At a APEurope Correspondent's Pool workshop today (21/08/2021) the current apparent aims of central banks were reviewed. The developments that have taken place in parallel to the announcement of "a New Bretton Woods" and the concept of a CBDC (central bank digital currency) reflect a desire of central banks to control consumption.
This is Part 2 of a 2 part article covering the morning and afternoon sessions.
The afternoon session was introduced by Hector McNeill, director of The George Boole Foundation and below is some of that introduction.
Forward to the past
In the morning session we ended the discussion citing Hayek's observation and warning,
In the context of economics it is worth considering what the word "freedom" signifies.
Freedom has many definitions but an economic and constitutional sense the degree to which we benefit from freedom is, to a large degree founded on what we know. To make sense of this statement it is necessary to establish how centralized "policies" can support a concept of freedom. Thus, the public good of legislation that applies to all to guarantee an individual's ability to pursue their own objectives without constraint. At the same time it is also there to ensure that constituents do not pursue their objectives at the expense of other constituents. If we consider legal frameworks to be policy based, since they are normally supported by regulations consisting of sanctions and enforcement, it is plain that this is another example where "centralized policy" is beneficial. The only "knowledge problem" is to monitor people's behaviour. However, because of the existence of the legal framework, anyone prejudiced by the behaviour of another can seek redress via the indicated regulatory authority that oversees sectors. So depending upon the level of awareness of individuals with respect to expectations of behaviour under the law, as well as the provisions that permit individuals to react, there is no significant "knowledge problem"
However, if the very legislature that enacts laws and regulations "defending freedom" is also carrying our policies that, in themselves, are the source of negative externalities that have differential impacts on the ability with which constituents can pursue their objectives, then this is an abuse of constitution. What is worse is that because this is imposed by government there are less obvious means for gaining redress other than voting the government out. But when the main opposition follows the same economic logic upon which to base policies the situation becomes a significant constitutional issue. It would seem that Hayek's statement is a rational one.
The breakdown of Bretton Woods in 1971 was followed by a period of relaxation of relatively sound financial regulations led to a weakening of the public good of legislation protecting the freedom of market participants. A growing level of abuse by the financial services sector were not sanctioned. The "mechanism" of this decadence is easy to understand. Any decision represents the resolution of a tension between law, prudence and ethics. Law sets out the sanctions for non compliance with the law. Prudence is the action taken in the interests of the individual or company. Ethics is the right thing to do in terms of fairness and the expectations of behaviour governed by the community conscience. As from about the 1980s to the present date, legal sanctions were reduced or removed weakening the significance of law in decisions-making. This augmented the weight of decision-maker advantage or prudence in decisions. Since the sanctions are minor the decision logic of the cost-benefit of decisions provided an incentive for financial service abuse of the economic freedom of constituents as a way of conducting business. Any fines "under the law" became a minor cost of doing business. The tiny sanctions hardly raises the question as to whether such behaviour is ethical since the law deems it to be a minor infraction; people's economic freedom became increasingly denied.
It is plainly obvious from the foregoing logic just how significant Hayek's concern for freedom was. It was not some conceptual nicety but something that affects us all and yet what he referred to as "....policies which are now followed everywhere, which hand out the privilege of security now to this group and now to that, are ..." are commonplace in a rank abuse of constitutional principles.
In summary, in terms of economic freedom, the legal framework has not safeguarded it but rather has permitted a minority of constituents to pursue their objectives at the expense of a larger number of constituents. This was and is not a "knowledge problem" since awareness of this tendency under quantitative easing was articulated clearly by Mervyn King when he retired from the governorship of the Bank of England. Since no action was taken by the government, this prejudice, impacting the economic freedom of many, was clearly a confluence of an ideological pursuit by government with the active support of the Bank of England in promoting this prejudice.
When did things go wrong in the UK?
The process of protective legislative destruction started with the failure of the USA to uphold their obligations under the gold standard in 1971. Much followed, see box on the right.
Although where "monetarism went wrong" is pinned on the Thatcher government and in particular the Budget of 1981, in reality Nicholas Kaldor called attention to the fact that this misdirection started under Denis Healey as Chancellor in the Callaghan government Government leading to Kaldor resigning from his advisory post with Labour in 1976. James Callaghan has requested an IMF loan and Kaldor saw this as a swing to monetarism. At that time the international petroleum price crisis had begun, heralding slumpflation.
The marginalization of a culture and economic decadence
In his inaugural address at Professor of Economics of Cambridge University in 1966, Nicholas Kaldor spelt out the importance of manufacturing to the British economy and its central role as a creator of economic growth and employment. Kaldor was one of the first to measure the role of technology in macroeconomic models.
The recent book by Jon Cruddas entitled, "The Dignity of Labour" describes the very process that Kaldor sought to avoid with the following Conservative administration failing to invest in the cumulative tacit knowledge of the British workforce in the automobile sector in particular.
Cruddas describes the tragic decline of the Dagenham automobile plant at the hand of governments, the declining grasp of government of the significance of accumulated tacit knowledge and the resulting social and economic decline of the areas around the plant.
By 1990, a survey funded by the Department of Employment's Manpower Service Commission to enquire as to the potential interest of high tech companies and SMEs in Hampshire County in the formation of an "Onshore Engineering Club" to identify technologies to enable the feasible manufacture in the County to slow down the loss of jobs arising from British investment flowing abroad to South East Asia. No company expressed any interest since they were becoming import agents for South East Asian offshore manufactured products while others were in the process of substituting UK sourced inputs by imported components.
As In the early 1980s Europe and the USA reacted in a "Sputnik-like moment" to the release of the ICOT Report by the Japanese Ministry of International Trade and Industry (MITI) which declared he intent of the Japanese government to make Japan world leader in 5th Generation computing or Knowledge Engineering also referred to a Artificial Intelligence. The European Commission established an Information Technology & Telecommunications Task Force (ITTTF). The global intelligence of the ITTTF was so good that many companies would visit the ITTTF to understand what was happening in these areas. The collection of intelligence was under the coordination of Maurice English.
Three events and initiations of processes were monitored with some interest at the ITTTF:
The Japanese interest in robotics involved experienced manufacturing company people such as Mitsubishi.
Huawei's foundation involved a group of electronic engineers most of whom did not have a long track record in their field but they were focusing on specific applications.
Mitsubishi and several other Japanese robotics companies now dominate the world market in robotics and Huawei is the most efficient manufacturer of 5G and 6G technologies. In both cases the combination of applications domain knowledge and the learning curve served to increasingly improve their competitive status on the world market. It is also notable that amongst world leaders, both of these companies are now at the forefront of AI developments (see: The position of the UK on 5G and Huawei technology - note).
The 5th Generation Programme delivered very little and ended up being closed.
The reason Mitsubishi and Huawei were so successful was because they used engineers with accumulating domain application expertise to guide design and innovation. The 5th Generation teams were young IT experts with little or no applications domain experience with a remit limited to designing programmes and faster computers but not engaging directly with domain experts or real world applications. In the diagram shown on the right, the robotics and telecommunications technology efforts of Mitsubishi and Huawei contained the Applications Domain Information (EK & TK) whereas the 5th Generation programme did not. As a result they did not receive applications challenges and came up with little of practical use.
As we know, engineeers work with data and information but this cannot be used in design unless the engineers are provided with benchmarks of the state-of-the-art performance which they attempt to improve. All of this information, data, graphs, tables and symbols (explicit knowledge) is easy to communicate. The robotics and 5G telecommunications systems success was the result of the design effort applying explicit knowledge oriented and vetted by individuals with an accumulating experience and expertise (tacit knowledge).
All successful businesses that produce goods and tangible products maintain a constant learning curve based on cumulative tacit knowledge.
The UK, USA and European Commission had separate 5th Generation programmes, with the Commission spending 6 billion ECUs on the ESPRIT programme. One of the largest projects was a chip manufacturing initiative that seemed to improve the profits of the companies concerned but not resulting in any chips. Many collaborative programmes based in universities dried up as cash ran out and very little resulted from so much cash expenditure. Even today, it is difficult to identify anything that actually came from such a large amount of expenditure. In the mid point of ESPRIT a questionnaire sent to the participating companies was used to justify the second phase of the programme. Evidence of mid-term results hardly featured in the justification of the continuation. However, since the participating companies confirmed in writing that they thought the programme, "... was a good idea", money speaks...it continued into the second phase.
In the meantime ...
While these events took place, the ITTTF itself ended up encouraging telecommunications companies to take up the GSM mobile standard and the early involvement of Racal, which became Vodafone, resulted in this company becoming the largest mobile company in the world until overtaken by China Telecom. Even this event was predicted by internal strategic studies within the ITTTF. Just this initiative alone gave rise to a Euro multi-billion global market based on standarization, which placed Europe ahead of the USA in the area of mobiles. However, few give the ITTTF and European Commission any credit for its role in this economic development.
The practical concern with the quality of information shared on a global networks was studied by the ITTTF giving rise to Locational-State Theory some 25 years before this has appeared a the "Fake news" syndrome. In the context of the development of life-long learning systems, search systems and blockchain type solutions were discussed before Alta Vista and Google appeared and Bitcoin blockchains were announced. The reasons for these advances were that the state-of-the-art technologies were advancing and their basic functionality given, the challenge is to identify and build applications not bury effort and funds in program theory without defined applications. None of these advances involved large amount of funding but involved salaried staff and voluntary panels covering different applications sectors. The additional costs included travel and the serving of tea or coffee. In an isolated panel involving trades unions, Clive Atkinson, leader of the Association of Scientific, Technical and Managerial Staffs, demanded beer. A notable point was that in 1985, Atkinson was particularly interested in ITTTF internal project documents concerned with the contribution of learning systems supporting investment for industry in a way to reduce risks, augment productivity and promote employment; he provided useful feedback.
Strategies for the United Kingdom
The state of affairs of social and economic conditions in the United Kingdom, in the wake of the 2008 financial crisis and 12 years or quantitative easing and the impact of Covid-19, is not good. The real issues of increasing risk associated with climate change need to be taken into account in any proposed solutions. The issues and solutions are not simply a matter of adjusting the existing threadbare macroeconomic instruments but rather introducing a programme following the principles of development economics. The reason for this is that there are too many gaps in the economy leading to the need for a coordinated programme of solutions.
From the perspective of development economics the first steps are to identify the country's principal gaps and global constraints on development.
Paradoxically the solution is less related to money as it is to the sources of organic growth and the raising of real incomes. Organic growth involves the conduct of business and manufacturing on the basis of a steady learning process to generate a constant growth in real output based on increasing efficiency and moderate, steady or slowly declining unit prices. Technology and the refining of techniques makes this entirely feasible. In order to achieve this there is a role for an education system adapted to the future needs of individuals and society including life-long-learning support including on-the-job training. The constitutional framework also needs to change so as to eliminate the "knowledge problem" while re-establishing a legal framework across all sectors, including financial, that defend economic freedom with effective sanctions for any form of economic discrimination. In terms of policy, a constitutional economics which is designed to guide the economy towards an operational status that does not provide direct incentives that lead to increasing income disparity.
This has been an outline and the APEurope Correspondent's Pool decided that rather detail out some of the findings here it would be better to produce a dedicated article. It should be recorded that much of this will be covered in the forthcoming "British Strategic Review."