Oh damn, still in this dream.

Me, and many other folk interested in economics and the UK's new government.

www.guardian.co.uk/business/2010/aug/04/double-dip-recession-fears-economy 

And when Francis Maude comes out with this sort of stuff:

www.guardian.co.uk/politics/2010/jul/30/coalition-government-reforms-francis-maude

Then you just know where it's all going.

The Tories have always had an agenda. They may have been selective about sharing it with their coalition colleagues, but the agenda is obvious to anyone who can read, really.

Not my problem, as I'm all right, Jack. But the voters will get what they deserve.

I had hopes that Cameron and Clegg would have provided a new form of one-Nation Toryism, but instead they seem shackled by the old Tory shibboleths of bowing to the markets, and immediately reducing the size of government at the expense of the overall economy, and paving the way for a return to the sort of Victorian society that Dickens described so vividly.

Maybe a spell in service might do some of the ne'er-do-wells (like the coalition government, or the hoodies from the estates) in our society some good, but I doubt it: I mean, would you really trust either of these examples to clean your silver properly? And most of the children of both these groups are too fat to fit up our chimneys.

And further to my last post:

en.wikipedia.org/wiki/Lost_Decade_(Japan)

I quote from the end of the Wiki article.

Economist Richard C. Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.

Now, Paul Krugman describes Japan's lost decade as a liquidity trap rather than a balance sheet recession.

Whichever it is will be telling in the coming years. I'd bet on Koo rather than Krugman, but I'd be happy to be wrong, as I'm not proud. And it's not as if it makes any material difference: we're still in it up to our middles.

Ode to Post Neoclassical Endogenous Growth Theory

Men often think of Halcyon days of long ago
But much past time was dreary, nasty, full of woe
And for this problem no one could think of any good solution
Until one day, along came the Industrial Revolution

Man's labour, engines and his keenest wit
Produced all manner of goods, some welded, others knit
And in this way Man's welfare grew at a rapid rate
Saving many from a much more horrible fate

Bright Scotsmen, and some English too
Studied hard; and so they thought they knew
That this was not just something plainly magical
But was due to free markets – and explanation quite classical

But when, later, wise men asked where all the growth came from
Then many, even great economists, were struck dumb
All the statistics that they gathered were quite clear
The hard toil of people and machinery were small beer

Only inventions seemed to have any effect
And from where these arose everyone was quite bereft
So people then began to get rather weary
Of the once almighty neoclassical growth theory

But then new analyese, oh do subtle
Questioned all this and led to its rebuttal
A new explanation arrived, over which there was quite a fuss
Technical progress – innovation, ideas – were "endogenous"

Invention was crucial but needed embodiment
In people – in skills – and in capital investment
So these were important to make growth shine
Although others had known this for a very long time

All this was important to men in Whitehall
Who hadn't had much luck with growth rates at all
Now they had reason to spend on capital, education and skills
And made sure this happened through many Parliamentary Acts and Bills

This was very much favoured by one Gordon Brown
Who soon became much the biggest man in town
And if critics did all this approach then query
He answered "it's post-neoclassical endogenous growth theory"

Sir Derek Morris

Done deliberately in the style of William McGonagall.

You know the way it goes: you wait ages for a bus and then a bunch of them come along at once.
I read this by professor Joseph_Stiglitz in the London Review of Books.

www.lrb.co.uk/v32/n08/joseph-stiglitz/the-non-existent-hand

I draw it to the attention of those folk who are....um, rather less favourable to the idea of government regulation and who believe in Adam Smith's unfettered hand of the marketplace.

I'll quote from the Wikipedia article on Stiglitz.

Traditional neoclassical economics literature assumes that markets are always efficient except for some limited and well defined market failures. More recent studies by Stiglitz and others reverse that presumption: It is only under exceptional circumstances that markets are efficient. Stiglitz has shown (together with Bruce Greenwald) that "whenever markets are incomplete and /or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient". In other words, there almost always exists schemes of government intervention which can induce Pareto superior outcomes, thus making everyone better off.

Although these conclusions and the pervasiveness of market failures do not necessarily warrant the state intervening broadly in the economy, it makes clear that the "optimal" range of government recommendable interventions is definitely much larger than the traditional "market failure" school recognizes. For Stiglitz there is no such thing as an "invisible hand".

Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.

The real debate today is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place.

Also, as if to emphasise professor Stiglitz's point about information asymmetry it seems that Goldman Sachs has come a bit of a cropper with the SEC.

news.bbc.co.uk/1/hi/business/8625931.stm

www.guardian.co.uk/business/2010/apr/16/goldman-sachs-fraud-charges

I imagine they'll get off lightly, if convicted at all.