The Government’s Economic Vandalism did not Begin or End with Liz Truss:

An Overview of the UK Economy.

The UK has been in a dire economic position for more than a decade now. Starting with the financial crisis, then the economic shock of Brexit, and then the world wide crisis of the pandemic – problems come along that our country does not seem capable of dealing with. The solutions drawn up by our government do not work and often make things worse. The economic vandalism did not stop with the Truss government – this is because our political elite have an irrational and religious devotion to small government and free market economics.

As a Socialist, you would expect me to say that socialism is the answer, and admittedly that would be my favoured conclusion. But the economy could be run much better even under capitalism, and the truth is that it is an understanding of the reality of economics that is needed rather than some ‘ism’.

I have no academic training in economics, but through some thought and investigation some things have become clear to me. Here, I hope to give an overview of how the economy actually works. Most of those who pronounce their expertise in the field are actually leading us into a terminal decline.

Economics is very complicated. I find it easiest to simplify its discussion in a somewhat allegorical manner. You should imagine that the economy of the UK is made up of just three bank accounts. The first belongs to the government, the second to the super-rich elites and the third to everybody else, who does the work. Money is transferred between these accounts, and money comes in and out of the system in the form of loans, sales of exports and the purchase of imports. Wealth cycles through these accounts with some of it leaving the cycle and going to the rest of the world, and less of it coming in.

The Government:

Margaret Thatcher famously said that the government budget is like a household budget. This is completely incorrect: Firstly the government does not have to pay back its debts, it only has to pay the interest on them. Lenders are nearly always so confident that the government can reimburse them that it is easy to sell the debt to somebody else, meaning that the government rarely has to pay up. This was famously not the case with the Truss government which had no plans on how to pay the interest on an extremely large debt, and therefore lenders completely lost confidence. Secondly, the Bank of England can create money out of thin air and lend it to the government. On top of this, revenue is collected in taxes that people have no choice but to pay – not using services does not mean you can avoid taxes.

The Elites:

These are the people who have enough surplus wealth to invest it, and live off the profits without the need to work. Free market dogma says that they will invest their profits in the economy, providing more production, services and jobs, and making more profit to reinvest. Unfortunately they invest most of their wealth abroad, or in tax havens, as the UK is not particularly productive or profitable. This means that most profits from the UK are exported abroad. The elites are able to avoid many taxes through contacts in the off-shore financial industry and the hiring of tax lawyers – they are also taxed in a very timid manner.

The Majority:

They mostly work to produce what is necessary for society in return for wages, ultimately being paid by the elites or the government. They do not have the surplus wealth to invest very much, and purchase most of the consumables produced by the economy. As well as having to pay proportionally more taxes than the elites, the elites extract profits out of the majority. In order to keep the country productive the majority should be reasonably healthy, educated and happy, and they largely depend on the government to provide these services.

The Trade Deficit:

The UK cannot produce what it needs to survive by itself. We spend more on imports than we receive through exports and therefore over time the country gradually gets poorer in a material sense – even when the economy is expanding. Some of the shortfall is made up by historic investments abroad, which send the UK their profits. Another part of it is made up by foreign investment into the financial and property sectors – this doesn’t produce anything, has little to do with the ‘real’ economy and only benefits the elites. The obvious solution to this problem is to produce more exportable items. But for decades the elites have preferred to invest in the service economy, as it is more profitable. By their very nature services to the British people cannot be exported, so they do not make the country any wealthier.

The Investment Problem:

The UK is stuck in a vicious cycle economically – it cannot become more productive without more investment, but the elites will not invest more because of the lack of productivity. The neo-liberal fallacy is that investment can be attracted – and the economy expanded – with lower taxes on the elites. This is provably untrue. Between 2010 and 2020 the UK had some of the lowest taxes in the G7. Although the elites did quite well out of this, wages stagnated, public services crumbled and investment plateaued. Countries such as France and Germany have higher corporate taxes than the UK, but get much more investment and are doing better economically. This is because investors care about profit – low taxes do not matter if there is no profit to be made in the first place. Profit needs productivity, which needs a healthy, educated, motivated workforce with good public services to maintain them.

The Keynesian Multiplier:

John Maynard Keynes was a liberal economist active in the 1930s. He realised that the economic situation could be improved by government spending. If government collects enough taxes and borrows enough they can fund good public services – and for the socialists, even invest in industry. As well as providing practically useful results, this will lead to more reasonably paid jobs, more people spending in the economy and a greater tax revenue that can be used to maintain the debt. It is a golden cycle rather than a vicious one – wealth is redistributed in a productive manner, not just through hand-outs. While the elites will only invest in a way that profits them, the government will invest in a way that is hopefully of practical use to the majority. The economy is not improved just by having wealth pumped into it, but by having more people who spend. The Conservative strategy of austerity to make up for the shortfall of the financial crisis only led to an economy with less wealth and productivity – therefore less tax revenue and the need to make more cuts because of a greater shortfall. It is a race to the bottom. Although Gordon Brown’s idea of borrowing and spending at the 2010 general election may have been counter-intuitive, it would have gone some way to solving the economic problem.

The Inflation Problem:

In the 1970s improvements to the conditions of workers, the cost of de-colonisation and the oil crisis led to a large increase in prices. The trade unions forced up wages so that workers could survive and this led to further increases in prices, and further wage demands. This is the wage-price spiral that the government want you to think about as they attempt to force down wages in the public sector – but it is not what is happening now. In real terms wages have been stagnant since the 1980s and recently they have decreased. It is not wages that are forcing up prices but the cost of the pandemic, the war in Ukraine and other supply problems. The market conditions do not mean the elites have to increase prices – they just provide them with an excuse to increase prices. After all, the cost of getting gas out of the ground and transporting it to customers has not increased – there is just less gas available to us. It is not wages that are out of control, but profits. Forcing people into poverty will not solve the problem but just bring misery and even more contraction in the economy. Whilst increasing interest rates may limit the rise in house prices, it is ridiculous to think it will solve these other problems, and house prices will probably continue to rise anyway, due to housing scarcity. These government policies will lead to an even richer elite, a poorer majority and an even worse economic situation with lower tax yields. The pragmatic approach would be to limit profits either by enforcing price caps on strategic goods, or by collecting scaled taxes on profits.

Public Ownership vs Out-Sourcing:

It has long been pointed out that the pitfall of public ownership is a lack of competition – immunity from failure makes organisations and their workers lazy. But large private corporations suffer from much the same problem: Corporations that totally dominate a market do not have to worry about competition. Small numbers of corporations that control a market nearly always fall into a system of informal cartelism, and the competition is artificial. Some private corporations are so politically important that they are ‘too big to fail’, and will be bailed out with taxpayers money when they are in trouble. Additionally, out-sourcing makes services more expensive, as private companies expect to make a profit whilst public services don’t – or they at least re-invest their profits. When governments and councils decide on sourcing contractors they are always under pressure to keep financial costs low whatever the failures in service – the market is skewed and unnatural. Prioritising profit is not compatible with running services that are meant to be controlled collectively and democratically rather than on the basis of individual choice. When services are publicly run the people can vote appropriately if the services are bad – out-sourced services actually leave the ultimate customer with less choice. This could be solved by legally limiting profits – as is done with GP services – and by breaking up big companies. Running things through much smaller companies could well be better – corporations with a lot of power skew the system undemocratically and have more leverage in terms of profit. A more pragmatic approach would be to out-source to not-for-profit co-operatives run by workers, that would have the capacity to fail but would not skew the system with profit.

Sustainable Energy vs Fossil Fuels:

Like with public services, profit is the main barrier to a sustainable energy system. As well as being far less damaging than fossil fuels, sustainable energy would be far cheaper – so cheap, in fact, that there would be little profit in it. This is the reason that the elites and the political class are so recalcitrant in getting a transition underway. If we want an energy system that will let the ecosystem survive then it cannot prioritise profit. Like policing, it should be firmly within the ambit of a government service run for the public good.

The Labour Market:

Due to increasingly sophisticated technology, and access to cheaper labour abroad, western society has more workers than there is necessary work to do. We can import labour-saving devices less expensively than doing the labour ourselves, and in the last few years it has become normal to have purchases delivered, when there is nothing to stop most of us from a journey to the shops. In the 1990s and 2000s the problem of an unnecessary sector of the workforce translated to the ‘long-term unemployed’. These people were abandoned to poverty, and discriminated against with labels such as ‘chav’. Since 2010 changes to technology and government policy have transformed this situation. Both the ‘long-term unemployed’ and lower paid workers have been placed in a ‘gig economy’ that doesn’t pay them enough to survive on and so they must be subsidized by welfare. Although this means there is less unemployment it also means there is more people in poverty – the lack of work to do has been spread out over a greater number of people. It also means that nowadays people are having to work hard just to stay in poverty, whilst the ‘chavs’ were not expected to work. Not only is this an obvious injustice but it means that less people have the means to spend and so the economy suffers. The natural thing to do would be just to accept that not so much work needs to be done and pay people more for doing less. We could be moving towards a post-scarcity economy that would seem semi-utopian by traditional standards – yet we refuse to do this in the name of profit. As pointed out above this doesn’t necessarily mean a massive hike in prices, and the tax-payer is already subsidising wage payments from profitable elites anyway. Universal Basic Income would be a fair way of ensuring everybody gets enough, whether they are working or not, and can be paid for mostly through tax bracket adjustments and the disolution of benefits that would no longer be needed.

Will a Labour Government be much better?

Labour’s pledge to invest in sustainable energy is laudable and completely necessary. But they are not planning to invest enough to kick-start the economy and much of the money will come from the majority paying their energy bills, not from the elite. They have even said that they will shelve the idea if this investment contradicts their mysterious ‘fiscal rules’ – which we might assume prioritises the profits of the elites. Hopefully Labour would settle the disputes with the striking workers quickly and on good terms, but they have announced no other serious government investment and are highly averse to increasing taxation. They intend to revive the NHS with private money and out-sourcing, making the tax bill for running it even more artificially expensive. This will lead to a temporary increase in the quality of medical care before the whole system starts crumbling even faster than it is now. Their plans to subsidise the mortgage market will create more inflationary pressure in the housing sector whilst not helping the worst off. They have announced no transformation that will end the decline, merely some sticking plasters for a few of our problems.

The decline of the UK can only be halted by investment in its people, private enterprise has proved itself unable to do this – due to its never ending quest for profit. Socialism is an obvious way of doing this but a government that organises investments does not have to be one that prevents the making of profits altogether – moderate capitalistic countries such as Germany and France manage this quite well. In the late nineteenth and early twentieth centuries Britain was a capitalist society with some notorious injustices, but the market was not all important and profit was not the only concern – decency, probity and honour were just as important.

Whilst a Labour government would make a few improvements, it seems unlikely at the time of writing that they are willing to embrace pragmatism or abandon their dogmatic ideology of profit for the elites. Their top priority has been to distance themselves from economic policies that would have benefited the majority and may have revived the country.