Category Archives: economics

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.

Pre-distribution: The future of capitalism?

In September, Ed Milliband spoke out about Labour’s vision for ‘Pre-distribtion’. I have been considering what PREDISTRIBUTION means (and if there is indeed a better way to express what is meant by it.) There are echo’s of thoughts, maybe just questions that need investigating, that I’ve had for some time.

One being, why give working people ‘tax back’ instead of just not taking it away in the first instance? Collection and RE-distribution is surely costly? Could PRE-distribution (or a more accurate named equivalent) save administration costs?

Why the former? Is it this idea of ‘deserving causes’? Perceived ‘need’ and various ‘justifications’? Not taking the money means that it becomes universal regardless of need, so some will spend on their needs, other on just their leisure. This leads us to parallels with modern arguments amongst some groups about how benefits are spent by their recipients anyway.

But is this line of reason justifiable, is it EVEN reasonable? No one tells a more wealthy person what they can or cant spend money on, each makes their own decisions according to the needs, desires and perceptions thereof.

In essence RE-distribution, in the form of welfare, benefits and tax credits, precipitates political and social control, the subjugation of an economic class of people. Rebalancing the capitalist system to a PRE-dsitributive model would contain the out-of-balance problems of ‘rampant capitalism’ before they occurs, which the current redistributive system attempts to constantly intervene and correct-balance, and thereby reduce the administrative cost borne collectively.