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.

Workplace nursery provision: that’s a good thing right?

This post follows my previous on a proposed new nursery at the University of Cambridge. Following a campaign by staff in the Faculty of Education, the university balloted eligible staff (mainly academics and senior administrators) on the proposal. The Grace (Cambridge’s term for a proposal) was passed by 777 votes to 151. This means that the university will progress to looking for a provider to run the new nursery.

The campaign against the proposal began with very local concerns about the impact on the Faculty of Education and the staff. Those interests are set against what might be argued to be the greater good. The greater good being much-needed childcare provision in the university. As we started to look into the university’s proposal, we found that there were issues that should be of general concern:

  • Equality and diversity – the cost of nursery provision (as it is in most private nursery provision) is £1000 per child per month. Even with government subsidy and salary sacrifice, lower paid workers in the university cannot afford this or any childcare. Given the ethnic representation in the lower paid group, this provision contributes to increased inequality within the university workforce.
  • Marketisation and privatisation – nursery provision has shifted from being a public provision (often run by local councils) to being privatised provision. This results in a fragmented system that is underpinned by investor returns and what appears to be lower quality provision. Marketisation also contributes to inequality since competition results in winners and losers.

So in answer to my question: nursery provision is a good thing right? The answer here is ‘no’ – it contributes to inequality and threatens diversity in the university. It contributes to further marketisation and privatisation of nursery provision, where we should be demanding universal free childcare.

My main point is that institutions like the University of Cambridge have the power to use their institutional voice to challenge government policy on nursery and childcare provision in England. Staff can use their collective voice to demand the university do this.

The proposed nursery is a highly political issue and we should be critically informed and act appropriately.

The frustration (and anger) in my previous post was impossible to hide, especially toward what I considered to be, the self-interested behaviour of the better-paid staff in the university who supported this proposal. My anger has now subsided (a little), I am now more motivated to encourage colleagues and the university to think about the political and economic aspects of the university’s current policy toward workplace provision. It needs to be seen for what it is – a piece of austerity in our own backyard and a contribution to the continued break up of universal free public childcare and nursery provision.

These things are part of the deepening of inequality in society, the fracturing of communities and, yes, they contribute to the dissatisfaction that is fueling growing far-right sentiment. We, as staff in the university, need to be critical and take responsibility. We must act beyond our immediate self-interests. We must force the  – our – university to start making a stand.

… and three days to recover: an open email to faculty colleagues about the UCU strike action

The text of an ‘open’ email I sent to the University of Cambridge, Faculty of Education, University and College Union members, but also addressing all members of the Faculty Community

Thursday 9th March 2018

Dear Faculty of Education UCU members and non-members,

It is hard work withdrawing your labour.

I would like to begin by pointing you to this evocative Twitter thread by Tyler Denmead – words, ideas, feelings and images from the Faculty of Education picket line, it is a wonderful documentary of that experience.

This action has been tough: tough on those striking but also tough on those who have chosen not too. As we approach a day of truce, indulge me in giving this some thought.

I grew up around the North Nottinghamshire coal fields. Although my family did not work in coal mining, the three nationwide miners’ strikes of 1972, 1974 and 1984-85 had a lasting effect on the community in which I grew up. The 1974 strike was a bitter dispute which led to the fall of the Conservative government. The 1984-85 strike was brutal, bitter, divisive and tinged with revenge. Prime Minister Margaret Thatcher, who was Education Secretary during the Heath government, that was deposed by the miners in 1974, was out to settle the score and to destroy the most powerful trade union, the National Union of Mineworkers. She did this in part, it was revealed later, by funding the Union of Democratic Mineworkers which supported miners in going back to work in order to break the strike. While the Yorkshire miners remained loyal to the NUM, the Nottinghamshire miners split and the UDM attracted increasing numbers. I witnessed the bitterness and brutality as the rift cut through families and communities. I am sure those scars remain in the former mining communities of Nottinghamshire to this day.

In those working-class communities, the divisions were clear, there was no grey-in-the-middle, there were no complexities of Ofsted, complex student needs or management responsibilities. As a miner you were either on strike or – forgive me for using the pejorative term – you were a scab. In our situation, it is far from binary, and from speaking with Faculty colleagues involved in the strike action, I believe everyone is well aware of this. The Faculty community – UCU members and non-members – are divided in that some have chosen to strike and some not. The reasons on each side are undoubtedly both complex and profound; so far I have witnessed nothing but respectful behaviour for each other’s position. They are, however, deeply conflicting positions.

I believe that as this action continues, and if those with the power to permit a speedy resolution fail to engender such, we will all become increasingly tired and there is danger that tempers become frayed and frustrations surface. Respectful disagreement in a divided community can degenerate into misunderstanding and mistrust. This could do lasting damage to our professional community. I don’t want that and neither do, I believe, my colleagues on the picket line.

I just want to say, on the eve of the one day’s break in strike action, that I have nothing but respect for colleagues who have chosen not to strike and that will remain whatever happens. Notwithstanding, it is my strongly-held view that if we all collectively make a stand against the decision to cut defined benefits from our pensions – a decision that is merely the visible part of fundamental and damaging transformation of the UK HE sector – we can stop it. These changes are not inevitable, but they will be if we do not draw the line and make a stand at some point.

While the strike action will have a lasting effect on the culture of the Faculty, the questions that are put in this dispute – that have divided us – are necessary to ask. The democratic governance of this institution at all levels has been increasingly marginalised and fundamental strategic questions have not been deliberated upon by all the members of the University. I will take the liberty of assuming that for those for and against strike action, these observations are not contested. What is contested is, how and when we do something about it.

In what is a deeply difficult time for our professional community, I believe that we can and will come back from this stronger and we will restore the warm and neighbourly professional community that existed before this dispute. In the meantime though, I will, as I expect others who are taking part in the strike action will do, put my full effort into the action that the UCU has democratically agreed to take. I will argue my position robustly and attempt to persuade others to participate in the action, but I will do my utmost to respect different views and with respect for my colleagues who have chosen not to strike and I expect you to tell me if I don’t.

At least we do not have Margaret Thatcher, Robert Maxwell and MI5 conspiring to drive a wedge between us.

In solidarity with all,

Steve Watson

Faculty of Education UCU co-rep