Thursday, 31 May 2012

Eurozone needs a pre-nuptial

By Reuven Brenner

French President Francois Hollande has announced that he will be pushing for mutualizing European debt, which Germany, the Netherlands and Finland oppose. [1]

While there are historical precedents for mutualizing debts - Alexander Hamilton 1790 assumption of states' debts - there are significant differences between that situation and the one Europe is facing now. While the US eventually managed to shape an "American tribe" - though 70 years after Hamilton, a civil war was fought that shaped eventual features of this new tribe - the notion of a European "tribe" is not on the horizon.

The Balkan tribes are as divided as they have ever been; the Scots want to separate from the rest of the United Kingdom; Italy seems to be almost as divided between south and north as it was in Garibaldi's time; and the chances of Greeks, Italians, Spanish, French intermingling with Germans to shape a European tribe do not seem much closer today than they were in preceding centuries.

The above does not imply that crisis might not make for strange bedfellows, resulting in mutualizing some debts. If that happens, the problems raised with the demutualizing of the national debt during the 1995 referendum when Quebec almost separated from Canada (there was just 1% difference in the votes which prevented it) suggest what certain clauses should appear in the potential Eurozone debt offerings and prevent crises that lack of such anticipatory clauses would bring about.

Paragraphs in the draft bill of the Quebec government tabled on December 7, 1994, in the National Assembly, indicated ways in which constitutional, territorial issues, as well as those linked with currency, debts would be settled in case of separation. The document though never addressed the question how an independent Quebec would assume responsibility for its share of Canada's public debt. Yet these were questions raised then:

  • How do you credibly transfer responsibility for the debt in case of demutualization?
  • What will Canada's creditors say about the transfer? What will be the price paid for it?

    Quebec had the following options:
    1. The Quebec government convinces Canada's creditors to release Canada from their fraction of the debt, exchanging it for bonds issued by Quebec's government (or equities in enterprises);
    2. Quebec issues bonds and deposits them with the Canadian government. The Canadian government continues then to bear responsibility for payments.

    In the European case, the countries that would not implement the policies agreed upon when the bonds are issued would also be facing these two options. If the eurozone bonds are issued, clauses in the bond contracts would have to deal with these two questions. Answers to them would indicate creditworthiness in case of mutualization, and potential demutualization. Let examine these answers.

    A public debt is backed by the government's right and ability to tax. The proposed euro-bonds would be backed by expectations that European Community's citizens can create sufficient taxable wealth. I highlight "taxable" because both Greece and Italy create wealth, just much of it does not pay taxes.

    Assume then that with the potential euro-bonds issue, Greece, Spain and Italy ("Club Med") would agree to a clause that in case of secession due to lack of performance, the bonds would be exchanged for those of the three national governments. Would creditors buy these new issues at lower interest rates that the Club Med countries are now trading? The answer is no.

    After all, the new paper would be backed by exactly the same thing that any governments' outstanding debt is backed by: governments' right and ability to tax. What happens with such clauses in place is that the European Community gives up the right to enforce payment on the seceding members, and that right is transferred to the seceding national governments.

    This is the core of the issue: Under what political umbrella can the debt be serviced more credibly? Is it under the European community umbrella, with its ability to speed up changes in fiscal, regulatory, monetary and immigration policies? Or are the Club Med countries separately, outside the European umbrella, more creditworthy in changing their fiscal, regulatory, monetary and immigration policies so as the service the debt?

    With these clauses in the proposed Eurozone bond, it is not clear that the issue would fly. The price buyers would pay would reflect the option that the Club Med countries would not change their policies, end up seceding, in which case the eventual national governments would be standing behind the debt.

    Now what happens if Germany, the Netherlands and Finland agree that the new public debt remains an obligation of the European countries, with some separate side agreements between the countries?

    In 1995, the assumption was that Quebec would remit to Canada the funds necessary to service the interest and the principal on the negotiated portion of its debt with a "Promise to Pay Agreement" for every issue, whatever the interest rate or the maturity. Could this work for Europe today and lower interest rates for the Club Med countries? The answers is again no.

    If Quebec was unable to convince lenders of its ability to service the debt under the federal umbrella, why wouldn't the rest of Canada have not the same doubts? After all, we are talking about the same amounts of money exactly. If Club Med countries are unable to raise funds now, why would the solvent European countries believe that if they back the Eurobonds now, the Club Med countries would pay them back in timely fashion? And if they do not, what are their options? To send in tax collectors, backed by armies?

    Thus we are back at the point where we started. Creditors know that government bonds are backed by governments' recognized rights and abilities to tax. If all Europe is held responsible for the additional debt, a credible promise that the debt will be serviced without interruptions or without imposing more taxes on Europe's solvent members, would mean that the stronger European countries would have sufficient influence on the weaker countries' fiscal and regulatory policies so that they would be changed in time and prevent default on payments. If solvent Europe does not have the stomach and ability to do this, its creditworthiness diminishes with the proposed euro-zone bonds.

    Briefly: no matter which of the two options is chosen, creditors must know that the entity who is responsible and held accountable for the debt is also the entity who has the right to tax and regulate. If the two are not the same, the eurozone bonds idea loses credibility. Either clauses in bond covenants or the side political agreements - if enforceable - are ways to increase such credibility.

    The above analyses is similar to "pre-nuptials" adapted to national levels. Such agreements are by now a common feature of marriage contracts in the United States. In France, they have a longer history. French novelist Honore de Balzac's classic Marriage Contract (1835) is dedicated to them, with perfect insight into human behavior and with broad implications relevant to today's Europe.

    The story is about Paul de Manerville, a wealthy gentleman who decides, against the advice of his friends, to get married at the age of 27. He marries the Spanish Natalie Evangelista, whose financial assets have been declining since the death of her father - the banker who nature furnished her with at birth.

    He does not see either that Natalie's loyalty is to her "tribe" - her mother, that is - and that outsiders, her husband among them, are way down the pecking order; that Natalie's mother is desperate to assure for her daughter the lavish lifestyle she believes to be her "right"; or that the various marriage intermediaries negotiating the marriage contract are trapping him. Paul ends up in an unhappy and childless marriage - with his wife happily playing the field.

    Reads like a good allegory for today's childless Europe; brought into a union by politicians blinded by a non-existent European "democratic ideal," misleadingly traced back to Greece (whose present population has nothing to do with Ancient Greece, except occupying the same real estate); and whose politicians sold every possible rights to their constituents - without requesting obligations.

    Although Germans and Dutch - not French - pay the bills, and the International Monetary Fund (IMF) and central banks play the roles of the intermediaries, reminding one of Balzac's self-interested negotiators, whom he despises, and whose wile he describes with devastating perfection.

    If Paul's friends had only managed to convince him to put some enforceable clauses in his marriage contract, linking "secession" to measures of future "productivity" - children, in his case (after all, that's the only source of future productivity) - perhaps Balzac's story would have had a happier ending. Perhaps German, Dutch and Finnish leaders could distribute the book before the next Group of Eight gathering, instead of dealing with IMF intermediaries' Keynesian nonsense and mindless statistics.

    Then they could discuss the aforementioned clauses in the mutualized debts contracts, and debate if they have the guts to enforce them, knowing that some Club Med countries would sure raise the specter of "Occupation".

    1. Mutualizing debt involves guarantees whereby each member state not only pays for itself but also meet the obligations of any other country unable to meet its liabilities.

    Reuven Brenner holds the Repap Chair at McGill University's Desautels Faculty of Management, and serves on the Board and the Investment Committee of McGill's Pension Fund. He was appointed to be one of a seven member commission dealing with consequences of the 1995 potential secession of Quebec. The article draws on his Financial Options for Countries Wanting a Divorce (1995) and his Force of Finance (2002).

    (Copyright 2012 Reuven Brenner)

  • Auditors must be held to account

    The shareholder spring is the perfect time to challenge the poor performance of unscrutinised accountancy firms
    KPMG on building
    'KPMG, PricewaterhouseCoopers, Deloitte and Ernst & Young, collectively known as the Big Four accountancy firms, audit around 99% of FTSE 100 companies.' Photograph: Action Press / Rex Features
    Shareholder spring is in the air, with increasing numbers voting against fat-cat executive rewards for failure and mediocre performance. However, the same scrutiny is not being applied to the business advisers and consultants implicated in headline failures. They continue to receive huge financial rewards. Company auditors are good example.

    PricewaterhouseCoopers (PwC), Deloitte, KPMG and Ernst & Young, collectively known as the Big Four accountancy firms, audit around 99% of FTSE 100 companies. These firms audited all distressed banks. At the height of the banking crisis they gave the customary clean bill of health to Northern Rock, Abbey National, Alliance and Leicester, Bradford & Bingley, HBOS, Lloyds TSB and Royal Bank of Scotland (RBS). Bear Stearns and Lehman Brothers went bust shortly after receiving the all-clear. A subsequent inquiry by the House of Lords economic affairs committee accused auditors of "dereliction of duty" (para 161) and "complacency" (para 167) and basking in a culture of "box ticking" (para 6) rather than delivering meaningful audits. Despite the damning criticisms, some partners in audit firms still charge over £700 an hour for their services.

    In 2011, Barclays, the bank that forced the government to introduce retrospective legislation to combat its tax avoidance schemes, paid £54m to its auditors PricewaterhouseCoopers, including £15m for consultancy and advice on tax matters. PricewaterhouseCoopers, which once audited Northern Rock, collected another £48m from Lloyds Banking Group , including £10m for consultancy. HSBC has paid a whopping £56m, including about £8m for tax and consultancy services to its auditors KPMG, the firm that audited HBOS and Bradford & Bingley. RBS has paid £41m, including £7.4m for consultancy to Deloitte, the firm that audited Abbey National, Alliance & Leicester and Bear Stearns. Ernst & Young, the firm that audited Lehman Brothers, earned £36m in audit and consultancy fees from BP and another £28.5m from Aviva. At major companies, the fees paid to accountancy firms are larger than CEO salaries, but rarely attract sustained media attention. The auditor dependency on companies for vast fees neuters any impulse to deliver an independent opinion on company accounts. No one at any accountancy firm is ever promoted for blowing the whistle on dubious practices of companies and losing a client.

    At company AGMs auditors are appointed often without any discussion. The resolutions on auditor appointment are not accompanied by any information on the composition of the audit teams; time spent on the job, audit and consultancy contracts, information obtained from directors, list of faults found with company accounts, regulatory action against auditors or anything else that might shed light on the quality of audit work or conflict of interests. With weak accountability measures, auditors deliver little of any social value.

    The charges of "dereliction of duty" and "complacency" have not led to any worthwhile UK reforms though there is plenty of spin about encouraging auditors to be sceptical and tweaking auditing standards. There is no scrutiny of the basic auditing model which requires entrepreneurial accountancy firms to somehow invigilate giant corporations. The success of auditors is measured by private profits and they have no obligations to the state, or the public, which eventually bears the cost of bailouts and fraud. This mutual back-scratching has been a key factor in the debacles at Enron, WorldCom, Lehman Brothers and the banking crash. Yet no real change is in sight.

    The EU is proposing minimalist reforms to check the collusive relationship between auditors and companies. These include a ban on the sale of lucrative consultancy services to audit clients and forcing companies to regularly change their auditors. At present, FTSE 100 companies change auditors every 48 years on average. Inevitably, major firms are using their financial and political resources to oppose even these modest proposals.

    Major accountancy firms have got used to collecting mega fees for failure and mediocre performance. Shareholders should check that by turning the spotlight on them and demand refunds for poor performance. The government should sharpen liability laws so that auditors are forced to make good the damage done by their silence.

    Wednesday, 30 May 2012

    Viswanathan Anand shows the heart of a champion in winning Fifth World Title

    They trash-talked him, ridiculed him, and wrote him off. They said he had slowed down, lost his flair and chutzpah, and become conformist and traditional in his play. But Viswanathan Anand took on everything the Russian-Israeli chess mafia and his growing band of critics threw at him and emerged on top yet again on Wednesday, winning the world chess title for the fifth time, and shutting up detractors for now.

    For sure, they will carp and crib at Anand's struggle to retain the title, the same way critics put down Sachin Tendulkar when he's going through a lean patch, or plays conservatively. But these two heroes of India have set such stratospheric standards for themselves that any hint of a slowdown or downturn in form is enough for detractors to write finis to their careers.

    However, 42 is not 24; even the greatest don't have the same reflexes and mindset they when they push 40 -- much less in the twilight of a career -- that they had in their teens and twenties. But when it comes to the crunch, great champions find a way of winning. The flesh and bones might have sagged a little, but a lifetime of experience and a capacious heart comes into play. That is pretty much what Vishy Anand summoned on Wednesday to win the world title in a tie-breaker after Boris Gelfand, an Israeli challenger from the Russian stable of chess greats, held him to a 6-6 tie in regulation play.

    The stakes were enormous. Anand has not been in top form for several months now; he's given up several titles he routinely won on the chess circuit. He's also the happy father of a year-old son who is more important than anything on the board. And to top it all, the Russian chess mafia has long been smarting at the loss of the chess crown to the genial Indian after the Karpov-Kasparov combine dominated the game for decades.

    Anand has taken on everything they have fired at him from since 2000, including a divided and discredited world title. But since 2007, he had been the undisputed world champion, defeating the Russian Vladimir Kramnik, whom Moscow regarded as the heir to the two Ks, and the Bulgarian Veselin Topalov in 2010.

    In each instance, Anand has had to battle not just his opponent, but also a mighty chess establishment, and sometimes even forces of nature. In 2010, he had to drive from Spain to Bulgaria, a distance of nearly 3000 kms across Europe, after the volcanic ash disrupted flights and the (challenger's) host country refused to delay the start, citing TV rights issues. He got to Sofia just in time -- and went on to win.

    This time too, the biases were evident. After the two players were tied 6-6 in regulation play, the Russian news agency Ria Novosti ran a preview that, citing ''Russian pundits,'' said ''Boris Gelfand is the favorite to dethrone India's world champion Viswanathan Anand now their title match in Moscow has gone to a rapid chess tie-break.'' This, despite Anand's well-known prowess in rapid and blitz chess.

    So even the most cerebral of all sports was not exempt from mind games. In Tel Aviv, Israeli Prime Minister Benjamin Netanyahu had a giant screen installed in his office to follow the live telecast of the games, often conferring with his former cabinet colleague Natan Sharansky, a chess player himself, about the moves. In Moscow, Sergei Smagin, the Moscow chess federation vice-president, described Anand as being "in terrible shape, which forced him not to play to win, but to struggle all match long," demonstrating "a tremendous lack of confidence and lot of mistakes.''

    The situation is likely to be the same at a tie-break, giving the Israeli better chances to win provided that he copes with nerves, Smagin added.

    Smagin hadn't factored in the heart -- the heart of a champion.

    How to Adapt to the 4 Types of Attacking Batsmen

    From Pitch Vision Academy

    Sometimes your bowling spell doesn't go to plan and the batsman is the one on the attack.
    Now it's time to adapt our plan to take into account how and where the batsman is hitting the ball.

    One option is to move a fielder or two around to cut off his favourite shot, and try and force him to play a shot he isn't so comfortable with. This will often lead to his dismissal.

    Another option is to leave the field as it is. Instead back ourselves to dismiss him by adjusting our bowling strategy itself. Here we look at how to counter-attack four types of aggressive batsman:

    1. The batsman who is playing aggressively against the spin
    The batter is cutting and cover driving the off spinner, or playing across the line against the leg spinner. Here the percentages are with you, so simply keep spinning the ball as hard as possible to try and beat the bat. Probe for an error. Work in some simple variations and find the hole. Keep spinning the ball as much as possible. Eventually, he will make a mistake.

    2. The batsman who is consistently playing with the spin
    Here the batter is cutting and cover driving the leg spinner, and working the off spinner into midwicket. He has now left himself vulnerable to the ball moving in the opposite direction. The killer blow will come from beating the opposite side of the bat to the direction of turn. To do this, use either a googly to bowl him through the gate or an arm-ball to find the leading edge.

    3. The batsman who is attacking with cross batted shots
    Sweeping and pulling in the order of the day with this batter. The wrong ‘un or a big spinning stock ball will have little effect against the cross batted shots. In this case, we need to vary our flight - especially using topspin and backspin - to get the ball over or underneath the horizontal swing of the bat. A backspinner will get us a bowled or LBW. A top spinner will result in a top-edge or a nick behind.

    4. The batsman who is charging down the track or slogging.
    These two can be dealt with in the same way. You're looking for a stumping or an aerial shot resulting in a catch. Changes of pace are key here, so that batsman is unable to time his shot. Top spin will also create extra dip and bounce and make the ball more likely to go in the air. If you can make the ball move away from the batsman, you will also have a better chance of a stumping.

    About the author: AB has been bowling left arm spin in club cricket since 1995. He currently plays Saturday league cricket and several evening games a week. He is a qualified coach, and his experiences playing and coaching baseball often gives him a different insight into cricket.

    The ART of Flight to deceive the batsmen

    What spin bowler hasn't heard these clichés in his cricketing career?

    "Toss it up" the young spin bowler is so often told. "You've got to flight the ball, give it some air, and get it above the batsman's eye line".

    The problem is that experience soon teaches that simply lobbing the ball up in the air does not suddenly make a competent batsman turn into a tail end bunny. Whilst the advice may be well meaning, it completely misses the point. Flight is about deception. There is nothing deceptive about simply bowling the same ball but slower and with a higher trajectory.
    So what is flight then?
    The art of spin bowling is the art of deceiving the batsman as to what the ball will do. This comes in two parts: we are able to confuse him when the ball pitches by making it turn. It might turn a small amount, it might turn a large amount or it might turn the other direction entirely.

    We are also able to use the same set of techniques to deceive him as to where the ball will pitch in the first place.

    This is flight: the art of deceiving the batsman as to the exact location where the ball will pitch.
    How do we do this?

    Well, first and foremost we use the same technique we use to make the ball turn: by spinning it hard. In the case of flighting the ball, this primarily means using topspin and backspin.

    These make use of the Magnus effect to change the trajectory of the ball as it travels towards the batsman.
    • Top spin will make the ball drop more quickly and land further away from the batsman than expected. Imagine a tennis player playing a top spin shot with his racquet, hitting over the top of the ball. You can apply this same spin on a cricket ball. How you do it will depend on whether you are a finger spinner or wrist spinner but the effect of spinning “over the top” is the same.
    • Back spin will make the ball carry further and land closer to the batsman.  Our tennis player would slice underneath the ball to make the shot. Again your method for doing this will vary but think ‘slicing under the ball’ to create the effect.

    Using the two in combination makes batsman completely clueless as to whether to play forward or back to any given delivery.

    Tahir trains with Qadir in Lahore

    Abdul Qadir passes on a few tips to Imran Tahir, Lahore, May 29, 2012
    Abdul Qadir: "He [Imran Tahir] sought my guidelines regarding the finger googly and using flight as a weapon." © AFP
    Related Links
    Players/Officials: Abdul Qadir | Imran Tahir
    Series/Tournaments: South Africa tour of England
    Umar Farooq in Cricinfo

    Abdul Qadir, the former Pakistan legspinner, has said he rues the fact that the Lahore-born Imran Tahir went on to play for South Africa and not Pakistan. Tahir had met Qadir in Lahore on Tuesday, and will remain in Pakistan for the rest of the week, for personalised training sessions in preparation for South Africa's tour of England in July. 

    The pair had worked on increasing the variations in Tahir's bowling. "He is here to enhance his variations, and sought my guidelines regarding the finger googly and using flight as a weapon," Qadir told ESPNcricinfo. "He is very keen to learn more and I love to help him, because he applies what I teach him. I have only shared the googly information with him and Shahid Afridi."

    Qadir is confident of Tahir making an impression in England. "England [have always] struggled against spin bowling a lot, but once it comes to their home conditions, they are good. I have shared my past experiences with Tahir, told him how to counter English batsman in their own conditions … I am optimistic that he will make an impact with his improved bowling."

    Tahir, who has played seven Tests for South Africa, played cricket in Pakistan from 1996 to 2006. "My relations with Imran aren't something new," Qadir said. "I've know this boy since he was playing in the Under-19 team here; he had tremendous talent and I was urging the [Pakistan] board to try him. I still regret not having this boy in Pakistan colours, but I am proud of him."

    Tahir was once part of the Pakistan A team and was one of the popular legspinners on the Pakistani domestic circuit in 90s. He was team-mates with Shoaib Malik and Abdul Razzaq in 1996, in the Under-19 squad that played against England and Australia.

    "He has played an ample amount of cricket in Pakistan, it's unfortunate that we couldn't have him playing for Pakistan," Qadir said. "He was so hardworking and a good learner, and always wanted to play cricket on the big stage. He eventually got there, where he always wanted to get.
    "This is not the first time he has come up to me for tips, he was consistently in touch with me and always visits me when he is here in Lahore."
    Umar Farooq is ESPNcricinfo's Pakistan correspondent
    RSS Feeds: Umar Farooq
    © ESPN EMEA Ltd.

    Tuesday, 29 May 2012

    Pritish Nandy - My separated at birth twin

    The pleasures of being a bore

    Pritish Nandy
    29 May 2012, 12:03 AM IST

    I am an itinerant presence on Twitter. I am not on Facebook. I rarely trawl malls and try out new brands, new restaurants. I avoid pulp fiction and Hollywood blockbusters don't excite me overmuch. Dating a celebrity is not exactly my idea of a great evening out. And no, I don't go to Ibiza to party or Bahrain for F1. I don't even own a Blackberry or an iPad. I haven't worn a watch in years but am almost always on time. And no, I don't consider myself famous, never did.
    Now doesn't this make me the perfect bore?

    I write for my livelihood, paint for my pleasure. I make movies because they are fun. I work out because it makes me feel good. I yoga because it wakes me up early and allows me to watch the city come to life. I tweet when I feel like and I enjoy the response of others to what I say, even when they are not always polite. The interplay of ideas sharpens my thoughts. I walk into bookshops, sit in a corner and read. I travel a lot because it allows me to escape the ennui of routine. You can recognise me anywhere by my faded jeans and white shirt. A grey waistcoat and sneakers complete the ensemble. I never dyed my beard which greyed in my thirties. I shaved my head by accident and liked it so much I never grew my hair back.

    I listen to all music, enjoy them all. From Elvis to Gangubai Hangal to Nusrat to Adele. But yes, I love music where the words touch my heart. I love Sahir and Kaifi. I re-read old classics. But I enjoy watching The Simpsons too. It bothers me when Inception tests my intelligence, and my patience. But that doesn't mean I watch Houseful 2. I would rather watch ZNMD or Kahaani. My idea of a perfect date would be in a tiny café in a place where I have never been with someone I have never met and am unlikely to ever meet again. Mystery and magic are what I seek from life, and the occasional miracle of love.

    So rarely do I go to parties that people have stopped inviting me. The company of one beautiful or intelligent person excites me far more than people in the collective trying very hard to enjoy themselves. I find the world a charming place, best savoured on one's own or with someone you love. Group celebration is as unexciting to me as group sex. I find both tedious. Sex, like love, is at its best when you experience it with someone of the opposite sex, which makes me doubly boring in a world where almost everyone is bisexual or (in Samantha's memorable coinage) trysexual. I really wouldn't know what to do with a naked man. Only women exist in my sexual universe.

    Even there I am deadly boring. S&M doesn't titillate me. Mozart may. I passed on drugs when I passed out of school. Alcohol makes me drowsy. And the current obsession over food I find gross. I eat little, speak less, grab the passing moment. Neither greed nor gluttony excite me. I wouldn't notice if Gordon Ramsay was in the kitchen. It's the person I am with who makes it happen. I never eat alone. The only food I miss is what I don't get. Ergo, nostalgia food. A meal I had on a steamer in Bangladesh. My mother's cooking, even though it was never great. I miss food from little known places that have shut down. I remember a city by what I ate there, usually happenstance street food.
    I believe our hearts teach us how to react. A book, a film, a song may move me to tears at a special moment. On another, they could leave me untouched. That's why it's so tough being a critic. You have to carry your moment with you. Trees, dogs, cats, birds, flowers, squirrels running on the fence, the sound of laughter work any time for me, and the delight of walking through unknown streets, empty fields, unseen dreams. I love them all and wish I could pass on the memories to those I care for instead of the trinkets we gift each other and so easily forget.

    Monday, 28 May 2012

    Why economics needs to be seen not as a science but a moral philosophy

    Michael Sandel: 'We need to reason about how to value our bodies, human dignity, teaching and learning'

    The political philosophy professor on his new book, What Money Can't Buy, and why economics needs to be seen not as a science but a moral philosophy
    'What is a good hospital?' … Michael Sandel
    'What is a good hospital?' … Michael Sandel Photograph: Felix Clay for the Guardian
    Something curious happened when I tried to potty train my two-year-old recently. To begin with, he was very keen on the idea. I'd read that the trick was to reward him with a chocolate button every time he used the potty, and for the first day or two it went like a breeze – until he cottoned on that the buttons were basically a bribe, and began to smell a rat. By day three he refused point-blank to go anywhere near the potty, and invoking the chocolate button prize only seemed to make him all the more implacable. Even to a toddler's mind, the logic of the transaction was evidently clear – if he had to be bribed, then the potty couldn't be a good idea – and within a week he had grown so suspicious and upset that we had to abandon the whole enterprise.

    It's a pity I hadn't read What Money Can't Buy before embarking, because the folly of the chocolate button policy lies at the heart of Michael Sandel's new book. "We live at a time when almost everything can be bought and sold," the Harvard philosopher writes. "We have drifted from having a market economy, to being a market society," in which the solution to all manner of social and civic challenges is not a moral debate but the law of the market, on the assumption that cash incentives are always the appropriate mechanism by which good choices are made. Every application of human activity is priced and commodified, and all value judgments are replaced by the simple question: "How much?"

    Sandel leads us through a dizzying array of examples, from schools paying children to read – $2 (£1.20) a book in Dallas – to commuters buying the right to drive solo in car pool lanes ($10 in many US cities), to lobbyists in Washington paying line-standers to hold their place in the queue for Congressional hearings; in effect, queue-jumping members of the public. Drug addicts in North Carolina can be paid $300 to be sterilised, immigrants can buy a green card for $500,000, best man's speeches are for sale on the internet, and even body parts are openly traded in a financial market for kidneys, blood and surrogate wombs. Even the space on your forehead can be up for sale. Air New Zealand has paid people to shave their heads and walk around wearing temporary tattoos advertising the airline.

    According to the logic of the market, the matter of whether these transactions are right or wrong is literally meaningless. They simply represent efficient arrangements, incentivising desirable behaviour and "improving social utility by making underpriced goods available to those most willing to pay for them". To Sandel, however, the two important questions we should be asking in every instance are: Is it fair to buy and sell this activity or product? And does doing so degrade it? Almost invariably, his answers are no, and yes.

    Sandel, 59, has been teaching political philosophy at Harvard for more than 30 years, and is often described as a rock star professor, such is the excitement his lectures command. In person there is nothing terribly rock star about him; he grew up in a middle-class Jewish family in Minneapolis, studied for his doctorate at Balliol college in Oxford as a Rhodes Scholar, and has been married for decades to a social scientist with whom he has two adult sons. His career, on the other hand, is stratospheric.

    Sandel's justice course is said to be the single most popular university class on the planet, taken by more than 15,000 students to date and televised for a worldwide audience that runs into millions. His 2009 book Justice, based upon the course, became a global bestseller, sparking a craze for moral philosophy in Japan and earning him the accolade "most influential foreign figure" from China Newsweek. If you heard a series of his lectures broadcast on Radio 4 in the spring you would have glimpsed a flavour of his wonderfully discursive approach to lecturing, which is not unlike an Oxbridge tutorial, only conducted with an auditorium full of students, whom he invites to think aloud.

    In keeping with his rock star status, Sandel is currently embarked upon a mammoth world tour to promote his new book, and when we meet in London he has almost lost his voice. His next sleep, he croaks, half smiling, isn't scheduled for another fortnight, and he looks quite weak with jetlag. Understandably, then, he isn't quite as commanding as I had expected. But although I found his book fascinating – and in parts both confronting and deeply moving – in truth, until the very last pages I didn't find it quite as persuasive as I had hoped.

    This may, as we'll come on to, have something to do with the fact that its central argument is harder to make in the US than it would be here. "It is a harder sell in America than in Europe," he agrees. "It cuts against the grain in America." This is truer today than ever before, he adds, for since he began teaching Sandel has observed in his students "a gradual shift over time, from the 80s to the present, in the direction of individualistic free-market assumptions". The book's rather detached, dispassionate line of inquiry into each instance of marketisation – is it fair, and does it degrade? – was devised as a deliberate strategy to "win over the very pro-market American audience" – and it certainly makes for a coolly elegant read, forgoing rhetoric for forensic examination in order to engage with free market economics in terms the discipline understands. But I'm just not entirely sure it works.

    If, like me, you share Sandel's view that moral values should not be replaced by market prices, the interesting way to read What Money Can't Buy is through the eyes of a pro-market fundamentalist who regards such a notion as sentimental nonsense. Does he win you over then?

    He certainly provides some fascinating examples of the market failing to do a better job than social norms or civic values, when it comes to making us do the right thing. For example, economists carried out a survey of villagers in Switzerland to see if they would accept a nuclear waste site in their community. While the site was obviously unwelcome, the villagers recognised its importance to their country, and voted 51% in favour. The economists then asked how they would vote if the government compensated them for accepting the site with an annual payment. Support promptly dropped to 25%. It was the potty-and-chocolate-buttons syndrome all over again. Likewise, a study comparing the British practice of blood donation with the American system whereby the poor can sell their blood found the voluntary approach worked far more effectively. Once again, civic duty turned out to be more powerful than money.

    However, a true believer in the law of the market would surely argue that all this proves is that sometimes a particular marketisation device doesn't work. For them it remains not a moral debate but simply one of efficacy. Sandel writes about the wrongness of a medical system in which the rich can pay for "concierge doctors" who will prioritise wealthy patients – but to anyone who believes in markets, Sandel's objection would surely cut little ice. They would say it's a question of whether or not the system is fulfilling its purpose. If the primary purpose of a particular hospital is to save lives, then if it treats a millionaire's bruised toe while a poorer patient dies of a heart attack in the waiting room, the marketisation has clearly not worked. But if the function of the hospital is to maximise profits, then treating the millionaire's sore toe first makes perfect sense, doesn't it?

    "I suspect that you have – we have – a certain idea of what a hospital is for, such that a purely profit-driven one misses the mark; it's deficient in some way; it falls short of what hospitals are properly for. You would say, wouldn't you, that that hospital – that market-driven one – is not a proper hospital. They've misidentified, really, what a hospital is for. Just as if they were a school that said: 'Our purpose isn't, really, primarily, to educate students, but to maximise revenue – and we maximise revenue by offering certain credentials, and so on,' you'd say: 'Well, that's not a proper school; they're deficient in some way.'"

    I would, I agree. But a rabid rightwinger wouldn't. They would say the profit motive is in itself blameless, and pursuing it by mending people's bodies or expanding their minds is no different to making motor cars, as long as it works.

    "My point is that the debate, or the argument, with someone who held that view of the purpose of the hospital would be a moral argument about how properly to understand the purpose of a hospital or a school. And, yes, there would be disagreement – but that disagreement, about purpose, would be, at the same time, a moral disagreement. I'd say 'moral disagreement', because it's not just an empirical question: How did this hospital define its mission? It's: What are hospitals properly for? What is a good hospital?"

    I don't think that would convince a hardliner at all. Similarly, I imagine a hardline rightwinger might read Sandel's chapter about the practice in the US of corporations taking life insurance policies out on their staff, often unbeknown to the employees, and think: what's the problem? Sandel writes about the "moral tawdriness" of companies having a financial interest in the death of an employee, but as he doesn't suggest it would tempt them to start killing their staff, these policies would strike many on the right as a rational financial investment.

    At this point Sandel begins to peer at me across the table with an expression of mild disgust and disbelief. Is this woman really, I think I can see him wondering, from the Guardian? So I explain hastily that I tried very hard to read his book wearing Thatcherite glasses.

    "You tried a bit too hard," he says wryly. "You shouldn't have tried so hard. You should have gone with the flow a bit more." Which feels like a disappointing answer.

    The irony is that I think Sandel would have written a more powerful book had he not tried to argue the case on free-market economists' own dry, dispassionate terms. It is, as he rightly points out, the language in which most modern political debate is conducted: "Between those who favour unfettered markets and those who maintain that market choices are free only when they're made on a level playing field." But it feels as if by engaging on their terms, he's forcing himself to make an argument with one hand tied behind his back. Only in the final chapter does he throw caution to the wind, and make the case in the language of poetry.

    "Consider the language employed by the critics of commercialisation," he writes. "'Debasement', 'defilement', 'coarsening', 'pollution', the loss of the 'sacred'. This is a spiritually charged language that gestures toward higher ways of living and being." And it works, for the book suddenly makes sense to me. His closing elegy to what is lost by a society that surrenders all decisions to the market almost moved me to tears.

    "Does that mean I should have just started and ended with the poetry, and forgotten about the argumentative and analytical part?" he asks. "I want to address people who are coming to this from different ideological directions." But funnily enough, I think the poetry might well do a better job of persuading those very sceptics he's trying to convert.

    A fascinating question he addresses is why the financial crisis appears to have scarcely put a dent in public faith in market solutions. "One would have thought that this would be an occasion for critical reflection on the role of markets in our lives. I think the persistent hold of markets and market values – even in the face of the financial crisis – suggests that the source of that faith runs very deep; deeper than the conviction that markets deliver the goods. I don't think that's the most powerful allure of markets. One of the appeals of markets, as a public philosophy, is they seem to spare us the need to engage in public arguments about the meaning of goods. So markets seem to enable us to be non-judgmental about values. But I think that's a mistake."

    Putting a price on a flat-screen TV or a toaster is, he says, quite sensible. "But how to value pregnancy, procreation, our bodies, human dignity, the value and meaning of teaching and learning – we do need to reason about the value of goods. The markets give us no framework for having that conversation. And we're tempted to avoid that conversation, because we know we will disagree about how to value bodies, or pregnancy, or sex, or education, or military service; we know we will disagree. So letting markets decide seems to be a non-judgmental, neutral way. And that's the deepest part of the allure; that it seems to provide a value-neutral, non-judgmental way of determining the value of all goods. But the folly of that promise is – though it may be true enough for toasters and flat-screen televisions – it's not true for kidneys."

    Sandel makes the illuminating observation that what he calls the "market triumphalism" in western politics over the past 30 years has coincided with a "moral vacancy" at the heart of public discourse, which has been reduced in the media to meaningless shouting matches on cable TV – what might be called the Foxification of debate – and among elected politicians to disagreements so technocratic and timid that citizens despair of politics ever addressing the questions that matter most.

    "There is an internal connection between the two, and the internal connection has to do with this flight from judgment in public discourse, or the aspiration to value neutrality in public discourse. And it's connected to the way economics has cast itself as a value-neutral science when, in fact, it should probably be seen – as it once was – as a branch of moral and political philosophy."
    Sandel's popularity would certainly indicate a public appetite for something more robust and enriching. I ask if he thinks academia could do with a few more professors with rock star status and he pauses for a polite while before smiling. "That's a question I would rather have you answer than me, I would say." That someone as unflashy and mild-mannered as Sandel can command more attention in the US than even a rightwing poster boy academic such as Niall Ferguson must, I would say, be some grounds for optimism. On a purely personal level, I ask, is there any downside to engaging with the world through the eyes of moral philosophy, rather than simple market logic?
    "None but the burden of reflection and moral seriousness."

    Friday, 25 May 2012

    The IPL is bad for capitalism, democracy and cricket

    Smash-and-grab crony league

    Ramachandra Guha

    I live in Bangalore, down the road from the Karnataka State Cricket Association (KSCA). I am a member of the KSCA, which means that I can watch all the matches played in its stadium for free, and from a comfortable seat next to the pavilion. I exercise the privilege always during a Test match, often during a one-day international, and sometimes during a Ranji Trophy match. However, I have not yet watched an Indian Premier League (IPL) game played at the KSCA, nor do I intend to in the future.

    My original reasons for boycotting the Indian Premier League were aesthetic. 20-20 lacks the subtlety of the longer form; no one can build an innings, no one bowls a probing spell. I didn't much care either for the way the game was packaged, while the man who owned the local Bangalore team was — as seen by someone whose day job is studying the legacy of Ambedkar, Gandhiji, Nehru — somewhat on the loud side.

    The sting operation involving some (fringe) IPL players and the fight between Shah Rukh Khan and the Mumbai Cricket Association both seem to confirm these aesthetic reservations. But in fact the problem with the IPL goes far beyond petty corruption and boorish celebrities. The Indian Premier League is not just bad for me, but bad for Indian capitalism, bad for Indian democracy, and bad for Indian cricket.


    With liberalisation …

    Let me defend these claims. When the Indian economy was liberalised, in 1991, it unleashed the long-suppressed energies of the entrepreneurial class. Sectors such as software and pharmaceuticals, that depended chiefly on innovation and knowledge, prospered. This was capitalism at its most creative; generating incomes and jobs, satisfying consumer tastes, and also spawning a new wave of philanthropy.

    More recently, however, some less appealing sides of capitalism have manifested themselves. The state retains control of three key resources — land, minerals, and the airwaves. These resources have become enormously valuable with the expansion of the economy, prompting sweetheart deals between individual politicians and individual entrepreneurs, whereby land, minerals, or spectrum are transferred at much less than market cost, and for a (quite large) consideration. Creative capitalism has increasingly given way to crony capitalism, with dire consequences for society, for the environment, and for public institutions. Hence the 2G scandal, the spike in the Maoist insurgency due to the dispossession of tribals by mining companies, the killings of whistle-blowers by the land mafia, etc.

    The Indian Premier League is decidedly on the crony rather than creative side of the ledger. The original auction for teams was shrouded in secrecy — the allocations were not made on the basis of bids transparently offered and assessed. Player prices do not accurately reflect cricketing worth either. Thus foreign players are paid a fraction of what Indian players of comparable quality are paid. The most egregious form of cronyism, however, is the ownership of an IPL team by the current president (and former secretary) of the Board of Control for Cricket in India. It is as if Alex Ferguson was simultaneously manager of Manchester United and the president of the English Football Association. Tragically, the cronyism runs down the line. The current chairman of selectors is the brand ambassador of the team owned and run by the Board president. The famous former cricketers who cover Indian cricket on television have been consultants to the IPL. Other commentators have accepted assignments from IPL teams. To put it bluntly, their silence on this (and some other matters) has been bought.

    The IPL has given capitalism and entrepreneurship a bad game. But it has also been bad for Indian democracy, in that it has vividly and even brazenly underlined the distance between the affluent, urban middle classes and the rest of India. Consider the fact that no city in India's largest State, Uttar Pradesh, which has an excellent Ranji Trophy team, was awarded a franchise. Nor any city in Bihar, Orissa, or Madhya Pradesh either. To leave out four of India's largest States — all cricket-mad, and which collectively account for close to half the country's population — must seriously disqualify the League's claim to be ‘Indian.'


     Names and bias

    Yet it can still be called ‘Premier,' for it speaks for the more prosperous parts of India, and for the more prosperous sections within them. The very names of the teams are a clue to its elitist character — two ‘Kings,' two ‘Royals,' and one ‘Knight,' this in a democratic Republic whose Constitution and laws (rightly) did away with aristocratic titles of any kind.

    The IPL is explicitly biased against the poorer States of the Union, and implicitly biased towards what, in marketing argot, is referred to as ‘S(ocio)E(conomic)C(lass)-1.' Maharashtra has two IPL teams, based in its largest and richest cities, yet it is the upper strata of Pune and Mumbai society that most closely follow these teams. Some watch the matches at home, over a drink and after a hard day at the office; others go to the stadium, seeking vicariously to soak in the glamour of those even richer than themselves. That is to say, they go not so much to see Virat Kohli or Sachin Tendulkar bat, but to be in the same privileged space as the Nita Ambanis and the Shah Rukh Khans, this fleeting proximity reassurance that they too are within that part of India which is Shining as well as Winning.


    Balance of power

    The middle classes of the major metros are large and prosperous enough to sustain the IPL. But the rest of India, that is to say, the majority of India, does not appear to connect with the tournament. When there is a match on at the KSCA, there are crowds in the ground and in pubs in central Bangalore, but no interest in the poorer parts of the city or in villages 10 or 20 miles away.
    On the other hand, when the national team plays, as India, the peasant and the slum dweller can follow its fortunes as keenly as the hedge fund manager and software engineer. The IPL is exclusive; the Indian team inclusive. Notably, they do not live in separate worlds; rather, they are connected, with the former having a decided impact on the latter. Had the Indian cricket team taken six weeks off after the 2011 World Cup, they may not have lost four-nil to England in that summer's Test series. Two of India's leading batsmen and its leading bowler were carrying injuries sustained by playing in the IPL, which was held immediately after the World Cup. The weariness and the exhaustion carried over into the Australian series, likewise lost four-zero, and into successive one-day tournaments, where the World Cup champions were humiliated by such sides as Bangladesh. The ordinary cricket lover now knew what our ‘professional' cricket commentators were too nervous or too polite to say — that too much cricket, and too much of the wrong kind of cricket, was a major reason behind the disgraceful performance of the Indian team in the latter half of 2011.

    English and Australian cricket administrators may have other (and less salutary) reasons to dislike the IPL — namely, that it has shifted the balance of power in world cricket away from the white countries to India. However, some former colonial countries should be less than pleased with the tournament as well. Thus, the international game would benefit hugely if the West Indies were to somehow rediscover the art of winning Test and one-day matches. Recently, the West Indies have fought hard in series against Australia and England; their pluck might have been rewarded with victory had they the services of their best bowler, Sunil Narine; their best batsman, Chris Gayle; and their best all-rounder, Dwayne Bravo — all, alas, choosing to play in the IPL instead of for their national side.

    There is a larger, cosmopolitan, reason to dislike the IPL; and also a local, patriotic, one. The baleful effects of the tournament should worry Indian liberals who admire that form of capitalism which rewards those with the best ideas rather than those with the best contacts; Indian democrats who wish to nurture a more caring and just society; and Indian cricket fans who want their team to perform honourably at home and abroad.

    (Ramachandra Guha's books include A Corner of a Foreign Field. He can be contacted at

    If socialists really did run the show, working people would benefit

     Rather than having to engage in debate, an opponent can be dismissed as extremist

     Owen Jones in The Independent

    Having just moved to north London, I was perturbed to be woken on Tuesday morning by a whirring sound in the distance. When I glanced at the Telegraph's front page later that day – which revealed that multi-millionaire Tory donor Adrian Beecroft had accused Vince Cable of being a socialist – I realised it must have been Karl Marx spinning violently in his Highgate Cemetery grave. The great man shouldn't take it to heart: Beecroft strikes me as the sort of bloke who would accuse opponents of privatising the first-born for being a bit "pinko".

    Beecroft's smear on the good name of socialism was triggered by Cable's description of his proposals to shred Britain's remaining workers' rights (not least by allowing bosses to fire at will) as "bonkers". Given the contents of Beecroft's report for the Conservative Party, the certifiably non-socialist Lib Dem was being rather mild-mannered.

    We are in the most protracted economic crisis since the late 19th century because of a financial collapse and the Government's decision to suck demand out of the economy, and yet our economic elite still attempts to scapegoat people's rights in the workplace. I doubt that the Confederation of British Industry – fervent supporters of Beecroft's plans – believes it for a second, of course: they are merely class warriors attempting to exploit a crisis to push policies that would otherwise be politically impossible.

    But it does demonstrate how "socialist" is regarded as the ultimate insult by much of our wealthy elite, who have been in a virtually uninterrupted triumphalist mood since Margaret Thatcher defeated their political opponents in the 1980s. Similarly, an increasingly hot-tempered David Cameron routinely slams Ed Miliband for being "left-wing" at Prime Minister's Questions; it was once fashionable for the media to label the Labour leader "Red Ed". It is much like the term "liberal" in the United States: in the 1950s, even Republican President Dwight D. Eisenhower described himself as such, as did huge numbers of American voters. Liberal US scholar Lionel Trilling once felt able to dismiss conservatism as "irritable mental gestures". But now "liberal" is largely hurled as a term of abuse in US political debate, with few mainstream politicians willing to associate themselves with the label.

    Socialism used to be a term the Labour Party was more than happy to champion. In its historic 1945 manifesto, Labour announced that it was "a Socialist Party, and proud of it", with the ultimate objective of establishing a "Socialist Commonwealth of Great Britain". But the word hasn't made an appearance in a Labour Manifesto since 1987. Curiously, Tony Blair repeatedly spoke about socialism in his early days as Labour leader but, given that no one really believed he was a socialist, it was more a case of "the lady doth protest too much". For Blair and his adherents, if there was a rare, sentimental need to dust off "socialism", it was to mean nothing more than platitudes no decent person would disagree with, like "community" and "fairness".

    The reason "socialism" came to be seen as a swear word was twofold. First, Thatcher made it abundantly clear that she was at war with what she regarded as socialism. In her memoirs, she described post-war Britain as a "socialist ratchet" and, reflecting on the 1983 general election, she argued that "socialism was still built into the institutions and mentality of Britain". In her mission to "create a wholly new attitude of mind", as she put it soon after her first election victory, she appeared to crush "socialism" into the dust.

    In what was fortunate timing for Thatcher's acolytes, the Soviet empire began disintegrating as her project reached its climax. Although almost all socialists abhorred Stalinist totalitarianism (by the 1980s, at least), these were regimes that described themselves as "actually existing socialism". Their collapse was portrayed as the final discrediting of socialism, and the ultimate vindication of capitalism.

    Beecroft's use of "socialism", then, relates to a theory called the "Overton window", which describes what is seen as politically acceptable at a given time. Rather than having to engage in a debate over the merits of bosses being able to dismiss their workers at will, an opponent can be dismissed as a "socialist", which – for Beecroft – is code for "extremist" or "someone with views outside of what is politically acceptable".

    The irony of it all is that socialism, of a sort, is actually flourishing in Britain – for wealthy people like Beecroft. The taxpayer bailed out the banks that caused the crisis, allowing them to carry on much as before, courtesy of public money. Private companies such as "welfare-to-work" business A4e leech off the state, as do private contractors throughout our public services. Indeed, our NHS is set to become an even more lucrative opportunity (at taxpayers' expense) for private health care firms like Care UK than it was under New Labour.

    The taxpayer splashes out three times more subsidies on private train companies than they did on publicly owned British Rail. Private landlords get away with charging extortionate rents, knowing that the state will pay billions subsidising them through housing benefit. Wealthy individuals enjoy tax relief on their pensions worth billions. Socialism for the rich is thriving while, for everybody else, it is capitalism red in tooth and claw.

    If socialists really were running the show in Britain, they would be building a society run by, and in the interests of, working people. Our banks – propped by the British people – would be taken under genuine democratic control, forcing them to operate in the interests of society as a whole. Our booming wealthy elite would be forced to pay a fair share of tax (or, in some cases, any tax whatsoever). After the disastrous failures of market economics, real socialists would be taking our utilities – such as the railways and rip-off energy companies – into social ownership: not old-style, statist nationalisation, but democratically run by workers and consumers. They would bring down welfare spending, not by kicking people at the bottom, but by building social housing, introducing a living wage, and creating jobs. And they would be reversing the scandalous lack of rights that workers have in the workplace, which is what ensured that wages were declining for many before the crash had even happened.

    Instead, we have a government (of which Vince Cable is a pillar) ruthlessly forcing working people to pay the immense cost of getting capitalism out of its mess. Beecroft may feel frustrated that it is not politically possible to adopt his attacks on workers' rights wholesale, but he can rest assured that this is a government that stands for people like him – and those pesky socialists could not be any further away from the corridors of power.

    Adam Smith's Market never stood alone


      By Amartya Sen
    Published: March 10 2009 20:15 | Last updated: March 10 2009 20:15
    Pinn illustration

    Exactly 90 years ago, in March 1919, faced with another economic crisis, Vladimir Lenin discussed the dire straits of contemporary capitalism. He was, however, unwilling to write an epitaph: "To believe that there is no way out of the present crisis for capitalism is an error." That particular expectation of Lenin's, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the second world war, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. The global economic crisis began suddenly in the American autumn and is gathering speed at a frightening rate, and government attempts to stop it have had very little success despite unprecedented commitments of public funds.

    The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The invoking of old and new capitalism played an energising part in the animated discussions that took place in the symposium on "New World, New Capitalism" led by Nicolas Sarkozy, the French president, Tony Blair, the former British prime minister, and Angela Merkel, the German chancellor, in January in Paris.

    The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. Do we really need a "new capitalism", carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason? Should we search for a new capitalism or for a "new world" – to use the other term on offer at the Paris meeting – that need not take a specialised capitalist form? This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.

    Smith never used the term capitalism (at least, so far as I have been able to trace), and it would also be hard to carve out from his works any theory of the sufficiency of the market economy, or of the need to accept the dominance of capital. He talked about the important role of broader values for the choice of behaviour, as well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that "prudence" was "of all virtues that which is most helpful to the individual", Smith went on to argue that "humanity, justice, generosity, and public spirit, are the qualities most useful to others".*

    What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification for an economy to be seen as capitalist. In a similar way, dependence on the profit motive, and on individual entitlements based on private ownership, are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist? All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.

    It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. Perhaps the biggest mistake lies in interpreting Smith's limited discussion of why people seek trade as an exhaustive analysis of all the behavioural norms and institutions that he thought necessary for a market economy to work well. People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently. For example, Smith argued: "When the people of any particular country has such confidence in the fortune, probity, and prudence of a particular banker, as to believe he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them."

    Smith explained why this kind of trust does not always exist. Even though the champions of the baker-brewer-butcher reading of Smith enshrined in many economics books may be at a loss to understand the present crisis (people still have very good reason to seek more trade, only less opportunity), the far-reaching consequences of mistrust and lack of confidence in others, which have contributed to generating this crisis and are making a recovery so very difficult, would not have puzzled him.

    There were, in fact, very good reasons for mistrust and the breakdown of assurance that contributed to the crisis today. The obligations and responsibilities associated with transactions have in recent years become much harder to trace thanks to the rapid development of secondary markets involving derivatives and other financial instruments. This occurred at a time when the plentiful availability of credit, partly driven by the huge trading surpluses of some economies, most prominently China, magnified the scale of brash operations. A subprime lender who misled a borrower into taking unwise risks could pass off the financial instruments to other parties remote from the original transaction. The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.

    This institutional vulnerability has implications not only for sharp practices, but also for a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits "prodigals and projectors" – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.

    Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.

    The economic difficulties of today do not, I would argue, call for some "new capitalism", but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.

    Britain can’t afford to fall for the charms of the false economics Messiah Paul Krugman Superstar economist Paul Krugman wants us to change course, but his solutions are simplistic.

    Jeremy Warner in the Telegraph

    What does the future hold as Europe slides, ever more hopelessly, towards the abyss? As David Cameron has pointed out, there have been 18 EU summits since he became Prime Minister little more than two years ago, and none of them has produced anything remotely resembling a solution.
    The stand-off got a whole lot worse this week. France and Germany are now in open conflict over the way forward, if indeed there is one. For the UK, already bleeding badly from the after-effects of the financial crisis, the situation could scarcely look more threatening.
    The fiscal consolidation chosen by the Coalition was always likely to have a negative impact on output, at least in the short term. To make it work, the Government needed the following wind of decent growth elsewhere in the world economy. Instead, it’s facing a hurricane. We look set to be broken by the storm.

    But fear not – salvation is at hand. Next week, there comes to these shores a Messiah, a prophet of great wisdom and understanding whose teachings promise to vanquish despair and “end this depression”. He is Prof Paul Krugman, a superstar polemicist who has been described by The Economist as “the most celebrated economist of his generation”. Actually, “celebrated” is not exactly the right word, for Krugman divides opinion like no other. To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

    I’ve been a little misleading here. He’s not really coming to Britain to save us, but rather to promote his latest book, End This Depression Now! Krugman is an economist with attitude, and he thinks Britain is in the midst of a “massive blunder” in economic policy. The UK is the very worst example of austerity economics, he believes, for unlike the poor beleaguered nations of the eurozone periphery, we’ve not had this misery forced on us by the ghastly euro, but have opted for it as an unnecessary penance for the sins of the boom. If only we could be persuaded to forsake “Osbornomics” and tread the path originally set out by our dearly beloved former leader, Gordon Brown – that of spending our way back to growth – then all would be well again.

    Put like that, of course, it sounds ridiculous, but the fact that Krugman is a Nobel prize-winning economist gives Labour’s calls for a U-turn on the economy an intellectual credibility they would otherwise struggle to attain.

    All the great economists – from Adam Smith to John Maynard Keynes – were as much moral philosophers as dispassionate analysts of events, and Krugman is no exception, preaching his message with all the passion of the religious zealot. He feels our pain and begs us to let him help. “The road out of depression and back to full employment is still wide open,” he insists. “We don’t have to suffer like this.”

    Krugman may appear loud and radical, but he follows a fairly standard Keynesian text. By his own admission, the social cost of the present downturn doesn’t come anywhere close to the Great Depression of the interwar years, or not yet. None the less, there are parallels, and we already meet Keynes’s classic definition of a depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”.

    In such circumstances, monetary policy can help, but only up to a point. In a depression, even those with the balance sheet strength to spend and invest won’t do so, whatever the encouragement offered through ultra-low interest rates. It follows that governments should step into the breach and do the job instead, as a kind of spender of last resort. They can worry about the accumulated debt later, once output has picked up again.

    To Krugman, it’s understandable that policymakers screwed up so monumentally in the Great Depression; they didn’t understand what was going on and there was no template for the circumstances they found themselves in. To his mind, there is no excuse this time around; it’s textbook stuff, which is being wilfully ignored.

    But haven’t we already tried borrowing to stimulate? And what did it deliver other than fiscal ruin, which in the eurozone periphery is so serious that markets have stopped lending altogether? Krugman has an answer for these questions, too. It’s not the policy that was wrong, merely that the stimulus wasn’t big and sustained enough. As for the eurozone, again, it wasn’t the policy, but the euro. Countries with their own currencies and central banks won’t run into this kind of problem. In extremis, they can always print the money.

    Easy peasy, then. What’s not to like? Well, I’m sorry, but I just don’t buy it. It may or may not be possible for a vast, largely internalised economy such as the US, with its reserve currency status, to run double-digit deficits into the indefinite future without adverse consequences, but for the UK it is a much more questionable policy.

    True, Britain has lived with much higher debts relative to GDP in the past, but this has nearly always coincided with major wars. With demilitarisation, much of this borrowing to spend falls away and domestic consumption comes roaring back. No such get-out-of-jail-free card exists this time around. Further, the demographic is completely different from that of the post-war baby boom generation, where growth and therefore debt erosion were more or less guaranteed. Today, the unfunded liabilities of an ageing population stretch menacingly into the long-term future.

    As it is, government spending in the UK is already approaching 50 per cent of GDP. Just how high does Prof Krugman propose it should go? It’s all very well to say “jobs first” and worry about the deficit later, but once government spending becomes entrenched, it’s very difficult to get rid of it. Even Reagan and Thatcher struggled to make significant inroads.

    In any case, the picture Krugman presents of wrong-headed British austerity is a caricature of the reality, though one admittedly encouraged by the Coalition’s rhetoric. Yesterday’s revised GDP figures, showing that the country is even deeper in recession than we thought, would appear to support the mocking tone in which Krugman condemns the idea of “expansionary austerity”. But where is this austerity? In fact, one of the few positive contributors to output in the last quarter was government spending, which grew by 1.6 per cent. Krugman seems to have forgotten the automatic stabilisers, which because of our welfare state are considerably bigger than in the US. In America, much current UK spending would count as a discretionary fiscal stimulus of the sort End This Depression Now! advocates.

    As Raghuram Rajan, a former IMF chief economist, has argued, today’s troubles are not simply the result of inadequate demand, but of major changes in the world economy brought about by globalisation. The old monopoly of knowledge and expertise once enjoyed by advanced economies has been swept away. For decades, we compensated for the jobs and income lost to technology and cheaper foreign competition with unaffordable government spending and easy credit. Much of the growth enjoyed in these pre-crisis years was simply unsustainable.

    Paul Krugman’s message is seductive, but it’s also unrealistic. If only the solutions to our plight were as simple as he thinks.