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Comment on: ‘Eight Elementary Errors of Economics’

Richard Giles

This article in the Jul-Aug Review by Geoff Davies points out quite clearly some home truths about neo-classical economics. The second error however deserves a comment.

The Second Elementary Error: Poor Performance Ignored

Dr Davies points out that economists have ignored the poor performance of the economy since 1980. He argues that unemployment and inflation were significantly lower in the period 1953-1974 than post-1980. That he says is

due to the fact that between 1953 and 1974 “governments involved themselves substantially in the economy”. The remedy he adds is that markets “need to be carefully nudged and guided into behaviour that is beneficial”.

Repression can always make things appear superficially better than they are. Political repression can do that but so also can economic repression. The period 1953-1974 was one of economic repression.

The ability of employers to exploit the poorer bargaining position of workers was repressed through the encouragement of compulsory unionism, ‘closed shops’, periodic basic wage decisions, awards, arbitration and so on. At the same time it was generally harder to get a home loan.

After 1980 economic repression eased considerably. Employers regained greater bargaining power and banks and building societies tried to make it possible for everyone to buy a home. Trading in mortgages helped to replenish capital for more mortgages.

No Questions Asked

But no one probed very deeply in the period 1953-1974 as to why economic repression was needed or, after 1980, why wages and conditions deteriorated and why the very poorest 30% of the population could never afford a home.

In sum, having taken away economic repression the distorted shape of the economy reasserted itself. Dr Davies does do some probing. He says it “was the collapse of a mortgage debt bubble in the US that triggered the GFC”. Let us go on from there. In other words, land speculation (the great ‘free lunch’ in our society) mostly in the form of mortgages, exacerbated by a mounting trade in those mortgages, finally produced a reverberating collapse. The poorest 30% failed to repay these debts, then investors failed to repay debts when it became impossible to sustain the ongoing sales of property, and then banks ran out of funds.

At the same time rising land values and rents made it harder for households and labour, including developers and entrepreneurs, to sustain their ‘ordinary returns’. The expansion of construction slowed and from this failure of supply the vicious cycle of falling supply and demand developed.

For the two problems of land speculation and increasing poverty Henry George in Progress and Poverty proposed one answer: the return to the community of that income stream called economic rent (the locational value of land). That seems too hard for our community. We prefer to personalise the economy into goodies and baddies and, instead, to demand that ‘they do something’. We almost forget that “they” are politicians who have as much chance of changing things as Canute did in stopping the tide.

Richard Giles is Secretary of the Association for Good Government

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