Why vote? Part 1

30 04 2010

For idealists who believe that democracy is about informed debate, this election has to be brutally disillusioning. Martin Wolf

The final leaders’ debate prior to the General Election told us only one important thing, that the evasive approach to the UK’s economic problems which has typified political debate over the past few years will continue right up to the election itself.  The failure of the political parties to have a serious public discussion about the state of the economy will have serious repercussions for years to come.

Some commentators have interpreted the parties’ unwillingness to have an open discussion about the economy as down to a fear of making themselves unpopular in the polls. This may be true as far as quantifying public spending cuts is concerned. However, I am afraid that there is a far more serious issue than this behind their reticence. The reality is that none of them have any real idea how to solve the UK’s economic problems, in particular how to get the economy back onto a serious growth track. The media has also largely failed to put the politicians on the spot about this, focusing instead on criticising politicians for not revealing how far and how fast public spending will be cut, as if that were the only problem we face.

The question of how to get the economy growing again has been barely mentioned during the course of the election campaign. There are some populist, but essentially tinkering, supply side proposals to get the sick back to work. Noises have been made about getting the banks to lend to business, without any detail of how this could be done. But none of the parties has any serious plan for how to help create a dynamic UK economy.

There is nothing mysterious about economic growth. Capital has to be put together with labour to produce goods or services that can be sold at a profit. In the UK, as in much of the developed world, this basic process is being strangled by insufficient innovation, an unwillingness to take risk and a dearth of investment in research and development. (For a full exposition of the problems we face take a look at the Big Potatoes manifesto which explores these issues in detail). All of these factors remain unchallenged by a political culture which one foreign writer recently accurately described as banal. There is a collective failure of imagination here which needs to be overthrown if we are to keep our economy moving.

One example of this problem , round about the same time that the UK government finally got round to announcing plans for a second high speed rail line between London and  Birmingham, which was met by the usual howls of outrage from nimbys in the Cotswolds and pessimists who argued that we cannot afford it, the Chinese announced an aspiration to build a high speed rail line between Beijing and London-potentially the biggest infrastructure project in human history.

For readers of this blog, none of the above should come as any surprise.  As we have chronicled here since the financial crisis begun, public debate on the economy has been either evasive, pessimistic  or delusional. Now, in the few days before the election and looking at the pitiful attempts of the main parties to grapple with the impact of the recession, the question is, why vote, does it make any difference and if so who for? I shall return to this early next week.

Oh no, not Keynes again! New economic thinking urgently required

26 04 2010

Book Review

The Economic Crisis and the State of Economics Edited by Robert Skidelsky and Christian Westerlind Wigstrom, Palgrave Macmillan, 2010

The Institute for New Economic Thinking, funded by the billionaire George Soros, held its first Conference in early April 2010. Just in case we were not already aware of its intellectual underpinning, the event took place at Kings College, Cambridge, where Keynes developed his General Theory, sessions took place in the Keynes lecture theatre and many of the participants and speakers were neo Keynesians.

Much of the substance of the discussion that took place is prefigured in a new book of essays, The Economic Crisis and the State of Economics, edited by leading Keynesian Robert Skidelsky. Although written last year in response to the recession, its themes have now become central to the range of economists lined up in Soros’s new Institute. The three main themes which emerge from the selection of essays in the book are, first, the future is uncertain and cannot be predicted, secondly, no economic model can be trusted to work and thirdly, economics cannot be a science because it is driven by often irrational human behaviours. A fourth, although often tacit conclusion, is that the state has to be prepared to intervene in order to make up for the inadequacies of the market.

The main target of the essays is the Efficient Market Hypothesis (EMH), associated with the Chicago school of economists, the view that markets operate efficiently and that state intervention can only be damaging to the market mechanism by distorting market rationality. The general view expressed in this book is that the financial crisis has destroyed both the practical and intellectual basis for the EMH. The peculiar aspect of this debate is that, although it is true that the EMH has been popular amongst some economists in the past, it has had very little to do with the real world outside of academia. In the real world the 20th century saw ever increasing state involvement in the economy at every level.

The free market, outside of state control, subsidy and regulation, is a myth. In that sense the EMH is a straw man for the Keynesians to tilt at. If you have any doubt about the irrelevance of the EMH in the real world then just look at how the world’s leaders responded to the financial crisis. Governments everywhere stepped in with massive subsidies to keep the financial system afloat. Would leaders who were supposedly ideologically wedded to the principles of the free market have acted in such a concerted way to bail out the markets?

Economics and rationality

So if the demolition job on the EMH is of little value, is there any interest in what the Keynesians are saying? Yes, because what they are trying to do is to suggest that rationality is not possible in the economic sphere. John Kay, in his essay, Knowledge in Economics, says that ‘the test of an economic theory is whether it is useful rather than whether it is true’. P91 Paul Davidson, in Risk and Uncertainty, says that believers in the EMH, and indeed anybody who accepts the views of the classical economists Smith and Ricardo, are guilty of thinking that ‘the future is merely probabilistically risky but not uncertain’ P20. Davidson argues that the future is not predictable and therefore planning is pointless. All governments can do is be prepared to step in when things go wrong, which they inevitably will.

The Keynesians are expressing in their abandonment of rationality the viewpoint of those who feel that the world is out of control. Paradoxically perhaps there is a rational aspect to this viewpoint. The global market is indeed out of control, but only in the sense that markets always are and always have been. Markets are the antithesis of rational planning. It is only after production has taken place, money spent and resources used up, that you take the product to market and find out if there is a buyer. Enormous effort and time is wasted on products which turn out to have no buyer, leading to waste, bankruptcy and redundancy. That is how the market regulates the economy, through destruction.

It is because of the essential irrational nature of markets that the state has emerged over a long period to regulate and support the economy and limit the damage done to society as a whole when markets cease to function effectively. The challenge facing us all, especially in the aftermath of the global recession, is to work out what a more rational economic world would look like and how it would operate. After all, most production is essentially rational, in that it is about the meeting of human needs in one sphere or another and requires conscious activity in order to be effective. The key element that is missing, which the Keynesians recognise, is the absence of enough information about what is happening in the economy which would enable people to make rational decisions. But that is not a problem of economics but of politics.

How can we organise an economy in which people are sufficiently engaged in and have control over the consequences of investment decisions and their outcomes? This would be a good subject for the Institute for New Economic Thinking to consider.

Ten questions to ask your candidates about the UK economy

12 04 2010

According to the papers today, the election focus of the main parties this week will move away from the economy and on to domestic issues. Apparently last week’s spat over 1% increase in national insurance is what the parties think constitutes a debate on the economy. If you are thinking, given  the deep problems facing the UK economy, that this is a totally inadequate level of debate on the economy then you are right. And this is what you should do about it….

If any electioneers come to your door ask them as many of the questions below as you can get in. The links in each question refer to a discussion of the topic in other parts of this website.

1. The UK economy is slowly but surely slipping down the international rankings of economic size. Do you think it is possible to reverse the UK’s relative economic decline? If so how?

2. The recession appears to be over, do you believe we are inevitably now in for a long period of austerity?

3. The whole idea that economic growth is a good thing has come in for a lot of criticism, from Greens and others. Are you in favour of economic growth as an objective, or should we all permanently tighten our belts for the good of the planet?

4. For the past ten years the financial sector has been the motor of the UK economy. Do you see this continuing,if not what will take its place?

5. Is it necessary or indeed possible for the UK to revive its manufacturing industries, or should we focus on growing our services business, which already makes up 75% of the economy ? 

6.The UK manifestly needs a better transport and communications infrastructure in order to operate effectively. What should any government do to make sure that, for example, our railways, roads , energy or broadband provision, are world class? Or is this all just a job for the market?

7.  Most of the plans for job creation laid out by the main parties are based largely on supply side reforms, such as encouraging the sick to go back to work. Should government be doing more on the demand side as well, through, for example, creating favourable environments for successful forward looking industries such as bioscience,through support in taxation, policies, enterprise zones, science parks, the kind of educational and training policies we pursue etc.

8. There has been a very risk averse public response in this country to some cutting edge scientific developments, such as GM food, nuclear power and some pharmaceutical and medical breakthroughs. What would your approach to public fears around these types of issues be? Do you think government should be leading public opinion in these kind of issues or following it?

9. Should the UK be investing more in space travel?

10. What do you see as the cause of the economic crisis, greedy bankers, greedy people or the over reliance on the finance sector?