Err, good question

The root of Philips’ and Lord Wolfson’s concern is that wage inflation in the UK continues to lag general inflation. That means real earnings are still falling for consumers.

“How can you have a recovery when people are getting poorer?” asked Lord Wolfson.

The answer being if everyone was earning too much before. This is the same statement as productivity was too low. Thus we need to have a decline in real wages. Which will raise productivity, they’re the same statement.

If you’ve not got your own currency then this can be an horrendous experience, as Portugal and Spain are showing us. Fortunately, if you do have your own currency, as we do, you can depreciate it, get a bit of import led inflation going, and thus reduce real wages while nominal wages continue to rise.

Very Keynesian in fact. And also entirely planned.

7 thoughts on “Err, good question”

  1. But sterling has been falling and imports not falling

    Surley a meaningful definition of productivity is produce per hour labour not produce per unit currency

  2. correction – sterling value ,- coudn’t find definitve data for sterling value long term against a basket of currencies

  3. For someone who isn’t generally keen on governments controlling things Tim seems remarkably keen on governments controlling the means of exchange.

  4. reduce real wages while nominal wages continue to rise.

    If everyone was earning too much, then is it not better for us to be confronted with that reality in the most direct way possible, i.e. nominal wage cuts? How else will we learn that we need to change (to accept getting less, be more productive in our current jobs or to do something different for a living)? Trying to hide the need for change by debasing your currency may be politically convenient, but it is economically counter-productive in the long term.

  5. JamesV,
    Those on the right are often surprisingly quick to leap to the defence of central banks, even though they are surely the epitome of a planned economy.
    We all know Mark Carney was hired to keep the pound falling, and thus to prevent house prices falling and keep the banks afloat. Sell your pounds now while you can still get a good price for them.

  6. Don’t worry chaps, the rentier cartel have already got the next bubble underway. And when anyone questions why those incomes never seem to be required to fall to improve productivity, we will be confidently informed that they in fact need to rise to “attract the best talent”.

  7. Those on the right are often surprisingly quick to leap to the defence of central banks, even though they are surely the epitome of a planned economy.

    This is why those “on the Right” aren’t really free marketeers, any more than those “on the Left”. Only the small band of Libertarians are real free marketeers.

    *waves banner*

    The basic problem seems to be that most people fall for some form of what we might call the “physiocratic fallacy”. This is the idea that some sector of the economy is the “driver” of it, the productive part, and everyone else is just living off them, so to create economic growth/success you need to nurture and cherish this particular sector and then everyone else will benefit by its success.

    The Physiocrats themselves believed it was agriculture; agriculture was production, everyone else was a parasite living off the farmer’s production. Because, nobody can produce anything without food, so excess food production allowed other businesses to exist at all; so while agriculture produces food, everyone else is just a consumer of it.

    The industrial era was characterised by the beleif that the driver sector was Great Industry, and that belief lasted until the Neoliberal Era. Thus, planners saw it as their job to nurture and direct great industry; thus, the nationalisations, and five year plans, and Board of Trade and all that. King Coal and British Steel, industrial production. The more coal, steel, shipbuilding etc, the better.

    The fallacy believers (“fallacrats”?) in the 80s switched to declaring finance to be the great driver of the economy. It was the economy’s “engine room”. Instead of capitalisation simply being a service that other economic actors require, capital became the driver of the economy. The more financial activity, just like more farming or more steel, the better everyone is supposed to do. Because that “drives” the economy. The bizarre conclusion being that the financial sector is the productive one, and everyone else is just a parasitic consumer of their output- capitalisation. Banking ceases to be a service which other agents seek as required. It becomes the economy itself.

    And here we are.

    In the Physiocratic era, landowners were the power class. The old aristocracy, the owners of the great agricultural lands. The industrial era led to industries becoming the power class, and as they became interwoven with government, the workers in those industries via their unions came to a position where they could hold the rest of the country to ransom simply by industrial action. The government on behalf of everyone else- let alone the ordinary “everyone else”- did not believe they could say “no” to them, because to lose “industry” would be to lose the economy itself.

    We now have the same situation with finance. Just like the NUM, they simply have to withdraw goodwill and everyone panics, gives them whatever they want, anything to keep the economy’s “driver” afloat.

    There was a time when privatising the great industries- or even taking a “hands off” approach was unthinkable. Currently, it is now unthinkable to privatise banking. The assumption that it must be tightly interwoven with the State, and the State must give it whatever it requies, is as ubiquitous as the previous attitude to industry. It drives the economy. It is the economy. What else can you do?

    There will come a point (indeed, it has already come, but we are not ready yet) when the banks will have to be given the same treatment as the unions were. You can’t keep pumping taxpayers money into an industry predicated on holding the rest of the economy to ransom without ruin. As in the 1970s, it’s just a matter of how far you let the ruin go before you find the balls to say, “Enough!”.

    And, apologies to our host, but this is Tim’s weakness. For all the good words he writes, he is too much the tepid free marketeer in the style of Smith. It’s free markets for everyone else, but not this class of economic activity here, and this one here. Creative destruction is the bitter pill for everyone else but- due to the physiocratic view that creeps in- not for the supposed “driver” of the economy. That must not be subjected to the market. It must not be creatively destroyed. It must have whatever support and patronage will keep it buoyant and, however much that harms everyone else well, tough titties.

    Which it seems to me is the difference between a Neoliberal and a genuine market capitalist.

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