We need a Reformation in Economics – The salutary story of Semmelweiss


First posted on Think Left as ‘Like heterodox economists, Semmelweis was ignored…’ 29th April 2013


In 1844, Ignaz Philipp Semmelweis graduated as a doctor, and was appointed assistant at the obstetric clinic in Vienna.  At the time, the great scourge of new mothers was ‘childbed’ or puerperal fever.  It was thought that the deaths were unpreventable… the result variously of overcrowding, poor ventilation, the onset of lactation or a dreaded ‘miasma’.

However, Semmelweis oversaw two maternity wards and couldn’t help but notice that the puerperal death rate was two or three times in one, to what it was in the other. In fact, the pregnant women were only too aware because they would go to all sorts of lengths, pleading to be booked in on the lower mortality ward.

The two divisions were apparently identical except that the first, with the higher mortality, was used for teaching student doctors, whilst the second was staffed with just midwives.  Semmelweis noted that the student doctors were coming to the maternity ward directly from the dissecting room, having just completed autopsies on women who had died from puerperal fever…. he suspected that somehow (at that time no-one knew about bacteria or viruses) that the students might be carrying the infection to healthy mothers on the ward.

As an experiment, he ordered the staff to wash their hands in chlorinated lime water before each examination, and within the week, the mortality rate dropped from 18% to 1%.  Furthermore, no women died on his wards between March and August 1848.

So with such an immediate, dramatic drop in the death rate, why was there no corresponding immediate and widespread acceptance of the practice of hand-washing?

Why did the editor of the Wiener Medizinische Wochenschrift write that it was time to stop the nonsense about the chlorine hand wash?  Why did pregnant women have to wait over 25y for the importance of hygiene to be accepted; with Joseph Lister being credited as ‘the father of modern antisepsis’ instead of Semmelweis?

The reasons are still relevant not only in medicine but also in politics and economics …

Despite various publications of results where hand-washing reduced mortality to below 1%, Semmelweis’s observations conflicted with the established scientific and medical opinions of the time and his ideas were rejected by the medical community… Semmelweis’s practice earned widespread acceptance only years after his death, when Louis Pasteur confirmed the germ theory and Joseph Lister, acting on the French microbiologist‘s research, practiced and operated, using hygienic methods, with great success.


In other words, Semmelweis’s findings required a ‘paradigm shift’ but the old-guard ‘power elite’ were ‘invested’ in maintaining the status quo in spite of all the statistical evidence of the efficacy of hand-washing.  The weight of authority stood against Semmelweis’s prophylactic practice.

Exactly the same is true of the ‘austerity’ which is being inflicted on the UK and across the Eurozone. The tenets of neo-classical economics are daily shown to be completely wrong, contradictory and ill-conceived.  Furthermore, the policies (just like puerperal fever) are inflicting enormous damage on the most vulnerable in our populations.  Nevertheless, our politicians and our media go on spouting the same mythologies and neglecting to see the obvious.

… the Tory/LD coalition government is borrowing £245bn more than expected in 2010 and the economy has grown by just 1.1 per cent, 4.9 per cent less than expected …

Sticking with TINA (monetarism) is clearly a madness akin to the rejecting of hand-washing on the labour wards of the 1850s.

There is an alternative!

However, just as the medical professors had not wanted to relinquish their status or their paradigm of miasmas, the 0.1% have too much to gain from pursuing the current paradigm.  In this, they have been ably aided and abetted by the embedded assumptions of the so-called ‘free press’ and MSM which are owned and dominated by the ‘oligarchs’.

Mainstream economist Paul Krugman writes in the NY times:

… the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.


 The ‘Deficit’ is the new ‘miasma’ analogous to the flawed theories of puerperal fever causation.

But the deficit is just a reflection of the state of the economy.  In a sovereign country like the UK with its own currency, it is not a cause of anything.  If there is no problem of excess demand, there is no ‘deficit problem’ regardless of the magnitudes, short term or long term The methodology of its calculation is wide open to dispute and in any event, one agent’s deficit is another’s surplus.   As Professor Bill Mitchell writes

Structural deficits – the great con job!


Similarly, with the so-called ‘debt’ problem …

but my intention is not to discuss economics but to show that disastrously ‘wrong thinking’ and manipulation can persist to our detriment and against all the evidence for extended periods of time… particularly when there is wealth and power to be gained.

As Paul Krugman concludes:

.. the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

Payam Sharifi quotes Mark Thoma, an economist who runs a popular economics blog :

“too many minds in the profession cannot be changed even when the empirical evidence is relatively clear…the politicization of the profession…plays a large role”.  Could it be that this reflects a crisis in economics, which is a crisis in its method of analysis and even the subject matter itself? 

That seems like good thinking .. there needs to be an Economic Reformation:

Economics in crisis – it needs a ‘Reformation’


As Antonio Gramsci wrote from his Italian prison cell, sometime in the 1930s:

‘The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.

I think it is more than time for our politicians to ‘wash their hands’ of the ‘miasma of deficit reduction’ and act as ‘midwife’ for an economics which serves the 99.9% and the natural world.

For more information about heterodox economists and MMT (Modern monetary theory – macroeconomic reality):

Bill Mitchell – billy blog

New Economic Perspectives

Steve Keen’s Debtwatch 

and many other sites

Related posts:

Cameron and Osborne dwell on Bullshit Mountain, UK

Telegraph tosh on economics

Neoliberal TINA economics is flat earth thinking 

Neoliberal TINA Economics is Flat Earth thinking


By Prue Plumridge

Belief in a flat Earth is found in the oldest writings and early Mesopotamian maps showed the world as a flat disk floating in the ocean.  Thankfully things have moved on since that time and we now accept the proof that it is indeed a sphere spinning in space.

It is not difficult to imagine the reaction to those who challenged this view, such as Christopher Columbus, and the scepticism with which such ideas would have initially been received.  After all, if you’ve been told that you’ll fall off the edge of the world if you go too far, questioning that notion would have led to shaking of heads.  Those disputing the prevailing set of ideas or beliefs on the basis of “what if” would have been ridiculed, insulted or even physically attacked as fear of the new set in.

We have reached such a time in history now.  The destructive neoliberal status quo of the last few decades is being shaken to its core and there is an opportunity at last for a conversation about where we go from here and how we can bring about change.  It won’t be easy but Jeremy Corbyn has started the ball rolling by offering a radical vision which not only restores the core values of the Labour party and responds to a changing world but also opens up an opportunity for dialogue on such issues as climate change, finite resources and sustainable living.  It is a positive start.

Of course, those who have the most to lose will not let their power go easily and we are seeing that already with attacks on Jeremy Corbyn by the Establishment and business leaders and worse still, from his own party.  Only this week, an article in the Telegraph was predicting that Jeremy Corbyn’s economic plans will turn us into Zimbabwe and lead us to calamity.   We must, however, stand strong against such attacks which stem from fear and forge our future together.

People are starting to see through the decades long political neoliberal consensus which favours the magic of free markets.  But there is still a way to go and it won’t be easy.  It is vital that we ask questions and, even when, like the flat earthers, we find the potential solutions out of our comfort zone because it questions the long-accepted paradigm, we must not turn away.

Most people (including me) shy away from discussion of economics.  Mathematical equations and economic models dance before the eyes and shut down the brain like no other subject.  And yet the decisions made by our elected politicians are based on economic ideas which can wreak havoc on our lives and the lives of our families and friends or can, alternatively, be used for a public purpose to benefit those same lives.  Indeed, we are seeing the damaging consequences of those decisions today.  Dismantling our social security system, selling our publically funded public services to the private sector, deregulation, the watering down of employment and trade union rights and driving down of wages in the name of competition.  TTIP, TISA and CETA added into this mix will prove to be the final nail in the coffin of democracy.  It is, therefore, time to engage in a conversation and challenge those who have deceived us for so long.  We must ask ourselves what if the world isn’t flat at all?

Maggie Thatcher’s line “There is no alternative” is the usual excuse for continuing with the free-market ideology and the claim that continued austerity, balanced budgets and surpluses are vital to a successful economy.  We will all remember Liam Byrne’s infamous note, when Labour left power, saying ‘There is no money’.  That one stupid remark has allowed the deficit/debt reduction argument to dominate the economic and political landscape of the last five years and been used by David Cameron and George Osborne in a deliberate distortion of reality to justify cuts, the creation of a small state and private sector domination.

It is unfortunate that even some of the Labour elites are using the same loaded language which says that we must continue with such policies. Yvette Cooper, who has a PPE from Baliol College at Oxford, said recently “I don’t think the answer is what Jeremy has proposed, which is basically printing money that we haven’t got to build things”.  Her comment is symptomatic of her lack of grasp of wider economic ideas and yet, she, like many, has been a victim of the way it has been taught for decades in educational institutions. One might think that the doctrine of balanced budgets was the only game in town.

Regretfully, these ideas have been cleverly used to also deceive ordinary people that there is no alternative.  That we must accept the pain and balance our budgets in true Micawber style. The idea that the state should deal with the deficit and reduce the national debt has become a part of the narrative which is firmly fixed in the collective psyche. The problem has been reinforced by our experience of our own household budget which has to be managed to ensure we don’t go into the red or get into debt.

The first step is to ask questions. Don’t rule anything in or out – the world is a complex place much more so than even this simple presentation.

Most of us will remember from our history lessons, the 1929 crash.  The UK government’s response at the time was to balance the budget and re-establish confidence in the pound.  Public sector wages and unemployment benefits were cut and by 1931 unemployment had risen to almost three million. The march to London by the men of Jarrow is a symbol of that economic disaster which left thousands of people destitute and hungry.

One of the people who challenged that view was John Maynard Keynes who was fiercely critical of the then Conservative-Liberal coalition government’s austerity budget and wrote:

‘Every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every sort of economic activity, we can become prosperous again.” 


It is ironic, that when the coalition came to power in 2010, they chose to repeat an economic policy that had so singularly failed in the 1920s and 30s, and the Conservatives are promising more of the same over the next five years.

‘Insanity is doing the same thing over and over again but expecting different results’   Albert Einstein is once said to have observed.  But then one could ask the question is it insanity or a deliberate strategy?

To return to Keynes, his argument was, essentially, that in order to support full employment governments must use their spending power to invest in the economy on the basis that spending equals income to someone which is, after all, what makes the world go round. So when governments reduce public spending the result can only be higher unemployment.  Indeed in the last week we have learned that for the financial year so far the deficit was down £7.3bn (23%) but in the three months to June there was a rise of 25000 in unemployment.  To make the connections if we stifle spending to reduce the deficit then this can only have a detrimental effect on the economy by reducing the amount of money available to the non-government sector.

So where, may you ask, will the money come from to deficit spend?  When Yvette Cooper suggested wrongly as it happens that we can’t print money that we haven’t got to build things she was forgetting that electronic monetary resources were created to rescue the banking system in the form of Quantitative Easing which no-one objected to then, even though, basically, it disappeared into a big banking black hole.

Jeremy Corbyn’s People’s QE is quite another kettle of fish and this time those money resources would be used for public purpose that is for the benefit and well-being of society as a whole and not just a small section of it.  To put that clearly in the words of Professor Bill Mitchell:

“People would soon see the benefits in the form of better schools, hospitals, public transport, green energy innovations, more jobs, more diverse cultural events”

The response to these ideas has been one of panic-stricken hysteria, as emotive language such as ‘debt mountain’ is used by politicians and the media to scare the general public, by reinforcing the household budget model of our state finances and economy.  Let’s not forget the irony here that George Osborne has managed to achieve a debt mountain all of his own!

Professor Bill Mitchell’s conclusion should reassure the public:

PQE is an excellent strategy for the British government to introduce. It exploits the currency-issuing capacity of the government directly and uses it to increase the potential of the economy to improve well-being.

It is astonishing to realise that contrary to common belief sovereign governments start the ball rolling by issuing money, tax revenues are not necessary for a government to spend and that our national debt is not a debt in the usual sense of the word.

So, I can hear you ask:  what then is the purpose of tax?  I’ve heard that ‘printing money’ is inflationary?  And say that again our national debt is not a debt at all?

We must start with the first principle which is that, since the abandonment of the gold standard, sovereign governments like ours can issue as much money as it needs. Remember the money issued comes first, and not taxes.  This is a key point.  Without money in our pockets we can’t pay taxes anyway.

Beardsley Rumi former Chairman of the Federal Reserve wrote as long ago as 1946:

… given control of a central banking system and an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore should be regarded from the point of view of social and economic consequences.

What this actually means is that tax, far from being a revenue raiser, is a mechanism for what we can call public purpose meaning, for example, redistribution of wealth from the rich to the poor.  It also has the function of managing inflation by raising taxes to dampen demand, or reducing them to increase it.

Secondly, money issue by a sovereign state is not, in itself, inflationary. Politicians parading as prophets of doom are warning us that ‘printing money’ will cause inflation.  In an effort to scare people, we are reminded of Germany’s hyperinflation after the First World War or Zimbabwe’s in the 1990s.  In both cases, the truth of the matter is that these episodes could not be described in any way as normal – they were extreme events and not remotely like the situation in the UK or the US.  Of course in Germany’s case, the imposition of huge reparations in gold under the Versailles Treaty, the loss of 25% of its industrial capacity as a result of the war and then the occupation of the Ruhr when Germany defaulted forced them to increase the money supply which did not match its supply capacity.  So when exports then slowed and Germany could not continue to pay back its debts it led to the hyperinflation which was to have catastrophic consequences for the German nation both in the short and long term.

And herein lies the clue, if you keep on spending and can’t produce the goods to meet that spending, you’ll get inflation  Spending with no regard to whether there are enough resources to match it, is the cause of inflation not the money issue in itself.  So deficit spending is not the problem.  The issue is whether we have the resources to justify the spending and if we have, how we can use them effectively for the benefit of society as a whole.

We have almost two million people without jobs. People whose talents remain unused.  People who want to work despite the inference by government and irresponsible media that the unemployed are lazy and feckless which has become the prevalent myth, now accepted by the public as being true. The solution therefore is to invest in building new schools, hospitals, homes and green infrastructure as well as create real job opportunities so that people can make a positive contribution not only to their own well-being but that of their communities. Remember that spending equals income to someone, and so by using the resources we have, effectively and fairly, we can improve the lives of all. The deficit will only be a problem when all available resources are being used. And we are most certainly not in this position at the moment.

And this brings me, finally, to the notion of the national debt.  If, as is noted above, sovereign governments can issue money then it begs the question why do we have to borrow?  Well the reality is that we don’t.  Sovereign governments don’t need to issue debt. The real game is about corporate welfare as Treasuries and Bonds are sold to big investors who want a nice safe, risk free place to stash their money and get a guaranteed income flow.  Much like us when we transfer money from our current bank account to a savings account.   Where governments are the primary money issuers there is no reason why the national debt could not be scrapped. We wouldn’t have to worry about ‘paying it back’.  And, after all, how could you pay back the money supply?

The important thing for us to understand is that there is an alternative to the inertia of past decades.  We don’t have to accept it we have to challenge it.

The world is a complex place and full of uncertainty but we have been bewitched by a dogma that proposes freedom and everlasting growth on the backs of the people and the planet but which, in fact, is tying us in chains to the benefit of the few.  As Keynes observed in his book written in 1936:

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

The Post War Consensus is long gone and the positive outcomes of that consensus, being dismantled as we speak.  The ascendency of individualism over cooperation and all that entails is almost complete.  As Ha-Joon Chang wrote:

‘Many believers in the individualist view would sacrifice political freedom to defend economic freedom”

It is clear that such unrestrained pursuit of self-interest through the belief in the magic of free markets has proved itself wanting and resulted in huge disparities of wealth, impoverishment, inequality and unequal access to opportunity.

Whilst we need wisdom too, knowledge is power and so the more we are informed, the easier it is to challenge the lies of politicians and their media lackeys. It is not necessary to immerse oneself in economic models and mathematical equations to understand the importance of economic policies and their effects on society but if we are to move forward we must show those who would lie to us that we cannot be fooled any longer.


Resources and credits:

Steven Hail

Governments do not need the savings of the rich or their taxes 

Corbyn should stop saying he will eliminate the deficit

Zimbabwe for hyperventilators

PQE is sound economics but is not in the QE family

Correcting political ignorance and misconceptions

Printing Money does not cause inflation

Summer of Unrest: The Debt Delusion Mehdi Hasan

Economics: The User’s Guide  Ha-Joon-Chang

The Angry Birds Approach to understanding deficits in the Modern Economy



The “Angry Birds” Approach to Understanding Deficits in the Modern Economy


Additional links:

Austerity is a Political Choice not a Economic Necessity

Like heterodox economists, Semmelweiss was ignored…

The riddle of the deficit or (deficits for Dummies)

The motives behind Corbynomics

Nottingham meets the Modern Robin Hood, Jeremy Corbyn


Jeremy Corbyn has met tremendous support for people all around England, Scotland and Wales. This has not been seen in the Labour movement for generations.

Take a LOOK at the queues waiting to listen to Jeremy Corbyn speak in Nottingham, home to the original Robin Hood.

This has been nothing short of astonishing. LISTEN to the event here, in high quality audio.

Unite the Union hosted the rally  in Nottingham and  present these Speakers:

Jeremy Corbyn MP
Richard Murphy, Tax Research UK and Economics Advisor to Jeremy’s campaign
Manuel Cortes, General Secretary TSSA Union
Annmarie Kilcline, East Midlands Unite
Tony Kearns, CWU
Nadia Whittome and Umaar Kazmi, young Labour members
Chaired by Cheryl Butler, Leader of Ashfield District Council

From this NG Digital site you can listen to the excellent quality audio of this  event, or download the file on ITunes

Jeremy Corbyn’s campaign for the Labour leadership has electrified the contest and brought new ideas to a stale political system. He is Labour’s best chance of defeating the Tories at the next election and bringing back voters lost to the SNP, the Green Party and UKIP.

Countering the Attack on Corbynomics


The counter-attack on Corbynomics

From Michael Burke

Published on Socialist Economic Bulletin

The economic policies of Jeremy Corbyn have come under widespread criticism.  This exceeds the level of scrutiny of his policies; many of his critics do not seem to have troubled themselves to read his key policy document.  It also by far exceeds the level of scrutiny devoted to any of his leadership rivals.

This is not surprising.  All major sections of big business in Britain and in the western economies as a whole are committed to austerity policies.  The economic consensus in favour of austerity arises not from economics textbooks or any appraisal of economic history – even recent history such as the stagnation from 2010 to 2012, and the rise in the deficit that resulted.  Austerity is the consensus because it represents the interests of those dominant sections of the economy and therefore society.

This explains the assault on Corbynomics, which we should expect to intensify if he wins the leadership of the Labour Party.

Therefore, it is important to address these arguments.  The BBC’s economics editor Robert Peston, led the way and was closely followed by the Financial Times’ economics editor Chris Giles.  Academics have weighed in, with one characteristic contribution from John Van Reenen at the LSE.  There are important nuances between these and other critics of Corbynomics but they have common central arguments. All summaries are reductive and readers are encouraged to review these pieces themselves.  But the central argument is this:

· the British economy is dependent on foreign capital inflows
· instructions from government to the Bank of England undermine the Bank’s independence
· the flow of international capital on which Britain depends will halt as investors take fright
· as a result, the currency will fall and interest rates will rise
· this will cause inflation and reduce investment, the very opposite of Corbynomics’ aim
· And, the existing £375bn in Quantitative Easing cannot be used as an example as this may be temporary and almost solely focused on the purchase of government bonds (gilts)

It is noteworthy that the critique begins with capital flows and rests on the absolute power of financial markets to set exchange rates and interest rates.  These are real and powerful forces and cannot be ignored.  But the dominance of finance capital in British society is so great, it influences opinion so that the argument ‘There Is No Alternative’ appears to have great weight.  The weight of this argument would be lesser in countries such as Germany, or Sweden, or even the US.

There is no denying the British economy is increasingly dependent on inflows of overseas capital, setting new lows last year. This is not simply or even primarily the chronic UK trade deficit, which has persistently oscillated around 2% of GDP in recent years.  As Fig.1 below shows it is the sharp deterioration in the primary income account which has caused a sharp and unsustainable rise in the current account deficit. It has swung from small surplus in mid-2013 to a deficit of 3% or more of GDP in recent quarters.

Fig. 1 Current account balance, % GDP & components
Source: ONS

The primary income account and its components is shown in Fig.2 below.  There are two key points to be highlighted.  The first is the very large and persistent deficit on portfolio investment, ranging between 5% and 10% of GDP.  This is a net outflow of capital representing the far greater propensity of British capital to invest overseas because of higher returns.

But this persistence means that portfolio investment outflows are not responsible for the recent sharp deterioration in the primary investment account, and therefore in the current account as a whole.  The balance of Direct Investment has swung from a surplus to a deficit and accounts for the deterioration in the external accounts.  This has taken place while corporate taxes have been cut and while the last government was claiming that ‘Britain was open for business’.

Fig.2 Primary income account and components
Source: ONS

It is a remarkable fact that the government’s repeated assertions that its policies are promoting growth and investment are rarely challenged although they are so clearly false.  George Osborne has repeatedly asserted that his policies are successfully promoting investment.  Specifically, he and his supporters have argued that the cut in Corporate Tax rates from 28% to 18% is and will promote Foreign Direct Investment.  Fig.3 below shows that FDI inflows have been declining over the medium-term, even while corporate taxes have been cut and ‘business-friendly’ policies have been adopted.

Fig.3 Net FDI Inflows and components
Source: ONS

It is no accident that the sharp deterioration in the external accounts occurred in mid-2013.  As SEB has shown elsewhere the Coalition government halted new austerity measures and even slightly increased government spending in order to get re-elected.  Borrowing, particularly for housing and other consumption was encouraged.  Unless government borrowing was to increase, or were to companies face higher taxes, then the increase in borrowing had to be sourced from overseas.

In order to get re-elected the government encouraged an unsustainable borrowing binge.  It now proposes to deal with this crisis with renewed austerity, which will cause an economic crisis.  Overseas investors have a diminishing appetite for investment in Britain because it is a slow-growth, low-investment economy.  Low British investment levels become self-reinforcing.

The entire criticism of Corbynomics can be shown to be a case of what Freudian psychoanalysts term projection.  It is the current policy which has dramatically increased the dependence of the British economy on overseas capital inflows.  And the only remedy offered is renewed austerity.  This is simply ‘TINA’ (there is no alternative) purportedly from the perspective of the all-powerful dealing room floors of the City.

One of the weakest points of the critique is that it rests on the outlandish proposition that the Bank of England retains credibility.  The independent Bank has presided over the biggest ever financial crash in Britain and the longest recession.  Throughout most of 2008, the MPC was discussing the need to raise interest rates, even as the economy had already begun its biggest slump since the 1930s.  The Bank’s record on growth since independence has been markedly worse than the rest of the post-WWII period.  It has also persistently missed its own inflation target.  It has a spectacularly bad forecasting record for growth and inflation even in the short-term.  It is even questionable how independent the Bank is on decisive matters as the bank bailout of 2008 was clearly a government plan, with Bank officials still delivering speeches about ‘moral hazard’ (pdf).

The superiority of Corbynomics 

The weakness of his opponents arguments do not by themselves mean that Corbynomics can succeed.  But this has been dealt with in a previous post.

Instead, it is important to state why Corbynomics is superior to the alternative, based on economic fundamentals.  The critics argue that government intervention may have been a necessary evil at the time of the banking crisis (and unsurprisingly acceptable to bankers) but that government intervention in the real economy is unacceptable.

This turns economic reality on its head.  The returns to productive investment in the economy are far higher than government bond yields. The rate of return for UK companies is currently around 12%, and never fell below 8% even in the depth of the recession as shown in Fig.4 below.

Fig.4 Net rate of return to Private Non-Financial Corporations, %
Source; ONS

By contrast the British government can borrow at extraordinarily low rates to fund investment, as shown in Fig.5 below.  At the time of writing the yield on 10 year UK gilts is 1.8% which is a fraction of the rate of return on private investment.

Fig. 5 UK 10 year gilt yields
Source: Bank of England

The objection raised at this point (see Peston in particular) is that there are no projects or sectors where such returns are additionally available, otherwise the private sector would be investing in them.  But this criticism is misplaced and only serves to highlight the innate superiority of state-led investment over that of the private sector.

On exactly the same investment, the returns available to the public sector are higher.

To demonstrate this, take the obvious case of housebuilding.  Private builders estimate an average construction cost per home of £100,000 in Britain, and a sale price of £175,000 to cover their fees, borrowing costs and of course profits (National Association of Home Builders estimates).

Yet government can build exactly the same home at exactly the same price.  It will naturally have far lower borrowing costs than any private sector company.  But it is the returns to government which are massively higher.  This is because government obtains tax revenues which of course are unrecoverable by any private sector developer.  This will be both income taxes on all labour employed, plus tax revenues on all consumption financed by that income, and all other consequential taxes.  There is also a benefit to government finances from the increase in economic activity arising from lower social security payments.

The UK Treasury estimates that for every £1 increase in economic activity there will be a 75p boost to government finances, 50p in tax revenues and 25p in lower social security payments*.  As a result the net cost of home construction is just £25,000 (after all returns are included) while it now has an asset with market price of £175,000.  Employment and a home have been created and a genuinely affordable rent is easily possible.

The superiority of the public sector is even greater in a strategic sense.  Government can direct investment to the most-needed or most productive sectors of the economy, energy, transport, infrastructure and education, in addition to housing in a coordinated fashion.  The vastly greater returns to the government means that it is not even the main direct beneficiary of the investment.  It is private firms who benefit most, at least in a direct sense, from investment in transport, education, infrastructure and so on.  But the key condition is that they not be allowed to act as a brake on investment, as they are currently.

The trading response of financial operators is entirely predictable.  Irrespective of their political views, their purpose is to make money.  The dire warnings against the 2009 Labour stimulus Budget, that interest rates would soar was actually followed by a sharp fall in interest rates.  Investors were more likely to get their money back from a government whose economy was growing rather than contracting.  (The political response may be another matter, but that is a separate discussion on the levers a radical government would have to use).

Government investment in the productive sectors of the economy yields very high returns, much higher than the interest payable on government debt.  Corbynomics has offered a range of options to achieve that increase in investment.  All of them are preferable to current policies because they can work.

*Treasury Working Paper No.5, Public Finances and the Cycle http://webarchive.nationalarchives.gov.uk/20100407010852/http://www.hm-treasury.gov.uk/prebud_pbr08_publicfinances.htm The author is grateful to the office of Caroline Lucas MP who managed to locate this paper. It seemed to have been buried away under the Coalition government.