Scotland’s Currency Dilemma
In the aftermath of Humza Yousaf’s latest speech William Thomson of Scotonomics argues that “the economic framework underpinning Scottish independence is dangerously misguided and likely to lead to a worse economic situation than we experience as part of this dysfunctional Union.”
One of the reasons that people are drawn to heterodox economics is the scientific desire to be proved wrong. As the world’s most famous heterodox economist, John Maynard Keynes, quipped, “When the facts change, I change my mind – what do you do, sir?” Like other scientists, economists in heterodox schools of thought attest that being proved wrong leads us closer to the truth.
As 2024 opens up before us, I have a stronger than ever desire for the following statement to be proved incorrect: the economic framework underpinning Scottish independence is dangerously misguided and likely to lead to a worse economic situation than we experience as part of this dysfunctional Union. The statement, however, seems to be gaining strength, powered as it is by the current SNP’s orthodox economic view, revealing itself in economic contradictions that prove it is unravelling in front of our eyes.
Undoubtedly, the Scottish government is firmly rooted in an orthodox view of the economy. Their advisers, as orthodox economists, fundamentally struggle to change their narrative. This is perhaps one of the reasons why the orthodoxy remains so powerful. No deviation from the founding principles is ever considered, save the whole edifice will fall. In many ways, this obstinance is hardwired into the discipline. When you build your beliefs on axioms, ‘natural laws’ and assumptions which can not be tested in the real world, pivoting is a serious challenge. For an orthodox economist, it is much easier to move the goalposts than to change the rules of the game.
The advice from these neoclassical economists seems to be able to weather any storm. Real-world evidence constantly crashes against the hull of mainstream economics without the slightest chance of a course change. The 2008 financial crash should have sunk the orthodoxy or at least knocked it off course. But onwards, it steamed. As Karl Polanyi observed in his 1940s masterpiece The Great Transformation, the economic orthodoxy had bouncebackability, “its particle eclipse may have even strengthened its hold since it enabled its defenders to argue that the incomplete application of its principles was the reason for every and any difficulty laid to its charge”. Onwards and faster.
The reason for the 2008 collapse, shouted the mainstream, was imperfect knowledge, market failure, and, if you can believe this, too much financial regulation. Heterodox economists, led principally by the indomitable Professor Steve Keen, modelled the financial collapse based on Hyman Minsky’s simple real-world observation: stability leads to instability. This post-Keynesian view was supported by Marxist economists who pointed to the crisis as another example of the unsolvable internal contradictions of capitalism. But despite the obvious problems with this particular form of financialised capitalism, little has changed. Orthodox economists maintain their seats, whispering in the ears of governments across the globe. While the World burns.
In this sense, the Scottish government is simply a standard, run-of-the-mill European government. It sticks to orthodoxy. As JK Galbraith said, “It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought.” The nonsense continues to influence this administration, even though not since 2008 has the orthodoxy been so clearly on the back foot.
The orthodox stalwart the Phillips Curve is now an anachronistic tool to guide policy, insisting as it does that unemployment must rise to control inflation. Orthodox economist Snowbird and former US Treasury Secretary Larry Summers, from his beachside retreat in early 2023, agreed with the US Federal Reserve position and assured his Bloomberg audience that the Fed “explicitly recognise that there’s going to need to be increases in unemployment to contain inflation.” Inflation and the US unemployment rate are close to 3% and well under control.
Heterodox economist Isabella Weber was rounded on for suggesting that inflation was due to price gouging. Later that year, Isabella was proved correct. The Orthodox bastion, the OECD, admitted that “corporate profits contributed far more to inflation in Australia than wages”. Orthodox models say this is impossible! And yet, we are still led by their output.
Finally, and I really could have written up a much longer list, there is mounting evidence that the GOAT of monetarist tools, Interest Rates, are more of a fiscal stimulus than a monetary handbrake, just like MMT founder Warrne Mosler has been saying for decades. Last year, over £140 billion was paid out in interest to the already-wealthy bondholders in the UK, supercharging wealth inequality. This leisure class shot-in-the-arm likely helped the UK avoid the recession that raising interest rates is supposed to create.
Using the evidence above, I hope I have made a case that it must be time for the Scottish government to listen to opinions and ideas outside the neoliberal economic mainstream. That ‘firm anchor in nonsense’ for all of our benefit must be loosened.
Returning to the inconsistencies in SNP economic policy, the charge sheet is even longer.
As stated by our FM in his major economic speech yesterday, the Scottish government has “very limited borrowing powers for capital investment”. Yet his administration settled on a new Fiscal Framework that left Holyrood with fewer prudential powers than a Scottish Local Authority. The turkey that voted for Christmas twice, according to a common weal report.
The 2022 National Strategy for Economic Transformation maintains that Scotland – with the current set of powers – can “significantly increase GDP growth”. How can this be feasible while we simultaneously lack the current capacity to create a Ministry for Industrial Policy?
At every opportunity, the administration bemoans Westminster’s economic control of Scotland, yet for perhaps a decade after independence, it will retain the Bank of England and the UK Treasury as paymasters.
Our economic future is being positioned towards EU membership, while our decision to use Westminster’s pound stymies this process. We need a separate currency and central bank to move to EU membership. If EU membership is the aim and is regarded as ever so important, then surely we should have our own currency on day one of independence?
After decades of under-investment, Scotland will need substantial government deficits to create a prosperous Scotland. But by signing up voluntarily (this is the very definition of economic madness) to the EU’s Stability and Growth Pact, we ensure we cannot create those deficits even when we have our own currency.
Without our own currency, we must borrow foreign currency and pay that back with interest. Somehow, this process is expected to lead to investment in social infrastructure of the type that creates no financial return on investment.
We are told to believe in our long-term consistent plan for a post-independent Scottish economy. At the same time, our FM can make a lengthy speech on the economy and fail to mention a Just Transition, a circular economy, a well-being economy, or Community Wealth Building.
And finally, the Scottish government seek to lead on climate change while placing continued fossil fuel extraction at the heart of our economy. Humza Yousuf’s speech yesterday placed fossil fuels front and centre in a way not seen since the 2013 Scottish government white paper on independence. This seemed ignorant at the time. 2013 tied with 2003 as the fourth warmest year globally since records began. 2023 was the warmest year on record. Inconsistency is one thing; ecocide is another thing altogether.
These contradictions are brought into sharper focus with every Scottish government economic paper and speech.
Possessing a scientific approach to the economic discipline as I do, I am open to the chance or the charge that I am wrong. Speaking as I know I can, all I ask on behalf of many independent-minded economists and commentators is a forum or an opportunity to question this orthodoxy in detail and explain that there is an alternative.
To this end, in 2024, Scotonomics is resourcing up for the challenge. You can see our provisional plan for this year. On the 21st of March, we will host an event at Holyrood entitled Economics of The Real World with four leading heterodox economists. Later that evening, our public events will move our erudite panel down the road to the Leith Dockers Club. 2024 is a year of action.
We have two objectives. The first is to continue to put forward a thoughtful heterodox economic narrative to demystify the economy. Our second objective is more specific. To be able to engage openly and meaningfully with this administration.
We could do with your support. Subscribe to our mailing list here or find out more details of our events in 2024.
the OECD, admitted that:
our provisional plan for this year:
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