Cybernetics, economics, thermodynamics and information

I had a really thought-provoking visit to Liverpool last Friday to talk with Mark Johnson and visit the Stafford Beer archive at the Liverpool John Moores University. That left me thinking about organisational cybernetics and the Viable System Model but also prompted much discussion about the use of machine learning with Adaptive Comparative Judgement – more of that later.

A lot to think about, and a lot to read.

But early this morning I started to think about Steve Keen, the post-Keynesian economist. It had been at the back of my mind that – and this is probably because he frequently references Hyman Minsky’s economic instability theory – Steve Keen’s approach is based on dynamic systems.

It was before 5 AM that I began searching YouTube for some of Steve Keen’s lectures. And there it was a reminder that his approach is underpinned by dynamic systems and though he doesn’t reference it, cybernetics. My recent introduction to economics has been through Modern Monetary Theory (MMT). Which is a very useful way of understanding the economy through a combination of sectoral balances and the circulation of government-created money. It is a very valuable framework for understanding money, finance and tax, but where I think it has limitations is in its lack of sociology and political praxis. And importantly it is not underpinned by the philosophy of dynamic systems, though it does model the behaviour of economic systems very effectively but in specific conditions. Steve Keen’s dynamic systems approach is a more sophisticated model but does not deny the validity of MMT.

As I was thinking about economic modelling from a dynamic systems approach while I was listening to Steve Keen’s lectures, there came a point in 2016 where he began to introduce energy into his modelling. That output is not just a function of labour and capital, but a function of labour, capital and energy. This at once does two things it introduces the first law of thermodynamics into his economic analysis but also incorporates environmental issues i.e. the use of resources.

The first law of thermodynamics states that in a closed-system (and Keen points out that there are a number of closed-system models in economics), energy can neither be created or destroyed. In cycles of production, therefore, we must constantly input energy. This is overlooked by economists according to Keen.

In more recent work, Steve Keen has introduced the second and third law of thermodynamics. He points out that these truly are physical laws unlike laws that are proffered in the social sciences. The second law states that in a system entropy is always increasing. Entropy is a measure of disorder; it is the number of possible states that each element in that system can be in. Thermodynamically, this can be interpreted as the transfer of ‘useful’ energy or work like mechanical energy into heat. It’s a slippery idea, I know. But it can be thought of as a shift from order to chaos. Information theory characterises information as ‘negentropy’ – the information is creating order. Information is an ordering process.

The following is a speculation then – a hypothesis:

  • in any production process – whether that be physical, or the provision of services – then energy is wasted (by releasing it as heat). And while entropy might be reduced (as the ordering process of production) within the waste, entropy is increasing.

Bringing these together then we have the possibility of bringing together economics, value theory, environment (climate change) and information (technology and platform capitalism).

Is consciousness – by that I mean self-awareness or even life – counter entropy? Is life the means by which order (information) is created? Is life the cybernetic response to an expanding universe?

 

 

A critique of the University of Cambridge’s external financing approach from the perspective of modern money theory

Remarks for the discussion at the Senate House, University of Cambridge on 6 November on the use of funds from £600 million bond issue

Deputy Vice Chancellor.

The Council has already approved of raising external finance by issuing bonds of up to £600 million. And I understand that this discussion is about the use of the funds raised. But I thought it important to explain that there are potential societal affects as a result of this kind of debt financing, since no Regent or any other person has done so previously, and that a stated aim of the University is to benefit society and not to act in a way that is detrimental to it.

I will try and explain as briefly as I can.

My starting point is a simple incontrovertible truth about a national economy, that is, the sum of individual deficits must equal the sum of individual surpluses. To illustrate this, if there was just me and the Deputy Vice Chancellor on a desert island where we agreed on an issued currency, if I was in deficit, that is earning less than I spent, necessarily the Deputy Vice Chancellor would be in surplus, earning more than he or she spent.

Within the closed monetary system of a national economy no one other than the state can create or destroy currency. Therefore, the sum of deficits must equal the sum of surpluses.

Let us now aggregate. If we consider three aggregations, as is the practice in national accounting, public, private and overseas: ‘public’ represents government spending and revenues, ‘private’ represents household and business spending and income, and ‘overseas’ represents imports and exports. Using the same reasoning about individual deficits and surpluses, the sum of public, private and overseas deficits and surpluses must be zero.

The UK economy generally has an overseas deficit, we import more than we export. Therefore, the rest of the world is in surplus with the UK economy. In managing an economy, a government should ensure that the private sector is running a surplus so that people, households and businesses can accumulate savings to cope with changes in the economy. The normal operating condition of public finances is in deficit. This ‘sectoral balance’, as it is called, reveals that a national economy is nothing like the economy of a household or business.

But UK governments over the last forty years have become preoccupied with treating the national economy as a household and a key economic mission has been in balancing the books or reducing the deficit or recently in its more extreme form, ‘austerity’.

What is the effect of this? Overseas deficits have remained broadly constant, so reductions in public sector deficits have resulted in the reduction in private sector surpluses. This reduction in private sector surpluses does not affect the sector evenly. The poorest households become increasingly indebted and the credit is provided by the wealthiest in the private sector. Austerity exacerbates a private debt-based or rentier economy, where existing wealth is expanded through debt interest and rent. As the state withdraws from using fiscal policy, in other words, as it stops investing, private debt and credit become the dominant economic form.

So, as government attempts to reduce public deficits, by cutting spending on things like higher education the poorest in society are under increasing financial pressure. Meanwhile universities are forced to raise finance in other ways and this simply adds to the problem.

There is a further consequence of public deficit reduction that was recognised by both Marx and Keynes. When conditions lead to a private debt-based economy or rentier economy, the investor is less likely to invest in the productive economy. That is in enterprises that deliver the things that we need as a society. In a debt economy demand is fickle, it is reliant on household debt and inflated assets. The risk of making profits from lending is much less than investing in the productive economy. Investing in manufacturing, for example, becomes much less attractive, it is much more attractive to live off interest and rents. This has an impact on jobs and on the creation of long-term meaningful work. This contributes to undermining liberal democracy (see for example the EU referendum result, or the US presidential elections in 2016).

So, there is a great deal of demand for debt, it is bought and sold and traded like a commodity. Financialization is the business of using low-risk low-return debts such as that generated by the University’s bond scheme and using it to construct portfolios that feature a balance of high-risk speculative investments and safer investments such as government bonds. Financialization involves securing marginal profits from speculating on debt, interest and risk using sophisticated financial products. This kind of financialization led to global and political crises in the 1920s and a major financial crisis in 2008 (among others). By entering the debt economy, the University contributes to the problem.

It may seem expedient to the Council to proceed with this proposal since the University must sustain its work. I accept that the decision has been made. However, I just wanted to explain that this is not a politically or economically neutral endeavour. From our privileged position we have a duty to offer moral and intellectual leadership and must at least be aware of what we are complicit to in issuing over £0.5 billion of bonds. I welcome the Vice Chancellor’s commitment to more robustly challenging government’s higher education policy, but we must match this with our actions.

Dr Steven Watson

Faculty of Education and Wolfson College

For further reading on modern money theory:

Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.

Nersisyan, Y., & Wray, L. R. (2016). Modern Money Theory and the facts of experience. Cambridge Journal of Economics, 40(5), 1297–1316. https://doi.org/10.1093/cje/bew015

Wray, L. R. (2012). Introduction to an alternative history of money. Working paper, Levy Economics Institute of Bard College.

Wray, L. R. (2015). Modern money theory: a primer on macroeconomics for sovereign monetary systems (2nd edition). Houndmills, Basingstoke, Hampshire ; New York, NY: Palgrave Macmillan.

That’s all very well but as a nation we just can’t afford it

Health and social care and education are now just unaffordable. There are too many old and sick people and too many people want to go to university. We can’t afford it. We have to do something different, they say.

However, affordability at the level of a nation is widely misunderstood. The common metaphor for a nation’s finance is drawn from household budgets and an appeal to prudence. Dickens expressed this through the character of Wilkins Micawber in David Copperfield,

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

This we are told is the basis of sound fiscal management of a national economy – the books should be balanced. We are reminded of this on a daily basis in the news and media. Recently when the UK Prime Minister, Theresa May, announced additional funding of £20 billion for the National Health Service, the first questions from the press were “where is the money coming from?” and “will there be additional taxes to cover the cost?” The Micawber principle is deeply embedded in public discourse. Indeed to suggest otherwise is considered to be incompetent or economically reckless, or both.

What the mainstream media rarely talk about is the differences between a national economy and a household. The difference is very important in understanding the nature of public spending. What makes a household different to a nation is that most nations are the issuers of the currency used in that nation. Households do not in general issue their own currency. This is an essential fact in understanding a nation’s finance. The demand for that currency is a consequence of taxes having to be paid in the national currency.

The next bit takes a little bit of thinking about. It is worth allowing your imagination space to contemplate what I am about to say to assure yourself of its validity.

The sum of all surpluses in a national economy must equal the sum of all deficits. 

Let us unpack this with a thought experiment. Imagine there are just two of us on a fabled desert island. We decide that we are going to issue a currency and agree that is the only legal tender on the island. If one of us, for some reason or another is acquiring more currency than they are spending, then that person is running a surplus. It follows then that the other person must be in deficit – they are losing more currency than gaining. Of course, no one would issue a currency for two people, but this does illustrate how in a simple case, with a single legal tender, deficits and surpluses must sum to zero. If we now start adding people into the economy the same accounting fact must hold; all deficits and surpluses must sum to zero since there is only one source of currency.

The zero-sum of deficit and surpluses is profoundly different from the Micawber principle of income and expenditure. The implication of this is that if the government tries to generate a surplus by reducing the difference between spending and taxation, members of society will have to start to carry a deficit (and accumulate debt) in order to meet the needs of the nation. At the same time, public services are run down as result of lack of funding. Yet a government, as the currency issuer, has the capacity to create money to spend on things like health and education. In fact, a government with a sovereign currency (i.e. one that is not pegged to another currency) does not need to borrow money to spend, it has the power to create currency to spend on the things we need, like health and social care, education, housing, welfare, infrastructure, defence and an industrial strategy (secure and meaningful jobs).

It is incorrect then to argue that public services are unaffordable, the choice is to fund them through public funding or through private debt. I know which I prefer. Political activists are quite right in saying that austerity is a political choice and not an economic necessity.

I am going to end here, but no doubt, there are many questions from this which I will address in subsequent posts. Questions like:

  • How does this relate to the £2 trillion national debt in the UK?
  • Doesn’t currency creation lead to massive inflation?
  • Why does the mainstream media insist on the Micawber principle?

Acknowledgements

I have not referenced these ideas and none of theme are mine, so I would like to acknowledge some sources, past and present: Bill Mitchell, L Randall Wray, Stephanie Kelton, Warren Mosler, Ellis Willingham, John Maynard Keynes, Karl Marx, Win Godley, Alfred Mitchell Innes and all the Modern Money Theory proponents on social media #learnMMT

A quick response to Lord Willetts on intergenerational equality (Resolution Foundation Report).

This is a quick response on Willetts’ talk in the Imagine 2027 series at Anglia Ruskin University last night.

It is remarkable that the liberal wing of the Conservative is being forced to respond to the Labour Party’s progressive economic turn.

Willetts’ considers that intergenerational equality is driven by birth rates, a largely Malthusian idea. It assumes that birth rate causes economic conditions, whereas the relationship is probably reciprocal i.e. birth rate is as much influenced by economic conditions as vice versa.

Willetts is insistent on fiscal conservatism, that means taxation must be greater than or equal to public spending.  Based on the accounting fact that all surpluses and deficits within an economy must sum to zero, if fiscal conservatism is pursued with an overseas trade deficit, debts in the private sector continue to accumulate. At the same time, investors become reluctant to invest in the ‘productive’ economy. Fiscal conservatism leads to inflated asset prices (like property) a rent-seeking economy and growing wealth inequality.

These are the economic conditions that we have been in since the mid-1970s and has been the source of much of what we describe as intergenerational inequality.

The solution is fiscal policy (spending in the public sector, regional investment and industrial strategy). This will encourage investment in the productive economy, create worthwhile and sustainable jobs, improve our trade deficit, lower inflated house prices and counter rent-seeking speculative investments. This should be accompanied by progressive taxation, but I don’t believe that taxation should be punitive but should support fair distribution of wealth (no, I am not that nasty socialist that wants to go after the rich that Willetts portrays). Moreover, it will reduce the demand for government bonds (national debt) because investment in the economy would be less risky, bonds become less appealing.

Willetts and the Resolution Foundation’s plan proposes increased taxation to pay for public services (fiscal conservatism is not negotiable, ergo neither are inflated asset prices nor is the rentier/ private debt economy). In some cases, the taxation is hypothecated. On the whole, the proposal for paying for public services and redressing intergenerational inequality is through taxation (in some cases hypothecated and overall regressive).

Sadly it won’t work.

Willetts is a charming and an engaging speaker and speaks with authority, but he is trying to sell snake oil and it is not to be trusted. He is trying to make a plausible case for the continuation of debt/ rentier capitalism mitigated by regressive taxation. A fool’s errand.

 

The Higher Education pensions dispute: a perfect storm of neo-liberalism, marketisation and austerity

The current dispute between the University and College Union (UCU) and the representative body of the employers, Universities UK (UUK), is over imposed cuts to pension benefits. According to the UCU, the annual retirement income of academics will be reduced by 10 to 40 percent. This is on top of real-terms pay cuts of 19.5 percent since 2009/101http://www.ucu.org.uk/circ/pdf/UCUBANHE14.pdf, while surpluses in UK Universities have gone up from £1.85 billion in 2014/15 to £2.34 billion in 2015/162Ibid. The accounting model changed in 2016/17 but the sector continued to secure considerable surpluses..

The dispute is more than about pensions though: on the surface, it appears to be a debate about the justification for changes to pension benefits, but beneath is a fundamental argument about political economy and the further push toward a privatised and marketized higher-education sector. Within the sector, within universities, decisions are being made without sufficient democratic scrutiny from members of staff and the wider community. Moreover, many academics may be unaware of the economic underpinnings of what appears to be conflict over pension affordability and university staffs’ pay and conditions. I set out here the underlying political and economic issues that are driving policy in government and that have led to the decision to cut pension benefits. I hope you will see that the pension cuts are the symptom of a deeper malady. I wish to show that the inherent threats to higher education are way beyond being about the comfort of academics in their retirement. And that anyone who believes strongly in the value of scholarship, research and learning should show solidarity with the striking members of the UCU.

I begin with some background to the dispute over pensions and the role of my institution, the University of Cambridge, which along with Oxford has taken a particular stance. I follow this with a quick summary of the economic context. Finally, I bring these elements together and demonstrate that we are in the conditions of a perfect storm for higher education. The underlying debates about the projection and level of risk in the pension fund are connected to government economic choices.

Finally, I argue that universities have a moral duty and should not simply accept the political and economic orthodoxy, rather than acquiescing to the parochial rationality of neo-liberalism and marketization.

Background to the dispute

The Universities Superannuation Scheme (USS) was valued at £41.6 billion in 2014 and £60 billion in 2017. The most pessimistic valuation leaves the pension fund with a shortfall of £5.1 billion in 2017. On the other hand, a best estimate valuation suggests a surplus of £8.1 billion. The question of whether there is, in fact, a shortfall depends very much on the model used to calculate future liabilities, growth and risk. An important factor in this is what is deemed to be an acceptable level of risk. Universities have been particularly keen to reduce the level of risk and a strategy of “de-risking” has been adopted. Equities, are higher risk investments than government bonds or gilts but offer higher returns. However — and I shall explain why in the next section — gilts offer a much lower rate of return than equities. Between 2011 and 2017 the percentage of the USS fund that has been in equities has reduced from 55 percent to 37 percent. While the amount invested in gilts has gone up from 13 percent in 2011 to 31 percent in 2017. Reducing the level of risk leads to a reduction in the rate of returns and is a factor in the pessimistic valuation of the USS fund.

It is the issue of risk that is central to the current dispute. According to Michael Otsuka, who analysed the results of the employers’ consultation over USS3https://medium.com/@mikeotsuka/oxfords-and-cambridge-s-role-in-the-demise-of-uss-a3034b62c033, only a minority (32 percent) of employers were looking for changes to the way in which contributions are set and assets and liabilities calculated. In other words, most employers were happy with the scheme as it stood. However, 73 percent of Oxbridge institutions (which presumably includes constituent colleges as well as universities) were opposed to the current arrangements.

The USS is based on last-man-standing mutuality which means that should all the universities go bust the liabilities would be passed to the last remaining universities. This means that Oxford and Cambridge, as the richest institutions, would bear the liabilities in the unlikely event that the other universities went to the wall. This also assumes that government would not intervene should the whole of the higher education sector go in to complete meltdown.

Otsuka points out that in their submissions to the September consultation on USS both Oxford and Cambridge expressed concern about the level of risk in the last-man-standing scheme. Cambridge objected that:

The University (and the other financially stronger institutions) continues to lend its balance sheet to the sector, which contains the cost of pension provision for all employers. In a competitive market for research and student places the University would be concerned if this appeared to be having an adverse effect on the University’s competitiveness (by allowing competitor universities access to investment financing or reducing their PPF costs in a way that would not be possible on a stand-alone basis).

Within this, Cambridge acknowledges that higher education is and will remain a competitive ‘market’, there is no sense in which Cambridge characterises itself as a public institution there to provide a universally available service in collaboration with the rest of the sector.

This also became evident to me when the government were trying to hurry through the Higher Education and Research Bill at the time the General Election was announced in April 2017. I approached the Conservative Member of Parliament, in whose constituency my Faculty sits, with objections to the Bill. Heidi Allen MP explained to me in her response, that the University of Cambridge had already been in touch with her to explain that they were happy with the Bill as it stood. I am aware how Cambridge, and most likely Oxford too, are seemingly sanguine about the marketisation of higher education and are preparing themselves to exist in this environment.

USS have reacted to a minority (42 percent), of whom, according to Otsuka, Oxford and Cambridge are the most prominent and hawkish members. The majority, however, were happy with the current levels of risk. The UCU describe how on the 23 January 2018, Chair of the USS Board, Sir Andrew Cubie, used a casting vote at a meeting of UUK-UCU Joint Negotiating Committee to remove Defined Benefits from all members of USS. The USS now transfers to a Defined Contribution scheme, where all contributions are placed in an individual investment portfolio. The risk is entirely transferred to contributing members of the USS. It also means a reduction in pensions of between 10 and 40 percent, particularly affecting younger entrants to the scheme.

The national economy does not work like a big family home

It is a common belief that a national economy works much the same as a household; that income must at least equal outgoings and preferably income must exceed expenditure – for that rainy day. Yet, there is a major difference between household economics and a national economy. In a household economy, expenditure is independent of income, one or both can change without really affecting the other. In a national economy, government income or taxation is dependent on its spending. The reason for this is that government spending is the only means by which currency can be introduced into that economy. Government spending creates currency, taxation effectively destroys it.

Within a national economy, all deficits and all surpluses must sum to zero. To understand this, imagine if there were just two people in a national economy. If one person has a surplus, i.e. they have more income the outgoings, the other person must be running a deficit, they must have more outgoings than income. The sum of deficits and surpluses is zero because there is a fixed supply of currency. Now imagine adding more people until there are 60 or 70 million, the sum of deficits and surpluses must still be zero for a fixed supply of currency.

By convention, nations divide economies into three sectors: the public sector (government spending and taxation) the private sector  (households and businesses) and ‘overseas’ (imports and exports). The sum of public-, private- and overseas-sector surpluses or deficits must sum to zero. The UK has an overseas deficit, we are a net importer, so currency is leaving the UK4It is not really leaving the UK, more accurately it means there is domestic accumulation of Sterling as a consequence of overseas trade.. We have a public-sector deficit, government spends more than it receives and the private sector is in surplus, households and businesses have more income than expenditure. It is important to realise that this is an aggregate surplus across the whole private sector, it is just the wealthy individuals and businesses that run a surplus, while poorer households are running a deficit and accumulating debt.

The austerity measures of the last eight years were intended to reduce public-sector deficits. Reducing public-sector deficits while maintaining an overseas trade deficit reduces private-sector surpluses and puts more of the poorer households and businesses into debt. The wealthy are then able to lend their accumulated wealth to the poor profitably.

Austerity uses a household analogy to justify reducing public-sector deficits, where in reality it increases the debts of the less well-off and the wealthy can the profit by lending. Indeed, it is preferable for the wealthy to profit through lending rather than investing in productive business and enterprise. If the poorer are in debt, they will be reluctant to spend, so aggregate demand is reduced making business investment riskier and less attractive.

Austerity is an exercise in trickle-up economics and the poorer are paying rents (that can be rents on property or money) to the rich. This leads to an accumulation of currency and creates a demand for government bonds or gilts as a low-risk means of saving. This is also referred to as the national debt, which is not really debt, but savings. The high demand for gilts (and so-called high national debt) reduces the returns on them. In an investment-led economy, money invested in gilts would more likely be invested in businesses, because government spending and investment increase aggregate demand and the risk of business investment is reduced.

Neo-liberalism: choice and competition

Neo-liberalism is closely aligned to austerity, it is based on the belief that the free market is the most efficient means of exchanging goods and services and that competition results in lower prices, efficiency and improved productivity. A further characteristic of neo-liberalism is the transfer of public services, utilities, nationalised industry and public transport to the private sector. The first moves toward neo-liberalism in the UK were in the 1970s. In 1976, Denis Healey, the Labour Chancellor of the Exchequer, accepted a loan from the IMF, attached to it were conditions that forced austerity, i.e. reducing public-sector deficits. When Margaret Thatcher came to power in 1979 public assets were sold off to individuals and investors, including public housing, utilities and public transport for example. At the same time, there was increased financial liberalisation which facilitated more lending. Outsourcing and private finance expanded through John Major’s premiership and was further extended by Tony Blair during the New Labour government. While it might seem that privatisation reduces the size of the state, the state is still required to fund public services such as health, education, prisons and transport infrastructure Privatisation presents an opportunity for businesses to profit from the provision of public services. Importantly, losses and risk are largely underwritten by the state. The provision of public services by the private sector is an attractive investment: in a period of austerity, with low aggregate demand in the private sector, investing in public service provision with socialised risk, is very attractive.

A further lucrative low-risk investment is the financing of capital projects in the public sector, so-called Private Finance Initiatives (PFI), Public Private Partnerships (PPP) or Private Placements where an institution issues a bond to raise finance.

Privatisation, marketisation, neo-liberalism and austerity are beams of the same sun. They don’t happen without political will and citizen consent; the neo-liberal project has to be lobbied for and promoted. The project has many outriders, think tanks such as the Adam Smith Institute, the Institute of Economic Affairs, and Policy Exchange, all funded by business and wealthy free marketeeers (sometimes transparently but quite often opaquely), to assemble evidence, create arguments, lobby and advocate, through the media, the benefits to the public of choice, competition and private-sector efficiency and innovation. Of course, this is driven more by a fundamental need for capital accumulation, than it is out of a concern for the provision of quality public services. Though the neo-liberal project attracts its enthusiasts and disciples who espouse the benefits of autonomy, individualism, efficiency and innovation.

Neo-liberalism and austerity have been central to growing economic inequality , in addition, the privatisation of public services has contributed to a growing democratic deficit, a powerlessness over the conditions of the community, where service provision is provided by an unaccountable public service . There is a growing inequality in the access to public services, where the principle of universal provision is replaced by an increasing amount of part or wholly private-paying services.

A perfect neo-liberal storm in higher education

The pension issue in the UK’s higher education sector is a perfect storm in the progress of privatisation and marketisation. There are two aspects. Firstly, poor returns from government bonds (gilts) mean that a low-risk investment of the USS pension fund in bonds give returns lower than the consumer price index. Other types of investment, such as equities, are higher risk because of the low aggregate demand in the economy. This is a consequence of austerity and the attempts by successive governments to manage the economy by balancing the books i.e. by reducing the public-sector deficit. Austerity leads to deflationary conditions with low aggregate demand in the economy and high demand for low-return low-risk government bonds. This makes the USS fund vulnerable to pessimistic valuations and to anxious evaluations of risk.

Secondly, the government continues to pursue an outsourced, privatised and marketized model for public services. This is driven by a capitalist lobby that seeks to maintain and expand a rentier economy. The introduction of student loans, tuition fees and subsequent increases are all part of the commodification and privatisation of higher education. The Higher Education and Research Bill that was hurried through before the general election in 2017 further embeds the consumerization of higher education, with the creation of the Office for Students and providing opportunities to establish challenger institution to increase competition in the sector.

The government claims that the reforms introduced since 2010 have resulted in more disadvantaged young people entering higher education, but the evidence suggests that there is an uneven distribution, with disadvantaged students more likely to take up places in less prestigious institutions5https://www.tes.com/news/school-news/breaking-news/new-figures-reveal-dearth-poor-students-russell-group-universities. Further competition and marketisation in higher education will lead to greater inequality, as institutions are forced to compete for the most university-oriented students, generally those from backgrounds with high social, economic or cultural capital.

Higher Education institutions have increasingly adapted to the neo-liberal reforms . This has seen the emergence of ‘New Public Management’ of ‘new managerialism’ as a hierarchical system of control and performativity. The cultural shift is away from democratic governance and collegiate professionalism to executive decision making principally drawing on management accounting and metrics. The disciplining and performative and managerial cultures lead to conformity and undermine academic freedoms except for, say, a few at the pinnacle of elite institutions.

Conclusion

I hope I have demonstrated the connection between the pension dispute, the introduction of student loans, the privatisation and marketisation of higher education and our current national economic policy. For me, as I take part in UCU’s action over the pensions, it is not just about being comfortable in my dotage. I love my job, I love the environment in which I work and I love working with students. There are so many achievements that my institution and the UK higher education sector, as a whole, can be proud of and with which it has led the world. So my motivation is to prevent public education from sleepwalking into becoming a further fragmented and inequitable system. A system that treats students as consumers and undermines scholarly inquisitiveness and the pursuit of ideas, ideas whose inspiration might arise from unusual and unconventional lines of inquiry. The performativity of neo-liberalism fosters a conformity, a narrowness and too often the safe and mundane.

I say we are sleepwalking, because it feels like this here in Cambridge, decision making has become concentrated with a few, no doubt highly-skilled and rational managers. That same rationality appears to have usurped the University’s democratic governance. Of course, it makes sense to reduce the University’s liabilities and exposure to risk to attract private finance, it makes sense to make the University competitive internationally and of course, there is logic in reducing staff pay and conditions to maximise surpluses. But these are rational judgements based on an acceptance that austerity and neo-liberalism are a) necessary and b) the only choice of political economy. It is not the only choice and, as I have argued, austerity is a political choice and not an economic necessity and in accepting it as though it is, we, as a University, make a moral choice. Or worse, we dispense with moral deliberation and accept that growing inequality and a deepening social crisis in society is simply a cost, a risk that can be put into and evaluated in our management analysis. If a university fails to accept its moral mission and fails to engage in genuine democratic moral deliberation over what society should look like, then it has failed as an institution. It may have secured private investment and have good metrics, but, nonetheless, it has failed.

The reason I take action as a member of the UCU is to encourage the higher education sector — and especially the elite institutions — to take responsibility and offer moral leadership. And not to acquiesce to those who look to perpetuate a rentier economy. Universities must offer a robust independent voice based on independent scholarship and promote the same moral purpose and critical thinking in their students.

Finally, I ask: colleagues, students, parents and communities please stand in solidarity with the striking members of the UCU.

References

Radice, H. (2013). How we got here: UK Higher Education under neoliberalism. ACME: An International Journal for Critical Geographies, 12(2), 407–418. https://acme-journal.org/index.php/acme/article/view/969/823
Stiglitz, J. (2012). The price of inequality. Penguin Books.
Piketty, T. (2014). Capital in the twenty-first century (A. Goldhammer, Trans.). The Belknap Press of Harvard University Press.
Harvey, D. (2011). A brief history of neoliberalism (Reprinted). Oxford Univ. Press.

Does deficit spending increase national debt?

A national economy, with a sovereign currency, is big money system. Unlike a household the independent inputs and outputs are not income and expenditure. The input to a national economy is currency that is introduced into the system through public spending. The output is the money that leaves to go abroad, as a trade deficit, currency that is saved by the private sector (households and business) and money that is removed from the system through taxation.

The diagram below illustrates this system for the UK in 2016. The government spent £745 billion6All data is approximate and values are indicative. Data was drawn from www.ukspending.co.uk into the economy on things like health, education, welfare and pensions and defence etc. It removed £680 billion in tax (income tax, corporation tax, VAT etc).

We are net importer, so our trade deficit was approximately £87 billion. In other words this currency left the domestic economy.

To balance this, private sector savings had to reduce to by $22 billion to meet the shortfall. For many individuals this means increased private debt. In other words £22 billion was introduced into the economy from the private sector. The private sector was using reserves or borrowing to deal with a private sector deficit created by government economic policy.

This model is the idea of former University of Cambridge economics professor and government adviser, Wynne Godley. Godley proposed that all surpluses had to match all deficits in the economy. This an accounting fact and not an economic theory.

A government with a sovereign currency does not borrow to spend . It simply credits the accounts of health trusts, local governments and welfare recipients.

Then, it is important to understand how the national debt arises.

Government bonds or gilts are used to reduce excess reserves accumulated in private sector saving accounts in commercial banks. This is necessary to maintain interest rates. If savings are too large then interest rates, as a result of supply and demand, will have to reduce. In order to stop them going negative the government has to reduce the amount of saving by exchanging currency reserves for bonds.

The private sector and its investors, in times of economic certainty prefer to limit risk. Government bonds are one of the least risky investments even though returns might be low. When the government cuts spending, like the Conservative-led government in the UK since 2010, demand reduces and private debt increases. Investing in business or development becomes risky, there is uncertainty that there will be sufficient demand to make the business sustainable. Currency that has gone overseas in trade or that has been accumulated in the domestic private sector ends up in banks and it is necessary for the government to exchange these for bonds, i.e. to increase the national debt.

This explains why, even when we cut spending, the national debt does not reduce and can even increase (see chart below). In fact, taking Wynne Godley’s approach demonstrates that the normal operating condition of a healthy economy is with a public sector deficit.

The period from 2010 shows a decrease in the deficit yet the national debt increased. It also happened 2004 to 2007 and 1993 to 1996. National debt is as much dependent on economic confidence as it is on public sector deficit.

Reference

Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.

Modern Monetary Theory (MMT) does not change things in an instant

The idea that MMT can just change politics and economics the moment people engage with its ideas is wrong.  While I very much believe in the efficacy of MMT, I do not accept some of the views about how it should be taken up by politicians.  Particularly, the suggestion that leftist and progressive politicians should lead with the ideas of MMT.  That they should be bold in talking about the real limits of government spending, when that government has the sovereign powers to create a currency.  From the perspective of MMT, currency is introduced into the economy through government spending,  it withdraws currency through taxation.  This is contrary to the orthodoxy of seeing taxation as a revenue and government spending as an expenditure.  MMT aficionados become hot under the collar when they hear politicians, media presenters and lay persons relating tax to spending:  that all government spending must be matched up to tax revenue.

A short while back I found myself responding to a blog post from the heterodox economist Bill Mitchell. British Labour has to break out of the neo-liberal ‘cost’ framing trap. Bill was incredulous with the British left, that John McDonnell (Shadow Chancellor) and Jeremy Corbyn (Leader of the Opposition) had abandoned progressive economics. There is another out to day. British labour lost in a neo-liberal haze. Mitchell’s argument is that UK Labour are being lured into the neoliberal thinking because they are explaining their economic policy based on tax and spend.  A crime against MMT.

Now I have greatest respect for Bill Mitchell, I have learnt a great deal from his books, his blog and various videos on YouTube.  It is his writing that has helped me understand post-Keynesian economics and MMT.  It has empowered me politically.  While the economics is crystal clear, I feel Bill has a blind spot politically.

I’ve also had arguments on social media with MMT supporters about this.  And it is perhaps my own research in education that makes me realise why the introduction of a new theory or a new idea—no matter how brilliant, how insightful or how effectively and accurately it reflects the real world—does not change people’s thinking and behaviour easily.

The reason for this is to do with human reasoning.  There is a duality in our reasoning facility.  At one level, we are rational and logical.  We have the capacity to consciously reason based on the evidence, assumptions and premises in front of us.  At another level we are highly intuitive, we make judgements based on the situation we see in front of us.  With this kind of reasoning we draw much less on our capacity to consciously reason.  We rely on our experience and judgement.  We rely on our memory and previous experience.

For the most part, humans are much more reliant on intuitive reasoning than they are conscious reasoning.  The reason is simple, conscious reasoning requires much more effort, the mental processes required draw on the body’s resources.  Unlike a powerful computer, human beings are not able to sustain conscious logical and deliberative reasoning for sustained periods.  We therefore must rely on our intuitions.

But if we were simply to rely on our intuitions, our social lives would be chaotic.  It would be an interaction of individuals making fairly random intuitive judgements and responses to the situations they met.  Fortunately, we have culture to overcome this.  This provides us with a shared pattern of behaviour to make our actions more predictable and more understandable for each other.  Call it what you will, these are life’s protocols, mores, manners, and even language.  It is like much of our behaviour is pre-programmed but constantly adapting. Vary it too much and your behaviour appears abnormal or even unacceptable.

My research has been largely about the professional learning and development of mathematics teachers in secondary schools.  I have observed many lessons and they mostly follow similar patterns, like a cultural script.  The teacher begins by explaining or demonstrating a mathematical method or idea.  The students will follow this with practice on exercises or working through textbook questions.  Even the dialogue follows fairly predictable patterns.  Notably, the initiation-responds-feedback routine of teacher-student dialogue predominates.  The teacher asks a closed question to the class, a student responds and the teacher replies yes or no.  It is predictable classroom rhetoric.

The classroom is an intense and demanding place.  The teacher has little opportunity to consciously reason through their actions and decisions in carrying out their teaching.  They are relying on patterns and routines, heuristics and cultural scripts in order to make complex social interactions more predictable.  By the same token, students also become familiar with the cultural script and the ground rules.

And this is how I understand the frustrations of MMT economists.  Why is it that we have a theory that is so good, it explains the economy so effectively and so comprehensively but everyone is not using it?  And I felt the same way when I started researching the professional learning of mathematics teachers.  Why is it that we know so much about learning, through a combination of anthropology, sociology, psychology and neuroscience?  Why isn’t the teaching and learning that I observed in the mathematics classroom reflecting this knowledge?

My explanation, which draws on the work of philosopher and cognitive psychologist, Philip Johnson-Laird, is in the duality of human reasoning and the limitations of our capacity to consciously reason.  Furthermore, it is our reliance on culturally defined patterns of behaviour and thinking.

That is not to say, humanity is incapable of change, that it is incapable of adopting new ideas, new thinking and acting in different ways.  However, the assumption that new ideas will simply change behaviour, no matter how good that idea is, simply misunderstands the nature of human thought and behaviour.

In terms of economics, the orthodoxy that government spending is dependent on taxation is not simply a construct of neoliberalism—of liberal economics—from the last few decades.  No, once we start to dig and search for the origins of this thinking we go back centuries.  Mark Blyth, in his recent book, Austerity: The History of a Dangerous Idea, sees the source of cultural thinking about economics in the work of John Locke in the 17th century.  It can be tracked through the work of Adam Smith and David Hume, for example.  It is embedded within cultural thinking about political economy, it is a fundamental cultural artefact: that in order for government to spend it must raise tax.

Of course, this is reinforced by the media and by mainstream economics.  It is easy for people to accept since it is analogous to every individual’s experience of their own personal finances.

So, we do not simply change people’s thinking with a radical idea.  We need so much more.  Education is at the heart of this, people need time to think about and muse on how the economy works.  People need teachers to guide and challenge their thinking and help bring heterodox economic ideas into everyday use.  It is complex, demanding and it needs time and investment.

I acknowledge therefore, that no political leader, however progressive will be in a position in the current cultural orthodoxy to change thinking.  No matter how eloquent, how compelling and how richly they explain MMT, without addressing cultural dispositions towards economic ideas, thinking will not change.

However, what political leaders can do is move the argument on.  They can present progressive economic ideas in terms that mean things to people.  At the same time, as Jeremy Corbyn and John McDonnell have done, they can get more people talking about how the economy works and in many cases people are reaching for further understanding.  This presents an opportunity for heterodox economics, such as MMT.  People are looking for something different.

It is important to think about economics in political economic terms.  Orthodox economics lends itself to the worst forms of exploitative capitalism, like for example, neoliberalism.  There are indeed vested interests in retaining the status quo.  You don’t have to listen to the BBC for very long or read any of the UK’s leading newspapers to realise how embedded politically and culturally, orthodox economics is in our society.  Vested interests prefer it that way and will do everything to retain it.

It is necessary therefore, that any project to revolutionise the economic thinking of the masses is seen as a political project.  That doesn’t mean that progressive forces seize power and impose new economic thinking.  No, it is a more consensual project.  One that must concurrently develop economic thinking and political purpose.  This is about the development of economic literacy in tandem with political empowerment.  These two elements are inseparable.  You can’t have political empowerment without economic literacy.  MMT aficionados recognise this and find it frustrating, understandably.  However, they must also recognise that economic literacy only comes through political empowerment and action.

I was listening to a podcast from Novara Media on Saturday as I pottered round the house. The Long Depression: Michael Roberts on Capitalism and Crisis.  The presenter James Butler questions the guest, Michael Roberts, about post-Keynesian economics.  As a Marxist economist, Roberts puts forward a view not dissimilar to the one that I present here.  It was interesting, as I was made to think about tensions between Marxist economics and post-Keynesian MMT.  The former, as described by Roberts, is rooted in a political struggle of between capitalist and proletariat.  On the other hand, MMT does not have the political dimension.  It is an economic model with political consequences.  As this discussion unfolded, between Butler and Roberts, I found myself in sympathy with both positions.  I have a good understanding of MMT but also recognise that economics is necessarily a political project. In other ways Marxist and post-Keynesian economics are not incompatible.

And this is why I ask that progressive economists back the UK Labour Party, Jeremy Corbyn and John McDonnell.  Their proposal for the economy, while not exactly in the language of MMT is not inconsistent with it either.  I refute the claim that it is neoliberal. If we are generous, we can see that they are attempting a combined political and economic project.  Increasing public spending, progressive taxation and potentially greater regulation of the financial sector.  However, they are using the language of the economy that people are familiar with.  As a political project, their aim, in my opinion, is to make government more democratic and transparent.  It through this that economic literacy can be expanded.

At a personal level, this is the first time in my fifty-two years that there has been anything close to the faintest sniff of something radical or different.  We must support it.

Labour’s Universal Free School Meals policy: an economic not an educational policy

Labour’s Universal Free School Meals Policy, for primary schools, funded by adding VAT on private school fees was generally well received. Those that opposed it, generally, did not see it as an economic policy and it perhaps reveals a limited understanding of how a nation’s economy work. So in this blog, I want to outline how our economy works. It is brief, so it may be a little crude in places. On the whole, though, I feel I offer a succinct explanation of the model.

No, don’t go anywhere! It’s worth reading. Really it is.

The recipe for happiness, according to Dickens’ Mr Micawber, is through fiscal prudence:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery (Dickens, David Copperfield, 1850).

It’s simple isn’t it? And if you follow these rules then you will be happy.

It follows then that the same rules apply to a national economy. Income £721 billion (from national and local taxation for 2017), annual expenditure £720 billion result happiness, annual expenditure £784 billion (all government spending for 2017), result misery.

Oh dear! No wonder there is so much misery about. We are in deficit to the tune of £63 billion. Surely, it follows then, that we have to make savings and cut back or increase taxation.

While this is the narrative that is perpetuated in the media and by government, it is not the way the national economy works.

A national economy is not like a household with incomes and expenditure. A household has money going in and going out again. A national economy does not have money going in and out of it, in the same way. The national economy includes all the money that is in its own currency. Some may get saved up, some my go abroad. But the only place that money is going to be spent is in the national economy, even if that activity is overseas.

The national currency is introduced into the economy through government spending. There is no other way of creating currency. The way in which currency is introduced by the treasury is by spending on health, education, defence and welfare, for example. The government either credits the accounts of public-sector organisations or gives contracts to private companies to provide goods and services.

A government’s currency is an IOU. The reason these IOUs have value is that the government expects us to pay taxes in the national currency. The government will not accept anything other than its national currency. We accept it as salaries and shops accept it because, essentially, we have to pay our taxes in the national currency.

Before a government can raise any tax it has to spend. It has to introduce IOUs into the economy. This year, in the UK, it will be £784 billion.

If we apply the Micawber principle and cut spending to try and get it down to £721 billion, you would expect tax revenue to reduce. The reason it doesn’t is because people and organisations increase their borrowing. Much growth in the economy in the last few years has been a result of consumer spending funded by private debt. Individuals and businesses (the private sector) have to borrow from commercial banks to help fund a reduction in public spending. Or they have to use up their savings. The government’s cuts in spending mean that public sector deficit is transferred to private sector debt.

Cutting public spending leads to a reduction in spending on things like health, education and welfare. We have to make decisions about what to spend limited resources on. We have to prioritise spending. This is austerity.

Austerity increases the amount of private debt, with households and businesses borrowing from commercial banks and lenders who profit from the process. Currency entering the system as a result of government spending becomes unevenly distributed. With the lenders and those with capital accumulating further, while the rest become poorer and indebted. It trickles up rather than down.

The accumulation of currency at the wealthier end of the private sector ends up in the banks. The treasury and Bank of England have to create bonds in order to buy back this currency to maintain interest rates. This is what the national debt is, it is not what we think it is. It is private sector-accumulation of currency.

A regressive taxation, one where the more wealthy pay a smaller proportion of their income and wealth in tax, than the less wealthy, adds to inequality. It also increases accumulation at the top end and adds to the national debt.

We need a progressive taxation, one that increases the proportion of tax paid by those at the top end and gives more income to those on lower incomes. I am not going to go through the benefits of universal welfare here. Abi Wilkinson offers an excellent explanation here in The Guardian. Kevan Bartle’s blog about Universal Free School Meals argues the benefits of this policy excellently, too. The important point is that this policy should be seen as an economic policy and not an educational policy.

The austerity programme (it has actually been with us since the mid 1970s, to a lesser or greater degree) is system that allows finance unrestrained access to our economy. Politically, by drawing on Mr Micawber, a consensus has been established amongst the electorate. Consequently, we find our public services starved of funding. But the Mr Micawber doesn’t work on a national scale and if applied, like it has been done,  it leads to growing inequality.

The government can increase public spending. Additional spending, more currency entering our economy, increased pay, better working conditions for teachers, more investment in research and development. And the currency that enters the economy does not just remain in schools, it is spent in the private sector. More wages, more spending in the economy, more tax revenues. It will not increase the deficit, but it will mean more money going to the less well off (including most public-sector workers e.g. teachers).

That national debt will come down if we have a more progressive taxation system, discouraging the accumulation of currency, and so the treasury does not have to issue bonds to maintain  interest rates.

We, like the US and many countries in Europe, need an end to austerity, an end to deficit reduction. We need to increase public spending and we need progressive taxation. Labour’s simple policy is the latter. It is a very good policy proposal. More of this please.

Further reading and information

You can read previous blog posts:

Taxation and government spending: which comes first?

There is plenty of money to spend on schools: a Modern Money Theory Perspective

More information about Modern Monetary Theory on this page:

Modern Money Theory

The following books are useful background and all readable:

Pettifor, A. (2017). The production of money: how to break the power of bankers. Verso.
Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.
Wray, L. R. (2015). Modern money theory: a primer on macroeconomics for sovereign monetary systems (2nd edition). Palgrave Macmillan.
Stiglitz, J. (2012). The price of inequality. Penguin Books.

 

Taxation and government spending: which comes first?

The common assumption is that the UK’s taxation is the source of revenue that pays for public services, health, welfare benefits, education and defence. It is often assumed, and commonly framed as, taxpayers money. I was having quite a discussion on Twitter about this. I was putting forward the idea that taxation is not a source of income. The following justification comes from Larry Randall Wray and is a view held by heterodox [1] economists who subscribe to Modern Monetary Theory or Modern Money Theory (MMT) (see Mitchell, 2016; Wray, 2015).

Wray explains the principles in the following video. If you want a brief overview read on.

[youtube https://www.youtube.com/watch?v=-KRi9nF8BiA&w=854&h=480]

Imagine year zero for a country’s economy, the notional point at which the economy begins. The first thing that the country has to do is invent a currency. In the UK we have the pound. The government creates a currency with which transactions and trade can take place. The government is the only institution that has the legal power to create that currency. Anyone else who tries to faces criminal prosecution.

At year zero, the UK has to introduce that currency into the economy, it can give it to its citizens and it can pay them to provide the things we need for our society. The government pays people to provide administration, build hospitals, schools, sports facilities and weapons. It can pay people who don’t have a job. It can pay people to be doctors, teachers and it can provide training for those individuals. It can pay for research and development.

It is only after the government has introduced currency into the economy that it can tax people and businesses. This flow of spending followed by taxation continues year-on-year. And in fact most of the time the UK runs at a deficit, there is lag between spending and taxation. Because spending precedes taxation. You can see this in the graph below.

gov-spending-and-revenue
Government General Expenditure (GGE) and Government General Revenue (GGR) (IFS source)

So what is taxation for, if it does not provide government its revenue?  Wray and other MMTers argue that it creates a demand for the currency, it makes it flow round the national economy. If we did not have taxes then the currency, the pound for example, would not be in demand in the economy. We need it because we have to pay taxes in that currency. Richard Murphy (2015) considers tax a kind of democratic subscription, it gives citizens a commitment and right to participate in democracy. Taxation is also used to redistribute wealth and to regulate inflation by increasing or reducing demand in the economy.

It is important to recognise that running an economy in deficit does not necessarily increase the national debt, because the national debt is not really a debt in the sense that we understand personal or household debt (Wray, 2015). The national debt are bonds created by the government to drain accumulated reserves in the banks. This represents the accumulation of currency in the private sector and technically speaking it is used to maintain the overnight interest rate. This, I understand is common knowledge for anyone in banking or finance.

So when a government talks about maxing out the government credit card, or leaving a debt for our grandchildren this is highly misleading. A government cannot run out of its currency. Therefore, there is really no excuse for not funding health and education and other public services properly.

Related blog posts:

There is plenty of money to spend on schools: a Modern Money Theory perspective

Education, policy and pedagogy: It’s the political economy stupid!

Note:

[1] Heterdox economics contrasts with orthodox or mainstream classical economics.

[2] 0n 22/2/2017 I noticed that this blog had been replaced with an earlier incomplete draft, I have now restored it

[3] Thank you to Sandra Crawford who introduced me to this excellent illustration of the ideas in this post.

[youtube https://www.youtube.com/watch?v=IhRzC_fERbs&w=854&h=480]

References

Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.
Murphy, R. (2015). The joy of tax: how a fair tax system can create a better society. London: Bantam Press.
Wray, L. R. (2015). Modern money theory: a primer on macroeconomics for sovereign monetary systems (2nd edition). Houndmills, Basingstoke, Hampshire ; New York, NY: Palgrave Macmillan.

Education, policy and pedagogy: It’s the political economy stupid!

At the heart of all the main issues in education at the moment is economics. In fact economics in education has become of increasing importance and is a growing field in itself. Analysis of data to evaluate education policy has been valuable in understanding how schools perform and the achievement and a progress of different types of students, for example.

This approach is in the tradition of classical economics. Underpinning classical economics is the idea that people make rational decisions within markets. This leads to econometric models that can be used to predict the behaviour of markets and the behaviour of the economy as a whole. In education, for example, it leads to predictions about earnings following participation in school-based programmes or interventions, the study of various subjects or attendance at Higher Education.

Classical economics sets its boundaries at the edges of the economic system. It does not concern itself with the political dimensions of economics, apart from say, informing policy makers on resource allocation. This rests on its fundamental principle of rational behaviour.

If we step outside classical economics, we can still see the distributions of wealth and power that classical economists observe, but we can also begin to see the forces that create these systems. It is not simply rationality with, as Adam Smith observed, an invisible hand ensuring that all would be fair in a freemarket society. Karl Marx’s critical analysis of capitalism in the three volumes of Das Kapital showed that the freemarket does not lead to a fair or equipatable distribution of wealth. It necessarily leads to the accumulation of capital. As a consequence there is an exploited working class. And hence economy is necessarily political.

One can be forgiven for thinking that in state education political economy can be ignored. The reason we think like that is that since the end of the Second World War and until recently, we have had no reason to think differently. But now we must. I shall explain by dividing the period between 1945 and the present into three economic phases.

The first phase is from 1945 until 1970. The post-war period saw considerable government spending on health and education and sat alongside a  freemarket economy. Education was grant-funded through local authorities. This investment was seen as a benefit to society as a whole. However, from the late sixties until the 1970s, things changed. The economic context changed and public education economics had to change in response. This leads to our second economic period between 1970 and 2008.

In the 1970s, there was a change from a mixed economy with public sector spending alongside a freemarket economy to neoliberalism, where there was much greater emphasis on the freemarket. During the early seventies there was a crisis in capitalism, in the UK this was characterised by inflation, decreasing company profits and increasing wage demands by the work force. In the end the unions lost, their pay was controlled and businesses were able to maintain their profits to some degree. The worst outcome was that the economic crisis was erroneously blamed on the unions, inefficient nationalised companies and a supposedly bloated public sector. When Margaret Thatcher was elected in 1979, she famously took on the unions, began privatising nationalised companies and reducing the size of the public sector. Underpinning this was the belief privatisation and marketisation was the best way to run our public services. The invisible hand would do its job. Neoliberalism was the political economy that continued until 2008. It was adopted by New Labour in 1997 and was supplemented by an increase in public spending. Although much capital spending in schools was from private capital. For large businesses, neoliberalism created opportunities to profit from public-sector services and subsidised by the state.

The preoccupation through this period of neoliberalism has been on the deficit in public sector finances. That is the difference between tax revenues and government spending. The preoccupation with eliminating deficit spending and an attempt to return a surplus in public finances has the effect of reducing private sector surpluses (I explain this in more depth here). In other words private sector borrowing has to increase, households become more indebted, house prices inflate. This creates demand in the economy (consumers are debt spending) and the banks profit. In 2008 this whole sorry pile of private debt was found to be overvalued and the big banks had to be bailed out by the state. Once again capitalism is in crisis. But the financial crisis of 2008 was a symptom of underlying problems brought about by neoliberalism itself.

The neoliberal period of unregulated freemarket capitalism has resulted in increased wealth inequality, while the richest 10 per cent or so, have got richer the rest have got poorer or are carrying considerable debt. Inequality in society is indicative of a divided and unhealthy society. Wealth and income inequality leads to democratic inequality, where the wealthy are in a position to influence government much more than the less well off. It also leads to health and education inequalities. Furthermore, it leads to a less productive society since there is less investment in workers and their development.

We find ourselves in period of post-capitalism or post-neoliberalism, the collapse of centrist politics is indicative of this also. No longer is the status quo working for a large proportion of society, this is evident in the election of an unequivocally anti-austerity leader of the opposition, and more dramatically the referendum result that will ultimately lead us out of the EU. This was the precipitation of an anti-establishment and anti-status quo vote.

In terms of the character of education, the three economic periods (public sector, neoliberalism and post-capitalism) have shaped schools and pedagogy in particular ways. During the public-sector period (1945 – 1970) practices and organisations were emergent, but drew heavily on the approaches used in traditional establishments, like for example, the grammar school. In an attempt to address diverse social needs and with new ideas developing in the fledgling field of education research, there were attempts to address individual needs using student-centred practices. However, the mainstay of educational practice drew on traditional teacher-centred practices, because it is much easier to prepare for and to manage classrooms.

The neoliberal period (1970 – 2008) can be characterised by increasing accountability, increasing managerialism and perfomativity. The emphasis on accountability means that teachers are expected to ensure students achieve targets and expectations in terms of progress and examination results. There is increased surveillance and attempts to identify effective practice in terms of progress and attainment. In the 2000s this extended to a prescription of classroom practice and pedagogy. While practice remains largely traditional, there are elements of progressive student-centred teaching, but on the whole the latter, apart from among enthusiasts, was superficial. The importance of the social aspects of learning, such as discussion and dialogue, the importance of affect and motivation and the recognition of constructivist learning were recognised and mandated in official views of pedagogy. However, given the demands placed on teachers and the intensity, as a result of being held increasingly accountable for students’ results, these elements were only really implemented in a performative way, to please observers and inspectors rather than placing them at the heart of education.

The post-capitalism period (2008 – present) continues a neoliberal theme, but it does not hide the crisis beneath. Since 2010 the Coalition government and the  Conservative government from 2015, have extended the privatision projects brought in by previous governments. Academies are effectively outsourced education service providers to the state. There is increased emphasis on quantifiable outcomes to monitor the quality of the service provided by schools. In an attempt to make the educational commodity more clearly defined the student-centred aspects of pedagogy have been abandoned and even vilified. The emphasis has been increasingly on narrowly defined definitions of knowledge and the reduction of learning to a process of memorisation of increasingly complex facts. The crisis beneath this, within the post-capitalist school, is the overall reduction in teachers’ pay and conditions, longer working hours, excessive workloads and deprofessionalisation. The recruitment and retention of teachers is increasingly challenging. There are also deep concerns about the impact of intense school experiences on children’s mental health and wellbeing.

Economically, we move into a post-capitalist post-neoliberal world in which economic, technological, social and political forces are undermining existing approaches. Yet the government continues to press ahead with a privatised and marketised approach to education. What we need to do is develop schools and educational practices to respond to community needs in a more holistic way and to draw on contemporary understanding of learning in terms of culture, socialisation and cognitive development. We cannot return to public sector nationalisation of state education, but we must reduce the managerialism and hierarchical structures of schools and academy chains and improve the working conditions and professionalism of teachers. They can be mutualised as community co-operatives, to devolve decision making and to collaborate with communities. This is an antidote to the corporate managerialism of the neoliberal period. While schools cannot mitigate for wealth inequality, they can connect with local communities and help develop confidence and build social and cultural capital. Austerity (deficit reduction) is a political choice and not consistent with the post-capitalist period we find ourselves in (I elaborate on this in a previous post here).

The driving force in state education is political economy and by considering economic and political forces, not only can we better understand policy, practice and pedagogy, we can better design schools and learning to respond to the political economy in which we live.