Just how much cash does the NHS and social care need to prevent the distressing stories of patients languishing on trolleys for hours in A&E departments? Can we possibly afford what it needs, or is it really a ‘bottomless pit’ as often claimed? Do we need to lower our expectations of what can be provided for us? Or does the whole funding system of the NHS need to be overhauled, with charges and/or insurance-style payments? Sadly, we are frequently being directed by politicians’ state-shrinking agendas and commentators’ ignorance towards the wrong numbers and the wrong reading of those numbers, with the result that the wrong answers are given to these questions. The truth is that if we look at things correctly, there is no reason why we cannot have an excellent healthcare system in Britain without any great sacrifice in our enjoyment of the other goods and services that the modern economy has to offer. Continue reading Explaining the NHS Crisis: Lies, Damn Lies and Health Spending→
Since the financial crisis of 2007-8, one suggested target reform has been the monetary system itself. This reform is based on the recognition that money in the modern economy is a rather peculiar phenomenon.
There are two popular conceptions of the nature of money, both of them incorrect. (Note that when we talk about money, it is entirely artificial to separate cash, in the form of bank notes and coin, from what we hold in bank accounts. To all effects and purposes, for the vast majority of us, they are the same and completely interchangeable.)
The first conception is that money is a fixed quantity determined by the government, which is either accepted by convention or because you can go to your bank and get a certain quantity of gold for it. (Presumably not many people have actually tried this!) The second is that banks can issue new money to lenders as a multiple of pre-existing deposits, depending on how often depositors demand cash. This is frequently referred to as ‘fractional reserve banking’. Continue reading A Banking Debate→
The authors of this report claim that ‘there has been a failure of government policy to decide the role banks should play, and therefore what sort of institutions they should be.’ and that ‘we have ended up with a banking system dominated by a small number of giant banks…’ These institutions are only able to survive because they are ‘too big to fail’, yet they offer poor customer choice and service, have acted illegally in rigging markets and indulge in ‘socially useless’ activities.
A Review of ‘Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down…and Why They’ll Take Us to the Brink Again’ by Suzanne McGee (2010, Crown Business)
This book is an excellent complement to the academic stuff I’ve read on the causes of the financial crisis. These latter accounts are very detailed in terms of ‘what’ happened but tend to be light on the ‘why’. ‘Chasing Goldman Sachs’ goes a long way to filling that gap.
The academic consensus view seems to be that driven by an increase in demand for safe places to save there was a huge increase in deposits held by financial institutions and collateralised by Asset-Backed Commercial Paper (ABCP). A significant proportion of this paper was comprised of securitised mortgages – many packaged in such a way that their quality was opaque. The toxicity of these was enhanced by dodgy ratings and shuffling to off-balance-sheet vehicles. When problems with some of these mortgages arose it took a while for holders of these ‘shadow-banking’ deposits to sort out whether or not their deposits were collateralised by bad assets or good ones. There was a panic and large-scale dumping of these deposits which led to loss of liquidity in the market for short-term interbank loans. Without these loans banks find it very difficult to balance their books at the end of each day as they are obliged to. (A good guide to all this from the academic point of view and to further more technical reading is at http://www.nber.org/papers/w17778.) Continue reading ‘Chasing Goldman Sachs’ by Suzanne McGee – A Review→
Understanding Money – a non-technical account of the essential role money and its creation plays in a modern economy. This article was previously available as a pdf, but I have now posted it as a blog in its own right. Since it was originally written in 2010, I have made a few revisions and additions.
Most of us have little idea of what money is and where it comes from. When we think of money, we think of bank-notes and coins. We know that most money is held in bank accounts, but even then we have an image (although most of us are probably aware that it isn’t quite an accurate image) of these notes and coins being held for us by the bank or lent out by the bank to make money for them (and hopefully us, if the money is held in an interest-bearing account). In fact the reality is about as far away from this as it is possible to imagine.
Of the total amount of money (adding together bank-notes and coin held by the general public and the value of all bank accounts in the UK), the bank-notes and coin make up only around 3% ! The reality is that the vast majority of all money exists only as a record held in someone’s name by some bank or other. How can this be? Where does this money come from? Where does it go? In this article I will attempt to answer these questions, and in doing so explain the benefits and the potential downside to our monetary system. Continue reading Understanding Money→
‘Aggregate Demand, Idle Time, and Unemployment’ – A Critique of Michaillat and Saez
Like all neoclassical models, that of Michaillat and Saez (2014) referred to in Simon Wren-Lewis’s Mainly Macro blog on 16th August fails to model money realistically. This renders their model incoherent and in any case incapable of encompassing one of the most important causes of unemployment: inadequate aggregate demand due to monetary factors.
The chief feature of their model is a product market in which matching is the mode of exchange. This produces costly frictions that lead output to apparently run ahead of consumption. To make sense of demand that does not automatically follow from income Michaillat and Saez introduce a ‘non-produced good’ which is endowed to every household. When households meet to exchange goods there is mutual trade of this non-produced good and households’ individually produced goods so as to optimise each household’s joint holding in utility terms. Michaillat and Saez ascribe a relative price p to the production good, which apparently becomes the absolute price when they determine the price of the non-produced good as 1. Since it is determined in equilibrium it is important that p is an absolute price, otherwise quantities of exchanges, production and labour demanded would be indeterminate in the model as they would also depend on the rate of exchange between the produced and non-produced goods. In fact it turns out that claiming p to be an absolute price is untenable. Continue reading Money and the Neo-classics… Again→
Independence is Nominal – long-gestated thoughts given birth to in response to Brian Barder’s blog post on the lack of post Scottish referendum preparedness and the need for the UK coalition government to resign if there is a ‘Yes’ vote.
Here I am, up in Scotland and strangely detached from the debate. (For comparison I was very active for the Yes side in the devolution campaign.) This detachment is partly due to personal events over the last 18 months, but also to a difficulty in getting a handle on what it all means. Continue reading Independence is Nominal→
‘Modern Thinking: Atomism and Communication’ – Although written four years ago for an essay competition, I still think this piece encapsulates as well as anything my approach to economics, politics and social institutions.
Bertrand Russell, the great British mathematician and philosopher, believed that to be ‘modern-minded’ was to make the error of thinking with the fashion rather than ahead of it. When he wrote about this in 1937 he believed that with God’s role as arbiter of truth and beauty having been usurped, ‘detachment and objectivity, both in thought and feeling’ had also been thrown overboard. Russell, as a rationalist and a non-believer, believed it was ‘possible and important’ to preserve them without recourse to a Creator. To do so, he believed, required ‘solitude’ and ‘a certain degree of isolation both in space and time’. While he may have been right when it comes to studying the physical world and creating great art, his advice is less helpful when it comes to human nature and society. Even if we wanted to, as human beings ourselves, we cannot stand apart from other humans and society as a whole. Unfortunately when this recognition came it was in part responsible for a critical wrong turning in our approach to social phenomena. This wrong turning came about because modern thinking, having dispensed with God guiding from above, had already turned to look for causes and drivers of events at the level below that at which they are observed. The properties of substances had to be derived from the properties of their molecules; the properties of the forces that change the world about us from day to day are derived from the waves and particles into which they can be decomposed. Continue reading Modern Thinking: Atomism and Communication→
The causes of unemployment make it a moral issue. Radical solutions are required.
In an earlier post I noted some features of unemployment from a UK perspective. The main thrust was that a fairly constant proportion of the population in employment (around 72% of those of working-age) hides a serious decline in the availability of adequate work, due mainly to the increase in women in the workforce and the fall in the ratio of full-time to part-time work. In a paper I wrote and referenced here on welfare I hinted at a moral dimension to the issue of unemployment in a capitalist economy (by which I simply mean an economy where physical means of production tend to belong in more or less concentrated hands).
I have now written a rather more formal paper (pdf 198kb) which I presented to the Post-Keynesian Study Group annual workshop in May this year in which I expanded on why we have a persistent problem with unemployment, and why this has a significant moral implications in our attitude to the unemployed. In this light of this I review the inadequacy of current policy and look at some of the more radical solutions proffered. The following is a non-technical summary of the paper. Continue reading Unemployment – Morality, Money and Increasing Returns→
As Kawan Patel suggested on LabourList a few days ago, New Labour was founded on the idea that while Margaret Thatcher might not have ‘saved the nation’ as her Conservative supporters claim, there were things she ‘got right’. I believe that this focus on the specifics of the Thatcherite legacy, such as privatisation and reductions in union power, is wrong. It is what was entirely responsible for New Labour’s failure to reverse inequality and for allowing a massive financial bubble to replace a sustainable industrial infrastructure in Britain. We must learn this lesson.
For a start, the image of 1970s Labour government in hapless thrall to left-wing union leaders leading their unwilling rank-and-file members to destroy the British economy is almost entirely a creation of the press and Conservative myth-makers. The root cause of the industrial unrest of the 1970s that culminated in the ‘Winter of Discontent’ of 1978-79 was consistent annual inflation in double digits. This was mainly as a consequence of massive hikes in the price of oil. Firms showed no restraint in allowing their prices to rise to maintain their profits; for workers to maintain their standards of living required credible threats to withdraw labour. In doing this they were, on average, successful – but no more than that. In relation to labour productivity, hourly wages were at exactly the same point in 1979 as they had been in 1972. Continue reading Thatcher and Labour: The Real Lesson→