Guy Routh’s Critique

Twenty five years ago Guy Routh published a book entitled ‘Economics: An Alternative Text’, proposing the outrageous idea that economic theory should be based on observation and an understanding of how things work. He quotes Richard Jones “if you want to find out how the world works, you must look and see.” This approach was, and is, completely outrageous; that’s not how economic theory works. And it is economic theory by which we are all ruled. Orthodox theory is based on the statement of axioms, ‘plucked from the air’, from which logical, usually mathematically calculable, deductions are made. The fact they bear no relation to the real world is of little importance to the ‘madmen in their ivory towers’.

Continue reading Guy Routh’s Critique

The Cut – Recovery Dilemma

The dilemmas facing the new British government, though not them alone, in dealing with the biggest ever peace-time indebtedness, are how much of public expenditure to cut, what to cut and how to cut it and above all when to start. Do too little too late and “the markets” won’t like it and that would bring untold disasters. Do too much too soon and we’ll be in for a double dip recession. And then “the markets” would forsake us for good and all. We need to reduce short term indebtedness before its costs bring the recovery to a shuddering halt. That mustn’t be allowed to happen since its only a recovered economy that will eventually repay the long term debt and finally get us out of this mess.

Well, where are the very clever economists who invented all this jargon about double dip recessions and “the markets”? It’s exactly the sort of conundrum their sophisticated mathematical models should be able to solve. They have the computational power at their disposal; why are they not doing their sums and coming up with the answers?

Media commentators are continually condemning politicians of all parties for not being straight up with us, telling us the bad news about what they intend to cut. But, till now, politicians have probably been 100% honest on this score if nothing else. The simple fact was they didn’t know what they were going to cut. Because the economists hadn’t come up with any coherent suggestions. Because they didn’t know either. Because their fancy mathematical models didn’t work any better on that, than they did on credit default swaps, or eliminating the risk on sub prime mortgages, etc etc etc.

Maybe it’s time for people controlling the real world – who Keynes referred to as ‘the madmen in authority’ – to ignore theoretical economists, and apply the lessons of experience and common sense instead.

Degrees of Inequality

Economic progress has always had the unfortunate side effect of magnifying inequalities, between the rich and poor, the employers and workers, and between the providers of capital and providers of labour. These inequalities were accepted by some to be a necessary component of industrial progress and elaborate philosophical arguments were raised for their justification. Inequalities became so extreme in the nineteenth century, that they motivated protective legislation, regulating working hours and conditions as well as the rights of workers to combine in their own defence. They also motivated the communist manifesto and subsequent revolutions.

The mid twentieth century saw a move to a more equitable distribution of income and wealth, but since the 1980s, extremes of inequality have again been experienced. Judt opened his critique of today’s inequalities -‘Ill Fares the Land’ – with the following: ‘Something is profoundly wrong with the way we live today. For thirty years we have made a virtue out of the pursuit of material self interest; indeed, this very pursuit now constitutes whatever remains of our sense of collective purpose.’

That pursuit of material self-interest, justified by free market theory, seeks to minimise taxation and exclude wherever possible any government regulation and control aimed at inhibiting the strong from exploiting the weak, and especially anything which might seek redistribution of income and wealth on a more equitable basis, both within economies and between them. The degrees of inequality between nations experienced today will increase as a result of resource depletion, pollution and global warming since it is the poorer nations, especially those in Sub-Saharan Africa, that will be on the brunt end of such effects.

The free market dogma, which is espoused by both sides of the new UK coalition, frustrates any attempt to replace the amoral pursuit of money with a search for fairness and equity. But as evidence mounts of the ill effects of inequality – for example, Wilkinson and Picket’s ‘The Spirit Level’ – initiatives for a more equitable society may become irresistible.

Yesterday's Gods

The “madmen in authority”, as Keynes characterised them, are still in thrall to “the markets” and the rating agencies. The people surrounding messrs Clegg and Cameron, as they struggle to an agreement, are more concerned that what they finally come up with will satisfy the markets, than that they will satisfy the electorate.

But, by definition, nobody understands the markets. That’s why speculative funds, such as hedges and private equity funds, can still make money out of them. Commentators can never predict future market moves, though they always explain in detail reasons for movements which have already occurred. Over the past few days it’s been repeated endlessly in the media, that the markets dislike uncertainty and want stability, but plainly that is the reverse of the truth: market volatility is what presents marketeers with the opportunity to make huge amounts of money, for which the tax payer will in the end pay. The question arises not so much as to why we still take markets seriously, but why markets should still be allowed such freedom to do damage. Surely the electorate should be given some protection.

If markets are free, protection might be expected through the credit rating agencies, Standard and Poor’s and Moody’s. But they contributed in no small way to the massive losses incurred by the electorate as a result of the credit crunch of 2007-8. The agencies gave AAA credit ratings (ie lowest risk) to the riskiest pools of loans, fuelling the sub-prime mortgage fiasco. Among many other cock-ups, they failed to notice the insolvency of the Icelandic banks and gave the Icelandic Government a clean bill of health till its economy imploded. If these were not cock-ups, they were something rather more sinister resulting from vested interests. The rating agencies offer no protection, and don’t deserve to be taken seriously.

What the “madmen in authority” need is a different economic perspective to replace the free market fundamentalism which still rules today. But there can be little expectation of that informing the Conservative / Lib-Dem negotiations.

The Point about Profit

Profit is wilThe idea of profit has caused much aggravation over the years and even today is still the source of heated debate. Marx borrowed Ricardo’s idea that profit was no more than the wages earned by labour but stolen by the providers of capital. This explained the grossly unfair divergence between the poverty of the labouring classes and the wealth of the capital owners. The neo-classical economists argued that the purpose of industry was to maximise profits, referring not so much to the theft of wages but the surpluses to be earned from industrial and business activity. Latterly, the free market fundamentalists, to which all three of the main political parties are to some extent in thrall, have argued that maximisation should apply to shareholder wealth rather than profit. This then seems to confirm again the inequity first argued by Ricardo, consolidating the position of the owner over that of the employee.

Clearly, none of these theoreticians have really understood the vital role of profit in industry and business. Adam Smith argued the self interest of the butcher, baker etc as vital to the effectiveness of their businesses, because that was how they earned a living and supported their dependents. The survival and long term prosperity of the business was what mattered, profit being some measure of that ability to survive and prosper.

The idea of maximising profit is based on a misunderstanding of business realities, which are concerned with, as Peter Drucker put it, the ‘real risk of ending up with an impoverishing deficit, and the need, the absolute need, to avoid this loss by providing against the risks’. But providing against the risks is anathema to the free market fundamentalist. They regard any such provisions against risk, such as spare or underutilised assets, as evidence of inefficiency and therefore grounds for replacing the business management with one that will maximise shareholder wealth, and this is most easily achieved through the firm being taken over and often being broken up..

Whatever profit is argued to be, it is a necessity for the survival of any business. Its theft by shareholders, or any other stakeholder, only serves to destroy the real economy.