There’s been a massive right wing economist / libertarian traffic on this blog for the last few days.
I discussed this with a wise friend last evening, over a glass or two of quite nice wine, I admit. They thought I was mad to accept any such comments on the blog: I said it came with the territory. The idea I was an extremist, as many of these commentators like to suggest, made them laugh: as my friend noted, and as I know to be true, being a social democrat is not extreme. It fits you into all mainstream UK political parties right now bar the Tories (I don’t count UKIP and the BNP as main stream). Not so long ago the Tories were happy to embrace it too: Red Tories are trying to revive the idea. Some extremist then.
But what of what these people argue? The comment was very wise:
All models are abstracts from reality. All models are wrong. Models are helpful if they either help understanding or accurately predict beneficial behaviour. The model that these people espouse clearly did not work. It created massive misunderstanding reflected in market breakdown. It created massive cost for society. It follows the model was wrong. How can they still believe in it?
As some others have suggested here over the last few days, a number of explanations are plausible:
- A sort of quasi religious belief in the model that defies logic now it has failed;
- Fear of being exposed as the exponent of a mistaken philosophy;
- Persistent adherence to the self interest it promoted.
So the continued pursuit is deluded, fraudulent or self interested.
Rationally there is little other explanation.
As my friend said, let’s move on to a better model as the facts clearly demand.
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Richard
You are absolutely correct that the previous approach has failed, at massive cost and it is government intervention which has failed.
We have one sector of the economy, the finance sector, which operates with a far greater degree of government intervention than almost any other. Guarantees are given to investors (euphemistically described as depositors), which encourages them to seek out the highest return, irrespective of the risk. The largest institutions are told they will be treated as too big to fail, which encourages excessive concentration. Regulations are introduced which frequently deal with a previous crisis at the expense of creating a different, but larger, crisis in the future.
So, while other sectors operate in a relatively stable fashion, the finance sector lurches around.
Yes, putting faith in a model which treats governments as omniscient and government intervention as a panacea was wrong and for once, I completely agree with you that the only reason anybody would continue to give it unquestioning support is:
A sort of quasi religious belief in the model that defies logic now it has failed;
Fear of being exposed as the exponent of a mistaken philosophy;
Persistent adherence to the self interest it promoted.
Libertarianism is a kind of religion of the simpler and less sophisticated kind, a faith held unreflectively.
Its present popularity is reactive against communism and seems to have developed from the writings of Ayn Rand, who had seen Soviet Russia at first hand. The failure of socialist regimes in Europe has also help to gain support for Libertarianism. Even the best of socialist regimes, perhaps the Swedish model, has been breaking down for the past thirty years and has left a difficult aftermath to be dealt with – though many good things too. So socialists too need to accept that this is a light that has failed.
As I mentioned in an earlier post, Libertarianism has a long history. It grew up in the aftermath of the Reformation and can be traced back to John Locke. Latter day philosophers have picked it up, notably in the USA. Rand and Nozick are two such who inform the political right, and their fallacious underlying arguments, which depend partly on sloppy definitions, need to be demolished.
Locke himself is an early Enlightenment figure and the Englightenment, too is a movement that is not what it seems. Ostensibly rationalist, it has roots in the Neoplatonist revival of the 15th century which was itself a revival of Gnostic ideas from antiquity, coming about through the translation of fifth century Neoplatonist texts which had come to Italy following the fall of Constantinople in 1453. Socialism, Marxism, and the 18th century Republican ideas which came to fruition in France and the USA can reasonably be regarded as developments of the same stream of thought, which runs through figures such as Kant and Hegel.
A close examination will make it evident that all of this stuff is profoundly anti-Christian, which is why successive Catholic Social Teaching documents from Rerum Novarum of 1891 to the latest one, Caritas In Veritatis, issued this year, take the view that Left and Right are wrong.
In the economic realm, the most serious defect of Libertarianism is its view of ownership rights. This stems from Locke’s nonsensical analysis:
“Though the earth and all inferior creatures be common to all men, yet every man has a property in his own person; this, nobody has any right to but himself. The labour of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature placed it in, it hath by this labour something annexed to it that excludes the common right of other men. For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good left in common for others.”
Although Lock’s final sentence qualifies the main proposition, put plainly, if you find a piece of land, put a fence round it and grow a crop there, it is your property to dispose of as you will, and so for all eternity. This is nonsense but it is part of the Libertarian baggage and its fatal defect.
It could be useful to tell these believers where they have got their strange notions from because they almost certainly have no idea and might be shocked if they knew.
Hmmm – rationally surely the point of the blog is that it is widely read – in which case well done 😎
rational is a fascinating word. A dictionary definition “1 a : having reason or understanding b : relating to, based on, or agreeable to reason : reasonable ”
I think it is a natural human condition to have a world view and see it as reasonable, so when you find someone that disagrees your starting point is that they are wrong/irrational/unreasonable, etc. And of course this conflicts with the academic requirement to be able to appreciate different arguments. This poorly articulated point might help you to understand why you think some of your commentors are extreme, and they have the same view of you. Nothing to do with models, just the way people are wired.
Who was it who said that a day is a long time in politics? Very relevant to your comments about mainstream, because if Gordon continues on his current trajectory then there is every chance that you will have to stop referring to Labour as mainstream.
i also recall an earlier reply you made to one of my comments – something about you not being a reasonable man – taking the dictionary definition literally it sounds like that contradicts your comments about being a rational man
Responding to PaulL, do you really believe that finance is like any ordinary business. I mean what other business gets its main materials (money/credit) for free? The best way to control finance is to nationalise this element of the business.
Carol, what makes you think a finance business gets its money for free? That is the strangest thing I have heard all week.
Carol Wilcox: “Responding to PaulL, do you really believe that finance is like any ordinary business.”
What is an “ordinary” business? All businesses are different. You’ll have to clarify what you mean.
“I mean what other business gets its main materials (money/credit) for free?”
I’ve already explained to you why it is the case that banks, building societies and credit unions don’t get their main materials for free. Do you want me to explain it to you again? If my previous explanation wasn’t clear enough, I’ll be happy to go into more detail.
“The best way to control finance is to nationalise this element of the business.”
Of all the activites which could be nationalised, lending is probably the worst to do it with. Lending is inherently risky, it involves giving money to people for some length of time knowing that there is a risk that they may not be able to pay it back. I don’t think gambling is ever a legitimate function of government.
Another thing that repulses me about the idea of nationalising the business of lending is that it is one of the areas which has a relatively strong mutual sector. The idea of destroying institutions which have been built in a co-operative spirit of mutual self-help in order to centralise control in an elitist state department doesn’t sit easily with me and I struggle to understand the mindset of those who would wish to do it.
Carol,
I mean what other business gets its main materials (money/credit) for free?
I’ll play along. A few businesses who get their main materials for “free” come to my mind right off the bat:
1) Solar Industry – main material, the sun (free)
2) Geothermal Industry – main material, heat stored in the earth (free)
3) Wind-power Industry – main material, wind (free)
4) Hydro-electricity Industry – main material, water (free)
I would ask if the statist community believes these industries should be nationalised but I think I already know the answer to that question.
Georges
As a farmer I would say I get my raw materials for free – sunlight, carbon dioxide in the air (and no it isn’t a pollutant), grass growing for free, soil providing nutrients for my crops, the whole natural carbon cycle in fact.
Other ‘free’ industries – mining, fishing, oil & gas extraction, forestry.
In fact given that human existence on planet earth is down to the energy we derive from the sun, we all get the raw materials for survival for free. Its just extracting, processing and transporting them that costs money.
What Georges and Jim fail to understand is that all the ‘materials’ which they list are in fact land in economic terms. You can ‘nationalise’ land by extracting all the Ricardian rent for public benefit via annual land value tax. Money cannot be nationalised in this way.
Carol,
If you seriously propose that sunlight, carbon dioxide and water are “land in economic terms” then you may also wonder why economists have such a bad reputation.
Whilst I am sure you would in theory like to tax the air that we breathe, and while I am sure in economic terms there is no barrier to you doing so, I’d like to see you try.
Carol,
So which is it:
The best way to control finance is to nationalise this element of the business.
or,
Money cannot be nationalised in this way.
Still playing along here.
Georges
MF
Land in economic terms is essentially any resource which is neither human labour, nor the product of human labour. I don’t see how anyone could argue that, for instance, sunlight, doesn’t fit into that category.
Mad, the reason why economists have a bad name is that they have forgotten the basics of their discipline. The conflation of land with capital (which is itself a combination of land and labour) renders their analysis of economic problems insoluble. No standard economic text examines the special attributes of land, except the fact that its supply is ultimately fixed.
You can certainly tax the ‘air that we breathe’ in as much as a location with poor air quality has lower land value than a location with sweet air. Ever thought of buying a home near a sewage or bait farm?
I’ve learned something. Shows it can be done.
Credit is money created by banks through book-keeping device, the aim being to provide purchasing power to those who need it, in what amounts to a temporary transfer from those who have claims on wealth production but do not wish to use them for the time being.
“Credit” comes from the Latin word to believe or trust in. The system is meant to be built on trust. The depositor trusts the bank and the bank trusts the person to whom credit is given.
The proper use of credit is to facilitate the production of wealth eg to enable a farmer to buy seeds and like until the crop is harvested and sold, when the credit is repaid and the debt extinguished. The cost of production of this credit is the time spent on administration, plus a risk factor against failure, the latter being in the nature of an insurance cost. Consequently, there is no necessity for interest on credit and bankers could survive perfectly well on the basis of a fee charge plus insurance premium. This understanding probably lies behind the biblical prohibition on usury.
Things have gone wrong in several respects. It is an abuse of credit to use it for land purchase, since land does not need to be produced, having existed from time immemorial. It is also an abuse of credit to take collateral, since this implies a fundamental breakdown in trust. In fact, it is not banking at all, but pawnbroking. It also leads to sloppy lending since the banks then cease to be so careful about whom they give credit to, and for what purpose. It is abuse-on-abuse to lend money for land purchase on the security of land as collateral. And since neither land, nor titles to land, are not wealth, it is an unsafe banking practice, though temporarily profitable.
Whether banks should be nationalised or not is a secondary question. The fundamental issue is that banks should confine their activities to normal banking services such as cash handling and money transfers, and the issuing of credit as properly defined. They should not be permitted to act as pawnbrokers, not to lend money for land purchase.
Henry Law: “Consequently, there is no necessity for interest on credit and bankers could survive perfectly well on the basis of a fee charge plus insurance premium.”
I don’t see what difference there is between a fee charge and interest in this scenario. They’re both amounts paid by the borrower in return for the temporary use of somebody else’s money.
Banks, building societies, credit unions, etc. are fundamentally nothing more than middlemen. On one side they have “savers” who have money, but are prepared to defer their spending and lend it to others, in return for a payment. On the other side they have borrowers, who want to spend money which they don’t yet have and are prepared to make a payment in order to do that.
The saving/lending arms of those businesses exist to match up the two groups of people in the most efficient way possible.
There is a world of difference between a fee charge plus insurance, and interest. If banks charge a fee plus interest, and do not take collateral, they make a careful assessment of the project they are giving credit for. If they are charging interest on the credit that they create, (true banks do not lend out the borrowers money) then they can create and do it for any old thing, including land purchase and consumer spending, which is an improper use of credit.
Henry Law: “There is a world of difference between a fee charge plus insurance, and interest.”
What is that difference? How does £1,000 borrowed for a year at 5% interest fundamentally differ from £1,000 borrowed for a fee and interest charge of £50?
“If banks charge a fee plus interest, and do not take collateral, they make a careful assessment of the project they are giving credit for.”
The collateral issue is a separate one, but in some respects, the collateral fulfills the same role as the insurance element of the fee plus insurance model. Take the collateral out of the equation and you just get higher charges for credit in response to the higher risk.
“If they are charging interest on the credit that they create, (true banks do not lend out the borrowers money) then they can create and do it for any old thing…”
The same applies for a fee charged. I’m not sure what you mean by not lending out the borrower’s money. The reason that the borrower takes out the loan is generally that they don’t have that money.
“…including land purchase and consumer spending, which is an improper use of credit.”
I don’t accept that there is a proper use of credit – it is merely an arrangement between a lender and a borrower and as far as I’m concerned, it is for them to decided what is and isn’t and acceptable arrangement between them. I have a similar take on the problems with our system of land rights to you, but I think they are a separate issue.
If you take collateral out of the equation, then the insurance charge has to be carefully matched to the risk. Which means that some people would get very cheap credit, including, crucially, the public sector, since there is minimal risk. How much taxpayers money goes to servicing the national debt?
The banks do not lend out depositors’ money. When they create credit they create a loan facility. That is how banks operate and have done since the late middle ages. (as opposed to Building Societies and the Cooperative Bank which are basically credit unions). The deposits just provide a reserve. Banks can safely create about twelve times the amount deposited.
On this analysis it should be easy to understand why things went horribly wrong when building societies turned themselves into banks. Apart from the ones that got absorbed into the larger banks, most of the others went bad.
If credit (remember, the word means “trust”) is properly used it results in some production taking place, which is its function. If it is used for the purchase of land titles, no production has taken place. If it is used, for instance, to purchase a fishing boat, then the credit has enabled the boatbuilders to build the boat and the fisherman to pay for it, and the fishing boat can then be used to catch fish.
The improper use of credit leads to periodic and widespread economic disruption, as has been happening at the moment. Which is why it is improper – it has implications for everyone and can be very damaging.
“If you take collateral out of the equation, then the insurance charge has to be carefully matched to the risk. Which means that some people would get very cheap credit, including, crucially, the public sector, since there is minimal risk. How much taxpayers money goes to servicing the national debt?”
I’ve touched on this issue previously. One of the biggest issues is that the government underwrites deposit protection schemes. If they didn’t, the relative security of National Savings compared to other deposit takers would enable it to offer lower interest rates. I don’t see collateral use being a big issue in comparison.
“The banks do not lend out depositors’ money. When they create credit they create a loan facility. That is how banks operate and have done since the late middle ages. (as opposed to Building Societies and the Cooperative Bank which are basically credit unions). The deposits just provide a reserve. Banks can safely create about twelve times the amount deposited.”
I’ve addressed this previously. It is a myth. There is functionally no difference between the way a building society generates loans and the way a bank does. The Cooperative Bank is by definition a bank, so to claim otherwise seems strange. Banks may create loans which are many multiples of their reserves, but that is not the same as creating loans which are many multiples of their deposits.
“On this analysis it should be easy to understand why things went horribly wrong when building societies turned themselves into banks. Apart from the ones that got absorbed into the larger banks, most of the others went bad.”
Primarily because they tried to expand by moving in to areas in which they had no experience.
“If credit (remember, the word means “trust”) is properly used it results in some production taking place, which is its function.”
If credit has to involve trust, then why is insurance any more permissible than collateral? Surely that equally implies a breakdown in trust.
“If it is used for the purchase of land titles, no production has taken place. If it is used, for instance, to purchase a fishing boat, then the credit has enabled the boatbuilders to build the boat and the fisherman to pay for it, and the fishing boat can then be used to catch fish.”
The issue of land titles is complicated by the fact that the land title is usually accompanied by a produced item – a building. I don’t see why the finance system should be used to address issues which are really a factor of the system of land tenure we have. I don’t really see how the rest of the argument holds together. Consumer spending on credit results in production taking place too.
There is a huge difference between credit unions and banks. Go into a branch of the Co-op Bank and they will explain why they have not got into trouble.
Deposits are credits the depositors give to the banks. From the bank’s point of view they are a liability. And banks can create about 12 times the amount of credit on the strength of those deposits. These loans are the banks’ assets.
Insurance is indeed a measure of the breakdown of trust and confidence. The world is unpredictable. And some people can be trusted more than others. Insurance puts a precise charge on these risks in a way that the taking of collateral does not.
You are right about the fact that property is both a produced item and land. This was perhaps implicitly understood when building societies limited their advances to a fraction of the total value, not 125% as Northern Rock were doing!
I am not sure about the use of credit (created money) for consumer spending. In recent times it has been secured on land, which is dangerous for lender and borrower.
“There is a huge difference between credit unions and banks. Go into a branch of the Co-op Bank and they will explain why they have not got into trouble.”
They didn’t get into trouble because they took a more prudent approach. The same applies to other banks who didn’t get into trouble. Likewise, some building societies got into trouble and others didn’t, purely because of the risks they took. It is nothing to do with the way they grant loans. Functionally, banks, building societies and credit unions use the same credit creation mechanism.
“Deposits are credits the depositors give to the banks. From the bank’s point of view they are a liability. And banks can create about 12 times the amount of credit on the strength of those deposits. These loans are the banks’ assets.”
A bank cannot create any more in loans than it has taken in deposits. It can use a fractional reserve system to create many times more in loans than it retains in reseves, but that is a completely different matter.
“You are right about the fact that property is both a produced item and land. This was perhaps implicitly understood when building societies limited their advances to a fraction of the total value, not 125% as Northern Rock were doing!”
I don’t think the split necessarily even entered anybody’s head (unfortunately). I suspect that NR just assumed that land prices were on a permanently upward curve and made decisions based on that assumption.
Paul – thanks for clarification.