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Steering the Economy

June 3, 2017

I have just been reading Kate Raworth’s book ‘Doughnut Economics’, a brilliant and very readable account of how economics has to change if everyone is to have ‘enough’ whilst staying within the resources and carrying capacity that the planet can cope with. She explains why economic growth cannot in future be the primary goal. We have to learn that the economy is not in stable equilibrium, and that the market cannot solve all. Orthodox models are useless. Systems Dynamics models such as those used by Steve Keen give a good explanation of why credit crunches, such as that occurring in 2008, happen and could potentially forecast the next one on the assumption we carry on as we are.

If we want to work out how we can get from where we are to where we need to be, we surely do not want to have to cope with recurring crises of that sort. Economies need to be steered. During the elction camapign a lot has been said about taxes. That is fiscal policy and is one aspect of what governments have to do to control the economy, but there is also monetary policy, now delegated to the Bank of England. What instruments does the Bank have for this purpose? Currently, for the most part, only interest rates, which are supposed both to keep inflation within acceptable limits and to ensure growth. Here  Kate Raworth says something I do not understand, ‘It’s time to stop searching for the economy’s elusive control levers (they don’t exist) and start stewarding it as an ever-evolving complex system.’

In the decades following WW2 the British did use powerful levers to control money – credit controls and exchange controls. In what Lord (Adair) Turner called a time of ‘financial repression’, the economy did ok. The crash of 2008 could not have happened. There are at least two measures to avoid another 2008:

The first is the one advocated by Prof. Richard Werner. Based on his investigation of Japan’s asset bubble followed by a long period of stagnation starting in 1992, he claimed that in order to prevent future asset bubbles, there should be controls on the amount of credit extended for speculation in existing assets, such as real estate, which makes no contribution to the real economy – see for example, on Richard A Werner, “New Paradigm in Macroeconomics: solving the riddle of Japan’s macroeconomic performance”, Palgrave MacMillan, 2005. This depends on being able to keep track of the amount credit extended for speculation in existing assets as opposed to that to fund productive investment. I am not sure the Bank fo England is good at that, but cannot find the appropriate reference. Werner is now professor of Banking and Finance at Southampton and continues to advocate his prescription. He has extensive knowledge of local banking in Germany and has been leading a team working to establish a Hampshire local bank, which would include current accounts, but I think they are still snarled up in the bureaucracy.

An alternative is to adopt the solution advocated by the campaign group Positive Money, whereby money is created by the central bank rather than by commercial banks in the act of lending. This is similar to the Chicago Plan advocated by Fisher et al in the 1930s. It has several advantges, one of which to allow counter cyclical issue of money. However as I argue at whereas at present credit and money are indistinguishable, this reform would separate the two. Werner style credit controls might still be required.

I believe that the two solutions are complementary. For example if we got into a situation of debt deflation Postive Money could be an alternative to ‘People’s Quantitative Easing’.

One way in which these two proposals could be evaluated is by extending Steve Keen’s system dynamics models to encompass rules of thumb based suggested by them. We are straying here into the field of cybernetics, and it would be worth studying the work of the late Stafford Beer, both on his Viable Systems Model, and on the work of his team on the Cybersyn project in Chile on controlling the economy in as close to real time as the state of IT allowed in 1972 – This promising experiment was brutally terminated by the overthrow of Allende by Pinochet and the CIA. Pinochet’s military examined the project, but they found the open, egalitarian aspects of the system unattractive and destroyed it. Since then neoliberal ideology has outlawed such approaches. Would such an approach kill subsidiarity? Not necessarily; this needs looking into.

These measures are in no way in conflict with Kate Raworth’s vision. They would merely create a situation of stability within which the hard work of matching people’s needs to the capacity of the planet could proceed. This requires hard work, much patient negotiation and imagination.

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