The fundamental pension contract that should be at the heart of our macroeconomy

Published by Anonymous (not verified) on Sat, 22/07/2017 - 7:14pm in

I was asked yesterday if I would write about pensions as part of the series of blogs I have done over the last few weeks on pretty fundamental economic issues. I’d have liked to do something new, but work (and holiday) has got in the way and so I offer something that’s two years old, but which I would only have updated a little at most. I hope this does the job:

The need to save is innate to many humans (not all, I know: some always assume tomorrow will sort itself out). The reasons for saving vary from simple caution about the proverbial rainy day, to family provision (education, weddings, housing), to retirement. I suspect the variety of motives is remarkably small the world over and these three explain most savings. In most cases there is also likely to be strong risk aversion on the part of the saver: those who save are, almost by definition, cautious people.

What the world offers them are essentially three products. The first is cash and its close relations, including gilts (although these have downside risk, especially with present interest rates) and (maybe) corporate bonds. The latter tend to merge risk into the next category for saving, which us broadly based around shares. Beyond these there is the illiquid market. That’s made up of your own business (yes, that can be a savings mechanism if the aim is to realise a lump sum) and property. Go much further into categorisation and you come into a derivative of any of these.

The difficulty in all this is multifold. First, cash saving is essentially a negative act. In times of low inflation it is a safe act and, with deposit guarantees, broadly secure but it yields next to nothing and, as importantly, does nothing for the economy. Saving in cash effectively takes money out of active use. It is a loan to a bank that then forms part of its capital (it no longer remains your money: it does belong to the bank once deposited and all you own is a loan recorded in a bank statement) but what we now know is that banks do not then lend this money on: all the loans they create are made out of new money created for the purpose. They do not therefore, effectively, need deposits to make loans. Unsurprisingly, as this realisation has dawned so too have cash deposit rates fallen, in real terms, to near enough nothing to reflect their near worthless economic status.

Gilts are a surprisingly hard to access savings mechanism for the average person: National Savings is the alternative product for many. What’s the plus? The person you’re lending the money to is guaranteed to repay. Plus, they use the money for social purposes and there is no intermediary: the government sells the product and it uses the money. It’s a surprisingly rational savings mechanism, but one with a dull reputation unless the rates are out of line with expectation.

Then there’s the stock market. In this case we go out of our way to incentivise this arrangement. Once almost all mortgage savings were in it. Now a significant (but falling) part of pension savings are. And ISAs are still used to encourage it. The incentive is even encouraged by subliminal messaging: on the hour almost every hour the news tells you what is happening on the markets and most of the time that induces feelings of good news: markets rise steadily and do down sides rapidly. It’s as if there is a conspiracy to lure money in.

But why are we promoting stock market saving, which it is what it is unless the shares are newly issued, which the vast majority are not? This stock market trading is almost entirely about redundant money: almost as useless as cash in its economic impact. When you buy a share it is almost invariably a second hand piece of paper you are acquiring: someone else other than the company whose name is on the share certificate sold a property right in that company to you and (although many people seem to think otherwise) the company that created the share that has been sold gains or loses not a penny in the process. In the case of many companies it is also many years since they created any new shares: the stock market in shares is now rarely used as a mechanism for raising money for investment, which is a process undertaken almost entirely through corporate bonds, which few smaller investors have any knowledge of, and which are almost entirely institutionally owned. So, the truth is that the stock market, and saving in it, does not produce new investment funds. It is almost as hopeless in this regard as saving in cash.

No investment conspiracy is needed to get money into property. For those who can access the market the appeal is obvious: it is in short supply, there is a real demand for it and, just as importantly (if not more so), it’s utterly comprehensible. Do not fail to notice this last point: ask most people to explain the economic realities of any of the other savings mechanisms and I expect they may well have real difficulties, even with the reality of cash deposits. Property also has an obvious use as a long term savings mechanism, even if the very process of using it as such means many who want to own property are denied the chance to do so: that’s the paradox in this savings market; using it for saving frequently undermines the goal of providing secure housing.

Small business saving does, I think, fall into a wholly different category. I am going to ignore it.

But having made these points let me be clear. What they reveal are three things. The first is the difficulty people have with understanding savings. Very few people have any real understanding of the mechanisms that they use to save or what the impact of those mechanisms on the real economy is. This leads to serious errors of judgement, mismatched expectation and to exposure to mis-selling, loss and even fraud.

Second, most ‘saving’ is unrelated to any investment activity, meaning that little economic gain arises from it.

Third, saving in these largely economically useless ways allocates vast amounts of energy to supporting this activity when in many cases little or no return is actually generated as a result of that activity.

Last,  and perhaps most significant, given that the most important  reason for saving is, without doubt, to provide for old age, the fact that many of these savings mechanisms cannot actually generate the returns needed to support people in their old age means that in large part they are unsuited for that purpose. There is massive market failure as a result.

I explained the essence of this in a short publication I wrote in 2010 called  ‘Making Pensions Work‘. A lot of what I wrote then does, I think, remain completely relevant today. At the heart of my concern was the failure of what I called the ‘fundamental pension contract‘:

This is that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit that succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental contract that underpins all pensions is honoured any pension system will fail.

As I then argued of private pensions:

This contract is ignored in the existing pension system that does not even recognise that it exists. Our state subsidised saving for pensions makes no link between that activity and the necessary investment in new capital goods, infrastructure, job creation and skills that we need as a country. As a result state subsidy is being given with no return to the state appearing to arise as a consequence, precisely because this is a subsidy for saving which does not generate any new wealth. This is the fundamental economic problem and malaise in our current pension arrangement.

If anything matters are now worse than I envisaged at the time. George Osborne’s pension reforms are turning what was meant to be a pension system into a tax subsidised short-term savings arrangement for those already well off: it is staggering that, as the FT has reported this week, two-thirds of customers surveyed by Royal London, the largest mutual life, pension and investment company in the UK, took their entire pension pot as a cash lump sum following the introduction of the pension freedoms in April. Most seem to have no intention of using those funds for pension purposes now, and George Osborne is simply exploiting this financial short termism for the purposes of securing his own short term tax hit.

In the face of this effective collapse of the private pension system some radical re-thinking of pensions is needed. This is no small issue either. As this table, adapted from that published by HMRC, shows, the cost of pension tax relief over the last 13 years for which records are published is £509 billion (click for a larger version) :

Screen Shot 2015-08-23 at 11.56.36

For the sake of clarity the data for 2013/14 alone was:

Screen Shot 2015-08-23 at 16.49.58

Now, I accept that if totals are considered some offset of tax collected is appropriate, (although of course much of the tax collected would have related to contributions from before this period, so the direct offset of tax against cost is not appropriate), but however looked at the cost of these reliefs in proportion to  total government spending is enormous. In 2013/14 total government spending was £720 billion. And let me be clear, the taxes on past pensions would have been received in that year in almost exactly the same amount if no new tax relief had been given. So, the net effect was that a subsidy of £48.3 billion was given to the pension sector, equivalent to 6.7% of all public spending. To put this on context, defence spending in the year was £40 billion, housing and environment spending was £21 billion and public order and safety cost £31 billion.

The latest reliable data I can find on allocation of these sums comes from the ONS in Pension Trends – Chapter 9: Pension Scheme Funding and Investment, 2013 Edition. There the mix of assets invested in the largest category of pension funds is shown to be as follows:

Screen Shot 2015-08-25 at 15.11.02

There was a flattening in corporate exposure post 2009, and this figure includes bonds and equity with overseas holdings growing significantly over time:

Screen Shot 2015-08-25 at 15.26.57

This is a trend seemingly associated with a growing use of mutual fund investment:

Screen Shot 2015-08-25 at 15.29.44

Now I stress that I know that this is not the whole picture on pension fund investment, but what  seems to be fairly obvious is that the trends that are occurring are broadly towards increasing financialisation, less direct engagement with UK corporates and an increasing international diversification to the point that the obvious question has to be asked, which is what is in this for the UK government and what now justifies its massive spending on pension subsidies?

To put it another way, why are we willing to spend £48 billion a year subsidising the financial services sector in the UK and abroad when doing so is not resulting in funds being used to, in almost any way, fulfil that fundamental pension contract that I outline above?

And why, at the same time, are we tolerating the use of those funds to a) support the increasing financialisation of our society b) support activity largely based in the south east of England c) increase wealth divides in society, which is what this process, inevitably, does?

I can no longer find reasonable answers to those questions. I stress, I am not alone in doing so: George Osborne is floating the idea of an ISA based pension with substantially less tax relief given. There does, however, remain a problem with that: the fundamental pension contract that requires we pass on real assets – houses, infrastructure, functioning businesses, knowledge, intellectual knowledge and the mechanisms that support all these things – is likely to be even more ignored in a personal ISA based pension than it is at present. What we will actually have instead us a continuing savings deception largely, it seems, designed to ensure that the financial services sector got rich in real time.

It was for this reason that I suggested People’s Pensions along with Colin Hines and Alan Simpson (then an MP) in 2003. The idea was simple. The government would create a pension fund, or funds, in which people could invest. This fund would then fund the creation of the assets that the nation needs to ensure that the fundamental pension contract was fulfilled. So it would finance the building of hospitals, schools, broadband for rural locations, insulated properties and invest in small business and high tech and so much more. The fund would attract tax reliefs: an ISA wrapper may work for investments in it. Alternatively, capital gains and income received from it, to a limit, could be considered tax free. And the fund would then work in partnership with (let’s call it) a National Investment Bank, whose bonds it would buy and who would actually deliver the projects. The same National Investment Bank would also issue those bonds into the broader market for those who wanted to buy them: they would also be available for the purposes of People’s Quantitative Easing when the government, via the Bank of England, believed it needed to stimulate the economy by increasing investment in these assets.

How would returns be paid? Three ways. First, by way of interest payment: that’s hardly surprising. The government is used to paying interest on its borrowing.

Second, there would be a real current return on the investment: I think it would be entirely appropriate to designate local funds or sector funds so people could see that the money they were investing was linked to a real economic output. Nothing could make investment more comprehensible than that.

Third, there is, of course, in the long term a return to be paid as a state backed pension based on contributions. The mechanisms would need refinement, but given that government bonds have for decades underpinned the annuities used by private pension funds such an arrangement is completely normal. The important point to make though is that this pension could be economically justified precisely because the assets underpinning it would still be in use: this is a pension contract that reflects the inter-generational agreement that must underpin such arrangements with real assets.

How much could be spent a year on new investments? Well, let’s start with most of that £48 billion, shall we?

The gains are obvious. First the fundamental pension contract would be recognised and be the basis for pension provision, for maybe the first time ever.

Second, the savings mechanism would be readily comprehensible, have low risk and be secure.

Third, a mechanism for increasing the flow of funds into the productive economy and away from the financial services sector – an essential part of rebalancing the economy – would have been created.

What’s not to like? Ask the City. But for the rest of us this is all gain.

First this is a programme to deliver real investment.

Second, it redirects pension subsidy to public gain.

Third, it rebalances the economy.

Fourth it creates jobs in every constituency in the UK.

Fifth it creates an understandable savings mechanism.

Sixth, that mechanism reflects the fundamental pension contract that must exist in the macro economy.

Seventh, this provides a mechanism for enduring people’s quantitative easing when it is needed.

Eighth, this is clear economic narrative that is straightforward to explain both as to the reason for its creation and as to its long term benefit.

And it’s open to any political party to use.

Economics for a moral end

Published by Anonymous (not verified) on Sat, 22/07/2017 - 1:33am in


Economics, history

I’ve read Pigou’s Economics of Welfare, and I talk to students about Pigouvian taxes and subsidies, but never known anything about the man. So I enjoyed The First Serious Optimist by Ian Kumekawa. The author is a Harvard PhD history student (so kudos to him for having a book published so early in his career!), and this is definitely a historical biography rather than an economics book.

As an economist, and one getting specifically interested in welfare economics, I’d have preferred more about the economic ideas. But for less nerdy readers, there is plenty here on the intellectual trends. And the wider intellectual and political context of Edwardian England, the terrible decades of war, depression and war in the early 20th century, and the post-war swing to Labour and the welfare state, is portrayed very well.

At the end of the book, I decided Pigou the man was still a bit of an enigma, but perhaps someone from a privileged Edwardian milieu, who spent his entire adult life at Cambridge, is just a bit too alien. But the arc of his thinking from classical liberalism to active sympathy for the Labour government of 1945 is fascinating. And the tale is quite sad in the end, Pigou seen as a surly recluse, his star not only waning but utterly shot out of the sky by Keynesianism (and, as so often, Keynes comes across here as a brilliant but not very nice man).

(One is also left wondering how scholars of the future will ever write biographies now we don’t write letters to each other any more? Email exchanges, with their more telegraphic form, or skype conversations – these are how we discuss ideas with colleagues. I suppose conferences are recorded so the video of those formal occasions will be available. That, and the Twitter record? )

I like very much the way the book ends: ” His justification for his career, maybe for his very existence, was to serve a moral end. Perhaps it is this part of Pigou’s systematic framework – its self-conscious motivation – that present-day economists would do best to revisit.. …. It would mean accepting what Pigou had declared in 1908 that, ‘Ethics and economics are mutually dependent’ and that ‘Economics cannot stand alone’.”

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Paul Krugman: Health Care in a Time of Sabotage

Published by Anonymous (not verified) on Sat, 22/07/2017 - 1:27am in

"It’s basically about spite":

Health Care in a Time of Sabotage, by Paul Krugman, NY Times: Is Trumpcare finally dead? Even now, it’s hard to be sure, especially given Republican moderates’ long track record of caving in to extremists at crucial moments. But it does look as if the frontal assault on the Affordable Care Act has failed.

And let’s be clear: The reason this assault failed wasn’t that Donald Trump did a poor selling job, or that Mitch McConnell mishandled the legislative strategy. Obamacare survived because it has worked — because it brought about a dramatic reduction in the number of Americans without health insurance, and voters ... don’t want to lose those gains.

Unfortunately, some of those gains will probably be lost all the same: The number of uninsured Americans is likely to tick up over the next few years. So it’s important to say clearly, in advance, why this is about to happen. It won’t be because the Affordable Care Act is failing..., when Trump threatens to “let Obamacare fail,” what he’s really threatening is to make it fail.

On Wednesday The Times reported on three ways the Trump administration is, in effect, sabotaging the A.C.A.... First, the administration is weakening enforcement of the requirement that healthy people buy coverage. Second, it’s letting states impose onerous rules like work requirements on people seeking Medicaid. Third, it has backed off on advertising and outreach designed to let people know about options for coverage. ...

And there may be worse to come: Insurance companies, which are required by law to limit out-of-pocket expenses of low-income customers, are already raising premiums sharply because they’re worried about a possible cutoff of the crucial federal “cost-sharing reduction” subsidies that help them meet that requirement.

The truly amazing thing about these sabotage efforts is that they don’t serve any obvious purpose. They won’t save money — in fact, cutting off those subsidies ... would probably end up costing taxpayers more money than keeping them. They’re unlikely to revive Trumpcare’s political prospects.

So this isn’t about policy, or even politics in the normal sense. It’s basically about spite: Trump and his allies may have suffered a humiliating political defeat, but at least they can make millions of other people suffer.

Can anything be done to protect Americans from this temper tantrum? In some cases, I believe, state governments can insulate their citizens from malfeasance at H.H.S. But the most important thing, surely, is to place the blame where it belongs. No, Mr. Trump, Obamacare isn’t failing; you are.

Globalization—how did they get it so wrong?

Published by Anonymous (not verified) on Fri, 21/07/2017 - 10:00pm in


There is perhaps no more cherished an idea within mainstream economics than that everyone benefits from free trade and, more generally, globalization. They represent the solution to the problem of scarcity for the world as a whole, much as free markets are celebrated as the best way of allocating scarce resources within nations. And any exceptions to free markets, whether national or international, need to be criticized and opposed at every turn.

That celebration of capitalist globalization, as Nikil Saval explains, has been the common sense that mainstream economists, both liberal and conservative, have adhered to and disseminated, in their research, teaching, and policy advice, for many decades.

Today, of course, that common sense has been challenged—during the Second Great Depression, in the Brexit vote, during the course of the electoral campaigns of Bernie Sanders and Donald Trump—and economic elites, establishment politicians, and mainstream economists have been quick to issue dire warnings about the perils of disrupting the forces of globalization.

I have my own criticisms of Saval’s discussion of the rise and fall of the idea of globalization, especially his complete overlooking of the long tradition of globalization critics, especially on the Left, who have emphasized the dirty, violent, unequalizing underside of colonialism, neocolonialism, and imperialism.*

However, as a survey of the role of globalization within mainstream economics, Saval’s essay is well worth a careful read.

In particular, Saval points out that, in the heyday of the globalization consensus, Dani Rodrick was one of the few mainstream economists who had the temerity to question its merits in public.

And who was one of the leading defenders of the idea that globalization had to be celebrated and it critics treated with derision? None other than Paul Krugman.

Paul Krugman, who would win the Nobel prize in 2008 for his earlier work in trade theory and economic geography, privately warned Rodrik that his work would give “ammunition to the barbarians”.

It was a tacit acknowledgment that pro-globalisation economists, journalists and politicians had come under growing pressure from a new movement on the left, who were raising concerns very similar to Rodrik’s. Over the course of the 1990s, an unwieldy international coalition had begun to contest the notion that globalisation was good. Called “anti-globalisation” by the media, and the “alter-globalisation” or “global justice” movement by its participants, it tried to draw attention to the devastating effect that free trade policies were having, especially in the developing world, where globalisation was supposed to be having its most beneficial effect. This was a time when figures such as the New York Times columnist Thomas Friedman had given the topic a glitzy prominence by documenting his time among what he gratingly called “globalutionaries”: chatting amiably with the CEO of Monsanto one day, gawking at lingerie manufacturers in Sri Lanka the next. Activists were intent on showing a much darker picture, revealing how the record of globalisation consisted mostly of farmers pushed off their land and the rampant proliferation of sweatshops. They also implicated the highest world bodies in their critique: the G7, World Bank and IMF. In 1999, the movement reached a high point when a unique coalition of trade unions and environmentalists managed to shut down the meeting of the World Trade Organization in Seattle.

In a state of panic, economists responded with a flood of columns and books that defended the necessity of a more open global market economy, in tones ranging from grandiose to sarcastic. In January 2000, Krugman used his first piece as a New York Times columnist to denounce the “trashing” of the WTO, calling it “a sad irony that the cause that has finally awakened the long-dormant American left is that of – yes! – denying opportunity to third-world workers”.

The irony is that Krugman won the Nobel Prize in Economics in recognition of his research and publications that called into question the neoclassical idea that countries engaged in and benefited from international trade based on given—exogenous—resource endowments and technologies. Instead, Krugman argued, those endowments and technologies were created historically and could be changed by government policies, including histories and policies that run counter to free trade and globalization.

Krugman was thus the one who gave theoretical “ammunition to the barbarians.” But that was the key: he considered the critics of globalization—the alter-globalization activists, heterodox economists, and many others—”barbarians.” For Krugman, they were and should remain outside the gates because, in his view, they were not trained in or respectful of the protocols of mainstream economics. The “barbarians” could not be trusted to understand or adhere to the ways mainstream economists like Krugman analyzed the exceptions to the common sense of globalization. They might get out of control and develop other arguments and economic institutions.

But then the winds began to shift.

In the wake of the financial crisis, the cracks began to show in the consensus on globalisation, to the point that, today, there may no longer be a consensus. Economists who were once ardent proponents of globalisation have become some of its most prominent critics. Erstwhile supporters now concede, at least in part, that it has produced inequality, unemployment and downward pressure on wages. Nuances and criticisms that economists only used to raise in private seminars are finally coming out in the open.

A few months before the financial crisis hit, Krugman was already confessing to a “guilty conscience”. In the 1990s, he had been very influential in arguing that global trade with poor countries had only a small effect on workers’ wages in rich countries. By 2008, he was having doubts: the data seemed to suggest that the effect was much larger than he had suspected.

And yet, as Saval points out, mainstream economists’ recognition of the unequalizing effects of capitalist globalization has come too late: “much of the damage done by globalisation—economic and political—is irreversible.”

The damage is, of course, only irreversible within the existing economic institutions. Imagining and enacting a radically different way of organizing the economy would undo that damage and benefit those who have been forced to have the freedom to submit to the forces of capitalist globalization.

But Rodrik and Krugman—and mainstream economists generally—don’t seem to be interested in participating in that project, which would give the “barbarians” a say in creating a different kind of globalization, beyond capitalism.


*Back in 2000—and in a series of articles, book chapters, and blog posts since then—I have attempted to rethink the relationship between capitalist globalization and imperialism. Marxist economist Prabhat Patnaik has also made the case for the continuing relevance of imperialism as an analytical construct for understanding and challenging effectively the logic and dynamics of contemporary capitalism.

Tagged: capitalism, colonialism, Dani Rodrik, economics, free markets, free trade, globalization, heterodox, imperialism, inequality, mainstream, Marx, Paul Krugman

What so many critiques of economics gets right

Published by Anonymous (not verified) on Fri, 21/07/2017 - 8:39pm in



Yours truly had a post up the other day on John Rapley’s Twilight of the Money Gods. In the main I think Rapley is right in his attack on contemporary economics and its ‘priesthood,’ although he often seems to forget that there are — yes, it’s true — more than one approach in economics, and that […]

Ricardo’s trade paradigm — a formerly true theory

Published by Anonymous (not verified) on Fri, 21/07/2017 - 6:59pm in



Two hundred years ago, on 19 April 1817, David Ricardo’s Principles was published. In it he presented a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have comparative advantage and importing goods in […]

We can afford all the public services we need: it’s only our economic model that prevents it

Published by Anonymous (not verified) on Fri, 21/07/2017 - 6:55pm in



I am not sure who it was who said “All models are wrong but some of them are useful”, but they had a point. I just made up the version that says “All models are wrong and some of them are harmful.” I am thinking of austerity.

The model has always been wrong because it embraces the government as a household fallacy. It is true that if a household that is in debt cuts its spending it increases its chances of balancing its books. That is not true of a government for two reasons. First, government spending is national income. Cutting it does then only increase the chance of balancing the books if the spending adds less to income than it incurs in costs (meaning in economists’ terms that the ‘multiplier’ is less than one). This is what the Office for Budget Responsibility has always assumed, except for investment. They are however wrong; when there is underemployment there is now a mass of evidence, from the IMF and others, that the multiplier is well over one. In other words, spending more than pays for itself and cuts impose more harm than the initial sum supposedly saved reduces spending by. Second, unlike a household a government with its own currency cannot have a debt crisis. It can always pay because it creates the currency required to make the payment and households can’t do that.

What is the harm? This is becoming apparent. Data on dramatic increases in crime rates are clear indication that the police have now had resources cut beyond the point where their operations remain effective. They just add to the long list of services where this is apparent. From health, to education, to the rest of the justice system, to social care, and more, cuts are destroying much of what we value and leaving our society at risk. And all this to supposedly balance the books, which has never happened because cuts actually make the achievement of that goal harder, and not easier for reasons already noted.

This we knew though. Let me now add in something many are less familiar with. This is  Baumol’s law. What William Baumol suggested in the 1960s was that salaries in jobs that have not experienced growth in productivity increase in response to rising salaries in  jobs where there has been  productivity growth.  So, for example, automation in manufacturing might increase productivity, and wages rise with it, but the salaries of string quartet players also rise as a result and there is no productivity gain to be had from playing a string quartet movement written to be played in six minutes in four minutes: in fact, you ruin it if you do. The example is of course contrived: the reality is that string quartet players have increased productivity through better transport, distribution methods and recording techniques. But the fact remains that their core product can’t be compressed in time scale.

Nor, once admin gains are won, can policing, education, nursing, social care, social work, the justice system and many other services be compressed and still function. In fact, because they require face to face contact you ruin them if you do that. But the government, dedicated to an austerity programme that demands increasing productivity, demands that we do crush the time spent on these services, which undermines their value, and that the wages of those undertaking them be cut to break the relationship Baumol observed. But there’s a problem with that too, because those who enjoy the higher pay set the cost of living e.g. by forcing the price of housing up. In that case those in the services where productivity gains have reached their limit suffer real pay cuts, a loss of job satisfaction as they’re not allowed to do the job properly, and quit as a result. The exodus of teaching staff and the declining number of nurses is evidence of that.

And this matters. It matters because we literally cannot do without these people but apparently we can’t afford them. I don’t blame Baumol for this. Describing the phenomenon does not make him responsible for it. I blame governments, economists and politicians, none of whom have apparently appreciated that technology can only take us so far in many public services and then we reach the crunch point where dealing with people requires real time and irreducible interaction and there is nothing that can be done about this barring supplying a poor service, or none at all.

That’s the conundrum at the real heart of modern government. We’re phenomenally more productive than we ever have been. And apparently, as a result, we can’t afford large numbers of things that were possible in the past. Unless, of course, we change the model. Remember all models are wrong. And what is now clear is that model we’re using is not helping.

The model we’re using is one that says the state has a limit to the size it can be in proportion to the private sector. And it says the state can supply all the services we need despite this constraint, even if Baumol’s law applies. And that model is wrong. We cannot do that. What Baumol’s law actually implies is that as we get richer in terms of the productivity of some labour (which, because of robotics, is likely to continue to grow even as total employment falls) the price of public services will rise and that we must accept the growth in the size of the state sector that follows if we are to still enjoy those services we once thought of as basic.

And of course, that means we will pay more tax too. But that tax will be paid out of the proceeds of the spending, because as I argued yesterday, spend comes first and tax comes second, and unless there is full employment at fair pay (which there clearly is not in the UK) the spend does not result in inflation. In fact, the tax ensures that is true. Indeed, because of the multiplier effect, we might even, perchance, balance the books.

But that’s not the goal. The goal is to have the services that we are told, despite our apparent riches, that we cannot now afford but which we could have when we were much worse off. And of course we can have those services: it is glaringly obviously absurd to say that because we are richer we can no longer afford to teach people, have police or provide care. It’s just that the economic model we are using is wrong. And that’s the bit we have to change as a result, which is, unfortunately, the hard bit. Although heaven knows why.

Mid-life crisis – are student loan repayments really progressive?

Published by Anonymous (not verified) on Thu, 20/07/2017 - 9:01am in



The crack-wonk-team at London Economics have crunched the numbers on how much graduates in different professions can expect to repay in student loan costs over the course of their careers.

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LEO shows how graduate pay has been squeezed

Published by Anonymous (not verified) on Mon, 19/06/2017 - 9:01am in



LEO data shows that, when adjusted for inflation, graduates' pay packets are being significantly squeezed. Jonathan Boys has broken down the data.

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Why is there such a large gender pay gap for graduates?

Published by Anonymous (not verified) on Wed, 14/06/2017 - 10:45pm in

Women graduates earn less than their male counterparts immediately after leaving university and in the vast majority of subjects. We pick this apart and suggest what role universities might have to play in fixing it.

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