Economic Nonsense: 36. It is important to ensure that the finest minds are directing the economy

This commits the Platonist fallacy of supposing that the problem is to find the wisest, noblest rulers.  The assumption behind it is that we will come out best if only the right people end up in charge.  In “The Open Society and its Enemies,” Karl Popper exposes the fallacy.  The problem is that that whatever method we choose to select our rulers, those rulers can easily be corrupted in office.  The temptations of power are all too obvious.

If we did manage to have the finest minds in charge of the economy, the odds are high that they would direct it to serve ends they approved of, rather than the ends that ordinary people would freely choose if they had the opportunity.  

But there is a deeper fallacy.  It is that any minds, no matter how fine, can have sufficient information and act quickly enough to direct the economy.  The economy is changing from micro-second to micro-second as choices are made, decisions reached and actions taken.  These all input into the flow of information conveyed by prices and deals.  The economy is not like a vehicle that can be controlled by accelerators, brakes and steering wheel.  It is more like a living organism in its complexity and its ability to adapt to changing circumstances.  The odds are that if the finest minds were to direct the economy, they would direct it badly. 

Popper’s answer was not to ask, “How can we choose or train the best rulers,” but to ask instead, “How can we so organize political institutions that bad or incompetent rulers can be prevented from doing too much damage?”  His answer was that you need a means of rejecting the bad, rather than selecting the good.  In the economic sphere this happens without the direction of the finest minds.  Products that do not cut it with consumers are counted out, along with the firms that market them.  Capital is redeployed to the newer, smarter people who can satisfy customers.  It is a continuous process by which the less competent is weeded out in favour of the more competent.

If we did have the finest minds trying to direct the economy, the chances are that they would contrive to stop this happening, or at the very least, interfere with it in ways that made it less effective.

The Observer seems remarkably confused about Chinatown this morning

Apparently rents are going up in Soho’s Chinatown enclave. The Observer seems very confused indeed about this:

The doubling and more of rents and the pressure to convert restaurant space into residential property are causing long-established family businesses to close, social networks to break up and generic catering businesses with more financial muscle to move in. A famous and attractive manifestation of London’s celebrated diversity will dilute and fade.
Big trouble in little Chinatown as rent rises force restaurant owners out
Read more

Other examples include threats to markets and industrial space in other parts of the city, to the music shops of Tin Pan Alley, much-loved clubs or independent-spirited restaurants. There are the squeezing out of small but useful shops and other businesses, the city’s inability to house its poor, the exclusion by house price of the people who provide its services, from cleaners and carers to the designers and creatives who are said to add so much to London’s international lustre.

It is confused to both complain about the shortage of residential space and also about the conversion of commercial space to residential space in the same city, isn’t it? But the real problem of course is the headline:

The Observer view on the threat to London’s Chinatown: its loss will be no one’s gain

Well, let’s see. The landlords will gain, they will be getting more money for their property. But that’s not all: all of the users of the properties will gain as well. If the value in use of some part of Soho was greater as a chop suey house than as a house then the chop suey place would produce a higher valuation for the property. We thus don’t need an agonised “conversation” about what provides the greater value. We only have to go and look at the prices. If the price is higher as a not chop suey house, which is what The Observer is complaining about, then quite obviously all of the users of that joint value the joint at a lower value than the alternative use.

After all, this is the very definition of societal wealth creation: moving an asset from a lower to a higher valued use.

It may well be that some looking for a cheap chow mein will be disappointed at not being able to get one from that now residential building. But if the customers in aggregate were in fact willing to pay the amount needed to keep the restaurant in place then it would still be in place, wouldn’t it?

The democratic cycle

Just as the business cycle seems to punctuate times of economic growth with periods of stagnation or recession, so there appears to be a political cycle in democratic countries, a cycle that features times of economic consolidation and progress with those of profligacy, deficit and debt.

In some countries a centre right government coming into office institutes policies that rein in spending and encourage the growth of the private economy. Supply side policies aid business development and expansion, and tax cuts increase rewards and act as incentives to economic expansion.

The growth that often follows the policies can lead to the re-election of the government that implemented them. The feel-good factor of improving standards, higher wages and inflation under control can enable such a government to secure re-election.

Memories are short, however, in the democratic cycle, just as they are in the business cycle. People come to take wealth and growth for granted, and to be less prepared to continue with the policies that led to them. People grow careless and are more ready to take political risks.

Quite often a party that proposes to concentrate on distributing the new-found wealth rather than on continuing to grow it, appeals to the electorate more than the one whose policies helped bring it about.

The centre-right government is replaced by one that leans more to the left. It sets about expanding benefits and growing the public sector. It tries to exact more from private business by increasing taxes. It needs to fund new programmes and borrows money in order to do so. For a time its largesse is appreciated, but increasingly investment and business find it harder to flourish in the new environment it has created.

Growth slows down, the economy grows sluggish. People begin to feel less secure and less wealthy. They begin to question the competence of ministers who seem unable to manage the economy. The left-leaning government sometimes wins its first re-election after a term in office, but often with less enthusiasm than that which first put it there.

The economy stagnates under the impact of inappropriate policies, and a centre-right government is sometimes then elected to clear up the mess. It implements the policies that encourage investment, applies fiscal responsibility, and makes it easier and less costly for firms to take on new employees. Gradually the economy recovers, and the democratic cycle begins once again.

It might be a feature of democratic societies that whenever wealth and growth are created, a popular party will eventually secure election on the basis of promises to redistribute that wealth. The less well-off can always outvote the more well-off. It means that instead of a steady continuation of policies that allow the economy to grow, there is more likely to be a staccato, with periods that help the economy alternating with those that stunt it. This is more about politics than it is about economics.

This is just sooo embarrassing

There’s many things that we don’t know much about and they tend to be the things that we don’t opine upon. There’s a (rather smaller) set of things we do know something about and we do tend to opine upon them. We would put this forward as useful general advice in fact. So it’s just too, too, embarrassing to see one of our national legislators revealing that he’s got an opinion on a subject where he is obviously entirely clueless:

USC collapsed into administration in January but was rescued days later by another Sports Direct subsidiary, Republic, as part of a controversial pre-pack deal that saw staff given just 15 minutes notice of their redundancy.

In a testy three hour exchange, Ian Davidson, the Labour MP who chairs the committee, said that while Sports Direct was legally shielded from the losses incurred by USC’s collapse, it had a “moral” duty to foot the bill for USC’s oustanding debts and redundancy payments.

“You have managed to retain all the good bits remove bad bits. You’ve done over the taxpayer as well. We have ended up carrying the debt and you’ve strolled off into sunset with the money. It’s good business if you can get away with it. It may be legal but it’s not moral,” he said.

A market economy is, in one sense, an experimental economy. People continually try new combinations of whatevers, within the technological envelope of what is possible, and see what happens. Most of these experiments fail but enough succeed that the general living standard rises over the years and decades. We like this. An extremely important part of such an experimental economy being, well, what do we do with the failed experiments?

The complaint here is that the debts have been put over into one pot while the potentially productive assets have been detached from the debts and sold on (for whatever sum) to someone who might be able to make better use of them. This is the complaint note: but this is not a bug in bankruptcy, it’s actually the entire damn point.

If we leave those potentially profitable assets attached to that debt then the value of the combination is less than zero. That’s actually what “being bankrupt” means. Those assets cannot therefore be used to do something more useful as no one will take them on. Who would take on something with a negative value, if you lose money just by walking in the door? Thus what the process of bankruptcy actually is. Separating the debts, into one pot, from the assets into another. So that those assets might, at least potentially, be used in a manner that adds value rather than decreases it. If we don’t do this then every experimental failure leaves assets that cannot be used by anyone: and the entire society will thus become poorer over time.

“You have managed to retain all the good bits remove bad bits.”

Yes, that’s the point of having a bankruptcy process.

It might be a bit much to hope for our being ruled by wise Solons but might we at least expect that our Solons do in fact have a clue?

 

Miliband’s attack on profit is an attack on patients

Either Ed Miliband is struggling to understand the basics or his ideology is spiralling out of control.

The latest Labour pledge:

Labour would cap the amount of profit private firms can make from the NHS, Ed Miliband will say as he launches the party’s election campaign.

He will pledge to halt the “drive to privatisation” he claims has taken place in the health service since 2010.

The future of the NHS is “on the ballot paper” and only Labour can guarantee the funding it needs, he will say.

Under his plans, private firms will have to reimburse the NHS if they exceed a 5% profit cap on contracts.

Companies make profit by keeping costs as low as possible while producing a product or service that people want (and ideally choose) to consume. Apologies for the simplicity, but apparently Ed needs it.

Pledging to fix levels of profit that a company can make ruins any motivation for the company to bring costs down. Given the NHS’s current financial situation, Miliband should not be so quick to toss aside the importance of efficiency gains.

Nor should he be ignorant of private firm’s impacts on patient outcomes.

Private firms are hardly private when working for the NHS; they are still under the jurisdiction of NHS bureaucracy and are often dependent on public funds for their operations. But where private firms and independent sector treatment centres do differ from the public sector is in their record on patient outcomes. Research from 2011 showed that ISTC surgery patients are healthier and experience less severe recovery conditions than patients undergoing the same surgeries with NHS providers.

Furthermore, Circle’s management of Hitchingbrooke Hospital turned a failing trust into one of the highest ranked hospitals for patient happiness and cut waiting times drastically; their recent failings were not a result of bad healthcare but rather bad business.

One of the reasons Circle reneged on its government contract is because it’s a struggle to make efficiency gains under NHS regulations as they currently exist; if Labour gets its way, this will become nearly impossible.

Miliband’s attack on privatization and profit is an ideological attack on buzzwords; unfortunately, his crackdown could have real affects on patient outcomes.