Dismal economics may be, but a science it is not. Such has been my opinion for at quite 40 years and nothing of late has shaken that opinion. I find it worrying that our welfare is at the mercy of nostrums for which there is neither theoretical backing nor empirical evidence. Some are pure myth, some are mumbo-jumbo, some are self-fulfilling – what happens, happens because we believe it will happen.
A few examples.
The status of gold is irrational. Gold is of no use; you cannot eat it, or burn it or make machines with it. Only small quantities are used in electronics. We dig and refine gold with great effort only to bury it again. If the times are uncertain there is the flight to the “certainty” of gold. The value of gold is just the value we ascribe to it, and “value” is registered in some currency anyway. The position of gold I can only conclude is down to its mythological and mystical status. It really is mumbo-jumbo.
On the ten-pound note that I have before me it says, “I promise to pay the bearer the sum of ten pounds”. It used to be bear the signature of was it the Governor of the Bank of England? If I were to go into my bank, proffer the ten-pound note and ask for ten pounds they would suppose I wanted two fivers or ten pound coins. If I said, ”No, I want ten pounds” the cashier would think me unhinged. The solemnly signed statement on the note is meaningless.
I believe it was Milton Friedman who said that governments could halt inflation at a stroke by limiting the printing on money. Did he mean that if I went into my bank and tried to withdraw £100 the cashier would say, ”Sorry Sir, we are rather short of money. We are rationing each customer to £50”? If not what did he mean? And what about credit cards? I rarely use cash.
Then there is currency trading. This is fundamentally different from other trading since it facilitates nothing. The business exists in a self-contained world. Trading in money is anchored to nothing. Money is made from money and the only beneficiaries are the currency traders. Of course the value of one currency against another or perhaps better against the reserve currency the $US, depends on a number of things, even a few in the real world, but speculation is an undesirable and unproductive factor.
The Bank of England and other central banks have the job of keeping inflation in check. The only tool the bank has is its lending rate – the bank rate. There is no empirical evidence that inflation is checked by a rise in the bank rate. If you point this out you are likely to be told that the effect is masked by other factors and anyway the time taken for a rise to have an effect varies. If we cannot tell if the bank rate does affect inflation how is it supposed to work? A rise in the bank rate increases the cost of borrowing and servicing debt is a major cost to industry. It is not clear a fortiori why something that increases costs should keep down prices. I asked the Bank of England, the Treasury and a well-known economic journalist to explain. Each gave a different reason. One said a rise strengthened the currency so making imports cheaper. Perhaps so but the serious down-side to that is to drive the balance of payments into the red – or in the case of USA and the UK even further into the red. Another said it made companies forgo research and development and buying new machinery, in order to keep prices down. Perhaps so, but again not a desirable scheme – jam today. The journalist said it caused firms to lay off staff – or even go bankrupt – so increasing unemployment and hence decreasing the bargaining power of those still employed. Plausible as an explanation but not a good idea. Mr Bernanke the chairman of the Federal Reserve has admitted to “gaps in knowledge about how the actions of central banks affect inflation”. The Bank of England has been told to do a job with a single tool although no one knows how the tool works or if it works at all. My own view is that if raising the bank rate does curb inflation that is only because everyone believes that is what it does.
Then there is stocks and shares. When a company first issues stock it receives the money of those that buy, after those who manage the sale have taken their cut. But the company does not get a penny from subsequent trading of the stock. If a companies stock stands high I believe that makes it easier for it to borrow but that is a secondary benefit. Keynes remarked that making money on the stock market- which he did -was like judging a beauty contest where you were not deciding which of the girls was the prettiest, but which girl the other judges would think the prettiest. Economists agonize over the level of the stock market- the DOW, the Nikkei and the FTS - but I cannot see why. The level of the stock market is a consequence not a cause, but one might be forgiven for thinking that economists believe it to be the other way round.
Then there are the economists themselves. The reputations survive of those who remain safely in academia or venture no further than acting as a consultant -that is just telling others what to do. The reputations of those who venture into the real world seldom do. Stocks in Alan Greenspan have gone from triple A to junk bond in a very short time. The reputation of Mervyn King is not what it was. The high priest of down-sizing rashly ventured to take on running Sears Roebuck with disastrous consequences and admitted on his death bed that he had never realized just how difficult actually doing the job was.
That brings me to “confidence”. The former Governor of the Bank of England Sir Robin Leigh-Pemberton, once said, “It is difficult to stop a currency rising when sentiment is running in its favour”. No doubt true but scarcely illuminating. An article in the Economist tells me that the “textbook account puts expectations at the heart of the inflation process”. One way of “divining expected inflation is to ask people what they think the inflation rate will be”! The other is the “gap between conventional and index linked bonds” which amounts to the same thing. If a collective guess is the best economists can do, economics has no business calling itself a science. Marks and Spencer’s today issued a profit warning following a drop in sales put down to lack of “consumer confidence”. I would have that the more likely explanation is people buying less. The way economists talk of “confidence” one might think it was something tangible that could be weighed and measured, not merely a collective belief.
I find it odd that banks lend each other money and even odder that their doing so is fundamental to the working of the whole financial system. It looks to me like taking in each other’s washing.
Then there are “financial services”. Whatever those are they are secondary. It worries me that in the developed world and in Britain especially, the primary activity of making and manufacturing has declined. There will soon be nothing in Britain for the secondary activities to be secondary to. But the financial services seem to be able exist largely without serving anything concrete. Surely that can’t go on; perhaps it is already collapsing. It is like the cartoon character that runs off the edge of a cliff and momentarily keeps running in thin air.
The world is financially in a mess. The acceptance of economics as a science is the reason; we have accepted as proven and inevitable what is neither. It is no good looking to those who have got us into this mess, to get us out of it.
Aug 2008