EcoLogics

Over the past weeks, the UK has witnessed a remarkable phenomenon whose macroeconomic implications have been glossed over by much of the UK’s press.

The monetarist discourse—an integral and indeed central aspect of the neo-liberal ideology that continues to dominate the UK, and much of the world—is premised on the notion that governments can use the supply of money, as regulated by central banks, to control inflation. Two arguments underpin this logic. The first is that central banks actually can control inflation by controlling the money supply, i.e. by raising or lowering the main interest rates. The second is that inflation is the main economic bogey. Simplifying somewhat, and to paraphrase Mother Julian of Norwich, the idea is that if inflation remains low, then all will be well, and all manner of thing [sic] shall be well.

New Labour—and more specifically, Gordon Brown—are keen as mustard on this, Milton Friedman’s great idea. It was of course New Labour who set up the Bank of England’s ostensibly independent Monetary Policy Committee, and gave it the task of determining the Bank’s main interest rates each month. Until 1997, this had been the prerogative of finance ministers (or chancellors of the exchequer) who were prone to mismanage the interest rates for political reasons. An independent body would take care of this problem for once and for all, or so it was argued.

To critical theorists, this logic was as fallacious as the concomitant notion that, left to its own devices, the economy would work like a quaint 18th century market in which collective forces would attenuate the greed of individuals by way of the allegedly objective ‘laws’ of supply and demand. One does not have to be unemployed to realise that controlling inflation is meaningless if it results, as it arguably has, in greater unemployment (this is, of course, a point that the Tories, of old Conservative or New Labour ilk, would contest and massage away by way of clever statistical calculi, e.g. excluding the long-term unemployed, or those no longer looking for employment). On the other hand, as BAA, Tesco and other mega-corporations show, the market left to its own devices is no longer a market, in Adam Smith’s sense of the term. As Smith himself pointed out, untrammelled greed breeds even more greed, and crucially, greater economic concentration.

Alas, over the last decade or so, the monetarist theory has nonetheless appeared to work: inflation rates have gone down and pretty much stayed down, the economy has grown, and to paraphrase Mother Julian once again, it has seemed that all is well, and all manner of thing remain well.

In fact, all manner of thing are not well. For a start, the gap between the rich and the poor has grown during New Labour’s first (and probably last) 10 years in government. It is not just that the proverbial gap between the haves and have-nots has increased; it is also that the class structure has begun to ossify to the point where, for the first time in decades, class mobility has decreased: today it is less likely than it was shortly after WWII that a young person who has grown up in a working class family will be able to move into a higher social class. To be sure, a whole generation of middle class young people whose parents were comfortably well off can now expect to be decidedly less well off than their parents by the time they reach their parents’ age. One of the factors in this impoverishment will undoubtedly be the New and Old Tories’ not-so-covert plans to privatise healthcare in the mid- to long term. Another is the virtual impossibility of getting a foot on the first rung of the property ladder. Indeed, all those who have been willing the property bubble to burst may be disappointed to find that it will make little difference that a house once worth 200K reaches 150K if they cannot get a reasonably priced mortgage—or any mortgage whatsoever—despite the lower price.

This brings us back to the subject of today’s blog: at a time when the Bank of England is lowering interest rates, the real cost of mortgages is going up. The banks, ever ready to find even greedier ways of disproving Adam Smith’s theories (even as their managers loudly profess allegiance to those self-same theories), have discovered that they can justify the rising cost of their own products by blaming the quaintly named ‘credit crunch’. This strategy will no doubt be encouraged by that additional ‘bloodaid’ of £50 billion that Brown is throwing in to gladden the heavy hearts of all those corporate managers who, in the manner of the image drawn by Steve Bell, are lying on their furry backs even as they receive ‘transfusions’ from Nurse Brown.

When one is filthy rich, and a pragmatist to boot, the trials and tribulations of the poor, let alone of a lowly economic theory, probably do not matter much. However, once a central bank can no longer really affect inflation via the money supply, it is not just monetarism that dies. When millions and millions of people find that their only saving is worthless, when they find that they are deeply in debt, and that rising fuel and food prices are stoking the fires of inflation, then the possibility of a full-blown economic depression becomes a growing reality. Will Gordon Brown join Tony Blair on the board of JP Morgan when that happens?