Medium-term prospects for the UK and the world: thoughts on the Autumn Statement


George Osborne

The UK government’s ‘Autumn Statement’ on the public finances was delivered this week. It contained a curious mixture of both real and superficial U-turns. On the former, the Chancellor of the Exchequer, George Osborne, outlined plans to raise taxes and spending over the next fiver years more than promised in the run-up to May’s general election. On the latter, he scrapped plans to cut tax credits, an in-work benefit for the low paid, although the new Universal Credit, which is gradually replacing tax credits, will be less generous once it is introduced fully, hitting some of the poorest workers about as hard.

What I want to briefly concentrate on here is Osborne’s plan to run a budget surplus, that is an excess of receipts over expenditure, or tax revenues over spending, by 2020. Running a surplus under ‘normal’ economic conditions is to become law, although of course this could be overturned by any future government if deemed necessary. Continue reading

Philosophy of mind and ideas in economics


All theories and models generated by the human mind and brain are simplifications of reality. They of necessity leave out information in order to make analysis manageable and useful.

This is true of all human thinking, not just in economics. Beliefs, values,  theories and models are all products of human consciousness and are apparently accepted and used when they prove useful, at least to some people!

All schools of economics, whether they emphasise mathematical methods or simply the written word, must necessarily simplify reality. As Alfred Korzybski (pictured above) proclaimed: ‘the map is not the territory’. A map to the scale of 1:1 would be impractical, so mapmakers simplify in order to provide a useful product. Continue reading

European recovery needs reform in Germany

Coat_of_arms_of_Germany.svgGerman economic reform is vital for sustained recovery in the Eurozone and the world. That was the subject of Wednesday’s leader article in the Financial Times. I absolutely agree and have written about this before here, here and here, so I will not go into too much detail this time. These ideas are not my own, but I find them convincing and believe they should be widely disseminated.

Germany is running a current account surplus of more than 8% of GDP. This reflects a massive total surplus of private and public sector savings over investment: firms, households and the government are in aggregate net savers. This is deflationary for the country itself as well as its trading partners, many of whom are members of the Eurozone. Continue reading

Rent-seeking and inequality: thinking beyond Joseph Stiglitz


Nobel memorial prize winner Joseph Stiglitz

Inequality in the US is in part a political choice. This is the claim of Nobel memorial prize winner in economics Joseph Stiglitz, who has written extensively about it. Some of his views are outlined by Eideard here.

The claim is that inequality in the US has become self-reinforcing. The wealthiest are able to spend resources lobbying politicians, who then tend to support policies that favour them, such as tax cuts for high earners. If so-called ‘trickle-down’ economics fails to work, as indeed it has for many years, and dramatically so since the Great Recession, then the majority do not benefit from policies that favour the rich. The resources or economic ‘rents’ that accrue to top earners as a result of government policies promote further lobbying or ‘rent-seeking’. Thus rather than economic growth benefiting the majority, only those at the top make substantial gains, and the process continues. Continue reading

Keynes on the long run in economics

John Maynard Keynes, possibly the most influential economist of the 20th Century, and his view on the long run in economics, which makes the case for intelligent state intervention to improve economic and social outcomes.

“But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

The actions of today’s policy-makers show that they have taken heed, though not always successfully or consistently. In particular, Keynes’ and his followers’ legacy of ideas have in many ways become marginalised in the work of heterodox economists. We are a long way from the post-war international order that Keynes helped to construct at Bretton Woods, which underpinned 25 years of unprecedented prosperity under capitalism.

Alternative approaches to boom and bust: Austrians, Marxists, Keynesians

Contando_Dinheiro_(8228640)What should governments do about the phenomenon of boom and bust, if anything? Different schools of thought have different explanations for what is known as the economic or business cycle. Below I shall touch upon three of them, and consider the implications for policy.

In brief: Marxists and Keynesians tend to think that the economic cycle is endemic or endogeneous to capitalism, while Austrians think it is the result of meddling governments and central banks. For Marx, the solution was ultimately to abolish and replace the system with socialism. For Keynes, intelligent government policy could mitigate the cycle, while Austrians propose that this could happen if only government and central banks would get out of the way.

Which of these three sets of ideas is the most relevant and helpful, especially given recent economic history? Continue reading

Economics: the science of scarcity or abundance?

The Great Depression. Unemployed men queued outside a soup kitchen opened in Chicago by Al Capone. The storefront sign reads 'Free Soup, Coffee and Doughnuts for the Unemployed.' Chicago, 1930s (Newscom TagID: evhistorypix027753.jpg) [Photo via Newscom]

The Great Depression. Unemployed men queued outside a soup kitchen.

The dismal science. The science of choice. The study of the relationship between ends and scarce means which have alternative uses. The imperialist social science.

Economics has been called many things. My first economics class at school demonstrated the concept of scarce resources and the value of specialisation in production. The slightly eccentric teacher did this by distributing a few pairs of scissors, pencils, some paper and compasses among about twenty of us at the start of the lesson and instructing us to make some paper circles, one for each of us. We tried hard, but there were just not enough materials to go round. We all struggled to complete the task for much of the lesson before failing dismally. Continue reading

Sustaining economic growth and public vs private investment

Millen bridge London

Construction of the Millennium Bridge, London

What are the drivers of economic growth? Many economists would agree that investment is vital, as it adds to both demand as a form of spending, and supply as an increased capacity to produce output and raise productivity. Investment can come from either the private sector or the public sector. Since the 1990s, governments have also tried to get the private sector to finance major construction projects, and then pay for the use of them once the project is completed. This shifts public borrowing off the government’s balance sheet, while potentially raising subsequent spending. It remains controversial.

With global economic growth currently looking a little sluggish, there is plenty of debate among economists and policy-makers over what should be done, if anything. Continue reading