You will be aware of the difference of opinion between those who argue
for the Government, Bank of England, and others to increase spending and money
flowing into the system and those who take the view that balanced finance and
careful control of spending is the only safe way forward.
At the root of this is the concept of the Multiplier, that spending will
circulate in such a way as to encourage economic activity and recovery from the
recession/depression. Those for deficit finance, that is borrowing to spend,
argue that this is essential to kick in the Multiplier. Those opposed argue
that as excess borrowing was the root of trouble, spending should be carefully
targeted, and debt restricted to that sustainable in the long term.
Much of the debate revolves around the validity or not of applying the
theories of John Maynard Keynes to the current situation. To reduce it to its
barest level, it is said that he was in favour of deficit financing in times of
economic recession to stimulate the economy. Unluckily, when the world changed
after 1939, whilst he was heavily involved in the war effort and in rescuing
the world economy in 1945, he died in 1946 and never had time to write up and
publish in full how his thinking had developed since the early 1930’s.
His ideas were taken up by Nicholas Kaldor (1908-1986) and Joan Robinson
in what was known as the “Cambridge School”, which were highly influential in the UK in the
period 1950 to 1980. Their influence on the one hand, and the Marxist-Leninists on the other,
more or less wiped out the middle ground and other schools of thinking in the
Putting complex ideas, however, in the hands and minds of politicians is
even more dangerous than allowing them to determine their own expenses, or to
run a scheme of agricultural or other subsidies. The concept of the Multiplier
is such an idea, to a politician and their special advisers facing a bad downturn
in the economy it is a powerful psychedelic hallucinogen.
Briefly, the idea is that when economic activity slows or turns down to
avoid the risk of a major decline, there should be monetary and other “pump
priming” injections into the economy. Because this money will them go from one
activity to another, if the circulation takes place as expected the total
economic effect as it goes through the system will multiply the several sectors
involved to the total health of the economy as expressed in the Gross National
This will generate added tax revenues etc. and balance can be restored. Necessarily
there are a number of assumptions embedded in Keynes ideas. One is that there is a moral ethic involved
in policy decisions and expenditures. This may have been the case in the
1930’s, when morality was a touchstone of much of public and welfare policy,
but in recent years has been overtaken by other ideas, that of serving
particular interests represented by lobbyists where it is access and power that
Another is that as far as possible the statistics and data used for the
process of decisions should be as reliable as possible and honestly derived. As
the figures given out by government, and the indexes and basic data are now
more often works of political fiction, and sometimes fantasy, there are real
Other assumptions in Keynes were that essentially, all the more
prosperous in the population would pay taxes, all the companies and other
economic entities in the UK would pay UK taxes, all the financial sector would
be included in the tax base would be taxable, there would not be a major
criminal element in economic affairs, and the public sector would be the minor
spender as opposed to the real economy.
Also a government would not stoke up a boom by grossly inflating any
market of significance. In recent years this has been the property market, and
the huge bonuses being tolerated, even encouraged, in broken nationalised banks at present are designed to try
to rack the London market up as fast as possible if only for the sake of the
politicians own property portfolios and their trusts and special accounts
offshore in tax havens. If you attempt to factor all this into Keynes ideas,
then you have very serious problems.
In the 1960’s the UK
and the world was a very different place.
Where did my money go at the time? The house I was in was built by local
builders, from UK
materials. My current property was built by a firm with offshore financing and
the service charges and freehold payments go to people with offshore private
trusts. My power suppliers were British gas and electricity boards, but now is
The railway was British Railways, now it is owned by the French. My food came from small local shops, with
most of the supplies, seasonal, from within the region. For most people it is a
local supermarket, and you have to look for the British produce. My clothing
and footwear were always British made, now it takes time and effort to find a
British product, most people do not bother. My insurances, once British, are
now in the hands of an offshore based Private Equity Company; and so on.
The upshot of all this is a large proportion of Magic Money Tree going in as
“quantatitive easing” or “pump priming” is not circulating in the UK economy,
it is going somewhere else in the world. In short to produce an effect in the UK similar to
that of the 1960’s or 1930’s, a proportionately vastly greater amount of money
has to be spent, and therefore borrowed because of the nature and extent of the
leakages abroad at all levels.
Additionally the UK
financial system is entirely different from the times of either Keynes or
Kaldor. It is geared to operate extensively outside the UK on a far greater scale and much of it under
foreign ownership, albeit using the City of London as its base. So much of the money
going into that system will not appear in UK pockets.
A chunk of the money that does remain goes into the pockets of money men
at multiples comparative to ordinary people hugely greater than those of the
past, and certainly of my own, my parents, and my grandparents time. As I
suggest one modern multiplier effect is to sustain property prices, and
therefore to help keep most of our politicians and their associates personal
wealth at high levels.
The idea of Keynes Multiplier was to benefit us all. The multiplier of
today will impoverish the majority of us, and enrich the few.