This book (http://www.gowerpublishing.com/isbn/9781409448303) is about a new direction for market capitalism, based on co-operation rather than the neoclassical idea of maximising self- interest. It is not argued from a moral or ethical standpoint, but has a hard-nosed foundation in economic theory. The Road leads from the predatory capitalism we suffer today to a co-operative and far more productive capitalism we could enjoy tomorrow.
Predatory capitalism is the inevitable result of encouraging almost anyone to trade in almost anything, not just sub-prime, but actually worthless, even imaginary, financial “products”. The aim is to create a fever of anticipation which sucks money out of the real economy (manufacture, distribution etc) into bubbles of speculation in derivative or imaginary “products” or in mergers and acquisitions. Continue reading The Road to Co-operation: Escaping the Bottom Line→
Mr Cameron really doesn’t understand what’s going on. When he talks of rebalancing the economy he appears not to have the faintest idea what has unbalanced it. He doesn’t understand the crucial difference between real markets and financial markets. Demand for real things is essentially finite – when you’ve had enough, you’ve had enough; demand for high yielding financial “products” is essentially infinite. An investment, such as a ‘carbon credit’ which would yield ‘up to 398% return’ (see: http://www.gordonpearson.co.uk/06/pity-the-poor-banker/), would attract anyone. Would you invest in a widget maker earning 10% a year at some risk, when you could be earning up to 398% risk free? Consequently, despite the sub-prime fiasco of 2008, money is still leaving the real economy to be bet on financial “products” which are high on promise, but low on substance. That’s the rebalancing that’s actually going on, with Mr Cameron’s approval.
The only rebalancing towards manufacturing and the job creating real economy results from the ingenuity and efforts of practical people achieving results on the ground, through co-operative rather than exploitative means (The Road to Co-operation is due out Gower in April). This achievement is despite Mr Cameron and his friends. Continue reading Mr Cameron Doesn’t Understand→
The Financial Services Authority’s report on the collapse of the Royal Bank of Scotland is published this morning and this afternoon the Prime Minister will explain to parliament the reasons for last week opting out of some of the EU decision processes. The FSA report is an examination of disastrous failing in the financial sector. Cameron’s speech is an explicit defence of that sector’s right to continue such failing.
Successive deregulatory initiatives by both Conservative and New Labour administrations have led to the conflation of traditional banking activities with those exploiting the open access and free market in financial speculation. That is what encouraged Fred Goodwin to bully the traditional RBS into its unintelligent acquisition of ABN Amro. It’s a mistake that, despite Cameron, we don’t need to continue making. Continue reading The Coalition’s Rebalancing Act→
British Prime Ministers and their Chancellors are clearly in the pocket of the City of London, as regularly demonstrated by their red faced compliance at the Lord Mayor’s fancy dress functions. The politicians dutifully swear their allegiance. And they mean it, as Cameron recently showed by vetoing the Franco-German proposal for a timorous financial transaction tax. It might have put some friction into the City’s speculative finance machine and offered a chance of slowing it down and ultimately of reducing its size. Like all his predecessors over the past three decades, Cameron would contemplate no such challenge to the City.
That appears to be the only certain position he holds as he attends the EU summit The rest of his pre-Summit statements appear to be incoherent bluster, largely aimed at placating the emerging Tea Party element of his own party. And specifically not aimed at what he himself previously referred to as ‘rebalancing’ the UK economy. Continue reading Cameron Fights for the City against the People→
Aside from IQ, what do Fred ‘The Shred’ Goodwin, the Duke of Westminster, the Prince of Wales and dear old Bob Diamond have in common? Well, it’s not absolutely certain, but there’s a strong probability that they pay a lower rate of tax than you do. The interesting thing is ‘why?’ There are two reasons.
There is an elaborate theoretical structure which seeks to justify not taxing the rich. It operates at many different levels. There’s the Tea Partyish argument that tax is Bad. This is because government is Bad. Because government can only stop things happening, get in the way and generally inhibit the entrepreneurial dynamism of people like Fred, the Duke, the Prince, and Bob. Government and all its works should be minimised. Continue reading Tax and Grow→
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. Continue reading Making Capitalism Work: some initial steps→
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. Continue reading The Real Economy Being Drained Away→
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.
Former UK Chancellor Alistair Darling’s memoir describes Gordon Brown’s approach as ‘a shambles’. As illustration, the much quoted description of a speech by the former Prime Minister about “neoclassical endogenous growth theory”. Brown started before the speech was fully written, so that part way through delivery, “a hand appeared from behind a curtain and handed him the rest of the speech.” It may sound pretty shambolic, but much more important than that: what was Gordon Brown doing talking about neoclassical endogenous growth theory in the first place? He was shadow chancellor at the time, not some first year economics undergraduate. It’s an example of what Keynes described as the “madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
In this regard at least, Gordon Brown was far from unique. Politicians, bankers and business people tend to retain a residual belief in the academic ideology they learned at university and business school. When it’s relevant they seem likely to act according to its dictates, and to be eloquent in its defence, no matter how obviously stupid it appears to be. Thus the current debate about retention of the 50% tax rate for those earning over £150,000 pa. Continue reading Neoclassical Endogenous Growth and a 50% Tax Rate→
The Independent Commission on Banking (ICB) is expected, when it reports next Monday, to recommend ring-fencing investment banking (the speculative ‘casino’ activities) from the traditional bank role supporting the real economy. The aim of ring-fencing is said to be to ensure the government never again has to use tax payers’ money to bail out the banks when their speculations go wrong.
However, ring-fencing is a hugely ambiguous concept. No doubt the ICB will deliberate at length on its chosen interpretation. But why bother? If the aim is to insulate traditional banking from the high risk, high return speculation, why ring-fence? Why not separate the two completely, as they were prior to deregulation? Then, if the ‘casino’ banks create a bubble that bursts, they can be allowed to go to the wall with a more limited impact on the real economy. But the bankers wouldn’t like it. Continue reading Ring-fencing or Separating Banking Activities→
Fighting for Fairness by Remaking the Real Economy 