An important step in making economic scholarship relevant to the post-crisis world may have been taken last week in Cambridge, UK. A number of economists that do not subscribe to the majority view of how the economy works met to consider what a ‘New Economics’ might look like. While new in several senses, the ‘New Economics’ does not lack deep roots. It is founded in ideas that have taken on new life in the last two years, such as those of John Maynard Keynes from the 1930s and Hyman Minsky from the 1970s. Keynes’s insight was that because the saving of individuals does not automatically translate into investment by firms, government spending may be required to make up for low private sector demand in times of recession. Minsky’s observation was that there is a tendency for firms to optimistically over-borrow in good times to the extent that they become prone to collapse when times turn bad. These insights have become current in the financial media, yet what underpins such ideas and why they must become embedded in our economic thinking, has not.
Modern economics has insisted that the economy as a whole can be studied as a stable outcome of markets that are populated by completely rational and fully-informed individuals. To the extent that this ignores what we know of human knowledge and behaviour, ignores the existence of economic institutions such as firms, banks and governments and ignores the outcomes of actually existing markets, this can be justified by the gnomic utterings of Milton Friedman. Continue reading The Reality-based Economics Community Strikes Back→
Is ‘economic activity’ always a good thing? The banks hit by the bonus tax have raised the spectre of lost incomes and tax revenue if they choose to relocate away from the UK. The British Broadcasting Corporation (BBC) has recently sought to justify the licence-fee by calculating the revenues its commissioning generates for independent production companies. But it’s a deeply misleading idea that the benefit of any activity can be calculated by measuring the quantity of money that is involved in purchasing or producing it. Because money is the definition of wealth to each of us as individuals, it’s easy to forget that in itself it is pretty much worthless paper or more commonly today, an electronic pattern on digital media. For the welfare of the nation in which it is generated money represents no additional wealth whatsoever. Continue reading The banks, the BBC and ‘Economic Activity’→
A Church of England vicar has recently said it’s OK to steal from supermarkets if you’re hungry and desperate. This is against the law. Apart from the 8th commandment do we have any idea why? It’s annoying to be stolen from, certainly, but it’s also unpleasant and dangerous to be poor.
The social, as opposed to the moral, justification for the illegality of theft is that without inviolable property rights no modern transaction-based economy would be possible. Who would exchange anything (for money or otherwise) if they could just take it or fear that the other person might? Who would build a factory and employ workers if they thought the workers could, without penalty, take over its running and obtain all its revenue themselves? Continue reading The Economics of Theft→
There is at present an unprecedented wave of concern about pay disparities. We have the bankers’ bonuses, both main parties promising to limit high salaries in the UK public sector and a vigorous debate in Scotland about the high levels of pay of some Health Board managers.
Last week, the New Economics Foundation (NEF) published a report in which they calculated the benefit to society of various low and high paid workers per £1 of income. Whatever one might say about the rigour of their methods, the report makes a strong case for current income disparities having little basis in social contribution. My view is that as a nation we are at last waking up to two realities of ‘political economy’. Continue reading The Truth of Unequal Pay→
After the banking crisis and the debacle surrounding the collapse of MG Rover, a British car manufacturer, it’s surely time for a rethink of corporate limited liability.
The Phoenix Consortium, an ad-hoc partnership of four businessmen friends led by John Towers, extracted at least £9 million each from MG Rover, thanks to a sum of just under £500 million paid to them by BMW to take the firm off their hands. In May 2000 the Consortium purchased MG Rover through a company, going by the name of ‘Techtronic’, that they set up with £60,000 each of their own money. This holding company profited from interest on BMW’s £500 million while paying none. This profit was transferred to a higher tier holding company, Phoenix Venture Holdings (PVH) of whom the controlling and main beneficiary owners were the Phoenix four.
The four partners failed to find a joint venture partner for Rover, and in April 2005 it went bankrupt owing £1.2 billion to its creditors, including the pension fund of its own workers. For this work and its failure and their investment of £60,000, each of the Phoenix four received the equivalent of over £2 million per annum (excluding the benefits from MGR Capital). Even by current inflated standards of boardroom pay, this would be excessive for success but for failure it is absurd. Continue reading Rover, the ‘Phoenix Four’ and Limited Liability→
I’m interested to see that the Real World Economics Review (an e-journal for heterodox economists) now has a blog. They already have some interesting contributions, and I hope fertile discussion will follow!