Money and Value

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

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

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

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

Vigorous Capitalism

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

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

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

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

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

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

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

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

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

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

Old and Useful?

Britain has passed half a century dismantling industry, and pensioning-off the people who understand it. I spent almost half of that time in Sheffield, mostly when it was still a city that provided jobs for more than 75,000 highly skillied artizans and several thousand of the world's leading metalurgical, ceramic and glass scientists. To see that accumulation of expertise dissipated was as big a tragedy as it was possible to experience in any economy. The world continues to need those skills: demands are growing for expertise in using old and new materials for ever more challenging applications in millions of structures and machines that are required to operate in space, in deep mines, under the oceans, in radioactivity and within the human body. A profoundly ill-advised view that 'smokestack industry' was a thing of the past prevailed, most notably in the nineteen-eighties. The twerps who adopted that view assumed that Lancashire mills which operated on the unsustainable [and always incredible] business model of importing raw cotton for processing and re-export were on a par with innovative firms that developed new forms of special steels or carbon fibre: the whole range of industries was considered dispensable. That delusion cost the country dear as the immaterial business of casino banking took pride of place in the limited perspective of the government, taking precedence over the solid virtues of the world's leading insurance market and the world's most effective system of commercial law. The City of London is important because it is of huge value to the real economy, especially for the things that it did well in 1700 and 1800 and 1900 and even in 2000: though by then sleight-of-hand betting had taken the top fashion spot and was by far the most lucrative area of 'finance' which attracted very clever people who made bonuses on the turnover that they could conjure into being; literally without the use of any material commodity other than computers and electricity.

While 'the City' only ever accounted for around the same proportion of the turnover of the economy as the construction sector, it was much more highly rated by bedazzled politicians: most notably Gordon Brown and his acolyte - who was duly promoted to be 'City minister' - Ed Balls. Having thrown off the image, and most of the substance, of being a trade-union dominated organisation the 'new' Labour Party embraced the adventurism of those who were later to be reviled as 'casino bankers'; while it still depended on finance from the unions. Tony Blair escaped criminal investigation into the means that had been used by his agents to obtain donations from people who were coincidentally ennobled, but when he had gone from office and his peculiar means of funding dried up almost completely the unions conspicuously remailed Labour's major funders. But these latter-day unions were very different from the unions that had ineffectively opposed de-industrialisation and the destruction of their own members' jobs in the 'eighties. Between 1985 and 2005 trade unionism ceased to be a significant force in the private sector even while the former nationalised industries passed into the private sector.

The new area of strength for 'organised labour' was in the expanding public sector, where [unlike most firms owned by shareholders] government departments and state agencies provided accommodation for union officers and allowed staff time off work for union activities. The coalition government has decided - probably correctly - that the future economy will not be able to bear the cost of the pension payments that had been provided for in state employees' contracts; so those entitlements are being reduced and the unions are planning to defend their members' contractual rights. This campaign by the unions attracts minimal sympathy, and virtually no support, from the mass of the population who are experiencing declining living standards while they learn that part of the increased cost of living is raised taxation from which [among many other things] civil service pensions are funded.

When trade unionism was based in industrial plant pretty simple arguments could be advanced about the division of the income that the operation generated. Political Economy taught that there were three factors of production: land, labour and capital. For industrial production, for wholesale and retail trade, and for catering and entertaining establishments, land was bought or rented by the providers of capital for the business and the cost of land was accounted as part of the fixed cost of the firm [which varied with the location, so that operators of shops on Oxford Street in London paid vastly higher rents per square metre than did the owners of wareouses on the fringes of Pennine mill towns]. Once the site was paid for the construction and adaptation of the buildings on it were components of the capital stock that the owner had to provide, along with the machinery inside and around the premises, the materials to be worked on, the fuel to power the operation and the services [such as water supply and lighting] without which it could not operate. The vast contribution that capital made to any business i the real economy was visible and could be recognised. But that investment was useless unless people possessed of the necessary skills, experience and strength made themselves available to work there. By an iterative process of debate, dispute and discussion -sometimes involving strikes, lock-outs, mass sackings, reinstatements, arbitration and intervention by the courts - mutually tolerable rates of pay to employees and rates of return to capital were settled. Workers realised that capital equipment and investment were necessary, even if the plant was owned by a socialist system, and they conceeded that any capital stock must be maintained by constant refreshment. Capitalism - as a system of economic organisation - recognised that a willing workforce was best to manage and so employers were in broad terms willing to agree with unions on fair terms and conditions of employment in that place at that time. The skilled gained relative to the unskilled, the fit relative to the less fit. The physically weak who were not able to compensate by developing intellectual skills were ill cared for by the system, as were the mentally less able. There was much unintended cruelty in the operation of the system, but there was also an opportunity for the majority to find a level of remuneration that they deemed acceptable.

In the present postindustrial era pay [for the employed] is the outcome of various forms of negotiation and 'comparison' of one category job description with another. It is widely accepted that jobs in the public sector are generally better paid that those that can be said to be broadly their equivalent in the private sector: and all sources agree that pensions expectations for public sector employees are better at almost all salary levels [except the most highly paid categories of business executives] than in the private sector. There are a few tens of thousands of people in Britain, a few hundreds of thousands in the European Union, perhaps a couple of million in the world, whose transcendant skills, talents and experience enable them to command whatever remuneration they demand. There are many others who are almost as well talented as the topmost elite, who are able to demand superior pay for their work. There are others who have created inventions or works of art that become so popular that the creators are massively enriched by the proceeds from their willing users: and yet others who have seized  the ownership of capital and access to natural resources by political manipulation [or even criminal activity that no state can prosecute] that legitimate commerce and industry need to buy from, to the enrichment of the owners. Much 'unfairness' is evident in the contemporary distribution of incomes and of wealth, especially in instances where executives fail to deliver the expected results for their employers and still walk away with huge remuneration. The widespread awareness of indefensible income differentials has created a sour mood through almost all of society, to a degree that it can poison progress in economic development.

The point to which this argument is trending is that if Britain is to adopt the one big Strategy that is readily accessible to the economy, it must recruit the people who can manage the greatest leap forward in marine technology in human history and it must take the risk of paying them whatever is necessary to engage them in the task.

My last blog set out trhe bare bones of the Strategy. Britain has the opportunity uniquely to exploit - in a sustainable manner, for the indefinite future - the massive surface area of the earth's oceans that are currently recognised internationally as the coastal waters surrounding the imperial lagacy of oceanic territories. To vindicate this Strategy The UK needs first the naval and military forces that can enforce the assertion of sovereignty, over the long term.  Then it would be absolutely essential to build the industries and develop the technologies on which the Strategy absolutely depends  for economic viability. It is inescapably necessary to recall scientists, engineers and artizans who were dumped unceremoneously from their careers up to four decades ago. To attract people from their retirement, or from the alternative careers into which they have settled, or to bring many back from the foreign states that benefit from the skills that Britain spurned, will require payments up-front from the hard-pressed national budget; of salaries and potential bonuses that are enough for the purpose. Some patriotically minded individuals  might chose to return some of their remuneration to the state; but that option should be left to them, it cannot be assumed that people who have been rejected will suddely embrace the political class who will be bidding for their skills.

Unless the nation can be motivated to recognise and to support the proposed Strategy, the concept does not have a hope of taking off. A first step in demonstrating that it can be implemented is to show that Britain's Got Talent: not just in ephemeral popular entertainment but in all the areas that must be drawn in to the greatest and most grimly serious venture in the nation's history. The young have been denied most of the skills and all of the experience that existed on the shop floor and in the works laboratories in Sheffield, Birmingham, Glasgow and hundreds of other urban centres throughout the United Kingdom. One motivation for Scottish Nationalism is a reasonable desire to cut free from the corpse of a failed state: and the best motive for Scots to remain in the United Kingdom would be the probability of benefit from participating in the Strategy.

I have been privileged for several years to support a charity called Age Exchange that [among other things] brings elderly people into contact with the young, including many who have no extended family and therefore no familiar folk traditions or reference-points outside their immediate experience, to let them begin to understand what life was like within living memory in the places they now inhabit and thus open up some perspective. Something similar needs to be done on a national scale to enable depressed young adults to believe that the capable and experienced people exist who can help them to develop themselves as contributors to a technical wonderland that can be the envy of the world: while it brings them a world class standard of living.

This is all feasible technically and organisationally. The political will to bring it into effect is much more problematic.