Some Distinguished Economists

I remember a time when the Econocracy had not yet emerged. Economics was beginning to flounder, as the NeoKeynesian orthodoxy that had been established in the nineteen fifties  began to reveal its fallibility in the emergence of excess inflation in the 'sixties; which was to lead to the chaos of the 'seventies and the rise of Monetarism that paved the way for the free marketeers who were the founders of the Econocratic hegemony that currently prevails.

For any reader who might happen upon this blog, and wonder what planet I am writing from, I explain that the term Econocracy has been created by the Post Crash Economics Society, a Manchester-based student movement that has successfully challenged the prevailing orthodoxy in formal Economics that has given us the 2007-9 crash, declining living standards, decayed industry, an intractable balance of payments deficit, austerity and [in a public backlash] the Brexit calamity. The Econocrats are the professors and established lecturers, senior lecturers, readers who demand of their students credulous adherence to the dogmas that have led to the ills in society and the economy that have just been listed. The Manchester group have produced the book - Econocracy -in which they explain the term in its context. They have also published research that shows how closely most university courses follow the 'official' line.

I was fortunate to pass through a university system that was vastly smaller than it is today: fewer than forty fully-fledged UK universities, and many of them had only one professor of Economics and up to six other teachers. I find it astonishing now to look back into old university Calendars and find that whole degrees were delivered by teams as small as four academics. The Great Man of the 'Economics profession' was Sir John Hicks [the first British recipient of the pseudo-Nobel prize], but the dominant individuals who decided who got appointed to which vacant chair in Economics were Lionel Robbins [Lord Robbins of Clare Market] the unchallenged boss-man of the LSE and Charles Carter, founder VC of Lancaster University and editor-in-chief of the highly influential Economic Journal.

Typically, syllabuses contained an element of Economic History [which would greatly benefit the students of today] and also a paper on the History of Economic Thought. Mathematical aspects were not prominent, and could often be avoided: in my own university it was even possible to evade the simple Statistics course by opting for Ethics. By 1945 all universities [so far as I know] had supplanted JS Mill as the basic source text by Alfred Marshall's Economics,  and they all taught about Neo-Keynesian macroeconomics. Paul A Samuelson and JK Galbraith were the best sellers among a raft of fat textbooks that combined those two syllabus areas; and when I joined the University of Sheffield as a research fellow there was a well-established game by which students tracked Prof JC Gilbert's lectures through the textbooks.

One great characteristic of the small number of leading professors of the subject was their difference in emphasis and research orientation. Bob Black at Belfast, Terence Hutcheson at Birmingham, and Ron Meek in Leicester provided a choice of interpretations that is painfully lacking today. Mark Blaug, though he went through much of his career in the shadow of Lord Robbins, was a good independent scholar. It is very sad for the subject and for the country that such a range of talent is not available today.

The Tragic Triumph of the Econocracy

'The Bank', with a capital letter, means the Central Bank in any country or community: in our case, the Bank of England; and 'the banks', as a collective, means all the other firms and partnerships that the Bank recognises as legitimate banks and thus it is authorised to give them instructions and to trade with them. Specifically, it will sell them bonds and other debt certificates [from a list of approved categories] and lend them money at a publicly announced rate of interest called 'base rate'. A large proportion of the Econocracy [the prevailing rat-pack of professors of Economics] argue that if the management of the banks by the Bank is perfectly calibrated the economy can operate perfectly. If the money-managing institutions work perfectly, the whole economy can achieve 'equilibrium': a state where all the resources available to the human race are allocated to their optimum uses.

This is a model of perfection. The realities of human existence make it a total nonsense: but the Econocracy currently has control of the channels of advice to governments, and most of the economic commentators in the media, in banks and investing institutions are required to parrot the prevailing orthodoxy: though there have always been some brave spirits who have the wit and the integrity to deny the validity of the whole structure.

So-called Monetarism, a package of ideas formulated by Econocrats in terms that could be explained to politicians and to students, was introduced in the USA in the later nineteen sixties, when the flaws in the attempt at practical neo-Keynesianism had generated a disastrous wage-price spiral as trade unions demanded pay increases to match price increases [as reported on official indexes of 'inflation']. In the early nineteen seventies the major oil-exporting countries tripled the royalties that they charged for access to their oil and natural gas; and this sent up the prices of all goods and services because of the universal impact of the costs of fuel for vehicles to deliver goods and people to where they were wanted, and the price of fuel for the provision of energy to heat homes and schools and to power factories. Additionally, petroleum was a vital ingredient in many plastics and polymers. So all prices were rising, hence wage demands took on a new stridency: and governments tried to stop the 'spiral' going out of control.

The Monetarists argued that if real control was given to the Bank and the government backed up the Bank in issuing stringent instructions to banks as to when and on when terms they could lend money to whom, that would strangle the spiral of rising wages and prices. Employers would not be able to borrow from their banks on affordable terms: so instead of borrowing to pay workers inflated wages, they would have to tell them "take what is on offer, or we'll have to close down and sack you all". Similarly, consumers would be told that they could only stay in the homes on which they were servicing mortgages provided they paid penal interest rates which went as high as 15%: which left them with little to spend on other things. So if they kept the house and the car, paying high mortgage interest and high interest on their car loans and the loans against which they had bought their fridges and TV sets, they had to reduce consumption of everything else.

The Thatcher government adopted their own version of this policy straight after their election in 1979, and by 1992 they were well on the way to implementing it. Economic growth slowed dramatically; and wage growth slowed even more. Then the government itself stopped creating money with which to maintain activity in the coal mines and the shipyards. They compensated for the loss of income that they suffered as the real economy declined from the tax revenue that they received on North Sea oil and by the sale of the privatised industries. They cut back heavily on government spending on defence and in support of industries that had previously been considered essential for national survival: steel, shipbuilding, aerospace and coal. The economy was dramatically changed, as the 'real' material productive sectors were decimated and the financial services - notably 'investment banking' - began to predominate: and that sector of the economy was supposedly susceptible to refined control by the Bank.

Thus, by 2005 the 'real' - the material - economy on which human animals depend for their continued existence and comfort was utterly denigrated and largely despoiled; and the finance sector was put in a position to undermine the entire economy through its greedy overindulgence in speculative deals that the Bank did not even understand. This is the achievement of the Econocracy. The real incomes [money wages adjusted so that their current purchasing-power can be computed] of the mass of the British population have been static for a decade. Over those years, 2007-2017, plenty of jobs have been created; almost all of them in activities that do not result in any substantive increment to the real economy. There has been a spectacular degree of material stagnation which, set alongside the government's obsession with 'austerity' [in which they have been mentored by the same Econocrats] leaves almost everyone with an awareness that the economy is not "working for me". That is because the economy is being driven in obedience to an abstract model. The fundamental reality, that the economy should be the mechanism that serves material, living, aspirational individuals, has no place in contemporary Economics. That is why Economics must be brought down from its high place in academic temples, and opened up for radical restructuring.

Money, Democracy and Economy

Evidence is accumulating that the International Monetary Fund [IMF] is preparing to work closely with the European Central Bank [ECB] to prolong the survival of the euro for long enough to allow Greece to demonstrate whether or not an austerity regime can be imposed with sufficient rigour to allow the country to remain in the eurozone. Whether or not the Greek economy meets the challenge under the very difficult current circumstances, it is highly probable that Chinese resources will also be transmitted via the IMF and the ECB to prop up the rest of the eurozone. Chinese government deposits with the IMF are extremely secure, and China is happy to take a greater share of control of the IMF which is a corollary of increasing its deposits. The USA is watching this situation jealously: so the Americans will most probably also agree to support the ECB to prevent the Chinese becoming too influential.

This set of moves will help to offset the risk of an intensification of the recession that is already gripping the whole of the EU. The recession is already set to last through most of 2012, and could go on longer. Trade between Europe and North America is important on both sides of the Atlantic so it is a direct US interest that Europe will be a good customer for US commerce and industry in a presidential election year. Both China and the sovereign wealth funds that are held by oil-exporting states and by Singapore are looking for businesses in Europe that will be a good buy during the recession. China will gain both the turnover and the institutional experience of the European firms that they may come to own; and - more importantly - they will take control of the intellectual property that the companies have accumulated. They will own the speculative research and the design capabilities of their European subsidiaries, which they can carry forward in China or in Europe as they see fit. They will be able to put their European brand-names on products made in China, greatly increasing the value-added to Chinese industrial output. The Chinese owners will be free to decide whether or not to run-down their European factories, and they will have the option to make their brands in China and sell them at European prices.

Such takeovers, followed by technology transfer to China, will mean that European consumers will still have access to the same brands; but employment and production in Europe will decrease and profits will be exported, so European spending-power will permanently be diminished. The de-industrialisation that has been undermining Britain and the USA for the past half-century will spread rapidly in Europe, even in Germany, unless specific measures are taken to prevent the alienation of ownership.

The massive middle classes in India, China, Brazil and other leading emergent economies are the most avid buyers of quons - brands - [see PPE via the link from this site] and an increasing mass of the population aspire to follow them. Exporting leading brands will be a huge boost to the national balance of payments of the countries that will have bought the brands, and will give them increased profits to apply to new investment. This is the outcome of the operation of the Iron Law of Wages. The EU as a whole has broken the law for decades and the inescapable payback is now being taken by the rest of the world. Proper, provident Germany has not participated in the profligacy; but is straight in the firing line now that redress is being taken. Because of their loyalty to the European fantasy Germans are now at risk of losing some control of their own economy and of the technology in which they have led the world. They have deferred - perhaps permanently - the day on which they would have to open their currency reserves ad lib to bail-out the most profligate members of the euro. But because of their loyalty to the EU they have placed at risk their control of technology and of the brands that they have exported so successfully over recent decades.

Meanwhile there is a daft shouting-match developing in Britain, between those who think that David Cameron has in some degree 'saved' the City of London by declining to support the implementation by the EU Commission and the Court of the Merkel package of financial stringency that has been endorsed by the other 26 member states, and those who argue that Cameron has damaged the vital interests - and the prestige - of the United Kingdom. The Deputy Prime Minister expressed both views, in a perfect vignette of Liberal Democrat policymaking. It is not clear how the new eurozone agreement will be 'policed', and most probably some fudging mechanism will be cobbled together in the drafting of the Compact that is now to begin. It is expected that most of the 26 'inner European' states will agree to impose a Robin Hood Tax, or Tobin Tax, on financial transactions. Britain could veto a tax change, under the Lisbon Treaty; but the veto power would not be applicable to a regulatory change under which the EU might apply service charges or other 'penalties' to the financial services sectors of the UK economy.

The sound and fury of the debate will help nobody. It is, however, incontrovertible that the United Kingdom is again offering itself as a test-bed for seat-of-the-pants economic policy experimentation. Unlike the bowdlerised Keynesianism that was tried in the nineteen-sixties and the crude but clearly articulated monetarism of the nineteen-eighties, the present experiment in austerity management has no underpinning economic theory and no ideology. It stems from a naive pragmatism that was hastily cobbled together by professional politicians from the fundamentally incompatible Conservative and Liberal Democrat parties. It has nothing substantial to contribute to a global dialogue on responding systematically to a crisis which is has reached its high pitch of intensity because the world has allowed the postindustrial countries to breach the Iron Law for almost half a century. The resulting pain is being felt intensely in Greece, and is beginning to cause serious stress in most member countries of the European Union, not always in proportion to the extent to which individual countries breached the Iron Law. It is impossible to predict where this will lead in terms of socio-political tension, but it is inevitable in conventionally democratic societies that the complacency of the democracy itself will be challenged. Nothing can be taken for granted but it becoming common to question whether democratic principles have failed, or whether the disaster is the product of a perverse and irrelevant political class that has emerged in separation from the rest of society.

China has a huge political caste, who have been segregated for the entire length of their careers from the toil and economic stress of life as it is experienced by the vast migrant working class and by both the megarich and the tens of millions of middle-class consumers. There are great hazards in attempting to climb the greasy pole of party hierarchy, and even greater risks if party apparatchiks dabble corruptly with business; but the people who reach the top are generally of the highest quality. The near-miracle of economic and monetary management that has been accomplished over the past two decades is the best evidence of this. Western commentators have regularly predicted disaster, from hyperinflation through 'stagnation' in the property sector to mass unemployment, while standards of living have risen consistently. Democratic rights as defined in Magna Charta or the US Constitution and Bill of Rights have not been matched in China, and the lack of such rights is probably to the detriment of the Chinese people; but it seems generally to be accepted in the country that it is fair enough to concentrate first on economic development, and then to allow for the development of more open institutions. Dissent in China is very much a minuscule minority activity and is often ethnically based or specifically aroused by corrupt land seizures. The internet and mobile technology ensure that dissent and repression are more widely reported when it occurs; and the government is increasingly open to treating the dissentients more fairly. But the western model no longer looks like an inevitable endgame for Chinese youth to aspire to.