The truth about Greece

Now look, there's no need to get yourself into a twisted-knicker situation, it's all really very simple.

Individuals, families, businesses, clubs, towns, cities, counties, countries or federations of countries only have so much wealth. Wealth is measured in money but money is not, in and of itself, wealth. Money is a system of tokens that we give and receive in place of real stuff. The true value of money is dictated by the stuff it represents. I grow a pound of runner beans and you like to eat runner beans so you are prepared to give me something for those runner beans. What should you give? Well, that's up to you. You decide what my pound of runner beans is worth to you. You might offer two pounds of potatoes, or a small diamond, or twenty minutes with your wife, or you might offer money. You must value my runner beans and offer what you consider to be a fair exchange. What is essential is that you offer something of substance because I have no incentive to give up a pound of delicious green scrumptiousness unless I receive something that I value as highly as I value the finest vegetable god ever created.

Our transaction is not about money, it is about stuff. It is about something substantive. I give you something to enhance your life and you give me something to enhance my life. Were I to accept potatoes, diamond or fleeting fleshy pleasures with a lady who has seen better days, we exchange no money. Except that we do. Money is involved in all trades, even barter, because money is just a language by which we value stuff. Money is involved in a swap of a pound of runner beans for two pounds of potatoes just as it is involved in the swap of a pound of runner beans for a £2 coin. The reason it is involved is that the trade comes first, the stuff comes first, and money is just a way we can assign value to the goods we exchange. That exchange involves £2 for £2. My £2 is runner beans, your £2 is ten minutes access to a scrawny dry crone, although the reality is the other way round - £2 is the token we assign to represent each side of what is actually exchanged. Without stuff behind it, £2 means nothing. It has no value of itself.

That is not to say that the production of a pound of runner beans that gives me a £2 coin is a transaction without consequences. I take that coin to Mr Patel's Minimart and exchange it for a super-sized condom (in preparation for my next visit to Madame Fifi's Sauna and Hanky-Panky Parlour) thereby giving Mr Patel a bit of profit and justifying the profit he has already paid to Mr Choudery's Cash-n-Carry who have already given a bit of profit to the manufacturers of the intimate rubber item of gentleman's apparel. Their profits are the consequence of me producing something new. But that tells the story from only one side. Kingdong Condom Ltd also produced something, something rather big actually, and it is the combined action of turning what I produced and what they produced into economic activity that gave work and profit to Mr Patel and Mr Choudery. The whole thing is sustainable because it is based on stuff that people value sufficiently to be prepared to exchange their own stuff for it.

Economic activity that is not part of the production and exchange of stuff is a drain on the wealth of a national economy. What each country has to do is decide how much of the profit derived from the production of stuff can justifiably be committed to activities that drain wealth. Some government expenditure supports and contibutes to the production and exchange of stuff, sadly the things that buy votes are usually nothing other than a drain.

Greece suffers from one thing and one thing only, its government spends far too much money on things that do not support and contribute to the production and exchange of stuff.

There is only so much wealth in any national economy. It can go up and down from year to year but each year and each decade it is limited by the amount of stuff that is produced and exchanged. Wealth comes from the production and exchange of stuff and from nothing else.

Governments can produce more money but they cannot produce more wealth because they cannot produce more stuff. They can produce money by diluting their currency through either the printing press or devaluation, in each case they reduce the value of each unit of currency in circulation; they do not, however, change the substance of their national economy. The substance is dictated by the production and exchange of stuff. Currently the government of Greece can produce neither money nor stuff. It cannot turn on the printing press and it cannot devalue because it is tied into the ludicrous Euro, yet it is spending far more on non-productive governmental activity than the Greek nation's output of stuff can sustain.

Greece is bust, it's a simple as that. Nonetheless it still has a valuable economy, it's just that it is overvalued because it is tied into the Euro. Released from the straitjacket of the Euro the true value of it's economic activity will be reflected because there will be adverse effects to every part of its economy from its government continuing to overspend. Only then will there be any chance of the Greek economy becoming sustainable.

Why do we seek economic growth?

The excellent Mr Stan left a comment last week questioning why so much store appears to be given to the state of the stock market. If you don't know Mr Stan you really should visit his place, he's on fine form.

He started his comment by expressing concern about the perpetual chase for growth, (be it in GDP, revenue or profits) and posited that it is done to try to improve standing in the stock market. He then questioned why the state of the stock market is treated as the most important indicator of economic importance. I don't often disagree with Mr Stan, but I do on this subject. Let me say why.

Seeking economic growth is not just about trying to get richer. Most of the time it is more concerned with trying not to get poorer. Inflation is always with us, so we have to improve our income just to be able to stand still. Some of us remember annual inflation running at between eight and fifteen percent for year after year and look on current levels as light relief from those times, but even at about five percent (my best estimate of the real cost of living increase suffered by real people today) someone with a disposable income of £10,000 must raise it by £500 next year just to maintain his current standard of living. The business he works for cannot just magic money out of thin air, it needs to receive more if it is to pay more, so it must achieve a growth of revenue just so that its employees can remain as they were.

More than that, people have ideas and want to profit from them if they can. Maybe they write a novel, maybe they invent something entirely new, maybe they see a way to improve an existing product or find a way to make an existing product more efficiently. They might be rich, poor or of average wealth but no one will stop them wanting to put their new idea into practice and to profit from it. That is human nature. Economic growth is an aspect of human nature.

That point is worth a few more words, not least because we are constantly beset by bleating greenies who tell us we should forgo material pleasures and commune with nature. How, I wonder, do they decide on the ideal state of affairs? Were they to be forced to live in an Ethiopian village with insufficient food and water for the population and hardly any access to medical facilities, would they jump with joy or would they say "um, actually we don't mean this sort of communing with nature". The answer is obvious. OK, how about sitting them in a bit of rural India where there is plenty to eat and ample fresh water but the homes are flimsy shacks and the food requires year-round hard labour in the fields? They don't mean that either. Do they mean somewhere like London in the sixteenth entry? An astonishing comfortable paradise compared to the Ethiopian village, but utter squalor compared to Victorian London. Do they mean Victorian London before fresh water and mains drainage were the norm? Perhaps that is approaching what they mean, but there is no sense in putting up with the avoidable problems of that existence when those problems are avoidable.

You can't have the benefits of economic growth without accepting that they are benefits of economic growth. You can't stop the clock and say "everything is tickety-boo" because everything is not tickety-boo. The concept is based on a false premise. The false premise is that we have reached a state of affairs that is good enough. There is a certain degree of logic to it because life for most of us now contains no real threat of starvation, malnutrition, death in winter from hypothermia or death at any time from cholera or dysentery. But that is to look on mere existence, mere subsistence, as a satisfactory state of affairs. Yet the definition of mere subsistence today is radically different from what it as a hundred years ago because economic growth has raised the bar.

The greenies who say we have a more than adequate existence today form that view by looking at things today and comparing them to times past. Why not roll the clock back a hundred years and apply the same argument? Life in the most developed countries was viewed as hugely comfortable because it could only be compared to what had gone before. No doubt there were arguments against seeking further comforts because the current state of affairs was viewed as quite good enough, thank you very much. We look at those times and see them as harsh and, in many ways, squalid. Has economic growth since 1910 been a good thing or a bad thing, has it improved the quality of life or merely added unnecessary luxuries? You can live as they did if you want to, but it's not for me. Even the nastiest sink estates contain homes of greater comfort than those inhabited by most British people a hundred years ago.

Economic growth provides real benefits on both an individual and a collective scale. Further benefits will accrue through future growth. They cannot be measured because we don't know what they are, they don't exist yet, but they will exist. Central heating, motor cars, fridges, washing machines and battery operated boyfriends for lonely ladies started as science fiction. Now they are everyday things that make life better. None of them would exist without a constant striving for economic growth spurred on by the profit motive. The same can, of course, be said of the personal computer, without which you would not be reading my meanderings. You see how important it is and how shallow life would be without it?

I doubt that companies seek growth in order to look good on the stock exchange. The stock exchange is just a measure of what other people see as the value of shares in the listed companies. Companies don't collapse because their share price falls through the floor, their share price falls through the floor because the company is collapsing.

Mr Stan is undoubtedly correct in bemoaning excessive reliance on stock exchange indices as indications of the state of national economies. Not only are too few businesses included for them to give more than a limited picture of the state of affairs but they also cover only large businesses and are skewed by fluctuations in the share price of the very largest companies. They are, however, some evidence of what is going on, particularly because the fate of shares in big companies affects such things as the value of pension funds and the premiums insurance companies have to charge. He described the stock exchange as "a glorified gambling cartel". There is a lot of truth in that but it doesn't stop it being a fair indication of the current state of big business.

Are the Conservatives moving in the right direction?

With the Budget speech now only a couple of days away I sit here on Sunday night full of roast pork and delighted that, at long last, there appears to be a difference of substance developing between the economic policies of our main parties. In particular, the Conservative front bench is now making increasingly loud noises about the need to make severe cuts in government expenditure. They are not yet, however, saying the one thing I long to hear.

The Chancellor and his Shadow have been setting out their stalls in advance of Wednesday's Budget, there is quite a nice summary in a piece on the BBC website (here). After a gap of a few weeks following the refusal of the G20 leaders to endorse Gordon Brown's ludicrous call for yet more non-existent money to be used to "stimulate" economic activity, it appears that the spendthrift government is reverting to type. We will see on Wednesday how Mr Darling chooses to package it. What is already clear, however, is that he will continue to borrow and spend in the belief that government can make the world of business take risks it does not want to take. His shadow, George Osborne, is emphasising the need to reduce government borrowing to prevent it being a albatross around the country's neck for generations to come.

Both my regular readers will know that I am no fan of debt. Debt is self-induced inflation causing things you buy to be more expensive than their sticker price because you have to add the interest payable on that price to get the true amount payable. That is as true for a government as it is for an individual. We appear to be facing the prospect of the government borrowing in the region of £150billion over the coming year; it could be a little less or an awful lot more but it cannot be a lot less. They will not able to rummage down the back of chair and find £150billion to pay it off any time soon, after all it is about a quarter of the total amount they spend each year, so it represents a long-term burden unless something radical is done to address the problem.

What should never be forgotten about government expenditure is that it happens because the government of the day considers it necessary. It should also not be forgotten that governments seek reelection periodically and will, for understandable political reasons, not be prepared to cut areas of expenditure that will lose votes in key constituencies even if they believe the expenditure is not merited in itself. There is nothing corrupt in this, it is part of the price of democracy. Yet, like all political pressures, the existence and nature of the pressure change over time. In the 1960s and early 1970s it was inconceivable that a party arguing for the dismantling of massive nationalised industries could be voted into office, eventually the economic absurdity of those industries was so well-proven that the argument became a vote winner rather than a suicide note.

An interesting benefit of the current slump is that there is increasing interest in examining exactly what government spends money on. No one can be surprised at Mr and Mrs Ordinary asking how this that and the other can be justified now, despite expressing no such concerns when there appeared to be money to burn.

George Osborne is identifying a number of areas of government expenditure which can be eliminated without losing votes, such as the identity card scheme and certain of the more pointless quangoes. These represent a tentative first step in the right direction and there must be a significant chance that they are genuine vote winners. More importantly, they establish a precedent for reducing what government does rather than just looking for ways to allow it to do the same things but a little cheaper. Efficiency savings are sought by every government, including the present one, but they are just tinkering at the edges they do not address any point of principle. Mr Osborne seems to be addressing the point of principle, namely that very range and scope of the State operation needs to be challenged because it is unaffordable.

What he has not yet done is explain this principle in terms. To a degree I can understand his reticence because it involves opening up a debate the British people have shown no stomach for over more than a decade. He is dipping his toe in the water, seeing what reaction his current proposals receive and, of course, seeing what effect there is on the opinion polls. How far he and David Cameron want to go in slimming down the role of the State remains to be seen, they have not set out a clear position yet. Others in their party, such as John Redwood, have set out a clear position on this for many years. As those who follow Mr Redwood's blog will know, he is no fan of big government. In fact he is adamantly opposed to big government and high taxes because he believes they hurt the poorest in the country most through increasing employment costs and, therefore, reducing employment opportunities and by requiring such enormous tax revenues that the many at the bottom of the pile have to be hit hard for the government to have any chance of raising what it claims to need. I have written before about how those at the bottom can only be helped if those in more comfortable positions help them (in particular here and here). What is, I would suggest, obvious is that those at the bottom are not helped by big expensive government.

Current economic conditions provide the best opportunity in my lifetime to undertake a wholesale reform of the size and scope of government. A series of very obvious questions arise: (i) if big government is so successful in controlling the economy how was it not able to avoid the present slump, (ii) if big government is so good at running medical services why do we have greater infection rates in State hospitals than in private ones, (iii) if big government is so good at running schools why do so many children leave school at 16 barely able to read and write and why are universities having to introduce remedial classes for state school freshers but not those coming from the independent schools, (iv) if big government leads to safe societies why are we spied-on by the largest concentration of CCTV cameras of any country in the world, (v) if big government is the answer to relative poverty why has it not decreased as government has increased in size? The list can go on and on.

For more than a decade we have had a steady increase in the power and expense of government. Mr Osborne is starting to address the expense side of things. His job will be made easier if even modest changes to the power of the State are also proposed because the more power the State has the more it costs to wield that power. I believe the mood in the country is now receptive to the idea that the State is too big and too powerful. My hope is that Mr Cameron, Mr Osborne and their colleagues have the courage to tap into that mood.

The capitalist anti-capitalists

I've never been on a march or engaged in any organised act of protest against anything. It's just not the sort of thing I do. For all I know the vast majority of protestors on any march-type event might be genuinely concerned about something and opposed entirely to the use of violence to seek redress for their complaints, but as an outsider to such events I see violence as an inevitable result because there are always extremists who will latch on to the naive and hide behind them in order to seek to achieve something they could never attain by debate or through the ballot box. Of course it's always the same people. The anti-everythings. All you have to do is announce a protest that includes the word "anti" and they will be there.

Pootling (within the speed limit) to-and-from my Wednesday round of golf I occasionally turned on the radio. The BBC has a radio station called Radio 5Live and advertises it as a 24-hour news and sport station. Much of its sports coverage is excellent, the football and rugby commentaries are unrivalled in my opinion, but when it comes to news it's a rather different matter. As I turned the radio on all I seemed to hear was gushing sympathy from the presenters for the so-called anti-capitalist protestors in London and copious interviews in which people with matted hair advanced their bizarre anti-ness. Control of my blood pressure eventually required switching to a channel playing music. I don't "get" music so after a while it was me, my car and a packet of ciggies against the world.

Being "anti" something is the easiest thing in the world because you are under no obligation to argue a positive case, all you need to do is complain. When the anti-brigade hold a big rally they are unable to just complain because professional loudmouths see an opportunity to further their careers by making speeches, such speeches won't make them a penny unless they put forward an inflammatory positive case. The more outspoken they are the greater the chance they will be noticed, have their egos massaged and provide opportunities for their agents to secure them highly paid engagements. There isn't much of a market in arguing for pure anarchy, after all true anarchists will not pay to hear someone tell them there should be no laws and no prices. The real market is in trying to sell the beguiling religion of socialism.

You see, there is a bizarre parallel universe in which socialism is the epitome of virtue despite every example of socialism in action being an object lesson in social repression and economic misery. But there's a book, a few books actually, in which the theory is set out in a way some find convincing. Others have not read any of the books but have been persuaded by summaries of those books' conclusions into believing it really can provide material comfort for all with absolutely no downside. The effect is hypnotic. Facts and practicalities have nothing to do with it. If the facts don't fit the theory it is because the facts are a tissue of lies spun by a cabal of wicked capitalist liars. Or it is because they are not true facts, true facts will only emerge once real socialism has been put into practice. All previous attempts at applying socialist theory have failed only because they were not implemented properly. This is how they think, or at least how they express themselves. It is pure, unbridled, fundamentalist religion. There is no difference between the millions killed on the orders of Stalin and Mao and the (so far) thousands killed in the name of radical Islam.

I have never been a one to promote theory above observation of fact. Any theory is nothing more than a suggestion that particular acts will produce particular consequences. The only way to find out whether the theory is sound is to do the defined acts and see whether the predicted consequences follow. Putting into place socialist economic policies has never produced the consequences predicted by their advocates, yet capitalist economic policies have produced (albeit imperfectly) beneficial consequences.

Capitalism can have a downside if it is not managed properly. World War II spivs selling stockings, cigarettes, petrol coupons and gin at exorbitant prices on the black market engaged in purely capitalist activities. Shops that sell dangerous electrical goods engage in purely capitalist activities. As do restaurants selling tainted food, dealers selling unroadworthy cars, banks passing-on their bad loans to mugs foolish enough not to ask questions and all the other rogue traders of the world. The State steps in to manage capitalism and prevent its rawest form from doing disproportionate harm. At least it does with black-market racketeers, dangerous irons, unsafe food and unroadworthy cars. Except in sensible places like Canada it did not step in to prevent banks buying and selling each others bad debts. I fail to see how that is a failure of capitalism. It is not, it is a failure of the State to exercise its supervisory role to prevent the potential harm from capitalism coming to fruition.

The very nature of capitalism is that the increase in comfort for real people, for the little people, can come about only by the creation of new wealth. And new wealth can only result from using some of the stuff we currently have to produce new stuff. You can't have new bricks with which to build a new house unless you spend money making those bricks. If no one buys your bricks you're stuffed , but if people do buy your bricks you can then produce more bricks and, most importantly, you have produced a product that increases the sum of human comfort. Whether you call your system capitalism, socialism or avocado dip it can only work in one way. To make new stuff you have to forgo current stuff and use it as fuel for new production.

Anti-capitalism is true anti-capitalism for only a few anarchists and ascetics. For the majority who sign up to the notion, it is not anti-capitalist at all. They don't suggest we should not use some of what we have now to provide the means to create more stuff. They accept the need for capital to be provided in order that new wealth can be created. Frankly, there is no other way of producing new stuff to make life comfortable for those in discomfort and more comfortable for the rest. The argument is not about capitalism, it is about who should decide where, how and in what quantity capital should be expended.

You could leave it to the State to produce the stuff, sell the stuff and control both the quality and safety of what is produced, but in doing so you build an impractical conflict into your system. The State creates a duff item, what is it meant to do? Scrap it and waste the capital involved? Or let the little people have something defective because the alternative is waste? When the quality is poor how does the State protect potential consumers from its own defective products? Once you have made a washing machine that works, where is your incentive to improve it? And if you do find a way to improve it what do you do about the existing specification, cease production or make both the old and the new model? If the improved model costs more to make do you keep the old one in production for the benefit of those who cannot afford the new one, or do you price some out of the washing machine market? These questions result in internal conflicts for a State run economy but not for an economy in which the State has a supervisory jurisdiction over quality and safety but no role in the production and sales processes themselves.

All the usual suspects were out and about giving speeches and interviews on Wednesday. Arguing their so-called anti-capitalist position. The reality is that they argue for a capitalist system but one that is under the total control of the State rather than in the hands of individuals and companies. For many of them I have no doubt that the principle of the thing is far less important than the promotion of their own careers, after all they know the UK economy probably won't descend into State socialism within their lifetime and they want a nice series on the BBC. Others really believe the State can produce, sell and supervise everything efficiently. They point to specific failures in private sector production and selling to advance their case, yet that case is incomplete because they don't address the failure of the State to supervise. By ignoring this vital part of the equation they also fail to recognise the essential weakness in their position - if the State cannot supervise effectively when it has no other role, how can it possibly be expected to produce, sell and supervise?

There is no case against capitalism other than the readily dismissable arguments for anarchy or economic stasis. You cannot create new wealth, so as to improve the lot of the least well off, without investing capital to make new stuff. That is capitalism. The only argument is whether the State can do it better than the imperfect private sector. All the evidence is that it cannot. That will never satisfy the radical religionists, but it is true.