A Problem with the Economy

Imagine a small island with ten people living on it.

One of the island inhabitants, Bill, owns a mill. He invested $10k in it. Everyone works at the mill. The mill makes $11k profit (surplus value) every year out of which wages and dividends are paid. Everyone is paid $1k in wages, including Bill, but he gets an extra $1k in dividends because he invested his money in the mill instead of buying a second-hand Lamborghini, which is what he really wanted to do. Everyone is happy.

Then, the technology changes. Someone invents a better way of milling. So, Bill is in a dilemma. He owns a house worth $20k so he takes the plunge and borrows $20k from the bank secured on his home. He tears down the old mill and builds a new one. He takes the risk and, this time, it works for him.

But things have changed. This mill produces twice as much product with a lot less labour. So, now a senior technician is needed at $1.5k, a junior technician at $1k and 4 porters at $500. Meaning there are three people unemployed on the island and average wages have fallen.

For a time, this is good for Bill. His revenue from the mill is $22k. He pays $2k to the bank  in interest for the loan. He pays out $4.5k in wages. So, he is rich. He has $15.5k when he used to have $2k. Great! But, no one is happy and everyone hates Bill.

It gets worse.

Other people in other places buy the same technology and set up as competitors. The price of the goods falls by 50%. This is good for the islanders because their, reduced, incomes go further. However, the mill is now only making $11k gross profit. Out of this Bill pays, $2k to the bank for the loan, $1.5k to the senior technician (hard to find guys with these skills), $1k to the junior technician (also hard to find) and $500 to each of the unskilled porters, leaving Bill with $5.5k. Not as rich as he briefly was but richer than he used to be.

However, as more competitors crowd into the market place, some on islands with much lower wages, the price of the product continues to fall.

Bill works out that there are 3 unemployed people on the island and they all want work so it doesn’t matter if one of the porters quits as it would be easy to find a replacement. So, he reduces the porters’ wages to $400. Then to $300. Then to $200. It’s only a fifth of what they used to make but, hey, it’s better than it is for the 3 unemployed. Anyway, the prices of a lot of stuff has gone down, which helps a little.

Everyone now hates Bill even more. He feels under big pressure because of increasing competition, falling prices and the risk of defaulting on the bank loan. Some of the islanders are unemployed and some are on lower wages. All of the islanders are miserable because of the social problems that have been caused by the new economic circumstances. Bill is looking forward to a time when the mill can be fully automated and he won’t have to pay anyone. In the meantime, he is thinking of relocating, with his mill, to a lower wage island.

Questions:

1. Whose fault is all of this? Are you a conspiracy theorist – must there always be someone to blame?

2. What is to prevent the price of the product falling so far that no one can make any profit from any of these mills?

3. What happens when there are less than, say, 10% of the workforce in employment? If hardly anyone works, how can anyone buy anything?

4. Suggest possible solutions to the problem. Use your imagination. Give:

(i) a hierarchical solution involving regulation, rules and prohibitions

(ii) an individualist solution in which everyone takes responsibility for themselves

(iii) an egalitarian solution in which everyone shares everything

(iv) a fatalistic solution where, maybe everyone becomes a criminal, I don’t know, I can’t be bothered.

(v) or better still, some kind of mixture of all, or some, of these

 

Unease with Neoliberalism

I often come across academic publications that contain the word “neoliberal”. It makes me uneasy because I have some problems with the way that this term is generally used.

There was a trend in the 1980s among conservatives to move away from centralised control (which had been favoured during WW2) and the term neoliberalism was coined to describe this trend. For example, a book by Graham and Clarke (1986) titled The New Enlightenment: the rebirth of liberalism which celebrates the “death of socialism” and Austrian economics particularly Hayek, is typical of that way of thinking at that time.

However, the term is used nowadays much more broadly than it was in its original, historically specific, circumstances. For example, if you were to describe a particular policy now as ‘neoliberal’, it would not, to my mind, have any meaning. My concern is that it is not possible to say when something (anything) is neoliberal and when it is not and, therefore, neoliberalism presents itself as a precise technical term when it really isn’t one.

It seems to me that it has become a term of abuse used, in Grid-Group terms (Thompson 2008), in egalitarian thinking to describe individualist thinking. This means that it has become a term that is used, usually unconsciously, as a means of censure or coercion. That is, if a policy, idea or activity is labelled neoliberal then anyone who has anything to say in its favour must be a selfish capitalist with dubious morals. This kind of Trojan horse value, which is based on an unexamined assumption, is not good for academic enquiry or debate.

Barnett (2005) has identified the problem and commented on how lack of questioning of the assumptions behind the usual use of the term is obstructing potentially fruitful enquiry:

Theories of neoliberalism provide a consoling image of how the world works, and in their simplistic reiteration of the idea that liberalism privileges the market and individual self-interest, they provide little assistance in thinking about how best to balance equally compelling imperatives to respect pluralistic difference and enable effective collective action.

It seems to me that the root of the problem of the current theorisation of neoliberalism is that most scholars in the field are working with a critical realist paradigm which assumes that there are individuals who precede the institutions of which they are members. In this way some individuals become victims of “the system” while others manoeuvre themselves into positions of power and force everyone else to dance to their tune. As Barnett points out, this is rather a crude model when it comes to explaining present day social relationships and Foucault’s model of generative power seems to have more to offer.

I agree with Latour (2005) that much academic enquiry is hampered by what he calls ‘the sociological fallacy’; that is, the habit that sociologists have of sticking labels on things and then proceeding in their enquiries as though the label has explained something, when in fact it is nothing more than an empty term. In these cases it would have been more fruitful to dig deeper under the label to find out what is really happening. The terms class, culture, society, capitalism and neoliberalism are all good examples of this phenomenon. By employing Foucault’s model of power for deeper analysis more progress might be made.

References

Barnett, C. (2005). The Consolations of Neoliberalism, Geoforum, 36(1), pp.7-12.
Graham, D. and Clarke, P. (1986). The New Enlightenment: the rebirth of liberalism, London: Macmillan.
Latour, B. (2005). Reassembling the Social: an introduction to actor-network theory, Oxford: OUP.
Thompson, M. (2008). Organising and Disorganising, Axminster: Triarchy Press.

UK Politics Post Brexit

The politics of the UK, like the politics of everywhere else has fallen into a new pattern. We have political systems based on nineteenth century interest groups and class conflict. The world is different now. Instead we have a large middle class who typically are university educated, rational and democratic in outlook. They are open-minded, outward looking and have an international view.  These people exist in almost every country in the world and they have a good deal in common with each other. They think the same way, spend their money in the same way and have the same values. Then there is everyone else. These are the people who have not had the opportunities that their neighbours have had and they don’t recognise the world they live in. They feel that they have little control over their lives so they feel they have become victims. It is easy for them to look back to times they understood, or thought they did. These are the bulk of the Brexit voters, the Front National voters and the Trump voters (and the religious fundamentalists). It is the same everywhere.

The UK has a first past the post voting system making it inevitable that there are two main political parties. This system has worked well in the past and led to decisive government. But these two blocks are really uneasy, fragile coalitions. The Tories are split many ways but certainly into soft-right pro-Europe and pro-business, like Cameron, and an assortment of traditionalists with dark motives. Cameron called the Brexit referendum because he was afraid that the Tories would lose votes to the far-right UKIP. He didn’t expect to lose the vote and had no plans for what to do if he did – it isn’t even clear what “Brexit” actually means. So, he didn’t try too hard to influence the voters. Meanwhile the shabbily opportunistic Boris Johnson told a lot of lies in a flamboyant manner which gave the unsophisticated voters the confidence to register their unease about the contemporary world. Of course, it was also easy for them to blame the other – the foreigners – for things totally unconnected with them.

On the other hand, the people who should have been saving the situation offering hope and realistic alternatives were disintegrating into a farce. The Labour party under Tony Blair was a well-oiled machine full of talented people fighting for fairness and progress. After Blair left and his generation stepped aside there was a dearth of talent to replace them. The Labour party allowed itself to be taken over by a minority of far left ideologues who behave as though it is 1916 not 2016. The party has deteriorated into an unseemly internal war without any regard for the voters who they are supposed to represent. The people of good will in the Labour party seem to be unable to make any mark on the situation.

What is needed? A new centre party, maybe with a name something like called “Reason”. This party will have an ideology of polyrationality based on Douglas/Thompson Grid-Group Cultural Theory. This is the principle that there is no one ‘elegant’ solution to any problem but that all problems must be based on a negotiation between: hierarchical principles – the rule of law etc – egalitarian principles – needs of the community, equality and inclusiveness and individualism – the needs of individual talent, aspiration and competition. The current parties include only one or two of these but in reality they are mutually supporting principles so ignoring one or two of them sows the seeds of failure.

The Labour party needs to split with the old left going its own way. The other two thirds would form the basis of the new Reason party. Then there should also be people joining from the left of the Conservatives – the individualism principle in the mix. And, it should also include the old, rudderless Liberal Democratic party which presently is a centrist party but with no definite ideology and a very small following.

The Three States of Money

At the core of most stories in the news media that have to do with politics is the issue of money. There is debate about its generation, it’s expenditure, how much should be raised in taxes, how much executives should be allowed to earn, how much pension people should expect in retirement and so on. There is an assumption among journalists that everyone understands the basics, after all, we all have a few coins in our pockets don’t we? But, of course, many consumers of news feel that they do not understand much of what they are being told and skip over the economics stories until they find something which has more readily accessible content. Journalists see their role as being disseminators of information but, in the main, they make very poor teachers.

 The trouble is that money is a strange substance though it is with us all the time. It is a bit like water. When water is cold, water it is a solid. Normally, we experience it as a liquid. And when it is very hot, it turns to steam and becomes gaseous. I would like to suggest that just as water has three states which vary according to its temperature and pressure, it is helpful to think of money as having three states which vary according to its quantity and use.

For want of more elegant terminology, let us call small amounts of money ‘Money 1’, middling amounts of money ‘Money 2’ and large amounts of money ‘Money 3’. Economists have the terms ‘micro economics’ and ‘macro economics’ and in this suggested classification ‘micro economics’ roughly corresponds to Money 1 and Money 2 whereas ‘macro economics’ corresponds to Money 3. I suggest that the three states of money model paints a clearer picture.

Money 1 is the money that individuals and families spend on an everyday basis. It falls within the limits of their income. It is the money that is used for daily expenses such as food, travel, mortgage payments and so on. The wisest approach to managing Money 1 is not to allow expenditure to exceed income. If it does, there is an extra cost which reduces spending power in the longer term. The time horizons of Money 1 are short and the amounts are small. The emphasis is on income, directly or indirectly arising from labour. Risk is to be kept to an absolute minimum and, if possible, eliminated altogether.

Money 2 covers a range from amounts required to buy domestic properties and small businesses up to amounts turned over by large commercial organisations and may run into billions of dollars. The keynote of this state of money is investment: it is money used to make money.

The aim of a purchaser of a domestic property in taking out a mortgage loan, in preference to renting accommodation, is to pay it off so that housing ceases to be such a significant cost and to acquire an asset which stores value and, perhaps, increases in value. For a business, Money 2 is an input which is used to invest in means of production which, in due course, generates wages and dividends – Money 1 – paid to employees and shareholders. Without Money 2 there would be no Money 1. Money 2 is money for investing.

Money 3 is money in such large quantities that its use affects the nature of reality. It is money spent by government. It cannot be seen as investment in the same sense as Money 2. In Money 2, for example, two commercial organisations engaged in similar activities could decide to invest similar amounts of money in different ways. Shareholders or commentators can then compare the effects over a period of time and make a judgement on which organisation made the wisest choice. This cannot be with Money 3. By applying Money 3 the nature of the whole situation is altered. For example, there was a time when the British Government was faced with a choice of building a tunnel under the Channel or building a bridge over it. Once the tunnel was built the nature of the situation had been altered so there could only be a theoretical comparison made. Governments cannot own money; they can only direct its flow from taxes into expenditure. Money 3 is money for spending.

The essence of Money 1 is ownership, the nature of Money 2 is investment and the nature of Money 3 is expenditure.

The fundamental structure of our society (capitalist) is tripartite. The terminology varies from writer to writer. We could, for example, use Hegel’s terminology from the ‘Philosophy of Right’: ‘Family, Civil Society and Government’. In this schema ‘Family’ is the realm of the private where people know each other and are mutually dependent. ‘Civil Society’ is where people meet as strangers, for example, to take part in market activities. It is the realm of business. ‘Government’ is where the common interests of all individuals and groups come together and its function, which may be achieved with varying degrees of success, is the maintenance of the common good and its realm is that of justice. We could make a parallel here and say, roughly, that Money 1 is the money of Family, Money 2 is the money of Civil Society and Money 3 is the money of Government.

I suggest that this idea of the three states of money is a simple model and easy to grasp. For example, politicians over recent months have frequently used the analogy that the British economy is like ‘a credit card that has been maxed out’. Now a credit card is Money 1 and the British economy is Money 3. They are fundamentally different so the analogy is obfuscatory and confusing.

I would also like to suggest that the model is helpful for understanding other issues. For example, social class or whether or not experience in business is useful for a politician.

Let us take social class. Everyone is familiar with Money 1. It is not possible to be a fully functioning adult and not have a thorough grasp of Money 1. It’s laws are simple: don’t borrow unless you must; save for a ‘rainy day’; if you want to spend more, you must earn more. However, the degree to which a person is middle class depends on their grasp of Money 2. If you see all expenditure as just expenditure you cannot grasp the concept of investment. Middle class people think in terms of making investments: in buying houses, businesses, investing in education and training. Thus, they are able, to some extent, to escape the cycle of income and expenditure which working class people are trapped in. Class is a state of mind and it is, essentially, a state of mind about money.

In order to understand how the world works and make good decisions about our lives, how to vote and how to plan for the long term, it is essential that people should come to understand much more about economics than they do. An understanding of the three states of money would be a good starting place.