Original URL: http://www.theregister.co.uk/2008/12/29/economic_models_and_upturns/

101 uses for a former merchant banker

Innovators who work out the best one will make a killing

By Tim Worstall

Posted in Financial News, 29th December 2008 08:02 GMT

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.

What the Austrians can add to our understanding is a mechanism by which this shift can occur. OK, so the Keynesians provide a fiscal boost, but we’ve still got to somehow move those resources from banking to some other sector. Ditto the monetarists with low interest rates. We don’t, thankfully, live in a country where anyone can, by fiat, tell the bankers to go and be salt miners in Derbyshire - so what is the method by which this shift is going to occur?

The Austrian answer, crudely put, is entrepreneurs. The price of bankers has fallen, continues to fall and presumably will fall further in the future. The buildings they banked in, the capital they banked with, are also looking for a new and productive home and thus their prices have fallen too. What we want and need is therefore some bright spark to come up with a way of using these newly released resources to do something else that we might appreciate. Quite what is entirely unknown: what do you use ex-bankers, however cheap for? Loft insulation?

It’s true that this almost paramilitary wing of liberal economics places a great deal of faith in the idea that someone will come up with a decent and profitable use, yes, but they do at least provide us with the mechanism by which any recession or depression will be ended.

When the resources currently not being used are indeed being used then we won’t have unused resources: the very definition of a recession being that, at heart, we have unused resources lying around. And the people who are going to find those new uses are the entrepreneurs. For that's what entrepreneurs do - experiment with combinations of resources to provide new and/or different products and services. Anyone who finds a profitable use for a few hundred thousand ex-finance middle managers is going to both make a fortune and earn the undying devotion of a nation.

There’s nothing particularly ideological about this analysis (although there very much is about the philosophy that underlies it) - it’s just another strand of economics giving us a glimpse of a partial truth. What it does lead to is something which I think is rather important to remember in the debates over what to do next.

We’ve been told that our current problems have been caused by markets run amok, by an excess of innovation. That might even be true, but what is certainly true is that we’ll get out of our problems only by entrepreneurs innovating. They might be in the public sector (I leave it to you to decide how effective that’s going to be) or the private, but it will be people trying new and different ways of combining resources that will make sure that all get used and thus end the recession.

If anyone’s got any possibly profitable ideas about what to do with all these excess bankers, drop them in the comments and we’ll see if we can raise the money then, shall we? ®

Tim Worstall knows more about rare metals than most might think wise, and writes for himself at timworstall.com, and for The Business and the Adam Smith Institute, among others.