The world we have made as a result of the level of thinking we have done thus far, creates problems we cannot solve at the same level of thinking at which we created them.
You can apply this to anything you like, but it seems to me apposite to think about it in relation to the economic models we have come up with so far.
Historically we have moved from a gold-based system via a representational base-metal and paper money system via a deluge of bound-to-be broken promissory notes. The muddle we are now in seems to have arisen from a digitised money system where we shuffle decimal points and zeros between accounts. If every man jack of us, and his dog, tried to liquidate all those figures into cash at the same time, I suspect no-one would be able to save the current global economic system, least of all our governments.
Governments have the right to create money, but we have drifted into a system where financial institutions give us extra digits and zeros to buy what we want. This is, to all intents and purposes, allowing banks to create money they don’t have.
This is what happens when most of us are sleepwalking through our lives, accepting the education laid out by the government that will allow us to compete in global league tables, but not allow us to hold our own governments to account. Education that does not allow us to even form the questions that might challenge prevailing ideology such as is needed to force real change through a democratic process.
Back to Einstein I think.
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I am no economist, as the state of my bank deficit can testify, nonetheless I have taken some time to try and understand what the hell has gone on with the global economy in the last few years. I lived through the boom and bust of the late 1980s and early 90s and my experience with credit then, gave me a good grounding in how fragile life becomes when we live on a play now, pay tomorrow basis.
On the other hand I still live in a Western capitalist economy, some people live without debt, but they are probably the minority. I learned from the 1980s but I could not entirely mend my ways. I did learn one thing though. Don’t buy a buy now, pay later sofa – that’s just stupid.
And that’s where Friedrich August Hayek comes in. His economic theory can be loosely applied to DFS, MFI and the like. If too many people buy sofas they don’t strictly speaking need, with money they don’t strictly speaking have, we have created a sofa purchasing bubble. The bubble contains too many bums on sofas that will be paid for later, and when easy credit becomes hard to come by, the sofa bubble bursts. Suddenly, the demand for new sofas, or kitchens, or white goods decreases sharply. Companies that manufacture or retail these items make less money and worse might not even be receiving the money for the sofas they sold two years ago. Production slows, jobs are lost; it’s not a pretty sight.
Hayek said that to return to a sustainable model of production, liquidation was inevitable. Liquidation of companies and jobs – that’s the pain of a recession. Sustainable production and the accompanying modest consumption, as a model is not all bad surely? However, in a recession I find I am far more drawn to the Keynsian way of doing things. John Maynard Keynes promoted the idea that government could control the business cycle of boom and bust and that in times such as now the government should spend to stimulate growth. There’s sense in both. The weakness in the Keynsian model is that national government most evidently cannot control the business cyle in a global economy that relies so heavily on the financial sector. The weakness in the Hayekian approach is that he would see us all return to subsistence farming, living hand to mouth whilst the sustainable model of production found its feet.
Given that both these influential economists were knocking about in the 1930s and 40s isn’t it well overdue that we quit with the either or approach, where we put the notionally opposing ideologies in conflict, and try to take the elements that might work in a 21st century context?
Take the state sector in Britain, it is true to say that the public sector payroll swelled under the last Labour government, but the proportion of people employed did not exponentially increase. Employment of workers by the state is unevenly distributed regionally. Putting the same proportion of state sector workers on the dole in areas of low industry and high unemployment is not going to make Hayek’s model kick in, as if by magic. It might work better in the South East, where the spread of private and public sector employment is more equally balanced. On the other hand it might not, and it has not so far. Cutting jobs as George is doing is effectively making the poor poorer and increasing unemployment in places where you are more likely to stay unemployed – which is why Keynes’ growth model is so much more attractive.
Having said that Hayek was right at a fundamental level, which is that false demand for consumer goods will lead to boom and then bust. Equally, Keynes was right about the state spending to stimulate growth either; note no Plan B George Osborne’s announcement about a building programme to enhance rail and road infrastructure – jobs and income to stimulate the economy.
To be bold and try to decide which came first, the chicken or the egg you might conclude that the generation of state income needs people employed in the private sector. I have heard it said that the split for public sector and private sector employment is around 40/60. Apparently it has not changed much in the last half century and was actually the highest it’s ever been, in terms of jobs in the public sector, under Thatcher and not Labour, which is interesting and not much advertised. Therefore despite the private sector apparently driving things we may surmise that the state and the private sectors’ fortunes are now inextricably linked – which probably puts Keynes back in the driving seat. After all, when the banks were deemed too big to fail, who bailed the private sector out – the public purse.
In a sense, the balancing act is to cut carefully and judiciously, not quickly and savagely, and to implement a more finely tuned tax system where the rich, the 1%, are not getting wealthier at the expense of the majority. As President Obama asks ‘Is it right that Warren Buffet’s secretary pays more tax than he does?’ Warren says no, I think Obama says no. Certainly the Occupy movement say no! I am not so naive as to think that slamming the super-rich against the wall and fleecing them through higher taxes is going to generate enough money to reverse the tide, but it is can’t be beyond the wit of man to develop a fairer tax system – the paltry 0.001% levied on bank trades is a joke.
To be fair to the coalition government it appears the Big Society, with its focus on the development of social enterprise at its heart, does aspire to take a combination of Keynsian and Hayekian theory – the state funding new businesses with a heart (not for profit). The problem with this approach is that the cutting of the public sector does not immediately covert into quantities of social entrepreneurs kicking their heels. Becoming an entrepreneur, even a social-minded one, takes a particular vision and skillset, an low aversion to risk and a willingness to work every hour of the day – making money available to set these businesses up does not guarantee a supply of people wishing, or able, to start and run them.
The best that could be hoped for is that voluntary sector providers going to the wall due to lack of funding manage to rejig themeselves into a social enterprise model. There’s another problem too. Sustainable business develops at a steady pace, the subsequent impact on unemployment and growing the economy is a very long way down the line and in the meantime the unemployed (former public sector workers included), especially those in regions of high unemployment, cost the state money and generate precisely zilch state dividends. As much as I fulminate against the current regime, there’s no doubt, particularly set against the Eurozone backdrop, we are in a tight spot indeed.
Here’s some food for thought. I was listening to a radio programme at the weekend that contrasted our Chancellor and his career to date with that of his opposite number, Ed Balls; the link is here. It turns out that although Osborne has been an MP for a number of parliamentary terms, his most notable achievement has been his contribution to consistent team failure (Back to Basics, BSE, four election defeats for his party).
You might well argue that creating the largest deficit in history is nothing to be proud of either (Balls), but Labour’s subsequent management of the crisis did indeed seem to be shepherding the UK economy back to some sort of mini recovery until Osborne came along and put the skids under that with his swingeing cuts, incidentally the largest and fastest programme of its kind ever, in the world. As I personally carried on in some degree of debt having learnt my lesson partially in the last millenium, so did the Labour government and every other Western capitalist government, more, or less. What we are not told by the government when we are being given the message that budget and household deficits are bad, is that debt long since became a commodity in itself. That much of the crisis was caused by the slicing and dicing of debt and the selling it on, and on, and on, in various forms for profit. Bad, wrong, mad? It doesn’t really matter now, it is a fact. And to deal with the situation we have to deal with the facts at hand. Putting growth and austerity into head-to-head conflict with each other undermines both approaches – and in the meantime the Eurozone, lead by Germany and France, try to repackage their member states debts to make them more attractive to traders and our own government offers start-up loans to social enterprises willing to develop and sell more financial loan products to new social enterprises…
And that’s kind of what happens with this whole debt-ridden thing: we all start chasing our tails and it needs to look like we’re not because at a corporate or national level this kind of behaviour rattles the markets, stocks and bonds take a tumble and we are back to chasing our panic-stricken tails in ever decreasing circles. Which is a bit how it felt trying to write this.
It’s broke folks, and it needs some fixing. We need some radical responses to effect some real change. I wish I knew where they were coming from. In the absence of that, we probably are stuck with an ideal of cautious austerity with a little bit of growth. It’s like nursing the Selfish Giant’s garden back to life when the children have all gone away. But before we can do that, the Giant needs to drop the Selfish bit…