Labour's Monetary Policy?

Labour has prioritised growth but not fully explained how that will be achieved. Previous governments have used monetary policy to do the heavy lifting but there is a lot of conflict amongst Economics Professors at the moment about the best way to do that. I am no economist but as a psychologist I am interested in how two opposing monetary theories are contesting the same small set of uncontested facts. For me, this process provides the sort of evidence I need to test a theory that I have been developing for a PhD. That is that Hegel's dialectics and Gadamer's hermeneutics can usefully be combined to explain an underlying opponent process of interpretive perspectives that occurs within the history of a culture that can be used to trace the evolution of the human mind at a macro-economic, if not meso- and micro-economic, level.

From 1979-1990 the official Thatcherite theory of Monetarism assumed that the government's finances should be run like household finances. It stated that a government must borrow money from the private sector in order to fund public services. The debt to the private sector would paid through general taxation of the profits. Thus, the economy was set on course for a 'smaller state' which was diametrically opposed to the 'planned economy' of the Soviet Union. Monetarists believed that the amount of money that the Government printed should be restricted; this would have the net-effect of increasing the value of their currency on international markets; leading to lower interest rates and higher growth; with a tolerable level of unemployment being maintained to keep inflation down. 

Thatcherite economics were largely credited at the time with winning the Cold War. From their stubbornly high 8%-18% levels up until 1989, UK interest rates dropped to 4%-8% after the fall of the Berlin Wall. The expansion of the European Union eastwards, and stable inflation rates of 2%-5% in the US, ensured a plentiful supply of high quality cheap labour for private investors to exploit. The UK lost its industrial base as the City of London led a period of steep growth in the UK. 

This period of prosperity came to end with the Credit Crunch in 2008. The crunch started in the US where the low paid, low skilled, workforce were provided with huge amounts of credit, with very little security, that they were never going to be able to repay. The US lenders sold this debt on to private investors around the world who only realised that they had bought into ahuge pot of 'negative equity' when the US workforce started to default on their repayments. This led to a fall of confidence in the stock market the collapse of the financial system: all the investors wanted to take their money out of their investments at the same time, with no-one willing to pay anyone else back, so all 'promises to pay the bearer of this note' became devalued. UK GDP per capita has not risen above 2007 levels since then. 

The pendulum had now swung against the Thatcherite model of growth. The currency owning democracies of the World came togther to take control of the debt through a temporary rebalancing of the World economy that was referred to as Quantitative Easing. The worst affected private lenders were nationalised thus ending any further speculation of their stock, and the Government's Central Banks took on the markets, printing vast quantities of money at the same time as droping their interest rates to 0%. This effectively set-up a pincer movement against Monetarism, balancing any inflationary pressure on their currencies because of the debt devaluation with an increased supply of private investment to replace the devalued stock. To almost everyone's amazement, Quantitative Easing worked, but the elecorate were either unconvinced or did not understand. Despite the devaluing of Monetarism the shadow of communism was still used to win the next election.

In 2010 a coalition centre-Right government seized power by the narrowest of magins, which meant that by 2015 the Thatcherite narrative that had caused the crash was returned to power unchallenged. Civil society was led to believe that the previous centre-Left government had relied on a 'magic money tree' to fund unproductive public services. It now appears that the reverse of this narrative was probably true: growth in private sector capital could not be sustained indefinitely through the exploitation of cheap labour at home and abroad. The swing to the Right from 2010 to 2019 resulted in an increasingly hostile enviroment towards immigrants and foreign investments, with a protracted period of asset stripping of public services, to pay-off the debts that were consistently being amassed by failure in the private sector. When the pandemic hit in 2019 the UK along with the rest of the global economy was ill-equipped to meet the demands of a public health crisis that many scientists and business leaders had been predicting for a long time. Fifteen million people died unecessary and painful deaths. 

On the retreat, the Right-Wing carried out a 'slash and burn' rear-guard action, blaming all their victims, until they could find no-one else to blame but themselves: from 2016 to 2020 they blundered through an exit from the European Union, promising the electorate it would reduce net migration, only for it to soar to record levels. In 2022 the dying swan of Thatcherite politics named 'Trussonomics' promised billions of pounds worth of unfunded tax-cuts to stimulate growth. But it did exactly the opposite. The markets lost confidence in the lack of detail and disposed of their government assets, devaluing the currency to its lowest ever level against the US dollar. Two-years later the electorate voted for change. Fourteen years of Monetarism had left the UK broken and bleeding. And yet, large numbers of the electorate still put their faith in the Monetarist model.

Now, the unenviable task of plotting a course out of the financial bomb-crater has fallen, once again, to the centre-Left. The tail-end of the centre-Right givernment have done a reasonable job at stemming the initial bleeding, as UK inflation rates have been reduced from their initial peak of 11%, to meet the Bank of England target of 2%. However, the new administration has still inherited a flat-lining economy, with massive investment needed in public services. Rather predictably they have made growth their number one priority. With few other means of leveraging it, probably the single most attractive option open to them now is a repeat of the sort of Quantitative Easing that proved so successful in the last recession. But doing this unilaterally comes with risks.

The Modern Monetary Policy (MMP) that lay behind the success of Quantitative Easing assumes that governments do not need to run their balance sheets in the same way that households or businesses do. As long as they are in charge of their own currency, and their currency is not anchored to the price of any other commodity, i.e. their gold reserves, then the value of their currency is solely based on the trust. This is the trust that their investors have that the government will do what they promised the electorate that they would do or be voted out. 

Thus, the new administration can request the Bank of England to print as many pounds as they need to make the new investments in inifrastructure that they promised the electorate in 2024. The government can then spend its money, by paying sub-contractors to deliver its projects. The payment can even be in the form of guaranteed interest through government bonds. This would stimulate growth through innovation within a 'planned economy' - taking a lesson from the People's Republic of China, with some important caveats that come with being a liberal democracy. As long as the government is making the right calls, it permits any dissenting voices are heard, and the currency continues to become popular in new markets, then the main threat to its succes - inflation and inactivity - should remain under control. There are three main regulatory mechanisms the government can use to stay on target. If inflation starts to go up, taxation can be increased, thereby reducing the amount of credits available to private speculators within the economy. If the value of the currency starts to fall, more government bonds can be issued, to soak up any excess credit from the supply chain. And if inactivity increases, then the planners need to create some room for more speculative investments. 

So MMT is effectively the mirror image of Thatcherite policies that have become the orthodoxy for Western markets. This is mainly because MMT says that there is no limit to the deficit a government needs to run against its GDP. However, if I understand its critics correctly, then the weakness in this system is its inability to regulate any falls in the value of government bonds, and the interest paid on the sale of these bonds in the government's currency. If the private investors remain outside of the government'seconomy they will have no need for the government's plans to succeed,  or the currencyvyo hold its value. Thus, the private investor, not the government remain in control of the value of the country's assets in the bond market. This may be true, however, the counter-argument is that as long as the private investors still believe that they can increase their rate of return on their bonds, over and above the interest the government is paying them on it, then there is no reason why they would want the value of these assets to fall. 

Thus, my view is that govenrment bonds should really only be sold to raise funds for specific projects that the government has invested its human capital in. These would be projects that the private investors and sub-contractors believe they can make a profit on, in addition to the baseline the government is offering as a security on their investment. Thus, both the MMT proponents and their critics can be correct. But only when they factor in the most important element to this whole debate, that is the intentions and purpose of central government, in their commitment to grow the human capital of the Nation State, over and above the financial interests of any specific market.

In conclusion, there is consistent and coherent historical evidence that monetary theory has evolved since the Cold War era. Political extremes have started to centre on a hybrid model of Monetarism and Modern Monetary Theory. This supports the application of Hegel's dialectics and Gadamer's hermeneutics to western liberal democracies. If the proposed synthesis of positions, is correct the hybrid model may prove the way forward for this country as it seeks to stimulate growth by stealing fruit from another one of its magic money trees. But, the value of the credit notes that the government issues in the form of money will have to be regulated in order to avoid inflation or devaluation. By assuming that the goal of a government is to increase the human capital of all who trade in its currency, we can see that only if it fails to keep its promises will the value of its currency, relative to the price of other goods and services, ever be likely to decrease. Promises that a government makes generally involve creating new products and services, or health and wellbeing, for those who accept its currency as good tender, and so the value of a currency is linked to the value of the government in the eyes of the people, in a self-fulfilling prophecy. Likewise, the value of the currency will increase if demand for the currency increases, as any new markets the government creates begins to soak up it's monetary supplies. Perhaps we should start to think about Pound Sterling as a digital currency that can be used to fund massive infrastructure projects in developing economies. Targetting a net increase in the human capital of other countries should legitimise the printing of money to stimulate growth in new markets, but only if the private investors and sub-contractors, along with the rest of the taxpaying electorate, believe that we can all work together to maximise a return for the UK on those initial investments.

Labour's Growth Plans?

Although Labour's budget has started to rebalance the inequalities between rich and poor neighbourhoods, public and private sectors, and male and female pay structures, their strategy for growth has yet to be set out. This is becoming increasingly important because it is unlikely that Kier Starmer will win a second term as PM without achieving significant growth: he has idenitified it as the single most important factor in his plans, but it will not be able to deliver itself. So how do Labour hope to achieve it? Most people would probably agree that growth will come from the use of information technology to drive increases in productivity. But few have recognised that this just creates an additional inequality, between high-tech and low-tech users. So unless a regulatory mechanism is written into Labour's plans, growth is likely to be based on one group of society exploiting another, in the same way it always has been.

SUPPLY CHAINS

The single most important factor in the slump we saw during Covid was a breakdown in global supply chains. This was due to a popular high-tech concept called 'Lean Six Sigma'. This attempted to reduce waste and increase profit margins by treating the hugely complex and international supply chains as one long conveyor belt. This was only made possible by information technology. When one product was sold to a customer at one end, another product was automatically ordered from suppliers at the other end. This reduced the need for any expensive storage capacity in between, making the whole process maximally efficient, thereby increasing profit margins.

For a while this system worked perfectly, but when Covid hit, smaller parts of the supply chain began to break down. They had very little spare capacity with which to flex to meet gaps in the supply and demand for materials and labour. This led to a catastrophic collapse of the conveyor belt as a whole. My theory is that 'building back better' has meant organisations have attempted to reduce the risks involved in resourcing their components internationally, by resourcing them from suppliers closer to home. This may have reduced the risks of the chains breaking again, but has meant that labour costs, and therefore the cost of products to the consumer, have remained relatively high. This is because manual labour in the high-tech EU and UK economies is relatively expensive. So the profit margins for many parts of the manufacturing process that used to be outsourced to lower wage, lower-tech, economies around the world, have been squeezed.

This change in global manufacturing practices is nowhere more obvious than the automotive industry. During the pandemic, no-one needed a new car. The reduction in demand was balanced by a parallel break down in the supply chain, so the net effect on pricing was that cost of purchasing a new vehicle remained about the same. However, the reduction in volume of new cars passing into the second hand car market led to demand for second hand cars outstripping the supply. The price for purchasing a second hand vehicle then rose steadily, by an estimated +30% year on year, from 2019. In addition, replacement parts were harder to source, so the cost of repairs increased to extortionate levels. Many people reverted to using public transport, which created problems for the aging public transport networks. The virus spread quickly across commuters who were largely employed in low-tech sectors. So it can be seen that huge inequalities began to emerge in the death rates of the high-tech and low-tech transportation sectors and their associated workforces. Now, it just so happens that cars are the biggest export of the EU and UK's the high-tech automotive industries. America's biggest export is the petrol that fuels our cars, and China's is the electrical products that go into making them, so the GDP of all the major economies in the world were interlinked in this same supply chain. 

Now, a second blow to the UK economy emerges. Recent figures suggest that while the EU's was able to adapt its Lean Six Sigma supply chains to source more of its parts from an internal market the UK has not been able to keep up. This was probably because of Brexit and the fact that we have basically just isolated ourselves from all our nearest trading partners. So the first thing the UK government will now have to do is fix its supply chains and this is not going to be easy. Unless the EU suddenly has a reverse of its policy on the internal market, it is unlikely to allow any of its member states to do deals with the UK independently. Thus, UKGDP looks like it is going nowhere very fast, and that Brexit has well and truly sunk the UK economy.

DEFENCE INDUSTRY

So this is where the defence industry comes in. The UK has developed its defensive capabilities around trade. It knows better than anyone else that trade is not possible without securing the passage of goods by force, if necessary. The EU pays NATO for these services, but the Trump administration is likely to demand more and deliver less. Thus the UK has a unique position in NATO due to the 'special relationship' it has with the US, and the strategic position it has for the trading routes in and out of Europe. For example, whereas Ireland is not a member of NATO it still benefits massively from all the protections that NATO offers the EU as a whole, including those afforded it by the UK's continuing presence in Northern Ireland. 

So there is potential for the UK to use its unique position within NATO as a bargaining chip to secure a better deal with the EU on trade. This would be based on it increasing its commitment to the defence industry, through the R&D it already shares with the US and EU. NATO has always been very active in the R&D. It is interested in all sorts of scalable healthcare products and industries. The pandemic showed how agile the UK is as a world leader in the conversion of genomic intelligence into world-beating pharmaceutical products, with Pfizer and Astra-Zenica leading the pack in these fields. 

It may therefore be in the EU's and UK's interests to create a super-national defence industry that is similar to the one that the US had during the Cold War. That is where the nation state commissioned innovation from the private sector, but because the private sector was not tied to any particular nation state, it was able to adjust more easily to innovations, and was more efficient that the Soviet Union in keeping costs down. And if a super-national industry like this was looking for a place to base itself, for legal and ethical business purposes, then nowhere could be better placed than Northern Ireland, from a geo-political and military point of view. 

HUMAN CAPITAL

The pandemic proved the worth of many areas of the economy that had been under-valued for many years before. Genomics, for instance, is just one branch of Human Capital management and exploitation. With greater knowledge of the interaction between genes and environment on the horizon, this is likely to be a hihgh growth area. In addition, the hierarchical structure of a centralised NHS, in association with its local Higher Education, Public Health and Adult Social Care partners, makes it perfectly placed for investment in R&D that has scalable potential. 

However, weaknesses have been exposed in its data storage, data sharing, and data security architectures that need to be worked out, probably at the level of the new Integrated Primary Care Hubs. That is, if the public sector will be able to take full advantage of the private investment in R&D that is now available in the synergy between Big Data, Artificial Intelligence and Large Language Models. For example, a local authority could set the expectation that a drone will be able to deliver a defibrilator anywhere within its geographical area within five minutes of a 999 call being received. It would be up to private providers to compete for the contract, but up to public services to run it.

This could help prepare the ground for more innovative social housing, that could be purpose-built by the private sector to meet commisioning objectives set out by local public services. They might, for instance offer telemedicine services to retirees, with remote sensing capabilities, through state-of-the-art infrastructure, that would be agreed for individual tenancies, that may or may not attract public funding, following the appropriate needs led assessment. 

The facilities would have to meet local standards of quality and inter-operability, so an element of licencing woud have to be involved. But the model for these sorts of facilities already exists, and could easily be extended to many different demographics, many who are currently unable to secure even the most insecure types of tenancy in the current housing market, providing some certainty and return on investment, for landlords and tenants alike.   

The NHS also needs to provide more assurances to local businesses that workers will receive an appropriate occupational health service at the point of need, regardless of ability to pay. This would be alligned with DWP benefits and would be aimed at reducing the number of unemployed who become inactive. This number increased dramatically during Covid and has remained very high. Demographic factors are significant, and may require a public health approach to accommodating the needs of different cultures, in order to improve access to health. For example, blood testing for Vitamin D levels among immigrants, testing for male and female hormone levels at specific age points, and analysing MRIs for white matter lesions for anyone suffering concussion, should be reviewed by NICE for their contribution to quality adjusted life years. 

In addition, anyone who contributes their own personal and provate data to a givernment run public health programmes should be able to get an estimate of their life expectancy in return, through an app delivered by their GP. This will help establish the sort of risk-reward calculations that healthcare professions need to embed in their patients, and help patients can be empowered to take control of their healthcare plans for themselves. It should also help stimulate the private healthcare prividers to provide a suite of psychological and physiological assessments that can be fedback to the GP for R&D purposes.

ENVIRONMENTAL ASSETS

Advances made in the health and social care sector through R&D needs to feed into an information revolution in other sectors. Evidence already exists in the energy, mining and agricultural sectors that more and better knowledge infrastructures can make them more competitive, scalable, and profitable. Unfortunately, these industries are currently extremely exposed to exploitation by financial services which is a high-tech industry that has no interest whatsoever in promoting UKGDP or reducing the gap between them and more low-tech economies. Government could help small and medium sized businesses to access the same Big Data, Artificial Intelligence, and Large Language Model resources that the multi-national conglomerates do. This should facilitate more routes from cottage industry to mass market, and provide some assurances regarding risks to investment capital. 

Recent history in Lithium Mining, Electric Vehicles, Fertilisers, and Flooding show that the more exposed the UK comes to global forces outside of its control, the more adaptable it has to become. The need for us all to 'Think Global & Act Local' is demonstrated by organisations like the 'Farming Forum' operting at the grassroots of international collaboratives like the 'Agricultural Market Information System'. These platforms prove the value that information sharing amongst competitors has to all businesses within a sector, in terms of: sourcing raw materials, predicting trends, setting prices, managing waste, sharing knowledge, and collective bargaining. Government have attempted to plug some of the barriers to scalability through websites like www.custom-declarations.uk. But more could be done with this data. If the information revolution is about anything, it is about government providing the environmental conditions for individual aspirations to grow and accumulate wealth. 

At the heart of this information revolution is an investment in human capital. This means new technology will likely be deplyed in exploiting human capital. But we must not repeat the mistakes of the past where exploitation means depriving individuals of their liberties and whole communities of their identities. Our public services have only survived because of the contributions our Commonwealth partners have made to them. And because of their contributions, our public services have become hot-spots for the creation of new forms of cultural and identity capital. We should be ready now to export some of that learning to the rest of the world. 

The easiest way to do that is through knowledge transfer and cultural exchange activities for our Commonwealth students. Once they have graduated from a UK Higher Education Institutions they should be offered an opportunity to work on an International Development Programme of their choosing, in return for having their student loans paid off. Only in this way will we be able to repay the debts of the past, and continue to look forward to their help in the future. It is in the interests of the Commonwealth that we work together to create these new markets, markets within which the information revolution can continue to grow.    

CONCLUSIONS

There is plenty to be optimistic about when it comes to the UK's growth prospects. It may take strong leadership to see it through, but a vision and set of values is already in place by which we can plot a course through some of the most difficult obstacles we face in the current economic climate. We must build an infrastructure that can accelarate the information revolution, that creates a feedback loop between the UK Government and every Commonwealth Citizen, if we are going to be able to participate in the global economy in the way that we want to. New technologies make this possible, but implementing the lessons we have learned from our not-too-distant past is the only way we will be able to make it real. We are on the threshold of a new age, with unknown potentials and dangers, but with good planning, some trust, and a commitment to each other, I am sure we can all pull through. A Happy Thanksgiving to all!