It is argued that in a free market monopolies either aren’t possible or possible but acceptable. The reasoning behind both is really the same: the mechanics of free markets only allow a monopoly if no one has any objections to it. In classical economics there is an idea called diminishing marginal returns. It’s held that as companies get bigger their unit costs increase. Actually, it’s a law. It seems to be derived from observations of agricultural economies in which the most fertile land is usually taken first. As the agricultural industry scales up every unit of land it takes is progressively less productive. This idea clearly doesn’t apply to most industries, and might not even apply to agriculture anymore, but it is held as a law. It, in of itself, if true, would prohibit monopolies.

In the real world there are ideas called economy of scale and profit maximization, which are some of the most fundamental and generalizable concepts in all business modeling, both of which form a powerful incentive to monopolize. I doubt any pro-market types could disagree with that and keep a straight face. So the pressures exist, so what stops bad monopolies from forming? The answer is competition.

Take the example of banking. There are lots of banks. You can use whichever you want. The banks all form a cartel, agreeing to charge the same super-normal prices. We don’t need to worry about that because in a free market there are no barriers to entry. Anyone can create a bank, charge market prices and everyone will sheeple over to the new, non-monopoly bank. Great, right? Almost magical. This argument is profoundly flawed for the following reasons.

Firstly, imagine the context. You have a series of large, established banks. Banks, by their nature, work better the bigger they are because they have to cover fewer inter-bank payments, which reduces their reserve requirements (or risk exposure). There probably aren’t that many of them because they managed to form a stable cartel. The new-comer would have to compete, from day zero, with all existing banks. This comes down to more than just saying “hi, I’m a bank and I’m cheaper than all the other ones.” You have to find someone willing to invest who agrees with you mission to bring down the cartel, or use your own money, in an extraordinarily risky venture. And you have to source your capital, including all of the technology needed to be a competitive, integrated bank, which hopefully doesn’t belong to someone that’s in the cartel. Or you could build it from scratch. This is risky and expensive, and the whole banking sector is against you, so you’ll probably find it hard to get a loan. The “no barriers to entry” idea seems a little naïve.

The next problem is getting people to use your bank. In real life there are all kinds of transition costs that are ignored in most pro-market positions, which tend to assume frictionless interactions. In this case there are costs, both financial and otherwise, associated with changing bank. Anyone who can’t afford the cost of changing bank, can’t change bank, regardless of how good a deal the new bank is. What are the transition costs? Who knows. They could be anything, free market theories don’t prohibit any of the financial ones and can’t prohibit any of the non-financial ones. The transition costs mean that even if the new-comer charged market prices, they would still be too high. They would have to expect the customers to take the hit, or cover those costs, making themselves uncompetitive. Hopefully that doesn’t push prices up to monopoly levels.

Another problem is scalability. As I mentioned banks, by their nature, become more efficient as they get bigger. The reverse is that small banks don’t make any practical sense. The pro-market anti-monopoly mechanism assumes a kind of perfect scalability, in which the new-comer’s business model is competitive from the first customer and remains so after every new customer joins, regardless of the passage of time. All new businesses generally make a loss at first and are vulnerable to cash-flow problems. A bank with 1 customer is not even a viable bank because any transaction that customer would like to do would incur use of a vast proportion of the bank’s reserves, they’d also have no lending power, so no profit. Banks are only banks because the aggregate transactions to almost to zero and can lend. Their profits are interest payments. For a new business the clock is ticking, it needs to get to a viable size in a relatively short time. If it’s cash-flow fails the business fails. There is a chasm between the new-comer and success that can’t be jumped one customer at a time, it has to be cleared in one go, quickly.

What’s more is that the above process, which seems to rely on a lot of ideal circumstances, must happen so frequently and reliably that investors believe it to be a reasonable investment.

Things get worse though. If the new-comer jumps the chasm and becomes a viable bank, in stable competition with the cartel… why wouldn’t it join the cartel? It seems like the most attractive reason to do all of the above is to do just that.

None of the above takes into account the possible action of the existing cartel, which, according to pro-market theory, just roles over. How can it intervene without breaching free-market rules? Easily. Obviously. Firstly by refusing to fund the venture. Secondly, savings account aren’t liquid, you can’t just close them, and the rules about changing bank accounts generally could be anything. Everyone might have signed a contract saying they have to give 6 months notice to change their accounts. Why would they? It’s a monopoly they have no choice.

There is also a pretty obvious step the cartel could take: give their customers discounts for staying until the new-comer’s cash-flow fails. They’ve been raking money in from years of monopolying, it would be trivial to put some of that money into a fund to bribe customers to stay put whenever a new-comer shows up, strangling them and making the idea of competing with the cartel even more un-fundable.

 

In economic theory it is held that the market, without external shocks, reaches equilibrium prices where supply meets demand. Those that talk about this equilibrium price effect use adjectives like “efficient”, “optimum”, “correct”, “valid”, even “objective”. The standard position in all neoclassical economics is that equilibrium prices established by the market facilitate the perfect ongoing distribution of resources, a situation that is very very hard to reproduce without a free market, and very very hard is the same as impossible in economics. This idea is asserted with more or less venom depending on which school is involved but the basic idea is foundational to mainstream as well as most fringe schools. Some call this the “calculation problem”, the problem being that proper prices can’t be calculated, only derived by the market.

I think there is a far more fundamental calculation problem: Prices.

Price is a funny word in economic theory. It ostensibly means “exchange ratio” and is modeled as such. This leads to the miraculous observation that a massive proportion of consumer goods happen to have a “exchange ratio” of one penny under the pound, but this is perhaps because “prices” are really an internal variable, a kind of force of nature, and what we think of as prices are some kind of outward manifestation wobbled by human judgment. We can only hold price as an abstraction.

It’s nice to have the view that there are these prices everywhere, on everything, as if there’s a big book of real prices somewhere that guides us all in making the correct economic decisions. You can partially accept this if you take prices as labels on things, because price tags are everywhere. Trouble is that the price tags are irrelevant because, as mentioned, they are just outward manifestations, judgements or wishes about what a real price might be. It seems pretty clear that prices (i.e. the ones economics like to talk about) only exist at the moment of a transaction. A lot of things aren’t for sale, so don’t have prices in any technical sense, only factors that influence future real prices. Even those things that are for sale can’t be said to have a definite price until they are bought, then they instantly lose their definite price. It’s a bit like a probability density function in Quantum Mechanics, the price can be anything but at the moment of transaction the function collapses and the price briefly becomes definite. This definite price is only correct for that one transaction, that one distinct event, and instantly goes out of date. Even worse, the collapsing of that price can change the future prices for everything else to any extent. This can happen for any number of reasons; for example, people trading a thing can give the impression that, you know, people want it, pushing up supply, or demand, or both.

If we wanted to track the price of a thing, say coffee beans, even if we could record every transaction that ever happened, instantly, that would give us only out-of-date data on a subset of coffee beans. An important set of coffee beans (the ones yet to be sold, or even yet to be grown) don’t even feature in that data set. Who is gathering this data? Data itself is a commodity so how does everyone get access to the total set? If the acquisition is a private institution then there are plenty of opportunities for distortion of the measurement of prices without breaching any free-market principals. If a company is selling price data it is itself interacting with price data even if it isn’t tracking price data on price data. This is a problem for pure market models: does the valid market include whatever is gathering the price data or is it valid only without that entity? If it is included then… how are it’s prices tracked (and therefor set)?? If it isn’t included then valid markets can never exist because they’d require a lack of a price gathering agent which would be required to track prices at all. Or perhaps the price data agent would give the data away… pricing below the equilibrium price, interfering with clearing, causing perpetual non-equilibrium prices, which is invalid/inefficient/evil/socialist.

This isn’t dealt with in neoclassical economic theory, instead real prices are some kind of fundamental force to which all of the everyday prices, on the whole, over time, or on average, or whatever, converge; it doesn’t matter what those prices actually are, the market will get them right. As I have said, even if the market does generate correct prices we still have to measure them, and face a significant challenge in doing so and even if we succeed we would distort the prices being measured.

I doubt many people know what Praxeology is despite its followers regarding it as the single most important and applicable advance in all of intellectual history. It’s more relevant than you might think. It inhabits the thoughts of many pro-market, anti-social responsibility think tanks and lobby groups. I think it’s only a matter of time before UKIP incorporate into their public manifesto.

Economics is split into ‘Schools’, one of which was called the Austrian School, which was largely similar to any neoclassical economics school until a guy called Ludwig von Mises came along and, in my opinion, fundamentally changed the school’s basic assertions. He kept the von in his name because he was a colossal snob and moved to the US  where an anarcho-capitalist movement was building political steam. The movement took the title ‘The Libertarian Party’ (a word that until then meant something completely different.) So called ‘Austrian Economics’ was chosen as its technical basis.

I say so called because nowadays ‘Austrian Economics’ means anything Mises said[2] and ‘Austrian Economists’ means a bunch of self-publishing, capitalist-funded apologists that unanimously conclude that capitalism is the answer. If you take a look at Mises.org you’ll see an obvious personality cult that literally praises Mises whenever possible.

Mises came up with Praxeology, which he presented as “the (not a) science of human action” (while spending a lot of time explaining that science is useless for understanding economic behavior). This is taken as the philosophical basis of Austrian economics. Taken in the sense that I’m not sure to what extent Austrian economists used praxeology, but Libertarians today seem to regard its position with respect to Austrian Economics as undisputed.

So, here’s the thing… Anarcho-capitalism smacks of religion. You have The Market. The Market is always right. You can’t ‘know’ The Market because it’s mysterious and if you try to know it or control it it’ll strike you down with righteous fury. If you think The Market is wrong you are wrong. There are no alternatives. There can be no compromise. This is just true, get over it. Global warming is a myth.

More similarities can be found in Praxeology texts. For example: Non-Overlapping Magisteria. This is the argument that theology and science deal with different aspects of reality and therefor cannot comment on each other’s findings. This is recreated explicitly in Praxeology, and some. They argue that “human action” can only be understood through pure-thought logic and that empirical evidence is of no consequence because it can’t prove or falsify economic theories.

Praxeology is a body of philosophical work. It presents itself as both complete and self-validating. It proves itself. It uses a kind of custom variant of logic, missing out a lot of key findings, like incompleteness. Like any quasi-philosophical crap it makes heavy use of special, private definitions of otherwise common words, while not making much effort to make that explicit. I think this is, in a sense, a useful property of the theory: it makes it very hard to think about competing ideas because it’s just confusing. It’s a bit like how companies use custom power adapters; it keeps you in the eco-system. For example, “true” means something like “valid” and/or “consistent”; and the terms “valid” and “consistent” themselves are often conflated. Formal logic allows a set of statements to be both valid and inconsistent; Praxeology doesn’t seem to allow that, or at least when this situation arises it’s discarded without justification. The same is true of words like “right”, “freedom”, “truth”, “valid”, “action”, “act”, “logic”, “axiom”, “aggression”, “state”… all of which have special definitions (sometimes explicit, sometimes implicit) in Praxeology and are often defined as derivatives of other concepts within Praxeology, making their use confusing.

Praxeology plays a strange game of switching between deduction and induction and back again (incoherently insisting it is both at once with only the fuzziest justification) to make statements that are asserted as empirical statements but defended as deductive ones. The only support for this necessary habit is to insist on the existence of a third category of statement beyond a priori and a posteriori, without providing any formalized way of deducing which of these categories a statement belongs to (arguably the third category is axioms, more on that later). This imposed ambiguity is actually used to allow unsupported shifts between deduction and induction. They argue that while many might think that a statement is either a priori or a posteriori, that in reality a statement can be a synthetic a priori (one that is deductive but tells you something about reality [5]). This is wobbly already because it’s like saying “a statement is verifiable, not verifiably, or something else”, but beyond that it also betrays a faulty idea of what a statement is. They imply that “all statements belong to one and only one of these three categories and you can just tell by looking at it”. This is not quite right. The statement “the moon is made of cheese” is neither a priori nor a posteriori in of itself. Only in it’s use in some system of statements does it become one of those things. Statements can be either, depending on use. Praxeologists assert statements, don’t specify what their usage is, and use that ambiguity to allow the impression that the statements are synthetic a priori statements by varying how it is framed.

You can get a taste of that when Austrian economists talk about governments causing inflation…then, when pursued, explain that they define inflation as increase in the money supply so their presented assertion about the world is just a statement about their own private definitions of common words[3].

The whole structure rests on one statement, the Action Axiom, from which Mises derived everything else. The action axiom is simply “human action in purposeful behaviour”. Mises then went on to argue that action is comprised of “categories of action” like “ends”, “means”, “profit”, “causation”, “time”, “space”. He argued that an “action” has a concept of “ends” built into it, or put another way, that an agent considering action must have an concept of end. To me, that is a boldly empirical claim, one that if demonstrated would be worth a Nobel Prize in Neuroscience. Of course, if forced to defend the assertion, it would be defended as a deductive statement. It’s as if “action includes ends” is just what those words mean… but also a statement about the world… but they don’t need to prove it empirically… so it’s deductive… so it’s just what those words mean…but it is definitely true…but they kind of use the words “true” and “valid” interchangeably…and “valid” often means “derivable from the action axiom”…which is true…because it is…

The Action Axiom is fraught with ambiguity. Is breathing purposeful? If so is every breath an action or are all breaths one action? Is every step an action with it’s own explicit purpose? What’s a purpose? Are there purposes to be found? If not in what sense is the Axiom true? Is converting oxygen to carbon dioxide purposeful? Is something not an action if it isn’t purposeful? If I don’t know I’m doing it is it an action? What are unintended consequences? How would you prove the axiom false? If the answer (which I believe it is) is that you can’t falsify it then I can use it to show that every molecule of oxygen you breath corresponds to a distinct and conceived purpose. Decomposing actions like this leads to the problem that the sum effort in performing individual acts is far higher than treating the whole breath as a single act, and that sum increases the more you arbitrarily split the action.. so the Praxeologist can’t argue that arbitrary division always adds to the same total. Obviously it limits at infinity, which has to be wrong.

Praxeologists… Praxeologians… use the word “axiom” a lot, which they define as something like “a statement that cannot be argued against without employing it”. Actually this is, again, a private definition. It’s not what an axiom is to everyone else in the world. An axiom is simply and underived statement. That’s it. Any statement can be used as an axiom. For example “the moon is made of cheese” is an axiom if it you use it as an axiom. That’s how logic works. It doesn’t deal with meaning and it doesn’t tell you anything about the world. It’s just a bunch of rules about how to derive statements from statements. Your axioms are your chosen starting point. If you can demonstrate that your axioms are true then any other statements you derive from those axioms are true, right? So, for example, if my chosen axioms are “the moon is made of cheese” and “cheese contains milk” then I can derive the statement “the moon contains milk”. If the axioms were true then all three of those statements would be true… or reality is crazy. This is going somewhere.

I really want to focus on one part of Praxeology; is it’s most clever and batshit bonkers idea: Performative Contradiction. It kind of follows from the their idea of what an axiom is. They never prove the Action Axiom (if they did it wouldn’t really be an axiom) instead they argue that a human can’t argue that humans don’t act without acting, therefor humans act. Many are very impressed with this idea. Arguing is an (intentional) action so arguing against the Action Axiom proves the Action Axiom. Brilliant and literally ridiculous.

The first problem is that contradiction happens between statements. A statement can contradict a statement. An act can’t contradict a statement. So there’s that. The act of asserting a statement is not a statement in the argument being asserted. Obviously. Perhaps the act demonstrates the arguer is a hypocrite. So by saying “the moon is made of cheese” I prove that I must believe that humans act with intention? The problem is that that still doesn’t prove the axiom is true. It simply demonstrates, at best, I presented a collection of statements that contain at least one contradiction. It doesn’t establish which side of the contradiction is false. If I say “the moon is made of cheese” and “the moon is not made of cheese”, those two statements collectively are invalid, but there is no way to deduce which of those statements is true from just those statements. Similarly the “performative contradiction” doesn’t establish that the axiom is true, only that it is either true or it’s antithesis is true, but that’s just an axiom of logic itself (it’s the definition of ‘not’). The performative contradiction argument only really works if the axiom is true, because if it is true then I did act with intention (regardless of whether I believe that I did or believe that I didn’t)… if it’s true it’s true. So what?* If it isn’t true then I didn’t act with intention regardless of what I actually said. The possibility remains that the counter-arguer doesn’t believe that humans act with intention, only that they believe they do, in which cause they could assert “humans believe they act with intention” and “humans don’t act with intention” without contradiction and therefor without proving the action axiom. This opens up the possibility of constructing an argument that disagrees with the action axiom without using the action axiom. So the action axiom isn’t an Austrian axiom.

In fact the Action Axiom isn’t event a genuine axiom. Another common property of internet nonsense is the use of hidden axioms. These are things that are axiomatic in the theory but never explicitly stated. This can be done intentionally or not, it’s hard to tell. Praxeology has a lot of them. If the Action Axiom is indeed proved by use of Performative Contradiction in an argument then the Action Axiom clearly isn’t axiomatic; the content of the Performative Contradiction argument is. The theory should, if it were proper formal logic, construct Performative Contradiction from other statements or it is itself axiomatic. Contradiction can be taken as given from logic theory itself but the theory has to establish that making an argument can somehow prove that the arguer has assumed something and how to derive what that something is. This is never given as far as I can tell but more importantly it isn’t derived from the Action Axiom. It’s just there. So the whole “praxeology proves itself” is plain wrong.

There are many other hidden axioms in Praxeology. Big ones too. Like “homesteading”; also known as “original appropriation”. It is held that people own themselves (which is bonkers in of itself). A statement that is defended with Performative Contradiction (bonkersly).  They then argue that owning something can only happen by voluntary exchange or original appropriation, by which I mean that they are established as congruent but not proved, and further that something can become owned once a moral agent “mixes his labour (as far as I can tell there are literally no women in Praxeology except Ayn Rand)” with the whatever it is. That’s right… mixes labour with stuff. Those people who snigger at “leftists” and “socialists” and “liberals” for being “economically illiterate” believe that mixing an action with a substance makes sense. This mixing is never derived. It’s just held that it can be done. How this mixing causes something to become owned is never demonstrated or derived from the Axiom Axiom. It’s not even proved by Performative Contradiction. Even further they make unfounded leaps; you “mix your labour” with soil but end up owning a geographic region. How? How do you “mix your labour” with a geographic region? As far as I can tell the only validation of homesteading is that it doesn’t, and cannot, be an act of aggression and therefor doesn’t breach their non-aggression principal. But this is clearly not true. I suspect that if you push a Praxeologian on it they’ll likely fall back to that being what the word “aggression” means i.e. a breach of property rights and nature has no property rights (another hidden axiom).

While Praxeology is presented as logically infallible it skirts over all kinds of ambiguity. A good example is the idea of a “threat.” You can’t initiate force, but you can use force to stop your property rights being breached, which is the basis of self/property defense. This argument is intrinsically flawed because you can’t use force to stop something that has already happened. If someone invades your property they have already done it. Using force can never stop them from doing it. If you use force before they invade your property you are the originator. Their theory only seems to permit something that it also forbids. It does however allow someone to respond to a threat but does so in a categorical way: if someone breaches your property rights then you can breach theirs (note that to a Praxeologian that includes murder). Praxeology removes the problematic ambiguity of lesser moral systems… but what constitutes a threat? A threat is, and can only be, a perception in the mind of the threatened. Remember that these are people who complain about the arbitrary power of states to deprive you of property, but have no problem peddling the idea that if someone steals your pen you can murder them. Of course, surely, no Praxeologist would argue that murdering someone over a pen is something that should be happening in any functional society, but how do they resolve that inherent ambiguity? We can employ arbitration, I have no objections to systems that need arbitration, but I do have a problem when people claim that they have a logically airtight moral system that generates such ambiguity. Praxeology doesn’t set a good foundation for resolution of what constitutes a threat, because, ultimately, who has the authority to deny anyone the right to murder a pen stealer? Any such authority is, by their own arguments, invalid. Some might argue that the only force that is allowed is whatever is necessary to return the pen to it’s owner, but, again, what is necessary? The approach also renders any third party force intervention invalid, because the third parties rights were never breached. The only way around that is to allow the third party to joint-own everything that could be stolen, granting them rights to use force against theives… sounds familiar. Or perhaps they could argue that anyone whose property rights are indirectly breached by the pen owner’s act to return the pen (say the pen owner’s boss who lost a day’s labour because the pen owner skipped work to murder someone) also have the right to use force against the pen thief, but who isn’t in that group? Something I have never understood about this is what happens if the pen thief kills the pen owner? Very caustic social castigation?

The incorporation of threat into Praxeology also leads to a clear self-contradiction with other parts of the theory. Praxeologians hold that the point of property norms is to minimize conflict (another hidden axiom) and that exclusive private property norms are the only realistic option[6] (which is a fantastic coincidence because by a completely unrelated argument exclusive property rights are undeniable). They argue that “argumentation” can never cause conflict but that is clearly false. A threat is a statement and arguments contain statements, so an argument can contain threats of any type. And anyone can be the target of the threat. So any “argumentation” between any two people can constitute a threat to any number of people. Obviously. They allow, by the use of the concept of threat, for “argumentation” to be a literal source of conflict. And, even more, the inclusion of a threat in an argument can happen without breaching any “argumentation” principals. For example, the arguer might not know it’s a threat. So there is no get out clause. They can’t say “the inclusion of the threat terminates the argumentation and avoids the contradiction” but even if that were valid argumentation would still clearly have the potential to lead to conflict. The only remaining defense is that responding to a threat doesn’t count as conflict, which would show that a world filled with people brutalizing each other all day long, because some third party argued that some pens might get nicked, is perfectly congruent with Praxeological morality, while a world in which no-one kills anyone but everyone pays tax isn’t and, as such, that this system of thought minimizes conflict by simply defining it a certain way. Good work guys.

So far I have dealt with Praxeology on a mostly logical level but there are some aspects that are worrying, rather than just absurd. They argue all rights are derived from self-ownership, which is itself just a special example of property right. But who has rights? You might think that those that have the right to not be harmed are those capable of suffering, right? Wrong. Harm to others is framed purely in terms of damage of property; the individual’s body being property. Rights are granted to “moral agents” and “moral agents” are individuals capable of deliberately respecting or breaching property rights. If a given being is not capable of conceptualizing their principals, like the principal of private property or self ownership or purposeful action, then they don’t have rights. That’s how they exclude animals. What is worrying is how easy it would be to include anyone in that category and how, coincidentally, that category seems to include anyone who disagrees with them. Not believing their fundamental principals is the same as not being able to deliberate over their implications. How can someone truly deliberately respect someone’s property rights while not believing they have them? So if you disagree you are either wrong or you have no basis claim your rights can be breached. Sound familiar? Like the annihilation of entire indigenous populations? It also demonstrates a tragic irony: no one has rights unless it can be established that they are moral agents… how would that be established?

[1] At best all Mises did was show that humans think that humans act with intention and can’t think otherwise, but that’s a pretty generous description, really he showed that any human that thinks the way Mises did will find it hard to conceive of themselves as not being intentional (we can easily conceive of others as not intentional), but clearly not impossible because his only proof requires humans to be able to at least conceive of themselves as not being intentional actors else how could they, even in theory, form the invalid argument Mises needs to prove his Action Axiom?

[2] Although they convieniently miss out when Mises said that any regulation that is beneficial to the efficacy of the market is valid, citing fire regulation as something that no sane man could disagree with. Or how Mises didn’t believe “Fiat Currency” existed. They also don’t mention that Hayek thought that government control of interest rates could have no significant effect (they very much disagree with him on that) because the expansion caused by private bank lending far outpaced it’s effects. That one isn’t so yay-capitalism.

[3] All government managed currencies inflate because that’s what those words really mean to them. They’ll never point out the epistemic invalidity of data gathering if people find data to back their ideas up but no data can prove them false.

[4] This video contains a few more examples of this similarity. A few minutes in Hoppe starts a slightly mocking attack on empirical scientists (positivists) with an inaccurate caricature of the scientific method (he hedges early on by saying he used to be an expert in this but forgot most of it). He says that they lack the luxury of absolute certainty possessed by praxeologians and that they repeatedly modify predictions until data fits them. You can find identical recreations of these criticisms in fundamentalist/creation science/intelligent design literature. He then argues that if Praxeology was accepted economists would all be out of work and as a result they all have a vested interest in opposing it (he missed out how Austrian Economists would also be out of work, but whatever). This persecution complex non-sequitur, again, can be found in anti-secularism texts; specifically that atheists like atheism and hate faith because it allows them to get away with their amoral way of life.

[5] I suspect that this is another special use. They seem to assume that a synthetic a priori tells you something about reality, but that’s not the classical meaning. A synthetic statement is one that asserts a concept not found in it’s subject concept (regardless of whether it refers to reality).

 [6] Yes, practicality is included in Praxeology despite it not accepting empirical methods.

…in the UK that is.

I will take democracy to mean “implementation of the policies of the population at the government level”.

Some might think that democracy is a kind of ideal pinnacle that we’re systematically working towards, or at least someone is, and that I am just setting my threshold too high. I don’t see “implementation of the policies of the population” as futuristic ideal form of society beyond our practical abilities, do you? It’s an obvious starting point not an ambitious end point. In any case I will point out some factors that, to me, show that our society is not only way off that definition but shows no evidence of progress toward it, and in some cases has moved away from it in our lifetime.

1) The Electoral System is a Mathematical Joke

At school we were taught to “always leave rounding to the end!” At least, I was. Maybe it’s different at Eton. If you are doing some kind of arithmetic procedure you should never round up or down until the very end of the sum. This is because rounding introduces errors, errors that add up. Our electoral procedure ignores this basic maths lesson and rounds up or down at every constituency; creating rounding errors that add up. The resulting range of error is so big that the election result is effectively irrelevant. We may as well roll some dice.

Constituencies hold, by convention, about 70 000 people. The last election’s turn out was about 50% so to secure a clear majority in a constituency only about 16 000 votes are needed (assuming they need half the votes cast, which is an over estimate). The commons is about 650 chairs so 326 seats is a majority. That means that, in ideal conditions, a party can get a majority with 5.2 million votes. On the other hand, imagine that a party gets 5.2 million votes but they are all won in the minimum number of constituencies. With full turn out (in those constituencies alone) that gives them just 74 seats, meaning that 12% of the population’s votes can secure a party anything from 11% to 51% of the commons depending on turnout and geography.

Of course these are two extremes but that’s the point, the range of error is gigantic. Although, interestingly, it’s not quite big enough for small parties to quantum leap to the top and threaten the two main parties, but it does raise the serious question: are our two main parties are Heads and Tails?

Incidentally, there has been talk over recent years of the House of Commons being too big (under the banner of being too expensive). Making the Commons smaller would make this rounding error even worse because constituencies would be bigger.

2) The House of Lords

Every act passed by our parliament starts with the following (emphasis added):

Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:-

For a piece of legislature to be passed, that is, for a law to be enacted, both the Lords Temporal and Lords Spiritual must give consent [1]. The Lords Spiritual were given their position by virtue of being in particular positions in religious orders. No democratic process there. The Lords Temporal used to be people whose ancestors were made Lords by the Crown for some arbitrary reason, winning battles or whatever. Nowadays people can be made “Life Peer” without any democratic process. Once made a Lord it’s permanent. You can’t even retire. The only way to get out of the House of Lords is to assume a meaningless title that they reserve for that purpose that has no obligations.

Earlier I mentioned talk of the Commons being too big. The House of Lords is bigger than the Commons and I don’t think there is talk of it being reduced in size.

3) Manifestos Are Not Binding

No-one knows what MPs are really supposed to do. They have no job description. They are supposed to represent their constituency but they are under no contractual obligation to do that at all, and party politics messes with that commitment because they are expected to go along with the party position. There is no formal process to make sure MPs actually do whatever their job is supposed to be, or even what they say they intend to do. There is also very little actual tracking of what MPs do. The don’t publish time-sheets (a basic concept in all project management). They can have meetings with lobby groups often without any mechanism for is to find out. Similarly parties are under no legal obligation to even enact their own manifesto. Not only are they free from such obligations, they aren’t even obliged to tell anyone the truth about their activities or whether their policies are having the claimed effect.

The severity of this deviation from democracy is made greater by the fact that there are plenty of other situations in which people are legally required to tell the truth. The lying of politicians is taken as another one of those laws of nature that we have to live with.

MPs only have to get us to believe that they will enact our policies but once elected they are free to do whatever they can get away with and lie to our faces about it. They can deviate from their own promises and face no discipline except the threat of losing their seat (which doesn’t apply to more than half of parliament), and they can avoid losing their seats using the same non-democratic tactics mentioned. No one is tracking whether MPs parliamentary voting is reflective of their constituencies’ wishes or just their own ideology or career strategy or personal influences.

In a real democracy a politician would have to agree to a binding policy document and would be removed the instant they deviate from it. Unfortunately we have been trained to believe that democracy means accepting vague non-binding manifestos and that once we have elected someone removing them (for not delivering it) would be anti-democratic!

You might point out that ministers can’t enact laws on their own. Even with a majority there is no guarantee that a parliamentary vote will go the government’s way so it is unfair to expect MPs to always be able to enact their own manifesto. This is true but this only applies to legislature, and a majority government will likely get it’s own way with that. It raises the question though: why promise things you don’t ultimately control? The answer: because they can promise whatever they want. It’s not binding.

4) The Economy Is Not Democratic

If democracy involves consideration of factors that affect our lives then modern democracies have a blind spot: the economy. The general principals that govern the economy affect all of our lives but could not be further from democracy.

One of the reoccurring splits in modern politics is between left and right, using various names, which often reduces to a single question: should the economy be democratic? Liberalisation of markets, corporatisation, limited liability, property rights and shareholding are all attempts to make the economy less democratic. Labour unions, co-operatives, legislation, the modern public sector are attempts to make the economy more democratic. Socialism itself is the principal that working in a company gives you the right to control it.

The number of people that control the majority of the economy is tiny, and they answer to no one because the idea of real democracy is so alien to us that we never even consider it an option when it comes to the economy. The very use of the word “economy” has become a strategy to present it as a force of nature that just is with internal rules that just are, not something that even qualifies as being considered a democratic matter.

We can debate whether the economy should be democratic, but we honestly can’t claim that it is.

If you work you almost certainly do not control the company for which you work. You give your finite time on earth to a project, there is a good chance you give more time than the owner, and yet you probably have no say at all over anything that that company does. Sure you can influence, of course the owner(s) might chose to listen to you, but the legal reality is that you have no control over how your efforts effect with world. Anyone can be fired/hired without you being consulted. How the company’s resources are used, who they sell to and buy from, how they treat people, even whether the company actually functions, are all beyond your control.

Here the deviation from democracy goes beyond practice. The religion of the market has made it undetectable at a psychological level.

5) The Political Ladder

It’s important to make a distinction between how you play a game and what the game is. Some things can be achieved by playing the game differently, but some things cannot be achieved because of the way the game itself is designed. The game has to be changed.

A person has practically zero chance of becoming an MP, let alone a minister, unless they affiliate with an established party. Parties have practically no chance of forming a government without serious funding, either directly or help-in-kind like having a media empire not destroy you, or having a few shareholders not threaten to destroy an industry when you get in power.

The process of going from child to cabinet minister ensures that only people with specific beliefs and ideologies get anywhere near their final goal. This isn’t to say that politicians are being bought (they are) but rather that only the right personalities are allowed to climb the ladder. Who is designing this screening process? I suspect that this isn’t entirely by design, for example, high ranking MPs having psychopathic levels of manipulative skills and emotional detachment is more likely a happy side-effect than an intentional strategy, but who knows?

Whether you accept that this filtering process is as I describe is one thing but if you think that what I have said is some kind of conspiracy theory then consider that three quarters of our cabinet are millionaires. Or consider that the government’s perpetual commitment to subjects like Science, Technology, Engineering and Maths and then note how few cabinet ministers come from any of those backgrounds. The discrepancies we see occurring in a democratic process would be an astronomically unlikely coincidence.

Remember that none of this is nature, these are systems created by us either intentionally or via absent-mindedness. The fact that many of these things are not even open to discussion raises serious doubts about whether we live in a democracy. The thing we refer to as our “democracy” is really a set of systems that exist to make us believe we live in, or are progressing towards, democracy.

[1] There is an exception to this in the Parliamentary Acts but they have only been used a handful of times.

If you watched the party leaders’ debate you can see quite clearly how the parties fit on a spectrum. In political theory that spectrum would be the left-right spectrum, which is probably the case, but the left-right spectrum is generally to do with value judgments about style of governance. Traditionally it meant bottom-up versus top-down, dating back to the masses versus land owners. More recently it was more to do with being ‘progressive’ or ‘liberal’ versus ‘conservative’. Now if you are in favour of market regulation you are a liberal, which makes no sense. Anyway, whatever those words are supposed to mean they ostensibly referred to subjective ideas about approaches to governance.

More and more the spectrum we see seems, to me at least, to no longer be about abstract value judgments but about statements of facts that could be refuted or verified. The establishment holds to a dogma because they got to be the establishment thanks to the funding of those who benefit from that dogma. If the right of this spectrum was pro- and the left anti- then on this spectrum the Conservatives, the Liberal Democrats and UKIP are far-right. The green party somewhere on the far-left (I get the impression that they don’t accept this dogma at all). Plaid Cymru and the SNP seem to be somewhere towards the left. Labour is in a compatibilist position; trying to be in both groups.

The problem is that the dogma has such strong backing that to directly disagree with it in public would cost any political party too much, they’d be seen as mad, and the establishment parties would use the opportunity to attack that party and destroy some competition, rather than to allow any reality to leak into the political discussion. It is a monster created by the political class that even they can’t control.

The dogma is a series of lies concocted to stop the masses revolting against huge disparity of wealth and power. I think people understand and recognize this distinction but in most cases have head their heads filled with nonsense about how an economy functions and so can’t describe it explicitly, the words they would use just don’t fit together properly, but people can tell the ‘establishment’ parties from the outsiders along exactly the same lines as those above. People are starting to see austerity as a kind of con, but lack the economics theory to fully describe the nature of the con, although they can get, in most cases, very close. The dogma has the useful property that it aligns with common sense, and so is hard to fully disregard, but if you look at the details it doesn’t make sense at all.

The dogma is an assembly of political / economic theories that allow politicans to have prolonged discussions about the NHS, immigration, joblessness, infrastructure in which they make patently ridiculous claims, that are demonstrably false, and not just get away with it but earn political capital for saying it. They have to feed to monster. I’m not talking about cherry picking statistics to fit a preferred narrative, that’s bad enough; I’m talking about explicit and absolute claims about fundamental aspects of how our country’s economy functions that are obviously false.

In 2008 the world economy was almost destroyed by the actions of a tiny group of people called the financial sector. It followed an almost worldwide shift in policy as our best and brightest economists ensured us all that their Efficient Market Hypothesis showed that opening up our financial systems to the market by deregulation they would work better for everyone. The banking sector profits by getting people into debt, obviously, so any idiot can see what happens when you let them do that: they generated more debt than there is means to pay it back. The interlinked nature of and speed of trade between banks meant that once confidence in those schemes disappeared it collapsed practically instantly. Those economists watched the debt grow and, even in the last minutes, ensured us that such a debt can have no macroeconomic effects. The more liberal economists argued that markets know best while the right wing economists argued the same and that we should be more mindful of ‘government debt’, a message that became a strong part of the dogma.

If you cast your mind back to 2005-2008 you will remember all of those ‘consolidate your debt’ schemes and mortgages with tiny deposit requirements, these were part of a huge Ponzi scheme. Banks had found a way to profit from issuing mortgages even if the mortgages could never possibly be paid, so called toxic assets. They also subscribed to a method for measuring risk (based on the idea that financial assets can be combined to improve their yield while not aggregating their risk proportionately) that significantly undervalued it, bloating their confidence.

After the crash happened there was a kind of quiet chaos. The top 1% had to scramble to protect their fortunes. The newspapers ran with stories telling us what had happened in black and white: bankers had almost brought the world economy down.

When the dust settled the establishment kicked back in and stories of banking system’s economic crimes and the question of regulation almost disappeared from the press and were replaced with a new narrative: it was the benefits! The problem was clear: private debt had blown up but the establishment can’t tell people not to get into debt. So a strange, and in my opinion intentional, chimera was created. The word ‘debt’ was turned into a Frankenstein’s monster of mish-mashed econometrics. Was this monster our credit card debts? Or our mortgages? Something to do with our pensions? Was it the same as the government debt? We were told we were “living beyond our means”. It had something to do with government spending…right? Sacrifices had to be made to the Gods of the Markets else they would send their monster to destroy everything. At least when ancient civilization sacrificed people to the gods it didn’t make things worse. This monster’s confusing anatomy allowed any discussion of the 2008 crash to easily transition into how bad government spending is. The Conservative Party pushed the benefits story for maybe a year but it started to backfire because most of the population are on benefits. As, it would turn out, are most of the Conservative party, but that doesn’t count. Half of benefit claimants are in work. Also, most benefits are paid to old people. The story was alienating the party’s popular support so it had to be replaced with a new narrative: the monster is attracted to immigrants! This was pushed through the news media and backed by the Conservatives. Remember the ‘Go Home’ vans?

The immigrant story was perfectly in sync with the relatively unknown UKIP ideology. The government was now funding UKIP’s campaign; a strong factor in their rise. Later the BBC would join UKIP’s funding stream by giving bewilderingly disproportionate and free coverage practically ever day, while completely ignoring other comparable parties. UKIP would, without hint of irony, complain of “liberal bias” and would later spin this to imply that their coverage was proof that they are the voice of the masses, rather than that they were popular because of the efforts of the Conservative party and the BBC’s bad coverage choices.

Seven years later political leaders are having discussions about how to fix the economy while, as far as I can tell, nothing has been done to stop a repeat of 2008 and all of it’s effects (banks are just waiting for confidence / recklessness to return), which are all the things the government is taking responsibility for fixing. The crimes of the financial sector were whittled down to the real but minor issue of banker’s bonuses while the story of the monster is still wreaking havoc. Worrying about banker’s bonuses after 2008 is like worrying about the cleanliness of an axe murderer’s axe, but even that issue hasn’t been resolved. Meanwhile we are seeing the return of tiny deposit mortgages and weird debt schemes, while the financial sector functions along the same governing principals as in 2006. The problem of affordable housing means that if banks start to offer low deposit mortgages this is seen (and I’m sure would be claimed) as a cost of living victory, a way to get on the property ladder, rather than the onset of another debt bubble. Every time a political party does whatever it can to claim an unjustified victory over something, even if it seems harmless to do so, our political domain moves one step further from reality and the dogma gets stronger.

‘Balance’ had to be the most overused word in the Party Leader’s debate although most of the time it wasn’t clear what had to be balanced with what. The dogma holds that the government must balance it’s books, the debate had this idea built into it. A youngster in the audience demanded to know how leaders would balance the books. Is that really what troubles the average 15 year old? Those books, wherever they are, have never been balanced. In fact if they had to be unbalanced to exist.

The Conservatives, the Liberal Democrats, Labour and UKIP all accept that the books must be balanced. Plaid Cymru and SNP seem to hold that the books must be balanced but will tend to balance themselves if the government prioritises properly. I’ve seen no evidence that the Greens accept the need to balance the books, so I’m beginning to think the don’t subscribe to it, but they are being very careful, for reasons mentioned above, to not say it explicitly.

The story is that the government must borrow off someone if it wants to fund spending when it can’t gather enough in taxes. The simple fact that the treasury is the only entity in the universe that can create pounds fundamentally contradicts that story. If the government is to get pounds off anyone it had to have given them those pounds in the first place. When the creator of pounds creates new pounds we call that the “deficit.” It’s pretty easy to see that if the thing that issues a currency issues it they are by definition running a deficit, although I’ve had discussions with people who have read a lot about economics and can’t get their head around that. If the treasury created pounds and kept them all they wouldn’t run a deficit but would have issued zero pounds. If they were getting back as much as they issued then they wouldn’t be issuing any, right? Basic accounting. 1 – 1 = 0. When someone else tries to create pounds we call that “counterfeiting” and throw them in prison.

We have been trained to think that it is ‘common sense’ that the government must borrow pounds in order to spend more than it taxes but it is more fundamental common knowledge that the treasury creates those pounds. And what’s more it’s actually true.

That same ‘common sense’ makes us all think that more people can be employed if people just work harder. If we work harder we will earn more money that we can spend on hiring more workers… but if everyone is earning more, who is paying for it? For you to take more someone else has to give more. If the money supply is fixed how can everyone take more? Again, more fundamental common sense applies. One company’s success of increased revenue is another companies failure of increased expenditure. One person’s saved spending is another person’s lost revenue. It doesn’t matter how clever, enterprising or industrious we are, or how strong our work ethic is or how big big society is. 1 – 1 = 0.

More work-hours means more money in circulation. So how can money get into circulation?

First you have to see that pounds are a type of money, but there are other types. Anyone can create money, but in most cases not many people would accept it. The trick of banking is that they don’t need anyone else to accept it. Each bank keeps it all to itself. If you have a pound coin in your pocket that was created and issued by the treasury without a doubt. If you have a pound in a bank account you don’t really have a pound, you have an account containing your banks’ own denomination of money. The bank promises a 1:1 exchange rate with the pound. When you move money between accounts in the same bank the bank just has to alter it’s own internal records. Banks each have an account at the Bank of England (BoE). If you transfer money to an account in another bank, since your bank can’t alter another banks accounts, they have to transfer pounds to that bank before it will update the other persons account. They ask the BoE to transfer pounds from their account to the other bank’s account. BoE accounts contain BoE money, and because the BoE and the Treasury are branches of the same thing, they can always give you 1:1 exchange for pounds, so those accounts contain, by definition, pounds.

The economy tends to want to expand if it can. It wants to do more. Whether what it wants to do is beneficial is, of course, another matter. If expanding requires new labour (which isn’t guaranteed but generally the case) it needs to put more money into circulation. There are only three ways from which that new money can come: from the treasury, from savings or from banks. Note that I said ‘money’ i.e. not necessarily pounds. If it wants pounds then the banks can’t help.

If the government is obsessed with Austerity or Monetarism or Fiscal Responsibility or whatever the current looters call it then the government is actively trying to stop flow of new pounds from the treasury into the economy. In this situation the economy can only get money by either raiding savings or asking banks to lend. Depleting savings at an economic level is probably a terrible idea for obvious reasons, it’s like a starving animal burning off all of it’s fat; it’ll keep it alive but a single bad winter would kill it. The other option is bank lending.

Banks lending is a delicate game. It can be perfectly benign and useful or cataclysmically destructive. If those that borrow can afford the interest payments and the shareholders profiting from that interest are spending the money back into the economy (i.e. it is circulating wages to shareholders to wages etc.) bank lending can expand the money supply in a stable way… to a limit. If this creates no social problems then it’s all win-win. If the banks generate more debt than the economy can service then the process itself demands more money beyond what the economy can create internally: i.e. pounds. If the treasury refuses to intervene and supply those pounds (or it supplies them at too low a rate) then there will probably be a serious credit crunch or crash. Further, austerity rules will actually force the government to be part of this process, going to banks to borrow, rather than act to remedy it.

So if the bank’s lending practices are kept within the obvious limits of not creating debt beyond what the economy can sustain or destroying the social order it can be stable. There is, however, a far simpler and less toxic way of getting money into the economy: the treasury can just issue pounds.

The treasury can do that in three ways: give it, spend it or pay interest. It can also lend it but that is only short term because, assuming it charges positive interest, it will get more back than it lent, so the net is negative (unless it just spends the interest earned back out). The government gives pounds away through things like benefits and tax breaks. It spends it, obviously, when it buys stuff. It pays it as interest to anyone that is holding treasury bonds, which are bought when people open savings accounts, which is why talk about government debt is mostly nonsense. All of the above add up. If they add up to a deficit then the government is a net issuer of pounds.

Which of these seems like the best approach to getting pounds into circulation? The good thing about spending is that it kills two birds with one stone: it gets pounds out into the economy that can be re-spent and circulated, and it gets specific stuff done. When the government buys, say, roads we get pounds to circulate and we get some roads. Since the government is the buyer it can request whatever it wants. It can demand bombs or hospitals or whatever. The government creates demand for whatever it offers to buy. The people who worked on those things will now have money to spend, adding to someone else’s income allowing greater employment  and creating new supply chains each link of which being a possible employer. The pounds either remain in circulation or they end up being paid as tax back to the treasury (or sit in a savings account waiting to be spent).

So austerity is an attempt to stop a perfectly healthy and effective means of expanding the money supply, which is necessary to increase employment, forcing the economy to resort to bank lending and savings raiding to finance expansion. If the government implements policies to stop dangerous bank lending then it intrinsically limits the extent to which banks can expand the money supply, which could stop that expansion from resulting in full employment, assuming that those running banks would allow full employment at all (and it will likely mean raiding savings as well). If, however, the government gives banks freedom to meet all expansionary demand for new money the result could include full employment and probable catastrophic failure of the banking system (and probably raiding of savings as well). We can assume this failure is very likely given that we have already seen it happen when we gave banks freedom while also running a bigger deficit, in other words when the treasury and the banks were sharing the demand for new money it crashed and we didn’t achieve close to full employment. Leaving money creation to banks and having the government not run a deficit and take part in bank lending will likely fail faster and harder and not get close to full employment either. So we’ve got that to look forward to. It is likely that the current government won’t be in power when this happens, they’ll be in opposition blaming whoever is in power. And probably insisting that governments don’t create jobs.

I often think that if people knew what our governors really believe, or are willing to pretend they believe, about how our country works they would be horrified. The theories that form the basis of the political class’ framework for managing our country are mostly superstitions and religious nonsense, but the topics are so convoluted and boring that they’ve managed to keep it all a secret. This smokescreen around their beliefs has created a kind messy, self-contradicting, cartoon reality that can be twisted and shaped to fit any story, which is exactly the way politicians, all politicians, like things to be. Politicians would never risk reality coming into their discussions if they can help it.

I just overheard a man from the Guardian newspaper on TV, on a discussion show, say to the audience members “the deficit on all of your pensions will be £75 000!” I have no idea what he could possibly think that means.

Luckily, I have a high threshold for convoluted, boring subjects. In these religious ideas there is a particularly crazy idea. One that they will never let slip. They think that unemployment is necessary.

This idea is interesting because it really shows everything that has gone wrong with how we run our country, but first thing’s first, why do they think unemployment is necessary? The reasoning is this: if there were more jobs than people the companies would have to compete for workers, this would force them to offer higher wages to get staff. Higher wages mean higher costs, which means higher prices. Higher prices is called inflation and inflation is like the devil incarnate to economists. So if you eliminate unemployment you unleash the inflation monster and you destroy the economy.

Now this misses the obvious point that prices might be higher but wages would be too. If everything costs twice as much but wages are twice as much then any inflation just cancels itself out. So what’s the problem?

The problem is that there is a group of people who earn money, not by being paid wages, but by capital investment (which is a technical term for “owning stuff”, another one of those smoke screens). For those people wages are a cost they pay to maintain those capital investments. For example, if you own a stretch of land that you rent out you might have to pay people to look after it. Those people have a vested interest in wages being as low as possible. Those people also have vast amounts of money from centuries of capital investments, they could pay people wages with that money or they could spend a fraction of it to buy politicians and theorists to write and spread nonsense scare stories about what will happen if they don’t get what they want.

The result of this is everything we see. Wages have been held down for decades while returns for capital investors have increased. Wealth, and therefor control, is being concentrated into a smaller and smaller fraction of the population. At the top of the pile we have a financial sector that engages in no actual production, their capital is imaginary, hires very few people, and yet commands extraordinary profits for the people who own that capital. The government is implementing policies designed to cause unemployment.  When the government increases interest rates they do it because they believe it will slow down economic expansion, that is, stop people doing new productive activities, because they are afraid, or say they are, of runaway inflation. The most extreme measure is austerity. New jobs require new pounds. New pounds come from the treasury deficit. Austerity is designed to stop the creation of new pounds and thereby limit how many new jobs the economy can finance. They want to maintain what they call a “buffer stock” of workers to ensure employers can always find someone cheaper.

The UK’s £1.7 billion surcharge is the big thing in UE/UK news right now. It’s in the interests of Cameron and Osborne to present this surcharge as a serious problem for two reasons. Firstly, because it presents the EU in a negative light forcing us to part with pounds at a time when we need them all, and secondly because it’s an opportunity to spin themselves as heroes, even if only in that they publicly resist it. Although they managed to totally **** that up. ALittleEcon describes the situation here.

The question is why should we be worried about this? Well, as far as I can tell even if paying the surcharge causes a problem for us, which is questionable, the problem is not at all what we are supposed to think it is.

We are supposed to imagine that we can only pay this bill if we give something else up. We need to give up a hospital or something. What actually happens when the government pays this bill? Someone at the Bank of England opens a spread sheet, finds the row that represents the EU’s bank account, and increments it by 1.7 billion. That’s it. They don’t have to raid any savings, or some budget. They don’t have to find a pile of cash somewhere. There is no bank account they withdraw from. They just press some keys and that’s that. No budgetary effects at all. If they then choose to subtract the same amount from somewhere else that’s purely up to them. Incidentally, the talk about the interest that might or might not be incurred is ridiculous. The government can pay that bill any time they want regardless of how big it is, so if they could only be forced to pay late fees if they choose to put off paying it, but there is no intrinsic reason for them to wait. Again, they don’t have to get the money from anywhere.

The EU can then do two things with the pounds in that account. They can buy things from the UK or they can trade it on the currency exchange market. If they buy things from us then, obviously, the pounds go right into one of our bank accounts. That would have some effect on prices. What effect? No-one has of yet provided a model to figure that out so there is no way to know. Anybody buying anything has a similar effect but we rarely stress about that.

The only clear effect of our government issuing the pounds needed to pay the surcharge is it’s effect on the exchange rate. You have to accept that the law of supply and demand holds, which is shaky but, assuming it does, if we increase the supply of pounds by some factor then it’s value should drop by the same factor. If we double the number of pounds in circulation then we would halve it’s value. In theory… which they call a law. So the magnitude of the effect is equal to the magnitude of the change of supply… right? We know the change is £1.7 billion, but what’s the total supply of pounds? If you go to the Bank of England website they have data on this. I think it’s at about £1.5 trillion. That puts this theoretical total effect on exchange rates in the range of about 0.1% over some period of time. To put this in perspective the Pound:Euro exchange rate has moved around over a range of 10% over the last couple of years. We’d have to issue 100 times this surcharge just to get back to 2012 rates.

Would this flicker in exchange rates be bad? Who knows. It would (again assuming theory holds) make imports more expensive and exports more profitable. Is this enough to warrant offsetting the pounds placed in the EU’s bank account by taking the same number away from some other public services? Given that our public services are being strangled to death through lack of investment I imagine that the theoretical exchange rate blip is a better choice.

 

 

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