A Little
History of Economics, and, Unfortunately, Why the Past is the Best Guide to the
Future – Terrence Field, Businessman, Economist and Thinker
Most people who hear the words
‘economy’ or ‘economics’ instinctively recoil, out of an inner alienation, and
a distaste at having to apply a fleeting regard something they know matters,
but which, at bottom, the simply do not really understand.
Below, Terry explains to Barbara Holliman
Below, Terry explains to Barbara Holliman
For those of us cursed with minds
attuned to consider the nature and implications of economics and of capitalism
in particular, understanding the past economics of our societies can lead to
the understanding of not just the future of economies, but also the social and
cultural consequences of how economic life will change.
The early history of the
development of economic thinking has taken place in countries where the very
nature and condition of economic activity have changed radically in size,
geographical reach and complexity over the past two centuries. Today social, cultural and political
influences force economists to reconsider the controllability and stability of
economic conditions and structures once taken as self-sustaining.
The Classical Economists
The early view of the ‘classical’
economists such as the famed Scotsman, Adam Smith, reflected the elegant architecture of the period. The late Georgian period
produced architecture concerned with symmetry, balance, proportion and the
‘golden ratio’ of classical elegance. In
like manner classical economics looked to an economic engine that tended to natural
stability, balance, rational decision making coming from enormous numbers of
players who together formed a supra-human ‘hidden hand’. The ‘hidden hand’ guided the progress
of the economy, of human activity, and by implication, the optimization of order,
activity, output and human happiness.
Then came the great perturbation
of the 1930s. The system failed to do what it was expected to do. As an
example, the fall in wages did not produce a rise in the demand for labour, but
rather a loss of confidence that accelerated the collapse of demand, output, employment
and – to understate it - contentment.
Which leads us to ask, and leave
hanging in the air until later in this little note, what, if any ‘purpose’ can
be imposed on economic activity. More of that later.
Keynsian State Intervention.
As a response to the horror of
the Great Depression, a consensus formed that government-led economic activity
would be required in the depths of depression in order to ‘stimulate’ the
moribund economy into output and employment recovery. This is understood by all
to fall under the umbrella of ‘Keynsian’ economics named
after Englishman John Maynard Keynes. From this developed the ideas of greater
state intervention, the application of politics at the level of the State –
socialist intervention. This intervention would
not only cause the general economy to recover, but also give government the
opportunity to so ‘manage’ the economy in order to protect some social groups
against the assumed excess power of other social groups.
In those times, those developed
economies who applied these concepts operated in an environment of control of
the supply, cost and use of resources, from raw materials right through to
final production and consumption. Britain had a comprehensive economic and
political empire. The United States was a
largely self-contained ‘closed loop’ economy, with equally total control from
raw material extraction through to final market supply.
In other words, social, political
and economic order coincided geographically. The potential for control seemed
total.
IN the context of large-scale, or
‘macro’ economics – western developed economies, where capital, resources,
labour, distribution, markets, and social order were all susceptible to
governmental influence, and where economic thinking in the great universities
focused on how the state could control economic life to the advantage of the citizenry, all seemed possible.
From the late 1940s through to
the collapse of Soviet communism, as ‘macroeconomic’ (large-scale) management
of the economy became accepted orthodoxy, the ‘levers of control’ – monetary
policy, fiscal policy, together with forms of state-directed activity – were
aggressively and confidently applied by chancelleries throughout Europe and
Great Britain.
Private activity would be vital,
but managed. The future would be predictable.
The difference in how the Soviet
Union and most nations in Western Europe applied state control to economic life
was really a matter of degree. In the
United States, whilst there was less appetite for far-reaching state
intervention in the public mind, yet in reality the role of the state was
considerable.
The immense ‘military industrial
complex’ was used as an engine of demand management by US governments.
A significant element of the aura
that attaches to the Reagan period is the massive increase in military demand
from government, the resultant manufacturing activity feeding through to add to
the buoyant level of overall demand and of output.
So what happened then?
Busting the
controllable ‘end to end’ economy wide open.
Firstly Japan opened its post war
economy and a new, vigorous centre of output appeared to challenge the western
nations. No longer could western
governments operate on a world of end-to-end control. They faced another
economy that had its own resource supplies, its own social order, belief
systems, attitude to work, skill sets and attributes.
This
was the first external attack on the productive capacity and market
demand for the goods habitually churned out by the old western economies. To
add to the western economic pain, Japanese banks operated differently, in close
integrated harmony with their manufacturers, making the competitive threat to
the ‘west’ the more potent.
This supply of increasingly superb
goods into western markets resulted in
the withering of uncompetitive western businesses, increased unemployment,
and state support spending, accompanied by reduced tax revenue and increased
government borrowing was applied to protect the local victims of superior external
competition.
Southeast Asia awakes - Myanmar 2016
In all this the interesting thing to ponder is the essential untruthfulness of both
monetarist and non-monetarist claims that each could be capable of optimizing
the performance of the western economies.
Why did the proposition
of effective economic control in the west become more and more of a sham?
The controllable end-to-end western
economies were being ripped to pieces. Where did this collapse of self-contained
western control come from? It arose from Deng Xiaoping and the acceptance by
China of open economic development, co-ordinated by Chinese Communist Party
five-year plans.
The scale of the growth of the
Chinese economy now dwarfs that of Japan, with gigantic manufacturing capacity
and a cost base that, whilst increasing year by year, still exerts a mortal
threat to the manufacturing base of the west - all of the west.
This
new world of globalising resource extraction, manufacture and supply now means
no national or regional economy can be managed comprehensively at the local
level.
At the same time, the directed
Chinese state appears to offer performance not any longer available to the
western states.
This is not entirely
unprecedented.
The Soviet leader, Kruschev, suggested
that the soviet system would ‘bury’ the west with its superior economic
performance. At the time the growth of the soviet economy was robust, whilst that
of the west was quite modest.
The centrally directed
construction of the ‘skeleton’ of the soviet economy - its basic industry, its
transport system, its new cities, its directed education system, and of course
its immense military, gave an external observer concern that it may well be the
future.
So what happened? The next phase
of development to a responsive, sophisticated economic engine required to meet
the detailed needs of the variety of the soviet citizenry was entirely beyond
the capacity of the soviet state planning system.
To this failure must be added the
gigantic misallocation of resources in the process of building soviet cities,
industries, agricultural and military; thus the system collapsed into total
failure and social trauma, where for a time the lifespan of soviet citizens
fell to the mid forties.
So what is
different about China?
China is another example of fast
structural development, with a remodeling of the economic and physical landscape
that is unprecedented in speed. To date, the country has flooded the world with
goods, polluted its rivers, poisoned its air, dammed its principal watercourses,
added huge city scapes, developed a potent regional military capability, massively
increased hydrocarbon usage yet managed to give the impression of un-phased
long term control and stable social order.
What
it has not done, however, is offer a pluralistic democracy, an open society,
clear data and information, nor has it focused on working harmoniously with its
near neighbors to establish a co-operative political landscape in south east
Asia.
China is a work in progress.
The pressure to employ a gigantic
population has caused China to over-extend the period of development of the
capital infrastructure of the economy rather than to move to a retail consumer
economy at a fast pace.
Right, Terry reads about the economic history of a Pennsylvania river town. 2016
This could be because the social
and political structures are not up to
the job of facilitating a sophisticated and free private sector economy
capable of offering the panoply of goods and services a maturing society of consumers requires. This need for a totally free,
sophisticated economy is a primary challenge to the value and usefulness of the
centrally directed political structure.
Whilst this may be no rerun of
the Soviet Union, it may or may not prove to be a model of economy that matches
or exceeds the performance of the western democracies.
The example of the Chinese
economy has suggested to many that the state has a valuable role to play as a
directing hand – the creator of the structure in which private activity can operate. But
we have tried this before, in Europe, in Russia, even in Britain. The result has been a massive waste of
resources - the construction of industries in the wrong places, making the
wrong goods, consuming vast resources, and polluting the environment and
blighting people’s lives.
It is certainly true that the
western economies have been guilty of the waste of resources on a massive
scale; in telecoms for example, many hundreds of billions of dollars have been
spent of cable connections across the world that will never be illuminated with
traffic. New industries, new technologies cause people simply to guess about
the future, with waste to match the exuberance.
Should we expect that future economic management will take place in a
world of uncertainty, disorder and the danger of impoverishing waste?
Of course.
Is
unmanageable disorder the certain and unalterable future for economies?
That is the life we must live for
a very long time to come, but maybe not for ever, since the development of
competing new regions of the globe that causes these immense dislocations will
itself stabilise.
The economic blocks will mature.
Since the present economy of the world is
politically and socially fragmented, each component element of this developing
global economy cannot be adequately managed by the local political authority -
certainly current political offerings
suggesting state actions can control the economy to the extent that it
can improve broad swathes of workers lives in any one location is transparently
un-provable, and very probably untrue.
Open economies now are subject to
ungovernable and often unanticipated external pressures. Politicians are now reacting by ‘hardening’ the external barriers.
In modern open economies global corporations can and do act to remove
the power of governments to raise revenue. Those newly developing regions
of the world house corporations experiencing very fast growth, which are asset
rich, free of debt, with buoyant revenues; the governments of those developing
regions have no interest in co-operating with the revenue-starved governments of
the ‘old’ western economies. Thus the corporation commands capital, controls its
labour costs, pays taxes almost as it wishes, is disconnected from any local
authority.
How will the
developed economies respond to the new integrating world?
What then can we in the old west
expect of our economy? What can we reasonably ask of our political
representatives, and what model of capitalism will develop in the near and
intermediate future?
That should take us back to the
question hanging in the air – can overall social objectives be the driver of
economic management. Is this a luxury no longer relevant to modern economies?
Since the classical assumption of
the self-correcting structure producing the optimal result is now irrelevant, can the economy be optimized in terms of
human happiness, economic security and stability?
In the fragmentation of the
global economy, the present answer has
to be no.
Certainly there are competing
ideas about how the new model of capitalism can be developed to produce a
recovery in activity and wealth creation, but nobody is close to being able to
suggest a ‘model’ that can reliably produce control and predictability at the
level of functional political interest.
If the west does develop a
capitalist model that blends a version of state activity that moves towards the
Chinese model, because it is the present fashion, and which also maintains the
market economy as the vehicle for resource allocation in an attempt to achieve
greater predictability, it is clear that
such a capitalist model will suffer periodic instability, social dislocation,
surprising local successes or the periodic collapse of significant components.
Open
ended economies, and disrupting technologies lay waste to the old. They build
new worlds and now social conditions. No economic model theory or management
can neither stop nor adequately manage this.
Does any strategy act to reduce the potential for disruption? Well,
there are conditions that lend to greater stability.
Size matters. A very large economy such as the United States
commands a reserve currency, and resources that allow for a greater degree of
economic control. A very small economy, such as Switzerland, replete with very
high educational standards and technical competence, industries with wide
competition ‘moats’ and conservative management of currency stability also lend
themselves to effective economic management.
Left, Viet Nam open air market of food stuffs in another hybrid system of free enterprise and state control of the economy. 2015
By contrast countries with intermediate scale, poor resources, low productivity,
low levels of educational attainment and de-capitalised industries face a
formidable task to control events where the world conspires to outcompete
them. There, attempts at control via state direction will not protect the
population against impoverishment. Such economies will continue to see key
sectors destroyed by overwhelming competition from great powers.
Economic management of socially dysfunctional states cannot be
successful. Old and irrelevant social models preclude the progress to
relevant economic management. For a potent example of this condition, France is
instructive. That country wished to challenge the United States by creating a
new monetary and political economy in Europe. The directed economy and the
political currency (the Euro) has produced major crises and now the exit of the
second largest European economy, the UK, from the political structure.
Old, failed economic ideas die
slowly.
The political class tends to
tinker with their failings to extend their damaging effects.
At present it seems the old world has no reliable model that ‘works’ to
deliver wealth and adequate output. At the same time the Chinese model is
half-formed and untested.
Since the economic future is more
opaque than at any time in the last two centuries, populist political statements of certainty are plainly unsupportable.
In all this the suggestion that
Britain will either do better or worse as a free-floating economic island
cannot be supported. Certainly in the near future the economic management of
each and every region of the world economy will be more unstable, more
volatile, less predictable than in the prior periods of ‘closed-loop’
economies.
That applies with force to the
economic management of smaller economic states, whatever the nuanced form of
capitalism is applied.
IN addition, it can be asserted
with some confidence that, as the period of globalization changes over some
decades to a period of mature stable power blocks, with currencies, energy
supply, resources, populations, socio-political structures, industrial outputs contained
in defined borders, then small states that operate outside such structures will
have to have – relatively - better educated workers, better managed economic
activity, greater capitalization, be more creative, more productive, more
resilient, more market responsive and more sophisticated that those great
blocks they compete with in order to survive, let alone thrive.
Who seriously believes the
history of the UK since 1945 makes such a scenario a probable outcome?
The distortion
of economics by social preconceptions.
The present economic prejudice
required global relocation of activity according to perceptions of what should
or should not be done in particular places – thus engineering in Germany,
agriculture in France, financial services in the USA and the UK, and high
technology, movies and software in the USA.
NO matter that this made little
sense in terms of the historical competences of the populations, rather it was
a mechanism for financial control via banking houses to direct the activity of
the globe, and to vastly enrich themselves in the process.
The result is completely
inappropriate and unnecessary wealth accruing to banking ‘taipans’, poverty and
misery visited on huge population groups previously profitable employed in
gainful activity in the ‘old’ economies, immense concentrations of new wealth
founded in the east, huge numbers of Asians newly prosperous, and trillions in
surpluses accruing to remote peoples who find themselves sitting on land full
of oil and gas.
It would therefore appear highly
desirable that a new form of capitalism develops to modify these tendencies,
with a larger directing role to be played by the state.
Are new
survival strategies now a vital required component part of economic management?
Of even greater significance than
developing newly effective general economic tools, however, is the requirement to modify the – until
now – market-determined price mechanism to cause hydrocarbon consumption to be
radically reduced, and in the process stimulating the direction of
significant resources to research and development of new non-carbon energy
resources. Without this the future of
any economic system is likely to be bleak, as climate change rips through the
life of the global populations, resulting in unlivable environments, unviable
societies and economic collapse.
The requirement to modify the
energy price mechanisms requires long term global co-ordination of the great
power blocks. That is, at the best of times, a tall order. Now, with the
emergence of the old forces of nationalism, both in Great Britain, Europe and
most particularly in the United States, such co-ordinated price management is
temporarily – perhaps permanently – off the agenda.
In order to argue for national
activity, to include protectionism, aggressive assertions of cultural
shibboleths such as military assertiveness, and to support the proposition of
hydrocarbon extractions becoming once again a core element of local (US)
prosperity, it is a primary requirement to argue that there is no
anthropomorphic global warming, climate change and resultant risks.
If that proposition cannot be supported,
there can be no rational or safe assertion of the rest of the new nationalism
and its beliefs.
To deal with climate change, global governmental intervention to
consistently, progressively and universally modify the price and thus usage of
hydrocarbon extractions is an
unavoidable requirement. This would cause United States hydrocarbon usage
to radically reduce, materially offset the growth of such usage in the
developing economies of China and India, and propel development of carbon-free
energy systems to allow for an energy rich world, with the hydrocarbons left in
the ground.
That the Russian state, together with the hydrocarbon producers of the
United States wish to defer the reduction in the value of their corporate stock
capitalisation and dividend potential is plain.
Russia and the tombs of the Romanovs in St. Petersburg, 2015. A hybrid economy and government.
And quite soon.
The idea of changing our
capitalist model to include the value of ‘externalites’ such as hydrocarbon
pollution ( as well as the rest of non-human life could also be so included,
but that seems beyond our wit, as well as our moral compass) is radically a new
departure for economics.
It suggests that we deliberately develop new energy
technology, displacing immense numbers of hydrocarbon workers, ruining the
investment value of hydrocarbon corporations, removing significance and
potential wealth from Saudi Arabia, and much of the Middle East, whilst cutting
the economic legs from the Russian energy industry – not because the present
price mechanism requires it, but because
our grandchildren will die in a boiling cauldron of misery if we do not.
Do contemporary
electoral changes impact the potential for economic and social success?
The election of Mr Trump would-
at first glance – suggest that democratic processes, and universal suffrage are
an impediment, not an aid, to achieve this change.
Mr Lovelock, the British ‘Gaia’
theorist and scientist – one of the first who identified the climate change
danger – has suggested that democratic life may need to be suspended in order
to achieve the desired radical re-engineering of the global energy economy.
It is a central problem to
imagine how the present global capitalist system, likely now to be even more
grotesquely misdirected as a result of monumental greed and ignorance, can be
modified to direct the world to a new energy and environmental support future
in the context of democratic control.
Until now, even with the immense
growth of human economic prosperity the carbon economy has not precluded vast
numbers of economic ‘disruptions’, and local inequitable impoverishment.
How the global economy, shifting
via modified price mechanisms to a post carbon energy economy will manage its
transformation when even larger groups are more severely disrupted,
impoverished, removed from comfort, whilst others, through chance, find their
lives moving in the opposite direction is not clear.
If Europe, as a regional economy, is threatening to break apart because
of the non-acceptance of economic discipline, combined with support
payments from the rich (Northsea) states denied to the poorer southern states,
what chance to do this more radically and on a global scale, and in the context
of the abandonment of an energy supply that we know is abundant, inexpensive,
universal and completely integrated to our lives and easy to use –
hydrocarbons.
That such as UKIP and ‘The
Donald’ have triumphed in a post – crisis downturn gives little confidence that
global governance to modify the hydrocarbon price mechanism has even a slight
chance of success.
I can only therefore conclude that economics is a busted flush.
It seems economic order can only be achieved when there is easy success
to be had.
Now that this pleasant condition is
passed into history, it follows that the vital changes to how we consume, live
and regard our world will only take place when the event described as their prerequisite
for change by David Attenborough takes place.
And the event he identifies is ‘catastrophe’.
Economics will become a conversation not about how to become and remain
prosperous, but rather it will become an urgent conversation about how to
survive.
Trump and survival. Oxymoron? Possibly.
I am Terence Field and I approve this message.
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