Systems thinking for Productivity

Who is paying for the UK September mini budget?

Why we need an international programme to develop systems thinking in the Citizen’s Story

A lot of uncertainty and not a little alarm has resulted from the UK September mini budget. It proposes cuts in income tax, reverses rises in National Insurance and Corporation tax, tightens benefit and trade union conditions, cuts stamp duty on properties, caps energy bills, scraps limits on banker’s bonuses, cancels VAT for overseas shoppers, and liberalises planning rules. It has yet to be approved by the UK Parliament.

The OBR (Office for Budget Responsibility) were not asked to cost out the plan and will not publish their deliberations until the end of October or November. The response of the markets was immediate. The £UK sank against the $US and then recovered. Interest rates rose and are rising. The IMF (International Monetary Fund) asked the UK Government to reconsider. The BoE (Bank of England) intervened to save pension funds from the effects of rising UK Bond prices and interest rates by temporarily stopping its Qualitative Tightening (QT – contracting the money supply) and buying Bonds (QE – expanding the money supply). A report from the United Nations Conference on Trade and Development (UNCTAD) released this week states that the alarm bells are ringing and a major course correction is needed—quickly—if the world is going to avert a painful economic slowdown and a global debt crisis. The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies. The report calls on governments in advanced economies to avoid austerity and urges central banks to avoid trying to bring down prices by increasing interest rates.

We now have in the UK, a fiscal policy and a monetary policy pulling in opposite directions – yet both are inflationary. Reduced taxes increase demand by putting more money into people’s pockets, some of which they will spend and some of which they may save if they can, to offset it against future uncertainties. Raising interest rates increases the cost of mortgages. Quantitative Easing (QE) swaps illiquid government bonds for liquid cash to stimulate the economy – though the Bank of England says that is temporary. We must wait and see what the Bank of England decides about future interest rates and if it returns to Quantitative Tightening (QT).

All of this is happening at a time when unemployment is low.

Governments of the past have found it difficult to buck the financial markets when traders have lost confidence in their economic policy. Credibility is fragile, easily lost, and hard to regain. Problems in one financial market can spill over into others with unexpected and global consequences. Cuts to public spending can be damaging. Infrastructure is harder to repair as a way of stimulating longer term growth. The political damage is long lasting and weakens support for the parties and creates general disillusion with politics. It would be unfortunate if the phrase ‘Remember what happened in 2022’ became the new narrative. We do not want to reinforce the idea that financial markets ultimately get to say whether or when governments can expand their budgets. Nor do we want to hear that if investors decide that the government is behaving irresponsibly, they will refuse to supply the £ needed to pay for government spending. The UK government issues currency – it does not need to borrow from anyone.

So, the key question is what the UK government will do to improve the economy to increase supply and meet the growing demand. If it fails, then inflation will get worse.

Stephanie Kelton emphasises in her book ‘The Deficit Myth’ that countries with a fiat currency cannot go bankrupt. The reason is simple – they issue currency whilst the rest of us use it. Fiat just means ‘by decree’. The £UK is a fiat currency as is the $US and the Japanese Yen ¥. It is a common mistake, she says, to equate household budgeting with that of a country with a fiat currency. Individuals, households, and companies are currency users so if their income does not match their expenditure, they will eventually be bankrupt. The UK government is not so constrained as it is a currency issuer. Indeed, the government has a year-on-year deficit as its spending exceeds its income. Its income is chiefly taxes. That spending goes into the economy as a surplus. The accumulated deficit over time is the national debt (which really isn’t – we need a new word for it). But we have to be cautious, the UK government cannot simply put money into the economy willy-nilly – there is one big constraint, inflation. If there aren’t enough supply resources to meet demand, then inflation becomes a problem. Current inflation was triggered by energy imports paid for in $US but has now become embedded right across the economy.

The UK problem now is therefore one of insufficient supply to meet demand. It is not helped by unemployment being so low after Brexit and Covid-19 because one of the ways to strengthen supply is to recruit more labour. Other ways commonly quoted as helping to increase supply are, investment in the public sector, education, and training, better working conditions whether in the workplace or through better housing and health, reducing regulations, free trade agreements and reduced welfare to increase incentives for people to get a job.

But there is one further way of improving supply that is hardly ever mentioned yet could potentially be very powerful. It is to move emphasis beyond formal education and training to one of helping and encouraging people to ‘learn how to learn’. We are living in a new age of uncertainty and complexity with constant flux. The ever-increasing pace of change is demanding on all of us and many people flounder – some so seriously that they refuse to engage with IT altogether. But herein is an opportunity. Companies and individuals that learn how to learn faster than their competitors get a considerable competitive advantage. Inbuilt in that process lies a systems thinking approach to life. Systems thinking can be hard to grasp at first. In simple terms it is ‘joined-up’ thinking but it is more than that. It is an approach to understanding the world and making decisions individually and collaboratively in teams. Systems thinkers look for interconnections – they are social joiners. Out of it emerges a different approach to the processes of solving problems. Rather than isolating and fixing a problem they see the wider context and the ways in which all of the parts to the system interact. These ideas lead to new concepts such as seeing the natural and social world in layers or levels, of parts and wholes and how characteristics in those levels emerge from interactions between parts at lower levels. Another way of understanding is to see systems thinking as about getting the right information (what) to the right people (who) in the right way (how) in the right form (where) at the right time (when) for the right reason (why). If adopted by individuals, organisations, companies, and government then widespread use of systems thinking could improve efficiencies as well as providing better working conditions, more innovation and self-satisfaction – in short human flourishing.

Collectively we must try to persuade governments around the world to invest, at this time of financial crisis, in this novel form of raising productivity. We want to see the wholesale adoption of systems thinking to learn how to learn how to adapt, innovate and become ingenious in the sense that it is the root of the word engineer. It nurtures practical wisdom – being inventive, resourceful and skilful through direct practical experience. Such moves would be a natural partner to attempts to move away from the consumer story of economics to the Citizen’s story of economics as promoted by Jon Alexander and others.

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