• Hegel, 1820

The education system in Britain is in the mud. That is scarcely news. But would Labour have the courage and values needed to revive it? The trouble they would have if they win the next General Election is due partly to their Party’s legacy and partly to a personal problem.

Education is, or should be, a commons. It belongs to all of us equally, in the sense that whatever counts as knowledge and learning cannot morally be made the property of anybody or any interest. It is a natural public good. If preserved as a commons, education is a superior public good, in that if everybody has good education, we all gain. A public good is one that is non-competitive, in that if one person has it, that does not or should not deprive others of it. So, denying it to some people, as when the price mechanism is used, is a denial of common rights.     

In the past 50 years, the educational commons has been shredded. Instead of education as liberating, as a public good and as a means of developing cultured citizens, it has been commodified to the point where higher education is the largest ‘industry’ in the economy, after finance. A progressive government will have to confront a systemic collapse that is far more than a matter of more public funding or one capable of being rescued by the sensible fiscal measures so far announced by the Labour leadership.

To appreciate the scale of the challenge, and its economic aspects, we must recall what education is all about. In ancient Greece, education was depicted as a means by which people became civilised. But a struggle evolved between the ‘authoritarian’ approach, in which wise elites conveyed truth to the masses, and the ‘liberal’ Socratic approach, in which teachers and students learned from each other, in common pursuit of truth.

The latter was the model for university education from the 12^th century onwards, crystallising in the views expressed by Hegel, Cardinal John Newman and J.S.Mill in the 19^th century. As Newman famously stated in 1875, ‘A university training is the great ordinary means to a great but ordinary end; it aims at raising the intellectual tone of society.’

In the UK, this liberal view was extended to workers in the early 20^th century with the formation in 1903 of what became the Workers’ Educational Association, set up by moderate reformists to broaden knowledge of society and politics. Seen as diverting energies from revolutionary Marxism, the WEA received the approval of the Conservative Balfour government and the likes of Winston Churchill.

Nevertheless, it advanced the liberating effects of education, conveyed in lectures and classes on the arts, social sciences, reading groups and nature study rambles. In 2003, in a book celebrating its centenary, Tony Blair wrote a Foreword. One abiding aspect of the WEA is a vision of education as a two-way process between lecturer and student. Among its formative lecturers were R.H.Tawney and Karl Polanyi.

However, it was the two World Wars that advanced the liberal model most emphatically. In 1919, a monumental statement was the Report of the Adult Education Committee of the Ministry of Reconstruction, known ever since simply as the 1919 Report. In his covering letter to the Prime Minister, the chair wrote that the ‘goal of all education’ should be citizenship, ‘that is, the rights and duties of each individual as a member of the community; and the whole process must be the development of the individual in relation to the community’. It stated that the objective of adult education should be the strengthening of democratic society, geared towards shared civic, social and economic values. Put bluntly, adult education should not be about just preparing workers for jobs.

As the Second World War approached its end, as politicians considered a new post-war social compact, the liberal Conservative ‘Rab’ Butler steered through the 1944 Education Act, which shaped state schooling for the next 44 years. Albeit in a segregated way, and with a foolish streaming through the 11+ exam, it established free secondary schooling for all. In doing so, it reiterated education as a commons, as a public good.

The zenith of the liberal perspective came in 1963 with the Robbins Report on higher education. It was chaired by Lionel Robbins, a right-wing economist at the LSE and a founding member of the Mont Pelerin Society in 1947, a society that was to produce all the economists who forged the neo-liberal economics revolution in the 1970s and 1980s. The irony lay in the fact that the Robbins Report was an eloquent restatement of the classical view. It depicted the university as a public good that should be accessible to everybody able to qualify to enter it. It was firmly in the tradition of Cardinal Newman and John Stuart Mill. This is captured in three statements in the Report:

‘Excellence is not something that can be bought any day in the market’

‘The essential aim of a first degree should be to teach the student how to think.’

‘We should deplore any artificial stimulus to research’.

The Report stated that universities had four tasks, ‘the promotion of the general process of the mind so as to produce not mere specialists but rather cultivated men and women’, ‘the search for truth’, ‘instruction in skills’, and the transmission of culture and common standards of citizenship.   

The liberal tradition was extended in the Open University set up by Harold Wilson in 1969, overcoming scepticism from Anthony Crosland among other Labour politicians. To this day, the Open University remains the largest university in terms of student enrolments, despite going through a difficult period after the sharp rise in student fees in 2012. A benign offshoot has been the U3A, the University of the Third Age. 

However, the establishment of the Open University marked the zenith of the liberal tradition. The erosion began with the arrival of Margaret Thatcher on the scene, as Secretary of State for Education, known as ‘the milk snatcher’ for ending free school milk for 7-11 year olds. Her lasting legacy came during her Prime Ministership. It began with her vandalism in selling off state school playing fields, clearly an illegitimate theft from the educational commons. But the attack on higher education was more strategically ideological.

In 1985, in the height of the neoliberal economics revolution, a new report was published, the brainchild of Keith Joseph, Thatcher’s political mentor. Known as the Jarratt Report, after its chair Alex Jarratt, it was drawn up by a committee biased towards financial interests, with the directors of finance of Ford and of an arms company among its members. The report recommended that universities be run like businesses, stating that ‘universities are first and foremost corporate enterprises’, to which academic departments owed their allegiance. Vice-chancellors, rather than being ‘scholars first’, should act like chief executives, with management, finance and business skills taking primacy.

The government’s adoption of the Report’s recommendations effectively ended the academic independence of British universities. Among the reforms were abolition of academic tenure, beginning the commodification of academics, the introduction of managerialism, with a dictate to earn from university assets, and an emphasis on ‘competitiveness’ as the guide to ‘the education industry’.

The Jarratt Report was followed by the 1988 Education Reform Act, a remarkably ‘regulatory’ measure for a government claiming to favour ‘de-regulation’. Its main features were, first, introduction of a national school curriculum combined with more use of exams to make sure more children left school with qualifications for the labour market, second, removal of control over schooling by local authorities, allowing individual schools to opt out and receive funding from central government instead, and third, a declared attempt to raise standards by giving parents more choice over where to send their children to school.

The 1988 Act was an act of enclosure, centralising control over content and choice, and preparing the ground for privatisation and commodification. For state schools, Thatcher herself wanted a national curriculum that was very narrow, leaving out all artistic and creative subjects as not functionally useful.

Since then, commodification, privatisation and financialisation have detonated what was left of the educational commons and the liberal tradition. Higher education became a zone of rentier capitalism. Students and degrees became commodities. Maintenance grants were replaced by student loans in 1990 and New Labour introduced fees in 1998. Government grants were formally ended in 2015. These measures turned students into instruments of the new debt-driven economy. Students were required to take loans to pay ‘tuition fees’, which rose from £1,000 in 1998 to £9,250 in 2018 (still that in 2023). On a per capita basis, student debt in the UK is easily the highest in the world. 

Universities have been turned into corporate entities plunged into market competition, with each other, with foreign universities and with other emerging purveyors of adult education. The government has steadily cut funding for universities, meaning that they must mobilise more money themselves, primarily by expanding the number of students, a tendency unleashed by the removal of the cap on numbers after 2012. The fetish of promoting economic growth was extended to universities, frontline of the ‘education industry’.

Universities began to sell themselves as ‘brands’, and accordingly devote more of the financial resources they could mobilise to selling themselves. Four developments stand out. First, they devoted more resources to making their ‘product’ an attractive package, with more lavish amenities and entertainment facilities. Second, they sought to sell their packaged product abroad by expensive sales campaigns and recruitment drives. Third, some opened up foreign campuses.

As a result of the second and third activities, today over three-quarters of a million students of British universities are studying outside Britain, and the total number of foreign students has grown to about 40% of the total. But it is the fourth outcome that implies fraud. As a result of devoting more financial resources to selling activities, much less than half the income from tuition fees is actually spent on tuition. Students are being cheated.

Meanwhile, a new trend is taking shape, which is predictable when a public good is commodified. Substitute competitors emerge to take, share and expand the market. In the UK, these are mainly MOOCs and educational brokers, both thriving with the aid of electronic technology and predatory financial capital.

MOOCs

MOOCs are Massive Online Open Courses. Politically, they have been given an easy ride so far. Increasingly, courses and bits of schooling are being packaged and sold to universities and schools instead of, or in addition to, teacher training in classes. There are now degrees based entirely on MOOCs.

Unsurprisingly, they tend to be cheaper than teacher-taught degrees. But to any progressive they should be concerning. They risk minimising the essence of liberal, dialogical education; they risk standardising learning and becoming instruments for indoctrinating millions in a hegemonic way of thinking. And they tend to be acquired by Big Tech and Big Finance, dominated by a few corporate giants able to extract rental profits.

MOOCs were expected to be disruptive of university education, but have proved to be mainly complementary, because as The Economist noted, students ‘are not buying education for its own sake, but rather a certificate from a respected institution.’ What has boomed most is a broker system, through ‘Online Programme Managers’, led by the firm 2U. They have gained from an increase in online second  degrees. Around one third of graduate education in the USA is online, reflecting the high wage premium associated with such degrees. One can predict that MOOCs will burrow away at taking profits from universities in Britain, further eroding the liberal tradition.

Education Brokers

However, it is another commodifying trend that should be given priority by an incoming progressive government. Generically, it may be called the ‘education disruptor’. If politicians forge an education ‘industry’ geared to preparing children and adults for jobs and for earning more, then it is likely that companies will emerge promising to do that more efficiently than universities. This is made more likely if the commodities produced by universities become ‘credentials’ rather than signals of occupational prowess. That makes it easier for competitors to offer near substitutes.                   

Enter the self-styled ‘education provider’. In April 2017, the government introduced the Apprenticeship Levy to boost apprenticeships. For large firms, this involves a 0.5% levy on the annual wage bill if it is over £3 million, with smaller firms paying just 5% of the cost of any apprenticeships, the government paying the remainder.

Just beforehand, a young employee in J.P.Morgan teamed up with a colleague to set up a company that has been able to take advantage of the scheme. It became Multiverse, in effect a labour broker. It places young jobseekers in firms as apprentices. The jobseekers do not pay anything directly, while the firms pay Multiverse for finding trainees. The business model is simple and risk-free. The firms that would have to pay the Apprenticeship Levy anyway can divert that to paying Multiverse, which undertook to provide nominally apprenticeship training, all online, for about 12 to 15 months.

Over six years, Multiverse has placed about 8,000 ‘apprentices’, bringing in a remarkable amount of revenue, declared to be £27 million for 2021-22 alone. Somehow, it has managed to declare a loss every year, leading to the firm receiving from the government millions of pounds of tax credits (£2.7 million in 2022). The head of Multiverse is Euan Blair, eldest son of Tony Blair. At the age of 38, he was awarded an MBE for ‘Services to Education’, although it is unclear what services he has provided.

Despite his company apparently making consistently large losses, Blair flaunted his plutocrat status when he splashed out over £22 million on a luxurious five-storey west London town house, with seven bedrooms, a two-storey ‘iceberg’ basement with an indoor pool, gym and multi-car garage. In 2022 as well, financial capital poured money into his company, turning it into a unicorn, valued at £1.7 billion; Blair apparently has a 50% stake.

There is an irony in that while universities have become more like job preparation factories, the son of the Prime Minister who promoted ‘Education, education, education’ as Labour’s mantra dismisses the relevance of university education for job markets. Blair told the digital media platform UNLEASH that ‘a university degree has become a stamp in the passport for young people seeking access to the best careers. But, more often than not, the education they’re getting at university isn’t relevant to the jobs they’re going for’.    

Blair was quoted in the Financial Times as saying: ‘One of the things that’s so broken about the current system is it tries to pretend a three- or four-year undergraduate degree is enough to see you through a multi-decade career. We won’t make the same mistake with apprenticeships. Our vision is for a system in which people can return to apprenticeships whenever they need to, to level-up their career.’ There is no evidence that anybody does ‘pretend’ any such thing. But this disparaging of university education comes from a neoliberal perspective that sees universities as simply preparing people for careers.

Then came the potential bombshell. In September 2022, Blair’s firm was granted a licence to award degrees without the need for a university or college, a huge break with historical tradition, marking a new phase in commodification and privatisation, the apprenticeship degree or ‘degree apprenticeship’. It is moot whether a 12-15 month on-the-job training course, done entirely virtually, would have passed muster as an apprenticeship at any previous time in history. It is even more dubious to call what Multiverse is offering a ‘degree’, entitling successful apprentices to the degree of B.Sc.

Although its growth has been rapid and its completion rate has been remarkably high, the scale of this education disruption is still modest. But financial capital and the Office for Students, the government regulator that approved Blair’s ‘degree’, have clearly decided that it is a model for the future on a grand scale. But it raises many ethical and economic issues. The most obvious is that it is an abuse of the idea of a degree as the embodiment of the liberal view of education. It is also a further move towards a ‘modular’ approach to skill and training undermining the apprenticeship traditions. It is also further shredding the idea of adult education as a commons, a public good.

Euan Blair’s disruption model (as he describes it) will pose a delicate challenge for Labour if elected as the next government. Labour’s Deputy Leader, Angela Rayner, has said, ‘Education is a public good and should be treated as such.’ Blair’s model is the opposite, as is the licence to issue degrees given by the Office for Students to James Dyson, the billionaire Brexit backer who promptly moved his headquarters to Singapore after the Brexit vote. They epitomise today’s rentier capitalism.

They also raise numerous questions. Should a commercial company be raking in millions of pounds by dispensing ‘degrees’? Should firms be able to divert the Apprenticeship Levy to pay a private corporation to recruit workers for apprenticeships paid for by the tax? Should Blair’s lightly regulated company, valued at nearly £2 billion, be receiving millions of pounds each year in tax credits, paid by the taxpaying public? Should Blair’s ‘degree’ be half the duration of a normal university degree? If Blair’s firm is allowed to issue degrees, should all its competitor online platforms be allowed to do so? The awkward questions can be multiplied. 

However, there are crucial societal questions that Labour should pose. First, should the education system be an ‘industry’ driven by the perceived demands of the labour market? The current commodifying trends are destroying a broad-based liberal education. Second, how can a progressive government restore the foundational principle of education, that of developing critical minds and citizens driven by values of empathy, altruism, ethics, creativity and social solidarity, rather than by competitiveness, narcissism and personal aggrandisement? Third: Given the trends towards superficiality and commodification, at what point will a degree from a British university not be recognised as a credible degree abroad because it has been so devalued? Alarm bells should be ringing. Following previous traumatic transformational national events, such as the two World Wars, there were radical reappraisals of the role of education. Whatever the political hue of the next government, it should set up a high-powered Commission to map out how to recover the soul of the educational commons.                  

The author acknowledges the helpful comments from Will Hutton and Danny Dorling on a earlier draft of this blog

photo credit: Flickr    

The post Can Labour de-Commodify Higher Education? It has a Minor Problem appeared first on The Progressive Economy Forum.

The Governor of the Bank of England, speaking at an IMF conference yesterday evening:

Bank of England, as reported before breakfast this morning:

In between time, the pound had done this:

Modern central banking is mostly about the communications of modern central banking. Take former European Central Bank president Mario Draghi’s declaration that he would do “whatever it takes” to save the euro, in 2012. Did Draghi actually have to do “whatever it takes”? No, just declaring clearly and credibly that he would was enough to end the speculation around the terms of the euro’s disintegration and immediately improve financial condition in the eurozone and beyond.

What Bailey and the Bank of England have just done is the exact opposite.

Confusion

So why the confusion? Why the mixed messaging? The Bank’s fundamental problem, beneath whatever it wants to tell the world, is that its two major objectives now contradict. The Bank of England, like any central bank, has a primary task of ensuring financial stability. This is why central banks exist at all, in their modern form: central banks emerged as a “lender of last resort” for a currency’s banking system, meaning it was known by all other banks, financial institutions, and their customers, that the central bank was ready to step in and preserve the system’s stability if needed – by issuing emergency loans to failing institutions, for example.

Their second function, inflation targeting, emerged only very much later – really in the last few decades or so. Although much better-known today, inflation targeting by central banks is only possible because of their fundamental role in trying to preserve financial stability. By acting as the fundamental support for the whole monetary system, central banks develop great powers over the system. The interest rate central banks pay on the bank accounts the commercial banks hold with them grows to exercise a control over interest rates in the system more generally. When the Bank of England or some other central bank is reported to be adjusting “the” interest rate, this “Bank rate” is the rate it is adjusting. The idea is that by the central bank changing the interest rate paid out on its own reserves, every other bank and financial institution will adjust its own interest rates. (The Bank of England has a clear explainer here.)

Under normal circumstances, these two functions work together. The Bank of England’s Monetary Policy Committee (MPC) meets monthly to set the Bank’s main interest rate, aiming to keep inflation at the government’s target level of 2%. The Financial Policy Committee, meanwhile, keeps an eye out for future financial crises and potential instability. After the 2008 crash, the MPC has also overseen the massive programme of government bond-buying called “Quantitative Easing” (QE), taking decisions on the value of government bonds the Bank should buy with freshly-issued Bank money. Novel in early 2009 when it was introduced, for good or ill QE is now an accepted part of most central banks’ policy toolkits. Again, this has all been accepted as normal, innocent central bank behaviour – even when QE was expanded by some £400bn to cover the costs of covid in 2020. At the start of September, the MPC announced it would be reversing QE with “Quantitative Tightening” (QT) – selling government bonds back to the financial markets – as part of its effort to control inflation, alongside increasing the Bank rate.

Normal

Alas, the times are not normal, and haven’t been for a while. Kwasi Kwarteng’s mini-Budget on September 23rd, containing £45bn of additional borrowing (on top of the Energy Price Guarantee) and including an unexpected new tax cut for the wealthiest, sparked an almighty panic amongst those in financial markets. The pound fell rapidly in value against other currencies and the price demanded by traders for lending to the British government – the “gilt rate” – shot up. This sudden change in the gilt rate in turn seems to have destabilised British pension funds, who had, over the previous decade or more, developed sophisticated ways to try and match up the payments they make to pensioners with the earnings they receive from their assets. These techniques, collectively known as “Liability Driven Investment” were sophisticated but, it turned out, fragile if market conditions changed rapidly. By Monday 26th, there was a risk that some pension funds faced insolvency and therefore of much wider market disorder.

The Bank of England, as the situation worsened, moved on Wednesday 29th to operate its primary function: preserving financial stability, promising up to £5bn-worth of additional bond-buying a day for the next 13 working days, and ending Quantitative Tightening.

But notice that this is a screeching reverse of the earlier decision to start QT to combat inflation. The Bank’s aim of preserving financial stability runs directly counter, right now, to its aim of keeping inflation low. The same tools and instruments are being used to try and do two, contradictory things. This contradiction by itself would be a decent reason for the Bank to try and impose a time limit on the extra support it has offered, and was (presumably) the reason for setting that limit. But without the pension funds magically managing to reorganise themselves at very short notice – and the picture here is unclear – the time limit just delayed the inevitable, currently set to arrive on Friday morning.

This contradiction is the reason for the confusion at the top of the Bank. But the confusion should alarm all of us. The Bank of England has been the most important economic institution in the country for the last decade. Time and again its interventions have enabled an otherwise weak economy to steer through a series of crises, from Brexit to covid, with relatively little damage. If the Bank is now itself starting to look as dysfunctional as every other major institution, we are collectively in a very bad place. And it is absolutely not a good look for the governor of a central bank to say one big, important thing and then have himself immediately contradicted by his own bank a few short hours later.

Chicken

What to do? There might be ways for the Bank to try and manage this mess more effectively. Steven Major, HSBC’s head of global research has suggested they should make clear the financial stability intervention is only buying long-term bonds (which it is), whilst the monetary policy intervention (“Quantitative Tightening”) is only selling short term bonds (which it is). These are two different parts of the market and two different financial products, so – in theory – two different interventions could be applied. Major goes on to suggest that the Bank rate could still be used to signal the Bank’s intentions about inflation, with Bank rate rises (expected to be steep over the next few months) continuing.

Perhaps more fundamentally, as former Permanent Secretary to the Treasury Nick Macpherson has said, it isn’t actually the Bank’s job to bail out pension funds. That falls to the government – the Bank was only bounced into intervening as it became apparent, barely two weeks ago, that a general failure of pension funds had bigger market implications. That would mean the Treasury pulling together a rescue package for the funds, which, one way or another, means adding still further to the government’s rapidly rising pile of debt and more pressure on interest rates. One, possibly generous, reading of Bailey’s behaviour is that he has thrown down the gauntlet not so much to pension funds as to the government: that either the Treasury will have this mess resolved by Friday, or the Bank will not be responsible for the consequences. (You may think it’s a bad sign that a central bank is playing chicken with its own government, and you’d be absolutely right.)

So a quick, relatively low-cost resolution to the current mess would be for the government to U-turn on whatever remains of the Budget, although plausibly this would end Kwasi Kwarteng’s political career; the slower, higher-cost resolution would involve a government backstop for failed pension funds, although this might allow Chancellor Kwarteng to remain in Number Eleven. It’s a dilemma: who amongst us can truly say which of these options is best? Most likely, of course, is some fudge, whereby the Bank declares and end to the current round of exceptional support, but then cunningly reintroduces something quite similar looking for Monday morning whilst the government continues to chisel away at its own mini-Budget.

Either way, the resolution would only be temporary. The cost of government borrowing has been forced upwards, to heights unheard of even a few years ago, and is unlikely to come back down much in the future. The pound continues its long-term decline. The economy is shrinking as we slide into a probable recession. If we get right down to the fundamentals, Britain is a weak, unproductive, low investment, low wage, high debt economy with a massive dependence on imports for essentials like natural gas and food. It has run off fumes for much of the last decade, leaning more and more heavily on the historic reputation of its core institutions – like the Bank of England – to maintain a semblance of progress. But there are limits to how much the Bank can do with monetary policy, and the Truss government has cack-handedly exposed those limits in the last few weeks. Things are only likely to get worse, and potentially much worse, from this point onwards.

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The Financial Times front page this morning splashes on reports that China is dropping its studied neutrality over the Russian invasion of Ukraine:

China signalled it was ready to play a role in finding a ceasefire in Ukraine as it “deplored” the outbreak of conflict in its strongest comments yet on the war.

Beijing said it was “extremely concerned about the harm to civilians” in comments that came after a phone call between Chinese foreign minister Wang Yi and his Ukrainian counterpart Dmytro Kuleba.

“Ukraine is willing to strengthen communications with China and looks forward to China playing a role in realising a ceasefire,” the Chinese statement said on Tuesday.

It added that it respected “the territorial integrity of all countries”, without indicating whether Beijing accepted Russia’s claim to the Crimean peninsula or shared its recognition of separatists in the Donbas region of eastern Ukraine.

First signs of this emerged a few days ago, as China’s Ministry of Foreign Affairs shifted its neutral tone on the conflict to stress the importance of “sovereignty” in comments to foreign journalists.

China’s central role here shows the way in which power in the world has shifted over the last decade. The US, Canada and European countries, later joined by Japan, took exceptional economic measures against Russia over the last week. These have been described as unprecedented in their scope, taking action against oligarchs, banning some Russian banks from using the SWIFT banking service, and imposing restrictions on Bank of Russia, the Russian central bank.

But the real importance of these measures sometimes gets confused. Blocking SWIFT, the interbank messaging system, has been talked up as a deadly blow to the Russian economy. It certainly adds costs and difficulties to doing cross-border business with Russia and for Russian institutions, but it’s not an economic knockout. SWIFT isn’t a payments service – it’s a system designed for banks to communicate with each other about the payments they wish to make. It could be replaced with phone calls or faxes.: a nuisance, but not critical.

Jamie Dimon, chief executive of JP Morgan, made the same point in interview two days ago:

He said the move to limit Russian access to the Swift banking network might have a lot of workarounds, meaning it wouldn’t alone stop sanctioned parties or others from doing business. The Swift network is the main messaging system banks use around the globe to conduct cross-border transactions. Mr. Dimon said blocking it doesn’t mean alternative messaging systems are blocked as well.

“A sanction says I cannot do business with you,” Mr. Dimon said. “A Swift thing says I can’t use a communication [tool] to do business with you. I can still do business with you.”

Similarly, sanctions against oligarchs and the networks of criminal financing that they use – flowing in vast sums through London and its associated tax havens – will cause difficulty and nuisance, and plausibly could help turn those closest to Putin against him. But it’s in the category of nuisance – potentially serious nuisance – for the mega-rich, rather than a fundamental blow.

Central bank sanctions are decisive

The deadly warhead in the sanctions is the ban on trading Russia’s central bank reserves. The joint communique from the US, Canada and the European powers says:

[W]e commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.

Russia will be barred from selling its central bank assets on global markets, where those assets are held in a participating country, or are being traded by an institution or an individual in a participating country. This has left Bank of Russia unable to support the rouble by, for instance, selling those assets to buy roubles (as it was doing until the ban came in force).

And it means that many Russians will assume that both their roubles are worth less, and their banks are at risk of collapse, sparking bank runs – as we have seen. The response of the central bank has been to whack up interest rates to 20%, and to impose various restrictions on taking currency and assets out of the country  – most recently, it has banned moving more than $10,000 in foreign currency out of Russia.

Central banks are the lynch-pin of a modern economy, defending the stability of the banking system and (therefore) its currency. Control over a central bank gives a hostile power immense leverage. We saw this in the eurozone crisis, when both Ireland in 2010, and Greece in 2015 were threatened with the collapse of their national banking systems by the European Central Bank, if they did not sign up to stringent austerity measures. Both were brought rapidly to heel.

The sanctions being put in place today are an unprecedented economic weapon applied by the joint powers to the Russian economy. The chaos they have produced is all too evident, the rouble falling, for a while, to an all-time low against the rouble. There are suggestions that financial markets across the world are exposed to the risk of default and economic failure in Russia, but of course the people suffering their effects most right now are ordinary Russians. They are the most effective weapon in the joint powers’ economic armory.

Russian defences against economic sanctions

Crucially, however, the sanctions leave assets not held in the joint powers’ currencies, or in their jurisdictions, outside of their scope. The Bank of Russia’s reserves come to $640bn – a veritable war chest that has been built up, very deliberately, over the last decade or so. Russia squeezed its domestic economy and ran huge current account surpluses which, in turn, enable the central bank to acquire these reserves.

But at the same time, Bank of Russia has been getting our of dollar and dollar-denominated assets, precisely in anticipation of something like this ban being applied. It now holds only $bn of US Treasury bills, massively down from the all-time high of $176bn in October 2010.

Jon Sindreu, in the Wall Street Journal, has a breakdown of the Bank’s holdings today, in a piece noting the holes in the sanctions regime:

The two largest components are gold and renminbi-denominated assets. As the caption notes, both of these are “likely safe from being blocked by the West”. It’s difficult – arguably increasingly difficult – for even the Federal Reserve to try and bar sales of renminbi assets outside of US financial institutions. Gold, playing the role it has for millennia, is a uniquely tradeable store of value. Russia holds its gold physically inside the country, and – if it can arrange physical transportation, or offer credible guarantees of its future delivery (big ifs!) – this is a viable reserve for exchange.

That leaves China. And this is where the essential leverage of China comes in. Both countries have been building up trade and other economic relations for some time, agreeing a strategic cooperation with “friendship… that has no limits” just ahead of the Beijing Olympics. Since sanctions were imposed on Russia in 2014, trade between the two countries has grown more than 50% and China is now Russia’s biggest export destination. China and Russia agreed a thirty-year contract for gas supplies just ahead of the invasion.

This is a lifeline for Russia right now. But it is also a pressure point, and potentially a decisive one. Europe gets 40% of its natural gas from Russia. This is way the gas trade with Russia is not sanctioned. China’s demand has been growing, but Russia still supplies just 5% of its domestic consumption. China could apply leverage here. Russia’s remaining non-gold central bank assets are renminbi-denominated. China could try to control their use. Or, in both cases, plausibly threaten to do so.

We are a long way from the Cold War: the balance of the world does not hinge on decisions in Moscow and Washington, or even Paris and London. They depend on Beijing.

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The Bank of England’s new chief economist, Huw Pill, gave his first interview in the job to the Financial Times a few days ago. It will do little to confirm the fears of those of us think, at the worst possible moment, the Bank is about to lurch into a round of interest rate rises on the back of inflation fears.

The focus has been on his comments about the short-term outlook, noting that forecasts suggest it will reach 5% over the next year or so. This, claims Pill, is “very uncomfortable” for a central bank with a target for inflation of 2%. True – but an indicator of the weakness of the Bank’s inflation mandate, drafted 24 years ago in a very different world. As the previous Bank governor, Mark Carney, demonstrated, in practice a central bank has significant discretion over its interpretation. The principle of discretion is built in to the Bank’s operations, with the governor merely having to explain, in a formal letter to the Treasury, why the Bank was missing its inflation target should it do so. (This relative autonomy is, after all, the point of saying the Bank is “independent”.) Under current circumstances, with inflation very obviously driven by supply-side shocks, there is no reason for the Bank to be expected to hit its target.

More concerning, however, were Pill’s comments about his “mentor”, first chief economist at the European Central Bank, Otmar Issing. Issing was (and is) a notorious inflation hawk, acting as one of the leading academic advocates for the high interest, tight money policies of the 1970s and 1980s that were crucial to securing the neoliberal turn against post-war Keynesianism. As central banks like Germany’s Bundesbank, the Bank of England and, especially, the Federal Reserve drove up interest rates, supposedly with the aim of targeting inflation, businesses failed and millions were pushed into unemployment.

Issing himself joined the board of the Bundesbank in 1990, as the reunification of Germany following the fall of the Berlin Wall gathered pace. The same high-interest, tight money approach by the Bundesbank, pushed by Issing, helped bring devastation to the former East Germany, as factories closed under the lash of an overvalued deutschmark and skyrocketing borrowing costs. Ratcheting up the interest rate, supposedly to cope with inflationary pressures and rising budget deficits, saw East German unemployment peak in 1992 at around 15% – up from scarcely 1% a few years earlier.

Issing later brought the same approach to the ECB where he pushed for a similarly “sound money” approach to designing the euro – this time, attempting to hitch the entirety of the Eurozone on to a monetary policy designed around the preferences of the richest parts of its largest economy. When the Great Financial Crisis erupted over 2007-8, the ECB’s brutal enforcement of its tight money policies under its President, Jean-Claude Trichet, helped push southern Europe into a devastating recession.

Pill himself makes clear that he believes the primary focus of the Bank of England should also be “price stability”. After a number of years in which central bankers, including those at the Bank of England, have recognised that a central banks’ footprint is necessarily larger than just controlling inflation – including, for example, recognising that environmental instability also hurts financial stability, and so central banks must take account of the environment – this looks like a real step backwards.

Facing a spike in prices as a result, primarily, of environmental instability – including the impact of covid-19 – there could surely be no worse time to back away from the Bank’s welcome and growing focus on environmental issues, whilst at the same time threatening to drive up interest rates. Increasing the Bank’s base rate won’t deliver more gas, or grow more food, or end the semiconductor shortage; but it will make it harder for companies to finance themselves, and risk rising unemployment here in Britain.

The Bank of England has an unhappy history of lurching back to monetary orthodoxy at the worst possible time: the disastrous 1925 return to the Gold Standard is the outstanding example, resulting in an immediate fall in exports and rise in unemployment as the pound was overvalued. If that return to orthodoxy happens now – if the Bank starts pushing up rates in the belief this will restrain inflation – future students of economic history may well have cause to view it in the same light.

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LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?0

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy. This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming, and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion, or 40% of current GDP. The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets. A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding. Money flows into reserves, and saving goes up, while spending goes down. This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy. Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.” During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.” A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles. Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics. Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation, and Ponzi. At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan. Then, it needs to be high enough to meet only the interest payments. And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending. When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability. Today, there are already clear signs of mortgage-market excesses. UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.” And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years. This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus. The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness […] the patient would either get well or die just before all of his or her money runs out. It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes. That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government. Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability. It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky

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Jan Toporowski

TO PURCHASE THIS BOOK click here and use AGENDA25 to obtain a 25% discount

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Robert Skidelsky

Will Hutton

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Edited by PEF Chair Patrick Allen and council members Suzanne Konzelmann and Jan Toporowski

Publication Date 29th April 2021. Agenda Publishing

40 years of neoliberalism has failed to provide prosperity or stability to the UK economy. Instead it has led to low growth, turbulence, grotesque inequality , poverty and ill health for millions . This is the outcome of damaging economic polices driven by free market dogma, rentier capitalism and ideology. It’s time for a change.

This book contains 18 essays by PEF council members and academics who outline the essential features of a progressive economy dealing with the five massive challenges of our times to the economy – Covid-19, austerity, Brexit , inequality and climate change.

PEF calls for bold public intervention. Shrinking the state and weakening our public institutions has undermined social and community resilience and promoted an out-of-control, value-sapping and high-inequality model of capitalism. 

The authors say the resources of the state must build a fairer and more dynamic post-Covid society, using a mix of regional and industrial policy and investment to revolutionise our public health, housing and social services. A progressive new society should construct a new income floor and new measures to spread wealth and give everyone an equal stake in the economy. 

The financial crash of 2008 proved that only the state can rescue the economy when all else fails including the biggest banks. Covid has shown how only the state can rescue us from death and the collapse of the economy during a devastating pandemic. Only the state can steer the economy and deliver the investment needed to cope with climate change

The 2008 crash showed the breathtaking incompetence of the private financial sector. Now Covid has once again laid bare the myth than private is best – outsourcing to companies the job of track and trace at a cost of £37bn has so far failed to show any discernible benefit say the Public Accounts Committee.

By contrast, the selfless work of millions of NHS workers and volunteers has delivered one of the most outstanding vaccination programmes which has been the envy of the world. This has been done at modest cost and was only possible with a national health service drawing on the vocational drive of its workers for the common good.

The Biden adminstration is today showing the mighty power of the US State with Biden’s Covid and infrastructure bills. The results are expected to cut child poverty in half. The UK government should follow this lead and bring in new models of public intervention to deliver a pandemic-resistant, green economy which works for all citizens.

For an outline , list of chapters and authors and to order a copy go to this webpage

You can obtain a 25% discount on the cover price by entering code AGENDA25 on the Agenda page here

Launch event on Zoom – Wednesday 19th May 2021 at 11am . Joining details to follow.

The launch will be chaired Miatta Fahnbulleh , CEO of NEF and attended by Ed Miliband, Shadow Secretary of State for Business, Energy and Industrial Strategy . Martin Sandbu of the FT will attend as commentator.

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The prevailing image people have of inflation is frequently that of toy boats in a bathtub.  Water is money and the boats are prices.  Turn on the money tap and the boats (prices) rise.  That metaphor is wrong.  Prices are not equally inflatable, do they not all float with the same buoyancy, and money cannot be strictly regulated.  Price increases do follow a general rule, that they result from excess demand for the good or service in question.

Almost all inflationary pressures, a general rise in excess demand, have one of four causes: 1) cycles in internationally traded commodities; 2) exchange rate depreciation; 3) external debt-related excess demand; and 3) sudden loss of tax revenue.  In the United States over the thirty years 1990-2020 almost all of the general increase in the consumer price index of 2-3% annually resulted from changes in international fuel prices (Economics of the 1%, page 148),   The same applies to other developed economies including the UK and major EU states.  While presented as “inflation” in the media, fluctuations in international prices are more correctly viewed as price adjustments responding to the economic cycle. 

Hyperinflation in developing countries frequently results from exchange rate depreciation, which itself follows from large trade deficits.  This type of inflation rarely occurs in advanced countries.  Infamous examples include the Indonesian inflation during the Asian Financial Crisis of the 1990s.  Large external debt payments are a closely related cause of high and hyper-inflation.  External debt service acts as an export for which there is no compensating import.  Exports generate foreign currency which is channelled abroad to pay interest and principle on public debt held by foreigners. 

With no import to absorb the domestic income generated by the export, the national economy suffers from chronic excess demand unless the government runs a budget surplus equal to the debt service.  The budget surplus eliminates the excess demand, but at high social cost.  This process generated high inflation in the deeply indebted Latin American countries in the 1980s and 1990s.  Governments were loath to generate the necessary budget surpluses because of their depressing effect on output and employment.  The German hyper-inflation of the 1920s was a rare case of this process in an advanced country, caused by the large war reparations specified in the Treaty of Versailles and the French military occupation of the Ruhr.

Sudden loss of public revenue is related to debt-related inflation.  Historically this has occurred as a result of looming or actual civil conflict.  Chile in the 1970s and Zimbabwe in the 2000s are obvious examples.  After the election of the progressive Salvador Allende president in 1970 the wealthy in Chile in effect went on strike, not paying their taxes and undermining the expansion of the economy.  The politics of the disintegration of Zimbabwe’s civil society developed in a less clear cut manner, but reflected a process of social disintegration.

In summary, over the last four decades mild inflation occurred in most countries developed and underdeveloped in response to international price cycles, most often prices of hydrocarbons.  In contrast rapid inflation invariably results from one of three causes or the interaction of the three — exchange rate collapse, high external debt burdens and civil strife. 

We should view the role of money in the inflationary process as passive, the policy or systemic response to the deeper causes.  Governments choose to cover strong inflationary pressures with monetary expansion in order to avoid what they consider a worse outcome of collapsing output and employment, even though the resultant hyperinflation may have the same effect.

For most advanced countries the low inflation rates of the last few decades should not fall into inflation terminology.  Price increases of 0-3% reflect international and domestic price adjustments inherent in dynamic economies.  Suppressing those price pressures results in economic stagnation and allocative inefficiency.  Treating any positive change in the consumer price index as inflation is practically and analytically wrong. 

If as some have suggested, the post-corona virus period brings a stronger role for trade unions and more vigorous expansion and innovation-driven productivity growth, we should expect higher rates of price increases, perhaps up to five percent per annum.  Should that happen it will reflect another general rule of market economies, that increased real wages occur during periods of moderate price increases.  That is because economic expansion itself creates upward pressure on prices while simultaneously reducing unemployment and strengthening bargaining power of employees.

Far from a problem, moderate rates of price increase signal a healthy, expanding economy.

Photo credit: Flickr/Alan O’Rourke

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 Symbolic of the failure was that Britain’s 10,000 bank branches were not seen alongside petrol stations, supermarkets and hardware stores as offering a core economic function that needed to be kept fully open during the lockdown, instead of closing or opening part-time. Of course in a way the government was right. Bank branches in Britain have long ceased to be hubs supporting local enterprise: they now largely exist to process the documentation associated with providing mortgages or the odd financial transfer that does not lend itself to automation – hardly needed during lockdown.

  But that is indicative of the problem. The British financial system’s long standing dissociation from the real economy of innovative wealth creation while embracing real estate lending in incredible volumes has widened over the last 30 years. The government may want to use banks as the pipes through which it can channel vital emergency credit to business. But the pipe network barely exists, and even where it does the pipes are shrivelled and silted up.

 British clearing banks know their business customers largely as notations on centralised data bases. It is expensive and time-consuming to organise sophisticated credit scoring of business borrowers, let alone to get to know their business models, their leadership teams, their strategies and sales prospects. Indeed beyond London and the South East there is very little net ending to small and medium sized enterprises ( SMEs) at all. Credit scoring of small and medium sized companies is contracted out to agencies like Experian who have industrialised the process, or for larger companies left to the tender mercies of credit rating agencies. Banks want to conserve their capital and deploy it to maximise their financial returns, and on top regulators insist that the risk weightings associated with much business lending, especially SMEs, are significantly higher than those on real estate lending.

Lending to business is thus risky, low margin and expensive in terms of foregone opportunities to use scarce capital on more profitable lending to property. On top the banks suffer the same disability as the rest of Britain’s quoted companies: they have no anchor “block-holder” shareholders but rather the same shifting, often anonymous, shareholder base of institutional investors who, with honourable exceptions, are disengaged from the companies in which they invest and largely ignore their stewardship obligations. Their interest is in short term share price performance. Where the banks do have large shareholders they are “ activists” insisting that they promote even more short term profitability by even more disengagement from business lending.

 Government schemes to help de-risk business lending – typically various business loan guarantee schemes – are themselves expensive, with the costs displaced onto the business borrower. Small wonder that of the £1.7 trillion of loans on British bank balance sheets in 2019 some £1.45 trillion were represented by mortgages. Lending to small and medium sized business stood at some £160 billion, of which £110 billion was real estate or property related. Manufacturing lending totalled £10 billion. Net new lending to the entire sector stood a miserly £15 billion over all 2019, a fraction of the credit advanced by regionally dispersed German banks – many co-operatively or publicly owned . To explain Britain’s much criticised incapacity, compared with Germany, to manufacture vaccines, ventilators, masks, testing equipment and PPE, you need hardly look beyond these figures.

 The British Business Bank, set up by the Coalition government to plug the gap, is a misnomer in terms: it has been disallowed from doing any significant lending itself after intense lobbying by the banks who complained it might displace the private sector so that its principal job is to broker financial support, in particular government schemes,  to particular borrowers that would otherwise not have known of them  – a job which its some 300 staff in London and Sheffield do effectively. But besides public business and development banks in other countries – Germany, Holland, Sweden, South Korea, Japan – its size and scope is an embarrassment.

 The necessary transformation of the entire system requires action on a number of fronts. In response to the crisis the Treasury has introduced  Covid Business Interruption loans (CBILs) that companies can apply to banks for.  To support CBIL lending the  Bank of England  has  launched  a new Term Funding scheme for Small and Medium Sized Enterprise (TFSME) that banks together with relaxing capital requirements ( and requiring the suspension of dividends), the Bank says could boost lending to £190 billion  to SMEs over the next twelve months – as  it dryly observes, 13 times more than the banks managed themselves over all of 2019. But as banks conserve their capital, they have little appetite to increase their lending 13 times – the scale that is necessary.  In the most recent week banks lent £1.3 billion: weekly lending needs to run at ten times the rate £12-15 billion – as much as banks lend to SMEs in a year –  if by mid-summer there is not to be an avalanche of closures and redundancies.

To dynamise what is happening he Chancellor should chair an emergency task force tasked with driving lending up by the day, to be monitored with the same intensity we monitor Covid testing. The British Business Bank, miniscule compared with industrial development banks in other countries, needs immediately to be given the mandate and capital to increase its own lending ten times – across the country. It must be tasked with getting the money to where it is needed across the country beyond the south-east – with the banks cajoled into becoming active partners.  It will be a transformation of the role of the BBB into a fully fledged development bank in a matter of weeks – but if the army can build Nightingale hospitals at such speed the BBB must rise to the task in its sphere no less quickly. Its lending should not just be about preserving viable businesses: it should be thinking of supporting firms, especially SMEs, in key sectors, especially those identified as priorities by the Industrial Strategy. The MacMillan Committee recognised the problem ninety years ago. It is sad that it has taken a pandemic to trigger the necessary action.

 Secondly bank shareholders need to say more vocally and publicly than they have hitherto that they will support banks as they lend to distressed lenders. It is a public interest function. As fast as possible a new Companies Act should require banks retail and commercial arms, as discharging core economic functions, to incorporate as public benefit companies whose task is first and foremost to transmit money and credit to achieve public interest outcomes. Profit will follow from the delivery of purpose. The Act should also lay a responsibility on shareholders actively to curate and steward the companies in which they invest, ensuring that they deliver on the purpose for which they were incorporated. Britain will thus create a new generation of commercial  banks that serve the economy and society. Many good bankers would welcome the change.

 Thirdly it is no longer exports that requires financial guarantees. The fourth industrial revolution is being driven by scientific advance. Intellectual property rights need to become as good as collateral as property, so that the risk weightings on both are the same. A transparent market needs to be established in intellectual property rights ( as Big Innovation Centre has consistently argued) so that they can be fairly valued, and then crucially insured by government just as it does exports, to create bankable low risk weighted collateral. This insurance function can also be extended to the top slice – say 20 per cent – of other loans to small business, so that insured IP loans, insured  SME loans and eventually British Business Bank TFSME loans can be bundled together and sold as bonds to the UK insurance industry, allowing it to diversify part of its £1.9 trillion holdings of financial assets into bonds that directly create real wealth, with the funds recyclable for a fresh round of financing.  The insurance industry should not be allowed to stand on the sidelines.

Some companies will not want loans, but equity: the venture capital and private equity industries must transmute themselves from their default role as predators and asset sweaters to long term patient investors – working with the newly  created Futures Fund to take generous equity stakes in companies in need.  Supporting intellectual capital rather than seeking property collateral should be new North Star of British finance

 If there is not to be a terrifying slump followed by stagnation, the British financial and ownership system needs a revolution – and to take place in mere  weeks. Good people abound in it, marginalised until now by the predominant culture of wealth extraction. They need to be unleashed. These measures taken together would transform the piping of the British financial system. Instead of being an engine to inflate property prices, it would become an engine to promote innovative enterprise – a crucial component of the economy the UK need to grow not just to avoid deep economic scarring in the months ahead but to support great businesses, jobs and livelihoods in the future. Once we get to the other side, the new systems of engagement and support need to be retained. Good, after all, might come from all of this pain.

Image credit: flickr/Mike Cohen

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