Economics for the Many: Labour’s challenge to the orthodoxy part 1

In my last post I referred to a new book, Economics for the Many, a collection of essays edited by Labour's Shadow Chancellor John McDonnell. I am very interested in any new thinking coming from the left because I spy the possibility of a coalition between liberals and socialists - whether inside Labour or between Labour and another party or parties - since the right  seem to have run out of ideas and started allying themselves with toxic nostalgists. So I bought the book. My first idea was to read it all and produce a single review article. No doubt I would have come up with something along the lines of this rather dismissive review by the FT's Chris Giles. But the interest is likely to come from some of the details rather than the general thrust, so my plan is write a series of articles as I read it, a few chapters at a time. This is the first.

Introduction - John McDonnell

In my last post I was somewhat dismissive of Mr McDonnell as a Leninist more interested in candyfloss policies than promoting serious policy debate. Be that as it may, Mr McDonnell is keen to portray a picture of a ferment of new thinking on the left, which will produce a radical new orthodoxy, much as Margaret Thatcher ushered in 40 years ago. This collection of essays is part of the evidence, and his introduction sets out an overview..

As such it doesn't tell us very much. Some of the familiar left wing narrative pops up. Those two abstract nouns, neoliberalism and austerity, play star roles as the villains. The first as a process of alienation of economic management from human values, the second being ideologically motivated cuts that have left tragic consequences. These let to the “social murder” of Grenfell Tower, for example.

But is it candyfloss? Is it designed to give the impression of intellectual movement just to provide cover for a power grab? I have two concerns. Are they coherent? And in particular, do they point to a radical decentralisation of power, or in fact the a Chinese style centralisation, guided by a political commissariat? And secondly, are they actually workable? Do they form a credible basis for reforms in our economic management?

1.    Democratising Economics in a Post-truth World – Antonia Jennings

This isn’t a promising start. The basic thesis is sound enough. There is widespread ignorance about economics, and bafflement at the way it is talked about. I think it is a bit worse than Antonia Jennings, a member of the political think tank/charity ecosystem, suggests. Many of that minority who think they have a strong grasp of the subject actually don’t. This allows politicians to build up myths not based on sound economics. The austerity policies of the 2010 government is, of course, used as the primary example. The Brexit campaign of 2016 is used as another.

Her solutions, though, don’t measure up to the task. She suggests a number of nice ideas: improve education at schools and universities, bring more women into the profession, change the way economics is presented. But these feel hopelessly inadequate.

The first problem is that economics rests on a number of insights that are profoundly counter-intuitive. One is that an economy as a whole has to be managed quite differently from a household budget – the idea of living within your means works out in a very different way. Another is the idea of comparative advantage – which means that trade should benefit everybody. Alas these ideas are not only counter-intuitive, they have layers of understanding, which even trained economists argue over. Many, for example, have not got beyond the basic idea of "trade is good" to understand how a changing world might affect the benefits of trade. This will take much more than a bit extra schooling and more user-friendly language to fix, surely?

The second is the sheer political imperative to frame an easily digestible narrative. Austerity illustrates this. There is a perfectly economically literate case to be made for this policy – many economically literate politicians and civil servants, amongst others, supported it. The government did not attempt to make that case in public because the level of political debate did not permit it. The counter-narrative from the left that austerity was unnecessary and therefore an ideological attack on public servants and poor people is just as illiterate, and framed from the same political necessity. In fact there is a very challenging debate to be had on the subject with well-made arguments on both sides. What is rather depressing about the whole episode is that so few people are or were interested in having that argument out. It is too politically important for that.

Political polarisation is no doubt a strong factor here. It is much more effective to shout down and demonise your opponent than start a reasoned debate. Labour is part of the problem, or, more generously, a victim. What is the answer? I am tempted to say that it is greater political pluralism based on electoral reform – though that has brought its own problems elsewhere in the world.

So yes to reforming the economics discipline. But expectations on the political impact of this need to be moderated. The problem is more deep-seated.

In fact I suspect this chapter is more about maintaining that sense of outrage at neoliberalism and austerity, with the suggestion that both are founded on economic ignorance. A rather bitter piece of candyfloss.

2.    Labour’s Fiscal Credibility Rule in Context – Simon Wren-Lewis

Simon Wren-Lewis is an academic macroeconomist, who has advised the Labour leadership on its economic policies. He writes lucidly and is perhaps an example of what Ms Jennings is looking for in clearer economic discourse. His topic is the Fiscal Credibility Rule (FCR), an operating principle for tax and spending policy that was adopted by the Labour leadership before the 2017 general election to show that it could be trusted with the government finances.

He starts with an elegant description of macroeconomic policy before the crash. He then moves into criticism of the 2010 coalition government’s austerity policy, which he says strangled economic growth. This story is central to Labour’s narrative, and you cannot expect a balanced discussion of this in a book like this, published on the party’s behalf. Mr Wren-Lewis, anyway, has taken sides, in an example of something that Ms Jennings might have commented on but didn’t: academic economists take sides in policy debates rather than trying to tease out the disputed issues and resolve them. I’m not sure how much this tendency is due to the politically charged nature of the discipline, and how much this goes on generally in academia. It is tempting to rise to the challenge, but this is the wrong place to do it. His is a perfectly respectable academic argument that I happen to disagree with. But it matters more in understanding the past than in working out what to do in the future.

The feature of the FCR that Mr Wren-Lewis thinks is most innovative is the idea that when interest rates are near zero, the government should use fiscal policy to help restore aggregate demand back to the point when interest rates start to rise again. The article then takes a rather puzzling turn. He talks about Modern Monetary Theory (MMT – SW-L shows a real weakness for TLAs). This is an idea that has growing currency on the left, which suggests that the regulation of demand should principally carried out by fiscal policy, and not the manipulation of interest rates by a central bank. If that is the case then the FCR is a bit of a miserable compromise. He leaves it unclear as what he really thinks.

Another interesting point is thrown in as an aside: Labour’s fiscal rule does not include borrowing for investment. This would be a radical departure for the British Treasury, who like to manage government borrowing as a whole, whether it is driven by investment or not. Many academic economists, such as Joe Stiglitz, a Nobel Laureate often quoted by writers on the left, think that this is critical. If you read their critique of the 2010 coalition government closely, you will see that they don’t particularly criticise the aspects of austerity that made Labour supporters most angry – benefit cuts and reductions to the government payroll – but focus on the slashing of investment. An interesting debate is glossed over here: if fiscal policy is to be the main instrument for managing the business cycle, what balance should be taken by capital spending, and what by revenue deficits? I can see arguments on both sides, but it isn’t talked about enough.

For what it is worth, I agree with the central premise of MMT (which Mr Wren-Lewis points out is old-fashioned Keynesianism) – which is that fiscal policy should take up a full role in managing the business cycle, relegating central banks to support. But that invites a whole series of difficult questions, of which the role of capital spending is just one. A more important one is how do you tell when the economy is overheating, and so fiscal policy should be tightened? Mr Wren-Lewis simply suggests inflation – but in the modern economy inflation is no longer a reliable signal: dangerous imbalances in the financial system can build up instead. And there is an even bigger question: MMT in its simplest form implies a massive concentration of political power at the centre. For Leninists that is a good thing; liberals worry that this simply leads to incompetence and corruption.

But Labour aren’t going there yet. The FCR is actually rather a modest proposal, and sensible enough as far as it goes. But there is a much bigger debate to be had about how to manage the macroeconomy.

 

So a rather disappointing start, but many of the more interesting chapters were always going to be later on.

 

 

 

Lib Dem economic policy takes a step leftwards

Last Monday the Liberal Democrats passed a policy paper on economic reforms, Good Jobs, Better Businesses, Stronger Communities. This covers economic policy outside fiscal and tax reform, and fits in with the party leadership's wish to address the challenges of what is often called the fourth industrial revolution. Does it measure up to the challenge?

Sometimes it is hard not to agree with fellow Lib Dem blogger David Boyle that liberals don't take economic policy seriously enough. There was little excitement about this motion, or another two which tackled taxation. I only attended two of the three debates myself and spoke in neither. But the party leader Vince Cable takes economics seriously (he was a professional economist after all), and the party does find itself well-provided with official policy, even if most of its members might struggle to know what it is. The party should be doing more to promote internal debate.

The Good Jobs motion, and the paper behind it, demonstrate one of the problems. They are very densely packed with ideas and policies. So much so that they are hard to read and harder to condense into something clear and ringing. There seem to be two problems here. First the scope was probably too large. You could easily produce a worthwhile motion on workplace rights, for example, rather than tucking it away in this much bigger motion. And then there is the desire to establish consensus. This boils down to including something for everybody: I'll let your hobbyhorse through if you'll do the same for mine. How much this dynamic came from the policy working group itself, and how much from outsiders I don't know. It must be admitted that there are some advantages to this approach. The Labour manifesto last year seems to have been produced by a similar process, and it collected together enough hobbyhorses to make it a good tool for roping in disparate groups of special interests. I remember one online commenter disparaging the Lib Dem manifesto because, unlike Labour's, it had no policy on puppy farms. It was an electoral success, notwithstanding major holes in, for example, university finance. Secondly, if your party actually does get into government, it helps to have a bank of small-ish policy ideas ready. This gives ministers something to do, and helps them set their own agenda, rather than being swept along by their departments and issues of the moment. So the policy paper should do valuable work, even if it failed to the party at large on fire.

My main beef is that it pays homage to the idea that the country has a serious productivity problem, and that this is something politicians should worry about. But this is such a consensus view that I guess they had little choice. I don't particularly object to the polices that this gives rise to. Indeed many of its ideas would no doubt dent measured productivity in the short term (more regulation, tougher environmental focus, and so on), so it is probably politically wise to have some policies specifically focused on raising productivity. Labour does something similar.

So what, for me, are the key issues? The first is that too much money in the economy is being either retained by businesses, or distributed to shareholders, or paid to senior employees. Quite apart from the corrosive effect this has on people's sense of fairness, too much of this money is idle, causing a phenomenon called secular stagnation. One of the symptoms is low interest rates and too much private debt. This tendency started in the 1980s and  technological changes aren't making it any easier. In order to address this, broadly two sorts of reform are suggested. First there is attacking monopoly capitalism. This is David Boyle's big theme: he wants to rescue the old liberal concept of free trade as a liberator, after it has been hijacked by neoliberals to mean staying out big business's way. The second is to redress the balance of power between workers and bosses. I think this latter is probably more important - I am less convinced than David that modern monopoly capitalism is quite as harmful as it was in old economy days of oil, phones and steel - though I do think he is onto something over excessive protections for intellectual property. The Lib Dem paper embraces both approaches, though not intellectual property, which requires a policy paper all to itself. It opens the door to supporting unions. Having heard a very sensible presentation by a representative of the union Prospect at the party conference, I am changing my mind about the role of trade unions. One of my formative political beliefs (from the 1970s) was that unions were a baleful influence on the economy. But empowering unions sounds much more likely to redress the palpable power imbalabce than more shared ownership of businesses, a typical Lib Dem suggestion (though not advocated as radically as the left are starting to).

The second issue is that the economy needs to be pushed towards environmental sustainability. Not only does this mean unlocking renewable energy and leaving coal and oil buried in the ground, but it also means producing and consuming less stuff. The sustainable economy will be based on services, not manufacturing. This needs a change of mindset, and the policy paper does give it a big shove in the right direction.

A third issue is getting a more even geographical spread of economic success. It is a pity that economists are not giving this more thought. Certain economic processes seem to benefit from accelerating returns - returns that rise with concentration. The idea of accelerating returns sounds good, but it isn't, because it leads to success being concentrated, and increases inequality (unlike the alternative concept of diminishing returns, the more conventional assumption in economic modelling). This seems to be because of network effects among personal relationships, that work better in geographical proximity. This is not particularly well understood, but needs to be. I am convinced that government structure is part of the story. More devolved political power helps - but exactly how and why is less clear. The policy paper duly pushes for this, both in government and in the purchasing of public agencies. That is helpful. But whether more devolved government will help Boston, Margate or Merthyr Tydfil enough is doubtless open to scepticism. The centralised political culture runs deep in Britain.

And a fourth issue is human fulfilment. We have reached the point in our economic evolution when economists need to consider this explicitly, rather than simply trying to give people more money to spend. This fits in with worker empowerment, but there needs to be more. The paper's advocacy of lifelong education and individual learning accounts is helpful here. But I want to see the greater availability of counselling for people between jobs, or unsatisfied with their jobs, as a part of this. Simply giving people spending power is not enough, and can be dehumanising - one of the reasons that I am suspicious of universal basic income, a very fashionable idea on the left that the Lib Dems are sensibly steering clear of.

So, overall, this policy paper fits well enough with the economic agenda that I support. But standing back it leads me to a striking thought. There is a growing overlap between current liberal thinking and new socialist thinking (which isn't just a throwback to the 1970s as its opponents claim), and a step away from the neoliberal thinking that still dominates the centre-right. Perhaps there will be enough common ground for a future coalition, once Labour sees beyond its internal struggles and overcomes its more extreme tribalism. Alas that day is some way off. But a coalition with Conservatives once the Brexit hoo ha has settled looks even less wise than it was in 2010.

 

The new economics: 5 new issues should we be worrying about

Last week I identified five issues we don't need to worry so much about in modern economics. Symmetry demands that I balance this with five issues that we should be worrying about more.

That's much harder because there are a lot more than five things that are very important. So I need to thin down the list. First I have excluded things that people are already very preoccupied with, such as inequality and poverty. They may be important, but I want to show how thinking needs to change. Besides I suspect that the solutions to many such issues will be indirect rather than arising from pulling them apart directly. I thought hard about whether to include environmental sustainability, or greenhouse gas emissions in particular, as this would be a really good place to start modern economic policy. But that isn't new, and many economists are already wrestling with it. What I can say is that moving away from a focus on increasing production and consumption is part of making this problem easier to solve.

And I have also exclude issues too nebulous to approach systematically. This includes the topic of human wellbeing. We absolutely need to be thinking about wellbeing, and break out of the thinking that we can use measures of income or expenditure as a proxy. But trying to construct alternative measures and focusing on them instead is the wrong way to deal with this.

Anyway here's my five:

1. Private debt

This isn't exactly a new issue, though economists have often struggled to know what to do with debt. I remember in pre-crash days (and even afterwards) people suggesting that macro-economists could ignore debt levels since all debt cancelled out - one person's debt is another's asset.  In fact debt was always at the heart of monetary policy, which has been at the heart of macroeconomic management since the 1980s.

This was when the idea of regulating aggregate demand (and the business cycle) through public fiscal policy and public debt, often referred to as "Keynesianism", went out of fashion. Instead, the theory went, you could do something similar by manipulating interest rates. A lower interest rate would encourage people to bring forward investment plans and raise demand when the economy was running slack. Likewise, if inflation looked like an issue raising the rate could rein in demand. Although this clearly meant using private debt to regulate aggregate demand, economists were very shy about saying so. They kept on talking about the money supply instead, clinging to a picture of people using banknotes to settle all their transactions, whose supply was regulated by printing presses.

It was not until the crash of 2008-2009 that serious doubts were raised about this in the economic mainstream. In fact interest rates are a very imperfect way of managing aggregate demand, and high levels of private debt create financial instability. The crash itself was more complex than that - a lot of the problem was financial institutions lending to each other to generate fees and bonuses. Low interest rates were only part of toxic mix. But most mainstream economists still seem to think that private debt is a good way to regulate demand, provided banks are sufficiently regulated.

An alternative view of debt, put forward by heterodox economists such as David Graeber (if I can call an anthropologist that), is that it is the root of all evil - an instrument whose sole purpose is to dehumanise and enslave. This idea is not without merit, but a modern economy has come to rely on debt to carry out three things in particular which are more constructive. The first is to allow businesses to invest in capital projects which in turn make the economy more productive. A second, sometimes overlooked, is to provide working capital as a lubricant that keeps the wheels of a complex economy in motion; most business to business transactions are on credit. And thirdly it allows private individuals to buy assets by spreading payment over their useful life. Debt also helps private individuals deal with temporary cash flow problems, though this can lead to serious social problems with loan sharks, and I don't think this role is an important part of a functioning economy.

But, in the developed world at least, debt is mostly used for other things than these three, and in particular it is used to support speculation, and to generate income for middle men (aka "financial engineering"). Lending to private individuals to support property purchases spills into this economically useless territory. Some suggest that easy money is creating more demand for residential property more than society really needs.

In short, private debt has a useful role to play in the economy, but at current levels it is a source of financial instability and tends to exacerbate inequality. Policymakers need to start distinguishing between useful and dangerous debt, and clamp down on the latter. Alas they show little interest in doing so.

2. Low pay

One of the features of  modern economies is the spread of low paid or insecure jobs. Economists have traditionally been pretty relaxed about this. They assume that it is a temporary problem that will rectify itself quickly, and it must be the fault of a poorly functioning labour market. But it seems to be a big problem is in the less regulated labour markets (such as the USA and Britain); the more regulated markets tend to have high unemployment instead. It is one of the driving forces behind the suspicion of immigration, and the feeling by working class people of being let down by the elite. Technological change seems to be making this worse.

But the traditional economists are right up to a point. Solving the problem is not about throwing away market economics, such as creating lots of high paid but useless jobs in the public sector, or arbitrarily high minimum wages. These would create more problems that they solve. Neither am I convinced by the fashionable idea of topping up low-paid workers income with a universal basic income. The point is to find ways of giving ordinary workers more power. Such power comes from one thing: a shortage of workers compared to the opportunities available.

The public sector surely has a role in this. An expanded public sector with meaningful and skilled jobs (teachers, nurses,social workers) may well be part of it, but the public sector does need a bit of rethinking before we can turn it into an instrument of economic engineering. I am intrigued by ideas of job guarantees to take surplus workers out of the market - though I can see many ways this could go wrong. Should lifelong liberals accept that managing immigration flows is a part of it? Maybe, but allowing workers opportunities to work in other countries may be part of the solution too. The truth is I'm pretty short of answers, but the point is that we need to be looking at ways of tilting the job market in favour of the disadvantaged, without creating either mass unemployment or pointless jobs.

3. Economic clustering

Economists have long noticed that successful businesses tend to cluster together geographically, creating a pattern of a small number of prosperous islands amid a general sea of poverty and disappointment. In Britain this is a very serious problem, and we are not alone. Various attempts have been made to address this, including regional subsidies, pushing public service institutions out to struggling regions, creating deregulated freeports, and so on. They almost always disappoint. The extra money pumped into the poor regions flows straight back to the rich ones. Meanwhile the poorer areas become hotbeds of disillusion and discontent.

Economists don't seem to be very interested in solving this problem, to judge by the articles I read in The Economist. These largely take the line that clustering improves productivity and should be encouraged. We should concrete over the green spaces in prosperous areas areas, and build more homes there - while bulldozing the empty homes elsewhere.

But what I can't help noticing is that the problem is worse in some places than in others. France and Britain, for example, but not nearly so much in Germany, extending into Austria and Switzerland, or in Scandinavia. The big difference between these healthier regions and neighbouring Britain and France is political structures, both now and historically. Greater Germany, if I may call it that, and Scandinavia, have much more decentralised political structures, going back through history. Centres of political power attract economic clusters. We need to understand that better. By reorganising our politics we may alleviate the problem. And maybe technology will one day start to undermine the current successful clusters.

4. Intellectual property

In the new economy intellectual property, such as copyrights, patents and so forth are becoming much more important. Unfortunately, the idea that such property rights over ideas is a something innate and sacred is being accepted lazily by politicians, quietly egged on by business vested interests who like to pretend they are fighting for impoverished artists and inventors. This needs some serious pushback, because intellectual property rights are being used by the rich and powerful to oppress the rest of us. It is also used by multinational businesses to manipulate profits into low tax jurisdictions.

Intellectual property rights do have a socially useful purpose - to help reward and stimulate creativity.  But they should only be as strong as necessary. I'm intrigued by the idea that intellectual property costs should not be tax-deductible (I think similarly for loan interest...). Doubtless this is too extreme to work, but there may be intermediate ideas better prospects. And what about making intellectual property non-transferable? That would stop patent trolls, an activity that no social merit at all.

4. Effective public services

This sounds obvious, but I am really struck by how few economists understand how different public services are from private ones, and how they must often be managed in a completely different way. It is no wonder that they are so badly managed. On the one hand public services have been managed without any incentives to be efficient, and becoming useless, conservative bureaucracies who have lost touch with their purpose. This is why so many of us with memories of the 1970s and 1980s are so suspicious of calls on the left to re-nationalise railways and energy services. On the other hand, if you run public services like private businesses they lose touch with their purpose in a different way. They try to avoid or pass on the difficult cases, or try to turn them into lucrative repeat business instead of solving problems; they hollow out key performance indicators so they become a meaningless game; they soon learn to manage their political masters rather than their customers.

But highly effective public service can be done (London's primary schools for example, though the current government is trying its best to undermine and destroy their achievements). Ultimately we need to understand that public services are about solving complex problems using skilled professionals that engage with their users as human beings. Creating institutions that can do that, and identifying the more from the less effective ones, is something that should be engaging economists and policymakers much more.

Conclusion

I have gone on enough. But I hope I have shown why I think that fresh thinking is needed as our society moves through its next phase of economic development.

The new economics: five things to worry less about

Featured on Liberal Democrat Voice

Reading Adair Turner's lecture on the implications of robotics on the economy has been an inspiration. Following my blog last week, I want to develop the thinking to try and get a better focus for liberal policymakers.

The first point to make is that although the current kerfuffle is around the advance of machine learning and artificial intelligence, this only builds on trends that became important in the 1970s. This was when the previous spurt of growth, based on a huge expansion of consumer goods and services, was coming to an end, in the developed world at least. This I have called the the Age of Light Industry. It featured a virtuous circle of increasing consumption and the creation of middle-ranking blue and white collar jobs. Economists lazily assumed that this was the natural flow of technological progress. It broke down partly because consumption started to reach saturation (few people need two fridges), and partly because technological development became more about making businesses efficient than developing new products for consumers.

And we should not assume that advancing technology automatically makes things better for the majority. Lord Turner drew on the example of the first industrial revolution (the Age of Textiles in my schema), when technological improvements drove up productivity in agriculture and the textiles industry, destroying a lot of artisanal jobs. These jobs were replaced by lower paid and less skilled jobs, such as low-skill factory hands, or domestic servants for the newly enriched farmers and factory owners. The result was widespread destitution. Lord Turner shows sympathy for the Luddites, who are these days usually vilified, who tried to fight this trend. This was in the later 18th to earlier 19th century, and it wasn't until the later part of the 19th century that things started to get better for the working classes. This was in part because demand for factory jobs rose with the development of heavy industries (railways, mines, steel, ships, armaments, and so on). But it also arose because of political reforms, and an adjustment by political leaders about how economics had changed: for example the realisation that social security for the masses was affordable.

We need these things now: political reform, and a waking up to the new realities of economics. One way to make this point is to consider the things, central to mainstream economic policy making, that we don't need to worry so much about. Here are 5.

1. Average productivity

I don't need to say much more on this after my post on Lord Turner's lecture. Improving productivity matters for individual businesses and public agencies. But we can't expect statistics on the economy as a whole to tell us anything very useful, because new jobs are beiong created in low productivity services (think personal care) or in arms races that don't add anything overall (cyber crime; designer goods; ever bigger yachts; hi-tech weaponry).  Unfortunately this means that growth rates in the money economy are liable to be slow, which poses questions for how to fund public services and social safety nets.

2. The national debt

Two features of the new economy should change the way we think about public debt. First is that businesses generally need less capital, as more value comes from intellectual property than capital equipment. You can see this by looking at the modern giant firms: Google, Apple, Facebook and so on - and compare them with the old ones - GE, IBM, General Motors, etc. That reduces the need for business capital. Also the new economy is concentrating surplus wealth amongst a minority, who will inevitably want to save and invest much of their earnings. So the savings go up and investment opportunities go down. As Maynard Keynes would have told you, this is a recipe for recession. But government debt can fill the gap. Instead of putting their money into businesses, or fuelling property bubbles, the rich can buy government bonds instead. And while the need for business investment falls, the same can't be said for public investment - there is still plenty of call for that (schools, railways, and so on). Developed world governments are finding it comparatively easy to sustain a much higher level of debt than they previously did. Japan has led the way, as with so many aspects of the new economy. National debt there is now over 200% of GDP, when the conventional wisdom quite recently was that 90% was a practical limit. And the budget deficit is 4.7%, compared to a growth rate of 1.1%, so it's still going the wrong way, with barely a murmur from anybody.

Of course this leads to an important question, to which there remains no clear answer. When is there too much national debt? And how big a budget deficit is sustainable? Roughly speaking, when a country has to borrow in a currency other than its own, it is likely to hit trouble. Japan still doesn't; it helps that it does not need much foreign currency because it runs a current account surplus. Britain does not have that luxury, but the government still has no need to borrow in foreign currency.

This is important because governments can expand their own currency supply (unless they are in the Eurozone, another story), which gives them a useful lever in managing their debt. Clearly there are limits to how much it is wise to use this power - but those limits are not as severe as people thought..

And it makes little sense to drive down levels of government debt, which some conservative politicians like to do, or did before the era of Trump. There is much kerfuffle about it being irresponsible to let future generations pay for our current profligacy - but future generations will have access to highly productive technologies.

3. The dependency ratio (aka the demographic time bomb)

There is much worry that a higher proportion of older workers and retirees will drag down a future economy. Some suggest steps to increase the birth rate to counter this; it is also offered as a reason to allow high levels of immigration. But, as Lord Turner points out, if the new technology is destroying good jobs and creating poor ones, there is something to be said for fewer workers and a higher dependency ratio. Besides, it is not hard for people to retire later if that's what the economy needs.

4. Global trade

Even before Donald Trump decided to inflict his ideas about international trade on the world, the volume of world trade was in decline. People fret about this because expanding global trade was an important source of economic growth in the 1990s and early 2000s. But things have changed. As China's economy matures, it has less need to produce cheap exports. This is not particularly good news for developed economies, who are having to replace those cheap imports with something a bit more costly, but that is a temporary problem.

Longer term, increased automation will reduce the relative value and volume of traded goods. Traded goods are among the first things to be subject to automation. And as production gets more efficient, their value as a proportion of the total economy declines (this is the Baumol effect, a favourite of mine). So trade will be less important.

Technology develop will also reduce the need to trade in the first place. It will become easier to produce things closer to home, since cheap labour will be much less of a factor, and intellectual property is more mobile than a skilled workforce. I also have a hunch that much new technology will reduce economies of scale, making one-offs cheaper (think about 3-D printing), which undermines a nother reason for trade.

Mr Trump's trade wars are still an act of self-harm. But, a bit like his reckless approach to the US national debt, he has the forces of history on his side - a big difference between now and the 1920s.

5.Inflation

Since the 1970s economists have been obsessed with inflation. The idea was that if demand across an economy outstripped sustainable supply, inflation would result - so it was a critical indicator that things were in balance. This developed into the idea of an ideal Goldilocks rate, not too high and no too low, as a central ingredient of sound economic management. It became the key, sometimes only, target for central banks' monetary policy.

In fact the forces that determine prices and inflation are more complex than this, and new developments are taking it further from this idea. There are other ways for excess demand to play out, such as property bubbles and other forms of financial instability. One explanation for the financial crash of 2007/2008 was that excess demand, especially in both the US and the UK, had been allowed to develop, taking the world financial system to breaking point. With theirs eyes fixed on a stable inflation rate, most economists failed to see the crisis developing.

This is important, because if I am right about point 1 on national debt, there will be a temptation for governments to stoke up aggregate demand. They might think that this is perfectly sustainable if inflation remains low - but something else is likely to go wrong instead. Meanwhile an obsession with central bank inflation targets is wasted energy. Interestingly enough, the best example of this is again Japan. There the issue is that inflation is below target. But no matter what policymakers do, the effect on the rate of inflation is minimal.

Conclusion

So productivity, national debt (and budget deficits), the dependency ratio, global trade volumes and inflation don't matter as they used to. That's quite a change. What what should we be worrying about instead? I will return to that.

Adair Turner: the advance of robotics changes economics

Expounding my views on economics can be a lonely business. Though they are based on nothing more than conventional economic theory, few commentators even acknowledge the line of thought. Not long ago the FT columnist Martin Wolf wrote an article on a favourite topic of mine, the productivity "puzzle", which went through a series of potential explanations without mentioning the Baumol effect at all. I pointed this out in the comments, but this was doubtless futile. Then the cavalry came. Adair Turner gave a lecture in Washington DC last April, which only recently seems to have been published, and which picked up many of the themes that I have been banging on about, not least about productivity and Baumol. This time Mr Wolf had to take notice, and he published a column on it without venturing to disagree. Perhaps the view will start to break out into the mainstream.

The lecture was entitled Capitalism in the age of robots: work, income and wealth in the 21st Century. It goes much further than I have, explains the logic more rigorously, and follows through more thoroughly on important implications. Though I have long known that Mr Turner has being saying similar things, I feel vindicated.

He starts with the possibility that robotics could replace pretty much all of what we now consider to be work, and asks what the implications of this are. This is a clever angle, since the rapid advance of robotics and artificial intelligence, following the development of machine learning, is giving a lot of people pause. In reality the phenomena he describes first become important more than 40 years ago, when such ideas on robotics were just science fiction (notably Arthur C Clarke's 2001: a Space Odyssey).  This was when what I have called the Age of Light Industry started to run out of steam, even as it has continued to dominate the way people thought about economics. It's worth describing the five sections of the lecture.

When, not if

In this Mr Turner makes the case that the complete automation of work is really just a matter of time. This is a popular view amongst techie types, though I am sceptical. The advance of intelligent machines runs in spurts of incredible speed, between periods of very little progress. In 2001 Clarke expected what is sometimes called "general AI" to be developed by, well, 2001. It remains a distant dream. The trouble is that developers persist in thinking that the human brain is analogous to a computer, programmed by an intelligent mind. That's a bit ironic, since they are mostly ardent atheists, but they haven't grasped the difference between evolution and design. The advance of machine learning only came when that understanding was modified; but machine learning has limits. It may take a long time before technologists make the next breakthrough.

But any disagreement I have with Mr Turner is of little importance because I with him agree about three things. Firstly that robotics will transform the world of work in the next generation and more. Secondly that it will affect some areas of work more, or more quickly, than others. And thirdly even if robots are able to do things, we may not want them to.

Explaining the Solow paradox

The Solow paradox arises from the great economist Robert Solow's comment that "you can see the computer age everywhere but the productivity statistics". That was in 1987, but it's even truer now - it is the productivity puzzle. Why is it that, with the pace technology development as fast as ever, increases in average productivity are slowing down? Mr Turner points to three things.

The first is my old friend the Baumol effect, from a paper by William Baumol in 1967. Workers released from areas of high productivity tend to move into jobs with lower productivity, or a lower rate of productivity improvement, which will neutralise the effect of the original productivity advance on average statistics. So if a farmer doubles productivity, he might sack half his farm workers and employ domestic servants instead. This is a well-trodden trail for readers of this blog, but Mr Turner explains it in more detail than I have ever attempted. It is clearly true in the area of robotics which of itself it creates few jobs.

The second thing is something that I have only hinted at, and which I find interesting. As we get wealthier, we spend more on "zero-sum" activities - activities that may advance individual interests, but not society overall. Cyber crime and the security industry that counters it is an example. The search for status goods, such as high fashion is another. These activities drive arms races between rival players, including the literal arms race of deadly weapons. Not mentioned by Mr Turner you could add extracting and burning fossil fuels to the list.

The expansion of zero-sum activities creates a couple of problems. First is how do you measure measure productivity of something where the output is often negative? The answer, for statisticians, comes from the monetary income generated - which is circular: you can't tell the difference between inflation and productivity. A second problem is that it means measured economic income, such as GDP, becomes increasingly detached from human wellbeing. What is the point of getting a higher monetary income if it simply disappears in higher property costs (land is a classic zero-sum game), security and badges of status? This is not far from the point I have made that the most dynamic bits of the British economy before the financial crash were in finance and professional services, which are (mainly) classic zero-sum activities. Discounting this and you find that "real" growth was lacklustre long before austerity kicked in.

The third reason for the Solow paradox is that a lot of the benefit to new technology is non-monetary, and doesn't reach the economic statistics. We are living longer, for example. This is an argument often used by people on the right to suggest that things are much better than they look, and that we should not worry about stagnant or reducing incomes among the majority. This is not a debate that I have ever got into. Mr Turner acknowledges its validity, but not the conclusion that those on the right draw from it.

Meaningless measures in the hi-tech hi-touch economy

This is an attack on standard economic measures, notably GDP and productivity. Economists have always acknowledged the weaknesses of GDP as a general measure of whether an economy is delivering what people need - but those weaknesses are growing to the point of absurdity. Well, not quite. GDP (and especially the nominal measure which doesn't try to adjust for inflation) is a useful measure for the management of money in the economy. But we cannot assume that if GDP per head is growing that so are people's wellbeing. Likewise wellbeing may advance while GDP is stagnant.

This is an old idea. Mr Turner develops it by following through the thought experiment of what happens when most work is automated. Measured economic activity then most arises from what economists call "rents" - returns on asset such as land and intellectual property.

Developed economies: average is over

Where this is leading is to an increased gap between a lucky minority of people who are well off, and a growing body of people stuck on very low incomes. The middle ground is disappearing. Notwithstanding some on the right who shrug this off, this is a major problem. And mostly we are looking for solutions in the wrong places.

The problem will not be solved by educating everybody to a high standard so that they all have the skills to programme robots, though improving education is surely a good idea anyway. Inequality does not have its root in a skills gap, but in the nature of work. Education will simply turn into another arms race for the small number of well-paid jobs. Neither is a focus on improving productivity going to help. This simply replaces middle income jobs with lower paid ones. Meanwhile we worry about things, like the increasing proportion of elderly people, that probably won't be such a problem after all.

But in developed countries, and many middle income ones, like China, the problem should be soluble. The economy will have the capacity to produce a good standard of living for everybody. Mr Turner suggests a number of policy responses:

  • Income support such as universal basic income. He sees the logic but is sceptical.
  • Offsetting the concentration of income, wealth and rents. Assets and higher incomes need to be taxed more. Intellectual property rights need to moderated, rather than strengthened, as now.
  • High quality urban development. To enhance areas that would otherwise be left behind.
  • Adequate wages and status for caring services. This will require some form of political intervention.
  • Celebrating craft skills.
  • Increased leisure.
  • Education for life and citizenship - breaking free from the idea of education for productivity.

Developing economies - the old ladder destroyed

The prospect for low-income countries, especially in sub-Saharan Africa, does not look good, though. The development ladder used by Asian economies from Japan to China to join the ranks of the better off, is being knocked away. There will be no demand for cheap manufactured exports, as richer countries will do more for themselves. This is a serious global problem which will require a change in development thinking. It will be important to slow population growth.

Implications for economic theory

Mr Turner concludes by pointing out that all this makes much conventional economic theory obsolete. It is too focused on maximising income to improve wellbeing. It is based on a series of idealised assumptions, such as the non-existence of zero-sum activities, whose usefulness is vanishing. Higher levels of income do not necessarily mean that wellbeing is improving.

This is easily said, but few have taken on the implications. In Britain Conservatives still talk of the virtues of an open market economy to produce a better standard of living for all. Meanwhile Labour focuses on capital investment and productivity. This is yesterday's economics.

But more people are calling for a rethink. What Adair Turner does so well is to use conventional economic logic to show why conventional economics doesn't work any more, and that we need fresh approaches. That's what this blogger is trying to do in his own, much smaller way.

 

Economics is at the heart of the left’s weakness

In my last post I said that the lack of a convincing economic vision was at the heart of the British Labour Party's difficulties, and a problem for the left generally. It is worth unpacking that a bit and sketching the direction that any new thinking should take.

The central political problem for the left is the disaffection of so many working class and lower middle class voters, particularly ethnically native people. They are becoming increasingly voting for right wing populist parties and causes. This was a dominant factor in the vote for Brexit in Britain, and the rise of Donald Trump in the US and Marine Le Pen in France, to name just a few examples. These voters had been part of a left wing coalition, but leftist parties moved up market to attract liberal middle class voters, especially those employed by the public sector, and also pitched for ethnic minorities.

Meanwhile problems for the traditional working classes go beyond political neglect. They are overwhelming the losers from the advances in technology and globalisation which have destroyed the relatively stable and well-paid jobs on which they used to depend. Whole swathes of Britain are stuck in a post-industrial doldrums, especially in smaller towns in England and Wales. The left needs to win back these voters if it is to challenge the populists and the centre right. They have little clue as to how to do this, and distract themselves with other issues. Labour indulges in internecine strife. The Lib Dems are concentrating on rebuilding their core vote - i.e. focusing on the middle class vote.

But the cluelessness of the left in Britain struck me most forcibly from a comment made by the Green MP Caroline Lucas. She blamed the Brexit vote on austerity - government cutbacks since 2010 following the financial crisis. And yet the bulk of the disaffected voters were never very dependent on government jobs and handouts, and are often quite supportive of austerity policies, as they felt they hit the undeserving - immigrants and layabouts -  rather then themselves. Indeed, they benefited probably more than most from government generosity on raising tax allowances. It's not austerity, it is the lack of decent jobs that is the problem. And government handouts are not the answer because these foster dependency and undermine people's sense of self-worth.

The left starts with a cultural problem. They are by and large liberal, inclusive and cosmopolitan in outlook. This helps in coalition building generally, and especially in outreach to ethnic minorities, but it creates immediate distrust from native working classes. In order to overcome this the left needs to offer hard benefits - and that involves two things. Good quality jobs and decent public services. The left loves good public services too, of course - they provide lots of employment opportunities for their core supporters - though they are less certain how to pay for them as an aging population pushes up demand. But on jobs they have almost nothing to say.

Such talk as there is concerns macroeconomics. The left favours stimulating demand through generous fiscal policy to create jobs in the economy as a whole. Jeremy Corbyn, the Labour leader, talks of investing in infrastructure. This may be a good idea in itself, but by and large these policies create the wrong jobs in the wrong places. New housing, for example, needs to be built in the prosperous south east, where the shortage is greatest, and firms often have to import the workers from abroad because local ones lack the skills. Some infrastructure projects should help the economies of the more run-down regions, it is true, but these need to be part of a more coherent strategy of regeneration. Meanwhile the centre-right has cottoned on the ideas of infrastructure and regional redevelopment as well.

What to do? The first thing is accept that the problems of the disaffected working classes are more than a little local difficulty with conventional economic policy. It is an aspect of a broader crisis brought about by globalisation and technology change, and a blind spot in conventional economic thinking, with its emphasis on aggregated statistics like GDP, and one dimensional concepts of efficiency and productivity. It needs fresh thinking of a type that will be heavily criticised by the conventional public policy establishment. As fellow blogger David Boyle has pointed out, this is not necessarily a problem with economists, but with public servants tied to the old conventional wisdom.

The problem is that conventional policies are tied to highly centralised political structures and tend to concentrate the benefits of economic growth at the centres of power, while hollowing out the rest. While promising efficiency, it is in fact wasteful because it leaves so much human capital under-used. So political decentralisation is a large part of the solution. This is very hard for Britons to grasp, since we have been centralising since William the Conqueror in 1066. But countries with a more distributed history of political power, like Germany, Scandinavia and Switzerland, perform much better while having very similar cultural conditions.

But if political decentralisation is part of the answer, it is incomplete. The USA is politically highly decentralised and yet suffers similar problems of alienation. There localised political units have not been able to challenge the power of big corporate interests, who collect large monopoly profits and suck them out of the local economies in the name of economic efficiency. Wider national and international political structures need to keep these corporations in check, and yet too often they are captured by them. This is an unresolved battle in the European Union, incidentally, and the best reason to be sceptical of the EU project - though the EU also does much to counter global corporate power.

Meanwhile we need to stack the economic odds in favour of local entrepreneurship and innovation, and celebrate localised, human and integrated services that tailor service solutions to individuals. Much more public money needs to be channelled into rebuilding skills in de-industrialised regions - something Britain is woefully bad at by international standards (consider this interesting article in the Economist).

Some on the left are starting to get this. American Democrats are waking up to the evils of large corporate oligopolies. British Lib Dems are sympathetic to the decentralisation agenda. A number of Labour city leaders also grasp it. But it is complex and difficult area. It needs both grand visions to change mindsets and capture the imagination, and small, practical steps that will achieve the goals in an evolutionary way that convinces sceptics.

I will try to use this blog to help develop the new economic thinking in my very small way.