Though Cowards Flinch

The Euro Debt crisis grows more acute. The attempt to form a currency union without a European state and a single tax system linked to the currency would always be problematic. What has made it impossible is that now, the model on which Western Capitalism has been based post the crisis of the 1980s has run into the sands.

Capitalism has always had a fundamental problem in that those who produce society’s wealth are paid too little to consume the wealth that they produce. Property income, which always represents a large fraction of all income, is very concentrated. Huge wealth flows into the hands of a small number of companies and individuals. Unless this wealth is somehow spent, the economy goes into recession.

There are several possible solutions to this. In rapidly developing economies like China today of Japan 50 years ago, profit income is overwhelmingly directed into capital investment – recently as much as 50% of Chinese national income has been reinvested. But this process of reinvestment innevitably leads over time to a lower rate of return on capital, at which point further investment becomes unprofitable. By the 1990s Japan had reached the end point of this process with profits driven to the floor and the economy entering a long period of stagnation.

There are other possible solutions – Britain in the late 19th century had very low levels of investment out of profit, but very high levels of luxury consumption by the upper classes : the building of large stately homes, the employment of armies of butlers and maids etc. That model did not survive two world wars.

The period 1945 to 1980 in Europe was a different model, combining historically high levels industrial investment with relatively redistributive tax and spending regimes to maintain demand. By the end of this period the rate of profit had fallen to crisis levels. At this point a continuation of the trend towards greater social equality would have required private capitalism had to be replaced by state capitalism ( the Tony Benn strategy ) or the post war goals of social justice and full employment would have to be repudiated ( the Thatcher strategy).

We all know which model won out, first here, and then in other countries. Under the neo-liberal model, social inequality increased, taxes on the wealthy were cut and productive capital investment shrunk to barely replacement levels. There was a big increase in conspicuous consumption by the very rich, and social pressures on the population in general to also engage in conspicuous consumption. Economic activity could only be sustained by the extension of credit on a huge scale. States, unable or unwilling to tax the wealthy, became dependent on borrowing from them to cover public expenditure. Employees were encouraged to finance ‘aspirational’ consumption likewise. But this could only work for a couple of decades until the level of debt, public and private became unsustainable.

Now the conflict of interest between the bond holding classes and the rest of society has become intolerable. Monetary union was constructed according to rules that made the bond holding interest sacrosanct. Nation states lost the power to inflate away the national debt by the issue of fiat money. This would not have matered if the issue of the new currency had been under the control of a democratic federal state with its own tax raising and monetary powers. Without such a state we have had a series of crises as the financially weaker countries are forced into successive and counter productive austerity programmes.

Think about it, if the level of debt is to be reduced, then at the end of the process the debtor states and individuals must end up with less liabilities and the creditor class must end up with less assets. The liabilities of the debtor states and the assets of the bond holders are opposites sides of the same coin. Reducing social services does nothing to reduce the assets of the bond holders, since those hit by public expenditure cuts own little or no bonds. The only ways that the debt burden could be reduced would be:
a) deliberately inflating the Euro to reduce the real value of bonds,
b) instituting a uniform European system of property and income taxes that bore most heavily on the bond holding classes and firms,
c) or more radically, declaring a general debt amnesty – something sharper than Angela’s ‘haircut’.

As the Globe and Mail reported 562 arrests of those protesting the summit, the G20 leaders released their final communique. It represented a victory for those like Merkel and Cameron who were pressing for deficit reduction to be the key aim. The final communique stated:

Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges o aging populations, and avoid leaving future generations with a legacy of deficits and debt. The path of adjustment must be carefully calibrated to sustain the recovery in private demand. There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recover. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will a least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.

We see the opposing views of Europe, China and the USA in this summary. Presumably Chinese and US pressure led to the

There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recover.

Whereas the European right seems to have won the conclusion

There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will a least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.

How achievable are these aims?
Can they half deficits by 2013?

When considering individual economies there is always the possibility of reducing deficits by exporting more, but for the whole world this does not apply. How can the whole world reduce deficits in the midst of a recession?

It can only do it if the private sector as a whole, world wide, saves less. And how can this happen?

The most obvious solution — to sharply raise taxes leaving the wealthy of the world with less money to save — seems to have few advocates, so we are left with three other courses of action.

1. The most likely initial scenario, the budget cuts of Cameron, Merkel etc plunge the economy of Europe at least into a much deeper recession as a result of which millions of newly unemployed stop making payments into pension schemes and bring down the level of saving.
2. The next alternative is that private firms start borrowing on a large scale to finance new investment. This is not impossible, but is unlikely until the private commercial sector has improved its liquidity.Companies have to go through a period of saving to do this. The savings of the private sector must balance state borrowing, so what is happening is that firms are offloading their debt onto the state as the borrower of last resort. Once they have shifted enough debt onto the state, and if world demand looks buoyant, they might then start borrowing to invest again. But this requires governments across the world to go on borrowing until private investment picks up. If they immediately start to try and cut the rate of borrowing and even try to run down the total level of outstanding debt by 2016, as the communique states, the whole process stalls. The communique implies that the private sector is to become a net-borrower from the state sector by 2016 — an extraordinary unlikely prospect.
3. The one plausible and progressive mechanism mentioned is to expand demand in the surplus economies.

Surplus economies will undertake reforms to reduce their reliance on the external demand and focus more on domestic sources of growth. This will help strengthen their resilience to external shocks and promote more stable growth. To do this, advanced surplus economies will focus on structural reforms that support increased domestic demand. Emerging surplus economies will undertake reforms tailored to country circumstances to:
• Strengthen social safety nets (such as public health care and pension plans), corporate governance and financial market development to help reduce precautionary savings and stimulate private spending;
• Increase infrastructure spending to help boost productive capacity and reduce supply bottlenecks; and
• Enhance exchange rate flexibility to reflect underlying economic fundamentals.

There is blatant hypocrisy here. Surplus economies are supposed to be expanding domestic demand, but Merkel, the head of Germany with the 3rd largest trade surplus is determined to retrench rather than step up domestic demand. In effect the pressure on surplus countries is addressed exclusively to China. There is no doubt that were China to put in place really large scale social democratic reforms, then domestic demand there would rise, with significant expansionary implications for the whole world. But for now, China’s trade surplus continues to grow, contra the declarations of the the communique. The sorts of changes that the communique asks for in China actually require a change in the political balances of forces towards the working classes in China. The fact that Hu Jintao was willing to allow even this much to go into the communique, along with the successes of the recent strike wave in China, indicates that this internal change may be beginning to happen.

I was asked the following questions after my last posting.

a) we have a structural deficit which requires fresh debt to be raised and b) a lot of debt repayment is met by refinancing i.e. by issuing more debt to pay the holders of gilts reaching maturity.

Given that state of affairs, if:
i) The Gov prints Sterling to meet payments causing inflation to rise to deliberately erode debt (if that is the proposed policy) – why would an investor the period after buy debt from a country who does that? (except perhaps at a stonking yield).
ii) We whack a massive tax on savings. It instantly becomes less profitable to but government debt – cue mass sell off and fall in demand for future gilt offerings.
iii) The markets crash and value of sterling drops significantly. Why has that happened? Because investors have pulled their cash out – no more demand for gilts.

Why wouldn’t these things happen?

I think that these questions show a misunderstanding of the role of the Crown in the financial system of the country.
The impression is that the Crown is dependent on the financial system, whereas historically the whole financial system
from the foundation of the Bank of England grew up to service the tax and spending activities of the Crown.

The early English taxation system  well described in   Peter Heather’s recent book and in Menninger rested on a system of tallies. The Lords Lieutenantof the shires initially had to render taxes in kind to Crown in return for which the exchequer gave them split tallies which recorded their payment.

One side of the tally was kept by the Exchequer and the other by the person rendering taxes. Later it was found that the tallies could be used to pay directly for Crown expenditure – the purchase of naval stores etc. The merchant delivering the stores to the Crown would get a tally which they could then sell to somebody else who could render it in lieu of tax. The birch sticks having been split down the middle were proof against forgery, since only the twin of a divided tally would match it.

After the establishment of the Bank of England these wooden records were replaced by paper ones, but the essential principle has remained the same. If you are paid by the Crown you get a slip which looks like a cheque but isnt. A cheque is drawn on a bank. The Crown makes payments in the form of drafts on the Queen’s and Lord Treasurer’s Remembrancer in Scotland or the Paymaster General in England. These drafts, which now go through the automatic bank clearing system with a Bank of England sort code, can be used by the banking system to offset taxes falling due. The banks also use them as the foundation of their whole lending system. Payments by the banks are drafts on private a bank that are only ultimately valid so long as they can ultimately be translated into drafts on the Paymaster General.

At times the banking system creates more private liabilities than it can back up with drafts on the Crown – when this happens as it did in 2008, there is ultimately no recourse but for the Crown, via the Bank of England to create additional such drafts, a process with now goes under the term quantitative easing.

In the normal course of events drafts are continually being created by Crown expenditure and anulled by tax payments. If the Crown expenditure exceeds tax liabilities falling due, it offers to annull the drafts for a period in return for interest. Barney asks what will happen if there is no more demand for gilts? What will happen if investors pull their cash out?

This is to confuse the position of an individual holder of government bonds with the position of the financial system as a whole. The banking system can not ‘pull its cash out’. Its monetary base exists purely in the form of records of credit with the exchequer, managed via the Bank of England. The only thing it can do with these is use them to settle taxes, or to lend back to the Crown. And in recent months, the problem has been not a superfluity of these credits with the Crown, but a lack, hence the need for quantitative easing.

An individual firm can decide to sell UK gilts and buy US Treasury bills, which, if pursued by sufficient firms, may push down the exchange rate of Sterling relative to the Dollar, but the UK banking system as a whole has no option but to go on buying Crown instruments of debt. But as I argued before, a fall in the value of Sterling is sufficiently necessary that the Bank of England would be better to engineer it if it fails to happen spontaneously.

The banking system today hides and mystifies what was transparent in feudal society – that all are subject of the Crown and liable to duties on its behalf. We no longer have to do duties in person in Britain except in time of war. Instead we render to the Crown that which is the Crown’s: money. Because a vast private bureacracy has grown up to manage this process the illusion arises that that bureacracy – which we now call the banking system – creates money.

ii) We whack a massive tax on savings. It instantly becomes less profitable to but government debt – cue mass sell off and fall in demand for future gilt offerings.

I did not prescribe a tax on savings, but on the saving classes. The Crown, appropriates a large part of the social surplus product. In Commercial Society, the real appropriation of the surplus — real consumption of labour and goods by the Government, becomes separated from the symbolic appropriation in tax payments. The public debt is the resolution of the contradiction between real and symbolic appropriation. It is a matter of politics and administrative capability to resolve how effectively the symbolic appropriation matches the real appropriation. Those classes currently saving, predominantly from the higher income groups, are symbolically appropriating part of the social surplus product whose real appropriator is the state. A change in tax rates on higher income groups will help bring symbolic and real appropriation into alignment.

The national interest is again paramount, and this it seems is identical with the concerns of ‘the markets’. The principle task of any coalition, accoding to Liberals, is supposed to be the elimination of the deficit as soon as possible.

“You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold,” Said William Jennings Bryan in 1896. The Gold standard is long dead, but the living standards of the working population are to be crucified to satisfy the bond holders. The issue is the same today as in 1896, is the real economy to be sacrificed to the claims of the rentier class.

The issue now is the same today as it was in 1928 when Keynes wrote:
“The practical steps which ought to be taken if we really want to reduce unemployment are, I suggest, the following:‑

First, as Mr McKenna has consistently maintained, the Bank of England must gradually increase the reserve resources of the joint stock banks up to (say), £I0,000,000 above their present figure‑an augmentation of the basis of credit which will ensure that no worthy business borrower will be turned down by his bank.

Secondly‑since this would greatly reduce and perhaps avoid altogether the risks of the experiment‑the Governor of the Bank must induce his colleagues throughout the world to change their tune when he changes his, instead of his encouraging a general deflationary atmosphere by insisting on every state bank in Europe locking up its gold against note issues which do not need it.

Thirdly, the Chancellor of the Exchequer must remove and reverse his pressure against public spending on capital account.

Every public department and every local authority should be encouraged and helped to go forward with all good projects for capital expansion which they have ready or can prepare‑roads, bridges, ports, buildings, slum clearances, electrification, telephones, etc., etc.

When we have unemployed men and unemployed plant and more savings than we are using at home, it is utterly imbecile to say that we cannot afford these things. For it is with the unemployed men and the unemployed plant, and with nothing else, that these things are done.

To have labour and cement and steel and machinery and transport lying by, and to say that you cannot afford to embark on harbour works or whatever it may be is the delirium of mental confusion.

For several years past these policies have not lacked powerful advocates who have some claim to wisdom and experience‑Mr McKenna, Lord Melchett, Sir Josiah Stamp, for example, amongst business authorities, Mr Lloyd George and Lord Beaverbrook amongst public men, and many economists and journalists.

I do not believe that the Chancellor of the Exchequer is naturally unsympathetic to this outlook. But he has succumbed, just as Mr Snowden did before him, to the timidities and mental confusions of the so‑called `sound’ finance, which establishes as an end to be worshipped what should only be pursued so long as it is successful as a means to the creation of wealth and the useful employment of men and things.(Keynes, How to Organize a Wave of Prosperity, The Evening Standard, 31 July 1928)”

The Liberals have forgotten the insights of their greatest 20th century economist, but the lessons of the 30s have at least been partially grasped by Brown. Partially, because he seeks only to postpone the remedies of ‘sound finance’ another year.

The true sound principle in public finance is to always address the real economy rather than property claims.
The UK is not Greece. Our public debt is not denominated in Euro but in Sterling. The state bank can create sterling as required ( Keynes first point above ). The internal structural deficit can be addressed by taxing the saving classes. The revenues currently flowing to the exchequer as bonds would then come in as tax receipts.

What the UK state can not do is cover that portion of the public finance deficit that originates with the trade deficit. That can only be addressed by righting the trade imbalance that has been engendered by 3 decades of overvaluation of Sterling.

Ever since North Sea Oil led Thatcher to beleive that the industrial working class could be dispensed with, the Pound has been deliberately held high – to the benefit of the City, and through cheap imports, to the benefit of working class as consumers. As the towers of Canary Warf rose, theose of Mothewell and Redcar fell. What was gained in consumption was lost in community and productive social role.

What is the worst that can happen if the ‘markets’ are unhappy?

A run on the pound.

Nothing to be feared.

Nothing would be a better stimulus to a productive restructuring of the UK economy than substantial devaluation.

In the siren calls to National Interest, we hear echoes of the 1930s National Government, echoes of the Gold Standard and the dictates of Montague Norman. The cross is being prepared.

Two stories dominated the news tonight – Brown’s gaffe and the Greek financial crisis. Both linked by a common thread – the economic consequences of a neo-liberal agenda for European unity.

The voter that Brown called a bigot was concerned about the combination of unemployment and the free movement of labour across the continent. From Brown’s standpoint, from the economic strategy that New Labour has followed, her views would have appeared as bigoted. Once New Labour had given up any socialist ambitions, the sole progressive pole open to it was a humanism based on liberal internationalism. The liberal internationalism of the market economy based on free movement of labour and capital.

For some years it appeared to have paid off. His successes during the ‘no-more boom and bust’ years were built on the easy availability of international credit and imported labour.

UK government policy towards Europe has, throughout the New Labour years been consistently neo-liberal. Successors to Thatcher, they built on the greatest foreign policy success of her and Regan : the dismantling of the social democratic economies of Eastern Europe. The resulting mass unemployment in Poland, created an external reserve army of labour for British capital. Almost alone in Europe, Britain insisted on immediate implementation of free labour migration from the East. The freedom that neo-liberalism brought to Europe was the freedom of primitive accumulation – the creation of a labour pool that was free of any existing means of livelihood, freed from their homes, free to serve business on demand.

For all Brown’s professed adherence to ‘post neoclassical endogenous growth models’, New Labour actually followed a policy that made good sense in terms of Marx or Solow : keep the labour supply growing as fast or faster than the growth of capital in order to maintain the rate of profit. In this context, spontaneous working class objections to increased competition in the labour market, are just bigoted objections to liberal progress.

At the same time they set their face against any transformation of the EU that would have strengthened the tax raising and spending powers of the European Parliament. The crisis in Greece, and shortly in Portugal, stems ultimately from this. The Eurozone is a monetary federation without the federal government tax and spend powers that have been essential to the functioning of earlier monetary federations like Germany or the USA. If the EU parliament had the power to levy income and property taxes across the Union, the current crisis in Greece would not be happening. A large part of the expenditure now met by the Greek Government would be being met by the Union out of general Union taxation: defence, pensions, perhaps medical costs.

Union taxes would, as in any other federal state act as a means of redistributing income between richer and poorer areas. Within the UK, Northern Ireland, being a relatively impoverished area, receives a greater per-capita share of central taxes.

But all this would have run counter to the neo-liberal agenda. Social democratic politics having been exorcised at the national level, could not be allowed to return at the Union level. Thus there was no question of the Union having the tax raising powers necessary to provide for example common EU pensions or an EU health service free at the point of need across the continent. Now workers at national level are refusing to let go of the few concessions they have won, and national opposition to EU-wide social democracy is causing problems because there’s no EU-wide capital safety net either.

The blog Stumbling and Mumbling has posted a short article on an alleged tendency of the rate of profit to rise , contradicting the Marxian argument about the falling rate of profit.

The results he publishes are not new, Marxian economists including myself were reporting 10 years ago that the rate of profit in the UK and USA had started to rise after falling for most of the previous 30 years.

For instance see here or there .

The interesting question is why this happened, Stumbling and Mumbling identify Thatchers anti-union laws and the opening up of China as factors. Marxian economist would not disagree with this, but the more interesting question is whether one can come up with a more general formulation of Marx’s theory of the rate of profit which deals with both the period 1945-1980 and the period since 1980.

The answer is yes, and it involves going back to what Marx wrote about over accumulation of capital — that the rate of profit falls when capital stocks accumulate faster than the rate of growth of the workforce. It then becomes possible to formulate a Marxian master equation of state for the rate of profit that not only is compatible with both the pre and post 1980 period, but also has real predictive value. This was done most clearly by Zachriah in his paper to the July 2008 Probabalistic Political Economy Conference available here .

One can also apply this theory to predict trends in the rate of profit about 2 to 3 years in advance.
The key point is that one has to look at the relationship between the share of profit that is reinvested and the growth of the working population. Countries like Egypt with a rapid population growth and low reinvestment rate have rising rates of profit, whereas Japan and Switzerland, where the reverse applies have falling rates. You can study this interactively at my website here.

The work of Zachariah showed that there is an equilibrium rate of profit governed by the rate of growth of the population and the share of capital accumulated. If capital accumulation is high and population growth is low, this equilibrium rate is low, and the real rate of profit falls to meet the equilibrium rate.

In the case of the UK, decisive factors have been the slowdown in the share of productive reinvestment in the post 1980 period which shifted up the equilibrium rate alongside this has gone the growth of the labour force made possible by the free movement of labour in the EU.

Over the longer historical period though, the world average rate of profit will be increasingly determined by the demographic transition in which birthrates accross most of the world are falling. This will produce a global slowdown in population growth, with a consequent global reduction in the world equilibrium profit rate.

In commonsense terms, labour will be in short supply relative to capital, which will strengthen the bargaining position of labour and weaken that of capital.

A key point will be when the Chinese working population peaks some-time in the next 15 years. This will shift the balance of social power within China, and in consequence, the threat of jobs being exported to China will diminish. Overall the tendancies that Marx identified, and which came to fruition first in Britain ( de te fabula natur), are now being played out on a world scale, and on a world scale, they will reproduce the rise of Labour that we experienced a century ago.

I was recently looking at the excellent web site AfterNow which examines issues of population health and their relationship to the type of society we live in.

In one of the videos there Prof. Phil Hanlon describes the human species as obeseogentic, having an innate tendency to consume available food even if it makes us obese.

He argues that those of our ancestors who failed to eat what was available would not have survived to produce descendants, so on classic Darwinian grounds we are adapted to eat as much as we can.

This was fine until the technology of food production reached its current development. In rich countries today substantially more food than is necessary is readily produced. Under these circumstances what had at one time been a survival trait becomes a source of pathology.

This is a very telling point, it undermines the idea that over-eating is almost a moral failure, the ideology that healthy eating is a matter of personal responsibility. If eating what is available is programmed into our genes, preaching dietary responsibility is as futile as the centuries of religious strictures against fornication.

At the same time it hits at the belief that all is for the best in the best of all possible worlds if production is guided by consumer preferences expressed in the market.

Our preferences express survival traits that are no longer appropriate.

How then can we respond politically to the growing health problems posed by obesity?

If we reject moral lectures, what is left?

Planned food production. It is possible determine with a high degree of precision how much food is required to maintain the population at a healthy nutritional level. Produce in excess of this and there will be health problems due to obesity, diabetes etc. Produce less and there will be health problems due to malnutrition.

Agriculture in the EU has long been the subject of political intervention, but these interventions have not been directed towards optimising population nutrition. To move that way would require the Commission to set quotas for the production and import of carbohydrates, sugars, proteins, saturated and unsaturated fats, set by the dietary needs of the EU population.

It would require planning in kind of the sort that was carried out in wartime, but without the need for rationing.

Rationing was only necessary because total wartime production was short of optimal health requirements.
Today it would be unnecessary to interfere directly with personal consumer choice in that way. So long as the total flow from farm to factory was controlled, there would be no need to intervene in the detailed flows from factory to consumer via the super markets.

Failure to do this, continuation down the line of market led food production means condemning the rising generations to a future of ill health.

In the commentary on the BBC this morning about the budget and the prospects for reducing the deficit there was an important unmentionable – the trade deficit.

On Tuesday I was listening to Blunkett speaking in Glasgow. In the course of this he mentioned how in ’47 Keynes was sent over to Canada and the US by the Attlee government to negotiate a loan to carry the country over the cost of post-war reconstruction. Blunkett said how difficult it would be to imagine Churchill in 1952 promising to eliminate the government deficit by ’58 and pay it off by ’62, saying that in fact it was not until 2003 that the UK finally paid off the loan from Canada.

But these loans did colour the politics of the Attlee and Wilson governments. The pamphlets that Wilson wrote as a minister during the Attlee government show him obsessed with how to rebuild industry to get the exports needed to pay off these loans. The recent obsession with Britain’s ‘high tech’ industries mirrors this in some ways.

As Prime Minister, Wilson continued to focus on the balance of trade and the need to foster export industry, as indeed had the intervening Tory administrations. But post Thatcher, the trade balance vanishes from politics. It ceases to be an issue.

Thatcher had the advantage of North Sea oil. That allowed her to destroy manufacturing industry in order to destroy the social poser of the industrial working class. Manufactured exports and those who made them were no longer vital.

United Kingdom Balance of Trade, 1948-2009

Oil allowed the return to dominance of the financial interest in Britain. It had been dominant in the ’20s and ’30s, but post-war indebtedness brought the manufacturing interest back to the fore. Even the Tories led by Macmillan, an MP from a northern constituency whose formative political years had been during the industrial depression, went along with the priority of manufacturing.

Under Brown the trade deficit was forgotten, even though the oil was running out. When he gave independence to the Bank of England, the goals of the monetary policy committee were just about inflation. There was no obligation on them to maintain an exchange rate compatible with balanced trade.

There was a myth about in those days that central banks could not manage exchange rates – the Tories debacle over the European Exchange Rate Mechanism was cited. But this was one sided. The Bank of England may be unable to maintain a consistently overvalued Pound, but it can reduce its value.

China’s example shows that a central bank can even keep an undervalued currency low.

We have had 30 years of neglecting the balance of trade see figure. The balance of payments deficit is a major contributor to the budget deficit. Basically it means that there is an outflow of funds abroad, and either private individuals and firms or the government must borrow to offset this. So to reduce the deficit there would have to be a major structural change in the economy to regenerate export industries.

It is remarkable that this basic reality is not better acknowledged. The Tories go on about the danger of the UK losing its AAA rating and what a disaster that would be. Well if it does happen then so what? The UK government borrows in Sterling. It is not taking Dollar loans as in 1947. It can go on doing that, but the consequence might be a significant fall in the Pound.

This is precisely what is needed to make manufacturing exports from here viable again, in the face of high labour costs amongst a well-unionised and demanding workforce.

Whichever government comes to power will be eventually forced to address this, and in the long term the necessary regrowth of industry can only benefit the Labour movement.

Today’s budget day played out an old ritual. One man with a red bag of office will reveal what he has decided the nation will spend and how it will raise taxes to finance this.

This is the way it is done, and this is the way it seems always to have been done, ‘democratic politics’ is played out around his decisions. The Labour Party will go into the election on the basis of these decisions and the Tories will oppose them, offering some half revealed alternative package deal.

The voters will, for once, have a yes no decision to make on the package in a couple of months. But what if you agree with some of the buget and not other parts, what if you agree with the level of education expenditure but not the level of naval procurement. What if you would prefer the top rate of tax to be 55% not 50%.

Tough!

Its take it or leave it.

There has to be a better way. If phone voting can be used to decide trivial issues like who should leave Big Brother, why can the public not have a say on the important issues that affect them.

It would be quite possible to put up a website with say half a dozen key questions
Should the top rate of tax go up 5%, down 5% or stay the same.
Should VAT go up by 2%, down, 2% or stay the same.
Should health expenditure go up 5%, down 5%, or stay the same.

Provided that the government had previously decided on the overall level of borrowing it is quite simple to count the votes and decide on a consensus level of taxes and expentitures. I show this in the talk I will be giving to the BCS conference next month.

If such a democratic budgeting system were introduced, and if there were provision for citizens initiatives on what questions were to be included in the vote, politics would change. Campaigns would arise focused around specific changes to the tax system that benefited different social classes.
These are questions that directly affect peoples pockets, and would provide a motivation for greater democratic engagement.

In Germany the new Die Linke programme drawn up by Lafontaine commits to this sort of budgeting.

There would of course have to be all sorts of provisions to protect against fraud, but we know how to make mobile phone voting secure, anonymous and verifiable. The Handivote system is one example.

In responses to my recent postings I have encountered scepticism about the validity or   relevance of Marxian economics today. So I thought it would be worth explaining a few reasons why he has to be taken very seriously as an economist.

It feels a bit like summarizing Proust in 100 words to say this but, the two most important things that Marx wrote about the economy were that labour is the source of exchange value, and that the incomes of the propertied classes derived from the exploitation of labour.

He was not the first to make these points, they were an established  strand of early 19th century thought, but Marx made the points more clearly and with greater cogency than any of his predecessors.  Nowadays, these ideas are absent – not only from the economics curriculum but even from Communist Party policy.

Why? Have they been proven wrong?

Well orthodox economists are pretty confident that the labour theory of value has been proven wrong, but if you follow up the literature, their proofs are of a type peculiar to contemporary economics. In most sciences, hypotheses are evaluated by confronting their predictions with empirical data. In economics proof is rather different. It is mathematical proof of the form: Let us assume the following axioms, and then see what must be true about the economy.

Using proofs of this sort, Samuelson for example claimed to have demonstrated that the labour theory value provided no useful information about prices.

The problem with this is that if the axioms are wrong, the proof is worthless. By a judicious choice of axioms one can prove all sorts of things.

Then in the 1990s Marxian economists started to apply the normal scientific method to the labour theory of value, for example here or  here or  there. What did they find?

They found that the predictions of Marx and before him Ricardo had been spot on. Market prices were actually correlated with labour values to the remarkable degree of 95% or more. That meant that 95% of the variation in the prices of goods is explained by the labour cost of making them.

More strikingly, it was shown that the more capital intensive an industry was, the lower was its rate of profit. This is exactly what one would expect if labour rather than capital was the sole source of value. This explains why railway projects like the Channel Tunnel are almost always unprofitable. They involve a lot of capital but employ little labour on which to make a profit.

Marx had said that : “Very large undertakings, such as railways, on the other hand, which have an unusually high proportion of constant capital, do not yield the average rate of profit, but only a portion of it,“  Those in favour of rail privatisation in other countries take note, they will never be profitable.

Capital itself creates no value.

Once it is realised that the determination of value by labour is a well proven scientific theory, then Marx’s analysis of exploitation follows – with all sorts of disturbing moral consequences for the established order.

It gives moral strength to Unions opposing exploitation and it undermines any claim of capital to a share in the national income.