Hayek II: Neoliberalism

Hayek organised a conference for the like-minded in 1947; it was held at the Swiss resort of Mont Pèlerin. Three dozen people attended; the costs were almost completely covered by the Credit Suisse Bank. Milton Friedman came from Chicago, and later developed his monetarist ideas on these foundations. The Mont Pelerin Society still exists, with aims based on the founders’s ideas.

Antony Fisher, having read The Road to Serfdom, met Hayek in 1945. Rather than his becoming a politician, Hayek advised the formation of a ‘think tank’ to promote ‘free market’ ideas. After Fisher had made a fortune from battery hens, he established the Institute of Economic Affairs in 1955. It was later described as:

The arguably most influential think tank in British history… benefited from the close alignment of IEA’s neoliberal agenda with corporate interests and the priorities of the Thatcher government.

Margaret Thatcher was one of the cofounders of the Centre for Policy Studies in 1974. Though nominally non-partisan it has had strong connections with the Conservative party. Policies are based on free market economics of a monetarist type, that is ‘neoliberal’; individual choice and responsibility; and on concepts of duty, family, liberty and the rule of law.

Mrs Thatcher used Friedman’s and her think tank’s monetarist ideas in what became known as ‘Thatcherism’; Ronald Reagan used ‘supply side economics’ in what became Reaganomics, though there was much similarity between the two doctrines. Thatcher and Reagan also advocated neoconservative ideas, those dogmas of neoliberalism in economic policy, that is non-interference with industry, combined with coercive effects on the population in terms of ‘public security’ and ‘traditional’ morality. This was despite the GOP’s traditional dislike of ‘big government’. Such ‘traditional’ morality was based on Victorian fantasies, repackaged and sold on as how things had always been.

Mrs Thatcher began a programme of privatisation, the selling off of state assets to private enterprise, another important part of neoliberal economics. Such enterprise would enhance ‘competition’ and thus give greater and better choice. Now the idea of competition is fine if you are selling ‘white goods’ or cars, when competition clearly improves the breed. It’s less clear that selling off council (social) housing actually improves the housing stock. In the UK, the National Health Service was established in 1948, taking over almost all hospitals. Since then the training of junior doctors to become either general practitioners or hospital consultants has been entirely within the NHS. There are certainly a number of ‘private’ hospitals; these compete with the NHS at the higher end of the ‘market’ for health services; they do not provide a parallel, comprehensive service. (In parts of continental Europe, private and public hospitals both train doctors and provide complete services.) Despite this, successive governments have attempted to bring ‘competition’ into the NHS, with various artificial splits between purchasers and providers, and commissioning groups. (Note, most of these ‘reforms’ refer to England; Scotland and N Ireland have rather different systems.) The present health secretary, Mr J Hunt, co-authored a book about a decade ago on why the NHS should be privatised; today’s funding problems are seen by many as a ‘death by a thousand cuts’, designed to make the NHS unviable, and pave the way for proper, full privatisation. The previous health secretary, Mr A Lansley, now Lord Lansley, is an advisor to such privatising health service organisations.

Mrs Thatcher took on and defeated the ‘coercive’ trades unions. While many of these had certainly become very powerful—too powerful, perhaps, their original aims of protecting their members from rapacious capitalists have been severely reduced. Her monetarist policies, designed to curb inflation, resulted in around 3 million unemployed people. Business was ‘deregulated’ in a bonfire of red-tape; capital controls were scrapped, and the free movements of goods encouraged. With this went the free movement of people which was unproblematic in the UK until the accession of eastern European countries to the European Union, when free movement into the UK became a ‘bad thing’.

A further noticeable achievement of Thatcherism was the marked decline in the UK as an engineering and manufacturing country, with these activities outsourced abroad; and the marked rise in service industries. The deregulation of banking was particularly prominent in this, with London becoming a world financial centre; there was an influx of brash and abrasive American banks and financial institutions into the gentlemanly world of the City of London. The government didn’t attempt any replacement of the manufacturing industries in the north of England. (Similarly in the US, heavy engineering was outsourced, with those areas becoming known as the ‘rust belt’ or ‘fly over’ states.)

Mrs Thatcher also lowered rates of income tax on higher earnings. At one time previously, taxation of earned and unearned income rose to 98%, a level which is surely confiscatory. The threshold for income tax has also been gradually raised over the years. However, the poor pay relatively more of their income in tax than the rich because of tax and excise duty on so many goods, even if the rich contribute more in absolute terms to the total of income tax take. Hayek believed in ‘proportional’ rather than ‘progressive’ taxation, and tax rates have moved in the direction he would approve of.

New Labour continued many of Mrs Thatcher’s economic policies; New Labour’s ‘third way’ is a mixture of some socialist ideas with bits of neoliberalism. Labour also increased private finance initiatives (PFIs) whereby private investment was sought for, say capital projects, with the state then paying for this over decades. Clearly, any lessons from the Glasgow Trams had been forgotten; and of course, experienced capitalists could easily tie civil servants in knots when it came to the details of the contracts. Hinchingbrooke Hospital was run for a time by a private company; it seems to have been thought that this would increase ‘efficiency’ and give greater patient satisfaction. However, the company could not run it at a satisfactory profit, and therefore withdrew, leaving the state ‘holding the baby’, as always. Private companies can prosper at times; if things don’t go so well they just ‘cut their losses’. This is something ignored in neoliberal theory; that public services are not easily amenable to ‘privatisation’.

Despite such defects, neoliberal economic theories seemed to be working in the decades after their introduction. Wealth was indeed increasing; but looking behind the outline figures, it is apparent that such wealth did not ‘trickle down’ as it was supposed to. Rather the less well off stayed less well off, and the rich got richer. Rates of pay, in real terms, barely increased during the decades. Meanwhile, executive pay increased enormously; the differentials between the lowest and highest paid in a company vastly increased. In part this was because executives simply could raise them, and in part because companies were now expected to report three or six-monthly. And the expectation was for ever increasing growth, and thus shareholder dividends. (See also here.)Also, ‘corporate raiders’ and ‘asset strippers’ could buy unloved companies, and then sell off the various bits for profit. Short-termism replaced the idea of steady, unspectacular growth of the first 30 years after WW2.

The increasing wealth disparity or inequality had unexpected results, effects that the theorists had either not thought of, or if they had thought of them, felt that they could be ignored. Remember, Hayek was ‘not an egalitarian’. The effects were mostly in terms of health and social problems, and it’s very clear that the greater the inequality, the greater the magnitude of the problems.

health and social problems are worse in more unequal countries.jpg

I cannot imagine, for all his ivory-tower theorising, that even non-egalitarian Hayek would have been happy with this outcome.

Financial organisations such as banks were ‘de-regulated’ and allowed greater freedom as actors in the market. One such area was the ‘sub-prime’ mortgage market in America. Here, the idea was that although the individuals had a poor credit rating, it didn’t matter for the continuing rise in the value of their property would make such mortgages safe. Clearly, the idea of ‘asset bubbles’ had been forgotten or mislaid. The mortgages were combined in many and complex ways, some so complex that many people, including those selling them, didn’t really know what they were. Asset bubbles always burst; and we know what happened. Lehman Brothers, a previously well respected bank, went bust. Many other banks had to be rescued by the state, though of course it is the taxpayer who pays, and the taxpayer on a modest income who pays most; such banks were ‘too big to fail’. And following them, several European countries were going the same way. Greece was, and is, the worst affected; Spain isn’t far behind. Now, if you or I go bust, we are declared bankrupt, and our creditors get what little we have. But, it was different for the lenders to such countries; The lenders expected to be repaid, and the bail-outs that such countries received went into the banks’ pockets, and not to the countries. Meanwhile, the countries were expected to introduce ‘austerity’, to cut public wages, public services and pensions. Even medical services, which the International Monetary Fund had declared to be a ‘luxury’ item weren’t spared. Thus, malaria returned to Greece. Nor was it anyway explained how reducing the size of the economy, and impoverishing so many of the population, which is what austerity does, could actually pay off a debt. When the banks went bankrupt in Iceland, the population soon realised the magnitude of the debt they were expected, as individuals, to take on. They simply refused. Look what happened:

Iceland Greece recovery.jpg

In Britain, when a coalition government was formed after the 2010 election, the then Chancellor and Prime Minister implemented a policy of austerity. This they said, was because the previous Labour government had overspent and squandered. In reality, it was an application of Hayekian philosophy and neoconservatism. That is, economic austerity and working towards a ‘small state’ government; and working on purely ideological grounds. Disgracefully, their Liberal Democrat partners went along with this.

Keynesianism had no answer to the problems produced by the oil price increases in the 1970s and the ‘stagflation’ in that decade. Keynes was cast aside, to be replaced by Hayek. Neoliberalism gave us increased wealth, but only for the wealthy; not just the top 10% or the top 1% but particularly the top 1% of the 1%; and created the ‘masters of the universe’. And gave us privatisation, globalism,  deregulation, the idea that ‘the market knows best’; and all that gave us the Great Crash of 2007/08. I think it very unlikely that the paternalistic Professor Hayek could have envisaged a world where gentlemanly rules of conduct in business no longer applied, and I’m equally sure that he would have been aghast at the thought that his theories could have cause such destruction. Hayek did have an answer, though: austerity, and that has given us greater poverty, specially for the already poor, with preservation and increase in the wealth of the already wealthy. Hayek has no answer to the rust-belts of the American mid-west or the north of England beyond ‘the market knows best’ though the market wasn’t interested. As in the 1930s after the Crash and the Great Depression, it looks as if Britain will again be in a ‘lost decade’, or possibly two.

In Britain, a very vociferous group of Thatcherite ‘drys’ and others opposed in principle to the European Union blamed the EU for all the ills of the country; the EU was portrayed as being responsible for the ‘swarms’ of migrants over-running the country. In the US, ‘Wall Street’ was widely seen as the root of the financial problems, the ‘greed is good’ culture of Gordon Gecko; and the migrants came illegally from Mexico and were mostly ‘baddies’. And that gave us—it should not be a surprise—both #Brexit and #Trump.

Hayek I: Serfdom and Liberty

Neoliberalism or neoclassicism is the dominant politico-economic theory today; so dominant that it’s hard sometimes to realise that there are another half dozen or more alternative theories. All theories share one trait; they are all incomplete and cannot fully explain the workings of the economy at micro and macro levels. Neoliberalism is founded on the ideas of FA Hayek.

Friedrich August von Hayek (FA Hayek) was born in Imperial Vienna in 1899; his father was a physician, his mother came from a wealthy family. He graduated in law and political science form the University of Vienna, becoming an economist, and later a philosopher of economic systems. In the early 1930s he moved to the London School of Economics, and after the war moved to Chicago; later he had a rather peripatetic career. Beside his academic work, he published  two popular works; The Road to Serfdom in 1994, and the Constitution of Liberty in 1960. Serfdom was very popular when published, particularly in the US; Liberty was very influential in the Conservative party.

Serfdom is a very severe criticism of socialism, fascism and communism. It is one of the densest and most turgid books I have ever read; the sentences are long and complex to the extent that it is hard sometimes to be sure what things mean. Sometimes, I thought that Hayek was thinking in German but transposing into English. Hayek’s criticism of totalitarian systems, socialism, fascism and communism, rests on the idea of ‘liberty’, for he reasoned that all three systems would deprive individuals and firms of this, largely through central planning. For Hayek, liberty was an essential for human development; it includes laissez-faire (originally, laissez-nous faire), the idea that business should be free of artificial, state organised restraints. His concept of freedom, of liberty, is rather bounded by the idea that it is the freedom from coercive action by the state.

Western civilisation, Hayek declared, comprised liberty, democracy, capitalism, individualism, free trade and internationalism. It’s one of the features of the book that Hayek makes statements or assertions on every page as if like axioms they are obviously and self-evidently correct, yet I so often felt that, while he wasn’t wrong, his assertions needed modification.

Collectivism is, he asserted, centralised planning and a planned economy; but competition is always superior, and planning is anti-competitive. He favoured centralised planning for competition, not against it. He felt that a planned economy needed a dictator.

The system of private property, he asserted, was the most important guarantee of freedom, and not just for the wealthy. Even the poor had a better chance in a competitive economy than in a planned one. Although the wealthy had better chances in a competitive economy, there was, he felt, a case for reducing this inequality though the process had to be ‘impersonal’; he did think the world of the wealthy was ‘a better one’. He allowed for state intervention where an individual had been submerged in a ‘hazard’ against which it would have been impossible to make adequate provision; the case for state social insurance in such cases was strong. There’s much more along similar lines, stressing individual liberty, the importance of wealth while admitting that there might actually be a role for the state at times. Keynes thought there was much that he agreed with in the book. Certainly, the criticism of coercion collectivism is severe and continuous, and he makes a good case against it most of the time.

The Constitution of Liberty continues and expands his themes. It’s in three parts; firstly, why liberty is necessary and the value of freedom; secondly, there is a discussion of the law and legal institutions; and thirdly, his principles are tested against some economic and social issues. It’s an easier read than Serfdom; Hayek acknowledges the sympathetic help he received from Mr E McClellan ‘to straighten out [his] involved sentences’ (but see below). The front cover of my copy shows a pair of artery forceps, a rather odd bit of symbolism but perhaps emphasising his Hayek’s criticism of coercion. Let me emphasise just a few bits of what is a long book.

If, Hayek said, ‘capitalism created the proletariat’, it was because the wealthy gave employment to the poor, allowing them to survive and procreate. He thought that only the independently wealthy could ‘reason’ and concluded that wealth is a ‘good thing’.

In Chapter 19 has a section on social security and health. Hayek thought that the case for a free health service was based on two (economic) misconceptions; that medical needs are objectively ascertainable, and that they ought to be met fully in every case ignoring economic consequences, and secondly, that improved medical care results in economic improvements.

The conception that there is an objectively determinable standard of medical services which can and ought to be provided for all, a conception which underlies the Beveridge scheme and the whole British National Health Service, has no relation to reality. In a field that is undergoing as rapid change as medicine is today, it can, at most, be the bad average standard of service that can be provided for all.

Under a system of state medicine choice will have to be imposed by authority upon the individuals. It may seem harsh, but it is probably in the interest of all that under a free system those with full earning capacity should often be rapidly cured of a temporary and not dangerous disablement at the expense of some neglect of the aged and mortally ill. Where systems of state medicine operate, we generally find that those who could be promptly restored to full activity have to wait for long periods because all the hospital facilities are taken up by people who will never again contribute to the needs of the rest.

There are so many serious problems raised by the nationalisation of medicine…But there is one the gravity of which the public has scarcely yet perceived…The inevitable transformation of doctors, who have been members of a free profession primarily responsible to their patients, into paid officials of the state, officials who are necessarily subject to instruction by authority and who must be released from the duty of secrecy so far as authority is concerned.

The Beveridge Report identified ‘five great evils’, want, disease, ignorance, squalor and idleness. Hayek thought that the evils were really inflation, taxation, the dominance of government in education and the arbitrary powers of social security.

In an postscript to the book, Hayek explains ‘Why I am not a Conservative’. He describes himself as an ‘Old Whig’, that is an archeo-liberal, a believer in free trade and laissez-faire. He also says, quite explicitly, that ‘I am not an egalitarian’. A liberal, he thought, was based on moral beliefs of conduct which did not interfere with others and which does not justify coercion. A liberal was someone who went somewhere, who didn’t stand still, and was not an egalitarian. A conservative had a belief in inherited wealth and position with thus a greater influence on others. (Hayek also believed that inherited wealth was accompanied by inherited talent.) A conservative had a fear of change, and a distrust in the new; a conservative lacked principles; not moral principles, for these were usually strong, but political principles which would enable him to work with others with differing moral values, and it was the tolerance of such differences which made it possible to build a strong society.

There is much more that I could identify and quote; but now I want to turn to my own thoughts on Hayek, and on what he didn’t say. There is no criticism that I see of free market policies or laissez-faire, rather the acceptance that this is the best way for an economy and always was. Well, the might of the British economy in the 19th century wasn’t originally based on free trade, for that came later. British wealth was based on colonialisation and the expropriation of property, and on tariff barriers. It was only after the mutiny that the ‘pearl in the crown’ was a freed from the grasp of the East India Company who regarded it as a ‘cash cow’. Britain had high import tariffs—think of the ‘Corn Laws’—but demanded that other countries had low tariffs for British guns—think of ‘gunboat diplomacy’. Free trade is fine once you are the world’s major trading power, but it doesn’t get you there.

Hayek thought that the typical man was much better off in 1900 than in 1800; perhaps this was true for the rising middle class. In 1800 much of the population were agricultural labourers who were paid a pittance and lived in hovels. The town/country population split of 20/80 in 1800 was reversed in a century. With industrialisation, many moved to the cities where they were paid a pittance and lived in slums. Things were even worse for single women, even in 1900; they could barely earn enough to provide for themselves, and if they had a child, they were often forced ‘onto the street’.  Industrialisation needed workers, preferably cheap ones; children often worked long hours in dangerous conditions. Attempts to reduce their hours were met with the usual excuse that it would be too costly to pay proper wages to adults. Hayek should have known this. If only the wealthy were able to reason, as he said, perhaps it was because the poor were too concerned with everyday subsistence to consider higher things.

The Irish agricultural labourer in the mid 19th century grew his and his family’s staple food, the potato. At that time Ireland exported much food to England. When blight destroyed the potato harvest, the peasant could not afford to food buy in the market, and during the famine food was still exported. At the time, Peel was prime minister, and arranged a covert shipment of ‘Indian maize’; the Irish had no experience of this. Peel was replaced by Lord John Russell who, at least initially, did not want to offer aid because it would be seen as interfering in the market, of upsetting laissez-faire. Hayek should certainly have known this, and should have seen that there were limits to what the market could do, where the market could and did fail.

In a railway accident in 1889 in Armagh, 80 people were killed; many of them were children. The subsequent Report advised the use of a ‘fail-safe’ breaking system. Such an automatic system had been urged for many years by the Board of Trade, but the railway companies always stalled—capitalists aren’t usually altruists, and the Board had no enforcement (coercive) powers. The accident was on 12 June; an Act came into force on 30 August. During a reading of the Bill, one Liberal MP said:

It would be a very serious thing if the Government in its attempt to protect the lives of passengers by rail, and the lives of working men, should take on itself to decide what form of carriage, what form of coupling and break [brake], is the proper form for railway companies to use. I am of opinion that the lives of passengers and railway men will be safer in the long run, if these matters are left in the hands of those who understand them best. I cordially approve of the pressure of public opinion being applied, through this House or through the Press, to railway managers, to compel them to consider both the safety of the public and the safety of their men; but if we endeavour in this matter—as we have, in my opinion, sadly too often endeavoured in the past—to give Government officials the power to decide what is the precise form of appliances which shall be used in connection with railways, we shall not be providing for the safety of the public or the safety of railway servants.

That is what Hayek believed; leave it up to the capitalists, to the market, and all will be well. As so often, it takes a disaster before anything gets done.

There’s a further ‘elephant in the room’; Hayek refers constantly to ‘man’, ‘manhood’ and ‘men’. There are almost no mentions of women; even when acknowledging the help he received from Mr McClellan he notes ‘he understands that Mrs McClellan helped’; she isn’t named. Hayek ought to have known of the role that women twice played in the wartime economies of Britain, and of the ‘women’s lib’ movements.

Hayek was a product of his times; born into the bourgeoisie he saw savings destroyed by the hyper-inflation after the Great War; he saw, and recognised, the evils of fascism and communism, even if he thought that socialism led inevitably to communism. He was an elitist, apparently ignorant of the roles of women, a believer in ‘free trade’ in some sort of golden age, even when neither actually existed; a man of blinkered vision. He felt that his views were unfashionable; his writings are so difficult that I wonder what he conceals that I haven’t discovered. It’s not necessary to write in a way that makes comprehension difficult, but clear writing does take time and effort.

He didn’t believe in ‘socialised medicine’; I’d say his views weren’t just ‘harsh’, they were cruel, unsympathetic and ignorant. They demonstrate the triumph of economic theory over common humanity. The UK’s Health Service certainly isn’t perfect, but much of the founding principles remain. Initially, the planners thought that once the NHS started, the costs of treatment would actually fall; it only took a few months for the extent of the need for treatment became apparent. Only the other day, I read of a gynaecologist in the early days who saw several women every week with a complete uterine prolapse, a procidentia, which they had tried to hold up with towels. The NHS staff most certainly aren’t lackeys of the state. And in the US, even with Obamacare, around 10% of the population have no health insurance and a dubious ability to access treatment; yet the US also provides world-class treatment—but limited to those who can afford it. A ‘bad average’ or nothing?

A last word, an anecdote, a chilling foretaste of the future:

At a meeting a few months after Margaret Thatcher became leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of conservatism. She snapped open her handbag, pulled out a dog-eared book, and slammed it on the table.

“This is what we believe,” she said.

The book was The Constitution of Liberty.

Recession V

What then of Ireland, both North and South? In the South, after the boom and bubble of the early naughties, the banks were bust. The government promised that deposit holders would not loose out—after all, such depositors were much closer to home than many of those depositors in the Icelandic banks. And having promised what they could barely manage, the Irish government were obliged to go as supplicants to the ‘Troika’ of the EC, the ECB and the IMF for help. These, not having learned the lessons of history, prescribed austerity (health care programmes are a ‘luxury’, for example). Meanwhile, in the UK, the Labour government which had tried some modest stimulus were replaced by a coalition between the Tories and the Lib-Dems. The former had promised that there would be no ‘top-down’ reorganisation of the NHS; the latter had promised that there would be no increase in student fees for university. Once installed in the coalition, both parties totally ignored these ‘promises’; there was to be a major reorganisation of the NHS (in England and Wales), and as for university fees, well we know what happened. This coalition also advanced the idea that Labour (or benefit scroungers, health tourists, the obese, take your pick of the baddies) were responsible for the economic problems; and the the remedy was self-imposed austerity—what the prime minister, in a delightful Spoonerism, described as ‘maso-sadism’. In N Ireland, however,  it was politics as usual, a state that has generally continued up to now; that is, a concentration on sectarianism, bickering, ‘flegs’, emblems, marches, though with a common agreement that abortion, equal marriage, sodomy—anything to do with sex—were of far greater import than the state of the economy. So, what happened? You could almost argue that this emphasis on historical problems has prevented the implementation of the worst excesses of austerity in the North.

From historical parallels, we could expect that unemployment would rise in a recession, and the austerity response; and that mental health would worsen. Further, we might expect that poverty would increase, as would homelessness caused by mortgage foreclosures. Not all these indices are captured in official statistics, making it difficult to measure some of these things.

There is indirect evidence of the reduction in ’disposable earnings’ in N Ireland. Some people, we might imagine the young, simply could not afford to drive as much:

RTA deaths NI.jpg

N Ireland Source: PSNI

And in the South:

Ireland RTA deaths.jpg

Republic of Ireland Source: Wikipedia

While the DHSS and the PSNI in the North, and An Garda Síochána in the South might feel that this reduction is related to their policies, the reality is more likely to be related to relative poverty.

Suicides are a crude proxy for mental health, particularly depression:

death by suicide NI.jpg

N Ireland Source: NISRA

Ireland suicide.jpg

Republic of Ireland Source: CSO

While you could argue that the recession and austerity are associated with increases in suicides, there is another factor which may be more important—emigration, the Irish response through the centuries to financial, social and economic disaster through the centuries.

The numbers for N Ireland are actual numbers of people, for the South they are in thousands. The diagrams are for net migration—negative numbers mean emigration is greater than immigration.

Net migration NI.jpg

N Ireland Source: NISRA

Net migration Ireland.jpg

Republic of Ireland Source: CSO

There are many factors in suicides, not just austerity, yet the rise with the onset of austerity is striking, as is the rise in net emigration. All of these emigrations, and many of the suicides, represent the human cost of rescission and attendant austerity; families torn apart, relationships destroyed. These are situations for which only the most cold-hearted actuary could translate into financial terms.

Homelessness is more difficult to measure. There are multiple definitions of ‘homelessness’, why people are homeless and look for help. There are no local statistics showing totals (trends) of homeless over time. The NI Housing Executive records the numbers of applicants, and the reason for their being homeless; but this cannot be a complete picture of the problem.

Homeless NI.jpg

Source: Crisis

The NI Housing Executive (here) do note that there has been increasing trend in homelessness since the 1990s, and a ‘significant increase in 2010/2011’, in part due to the current economic situation.

The causes of homelessness are multiple; poverty is only one of them. Curiously, ‘poverty’ is not included in this diagram:


Source: NIHE

Indirect measures of homelessness are mortgage repossessions; this clearly shows a rise in 2008/09, as could be expected.


Source: Crisis

I have been unable to discover equivalent data for the Republic. Following the 2011 Census, a  special report was issued with details of the homeless then—a ‘snapshot’. There do not seem to be any continuing data.

Ireland census 2011_1.jpg

Source: CSO

Recession IV

[W]hat experience and history teach is this—that people and governments never have learned anything from history, or acted on principles deduced from it.

—GFW Hegel

The Great Crash in the US in 1929 followed a period of boom, a bubble. The initial government response was retrenchment, often seen as the genesis of the Great Depression. Franklin Delano Roosevelt, after becoming president, inaugurated a ‘New Deal’, a form of stimulus encompassing both social welfare and infrastructure projects. During the depression, unemployment vastly increased; read John Steinbeck’s The Grapes of Wrath to get an idea of what things were like. With unemployment went poverty, expressed in the works of official government photographers:

Migrant mother.jpg

Dorothea Lange: Migrant Mother

What’s not so well known is that deaths from road traffic collisions fell markedly during this time; people simply didn’t have the money to afford petrol. Deaths from suicide rose until the beginning of the New Deal:


Source for this and the other diagrams: Stuckler and Basu, 2013, The Body Economic

Economics is theoretical; the equivalent of a medical ‘double-blind, randomised, controlled’ trial doesn’t exist. Modern medicine no longer believes in the power of powdered unicorn horn or of gnats’ urine. However, there are examples where similar countries have pursued very different responses to recession, a sort of ‘natural experiment’.

Communist Russia collapsed in the early nineties. Russia, and many satellites, introduced ‘Shock Therapy’, a period of very rapid privatisation of state assets, though this is now more usually associated with corruption, nepotism, asset-stripping, billionaires and their yachts and football clubs. Shock Therapy lead to mass unemployment, poverty, a great rise in alcohol consumption, and the premature deaths of 10 million Russian men.

Russian mortality.jpg

Other countries, such as Poland and some central European states, privatised much more slowly, averting much of the Russian health and mortality disaster; and their financial recovery was quicker.

Russian and central euro recovery.jpg

In the 1990s, there was a financial crisis in SE Asia. Indonesia, S Korea, Thailand and Malaysia went ‘cap in hand’ to the World Bank, and the IMF (International Monetary Fund). If the Bank provides the finance, the IMF are the ‘enforcers’ or ‘heavies’ of the financial orthodoxy. At one time the IMF thought that health services were a ‘luxury’, and could therefore be sharply cut back. Malaysia didn’t accept the tenets of austerity, while the others did as they were told. Thailand once had an impressive disease control programme, including for HIV. What happened was inevitable:

IMG_20150317_0001 copy.jpg

To return to Europe. Finland and Sweden had major financial problems in the 1980s, with greatly increased unemployment. However, both countries had ‘Active Labour Market Programmes’, a system where the unemployed had access to a counsellor and to significant financial ‘benefits’. The counsellor supported the unemployed person both financially and, if you like, ‘emotionally’ by actively and deliberately helping and motivating the person to find alternative employment. Suicide, the common result of poverty and unemployment actually fell in Sweden:

Sweden suicide.jpg

Contrast this with what happens in the UK. The Coalition has ‘reformed’ the ‘benefits’ system so that, for example, if an applicant is as much as a nanosecond late for an appointment at the Job Centre, he or she will be ‘sanctioned’, a polite euphemism for benefit reduction. Quite how this will help to motivate and support people isn’t explained. And the Job Centre staff get ‘brownie points’ for sanctions. (‘Benefits’ covers pensions, for which people have paid, as well as welfare payments, for which people may well have paid; ‘benefits’ are not a form of charity, neither are those in need the ‘undeserving’ poor of the torrid Victorian imaginations. And ‘reform’ is a euphemism for ‘change’, often for the worse.)

The recent and continuing woes of some of the Euro countries—particularly the PIIGS, Portugal, Italy, (Republic of) Ireland, Greece and Spain are well known. In Spain, the youth unemployment rate is now above 50%, as it is in Greece; the young are the people who we look to in the future to maintain and grow the economies. In Greece, the ‘Troika’ of the European Commission (EC), the European Central Bank (ECB) and the IMF have produced an economy now 25% smaller than previously, with adult unemployment now 25%. And yet this economy is expected to repay the ‘bail-outs’ it has received. Pensions and health programmes have been severely reduced; health provision funding by an initial one-third, and more subsequently. (Remember, pension recipients have paid into their schemes for years.) HIV infections have risen alarmingly; pesticide spraying programmes, to control mosquitoes, have been abandoned, with the inevitable outbreaks of West Nile fever and of malaria. Not to forget, health provision, in the eyes of the IMF, is a ‘luxury’ good. Unsurprisingly, the Greeks recently voted for an anti-austerity government.

There’s another, rather unpleasant, side to the negotiations around the repayments of debts by southern European countries. It’s not where the repayments end up—it’s accepted that the bail-outs to, say, Greece, while they initially go there, they are almost immediately returned to the banks who made the loans in the first place. If you or I spend beyond our financial abilities, our creditors will chase us, and we may well be made bankrupt. Our creditors, who loaned us the funds, will have to accept a much reduced repayment. But if a sovereign country, such as Greece, is in the same position, it really seems that any funds made available as a ‘bail out’ go straight to the banks, those ‘masters of the universe’ who were so foolish to lend in the first place. The condition of the Greek people is of no concern; the poor are always with us. But then banks, as we’ve seen, are ’too big to fail’, and bankers too arrogant to admit their mistakes. For whose benefit are the ‘bail outs’, the bankers or the people?

Remember too, the concept that the Euro was developed as much as anything to stabilise the German export industry. And that, to maintain and grow their exports, loans to poorer countries would allow these to access German products. As ye sow, so shall ye reap.

The unpleasant feature is the hidden political ideology behind the ECB and, particularly, Germany. Southern European countries are Catholic, though Greece is Orthodox. Northern Europe is predominantly Protestant; there are stark echoes of Jean Calvin and the Protestant Work ethos. Frau Dr Merkel’s father was a Lutheran pastor. Think of the idea of the redemption of ‘sin’ in these ideologies. Vengeance is mine, I will repay. In the past, debtors could be taken into debt peonage by their creditors, with no real possibility of ever repaying their debts. But also, long ago, there was the idea of a sabbatical cancellation of (some) debts; the peons could return to their families.

Iceland is beyond the Euro zone, yet was as badly affected by the Great Crash. The three major banks, over-exposed to the collapsing sub-prime mortgage market folded. Following the collapses, the governments called on ‘the usual suspects’, who advised the usual treatment, austerity and repayment of bail-outs. After a while the population revolted, and a referendum on this was held; 93% of Icelanders voted to ditch austerity, and not to repay the debts of the private banks (at least not in any IMF timescale). A new government did as the people, the sovereign, wished, and refused to bail out the banks. (The UK and the Netherlands are fighting this in the courts.)  Compare what then happened in Iceland and Greece:

Iceland Greece recovery.jpg

As the lawyers say, Res Ipsa Loquitur.

Recession III

Is the US pattern of suicides and road traffic deaths in a recession/depression found elsewhere? I’m thinking specifically of N Ireland and the Republic of Ireland after the great crash of 2007/08. Austerity, imposed externally in the South came earlier than self-imposed austerity in the North, where its effects were probably less than in mainland Britain.

N Ireland

Deaths from suicide:

death by suicide NI.jpg

(Source: DHSS, here)

Deaths from road traffic collisions:

RTA deaths NI_2.jpg

(Source: PSNI, here)

Republic of Ireland


Ireland RTA deaths.jpg

(Source: CSO, via nsrf.ie here)

Road traffic collision fatalities

Ireland RTA deaths.jpg

(Source: Wikipedia, here)

In both parts of Ireland, there has been a decrease in deaths on the road; the figures for 2012 from N Ireland were the lowest since records began in 1931. There has a certainly been an increase in deaths by suicide in both parts, more obvious in N Ireland.

There is, however, another factor at work; the traditional response to financial, social and economic problems in Ireland—emigration. Without emigration, it’s likely that there would have been many more deaths from suicide.

In the following diagrams, numbers above the line represent net immigration inwards, negative numbers represent net emigration outwards:

N Ireland

(Numbers on the vertical axis are actual numbers)

Net migration NI.jpg

(Source; NISRA, from here)

Republic of Ireland

(Numbers on the vertical axis are in thousands)

Net migration Ireland.jpg

(Source: CSO, here)

It’s quite clear from these two diagrams that net emigration in the South began earlier than in the North, and involved considerably greater numbers of people.

Net emigration isn’t a new phenomenon. David McCann wrote about it on Slugger in August 2013, here. He wrote of  the greatest challenge to N Ireland being the loss of the next generation.

Recession II

If ‘economics’ originally meant something like ‘household management’, today it’s synonymous with the management of wealth and productivity of a country. Economics is a largely theoretical activity, and it’s beliefs (or models) are highly politicalised. Since WWII, three models have dominated in the western world:




Economy made up of




Individuals are

Selfish, rational

Selfish, but layered (unquestioning acceptance of tradition)

Not very rational

Policy recommendations

Free market or intervention

Free market

Active fiscal policy, income redistribution to the poor

Response to recession





(Almost) any

Conservative (usually)


Source: based on Ha-Joon Chang, 2014, Economics: The User’s Guide

In the ’thirty glorious years’ after WWII, neo-classical theory was dominant; Thatcherism and Reaganism, from the early 1980s onwards, were based on the neo-liberal model of von Hayek and the Chicago school. This emphasised a reduction in the size of the state, the belief that markets knew best and should be interfered with as little as possible, and that the state ought not to be a provider of services. It also believed in the ‘trickle-down’ theory of wealth generation and distribution. Neo-liberalism reaches its apotheosis in the simplistic ideology of the ’Tea-Party’ faction of American republicanism, and in ‘libertarianism’, the extreme exposition of laissez-faire economics. (Laissez-faire was, after an initial stutter, the early response of the UK government to the Irish Potato Famine; it advocated ‘do nothing’, the market will take care of things. While Ireland exported grain to England, the population starved, died or emigrated.) The neo-liberal response to recession is austerity.

In the UK, the implementation of neo-liberal beliefs lead to the sale of state assets (or privatisation) and deregulation of the banking industry. The NHS, for example, was then expected to develop ‘internal markets’; more recently, the trend has been to open services to competition between all providers (also known as ‘creeping privatisation’).

If growth in the thirty glorious years was unspectacular, it was mostly positive, so that Supermac could boast, rightly, that ‘you’ve never had it so good’. (He, Macmillan, was able to build, at a time when the UK was still raddled economically after WWII, some 300,000 new homes per year.) Neo-liberalisation saw a massive increase in the banking industry, and a similar decline in manufacturing industry. Banks began to look for ever more ingenious methods to make money, because they now could. Mortgages were sold, predominantly in the US, to people who were poor risks; but packaged and repackaged with ‘insurance’ and sold as ‘risk free’. In reality, these products were junk, and were the root cause of the Great Crash of 2008/09.

The Labour government in the UK organised a massive credit package for its banks, on the basis that they were ‘too big to fail’, and attempted some modest stimulus to try to stave off a recession. When the Coalition government took power in 2010, they proceeded on a policy of austerity; a reduction in state spending, particularly on ‘benefits’ but with no rise in income tax. The Conservative part of the Coalition blamed the Labour party for the crash initially; as well as them, so-called ‘benefit-scroungers’, a supposedly vast pool of the idle and work-shy were blamed, as well as ‘health-tourists’ and the obese.

Recessions in the past have been (usually) associated with rises in unemployment, rises in poverty, rises in suicide, and other health problems. The economic cycle generally recovers, with a return of growth and prosperity, though recovery when austerity policies have been invoked is, historically, the exception. Part of the theory of austerity is that, by ‘getting a grip on government finances’, confidence will return to investors more quickly.

Despite Mrs Thatcher’s assertion, there is an alternative. John Maynard Keynes was the leading economic thinker of the 20th century. In a recession, he advocated increased government investment on infrastructure projects, and support through social welfare for those affected. Increased government spending could be financed by borrowing; the quid pro quo was that in good times, the state should build up reserves, for the natural state of economies is cyclical. This was said to be one of the failures of the recent Labour governments; they borrowed in good times to pay for extensions of the welfare state, or ‘benefits’, when they should ideally have been saving.  The graphic says otherwise, and shows that the debt ‘problem’ began with the Great Crash and the bail-out of the banks. It’s possible that the increased borrowing under the Coalition actually relates to some Keynesian social welfare stimulus, no matter that this isn’t the general understanding.


Source: Daily Telegraph

Recession I

The business cycle today is characterised by periods of growth, or ‘booms’, and periods of retrenchment or ‘busts’. Booms can be worsened by over-confidence, producing a ‘bubble’; busts likewise can be worsened by over-reaction, producing a depression. Confidence, and its opposite, are psychological factors not rational ones.

One of the first recorded booms was the Dutch Tulip Mania, though there have been plenty of others, most recently the period of boom just before the great crash of 2007/08. The world-wide extent of this crash was unusual. The Great Depression, after the US stock market crash of the late 1920s is perhaps the best-remembered bust; events after 2007/08 again differ because of their worldwide reach.

Governments can respond to recession in two broad ways. They may choose a reduction in state spending, often encouraged as being to ‘balance the books’, with emphasis on health and social welfare programmes. Alternatively, they can choose to invest more in people’s health and social welfare, and to try to stimulate the economy through ‘public works’ programmes.

‘Balancing the books’ is often associated with a desire to reduce or eliminate the National Debt (and often a desire for a ‘small state’). On a personal level, eliminating our debts is a ‘good thing’. For a state, it’s not so clever. The central bank is able to issue money because people have deposited savings with it; it can use these savings as ‘collateral’ against which to issue money. If there were no savings in the bank (a ‘National Debt’), any money it issued would have no backing.

After the US stock market crash, the initial economic policies followed were what we would recognise today as ‘austerity’. However, in the 1932 presidential election Franklin Delano Roosevelt was pressurised by the unions and labour movements into offering a ‘New Deal’. This New Deal had elements of Keynesianism, a stimulus to the economy in bad times.

One curious ‘effect’ of the crash and the depression was an apparent increase in health, as measured by death rates.

(All data and diagrams from Stuckler and Basu, 2013, The Body Economic)

Crude death rates.jpg

Suggestions for this improvement included the idea that, because of poverty, many Americans were eating a much healthier, vegetable-based diet, and walking because they couldn’t afford to drive. However, other factors were lurking behind this improvement. This period is known as an ‘epidemiological transition’, a time when public health measures can be seen to be effective. Such measures included proper sanitation and the supply of clean, fresh water.

Prohibition of Alcohol, a significant ‘confounding’ factor, was lifted in 1933. In part, Prohibition was lifted because the supply of alcohol had become criminalised; it part because FDR reckoned it would be better to regulate and tax it. Deaths from alcohol-related disease immediately rose:

alcohol deaths.jpg

Mental illness, depression and suicide usually rise during recessions, and fall when the economy recovers:


What else changed? One major factor was a very significant reduction in death from road traffic collisions (‘accidents’). Many Americans simply didn’t have the money for petrol, and so couldn’t drive.