Nonlinearity

Let me first point out what I mean by nonlinear, because I’m using it in a technical sense. A nonlinear function is a mathematical expression that feeds into itself, e.g.

Now, it may be that something like the above can be easily re-arranged to give you a linear equation (where you have a straight f on one side at some xs on the other,) but assuming you can’t this is a nonlinear equation; you can’t find f when given x without iterating through your calculation lots of times, and seeing if you converge on an answer or not.

So, a nonlinear thing, is something that feeds into itself and converges to a value, rather than just being simple, or linear, to solve. Economies are nonlinear: activity (jobs, and salaries) gives people spending power, which stimulates more activity (people hired to make stuff to sell to the people will salaries), and confidence breeds confidence. In short the economy feeds into its own equation.

Keynesian Stimulus

Next we need to understand Stimulus. The economic left love to talk about the ideas of a Liberal Peer from the 1940s called Keynes, and his economic theory (from back in the 30s, when he was a civil servant) concerning how governments could fix economic problems (like the great depression of the 30s.) They often confuse what Keynes actually said with a modern narrative, so let me pull out the differences briefly.

Modern Keynesianism is the idea that a government should constantly spend money in order to keep an economy running, regardless of the economic circumstances. Thus the world supposedly divides into “big state”/Keynesian politicians, who want the government to raise lots of taxes to pay for constant stimulus; and “small state”/Neo-conservative politicians, who want to keep taxes to an absolute minimum and let the Market do its thing.

As you can see there is no difference between the two in terms of economic stimulation of the economy; either the government takes a load of money out of the economy and injects it somewhere else, or it leaves the economy to get on with it. There is no net money going in or out, and as such neither really does much, assuming a healthy economy.

Of course if the economy slows down, the government tax receipts go down. This means the “big state” government can’t afford to pay for all its staff or projects, and so it must either cut spending or borrow money to keep spending it. The “small state” government will also have budget problems, but on a much smaller scale, because it wasn’t taking very much in tax, at least compared to the “big state” government.

Now, in the midst of a recession, is where Keynes’ theory really applies. It says that, because economies are non-linear, government can borrow money in a recession/depression and spend it*, stimulating activity and jump-starting the process.

Note that the Keynesian Stimulus is temporary, and debt fuelled. It explicitly adds money to the economy over a fixed period of time, and hopes that people will have the confidence to spend that money and stimulate more activity. You don’t need to keep adding the stimulus, because the self-feeding equation should be building up again (assuming your stimulus was big enough to work, i.e. to give people the confidence to spend.)

A Cheaper Stimulus?

So, the coalition narrative is that Labour didn’t pay off enough debt during the boom, so there now isn’t enough overdraft-headroom for a Keynesian stimulus. Given the size of the stimulus that would be required, this is possibly true, but I’m not going to get into attacking or defending the ConDems (today, of all days, March the 26th).

One way to stimulate nonlinear growth is to inject money, as we’ve seen. But another way is to inject confidence. One of the things I looked at in my last Capitalism Explored post is what the point of a company is; the conclusion being not to make a profit but to do stuff; produce a good, provide a service. If the government is serious about basing its forecasts on massive private sector growth, then it needs to inject confidence into the economy on a monumental scale; and that means getting people to do stuff, themselves, in small private ventures all over the land.

It isn’t a case of pandering to big companies to get them to create jobs for you. Neither the government nor the people should be fooled by that implicit assumption in our national political discourse; don’t let the “fat cats;” whether politicians or venture capitalists, be the roadblock to growth that you can make, yourself, at home, by creating your own job (and possibly, later, jobs for other people too) by starting a small business or social enterprise to meet a need in your area. Now I appreciate that this will not be for everyone, but it doesn’t need to be everyone to have an effect. Running companies (whether for profit or not) is hard to do well, so only a small number of crazy people will ever want to take the plunge even in good times, let alone bad.

But this is where the government’s action in the stimulus comes in. Not just in Enterprise Zones (although those will be good places to start) the government needs to provide the resources people need to find out about starting their own small enterprise. Sample forms, example cashflow spreadsheets, free advice and drop-in centres, an agressive advertising campaign selling the package to people. This will cost far far less than the Keynesian stimulus, especially with modern communication technology as it is, and if it’s well-executed it could yield similar results in increased economic activity, and result in a more diversified and flexible country for us all, more immune from the ebb and flow of particular global markets, and less exposed to the kind of debt contagions we’ve seen still echoing through EU economies since 2008.

I will go on, in another post, to explain why social enterprise trumps profit based ventures in this field, in my opinion. I believe whichever model people choose though, that this stimulus, if applied correctly, could be a way of making a big society, run for and by local people everywhere, grow up out of the ashes of the coalition’s painful, damaging, sometimes-necessary public sector cutbacks.

* Keynes was non-specific about what to spend it on – literally anything would work, he argues. One example is burying money: pay civil servants to head out onto public land all over the country and bury pound coins. People will then set up enterprises to dig up the coins; pay each other to do it, suddenly everyone wants to buy a shovel, and so on, and at the end of it all they’ll have pound coins with which to buy stuff that people make.

More nuanced thinking tells you that it might be good to have a useful national asset at the end of the stimulus; so order the building of football stadia or new roads; rather than churned up fields you have useful things that facilitate further economic activity later, and assets that the state can sell to pay of the debt it incurred building them. This thinking is why there are many abandoned sports facilities all over the developing world; because they chose football stadia over roads when there was no economic substructure to support an entertainment-based football industry.