Lessons in Proving that Change is Necessary

imageIn the event of Independence how are we to reconcile the remaining unionists to the new political reality?

I shall here assume unionists to be by and large moderate conservatives and third way social democrats, people who are aware of the problems of the current neoliberal order but are averse to radical change. The question of change versus stasis is the classic political question. Since the financial crisis the question of what sort of change it is acceptable to ask for is more open than it has been in decades.

From Trump and Sanders to Corbyn and the Brexitiers the dissenters are gaining ground against the established consensus and this development presents as many dangers as it does opportunities. To win independence in the first place it will be necessary to persuade those who are minded to prudently retain the economic and political old consensus that there is in fact something here that is desperately wrong.

The crisis of 2008 is looking like an opportunity on which the independence movement and progressivism more broadly is about to miss out. When the stagflation crisis of the seventies hit, the Right were ready with a coherent policy platform to tackle what was successfully cast as the crisis of the Keynesian social democratic post-war consensus.

“The third way of Blair and Clinton was built from economic prosperity brought about by letting the banks create vast mountain of new money in the form of private debt.”

This agenda was produced in large part by the Mont Pelerin society which contained such luminaries as Friedrich Hayek and Milton Friedman. They had a network of policy institutes and think tanks ready to thrust their ideas into the hands of amenable or at any rate desperate politicians. Similarly they crafted an economic world view and narrative with which civil society was successfully persuaded. This consensus is now coming asunder.

The guiding theory of neoliberalism- neoclassical economics is starting to fall apart. Olivier Blanchard, former chief economist of the IMF and co-author of one of the perennial textbooks in university macroeconomics, recently wrote an article questioning whether the central neoclassical tool for modeling the economy (DSGE modeling) is even viable.

His conclusion was somewhat astounding essentially admitting that this technique is about as useful at predicting the future course of the economy as reading tea leaves but we should still use it as a core for discussion. It is for good reason that it has been said that science advances one funeral at a time. The IMF itself was condemned by its own internal review on how it handled Greece. The aforementioned models played a major role in justifying the disastrous policies imposed by the Troika.

“There will not be a new Clinton boom should Hillary win. So there is a genuine need for proper economic policy alternatives of the sort that progressives can provide.”

The central problem with neoclassical economics is that in a very important sense it doesn’t admit that banks exist. At least not banks as there are in the real world with the power to create money and manipulate the prices of assets. Paul Krugman is a good example of this view having publicly defended the view that banks don’t matter in a blog debate with Steve Keen, a Post-Keynesian economist who is widely regarded to have predicted the financial crisis and who has accumulated an impressive collection of awards for accurate economic forecasting. The twice Nobel laureate Joseph Stiglitz has recently moved away from neoclassical economics having publically called for the end of the Euro and co-authoring a paper on a new approach to economic modelling which does include a realistic banking sector drawing on Post-Keynesian economics.

We are now living through a time of widespread crisis for finance driven capitalism. Since the great financial crisis we have witnessed one crisis after another from the ongoing Eurozone crisis to more recently the Chinese crisis and the collapse in the commodities markets. The third way of Blair and Clinton was built from economic prosperity brought about by letting the banks create vast mountain of new money in the form of private debt. This inflated house prices, stock prices and allowed the creation of the toxic derivatives which nearly collapsed the global economy.

“The central problem with neoclassical economics is that in a very important sense it doesn’t admit that banks exist.”

But this trick is not going to work a second time because we’re still saddled with that previous mountain of private debt. There will not be a new Clinton boom should Hillary win. So there is a genuine need for proper economic policy alternatives of the sort that progressives can provide. From the USA to Japan and in an indy Scotland the cause of the problem is the same and the solutions that present themselves are also, conveniently, a set of policies that easily fall under the progressive umbrella.

The Independence movement must embrace a few simple lessons from Post-Keynesian economics as few things are as important at the ballot box as economic credibility and to earn credibility you must first have a coherent narrative: Government debt and deficits are not a problem with an independent currency as this is actually how money is created. The economic indicators that we need to worry about are the level of private debt and the trade deficit. Governments are not funded by taxes but rather the purpose of taxation is the control of the currency.

The vast majority of the money in the economy is created by banks and their irresponsibility with this power caused the financial crisis. This sounds strange or even mad to most people but this is merely a measure of how misunderstood the real workings of our monetary system are. The Bank of England in 2014 published a paper agreeing with the Post-Keynesian position on money and stated that a majority of economics textbooks were in fact wrong on this subject.

“From the USA to Japan and in an indy Scotland the cause of the problem is the same and the solutions that present themselves are also, conveniently, a set of policies that easily fall under the progressive umbrella.”

In order to persuade civil society at large that change is necessary we in the independence movement must work at reformulating how people in general think about the economy and what is economically possible.

We know how this type of crisis plays out because it has happened before. The Great Depression was effectively a private debt crisis and the last twenty years of stagnation in Japan is also the same animal as Richard Koo, an advisor to Japanese Prime Minister Shinzo Abe, has argued. These do not go away without dramatic interventions.

The way such a mountain of debt was cleared away after the Great Depression in the US was World War II. Hopefully this time we can do it less violently. Privatisation, deregulation and austerity are incapable of restoring growth and the sooner this reality is accepted by civil society at large the sooner we can move forward.

By John Alexander Smith

Comments (25)

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  1. Broadbield says:

    Maybe you’ve been reading “Rethinking Capitalism etc” by Michael Jacobs & Mariana Mazzucato, a series of essays deconstructing the neoliberal world view. It includes a good chapter on Money and its creation as well as others on the mythology of deficits and debts and the Euro. So much of the Orthodox view of economics is utter nonsense: perfect markets, consumers with perfect knowledge and yet so many still believe.

    Another problem is the attitude of the media, especially the BBC who seem wedded to neoliberalism. Just last night on Radio 4’s 6 o’clock news they has some financial industry person on saying how essential it was to cut the deficit. Why is there never anyone with a contrary view given airspace?

    1. John Alexander Smith says:

      The BBC isn’t so terrible. Just this week they had an episode of Hardtalk with Steve Keen.

      1. Broadbield says:

        Don’t have Tv but have just downloaded the podcast. Thanks.

      2. Haideng says:

        Thanks for that article, was interesting. I watched the Keen Hardtalk also, was also interesting (despite his rather irritating insistence on referring to the UK as England). The issue I have with the whole ‘where do we go from here’ discussion on economics is that rarely do you hear a comprehensive plan of action, nor a nuanced argument from most – usually just criticism, which even if it justified doesn’t really answer much and also the framing of the debate in a restrictive ‘moral’ framework. e.g) Neoliberalism + all it’s exponents bad – and that also spills over into all liberal economics/ Austrian School thinking, thus closing down debate.

        This is not an attempt to rehabilitate Friedman, the Chicago boys and so on but it helps to understand the position where Hayek in particular came from. His antipathy to planned ‘economics’ especially the interventionist Keynesian kind was grounded in his experiences in Austria/ Germany in the 30s where attempts to solve the debt crisis by fiscal stimulous and other Macro government interventionist means led to hyper inflation and well you know the rest…(and it was grounded in the thoughts on economy and human behaviour of those great Scots, Smith and Hume – see the Road to Serfdom for his fear of how economics of the interventionist kind, can be used as tools for repression and illiberal politics – he linked it to fascism with some justification given he was Austrian and Jewish and saw how liberties were slowly eroded in the name of economic expedience).

        ‘Emergencies’ have always been the pretext on which the safeguards of individual liberty have been eroded.’ Hayek.

        Also, I disagree that everything is actually neo-liberal. After 2008 the response was actually a Keynesian / state interventionist one, to bail out the banks using the tools of state. A true Neoliberal Hayekian response would have been to let them fail, don’t bail out the very system that caused the asset bubble and crash in the first place and divide up the venture capital investment arms of banks to the savings side – furtherance to this was actually in Milibands manifesto, arguably the best economic plan of all the parties (including the SNP who don seem to have any set position that I can discern) but hey ho he couldn’t eat a bacon sandwhich so… –

        Personally I don’t know what needs to be done – or not done – but the assumption that all neoclassical economics is innately bad while assuming there is something fundamentally ‘ethical’ about government intervention simply doesn’t stand up to historical analysis, nor does it help debate.

        But interesting article, more of this please Bella, less of the silly stuff.

        Oh and as for the evil neo-liberal BBC ??? an absurd claim not grounded in any empirical analysis, only a year ago they did an excellent entire three part series on various modern economic thought, including Hayek, Keynes and Marx. Wonder if the Russians in our brave new Scotland will be so open to opposing views?

        http://www.bbc.co.uk/programmes/b01n2rpx

        1. Broadbield says:

          In “Rethinking Capitalism etc” several of the essays therein refute your assertions about classical & neoliberal economics and the notion that bailing out the banks was simply a Keynesian solution – see automatic stabilisers.

          I wonder how many of those who glibly quote Smith have actually read him. Lots of the stuff I read from economists and financial journalists, well it’s mainly “the invisible hand” actually, seem to bear little relation to his arguments. Never has so much be misappropriated by so many…

          I don’t know who says neoliberalism is “baad” and state intervention is “ethical”, but much of the current economic dogma doesn’t stand up to theoretical of empirical critique, while, I suggest, it is only state intervention which has ameliorated the worst effects of capitalism on the majority of the population. Hence social security, employment legislation etc, the very things now being dismantled by the hard right.

          As for the BBC, I should have made it clear that I was talking about the news bulletins (I mentioned the 6pm News, specifically). I haven’t heard Keen or Stiglitz too often on the News. And your programme link is dated 2012 at 01:25 am. I was asleep at the time.

        2. John Alexander Smith says:

          An interesting set of points there.

          On neoclassical economics, a major problem is that it’s a sort of Platonist world view. Markets if unrestrained will tend to a perfect equilibrium with everyone maximising their utility functions. This is where the interventionist/noninterventionist idea comes from. However the economy is a fundamentally disequilibrium system.

          Many proper physicists and mathematicians that have come into economics have found the insistence on equilibrium to be fantasy.

          So I’d argue it’s not a question of whether intervention. No economy in the world has ever been a free market if we are to take Hayek and Freidman strictly. It is a question of what sort of intervention.

          Neoliberals generally think all you need is the central bank intervening to control the interest rate and inflation level. I’m arguing that it’s the ratio of private debt to GDP and the trade balance that the government should work at controlling. From there you could be more ambitious and go for a full employment target.

          On the German hyperinflation, I think this is a slightly misunderstood point. The hyperinflation was associated with war reparations being payed on the back of an economy with a ruined economic infrastructure, a similar situation happened with Zimbabwe. Actually the money supply and the inflation rate are very poorly correlated and there are interesting reasons for that. I’d direct you to the work of Wynne Godley.

          I don’t know the answers but I think these are promising ways forward.

  2. Alf Baird says:

    “The economic indicators that we need to worry about are the level of private debt and the trade deficit.”

    To enable Scotland’s trade to develop, we really do need to modernise our outdated Victorian ports infrastructure, particularly in the central belt whaur maist fowk bide. One of the problems to overcome here is that these ports (or at least what is left of them) are now owned and regulated by offshore ‘bankers’ who seem happy to exploit their given monopolies whilst making minimal investment in new infrastructure (our airports being in the same ‘boat’). See: http://reidfoundation.org/2016/01/sort-out-our-ports/

    Holyrood can deal with this (ports are a devolved responsibility), but first MSPs must realise that our current fully privatised ‘port system’ actually constrains trade, hence Scottish export trade has not been rising, quite the opposite in fact. Which brings us to the basic question I used to put to students of transport: ‘what comes first, the trade, or the port?’

  3. Crubag says:

    An odd articld. The title and first two paragraphs seem to belong to a completely different article.

    Because the remainder is about current economic orthodoxy that would dominate whether Scotland was independent or not – nothing to do with rump unionists or not.

    1. Broadbield says:

      Isn’t it up to those of us who reject neoliberalism to ensure that an Independent Scotland adopts a more enlightened vision of economics?

  4. Brian Stobie says:

    I agree with most of this article, which implies that I understand it. However, I imagine that well over 90% of the readers of this site (and probably well over 99% of the population of the planet) will have some difficulty with the economics jargon and concepts presented (I would cite ‘neo-classical’ and ‘Post-Keynesian’ as basic examples).

    Which is amazing, considering most people’s standard of living is a direct result of the political manipulation of economic theories together with a strong dose of what appears to be common-sense household budgeting at the national level.

    I strongly feel that the primary responsibility of all progressive movements should be the education of the people in the simple facts of non-mainstream economics, only in this way can the economic lies of politicians be exposed. I advise Modern Monetary Theory as the core theory. Just Google it for starters.

    “We need austerity, because we can’t afford pensions, disability benefits, the NHS, new social housing, or anything else you think is a good idea”.
    “There is no public money, only taxpayers money”.
    ” We’re living beyond our means”.
    Lies. All lies. Filthy, murdering, crushing, brutalising lies.

    1. Haideng says:

      Good point, there really needs to be more economic education all round – amazing to think you can go through school and never learn the basics – when it is so central to all our lives.

      These guys are good for a laugh – went viral a few years ago.

      https://www.youtube.com/watch?v=d0nERTFo-Sk

  5. Richard MacKinnon says:

    Have you ever heard the term ‘gawp’ John Alexander Smith? Gawp is what I did when I read the first sentence of your article. “In the event of Independence how are we to reconcile the remaining unionists to the new political reality?”
    That is beyond arrogant. It is such a leap into meta fantasy it is hard to comprehend that people can come up with such weird and remote scenarios.
    The best way I can help you inderstand just how far from real life you are drifting into is for me to turn your openning statement on its head and ask yourself the same question John. Consider this question; ‘In the reality that is the union how do unionists reconcile the remaining nationalists to the political reality’?
    I’ll save you the effort, the answer is ‘they don’t’. They are’nt bothered. Why would they want to? Why would it be anything to do with them what the remaining Scottish nationalists think? Its not so much, ‘who cares’ it is more a case of, what business is it of unionists to reconcile nationalists?
    So John I suppose what I am trying to say to you is, dont waste any more of your time worrying about reconciling others to a future that is never going to happen, concentrate on the here and now and yourself.

    1. East Neuker says:

      At all times, Mr MacKinnon, you firmly bolster your reputation as an arrogant, right wing self satisfied unionist. Maybe you will be right. I do hope not. If your presumption is finally defeated by the Scottish people, you will probably support armed intervention from England.
      It would be good to be running your acceptance support group, but I suspect you will have left for England by then….. If in fact you are not already based there.

    2. Alf Baird says:

      ‘Gawp’ seems awfully English, naw? Whit aboot gaup, or gaupit, or e’en gaupie, gaupin, gauper, gauperie an gaupus. Peety thay dinna taucht Scots in Scottish schuils. A dout if we haed wir ain leid, offeecial like, we wid want wir ain naition bak anaw.

      1. Richard MacKinnon says:

        Alf,
        Sorry to offend old boy, but as long as you got the message that is all that one cares about.

        1. Alf Baird says:

          Thank you Richard, I was merely marvelling at the immense range of amazing Scots vocabulary of which I (and all other Scots) were (and still are) deprived off as a bairn in school, where of course English wis garred doon ma thrapple. ‘Cultural deprivation’ is the term, I believe, nae doot tae mak us aw hink wir ‘ane naition’.

    3. John Alexander Smith says:

      If my taste in rhetorical questions has offended you, I can only apologise.

      Now if you will excuse me I have some time in urgent need of wasting.

      1. Richard MacKinnon says:

        John,
        No offence caused. I’m just a bit surprised you haven’t moved on from stage one, denial and isolation.

  6. Ian says:

    Good to see an article about the economy. Brexit has simply highlighted just how badly the UK economy has been ‘managed’ and is just the latest example of how unsuited Westminster is to governing Scotland (and most of the UK). Look at the UK balance of trade. It turned negative in the early eighties and relentlessly became worse every year since. And yet the UK powers that be have the brassneck to claim that Scotland needs the broadshoulders of the UK to survive. I’d like to see that every time a vague UK benefit is mentioned, that hard facts are thrown back so that people can become increasingly aware of the mismanagement of the UK for decades. Why has the UK trade deficit been so bad for so long? What was the North Sea oil money used for? Why was the McCrone report hidden by successive UK governments for so long? Does the UK plan to take Ms Merkel’s comment and start to make things again? Why was there no Plan A for Brexit?

    At least of equal importance as to how Scotland would fare as an independent country is the question of how Scotland would fare continuing to be part of the UK. Fortunately the hard evidence regarding the latter makes that option, once it has been exposed in all it’s self serving short termism and incompetence, to be a ridiculous proposition. Track history triumphs over wishful thinking or spin every time provided that it gets to see the light of day.

  7. Richard MacKinnon says:

    East Neuker,
    I thank you for your response. But you you have me wrong. I voted Yes in 2014. I am a Scot, as are my children. I do not come here to gloat on the the result of 2014. I come here to say move on.

    1. David Sangster says:

      Wise words, Richard. I too voted Yes, but I sense the historical moment has passed, and it is well to move on. The peevish Remainians, in my view, should do likewise. We are where we are, and the sooner we get down to making the Union work better, and join forces to forge a future for the UK independent of the EU, the better.

      1. Broadbield says:

        How easily some give up. The future as you describe is hard right (if we stay with the UK). I hope you will enjoy it and do well. Millions won’t.

    2. East Neuker says:

      Thank you for your courteous reply, perhaps more courteous than I deserved. What I would say in response is that I understand your position better now, but disagree with it. The time is not past, the possibility not yet dead.

  8. LGBT girl says:

    As it seems posts are being cut on the other articles, questioning the wisdom of supporting the very neo liberal Mr Putin, perhaps the ‘indy’ movement needs to stop and take stock of who and with whom they feel it is ok to associate with.

    1. Alf Baird says:

      Aye, yer richt thair, thon Scots shuid leuk nae farther ‘an Perfidious Albion. Sae in better the deevil ye ken….

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