Trussonomics 101

Liz Truss, ex-Prime Minister of UK

For anyone who has not been following the horror show of British politics in the last few weeks, here is a brief summary:

Liz Truss was elected Prime Minister on 6 September 2022 following the resignation of her predecessor. She appointed Kwasi Kwarteng as her Chancellor, who announced a “mini-budget” on 23 September. This contained £45 billion in unfunded tax cuts including the abolition of the 45% higher rate of income tax and the scrapping of the limit on bankers' bonuses – both unpopular measures which were widely seen as benefiting the rich at the expense of the poor. Following the mini-budget, the financial markets tanked, interest rates rose, sterling fell to its lowest ever level against the US dollar and turmoil in government bond prices led the Bank of England to launch an emergency bond buying programme. This caused house mortgage lenders to withdraw over 40% of their products, with other products repriced upwards. The package was criticized by the International Monetary Fund. 

Kwarteng was dismissed as Chancellor on 14 October after only 38 days in post. Following weeks of political and economic turmoil and a collapse of confidence in her leadership, Truss resigned on 20 October, making her the shortest serving Prime Minister in British history. Her main legacy was to add a new word to the English language: Trussonomics. 

This economic chaos seems to have resulted from Truss’ ideological commitment to stimulate economic growth by any means possible. To understand the roots of this, we need to go back to Truss’ formative years when she read Philosophy, Politics and Economics at Merton College, Oxford, graduating in 1996. This probably sowed the seeds of the economic theories which she deployed to such disastrous effect. 

Lipsey & Chrystal: Economics, 14th Edition

Coincidentally, my wife is currently studying first year economics. I therefore looked at her economics textbook (Lipsey & Chrystal, Economics, 14th edition) to find out what students today are taught about economic growth. The book contains a 34 page chapter about “Economic Growth and Sustainability” and I read it from start to finish. 

An engine without coal - like a Prime Minister without a job?

I had misgivings about it from the first page of this chapter. On this page it sets out some supposed core principles for students to learn. These include claims like “The long term growth of output depends primarily on changes in technology, which raise productivity (i.e. output per unit of input) and also on growth in inputs such as capital and labour”. Actually, that’s not true. The long term growth of output depends largely on growth in material input. If you have a steam engine but no coal, then it doesn’t matter how technologically advanced your steam engine is, or how many shareholders and workers you have, it’s not going to give you any output. 

Another claim is “Sustainability of growth has become an important policy issue”. The problem with that is that if you accept that economic growth requires growth of material inputs which are finite on a finite planet, then growth must eventually stop when material inputs are exhausted. In other words, there can be no such thing as “sustainable growth”, because no level of growth, however small, can be sustained indefinitely. 

As we get deeper into the chapter, these principles are elaborated upon, and increasingly tenuous claims are made such as “growth can go on indefinitely”. Various tables and graphs of GDP growth are produced, but none of them start earlier than 1700; in other words, they only cover the fossil fuel era. It could therefore be argued that fossil fuels, and not technological innovation, are responsible for the GDP growth shown in the graphs. 

“Sustainable growth”, the chapter tells us, will “inevitably require the development of alternative technologies that generate energy without both the burning of fossil fuels and the release of carbon dioxide”. This is true in theory, but there is no guarantee that such energy sources will be found in practice. Even wind turbines and photovoltaic panels require large quantities of fossil fuels and minerals for their manufacture, installation and maintenance. 

The claim that economic growth raises living standards is made many times. This is also true – but unless it can be sustained indefinitely, there is little point to it if living standards will eventually fall again. 

Students are signposted as to which economic thinkers are to be followed and which are to be dismissed. Joseph Schumpeter, a cheerleader for long term growth, is a “pioneering theorist of innovation”, whereas poor deluded Thomas Malthus’ theories are now “totally obsolete”. 

Halting or restricting economic growth is dismissed as “impossible” because “the world’s major economies would never accept such a goal politically”. That implies that we have a choice. But what if we don’t have the choice because reality forces it upon us? 

I could continue to list the claims made in the rest of this chapter, but I won’t because you have probably got the general idea by now. The point is that this is what first year students of economics are expected to learn and subsequently regurgitate in order to pass their assignments and exams. 

So suppose you are one of these first year economics students, you read this material and you have doubts about it? There are four main options open to you. 

Option 1: leave the course and study something else. 

Option 2: argue with your tutors, professors and fellow students that the study material is wrong. This will probably leave you socially isolated and you are unlikely to pass the course. 

Option 3: fake it. Learn the material well enough to regurgitate it for exams, but without believing it. This might get you through the course, but then what? Can you continue faking it – pretending to believe – for the rest of your career? I suspect not. 

Option 4: internalize it. Drink the Kool-Aid, believe all the claims, suppress any doubts and ignore any dissenting views. This is the best way to a successful career in politics, economics or academia, and to return to my starting point, it appears to be the route Liz Truss took at the start of her political career. It is also the way the system perpetuates itself, with “true believer” professors indoctrinating a new generation of “true believer” students. 

Looked at in this light, Trussonomics makes a sort of logical sense, even if it is a bizarre, twisted logic. If the way to raise living standards is through economic growth, and the way to achieve economic growth is to increase capital input, then of course it makes sense to lower taxes and make more capital available for investment, as any debts incurred would be paid off by the resulting economic growth – which was in fact the reason she gave for doing it before she was ousted from power. 

This is a cautionary tale about what happens when ideology collides with reality. And if you think this doesn’t concern you because you don’t live in the UK, think again. As resources deplete, similar scenarios will play out near you, wherever you are.

Slaynt vie, bea veayn, beeal fliugh as baase ayns Mannin