Bursting the bubble

On a day when the Nationwide Building Society published figures showing that UK house prices fell by 2.5% in May, there has been some reflection in the media on whether this is a good or a bad thing. Larry Elliot’s column in the Guardian was a particularly welcome piece of common-sense; he recognises that the so-called “housing boom” has seen a massive shift in resources from the younger and poorer to the older and richer.

But, nagging away behind all this, there’s a much more fundamental question. Supposing that, in the longer term, there is a fundamental instability in house prices? After all, the story – in Britain at least – has been long term cycles of boom and bust, a market that is apparently incapable of settling into a stable equilibrium. Now there’s quite an interesting issue here of the psychology of the market, and the way in which it has been a vehicle for speculation. As this article by ABN AMRO bank suggests, the UK’s house price trends have been much more volatile than in the US, where the current credit crunch is supposed to have originated; it identifies speculation and willingness (and ability, supported by lax monetary policy) to service debt as important features in the UK, and argues that houses may be overvalued by as much as 50%.

Obsession with property is a peculiarly British condition.  Back in the late 1970’s – another boom-and-bust period – Harold Lever was arguing persuasively that this obsession was damaging the British economy.  But since then we have been increasingly suckered by the view that the market can do no wrong.

We’ve also seen the social and economic divisions it causes – the redistribution of wealth to the already wealthy, the fact that increasingly both parents in a family have to work full-time to pay the mortgage, the vulnerability of people who have to borrow increasingly large multiples of income to buy a house at all.

The question may be whether we are prepared to accept what looks in the long term to be a fundamental instability in the market for the most important commodity of all – indeed to accept regulatory “reforms” and tax regimes which offer incentives to speculate – in the name of cultivating this socially and economically divisive obsession.

Bottlemania

Now here’s a marketing coup.

Imagine a commodity that is supplied cheaply, safely and to a high standard to every house in our society, through a sustainable infrastructure network. Now imagine an attempt to market this commodity in much smaller, portable packages. Imagine that this new version will have a price tag several thousand times that of the supply to your home; that its standard will be unregulated; and that it will be packaged in a way that potentially damages the environment, and has to be transported to shops, and from the shops to home.

Disaster? Not a bit of it. For this is the story of bottled water, one of the more obviously absurd consumerist fads of our time.

This phenomenon is examined by Elizabeth Royte in her new book Bottlemania: How water went on sale and why we bought it. An extract published by Alternet can be found here.

Royte’s thesis is that the reasons for the success of bottled water are, in essence, laziness and impatience. This has, as in so many areas of life, led to the effective privatisation of water consumption (as distinct from the actual privatisation of the supply of water, which of course happened in the UK some years ago). And it’s about narcissism, an increasing obsession with hygeine and sterility, and the use of the water bottle as security blanket.

And it is of course about the power of the market to provide us with – and to persuade us to part with our hard-earned cash for – something that is superfluous, a lifestyle accessory; in this case a necessity of life, once provided as a public service, provided more expensively and wastefully by the free market.

Oil prices and irrational exuberance

Alan Greenspan’s great phrase about irrational exuberance gains greater resonance by the day, as one looks at the way markets behave in our modern deregulated world.

Take oil.

Everybody knows that oil prices are soaring. This is often attributed to increasing demand, especially from China. But there’s increasing comment in the media that the recent increase is much more likely to be due to speculation, and that the fundamentals underlying the market haven’t really changed – for example this one from Anatole Kaletsky in The Times. Kaletsky is scathing about how prices become detached from the economic fundamentals – and argues that OPEC countries are storing massive surpluses. So much for the laws of supply and demand. He writes:

“The resulting misconceptions drive market prices to a “far from equilibrium position” that bears almost no relation to the balance of underlying supply and demand. The people who tell you that commodity prices today are driven by “economic fundamentals” are the same ones who said that house prices in Britain were rising because of land shortages. The amazing thing is that just months after losing hundreds of billions in the housing and mortgage bubbles, investors and governments around the world have reverted to the discredited fallacy that financial markets always reflect economic reality …”

Now I’m not going to argue that in the long term oil prices don’t have to rise. On the contrary, I think there’s a lot of evidence that we are facing the exhaustion of oil supplies and a painful and difficult period of re-adjustment. But how should this transition be managed? By concerted political initiatives based on international institutions? Or by leaving the market to the ravages of speculators?

Bananas and capitalism

A sad and powerful parable for our times in Johann Hari’s column in today’s Independent newspaper – the banana as we know it is dying out, and Hari shows how feral capitalism has shaped the fate of our favourite fruit.

Inverted totalitarianism

Just picked up on this review of a new book, Democracy Incorporated by the veteran American political scientist Sheldon S Wolin. It’s a study of current politics in the United States. In his review, Chalmers Johnson writes:

Given this historical backdrop, Wolin introduces three new concepts to help analyze what we have lost as a nation. His master idea is “inverted totalitarianism,” which is reinforced by two subordinate notions that accompany and promote it — “managed democracy” and “Superpower,” the latter always capitalized and used without a direct article. Until the reader gets used to this particular literary tic, the term Superpower can be confusing. The author uses it as if it were an independent agent, comparable to Superman or Spiderman, and one that is inherently incompatible with constitutional government and democracy.

Wolin writes, “Our thesis is this: it is possible for a form of totalitarianism, different from the classical one, to evolve from a putatively ’strong democracy’ instead of a ‘failed’ one.” His understanding of democracy is classical but also populist, anti-elitist and only slightly represented in the Constitution of the United States. “Democracy,” he writes, “is about the conditions that make it possible for ordinary people to better their lives by becoming political beings and by making power responsive to their hopes and needs.” It depends on the existence of a demos — “a politically engaged and empowered citizenry, one that voted, deliberated, and occupied all branches of public office.” Wolin argues that to the extent the United States on occasion came close to genuine democracy, it was because its citizens struggled against and momentarily defeated the elitism that was written into the Constitution.

It’s a powerful thesis, and the key is the way in which power is exercised not through coercion but through the passivity of its population: through consumerism, through the triumph of the market, through popular mythology, and through the neutralising of dissent in the Universities. Privatisation is a primary tool of managed democracy; both through the actual removal of democracy from the public sphere, but also by focussing the attention of the citizens on the peripheral issues – often of personal politics – which ensure that they do not engage with fundamental issues of wealth and power.

And another key issue is the Superpower issue: militarism, and the domination of political life by military imperatives. Wolin writes:

“Imperial politics represents the conquest of domestic politics and the latter’s conversion into a crucial element of inverted totalitarianism. It makes no sense to ask how the democratic citizen could ‘participate’ substantively in imperial politics; hence it is not surprising that the subject of empire is taboo in electoral debates. No major politician or party has so much as publicly remarked on the existence of an American empire.”

Important, impressive stuff, offering key insights into modern American politics; and powerfully relevant for us here in Britain too.

Economics and free-market prejudice

Economics is, at heart, about psychology. It’s about how people react in certain circumstances – namely, when allocating scarce resources. Free-market economics is based on the notion that individuals will behave in certain ways; a large part of my problem with the free market is the ease with which one can falsify those assumptions by providing counter-examples from everyday life. In the UK we donate that most scarce of resources, blood; we don’t sell it. It assumes that we maximise our benefits in a rational way; yet many of the biggest decisions in life are taken without any such careful assessment. And it makes a great virtue of choice.

These values are at the heart of the way our society is run. There is no more powerful buzz-word than choice, promoted by politicians even in cases where (as in the case of selection of secondary schools for children) it is, for most people, entirely illusory. The market is one of the governing principles of life in modern Western societies. If its psychological foundations are shaky, then that tells us something pretty important about our society.

Getting to grips with the reality

That view is examined in a piece in today’s Guardian, which examines the growing science of behavioural economics through the arguments of Dan Ariely, one of its most prominent exponents, and author of Predictably Irrational.

Ariely’s arguments throw down a powerful challenge to the concept of choice. His research suggests that, faced with an increasing range of choice, we make increasingly bad decisions or no decisions at all. In particular, he argues that orthodox market-based economists don’t recognise habits and inertia.

Irrational exuberance

All of this is very much of a piece with the view that the current economic mess is partly due to the fact that the ideology of choice and the free-market fails to deal with important motivations of human behaviour. The market, unaided, has produced a situation where cheap money has financed an unsustainable boom. I suppose some market economists would argue that this is just fine; the word correction, used by some to explain what is happening now, carries that implication. Likewise, the failure to discount the effect on the environment in setting prices can be seen as a rational choice; in the long run, after all, we are all dead.

There’s an old saw, often heard in the City, that market capitalism is about greed and fear. That seems to me to sum up the situation much better than any amount of mathering about the inevitabilities of the market.

The real question, surely, is whether as a society we are prepared to accept the implications of that. I think that, for most rational people, the answer is no; there appears to be a core of irrationality based into this ideology of rationalism.

My own view is that at least part of the popularity of free-market economics is that it allows those with wealth and power to divest themselves of responsibility when things go wrong, and that this is no basis on which to build a sustainable society.

Privatising schools

Today’s Guardian carries a report that the Government has commissioned a review from London University professor David Buckingham on the impact of commercialisation of schools. As well as looking at the perennial issue of academies, Buckingham is particularly concerned about the commercial sponsorship of school activities, and concedes that the Government may not like his conclusions.

I’m particularly pleased to see that he is going to examine so-called “edutainment” products – the marketing of alleged intellect-enhancing strategies and even toys for children. In particular, one hopes for a bit of consideration of Brain Gym, for which state schools are paying large amounts of money in spite of a scientific basis which, to put it mildly, has not stood up well to serious scrutiny.

Definitely one to watch. I wonder how far he’ll be allowed to go …

Toffs and apparatchiks

New Labour’s campaign in the forthcoming Crewe and Nantwich by-election has hit something of a low, with the attempt to portray Conservative candidate Edward Timpson as a “toff” drawing a lot of well-justified flak. Timpson is indeed a very wealthy man; Labour candidate Tamsin Dunwoody’s attempt to portray herself as an unemployed working mother of five rings particularly hollow in the light of the fact that her late mother was the last MP. Evidently the hereditary principle is alive and well.

And yet, nasty and irrelevant though this particularly piece of campaigning undoubtedly is, there is a question that needs asking here about the inclusivity of British politics. The preponderance of Old Etonians at the top of the Conservative Party is well known; but Labour has now moved a long way from its Trade Union roots and the recent contest for the leadership of the Liberal Democrats was conducted between two men who had attended the same public school and university.

Now as far as the individual is concerned, the fact that he or she has been to a certain type of school probably doesn’t matter very much. But the collective picture is a different matter. The fact that we now have a professional political class – drawn across the parties from people who have similar, privileged backgrounds and who increasingly have no experience of an occupation outside politics – has to be a concern in a country where public faith in politicians is at something of an all-time low and in which the proportion of the electorate who turn out to vote is steadily declining.

There’s a concern that politics is increasingly becoming a rich man’s game, and that applies across all the parties. In a society in which most people are having to work harder and harder simply to keep financially afloat, and in which the idea that a family can live comfortably on the national average income is increasingly a piece of history, only those who have made their pile (or indeed inherited it) are in a position to commit the time and resources needed even for membership of a local authority. And, for all the recent revelations about the John Lewis list our politicians in Britain remain among the lowest paid in Europe, increasing that pressure further.

Now the job of democratic politicians is to represent, and to use their judgement in doing so – there will be no advocacy of plebiscitary politics on this blog. But it seems to me that when the body corporate of our political institutions is drawn from an increasingly narrow part of society, democracy has to suffer. It’s the shared, closed assumptions that are so damaging; the sense one has that, for example, Gordon Brown’s 10p tax debacle came from the fact that nobody in Government knows or cares what it is like to raise a family on £18,000 per year.

And this remoteness plays into the hands of extremists, who play on the fears of precisely that excluded class.

An Englishman’s home …

It’s abundantly obvious that Britain’s long property boom is coming to an abrupt and painful halt. Articles such as this from today’s Independent strongly suggest that not only are prices already falling, but there is much worse to come.

It’s perhaps time to start asking the question about what these events tell us about markets and prosperity.

Property price equals wealth?

It is almost axiomatic in large swathes of the media that rising property prices are a good thing, a sign of increasing prosperity. I believe this is nonsense – how can a rapid increase in the price of this most basic of commodities, much faster than people’s pay – possibly be a sign of wealth? If any other essential goes up in price in this way, it’s seen as quite the reverse. Now this is partly because we don’t consume houses – but we do buy and sell them, on something called the property ladder, although the fact that the price of the house we might want to buy in future has gone up means that the increase in wealth is more apparent than real. And we can borrow money against them. But it’s also because there are far more people at any one time who own houses than are seeking to buy one. It’s essentially an illusion of the prosperous.

But there is a social pressure too. Unlike our neighbours in Europe, the British are obsessed with home ownership – it’s part of our obsession with class – and people will take increasingly desperate measures – by which I mean borrow increasingly unsustainably, or even dishonestly, to fulfil the dream of home ownership. And this process is of course self-fulfilling – the price goes up, so the amount that one has to borrow goes up, but so too does the value of the security … until it all goes bad.

Credit crunches and blind stupidity

The recent events – blamed increasingly on what has become known as the credit crunch, the domino-like collapse of world liquidity caused by the collapse in the sub-prime market in the United States – seem to me to illustrate some important facts about the way in which what I firmly believe to be the illusions of market economics are maintained. It should have been obvious that the collapse was going to happen. Increasing lending, desperate borrowing by people who cannot afford to repay in an environment – in the United States in particular – in which real incomes remained static or were even falling – can only lead one way. And add to this a financial system which seems totally dependent on faith and optimism, and the speed and severity of the crash become almost inevitable.

In the circumstances the word “credit” is accurate indeed. What we have is a system in which people who have been sold (not least by themselves) as great experts, manipulators of a fundamentally benevolent system – have shown themselves to be about as understanding of reality as a Roman soothsayer inspecting the innards of a sheep. It’s all puff, all desperate blind faith, with no underpinning whatsoever. In most other areas of life, it would be called sheer abject stupidity – but when one calls oneself a banker and wears a pinstripe suit one seems to be able to get away with stupidity more easily than most. (But not more easily than the legions of journalists, TV programme-makers and pundits who have wittered on for the last few years about housing booms). There is a whole industry – an industry built on an edifice of epic stupidity – that has been building all this up as wealth.

Inflation, inflation, inflation

As any economist knows, there is a simple word for what has happened: inflation. And it’s no less inflation for not being included in the official figures. And we know what inflation does; it creates illusions.

The bursting of the bubble is wholly predictable by anyone with the slightest understanding of the basics of economics. The fact of what has happened over the past few years is that the commentariat has taken leave of its collective senses. It has simply praised the workings of the market, without giving a thought to the consequences, and has shown a pitiful inability to engage with reality.

Young musician debacle – continued

The BBC has taken a lot of flack over the way this contest has been run, and rightly so. Former Radio 3 presenter Tommy Pearson has said everything that needs to be said in his blog, and the outrage of the musical public can be found expressed both on Radio 3’s official messageboards (whose link from the BBC Young Musician website mysteriously disappeared once the flak started flying) and on the R3OK boards, made up of an eclectic group of music-lovers who found the atmosphere on the official boards too controlled.

The BBC has, yet again, succeeded in drastically annoying its own audience. Are they really so confident about the future of public service broadcasting that they think they can just walk away from these people? It’s pure hubris.

I’d like to think they’ll learn. But experience tells me otherwise.