Slide 1

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Paul Krugman, The Age of Diminished Expectations, MIT Press (1994).

Calculating Productivity

Productivity, at its most basic, is merely the ratio of outputs to inputs.  Having established the units of output and input, it is a simple mathematical ratio.  In a corporate setting, if you believe the accounting numbers, productivity might be rather close to being the same as operating profit.  However, the inputs are tough to establish, and for simplicity many measures of productivity therefore focus on ‘labour productivity’, i.e. the ratio of outputs to labour inputs.  However, labour input measures can take at least two basic routes, hours or wages.

Even simple corporate comparisons are fraught with difficulty [see W Bruce Chew's “No-Nonsense Guide to Measuring Productivity”], for example moving beyond direct labour to wages, considering unpaid overtime, handling foreign exchange movements, the circularity of cost attributions often being allocated by labour hours, and confusing efficiency (“same with less”) with productivity (“more with same”) leading to volume reduction being equated with increased productivity.  And this is well before arguments on financing structures and rent extraction, or existential arguments on output (e.g. “number of patients treated” or “quality of care” or “quality-adjusted life years”) or inputs (e.g. government R&D subsidies).

National productivity calculations and comparisons are largely extrapolated from firm-level methods.   The Office for National Statistics (ONS) headline labour productivity measure is output per worker for the whole economy.  Other published productivity measures are output per filled job and output per hour worked which are available for the whole economy and selected industry sections and sub-sections.

“Both unit labour costs and unit wage costs are available for the whole economy and measure the labour or wage cost of producing one unit of output.  Although not a direct measure of productivity, an inverse relationship between these measures and productivity tends to be observed: the higher the productivity of a worker, the lower the cost of labour per unit of output, and vice versa.”

Problems With The Numbers

ONS International Comparisons of Productivity (ICP) "are based on two productivity measures for all G7 countries (Canada, France, Germany, Italy, Japan, the UK and the US). These two productivity measures are gross domestic product (GDP) per worker and GDP per hour worked. These are calculated using both current and constant purchasing power parities (PPPs).

Note that both GDP and PPP methodologies are highly criticised, often highly volatile, and often revised, for example Nigeria’s 89% GDP jump in 2014  or Ireland’s problems with aircraft leasing statistics leading to a 2015 revision of GDP growth from 7.8% to 26.3%.  The problems with GDP calculations are legion. As Diana Coyle said her 2014 article "A Measure For Error" - "So complicated is the task that the official handbook explaining the construction of GDP and related national accounts figures runs to 722 pages (up from 50 pages in 1953).  And the margin of error on the UK’s annual change in GDP has been two percentage points over the past 15 years, which is the same order of magnitude as the headline growth figure itself.”  

One of the great areas of discussion surrounds quality and technological advance.  For example, search engines have become enormously valuable tools for all businesses since the late 1990s.  And search engines have increased markedly in power and usefulness, but how is that captured?  Further, the effects of the search business model on other sectors are unknown.  Advertising pays for the bulk of the service provision, while the effects are felt on directories, travel agents, or consultants (there was a mini-industry for consultancies marketing their ‘rolodexes’ in the 1990s).  Is advertising less productive (more expensive/person in traditional advertising) or more productive (billions of ads served), while directory enquiries is more productive (charge for residual enquiries much higher) or less productive (fewer, more complex enquiries per person), due to search engines?

Another telling point is just that because something is measurable because it’s paid for, doesn’t mean the overall system is working.  This is related to Bastiat’s broken window fallacy, that we can increase GDP by encouraging breaking windows and then repairing them.  We can install heating systems in tropical countries, or air conditioning systems in temperate countries that don’t need them.  We can have a lot of bureaucratic ‘make work’ by government.  We can employ a lot of people on artificially low wages and improve our productivity.  Productivity and efficiency measures do not naturally focus on the right outcomes, typically more quality-of-life issues.

Government comprises a significant amount of the economy and causes difficulties as well in the calculations.  The Atkinson Review: “Measurement of Government Output and Productivity for the National Accounts” (2005) commissioned by the ONS focused on the methodological problems in government output measures.  The New Zealand government reviewed many similar issues and have a short critique worth reading.  Amongst other methodological problems, they note the tendency for government services to assume inputs are outputs and thus productivity is stable over time, cost of production is often used as a false surrogate for value, output quality can improve markedly while productivity measures are constant, and capital and depreciation numbers may not represent inputs.

The ONS Productivity Handbook: A Statistical Overview And Guide” (2007), ONS, 191 pages, covers almost all of the theoretical ground and the complexities.  Even here though, there is insufficient time and space to cover role of national debt, role of taxation, position of pensions, and other long-term issues.  Some traditional areas of market failure highlight some quick areas of critique:

  • externalities – is productivity flattered by running down the environment?
  • agency problems – though agency strength can be a competitive advantage, equally agency issues feature in calculations of pension reasonableness, health care quality, care for the aged, and other awkward topics that can lead to biasing the numbers;
  • information asymmetries – is productivity flattered by living off historic educational quality, or infrastructure?
  • inappropriate or missing competition – for example flattered by exclusive natural resources?

Internationally, the Organisation for Economic Cooperation and Development (OECD) works hard to create valid comparisons.  Their Global Forum on Productivity has a wealth of information.  But the fact remains that productivity measures are not very reliable.

Comparative UK Productivity

Still, productivity in the UK is puzzlingly low when compared with its peers.  Traditional theory indicates that as employment becomes expensive, economic agents are encouraged to find ways to increase productivity.  In the UK, despite unemployment being low, productivity remains comparatively low as well:

 Productivity Graph

The UK is interesting in that statistics might imply there is no universal policy for all sectors as some sectors soar in productivity while others plummet:

Andy Haldane and the “Productivity Commission”, chaired by Sir Charlie Mayfield, emphasise, “a long tail of companies across all sectors in the UK whose productivity performance is falling short.   The Commission are developing, among other things, a tool which would enable firms to benchmark themselves relative to others in their sector along several key business dimensions. This could then serve as a prompt for action, enabling firms to boost their productivity performance through targeted action.  I think this micro-level assessment of productivity is a useful way to formulate plans which support productivity, and narrow productivity differences, regionally and sectorally. For example, recent work by the OECD has looked at the changing distribution of productivity across firms over time.  It suggests a widening– or bifurcation - of this distribution, with a small set of frontier firms whose productivity growth continues apace but a long tail of laggard firms whose productivity has effectively stagnated.” So we have national, sectoral, and long tail productivity problems.

 Anything Special About Professional & Business Services (PBS)?

PBS firms are characterised by low levels of physical assets and high levels of rent extraction by principals, the people who run the firm.  The traditional profitability calculation looks at profit/principal as a function of rate (the billing rate), utilisation (the percentage of available time working at a rate), margin (the overheads and tooth-to-tail ratio of fee-earners to support staff), and leverage (the number of fee-earners per principal).  People who have worked in PBS are well aware that the published billing rate is frequently not the billed billing rate, utilisation algorithms vary and rarely take account of unpaid overtime, and that fee-earners and support staff are not always clearly delineated.

As a result of three factors being strongly influenced by chargeable time, PBS is characterised by a focus on billing for time where possible.  Timesheets, time-based comparisons, daily rates, all proliferate.  If you can sell on a time-basis, then efficiency can become a contradictory, countervailing factor, a point that has not gone unnoticed by clients.  However, one might expect competition, local, national, and international to make a difference. 

Ian Stewart, Deloitte’s Chief Economist, feeds in, “As with all aspects of the productivity story there are plenty of explanations - a slower pace of deregulation and globalisation, professional firms hoarding staff as demand fell away in the recession and aggressive cost control on the part of clients… It could be that productivity is not being measured properly and that the true rate of productivity growth is higher. In professional services the official measure compares growth in revenues with growth in wages. This roughly accords with how we measure margins which have, of course, been under pressure for the last decade. In this respect the official productivity numbers and the margin data tell a similar story. The official measure is based on existing, market based data sources which ought to be of decent quality. In the shadowy world of measuring productivity this is pretty good going.”

We are back to observing that “if you believe the accounting numbers, productivity might be close to the same thing as operating profit”.  If you believe that there is a ‘natural level’ of profit sufficient to make people aspire to be principals, then productivity might closely approximate a fairly stable operating profit percentage.  This might imply that PBS is characterised by firms with little incentive to invest to increase efficiency and facing little change until punctuated by a period of technologically-induced turmoil, potentially with large amounts of culling.

Another area where PBS can sometimes differ is in having mandated services, e.g. audit.  In such an environment, i.e. an oligopoly and a coerced client, there is little motivation to reduce time or fees, thus little motivation to improve productivity.  Other areas of PBS have similar mandated services, e.g. architecture, legal services, though they might argue there is more competition. 

 Any Problems With The Policy Responses?

 The traditional policy responses to low productivity are:

  • increase skill levels and balance skills with needs – through vocational training and education, in order to get higher-value-added per employee;
  • improve infrastructure – to increase overall economic efficiency;
  • encourage innovation – in order to discover new ways of doing things, typically via increased competition and research.

 These policy responses equally make good economic sense at any time.  A longer list comes from “The Future of Productivity”, OECD (2015), that summarises well the potential generic policy responses to improve productivity. These include: 

  • Improvements in public funding and the organisation of basic research, which provide the right incentives for researchers, are crucial for pushing out the global frontier and to compensate for inherent underinvestment in basic research.
  • Rising international connectedness and the key role of multi-national enterprises in driving frontier R&D imply a greater need for global mechanisms to co-ordinate investment in basic research and related policies, such as R&D tax incentives, corporate taxation and IPR regimes.
  • Productivity growth via the diffusion of innovations at the global frontier to national frontier firms is facilitated by trade openness, participation in global value chains (GVCs) and the international mobility of skilled workers. Rising GVC participation magnifies the benefits from lifting barriers to international trade and from easing services regulation.
  • Well-functioning product, labour and risk capital markets as well as policies that do not trap resources in inefficient firms – including efficient judicial systems and bankruptcy laws that do not excessively penalize failure – help firms at the national frontier to achieve a sufficient scale, enter global markets and benefit from innovations at the global frontier.
  • A competitive and open business environment that favours the adoption of superior managerial practices and does not give incentives for maintaining inefficient business structures (e.g. via inheritance tax exemptions that may prolong the existence of poorly managed family-owned firms) facilitates within-firm productivity improvements. Stronger competition also enables the diffusion of existing technologies to laggards, which underpins their catch-up to the national frontier.
  • Innovation policies, including R&D fiscal incentives, collaboration between firms and universities and IPR protection, should be designed to ensure that they do not excessively favour applied vs basic research and incumbents vs young firms.
  • Framework policies that reduce barriers to firm entry and exit and improve the efficiency of matching in labour markets can improve productivity performance by reducing skill mismatch.
  • Reforms to policies that restrict worker mobility and amplify skill mismatch – e.g. high transaction costs on buying property and stringent planning regulations – and funding for lifelong learning will become increasingly necessary, to combat slowing growth and rising inequality.

 The universal application of the above at any time raises the question of whether productivity measurement at a national level makes any difference.

 What Might PBSC Do On Productivity Measures?

There is an old Groucho Marx joke that Woody Allen recycled to explain the inevitability of amorous relationships:

~Doctor, my brother thinks he’s a chicken.  Can you help?

~Why don’t you stop him?

~We need the eggs!

 In some ways, productivity measures are equally absurd, and inevitable.  We’re going to create them and use them regardless, so what might we do to improve them, or develop alternatives?

On alternative measures, there is an argument that productivity at a national level should focus on outcomes, and that these outcomes are not necessarily quantifiable in market terms.  For example, perhaps what we should really be exploring is how many people produce what quality of life.  This could lead to looking at output (quality of life) to inputs (working population).  Some might argue this could encourage near-term unemployment to produce a better ratio, though over the long-term this might be a better approach.  Without doubt such measures are harder to make than just relying on economic statistics, but they might be much more meaningful and useful in determining the way ahead.

Some thoughts for discussion:

  1. We must first recognise how imperfect productivity measures are. We should urge caution against over-zealous application, particularly in PBS where some of the arguments may be circular;
  2. We could encourage more examination of improving productivity measure discussions and methodologies. One suggestion might be that we consider a comparative advantage trade analysis using Monte Carlo simulation to explore the ‘gap’.
  3. We could encourage the exploration of alternative measures focused on outcomes. This might mean exploring happiness economics and human development indices in preference to GDP-based measures.


Published: Thursday, 20 July 2017 17:01

 Portrait of Sir George Paish

Everyone knows about the £40m of gold recovered in the 1980s from the wreck of HMS Edinburgh which was sunk in the Arctic Sea.  Not so well known is that there is at least a hundred times that much gold waiting to be recovered from British merchant ships that were ferrying gold about during two world wars.

The problem is that unlike Royal Navy ships information on sinking of merchant ships and their cargoes has always been scrappy.  But now the Daily Mail has published an exclusive article (March 18) telling how City of London marine lawyers Campbell Johnston Clark has painstakingly pieced together a data base showing the location of hundreds of war-time wrecks carrying gold as well as how much and even where on board it was stored.

For treasure seekers this information is comparable to that about Spanish galleons sunk now stored in the great library in Seville, information which makes it the first port of call for all treasure seekers. Now a £15m venture to recover gold from a cluster of three ships sunk west of Ireland will start this summer thanks to the new City data base.  What is most intriguing about the gold sunk by U-boats is how they were able to target which ships were carrying gold.  

An example of this is the “City of Benares” which in September 1940 left Liverpool carrying hundreds of children being evacuated to America in a convoy of 18 ships. They all perished.  But why had it been singled out by a U-boat   It later emerged that it was carrying gold to pay for US munitions.  A similar incident a few days later with another ship suggests the Germans had prior information.  This almost certainly was true during the Great War and the idea for the modern-day version of a treasure data base only began when a partner, while going through some marine wills at the Public Records Office, discovered a letter that had been misfiled.

This letter, dated 1915, was to the Chancellor Reginald McKenna and had been sent by Sir George Paish, who at the time was the government’s senior economic adviser at the Treasury.  It pointed out that the Bank of England was in the habit of advising the market of any sales of gold on the very day that the gold was shipped out of the country.  From this information it was relatively easy for the Germans to deduce from published liner sailing information which ships had sailed that day (it was already known that only certain liners were licensed to carry gold).

Little was ever published about the gold losses.  This was partly because while private gold was insured, Bank of England gold was self-insured and anyway the government did not want the public to know about the loss of so much public money.

What the Daily Mail article did not tell about this 1915 letter is how Sir George Paish had been tipped off about the Bank’s idiocy by his great friend Sir Edgar Speyer, a leading City banker and, like Paish, a personal friend of Lloyd George.  Sir Edgar in pre-Great War days was chairman of UERL (Underground Electric Railways London) from 1906 to 1916 and he put together what was to become London Transport (tube and buses).  He was also a music lover who financed the start of the Proms.  His “reward” was to be most disgracefully pilloried because of his German Jewish origins and he was eventually stripped of his Privy Council membership.

German bankers were so angry at this shameful treatment of one of their kind that they shunned the City of London in the 1920s and it was not until the 1970s, when we joined the Common Market, that Deutsche Bank opened a City branch.

We had the privilege of knowing Sir George Paish (1867-1957) in his later years when he was still a great enthusiast for Free Trade.  The son of a coachman he had started work aged 14 at “The Statist” magazine compiling statistics.  This was at a time when there was little understanding of the subject (Florence Nightingale had only recently invented the “pie” chart) nor was it widely understood that statistics could be useful in managing businesses.  As a result young George was rapidly able to become seen as an “expert” and his development of railway freight/miles and passenger/miles statistics resulted in the railway companies in both the UK and the USA much improving their efficiency.  Hence the friendship with Sir Edgar of UERL.

In the Edwardian era Paish became seen as one of the leading economists of the age and he was knighted in 1911.  As it happens that was the year the Kaiser had wanted to go to War with France, but put it off when 200 German businessmen implored him to give them a couple of years to sort out their international investments.  Overseas investment at that time was regarded with suspicion by the British public, seen by many as a form of tax-dodging.  But Paish at “The Statist” , along with his friend Francis Hirst at “The Economist”, convinced Lloyd George otherwise.

Paish’s reputation at “The Statist” was such that on one of his frequent trips to America he was called on to advise President Wilson.  He could also be credited with stopping the London Discount Market from declaring insolvency when there was a “run”.  With War looming Lloyd George persuaded him it was his duty to become a civil servant (which idea he hated) and join the Treasury. There, in preparation for his retirement in 1915, he took on as his assistant, and prospective successor, a young man from Cambridge, a very different background from his own as the coachman’s son who had self-educated himself at night school.  His assistant’s name was Keynes.

John Heffernan B.Com, Barrister, is the Hon Secretary of the Free Trade League. A former financial journalist (City Editor United Newspapers and Yorkshire Post) and proprietor of the City Press (1965-75), John is publisher of The Bulletin, available by annual subscription @£50 p.a (email This email address is being protected from spambots. You need JavaScript enabled to view it.)




Published: Monday, 12 June 2017 09:58

Sparks in the firework factory

The “Uber economy” which has taken root over the last decade has changed the face of employment for millions.  In the UK, those classed as self-employed are set to outstrip those working in the public sector by 2018, by which time they will number about 4.8m people.

Some work in high-paid professional jobs, such as interim management or IT (iPros), however, many other - the so called “Precariat” - are in the low paid “gig economy”, what used to be called casual, or itinerant labour back in the 19th century.

Professionals and iPros often have formal written contracts and a reliable payment mechanism in place.  Self-employment for them, can be said to be a lifestyle choice. But speak to the Precariat, and you will discover that for them this isn't always the case.  As a result many do not have written contracts and late payments and defaults are common.  Low pay, limited resources and a fear of not gaining further work leaves the Precariat with little bargaining power when it comes to negotiating the terms of their employment.  This has resulted in diminishing their civil, political and economic rights, reducing them to supplicants, pleading for services and reliant on discretionary benefits, leaving them prey to ideologues from the extreme left and right.


The fight back begins

Technology helped revive the modern equivalent of the 19th century dockworker, but can it help bring 21st century working practices to this sector?  Is it possible to help the growing number of self-employed workers in the economy to be paid on time and to have written contracts for their work?

The answer is yes, if we take inspiration from action in the USA and good practice from unions in the UK and combine them with latest technology.

In New York State, the influential Freelancers' Union recently took decisive action.  They lobbied successfully for new state legislation which has been dubbed the 'Freelancing Isn't Free Act'.  This Act gives freelancers, who are billing for more than $800, the rights to a written contract (otherwise a default one is assumed) and the right to be paid on time.  It makes provision to levy substantial damages against employers who are habitual late-payers.  The Act was agreed in November 2016 and comes into force on 15 May 2017 and the legislation has been broadly welcomed. 

Unfortunately, whilst the UK already has Late Payments legislation, it is has limited effect for freelancers, who don't have bargaining power or wish to risk upsetting clients from whom they want further work.  As a result there are no real consequences for employers who treat freelancers badly or pay them late.

As a freelancer myself, I would like to see late payments triggering automatic third party action.  This would allow me to say ‘it is out of my hands’ to my client, and create enhanced bargaining power.

Some freelancers already have this.  The Musicians' Union is a good case study, as most of their members are self-employed.  If a client is late in paying them, instead of factoring the debt, they simply inform the trade union who then act on their behalf. The union has a strong reputation for getting results so it acts as a deterrent against late payment.

So how can this help the Precariat members of the gig economy or professional freelancers from suffering the same fate?

Few if any are in a union, as their perception is that unions are focused on employees’ rights, not freelancers and payments.  However, a solution may be at hand- if we were to take the existing late payments legislation and combine in a framework similar to that of the 'Freelancing Isn't Free Act', we could create a link to a third party which would chase up late payments by default, just as the Musicians' Union does.


The Magic Tally Stick

My proposed version of the Freelancing Isn’t Free Act would allow a freelancer to nominate a Late Payments Provider, (which is what the Musicians' Union are) to whom the lack of a contract or late payments would be automatically referred.

Technology can help us enforce this and do it at scale:  If you consider the market an untrusting environment with unknown players, the solution is to provide control collectively not centrally.  The technology that works best in such environment is Mutually Distributed Ledgers (aka the Blockchain).

An employer and the freelancer can use a Mutual Distributed Ledger to load up a copy of a standard contract which can be hashed and timestamped.  This will result in a trusted, stored copy.

The contract would have a number of parameters including payments terms.  The payment terms would be shared with nominated Late Payment Provider.  Invoices would then be issued against this contract and those terms. Like all ledgers it has two entries one for the debt owed and one from it has been received.

On top of the contract and invoice would be a smart contract, ticking away waiting for payments to be made.

If a payment is not made against an invoice within the stipulated time then a notification would automatically be passed to the Late Payment Provider.  This means that the freelancer could simply hold their hands up and state that matters are out of their hands.

The Late Payments Provider would recover the late payment and charge an administration fee.  The beauty of the scenario is that the system will pay for its self through administration and membership fees.

The Mutual Distributed Ledger network would consist of servers provided by the Late Payment Providers.  They could be unions, co-ops or private third parties.

The trade unions have expressed interest in the idea as it actually provides a legitimate and tangible reason, with immediate benefits, for joining a union if you are self-employed.

For UK, we could move beyond words of sympathy to concrete action for the growing number of workers in the “gig economy”, providing a secure and trusted platform that is in their corner and works for them.

A UK version of a ‘Freelancing Isn't Free Act’ is being proposed with cross party support as a Private Members Bill.  Our goal is to see if we can write in provision for Mutual Distributed Ledgers.

This is the first step on a long road to providing security for the precariat, and whilst legislation is not required to make this happen, it would help strengthen the relationship between low-paid casual workers and the state, perhaps going some way towards reduce the nihilism currently afflicting western democracy.

Philip Ross is a freelance Agile Business Analyst working in fintech. He is also a leading member of the freelancing community and author of publications on self-employment and the future role of co-ops and unions.

A useful resource for freelancers who are just setting out, can be found at


 [PR1]Not entirely my opinion

Published: Friday, 24 March 2017 09:27

As a teenager at Rugby School, attendance at chapel was pretty much mandatory, forming part and parcel of a Pavlovian regime. If I wasn’t gawping at my unfortunate female classmates - who were in a tiny minority - I would be scanning the wall plaques in awe, commemorating an array of eminent past pupils. My gaze should of course have been lowered and bowed in prayer. Whenever my Housemaster spotted my wondering eye he would aim his icy stare in my direction and my head would snap down, as if shot by a sniper from behind.
I remembered one plaque that seemed rather isolated and desultory with a window drawstring dangling disrespectfully over it. On further investigation I discovered it was dedicated to Charles Lutwidge Dodgson, better known by his pen name Lewis Carroll, author of Alice’s Adventures in Wonderland. He was a master of wordplay and mathematics, inventing the forerunner of Scrabble.
Some believe that the so-called nonsense literature that characterised his work was his way of mocking a trend among contemporary mathematicians. They were debating illogical ideas such as imaginary numbers and the square root of a negative. It was anathema to the conservatively-minded Carroll, long before alternative concepts in quantum mechanics became commonplace.
In the sequel Through the Looking Glass, Alice steps though a mirror into a back-to-front world. It is reminiscent of the topsy-turvy future we face in finance. In some ways we are already there in that you are charged to deposit money in some currencies. Likewise a recent UK government bond issue had a negative annual yield; and it was over-subscribed. In other words you are paying the government to lend them money – go figure.
In many cases there is little choice. Insurance companies and banks have been driven by legislation to allocate money to ‘safe’ government bonds. Thanks to Quantitative Easing, interest rates are now too low for many pension schemes to meet their commitment to members. They cannot generate the income to pay pensioners and will eventually eat into capital to do so; the well will run dry as we live longer. It is of course different for government staff who can tax the rest of us to fund their retirement.
As we enter an inflationary period we are likely to see bond markets suffering. Bonds are key components of pension funds, purchased to generate income or yield. I was fortunate because my previous employers provided a fixed pension in retirement, known as a defined benefit scheme. One of them is even offering me a bonus to transfer it away to clear the liability off their books. I have calculated that the transfer value now matches my entire earnings while working at the firm; such is the extent of the financial distortion.
One of the few methods of protection in an inflationary scenario is provided by precious metals. Up until 2016 they had endured several years of pitiful performance and were out of favour. Many conventional investment managers are very sniffy about gold and silver, viewing them as unsophisticated or simply too volatile. Instead it is easier to regurgitate disparaging comments heard elsewhere to sound smart. Consensus-driven committees are all-too-ready to cling to negative sound-bites to avoid discomfort. They dismiss what they don’t understand to circumvent controversy and debate.
Economics resembles a cult rather than a science, where heretics are denounced and driven-out. It is no wonder that financial parlance includes words with religious overtones such as obligation and redemption. To be fair it is understandable for investment managers to become conditioned and cling to familiar assets like bonds as they have risen inexorably for the last 35 years. To put this into context the rally started during my adolescent daydreaming; a period that covers the entire career of most finance folk. The collective memory of the 1970’s has all but disappeared from the psyche of market participants. I for one relish interrogating retired City folk who were around at that time to tap into their wisdom.
A Hollywood blockbuster of Alice in Wonderland was released by Paramount Pictures in 1933. It is was an era of reflation as America abandoned the last vestige of the Gold Standard to counter the Great Depression. Bullion ownership was outlawed so there was little defence against the subsequent and substantial devaluation of the US Dollar. It was a time of big government, trade tariffs and major infrastructure projects to mop up mass unemployment. The politics of the époque bear an uncomfortable parallel with modernity. As stated in my book a decade ago, financial turmoil has a tendency to push opinions from a crowded centre to the far left and right, as the political pendulum oscillates to extremes.
Madness was a key theme behind Carroll’s publication, particularly for the enigmatic characters at the tea party. The Hatter was a reference to hat-makers who frequently went insane from their exposure to Mercury, which they utilised to cure felt. The character is reminiscent of central bankers who speak in riddles which they don’t know the answer to. Mad as a March Hare is a familiar idiom, relating to the animal’s excitability in the mating season. Its role was that of a messenger and is evocative of the financial press with its constant chatter over pointless minutiae, meanwhile missing the big picture. The soporific dormouse is akin to the investment community, sleepwalking into the next crisis as the next major trend unfolds.
At the end of the chapter Alice makes an indignant exit from the lunacy of the tea party, unlocking another door with a golden key to enter the rose garden. In the next article I will give my thoughts on the forthcoming flight of funds, entitled the Exodus to Equity. 

Toby Birch is managing director of Birch Assets Limited in Guernsey. Educated at the City University in London and a Fellow of the Securities and Investment Institute, he also holds the Securities Institute Islamic Finance Qualification and is author of The Final Crash: Addictive Debt & the Deformation of the World Economy (Pendula Press), written under the pen-name Hugo Bouleau.



Published: Thursday, 13 April 2017 11:02

“In space, no one can smell you stink.” 

2057 Macroeconomics Quip, Adapted from Alien (1979)

Pecunia non olet” ("money does not stink") is ascribed to the Roman emperor Vespasian (09-79 AD). When Vespasian’s son, Titus, ridiculed a urine tax that supported the family’s fortunes his father held up a coin and asked if Titus was offended by the odour.  Karl Marx extended the discussion, observing, "since every commodity disappears when it becomes money it is impossible to tell from the money itself how it got into the hands of its possessor, or what article has been changed into it.  'Non olet', from whatever source it may come."

Some major technological evolutions for money have included moving from social monies to commodity monies, to city-state monies, to gold, to fractional reserves, to central banks, to contemporary fiat currency.  Fiat, ‘let there be’, currency is an artefact created by national or federal governments.  Fiat currency consists of tokens that allow us to extinguish tax debts.  We trade those tokens freely in a geographic region where we are likely to meet people under the same tax system.  Fiat currency’s value lies in its ability to cancel tax debts.  Governments ‘back’ their currencies through their monopoly of force on tax payments, creating a semi-coerced community of taxpayers who confidently trade these tax debt cancellation bills of exchange with each other.

Evolving A Sense Of Smell

At the moment the dominant monetary technologies are quite visible paper & coins (about 3% to 8% of global fiat currency) and electronic deposits in bank accounts (most of the rest).  The much-touted next evolutionary stage is paper-less or electronic money.  Current interest in cryptocurrencies such as Bitcoin, has people pondering why governments don’t use them too.  Numerous central banks have declared their sincere, though careful, interest in moving forward with digital fiat currencies (DFCs) acceptable for taxation.  DFCs are emphatically not cryptocurrencies.  The underlying distributed ledgers might be similar, but the validation of transactions will be done by the central bank and not through a ‘mining’ process.  Further, the technology will be firmly controlled by the government who issues the currency, not left to an autonomous collective.

DFCs raise a unique opportunity.  Unlike contemporary fiat currency, each individual tax credit can be tracked.  It’s as if the serial numbers that already exist on paper money were being recorded in transactions so you could examine the entire history of the banknote you received in exchange for a newspaper a second ago back to its issuance by the mint.  Long Finance 2011 research by Gill Ringland, “In Safe Hands? The Future of Financial Services”, set out some scenarios that might broadly be classed as “Visible Hands” - a ‘top down’ structured control of finance by governments versus “Many Hands” - a ‘bottom up’ set of communities sharing “trade and honest commerce for all”.  For speculative futurists sniffing the future, here are two futures from StarFinanceDate 2057…

Visible Hands

These days virtually all states adhere to the Beijing-Brussels-Washington Consensus of 2021, i.e., like Star Trek’s Federation, governments control a ‘minimal’ fiscal policy within protectionist control of investment, though there are floating currencies.  Much of this began with the intensification of economic nationalisation sparked by Brexit and the US Trump administration in supporting moves to ‘take control back’ ranging from Colombia to Italy.  

For ages central banks claimed to be moving towards DFCs.  The Bank of England had been studying their use since at least 2014, followed by the Fed and most other central banks.  In 2020, the World Bank and the IMF forced Somalia to use a DFC.  The Soma-Tick transformed that war-torn nation’s prospects.

Suddenly, it was difficult for OECD central banks to keep dragging their glacial feet.  DFCs whipped across the globe.  There were some initial howls, not least from civil libertarians, but also from financial services firms used to taking their cut.  Still, the Somalian and Indonesian BOOMs (bit organisation of monies) convinced consumers of DFC robustness and they willingly ceded their data rights for convenience, lower transaction costs, and economic prosperity.  There were some high-profile arrests of entire criminal networks, bound together in court by their e-cash transactions.  If you don’t have something to hide, why would you object to a DFC?

Macroeconomists were thrown into turmoil.  The quantity theory of Money, MV = PQ, i.e,. the total amount of money (M) times the velocity of money (V) equals the average price level (P) times the level of output (Q), had virtually no empirical basis.  This was not surprising as the quantity and velocity had never been known with any accuracy.  DFCs provided M and V to a high degree of accuracy.  It turned out there was almost no correlation of fact to theory.  All that central bank navel-gazing and monetary prognostication had been so much augury and astrology.

Some of the other implications took a while to emerge.  Tax authorities began to take accuracy to the penny, resulting in thousands of tax evasion convictions before the 2022 Tax Accuracy Reasonableness Movement gained “+/-5%” riders on most DFCs.  Taxation over-precision attracted thousands if not hundreds of thousands of proposals to tweak the DFC systems to support various initiatives.  There were local town taxes, child taxes, land-value taxes, let alone distasteful ethnic and foreign visitor expenditure taxes.  DFCs could target complex algorithms to vary taxation on any transaction in real time.  One popular tax, only possible because of DFCs, was the geographic redistribution tax whereby the tax on transactions rose in wealthy districts.

As foreseen by 20th century commentators such as Ian O Angell, the ‘New Barbarians’ and the ‘Golden Geese’, i.e. the mobile wealthy, took flight to welcoming jurisdictions and offshore centres.  Gold and Bitcoin 7.0 values soared outside the reach of populist governments and their capricious taxes.  The paradox was that taxation over-control directly led to the vertical rise in cryptocurrency popularity.  The very consensus around control led to most global wealth ceding monetary control to algorithms rather than governments.  With the wealthy leaving, the remaining, non-mobile, fulminated, but too late.  A fundamental technology of social relations, money, had moved largely outside the hands of humans.  Human beings just couldn’t control themselves.

Many Hands

Many quickly forgot Occupy, the 2011 movement to reduce social and economic inequality worldwide.  No one forgot Seize, the 2020 movement to grab money from ‘the rich’ and give to ‘the poor’ with its slogan, “Carpe Pecuniam!”.  Back in 2016, ‘The DAO’ (decentralised autonomous organisation) was an investment fund project implemented on Ethereum blockchain smart contracts.  The DAO defined all its relationships with investors through embedded code in the Ethereum ledgers.  Due to a coding mistake, one party was able to extract funds then worth tens of millions of dollars to their own account.  The Ethereum community acted to overturn the mistake, but this emphasised ‘tyranny of the majority’ superseding ‘tyranny of the code’.

Autonomous collectives inspired Seize.  It’s well-known that Seize started as a peculiar combination of comedians impersonating bailiffs at rich people’s homes supported by populist politicians egging the comedians. Money laundering and tax evasion allegations, some false and some true, provided more fuel to the seizures as things spiralled out of control.  ‘Grasp & Snatch’ is today about as welcome a term as ‘Nazi’, but in its day was enough to have a mob tearing a rich house apart.   In association with The New Diggers and The New Levellers, Seize led inexorably to civil unrest and then to violence.

And what a wild ride it’s been.  A bit like the Irish bank strikes in the 1960s and 1970s, communities have soldiered on.  Popular frustration with perceived inequality and tax avoidance led the move from fiat currency to community monies.  Communities adapted and formed around new monies.  Community monies soldiered on, convincing everyone they had ‘taken back control’ from the central banks.  There have been some severe problems, for example the ‘infinite taxation’ some New Levellers imposed in north-eastern China, or the ‘audit your neighbour’ movement of eastern Indonesia that led to lynchings.  And some inappropriate starting parameters have resulted in some mini-Weimars.  Yet, these problems have been ‘local’ rather than ‘global’ thanks to the proliferation of central-bank-in-a-box blockchains that come with standard settings and safety controls for sensible communities.

What’s less well-known is that Seize’s ‘in a box’ technology relies on the same technology that failed The DAO.  However, the intense fragmentation into local communities and their monies has created strength in diversity rather than a single point of failure. They may be less efficient, and some have certainly had their problems, but the proliferation of community monies have all been underpinned by one new advantage.  Every unit of ‘money’ is tracked.  Ethical banks can assure people of the source and destination of the monies on deposit.  Solar credits and social good credits are transparent.  The provenance and chain-of-custody of goods matches the provenance and chain-of-custody of money.  

Follow The Stench; It’s Lovely, Clean Money

Some say there is no money in Star Trek.   That’s strange.  Money is a technology communities use to trade debts across space and time.  Doesn’t Star Trek’s mission, “to explore strange new worlds, to seek out new life and new civilizations, to boldly go where no one has gone before”, bring the series into direct contact with communities exchanging debts?  Captain Jean-Luc Picard crows, “The acquisition of wealth is no longer the driving force in our lives.  We work to better ourselves and the rest of humanity.”  Yet dedicated Trekkies well know there are Federation credits, just perhaps not Federation cash.  The future still holds an innumerable number of communities, not least the trekkie community, using “technology to exchange debts across space and time”, i.e. money.  

Money has long been the way communities trade debts across space and time.  Whether new DFCs or community monies, the technology of money is changing, again.  The Sumerians based it on clay, the Egyptians on papyrus, the Lydians on gold, the Chinese on paper, the Romans and others on tally sticks.  Yesterday’s dominant technology, fractional reserve banking underpinned by central banks, is over.  Our new technology allows us to track money from source to sink, precisely. Jerry Maguire accosted everyone with “where is the money?”.  Today we accost everyone with “how does it smell?”.  And where might this lead?  Well, I for one am very concerned about the relative rates at which people create and secrete wealth and have been considering an on-the-spot punitive criminal tax that...

Professor Michael Mainelli is Executive Chairman of Z/Yen Group and Principal Advisor to Long Finance.  His latest book, The Price of Fish: A New Approach to Wicked Economics and Better Decisions, written with Ian Harris, won the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.



Published: Monday, 20 February 2017 12:14