Bring back the light
Is there a role for more central governance replacing market forces in some areas of economic activity, or is the free market the ultimate answer?
Is there a simple solution that is achievable and would permanently and effectively fix the current global economic malaise.
It is hard to tackle a subject like this without being immediately immersed in a discussion about economics. After all the science of economics was ultimately a replacement for monarchy/dictatorship and many of its earliest theories were as much arguments against feudalism as for free and open markets.
A popular modern definition of Economics is;
“the scientific study of the choices made by individuals and societies in regard to the alternative uses of scarce resources which are employed to satisfy wants”.
Nowhere will you find a text that suggests economics has any role in providing for people’s happiness and wellbeing.
There are many who intimate that democracy provides for individual freedoms that surely must be making people happier. Is that so?
Many point to the fact that countries with a free economy produce more wealth and therefore their people surely must be happier. Little attempt has ever been made in any economic or government science to measure happiness.
In this piece I discuss the balance of power between workers and capitalists, the roots of the current crisis and a surprisingly simple move that could wipe out the entire problem.
Bring in the new?
Is economic theory old and outdated or do 18th century theories still apply to 21st century economies? Are you really more free when you live in a democracy? Does more productivity increase your well being and happiness?
Central themes of economic thought
The following summaries cover most of the underlying principals on which economic discussions today are based. Skip them if you wish, you can always scroll back up if you need to.
1. “The invisible hand”. Adam Smith
This refers to an unseen force embodied in free markets that direct investors to produce the things that people most want to purchase better than would ever be possible through the hand of government or dictatorship.
2.” Perfect markets” based on knowledge. Hayak
The idea echoes Smiths invisible hand and explains that the information provided by the markets in terms of the transactions taking place are all the information needed to self-govern a perfect market.
How it works is this: many people want to own cars so they go to a dealership, this obvious demand results in the dealer putting prices up, which in turn leads to manufacturers increasing production to grab some of these profits. Higher production leads to a glut of choice and customers begin to shop around more, the dealer has to lower prices to keep selling and this in turn leads the manufacturers to ease off a bit. A perfect circle of information that is self governing.
Smith argues that no amount of central planning even without the sloth and inefficiency we have all come to expect, would ever be so reliable at governing these markets and many agree with that, but not everyone and modern technology must surely have a major impact on that equation.
Bear in mind also that central control of productivity could just as easily happen in a democracy as any other society they are not mutually exclusive. Indeed it is perfectly feasible to have free markets with a substantial degree of guidance. This was a primary goal and a huge success story for the EEC which became the EU.
3. MV = PQ . Irving Fisher
Money supply times Money velocity = Price times Quantity
Challenged later by Keynes who demonstrated the impact of other social inputs on people’s buying behaviour, nevertheless the core idea is sound as long as the caveats remain in place.
All the money available to be spent is the amount in circulation times the speed at which it moves around from person to person. This means that the total goods sold, and therefore produced and therefore the employment levels will be equal to this available money assuming of course that it is all spent. Modern calculations of money supply ignore long term saving accounts etc.
The part of this that trips many beginners is the significance of velocity. What this means is that an economy where people are very active spending will also be very active producing and therefore the single factor influencing employment and GDP is the activity levels of individuals.
This only becomes complicated when people consume stuff from other economies and don’t balance that out with sales to other economies, then they are effectively exporting the employment and reducing the money supply so there is less going around. Likewise, when they do the opposite and export too much their currency can become too valuable and they soon find they can’t export and employment falls. Balance and cooperation is the key to prosperity. Hold that thought.
4. Inverse relationship of Interest rate and employment.
Disproven by Keynes. Clearly high interest rates do not necessarily mean low employment and vice versa.
5. The problem of free markets . Adam Smith
He described a simple dilemma that exists today as it did in the eighteenth century that: If you let the workers organise, they will overpower the capitalists and destroy the market. If you allow the Capitalists free reign they will organise oligopolies and enslave the worker.
The first we saw happening as Thatcher came to power and the miners were taking control. We second scenario wright now. Both apparently a result of over-compensations.
6. Trickle down theory. Neoliberalism, Chicago School, Thatcher, Reagan.
It holds that if you incentivise the richest in society they will invest more and some of the gains will trickle down to the poorest in society.
We still live by this rule more than any others and our cities are full of starving people waiting for crumbs to fall form the tables of bankers, yet even the hungry continue to espouse principals they never even understood and vote for the party their father voted for. More about this below.
In truth this theory was intended differently, it was based on a sound notion that encouraging people to start businesses would create employment and thus wealth for all and although it meant helping people who were already well off in the short term, as opposed to handouts to the poor, in the medium term a government could do more good in this way.
If you think about paragraph 3 above, you will realise the power in this theory as activity breeds activity and the once poor open new businesses to meet demand.
In reality, trickle down theory in its original form is really another expression of MV=PQ and as long as the caveats remain in place and governments don’t use it to help the super rich hide their billions offshore, nor encourage stock markets to rise on the back of cost cutting, nor accept campaign funds in return for pursuing the aims of the super rich, then trickle down theory is surely a necessary part of every recovery plan.
The reality however. Is no surprise to students of human nature, but suffice to say that:
- The power of Governments comes primarily from the Oligarchs who fund the Political Parties and heavily influence who gets selected to stand for seats including a large number of “Safe seats” in every country. That alone amounts to Mr Oligarch literally deciding who will be the Members of Parliament for specific constituencies.
- Next in order of power is ownership and control of the popular media that voters turn to for a hint. The owners of these media buy the specifically for this power and monetise it in various ways other than selling newspapers.
- Finally there is provision of huge budgets for advertising, PR and other activity to ensure that their favourite candidate is elected.
These three seats of power can comfortably dictate which party wins and who specifically will occupy a portion of the seats. Leading on form this, they again have huge influence on the choices of cabinet ministers. This sort of political power among Oligarchs naturally prevents the citizen form receiving the rights and protection she deserves and this is magnified in an y country with no or a weak constitution to control the power of politicians once elected.
The roots of modern economics thinking
When economic thinking was being formed and the great works that still guide is today were being written, the world was a very different place and the average person had a different set of problems to deal with. In fact I digress to say that the average person had never heard of economics and there was nothing at all average about Adam Smith, Hayak, Friedman etc They were born with privilege and whatever their theories, they certainly never understood what it might be like to be an average person.
Adam Smith wrote “ An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776. His Father was a Lawyer and his family, well-to-do middle class professionals.
He lived in a time and a place where men toiled in fields in serfdom for bread and a cottage and the industrial revolution was getting under way.
The road to freedom in the 18th century would undoubtedly have been blocked by the fact that all means of creating wealth was owned by the upper classes by right of birth. Capital was as yet a very simple concept and average people had no possibility of raising capital.
Hayak was born into Austrian nobility and educated in Vienna at the height of Austro Hungarian power. Much of his drive to promote free market economics and small government was a commonly held reaction to the Germanic drive towards organisation and planning and veneration of the state. We all know where that ultimately lead.
John Maynard Keynes was born in Cambridge, in 1883, to an upper-middle-class family.
He lived against the backdrop of the great depression and was a giant in the move to convince government to alleviate poverty and stimulate the economy through forms of QE. He counselled against the policies that drove the German people into WW2 and after the war, at Breton Woods, he proposed the creation of a common world unit of currency, the bancor, and new global institutions — a world central bank and the International Clearing Union. Keynes envisaged these institutions managing an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses. The USA’s greater negotiating strength, however, prevailed. Keynes was later proved correct yet again by events.
While there is still much to be learned from the work of these great thinkers and in particular their wins and losses in the real world of economic management, it remains a fact that the world we live in post 2007 bears little resemblance to Feudal Scotland, the French revolution, WW1/2, or even the great depression.
- Some things were understood, but conveniently ignored when the work of these great men was adapted by politicians like Thatcher, Reagan et al.
- Some ideas accepted as fact in previous centuries and even some that underpinned pivotal theories are known to be inaccurate, or to have become outdated.
- Above all, as these theories were tested in various scenarios, each was twisted and misused to benefit politicians and their wealthy benefactors.
Despite these facts, we continue to slavishly follow the school of Smith 18th century, Hayek, Von Mises, Friedman, Keynes early 20th century and to do so with a religious fervour that precludes any questioning, or analysis, even to allow for the passage of time, changes in the sociologic state and revolution in information technology.
In fact, it would seem to the casual observer, that the only development of these theories has been to casually ignore bits that don’t suit a particular political campaign since in the world of economics the price is more often than not paid several years down the line.
Some notable changes we need to be aware of
It is important to be aware of some developments in our economic world that have profound impacts on those early theories. There is a real danger of getting bogged down in politically driven views about complex theories so I will be vigilant to avoid hotspots and keep this simple.
Utilisation of scarce resources.
This is a founding principal of economic theory and when exchanging diamonds, or even potatoes, the theory worked very well. Unfortunately, when we extend the market model to commodities, or things that are not scarce, the theory is thrown on its head and when we delve into options, naked shorts and even the world of spread bets it all falls apart.
Cast your mind back to the discussion on perfect information, Adam Smith and Irving Fisher. Scarcity lead to high prices that drove increased production and the inverse quickly corrected things. With fast flowing information today, one might expect the waves of over-compensation to be very small and a good correlation between production and demand, but in fact this is rarely the case and the reason is connected to this discussion.
The first problem is with markets in promises that do not necessarily result in the delivery of goods. Here the connect between actual supply and goods sold, just as between demand for goods and actual production is totally broken down.
Let me explain; a potato exchange meets every week to trade potatoes, but then they decide that instead they will trade options to buy potatoes and they can simply write these options out and sell them for good money. Then they decide that you don’t have to deliver the potatoes at all, but you can simply fail to deliver because the price has gone up and you pay a penalty, but the important thing is you are trading in potatoes that never existed and hence the fundamental supply and demand basis for price discovery has gone out the window.
Before long there are options in existence for many times the number of potatoes of the entire production is likely to be at harvest time. This brisk trade has led some to believe that there must be a poor crop coming and potatoes will be scarce, so they rush out to bid even higher for these contracts. At some point a few brighter ones realise there could be a problem coming and sell out everything, thus giving out a negative signal and sparking a huge sell-off. All the time the prices are over correcting, an algorithm from a high-frequency trader is picking off profits without contributing liquidity, price discovery or anything else. Effectively this trader is eating a little piece of a poor person’s dinner times a few million at each move of the needle.
High Frequency Traders use large funds to grab an unfair advantage and in the process they create a cloud over price discovery. Unethical practices such as stop running, quote stuffing and forms of short and distort further distort the ability of the market to reflect a true value for assets.
This phenomenon has been studied by the greatest minds in mathematics and human behaviour to find some way of predicting where a market will end up tomorrow, let alone next season yet with the wealth of the planet at their mercy should they resolve it, nobody has achieved anything better than the results of random guesswork.
What this tells us is that once we are dealing in promises to deliver gold bars, coffee, oil, or whatever, there is no longer any useful information in that market to help drive production, very little to regulate price and none of it beats guesswork.
The speculators argue that allowing short sellers to take positions, assuming of course that we had knowledge of all these positions, adds useful information to warn people of an imminent drop and help to regulate prices. That may occasionally be true and of course, for large merchant banks who often walk with both seller and buyer, but has no value for society and creates enormous volatility not to mention motivating people to manipulate markets with misinformation. Countless papers have been written and all of them point to an issue with unreliable information attached to instruments like naked short selling.
It is clear that most commodity markets are now awash with data (I wont call it information) many thousand times greater than the actual activity in exchanging goods and it is at best meaningless, but at worst causes extreme loss and pain to producers and consumers when it goes wrong as it frequently does.
Availability of data to everyone in real time.
The twitter generation are surrounded by dashboards and feeds telling them what every other little starling in the flock is doing or chirping about right now and where the flock is currently apparently going. The only real value of any of this is to observe from afar the interesting patterns left in the sky by the flock and occasionally to recognise that there is probably a cat over there or the one on the right really wants to get next to number 335 and won’t stop swerving till he brushes up to her. That of course is my opinion, you may find it a source of wisdom or even inspiration and that is great for you. What nobody is getting from it is any useful information. Even the potential cat in my example is nothing more than an apparent reluctance to go south east but it could be nothing.
Stock market information like commodities markets and news in general is multiplied by thousands of times in myriad versions and released into the air alongside accidental and deliberate misinformation in huge quantities and the result is little more than a grey haze on the windscreen and interesting psychedelic patterns to admire.
What is notable about all of this is that it is not the speed of information that is a problem, but the ability of everyone to freely add to it anything they wish whether accurate or not and there is little anyone can do about that.
In a closed and supervised information network, the speed of communication would be a critical advantage. Colonel John Boyd of USAF observed the advantage enjoyed by his pilots because of better visibility in the cockpit outweighed the fact they piloted inferior craft leading to substantial wins. He used this to develop his OODA loop theory.
The ultimate diagnosis has to be that there is no information in any of this activity and apart from luck which will eventually balance out, or inside information which is rife, nobody knows anything useful about supply or demand.
Before you stamp your floor indignantly, compare the performance of the top ten investment managers in the UK to the FTSE100 index a script written by a ten year old with help from his granny in terms of its sheer simplicity.
Enjoying your freedom?
The moment you arrive on this planet, before you even open your eyes, a great deal is predefined for you and much of what has been pre-ordained can only be changed under great duress, though you are still left with perhaps more freedom than at many points in man’s existence.
First of all, it is unlikely that you would be capable of any form of independence within your first ten years and even longer in an urban environment so like it or not your fate is tied to those who are connected to you, usually by blood, though in reality the blood is irrelevant and an ingenious piece of programming makes us connect to the first pair of eyes that make regular contact with ours and applies a similar affect on the adult involved.
By the time we reach our teens and are capable of some sort of independence, we are already committed to a country, a region, a family, possibly a religion, certainly a moral code of some sort, a type of person we like to associate with and many other deeply ingrained preferences, beliefs and affiliations, many of which we have no control over and the rest we have had little control over.
This conditioning and circumstance will determine immediately whether we are likely to be academically capable and accomplished, whether we are honest, whether we dress and speak well, or rather roughly, how we carry ourselves, our general manner, our self image, what we believe we are entitled to and what we are likely to aspire to.
The latter aspects of our demeanour will then dictate what opportunities we have in life to a large extent.
Rarely will we even attempt to move outside of that comfort zone unless we continue to a high level of education and, or travel to a far away and very different society and live there for a long time.
By full adulthood, we probably have pledged allegiance to a political party and perhaps if we are so inclined to a school of economic thought. Though that probably does not mean we understand it. In truth the older we get and the more we experience life the more closed groups we subscribe to and the less open our minds become to new ideas and thoughts, therefore the less free we become.
No room at the inn
Notwithstanding all the cultural baggage we have picked up by this point we are also lumbered with a very crowded planet. We can’t go and pick some fruit, or kill a rabbit to feed ourselves, the land where these things are all belongs to someone else, probably someone who inherited it at birth and this food is their property. Neither can we collect some materials, pick a spot and construct a dwelling for ourselves, all the land belongs to someone else apart from public roads and parks, but you can’t place a dwelling there either.
It gets worse. Of the places not privately owned, you can’t eat in certain places, drink in others, sit in others and you certainly can’t sleep in them. You are surrounded by food, but you can’t touch any of it. This, my friend, is freedom.
You are for the most part confined to living in the country in which your parents lived and hence where you were allowed a passport. Travel to other parts of the world is only by prior permission and potentially suspicion and you travel with few rights. Don’t be fooled by the ease of casual holiday or business travel. Step outside these streets and these hotels and you will see a very different side.
In most parts of the world you no longer have a right to water and it is surely only a matter of time till the air is for sale. Certainly clean air is already becoming commoditised like clean water has.
You would be if you didn’t wander about with your eyes shut, but that too is part of our conditioning. Just like we suspend disbelief when we go to the movies, so we step into line every day with the currently accepted way of thinking, acting, being and we have learned to express our deep satisfaction with it if we know what is good for us. Luckily most of us do. Apart from the most vigilant and determined, we have also learned to believe what we say in preference to what we think. If indeed we think, let alone freely.
If you are in any doubt about this, just observe the hatred and mistrust directed at gypsies and travellers who dare to be different, who shun our cities and concrete houses, our 9–5 jobs and odd habits. Go have a conversation with any ethnic community you know, if indeed you do know anyone and they will trust you enough to speak to you and see how well they integrate with the local mob. It’s often not pretty and it takes a very long time for attitudes to change. If you spend some time with communities you believe to be fully accepted and integrated and if you can get their trust, you will then learn just how far wrong you were.
The influence of the crowd in our lives
Very early in our childhood we learn the lessons of mob acceptance. It has been observed by child psychologists that a child on encountering a new group at play will often go through the motions of playing their game without attempting to play with the group, thus demonstrating to them that she knows the rules and is one of them, before then being invited to join in the game after due consideration by the peer group. This little charade continues throughout life and people either dance this dance or dance their own, largely depending on whether they have a group of their own peers to associate with or they are entirely alone. Immigrant groups generally choose to remain aloof, while individual immigrants integrate totally.
If you want to understand some more about this phenomenon, read about the Stanford prison experiment when well bred, well adjusted students were placed in an experiment whereby some were made prison officers and others prisoners and left to set their own rules. The experiment had to be stopped because of the systematic abuse of prisoners and the genuine fear that a fatality might occur. People are conditioned to both use and respond to authority and to adapt roles without a second thought and until you are thrust into a new role you have no idea what you will do, I promise you.
How much of what you believe in strongly is yours?
Do you hold some strong beliefs? You would do well to question them.
It is well proven and it is easy to test the simple fact that if you ask someone to argue a point on your behalf, one that they do not currently hold to be true, they will become enthusiastic proponents of it, often despite conflicts it may have with their other strongly held views.
Yes it is true, not even in the sanctuary of your own mind, in fact, especially in the sanctuary of your own mind, are you free. Not even a little bit.
If you were truly free? I mean free to do anything, other than to injure, rob or hurt other people, what would you do that is different? Hopefully you don’t really want to hurt others. Let’s assume everyone in the world has an unlimited credit card as long as they did something useful towards providing for themselves. There are no boundaries, no governments, nor rules, just freedom;
- Would you work every day? Same as now? Less than now? More? Never?
- Would you change how you get food on the table and provide?
- Would the way you bring up your children change at all?
- Would you live in the same place? Country? Continent?
- Would you try to accumulate lots of cash?
- How much of your time would you dedicate to different things?
- What is the biggest change you would make?
- What is holding you back right now? Is it real, or imagined? Are you sure you couldn’t just do it if you really tried?
- Is everything in your new list of important things available to you via the free market? Could you order it online? Call a service provider? Do it yourself?
- If not why not?
10. How much would you be influenced by what others are doing?
- Who would influence you most?
- Why would it matter?
11. Once you stopped buying things and changing things, would you be happier?
- A lot, b A little, c Not at all
12. How much do you think you would have changed as a person?
13. Would you find yourself craving a familiar wall to bang your head on?
What does all this have to do with economic theory?
Well cast your mind back to this theory; ”the scientific study of the choices made by individuals and societies in regard to the alternative uses of scarce resources which are employed to satisfy wants”.
We have already spent some time examining the level of true freedom individuals really employ to make choices and accepted that most of the time they are reacting to what other members of the gang nearby are doing. Rarely are they attempting to make an informed choice and even rarer is the availability of useful information. For this reason, I have elected to replace choice with “reaction”
As we have seen there is little need to separate individuals from societies and indeed the individual has precious little freedom even within our own minds. Our attitudes are set by our need to belong to the safety of a gang and by the continuous stream of gang thoughts delivered by advertisers only too aware of all the weaknesses we discussed above.
Let’s ignore individual then and just use the word “gangs” as a replacement for society. You are free to substitute your own word, but don’t spend all day fretting over it.
As we noted above there is really little choice for someone who is indoctrinated and locked into a gang mentality. Someone who needs to have what the other gang members have and to copy the others in most every ways. Likewise economics is about use of resources not anything else, so lets substitute choices with “purchases”.
Scarce resources no longer has a great deal of relevance for most of the economic activity that occurs every day. Even though the commodity may be scarce, trading in its shadow via pieces of paper is unlimited. Furthermore, the internet has made it easy to source a replacement supply anywhere on the globe and get it on your shelves quickly therefore, eliminating most of the impact of scarcity when it does occur locally. Therefore, let’s ignore this bit.
We also discussed the motivation behind these purchases and we came fairly easily to the conclusion that our wants are nothing more than the signposts we must display to demonstrate our membership of our chosen gang, so wants is somewhat vague and it might be more accurate to say satisfy our peers.
So now we have; the scientific study of the reactions of gangs in regard to the alternative purchases which are employed to satisfy the opinion of their gang”.
To a marketer about to embark on a huge campaign, I can tell you from experience that this definition will serve you far better than the current academic one.
All the same, does that that look anything at all like a science that might have some impact on the happiness and wellbeing of people?
Is it immediately apparent, or even after some thought, that this theory is superior to a central controlling force such as a bigger government, monarchy, dictatorship.
I know what you are thinking. We spoke about this in a previous paragraph, you already followed your conditioning and associated Monarchy and dictatorship with persecution and you associated bigger government with socialism and you stubbornly stomped your foot without ever even knowing why. That’s exactly what we’ve been talking about all along.
I am not personally in favour of Monarchy, nor dictatorship, although there have been many and still are who are as respected by their people as any elected leader.
My argument is that there is a higher risk of a king or dictator abusing their power than of an elected leader. Many elected leaders, however, have and continue to abuse powers and abuse their people in all kinds of ways, but I feel there is a better chance of getting rid of them from a democracy if that were to happen. That is just my personal belief, but it is constantly under review.
What about a bigger government, i.e one that helped regulate prices and police information so that it is accurate. They do this already with the price of money and information about how PLCs are performing and it is indispensable to our markets. Why not extend this to all important commodities like rice and coffee and wheat etc?
Why not help farmers choose the crops for which there will be reliable demand and help regulate prices as the EEC used to do when it bought surplus production and released it back bringing enormous benefit to farmers and consumers alike?
Again, I am not wild about the idea, not because in some countries that would be interpreted as communism, but because I don’t trust big government in terms of either honesty or capability. In my personal view, small government is a necessary evil, but big is pretty much guaranteed to fail and cause a big disaster. Again, this is my personal reaction though based on plenty of experience on the inside, I accept it is just an opinion and it is under constant review. I also accept that any government in the grip of big business is equally doomed and that big business absolutely must be controlled.
You’ll be pleased to know that I have no big answers, only big questions, but I have a lot less of these questions than many of my peers it would seem.
The point I am making is that many of the things you and I have accepted as givens about our world have no basis in fact and are nothing more than an illusion.
Communism is not a threat to anyone, the Russians or indeed the Chinese are not planning the downfall of America or Europe, the EU never banned bent bananas. Democracy and free markets are not interdependent in any way.
Globalisation ouch! But it used to feel great.
Everything about economics that we understand and are certain about supports the belief that when more people cooperate, all participants have a realistic chance of gaining from this cooperation. I.E. the pie gets bigger and everyone can have a bigger slice. It is a simple and powerful theory that has stood the test of time.
Countries/Economies with peace, order, lawfulness and trust have a strong culture of cooperation and everyone is benefiting. This law also applies to countries cooperating with each other. The barrier and therefore the challenge, is exactly the same, common rules, policing, shared principals and beliefs and a gradual growth in trust are the elements that fuel a global economy too.
After WW2, there was a real fear that global trade might not be able to resume because of mistrust especially given that everyone was broke. Breton Woods provided the assurances needed to get global trade started again and without that most of us would probably not be here now. So there is no question that global trade is necessary and that it requires areas of trust between trading partners.
The problem we have with this theory is that unsophisticated humans feel more comfortable amongst their own kind where they can see the symbols of belonging displayed, hear the familiar chants and easily gauge what the gang will do next.
Today our global trade includes labour/services. An enormous army of people, myself included travel frequently to work in other countries, where we provide scarce capabilities and earn welcome revenue. It’s win/win and it is so powerful it won’t go away no matter how badly some other sectors of society may misguidedly wish for it.
Right now all of Europe and the US is reliant on an army of similar skilled IT workers mostly form India who keep our businesses running both from offshore and onshore.
These people provide their services which we value and need in different ways but the outcome is almost exactly the same. They provide services and in turn we provide them revenue. This is a perfect example of economic theory at work. Likewise, we trust, rightly or wrongly that the market will tell us when we don’t need more of any service. This latter signal is already visible via the rapid increase in the cost of outsourced software professionals that makes them only marginally cheaper. We now hire them because we have no alternative rather than for cost cutting.
But there are problems too with trade in services
- When we bring people into our country, wherever that may be, the visitors are entitled to public services. I doubt any mentally healthy person would argue with this. Nobody will take his family to another country where he will be denied healthcare, denied protection by the police and not allowed to educate his children, especially if he is paying local taxes both direct and indirect on top of productivity. No skilled and valuable person will move his family to a hostile environment.
What really happens of course in most countries is that governments find other ways to spend their revenues and neglect the services, not only failing to cater for this sort of growth, but as in UK for example, allowing services to shrink in real terms year on year and decade on decade in the face of growing population.
Local people are now struggling to find good schools, queueing for medical care and police response etc and they begin to blame this wrongly on migrant workers, or immigrants, with no discouragement from politicians I might add, but the truth could not be more different. Highly skilled migrants pay a higher net contribution than locals and are entitled to what they receive, but government is happy to take their contributions and fail to meet their commitments.
- The laws that bring in highly skilled and much needed workers cannot be prevented from bringing in low-to-no skilled people who are needed in the short term, but then remain and can contribute much less in the medium term, yet also compete for services and for jobs at the lower end where pay is poor and the lower paid locals are already struggling. This leads to resentment and breakdowns in relations.
- Importing the goods, but leaving the people offshore doesn’t solve the problem as Americans will attest. The stuff that is made abroad puts people out of jobs back home and the money earned by these workers benefits the offshore economy instead of being spent in the local economy to speed up “velocity” and keep the pot boiling. What is gained with the left is lost with the right and then some, but it at least avoids mistreating people.
- Balance and cooperation is the key to prosperity, remember when we talked about this. One of the most vexed mistakes people make about economics is to imagine that a country is a company and that the road to prosperity is to sell lots and buy very little building up a huge surplus. Not quite. There are only a few players in our economy and when one can’t afford to shop that spells trouble for all the rest. The money must move around constantly and there must be balance or jobs disappear fast.
The real problem with globalisation
No, it’s not all rosy, there are big issues too.
There are many flavours of globalisation, but the one that helps nobody is the proliferation of market leading global giants who have reached the level where they can totally dominate the supply chain and to a large degree fix prices independently of supply and demand either via monopolisation or by arranging loose oligopolies that are all but impossible to govern. Accelerated by the era of zero interest rates, acquisitions have become the tool of choice for expansion and it is a trend that will either create its own end or resulting all markets being dominated by one or two global giants in an oligopoly.
Most people in UK for example, even those who have never been inside a Utility will tell you that the big 5 or 6 players agree prices and don’t compete. Nobody has ever proven this of course and it could simply be coincidence, but despite every attempt at using market forces to keep prices competitive, they continue to rise in the face of falling oil and gas costs.
The US is full of such businesses. All around the word there are chains of fast-food businesses, retailers and others paying wages that will not sustain an individual let alone a family for a full week’s work. They can do this because the government or rather the tax payer, you and I subsidise these business by providing social housing, food banks, nice roads, clean pavements etc for free, thus paying their staff and allowing them to operate these models and in many cases the profits from their trade end up in an offshore tax haven. To add insult to injury, governments are focusing on taxing low paid workers to get some of the missing tax revenue, but still wont do the obvious thing and set a realistic minimum wage.
The ability to avoid taxation is bad given the dire straits many of their staff live in after paying theirs at source, the imposition of poverty on the poorest and least privileged is unforgivable.
The fact that unskilled immigrants will work in these places for a spell while they find something better is not the cause of the problem. If anything, it shows their desire to work rather than seek benefits.
Think also about the affect of systematically removing currency form the world economy and salting it away in havens. These big players are now refusing to feed the pig they plan to feast on because they have become so greedy and lost sight of reality. This has other consequences beyond the scope of this piece.
As governments begin to attack the loans back from tax havens they deprive the economy of investment. It’s not an answer.
The simplest solution to the race to the bottom with ages and zero taxation on big business will cost nobody anything and make the world a better place for everyone, but we don’t currently have a crop of global politicians with the mindset or courage to bring it about.
Business is all about competition. If you ever launch a product or a business or even a serious campaign, one of the earliest moves will be a competitive analysis of that market. In a pinch you could get away with only this move. Why? Well all you have to do to be successful in business is to compete well with the others and ideally get to be number one. It’s never a measure of how good you are, such a measure doesn’t exist, it’s how much better or wore than your competitors that will determine your results.
Not only that, the leaders of these businesses motivate themselves via their natural competitive drive to dominate their opponents, which of course, amounts to the same outcome.
That is why the thing that counts is a level playing field. Businesses will say it is not the policy we worry over, it is the uncertainty. That’s because a level playing field is all they want and their strategists will set about trying to tip it a little in their favour then the game begins and everyone is happy.
The reason the global race to the bottom remains a problem
It’s still a problem because the global marketplace is not a level playing field. If every business in the world pays no tax, that for them is a level playing field, though eventually it will spell ruin because there will be no police, no services, no roads and they will have to give up.
If however, every business in the global marketplace pays the same level of tax and if there is nowhere to hide your loot (no tax havens), that is also a level playing field, but it is much better for everyone because it is sustainable.
So why are we not getting on with it? Why do we have tax havens and convoluted rules with the big businesses failing to contribute their share.
Cast your mind back to the recent US or other election, or a previous one if you prefer. If you have time you might research who donated the money to fund the candidates and who chose the teams that would govern once the dust had settled. However you dress this up, you are most likely going to conclude that the people sitting in positions of power in the great nations are put there by the people who control the money sitting in tax havens and in some cases those politicians sit on substantial piles of it themselves, or they are put there otherwise by people who control the world’s biggest global corporations.
We seem to be on the brink of going back to an inward-looking series of walled in, suspicious and starving nations looking for scapegoats rather than solutions.
Far more worrying than the rumble of bombers in the distance is the existence of active military contractors using illegally acquired data in information warfare to literally brainwash dumb, impressionable and uneducated people via their natural bias to get precisely the outcome they want in election after election around the world.
These people are not only a threat to democracy as an institution and the ensuing peace and prosperity, but to the world itself, yet nobody will as yet, move to deal with them.
Countries are in some cases, UK in particular and to lesser degree, the USA, corrupted by the huge donations from lobbyists and donors, most of whom are simply looking out for the interests of these huge corporations and many only citizens by convenience.
So what could the conclusion be?
- My definition of Economics is more realistic:
“the scientific study of the reactions of members of gangs in regard to the alternative purchases which are employed to satisfy the opinion of their gang”.
- Above all we have to accept that Neoliberalism, the belief responsible for the mess we currently have is a failure and needs major revision or probably outright replacement.
- Clearly, we need to establish some shared views on economic theories and how they affect all of us and start holding politicians and business leaders to account.
What could those key principals be?
- There is no doubt that global trade is the new internet and it won’t go away, so rather than building walls, we need to understand, regulate and embrace it.
What might that look like?
i. Global giants are bad for investors, bad for employees and bad for the economies of the countries they operate in. They only exist as vehicles to huge bonuses enjoyed by an elite powerful and often ruthless handful; their size and power has to be reduced substantially and permanently.
5. What might this new landscape look like?
i. Global governments must agree a common policy for taxing
international businesses where they earn profits and put an end to ‘beggar thy neighbour‘ tactics that see these people avoiding their responsibilities almost entirely. I would personally favour indirect taxation that is simple to administer combined with larger tax free allowances to encourage start-ups and small local businesses, but the method is less important than the principal.
ii. Shut down all the tax havens and any money that can’t be properly accounted for should be used to alleviate poverty reward the countries that agreed to cooperate and other good uses.
iii. Take a high tax rate from those who claim money but have not paid tax on it.
There are already enough global institutions to get this done and indeed there are already discussions in Europe and murmurs elsewhere. These people need encouragement and support from the public.
iv. Individual countries must agree to curb the size of donations and control the means and quality of electioneering. If we can’ make proper use of the tools we now have at hand we will be attacked and destroyed by them. Politicians and political parties don’t need millions in donations anymore. In fact, the entire system could easily stand up to a complete revamp and entry into the 21st century, but one step at a time.
v. Globally countries must agree minimum wage adjusted based on the cost of a parcel of goods, so that labour too is a level playing field. In the longer term this agreement could extend to human rights and all sorts of shared values as long as the pies is tasty enough and it will be.
How might that be achieved?
- Use the gang culture only this time use it to build a gang that won’t stand for this rubbish. Sanctions that don’t starve the poor and membership of a new elite trading club with real benefits would be a great answer.
- Make the symbols of membership of this gang integrity and cooperation. Shun those who would ignore our values and celebrate those who are with us.
The same forces that threaten to destroy our world can be realigned to bring back the light.