Unsurprisingly, given what else I get up to these days, I now spend less time talking to academic colleagues than I used to, but I am still on the staff at Sheffield, although the Professor Emeritus role is unpaid, and, as a result, I was in conversation with colleagues around some issues yesterday.
Three themes emerged from our discussions.
One was the absolute irrationality of markets. There was unanimity on the subject of the forthcoming crash and, in fact, why it had not already happened, given current stock market valuations. The pretence that returns can be made from the investment in AI now happening is so obviously absurd that nothing can, in our collective opinion, justify what is happening with regard to investment in this sector. This is not to deny the significance of AI; it is to question the rationality of markets and the resource misallocation they create.
Secondly, I was surprised at the feedback from research projects going on in Sheffield, which suggests that the trend that I noticed recently of Berkshire Hathaway, in its role as an investment fund, holding extraordinary levels of cash, is becoming increasingly commonplace. There is apparently a very marked tendency for investment funds to now hold ever-increasing sums in cash because, so the story goes, there are no good investment opportunities available for them.
This scarcity is apparent in several ways, with issues related to environmental projects being particularly notable. Good managers capable of thinking up such schemes are in incredibly short supply, and whilst schemes that are themselves environmentally essential can be identified, working out how to monetise them is hard at a microeconomic level, so they do not happen.
After that, there is also a problem of scarce resources when engineering contractors are distracted by the demands of projects like HS2, Hinkley C, Sizewell C and a third Heathrow runway, all of which I think are environmentally destructive.
The result is that money in many investment funds cannot find a use. We agreed that this implies that the business model in question is fundamentally flawed. I understand that colleagues are going to be looking at this issue.
Thirdly, I was told there is growing undergraduate interest in modern monetary theory and related topics. There had to be some good news, and in this case the result is that the academic staff are having to become more acquainted with these themes because students want to write their dissertations around this theme.
Three themes, then. In one case, we were just observers, as yet. Another will be studied, and the last will require an action that I think will be beneficial.
There is, however, an obvious connection. In the case of the first two, it is a market failure in the allocation of resources because of false expectations about the appropriate monetary evaluation of the benefits of investment activity, where externalities are not taken into account or compensated for.
The third theme might be in its infancy, but it suggests something important in the context of the first two, and that is that the ability to question might still, somewhere, exist despite the demands imposed upon students to conform to the expectations of a society that has got most of its economic values wrong.
I saw some hope in that, and I have to cling to straws these days.
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Thinking about what I have said in my other post this morning then, it does seem that the issue is that what Neo-liberalism actually ends up doing in the end is destroying everything viable to the point that nothing is of any use to anyone anymore including real investors.
Unpicking this for me relates to ‘investment’ – a much abused concept in this country. As I never tire of saying, I see most ‘investment’ – sold to us as additional resources to help make taxes cheaper – as just an entry payment by bad actors to tap into or create extractive revenue streams that help grow already huge pots of money – financialisation in other words.
This crowds out real investment opportunities because financialisation is actually a monopolistic operation aimed at dominating any activity by exclusion and exclusivity. The thing is, in the end financialisation is like bottom trawling the oceans – it destroys everything, leaving nothing.
It also makes me reflect on right to buy RTB policies in social housing? We are losing affordable homes faster than we can replace them as the sales prop up the housing market. At some time I warn you, affordable housing will not be sustainable, the amount of rent coming in will not manage these homes, spare council investment capacity will be all used up or much less because like financialisation, the Thatcher dream was a ONE WAY TRIP – the quick profit motive – once it has gone, it has gone, it was never made sustainable in the first place and RTB will be denied future generations and quietly retired. Short termism rules and that has to change or a huge transfer of assets to capital is complete. They will have taken it all.
Noted and agreed
“At some time I warn you, affordable housing will not be sustainable, the amount of rent coming in will not manage these homes”
This is also a major problem with “subsidized housing” in the USA. Hosing Authorities cannot properly maintain these housing units without large federal grants from HUD.
“Affordable Housing” schemes in the USA work differently than “Affordable Housing” in the UK.
I find it surprising that investment funds are holding increasing levels of cash. Could they not invest in government bonds? Would these not provide at least some return, particularly at the moment when bond yields are high?
Perhaps this indicates increasing distrust that governments, particularly the US government, will honour it’s commitment to repay? Why might that be?
The figure is cash and near cash equivalents including bonds. So you are right – they do buy bonds.
All that inactive capital.
All those needs waiting to be addressed-climate change, housing, health, education and training and other worthy projects.
Not only economically inefficient but immoral as well.
A timely post Richard. A reminder, if we needed one, of the value of your expertise. It is easy to overlook the fact that we – your subscribers – are being informed, indeed taught, by a Professor Emeritus. And your output is beyond compare in its abundance as well as its value.
My son is at the University of Sheffield studying a Humanities degree. He pays over £9,000 per year for around 12 contact hours per week with his lecturers. He is doing fine and as a mature student is able and willing to approach his lecturers for further help and support. But I look back to your post of a few days ago concerning your YouTube work which detailed the costs of your work. I am reminded that the level of your expertise and experience means that we are getting a university level education – daily- for the cost of a coffee (or more for those with better means and commitment). I will be upping my game when I get back from my holiday this week. And doing what I can to spread the word too. Thank you for all you do.
P.S. university level sans the academic reading and assessment of course!
Very many thanks.
@ Anne K, and fao Richard,
I couldn’t agree more, Anne. In simple terms, I regard this Blog as the REAL PPE course, the famed Politics, Philosophy and Economics course at Oxford University, that so many politicians undertook, with dismal results, to judge by their effectiveness.
As an Oxford MA, with friends who graduated in PPE, I’m a little shamefaced to have to criticise my alma mater, but called for, IMO.
SO why/how is Richard’s blog the real PPE? I think because your approach, Richard, is basically “Trinitarian” – and apologies for slipping into theology (I am a Christian Socialist, after all, with emphasis on both parts of that description).
There is in Christian theology an attempt to describe the operation of the Trinity as being a Circumincession (also called a perichoresis in the original Greek), meaning “seating successively in the round”.
This is a Christian theological doctrine describing how the three Persons of the Trinity—the Father, the Son, and Holy Spirit—reciprocally exist, dwell, and interpenetrate within one another, and tries to describe that at a successive seating, or place-taking of each person of the Trinity, where each person is successively, yet also simultaneously, the other two persons
And I think this is why your teaching is the real PPE, Richard, because what you set out has the dynamism of the Trinity, in which Politics, Philosophy and Economics are dynamically present in each other, where I suspect they are only juxtaposed, and relatively statically related in the degree course.
That dynamism is the crucial element in looking at events, because it prevents one from taking things as they are, but compels one to look at things as they are, or could be, becoming.
And that is what we find in this Blog. IMO.
I need to think about that, but it’s a fascinating view of my pedagogy.
Your point about large quantities of underused cash seeking safe returns made me wonder whether there is scope for a different approach to infrastructure and environmental investment.
Rather than relying on either conventional gilts alone or old-style PFI, could government-backed “alliance” investment vehicles be created, combining sovereign security with collaborative delivery models?
Back in the day, my own background in a large Government department involved partnering arrangements using open-book pricing, integrated project teams and gainshare/painshare incentives. Properly designed, these structures reduced adversarial behaviour and encouraged all participants to challenge specifications, processes and delivery methods to improve outcomes and reduce whole-life costs.
It seems to me that pension and institutional capital is already seeking relatively safe long-duration investments. Instead of merely financing deficits or inflating existing assets, part of that capital might be channelled into publicly governed infrastructure alliances for housing, energy transition, flood defence, transport etc.
The state could still provide the sovereign underpinning that investors require, while enhanced returns could arise from genuine productivity and efficiency gains achieved through collaborative working, rather than extraction through monopoly pricing or privatisation.
I think there is a great deal of merit in that idea. It is akin too the model I talk about for ISA and pension saving.
One of the weaknesses in the UK has been the assumption that there are only two choices: direct public provision or some variant of privatisation and PFI. There are many other possibilities.
What you are describing is, in effect, a publicly governed investment structure where:
– the state provides the guarantee and strategic direction,
– long-term savings provide capital,
– and delivery is organised through collaborative rather than adversarial relationships.
That makes a great deal of sense.
But the crucial issue is that the returns must arise from the successful creation of real assets and real social value, not from the extraction of rents. Too many current investments and much of PFI is based on rent extraction.
Despite that there is a vast pool of savings seeking safe long-term returns. In the absence of alternatives those savings are channelled into existing financial assets, property speculation and secondary market trading instead of productive investment which will generate value for decades. They are exactly the sort of projects that long-term savers ought to be helping to fund, in what I call a Green New Deal.
The role of government in such arrangements would be critical, not because it needs private money before it can act, but because it can create structures that connect private savings with socially useful investment opportunities.
In other words, the state’s role would be to organise and direct capital formation, not simply to act as a borrower.
This is the sort of institutional innovation we should be discussing if we are serious about rebuilding the UK’s productive capacity and resilience.
Makes sense to me. Some years ago when I was at WWF I met with the then head of the Green Investment Bank. Before it was sold off to none other than Mcquarie, those nice people who owned Thames Water. I was there along with a few other environmental NGOs – I think they thought they would butter us up, not realising than one of us had a background in banking. As you can imagine, they were very patronising.
Several points came up; they tried to explain to us that renewables were of course very high risk… To which I pointed out that they offered long term steady returns and that the technology was solid even back then. The type of investment institutions like. I could not resist observing that the then CEO had been at Merrill Lynch whose track record in assessing risk was particularly dismal.
I also asked who they were talking to in terms of the types of organisation they might lend to. The CEO and his apparatchiks looked at each other… They literally had not been out researching potential borrowers but were more interested in hatching up products that they could then sell on – pure investment bank thinking.
I could go on. The Tories were in power and the GIB had lost its purpose.
Thanks
I met that sort at another supposedly green bank that was actually just a wealth management pitch as far as I could see.
Thanks.
One further thought on alliance-based infrastructure models is that they should not be seen simply as financing mechanisms, but as integrated delivery systems.
In the ship maintenance partnering arrangements I worked on, one of the most successful features was the inclusion of Ship’s Staff within the joint project team alongside Government Department and industry personnel. This brought operational knowledge directly into planning and delivery, reduced adversarial behaviour, improved problem-solving and often identified improvements that would otherwise have been missed.
The same principle could apply to infrastructure and environmental programmes. Housing providers, transport operators, NHS staff, local authorities, tenants and other end-users could be integrated into alliance teams so that projects are designed around operational reality and whole-life performance, rather than narrow contractual compliance.
I suspect Treasury resistance would centre on concerns about risk attribution and fears of repeating PFI mistakes. However, one lesson from complex defence procurement is that adversarial “risk transfer” often conceals rather than reduces systemic risk, while generating costly defensive pricing and disputes.
The argument for alliance models may therefore be strongest if framed not merely as alternative finance, but as a means of reducing total system cost, improving delivery reliability and managing unavoidable long-term public risk more intelligently through transparency, open-book accounting, shared incentives and integrated governance.
But I’m just some old bloke in Somerset slowly losing the plot! If there’s anyone out there who wants to take up these ideas, please, please do. As is always the case, there are risks that human beings will mess this up. But I think it’s a better framework than anything we’ve currently got.
Your comments make sense to me.
Pleased to hear that students might be pushing back and asking more challenging questions. Especially if it’s on economics.
At the same time, feedback from 2 senior academic sources makes me very concerned about the impact of AI on learning in universities and increasingly in schools. I am cautiously using Claude in areas that I am familiar with and hence can question the results. Taking on board some of your own comments Richard on how best to use these tools. I’m not convinced that students let alone school level will be getting that kind of guidance and the research and questioning is a key part of learning, now being lost.
meanwhile the AI bubble continues to explode, diverting capital and resources, natural and human, away from more essential and productive needs. The usual suspects driving financialisation rubbing their hands with glee. Putting yet more capital into AI. With no sign whatever of where replacement jobs might come from, let alone that these people care. Bad news for today’s students looking for first jobs.
Cox-Richardson and Krugman asking a lot of the right questions here
https://open.substack.com/pub/paulkrugman/p/lunch-money-with-paul-krugman-and-408?r=qshi&utm_medium=ios
Thanks
I may listen to that this afternoon
You touched on this other day Richard, but I wonder how much the market disconnects are a symptom of the massive use of indexed fund investing. In the past, with most pensions being final salary admistered by companies for employees, the investment pool was, I believe, invested more in bonds and cash than shares. With the move everywhere towards individual pensions, I would imagine that the amount of capital pouring into index funds (the cheapest to own and the best return over time) has dwarfed the buyers and sellers of individual stocks based on specific company metrics.
It would mean that the real determining factor for market success is sheer size, so pouring capital into chasing scale over efficiency may provide better returns for companies. It also means that buyers and sellers of stock really don’t chase good companies, but either spread their investment equally (index finds) or pump small stocks that can multiply beyond reason at the margin.
Quite how this change in equity market operations will end up affecting any market crash is beyond my knowledge, if indeed I’ve accurately described it. But I do think there may be something to it, and I’m sure that blurring the link between valuations and utility is not good. It may be that some of these factors have contributed to the prolonged disconnect we can all see.
Interesting