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Confidence: why it matters and why it shouldn’t

Business confidence is a big deal for the news editors… particularly when it slumps.  This is because – it is widely believed – a fall in business confidence reflects an economic slowdown at best or, worse still, the onset of a new recession.   With this in mind, the latest round of surveys of UK business confidence makes for unpleasant reading.  As Simon Goodley in the Guardian reports:

“In a report published on Monday, IHS Markit said the ‘net balance’ of UK firms expecting a rise in business activity over the next 12 months stood at +35% in June, markedly down from +52% in February and the lowest reading since October 2011…

“Meanwhile, the EY Item Club nudged down its forecast of GDP growth from 1.8% to 1.5% in 2017.”

For the pro-Remain Guardian, the reason is simple:

“Fragile business sentiment linked to Brexit-related anxiety, domestic political uncertainty and squeezed consumer budgets have caused UK business confidence to drop to its lowest point for almost six years…  Meanwhile, Britain’s economic growth will continue to weaken this year due to a Brexit-related consumer-spending squeeze and muted earnings growth.”

Consumer confidence is afforded less weight by the mainstream media, who choose to regard it as a sub-set of business rather than a broader indicator of the state of the economy.  But, for what it is worth, UK consumer confidence has fallen significantly since May and is now back to the low experienced immediately after the Brexit referendum result.

Protected by futures contracts, cushioned by the Bank of England’s interest rate cut, and still benefitting from competition between the supermarkets, British consumers avoided the worst of the economic impact of a falling pound last year.  However, most of those cushioning effects have now run their course.  Stagnating wages and high inflation in key areas such as food, energy and housing costs have left consumers with significantly less money to spend on discretionary items.  It is this that is reflected in the downturn in business confidence.  Indeed, the only reason business confidence hasn’t fallen further is that Britain’s small number of remaining manufacturers have enjoyed increased orders on the back of the weaker pound.  As Goodley notes:

“The headline figure masks vastly different views of the world depending on the respondents’ business sector. The service sector recorded a score of +32%, while more upbeat manufacturing firms, who are hoping for gains in new export markets, scored a balance of +49%.”

The deeper question with this, though, is why confidence should matter at all.  After all, it is a matter of perception and it is backward looking.  That is, it may owe more to what people feel about their situation rather than what the economy is actually doing.  And since it is telling us about what the economy was doing a month or more ago, it tells us little about what is actually happening today.  For what it is worth, as the global economy was melting down in 2008, both business and consumer confidence were higher than they are today.

The reason that confidence matters is that in a free market economy it acts as a corrective force on government.  If consumers don’t feel confident they will not spend; and they certainly won’t borrow.  That means that sales of goods and services will fall and businesses may fail.  If businesses feel the pinch, their confidence will also fall.  If that happens, there is a risk that they will stop investing.  Indeed, if business confidence falls far enough, businesses may start to cut back; causing unemployment to rise and overall GDP to stall.  The unspoken corollary, of course, is that whatever else government’s do, they had better take heed of business confidence if they don’t want to crash the economy.

This is the very essence of Neoliberalism.  It is also a clear example of the way the business tail wags the democracy dog.  Giving unelected business owners the power to influence political decisions in this way was a choice made by politicians and governments in the 1980s and 1990s.  It is not, as Neoliberals would have us believe, the natural order of things.  In a lecture given in 1942, economist Michal Kalecki exposed the politics masquerading as economic orthodoxy:

“We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.” (My emphasis)

By effectively privatising the money supply in the mid-1980s, Neoliberal governments chose to leave the economy and the civilisation that depends upon it to the whim of these “captains of industry” on the bizarre grounds that their self-interest would somehow translate into the best possible outcome for everyone else.  That lie was finally exposed by the financial collapse in 2008 and the ongoing depression that all but the wealthiest 10 percent have experienced ever since.

For the first time since the depression of the 1930s, British children are going to school without shoes on their feet.  Families are forgoing personal hygiene in order to eat.  And if hundreds of thousands of families having to fall back on a network of foodbanks to feed their children was not bad enough, those charities have begun to run out of food.  We know to our cost where this led us in the 1930s; Kalecki explained why:

“One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

“The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of ‘sound finance’, which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

“The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, ‘discipline in the factories’ and ‘political stability’ under full employment are maintained by the ‘new order’, which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.”

In the words attributed to Mark Twain: “history doesn’t repeat but if often rhymes.”  It is unlikely that we will get a repeat of the Nazis.  But if mainstream politicians and governments cannot break away from the debt-based Neoliberal paradigm, then sooner than later someone from the political extremes is going to come along and do it for them.  The early rumblings of this are already being felt in the Brexit result, the election of Donald Trump (with the even more obnoxious Pence waiting in the wings if Trump is toppled), Marine LePen getting into the second round of the French presidential election, and from the political left the popularity of Bernie Sanders and Jeremy Corbyn.

The trouble is that the solutions put in place in the aftermath of the Second World War are unlikely to work this time around either.  To secure full employment requires ready access to the resources and especially fuels needed to grow the economy.  In 1945 just a handful of economies – the USA, UK, Europe, the USSR and Japan – were oil-based.  At the same time, few of the planet’s oil deposits had been developed.  Population has quadrupled since then.  In 2017, most of the world’s oil deposits have been discovered and all but the most expensive are being recovered.  All of the northern hemisphere states and most of the southern hemisphere are fossil fuel-based.  Mineral grades are a tiny fraction of what they were in 1945 meaning that it takes more and more energy to recover ever smaller amounts of useable minerals.  To cap it all, even if we were to somehow discover several new Saudi Arabia-sized oil deposits that we somehow overlooked, the ecological impact of our burning even a tiny fraction of them (or even of the reserves we already have) will be sufficient to guarantee the extinction of our species by destroying our habitat.

Given these dire straits, the “captains of industry” have good reason not to be confident about the future.  But that is the future that politicians have allowed them to create for everyone.  Their falling confidence is even more reason for governments to stop ducking their responsibility and begin steering our civilisation in a more sustainable direction.

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