Will the Dark Forces save the Tories and crush Ukip?

My advice to Ukip is to savour this moment. After being repeatedly being dismissed and written off, their performance in last week’s local elections was the story of the day. They took over a quarter of the vote where they had candidates, and that was in many more seats than before. They won well over 100 council seats. The commentariat are reeling, and were talking about little else over the weekend. As the dust settles somewhat, what are we to make of it?

The obvious comparison is with the Lib Dems and their predecessor parties in their two separate golden runs, in the 1980s with the rise of the SDP, and in the 1990s after the merged parties recovered from their near death experience. Those were golden moments for their supporters. But by and large they presaged disappointment in the subsequent general elections (though not in 1997). Many predict the same fate for Ukip. But their influence on British politics could be profound.

They are, of course, a very different party from the Lib Dems and their predecessors. The latter always had one foot in the political establishment, however much they were outsiders to government itself. Ukip are complete outiders; while they pick up the odd defector from the Conservative party, they are not high flyers – like Roy Jenkins or Shirley Williams were. Ukip are from the political right, and rebel against Politically Correct notions, where the Lib Dems were liberal and, if anything, more PC than the others. But both parties have a set of clear core values which can bind activists to the cause, and both have proved able to pick up a mid-term protest vote. Many voters feel badly served by established politicians, and want to kick them by voting for somebody else, when not much is at stake.

But the Lib Dems have been able to do more than this. They have built a big wedge of MPs and a solid presence in local government, which in turn has led them into coalition government at national level. Could Ukip do the same? We should put aside two common criticisms of the party. First is that it is a “one-trip pony”, obsessed with Britain’s membership of the European Union, an issue which doesn’t really engage the British electorate. The party has successfully branched out into capitalising on anti-immigrant feeling however, giving it a much broader policy appeal. Attacking immigration policies is a wonderful political tactic for opposition parties; the government can’t do that much in practice about it, and to the extent that they can, nasty consequences would flow. And they can add a few other goodies of more local appeal, like attacking wind farms. The second criticism is that they are too dependent on their leader, Nigel Farage, who is a bit of a media star. There may be some truth to this, but we must remember that it is of the nature of minor political parties that the media concentrate on just the personality of the leader. It was a common criticism of the Lib Dems that they were too dependent on whoever their leader was at the time. In fact strength and depth was being built from beneath. This could easily prove to be the case for Ukip too.

Ukip still has two deeper problems. First are its libertarian and socially conservative policy ideas. Worries about immigration and the EU can rally a broad spectrum of voters, but when you start wanting to dismantle the welfare state and cut taxes for the rich, you are backed into a minority. The second is linked, and it is that both their activists and voters are predominantly drawn from older people. Can such people put together hard hitting and disciplined ground war machines in the way the Lib Dems achieved?

And this leads to their main significance to British politics (this applies almost exclusively to England – but the implications apply to the whole country). To the extent that Ukip are able to capitalise on their current success, it will be at the expense of the Conservative Party’s core vote. Ukip are currently drawing voters from all over the place, but when it comes to activists and committed voters, this will surely mainly come from the Tories. Labour politicians fantasize that they will split the Tory vote, and let Labour into a majority, much as the SDP split the Labour vote and kept Mrs Thatcher in power for so long. Some Tories are suggesting some kind of electoral pact with Ukip to stop this from happening.

Behind all this I see the murky presence of what I call the “Dark Forces”. These are a collection of newspaper proprietors (Murdoch, the Barclays, Dacre and Desmond) and big party donors, who have a political agenda not dissimilar from Ukip’s. So far they have found Ukip a useful stick with which to beat the Conservatives. If Ukip do well, then it proves to them that their policies are vote-winners. But the one thing that unites the Dark Forces more than promoting their conservative-libertarian agenda is their hatred of Labour. If Ukip are posing a serious threat to the Tory majority in parliament that they crave, then they will turn on them.

There is plenty of time for this. The more the Conservatives are running scared, the more they will curry favour with the Dark Forces. There are signs of this already, with the Tories softening their stand on press reform. Ukip will be allowed a clear run up to next year’s local and European Parliament elections, where in the latter case they stand a good chance of being the top party. Then the worm will turn. The press will start stoking up fears about Labour’s plans to raise taxes (the truth never did stop the British press – Labour’s softer stand on austerity policies will give this line all the credibility it needs), and building up the Tories as the only people that can stop them. Will it work? It might. The press remains extremely powerful in the British media (the BBC seems completely cowed by them these days); I can’t see any obvious signs that the Labour leadership understands the danger.

The British political soap opera edges towards a gripping climax in 2015.

How is Labour’s economic stimulus meant to work?

ON Monday at lunchtime Labour’s leader Ed Miliband was subjected to a fierce interview by Martha Kearney on the BBC Radio 4’s World at One. The main subject of contention was Labour’s economic policy, and in particular whether the party’s plan for a temporary cut in Value Added Tax would increase government borrowing. Mr Miliband did not want to say this, only that, because it would stimulate growth, it would help bring down government debt in the medium term. This was not an assured performance by Mr Miliband, but beyond that it seemed to me, perhaps unfairly, that he only had a superficial grasp of the economics involved. If so, he shares this superficial understanding with many members of his party, who lap up quotes from economic commentators such as Paul Krugman, and marry it to half-digested economic theory. So how is it meant to work? How can a temporary tax cut reduce government debt?

Let’s start with the Keynesian multiplier, which is widely taught in basic economics, and which I suspect comes to mind to most people here. You really have to do a bit of maths to understand the implications. Suppose you have an economy with a national income of £100bn a year, and an average tax take of 40%. You decide on a 1% stimulus with a temporary tax cut of £1bn. As people receive the extra money, 40% of it goes in tax, and they spend, say 80% of the rest on domestic goods and services (it doesn’t work if people use it to pay off debt or spend it on a foreign made car…). This adds £480m to the economy with extra expenditure straightaway. And this process continues in a virtual but diminishing circle, as that £480m is taxed, spent and so on.  If everything turns out to be mathematically consistent the stimulus adds over £900m to the economy. You have nearly 1% growth! This has cost the taxpayer (added to national debt) of £1bn in the first instance, but a lot of this has come back in extra taxes from the growth.

This is what people half remember when economic experts like Mr Krugman say that stimulus can reduce debt. But there are two problems. First of all, although on my fairly realistic assumptions most of the cost is clawed back, about a quarter of it isn’t. Keynesian stimulus cannot pay for itself at this simple, basic level unless people increase their spending by more than the stimulus itself. And secondly, it is a one-time event, so that you get 1% growth for one year, and then it stops, unless you repeat the giveaway. This tax cut is temporary. When you put taxes back up again, the whole process goes into reverse and the economy shrinks back to where it started. Something very like this happened to the last Labour government’s temporary cut in VAT: a small bounce that was undone when the cut had to be reversed, which, of course, they then blamed on the Coalition.

All this is well known to the Paul Krugmans of this world though, otherwise they wouldn’t be writing economics textbooks and winning Nobel laureates. When they advocate stimulus they are actually talking about something else: the effect of such a stimulus on the national zeitgeist. That 1% lift may make people and businesses happier. Businesses go out and invest more money; people save less, perhaps thinking that their share and property values will go up, and consume more. If this happens then all bets are off; the economy grows further, the government gets more taxes and the stimulus can pay for itself quite quickly and easily. Investment is particularly important; Maynard Keynes’s critical insight was that recessions happen when investments don’t match the amounts people save.

What to say about this? There are two potential snags and an irony. The first snag is that  the zeitgeist is a hard thing to manage. The whole thing can be undone by another crisis from the Eurozone, for example, which might reduce prospects for exports and dent confidence generally; or there could be some other crisis. The second snag is that this model of short-term growth assumes that there is spare capacity in the economy. When people and businesses go out and spend, domestic companies can readily ramp up production, employ new people and so forth. This is usually the case in a recession. But not always. In the 1970s, after the price of oil skyrocketed, the economy had to be restructured in order to grow – which was particularly hard because of the trade unions. Attempts to stimulate the economy simply led to high inflation while doing nothing for unemployment. Today, more flexible and globalised markets seem to have reduced the inflation threat – but stimulus can still be dissipated on imports and asset prices. What of the British economy now? Many commentators think that the British economy should be “rebalanced”, reducing its dependence on financial services and North Sea oil, as well as excessive private consumption fuelled by debt and property prices.

These potential snags to stimulus are why many critics of the government, such as the FT’s Martin Wolf, and many Liberal Democrats, such as the Social Liberal Forum, say that any stimulus should take the form of added public expenditure on investment, in infrastructure and homes. Since these have an inherent value, and help expand the economy’s capacity, there should be much less risk. This is a sensible idea in theory that is a lot less easy in practice. The public sector has a tendency to invest in wasteful projects for political rather than economic reasons.

This is where Labour’s plans are quite distinctive. They talk about temporary tax cuts, and hint at increased current expenditure. This is founded on a belief that there was not much of a problem with the pre-crisis economy, or unsustainable about the growth rates achieved in the years leading up to it. The crisis was simply a problem with the global financial system, and the country’s poor performance since is down to incompetent economic management from the Coalition. This is pretty much what Tony Blair said in his recent piece for the New Statesman. If you believe this then capacity is not at issue, and the zietgeist should be readily easy to fix.

And the irony? Left wing economic commentators like to laugh at the “Voodoo economics” of Laffer curves and self-funding tax cuts advocated by far-right commentators. Paul Krugman talks about their belief in the “confidence fairy”. But the left’s economic beliefs are no less dependent on their own confidence fairy.

Time to think of England

This week it was St George’s Day, a time when we in England reflect on what it is to be English – a few of us do anyway, especially when St George himself was so un-English. There was also a small flair in the ongoing campaigning over Scottish independence, when the British government poured cold water on the idea of a currency union between an independent Scotland and the what is left of the UK (which would no longer be a united kingdom…). As I have written before, it is a conceit that there is a Scottish problem for the UK. The issue with Scotland is just an aspect of the English problem. England so dominates the union that governance of England and governance of the UK get confused. We need to look at remaking the constitutional arrangements for the whole UK if Scotland, as expected, decides to stay in the union at their referendum next year. But how?

At this point it is all to easy to craft elegant new constitutional solutions to solve the problem. Alas, that is not how the British constitution works. We are deeply conservative. Any proposed change throws up a series of opponents, who are able to stoke up fear of change. The AV referendum in 2011 was a very painful experience for people who thought that sensible constitutional reform, or even sensible debate about reform, was an easy matter. So where does that get us?

First there must be a crisis. Most people must think that the current situation is intolerable. The crisis is presented by the Scots. Of course, if they vote to stay in the union, most English politicians will want to think that it is an end to matter, and we can go on as before. I don’t think many Scots think this, though. Even holding the referendum is a shocking event, showing that consent for the current British constitution is breaking down. Most think that if they lose the referendum, the Scottish National Party (SNP) will respond by pressing for “Devo-Max”, which will then look like a sensible middle way. Devo-Max implies a much greater level of devolution to the Scottish Parliament, leaving the UK responsible for just defence and foreign affairs in some readings, like Gibraltar, perhaps. Why, then should Scottish MPs have so much say in who governs England? This question is an irritant now, but it would become a much bigger deal. We need to head this problem off with a new constitutional settlement for the whole of the UK.

Second, messing with the sacred sovereignty of the House of Commons is to be avoided. To some people, including me, this is pompous twaddle. A parliament’s fitness for purpose is not derived from history, but from what it actually does. The people should be sovereign. But the sheer weight of traditions and interests that centre on the Commons is not to be trifled with. This body needs to rule all of the UK. Restricting its scope to England, for example, and having a new Federal Assembly is going to get nowhere.  And after the AV fiasco, changing the electoral system is off the agenda too.

And thirdly, there needs to be something for everybody in any new settlement. Each of the three main British political parties, and their backers should see at least some benefits, to weigh against inevitable threats. There will not be a consensus, but any new proposal must have broad support from a cross a wide spectrum.

And so to the English problem. In order to balance out devolution to Scotland (and to Wales and Northern Ireland) there must be an equivalent devolution to England. To many the sensible thing to do would be to establish English regional governments, of the same sort of size as Scotland, to give an overall shape resembling Spain or Germany. Elegant an idea as this may look, though, it has no legs. Local traditions in England have been so hollowed out over the centuries, unlike in Germany or Spain, that there is little in the way of tradition to build on. The English administrative regions, used for things like elections to the European Parliament are mostly named after points of the compass. London and Yorkshire, may be viable, but it ends there. Either identities are too diverse (the Celtic Cornwall compared to the Saxon Devon, for example) or else there is very little identity at all (where does Northampton belong to?). Constitutional change is hard: this is too hard.

Which leaves us with an English Assembly. I used to dismiss this as a nonsense, but it is growing on me. This should have equivalent power to the Scottish Parliament, whatever those are. That means an English First Minister and cabinet, control of education and the NHS, and, surely, over large chunks of tax. The bold, but necessary, step is to say that the capital of England should not be in London. Having it in the same city as the UK capital will make its identity and authority harder to establish, especially since London has its own mayor, making the  layer of government very crowded. Moving the UK Parliament and the paraphernalia of government out of London is too much as well. Besides there is a real grievance in much of England that too much of the establishment is based in London. Where? Geography points to Birmingham or Coventry; others may have better ideas. An old and grand but under-utilised Victorian classical building would be good to use as a base. Building a brand new building is asking for trouble. Like the Scottish Parliament and Welsh Assembly, it should be elected under proportional representation (PR).

So what would be left in London? The House of Commons would stay, but needs to be shrunk. It probably doesn’t need more than a couple of hundred MPs, but no doubt a compromise of 400 or so would have to be settled on. It is difficult to get turkeys to vote for Christmas. The House of Lords should be reformed too, though it is tempting to let it collapse under its own absurdity after last year’s reform fiasco. The UK cabinet would be shrunk. The Treasury, Foreign Office and Defence would stay much as is, as would much of the Department of Energy and Climate Change. But others would need to be shrunk down.

So how to sell it? To those in the north of England or Midlands, breaking the Whitehall stranglehold would be an advantage. Frankly this is a big attraction to me, even in London. Even under PR, the Conservatives would have a good stab at dominating the English government. Both they and Labour would benefit from PR giving them a political base in large swathes of the country where they are in danger of extinction – as PR has saved the Tories in Scotland and Wales. The Lib Dems would benefit from PR too, though they might lose out badly in the bigger and redrawn constituencies for the House of Commons. This losing out of the Lib Dems might be an attraction to both Labour and Conservatives, though – they might feel that they have a better shot at an overall majority for the UK if minor parties would struggle in the larger constituencies. Such are the sorts of calculations upon which British politics turn.

Food for thought, anyway. The next step, though, is to start talking up the idea of a UK Constitutional Convention if the Scots vote to stay in the union. The idea of an English assembly does have opinion poll support, though no doubt iti s very soft. But in small steps the idea can grow momentum.

The private war of the jihadi terrorists

Last week’s bombing of the Boston marathon received blanket coverage here in the UK. In a world where there is still plenty of death and destruction, it seemed to be particularly shocking. But the strangest aspect of the episode to me was that nobody claimed responsibility. We were left to speculate as to whether it was Islamic jihadis, right wing extremists or some tortured loner. What’s the point if nobody knows why you did it? It turns out that it was the jihadis: but this still leaves us with the question of what their cause is all about.

Describing the jihadist enterprise as a war, as in “war on terror”, is controversial on the part of the western states that seem to be the main targets. Be that as it may, the jihadists themselves see it as a war. “I am a soldier,” said one of the London terrorists of July 2005 in the video released to publicise his suicide attack. But it is a strange sort of war.

Following the 19th Century philosopher of war Carl von Clausewitz very loosely, we can see war in terms of three elements: purpose (the political, rational element), strategy (the way the two sides try to outwit each other, which resolves to a game of chance), and will (the primordial hatred and drive to violence). The will is evident, and there is quite a bit of strategy too, as the jihadis spend quite a bit of time plotting their acts, while the authorities try to catch them. The problem comes with the political purpose. What is all this designed to achieve?

It did seem a bit clearer in September 2001. The scale of the attacks on New York and Washington was breathtaking, and there seemed to be a strategic driving force, based in Afghanistan. The Western media focused on the personality of Osama Bin-Laden, though what his personal role was in all of this I find it difficult to say; he was a convenient focus for the attacked nations. But if not him, there were other strategists and leaders in a global enterprise. We could make out some kind of purpose. There was something about establishing a global caliphate, and pushing the Western countries towards enlightenment and the Islamic path. The terrorist attacks would so disrupt western civilisation, whose foundations they believed to be very weak, that its economy would collapse and they would then be forced to consider their ways. With talk of escalating the violence towards nuclear and biological weapons and “dirty bombs”, you could just about see this as being rational, if deluded.

But those delusions became pretty obvious pretty quickly, and the jihadist campaign resolved to a few nasty pinpricks that could do little to undermine the fabric of western society itself. The Al-Qaeda leadership, so far as it exists, is focusing on maore local issues, in Iraq and Afghanistan, and expanding elsewhere in the Middle east and Africa. It is an armed part of a puritanical, fundamentalist Islamic political movement, operating in countries that are  predominantly Muslim. They have no real interest in pursuing terrorist campaigns in the West, which might even harm their cause by getting Western securities services involved. Western countries don’t want to get themselves bogged down in messy wars in countries they don’t understand. The foreign jihadists might see some use in recruiting sympathetic residents of Western countries to act as foot soldiers in their wars, but that is probably the limit.

But terrorism in the West lives on. Not only are there the occasional successful attacks, like that in Boston, but many more plots that come to light before they are executed – such as a Canadian plot in the news today. But these are local affairs carried out by citizens or residents of the countries concerned, with little outside involvement. The plot of the US TV series Homeland is a fantasy. Does that mean that the US military effort against the terrorists, drone strikes and all, is purely a geopolitical game? Or is it successfully suppressing outside terrorism? It is impossible for us ordinary members of the public to know.

What we have is a very private war, carried out by isolated and frustrated members of minority communities, who feel excluded and alienated. Terrorism is some kind of release, but serves no wider goal. As one character in the BBC TV series The Village set in the First World War says in another context (I paraphrase from memory): “He thinks that by going to war and getting killed he will impress her; he forgets that the problem with being killed is that you are dead.” This was quite striking with the 7/7 bombings in London. It was perpetrated by a well-organised cell (compare their attacks with the ham-fisted ones that took place a week later), but it was a one shot weapon. Any military virtues died with them. The silence that followed the Boston bombings has something of the same disconnection with any wider objectives.

So what to we do to protect ourselves? The police and intelligence effort has to go on, even if we suspect those that lead it are playing the threat up, and hiding behind national security. But we also need to carry on the slow, awkward process of outreach and integration of minority communities: multiculturalism. We need at least to try to drain the hatred that drives these very private wars.

Britain’s austerity policies under attack

Since the coalition government came to power in 2010 the British economy has been stagnant. Unlike other advanced economies, the United States in particular, national income has failed to recover back up to the level it reached before the crisis struck in 2007 (a more correct turning point, in my view, than the more commonly used 2008). In particular the government has failed to meet its own projections, with plans to reduce the government deficit behind target. A common view in the media, backed by a number of distinguished economists, is that the government’s austerity policies are “not working”, and need to be loosened. This view was strengthened this week by two events: some comments in the IMF’s World Economic Outlook, and the discrediting of an influential academic paper Growth in a time of debt by eminent economists Carmen Reinhart and Kenneth Rogoff (you can read The Econonist’s coverage here). This had put forward the idea that economic growth collapses when government debt reaches 90% of GDP, and had been used to give intellectual heft to the country’s austerity policies. Stepping back from the political ding-dong, what lies behind this controversy.

First, some perspective on this week’s two events. I have had a look through the IMF report to see what it says about the UK economy, and it is … almost nothing. With a world perspective it is, of course much more interested in the US, the Euro zone, and even Japan, never mind less developed economies, whose influence on the world economy is growing. There is a single sentence that causes the furore, repeated in the executive summary: “Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lackluster private demand.” Still, the IMF will be looking at the UK in more detail shortly, and today’s Financial Times, no less, is billing this as a major confrontation. Does the IMF matter? IMF analysis is academically rigorous, politically neutral and based on detailed factual analysis. This stands it apart from most economic comment, even that from distinguished economists, which is little more than grandstanding. It also has an institutional bias towards conservative financing of government. Criticism from that quarter saying that the government should relax fiscal policy lends weight to the notion that the government’s economic policy is based on a naive Treasury orthodoxy that has changed little since Maynard Keynes railed against it in the 1930s.

As for the Reinhart-Rogoff paper, I give this a lot less weight. Its core claim is based on the statistical analysis of past episodes growth and debt. Such regressions used in macroeconomics are always flaky, never mind any mathematical errors, as the various assumptions needed to give them validity rest on wishful thinking. We looked at a few when I was an economics student, and noted how no two independent statistical regressions came close to agreeing with each other. There are no economic laws of motion out there waiting to be discovered by careful data analysis. And if there were, their validity would generally be broken by the act of discovery and its effect on people’s behaviour. The value in such studies is in posing questions, not answering them.

So what issues of disagreement might there be between supporters and critics of the government’s policy in terms of generally accepted economics? First let’s start on the points what they should agree on. The reason why the UK has not met government forecasts made in 2010 has been weakness in demand from two areas: exports and investment. Consumer demand has been fairly much as expected. It is difficult not to see the shadow of the Euro crisis in both, though a case might be might be made for a weak banking sector causing lack of investment (though I wouldn’t buy it). This weakness in demand is damaging because it causes persistent unemployment, which in turn may damage the economy’s longer term prospects as longer term unemployed people become unemployable. Meanwhile living standards are being squeezed by the depreciation of the pound, which is spreading hardship and pain far and wide. A further point of agreement amongst most is that the economy needs to rebalance: for some areas of the economy to shrink relative to others, in particular towards areas of the economy that strengthen exports, rather than just fuel borrowing. This point is not accepted by many Labour politicians, especially those close to the last government though (for example Tony Blair in his recent New Statesman article). It implies that the last government’s economic strategy was mistaken in causing these imbalances. However I suspect most neutral observers accept that substantial rebalancing is needed.

There are probably two important points of disagreement. The first is the extent to which any fiscal relaxation will slow or prevent rebalancing. Will it just prop up areas of the economy that will need to be shrunk for the economy to progress? This line of argument is particularly strong when it comes to the expenditure side of the austerity policy. Cuts to government services and reform to the benefits system are not just about cutting the deficit: they are about making the economy more efficient. However, when it comes to temporary tax cuts, it is a lot less clear that it has anything to do with rebalancing. Also expenditure to invest and improve the economy in the long term is not affected by this line of argument.

The second area of disagreement is the ability of the government to borrow money to finance fiscal stimulus, and the effect of borrowing on growth. This was where the Rienhart-Rogoff article was deployed. I won’t attempt to explain it in today’s blog: it gets fiercely technical. In the more public arena both sides like to deploy spurious arguments on this topic. I disagree with most of the arguments used by government supporters, but that does not make them wrong in the round.

Government supporters, especially of a Lib Dem hue, will suggest that the government has already been flexible by stretching out its targets in face of the disappointing economy. There remains a case for some kind of shock treatment, though: a change in policy that is a pleasant surprise to people, and which will improve confidence.

And that is an issue that is at the heart of the matter in my view, but which economists don’t like talking about because it seems so ephemeral. The economy is driven more than they will admit by the zeitgeist: common expectations, confidence, mood, world view, etc.  There is little fiscal and monetary policy can do in the face a determinedly depressed outlook that increases saving but reduces investment. That is what we have now. One aspect is welcome: it means that inflation is unlikely to take off. A positive shock can change the mood: but Britain is a small country which depends a lot on what goes on in the rest of the world. There is a real risk that what goes on in the wider world undermines domestic attempts to change the mood, which means that the whole exercise makes things worse. The outlook remains grim, I’m afraid.

 

 

Will Labour let the Tories win the 2015 election?

Margaret Thatcher’s death on Monday has distracted attention at rather an interesting moment in British politics. There is a vigorous debate about how Labour should fight the next General Election, which should be in 2015 (one of the very few Lib Dem inspired constitutional changes to get through was one on fixed term parliaments). I have picked this up from two articles. First was an article by Guardian journalist Jonathan Freedland last Saturday: Labour must draw the sting from welfare, or lose in 2015. Mr Freedland is nominally an independent journalist, but this article seemed to be very well coordinated with material coming out from the Labour leadership, including a TV interview with deputy leader Harriet Harman. It sounds their leader’s, Ed Miliband’s, party line. Then came former leader and prime minister Tony Blair in a widely reported article in New Statesman: Labour must search for answers and not merely aspire to be a repository for people’s anger. The link is to a summary, which is all I have read; the full article is in a special Centenary print issue. I don’t think either have identified the right strategy for 2015, though Mr Blair is closer.

Both writers attack a complacent view which seems quite popular in Labour circles, and which is often associated with another Guardian writer, Polly Toynbee (though not by either author, and possibly not fairly). This is that the Conservative led coalition is in a mess, having picked the wrong economic strategy, and heartlessly cut important parts of the British system, such as working age welfare. The Conservatives are very unpopular; public anger is raging. They even face a challenge from the far right, Ukip, which is causing panic and leading them to revive their reputation for being the nasty party. Meanwhile Labour have already dealt a mortal blow to their coalition partners the Liberal Democrats, who face a private battle with oblivion in a few dozen constituencies across the country, and are reduced to irrelevance everywhere else. On this reading, all Labour have to do is to ride the anger and say as little as possible about what they would do in government, beyond the implicit or explicit promise to roll back the Tory cuts. The coalition parties will lose the election without Labour having to try very hard to win it.

But both authors suggest that the middle ground of British politics has shifted, to something much sourer than it was before the crisis. Before Mrs Thatcher’s death, the left had been stoking up the anger over the government’s welfare reforms, and especially some changes on housing benefit that they dubbed “the bedroom tax”. But into this maelstrom stepped the novelist A.N. Wilson and The Daily Mail who suggested that odious killer Mick Philpott was a product of the British benefit system, showing that cuts were needed. And then Chancellor George Osborne joined them, to apoplexy of the left. Labour’s anger is genuine, but it does not seem to be hurting the Conservatives. Opinion polls put Labour on about 40% to the Tories’ 30%. Add in more than 10% for Ukip and the right is level pegging with the left before the fight has really started. Labour are appealing to people who already vote for them, or who live in Northern urban constituencies where their votes are not needed.

The threat to Labour is quite clear, with a parallel in 1992, another election in difficult economic time. The weak economy is causing hardship across the board, and not just amongst those on benefits. If the economy picks up in the next two years, the government will get credit. If, as most people expect, things stay grim, then that sour mood will continue. People don’t buy the argument, popular amongst trade union leaders, that bit of extra government spending will stimulate the economy into a virtuous circle of growth. As in 1992 the Tories will claim that Labour’s plans to restore the cuts will simply make things worse by raising taxes. This will be very hard for Labour to fight if they follow the Polly Toynbee strategy, and they might lose rather than gain seats. A Lib Dem meltdown, predicted gleefully by Labour activists, will simply deliver a full working majority to David Cameron.

What to do? Mr Freedland suggests a programme of radical reforms to welfare, which will inspire the public with fresh thinking against Coalition incompetence. Ideas include moving towards the contributory principle for benefits (linking benefits more tightly to contributions, as many other European countries do), increased support for childcare, guaranteed jobs after a year of unemployment, and so on. These reforms will tackle the crisis of legitimacy that Mr Freedland highlights as the problem with the benefits system. This seemed to chime with what Ms Harman was saying on the television, and which I had read elsewhere from another Shadow Cabinet member.

What Mr Blair is suggesting is not clear, certainly from the article summary. He asks questions rather than provides answers. He does not seem to be going down the radical reform line, though. He suggests things like building more houses (in his case probably by building private sector houses on green belts), more computerisation of government services, and using DNA databases to tackle crime more effectively. Overall this is much closer to what the Coalition is already suggesting. On the economy, he does suggest industrial strategy, but not re-balancing. He even suggests rebuilding the finance sector. But then he does not accept that the British economy was more vulnerable than others to the financial crisis. More pleasing to liberals, he suggests challenging the right on Europe and immigration – though this can be read as justifying his policies when he was last in power.

Mr Freedland’s approach would be a serious mistake. If the Coalition has shown anything, it has shown just how difficult reform is, especially in hard economic times. All reforms create winners and losers. Politically the winners keep quiet, but the losers shout like mad. And reform ideas put together quickly tend to fall apart quickly. Any programe of radical welfare reform would fall apart under the full weight of attack, led by a press pack that still tends to set the political agenda. They will be portrayed as expensive and muddled; and any areas where savings are suggested will be attacked vigorously so that the losers’ voice is heard. It is simply too late to be radical. The country has reform fatigue. Remember the referendum on reforming the electoral system? An idea that seemed quite popular at first fell apart under concerted attack from the right.

Mr Blair is closer to the mark only because he seems to be less radical. But his central idea of trying to restore the reputation of the last Labour government is surely a dead letter. What Labour should be doing is learning from the way he secured a landslide at the 1997 election. He did this by signing up to 95% of the Conservative government’s policies, with a few carefully chosen and well publicised exceptions, while appearing more cohesive and inclusive than his opponents.

Likewise Mr Miliband needs to sign up to the bulk of the welfare reforms, with some token exceptions. Unfortunately reversing the “bedroom tax” would be a poor choice: the change only applies to social housing tenants, so private sector tenants either have to be included at great expense, or else they will protest as to why they are being left out. Personally I would would focus mainly on reducing the costs of childcare at the expense of some pensioner benefits – though the coalition parties might jump on this bandwagon.

But Labour needs to act now if he is to do something like this. The activists will hate it: so they need enough time for the fuss to die down, before they return to their visceral hatred of the Tories for motivation. But I don’t think Mr Miliband will go down that road, though.

David Cameron is not a particularly effective Prime Minister. But he is the most skilled politician amongst the party leaders. He has an excellent instinct for the political middle ground, and he is slowly but surely manoeuvring Labour into a cul-de-sac. Whether he will win a majority in the 2015 election is open to doubt: but I would bet good money on the Tories being the largest party.

 

 

Mrs Thatcher: the lightning conductor

Oh dear! The death of Margaret Thatcher yesterday has unleashed a flood of comment about how she transformed this or that. Mainly it is praise from the right (it’s everywhere and I can barely bear too read them, so I’ll only link to this one from the FT’s Janan Ganesh which manages to be reasonably objective). But the left do not want to be deprived of an opportunity to vent their precious hatred – like this absurd article from the Independent‘s Owen Jones. What she symbolises seems to be more important that her actual achievements.

When I first studied history (I did History Part 2 at Cambridge, graduating in 1979 just as Mrs Thatcher took office) the Marxist view of history was quite prevalent. This saw history as a sort of clash of tectonic plates (I also studied Geology at Cambridge…) formed by social classes or interests (“the forces of history”), which downplayed the contribution of individuals. If one person had not led such a change, it was held, then somebody else would. This was closely linked to the idea of historical inevitability, used by left wingers to predict their inevitable victory, and so contributing to their tactical ineptitude. The Marxists greatly overplayed their hand, but the fashion seems to have gone too much the other way. We associate the process of historical change too much with individual achievements. And none more so than with Mrs Thatcher (as she is no longer alive, I do not feel the need to use her title: she was always Mrs Thatcher to me).

The period when Mrs Thatcher was Prime Minister of the UK, 1979 to 1990, was one of quite dramatic transformation in both this country and the world. I remember the 1970s all too well. The British corporate settlement was in a state of collapse. In common with many democracies the country had been governed through a sort consensus of trade union bosses, managerial types and civil servants. Unfortunately the management leg of this arrangement was very weak: business leaders were more interested in undercutting each other than showing solidarity in the face of common challenges. In this the system contrasted with Germany and Japan who have used the corporate model much more successfully; and unlike in France, the state element had an anti leadership culture. With management and the state weak, trade unions ran rampant. Edward Heath’s government of 1970-1974 at first tried to work with the consensus, but the unions were too greedy – and he lost power in 1974. Though the public mainly agreed with him on the unions, they saw his government as incompetent, leading to an indecisive election result that Labour’s Harold Wilson skilfully exploited. The world economy was reeling from a massive rise in oil prices, which the government tried to treat as if it was a cyclical rather than structural problem with loose fiscal and monetary policy (following principles espoused in our current environment by Paul Krugman et al). Labour wrestled with the impossibility of trade union economics. The turning point came in 1976, when Britain had to go to the IMF for a bailout. Wilson had bowed out, and the messy job of fighting back fell to Jim Callaghan and his Chancellor, Dennis Healey. But the unions fought back, and the notion arose that the country was ungovernable. Enter Mrs Thatcher.

I voted for Mrs Thatcher in 1979, or rather I voted for Sir George Young in Ealing Acton, in support of the Conservatives. I was growing out of my cold war inspired distrust of Labour, but hated the messy process of fudge and compromise that was Mr Callaghan’s way (symbolised by such outrages as the Dock Labour Bill, which thankfully never got into law). Mrs Thatcher’s economic policies were a real shock: sky high interest rates, causing industrial collapse across swathes of the country. But who else had an answer to the simultaneous inflation and unemployment in which the economy had been stuck? But the style, if not the substance, grated and when the SDP was formed out of the wreckage of the Labour Party, I joined it.

Mrs Thatcher’s government swept away much nonsense: trade union power, nationalised energy and telecoms businesses, City restrictive practices, and so on. These acts of destruction were necessary for the British economy to thrive. On the left the Thatcher government takes the blame for the destruction of swathes of British industry, and the communities they supported. The emotion gets very high in the case of coal mines. And yet there is no modern economy that has not seen destruction of such jobs on a similar scale. Walk into a German factory and you will see lots of production, but few workers. Industrial technology has wiped out a whole category of seemingly safe industrial skilled and semi-skilled jobs that were the bedrock of the working class. After Mrs Thatcher, globalisation has continued the same process, but the main destruction comes from technology, not the export of jobs. And, for all the destruction of these jobs, the extra wealth generated by productivity improvements has spread across the whole of society, even if it has favoured the rich proportionately more. This is one reason why our current recession is inflicting less genuine hardship that previous ones.

The process of modernising the British economy was necessary and beneficial. And also, surely, inevitable. Without Mrs Thatcher the changes would have happened more slowly, perhaps. But they would still have been painful, and yes, “divisive”, to use the common word attributed a lot to Mrs Thatcher. But she did take the process of confrontation to extremes. Did this create more social harm that was necessary? We can’t know, though the admittedly smaller and more cohesive country of Sweden managed a very similar transition rather more successfully, I feel. But Mrs Thatcher was a hero to many Swedes.

A more serious criticism of the Thatcher government is that it did little to create sustainable jobs to replace the ones destroyed. The country launched forward on a twenty-odd year credit binge fuelled by North Sea oil. Just how hollow this was is now becoming clear, as the flow of oil slows. A severe devaluation of the pound has not done much to correct a severe imbalance of trade. But it is a little unfair to entirely lay this at the door of Mrs Thatcher, though. The imprints of Labour’s Tony Blair and Gordon Brown are just as firmly on this failure. And it is no so easy to see what should have been done about it.

And on the world stage? Mrs Thatcher’s most conspicuous triumph was taking on Argentina in the Falklands war. This one was about heroes I think, rather than the forces of history. It helped bring down a nasty dictatorship, and secured Britain a stronger international standing – though I am less clear about what good that led to. To suggest that she and Ronald Reagan’s confrontational attitude to the Soviet Union had much to do with its eventual collapse is nonsense: it needed no outside help to do that. And when it fell Mrs Thatcher was flat footed, failing to understand the implications of what was happening. Her contemporaries Helmut Köhl and George Bush (senior) were much more on the ball. Her reservations about a united Germany may have been well founded, but she had no solution.

Still she deserves credit for one important international development, beyond toppling the Argentine generals. She was instrumental in the launch of the single European market in the EU. This project was making little headway as Eurocrats pushed forward a hopeless programme of bureaucratic harmonisation. Mrs Thatcher, with the Commissioner she appointed, Lord Cockfield, turned this around giving a presumption to free trade. It was a classic synthesis British freewheeling pragmatism and the more bureaucratic and formal French approach. She may have felt with hindsight that the Single European Act that enshrined it in UK law went too far, but her vision of Europe as an open market was genuine enough, and she deserves credit for persuading her European colleagues of the idea’s merits.

Mrs Thatcher was a hugely conspicuous character on the British and world stage, both through her sex and her personal style. It is only natural that we project so many positive and negative feelings onto such a person, as a sort of lightning conductor. But many of the changes she wrought were the inevitable march of modernisation; and many of her achievements were undermined by tactical and strategic errors. She did more good than harm. Faint praise. She would not have liked that, but then she would not have like me.

Monetary policy is a useless collective noun

At the time of the financial crisis of 2007 and 2008 it was commonplace to say that modern economics, especailly the macroeconomic variety, was in crisis, and needed a fundamental rethink. Alas, the vested interests of established economists have prevailed. Very little rethinking has occured, and this mainly tweaking rather than anything big. This is most striking in the area of monetary policy. The debates now going on in Japan and Britain remind me of the academic papers and discussions that I read about while an economics undergraduate at UCL in 2005-08. Circumstances have changed (in Britain anyway) but not the economics.

Economists of complain that amateurs are guilty of the fallacy of composition: to assume that was is true for a household, say, is also true of all households grouped together in a single economy. It may sensible for a single household to save more of its income to repay debt: but if a whole economy tries this at once, it could be disastrous. But economists are guilty of their own fallacy, though one for which I have not found a commonly used name. I will call it the fallacy of collective nouns. It is idea that by collecting together a group of disparate elements and giving them a name, that you have created a new entity that allows you to ignore its component parts. Most macroeconomic concepts are such collective concepts: GDP, inflation, and so on. Such collectives are useful only up to a point, and then you have you have to look at their component elements. And yet most macroeconomists, even very intelligent and distinguished ones, can’t bear to let go of their collective concepts and carry on using them long after their usefulness has ceased.

This is clearly the case with the idea called “monetary policy”. The conventional idea is that an economy has something called a “money supply”, which can be manipulated through policy instruments under the control of a central bank. In turn this money supply affects the behaviour of the people that form the economy with fairly predictable effects on things like consumer prices,wages, investment and output. All of this is very questionable in a modern economy. It is much more helpful to think of the particular components of “monetary policy”: central bank interest rates, state purchases of its own and other bonds, bank regulation, and so forth, and how these affect the various parts of the economy acting through the financial markets.

The conventional economic thinking runs something like this: the economy (Britain and Japan in particular) is stagnating with relatively low levels of inflation, but high or rapidly rising levels of government debt. In order to pay back this government debt you need to break out of the stagnation and grow, or (whisper it) let inflation make the debt more affordable. To do this you need to “loosen” monetary policy and increase the supply of money. With more money in their pockets, people go out and spend more, leading either to growth or inflation. To do this the central bank lowers interest rates, and where this does not work, use other measures like Quantitative Easing. Cue lots of debate about the relevance of inflation targeting and its alternatives (nominal GDP targets for example), all well within the comfort zones of economists.

There are very many problems associated with this line of reasoning. It is far from clear what money is. However it is clear that commercial bank accounts form the most important part of it, and this is a function of commercial bank policies, not those of a central bank, whose influence is increasingly marginal. It isn’t clear that large bank balances lead to increased spending, least of all on constructive economic things like consumption or proper investment (as opposed to chasing up the value of assets in fixed supply). Rising prices do not necessarily make debt more affordable: that requires rising income for the people holding the debt. And it goes on.

All the verbiage around “monetary policy” is clouding the issue. There are two problems being faced the British and Japanese economies: weak output and excessive debt. Weak output in turn has two components: using spare capacity (i.e. that created simply because of slow demand) and strucural problems. In Britain there is a big argument about how much of the problem is spare capacity and how much is structural. If it is largely spare capacity then simple macroeconomic solutions may have merit: you just need to boost confidence a bit to lift demand. But even here it is not self evident that any of the loose money policies will be much help. In Japan there seems to be even less spare capacity.

I can’t help thinking that what policy makers really mean by “loose monetary policy” is higher wages. Increasing consumer spending power through increasing wages will lift confidence, and even if it is not based on increased productivity, it will make debts easier to pay off, including public debt through higher tax revenues. This lurks behind a lot of the talk about greater tolerance for inflation. But in Britain we have the wrong sort of inflation: rising import costs through a lower pound, and increased government charges. This really isn’t helping. If policymakers want higher pay it would be better to throw away the weasel talk about loose money, and talk about pay. There is some evidence for that in Japan, but this only serves to show how difficult the policy is in practice.

The Japanese government also deserves some credit for the fact that it is not advocating looser monetary policy by itself, though you wouldn’t guess that from much of the coverage here. It is one of three prongs, the other two being fiscal stimulus and structural reform. There is plenty of scope for structural reform in Japan, and this gives their economic policy some hope for ultimate success if they follow it through. But it is the prospect of quick and easy solutions through fiscal and monetary policy that is exciting people.

In Britain a chronic trade deficit shows major structural problems, no doubt partly as a result of reduced North Sea oil. This requires the economy to be producing different things, not just more all round. Loose talk using economic collective nouns is making this harder to see and address.

The NHS: how the accountants are hiding dubious policies

The NHS is quite high up the news agenda these days. From the media there seem to be two big issues: culture and privatisation. The mainly right-wing press say that much of the NHS lacks a caring culture and this often leads to a breakdown of service. Left-wingers, and NHS insiders, worry about the new commissioning rules, and whether unscrupulous private companies will bid their way into contracts that destroy what is good about the service. These are both valid concerns, but a third issue should be causing more controversy than it does: funding. Not so much the NHS’s overall budget, though that too is worthy of debate, but how it allocates what it has. Recently the Health Service Journal has highlighted no less than three quite distinct issues on the topic. Politicians should be paying attention.

The first was an opinion article on 14th February by Robert Royce, a visiting fellow at the King’s Fund, the health think tank. His subject was the Mid Staffordshire Foundation Trust: but not the Francis report, but the preceding report by Monitor, its regulator. This report questioned the trust’s financial viability, suggesting that the hospital lacked scale. Hospitals like Mid Staffs are funded mainly through something referred to as “the tariff”, and which used to be called by Orwellian name “Payment by Results”, which was put in place by the New Labour government. This puts a price on every service episode the hospital performs: payment by activity, rather than by results. This system is often portrayed as being a commercial, market type discipline, but the tariff looks like no market tariff that I have ever seen. It is massively complicated, requiring big information systems resources to work.

What the tariff does remind me of is a transfer pricing system to allocate costs internally between two fractious units of the same organisation, who hope that by referring the problem to management accountants they can find an objective resolution. As the accountants grapple with the complexity of the problem they add layer upon layer of detail, in a hopeless quest to replicate the infinite complexities of real life, resulting in something which is nearly useless for management purposes. The system is designed for a political rather than a commercial environment, with the aim of pretending that strategic value judgements are mere technical problems. In the NHS almost all commentators go along with this pretence.

Mr Royce points to one pernicious value judgement in the tariff. It is that emergency services are bad, and elective services are good. Mid Staffs is perfectly viable financially on its elective services, but is being dragged down by losses on its emergency services. What if the tariff were raised for emergency services and lowered for elective, to genuinely reflect the underlying costs? The the hospital’s viability might look altogether different.

The second article was in the magazine’s “Resource Centre” section on 14th March, and is entitled The real reason for “failing” hospitals. It is by Sheena Asthana and Alex Gibson from Plymouth University. This is dressed up a piece of academic data analysis, but it is politically pointed. The authors look at the funding formula for Primary Care Trusts (PCTs: the bodies that fund the hospitals, at least until 31 March), and tries to correlate troubled hospitals and underlying population characteristics. They find that there is a strong correlation between hospital stress and a high proportion of older people in their catchment area. Their claim is that the funding formula is diverting financial resources away from these areas of greater need towards areas that are less wealthy – and this is the fundamental reason why so many hospitals are failing.

The last government was obsessed with addressing “health inequalities”, an expression that I hate because it implies that the solution is making things worse for the better off, rather then improving the lot of the worse off. And if Ms Asthana’s and Mr Gibson’s study is to be taken at face value, that is exactly what is happening. The present government show no sign that they want to address this awkward issue, and, according to the authors, much the same allocation is being ported into the new system.

The third article was another opinion article, this time by accountant (sorry, independent consultant and former NHS finance director) Noel Plumridge on 21st March. This looks at something that has been bothering me. If the NHS budget is protected, and increasing at a rate faster than most people’s pay is rising (2.6% as against 1%), how come so many NHS organisations are under such financial pressure? He finds the figures for next year’s budget less than transparent but concludes that there are no plans to spend a large chunk of the money at all: they are destined for unspent surpluses or contingency funds to “mitigate risk”. These surpluses are a point of difficulty: the individual trusts that make a surplus are supposedly allowed to reinvest them in future years. But under Treasury rules the NHS as a whole must hand the funds back to the Treasury for good. Is this just a backhand way of breaching the promise to ringfence NHS funding?

I only subscribe to the HSJ because I forgot to cancel it after my attempt to find a job in the NHS ended in failure – now I find interesting articles nearly every week. What these three articles show is that there aren’t enough accountants in politics. NHS leaders are being allowed to get away with some highly contentious political policies by dressing them up in complicated accountancy.

David Graeber’s Debt the First 5,000 years – the emperor has no clothes

Graeber DebtOne of the books I received for Christmas was David Graeber’s Debt, the First 5,000 Years. Mr Graeber is an American anthropologist, now working at Goldsmiths in London, who has been active in the anti-capitalist Occupy movement, and describes himself as an anarchist. The book promises to give some intellectual heft to the anti-capitalist case, by examining the origins and history of debt and money, and how we need to rethink it. So far so good. But after the book promised so much at the beginning, I can hardly contain my disappointment with its limp ending.

The book starts well enough. He immediately focuses on modern economics’s weakest point: the theory of debt and money. He may labour the nonsense of the economist’s creation myth of a barter a economy a bit too much: economists aren’t really interested in history after all. But economists’ confusion over the role and meaning of money is evident; personally I wouldn’t use the barter myth to illustrate this, but the way economists still talk about printing preses and helicopter drops when trying to explain monetary policy. Mr Graeber runs his hand across the soft underbelly of economics, but then, instead going in for the kill, he throws away the knife. He rejects the whole, quantitative, mathematical language of economics. He thinks that the discipline’s attempt to preserve moral neutrality is in fact condoning immorality and violence. Like it or not, numbers and mathematics are central to our society’s workings, and rejecting these tools out of hand leaves Mr Graeber’s arguments with very little purchase.

The full, awful implications of this are not immediately clear, however. Mr Graeber puts the question of money and debt into an anthropological context, and this is a good read. I found his categorisation of human interactions into three types very illuminating. These types are exchange, what he calls “communism” and hierarchical. The exchange relationship is the typical arms length commercial one: one item is exchanged for another, typically money, and there are no further implications for the relationship between the parties; it ends with the transaction. A communistic (or perhaps communal would be a less provocative word) transaction is typical of close communities: transactions aren’t exchanges, those who are able give to those who are in need, all a part of a wider, long term relationship. Relationship is also key to hierarchical transactions, but it is one of authority. A lower individual pays tribute to a higher one, while the higher one may cast beneficence to those beneath. Mr Graeber is careful to say that none of these is inherently superior to the others, and any society needs to use all three. But he complains that the modern world puts exchange relationships on a pedestal at the cost of communistic ones, costing the quality of human relationships.

All this leads into a broad historical narrative – the 5,000 years – of the Eurasian continent. Originally money develops as a credit relationship, and is not seen as a thing in itself: its accounting function is the critical element, and it is woven into the fabric of society, based on trust. But then the idea of precious metals, gold and silver in particular, becoming money in its own right rapidly took hold across the entire continent. The effect, in his telling, was malign. Money existed independently of states and relationships. Soldiers could loot money from one place as they destroyed it and spend the proceeds elsewhere. It facilitated both the running of armies and trading of slaves. Sinister, cynical empires came to dominate the world in Europe, India and China in the centuries before and after Christ.

These empires then broke down (or changed nature in China) as precious metal (bullion) money was drained from the system. In Mr Graeber’s telling this has much to do with the new world religions (Christianity, Islam and Buddhism) in what he calls the Middle Ages. His account is admirably even handed in its geography, rather than the customary focus on Europe. In this age Europe is a barbaric offshoot from the civilised worlds of the Middle East and China. Credit becomes central to commerce, which operates independently of the state, and is based on trust. This is something of a golden age to Mr Graeber, though not the European end.

This unravels in the Renaissance, with the Europeans leading the way. Gold and silver is looted in America and then traded with the Chinese. An age of violence and destruction is born, as trust is no longer required in trade and commerce.  Then, in the 17th and 18th centuries the malign instruments of modern finance, bonds and shares, are invented in order to fuel society’s appetite for war. Meanwhile, the slave trade takes off, destroying African society amongst other victims. An age often portrayed by western historians as one of progress, Mr Graeber portrays as one of a descent into destruction. This is deliberately provocative, but he has a point: this is an age of war, colonialism and slavery.

And it is here, as the industrial revolution begins, that Mr Graeber’s account runs out of steam. All the building blocks for capitalist society are in place, and its evil roots clear; he almost says “and the rest is history”. He swiftly moves on to his final chapter, where a new era begins with the collapse of the Bretton Woods system, and with the inevitable collapse of capitalism in its wake. I was expecting to read an account of the era of economic growth, but there’s practically nothing there. And the awful truth dawns. Up to this point I had been giving Mr Graeber the benefit of the doubt, for all his provocations. But the emperor has no clothes. When it comes to describing the modern world he is utterly out of his depth and as a result anything of consequence he has to say (and there are some) seems a matter of random chance. An example is his idea that the purchase of US Treasury securities, which will always be rolled over rather than repaid, is in fact paying tribute to the primary military power. the USA. He spots a problem with this account: the Chinese are amongst the largest buyers, and they are power rivals. He then has to concoct a story that this is part of a long term Chinese game. This is really very silly. The Chinese are buying US Treasury stock because they are running a big trade surplus and there is nowhere else for its surplus dollars to go; the power transfer implied is minimal; but the trade surplus is an important element of the Chinese development strategy, which involves building up production in advance of consumption, and in the great scheme of things the dollar surplus isn’t that important to them; it’s only money – if they lost the lot in a crash tomorrow, how much does it really matter? The Chinese seem to have grasped Mr Graeber’s message about money rather better than he has himself. Mr Graeber’s lack of economic literacy has him floundering to comprehend what is happening around him.

His thesis is that modern capitalism is a typical bullion economy based on power and violence, and the absence of trust, with exchange and hierarchical transactions driving all else out. Most people in developed economies are little better than slaves, tied to their employers and struggling to pay off debt. Debt is used to enslave people. But this system is fundamentally unstable and is in the process of collapsing.

But after the emperor-has-no-clothes moment there is no aspect of Mr Graeber’s thesis that doesn’t look questionable. Is is really true to say that capitalist transactions are based on the ultimate sanction of force, and not on trust? Is it not trust that distinguishes advanced capitalism in say, Denmark, from the less developed versions in Russia and China?

And he misses the whole issue of growth. This process, driven mainly by increased productivity, has improved the lives of countless millions – and is genuinely popular with most people in both the developed and developing world. It is by no means evident that today’s workers can be compared to Roman and African slaves. And debt has played a critcal role in lubricating this growth process, by allowing investment: payment now for a later gain. The whole culture of investment is omitted from Mr Graeber’s analysis: debt for him has but one purpose: to enslave the debtor by forcing him to make a promise he cannot keep.

Mr Graeber’s failure is underlined by the absence of any practical ideas about how the world should change to make it better. His only idea is a Jubilee: a systematic forgiveness of debt. But he hasn’t thought about the social chaos that would result as all savings were wiped out. The modern way of doing a Jubilee is called hyperinflation. It is hardly evident that the phenomenon that created Nazism is necessarily helpful to the development of society and the empowerment of the poor.

Is there anything to be retrieved from Mr Graeber’s spectacular collapse when confronted with the modern economy? He happens to be right about an awful lot of things. Money is best regarded as an abstract concept, a social invention without underlying reality. Debt also is a social convention that can outlive its usefulness, and should not be treated as sacred promise. The exchange method should not be idealised as model for all life, as Chicago School economists do. And economic growth in the developed world does seem to have hit natural limits, whose consequences we still don’t understand. Capitalism may indeed collapse if it continues in its current form.

But the answer is not to condemn capitalism as the work of Satan, and hope for something better to turn up. Mr Graeber’s work is pure antithesis. Progress is made by synthesis: by taking capitalism and making it better. And you can’t do that by rejecting the discipline of economics, for all its manifest faults.