Starring Kevin Dowd, Richard Wellings, Allister Heath, Phillip Booth, Eamonn Butler, Bill Bonner, Matthew Sinclair, David Smith, Anthony Jay, James Bartholomew, Mark Littlewood, Richard Teather, Lionel Blair, Vanessa Feltz, Kelvin MacKenzie, Geoffrey Howe, Norman Lamont, Nigel Lawson, Andrew Wong, Jimmy Lai, Simon Lee, Alistair Darling, Brendan Barber, and a cameo role by Arthur Newton — who apparently is a Geordie — Martin Durkin’s “Britain’s Trillion Pound Horror Story” is essential and brilliant viewing.
YouTube Link
[Alas, unavailable for embedding]
Statists, socialists, and Keynesians everywhere must have been seething, while watching it.
Excellent.
Perhaps some of them may have even had the beginnings of an inkling, or an epiphany, that something somewhere in their mental mindset is broken. We can but hope.
Personally, I think the programme would have been even more brilliant with Sean Corrigan, Douglas Carswell, Steve Baker, or Toby Baxendale on board, but that’s life. You can’t have everything.
Channel4’s ‘On Demand’ TV service is also showing this programme for 29 days, here.
Look out for the section where Lionel Blair, Vanessa Feltz, and Kelvin MacKenzie try to work out what some public sector tax consumers do for their incomes.
Brilliant program! I hope a lot of people watched it and a few lights switched on!
The programme certainly made me think and I’m now a bit worried about my own debt situation. I have a new £100,000 repayment mortgage on which I spend 25% of my disposable income. This seems even worse than the UK economy.
I wonder if Martin’s host of top economic experts could help me letting me know the following:
– if my mortgage was water in an Olympic swimming pool, would the annual capital repayments be like a glass of wine or a pint glass?
– if the £100,000 loan was split into £1 coins placed on top of each other, would it be as high as the Eiffel Tower or The Tokyo Tower.
This would really help me understand things better.
If you’re repaying any of the capital on your mortgage, rather than going further into debt, you’re in a better situation than the UK government.
Just to follow on from mrg’s statement….
You’re borrowing is private borrowing. We’re looking at state borrowing which *adds* to private borrowing. It means that people must pay of too kinds of interest, that on their own personal debts and that on the states debts. If the personal debts cancel with corresponding liabilities within the country concerned then they aren’t a macroeconomic problem. If state debts cancel with corresponding liabilites within the country concerned then the only macroeconomic problem is that of government misallocation of spending. However, if neither cancel out then things are different.
Andy Duncan’s rather self-indulgent and stilted remarks (above) notwithstanding, yes, an extremely disturbing and sobering programme. I’m not sure demonising the entire public sector achieves a great deal. This is divide and rule (public vs. private sector employees), so causing me to question some of the motives of the programme makers: it was some way into the programme, before it was acknowledged that there are at least 2 million public sector at the front line, doing jobs essential to our infrastructure and economic success. However yes, far too many publicly funded “non-jobs”. And far, FAR too little manufacturing and export. This latter trend was certainly not addressed by Thatcher, so lets not delude ourselves by playing party politics.
The fact that the politicians interviewed had thought £155bn was the national debt and not the budget deficit, is mind-boggling. Accountability? Hmmm, not likely if the people who are supposed to be holding the government to account cannot even avail themselves of the true facts. MPs: yet more publicly funded, over-paid non-jobs!
Overall, an interesting, thought-provoking and very depressing documentary.
Oh, my, the program is not available in my area: Ukraine. Hopefuly somebody shares it on the internetz, so that people from all over the Globe could watch that program.
Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.
Krugman, P. (2010) ‘British Fashion Victims’, New York Times, 21 October, Available at: http://www.nytimes.com/2010/10/22/opinion/22krugman.html
This paper explores the macroeconomics of fiscal austerity and deflation in an economy with public debt. A binding budget deficit cap destabilizes the economy by turning the government budget into an automatic destabilizer. Public debt helps maintain AD in the presence of deflation because deflation increases the real value of public interest payments. That makes public debt significantly different from private debt. If the economy is subject to a binding deficit cap, deflation no longer stabilizes output. This is because increased real interest payments must be matched by spending cuts, giving rise to a negative balanced budget multiplier.
Palley, T. I. (2010) ‘The Simple Macroeconomics of Fiscal Austerity, Public Sector Debt and Deflation’, IMK Working Paper, Available at: http://www.boeckler.de/pdf/p_imk_wp_8_2010.pdf
Well Mary, I can see we have some way to go to persuade you, and to save a few trillion pointless electrons I won’t even begin to attempt that exercise in argumentative futility here, though I must say, I am looking forward to the debate in which Robert Murphy destroys Paul Krugman, should Krugman dare to go up against Murphy of course:
Why Paul Krugman WILL Debate an Austrian
Perhaps you’d like to make a pledge yourself to see if Krugman can actually face a real debate against an intellectual equal? My betting is that he’ll keep running a mile until he’s pinned in a corner.
Let’s pin him.
I agree the section with Lionel Blair, Vanessa Feltz, and Kelvin MacKenzie judging the usefulness of civil service jobs was pure satire – it’s hard to conceive of three more useless individuals.
I find it easy to conceive of more useless individuals, Sarah. The millions of useless civil servants in this country spring to mind, immediately, and all the other rent-seeking parasites, such as those at the BBC, who would be incapable of earning a living except via using the state to force their incomes out of other people who don’t want them, who don’t want to pay for them, who wouldn’t notice if they were gone, and who would be better off without them. I especially include those nasty pieces of work at airports who enjoy either forcibly scanning people’s naked bodies with cancer-causing radioactive devices and those who enjoy going through other people’s dirty underwear, and humiliating those people who are forced to pay their wages, in the vital war against people bringing cheap cigarettes into the country, without the government getting its tax cut.
I’m quite simply amazed the programme got made and actually aired. It was the best thing I can remember ever seeing. My only criticism is that Martin Durkin seemed to be a little too optimistic in what the role of the state should be. He didn’t say say it should be abolished altogether.
Nonetheless I’d love to buy him a pint and shake his hand.
Just a minute… Yes, a fascinating program. but it wasn’t long before I realised it was seriously unbalanced. Assertion followed assertion, without any attempt to put the counter view. Which left me deeply suspicious. The risible manner in which we were supposed to consider £5 notes floating out of a top window capped it – can’t take it seriously, even though there were some valid points hidden away in there.
Television in the UK, especially on the BBC, and usually on Channel 4, is “seriously unbalanced” in the other direction.
I, for one, am glad Durkin didn’t waste any time on the standard statist objections. We hear them all the time.
This, for once, was an opportunity to tell the other side of the story.
I’d welcome a follow-up programme where the issues raised are seriously debated, but I can’t imagine any socialists taking the bait.
Which points would you challenge?
Even if it turns out that there is poverty in Hong Kong to accompany the gleaming subways, it doesn’t change the fact that our current course is unsustainable and immoral.
Even hardcore redistributionists should recognise the evil of condemning future generations to debt slavery.
A refreshingly honest look at where the UK is headed and more importantly, why. It’s hard to stomach the fact that individuals have vastly increased their standard of living on the back of unfunded government spending, still to be paid for (plus interest) by future generations. I agree that most politicians are completely ignorant to this unsustainable lie. In my opinion, it’s only a matter of time before Greece, Ireland, Portugal and Spain break the ECB, at which point the civil unrest may make people realise that our superstate tax and spend model has been a fairy tale.
I also thought it was excellent, thought-provoking television. Shame the Left have not addressed any of its key points but, as always, just picked at the fringes – Hong Kong also has poverty, Durkin has demonised the public sector, unbalanced view, yadda yadda. Will any critic of this programme please address just these three areas: (1) The State is too large, at 50% of GDP, not least because it can only pay one member of staff, say, £20k if it has taxed at least £20k out of the public sector, or borrowed the £20k from someone else! This is terrible for democracy because a majority of the electorate depends on its continuation – imagine the howls of horror if 50% of our GDP was made up of one oil company or bank, for instance!(2) Of the 7 million people directly employed by the State, how many are actually ‘front-line’? You know, the ones that the Left always say are going to disappear if there are any cuts, like nurses, doctors, firemen, police, prison officers etc? About 2 million. (3) Our current high tax, low incentive economy evidently hits the poorest hardest. Why are areas with huge State ‘stimulus’ extending over decades, still such awful places to live, work and do business? Why is social mobility declining while State spending has been increasing for decades?
After watching the very revealing channel 4 programme the other evening (Britain’s Trillion Pound Horror Story) regarding the eye-watering national debt of £4.8 trillion. I find almost the same difficulty in understanding these astronomical figures as I do when astronomers talk about thousands and millions of light years away from planet earth! – it was most useful for the programme to put this into layman’s terms whereby £4.8 trillion could be represented by a pile made up of £50.00 pound bank notes laid one on top of another would climb to a grand height of some 6000 odd miles above the earth’s surface!
My question is how come, when a business finds that its out-goings exceed its incomings the company is technically classed as bankrupt. Yet, here we are well and truly bankrupt handing out money to the beleaguered Republic of Ireland! – What a kind neighbour we are! Also with this level of debt – how come we have a positive (AAA) credit rating from Standard and Poor? I find it all baffling!
Best wishes
Keith Atkinson
> Also with this level of debt – how come we have a positive (AAA)
> credit rating from Standard and Poor? I find it all baffling
Because Britain has a floating fiat currency, it isn’t part of a currency zone. So, if debts become too onerous for the government they can be shifted onto the populance by paying them off with newly created money. That impoverishes the people, but the government normally don’t get the blame.
@HomoCroydonius
The reason ‘the Left’ have not bothered to address any of Durkin’s points is that the documentary was so riddled with errors, misunderstandings and plain good old fashioned lies that it was difficult to take anything he said seriously. Let me explain what he got wrong and why.
First, Durkin didn’t explain how he derived the £4.8 trillion figure. I can only assume he was conflating interest bearing debt (ie. debt) with non interest bearing unfunded liabilities (ie. not debt). This is a critical difference because the ability to service debt depends on how much interest you have to pay. Debt represents expenditure which has already occurred and which needs to be serviced with interest. Unfunded liabilities represent an estimate of expenditure that will be incurred at some point in the future and which do not bear interest. Do you consider your personal future rent payments as debt? – this is more or less what Durkin is doing. It is therefore simply wrong to say that UK has this much debt. The actual Figure is £955bn (ONS, Public Sector Finances October 2010, 18 November 2010).
Second, Durkin conflates ownership of activities (public-private) with whether they create or consume economic value. Again, this is simply wrong. Whether an activity creates economic value or not is independent of who owns it and whether it is tax funded. Teaching, policing, medicine etc. create a huge amount of economic value (try living somewhere where they don’t exist if you don’t believe me) and the ownership of those activities is irrelevant. There are many good reasons for funding a lot of productive economic activities from tax and having them publicly owned (co-ordination problems, free riders, distributional effects etc).
Third, Durkin conflates the growth of the money supply – inflation or the ‘printing of money’ as he puts it – with the growth of the Government debt. The two things are quite different (although related). It is quite possible to have a large amount of Government debt and low inflation, and vice versa. Moreover, the Government doesn’t even create the vast majority of money that exists (less than 5% is actually notes or coins). It is mostly created ex nihilo as debt (demand deposits) by private banks. The Bank of England (independent of Government remember – courtesy of Gordon Brown) gives the banks the ability to create this new money by increasing their reserves through open market operations (at a large scale – quantitative easing), but the decision to create new money is a commercial decision made by private banks. (This is actually a huge subsidy to private banks in the form of seignorage but that is another story). This means that under the current fractional reserve banking system aggregate debt (private or public) has to grow exponentially as this is how money is brought into existence. If the Government reduces its debt then the private sector has to increase its debt by the same amount, otherwise there would be a sharp contraction in the money supply, deflation and probably depression. This system was not created by the last Labour Government – it is an inherent part of the financial capitalist system. It is sustainable insofar as exponential economic growth is sustainable. Durkin and the right wing cranks on his show do actually believe that indefinite exponential economic growth is possible (I don’t – but that is also another story) so I don’t see why they think that exponentially growing debt is a problem – it is in fact a necessity under the current financial system and it won’t be paid back because it can’t be paid back and doesn’t ever have to be paid back.
Fourth, there is actually no debt crisis in the UK created by the last Labour Government. This sounds astonishing because of all the ill-informed and ideological nonsense we have heard over the past months, but it is in fact true. Let’s just take a look at the facts. National debt as proportion of GDP was below 35% in almost every year of the last Labour Government before the financial crisis. By contrast it was almost 44% in the last full year of John Major’s Tory Government. Since the financial crisis national debt has increased sharply both absolutely and as a proportion of GDP for two reasons: first, the direct bailout of the financial system – estimated at £850bn in total, fortunately only around £110bn of which appears on the Government balance sheet as interest bearing debt (not the £73 billion mentioned by Durkin in his film by the way); and second, the resulting global recession which has caused UK GDP to be 10% lower than it otherwise would have been. Currently the debt (£955bn) to GDP (£1481bn) ratio is 64.5% which is not particularly high by historical standards (this is lower than the average of the 20th century which peaked at 250% after WWII), nor by international standards (Japan is 192%, Germany is 73%, France is 78%, Italy is 116% and the US is about 70%). Indeed, we are in a relatively strong position – thanks to Gordon Brown’s swift actions using all the skill and resources of the much maligned public sector – given the monumental size of the catastrophe unleashed by the private sector banksters. Gordon Brown also had the forsight to take on debt with long maturity (12 year average – much longer than most countries).
Durkin also seems to think that life was better in around 1910 when rickets, polio, malnutrition, TB, illiteracy and early infant death were common place. But hey, public spending was only 10% of GDP back then so it must have been better.
I hope this is clear enough.
Recharge,
Durkin didn’t explain how he arrived at his £4.8tn figure but you can easily find out where it comes from by doing a Google search. It is from an IEA report and it is easily available on their website. The majority of it comes from pension liabilities and yes I am afraid it is debt. Your definition of debt is incorrect. Debt can simply mean an obligation to pay or do something. The government has obligated itself to pay these pensions. According to standard GAAP rules the value of these liabilities should be properly represented on the balance sheet. Further, more the ability to service debt does not depend solely on how much interest you have to pay. That is the ability to service interest and it is only debt service if there are no principal payments. However, that is beside the point – pension obligations still need to be paid regardless of how different they are to bonds. Rent payments are completely different since you are paying for the use of a good, not obligating yourself to pay a future benefit in return for present contributions. Your rent could become a debt should you break your lease early however.
Second, the State consumes capital when it taxes and arbitrarily decides which activities to spend these funds on. E.g. it does not create economic value. See Bastiat (That Which is Seen and That Which is Unseen) for details.
Third, banking and government are heavily intertwined. The Government gives banks license to operate the way they do because it directly benefits from it. The BoE prints money to buy Government bonds – hence the link. See Rothbard (Mystery of Banking) for details.
Fourth, see point One. Btw the IEA have revised their figures upwards, to £6.5tn.
Style and bias aside (and bias is perfectly acceptable), Durkin’s documentary is fundamentally correct.
Robert,
You should read the rest of the posts as some of these points have been covered in more detail below. I have to respons directly to some of your points however.
“Durkin didn’t explain how he arrived at his £4.8tn figure but you can easily find out where it comes from by doing a Google search. It is from an IEA report and it is easily available on their website. “
Since when has the IEA been the judge and jury of what constitutes debt? In any case, Durkin should have stated clearly at the outset how he had reached the figure: not to do so was simply dishonest. He should also have given some international and historical comparisons (based on the IEA definition if you like). The £4.8tn figure as it stands with no context is simply a big number and is completely meaningless.
“The majority of it comes from pension liabilities and yes I am afraid it is debt. Your definition of debt is incorrect. Debt can simply mean an obligation to pay or do something. The government has obligated itself to pay these pensions.”
It is not a legal obligation which is why it is not debt. The pensioners have a claim on the future value of the UK economy. If the UK economy does not generate enough value in the future they will be paid a smaller pension. This may be politically difficult but that is the legal status: they do not have a legally enforceable contract with the UK Government. The pensioners are effectively taking equity risk on the value of the UK economy. It is therefore not debt.
According to standard GAAP rules the value of these liabilities should be properly represented on the balance sheet.
I don’t really care what the GAAP rules are – I am looking at the economic fundamentals. It has the economic character of equity not debt.
Rent payments are completely different since you are paying for the use of a good, not obligating yourself to pay a future benefit in return for present contributions.”
You are obliging yourself to pay rent in the future on the day you sign the lease, and under GAAP rules that will appear on your balance sheet as a liability. However, I agree it is not debt, which is why I do not care what the GAAP rules are.
“Second, the State consumes capital when it taxes and arbitrarily decides which activities to spend these funds on. E.g. it does not create economic value. See Bastiat (That Which is Seen and That Which is Unseen) for details.”
This is just complete nonsense and manifestly not true. The state does not invest arbitrarily, it invests to create economic value where it believes the private sector will not or cannot. The public utilities privatized by the Thatcher Government created an enormous amount of economic value – check how much was raised from the IPOs. Just go to Germany or Sweden if you want to see high quality publicly funded infrastructure.
“Third, banking and government are heavily intertwined. The Government gives banks license to operate the way they do because it directly benefits from it. The BoE prints money to buy Government bonds – hence the link. See Rothbard (Mystery of Banking) for details.”
I have read Rothbard thanks and I just don’t see what point you are making. My point is that the creation of debt is central to the way the banking system works and the quantity of debt (public and private in aggregate) will continue to grow exponentially as long as the economy grows exponentially and the money supply grows exponentially.
“Fourth, see point One. Btw the IEA have revised their figures upwards, to £6.5tn.”
So give me the international and historical comparisons of the IEAs view of debt. How has that changed over time and how does it compare with the last 100 years? How does it compare internationally? Without this context £6.5tn is just a meaningless big number to which the only intelligent response is: so what?
“Style and bias aside (and bias is perfectly acceptable), Durkin’s documentary is fundamentally correct.”
I just can’t see how any fair minded person could reach that conclusion. It was fundamentally dishonest and inaccurate.
> It is not a legal obligation which is why it is not
> debt. The pensioners have a claim on the future value
> of the UK economy. If the UK economy does not generate
> enough value in the future they will be paid a smaller
> pension. This may be politically difficult but that is
> the legal status: they do not have a legally
> enforceable contract with the UK Government. The
> pensioners are effectively taking equity risk on the
> value of the UK economy. It is therefore not debt.
I love this argument.
Leftists have been arguing for generations that long-term private sector arrangements are unstable because private businesses can go bankrupt. They have also being arguing for generations that this problem can be solved by the state. They argued that the state can provide financial security in cases where the private sector can’t, they’ve said that the state would be completely honest in making such agreements unlike immoral capitalists who would lie about future provisions. The leftists who created state pension systems even called the payment to fund them “insurance”!
Recharge, you are now arguing the opposite to your leftist forebearers. You are right and they were wrong. Thanks to those earlier leftists many pensioners have already lived in penury, and many more will. I’m not particularly sorry for them though, they should have seen through the empty-promises of your forebearers.
Also, I hope you see from this why many classical liberals have cynical views of the intentions of leftists.
Current,
I actually think the Government will do all it can to pay those pensions and it is certainly less risky to take equity risk on the UK economy than on any individual company. Let’s run a few numbers and see how risky it looks that the Government will not be able to pay. I assume (maybe wrongly) that you, like most libertarians and rightists, believe that almost all environmental and resource depletion concerns are nonsense and that with the right dose of free markets to generate the necessary technological innovation all conceivable environmental and resource constraint problems can be solved. In other words, you assume that indefinite exponential economic growth is possible. Let’s assume the following:
• the economy grows on average at 2.5%/year
• the total pension liability is £6tn (let’s be really pessimistic)
• the liability will be paid over 60 years
This means that the liability will be £100bn/year on average over the 60 year period. However, over this 60 year period, if the economy grows at 2-3 percent, it will roughly quadruple in size (such is the power of exponential growth) and GDP will be £6tn by then. This means that the average size of the economy over the period will be somewhere around the £3.5tn mark. So the liability actually amounts on average to £100/£3500 or 2.9% of GDP. This compares with 8% on health, 7% on welfare (this actually peaked at 12% under Mrs Thatcher in the early 80s), 6% on education and 3% on defence. So it doesn’t really look that onerous does it? Let’s be even more pessimistic and assume that the liability peaks at £300bn/year when GDP is £2.5tn (ie. about 20 years from now). This still amounts to only 12% of GDP (the welfare bill under Mrs T. remember). So there really is not a problem if you believe in indefinite exponential economic growth.
So now we get to what I think is the real problem, namely: indefinite economic growth is not possible. There are physical limits, and I think we are getting pretty strong signals (largely ignored unfortunately) that we are bumping up against them (climate change, peak oil, fish stock depletion, deforestation, reduction in biodiversity … I could go on). So the fundamental problem is that we will not be able to grow, and this goes way beyond an issue with debt and pensions: this means a fundamental re-assessment of the way we live in which the pensions issue is just a flea on the elephant. I honestly believe that there is going to be a huge reckoning in the next couple of decades or so as people realize that the dream of eternal growth is just that, and that is when the state will have an even larger role to play in managing the (extremely nasty) fall out. But, like I said, for you “growth men” the pension and debt issue is simply not a problem.
I think that Recharge has given an interesting reply. Some of what he says is correct and some wrong, just as some of what the documentary said is correct and some wrong.
> The actual Figure is £955bn (ONS, Public Sector Finances October
> 2010, 18 November 2010).
That’s true, but just because the ONS claim this amount as the national debt doesn’t mean that it actually is the national debt.
If a government pays something like rent then that shouldn’t be included in the national debt. The problem though is that the government has many liabilities that are not all like rent, but not included in the debt either.
Take pensions for example. Lots of these aren’t included in the ONS national debt estimate. However, even if not legally, politically speaking the government must pay many of them. This would be sustainable if the flow of payments from those joining the various schemes could be relied upon to cover the cost of paying pension payments for current pensioners.
The means Durkin picks is unlikely to be correct, but the way the ONS do it isn’t right either.
> Second, Durkin conflates ownership of activities (public-private)
> with whether they create or consume economic value. Again, this is
> simply wrong. Whether an activity creates economic value or not is
> independent of who owns it and whether it is tax funded. Teaching,
> policing, medicine etc. create a huge amount of economic value (try
> living somewhere where they don’t exist if you don’t believe me)
> and the ownership of those activities is irrelevant. There are many
> good reasons for funding a lot of productive economic activities
> from tax and having them publicly owned (co-ordination problems,
> free riders, distributional effects etc).
If Durkin does this, then he’s wrong. However, as Recharge alludes in his last line the question is whether or not the state can do something better than the private sector. If it cannot then the state’s intervention is a net cost. Also, if the distribution of the state’s activities causes knock-on effects. For example, it is more attractive to be unemployed or “on disability” in a country with something like the NHS.
> Third, Durkin conflates the growth of the money supply – inflation
> or the ‘printing of money’ as he puts it – with the growth of the
> Government debt.
This is indeed wrong.
> The two things are quite different (although related). It is quite
> possible to have a large amount of Government debt and low
> inflation, and vice versa. Moreover, the Government doesn’t even
> create the vast majority of money that exists (less than 5% is
> actually notes or coins). It is mostly created ex nihilo as debt
> (demand deposits) by private banks.
As I seem to be saying all the time on this website, it is not created “ex nihilo”. It is created from debt. Commercial banks must balance their balance sheet, that means they must have more than one pound of assets for every pound there is in bank accounts.
Sadly the Rothbardians around here seem to believe this myth too.
> The Bank of England (independent of Government remember – courtesy
> of Gordon Brown) gives the banks the ability to create this new
> money by increasing their reserves through open market operations
> (at a large scale – quantitative easing), but the decision to
> create new money is a commercial decision made by private banks.
That’s fairly much correct. However, it’s wrong to think that the government blesses the banks with the ability to create money. That’s something banks can do anyway if base money exists. The government controls and regulates the process.
(I detect Recharge is a post-Keynesian, I always enjoy arguing with post-Keynesians).
> (This is actually a huge subsidy to private banks in the form of
> seignorage but that is another story).
Whether it’s a subsidy or not depends on the situation. Inflationary creation of money, that is creation of money beyond demand, is certainly a subsidy to the banks. But, meeting the demand for money isn’t.
> This means that under the current fractional reserve banking system
> aggregate debt (private or public) has to grow exponentially as
> this is how money is brought into existence.
It amuses me when post-Keynesians make long-run theories.
What must “grow exponentially” is the amount of debt allocated to balancing money on balance sheets, not necessarily the total amount of debt. This is the consequence of the positive price level policy that the Bank of England adhere to, i.e. the inflation target of 2.5%. However, this doesn’t mean that the real level of this debt must also grow by 2.5% per year, it only means that the nominal level must grow by that amount, and it will considering the price level.
> If the Government reduces its debt then the private sector has to
> increase its debt by the same amount, otherwise there would be a
> sharp contraction in the money supply, deflation and probably
> depression.
The private sector doesn’t necessarily have to increase it’s debt. Certainly, if the government pays off it’s debt then the commercial banks can no longer use those bonds as assets. So, those bonds can no longer reflect on-demand liabilities (ie. money) on bank balance sheets. But, the private sectors has a great many assets that are not being used in that role.
Also, as the future expected tax burden falls the future expected returns on private-sector assets increases. As this occurs they become worth more and more can be borrowed against them.
> it is an inherent part of the financial capitalist system
Not really, there have been capitalist economies without all this.
> It is sustainable insofar as exponential economic growth is
> sustainable.
No, economic growth has nothing to do with it. If you feel like it post the post-Keynesian explanation of why it supposedly does and I’ll criticise it.
> National debt as proportion of GDP was below 35% in almost every
> year of the last Labour Government before the financial crisis.
Why should the years of the financial crisis be struck from the record? I certainly agree that if the financial crisis had come during a Tory government we may we be in a similar pickle. But, all this shows is that neither have acted prudently. Gordon Brown’s running of deficits throughout the boom was exceedingly imprudent.
> Currently the debt (£955bn) to GDP (£1481bn) ratio is 64.5% which
> is not particularly high by historical standards
Only if you believe the official statistics.
Besides, if you’re a post-Keynesian then what are you doing comparing a stock with a flow?
> peaked at 250% after WWII
When there was a pound crisis and Britain was forced to give up most of the empire. That said, in many ways that was a very positive thing in the long run. I expect the US national debt will seriously hamper it’s military objectives, which is welcome.
> Indeed, we are in a relatively strong position
You are right that compared to other western countries our position is better. We may be the “tallest pygmy in the forest”.
> given the monumental size of the catastrophe unleashed by the
> private sector banksters.
To begin with why would you argue that this crisis is exclusively (or even mostly) the fault of the bankers? I assume you have read the articles here about the Austrian theory of the business cycle. Why do you think it’s wrong?
> Durkin also seems to think that life was better in around 1910
> when rickets, polio, malnutrition, TB, illiteracy and early infant
> death were common place. But hey, public spending was only 10% of
> GDP back then so it must have been better.
When Classical Liberal’s praise they are praising it’s attitudes and institutions, not it’s level of economic development and technological development.
All of those things that you implicitly praise have been produced by economic and technological development. But, like other leftists you seem to take this for granted. Since we have these things now in our modern welfare state they must be a benefit of that welfare state. Clearly this doesn’t follow.
In fact, the very opposite is true. Those developments have occurred because of the free enterprise that has still gone on despite the welfare state. If it were not for the private sectors where would the resources have come to tackle the problems you mention?
Think about your little insult “banksters” above. Bankers provide a very useful service by matching lenders and borrowers, and lending only on projects that are good risks. By deriding them, as many wealth creating activities are derided, you are discouraging people from doing them. Taxation does exactly the same though more directly.
Current, your response is equally interesting and I’d like to come back on a few points.
First, the thing that struck me while reading your reply is that you have not fundamentally disagreed with anything I have said. You have challenged a few technical points but the main thrust of my argument appears to stand, namely, that Durkin’s show was a completely distorted picture made by someone who has a very limited understanding of the subject matter. You are of course right to say that debt may be higher than £955bn (it is a question of judgment in the end as to what exactly is classified as debt) and there is a legitimate argument to be had by well informed people about what the level should be. But that is my main gripe with the entire show – Durkin makes no attempt to have this debate, he just makes assertion after assertion (as if it is settled fact), acknowledges no counter arguments, and does not try to inform or get to the truth (as you do in your reply to my post which has given me some food for thought by the way). He simply wants to make a narrow ideological point (private good – public bad) and is happy to use any data or argument to support that point regardless of its soundness. In my view this is just fundamentally dishonest and for that reason the programme should never have been broadcast in this form.
Here are some more specific points I want to pick up on.
However, as Recharge alludes in his last line the question is whether or not the state can do something better than the private sector. If it cannot then the state’s intervention is a net cost.
There is certainly a debate to be had here, and in the end it all comes down to what you define as ‘better’. Better does not just mean more wealth creation, it also concerns the distribution of said wealth which may indeed incur a cost, and the state has an entirely legitimate role in ensuring that the distribution of wealth is not too skewed.
As I seem to be saying all the time on this website, it is not created “ex nihilo”. It is created from debt. Commercial banks must balance their balance sheet, that means they must have more than one pound of assets for every pound there is in bank accounts.
True, but most of the ‘assets’ are IOUs which are created ex nihilo so I think you are splitting hairs. In any case, the key point is that commercial banks create most new money and not the Government.
What must “grow exponentially” is the amount of debt allocated to balancing money on balance sheets, not necessarily the total amount of debt. This is the consequence of the positive price level policy that the Bank of England adhere to, i.e. the inflation target of 2.5%. However, this doesn’t mean that the real level of this debt must also grow by 2.5% per year, it only means that the nominal level must grow by that amount, and it will considering the price level.
I may be missing something but I just don’t understand this point. What is the difference between debt allocated to balancing money on balance sheets and the total amount of debt? Given that money is created from debt and the money supply grows exponentially then aggregate debt has to grow exponentially doesn’t it? This is just a mathematical identity (ie. a balance sheet). Similarly, even if the bank had a 0% inflation target, as long as the economy is growing exponentially the money supply would still be growing exponentially just at a lower rate than with a 2.5% target (otherwise there would be deflation). So the real debt also grows but the ratio of debt to GDP remains constant.
The private sector doesn’t necessarily have to increase it’s debt. Certainly, if the government pays off it’s debt then the commercial banks can no longer use those bonds as assets. So, those bonds can no longer reflect on-demand liabilities (ie. money) on bank balance sheets. But, the private sectors has a great many assets that are not being used in that role. Also, as the future expected tax burden falls the future expected returns on private-sector assets increases. As this occurs they become worth more and more can be borrowed against them.
Again, I just don’t understand this. You said yourself that money is not created ex nihilo but from debt. Doesn’t it therefore follow necessarily from that premise that if the aggregate debt reduces then the money supply must contract because the debt from which the money is created has contracted?
In fact, the very opposite is true. Those developments have occurred because of the free enterprise that has still gone on despite the welfare state. If it were not for the private sectors where would the resources have come to tackle the problems you mention?
You make the same mistake as Durkin. Not all wealth is created in the private sector and the welfare state is not the sum total of the public sector. Just think how much money was raised from the privatizations of the 1980s. That economic value was created by the public sector.
Think about your little insult “banksters” above. Bankers provide a very useful service by matching lenders and borrowers, and lending only on projects that are good risks.
Really? Why the bail out then if they managed their risks so well?
I dont think I am a post-Keynsian by the way as I am not an economist – I just read alot about these issues.
“the state has an entirely legitimate role in ensuring that the distribution of wealth is not too skewed”
Try reading that as “the state has an entirely legitimate role in facilitating theft”.
The reality is that state takes various steps to ensure that the distribution of wealth *is* skewed. Setting aside the welfare state, we see a tax code that plays favourites, regulation that discourages entry into markets, protectionist excise duties, bailouts, and inflation.
Remove all of these distortions, and we will have a much more equitable distribution of wealth.
“Just think how much money was raised from the privatizations of the 1980s”
For ‘privatizations’ read ‘denationalisations’.
What was the opportunity cost of nationalisation? How much more wealth would have been created if those industries had remained in private hands?
“Try reading that as “the state has an entirely legitimate role in facilitating theft”.”
Why would I want to do that? It would be using the words incorrectly. Theft is unlawful and taxation is not – that is why we have different words for these things because they are different and unrelated concepts.
“The reality is that state takes various steps to ensure that the distribution of wealth *is* skewed. Setting aside the welfare state, we see a tax code that plays favourites, regulation that discourages entry into markets, protectionist excise duties, bailouts, and inflation. Remove all of these distortions, and we will have a much more equitable distribution of wealth.”
Do you have any empirical evidence to demonstrate that this is true? As far as I am aware, the countries with the most equitable distribution of wealth as measured by the Gini co-efficient(Nordic Countries, Germany) tend to be the most regulated and highest taxed.
“For ‘privatizations’ read ‘denationalisations’.”
Why do you keep re-defining words? As a matter of fact, not all of the privatizations were denationalizations. Many public utilities were started by public sector municipalities and were subsequently privatized.
“What was the opportunity cost of nationalisation? How much more wealth would have been created if those industries had remained in private hands?”
We will never know because we can’t run a controlled experiment. Maybe it would have been more and maybe it would have been less. But the fact of the matter is that it is not only the private sector that creates wealth. So when Durkin and Current refer to the private sector as the wealth creating part of the economy they are just plain wrong because the two categories do not coincide.
Not everything that’s currently lawful is “entirely legitimate” (and many things that are entirely legitimate are not lawful).
Redistributive taxation is morally equivalent to theft.
Other kinds of taxation are more akin to a protection racket. You get something of value, but not at a freely-chosen price.
It may seem pedantic, but the shift of perspective can make a big difference. Consider: legalisation of drugs vs relegalisation.
Around this time last year, I commented on one of Toby’s articles:
“I am very sceptical of government spending, but I have trouble with the suggestion that government spending cannot — at least in theory — result in wealth creation.”
After giving a couple of examples, I concluded
“it is not impossible for governments to create wealth. It is even possible for governments to create more wealth from the same initial funds than the private sector would. It is just extremely unlikely in practice”
Toby was good enough to write a follow-up article, which you might be interested in:
https://www.cobdencentre.org/2009/12/can-government-create-wealth/
When people talk about the private sector as the “wealth creating part” of the economy, they are using shorthand. There may be examples of the public sector delivering services more efficiently than the private sector, but I contend that they are extremely rare.
> First, the thing that struck me while reading your reply is that you
> have not fundamentally disagreed with anything I have said. You have
> challenged a few technical points but the main thrust of my argument
> appears to stand, namely, that Durkin’s show was a completely
> distorted picture made by someone who has a very limited
> understanding of the subject matter.
I agree that it was a distorted picture certainly. But, in many ways it’s no worse than anything that the BBC or some other mainstream media outlets put out. The only real difference is that the limited understanding and the distortions are not the usual ones.
> You are of course right to say
> that debt may be higher than £955bn (it is a question of judgment in
> the end as to what exactly is classified as debt)
Yes, it’s partially a political argument because no parliament can bind a future one. Future parliaments may use their power to make certain debts worthless.
> and there is a
> legitimate argument to be had by well informed people about what the
> level should be. But that is my main gripe with the entire show –
> Durkin makes no attempt to have this debate, he just makes assertion
> after assertion (as if it is settled fact), acknowledges no counter
> arguments, and does not try to inform or get to the truth (as you do
> in your reply to my post which has given me some food for thought by
> the way). He simply wants to make a narrow ideological point
> (private good – public bad) and is happy to use any data or argument
> to support that point regardless of its soundness. In my view this
> is just fundamentally dishonest and for that reason the programme
> should never have been broadcast in this form.
But, the BBC and much of the rest of the media don’t much attempt at having a debate either. The starting premise of almost every documentary or news article on economics is that something is wrong in the private sector and government must fix it.
I live in Ireland, recently somebody sent me an article from the BBC website about the reasons for the crisis here. The article didn’t even question the fact that the government had bailed out Anglo-Irish bank.
What you’re asking is that the economic right be held to a higher standard than the left. Recently there was an history documentary full of very similar errors coming from the left, but it seems to have passed without much comment, see http://www.countingcats.com/?p=8289 .
You’re asking the same thing for yourself a bit too. Regarding Mrg’s comments on tax you wrote: “My point is that it does not help move the debate forward if you characterize redistributive taxation as theft. It just polarizes opinion and forces us to debate the meaning of words rather than the underlying issue.” I think that’s perfectly true, but I’ll remind you that you used the word “banksters” earlier ;)
>> However, as Recharge alludes in his last line the question is
>> whether or not the state can do something better than the private
>> sector. If it cannot then the state’s intervention is a net cost.
>
> There is certainly a debate to be had here, and in the end it all
> comes down to what you define as ‘better’. Better does not just mean
> more wealth creation, it also concerns the distribution of said
> wealth which may indeed incur a cost, and the state has an entirely
> legitimate role in ensuring that the distribution of wealth is not
> too skewed.
I don’t agree with redistribution. I asked you and Mrg about moral codes, that’s because I thought you may have different ones. You’re a utilitarian, I wondered if Mrg is perhaps a natural law advocate. Anyway, I’m a utilitarian too, so I don’t think our ends necessarily conflict.
The problem with your view is that it sees distribution as something inherently separate from production. But, in the ongoing market process the two are closely interlinked. The state can’t manipulate distribution without changing production. This argument takes various forms such as that about the deadweight loss of taxes, or how welfare encourages idleness. But, these arguments are really all part of the general idea of looking at the economy from the individual’s point of view.
What everyone should remember is that capital accumulation by society is an accumulative process. So, the present has a great affect on the future.
>> As I seem to be saying all the time on this website, it is not
>> created “ex nihilo”. It is created from debt. Commercial banks must
>> balance their balance sheet, that means they must have more than
>> one pound of assets for every pound there is in bank accounts.
>
> True, but most of the ‘assets’ are IOUs which are created ex nihilo
> so I think you are splitting hairs. In any case, the key point is
> that commercial banks create most new money and not the Government.
Yes, commercial banks create new money, but that’s not created “ex nihilo”.
The assets the commercial banks own are indeed IOUs – debts. I suppose someone could claim that all debts are created from nothing, in a sense they are. But, not really in the sense critics of banks mean.
Suppose that I have 10 ounces of gold and I lend that to Jim. He then has 10 ounces of gold. I also have a certificate saying that Jim must pay me back with interest, and Jim has a certificate saying that same thing. The point here is that the nobody makes a great gain from nothing.
Fractional reserve banking is essentially no different except that the debt certificate in question acts as money.
People suppose that because a commercial bank can create money that it thereby has a key to riches. What they forget is that while bank accounts are assets to those of us who use them they are liabilities to the bank. A bank can write checks on itself and those circulate as money, that is all. Suppose, for example, that a bank were to put £10M into one of it’s accounts. Then a bank employee goes shopping with that money. As he hands over his debit card to vendors the debit card system triggers a demand to transfer money into the account of the vendor. As these accounts will mostly be in other banks that will trigger transfers from the bank in question to those other banks. Banks don’t accept each other’s accounts as payment, they only accept assets or reserves. So, if the employee spends £10M then demands will come back to the bank for £10M.
Governments however really are different. They can use the law to alter what money is. They have done this many times, most recently by suspending the gold standard and then abolishing it. The money that they issue, reserves, isn’t really a liability, they have no duty to convert it into anything.
>> What must “grow exponentially” is the amount of debt allocated to
>> balancing money on balance sheets, not necessarily the total amount
>> of debt. This is the consequence of the positive price level policy
>> that the Bank of England adhere to, i.e. the inflation target of
>> 2.5%. However, this doesn’t mean that the real level of this debt
>> must also grow by 2.5% per year, it only means that the nominal
>> level must grow by that amount, and it will considering the price
>> level.
>
> I may be missing something but I just don’t understand this
> point. What is the difference between debt allocated to balancing
> money on balance sheets and the total amount of debt?
The part is really two points, not one, that may be what’s confusing.
The difference is that not all debt is reflected by money-substitutes. For example, I myself have a lot invested in bonds from commercial banks. That means I’m lending to the bank and the bank is lending to some other people. But, I don’t have a current account (or savings account) with those banks.
My point here is to criticise what you wrote about the government debt. Reducing the government debt in a recession doesn’t necessarily cause a corresponding reduction in the money supply. This is because changes can occur in the composition of the liabilities side of the balance sheet of banks and businesses. If bank account balances are in high demand then they will out-compete bonds for asset coverage.
> Given that money is created from debt and the money supply grows
> exponentially then aggregate debt has to grow exponentially doesn’t
> it? This is just a mathematical identity (ie. a balance
> sheet). Similarly, even if the bank had a 0% inflation target, as
> long as the economy is growing exponentially the money supply would
> still be growing exponentially just at a lower rate than with a 2.5%
> target (otherwise there would be deflation). So the real debt also
> grows but the ratio of debt to GDP remains constant.
That’s fairly much right. But, I don’t see the problem here.
>> In fact, the very opposite is true. Those developments have
>> occurred because of the free enterprise that has still gone on
>> despite the welfare state. If it were not for the private sectors
>> where would the resources have come to tackle the problems you
>> mention?
>
> You make the same mistake as Durkin. Not all wealth is created in
> the private sector and the welfare state is not the sum total of the
> public sector.
I agree that the state may create wealth under some circumstances.
> Just think how much money was raised from the privatizations of the
> 1980s. That economic value was created by the public sector.
That money was raised from the privatizations doesn’t really prove the point. Suppose that a government nationalizes potato farming and buys all the potato farms. It then produces half as many potatoes as the private sector did. Does that mean that if the potato farms were sold back to the private sector they would be worth nothing? No, of course not. I don’t think the nationalized industries were really like that in general, but it illustrates the problem in principle with what you’re saying.
Let’s take the electricity industry for example. Certainly it was worth a lot when it was sold. But, think about where the capital came from, it came from tax and from electricity bills. Those who were paying the electricity bills had no choice in their vendor. The electricity that people bought was worth more than what they paid for it in their eyes. But, that doesn’t mean that more was created than could have been under a private system.
>> Think about your little insult “banksters” above. Bankers provide a
>> very useful service by matching lenders and borrowers, and lending
>> only on projects that are good risks.
>
> Really? Why the bail out then if they managed their risks so well?
Well, I was talking about bankers generally not recently. Clearly the insult – at least when most people say it – is one aimed at all bankers in all times and places, not just those we have now.
That said I don’t think we should be so eager to blame bankers for the recent crisis. I think the crisis had it’s origins in central banking, not in the commercial banks. That doesn’t necessarily excuse all the commercial banks though.
> I dont think I am a post-Keynsian by the way as I am not an
> economist – I just read alot about these issues.
Fair enough. A couple of the points you made were one’s from post-Keynesian economics.
“I agree that it was a distorted picture certainly. But, in many ways it’s no worse than anything that the BBC or some other mainstream media outlets put out. The only real difference is that the limited understanding and the distortions are not the usual ones.”
Maybe I am less sensitive to it but I am not sure I would agree that the BBC is always biased the other way. I often get pretty hacked off with some of the rubbish that passes for analysis on the BBC, even the up-market Radio 4, and it is not always left leaning. The real problem is that there has been a dumbing down in general across all the media, and it is rare to have any really insightful analysis presented from a left or right perspective.
“I think that’s perfectly true, but I’ll remind you that you used the word “banksters” earlier ;)”
Touche – but in my defense they did make a hell of a mess…
“Anyway, I’m a utilitarian too, so I don’t think our ends necessarily conflict.”
Possibly – but there may be a difference in our outlook. I said I am an empirical utilitarian. By this I mean I look at accumulated experience and evidence to decide if something increases welfare or not. In contrast, I think some people are what you might call a priori utilitarian, that is, they base their calculus of welfare on what general equilibrium theory predicts thereby building in numerous dubious assumptions about what actually happens in the real world. I don’t know if that applies to you or not.
“The problem with your view is that it sees distribution as something inherently separate from production. But, in the ongoing market process the two are closely interlinked. The state can’t manipulate distribution without changing production. This argument takes various forms such as that about the deadweight loss of taxes, or how welfare encourages idleness. But, these arguments are really all part of the general idea of looking at the economy from the individual’s point of view. What everyone should remember is that capital accumulation by society is an accumulative process. So, the present has a great affect on the future.”
Actually, I think this is critical. As I said in a response to mrg, wealth creation is a function of demand which in turn is a function of past wealth distribution (ie. the people with the wealth determine future production priorities). This means that any market equilibrium reached (which may be the most efficient allocation of resources at that time) will be a function of how the previous wealth was initially allocated. I think there is good evidence in the post war period to show that by changing the initial allocation to a more egalitarian distribution a different future equilibrium is achieved which results in higher aggregate value, because different production priorities are chosen (ie. more lower cost goods with high marginal utility and fewer luxury goods with low marginal utility). Seen from this perspective, redistributive taxation (especially inheritance tax) creates wealth.
“Suppose that I have 10 ounces of gold and I lend that to Jim. He then has 10 ounces of gold. I also have a certificate saying that Jim must pay me back with interest, and Jim has a certificate saying that same thing. The point here is that nobody makes a great gain from nothing.”
This is fine if the gold is yours, but what if Dave gave it to you (in exchange for gold certificate) for safe keeping and fully expects to be able to claim it back from you at any time? By lending it to Jim you have created a simultaneous claim on the same quantity of gold and thereby doubled the money supply because there are now 20 ounces of gold certificates circulating (both Dave’s and Jim’s). This is fractional reserve banking, and this is how banks create debt (and hence money) out of nothing, and why they are always vulnerable to a bank run. In my view we should move to 100% reserve banking (bankers genuinely acting as brokers between savers and borrowers by ensuring that the length of deposits matches the length of loans and there is no simultaneous claim on the same assets) and leave the creation of new money to the Government. There should be a zero inflation target and the Government should spend new money into existence as required to meet this target. The Government would collect the seignorage value and would therefore be able to reduce taxation of other kinds. By the way, since you mentioned Rothbardians before, I think Rothbard’s The Mystery of Banking is an outstanding critique of all that is wrong with the modern banking system, even if I don’t agree with his solutions. He would probably have approved of the term banksters!
“Not everything that’s currently lawful is “entirely legitimate” (and many things that are entirely legitimate are not lawful).”
That is a matter of opinion. But if you don’t like the law as it stands you are free like everyone else to campaign to change it. That is democracy.
“Redistributive taxation is morally equivalent to theft”.
No it isn’t. I have given my consent to the Government to take tax from me and re-distribute it in accordance with the priorities set out in their manifesto. It is just silly and pejorative to call that theft. I benefitted from free (at the point of delivery) health care and education as a child and I am more than happy to pay the top rate of tax now that I have a good job to ensure that other people get the same benefit I had. This is not theft – it is my entry ticket to civilisation. By the way, since much of what I earn is economic rent, the 50% tax rate does not act as a disincentive to work.
“When people talk about the private sector as the “wealth creating part” of the economy, they are using shorthand”
My turn to be pedantic: they shouldn’t use it as shorthand because it is incorrect and (in Durkin’s case at least)deliberately misleading.
“There may be examples of the public sector delivering services more efficiently than the private sector, but I contend that they are extremely rare.”
Maybe you’re right and maybe you’re not. But as I implied in an earlier post, economic efficiency is not the only thing that matters in life.
I have not got time to read the other article now but I’ll see if I can take a look tomorrow.
“But if you don’t like the law as it stands you are free like everyone else to campaign to change it. That is democracy.”
Commenting here and elsewhere is part of the campaign :-)
We should be under no illusions about democracy. It may be the least bad option (Hans-Hermann Hoppe would question that), but fundamentally it is the tyranny of the majority (or in our case, under FPTP, the tyranny of a minority).
“I have given my consent to the Government to take tax from me and re-distribute it in accordance with the priorities set out in their manifesto”
You may consent to the current order of things, but you impose your will on millions of others who do not share your view.
Having rudely hijacked this thread, I’ll now step aside and leave Current to reply (FWIW, I think my underlying moral position is clear from my previous comment, BICBW).
I hope you enjoy Toby’s other article. It’s not empirical proof, and I expect you’ll find much to disagree with.
You might also be interested in Milton Friedman’s 4 Ways to spend money: http://www.youtube.com/watch?v=5RDMdc5r5z8
“You may consent to the current order of things, but you impose your will on millions of others who do not share your view”.
By the same token, I didn’t consent to a large amount of what Mrs Thatcher’s Government did, but that did not mean that what she did was not legitimate – it was. That was unfortunate for me but there you are. My point is that it does not help move the debate forward if you characterize redistributive taxation as theft. It just polarizes opinion and forces us to debate the meaning of words rather than the underlying issue.
I have now had a chance to look at Toby’s article and I (maybe not surprisingly) do not find his arguments convincing. Indeed, his whole argument seems to be based on a tautology which runs as follows. Wealth creation is always defined against an imaginary benchmark, namely what the private sector would have done with the same resources. It seems to be implicitly assumed that this will always be higher than what the Government would do with these same resources. It therefore follows necessarily that Government cannot create wealth as there will always be an opportunity cost associated with their activities.
There seem to be at least two things wrong with this argument, even if you agree with the premise that Government’s always impose an opportunity cost on society whenever they use recourses that could otherwise be used by the private sector (which I don’t by the way).
First, there are many market failures (externalities, information asymmetry, free rider problems etc etc.) which mean that the private sector may not make optimum use of the resources available to it (some will be under-utilized and some over-utilized). The Government can in many cases correct for these market failures and therefore ensure higher aggregate value creation by forcing the private sector to use resources more effectively. That is Government creating wealth indirectly, because many things would never be done by the private sector left to its own devices, but which nevertheless add to aggregate wealth.
Second, wealth creation is a function of demand which in turn is a function of past wealth distribution (ie. the people with the wealth determine future production priorities). This means that any market equilibrium reached (which may be the most efficient allocation of resources at that time) will be a function of how the previous wealth was initially allocated. Given a different initial allocation, it is quite possible that there will be a different equilibrium which results in higher aggregate value, because different production priorities were chosen. This is the role of redistributive taxation (especially inheritance tax). One of Toby’s quotes I have to single out is as follows:
“I would note the following pre big government:
• All the great roads until the 40’s, but now only toll roads as the road system has been nationalised, were built by the private sector;
• This is the same for all the railways, the canals and other infrastructure systems;
• And all the bridges;
• All the health care provision;
• All the education provision;
• Power supply;
• The tunnels;
• And the sewers.
I could go on and on…”
Forgive me for pointing out the obvious, but most of these things were not very good before the 1940s. That is indeed why we nationalized many of them and saw the largest expansion of wealth the world has ever seen. Look at the numbers.
UK GDP/Capita (1990 Dollars)
1840 1990
1920 4568
1950 6907 (Note to Toby: Right here is where the numbers take off).
2001 20066
Maddison (2003) Organisation for Economic Co-operation and Development, p32
No need to apologise for hijacking by the way. This is what the forum is for.
I dont know what my underlying moral position is. Some kind of empirical utilitarian I would say if pushed.
“By the same token, I didn’t consent to a large amount of what Mrs Thatcher’s Government did, but that did not mean that what she did was not legitimate – it was.”
If 51% of the population voted to reintroduce slavery, would you consider it legitimate? If not, why not?
On the original point, my objection was that if I were to forcibly confiscate wealth from Peter to give to Paul, I would be committing theft. My contention is that when the government does the same, it is still theft, just by another name. Whether a fourth party, Recharge, would have gladly given money to Paul is irrelevant. Peter has still been robbed.
I fear we’re not going to make progress on this question, so I’ll leave it there, and respond to your other points separately.
If you have time to read a lengthy exposition on the morality of taxation, I recommend Rothbard’s Can There Be a ‘Just’ Tax?
(he’s even more extreme than I am, but it’s good food for thought)
“I have now had a chance to look at Toby’s article and I (maybe not surprisingly) do not find his arguments convincing. Indeed, his whole argument seems to be based on a tautology which runs as follows. Wealth creation is always defined against an imaginary benchmark, namely what the private sector would have done with the same resources”
I think there was rather more to his argument than that. In a nutshell:
– price signals are essential to entrepreneurs seeking to meet the needs of consumers, but these signals are distorted and ultimately eliminated as state intervention increases
– central planners cannot access and interpret the subjective desires and preferences of millions of geographically dispersed individuals; as more decisions are taken (or influenced) by distant planners, the gap between what people really want and what they are given widens
– the Soviet experience provides strong empirical evidence for the folly of central planning. Today we continue to see poverty in Cuba and North Korea, for the same reason.
Now, presumably you would argue that ‘moderate’ Third Way socialism hits a sweet spot, superior to both Communism and Free Market Capitalism. Do you acknowledge the points above, but contend that these inefficiencies (and others) are outweighed by other benefits?
I’d be interested to know exactly where you think the sweet spot is (and how you’d know when you found it).
You spoke of the money raised in the 1980s privatisations as evidence for wealth created in the public sector. Do you believe that Britain would be more prosperous today if those privatisations had not taken place?
mrg,
“Now, presumably you would argue that ‘moderate’ Third Way socialism hits a sweet spot, superior to both Communism and Free Market Capitalism. Do you acknowledge the points above, but contend that these inefficiencies (and others) are outweighed by other benefits? I’d be interested to know exactly where you think the sweet spot is (and how you’d know when you found it).”
The honest answer is I do not know. I try to look around at enduring policy outcomes and determine as best I can what the causes of good and bad outcomes were and what we can do to replicate the good ones and eliminate the bad ones.
Of course the price mechanism (the market) is an incredibly powerful tool and appears, in most situations, to be far more effective at allocating resources than central planning. However, it also appears to be the case that there are many circumstances where unfettered markets do not allocate resources efficiently and there appears to be an important role for the state to play in these cases (eg. externalities). Similarly, there are also some things that I simply do not want to be allocated by the market (healthcare and education spring to mind). It may be an efficient allocation of resources to give the best healthcare to those who can pay the most, but it would be profoundly wrong to watch a small child die in agony because their parents can’t pay – economically efficient or not. This means we have to allocate those resources using a different mechanism and we have to redistribute wealth.
Now whether there is a sweet spot or not I can’t say and I suspect we will never know. Maybe the role of the state should vary over time and place – sometimes larger sometimes smaller – depending on the culture, the stage of development and the history of the country involved. I suspect there is no one universal answer to this question – we just have to keep experimenting.
Good to see that you accounted for inflation, although the selection of dates seems a bit random. The 3x increase in GDP/capita between 1950 and 2000 looks about right.
Some relevant questions:
– how does the 3x growth over 50 years compare with other 50-year periods throughout history?
– how does Britain’s growth in this period compare with other countries?
– what effect has war & peace had on GDP?
– how much of the increase in GDP/capita is due to stabilising population vs increasing total wealth?
– within the period from 1950 to 2000, where did most of the growth occur?
– how good is GDP at measuring wealth?
It is indisputable that we are wealthier today than we were before the rise of Big Government. The question is whether we have prospered because of the state, or despite it.
Recharge, MRG,
The problem with your discussion is that you’re making judgements of each other without clarifying your underlying moral positions.
I’ll reply to Recharge’s reply to me soon.
Recharge, MRG,
In my view the moral imperative of a democratic society is that people should obey the democratically elected bodies and what they produce: the law and executive commands. Provided that the law and the commands are not outrageous.
But, democracy doesn’t mean that the opinion of the majority or the policies of the government cannot be debated. Democracy can’t function without debate and inevitably all of us must take a view on many things that are different to state policy and different to the majorities view. In a debate if someone says that the majority disagree then that really isn’t a strong argument. If political debate has a point to it (apart from having fun) then it’s to present reasons for policies.
For example, if mrg doesn’t pay his taxes then Recharge can say that he’s anti-social for not obeying the moral code of democracy I mention above. But, the same doesn’t apply if Recharge justifies taxation by saying that the majority agree. That the majority agree means that we must submit to their will or become anti-democratic revolutionaries, but it doesn’t mean that we must agree with it.
Recharge and Current – thank you both, I was really hoping someone would shed some educated light on the issues in Durkins programme!
I have a question.
IEA figures here (which Durkin has used):
http://www.iea.org.uk/record.jsp?type=release&ID=199
These suggest the £4.8tn is made up of:
£1,179 bn public sector pension liabilities (non-interest bearing – but a real liability)
£73bn bank bailout (presumably excluding all contingent liabilities)
£772bn of interest-bearing debt (presumably built up through consecutive budget deficits)
So what makes up the other £2,776?
Daniel,
Apologies but I can’t give you an answer – that is one of the problems with Durkin’s programme. He did not explain how he derived the number nor what it comprises and why.
I can only say that the ONS number is £955bn including £110bn (not £73bn)of interest bearing debt associated with the bank bail outs (ONS, Public Sector Finances October 2010, 18 November 2010). However, according to the National Audit Office (NAO) the total cost of the bailout was £850bn, when we include contingent liabilities,as follows:
£76bn To purchase shares in RBS and Lloyds Banking Group
£200bn Indemnify Bank of England against losses incurred in providing over £200bn of liquidity support
£250bn Guarantee wholesale borrowing by banks to strengthen liquidity in the banking system
£40bn Provide loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme
£280bn Agree in principle to provide insurance for selection of bank assets
There was also £107m of public money paid to private companies for advice on the bail out, namely:
£32.9m Slaughter & May – Commercial legal advice
£15.4m Credit Suisse – Financial advice on a range of measures, including Bank Recapitalisation and the Asset Protection Scheme
£11.3m PricewaterhouseCoopers – Advice on APS
£8.7m Ernst & Young – Due diligence on APS, Northern Rock
£7.7m KPMG – Due diligence on APS
£7.4m Blackrock – Valuation advice on APS
£5.3m Deutsche Bank – Financial advice on a range of measures
£5m Citi Financial – Advice on Aps
£4.9m BDO Stoy Hayward – Valuation of Northern Rock
£4.5m Goldman Sachs – Financial advice on Northern Rock
£1.5m Morgan Stanley – Financial advice on Bradford & Bingley
£2.5m Other advisers – Financial advice on a range of measures and proposals to revive Britain’s ailing economy
The NAO said that the “unprecedented” £850bn of support for the banks was justified toavoid the potential damage of one or more of the banks going bust, and preserving people’s savings and confidence in the financial system.
So lets just be clear. The UK Government had to directly spend or make unfunded commitments of £957bn to bail out private sector banks and pay private sector advisers to help them. By coincidence this is almost exactly the same as the current level of the national debt.
You really could not make this up.
Thanks Recharge.
So why was Durkin’s programme allowed to be aired? It seems to have fundamentally misrepresented most of the issues it covered.
Don’t get me wrong – a couple of good points were made in it: above all MP’s confusing the annual budget deficit with the total debt figure, however I’m disappointed that Channel 4 did not challenge the assertions in there.
Anyway – thanks again Recharge.
Daniel,
I couldn’t agree more. That was my main gripe with the programme as I said above. I’m all for a robust debate on this subject, but let’s get the basic facts correct first, or at least acknowledge where there is disagreement.
By the way, I just noticed that there was a mistake in my last post (it was late at night). It should have said:
“So lets just be clear. The UK Government had to directly spend or make unfunded commitments of £850bn to bail out private sector banks and pay private sector advisers to help them. By coincidence this is almost exactly the same as the current level of the national debt less the direct costs of the bail out £845bn (£955bn – £110bn).”
But you still couldn’t make it up.
I’m not denying that Durkin’s programme was one-sided, but please don’t pretend that the majority of programmes on C4 and the BBC are unbiased. The bias is systematic, and it is leftist. Durkin presented the arguments that we never get to hear.
I’m not sure what exactly you have in mind, Daniel, when you suggest the programme shouldn’t have been “allowed to be aired”. Is it taxpayer-funded bias that you object to, or something else?
mrg,
Durkin fundamentally misrepresented the facts his programme claimed to cover, period. Maybe my point about it not being allowed to be aired (because it so blatantly and significantly misrepresented quantifiable fact) is naive, yes.
Other programmes are biased: so what? What does that have to do with an intelligent person like Durkin misrepresenting a serious issue in such a daft way?
I’m neither rightist or leftise. I was really looking forward to the show because I have wanted to understand how the whole public debt issue works for ages.
Whilst the programme was illuminating in some ways, and I think made some valid, indisputable points (e.g. the private sector does “fund” the public sector), it also contains “mistakes”, which I think Recharge’s post of November 20th at 15:40 clarifies very well.
I’m a banker by the way. And no, tax is not theft!!!
Recharge,
> Maybe I am less sensitive to it but I am not sure I would agree that
> the BBC is always biased the other way. I often get pretty hacked
> off with some of the rubbish that passes for analysis on the BBC,
> even the up-market Radio 4, and it is not always left leaning. The
> real problem is that there has been a dumbing down in general across
> all the media, and it is rare to have any really insightful analysis
> presented from a left or right perspective.
The BBC isn’t always “left-leaning” in that it supports what honest leftists think. But it is often statist, in the sense that it supports whatever interventions are considered appropriate by governments at the time. That was my point about the Irish bank guarantee, it wasn’t really a leftist policy, I think lots of honest leftists would have disagreed with it. But, it was a government intervention.
I agree that the media is quite “dumbed down” but I think that’s because people don’t think about these things very much. I live in Ireland where people are up-in-arms about the EU and the IMF. But, those people didn’t have any interest in politics beforehand. Because they are just responding to an event they don’t have a background of understanding. What’s developing here is an atmosphere of incoherent rage.
> “I think that’s perfectly true, but I’ll remind you that you used
> the word “banksters” earlier ;)” Touche – but in my defense they did
> make a hell of a mess…
As I said earlier the question is whether they were really to blame. It’s not as straightforward as many people think.
> “Anyway, I’m a utilitarian too, so I don’t think our ends
> necessarily conflict.”
>
> Possibly – but there may be a difference in our outlook. I said I am
> an empirical utilitarian. By this I mean I look at accumulated
> experience and evidence to decide if something increases welfare or
> not. In contrast, I think some people are what you might call a
> priori utilitarian, that is, they base their calculus of welfare on
> what general equilibrium theory predicts thereby building in
> numerous dubious assumptions about what actually happens in the real
> world. I don’t know if that applies to you or not.
I look at both. Both have there problems. As you say, in Economic theory there is the obvious risk of being wrong. I’m not particularly interested in general equilibrium analysis, but all methods of analysis potentially have problems. But, so similarly does “accumulated experience”.
If you think about it carefully there’s no clean distinction. Every significant idea or system of ideas has aspects of both. Ludvig Von Mises wrote “the evidence does not speak for itself, the evidence must be spoken about by a theory”. Amongst the “blossoming confusion of facts” (Jeffrey Friedman’s phrase) we must choose which to pick out, just doing that is a form of theorising.
I’m an engineer, when I do experiments in my lab I rely on physics theory. Theory may not tell me what will happen in a given situation, but it tells me where to look. Often I consider theory to be more accurate than my experiments and throw away the results of those if they contradict a well know physics theory. But, sometimes I question theory if the experiments are plausible.
In this case economics is similar to physical sciences. We must deal with both theory and evidence at once. They can’t really be fully divorced from each other. “Facts are theory laden” as someone said, someone famous who’s name I can’t remember right now.
(As a sidenote… Mises theory was not a priori in all or even most of it’s parts. The a priori part is about part of the foundations only. Mises thought that prioritization, and therefore marginalism, are be embedded in all concepts of purposive action.)
>> The problem with your view is that it sees distribution as
>> something inherently separate from production. But, in the ongoing
>> market process the two are closely interlinked. The state can’t
>> manipulate distribution without changing production. This argument
>> takes various forms such as that about the deadweight loss of
>> taxes, or how welfare encourages idleness. But, these arguments are
>> really all part of the general idea of looking at the economy from
>> the individual’s point of view. What everyone should remember is
>> that capital accumulation by society is an accumulative
>> process. So, the present has a great affect on the future.”
>
> Actually, I think this is critical. As I said in a response to mrg,
> wealth creation is a function of demand which in turn is a function
> of past wealth distribution (ie. the people with the wealth
> determine future production priorities). This means that any market
> equilibrium reached (which may be the most efficient allocation of
> resources at that time) will be a function of how the previous
> wealth was initially allocated.
Yes, that point was made by the original marginalists.
> I think there is good evidence in the post war period to show that
> by changing the initial allocation to a more egalitarian
> distribution a different future equilibrium is achieved which
> results in higher aggregate value, because different production
> priorities are chosen (ie. more lower cost goods with high marginal
> utility and fewer luxury goods with low marginal utility). Seen from
> this perspective, redistributive taxation (especially inheritance
> tax) creates wealth.
I don’t really agree.
Lets suppose that there is an uneven distribution of wealth in some progressing market economy at some particular time. Those individuals who have wealth have more power to demand, so producers will satisfy their demands. But, that doesn’t mean that the same situation continues forever. Because profits come to those entrepreneurs who are best at satisfying demand, and wages to those workers who are best at their work. If those initially rich wish to continue to hold that power to demand then they must only spend their income. And, if they don’t have ability as entrepreneurs or workers then that income will not keep pace with that of others.
It could be argued that redistributive taxes and inheritance taxes accelerated the process of change in a positive way that led to more for the common man. I find that doubtful for three reasons.
Firstly, despite the tendency of some to regard the 19th century as a time of aristocracy there was competition at almost every level. Capitalists and entrepreneurs competed with each other, professional and non-professional workers competed too. It’s by no means true that those who were rich in 1950 had got that way by aristocratic privilege. Inheritance tax laws and redistributive taxes affected both those who had made their money in the marketplace and those who hadn’t.
Secondly, even in the 19th century the focus of capitalism was on producing consumer goods for the masses. The industries that were the focus of the industrial revolution were common consumer goods such as cloth, kitchenware and soap. The other focus was on producer goods such as cheap power from steam and transport from canals and rail. Those things help transport good demanded by all classes. Government intervention isn’t really required to focus the market in this direction.
Thirdly, richer people generally have a lower time-preference than poorer. That’s because they can afford to have that preference. For this reason redistributing from the rich to the poor means that more is spent on consumer goods and less is saved. This acts as a drag on economic growth for all.
> “Suppose that I have 10 ounces of gold and I lend that to Jim. He
> then has 10 ounces of gold. I also have a certificate saying that
> Jim must pay me back with interest, and Jim has a certificate saying
> that same thing. The point here is that nobody makes a great gain
> from nothing.”
>
> This is fine if the gold is yours, but what if Dave gave it to you
> (in exchange for gold certificate) for safe keeping and fully
> expects to be able to claim it back from you at any time?
If I promised Dave a bailment then I have broken the law. If what we agreed was a debt contract then I haven’t broken the law.
> By lending it to Jim you have created a simultaneous claim on the
> same quantity of gold and thereby doubled the money supply because
> there are now 20 ounces of gold certificates circulating (both
> Dave’s and Jim’s).
I’m not denying that FRB can create money, it certainly can. I’m denying that this is inherently dishonest – it isn’t. Throughout history people have agreed to it knowing full well what they were doing.
> This is fractional reserve banking, and this is how banks create
> debt (and hence money) out of nothing,
Again, where is the “nothing”, debt is not nothing. Unless you are going to argue against all debt and credit relationships I don’t see how you can maintain this argument.
> and why they are always
> vulnerable to a bank run. In my view we should move to 100% reserve
> banking (bankers genuinely acting as brokers between savers and
> borrowers by ensuring that the length of deposits matches the length
> of loans and there is no simultaneous claim on the same assets)
In FRB there is no “simultaneous claim on the same assets”. Where “claim” means “bailment”. A banknote is not a bailment, it is a debt. It doesn’t create “inconsistent property rights” because it isn’t a property right like a title, it’s a contract.
> and leave the creation of new money to the Government. There should
> be a zero inflation target and the Government should spend new money
> into existence as required to meet this target. The Government would
> collect the seignorage value and would therefore be able to reduce
> taxation of other kinds. By the way, since you mentioned
> Rothbardians before, I think Rothbard’s The Mystery of Banking is an
> outstanding critique of all that is wrong with the modern banking
> system, even if I don’t agree with his solutions. He would probably
> have approved of the term banksters!
I think Rothbard would have loved the term banksters. But, Rothbard
was wrong about some things and this is one of them.
See my discussion with Stephen in the thread here:
https://www.cobdencentre.org/2010/10/huerta-de-soto-hayek-lecture/
“I look at both. Both have there problems. As you say, in Economic theory there is the obvious risk of being wrong. I’m not particularly interested in general equilibrium analysis, but all methods of analysis potentially have problems. But, so similarly does “accumulated experience”.”
Coincidently, I’m an engineer as well, and I think that there is a fundamental difference between natural science and economics, namely, we cannot do controlled experiments in economics. This means that a theory in physics – which has not been disproved over literally thousands of controlled experiments – has a status worthy of being called a law. This means that if your latest experiment is apparently in conflict with a well established law, you are absolutely correct to be wary of accepting your experimental data – you have probably made a mistake. But this is simply not true of economics: we cannot conduct controlled experiments so there are no laws in this sense and there never can be (no matter how many obscure equations economists invent to describe their theories). This means that economic theories must always be treated with extreme caution and empirical facts must always take precedence over theory.
“Again, where is the “nothing”, debt is not nothing. Unless you are going to argue against all debt and credit relationships I don’t see how you can maintain this argument.”
I don’t think we disagree about anything material here, we are just discussing the meaning of the word ‘nothing’. I also think you are splitting hairs again with your distinction between a bailment and a debt: I know this is an important distinction in law that makes FRB perfectly legal (although Rothbard thinks this is precisely where the law took a wrong turning), but it does not change the underlying situation. The fact remains that if all claims on the underlying asset (either gold or reserves at the Bank of England) were to be made simultaneously (a bank run), the bank would be unable to meet its obligations. This is the sense in which debt (and hence money) is created out of nothing: there is a gap between reserves and obligations and ‘nothing’ is in my view a perfectly fair description of this gap – because that is exactly what you would get if you are the unfortunate depositor who is the last to claim his gold.
In any case, this is all secondary to my original point which is that it is not the Government that creates the vast majority of new money that comes into existence: this is done by privately owned commercial banks, steered by the independent Bank of England. So when people talk about inflation as a ‘stealth’ tax this is simply wrong, for two reasons. First, the Government does not control the process of money creation, or only very indirectly through setting a (public and transparent) inflation target. So there is no mechanism, as the law stands, for the Government to inflate out of debt by stealth. It can only explicitly change the inflation target to a much higher level, which would not exactly be stealthy would it? Second, it is, in any case, the person who creates the new money who captures both the value of seignorage (the difference between the cost of creating money and its value), and the long term value of debasing the money supply (because they get to use the money first and lend it at interest before its inflationary effects have cascaded through the economy). It is true that short bursts of high inflation (which under the current monetary policy framework the Government cannot engineer) transfer wealth from creditors to debtors (from which the Government as a net debtor can benefit). But under the normal run of things with a relatively low inflation target (2.5%), it is the private banks that capture the value of debasing the money supply and not the Government.
Oh yes, Hong Kong, that power house of manufacturing that Durkin was so emphatic we should emulate….. ah, no – the little bit of HK that he chose to shoot is occupied by bankers and we all know what they make don’t we. Maybe a short walk around the other part of Hong Kong (Kowloon) would have shown a better balance of Hong Kong’s true self. Like many other regions of the modern world, it too has two sides.
Durkin almost bordered on intelligent comment when he reminded us that Britain funded two major conflicts, which had a major impact on raising taxation…but promptly neglected to include it as a fact in any further consideration. Likewise, low taxation in the 18th century didn’t fund education for the masses, nor any sort of public health facility….sadly these cost money and private enterprise displayed total disregard for 150 years to provide either so Government, thankfully, took charge. I think poor houses and back street quackery are certainly worth archiving to history.
Of course, public sector did have ability to produce viz. electricity, gas, water but we gave those away to our European friends, who by the way still have industry because they didn’t consider it intelligent to control their Unions by closing the industry the Unions represented.
And finally, great store was made of the fate of private sector business that fails; apparently they don’t get paid. Would RBS, Lloyds and TSB be good examples of such, or have I missed the point?
I think Channel 4 should be commended on bringing Daily Mail quality comment to our screens.
I’ve just been sent something with a different slant to Durkin’s programme:
http://www.pcs.org.uk/en/campaigns/campaign-resources/there-is-an-alternative-the-case-against-cuts-in-public-spending.cfm
I think I disagree with this more than I do with Durkin, but it’s certainly a different side to the discussion….!
Recharge,
> “I look at both. Both have there problems. As you say, in Economic
> theory there is the obvious risk of being wrong. I’m not
> particularly interested in general equilibrium analysis, but all
> methods of analysis potentially have problems. But, so similarly
> does “accumulated experience”.”
>
> Coincidently, I’m an engineer as well, and I think that there is a
> fundamental difference between natural science and economics,
> namely, we cannot do controlled experiments in economics. This means
> that a theory in physics – which has not been disproved over
> literally thousands of controlled experiments – has a status worthy
> of being called a law. This means that if your latest experiment is
> apparently in conflict with a well established law, you are
> absolutely correct to be wary of accepting your experimental data –
> you have probably made a mistake. But this is simply not true of
> economics: we cannot conduct controlled experiments so there are no
> laws in this sense and there never can be (no matter how many
> obscure equations economists invent to describe their
> theories). This means that economic theories must always be treated
> with extreme caution and empirical facts must always take precedence
> over theory.
This is a complicated subject and an interesting one. To begin with I must say that I think it’s not wise to talk about “scientific law”. As you know, even in the natural sciences it isn’t really clear what a law is. There are mearly some things that we are much more sure of than others.
It’s not entirely true that we can’t do experiments in economics. Vernon Smith has shown how it’s possible to do simple experiments. Though we may still doubt how significant those experiments are, and I certainly share the doubts of many people about some of Smith’s experiments.
However, I don’t think that the difficulty in performing experiments on overall economies and such is as critical as people often suppose. There are still many facts that can be used to aide economic thought. For example, for macroeconomic theories it’s very important that they be consistent with microeconomics. This was my original point in comparing the situation in physics. Microeconomic theories are perhaps not as certain as Maxwell’s equations (though I would argue there is not that much of a gap). But, macroeconomist cannot ignore them. That doesn’t mean that we must all agree with the New Classicals they present only one attempt to make micro consistent with macro, there are several others.
You write: “empirical facts must always take precedence over theory.”
I’ll just quote what I said above:
> If you think about it carefully there’s no clean distinction. Every
> significant idea or system of ideas has aspects of both. Ludvig Von
> Mises wrote “the evidence does not speak for itself, the evidence
> must be spoken about by a theory”. Amongst the “blossoming confusion
> of facts” (Jeffrey Friedman’s phrase) we must choose which to pick
> out, just doing that is a form of theorising.
My point here is that empirical facts *cannot* take precedence over theory. Simple minded empiricism can’t be done in economics. All “facts” are theory laden. This is what Keynes’ meant when he said that even “practical men” are normally “slaves of some defunct economist”.
One of the best examples of this is discussions about GDP. Critics of economic theorising will often says that some particular policy has led to growth in real GDP. This involves far more economic theorising than the critics are often willing to acknowledge. There are three important theories involved in this line of thinking that aren’t at all trivial.
Firstly, there is the theory that GDP itself is significant. Real GDP is a measure of real output flow. The link between that and aggregate utility or happiness is very indirect. The link is especially tricky for the investment component of GDP, relating that to future flow of consumption goods isn’t at all simple.
Secondly, the how quickly does GDP respond to changes in policy. Here there is another hidden theory. If someone says that a change in policy at time X causes something to happen at time Y then they are making a theory about how quickly the change has an effect.
Thirdly, the idea that the rise in GDP is essentially beneficial rests on a great deal more theory. This applies if the rise in GDP comes mostly from the consumer spending or mostly from the investment. There are problems with relating both directly to future prosperity.
(I’m not really sure if it’s necessary to tell you all this seen as you’ve given so many economic theories on this forum so far anyway.)
> “Again, where is the “nothing”, debt is not nothing. Unless you are
> going to argue against all debt and credit relationships I don’t see
> how you can maintain this argument.”
>
> I don’t think we disagree about anything material here, we are just
> discussing the meaning of the word ‘nothing’. I also think you are
> splitting hairs again with your distinction between a bailment and a
> debt: I know this is an important distinction in law that makes FRB
> perfectly legal (although Rothbard thinks this is precisely where
> the law took a wrong turning), but it does not change the underlying
> situation. The fact remains that if all claims on the underlying
> asset (either gold or reserves at the Bank of England) were to be
> made simultaneously (a bank run), the bank would be unable to meet
> its obligations.
What you’ve said doesn’t mean that the commercial bank is creating “money out of nothing”.
Note the for a solvent bank the only reason that a run may result in bankruptcy is because of fire-sale losses. That is, because the bank must sell it’s assets at below market value in order to acquire reserves. That gap may be covered by shareholder’s capital.
The situation a bank faces is no different to the situation many companies face. Consider an insurance company. If all policyholders claimed at once then the insurance company couldn’t meet the claims. Similarly, if all people with HP PCs called HP tech support then HP wouldn’t be able to cope with the volume of calls.
> This is the sense in which debt (and hence money)
> is created out of nothing: there is a gap between reserves and
> obligations and ‘nothing’ is in my view a perfectly fair description
> of this gap – because that is exactly what you would get if you are
> the unfortunate depositor who is the last to claim his gold.
Remember that the gap between the banks reserves and the banks obligations is the amount of assets the bank has, it isn’t “nothing”. Let’s suppose that there is a run and you present your note to the bank, and they cannot redeem it, they are bankrupt. Certainly someone demanding redemption gets nothing at that time. In that case they will be taken through a bankruptcy procedure, such as administration or liquidation. The administrator will sell of assets in order to pay creditors such as noteholders. What that means is that if the bank’s liabilities exceeded the value of it’s assets then the creditors will not be fully paid. Whether you get something for your note doesn’t just depend on how much gold the bank have.
Like various other posters on this site you are presuming that bank runs occur essentially randomly. That because the flow of redemptions is supposedly very uncertain that on some day there may be a run. This isn’t how bank runs occur. In practice the flow of redemptions is quite predictable. In general, and there are very few exceptions, this what happens. A run on a bank occurs because it’s customers doubt that it has sufficient assets overall, not sufficient reserves.
Put yourself in the shoes of a current account holder. Your balance provides you with banking services, which is why it’s useful to have a bank balance rather than just keeping cash. What is the point then of redeeming your balance if your bank is solvent?
> In any case, this is all secondary to my original point which is
> that it is not the Government that creates the vast majority of new
> money that comes into existence: this is done by privately owned
> commercial banks, steered by the independent Bank of England.
Certainly. However, the Bank of England isn’t “independent” in the sense of being separate from government. The BoE is a government institution, one owned by the government. It is “independent” in the sense that it’s decisions are not supposed to be based on short-term politics. In a sense it’s rather like the newly established independent parliamentary standards authority.
> So when people talk about inflation as a ‘stealth’ tax this is
> simply wrong, for two reasons. First, the Government does not
> control the process of money creation, or only very indirectly
> through setting a (public and transparent) inflation target. So
> there is no mechanism, as the law stands, for the Government to
> inflate out of debt by stealth. It can only explicitly change the
> inflation target to a much higher level, which would not exactly be
> stealthy would it?
To some degree I agree with this “Wicksellian” argument. The government announces an inflation target we can expect they will come reasonably close to meeting it. As such we will adjust our expectations accordingly.
But, there are three problems with this view. Firstly, the “independence” of the Bank of England is strictly limited. During the past couple of years inflation targets have been regularly overshot without any complaint from the government. I expect that had they not being overshot that the board of the BoE would have been in trouble.
Secondly, the BoE only target the price of output. They don’t target prices overall, asset prices play no part in their system.
Thirdly, this doesn’t mean that there isn’t a seignourage tax. Let’s suppose that I decide I need to keep ~200 euros in my wallet at all times. I’d do that because of what the sum can buy, and I may do it in the knowledge that what it can buy is diminishing. But, this knowledge doesn’t mean that I don’t lose out because of price inflation. I do lose out relative to money with a stable purchasing power.
> Second, it is, in any case, the person who creates the new money who
> captures both the value of seignorage (the difference between the
> cost of creating money and its value), and the long term value of
> debasing the money supply (because they get to use the money first
> and lend it at interest before its inflationary effects have
> cascaded through the economy). It is true that short bursts of high
> inflation (which under the current monetary policy framework the
> Government cannot engineer) transfer wealth from creditors to
> debtors (from which the Government as a net debtor can benefit). But
> under the normal run of things with a relatively low inflation
> target (2.5%), it is the private banks that capture the value of
> debasing the money supply and not the Government.
When there is a short burst of unexpected inflation both the
government through the central bank and the commercial banks benefits.
However, the normal situation for commercial banks is quite different. A commercial bank cannot produce money without assets. To us ordinary citizens a bank balance is an asset, but to the commercial bank money it is a liability. It must have assets which more than cover the value of it’s liabilities.
But for a government things are different. The government has a great deal of power over the monetary system through it’s control of the law and taxation. It may be argued how great this power is. But, it has allowed governments in the 20th century to eliminate the gold standard. When a government creates a unit of money, such as a £5 note it isn’t creating a liability. It has no duty to pay anything back. To an ordinary citizen a £5 note is an asset *and* it is an asset to government.
Banks can benefit because the value of their liabilities is tied to value of the fiat money. If the government unexpectedly and secretly issue large amounts of base money then the the banks can buy assets at prices that will turn out to be very cheap. (See the article from Mises’ “Economic Policy” posted today).
But, in the normal situation that doesn’t happen. Certainly they get an interest free loan from current accounts that don’t pay interest. But, they must compete for that business against other banks. That means they must provide good banking services or interest or both. They would get that income even if money were rising in value, or if there were no central bank.
Current,
We have strayed a long way from the original discussion and I fear this will require a very long post to answer your post in any detail as we are getting into deep philosophical water. I will just come back quickly on a couple of points.
“My point here is that empirical facts *cannot* take precedence over theory. Simple minded empiricism can’t be done in economics. All “facts” are theory laden. This is what Keynes’ meant when he said that even “practical men” are normally “slaves of some defunct economist”.”
My point is only that we will never be able create ‘laws’ in economics that have the same status as the laws of thermodynamics for example. This means that we must be much more cautious in asserting what will or might happen based on an economic theory, and we would be better off looking at what actually does happen. This means lots of small (and imperfect) experiments and incremental adjustments and not one grand unifying theory.
Remember that the gap between the banks reserves and the banks obligations is the amount of assets the bank has, it isn’t “nothing”. Let’s suppose that there is a run and you present your note to the bank, and they cannot redeem it, they are bankrupt. Certainly someone demanding redemption gets nothing at that time. In that case they will be taken through a bankruptcy procedure, such as administration or liquidation. The administrator will sell of assets in order to pay creditors such as noteholders. What that means is that if the bank’s liabilities exceeded the value of it’s assets then the creditors will not be fully paid. Whether you get something for your note doesn’t just depend on how much gold the bank have.
But, as you know, in fractional reserve banking most of those assets are IOUs, which in turn are deposits at other banks. This means that if bank A has to access these assets to pay its depositors, it will call in its loans, which means the depositors at bank B will have to withdraw their money to pay back the loan from bank A, bank B will now call in its loans, which means the depositors at bank C will have to withdraw their money to pay back the loan from bank B, bank C will now call in its loans, which means the depositors at bank D will have to withdraw their money to pay back the loan from bank C…. and so on until the entire system collapses because there is a deficit between reserves in aggregate and the claims on those reserves in aggregate (ie. nothing). This is just the way the system works and I don’t know why you are being so stubborn on this point.
We have probably done this to death now and it has been an interesting discussion. I made my original post because I was annoyed with the glib comments supporting Durkin because I thought (and still think) that the programme was a pitifully poor quality analysis of the situation. No one has refuted that point, only justified it on the grounds that the bias is (in their view) normally the other way around. For that reason, I don’t think Durkin did your cause any favours. You would be better off making a follow up programme yourself Current – it would at least be intellectually coherent (although I am sure I would disagree with it) unlike the dog’s breakfast that Durkin served up.
> We have strayed a long way from the original discussion and I fear
> this will require a very long post to answer your post in any detail
> as we are getting into deep philosophical water. I will just come
> back quickly on a couple of points.
Yes, I know what you mean. I’m glad you haven’t come back with pages and pages since I’m quite busy at present.
>> “My point here is that empirical facts *cannot* take precedence
>> over theory. Simple minded empiricism can’t be done in
>> economics. All “facts” are theory laden. This is what Keynes’ meant
>> when he said that even “practical men” are normally “slaves of
>> some defunct economist”.”
>
> My point is only that we will never be able create ‘laws’ in
> economics that have the same status as the laws of thermodynamics
> for example.
As I said earlier I think we should be careful with the word ‘laws’ and the arguments surrounding it. People can claim things that are very uncertain in any science. The difference between sciences isn’t really that some of them are more certain than others. I think the difference that most people are really thinking of in this type of discussion is in the utility of the portion that is quite certain.
The problem with economics isn’t so much that it doesn’t allow things to be said great certainty. It’s rather that those things that are very certain are not useful by themselves. Simple theories about marginal decisions are really very certain at least about how people intend to act, but they aren’t useful by themselves.
> This means that we must be much more cautious in asserting what will
> or might happen based on an economic theory, and we would be better
> off looking at what actually does happen. This means lots of small
> (and imperfect) experiments and incremental adjustments and not one
> grand unifying theory.
I certainly agree that we would be better off making incremental adjustments, though for different reasons.
I disagree with you though about “grand unifying theory”, and about the supposed advantages off “looking at what actually does happen”.
How can we “look at what actually does happen”? As I think I illustrated by my previous examples in economics there is no way to make naive empiricism useful. Our “facts” about what “actually does happen” contain counter-factual theories about economics. (BTW Hayek wrote a book on these issues called “The Counter-Revolution of Science”).
We agree that economics is difficult, but it’s not difficult like aerodynamics for example. In aerodynamics the theory is difficult and doesn’t always work very well. But, the simple empiricism of one sort or another is quite possible. Sytematic and isolated experiments can be done. Economic’s difficulties come from all sides.
Let me put it like this: if you think it is possible to do simple empiricism then please explain how.
>> Remember that the gap between the banks reserves and the banks
>> obligations is the amount of assets the bank has, it isn’t
>> “nothing”. Let’s suppose that there is a run and you present your
>> note to the bank, and they cannot redeem it, they are
>> bankrupt. Certainly someone demanding redemption gets nothing at
>> that time. In that case they will be taken through a bankruptcy
>> procedure, such as administration or liquidation. The administrator
>> will sell of assets in order to pay creditors such as
>> noteholders. What that means is that if the bank’s liabilities
>> exceeded the value of it’s assets then the creditors will not be
>> fully paid. Whether you get something for your note doesn’t just
>> depend on how much gold the bank have.
>
> But, as you know, in fractional reserve banking most of those assets
> are IOUs, which in turn are deposits at other banks. This means that
> if bank A has to access these assets to pay its depositors, it will
> call in its loans,
In most circumstances the ownership of a loan can be changed. That is, rather than calling in a loan all that need happen is that an new owner for the loan must be found. The loan can be sold as a bond rather than called in.
In some circumstances the bank can’t legally call the loan in. When it can the decision the bank must take is which path will yield the best return, to call in the loan, or to sell it. If it calls in the loan then the borrower may be able to pay the full amount or the bank may sieze the loan collateral and sell it. To summarize, a bank would only call in a loan if it believes that the borrower would pay whereas the rest of the market believes that the borrower wouldn’t pay.
> which means the depositors at bank B will have to withdraw their
> money to pay back the loan from bank A, bank B will now call in its
> loans, which means the depositors at bank C will have to withdraw
> their money to pay back the loan from bank B, bank C will now call
> in its loans, which means the depositors at bank D will have to
> withdraw their money to pay back the loan from bank C….
It’s quite true that there is a risk of what people today call “contagion”. But, the risk is often exaggerated.
If a bank goes bankrupt then the banking industry as a whole must take up the role it once filled. Banks that are highly connected to the failing bank are certainly at greater risk. But, it’s not quite how you characterise it loans don’t necessarily need to be called in in great volumes. (In the recent crisis AFAIK they weren’t).
> and so on
> until the entire system collapses because there is a deficit between
> reserves in aggregate and the claims on those reserves in aggregate
> (ie. nothing). This is just the way the system works and I don’t
> know why you are being so stubborn on this point.
It’s easy to claim that banking crises stem from a deficit of reserves overall. Rothbardians claim that if banks were 100% reserved then crises would not occur. (I don’t really believe that but that’s an argument for another day). But, for the purposes of this discussion let’s presume that it’s true. That still doesn’t demonstrate that banking crises are caused by a deficit of reserves. Or that we are better off with full reserves.
Israel Kirzner made a useful distinction between mistakes of commission and mistakes of omission. Let’s suppose that I decide that I’m not going to trust anyone. I buy a hut in a forest and live by myself, on what I can hunt and grow myself. I believe that by doing this no-one will ever betray my trust, so that risk is eliminated from my life. The mistake I would make if I were to do this is confusing a situation with trade-offs for one without them. By not trusting anyone I make life much more difficult for myself in other ways. This is an error of omission. If I decide to live life as I do within civilization then I run the risk of breaches of my trust, but I also benefit. When I trust someone in error that is an error of commission.
The Rothbardian approach is rather like going to live in a forest. It’s quite right that with 100% reserves there would be less chance of systemic banking problems. However, that’s not a choice taken without trade-offs. The trade-off is the greatly reduced funds available for investment. That contagion may occur doesn’t mean that fractional-reserve banking is necessarily a bad thing overall.
More importantly though banking crises don’t occur as Rothbardian allege they do. Banking crises in the past haven’t really stemmed from the deficit of reserves per se. In general banks have always been fractionally reserved throughout history. Crises have stemmed from lack of trust in assets held by the banks.
Let’s suppose we have a contagion situation as you describe above. Let’s suppose that bank A enters receivership. In that case will the receivers call in it’s loans? It unlikely, most likely they will sell them to another bank. They will recall only that proportion that they can’t sell but can recall.
What about the banks affected by the recalls? Well, if the borrowers take money out of there accounts to pay bank A then those other banks, B etc, must sell assets to purchase more reserves. But, that would only bankrupt them if they didn’t have assets to sell. (Also, it’s very unlikely that borrowers would do this anyway, in the vast majority of cases borrowers don’t keep the money they have borrowed, they spend it or invest it. So, recalls would lead to collateral being seized.)
The real contagion problem is with the value of assets. If the bankrupt bank was really insolvent, and that’s most likely, then it’s creditors won’t all be paid the full amount. Many of those will be other banks. It’s likely that when fire sales occur there will be more losses because of the information asymmetry between those selling and those buying. But, none of this means the whole financial sector will collapse.
I could talk about this much more, and I have on other threads here. See the articles from Larry White, Steve Horwitz and George Selgin too.
> You would be better off making a follow up programme yourself
> Current – it would at least be intellectually coherent (although I
> am sure I would disagree with it) unlike the dog’s breakfast that
> Durkin served up.
Thanks, but alas I’m not a TV producer. I agree a much, much better job could have been done.
Recharge,
Your post mixes two different subjects, long-run growth and the effect of government debt. I’ve reordered it to make my answer clearer.
First the parts about government debt:
> I actually think the Government will do all it can to pay those
> pensions and it is certainly less risky to take equity risk on the
> UK economy than on any individual company.
Yes. But, that a government’s debt has lower risk is not a magical property of governments. It stems from the fact that a government operates by taxing a population, which is a reliable source of revenue. A government runs a sort of monopoly and can afford to operate very conservatively.
I’m not criticising governments for doing this per se. I’m not an anarcho-capitalist, I’m a classical liberal, I believe in some form government is needed. My point is that they only spread debt risk they don’t remove it.
The uncertainty is transferred onto taxpayers who cannot be sure that the government won’t raise taxes unexpectedly to pay debts or debt interest.
In my view this is inferior to private pensions in the long run because private individuals have a strong interest in taking care of their financial situation. Governments however have no long-term interest, they look only towards the next election.
> Let’s run a few numbers and see how risky it looks that the
> Government will not be able to pay…. Let’s assume the following:
>
> * the economy grows on average at 2.5%/year
> * the total pension liability is £6tn (let’s be really pessimistic)
> * the liability will be paid over 60 years
>
> This means that the liability will be £100bn/year on average over
> the 60 year period. However, over this 60 year period, if the
> economy grows at 2-3 percent, it will roughly quadruple in size
> (such is the power of exponential growth) and GDP will be £6tn by
> then. This means that the average size of the economy over the
> period will be somewhere around the £3.5tn mark. So the liability
> actually amounts on average to £100/£3500 or 2.9% of GDP. This
> compares with 8% on health, 7% on welfare (this actually peaked at
> 12% under Mrs Thatcher in the early 80s), 6% on education and 3% on
> defence. So it doesn’t really look that onerous does it? Let’s be
> even more pessimistic and assume that the liability peaks at
> £300bn/year when GDP is £2.5tn (ie. about 20 years from now). This
> still amounts to only 12% of GDP (the welfare bill under Mrs
> T. remember). So there really is not a problem if you believe in
> indefinite exponential economic growth.
I agree with you that economic growth will solve the problem in the end. But, I don’t really agree with you calculation here.
I’ll prefix this by saying that I don’t really hold much store behind these sorts of GDP based calculations, but that since you’ve proposed the problem that way that’s how I’ll answer it.
As I understand it you’re assuming that £100bn/year in real terms must be paid in pensions. At the beginning of the 60 year payment process you propose the amount paid back must be much larger in real terms than it is at the end. If we are to pay £100bn this year then that is ~7% of GDP. That means that many taxpayers living in the next ten years will receive lower real incomes. They will miss out on ~3 years of economic growth.
A more Austrian analysis may cast doubt on the 2.5% growth assumption. The government debt issue indicates that we have been “living beyond our means” and should have saved more and consumed less in earlier years.
> I assume (maybe wrongly) that you, like most libertarians and
> rightists, believe that almost all environmental and resource
> depletion concerns are nonsense and that with the right dose of free
> markets to generate the necessary technological innovation all
> conceivable environmental and resource constraint problems can be
> solved. In other words, you assume that indefinite exponential
> economic growth is possible.
>
> So now we get to what I think is the real problem, namely:
> indefinite economic growth is not possible. There are physical
> limits, and I think we are getting pretty strong signals (largely
> ignored unfortunately) that we are bumping up against them (climate
> change, peak oil, fish stock depletion, deforestation, reduction in
> biodiversity … I could go on). So the fundamental problem is that
> we will not be able to grow, and this goes way beyond an issue with
> debt and pensions: this means a fundamental re-assessment of the way
> we live in which the pensions issue is just a flea on the
> elephant. I honestly believe that there is going to be a huge
> reckoning in the next couple of decades or so as people realize that
> the dream of eternal growth is just that, and that is when the state
> will have an even larger role to play in managing the (extremely
> nasty) fall out. But, like I said, for you “growth men” the pension
> and debt issue is simply not a problem.
You’re quite right that I’m positive about the long run.
Like many people who are attracted by Rothbard’s “hard money” theories I think you are too concerned with physical things, and you interpret economics in a too physical manner.
Increasing GDP doesn’t necessarily mean increasing consumption of resources. And, what constitutes a useful resource depends on the technology and capital available.
Of course growth does depend on human ingenuity, but that doesn’t mean that the idea of it continuing depends on some very positive view of humans. Because we depend on the capital, technology and scientific production of previous generations we are in a better position than any generation before.
There are many marginal changes that can be made that add up in aggregate. As time progresses technology and investment will provide more of them.