Tag: OBR

Stepping into the mud with the barefoot economist, Manfred Max-Neef

By Daniel Margrain

Manfred Max Neef sits at a table near a notebook computer. On the wall behind him is a slide from a presentation.

The media’s trumping (excuse the pun) of economic growth over environmental concerns exemplified by their lack of any critique of the latter following yesterday’s (November 23) Autumn Statement announcement by chancellor, Philip Hammond, is a familiar, if rather depressing, narrative. The news from the government’s Office for Budget Responsibility (OBR) that growth forecasts for 2017 as a percentage of GDP are projected to fall by 0.8 per cent, largely due to Brexit-related affects, was perhaps expected.

But what is rarely questioned by the media are the consequences this prioritizing of growth as a central plank of the governments economic strategy has for the medium to long term sustainability of the planets ecosystems upon which the well-being, and even survival, of humanity depends.

The Green Party MP, Caroline Lucas raised her concern in the House of Commons that neither Hammond in his Autumn Statement – nor any of his Tory predecessors – “have ever mentioned the words ‘climate change’ in the year that’s the hottest on record and where parts of the country are under flood water.”

To all rational observers this is a particularly alarming state of affairs given that the government’s own 2015 National Security Strategy states that human-induced climate change is one of three tier-one threats – alongside international terrorism and cyber crime – that the UK currently faces. By subordinating climate change to a neoliberal economic growth model within a finite planet, amounts to willful ignorance and stupidity of the most serious and blatant kind, namely, because the consequences are potentially catastrophic for all living things.

Shifting the paradigm

Of all the recent discussions around the production of fake news, the inability of the mainstream media to bring the issue of climate change to the forefront of public discourse is probably the greatest dereliction of duty that can be brought to bear on the credibility of professional journalism.

But arguably just as unforgivable, is the media’s inability to bring political power to account in respect to the latter’s fetishization of the current growth model and to shift the discourse from a paradigm where this model is currently regarded to be a panacea among large swaths of the public, to one where it is widely regarded as the death knoll for society and the planet.

The November 22 edition of the BBCs current affairs Newsnight programme featured an extended piece on the current chancellor. Some of Philip Hammond’s former school friends were interviewed, all of whom described him as a highly intelligent figure who, after having completed his class work before everybody else, would often put his feet up on his desk in lessons. Hammond was portrayed by his friends as being so clever that he regularly outsmarted his teachers.

Having made large sums of money as a music promoter soon after having left school, Hammond fulfilled his youthful boast that he would become a millionaire by the age of thirty. But although well-educated, wealthy and well connected, this former Oxford graduate like so many other chancellors before him who have gone on to be the pillar of the political establishment, continues to promulgate the deluded notion that sustained economic growth is emblematic of societal progress.

Hammond is part of a Tory establishment that continues to perpetuate the myth that the current economic growth model is the best way to curtail the threat posed from the likelihood of further economic crisis as opposed to recognizing it’s the major cause. Consequently, Hammond will continue to systematically push for policies that fly in the face of all available scientific evidence.

Politician’s like Hammond know what is to be done but for ideological and dogmatic reasons they do the opposite. Rather than the global financial crisis of 2008 acting as a wake up call, Hammond and Osborne before him, continue with the same poisonous model until the next crisis comes along, by which time they will continue with it until the one after that. And so it goes on. This is the economics of the madhouse.

Radical visions – development not growth

What is required is a radical alternative vision for society – a break from the concept by which everything has become a commodity to be bought and sold for profit. But who, other than a handful of creative thinkers in the academic sphere, are proposing alternative, imaginative visions? One of the most ambitious thesis I’ve come across is that postulated by Pat Devine, who articulates in some detail, the processes by which the development of a democratically planned socialist economy can come into being.

Devine’s thesis is closely aligned to that of the Chilean economist, Manfred Max-Neef whose visionary holistic and philosophical appraisal of the existing model ought to go a long way in persuading people of the legitimacy of the planned socialist model. While recognizing the importance, geographically, of bringing production closer to consumption, Max-Neef argues that the root of the existing problem stems from how establishment economists perceive their academic discipline as being above, and separate from, nature and the biosphere.

For Max-Neef, economists know nothing about ecosystems, thermodynamics or biodiversity. “I mean, they are totally ignorant in that respect”, he said… “And I don’t see what harm it would do, for an economist to know that if the beasts would disappear, he would disappear as well, because there wouldn’t be food anymore. But he doesn’t know that we depend absolutely from nature. But for these economists we have, nature is a subsystem of the economy.”

Max-Neef argues that for the paradigm to shift, it is necessary for economics to be taught in a different way based in five postulates and one fundamental value principle:

1) The economy is to serve the people and not the people to serve the economy.

2) Development is about people and not about objects.

3) Growth is not the same as development, and development does not necessarily require growth.

4) No economy is possible in the absence of ecosystem services.

5) The economy is a subsystem of a larger finite system, the biosphere, hence permanent growth is impossible.

The fundamental value to sustain a new economy should be that no economic interest, under no circumstance, can be above the reverence of life.

For far too long, humanity and the natural world has been subordinate to the imperatives associated with an economic growth paradigm that’s perceived by economists and politicians as being separate and distinct from the former. What Max-Neef is saying in the first point above is that the dialectical relationship between economy and people has to be restored in order for society and nature to function properly.

The distinction Max-Neef makes between growth and development in point three, is particularly significant. As the economist from Berkeley points out:

“Growth is a quantitative accumulation. Development is the liberation of creative possibilities. Every living system in nature grows up to a certain point and stops growing. You are not growing anymore, nor he nor me. But we continue developing ourselves… So development has no limits. Growth has limits. And that is a very big thing, you know, that economists and politicians don’t understand. They are obsessed with the fetish of economic growth.”

This fetishization of economic growth is arguably explained, in part, by the fact that the monetary offshoots that accrue as a consequence of this growth have, since the onset of ‘trickle-down’ neoliberalism, increasingly ‘gushed upwards’ towards the top of the socioeconomic pyramid.

This is revealed by statistics which indicate that economic output (GDP) in the UK, adjusted for inflation, has over doubled from £687bn in 1979 to £1,502bn in 2011. However, over the same period, income inequality, as measured by the Gini coefficient, increased from 0.25 to 0.34. In other words, since the era of neoliberalism, working people who have created the sustained increase in wealth in society, have seen their slice of the pie reduced. Max-Neef understands that the ruling class obsession with the fetish of economic growth is underscored by the fact that this is the class that disproportionately benefits the most from it.

The threshold hypothesis

One of the later works Max-Neef authored was the famous threshold hypothesis, which says that in every society there is a period in which economic growth, conventionally understood or not, brings about an improvement of the quality of life. But only up to a point – the threshold point – beyond which, if there is more growth, quality of life begins to decline.

According to Max-Neef, the U.S, which he terms an “undeveloping nation” is currently at this point. The UK is not far behind. This is reflected in the growing concentration of wealth towards the one per cent at the expense of the 99 per cent. The logic of diminishing returns applies to other parts of the system that eventually results in net costs over the long-term.

These costs are quantified not only in strict monetary terms, but involve human capital too – something which the economic-growth fetishists rarely factor in to their cost-benefit calculations. Diane Abbot’s posting on Twitter yesterday (November 23) of an OBR sourced graph (see below) highlighting the impact of immigration on UK debt, is a case in point.

 

“OBR has also shown immigration reduces Government debt, because it is a net economic benefit.”

 

 

The ORB (and Abbot) present only a partial truth. While Abbot is correct in stating that “immigration is a net economic benefit because it reduces government debt”, the analysis doesn’t take into account other factors such as the uneven distribution of wealth described which negate the benefits accrued, or indeed, other (social) indicators such as reduced quality of life resulting from, for example, a lack of school places or other pressures on public services that mass immigration potentially brings.

Walking barefoot

It’s the apparent inability of politicians to view the economic growth paradigm as destructive that opens up spaces for alternative narratives of the likes of Max-Neef to fill. After winning the Right Livelihood Award in 1983, two years after the publication of his book Outside Looking In: Experiences in Barefoot Economics, the Chilean economist’s metaphor was inspired as a result of the ten years he spent working in extreme poverty in the Sierras, jungles and urban areas of different parts of Latin America. It was during this period that the economist from Berkeley began to view his profession in a different light. What subsequently happened was to change his life for ever.

“I was one day in an Indian village in the Sierra in Peru”, recalls Max-Neef. “It was an ugly day. It had been raining all the time. And I was standing in the slum. And across me, another guy also standing in the mud — not in the slum, in the mud. And, well, we looked at each other, and this was a short guy, thin, hungry, jobless, five kids, a wife and a grandmother. And I was the fine economist from Berkeley, teaching in Berkeley, having taught in Berkeley and so on.

“And we were looking at each other, and then suddenly I realized that I had nothing coherent to say to that man in those circumstances, that my whole language as an economist, you know, was absolutely useless. Should I tell him that he should be happy because the GDP had grown five percent or something? Everything was absurd.”

Max-Neef continued:

“So I discovered that I had no language in that environment and that we had to invent a new language. And that’s the origin of the metaphor of barefoot economics, which concretely means that is the economics that an economist who dares to step into the mud must practice.”

“The point is, you know, that economists study and analyze poverty in their nice offices, have all the statistics, make all the models, and are convinced that they know everything that you can know about poverty. But they don’t understand poverty. And that’s the big problem. And that’s why poverty is still there. And that changed my life as an economist completely. I invented a language that is coherent with those situations and conditions.”

The ‘language’ Max-Neef refers to relates to the way that we as human beings in developed countries have lost the capacity to understand. Despite our ability to accumulate knowledge, this capacity, in the absence of empathy, love and understanding, is according to Max-Neef, insufficient:

“You can only attempt to understand that of which you become a part”, says Max-Neef. “If we fall in love, as the Latin song says, we are much more than two. When you belong, you understand. When you’re separated, you can accumulate knowledge. And that is — that’s been the function of science. Now, science is divided into parts, but understanding is holistic.”

For Max-Neef, in order for professional economists to understand poverty, it’s necessary they live among people who are poor. Only then can economists understand that in such an environment there exists a different set of values and principles that are alien to world of academia that cannot be learned or understood their.

“What I have learned from the poor is much more than I learned in the universities”, said Max-Neef. “But very few people have that experience, you see? They look at it from the outside, instead of living it from the inside.”

The economist from Berkeley, continued:

“And you learn extraordinary things. The first thing you learn, that people who want to work in order to overcome poverty and don’t know, is that in poverty there is an enormous creativity. You cannot be an idiot if you want to survive. Every minute, you have to be thinking, what next? What do I know? What trick can I do here? What’s this and that, that, that, that? And so, your creativity is constant.”

“In addition, I mean, that it’s combined, you know, with networks of cooperation, mutual aid, you know, and all sort of extraordinary things which you’ll no longer find in our dominant society, which is individualistic, greedy, egoistical, etc. It’s just the opposite of what you find there. And it’s sometimes so shocking that you may find people much happier in poverty than what you would find, you know, in your own environment, which also means, you know, that poverty is not just a question of money. It’s a much more complex thing.”

What underlines Max-Neef’s message, perhaps more than anything else, is that the developed world that sees itself as sophisticated, educated and cultured, while pushing away to the margins the poor of the developing world by building walls, do so while failing to acknowledge that the kind of ‘progress’ the economists and politicians sitting in their plush offices aspire to, is in truth measured by the speed at which they are destroying the conditions that sustain life.

Osborne’s Budget of Irresponsibility

By Daniel Margrain

Chancellor Gideon Osborne’s budget last week that represented a culmination of six years of government failures and which slipped the UK into a deeper recession, amounted to another massive transfer of wealth from the poorest to the wealthiest in society. This was reiterated by both the Institute for Fiscal Studies (see chart below) and the Office for Budget Responsibility (OBR). The Economist projects that by the end of this parliament, levels of investment – which are already one of the lowest in Europe – will fall to just 1.4 per cent of GDP, under half of what it was when the coalition government came to power. It is also half of what the OECD said is necessary just for the UK economy to stand still. But despite these facts, an alternative narrative has emerged in many of the editorials of the corporate controlled media which bare no resemblance to reality for the vast majority of the British people. As Shadow Chancellor, John McDonnell put it on LBC last week, “If press releases built things, Cameron would have rebuilt our country.”

 

The main thrust of the budget was Osborne’s cut in funding to the disabled by £4.2 billion in order to pay for three separate tax cuts to the rich against a backdrop in which the national debt is rising by £45 per second or £2,700 per minute. Paul Mason summed up the mood in the House:

“Osborne’s glum face during Jeremy Corbyn’s speech — an uncharacteristically angry barnstormer — was matched by the glum faces of Blairites as they realised their own party was actually going to inflict moral and political damage on the government.”

Osborne’s inhumane and fiscally irresponsible budget was preceded by the fiscally responsible alternative version outlined by his opposite number, John McDonnell who, in a speech on March 11 (as well as in various interviews to the media and public meetings), laid out his parties fiscal credibility rules. The shadow Chancellor stated that he will eliminate the deficit and tackle the national debt within a five year period on the basis of the implementation of a progressive and ambitious investment programme that he said will provide the stimulus for growth and demand in the economy.

McDonnell insisted that a future Labour government would invest in skills, infrastructure and above all, technology. The speech was subsequently praised by a wide range of economists and some media outlets in addition to business organizations that included the CBI and the Chamber of Commerce. As a committed socialist, McDonnell is aware of the importance planning is to the economy and the ruthlessness that is required to properly monitor how governments’ spend and, more importantly, earn money. The whole debate is how the country earns its future which McDonnell has said ought to be focused on investment.

The difference between McDonnell’s approach and that of one of his often cited predecessor, Gordon Brown, is that the latter never went for an investment-growth strategy and relied too much on unregulated finance sector growth and the revenues generated, as the catalyst for the subsidizing of public services. This policy strategy proved to be an abject failure. Similarly, the approach under McDonnell’s immediate predecessor in opposition, Ed Balls, was firstly to underplay the drive toward investment and, secondly, was marked by his failure to recognize that governments’ have to borrow to invest in the long-term in order to grow the economy.

But equally as important, was Balls’ inability to grasp the important role organizations like the IMF and OECD play in diagnosing economic problems and how best to solve them. Specifically, Balls appeared to have underplayed the scope the combination of fiscal and monetary policy plays in combating low or negative interest rates. In contrast to the incompetence of Balls and Brown, McDonnell has expressed awareness that when government’s reach the limits of monetary policy in terms of low or negative interest rates, they have to combine the monetary with the fiscal. What McDonnell acknowledges, is the importance the building of a balanced economy plays to the modern democratic nation state.

The problem under previous government’s – both Conservative and Labour – has been that the investment in the manufacturing base, predicated on new technology, has been largely sidelined at the expense of the finance sector. On LBC, McDonnell used the analogy of a small company to outline his case. “An owner of a new company will need to invest in new machinery in order to compete against his rivals otherwise he or she will go out of business”, he said. He continued: “Government’s, like businesses, need to invest in the future otherwise their economies will fall behind.” The lack of investment is precisely what has beset the UK economy over recent decades, particularly under the latest Tory government which has overseen a widening productivity gap between the UK and its major European rivals.

McDonnell, correctly in my view, has made it clear that the Office for Budget Responsibility (OBR) should be given the power to monitor the UK’s own application of its fiscal credibility. The OBR, according to McDonnell, should not report to the Chancellor as is currently the case, but instead it should go directly to parliament. The aim is not merely to raise the economic credibility of Labour among the public but to raise it among the political class too. It’s ironical that despite the public perception that Labour governments’ have been more economically incompetent in the 37 years since Thatcher was elected than their Tory counterparts, the reality is there have been only two years – under Nigel Lawson during the boom period of the 1980s – in which the Tories produced a balanced budget. Conversely, Labour produced three years of balanced budgets under Gordon Brown.

 McDonnell has been aided in his approach to countering Tory and media propaganda by some of the world’s renowned and leading economists who have not only openly backed the oppositions anti-austerity economic model but have played an active part in advising the Shadow Chancellor as part of Labour’s Economic Advisory Committee. A central plank of the fiscal responsibility rules that McDonnell and his team set out on March 11, relates to Labour’s intention to reduce debt as a proportion of GDP over the lifetime of the government. This will entail growing the economy over the requisite five year period, allied to a fiscally disciplined and controlled approach to spending. The alternative budget that McDonnell proposed emphasized the application of a process of rigorous budgeting so as to restrict the likelihood of public expenditure spiraling out of control. To this end, the Shadow Chancellor stressed the need for the treasury to return to its former role of managing public finances as opposed to signalling to government departments that they have a license to spend public money in a prodigious manner.

An example of the latter happened two years ago following the Tory government’s much criticised selling off and closing down of the Forensic Science Service (FSS) against the advice of all the relevant parties concerned. The treasury ignored the advice because they envisaged the closing of the service as being financially prudent in the short-term. Two years down the line, they decided to set it up again. It’s this kind of short-term based decision-making predicated on the top down authoritarian micro-managed approach of their principal overseer in number 11 Downing Street that inhibits not only the long term financial credibility of government, but undermines democracy and the well-being of society as a whole.

Then there are the secret and highly wasteful and expensive P F I funded projects that typified the Blair and Brown era that McDonnell says he wants to put an end to. A third example of how short-term policy approaches are counterproductive to the long-term financial well-being of the nation, is within the realm of housing. The most labour intensive form of public spending is affordable council house building which, year on year, since the era of the Thatcher government, has failed to meet the demand for them. Labour’s Housing Minister, John Healey, has stated that he intends, as a starting point, to use savings on housing benefit (which is beneficial mainly to the rich), to build 100,000 affordable homes.

Government investment in housing is not only beneficial to those in need of a home, but it also reduces the housing benefit bill. In addition, the cost of buying a house is reduced due to increasing availability more widely. Although on the surface the intention to bring greater scrutiny and accountability to bare within the public sphere sounds overly bureaucratic, the kinds of attempts to rein in government and treasury short-term excesses are nevertheless fundamental to the successful running of governments’ in the eyes of the electorate. It is this electorate that is increasingly aware of just how callous Gideon Osborne has been in the lead up to the decision to cut disability welfare benefits which allegedly prompted Iain Duncan Smith’s resignation letter.

The letter basically outlined every suspicion that voters, and indeed Tory MPs, have about Gideon Osborne in relation to his obsessive attempts to micro-manage government departments as the prerequisite to his cynical positioning as next in line to succeed David Cameron as Tory leader. In relation to Duncan Smith’s resignation, one theory espoused by former UK diplomat Craig Murray is that his conscience got the better of him and as such Osborne’s budget attack on the disabled was regarded by Duncan Smith as one attack too many. Personally, I don’t buy it.

I’m more inclined to believe John McDonnell’s interpretation as expressed on LBC yesterday (March 19). McDonnell claims that the former Work and Pensions Secretary went through a long consultation exercise which specified the new proposal for the qualification criteria for the Personal Independence Payment (PIP). As a result of pressure from Osborne, McDonnell claims that Duncan Smith had no option other than to tear the agreement up.

In other words, a deal was allegedly done but Osborne is said to have reneged on it. This put pressure on Duncan Smith who, in turn, McDonnell claims, had taken the flack for something that was not ultimately his doing. Osborne had invented a fiscal rule that has been unable to withstand political scrutiny and the public, judging by the latest opinion polls, are wise to it. Let’s hope they will continue to be wise to the government’s various shenanigans prior to the forthcoming local elections and vote accordingly.