Month: March 2015

 

The support in the general population for Green party policies is above 20%; if everyone who supported Green policies voted for the Green party, they would win several seats. But this will not happen, because in British elections, many people believe that they are being cunning in refusing to vote for the party whose policies they support. They call it “tactical voting”.  The argument is that if you vote for good, rather than indifferent, the field will be left open for pure evil.

In my view these well-intentioned people have been hoodwinked by a conspiracy between the large parties and their supporters in the media aimed at squeezing out the smaller ones. In most cases I believe tactical voting is illogical and misguided and this post I will try to explain why.

To me it is simple; one should always publicly support what one thinks is right, however overwhelming the opposition.  It is not a matter of intellectual effort; it is a matter of conscience. It is important to realise that a party does not have to win in order to be able to influence the debate;  even a “single issue” party can  raise national awareness and can move the policies of all parties it it gains enough support.  If  you believe (as I do) that some issues are of overwhelming importance, (perhaps global warming, global war or global famine),  you must surely add your voice to the party that will confront the issue most effectively; to vote any other way is to fiddle whilst Rome burns. One should never do nothing because one can only do a little. But even if you do not believe in any existential threat, there are solid rational grounds to reject tactical voting.

(For the sake of example, I will assume that our voter really supports the Greens, but thinks that at any rate Labour would be better than Conservatives.  If this is not your voting preference – you may change the parties accordingly.)

Some arguments for tactical voting are easily dismissed because of the nature of our voting system.  Many people confuse national with constituency victories. For example, suppose that nationally, it is a tie between Labour and the Conservatives. Our voter may reason that voting Green makes it more likely that the Tories will win; but this depends entirely on their local constituency. It obviously makes no sense at all for our voter to vote Labour to keep out the Tories if they happen to live in a seat in which Green are in the lead and Labour are a poor fourth.

Similarly the argument that a vote is wasted unless you vote for a party that can win is obviously false; following that line of argument, if you live in a secure Tory stronghold, logically everyone should vote Tory, irrespective of their views, because only the Tories can win.  Clearly there is a mistake here.

More generally, if you live in a safe seat, “tactical” voting makes no sense, because your vote will not affect the outcome, and voting for your second best deprives your preferred party of the encouragement (and funds) they need to gain a higher national profile, and to influence the debate.  A vote for a party that cannot win in your constituency, and that you do not even support, is surely the definition of a wasted vote.

 

So tactical voting can only make any sense at all if our voter lives in a constituency in which the Greens have no chance, and where either Labour or the Tories might win, and where  no single issue is so important that it overrides all other considerations.  But even then, voting tactically is usually the wrong thing to do.  In fact I would say that in a marginal constituency it is particularly important to vote for your convictions; because in a marginal seat both parties will move to try to take over the minority vote, and this is the way the balance shifts in your preferred direction. Politicians should choose the policies that we want, not the other way about; and elections happen only once in four years. If on that occasion you give the politicians no guidance as to the policies you favour, how can you hope to influence the direction they take? We have seen recently that a party like UKIP can have a profound effect on the political discourse without winning any seats at all.

A tactical vote places the short term above the long term. All parties start small, and get bigger. No party will win an election in the first year that it is established – it takes time to change the tide.  To achieve change you need to think beyond the current election to the one after, or the one after that.  By voting for the party you support you are sending a clear message to politicians and the voting public. As the voter base of a party grows, it gains more media coverage, more credibility, more funding. The other parties will be forced to move in the direction of the newcomer.  In contrast, a tactical vote is a vote for defeatism. By refusing to vote for the policies you advocate, you are abandoning hope of changing the political balance now or at any time in the future.

The only exception is when one party intends to do something so completely catastrophic or immoral (such as a criminal attack on another country) that it must be prevented at any cost, and the other main party unconditionally rejects it. But this should be the exception not the rule – because by voting tactically you may win the battle – but you give up any hope of winning the war.

Trickle down economics is the theory that the best way to help the poor is to give money to the rich (eg through tax breaks).  The idea is that these rich people will then be motivated to create a thriving economy which will benefit everybody.  I am immediately reminded of Galbraith’s brilliant observation that “Capitalism is the theory that the rich don’t work hard enough because they are paid too little, and the poor don’t work hard enough because they are paid too much”

The image that comes to mind is that of pouring water over a pile of rocks. The water trickles downwards, spreading out, until it comes to rest at the lowest level.  But this comforting metaphor is deceptive. Money, the “water” of the economy does not sink and come to rest – it is in constant circulation. The real metaphor is that of an elaborate fountain.  At the top are a few enormous gushers, through which flow fantastic amounts of watery wealth. The water runs down and down, though progressively smaller spouts, until it is sucked up by a tremendous pump, which collects all these small streams and pumps them back up to the top again.  Much of the water never reaches the lowest levels at all.  The real nature of the economy is “Pump Up” rather than “Trickle Down”.

The reality of course is that in order to get money you have to work for people who are in a position to give it to you. And it is a common observation that the people who work the hardest get paid at the lowest hourly rate. But, putting my moral outrage at grotesque inequality to one side for a moment, and moving to a different watery metaphor– is there any truth in the idea that giving more money to the rich, concentrating wealth,  actually  creates a tide that lifts all boats? Do low labour costs lead to a more active economy?

Let us suppose that a certain thneed factory decides to undercut its rivals by reducing the price of its product from £10 to £5. We will suppose there is no new technology available, so in order to do this, it cuts the hourly rate of the workforce. Because thneeds are now cheaper, everyone else now has more money left over after buying all their thneeds, and this surplus money is available to provide demand for other goods and services, which could not otherwise be afforded. This will lead to an increase in employment to fill the new demand.  Great! But wait. Other thneed factories will be forced to follow suit in order to remain competitive; the same drivers apply to the rest of the economy too, and so wages in general are reduced. Although  general prices go down this is offset by a general drop in wages.  Which effect is greater?

Presumably the company owners and management will not cut their own wages; on the contrary they will probably give themselves a cost-cutting bonus.  It follows that the company will have to reduce its wages by 60% to achieve a 50% drop in price. In other words, the general drop in wages will be greater than the drop in price; and so people will have less spare money; demand will be reduced, and the economy will go into a downward spiral.  The only people to be better off will be the owners and managers, and these wealthy people form their own micro economy, buying assets from each other and inflating the price of art and vintage wine, which does not serve the general population. Remember none of this applies if the reduction in price is due to new technology; that is quite different, as was discussed in the previous post.

The corollary is also true; if wages are generally increased, this will create a general increase in demand.  This is not a controversial idea; it is well known that the United States became great by following Henry Ford’s policy of paying his workers enough money to buy his cars.  Such altruistic behaviour is out of fashion; but it should be clear that far from being a drag, a minimum wage can be a boost to the economy.  More in the next post.

Hello!

In my last post I discussed the operation of a thneed factory in order to illustrate the difference between growth in stock and growth in production. In this post I want to explore this a bit further. (Throughout this blog I use “standard of living” to refer to material wealth, and “quality of life” to represent intangibles such as working conditions and environmental health).

The factory in question , you will remember, produced thneeds at a steady rate of 10,000 a year. Since thneeds last 20 years or so, for a while after the construction of the factory the total stock of thneeds steadily increased. But after twenty years, the thneeds made in the first year wore out and were recycled to be replaced by new stock. From then on the total number of thneeds in circulation remained constant at 200,000 thneeds.

What I did not tell you is that, in the neighbouring district, another factory has been set up, but these goods are of inferior quality, and last only 10 years.  To compensate for this, the factory workers work twice as long, and produce 20,000 a year, (incidentally generating twice as much smoke).  Twice as many thneeds are produced as before, but after just 10 years the old ones start to wear out, and so the stock in circulation remains steady at 200,000 thneeds, as before.

Let us assume that the factory capacity is such that everyone has as many thneeds as they can use (the factory is sufficient to meet everyone’s thneed, if not everyone’s greed).  Everyone has enough thneeds, and everyone is happy. This steady state economy is what most people have experienced through most of history, interspersed with brief exponential explosions when new resources are tapped, or new discoveries made, followed by collapse.

So , the citizens of both districts have the same stock of thneeds, the same material wealth, although those in district 2 are working twice as hard to produce garments of inferior quality, and generating twice as much smoke.  But here is the thing. The second district is producing twice as many thneeds a year (and wearing them out twice as fast), so if we use GDP as our measure the economy in the second district is twice as successful!!. If the first district were to start making poor quality thneeds and working twice as hard, they would obviously be materially worse off – but their economy would grow by 100%! And if the second district were to cut the hours in half and produce better garments – their economy would shrink by 50%!

There is no connection between GDP and the stock of goods in the country, real wealth. The rate of production in both cases has remained constant, so there has been zero growth in Domestic Product (GDP) throughout. To repeat; it is possible to double GDP without having any effect on standard of living, while simultaneously seriously eroding quality of life.

The focus on trying to achieve an unsustainable exponential explosion in activity, regardless of its effect on wealth or quality of life, as the fundamental driver for all decisions affecting our society is so bizarre and so destructive, it cries out for explanation.  How did GDP come to become the holy grail of economics? I would like to suggest two possible answers (other explantions must wait for future posts).

The first explanation is that GDP growth can bring a short term financial advantage to those who grow first.  Let us suppose that the price of a thneed is the same in both districts.  In district 2, the factory is selling twice as many thneeds, and the workers work twice the hours and so have twice the income.  Of course  over the course of 20 years, they have to buy twice as many thneeds, so their cost of living (in terms of thneeds) has also doubled.  But in the short term there is a direct financial incentive for the owner of the factory in district 1 to change to making lots of poor quality thneeds like district 2, because in the short term it will double her income – it is only in the long term that it becomes apparent that she has also doubled her cost of living.

But for me, perhaps a more convincing explanation from a historical point of view is the rise of technology.You see,  before the invention of the thneed machine, thneeds were knitted by hand, a labour intensive process. The thneed machine halved the human effort required. What happened next is crucial.

In district 1, the factory was run by a cooperative. As a result, by general consent everyone was kept in employment, but their hours were halved, and so their wages were also halved.  The new factory-made thneeds only cost half as much (because the labour cost was halved), but the IMMEDIATE  consequence was  that in the SHORT term, the workers were worse off.  In the long term the new technology meant that everyone could enjoy the same number of thneeds, but work half the number of hours. Technology had been used to increase quality of life.

In district 2, half the workforce was sacked. Consequently, half the working population had the same wage as before, but thneeds cost half as much, so their standard of living doubled. The other population had no wage and could not afford any thneeds at all.

So they set up their own thneed factory, and took business by reducing the quality and increasing output, enabling them to reduce the price. In response, the first factory did likewise, in a race to the bottom. In the end one factory went out of business, and the surviving factory  was by this time employing  the whole workforce – on twice the hours. The advantages of the new technology had been defeated by the short termism inherent in competition.

This parable has a number of morals; firstly that GDP is not a measure of wealth, let alone quality of life; secondly that technology can be used to improve everybody’s wealth and quality of life, but at the cost of short term pain; thirdly that competition and capitalism do not inevitably lead to a better world.  I will explore these ideas, and more, in future posts.

 

Hello!

In my last post I discussed how Malthus correctly predicted the death of hundreds of millions by observing the difference between linear and geometric growth. In this post, I want to expand on this to discuss economic growth.

In a nuclear bomb, a single atom breaks into pieces, and releases energy. Two of the pieces fly off and strike other atoms, causing them to break up. Each of those two atoms relase two more particles, causing a further 4 atoms to fragment. These catalyse the breakup of a further 8, then 16, then 32 atoms. This repeated doubling results in the wave of destruction moving at extraordinary speed, trigering the breakup of millions of billions of atoms in a fraction of a second – a nuclear explosion.

This exponential, doubling pattern of growth always results in an explosion. The mathematics are simple and irrefutable. And this, in ultra slow motion, is the form of growth almost universally recommended for our economy.

When people talk about economic growth, they generally mean a percentage increase in GDP (Gross Domestic Product – a measure of how much is produced). For example an economic target might be a growth in 2% of GDP per year. This
definition of growth has two important features. Firstly, it is growth in activity, or throughput. Secondly, it is geometric, or percentage growth. This contrasts this with a linear growth in stock. Let me explain.

Suppose we invent a machine for knitting thneeds, and we build a new factory. In the first year, we produce 10,000  thneeds. Great!

In the second year, we produce another 10,000 thneeds. Now, a thneed will last for 20 years if properly cared for, so we have just doubled the worlds stock of thneeds. Twice as many people have thneeds as before. Thneeds have halved in
price. Everyone is better off. But the economists will be tutting and shaking their heads. According to them, we have achieved zero economic growth, because the rate at which we produce thneeds has stayed the same, and GDP measures the rate at which thneeds are produced, not how many there are in existence. This is the difference between growth in stock and growth in activity.

In the third year, we produce another 10,000 thneeds, bringing the stock to 30,000 altogether. Great! But now the economists are openly sarcastic. By their definition there has still been zero economic growth. But worse than that, they will say that even by our definition, growth has halved.

What? Surely growth has stayed the same, at 10,000 thneeds a year? Not according to the economists. In the first year the stock grew 100% from 10 to 20 thousand thneeds. But in the second year, stock only grew by 50%, from 20 to 30
thousand thneeds. To satisfy the economists, steady growth of 100% would mean that we have to produce not 10 but 20 thousand thneeds in year 2.

Conventional economic growth does not measure increase in wealth, it measures increase in activity. And for economists, steady growth is not steady growth – it is growth at a steadily increasing rate. This seems an eccentric
definition to most people. And when this definition is used to set targets for “sustainable growth”, it is not just very destructive – it is completely insane.

Linear growth adds the same quantity every year; geometric growth adds the same percentage. Suppose you start with one thousand pounds in a savings account, linear growth of £100 p.a. will result in £1,100  in one year, and £1,200 in two. Geometric (“compounding”) growth at 10% p.a. will result in £1,100 in one year, and 1,210 in two. The extra £10  in year two is the interest on the£100 gained in year one.  From this example, it does not seem a very significant difference, but over a longer period the difference is extremely dramatic.

Geometric growth has the property that an initial quantity is doubled in a fixed time period, and ten such doublings in a row will multiply the initial investment by about 1000 (actually 1024). At a growth rate of around 2%, the doubling period is about 20 years. So if you invest £1,000 today at linear growth of £100 p.a.,  in two hundred years this will have grown to twenty one thousand pounds. But at geometric growth at 2%  it will have doubled 10 times over, and have grown to a thousand thousand pounds – you will be a millionaire!

Because ten doublings gives a multiplication factor of 1000, it follows that 20 doublings multiplies by a factor of a million and thirty doublings by a factor of a billion. This leads to some astonishing numbers.

Let us suppose that we are currently using the whole earth’s resources in a sustainable way. At 2% growth in consumption,in just 20 years we will need to either double the productive capacity of the Earth, or find a second planet. That is not long in which to implement a technological revolution! But suppose it can be done.

Two hundred years from now we will consume the resources of 1000 planet earths. Even the most optimistic economists must quail slightly at the prospect of multiplying the productivity of planet earth by a thousand. But in two hundred years – well maybe. Lets just suppose this miracle happens. Just twenty years later, we would need to have doubled consumption again to 2000 planet earths.

In 1000 years time, that is, five factors of a thousand, we will need 1000,000,000,000,000 planet earths to support our extravagant lifestyle. Each one of us would need to continuously consume the productive capacity of 100,000 planets. Twenty such people would consume the estimated resources of all the earth-like planets in the galaxy! When you consider that at even at the speed of light it takes a hundred thousand years just to get from one side of the
galaxy to the other, it is clear that we have gone far beyond the bounds of any sane assessment of reality. This is why all sensible people admit that indefinitely sustained geometric economic growth is an absurd impossibility in any
conceivable universe. In fact the technical term for this kind of growth is “exponential growth” – a phrase that has become synonymous with unsustainability.

Why is it then that there is an unquestioned assumption in all discussion of economics that we need sustainable economic growth of at least 2% a year? It is easy to understand why people should WANT to get better off every year;
and so, it is natural that politicians should promise to deliver it. But why the world’s economists should persist in insisting that we can achieve the manifestly impossible is a mystery. We are currently consuming the worlds resources more quickly that they are being replaced – we are running down the Earths capital. Our food is grown with fossil water, using energy from fossil fuel. Fish stocks are being exhausted, and forests cleared – in other words, even our current rate of consumption is unsustainable.  It is just foolish to suggest that we can achieve exponential growth from here. 

The bad news is that beyond the very short term, percentage growth in consumption is an impossibility. The good news is that steady growth in wealth is an entirely different matter – and the subject of the next post.

Hello!

I have explained in previous posts that money is created by the banks. For example, when you buy £100 worth of clothes on a credit card, the bank adds £100 to the shop’s account, and adds £100 to your credit card bill. Nothing else in the system is affected – this is new money. Let us suppose that you yourself work for the shop. At the end of the month, the shop pays you the £100 pounds back as part of your wages, which you can then use to pay off your credit bill – and the money disappears. In effect you have done £100 pounds worth of work for your clothes. In this way, money is continually created and destroyed in the economy. This is a brilliant system for creating the “oil” which an economy needs to enable transactions to take place – but there is a catch. The bank charges INTEREST on the loan.

Of course the banks provide an essential service in mediating transactions in this way, and if they charged a fixed fee, I would have no complaint. But the bank can create £1000,000 as easily as it can create £10, and has no additional expenses whether the money is paid off in an hour or a decade. By charging interest on something they created at almost no cost – and since every penny of the trillions of pounds circulating in the economy has been created as a loan – the banks impose a burden of tens of billions of pounds on the economy. When it is understood how money is created, it is easy to see that this is essentially money for nothing.

In my last post I suggested that if the Government took control of the creation of money, all the interest on our money supply would flow to the government. This would bring in so much income, it would greatly reduce our tax burden. To me it is very obvious that this is the just and proper way to do things. The government represents “we the people”, and “We the people” have a right to engage in transactions with each other without paying exhorbitant costs to a third party. This is particularly stark when you consider government debt.

The government has a debt of around 1.4 trillion pounds. There is no realistic prospect of ever paying this off. When payment becomes due, it is “rolled over” for another 1, 10 or 50 years. The interest on this debt is around 45 billion pounds a year – equal to the defence budget.

I have found it quite difficult to get a clear answer as to how Government debt is created. When pressed, people talk vaguely about “money markets”, “market makers” and “secondary markets”. In the Bank of England paper mentioned in my first post, it states quite clearly that commercial banks create new money when the government sells treasuries or bonds, or gilts, but the example given involves a pension fund as a third party. Other texts say that these “instruments” are distributed to big commercial banks, but don’t explain how they are paid for.

However, the mechanism is not important. At some point banks created that 1.4 trillion pounds out of nothing, because that is how all electronic money in the economy is created – and on that basis, they will charge the taxpayer 45 billion a year for ever. Is that just?

Many people believe that this is indeed just – we were brought up to believe that loans must be paid, and that we should pay interest on those loans (actually this is a recent phenomenon – historically, Judaism, Christianity and Islam have banned the payment of interest, and Islam still has that ban in place). But whether or not you believe in paying interest on a genuine loan, it is very hard to see why interest should be paid on money created out of nothing. The Government, “we the people” could create our own money, and use it to pay for public works and public services. The money can be destroyed again by collecting it in (light) taxation in order to avoid inflation. This is not a crazy fantasy – there are many historical example of governments creating their own money in this way, and these have often been extremely successful (Ellen Brown’s book “Web of Debt” lists several examples). By taking control of the creation of money, “We the people” could not only collect the interest ourselves for our own social purposes, we could save tens of billions in interest payments to the banks.

If you are interested in taking this further, I strongly recommend that you check out “Positive Money”, a not-for-profit organisation which has produced detailed plans, and which is actively campaigning for change along these lines.

http://www.positivemoney.org/