Heading For A Fall

Chris Waller - August 2011
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Once upon a time, an alchemist arrived at the court of a medieval king. The alchemist told the king that he was in possession of the Philosophers' Stone and the secret knowledge that could transmute base metals into gold. The king demanded proof of these claims and so the alchemist showed him his books, inscribed with all manner of arcane symbols and incantations in strange tongues. The king was impressed, seeing that the alchemist was clearly in possession of esoteric knowledge. The alchemist told the king that he would work his dark arts, but only in secret and he would therefore require the keys to the treasury wherein he could work undisturbed and away from the prying eyes of the rabble. The king granted the alchemist his wishes and handed over the keys to the treasury. The king, being the king, demanded that he be able to enter the treasury and see the results of the alchemist's dark arts. The alchemist, of course, told the king that, since he was the king, and of noble status, he would be privy to his work. The days and the weeks passed and every day the king's chests of gold seemed fuller than before. The king saw that, with all this gold, he would be able to do great works about his kingdom and win the love of his people. He would go down in history as the greatest of kings.

One day, the king went down to his treasury to find that the alchemist was nowhere to be seen. The gold similarly was nowhere to be seen and all that remained in the treasury was mere brass.

The above is an allegory on modern economics, to which I shall return presently. But first, a little history.

At some time in the post-war period, the political view of the economy changed. Under the Heath government in particular, it became the received wisdom that the economy was a vast machine and that politicians could read the dials, pull the levers and turn the valves and the machine would respond as required. Much of this thinking stemmed from what was known as the Phillips Machine, a wondrous device, comprising transparent glass tubes, valves and pumps, around which coloured water flowed. It owed its existence to one Bill Phillips, an engineer turned economist, who hailed from New Zealand. The Phillips Machine made its first appearance at the London School of Economics in 1949, having been built in a garage in Croydon, and was driven by an electric motor salvaged from a Lancaster bomber. In its appearance it owed much to the fantastic creations of Heath Robinson, but it was intended as a serious explanation of the workings of the economy.

In light of developments during the last sixty-odd years, the Phillips Machine, as a model of the economy, now looks as relevant as a Victorian phrenological head. Phrenology was one of the most popular of Victorian 'sciences' and purported to be able to divine a person's disposition from a reading of the shape of the head. Phrenology was, of course, utter nonsense, but much of modern political economic thinking is perhaps utter nonsense.

If one goes back to the late 18th and the 19th centuries, when Britain was vastly the greatest economy on Earth, politicians had very little involvement in its operation. At that time there were three principal institutions of government: the Home Office, the Foreign Office and the Treasury. The entire British Empire was run by a few hundred clerks. It was not until the 20th century that politicians began to become involved in the nuts and bolts of the economy, and even then only in the coal-mining industry , since this was the principal driver of the British economy and yet also the most troubled of industries. As Lloyd George said in 1916, "In Peace and War alike, King Coal is the paramount Lord of Industry." (1)

In 1945, with the election of the Attlee government, Britain entered what J F Wright(2) has called the Age of Economic Management, implementing the principals of JM Keynes under the global umbrella of the Bretton Woods Agreement, signed by the major powers in July 1944.

It was during this period that governments of both political stripes believed that they could manage the economy to optimise economic growth by macroeconomic policy. This philosophy held sway until the early 1970s. In August of 1971 the USA unilaterally declared that the dollar would no longer be convertible to gold and thus thereafter a fully fiat currency. That declaration brought an end to the Bretton Woods era of international economic management. It is interesting to note that this decision coincided almost exactly with the end of the upward phase of the Kondratieff cycle which had begun in the early 1940s. Indeed, the Bretton Woods era coincided almost exactly with the upward half of that Kondratieff cycle. (3)

Following the Bretton Woods consensus, a new era of economic and political thinking came to the fore. This was the era of Milton Friedman and the 'Chicago school', itself heavily influenced by the thinking of Friedrich von Hayek, exponent of the 'Austrian school' of economics. These were the free marketers whose writings influenced Margaret Thatcher through her political mentor, Sir Keith Joseph.

Even though Thatcher declared herself to be an adherent of free-market thinking, her government still believed that, through macroeconomic policy, primarily the control of the money supply - Monetarism, as it was called - the real economy, that is, manufacturing and services, could be steered in the required direction. In the event, Monetarism failed: for example, between 1979 and 1987, sterling M3 almost tripled, while in that same period, consumer credit increased three times faster than incomes. Monetarism failed not only in its application but even as a theory, Milton Friedman admitting towards the end of his life that his theory was, if not entirely wrong, then at the very least, inadequate.

I return now to my allegory of modern economics. There was a time when politicians believed that they could influence the economy as a whole through macroeconomic policy: this mode of thinking was prevalent both during the Wilson and Heath governments. It was under Thatcher that the emphasis changed to something which one might call Financialism: the idea that providing we were generating increasing amounts of money, all would finally be well - thus 'Big Bang' and the deregulation of the City. The City was awash with alchemists, all of whom claimed that, given the keys to the treasury, they could transmute the leaden British economy into a golden one. The perils of this idea are not new: the Greeks gave us the myth of King Midas, who wished that all he touched would turn to gold, realising only too late the full implications of this wish.

There is an irony to be appreciated at this point because although Thatcher was wont to hail Adam Smith as her intellectual guiding light - insofar as she had an intellect on which any light fell - she had clearly not assimilated Smith's notion of the 'dual circulation', that is, the circulation of money mirroring the circulation of goods. She had imagined that if the money circulated, the goods would appear as if by magic.

The Thatcher government was seduced by the bankers' claims that they alone had the power to change the economy, that they had the economic equivalent of the Philosophers' Stone; all they needed were the keys to the treasury. Thatcher was not alone in being bamboozled by the bankers: all subsequent governments have kowtowed to the City, fearful of the consequences of doing otherwise. The high priests of finance, like their medieval spiritual counterparts, wield the threat of eternity in Hell for those who fail to accept the orthodoxy. The bankers create the money and the politicians dispense bread and circuses to the electorate in the final hope of winning another term in office. In return, the politicians cosset their paymasters and protect them from the consequences of their folly. Politicians and bankers are like two drunks staggering along, leaning together, aware that they are mutually dependent: if the one falls, so does the other.

The bankers, like medieval alchemists, have been revealed as charlatans, sellers of snake-oil. If any progress is to be made then it must begin with politicians admitting that they were conned, but I fear we may have a long wait to hear such an admission. The moral of this story is nowhere better encapsulated than in Goethe's story of the Sorcerer's Apprentice, the boy who had sufficient knowledge to conjure up the spell but insufficient wisdom to see the consequences of so doing, and even less the ability to stop what he had started. As matters are progressing at the present time, both nationally and internationally, the spell may well only be broken by a catastrophe. At the European level, the Greek debt crisis seems likely to plunge Europe into not only another economic storm, but also a political one. Heather Stewart, writing in The Observer (Business, Analysis, 12th June 2011) quotes Erik Britton of Fathom Financial Consulting, who has said that a 70% default on Greece's debt will be necessary and that it will be followed eventually by Ireland and Portugal, and furthermore that if the markets panic, even Spain could be dragged down. The end of the Eurozone, as currently constituted, is being seriously discussed.

As I have said before, to the point of tedium, I am sure, money is a language: money stands in the stead of goods; it is the medium by which we communicate the idea of value; it facilitates economic transactions as language facilitates intellectual transactions. As David Hume said, "Wealth consists not in money, but in goods." John Searle writing in 1999, alludes to this same notion in his book 'Mind, Language and Society'(4) in the section entitled 'The Example of Money', describing money as being 'a pure case of status function', that is, something is accepted as money because the government says it is money.

The problem with that approach is that governments have now lost all control over money. The state is the final guarantor of the currency and it is the state alone which should be issuing and trading in that currency. The banks have no right to create money since they cannot validate it. Having handed over the keys of the treasury to the financial alchemists, politicians have abdicated all responsibility for it.

The denizens of the City are akin to the medieval priesthood who, through their use of the arcane language of Church Latin in which they intoned the mass, sought not only to exclude the broad mass of people but also to convince them that this incomprehensible mumbo-jumbo was essential to their salvation. Bankers today like to try to convince us that without their particular brand of mumbo-jumbo, incantations and strange rituals, the entire world will be cast down into the Ninth Circle of Hell. What they actually do is tantamount to the selling of Papal Indulgences.

This thing which we call the economy is nothing more than the logical view of the totality of human activity given to us by measuring amounts of money, whether static in the form of assets or dynamic in the form of transactions. It gives us at best an imperfect view of the world and at worst can be thoroughly misleading. It is, finally, an epiphenomenon: money in the absence of goods is worthless; it is the production of goods which underpins money. To borrow from Wittgenstein, language, to be useful, must map the real world; money, to have value, must map the production of goods.

Eric Hoffer, the American philosopher, said, "They are dangerous times when words are everything." By the time the Blair government came to power, perhaps no one in Westminster truly believed any longer that politicians could have any effect on the economy. It was at this time that 'presentation' and 'spin' became the tools of government. If they could not actually influence the economy, they could at least try to convince us, via a conniving media, of the Panglossian dictum that all was for this best in this best of all possible worlds. Karl Kraus, the Austrian political commentator, noted that "the corruption of language is the corruption of the soul", and that the corruption of political language was the surest indicator of a deeper political corruption. Despite all the warm and reassuring words from Blair and Brown, the political errors of the Thatcher era were not corrected; indeed, they were compounded.

It is quite possible, even probable, that politicians can have no beneficial impact upon the economy: they can, it is clear, have a destructive impact on it and they have been destructive in so far as they have abdicated responsibility not only for economic policy in the sense of industrial policy - how quaint that term 'industrial policy' now sounds thirty-odd years since we last had a government that entertained such notions - but they abdicated one of the state's most crucial functions, the validation of the currency. Money now is completely detached from the real world and yet its corruption, in the Krausian sense, has a toxic effect on the real economy.

Mira Tekelova, writing in 'Positive Money' (2nd June 2011) quotes Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group and named as one of the Top 100 Most Powerful and Influential People," by Asiamoney, as saying:"There is definitely going to be another financial crisis around the corner because we haveen't solved any of the things that caused the previous crisis." Mobius was speaking at the Foreign Correspondents' Club in Tokyo. When someone at the very core of the financial world makes a statement like that, we should be worried.
Writing again in 'Positive Money' (25th May 2011), Tekelova cites the case of Paul Moore, formerly head of regulatory risk at HBOS, who, having warned the directors of HBOS in 2004 of the folly of lending to people who could not repay, was promptly sacked. Within less than four years, HBOS had to be bailed out at public expense and merged with Lloyds TSB, itself a beneficiary of government largesse, ultimately to be funded by the taxpayer. Moore has also spoken of his fears of an impending second banking crash, speaking on the BBC (23rd May 2011).

Throughout the Thatcher era and latterly, thought less overtly, during the Blair-Brown era, we were assured that the benign effects of private capital would lift the dead hand of state bureaucracy and Britain would become a brighter place. Among other things, the railways were sold off, internal markets were introduced to the NHS and education was subjected to Stalinist levels of micromanagement. The railways are still mediocre and bear no comparison to those of our continental European neighbours. The NHS continues to struggle under a deluge of political interference, while education, despite the vast increase in expenditure, is still in confusion and failing to deliver as promised. None of this, it must be said, can be blamed on the people working in those institutions.

Only today, on the television news (12th June), it has been revealed that the nine Regional Fire Brigade Control Centres will now never be used due to failings in the computer software necessary to their operation. The taxpayer, however, will have to meet the rental costs of these centres, currently running at £50,000 per day, and the rental agreements have between 20 and 25 years to run.

A common refrain to be heard from politicians, is to blame our economic woes on the 'ageing population', or, most recently from David Willetts (5), the 'Baby Boomers', who have, according to him, grabbed all the goodies and deprived their children of similar opportunities. Willett's argument is mendacious nonsense and in making it he attempts to divest politicians, particularly those of his own party, of responsibility for the economic errors of the past thirty-odd years.

Life expectancy in Britain has been rising now for well over 100 years. Politicians have had at least sixty years to prepare the economy for the consequences of this increased longevity, but they have egregiously failed to do so. It was the Tory government under Thatcher that promised 'a property-owning democracy' and in order to encourage people to sign up to it, engineered ever-rising house prices with the connivance of their friends in the City. Furthermore, I cannot think of any parents, at least not those of the middle classes, who would wish to deprive their children of the opportunities they had: on the contrary, parents usually hope to see their children enjoy more material benefits than they themselves had. What Willetts is trying to deflect attention from is the manifest failure of British governments of all persuasions these past sixty-odd years to invest in productive capacity to generate the wealth needed to sustain the population. Had they done this rather than trying to buy favour with the electorate by creating the appearance of wealth in rising house prices while delivering tax cuts at the expense of public services, then we would not be in this mess.

We were promised a bright, shiny world under the benign influence of private capital. Private capital simultaneously demanded tax cuts, which were deleterious to public services, and then offered to underwrite same through such devices as the Private Finance Initiative and its offspring, Public-Private Partnerships, which although implemented by Blair's New Labour government, were Thatcherite in terms of economic philosophy. The net result has been a white elephant which the next generation of taxpayers will have to fund, though the financiers will be laughing all the way to the bank.
Nothing can emphasise the failure of this entire approach to the funding of public services than the recent collapse of Southern Cross, the care homes provider. Southern Cross has defaulted on its rent payments; of its four largest landlords, one is in administration, one is on the brink of going into administration and one is carrying a £750 million debt burden.

This, by Simon Neville, from the Daily Mail, 1st June 2011:-
Four Seasons Healthcare, which rents out 40 homes to Southern Cross, is particularly vulnerable. Bought in 2006 by the Qatar Investment Fund, it ran up debts of £1.5bn, but when the recession hit it was unable to repay its lenders - including RBS - and was forced into a debt-for-equity scheme to pay down £750m. The remaining £750m debt was due to be repaid by September 2010, but this was extended until September 2012. But whether the firm can make the repayments by next year is still unknown. NHP - which was previously owned by Southern Cross's former owner, Blackstone - is on the brink of administration. With debts of more than £1bn, it defaulted last year and is currently being managed by Capita.

The mire becomes more turbid when one looks into the financial shenanigans behind this collapse. Again, from the Daily Mail's Tim Shipman, 2nd June 2011:-
The U.S. private equity firm Blackstone, led by Stephen Schwarzman, bought Southern Cross in 2004 for £162million and sold it three years later. It is believed to have quadrupled its investment. But to achieve this it sold off the company's homes, robbing Southern Cross of its capital and forcing it to lease the properties back from another company. Downing Street announced yesterday that the Government will use public money to ensure those in the 750 affected homes can stay - amid warnings that moving them would lead to the deaths of the most vulnerable.
It is estimated that it will cost the taxpayer £600 million to bail out Southern Cross. But at least we can rest assured that Stephen Schwarzman will be secure in his old age.

It is clear that the failings of the British economy cannot be blamed on the avarice of the baby-boomers, nor the incompetence of the public sector, nor the intransigence of the unions nor any of the other bêtes-noires which politicians like to invoke. Our current predicament is wholly down to the inadequacies of our political system and those to whom its offer of transient power is so appealing, knowing as they do that they will have long departed the political stage by the time the economic chickens come home to roost, and that the blame will fall in someone else's lap.

An economic and political philosophy which had its origins some 40 years ago, and was flawed at the outset, has run its course: it has manifestly failed. At the moment we have a government which seems to believe that a philosophy that failed previously will this time work if only applied with sufficient vigour. Albert Einstein's definition of insanity was, "Doing the same thing over and over again and expecting different results". It seems that we have a government which is insane but I fear that there will have to be an absolute catastrophe before someone realises that we need to change.

The British economy is often included in what are called the 'Anglo-Saxon' economies, that is, the northern European and North American economies. This is a misnomer in the case of Britain, or perhaps I should more precisely say, England. The British economy is a Norman economy, that is, its socio-economic structure was determined by the most egregious act of theft in this country's history, perpetrated by William, Duke of Normandy, and its effects are still with us today, compounded as they were by the Enclosures of the 18th century, when the landowners expropriated a further 8 million acres. Kevin Cahill, in his magisterial volume, 'Who Owns Britain?', (6) details, as far as it is possible so to do, the ownership of land in this country and shows that it has hardly changed since the days of the Norman conquest. In 1872 an attempt was made to establish exactly who owned the land - the 'Return of Owners of Land' - but it was frustrated by the landowners who were somewhat coy about revealing the full extent of their holdings. Even today, the Land Registry does not know who owns between 30 and 50 percent of the land in Britain.

With only 7.5% of England and Wales under residential occupation, a population of 47.8 million live on 3.4 million acres, the other 26.9 million acres being owned by as few as 135,000 people. These already privileged landowners also receive around £2 billion in subsidies from the European Union plus a further £2 billion from the British taxpayer, all of which serves to force up the price of land to the point where the vast majority of young people now no longer expect to be able to buy a house, a situation which, with his weasel words, David Willetts tries to blame on the baby-boomers.

The majority of the hereditary peers might have been evicted from the House of Lords in 1999, but they still control the real assets much as they did 900-odd years ago; it is time for a change. Even after thirty-five years of variously inept, hypocritical and mendacious government, the real problems of the British economy remain unchallenged and at time of writing there is no genuinely radical alternative in prospect.

I quote Einstein once again: "We cannot solve our problems with the same thinking we used when we created them."



  1. The Power Game - The Struggle for Coal, David Powell, publ. Duckworth 1993
  2. Britain in the Age of Economic Management: An Economic History since 1939 by J. F. Wright, publ. OUP 1980.
  3. The Downwave, Robert Beckman, p.87, publ. Milestone Publications, 1983
  4. Mind, Language and Society - Philosophy in the Real World, John Searle, publ. Weidenfeld and Nicholson, 1999.
  5. The Pinch: How the Baby Boomers Took Their Children's Future - And How They Can Give it Back, David Willetts, publ. Atlantic Books, 2010.
  6. Who Owns Britain?, Kevin Cahill, Cannongate Books, 2001.


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