The Labour Manifesto and the Myth of “Free Stuff”

I keep hearing and seeing  people saying “Labour just want to give everyone free stuff.” Let’s briefly take a look at this.

• Good Education for all benefits all of us and leads to greater prosperity for everyone;

• well funded health ensure that all of us benefit, being happier, more productive, and living more fulfilled lives. That benefits everyone;

• fairer benefits mean that if sickness, disability and unemployment should come, no one will be left destitute. We all benefit;

• higher minimum wage means more money to spend in the economy. We all benefit by this increase. 100 years ago even Henry Ford knew that if workers are paid more, they buy more of your goods. More jobs;

• mass machine automation is coming: we need to rethink how we structure work, payment and society. These will be in so called middle class jobs too, disrupting everything we know about how work, earnings, profit and reward are understood;

• water companies being owned by the regions means the profits get ploughed straight back in to those communities. Everyone benefits.

And so on.

The phrase “Free stuff” is utter nonsensical term. Everyone pays in one form of another, everyone benefits. If “free stuff” were even a true statement, then how would one describe the situation in Norway, Iceland, Denmark, Sweden, Germany and so on, where tax is higher, public services and ownership so much better provided for, and quality of life, productivity, and satisfaction is very high.

What a basket case.

Labour will enact a Robin Hood Tax on financial transactions

Modern “neoliberal” capitalism requires constantly increasing velocity and atomisation of transactions. A #robinhoodtax at 0.5% is nominal and fair. Capital cannot remain stateless and boarderless.

Consider what VAT is: a regressive tax on the transaction of purchasing goods set at 20% (with exceptions). 0.5% on financial transactions is fair and reasonable, will raise £26bn.

There is already a transaction tax, it’s just the proceeds for this go to the big financial institutions. Every transaction has a cost. That’s how modern capitalism works. 0.5% per transaction is effectively a micro payment. Remember these banks make hundreds of billions, and caused a world wide financial crash. It’s about time we stopped being so deferential to them and make capital contribute to the security of the societies they effectively leech off.

Steel Crises & Tariffs: What is the economic argument?

The ‘conventional’ view of globalisation and low tariffs, is an  assumptive model based on a Ricardian* view of trade and globalisation.

However things are much less clear cut than conventional view admits. In the end, economic theory can prove nothing about whether free trade or some form of restricted trade is best from the point of view of the people living in a particular country. It can provide a framework to help to understand the consequences of alternative policies and to identify who is likely to experience gains and losses. Other ‘non-economic’ considerations may come into play as well, such as national autonomy.

Furthermore, the conventional view slides over a number of important issues concerning globalisation (and anti tariffs). Pervasive externality and informational problems are compounded by inequalities in power, particularly at the national level.

The analysis of tariff removal compares two equilibrium positions. The implicit assumption is that the economy moves instantly and costlessly from one equilibrium to the other. This is not just a simplification for theory purposes, it is common in empirical studies of changes in trade policy. These typically simulate what the economy would look like after a change in trade policy, but only consider the new equilibrium when all adjustments have taken  place. However, we all know that in reality, the economy does not hop from one state to another; and in the mean time there is considerable unemployment which should not be ignore in terms of economic costs.

The economist Driskill wrote that in their enthusiasm for free trade, exponents of its benefits sometimes neglect to note that when tariffs are removed, the relative price of exportable goods must rise. People buying those goods will see their consumer surplus shrink. Whether any particular consumer is better off or worse off depends on the balance between the importable and exportable goods they buy.

Lowering protection against imports makes some people in society worse off, while others become better off. It’s not a clear cut zero sum game. We’re in danger of ignoring the welfare of our workers, the economic impact of letting steel fail, the desperate need to get our balance of payments under control and the tacit implicit cooperation or approval of China’s actions subsidising their steel making by up to 75% and flooding the world market by accepting that the low price is a natural price and a raised price (meaning also the need for firms to look closer to home for steel instead of internationally) would be “harmful”.

*The modern version of the Ricardian model assumes that there are two countries producing two goods using one factor of production, usually labour. The model is a general equilibrium model in which all markets (i.e., goods and factors) are perfectly competitive.

More information on Ricardian Model Assumptions: http://catalog.flatworldknowledge.com/bookhub/reader/28?e=fwk-61960-ch02_s03

Did UK manufacturing exports halve under Labour?

Part of an ongoing “Economic Myths Debunked” series.

I am going to be as brief as possible and use mostly diagrams. All data is from the Office of National Statistics, an independent body operating at arm’s length from Government as a non-ministerial department, directly accountable to Parliament.

UK Balance of Payments under Labour

Balance-of-Trade-in-Goods- under labourThe graph above shows that the UK balance of payments as a proportion of GDP decreasing significantly over the Labour years (red bars), from just over minus three per cent to just under minus seven per cent.  It appears that imports exceeded exports by over twice as much by 2010.

Here is some of that data in monetary terms, and it seems to look even worse:

UK balance of payments in monetary terms

Below is the rest of the balances of payments dataset going back to 1950. The big spike down is 1973 (OPEC 1973 oil crisis) and the big spike up is 1980 (the 1970s North Sea oil discovery exports thanks to 1979 oil crisis) .

Balance-of-Trade-in-Goods-II

I will leave interpretation up to the reader of how the long view of UK exports looks according to the data.

US Balance of Payments

However, the UK was not alone in seeing balance of payments fall over a similar period. Here is the US balance of payments from 1960 as a percentage of their GDP.

US dollar balance of payments

 

The chart bears perhaps a striking resemblance to the UK balance of payments.

UK exports to the EU

UK exports to EU and non EU

The graph shows a stead increase in the value of exports to both EU and Non-EU counties over the Labour years. Not an astonishing amount, but an increase of between 60 and 80 per cent.

UK Manufacturing Output

manufacturing-growth-96-07-500x407

The chart shows that manufacturing output in the UK shrank in six out of the 13 of the Labour years. However, one must take in to account the world wide recession which started after the financial crash in the autumn of 2008.

One must also look at a longer range dataset which goes back from 2012 to 1990 and shows that over all during the 90s manufacturing output had risen to a peak in 200, and effectively stabilised over the 00s until the financial crash. It still hasn’t recovered much above 1990 levels.

industrial-production-index-1990-2012-500x369

UK Imports

pngbricmports_tcm77-326387

The 00s saw the rise of the so-called BRIC economies and the graph above shows, overall, the BRIC countries’ share of total UK imports has increased from 3.3% to 11.6% over the last 15 years (ONS).

However, at an aggregate level, UK exports to the BRIC countries as a percentage of total UK exports have increased from 2.6% to 9.1% over the last 15 years, 6.0 percentage points of this rise having occurred since 2006.

pngbricmports_tcm77-326387

UK balance of trade with China

It is worth looking a little closer at the balance of trade with China over the last 15 years to get a real perspective of how the rise of low cost goods from a rapidly growing economy has effected the UK’s manufacturing industries. From 1997 to 2010, the UK’s monthly trade deficit with China grew from around £100m to an astonishing £2,250m.

uk-bop-balance-of-trade-china-monthly-ons

Summary

The evidence seems to initially suggest that manufacturing exports declined rapidly during the Labour years 1997-2000. However, that is a misleading picture when one takes into account the value of exports in total.

Whilst it is true that manufacturing in the UK saw a small decline in the 00s, the biggest reason for decline was the global financial crash of 2008 which saw output collapse around most of the ‘developed’ world. This was balanced by the BRIC countries whom managed to weather this decline, but likewise our exports to those nations remained stable too from 2008 onwards.

Conclusion

Did UK manufacturing exports halve under Labour? 

On balance it would seem that this is unproven: our exports did rise a little, but our imports rose dramatically.

A different perspective on modern economics (revised)

Part of an ongoing “Economic Myths Debunked” series.

Economics is often portrayed as being independent, devoid of value judgements, and immune to ethical or ideological influence. Over the past thirty years our politicians and policymakers, many economists in the media, and most economics textbooks have encouraged us, in the words of Harvard professor Dani Rodrik (2009),  “to think of economics as a discipline that idolizes [sic.] markets and a narrow concept of (allocative) efficiency.”

The mainstream view

The general public, media and indeed economic students have all been subtly indoctrinated with an emphasis on demand and supply (also called the model of perfect competition) as the central theoretical structure of an immutable reality: “…a world of perfect markets in which given resources are allocated as if by an invisible hand in a way that maximizes[sic.] the value of total production. The belief that this model approximates how markets operate in the real world is often referred to as ‘market fundamentalism’.” (Hill and Myatt, 2010, p.4)

[It is essentially a laissez-faire view. The core belief is that markets are efficient and that governmental attempts to ‘interfere’ with markets necessarily create inefficiencies. (ibid, p.264) They give the impression that markets generally are sufficiently competitive that (for the most part) they lead to efficient outcomes; that minimum wages and unions are harmful to workers themselves; and that government regulation is either ineffective or harmful. (ibid, p.1)]

Further still, most are under the impression “that economics is a value-free science; that economists have an agreed-upon methodology; and they know which models are best to apply to any given problem.” (ibid, p.1)

Most of this is myth.

The reality

“Value judgements pervade economics and economic textbooks. These value judgements reflect a social and political philosophy and can be called an ideology or world-view. It is one that textbook writers are implicitly attempting to persuade the reader to accept.” (ibid, p.1)

The point is not so much to claim that this ideology is wrong, but simply to point out that it exists, and that there are always alternative views that one ought to consider. Hill and Myatt agree with Rodrik (as quote in the first paragraph) that the typical text offers a view that ‘idolizes markets’ – “usually not in a crude way, but in a subtle way through its choice of themes, and through its emphasis on demand and supply (also called the model of perfect competition) as the central theoretical structure.” (Hill, 2010, p.4)  Australian economists Prof. Steve Keen goes further, implying that because the values that pervade the textbooks are so subtly woven through they present themselves as  neutral, yet only by absence of alternative views. A whole generation now exists that thinks  “neoclassical economics [is] economics.” (Keen, 2011, p.9)

Neoclassical, mainstream, economics  presents hypotheses and policy prescriptions with surprisingly little or no supporting evidence, or (worse) it ignores inconvenient contrary evidence. Indeed, what neoclassical economists don’t admit is that even their fundamental “totem of supply and demand” (as Keen refers to it) is based on an initial assumption that would leave the most ardent supporter of “free-markets” with their jaw planted firmly on the ground.

“Scientists … check their theories and models against observations of the real world at every opportunity. The central theory of the currently dominant stream of economics has not been properly checked against real economies for over a century. If it had, it would long-since have been abandoned.” (Davies, 2012)

Particularly, many  supporters of market fundamentalism, the modern free-market theory (or academically, the neo­clas­si­cal theory), are actually ignorant (or misinformed) about the foundations this theory is built upon and the assumptions of its economic models. It comes as a shock for many when they find how little this widely revered theory has to do with science and reality in the real world. When people who seem to vehemently support ‘free-markets’ start stating how they think they work and the basis of their understanding, they don’t realise that they ironically showing how much they don’t support market fundamentalism!

In 2000, a group of economics students in France circulated an open letter to their professors declaring ‘We wish to escape from imaginary worlds!’ and deploring the ‘disregard for concrete realities’ in their teaching.  They asked for less dogmatism and more pluralism of approaches. Since then, petitions and open letters have appeared in the United Kingdom and in the United States. (For details, see www.paecon.net.)

Forthcoming blogs

My aim with the forthcoming blogs on economics topics is to open up your views on economics; to see things in broader terms; to understand the differences and similarities in the many schools of thought outside of the current neoclassical dominated world view and hopefully to think more critically when presented with economic ‘facts’ and ‘discussions’ by the media, economists,  and politicians.

Contradictory to what neoclassical economists insist, economics is not an immutable science or natural force with set physical laws; it is socially and philosophically driven, morally adaptable and is fundamentally controllable. The “free market” as is defined by the political ‘right’ and neoclassical economics is not natural or inevitable, and does not exist outside government. Markets aren’t “free” of rules; the rules define them.

I want you to imagine how you believe economics should look and behave; and then be an influence that can make that change. In the words of Akerlof and Shiller (2009, p.173):

‘There is then a fundamental reason why we differ from those who think that the economy should just be a free-for-all, that the least government is the best government, and that the government should play only the most minimal role in setting the rules. We differ because we have a different vision of the economy.’

Postlog: Myth of the ‘free-market’

ROBERT B. REICH, Chancellor’s Professor of Public Policy at the University of California at Berkeley, http://www.huffingtonpost.com/robert-reich/free-market_b_3935173.html (extract)

Who should decide on the rules [of the ‘free-market’], and their major purpose? If our democracy was working as it should, presumably our elected representatives, agency heads, and courts would be making the rules roughly according to what most of us want the rules to be. The economy would be working for us; we wouldn’t be working for the economy.

Instead, the rules are being made mainly by those with the power and resources to buy the politicians, regulatory heads, and even the courts (and the lawyers who appear before them). As income and wealth have concentrated at the top, so has political clout. And the most important clout is determining the rules of the game.

Not incidentally, these are the same people who want you and most others to believe in the fiction of an immutable “free market.”

If we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.” We can make the economy work for us, rather than the other way around. But in order to change the rules, we must exert the power that is supposed to be ours.

Bibliography and Cited Works

  1. Akerlof, G. A. and R. J. Shiller (2009) Animal Spirits: How human psychology drives the economy and why it matters for global capitalism, Princeton, NJ, and Oxford: Princeton University Press.
  2. Davies, G. (2012) The nature of the Beast – How economists mistook wild horses for a rocking chair, Ebook, Online: Geoff Davies.
  3. Hill, R. and Myatt, T. (2010)  The Economics Anti-textbook: A critical thinker’s guide to microeconomics, Black Point, Nova Scotia: Fernwood Publishing.
  4. Keen, S. (2011) Debunking Economics: The naked emperor dethroned?, London and New York: Zedbooks.
  5. Rodrik, D. (2009) ‘Blame the economists, not economics’, Guatemala Times, 11 March, available at www.hks.harvard.edu/news-events/news/commentary/blame-the-economists

If you have an area of economics, or political philosophy that you would like to see discussed in these blogs, or questions that you feel need to be addressed, please let me know via the comments below.

The Great GDP Fallacy

The economic figures for the UK released on 1st May caused economists and not least the government to exhale a sigh of relief. The UK had narrowly avoided a third technical recession because ‘Gross Domestic Product’ (GDP) had grown by 0.3%. Not quite trebles all round, but perhaps at least a thumbs up at any rate.

GDP is not an indicator of wealth, or consumption, or growth. It is a recording of transactions.

However, at the heart of mainstream neoclassical economics, and thus in our financial system, there lies some uncomfortable fallacies, or delusions, and they are very seductive. Like sirens they draw us into putting too much stall by metaphors used to explain the market; and the illusion that “the system” can be analysed as if it is like a physical system subject to scientific laws.

The Language Gap

‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
Through the Looking Glass, by Lewis Carroll

All sciences develop their own language, just as Humpty Dumpty invented his own meanings for words. They take words in common usage, but endow them with quite different technical meanings. But no other science plays so fast and loose with the English language as economics. (Keen: p.271)

“Efficiency” is one such term. “When economists say that the stock market is efficient, they [actually] mean that they believe the stock markets accurately price stocks on the basis of their unknown future earnings. [It shifts the meaning] from something that is obvious to something which is debatable. But that is not the end of the story, because to ‘prove’ that markets are efficient in this sense, economists make three bizarre assumptions:

  • “that all investors have identical expectations about the future prospects of all companies;
  • “that these identical expectations are correct; and
  • “that all investors have equal access to unlimited credit.

“Clearly, the only way these assumptions could hold would be if each and every stock market investor were God… Yet economists atsset that stock markets are ‘efficient,’ and dismiss criticism of these assumptions [by saying] that you can’t judge a theory by its assumptions. …this defence is bunk.” (Ibid.)

Neoclassical Market Liberalism

In my recent post, a reblog under the title ‘What is Neoliberalism,’ I explained that the free market is not simply ‘exchange’ or ‘trade’. I will summarise some of the points made:

  • the market is the primary process, and market transactions are the interaction;
  • economic transactions should take place in a framework which maximises the effect of each transaction on every other transaction;
  • there is a desire to intensify and expand the market, by increasing the number, frequency, repeatability, and formalisation of transactions. The ultimate (unreachable) goal of neoliberalism is a universe where every action of every being is a market transaction, conducted in competition with every other being and influencing every other transaction, with transactions occurring in an infinitely short time, and repeated at an infinitely fast rate;
  • new transaction-intensive markets are created on the model of the stock exchanges – electricity exchanges, telephone-minute exchanges. Typically there is no relationship between the growth in the number of transactions, and the underlying production;
  • new forms of auction are another method of creating transaction-intensive markets;
  • artificial transactions are created, to increase the number and intensity of transactions. Large-scale derivative trading is a typically neoliberal phenomenon, although financial derivatives have existed for centuries. It is possible to trade options on shares: but it is also possible to create options on these options, an accumulation of transaction on transaction;
  • there is contract expansionism and therefire transaction costs play an increasing role in the economy. For example in the privitisation of British Rail, there were 30,000 contracts and these had to be drafted by lawyers, and all the assessments have to be done by assessors. There is always some cost of competition, which increases as the intensity of transactions increases.

In even shorter bullet points, neoclassical free markets require and produce:

  • transaction maximalisation
  • maximalisation of volume of transactions (‘global flows’)
  • contract maximalisation
  • supplier/contractor maximalisation
  • conversion of most social acts into market transactions
  • artificial maximalisation of competition and stress
  • creation of quasi-markets
  • reduction of inter-transaction interval
  • maximalisation of parties to each transaction
  • maximalisation of reach and effect of each transaction
  • maximalisation of hire/fire transactions in the labour market (nominal turnover)
  • maximalisation of assessment factors, by which compliance with a contract is measured
  • reduction of the inter-assessment interval
  • creation of exaggerated or artificial assessment norms (‘audit society’)

I am hoping that you can already see where this is all going and its relationship to GDP.

What is it, what does it do?

  • Financial and economic markets are transactions. [If the references above to transactions didn’t pop-out at you, they sure should now!] GDP is not an indicator of wealth, or consumption, or growth. It is a recording of transactions. That is why, for instance, GDP in Japan rose after their tsunami. As people cleaned up the mess, they transacted more. (Sell)

So when we say that the UK’s GDP went up by 0.3%, we all perceive that the UK is growing, doing well. However, the metaphor and the system has deluded us. Of course, this sounds very different from “Britons transacted 0.3% more.” And free market economics artificially creates reason for there to be an increasing number transactions. Increased transactions are assumed to mean (and we already know that their meaning of assume is nothing like ours!) that output has increased, and thus the ‘product’ of the nation has increased.

Take the loyalty card of the global coffee chain Starbucks, for instance. It is a ‘pre-pay’ card system, but it can also be used on a mobile phone. I charge the card up in the app, and can pay for my coffee by scanning the bar code on the screen. A fantastically swift cashless interaction and far quicker than chip and pin. However, as was said previously, the amount of transactions has dramatically increased from the one transaction, handing over cash in exchange for the coffee,  to a complex chain:

  • I request that the loyalty card be charged with £10 on my phone app;
  • the app requests this amount from the issuer of my registered credit/debit card;
  • the card issuer charges a transaction fee for this process to Starbucks;
  • VISA charge a transaction fee to the issuer for using the VISA payment system and branding;
  • the £10 is then transferred from my bank account and there is yet another transaction fee applied (the banking system is a complex series of transaction in itself, most of them probably pointless in reality);
  • a Starbucks subsidiary company that runs the loyalty card scheme receive this money, and another transaction with its corresponding fee is registered;
  • when I scan the bar code, there is yet another flurry of transactions between subsidiaries and accounts, causing work for auditors and accountants, and transferring money via various other chains, through to their next temporary purgatory.

All of this ‘activity’ looks absolutely fantastic as far as economists and free marketeers are concerned, despite what looks like an utter waste to anyone on the outside looking in. In this surreal world of free market economics, if you were to pay for your shopping basket each individual item at a time, they would be in absolute glee and the GDP figures would look astounding if we all did that.

But it is and will always remain a fallacy.

Postscript

Sell:
The second of the twin delusions is to mathematicise the recording of the transactions. So, for instance, economic transactions such as GDP, which is a number, can be cross referenced with other numbers in the financial sphere, such as interest rates, or currency transactions.

“Interest rates fell and GDP went up so that must be an indication of XYZ ratio., especially when we look at the $A cross-rate ….”
[This] mathematicisation [of the system] creates the illusion that these correlations are necessary, like physical laws. That is far from inevitable. Except for the purely computer driven activity (admittedly becoming increasingly dominant) transactions are created by people. People have to decide that there is some shared value system and minimum level of trust to engage in a transact. I often think that the word is interesting: trans (across) act (an act). I wonder “across what?” The answer must be some shared belief about value. So when that belief starts to come apart, such as during the GFC, the artifice starts to fall to bits, the “system” starts to disintegrate.

The point about the twin delusions is that they take us a step away from the fact. The fact is that transactional systems are a human artifice conducted by humans. Humans are at its centre. And humans produce that wonderfully unpredictable thing: HUMAN BEHAVIOUR. They are self conscious, unpredictable, they feel more strongly about losing money than gaining it and so on.

Columbia University economist Jeffrey Sachs described an environment of Wall Street buying off politicians with their huge campaign contributions. In the 2012 election cycle, political contributions by the securities and investment sector totalled some $271.5 million, compared with $176 million in 2008, according to the Centre for Responsive Politics.

“I meet a lot of these people on Wall Street on a regular basis right now,” Sachs told the conference, hosted earlier this month by the nonprofit Global Interdependence Center. “I am going to put it very bluntly: I regard the moral environment as pathological. And I am talking about the human interactions . . . I’ve not seen anything like this, not felt it so palpably.”

Greed and Wall Street have been bedfellows as long as Wall Street has existed.

What is new is the way the “pathology” is concealed. It is easy to cover up greed and its immorality by either deploying a metaphor – “these are the way the capital “flows” are going and we have to invest accordingly – or by creating a mathematical equation. In both cases the activity is pushed one step away from what it is – an activity between humans – and so decoupled from anything human such as morality, or ethics or what is good for society. By being denuded of its human element, scientised, as it were, the question of personal responsibility is removed. In other words, the greed is not new. It is the sophistication of the cover up that is new.

“Sachs said these same people on Wall Street are out to make billions of dollars, and believe nothing should stop them from doing that. “They have no responsibility to pay taxes; they have no responsibility to their clients; they have no responsibility to people, to counterparties in transactions,” he said. “They are tough, greedy, aggressive and feel absolutely out of control in a quite literal sense, and they have gamed the system to a remarkable extent.”

Sachs’ outburst stunned the crowd. “There was an initial shudder, is how I would describe it, because they could feel the passion that was in the discussion,” said attendee Dennis Peacocke, head of Strategic Christian Services, a religious group that advocates on topics of economic and social justice. “Jeffery Sachs’ comments were full of conviction. I was applauding him for bringing values and ethics into the discussion.”

 

Bibliography

Books:
Keen, S. Debunking Economics.London: Zed Books, 2011.

Web pages:
Sell. “The insufferable conceit.” Macro Business. Published: 5 May 2013. Accessed: 5 May 2013. <http://www.macrobusiness.com.au/2013/05/the-insufferable-conceit>.

My Personal Outlook before the Autumn Statement by the Chancellor

Just a quick note this morning.

It’s Autumn [Budget] Statement day today. Remember one thing: even if there was no deficit problem, the Tories would still cut welfare, jobs, community support, privatise the NHS and in return they would still support business in their aims to drive down wages and increase the wealth of the top 1%.

The Tory cuts are ideological.

The Government have increased spending overall by £150bn since coming in to power. If they had borrowed that anyway 2 years ago at the historic low interest rates, and invested that in building and infrastructure project, we would be experiencing growth, more jobs, and increasing wages. Borrowing to invest is not a bad thing! Every single business and household in the world does it, and is right too.

The only people to benefit out of this financial crisis have been the rich who have increased their wealth by up to 300% in some cases while wages at the bottom have not moved in over 5 years.

It’s taken me 15 years, but I’ve woken up to the Tory Lie. They sold us a pup:

Working hard doesn’t make you better off- it just makes you more tired.