Mainstream economic theory frequently starts from the assumption that people pursue their own self-interest. But that is not how most of us actually live. We care for our families, our friends and our communities. We also recognise obligations towards people we will never meet.
I call this economic empathy.
Sigh.
The new, new, idea.
As a result, I have considered an issue that very few accountants seem aware of, which is the existence of an underlying capital maintenance concept in all accounting of any sort, and what it might mean if this were changed.
OK.
The question that came to me at that point was, what would happen if we did something analogous with regard to accounting? Suppose we kept all the rules of double entry and the basic structure of accounting in the form of an income statement, a cash flow statement and a balance sheet in place, but instead of focusing upon maintaining financial capital, as is the prevailing norm within financial accounting, as laid down by the International Financial Reporting Standard Foundation in most of the world and the Financial Accounting Standards Board in the USA, we replaced the return to financial capital, which we call profit, and substituted a return to labour in its place?
OK.
In fact, the only potential technical accounting difficulty might be in deciding what the required rate of return to equity capital might be, but given there is ample evidence of average returns in stock markets on what these returns might be (and they are quite low), and that the amount of equity capital in many smaller businesses is normally insignificant in proportion to the scale of their activity, this is very far from insurmountable. After that, everything could fall into place quickly.
So we’re to base our accounting *not* on that idea of capital maintenance. We’re going to do that by defining the return to capital which maintains capital then insisting that that is the fixed return to capital – the amount which maintains capital.
There does seem a certain inconsitency here.
There’s also a joy. So, imagine that the business is making a loss. But we’ve also insisted that the return to capital is fixed. That means wages must fall in a loss making business.
Really, what he’s suggesting is that everything gets financed by bonds, not equity. But the effect will be as I say. It’s wages that will have to be cut to maintain that fixed payment to capital. Which is fun, no?
I have been thinking about something that is so obvious within conventional accounting that almost no one thinks to question it. It is the assumption that labour is a cost.
Every accountant thinks this. A business has sales, and from those sales it deducts the costs incurred in generating them. Those costs include materials, energy, rent, depreciation and, most importantly for many businesses, wages and salaries. What is left after those costs have been deducted is called profit.
But suppose we ask a different question. Suppose that the purpose of a business was not to maximise the return to capital but was instead to maximise the sustainable return to labour. What would accounting look like then?
Oh Lordy. Save us.
Labour is a cost because labour is a cost. It’s the human effort required to get something doe. This is a cost. Which is why it is treated as a cost.
Some people who have no desire to understand modern monetary theory, like Ann Pettifor, for example, suggest this is what MMT proposes, when nothing could be further from the truth.
Only The Sage knows the proper and deeper truth, right?
Secondly, whilst some recipients of this money might prudently use it to pay off their debts, and others might save it, you can be fairly sure that many might decide to spend it almost immediately, but the inevitable consequence of that will be inflation because there will be no more goods and services to buy than there were before the money was created. On this issue, I find myself in the strange position of agreeing with Milton Friedman.
OK, so standard monetarism says it’s both possible and also a bad idea which will lead to inflation.
As MMT makes clear, creating money when there might not be anything to buy with it virtually guarantees inflation, and MMT is almost obsessed with preventing that, and yet this is what Trump is doing. MMT, in that case, provides the only economic framework that shows both how he can do this and why he should not.
It is time people took it seriously.
But only MMT says it’s both possible and also a bad idea.
For, if anyone were in any doubt, monetarism is neoliberal and so poo, right?
Why do this? It is to explore the idea that the supposed certainty that many neoliberal thinkers have about matters to do with economics is entirely misplaced. The idea that anything in economic data has an objective reality is just wrong.
Gonna make planning difficult if we don’t know anything, innit?
Of course, the actual observation itself is Hayek’s Nobel acceptance speech in a nutshell. The Pretence of Knowledge. That Spud uses the core observation of the arch neoliberal to disprove neoliberalism is rather fun, no?
This is what neoliberalism chose to do. For those old enough to remember, the plan was clear from the start. When Thatcher reached office in 1979, her first goal was to destroy British industry
Is it worth reading more of such frothings?
For example, we discussed unemployment and agreed that instead of thinking of it as the absence of useful things to do, we should describe it as a state-imposed prohibition on people doing work society plainly needs because wages have been pushed too high for the worker to do the task.
Worse, this was a deliberate attempt to prevent lives from being saved at sea, and national and international law has long treated this as a priority. I have not bothered to investigate the law, but I suspect it is backed by that.
The stated aim of QE I was to increase asset prices. Make more money, lower interest rates, increase asset prices. This will then spark a boom opf asset creation as borrowing to invest is cheaper and thus we’ll have a lovely investment boom – as we did in the 1930s – to drag us out of recession/depression.
This isn’t a “but” this is the aim. Widely distributed aim at the time too.
Now, that it didn’t quite work out like that was because we’ve an idiot planning system. But that was indeed the aim.
What we all seem to think in common is that we have now, beyond doubt, reached the point where the current economic system is utterly unsustainable.
Rightie Ho.
The neoliberal process Thatcher and Reagan put in place, based on the thinking of Hayek and Friedman, promoted the idea that ever-increasing financial wealth mattered more than meeting people’s real needs, and this was always bound to fail. You can increase a house price as many times as you like, but you create no new wealth for society as a result. At some point, the financial claims based upon this false understanding of wealth were bound to collapse, and I think John, Guy and I all think that this moment is arriving.
Isn’t it just lovely that house prices have been falling for a few years now. Raising interest rates was all it took too. But, of course, increasing interest rates is, as the Elyian thinking goes, the wrong thing to do.
But, of course, falling real house prices are evidence of the failure of neoliberalism. Not the inevitable result of reversing QE, ho dear, no. To think that would be to misunderstand the intricacies of FatControllerThought.
He is warning that too much money is being borrowed to buy shares. This is happening in ETF funds, as they’re called.
….
Bailey thinks too much borrowed money is being used to buy shares through Exchange Traded Funds
One of the points about ETFs is tha tthey are not internally geared. A mutual fund could be, maybe, even often is, buit an ETF isn’t.
Firstly, the Bank of England could be told to stop its quantitative tightening programme, which is deliberately designed to fuel this crisis.
Secondly, the government could declare what it already says exists, and call the current economic situation a cost-of-living crisis, and so intervene in Bank of England policy, ordering it to cut rather than increase interest rates at this point in time.
Thirdly, the government could, if it wished, reduce the number of bonds it sells into financial markets when it appears they do not want to buy them. It could do this by cancelling current bond auctions and funding itself through the Bank of England instead. Rationing the supply of new bonds would immediately affect their price and send shockwaves through the market.
You just wait and see what gilts rates rise to if you go for full on monetisation of the deficit, Matey. For a major determinant of the price/yield on gilts is expectations of future inflation……
The deeply contented edifice that is the Financial Times, populated by teams of people who have done particularly well from maintaining the status quo of the last 45 years, does need to feel that it is under threat, because the reality is that the winds of change are blowing, and they are heading its way.
Spud pitched a piece to the FT which declined. They are therefore neoliberal – until he’s at war with Eastasia at least.
Take a house as an example. You can increase a home’s value by taking out a bigger mortgage, and on paper your financial wealth has grown. But the house is the same house. No new bedrooms, no new kitchen, and no new real wealth has been created by increasing its price. What has changed is the claim on it, and the power that claim represents.
Why does taking out a mortgage on a house change the price of the house?
Is this just Spud being Spud?
This matters. Partly that is because private wealth cannot exist without public wealth. The roads, schools, hospitals and legal systems that make economic activity possible are public wealth, but poverty prevents some people from even having access to them.
Again, eh? Someone’s too poor to be able to walk down the road? Whut?
To push the market interest rate on government bonds upwards, investors have to push the price of those bonds down. And there is only one way they can do that: they have to sell government bonds. Full stop.
But to have a significant effect, they have to sell enough of them. And, crucially, having sold them, they cannot then buy them back without reversing the very pressure they are supposedly trying to create.
They can, in fact, just stop buying them. Issuance of new to cover this year’s deficit is what, £100 billion? Another £200 billion matures each year and must be rolled over? About that?
£300 billion has to be sold each year, perhaps 10% of total ossuance. If people just stopped buying these new – a buyers’ strike – then that would push the price of gilts down. Pretty substantially too I’d say – but am not going to try to prove. So, Spud is, again, wrong….
That said, most politicians never move the Overton Window. They work inside it, using polling and focus groups to figure out which policies to offer that fit within it. That’s why, too often, nothing seems to change.
The mainstream media reinforce this stability. They hold most of the power over what is in the Overton Window, deciding which issues are treated seriously and which are made to look ridiculous. Repetition does the rest. Say “we can’t afford better public services” often enough and it hardens into fact, even though it is a choice.
But the Window moves when people start thinking differently about what is possible.
And Lordy, doesn’t he bitch when people do move that window. Say, Nigel on the EU.
Surviving climate change just requires storing a bit more water, in plastic bottles (irony alert). And a stock of tinned food will definitely get us through any national emergency.
The stupidity of this as a general announcement, rather than as a specific household choice, is quite extraordinary.
Twenty per cent of people in the UK live in poverty. They have no chance of buying these items.
UK poverty is a relative measure. Under 60% of median household income.
This does not mean people too poor to buy some water and tinned food.
Sigh.
In this case, Bush fails to explain what economists call Baumol’s cost disease. This explains why services such as healthcare, education, social care and the arts tend to become more expensive over time, even when their productivity does not improve. The reason should be obvious, but like many things that should be, it is hiding in plain sight.
The reality the so-called disease highlights is that, over time, the manufacturing sector in an economy can become more productive because technology lets each worker produce more. Wages can therefore rise without prices rising by the same amount. So far, so good.
The problem is that many services cannot increase productivity so easily. A teacher still needs time to teach a class, a carer needs time to care, and a string quartet still needs four musicians and almost exactly the same time to perform, or the result might be truly terrible. But, and this is the crucial point, if we still want those services, the workers engaged in them must nevertheless receive wages comparable with those available elsewhere, or they will leave. The cost of providing their services does, therefore, inevitably rise even though their output per hour has changed little.
The crucial point is that in this case rising costs do not necessarily indicate inefficiency. They may instead reflect the inherently labour-intensive nature of valuable services.
Yes, very good. But it works through wages rising. And as Spud tells us all the time wages have not been rising. Therefore Baumol doesn’t apply.
There is also only one known solution, as it is clear that the private sector will not create the number of jobs required to engage younger people in the UK in work, and that is for the government to take on that job instead.
Hire more Lanyards. That’ll do it.
The mising ingredient
Cheap I know, and also very cheap, given my spelling.
But a little known fact. Spell checkers do not work in the headline space of near all content management systems. Just one of those things.