A commentator on this blog highlighted in a few words the fundamental flaw in right wing thinking on economic management overnight when he or she said:
Running a country is not same as running a company. For example when a business lays off workers they become someone else's is problem…a country however can't sack the unemployed…
That's why micro-economic thinking from those who think the country is UK plc is failing us.
We are all in this together. They just haven't realised. Governing for everyone is beyond their imaginations because it is beyond their theories.
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Businesses do micro. Governments do macro. The fallacy of composition: every firm wants to pay its workers as little as possible, but it wants its competitors to pay its workers more so that they can afford to buy what it sells. That’s why a minimum wage is good for business. Right wing economists do not seem to understand this.
Bang on
I might post that….later
Of course, at the moment the Government IS ‘sacking’ the unemployed and ill, by showering those on benefits with opprobrium, vilifying them, cutting off their basic subsistence, threatening with eviction and giving the rest of the populace the view that they are the problem and are letting others down. It is not enough to be unemployed under this vile, moronic administration -you must be ‘sacked’ as well -both materially and psychologically.
Actually, a lot of companies have as their objective to pay “above average”; sometimes for all staff, sometimes just for management. Just as problematic, especially when they perceive themselves as above average but are unexceptional achievers.
One is reminded of Henry Ford and his perceptive question about how many cars can his assembly-line car manufacturing workers afford to buy. This important aspect, that monies denied to the economy through cuts and sanctions and workfare can’t be spent, seems to entirely pass neoliberal thinking by. The bosses of Tesco are apparently beweildered that their profits are falling at precisely the same time they choose to pay their staff so badly many need their wages topped up by the goverment and they also use workfare staff whom they don’t pay at all. These people, people at just that place in the economic spectrum, are Tesco’s customers. If Tesco and similar firms don’t invest in them via wages then they in turn can’t spend back. Where there is no appreciable investment, there is no yield, yet yield is precisely what big company bosses, confused on this issue, seem to expect. When profits fall as a consequence it astounds them. The only people I can think of who this economic model works for is Poundland as when people can’t afford even supermarket value prices, where else but Poundland can they go? Great for them but terrible for everyone else. As ye sow, so shall ye reap. Boardrooms should remember that.
“….they choose to pay their staff so badly many need their wages topped up by the goverment and they also use workfare staff whom they don’t pay at all.”
Great point but I’d use the word taxpayers….taxpayers are being used to prop up the wages of the firms making shed loads of money. I’m not really certain that is the most sensible use of taxpayers cash when things like housing, health, education and such like also need huge sums.
I’ve said it on another website, but it strikes me as madness that HMG uses taxpayers cash to prop up wages and then complains about having to do so and worries about the cost of living in general (or rather the electoral impact)….
…either HMG has to raise the NMW (and protect jobs via trade barriers so UK firms can compete with the sweatshop economies in the BRICS) or mandate what price the essentials should be. One or the other.
Many companies seem keen to bang on about the expense of wages. What they are more reticent in talking about is the rise in productivity that accompanies newer and better machinery and more productive working practices. for instance, new machinery could allow a firm to lay off 3 or 4 people and have just 2 people doing that same job of work – you have two people doing the work of 3 or 4! With new working practices, a company may increase productivity by around 8 percent, yet offer maybe just a cost of living rise of 3 percent for 8 percent more work! In other words, companies often pay you just a little, or sometimes nothing extra at all, for a lot more work!
And Richard may prove me wrong on this point, but I believe that, when a company invests in new machinery to replace obsolete or worn-out machinery, they can claim it as depreciation and business expense and claim a lot of this money back on tax!
Richard, it is worth pointing out, as I have done before, that the discourse is no longer limited to a left/right issue as there is more and more critique coming from economists who have a background in banking and asset management -the very people we would traditionally associate with the ‘right’; indeed some of these people are more trenchant and severe critics of the over-financialised system than the the political groups (Labour!!) from whom we would EXPECT to hear it!
A new book by Andrew Smithers illustrates this: http://www.smithers.co.uk/files/Road_To_Recovery_website_flyer.pdf
Isn’t there also something about ‘free markets’ requiring strong trade unions to counter-balance? I know that this bit of obscure neoclassical theory set Steve Keen off in his heterodoxy… and doubtless would have had Mrs Thatcher in a bit of a spin.
There is no such thing as free markets and probably never has been!
Apart from this, the free market doesn’t actually run things very well.
In “Down & out in Paris & London” George Orwell set out his experiences as a “Plongeur” (kitchen worker) in Paris in the 1920s. He worked in the top restaurants & hotels of Paris & said that the standard of cleanliness was deplorable, cockroaches &, even, mice, ran freely around the kitchens.
Now, in my own small way, I’ve also worked in kitchens, both in the UK & the US. They were spotlessly clean & there were deffo no mice or insects.
Orwell said the top restaurants & hotels of Paris prided themselves on the perfect white cleanliness of their napkins, table covers etc & the immaculate garb of their waiters. This was what the public judged them on. They couldn’t see what went on behind the scenes.
When I did Orwell’s job, 60 years later, by contrast, everyone was in terror of a visit by the sanitary/H&S people. So we actually cleaned the kitchens & food-preparation areas (which is what matters) rather than stressing about the waiting staff being immaculate.
Had we been controlled by the market, rather than the Government, I’m sure we’d have had the outside looking perfect while Rats scrapped with Mice for leftovers in our food trays.
Richard, I see a basic flaw in the viewpoint. A private organisation sacks people and doesn’t bother about what happens to them.
Those who advocate the equivalence of the government and private organisations, in the “pure” sense, would take the same view of the unemployed, they are not the government’s problem, get on with it, get a job.
The real flaw in the thinking is a belief that there is a role for sympathy, but no money is allocated to deal with it.
B
Interesting reading. However, this is a “captured” government so I forseee little to interest me. I note that Miliband seems to have started to shed his chrysalis and started his metamorphosis…..maybe he isn’t a complete idiot after all, and maybe there is more planning in him than I thought:
http://touchstoneblog.org.uk/2013/10/the-emerging-shape-of-milibandism
Looks like the next few years may be [politically] interesting, maybe we shall even see some bankers having long holidays at the taxpayers expense, in prison ?
Banker’s in prison -not very likely! The poor going to prison for earning a tenner, cash in hand whilst on JSA, or evicted for non-payment of bedroom tax, yes but bankers in prison is as likely as Haley’s comet passing over my house this evening.
“Right wing economists do not seem to understand this”
I think they do.
They find it impossible to overcome their dislike of people who have little, or nothing, and hence are of little value in an economy such as this.
just to add to that, there is no such thing as a free market in the real economy. As soon as one player has one dollar more, that player is in a position to dominate the market, unless other players gang up, in which case they come to dominate the market. A market containing, for example, banks TBTF, is not a free market; nor is one which has offshore tax havens for some but not others.
The irony is that those who shout loudest about free markets are often the same people atttempting to corner monopoly positions for themselves.
A market has to be managed so as to conform more closely to the strict assumptions of the economic models. So we have a paradox – to approach free market conditions, we need rules to remove some freedoms from the market.
None of which is to forget that markets are there to operate for us, as a society. They are not an end in themselves. We, together, are.
Whilst agreeing with the post, our argument is seriously undermined by the likes of prominent politicians on “our side” who constantly use the government finance/budget = personal finance/budget analogy.
There’s a blog by Richard on this called ‘The fallacy of Composition’ which is phrase (coined by Galbraith?) used to describe this ‘reasoning.’
http://www.taxresearch.org.uk/Blog/2013/06/28/the-absurdity-of-austerity-in-a-nutshell/
And running a country is not the same as running a household either. This is another popular view Richard, but also erroneous. It’s this myth that’s driving this desire to achieve surpluses in Western democracies.
You and I have to balance our books and we can only take on so much debt before going bankrupt. A country that generates its own currency doesn’t have this issue. And it doesn’t need to issue bonds either.
If Scotland chooses to go its own way, they would be wise to remain out of the Euro and create a Scottish pound/dollar. And the only way out for the nations of Southern Europe, is likewise to leave the Euro.
While there is high unemployment, a government that prints its own money can spend as much as it likes to create work. Once unemployment is reduced, the government recoups money via the taxation system. This is the essence of Modern Monetary Theory.
Had the governments of the U.K. and the U.S. utilised quantitative easing in this manner (or in the way Richard has always suggested)instead of flooding the banking system with funds (they are barely using), there wouldn’t be the misery we see now.
EU countries, those using the euro as their currency, also have their own central bank, the ECB. It can create euros, the currency unit of the EU, just as our central bank can create pounds stirling or their virtual equivalent. Is it not the case that individual EU countries, finding themselves awash with euros, can tax them out of circulation just as we can tax pounds from circulation? This would mean the whole eurozone can be regarded as the same as a country where creating and distributing money is concerned. Those countries short of euros but with factories and hands standing idle should be lobbying their central bankers demanding euro creation.
Hi Bill, the ECB could assist these struggling countries, but won’t. It has gone as far as buying the bonds of countries such as Portugal, but I believe more to try to keep the yields down. I may be wrong, but as far as I’m aware, the ECB has not done any form of quantitative easing to the extent the BOE and the FED have.
At the end of the day though, countries such as Italy cannot print EUROs. This power has been taken out of each country’s hands. It’s in the hands of the ECB, who are not answerable to the Italian, Portuguese, Greek or any of the governments. They are answerable to Brussels. In terms of monetary policy, these countries are similar to the states of the U.S.
I’d like to draw attention to this recent article in the FT: http://www.ft.com/cms/s/0/7fb83a86-326d-11e3-b3a7-00144feab7de.html#axzz2hQNDzTAZ. The title and first para are misleading:
“Race to register ‘manorial’ rights as feudal remnants swept away”
“This weekend, almost 1,000 years since William the Conqueror’s coronation as England’s king, some of the last remnants of the feudal system he established are being swept away.”
because it is in fact preserving the mineral rights of those whose ancestors acquired them centuries ago. These privileges should absolutely never have been granted in the first place. I don’t care that some of the titles are held by the CofE – they of all people should recognise the injustice of exploiting something which is rightly our common wealth.
I did not manage that one over the weekend
I agree with you!
When a corporation sacks workers, it largely externalises its costs onto the state, that is, the state now has to pay those ex workers benefits.
Someone made a point about Henry Ford. Nasty piece of work as he was, he apparently said (paraphrasing a little):”I pay my workers enough to buy my cars”. In other words, he distributed enough money in wages in order to sell his cars. That is the key thing that most companies and businesses have been trying their utmost to get round for the best part of 30-odd years. Low wages generates a good profit for a while, but in time, low wages gradually undermines the ability of workers to buy. If inflation and prices continue to rise, this only becomes worse.
Combined with sending work to low wage countries, purchasing power keeps dropping until finally a deflationary effect takes hold, causing a recession. In the early 2000’s, as in the late 1980s, a brilliant solution was found where firms could still pay low wages and sell products; simply reduce interest rates to rock bottom levels and offer easy credit! This credit could keep the economy booming while rock bottom wages were paid! Simply bog people down in massive private debt!
Of course, we know the result of the last credit binge!! Until it is realised that enough money is distributed through wages to provide adequate purchasing power, there will never be a just and equal society.