Dickie Dear, I think you don\’t understand

Richard Murphy in his comments section.

"If economics is a science it is a very poor one. Let’s look at some of the assumptions it requires to ensure it works as one:

1) Perfect knowledge of the future

2) Certain knowledge of current preferences which will never change

3) Mindless pursuit of self interest in the face of conflicting goals

4) No externalities i.e. everything of value can be priced, with certainty

That’s not science: that’s mumbo jumbo. "

I agree that what you\’ve laid out there is mumbo jumbo. But that\’s because what you\’ve laid out is not "economics". It\’s a desperate misunderstanding of a certain sect.

1) I can\’t think that there\’s any economist at all who claims that the subject rests upon perfect knowledge of the future. Good grief, there are few enough who argue that it rests upon perfect knowledge of the present. For example, Akerloff got the Nobel for studying asymmetrical information…if one group has more knowledge than another (which is what that phrase means) we\’re pretty clearly not talking about everyone having perfect information, are we?

2) Certain knowledge of preferences? Well, yes, most economists do argue that both individuals know what their own preferences are better than others do for them and that preferences are consistent. That if you prefer A to B and B to C then you prefer A to C. But no one at all insists that these are unchanging over time. Appetites for (the same as a preference) for risk for example are known to change: it\’s one of the ideas that underpins a certain set of business cycle theories. Savings and consumption preferences are known to change over time: Modigliani\’s lifetime savings hypothesis for instance.

3) Mindless pursuit of self interest? Umm, no, not even Adam Smith said that. Pursuit of enlightened self interest, yes, but if you actually bother to read him he talked a great deal about sympathy for one\’s fellow man, just as an example. The current phrase used is that we all attempt to maximise our utility. And yes, the warm glow that comes from doing the morally right thing is indeed included in the definition of utility (as is of course the warm glow from doing things that aren\’t morally OK, say, adultery).

4) No externalities. Umm, Richard, have you even bothered to crack open an economics text book in recent decades? Externalities are taught at A level economics these days. Absolutely every single damn economist looking even vaguely at climate change is arguing not about whether they exist but how do we deal with them? The cap and trade systems have been designed by economists, the proposals for carbon taxes (one creates a market in what was formerly an externality, the other brings it into the current market pricing structure)….good grief, the entirety of environmental economics is based on Garrett Hardin\’s analysis of the Tragedy of the Commons, simply another name for a certain type of externality.

I\’m afraid that you\’ve betrayed the fact that you really do not understand economics at all. Something I have to admit I\’ve suspected for some time now but at least now I know.

"Ecnomics" is, like "science" itself, best understood as a toolbox to be used in attempting to make sense of the world around us.

Aaaaaargh!

Economic cretin alert!

A handbag? For £500? Get real Whether it\’s our own crazy consumerism or the billions spent on bail-outs, the world is still in denial about the limits of growth.

Jeepers. Economic growth is defined as the value added in the economy. A £500 handbag adds more value than a £35 one (crazy though that thought might seem it is in fact the way that we measure economic growth).

Since when did it become acceptable to pay £500 for a handbag? This is now the going rate for a must-have bag, I am told by my younger colleagues. That is way over the top for me. I recently demurred at paying £35 for one from a market near work.

Thus if we all buy £500 ones we get more exonomic growth than if we all buy £35 ones….and we don\’t increase the resource use either.

Yes, I know, this all seems rather odd and I\’m not trying to claim that handbags are the centrepiece of a modern economy. Just that the limit to economic growth is the limit of the value we can add, not a limit imposed by the resources available.

Simple answer

Those leftist governments of Latin America. Now that times are getting harder, will they be able to continue to be leftist?

Now, the financial crisis will press them to prove they can manage and run similar policies when the cash isn\’t flowing into their pockets. Venezuela will get less for petrol, Brazil, Argentina and Uruguay won\’t receive as much from soy and other agricultural exports and Chile could have trouble if copper prices and demand falls.

In the end, the crisis could serve to separate those governments that are committed to change from those who have either jumped onto the progressive bandwagon only for the ride or are so shallow that they will crumble when the first strong winds start blowing against them. Those who continue to treat the fight against inequality as the cornerstone of their policies will probably be called the true Latin American left.

Given that Argentina has already nationalised private pension plans in an attempt to pay the foreign debt, I think we can safely say that no, those who have been following these alternative economic policies won\’t be able to continue to do so.

As the man once said, heterodox economics seems to have higher costs than non-heterodox economics.

Economics paper bleg

Anyone got access to the system where this paper might reside?

One of the most important pieces of research used by euro proponents was a paper from Andrew Rose showing that countries which joined currency unions tended to see their trade increase by up to 200pc. However, a paper published by Harvard\’s Jeffrey Frankel has shown that, in fact, trade within the eurozone increased by just 10-20pc during the first four years of the currency. Moreover, the volume of trade did not rise any further thereafter.

In the paper, published by the National Bureau for Economic Research, Prof Frankel says: "The most surprising finding of this study was the absence of any evidence that the effects of the euro on bilateral trade have continued to rise during the second half of the eight-year history of the euro."

Care to send me a copy?

And for our next story…

It is a message sent from on high to the world\’s financial and political elite. The Roman Catholic Church is calling for the effective closure of secretive tax havens as a \’necessary first step\’ to restore the global economy to health.

In a policy paper from the Holy See, Pope Benedict pins the blame for the international financial crisis largely on \’offshore centres\’, many of which, such as the Channel Islands, are British dependencies.

\’They have given support to imprudent economic and financial practices and have also played a significant role in the imbalances of development, allowing a gigantic flight of capital linked to tax evasion,\’ says the report. \’Offshore markets could also be linked to the recycling of profits from illegal activities.\’

And for our next story, Paul Krugman, the most recent Nobel Laureate* in economics, points out the basic and essential truth of transubstantiation. Accept no substitutes.

 

* Yes, we know, and we don\’t care**.

** Sverige Riksbank etc etc.

 

Seamus and economics

They don\’t really mix, do they, Seamus Milne and economics?

That\’s what makes Mandelson\’s sudden conversion to industrial policy – anathema under the New Labour ancien regime – all the more emblematic. The new business secretary\’s commitment to "industrial activism" to support low-carbon, hi-tech manufacturing, spelled out last night in his Hugo Young memorial lecture, is potentially almost as significant a turn as the nationalisation of Northern Rock. This is a politician, after all, who almost embodied corporate "light touch regulation" in his earlier incarnation. But with engineering employers warning of a wave of manufacturing bankruptcies "within days or weeks" without state support and the prospect of three million unemployed by the end of next year, such dogmas have become a luxury.

Naturally the move is dressed up in all-purpose New Labour-speak about "what works" and will undoubtedly be nothing like as ambitious as French president Nicolas Sarkozy\’s new €20bn state investment fund, complete with public equity stakes in strategic companies and industries.

It ain\’t manufacturing that\’s going to crater this time around. It\’s services.

You might have noticed that the pound has fallen a tad here and there. That\’s going to boost manufacturing all on its very own. Manufactured imports will become more expensive to us and our exports to others become cheaper to them. Because we have a floating currency (ie, we\’re not inside the disastrous euro) we\’ve already done pretty much what is necessary to set off a boom in manufacturing. We just don\’t need to start spraying taxpayers\’ cash all over "strategic companies and industries".

This Ricardian Equivalence thing

OK, so not even Ricardo thought it actually worked but there is this idea that tax cuts which will be followed by tax rises don\’t provide a stimulus to the economy. For rational people save the tax cuts in order to pay the future taxes. I don\’t think I actually believe this, at least not whollly. However:

The Chancellor will say on Monday that tax increases and a reduction in future spending plans are necessary to pay off the borrowing that will fund short-term emergency tax cuts.

Loudly announcing that taxes will have to rise in the future is a pretty good way of ensuring that more people do indeed save the tax cuts and thus diminish the effects of the boost.

Well done Alistair. So nice having a lawyer trying to run the economy isn\’t it?

Ricardian Equivalence

There\’s an interesting little economic theory out there. Sure, you can cut taxes in order to try and boost demand. But if people know that taxes will rise in the future to pay back the borrowing then they\’ll not spend the money, they\’ll save it. Save it to pay the future higher taxes.

Thus your tax cut doesn\’t in fact boost demand.

Now, there\’s a certain controversy over whether this actually holds. David Ricardo, who first considered it, thought it didn\’t and people have been arguing ever since.

But whether it does or it doesn\’t hold depends rather on what people believe. Is this a permanent tax cut? Or just a short term one which will have to be paid for?

Lord Mandelson, the new Business Secretary, said that there would need to be "a medium term adjustment some years ahead" to pay for a "fiscal stimulus" now to revive Britain\’s ailing economy.

His remarks were seized on by David Cameron, who warned that a tax "bombshell" was being stored up.

In a Commons exchange with Gordon Brown following the G20 summit in Washington, he told the Prime Minister that "discretionary borrowing now" would mean "higher taxes later."

The Tory leader said: "Isn\’t it the case that Labour\’s borrowing bombshell will soon become a tax bombshell? And let\’s be clear about what that means. Borrowing £30 billion now will mean an income tax bill for the average earner of nearly £1,500 later.

Oh, well done everybody. If you\’re going to remind everybody that these cuts will need to be paid for then you won\’t in fact get any boost to the economy from the tax cuts in the first place.

Don\’t these people that we hire to administer parts of the economy know any economics at all?

Black women earn more than white women!

That\’s one thing that\’s come out of the latest ONS figures.

The average earnings of black women in Britain are now higher than their white counterparts, according to government statistics.

But before we all become delirious with joy over this proof of how race discrimination has fallen, ponder this:

The Equality and Human Rights Commission said the figures may be explained by the fact that half of all black women live in London, where average pay is higher than elsewhere in the country.

Indeed it is. Using male figures for last year, median London wages are north of £20 an hour, in the NE, £12.50 or so.

This is in fact very little to do with racial discrimination, rather, to do with geographic concentration of immigrants in the highest paying area of the country. Where you\’d sort of assume immigrants would end up anyway.

Adrian Pabst

This is interesting.

Crucially, Polanyi\’s vision for an alternative economy re-embedded in politics and social relations offers a refreshing alternative to the neo-liberalism of left and right. In practice, an embedded model means that elected governments restrict the free flow of capital and create the civic space in which workers, businesses and communities can themselves regulate economic activity. Instead of free-market self-interest or central state paternalism, it is the individual and corporate members of civil society who collectively determine the norms and institutions governing production and exchange.

Sounds delightful really, doesn\’t it? Happy gambolling workers in charge of their own destinies as a solution to the ills of capitalism while avoiding the concentrations of power inevitable under a system of central planning.

So what might be the effect of such a system, for, remember always, there are no solutions, only tradeoffs.

Because of the way workplaces and the investment mechanism are structured, Schweickart\’s model aims to facilitate fair trade, not free trade, between nations. Under Economic Democracy, there would be virtually no cross-border capital flows. Enterprises themselves will not relocate abroad, since they are democratically controlled by their own workers. Finance capital will also stay mostly at home, since funds for investment are publicly generated and are mandated by law to be reinvested domestically. "Capital doesn\’t flow into the country, either, since there are no stocks nor corporate bonds nor businesses to buy. The capital assets of the country are collectively owned — and hence not for sale.

Oh my, that\’s the developing world fucked then, isn\’t it? Mone of us rich world people can invest in a factory, in a business, in anything at all, outside our own national borders, thus insisting that those poor folk in other countries will have to stay poor. We can\’t even lend them money for finance capital is similarly restricted.

Hmm, perhaps this isn\’t such a good idea after all then.

Wee Wullie

Hutton\’s at it again:

I don\’t know whether any economist who believes that markets are rational and incapable of making systemic mistakes still exists.

Don\’t be bloody stupid. No one says that markets don\’t make mistakes. Rather, the thought is that markets correct mistakes faster than any other method of running things.

But markets are very, very stupid. Thank God we have governments.

Governments are more stupid than markets is the point there.

Willy today

The usual quite glorious stuff.

Most important is the introduction of schemes that insure the nominal value of loans, such as James Crosby\’s proposal to create a government insurance scheme for raising funds for mortgages. We need similar schemes for small firms\’ working capital requirements and larger firms\’ investment needs. I would create lending organisations as Roosevelt did in the 1930s.

Yup, we need Fannie Mae and Freddie Mac. Like that worked so well, eh?

Human beings do not know the future. We may try to attach rational probabilities to certain outcomes, but that is not the point; there are, Keynes said, prefiguring Donald Rumsfeld, unknown unknowns. An unknowable future creates herd effects, waves of irrational exuberance or gloom.

Very true.

Thus, credit flows and the prices of financial assets must be constantly monitored to see if they are behaving rationally. Intervention in the financial markets – regulatory, institutional, via monetary policy and in collaboration with other governments – is vital.

And where do we find these genius humans who can indeed see into the future and thus determine rationality?

In the longer term, we need to develop a new insurance infrastructure to help banks – and borrowers – better manage risk. None of this will be delivered by market forces. Everything will have to be created by government.

Gosh!

The Bank of England revealed in its financial stability review last week that in the seven years up to 2008 British banks had lent £700bn more to their customers than they had saved, making up the difference from taking deposits from abroad via the now dead markets in securitised assets insured by credit default swaps.

That\’s amazing, isn\’t it? To insist that the market cannot, will not, deliver an insurance infrastructure to manage risk while pointing to the current market based system for managing risk…..the one part of the credit markets which has actually been open, liquid and working in recent months.

If Willy didn\’t exist we\’d have to invent him, wouldn\’t we?

Polly Today

This isn\’t going to turn out well, is it?

Words to draw a picture of good government hold the key to winning the Keynes v Hayek argument.

Polly\’s going to explain the difference between those two to us?

I think I need to build my strength before looking at that one.

OK, I had a go at that one here.

 

Green gloom and doom

Long piece about how the Maya al died because the ecology couldn\’t support them…..just one line to note:

Governments are beginning to assign monetary values to natural "assets" such as forests, a conceptual leap that could reinvent economics.

Really? Noting that assets have values is going to revolutionise economics?

I think you\’ll find that assigning such values is commonplace withing economics…..it might change politics as governments wake up to the point but then that\’s true of a great deal of both economics and politics.

A good description

Yes, it\’s Boris:

We should remember that the boom-slump cycle is a natural part of our history; indeed, it is indispensable to our psychological make-up. It is like love. It is a basically incurable condition, and we revert to it again and again. First. we conceive the passion – the Tulip Mania, the South Sea Bubble, the dotcom or the property boom – and then we bicycle-pump our hearts with wild hormonal elation, and every time it happens we tell ourselves that this is the big one, this time it\’s real, this time we have broken the paradigm; and we invest with ever more irrational exuberance, and though some people occasionally tell us that the love-object is not worth it, we don\’t see it that way, of course we don\’t, since our exuberance is irrational.

And then it turns out that we have been in some way deceived, and the bubble bursts, as bubbles do, and the irrational optimism gives way to a pessimism that is equally irrational, and life isn\’t worth living, and nothing will ever be the same again, and we wish we could be towed out to sea and sunk with 20-inch guns.

Although it has to be said that this isn\’t quite right:

There is a system called capitalism, by which goods and services are allocated by markets, and under capitalism I can go to the off-licence and buy five times the cider, of vastly superior quality, for a twentieth of the price, and I can use the time and money saved to buy other things and stimulate the economy in other ways; and by the time the mistresses of the bedchamber have finished trying to make and mend her clothes, I expect you could say the same of the Queen\’s dresses.

Capitalism may indeed operate that way but that\’s not a definition of capitalism. That\’s a definition of markets and the associated division of labour. There\’s nothing there that requires the capitalist method of the ownership of assets, nothing at all.

Willy today

There is one good bit in Hutton today:

China\’s banking system is a house of cards, with billions of dollars of toxic loans made at the party\’s request to loss-making enterprises set against tiny amounts of core capital.

Both true and a warning to us. That\’s what happens when you have political control of the banking system. Loans are handed out for political reasons. And no, politicians are not better at being bankers than bankers are.

That\’s why we want our own banking system sold off again, as soon as is possible (ie, as soon as everyone is convinced they won\’t fall over if they are).

This however is nonsense:

Then there is innovation, where its track record is abominable. China accounts for only 0.1 per cent of the world\’s patents that apply in Japan, the EU and the US. Economists believe the invention of general-purpose technologies, like the internal combustion engine, internet or aeroplane, that have massive general application, holds the key to growth and will accelerate in the decades ahead. Not one of this century\’s general-purpose technologies will be made outside the West and Japan, which have held a monopoly for 300 years. Their lead will widen rather than narrow.

The Chinese government knows it must unblock control of universities, laboratories and business if China is to change this dismal prediction and create the subtle combination of freedom to experiment and incentives in which innovation flourishes.

If you actually go and read the books on innovation (as I currently am, this one for example) who does the initial research is an irrelevance.

If we\’re talking high science then that is a public good. That\’s why we support it from tax money, because those who do it cannot collect the full value of their results. A public good, by it\’s very definition, is non-rivalrous and non-excludable. Newton couldn\’t stop other people from using gravity after he\’d worked it out. The same is true of any other piece of science: they do publish this in journals you know, and anyone can read them.

If we go a stage further, and look at patents, again, it really doesn\’t matter who files these. They end up being licensed to manufacturers anyway. Who cares that an English patent is licensed to a Chinese, an American or a UK company? And vice versa of course.

Where innovation is very important is in the spread of the actual products or services made available by it through the economy. That depends upon the felixibility of said economy, the lack of barriers to entry.

There may well be problems in China in this regard….as there are in many economies, the Continent included. But the problems about innovation don\’t depend upon the high end research at all….the results of that are available to all on exactly the same terms, either free through the journals or via patent licensing. It\’s how those results are spread through the operating economy, how quickly they are adopted, that makes the difference.

Keynesian Spending

These laddies do have a point.

Further to your interview with Alistair Darling, we would like to dissent from the attempt to use a public works programme to spend the country\’s way out of recession.

It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession.

Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.

Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector\’s recovery once recession is past.

Occasional slowdowns are natural and necessary features of a market economy.

Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.

If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them.

Dr Andrew Lilico, Europe Economics; John Greenwood, Chief Economist, Invesco; Richard Jeffrey, Cazenove Capital Management; Dr Ruth Lea, Economic Adviser, Arbuthnot Banking Group; Trevor Williams, Chief Economist, Lloyds TSB Corporate Markets; Dr Nigel Allington, University of Cambridge; Prof Philip Booth, Institute of Economic Affairs; Prof Tim Congdon, Author, Keynes, the Keynesians and Monetarism; Prof Laurence Copeland, Cardiff Business School; Prof Kevin Dowd, University of Nottingham; Prof Kent Matthews, Cardiff Business School; Prof Alan Morrison, Said Business School; Prof Sir Alan Peacock, Former Chief Economic Adviser, Dept of Trade and Industry; Dr Mark Pennington, Queen Mary College, London; Prof David B. Smith, University of Derby; Prof Peter Spencer, University of York.

We\’ve already got in place what are called the "automatic stabilisers" which will ensure that government borrowing will rise. For taxes will fall off, as of course they always do in a recession, while payments on such things as unemployment pay etc will rise. So we\’ll already be pumping up aggregate demand, as Keynes would have said we should.

But deliberately going out and spending more on, say, the railways? Two problems. The first is timing. Getting a show like Crossrail on the road (sorry) takes years. It\’s a decade or more already, isn\’t it? This recession is likely to be over two years from now….and it\’s extremely unlikely that any significant sum of money would or even could be spent upon an infrastructure project in the next 24 months.

So the stimulus, even if it were in fact correct that we want to make such a stimulus, just isn\’t going to arrive in the timescale that would be necessary.

The second of course is that we\’ve seen an economy try to do exactly this recently. Japan. And that worked so well, didn\’t it?

So the biggest argument against such schemes, massive public sector infrastructure spending, is that they won\’t actually work, won\’t solve the problem we aim to solve with them.

In which case, why would we do them?

 

 

New OECD report

Prizes and secret masonic handshakes for the first to spot someone distorting these findings.

We have a high level of relative poverty….another way of saying that we are an unequal society. Which, given that we are more involved in globalisation than most other societies, doesn\’t surprise me in the least*. But this line:

While both the richest and poorest have been getting richer….

The prize is for spotting the first person to rewrite this as the rich are getting richer and the poor are getting poorer.

 

* The argument here is that there will be, in any society, a few who can play on the global rather than just national stage. So a more open, globalised, economy will allow those few to make pennies each off billions, rather than just pennies off the national millions. Tiger Woods doesn\’t make $100 million a year by taking $10 each off 10 million American golfers. He takes $1 each off 100 million global ones (numbers purely as an example).

 

Well now, who would have thought it?

The search for success has spawned a motivational industry worth millions of pounds and libraries full of self-improvement books.

It is practice, however, that makes perfect, according to the sociologist whose books have become required reading within the Conservative party. The best way to achieve international stardom is to spend 10,000 hours honing your skills, says the new book by Malcolm Gladwell, author of the best-selling The Tipping Point.

The harder you work the luckier you become, no?