A special thank you to the Adam Smith Institute for exposing more NEF nonsense.

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As you know, dear reader, the New Economics Foundation is one of my very favourite institutions - a source of endless 'hand-to-face' moments, squeals of delight at ignorance and general 'do these greenie lefies really believe that' occasions.

It seems I'm not alone and the venerable Adam Smith Institute gets a similar pleasure - here commenting on NEF's solution to the housing supply problem:

Well, if you work for the nef, you suggest that taxation on property development should be raised. Quite ignoring that taxing something produces less of it. You then insist that private sector organisations shouldn't be allowed to get planning permission. No, really, reducing supply is well known to reduce prices, isn't it? Finally, we'll bankrupt most of the current developers by taking away their land banks which already have planning permission.

Oh, and joy of joys, they also reinvent the collaterialised debt obligation (CDO)* but this time it's the government's housing benefit payments that provide the collateral.

Great stuff.

*CDOs were at the bottom of the the foetid pile of dingos kidneys that is the US banking system, since you ask

Multipliers, markets and why the New Economics Foundation make me cross

The frighteningly bright Jon Beech has challenged my frothing rant about the New Economics Foundation and indeed my contention that much of their economics work is “evidence-free”. In doing this Jon provides what I find a very helpful positioning of NEF:

NEF's primary agenda is to counter the consumerist agenda that's piped out through radio TV etc, and to help people to reflect on what their relative wealth actually buys them: neuroses and over-leveraged anxiety. They question the economies of scale which result in uninterested interest.

Now were NEF simply engaged on a moral crusade then that would be a fair position but they are clearly positioned as researchers engaged in a scientific (in so far as we can call economics science) process. Which – as I said in my rant - requires evidence. And science, being the troublemaker that it is, evidence means empirical study. It means the raising and subsequent testing of hypotheses. And this NEF does not appear to do. It isn’t sufficient (and this applies as much to those who prefer a libertarian analysis to a statist analysis) simply to select the statistics you like, find a few quotes and cite your own earlier work. Unless of course you're a simple blogger like me!

Let us take just one of NEF’s “products” – LM3:

LM3 was developed by NEF (the New Economics Foundation) as a simple and understandable way of measuring local economic impact. It is designed to help people to think about local money flows and how their organisation can practically improve its local economic impact, as well as influence the public sector to consider the impact of its procurement decisions. It was designed to be quick and relatively easy, and to highlight where an organisation can improve its impact.

This is presented as an econometric tool (indeed I used it in my MSc dissertation) for assessing local economic impact but it is very difficult to track back to the theory underlying the model or indeed to find whether NEF actually undertook robust, peer-reviewed tests of its validity before launching it (with the accompanying consultancy offer) onto a credulous public. And where it has been tested this is what we find:

Notwithstanding this conclusion, difficulties in data collection combined with inaccuracies inherent to the LM3 process created a large margin of error in the findings.

And this is before we have considered the theoretical critique of the Keynesian multiplier. So apologies for getting all academic for a minute:

The multiplier is a central concept in economics and especially regional studies where it is widely used to assess the long term impact on employment and output from different forms of investment. As such it represents a significant part of the Keynesian aggregate demand model of the economy and can be described as the impact of the marginal propensity to consume (mpc) on a given investment or expenditure where the higher the level of mpc the bigger the multiplier (Heertje & Robinson, 1979).

The problem is that measures of the multiplier do not take account of the input source (i.e. where the money is earned) and that it is very difficult to define what we mean by “local” or “local economy”. This is significant since by applying the LM3 model to public expenditure we do not take account of the opportunity costs associated with that public spending (i.e. what the taxpayer would have spent it on had it not gone in tax). With the result that:

It is quite misleading to leave public policymakers with the notion that their spending is not at the expense of the private sector because it may be autonomous or have multiplier effects

None of this intended to say that Keynes was wrong about the multiplier (although there is plenty of doubt about his arguments in this respect) but to point out that NEF appear not to have been rigorous in their appraisal of LM3. Or rather that I cannot find any peer-reviewed, critical appraisal of their model – there is nothing evident from their website and my (limited) searches find very little published work applying the LM3 model in an academic research setting. Even in NEF’s own published work in my area of specialist interest – street markets – there is only an assessment of inputs (how much consumers spend) and no evidence of how that money then flows (e.g. derived from sales figures, margins and staffing costs of market traders). I happen to agree with NEF’s conclusions about the negative job impact of supermarkets but then so does almost every piece of independent economic research which doesn’t excuse NEF from skimping on the evidence.

This is just one of NEF’s products – I cannot comment on other products or reports – but to me it suggests that Jon is right in suggesting that this think tank sees its role as challenging the moral basis for consumerism and perpetual growth rather than providing a substantial and robust evidence base for us to understand how an alternative might work.

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NEF and George's medicine - more evidence-free economics from the masters...

George plans his spending cuts

Now as you know dear readers I am an especial fan of the New Economics Foundation. Their brand of greeny-greeny, evidence-free economics with a twist of Keynesian nonsense, is just what I need to reassure me that my ever so slightly grumpy view of economics is right.

Today – courtesy of New Start – I stumbled across the opinion of this august body of mythic thinkers on the “cuts”.

Andrew Simms, policy director at the New Economics Foundation, said: ‘George Osborne is set to apply the economic equivalent of medieval medicine to the UK economy. Unfortunately bloodletting an already ailing patient is unlikely to improve their progress. To strengthen the economy and make it more resilient and fit for current challenges, we need to invest comprehensively in new low carbon infrastructure. This modern medicine will improve security, create jobs and boost the economy.’

Now leaving aside the image of George Osborne as some form of hedge witch administering a tincture of wood sorrel and elderberry to the ailing British economy, I am struck by the transference implicit in NEF’s argument. For it is the green economists who prescribe medieval remedies for modern ailments – indeed, NEF’s economic ideas has about as much link to the science of economics as homeopathy does to the effective practice of medicine.

After all this is the organisation that thinks we can get by with only working three days a week (I vaguely remember those days – happy ones for an eleven year old but less happy for older folk), who think that jobs aren’t created by enterprise but by the magic of public sector intervention and who persist in misunderstanding the Keynesian multiplier. I could go on to talk about how NEF believe there’s another credit crunch on its way and how Britain should be more like poverty stricken Ecuador. All in all a fine bunch of pseudo-economists (remember this is “new” economics so it can ignore nearly 200 years of evidence, research and study).

When we get to the crunch, NEF are simply a bunch of socialists and peddle the same tired (and disproven) solutions as all the socialists of past times. Despite its low-carbon tinge NEF’s economics is more red than green and its application would represent a huge leap backwards to a protectionist, interfering, over-taxed, over-regulated and producer dominated economy. The sort of economy that nearly ruined Britain in the 1970s. That NEF want investment to be in a “low carbon infrastructure” is irrelevant – this is just repeated the disasters of socialist capital investment led, import substitution strategies.

But then, like Gordon and the Labour Party, NEF have a money tree…

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A World Shortage of Fairy Dust...how this threatens the green economy

We underestimate the importance of fairy dust. Not only is it essential to the new green energy but it provides a critical fertilizer for the money trees we need to make that green economy operate properly. So we need to understand that there are limited sources for the fairy dust.

#Source One: Fairy dust from the deep mines of Aelfhame. This however would be a concern to those worried about human rights since the gnomes mining the dust are not, in any recognisable sense, free. Or for that matter paid since they are under Oberon’s geas for mooning at his daughters.
#Source Two: Treated moondust. Not strictly speaking fairy dust – I wouldn’t recommend running your Mini on this – but an acceptable substitute in most cases. However, you must go to the moon to get the dust (opting for a day when she isn’t green cheese and the man is away).
#Source Three: Manufactured or Synthetic Fairy Dust. There are many recipes for the dust all of which require complicated process, appropriate spells and careful timing. Even the most experienced thaumaturgical engineers have struggled to design systems much better than those used by an individual mage working alone.

The result of this is that we have a world shortage of fairy dust. For all it’s environmental credentials, there simply isn’t enough of it to provide the means of operating the fairyland economy proposed by the greens and their friends. And what little there is remaining has been carefully hidden and well-guarded by The Gentry.

We will have to go on – I fear – using real energy sources that actually work to get us about for the time being. Like oil, coal, gas and uranium. It’s a pity, I know, but what else can we do?

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How searching for a "new economic model" is a threat to all our futures

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I make no apologies for returning to the theme of economic policy and to the ongoing search for a new economic model. Sometimes – as appears, I hope, to be the case with George Osborne’s recent Mais Lecture – this search is driven by the requirements of rhetoric. Osborne is really talking about economic policy rather than the model of the economy:

"Britain has been failed by the economic policy framework of the last decade. It promised stability, prudence and an end to the cycle - it delivered instability, imprudence and the biggest boom followed by the deepest bust.

We need to head in a completely new direction. We have to move away from an economic model that was based on unsustainable private and public debt. And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports. This will require new policies and new institutions."

Now while there is a reference to “a new model of economic growth” the context is about things the Government can influence. Things like higher rates of business investment, more savings and manufacturing that must be predicated on having a much smaller government, less regulation and more trust in the citizen.

But a lot of other people seem to think that prior to 1776, there weren’t any free markets and that Adam Smith designed the “economic model” that has driven the unprecedented growth in human wealth and happiness since that time! These people are stupid and live in the same box as the (overlapping) group who want us all to live on smallholdings, grow our own spuds and keep goats. So let’s look at one of the worst offenders:

The New Economics Foundation:

“There is nothing ‘natural’ about our current economic arrangements. They have been consciously designed to achieve a simple objective: growth. But growth is not making us happier, it is creating dysfunctional and unequal societies, and if it continues will make large parts of the planet unfit for human habitation.”

Did you guys actually read “The Wealth of Nations” before you started saying that our economic arrangements were “designed”? Maybe you can point to the time and place of that design, the people involved and how it was implemented? You can’t, can you because what you’re saying is a lie. Our economic arrangements are the consequence of human ingenuity, the triumph of exchange and the wonder that is the free market.

Oh and the answer to this question you pose:

“At nef, we want to break that vicious cycle by building a new macro-economic model that is geared not towards growth, but towards achieving the outcomes that are important to society and that can be sustained by the planet's finite carrying capacity.”

Is really simple too – it’s called “the price mechanism” and you appear to have forgotten how it works (maybe because it was a long time ago in lesson two of GCSE Economics). The price mechanism is a:

“System of interdependence between supply of a good or service and its price. It generally sends the price up when supply is below demand, and down when supply exceeds demand. Price mechanism also restricts supply when suppliers leave the market due to low prevailing prices, and increases it when more suppliers enter the market due to high obtainable prices.”

If you allow environmental and social goods to be owned and traded – rather than carrying on with the myth of “public goods” – the price mechanism will meet all NEF’s needs. Without us having a “new economic model”.

The problem is that NEF are not really interested in individual initiative, innovation or even in any allowance for private action. What NEF wants is a state-directed and mandated programme aimed at breaking the free market model. Despite the rhetoric of sustainability, social justice and well-being, NEF’s agenda (and that of others involved in “green” economics) is philosophically indistinguishable from this:

"In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness."

A “progressive” government must take command of the economy and direct it to the benefit of all – as determined by the leaders of that progressive government. Now that worked very well here and here and especially here:

“We do not wish to copy anyone; we shall use the experience gained in the course of the liberation struggle. There are no schools, faculties or universities in the traditional sense, although they did exist in our country prior to liberation, because we wish to do away with all vestiges of the past. There is no money, no commerce, as the state takes care of provisioning all its citizens.”

The green economic model threatens not just the wealth and happiness we enjoy but worse it threatens the future opportunities for millions who do not yet have the pleasures of a free market civilization. And all the “sustainability strategy”, “social outcome measures”, “local multipliers” and “zero growth” that NEF and others talk about do not change the truth that the risks associated with a move away from a free system are too great for us to countenance allowing such people lose on our economy.

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Try talking about a three-day week to the small business owner!

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I have been pondering how I might comment on “21 hours”, the latest piece of “research” from New Economics Foundation – who are to economics what homeopathy is to medicine.

This evening as I walked through Bingley, the real truth came to me. I walked – at about 6.15pm – past Ophiuchus. Run by Donna and Oliver, this is a hairdresser. And it was open. I wondered what this couple would think about:

“A ‘normal’ working week of 21 hours could help to address a range of urgent, interlinked problems: overwork, unemployment, over-consumption, high carbon emissions, low well-being, entrenched inequalities, and the lack of time to live sustainably, to care for each other, and simply to enjoy life.”

I suspect the answer would be somewhat a somewhat bemused shrug. After all let’s look at Donna & Oliver’s work:

*The shop is open six days every week – seven days during busy times such as approaching Christmas or before the school summer holidays

*Most days someone – usually either Donna or Oliver – is working from 8.30 in the morning through to 6.30pm or even later if there are still customers

*When the last customer’s hair is finished there’s the shop to clean, tidy and lock up – another half hour each day

*And then there’s stock to order, books to keep, tax and VAT forms to fill, staff to manage and tradesmen to arrange

Assuming it’s a normal week, Donna and Oliver probably clock up 100 hours working. And it’s stressful – margins are tight, business is tough and there’s plenty of competition. And on top of this Donna and Oliver have two kids – who have all the demands and needs you’d expect of young children.

Talking about “21 Hours” is an insult to these hard-working, decent, caring people who happen to have made the life choice of running a small business. The “21 Hours” idea is the product of people who have no clue why people work, what business is about or how the normal life of normal people operates.

We’d all like the “good life”. But some – like Donna & Oliver know it only comes from hard work, effort and good service. So New Economics Foundation, you know where you can stick your “21 Hours”?

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Sorry but cleaners are not more valuable than bankers or ad men - however much you may wish this to be

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“Cleaners more valuable than bankers” screams the headline – written to get the most attention the Unison press release celebrates the publication of a report from the New Economics Foundation (NEF) dubbed “A Bit rich”. A boy is it a bit rich – and for that matter a lot ignorant and very worrying.

I could go on for a long while taking apart the economic illiteracy of the NEF report – it purports to show that cleaners, child care workers and recycling employees contribute more value than do bankers, advertising executives and tax accountants. And it does so by applying something the authors call the “Social Return on Investment” – precise figures for the value added by the carefully selected professions are presented that show just how evil bankers, ad men and accountants are and how we really should be paying cleaners and child minders more money than these spawn of Beelzebub.

However, I have trawled through the full report and there is no model, no econometrically valid methodology – just some adding and subtracting based on sweeping assumptions about the chosen jobs:

“We attributed the entire measurable loss to the UK’s economy and public finances to an elite few thousand very highly paid financiers – those earning over £1 million in bonuses.”

Big assumption that one! Those 1000 bankers are really bad boys! Clearly this is a ridiculous assumption with no theoretical foundation and certainly no validation.

“The calculation for the advertising executive centred on the notion of overconsumption – that we consume more than we need and that this has damaged environmental and social impacts.”

This is based on something invented by the Joseph Rowntree Foundation as a means of assessing what the lowest reasonable income should be – the Minimum Income Standard. Most of the consumption above this level is, according to NEF, down to wicked advertising folk making us buy stuff we don’t want.

For the tax accountants “…there is clearly an opportunity cost in terms of foregone public service value that could accrue to society from having this revenue available.”

Obviously tax accountants are bad because they help their “wealthy clients” avoid tax. This is also known as paying the right amount and is no different from making sure that the folk on benefits get their entitlement surely?

This is not economics – there is no replicable model that I can test on say “Equal Opportunities Officers” or “Five-a-day Co-ordinators” to find out what they contribute. Moreover the argument builds on:

1. The lump of labour fallacy. The “iron law of wages” (that they always trend to a minimum) is so comprehensively false it’s hard to countenance the arguments made just on this basis. Empirical observation tells us that Ricardo was right (as he was on trade) innovation will always raise wages above subsistence.

2. The determination of utility by money. My jaw dropped reading the statement that “…orthodox economic thinking tells us that our utility is derived from money.” Again this is a comprehensive misrepresentation – the only way to measure economic value is money but the utility of something isn’t derived from money. Utility (probably the first thing you learn on an economics course) is determined by how much it is of use to the consumer.

3. The confusion of earnings with spending. The work of public sector workers – however we value it and deem it important – is consumption. What bankers, ad men and accountants do is earn – without that earning we cannot have the spending. Simple really – the private sector earns and we spend it (sometimes through the mediation of taxes)

4. Ignoring consumption. It’s not at all clear whether the authors recognise that it’s consumption that matters rather than production? The banker, the ad man and the accountant either spend or save their ill-gotten gains (and roughly half of that spending will be taxes) – that spending employs shop workers, plumbers, holiday company executives, car salesmen and adult entertainment providers. The model does not recognise how valuable all that spending is to our economy.

5. And the saving supports investment. All those savings – the deferred spending – go to invest in industry, commerce and (too much these days) providing borrowing for governments. It isn’t wasted.

There is within the NEF report a great deal of information, much referencing but no evidence of research. Was I assessing its academic value I would suggest that the whole idea is to substantiate an initial (and economically illiterate) ideological position rather than to extend the body of knowledge. It is a triumph of selective desk research over a genuine understanding of economics as a science and does cleaners, bin men and child minders no favours. I'll believe when some models are constructed, data is collected, assumptions are challenged and this shows the headline is right - theory says it's wrong and the market says it's wrong. 'Nuff said.

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