The economics which created our crisis can’t fix it

The latest war-driven global price panic is not an aberration but a constant state of being in the contemporary global economic. It is all so unstable that unless we take a new course, it will fall down sooner or later.

Here's another screaming emergency call for Scotland which I wish I believed anyone would listen to. At some point soon a number of economic conditions may coincide in a way that creates an existential risk to our society, and Trump appears determined to accelerate it. To understand I'm afraid I'm going to have to ask someone to explain capitalism to me again...

In the summer we are all facing yet another financial cliff edge. At the moment there remains a price cap on energy so Trump's Iran madness isn't filtering through to our economy yet. But come the summer the regulator is obliged by law to make sure that all the operators keep making a profit.

Also just a reminder; the actual cost of extracting oil and gas has not changed at all, it is only scarcity of supply which is pushing prices up. So the oil companies are profiteering via what are effectively global cartels and the domestic energy providers have a contract to make clear that they keep getting a profit no matter what happens. Leaving...

...You. Capitalism was never sold as a system in which the state guarantees profits to rich people by forcing everyone else to pay them more all the time. What does any of that have to do with competitive markets and consumer choice and the application of labour to capital in pursuit of productivity improvement?

So we're about to go into another spiralling cost of living crisis which will further distort domestic politics and undermine what's left of our domestic economy – and it is almost guaranteed to mean that while more enlightened observers are talking about the real problem behind all this, our politics will go back to finding easy solutions at taxpayer expense while missing the big picture.

What is the enlightened observer actually talking about? The inherent structural risk of an economy based on globalised supply chains in a increasingly unstable world. I won't take you through all of this but the model of globalised capitalism we exist with now was designed for a different era.

It was already falling apart in the early 2000s because the model assumed plentiful global supplies of cheap oil and gas. Globalisation rested on the assumption that the key component price of production was labour and not energy. But then China started to grow and East Asia's demand for oil and gas really started to accelerate.

The 21 century has therefore become an era of extreme volatility in energy costs. Demand has risen, speculative investment has poured in, government action has been scaled right back and the outcome is an endemically erratic global economy. Globalisation enabled production to move according to labour prices, but over a timescale of a number of years. It cannot respond to oil and gas prices which are globalised anyway and which can vary from hour to hour.

The biggest rule in capitalism in Britain is not competition in free markets but ensuring that market conditions are managed in a way that ensures generous returns for investors. The theory is that money is something someone else has and unless you make it very attractive for them to put some of that money into your economy, you will have no more money.

But guaranteed profits are anathema to real capitalism and will inevitably distort an economy – and that is what has happened. If investors are guaranteed profits but producers are not, sensible money moves away from production and towards speculation (which isn't really speculation if the government is all-but guaranteeing your returns).

There is a lot of talk about how Thatcher deindustrialised the north of England, Scotland and Wales. But that makes it sound like she passed legislation forcing the closure of factories or something. What actually happened was that she made a mess of her very early industrial interventions, nearly killed the economy and so panicked and lit a rocket under the financial services sector to make up for what she had accidentally destroyed. Thatcher didn't deindustrialise the north, neoliberalism did.

It was a desperate scramble, not a planned move – and yet we remain stuck with it. We sell services and buy products. That is our economy. But this also disguises a significant reality – a lot of those 'services' are actually about selling our national assets or borrowing in the private sector to stop our economy drifting to insolvency.

As you probably know, Britain's national debt is hovering around 95 per cent of GDP. But that is only government debt. Overall (including the private sector) Britain is actually in hoc to the rest of the world to the tune of 550 per cent of GDP. That is by far the worst in the G7.

We buy much more than we sell and we then borrow in ways visible or invisible to make up the difference and sustain something like our standard of living. This is what Mark Carney astutely referred to as Britain 'relying on the kindness of strangers' to get by (though there is no kindness involved). But it's a Ponzi scheme and there isn't a lot holding it up.

“Put really simply, the solution to this is going to be unorthodox or unsuccessful, one or the other”

This is all very theoretical and spreadsheety and won't make sense to most people. It is like a hidden dragon that influences your world but which you can't see. What you can see is the crouching tiger, the inherent instability contained in this which is waiting to pounce, and does pounce again and again.

It happened with the financial crisis. The 'guaranteed returns for investors' strategy encouraged investors to go mad, crashing the economy – but then with us having our tax money redirected to restore their returns because that is the floor of the Ponzi scheme. It kind of happened again around Brexit – but then mainly during the pandemic, and again in the post-pandemic supply chain snarl up.

And again because of the Ukraine war – and now again because of the Iran war. The whole system is wobbling badly, and a strong example of that is housing. Remember the kindness of strangers? Well investment into the housing market is like that. We promise to inflate house prices continuously because there are very few other options for safe, guaranteed investor returns.

So now we can't provide homes for anyone under 40 because constant investor returns mean houses have become incredibly expensive – and so Reform blames the immigrants and we end up here. But this is only the tip of the iceberg. The stupidest thing of many stupid things the UK did was happily cede food sovereignty to supermarkets. By asking profit-making companies to ensure our national food supplies, we managed to offshore most of our food production.

Put another way – without unimpeded international trade, Britain starves. How reliant are we? Worse than you think. We directly import more then 40 per cent of the food we eat, but the food we produce is also reliant on supply chains. One of the impacts of the Iran War is going to be an immediate scarcity of fertiliser. Take fertiliser out of farming and our food productivity craters.

In fact one authoritative estimate concludes that without imports, Britain's food supplies would collapse by 80 per cent. We are cripplingly dependent on the rest of the world for our financial wellbeing and even more so for our basic material wellbeing. We just don't produce enough to pay our way on the world stage or survive without massive amounts of imports.

Looking at why we don't produce fertilisers tells you everything. High and volatile oil and gas prices made it less than a sure bet that investing in artificial nitrogen (which is basically what fertiliser are) would pay off. So we went from self sufficient to zero – and now we're a hostage.

I had wanted to go through what the alternative looks like and how we could get there, but if you start there it all gets too glib. 'Re-shore production' is a Trump myth. The economy we have will not re-shore anything – and it is because of half of the trend I've described above. Our 'investor economy' doesn't make things, but it is the volatility that makes this hard to reverse.

You cannot shift from one system or approach to another without a sustained commitment, and who wants to make a sustained commitment when everything is changing all the time. Look at graph of the week this week – look at energy prices in 2022 and tell me what you'd do. Now look at the same prices a year later and tell me what you'd do. Now jump forward two years and tell me what you'd do.

It you were only responding to 'today', it wouldn't be the same thing, would it? One's a problem, one's a crisis, one's not too bad. But then look a year later than that and it's back to being a problem. By the summer it might be a crisis again. As Trump is finding out, you can't make producers invest more by creating a set of circumstances they don't believe will be there a year or two later.

Because we have made investors fat and lazy. They literally think that they should always get a return on investment, like it is a human right. And it is politicians who have worked their little socks off to reinforce that mindset. It cannot correct itself any more.

So let's circle back for a second. The labour component of production is not as important as it was if the energy component is rising, and again, if automation can replace labour then labour costs become irrelevant. But the energy component is becoming not only more important but also more unstable, destabilising the whole system.

And the part that was never previously discussed – that capital element – is now the subject of heated debate. At the dawn of the globalisation era everything was going to be made of plastic and it was cheap and never-ending so material inputs weren't that important. Suddenly the choke point is rare earth metals and minerals – and the problem isn't even price, it's availability and control.

Put really simply, the solution to this is going to be unorthodox or unsuccessful, one or the other. Either we re-incentivise production and put the brakes on speculative investor capitalism or disrupted trade could actually kill us. Either we push for energy stability or we're clinging on forever by our fingernails, hoping there are no sudden movements when that is all there is.

Either we build markets for domestic production or any steps we take will unravel. Either we take an active strategy of resource management or any nation with a monopoly on any metal or mineral we might need will have us by the balls forever. And none of this at all can be achieved through orthodox means.

I said this was alarm bells for Scotland. Well this is alarm bells for everyone right now. Britain is most exposed of all developed countries, and inside Britain Scotland is probably more exposed than anyone. In Scotland we don't rely on the kindness of strangers but their pity. Inward investment is a mindless cry of patheticness in a nation that doesn't waste time thinking about economics.

We think we're a developed country with a standard of living to match, but it is largely an illusion. We're on the verge of a serious recalibration and, worst of all, we have left things so this is all out of our hands. We need to take a grip or be buffeted about by ever-increasing chaos. I will return to what this means next week.