‘We can’t solve problems by using the same kind of thinking we used when we created them.’
Albert Einstein

Duncan, you should watch this and read this.

The ebook does touch on these issues. E.g.:

“Second, our economy faces ecological limits. A recovery strategy of
unlimited consumption and economic growth is no longer an option.
Global warming, peak oil, insecure energy supplies, diminished UK
agricultural capacity – all pose systemic threats to our way of life. At
the same time an emerging ‘producers market’ in raw materials will
raise commodity prices and impact on profitability, altering the
balance of power between Britain, the EU and poorer economies.”

After this next, I wonder if we shall be hearing any more about the Zimbabwe option from Mail readers?

A growing sense of unease over the faltering UK economy has persuaded some Bank of England policymakers that further funds may need to be injected into the economy as part of a second round of quantitative easing.

Minutes of the monetary policy committee’s (MPC) September meeting show that more than one member argued there were increasing downside risks to the economy.
http://www.guardian.co.uk/business/2010/sep/22/bank-of-england-minutes-mpc-vote

Bank considers need for further stimulus
http://www.ft.com/cms/s/0/059f2b96-c624-11df-9cda-00144feab49a.html

Whilst you correctly criticise the fundamentals of neo-liberal economics and the Right’s attempts to deflect such criticism you don’t subject the Left to such discipline. You only diagnose the Left’s failures as it being being craven to markets in recent times. The Right don’t acknowledge the fundamental issues in markets and you don’t acknowledge the many obvious failures of collectivism.

My problem with both sides is that your diagnosis is always the same – “our ideals have been polluted by the other side”.

Here’s the narrative

1. More XXX
2. Oops!
3. We’ve analysed the oops and it was YYY’s fault
4. Less YYY, more XXX

If you’re left wing substitute xxx with state and yyy with market. If your right wing it’s the reverse.

A plague on both your houses.

That said, thank you. It’s a valuable contribution whatever your position and a good read.

It’s a fascinatingly awful document. As one of your co-writers has already confirmed to me there’s a glaring error in the repeated calls for ignoring/abolishing neo-classical economics. “Neo-liberal” is meant each time.

Just two more details we might describe as howlers….insisting that the current housing market problems come from an excess of markets….when in fact they come from an absence of them. The high cost of housing and it’s flip side, the low supply, is entirely to do with the very non-market system of planning permission.

Open that up and all of the other problems go away.

You also give Richard Murphy free reign with his obsession over the secondary financial markets. You really do need to take him aside and have a chat. That you can get out of an investment (say, when you retire and buy an annuity) increases the amount of capital available for investment, not reduces it.

Tim @5.

I certainly meant Neo-classical economics.

As for you comments, over at your blog, on Keynes not attacking classical economics but buolding on them (you mention Marshall, Ricardo, Pigou), I’m afraid I disagree.

As would Keynes. He specifically attacks those three and their theories and what he dubs “the classical system” throughout the General Theory.

Obviously we need a secondary market in securities. But the disconnection between the real economy and finance has gone far too far. See left wing radical and Senior Bank of England technocrat Andrew Haldane’s recent work for example. or “Red” Adair Turner.

As for housing – yes there are planning law problems. But’s hardly the only problem!

@4: “The Right don’t acknowledge the fundamental issues in markets and you don’t acknowledge the many obvious failures of collectivism.”

There are entirely sensible and important criticisms to be made of those who persistently extol the supposed benefits of “Free Market” or unbridled capitalism without going to the extreme of espousing collectivist solutions.

Keynes was a member of the Liberal Party and explicitly rejected collectivism. He was motivated to understand how market economies could become trapped in a low-level equilibrium, with persistently high unemployment, without presuming that had something to do with an otherwise inexplicable fashionable aversion to riding bicycles.

“The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

“Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.”
http://www.ft.com/cms/s/0/19491372-472c-11df-b253-00144feab49a.html

Keynes recognised that unbridled capitalism is prone to periodic crises. Great interview in the FT of Carmen Reinhart on recurring patterns in 800 years of financial crises:
http://video.ft.com/v/82349517001/May-3-800-years-of-financial-crises

She is co-author of a book with Kenneth Rogoff: This Time Is Different – 8oo years of financial crises (Princeton UP, 2009)
http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

Rogoff, now at Harvard, was previously chief economist at the IMF.

That’s interesting. Because Larry Elliott has said precisely the opposite (via email). That it should be “neo-liberal” that is junked, not neo-classical.

I think I can see where the problem is coming from too:

“Keynes not attacking classical economics but buolding on them (you mention Marshall, Ricardo, Pigou)”

You don’t seem aware of the history of economic thought. Ricardo was a classical and of course Keynes was arguing with him. If Ricardian Equivalence holds then fiscal stimulus doesn’t work.

Marshall and Pigou are after the marginalist revolution and are therefore “neo-classicals”.

Junking “neo-classical” economics would be pure madness for you’d, at the time you did that, be throwing out the entire analytical tool set that is used to do economics.

To say that you disagree with the neo-cs on macro and responses to recessions is fine (even if I think you’re still wrong there) but throwing out the entirety of price theory, marginal analysis, externalities (yes, Marshall and Pigou gave us the solution….heck, Pigou was the bloke who first hired Keynes into an academic position!) and almost all of micro….no, pure nuttery.

Tim,

The book is written by a dozen odd authors. It’s fair enough for not everyone to agree on everything. I can only speak for myself.

I simply don’t accept that rejecting Neo-Classical Macroeconomics means rejecting the marginal revolution, etc.

I think of Keynesian Economics (really Post Keynesian economics) as a seperate school. One which accepts some of the ground work from earler theories but which is distinct.

I’d put the Neo Classical Synthesis (of 1960s vintage) in there as a seperate school too (alng with Austrians and Marxists).

But this is definitional point scoring.

I’d prefer to debate the policy implications.

Most folks are not sufficiently versed in the history of disputes among economists to argue this out. A more likely productive starting point for discussion is this interview of Turner, chairman of the FSA, by Robert Peston, the BBC’s business editor:

Adair Turner: Time to stop ‘demonising’ bankers
http://www.bbc.co.uk/news/business-11386464

Turner picks out banking regulation failures as a leading cause of the recent financial crisis. Recognising that will help in avoiding future financial crises over the medium to longer term but it isn’t going to resolve the current problems of an unsustainable budget deficit alongside a flagging economy. And we do need to appreciate that.

“I’d put the Neo Classical Synthesis (of 1960s vintage) in there as a seperate school ”

No, that’s the New Classical.

Classical, Hume, Smith, Ricardo, Malthus….neo-classical, Marshall, Pigou and just about everyone since in working tools.

New classical, Lucas, Kydland, Prescott…..

“The high cost of housing and it’s flip side, the low supply, is entirely to do with the very non-market system of planning permission.”

Well the implication of that is to do away with planning permission and concrete the entire south east over. Furthermore, if low supply is the issue, then you would expect the fall in houseprices to correlate with an increased supply – yet the opposite is the case. The actual problems were more to do with a bubble developing, and in which financial institutions used securities to escape the long term consequences of irresponsible lending.

“The actual problems were more to do with a bubble developing, and in which financial institutions used securities to escape the long term consequences of irresponsible lending.”

Absolutely IMO.

Bob @7 “There are entirely sensible and important criticisms to be made of those who persistently extol the supposed benefits of “Free Market” or unbridled capitalism without going to the extreme of espousing collectivist solutions.”

You’re absolutely correct. I can also see my original post could lead you to think I was presuming the authors were espousing collectivism and that was my objection. That wasn’t my intention. Indulge me with a second attempt.

I think the left is still tainted with the failures of collectivism just as the right is now tainted by neo-liberal market failure. I accept the publication may not be the time or place to examine these failures. However the author’s clearly think it is. They show no reluctance in discussing the ideological failures of the right. Doing this whilst not acknowledging the ideological failures associated with their own movement’s past undermines their credibility with me the reader. Introspection is limited to comments on New Labour being corrupted by the city. I’m left with a corrosive thought that maybe this isn’t new thinking but the same old left thinking in camouflage. Fine if the book’s destined for left wing bookshelves but not if you want to engage a non-aligned audience.

I’m not criticising or supporting the ideas in the ebook. I’m criticising the sales skills. After reading it I was thinking “Would I buy an idea from these people ? No, I don’t trust them”.

14/

I’d recommend having a read of the book. Aside from the criticisms of New Labour you mention, the book also discusses why the pre 1979 orthodoxy didn’t work and argues against a nostalgic attempt to return to pre-Thatcher social democracy.

That doesn’t come across in the article above which is a 500 word taster of a 60 odd page book. (And written for a left liberal website)

‘ At the same time an emerging ‘producers market’ in raw materials will
raise commodity prices and impact on profitability, altering the
balance of power between Britain, the EU and poorer economies.”

One of the surest ways to lose money in the long-term is to be long commodities. What has happened historically might not hold in the future but it always has in the past. However, it is a whole different debate so best not distract the thread.

I have difficulty reconciling the alleged ‘ financialised growth ‘ model with reality. It might surprise you but there is precious little evidence that it exists. Sure we have the highly profitable City. However, we have had the City for hundreds of years intermediating capital from all over the world. If capital flows increase as global trade increased it is hardly surprising that the City grew. The British financial sector as share of GDP only surpassed the German share in 2000, and only recently caught up with the French share.
http://2.bp.blogspot.com/_tvshDVnXSLc/TGMgs2BpWDI/AAAAAAAADY8/AkTeaa87_LM/s1600/share+of+fin+sector+gdp.jpg

However, that is far from what most people believe. What we have in the UK is a Treasury too dependent on profits from the City for the tax base. Moreover, the City probably sucks in the best graduates because they pay the highest wages. See this interesting chart for education and wages in the financial sector. Is it the human capital driving the wages or the wages attracting the graduates?
http://4.bp.blogspot.com/_tvshDVnXSLc/THPVN-2vqeI/AAAAAAAADZU/xhZg3RcxRVM/s1600/bank+bonus+humancap.jpg

The real problem in the British economy is the commercial high street banks do not support British industry and have not supported firms since the 1930s. UK bank lending is 70% to mortgages and property, only 1.5% to small firms (who employ half of all private sector jobs) and only 23% to business that is not related to property and only 5% of all lending is to UK industry making tradable goods on whom we rely for a fifth of our economy and most of our exports. The British banks provide short-term credit but do not support firms with long-term investment. That is why British firms struggle to organically grow and must takeover other firms to grow or be taking-over. German banks lend ten times more to domestic industry and small firms than UK banks. UK banks lend more to foreign industry in foreign countries than to businesses in the UK.

Duncan @ 15

> I’d recommend having a read of the book….
> That doesn’t come across in the article above which is a 500 word taster of a 60 odd page book. (And written for a left liberal website)

My comments were made after I’d read the book not the taster !! But enough, even I don’t think they were profound enough to warrant extended debate. Just my gut reaction. I’ll shut up and let the economists, rather than the salesman, continue.

“The real problem in the British economy is the commercial high street banks do not support British industry”

Ok what measures would help here?

“The real problem in the British economy is the commercial high street banks do not support British industry”

If the banks believe that the economy is faltering with a high risk of falling back into recession, it is rational to be cautious about lending.

This was in the news in early September:

“Economists fear the dangers of a double-dip recession are ‘growing alarmingly’ after the release of the latest ‘grim’ survey of business confidence in the service sector, and evidence of collapsing order books in the construction industry.”
http://www.independent.co.uk/news/business/news/economy-suffers-slowdown-as-double-dip-looms-2070141.html

Richard W

> German banks lend ten times more to domestic industry and small firms than UK banks. UK banks lend more to foreign industry in foreign countries than to businesses in the UK.

Ouch, that is a big difference.

But there are real hindrances to small company growth in Germany compared to the UK. I wonder if the ‘small firms’ loans in Germany – are on average to the bigger end of SME – which is often set at up to 250 employees – which is pretty big, certainly in my sector of internet/ecommerce companies: small, fast paced and changing rapidly.

@ 18. Planeshift

I can see where the problems are but I am not smart enough for the solutions. The last government plans for a state investment bank were a step in the right direction. Although it was probably not wise to publicly demonise the same institutions you were behind the scenes asking to invest. Something along the German KfW seems to be a good model to me.

I don’t know if the present administration are still pursuing the idea. Normally I would not favour solutions like a state investment bank because there is such a danger of the state trying to pick winners and pushing investment to favoured constituencies. However, the biases in the system are so overwhelmingly towards the short-term something needs to change. The commercial banks incentives are all towards lending against collateral so that is why they are biased towards property lending. Smarter people than I could redesign the whole tax system to change the incentives from short-termism to favour investment.

@21: “I don’t know if the present administration are still pursuing the idea. Normally I would not favour solutions like a state investment bank because there is such a danger of the state trying to pick winners and pushing investment to favoured constituencies.”

The experience in France with Crédit Lyonnais, a state-owned bank since 1945, must be an object lesson:

“By July 1997, French finance minister Dominique Strauss-Kahn could admit that the bank had probably lost around Ffr100 billion, or around $17 billion, in its colossal spending spree. Independent commentators have suggested that the debacle will end up costing the French taxpayer between $20 and $30 billion.”
http://www.erisk.com/Learning/CaseStudies/CreditLyonnais.asp

At one stage, in pursuit of its ambitious investment strategy, the bank came to own the MGM studios in Hollywood.

Btw Dominique Strauss-Kahn mentioned above is now MD of the IMF.

Of course, Labour government have previously flirted with the idea of a state owned investment bank in Britain.

“However it was with the idea of a state planning agency that [Stuart] Holland [Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9] hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of the National Plan [in Britain] in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction.”
Geoffrey Foote: The Labour Party’s Political Thought: A History (Palgrave, 1997) p.311.

The attraction for Stuart Holland of Mussolini’s model for funding business projects is further advanced in his book: The Socialist Challenge (1975).

Crédit Lyonnais was not a state investment bank. It was a state-owned commercial bank as most of the French banks were nationalised after WW2. What serves as a state investment bank in France is Caisse Depots. We had a state investment bank in the UK called the Industrial and Commercial Finance Corporation (ICFC), which was set up in 1945. It was privatised in 1994 and is now the 3i Group plc. We need another with a larger balance sheet.

“German banks lend ten times more to domestic industry and small firms than UK banks.”

The confusion here is over what the “Anglo Saxon” and “Rhineland” models of capitalism actually mean.

Rhineland is essentially bank financed. That’s just how they do it. A-S is essentially equity and market financed. We (and the Americans) simply tend to fund new companies, and SMEs, through equity investment and market forms of debt: bonds, commercial paper and so on.

There are advantages and disadvantages of both systems. But to note that German banks lend more to domestic industry than UK banks do isn’t some killer condemnation of the A-S system. It’s simply the statistical note of the difference between the two systems.

There’s nothing in theory that says that Lloyd’s lending money to a company for its operating capital is better than issuing bonds or equity to a public market for the same operating capital.

BTW, German banks only lend against security as well: they take a floating debenture over the assets of the firm just as a bond issue is in effect a floating debenture.

As an example of this, do note that 3i, while it’s a state investment bank (or at least was, now privatised) didn’t actually act like a German bank, lending money to companies. 3i takes equity stakes in companies as a way of providing them with finance.

This “banks don’t lend to industry” is something Will Hutton has been banging on about for decades and he always, but always, fails to go on to note that this doesn’t mean that British companies don’t get financed. It means that they get their finance in a different way: intermediated through markets rather than directly from banks.

One of the disadvantages of the A-S system is that it is more difficult for a solid but unexciting SME to get expansion funds. However, it’s a lot easier for a whizzy new start up to get funds as we’ve the venture capital structure which Germany really didn’t until recently.

The take away point here is that the statistics being used, while true, is terribly misleading. It’s making the assumption that banks *should* be financing domestic industry….when we have an entirely different system which does that.

Tim W,

What we are really speaking about is small to mid-size companies. Only larger can access capital markets. Thomas Cook and Manchester United were recent ones to issue bonds for the first time. That type of cheaper finance is not available to small firm and banks still dominate all lending. In the UK, bank loans account for 76 per cent of all corporate debt finance. Although corporate bond issuance has been growing since the collapse of Lehman it increased by £22.2bn by the end of the second quarter of 2010. At the same time UK financial institutions have reduced their net lending to UK companies by £59.1bn.

@23: “Crédit Lyonnais was not a state investment bank. It was a state-owned commercial bank as most of the French banks were nationalised after WW2. What serves as a state investment bank in France is Caisse Depots.”

Does that mean the Ffr 100 billion losses clocked up by Crédit Lyonnais were OK then?

“We had a state investment bank in the UK called the Industrial and Commercial Finance Corporation (ICFC), which was set up in 1945. It was privatised in 1994 and is now the 3i Group plc. We need another with a larger balance sheet.”

ICFC did well and now the 3i Group is also doing well but what happened to the National Enterprise Board?

By the time it was privatised in 1988, £3.4 billions of taxpayers’ money had been sunk into the British Leyland/Rover Group. I don’t recall how much was wasted on ICL, which was to be Britain’s answer to IBM – see John Hendry, Innovating for Failure: government policy and the early British computer industry (MIT Press 1989).

Of course, there was a great success story with Rolls Royce, which was nationalised by a Conservative government in 1971 to save the company from collapse, turned around and then privatised in 1988 to become in due course one of the leading global aeroengine manufacturers.

The trouble with state owned banks and industrial reconstruction corporations is that they tend to get pushed onto political agendas – notoriously so in the case of Italy – so much public money goes down the drain on duff projects. OTOH the Japanese car companies with plants in Britain are doing well.

If the state wants some private sector business to take on some activity which the business considers is not in its best interests, the government can always offer the business a contract. supported with taxpayers’ money, to do what the government wants of the business. That option is far more transparent than the way the nationalised industries acted, supposedly motivated by their interpretation of “the public interest”.