It's No Secret!

Throughout human history, inventors have had to borrow money to make their machines; then have to borrow more to scale up their innovation to the point where profitable production can begin.

In the era of the industrial revolution the infrastructure of better roads, then canals, then railways was provided by raising money from shareholders in Turnpike Trusts, then in Canal and Railway Companies. In case you had not noticed, selling shares in a company is a form of borrowing: the directors of a company ask their investors to make their money available to the company, under the promise of long-term partial ownership of the company and the hope of recurrent profits. Usually investors have come forward if there is a reasonable prospect that the returns to shareholders over a ten-year timescale will put more money at their disposal than they would get in interest if they had just kept the money in the bank.

Richard Arkwright had to borrow the money to build his first spinning machine; then he established patents on all the technologies involved, including the work supplied by a clockmaker who cut and assembled the gears that were indispensable for the project. Other people who wanted to open spinning factories had to pay Arkwright royalties on the technology until, many years later, the extent of his patent coverage of the device was reduced. James Watt developed his concept of a steam engine in the university laboratory at Glasgow, where he was a technician to Professor Black. Eventually the good professor moved on in his research, and to make the engine a commercial proposition Watt had to find an investor with deep pockets. Matthew Boulton was a successful serial entrepreneur based in Birmingham; so to Birmingham Watt had to go, and Boulton's name came before Watt's in the name of the firm that successfully patented and sold the first steam powered devices that were ready for the mass market. The first engines were for pumping, and their principal customers were mines, breweries, dye works and other consumer-goods suppliers: the steam engine that could provide motive power to road and rail vehicles and to vessels came later - which ties in with the fact that roads, canals and railways needed to be built first, at vast capital cost.

The essential problem of the British economy, certainly since the swathe of industrial destruction that is the strongest characteristic of the Thatcher era, is the lack of big industrial development. That picture of failure is reinforced by the poverty and antiquity of the infrastructure on which the UK economy depends. The shining exceptions of Sir James Dyson and of the Bamfords' JCB stand alongside the massive pharmacological companies as rare exceptions to the general picture that the remaining British-owned large firms are either dependent on their overseas operations or on the popularity of long-ago registered trade marks and copyrights. There are many wonderfully innovative small firms; most of whom find it difficult to impossible to secure funding for their expansion, to the extent that many of them sell their technology [and thus the potential for future profit] to aliens.

In the current election campaign, it is clear that the Tories are content to continue the stagnation, and [as the economy is contracting, in real terms, with a huge balance-of-payments deficit] they will continue with their socially destructive austerity programme. Labour is suggesting that investment is needed: and the Tories assert that this would create a great 'black hole' in the national finances. Labour is not bold enough in its investment programme, which doesn't matter anyway, because they can't win. Every time you see Mrs May in a 'factory' context, you will see that she is in a clean, small-scale workshop: because that is pretty well all that her minders can find to indicate 'industry'.

It is not at all secret, that nothing happens without investment: and Britain's investment drought is exacerbated by virtually every action of the present government.

Economic Blindness

The start of 2013 has brought more mild, cloudy and [here in the Peak District] drizzly weather. Just a dawn on which to take the BBC's TODAY Programme with the morning tea.
One of several depressing items was a discussion by Economists about the phenomenon that is thrown up by British economic statistics. Employment is at its highest level in recent decades: but perceived productivity has declined and the national product is not increasing significantly [indeed, it may just have 'flatlined' over the whole of 2012].
Wages are increasing overall at less than the government's indexed figure for 'inflation', and a high percentage of the workforce are attending their workplaces for less than the 35 hours a week that sensibly can be classified as full-time employment. Some firms have put reliable, trained employees on 'short time' to keep them on-side in case business improves; but the majority of part-timers are engaged on that basis. Many of the part-timers receive only the statutory minimum wage per hour; and for the majority there is no pension provision. The new catch-all pensions legislation will draw many such people into basic schemes: which implies that a further deduction will be taken from their wages and put into a pot with a promised yield in retirement that will be derisorily small. The loss of even a couple of percent of an exiguous wage will have a depressing effect on overall 'cansumer demand' in the economy, when multiplied by millions of affected individuals; but the sums gathered for investment by the pension providers will not be sufficient to create investments that will absorb significant numbers of the unemployed into new jobs and thus increase demand through their enhanced spending.
Wage-earners are still buying imports on an heroic scale: everything from East African fruit, veg and flowers to web using technology from the Far East.
Any increase in the real wages of empoyed people, or in the number of employed people, would most likely increase the deficit on the balance of payments: so in a seriously depressing sense the government is contributing to its target of deficit reduction by keeping a pretty tight cap on incomes.

This is the context in which the Economists this morning discussed these recent economic data. One of them had recently publiched a Paper with a mind-blowingly complex title, replete with pseudo-scientific terminology adding up to zero usefulness. They spoke of productivity as if there was no qualitative difference between the various categories of output: as if it did not matter what was the level of notional value-added by different firms' plant. This is in line with the textbook assumption that all output is of widgets: it is almost impossible for non-Economists to understand the primitivism of this lack of thinking.

To say that "the productivity of the British economy is declining" is to say that products and services are sold for a declining number of money-units per unit of output. This means that prices of goods made in British factories are falling. This does not necessarily mean that fewer units of output are being sold; it can equally mean that goods are being sold for lower 'factory gate prices'. How could such a thing occur?
A] It could mean that global competition is forcing factory owners to lower the prices at which they sell their branded goods Or
B] it could mean that firms have been bought by foreign owners who buy the output as being part-processed [though it is physically complete] and then ship it to the export markets where it will be sold, and the magic transformation by which a pile of coats or a cartoon feature film becomes a branded commodity [in the terms of my own analysis, a quon] takes place outside the UK - it may even notionally be reinported to the UK as a quon - so that the final, most significant 'addition of value' is ascribed not to the UK factory but to the corporate owner's success in transfer pricing the product offshore. Or
C] it could mean that rising wages and other industrial costs in China are making it viable to start or restart or increase the output of basic industrial products in the UK; which only have modest price tags such that an increasing proportion of British factory output is of modestly  priced goods [what I describe as marcoms].

All those three possibilities point to a sharp decline in the profitability of British industry, and in the taxes that firms can pay to the state, and the level of wages they can pay to employees: all of which presage declining investment, declining public and social services, and diminishing real wages.

The policy options that are being presented to the government, and to the opposition, and to the Bank of England display the economic ignorance of Economists.

Hard times are ahead of us: and mitigation will only become feasible when the proven principles of Political Economy are reinstated as the basis of policy.