an increasing frustration with the unfairness of the nineteen-forties institutions that regulate world affairs [insofar as such matters are regulated], and a shared determination to gain appropriate recognition for their group - and for its members individually - in global institutions.

Their importance in the global economy has already gained recognition as a fact, as more of the goods in a typical European or American hardware store are marked as having been made in some of those countries; and oil, crops, minerals and other 'primary products' from those sources are increasingly important. China has gained control of the global market in 'rare earths' as well as a massive market share in simple manufacturing. Indian firms control globally renowned brands of high-quality cars and have exported their software building and managing skills into the highest technology laboratories and factories worldwide. Brazil is increasingly gaining respect for the balance between sectors that is being achieved as it grown rapidly. Despite the threat to economic stability that is posed by Zimbabwe-style pressure to dispossess 'white' firms and farms that comes from the 'left' of the ruling party, South Africa has managed to display economic data that currently justify their membership of the club. Enemies stress the weaknesses of Russia - declining population, oligarchy, corruption, the failure to establish 'real democracy' and the dubiety of the rule of law - but the combination of military strength and natural resources that always provided the basis for Tsarist power is still enough to ensure the global significance of the biggest country on the planet.

The Delhi group asserted that half of the world economic growth that is forecast for the next few years will take place in those countries. When 'the west' was in the lead, its Economists and politicians extolled their role as 'the locomotive' for the world economy: the concept has quietly been forgotten now that the BRICS can claim to be the motive forces for the present era. The most influential of the post-war institutions, the International Monetary Fund [IMF], was structured to serve the victorious wartime allies and even after many revisions to reflect changes in the world [and much weakening of the role of the US dollar] the EU together has 36% of the votes, the US still has 17%, and the BRICS together have just 11%: while their turnover is 28% of the global economy [and rising quickly as the west stagnates]. The Delhi assembly criticised this, demanded a reorganisation of the United Nations, and especially of the permanent seats on the Security Council, to reflect the shift in power. The rigidity of the World Bank - and the probability that yet another American would become its chairman - led to the BRICS examining the possibility of creating a South-South Development Bank through which they could lend money to each other and their emergent-country clients.

If the old-world institutions do not open themselves to recognition of the shift in the basic facts of Global Political Economy, they will compel the BRICS to set up their own parallel institutions: and the potential of global institutions to foster Peace among the Nations, which was promised to the whole world by the victors of 1945 - which included China and Russia and Imperial India - will be vitiated. The BRICS have the resources and the ability to go their own way: within the first half of the present century the Chinese and Indian economies will both be larger than the American. If these powers are not welcomed with due respect into the global institutions, the postindustrial countries will be much the loosers.

No Crisis of Capitalism

Fashionable babbling in the media and among politicians has now fixed on the vague idea that that there has been a crisis or even a failure of capitalism. So what is Capitalism?

By 1800 Political Economy taught that there were three factors of production without which economic activity could not occur:
land: which means both the site where production and/or trading takes place, and all the natural resources that are needed as direct and indirect components of the process;
labour is all the manpower and womanpower that has to be brought to bear to start and to maintain the production of the output and of all the components that go into making it, including the management of all stages of the process;
capital is the accumulated saving from the output of past times that is deployed to meet all the costs of running a business until an exchange of output for revenue to take place. The capital must cover rent for the site, the cost of the materials, and the wages of people who build and equip the factory and start production; it must also fund the original marketing of the output.

In a quest for transparency between 1800 and 1860 Political Economists developed the concept that there was a symmetrical means of computing the fair return to each factor:
Land was remunerated with rent which was the price that had to be paid for the use of the land for this purpose rather than for any alternate use. Landowners could chose to keep their estates undeveloped, for hunting; but they can optimise their income by farming it for crops [or leasing to tenant farments], or by letting sites for all sorts of purposes, including urban property which is most lucrative.

Labour was remunerated with wages that must be sufficient to attract the necessary labour, with the necessary skills and experience [where relevant]. The vast majority of people who are not peasants need to earn a living, and they learn that location, luck, experience, skill and physical fitness can attract differential wages. There are differing wage-rates for different jobs, and for the same job in different locations even within a small country. Intellectually able, fit, skilled people who are able and willing to migrate can maximise their earnings.

Capital was rewarded with profit which must be sufficient for the capital to be allocated by its owners for one selected purpose rather than for any possible alternative use. Instead of being invested in business, with all the risks that follow from such an investment, capital - in the form of cash - can be lent to the government [whose borrowing was believed to be absolutely guaranteed for the lenders]: so money will only be invested in trade and industry if it is at least likely to produce a return to investors that is greater than the rate that can be got from the government.

Political Economy earned the nickname 'the gloomy science' [or 'the dismal science'] because of the stark realities that it exposed [notably the Law of Diminishing Returns, the Iron Law of Wages and the Principle of Population]. Attempts to make aspects of the subject look more humane produced more confusion than clarity; and when clever concepts like the Labour Theory of Value were brought to bear in an attempt to explain wage differentials the oppotunities for reductionist quibbling became infinite.

After reading about these issues in depth, the young Dr Karl Marx declared that all the theorising masked one essential fact: that the system of production was not fair and was programmed constantly to become less fair. Progress in industry and in agriculture was derived from the application of ideas and of human ingenuity, but these natural resources - which brought about all the progress for mankind - could not be employed without capital and unless access was granted to land. Land was controlled by landlords, often aristocrats, who could demand increasing incomes for letting their land be used for factory and housing sites, and/or for growing crops more intensively, or for allowing quarrying and mining on and under their land. Even more outrageously unfair, to Marx's perception, was the fact that operators of factories and of rented modernised farms captured the surplus value that was generated in the process. The owner-managers of factories paid the lowest wages that could be forced on uneducated and anxious people, selected factory sites where they would pay as little in rent as possible [which is why so many works and mills were built in grim Pennine valleys] and bought raw materials from the cheapest sources: and then they sold the produce at the highest possible markup. The difference between what the output cost to make and to deliver and the price that was received at the point of delivery, was surplus value. The chap who took the money that represented the surplus value put the greatest possible amount of his takings into his firm as additional capital: which was used to expand the factory, increase the stock of raw materials and take on more labour. He squeezed costs as tightly as possible, and sold his produce for the highest possible price: so that he could invest even more in the next period and appropriate even more surplus value. The purpose was not to feed or clothe or otherwise benefit human beings: the sole objective of the new dominant class - the capitalists - was to accumulate more capital through the expansion of the system of production.

Marx constructed a political ideology based on the concept that the community must capture the control of economic activity from the capitalists: hence his system adopted the name communism: which had a special resonance with radicals after the experience of the Paris commune in 1870.

Transcending the Teutonic complexity of his formal writing, Marx and his associate Engels used journalism and pamphlets to popularise his message and to report on the obviously detrimental conditions in which many wage-earners lived, especially in the most industrialised areas of England. Anyone who combined Marx's explanation of the depredations of capitalism with the Laws of Political Economy was drawn to the conclusion that the outlook was bad. Capitalists controlled the system, and they faced diminishing returns; so they would demand even more surplus value proportional to the falling prices for which output could be sold. In an attempt to preserve their income they would reduce costs by cutting wages and demanding more work from their employees: the workers would have to take that, or become unemployed with a risk that they and their children could starve. The capitalists would also use their power vis-a-vis the landlords to reduce the prices they would pay for materials; and they would eventually dispossess the landlords either by buying them out or by the exercise of political power.

Capitalist and capitalism were created as terms of opprobrium, characterising a class and a mode of economic organisation that had emerged with modern industry and was perceived by the inventors of the concepts to be essentially inhumane. At the same time as Marxism became the ideology of the political 'left', between 1860  and 1900, successful businessmen in North America and Europe came to accept the term capitalist as a description of themselves. In the twentieth century as communism became more oppressive and inefficient after Lenin had grabbed power in Russia, the more businessmen and politicians in the 'free world' became proud of being 'capitalist'. The doctrine that a free market enabled investors of capital to maximise economic growth came to a shuddering check in the early nineteen thirties. Politicians and the few perceptive Economists [most notably Keynes] recognised that only government action could recalibrate the system. Capitalism - of a new kind - was able to survive in parallel with an interventionist state.

The resulting 'mixed economy' of the post Second World War era was very little like Marx's capitalism, but at its best it fostered the development of investor-funded businesses which provided employment, taxes and innovation that were the main contributors to economic growth. Even social democrat governments worked closely with 'civilised capitalism' and after 1970 they followed  right-wing parties in privatising nationalised and state-created industries. It became the fashion to argue that this variant of capitalism was the best form of economic organisation. But - unfortunately for the long terms health of the economy - this heavily regulated and highly-taxed market economy became less and less like Marx's capitalism. Far from being concerned obsessively to invest in the expansion of productive facilities, Thatcherite capitalism became a system from which spending power could be extracted for taxes, for dividends [returned to collective investment funds: investment and unit trusts in the 'sixties, then pension funds in the 'seventies, then venture capitalists in the 'eighties, now hedge funds] and for increasingly inflated remuneration packages for directors, managers and star traders. That system of chaotic and inflationary economic disorganisation was not capitalism: nor was it anything like Leninism although it was controlled by the state through regulatory regimes, licensing systems, discretionary taxation, procurement policy for the overweening public sector, and the manipulation of monetary and fiscal policy.

The growth of the chaotic real-world business system was funded by the emergence of the parallel system of credit expansion in cyberspace that enabled firms and individuals - and governments - to borrow money to spend greatly in excess of what they earned. The gross overexpansion of that fantasy universe led directly to the credit crunch and to the slow realisation in the countries that were most affected by it that their economies had been despoiled of any solid foundation.

Some individuals have recently become rich by manipulating shareholdings and by creating or capturing intellectual property. Only a very few of them have behaved like classic Marxian capitalists and put their profits back into their real-world businesses as new investments; and even those few have realised that taxation will destroy their personal business empires on their death [if not before]. The portion of the economy that is controlled by individual capitalists [and by capitalist dynasties] is trivial; and the real economy is overshadowed by the nexus of fantasy businesses that is called casino banking.

We live with a systemic crisis: but it is decidedly not a crisis of capitalism: it is crisis caused by the absence of any system to ensure that the investment that is necessary for the future survival of the economy is being made. The present standard of living of every nation in Europe, except Germany, and of the USA is only maintained as it is by borrowing: most notably the borrowing that governments undertake to subsidise the welfare state. However incoherent, incomplete and insensitive the welfare state may be, it still maintains millions of people. The decisions about this system are taken, always have been taken, and always will be taken by politicians. Contemporary politicians have no serious business experience, no knowledge of Political Economy, no recognition of the nature or depth of the crisis that it is their duty to resolve. The mess was created by politicians, with the enthusiastic support of would-be capitalists who have been encouraged to 'go for it'. Few non-politicians believe that the political class have the intellectual power, or the integrity or the guts to meet these challenges. Recently the media have followed politicians in using diversionary tactics by decrying and individuals who can be characterised as 'fat cat' capitalists. But it is impossible to sustain the assertion that a predator class  of 'bankers' is exclusively responsible for the recent crisis. The pseudo prosperity of the era from 1980 to 2007 was achieved by the symbiosis of the human economy with the finance generated in cyberspace: that was not  capitalism.

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.