BLOCL

SACK THE ECONOMISTS and disband their departments

By Geoff Davies

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Half of Europe and many regions and groups in the United States are in depression, and fascism is making a comeback. The last big depression spawned Hitler. This one is promoting Golden Dawn in Greece and similar extremist movements elsewhere. In the Anglophone world a fundamentalist right-wing ideology is enforcing an increasingly narrow political correctness centred on “free” markets and the right of the rich to do and say whatever they like.

We need to speak in plain English, to everyone, and get straight to the point. Economists don’t know what they’re talking about. We should remove economists from positions of power and influence. Get them out of treasuries, central banks, media, universities, wherever they spread their baleful ignorance.

Though many economists themselves may not realise it, economics is an ideology rationalised by a dog’s breakfast of superficial arguments and defended by dense thickets of jargon and arcane mathematics. The ideology is an old one: the rich and powerful know best, the rest of us are here to serve them. *

The latest guise of this ideology is called neoliberalism (and also known as economic rationalism, market fundamentalism, Thatcherism, Reaganism and neoconservatism). It espouses “free” markets and minimal government: just the ticket for the rich and powerful to do what they want.

It is pseudo-science, and its adherents have no idea how economies work. That is why they allowed the US sub-prime mortgage bubble to blow up and burst, precipitating the Global Financial Crisis, and why they are making things much worse with austerity policies.

They failed to foresee the collapse of housing bubbles in the US and Europe and its consequent downturn. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere that applied it: in the US, the Eurozone and, especially, the UK.

Economies are the way societies make their living. If there is any pretence of democracy, then a society can choose to be however it wishes, and the economy would then, sensibly, be tailored to support that kind of society. So an economy is a subordinate part of a society. In a functioning biosphere, a human society is in turn subordinate to the biosphere, at least if it desires its descendants to be around for anything like as long as its ancestors.

A modest amount of investigation, using readily available observations and some modern ideas to make sense of them, readily shows there is no basis in theory or practice for the claim that free markets are the best possible way to organise an economy. That is the central tenet of neoliberal ideology, and it has dominated the world for the past several decades. So neoliberalism is wrong, and the fact the world is in a big mess is not a surprise.

The neoliberal reliance exclusively on competition is an unhealthy aberration, just as much as the communist reliance exclusively on cooperation was an unhealthy aberration.

The mixed, social democratic economies of the post-war decades are the nearest approximation so far to what is possible.

However we can do better than social democracy, better than an uneasy truce between opposing ideologies based on simplistic views of human nature.

The resulting economies could also be made compatible with the natural living world, which is good because at present we are rapidly ruining the world that is our total and exclusive life support system. It would be possible, in other words, to live well while respecting others and having the natural world thrive around us.

Anyone with any training in economics has to find their way out of the morass, and it tends to be difficult to “unlearn” things that have become familiar mental furniture.

On the other hand I am an experienced scientist finding my way in from the outside.

Neither am I aware of any economist who straightforwardly draws out the fundamental implications of identifying economies as complex systems nor who argues for separating the supply of money from investment, thereby removing perhaps the strongest destabiliser of our highly unstable economies.

My main objective here is to break down the wall of silence that insulates the mainstream from criticism.

The Global Financial Crisis of 2007-8 became what is variously known as the Great Recession or the Second Great Depression, which still has much of the world in its grip.

The GFC was triggered by the collapse of an excessive build-up of mortgage debt, in the United States in particular.

In US vernacular, why does a crash on Wall Street cause such havoc on Main Street?

The reason, in essence, is that when you get a mortgage loan, the loan money that appears in your bank account is mostly new money, created out of nothing. *

Money, loans and debts are only built on promises, it turns out.

If I gave you a piece of paper saying I owe you a pig, but my pig dies, then my promise, my piece of paper, is worthless to you.

This is why a Wall Street crash causes so much disruption on Main Street.

It’s because new bank “loans” are made with new money created out of nothing.

In the capitalist myth, the capitalist accumulates a lot of money (capital) and re-invests it. In the real modern world the capitalist borrows most of the money. So perhaps we should re-name the present regime debtism instead of capitalism.

You won’t hear this said very often. Changing the way money is supplied seems to be a deeply disreputable topic among economists.

Of course the present system has allowed bankers and financiers to become masters of the universe, so that might have something to do with it.

More precisely, we were living off our mortgage loans, because they were much the biggest component of the net new debt. So much for a healthy, booming economy.

Since the GFC, all the talk has been about the need to cut government debt, to get the government budget back in balance, because only then, supposedly, will economies recover. That is the approach in the Eurozone, in Britain and the US.

The funny thing is that private debt was much larger than government debt in most countries and still is.

It was unsustainable private debt that caused the GFC. Australia was saved from recession because the government had the guts to go into debt so enough money would be circulating to keep Main Street business, also known as the productive economy, functioning. Europe and the US are still deep in recession because of austerity policies.

What counts most is not whether debt is public or private. What counts is whether borrowing is invested in sensible projects that will pay back over a reasonable time. School buildings and housing insulation are sensible investments. Dumping money into a property bubble is not a sensible investment.

On the one hand, economists say one person’s debt is another person’s asset. On the other hand the economics texts explain the fractional reserve system, which involves the creation of new money in the loans process, which contradicts the first claim. I don’t know why the contradiction is not noticed, but it is not the only fundamental inconsistency in mainstream economics.

Debt and money are excluded from the computer models used by economists to monitor and forecast the state of the economy. Debt is excluded for the false reason already stated: one person’s debt is another person’s asset, so the total purchasing power in the economy is not affected. Money is excluded because, it is claimed, money only facilitates exchange, so it is like a lubricant to the economy.

But money is a form of debt.

The point here is that all debt carries risk, because all debt implies a promise about the future, and no-one can predict the future.

Money is debt and carries risk, just as much as a bank loan or a clever instrument of the financial markets.

So the big, elaborate computer models that are used to monitor and predict the economy exclude absolutely fundamental aspects of the economy from their number crunching: debt and money.

I think a nearly complete malfunction of the financial markets, that causes misery for hundreds of millions if not billions of people, is not appropriately described as an “imperfection”, or an “aberration”.

Neoclassical economists, the ones who dominate mainstream economics, believe economies are almost always close to a general equilibrium in which all supplies balance all demands.

If this were true of real markets, prices and wages would always be fair, there would be full employment and market crashes would be impossible.

Mainstream economists also believe in something called the efficient markets hypothesis. This is the claim that financial market traders collectively bring all relevant information to bear, and therefore the market prices can be expected to accurately represent the “true” value of the entities being traded.

In turn, efficient markets would ensure capital is allocated with maximum effectiveness to enterprises.

The trouble is, markets will be efficient in this sense only if traders act totally independently from each other.

In that case there is no basis for claiming markets allocate capital efficiently.

Unfortunately, because the supply of money to Main Street is tied to the debt markets, the contraction of the money supply damages the productive economy.

In fact there are plenty of reasons to conclude that modern economies are always far from equilibrium.

Neoclassical economists seem to have missed that essence of science at the beginning, over a century ago. They have spent a century thinking that because they had an elegant theory about which you can do a lot of sophisticated mathematics, then they were doing science. No, they have been doing a lot of mathematics, but it does not have a useful resemblance to the observable world, so it is not science. It is, in simple terms, pseudo-science.

It is not hard to identify why the neoclassical theory does not usefully resemble real economies. It is because of the assumptions it is built on.

Here are some of the assumptions upon which mainstream free market theory is built. We are all fully informed about every product and service we buy. We are all rational, so we are not influenced by fashion, our peers or advertising. We all have the same preferences. We can all foretell the future (it is assumed that we can all assign accurate probabilities to all the possible future courses of events). There are no economies of scale.

The problem for the neoclassical theory is that the invisible hand only works if no-one dominates the market. In a monopoly, the monopolist can charge whatever the market will bear, which may be far above his production costs, and he can become obscenely rich (and powerful, and buy himself compliant legislators, until you have a fascist fusion of big business and government). Worse, though, much worse, the market will not be efficient.

The pervasiveness of economies of scale has a simple and fundamental implication. The biggest firm can undercut its rivals and grow at their expense. It’s a recipe for monopoly. Evidently it works, because today many industries are dominated globally by only a few companies.

By the nineteen nineties only five firms accounted for more than fifty percent of worldwide business in each of the automobile, airline, aerospace, steel, electronic components, and electrical and electronics industries.

Some of the other assumptions also are clearly unjustified. Unfortunately when they are made more realistic the result is also to predict instability instead of equilibrium.

For a market to function properly, everyone has to have reasonably complete information, and the information should be up to date.

Managers of big financial funds may trade stocks worth tens of millions of dollars in a morning’s work. There is no way at all these traders can have more than miniscule knowledge of the actual firms in the productive economy whose fates they are playing with.

It is absurd to assume that all transactions in a modern economy are backed by reasonably complete and timely information. The vast majority are not.

Neoclassicists assume our transactions are not influence by third parties. Then there should be no fads and fashions. Nor would there be herd behaviour in financial markets, in which traders notice everyone is buying so they buy, to avoid missing out.

Neoclassical economists assume society can be reduced to the representative agent, which is the average of all of us.

If your teenage daughter spends every available cent on clothes, do you? If some of us are lenders and some are borrowers, do we all get wealthy at the same rate?

We cannot predict the future. Good heavens, we cannot predict the future even to the extent of listing the possibilities and their probabilities.

The original neoclassical theory in effect considered only an instant of time, within which everyone weighs up everybody else’s likely purchase price before actually making a purchase.

Even neoclassical economists recognised this as an artifice. In effect the assumption suspends the flow of time.

However the future stays resolutely unknown. If the possibilities are unknown, there can be no proof of a general equilibrium.

There is no basis, in theory or in practice, for believing free markets will yield desirable results. The neoliberal ideology has no basis.

The way forward is to recognise that systems with internal instabilities are self-organising systems, and there is a lot known about such systems. Self-organisation is actually quite common in the natural world.

Emergence is a characteristic feature of self-organising systems. The internal structure emerges spontaneously from the internal interactions within the system. This is the source of the saying “the whole is greater than the sum of the parts”. An emergent property or behaviour is one that can only exist when the full system is functioning - it cannot be seen in a single component.

Self-organising systems come in many varieties, some exhibiting quite simple patterns and others more complicated patterns. How complicated the patterns are depends, loosely, on how strong the internal interactions are.

A system with strong interactions of the right kind can become very complicated. In fact it might be chaotic.

Economies are probably not chaotic, because they do exhibit periods of relative calm. Every now and then, however, a major change can sweep through an economy.

Systems with this kind of behaviour are called complex self-organising systems, or just complex systems for short.

Small changes are happening all the time and every now and then there is a large change.

Because economic systems contain living components (people, animals, crops, etc.) they also must be studied as a whole, not just as the sum of (highly simplified) parts in the way of the neoclassical theory.

So economies may not be chaotic, but if they are complex, then the job of understanding and managing them still sounds daunting. Again, there is a path forward, and it will not be too unfamiliar to the more pragmatically minded economic managers.

So, do we have to give up on markets and all become socialists? I don’t think so. The problem is not markets per se, the problem is unfettered markets. The lesson is that markets should not be left to themselves.

For example, obvious present trends are to increase material throughput and to rapidly degrade the natural world, and we would be wise to reverse both of those trends.

Peoples’ taste for fashion and the collapse of a soil’s microbial ecosystem are just as much a part of an economy as factories and finance.

Where the profit is, markets will follow. So long as it is profitable to exploit people and trash the Earth, we can expect that people will be exploited and the earth will be trashed.

Rather than pretending that bad outcomes are the exception, an “imperfection” in an otherwise orderly system, we must recognise that bad outcomes are common, or even these days the rule.

If markets need to be managed, there is clearly a role for government. The government’s role is to monitor the results of markets, to monitor our collective opinion as to what kind of society we want, and to design and adjust policies so markets will yield better results.

We need to run our economies without the fundamental misconception that markets can be left to run themselves, and we need to free the whole subject from the messianic ideologies with which it has been plagued for the past couple of centuries.

We also need to abandon the implicit and insane goal of increasing material production without limit, and to manage instead for improved quality of life.

I haven’t heard a sustained campaign by the economics profession to get the GDP replaced by a proper balance sheet, one that shows incomes and costs and calculates the net benefit of our activities. Using the GDP to measure our “standard of living” or national income violates the most elementary requirement of accounting - that costs are subtracted from gross income.

Governments anxious to see the GDP rising have little incentive to encourage mothers to stay home and care for their babies. However governments have a real incentive to see mothers out working, because then their paid work and their child care costs add to the GDP.

The shift from growing vegetables to buying fast food adds to the GDP and thus counts as progress, whereas it commonly represents a significant regression in the person’s health and happiness, and in the health of the nation’s social fabric.

In the post-war decades, until roughly 1970, most people would not have disputed that their wellbeing was rising along with material wealth and the GDP. Since then, many people are not so sure their wellbeing is really being served by a ‘growing economy’.

For many people work hours have been increasing, the pace of life has become too stressful, the natural world they used to value is retreating, and they worry about the global threats of pollution and destruction of forests, soils, and habitat.

These thoughts bring us to a third basic problem with GDP, its failure to take any account of the state of society. *

Income closely followed rising productivity until the 1970s. After 1980 (the start of the Reagan years) there is a sharp break, and income rose by only 8% thereafter, compared with an 80% further rise in productivity. The reason, very clearly, is that most of the extra wealth generated in the neoliberal era has been creamed off by the very wealthy.

Employment has become less secure, because neoliberals regard employees as just another disposable commodity, and that increases stress, along with unemployment. With greater inequality, those at the bottom are more resentful, and that feeds into both ill health and crime.

Neoliberal hostility to governments, and particularly to social programs, has resulted in cuts to community and social services, along with infrastructure, so people receive less “in-kind” income and have less social support as stress levels rise.

You can put a dollar value on the timber in a forest, but you can’t put a dollar value on the healthful and aesthetic experience of being in a mature forest, nor on its biodiversity, without which the Earth would be a less effective life support system.

However in the superficial and sensational world that passes for political discussion and reporting, politicians and media would rather reduce everything to a single number.

I would agree with some critics that you could put almost any number for the “cost” of global warming. If it results in the collapse of global industrial systems, the loss of major agricultural production, epidemics, and flooding of half the world’s cities and all of its harbours, what is the dollar cost, now?

In no defensible form of accounting would you put all your transactions, incomes and costs alike, in the Credit column of a ledger, add them up, and proclaim that your shop is thriving because your Gross Shop Product is increasing. As a measure of our overall state of material wellbeing, the GDP is deluded and indefensible.

Our crazy national accounting actually encourages governments to ignore over-exploitation of natural resources. In fact, since exploitation of resources and of people (through overwork and low wages) simultaneously increases corporate profits and the GDP, there is a clear incentive for an unholy alliance between unscrupulous corporations and unscrupulous or stupid governments.

The Earth is being degraded rather rapidly. So long as their is no accounting of our assets (economic, social and environmental), then that degradation is invisible to our so-called national accounts.

However it is clear that even at the level of elementary accounting, mainstream economics is astonishingly deficient. Even to refer to “elementary accounting” is to understate the problem. Adding things that should be subtracted does not qualify as even the beginning of accounting.

The Wall Street financiers present themselves as a great boon to humanity, as essential to lubricating the economy, indeed as directly contributing a great deal of economic activity and wealth. They are so powerful they call themselves Masters of the Universe. This, apparently, gives them the right to ignore the law, to place their people in governments, and to buy themselves majorities in congresses and parliaments.

Perhaps the present financial sector really is a boon to humanity, or at least a boon to economies, on balance. Mainstream economists certainly think so.

The mainstream claim can be challenged on different levels. One is whether the most profitable enterprises, to which financial markets may direct capital, are necessarily the most beneficial.

A more telling question is how much of the activity on financial markets is even about allocating capital to the productive economy?

Indeed when tens or hundreds of millions of dollars worth of stocks or currencies are traded within a few hours, traders cannot possibly know whether the real-world enterprises represented by financial instruments are useful, or even profitable.

Only 1-2% of financial market trading is about the efficient allocation of investment. The rest, 98-99%, is about something else. There is only one thing it can be about, and that is speculation. The vast majority of financial markets trades are about speculation.

This information shows the behaviour of the financial markets in a quite different light, a light that admits a clear interpretation quite different from the mainstream economics story. It also exposes (again) the core of the neoliberal ideology as the bombast that it is.

Financial market apologists use such numbers to argue the financial sector is a large, vibrant and essential part of the economy. But most of the activity of financial markets is not useful. At best it is useless churning of money.

At best, 98% of financial market activity is parasitic. It contributes nothing useful. It merely siphons money out of the productive economy and into the bank accounts of financial traders.

There is one such policy that could rather directly eliminate much of the parasitism and instability from financial markets. It is to impose a small tax on all transactions. These are sometimes called Tobin taxes. The tax need be only large enough to take the profit out of short-term speculation and arbitraging.

If financial markets were reformed to the point where most of their activity was actual allocation of capital, rather than gaming, then the financial sector would be considerably smaller in terms of turnover, profit and “economic activity”.

They might then be more focussed on providing a service, rather than holding the rest of the economy to ransom.

In fact it is not hard to identify mechanisms in our economies that tend to channel wealth to the already wealthy.

Why does mainstream economics neglect this topic? At a minimum it reflects a monumental failure in curiosity, because disparities of wealth play such a central role in our societies.

The problem is that the interests of owners are not the same as the interests of employees. An owner’s short-term interest is to maximise production and to minimise costs, including the costs of employees. An employee’s interest is to work decent hours for a decent wage.

Cooperatives and other alternatives are routinely and contemptuously disparaged by neoliberals and the rich as backward and incapable of serving the needs of a modern industrial society. This is obviously untrue, but so long as the plebs are kept ignorant the lie can persist.

Sociocracy has a couple of intriguing and quite novel features that may not be immediately obvious. It forces us to rethink some of our usual concepts. The first feature is that leadership is distributed.

The second feature is that, in effect, democracy is merged directly into governance, where it can operate as an intrinsic part of governance, instead of just occasionally and indirectly influencing governance.

If a political sociocracy were to be created, there would be no role for political parties. A major advantage would be the elimination of the unproductive adversarial contest between political groups. The whole point is to resolve differences as they arise and where they are most relevant, face-to-face instead of impersonally with strangers. The role of abstract philosophies would also be greatly diminished.

According to the capitalist myth all progress is dependent on capitalists.

Without them we would stagnate, and our societies would collapse into anarchy. All despots, monarchs and pharaohs throughout recorded history have peddled this story.

The present version of the myth is that the current form of financial markets is essential, and that it plays a real, positive and important role in the global economy.

At least the nineteenth century capitalists were dealing mainly in real productive enterprises like railways and steel. The modern masters of the universe mainly shuffle pieces of paper and computer entries, and claim those activities will put groceries on our tables.

The strategy of neoliberals in the US since Reagan took office has been to cut taxes on the rich, then use the resulting government deficit as an excuse to cut social services, which mainly benefit the poor and middle class. Supposedly, the economy will boom without the dead weight of taxes, and everyone will end up better off as the wealth trickles down from the wealthy.

The capitalist myth is nonsense. All enterprises in modern economies are collaborative in one way or another, and the bosses and money men are not the sole source of initiative and innovation.

If we dispense with the myth, then we can look more carefully at the contributions from people in various roles within modern economies, consider how rewards might flow more proportionately to their contributions, and find structures that more effectively apportion the wealth. We might also ensure responsibilities are less evaded.

For the industrial nations the decades after World War II, until the early 1970s, were the most prosperous of the past century, by conventional economic measures. Furthermore that prosperity was distributed far more equitably than before or since.

Before about 1980, most governments were much more involved in the economy, partly because the philosophy then was closer to that advocated by Keynes, who had argued that economies would run better if they were actively managed. Governments also worked more actively to counteract mal-distributions of wealth, through progressive taxes and by providing social services, and they invested directly in infrastructure and even to some extent in production of goods and services.

In the neoliberal era, since 1980, both government spending and leadership have fallen away, and so has GDP growth. Such new wealth as has been generated, or extracted, has flowed mainly to the rich. Morale among the poor and middle classes is now very low, and common purpose has been lost.

Averaged over many countries, growth in gross domestic product (GDP) since the neoliberal ascendancy began in 1980 has been less that half what it was before.

The 1980-2005 period has been the worst in modern Latin American history, worse even than the Great Depression.

These numbers show clearly that modern neoliberal capitalism has not delivered on its promise, even when only average and aggregate measures are used. If the distribution of income within countries is considered, then the failure is even clearer.

Thus capitalism, in its modern neoliberal form, is about the rich getting richer, and the rest can take their chances. This is nothing new. During the first great capitalist binge, a century ago, a few hundred US families accumulated fabulous wealth, easily comparable to the old monarchs of Europe, while most people endured grinding poverty. It took half a century of political struggle to achieve a reasonable share of wealth flowing to the poor and middle class.

No less an authority than the International Monetary Fund, showing that inequality retards economic growth. The social effects of inequality are also now documented clearly.

The effect of inequality is not just psychological, although that aspect is very important. Inequality and competitiveness can interact to create a downward spiral, in which, for example, the wealthier put their children in expensive private schools, while public schools are left underfunded and deprived of many of the better-prepared students. Wealthier people vote for government services and tax policies focussed on them, and services for the poor decline, so the poor and lower middle class receive fewer benefits from government services. In these and many other ways the poor are poorer not just in income, but also in public services, life skills, opportunities, self confidence and expectations, and so the gap between rich and poor widens.

That our societies could be so uncaring about or oblivious to the prospects of many of their children is a profound commentary on the state of their social and moral fabrics.

As noted in the previous chapter, mainstream economics considers the distribution of income to be a matter for social decision and none of its business, as it makes no difference, in their models based on the representative agent, who spends the money. Once again mainstream economics is shown to be deficient and misleading.

The neoliberal deregulation of markets, particularly of financial markets, precipitated the Global Financial Crisis, which started the Great Recession that still continues for much of the world.

The global economy would have been thrown into deep depression had not some Keynesian-type government interventions kept it from sinking as far as it might have. Even so the periphery of Europe is in depression, thanks to the stupidity of neoliberal European central bankers, who repeat the mistakes that deepened and prolonged the 1930s depression. They make those mistakes for the same ultimate reason too: they are fixated on saving the rich from themselves, and the poor must go begging.

So yes, the capitalist myth is nonsense. Unbridled capitalism simply allows the rich to capture more and more of society’s wealth, through their economic power and then by corrupting politics and subverting democracy.

Money is perhaps the most powerful agent in our economies and also the object of great confusion. Money involves debt, and therefore it carries risk. In our present system the supply of money occurs through the issuing of bank loans, and this magnifies the risk involved in both functions. The entanglement with loans means we must also reconsider investment. There is thus more to be said on the subjects of money, investment, debt and risk.

If we want any hope of creating stable, equitable and enduring economies we must attend to the way we supply money and to how we invest in new enterprises. Mainstream economics is, yet again, seriously deficient in a central aspect of economies.

When we recognise money as a contract, we can see two sides to it. To the giver of the note, it represents a promise to deliver a service. On the other hand to the bearer of the note it represents a claim on someone else’s service. The ten-dollar note in your wallet carries an implicit promise, and gives you a claim. The claim is on your community, for ten dollars’ worth of goods or services. The implicit promise from your community is to supply you with those goods or services. The promise is that at some point in the future goods or services will be supplied. The promise involves a debt. Because the future is uncertain, the promise involves risk.

Rather than saying token money is backed by nothing, I think it is more accurate to say it is backed by trust within the community.

Here we encounter yet more contradictions in the neoliberal view. The neoclassical theory assumes competition and derides cooperation, so trust is implicitly derided, yet the money we commonly use is token money that requires trust for it to hold its value. The neoliberal ideology extols markets and derides centralised government control, yet the value of our money, the rules of its issue, and the interest that it draws all depend on central authorities.

Token money, in a trusting community, does not need to be backed by gold or any other commodity. It’s true that in order to maintain a steady value the money supply must be carefully managed, but that is a different issue.

Because bank loans are made up mostly of new money created out of nothing, the supply of money is entangled with the investment process. The supply of money is prone to fluctuate with investment activity, and an investment failure can rebound on the value of money.

Money involves promises, debts and risks, but it is so useful we just have to put up with the problems. Our present system, we’ll come to see, magnifies the problems and reduces the benefit.

In the capitalist myth, investment is done with the capitalist’s savings (never mind how much he has screwed everyone else to accumulate his savings). However in the real modern world a great deal of “investment” is done with money created out of nothing. *

Creating new money for investments links the supply of money to the investment process. This is what exposes the whole economy to the vagaries of investment (not to mention speculation). The supply of currency people need for their business as usual goes up and down as investment goes up and down, and the whole economy is exposed to the risks that are inevitably involved with investment. If speculation plays a large role in the financial system, then the risks are much greater. Everyone is exposed to the follies of the big-money casino that our financial markets have become.

I have argued the provision of currency needs to be kept separate from the provision of loans for investment.

In combination with neoliberals’ aversion to anything to do with governments, this has led to an obsession with balancing the government budget, as though the money-issuing authority is like a household or a business. This is quite misguided.

The money spent into circulation by the government is a considerable fraction of all the money, so if the government, in effect, pulls money out of circulation the economy will slow. This might be sensible if there is excessive debt and money in circulation, as in a boom. However it is not sensible if the economy is depressed.

One current manifestation of this misconception is that “austerity” policies intended to reduce government deficits reduce the amount of money in circulation and thus stifle the economy. The European Central Bank is currently the most ardent practitioner of austerity, and its imposition of austerity on Europe’s struggling peripheral countries has worsened their depression.

The obsessions with austerity and balancing the budgets of national governments are misguided in those countries in which the government controls the issue of currency. The government will never go broke, because it can always create more money to pay its debts.

Unfortunately for the peripheral countries of Europe, they have ceded their money-creating power to the European Central Bank, by agreeing to use the Euro currency, so it is possible for them to go broke. That only makes the ECB’s austerity policy more foolish, because it makes it even harder for the struggling countries to pay their debts.

In our present system there are major incentives for the private banks to increase the money supply, and central authorities have left themselves with only very weak means of controlling the money supply.

If Main Street is to be insulated from the vagaries of Wall Street, then currency needs to be supplied independently from making loans.

New money should not be issued as part of a loan. This means that loans should only be made from savings.

For bankers this change would mean the end of the fractional reserve system, but for everyone else it would mean there would be far less debt hanging over the economy and generating instability. It would also mean the end of what amounts to a private tax on money, which means a private tax on the entire economy.

At present money is borrowed into existence with a burden of interest due on it for a long as it circulates.

The result is a large transfer of wealth to the already wealthy.

Charging interest brings about a market failure, which is why it has been morally proscribed by many societies.

Money can be supplied for routine business through institutions modelled after Mutual Credit Unions. Investment can be facilitated by saving and loan facilities. These institutions would bring about several major improvements on our present arrangements.

First, the supply of money would be separated from the investment process. This would go far towards insulating Main Street from Wall Street. The failure of someone’s investment need not affect the availability of the medium of exchange.

Second, the amount of debt in the economy would be dramatically reduced. Rather than creating new money for “investment” and paying back, people would save and invest.

Third, by funding investment from savings rather than by creating new money, we would be bearing the burden of investment ourselves and giving our children the gift of an improved economy.

Fourth, several of the main ways in which wealth is disproportionately channelled to the already wealthy would be eliminated or greatly limited.

Neoliberals have a ready array of accusations and derogatory phrases to throw at anyone who questions their ways. Progressive taxation and social welfare are wealth transfer programs. Progressives indulge in social engineering. Anyone who questions the existence or behaviour of the super-wealthy is engaging in class warfare. Anyone who advocates any kind of ethical consistency or tolerance is accused of trying to impose political correctness.

Mainstream economics provides the supposed justifications for neoliberal policies, so again mainstream economists are called to account.

We have, in this book, identified a number of mechanisms that pump wealth from the poor and middle class to the rich.

The financial markets are dominated by speculation and other activities whose sole objective is to siphon wealth from the productive economy. The amount of wealth involved is very large.

Our money is created in the course of making loans, and interest is charged as though it were savings, rather than having been created out of nothing. Because we need money for the economy to function, this burden of interest weighs on the whole economy.

This is effectively a private tax on the entire economy that pumps wealth to the richest ten percent.

The rich can obtain loans much more easily than the poor. They can invest their loans and become even richer.

We use only a restricted range of ownership options in our present economic system. As a result ownership is highly concentrated.

Even though many people own some shares through retirement funds, the distribution of ownership is still strongly skewed to the rich.

There are many subsidies paid to corporations or rich minorities that benefit the rich at the expense of the poor. Often they harm the environment as well, thus harming everyone.

Tax havens could be closed down overnight by concerted action of a few rich nations, but those nations’ governments are owned by the rich, so it doesn’t happen. The proportion of taxes collected from corporations has dropped by about half over the past half century.

Either the markets operate perversely, through the invisible fist instead of the invisible hand, or they have been rigged, with the connivance of compliant legislators.

Neoclassical economists, so unused to thinking about anything but equilibrium, are not good at recognising instabilities.

Many of the mechanisms listed above generate analogous instabilities, such that the more you have the more you are able to get, by fair means or foul.

Capturing emergent community wealth and interest charged on new money may be less well known mechanisms, but they were each identified a century or more ago.

If we simply eliminated the mechanisms that unfairly pump wealth to the rich, our societies would be considerably less unequal. The need for welfare would be greatly reduced. The efficiency of the economy would be increased, because producers would pay closer to the full costs of production and costly welfare bureaucracies could be reduced.

Fixing the problems at their sources would be far more efficient and effective than the various retroactive mechanisms that have been developed through the twentieth century.

The neoliberal era has seen the imposition of a doctrine that most social interactions can be replaced by market mechanisms. This has caused dramatic changes in our societies. There has been a rise in individuality, selfishness, insecurity, inequality, poverty, and our families, communities and social fabric have been weakened. Democracy has been weakened and often actively subverted by the wealthy. The rise in international hostility that has accompanied these changes has been used as an excuse to seriously diminish our legal and civil rights, and to increase the power of the rich and powerful.

When you focus on the effect on children, you see we are exploiting our own children, profiting in ways that are harmful to them. That is one of the main features of the grand social experiment being conducted by the neoliberal social engineers.

There would not be any communists or socialists if capitalists had not behaved so badly. There would not have been serfs, slaves or revolutionaries if kings, pharaohs and despots had not behaved so badly

The Bush II administration in the US was remarkable for the blatancy with which it challenged the founding principles of the US. The powerful know best, restraints on the exercise of power are to be broken or ignored, government, acting for the people, is to be drastically curtailed, and the role of government is to be restricted to defending the property rights of capitalists and to fighting wars. The Obama administration (with many plutocrat apologists in its ranks) is either complicit or oblivious to what is really happening.

Is it “class war” to argue against super-concentrations of wealth, and its associated political power? Is it class war to point out that plutocracy leads to political corruption, subversion of democracy, human rights abuses, and poor economic performance leading into economic collapse? Well if it is, then the plutocrats have created the class distinctions. Once again, if they did not behave so badly there would not be a building movement opposing them.

The purpose of an economy is to support the society it is part of. Supporting the society includes supporting every individual in the society, so at the very least they have access to a dignified livelihood. Dignity requires not being markedly lower in status than most people, and that includes not being markedly poorer.

Apologists for the present regime contend it is the best way to provide for all. Plutocrats contend simply that they are the ones who know best how to create wealth, but the evidence from the two modern eras of plutocracy contradicts their claim, and anyway extremes of wealth and poverty are not compatible with human dignity for everyone. Mainstream economists claim to have shown that free markets maximise wealth creation, but their theory is so deficient as to be a joke, and the same evidence is against them as well.

Modern economies are clearly far from equilibrium all of the time, so a theory presuming equilibrium, or capable of depicting nothing other than near-equilibrium, is not a useful place to start.

We need to bypass mainstream economics and essentially start again.

The productive economy will be hostage to the vagaries of financial markets and risky investments so long as money continues to be supplied through bank “loans”. It is high folly to allow the supply of our medium of exchange to depend on a mechanism at once so erratic and so vulnerable to manipulation.

Hayek was correct in recognising this power of markets. However he and the neoclassical economists were quite incorrect in claiming that free markets will deliver desirable results efficiently.

By divesting ourselves of the neoclassical myth, that free markets efficiently deliver desirable results, we remove the scales from our eyes.

At present social and environmental needs are quite secondary to the alleged needs of our pathological economic system.

In the sane society we might have, if we can abandon the present pathology, there will be no conflict between “the economy” and “social welfare”, nor between “the economy” and “the environment”.

If the socialist goals of social and economic justice begin to be achieved by means other than pervasive government ownership and management then perhaps socialists will begin to see the benefit of sensibly managing markets.

If we don’t take the trouble to imagine better ways, we will certainly be trapped in our current predicament. If we all agree it can’t be done, we will certainly be correct. If we don’t change our ways, and soon, the Earth will change them for us.

Most of us, already, do not want things to continue as they are. Most of us recognise that we must change the way we live if we are to leave plentiful opportunity and a rich planet for our children, but we are afraid to say so. We just need to discover how many we are, and how powerful.