Friday, 31 August 2012

Harvard economist believes in magic

Yesterday, my friend Tim Coldwell sent me a copy of the Harvard economist Martin Feldstein's article at Project Syndicate, "Is Inflation Returning"?

Feldstein argues that the Fed's QE program will inevitably lead to inflationary pressures in the future, because when the new money finds its way into the real economy it will lead to a spending splurge. Frankly, at the moment a spending splurge would be a very good thing. The economic trend throughout the world is deflationary, everyone is cutting back spending, banks aren't lending and the velocity of money is dropping like a stone. The Bank of England (which Feldstein doesn't mention), which has done far more QE in relation to the size of the UK economy than the Fed in relation to the US, says that the primary purpose of QE is to maintain inflation near its 2% target and counteract DEFLATIONARY pressures. Many might dispute this, since the UK's CPI has been and remains well above target, but the BoE's quarterly inflation report shows a downwards trend and there is evidence of significant retail deflation which is not being picked up in the CPI measure because it is occurring through discounting from published prices, coupons, special offers and sales.

Many might also dispute the effectiveness of QE as a counter to deflation - by extension this also implies disputing its inflationary effect, although those who both complain about the ineffectiveness of QE and predict runaway inflation arising from it don't seem concerned by logical inconsistency. Stella and Singh argued that as QE is simply an asset swap, it has no effect on inflation. Others have noted that as most money in circulation is created through bank lending, and banks are currently restricting lending, all QE does is increase bank reserves without any great benefit to the wider economy. Conversely, the Bank of England (not surprisingly) argued recently that the UK would be in deeper recession without QE. My own view is that QE is at best a very weak stimulus and you would have to do an awful lot of it to achieve the same effect as a 50 bps cut in interest rates.

However, Feldstein is not describing an immediate inflation risk. He is looking ahead into the future when (we hope) the economy starts growing again. At that point the money created through QE would indeed be likely to create inflationary pressures in the economy, and it is the Fed's job to nip those in the bud through interest rate rises and other measures.

Feldstein believes the Fed will be unable to tighten monetary policy enough to counter the inflationary effect of QE. He notes that high unemployment rates persist throughout the Western world, and suggests that hysteresis will prevent unemployment falling to levels acceptable to politicians. Politicians will then apply pressure to prevent the Fed raising interest rates to the level needed to choke off inflation. This is really quite unfair to the Fed, which has maintained generally good control of retail price inflation for the last twenty years. The Fed does have two mandates - price stability and low unemployment - and the two might come into conflict, but that is certainly not a reason to suppose that the Fed would abandon any attempt to control inflation if unemployment remained high. Rising inflation is a disincentive to saving and investment, and in the longer run that destroys jobs. Controlling inflation is therefore an essential part of the Fed's low unemployment mandate.

There are calls for the Fed and other central banks to be brought under political control. Feldstein rightly in my view identifies this as a risk. Politicians by definition have a short-term view - their goal is always re-election - so they generally prefer policies that give short-term electoral gains at the expense of longer-term economic benefits. But in what way would preventing the Fed from controlling inflation improve their electoral chances? Well-off Americans are as terrified of inflation as the Germans, and the powerful "grey voters" have lived through a period of high inflation and remember its effects all too well. At present the political pressure is clearly in the opposite direction. The American right is arguing for tightening of both monetary and fiscal policy, ostensibly to choke off inflation that is not happening and will not happen any time soon, but I suspect actually to improve returns on capital and enable taxes to be cut for the well-off. And Feldstein is providing ammunition to their campaign. Political pressure doesn't always come from politicians.

The fact that the combination of tight monetary and fiscal policy prevents people spending and investing, and therefore inhibits growth, appears nowhere in Feldstein's analysis. Yet he clearly believes that growth would still happen if policy were tighter. I find it worrying that a Harvard professor of economics apparently believes in magic. 

And growth in the absence of adequate money supply is not the only Feldstein magical belief.  Feldstein argues that the recent rise in the gold price and rising price of agricultural land in Iowa and Illinois indicate flight to hard assets, and that this suggests that investors fear inflation. But if that is their fear, why are yields on non-indexed highly-rated government securities in negative territory? Why is there a global shortage of USTs? In short, why are investors still buying these securities if they believe the value of those investments is about to be catastrophically eroded by runaway inflation? And is there really a noticeable flight to hard assets anyway?

There is a fallacy of composition in Feldstein's assertion about agricultural land: since when has the price of land in Iowa and Illinois been a reliable indicator of the global price of agricultural land? Are there really no local effects?  And his argument about gold doesn't make too much sense either. The underlying trend in gold prices has been downwards from a peak of nearly 1900 in September 2011 (change the settings on the link to see the 1 year, 2 year and 30-day charts). Yes, in the last ten days there has been a bit of a positive spike. But a ten-day spike is not sufficient to indicate a change in the underlying trend. The gold price is traditionally volatile, and there are many possible reasons for that spike. Central banks have been buying gold for reasons that are not entirely clear: Izabella Kaminska argues that central banks are propping up the gold price, which would otherwise be falling off a cliff. Cullen Roche recently changed his investor advice for gold to "buy", because the long-term price and the risks to the economy had in his view changed sufficiently to make gold a reasonable investment choice within a diversified portfolio. Gold was recently reclassified as a zero-risk asset for the purposes of bank capital adequacy requirements, which would encourage banks to buy gold. And there might also be some investors buying physical gold as an inflation hedge, as Feldstein thinks - the inflation fear-mongers and goldbugs no doubt have some effect, and the FOMC's suggestion that more QE will be needed soon will have spooked some investors. But the effect doesn't exactly seem large, and it is really too soon to tell whether the gold price trend is reversing. Feldstein doesn't seem to have much evidence to support his claim that financial markets generally fear inflation.

Inflation is not the only risk to capital. Default is also a risk if your assets consist of someone else's debt, as most do. One thing I learned from my extensive debates with Freegolders recently is how frightened they are of counterparty risk - the risk that the borrower will simply walk off with your money, leaving you with nothing. The fact that investors are currently prepared to accept negative real returns on investments they regard as "safe" - USTs, German bunds, FDIC-insured deposit accounts - suggests that fear of counterparty default is not limited to the Freegold hyperinflationistas, but is widespread among investors. Better to suffer a small amount of capital destruction than risk losing everything for a positive return, it seems. The shadow of Lehman lies long over the American financial markets, and the Eurozone debt crisis looms large in the European markets.

On Twitter, the Berkeley economist Brad Delong asked me whether investors really fear inflation, since they don't seem to be hedging against it:
And in his own post on this matter, Delong notes that if investors really feared inflation they would be investing in index-linked securities, but there is no evidence of a flight to TIPS from other US government securities. Admittedly if the prevalent investor fear is hyperinflation, not inflation, then TIPS would not be regarded as adequate protection so would not be preferred over hard assets. But as I've already noted, there doesn't seem to be any evidence of a flight to hard assets from other "safe" investments, either.

Investors are indeed afraid - but not of inflation. In a debt-laden and deflationary economic environment, fear of default is quite sufficient to explain investor flight to "safe" assets - including, of course, gold and land, though the fact that at present there isn't a noticeable movement of funds from highly-rated government debt to hard assets suggests that investors in general still believe that their money is safe with government.

Feldstein's article is written entirely from an American perspective. So his mention of the ECB is somewhat strange. It is also very wrong. The Eurozone economy is dominated by Germany, which does not have high unemployment - but does have a paranoid fear of inflation. Unlike the Fed, the ECB has only one mandate, namely price stability (it has no mandate to control unemployment). Monetary policy in the Eurozone since 2008 has been tighter than anywhere else: it is the only major central bank that has not done QE, although its two LTROs amounted to much the same, and until recently it maintained interest rates well above the zero lower bound. And it has the Bundesbank breathing down its neck. Every time the ECB does anything slightly unconventional to loosen monetary policy, someone from the Bundesbank complains. And it is only a year since the ECB raised interest rates because of inflationary pressures in Germany, despite the mounting evidence of catastrophic deflation in the periphery. The ECB has also continually resisted attempts from the distressed peripheral countries (and France) to persuade it to finance sovereigns and recapitalise banks in contravention of its mandate: the little bond-buying and bank financing it has done has been only just sufficient to prevent deflationary collapse and protect the Euro. So Feldstein's suggestion either that the ECB would suddenly cave in to political pressure, when it has not done so throughout the debt crisis, or that Germany would suddenly choose low unemployment over inflation control, when it did not do so throughout German reunification, is yet more magical thinking on his part.

Inflation is not the main risk at the moment, and it is not what investors fear most. Feldstein is not only wrong, he is - because of his influence - dangerously wrong. The US has tightened monetary policy in a deflationary environment before. The result was the Depression.

Wednesday, 22 August 2012

On the callousness of the American right

A couple of days ago, the Republican Senate hopeful Todd Akin claimed that women who suffer what he called "legitimate rape" would not become pregnant because their bodies would "shut down", and therefore argued that abortion after rape should not receive Federal funding. Not surprisingly, there was a worldwide storm of outrage: there were calls for him to withdraw from the Senate election race and calls for him to be sacked from the Republican committee on Science, Space and Technology. The Republican Presidential candidacy duo, Romney and Ryan, distanced themselves from Akin's claims and insisted that they supported abortion after rape.

Romney has indeed in the past been a supporter of the Roe v Wade legislation that legalised abortion in the US, although in recent years his position has hardened and like most right-wingers he now argues that abortion should only be available to victims of rape or incest and where the mother's life is in danger. Paul Ryan, though, is an entirely different matter, and his failure to support Akin looks very much like treachery. Like Akin, he was one of the original sponsors of the "No Taxpayer Funding For Abortion" Act, which in its original form sought to restrict Federal funding for post-rape abortions to so-called "forcible" rape. Akin did not define what he meant by "legitimate rape", but since his remarks clearly indicated his belief that trauma would cause the body to shut down, preventing pregnancy, it is reasonable to suppose that he meant rape achieved through the use of force - in other words, "forcible" rape. So in distancing himself from Akin's remarks, Ryan, it seems, has changed his tune. Now that wouldn't have anything to do with his selection as Romney's running-mate, would it? Women have votes too, after all. A very hard line on abortion might be costly for Republican presidential chances.

But leaving aside Ryan's well-timed abandonment of his principles, where does this very hard line on abortion come from? Is Akin alone? Hardly. In fact his belief that abortion after rape should be outlawed is quite common among American Christian right-wingers - and it is heavily promoted by fundamentalist Christian preachers and writers. Some claim to provide medical evidence that pregnancy after "forcible rape" or "assault rape" is extremely rare. It is, but that is because rape that meets their definition - violent assault by a stranger - is also extremely rare, not because it is somehow qualitatively different from any other sort of rape. Now, many Christians would object to abortion on demand, but would regard abortion after rape or incest as a Christian compassionate response to a distressed woman. By redefining "rape" as violent assault by a stranger, and then producing medical "experts" to argue that under those circumstances the chance of pregnancy is vanishingly small, these Christian right-wingers are setting the stage for the complete outlawing of abortion on the grounds of rape. If the vast majority of rapes aren't really rape, and pregnancy after forcible rape doesn't really happen, then there will hardly be any need for abortion on those grounds anyway, will there?

They then muddy the waters by conflating the rights of the unborn with prosecution of the perpetrator. Akin and Ryan both say (correctly) that the rapist should be brought to justice, but they argue that this should be instead of "punishing" the child through abortion. This is a false argument. Bringing the rapist to justice has to happen whatever the future of the child. The choice is between punishing the MOTHER or the child, if the mother does not wish to bear the child that has been forced on her. Both parties are innocent. It is a truly horrible choice.

Some American Christian fundamentalists go even further and oppose abortion after ANY rape, including violent assault. They do this on the basis of the child's right to life and its future potential. Mick Huckabee explained how great things have been done by people who were born as a consequence of violent rape. And Sharon Barnes described the "blessing" of pregnancy after violent rape. But the future of the child is a red herring as far as the present life of the woman is concerned, and the idea that a child is worth saving because of its potential usefulness is dangerously utilitarian. I've complained before about the consequences of valuing humans only in terms of their contribution to society. To me as a Christian, a human being is of value simply because they exist.

Which brings me to the real Christian dilemma in all of this. The absolute belief of the American Christian fundamentalists in the sanctity of life for the unborn leads them to display shocking callousness towards women. Like them, I consider abortion barbarous. I am angry about the social circumstances that leave women in a position where they feel they have no other choice. I feel the pain of the women who make the difficult choice to terminate their pregnancies. And I grieve for the children who will never be born. But if the social circumstances were different, those children would never have existed. If men did not commit rape, women would not become pregnant from rape. In some cases, a woman may choose to bear the child forced upon her, and she may indeed see that child as a blessing. But it is going too far to insist that women MUST see children conceived through rape as "blessings" and therefore be denied abortion if that is their choice.

For what is missing from the American right wing's argument is any concern for the life, health and wellbeing of the women concerned. Where is the financial support which would enable those women who wish to bring their rape-conceived children into the world to do so without ending up in penury? Where is the love and care for unmarried women with children in fundamentalist Christian churches? I don't see it. And until  fundamentalist Christians learn to love and care for women who are the victims of male sexual violence,  support them through the difficult choices they must make, and work to change the social values that result in men believing they can rape with impunity, their Christianity is a hollow sham.

Tuesday, 21 August 2012

It's the currency, stupid

A few days ago the German newspaper Der Spiegel broke a story that the ECB was contemplating capping yields on Eurozone sovereign debt by effectively promising to buy the debt of distressed nations in sufficient quantity to keep yields at sustainable levels. There has understandably been considerable comment on this story, both from those who think this is a good idea because it will provide a lifeline for struggling Eurozone sovereigns (especially Spain), and those who think this is a terrible idea because it will let profligate Eurozone sovereigns (especially Spain) off the hook. But they have all misunderstood. This action - as with everything else proposed and done so far by the ECB - has nothing whatsoever to do with bailing out Eurozone sovereigns, although that may be an incidental effect. It's all about the Euro.

Here is the final paragraph (my emphasis) of Asmussen's commentary on Draghi's suggestion that yields may be capped (h/t FT Alphaville, German translation courtesy of Joseph Cotterill):
We’re acting within our mandate, the priority of which is aimed at guaranteeing price stability for the euro area as a whole. Only a currency about which there are no doubts to its survival can be stable. That’s what we’re working for at the ECB.
So much for the "single mandate" of the ECB. Inflation is no longer its primary concern. If the Euro collapses, the ECB has no mandate, and indeed no reason to exist. So its absolute priority is preservation of the Euro at all costs. And if that means loading its balance sheet with everybody's junk, printing money like it is going out of fashion, bailing out sovereigns, banks, businesses and individuals, IT WILL DO IT - however much the Bundesbank objects and whatever its nominal mandate says.

So is the Euro really at risk? There are conflicting views on this. In my extensive discussions with Freegold supporters recently, they refused to believe that the Euro could collapse. They saw it as completely independent of the countries that use it: in their opinion, the Eurozone crisis is no threat to the existence of the Euro, because the Euro would continue to exist and be used for international trade even if all the Eurozone countries stopped using it domestically. Frankly I think this is naive. The Euro is a creation of the countries that use it. If they were all to stop using it, it would have no purpose - it would be simply a failed currency experiment consigned to the dustbin of history. The Freegolders also believe that the Euro is immune to hyperinflationary currency collapse, because the ECB's single mandate means that it would never monetize sovereign debt. This is arrant nonsense. The ECB has already monetized significant amounts of the debt of Greece, Spain and Italy both directly through the SMP programme and indirectly through the LTROs, and Draghi's proposal could monetize a whole lot more. If the single mandate is being reinterpreted to mean currency survival rather than price stability, the Euro is no more immune to hyperinflation than any other currency. I'm afraid I do not share the confidence of Freegolders (and to be fair, many other people with strong emotional attachment to the Euro project) that the Euro cannot collapse if the Eurozone fails.

At the opposite end of the scale are people who clearly do think the Euro is at risk. Finland was reported as considering "all" options for the Eurozone crisis - including the end of the single currency. Others, too, have openly debated the possibility that the Euro may fail, and there is some evidence that speculators are beginning to bet on its failure. This is potentially disastrous, and in my view explains Draghi's apparent volte-face on bond yields. Speculative attacks can cause exchange rate pegs to fail and currencies to collapse. The ECB leadership will not have forgotten the collapse of the Euro's predecessor, the first Exchange Rate Mechanism (pdf), under sustained speculative attack.

Whether or not the ECB leadership think the collapse of the Euro is a realistic possibility, they are certainly not saying so. In fact they are doing their best to talk it up. And it may work. Giving speculators a clear message that the ECB really will do whatever it takes to support the Euro may frighten them off: after all the ECB is a central bank, so it has more than enough resources to fend off even sustained speculative attacks. But it depends whether the ECB really has the freedom to use its resources. I have to say that at present, it doesn't look as if it has.

Recognising that the ECB's mandate is first and foremost to protect the Euro frees it from the chains of inflation targeting and could permit quasi-fiscal intervention (such as bond-buying to cap yields) within its mandate. And that does seem to be how the ECB leadership is thinking. But the EU leadership, the Bundesbank and as far as I can see most of the press and the economics profession don't get it. So the hawks among them squawk about "moral hazard", "market discipline", "fiscal consolidation". And the doves coo about ECB recapitalising banks and buying sovereign debt to ease fiscal pressures and halt the austerity death spiral. It's all irrelevant. The ECB fundamentally doesn't care if half the countries in the Eurozone collapse, provided the Euro continues: but if their collapse would threaten the Euro's survival, as it seems that it might, the ECB will equally happily buy all their debt, public and private, and recapitalise their banks, if that is what it takes to preserve the single currency.

If the EU leadership, the Bundesbank and other key players wish to ensure the Euro survives, they really must give full support to the ECB. Undermining the ECB leadership and attempting to restrict use of ECB resources with threats of legal action, as some of them are doing, is an open invitation to speculators to test the real ability of the ECB to defend the Euro - and I have no doubt that they will accept that invitation with alacrity. It's unbelievably stupid.

Thursday, 9 August 2012

Standard Chartered and the regulatory smorgasbord

So yet another UK bank is at the centre of a storm of corruption allegations. First Barclays, then HSBC....this time it's the "whiter-than-white" Standard Chartered Bank that is alleged to have soiled its trousers. The New York State Department of Financial Services claims that Standard Chartered has laundered $161bn of Iranian money to avoid US sanctions against Iran: the regulator describes it as a "rogue institution" and is calling for it to be stripped of its US banking licence and its authority to trade in dollars. The release of these allegations caused Standard Chartered's share price to drop by 18% and created a storm of glee in US media and anger in the UK press.

Standard Chartered Bank is an interesting institution. Although it is headquartered in the UK, it has no domestic business. Its main business is in Asian and African emerging markets, where it is a major provider of trade finance, much of it in dollars. So losing its US licence and being unable to trade in dollars would deal it a crippling blow (though maybe not.....more on this later).

Not surprisingly, therefore, Standard Chartered is hitting back. It claims that "99.9%" of its transactions complied with US money laundering laws, and its chief executive says he is considering a lawsuit (paywall) against the regulator for "reputational damage".

So far, so unclear. The regulator says they done it, Standard Chartered says they never did. There have been claims that this is deliberate aggression by a "rogue regulator" hoping to prove that it has real teeth. And there are dark suggestions of a wicked US plan to discredit the City of London to leave the field clear for New York as the premier global financial centre.

What is clear is that the release of these allegations by the New York State regulator appears to have caught the other US regulators on the hop. Yes, you did read that right. US regulators, plural. It seems that Standard Chartered is also being investigated for Iran sanctions breach by the (Federal) Department of Justice, the FBI, the Federal Reserve, the Treasury and the Manhattan District Attorney's office. Oh, and the UK's FSA was involved, too, since Standard Chartered is a British bank. And these august bodies were distinctly miffed about being pipped at the post by a recently-established State upstart.

Predictably, UK regulators were unimpressed by this display of American regulatory competitiveness. Mervyn King, Governor of the Bank of England, commented wearily: "I think all that the UK authorities would ask is that various regulatory bodies that are investigating a particular case try to work together and refrain from making too many public statements until the investigation is complete."

King's comments will strike a chord with a number of people. The recent investigation of Barclays by the FSA and subsequent grilling of the major players by the Treasury Select Committee displayed a distressing lack of consistency among UK regulators. Although no-one had much sympathy for the embattled Diamond, the fact was that the FSA's sanctions appeared to expose at the very least tacit collusion with LIBOR-fixing by the Bank of England. Diamond's subsequent forced resignation at the behest of the Governor and the Head of the FSA looked to me, at least, very much like the regulators closing ranks to prevent further damage to their own reputations. The FSA's investigations into other banks with regard to the LIBOR-fixing scandal continue, in parallel with actions in various European states with regard to EURIBOR-fixing and investigations into US dollar LIBOR-fixing by the Fed. There is still much more to emerge on this and I strongly suspect that in the end the regulators themselves will be shown to be very far from innocent.

The Standard Chartered offence is if anything more serious than LIBOR-fixing, since money laundering is actually a crime everywhere in the Western world. So the lack of common purpose among regulators is all the more worrying. The sheer cost and inefficiency of a system in which six US regulatory bodies investigate the same alleged crimes apparently independently of each other beggars belief. And the competitiveness demonstrated by the New York State regulator hardly makes for good, impartial application of regulations.

It is by no means the first time that the American regulatory smorgasbord has caused problems. The American insurance giant AIG, which was expensively bailed out in the financial crisis after nearly bleeding to death due to CDS margin calls, chose as its regulator the Office of Thrift Supervision (OTS), a tiny, poorly-funded outfit that was systematically kept in the dark by AIG and wouldn't have had a clue how to evaluate the risks of its its derivatives portfolio anyway. It took some time even for the OTS's responsibility to come to light, since there was a prevalent belief that no one regulator was responsible for AIG. The question is how a thrift supervisor (for UK readers, a "thrift" is the US equivalent of a building society) came to be the principal regulator of a giant insurance company. And this brings us to the fundamental difference between the UK and US approach to regulation of financial institutions.

US financial institutions can choose their regulators, and the regulators market themselves to attract financial institutions seeking regulation. Regulators compete for business from US financial institutions. Which causes a problem, doesn't it? Regulators have to be seen to be effective, in order to attract customers, but if they are too effective in regulating US financial institutions, those institutions will ditch them in favour of less invasive regulators. OTS became the regulator of choice not only for AIG but for other large financial institutions because it offered lighter-touch regulation than other bodies: yes, each of those institutions had to buy a "thrift" in order to qualify for OTS regulation, but the cost was peanuts compared to the potential gains from lighter-touch regulation. The result was that these institutions were effectively unregulated, since OTS either would not or could not interfere with their operations. The rest, as they say, is history. It was perhaps unfair to blame OTS for its regulatory failure, but since the alternative was for Congress to accept that the American regulatory system is fundamentally flawed, it has, of course, been closed down.

In the light of this, John Mann's accusation of US regulators' anti-British bias needs to be taken rather more seriously. Many people have commented that the US regulators do seem to focus more on foreign banks than they do on US ones, which if regulators are seen by US banks as a source of competitive advantage is hardly surprising. Regulators' jobs depend on their ability to be seen to regulate foreign banks effectively while not interfering too much with US banks.

If we are to have a properly-regulated global financial system in the future, it is unacceptable that any major player has a regulatory system which is fragmented, systemically biased towards its own financial institutions and tending to lean towards regulatory avoidance. It is also unacceptable that any major player has a regulatory system in which the two major regulatory bodies behave in conflicted ways but close ranks when their inconsistency is exposed. And it is unacceptable that any major player has a regulatory system in which regulatory requirements can be watered down at the behest of vested interests.

Regulators need to be genuinely independent of the institutions they regulate, not dependent on them: regulators must be seen to be trustworthy and incorruptible: and regulators should act impartially in the application of regulations. The regulatory bodies of the US, UK and EU all fail on at least one of these criteria. The Standard Chartered investigation has (again) exposed the flaws in the US regulatory system just as the Barclays fine exposed (again) the flaws in the UK regulatory system and the European banking stress tests exposed the flaws in the European regulatory system. We simply do not have an effective system of international financial regulation, and until we do, there will not be a healthy international financial system.

Amusingly, it seems that the lack of agreement among American regulators could offer Standard Chartered an escape route. Masa Serdarevic at FT Alphaville points out that the New York State regulator can only ban Standard Chartered from trading in, er, New York State. Admittedly this is quite a problem, since Wall Street is of course in New York, but it would in theory be possible to clear US dollar transactions by FEDWIRE in a different state. This would be subject to approval by the Fed and the Department of Justice. Which are, of course, conducting their own investigations into Standard Chartered Bank.....

Sunday, 5 August 2012

The changing nature of work

One of the most interesting issues to arise in the course of the "comment-athon" on my post "The Golden Calf" was the suggestion that the link between money and work is broken, and indeed that there is no longer a reliable link between "earning" and working. This is a logical consequence of two things: firstly, increased automation of production means the number of people needed to produce enough goods to meet people's basic needs is declining; secondly, an increasing number of people do considerable amounts of pro bono" work that is directly beneficial to society. The converse to this latter point is that there also seems to be a broken link between remuneration for work and the benefit of that work to society as a whole: there are people who are rewarded very handsomely for work that benefits few people (mostly people like themselves), and there are  other people who are paid very little or even nothing at all for work that benefits far more people.

Of course, there has always been pro bono work. Women have always worked unpaid in the home: their work is not counted in measures of GDP, but in high-profile divorce cases the financial value of a woman's unpaid work supporting her extremely wealthy husband has led to some exceedingly high settlements. It is of course possible to value the housework and childcare done by most women without pay, because there are thriving industries in domestic help and childminding: the "opportunity cost" for a woman who chooses to do the work herself rather than employ others, and therefore foregoes paid work, is of course the difference between the income from paid work and the cost of employing others to look after the kids and keep the house clean. Where a woman has a lot of children, that difference can be so small (or even negative) that it is simply not worth her while doing paid work.

Middle-class women have also traditionally worked unpaid outside the home, as well, as have retired gentlemen. Charities rely on middle-aged, middle-class women to staff their shops, do fundraising and take on voluntary public service roles such as delivering meals on wheels. And the charitable jobs that both women and men do can be much more senior, too. For many years, my mother worked full-time for expenses only, running a day centre for the elderly: after she retired in 1998 at the age of 68, her replacement was paid £25,000 per annum (it is probably more now).

We also know that many middle-aged women have their paid work curtailed by the need to care for elderly relatives. Again, the opportunity cost for the woman is the difference between the amount it would cost her to pay someone to look after her dependents, versus the loss to her of giving up or reducing paid work. But the benefit to society is enormous: elderly care is one of our biggest and growing costs, and the extent to which the middle-aged (mainly women) take on this care themselves at considerable personal cost does reduce the burden on taxpayers. Not all frail elderly have property that can be used to fund their care.

Some men, too, have worked for nothing, though this tends to be in their spare time in addition to their full-time jobs. Traditionally, local politics has been an unpaid spare-time activity for men: both my father and my eldest brother have spent much of their lives working in their spare time for nothing as local councillors.

I am therefore very wary of measuring people's "value" in terms of their financial contribution to society. What is the "value" of a woman like my mother, who brings up four children and runs a day centre for nothing? What is the "value" of a woman who juggles poorly-paid part-time work with caring for children and elderly relatives? In terms of their measured contribution, it is very little. But their value to society, in terms of the improvements they bring to people's lives, is surely enormous - and their financial value, in terms of the cost that society WOULD have had to bear if these women had not sacrificed payment for caring, is also enormous. So benefits systems that are designed around financial contribution are therefore in my view fundamentally flawed, since they take no account of the enormous social AND FINANCIAL value of the unpaid work done mostly, though not exclusively, by women.

Furthermore, defining people's value in terms of their usefulness is a narrowly utilitarian view which denies their essential humanity: as Orwell noted in "Animal Farm", down that road lies the knacker's yard for those who are not "useful". Admittedly, the transformation in work practices that I expect to see in the next few years should make it possible for people who are now excluded from the workplace to work productively: home working, networking and internet-based commerce are all ways in which people who can't travel and sit in an office can nevertheless work, especially if employers start to become more flexible with regard to working hours. But there will still be some who cannot work: are we going to regard them as of no value? Surely not. We will love them and care for them because of who they are, not what they can do. And we will bear the cost of their care.

People's "value" as human beings is not dependent on their ability to do paid or even unpaid work. Which is fortunate, because I think we are seeing a fundamental change in the nature of work, arising from my first observation - that increasing automation means that in the future, very few people will be needed to produce the goods required to meet people's basic needs.

Automation only happens when machines are cheaper to run than people, and it is probably fair to say that in the last few decades automation has not happened quite as fast as one might have anticipated because companies have discovered that labour in emerging markets is cheaper than the cost of investing in machinery. But as the standard of living rises in emerging markets, and the cost of technology falls, that will not remain the case. Hazlitt, writing in 1952, pointed out that it was automation of production that enabled families to survive without children's labour, because the price of goods produced with the new machinery was so much lower than those produced in a more labour-intensive way. In the short term automation caused hardship, as people whose livelihoods depended on the old way of doing things lost their jobs: but in the longer term there was benefit to society in the reduced cost of goods that enabled many people to work less, and in the development of new industries to employ those people no longer needed in the old ones. The change we are seeing today is every bit as great, and the short-term consequences are the same - high unemployment, particularly among those with poor or irrelevant skills.

Automation should both require fewer people to work AND enable people to work less, since the whole point of automation is to reduce the cost of production, which in a competitive system would result in falling prices. Unfortunately this isn't always the case: the owners of automated industry may use reduced production cost as an opportunity to take more profit, and they may use political influence to create barriers to entry and trade tariffs to prevent competition driving down prices. But assuming that governments don't use subsidies and protections to keep inefficient companies alive and prices artificially high, where does that leave us in terms of employment and incomes in the future?

If most production is fully automated, there will be few production job opportunities. Izabella Kaminska assumed that most goods will be free, so people won't actually need paid work in order to live. I don't think I would go quite that far - production that is in private hands will always seek to make a profit, so goods will never be completely free to the end-customer even if production costs nothing. But it may be possible in the future to live quite well on very little money. Even now, discounting, smart couponing, reward schemes, special offers, product substitution, permanent sales and price comparison websites mean that it is rarely necessary to pay the advertised price for anything. The consumer price index is no longer a reliable guide to the real price levels in the shops, since it doesn't take account of measures retailers use to move goods that are not selling well at their advertised price, which these days is most of them. We have not just a glut of food, but a glut of consumer goods generally, and unless producers are artificially supported in some way, a glut always means rock-bottom prices for the consumer.

So if there will be few jobs in production in the future, and most people's basic needs can be met for very little anyway, what will people do instead? Firstly, it won't be nothing. People don't stop working when their basic needs are met: they move on into other forms of work that they find personally fulfilling (Maslow) and that bring benefit to society as a whole. The pro bono work done by my parents - arguably their life's work - was possible because my father's full-time job earned him sufficient to meet his family's needs. Would he have stopped doing that "social" work if he had only needed to work part-time to meet his family's needs? Hardly. He would have done more of it. Admittedly that work was unpaid, but there are many other types of non-production work that is or could be paid, which would encourage people who don't share my parents' commitment to public service to do socially useful things from which they benefit personally.

I fundamentally disagree with those who think that people must be "forced" to work, or that government should "guarantee" a job. In my view breaking the link between paid work and survival would be a good thing. If people are intrinsically of value, then they have the right to survive with or without working. I therefore think we should guarantee basic income, rather than jobs. Or, to put it another way (and root this argument firmly in human rights), we should guarantee people's unconditional right to "life, liberty and the pursuit of happiness": after all, people who are forced do physically debilitating and mentally unstimulating jobs in order to survive are effectively denied the second and third of these rights.   If people don't have to work to survive, most will find or create work that fulfils themselves and benefits others, and we will all be the richer for it. There will be some who will opt to do nothing, but in my view they will be a small minority and we will be rich enough - and I hope generous enough - to tolerate their laziness.

I think we are already seeing the future of work - and it is women who have seized the opportunity and are already well established in the new types of work. You see, women understand that the most precious resource we have is TIME. Giving someone your undivided attention for an hour is an incredibly valuable gift. Combining that with a skill in some form of "grooming" - hairdressing, manicure, massage and the like - enables you to charge for what essentially is a social bonding activity. The same is true of the various "personal development" industries - counselling, personal training, personal shopping, image consultancy - and of course the caring industries. Even the retail industry is becoming personalised, with internet sales of personalised products personally delivered by local people. In my own work, individual and small-group tuition, I am seeing a growing number of adults who want singing lessons as part of their "me time", and I am sure other tutors in a variety of subjects would say the same.

The obvious criticism from male readers of this blog will be, of course, that this "personal" work is mainly sold by women to other women. But actually men have always been prepared to pay for women's time and skills. The "oldest profession", at its higher levels, recognises that what is being sold is not sex but time and attention. At the most basic level, the smackhead streetwalker prices what she offers in terms of acts - hand job, blow job, full sex etc.  But in the rarefied world of the "escort" business, the price is time. Wealthy men buy the time of a high-status woman: what he does with that time may include sex, but it doesn't have to - and in some versions of the industry, sex is actively discouraged because it cheapens the offering. Courtesans down the centuries have charged men a lot of money for their time and their skills - by which I don't just mean their sexual skills: geishas, for example, have to be highly accomplished in music, dance and other artistic enterprises. The middle-class marriage market in Jane Austen's time understood this, too: women were expected to be beautiful and highly accomplished in order to attract a suitable husband. Money helped, but it actually wasn't as important, as Austen noted in her biting satire Pride & Prejudice. In our society the same still holds, and in fact because of our "camera age" it is even more the case now that a woman who is physically beautiful is a high-status woman. Even accomplishment seems less important these days than beauty, as Robert Silverman noted in his critique of Katherine Jenkins, who he (and I) regard as at best a mediocre singer whose looks have made her famous. And money - well, that inevitably arrives anyway.

Now, I am certainly not suggesting that the future of work lies in prostitution, even disguised forms of it. But I am suggesting that the future of work for most people lies in personal services. And an increasing number of men now offer these too.  The counselling industry is still dominated by women, but in the related world of psychotherapy there are a much greater number of men (probably because most of the theory underpinning this has been developed by men). Personal shoppers are almost all women, but a high proportion of personal trainers are men. Personal image consultancy is dominated by women, but motivational training is dominated by men such as Anthony Robbins. Massage is almost entirely women's work, but in physiotherapy, osteopathy, chiropractic and Alexander Technique the balance is much more even. And increasingly, we pay others - still more women than men, though that is gradually changing - to care for those who can't care for themselves. In so doing we recognise the value to society of both the carers and those cared for. Those who bewail the loss of our industrial base, sniff at service industries and think that only "making stuff" is proper work, are living in the past: the future of work lies in social activity and caring for people, not "making stuff" that we can produce for nearly nothing with little human involvement.

Personally I regard this as an exciting time. For the first time in history, people have the real prospect of no longer having to work long hours in boring, repetitive and physically debilitating jobs to meet basic needs. We will have more time to spend interacting with each other, caring for each other and - like all apes - "grooming" each other, and creating beautiful things and clever ideas to brighten up people's lives. And since the prices of basic goods will be very low, we will be both willing and able to pay those with skills in personal service and creative industries for their time and attention. And perhaps then people's remuneration will relate to their enhancement of the lives of many people, not their ability to make profits for a few.

Related posts:

Beyond Scarcity - FT Alphaville (series)
The Gospel of Consumption - Kaplan @ Orion Magazine (h/t Jon Stone)
Marx was right (about Napster) - Stone @ RedRock