Cooking the Books 1 – Fairy-tale economics

Trussonomics – what has also been dubbed ‘fairy-tale economics’ – teaches, even preaches, that if you cut taxes on businesses, they will have more profits and so will invest more, increasing growth and average living standards.

Cancelling the increase scheduled next year in corporation tax from 19 to 25 percent and reducing employers’ National Insurance contributions will increase the amount of retained profits directly and immediately. Cutting other taxes and a corresponding amount of government spending (for instance, as floated, the reduction in the pay of public sector workers outside London and not giving out any more ‘hand-outs’ to people to help them try to cope with the soaring cost of living) would have the same effect but indirectly and over a longer period.

In recognising the importance of profits for ‘growth’, Truss is being realistic enough. Capitalism is a profit-driven system and does run on profits. Every government must take this into account and give priority to profit-making.

Where she departs from reality for fairyland is in imagining that, just because you allow capitalist enterprises to retain more of their profits, that will make them invest more. This is wrong both in theory and in the light of experience. Businesses will invest only if they think this will bring them more profit; if they don’t calculate that it will, then they won’t invest. And governments can do nothing to change that.

‘Growth’ is the increase in the amount produced in one year compared with previous years. It is conventionally measured by changes in Gross Domestic Product (GDP). Most of this – over 80 percent – is consumed in the course of the year by individuals or governments. The rest is invested in expanding or replacing productive capacity. Because GDP includes replacing the wear and tear of existing buildings, machines and equipment (depreciation), the investment part is not an accurate measure of the increase in productive capacity. Net Domestic Product (NDP), which excludes this, is more accurate, the investment part of which is near to what Marx meant by the ‘capital accumulation’ – the accumulation of profits as more capital – which he saw as the driving force of capitalism rather than growth as such.

Fairy Liz imagines that, after cutting taxes on profits, she can wave her magic wand and, hey presto, enterprises will invest and the economy grow. They tried this in France in the late 70s and early 80s. It didn’t work.

According to L’Express (8 September 1979), referring to Raymond Barre who was then the centre-right (the French equivalent of the Tories, if you like) prime minister:

‘One of the prime minister’s disappointments is that the improvement in the finances and profits of enterprises has not produced the expected boom in investment. The bosses are more and more reluctant to take risks. “Give us the money”, they said, “and we will invest.” Today, with their finances in a healthy state, they add “Give us the markets”. You can’t make an ass that isn’t thirsty drink. A head of an enterprise does not buy machines without outlets for the products they make.’

Barre failed because no government can conjure up the markets on which to sell what expanding capital investment could produce. Truss will fail too for the same reason, especially as the IMF, the Bank of England and many others are predicting a world recession over the next couple of years.

If these forecasts are right, what will happen is that businesses will say ‘Thank you very much. We can use the extra profits to increase the dividends we pay our shareholders. If you want us to invest them, give us the markets’. That, the government can’t do. So, no fairy-tale ending.

Next article: Bird’s Eye View – Shelley, atheism and anarchy ⮞

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