101 uses for a former merchant banker

Comment So how are we going to get out of this recession thing, then? If we just cut interest rates to zero and crank up the printing presses, will everything return to being fine and dandy? Well, possibly, although I have to say that I personally severely doubt it. Such alarmingly simplistic Keynesian policies might help us along the way, but I don’t think that they’re the entire answer.

In fact, I'm entirely unconvinced that any economic policy or model is the entire answer - simply because they're models. They're simplifications of a complex world and thus do not capture the whole of the story at any one time. Rather, each of these different models (and there are hundreds) is able to capture some small or large truth about what’s going on, but not the entirety of the situation.

So those shouting about how we need to have a Keynesian reflation of the economy: yes, I can see the value here. If we are indeed in a liquidity trap then engineering a fiscal boost by deliberately enlarging the gap between tax raised and money spent by the government could help. Similarly, the monetarist prescription that - assuming we are not yet in a liquidity trap - interest rate cuts will get us through is illuminating another part of the picture.

This isn't, of course, how I’m supposed to think as a good little blinkered ideologue: I should find value only in my side's arguments and deride all others, surely? Perhaps, but it’s a lot more fun and informative to be looking at the truth of the statements and prejudices of others than it is to simply reject them out of hand. Even, for example, the Marxist insistence upon the progressive immiseration of the working classes.

This was going to happen because the capitalists would gang up on the poor and deliberately reduce wages so that capital could exploit them more: lower wages and higher profits were the aim. Looking around our world we can see that this obviously didn’t happen, the British working classes might not be all that joyful but they’re not immiserated. The error was in thinking that capital was going to combine so as to act with one voice (in the class interest I suppose) when in fact individual capitalists are in competition with each other for access to productive labour. It’s that competition which leads to the 1.8-2 per cent increase in the average per capita income each year, decade after decade as this liberal capitalism thing rolls along.

So does the fact that it didn’t happen mean the original insight was useless, entirely wrong? No, for it did indeed happen elsewhere, in Stalin’s Soviet Union by a nice irony. There there was indeed only one employer, one capitalist called the State, and they did quite deliberately keep down the wages of the workers in order to generate higher returns to capital. So while the statement that capitalists will grind the workers down wasn’t true, the statement that they would if there was only one capitalist instead of competing ones was indeed so.

What other ideological strands can we find that might shed light on the current situation? How about Austrian theory? This is something we don’t mention in polite society these days, it being thought of as part of that neo-liberalism that has brought us all to such a pretty pass. But even the works of such as Schumpeter, Von Mises and Hayek, desperately unfashionable though they are in bien pensant circles, can help us.

For one way of looking at what’s going on is to consider that the British economy is over-concentrated in certain sectors, that we’ve got too many of our resources (those traditional land, labour and capital) working in something like, say, finance, and not enough in industry or creating green energy or... well, take your pick. It’s true that the last time we had a burst of globalisation and international specialisation, in the 1880-1910 period, Germany ended up doing heavy industry while Britain did financial services, so there might be something which predisposes each society that way (my guess is that it’s the English commercial law system), but even if that’s true, I think we can all agree that the financial sector is going to shrink as a percentage of our economy over the next few years and decades.