Saturday, 19 September 2015


This week the current governor of the Bank of England, Mark Carney, was questioned about the impact of Corbynomics on the economy by the Treasury Select Committee. He said:
The issue would be imperilling potentially the achievement of price stability. The consequence of that of course would be inflationary
Which I think crossed a line he shouldn't have - since that is a deliberate political statement.

Corbynomics is about creating more investment in the economy by simply spending the money on infrastructure and refusing to pay out corporate welfare in the form of interest to those who choose to save in the private sector. That has been signposted five years in advance of any potential start, would be subject to parliamentary debate and approval anyway, and would take a little while to get going. If that isn't 'signalling' and 'setting expectations' then nothing is.

If a Corbyn government is elected it would be the Bank of England's job, under the current arrangements, to ensure there was space in the economy to handle whatever spending the government decided to undertake. It can do that, theoretically, by assessing the output gap and adjusting interest rates accordingly.

So if there is any inflation from the government spending it would be entirely down to Carney & Co. failing to do their job properly.

That means the quote above is either a statement of incompetence, in which case the Governor should be sacked right now, or it is, in reality, a statement in support of the political philosophy of the current government and the set of people the Governor belongs to and represents - the bankers.

That single political philosophy has, with the election of Corbyn, finally given way to a real alternative. Comparing the two is instructive.

The incumbent philosophy should be familiar to everybody.

  • A central bank ensures there is sufficient borrowing in the economy to maintain 'aggregate demand' at 'full employment' where 'full employment' is defined as a few million people out of work give or take a few million more. 
  • The central bank is supposedly independent, but is really politically homogenous. 
  • Activity is based entirely upon the private sector, under roughly free market rules, operating exclusively and having access to all the resources of society.
  • In this model the government is just another actor in proceedings that has to carve out its space 'competitively' with everybody else by taxing, spending and borrowing. 
  • The push is for ever smaller government with the state constantly deferring to private interests and binding its own hands ever tighter. 
  • If anybody is left behind it is their fault, not the fault of a system incapable of maintaining real full employment - where everybody has a job and an income. 

The result of this philosophy is all around us - vast inequality, massive private debt burdens, wage shares on the floor, insufficient investment, productivity trashed, and millions of people without a living income to sustain them. And of course eight years after a collapse we're still not back on our feet. It simply doesn't work for the majority.

The new philosophy is very different.

  • the state, as representative of us all, takes the resources necessary to create the critical public infrastructure and basic functions - all those that are a natural monopoly or are best treated as a natural monopoly, plus whatever is required to fulfil the critical public purpose of the people who elect them (a health service, education, etc). 
  • the private sector is then allowed to play with the rest of the resources as it sees fit.
  • the state then takes what the private sector decides it doesn't want to use and deploys them sensibly for the 'nice to have' public purpose.
Within this philosophy the free market private sector is bookended by the public sector and sensibly contained - like any good nuclear reactor should be. Here the public sector gets first dibs at the resources of society and maintains the structures necessary for the private sector to operate at optimal efficiency and maximum output (for example, removing the need for 'jobs' in the private sector allows it to press on with automation). 

Correctly configured this philosophy actually creates a private sector that is larger than the original structure because, of course, it can maintain more of the population at a higher level of economic activity. However what it does do is remove political power from bankers and corporate leaders and we've known for decades they don't like that idea.

So once you see the difference in world view, Carney's comments become clear. He doesn't believe it is his job to trim back the private sector and makes space for government investment. And that is a political position based upon belief.

This interference is why the central bank must be moved further back under political control - to make it crystal clear it is operating under a particular philosophy. The central bank should operate like the Department of Work and Pensions - taking decisions independently, but under direction from a minister of the government. Otherwise you end up with an unelected individual in charge who doesn't, or can't, understand a change in political philosophy. In other words the central bank director should change when the government does.

The consequence of that is the central bank governor either has to be a minister in the government, or the governor reports directly to and receives directions from a minister. That doesn't necessarily mean that the minister sets interest rates, delegation on technical matters is fine, but it does mean that the minister sets the philosophy under which the bank operates.

The whole political idea behind moving the central bank away from politicians is to embed a particular philosophy into the economy and to then defeat any alternatives that might come up. We have seen that with the deplorable actions of the ECB in Greece, declaring banks solvent on the one hand and refusing liquidity on the other solely to bring down an elected government. And now we are seeing the same rumblings in the UK with a deliberately political and provocative statement from the Governor of the Bank of England against regime change. Something that if said by any other Civil Servant would probably lead to them being fired.

Central banks are run by people, and those people are just as corrupt, just as embedded in class viewpoints, and just as political as all the other politicians. Those feting central bankers as latter day Solomons really need to rethink their position. All individuals suffer from the same human failings. Democracy is how we mediate those failings.

Now we have TIARA - There Is A Real Alternative - the vested interests are coming out into the open, declaring their intentions and shoring up their defences.

And that highlights where the incumbent philosophy has embedded itself and which institutions need to change so they can cope when there are changes in philosophy via the political process.

Ultimately those institutions must accept change, or be made to change, because, at long last, it's TIARA time.