Economic Nonsense: 47. The state should pay for university education because it benefits society

University education benefits society in several ways.  A skilled, university-educated workforce can boost economic growth and make society richer than it would have been without them.  Less well-off and less well-educated people benefit from this, just as a rising tide lifts all boats.

The experience of going through university generally produces people who are not only educated in their chosen subjects, but who have been exposed to more cultural influences in the process.  Many people would think a society to be a better one if it contained significant numbers of educated and cultured people.  It provides more opportunities for intellectual stimulation and self-development.

All of this is true to some degree, and benefits society as a whole, but there is little doubt that by far the greatest value of a university education accrues to the person who undertakes it.  There is firstly the personal fulfilment that comes from attaining more of one’s potential, but there are more material rewards as well.

Possession of a university degree in the UK increases one’s employability.  For those in the workforce, aged 18-65, employment among graduates is 87%, as opposed to 70% for non-graduates.  Median salary is higher, too, with graduates on average earning £9,000 more per year than their non-graduate counterparts.  Over a working life this could top £400,000 of extra salary attributable to the degree.  

This constitutes an overwhelming advantage accruing to the individual who undertakes a university degree.  While there are undoubted benefits to society, those gained by the individual are high and measurable.  They make the loans undertaken to finance university, perhaps £36,000 for a 3-year degree, a very good investment indeed.

When people suggest the state should pay for this, they mean taxpayers should.  It seems strange that a person not equipped to benefit from university, someone who leaves school at 16 to become a bricklayer, for example, should be called upon to pay higher taxes so that someone else, already endowed with more academic and intellectual ability, should benefit from what amounts to a ticket to a higher salary for life.  

Some would call this unfair, and suggest that those who gain the most from university education should finance most of its costs.

Economic Nonsense: 46. Profit is a sign of exploitation

No.  Profit is the reward for investment.  An investor defers gratification and uses their money instead to try to make more money later.  Profit is the compensation he or she receives for doing this.  Part of it takes account of risk, the risk that the investment might not pay off or that the investor might lose the money they put up.  Part of the profit is reward for taking that risk.

The notion of profit as exploitation derives from a mistake made by Karl Marx.  He supposed that value resides in objects, rather than in the mind of the beholder.  Because he thought it resides in objects, he asked how it got there, and answered that value represents the labour it takes to make something.  A price charged above the value of that labour represents “surplus value,” and is exploiting the workers who make the object.  Hence comes the notion of profit as exploitation.

In fact people value things differently, which is why they trade.  An object’s value to me might represent the other uses I might have made of the money, had I not expended it in producing the object.  If someone values it more than that they will pay a price that includes a profit for me.  Far from being a sign of exploitation, profit serves a valuable human purpose in motivating people to produce goods and services that are of value to their fellow human beings.  It directs us to serve the needs of others in seeking a return for ourselves.  The butcher, the brewer and the baker might seek their own reward in terms of the profit they make, but in doing so they provide others with meat, ale and bread.

Profit is legitimate, and sends signals to others.  If some areas of production show high profits, others are motivated to enter that field themselves and bring extra production onto the market.  The competition with other producers will generally act to restrain or reduce the high profits.

Economic Nonsense: 45. Unbridled capitalism brought about the Great Depression

In the popular account the stock market went wild in the late 1920s, with people gambling recklessly on stocks and shares, often with money they didn’t have.  Shares could only go up, they thought, but they were wrong.  The market crashed, people went broke, investors jumped off high buildings, and without investment GDP plunged and the Great Depression came about.  If it were true it might be a major indictment of unbridled capitalism, but it isn’t.

People did overstretch recklessly, assuming the market could only rise, helped by easy money from the Federal Reserve Bank, and the Great Crash came in 1929.  It wiped out many investors, but it did not lead to the Great Depression.  That came later as a direct result of bad policy decisions.  Had those decisions not been made, the stock market crash might have instigated a cyclical downturn and corrected itself after a year or two.

The Federal Reserve Bank, observing that people had bought shares with easy credit, decided to tighten credit and restrict the money supply.  This is what you do not do in a recession, when struggling companies need credit to keep going and companies that see opportunities ahead need money to invest in expansion.  It was a disastrous mistake.

The folly was compounded by protectionist policies.  The Smoot-Hawley Tariff of 1930 shut out most foreign goods to boost home-produced goods in the name of protecting American jobs.  Its effect was catastrophic.  It sparked a beggar my neighbour trade war as other countries responded with tit-for-tat measures.  Unable to sell goods in America, they stopped buying American goods.  International trade plunged and much of the world sank into recession. 

There were other contributing factors.  Banking regulation had been clumsy and restrictive, and left American banks unable to play their part in promoting investment and expansion.  Income taxes were massively hiked in 1932, just when tax cuts could have helped.

Unbridled capitalism did not cause the Great Depression, incompetent government did.  It is another piece of economic nonsense that President Roosevelt’s New Deal government activism helped America’s recovery from the Great Depression.  It didn’t.

Economic Nonsense: 44. Big business thrives on poor country sweatshops and child labour

In undeveloped countries people struggle to survive in agricultural economies.  Life is characterized by dawn to dusk heavy labour, even for children, and the rewards are meagre.  Diet is poor and the risk of starvation or at least malnourishment is prevalent.  

In the early years of Britain’s industrial revolution, conditions were poor.  Workers toiled for long hours amid safety standards that were often low.  There were sweatshops, and children worked in factories and mines.  This represented an early stage in economic development.  It was a considerable step up from life on farms, where conditions had been worse.  As capital grew, so did the machines that increased productivity and enabled labour conditions to be improved, and for women to leave sweatshops and children to leave the labour force.  It was wealth that made this possible.

Today in developing economies things are made cheaply in crowded working conditions with safety standards considerably below those in the developed world.  Although most countries have rules against it, there are undoubtedly children at work in several of them.  This, too, represents an improvement on the conditions found in the countryside.  The wages paid in sweatshops, well below those in the West, are far above those afforded by the agrarian economy.  Sweatshop workers enjoy higher living standards than their counterparts outside, and put their families’ and relatives’ names on the waiting list for any vacancies that occur.

This is not “big business” grinding the poor.  It represents a country’s labour force reaching up to improve its lot by earning wages not possible elsewhere.  Globalization has made this possible, bringing many of the world’s poorest people into the world market.  The goods made cheaply in poorer countries sell to richer ones, providing an inflow of cash to boost the poor country’s economy.  This is how China and India have achieved growth rates that have lifted over a billion people out of dire poverty.

As the UK became richer, it was able to improve working conditions and pay, and to eliminate sweatshops and child labour.  The same will be true of today’s developing countries.  Many of them are already doing so.  The faster they become wealthy, the sooner this will happen.  The way to speed it up is for rich countries to open their markets and buy as much as they can from poorer ones.

Economic Nonsense: 43. Private enterprise cannot generate public goods such as lighthouses

In fact private enterprise supplies many public goods, although few commentators think they should provide all public goods.  Lighthouses are often cited as an example of essential services that only the state can provide, but the Nobel laureate Ronald Coase showed that many lighthouses were indeed built and operated by private enterprise.

They had their origin in the hilltop fires that were lit near ports to guide incoming ships.  These eventually evolved through wooden or stone towers into their modern form with steady improvement in their illumination.  They were financed by contributions from nearby ports, which incorporated the costs into landing fees charged on boats entering the harbour.  The state’s role was to allow operators to levy such charges, in order to counter free riders who might seek to benefit from the lighthouse without contributing to its upkeep.  When the state took over their maintenance and operation, it was not because they were failing, but to standardize the charges which were then subject to wide local variations. 

Britain’s Royal National Lifeboat Institution (RNLI) is an example of an independent public service supported by voluntary contributions rather than out of taxation.  For a few years in the 19th century the RNLI did take government money, but found its private contributions dropped off by more than it received in tax support, so it reverted to voluntary finance, which it maintains to this day.  Because contributions are voluntary, there are undoubtedly freeloaders who benefit without contributing, but there are enough public-spirited people to sustain it through their support.

The usual way of providing public goods privately is by a charge levied on users, as the early lighthouses did.  Modern technology makes it easier to identify users and to charge those who wish to benefit from the service.  The BBC was originally financed by a licence fee to provide and broadcast its programmes, but later media providers have used first advertising, as with ITV, and then subscription services, as with Sky.  Many would say that it is fairer and more appropriate for public services such as these to be paid for by those who benefit from them, rather than use taxpayer funds.