Duncan’s Economic Blog

Not Learning the Lessons

Posted in Uncategorized by duncanseconomicblog on August 12, 2009

As unemployment ticks higher again, I find myself thinking of the below quote:

Blame for unemployment lies more with finance than with industry. Mass unemployment is never the fault of the worker; often it is not the fault of the employers. All widespread trade depressions in modern times have financial causes; successive inflation and deflation, obstinate adherence to the gold standard, reckless speculation, and over investment in particular industries…

The view is now widely accepted outside the ranks of the Labour Party, by most economists, by many Government officials, by many businessmen, even by some bankers…

Finance must be the servant, and the intelligent servant, of the community and productive industry; not their stupid master.

The Labour Party, ‘Full Employment and Financial Policy’, 1944.

I worry that we’ve forgotten much of what we once knew. As Larry Elliot says today:

Even assuming the Bank of England gets it right, all that happens is that we return to a fundamentally flawed model. The return of property inflation, asset bubbles, private equity deals and the whole big swinging dick culture that pervaded Britain back then does not signify real economic recovery: it is evidence of a deluded and chronically sick nation determined to learn nothing and forget everything from the crisis.

Deluded because the over-reliance on debt-driven consumption, speculation and financial engineering was what got us into this mess in the first place. Chronically sick because each of the recessions of the last 30 years has ripped a bit more out of the UK’s industrial base and hence aggravated a problem ever-present since the second world war: we consume too much and produce too little.

11 Responses

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  1. Tim Worstall said, on August 12, 2009 at 11:20 am

    Wow.

    “and over investment in particular industries”

    The Labour Party in 1944 was Austrian? Who knew?

    Of course, the solution to that is well known in Austrian circles. Instead of a fiscal stimulus to prop up those over invested in industries you allow them to fail and then the productive assets will move to find better and more value adding uses.

    We even have a word for the time lag in which these moves occur. “Recession”.

  2. duncanseconomicblog said, on August 12, 2009 at 11:33 am

    Not sure it was Austrian Tim…

    If anything it was Keynesian. As in actually Keynesian, rather than what has passed as Keynesianism for the past six decades.

  3. Tim Worstall said, on August 12, 2009 at 11:41 am

    That is the Austrian view of recessions though…

    • duncanseconomicblog said, on August 12, 2009 at 11:49 am

      Over-investment? Agreed.

      But – “obstinate adherence to the gold standard” – surely most Austrians would welcome such a ‘hard money’ policy?

  4. Andreas Paterson said, on August 12, 2009 at 12:18 pm

    The whole overinvestment view of things seems like a pretty sensible one really, I guess it’s just that von Mises hit upon it first and gets the credit. I don’t think he was right about the best way out of it though.

    What I reckon we need is tighter and more specific control on lending coupled with an industrial policy focused on the most capital intensive industries.

  5. Tim Worstall said, on August 12, 2009 at 12:41 pm

    “industrial policy focused on the most capital intensive industries.”

    Eh? Capital is a scarce resource. Why would we want to specialise in a sector which uses more rather than less scarce resources?

    • Andreas Paterson said, on August 12, 2009 at 2:13 pm

      Ok, I’m meaning “capital intensive” as in large investment in equipment per worker, just to save any confusion. Also, further to that “industrial policy” need not mean expansion, it might be about managing decline or an adapting to changing conditions. Finally, I’ll say that obviously, I don’t think it’s the only thing we need to do.

      Basically, the reason the government ought to concentrate on the capital intensive industries is because these tend to be the ones where capacity is slowest to expand. It’s in these situations where (in my opinion) state planning can lead to improved coordination of resources. If we are going to be stuck with a shortage of capital it’s important it’s allocated in the right places.

  6. Tim Worstall said, on August 12, 2009 at 2:28 pm

    “state planning can lead to improved coordination of resources.”

    What a strange belief. Having actually seen the politicians we have on our TV screens, what on earth leads you to harbour such an odd idea?

    Don’t forget, politicians having more economic power is not going to improve the quality of the politicians we have.

    • Andreas Paterson said, on August 12, 2009 at 6:04 pm

      There’s really a couple of arguments here, the first is whether I accept the idea that state intervention can in certain situations lead to better economic outcomes. I do think this is the case, but only in certain situations. The second is whether I am entirely comfortable with the state being able to intervene and dictate terms in this way, again I’ll have to say yes. This does mean economic power in the hands of politicians, but I’m comfortable with this, I want my politicians to have the power to act in my interests.

  7. Tim Worstall said, on August 12, 2009 at 6:08 pm

    “I want my politicians to have the power to act in my interests.”

    And I would like politicians capable of recognising what are my interests and then being able to act in them.

    Not something I expect this side of the second coming….

    (No, not religious, just a phrase…)

  8. dannyboy said, on August 13, 2009 at 10:19 am

    overinvestment can be seen in another light – lack of demand. Credit has been used to artificially sustain demand over the last 30 years but why the need? Well, if you look at a 100 year plot of income inequality you get peaks in inequality in 1929 and 2007, with minimum inequality in the mid 60s. Because the lower echelons of society, comprising the majority have been successively impoverished for decades, real demand has been eaten away. Demand will not return until purchasing power is returned to those most likely to spend, and by return of purchasing power I am not talking about credit, I am talking about real income.

    Secondly, I disagree that capital is a scarce resource when compared to investment opportunities and real demand for funds, which is why interest rates have been in secular decline for the last 40 years, and why we have billions belonging to the top 1% sloshing about in hedge funds with no productive outlets. I feel this point is borne out by the fact that simple 6 month CDs re-invested have outperformed equities in the US over the last 20 years, which says to me the cost of capital has been too high. What caused the housing bubble was deliberately lax underwriting, not low rates per se.

    Adding to the stock of funds for investment will only serve to push interest rates down further until the demand side of the economy is capable of picking up the slack.


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