Economic Nonsense: 40. Too much wealth is owned by too few people

Underlying the claim is an assumed egalitarianism.  How much is “too much” and how few is “too few?”  Obviously those making the criticism have some concept in their minds of how they would like to see wealth distributed in society, and it seems they would prefer a more equal distribution than is currently the case.  The obvious question is “Why?”  The answer often given is that this would be ‘fairer’, but since they seem to define ‘fairer’ as ‘more equal’, this is not very helpful.

It does not help, either, that many of these measures of inequality only count certain forms of wealth.  Many people in the UK see equity in housing as their main source of wealth.  For some it is pensions.  Many assessments of wealth distribution, on the other hand, only count assets and investments, and thus miss much of the wealth owned by ordinary people.  Few if any seem to count entitlements to such things as health and education as part of measured wealth, even though they undoubtedly improve the living standards of the average citizen.

It could be argued that societies with an unequal distribution of wealth are able to increase wealth faster, and that poorer people in those societies become richer more rapidly than those living in more equal societies.  To poorer people it matters that they are able to command more resources.  It matters less to them that software multi-billionaires have widened the gap between them and made society less equal.  

Part of the reason this criticism persists is envy, the resentment that some have more, yet aspiration is often motivated by the observation that some have it better.  The success of others can inspire the desire to emulate instead of simply envying.

The false zero sum game probably plays a role in this criticism, the notion that because some own so much, the rest must make do with less.  In fact wealth in constantly being created, and creating wealth is a far surer route out of poverty than redistribution.  Instead of envying those richer than themselves, people would be better advised to try to copy them.

Economic Nonsense: 39. Only strong government regulation can hold big business in check

It isn’t strong government that causes concern for big business.  They are more worried about the smaller, newer businesses that might take away their trade.  It is competition, not government that they worry about.  Big business often cozies up to big government.  It employs lobbyists to negotiate with civil servants and ministers, and hammers out agreements on what types of regulations should be introduced, and how they should be implemented.

Big business can cope with regulation.  It can afford the staff to deal with compliance.  Small businesses, especially start-ups, find it more difficult to afford the money or the staff time that regulatory compliance takes up.  Big business knows this, and often strikes deals with lawmakers to impose regulation that will deter newcomers from entering the market.  Far from it being used to control big business, regulation often helps big business by imposing unacceptable costs on its real or would-be competitors.  People speak of “regulatory capture” when the industry works with government to secure helpful regulation.

Some regulation is needed to reassure the public that it will not fall victim to sharp practice or shady dealing, but five words should be engraved above the door of every legislator: “Competition is the best regulator.”  It is competition that keeps firms striving to deliver high quality and keen prices.  The fear of losing trade is more powerful than the fear of incurring the displeasure of government.

Regulation is commonly used to protect those in the market from competition by those who might enter it.  If no-one can trim hair without training and a certificate, the prices charged by existing hairdressers will not be undercut.  If no one can enter the taxi trade without a medallion or a two-year training course, the fares charged by existing cabbies will be protected.  All rules like these are done in the name of protecting the public, but in reality it is the established operators that they most commonly protect.

To control big business government should pursue a policy of promoting competition.  It should make it easier, not harder, to enter established markets.  This, more than regulation, will keep firms attentive to their customers.

Economic Nonsense: 38. The market cannot produce art, music, literature & museums

The market actually does produce such things in some other countries.  What the market does best is to allow people to create the wealth that will fund cultural activities.  The United States has a strong tradition in which people who have done well in business support the arts.  Names such as the Guggenheim Museum or the Getty Centre remind us of the generosity of rich patrons.  Andrew Carnegie, who found fame and fortune in the United States, funded the provision of organs in many churches in his native Scotland, as well as numerous libraries.

In fact the arts have been funded by rich patrons through the ages.  It was often regarded as a sign of good character and culture that a wealthy person would support art, architecture and sculpture.  The emergence of modern economies since the Industrial Revolution has enabled wealth to be created on an unprecedented scale.  This, in turn, has allowed some people to become rich through business and become patrons, where previously it was mostly aristocrats and rich merchants who could afford to do so.

When Kingsley Amis wrote for the Adam Smith Institute opposing arts subsidies, his central case was that if government through its arts committees funded the arts, their output would be skewed towards the desires and tastes of the paymasters, rather than from the passion and inspiration of the artist.

It must remain a suspicion that the committees responsible for handing out public funds as grants to the arts will give effect to their own tastes, rather than those which the public might freely choose to support otherwise.

Some arts can be self-supporting through ticket or admission prices, but government can help through its tax laws, remitting all or part of the tax that would have been due on money donated to artistic institutions.  It does not itself need to dole out taxpayer-funded largesse,  The UK’s National Lottery has multiplied financial support for the arts without needing taxpayer funds.  The view that the market cannot finance the arts and that government grants are needed to sustain them is simply not correct.

Economic Nonsense: 37. Government must act to redress trade deficits

No, not really.  People used to think so.  To some extent this is a hangover from mercantilist attitudes when people thought you needed a surplus of exports over imports so you could accumulate wealth.  In its primitive form of bullionism, people thought you had to sell more than you bought in order to build up piles of precious metals.  

When the UK had fixed exchange rates the balance of trade was regarded as vitally important.  Each month when the Department of Trade (as was) published the figures, people would fret about rising imports or reduced exports.  The “trade gap” would sometimes feature as the lead item on the evening news bulletins.  The significance was that if the imbalance were sustained over a period of time, the pressures on the currency would rise to the point where the pound might have to be devalued to a new fixed rate.  This was regarded as a humiliation, and made imports more expensive, increasing the cost of living.

Once the pound was allowed to float against other currencies, however, the issue lost significance.  If imports exceed exports over a period, the pound drifts down in value, making exports cheaper to sell and imports cheaper to buy, thus closing the gap.  Trade deficits are only a problem for countries with fixed rates of exchange.  And even here, while devaluation can redress them, other countries might also devalue, leading to “currency wars” as each tries to give itself a trade advantage.

Floating currencies solve the problem.  If a country is uncompetitive, buying more than it sells, its currency will go down, enabling it to sell more and buy less.  One of the problems with countries such as Greece has been that within the eurozone, they were not able to devalue or to drift down.  The value of the euro was not within Greece’s control.  Had they left the single currency and restored the drachma, a steep devaluation would have addressed their debts and their competitiveness.  

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.