The aftermath of election defeat for Labour has been marked by the familiar combination of soul-searching and mutual recrimination. The remnants of New Labour bemoan the supposed failure to address the concerns of middle-of-the-road voters, and point to the lessons they believe should be drawn from Tony Blair’s three successive election victories.

Those who would prefer to disown the Blair legacy counter with the argument that Eds Miliband and Balls conceded too much to the Tories and did too little to establish their credentials with traditional Labour voters who accordingly failed to turn out in sufficient numbers.

It is certainly true that a number of familiar factors contributed to the Labour defeat – among them, the huge disparity in financial resources and media support enjoyed by the Tories, and the perennially lower turnout by disadvantaged voters. We can add by way of explanation some issues that were peculiar to this election, among them the collapse of the Liberals, the SNP’s exploitation of the discredited and moribund state of the Scottish Labour Party and the successful gerrymandering of the electoral roll and consequent disenfranchisement of mainly non-Tory voters as a result of the Electoral Registration and Administration Act of 2013.

But none of these factors – familiar or otherwise – helps very much in deciding where Labour should go from here.  As those behind cry “Forward!”, and those before cry “Back!”, the dilemma for Labour is that one thing is clear – there is little future in simply waiting for the voters to tire of the Tories. History tells us that that can take a long time.

The options that are regularly recommended – returning to Labour’s core support (declining as it is) on the one hand or posing as Tory-lite in the contest for the centrist vote on the other have little to commend them, either in principle or practice. There is no point in fighting the next and future electoral battles from either of these stances (or more typically from a confusing attempted combination of the two) when there is no reason to expect that they will produce any better result than they have done in the past.

What is surely needed, rather than simply repeat failed strategies, is a game-breaker, not in the sense of some hitherto undiscovered silver bullet, but in the form of some genuine new thinking that breaks free from the neo-liberal consensus that has in effect imprisoned the left in an intellectual straitjacket for three decades or more.

Both those who would go forward and those who would go back reflect thinking that is the product of a debilitating lack of intellectual self-confidence. Those who would take refuge in the past are happy to bemoan the consequences of Tory policies but have no convincing alternative analysis or prescription to offer. They dare not admit it, but they are terrified that if they are seen to depart too far from neo-liberal orthodoxy they will be exposed as having no clothes.

Those who argue for a move towards the centre are more likely to admit that – at heart – they see no option but to accept the Tory programme. Their hope is that they can persuade the voters that they are nicer people and will deliver that programme more compassionately. The voters prefer those whose hearts are in it.

Both of these apparently polar opposite positions, in other words, implicitly acknowledge the immoveable centrality of the Tory approach. Sometimes, that concession is explicit, as in the commitment to giving priority to reducing the government deficit. In any event, the defeatism at its heart communicates itself with deadly effect to an electorate that does not need much persuading that Labour does not deserve their confidence.

The paradox is that the Labour leadership (not just in Britain but elsewhere in the English speaking democracies as well) are so paralysed by fear and lack of confidence that they have failed to notice that the world has moved on. All the major central banks have abandoned the cautious conservatism of conventional monetary policy. The IMF has turned its back on austerity as a proper response to recession. The OECD says that inequality is not the price that has to be paid for economic efficiency but is a major obstacle to that efficiency.

Other countries have shown how living standards higher than our own can be raised still further through an appropriate policy mix. The way is open to learn from them and to offer the British people a new approach to running the economy – one that does not require us to choose between social justice and economic efficiency (or, for that matter, between Labour’s core values and Tory “aspiration”) but that recognises that we will all be better off if we give proper value to all our citizens and to the contribution they can all make to the general welfare. There is no mystery as to how this can be done if we only open our eyes; the necessary policy levers are just waiting to be pulled.

Working people – and that means most of us – have nothing to lose but our fears, and principally a fear of abandoning an orthodoxy that is no longer fit for purpose in a modern democracy. As to precisely what alternatives should be adopted, why not at least begin to think about them? They are not in short supply.

Bryan Gould

24 May 2015.

In the real world, supposed economic certainties are fast dissolving. All the major central banks have adopted one form or another of “quantitative easing”. The IMF has reversed its advocacy of austerity as the proper response to recession. OECD research shows that widening inequality is not the price that must be paid for economic efficiency but is in fact an obstacle to that efficiency.

And, perhaps, most significantly of all, the Bank of England concedes that 97% of all the money in circulation was created by the banks out of nothing, and most of that took the form of lending on mortgage for house purchase. Indeed, they do more than concede – they explain in convincing and irrefutable step-by-step detail exactly how that process of money creation occurs.

In the academic world, however, things are different. The neo-classical certainties taught in the early 1980s by excited young dons and lecturers, convinced that they were privy to a brand-new approach to economic policy, are still being taught by grizzled veterans. A whole generation of students have been taught economics, not as a social science, but as a simple branch of business management and as a celebration of the “free market”.

They are believers. Their faith is not to be shaken by global financial crises and recession, still less by the apostasies of those prepared to evaluate doctrine against outcome. And they have their bibles. Huge numbers of students doing economics and MBA courses over the past thirty years across the globe have placed their faith in best-selling and apparently authoritative text-books, written by prominent professors in the best universities.

So secure are their beliefs that they bother little with anything new or different. They don’t keep up to date with the latest thinking and writing. Teaching is much easier if it is just a matter of pointing students to an unchallengeable and long-established text.

One such text is a book that is probably the best-selling book on economics across the globe. It is written by N. Gregory Mankiw, a professor at Harvard, with two New Zealand co-authors for the New Zealand edition, which is called Principles of Macro-Economics in New Zealand. It is the book currently used in New Zealand universities.

The book explains the banking function as follows: “Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. The term financial intermediary reflects the role of these institutions in standing between savers and borrowers.” It includes banks in the definition of financial intermediaries.

This is a standard description of what is often called the “loanable funds” role of the banks in providing finance to borrowers. It postulates that the banks merely put savers and borrowers in touch with each other and charge a small fee for doing so. It is devoutly believed by 99% of those who have been taught economics over the past 30 years (and that includes, no doubt, most bankers and economists, including a former governor of the Reserve Bank of New Zealand, as well as academics). It is accordingly almost never challenged. It is also totally wrong.

The money that banks lend has virtually nothing to do with the savings deposited with them. The volume of their lending, which goes on rising hugely year on year, is many times greater than the sums deposited with them, and is the result of a power that banks, alone amongst “financial intermediaries”, possess – the power to create new money out of nothing by making a bank entry that becomes a deposit (and therefore spendable money) in the account of the borrower.

This point has of course been well-established on many occasions in the past, and has recently been most authoritatively re=asserted, as noted above, by the Bank of England. It is of the utmost importance. It is the most significant single element in the consideration of monetary policy and its truth invalidates almost all of the macro-economic policy we currently apply.

The statement by N. Gregory Mankiw and his co-authors therefore cannot stand. But, when one of our leading universities, which uses the book as the basis of its teaching, was asked to correct it, they declined not only to do so, but even to consider the matter.

They mounted a number of excuses. Professor Mankiw was a noted authority and not to be challenged. Views that differed from his were merely theories or alternative interpretations. And – most surprisingly – academic freedom allowed them to teach whatever they liked, even if it was wrong.

Let us be clear. There is no room for equivocation in describing the banks’ function and their hugely important role in monetary matters. Either they are mere intermediaries or they are not. The undeniable facts – now well attested to for anyone who cares to look – show that the banks have become by far the most important creators of new money in our economy.

It is surely the role of our universities to teach what they believe to be true, to stay abreast with how that truth might be established, and to correct error when it is discovered. If they do not, can we wonder that the study of economics is in such a parlous state and that students round the world are protesting that their economics courses do not take account of the real world?

Bryan Gould

13 May 2015

Note for British readers: The Mankiw textbook is widely used in the UK too, and the issues discussed here are equally relevant there.

Democracy is a messy and unpredictable business. The response to the British general election may well be to shrug one’s shoulders – and perhaps to enjoy the discomfort of all those pollsters and pundits who got it wrong. Perhaps the popular will is harder to read than we thought.

Or perhaps not. Perhaps what we have seen is a demonstration that the popular sentiment on political issues can be manipulated; after all, we have now seen a series of election results around the globe – in Australia, New Zealand and the UK – which have produced similar results following the use of similar techniques.

Those results have meant the election – and in some cases re-election – of right-wing governments which have used remarkably similar strategies. The pattern is now well established.

The first technique is a relentlessly sustained assault on left-of-centre rivals, focusing not just on their supposed disunity and incompetence, but even more specifically on the ground that they are extremist, left-wing (now used exclusively as a term of abuse) and financially irresponsible.

So, in New Zealand, a Labour party that in government produced eight successive surpluses is compared unfavourably in terms of economic competence to right-wing successors who have presided over six successive deficits.

In the UK, a Labour government that had to pick up the pieces following a Global Financial Crisis created by “free market” excesses and irresponsible banks is blamed for the unemployment, falling living standards and increasing poverty brought about by the austerity policies pursued by their Tory successors.

The second technique is to talk up, with equal relentlessness and disregard for the facts, the supposed successes of incumbent right-wing governments. So, a New Zealand economy that suffers a sustained trade deficit, a dangerous dependence on a single commodity price, an unsustainable bubble in its most important housing market and an overvalued dollar that destroys jobs, profits and investment in the productive sector is regularly described as a “rockstar”.

Similarly, a UK economy whose supposed recovery is based shakily on asset inflation and an unsustainable consumer boom that has still not ended the longest and deepest fall in living standards in modern times is celebrated as a triumph for the policies of a Tory government that remains intent on piling more misery on the most vulnerable.

These techniques, depending as they do on the simple and repeated assertion that black is white, cannot succeed of course without the willing connivance of large parts of the media and the business community. That connivance is regularly forthcoming and allows right-wing parties to avoid what would normally be expected in a properly functioning democracy to be a proper level of scrutiny.

So far, so expected. But there is another aspect of the ease with which the right wing establishes its version of events in the public mind that may be less expected and that certainly attracts little attention. That aspect is the supine attitude of left-of-centre parties in responding to the assaults made on them by their rivals.

So, in both the UK and New Zealand, Labour parties have made little effort to defend the economic record of Labour governments. They have on the whole preferred to remain silent on such issues, as if doubting their own ability to mount the obvious counter-arguments and as if resigned to an inability to win an economic argument.

Indeed, they have gone further in allowing their opponents to set the economic agenda. So cowed have they been by the attacks on their economic competence that they have hastened to assure the voters that they will be just as tough as the Tories in cutting public spending and deficits and just as heartless in sheeting home to the beneficiaries and the unemployed the responsibility for restoring balance in the public finances.

These attitudes have been made quite specific. In both the UK and New Zealand, Labour parties have gone out of their way to proclaim their over-riding commitment to cutting the deficit, thereby validating in the eyes of the public the improbable Tory proposition that this must be the prime goal of policy. It was at that point that the election was lost.

It was this eagerness to embrace Tory doctrine that made it impossible for Labour oppositions in either country to argue convincingly that, accepting as they did the same policy framework, they could be expected to produce different and better outcomes. Little wonder that the voters opted for the devil they knew.

The siren voices are at it again. Instead of learning the obvious lesson – that Labour wins only when it is seen to offer what the British people most crave, something fresh and full of hope and ambition – the Blairs and Mandelsons urge that Labour should become even more like the Tories. At a time when even the central banks and the IMF have abandoned their support for retrenchment and austerity, and neo-liberal orthodoxy is seen as a busted flush, Labour is advised to show no interest in a brave new world but to cower in a craven old one.

Lynton Crosby may have a lot to answer for. But at least he knew what he was doing and achieved what he wanted. Even so, he may not have succeeded if Labour had not been running scared.

Bryan Gould

11 May 2015