Category Archives: Economic History

Technological innovation changes everything

The economy is headed for a period of decline. The explanations of the economists and politicians who represent the self-perpetuating organised money establishment, lack any kind of credibility. They are so bound up with the latest set of figures and next quarter’s results, they have completely lost sight of the long term and its more profound effects. Technology is of far greater importance than Brexit, but it just doesn’t hit the headlines in quite the same way.

At the beginning of the nineteenth century, no country in Europe had yet re-attained the living standard of Imperial Rome. But three decades ago it was noted that over the previous hundred years, real income per head had risen by around 700% on average. It has slowed considerably since then, of course, but the only explanation for that explosion in income growth rates is technological innovation. Otherwise, William Baumol wrote, ‘the economic history of the period, and its contrast with the world’s economic performance in the previous, say, fifteen centuries, is difficult to account for.’

Technology is the engine which drives economic, social and organisational change. The connection between innovation and economic growth has been widely accepted since the original work of Kondratiev and Schumpeter. Analysts associate the great expansions with periods when major innovations coincided, referred to as technological revolutions. We appear now to be coming towards the end of the third such.
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Outsourcing: What a Waste!

Occasionally I have read stuff which seems so timely and apposite to work on which I am then engaged, that I’ve been motivated to provide an aide memoire of the text. This posting provides such a review of one 2015 text; it is not a summary and includes some personal interpretation; it is more a personal aide memoire of the opening chapter.

The book starts off with two rivetingly relevant-to-today quotes, one from 1936, the other from 1885.

Reading Review: What a waste: outsourcing and how it goes wrong, Bowman et al, 2015, Manchester University Press

Chapter 1 Outsourcing: organised money and disabled government

“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs.  We know now that government by organised money is just as dangerous as Government by organised mob.”  F D Roosevelt, announcing the Second New Deal, October, 1936.

“The common rights of ownership have disappeared. Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence.  Private ownership has taken the place of these communal rights, and this system has become so interwoven with our habits and usages, it has been sanctioned by law and protected by custom, that it might be very difficult and perhaps impossible to reverse it.  But then, I ask, what ransom will property pay for the security which it enjoys?” Joseph Chamberlain, Birmingham Town Hall speech, January, 1885.

1.1 Introduction: The text addresses new problems created by outsourcing public services to private contractors. It considers the gap between efficiency rhetoric and delivery reality and between public service and the outsourcers’ profit maximising and tax manipulation.

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Democratic Capitalism

Among all the debate about the vices and virtues of capitalism there is rarely any serious attempt to define its key characteristics. Whatever they are, they appear to work better than the best known alternative that has so far been tried: centrally planned totalitarian communism. Whether good capitalism or bad, compassionate, predatory or even ‘conscious’, all capitalisms appear to depend on the ownership and control of the established legal entity known in the United States as the corporation, or the public limited company elsewhere. That is the corporate form Chandler described as ‘the most powerful institution in the economy’ on which the affluence and growth of the past century and a half has been based.

The corporation was the legal form which was enabled to issue shares to many dispersed individuals and so accrue sufficient funds to make large scale capital projects possible. Initially its legal creation required a royal charter, then an act of parliament and finally, after 1844, a company could be legally established by a relatively simple process of registration. Limited liability followed a decade later. This was the precious means by which industrialisation was enabled.
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The Defunct Professor Friedman?

‘Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist’. Practical men, say, like Bob Diamond. You can’t get much more practical than a man of limited intellect who takes from his place of work £17m a year, less a bit for having led a banking operation now officially recognized for its lack of ‘skill, care and diligence’, not to mention its criminal fixing of international money markets. Bob, himself, admitted his favourite economist is none other than Milton Friedman of the Austro-Chicago school of laissez faire, free marketeers.

Friedman’s influence still dominates government, finance and business, not just billionaire bankers. When he first came to the fore it was as a monetarist. The way to a small government and light touch regulation was to grant maximum freedom within a tightly controlled framework: the quantity of money in circulation. According to Friedman ‘too much money chasing too few goods’ would inevitably cause inflation. With Thatcher and Reagan, that simple aphorism replaced the Keynesian economics that had ruled since the second world war. But it didn’t work. There were too many unknowns about the quantity of money and the velocity of its circulation, and that rendered monetarist policy ineffective. Friedman himself expressed his disappointment at the ineffectiveness of monetarist policy.
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Anglo-American Post-Industrial Waste

The idea of the life cycle is widely applicable, from products and industries to something as simple as a lighted candle, or even something as complex as a whole economy. It depicts four distinct stages: start up, growth, maturity and decline. The early stages are slow with typically many false starts, but once a particular approach is established, growth takes off. For example, the factory system in 18th century England. During this growth phase innovation dominates, with new technologies applied to produce genuinely new products with more features and better performance. In due course, generally accepted standards of performance emerge as growth slows into maturity. During this critical transition to maturity there will be a radical reassessment of growth projections and fierce competition will force the weakest to withdraw.

During the ensuing, relatively stable mature phase, the emphasis of innovation tends to move from product to process, where innovations are largely aimed at reducing costs and improving efficiency. That phase comes to an end when either a completely new technology takes over or some other structural change eliminates the existing; maybe something like globalisation. Again the reduction in future expectations will cause intensified competition and force out marginal units.
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Capitalism without bankruptcy: too big to fail

Industrialisation is what fired capitalism. Prior to that most capital was held in the form of land and buildings with not a lot of spare cash lying around waiting to be invested. Nor any pressing need for it. But when industrialisation began in the eighteenth century, it required major infrastructural investment in things such as canals, turnpike roads and subsequently railways. These huge projects took years before producing any return and the sums required were way beyond the capacity of wealthy individuals. Dispersed shareholding and large scale credit finance were brought into existence to enable the massive capital investments of industrialisation.

Contributory sums from large numbers of relatively small investors were multiplied by the bankers new found capacity for lending a proportion of deposits lodged with them for safe keeping. Even Marx acknowledged the ‘capitalistic system’ worked, having ‘created more massive and more colossal productive forces than have all preceding generations together.’ That was years before joint stock companies were allowed to provide the luxury of limited liability to their shareholders. When Marx was working on the Communist Manifesto, shareholders responsibility for their companies was total. If the company went bankrupt, they were liable for its debts and would in all probability go bankrupt with it. The possibility of bankruptcy was what gave the ‘capitalistic system’ its edge. As widely asserted, capitalism without bankruptcy is like religion without hell.
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In Praise of Renegades

The economic mainstream has flowed on its capital oriented way with relatively little deviation despite its manifest limitations, errors, omissions and downright falsehoods. And despite the occasional disasters to which it gives rise.

In the middle of last century, J M Keynes corrected some of the more apparent errors of the classical model, but his aim was improvement rather than revolution. He did argue powerfully that ‘the madmen in authority’ should accept the maintenance of full employment as their moral responsibility, but renegade he was not.

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