Five tips for George Osborne on banking reform

These simple steps would provide the direction for deeper reform of the banking system

• 
• • Prem Sikka
  • theguardian.com, Tuesday 26 November 2013 18.31 GMT

Public pressure for better banking reform from George Osborne, the chancellor, is growing. Photograph: Chris Ison/PA

Some six years after the banking crash, the UK taxpayer is still providing £977bn of loans and guarantees (pdf) to support the ailing banking sector. The reform process is painfully slow. The banking reform bill currently going through parliament (pdf) has grown from 35 pages to 170 pages, but still does not deal with the flaws that led to the crisis. Public pressure for a tougher approach is growing, with figures including the archbishop of Canterbury demanding firmer government action. The chancellor, George Osborne, should at the very least do the following five things. On their own, they won't necessarily solve the deep-seated crisis in our financial institutions, but they would provide the direction for deeper reforms.

1. Think outside the ringfence

Introduce a statutory separation of retail banking from speculative banking and not just the weak "ringfence" he is proposing. Despite the crash, banks remain addicted to gambling with other people's money. They bet on everything from the movement of interest rates, price of commodities, oil, wheat, foreign exchange and much else through complex financial instruments known as derivatives. Derivatives have been described by investment guru Warren Buffett as "financial weapons of mass destruction". Derivatives brought down Lehman Brothers, Northern Rock, Bear Stearns, MF Global, Countrywide, Merrill Lynch, Wachovia and Washington Mutual, just to mention a few. Yet no lessons have been learned.

The Bank of International Settlements (BIS) shows that the notional/face value of over-the-counter (OTC) derivatives is about $693tn. In addition, derivatives are traded on exchanges; adding up to a whopping $1,200tn. The exact economic exposure of the UK banking system is probably considerably lower, but is not known. The Treasury's response to requests for information is that the information "is not currently available". So what do bank balance sheets show us? The financial statements of Barclays Bank (pdf) show the dangers. Its derivatives assets and liabilities of £469bn and £462bn respectively need not net off and could expose it to anything from £7bn to over £900bn. The UK, with a GDP of £1.5tn is in no position to absorb the losses and the knock-on effects. Even Nobel prize winners in economics have been unable to manage the risks in derivatives.

2. Hold banks responsible for losses

Withdraw limited liability from speculative banking. Merely separating the banking arms is not enough because banks use monies from savers, pension funds and insurance companies to finance their gambling habit. Major losses from their bets will ultimately infect the rest of the economy and affect every household. Therefore, the owners of these vast casinos must be held personally liable for the losses.

3. Make them balance the books

Force banks to address their gross undercapitalisation. Barclays has gross assets of £1,500bn against capital of just £63bn. A decline of just 4.22% in the value of its assets could wipe out its entire capital. HSBC has gross assets of $2,700bn (£1,687bn) compared to capital of $183bn (£114bn). It can barely absorb the decline of 6.75% in its asset value. Capital ratios in these ranges have not been and will not be good enough to cushion losses. No doubt some will say that some assets are less risky than others and banks will get away with modest capital ratios, but none of this saved banks previously. So a healthy capital adequacy ratio of at least 12.5%, and higher, should be aimed for.

4. End fat-cattery

Risk capital should be built by clamping down on executive pay. No executive should receive more than 10 times the minimum wage until the required capital levels are reached.

Despite the taxpayer-funded bailouts excessive executive pay is rife and remains linked to reckless risk-taking. The long-term solution is to empower bank employees, savers and borrowers to vote on executive remuneration. They all have a long-term interest in the wellbeing of banks and can curb reckless risk taking.

5. Crack down on the auditors

Bring in a fundamental overhaul of the auditing of banks. Big accounting firms, acting as auditors of banks, are supposed to be the eyes and ears of financial regulators, but the lure of profit is too strong. Almost every ailing bank received a clean bill of health (pdf)from its auditors who received millions of pounds in auditing and consultancy fees. In some cases, banks collapsed within days of receiving the all-clear. Even worse, in some cases auditors were complicit in dubious practices. It is time to remove the accounting firms from audits in the financial sector. That task should be performed by a specially created body, equivalent to the National Audit Office. Unlike the present situation, the financial regulator should have unhindered access to all data held by the auditors.

Stop lecturing the Scots. They want freedom, not wealth

Westminster's arrogance has played straight into the SNP's hands: next year's Scottish referendum could deliver the shock of the century

• 
• • Simon Jenkins
  • The Guardian, Tuesday 26 November 2013 20.45 GMT

No nation seeks independence to get rich. It seeks independence to get free. The Scottish leader, Alex Salmond, today published a 670-page account of the political economy of an independent Scotland prior to next year's referendum. Little of it really matters. Some 30 countries have separated from dominant neighbours in the last half-century, and few stopped to count the cost. They left details of flags, borders, taxes and currencies to their negotiators. They simply wanted to govern themselves as they saw fit. That was enough.

That Scotland should come even near the brink of secession after three centuries of union with England is historically astounding. A mere 50 years ago, it was inconceivable. The reason is specific. There seems no limit to the insensitivity of Westminster's political class to the aspirations of the subordinate tribes of the British Isles. Edmund Burke remarked that London ruled even its American colonies more considerately than it did Ireland. In Scotland's case, from the poll tax and delayed devolution to the contempt for Edinburgh of London's "tartan mafia", every move has played into the nationalists' hands.

Supporters of the old British empire assumed it would last for ever. They were wrong. It disappeared because the mood of the age was against it, abetted by inept colonial administrators. Only in the white commonwealth was retreat dusted with some dignity. Meanwhile Britain's earlier empire, that of the English over the so-called Celtic half of the British Isles, has also been crumbling. Most of Ireland is gone. Salmond's white paper is a blueprint for dismantling the rest.

The white paper recycles a familiar agenda, largely included in last year's document on an independent economy. It is a confusing mix of real constitutionalism and a rag-bag of old SNP policies tossed in to give independence voter appeal. The latter tarnishes the former.

The constitution proposals are clearly a negotiating hand. We learn that the Queen can remain monarch, borders can remain open, citizenship can be shared and national debts divided. If the Scots want Faslane's nuclear submarines to go, go they must. Or perhaps Faslane could become Scotland's Guantánamo Bay.

Salmond has more trouble over his twin economic pillars, of European Union membership and the retention of sterling. He and his deputy, Nicola Sturgeon, must know that their economic model is heavy on optimism, if not fantasy. It portrays a Scotland surging forward on the cutting edge of capitalist innovation. Tax breaks galore would do for Scotland what they have done, up to a point, for Ireland. Scottish Widows would ride down silicon glen.

The reality is that Britain has long clamped the "golden handcuffs" of welfare dependency on the Scots, subsidising them annually by some £1,000 a head more than the English. The Institute for Fiscal Studies, admittedly on a worst-case base, reckons Scotland will need an 9% rise in income tax to compensate for losing Britain's subvention. Salmond retorts that the Scots would be £600 a head better off.

Whatever the truth of that, Salmond was unwise to distort the vexed debate by promising crude budgetary give-aways, such as childcare grants, tax cuts, social housing subsidies, windfarm hand-outs and the traditional splurge that tends to accompany the first stage of fiscal devolution. Nor does he allow himself the transitional leeway of a separate currency, with scope for depreciation. He wants to stay linked to the pound. He wants to share the national debt, pool financial sovereignty and reach a deal on pension and other inherited liabilities.

This is a recipe for Greek-style disaster. Scotland might enjoy the spurt of investment and growth that tends to greet new states, as in Slovakia or partly autonomous Catalonia. But the most likely sequence is brief euphoria followed by budgetary crisis, retrenchment and austerity. The emergence into the sunnier uplands of small-is-beautiful independence would be slow and painful. Salmond himself would not long survive such turmoil.

With nationalism realised, new forces to left and right would appear. Slashed payrolls and fewer benefits would see disaffection and emigration. Tourists would depart a Highlands landscape blighted by Salmond's turbine industrialisation. Optimism would no longer be an option. The road from Edinburgh to Denmark remains plausible, but it would be long and rocky.

Yet all this is Scotland's business, and is beside the question of how to give political shape to a fast-emerging national identity. Britain should know all about secession. It championed Ulster's separation from Ireland. It went to war to allow Kosovo to secede from Serbia. It sponsored the breakup of Yugoslavia, Iraq and now Afghanistan. The only empire London still supports appears to be its own ragged island confederacy.

If any generalisation is relevant to the Scottish referendum, it is that nation states worldwide are losing sovereignty upwards and downwards. States must pay obeisance to supranational treaties – in Britain's case to the EU – while their domestic control is eroded by ever more assertive sub-national groups. Wise countries such as Spain concede autonomy to the Basques and Catalans in response. There are many models of confederacy from which to choose, from Belgium and Italy to the European Union and the Commonwealth.

England's political tradition rejects such pluralism, and has paid the price. An empire that reached across oceans now struggles to reach across the Irish Sea, Hadrian's Wall and Offa's Dyke. Most of Ireland broke away in 1922, due to Westminster's mishandling. Today the English would be well-advised to stop lecturing the Scots and silence the claque of Scots expatriate scaremongers clearly appalled at becoming foreigners in their adopted land. Humility all round is urgently needed.

Polls suggest that the Scots may not go the whole hog to independence – but they may still deliver London the shock of the century. The truth is that there is no full national independence these days. There are layers of sovereignty, tiers of autonomy, democratic pluralism. Most Scots clearly seek greater detachment within, if not from, the UK.

Modern Edinburgh already feels more like Dublin than London. The coalition must seriously consider offering a new Anglo-Scottish deal, somewhere between independence and the present devolution. Salmond has put on the agenda a new dispensation between London and the "national" capitals of the UK, Northern Irish and Welsh as well as Scottish. Only the arrogance of London's political community finds such a prospect intolerable. That arrogance lost one British empire. It may yet lose another.

What the Maoist slavery sect tells us about the far-left

Far-left 'splittist' sects like Comrade Bala's proliferated in the 70s – and a genuine desire for change was corrupted

• 
• • Tariq Ali
  • The Guardian, Tuesday 26 November 2013 21.00 GMT

Journalists outside Peckford Place in Brixton, one of the properties linked to Aravindan and Chanda Balakrishnan, arrested on suspicion of holding three woman captive at addresses in south London. Photograph: Guy Corbishley/ Guy Corbishley/Demotix/Corbis

The recent Monty Python revival has come with a bizarre reminder from south London that once, long ago, there were a few tiny Maoist groups in Britain who used language that could have been cribbed from Life of Brian.

Aravindan Balakrishnan, 73, and his 67-year-old wife, Chanda – arrested last week on suspicion of holding three women as slaves in a flat for 30 years – were leaders of a tiny sect of 25 members known as the Workers' Institute of Marxism-Leninism-Mao Zedong Thought, invisible to the left at large. This sect had split from its father organisation, the Communist party of England (Marxist-Leninist), which itself had less than a hundred followers. The Maoists' antics were rivalled by a number of Trotskyist sects, smaller and larger, whose implosion often involved the mistreatment of women, and the story is by no means over.

The Balakrishnans' Brixton commune, it is now alleged, kept three women as virtual prisoners against their will. But it prospered. Membership declined, but property increased. The Balakrishnans pre-empted China's turn to capitalism – according to some reports they had interests in 13 properties, three more than their total membership at the time.

What was the attraction of Maoism? The figure of Mao and the revolution loomed large, but the outpourings from these groups did not suggest a close reading of On Contradiction or other texts by Mao that might have stimulated the brain cells. Instead they became fantasy outfits, each with its own homegrown Mao playing on the genuine desire for change that dominated the 1967-77 decade.

As a political current, Maoism was always weak in Britain, confined largely to students from Asia, Africa and Latin America. This was not the case in other parts of Europe. At its peak, German Maoism had more than 10,000 members, and the combined circulation of its press was 100,000. After the great disillusionment – as the Chinese-US alliance of the mid-70s was termed – many of them privatised, and thousands joined the Greens, Jürgen Trittin becoming a staunch pro-Nato member of Gerhard Schröder's cabinet. In France, the Gauche Prolétarienne organised workers in car factories, and set up Libération, its own paper that morphed into a liberal daily. Ex-Maoist intellectuals occupy significant space in French culture, though they are now neocons: Alain Finkielkraut, Pascal Bruckner, Jean-Claude Milner are a few names that come to mind. The leading leftwing philosopher Alain Badiou never hides his Maoist past.

Scandinavia was awash with Maoism in the 70s. Sweden had Maoist groups with a combined membership and periphery of several thousand members but it was Norway where Maoism became a genuine popular force and hegemonic in the culture. The daily paper Klassekampen still exists, now as an independent daily with a very fine crop of gifted journalists (mainly women) and a growing circulation. October is a leading fiction publishing house and May was a successful record company. Per Petterson, one of the country's most popular novelists, describes in a recent book how, when Mao died, 100,000 people in a population of five million marched with torches to a surprised Chinese embassy to offer collective condolences. All this is a far cry from the cult sect now being excavated in Brixton.

What always struck me even then as slightly odd was that, regardless of the political complexion of a sect, the behavioural patterns of its leaders were not so different. Even those most critical of Stalinist style and methods tended to reproduce the model of a one-party state within their own ranks, with dissent limited to certain periods and an embryonic bureaucracy in charge of a tiny organisation. It was in western Europe, not under Latin American or Asian military dictatorships, that clandestinity and iron discipline were felt to be necessary.

Young women and men who joined the far-left groups did so for the best of reasons. They wanted to change the world. Many fought against the stifling atmosphere in many groups. Women organised caucuses to monitor male chauvinism inside the groups and challenged patriarchal practices. Pity that not all the lessons were learned. Easy now to forget that many who fought within and led the women's and gay liberation movements – in Europe and elsewhere – had received their political education inside the ranks of the combined far left, warts and all.

I can still recall a South American feminist calmly informing a large gathering of revolutionaries in the 70s that advances were being made against machismo. "Only last year," she declared, "my husband, who is sitting on the platform, locked me in the house on 8 March so I couldn't join the International Women's Day demonstration." The husband hid his face in shame.

Now the 70s really does seem another country. The thunder of money has drowned much that was and is of value. The campaign to demonise trade unions – indeed, any form of non-mainstream political activism or dissent – continues apace, despite the fact that the left has never been weaker. A sign, perhaps, that the votaries of the free market remain fearful of any challenges from below.

INDIA'S NUCLEAR SCIENTISTS KEEP DYING MYSTERIOUSLY

(Photo via)

Joseph Cox in Vice.com

Indian nuclear scientists haven't had an easy time of it over the past decade. Not only has the scientific community been plagued by "suicides," unexplained deaths, and sabotage, but those incidents have gone mostly underreported in the country—diluting public interest and leaving the cases quickly cast off by police.

Last month, two high-ranking engineers—KK Josh and Abhish Shivam—on India's first nuclear-powered submarine were found on railway tracks by workers. They were pulled from the line before a train could crush them, but were already dead. No marks were found on the bodies, so it was clear they hadn't been hit by a moving train, and reports allege they were poisoned elsewhere before being placed on the tracks to make the deaths look either accidental or like a suicide. The media and the Ministry of Defence, however, described the incident as a routine accident and didn't investigate any further.    

This is the latest in a long list of suspicious deaths. When nuclear scientist Lokanathan Mahalingam's body turned up in June of 2009, it was palmed off as a suicide and largely ignored by the Indian media. However, Pakistani outlets, perhaps unsurprisingly, given relations between the two countries, kept the story going, noting how quick authorities were to label the death a suicide considering no note was left.

Five years earlier, in the same forest where Mahalingham's body was eventually discovered, an armed group with sophisticated weaponry allegedly tried to abduct an official from India's Nuclear Power Corporation (NPC). He, however, managed to escape. Another NPC employee, Ravi Mule, had been murdered weeks before, with police failing to "make any headway" into his case and effectively leaving his family to investigate the crime. A couple of years later, in April of 2011, when the body of former scientist Uma Rao was found, investigators ruled the death as suicide, but family members contested the verdict, saying there had been no signs that Rao was suicidal.   

Trombay, the site of India's first atomic reactor. (Photo via) 

This seems to be a recurring theme with deaths in the community. Madhav Nalapat, one of the few journalists in India giving the cases any real attention, has been in close contact with the families of the recently deceased scientists left on the train tracks. "There was absolutely no kind of depression or any family problems that would lead to suicide," he told me over the phone.

If the deaths of those in the community aren't classed as suicide, they're generally labeled as "unexplained." A good example is the case of M Iyer, who was found with internal haemorrhaging to his skull—possibly the result of a "kinky experiment," according to a police officer. After a preliminary look-in, the police couldn't work out how Iyer had suffered internal injuries while not displaying any cuts or bruises, and investigations fizzled out.   

This label is essentially admission of defeat on the police force's part. Once the "unexplained" rubber stamp has been approved, government bodies don't tend to task the authorities with investigating further. This may be a necessity due to the stark lack of evidence available at the scene of the deaths—a feature that some suggest could indicate the work of professional killers—but if this is the case, why not bring in better trained detectives to investigate the cases? A spate of deaths in the nuclear scientific community would create a media storm and highly publicised police investigation in other countries, so why not India?

This inertia has led to great public dissatisfaction with the Indian police. "[The police] say it's an unsolved murder, that's all. Why doesn't it go higher? Perhaps to a specialist investigations unit?" Madhav asked. "These people were working on the submarine program, creating a reactor, and have either 'committed suicide' or been murdered. It's astonishing that this hasn't been seen as suspicious."

Perhaps, I suggested, this series of deaths is just the latest chapter in a long campaign aiming to derail India's nuclear and technological capabilities. Madhav agreed, "There is a clear pattern of this type of activity going on," he said.

INS Sindhurakshak (Photo via)

The explosions that sunk INS Sindhurakshak – a submarine docked in Mumbai – in August of this year could have been deliberate, according to unnamed intelligence sources. And some have alleged that the CIA was behind the sabotage of the Indian Space Research Organisation (ISRO).

Of course, the deaths have caused fear and tension among those currently working on India's various nuclear projects. "[Whistleblowers] are getting scared of being involved in the nuclear industry in India," Madhav relayed to me. Their "families are getting very nervous about this" and "many of them leave for foreign countries and get other jobs."

There are parallels here with the numerous attacks on the Iranian nuclear scientist community. Five people associated with the country's nuclear programme have been targeted in the same way: men on motorcycles sticking magnetic bombs on to their cars and detonating them as they drive off. However, the Iranian government are incredibly vocal in condemning these acts—blaming the US and Israel—and at least give the appearance that they are actively investigating.

The same cannot be said for the Indian government. "India is not making any noise about the whole thing," Madhav explained. "People have just accepted the police version, [which describes these incidents] as normal kinds of death."

If the deaths do, in fact, turn out to be premeditated murders, deciding who's responsible is pure speculation at this point. Two authors have alleged that the US have dabbled in sabotaging the country's technological efforts in the past; China is in a constant soft-power battle with India; and the volatile relationship with Pakistan makes the country a prime suspect. "It could be any of them," Madhav said.

But the most pressing issue isn't who might be behind the murders, but that the Indian government's apathy is potentially putting their high-value staff at even greater risk. Currently, these scientists, who are crucial to the development of India's nuclear programes, whether for energy or security, have "absolutely no protection at all. Nothing, zero," Madhav told me. "Which is amazing for people who are in a such a sensitive program."

The drugs do work, but they can't cure unhappiness

Antidepressants are sometimes prescribed when they aren't needed, but never to use them is to miss an opportunity

• Tim Cantopher
• theguardian.com, Wednesday 20 November 2013 16.20 GMT

Antidepressants buy you time to sort out the issues that caused the depression in the first place. Photograph: Cultura/Rex Features

I can't stand zealots. Unfortunately, the literature on antidepressants is full of them. I'm not impressed by the protagonists in the polarised argument over the efficacy or otherwise of these drugs, whose positions are firmly held and loudly proclaimed. Many researchers appear to have written the conclusion of their study before the protocol.

At the one pole are the pharmaceutical industry and academic psychopharmacologists. I'll call them the pros. They urge us to practise only evidence-based medicine, by which they mean following rigid protocols based on treatments that have achieved positive results either in double-blind placebo-controlled drug trials, or meta-analyses (a method for grouping together results from several trials). Most of these studies focus on antidepressants because their effects are easy to measure.

The pros despise any practice not based on this narrow definition of evidence. One of them once told me: "Employing clinical experience to decide how to treat patients means continuing to make the same mistakes and never learning from them." So much for the lessons I've learned from treating about 3,000 people with this illness.

At the other pole are a group of naysayers who assert that antidepressants don't work any better than placebo. I'll call them the cons. They use the available statistics in the way best suited to their argument and are equally dismissive of any contrary view.

It's part of our culture to take up polarised positions. Our political and legal systems are based on this premise and our media rely on it. The middle ground isn't interesting and is rarely aired. It is this environment in which the pros and cons dominate the literature on antidepressants. Meanwhile, sufferers from the depressive illness don't know which way to turn.

The root of the problem is that good research is difficult and limited. Research is good at showing big effects in large groups of people. It's not so good at showing more subtle, or difficult to define, effects in subgroups of people. The results of your study will depend on whom you study, what you measure, what you define as an effect and what you do with your data.

The cons say that the pros have suppressed some findings that didn't suit them. If you compare two identical groups 20 times, you will find an apparently significant difference between them once. Test your ineffective antidepressant 20 times and you'll be able to publish a positive result, so long as you suppress the other 19. We clinicians knew this was happening years ago. One particular antidepressant was known by everyone to lack efficacy, yet the studies appeared to show that it worked as well as all the rest. Something was wrong with the published research and it seems we may now know what it was. Recent research seems to under-report some side-effects and withdrawal effects of antidepressants.

The cons are equally selective. They point to meta-analyses showing that antidepressants don't out-perform placebo sufficiently to reach this arbitrary level of significance. They conclude that antidepressants don't work. This is the oldest misuse of statistics in the book. An insignificant difference doesn't mean that you've proven no difference; it just means that you haven't proved that there is one.

Another issue is failing to exclude the outlier. As I've already pointed out, one expects occasional misleading results from research. A meta-analysis should deal with this problem by excluding from the analysis any study with results wildly different from all the others. The pros say that this hasn't always happened in the cons' analyses, potentially producing misleadingly negative results.

So research is failing us in this field. Unfashionable though this is in the environment currently existing in medicine, it means we clinicians need to use our experience, powers of observation and common sense, bearing in mind the experience of other clinicians.

We need to take note of the available research, while also taking a critical view of it. Here is the upshot, accepted by most of us on the ground: antidepressants usually work, but only for real clinical depression, the type involving a chemical disturbance in the brain, with a full range of characteristic physical symptoms. They don't work for unhappiness, grief or chemically induced depression and if you take them irregularly or for too short a period, the depression comes back.

Prescription numbers are rising mainly because doctors are getting better at identifying depression, though antidepressants are sometimes prescribed when they aren't needed and won't work. Except for people suffering from recurrent depression they are only first aid, buying you time to sort out the issues that caused the depression in the first place, but never to use them is to miss an opportunity to provide relief from this horrible illness.

Dr Tim Cantopher, consultant psychiatrist, Priory Hospitals Group, author of Depressive Illness – the Curse of the Strong (Sheldon)

Post-crash economics: some common fallacies about austerity

Propositions in economics are rarely absolutely true or false – what is true in some circumstances may be false in others

• 
• • Robert Skidelsky
  • theguardian.com, Thursday 21 November 2013 16.29 GMT

Two Swabian housewives in Germany. 'One should simply have asked the Swabian housewife,' said German chancellor Angela Merkel after the collapse of Lehman Brothers in 2008. 'She would have told us that you cannot live beyond your means.' Photograph: Frederick Florin/AFP

The period since 2008 has produced a plentiful crop of recycled economic fallacies, mostly falling from the lips of political leaders. Here are my four favourites.

The Swabian Housewife: "One should simply have asked the Swabian housewife," said German chancellor Angela Merkel after the collapse of Lehman Brothers in 2008. "She would have told us that you cannot live beyond your means."

This sensible-sounding logic currently underpins austerity. The problem is that it ignores the effect of the housewife's thrift on total demand. If all households curbed their expenditures, total consumption would fall, and so, too, would demand for labour. If the housewife's husband loses his job, the household will be worse off than before.

The general case of this fallacy is the "fallacy of composition": what makes sense for each household or company individually does not necessarily add up to the good of the whole. The particular case that John Maynard Keynes identified was the "paradox of thrift": if everyone tries to save more in bad times, aggregate demand will fall, lowering total savings, because of the decrease in consumption and economic growth.

If the government tries to cut its deficit, households and firms will have to tighten their purse strings, resulting in less total spending. As a result, however much the government cuts its spending, its deficit will barely shrink. And if all countries pursue austerity simultaneously, lower demand for each country's goods will lead to lower domestic and foreign consumption, leaving all worse off.

The government cannot spend money it does not have: This fallacy – often repeated by British prime minister David Cameron – treats governments as if they faced the same budget constraints as households or companies. But governments are not like households or companies. They can always get the money they need by issuing bonds.

But won't an increasingly indebted government have to pay ever-higher interest rates, so that debt-service costs eventually consume its entire revenue? The answer is no: the central bank can print enough extra money to hold down the cost of government debt. This is what so-called quantitative easing does. With near-zero interest rates, most western governments cannot afford not to borrow.

This argument does not hold for a government without its own central bank, in which case it faces exactly the same budget constraint as the oft-cited Swabian housewife. That is why some eurozone member states got into so much trouble until the European Central Bank rescued them.

The national debt is deferred taxation: According to this oft-repeated fallacy, governments can raise money by issuing bonds, but, because bonds are loans, they will eventually have to be repaid, which can be done only by raising taxes. And, because taxpayers expect this, they will save now to pay their future tax bills. The more the government borrows to pay for its spending today, the more the public saves to pay future taxes, cancelling out any stimulatory effect of the extra borrowing.

The problem with this argument is that governments are rarely faced with having to "pay off" their debts. They might choose to do so, but mostly they just roll them over by issuing new bonds. The longer the bonds' maturities, the less frequently governments have to come to the market for new loans.

More important, when there are idle resources (for example, when unemployment is much higher than normal), the spending that results from the government's borrowing brings these resources into use. The increased government revenue that this generates (plus the decreased spending on the unemployed) pays for the extra borrowing without having to raise taxes.

The national debt is a burden on future generations: This fallacy is repeated so often that it has entered the collective unconscious. The argument is that if the current generation spends more than it earns, the next generation will be forced to earn more than it spends to pay for it.

But this ignores the fact that holders of the very same debt will be among the supposedly burdened future generations. Suppose my children have to pay off the debt to you that I incurred. They will be worse off. But you will be better off. This may be bad for the distribution of wealth and income, because it will enrich the creditor at the expense of the debtor, but there will be no net burden on future generations.

The principle is exactly the same when the holders of the national debt are foreigners (as with Greece), though the political opposition to repayment will be much greater.

Economics is luxuriant with fallacies, because it is not a natural science like physics or chemistry. Propositions in economics are rarely absolutely true or false. What is true in some circumstances may be false in others. Above all, the truth of many propositions depends on people's expectations.

Consider the belief that the more the government borrows, the higher the future tax burden will be. If people act on this belief by saving every extra pound, dollar, or euro that the government puts in their pockets, the extra government spending will have no effect on economic activity, regardless of how many resources are idle. The government must then raise taxes – and the fallacy becomes a self-fulfilling prophecy.

So how are we to distinguish between true and false propositions in economics? Perhaps the dividing line should be drawn between propositions that hold only if people expect them to be true and those that are true irrespective of beliefs. The statement, "if we all saved more in a slump, we would all be better off," is absolutely false. We would all be worse off. But the statement, "the more the government borrows, the more it has to pay for its borrowing," is sometimes true and sometimes false.

Or perhaps the dividing line should be between propositions that depend on reasonable behavioural assumptions and those that depend on ludicrous ones. If people saved every extra penny of borrowed money that the government spent, the spending would have no stimulating effect. True. But such people exist only in economists' models.

Teaching philosophy to children? It's a great idea

Studying philosophy cultivates doubt without helplessness, and confidence without hubris. I’ve watched children evolve to be more rational and open-minded because of it

• 
• • Michelle Sowey
  • theguardian.com, Wednesday 20 November 2013 22.23 GMT

'I quickly saw that kids, too, have the capacity to enquire philosophically from an early age'. Photograph: Christopher Furlong/Getty Images

Recently I’ve seen a spate of articles along the lines of "what philosophy can do for you", focusing on the high results that philosophy students score on standardised tests, the marketability of philosophical skills, and the impressive earning potential of philosophy graduates. I’ve even seen pitches like: "If you want to succeed in business, don’t get an MBA. Study philosophy instead." I find this strange, because career advancement and commercial success are the most peripheral of the benefits of philosophy.

In my university days, still uncertain of my future directions, I came across an unforgettable quote by Alex Pozdnyakov, a philosophy student on the other side of the world: “I have this strange phrase I use when people ask me why I chose philosophy. I tell them I wanted to become a professional human being.”

Perfect, I thought. That’s what I want to be.

Since then, training in various jobs has made me into various kinds of professional, but no training has shaped my humanity as deeply as philosophy has. No other discipline has inspired such wonder about the world, or furnished me with thinking tools so universally applicable to the puzzles that confront us as human beings.

When I started running philosophy workshops for primary school children, I quickly saw that kids, too, have the capacity to enquire philosophically from an early age. They’re nimble in playing with ideas and deft in building on each other’s arguments. They’re endlessly inquisitive, wondering about values (“What’s the most treasured object in the world?”), metaphysics (“Is the earth a coincidence?”), language (“If cavemen just went ‘ugh-ugh-ugh’, how did we learn to speak?”) and epistemology (“Since you can have dreams inside dreams, how can you know when you’re dreaming?”).

In small groups, they’ve discussed artificial intelligence, environmental ethics, interspecies communication and authenticity in art. They’ve contemplated the existence of free will, the limits of knowledge, the possibility of justice and countless other problems from the history of philosophical thought. By continually questioning, challenging and evaluating ideas, the children have been able to see for themselves why some arguments fail while others bear up under scrutiny.

Studying philosophy cultivates doubt without helplessness, and confidence without hubris. I’ve watched kids evolve to be more rational, sceptical and open-minded, and I’ve seen them interact in more fair-minded and collaborative ways. As one 10-year-old said, “I’ve started to actually solve arguments and problems with philosophy. And it works better than violence or anything else.”

Over 400 years ago, the French writer Michel de Montaigne asked: “Since philosophy is the art which teaches us how to live, and since children need to learn it as much as we do at other ages, why do we not instruct them in it?” We urgently need to ask ourselves the same question today.

The central place of Theory of Knowledge in the International Baccalaureate (a globally recognised high school diploma) reflects a worldwide appreciation for the importance of philosophy – a discipline that underpins all other academic disciplines. A growing international movement is inviting young children to philosophise in primary schools in the USA, the UK and elsewhere – but Australia is lagging.

Although philosophy features on the high school curriculum in most Australian states, only a very few primary schools dedicate class time to broad philosophical enquiry or to the explicit teaching of critical and creative thinking.

If it were more widely embraced, the practice of philosophical enquiry in primary schools could make schooling a lot more meaningful and engaging for students. It would certainly promote the development of reasoned argument and higher-order thinking – skills which underlie learning in most other domains (including literacy and numeracy) and which are essential for responsible civic engagement.

By setting children on a path of philosophical enquiry early in life, we could offer them irreplaceable gifts: an awareness of life’s moral, aesthetic and political dimensions; the capacity to articulate thoughts clearly and evaluate them honestly; and the confidence to exercise independent judgement and self-correction. What’s more, an early introduction to philosophical dialogue would foster a greater respect for diversity and a deeper empathy for the experiences of others, as well as a crucial understanding of how to use reason to resolve disagreements.

The benefits to students would be there for the taking, if only philosophy educators in Australia could access appropriate funding and institutional support. Such support is provided by charitable organisations like the Philosophy Foundation in the UK and theSquire Foundation in the USA, which lead the way in embedding philosophy in primary school curricula. Unless funding is made available here to pay expert philosophy practitioners or to provide classroom teachers with rigorous training, our kids are condemned to forgo the many rich rewards that philosophy promises – or to suffer from the variable level of professionalism that characterises many volunteer-run educational programs.

Here’s something to think about on World Philosophy Day: while academic achievement, career advancement and financial success are no trifling things, they’re simply visible husks that may grow around a philosophical life. The hidden kernel is made of freedom, clarity of thought, and a professional mastery of what it means to be human. These are qualities we should seek for all our children, no matter what they grow up to become.