Category Archives: Economics & Finance

Reflections on economics, investment and the financial world

Have big organisations had their day? Alas not in the public sector

In a recent bog post David Boyle, whom I regard as a fellow campaigner for a new economic paradigm, describes the phenomenon of the “empty corporation”. He mentioned this after trying to deal with two large British companies: Barclays Bank and TalkTalk, the telecoms company. These companies offer their customers no human contact, and are unable to solve more than very simple problems without causing their customers a lot of work. And yet these businesses conform to our idea of high productivity, which is the holy grail of economic development. Examining how these companies work gives us clues about how economic development needs to change direction.

The key to this is the insight, offered in recent book by information scientist César Hidalgo, that the human brain can only handle so much complexity. And the human brain is at the apex of any system for managing complexity. Whatever power Artificial Intelligence (AI) and computing may have to transform life, they remain a long way from handling complex situations reliably. Groups of people can manage more complexity that individuals, but this is a process of diminishing returns; it ceases to be true of large groups. That is fundamentally why large organisations do not handle complexity well. So how do they succeed?

They do so by simplifying things. Manufacturers build standard products in large numbers. Service providers try to pull off a similar feat, by offering a standard service, handled by a relatively simple set of rules, with the minimum variation due to context. Further, they produce these products and services by fragmenting the more complex parts into simpler steps. By doing so they are able to develop “economies of scale”, first admiringly highlighted by the founder of modern economics, Adam Smith, in a pin factory. That makes them highly productive and competitive, within a tightly defined remit.

Anybody who has worked in a large organisation (as I have within in financial services) will recognise this drive to simplicity. Failures are usually attributed to excessive complexity. Every so often there is a reorganisation to re-simplify things. Hierarchies and bureaucracy is put in place with the aim of preventing complexity from growing – though this sometimes backfires by doing the opposite. Even so large organisations often become unstuck because vital processes are neglected (a recent example being TalkTalk’s inadequate defence against hacking) or parts of the organisation interpret their an over-narrow remit without comprehending the full context (VW’s problems with emissions standards being a case in point here).  It seems impossible to get the balance between inadequate and excessive control.

And yet officialdom often favours large corporations. That is mainly because they have a similar problem with complexity. They find it much easier to handle a smaller number of large organisations. They are many examples, but one that sticks in my mind is the almost vindictive campaign by officialdom against smaller abattoirs after a scandal of lax standards. This still afflicts British agriculture; we may question whether it really has produced much in the way of safety benefits. But it has made the blame game easier to manage. There is a further, and sinister twist. Large corporations, especially in the USA, have discovered how easy it is to manipulate new regulations by lobbying officials and politicians. The payback on investment is apparently enormous.

The problems of excessive scale are even more apparent in the public sector than in the private one. A recent case described by Guardian journalist Deborah Orr is particularly poignant. She told of a woman falsely accused by a neighbour of antisocial behaviour. It was quite clear that this neighbour had mental health problems. Officialdom, in the shape of the housing association that managed the property and the police, where utterly unable to cope. They could not see beyond an isolated series of incidents, which each had to be dealt with according to a set process, regardless of human impacts. In the end her neighbour was evicted – but only because his rent was behind; at no point did anybody think of getting down to the root of the problem – the neighbour’s mental health problems, which are presumably being inflicted on somebody new. The theme of Ms Orr’s article is the lack of compassion in the modern world. To me it is simply the inability of large organisations, like the housing association and the police, to manage context and complexity. There is no place for compassion is such places. Compassion means allowing the impact of context, and that means losing control.

These problems are made worse by organisations attempting to be more “productive” by reducing levels of staff, and “de-skilling” – using less qualified, and cheaper, staff, working within tightly defined rules. Unfortunately this is one area where the wrong lessons from the private sector are being imposed on the public sector.

There is a sort of defining paradox about the problem. On the one hand we have workers working very hard, and very productively, and on the other we have the organisations they work for failing. This almost always arises because the sum of all the things that the workers are doing fails to add up to what they are collectively trying to do. There is even a name for the discipline of trying to resolve this type of problem: “process management” – which I personally have found an essential set of ideas as a manager. Unfortunately people charged with process management are usually given too narrow a remit to get to grips with the real problems their organisation faces. And all too often these problems are insoluble for large organisations – because solving them means depending too much on the exercise of judgement at a junior level (including the “compassion” of which Ms Orr speaks), the full consequences of which the wider organisation will be unable to handle.

Economists should ponder this paradox when they tut-tut about poor growth in productivity, as they are prone to do. Most still believe that productivity comes about with simplification and scale. But each of our lives is complex, from the billionaire to the welfare claimant. Offering us a bewildering menu of simple, standardised products and services is often not what we need, even if each of these services is very cheap, because it is produced to high standards of productivity. At least the billionaire can employ a small staff of professionals to try and make sense of it all. Alas the welfare claimant often needs interaction with just the sort of trained and empowered professional whose jobs are being de-skilled. Productivity, as it is usually understood, may be self-defeating. We need a new way of looking at it.

In the private sector the processes of technological advance and competition will eventually drive positive change. Big corporations will try to slow it down by creating monopolies, by making life difficult for their competitors, or by misusing such concepts as intellectual property rights. But the life expectancy of larger organisations is already shortening. A long last technology may be taking forward individual empowerment at the expense of centralisation. It is always dangerous to predict where technology will take us, but the smartphone, blockchain technology (pioneered by BitCoin), and additive manufacturing (3D-printing) are surely pointing towards a more distributed model of capitalism. Meanwhile the struggles of large companies to secure customer databases and fight disruption from cyber attack are pointing the same way too. With inevitable exceptions, the big commercial corporation may have had its day.

Alas there is no sign that policymakers understand that scale is a problem for public services, even though almost very day provides evidence that it is. Each failure is greeted with promises that some tweak in the system will sort the problem out. You would think that after so many years of such failed promises that people would start to twig. And yet, alas, no.


Is the world heading for a new financial crash?

Yesterdays’ Guardian carried an article entitled Apocalypse now: has the next giant financial crash already begun? by Paul Mason, who is Channel 4’s economics editor. The same paper carried an article last week by David Graeber: Britain is heading for another 2008 crash: here’s why. So it’s clearly becoming fashionable for left wing types to start spreading stories of doom. Could they be right?

Mr Graeber is not a professional economist (neither am I, I should make clear); he’s an anthropologist, in fact. He has written engagingly on financial matters though, notably his book Debt: the First 5,000 years. His enthusiasm is for the big picture and the global explanation. I found his book a huge let-down because he was incapable of analysing more recent financial events at any level below sweeping generalisation.

And so it is this time. His central argument is that enthusiasm for governments to cut their financial deficits means that private debt, at less affordable rates of interest, will pile up. The key strand of evidence is this graph, which shows public, private and external deficits:

Graeber graph

He notes that it is symmetric, because it is based on an accounting identity. So, if the external balance is constant, which it roughly has been, any reduction in public deficit must be matched by an increase in private deficit. Ergo, we are simply swapping public debt for private debt. And since, as everybody knows, the crash of 2008 came about because of excessive private debt, another one is inevitable. He calls this the Peter-Paul principle (ie. robbing Peter to pay Paul).

Oh dear! It’s hard to know where to begin. As anybody with an understanding of mathematics will tell you, accounting identities don’t tell you as much as you might think. They are tautologies: you can’t use them to predict anything useful about the world. I remember, back in the 1980s, another accounting identity, this time on money, growth and inflation, getting people into trouble, as monetarists used it to “prove” that inflation and growth depended on money supply. Alas all it showed was how uselessly elastic are the concepts of money supply and velocity of circulation. A moment’s thought tells you that Mr Graeber’s argument must be flawed. He is suggesting that the amount of debt in the economy remains fixed – and yet it clearly goes up and down. Actually, the amount of debt is fixed – it is a net of zero! For every debtor there is a creditor; gross debt, however, must be independent of the sizes of the sectoral balances. The Peter-Paul principle is not the great taboo of economics as Mr Graeber suggests. It just doesn’ tell you very much. Not nothing, as the FT’s economics writer Martin Wolf, has shown – but it has taken him in a different direction. He suggests that if government austerity is not matched by extra private sector spending, the economy will shrink. An altogether more subtle point.

Mr Mason’s line of argument is sounder, in that it is based on more factual evidence rather than airy assertions. His line of argument is that aggregate debt has continued to rise, but the world economy has stalled, so that debt will be unrepayable, and so there will be a financial crisis. But this is still lightweight fare, based on aggregated data, which may be unreliable, and not on the specifics of who owes what to whom. The problem is that the world financial system is a very complex thing. It very hard to attribute cause and effect – or rather it is all too easy, it is just impossible to prove that you are right. The financial crash of 2007/2008 came about with the convergence of a number of things, of which the reckless build-up of private sector debt was only one (rising oil and food prices, reckless use of off-balance sheet finance by banks, persistent trade surpluses from China and oil states, a false sense of security from central banks – to name but a few).

One thing we can say is that the world in 2015 is very different from that of 2007, when the last crisis started. It is commonplace in left-wing circles to suggest that nothing has changed in the world of international banking since the crash. Well some banks are making money again, and some bankers are taking outrageous bonuses. But there are many fewer of them; there is much less profit sloshing around. The banks have been forced by regulation and bitter experience to be more prudent. Off-balance sheet finance, at the heart of the 2007 crisis, has been drastically reined in. And the world financial situation is very different, with low oil and commodity prices, a fading China, and the US fast becoming self-sufficient in hydrocarbons.

But that may not offer us much reassurance. We may not be heading for another 2007/2008 but we could still be heading for something nasty. There are four things that could be a sign of trouble:

  1. There are asset bubbles in some places. What is referred to as “emerging market” assets are the most spoken of: debt, shares and property located in China and various parts of the developing world. But there are others: London property and US shares come to mind. Some suggest that developed government bonds are in a similar bubble, as their prices are historically high, but Japan has shown that these prices can stay high for a very long time indeed.
  2. Central banks are running with ultra low interest rates, meaning that the main arm of monetary policy is not available. Quantitative Easing (QE) is problematic. This leaves them without the firepower to deal with a crisis as it emerges – or so many people think. In fact the dynamics of monetary policy have moved well beyond textbook theories about money supply and inflation expectations, leaving us unable to understand how things work.
  3. The maturing of China and the rise of shale oil and gas in the US have changed world financial and trade dynamics fundamentally from the pattern of the last two decades. I suspect the new pattern is more stable than the old one in the long run – but any such change tends to cause dislocation. It may, for example, become much more difficult for many countries, including Britain, to finance their deficits (the blue bit in Mr Graeber’s graph could shrink).
  4. International politics has become more fractious, making international deals more difficult to do. And populists from left and right are making it harder for governments to intervene to stabilise financial markets – often portrayed as bailing out bankers at the expense of ordinary taxpayers. That will make any future banking crisis harder to manage.

So I share some of Mr Hunt’s and Mr Graeber’s worries. I have my own airy narrative. Since the the Bretton Woods system of fixed exchange rates and gold underpinning was broken in the 1970s, by President Nixon who needed to fund the Vietnam war without raising taxes, the world has been addicted to an increasing cycle of debt. Some of this debt might be regarded as lubrication for the wheels of capitalism. But also there seems to be a bit of Ponzi scheme about it, with debt being repaid by the issue of yet more debt, rather than through substantive economic advance. In the long run, that cannot be stable. And yet it may take a long while yet before the trouble starts to show up.



4 liberal themes on economics and public services: my contribution to Lib Dem Agenda 2020

Agenda 2020 is the consultation exercise being carried out by the Liberal Democrats to set the framework of policy in the period up to 2020, when we next expect parliamentary elections. At this stage the idea is to keep the thinking at quite a high level. This is always quite hard for political activists. We somehow got onto VAT on tampons in the consultation exercise in Bournemouth. Then again, I’m always saying that political types on the left are too abstract. I haven’t submitted the following contribution yet, but the idea is to be strong on general direction, with only a few pointers on the detail. I’m afraid that it’s still a bit longer than my normal posts.

Economics, public services and wider Liberal Democrat policy

Economics and public services should be at the heart of any political narrative. Too often in the Liberal Democrats both topics have been neglected. The party has opted for a simple middle ground between the Conservatives and Labour. The 2015 General Election was no exception, at least as far as the headlines went. The time has come for a much more robust narrative. Here are some ideas on what this might look like.

The story so far

After 1945 the great Liberal thinkers Maynard Keynes and William Beveridge founded a post war consensus on economic management and public services. This was based on the state taking responsibility for managing the business cycle through fiscal policy, and a greatly expanded set of state services, funded by much higher taxes (compared to pre-war levels), to fulfil a series of new entitlements, designed to ensure that everybody obtained a basic level of wellbeing. These ideas were taken on by the Labour and Conservative Parties, and developed into an overbearing state, which also took over a series of failing businesses, from railways, to steel, to even aero engines.

By the 1970s the state had lost control of its finances and the country was heading for towards economic collapse. Public services had been captured by vested interests, with very little regard for their users. In reaction to this emerged a new conventional wisdom, initiated by Margaret Thatcher and expanded by Tony Blair. This new thinking was again based on liberal principles, and it is often referred to as “neoliberalism”.  The idea was that citizens should be empowered as buyers in a market economy, with the state stepping back to provide only basic services and a basic safety net. Much of the regulation of the business cycle would be taken up by monetary policy, so as to reduce the role of the state. Marginal rates of tax on income were cut, though overall levels of tax increased, if anything.

Probably not coincidentally, this change to public policy was accompanied by dramatic shifts in technology and global trade. Society changed substantially, mostly for the better. Living standards advanced, life expectancy improved, and pollution was cut. But now the country, in common with the rest of the developed world, seems stuck. Most economic growth just benefits a rich elite; businesses hoard excess earnings rather than invest or pay their workers more; property prices escalate. The number of badly paid jobs rises; most younger people are shut out of decent jobs and decent homes. Demand for health and care services grows, while public resources do not keep pace. And prosperity is restricted to a small number better-off areas, especially in the south east of England.

Liberals should worry. Power is being concentrated among a wealthy elite of people connected to big businesses. This trend Is abetted by a highly centralised national government that would rather deal with these large businesses, or else large public agencies like the NHS, than directly with the public. The power of the markets works for many people, but it is failing many more. Many people have inadequate leverage in the markets for jobs and homes in particular, leaving an unequal power balance in both domains. This state of affairs breeds fear and insecurity, which in turn leads to the rise of the political extremes of right and left, which threaten social cohesion.

In the meantime thinking on economic policy has not caught up with these profound changes. Most economists still think of the economy in a highly centralised way, in terms of aggregates across the whole economy, rather than the fate of its component parts. And thinking about productivity is stuck with ideas appropriate to manufacturing industry and economies of scale – and not to the efficient use of the human resources the country actually has to hand, in an economy increasingly dominated by personal services. The left rails against a series of pantomime villains, but resists any serious progressive reform of public services. This old thinking simply concentrates more power and wealth into the hands of a well-connected elite. Public services are dominated by functional silos based on political empires, not people’s actual needs.

We need fresh thinking, and my suggestion is to organise this around four liberal themes.

Liberal theme 1: green growth

Green growth means the advancement of human wellbeing while reducing the consumption of physical resources, especially non-renewable energy. The twin objectives are to ensure that everybody has the chance to live a healthy and fulfilling life in a comfortable environment, while easing the stress on the local and global environment.  There are two aspects to this: developing and implementing technologies that are more environmentally efficient, and breaking the idea that ever increasing consumption is the path to improved wellbeing. This requires a profound change in outlook – though one that is already taking place.

Green growth may or may not entail economic growth as currently measured. That depends on how advanced wellbeing is reflected in the monetary economy. In the short to medium term it entails a substantial level of investment, in more efficient homes, power infrastructure and transport infrastructure, as well as research and development. If properly carried out these investments will entail improved economic growth. Longer term growth requires the harnessing of human resources more effectively. This means a wider distribution of information management and decision making, or:

Liberal theme 2: small is beautiful

Large organisations, be they businesses or government agencies, are one of the main threats to green growth and liberal values. They concentrate power in the hands of the elites that control them, leaving the majority of their employees disempowered, and unable to react most effectively to the world as they find it. The elites are geographically concentrated, leading to geographic concentrations of power and wealth, and the hollowing out of communities elsewhere. This hollowing out leads to a waste of human resources, which must be tapped if green growth is to take root. Furthermore, large commercial organisations have a tendency to hoard surplus earnings (often abroad) rather than invest them, acting as a further drag on the economy.

Of course large organisations also play a vital role in any efficient economy; they are the best organisational form to take on some functions. But these are not as many as often supposed. A liberal government must change the legal and regulatory environment so that it favours large organisations less. This will include reforms to political structures, banking and taxes.

It will also entail a substantial reform of public services:

Liberal theme 3: public services that solve problems

It should be obvious that the main reason that public services are inefficient is that they do not work together to solve people’s problems. Housing, mental health, addiction, crime and poor physical health are very often bound together in one person’s feeding on each other – and yet we persist in trying to deal with each of these issues separately, in separate chains of command all the way to Cabinet. Often the key is making all the relevant services work together in such a way that the user moves to a better way of life, with less call on the public purse. Usually what happens is that the relevant agencies work against each other.

Public services should be organised to meet the needs of people, and solve problems rather than playing pass the parcel. This should be the foremost area for the development of policy, based on best existing practice. There may be a number of possible approaches.  Some of things are clear, however:

  • Changes will be easier to implement if responsibility for public services is more localised and more integrated.
  • Some form of empowered professional intermediary will usually be required to assess the users’s needs, to coordinate the different agencies and, where needed, to negotiate the compliance of the user. Empowerment will mean some form of budgetary control. This means a step back from the current tendency to disempower and de-skill such intermediaries, like social workers and probation officers.
  • Large scale functional outsourcing will usually take services in the wrong direction. Repeated tendering also leads to a dumbing down, a tendency to gloss over more complex issues. The greater use of local social enterprises may well be a better approach in a framework that ensures proper accountability.

Public services should help with some of the most difficult problems relating to poverty; but this has to be in a wider context wealth and income distriubtion. We also need:

Liberal theme 4: redistribution to correct imbalances

A well-ordered, liberal society might not require the redistribution of income and wealth. And liberals dislike redistribution for its own sake – different levels of wealth may simply reflect freely made choices over how to balance accumulating money with other things life has to offer. But in our society imbalances of wealth and income pose a threat. The less well-off are denied the opportunities that should be theirs. Excessive wealth can be used to buy political influence and monopoly power, reducing choices for others. The accumulation of wealth may also lead to excess savings and economic stagnation. Liberals must embrace redistribution, albeit warily.

Redistribution needs to work at two distinct levels: personal and geographical. The wealthy must be taxed on both income and assets (land, in particular), and the worse off must be compensated through access to benefits and rights to state services, especially housing. Children must be a particular focus of redistribution as early years are critical to life chances.

Also funds must be redistributed from wealthy regions and districts to those less well off, to offset the negative network effects of clusters of wealth.

At both levels redistribution arrangements must be designed so as not to create dependency. Those less well-off should be encouraged to improve their lot – but at the same time the level of redistribution must fall as the need for it falls. Systems of redistribution based on universal rights (like the state pension) have their place, but have limits too. Truly liberal systems of redistribution will require careful design.

A policy programme to match

At this stage the idea is to sketch out broad political priorities, and not detailed policy programmes. I do not believe that in most cases a radical departure is needed from adopted Liberal Democrat policy. The high level emphasis will need to be rethought, however.

The main policy implications of taking forward the four liberal themes are:

  1. Political reform, and especially the devolution of power to regions and districts. This is essential to create the right political environment. This may be combined with a new federal settlement for the UK and reform of the House of Lords. Electoral reform is important to ensure a plurality of power – but the priority must be to implement proportional voting systems at local level rather than at Westminster. A further important strand of political reform should be restricting the influence of wealthy individuals and organisations, especially through political donations.
  2. A programme of green investments must be instituted, including high quality social housing.
  3. With public service reform the emphasis should be on bottom-up initiatives – but national funding structures will have to be reviewed to facilitate this.
  4. The tax and benefits system will need to be re-examined. The Lib Dem commitment to increasing personal allowances must be rethought, as it is inefficient as a redistribution policy. Restoring tax credits is a higher priority. Taxation of land in some shape or form makes sense, though we may get no further than reforming Council Tax.
  5. On overall fiscal policy it is best to manage down expectations of additional government spending – though the principle that the government (including local governments) can borrow to invest must be clear.
  6. The banking system must be reformed to allow new, locally-based lenders to come into play. Investment in the “real economy” should be encouraged to create new assets, While avoiding a merry-go-round of existing assets.
  7. The UK should act internationally through the EU to curb tax avoidance, especially by large corporations. Trade agreements and relations with the EU should be viewed through the prism of promoting smaller businesses, and not simply advancing the interests of large multinationals.

Of course there are many more important policies that have a bearing on the economy and public services – not least reducing the level of carbon emissions. But overall such a policy platform should be quite distinctive from the orthodoxies of right and left, and yet fully in tune with modern times.


Labour changes the meaning of austerity

So far, so good. That’s my verdict of the remaking of Labour under its new leader, Jeremy Corbyn. I’ll say more about the big picture later in the week, after Mr Corbyn’s speech later today. This time I want to focus on economics and the performance of the Shadow Chancellor, John McDonnell, who spoke yesterday.

Like Mr Corbyn, Mr McDonnell is a serial rebel and a political outsider – and he is very much Mr Corbyn’s right hand man. That is why he was given the job of Shadow Chancellor over the much more politically correct Angela Eagle. Both Mr McDonnell and economics are central to the Corbyn project.

The first thing to note is the new regime’s ambition in taking on economics. The previous leader, Ed Miliband, was a bit embarrassed to talk about economic policy. He did not try to defend the previous Labour government’s economic policies, nor seriously criticise them for matter, in spite of the opprobrium being dumped on them by the coalition parties. He was late in developing his own economic proposals, and when these came out, they appeared to be “austerity-lite”, and not seriously challenging the government’s narrative.

Mr McDonnell, on the other hand, wants to take control of the economic narrative. He is enlisting the help of heavyweight economists to both support his own plans, and to undermine the government’s version of events. In this he is capitalising on a remarkable fact. Academic economists have been very critical of government policies and “austerity” generally. Indeed government policy seems to be more based on 200 years of Treasury orthodoxy than modern economic insight. This is an opportunity to undermine the government’s reputation for competence, and make it look ideological.

Labour is still left with the two paradoxes of anti-austerity economics that I referred to in a previous post.  The first is that by opposing austerity Labour will have to make its peace with the global financial markets that it so despises. Mr McDonnell tackled this head-on in his speech, and in an interview with the Guardian newspaper last weekend. He has nominally adopted the government’s trajectory for reducing the UK’s fiscal deficit, with its aim of bringing it into surplus by 2020. With a huge rider: he will exclude borrowing to fund capital investment. Depending on how loosely “investment” is defined, this is perfectly sensible public policy, and not, in fact, very different from Mr Miliband’s. It reduces dependence on international finance – remembering that the Bank of England’s Quantitative Easing policies may come to the government’s aid if the economy takes a turn for the worse.

There is, of course, a problem. It means signing up to austerity as most people understand it. And yet opposition to austerity remains his rallying cry. One of the many weaknesses of the left is its love of abstract nouns, especially as things to oppose – austerity, neoliberalism, inequality, and so on. Ordinary working people don’t understand what they are on about, but the activists work themselves up obsessively – and at the moment austerity is public enemy number one. But Mr McDonnell and Mr Corbyn have an ingenious answer to this: just change the meaning of “austerity”.

To them, the word now applies not to tightening the government’s finances overall, but to cuts and tax rises that might affect low and middle income workers. There will be cuts, said Mr McDonnell, but not to the numbers of policemen, nurses or teachers. Instead the cuts would be to “corporate welfare” – tax breaks to businesses, as well as raising taxes on the rich. He was careful not to be too specific about all this.

There are some pretty solid grounds for scepticism here. Mr Corbyn has brandished the figure of £93 billion for corporate welfare, a figure conjured up by the Guardian. Mostly these are allowances or direct support for investment, exports and research and development – all things Labour will want to encourage. And the small print of the Guardian’s report suggests not that this is low hanging fruit waiting to be plucked, but that it is, to switch metaphors, a rather overgrown hedge that can be trimmed a little. There is reason to doubt how easy it will be to target other measures to raise taxes, or clamp down on avoidance, without collateral damage to the small and medium sized businesses that the economy so needs. This is what undid Francois Hollande’s Socialist government’s attempt to do much the same thing.

But it isn’t nonsense either. Big business, and the pampered elites that run them, are not a benign force these days. They contribute to the hollowing out of much of the economy by destroying middle ranking jobs and sucking the soul out of towns and villages away from the main commercial centres. They also siphon profits out of the economy rather than reinvest them. Labour will do well to be wary of big business, unlike the earlier regimes of Tony Blair and Gordon Brown. But finding policies that will tilt things against big business without damaging the wider economy will not be easy. I think that tax treatments for intellectual property and debt interest are a better place to look than the Guardian’s corporate welfare list. And international cooperation on corporate tax avoidance will help (especially if we can move to unitary taxes, such as the US states apply among themselves).  But such policies will take time.

All this takes us into the territory of my second paradox for anti-austerity economic policy. It calls for more economic growth, and yet bears down on much of the private business that will be needed to generate it. This will be the next challenge for Mr McDonnell and his colleagues. It is fair enough to bear down on many businesses, especially the giants. But Labour also needs to show encouragement and support for more positive businesses, through investing in support infrastructure, improving access to credit for genuine investment, improving public procurement, and through reducing the burden of petty regulation. As yet I see no sign of this – but it is early days.

I remain highly sceptical of the new Labour project. But its leaders have made a competent start, and there is undoubted fresh air. The floor is still theirs.


Information science can help us understand economics

HidalgoI have just finished reading César Hidalgo’s Why Information Grows – the Evolution of Order, from Atoms to Economics. This is a flawed work. But the author is on to something – and something rather important.

Mr Hidalgo’s key insight is that it helps to understand economics as part of the advance of order, or information, against the tide of ever increasing entropy – the advance of disorder that is the central insight of the Second Law of Thermodynamics.

I don’t disagree with the disappointed reviews I have read of this book in The Economist or on Amazon. Some interesting ideas that lead to… nowhere much. His final section, a postscript nominally about acknowledgements, does much to explain how this came about. He describes how the book was written. Apart from Mr Hidalgo’s use of the words “bleed” and “vomit” to describe the process of writing, and his need to describe all the coffee shops where he wrote the book, he tells us how the book evolved. He started to write about economic growth, realised he was onto something much bigger, adapted and …

I have abandoned the book. Any bleeder knows that books are never finished, only abandoned. Yet I hope to have reached a point at which the orphan I produced is mature enough to find a home in most people’s heads.

Alas for most people he has not achieved that maturity – the ideas were to big to catch and consolidate in the time he had. But I am glad that he did “abandon” when he did, rather than keep his insights private for another few years while that extra maturity came about. It has found a home in my head.

The advance of order and information on Planet Earth is the great wonder of our existence. For some it is proof of God, for it can only be the work of an imagination. But for others, who do not believe in such a God, or for whom God works in altogether a different way, this wonder is a puzzle. Mr Hidalgo describes in general terms how such a thing can come about. A system out of equilibrium can generate order from its unravelling; this order can be stored in solid matter as information. We advance because our Sun is in the long process of self-destruction and because our planet has solid matter in which the information can be stored.

This advance of information took place though the formation of life on earth, and on to the civilisation created by humans. Mr Hildalgo’s starting point for the book was his realisation that this is that economic advance (a word I prefer in this context to “growth”, the word he uses) is another facet of this process, and that this insight helps us to understand economics. But his postscript describes how he was overcome by the banality of this observation, and how then strove to describe something altogether bigger.

If he is going to talk about economics, he needs to move beyond his understandable feelings of its banality towards an understanding of what economics is for, and then trying to work with that. He hints at it but leaves no time to develop his thinking properly. He is right that the idea of economic growth is not much in itself. But what economics should be about is advancing the wellbeing of humanity without destroying the planet that it inhabits. And that must be seen in terms of the growth of information, and not, as far too many people see it, as the consumption of energy and the creation of physical artefacts.

Now let’s move on. Mr Hidalgo’s thoughts on economics flow from an appreciation of the critical constraints on the growth of information in human society. This is set by the physical capacity of the human mind to retain and process information. People can organise as teams in order to acheive beyond their personal capacity, but this too has constraints imposed by what organisations and social networks can do. He draws on the insights of the great lawyer-turned-economist Ronald Coase, amongst others, to explain the implications of these constraints. These show why it is so difficult for “developing” economies to catch up with the developed world, for example. It is through understanding how organisations and networks manage and create information that we can understand the direction needed for human advancement.

Interestingly he does not feel the need to discuss whether massive computing power and databases help in this process (or I missed it if he did).  We tend to associate the word “information” with them. But these things are really very limited in their power to think and imagine, and we often confuse information with data. Still, there is an interesting discussion to be had about the role advancing artificial intelligence might play.

Economists often show what is referred to “physics envy”. This is the wish to reduce their discipline to some elegant natural laws which are susceptible to mathematical treatment. And yet, as somebody who has studied physics for real, I wonder at how little comprehension of physics economists generally have. By and large they haven’t got beyond the First Law of Thermodynamics, and systems in equilibrium. And yet physics (and chemistry come to that) only gets at all interesting and useful when you get beyond these basics. I remember that light bulb moment when studying Chemistry A-level when we moved from the stable predictable world of thermodynamic equilibria to the crazy world of kinetics, where most of the real value lies. And yet the economic models the world uses, and around which the world of economics revolves, are fundamentally based on equilibrium thinking.

So if economists have physics envy, Mr Hidalgo’s ideas are exactly the sort of direction they should be looking to move forward. But, alas, macro-economists in particular would prefer to pontificate about comfortable aggregates like GDP, inflation, productivity and money supply as if these were genuine physical phenomena.

An information-based outlook would change the way we viewed economics. We would see that Saudi Arabia is not a rich country, but a poor one, as its economy is based on oil rather than the enrichment of information. And we might understand better why making organisations, and systems like national economies, big often makes things worse rather than better. It does so because these big places tend to concentrate their information development into tight networks at the power centres, leaving much of their human potential under-utilised.

It isn’t that theoretical economics itself offers any basis for so-called economies of scale. In fact the idea goes against the oft-used maxim of diminishing returns, which economists like more for its convenient mathematical consequences that any real grounding in reality. But economies of scale are the language and self-justifying belief system of political and commercial power. Advancing productivity, it is said, is the key to economic success. Bigger systems are more productive. So we must make everything bigger. For an example of this, look at the case being made for expanding Heathrow Airport. Economists are unable to present a serious counter-narrative, it seems, though a few are uneasy about this logic leading to monopolies.

The most important thing about Mr Hidalgo’s work is that it starts to give us a strong theoretical language with which to tackle one of the biggest social and economic issues of our time – the under-utilisation of human resources through the consolidation of large governmental and commercial networks – which lies behind growing inequality. It also helps us with another issue – the commonplace assumption that we must choose between improving the lot of the poor and protecting the future of our planet.

By thinking about information and networks, we break the stranglehold of thinking about the world in terms of money and physical things. That holds a lot of promise.




The Chinese test the limits of a state managed economy

Political commentary on economic growth operates between two poles. On the one side the right argues that the state should get out of the way, and allow entrepreneurial businesses full scope to do their thing. On the other, the left says that growth is driven by investment, much of which must be directed by the state to be effective. Both are right, of course, and the balance depends on the circumstances. But China offers a fascinating case study in this discourse.

Until the rise of Deng Xiaoping in 1978, China offered a good example of a failed, state-led economy, alongside the Soviet Bloc amongst others. The economy was made up of state owned enterprises (SOEs) and state directed cooperatives, operating according to production quotas, all part of a state plan. But the economy took off as the shackles of state control were released.

This seems to follow the right’s playbook, but what happened was in fact much more subtle. The state quotas and SOEs remained in being, but a private sector economy was allowed to flourish alongside it. This contrasts with what happened in Russia after the collapse of the Soviet Union in 1990. There, following the advice of right-wing US economists, the state system was dismantled, with SOEs sold off and production quotas abolished. You can’t be half-pregnant, these advisers suggested. That was disastrous, of course. The SOEs were acquired by well connected crooks, who formed a governing oligarchy. Essential state support systems collapsed. A flourishing economy did not emerge until a natural resources boom saved things.

Meanwhile, China’s pragmatic approach delivered spectacular growth, which led to a rapid diminution of poverty. After a first phase in which private enterprise transformed agriculture, a growing private sector flourished in producing manufactured goods for export. It was one of the most brilliant acts of economic government the world has ever seen. They took no advice from westerners. But the Chinese governing elite was left with some difficult questions. Sooner or later the SOEs and political structures would present limits to growth, and would have to be reformed. Commentators, inside and outside the country, confidently predicted that the Communist Party would have to release its grip. But that is not how things have played out.  The Party did reform SOEs to make them more responsive to market economics, but they did nothing that would threaten its own monopoly of political power.

Instead, as the 21st Century has progressed, a new model of growth has emerged. Alongside a vigorously competitive private sector, a massive programme of state-directed investment has sustained growth. That meant growth rates of 10% or so, even through the world recession of 2008/09. Something like 35% of Chinese national income is directed towards investment, much of it through SOEs. This has now swung towards the left-wing model, and those suspicious of capitalism and democracy have taken inspiration. A wise government, unconstrained by the petty-corruptions of democracy, has led the way to continued spectacular advance – and throwing out all that austerity nonsense too.

But, as Martin Wolf writes in the FT this is all coming into question.  The Chinese economy is slowing down. To an outsider this might look like an orderly transition. Growth rates of 7% are still high by almost anybody’s standards; the government’s aim of moving to an economy led by consumption rather than investment looks natural enough – this will improve the wellbeing of the Chinese people. And yet deep flaws in the Chinese model are being exposed. China has rather little to show for years of massive investment – at least in terms of economic returns, rather than monuments in steel and concrete. And behind the investment lurks piles of debt – representing the savings Chinese people. Chinese productivity has been static.

And slowing the growth rate from 10% to 7% may sound easy, but it creates real strains on financial systems, with all the time lags built into it. It implies a much larger dislocation. But with a stock of useless investments, SOEs who are not used to making themselves more efficient and effective, and a financial system threatened by excessive debt, doubts are growing about how feasible even 7% is as a growth figure. And since China plays such a big part in the world economy, it is no wonder that financiers across the globe are getting jittery.

This has some resonance in domestic politics in the developed world. The left’s criticism of austerity policies since 2008 has been virulent, and joined by many respectable macro-economists. Surely, they suggest, the state should have shored up demand with a programme of investment. Labour leadership frontrunner Jeremy Corbyn’s economic proposals are thick with this sort of thinking. But this only works in two circumstances. First is that the pre-crash economy was sustainable, and can be revived quickly, so all that is needed is to cover a temporary lapse in demand. In this event it hardly matters if the investment itself is useless (digging holes and then filling them in, and so on). But in Britain at least there was good reason to question the sustainability of the pre-crash economy: a large current account deficit, a structural deficit on state finances, a bloated finance sector, a declining oil and gas sector. Besides it is all now a bit late.

The second way in which investment can shore up an economy is if that investment produces decent economic returns in due course, allowing debts to be repaid. The unfolding problems in China are showing what happens if investment is badly directed. There are plenty of other examples (Japan is another good one). The trouble is that the more you try and turn investment on and off like a tap, to regulate the macro-economy or in an explicit drive for growth, the more likely investment is to be wasted. The money is directed according to political imperatives, not economic ones. This is something that macro-economists, who don’t like to look behind their beloved aggregated and averaged statistics, often miss. In the UK the criticism that the government did not invest enough after the crisis remains a valid one – but it would not have been easy to pump in the sort of funds that the wider economy needed to keep on an even keel.

Time will tell on China. Its leaders are not to be underestimated. But they are demonstrating that you can have too much state direction for a healthy economy.


Heterodox economics is thin political fare

Last week the Social Liberal Forum hosted a three part series of blogs by”heterodox” economist Simon Radford, “Shouldn’t we listen to those who predicted the crash?”. In it he excoriated orthodox economics, and urged British Liberal Democrats to engage with heterodox economics. His advice is fine as far as it goes, but Lib Dems will find heterodox economics promises much and delivers little.

Now let me make my position clear. I think that orthodox economics has gone seriously awry, and I don’t want to defend it. Also I think that economics has become so central to the political debate that all those interested in politics should engage with it if they can – and they certainly shouldn’t accept orthodox economics as gospel. So to that extent I agree with Mr Radford.

But reading his series was like listening to a shaggy dog story. I eagerly awaited the punch line, the new liberal vision he seemed to suggest at the start, but it never came. The series ended before he had managed to say anything about the practical policy implications of following heterodox economics. I shouldn’t have been surprised. “Heterodox” simply means “not orthodox”, and it doesn’t imply any kind of coherence (which “orthodox” does). What we get was quite an interesting narrative, including a historical one on the development of orthodox economics after 1945. It explains that orthodox economics is seriously wrong – and was in large part to blame for the economic crash of 2008/2009. But we get no clear ideas as to what might be put in its place. This is quite a familiar pattern, I’m afraid. Criticising orthodox economics is like shooting rats in a barrel; so many of its core concepts are clearly nonsense; and it’s old news too. And yet the orthodoxy continues for a reason – it is at least coherent, and offers a discourse for the making of predictions and taking of decisions. It will persist for as long nobody presents a serious alternative way of thinking. This is a point made very well by the one heterodox economist I have any real time for, George Cooper. He at least puts some energy into shaping alternative ways of looking at things. There is no suggestion of that from Mr Radford.

There is a further problem that his readers might not pick up on. In it he seems to suggest, without quite saying it, that orthodox economics is behind current austerity policies, so popular in developed world economies apart from Japan. And yet the most trenchant critics of austerity are as orthodox as they come: economists such as Paul Krugman, Joe Stiglitz or Danny Blanchflower. Indeed when viewing the debate about the economics of austerity in places like the FT, I am struck by the number of orthodox economists taking a critical stance, and the dearth of them defending austerity. Instead austerity is defended by politicians and people like Niall Ferguson, who is a historian rather than an economist. Austerity is not built by a group of theoretical economists forcing the world to conform to their theories. It is largely the result of pragmatic politicians and central bankers struggling to cope with the realities of the world they are faced with. Germans may be fond of their “ordoliberalism“, with its worship of rules, but this not orthodox economics.

And this draws out an interesting point. It is that Keynesians increasingly dominate orthodox economics, and yet they are being marginalised politically. Before the crash there was a stand-off between neoclassical economists (often called “fresh water” because they tend to come from US Mid West universities) and the neo-Keynesians (“salt water”, since their US bases are on the eastern and western seaboards). Neoclassicists tended to oppose all kinds of state intervention; the neo-Keynesians offered clear theories for state intervention through fiscal and monetary policy. The crash has seriously diminished the standing of the neoclassicists. This wasn’t because their policies led to the crash – they argue quite coherently that it was various forms of state intervention that were the root cause. It was because they had absolutely nothing to say when the crash happened. They had a general attitude that the recession should be allowed to plumb its depths without any intervention. Nowhere was this considered to be practical or acceptable. Neoclassicists might support the idea of austerity, but of such a severe form that it would have no serious audience beyond US Republican primary voters. Neoclassicists haven’t helped themselves by predicting that the loose monetary policies followed by central banks would lead to massive inflation – when in fact inflation has barely budged. Neoclassical economics seems to have no connection with reality. Neo-Keynesians like Mr Krugman, meanwhile, simply say that the crash left their version of orthodoxy intact, bar a few tweaks. Indeed they confidently claim the post-crash world as vindication. To them heterodox economics is an unnecessary distraction.

And it’s hard not to sympathise with that view. Mr Radford suggests following websites such as naked capitalism or Steve Keen. The former seems to be a rage of negativity based mainly on US liberal domestic concerns; and the latter doesn’t seem to say anything that hasn’t been said better by the FT’s highly orthodox Martin Wolf. Confession – these opinions are based on a quick scan of these sites and reading Mr Keen’s explanation of the current China crisis. I may be doing both an injustice – but they don’t make a good first impression.

And here’s the strange thing. I have read almost no clear critique of the neo-Keynesian orthodoxy used to criticise austerity policies. And yet if their prescriptions are so obvious, why haven’t they been followed? It is clear to me that policymakers are basing their judgements on practical and political problems, not on economic theory – problems that their neo-Keynesian critics refuse to address seriously, so bound up are they in the theory of it all. I think this is a sign that neo-Keynesianism is past its sell-by date. That it no longer reflects the actual realities lurking behind the aggregated statistics that are the lifeblood of orthodox economics.

So we now find that the political left increasingly depends on orthodox economics for its politcal critique, and yet governments and central bankers are blundering along a different path, lacking a clear theoretical framework. Unfortunately, instead of searching for an updated theoretical framework that might offer public policymakers more guidance, heterodox economists seem content to rage against authority. Perhaps it is because the development of a genuinely new economics leads to questions that not even heterodox economists are comfortable with, such as the usefulness of aggregated economic statistics, and such central concepts as economic growth. But those searching for the policies of the future have to address these profound issues.


We need new economic thinking based on wellbeing and sustainability

If the political right and left can agree on one thing, it is the centrality of conventional economics – the quest for economic growth and rising productivity. For a few moments after the great crash of 2008/09 people suggested that conventional economics had had its day. But it just bounces back. And it fails to address the real needs of 21st Century society.

The right, the centre-right and even the centre-left remain entranced by economic liberalism, which the left refers to sneeringly as neoliberalism. This focuses on markets as the most efficient way of processing information on human wants, and that carefully designed incentives are the key to public policy in areas where markets fail. The centre-right and the centre-left are divided over the scale of government, but even the centre-left are wary about putting up tax rates, as a disincentive to work. The financial crash has not shaken their confidence, beyond showing the need to get banking right, though they are quietly putting even that thought on the back burner. If anything undermines confidence it is growing inequality. And yet while overall economic growth keeps going, at least in Britain and the US, they see no reason to question the foundations of their thinking.

That the left is as attached to the old economics as the right may seem surprising – they often claim that capitalism has failed and must be replaced. And yet their various policies need plentiful taxes, and they need a growing money economy to deliver this. They have received a boost from such conventional economic luminaries as Paul Krugman and Joe Stiglitz, who emphasise Keynesian fiscal expansion, and are critics of what the left calls “austerity”. Indeed opposition to austerity is now the rallying cry of the left. That this implies subscription to a prosperous capitalist economy is a paradox that does not seem to trouble them.

There are two basic, and linked problems with all this. Firstly that, for a variety of reasons, the potential for economic growth is sharply reduced in the developed world. Policies aimed at stoking it up are doomed to failure – usually in the form financial bubbles. Second is that it is largely addressing the wrong questions.

What are the right questions? Simple. How to promote human wellbeing. How to secure the future of the planet.

Consider human wellbeing first. Conventional economic theory puts the idea of “utility” at its heart. Utility is shorthand for the point of it all. But it doesn’t waste much time asking what this is, it just assumes that there is a hidden force behind market demand whose implications can be modelled with some relatively simple mathematics. And yet human wellbeing must surely be the point of all, and it is well worth taking a detached look at what this might be. This is, in fact, a flourishing field of study in modern economics – though it has failed to touch what I have called conventional economics.

This study highlights how important are things that are not easy to integrate into the market economy, and not related to quantity of consumption of goods and services: family life, local communities, public goods, and so on. After certain basic needs are met – sustenance, shelter, health care – higher levels of consumption do not securely lead to better wellbeing. And so an ever higher level of overall consumption – the central tenet of conventional economics – ceases to be important. This is actually quite obvious if we look around us. Public policy types might bang on about the need for ever greater economic productivity to promote our wellbeing, but this seems far from  most ordinary people’s minds. The great modern invention is the smartphone – but its big impact is on how we run our personal lives, not how we participate in the conventional economy. People seek out goods produced in environments of low productivity (organic goods, hand crafted clothing, etc.) because they confer higher status, or carry some other aura. And so on.

But there is a trap lurking in the promotion of wellbeing economics. Some want to reduce human wellbeing to numerical measures that can be used as a sort of replacement GDP. And yet the key to human wellbeing is human agency. It is something we must all learn to acheive for ourselves in our own way. The use of numerical measures implies that it becomes the responsibility of public policy makers – and that will be ultimately self-defeating. Public policy is better directed towards limiting human misery and providing basic needs – and not taking direct responsibility for human happiness. It is vital that people learn to take responsibility for their own lives, and not just blame everybody else for their problems.

And then there is environmental sustainability. The threat to the planet that we inhabit from excessive human consumption should be obvious to all. The threat to the atmosphere from an imbalance in carbon emissions is only the most immediate and serious aspect of this. And yet a public philosophy based on ever higher consumption cuts across this. Of course the unit impact of that higher consumption can be moderated. Energy efficiency is hardly incompatible with economic growth. And reduced environmental impact and economic growth are not necessarily incompatible. It is just very unhelpful to keep focusing on consumption for its own sake.

What difference does all this make? Here are thoughts, each of which needs to be explored in greater depth – something I hope to do in future blogs.

  1. The state can’t keep growing. Tax revenues are dependent on the money economy (indeed you can argue that the whole point of money is to pay tax). If that’s not going to grow, and we can’t assume it will, we must find better ways of solving our problems than expanding the state’s resources. I think that means a more joined-up and localised approach, drawing strength from local communities.
  2. We need less debt. Debt as currently conceived is a dehumanising process that increasingly leads to financial bubbles. Finance should be based much more on risk sharing instruments such as equities. We should approach this by steadily reducing creditors’ rights, as well as bearing down on the tax privileges associated with debt.
  3. We need to rethink housing tenure. Our homes are central to our feeling of wellbeing. But clearly things are wrong. Property ownership seems to be privileging a lucky few. In the rented sector too much power is put in the hands of landlords to trash the lives of their tenants. Somehow we need to improve tenants’ rights while ensuring that there is a sufficient supply of decent homes.
  4. We also need fresh thinking on employment. The employer-employee relationship is too often exploitative. And yet flexibility of employer-employee relationships often leads to a more efficient use of resources (consider Uber and its ilk).
  5. We should stop worshipping scale. Large organisations, from government agencies to big companies seem to be privileged. We lazily assume that scale leads to efficiency. It sometimes does. But too often it simply destroys local knowledge and human relationships.

I could go on. Tackling these problems will require reform of political institutions and public services, as well as the system of legal rights in which our society works. But a future where we are both happier, and reduce the strain on our environment is surely attainable. I think this is a fundamentally liberal idea – but it is possible to build broader political coalitions behind reform. But we badly need to move on from the staleness of the current political debate.



Corbynomics: hope, fantasy and shaky foundations

Jeremy Corbyn, the front runner in Labour’s leadership race, is clearly somebody that mainstream politicians and media types underestimate. The standard criticism of him is that he a blast form the past – somebody that wants to take the country back to the failed solutions of the 1970s. No doubt that’s how it looks if you just examine the various things the man has said down the years. But many of his supporters are young and are projecting something quite different onto him.  He has crafted his message to appeal to this group, to look like something much more modern. Today I want to take look at his economic ideas.

These have been set out in greatest detail in his paper The Economy in 2020, published on 22 July. It isn’t hard to see why he is enjoying so much support. He offers the hope of something fresh. He starts by attacking the government’s economic policies, which he characterises as “austerity” in the now familiar language of the left. Thankfully he has shown more sense than to use the word “neoliberal”, putting him ahead of the Green leader, Natalie Bennett, who put forward a strikingly similar prospectus in the May General Election.

“Austerity” is used as a general shorthand for economic liberalism, and in particular the attempt to keep government expenditure and taxation in check – which at present means reducing the scale of government expenditure. It also refers to attempts to reform public services through such policies as privatisation. Instead Mr Corbyn calls for investment to rebalance the economy towards higher paying jobs, though not ones in financial services. He has time for some supportive words for private industry – recognising that private enterprise will have to be part of the growth and investment process. It reads as constructive and hopeful.

This overarching narrative has some macroeconomic credibility. The current British economy is nothing like as strong as the government claims, and many of his criticisms are on the mark. Alas it falls apart on closer scrutiny. I want to quickly look at three aspects in particular: the so-called tax gap of £120bn, corporate subsidies of £93bn, and the idea of “people’s QE”.

But first I must mention a name that keeps popping up, and who ideas seem to be behind much of the document: Richard Murphy, an activist associated with the Tax Justice Movement. There are some striking parallels between Mr Murphy and me: he was born in 1958, he took an economics degree, and he is a Chartered Accountant. The main difference was that his Economics degree was joint Economics and Accountancy (at Southampton) in the 1970s, and mine was full Economics (at UCL) in the 2000s. It is one of the rare occasions when my formal qualifications in economics outrank that of a public policy wonk.

The Tax Gap estimate comes from this paper commissioned by the Public and Commercial Services Union and written by Richard Murphy in 2014. Mr Murphy (like me born in 1958 and a Chartered Accountant) is a prominent campaigner for Tax Justice. I first came across this document when it featured in a 38 Degrees campaign (“it isn’t rocket science”, which suggested that collecting more tax was basically quite easy), and I think its claims are firmly embedded in the hard left mythology. It suggests that the Revenue & Customs vastly underestimates the amount of tax lost through avoidance, evasion and the like – and that the real gap is £120bn and not £35bn (and falling). This is important because it suggests that a huge amount of extra tax could be collected if only politicians were less indulgent of wealthy taxpayers. To give some context, the Lib Dems were criticised in the General election for being speculative when they suggested that £10bn cold be gained by tackling the tax gap (more than the other parties, except the Greens, of course). Mr Corbyn has his eyes on something much grander – and thus funding extra government spending without raising taxes on ordinary working people.

The biggest part of this gap is the untaxed shadow economy, which Mr Murphy says is much bigger than official estimates. I can’t offer an opinion on whether this is true – but I can suggest that this is hardly low hanging fruit, and is by no means confined to fat cats (think small building jobs, domestic cleaners, to say nothing of drug dealers and the smuggling of booze and fags). This does explain a rather tangential reference to cracking down on small business tax evasion though in Mr Corbyn’s document.  It is hard to see how any government could do much more than make a marginal difference without a draconian clampdown on the black and grey economies which would carry a lot of uncomfortable implications right across our society.

Another number that gets an airing is the idea the government subsidises business to the tune of £93bn. The source of that seems to be the Guardian newspaper, and its correspondent Adtiya Chakrabortty (“The 93bn handshake” is their headline). This is unbelievably flaky. The biggest single item is £44bn of corporate tax benefits. This is mainly credits for investment expenditure. Calling this a subsidy is more than a stretch – it is simply putting capital expenditure on a level playing field with revenue expenditure by, in effect, making depreciation tax-deductible on some types of investment. I’m not clear whether the figure includes tax releif for research and development, but that would be entirely consistent with the logic. If Labour is serious about helping manufacturing industry, it will need more of this sort of thing, not less. Another thing thrown into the pot is export credits, which allow British exporters to compete on a level playing field. If George Osborne abolished this the noise from Labour benches would be deafening. Cleaning up old nuclear power stations is in there too. There is something not a little bizarre in on the one hand suggesting that the government should promote investment, and on the other hand attacking all attempts by government to promote private sector investment as corporate welfare that should be stopped.

Next comes the idea that the Bank of England’s Quantitative Easing (QE) programme should focus on public investment in housing and infrastructure and the like – “People’s QE” – rather than buying government and other bonds. This is promoted by Mr Murphy again (his ideas pop up several times – and not all of them are bad), in spite of his lack of economic qualifications. Quite apart form the fact that the Bank of England has ended QE because the monetary conditions no longer apply, it gets the Bank into the unenviable position of evaluating public investment projects.  Getting unelected technocrats to do this sort of thing rather than government ministers (funded by gilts subject to QE) is hardly democratic either. To be fair, Mr Corbyn just says that the idea should be looked at, not that he would do it. But it betrays a very weak understanding of economics. He seems unaware that the Keynesian critique of austerity is weakening all the time, especially now that real wage increases are growing, suggesting that economic slack has been taken up. The Keynesian critique may have had authority in 2010, but 2015 is another matter.

The truth about the modern economy is this: the world has moved on from the easy textbook world of the 1960s, and even the 1990s. Technology has made manufacturing so efficient that there are few jobs in it any more; most white collar jobs have likewise been automated away; we are left with a lot of important jobs (carers, nurses, cleaners, etc.) that cannot be made more productive (and so better paid) through investment programmes. Some things can and should be done: investing in public housing, rail infrastructure and building up renewable energy, for example. But these will not yield the hordes of well-paid jobs that politicians left and right so badly want. Productivity improvement has moved from the workplace to our private lives (think smartphones and search engines). And you can’t tax that. Meanwhile demographic change is adding a further brake to the formal economy. This is the real reason why the economy under the Conservatives is not doing well, not “austerity”. Mr Corbyn is offering 20th Century solutions to a 21st Century problem (as is George Osborne, the Conservative Chancellor, I must add).

Slower growth means that it will be a struggle to raise much more in taxes, and certainly not without increasing taxes on middle income people. That is a hard political sell that Mr Corbyn only hints at (“there will be hard choices” he manages at one point). And it means that the government can’t just keep adding things to public expenditure without public services being unable to keep up with demand. That’s why abolishing student tuition fees is such a bad idea, for example – you only have to look at Scotland, where the state pays for university education, to see that. The universities can’t keep pace with demand, and fewer people from poorer backgrounds go to university than in England as a result.

I believe that there is a way forward from here. It does not come from the current government’s economic liberalism. It comes from strengthening local communities and the small businesses that serve them. It will not necessarily produce lots of conventional economic growth, and it will not produce masses of new tax. But it might produce public services that don’t keep failing; it would stop national and multinational chains sucking the life out of local economies; it would harness the potential of the underemployed.

Some of the ideas Mr Corbyn is promoting might help; he seems to suggest devolution of power to centres away from London. But too many look like national solutions that draw power back to London; others look like a path towards mass surveillance in order to collect more tax. I cannot see that it is any better than what the Tories are doing – and frankly I fear it would be worse.

Mr Corbyn promises hope, but his ideas are built partly on fantasy and definitely on shaky foundations. And that is even before he attempts to convince the public at large.


Wanted: a new approach to economic management. Liberals should lead the way

The 1940s fighting the 1980s. There is something desperately stale about the debates over economics in the Labour Party right now. It is a battle between two approaches that have run their course. Meanwhile, on the Conservative side, the 1980s approach is unchallenged. On the principle that these things change every forty years or so, we should be setting our sights on something fresh. What will it look like?

Followers of David Boyle will recognise this narrative. The 1940s ushered in the era of social democracy. This featured economic growth through increases in mass production and mass consumption. An aggressive private sector was balanced by a growing state sector, both in terms of state services and transfers to the less well off. National governments reigned supreme, operating within an international system of fixed exchange rates. Keynesian economic management was unchallenged. Many important national issues were settled by negotiation between government, employers and trade unions – the balance between the three varied from country to country.

In the 1950s and 1960s living standards in the developed world – mainly the USA, West Europe and Japan – advanced steadily across all levels of society. But in the 1970s things fell apart. Environmental constraints took the gloss off the idea of ever upward consumption, especially of energy – as oil prices escalated. The Bretton Woods exchange rate system collapsed, taking the lid off disciplined monetary management. State run services became monstrously inefficient. State bureaucracy was vast and notorious, with not a little taint of corruption, especially (in the UK) over public housing. Arbitrary and misconceived development projects abounded. A massively expensive foray into nuclear power was perhaps the most egregious in this country – a huge waste of public resources for which nobody has ever been held to account.

This led to an economic crisis as the government wrestled with unreconcilable demands, ushering in a period of simultaneous inflation and high unemployment, supposedly impossible under the conventional Keynesian economics of the time . In Britain a major feature of this crisis was a rampant trade union movement, which openly flouted the rule of law with its use of mass strikes and picketing to support inflationary wage increases. Government finances became unsustainable, with the IMF having to stage a rescue in the late 1970s.

The crisis of the 1970s brought about the rise new thinking. This I will call “neoliberalism”. This word has become something of an all-encompassing hate-word on the political left, which has drained it of much of its meaning – but it remains a convenient term. Neoliberalism encompassed a wide variety of perspectives from the far right to the centre-left. It was essentially a rebellion against excessive state power. The state’s attempt to manage the economy was doomed to fail, they said, because of inadequate information and distorted incentives. In its place they advocated solutions based on markets – seen as the most efficient way of to reconcile information on supply and demand – and carefully designed incentives. Taxes should be cut to improve incentives to enterprise and hard work. At its heart was a liberal idea: personal choice should be at the heart of everything.

In Britain neoliberal thinking took off with the administration of Margaret Thatcher, who came to power in 1979. It was given a new lease of life by Tony Blair and Gordon Brown’s New Labour project, as they tried to combine a large state with neoliberal principles of management. How successful , or not, all this was is a matter of deep controversy. But in the early to mid 2000s things seemed to be going well enough, with a record of continuous, steady economic growth and generally improving living standards. Then things started to fall apart with the financial crisis which started in 2007, the aftermath of which still seems to drag us down.

But the styles of economic management only tell part of the story. Behind them lie important important developments in technology and patterns of world supply and demand. In the 1950s technology delivered a host of mass-produced household products, from cars to fridges to brightly coloured fabrics, which provided the basis of both expanded production and consumption. By the 1970s the markets for these products were becoming saturated, with a greater focus on quality and status rather than quantity. From the 1990s the world saw the rise of globalised supply chains, and the explosion of information technology. While economic growth in the old developed world can be questioned (much of it went to a rich elite, or went up in smoke in the crash), there was astounding growth elsewhere, notably in South Korea, China and India. This latter growth followed the adoption of neoliberal policies (though alongside a strong state) and is better evidence of their efficacy than progress in the old developed world.

But regardless of how successful they were, many think that neoliberal ideas have run their course. They do not offer an adequate template for future economic management. Low pay or unemployment is rampant; property values disappear out of reach to most younger people, unless they are helped by parents; large swathes of the country seem stuck in permanent depression; many public services, especially health, are cracking up under increased demand with which the tax base cannot keep up. Meanwhile questions of environmental sustainability persist, especially as it is clear that current levels of global carbon emissions will eventually kill the planet. It is not clear how neoliberal policies will be able to meet these challenges. And many neoliberal ideas look like downright failures – especially financial liberalisation and the attempt to manage public services through markets and numerical incentives.

So it is not surprising that many on the left look back fondly to the heyday of social democracy, conveniently forgetting its failures and the underlying circumstances that made it feasible (expanding demographics; low manufacturing productivity; and so on). But ultimately this is even less convincing. It is quite laughable that the left refers to itself as “progressive”. So what will the shape of the new economic management be?

The first point to make is that the point of it all is improved wellbeing for the general public and especially the least fortunate. We need to completely detach this from the idea that improved wellbeing is based increased levels of consumption of physical things like food, raw materials and energy. This may be so for the poorest in society, but that is a problem of distribution. Most people have more than they need, and many grotesquely more. This is a simple observation, but given how much of the current economic debate revolves around increasing levels of consumption and raising productivity, it does point to the need for a new mindset. Incidentally, reduced consumption of physical things is not necessarily incompatible with conventional economic growth – but focus on growth is not helpful.

The second thing to observe is that improved wellbeing will come from stronger individual empowerment, and stronger local communities. This is common sense, but it is supported by plenty of academic research. It seems to me that the main barriers are unequal power relationships, and dysfunctional services. And these in turn come about through an excessive concentration on specialisation and scale. The neoliberals were right about big, boneheaded national governmental institutions – and even their imitators at more local levels. These are incapable of the effective coordination required to help most people in need. But so many of our private sector choices seem to be based on similar inhuman systems – national and international chains incapable of responding to the needs of whole people. The advance of these institutions is hollowing out local communities while failing to deliver what people really want.

This requires a new management approach that is less focused on national and international institutions, and more on the health and wellbeing of people and their communities.  I will build on this in future blogs.

But one thing is very clear. Such a new approach is fundamentally a liberal one. The conventional left, in both its “hard” (think Jeremy Corbyn) and “soft” (think Ed Miliband or Andy Burnham) forms is still to attached to national institutions to be controlled by a small, enlightened elite and serving a grateful nation. Conservatives may be suspicious of the state, but they are very attached to large commercial corporations and global financial markets, which are surely part of the problem and not the solution. There is some hope in the Green movement – though its British incarnation needs to reverse out of the hard left blind alley in which they currently find themselves. But political liberals, especially those who understand community politics, are the closest to reaching the answer. I want to help move them along that path.