The heat is on in the debate on climate change

29 06 2009

The heat is on in LondonTemperatures are predicted to soar in London this week. As the mercury climbs higher no doubt it will be accompanied by louder claims that this is the product of global warming and human irresponsibility towards the environment. To digress a little, I was at the Neil Young concert in Hyde Park on Saturday when he played one of his dreadful odes to Mother Earth and how we are raping it etc. I looked around and the crowd, up until then excited by Young’s fantastic guitar playing, suddenly resembled a funeral party. Indeed, when I started to discuss this with my wife I was told to hush by someone close by.

This quasi religious approach to all things environmental typifies what is wrong with the climate change discussion. As Joe Kaplinsky and James Woudhuysen argue in their very good book Energise – A Future For Energy Innovation, insofar as there is a problem with human created climate change it needs to be tackled through a concerted programme of  energy innovation.  In other words it  should be a scientific and technological issue rather than a moral or political one.

The problem with discussing this issue at all is that climate change has become so politicised  that it is hard, as a rational person, to distinguish good science from green-led proselytising and moral blackmail.  It is also right to feel sceptical about a subject where nay sayers are accused of being ‘in denial’ and compared with war criminals.  

Nevertheless we have to assume that many of the scientists involved in this area are basing their concerns on good observations and proper scientific methodology. To do otherwise risks falling into the anti-science camp which doubts and questions all scientific progress. As Rob Clowes pointed out recently, were all the climate science to be proved wrong it would be the biggest failure of science since Lysenko.

However, given that climate change has been politicised, we have to challenge the anti-growth sentiments which lie behind it. The extent to which climate change is man made and can be reversed remains an open question. What we do have to insist on is that collectively humanity requires far more energy in order to have a good quality of life. This requires an open minded approach to energy innovation and far more resources put into all types of energy development. It requires an emphasis on economic growth to pay for it and a challenge to anybody who wishes to limit the types of energy that are developed on the basis that they change the world around us.

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What kind of state do we have?

26 06 2009

As we are are trying to work out what our approach should be towards the state and public spending, I would heartily recommend James Heartfield’s new essay on the nature of the modern UK state. In it he examines the way in which the state has  weakened its control over key economic developments by contracting out key aspects of its economic decision-making and responsibilities to consultancies and private companies,often in dubious circumstances.

Yet while the state has contracted out these key public services it has also created a more intrusive system of regulation over society through intervention in public and family life. This is one of the key aspects of the state that many of you objected to in the discussion of public spending we can do without.

James Heartfield’s conclusion is, 

All the time the established boundary between ‘state’ and ‘civil society’, between ‘public goods and private benefits’, is being redrawn, or broken down altogether. What emerges is neither an enhanced private sector, nor coherent state provision, but rather a hybrid, dependent on public finances to survive, and increasingly operating according to a mixture of political, administrative and business models that makes little sense.

 In his essay he looks in detail at some of the ways that state intervention into the banks, the railways and the NHS amongst others has acted as an indirect subsidy to private industry. More analysis along these lines would help us to understand what it is about the modern state that we object to and what we can do without.





Why the behavioural economists are wrong, a review of ‘Animal Spirits’ (Part One)

24 06 2009
 

Animal Spirits: How Human Psychology Drives The Economy, And Why It Matters For Global Capitalism, by George Akerlof & Rober Shiller

Animal Spirits: How Human Psychology Drives The Economy, And Why It Matters For Global Capitalism, by George Akerlof & Robert Shiller

BOOK REVIEW (Part One)
Animal Spirits: How human psychology drives the economy and why it matters for global capitalism, by George Akerlof and Robert Shiller (published by Princeton University Press)

 

“Keynes appreciated that most economic activity results from rational economic motivations-but also that much economic activity is governed by animal spirits. People have non-economic motives. And they are not always rational in pursuit of their economic interests. In Keynes’ view these animal spirits are the main cause for why the economy fluctuates as it does.” [1]

One of the most frustrating aspects of the recession has been the absence of serious examination of its causes. Of course, there has been huge coverage of the events of the recession. But at the level of serious analysis there has been a dearth of proper public discussion. The political and public domain has been dominated by trivia such as bankers’ salaries or MPs’ expenses. Public debates have been restricted because there are few people who are able to discuss the economy and politics in the same breath. Yet it is impossible to make sense of one without the other.

The demise of politics and the political sphere as a meaningful forum for discussing the economy has encouraged the search for other explanations, outside the sphere of politics or traditional economics. Some people, including influential people within the Conservative Party in the UK, have turned instead to the behavioural economists (BEs), like Robert Shiller and George Akerlof, for explanations and guidance. Shiller and Akerlof’s case is that it is the behaviour of individuals within the market system and their psychology which explains much of what has gone wrong.

 Behavioural economists reject the view that the recession can be explained in traditional economic terms. In particular they have in their sights the rational market theorists, more commonly known as the free market proponents who have been influential since the time of Thatcher and Reagan, who argue that free markets can regulate themselves.  The upheavals of the past two years in the world economy have discredited the rational market theorists, as the blame for the recession has fallen on to the unregulated  nature of the financial markets. The BEs conclusion is that markets are susceptible to the irrational behaviour of individuals. This irrational behaviour requires state intervention to counteract it and to reintroduce stability. In the wake of the global recession this explanation and remedy is falling on fertile ground.

But the recession is not a crisis inflicted on an otherwise stable system by the behaviour of irrational individuals, as ‘Animal Spirits’ suggests. The problems of present day capitalism are the product of historical and economic developments within the system itself. The idea that anybody can say, as Gordon Brown did, that we can have neither boom nor bust, is plain wrong. The recession is just as intrinsic to modern capitalism as the boom which preceded it.

Whether it is the overdependence of the UK on financial services and public spending, the lack of any underlying productive dynamic to western economies in general, the crisis of the political class and its impact on the economy or the likely effects of the rise of China, none of these developments are explained or accounted for by Akerlof and Shiller. Their argument is that capitalism can work fine if it only had a little more regulation:

Capitalism can give us the best of all possible worlds, but it does so only on a playing field where the government sets the rules and acts as a referee.[2]

We can agree with the BEs that the market, or capitalism, is not rational in the way that rational market theorists claim. The most singularly irrational aspect of capitalism is that decisions to invest are made by individual or groups of capitalists rather than by or in the interests of the majority of people. If the prospects for profitable investment look poor, because the expected rate of profit is too low or too risky, then money flows elsewhere. In the past ten years money flowed instead into apparently safe areas such as financial derivatives based on assets like housing etc . This created an unsustainable asset bubble which inevitably crashed and burned. Phil Mullan [3] calls this the financialisation of the western economies, the tendency for money to try to beget more money without going through the process of productive investment in new businesses.

In addition, capitalism is less and less able to stand on its own two feet as it becomes more and more established. The state often has to step in to try to prop up ailing industries, as the US government recently did with General Motors, or to subsidise whole ones, as the EU does with farming. The growth of financialisation and state support together represent the throttling of dynamic economic development in the west. The truly dynamic parts of the world economy are now in the east.

The approach to explaining the recession taken by the BEs turns reality on its head. Capitalism as a system with inbuilt tendency to crisis is let off the hook and the individuals who suffer from the recession are blamed for it.

Part two of this review will follow shortly

 


[1] Animal Spirits p ix

[2] Ibid p173

[3] http://www.spiked-online.com/index.php/site/article/4244/

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What the state is for

22 06 2009

News that the Tories are planning to scrap a new government body aimed at fast-tracking planning decisions, such as for airports or roads, should be met with qualified approval. The creation of this body, The Infrastructure Planning Commission, by Labour was an attempt to bypass the need to politically convince people that large infrastructure projects are necessary.

As Frank Furedi argues, the state in the UK is failing to fulfil many of its key functions, the creation of a modern infrastructure being one of them. There are many things that are socially and economically necessary which private capital cannot or will not do. The creation of large scale infrastructure projects involves levels of investment, planning  and coordination which necessitate the involvement of and leadership by the state.

The dependence of the UK economy over the past ten years on financial services , which require little more than offices and telephones in order to function,  has allowed growth to take place without  basic infrastructure upgrades. The probable decline of financial services as a driver for the UK economy makes the infrastructure issue even more vital.

New Labour, despite having increased public spending in almost every area of the economy, has conspicuously failed to modernise the basic infrastructure of the UK.  Dieter Helm recently listed the main areas which require attention,

Major upgrades are needed to the electricity and gas networks, smart meters, high-speed trains, upgrading the London Underground, Crossrail, new runways, new water resources and sewerage systems, and broadband roll-out, …new power stations, energy efficiency and renewables

Many of these projects are controversial and politically sensitive, nuclear power probably being top of the list.

Rather than confront directly those who cannot see the big picture requirement for investment in infrastructure New Labour has resorted to inquiries and bureaucratic means of pushing things through. It has often abdicated the need for government leadership by handing the decision making process over to third parties in an attempt to seem neutral and objective.

There are many aspects of life that the state should not involve itself in, (see the comments on this blog for some good examples), but it has a major responsibility for keeping the traffic running and the lights on.

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Innovation and risk

19 06 2009

A new report from the Future Foundation on attitudes to risk and innovation in the business community makes depressing reading. It found that two thirds of the companies canvassed thought that risk aversion would lead to lost opportunities. The report concludes that this is because of,

..a lack of available finance, a lack of confidence in the future economic prospects, a concern that investors are also averse to risk-taking, a desire to follow the example of others and even our inherent British conservatism.

In what is surely a further sign of how enfeebled and conservative British capitalism has become, fewer than half the business leaders said they admired risk-takers and little more than half thought entrepreneurs who took risks should be rewarded. When even the people who are running British capitalism are repulsed by risk taking and wealth creation then we surely are in a bad way. This is a classic example of how the culture of limits, a general sense that economic growth is a bad and dangerous thing, has infused our society at every level.

As James Woudhuysen has argued in his fine contribution to a forthcoming debate on innovation after the recession, this conservatism leads directly to inadequate investment in research and development, which further hinders economic progress. As I will be arguing at this event, the barriers to innovation have to be seen in a political and cultural context, not simply as an economic issue. It may be true that decisions to invest are made by the owners and managers of capital rather than by society in general, that is the nature of capitalism, but it is also clear from this report and others that investment decisions are influenced by  broader social and cultural factors. This is what makes a public debate on the need for more investment and more risk taking so vital and why stronger leadership in the political sphere is also urgent.

It is inherent in the paradox of risk  that caution seems to be a better option in the short run. We are still deep in recession and businessmen, like everybody else, are fearful of what may be round the next corner. It as at times like these that society needs to pull together to strengthen everybody’s resolve and encourage ways of investing and growing our way out of trouble.





Public Spending we could do without – your thoughts

17 06 2009
change-4-life

The government's anti-obesity campaign is a needless waste of our money and an intrusion into our private lives, according to one blog reader Jane Sandeman

The Chancellor Alistair Darling has declined to conduct a public spending review this autumn. This is in line with the government’s unwillingness to face up to the deep debt this country is in. There is no doubt that the best way out of this financial hole, as I have argued before is through innovation and economic growth. However, it is also true that there are whole parts of the state we can do without. There are also areas in which the state could be doing a lot more, particularly in enabling innovation and modernising the infrastructure of the UK.

Since I began this discussion there have been a number of very good proposals and some interesting ones. They range from the traditional left wing targets of Trident and ID cards from Charlie McMenamin to free market based changes from Julian Morris of the Policy Network. There are also a number of  comments which attack the various ways in which the state has intruded into private and family life, particularly from Jane Sandemanand Brid Hehir. James Woudhuysen reminds us that the education and health systems are now funding degrees in quack medicine. If you want to see all these and more in detail then go to the comments section on this blog.

Please feel free to add more suggestions and to comment on those already made. This blog will do its best to cost these suggestions up and put together an alternative public spending review based on the principles of economic growth, scientific and technical progress and personal privacy.

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Public spending we could do without: the civil list

15 06 2009

Public spendingGeorge Osborne has responded to claims that the main parties are failing to own up to their public spending plans by admitting that , apart from abolishing ID cards, they do not actually have any specific plans yet. He admitted that up until now he has ‘tip-toed’ around the issue. In the face of sustained media criticism, including from this blog although one is fain to deny any credit of course, Osborne has now admitted that something will have to be done, he just does not know what yet.

It is likely that the whole process from now will be like this, weak and faint-hearted, reflecting the political weakness of the main parties. Rather than giving a lead , politicians will shilly shally and end up responding to whoever shouts the loudest.  It would be better at this stage to conduct a rational public debate about the state and which parts of it we need to keep.

Let’s start by abolishing subsidies to the royal family

In that spirit I am inviting contributions about which parts of the public sector we could do without. I am not interested really in ‘efficiencies’ or ‘productivity’ as these are almost always euphemisms for sacking people, usually ‘middle management’. Besides applying usual standards of productivity to welfare for example is often a nonsense.

Instead I would like to know which big chunks of the state and the accompanying funding we should get rid of. To get the process started I suggest we abolish the civil list and other subsidies to the royal family. While this figure is in the millions rather than the billions it is a bizarre leftover from the past and should be abolished. Readers may infer an anti-monarchy current here and they would be right. The continuance of the monarchy in the UK is one of the hangovers from the past we could do without.

We should have a presidency instead. At least then if we ended up with a buffoon like Berlusconi it would be because we elected him. Under the UK system we could end up with the unelected buffoon Prince Charles as head of state instead.

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