Category Archives: Getting Wealthier?

The credit crunch: an effect not a cause

Robert Henderson

 How did we get  into this economic hole?

What we are experiencing is a direct consequence of the dominant economic ideology of the age, laissez faire, an ideology which underpins the general political ideology of political elites in the West, the form of liberal internationalism we call globalism.

This neo-Liberal mentality has brought us to the brink of what is probably the most dangerous economic crisis since the Depression. Perhaps it may turn out to be even more disastrous because countries throughout the world (including Britain) are now so much less self-sufficient than they were in the 1930s, while the scope and speed of communications are beyond anything in existence during the Depression.

Most problematic are the immense and entirely novel opportunities permitted by digital technology, a technological development particularly pertinent to the money markets which are at the root of the credit crunch. No one remotely understands the medium-term let alone the long-term implications for the money markets of the creation of a universal market for every form of financial instrument, which is what the Internet potentially provides, or its potential for destabilising currencies. All that can be done at present is to guess, and guessing when the lives and prosperity of entire populations are at stake is a criminally reckless gamble.

 The consequences  of Thatcherism 

There have been outbreaks of  free market and free trade ideological  dominance in Britain from  the 1840s onwards,  but  since  Margaret Thatcher came to power in 1979 the worship of the laissez faire god has become more devout than ever.

Thatcher introduced something quite new. For the first time in history, a British prime minister and government actively welcomed the wholesale destruction of strategically important industries on the grounds that they could not compete. The doctrine of comparative advantage was pursued by the government in an advanced economy to a degree never previously seen. At the same time she emasculated the unions and began

recklessly selling the family silver with  her introduction of  the idea of privatisation which rapidly placed  almost all of the important nationalised industries in private hands.

Mrs Thatcher was also responsible for one great political act of folly in the name of laissez faire when she successfully fought for the Single European Market. The consequence of this was to rob Britain of its ability to favour its own industry economically (beyond what was already being done) and gave any citizen of another EU country the same rights as a British citizen to be employed in Britain or for any foreign corporation to bid for any public sector contract offered in Britain.

Her ultimate triumph was not only to drive the anti-laissez faire strain from her own party, ( a strain which had survived during previous bouts of  laissez faire dominance) but to eventually force the rest of the British political mainstream to follow suit. The upshot today is that the three major political parties in Britain have as articles of faith both a commitment to free trade and the belief that private enterprise is preferable to public provision in virtually every area or life.

The latter belief has created a novel situation in Britain. Great swathes of economic activity which were once controlled by the state – everything from the great nationalised industries to prisons – have been either sold off or contracted out to private companies.  Once privatised, these erstwhile public operations have become prey to foreigners. Because of post-1979 British governments’ commitment to laissez faire, anyone is allowed to purchase any British company, no matter its strategic importance, and most public contracts are given to the highest bidder regardless of their provenance. Nor in most instances (because of Britain’s membership of the EU) can the privatised industries be subsidised by the taxpayer, a particularly telling restriction in the case of the old public utilities when energy prices are rocketing.

Today, British utilities such as gas, electricity and water are largely in foreign hands, our major airports are owned by Spaniards, we no longer have serious mining or shipbuilding industries, and our largest native owned car manufacturer is the company which produces the Reliant Robin. In addition, many of the iconic names of British business – Bentley, Roll-Royce cars, Tetley Tea, ICI, Cunard, British Steel – have fallen to foreign buyers, while the supposed flagship of the British economy – the City of London – has seen the wholesale transfer of British merchant banks to foreign ownership. The present government has even stood sanguinely by while the London Stock Exchange has come under persistent foreign take-over attempts.

What the credit crunch  is not about

It is not about levels of government spending, although that is probably the next great economic shock which will hit Britain as the economy slows, tax revenues stagnate, the  Public Sector Borrowing Requirement grows and the Enron-style ‘off the books accounting’ involved in the Public Private Partnership (PPP) and Private Finance Initiative (PFI) schemes becomes impossible to hide.

What this crisis is about is the virtually unrestrained working of private enterprise, which has created a titanic pile of indebtedness ranging from dangerously generous mortgages to unsecured debt, much of it promiscuously and casually granted with a significant proportion going to people providing false information.

At the heart of the crisis lies the bundling of risky loans (especially mortgages in the United States – the so-called sub-prime mortgages) into financial packages. These have  been sold on and treated not as toxic debt but much better quality debt, debt which could be used by the banks as collateral against which to borrow. Eventually the game was up as people (especially in the United States) began defaulting on payments and banks stopped lending freely to one another because much of the debt they held was seen for what it was, toxic. Banks had to write off bewilderingly large amounts in bad debts and their store of useable collateral to set against future loans was much reduced.

This crisis is a peculiarly difficult thing for free marketers to explain. They cannot rationally blame it on too much government interference, because British financial institutions have been allowed to run their affairs largely unchecked by government for the better part of a quarter of a century, a process begun by the Thatcher governments when they threw away credit controls, permitted the de-mutualisation of building societies and their transformation into banks (which placed them under less rigorous rules regarding what they could borrow and lend) and generally slackened financial controls and state oversight.

These practices have been assiduously followed by successor British governments, who have failed to control the development of exotic financial instruments such as derivatives and by relinquishing the power to set Bank Rate (Bank Rate being, in theory at least, set by a body independent of the government, the Monetary Policy Committee (MPC) of the Bank of England) and by embracing fiscal restraints imposed by the EU, such as restrictions on state aid to industry and restrictions on the setting of VAT rates.

The upshot is that the present government is left with only two very general means of controlling the economy, the variation of taxation and of government borrowing and spending. These are hopelessly inadequate instruments to deal efficiently with the multifarious financial problems which arise in an advanced economy. For example, if  credit is growing too fast, raising taxes to take money out of the economy may actually fuel further borrowing, at least in the short term, as people try to service the debts they have and to maintain their standard of living, while the additional taxation will have the unwanted extra effect of depressing the economy.

Alternatively, cutting taxes could conceivably reduce borrowing, although human nature being what it is people might actually feel more confident about the future and hence even more willing to borrow. However, even if such action reduces borrowing it will tend to worsen inflation because the amount of money put into the economy will probably be larger than any reduction in borrowing.

The setting of Bank Rate by the MPC is arguably a third weapon in the government’s armoury, because the MPC works to a narrow government set remit of controlling inflation within certain limits and the government has a considerable say, both directly and indirectly, in the appointments to the MPC. The behaviour of the MPC in crisis conditions suggests that they will do what they think politicians want rather than sticking to their remit. For example, they have dropped interest rates in the past eight months when inflation is rising. However, even if the setting of Bank Rate is a third weapon in the hands of the British government, it suffers from the same deficiency as the other two, namely, that it is too broad a measure to deal with many economic difficulties. Worse, since the credit crunch began, the interest rates charged by the banks and other lenders (especially on mortgages) have not shadowed the reductions in Bank Rate as history suggests they should do, but have stayed stubbornly and significantly above Bank Rate.

Of course, all economic interventions by governments have consequences which go beyond the narrow desired ends of the intervention, but the more economic weapons in a government’s hands, the greater the likelihood that they will be able to find one which is best suited to solve a particular problem with the minimum of unwonted side effects. For example, if the multiplier of salary for mortgages had remained by law no more than two times salary throughout the past quarter century, the housing market would have been pegged back by what most people could afford to borrow.

The money supply

There is a vital technical reason why government should control credit: it increases the money supply. To understand why this is of fundamental  importance, it is necessary to comprehend  what constitutes money, a concept which is far from straightforward in the modern world and growing more complex by the day.

A currency based on precious metals formed into coins is a relatively simple thing, because it is to a large degree self-regulating. The practices of debasing the quality of the metal or of clipping the edges of coins to remove some of the metal may be common, but such things can be tested objectively by anyone with the requisite knowledge, for example, by weighing the coin.  Moreover, the amount of physical money is limited by the availability of the precious metal(s) used in the currency.

Once a country moves from a physical currency based entirely on a precious metal to one which remains, in theory at least, fully convertible to the precious metal but which uses paper money alongside coins made of the precious metal, government’s role is expanded in importance because it is ultimately the guarantor of the currency’s integrity.

The final stage of physical money is when the link between a precious metal and the currency is broken and the entire currency rests upon trust. At that point a currency is entirely at the mercy of governments because there is no natural restraint on how much money is printed or coined in base metals.

Describing physical money is the easy bit. The concept of money becomes complicated the first time someone makes a loan. That has the same effect as someone depositing money with a bank: where one person had the money before, now two have it. Once a society develops a banking system, government needs to intervene both because of potential fraud and an expansion of the money supply. That applies in principle even in a supposedly 100% precious metal based currency, because even then there are primitive financial instruments such as bills of exchange which effectively act as money.

The more advanced a society is, the less important physical cash becomes as the instruments by which the money supply is multiplied increases. To see what a confused state we are in today we need only reflect on some of the various measures of the money supply which have been used in modern times in attempts to quantify the money supply:

1        M0 is the total of coins and notes in circulation plus banks’ deposits at the Bank of England.

2        M1 is M0 plus current account deposits

3        M3 is M1 plus all other types of bank accounts (deposit accounts, foreign currency accounts, public sector accounts)

But there are many other financial products which none of these measures catches that

arguably have aspects of money. Anything which can be readily traded for money can in effect be used as money in certain circumstances: shares, the vast array of derivatives, debt itself. For example, if I wish to buy a house in theory I could do so by swapping shares I own for the house.

The Northern Rock Debacle

September 2007 saw the first run on a British bank since the 19th Century with people literally queuing round the block to get their money out. A converted building society, Northern Rock, had been operating a reckless business plan whereby their core business of mortgages was predominantly funded not by deposits but by borrowing on the money markets. When the credit market tightened, Northern Rock were left stranded and were forced to go to the Bank of England (BoE) as the lender of the last resort, which made a loan of 25 billion to them.

Once that news became public, the panic began and the government was forced to guarantee all Northern Rock deposits which committed the taxpayer to a further £25 billion, a total of £50 billion including the loan. The Government then left the bank in limbo until February 2008 as it desperately tried to find a private buyer for the bank. Eventually, it had to admit defeat and nationalised the bank, exposing the taxpayer to another £50 billion of risk as it took over responsibility for the bank’s mortgage book. The taxpayer is now in for a potential liability of £100 billion. To put the scale of the risk in context, the  Treasury  Red Book forecast  for total government expenditure in 2008/9 is £617 billion, so the Northern Rock risk amounts to around 18% of total Government expenditure for this financial year.

All this is worrying enough but just imagine what will happen if a few more banks go belly-up. It is as reckless an act by a chancellor as you can find in British history, for not only are massive liabilities being put around the neck of the entire population, a precedent has been set. If other banks (and quite possibly much larger banks) get into the same position, it is difficult to see how the government could underwrite another Northern Rock let alone one of the clearing banks, especially in the light of the extensive borrowing facilities the BoE has extended to the banks generally. Of course, we are constantly told by the government that the taxpayer is not really at risk as the assets of Northern Rock are solid and that the loans extended to banks generally are held against sound collateral and will cost the banks a pretty penny in a premium on the interest rate they pay. Frankly, why should we believe them when the government cannot even give a guarantee of when the Northern Rock liabilities will be cleared.

Yet it is difficult to see what else the chancellor could have done. If Northern Rock had folded, the rest of the banking sector would have been placed in real danger. The position was not helped by the drawn-out attempt to find a private buyer for Northern Rock (a symptom of the laissez faire mindset of the Government), but that was merely a detail, not the heart of the problem. Had the government nationalised the bank immediately the problem was known, the liabilities would still be on the taxpayer. The scandal is that the lax credit situation was allowed to arise, something which could have been prevented by proper government behaviour over the past quarter of a century.

The developing crisis

Not only have governments been forced in practice to abandon laissez faire, there have been few if any calls for the central banks to stand back and do nothing. Even in the case of Northern Rock the supporters of the “invisible hand” have been loath to let it go to the wall.

Faced with the dangerous mess they created, the banks and big business asked the government to rescue them. The consequence is that the ordinary person gets the worst of all worlds, for they not only have to suffer a contracting of the credit market, but they also have to fund the rescue of financial institutions, either directly in the case of Northern Rock by nationalisation or indirectly through the extension of credit by the Bank of England (as lender of the last resort) to introduce money into the market for the financial institutions to borrow. The ordinary citizen also has to pay in terms of lost jobs, lower pay, poorer conditions and higher prices.

Commercial banks throughout the developed world have run squealing for help to governments, while the major Western central banks have reacted with behaviour ranging from the dramatic to the reluctant. The Federal Reserve has led the way, slashing interest rates dramatically and making tens of billions of dollars in loans to the banks available to the money markets, much of it on distinctly questionable collateral. The European Central Bank (ECB) has been more cautious on interest rates but has also made vast sums in loans available to banks.

Britain has somewhat tardily followed suit, reducing Bank Rate by three quarters of a per cent since September and belatedly providing billions in loans to the banks on collateral of ever decreasing value. The disquieting thing is that no matter what action has been taken, the flow of credit remains stubbornly locked and governments, including Britain’s, are reduced to throwing more and more money at the banks with less and less assurance that the money the taxpayer is risking will ever be repaid.

On 19 April it was reported (for example, The Daily Telegraph) that not only will the Bank of England inject a further £50 billion into the market with the banks using some of the sub-prime mortgage products they invested as collateral, but that the British government will also underwrite credit card debts held by the banks – all this on top of the eye-watering Northern Rock liabilities.

The most frightening thing about the crisis

The truly frightening thing about this crisis is that the people who are supposed best to understand the financial markets, the central bankers, are completely at sea. The Bank of England (BoE) has admitted that its understanding of the money markets is inadequate. Amid accusations that it failed to respond quickly enough to the crisis at Northern Rock, the Bank has admitted that it is struggling to determine the impact of the credit meltdown on the economy.  Charles Bean, chief economist, said assessing conditions in the economy is “subject to considerable uncertainty”. Writing in the Bank’s quarterly bulletin, Mr Bean also stated “One important step in analysing monetary demand and supply shocks involves improving the Bank’s information about credit conditions”.

The Bank’s admission that it needs to improve its understanding of the credit markets comes as John McFall, chairman of the Treasury Select Committee, voiced his frustration following the appearance of Bank of England staff before the Parliamentary watchdog. In an interview with The Daily Telegraph, Mr McFall said: “The responses that people gave were unconvincing as a whole. I’m looking at the system and asking the question: Is it working? And it’s not working” (The Daily Telegraph, “We don’t understand the markets, BoE admits”, by Jonathan Sibun, 24 September 2007).

A failure of oversight by central banks both here and abroad has been compounded by the long period of very low interest rates led by the central bank rates of the leading currencies, most notably by the Federal Reserve (“the Fed”) in the USA, which kept money too cheap for a long time, thus encouraging people to borrow. The prime author of this cheap money was Alan Greenspan, who was treated with quasi-religious awe by politicians and so-called financial experts alike while he was running the Fed. Come the credit crunch and the knives came out for him, vide the famous American monetarist Professor Anna Schwartz: “It is clear that monetary policy was too accommodative. Rates of one per cent were bound to encourage all kinds of risky behaviour…..the Fed failed to confront something that was evident. It can’t be blamed on global events” (Daily Telegraph, 13 January 2008).

The inability of everyone from bankers to governments to provide a solution or even understand what is happening is palpable. In April, Gordon Brown ordered a “summit” with bankers to discuss a way out of the mess and his chancellor Alistair Darling railed against the irresponsibility of the banks for reckless lending, carefully overlooking government’s irresponsibility in this area. Massive amounts of public money have been ploughed in ever more desperately, without the squeeze on lending loosening – “The Bank confirmed it would swap treasury bills for premium asset backed debt owned by the banks. Banks have six months to use the facility. The swap is for 12 months and banks can ask for two year-long extensions, making a total of three years….. The Bank has put no ceiling on the scheme” (Daily Telegraph, 22 April 2008, “Banks hail £50bn boost to liquidity”). That it has had no effect is unsurprising, because the banks have used the money to shore up the holes in their balance sheets.

The effects of the credit crisis

The entire economy is rudely affected by a sudden shortage of credit. Apart from hyperinflation, there is no more toxic disease which can affect a modern economy, especially one dependent on consumer spending. The reduced availability of credit at any price causes an economic slowdown. More expensive credit causes people and organisations to draw in their borrowing horns. The reduction in the amount of money available to spend reduces demand. Reduced demand and more expensive credit drives down profits at best and puts companies out of business at worst. Wages are depressed and jobs are lost. This reduces demand even further.

People habituated to debt find they cannot service what they owe, and default. That is especially important in an economy like modern Britain’s where a large number of people have built their lives on a continuous stream of credit. Things which are heavily dependent on credit, most notably property, lose value. People either cannot pay their mortgage or find them selves unable to sell at all or that the price they could get would be much less than they owe on the property. Even those who are do not end up in a position of negative equity find they have great difficulty in selling both because prospective buyers cannot get a mortgage or because other people are unwilling to sell. Those wishing to move, especially if they wish to trade up, find they cannot easily get a new and larger mortgage.

Britain is more exposed to recession than most because her economy is built primarily on consumer spending, much of which is on non-necessities. Such an economy is inherently more fragile than one which is primarily rooted in the production and consumption of necessities because it is very responsive to changes in economic circumstances. In the language of economists, demand for much of what is purchased in Britain is very elastic.

The economic fragility of most peoples lives

Ever since Harold MacMillan famously declared in 1959 that “We’ve never had it so good”, British politicians have been religiously telling Britons that they are getting wealthier. To support this claim they point to such things as the growth in owner-occupation, the myriad of electronic consumer goods, holidays taken abroad and cost of living indices such as the Retail Price Index (RPI) and the CPI.

Most people have tended to take this at face value until fairly recently. They have ignored the fact if it takes two incomes to maintain a family where one was sufficient before, that is not wealthier. That if most people cannot afford to get on the housing ladder when once they could, that is not wealthier. That if the price of most essentials is rocketing that is not wealthier. And that if the Government uses bogus cost of living indices which ignore housing costs and council tax that is not a true measure of purchasing power.

Data released by the Office of National Statistics showed that household incomes fell last year in real terms, and have risen by only £2.25 a year on average since 2001. The reality is worse because these figures are based on the bogus CPI measure, which excludes housing  costs and council tax . In addition, a majority of the British population do not have savings which would allow them to survive for two months if they lost their jobs, and a large segment of the population lives on incomes well below the average wage, which is still below £30,000. A true recession will consequently hit millions of people very hard indeed.

How do we escape this mess?

The honest answer is there is no certain escape. Nor is a ‘soft’ economic landing likely. Circumstances are forcing more prudent lending behaviour onto private financial institutions, with substantial deposits being required before mortgages are granted, the feckless multipliers of six or seven times salary for mortgages vanishing, credit card limits being reduced, cards withdrawn and new card applications being refused. Unsecured personal loans are being subjected to the same type of scrutiny. The problem is that this is all happening in a rush which creates a tremendous shock to the economic system rather than a controlled decline of credit.

All this will probably cause a sharp contraction in the economy.  This creates a dilemma for the BoE. Its remit is to keep inflation close to 2% as measured by the Consumer Price Index (CPI). Inflation is significantly above that and showing every sign of rising. According to its remit, the Bank should be raising rates not lowering them. Yet the BoE has cut Bank Rate by three quarters of one percent already and is being urged universally by private business and many politicians to cut further and quickly. The likely outcome of such a policy would be our old friend stagflation. Indicatively, the growth in UK output was down to a miserly 0.4% in the first quarter of 2008.

The great problem is the dependence of housing to drive the economy. There is consequently no painless way out of our present predicament. If house prices are kept high by low levels of house building and continuing mass immigration an entire generation will find them selves stranded in a no man’s land where they cannot find good rented accommodation at a reasonable price.

Contrariwise, if there is a correction which brings housing within the reach of first-time buyers we shall have a massive problem of negative equity which will mean existing home owners cannot move and if their homes are re-possessed, being burdened with ongoing debts as their homes are sold for less than they owe. That is the bind governments over the past quarter century have got us into.

What can be done to make a safer future?

There needs to be a sea-change in the mentality of politicians. They need to recognise that government has a vital role in controlling the economy, not via the heavy hand of nationalisation or hideously complicated regulatory regimes, but by simple and effective measures such as restrictions on credit and the use of exotic financial instruments and the protection of strategic industries such as farming and energy supply.

Back to the future is the answer. We need to create a different moral climate. As little as 30 years ago, people still tended to look upon debt as something to be avoided. For the most part people saved up for things they wanted. Part of that caution was enforced because credit was nowhere as readily available as it is now although we were already into the age of the credit card. But much of the frugality was simply cultural; people had been brought up to feel debt was something loathsome and bankruptcy next door to theft. This was a Britain where the morally vital mechanism of shame still had its place.

The credit which was on offer almost always came with some strong strings attached. If you wanted a mortgage you had to save with a building society for quite some time to establish your credentials. When a mortgage was eventually granted, the amount you could borrow was restricted both absolutely (there was an upper ceiling of £13,000 in the 1970s) and by sensible multipliers of household income (commonly twice income and often the mortgage multiplier was applied only to the main wage earner’s pay). 100% mortgages or anything approaching them were not to be found. A deposit of 10% of the property’s price would have been the minimum required and in many cases more would have been asked. Bank loans required a similar establishment of creditworthiness over a decent period and credit card limits were modest. If anything was bought on hire purchase, a substantial deposit was required. The consequence of such a regime was that far fewer people got into serious financial trouble than today.

1        Here accordingly are a few examples of what might be done. Mortgages – the multiplier of salary used to calculate mortgages should be a maximum of three and a minimum deposit of ten per cent required. The re-mortgaging of owner-occupied property to release capital and buy-to-let mortgages should be outlawed.

2        Hire purchase – a minimum of 20% deposit with the monthly repayment no more than ten per cent of the monthly net pay (net pay to be that left after deduction tax, National Insurance and the repayment of any existing debts).

3        Personal loans other than mortgages – a maximum of 10% of net income.

There is also a need to tighten up checks on creditworthiness. Lenders have been incredibly lax about the information that prospective borrowers supply to them. That is a particular problem with credit card issuers who tend to accept whatever the lender says, but it is also a significant problem with mortgages with people allowed to self-certificate their earnings in some cases. The laxity has its roots in the belief by the lenders that they can reliably calculate the percentage of borrowers who are poor credit risks who will default and in the case of loans secured against property, that house prices will continue to rise rapidly, thus increasing the equity the borrower has in the property. The events of the past year have shown that lenders cannot reliably make calculations of defaulters nor rely on house price inflation to increase equity.

What now?

Is there a chance that the laissez-faire mentality of the elite will change and that common sense will prevail? Or will we stagger on in this ideological straightjacket until a true catastrophe strikes?

On the level of common humanity the hope must be that the crisis is contained reasonably quickly, although I think that unlikely. (I am writing this article in May 2008. By the time it is published the danger of a full blown depression may have been averted, although that is improbable because after more than eight months of increasingly desperate governmental pump priming around the developed world there is no sign that the credit crunch is lessening, let alone coming to an end. )

But there is danger in a rapid resolution for if it happens the underlying reasons for this economic trauma may not be addressed by those responsible for the operation of the economy and things will go on as before until the next crisis occurs. The credit crunch is simply the latest in a line of dangerous economic crises stretching back a century an a half which were brought about by the same fundamental problem, the abdication of government responsibility for the economy.

Selling Britain by the pound: the immorality of privatisation

Does a British government have the moral and legal right to sell off industries and property owned by the state? In Britain the answer m is that it can legally do so. Barring restrictions agreed to in treaties, most particularly the Treaty of Rome and its successor treaties, a British government may legally do what it wishes. It may also repudiate existing treaty obligations. Parliament may in principle pass any law it wishes. That demonstrates the danger of having a political system without any  constitutional bars to government action.

But if privatisation is legal, it does not follow that it is morally justified. To begin with to sell that to which no legal title exists  would be illegal in any circumstance other than the special circumstance of Parliament passing a law to make it legal. That governments have no natural; legal ownership of that which is privatized can be seen from the fact that these are enterprises and property which were either developed from scratch by government or were taken over by the state, often from municipal undertakings which were public developments in themselves. In each case taxpayers’ money was used to either start or acquire them and in every case they were sustained and developed with taxpayers’ money.

For Britons who bought shares privatisation was a form of taxation. They paid money for that which the state already held on their behalf.  It was the greatest confidence trick in history,  selling people what they already owned. Non-British taxpayers purchased that which was not morally the State’s to sell. But the deceit went beyond this. By selling that which was held in common for the British, they robbed those Britons who did not purchase shares and the future generations who would have no stake in that which was sold before they were born.  

In many instances, especially after the first flush of Thatcher’s privatization bonanza, there has not been a public flotation , so that the public had not even the say of shareholders in how what was once held in common was managed.  The British government moved from being confidence tricksters to fences, selling what they did not own for what they could get, which, as is the way when thieves sell to fences, was always  far below the real value of that which was sold.  

Privatisation could perhaps have been morally justified if every British citizen had been issued free shares in each privatized industry, which they could then have held or sold as they chose. The Government would not then have had the proceeds, of course, but it should be remembered that the prime reason given by Margaret Thatcher for privatisation was that it would modernise great British industries through the invigorating blast of free enterprise. Ostensibly at least the raising of money for the government was not the prime motivation.

The money received from privatisation has simply vanished into general government expenditure. Had the money been earmarked for particular projects dear to the public’s heart, such as new hospitals and schools or placed in a separate fund to help pay the state pension in the years when it is anticipated that those working will substantially decline in relation to those who are retired, at least the public would have something concrete and identifiable to set against the loss of public assets. As it is the public as a whole has nothing.

It is of course impossible to prove whether taxes would have been higher or that government expenditure would have been lower if there had been no privatisation proceeds, but it is a fair bet that extra money in government coffers has simply meant additional government expenditure without a proper regard to whether the expenditure was warranted. That is the common experience of governments and public money.

The money obtained through privatisation should not be viewed as pure gain in terms of government expenditure. Privatisation has caused a great deal of what private business euphemistically call  downsizing”. The resultant unemployment costs – unemployment pay and other benefits  – have to be set against the privatisation receipts. In addition, a large proportion of those who have gained alternative employment have found themselves earning a good deal less than they did previously. That equals less tax paid.

Privatisation has been a great cheat practised on the British people.

The present state of global economies

Free trade is postulated on an absurdity, namely that the world will no longer see wars which will significantly disrupt trade, or at least the trade of the First World. It is a fool’s paradise.

 Those with memories greater than that of a goldfish may recall the help and support Britain received from her supposed EU “partners” in the Falklands. Remember how  France supplied military equipment in the form of missiles to the Argentine during that war. Imagine what would have happened if Britain at the time had relied largely on equipment which was either wholly or partly produced abroad. Suppose, for example,  her  main fighter aircraft had been produced by an EU consortium (as it soon will be), what guarantee could Britain have had of fresh supplies of spare parts and weapons during the Falklands war?

 The dependence on foreign suppliers affects even the greatest states. The New York Times (29 Sept 2005 – “More US weapons have foreign roots”) documents the reliance of the US military on foreign suppliers. This is still small as a percentage of the whole defence budget but it is growing and already encompasses important areas such as bio-chemical warfare protective suits. 

The reality is that what we have does not even fall within the  arbitrary and narrow definitions of “free markets” and “free trade” which most of the developed world’s  elites  espouse under the banner of globalism.   States still protect their economies with state subsidies, favourable tax regimes, quotas and tariffs. Nonetheless, protectionist barriers have been reduced sufficiently to severely damage first world industries through products from the developing world with their absence of labour laws and wages many times less than those of developed economies.

 First World economies have also exported vast numbers of jobs to the developing world. These range from manufacturing to skilled white collar work such many IT functions. The old middle-class belief that they were immune from the effects of globalisation has received a rude buffeting.

At the same time as jobs and industries  have been exported, the industrialised world has increasingly allowed the purchase of native companies by foreigners. Perhaps the most dramatic example of this has been the complete transfer of London merchant banks to foreign ownership.

The fourth strand in the modern “free trade” web is immigration. Since 1945, with the exception of Japan,  the First World  has allowed through a mixture of design and neglect of border controls, vast numbers of immigrants into their territories,  most of whom have been unskilled or low-skilled.

The primary consequences of the slowly evolving post war international economic regime have been two. The first has been the gradual  growth of dependence on the imports of vital goods and services by the developed world and a loss of governmental control of companies within their borders, not least because any large multi-national can hold the threat of upping sticks to another country if a government does not play ball.

The second consequence has been the degradation of the economic circumstances of those whose jobs were most at threat from the internationalisation of trade.  Those effected are mainly the poorer and less qualified workers and their dependents. They have found their opportunities for work much reduced and the pay and conditions for the suitable work which remains eroded by extra competition from both native  workers chasing fewer jobs and immigrants competing for the same jobs.

Those whose jobs opportunities have been degraded have suffered a form of theft. Had mass immigration and the export of jobs been prevented, the wages  for the jobs taken by immigrants would have been higher than they are when subjected to the additional competition of immigrant labour and the exported jobs would not have been exported, which in itself would have tightened the labour market. In societies of rising aspiration, this could result in jobs considered menial being  better rewarded than those which enjoy high status under  “free trade” circumstances. It might be necessary to pay a sewage worker as much as a doctor. Doubtless many would throw their hands up at this. But there is no logic to such a response, because in a society with a large private enterprise component a wage is simply a response to the value the market puts on a job. Unskilled workers may not earn as much as the average  doctor or lawyer at present, but skilled tradesmen such as plumbers and builders often do.

Waking up to the threat of the Second World

The Second World: Empires and Influence in the New Global Order: How Emerging Powers Are Redefining Global Competition in the Twenty-first Century

 by Parag Khanna

Publisher: Penguin
Published: 30 April 2009

I would urge everyone who wants to get a grip on exactly what the rapidly developing nations and especially the Chinese are up to read this book.

Khanna writes from a liberal internationalist viewpoint in one sense – for him the EU is the light to follow  as the world hardens into three empires, the American, the EU and the Chinese – but in another sense he is not because he is far from being a hardline laissez faire follower. 

The scope and ambition of China is truly breathtaking. Most will have probably heard of their forays into Africa and their attempts to buy strategic first world assets such as Rio Tinto Zinc and a decent lump of the major US port system, but that is just the tip of the iceberg. They have built a ring of client states around them from Burma to North Korea who are to All intents and purposes as much part of China as is  Tibet.  Their influence extends throughout all of South and central Asia and across to Latin America. Only the developed world is still largely untouched by their policy of giving massive amounts of Aid to get them into a country and then using that country for their own purposes. 

They are being immensely clever. Aid is giving without strings, unlike that doled out by the West. It is on a truly gigantic scale. They build infrastructure in Third and Second world countries for free but this infrastructure is very often to promote their own direct purposes such as transporting materials and manufactured goods. The deal is, we will give you money and material help and you will give us food and materials and allow our cheap manufactures to come into your markets. No moralising, just and exchange of goods and services. Resource wars may become a defining feature of the century. In particular, Khanna  identifies the  potential for serious warfare in the medium term between Russia and China as the Asian provinces of Russia are denuded of Russians and Chinese immigrants take their place.

Interestingly, as the extract from the book I reproduce below shows, Khanna rates the Chinese development and potential  vastly beyond that of India, despite the latter having the “correct” political system and China the “incorrect” one from the Western point of view.  I foresee a re-run of the Fascist-Liberal democracy argument in the 1920s and 1930s over which is the more efficient system and whether the First World can afford what we now call democracy (in reality elective oligarchy). 

But the book is about far more than China and India. It paints a vivid picture of of the potential of Asia and Latin America and the potential  threat this presents for the currently developed world. The time of laissez faire is almost done as governments in the developed world suddenly wake up to what is happening among the five sixths of the world which do not live in the First World.  Their  elites still instinctively think in protectionist terms. The elites of the developed world will have to begin to  do the same if the nations of the developed world are not to be overwhelmed by the sheer numbers and growing material strength of the developing world.

The Second World 
Parag  Khanna’s 

CHINA’S FIRST-WORLD SEDUCTION pp275 -277 
INDIA LOOKS EAST 
The devastating 2004 tsunami, which centered on Indonesian Sumatra and swelled over islands and coasts from India to Somalia, reinforced the 
reality of a seamless oceanic space in the world’s Eastern Hemisphere. As lunar gravity dictates the tides, however; the Indian 
Ocean increasingly serves as the western bay of a greater Pacific space centered on East Asia. Its western shores—Africa, Arabia, and 
Iran—increasingly send their natural resources eastward, even as the area provides investment and export markets for booming Asia. The 
majority of the world’s shipping now traverses this integrated Indo-Pacific realm, making all of South Asia the third-world western 
subsystem of the China-centered Asian order. Over 50 percent of India’s trade is with East Asia, while Japan, South Korea, and 
Singapore are its largest foreign investors. 
Under the British Raj, India was the most powerful territory between the Suez Canal and the Straits of Malacca, but its influence in the Arab world and Central Asia also ended with the Raj. Hemmed in by the world’s highest mountain range and a vast ocean, power projection (even with nuclear weapons) is highly circumscribed for India’s modest army and navy. The United States explicitly seeks to sponsor India’s rise as “the first large, economically powerful, culturally vibrant, multiethnic, multireligious democracy outside of the geographic West”—not to mention as a hedge against China. But India has transitioned from its Cold War nonalignment to multi-alignment. It declares itself and the United States to be the “twin towers of democracy” while announcing with China plans to “reshape world order. ‘ To lure India, America has offered high-tech investment, civilian nuclear technology, defense agreements such as joint F-18   production, and more visas for immigrants. China has emphasized their common positions in trade negotiations, joint oil exploration, commercial corridors through the Himalayas, $20 billion in annual trade, 
and a civilian nuclear deal as well. Indian IT firms must import hardware from China to produce their software; that the largest outsourcing operations in China are Indian-owned shows its growing integration with China. 
But China’s soft cooperation with India has facilitated its grand strategic goal of encircling and containing it through a naval “string of pearls” in order to reach the Arabian Sea without relying on the Straits of Malacca. Once part of colonial India, Burma is now entrenched in China’s orbit, with India’s proposed east-west gas pipelines 
dropped in favor of north-south pipelines to China. Where India has built a fence to prevent Bangladeshi migration, China has built a modern Bangladesh- China Friendship Conference Center in Dhaka. While India threatens to divert the Brahmaputra River (on which Bangladesh depends) into the Ganges, China has muscled in, since it is the source country of  the Brahmaputra. Against Indian wishes, China has become an observer in the South Asian Association for Regional Cooperation (SAARC), while Indian influence in the evolving East Asian Community is marginal. 

“Nobody in the region really cares what India   thinks,” confided a Malaysian diplomat involved with regional diplomacy. India is big but not yet important. Outsourcing has made it a  leading back office for Western firms, but except for a few segregated twenty-first-century oases of development, India is almost completely third-world, most of its billion-plus people living in poverty. In Mumbai (once known as Bombay), which accounts for over one-third of the national economy, some residents pay among the world’s highest rents while the city’s slums of over ten million inhabitants are also the world’s largest. Clogged Indian cities still have three-way streets: 
Two directions for automobiles, with pedestrians and stray cattle  meandering in between. India’s bonanza of IPOs, impressive corporate profits, and billionaires galore show the dynamic potential of its private sector, but its growth will remain spectacularly uneven until the government catches up—perhaps over the next two decades—with its promises of infrastructure development. India’s continued high   population growth ensures that even with high economic growth it will remain the poorest large country in the world for decades to come. 

Though agriculture constitutes only 30 percent of the economy, seven hundred million people depend on seasonal monsoons and harvests—yet India’s groundwater is depleting rapidly. Unable to pay their debts, many farmers have committed suicide, while indentured servitude continues in many backward areas. Most of India’s population growth is occurring in the northern states, which have the weakest infrastructure, the worst governance, the poorest education, and the highest rate of 
HIV/AIDS infection, all while also being the epicenter of a resurgence of the polio epidemic. 
China has order and may one day have democracy. India has democracy but achieves less because it is chaotic. The link between trade and development that China exemplifies is almost absent in India. Relative to its geographical and population size, India’s government is almost invisibly weak, with a federal budget the size of Norway’s. Unlike China, unified India is a British creation, and its unity often appears more geographical than psychological; it is a cramped peninsula where 
Tamils and Assamese have nowhere else to go—yet still they try. It could also be argued that China is a freer country than democratic India: Literacy is far higher, the poverty rate far lower. Also, it takes longer to start a business in India, one-third as many Indians have Internet access, and only one-fifth as many have cell phones. 
India’s democracy may never have experienced a famine, but over half of India’s children are malnourished. Because most Indians lack economic freedom, other freedoms are that much more difficult to enjoy. 

The difference between India and China is thus not just the time lag between the advents of their current economic reform eras but also a fundamental matter of national organizational ability. Even if India rises, it will be according to Chinese rules.

“Free markets”, “free trade” and the emasculation of democratic control

 “I just think that a lot of modern corporate capitalists — the managerial class basically — has no loyalty to any country anymore, or any particular values other than the bottom line.” (Pat Buchanan quoted by Daniel Brandt in his article “Class Warfare” in issue 13 of Namebase Newsline -http//www.namebase.org/news13.html).

Buchanan is grasping a demon which he only dimly apprehends. What is happening is vastly more significant. We are presently witnessing the creation of an international class of plutocrats who care for nothing but their own class and self-interest.  They have the potential to form a true international aristocracy. If that happens, the imperfect democratic control the masses have been able to exert over their elites in the past century will end. The prime tool for the creation of such an international aristocracy is “free trade”.

There are parts of Western elites which are more or less reluctant to embrace “free markets” and “free trade”, but the general economic trend is clear: the internationalist, globalist creed is the dominant philosophy when it comes to trade and increasingly the idea of “free markets” in the domestic sphere is being accepted in practice if not in overt political policy.

Why have these elites moved from their previous socially oriented nationalism to internationalism?  The answer to this question reveals the nature  both of elites generally and the particular philosophy they currently support.

In most circumstances throughout history the wishes of the mass of a population have been of little or no account in any formal  sense. The masses made their presence felt through rioting and social disturbance or as pawns in the service of elite members who wished to rebel. An elite took note only when they were frightened enough – the creation of a form of national public assistance by the Poor Law of 1601 is a classic example of such behaviour.

Eventually, representative government evolved to the point where the masses began to have a direct say in the political process through the vote. The elite as a group did not welcome this but felt it could not be resisted. It was not democracy to be sure but elective oligarchy, which was buttressed by elite constructed devices  to exclude new entrants into the political process such as first past the post voting, election deposits and a very strong party system. Nonetheless, once the franchise was broadened the masses were able to exercise a large degree of democratic control because politics was still national and a political party had to respond to the electors’ wishes. The elite resented this control over their behaviour as all elites do and looked around for a way to diminish democratic influence. They found the means to do it through internationalism.

In a sovereign country elected politicians cannot readily say this or that cannot be done if it is practical to do whatever it is.  That is a considerable block on elite misbehaviour. So elites decided that the way round this unfortunate fact was to commit to treaties which would remove the opportunity for the electorate to exercise control. The most notable example is the Treaty of Rome and the subsequent treaties which have tied Britain into the EU.

Vast swathes of policy are no longer within the control of the British Parliament because of these treaties. Add in the treaties tying Britain to the UN and the WTO and the commitment of every mainstream British party to them, and democratic control has essentially gone.

 To the anti-democratic  consequences of  Treaty obligations such as those tying  Britain to the UK are added those of more open international markets. “Free trade”   damages democracy by confining economic policy within narrow limits. The present “free trade” agreements mean that no political party can easily stand on a platform of extending  state intervention, whether by nationalisation, trade restrictions such as embargoes or the subsidy of its own industries.  A party which wished to do any of these things could of course propose to withdraw from the treaties, but that would be in practice a very difficult course to follow, especially where the treaty obligations go beyond mere trade such as those involved in membership of the European Union. 

Loss of democratic control is obviously to the disadvantage of the masses. However, it also has implications for competition.  The prevention of the formation of monopolies and cartels can be done at the national level, but it is impossible when companies become supranational. You offend against America’s anti-trust laws?  No problem, you remove your manufacturing abroad to countries which are happy to have you (or at least their clients are) regardless of what arrangements you may have made with competitors or the any monopoly position.

But internationalism is not simply a bureaucratic  elite device to weaken democratic control, it is a sociological event in itself.  An elite thinks of itself as a separate group, a group which may in some circumstances  extend beyond national boundaries and jurisdictions. The medieval aristocracies of Western Europe thought themselves part of a chivalric whole.  When Charles I of England was executed in 1649 the monarchs of Europe were horrified because they thought it would set an example for other royal killings.

The ruling elites in the First World today have a class interest which binds them more closely to one another than to the people they rule. Indeed, there  is arguably a greater sense of international elite solidarity than ever before.  This is because modern communications allow people, goods and ideas to move with an unmatched ease. Because of this the international class can constantly revitalise and  extend their group solidarity.

The advantage to the elites of this culturally based  international solidarity underwritten by many personal elite relationships across national boundaries,  is that it allows them to weaken even further their dependence upon their immediate (native) populations, because not only does a particular national elite have a ready made excuse for not doing something – our treaty obligations will not permit it – but the personal relationships and the growing sense of class solidarity increases the confidence and hence the willingness of the various national elites to act ever more in the international elite class interest. Indeed, the more they are together and the more they act together, the more natural it will seem.

 It is important to understand that elites are not engaged as a group in a conscious conspiracy against the masses. What happens is that the psychological and sociological forces which press upon us all lead the  elite to adopt policies which always lead to their retention of power. It is not difficult to see how this happens.

All human beings have a powerful ability to write a narrative in their heads which will persuade them that they act not from self-serving or disreputable reasons but honourable and socially useful ones.  The consequence of this is that while individual members of an elite will consciously comprehend  the likely effect of their ideology,  the majority will simply accept their ideology at face value. This helps to bolster and stabilise the elite’s position because no elite ideology ever overtly states that the masses will be disadvantaged if the ideology is followed, and in the case of formal democracies, the ideology positively claims to materially better society as a whole. This will emotionally reassure most elite members, who will bolster their acceptance of the ideology through inter-elite conversations – if most or  all those in a group are positive about something,  that is most powerful social reinforcer.

 The best way of judging any political ideology is to ask cui bono? (who benefits?) The obvious answer in the case of “free markets” and “free trade”  are those who believe (with good reason) that they nor their dependants will never be amongst those who will suffer the ill-effects of free trade. These people are and will continue to be overwhelmingly drawn from the middle and upper classes for the same reasons that such classes have always maintained their superiority, namely that such people will have inherited wealth, social connections and  superior opportunities for education which are denied to the majority.

 The new international elite is neither left nor right. Its ideology is simply designed to promote the interests of the elite. It has aspects of right and left, but they are merely the policies which allow the elite to both disguise their true intention and to give a pseudo-moral  camouflage  to their ends.  They speak  of  the internationalist  equivalent of “motherhood and apple pie”  with exhortations to “end world poverty” and fund a  “war on disease worldwide”. If I had to find a term to describe this elite I think I would settle for neo-Fascist because so much of what is proposed is reminiscent of fascism. 

It is also telling that Western businessmen who ostensibly support the idea of the positive effects of competition arising from “free markets” and “free trade”  never want it for themselves. They always happily grab  a state subsidy or an embargo if it is to their advantage. None of the US airlines had any hesitation in grabbing billions of dollars from the Federal government after 911. Large companies  publicly complain of government regulation while secretly welcoming it because they  can bear the cost of it more easily than their smaller competitors. Multinationals shamelessly play one country off against another in their search for massive subsidies and other favours before they deign to operate in a country. 

Countries play the same game, cheating wherever they can. And the more powerful the state the greater the cheating, both in terms of helping particular industries with direct state aid and in the formulation of the treaties governing world trade. Hence, the USA presents itself as the ultimate champion of free enterprise whilst being both now and throughout its history one of the greatest of protectionists and state subsidisers of its industries – that it is  seen widely as an enterprise society is one of the great propaganda triumphs of history. Its behaviour after 911 is symptomatic of the unequal nature of modern “free trade”.

The US not only handed billions to its ailing private airlines, but put up protective tariffs to protect its steel produces. It has been ever thus. The two greatest names of the early Industrial Revolution, Josiah Wedgewood and Matthew Boulton, were  happy to climb on the Enlightenment bandwagon with its beliefs in the universality of Mankind  and advocate lesser tariffs and freer trade – until the proposed freeing threatened their own businesses.  What goes for businessmen goes for the individual worker. Who has ever met someone whose job was threatened by “free trade” speaking in favour of it?

 Abe Lincoln’s  used to put this question to pro-slavers who said slavery was a boon for the slave because they were provided for and were free of normal responsibilities: “What is this good thing that no one wants for himself?”  An equivalent question should be put to the “free traders”. 

The truth is simple: “free markets” and “free trade” are simply part of an elite ideology and like all elite ideologies they serve the purposes of the elite first, second and last. Those not of the elite who espouse it act merely as useful idiots to promote the interests of the elite.

Opposition to globalisation should not be a Left or Right issue.  The socialist and the Conservative should both resist it because it removes the ability of the electorate to control those with power and  the power of their political movements to realise their ends.

“…since records began in 1659″

The year 1659 appears with remarkable frequency in the media in 
connection with the English climate, often in the form “since records 
began in 1659”. It is a statement  rarely if every questioned by 
anyone with access to the mainstream media. 

Just pause and think about that claim. Does it seem probable that 
official weather records have been meticulously kept for three and a 
half centuries, kept before the scientific and industrial revolutions, 
kept before the English or British state became a bureaucratic monster? 
The answer of course is that it is extremely improbable  and did not 
happen. What did happen in the third quarter of the last century is that 
a British meteorologist by the name of  Gordon Manley attempted to 
produce an historical series  for temperature in England which he 
eventually extended to 1659. His work over a quarter of a century is 
summarised in two papers published by the Royal Meteorological Society: 
The mean temperature of central England 1698-1952 (1953) and Central 
England temperatures – monthly means 1959-1973 (1974) The two papers 
can be found at  http://www.rmets.org/publication/classics/cp1.php Other 
academics have built on his work since. 

Manley, like a good academic, was scrupulous in admitting the 
difficulties in constructing such an historical series: “Methods of 
approximation must be resorted to [when constructing any historical 
series],  most notably in England where, despite our very long 
scientific tradition, almost all observation before 1841  was dependant 
on amateur effort so that widely scattered records of diverse length and 
accuracy provide endless problems… The English records offer a 
formidable problem”. The opening paragraph of  his 1953 paper. 

“Formidable problem” is understating matters. Even readings of 
temperature today using highly sophisticated equipment  cause 
considerable dispute because where the measurement is taken is all 
important, for example,  readings taken in or close to urban  areas will 
produce a higher temperature than ones taken in areas with little or no 
human habitation. Trying to get a consistent environment to take 
temperature over a long period of time is obviously difficult and 
comparisons with the past questionable because we can never know what 
the conditions were exactly at any point in the past.  Hence, even with 
the advent of official records early in Victoria’s reign it is not 
simply a question of comparing data from one time with another. For 
example, has can temperatures in London today be meaningfully compared 
with those of 150 years ago when there were no motorised vehicles and 
coal was the main energy source? 

Once Manley enters the period before the official records (pre 1841) his 
caveats  become ever more severe, whether it be the paucity of the data, 
breaks in the data, the widely different means used to collect data, the 
absence of any information about how data was collected and even the 
switch between the Julian to the Gregorian calendar in 1752 which means 
every record prior to the change has to be recalibrated to the 
Gregorian. 

Manley’s research and analysis was honest but the most rational thing 
to conclude from it is that it proved no meaningful  historical 
temperature series  for England could be constructed over the period. 
Yet his research is trotted out as having the status of certain fact by 
the mainstream media, politicians and, to their shame, often  by 
scientists when they enter the realm of public debate.

Is society materially enriched by “free markets” and “free trade?

This is an impossible question to answer categorically because there is no way knowing what would have happened if protectionism had remained full blooded throughout the last century and a half. One can compare growth rates under stronger or looser protection regimes,  but they really  say little  because the other determining factors such as public expenditure have varied so greatly.  These variables also blur judgement about the comparative merits of controlled and “free” domestic markets.

 The most certain thing one can say from the economic experience of the developed world is that governments running commercial industries such as coal and steel directly is generally a mistake. (Governments are the natural suppliers of universal services such as healthcare only because private provision of such things is never adequate.)

What is certain is the fact that the material effects of “free trade” are far from uniform. It is no consolation to those who suffer along the way that others may benefit from their disadvantage. The next generation or the generation after that may be richer but why should their benefit be brought at the cost of disadvantaging  a prior generation?  Certainly no politician or political party standing at an election would dare to do so on a platform of “we shall make many of you poorer to make future generations richer.” Those living at anypoint in time have their own moral context and needs.

The constant economic turmoil caused by “free trade” and its inevitable concomitant,  the supranational corporation,  undeniably leads to circumstances  which greatly disadvantage large swathes  of  the opulation in the First World through the removal of First World jobs to the rest of the world. At worst, these people become the perpetual victims of structural unemployment (try getting a job in an area where the main employer closes and you have no scarce or easily transferable skills or you are middle-aged or, indeed, try opening a new business or becoming self-employed in a depressed economy): at best they are diven into ill-paid and uncertain employment.

 What is meant by material enrichment? Britain as a case study 

The assumption is that the material conditions for most have improved considerably over the past two hundred years. Any economics textbook will plot economic improvement in terms of rising real  wages. But those supposedly  rising real wages are based on measures which are often  questionable, incomplete or derived from very narrow  data such as corn prices.  Even modern measures such as the Retail Price Index (RPI) are not static,  their content and weighting being regularly revised. Nor do such measures fully represent the true costs of necessities, the most notable distortion in Britain being the failure of the Retail Price Index (and its successor index the Consumer Price Index) to reflect housing costs fully.  Any comparison between different times based on such measures needs to be treated with caution.

Of course no one in their right sense would question whether there has been massive  material advance in the past two centuries.  A more interesting question in our context is  whether most people are materially better off now than they were in 1960s,  by which time  a fully fledged welfare state was bedded in, housing, both owned and rented, was reasonably priced, social housing was being built in assive quantities, university education was not merely free but students subsidized with grants, unemployment was tiny and inflation low.

Today  the welfare state is constantly under attack by the British political elite and in some areas such as NHS dentistry already seriously inadequate, while the state pension is much reduced as  a fraction of the average wage following two decades of increases linked to the  cost-of-living pegging rather than increases linked to the average national wage. Housing of all sorts in most parts of the country is presently absurdly  costly and social housing is greatly reduced  through Right-To-Buy and minimal new building since the 1980s. The cost of university education is rocketing and grants are a distant memory.

Unemployment remains high today (2005) even by the official figures – approximately 950,000 by the claimant count and around 1.5 million by the most widely used international measure –  figures which  most probably  severely understate the real unemployment level because it ignores the considerable disguised unemployment within the 2 to 3 million people currently on long term sick benefit payments (the 1980 figure for such people was 600,000). The increase in those staying on at school after the age of 16 and going on to university has also reduced the present figures by taking hundreds of thousands out of the jobs market for years.  From 1945 to the late seventies unemployment never rose above a million on the official claimant count and for most of the time was considerably lower even with little  disguised unemployment and far fewer people staying in education after the school-leaving age (which was only 15 until the mid sixties).

There  are other fundamental social changes which bear upon the material state of the nation.  Many more people today have to travel long distances to work than they did forty or fifty years ago.  That is costly both in terms of fares and time.  More generally, it is increasingly difficult for someone on the average wage to support a family on that wage. That often means both parents have to work not from choice but necessity.

 Taxation bears much more heavily on the poorer part of the population now than it did in the past.  Direct taxation – income tax, national insurance, inheritance duty – applies to many more people now than it did in 1960,  primarily because a failure to maintain  personal allowances and tax bands at a reasonable level. Direct taxation is also broader in scope, for example VAT compared to purchase tax.  Such taxation takes proportionately more of the income of the poor than the rich.

It is a moot point whether overall people are generally materially better off than they in 1960. They may own more trinkets such as TVs and computers and some imported goods such as clothes may be at least much cheaper, but those are small advantages to set against the great increase in housing costs and commuting fares and the diminishment in social provision. Doubtless a section of society has benefited, but it would be a brave man who wanted to argue that the condition of the vast majority has improved, especially the poorest third of the population.

Many will  read this with astonishment, saying but we have so much more today, dazzled as they are by the many new  products. It is important not to confuse technological advance with “free markets” and “free trade” or general material wellbeing. People are undoubtedly better off in 2005 in terms of being able to purchase such things as cars or electronic goods then they were in 1960.  But people in 1975 were also better off in those respects than those who had lived fifteen years before. That improvement  was long before “free markets” and “free trade” had become the elite ideology.  It is worth adding that  new products often result in additional expenditure regardless of whether the individual really wants the product – any product which becomes widely used is difficult to resist. Technological innovations are particularly prone to induce reluctant purchases.

Is society materially enriched by “free markets” and “free trade?

This is an impossible question to answer categorically because there is no way knowing what would have happened if protectionism had   remained full blooded throughout the last century and a half.  One can   compare growth rates under stronger or looser protection regimes,   but   they really   say little   because the other determining  factors  such  as public expenditure have  varied so greatly.   These variables also blur  judgement  about  the comparative  merits  of  controlled  and  “free”  domestic markets.

The most certain thing one  can say from the economic experience of the developed world  is that governments running commercial industries such as coal and steel  directly  is generally  a mistake.  (Governments are the natural  suppliers of universal services such as  healthcare  only because private provision of such things is never adequate.)

What  is certain is the fact that the material effects of “free  trade” are  far from uniform.  It is no consolation to those who suffer  along the  way  that others may benefit from their  disadvantage.  The  next generation  or the generation after that may  be richer but why  should their  benefit  be brought  at the cost  of  disadvantaging   a  prior generation?   Certainly no politician or political party standing at an election would dare to do so on  a platform  of “we shall make many  of you poorer to make future generations richer.”     Those living at  any point in time have their own moral context and needs.

The constant economic turmoil caused by “free trade” and its inevitable concomitant,   the  supranational  corporation,   undeniably  leads  to circumstances   which  greatly  disadvantage  large  swathes   of   the population  in the First World through the removal of First World  jobs to the rest of the world.  At worst,  these people become the perpetual victims of structural unemployment (try getting a job in an area  where the main employer closes and you have no scarce or easily  transferable skills or you are middle-aged or, indeed, try opening a new business or becoming self-employed in a depressed economy): at best they are driven into ill-paid and uncertain employment.

What is meant by material enrichment?  Britain as a case study 

The assumption is that  the material conditions for most  have improved considerably  over the past two hundred years.  Any economics  textbook will  plot  economic improvement in terms of rising  real   wages.  But those  supposedly   rising real wages are based on measures  which  are often    questionable,  incomplete  or derived from very  narrow   data such as corn prices.   Even modern measures such as the  Retail  Price Index (RPI)  are  not  static,   their  content  and  weighting  being regularly revised. Nor do such measures  fully represent the true costs of necessities,  the  most notable distortion in  Britain  being  the failure  of the  Retail  Price Index  (and  its  successor  index  the Consumer Price Index)  to reflect housing costs fully.   Any comparison between  different times  based on such measures needs to  be  treated with caution.

Of course no one in their right sense would question whether there  has been  massive   material  advance in the past two  centuries.   A  more interesting  question  in  our  context is   whether  most  people  are materially better off  now than they were in 1960s,   by which time   a fully fledged  welfare state  was bedded in,  housing,  both owned  and rented, was  reasonably  priced,  social housing was  being  built  in massive quantities,  university  education was  not  merely  free  but students subsidized with  grants,  unemployment was tiny  and inflation low.

Today   the  welfare state is constantly under attack  by  the  British political  elite  and  in  some areas such  as  NHS  dentistry  already seriously  inadequate,  while the state pension is much reduced  as   a fraction of the average wage following two decades of  increases linked to the   cost-of-living pegging rather than increases  linked  to  the average national wage. Housing  of  all  sorts  in most parts  of  the  country  is  presently absurdly   costly  and  social  housing  is  greatly  reduced   through Right-To-Buy and minimal new building since the 1980s.  The  cost  of  university education  is rocketing  and  grants  are   a distant memory.

 Unemployment remains high today even by the 2010 official figures  – approximately  2.5 million  by the  most  widely used  international measure –   figures  which   most probably   severely understate the real unemployment level  because  it ignores  the  considerable  disguised unemployment within the  2  to  3 million  people currently on long term sick benefit payments (the  1980  figure  for such people was 600,000). The increase in those staying  on at school  after  the age of 16 and going on to  university  has  also reduced the present figures by taking hundreds of thousands out of the jobs market for years.   From 1945 to the late seventies  unemployment neverrose above a million on the official claimant count and for  most of  the time  was  considerably  lower  even  with  little   disguised unemployment and  far  fewer people staying  in  education  after  the school-leaving age (which was only 15 until the mid sixties).

There   are  other  fundamental  social changes  which  bear  upon  the material  state of the nation.   Many more people today have to  travel long distances to work than they did  forty or fifty years ago.   That is  costly both in terms of fares and time.   More  generally,  it  is increasingly difficult  for someone on the average wage to  support  a family  on that wage.  That often means both parents have to  work  not from choice but necessity.

Taxation  bears much more heavily on the poorer part of the  population now than it did in the past.   Direct taxation  – income tax,  national insurance, inheritance duty –  applies to many more people  now than it did in  1960,   primarily  because a  failure  to  maintain   personal allowances and tax bands at a reasonable level. Direct taxation is also broader  in scope,  for example  VAT compared to purchase  tax.   Such taxation takes proportionately more of the income of the poor than  the rich.

It  is  a moot point whether overall people  are  generally  materially better off than they  in 1960.  They may own more trinkets such as  TVs and computers and  some imported goods such as clothes  may be at least much cheaper,  but those are  small advantages to set against the great increase in housing costs and commuting fares and the  diminishment  in social provision. Doubtless a section of society has benefited,  but it would be a brave man who wanted to argue that the condition of the vast majority has improved, especially the poorest third  of the population. 

Many  will   read this with astonishment, saying  but we have  so  much more  today,  dazzled  as they are by the many  new   products.  It  is important not to confuse technological advance with “free markets”  and “free  trade”  or general  material wellbeing.  People are  undoubtedly better  off in 2005  in terms of being able to purchase such things  as cars or electronic goods then they were in 1960.   But people in  1975 were also  better  off in those respects  than  those  who  had  lived fifteen years before. That improvement   was long before “free markets” and “free trade” had become the elite ideology.   It is worth  adding that   new products often  result in additional expenditure  regardless of whether the individual really wants the product – any product  which becomes widely used is difficult to resist.  Technological  innovations are particularly prone to induce reluctant purchases.

Has “free trade” ever been practised?

Between  1860  and  1914 Britain operated  the  best  approximation  to “free-trade”  the world has seen.  In the period 1840-1870 not only did she by  degrees open her markets to all regardless of  whether   other  countries reciprocated,  but the size of the British state was so tiny that  the  distortions  of government expenditure   and  taxation  were  minuscule compared  with the present day.   But   achieving  the  best  approximation to “free trade”   was not difficult to achieve because no other  country  of any size  has ever seriously attempted  it  for  any length of time. 

For a quarter or a century or so, Britain got away with the ill-effects of being  a  reckless  “free trader”   whilst  other  major  countries remained protectionist to varying degrees. She escaped the consequences for three prime reasons: Britain’s industrial dominance,  long distance transport  of bulk goods remained  cumbersome and expensive  and   the fact that America and Europe were  strangely slow to follow  Britain’s example and industrialise.

 That  all  changed  in the  1870s.  Bulk transport  was  becoming  much easier  and cheaper.  Railways –  ironically more often than not  built with British  capital and technical expertise – had begun  to  have  a considerable   influence  on  the continent and  in  America  and  were beginning  to  snake across Australia and South America.  Perhaps  most importantly  the  age  of the  practical  steamship  and  refrigeration arrived.   Manufactured goods,  food and raw materials could  now  move around  the  world in  volumes which dwarfed anything  which  had  gone before.   British farmers were especially badly hit when  the  Americas and Australasia flooded the British market with food and wool. To these developments,  and arguably in part as a consequence of  them, there was a widespread retreat into a deep protectionism in the  1870s, most notably by the USA and Germany. Britain failed to respond to these developments by guarding her own markets.

 The  period  of  1870-1914 saw the  predictable  results  of  Britain’s quixotic  refusal  to  guard  her markets  when  all  about  her   were assiduously  doing so:  she lost her general  industrial  predominance, well nigh  destroyed  her farmers and failed to  dominate  vital   new industries, such  as the chemical,  which at one time she  had  led  – Britain produced the first synthetic dye (Perkin 1856) and  the  first synthetic plastic  (Parkes  1855).   Two  of  the  most   enthusiastic protectionists, the  USA  and  Germany, became  the  first  to  exceed Britain’s GDP.

Bismarck  summed  up  what had happened in a speech  in  1882  when he said:”I  believe the whole theory of free trade to  be  wrong…England abolished  protection  after she had benefited from it to  the  fullest extent. That  country used to have the  strongest  protective  tariffs until  it became so powerful under their protection that it could  step out of those barriers like a gigantic athlete and challenge the  world. Free  trade  is  the weapon of the strongest nation,  and  England  has become  the  strongest nation in the world owing to  her  capital,  her iron,   her  coal,  and  her  harbours and  owing  to  her  favourable geographically position.  Nevertheless,  she protected herself  against foreign  competition with her exorbitant protective tariffs  until  her industries became so powerful.”

But  even the “free-trade”  Britain practised  was far  from  complete. Government contracts were generally  given to British companies.  Ditto municipal contracts.  Moreover,  there was a strong sense of patriotism in the country which, as with the present  day Japanese,  mitigated the effects of free-trade.  Nor,  of course,   was there a WTO,  EU  or any other body  to  question and interfere  with   the  internal  economic workings  of Britain  such  as taxation,  interest  rates  or  working conditions.

 British  “free trade”  was further complicated by the existence of  the Empire   and  a  widespread  imperial  sentiment  which   created   the opportunity  and the desire to trade with members of the Empire  rather than the rest of the world.  It does not do to over-egg the effects  of this because  British  trade  with  the  world  outside  the   Empire, especially the  USA,  always  remained  strong,   but  it  undoubtedly significantly distorted British trade.

“Free trade” today

 If “free trade” was a gigantic gamble for an industrially, commercially and politically  dominant  Britain in 1850,   it is vastly riskier  for any country now.   Transport even after the arrival of railways and the steamship was still expensive,  slow and cumbersome compared with now. The electric telegraph was the height of sophistication.  Most parts of the  world  could not engage in international trade on their own  terms because  they  were colonies,  under the practical control  of  foreign powers or unindustrialised.

Today physical transport is fast and cheap. In place of  the telegraph, we have the internet.  Many countries have industrialised.  The age  of formal empires is over.

But there is more than political and technological change which makes a difference  between our own time and the last outbreak of “free  trade” mania.   The  “free trade”  being advocated now is doctrinaire  to  the point of idiocy, namely the god of comparative advantage (the idea that each nation  should  concentrate  on those  products  which  are  most profitable  and forget the rest) is to be applied to  everything,  even (in  the EU) to all public contracts,  including those  for  weaponry. Childishly doctrinaire as they were as they played with their  untried intellectual toy, even the most extreme “free traders” in the 1830s and 1840s saw that some parts of the economy could not be reasonably opened to competition  for strategic reasons,   military supplies  being  the prime case.

Let us suppose that we had a perfect “free trade”  world now,   a world in which  there were no tariffs or quotas or embargoes or  “standards” to meet; that all the artificial restraints on trade were removed; that no government subsidized productive employment in any way and all  that remained  to differentiate countries were market decided labour  rates, carriage  costs   and the cost of nonproductive public  works  such  as justice and  the army. What then?

The consequences would be extremely dangerous  for the West. Farmers in the  First  World  would  be on their knees  and   mass  production  of virtually  anything in general demand would  quickly become  impossible because whatever a company’s efficiency,   it simply would not be  able tocompete with labour which  was a tenth or less of the cost  of  its own native  workforce.   All such countries could do is  try  to  make high-value goods.  Moreover, even if the redundant working populations of the First World could find alternative employment, which is dubious, their countries would be left utterly  at the mercy of those who now produced their food and most  of the manufactured goods they consumed.

Man-made global warming is the 21st century phlogiston

In the 18th century a   theory arose to explain the process of oxidation (combustion and rusting). The theory involved a non-existent substance named  phlogiston (from the ancient  Greek for burning up. It was a theory which neatly accounted for oxidation processes such as combustion and rusting. Phlogiston was supposedly contained within every flammable substance and released when a substance was  burnt. This meant that the residue (the calx) of what was burnt should be lighter than the original substance. Inconveniently for the phlogistonists , experiments showed that, for example, a the calx of a metal such as  magnesium gained weight when burnt in the air. The most excitable  phlogistonists  in desperation then floated the idea that  phlogiston had a negative weight. Some of the less excitable suggested that phlogiston was lighter than air, which obfuscated matters until the measurement of the weight of gases as well as the remainders of a burnt substance became possible  through the use of hermetically sealed containers .  Eventually an end was brought to this nonsense by a combination of  Lavoisier’s  identification of  oxygen and its combinational  qualities and numerous experiments by antiphlogistonists  which  showed that results of any substance that  was combusted or corroded in air could only be explained by the phlogiston theory if phlogiston had a negative weight.  The discrediting of phlogiston theory took the better part of a century.

The behaviour  of the man-made global warmists is reminiscent of  the believers in phlogiston. Time and again they are confronted with facts which are as damaging to their  creed as the weight gain of combusted material was to phlogiston theory.  Just like the believers in phlogiston, they meet every  unwelcome fact with increasingly absurd adjustments to their  theory. It gets warmer; that proves man-mad global warming. It gets colder; that proves global warming .  Here’s my all-time favourite of such reasoning: 

Daily TELEGRAPH   1.5.08

Global warming may ‘stop’, scientists predict

By Charles Clover, Environment Editor

Global warming will stop until at least 2015 because of natural variations in the climate, scientists have said.

Researchers studying long-term changes in sea temperatures said they now expect a “lull” for up to a decade while natural variations in climate  cancel out the increases caused by man-made greenhouse gas  emissions…..

… Noel Keenlyside of the Leibniz Institute of Marine Sciences, Kiel, Germany, said: “The IPCC would predict a 0.3°C warming over the next  decade. Our prediction is that there will be no warming until 2015 but it  will pick up after that.”

If this was an idea believed only be a few harmless academics it would be of no account. As it is part of the politically correct political elites of  most of the developed world it is potent  danger as massive costs are piled on developed economies while the economies of the developing world carry on merrily without such costs.  It is a recipe to make the West dependent on the likes of China and India and to inflate the wealth and power of the developing world at the expense of the West.  As a matter of simple self-preservation, the West needs to rapidly change the mentality of its elites.

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