Tag: #Economics

Does the Makerfield Test Really Work?

When Local Justice Meets National Responsibility

One of the most attractive political ideas to emerge in Britain this year is also one of the simplest.

Andy Burnham calls it the Makerfield Test.

His argument is straightforward: government should judge its success not merely by economic growth, favourable statistics or the approval of financial markets, but by whether life genuinely improves for ordinary people in communities such as Makerfield and thousands of places like it.

At first glance, it is difficult to disagree.

After all, what is the purpose of economic growth if it never reaches the people politicians claim to serve?

What does a rising GDP mean to a family struggling to pay its bills?

What comfort is a buoyant stock market to someone unable to afford their first home?

For too long, British politics has often spoken as though national success could be measured from Westminster, the Treasury or the City of London. Burnham’s challenge is refreshingly different. He asks us to begin where people actually live.

It is a powerful idea, but it is also a deceptively difficult one.

Because the moment we move from slogans to governing, the Makerfield Test encounters questions for which there are no easy answers.

Beyond Makerfield

Imagine Britain needs to increase defence spending dramatically because the international situation has become more dangerous.

The additional money has to come from somewhere. Taxes rise. Public spending elsewhere is reduced.

Does the Makerfield Test say this is the wrong decision because local communities feel poorer?

Or does national security sometimes require short-term sacrifice?

Consider trade.

A new agreement with another country creates thousands of jobs nationwide but causes one manufacturing town to lose its largest employer.

Has the policy succeeded?

Or failed?

Or what about climate policy?

Higher carbon taxes may increase household costs today while helping avoid much greater environmental damage tomorrow.

Should governments refuse such policies because today’s voters bear the immediate pain?

Or should they ask communities to accept temporary hardship for future generations?

The same questions arise with infrastructure.

A high-speed rail line may transform one region while another loses investment and homes are demolished.

A new airport may create prosperity for hundreds of thousands while disrupting the lives of nearby residents.

Every major decision produces winners and losers.

The Makerfield Test asks us to judge policy locally.

But governments must also govern nationally, and of course internationally.

The immigration dilemma

Immigration presents perhaps the clearest example.

Economists frequently argue that immigration strengthens Britain’s economy over the long term by addressing labour shortages, increasing tax revenues and supporting an ageing population.

Yet those national benefits may be accompanied by genuine local pressures.

Schools become more crowded. GP appointments become harder to obtain. Housing demand increases. Communities experience rapid cultural change.

These concerns deserve neither dismissal nor exaggeration.

But they exist alongside equally real national needs.

Which perspective should prevail?

Should government prioritise the immediate experience of individual communities?

Or the country’s long-term economic and demographic interests?

The Makerfield Test offers an important moral instinct, but it  doesn’t automatically provide an answer.

The burden of hope

There is another challenge.

Political hope can be a dangerous thing because expectations have a habit of outrunning reality.

Following Burnham’s emergence on the national stage, several commentators observed that his rhetoric was generating extraordinary optimism. Communities neglected for decades understandably wanted to believe that someone had finally recognised their experience.

Yet history offers a warning. The higher the expectations, the greater the disappointment when government inevitably encounters limits.

This is not unique to Burnham. It happened to Tony Blair, Barack Obama and Emmanuel Macron.

Democratic politics has a recurring pattern: campaigns promise transformation > Government discovers constraint > Voters experience frustration > The cycle begins again.

If Burnham persuades people that every decision will pass the Makerfield Test, he has also created a standard against which every decision will be judged.

That is both politically courageous and politically risky.

Judging the government by its own standard

This is where the Makerfield Test becomes genuinely useful.

If governments ask to be judged by the lives of ordinary people, then ordinary people are entitled to ask difficult questions.

Why was this policy chosen?

Why this priority rather than another?

Who benefits first?

Who waits?

Who pays?

Who gains?

These are very reasonable democratic questions.

Indeed, they are precisely the questions the Makerfield Test encourages us to ask.

The standard should apply not only to previous governments but also to those who introduce it.

The unavoidable dilemma

Ultimately, every government confronts the same uncomfortable reality.

Resources are finite.

Competing priorities are unavoidable.

Perfect fairness is impossible.

Sooner or later, ministers must decide that one place receives investment before another.

One project proceeds while another is delayed.

One industry expands while another declines.

One generation bears costs that another generation may eventually enjoy.

No political philosophy can eliminate these choices.

It can only explain how they should be made.

That is why I find the Makerfield Test both so compelling and so incomplete.

It reminds us that statistics are not people and that national prosperity means little if communities experience only decline.

But governing Britain also requires another perspective.

Sometimes a difficult national decision genuinely serves the country’s long-term interests, even when particular communities understandably object.

Sometimes today’s sacrifice becomes tomorrow’s prosperity.

Sometimes it doesn’t.

The difficulty lies in knowing the difference.

The real test

The most important question raised by the Makerfield Test is:

Who decides when Makerfield should lose for Britain’s long-term benefit?

That question has no comfortable answer.

Every government, whatever its political colour, will eventually ask one town, one industry, one region or one generation to accept sacrifice for a wider national goal.

The challenge is not avoiding those moments.

The challenge is ensuring they are honest, proportionate, accountable and genuinely necessary. And, better still, that they line up with a clear vision and values for which politicians have been elected.

“Parliament is not a congress of ambassadors from different and hostile interests… but a deliberative assembly of one nation, with one interest, that of the whole.”
— Edmund Burke

When a Country Gets Richer, Who Owns the Wealth?

Wealth. A man reading a financial newspaper about who owns Spain's wealth in the background.A newspaper headline over breakfast in Spain made me question something I’d never really considered before. When a country’s economy is booming, who actually owns the wealth that’s being created?

One of the unexpected pleasures of moving to Spain has been rediscovering the lost art of breakfast.

Most mornings I walk to my favourite café, order a café con leche and toasted bread rubbed with fresh tomato and olive oil, then spend half an hour simply watching the town wake up. The same waiter greets familiar faces with effortless warmth. Elderly couples linger over coffee. Shopkeepers raise their shutters. Sunburnt tourists wobble by. There is something reassuring about the rhythm of ordinary life here.

A few mornings ago, however, it wasn’t the people who caught my attention. It was a newspaper.

The gentleman at the next table was reading Expansión, Spain’s financial newspaper. Across the front page was a headline that immediately made me stop.

The real owners of the IBEX 35.

The real owners?

Surely Spain’s largest companies belong to Spain.

I finished my breakfast, but the question followed me home.

The Assumption

Like most people, I have spent much of my life assuming that when a country’s economy grows, its people become wealthier. I’ve lived in Germany for 16 years, which always provided me with the perfect example.

And that is how the news is usually presented.

The economy is booming.

Corporate profits are rising.

The stock market reaches another record.

We instinctively hear those as different ways of saying the same thing.

But they are not.

Companies create wealth where they operate.

Ownership determines where much of that wealth ultimately accumulates.

The distinction sounds almost trivial.

It isn’t.

It changes the way we think about almost everything.

Creating and Owning Wealth

Imagine two people.

One spends forty years working.

The other spends forty years owning.

The first helps create prosperity.

The second receives part of the return from that prosperity.

Sometimes, of course, they are the same person.

Often they are not.

That morning, as I watched the waiter carrying coffees from table to table, it occurred to me that he was helping to create Spain’s prosperity every bit as much as a hotel owner, a banker or a company director. Every tourist welcomed, every breakfast served and every day’s work honestly completed contributes, however modestly, to a nation’s success.

Yet if one of Spain’s largest companies doubles its profits this year, a significant share of those profits may eventually belong to people who have never set foot in Spain.

The wealth is created here.

The ownership may be somewhere else.

For some reason, that simple distinction had never really occurred to me before.

A Global Story

The more I reflected on it, the more I realised that Spain was merely the setting.

This is the story of the modern world.

Capital crosses borders far more easily than people do.

That freedom has transformed our lives. It has financed innovation, built industries, connected economies and lifted hundreds of millions of people out of poverty. Few of us would seriously wish to reverse it.

Yet every system has consequences.

Perhaps the least discussed consequence of global capitalism is that it increasingly separates the place where wealth is created from the place where much of it is ultimately owned.

The two are no longer the same thing.

Britain Taught Me the Lesson Before Spain Did

Ironically, Britain had been teaching me this lesson for decades without my noticing.

Successive governments sold companies, utilities, railways, airports, property and infrastructure into private and often international ownership. We were told that this was modernisation, efficiency and the price of attracting investment. In many respects, it was.

Investment creates jobs.

Investment raises productivity.

Investment helps economies grow.

But every sale also carried another consequence.

A little more of tomorrow’s income would belong to someone else. And if the quality of a service such as buses and railways deteriorates in Manchester when the company owners sit in an office along the Champs Elysées, we should not be too surprised.

At the same time, Britain itself became a major owner of overseas assets. Pension funds, investment companies and multinational businesses accumulated wealth around the world. Perhaps that is one reason Britain has continued to generate considerable income despite producing far fewer of the manufactured goods that once defined its economy.

I had simply never connected those two facts before.

The newspaper in Spain finally joined the dots for me.

The Conversation We Rarely Have About Wealth

Political arguments usually revolve around wages, taxation or redistribution.

The left asks how wealth should be shared.

The right asks how more wealth can be created.

Both debates matter.

But perhaps they both overlook an earlier question.

Who owns the wealth before anyone starts arguing about how to redistribute it?

That seems to me to be one of the defining questions of our age.

Not because ownership should be concentrated within national borders.

Nor because global investment is somehow undesirable.

But because ownership itself has become strangely invisible.

Millions of people spend entire careers helping to create wealth while accumulating very little ownership of the economy they are helping to build.

They earn incomes.

But wages and ownership are not the same thing.

One pays today’s bills.

The other builds tomorrow’s security.

A Fairer Form of Globalisation

I have no desire to retreat into economic nationalism.

The extraordinary prosperity of the modern world owes much to capital flowing freely across borders. The challenge, surely, is not to make investment less global but ownership less exclusive.

Economic growth should not become a spectator sport in which millions of people spend their lives creating wealth they will never meaningfully own.

A healthy economy should produce not only better wages but broader ownership, because ownership is what allows one generation’s work to become the next generation’s security.

That does not require abandoning global markets.

It requires asking whether ordinary citizens have enough opportunities to become long-term owners of the prosperity they spend their lives creating.

What if governments devoted as much energy to widening ownership as they currently devote to encouraging growth?

What if employee share ownership became the norm rather than the exception?

What if ordinary citizens found it easier to build long-term stakes in productive businesses through pension funds, savings schemes and investment accounts?

What if the people whose daily work creates prosperity gradually came to own a larger share of that prosperity?

That strikes me as a far more constructive ambition than trying to turn back the clock on globalisation.

I still remember folding that newspaper and taking one last sip of coffee before walking home.

The headline had answered one question.

But it had raised another.

When we say that a country’s economy is booming, we usually ask how much wealth has been created.

Perhaps the more important question is one we almost never ask.

Who really owns the wealth that a nation’s workforce is creating?

“The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty.”
— John Maynard Keynes

 

The Seven Economic Myths We Tell Ourselves

Seven economic myths we tell ourselves
Seven economic myths we tell ourselves

Last week I questioned whether our current school curriculum provides us with the knowledge we require for handling money during our adult life. This week I’d like to look at seven common economic myths I consequently grew up with that, I believe, should be examined by students in today’s education system.

Economics is often presented as a science of numbers. We hear about growth rates, inflation figures, government debt and stock market performance. Experts produce graphs. Politicians quote statistics. Journalists report percentages.

Yet much of our thinking about economics is not based on facts. We inherit economic beliefs in much the same way that we inherit religious beliefs, political loyalties, or assumptions about human nature. They become part of our mental furniture. We rarely examine them. We simply assume they are true.

Here are seven economic stories many of us have been taught to believe.

Myth No. 1. If GDP Is Growing, Everything Must Be Fine

One of the most common assumptions is that economic growth automatically means social progress. If the Gross Domestic Product is increasing, politicians congratulate themselves, commentators celebrate and newspapers announce that the economy is doing well.

But there is an obvious question that often goes unasked: doing well for whom?

GDP measures economic activity. It measures production. It tells us how much a country produces and sells. What it does not tell us is how that wealth is distributed or whether ordinary people are benefiting from it.

A nation can have impressive growth while housing becomes unaffordable, public services deteriorate and large sections of the population struggle to make ends meet.

As a former teacher, I sometimes compare GDP with examination results. A school may improve its statistics while becoming a worse place to learn. The numbers can look impressive while something essential is being lost.

The same is true of nations. Economic growth matters, but it is not the same thing as human flourishing.

Myth No. 2. Debt Is Always Bad

Most of us are taught to fear debt. For individuals, that is often sensible. Excessive borrowing can destroy lives. It can create stress, dependency and hardship. Yet not all debt is the same.

A mortgage, a student loan or a business investment is different from borrowing money to fund reckless consumption. One creates future value; the other merely brings tomorrow’s spending into today.

The same principle applies to governments. When a state borrows to invest in education, infrastructure, scientific research or healthcare, it may be creating assets that benefit future generations. The question is not whether debt exists, but whether the borrowing is productive and sustainable.

The most successful economies in the world often carry substantial public debt. What matters is not the existence of debt itself, but the wisdom with which it is used.

Myth No. 3. The Rich Create Jobs

This idea appears so frequently in political debate that many people accept it without question. There is, of course, some truth in it. Entrepreneurs create businesses. Businesses employ people. Investment can stimulate growth. But the story is incomplete.

Businesses do not hire employees simply because their owners are wealthy. They hire employees because there is demand for their products and services. A restaurant expands because customers fill its tables. A manufacturer recruits workers because orders are increasing. A shop hires staff because people are buying what it sells.

In other words, jobs are not created by wealth alone. They are created by economic activity. Moreover, much employment comes not from billionaires or multinational corporations, but from small and medium-sized businesses. Across Europe, countless family businesses, local shops, tradespeople and self-employed entrepreneurs collectively employ millions of people.

The real engine of employment is not wealth itself but a healthy and active economy.

Myth No. 4. Markets Always Know Best

For some people, the market has become almost a secular religion. The argument is familiar. Left alone, markets allocate resources efficiently. Government intervention merely creates distortions and stunts economic growth.

There is certainly some truth in this. Competitive markets can be remarkably effective. They often encourage innovation, efficiency and consumer choice. But markets are not infallible.

Consider healthcare. If access to medical treatment depends entirely upon ability to pay, many vulnerable people will be excluded.

Consider environmental protection. Businesses may profit by passing environmental costs onto society as a whole. Pollution becomes someone else’s problem.

Economists even have a term for these situations: market failures.

The reality is that markets and governments each have strengths and weaknesses. Mature societies require both. The challenge is not choosing one over the other, but finding the right balance between them.

Whenever someone insists that the answer is always more market or always more state, I become suspicious. Human societies are rarely that simple.

Myth No. 5. If You Tax the Rich, They Will Leave

This argument appears whenever tax reform is proposed. Raise taxes on wealthy individuals, we are told, and they will immediately pack their bags and move elsewhere.

At first glance, the claim seems plausible. Yet people are not spreadsheets.

Human beings make decisions based on family, friendships, culture, language, quality of life, security and belonging. Financial considerations matter, but they are rarely the only consideration.

Countries such as Norway, Sweden and Denmark have maintained relatively high levels of taxation while remaining prosperous, innovative and attractive places to live.

This does not mean taxes can be increased without limit. Excessive taxation can certainly discourage investment and entrepreneurship.

The point is simply that reality is more nuanced than political slogans suggest.

People stay for many reasons. They leave for many reasons. Tax is only one factor among many.

Myth No. 6. Inflation Is Always Bad

The word inflation usually arrives wrapped in anxiety. We hear that prices are rising and immediately assume disaster.

Certainly, high inflation can be deeply damaging. It erodes savings, creates uncertainty and hits those on lower incomes particularly hard. Yet economists generally do not aim for zero inflation.

A modest level of inflation is usually considered healthy because it reflects a growing economy. It encourages spending, investment and economic activity.

What is often forgotten is that the opposite problem can be equally dangerous.

If prices continually fall, people postpone purchases. Why buy today if everything will be cheaper tomorrow? Businesses then sell less, investment slows and unemployment may rise.

Like many things in life, the issue is not inflation versus no inflation. It is balance. Too much inflation can be destructive. Too little can be equally problematic.

Myth No. 7. Money Is Real

This final myth is my favourite because it takes us beyond economics and into philosophy.

Most of us think of money as something solid and tangible. We earn it, spend it, save it and worry about it. Yet money possesses no intrinsic value.

A fifty-euro note is merely paper. The number displayed in your bank account is simply a digital record stored on a computer somewhere.

Money works because we collectively believe it works. Its value depends upon trust.

This is not as strange as it sounds. Much of human civilisation rests upon shared beliefs. Nations exist because enough people believe they exist. Laws function because people collectively accept their legitimacy. Companies, universities and governments all depend upon systems of shared trust.

Money is one of humanity’s most successful collective stories. That does not make it imaginary. It makes it a social construct, like any other.

And perhaps that is one of the most important lessons economics can teach us.

If only I’d known in my twenties what I know now

If there is a lesson I wish somebody had taught me when I was starting out, it is that wealth is rarely built through cleverness alone. Looking back, the people who seem to achieve financial security are often not the most intelligent, the most educated or even the highest earners.

They are the people who consistently do a few simple things well.

    • They spend less than they earn
    • They avoid unnecessary debt
    • They acquire productive assets
    • They diversify their investment portfolio
    • They think long term
    • And above all, they allow time and compounding to work their quiet magic.

Perhaps that is the greatest economic lesson of all. Not that there are easy answers. But that small, sensible decisions repeated over decades are often more powerful than brilliant ideas pursued for a few months.

Beyond Economics

The purpose of examining these myths is not to replace one certainty with another.

It is to become more cautious whenever someone offers a simple explanation for a complicated problem.

Economic debates are often presented as battles between truth and error, between common sense and foolishness, between left and right. Reality is usually less satisfying.

The older I become, the less interested I am in certainty and the more interested I am in questions.

    • Who benefits from economic growth?
    • What kind of debt creates value?
    • When do markets work well, and when do they fail?
    • How much inequality can a society tolerate before trust begins to erode?

And perhaps most intriguingly of all: what other things do we collectively believe in that are no less dependent on faith than money itself?

Economics turns out to be about far more than money.

It is about human beings and the stories we tell ourselves about how society works.

The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.

— F. Scott Fitzgerald