Britain\’s Broken Economy

That\’s the new e-book from a left think tank. It certainly opens in fine form:

Labour made the mistake of buying the snake oil of neo-classical
economics. It must now discard it, and develop ideas for the
economy that are both practical and humane – based on the
principles of environmentally sustainable wealth creation,
durability, cultural inventiveness, equality and human flourishing.

We\’re to abandon the entirety of neo-classical economics are we? The whole marginalist revolution? Everything? Marshall, Pigou, the lot?

I have a very strong feeling that they have overdosed on the rhetoric there and actually mean \”neo-liberal\”. Because to throw out neo-classical economics is simply insane.

Nowhere is this problem more acute
than in the realm of political economy, where the discrediting of neoclassical
economics has left an intellectual void in policy making.

Hmm, no, I think they do actually mean it though. Weirdos or what?

Strategically, those who had fought a
long guerrilla war against neo-classical economics and conservative
politics went into the crisis in a weak position. The belief in the
primacy of markets, the virtues of deregulated finance and the
malign effects of government was deeply entrenched in finance
ministries, central banks, business, the media and academia.

They\’re certainly using neo-classical economics to mean something very different from what everyone else uses it to mean. Neo-classicism is, more than anything else, a method of analysis, one that very few economists indeed would want to abandon.

Unlike the neo-classical
movement, which in the 1970s had a coherent alternative to
Keynesianism to offer – after writing, thinking and arguing their
case during the three decades since 1945 – the left’s intellectual
wellspring was in danger of drying up.

Keynes being one of the people who used that very method of analysis to come to his conclusions.

To put this another way perhaps. Keynes does have very different ideas about what to do for the macro economy when at the zero interest bound than the neo-classical economists do. But that\’s about the only place that he does.

The great strength
of Keynes in the 1930s was that he was able to dismantle the
classical economic model and prove there was a better way.

Eh? Now we\’re bouncing back to the classicals? Malthus, Smith, Hume and Ricardo?

Market fundamentalism – with its belief in self-regulating markets
and a minimal state, and its narrow view of human beings as
rational economic actors – may be fantasy.

That description of it is certainly a fantasy. About as far as a market fundamentalist is willing to go is that when trying to act in the economy people act as rationally as they can. They prefer, just as an example, higher pay for less work rather than more work for less pay.

No one at all is saying that all human beings act rationally all the time. We\’ve asylums and the Labour Party to show that.

Following the collapse of manufacturing industry in the

Erm, what collapse was that then? Manufacturing output at the end of the 80s was higher than it was at the beginning of the 80s.

They borrowed to compensate for wages that were increasingly
falling behind productivity increases.

Erm, what does that actually mean? So wages fall behind productivity increases. So what? Why should that mean an increase in borrowing?

Wages for most of the population have been falling behind the
growth in productivity, and at an accelerating rate (see Figure 2).
Between 1980 and 2007, real wages rose by an annual average of
1.6 per cent, while economic capacity grew by 1.9 per cent.

Yes, but so what?

I have a feeling that this is included simply because they couldn\’t find any other measure that wages had fallen behind. Have real wages declined? Nope. Fallen behind inflation? Nope. Have the bottom 10% lost real wages? By their own figures, nope (they\’ve risen by 20% and note that almost no one in htat bottom decile is actually working and getting wages anyway).

At the heart of the inequality trend is a thirty-year-long squeeze
on people’s wages. The share of the nation’s output going to wageearners
peaked at 65 per cent in 1975, but has been in freefall ever
since. In 2007 it reached as little as 53 per cent (see Figure 1). In
contrast, the share of output taken in profits in that year had
reached a near post-war peak.

Yes, we know these figures. But perhaps it was the peak that was the problem, not the current level? 1975 wasn\’t really all that great a year for the British economy now, was it? And the great question of those years was \”Where the fuck has all the investment gone?\”

Which, if capital ain\’t getting sufficient return to make it worth investing, means that in order to get more capital invested we might want to increase the returns to capital.

Only a thought mind…..

Supporters of this Thatcherite model claimed it would boost
business investment and productivity. All sections of society
would benefit. But this has not been the case, since little of the
profit has been invested in the productive economy.

Ooooh, nice trick! That word \”productive\” there means \”what we approve of\” rather than investment as a whole.

In 2007,
banks invested some £50 billion in manufacturing. In the same
year they invested close to £800 billion in a variety of complex
financial products.

Sigh. As we all know, the Anglo Saxon model doesn\’t use banks to invest in companies. It uses markets. Equity, bond and commercial paper markets. You know, those £800 billion of complex financial products?

The decline of British manufacturing has stripped out nearly 5
million jobs from the economy, while the rise of finance has added
only a few hundred thousand.

As above, there hasn\’t actually been a decline in British manufacturing. There\’s been a decline in British manufacturing employment, a very different thing. Which has come about as a result of the increases in productivity already mentioned.

In the years after 2000, real
public expenditure increased by nearly 50 per cent.

Gosh, that\’s interesting. And there they are telling us that not increasing it for the next few years will cause a crisis.

In London and the South, the state and para-state
accounts for no more than 38 to 44 per cent of employment growth
between 1998 and 2007. In the North East and West Midlands, it is
as high as 79 per cent and 153 per cent.

Wonder if there\’s a connection between that and this:

And yet despite this, the private sector has still failed to
create sufficient new jobs across large parts of Britain.

For those government jobs are at national, not local, pay rates, thus removing the price advantage that the depressed areas have.

Nor is there evidence
that countries with more deregulated labour markets have lower
levels of unemployment,

Err, yes there is actually. Denmark has an almost entirely \”unregulated\” labour market and low levels of unemployment. Spain has high levels of such regulation and high unemployment. You\’re allowed your own opinions you know but not your own facts.

The housing crisis is another consequence of market

Nope…we most certainly don\’t have anything like market fundamentalism in the land market, that lack being the root cause of the price of housing. Unclog the planning system and houses will fall in price. More, not less, market needed here.

This is only part of the story. In 2007/08, total pensions paid out
amounted to approximately £122bn. And during this period, apart
from the £61.5bn cost of the state pension itself, a further £25
billion was paid by the state to its former employees, and about £38
billion was given in subsidy to private and occupational pension
This means that pension provision cost the state £125 billion in
that year – and yet the total amount of pensions paid from all
sources, including private sector funds, was just £122 billion. In
other words, every single pension payment made in 2007/08 was
made at direct cost to the state. The private sector did not bear any
of the burden in that year of paying pensions to members of private
sector pension funds.

Ahahahahaha……the £38 billion is the subsidy to future pensions, to money being saved now to gain a pension in the future.


Around 60 per cent of pension investments are in corporate
securities. 99 per cent of this kind of investment is made in second
hand-assets already in issue. The issuing companies receive no
direct benefit from their purchase. In other words, no new
investment or employment opportunities are created. In economic
terms these are savings activities and not investment activities.

Ah, yes, R. Murphy again. Yes, he is one of the writers of this report. He still can\’t get his head around the idea that the secondary market allows people to cash out their savings. Like, for example, when they retire and buy an annuity, or die and have to pay inheritance tax.

Indeed market fundamentalism is incapable of planning
for the future needs of society. Markets pursue short-term profits,
and companies chase competitive advantage; and the consequences
of this are a failure of longer-term investment and the loss of wealth
generation for a common prosperity

That\’s certainly new and interesting information. We\’ve got politicians who don\’t look beyond the next election and companies like Shell and BP with 50 year planning horizons. Amazing how much worse markets are at that long term planning thing really.

As anyone who has studied history – or simply looked around –
would know, opening your country up to the forces of global trade is
not a good recipe for economic development.

Yeah, quite, the autarky of North Korea and Cuba has worked so much better, hasn\’t it?

Similarly, China and India, which still rely on central planning,
and are among the most protected economies in the world, have
done well in this phase of globalisation.

Very carefully avoiding the fact that they\’ve done well since, respectively, 1987 and 1991, when they started to relax that central planning.

Incentivising union membership through tax breaks (for example a
lower rate of corporation tax for unionised firms) might help break
this logjam.


Greater democratic control of the credit system would allow
industries designated as being of strategic importance to borrow at
rock-bottom interest rates (for example, renewable energy firms
and green technology start-ups).

Oh, frabjous day! Can you not just see the orgy of political bribery that would follow lower interest rates for politically approved companies?

The housing market has failed, and we should consider a nonprofit
public clearing house, to which sellers could sell their homes
without waiting for a chain of transactions to be in place.


So, how do you price them? And anyone want to bet that those who know the local councillor in charge of the pricing committee will get a better price?

Lastly, the most effective fiscal-policy means of tackling housing
booms and busts would be an annual land value tax that would
replace council tax and the system of business rates.

I guess there has to be one good idea in something of this length….to be followed by this tripe:

In addition, consideration could be given to promoting
contributions made by employers in kind, by issue of new shares in
their companies to their pension funds.

No, absolutely not. You do not want a company pension fund to own shares in the company. We\’re trying to diversify risk, remember, not concentrate it?

Tax relief on pensions could only be secured if
a fund invests proactively to create new capital assets,
infrastructure, skills and jobs.

But if there\’s no pension investment in the secondary market where can I sell my pension assets when I want to retire and convert capital to an income?

the truth is that the economy suffers
from a dearth of capital investment, as vast financial flows chase
unproductive short-term profit. Our economy is anaemic because it
lacks capital.

So, as above, they want to increase the labour share of the economy, reduce the share going to capital and this will increase the amount of capital invested will it?

Yes, they\’re numpties.

13 thoughts on “Britain\’s Broken Economy”

  1. You do not want a company pension fund to own shares in the company.

    Indeed. This is the mistake Marconi made, when it collapsed the employees lost their jobs and their pensions simultaneously.

  2. And the real issue is that with Labour politicians (and most of Lib Dem ones like Vince Cable) – morons of this magnitude are empowered with the leevrs of state…

    And when it foes pear shaped in Capitalisms’ fault…

    Numpties barely scratches the surface of the depth of these people’s stupidity, becuase they simply don’t have any modesty to acknowledge how little they actuasl;l;y udnerstand.

    It’s all just marxist claptrap – “lets transform the world based on our wishful thinking”

  3. I still haven’t seen a decent argument as to why we should give a shit about carbon emissions AT ALL? Screw the socialist scum. Let them pay the bloody carbon taxes if they want to and leave the rest of us alone.

  4. re housing market “So, how do you price them?” … indeed, and if you underprice then how do you allocate, and if you don’t underprice then we have what we already have or else over pricing and that is even worse.

  5. That was exhausting, some stunning mistakes in that, but I shall have to take a look myself as I like that Duncan chap.

    I do wish the left would slag of economics a little less, learn tax incidence and so on.

    BTW, you’ve got the date wrong for China, 1978. And as a side note, both countries saw a notable increase in their GDP growth rate and then liberalised trade. I still think that lag is instructive for developing countries. However, for the UK, I struggle to see how taxing the import of Taiwanese bras or Brazilian bananas is a good (or left wing) idea.

  6. “I still haven’t seen a decent argument as to why we should give a shit about carbon emissions AT ALL? Screw the socialist scum. Let them pay the bloody carbon taxes if they want to and leave the rest of us alone.”

    You do have some funny people hanging around here Tim, very much of the toddler “lalala, I can’t hear you” school of climate “scepticism”

  7. Insofar as I’m aware, there’s only a single fundamental difference between the “classical” and “neoclassical” economists: recognition of “value” as arising from the minds of valuing human beings (characterizing the “neoclassicists”) or non-recognition of that relationship (of which the “classical” economists were ignorant because it hadn’t yet been discovered–until the 1850s, nearly simultaneously but independently–by Jevons, Walras, and Menger).

    Today, ALL economists are neoclassisists except
    for Marxists, who must adhere to the older belief simply because, without it, the “labor theory of value” and, with it, the indictment of the capitalist system and the bourgoisie as extracters and plunderers of the “surplus labor value”–produced
    by the proletariat–ceases to make any sense whatever (whether it ever did even under classical economic theory is a separate matter).

    The only significant, large difference between economists today is between those of the “mainstream” and those (like myself) of the “Austrian School”–so-called because following in the footsteps (and methodology) of Menger (and with Austrians Bohm and Mises as principal lights).

    The differences between the Austrians and the rest can be summarized briefly. The mainstream believe that those with economic knowledge are in position to advise (especially government) of certain “policies,” which, if adopted, will be economically beneficial to the nation and its people. They are intent on distinguishing between “good” and “bad” policies and, often, between choosing, instead of one that is merely “good,” another which is “better”

    Quite simply, Austrians deny categorically that there is any “policy” whatsoever, which, instituted, is capable of any favorable effect whatsoever not offset by other, unfavorable effect(s) of larger
    magnitude. Government can have no favorable effect on the economic lives of its subjects other than the successful exercise of the defense and police functions. Anything beyond is a net detraction from whatever may be theorized as “total welfare” and, most usually, consists merely in privileging one group at th expense of another (with attendant increased costs of implementation and enforcement).

    This economic committment of Austrian economists, while seemingly derived from a set of political presuppositions, is, rather, the RESULT of a distinct methodological difference from the “mainstream” of neoclassical economic thought: the eschewing of the use of mathematic processes (or the “empirical” methods assumed to distinguish “scientific” from other modes of thought). It is quite true that Austrians, in general, are very committed to political, as well as other forms of human freedom and that their economic opinions are thus rendered especially palatable to those of truly liberal inclinations. But the conclusions, as I’ve tried to make clear, are driven entirely from the other–methodological direction.

    Nowhere have these matters been discussed more clearly and forcibly than in Mises’ HUMAN ACTION, which I recommend to anyone of any opinion or persuasion whatever who might wish to understand such important matters as fully and as completely as possible. And, for those with no real grounding in economic thought of any kind, I’d recommend, as introduction, Henry Hazlitt’s ECONOMICS IN ONE LESSON.

  8. We keep reading of the “Austrian School” but I don’t recall seeing much evidence of their influence when I lived in Austria.

    The country might fairly claim to be the perfect example of the mainstream school. Indeed, life was so good, things worked so well, it would be hard to argue that the Austrians hadn’t ‘cracked it’, how to manage government and the economy, that is.

  9. As LO said, exhausting. Keep up the good work. A not-for-profit clearing house for property, forsooth. I can think of an Irish bank or two that might serve.

  10. ……99 per cent of this kind of investment is made in second hand-assets already in issue.
    The issuing companies receive no
    direct benefit from their purchase…….

    I love this train of thought.

    Companies spend a huge amount of time, money and effort on maintaining their share prices, why?

    Could it be that the effort rewards them in a potential for secondary share placements, and also better access to credit markets.

    Big companies hardly need to issue shares in order to make their run of the mill investments, it is the small ones that need access to equity capital in order to grow. Here we have investors with high risk appetites who are happy to provide the cash. But if you were to restrict the value of those shares in the future, then this market would dry up.

    Ironically it would push investments away from stock exchanges, so share trading would become less transparent, more like the shadowy world of derivatives for example.

    Pension funds like plain vanilla kind of investing. Blue chip companies, regular dividends etc. Punting all of the nations savings on AIM, might not be the best strategy.

  11. One small thing that really bugs me is their constant crapping on about selfish rationality being too narrow a view of human behaviour, and wanting to make room for reciprocity, altruism etc.

    Well fine, in the right place I’d agree that these things need accounting for and sometime economics is the worse for ignoring them, but if you take these things to be pervasive, does that strengthen or weaken the case for free markets?

    For some reason they seem to think that the case for free market rests on the narrow rationality thing and would be weakened by deviating from that view. Actually, it’s things like asymmetric information problems (markets for lemons etc.) that rest on narrow rationality and if you presume altruistic trustworthiness, all those problems go away.

  12. Pingback: Where Can I Sell My Pension

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