Down the Financial Plug-hole

What could Sir Martin Sorrell possibly want with £7.4m annual income? What could the FTSE350 company directors do with their 49% annual rise? As Adam Smith put it, there are limitations to ‘the size of a man’s stomach’. Of course, he also recognised they might want to satisfy ‘other wants and fancies … Cloathing and lodging, household furniture and … equipage.’ These might include what Thorstein Veblen referred to as ‘conspicuous consumption’, or for the truly inadequate: ‘conspicuous waste’. But Sir Martin Sorrell and his colleagues on the Prime Minister’s advisory committee on economic strategy, such as arch tax avoider Sir Philip Green, would struggle to spend even a small proportion of their income on such. So, according to the current economic orthodoxy – which it has to be admitted is based on some pretty quaint ideas – most of their income will necessarily find its way, as savings, into investment.

Some might get stashed under matresses and some might be spent on works of art, fine wine etc – the sort of things Ricardo noted as being in fixed supply and therefore reasonable stores of value with the potential for speculative gain. But the vast bulk of savings will be deposited with investment banks or other financial institutions where they are lo9oked after by professional fund managers. The orthodoxy assumes, though it is known to be an utterly false assumption, that it will be invested in real firms and real projects, creating jobs for the general population. Thus, even apart from Sir Martin’s claim to be worth 300 or more of his fellow human beings, his extreme high income is justified by its benign impacts for the rest of us. Any argument to the contrary must be motivated by base envy, and not worthy of consideration.
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Making Capitalism Work: some initial steps

The centrally planned socialist alternative has been tried and didn’t work. Even without the bureaucracy and corruption enabled by the communist system, central planning could never be as efficient or effective as a real market. But, as we are currently experiencing, unregulated markets can also lead to disaster. Most of our current trouble lies in the changed role of the financial sector.

When the 18th century canals were built it took on average over seven years from the start of construction to the first revenues being generated, seven years in which huge and not risk-free expense was incurred. Shares, bonds and bank credit were the means of raising the necessary money to get the industrialisation project going. So the financial sector was brought into existence to support the real economy. And it grew in importance, supporting the progress of industrialisation for over two hundred years. But since the 1980s computerisation and deregulation of financial markets, it has been possible to make substantially higher returns from speculation than from the real economy. Consequently the sector no longer supports the real economy with any real enthusiasm. Instead, when it invests in the real economy, more often than not, it does so to extract value, destroying real jobs, purely for its own benefit. It is not just, as Adair Turner once described it “socially useless”, but is actually working against the interests of ordinary people.
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The Real Economy Being Drained Away

The UK government hasn’t yet been able overcome its undergraduate belief in, and commitment to, markets free from government interference as the source of the most effective and efficient way to grow the economy. Unemployment has not yet reached the level, and persisted long enough, for that fundamental belief to be disturbed. But as unemployment grows, fears of further unemployment increase and result in general belt tightening which further reduces the prospects of economic growth. It is therefore only a matter of time before the government is forced to recognise its error.

Till then, and despite having made massive investment in the banking system to avoid Armageddon, the government will refuse to take control of the banks it owns. So, even though paid for by the tax payer, the banks remain free not to support the entrepreneurial businesses on which future employment growth is believed to depend. Any such interference in the free market would be anathema to this Chancellor. So, more quantitative easing, which it should be noted is a pretty fundamental interference, is likely to be effected without direction or control.
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Occupy the City as well as Wall Street

The Occupy Wall Street protest has been described as a deeply instinctive movement to defend America’s traditional values. So far, it has been a peaceful, dignified and respectful, almost wistful, restatement by disparate groups of belief in fairness, individual freedom, democracy, the rule of law and, of course, the social mobility embodied in ‘the American dream’. The protest is against corporate America’s deliberate destruction of those values, through the greed and dishonesty which has been largely justified by theoretical economics.

Demonstrably, the theory doesn’t work. It led directly to the current crisis in which 99% of the population are continuing to pay for the excess of the 1% who caused the problem and who continue to enjoy excess. The bottom 25% are required to shoulder the greatest burden of all, with the bottom 10%, even in the world’s richest economy, being reduced to genuine poverty.

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