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The Common Sense of Austerity and GDP growth

The anti-austerity protest which is getting under way on 20th June, is not just a politically motivated objection to a policy of the governing Party. It is a protest with deep foundations in both theory and common sense.

For successive governments GDP growth has been the holy-grail. Despite misgivings over its validity (https://gordonpearson.co.uk/2015/02/19/the-great-gdp-deception/#more-1278), it is accepted that balancing a budget with a growing GDP is a whole lot easier than doing so in recession. But imposing austerity on the economy only stifles GDP growth. So why do governments of both main Parties – assuming Labour takes the suicidal Blairite route – accept austerity as the necessary medicine for our economic ills?

The economy is a complex of many different sectors, public and private, that relate to each other in all sorts of different ways, and it is continually on the move with some sectors growing and some shrinking, some dying off altogether and new ones emerging. That dynamic is the result of millions of people striving to make progress. Politicians don’t control the economy; the best they can aim for is to do the people no harm.
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Tory’s Rocky Road Ahead Confirmed

Survey data re the 2015 general election is confirming the previous posting. But it is not a picture that is widely acknowledged. For example, Martin Kettle in today’s Guardian, suggests it is more important we should ask why the Tories succeeded, than why Labour failed. But the truth is the Tories are only a smidgeon ahead of their 2010 vote when they had to rely on Lib-Dem support to form a government. That can hardly be regarded as great success. The 24 additional seats those few additional votes produced was a quirk of the first past the post system. Labour undoubtedly failed, being stuck only 1.5% above their 2010 low point in terms of votes, but losing 26 seats, also a result of first past the post.

The survey sample referred to in the previous post has produced some further confirmation. The Lib-Dems were written off some time ago as having completely sold out. That may be grossly unfair, but that is the predominant reason being given by those former Lib Dems surveyed. The main cause emerging for Labour’s rejection was their failure to offer an economic programme that was significantly different from George Osborne’s. In particular, Ed Balls’ adherence to the Tory austerity programme, in case Labour should be seen as irresponsible, appears to have been a prime cause of frustration and rejection.

Those small changes in voter numbers disguise a lot of voter movement. In the survey, a significant number of former Labour voters turned to UKIP and the Greens, where they substantially increased numbers to around 5m but produced no additional seats. Labour’s losses to UKIP and Greens appear to have been more than compensated by deserting Lib-Dems.

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The Great GDP Deception

The idea of GDP is simple: the summation of what is produced within the UK avoiding any double counting. It is used to assess how well the economy is doing overall. For the government of the day, growth is good because it suggests we will all be better off. Though GDP is a very imprecise measure, it is one that most people broadly accept.

The economy used to be measured by gross national product (GNP). That measured what UK-owned assets produced, irrespective of where they were in the world. But GNP fell out of favour as UK owned assets were sold to foreign investors with the result that the economy, by that measure, appeared to be in decline. Successive Chancellors tried to make out the sale of UK owned assets was good, because it showed UK was ‘open for business’. But it didn’t really wash. So, since the 1980s, GDP has been the standard measure.

GDP is calculated by simply adding the product of various sectors together as if they were all of equal worth. But in truth some sectors benefit the common good and others are predatory on the common good. But if GDP is growing the government of the day takes credit for successful economic management, irrespective of the fact that it is the predatory components that have grown at the expense of the good sectors.
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Corporate Reform Manifesto to be launched at Westminster

The Corporate Reform Collective are launching their Manifesto for the incoming government at Westminster on Monday 2nd March at 6.30 p.m.

To support this initiative and join the debate at this People’s Parliament session contact:
http://thepeoplesparliament.me.uk/themes/fighting-corporate-abuse-beyond-predatory-capitalism
The Corporate Reform Manifesto is available at https://gordonpearson.co.uk/corporate-reform-manifesto

This is backed up in greater detail with explanations and illustrations of how the abuses are carried out through complex corporate structures and how they can be controlled in their newly published book Fighting Corporate Abuse – Beyond Predatory Capitalism


PB 9780745335162 £17.99 | $31 216pp
by the Corporate Reform Collective
PlutoPress http://www.plutobooks.com
Buy the book today for £16 http://bit.ly/CorporateReform

The members of the Corporate Reform Collective are: Tom Hadden (Emeritus Professor, Queen’s University Belfast), Paddy Ireland (Professor of Law at the University of Bristol Law School), Glenn Morgan (Professor of International Management at Cardiff Business School), Martin Parker (Professor of Organisation and Culture at the School of Management, University of Leicester), Gordon Pearson (author of Strategic Thinking, Integrity in Organizations, The Rise and Fall of Management and The Road to Co-operation), Sol Picciotto (Senior Adviser to the Tax Justice Network), Prem Sikka (Professor of Accounting at the Essex Business School) and Hugh Willmott (Research Professor in Organisational Studies at Cardiff University).

The Ignorance of Economics

Despite their much vaunted economic expertise, the leading national and global institutions failed to prevent the financial and economic crisis they’re now arguing over how to clear up. The IMF’s Independent Evaluation Office (IEO) reported last month on why the IMF, as one such institution, failed to identify the risks and give clear warnings. The prime causes of that failure were identified as ‘analytical weaknesses’, which were actually shared by all relevant institutions. These analytical weaknesses included a tendency, among IMF economists, to be dominated by neoclassical free market dogma, and so to believe ‘market discipline and self-regulation’ would be sufficient to avoid financial disaster, and to trust the new mathematically based techniques for spreading financial risk, and to conflate the financial and industrial sectors, thus ignoring the influence of finance over the real economy. ‘Perhaps the more worrisome was the overreliance by many economists on models as the only valid tool to analyze economic circumstances that are too complex for modelling.’ (Paragraph 46).

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Bury the Dogma

Neo-classical microeconomic theory, especially in its more recent fundamentalist manifestations, has done immense damage to the real economy while nurturing the parasitic financial sector, as recounted from time to time elsewhere on this site.

Various alternative approaches have identified and addressed problems created by that theory. Welfare economics, the economics of social balance, and what is referred to as behavioural economics, have all sought to modify how the neo-classical maximising model operates. However they have not provided a clear and simple alternative to neo-classical mathematics. So the neo-classical model prevails and will survive all such challenges. Utility maximising economic man and the profit (or shareholder wealth) maximising firm, operating within an assumed to be efficient market, will continue to be accepted as the solution to maximising economic growth and social welfare. The obvious inequity of distribution between rich and poor, both within and between nations, will continue to be regretted as necessary to the utilitarian result. Moreover, it is argued, care for the environment could be more readily financed by a successful economy, rather than by one which is struggling to survive.

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The Peasants’ Revolt: A Translation for Christmas 2010

The Revolt was precipitated by the government’s heavy-handed attempts to increase taxes and cut public services, in order to repay the debt which had been incurred by the speculative losses of the bankers, who continued to pay themselves massive bonuses. The government actions affected some of the poor more than others and the wealthy, including the bankers, not at all.

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