Book Review: The Price of Time – The Real Story of Interest by Edward Chancellor
Chancellor’s book could not be better timed as we start to see the unravelling of the low-interest rate environment that has dominated the West for over thirty years.
The sharp spike in interest rates and the return to “normality” (although Chancellor’s book begs the question as to whether there has ever been a period of ‘stable’ money) in monetary policy does raise significant questions for Conservative economy policy. It is well documented both in Chancellor’s book and elsewhere, how low interest rates have enabled cheap credit to pour into the UK economy which has in turn facilitated a boom in consumer spending. This boom in debt and credit has enabled questions of distribution to be postponed and debates about the structure of the economy to be passed over, effectively stuffing the mouths of voters, politicians, and journalists with gold.
Are higher interest rates a good thing?
Chancellor’s book provides an excellent history of debates about the nature of interest rates and whether they are an evil which clamps down on trade and investment or a good which enables money to flow to the right places.
The author makes no secret of his affiliation with the ‘Austrian school’ of Mises and Hayek. In this analysis, interest rates are critical to determining the distribution of resources in the economy. The higher the interest rate, the greater need for efficiency and productivity in the economy. The lower the interest rate, the greater the risk of misallocation of resources, bubbles, speculation and corruption. Interest rates are the way that the market seeks to allocate resources to their best use.
This may shock readers of this blog, but on this issue, I tend to agree with Chancellor and the Austrian School. Low interest rates have not benefited the real economy, in fact, they have encouraged the financialisation of UK economy to an unhealthy degree – another point in Chancellor’s book.
Another area touched upon on lightly in the book but important from a conservative perspective is the cultural impact of higher levels of interest. In short, one of the cultural problems in the UK economy is its excessive short-termism. Easy credit and borrowing facilitate this, encouraging households and businesses to look at capturing all the benefits from future investment today. Excessive deference to consumerism has led the UK to become badly imbalanced, running up huge balance of payment deficits which leave us in a vulnerable position.
We also see the same problem in the public sector through discount rates. At present, we are excessively discounting the future compared to the present. This has made productive investments that could benefit future generations (e.g. Net Zero) harder to achieve. In short, we have been misallocating the balance between present spending and future investment across the entire UK economy. Artificially low interest rates have facilitated this, and Whitehall has been captured by the same short-termism as the City.
Higher interest rates must be balanced with higher taxation for richest
If there is a criticism to be made of the book, it is that the myopic focus on interest rates does obscure a clear link with the tax system. Although dismissive of Thomas Picketty’s work on the history of capital, he does seem to downplay that one of the ramifications of higher interest rates would be to increase inequality between those with higher levels of savings and assets than those without. Although Chancellor’s response would likely be that higher levels of interest would incentive the poorest to put more money aside and benefit from that regime, it seeks unlikely that this would be enough to offset the benefits to the richest in society.
His example of Iceland at the end of the book is useful. In financial crash, the Icelandic state took an active role (which Chancellor supports) in protecting households and depositors whilst hiking interest rates significantly. However, the Icelandic state also significantly increased its tax take. Income generated from individual taxation increased by 12.7% a year between 2010 and 2020 compared to 8.8% in the previous decade. The increase in corporate tax revenues was even sharper, from 7.4% per year in the 2000s to 33% in the 2010s. This cannot merely be explained by higher levels of growth, as the economy grew 1% lower on average during the 2010s than it did during the 2000s. The Icelandic state did allow banks to fail and interest rates to rise sharply, but it also pursued a policy of higher taxation to ensure that the benefits were spread throughout the economy.
Again, the post-war period is instructive. Between 1951 and 1979, the average UK interest rate was much higher than it has been over the past thirty years, yet inequality decreased because of higher levels of taxation on the wealthiest in society. This ensured that the gains accrued from higher interest rates were reinvested and distributed throughout society.
The danger for Conservatives is to read that higher interest rates mean that the state should sit back and purely allow for the market to allocate capital without intervention. Chancellor is right that the government should not seek to artificially manipulate interest rates as a mechanism of economic management, but it also does not mean that we should simply allow allocation to take place without correction. Productive capital allocation is a public good, but the private sector does not, even with higher interest rates, always do the job well.
Learning from the post-war experience
Related to the above, Chancellor’s story of interest rates does seem to skip over the post-war experience for Britain and Europe. Although there were capital controls to “trap domestic savings” – a form of financial repression – it also marked a period of significant increases in living standards, productivity and the UK remained one of the world’s leading exporters. The post-war period tells us that an active state is essential to balance some of the weaknesses in the private sector’s allocation of capital. The UK used to be, for example, a world leader in nuclear power, yet the private sector has never stepped in to maintain those investments despite the undoubted benefits that energy independence brings. Chancellor would perhaps blame that on low interest rates, but it is also that the market naturally “chases returns”, as he references repeatedly, and is not prone to steady, patient investment in strategically important assets. The post-war period was an exception to the rule of the UK economy, which has seen the private sector prone to speculation and overseas accumulation rather than domestic investment. Perhaps this intervention could be avoided if the UK had more co-operatives, social enterprises and other purpose-led businesses which naturally gravitate towards that long term investment. However, until that happens, the state’s role remains an essential corrective.
In short, we need higher interest rates to prevent the creation of “virtual wealth” and bubble-economies but we also need a strategic state which is prepared to invest alongside the private sector to maintain the country’s long term economic position. In a sense, Chancellor’s book makes a strong case for returning to some of the features of our post-war economy, something that is unlikely to be welcomed by the modern-day Austrian school. The new Prime Minister would do well to reflect on what has worked, however, rather than indulging in the “fantasy economics” of some on the right.