

Forging Economic Discovery  
in 21st Century Britain

Edited by Johnna Montgomerie

ISBN: 9781310528781

© Political Economy Research Centre, Goldsmiths University of London. All rights reserved.

Published by Johnna Montgomerie and distributed by Smashwords.

Cite: Author (2015). 'Chapter Title', in Montgomerie, J. (Ed.) Forging Economic Discovery in 21st Century Britain. Proceedings from 'Recovery to Discovery' Conference on Alternatives to Financialisation, Goldsmiths University, March 19-20, 2015. ESRC Grant # ES/M003051/1

TABLE OF CONTENTS

Contributors

Foreword: Forging Economic Discovery in 21st Century Britain

PART 1: TRANSFORMING THE EVERYDAY GROWTH ECONOMY

1. Why is Recovery so Elusive?

2. Plan F: A Feminist Economics Strategy for Post-crisis Britain

3. The Personal is the Political Economy

PART 2: PERCEIVING THE ECONOMY AS SOCIETY

4. The Economy is More than the Sum of its Parts

5. Institutionalise Human Communication

6. A Feminist Rethinking of Economics and Politics

PART 3: DISCOVERING THE ECONOMY OF PEOPLE, PLACES AND THINGS

7. It's the (Foundational) Economy Stupid!

8. Building the Northern Powerhouse from the Rubble of the Old

9. Towards a New Industrial Imaginary for Britain

PART 4: REFORMING A FINANCIALISED ECONOMY

10. How Financialisation Forecloses Democracy (and what to do about it)

11. The Treasury View of English Higher Education: Student Loans, Illiquid Assets and Fiscal Control

12. Regulators Must Get a Grip on Local Authorities' Exposure to The City

CONTRIBUTORS

**Joel Benjamin** Joel@moveyourmoney.org.uk ~ @Gian_TCatt

Campaigner at Move Your Money, Co-founder of Community Reinvest, and Research Associate at the Political Economy Research Centre, Goldsmiths University.

**Craig Berry** craig.berry@sheffield.ac.uk ~ @craigpberry

Deputy Director, Sheffield Political Economy Research Institute, University of Sheffield

**William Davies** w.davies@gold.ac.uk ~ @davies_will

Co-Director of Political Economy Research Centre (PERC), Goldsmiths, University of London

**Andrew Gamble** a.m.gamble@sheffield.ac.uk

Sheffield Political Economy Research Institute, University of Sheffield. Author of _Crisis Without End?: The Unravelling of Western Prosperity_

**Mathew Lawrence** m.lawrence@ippr.org ~ @DantonsHead

Research Fellow, Institute for Public Policy Research.  
Author of _Definancialisation: a democratic reformation of finance_ (2014)

**Andrew McGettigan** http://andrewmcgettigan.org/ ~ @amcgettigan

Independent Journalist and Researcher — author of _The Great University Gamble_

**James Meadway** @meadwaj

Senior Economist, New Economics Foundation

**Johnna Montgomerie** j.montgomerie@gold.ac.uk ~ @j_montgomerie

Lecturer in Economics, Department of Politics, Goldsmiths University

Michael Moran

University of Manchester Business School

**Simon Parker** simon.parker@york.ac.uk ~ @sparkerworld

Senior Lecturer, University of York.

**Ruth Pearson** r.peason@leeds.ac.uk

Emeritus Professor of Development Studies, University of Leeds

**Daniela Tepe-Belfrage** d.tepe-belfrage@sheffield.ac.uk

Faculty Research Fellow, Department of Politics, University of Sheffield.

**Sara Wallin** sara.wallin@sheffield.ac.uk

Research Associate at PERC, Goldsmiths and PhD Candidate, Department of Politics, University of Sheffield

FOREWORD

Forging Economic Discovery in 21st Century Britain

Britain's economic recovery is fragile. Even achieving this point of 'recovery' took longer to achieve than the Great Depression, with inflation hovering at 0% and dipping into negative the UK economy (along with the rest of Europe) is facing the great unknown of 'debt-deflation'. Projections of the future are not much better; there is only Austerity and a continued dependence on finance-led growth, where credit creation fuels asset bubbles and household debt drives economic activity. Thus the need for a series of essays bringing key thinkers into dialogue about what needs to change in our understanding and analysis of the state of the UK economy.

This eBook speaks to the groundswell of interest in wrestling 'the economy' away from the orthodox economics expertise that dominates elite policy circles that treats the economy as an abstract series of models of markets built on assumptions about individuals' rational choice or inferences about individual behaviour preferences. This type of orthodox economic analysis is not about 'the economy' at all – it's about testing the validity of causal claims. We combat this framework by offering new ways of understanding the deep-seated problems in the UK economy that manifest as entrenched stagnation and perpetual crises.

What began as a two-day event hosted by the Political Economy Research Centre (PERC) at Goldsmiths (March 19-20, 2015) – _What are the alternatives to financialisation?_ – has become this collection of short interventions that mobilises different topics of expertise to answer two simple questions: what needs to change in our understanding of the economy? How or why does [it] need to change? Each author has their own area of specialism and this volume discovers a new collaborative research agenda where the economy is a human, rather than abstract, endeavour.

Each section explores key frontiers of discovery to better understand the economy as made up of people, places and things but also to combat the intensifying inequality that defines the contemporary British economy and society. PERC was established to develop fresh theoretical and empirical investigations of capitalism today, and to do so in ways that speak to various audiences, both inside and outside of academia. Goldsmiths has long been part of bringing critical and cultural perspectives to bear on the institutions and practices of modern societies, but too often the 'economy' is treated as a separate field, to be studied by specialists. With publications like this one, we hope that PERC will help bring political economy to life, and foster wide-ranging public debates about the basic principles and institutions of the economy today, in ways that reach well beyond the confines of economics as a discipline.

# PART 1

#

#

#

# TRANSFORMING THE EVERYDAY GROWTH ECONOMY

# 1.

# Why is Recovery so Elusive?

Andrew Gamble

What needs to change is how we 'think through' the problems the UK economy faces on its path to recovery. Specifically, the kind of 'growth' we want, the definition of well-being and security we use to contextualise growth, and the types of investments needed to prioritise social reproduction, social security, and respect for ecological limits.

In his budget speech on March 18th George Osborne declared that Britain was walking tall again. Unemployment is down, inflation is down, the deficit is down, and growth is up. Britain is the comeback economy, more successful than any other economy in Europe. All this is due to the way the Coalition managed the economy since 2010, sticking to its austerity plans despite opposition, and now the Conservative majority is reaping the reward. The recovery is in full swing but the Government is still acting prudently. There were no big pre-election giveaways in the budget. Instead as George Osborne said modestly: 'We are mending the roof while the sun is shining.'1 The FTSE index surged to its highest ever point the day after the budget, boosted by the hope that the world economy is returning to normality. Even the Eurozone, despite the stand-off with Greece, appears to have stabilised. Emerging economies are growing more slowly, but they are still growing.

But for all George Osborne's bluster, doubts continue to swirl around this recovery. This is the slowest recovery in the history of capitalism. It has taken seven years for most countries to return to the level of output they achieved before the financial crash, and some countries still fall short. Living standards for the majority remain depressed, a trend that emerged several years before the crash. Productivity levels remain low, in the case of the UK staggeringly low, a fact not mentioned at all in Osborne's speech. Growth rates have at last returned to trend in the UK and the US, but interest rates remain at record low levels, and quantitative easing is only just being wound down. In the Eurozone it is being cranked up. Despite the extent of QE, inflation remains strangely low and is even falling in some of the major western economies. The recovery looks fragile; the nervousness of the markets about what will happen when Central Banks finally do raise rates does not show any great confidence in the economic prospect. The western economies appear gripped, as they were in the 1970s, by stagflation, only this time it is deflation rather than inflation that is uppermost. The lack of investment opportunities makes companies unwilling to invest although many of them are sitting on vast cash reserves. The western economies still have a huge overhang of debt, both national (debt is still rising in most economies including the UK) and household. Much of the critical comment on the UK budget has focused on the fact that household debt is scheduled to rise steeply in the next few years in line with the growth projections. Far from being driven by exports and improvements in productivity, UK growth is still reliant on ever-increasing levels of private debt and asset bubbles. It looks like a recipe for another financial collapse rather than a sustained recovery. Western economies are still addicted to debt and the privatised Keynesianism that replaced the welfare Keynesianism and military Keynesianism of earlier eras. There are few genuine fiscal conservatives left, except perhaps in the Eurozone.

If recovery remains elusive, and the underlying problems exposed by the financial crash in 2008 have still not been solved, why has the neoliberal order that has produced this mess been so resilient? Bankers are back earning bonuses as if nothing had happened, and few genuine alternatives to the neoliberal dispensation have emerged. There has been no change in the hierarchy of states in the international state system, despite all the attention given to rising powers. There is no bloc of business interests seeking a reformed capitalism. There is no appetite in the political class for radical experiments, and neoliberal ideas continue to rule. Since the events of 2008 the crisis has been successfully managed and defused, even in the Eurozone. It seems extraordinary that the election of Syriza in Greece in 2015 was the first time an anti-austerity party had broken through in Europe, and the fate of this experiment is still uncertain.

Yet despite the economic and political resilience that has been evident in the last six years, we are still very far from a return to normality. The deep structural problems the crisis exposed in the neoliberal order have not gone away. They look as serious as the earlier problems that emerged in the Keynesian order in the 1960s and 1970s. These problems reflect perennial dilemmas involved in governing international market orders; how to establish and enforce rules for an increasingly interdependent international economic order where political authority is fragmented between competing states; how to achieve the conditions for sustained growth of output and productivity and manage the tension between private accumulation and social reproduction; and how to secure a fiscal base which allows the state to support accumulation and maintain legitimacy, and manage the tension between global markets and national democracies. There are two kinds of cycles in the history of capitalism – short business cycles that follow the familiar pattern of boom and bust and spontaneous recoveries, and long waves that span decades. At the end of each long wave problems and obstacles build up, requiring an intense burst of creative destruction to create the conditions – international, economic, political, social and ideological – for a new period of sustained prosperity and advance.

The phase of destruction can involve external wars as well as intense internal distributional struggles. Capitalism works by privatising gains and socialising losses, and periods of crisis are when costs are displaced from the owners and managers of capital on to public agencies and private households. Once a crisis hits and output slumps, the fiscal base is weakened and the resources required to maintain the existing level of public expenditure increases. The burden of resolving the crisis is shifted from banks and companies – whose actions precipitated the crisis – on to government departments whose budgets must be drastically reduced to release the fiscal pressure on companies, as well as on to private households which must absorb the cuts in pay and employment for family members, and the cutting of support for children, the disabled, and the old. The state is scaled back and the sphere of unpaid reproductive work is increased. Security is weakened and uncertainty increased.

This cycle is as old as capitalism, although under neoliberalism it has taken new forms. If we are not to be destined forever to repeat it, what has to change in our understanding of the economy? The great structural crisis of the 1930s was ultimately resolved by the cataclysm of the Second World War, and the emergence of a new international order and a reformed capitalism under American leadership. To resolve the present structural crisis will require a transformation of global governance, a new growth model, and a reform of the tax state. All three require a profound change in the dominant assumptions that frame national and international political economy.

The neoliberal order has seen a significant extension of globalisation, the emergence of many important rising powers, and the potential for a transformative shift in the balance of the international economy. But this shift has not yet occurred, and although there have been a number of signs that it might be happening, such as the new prominence given to the G20 after the crash, progress has been slow. Most international multilateral negotiations, over trade and climate change for instance, remain deadlocked. The shift in wealth and power that the rising economies represent indicates the possibility of a new era of prosperity and rapid advance for the international economy. But that potential is only likely to be realised if a new cooperative international order can be achieved. That involves a challenge to western leadership, and specifically US leadership. A new multipolar world is coming into being, but a multipolar world will not necessarily be a multilateral one. The first change in our understanding of the economy has to be the importance of the international rules and institutions that make cooperation and peace possible without relying on a western hegemon to impose it.

The second change concerns growth. The old western growth model is exhausted, even though western governments remain addicted to it. Their efforts to relaunch growth are unlikely to succeed because western economies appear to have reached a technological frontier, which is making it very difficult to raise productivity. No major technology has so far emerged which appears to have the potential of the major technologies of the past to raise productivity throughout the economy. At the same time demographic trends in the western economy have weakened one of the major sources of past growth, while immigration, which could in principle correct this, is subject to increasing political hostility and restrictions. Finally the implications of climate change are beginning to filter through, and the immense changes to the way the economy is organised and people live that will be necessary if the threat is to be contained. Changes that are needed in the way we think about the economy include new ways of thinking about growth, deciding which kinds of growth are desirable, developing alternative definitions of well-being and economic security, and giving priority to investing in the social reproduction of people.

The third dilemma that has to be resolved is finding a new basis for a fiscal compact. The old tax state is played out. The conflation of the public household with the private household that once again filled George Osborne's budget speech is tired and stale, but still holds us in its grip. The discourses of strivers and shirkers, makers and takers, the deserving and undeserving poor, still frame austerity debates both within and between nations. The form of political economy we have subordinates the public to the private, making the state dependent for its resources on its ability to extract resources from companies and private households. This leads directly to the discourse of the overloaded, overextended state – the idea of the state as an unproductive parasite on the wealth-creating private sector, which therefore has to be drastically curtailed in a time of crisis to provide the incentives private capitalists need to initiate recovery. At the same time the state remains crucial to any recovery, so the state has to simultaneously spend more and cut back. We urgently need a different way of thinking through these problems, tackling the problem of rentiers and rent-seeking behaviour, removing the perverse incentives which have proliferated in the neoliberal order, and creating the basis for a different kind of state, based on a new compact between state and citizens. Its priorities would be social investment, social security, and respect for ecological limits.

1] [ https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech

# 2.

# Plan F: A Feminist  
Economics Strategy for  
Post-crisis Britain

Ruth Pearson

What needs to change is the ideological notion that deficit reduction and shrinking long term public debt is good economic policy. To create a sustainable and equitable economy we need a 'Plan F' – a feminist economic strategy that promotes investment in our social infrastructure.

The 2015 valedictory farewell budget of the Coalition government reflects how little they have learned about the reality of Britain's economic abyss for the majority of people. I refer not to the asserted need to 'put public finances in order' but to the blatant refusal to acknowledge the growing crisis of underinvestment – or rather the de-investment in – the social infrastructure on which the economy rests.

The 2015 budget announced a series of giveaways worth nearly £8bn over the next few years for high earners, beer drinkers and car drivers that will largely benefit higher earning men. Meanwhile, the £12bn welfare benefit cuts and £13bn cuts to services still to come will continue hitting women hardest given the gendered responsibility that women shoulder in our economy. It must further be recognised that women lose out not only as service users but also as workers: public sector job cuts and redundancies disproportionately affect women. But the 2015 budget made no mention of vital areas such as childcare, social care, education and health – economic activities that are central for the wellbeing of all of us as well as the basis for any hopes for balanced economic stability and growth in the future.

Alternative policies based on feminist and heterodox economic analyses are required in order to create a sustainable and inclusive economy and society. We need to reconsider the focus of long-term investment policies, which should include the caring sector at their heart. This extends beyond physical infrastructure such as school buildings, childcare centres, hospitals and care homes, to the provision of public funding to the workforce required to deliver these essential services, guaranteeing them much better terms and conditions of work, which is key for high quality services. These measures build the social infrastructure and the country's human and social capital.

Many recent studies have set out the ways in which women have been disadvantaged by conventional post-crisis policies which have seen different groups of women such as single mothers, pensioners, minimum wage workers, and self-employed inequitably impacted _vis-a-vis_ full-time male sections of the population.

A feminist economics approach goes further by placing the often unpaid care activities carried out in order to secure biological, daily and generational reproduction of human beings at the heart of the economy. These activities are as much a part of a holistic notion of the economy, as the financial economy which is privileged by neoliberal economics (laying the basis of the increasing financialisation since the 1970s) and (neo) Keynesian economics which highlights the imperfection of adjustment of wages and prices in the context of modern national economies inserted in global markets and supply chains.

The UK Women's Budget Group (www.wbg.org.uk) has put forward an alternative economic strategy – a Plan F – that places the reproductive economy at the centre stage in devising policies appropriate for a 'post crisis' economy. A major part of this strategy to create a caring and more equal economy is concerned with investment in the fabric of human capital and care throughout the lifecycle. This would mean committing public investment (from recurrent and capital budgets) not just in the buildings and transport infrastructure on which we all depend but the services necessary to operationalise a commitment to lifelong learning, skills upgrading and quality care services which underpin a dignified life for all ages.

The current political debate about economic policies in the UK rarely challenges the ideological notion that the deficit must be reduced and the long-term public debt should be shrunk. Plan F is based on two principles that fly in the face of that current orthodoxy: firstly government expenditure should be balanced with current revenue, not just by reducing spending, but by increasing revenues. Current policy has made 85% of the adjustment from reducing spending on benefits and services. More equitable alternatives include not replacing Trident (estimated at £20bn), designing environmentally preferable alternatives to High Speed 2 (HS2) and substantial reform of taxation, including reversing the giveaways to higher earners, imposing a progressive wealth/property tax, international transaction tax, effective taxation on profits by international corporations and financial intuitions, curtailing rights of inherited wealth, as well as increasing income and indirect taxation, which would result from additional decent employment in public and private sectors.

The second principle is that government debt is only a problem if it becomes unserviceable, and there is no evidence that this is the case in the UK. Although it can be argued that the UK currently has a fairly large deficit-to-GDP ratio, the debt-to-GDP is currently not high in historical or international terms.

Detailed proposals include a range of economic activities that go beyond effective child and elder care networks and extend to policies and incentives that would place education and training choices within the reach of all groups. Plan F also entails radical reform of the housing and transport systems to offer affordable housing and effectively priced and designed environmentally prudent transport services. Key policies of this strategy include:

  * Paid care workers (who are mainly women) to receive better training, better pay, better employment rights, better job security, including the end of zero hour and exploitative contracts for care assistants;

  * More support for unpaid carers looking after family and friends (who are mainly women) from public services and social security benefits;

  * Increase in investment by both private sector and public sectors in the development of high-quality care service, and halting and then reversing the cuts to public services;

  * Reform of Universal Credit to ensure that women with employed partners gain from earning;

  * Raising of the minimum wage to a higher proportion of median wages;

  * Repeal of social security measures that are destroying women's links with their families and communities, such as the bedroom tax and the benefits cap;

  * Support for investment and expansion of social housing rather than subsidized lending for mortgages or payment of deposits on excessively high-priced private housing.

These arguments fly in the face of conventional economic orthodoxy in contemporary Britain but they are based on sound economic principles. The detailed analysis carried out by the Women's Budget Group (www.web.org.uk) informs the recently published article by Ruth Pearson and Diane Elson in Feminist Review #109 and is available here:  http://www.palgrave-journals.com/fr/journal/v109/n1/pdf/fr201442a.pdf.

# 3.

# The Personal is the  
Political Economy

Johnna Montgomerie

We need to fundamentally change the terms of the debate on the economy. To do this we forget economic 'recovery' and focus on economic 'discovery' incorporating the everyday lived experiences of individuals, households and communities as a framework for evaluating the state of the UK economy.

The election season is over and with it the steady stream of (Orwellian) declarations that the 'UK economy is in recovery', 'is growing again', 'Austerity is working', and 'employment is up and wages are bouncing back'. Still, this is the longest recovery is history. Looking over to Europe we see anti-Austerity politics in Greece and Spain while in the UK the commitment to austerity is unwavering given the lack of robust recovery and looming prospect of debt deflation.

In reality there is no consensus on whether the UK is in recovery or not because it really depends on who you ask. Politicians and technocrats say recovery has been achieved because economic growth is restored, but it is sluggish and uneven while still reliant on personal debt, consumer spending and asset-price inflation. Critics point to a continued dependence on tax-subsidised finance-led growth with no rebalancing away from finance and services toward manufacturing, creative industries or revitalizing small and medium-sized enterprise.

Still none of these even considers the reality that the very concepts of GDP growth, recession, and recovery are remnants of an antiquated framework. Judging the success of the economy using these terms still cannot account for unpaid labour in the home, the ecological limits of growth, the realities of a global economy or the potential for technology to fundamentally change every day experiences of economic life. Basically 'Recovery' is a free-floating concept for politicians to use and abuse to meet different ends.

With the election cycle finished and control over economic narratives resting with the Conservatives, now is the time to expose and question the political priorities embedded – often in an unspoken way – in debates about the 'state of the economy'. Recovery does not speak for itself no matter which strategically selected indicators of growth and employment are used. Despite some noise about why politically important economic figures have been routinely revised upward by the Office for National Statistics, there is no real questioning of why the numbers used to communicate economic activity belie the experiences of the people living in the economy.

To fundamentally change the terms of economic debate we need to ask: if the recovery does not materialise in people's lived experience of 'the economy' then perhaps it does not exist? The personal _is_ the political economy! If you do not experience growth or recovery in your employment conditions, your household finances, your local community or regional area then it is simply not there.

The very foundation of the modern scientific revolution is putting human beings' ability to use their senses to understand the natural world – not simply accepting the Oracle's vision of why the crop failed. Sadly, this is precisely how contemporary economic policy works in the UK: the economic High Priests in Parliament, the Treasury and the Bank of England tell us that all is well in the economy. If we question this edict then we are branded heretics.

Our personal experiences of crippling debt, insecure jobs or prolonged unemployment, stagnating incomes, rising prices – and the list goes on and on – exposes the reality of the state of the economy we live in. The High Priests tell us that, ultimately, this is a personal failing: a lack of financial literacy, job training, entrepreneurial ability, or a simple lack of the moral virtues of prudence, temperance or diligence. Basically, the crop failed because of your (collective) sins and you are rightly being punished.

For us, or so we are told, the recovery exists somewhere 'out there' in the Macro-Economy or Global Economy or over the rainbow. When there is stagnation it is caused by something even further 'out there' in Europe, in China, or by the fairies at the end of the garden. Yet we see and feel stagnation much closer to home: in our pay, on our high street, when we try to book a doctor's appointment.

This matters because it reveals why mainstream economics and economic policy-making is not fit for purpose. Theory, or ideology, is more important than evidence. For example, economic theory says that when interest rates decrease investment increases; however, the evidence shows that seven years of low interest rates have not led to increased investment. Actually it's the opposite: investment is stagnant as financial and non-financial corporations hoard cash because they get it for free from the Bank of England (through Quantitative Easing). So when the Monetary Policy Committee announce they will keep interest rates lower for longer it is based on their 'beliefs' NOT on any evidence that this policy is actually working.

Neoliberal ideology says that Quantitative Easing – where government debt is issued from the Treasury, given to the Bank of England and passed on to private banks to 'transmit' credit in the economy – is the best way to respond to finance-led debt crisis. Seven years of sluggish growth and predicable threats of deflation pressures is the evidence that contradicts this ideological vision, yet the High Priests remain devout believers.

Worse still is how contemporary economic policy refuses to adapt in the face of technological advancement. In practice, we use the same statistical measure devised when Downton Abbey was reality not drama; Gross Domestic Product (GDP) was invented when data was collected in handwritten ledgers in pounds, shillings and guineas.

We need to fundamentally change the terms of the debate on the economy. To do this we need to forget economic 'recovery' and focus on economic 'discovery' as a framework for evaluating the state of the UK economy.

Thanks to innovations in technology, there are vast amounts of data available that offer mind-boggling levels of detail that can give us all valuable information on economic activity. This data could be used in very innovative ways to show how the economy is 'made' through everyday practices of work, consumption and leisure and visualised on at different levels like the household, the postcode, and local community or regional levels. Shockingly, these types and scales of economic activity don't even exist in the economic theories policy-makers desperately cling to.

If we begin with the human experience then the economy is what you do every day: when you go to work, when you care for others, when (and where) you go shopping, when you pay your taxes, and when you pay your debts. These activities make up the economy through routine monotony that is the daily grind. Politicians prefer economists because, to them, everyday life is a series of rational choices – so financial insecurity is about individual poor choices, not because an individual is poor.

Moreover, the Precariat and the 'Squeezed Middle' cannot be measured by national statistics, but it does not mean they do not exist. For these people, financial insecurity is everyday life. Legions of the urban poor struggle to get secure minimum-wage jobs, or move from zero-hour contracts to agency posts, living on payday and 'everyotherday' loans. Those in the 'Squeezed Middle' have stable salaries at least, but these are not expected to increase any time soon – unlike the cost-of-living, which means another decade of living interest payment to interest payment.

Young people looking to enter this economy can expect some grim choices: under-21 wages (£5.13 p/hr), apprenticeships wages (£2.73) or unpaid internships, or go to university and face student debts well above their starting salary.

No one is searching for the next economic discovery, the one that gets us out this mess. Politicians and the economic High Priests are stuck worshiping their dead 1930s economists – because, according to them, 'Britain is doing great, haven't you heard?!'

Continued support for Austerity means the everyday taxpayer will have to accept more cuts to public services and transfers to allow the government to continue borrowing to help repair bank balance sheets. Unlike in Greece, the UK household sector has access to a steady stream of tax-subsidised credit, albeit with a substantial mark-up, so the banks can get their cut.

Increasingly public policy seeks to balance the public books by simply downloading the debt on to households, so lower public debt will achieved but households will pay the costs. The latest budget figures clearly show that public debt levels in the UK are not going down, while household debts continue to increase year-on-year.

Yet, what (rational) choice is there? If every household struggling with debt decided to pay down their debts the UK economy would be plunged into depression, with the global economy following closely behind. However, if every household struggling with debt continues to take on more debt to maintain their standard-of-living soon there will be mass insolvency.

Only by changing the terms of the debate to look for the next economy discovery will we find a way out of this Debt Economy.

# PART 2

#

#

# PERCEIVING THE ECONOMY AS SOCIETY

#  4.

# The Economy is More  
than the Sum of its Parts

James Meadway

What needs to change is the belief that individuals create society before society creates individuals. Economics needs to return to its own classical tradition and focus on the distribution of resources, as well as their use; to explain crises and dynamics, not stability; and an understanding of the economy itself as a system, not a mere assembly of elements.

To improve our understanding of the economy we must kill off methodological individualism – the belief that society can be best understood, fundamentally, as a collection of individuals and their actions. Neoclassical microeconomics fixes this belief at the very centre of its approach and, over the last three decades, the same belief has come to infest macroeconomics. The dogged pursuit of 'microfoundations' insists that analyses of economic aggregates like unemployment or inflation must be grounded in the rationality of individual agents. In other words, whatever claims were made about the relationship that existed between aggregates would have to be understandable through the rational behaviour of individual agents.

The aggregate matters. The totality of relationships, _particularly_ in a monetary economy, is different to the sum of individual behaviours.

## An Economy in Numbers

In the post-war period macroeconomics models were based on the 'neoclassical synthesis' of John Maynard Keynes' _General Theory_. These aggregate models tended to search out econometric relationships amongst the key aggregate variables – most notably, that between unemployment and inflation in the Philips Curve – appeared stable and amenable to this form of backward-looking exercise. The method was inductive rather than deductive: based on rules-of-thumb and ad hoc adjustments around a theory, rather than directly theoretical claims.

The crisis of the 1970s broke these models as modellers were confronted by changed circumstances in which, strikingly, the Phillips Curve relationship seemed to collapse – unemployment and inflation arriving together as stagflation. Genuine efforts at demand management from the early 1970s onwards, meanwhile, arriving hot on the heels of US President Richard Nixon's pronouncement that he, too, 'now a Keynesian'1 appeared to offer only temporary respite from the malaise.

It was at this crucial time that monetarists raised the contention that deficit spending by governments worked only on the basis of fooling the rest of the economy. The so-called 'money illusion' meant that deficits could work temporarily, but would eventually, as people realised they had been hoodwinked, would adapt back to the 'natural rate ' of unemployment but now with a higher rate of inflation. The political failure of Keynesianism was preceded from this theoretical denouement. Milton Friedman advanced a quantity theory of money to provide a neat explanation of the disappearance of the Philips Curve because inflation was 'always and everywhere a monetary phenomenon'2. All that was necessary to restrain rising prices, therefore, was effective commitment by governments to keep the supply of money growing at a steady pace.

The core tenets of monetarism proved to be extraordinarily difficult to implement: the 1979 Thatcher government's _Medium Term Fiscal Strategy_ 3 attempted to restrain money supply growth in its first few years and subsequently (quietly) ditched the policy when its chosen measures of the money supply veered wildly away from targets. Still, it established the general bias of monetary policy towards attacking inflation, backed up by (verbal, if not actual) commitments to tightness as needed to keep price increases down. This consensus held, with institutional variations, until the crash of 2008.

Large-scale Keynesian models were seen as _inherently_ unable to provide useful guidance for policy. In a world of rational actors (so it was assumed) all agents would know what model the policy-maker was using and act accordingly. For example, if a government attempted to exploit the presumed Philips Curve relationship and push unemployment down by increasing the rate of inflation, agents within the economy would foresee this behaviour, revise their expectations of inflation upwards – and in doing so, drive the actual rate of inflation upwards for any given level of unemployment.

## No rational representative agent is an island unto himself

This is the intellectual history of using _microfoundations_ to the study of economic aggregates. Macroeconomic models were based on the 'deep parameters' of the economy: preferences and technology, to ensure that they were _forward-looking_. Agents in these new microfounded models behave rationally in response to the economic environment. Since rationality implies the same behaviour from all agents given their preferences and technology, it was argued that models could simply include a _single representative agent_ to stand for the great number of actual agents existing in the economy. The representative agent is rational, forward-looking, and plots a path of decision-making over time that maximised utility under budget constraint.

The maths became increasingly sophisticated, invoking recursion to solve the representative agent's problem. Cutting-edge Dynamic Stochastic General Equilibrium (DSGE) models provided the intimidating theoretical armature around which the New Macroeconomic Consensus was constructed. Here, microfounded modelling procedures pushed the economy back to a stable equilibrium point, government intervention was limited to correcting 'market failures' and a heavy focus on monetary policy were seen as sufficient form economic management – in hands of an independent central bank, of course. By the mid-2000s, after years of low inflation, low interest rates and, for the US and UK, high growth, the confidence of mainstream macro was at all-time high. Robert Lucas used his 2003 Presidential Address to the American Economic Association to boldly declare that the 'central problem in economics of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades."4 Or, as Gordon Brown, Chancellor of the Exchequer at the time, pithily stated: 'no return to boom and bust'. Until 2008 that is, when markets went into free-fall.

However, to persuade a fully-specified DSGE model to behave like the economy it purported to model, all manner of essentially ad hoc adjustments were introduced, breaching the strict requirements of rationality: rule-of-thumb consumption, for example, or somewhat mysterious market imperfections. The happy coincidence of models geared to predicting stability during a period of actual stability does not, by itself, mean a model is correctly predicting anything. Correlation does not imply causation, or predictive power: more colloquially, even a stopped clock is right twice a day.

More convincing as an explanation for persistently low prices is the extraordinary, decades-long decline in the price of manufactured goods, driven by technological innovation and the immense shift of manufacturing eastwards. The rise of China and East Asia, in retrospect, may have been a more important influence on Western economies than a few over-engineered macro models and the policy conclusions divined from them. And needless to say, low inflation was highly selective: asset price inflation, the lynch-pin of the debt bubble during the 2000s, was very substantially ignored by policy-makers and economists alike.

This last point is a striking illustration of how the pursuit of microfounded models lead the mainstream so far astray. The insistence on looking only at a single representative agent meant pulling the range of different financial positions taken by different people and institutions in the economy into a single point of analysis.

In practice, it means collapsing a range of different positions into a net of assets and liabilities. Of course, in the aggregate, everything nets out perfectly: the nature of a balance sheet means that assets and liabilities balance. But the question of who holds which part of that balance sheet disappeared. An extraordinary expansion of private-sector indebtedness could appear, on this net basis, as nothing to become worried about. Should – as happened – either those holding liabilities fail to meet them, or (relatedly) those holding assets find their assets suddenly becoming worthless, the system would be thrown into chaos.

Lacking a proper description of the aggregate holdings of assets and liabilities, mainstream modelling almost entirely failed to notice this. The pinnacle of the modellers' art, the DSGE model, turned out to be a total flop because it was 'very poor' in forecasting.5

Importantly, endemic economic problems of credit bubble inflating an asset bubble could be easily observed and were well known some time before they were empirically modelled. Early debates over microfoundations highlighted rigorous mathematical proof of the _impossibility_ of constructing a stable microfounded model of the economy.6 Assuming that the conditions for individual behaviour in a market cannot be applied completely to the behaviour of many individuals in a market means it is impossible to guarantee, under the conventional assumptions about rational agents, that a single, stable equilibrium point can exist.

The project of microfounding macroeconomic models is not just difficult to sustain empirically: it did not function even at the most abstract level of theory. Properties of complex system matter, and matter in a way that cannot be derived a priori from a few assumptions about individual behaviour. Attempts to make that behaviour more realistic, by incorporating insights from psychology, appear either banal or redundant. It seems only an economist could be surprised to discover that people are not calculating, paranoid robots: adding psychological dynamics to rigid assumptions is a sterling example of propping up a 'degenerative scientific research programme'.7

Ultimately, the belief that individuals create society before society creates individuals, rather than the other way round, needs to be thrown out. This means, in other words, a great return by the mainstream of economics to those elements of its own classical tradition otherwise discarded by neoclassicism: a focus on the distribution of resources, as well as their use; a concern to explain crises and dynamics, not stability; and an understanding of the economy itself as a system, not a mere assembly of elements.

[1] The New York Times, 4 January 1971

[2] Friedman, M. (1970), The Counter-revolution in Monetary Theory, IEA Occasional Paper 33, London: Institute of Economic Affairs, p.11

[3] Bean, C. and Symons, J. (1989), "Ten years of Mrs T." in Blanchard, O. and Fischer, S. (eds.), NBER Macroeconomics Annual vol.4, Cambridge, MA: MIT Press

[4] Lucas, R. (2003), Presidential Address to the American Economics Association, 4 January 2003, Washington, D.C

[5] Edge, R.M. and Gurkaynak, S.F. (2011), "How useful are estimated DSGE model forecasts", Finance and Economics Discussion Series, Divisions of Research and Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C.

[6] Sonnenschein, H. (1973). 'Do Walras' identity and continuity characterize the class of community excess-demand functions?'. Journal of Economic Theory 6: 345–354; Debreu, G. (1974). 'Excess-demand functions'. Journal of Mathematical Economics 1: 15-21; Mantel, R. (1974). 'On the characterization of aggregate excess-demand'. Journal of Economic Theory 7: 348–353.

[7] The expression is from Imre Lakatos' theory of science.

# 5.

# Institutionalise Human  
Communication

William Davies

We need to recognise human voice as an irreplaceable technique of communication, or else move further into a depressive, cybernetic economy.

At the heart of neoliberal theory and practice is the disenchantment of politics by economics.1 Dating back to the 1920s, neoliberal intellectuals have cast doubt – and sometimes scorn – on the capacity of dialogue, democracy and moral deliberation to mediate human differences and arrive at collective agreements. As Milton Friedman put it, "over values, men can ultimately only fight".2 Ludwig von Mises argued that only markets could deal with competing notions of value, because only the price mechanism was capable of calculating them explicitly.3 For Friedrich von Hayek the market was a telecommunications system, through which local knowledge could travel, bypassing centralised scientific authorities as it did so.4

The neoliberal argument for the market was never a merely economic one, but based on the idea that markets were uniquely successful at upholding liberal principles of openness, fairness, peace, freedom and even – as odd as it may sound – a particular form of equality. Markets do what politics cannot.

## The Language of Numbers

From these perspectives, if we could come to express ourselves through numbers – be they the numbers of the market or associated techniques of accounting, management and economics – then we would no longer depend on the dangerously ambiguous language of politics and ethics. Neoliberalism is therefore a project of encoding social and political discourse, manifest in how New Public Management seeks to re-codify administrative and professional language.

As a project for the remaking of state and society, neoliberalism has experienced some astonishing successes and some terrible failures, simultaneously.

Neoliberalism successfully achieved considerable influence over the state and a great many public (or formerly public) institutions. The ambition of encoding and re-coding discourse, so as to match the explicit, calculative, quantitative medium of the market, has been achieved on a quite remarkable scale. Between the 1970s and the present day, whole cultures and traditions of association and authority have been re-made to privilege economic and managerial jargon over all other forms. Financialisation, for example, converts tacit social obligations into explicit, priceable debts.

It might very well be that neoliberalism is not about the triumph of 'free' markets at all.5 However, it undoubtedly achieves a certain form of cybernetic modernisation, inasmuch as it leads to a fusion of human and non-human forms of communication. Financial markets are the area where this has happened at the most startling rate, with ICT facilitating a dramatic acceleration of financial activity.

The spread of cost-benefit analysis into public and cultural life, and the more recent expansion of 'smart' technologies into the minutiae of social, psychological and physiological life mean that the goal of replacing political discourse with something more calculative has been achieved on an epic scale.

The failure of the neoliberal movement has been its inability to achieve the psychological engagement on which it depends. Amongst elites, this is manifest in the normalisation of fraudulent behaviour, in which numerical codes are no longer treated as fair representations of knowledge and value, but as opportunities to be gamed.

For those outside of the elite, things are more painful. Simultaneous with the expansion of targets, audits, computers and quantitative evaluations into everyday life has been a growing problem of psychological disengagement, regularly manifest in forms of psychosomatic breakdown. As union power has declined, managers have instead had to contend with a panoply of health and wellbeing problems in the workplace, which, unlike unions, defy negotiation. The cost to the UK economy of stress, anxiety and depression are already over £100bn a year, but on current trends will have doubled within 20 years in real terms.6 This would be far beyond anything the NHS would be able to cope with, suggesting that the orthodoxy of viewing such problems in medical terms is simply not practically sustainable.

While the uses of 'smart' devices and social media are things that are beyond the reach of public policy, there is similar concern as to how this constant digital mediation affects psychology, relationships and human intelligence. Even Andy Haldane, Chief Economist at the Bank of England, recognises that the information revolution may be having negative cognitive consequences that add cause for pessimism about the future of capitalism.7

It is one thing if humans cease to do work that computers can do more efficiently; but it is quite another if humans start to lose the capacity to do things that humans are uniquely able to do. There is a risk that the cybernetic convergence of machines and human beings starts to look like the imperialism of the former, producing what Lazzarato terms 'machinic enslavement'.8

The rising concern with 'happiness' as a problem in need of management and policy intervention is indicative that all is not well, and that elites now recognise this.9 Economists now feel confident in their ability to pinpoint the importance of happiness to the vitality of contemporary capitalism: one study shows that happy employees are 12% more productive than average.10 However, they are far less equipped to understand why unhappiness may have become such a widespread problem in the first place.

## What needs to change?

There is a simple, if naïve, argument against these trends, which is as old as industrialisation itself. Assert the need for 'humanity' against technology, for more 'authentic' relationships, to safeguard 'community' against the market, to assert the priority of qualitative or professional judgement over quantitative evaluation.

It is hard to disagree with the tenor of such claims. However, they typically ignore the thornier problem of _how_ – leaving core neoliberal principles relatively untouched. As a technocratic project, or a program for the development of _new instruments and means of government_ , neoliberalism is untroubled by ethical appeals to 'virtue' and 'goodness', unless an alternative set of instruments and means can be offered as well.

Contesting neoliberalism must begin with a challenge to its foundational distrust of intentional human language, as a basis on which to regulate economic life, whether at the macro or the micro scale. Equally, it must involve challenging the notion that evaluative and epistemological problems are best treated as computational ones. Following Philip Mirowski, this overturns the Hayekian argument that centralised authorities can never know enough to act in the public interest.11

Another element is to argue that when human relations are re-codified along the lines of computational, calculative relations there are negative consequences for psychology, health and capacity to engage in useful, non-fraudulent economic activity. It is now well understood that this has tangible economic costs, as well as social ones.

At its most ambitious, therefore, the design and construction of an alternative to neoliberalism must involve the rethinking of economic institutions in non-cybernetic forms. This means offering an alternative theory of communication, in which individuals are equipped (and required) to express their knowledge, values and tastes using their own words, and in ways that can't be adequately replaced by a numbers.

In the age of 'Big Data' and ubiquitous digitisation, this may sound like nostalgia. And yet new practices are developing all the time on the fringes, to attempt to stem the flow of stressful, high-surveillance techniques of management. 'Social prescribing', which encourages those with depression and anxiety to engage in practices such as singing, gardening and dancing, is one example. Activities such as 'digital detoxing' and 'mindfulness' do not challenge the status quo, but they do represent an attempt to limit the relentless expansion of calculation into everyday life. These are all 'treatments', not models, but they suggest at what needs to change within the orthodoxy.

## Alternatives cannot be found in what came before

As Andrew Gamble and others have argued for some time, the challenge for critics of neoliberalism is how to accommodate some of its most incisive insights, in particular, the problem of political-managerial coordination across a complex economy.12 If it is not markets (and associated knowledge systems) that will perform evaluations and circulate knowledge, then _what is it?_

The alternative to neoliberalism will not resemble Keynesian, Fordist social democracy, however sad that may sound. But the corruption and mental health crises that now engulf neoliberal forms of governance, which treat numbers as the only legitimate means of negotiation or judgement, mean that the alternative must involve the rediscovery of human voice as a legitimate basis for economic organisation. Templates and constitutions, developed with legal oversight, are needed to instantiate rights and responsibilities and to exert voice within and over economic institutions. Institutionalised economic democracy at a small to medium scale, and new public forums and norms of deliberation for elites at the higher echelons of economic power, are the only starting point for the imbalance in that power to ever be overcome.

Once humans are speaking as only humans can, the work of putting data analytics towards the social good, as has been dreamt by some socialists over the years, may even begin.

[1] Davies, W. (2014). The Limits of Neoliberalism: Authority, Sovereignty and the Logic of Competition. SAGE.

[2] Friedman, M. (1953). Essays in Positive Economics. University of Chicago Press: Chicago

[3] Mises, L. (1990). Economic Calculation in the Socialist Commonwealth. Ludwig von Mises Institute.

[4] Hayek, F. A. (2005). Use of Knowledge in Society, The. NYUJL & Liberty, 1, 5.

[5] Crouch, C. (2011). The Strange Non-Death of Neoliberalism. Cambridge: Polity.

[6] Royal College of Psychiatrists (2009) Mental Health and the Economic Downturn

[7] Haldane, A. (2015) 'Growing Fast and Slow', Speech given 17th February at University of East Anglia

[8] Lazzarato, M. (2014). Signs and Machines: Capitalism and the Production of Subjectivity. Semiotext(e).

[9] Davies, W. (2015). The Happiness Industry: How the Government and Big Business Sold us Wellbeing. Verso

[10] Oswald, A. et al (2008) 'Happiness and Productivity', The Warwick Economics Research Paper Series No. 882

[11] Mirowski, P. (2013) Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Crisis. Verso

[12] Gamble, A. (1996) Hayek: The Iron Cage of Liberty. Polity. Gamble, A. & Kelly. G. (1996) The New Politics of Ownership. New Left Review, 1/220, Nov-Dec

# 6.

# A Feminist Rethinking  
of Economics and Politics

Sara Wallin

**Daniela Tepe-Belfrage  
**

Any agenda for economic discovery should start from the insight that economics is a gendered, classed and racialized field. What needs to change is not only the theories and models that underpin our understanding of the economy, but also our practices as scholars within the disciplines of politics and economics.

The aftermath of the 2008 financial crisis shed light on a central feature of neoliberal political economy: the shift of costs from capital to states and households (Armstrong, 2010). Feminist voices are typically ignored but a growing number of activists continue to document how women have carried a disproportionate weight of crisis and recovery in the UK economy. For example the Coalition's cuts in tax credits cost women £8.3bn compared with £2.3bn for men, women lost £2.3bn from the reductions in housing benefits and men £1.5bn, and the freeze in child benefit will cost women £3.5bn and men £346m.1

Women have nevertheless been an important target of post-crash public discourse that seeks to restore the legitimacy and faith in neoliberal economics underpinned by disciplinary social policy. The 'Lehman Sisters' argument says that women's participation in financial institutions by virtue of their social and biological traits is a solution to masculine cultures of risk-taking that contributed to the crisis.2 Gender bias is reproduced through contemporary financial governance and the only solution on offer is for individual women to 'lean in'.3 Poor women are targeted by the disciplinary social policy that demonises them as bad mothers and 'welfare queens'.4 State policy is to morally reform these women with parental literacy classes to 'help' adjust their lifestyles.5

These reductionist analyses and practices profoundly fail to account for how neoliberal political economy relies upon and has exacerbated inequalities along the lines of gender, class and race. Black, Asian and Ethnic minority (BAME) women 'are more likely to live in poverty... unemployment is higher for all groups of BAME women than among white women... BAME women as a whole are more likely to report ill health and experience ill health earlier than white British people'.6 Still in the face of such stark inequality, the reality that gendered and racialized exploitation is fundamental to capitalism.

Against this background, we propose the need for a feminist analysis of the economy. The first task of this analysis is to begin the remaking of policy to bear upon the insight that different social groups are situated differently in economic life. These policy solutions also need to move beyond the individualising practices of neoliberalism to acknowledge the social and structural relations that underpin what we see as 'the economy' (Pearson and Elson, 2015: 9).7 However in order to get to this point we need nothing less than a radical revision of the theories that underpin policy and the institutional settings which economic knowledge is produced.

## Rethinking the 'economy'

Among the first questions emerging out of the PERC workshop was, how do we speak about the economy? Mainstream economics, as taught in the universities of Northern Europe and North America, pervades elite policy circles and contributes to the legitimation of neoliberal economic agendas.8 Maintaining the privileged role of individuals, production and finance has meant that mainstream economic analysis is inadequate to capture the impact of neoliberal restructuring. Indeed, the household as a key site which unpaid labour allows for the continuation of the productive economy is still excluded or subjugated to analysis on market-terms.

Constructing a new language of the economy entails putting the household and social reproduction at the centre of the analysis. Looking at the household sphere offers a holistic account of the impacts of financialisation on the economy and identifies the values and norms that are important for a human-centred economy. Even Adam Smith had his dinner cooked by his mother – for his entire life – out of feelings of love and family ties.9

Feminist economics' holistic understanding of the economy shows us how to redefine 'recovery' in a way that promotes long-term social objectives rather than on short-term financial gains; by creating the conditions for social reproduction, equality and wellbeing.10 With women already having disproportionately carried the burden of cuts to the welfare budget, the proposed £12bn cut to the welfare budget by 2018 is alarming. Here, feminist economics points to a politics of social investment rather than austerity. Again, rethinking the terms of productivity and the purpose of policy should increase revenue, not just cut expenditure – contribute to wages, welfare, public wellbeing.11 While being aware that the language of social investment can be framed in terms of the prevention of long-term costs or in the expectation of short- term financial returns; Feminist Economics shift the meaning to an understanding of social investment that aims at creating a social infrastructure that enables sustainable well-being.

Having social reproduction at the centre of understandings of how the economy works also requires a major revision of the concept of 'growth'. A New Economics Foundation report shows that the instability of neoliberal growth models stems from its propensity to exacerbate inequality.12 In the UK, economic growth has been premised upon the mass extension of household debt to compensate for the stagnation in wages and employment undermining at times the goal of sustainable wellbeing. Seeing how the social construction of unpaid care and housework as less valuable than paid work in the public sphere continues to be a key source of women's inequality, any estimate of growth needs to account for work in this sphere. In 2014, the ONS estimated that the value of unpaid GDP in the UK economy was at £440.2bn.13 In turn, a 2013 report the by National Domestic Workers Alliance in the US showed that that 95 per cent of domestic workers were women, 51 per cent were women of colour, 36 per cent were undocumented immigrants, and the vast majority didn't have health insurance or sick pay.14

## Searching for alternatives

We need a more reflexive understanding of the alternatives to economic orthodoxy that continuously interrogates how academics and activists (re-)construct the power dynamics within the disciplines of economics and politics. As a starting point, right at our doorsteps, is the masculine and white nature of both academia and activism.

The exclusion and alienation of ethnic minorities from top UK economics and politics departments already starts at the level of undergraduate admissions. A 2014 study of undergraduate applications to the London School of Economics found that, with the exception of mixed white/Asian and Chinese candidates, ethnic minorities were significantly less likely to receive an offer.15 This is mirrored at the faculty level as BME academics represent only 6.2 per cent of academics in social/political/economic studies. In economics, nearly 12 per cent of UK-employed full-time academics were of minority ethnic origin, but only one per cent were UK-born.16 Surveys of BME staff report significant issues with discrimination based on race, ethnic origin or nationality: 41 per cent of minority ethnic staff in economics departments in UK HEIs reported experiencing discrimination.17 Despite efforts to promote diversity BME staff in UK higher education report their work is side-lined in favour of work of white male academics.18

Women experience gender-based disadvantages in the disciplines of politics and economics. Internationally the proportion of women in the economics profession has risen over time, but they are still under-represented at all levels.19 In the UK, women are under-represented at senior levels within both economics and politics. The 'seniority sex gap' in UK politics departments means that 12 per cent of women are professors compared to 29 per cent of men20 as women academics suffer a 'baby penalty' affecting their career progression.21 The Research Excellence Framework (REF) implements its own male-bias penalty by strictly enforcing a formula of months of maternity leave to number of published outputs female academics can submit.22

Academia is not the bastion of Enlightenment it likes to believe it is, nor is it meritocratic in the way it wants to be. As more and more survey evidence shows academics' experiences are filtered through their identities as gendered, classed and racialized humans. For example, female PhD students are more likely than their male counterparts to experience 'Impostor Syndrome'23 because of the pervasive rationales that privilege assertive and competitive behaviour. This filters through to undergraduates: only 12 per cent of female third-year students wanting to pursue an academic career compared to 21 per cent of men.24

## Why we need a feminist political economy

The study of political economy is too often defined in ways that excludes rich feminist insights into care, the body, unpaid labour or even love-work that are essential to the functioning of any economy. There can be no viable alternative to neoclassical economic orthodoxy that does not recognise and incorporate the empirical and conceptual innovations of feminist research.

What does this mean in terms of forging strategies for transforming our understanding of the economy? In our practice as academics and activists, we must resist managerialism and pressures on time. We must work to close disciplinary boundaries by supporting initiatives for equal representation, equal pay and equal opportunities. This can only be accomplished by foregrounding feminist methodological practices and listening to women's voices that already tell us how neoliberal power relations operate.

[1] http://www.independent.co.uk/news/uk/politics/women-bear-85-of-burden-after-coalitions-tax-and-benefit-tweaks-9907143.html

[2] Prügl, Elizabeth (2012) 'If Lehman Brothers Had Been Lehman Sisters.': Gender and Myth in the Aftermath of the Financial Crisis', International Political Sociology, Vol. 6, pp. 21-35.

[3] Sandberg, S. and Scovell, N. (2013) Lean In: Women, Work and the Will to Lead, Randomhouse: New York.

4] [ https://www.opendemocracy.net/5050/kate-donald/feminisation-of-poverty-and-myth-of-welfare-queen

[5] Montgomerie and Tepe-Belfrage (forthcoming) Everyday feminist political economy of reform, Globalisations

6][http://www2.warwick.ac.uk/fac/soc/law/research/centres/chrp/projects/humanrightsimpactassessments/women/layers_of_inequality.pdf

[7] Pearson, R.and Elson, D. (2015) 'Transcending the impact of the financial crisis in the United Kingdom', Feminist Review Vol. 109, pp. 8-30

[8] Beneria, L. (1999) 'Globalization, Gender And The Davos Man', Feminist Economics, 5: 3, pp. 61–83

9] [ https://www.opendemocracy.net/5050/dawn-foster/who-cooked-adam-smith%E2%80%99s-dinner-women-and-work-postcrash

10] [ http://wbg.org.uk/wp-content/uploads/2015/02/PLAN-F-2015.pdf

11] [ http://wbg.org.uk/wp-content/uploads/2015/02/PLAN-F-2015.pdf

12] [ http://b.3cdn.net/nefoundation/005f379c2df9c812f1_gqm6ivky0.pdf

13] [ https://www.opendemocracy.net/5050/dawn-foster/who-cooked-adam-smith%E2%80%99s-dinner-women-and-work-postcrash

14] National Domestic Workers Alliance (2012) Home Economics The Invisible and Unregulated World of Domestic Work, Center for Urban Economic Development, University of Illinois at Chicago DataCenter. [ http://www.domesticworkers.org/sites/default/files/HomeEconomicsEnglish.pdf

15] [http://www.bbc.co.uk/news/education-28424556

[16] Equality Challenge Unit (2009) The experience of black and minority ethnic staff working in higher education, available at http://www.ecu.ac.uk/publications/experience-of-bme-staff-in-he-final-report/, accessed 26 March 2015.

[17] Blackaby, D. and Frank, J. (2000) 'Ethnic and other minority representation in UK academic economics'. Economic Journal 110(464): 293-311

18] Bhopal, K. and Jackson, J. (2013) 'The Experiences of Black and Minority Ethnic Academics: Multiple Identities and Career Progression', University of Southampton. Available at [ http://blackbritishacademics.co.uk/wp-content/uploads/2013/04/Research-Report-The-Experiences-of-Black-and-Minority-Ethnic-Academics-Dr-Bhopal.pdf

[19] Ferber, M.A. and Nelson, J.A. (2003) Beyond Economic Man: Feminist Economics Today. Chicago: University of Chicago Press. pp. 3-4.

[20] Bates, S., Jenkins, L., and Pflaeger, Z. (2012) Women in the Profession: The Composition of UK Political Science Departments by Sex. Politics, 32 (3), pp.139-152.

21][http://www.slate.com/articles/double_x/doublex/2013/06/female_academics_pay_a_heavy_baby_penalty.html

[22] http://www.genderandeducation.com/issues/early-career-female-researchers-beware-message-from-the-political-studies-women-and-politics-group/

23] [ https://chroniclevitae.com/news/412-faking-it-women-academia-and-impostor-syndrome

24] [ http://www.theguardian.com/higher-education-network/blog/2012/may/24/why-women-leave-academia

# PART 3

#

#

#

# DISCOVERING THE ECONOMY OF PEOPLE, PLACES AND THINGS

# 7.

# It's the (Foundational)  
Economy Stupid!

**Michael Moran** 1

What needs to change is our appreciation of the foundational economy – or the everyday economic activities that we hardly notice at all but which make life tolerable. The vital nature of the goods and services that the foundational economy provides is central to the political conditions under which business is able to operate in the age of mass privatisation and outsourcing.

The Budget of March 2015 was the capstone of the Coalition government's recovery programme after the great financial crash. And underlying both hostile and favourable evaluations of that budget lies a particular conception of the economy: as a single national unit engaged in a kind of life and death struggle with other national units. In the words of Boris Johnson in his Margaret Thatcher lecture of 2013: 'Like it or not the free market economy is the only show in town. Britain is competing in an increasingly impatient and globalised economy, in which the competition is getting ever stiffer.'2

This is an illusion. As far as the economy is concerned, there is more than 'one show in town'. Or as the great French historian of capitalist civilisation Fernard Braudel puts it: 'There (are) not one but several economies... Everyday life consists of the little things one hardly notices in space and time'.3

If we think about 'everyday economic life' we soon see that it consists, not of a ceaseless Darwinian struggle against extinction in the marketplace, but in the provision of goods and services that lie at the foundation of civilised everyday existence: in the production of food; in the creation of distribution chains for that food and other necessities of life; in the organisation of vital services like education, health care and social care; in the creation and distribution of services that we conventionally identify with utilities – public transport, water, light, heat. All these things form the _foundational economy_ – that is, they lay literally at the foundation of the everyday life that most of the time 'one hardly notices in space and time', but which makes existence tolerable.

A funny thing happened to the foundational economy in Britain on the way to the 21st century. What had once been largely publicly-owned and publicly-controlled was privatised in the greatest programme of privatisation carried out by any large capitalist economy. In the process the structure and workings of this foundational economy were also transformed.

Privatisation did not create a free market in foundational services; it created a system of state-licensed franchises and monopolies. The privatised foundational services – typified by the privatised rail services – offer licences to corporate interests to provide services under monopoly conditions – and licences to print money.

At the centre of this economy lie large corporations: the great outsourcing giants, like G4S and Serco, who run everything from transport to core state functions like incarceration, and the railway operating companies that are typically special purpose vehicles of big multinational operators. Success in the world of the privatised and the franchised does not depend on ability to compete against others in a free market; it lies in the ability to manipulate the politics of contracting in the foundational sector.

The foundational economy is therefore one of the 'shows in town' – and it is far more than a sideshow. Not only does it lie at the base of civilised life; it accounts for a huge chunk (by most measures about a third) of employment in modern Britain. Moreover, much of it – especially that large chunk that is created by outsourcing and franchising – offers stunning returns on capital employed.

Today's foundational UK economy generates returns of an order unheard of in a properly functioning competitive economy: for instance, rates of return for privatised train operators in excess of 100 per cent. Compare returns of less than 10 per cent even for the most successful large supermarket chains. Importantly this system is an artefact of privilege: an artefact of the successful manipulation of the politics of the kind of economy created by the waves of privatisation and the rise of outsourcing of foundational services by the state.

This state of affairs creates great problems for operating an economy that works in the public interest – but it also presents opportunities.

A first step is to strip away the verbiage of the kind produced by Boris Johnson in the Thatcher lecture, and to recognise that in the foundational economy we have created a sector where businesses operate successfully, not by market competition, but by their capacity to succeed in what is fundamentally a political process. In these circumstances private interests can be seen, not as the heroic contestants in market struggles but as the recipients of largesse at the hands of the state.

The key policy question is then transformed: from 'how can government operate in a maximally business-friendly fashion' to 'how can business justify the privileges which it enjoys?' Or, as the great American student of the corporation Adolf Berle observed in 1962: _'[business]_ _exists and derives its right to exist under... a tacit social contract. This social contract requires... business to assume certain responsibilities.'_ 4

The implicit social contract is particularly important in the case of the foundational economy, both because of the vital nature of the goods and services which it provides (the 'things that one hardly notices in space and time') and because of the political conditions under which business is able to operate in the age of mass privatisation and outsourcing.

The precise details of that social contract can only be worked out in public debate and will be shaped around the particular conditions in different parts of the foundational economy. A start is made when we shift the language in which the role of business is described. Business, as Berle put it, operates under a 'tacit' social contract.

The foundational economy under that tacit contract must be made explicit. In this vital part of our lives business must be licensed, and not just in the narrow terms of existing outsourcing contracts. Firms that are awarded monopoly privileges must pay by recognising their social obligations. That involves specification in the contract of, for instance, obligations as employers and as sourcers of goods.

Over a century ago a great defender of the business order put the point in more inflammatory terms, in a provocative question: 'what ransom will property pay for the security which it enjoys?' asked Joseph Chamberlain in a famous speech in 1885. What ransom will business now pay for the great privileges it enjoys in its role in the foundational economy?

Invoking Chamberlain is entirely appropriate, for he was also one of the great apostles of municipal activism in the original creation of the foundational economy: in that great burst of policy creativity which used public power at the municipal level to ensure that the first era in the creation of the foundational economy was guided by public institutions with the public interest as their central concern. And it is to those principles that we must return.

[1] This intervention draws on work done with my colleagues in the Manchester Capitalism research team at the University Business School: see <http://www.manchestercapitalism.co.uk/>

2] [ http://www.cps.org.uk/events/q/date/2013/11/27/the-2013-margaret-thatcher-lecture-boris-johnson/

[3] Braudel, Civilisation and Capitalism, p.29

[4] Berle, Adolf A. 1962. 'A New Look at Management Responsibility'. Human Resource Management 1 (3): 1–5. doi:10.1002/hrm.3930010302.

# 8.

# Building the Northern  
Powerhouse from the Rubble  
of the Old

Simon Parker

We need to rethink regional growth strategy in favour of redistributive fiscal devolution and a democratic renewal that puts service users and citizens at the heart of local government. The 'Northern Powerhouse' model as it currently is risks leaving most of its socially and economically disadvantaged residents locked outside.

## The 2008 Financial Crisis and its Aftermath

' _We both want to build a new economy from the rubble of the old. We will support sustainable growth and enterprise, balanced across all regions and all industries.' 1_

' _After 1979, Mrs Thatcher inaugurated a 30-year experiment through which both Conservative and New Labour governments balanced 'neoliberal' reforms with an undisclosed, redistributive national settlement of publicly-funded employment and service provision. After 2008, the financial crisis and the ensuing politics of austerity will traumatically terminate a redistributive social settlement which disproportionately benefited ex-industrial regions of the North and West that have no autonomous capacity to create private sector jobs.' 2_

Ertürk et al.'s assessment rightly points to the vulnerability of precarious regional geographies that have become dependent on public sector employment and what Froud et al. referred to as the 'parastate' – the private sector that has grown wealthy and engorged on the outsourcing of public services and infrastructure.3 At the same time, the increasing financialisation of UK capital and the accompanying property boom that was largely concentrated in London and the South East created significant overheating in this historically dominant and densely-populated region. But although the City of London together with Wall Street was the instigator and stage set for the 2008 financial crisis, its negative effects were almost entirely externalized to the 'non-core' UK regions.

The concentration of financial and economic power within the City of London has made it a kind of 'City State' within the national economy.4 _The Spectator's_ editor Fraser Nelson refers to as the growth of a 'bankocracy' under New Labour as an increasingly unregulated financial sector was allowed to engage in hugely risky speculative investments leveraged on the basis of a domestic credit boom.

When Labour failed to invest in new high technology manufacturing in the wake of the deindustrialization of the 1980s and 1990s, it set up regional economic policy making to be delivered by the Regional Development Agencies (RDAs) instead; their remit was to create jobs and business start-ups rather than high-skilled, highly rewarded employment. The result was pockets of FDI in the North-East, the Midlands and South Wales that were piecemeal and disjointed. This policy was pusillanimous in the face of global de-investment and mergers and acquisitions.

The reliance of the UK regions outside London on shrinking manufacturing and low-skilled service and manual employment has contributed to a substantial unbalancing of the UK labour market. London was the only region to experience job growth at the time of the financial crash and its aftermath (see Figure 1). It is clear that without the substantial influx of foreign capital and migrant labour into London's booming global economy during the period, even the most modest and slowest recovery in British history would not have been possible.

This newly assertive, often foreign-owned, and globally distributed capital has – specific tax and grant incentives aside – no motive for rebalancing Britain's highly skewed investment pattern. 'In manufacturing, the huge increase in import penetration more than outweighed export success so that, in real terms, the output of British manufacturing in 2011 was no higher than in 1979, while the employment base in manufacturing had declined over the same period from 6 million to just under 2.5 million'.5

Figure 1. UK Regional Job Losses 2007-2010 (Source: Ertürk et al 2011).

## Localism to the Rescue?

The combined trauma of the 2008 financial crash and the consequent contraction of the UK economy has only exacerbated the concentration of employment and investment in London and the South East. The Coalition government's response? Step forward Lord Heseltine, saviour of Liverpool and the Mersey, and a man with unfinished work to do on reversing the decline of the industrial North. In his report _No Stone Unturned: In Pursuit of Growth_ , he writes:

'The economic challenges faced by Bristol, Cambridge or Hull will never be fixed simply by improving housing or upgrading broadband access. Barriers to growth are always multi-faceted. But Whitehall continues to approach these issues from the individual policy priorities of different departments, as if economic issues can be addressed effectively in a placeless vacuum. All my experience with place-based initiatives – from Urban Development Corporations to City Challenge and the Regional Growth Fund – tells me there is a better way.'6

Undoubtedly the most significant result of the Regional Growth Fund has been the Local Economic Partnerships (LEPs) initiative, a new iteration of Regional Development Agencies with a much-reduced regional aid fund budget. Amid the pots of gold that LEPs are allowed to bid for are the newly revamped Enterprise Zones (first introduced by Heseltine in the 1980s), an opportunity to bid for the regional growth fund, and various mostly non-pecuniary powers under the Localism Act.7

In June 2010 local businesses and civic leaders were invited to come forward with proposals for establishing LEPs 'that reflected natural economic geographies'. Thirty-nine LEPs in total would cover the whole of England seeking to bring local business and civic leaders together '[to] provide the vision and leadership to drive sustainable economic growth and create the conditions to increase private sector jobs in their communities.'8

Note the strategic term 'functional economic market areas' which suggests a move away from the model of the centrally-defined and imposed administrative region towards a more 'organic' notion of regional agglomeration economies that advocates of city-regions have been championing for some time.9 However, with the removal of the institutional architecture provided by the Regional Development Agencies, the Government Offices for the Regions (GoRs) and Regional Leadership Boards, LEPs have struggled to create even the administrative capacity to support the task specific policy interventions that have been agreed between the contracting authorities.10 The National Audit Office report which found Enterprise Zones and the Regional Growth Fund have 'been slow to create jobs and face a significant challenge to produce the number of jobs expected. The estimate of jobs to be created by Enterprise Zones by 2015 has dropped from 54,000 to between 6,000 and 18,000'.11 Significantly, Austerity-led cutbacks led to the National Audit formally closing on March 31, 2015, leaving local authorities with no formal oversight.

## Beyond the Northern Powerhouse Model

In a desperate attempt to breathe new life into the rebalancing agenda, Chancellor George Osborne has endorsed Jim O'Neill and the City Growth Commission's proposal to create a 'Northern Powerhouse' based around a newly empowered and high-speed networked Manchester city-region.12 It is believed that greater connectivity between, and agglomeration of, Northern cities will strengthen growth and promote fiscal devolution and risk transfer from London to the Northern cities.13

The Greater Manchester hub – 'Devo Manc' as it has been dubbed – is expected to form the centre of a Northern metropolitan agglomeration economy including Sheffield, Leeds and Liverpool. The Institute for Public Policy Research (IPPR) believes Greater Manchester is particularly suitable candidate for what it calls 'Devo-More' and it also supports the establishment of a directly elected Greater Manchester Mayor with extensive direct powers. Under current devolved arrangements approved by the Coalition government, these powers now include health and social care as well as the Work Programme jointly commissioned by the Department of Work and Pensions – a suite of powers far more extensive than those currently enjoyed by the Mayor of London.14

Promoting Greater Manchester as 'London North' fails to acknowledge the vast gap between London and Manchester in the global urban hierarchy, which no amount of city-region branding can overcome. While it is true that Manchester can boast two world-class football teams, a newly built MediaCity and a large, world-class university, Manchester made only the 6th division (Beta) of the Global and World Cities Research Network (GaWC) global urban rankings in 2012.15 To put these relativities into context, in 2013 businesses added £20,724 to the UK economy for each resident of Greater Manchester compared to £40,215 per resident of London.16

The cities of the North East are notably absent. According to O'Neill only London, Manchester and West Yorkshire are ready to manage the risks associated with devolved status: 'other city metros – such as the North East – may well be ready for this very soon'.17 Ironically, the North East is the only English region to have voted for and rejected devolved regional powers. Expensive infrastructure projects like HS2 will skew infrastructural investment along the 'core cities' pole linking Birmingham and Manchester and Leeds, leaving the North East as a genuinely 'desolate North'. Ed Balls has shown a stronger commitment and appreciation of lateral high-speed links that might see a scaling back of HS2 by a future Labour government in favour of a Manchester-Newcastle HS3 link, which could be prioritized over the Southern route.18

Infrastructure is not enough; regional redistribution is needed. For example, if it is socially just to hypothecate mansion tax revenues from London and the South East to the NHS, it is equally legitimate to redistribute windfalls from London's speculative property bubble and the asset sales of partially nationalised banks to enhance the skills base of the North. These funds would invest in education and training, the creation of special regional investment banks (with a requirement that at least half the lending goes to small and medium enterprises), and targeted grants and subsidies aimed at stimulating the green economy with incentives for partnerships with the university and FE sector.

Without genuine redistributive fiscal devolution and a democratic renewal that puts service users and citizens at the heart of local government decision-making, the Northern Powerhouse will leave most of its socially and economically disadvantaged residents locked outside.

[1] David Cameron and Nick Clegg, in the Coalition agreement, May 2010

[2] Ismail Ertürk, Julie Froud, Sukhdev Johal, Adam Leaver, Michael Moran and Karel Williams (2011), 'City State against National Settlement: UK Economic Policy and Politics after the Financial Crisis', CRESC Working Paper 101.

[3] Julie Froud, Adam Leaver, Karel Williams, Sukhdev Johal and John Buchanan (2009), 'Undisclosed and unsustainable: problems of the UK national business model', CRESC Working Paper 75.

[4] Ismail Ertürk, Julie Froud, Sukhdev Johal, Adam Leaver, Michael Moran and Karel Williams (2011), 'City State against National Settlement: UK Economic Policy and Politics after the Financial Crisis', CRESC Working Paper 101.

[5] Ibid.

[6] Michael Heseltine (2012) No Stone Unturned. In Pursuit of Growth. London: Department for Business, Innovation and Skills.

[7] David Bailey. (2011) 'From RDAs to LEPs in England: challenges and prospects', Regions Magazine, 284(1), 13-15.

[8] Michael Heseltine (2012) No Stone Unturned. In Pursuit of Growth. London: Department for Business, Innovation and Skills.

[9] See Alan Harding (2007) 'Taking City Regions Seriously? Response to Debate on 'City-Regions: New Geographies of Governance, Democracy and Social Reproduction', International Journal of Urban and Regional Research, 31(2), 443-58. For a counter argument Andrew Jonas and Kevin Ward (2007) 'There's More Than One Way to be "Serious" about City-Regions', International Journal of Urban and Regional Research, 31(3), 647-56.

[10] Lee Pugalis (2011) 'The Regional Lacuna: A Preliminary Map of the Transition from Regional Development Agencies to Local Economic Partnerships', Regions Magazine, 281(1), 6-9.

[11] National Audit Office, 'Funding and structures for local economic', 6 December 2013 growthhttp://www.nao.org.uk/report/funding-structures-local-economic-growth-2/

12] Rt. Hon. George Osborne, 'We need a Northern powerhouse: Chancellor of the Exchequer on what we can do to make the cities of the north a powerhouse for our economy again', speech at the Museum of Science and Industry, Manchester, 23 June 2014 [ https://www.gov.uk/government/speeches/chancellor-we-need-a-northern-powerhouse

[13] Jim O'Neill and City Growth Commission (2015) Unleashing Metro Growth. London: Royal Society of Arts, p. 2

14] Nick Pearce, 'Greater Manchester: the beginning of 'Devo-More' for England', IPPR [ http://www.ippr.org/nicks-blog/greater-manchester-the-beginning-of-devo-more-for-england

15] 'The world according to GaWC 2012', University of Loughborough [http://www.lboro.ac.uk/gawc/world2012t.html

[16] Source: Office for National Statistics

[17] Ibid, p. 10.

[18] 'Labour question whether Birmingham-Manchester HS2 route makes any sense, and plan North East link' Manchester Evening News, 26 March 2015

# 9.

# Towards a New Industrial  
Imaginary for Britain

Craig Berry

We need to move beyond a narrow focus on 'advanced' manufacturing and rediscover both the value of the wider manufacturing sector, and the productive contributions of all workers to the British economy.

British manufacturing is in a very perilous state. We are seven years on from the height of the financial crisis, and more than five years on from the end of the subsequent recession, yet manufacturing output remains 5.4 per cent below its pre-crisis peak.1 Moreover, it would be wrong to suggest that manufacturing shared in the pre-crisis boom.2

The continuing decline of manufacturing foretells doom for the British economy. But policy elites would have us believe anything but. Policy-makers and the narrow stratum of economic commentators whose views are treated as gospel (or worse, as science) by the mainstream media vary between trumpeting a phoney resurgence of British manufacturing, or actually celebrating its decline as representing a higher stage of development.

Accordingly, we are told that Britain must focus only on 'advanced' manufacturing. This is a recipe for economic vulnerability and a continuing slide in earnings and job quality. Firstly, manufacturing is not recovering: evidence of a long overdue cyclical upturn is not evidence of resurgence. Any upturn that can be identified is highly dependent on car manufacturing. Output in the transport equipment industry (principally cars) grew by more than 50 per cent between 2009 and 2014; all other manufacturing industries saw either a fall in output or only a small increase over this period.3

Secondly, manufacturing decline is not a sign of development. In representing the application of technology to natural resources, manufacturing is the sector where productivity increases benefiting the entire economy originate. The sector has long functioned as capitalism's 'learning centre'.

We need to rediscover the value of the wider manufacturing sector, and recognise that the ongoing crisis of economic growth in Britain is to some extent synonymous with the longstanding crisis of manufacturing. Moreover, we need to rediscover what it means to manufacture in a capitalist economy, in order to better understand the invaluable contribution the vast majority of workers can and do make to the British economy.

## The post-industrial delusion

Political narratives of the dawn of 'advanced' manufacturing perpetuate complacency about the health of the British economy. The sluggish recovery in manufacturing, after such a sharp downturn in 2009, is another contributor to the sector's long-term decline.

This is a national catastrophe, but economic commentators seem quite happy with the status quo. Evan Davis' 2010 book and accompanying television documentary series _Made in Britain_ presents manufacturing decline 'as a sign of success, not failure'. He argues: '[m]ore than most other advanced economies, Britain has found ways of earning a living that are beyond manufacturing'.4

This is a well-worn argument that an economy's transition away from manufacturing and towards services-led growth represents economic development. This notion underpinned years of pre-crisis optimism about the prospects of 'post-industrial' prosperity. Yet the severity of the economic crisis exposed the fundamental flaws of this growth model, which offers only a bloated and unstable financial sector requiring ever-growing debt stocks to survive.

A similar, but slightly more nuanced take on British manufacturing is offered by economist and _Financial Times_ columnist John Kay. Kay is a vocal critic of so-called 'manufacturing fetishism', or 'the idea that manufacturing is the central economic activity and everything else is somehow subordinate'.5 However, the value from manufacturing comes from a 'crystallisation' of skills and capabilities, such as the scientific research that created Viagra, the precision engineering that enables the aircraft engine, and the ICT and design ingenuity that created the iPhone.6 Missing from this perspective is any consideration of whether Britain is actually successfully pursuing advanced manufacturing activities or 'manuservices'. The aversion to invest over the long term within our private sector hampers any move towards advanced manufacturing on a large scale.

Interestingly, Britain actually has a higher proportion of high-tech goods in its manufacturing exports than most of its closest competitors. In contrast, Germany exports a far higher volume of high-tech goods than Britain – it just so happens to export a far greater volume of low-tech manufactures too.7 This shows the choice between low-value and high-value manufacturing is a false one: in fact they reinforce one another.

How this strategy might translate into a wider strategy for sustainable growth has never been satisfactorily articulated. There are very few large manufacturing companies left in Britain, after the merger boom of the 1980s ended in widespread offshoring, and Britain's manufacturing supply chains are dysfunctional. Britain is therefore less able to capture the benefits of any increased capacity in advanced manufacturing.8

## The economic ecosystem

Will the handful of fashionable advanced manufacturing industries championed by policy-makers be as lucrative in a few decades as they appear to be now? If they are not – or if others are simply better than us at them – will the economy be resilient enough to cope? To improve the sustainability of the British economy, we need to think of the economy not as a collection of isolated industries, some more profitable than others, but rather as a complex ecosystem. Sustainable development is jeopardised unless we attend to economy-wide productive capabilities.9

Physical infrastructure and a skilled workforce are the most obvious aspects of the ecosystem that sustain manufacturing. So too are cordial industrial relations and wider civil society dialogue around appropriate resource management. Urban planning needs to foster both economic collaboration and decent spaces for people to live and raise families. We also need to reimagine public services and the welfare state as part of this ecosystem. Political elites in Britain often pay lip-service to aspects of this agenda – yet much of it has been (deliberately or inadvertently) undermined by a cross-party commitment to austerity.

The less glamorous, or mundane, manufacturing industries are clearly also part of this ecosystem. An economy in which advanced manufacturing industries flourish needs flexible and diverse manufacturing supply chains. It also needs well-paying jobs, evenly spread geographically, to maintain domestic demand for high-cost goods – the manufacturing sector in general is crucial to this.

But it also means we should focus more attention on economic life beyond what would be formally classified as the manufacturing sector. Much of what manufacturing companies or workers do is not actually manufacturing in an everyday sense of the term, even if it counts as manufacturing statistically. Equally, much of what many of us do in non-manufacturing jobs involves ingenuity in utilising resources, often outside formal job specifications as employers become more reliant on intangible inputs. We think of products requiring further assembly somewhere along the production chain as 'semi-manufactured', but we need to question whether any good (particularly in the case of innovative products) is ever fully manufactured until it is in the hands of the end-user (who might be a service-provider or a consumer – a distinction that is being blurred by ICT and social media). The freedom and security to experiment, and perhaps fail, is something we urgently need to nurture in British manufacturing – but restricting this approach to the manufacturing sector alone would be self-defeating.

## Conclusion

The chronic decline of manufacturing in Britain will not create a higher state of economic development. This delusion is shattered by the ongoing living standards crisis and the acute vulnerability of its economy to external events. A concerted focus on strengthening the country's capacity in advanced manufacturing, and related activities, is one part of the solution to the economic resilience puzzle. Of greater importance is finding new ways to value the myriad activities that contribute to Britain's productive capacities – and new ways to enhance them through industrial policy.

1] Penny Hollinger (2015) 'UK's "march of the makers' gather pace', Financial Times, 1 March 2015, available at [ http://www.ft.com/cms/s/0/307d0904-bc52-11e4-a6d7-00144feab7de.html?siteedition=uk#slide0

[2] Craig Berry (2015) 'The final nail in the coffin? Crisis, manufacturing decline, and why it matters', in Jeremy Green, Colin Hay and Peter Taylor-Gooby (eds) The British Growth Crisis: The Search for an Alternative, Basingstoke: Palgrave, pp 174-200.

3] Office for National Statistics (2015) Index of Production – January 2015, available at [ www.ons.gov.uk/ons/rel/iop/index-of-production/january-2015/index.html.

[4] Evan Davis (2012) Made in Britain: Why Our Economy is More Successful Than You Think. London: Abacus, p 84, 89.

5] John Kay (2012) 'Fetish for making things ignores real work', The Financial Times, 14 November 2012, available at [ http://www.ft.com/cms/s/0/a525e6dc-2cd9-11e2-9211-00144feabdc0.html?siteedition=uk

6] John Kay (2010) 'Why you can have an economy of people who don't sweat', Financial Times, 19 October 2010, available at [ http://www.ft.com/cms/s/0/00d4874c-dbb3-11df-a1df-00144feabdc0.html#axzz3UXpMHHmy.

7] Ian Brinkley (2009) Manufacturing and the Knowledge Economy, The Work Foundation, available at [ http://www.theworkfoundation.com/downloadpublication/report/212_212_manufacturing%20and%20the%20knowledge%20economy.pdf.

8] Julie Froud et al (2011) Rebalancing the Economy (Or Buyer's Remorse), CRESC Working Paper No. 87, available at [ http://www.cresc.ac.uk/medialibrary/workingpapers/wp87.pdf.

[9] Ha-Joon Chang (2014) Economics: The User's Guide, London: Pelican.

# PART 4

#

#

#

# REFORMING A FINANCIALISED ECONOMY

# 10.

# How Financialisation  
Forecloses Democracy  
(and what to do about it)

Mathew Lawrence

In order to restore the health of the UK economy and democracy we need to reverse financialisation and rebuild our financial institutions. In particular, we need to address how money is created and ensure that it goes to support productive and socially useful activity.

Financialisation is constraining our capacity for economic and social renewal. To discover potential new futures for the UK economy financialisation must be reversed. Present policy orthodoxies are inadequate to the task because they fail to address the institutional arrangements underpinning financialisation, especially the power of financial institutions to create 'money out of thin air'1 while operating with less and less actual equity to back it up. Worse still these policy orthodoxies cannot redress the inegalitarian and undemocratic outcomes financialisation has caused.

An alternative agenda is needed that re-orientates the banking system back towards its essential purpose: managing the payment system, providing appropriate levels of liquidity, and directing credit to productive and socially useful activity to create sustainable value. To accomplish this, institutional innovation must help reassert democratic authority over the financial system, particularly those privileged institutions that create and allocate credit within the economy in order to re-anchor finance in the real economy. Moreover, we need innovative new forms of collective ownership to ensure the process of financial accumulation works for public benefit.2

## Financialisation and democracy: shifting sovereignties

Financialisation, as Gretna Krippner argues, refers to 'the pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production'.3 This transformation not only increases the economic and political power of the financial sector, it also drives the dramatic accumulation of debt by the financial sector that spreads to the rest of the economy. This process forecloses economic discovery by freezing the rhythm of politics.4

Politics in the Arendtian sense exists between past, present and future. It draws on memory and tradition in its everyday acts, proclamations and policies, while its vitality is in offering the hope that the future is as yet undecided, with collective action capable of imagining and enacting new institutional trajectories for society. Politics, in short, claims to make the future indeterminate, contested and hopeful.

Being given free rein to issue credit, financial institutions also act between past, present and future but, unlike political life, they seek to make the future priced, 'certain' and tradeable, determining it in advance by the logic of investment and through bringing forward future resources as debt by the elastic production of money. This gives finance capitalism its immense power and productive potential. However, in the process, it also binds down societies and individuals as past financial obligations and accumulated debt constrain present (and future) efforts at reform.

Financialisation has deepened in the past four decades – for example, the assets of the UK banking sector grew from around 40% of GDP in 1960 to 450% in 2010, with predictions it will reach as high as 900% by 2050, while the household debt-to-income ratio roughly doubled to a peak of 160% between 1987 and 20085, and is forecast to reach 185% by the end of the decade. As a result politics has become less capable of determining the future, constraining our capacity for economic renewal and limiting opportunities for institutional innovation. In the process, the locus of political and economic sovereignty has increasingly shifted from democratic-based institutions and actors to financial and technocratic institutions immune from popular pressure.

If excessive financialisation is therefore a threat to democracy itself, a politics of alternatives needs to insist on reasserting democratic sovereignty over the financial system, requiring a Polanyi-like re-embedding of the political into economic forces. In particular, reform must address the deeper institutional arrangements that underpin financialisation through a democratic reformation of finance.

## An agenda for discovery

New paths towards economic discovery require new principles. First, we should acknowledge the financial system is a vital utility and the flow of credit to the real economy an essential public good. Therefore, credit creation needs to be guided by and made accountable to democratic institutions. Second, 'de-financialisation' will require building, reforming or experimenting with institutions, both public and private. We cannot just rely on regulation; institutions also need to be re-imagined in new ways to create and equitably sustain economic value.

Banks have a unique economic privilege in our economy, in that they create and allocate between 95 to 97 per cent of the money supply. At present, banks badly discharge their role as custodians of the money supply. New credit is not adequately generating sustainable returns through new business investment or productive capital formation, as is classically assumed. For example, in developed economies, upwards of 90 per cent of capital expenditure by firms is now funded from their retained earnings, while in the UK nearly 90 per cent of outstanding domestic loans go to fund either financial companies or property deals. Admittedly some of this credit will trickle into productive purposes, but too much circulates to achieve 'accumulation for accumulation's sake.'6 In other words, our credit system creates too much of the wrong sort of debt, fuelling asset bubbles and financial instability, unbalancing the economy, and constraining the productive potential of the economy.

To better anchor finance in the real economy, new institutions need to be forged and new models of economic governances discovered that can better manage the nature of our credit and money system. It begins by taking seriously the creation and circulation of money and credit within our economy as dynamic agents rather than neutral pawns. Indeed, as Geoffrey Ingham argues, the money system has a dual nature: it _'is not only infrastructural power, it is also despotic power.'_ 7 Democracy should rein in this power.

More broadly, critical features of the system – the operation of credit-rating agencies, the inadequacy of equity ratios, how potentially destabilising financial products are regulated, the opacity of the monetary system – currently ill-serve the public interest. Reform must address each of these in turn if the constrictive dynamic of financialisation is to be reversed. Without such an agenda, finance will continue to be overbearing master, not effective servant, of the British economy.

## Key suggestions for institutional reform

The remit of the Bank of England must change to include an additional, clear mandate to set overarching guidelines for the quantity and type of credit in the economy. This will re-anchor stable credit growth in the real economy and re-open public lines of democratic accountability. After all, the state is already implicitly involved in insuring the credit system: the Bank of England is a public-private partnership with the Treasury accepting unlimited liability to underwrite the financial system. The question is therefore not whether it should be involved at all in shaping the money and credit system – it already is, as a guarantor – but how democratic influence can be better brought to bear in shaping the system so it more effectively supports the creation of sustainable value in society by anchoring finance in production.

A number of policy tools could better ensure new forms of credit help generate sustainable returns based on productive capital formation. For example, alongside an overarching targeting regime, we should develop a tighter regulatory system that leans against the over-accumulation of private debt, remove the tax bias in favour of debt over equity finance, and multiply and diversify forms of public banking and more patient sources of capital.

_Equity requirements for financial institutions should be strengthened_ so they hold at least 10% tier one equity as a starting goal. Such a move would undermine the current operating model of banks (and the 'shadow' banking sector) which is based on very high leverage, extreme indebtedness and fragile debt sources that threatens macroeconomic stability. In doing so, it would also reduce the implicit public subsidy banks 'too big to fail' continue to receive and profit from due to ultra-low equity requirements, estimated to be worth £65 billion in 2013/4.8 Interestingly, the Federal Reserve is already leading in this direction; it is time the Bank of England followed.

_Create a public option rating agency_ to help provide a clearer signal of value within financial markets. Intermediaries are critical to how financial markets operate; an alternative to the present oligopoly that acts in the public interest in this field is therefore urgently needed. For example, the EU's financial transaction tax could fund a Europe-wide public options rating agency, albeit one that has a clear, autonomous governance structure and independent operating remit.

_Establish a Monetary Commission_ as an effective first step towards unveiling the mechanics of credit creation and its effect on economic, social and political power relations. The Commission should also examine radical reforms, such as providing central banking services directly to anyone who wants them, not just the banks, or the potential for money-financing the deficit, to see how the monetary system could be reformed to serve the public good.

_Establish a 'British Future Fund'_ to own assets and financial equity on behalf of the nation, investing the proceeds to meet the long-term needs of the country. Hypothecating certain financial operations, for example a scrip tax on bonuses or during mergers and acquisitions, would provide a strong, sustainable base for funding public investment, based on the public ownership of financial capital. Once a proportion of any profits made were reinvested to ensure the Fund's sustainability, the remainder of the surplus would be used to fund public investment, as set out in the fiscal strategy of the government of the day. In doing so, a Fund could help address the fiscal dilemma confronting all modern democratic states committed to maintaining reasonable levels of public expenditure in the face of financialised economies. For, rather than trying to tax footloose financial capital, innovative new forms of public ownership of financial capital would allow for the social accumulation of the proceeds of financialisation to help directly fund vital public expenditure in future.

## Conclusion

Reversing financialisation will not be an easy or swift endeavour. Alongside reform of the financial markets, other strategies will be required to ensure social welfare is maximised even as the economy slowly definancialises.

Definancialisation undoubtedly presents a challenge to the language and approach of political parties to the financial sector: the slogans of this Parliament – 'One Nation' and 'We're all in it together' – both empty out the conflict of interest between different sectors and classes that is inherent in excessive financialisation. What is required instead is a confident assertion that finance is vital to the UK's future but it must be more productively anchored in the real economy in a way that deepens democratic life. Currently this is not the case; democracy must therefore reassert itself.

This might sound an ambitious agenda. Ranged against the wealth and power of organised finance, hope for such ambitions might seem remote. However, a useful comparison might be drawn between today's financial system and the Catholic Church on the eve of the Reformation: two imposing cultural, intellectual and social systems that claimed a totalising logic, powerful, whose elites spoke and operated in a vernacular beyond the understanding of ordinary people. Yet arguably now, as then, the hierarchy imposed by excessive financialisation is shallower than imagined and deep-rooted change is possible. IPPR's report from which these recommendations are drawn is, of course, no Ninety-Five Theses. However, it is hoped that it can help to set out clear principles and policies for a still urgently needed financial reformation.

1] Ann Pettifor, 'The power to create ''money out of thin air'' ', [ https://www.opendemocracy.net/ourkingdom/ann-pettifor/power-to-create-money-out-of-thin-air

2] These recommendations are fully developed in IPPR's report, Definancialisation: a democratic reformation of finance, 2014. [ http://www.ippr.org/assets/media/publications/pdf/definancialisation_Sep2014.pdf

[3] Krippner, Greta (2004), 'What is Financialization?', mimeo, Department of Sociology, UCLA.

[4] William Davies, The Limits of Neoliberalism Authority, Sovereignty and the Logic of Competition, 2014.

5] [ http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q304.pdf

[6] Karl Marx, Capital, Vol.1, 1867, chapter 24.

[7] Geoffrey Ingham, The Nature of Money, 2004.

[8] IMF (2014) 'How big is the implicit subsidy for banks considered too important to fail?' in Global Financial Stability Report, http://www.imf.org/external/pubs/ft/ gfsr/2014/01/pdf/c3.pdf

# 11.

# The Treasury View of English Higher Education: Student Loans, Illiquid Assets and Fiscal Control

Andrew McGettigan

National accounting and headline fiscal statistics — the deficit and the debt — distort higher education policy insofar as they drive governments towards a sale of student loans to the private sector at a 'discount'. We need to construct alternative, critical accountability measures and resist the extension of the fee-loan regime into other areas of public service provision.

Recovery for the Treasury is not just a return to consistent growth or a reduction in the public sector fiscal deficit. Recovery also involves the return of public debt to levels seen prior to the financial crisis.

The Treasury is wrestling with an unfamiliar situation in terms of the government's balance sheet.1 If one excludes the financial interventions needed to rescue the banks, then Public Sector Net Debt currently stands at around £1.5 trillion, or roughly 80 per cent of GDP. The long-term plan here is for growth to reduce the relative standing of that stock, described by George Osborne as 'dangerously high'. In his 2015 Budget, he put forward his 'central judgment' that: 'higher national debt leaves our nation exposed, harms potential growth and costs taxpayers billions of pounds in debt interest'.2 The 'Treasury view' sees lowering Public Sector Net Debt (PSND) achieving three things: lowering payments to creditors; preparing the national balance sheet to absorb future shocks and reducing the chances of the capital markets restricting the UK's ability to borrow at reasonable rates.

Last year's _Fiscal Sustainability Report_ from the Office for Budgetary Responsibility had levels returning to 'comfort zone' by the mid-2030s. The Autumn Statement announced new asset sales to boost that trajectory slightly.

## The Treasury view of student loans

Student loans appear in the national accounts and the headline fiscal statistics in a manner that distorts higher education policy. Specifically, they benefit a potential sale of loans to the private sector, most likely pension funds and insurance companies.

Given the desire to return to the pre-crisis, fiscal 'comfort zone', the growing contribution of student loan issuance to the headline PSND statistic now impinges on more than Higher Education policy.

At the same time, that statistic fails to capture adequately the value of student loans as a government asset. This means that the accounting privileges an 'originate to distribute' loan model.

In turn, the Treasury demands that the 'value for money' assessment on any sale of the loans will use a proxy for borrowing costs that leads to greater long-run economic losses through sales at discount.

In sum, an off-balance sheet solution based on financial engineering simply scores better in national accounting cash flow terms and thereby leads to the replication of the kind of financing seen in Public Finance Initiatives.

How does this come to pass? Student loans are financial transactions that create assets with associated future income streams. As a result the money used to create them and the money that is expected to return in the form of graduate repayments is excluded from the national accounting categories of expenditure and receipts. More generally, loans – no matter how they are constructed – will always 'score' better than other approaches to the public funding of HE.

Student loans do not impact directly on Public Sector Net Borrowing (PSNB) or the current measure of the deficit, except for associated interest payments to creditors (based on the current balance). However, student loans do figure in the Public Sector Net Cash Requirement, which is the measure of the additional cash government needs annually to finance its commitments. This requirement is raised by selling gilts and so drives the level of public debt: each year's cash requirement adds to that stock.

Table 1 illustrates those flows for this year and the next five for the UK overall. My point is not to stress the expense of higher education funding, but to note that the 'asset-structure' of loans is formally isolated. These flows are separate, and additional, to PSNB or the Current Balance currently used as the basis for the preferred 'deficit' measure.3

The shortfall between new loans issued and repayments requires borrowing in addition to that measured by the deficit. So, for example, in 2019/20, the OBR estimates that £13.9bn would be needed to cover the difference. Significantly the size of annual loan outlay would preclude universities from buying their own students' loans – as suggested by former Minister, David Willetts – without partnerships with large money funds (pension and insurance funds).

## Income Contingent Repayment Loans are an unfamiliar financial product

Income contingent repayment loans are not structured like a typical fixed-period repayment loan contract, where a principal is borrowed with agreed interest rate with a determined schedule of repayments. Instead, mandatory income contingent repayments are based on the graduate's annual income. As such revenues from student loans are not expected to climb to significant levels for two decades at which point they will plateau at the equivalent of £8bn in today's terms.

Chart 1: OBR, Fiscal Sustainability Report, July 2014

These projections are somewhat fantastical but indicate the kind of commitments being undertaken in the new fee-loan regime.

The new fee-loan regime has to be frontloaded through borrowing: it is now thought that the new HE funding system will add over £100bn to national debt over above that contributed by the 'deficit' before repayments plateau.

I now need to explain a technical point about PSND. There are two initiating accounting events – the government borrows from creditors to whom it owes money (liabilities); but that money is then lent to students. The balances students and graduates _owe_ to government represent public assets. One would imagine that public sector _net_ debt would see both elements of the balance sheet, asset and liability, _net_ against each other. But this is not the case.

Since the student loans created are considered to be _illiquid_ assets (they cannot be sold readily), their value does not net against the borrowing used to create them in the calculation of PSND. So although student loan creation has a larger and larger impact on PSND, that impact is also skewed and misrepresents the overall financial position of government.4 With governments targeting that measure as part of their fiscal mandate, these presentational distortions have consequences. Selling something for what it's worth doesn't improve the overall financial health of the country, but illiquid assets excluded from PSND can be sold to generate cash and then pay down the liabilities that are scoring in the statistic. Most of the assets announced for sale in March shared this feature.

That said, the repayment profiles of student loan projections exhibit such a level of uncertainty that the Treasury would prefer to crystallise a known loss today and achieve a smaller balance sheet, even if the costs of doing so are worse than uncertain estimates of what will result from retaining the loans.5

## Flogging National Assets to manage the national balance sheet

The Treasury is so keen to execute a sale that it has instructed the Department of Business, Innovation & Skills (BIS) – responsible for universities and colleges – to skew its central 'value for money' test for a sale.

Very briefly, with a discount rate of 5% I would swap £1 today for £1.05 in a year's time; if that rate increases to 10% then I would only do the deal for £1.10 next year. A higher discount rate reduces the present value of future repayments.

BIS was told to use a discount rate of RPI plus 3.5%6 to value future repayments for the purposes of a sale. This 'hurdle rate' used to assess infrastructure projects is far higher than the current cost of government borrowing (c. 2%), and the normal discount rate used to value financial assets (RPI plus 2.2%). Here a sale is viewed as a 'negative spending decision' and so a higher rate is thought to better represent society's preference for cash today.

In short, the Treasury is endorsing the sale of student loans knowing that additional losses (over and above what is recorded in departmental accounts) would be tolerated to reduce public debt.

The Treasury believes society's preference for cash now is better reflected in a higher discount rate. These rates haven't moved since 2006 despite record-low borrowing for the last six years. Apparently, abstract 'society' prefers cash today so much that it will tolerate selling loans at further loss.

Roy Harrod observed that discount rates are the 'polite expression for the rapacity' that present generations have with regard to those to come. In this circumstance, we can add that the obscure discount rate encodes an ideology: it is better for the state to be small, for it not to hold assets, even if those assets have to be sold for less than they are worth.

## The language of numbers obscures stark political realities

The manner in which headline fiscal statistics are constructed and targeted obscures more fundamental issues to do with education, skills and industrial policy.7

Somehow we need to construct alternative structures of accountability given the way in which the legislation, the 2008 _Sale of Student Loans Act_ turns this decision to sell into an 'administrative' matter for the relevant Secretary of State: no vote in parliament is needed for a sale to go through.

Further, we need to be attuned to the ability of this loan structure to extend into other areas of public provision and 'social investment'. 'No _upfront_ fee' is not the same as 'no fee-loan regime'.

The 'three-step' in train sees England moving from (1) funding universities through current expenditure, to (2) loan funding as financial transactions that create assets to (3) an originate-to-distribute model that would be 'off-deficit' and 'off-balance sheet' bar the loss built into the process.8 More is done with less via the detour of financial engineering that would see the graduate becoming the bearer of the unit of account in a new form of indirect, asset-led exploitation.

A world 'awash in money' but with low returns prompted Rothschild, advisors on the student loan sale, to tell government:

' _Conventionally capitalism requires that a real return on capital should exist i.e. in other words that RPI should be below interest rates. However, right now capitalism is suspended ...'_ 9

Rather than simply an austerity narrative about savings, could one see in the story of student loans an effort on the part of government to create novel asset classes for investors who otherwise struggle to find a 'return'? From a certain dominant perspective, the public sector increasingly resembles an artificial, rather than a natural, resource built up over time to be mined and refined to produce investment grade products at a time of capital superabundance.

[1] This paper is a companion piece to a working paper I prepared for PERC on human capital theory and higher education policy. Andrew McGettigan, 'Human Capital and the Treasury's View of HE'. Available at: [http://www.gold.ac.uk/perc/news/percpaperno6thetreasuryviewofhevariablehumancapitalinvestment.php]

2] [ https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech

[3] These figures include the effects of a planned sale of older loans issued to those who started undergraduate study before 2012. But that sale is thought likely to raise only £10-12bn over this same five-year period, just about plugging the shortfall for one of the coming years. Although Vince Cable has vetoed a sale for this parliament, it remains Treasury policy and so the effects are still included in the OBR projections.

[4] Andrew McGettigan 'Cash Today' London Review of Books 5 March 2015.

[5] In general, one might also see a mistrust of 'fair value' modelling: the Treasury would prefer a market price. BIS Financial Report 2014/15, p. 191: 'The Core Department considers that the carrying value as described above is a reasonable approximation of the fair value of student loans, in the absence of an active market, readily observable market trends or similar arm's length transactions.'

[6] Technically, this rate is adjusted for 'risk' by subtracting one percentage point from the 3.5 and adding back in a market risk factor up to the original 3.5.

[7] For more detail see Andrew McGettigan, Accounting for Student Loans, Higher Education Policy Institute (forthcoming, Summer 2015).

8] Andrew McGettigan 'Project Hero and the student loans sell-off – an update and report transcript' False Economy, 18 December 2015 [ http://falseeconomy.org.uk/blog/project-hero-and-the-student-loans-sell-off-an-update

[9] ibid.

# 12.

# Regulators Must Get a Grip on Local Authorities' Exposure to The City

**Joel Benjamin**

The lack of transparency and oversight of public finance, coupled with the legal ambiguity of derivatives use creates financial risk blind spots and allows mis-selling. What needs to change is that regulators must get a grip on The City to ensure it works for the public good.

The "big bang" unleashed deregulation of financial services from the 1980's that increased not only the size, but also the political power wielded by the financial sector. Government-led efforts to boost the financial literacy of the electorate1 have failed to keep up with the rapid growth of the financial services sector.

This chapter looks at how public institutions, specifically local authorities, failed to keep pace with the quickly evolving financial landscape, making them complicit in systemic mis-selling and market rigging activity. Ultimately, it is taxpayers who are on the hook for Private Finance Initiative (PFI) and LOBO loan mis-selling, which follows the Payment Protection Insurance (PPI) and LIBOR scandals.

Light touch regulation is a misnomer. There are reams of regulations for financial activities, institutions and markets. Widely lacking, however, is the effective enforcement of financial crime required for a credible deterrent effect2.

The central problem, as David Graeber points out in _The Utopia of Rules_ , is that "With the rise of the financial sector, things have reached a qualitatively different level where it is impossible to say what is public and what is private."3

The near-seamless integration of financial corporations and the state in recent years shapes the world-view of regulators.

The Financial Conduct Authority, Bank of England, HM Treasury and the Prudential Regulation Authority see their role as enabling competition in financial markets, safeguarding key financial firms from systemic financial risk and contagion. Their collective response to the 2008 financial crisis has been to firewall the financial sector from further systemic shocks in order to improve resilience. In this context, banks are forced to hold more capital and use less leverage, yet still remain 'too big to fail' (TBTF) and posit a risk to host economies.

Financial regulators focus on identifying and managing financial as well as systemic risks. However, regulators continue to ignore the role that public sector organisations play in underwriting private sector financial risk-taking and profit-making.

Bank 'bail-in': How policy transfers financial sector risk to the unregulated public sector

The Bank 'bail-in' policy, adopted by HM Treasury to address TBTF and safeguard the public has merely institutionalised TBTF rather than solving it.4 First introduced by the Bank of International Settlements, a bail-in entails creditors writing off some of the debt they are owed. What is problematic is the new set of rules that accompany a bail-in; namely that payment of banks' derivatives obligations to each other are given 'super priority status'5 over other obligations. Bail-in represents a significant risk given 90% of derivatives contracts are controlled by the 15 largest global banks6, and in the UK, public sector deposits are overly concentrated in these TBTF banks7.

Ellen Brown of the US Public Banking Institute explains "[T]hat includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play."8

Transfer of financial sector shocks to the public sector is absent from Government scenario planning

Despite being financialised, heavily indebted, and well integrated into the financial system, public sector institutions such as NHS Trusts, local authorities and housing associations do not figure in Government financial risk analysis. In addition, the implications of future public sector bank bail-in losses do not factor in financial crisis contingency planning. A report issued by the Commons Public Administration Select Committee found:

" _We welcome that Treasury does contingency planning, and the Bank of England's role and structures have been strengthened. Yet financial and economic risks are not included in the Government's National Risk Register, so Government does not consider these systemic risks alongside other, non-financial risks."_ 9

This problem stems from the persistent belief that the public and private sector are two distinct spheres. In practice the public and private sectors operate as a financially integrated whole. This is particularly problematic when public financing remains unmonitored and unregulated.

Regulators and policy makers must develop models, tools and regulatory policy frameworks that interpret the complex web of creditor-debtor relations. This means identifying and managing the risks of financialisation – especially the use of derivatives – that permeates both the public and private sectors.

Financial regulators do not monitor or regulate the financialisation of the UK public sector

The Prudential Regulatory Authority (PRA) remit is to improve financial stability, focussing on private sector financial firms. The PRA do not expressly consider the safety and stability of public sector institutions, transacting with private financial firms.10

The Financial Conduct Authority remit is to promote competition in financial markets. This remit does not extend to promoting competition in public sector transactional banking services, where the big four UK banks enjoy oligopoly status, following the withdrawal of The Cooperative Bank in November 2013.11

Regulators cast public authorities as 'sophisticated'12 institutions that can transact with global (TBTF) investment banks on equal terms, considering them able to accurately price and assess the complex derivative products contained within PFI and LOBO loans.

Following Eric Pickles' 2010 spending review, the Audit Commission, the sole body tasked with independently scrutinising public sector finance and auditing services performed by the big four accountancy firms, was abolished on 31 March 2015.13 Without the Audit Commission, taxpayers have little assurance the public purse will be protected.

Ahead of Budget 2015, National Audit Office Chief Amyas Moore warned that Whitehall officials may be making such cuts without understanding their impact.14

## Austerity shifts debt and financial risk from central to local government

Austerity policies imposed by governments in the wake of the global financial crisis invoked a singular focus upon public sector debt, which ballooned alarmingly in the UK following the bank bailouts of 2007-09.

Central government debt inherited from the banking crisis is transferred via local government grant cuts. In turn, local councils have shifted the burden to the working poor by increasing council tax and cutting services with scant regard for social consequences.15

Audit Scotland data shows austerity cuts to central government grant funding post-2008 have resulted in a significant spike in local government borrowing figures.16 An absurd outcome, given that the stated purpose of austerity is the reduction of public sector debt.

## Derivatives are used to mask scale public sector debt

A look at the Eurozone shows how derivatives can be used to mask public sector debt. The Maastricht Treaty enshrined deficit-to-GDP targets as the terms of entry and membership of the Euro, requiring all member countries to adhere to a deficit target of three per cent of national GDP.

In practice deficit targets resulted in EU nations, including Italy and Greece, gaming the rules using 'arbitrage play' to massage their balance sheets to comply with the Maastricht Treaty. Most often this meant using swaps and derivatives to hide sovereign debt off their balance sheets.

Italy used US hedge fund Long Term Capital Management (LTCM) to mask its debt, while Greece employed the services of Goldman Sachs to hide billions of euros from its own accounts using interest rate swaps.17 For Greek taxpayers, the deal with Goldman cost the state billions.

## The legal status for derivatives use by UK local government is contentious.

In 1989, Hammersmith and Fulham council found themselves on the wrong side of interest rate swaps with banks and faced bankruptcy. _Hammersmith and Fulham vs Goldman Sachs_ ruled the interest rate swaps taken out by 137 British councils were 'ultra vires' meaning local government did not have legal authority to enter speculative swaps contracts.18 This ruling cast a long shadow over UK public finance; and until the _Localism Act 2011_ introduced a 'general power of competence'19 it was widely assumed that the derivatives use by local government was banned.20

However, City of London banks, brokers and advisors21 quietly engineered around the Hammersmith regulations, selling LOBO loans laced with derivatives with impunity from UK law.

LTCM's 'Italian Job'22 and Goldman Sachs 'devils derivatives'23 deal with Greece provide a cautionary tale that well-meaning regulation designed to prevent public sector indebtedness can have the opposite effect. Bankers and politicians simply engineer arbitrage solutions to hide debts off balance sheet using derivatives to deceive regulators and voters. In the UK, PFI deals are explicitly designed to keep public debt off balance sheets, enabling derivatives use via arm's length management authorities (ALMOs).24

Research by Move Your Money shows that 210 local authorities have so-called LOBO loans (lender option, borrower option), which embed complex derivatives on local authorities' books. LOBO loans were sold to "hedge" market interest rate risk, despite these derivatives contracts being sold linked to the LIBOR interest rate, which was actively manipulated by a cartel of global banks between 2005-2012.25

## How derivatives masks the true position of local authority debt

Investor Warren Buffet famously referred to derivatives as: "financial weapons of mass destruction."26 At present LOBO loan exposure is at least £11 billion, despite the Hammersmith ruling that (until recently) "outlawed" derivatives use.

LOBO loans use by local authorities and housing associations27 create a financial black hole in local authority budgets.

Nicholas Dunbar assessed the LOBO loan portfolio of Kent County Council28 and found the difference between the audited book value of Kent's LOBO's (£200m), and the mark-to-market value (£700m), including the cost of embedded derivatives to be £500 million – more than Kent's entire annual social welfare budget.

## Derivatives use by public institutions should be regulated and monitored

UK financial regulators need to regulate and monitor over-the-counter derivatives use by public institutions. Seeing how local authorities lack the expertise to accurately price complex derivatives products29, the Markets in Financial Instruments Directive (MiFID) framework which considers public institutions to be 'sophisticated investors'30 must be critically re-examined in the wake of LOBO exposure. It is not in taxpayers' interests to hide significant liabilities on public sector balance sheets.

Regulators have made significant headway post-crisis to insulate the financial system from future shocks. Failing to assess the role of non-financial firms, especially public authorities, will threaten the financial sector as a whole. This is particularly the case if bail-in and arms-length financial vehicles are used to transfer interest rate risk via derivatives from the private sector to the unregulated public sector.

1] [ http://www.theguardian.com/politics/2015/mar/16/lack-of-financial-literacy-among-voters-is-a-threat-to-democracy

2] [ http://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf [paragraph 247]

[3] Graeber, D. The Utopia of Rules: On Technology, Stupidity, and the Secret Joys of Bureaucracy (Brooklyn and London: Melville House, 2015) p. 15

4] [ https://www.gov.uk/government/consultations/bail-in-powers-implementation-including-draft-secondary-legislation/bail-in-powers-implementation

5] [https://www.youtube.com/watch?v=xIVRcYJvjwA

[6]http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q1prerelease_2.pdf#page=9

7] [ http://www.room151.co.uk/latest/concentration-risk-in-scottish-treasury-investment-worrying/

8] [ http://ellenbrown.com/2014/12/01/new-rules-cyprus-style-bail-ins-to-hit-deposits-and-pensions/

[9] House of Commons Public Administration Select Committee Leadership for the long term: Whitehall's capacity to address future challenges, 9 March 2015, p. 3

10] [ http://www.bankofengland.co.uk/pra/Pages/about/default.aspx

11] [ http://www.lgcplus.com/news/finance/more-on-finance/co-op-exits-local-authority-banking/5065189.article

12] [http://fshandbook.info/FS/html/handbook/COBS/3/5

13] [ http://www.audit-commission.gov.uk/2014/01/finish-line-in-sight-for-audit-commission/

14] [ http://www.civilserviceworld.com/articles/news/departments-dont-understand-impact-cuts-says-national-audit-office-chief-amyas-morse

15] [ http://www.jrf.org.uk/media-centre/most-deprived-areas-borne-brunt-local-government-cuts-66096?utm_content=bufferc6a2c&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

16] [ http://www.theguardian.com/news/datablog/2015/mar/05/why-local-government-debt-so-high-scotland

17] [http://www.bbc.co.uk/news/world-europe-17108367

18] [ http://www.nytimes.com/1989/11/06/business/british-court-invalidates-some-financial-swaps.html; http://duncancampbellsmith.com/pdf/ftm_chapter_6.pdf

19] [ http://www.publicfinance.co.uk/features/2011/11/d-day-for-town-halls/

20] [ http://www.parliament.uk/documents/commons-committees/communities-and-local-government/LGA-letter-LIBOR.pdf

21] [ http://www.ianfraser.org/how-city-banks-and-brokers-stitched-up-local-authorities-with-lobo-loans/

[22] Dunbar, 2001 p. 150.

23] [http://www.bbc.co.uk/news/world-europe-17108367

24] [ http://www.publicfinance.co.uk/news/2012/01/pfi-still-being-used-to-keep-costs-off-balance-sheet/

25] [ http://www.spiegel.de/international/business/the-libor-scandal-could-cost-leading-global-banks-billions-a-847453.html

26] [http://news.bbc.co.uk/1/hi/2817995.stm

27] [ http://www.insidehousing.co.uk/business/finance/barclays-allows-landlords-to-renegotiate-lobos/7008707.article

28] [http://nickdunbar.net/2014/10/24/lost-lobos/

29] [ http://www.ianfraser.org/how-city-banks-and-brokers-stitched-up-local-authorities-with-lobo-loans/

[30] CIPFA. Treasury Management Panel Bulletin. March 2010

__________________________________________________________________________________

The E-book's publication is part of a series of activities designed to bring academics, think tanks, civil society and activists together to develop viable solutions to craft an alternative politics of debt across the UK. The endeavour is funded through the Economic and Social Research Council (ESRC) with the intent of mobilising different forms of expertise to facilitate new forms of social innovation.

ES/M003051/1

The Political Economy Research Centre (PERC) is a new centre for cultural and political analysis of economic life at Goldsmiths University of London. Its work cuts across various disciplines, including heterodox economics, political science, sociology, anthropology, media and cultural studies. It aims to achieve new critical and empirical perspectives on political economy, breaking down boundaries between economics and other social sciences, and between experts and public, in the process.

