Sunday, 29 September 2013

Business investment, growth, and inflationism: commentary

From basic principles, economic growth comes from several key areas:
1) Dividing labour so we're not all doing the same task at the same time
2) Specialising in that which we have a passion/talent for.
3) Introducing more capital into the production process (this makes it more long-winded before it reaches the consumption stage).

Then we get a bit broader - what encourages such developments? Freedom to trade, the rule of law, and  a pro-culture business. Without these three, economic growth is thwarted either by government interventions and predations, legal uncertainties, and a culture that despises wealth creation.

When an economy sheds the manacles of violence and anti-wealth, it begins to move forward and upward: people can get richer not on the backs of others' labour or through exploitation or violence, but through trading in the market place. Economic growth then enriches the rich and the poor (something that even Karl Marx accepted but which has yet to filter into most people's consciousness).

Trading is fundamentally a win/win situation: when people trade their surpluses in the market, they benefit through the accumulation of stuff that they want. Through trade and profits, they can increase their ability to make money and attract wealth through leverage: Bob can build one house at a time with his crew, but if he expands his crew, they can get more jobs done as he rises to oversee more projects: he can become a housing developer. That is capitalism.

Capitalism is the introduction of more capital to give people leverage in what they do - this both increases the cash flow to them (when successful) and increases employment opportunities for people looking for jobs.

What is critical in this scenario is investment. To gain leverage, somebody must give up something somewhere to gain more in the future. In other words, they must pay the price today to get tomorrow's reward. From saving current funds, people can then invest to increase their own cash flow and thereby give themselves leverage through getting their money to work for them.

Investment is a sensitive action though. It is particularly sensitive to the general economic climate in which companies and individuals act. If the government proceeds on an inflationary path, the potential gains from future profits dwindle; if the government raises interest rates to protect its currency following its inflationary policies, it can pull up investment sharply. If the government taxes the return on successful investments, guess what? Investors become more reluctant to invest.

For an economy to develop healthily, it is critical that the economy is protected (constitutionally if politicians need it written down) from inflationist policies, whimsical legislation, and taxes on profits. 

Without investment, the infrastructure of the country begins to deteriorate - repairs are left, machines break down, houses and roads begin to look shabby: future prosperity is slowly being undermined.

We see this in countries struggling in inflationary environments - superficial prosperity is created around the cities or particularly around the financial centres but is obviously not filtering out to other parts of the country. It is an unhappy sign that the distribution of wealth is being stretched between those who are enjoying the inflationary ride and those who are being hit by it - but one of the greatest threats to future prosperity is the undermining of investment that QE (printing money) has on the ability of firms to invest. It slowly strangles it - and with it, hope.

To return to healthy growth, central banks should stop inflating (devaluing) their currencies: indeed, a return to a hard monetary standard such as gold would obviate the need for central banks, and it would improve the ability for investors to put their money into productive enterprises that enrich us all.

Saturday, 28 September 2013

Economics Fundamentals - the 19th C versus the 20th

In economics we're used to outlining the key government objectives - low unemployment, low inflation, balanced budget, healthy current account, and economic growth (to which a healthy environment can be added).

These are not bad values for a country to possess - after all, who wants high unemployment and inflation, a deficit careering out of control, a depression and an environmentally poisoned environment?

That they are considered key government objectives though is a recent phenomenon - a twentieth century phenomenon in fact born from socialist and social engineering ideas that governments could and should direct their countries economically, and that the economies would respond accordingly.

Now those in power have always enjoyed directing their people - pushing, cajoling, forcing, encouraging them to do as the kings, princes, and technocrats wish, but historically that has generally meant getting the people to wage wars against the neighbours and build massive monuments, walls, and castles (because of retaliation), or white elephant projects such as large monuments. Only recently have governments sought to control the economic reins and imagined that they could turn a few dials and achieve economic nirvana. It's more likely been hell.

In the nineteenth century government policy regarding the economy was one of laissez-faire; generally speaking that is - look at any historical period in more detail and you'll find the picture is much more complicated. In that century governments did not set economic targets (and did not even entertain the notion that they should); targets entered the picture in the interwar years and then dominated political economy after the Second World War following the Keynesian revolution.

Suddenly - that is in terms of human history - governments deigned to seize the economy and sought to direct it. In the UK this overarching policy was effected through nationalising the main industries and the formation of the welfare state. During the 1950s economists employed by the state (so we should really call them statists, people who see the state as the optimal tool for developing people and economies) thought they were doing a swell job and rebuilding Britain and directing its economy: they enjoyed low unemployment and inflation and economic growth. The PM, Harold Macmillan, famously said that the electorate "had never had it so good."

Really? Germany - demolished by the war - was overtaking the UK in economic growth: sure there was Marshall Aid, but more importantly was a return to a stable currency and free markets.

Macmillan's phrase began to haunt the British. Time taught us differently. The controls and manipulation of the economy gradually caused unemployment AND inflation to rise (STAGFLATION), economic growth to slow down, the current account to head negative, and the environment wasn't looking too pretty either. In the 1979, the UK had a Winter of Discontent.

Since that nadir, governments have deployed various policies to achieve their targets using privatisation and various policies to encourage trade. These have worked well (more or less) in freeing entrepreneurial activity, but still governments in the UK and the West remain wedded to the idea that they should be controlling the economy - indeed, that they have the power to do so.

It's worth recollecting Shelley's poem, Ozimandias:

I met a traveller from an antique land
Who said: `Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear --
"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.' 

The results are still dispiriting. Since 2007 the western economies have faltered into a dark, deep recession while their governments have actively debased their currencies: unemployment is tragically rampant across Europe and the States (and often undervalued by statistical manipulation); inflation is creeping up, and government deficits are historically massive.

That's Greece heading off the graph.

In the nineteenth century, there were no economic policies.

The government did not get involved in setting targets - and, guess what, unemployment was low, prices were actually falling (as productivity increased against a stable currency), and economic growth was pulling increasing numbers of people out of poverty.

But they don't tell you that in the textbooks.

The textbooks are implicitly or explicitly statist in orientation: the government, although critiqued well in some books, is still presumed to require the dominant role in people's lives. The authors take the world as it is and assume that it has always been like this. No, it hasn't and it doesn't need to be like this either.

For an overview of political philosophy see my Introduction to Political Philosophy.

Thursday, 19 September 2013

Understanding the Politics of Economics:

Just so we know where we are on the political spectrum. An anarchist community avoids all central planning and effectively has no state. This does not mean that anarchist communities don't have laws or values! Statists (those who believe that some people should be controlling others' behaviour and lives) often dismiss anarchists as violent thugs (ignoring the history of state to state wars, violence, ideological crusades, etc). As we move away from the 0% system, we move to libertarianism which generally avoids state intervention except (and this is controversial amongst libertarians) in cases of law and order  - i.e., they tend to support some government institutions such as the police, courts, army; sometimes libertarians don't mind governments building roads but usually they prefer market led solutions.

As we increase the percentage of the state's control over economic resources, we meet the conservatives who generally favour some form of welfare state to avoid poor people from revolting; further up we find those who argue for social engineering - using the state's resources (taken from the market place) to direct and control society - this may involve taking over professions and industries such as health care and electricity production. Moving along, we meet the socialists who prefer that that the country's economic resources be directed through political channels - they tend to favour mass nationalisation and intervention to alleviate poor people from poverty, equalise incomes or wealth, and/or direct the economy along certain lines (technological growth, cultural leaps forward, war against capitalism...).

Finally we meet the totalitarians who reject any form of freedom (as being dangerous, subversive) - they come in various disguises and are quite sensitive to what they are called: fascists and communists tend to hate each other - they are both totalitarian in their aims though and that's what counts. (Their mutual distrust is often explained by historians and political thinkers as being one of similarity - they both want control but only one team can gain control, hence they tend to rid politics of people of the opposing stripe when in office).

See my Introduction to Political Philosophy book to help: