I want to talk about two examples of bogus economics (although I have great many more examples available).

An excellent example is the vogue for stakeholding. Judging by the number of studies crossing my desk - let alone all the ones which I have been spared - the longest running public policy battle is that for the soul of the business corporation.

The issue is between the supporters of the traditional view of the corporation as an agent for the shareholders and the fashionable alternative of a stakeholder corporation, which is supposed to take into account all the interests of society.

The agenda is obviously political. It is no coincidence that stakeholder theorists regularly speak of constituencies. Consider the potential rivalry between present employees who resent a plant relocation decision and residents in the new location whose prospects will be badly damaged if it is vetoed. It is suggested in all seriousness that firms should appoint "a metaphysical director" to sort out these issues. As one author (Norman Barry) put the matter, it would "prolong the intractability between rival stakeholder groups up to a point at which the corporation just avoids bankruptcy".

If the stakeholder concept means anything at all, it is that the managers of a business should have some other aim in mind than gaining the maximum return from the assets under their control.

It is difficult to see what the nation gains from not using assets to their best advantage. And remember too that the owners do not have to be anonymous shareholders. They can be the workers themselves under ESOP arrangements.

What is actually happening in terms of government policy? For the moment the conflict has been kicked into touch. The Blair government has set up a Company Law Steering Group, which is to report in 2001. The Group regards itself as independent and it hopes to come out with recommendations which will not be reversed by a change of government.

Although it has not been widely noticed, the Group has already published a "Strategic Framework", outlining the main issues. This has been supplemented by a personal paper by Jonathan Rickford, the Group's project director. Mr Rickford's operates on "the happy lesson of experience that quite fundamental disagreements on ultimate values do not prevent consensus on practical problems."

The Group has tried to narrow the controversy by emphasising its exclusive concern with corporate law and it has asked reformers for precise formulations of the changes they would like to see.

Its purely factual enquiries have also been helpful. The popular view is that the US is the upholder of shareholder value, while Germany is seen as the apostle of the stakeholder principle. In fact many US states have provision of a stakeholder kind. These states have manager-friendly laws as opposed to the UK's shareholder-friendly structure. The laws have mostly been the result of lobbying by managers trying to free themselves from activist shareholders and playing on the concern of state legislatures for local employment. Another reason is that US states compete for corporate headquarters. In Delaware the incorporation services industry is a major contributor to revenues.

On the other hand, the Group has the impression that the considerations which affect board members in stakeholder countries such Germany, Austria, the Netherlands and Sweden are little different from those in operate in the UK. Although large German corporations are required to have two tier boards, with the unions represented on the top or supervisory one, the chairman's casting vote has usually been enough to see that the interests of shareholders prevail. The move by many German corporations to establish new plants in the former Communist countries or the emerging world show that this control is pretty real and is adding to the pressures on German leaders to modify the country's tightly knit corporatist structure. A further important influence is the growing importance of institutional shareholders. In one large Austrian bank the main shareholder is now Scottish Widows.

The committee lays down options for the future. One is the development of the "enlightened shareholder value" model. Under this it remains the corporation's duty to maximise shareholder value, but to do so in a responsible way, taking into account the longer term.

But if one looks at the authors' specific suggestions they consist of improvement such as clearer duties for directors and reporting requirements for boards and the long overdue reform of the farce of the Annual General Meeting. "It is argued that management's have a great many interests to consider other than the shareholders, such as employees, customers, suppliers, bankers and the community... But at the end of the day ... the distinction between taking into account and being responsible to must be maintained."

Although corporate law works in practice in favour of the shareholder, Section 309 of the UK Companies Act has two apparently contradictory provisions. One requires the directors to have regard to the interests of the company's employees. But it also states that the fiduciary duty imposed on directors is owed by them "to the company alone", that is its shareholders.

At a minimum the Group is likely to recommend clarifying this section, possibly to ensure that directors recognise their obligations to have regard to the need, where appropriate, to build "long term and trusting relationships with employees, suppliers, customers and others as appropriate in order to secure the success of the enterprise over time". There is a suggestion of a public statement like the Highway Code which need not be in binding legal form.

The alternative option would favour "pluralist" responsibilities to employees, the environment, the local community and numerous other supposed duties. If the Group were to take the pluralist approach it would have to choose between permitting directors to take into account the interests of non-shareholder participants and requiring them to do so. Mr Rickford is pretty confident that even if the group comes out for the pluralist approach, it will be permissive rather than mandatory. In other words directors will be allowed a discretion to sacrifice commercial advantage for ethical or public policy purposes.

There is a suggested third way called "entity theory". (J Kay?). This says that the success of a company is a sufficient criterion in itself, without emphasising either shareholders or other interests. Mr Rickford has an admirably individualist riposte to this view. "A company is ... simply a convenient portmanteau expression for summarising the complex set of legal relations between individuals which law prescribes to facilitate and control human associations of a particular kind." Even if legislators tried to adopt the entity approach they would still be left with the same question: "Whose interest is it to prevail in situations of conflict such as plant closure?"

Why then does stakeholding have such an insidious appeal. Ultimately, for all the pink political colouring, it is a managerial movement. In the end it comes from overvaluing business as a form of life. If you simply treat it as a way of making a living, respectable and useful to fellow citizens, then you will not look for a high moral purpose in every detail of your business life. There remains your family, you leisure activities, and your life as a citizen in which to show your wider concerns.

If on the other hand you arrive at work before 7am, stay until after dinnertime and work for many parts of many weekends, you will have no time or energy left for other human activities. You will therefore try to compensate by trying to make business an all-embracing vocation and to express all your concerns as a human being in the way you run XYZ Holdings PLC.

That way lies hypocrisy and self-deception. The more idealistic the "mission statement" of a corporation the more reason there is to fear for who will lose their jobs in the next act of downsizing. The stakeholding approach, so far from being an outpouring of loving kindness, arises from making a God of business and then desperately hoping that it is a good God.

Let us change the subject. The piece of bogus economics that enrages me most is that Western countries need to sell lethal arms to odious dictatorships to pay their way or to provide jobs.

According to the conventional business we live in a hard competitive world where governments cannot afford to be squeamish either about where the arms go or the methods used to sell them. The supposedly clinching argument is that if the UK does not sell arms to odious dictatorships, the orders would instead go to other countries which will take the jobs destroyed by sentimental domestic public opinion.

These arguments are stuff and nonsense. Here is one of many examples where genuine economics provides an antidote to the "businessmen's economics" beloved by UK government departments such as Defence and Trade and Industry (although not usually the Treasury). The fallacy would be described by international trade economists as that of mercantilism. This is that the object of policy should be to maximise exports and minimise imports; and that this will not achieved without heavy state involvement.

Those of us who think more in terms of output and employment would describe the fallacy slightly differently - although it comes to the same thing. We would say that the great myth is that there is a lump of labour engaged in making specific products. Then, it is supposed, if orders or output are lost in one area, they cannot be regained elsewhere. The labour and other resources are supposed to be wasted forever.

This disregards the fact that jobs are constantly changing. Well over 3m people leave the unemployment register each year, mostly for new jobs. Arms exports employ about 130,000 workers. The arms exporting industry is a small part of an economy which is itself a small part of world trade. Even if arms provide the best marginal return, the resources involved can still be shifted to other industries and other exports.

Nor does this need a vast "alternative strategy" as the Labour Left assumes. It involves merely leaving businesses to find the next best use of resources. Non-arms industries can always sell a little more on world markets. The worst that could happen is slightly worse terms of trade and therefore slightly lower real wages or some workers.

British arms sales of £2bn p.a. may be compared with total exports of goods and services, which amounted in 1998 to £224bn. If all arms exports had been stopped and it had been necessary to replace them with either exports or import substitutes, what would have been the consequences? Many international trade studies assume an export elasticity of demand of two. This means that the UK would have had to shift nearly £4bn of extra resources into civilian exports or import substitutes. Some £2bn of these could have come from workers and equipment previously devoted to arm sales; but another £2bn of net exports would have been required to offset the deterioration in the terms of trade. This £2bn represents less than ' per cent of gross domestic product.

The estimate is probably a big exaggeration, as a large proportion of arms go to NATO or EU allies or Australia and can be justified on grounds of division of labour. Even a once-for-all loss of 1/8th of a per cent of GDP does matter. But it is still a small price to pay for stopping the sale of limb-destroying mines or long-range guns to odious dictatorships.

So-called realists will say that workers and machines cannot be moved from military to civilian work overnight. But we have arrived at our present moral mess through gradual stages; and there is no realistic way of escaping it except gradually.

Indeed there are two stages in moving out of the unedifying parts of the arms trade. The first would be for the government to stop encouraging it, whether by covert subsidies, twisting the law or the soft soap of royal and ministerial visits. The second would be a legal embargo on such sales. The first stage may be the more important and require the greater culture shock.

Something would be gained if even one arms-selling country stopped active official encouragement to the trade. But is an intensification of existing international restraints so impossible?

How about Russia and China? Compliance should be made a condition of aid from he International Monetary Fund and other multilateral bodies. But an embargo excluding these countries would still be worth having.

The implications of the argument extend well beyond arms sales. Take the Pergau Dam in Malaysia where the last Government wrongly thought that it had to secure orders for UK suppliers almost at all costs. It is by stripping the pretences from such arguments that economics could regain its reputation as a humane and social study, shedding light in many shady areas.