"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
MR MICAWBER'S words are some of the wisest spoken in economics. I am just wending my way back from a trip to the Highlands, part recreation, part seeing authors, and reflecting on Mike Nevin and Bill Jamieson’s superb pieces on quantitative easing, its failure and its consequences. What the Bank and government seem to completely fail to understand is that the economy needs demand not money.
One can engage in as many pieces of arcane financial manouevring as one likes but if no one wants to invest because no one wants to buy then it is merely whistling in the wind. That the Bank should use the failure of inflation to take off (ie no demand to drive it) as a reason to further increase QE (notionally to increase demand) seems to me an example of the hapless confusion of policy in the UK.
On Raasay I was given a more telling example of economics in the real world. When Roger and his partner Caroline moved to Raasay the population was some 210. A tragedy at a fish farm led to its closure with the loss of five jobs. With those five jobs gone the workers and their families had to leave the island. With the families gone demand fell across the rest of the economy. More jobs went, the shop is increasingly marginal and the population now has dropped to 140 in a matter of some 10 years. What in essence the tale shows is how a small shift in demand can lead over time to seismic consequences. Equally those small shifts can have seismic consequences in the other direction. A few dynamic individuals in Skye have turned it into one of the fastest growing parts of Scotland, a bright spark in an otherwise mainly dark sky on our West coast.
What, of course, the government both wants and is terrified of is an increase in consumption. It wants it as an economic stimulus and yet it fears the consequences of the debt needed to fuel it. It is thus caught between a rock and a hard place. My own industry has suffered a decline in sales of some 11% or so this year – and if you take Shades of Grey out of the picture, possibly some 15%. By any standards it is a substantial decline, only partially ameliorated by e-books. It would seem manageable, however, until one considers the ‘Raasay effect’. This is that most business operate according to the principles outlined by Mr Micawber of a small return meaning happiness. Suddenly a reasonable and sustainable living is turned into an unsustainable and rapidly draining loss. The result is a small decline in turnover results in savage cuts, radical re-engineering of business and above all a defensive attitude towards innovation and change. For a year or two not much may seem to change. Businesses live off fat. They batten down in the belief that happy days will come again. They make minor cuts. But when there is no light at the end of the tunnel, or none foreseen, change can rapidly become uncontrollable and potentially catastrophic.
It seems to me that much of British business (I note the fall in unemployment this month) is still living in that uneasy turning of the tide when it hopes that with a flick of the fairy wand the tills will start to ring again.
When reality can no longer be postponed we will see change like a cascade and change that we will find a deeply uncomfortable experience. One of the great insights of Keynes was that the classical model of economics with its concepts of automatic recalibration within an economy, took no account of human psychology i.e. in recession if everyone stopped spending there would be no countervailing force springing to life unless it was willed into being – the classical machine would irredeemably break down. His concept of public expenditure as a deliberate counterweight to the panic driven herd of recessionary forces is not simply an economic concept but a psychological one. But now of course we have a government that is careering towards bankrupty in a spiral of declining tax revenues coupled with obstinate and massive deficits, both trade and fiscal, and simply does not understand how to fire the engine of growth without which a terrible vortex beckons.
The problem is that so few politicians have worked in business. They see figures but they do not even remotely understand that the figures are a validation of values and beliefs, whether it be in the books I publish or in the quality of food served in a restaurant or in anything any private business does or provides. One of the reasons they work is because they care about what they do and it is that care, those values that are measured by sterile metrics.
In other words money is merely a measure of ideas, initiative, confidence and vibrancy in an economy. The stronger the latter the greater the velocity of money round that economy and the healthier that economy is. Government sees things the other way round. It looks at tax breaks, subsidy, big ideas, ‘picking winners’ and all the other mechanistic ways by which it is thought human beings can be prodded or poked into particular courses of action. If these work they work for either a short period or with decreasing efficiency until we ‘adjust’ to the new reality of the tax break or subsidy offered.
So I would like to suggest to the Coalition a radical new economic strategy which involves no expenditure of money and indeed might both boost growth and cut expenditure. It is this.
Allow people to run their own lives. Allow people in their communities to take over and run assets of the state, any asset of the state be it a hospital, a ferry or a forest. Two conditions would be attached. There would be an arms length ‘contract of service’ for the community to uphold and the state would agree for a period to provide the same subsidy it previously did. If the community saves money on that subsidy they can keep it for themselves. If they don’t then we are no worse off than we are at the moment.
I hear the howl from the left of ‘privatisation’. It is not. The assets remain in community ownership. Yes, the community can partner with private companies but control must remain with them. In reality the whole sterile debate of privatisation versus state control is one designed to be exactly that – a debate obviating original ideas.
There is not a human being in this country who does not know of a litany of state inefficiencies and incompetency. So let the state throw down a challenge to the people who comprise it ‘Run it better yourself’. Naturally a genuine reinvigoration of local governance is involved, with the consequence that the state is rolled back – not by the airy promises of political parties who mean no such thing but by the will and enthusiasm and spirit of the inhabitants of this country who, empowered to run their own lives, can help rebuild their own country.
Photo: The Raasay Community Hall on Raasay, off Isle of Skye