The growing toxicity of supply side orthodoxy.
Just like collapsing stars, collapsing capitalism will leave a dense and unfathomable black hole, that, as it struggles to contain its own intolerable density, which is the need to maintain elitism and inequality, will destroy society. The process has already started.
Capitalism was described as ‘anarchy’ by numerous socialist thinkers in the 19th century. This anarchy was founded on the liberating principles of consent-based choice and contract. They were the three universal rules, and everyone had to play by them. The affluent merchant and later industrial producer as well as the exploited worker who toiled to make both the merchant and industrialist rich were legally obliged to observe contract and consent-based choice.
The role of the banking system within this model was to expand the economy cautiously and incrementally with increased money supply occurring as the combination of capital and labour power fused to drive the demand for goods, achieve their supply via productivity, and thus create profits.
It was always an uneasy relationship, this relationship between demand and supply, and crisis often occurred when supply was greater than demand. People were laid off and the economy shrank. Company failure was in the very beginning the reset button. Companies failed and new opportunities sprang up to improve the quality and price of goods and take on more workers. At least that was the theory.
As capitalism matured though, rather than just individual company failures, capitalism’s free market drive for profits led to the consolidation of production. Basically, bigger companies grew out of smaller company failures. When a crisis occurred the state also intervened to increase demand by pumping money into the economy so people could buy goods. This is demand management and it was essentially a left-wing state interventionist response to capitalisms periodic failures. It benefited the working class by creating jobs to stimulate demand.
By the 1970’s Western capitalism was in serious trouble because profitability was being squeezed. Consolidation within industries had made them complacent and sluggish. Wages had been increased to a more humane level, but this had hit profitability. Wages could not slide back as profits slumped. There were few realistic options available, company failures grew, and demand for products fell. In addition to this crisis in profitability companies were hit by a spike in energy prices causing inflation coupled to the downturn in demand.
The UK had an additional problem a belief that ‘the state’ should take money off the taxpayer to pay the workers in nationalised industries, not as a demand stimulus but as an entitlement. The left-wing orthodoxy of demand management was no longer delivering what it was supposed to. The West was now in competition with the rest of the world and demand management and government ownership would not help. . . Indeed, it seemed to be making matters worse.
If demand management was no longer effective, because it contributed to general inflation as fewer products were being manufactured there was poor quality, high public expenditure and wage inflation, so the thinking went that maybe liberalising the supply side of the economy would do the business of saving the Western world’s economy. ‘Supply side’ in effect means ensuring that supplies of all goods and services are delivered efficiently at the cheapest possible price. This of course includes labour power or the supply of workers as well as the supply of money itself. As long as things were cheap, the general inflation rate was low and interest rates ‘competitive’ the money supply could increase, thus stimulating demand without causing inflation and everything should remain in balance.
For forty years this model has infected every aspect of thinking, from government and business in the 1980’s and 1990’s to the public sector from 2000 onwards.
It began with selling council houses in the 1980’s. Valuable housing assets were taken from Local Authorities and were transferred to the banking sector and financial services industries via mortgages. This increased the money that individuals could ‘leverage’ or borrow against their housing asset. It was however sold as a political good news story for workers rather than a good news story for the banking sector.
The Government thus moved a huge number of public assets into the financial and service sectors and with that the means of managing demand became a function of the supply of money, money created not by the combination of capital exploiting labour. but by the ability of the financial services and banking sector to create money with whatever assets they were able to use to leverage. The markets rather than the government controlled this process. If general inflation was low, any amount of money created could only grow the economy. It was an Alice in Wonderland model based on political naivety, public expectation, and financial services hubris.
The assets that could be leveraged therefore included ex council homes and stocks and shares in once nationalised industries.
My suspicion at the time was that in the minds of politicians this money supply side approach would generate healthy demand and create a variety of jobs satisfying the need for both new goods as well as services. However in the minds of bankers and global corporations the West would become awash with cheap goods made outside of the West. These cheap goods would keep inflation down, profits up and as money circulated this would provide service sector jobs creating an illusion of a strong ‘real economy’.
It worked for a while but the problem with money and general supply side management is that someone must supply the cheap money, justify that supply with assets and without causing inflation and do it within a context of slowly reducing well-paid manufacturing employment for working people.
By the late 1990’s it was clear that the supply side model was running out of steam, but the demand model was still debunked. Blair’s government adopted supply side orthodoxy uncritically and took supply side ideology into the public sector, hoping to ‘tee’ the public sector up for privatisation.
The push for home ownership, started in the UK by Margaret Thatcher’s Conservatives when they sold council homes became the way money supply expanded. More mortgages, more borrowing against house price inflation, more money swilling around, more credit card debt. With the growth od ‘derivatives’ there were opportunities to bundle up mortgages and sell them to investors as risk-free investments, with, in theory, a good return as people made their mortgage repayments each month. The ‘markets’ grip on reality was loosening.
This bit of supply side exuberance lasted until 2007. The breath-taking level of overreach by the banking sector resulted in the crash of 2007/8. The banks had balance sheets based on high house price values. But these prices were not a reflection of the strength of the property market or economy in general and therefore didn’t reflect people’s ability to repay their loans. Just as now, there was and remains no ‘real economy’ just money supply within a context of low interest rates and low inflation. With no real economy, people defaulted on their huge and unrealistic mortgage loans. The whole banking system was bankrupt and crashed.
Because the West had moved headlong into supply side economics out of economic necessity, the only solution to the banking crisis was bank bailouts by governments and the introduction of stupidly low almost zero interest rates.
This was the next crank of the supply side screw. Again, it worked. For a while. People borrowed and spent; house building expanded to meet a fictional ‘high demand’ but continued to be bought as investments at ever increasing prices. This further expanding money supply and stimulated demand in a low inflation era. The supply of cheap imported unskilled labour continued, as did the importation of goods made abroad. With low inflation nothing seemed to threaten this model. Keep on importing cheap labour (labour needs housing too), keep spending money, buying houses, and borrowing and all will be good. At least for the bankers and corporations.
By the late 2000’s new threats were beginning to emerge. One such threat is that the West has an ageing population of people who own their own their own homes outright. This locks that house price ‘value’ out of the banking system. There is therefore a glut of housing, which offers nothing of monetary value to the banking system unless equity released or sold after death. But then housing gluts would likely force down prices. Good for buyers, bad for the markets.
The supply side monetary model needs high house prices and for prices to rise year on year. The markets have been lucky as since 2008 and until 2022 nothing has seriously threatened the supply side fundamentals of low general inflation, low interest rates and escalating house and other ‘asset’ prices. Even Brexit didn’t succeed in slowing the flow of cheap unskilled labour still much needed to make the model of supply side economics work.
However, amplified by the war in Ukraine, Chinese paranoia over Covid and energy price instability it is now becoming clear that the supply side model is not without serious consequences for ordinary people. Viewing it uncritically and continually trying to get it to work is undermining society on an almost irreparable scale.
In addition to the export of manufacturing to cheap labour markets like China, thus destroying livelihoods for millions of British working people, there is the additional consequence that poor wages and welfare generates too little demand and doesn’t help local economies. Town centres and less fashionable cities like Stoke on Trent become dormitories for migrant workers a growing number of whom arrive with little inclination to work. They thus provide no meaningful economic demand, and only take up the slack in the town and city centre market for Houses of Multiple Occupation.
The consequence of supply side economics failing to deliver sufficient economic demand in town and city centres is that these locations become shabby ‘melting pots’, managed reactively by police and local authorities. Adopting supply side orthodoxy themselves agencies only supply services on an ‘intelligence led’ basis, thus leaving people to essentially fend for themselves. No wonder people are angry. The money needed to rejuvenate town centres ends up in the hands of new build property developers who take full advantage on the flight of indigenous locals to the outskirts of town. Once in a new build, wages don’t go into the local economy, they go into home entertainment and fancy cars, both necessary to survive the numbing existence offered by these locations.
The supply side orthodoxy was so enthusiastically taken up by the banking system and financial markets that it was considered an appropriate model to inflict on the public and educational sector. Students became consumers and higher education supplied an educational product; the financial risk being borne by the student.
The orthodoxy of supply side economics has turned public services into organisations which supply products and interventions, and the efficiency of this supply is calculated by ‘score cards and performance measures. The proliferation of measurers and managers who oversee this process has created a class system within the public sector with grotesque wage differentials to reflect this. The toxicity of supply side management has created a mental health and recruitment and retention crisis all over the public sector.
So, in summary, the supply side revolution, which seemed so logical back in the late 1970’s has faltered and has now stopped. Its survival, as an economic theory is destroying western society. In its death throws it retains an ability to generate wealth for the few. But for the many a depleting lifestyle of declining local economies, poor town centre housing stock, debt, high inward migration, with the associated flight from town centres by the remaining workers is the reality.
For the supply side model to do what it does efficiently low interest rates need to fuel borrowing and therefore spending binge and of course inflation must be low assisted by low wages and cheap foreign manufactured products. However, the longer this process continues, like a black hole the denser the problems it leaves behind will be.
With a forty-year supply side orthodoxy the West is not so much an economy as a series of interconnected money manufacturing markets that are sensitive to changes in economic fundamentals like general inflation, and interest rates. The war in Ukraine and Covid have unleashed disturbances that will have long term effects. The bankers and markets will blame Brexit for Britain’s struggle to get back on track. The real answer however is to move away from supply side orthodoxy and get back to managing demand at a level that creates real jobs, wealth, and happiness, without creating inflation. That means putting power back into politics and taking it away from the markets. For more insights into the relationship between politics and economics please read our booklets, all available free to download on our booklets tab.