A Bigger Mistake?

Mervyn King, now Lord King of Lothbury, was the Governor of the Bank of England from 2003 to 2013. Being widely considered to have been asleep at the wheel prior to the Global Financial Crisis of 2007 -2008, he was lucky to have survived as Governor until 2013. When his luck finally ran out, it was not because of lack of diligence, it was because he upset Finance Capital, aka The City, by reminding them that they were responsible for crashing the economy. It probably didn’t help him that he had previously held discussions with the TUC – only the second Bank Governor ever to have done so.

Like Banquo’s ghost, King appears from time to haunt those who sacked him. His latest emanation is an interview on Bloomberg on 20 July[i] in which he observed that central banks and their economic advisers put far too much reliance on expectations. He attributes this ‘big mistake’ to ‘groupthink’ amongst economists due to their training. The  economics profession is, in his opinion,  “jammed with brilliant young people”, but, unfortunately, they have, in his view, all been taught the same wrong thing: money has absolutely nothing to do with inflation.

The shortcomings in economic education are not confined to the relationship between money supply and inflation; but King is, nevertheless, correct to draw attention to it. The relationship is, however, a complex one, probably in ways even he doesn’t appreciate. According to Banks and Banking[ii], central banks can, albeit with difficulty, manage the rate of inflation by seeking to influence the amount of money created by commercial banks (and by creating it themselves with Quantitative Easing) –  but only if they take into account the surplus value created by commodity production. The amount of capital diverted into speculative investment (termed by Marxist economists ‘Fictitious Capital’) also has an effect. The economics of this are analysed in the current edition of Communist Review[iii] where it is argued that the proportion of capital diverted into Fictitious Capital depends only on the rate of increases in productivity and wages in commodity producing sector of the economy less the rate of increase in the money supply.

Unfortunately, there are other, even more critical shortcomings in what is now taught as ‘economics’ in our universities. The subject is largely confined to neoclassical economics. The key assumption behind this branch of economics is that markets are generally in a state of equilibrium, well informed and therefore can be relied on to give the correct signals. This is seldom the case. Equally misleading is the core belief that the absence of barriers to market entry will ensure the welfare of everyone, regardless of any distributional consequences. Forms of monopoly exploitation other than those due to market share are largely ignored. Bolted on to this rickety framework is a hefty dose of maths-based financial economics that assumes that financial markets are close to perfect but still susceptible to arbitrage, enabling financial derivatives to be traded profitably by those with access to the best algorithms. This same approach supposedly enables appropriate charges made for the capital employed in public services. Some residual awareness of quasi-rational economics may still be taught, but class analysis and Marx’s Labour Theory of Value (LTV) are both ignored or, in the case of LTV,  dismissed on the specious grounds of internal inconsistency[iv].

If to change the world we must first understand it, it is to be regretted that so many “brilliant young people” trained as professional economists are denied, by their training, the tools to do so.

References

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[i] https://omny.fm/shows/merryn-talks-money/mervyn-king-says-the-bank-of-england-is-making-a-b/embed?style=artwork

[ii] Banks and Banking, a Discussion Paper by the Political Economy Commission of the Communist Party, January 2022. Available at https://shop.communistparty.org.uk/?q=pamphlets/banks-banking

[iii] Fictitious Capital, Communist Review 107, Spring 2023.

[iv] Reclaiming Marx’s “Capital”, Andrew Kliman, Lexington Books,2007.

SHARED OWNERSHIP

The articles by Solomon Hughes every Friday in the Morning Star are ‘must reads’. They tend to deal  with individuals – the article on 14 July was headed ‘investigating scoundrels’ – rather than economics as such. In his article this week under the heading Sharing the Pain, he takes apart the policy designed to address the housing crisis – shared ownership.

Hughes explains that, prior to Thatcher, it was universally recognised that the commercial housing market couldn’t meet everyone’s needs. In 1980 nearly a third of people lived in council houses. Thatcher sold off many of these and stopped councils from replacing them. The long-term result wasn’t a massive expansion of home ownership, it was a huge growth in private renters, dodgy landlords, sky high rents and insecure tenancies.

To prop up the policy, New Labour didn’t resume building council houses – it  promoted ‘shared ownership’ instead under which people who wish to buy a home but cannot afford even a smallest starter flat have to settle for, say, 30%, of such a flat, paying rent for the remaining 70%. With current interest rates, those with shared ownership are struggling to cope while the homeless and those at the tender mercy of private landlords can no longer access the facility. Yet this disastrous policy is still favoured by the Starmer Gang, with Yvette Cooper, responsible for its introduction after, according to Solomon Hughes, overriding her own housing experts, is now enthroned as shadow Home Secretary.

When Thatcher came to power in 1979, building societies (there were few banks then in the mortgage business) would lend three times the borrower’s annual salary. This was sufficient to enable those, especially young people on average incomes, to buy starter homes in which to step on the first rung on the ubiquitous ‘property ladder’. For many then it resulted in a spacious, post-retirement, unmortgaged home – the ‘forever home’ endlessly mentioned in such TV shows as Location, Location. Median house prices are now around some nine times average income. How does this economic mess unwind?

From a Marxist perspective, housing is a necessity for workers, those who actually create value in a capitalist society. Clearly, either wages are too low or house prices are too high. If capitalists are unable or unwilling to pay wages or finance a social wage sufficient to house workers, house prices must eventually fall. What stands in the way of such a fall? There are at least two factors:

1. Lenders, i.e. banks, have lent money secured on housing property. They have made and distributed huge profits from this activity, but when the house price bubble eventually bursts, they will themselves again face systematic collapse, just as they did in 2008. Banks can influence government to do their bidding, but will this extend to bailing them and their shareholders out again? We shall see.

2. Older home owners, many Tory voters, have paid off their mortgages and are sitting on huge paper profits from their ‘investment’. They don’t question where these profits came from and will vote to protect them. These gains are essentially transfers of wealth from the homeless and those renting to home owners, with a significant slice extracted on the way by banks and paid to their shareholders. That the children and grandchildren of these home owners cannot afford mortgages to buy homes is an awkward truth that can only be partially ameliorated by the prospect of inheritance. These conscience salving inheritances are threated by the absence of state funded social care in old age. Yet inheritance tax which could be used to build council houses and pay for social care in old age is seen as an anathema to most home owners.

Such are the contradictions of capitalism, especially in its neoliberal form. The only solution, as with all the other challenges facing society (e.g. global warming and war) is to change the system.

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