Power, Legitimacy and the Economy

Chairman Mao declared that "power comes out of the barrel of a gun"; and over the millennia many regimes all over the world have gained and held power by the power of the sling, the arrow, the spear, the sword and the gun. The Bible tells how the pyramid-building rulers of Egypt consolidated their power over centuries by maintaining state granaries, in which crop surpluses were stored in fruitful years, which could then be doled-out to maintain the people when harvests were insufficient; whether that was due to crop failure [usually due to irregular weather] or to military intervention with the farming year [as when 'the peoples of the sea' invaded some provinces].

The comfortable delusion upon which the European Union was built is that the founder states were mature democracies, where the mass of the population acquiesced in the constitutional order and selected between political parties in regular, orderly elections; largely on the basis of their performance or promises in developing the economy. Since 1995 several states were admitted that had recently been 'democratised' after decades under the Communists gun-rule, and their dissent from the consensus established in Brussels [not least, on inward migration from outside Europe] has now become conspicuous. But [as has been pointed out before in this blog] the west European democracies were new when the Treaty of Rome was signed. Germany was fascist and brutal until mid-1945, Italy was in a similar state. France was still recovering from the hidden conflict between wartime collaborators and resistants. Smaller states with monarchies had been able more quickly after 1945 to establish a sort of normalcy, but all carried legacy issues from the war [except Sweden, which had the great luck to maintain its neutrality]. The EU had a mock-democratic parliament, which was subject to the farce of moving every month from Brussels to Strasbourg that was the proof of its impotence: if the assembly had an iota of real power the members would have opted for a fixed location.

The United Kingdom and Ireland joined the Common Market together, with the secret agenda [agreed in London and Dublin, but not shared with the broad electorate in either country] that a 'peace process' could follow in Ireland as the identities of the two states was subsumed in the European project. Before Mrs Thatcher won her infamous 'rebate', the UK was paying in massive amounts to  the Common Market funds that made similarly vast payments to Irish farmers and local authorities. A generation on, Mrs May and her pathetic cabinet seem not to know that, so they delude themselves that are avoiding the crunch on the Irish Question by putting up notions for a customs arrangement that is very much secondary to the political fudge. If the political fudge is ignored the whole Brexit project will end in violence. It is more than a coincidence that Gerry Adams has announced his intention to stand down: if there is to be a new civil war in Ireland [with inevitable excursions into the British mainland] it will necessarily be  conducted by a new, vigorous Republican high command.

If this interpretation of current events seems apocalyptic, be aware that if consent is withdrawn by a coherent component of the population in any country [or province] the men and women of violence will seek to develop that situation. Mercifully, there is no sign of such a thing happening in Catalonia; but Ireland has been a different case, for centuries.

If a regime is able to provide the mass of the people with palpable economic benefits, as the pyramid-builders did - and as the welfare state did in western Europe for the half-century after 1950 - revolt against the centralised state is rare: Northern Ireland, the Basque region and a few other cases were the exceptions that proved the rule because there were deep historical reasons for those special cases. It is significant that as the Irish Republic gained more of the advantages of a welfare economy, so the politicians in that state eschewed the IRA and their political allies more and more deeply.

Meanwhile, in Zimbabwe massive crowds have assembled to support the army and the ruling ZanuPF party in their attempt to replace Mugabe by his erstwhile deputy. 'The crocodile', as he is known, is a notorious enforcer; hitherto in Mugabe's interests. It was he who unleashed North Korean mercenaries to support his own thugs in killing at least 20,000 Matabele. It was he who organised such beatings of opposition voters in the last presidential election that the opposition withdrew from the second round and allowed Mugabe to reap his 'democratic' mandate. By all accounts he is less blatantly kleptocratic than Grace Mugabe, who was being set up as the next president. Optimists are hoping that the crocodile will metamorphose into a consensualist who can forge a truly 'national' government, but the odds are stacked against that. Once the dust settles on Mugabe's departure, Zimbabwe will revert to rule by fist and cane, supplemented - as judged necessary - by bullets: as in the case in most of Africa.

The chances of Zimbabwe approaching any credible standard of democracy within fifty years are very small.

The chances of the beneficent Brussels fantasy lasting for another fifty years are diminishing: as Mrs Merkel's struggle to build a coalition well illustrates.

Sprinklers: A Key Indicator of Economic and Social Wellbeing

I have rabbited on about sprinklers in buildings on several occasions in the past, most notably in the context of the Grenfell Tower disaster in Kensington. I do it today in the context of another issue that has surfaced in the media in the past 24 hours: namely the fact - as officially recorded - that fewer new schools are built with sprinkler systems than in past decades.

Sprinklers are devices to produce a heavy shower of water inside a building that is on fire, and if they are properly installed to a good design [and an appropriate specification of devices used] they massively reduce the risk of destruction of the contents of the building and of death and serious damage to people and animals. There are advanced techniques for drying-out water-damaged assets.

The aspect of the prevalent free-markets dogma that is most directly damaging to human beings is the reduction and removal of controls that prevent dangerous structures and situations from being permitted. There was an almost-golden age of safety in factories and public buildings, when the local fire brigade had the power to insist that safety systems like supplementary escape staircases and sprinkler systems had to be installed in a building before it was granted a 'fire certificate' that permitted a range of uses of the premises. Buildings with fire certificates were usually acceptable to be insured - with their contents, including liabilities to people and to other entities than the owner or operator of the building - but nevertheless the insurance companies employed their own Inspectors who could enter the premises and check that safety systems, including sprinklers, were appropriate and properly maintained and fully functional. That last sentence is important, because it is possible to have a well-designed system that is regularly inspected but which can be switched off [or the water turned off] by human oversight or negligence: or as part of the preparations for a fraudulent insurance claim for loss of goods kept in the building which were burned in a fire where the sprinklers 'failed to operate'.

The free marketeers have been dominant in the United Kingdom since the Labour government submitted to the International Monetary Fund [IMF] in 1976: in return for being allowed a loan which was intended to 'stabilise' the external value of the pound sterling during a period of extremely high inflation and 'industrial strife', the Callaghan government accepted [very reluctantly] the free-market dogma that the Thatcher regime was to embrace after their election victory in 1979. On that reckoning, the free markets dogmatists - the Econocracy - have dominated society and the economy for forty-one years [though I have pointed out several times that 364 then-practicing Economists signed a letter to the Times in 1982 rejecting the dogma that was to gain hegemony by 2002].

The period since the autumn of 1976 is exactly the period of Britain's absolute decline as a manufacturing country. We have wantonly destroyed coal mining, most steelmaking, large-scale commercial shipbuilding, our separate aircraft industry, the mass production of textiles and most of the armaments industry [including even the capacity to supply uniforms for a mass military]. The economy has grown because new industries have arisen in high technology such as pharmaceuticals and microprocessors, and in the games and the entertainments industries; due to the brilliance of British inventors, some of them in the university system. The balance of payments deficit has been mitigated by sales of much of the new intellectual property to aliens.

At least equally important for the growth of the economy has been the expansion of government and personal debt. Some of the government's debt has been hidden from the official balance sheet, for example in the PFI schemes by which schools and hospitals have been built and funded by businesses on the understanding that the government [or agencies including the NHS and local authorities and their semi-independent social housing departments] will pay for the use of those buildings when complete. Those charges will for decades to come be paid out of the users' annual budgets; and the debt that would otherwise be required to build them is not listed in the public accounts.

In order to pare bits of expenditure off the public accounts, both from the admitted debt for construction and from the the running costs of premises, devices like sprinklers have been made optional. Building operators - including providers of social housing and free schools and the trusts that manage [and profit from] 'academies' - are exempted from costly requirements such as installing and maintaining sprinklers. Thus the 'economic burden' of building and operating the facilities is reduced: and so is the safety and utility of the premises.

The extreme shabbiness of this policy has rightly been attacked by the Commissioner of the London Fire Brigade, Dany Cotton. Human lives - even those of children is school and in care - are at unnecessary risk: due to the implementation of policies directly derived from Econocratic dogma. Thus has Economics become directly and fundamentally inhumane.

The Present State of Economy and Society

Official statistics are compiled by honest professional people, and tell the 'truth' in simple numerical terms. But much can be done to interpret them, either favourably or unfavourably, according to the wish of the interpreter. Hence, although the United Kingdom now has the highest proportion of its available adult citizens in employment since 1975 [one of the three years during which the mixed economy was tested most severely] it is sobering to note that in almost every way the present pattern of employment is massively more fragile than was that which NeoKeynesian inflation undermined. The effect of the inflation of prices, especially after the oil price hike of 1973, was that production was interrupted by strikes when the authorities took action to suppress wage rises in their clumsy attempts to cap the wage-price spiral. In each period of pay 'restraint' government costs rose while government revenues declined, and the balance of payments with the rest of the world became strongly negative. In those circumstances, the Labour government [which relied on minority parties to retain control of the House of Commons] sought a loan from the International Monetary Fund; and the conditions applied to that loan [in retrospect] can be seen as a demand for the state to bring in Monetarist policies to replace they failed pseudo Keynesianism that the Economic establishment had applied.

The Labour Party was torn apart by the consequent dissent from the new policy, with the trade unions - the traditional paymasters of the party - doggedly opposed to the government. Consequently the Conservatives won the 1989 general election. The new Tory leader, the largely-unknown and completely untested Margaret Thatcher, embraced monetarism enthusiastically; and she deplored the less-than-half-hearted attitude towards her radical policies from most of the Tory establishment [including most of her cabinet]. They had been broadly content with the mixed economy and were scared by the new radicalism. Mrs Thatcher and her close cohort dismissed the majority as 'wets', and became more intent on radical change in the economy. As to the social consequences of disruptive economic policies, Mrs Thatcher was simply to say 'There is no such thing as Society'.

The people who could be identified as the 'enemies' of the new Monetarist policies began with the Economists, 364 of whom signed a letter to the TIMES condemning her policies from a standpoint of NeoKeynesianism [and who succumbed thereafter, with amazing speed, so that those who remained in their 'profession' become locked in to the new Econocracy by the millennium]. Next among the 'enemies' were the trade unions, that had frustrated the attempts by the Labour government of 1974-79 to control the wage-price spiral. Here the Thatcher gang decided on a radical solution: if you close the coal mines and a large section of the iron and steel industry [including shipbuilding] you take the cash and the members away from the unions, leaving them as shell organisations with no real power. These radical solutions were adopted; and the majority of the electorate was unmoved by the pleas of miners and steel workers whose communities were largely isolated geographically and socially from the cities where banking, finance and smart retailing were providing more nice, clean jobs for the middle classes. While the traditionally unionised areas continued to return Labour MPs from constituencies with very high percentages of the industrial and ex-industrial population, other urban centres and the less-densely-populated majority of constituencies were content to return Tory [or, in some cases, irrelevant Liberal] MPs; and thus the wrecking job was done.

It is now more than thirty years since the steelworks of Sheffield, the pit sites across the country with their unmistakable winding-gear, the massive cranes on the dockyards to the Tyne and the Tees and the Upper Clyde, and other symbols of the most basic and essential industries were first left derelict; then cleared away. It is hard to believe that Meadowhall in Sheffield was once the world's leading steel and engineering centre, or that the placid banks of the Upper Clyde were once the proudest shipyards in the world.

No thanks to successive governments, pharmaceutical and biological companies have developed lucrative new products; creative industries [including computer games] have developed magnificently and - despite the idiocies that created the financial crisis of 2007-9 - the financial services based in London lead the world in expertise and innovation. So Britain has high spots, and remains uniquely innovative; but fools in government have congratulated themselves on 'attracting inward investment' as one after another the innovative firms [along with the intellectual capital] are snapped up by aliens. This almost-constant alienation of the most valuable assets that the British continue to create means that the balance-of-payments becomes increasingly adverse, as British consumers have to pay foreign firms to access British inventions, even if they are manufactured here.


The final knell of heavy industry has been sounded today, with the news that Tata is selling its steelworks in the UK to Thyssen-Krupp: whatever promises are made [and especially if we really do leave the European Economic Area] Port Talbot will go; and with it the last evidence of heavy industry will be consigned to the film archives and to history books.

More Lessons from British Home Stores

The defunct chain of shops that was British Home Stores has had more publicity in the past year than it enjoyed in any decade when it was an active business. This has largely been due to the pathetic way in which the life of the business ended, and the way its deferred pensioners were treated by the last two majority owners of the firm. The penultimate owner, Sir Philip Green, has in my view unfairly been lambasted: he has made a donation to the pensions fund that has been acceptable to the Trustees [who cannot be excused of negligence] and to the Pensions Regulator. The circumstances of his sale of the declining business to a twice-bankrupt chancer are murky, but there has been no indication of criminality. The final owner might well have been out of his depth, but he pushed his luck and took what he could out of the struggling business in a way that can at best be characterised as cynical.

For many years I had wondered how the business survived: and the one commonly recurrent answer was that it was the best place for lampshades and other lighting, especially for the home. I used the BHS shops for that purpose because they really were at least as good as anywhere else in the range, variety and taste of the wares in their lighting department. I became surprised at the longevity of that lead in one aspect of the business, over a couple of decades when all other departments seemed to get more run-down and the selection of goods was less attractive than in other stores. I was also surprised when Philip Green took the chain over, because his other shops were focused on particular market segments, which they addressed [in the main] successfully; and I was unsurprised when he dumped the cuckoo from his nest.

It is now a year on from the collapse of the business, and research publicised today makes interesting reading. More than 90 of the 160 BHS shops that closed last year remain empty; but almost all the London shops have been re-let and are in operation [mostly as shops] under new management. But around the rest of the country almost all of the shops are empty: this applies to most of the high street sites, and also to a few that are located in modern shopping centres in relatively prosperous towns. Large stores are less and less needed, as more shopping is done on-line via large warehouses and delivery services; which include the revival of Royal Mail for whom the internet has provided compensation for the decline of letter mail, which is itself largely to product of the internet.

Behind these obvious changes in shopping habits lies the more important fact that all Tory and many Labour politicians fail sufficiently to emphasise: the absolute real-terms decline of the economy in most regions since the Thatcherite destruction of so much of the material capital on which true prosperity ultimately depends. Human beings are material structures: we need the clothes and furnishings that British Home Stores used to offer us, almost as much as we need food and housing. Much of what we eat [and an increasing proportion of what we wear] is imported: so we need to sell countervailing exports to the rest of the world. But we no longer export goods in sufficient volume or with sufficient quality, novelty or other positive characteristics that used to make British goods attractive in global markets.

 Britain - hailed as the 'workshop of the world' before 1800 - became a net importer of manufactured commodities early in the Thatcher years: but the residue of old industries and the rise of new sectors, especially in the so-called 'knowledge' and 'technology' sectors as well as pharmacology and financial innovations, meant that until the financial crisis [that became apparent in 2007 and reached its peak in 2009] the balance of payments could from time to time be maintained. Since the 'crunch' a deficit on the UK's balance of payments has become entrenched: even after foreign money has been paid prolifically to UK sellers of London house properties, small estates in the home counties and firms that have made successful innovations. While super-luxury shops proliferate in central London, largely addressing wealthy aliens and the very small top-earning segment of British society, the majority of the country becomes increasingly dependent on pound-shops and charity shops and the most competitive supermarkets. A walk along any high street, especially one that lies more than commuter distance from London, is a salutary experience. It is proof of the material decline of the British economy; which no amount of financial manipulation can conceal.

British Home Stores, both historically in its decline and fall and now through its legacy of unlettable premises, stands as a stark symbol of the disaster that Mrs May and her cabinet have not yet noticed.

What Comes Next, After North Sea Oil?

Mrs Thatcher's government's economic and social policies were made viable only by the fact that her era coincided with the United Kingdom being able to exploit the oil and gas reserves that had been found under the North Sea over the previous couple of decades. The tax revenues derived from those resources largely funded the welfare state, enabled the government to give redundancy pay and early pensions to unwanted employees from the nationalised industries, and maintained the nation's defences. The material fact of having sufficient gas to meet the national need, and a significant oil supply that diminished the need for imports, enabled the country to shut down the coal industry almost completely. 

Those were the material conditions in which the financial revolution of 1986 was facilitated: and the financial services [with their related activities like the courts and arbitration services] were opened to the international community and became a significant earner of foreign exchange. The loss of the textile, crockery and steel industries was mitigated by the sale of financial and related service globally. In particular, Britain's membership of the European Economic Community as it went through the transition to the European Union enabled London to become the unchallenged financial hub of the Union. It will be interesting to see how far President Macron, as an ex-banker, is able to steal business for Paris in the coming years; but that will be a side-show compared to the issue that is being considered here.

The key fact is that material assets - oil and gas - enabled the immaterial activities of 'the City' to become established as major export markets. Simultaneously, the incomprehension of successive governments as to what was happening in the domestic financial services market was building up to the crash that almost brought down the entire economy in 2007-8. New forms of contract, most particularly securitisation, enabled the domestic financial sector to grow in an unprecedented ways to an extent that was way beyond the regulators' power to comprehend or to control it. Securitisation was developed simultaneously in the USA and the UK, as a means whereby borrowing by some firms and most individuals could be lifted off the books of the banks and building societies that made the original loans, and sold on as new forms of security to suddenly emerging 'wholesale' traders and investors. This meant that the retail banks reduced the amount of lending in their books, and could lend more again; which loans could then be securitised: and so on. The debts owed to their banks by small and medium-sized firms largely remained with the banks, because they were recognised to be too risky for securitisation. But the mortgages and credit card debts owed by millions of ordinary people were seen as safe debts to be securitised. Thus when the crash came, the banks faced the fact that they had many billions of pounds of debts from smaller companies on their balance sheets, most of which the companies could not settle in the depressed condition after the crash. So the debts were kept on the books, the Bank of England allowed the banks to cash in government bonds in sufficient volume and value to make those books look balanced, and a huge problem for the future in the form of 'zombie' companies was created [and it now seems almost permanent: impossible in the near term to resolve].

Meanwhile the financial institutions collectively have carried on lending pretty freely to house buyers with reliable incomes, fueling a boom in property prices for the sectors of society than can afford to maintain their repayments and causing a major social division between those who can 'buy' homes and those who can not. Juggling money to keep the mortgage market expanding, largely by expanding the money supply through the Bank of England's 'quantitative easing' trick, has maintained the illusion that 'owners' of property are asset-rich: and this has kept the economy buoyant with regularly reported 'growth' of the Gross Domestic Product of the economy. This is all based on a bubble of credit; about which the Bank of England is becoming increasingly concerned.

Meanwhile, the 'real economy' of goods made and imported and exported and consumed has shrunk to a minor proportion of the domestic economy. The country has become import dependent: to a degree that ongoing sales of financial and related services to the rest of the world will not enable he country to pay its way. Departure from the European Union, even if the UK is able to retain its status as the financial hub within the European Economic Area, will make this situation worse.

It is usually condemned as old-fashioned and uncomprehending to stress the overriding importance of the material economy. But the success of Germany as a material-exporting country [of high-value-added products] is the living demonstration of the point. The reckless use of North Sea assets to finance a material standard of living that the country can no longer afford, and to fund a finance sector that has exacerbated the nation's problems, is a horror story which will haunt economic reality for at least a generation to come: and no politicians are preparing to cope with it.

Defence Spending in context

The United Kingdom has some pretension - still - to be a major military power, by virtue of the nuclear arsenal that Jeremy Corbin so ardently wishes to destroy. Were he to have his wish, Britain's decline, far below the status of 'the world's fifth-biggest economy', would instantly be apparent. No sane living person who has breathed since the end of the war with Japan in 1945 has ever wanted nuclear weapons to be used. Many people deplore the use of two atomic bombs to 'bring the Japanese to their senses' and thereby save many millions of lives by enforcing the surrender of the Empire of the Sun. But the Corbyn ideal of mutual nuclear disarmament is not going to happen within decades; so to undertake unilateral disarmament would diminish Britain further than it has been diminished under Thatcher and her successors would be an act of harebrained vandalism.

Millions of people in southern England have been told so often that Thatcherism was a great restorative of the country's power and of its pride, that they at least half-believe it. I had the benefit of a Sheffield perspective, where the truth that I beheld was totally different from the myth that enabled Blair and Cameron to continue the craze for deregulation and the dissipation of economic and political cohesion that made inevitable the Grenfell Tower tragedy.

The Thatcher government deliberately stood back from the steel industry, when fellow members of EFTA [notably Austria and Sweden] took simple measures to protect their equivalent production facilities. Thus the greatest concentration of skill and capital intensity in steel and related technology in the world was exposed to cheap, short-term competition; and destroyed. More than 60,000 skilled jobs [out of around 80,000] in the steel sector in South Yorkshire were redundant within three years; while the government rode high in the polls on the post-Falklands euphoria. In Sheffield the loss of HMS Sheffield during the campaign to recover the islands was a salutary symbol of what was to come when a previously-unpopular government was returned with a sufficient majority to press on with its destructive policies.

The primary target of the returned Tories was the coal mining sector. The oil industry was riding high globally. High inflation in the industrial countries had counteracted the negative impact that the OPEC oil price hike of 1973 had had on the oil price relative to that of coal; and awareness of the detrimental effects of carbon-based atmospheric pollution was increasing throughout society. In various corners of the state-owned coal and electrical power industries experiments were being undertaken - successfully - to find ways of using coal to produce energy with minimal polluting effect; and with a realisable end objective of being able to use coal indefinitely [mostly mined from the abundant resources under these islands] as a primary source of electrical energy. The oil lobby was empowered hugely by the development of oil wells in the North Sea, and their arguments against investment in coal resources had weight with a government hell-bent on simplistic privatisation of electricity generation and distribution without the successor companies being lumbered with the obligation to fund research on 'clean coal'.

A more urgent reason for the Tories' ideologues to oppose the coal sector was, of course, the National Union of Mineworkers and their influence over the whole trade union movement. The Labour government of the late 'sixties had encouraged union membership, and the weakness of the Wilson and Callaghan governments in the 'eighties meant that they could not resist the pressure from their trade union supporters [and funders] greatly to empower unions to recruit members in the workplace and demand negotiating rights between firms and their employees. Millions of people were members of unions under 'closed shop' types of arrangement, where people who could not prove a conscientious [usually that meant a religious] objection had to join the union to get the job. The government was keen to sweep away all such obstacles to a 'free market' in labour: and saw the Mineworkers as the inevitable block in their way. So they decided to tackle it directly, and a plan was carefully devised simultaneously to stockpile coal where it was still needed - mostly at the power stations - as the necessary preparation for a strike that would probably cause coal production to cease for a protracted period.

The National Union of Mineworkers was controlled by a clique of hard leftists, led by Arthur Scargill, who were on their side so determined to have a strike that they alienated their colleagues in some regions that those regions' miners stayed at work when a strike was called without a formal ballot and at the time of year -spring - when the demand for coal at the power stations was declining. The dispute then turned into an uprising. I saw this for myself. Hundreds of the police who were drafted in to confront the miners and their violent leftist supporters stayed in the hall of residence where I was the warden, during the vacations. Non-miner supporters of the strike [and of the revolution that they hoped it would ignite] came along for the rough-stuff; and the strike took on another political dimension when the already heavily-exploited miners of the Soviet Union were levied a portion of their wages to support the supposedly-starving families of British miners. No ordinary miner saw any of that money: it vanished into bank accounts for which no explanation nor audit has ever been issued.

People spoke openly of a potentially revolutionary situation. Those around Scargill included a cohort who believed that the mineworkers were the last mass workforce who could spearhead a revolution in the UK. From being a sympathiser with the union, I became a sceptic and then - regretfully - an opponent of the extremism that the confrontation bred. In the end, enough people went through the transition that I experienced myself for the government - despite its destructive motives - to have the strength and support to drive the miners to surrender, and return to work until the pit closure programme could be implemented.

The attitude that closed the steelworks went on to shut the shipyards and aerospace plant, and allowed the demise of the potteries and a series of other regionally-based industries. Much of industry was tied up with national defence - steel for ships and aircraft and guns, as a prime example - the rundown of the nation's defences became inevitable as the real economy slowed down. The bubble of financial services and the poison of consumer credit were encouraged as means of claiming 'economic growth' through the expansion of consumer spending: increasingly on imports.

I have warmed too much to my theme and gone on too long. Apologies to anyone who actually does read this.

The Descent of Ascension as a Symptom of Britain's Decline

Ascension Island was indispensable to the Falklands War in 1982: without that airbase the islands could not have been supplied. Subsequently, until recent weeks, regular RAF flights from the UK to Stanley have stopped off at the Ascension airstrip: which has given the locals a regular access to the UK for themselves and for supplies. That has had to stop: the islanders must now travel several days by ship to South Africa to get a commercial flight to Britain. Sick people are in a deep quandary and it is impossible urgently to secure any medical supplies.

The reason for this is Osbornian austerity: the cuts that have so disastrously undermined every aspect of social and public services in the UK and its dependencies. Under a longstanding agreement, the Americans have use of the Ascension airstrip; in return for which, they maintain it. The cuts in UK defence spending [even before the Queen Elizabeth is fully manned or armed] mean that the RAF has had to dispense with the planes that have formed the 'airbridge' between Brize Norton and Stanley, via Ascension. The planes that are now available are unsuitable for the increasingly ropey surface of the airstrip on Ascension, which the Americans do not plan to upgrade for a couple of years. Thus an important point of communications, which has been militarily vital since at least the Second World War, is left to fester along with with council tower blocks, decaying schools, under-equipped hospitals and all the other increasingly conspicuous evidences of the failure of the state.

Ascension island is a long way off, so it is almost completely out of mind to the British public: which suits their government very well. The Tories [aided and abetted by the LibDems for their first five years in office] have painted themselves - and the country - into a corner where many options are cut off, and will remain so until the inevitable decision is taken to open up the stop-cocks of state spending. Then the catching-up will be begun, with remote islands in the South Atlantic very low down the list of priorities.

But hereby hangs another tale. The UK government, after a century of pleading, did build an airport on the larger island of St Helena: and located it in a place where the prevailing winds make it next to impossible for the sort of 'planes that could use the airport to do so. So one dead duck and one white elephant have been provided on the UK's major possessions in the mid-south-Atlantic. Thus the bureaucracy and the supine politicians whom they manipulate have embarrassed the nation, at significant cost in the case of St Helena and at the opportunity-cost of surrendering essential access to Ascension. Between crass incompetence and cretinous austerity Britain has created a total cock-up.

But why should anyone really take notice? The answer is very clear. Today the Chinese president drops in on Hong Kong, to mark the twentieth anniversary of the surrender that Mrs Thatcher left it to John Major and Chris Patten to complete, the abandonment of any chance to secure the then-colony's independence. Hong Kong is inexorably being wound in to the hegemonic block that China wants to consolidate. Meanwhile, China is building islands islands in the South China Sea to provide military bases and evidence on the map that a huge area is 'Chinese home waters'. Those claims are contested, and will increasingly be a source of friction with neighbouring countries and the USA.

Meanwhile, Britain is frittering away the residue of a great empire: in the island territories all around the world that could be developed [as the Chinese are developing theirs] into strategically significant points of focus. If Britain would just invest the necessary few billions of pounds the islands from Ascension to Pitcairn to South Georgia would restore a global presence as the contest to control the resources that are accessible in and under the oceans becomes increasingly important. The UK has given up or wasted most of its assets. It should quickly undertake a rational audit of what we have, and what can be done with it by an enterprising nation.

Banking Shock?

It is astonishing that anyone could be surprised by the latest major scandal to be published about the bankers. Of course they manipulated the London Market Offered Rate of interest: LIBOR.  Of course they sold completely inappropriate derivatives to small businesses. They have run the financial system on the basis of blatant veniality for the last few decades.

The Rating Agencies are paid by the firms whose stock they rate: and by 2010 they had completely blown away their wholly spurious reputation of earlier years, when the uselessness of their ratings of billions of dollarsworth of badly-cobbled 'securities' and other instruments was made clear. It is incredible that five years on from the crunch of 2007 they remain recognised [by regulators, actuaries and accountants] as holders of the magic means by which stocks, shares and gambling slips issued by other firms are regarded as possessing 'value' in financial markets.

This suspension of disbelief in respect of the Agencies' ratings of company stocks helps to explain how the banks have continued to get away with a similar - and even more obviously corruptible - standard and measure of 'value' in the banking sector. Nobody has had any excuse for believing that any valid standard of competence or integrity has been attached to the daily announcement of libor [and of other median rates of interest] in the London Market. These figures, which are used as numeraires in millions of transactions worldwide every day, are based on data that are submitted by employees of the regulated UK banks. Since the nineteen eighties these same institutions have been deeply embroiled in the business of the London Market on their own account, as well as in the role of agents for other investors.

After two years of investigation by the regulatory authorities, during which the libor has been produced on the accepted basis, it has been admitted publicly that Barclays:
First, both in the good times pre-2007 and during the consequential crunch, massaged the data that they submitted for inclusion in the libor computation to support "the sneaking arts of underling tradesmen". The supposed data that the bank submitted were adjusted to support the day-to-day convenience of their trading counterparties and their chums. They supported their own market positions by influencing the rates that were authoritative in the Market.
Subsequently, after the extent of the crunch had begun to become clear, Barclays continued wantonly to mis-state the data better to facilitate their traders taking up and winding-down borrowings.

There is no reason to believe that the other banks that contributed data were significantly immune to the temptation to use the libor methodology to their advantage. More confessions will be made; and  trivial fines [without criminal charges against offenders] are expected to be imposed on the other banks. Thus the whole of the UK's regulated home-based banking business have massively more undermined than had already been done by the crunch itself.

In the same week, just past, the RBS.group remained unable to rectify a disastrous, inept and incompetent 'upgrade' to its retail software that kept millions of customers from effecting transactions. This was reputationally at least as bad among less sophisticated customers as was the damage to 'wholesale' banking in the credit crunch that they could not understand. Then it was announced that thousands of firms had been invited to buy betting slips that had cost them heavily when interest rates had fallen: some of the 'invitations' had been presented as conditions that must be accepted by the client firm as a term for being granted some other facility by the bank. Many firms were ruined and many more suffered serious difficulty in finding the cash that was necessary to keep going through the slump.

The pathetic politicians have mouthed what their puerile advisers have recommended they should say in response to the multilayered revelations. They have demanded - or promised to establish - 'inquiries' informed by 'independent' 'experts' selected from the usual gang of lawyers and quangocrats who have drawn fees from the system that has promoted the decline of the once-robust economy..

Ordinary white British folk already know all too well what happened.  Since 1980 successive governments of both parties have grovelled to accommodate the demands of the most pushy segments of the finance sector of the economy, because they were declaring expanding turnover and creating jobs and paying taxes that partially made up for the politicians' systematic destruction of the 'real economy'. They never were and never will be capable of self-regulation in any particular. They never were and never will be capable of making objective statements about the 'value' of anything that they conjure into existence. The delusion that the empowerment of market participants will endow them with responsibility towards society or to the body politic was most powerfully asserted by Margaret Thatcher and her sycophants; and was maintained by Major, Blair and Brown. David Cameron has neither the intellectual capacity nor the will to understand the consequences of this ruinous litany; and sneering Osborne has every interest in letting Cameron founder, in the   hope that he will become the leader of a dying Tory Party.

It is certain that within the current political structure the government will not respond adequately or in good time to the next phases of the crisis that the political class has fostered; that the bankers will continue on their exploitative progress; and that the economy will continue to decline. Nobody can seriously claim to be surprised by any of it!

Rational Markets?

The degeneration of Economics in the nineteen seventies was accompanied by an unprecedented elevation of the worst aspects of the subject as a new philosophy in politics. Economic theory moved increasingly away from common sense, into a model-world where relationships could be made 'perfect' through the power of 'the market'. Every aspect of life could be imagined as a trade. A cohabiting couple of human beings engages in a mass of interactions for which no payment is offered or received, but it is arguable that the benefits and costs that are accepted by either party tended to balance-out; and if that were not the case, the relationship would end. In an even more extreme case, over a very long term, it can be postulated that the care and money that parents levy on a child over many years balances broadly with the care that the parents received from their parents plus any benefits the parents receive in later life from their children. For some people the nuclear family turns out to be a very bad deal, and as society has become less constrained by traditional and religious rules there are more cases of parents abandoning children [or accepting the children being taken from them] and young adults severing contact with their parents.

In countries where monetarism and the dogma of rational markets dictated policy, family life responded to the withdrawal of state spending from social and peripheral educational services [such as libraries and Darby and Joan Clubs] by taking on more of the aspects of a market. The perceived lack of an acceptable trade-off between the parties in a cohabitation could easily lead to a rupture: and nobody seemed to care. Religion had less and less influence on personal behaviour as the church leaders treacherously followed secular intellectual fashion: the Bishops acquiesced as the law was changed to facilitate the new fashion. Social norms by which people had for centuries recognised that some relationships - especially the most intimate - were not conducted on a market basis were abandoned. Margaret Thatcher declared that "there is no such thing as society". The next generation of politicians who have accepted Thatcherism as positive reform movement affect to be surprised at signs of absolute societal failure, reflected in child abuse and child neglect and the riots of summer 2011; whilst such societal failure is obviously the outcome of policies that were wantonly adopted by the patrons and exemplars of the pathetic crew of politicians who sit on the front benches of both sides of the House of Commons.

Thatcher's nominally 'conservative' cohorts, who discounted traditional morality and loyalty, also supported deindustrialisation as a manifestation of modernity and applauded the emergence of the cyberspace excrescences of so-called 'financial services' which they patently could not understand. 'New Labour' went along with the fashion and repudiated its roots in trade unionism; with the exception that it was still prepared to take the unions' donations while ignoring their members' interests. Now the breakdown of social cohesion [exemplified in the disappearance of the symbols of trade union autonomy such as bands, clubs, benevolent funds and rest homes] is causing acute concern all across the political spectrum. Applied Thatcherism has undeniably ended in something much worse and more far-reaching than the 'market failure' that collapsed the financial services boom.

Since the financial services collapsed in 2008 firms in the sector have survived only under huge governmental subsidies and an outpouring of money from central banks: but the firms continue to exploit practices that politicians and bureaucrats still have not understood. The profundity of that incomprehension is evident in the political nonsense that has been spoken about 'bankers' bonuses' in recent weeks, to which reference has several times been made in this blog.

Meanwhile it remains painfully obvious that markets do not behave according to any version of equilibrating supply and demand modelling that has featured in Economics since the eighteen-seventies. Trade in even the most simple material commodities that cross the boundaries of states [or of economic communities] is hamstrung by taxes and tax reliefs or rebates, quotas, tariffs, currency manipulation, prejudicially applied safety regulations and a host of other influences which ensure that asking prices are by no means the outcome of open competition. Demand is similarly affected by tax and regulatory interventions and while people grumble about the price of petrol they buy it to enable them to go shopping for quons which they know are priced at several times more than the cost of the materials of which they are constructed.

In share and bond markets the disparity of reality from Economists' models is even more stark. Very few commentators even pretend that share markets, bond markets or any form of 'casino banking' establish prices according to 1870s supply-and-demand models. Speculative Economists still make good livings from advising the economic regulators of  privatised utilities [and the firms they regulate] on the fantasy of 'rational' pricing, but otherwise the notion lives on only in academe. Government bonds are priced according to what interventionist central banks will pay for them, and shares even in successful companies are sold according to the decisions of corporate strategists in investment institutions for whom the revenue-generating potential of the shares is a minor issue - if it is considered at all. The current hoo-ha about the 'premium' above market price that should be offered by Glencore for the mining corporation Xstrata is a case in point. There was a price for Xstrata shares that had been set more-or-less by supply-and-demand on the date when the bid was announced, and the potential buyer offered approximately 8% above that price. The stage army of analysts and representatives of shareholding organisations declared that the premium should be more: the consensus settled around 30%. This was based on the sort of premium that had been offered for very different companies - in disparate sectors of the economy - during the previous few weeks. The only way a really worthwhile valuation can be established for any share is by looking back to today from the future. What a share is really worth today depends entirely on what will be paid out in dividend to the shareholders in future years, and whether the sale price of the share will increase or diminish - relative to overall price inflation - in future.

Nobody investing an insurance company's reserves, or future pensioners' savings, or child trust funds, should follow short-term movements in the prices of even [relatively] secure investments: the investments for which they are Trustees must be made for the long term. Thinking about such investment must transcend short-term conditions. The 'rational' behaviour of a hedge-fund manager who dives in and out of asset ownership with a view to profiting instantaneously from momentary juxtapositions of market positions and the availability of purchasing-power is wholly inappropriate for long-term investing institutions. Those pension funds and similar organisations that have tried to square the circle by investing a segment of their portfolio in shares in hedge funds have taken a massive gamble that could work adversely for the funds that they manage.

There is no 'right answer' to the question of how any buyer of bonds or of shares can optimise the security and the profitability of their investments in the future. But it is glaringly apparent that any suggestion that 'markets' are innately 'rational' on a day-by-day basis is nonsense. Economic theory implicitly requires participants in the market to anticipate the next move before it happens, and to back their hunch with significant trading activity. That moribund Economic theory has taken its final refuge in the universities where its aficionados still delude students whose challenges to the dogma will soon force it into its ultimate dissolution.

Pragmatism and cool thinking are of supreme value to long-term savers at this time: Economists' versions of 'rationality' bring nothing useful to the matter.

Back to Basics: Political Economy [1]

As an independent backstreet blogger I am fascinated to observe the clouds of intellectual debris that flit through the internet in thousands of blogs written by people who desperately want to be regarded as innovative mainstream Economists. Most of them are academics who have contracted duties in a university or a research unit; and some - especially those who produce branded research for a bank or a commercial think tank - have a direct business interest in publishing their opinions. The academics are desperately keen to be quoted by other bloggers and their output is already systematised so that those with academic ambitions cite the number of references to their output that are made by other participants in the racket, just as they do in respect of the 'peer reviewed' academic journals. Soon indexes of citations will list references to blogs alongside references to more formal articles; and citations in blogs written by senior professors will have a higher allocation of points.

The most tragic aspect of this ballooning exocrescence of academic blogging is that almost all the participants display the usual sycophancy to the seniors who can help their careers, who might deign to mention the mini-bloggers in their own blogs.Therefore they are anxious not to step outside the orthodox boundaries of the subject as it is set out by the dominant professors. The majority of the bloggers also display a painfully serious intent to classify themselves in sub-schools within the ever-more-diffuse 'discipline' of Economics, built on phrases like dynamic stochastic general equilibrium that attracted well-deserved ridicule when it was uttered in the House of Commons: but are commended in the hypoxic atmosphere of an academics' conference.

The more intelligent mainstream Economists are forced to realise that Economics fuelled the hubris that caused the credit crunch, but they cannot yet face the fact that the 'discipline' itself has failed. Such an admission would require them to admit that they have spent their careers on presenting doctrines that have condemned their fellow citizens, and themselves, to a lower standard of living in future than should have been available to them.

Economics fails most obviously at the interface between macroeconomics and microeconomics. In principle, socialist planning is a system for directing firms' and individuals' activities day by day, with the intention that each participant delivers outputs that serve as inputs to a planned macroeconomic aggregate. Keynes was in his prime precisely at the time when Stalin's Soviet Union was claiming success for its planning mechanisms: while the world became aware of the brutality with which The Plan was enforced and the disasters [including deaths through famine] that were caused by its inefficiencies. Keynes's wife was a Russian refugee, whose table-talk frequently included information and anecdote about Soviet repression. In The Economic Consequences of the Peace [1919] he had forecasted a strong reaction in Germany to the way the country was treated by the victorious allies at the end of the First World War, and fourteen years on he took no pleasure in seeing the fulfilment of his prediction by Hitler's National Socialists. The Nazi's economic programme was built onto a Four Year Plan controlled by a Commissioner, Goring, who took draconian powers over businesses and the trade unions. The principal objective of that Plan was to prepare the economy to support an aggressive war in Europe.

Keynes was a Liberal who deplored the emergence of tyranny in Europe and during the nineteen-thirties he was concerned that Britain must avoid an economic collapse that would allow communist or fascist ideas to capture any significant proportion of the electorate. Keynes's mentor, Alfred Marshall [1842-1924], was the great founder of authoritarian academic Microeconomics: within a decade of his death it was painfully clear that his Economics provided no prescriptions for solving the practical problems that were causing mass unemployment in democratic societies. Keynes recognised that the macro-economy, the environment in which firms and the buyers of their produce operate, must be managed actively by the state. He suggested techniques for creating employment by government intervention through taxing and spending, and by adjusting the supply of money and by manipulating the factors that determine the rate of interest.

Keynes was crucial to the management of the command economy that supplied the country and its armed forces during the Second World War, and he worked hugely hard at international negotiations in planning for the postwar settlement. The extreme demands that were made on his mind and body were at least contributory to his death from heart failure very soon after the war. Had he lived for another decade he may have addressed the mechanisms by which macroeconomic devices could be made to articulate efficiently with microeconomic systems; but posterity was denied that guidance.

 The lack of  effective articulation between macroeconomic interventions and the achievement of intended outcomes by firms and people has been ducked by the entire 'Economics profession' through the six decade since Keynes died. Whenever the data disclose a trend that the government decides must be addressed by a shift in macroeconomic policy, it increases or reduces the money supply, raises or lowers rates of interest, increases or reduces taxation, increases or cancels government orders to firms, and/or to increase or reduce the number and rates of pay for state employees. Recently in Europe restrictive policies have been imposed on the economies of Greece, Ireland and other heavily indebted states. Within the eurozone, in cases where the elected governments have hesitated to act in the required manner, a change of government has been imposed; composed of  technocrats: - which means Economists.

Because it is outside the eurozone, Britain still has monetary independence and control of most taxation. The current coalition government came together [and will probably stay together] because the party leaders recognise that the economy is in a very perilous situation. The government is taking radical steps to reduce the rate of increase in state spending to a level where  - in an ideal world - the economy in total would be growing faster than state spending, so that government spending and borrowing would become smaller percentages of the gross national product. The appearance of 'stable economic growth' that was delivered by the Blair-Brown regime was derived from increased direct spending by the government and by increased consumption by the increasing numbers of employees who were taken on in the civil service and in state agencies: supported by strong but ultimately unsustainable growth in demand arising from the bubble in the financial services sector.

De-industrialisation had been occurring by default in Britain since the collapse of traditional textiles in the nineteen-fifties: But after Mrs Thatcher came to power in 1979 it became deliberate policy. Coal mining, railways, shipbuilding, steel making and heavy engineering were regarded as the natural breeding grounds for militant trade unionism, so it was fashionable to argue that they should be cleared away like mosquito-breeding swamps. When the Second World War ended significant sectors of UK industry were old-fashioned and inefficient compared to newer factories in the USA and to the newly reconstructed plant in Germany. Rather than direct the bulk of the nation's disposable income into re-equipping the world's leading shipyards, aircraft factories, motor plant, electronic and chemical industries, successive Labour and Conservative governments raised taxes from industry to support the welfare state. While Germany developed the regional banks that supported the development of the Mittelstand of small and medium firms that supplied specialist products and services for industry and commerce, British banks took an increasingly dim view of industry. Within a democratic structure, Germany provided means by which firms could be funded to deliver desired growth. Britain had no such system; but nevertheless enough of industry survived, and new industries grew up - without government support - such that even now manufacturing is still a greater contributor to net national income than financial services ever could be.

Under the 2010 coalition government state spending is being held in check and employment in the public sector is being cut. Ministers talk often and grandiloquently about how the country will achieve macroeconomic salvation through the growth of real-world enterprises: but they become increasingly vague when pressed for details, and show that they are ineffectual in directing funds from state-controlled banks to promising businesses. This is the nub of the present problem: how are individual  firms to be enabled to deliver the contribution that they can - and must - make to recovery? What policies can build a proper articulation between the macro-economy and the firm? This vital topic must be the subject for further bogs in the coming days.

The First Million

UK government figures released yesterday report the number of unemployed young people in the country to be in excess of one million. Labour politicians have made ludicrous attempts to attach the blame for this to the present government. Anyone who has followed this blog knows that the responsibility lies with the entire 'political class' and over forty years or even longer. The story is not just the lack of jobs: the greater crisis centres on the absence of productive jobs in agriculture, industry, education and healthcare; and it applies to all age groups and  it is a part of the contemporary paradox that a significant and growing proportion of the people who carry on working after reaching the age of 65 are in productive activities.Industrial skills, in particular, are held by a smaller proportion of the people in each successive generation.

Between 1945 and 1980 a slow process of deindustrialisation happened spontaneously, despite half-hearted government policy in favour of expanding material exports. Policy was dominated by Keynesian ideas that the system must be fine-tuned to ensure that people were 'fully employed'. In practice this worked out as a series of inflationary 'stimuli' interspersed with periods of raised interest rates and restricted credit. Industrial investments take place over several years between design and the operation of new plant: every time that market conditions and the costs of investment were arbitrarily worsened by the government at the time when investment decisions had to be taken, companies were likely to cut their losses on the design of plant and just shelve the project. This happened again and again. Then from 1980 the Thatcher government had a deliberate policy to rid the country of 'smokestack industry' by removing all protective measures that had been maintained even during the supposed free trade era of the nineteenth century and declining to subsidise 'failing firms' or under-funded start-ups. What Thatcher began, Blair and Brown enthusiastically followed.

There was also a cross-party consensus that state schools should be funded to adopt educational theories that  stressed that 'students' experiences' should take overwhelming preference over orderly instruction. Ignoring the axiom "those who can, do; those who can't do, teach; those who can't teach train teachers'. 'Educationalists' in the latter category developed the theories that supported the comprehensivisation of schools on the cheap. The order and discipline of the Grammar Schools were ditched, together with the emphasis on practical technology - which requires workshop health-and-safety discipline - that had characterised technical schools and the good secondary-moderns. Margaret Thatcher as the education minister in the Heath government [1970-4] was an enthusiastic comprehensiviser and she never showed any subsequent awareness of the ruin that she had wrought. Thus there has been a multi-decade dumbing-down of education precisely where it hurts most: both in intellectual and industrial disciplines. This progressed step-by-step with deindustrialisation and the increase of manufactured imports.

With both industry and education lain waste, high unemployment among young adults is an inevitable consequence: and it is unsurprising that those employers who still have jobs available to fill prefer people from countries where the educational system has been less undermined. Within the UK there is an increasingly conspicuous differential in employability between products of state and private schools.  Parents who can afford to exercise choice in their children's education buy schooling that is anathema to the theorists: schools with order and discipline, pupils sitting in rows for class, plenty of sport and a concentration on 'hard' subjects. What a shock! How dreadful, so to privilege some children over others.

This is very much a British story; no other European country has so recklessly undermined its educational system [though some have gone quite a long way in that direction]; and no other country has so persistently suppressed industry. In the USA there are great doubts about the state of the educational system, and youth unemployment is close to the British level [with very much higher peaks among some ethnic groups in some states] but industrial development has continued across the board, and especially in the higher technologies, despite the collapse of some sectors of low-value-added manufacturing. Rebuilding the US economy can be accomplished within five years: the ruin of the British economy will take at least three times as long to replace.