World Finance interviews Dr George Cooper, fund manager and author of new book 'Money, Blood and Revolution', about how to fix the broken science of economics
Developing a modern economic model that effectively charts the world?s financial course seems like an impossible task. But that?s the call to action set forward by fund manager Dr George Cooper. In his latest book Money, Blood and Revolution he argues faulty policy is being built on even faultier economic models.
World Finance: Now you argue we have a crisis within the science of economics. Does the problem lie with broken models, or with the ineffectiveness of broken markets?
George Cooper: So, when I say economics is a broken science, what I mean is, it has become a battleground between effectively different tribal groups, all of which have got different ideas. There?s a bit of validity in each one, but they all appear to be incompatible with each other. So to fix this broken science, we need the new idea, the new paradigm shift, that lets us pick the right ideas from each of those tribes, and get them together into a single model that works.
We?ve got a very interesting debate going on that?s just started a few weeks ago with the Bank of England publishing a new paper saying that the old model of how money is made in the economy is wrong, and we need to go to a new theory which is called endogenous money. Now they?ve published this paper, and a lot of people are getting very excited about it. And really it should be radically changing monetary policy. But it?s actually having no impact at all. So they?re changing the theories of economics all the time, but not applying them to changing policies. They?re not linking the two together.
So unless we start thinking more clearly about how the economy works, we?re not going to be able to fix the policies, because until we think more clearly about the economy, we?re not going to be able to convince people the policies need to be changed.
World Finance: Do you think that a change in the models themselves is really going to be the impetus to get governments to make those radical changes you call for?
George Cooper: If I can give you an example. At the moment we?ve got a mindset that says that the way we need to stimulate economic activity is to make it easier for entrepreneurs. So we?ve got to cut the tax rate, and make it easier for people to do business. Now that?s a reasonable argument.
But there?s another argument, that actually the way you need to stimulate entrepreneurs is actually to put more money into the pockets of their customers. So if their customers have got more money, the entrepreneurs are stimulated to try and earn that money. And there?s a different approach there.
So what I?m arguing in my new book is actually, given the current setup of the economy, what we really need to be doing is putting money into the bottom of society, producing more spending power there, and that will actually stimulate those at the top to go out and invest in order to earn that money.
World Finance: Your book is very clear to criticise existing models and sets some clear target end goals, but there?s no concise model in there. Was that intentional on your part?
George Cooper: What I set out in the book was an alternative way of thinking about the economy. Which is the start of building an alternative model.
So what I described is, I said: we need to stop thinking about a neo-classical model, trying to get as rich as possible. We need to start thinking about a Darwinian economy, where we?re actually trying to get richer than each other. And that changes the dynamics very slightly.
The people at the top, they lose their motivation to invest. They?re at the top, and what they want is to keep the status quo in place. Economies tend to stagnate in that model.
What you need, in order to keep the economy growing, is therefore a progressive tax rate which takes some money out of the top, and puts money back into the bottom, and creates a circulatory flow of wealth around the economy.
It?s by no means a complete model, but it?s a change of mindset which makes it easier to understand the problems. It?s what the philosopher Thomas Kuhm called a paradigm shift.
World Finance: Do you have an economic forecast, or someone you think that is so clear-sighted that they could create such a model?
George Cooper: Again, if you change the mindset, I think it becomes suddenly very easy to see why these policies are going wrong; why we keep printing money, but the inflation rate keeps falling, and the growth rate doesn?t recover. Because QE ? quantitative easing ? is pushing money into the top of society, rather than the bottom of society.
So if we change the mode of the policy, and we say we go from monetary to Keynesian stimulus, and we cut the tax on the poorer people, and probably have to raise the tax a little bit on things like interest and dividends on capital, then we can start to deleverage the economy, and make it run in a more sustainable way.
World Finance: But doesn?t that run the risk of then creating inefficiencies in the system?
George Cooper: I think it will actually make them more efficient. Again, if we think about it the existing model, it looks like it?s an inefficiency. It looks like you?re hampering the entrepreneur. But in this new circulatory model, you realise, okay you might be hampering the entrepreneur, but you?re stimulating the customer of the entrepreneur. So actually you are helping the entrepreneur.
The analogy I use is the bicep and the tricep. They are working against each other. They?re antagonistic muscles, if you like. But no doctor would say that you only need the bicep, or you only need the tricep. You very clearly need both. And it?s the same in the economy. You need capitalism to generate the wealth and push the money up to the entrepreneurs, to encourage them to work. But then you need the state sector to help push the money back down again so that the customer of the capitalist has got the money to spend.
World Finance: Now that ties in well; of course you say in your book that democracies can really necessitate rapid economic growth, but if you look at the examples of China and Asia as a whole, don?t they contradict your assessment?
George Cooper: That?s an interesting one actually, but I don?t think it does. The model that I?m talking about is a competitive model, where we?re all trying to get richer than each other. If you start from a base level of communism, where everybody has got pretty much equal wealth (and not very much of it!) then once you taken away the communist constraints, you will get a sudden rush of entrepreneurial activity, as everybody tries to get richer than each other.
So the economy will expand very very rapidly, until a point where you get oligarchs controlling the economy. If we don?t then add in the democratic part, the recycling of the wealth, at that point the economy will stagnate.
So I don?t think what Russia did, and what China is doing now, is actually very consistent with this model. The really interesting question is whether those two countries can now make the transit to a democratic capitalism where they start to recycle some of the wealth of the oligarchs to keep the system running.
World Finance: Wouldn?t an oligarchical government that?s perhaps not on the extreme end be able to respond more quickly to changes in the market than perhaps a democratically elected government, who has to then look at issues within the Senate, or the House of Commons? Debate and then move forward with the policy?
George Cooper: You?re into an interesting question there. If we look at America and we look at Europe, it seems to me that actually the political system in both of those huge economic blocks has broken down.
We had a sort of mindset that a big super-state would work better than a lot of smaller states. I think given how the American system has become logjammed, and the European system?s become logjammed, maybe we should be asking ourselves whether actually democracy is better delivered in smaller units rather than bigger units.
World Finance: Now the eurozone is battling to get a concise plan of action forward to get economies moving. How would you rectify the situation if you were head of the ?zone?
George Cooper: Unless the European Union can establish a mechanism to create the fiscal transfers from the wealthiest states to the poorest states, it?s going to continue to create a system of polarising wealth within the European Union where the poorer countries will get poorer relative to the richer countries. And that will create first stagnation, and then probably social unrest.
If we can?t complete the European project and create those fiscal transfers, then eventually it will probably break up. It could be many decades away, and hopefully we?ll recognise this problem and fix it before that happens. But it definitely does need fixing.
World Finance: Thank you for sharing your insight today.
George Cooper: You?re welcome, it was a pleasure. Thank you.