When Ibec warns that voting Left would lead to a period of political instability that would hurt the economy, it’s easy to understand cynicism from the Left-wing parties. Someone should remind Ibec that it was the people at the commanding heights of Irish business who ruined the economy last time.
The Irish boom/bust/bailout crisis was caused by incompetence and some of it by those who paid the heftiest subscriptions to Ibec. Unlike Greece, Ireland’s woes were not a result of Leftie-inspired government spending too much. Ireland’s disaster was caused by people who agitated for lower taxes, lower regulation, lower government spending, and spoke the meritocratic language of business while behaving like looters who happened to play golf.
However, acknowledging this fact doesn’t mean Ibec is wrong this time. Two very different things can be right at the same time. The business lobby is warning that a hung Dáil might be bad for business and that is – at a stretch – right.
The extreme Left has never delivered on its societal promises. There is no example of a country that has adopted confiscatory policies and grown rich, prosperous and confident.
The economy grows and is stable when lots of people are creating small businesses and backing themselves. This is the indomitable human urge for commerce that the great champion of democracy, John Maynard Keynes, called the “animal spirits” of capitalism.
Politicians should understand that they do not create jobs; nor do rich people. Jobs are created by general demand. Rich people don’t create demand. You and I create demand. Demand is what happens when the society has enough income to buy goods and services.
How does that happen? Where does income come from?
It comes from investment. It comes from people, you and me, going out and risking capital into projects today that we believe may deliver fruit in the morning. These are animal spirits unleashed. So if we are opening a shop, café or online business today, we believe that we will be able to gain enough business to make the returns to that business better in the future for us than if we did nothing today. In short, we back ourselves, our ideas and our own personal energy, drive and talent to create something out of nothing now that will be worth something far more than nothing tomorrow.
These are the animal spirits and these are both the will and wallet of capitalism.
First, people must have the will to take these risks, and second, we must have the wallet – or the means – to do so.
A recession destroys both the will and the wallet of commerce.
People, even the most resilient, get beaten down by the difficulties of a recession and if their capital has been destroyed by the downturn in asset prices, they will not have the wallet to back themselves.
Any political decisions that prolong this agony will destroy the animal spirits. This is why, obviously, debt forgiveness is a pro-business, pro-employment, capitalist policy as it accelerates the recovery in the commercial human spirit, which can be oppressed by too much debt.
It is also why very low interest rates help as they ease the cost of debt. Very low interest rates are a global phenomenon right now. For sure, the euro rates are extremely low but so too are British, Japanese and even American rates. These are instruments no Irish politician has any control over and therefore cannot be the subject of political instability.
Once the will and wallet of capitalism are pointing in the right direction, the forces of human nature and the animal spirits will take hold.
This is the process of economic recovery. It is a journey from pessimism to optimism that has very little to do with politicians, or business lobby groups for that matter.
The truth is, the will and wallet of capitalism are determined when the herd moves from greed to fear or from optimism to pessimism. It isn’t easy to explain. It just happens.
The State’s job is to hinder this natural process as little as possible – because it’s impossible to orchestrate. It stems from a form of irrationality.
Humans are unbelievably irrational animals, driven by all sorts of excitements, depressions, giddiness and mood swings.
Everything you do influences me, even though I don’t usually realise it. And my decisions affect you and vice-versa.
As JP Morgan observed: “Nothing so undermines your financial judgment as the sight of your neighbour getting rich.”
Equally, nothing puts the wind up you more than hearing a good friend has been laid off.
When we are optimistic, we are impossibly so. We think nothing can go wrong. We dismiss risk as something that doesn’t happen to us and we take the plunge confidently. And optimism is infectious.
We spend money we don’t have in the belief that our income is going to be bigger next year. Sometimes this works out, sometimes it doesn’t.
In economics, this optimism is reflected in more borrowing, more spending, more investing and more debt because the animal spirits cause us to believe we are going to be richer tomorrow as a result of our own genius than we were yesterday. It is almost impossible to time when human nature changes, but we know that when it does the herd can move from pessimism to optimism quickly and unexpectedly.
After years of savings, pent-up demand is being released – and as this happens it becomes infectious. This is what is happening in Ireland right now: businesses are opening and unemployment is falling because ordinary people are buying, investing and backing themselves.
Taxes, as a result, are up and in general the economy is pointed in the right direction.
That’s about all we can say about the economy and this election.