I noted an article by Martin Wolf in the FT last week on this blog. In that article, Wolf argued that the UK needed a way out of economic stagnation. I offered my alternative.
Wolf's plan was published late yesterday, again in an article in the FT. It was headlined:
Wolf then offered an analysis based on the work of the Resolution Foundation, which I analysed here last Saturday.
For those who did not read that analysis of what the Resolution Foundation proposes, in summary it suggested:
- Governments should manage the macroeconomy in the way a household should budget its affairs
- Money should be treated as being in short supply
- Governments should, as a consequence, run surpluses for three out of every four years on average to save funds for the proverbial rainy day.
This, as I noted, is classical economy thinking from the pre-Keynesian era of more than a century ago that failed to recognise the proactive role that a government must have in the economy if growth is to be delivered, whilst simultaneously not apparently appreciating the drag on growth that government surpluses, by definition, always represent. This was the policy that led to the Great Depression of the 1930s.
Wolf does not notice any of these failings in the Resolution Foundation's work. He praises it for demanding an active state in peacetime. How that is possible when the state should, according to the Resolution Foundation, make its primary focus the withdrawing of value from the economy in most years, Wolf does not explain.
Wolf also agrees with the Resolution Foundation that the basis for UK growth should be the 'export of intellectual property and cultural, business and financial services.' Let's describe all of these, bar the cultural activities (maybe, but only maybe, given the way that they are now packaged as financial products) as what they are, which are exploitative, monopoly-based, rentier activities. This, apparently, is what Wolf and the Resolution Foundation want us to focus on.
I accept that other points are made, including that domestic services are based largely on low-paid employees servicing the whims of the well off, and that we as a country are short of investment, but there is no other vision in the Resolution Foundation report, despite which Wolf says:
I admire the strategic vision. That is such a welcome change from the usual cramped debates.
I wish I knew what I was missing. But I can only see outdated neoliberal (or earlier) thinking in the Resolution Foundation report of a sort that could, if implemented, lead to perpetual recession and even depression as vain attempts to run government surpluses led to a shrinking state, failing state services and a declining economy as a whole.
That, in my opinion, is not a strategic vision. It is a recipe for disaster. Planning the economy around a government surplus can never represent a strategic vision. It is instead a programme for book-keepers those with no idea of how an economy really works.
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Might Mr. Wolf also be skilled at proving how many angels can stand on the head of a pin?
“the drag on growth that government deficits, by definition, always represent.” ? surpluses, surely?
Thank you.
Corrected.
Sometimes seeing your own mistakes is hard.
Not just hard but clearly impossible for the likes of Wolf and Bell!
I think Martin Wolf’s “take away” from the Resolution Foundation report is that Government needs to be actively involved in the economy… in particular (in his view) delivering public investment and encouraging private investment. All this with a long term strategic time frame.
All good, I think we can agree.
You have focussed in on the absurd budget surplus suggestions…. and they are absurd. However, the motivation is not about shrinking the State (the usual neo-liberal goal) but enabling the State. So, I think we should support that element knowing that, when push comes to shove, no government will be able to enforce the surplus policy.
On the issue of all our service exports being “rentier” in nature, I am not sure I agree. In financial services (the only area I know about in detail) our exports are competitive due to time zone, language, tax system, legal and political stability. I suppose that is rentier-ism of a sort but not the sort one sees on exploitation of IP. The important thing is to deliver good and useful service in an ethical manner.
(Of course, all of this has been put at risk over the last decade but that is another story!)
Clive
We’re going to have to disagree
You can’t have an active state that seek to run surpluses without excessive taxation and hence stagnation
And I am afraid that i think almost all financial services are rentier in nature: slicing an income off the top of ptehr activioty.
Richard
Until now the prevailing philosophy has been the State should do the absolute minimum and budgets balanced.
Wolf/RF suggest that Governments should be active. This an enormously important step and potentially heralds a return to pre-Reagan/Thatcher thinking… but it needs becomes widely embraced. RF (but not Wolf) then suggests a “balanced budget” which as we both know is wrong. But I would rather encourage a first step on the right road rather than criticise them for not reaching the destination.
On Rentier-ism? People in financial services (accountants, lawyers, administrators… yes, and brokers/traders, too) do work very hard! You may not approve of many of the fruits of their labour but it is not Rentierism. On your definition waiters in restaurants “skimming off” a “service charge” are rentiers! I think not.
I wish I could separate the first of these issues, as you suggest Clive, but I can’t. I can’t see how the end in this case can be separated from the suggested means.
As for rentierism, bankers clearly work. So do CEOs on excessive pay but that does not mean that rents do not form part of their rewards.
‘ptehr’ typo. Can’t figure out what it should be.
I suspect that is ‘other’
Clive Parry
You say “People in financial services (accountants, lawyers, administrators… yes, and brokers/traders, too) do work very hard”. So do many drug dealers. That doesn’t stop them being criminals, does it? Surely an activity that is exploitative IS exploitative, no matter what effort the perpetrators put into it.
Cyndy,
My next sentence was “You may not approve of many of the fruits of their labour”. The point I was trying to make is that rentier-ism is about getting something for sitting back and doing nothing. Drug dealers and financial services employees may be many things… but they are not rentiers.
Sorry Clive, but we will have to disagree on much of the financial services sector.
I disagree that exploiting IP, specifically patents, is necessarily a rentier activity ( though it can be).
I’ve spent many years developing new technology. Someone has to pay if this is to be done at all. And, I think, developing new technology is generally a good thing. In principle it offers the possibility of growth without using ever more resources. The archetype might be the development of solar panels.
I have spent some years, as an employee, developing technology that is now in almost every new TV worldwide. I have some patents on this, which are an essential part of the process of developing most technology.
I’m currently working on another new technology, which I have patented. It is expensive to patent something. I wouldn’t have done so without the incentive of some monetary return. But, inventing new technology is a risk business and this, quite likely, won’t reward me. Nevertheless, because patents exist, this technology is now published for anyone to read.
When patents work as they properly should they can a force for good. Of course they can, and all too frequently are, abused. Large companies tend to use them as part of a legal arms race against one another. This is not helpful and, at least in part, monopolistic and rentier. Doubtless reforms are needed in our patent framework. But, bear in mind, that a patent only grants IP rights for 20 years from application. This is often a short window in which to make a return on speculative technology investment.
In short, please don’t assume that patents (or copyright) are necessarily a rentier activity. Sure they can be abused. And, yes, their legal framework needs reform, but they are essential for technological development (including, especially, life sciences).
One aspect I do regret is that the UK, all too often, does not directly exploit (other than through royalties) the IP it develops. This, it seems to me, is a failure of government to create a more positive environment for both public and private investments.
I agree that patents an copyrights have a riole until three things happen:
1) They are used for tax abuse (commonplace)
2) They are extended way beyond economic reason (most copyright niow, which extends way beyond an author’s life
3) They are used as barriers to entry – any patent for more than 15 years at most
So, get a fair return by all means
Beyond that, revent to creative commons licences
But that is not what is happening and whole business models are built on that fact now
All fair points with which I agree.
I’m not sure how patents are used for tax abuse. But no doubt you are right.
The length of copyright is particularly egregious. There is no justification for 70 years after the death of the author. Fifty, or fewer, years after publication would be fine. But, of course, Hollywood got involved and extended it to preserve their Mickey Mouse franchise. Inexcusable. As I said, reform is needed.
No patent last longer than 20 years. This seems pretty short to me for pharmaceuticals. Patents cannot be extended. Perhaps there needs to be some mandatory licensing of patents. But this is very hard to specify. Many standards specify RAND (reasonable and non-discriminatory) licensing of patents they use. This sounds good but is problematic in practice (because different applications require different licences, which this is precluded by RAND licensing).
As I said, reforms are needed. They are not easy. But let’s not assume all patenting is rentier.
OK, I agree, noit all is
But it an be abused
The tax use is to register patents in low tax locations and pay fees to those places
A diminishing issue but still real
There is blatant rentierism, with totally unethical behaviour, in some pharmaceuticals. Yes, they can and do bring huge improvements to human health, but some are oversold (eg. opioids) and others are restricted to those who can pay ‘extractive’ prices, 1000s times production costs and after R&D and testing is already covered (eg. antivirals, mRNA vaccines). “Sick Money” by Billy Kenber and “Pharmanomics” by Nick Dearden expose the details (although there are no doubt criticisms of aspects of both book). We need to establish a better way to reward innovation (and to a level that compensates for the risks, all the failed trials etc; or covers their costs whilst avoiding moral hazard) but prevents exploitation. And keep in mind that a lot of the original R&Dvl is university based and state funded.
Most pharma companies spend approximately twenty times more on promotion than they do on R&D
“In financial services (the only area I know about in detail) our exports are competitive due to time zone, language, tax system, legal and political stability”.
True, but over time and with changing technology in a global world, of decreasing leverage. You missed one critical aspect of our success; history. Britain was the first genuinely modern, world-scale financial centre, taking over from the precedent of the Dutch Republic at the end of the seventeenth century; critically with the most innovative new conception of the Central Bank. It became the model for the world, and has left its mark on the Federal Reserve, to this day; and, as this Blog shows day-in-day-out, this is esoteric territory, assisted by the world’s Central Banks tendency to ‘make smoke’ as a matter of policy.
In other words we have been living off the legacy, reputation and unexpired value of the goodwill in our sometimes real, often mystically conjured ‘expertise’ ever since; but the goodwill extension granted by uneven world economic development is, in the 21st century, now running out; particularly with the rise of the PRC, and now India – new economic Goliaths that change the global economic tectonic plates (frankly, we economically ruined India, stripped it bare; and it has taken decades for India to recover the damage we wrought). In short, the LSE is now only 9th largest in the world (by Market Cap), now passed by India (Mumbai). Call it realpolitik; call it markets. Basically, our USPs are no longer unique; and we are on the way out.
We’ve amortised the goodwill now
Has it expired?
I am just sketching the hypothetical arc of a concave curve of expiry of value added. I do not have the prescience to mark the precise date it reaches an endpoint …
Correct – I should have inserted “history” (or even “Empire”).
Is time running out? Yes. We used to call it “Wimbledonisation” (before Andy Murray); we could run a jolly good tournament but none of our players could manage to compete. Barclays is the only firm that tried to compete as a global investment bank… and doesn’t really cut it. HSBC is a global player in banking but there are musings about where it should have its HQ (although they have gone quiet on that recently).
We also see most “back office functions” outsourced to India… and that is spreading to other functions, too (IT. legal etc.).
The slow decline was given impetus by the shambles of the last 8 years….. but draconian immigration law is the real killer. Last time I worked on a London trading floor I would guess UK citizens made up less than 25% of the staff. Now, none of them will be caught by the new salary requirement to have a spouse… but they will have had friends who are and are aware of more hostility to foreigners in general life. If these people find London unattractive the business will leave very quickly.
Mr Parry,
When you say that Wolf/RF are proposing the Government should be “delivering public investment and encouraging private investment”, then say that the budget surplus suggestions are “absurd” (a provocative but I suspect ambiguous term); are they absurd, or actually contradictory? The reason I propose the distinction, is that an absurdity in the case may be set aside as totally wrong, but incidental to the broad thrust of the case; but a contradiction in the case goes to its foundations, and is probably terminal.
That fine distinction in language passed me by when I wrote…. but you are right.
My thought is that the triangle of Government investment, taxation and deficit (financed by debt/money creation) will, in practice, be resolved through a higher deficit…. whatever politicians say.
We are assuming that everyone wants to grow the economy. I think there are some who are content with austerity.
Nice one Clive.
Just to be clear, my ‘Nice one Clive’ was aimed at his comments on bonds which is weirdly below my original comment.
I will treasure approval from PSR wherever I can get it!
( I was a tad surprised at your approval on this particular post)
Slightly off topic… but still related.
Good article in the FT by Toby Nangle about equity v bond returns. I think it supports the whole point that for many a safe place to invest for old age is the bond market and that means government debt/deficit is an essential part of the financial ecosystem. Surpluses on any consistent basis would be dreadful.
Martin Wolf seems very influential and has written books which look interesting. I steer away from them because I heard him on the radio and realised that his analysis is flawed. This leads me to a general point: I just wish that there was a (post-Keynesian) resource the provided critical reviews of books that would help you decide books were worth spending your time and money on.
There isn’t such a resource, I am afraid
I have just finished Prof John T Harvey’s book Contending Perspectives in Economics – he is the ‘Cowboy Economist’ whose videos were mentioned here a while back. He offers by some way the best explanation of the different schools of economics that Ive come across, with barely a formula in sight. And Ive ploughed through many turgid, academic economics books in an effort to educate myself! Confirming for me how the world of (neo-classical) economics wishes to keep its secrets away from mere mortals. With rare exceptions amongst economists, such as Ha Joon Chang.
His book lucidly explains the different schools of economics from neo-classical (which as he says wrongly dominates) through Keynesian, to Feminist and Ecological. He manages that in only 160 pages of clear writing. And it’s quite clear where he stands though he saves that until the end. He is on the right side of the debate in case you wondered. Having watched many of his videos his lectures must be a riot.
Put it on your Christmas list!
Thanks
Done! Thanks for the tip.
Can I give a shout to Gary Stevenson, a former City trader? He made a fortune by “betting inequality was going to destroy our economy and make the poorest in society even poorer”.
He gave it up and now “I made the money by betting on what is a fucking disaster, right? I bet on the long-term, continual collapse of the global economy. No fucking joke, right? You know, people will die because of that. Families’ lives will be ruined, and it will get worse and worse and worse.
“Look at what is happening right now with the cost of living crisis. In the winter, half of this country will not be able to afford to turn the heating on.”
Guardian 2/7/2022
However, Stevenson didn’t just walk away from his old job. He is now working to fight the system he previously worked in, campaigning to raise awareness among the wider population about what bankers like him are doing in the gleaming towers of Canary Wharf and the City of London to “continue to make the economy unfair”.
Interesting stuff on Garys economics on Youtube .
And I am not related.
He is good
But he does not really get MMT and related issues, IMO
I am happy to be proved wrong though
Pitchfork Economics podcast with Nick Hanauer is also good. He is a venture capitalist but one who gets the dark side of finance. They get MMT too.
Another thought.
Is it not the case that if you restrict the supply of money then in a growing economy – which I assume they think is necessary – you end up with deflation?
It’s not that simple, but you might well do so
You are not missing anything at all Richard.
It has not sunk in that poor performance in our society is because money has been withdrawn and misallocated for years.
The strange morality with money now is that apparently only the already rich deserve it and are entitled to it. Money is not scarce to them, tax benefits and all.
Then there is the reversion to mythology about money – that it just sort of exists and that making it is what markets do – not governments. Keir and Rachel bless them would agree.
The Enlightenment is on the way out it seems.
A lot of chickens from 1979 are coming home to roost – economic, social, tax, environmental (I feel that I’ve been living on the set of Bladerunner with all this rain).
We must all now try to live through it somehow or at least find a decent way of dying.
It is a contradiction that has always struck me. How the rich, like the City boys, require extraordinary rewards to motivate them, but apparently at the other end of the scale it is low pay that is needed to motivate people to work harder.
On the other hand it could just be greed and power.
We don’t want “growth” at all costs that results in an ever-increasing production of consumer goods – usually from China or “emerging” industrial countries that leads to increasing CO2 emissions, more climate overheating plus attendant pollution and biodiversity loss. Even “green” growth like the development of renewable energy, electric cars , batteries and what have you will have these negative effects to some degree. To survive, we need a more simple, subsistence economy that does not involve the exploitation of either labour or the natural world. No politicians, apart from the Greens realise the gravity of our predicament and it looks like only global protest on a mass scale for an ecologically based economy will turn the tide.
What’s so depressing is that the UK lacks analysts who’ll observe an economy declining over the decades but refuse to examine whether the Neoliberal economic viewpoint is flawed. This turns Neoliberal ideology into a pathetic religious cult that cannot brook dissenters! So much for most British universities being at the cutting edge of economic research.
I will throw one name into the ring. John Gray. Though if you are looking for an economic analysis of neoliberlaism, you will find it very hard to find one. Gray believes that neoliberalism had nothing to do with economic policy but rather a world view where markets come first instead of nation states. And this fueled a populist backlash from the right. There is no shift in economic policy towards the left because the dialectic opposite to neoliberalism is nationalism.
“the dialectic opposite to neoliberalism is nationalism”
Such thinking is “clunky” to say the least! The Chinese haven’t been thinking this way for at least four decades!
Does Martin Wolf ever comment on your work Richard?
We have discussed it
He does not share my views
“He does not share my views”
There you go again (quoting Mr Raygun).
Having followed the blog for a long time (and see comment further down), on the economics you are not offering “views” or “opinions”.
For the most part what is dealt with in the blog is reality. (if it didn’t I wouldn’t read it).
As has been pointed out – ad nauseum – countries with fiat currencies are not & never can be treated (in economic terms) like a corner shop. History delivers plenty of examples of what happens when they are.
Thus the likes of Wolf & Co need to be portrayed as dealing in fantasy economics – disconnected from the real world and reality.
Their fairy stories portray inflation as the big bad wolf – (sic) etc . For those that need entertainment:
https://www.vrt.be/vrtnws/en/2023/11/21/european-commission-reprimands-belgium-about-our-countrys-budget/
Big demo in on Tuesday by unions – it was against the European Commission & its fantasy economics – same economics promoted by Wolf et al – but you will never, ever see the media making this observation.
Agreed
“Let’s describe all of these, bar the cultural activities (maybe, but only maybe, given the way that they are now packaged as financial products) as what they are, which are exploitative, monopoly-based, rentier activities. This, apparently, is what Wolf and the Resolution Foundation want us to focus on”.
Perhaps that is because, after forty years of fast-buck, rip-off, sell-off neoliberal economics; that is virtually all we have left ….
Waht is left? …. Can you privatise a breadline, or sell-off food-banks?
“That, in my opinion,”
What you wrote was not an opinion
It was a reasoned demolition of the “muscle-spasm-as-a-substitute-for-thinking” offered by Wolf and “Resolution”
Which leaves an open question: do these people ever try & look at the world through a fresh set of eyes? Are they curious? Do they ever thing “hang on a sec”. The evidence would suggest not. Which makes Wolf & Resolution quite unfit to talk about stuff about which they have a very poor grasp – given the evidence before our very eyes.
(BTW: I’d like to make a resolution – that the Resolutiuon Foundation has past its sell-by-date).
Facts do seem to pass so many economists by
That old joke about ‘that’s fine in practice but it would never work in theory’ sums up so much of neoclassical economics. Looking out the window at the real world and empirical research are despised.