The World is Still the Same; Economics Changed

There have been a number of headlines of late proclaiming that the world has changed, and economists have not noticed1,2,3,4,5. The truth is rather the opposite – the world is still the same; economics changed and the world either didn’t notice or acquiesced. Now economics needs to change back! The discipline as it generally understood is more of a lack of discipline – not fit for purpose and internally inconsistent, as a simple example will show.

Let us suppose your car needs a bit of a service – there are two mechanics you can choose between: Sam and Jo.

Sam drives the staff at the garage mercilessly (and also drives a top-of-the-line sports car). Sam lies awake at night planning how to bankrupt the competition, so as to take their customers. No one can say Sam isn’t honest (without being sued) because Sam is well known for staying just on the ‘right’ side of legality; which is to say that Sam has carefully worked out the ‘profit maximising level’ of dishonesty which can be applied in the business world. Sam has also worked out the ‘profit maximising level’ of breakdowns the customers should suffer after having had a service and the ‘profit maximising level’ of price. Sam takes great pride in the drive for riches because, as Sam has often said, ‘It is greed makes the world go round’6.

Jo, on the other hand, takes a different tack. It is obvious to everyone that Jo is never going to be rich, Jo believes in a work/life balance and spends time with the spouse and kids. So far as Jo is concerned, work isn’t everything, but Jo loves cars. Jo travels all over the country to go to car shows and everyone knows, at Jo’s, the staff aim to keep your car going at its best. Jo doesn’t even understand the ‘profit maximising level’ of breakdowns – Jo doesn’t want your car to break down at all. While the primary goal of the business is to, at the least, break even, Jo takes pride in providing good service, not because Jo wants to see you again (for your next service) but because Jo gets a lot of satisfaction out of providing good value for money.

To which mechanic would you take your car? To which mechanic would an economist take a car?

According to the principles of neo-liberal economics, as it is commonly conceived, the answer is clear. As Milton Friedman has pointed out, ‘the social responsibility of business is to increase its profits’[1] and ‘It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith .., “led by an invisible hand to promote an end which was no part of his intention …” ’[2] (i.e. the common good) . This would suggest I go with Sam and, indeed, that the world would be a better place if everyone was like Sam.

However, Sam is going to cost me extra resources. I can not trust Sam when I know there is no concern for my car or my safety, therefore I have to check the job has been done; I have to monitor ‘compliance’. With Sam, I have to pay twice: once to maximize Sam’s profit and again to check the work has been done. The level of service I get from maximising Sam’s profit depends on how much Sam thinks I will spend in monitoring. In effect, I have to force Sam to obey the ‘invisible hand’, and it is going to cost me.

Classical economists are more holistic: Marshall, for example, holds, ‘the best energies of the ablest inventors and organizers … are stimulated by a noble emulation more than by any love of wealth for its own sake’[3]. Likewise, Schumpeter maintained economic actors could be motivated ‘to succeed for the sake, not of the fruits of success, but of success itself … and, finally, the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity’[4]. While they are talking of entrepreneurs, it must equally be true of business people in general; this explains Jo’s motivation.

Now, it stands to reason, those who pursue other motives than money may be just as selfish as those who are motivated solely by money. Perhaps, Jo wants to give me great value for money and high quality service for purely selfish reasons, such as ‘the joy of … getting things done’. Jo’s joy, what economists would call an intrinsic motivation, creates a win-win. With the money I do not have to spend on monitoring compliance, I can even afford to pay Jo more than I would Sam. I get better service, Jo gets the satisfaction of a job well done and a higher rate of pay.

While no one would suggest we ignore the monetary motivation entirely – Jo will not want to be exploited – it is clear a solely monetary focus creates economic inefficiency; resources are wasted in checking compliance. Sam’s motivation erodes trust and, as Knack and Keefer[5] have shown, countries and cultures with less trust have lower rates of growth. We might suggest, therefore, it would be foolish if I sat Jo down and tried to argue it would be better if Jo’s garage abandoned the desire to give me good service but sought rather to extract the maximum amount of profit in cash. Yet this is precisely the core of teaching in the neo-liberal economic model.

In 1993, R.F. Frank and his colleagues demonstrated that exposure to the self-interest model used in neo-liberal economics causes students to become more self-interested and focused solely on money[6]. More recently, Stout[7] and Ariely[8] amongst many others, have shown an emphasis on monetary rewards tends to: drive out intrinsic rewards; erode conscience; promote a shallow and self-serving response; and increase the costs of monitoring and enforcement. This benefits no-one, not even the cash-greedy; as Kasser and Ahuvia[9] have shown, simple material acquisition, paradoxically, will undermine happiness. Promoting neo-liberal economics runs the risk of taking away the joy of getting things done, leaving both Jo and me worse off. On the other hand, if we promote a more holistic view of economics, perhaps Sam might job satisfaction. If so, I can afford to pay him more and we will all be better off!

One aspect of economics with which we might all agree is that we should operate in the most efficient way possible – therefore we should ditch the modern inefficient neo-liberal approach, as it is commonly conceived, and take a classical holistic view of humanity. It follows that neo-liberalism is not a viable economic paradigm, it is simply an ideology; it may be justified by its adherents, but not by economics.

Kevin Albertson


[1] Friedman, M. (1970) ‘The Social Responsibility of Business is to Increase its Profits’, The New York Times Magazine, 13 September 1970

[2] Friedman, M. (1962) Capitalism and Freedom, Chicago: University of Chicago Press

[3] Marshall, A. (1890) Principles of Economics (8th ed. reprinted 1966) London: MacMillan

[4] Schumpeter, J.A. (1934) The Theory of Economic Development, trans.R. Opie (1961 ed.), Oxford, Oxford University Press

[5] Knack, S. and Keefer, P. (1997) Does Social Capital Have an Economic Payoff? A cross-country investigation, Quarterly Journal of Economics,112(4), 1252-88

[6] Frank, R.H., Gilovich, T. and Regan, D.T. (1993) Does studying Economics Inhibit Cooperation?, The Journal of Economic Perspectives, 7(2), 159-171

[7] Stout, L. (2012) Killing Conscience: The Unintended Behavioral Consequences of ‘Pay For Performance’. Available at

[8] Ariely, D. (2008) Predictably Irrational: The hidden forces that shape our decisions, London: Harper Collins

[9] Kasser, T. and Ahuvia, A.C. (2002) Materialistic Values and Well-being in Business Students, European Journal of Social Psychology, 32, 137-146

Please note that blog posts do not necessarily represent the views of other authors on the blog or of the Manchester Metropolitan University

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Keynes: 2030 from 1930

The economist John Maynard Keynes, writing in 1930[1], mused on what was wrong with the economy of his day and what the following century would bring. He concluded the world was going through a tumultuous phase of the passing away of one economic paradigm for another. According to Keynes:

The prevailing world depression, the enormous anomaly of unemployment in a world full of wants, the disastrous mistakes we have made, blind us to what is going on under the surface to the true interpretation of the trend of things.

Keynes noted that productivity had grown – and was continuing to grow – rapidly in the west. He speculated “in our own lifetimes … we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed”. He coined the term Technological Unemployment to describe how, as productivity rises faster than demand, fewer and fewer workers are required to service the world’s needs; and thus fewer are employed at any given wage.

The classical economic response to such a reduction in demand for labour services is to reduce the price i.e. the real wage will fall. Hence, as capital is substituted for humanity, productivity rises, but wages and/or employment decline. The application of classical economic theory will lead to a new equilibrium. If the market clearing wage falls below than the living wage, an increasing proportion of the population will simply not be able to support themselves in the economy.

Technological unemployment, Keynes suggested, was inevitable where the benefits of productivity growth were not evenly shared. The solution is to recognise, as productivity increases, hours worked might decline rather than wages and employment. Keynes suggested eventually a fifteen-hour working-week would be sufficient to produce all that civilisation required; thus wages, leisure and standards of living might increase for all (rather than decline for many) as productivity increases. However, if all are to share the benefit from increases in labour productivity, we require a change of economic world-view. Rather optimistically (as we now see with hindsight) Keynes wrote “I see us free, therefore, to return to some of the most sure and certain principles of … traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable”.

More than eighty years have passed and we find ourselves in the second decade of the 21st century; there are still seventeen years before 2030, when Keynes foresaw the transition would be over and we would enjoy “economic bliss”. In the intervening period, various political-economic approaches have been tried: fascism, communism, socialism, Stalinism, Keynesianism (the so-called Golden Age of Capitalism), Thatcherism, monetarism, consumerism, market fundamentalism, nationalism and, most recently, austerity – and yet we find ourselves in western economies suffering problems not dissimilar to those of the 1930s. Since the west’s abandoning of Keynesian policies in the 1970s, real wage growth has failed to keep up with productivity growth and, according to Jim Clifton of Gallup, there is 1·8 billion too few good jobs world-wide.

This situation is likely to deteriorate as the digital revolution reduces employment opportunities in retailing and a new industrial revolution reduces employment opportunities in manufacturing. Similarly in the service sector, automation is stripping humans out of the supply chain in jobs such as bank cashiers, taxi and lorry drivers, doctors and even lawyers. In short, technological unemployment is likely to continue to increase as we move to a more capital intensive, robotic economy. Although many of these technologies are in their infancy, according to MIT technology review, “in the race against the machine, some are likely to win while many others lose”. There are those who blame the unemployed themselves for this decline in opportunities, others suggest this makes about as much sense as blaming shire horses for their displacement by the tractor. What is clear is that technological unemployment is not going away anytime soon, rather the opposite.

Meantime, the physical and ecological constraints of the earth imply western societies’ needless conspicuous consumption, planned obsolescence, and the ever-changing dictates of fashion are not sustainable. We already exist in a situation of 25% to 30% ecological deficit per year – implying we should be seeking to shrink, rather than grow, overall demand if we hope to achieve ecological sustainability: This will further impact on the availability of employment in the market.

There is no one solution to this on-going employment crisis; indeed, we suggest no solution is possible without a return to Keynes’ “traditional virtue”.

Kevin Albertson


1 Keynes, J.M. (1930) Economic Possibilities for our Grandchildren, reprinted in Essays in Persuasion, New York: W.W. Norton & Co., 1963, 358-373.

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Fighting for the Consumer in Financial Markets

In the 1980s and 1990s New Zealand embarked on a process of privatisation which saw many of the public’s assets being sold to private buyers. Amongst the “family silver” sold were two of New Zealand’s banks – the Bank of New Zealand and the Post Office Savings Bank – both of which went to Australian buyers. This process of liberalising – or perhaps we might say, neo-liberalising – the New Zealand financial sector reached “equilibrium” when New Zealand’s major financial institutions were largely owned by foreign interests.

The new owners of New Zealand’s banks quite naturally adopted policies designed to increase profit. Such policies included: monthly account fees; fees for the use of cheques; EPOS and ATM use and for banking at the branch; and fees for banking by telephone or internet. According to Consumer NZ research manager Belinda Allan, these often amounted to “hundreds of dollars a year” for each customer. As David Tripe (Centre For Banking Studies, Massey University) pointed out in 2001, for at least two of these foreign owned banks, “… significant increases in their gross income, … would appear to be largely attributable to increases in their non-interest income”.

The level of fees was, according to David Tripe, only one of the public’s list of complaints against the banks. In 2000, he noted the public were concerned over:

  • Bank fees and charges;
  • High interest rates faced by borrowers (and low interest rates paid to depositors);
  • Branch closures, which have made it more difficult for people to get to their bank, or to have contact with it;
  • Branch closures undermining rural (and suburban) communities;
  • Difficulties in dealing with call centres;
  • The failure of banks to lend to small businesses trying to get started, or to other people in need;
  • That the banks are almost all foreign-owned;
  • That there was insufficient competition between the banks, meaning that the banks were effectively operating as monopolies, and imposing excessive charges on their customers; and lastly
  • That banks provide poor service.

As Milton Freidman has pointed out “the social responsibility of business is to increase its profits”, however it cannot be assumed that this is of benefit to the public in general. Therefore the state has a role to play in ensuring the single-minded pursuit of profit does not undermine the public good.

The New Zealand government might have attempted to respond to these perceived problems with the nations financial services through legislation or regulation – instead it decided to provide competition. The so-called Kiwibank, owned by the public of New Zealand and operating in such a way as to increase public good was established in the early 2000s and proved an instant success. Private sector banks were motivated to provide at least as good a service as the publically-owned bank in order to compete. From the time of its entry into the banking sector, customers reported an increase in satisfaction across the sector as a whole.

No one, or, at any rate few, would argue that social good could be maximised if the entire economy were owned by the state – this is one of the lessons of the fall of communism. Neither, we suggest, will maximum social good necessarily be delivered by market fundamentalism – this is one of the lessons of the on-going Western Financial Crisis. A mixed economy, in which the public sector and the private sector fight it out in the market, can deliver social results which neither could achieve on its own.

There may be a lesson here for UK politicians concerned about the behaviour of privatised utilities companies.

Kevin Albertson

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Capitalism, Social Protest and Changing Common Law in Lancashire, 1750-1770: An example of the “golden rule”.

The predominant economic system in the Europe of the 15th, 16th, 17th and early 18th century was that of the Mercantilist. It was generally held that the purpose of trade was to further the military strength of the nation state. In particular Mercantilism demands a positive balance of trade and this was achieved through a system of trade barriers and tariffs which often impacted particularly severely on the working poor. However, built into the old system were certain safeguards, often based in common law, which not only protected the state and its colonial and imperial markets, but also the powerless and economically vulnerable. This sense of paternalism was to be increasingly challenged as a (so-called) free-market model was pursued.

It is widely accepted by historians and economists that pressure was being brought on the mercantilist model in the 1770s, particularly by the publication in 1776 of Adam Smith’s Wealth of Nations1. This work suggests a prosperous state is more easily created through individuals’ pursuit of their own ends in the (supposedly) free-market than through state manipulation of the market. Smith (1776) served to usher in not only a new set of macroeconomic principles but also opened the door to capitalist microeconomic practices.

However in Lancashire – a locality commonly associated with developing industrialisation – this process was initiated more than two decades earlier. This is seen in the struggle between the emerging class of capitalists of the “middling sort” and those groups of ordinary workers who were to be affected by industrial change. To accelerate the process by which the means of production changed from the artisan independent worker to the paid mill-hand, customary work practices were undermined by the emerging capitalist class. This was seen as a necessary pre-condition for the control of human capital as a means of production.

Naturally, this led to a degree of opposition, and the forces of the state had to be deployed to ensure the growth of private profit. The budding capitalists began this process in and around the Manchester area, but relatively quickly expanded their efforts to the whole of the north-west. Crucially they required legal sanction to effect the required changes and they were to get this by virtue of a highly dubious legal ruling by an early advocate of the opening up of trade in the form of Lord Chief Justice Mansfield in early August 1758.

In effect, Mansfield ruled that the imposition of a “flexible” labour market was necessary to give British capitalists a global trading advantage. These events were taking place when the nation was involved in world-wide warfare; the army and navy saw action in India, the Far East, Africa, North America, the Caribbean and Europe. Under Mansfield’s ruling, those who opposed the subjugation of their economic freedom by the new capitalist class could be charged with treason and potentially sentenced to the death penalty. Thus, the right of capitalists to incorporate so as to facilitate increasing returns on their assets was enshrined in law – the right of labour to incorporate so as to facilitate increasing returns on their assets was stripped away.

As capitalism replaced mercantilism, there was a decline in the inclination of the state to manipulate goods markets for the benefit of the nation; conversely, there was an increase in the inclination of the state to manipulate labour markets for the benefit of private profit. It would be a generation before the standard of living of the working class recovered from such “progress”.

David Walsh

1 Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, 5th ed. (1904) London: Methuen & Co., Ltd. Available at

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What we Lose when we Privatise

David Cameron has recently called for “more fair” energy tariffs from privatised energy companies, promising an end to their “tricks” and “loopholes”. Mr Cameron also apparently holds that SW Water rates have been unfair. Such concerns are not limited to SW water. According to the Jonson Cox, the chairman of industry regulator Ofwat, many other water companies pursue profit and taxation strategies which might be regarded as being “morally questionable … in a public service”. Similarly, an in-depth report by the Centre for Research on Socio Cultural Change at the University of Manchester has argued rail privatisation has been a “serial shambles creating artificial profits for the franchise holders and hidden costs for the public”. If the government doesn’t like the way privatised services operate, it seems reasonable to ask why they are so keen on privatising yet more public services.

The purpose of privatisation is often said to be to improve efficiency – although how this is to be defined is open to debate. State owned Scottish Water appears capable of providing less expensive water services than its privatised equivalents south of the border. Also, several of the UK’s supposedly private sector railways are actually owned or part owned by other national governments; for example, Arriva and Northern. The one British rail franchise which remains in UK public hands, the East Coast mainline, received (2011/12) the second to lowest subsidy from the taxpayer, only 0·5p per passenger mile, compared with an industry average of 7·5p. The people of Britain, at any rate, seem to prefer the service to remain in public hands for the moment.

In a recent discussion on the re-privatisation of the East Coast mainline, Graham Morris (MP for York Central) pointed out “By the end of this financial year, East Coast will have run the service for four years, returned about £800 million to the Treasury and provided an improved service.” This brings us to our second point; at a time of trying to reduce the budget deficit, can the government really afford to lose the profits which well run public services bring? Generally, before privatisation, publically owned industries make money for the government and hence for the taxpayer (Dewenter and Malatesta1): Afterwards, of course, they make money for the private sector.

Further, there are hidden social costs of privatisation, for example the reduction in the workforce which generally follows the adoption of narrow market-based objectives. As Haskel and Szymanski2 and Dewenter and Malatesta1 show, companies’ work-force sizes reduce after privatisation. At a time of historically high unemployment in the UK, we can ill afford to adopt employment reducing economic policy, however much private profit will result.

Despite all this, plans are being drawn up for further privatisation in the UK. Amongst the companies to “go under the hammer” is the Royal Mail. If past experience is anything to go by, we might expect:

  1. A reduction in profits to the government – Royal Mail Group made a profit of £440 million in the 53 week year ended 31 March 2013.
  2. A reduction in government tax receipts – as noted above, private sector companies have been known to engage in tax avoidance.
  3. A reduction in employment – effectively turning a proportion of the workforce from taxpaying employees to welfare beneficiaries.
  4. A deterioration in service – arising from there being fewer staff.
  5. An increase in charges to the service user – followed shortly thereafter by government ministers’ complaints of “tricks” and “loopholes”.

Ultimately, debates about efficiency ignore a distinction between private and public companies: Private sector companies are ideally run solely to maximise profits while a public sector company might be run so as to maximise return to society3. The best return for shareholders is by no means guaranteed to be the best return for the nation.

Kevin Albertson

1 Dewenter, K.L., and Malatesta, P.H. (2001) State-owned and privately owned firms: An empirical analysis of profitability, leverage, and labor intensity, The American Economic Review, 91(1), 320-334.

2 Haskel, J., and Szymanski, S. (1993) Privatization, liberalization, wages and employment: theory and evidence for the UK, Economica, 161-181.

3 It is sometimes argued that principal/agent theory implies civil servants might not always do what is in the interests of society, but it can equally well be argued CEO’s might not run a business in the best interests of shareholders.

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Austerity Kills, Reports the British Medical Journal (BMJ)

In Economics debates frequently revolve around the tensions between equity and efficiency (for example see Okun’s ‘leaky bucket’ hypothesis). Yet in recent articles published in the BMJ (cited below) the evidence is starting to accumulate that the austerity plans implemented by governments in the UK and across mainland Europe are not only inequitable but also inefficient. This is some feat.

Ben et al. (2012) found that in the UK between 2008 and 2010 349 of the excess
846 male suicides could be closely associated with the 25.6% annual increase in
unemployment. The areas with the biggest rises in unemployment also had the
biggest rises in suicides. The authors found that as a result of policies aimed
at taking demand out of the economy, reducing public sector employment and
access to preventative health services there were extra deaths.

Arie (2013) reports the doubling of suicides, increases in mental health problems, and alcohol and drug abuse in Greece, Spain, Italy, Portugal and Ireland. The costs of suicides in Ireland have been estimated at 1% of GDP (see Ben et al. 2013) Malaria has returned to Greece and infant mortality increased by 32% between 2008 and 2010.

Access to health services have also become more complicated with drastic reductions in funding and increased user payments for services or medications. In countries such as Greece access to health services is linked to whether a person is employed. Alongside these changes there have been wide spread attempts to privatise services and hospitals. Yet according to Legido-Quigley et al. (2013), research has not found that privatisation improves service efficiency, let alone equity.

These increased costs and reductions in coverage will tend to result in poorer people delaying their use of services and consequently only seek help when conditions are more
complex and costly. The removal of preventative services will also contribute to worse population outcomes.

Wider economic research has tended to show that for individuals to achieve their potential they require the support of society. In turn society is also then more likely to achieve its full potential. The quality and access to healthcare, education wider social services and the level of tolerance are instrument to individual’s long term economic opportunities. Moreover, the more equal the distribution of resources and economic opportunities the more resilient an economy is to shocks. For example, Kenworthy (2008) shows for a country such as the UK, that a reasonably high minimum wage and tax credits with a shallow taper at higher income levels supports individual’s ability to participate in society and contribute by paying taxes. Whilst the supplement to wages means firms can keep costs down and employment up. The changes in health provision briefly outlined above will result in poorly planned health provision, which becomes more reactive rather than focused on society’s longer term requirements. Provision will become inefficient. Health provision will also become more inequitable as access will vary depending on a family’s income and any lack of access will reinforce wider inequalities.

These poor health outcomes can be mitigated by strong social support for those at greater
risk. The short term recognition of the need for greater social support and possibly a need for the state to act as employer of last resort could reap long term equity and efficiency benefits. This was the case when such polies were followed by Scandinavian countries during their recession of the early 1990s (see Stuckler and Basu 2013) and Iceland is currently achieving relatively good outcomes in spite one of the highest European government debt to GDP ratios (World Bank Data). This evidence is seemingly ignored in the UK and elsewhere in Europe as we appear to be locked into a politically driven agenda. Irrespective of what makes for good politics, economics suggests austerity is not only
increasingly inefficient but also inequitable.

References and Book Recommendation

Arie S. (2013) Has austerity brought Europe to the brink of a health disaster?, British
Medical Journal
18th June 2013; 346 (BMJ 2013;346:f3773)

Ben B., Taylor-Robinson D., Scott-Samuel A., McKee M. and Stuckler D.(2012) Suicides associated with the 2008-10 economic recession in England: Time trend analysis, British Medical Journal 14th August 2012; 345 (BMJ 2012;345:e5142)

Kenworthy L. (2008) Jobs with Equality, Oxford University Press

Legido-Quigley H., Otero-Garcia L., la Parra D., Alvarez-Dardet C., Martin-Moreno J.M. and McKee M. (2013) Will austerity cuts dismantle the Spanish healthcare system? British Medical Journal 13th June 2013; 346 (BMJ 2013; 346:f2363)

WorldBank Data, Central government debt, total (% of GDP) Table accessed July 2013. Available at:

Recommended read: Stuckler D. and Basu S. (2013) The Body Economic: Why Austerity Kills, Allan Lane (ISBN 978 1846 147838). For a review see: BMJ 2013:346: f3659 or ‘Recessions can hurt, but austerity kills’

Dr Matthew Gobey

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Invented in Britain: Why not made here?

This month saw the death of Professor George Gray. Whilst by no means a household name, Professor Gray invented the technology that allowed the development of liquid crystal displays (LCD’s), which have revolutionised those other inventions of Britons: computers, TV’s and ‘phones.

Still on the theme of IT, it would remiss of an article written in Manchester to not mention ‘Baby’, the world’s first computer developed during and shortly after the second world war. On ‘Baby’ all subsequent computers have been based. Similarly much of the ground-breaking work in getting computers to talk to each other was done by Donald Davies at the National Physical Laboratory in Bushey in the 1960’s. The subsequent ‘packet’ technology laid the ground work for Sir Tim Berners-Lee to develop the World Wide Web. A more recent example of British technological invention is evident in the shape of Sir Jony Ive. Chingford born and educated at the then Newcastle Polytechnic, Jony Ive is Senior Vice President of industrial design at Apple and is the principal designer of the iBook, iMac, iPod &c.

So whilst, Britain or the British have been instrumental in inventing key modern technologies, it has not been British industry, in the main, that has taken these ideas forward. The many years of toil by James Dyson to gain investment capital for his ground-breaking vacuum cleaner technology is just one example of a disconnection between the long term investment capital needs of British industry and a banking and financial system seemingly unwilling to invest in this way.

This phenomenon is by no means new; the Macmillan Committee of the 1930’s recognised what became known as the ‘Macmillan Gap’. In other words, there were effective relationships between a country’s financial and industrial sectors evident in Germany and the USA but these were lacking in the UK. The work of the committee eventually led to the post-war establishment of corporations formed by the major clearing banks and the Bank of England to provide long term investment capital to small and medium sized enterprises. The corporations eventually became 3i (Investors in industry). Although successful at first, 3i was privatised in the 1990’s and, according to some, lost sight of its original purpose.

The late 90’s and 00’s saw various venture capital initiatives by the Government in the form of regional development funds, local enterprise partnerships &c. offering investment capital to small and medium sized enterprises, SME’s. However, as any venture capitalist will tell you however, ‘lemons ripen faster than plums’1 p.416 and so inevitable early investment failures drew criticism which might have discouraged such policy. In entrepreneurial activities, this is the nature of the game: eleven investments may see ten failures but perhaps one eventual success, which will more than compensate for any lost investment capital. The government is big enough, and certainly better placed than the private sector (being able to borrow more cheaply and independent of short-term share fluctuations) to play the long-game.

Even when smaller scale ‘seed’ investments were available, Britain lacked a capital injection system for larger scale investments, something which the USA does much better than its European counterparts. Companies such as Autonomy, a massive UK venture capital success story in terms of getting the fledging Cambridge based software company off the ground, reach a certain size then get snapped up by multinationals; Hewlett Packard in this case. It has to be said, however, that it is by no means clear the deal was a good one for Hewlett Packard.

A key issue currently is obviously getting banks to lend money full stop. Latest economic figures point to a large retrenchment in business investment, with inherent implications for productivity and international competitiveness. It’s not just a case of struggling companies needing a shot in the arm however; Britain needs a coherent long-term capital investment system for both fledging companies and medium size enterprises needing to kick on to the next level.

What form such investment vehicles would take is open to debate, although it is clear that state involvement will be required; perhaps along the lines of the original 3i model to ensure capital is going to SME’s and beyond, rather than just repairing bank’s balance sheets.

In summary a rebalancing of the economy and replication of Germany’s famed Mittelstand in the UK – let alone the creation of a home-grown Microsoft, Apple or Google – will not occur until British inventiveness is coupled with adequate long-term capital provision.

1 Cumming, D. (ed.) (2012) The Oxford Handbook of Entrepreneurial Finance, Oxford University Press USA.

Jon Prest

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Bank Lending and the UK Housing Market

In the current media there is analysis of two potentially offsetting features of the UK property market. Firstly there is speculation of a further house price bubble sparked by the government’s ‘Help to Buy’ lending scheme and secondly the constant criticism of banks for failing to lend. Sir Mervyn King is unimpressed and has criticised the state position on home buying support as a ‘government-guaranteed mortgage market’.

The lending process of banks is tied to many factors beyond their control. They are constrained by capital requirements and the prospect of an increase in the interest rate increasing their bad debt recordings through repayment default. However, it is by no means clear state sponsorship is the solution to this.

From the point of view of the lender, a mortgage is used to buy property which is used to provide the loan security. The risk to the lender should be minimal. The borrower goes to the bank to get a mortgage and buys property which is security for the loan. In the event of any default on the loan, the lender takes possession of the property which can be resold to cover the amount outstanding. However, we must also consider the risk that the house price falls and the property can not adequately secure the loan – and any outstanding interest – should the borrower default.

On this basis, it would appear banks’ reluctance to lend implies they are expecting a fall in property prices. However, the government wants an increase in mortgage lending to ‘kick start’ the housing market. Rather than regulate the banks to change their business model the state thus proposes to interfere in the market by becoming the risk taker. For example, let us say I am requesting a mortgage of £220k for a property the bank feels is £20k overvalued. The bank should be happy to lend the £200k at low risk and government sponsorship may fund the rest – the risky (one might even say, ‘sub-prime’) part of the loan.

However, perhaps the banks are lending less, not because of risk, but because of insufficient demand for their products. Supply must, after all, equal demand. If potential home owners find mortgages are unaffordable they will not borrow. Under normal operations, a firm unable to sell its products because it has priced too high, reduces the price or reduces sales. For example, the candidates on the TV show The Apprentice have realised this in their beer selling challenge. However, it would seem banks need not lower the price of borrowing and make mortgages more affordable if the government is ready, in effect, to subsidise financial products and profits. Bank of England economists have indicated that private sector UK banks already receive implicit subsidies of hundreds of billions of pounds.

Put simply, either: 1) the property market is overpriced, in which case a risk adverse business model quite rightly indicates lending should be reduced: In this case, the government scheme will support my paying too much for property and potentially fuelling a property bubble. Alternatively, 2) the government scheme may be seen simply as one of many which supports bank profitability, effectively, a subsidy.

To boost sales, firms in other industries would simply have to lower their prices, why not mortgage providers?

Richard Whittle

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Devastating Debt

In 1803, USA president Thomas Jefferson wrote to the governor of Indiana territory (Indiana was not at that time a state). Jefferson was keen to expand the territory of the USA by the acquisition of Indian lands. He advised:

… we shall push our trading houses and be glad to see the good and influential individuals among them run in debt. Because we observe that when these debts get beyond what individuals can pay, they’re willing to lop them off by the cession of lands.

The Natives of Indiana might not have been prepared to sell their land, however,all unknowing of the long-term consequences, they entered into unrepayable debt which ultimately led to the same result. It need hardly be said, this had a devastating impact on their heritage, patrimony and way of life. A more modern example of the same process might be the privatisation plans of the governments of the UK, Greece, Spain, Portugal, Ireland, Cyprus and Italy which are all regarded as debt induced, to one extent or another. Clearly, debt can have severe, unforeseen, negative consequences.

In the UK today, millions of the economically vulnerable are mired in debt problems of their own and must borrow further just to put food on the table. The UK, like other European nations has also embarked on extensive austerity measures which appear likely to have a further impact on the vulnerable.

This leaves them not only having to mortgage tomorrow to pay for today, but often to mortgage the rest of next week as well, through their resorting to so-called pay-day loans. Such loans often come at an eye-watering APR of circa 4,214%.

The model of instrumental rationality, which Economists generally assume applies to individuals and nations, states that economic agents will only take out such loans if they are better off by doing so. In this model, it is not the role of the state to infringe on individuals’ liberties by preventing their having what they want. However, the state is prepared to intervene in markets where people are in danger of making ill-informed decisions or where externalities exist – for example, the cases of alcohol pricing, cigarette advertising and limitations on the supply of narcotic substances. A justification of intervention might be that pay-day loans involves similar risks.

In any event, whether the state intervenes in the market or not, we might at the least consider whether it would be wise to eliminate the advertising of such debt. If we are rational, we need no adverts to entice us – if we are not rational, then all the more case for refraining from advertising such a potentially devastating deal.

An alternative to the need for pay-day loans would of course be more remunerative pay-days for the economically vulnerable. However, that may well be another story.

Kevin Albertson

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Where has all the happiness gone? … and how do we get it back?

The UK is a less happy place than it used to be. The proportion of the population that considered themselves ‘very happy’ has fallen from over half in the late 1950’s to a little over a third by 2006. It could well be argued that the late 50’s is not a fair benchmark as the shackles of post war austerity and rationing were finally beginning to be cast aside. However, it is clear that the deep recession of the last five years has done little to improve the mood of the nation. Moreover, it’s the numbers surrounding the flipside of happiness which are more alarming.

Depression has been termed the common cold of the 21st Century with one in four British people experiencing or expected to experience a bout of depression at some point in their lives. The Office of National Statistics estimates 10% of the UK population are depressed. Growth in the levels of depression is a worldwide phenomenon, although it is the ‘Western’ style countries, which suffer the most.

So where have we gone wrong? Even allowing for the on-going economic turbulence, the UK is a relatively wealthy country. Compare a modern household with its 1970’s counterpart and it is clear there is lots more ‘stuff’– with extensions and loft conversions built to accommodate it all. Technology that once was only imagined in science fiction is now at our fingertips and many of us can now expect to live well beyond three score years and ten. We have ‘more’, but we enjoy less. It would seem therefore that money does not buy happiness. Indeed, it may well be the dogged pursuit of money and material wealth which undermines happiness in modern society.

A recent study of MMU students revealed that ‘social life’ in whatever form that takes is their key driver of happiness. This conclusion is perhaps unsurprising but ties in with research conducted by consumer behaviourists who have found that happiness amongst adults is driven by ‘social connectness’; a connection with people and the world around us. It is not hard to see how western societies have lost this ‘connectness’. For many years now, economic conditions have forced UK workers to work long hours to ‘remain competitive on the world stage’. Parents have less time for children but worry more about their educational progress hence the inexorable rise in private tuition. A loss of social connectness has fed a boom in Internet dating sites, whilst the decline of the nuclear family has been matched by strong growth in single person households. Finally, an ageing population can lead to a proliferation of isolation and neglect.

So what is to be done? Comfort eating, retail therapy and ‘self-medication’ through alcohol have all become common and accepted ways of dealing with the uncertainty, change, stress and time poverty that goes hand in hand with modern life. However, consumption can be a case of short-term gain with long-term pain in terms of physical, mental as well as financial health.

Humans are generally good at survival and adapting to new conditions. The downside of Western life or ‘Westernisation’ has made many people look East for a solution. Yoga, meditation and mindfulness (a mix of meditation and cognitive behaviour therapy) have been adopted in the West as a way of dealing with the stresses of modern life and reconnecting with the self. Tal Ben-Shahar, author of the popular Happiness course at Harvard University advocates meditation as a way of staying in the present moment and being content with your lot, rather than striving for the next thing. Locally, connectness may be achieved through growth (or rediscovery) of knitting circles, book groups, allotment gardening, charity fundraising and sports events etc., with ‘packs’ of MAMILS (middle aged men in lycra) now a common sight on the UK’s roads. Meanwhile, social networking allows connectness with friends and family across the globe.

Richard Layard, emeritus professor at the LSE, recently called for government policy to be driven by the pursuit of happiness and reduction in ‘misery’. Meanwhile, the Government’s National Well-Being Index initiative is a welcome addition to the growing body of work on happiness and well-being. Whether it will supplant GDP as a key national indicator is very much open to question, although companies such as BMW and Rolls-Royce have adopted ‘happiness’ as a key employee metric to help ensure the long-term ‘wellbeing’ of the company.

Whilst Government economic and social policy can and should make a big difference to the health, happiness and general well-being of every UK citizen, it is more a case of the individual or the collective will of individuals in pursuing a more time rich, perhaps less material path. Research has shown that happiness for older generations equates to peace. Moreover, younger generations will state that happiness means excitement but dig a little deeper and they seek peace in whatever form that may take. This in no way suggests that everybody should reject material wealth and go off to the woods to meditate. Rather that we give more space and time to things that can bring lasting happiness.

In sum, we have to learn when ‘enough stuff is enough’. As Aristotle said ‘happiness is the meaning and purpose of life’. Perhaps we have forgotten this along the way.

Jon Prest

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