The new Economics?

Whether you agree with his political prescriptions and predictions or not, Karl Marx did have some very thought provoking things to say on the matter of historical development (or progress if you are of the Whig interpretation of history persuasion). One of his most succinct (and understandable) observations was that history does have a capacity to repeat itself; and when it does so it is first as tragedy and then as farce.

 

I was reminded of this when catching up on the coverage in the press of Jeremy Corbyn’s seemingly unstoppable trajectory to the position of Labour leader. Lest you think you know where this blog is going, please keep reading …

 

What is particularly of interest to us is what is increasingly being termed ‘Corbynomics’ (I don’t like the rough merging of these two words either, but let’s stick with this term for the moment). To many, what he is proposing in the field of economic policy is a rational alternative to the current government’s obsession with cutting back state activity and spending and those ‘lite’ versions of this ideology which have, seemingly, been adopted by some of the other Labour leadership contenders.

 

In our bland times, Mr Corbyn is politically colourful and his economic policies have lead to many irrational knee jerk reactions from the usual quarters. No-one has yet used the ‘reds under the beds’ phrase of Senator Joe McCarthy’s days; but some of the more hysterical comments are arguably coming close to this.

 

That is a shame for there is much in what Mr Corbyn is proposing in the field of macro economics which is worthy of detailed consideration. Some 40+ economists, from a range of backgrounds have said as much. In particular the suggestion that QE could be used in a different manner than that to which it has currently been applied (effectively bailing out collapsing banks and causing asset price bubbles – although perhaps these are rapidly deflating as we speak…).

 

Let us also remember that Martin Wolf, the Economics editor at the FT, has said for some time that the pre 2008 capitalist model which had relied on ever expanding debt to drive economic growth is now defunct and that there is a time and a place for radical solutions to our economic woes – and that time and place is right now. Policies which may have worked in the past are too timid for our current challenges. Mr Wolf’s and others calls for a radical change in economic policy seemingly chime with some of Mr Corbyn’s ideas.

 

And so we come back to Karl Marx’s observation.

We have seen history repeat itself just recently in John Cridland’s reported critique of Mr Corbyn’s ‘new’ QE proposals. Mr Cridland is no fan of this – although whether he is speaking in his own personal capacity or that of the outgoing head of the CBI is unclear.

 

Whilst defending the use fo QE to support failed banks he is withering in his condemnation of Mr Corbyn’s proposal to use ‘new’ QE to fund infrastructure investment (and, due to the way this would be structured, never to require ‘repayment’ – although whether you ever need to ‘repay’ invented money is an interesting intellectual question ..).

 

Now, there is, of course, nothing wrong with rational and considered critiques of others’ points of view; but the tragic or farcical bit in all this is that Mr Cridland apparently observed that the national economy is no different in principle to the household economy – and that as a household must pay its debts down, so must the nation state. Now there is a degree of truth in this – but not as much as Mr Cridland and others may think.

The principal object being how many households do you know which have the capacity to ‘print money or create it in a computer file somewhere? Not many I would suggest (and if you do, you probably should be reporting them to the police).

 

Another key difference is much of the national debt is either directly or indirectly ‘owned’ by the UK population, in the form of the gilts, bonds owned by our pension funds etc (yes in a national context, we lend to ourselves). Simply put, without government borrowing our pension funds would need to look somewhere else for a safe haven to lend funds. You might be scratching your head now, this is normal – economics is an art not a science. But hopefully this illustrates the fallacy of simply equating the national debt to household debt.

 

Let us also recall that a few years ago Mr Cameron got himself in just such a pickle with a speech he was intending to make where he would have drawn a parallel between the need for a household to pay off its credit card debts as quickly as possible and that of the state to pay down its national debt. When the dire economic consequences for the UK of the population paying down their consumption fuelled credit card debts was highlighted, the Prime Minister’s speech was hastily changed,

 

The fact is that the UK economy is not the same as your or my household ‘economy’. To suggest otherwise does not help to advance or develop the debate.

 

For more information on the topic, please contact Stephen Gregson on 01772 821021.

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