Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy R A Rayman © Robert Anthony Rayman 2013 Softcover reprint of the hardcover 1st edition 2013 978-1-137-30201-4 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2013 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-67150-2 ISBN 978-1-137-30450-6 (eBook) DOI 10.1007/978-1-137-30450-6 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library A catalog record for this book is available from the Library of Congress Contents List of Tables vii List of Figures ix Preface x Acknowledgements xvi Part I A Very Dismal Science The Greatest Pyramid Scheme since the Time of the Pharaohs? From Economic Miracle to Credit Crunch: Thirty Years of Self-Delusion Part II The Microeconomic “Market-Value” Fallacy A Mediaeval System of Accounting 25 Fair-Value Accounting and Balance-Sheet Myopia 37 The Market-Value Delusion and the Credit Crunch 47 Part III The Macroeconomic “Single-Gear” Fallacy The Topsy-Turvy Wonderland of Single-Gear Economics 65 Traffique: The Praeheminent Studie of Princes 76 Capitalism and Socialism: The Fatal Conceit 84 A Genuine Free-Market Alternative 93 Part IV The Tax that Got Passed by Mistake 10 Income Tax: A Two-Hundred-Year-Old Myth 103 11 The Assessed Taxes 108 12 Not So Much a Tax, More an Anti-Avoidance Provision 116 13 The Growth of the Monster 126 Part V Reform of the Tax System 14 Economic Efficiency or Social Justice? 141 15 Taxation and “The Law of the Market” 149 16 Pay As You Spend 160 v vi Contents 17 Pay As You Spend: The Social Justification 172 18 Pay As You Spend: The Economic Justification 181 Part VI The Bankruptcy of Economic Policy 19 Toxic Economic Theory and Global Recession 197 Technical Appendices: The Source of the Poison Appendix A The Fatal Flaw in Accounting Theory: The Present-Value Fallacy 209 Appendix B The Fatal Flaw in Macroeconomic Theory: The Single-Gear Fallacy 220 References 242 Index 247 List of Tables 2.1 The United Kingdom economy from the “bad old days” to the NICE decade 12 3.1 Expected and actual operations of the two companies 29 3.2 Summary of the conventional historical accounts of the two companies 30 The influence of the volume of activity on the accounting return 33 4.1 Initial balance sheet of the Fair-Value Company 41 4.2 Balance sheet of the Fair-Value Company after the “event” 41 The effect on investors of a reported fair-value “gain” of £100,000 42 The effect of price changes on a home owner intending to buy a more expensive house 49 5.2 House-price changes: winners and losers 49 5.3 The UK house-price bubble during the NICE decade 51 6.1 From 1960 to 2000: “temporary side-effect” or “change of gear”? 73 The mutual gains from trade 79 3.3 4.3 5.1 7.1 11.1 38° GEORGII III Cap.40 (10th May 1798) 109 11.2 38° GEORGII III Cap.41 (10th May 1798) 110 11.3 38° GEORGII III Cap.16 (12th January 1798) 112 11.4 Abatement under section IV 113 12.1 Abatement under section III 119 13.1 The British “non-system” of taxation 128 14.1 Two dimensions of “fairness” 142 16.1 Pay As You Spend: alternative methods 163 16.2 Taxes to be replaced under the proposed alternative 167 18.1 Where the whole item of income is consumed immediately 186 vii viii List of Tables 18.2 A.1 B.1 Where the whole item of income is saved for one year 187 Fisher’s measure of performance dependent on investors’ preferences 211 The effect on macroeconomic equilibrium of changes in microeconomic preferences 227 List of Figures 2.1 Twenty-five years of calm seas – prior to the storm of 2008 19.1 Annual percentage change in UK GDP 15 202 A.1 Initial market-clearing equilibrium 214 A.2 New market-clearing equilibrium 216 B.1 UK unemployment thousands 230 B.2 Allocation of total resources 232 ix Preface Economic Crisis or Crisis of Economics? Only a crisis – actual or perceived – produces real change When that crisis occurs, the actions that are taken depend on the ideas that are lying around That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable [Milton Friedman, Capitalism and Freedom (1982 edn), p ix] In a television interview in the autumn of 2011, the Governor of the Bank of England gave his view of the current economic situation: This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever [Sky News, 6th October 2011] Only three years earlier, in his Mansion House speech of 18th June 2008, he had been looking back on the period “since the Monetary Policy Committee was set up in 1997” as “the NICE decade” of NonInflationary Consistent Expansion During that period, the market value of the UK housing stock had tripled from £1.3 trillion to £4 trillion The heroes, whose widely acclaimed ingenuity and enterprise had achieved this apparent gain of £2.7 trillion, were the bankers In the summer of 2007, the property market began to collapse Within a year, the credit system almost seized up, and the economy was tipped into recession The most enthusiastic cheerleaders of one of the greatest pyramid schemes in financial history became its harshest critics The crisis was widely blamed on the banking and financial sector Reckless, and occasionally outrageous, behaviour certainly aggravated the crisis; but it was a symptom, not the cause The real blame lay with the bankruptcy of economic policy The root cause of bankrupt economic policy was toxic economic theory; and it still is The Revival of Classical Economics The source of the poison can be traced back to the neo-classical consensus which emerged in the late 1970s What amounted to a theological x Appendix B: The Fatal Flaw in Macroeconomic Theory 239 produced in response to misleading signals and the potential output which could have been produced, had those signals been accurate The width of that “gap” depends on the divergence between actual preferences and preferences as revealed by the bidding This type of divergence between appearance and reality cannot, of course, occur in a classical Utopia, where the bids automatically provide a faithful reflection of consumer preferences In a Keynesian Utopia, they not, and a theory of information for relating results with intentions is absolutely vital It is here that the “income-constrained process” [Leijonhufvud (1968) p.55], involving the consumption function and the multiplier, plays its part For Keynes’s theory of effective demand can be interpreted as a theory of information which plugs the information gap left by the elimination of the classical forward consumption markets as a channel of communication If consumers become more (less) thrifty, in a classical Utopia they merely switch their specific orders for real goods and services between spot and forward markets (At the Utopian auctions, specific orders take the form of bids which not become effective until the tâtonnement process has been completed.) In a Keynesian Utopia, on the other hand, they reduce (increase) their specific orders for real goods and services in total Entrepreneurs, in turn, reduce (increase) their specific orders for factors of production in accordance with the change in the orders received for their output Consumers, who are also factor owners, then reduce (increase) their orders for output in accordance with the change in the orders received for the employment of their factors – and so on The progress of these successive rounds of bidding and rebidding, which determine the relationship between the intended change in specific orders and the actual change, depends on the state of tastes and technology Many complex “objective and subjective factors” are involved, and they are described in chapters and of The General Theory By a masterpiece of simplification, however, they are summed up “in the portmanteau function ‘propensity to consume’ ”, and embodied in “the fundamental psychological law … that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income” [Keynes (1936) p.96] The “income” of which consumption is a function according to Keynes’s “psychological law” does not, however, require precise definition It is simply a question of deriving a relationship between that part of output for which specific orders are placed and that part of output for which specific orders are not placed “Income is equal to the value of current output” [Keynes (1936) p.63] “Saving [is] the excess 240 Technical Appendices: The Source of the Poison of income over what is spent on consumption” [Keynes (1936) p.74] A solution to the problem of actually measuring the value of current output is, in this context, unnecessary The “multiplier” is simply a formula which relates the actual change in specific orders for real goods and services (total spending) to the intended change It can, therefore, be interpreted as an “information multiplier” (k), in which, according to the Keynesian simplification, the “elasticity of information” (e) is equal to the “marginal propensity to consume” (MPC), so that k = 1/(1 – e) = 1/(1 – MPC) Thus, if the marginal propensity to consume is equal to ⅔, the actual change in specific orders for real goods and services is [1/(1–⅔) =] three times the change originally intended The exact location of the new equilibrium position, Ik, depends on the shape of the indifference curves and the transformation boundaries (i.e on tastes and technology) The “multiplier” is, therefore, a rather rough rule-of-thumb But it is vital for gauging the effect of flows into and out of monetary holdings, which are peculiar to a monetary economy In a “real world” without the benefit of the Utopian fiction of “recontracting”, the specific orders are actually executed and constitute the “proceeds” upon which entrepreneurial expectations are based And it is “expectation” which Keynes saw “as determining output and employment” [1936, p.46] In these circumstances, the theory of effective demand is a theory of expectations rather than a theory of information Final equilibrium is reached, not after successive rounds of bidding, but after successive rounds of actual spending By that time, however, some non-equilibrium transactions may already have taken place Clower has, in fact, attempted to argue that his “dual-decision hypothesis”, based on discrepancies between realised and planned transactions, is at the heart of the difference between Keynes and the classics.8 The possibility of dynamic disequilibrium, however, distinguishes Keynesian “reality” from a Keynesian Utopia It does not distinguish a Keynesian Utopia from a classical Utopia, for it is absent from both The neo-classical “counter-revolutionary” argument is clear and to the point “Either Walras’ law is incompatible with Keynesian economics, or Keynes had nothing fundamentally new to add to orthodox economic theory” [Clower (1965) p.278] But it is an argument which is wrong The displacement of forward contracts by financial claims as the main link See Clower (1965) Appendix B: The Fatal Flaw in Macroeconomic Theory 241 between the present and the future is sufficient, by itself, to account for the difference between Keynes and the classics There is no need for recourse to market imperfections or dynamic disequilibria, which are by definition absent from a Utopia of any variety For a gap between actual and potential output can appear, even though a Walrasian auctioneer is in charge of the proceedings, and even if all expectations are fulfilled and all results turn out according to plan This is what Keynes meant by “involuntary unemployment equilibrium” The real culprit is money For it is the opportunity for accumulating financial claims which relieves individuals from the obligation of bidding for real goods and services in forward markets and prevents them from signalling their real preferences and intentions Money may be a link between the present and the future, but it is more like an insulator than a conductor The Keynesian theory of effective demand, by providing an explanation of how economic information flows in these difficult circumstances, slots into the gap in the classical apparatus previously occupied by the markets for forward consumption It can be integrated into general equilibrium analysis as a theory of information, in a way which avoids what Leijonhufvud calls “the schizophrenic State of the Arts [of micro- and macro- economics]” [Leijonhufvud (1969), p.25] Not only is Keynes’s “general theory” compatible with Walras’s law, therefore, but it also adds something fundamentally new to orthodox economic theory It represents the vital step from the barter economy of classical theory to the monetary economy of the real world Keynes’s claim is therefore well justified His theory is indeed “a more general theory, which includes the classical theory with which we are 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Sterling and W F Bentz (eds) Accounting in Perspective (Cincinnati: South-Western Publishing) W Sombart (1902) Modern Capitalism as quoted in A C Littleton and B S Yamey Studies in the History of Accounting 1956 (London: Sweet & Maxwell) R R Sterling (1970) Theory of the Measurement of Enterprise Income (Kansas: University Press of Kansas) J Tobin (1972) “Inflation and Unemployment”, American Economic Review, Vol.62 No.1, 1–18 246 References A R J Turgot (1770) Reflections on the Formation and the Distribution of Riches trans W J Ashley 1898, reprint 1971 (New York: Kelley) L Walras (1874) Elements of Pure Economics 4th edn 1900, trans W Jaffé 1953, reprint 1984 (Philadelphia: Orion) K Wicksell (1898) Interest and Prices trans R F Kahn 1936, reprint 1965 (New York: Kelley) Index Accounting return (reported profitability), 30–3 distorted by volume of activity, 28, 32–3, 46 compare with true return Accounting standards, fraudulent nature, 5–6, 18 perverse incentive to “shorttermism”, 6, 18, 23, 32, 197 Accounting standards bodies, origins, 35 Assessed taxes (prior to 1799), 108–115 levied directly on consumption, 108–109 progressive nature, 109, 113 see also triple assessment Auditing Practices Board, 45 Authorised Institutions (for administration of Receive As You Save at source), 161–2 Authorised Monetary Holdings (subject to Receive As You Save at source), 162–4 Automatic economic “traffic lights”, 98, 191 BBC News (website), 3, Bear Stearns, collapse, 57 Beaver, William H, 40n Black, Fischer, 53 Bullen, Halsey G and Crook, Kimberley, 209n, 219 Burke, Edmund, 104 Balanced-budget multiplier, 169n Balance sheet misconception of its nature, 43–4 Balance-sheet myopia, 18, 23, 37–44, 58, 197 Balance-sheet perspective, 38–9 Bank of England, 3, 7, 11, 15, 16, 19, 68, 82, 197–202 Financial Stability Report, October 2008, Monetary Policy Committee, 3, 11, 15–16, 68 role change, 200 see also Governor of the Bank of England Bankruptcy of modern economic policy, 18, 19, 71, 191, 197–203 Callaghan, James, 72 Canning, John B., 36, 211, 219 Cantillon, Richard, 65 Capital gains tax, 129–30 Capital (transfer) taxes, 128–30, 167 Capitalism, the fatal conceit, 84, 90–2, 93 Circulation, freedom of, 19, 83, 93, 203 Law of, 18–19, 74–5, 83, 92, 94, 96–8, 169 Classical (orthodox) economics, 9, 63, 69, 74, 178, 230–41 Clower, Robert W., 228, 238, 241 Company Law Review Steering Group, 35 Comparative advantage, principle of, 78–80 Competition, freedom of, 19, 80, 82–3, 93–4, 96, 203 Law of, 18–19, 67, 74–5, 83, 89, 92, 93–5, 169 Communist Manifesto, 88, 175 Community charge (“poll tax”), 128–9, 132, 142–6, 155 Conceptual framework project, 23, 36, 37–8, 209–12, 218–9 Consumption tax (assessed directly on persons), Part V personal savings and corporate profits taxed when they are consumed, 184–5, 188–90 see also taxable consumption; tax reform 247 248 Index Conventional “hybrid” accounting, 25–36 accounting period problem, 26–31 adequacy for stewardship reporting on “custody and safekeeping”, 5, 25, 27 inadequacy for performance reporting on “efficient and profitable use”, 5, 23, 25, 28–36 see also hidden assumption (of constant volume) Corporation, a bookkeeping fiction or “dummy”, 158, 166, 188 Corporation tax, 127–30, 142, 165–7, 188–90 blatant dishonesty of the label, 188 perverse incentives, 130, 168, 189 Council tax, 128–9, 132, 142–5, 155, 167–8 Credit crunch (2007), 5–6, 9, 11, 16, 18, 47, 53, 56, 58, 197, 229 the real culprit, toxic theory, 5, 58–9 see also global recession Credit default swaps, 57 Credit pyramid see pyramid lending Davidson, Paul, 222, 225 Debt-collectors of last resort, courts, 52 Deficiency of effective demand, see under effective demand Deposit guarantor of last resort, government, 199 Derivatives, 53, 57 Disequilibrium rate of unemployment see “natural” rate of unemployment Double-entry bookkeeping, 25n, 34 Economic “gear-changing”, 15–19, 71–5, 134, 183, 191, 202, 221–41 Economic income see income concept Economic justification (of taxation) see under taxation “Economic miracle” (in UK), 8, 9–15 Economics: science or religion?, 19, 69–70, 73, 84, 88, 92, 96, 195, 201 Economist, The, quotations from The Economist are used throughout the book as authoritative examples of mainstream opinion Edwards, Edgar O., and Bell, Philip W., 31 Edwards, Jeremy; Kay, John; and Mayer, Colin, 40n Effective demand, 183, 236, 239–41 deficiency of, 63, 69–70, 183n, 223–4, 231 Emergency Economic Stabilization Act (USA October 2008), 17 Engels, Friedrich, 174–5 Equilibrium, see under market-clearing equilibrium Equilibrium rate of unemployment, 71–2 Erasmus, Desiderius, 84 Ernst and Young, 23, 212 Estate duty see capital (transfer) taxes; inheritance tax European Central Bank, 6, 8, 24, 197, 198 Excise duties and licence fees, 131–2, 142, 158–9 Expectation gap (financial reporting), 35–6 Fair value (definition and nature), 39–40 Fair-value accounting (FVA), 6, 23, 37–46, 197 additional flaws, 40–3 underlying fallacy, 212–19 False accounting, 6, 36, 218 see also Theft Act 1968 Federal Reserve Bank of New York, 55 Financial Accounting Standards Board (FASB), 23, 25, 35–9, 209, 211, 218, 219 see also conceptual framework project Financial Standards Authority (FSA), 200–1 Index 249 Financial Times, 27, 32 “Fisher diagrams”, 213–18 Fisher, Irving, 44, 154, 158, 160, 166, 186, 188, 210, 211, 213, 217, 233, 235 Fox, Charles James, 103–6, 114–15, 120–1 Free-market alternative (to capitalism and socialism), 92, 93–8 Friedman, Milton, 10, 66–8, 70, 72, 73, 87, 183, 203, 221, 223, 231 Funds, flow and stock, 25–6, 37 General equilibrium analysis, 70, 213–19, 228, 230–41 Gifts tax see capital (transfer) taxes Global recession, 16, 202 Goldwyn, Samuel, 53n, 56 Governor of the Bank of England, 3, 16, 68, 197–9, 202 Group of Twenty (G20) summits (2008 and 2009), 17n Hansen, Alvin, 222 Hayek, Friedrich August, 77, 87, 88, 90, 91, 93 Hedging, 53–4 Hicks, John R., 209, 210, 212, 219, 221–2 IS/LM model, 221–2 Hidden assumption (to justify conventional performance reporting), 31–2 Hirshleifer, Jack, 213n Historical cost, 26, 39–40, 45 Hobbes, Thomas, 151–3, 178, 188 Honours system, abuse of, 104 House of Commons Treasury Committee, inquiry into the banking crisis, 4, 7, 50 House of Lords, pressure for reform, 104 House-price bubble, 5–7, 16, 18, 47, 51–3, 58, 195 winners and losers, 5, 48–50 Housing (“consumption”) assessment, 153–5, 160, 164, 168, 170 Hume, David, 71, 175 Hyperinflation, 17 Income concept, 209–12 Income tax, 75, 80, 111, 132 an anti-avoidance expedient (in 1799), 116–22 bias against saving, 185–8 disincentive effect, 123, 159, 165, 168, 169, 191 economic absurdity, 114–15, 174–5, 189 mythical origins, 103–7 poor indicator of “ability to pay”, 173–5 repudiation in principle, 114–15, 122–5 self-assessment tax return, 118 Income Tax Act 1799, 118 Indirect taxation, 111, 152, 159, 169 Individual Savings Accounts (ISAs), 168, 185 Inflation accounting, 23, 26 Inheritance tax, 50, 128–9, 130, 157, 167–8 stealth tax during inflation, 50 Institute of Chartered Accountants in England and Wales (ICAEW), 34, 45 International accounting standards (IASs), 5, 35 IAS (2011), 43 International Accounting Standards Board (IASB), 6, 7, 23, 25, 35, 38, 39, 40, 47, 50, 209–11, 217–19 chairman’s evidence, 7, 50 International Financial Reporting Standards, (IFRSs), 6, 39, 46 IFRS (October 2010), 217 IFRS 13 (May 2011), 39 International Standards on Auditing, ISA (700), 46 “Invisible hand”, 67, 81–2, 86, 96 IS/LM model, see under Hicks Johnson, Harry, G, 222, 231 Johnson, L Todd, and Lennard, Andrew, 38 Joint Working Group of Standard Setters, 209n, 218 “Just deserts” fallacy, 91–2, 96 250 Index Kaldor, Nicholas, 152n, 160, 161, 176, 178, 179, 180, 188, 210n Kay, John, 31n, 40n Keynes, John Maynard, 57, 63, 69, 74, 153, 183, 220, 221, 222, 223, 224, 225, 226, 228, 230, 231, 233, 236n, 237, 238, 239, 240, 241 Keynesian (revolutionary) economics, 9, 63, 69, 222, 225, 228, 230–241 Keynesian Utopia, 230–41 Law, John, 197 Law of Circulation see under circulation Law of Competition see under competition Law of the Market, 148, 149–51, 159 Leach, Ronald G., 45 Leijonhufvud, Axel, 18, 207, 224, 226, 228, 231, 239, 241 Lender of last resort, central bank, 8, 19, 198, 199, 201 Lending pyramid see pyramid lending Lenin, (Ulyanov, Vladimir Ilyich), 34, 88, 90 Leverage, 54, 56, 189 Littleton, A C and Yamey, B S., 25n, Lloyd George, David, 110 Local taxation see council tax; rates Locke, John, 65 Long-Term Capital Management rise and fall, 4, 53–7 Mackay, Charles, 7n Macroeconomic “single-gear fallacy”, 16, 18, 59, 61, 71–4, 195, 203, 220–30 Malthus, Thomas Robert, 14n Malynes, Gerard, 76, 79, 80, 82, 94 Market-clearing equilibrium, 69–71, 214–16, 220–1, 226–8 Market place, forum for exchange (to “take advantage of each other’s talents”), 77–9, 151 dispenser of information not justice, 92 Market-related taxation, “insurance principle”, 150–3, 159 for protection of life, 150–1 for protection of livelihood, 151–2 see also under tax reform Market test, or Marxist test?, 87 Market-value delusion, 24, 46, 47–53, 197 Market-value fallacy, 5–7, 18, 37–46, 58, 195, 203, 207 see also present–value fallacy Marx, Karl, 84–90, 105, 147, 174–5 Mathematics, dangers of, 4n, 53, 77 “Maxims” of taxation, 141–2, 146–7, 152, 174, 176–7, 179, 190, 109, 114, 137, 141 Meade Committee, 156–7, 188 Mediaeval accounting see under conventional “hybrid” accounting Merton, Robert C., 53 Microeconomic “market-value (or present–value) fallacy”, 5–7, 18, 44n, 45–6, 47, 53, 58, 195, 203, 207, 209–18 see also present-value fallacy Mill, John Stuart, 66, 152n, 172, 178–80 Misselden, Edward, 80, 82 Mississippi scheme, 58, 197 Monetarist (neo-classical counter-revolutionary) economics, 9, 63–4, 69, 191, 199–203, 220–1, 222–4, 228–30 Monetary intervention, 10, 15–16, 67–8, 70, 73, 134, 191 Monetary Policy Committee see under Bank of England Monetary savings, taxation of, see under tax reform Monopoly, danger of, 80–2, 85, 174 Moral hazard, 8, 52, 198–9 Multi-gear (alternative) strategy, 18–9, 169, 191, 203 “Multi-gear” economy, 18–19, 71–2, 134, 191, 203, 221, 228–9, 230–41 Multiplier, 169n, 239–40 Mun, Thomas, 140 Index 251 National debt (UK), 3, 17 National insurance contributions see social security contributions Natural rate hypothesis, 8, 9, 53, 56, 70, 71, 73 “Natural (disequilibrium) rate” of unemployment, 9–10, 63, 70–1, 201, 221 Neo-classical consensus, 10, 19, 63, 70, 134, 195, 199, 222–4, 228–30 New Economic Fundamentalism, 10–11, 15–19, 23, 63–4, 66, 70–4, 82, 134, 191, 195, 199–203, 207, 223–4, 227–30 see also neo–classical consensus NICE Decade (of Non–Inflationary Consistent Expansion), 3, 5, 11–14, 16, 50–2 Northern Rock, 57 Old (Classical) Orthodoxy see New Economic Fundamentalism Pacioli, Luca, 25n, Paine, Tom, 105 Patinkin, Don, 69, 223, 231 Payroll tax, 166, 168 Pay As You Spend (PAYS), 160–71 economic justification, 181–91 social justification, 172–80, 190 Performance reporting, 5, 25, 34, 35n, 39 see also conventional accounting Petty, William, 65, 145, 147, 173 Phelps, Edmund, 73 Physiocrats, xi–xiii Pitt, William (the younger), 103, 107, 108, 109–15, 117, 119–20, 122, 124, 175–6, 77, 82, 84–8, 89–92, 94, 96, 138, 139 Poll tax, 101, 132, 142–3, 145–6, 151, 155, 178 see community charge Poll tax riots, June 1381, 143 March 1990, 132, 143 Present-value fallacy, 42n, 44–5, 209–19 President’s Working Group on Financial Markets, 54 Profitability, reported see accounting return Pyramid lending, 3–5, 7, 16, 18, 47, 51–2, 57–8, 189, 195 Quantitative easing, 17, 183n, 184n Quesnay, Francois, xi, xiii Rate of interest, 65–8, 74, 198, 200, 212 Rates (on property), 128–9, 132, 144–5, 155, 166–8 Rayman, Robert Anthony, 26n, 27, 29, 31, 32, 40n, 44, 69n, 71, 74, 201, 210n, 212n, 213n, 217n, 219n, 226, 229, 230n “Real-balance effect” argument, misuse by monetarists, 63, 70–1, 223, 226–8 Receive As You Save (RAYS), 161–4 Rhys Williams, Brandon, 124, 147n Ricardo, David, 66, 74, 78 Risk, misperception of, 4, 6, 53–6, 57–8, 197–8, 202 Roover, Raymond de, 25n Samuelson, Paul A and Nordhaus, William D., 127, 133–4 Sandilands, Committee of Enquiry into Inflation Accounting, 40n Say, Jean-Baptiste, 68 Schizophrenia, economic, 66–9, 207 “Schizophrenic” split between micro and macroeconomics, 18, 195, 207, 212, 241 Scholes, Myron S., 53, 54 “Short-termism”, 6, 18, 23, 32, 197 “Single-gear” fallacy see macroeconomic “single-gear fallacy” “Single-gear” (fundamentalist) economics, 10, 15–17, 63–4, 71–4, 82, 134, 191, 195, 199–203, 207, 223–4, 228–30 “single-gear” consensus/delusion, 63, 70, 134, 195, 199, 222–4 “single-gear” policy, a choice of evils between single-gear “austerity” and single-gear “growth”, 133, 195 252 Index Social justification (of taxation) see under taxation Smith, Adam, 67, 74, 77, 79–81, 84–8, 93, 94, 109, 141, 145, 146–7, 149, 152, 153, 155, 173–7, 179, 181, 188n, 189, 190 “maxims” of taxation, 141–2, 146–7, 152, 174, 176, 177, 179, 190 Social contract, 93 Socialism, the fatal conceit, 88–90, 93 Social security contributions, 128–30, 166–8 Solomon, Ezra, 31n Sombart, Werner, 34 South Sea Bubble, 58, 197 Soviet Union, Constitution, 147 Spender of last resort, government, 8, 19 Stealth tax see under inheritance tax on inflationary price increases Sterling, Robert R., 40n Stewardship reporting, 5, 25, 27, 34 accounting figures as symbols of volume, 27–8 see also conventional accounting “Structural slumps”, 73 Sub-prime lending, 8, 53, 203 Taxable consumption (measurement of), 153–8, 160–5 business “consumption” (of labour and land), 156, 165–8, 171, 189 personal consumption, 120–3, 125–6 of consumer durables, 153–6, 164, 170 of housing, 153–5, 160, 164, 168 of monetary savings, 154, 156–8, 165, 168, 170 Taxation, dysfunctional nature (of the British “non-system”), 19, 126–35, 139, 168, 203 automatic destabiliser, 134 economic justification, 141–6, 181–91 “fairness”, 142–4, 173, 177–8 “funding” fallacy, 181–2, 184 “maxims” of taxation, 141–2, 146–7, 152, 174, 176, 177, 179, 190 obstacle to economic policy, 19, 98, 127, 132–4, 139 social justification, 141–6, 172–80 Tax reform (market-related), 149–59 “insurance principle”, 150–2 monetary savings, 156–8 powerful instrument for achieving goals of economic policy, 19, 139, 159,169 removal of disincentive of tax on income and profit, 159, 165, 168–9, 191–2 simplification of the tax structure, 170–1 summary of proposals, 166–9 see also consumption tax; Pay-As-You-Spend (PAYS); Receive-As-You-Save (RAYS) Theft Act 1968, section 17 (false accounting), 6–7 Times, The, 45 Tobin, James, 224 Toxic economic theory see macroeconomic single-gear fallacy; microeconomic market-value fallacy Traffic lights see automatic economic “traffic lights” “Traffique” (the essence of economics), 76–83, 92, 93–4, 96 Treasury Committee, see under House of Commons Treasury Committee Triple assessment (1797), 110–4 True return, 31–2 compare with accounting return “Tulipomania” (Holland 1630s), 7, 50, 58, 197 Turgot, Anne Robert Jacques, 65 UK housing stock, market value, Unemployment equilibrium, 63, 69, 71–2, 220, 221, 222–3, 228, 230–1, 236–41 Index 253 Value Added Tax (VAT), 122n, 128–31, 142, 143, 167, 169 Venetian system of accounting, see under conventional “hybrid” accounting Wall Street Crash 1929, 8, 58, 197, 199 Walras, Léon, 9, 69, 225, 231n Walrasian auctioneer, 225–6, 231, 233, 237, 241 Walrasian utopia, see under market-clearing equilibrium “Wealth effect” argument, 47, 190, 226, 231 misuse of, 5, 52 Wealth tax (on monetary savings), 156–8, 165 Welfare benefits (under a consumption tax), 165 Wicksell, Knut, 223 .. .Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy. .. of economic policy The root cause of bankrupt economic policy was toxic economic theory; and it still is The Revival of Classical Economics The source of the poison can be traced back to the. .. which in the long run will only more harm Since the root cause of the bankruptcy of modern economic policy is toxic economic theory, there can be little progress until the two fundamental theoretical