Alas, Smith and Jez

"Given the massive sales of Thomas Piketty’s Capital, can Jeremy Corbyn’s election to the Labour leadership be that much of a surprise?"

One of the unhappiest moments in my life was in September 1969, sipping coffee with other Oxford freshers after our first college dinner together. Inevitably, the conversation turned to politics and the events of May 1968 in Paris. I quickly realised that I was surrounded by lefties and, for the most part, by lefty idiots. Whether I liked it or not, these people would form a significant part of my acquaintanceship over the next three years. I had expected better of an elite institution, where (unlike me) the majority of my contemporaries had had rich daddies and been privately educated.

Given the large number of British baby-boomers who would have manned the barricades in Paris in 1968 if they had been French, and given the massive sales of Thomas Piketty’s sloppily-argued Capital, can Jeremy Corbyn’s election to the Labour leadership be that much of a surprise? The truth is that many people have daft socialist ideas as students and they continue to have more or less the same ideas as they go through life. No amount of evidence or experience can change them.

How then should economists react to Corbynomics? Some of it appeals to the worst in people, notably the proposal to introduce the right to buy for private-sector tenants. Presumably the calculation is that tenants outnumber landlords, and that there are votes to be had by helping the less well-off tenants steal from the better-off landlords. But Corbyn seems to have come up with something more interesting in his advocating a new version of “quantitative easing”.

In his words, central bank asset purchases should be “for people instead of banks”. To amplify, “one option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in large-scale housing, energy, transport and digital projects”. The label “People’s QE” soon emerged, and it apparently has serious supporters. Last month the Guardian published a letter from 41 economists who said that Corbyn’s policies were not left-wing “extremism”. These included Professor David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee.

Schemes for using the banks to fund public spending are not new. Many British socialists in the 1930s and 1940s favoured nationalisation of both the Bank of England and the commercial banking system, so that finance could “serve the needs of society”, as they saw it. (And let us not overlook the fact that such commentators as Martin Wolf on the Financial Times and Anatole Kaletsky on the Times welcomed the 2008 nationalisation without compensation of Northern Rock and Bradford & Bingley. The mortgage books of these two organisations have now run off at immense profit to the British state, but no compensation has been, or will be, paid to former shareholders.)

The trouble is that Corbyn has a point. Suppose it is conceded that a bank, any bank, can have claims on the state, even in a free-market capitalist economy under the rule of law which respects (at least theoretically) the right to private property. Then where is the line to be drawn? Why should the UK’s banks not have claims on the state equal to over 80 per cent of assets, as they had in 1950, instead of less than 2 per cent of assets, as was found in early 2007? Why should the state not prohibit the banks from lending to the private sector altogether, so that all bank assets — and not just the central bank’s assets — are to pursue the desirable goals of social justice and ever-higher public investment?

The answer is that an overwhelming body of evidence — from scores of countries over long periods of time — shows that publicly-owned banks bossed around by politicians do a terrible job. Adam Smith explained almost 240 years ago that “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” A healthier debate on these matters might be held in modern Britain if it were noticed that “It is not from the benevolence of the banker, the stockbroker or the fund manager that we expect a decent return on our savings, but from regard to their own interests.”

Of course, the Bank of England must retain its independence from political interference, and the banking system must remain as far as possible in private hands and seek to maximise profits. But Corbyn’s notion of a “People’s QE” does fulfil a useful purpose, of alerting the commentariat to the role of certain financial structures and institutions in maintaining long-run economic success. Regrettably, the intellectual Right has been in a muddle on QE. Far too many pundits have been confused about “money printing”, claiming that QE would lead to rapid inflation. Nothing of the sort has happened. If the Right had spoken with greater understanding about QE, it would not now be necessary to man the intellectual barricades against the latest example of left-wing idiocy.

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