It’s the ineffable smugness that gets us

We’re all aware of the manner in which the supermarkets have been one of the evil bugbears of our times. The manner in which the upper middle class commentariat has been outraged, outraged we tell you, at the manner in which anyone has the effrontery to offer the working classes cheap and convenient food. doesn’t everyone realise that they should be buying at the butcher and greengrocer so as to subsidise the desires of the upper middle class commentariat?

Which brings us to this lovely piece claiming that the age of the supermarket is now over and ain’t that a good thing?

 In my street, the light thunk of plastic boxes as they’re unloaded from the supermarket delivery vans is now as familiar, if not quite so uplifting, as the sound of my beloved’s key in the door. Those who use the internet for grocery shopping do it for reasons of convenience, certainly. But we also know we spend less online, buying only what we need, choosing necessities with a ruthlessness that often abandoned us in-store. What we used to spend on impulse buys – or some of it – then goes on a decent wedge of Lincolnshire Poacher, a couple of fillets of haddock or some good beef, sold to us by smiling, helpful, talkative people whose names we may know, and whose businesses matter both to them and us.

The people who run our supermarkets, obsessed as they are with “price matching” and “meal deals”, seem not to have noticed this. Or perhaps they have merely accepted there is no real way to respond to it. Small, local supermarkets are good and useful should you run out of stock cubes or Persil of a Tuesday evening. But even their expansion is finite. For the rest, there is no short-term solution. We have become suspicious: of their mawkish advertising, of their treatment of farmers, of their desperate bids to package up things that really don’t need packaging up at all (I mean this literally and metaphorically, versions of “restaurant-style” dishes being every bit as phoney and wasteful as apples wrapped in too much plastic). Modern life, we feel, is isolating enough without self-service check-outs. They want to own us, but we aren’t having it. Suddenly, the over-lit aisles of Tesco have never looked more bleak. Or more empty.

The problem with this is as follows. I’ve always said that supermarkets were horrible things and look, now people agree with me! That means I was right! But, no, sadly, it doesn’t. It means that you might (assuming we accept the idea that the supermarkets are falling out of favour) be right now but it means that you were wrong before. Not in your personal taste of course: but in your projection of your personal taste to others.

And the point of emphasising this is that this is why we have markets. So that the consumer can decide for themselves how, in this instance, they wish to purchase their comestibles. If technology has changed so that internet delivery is now better all well and good. If it’s simply consumer taste that has, equally well and good. The entire point of having competitors in a market is so that the consumer can, with each and every groat and pfennig they spend, intimate which of the possible offerings they prefer. On the grounds of price, taste, convenience, technology or any other differentiator.

If the supermarkets do go down (something we rather suspect won’t actually happen) then it will not prove that those who campaigned against them in the past were right. It will prove that they were wrong: and further that their attempts to impose their views on others will always be wrong. For the very fact that supermarkets succeeded as a technology for however long it was or will be shows that they were wrong: and that they fail (as any and every technology eventually does) at some point will again show that that market process is the method of dealing with such matters. For, as is now being said, when the technology or consumer desires change then the market reacts and replaces the less favoured with the more. What else could you possibly want from a system of socio-economic organisation?

Strange fruit

Vishal was the 2014 winner of the Adam Smith Institute’s Young Writer on Liberty competition. 

The free trade of all goods and services seems likely to be optimal—however, given that there are countless lobbies and political pressures that make this situation currently infeasible, I will argue for the abolition of tariffs and restrictions on the trade of fruits and vegetables.

A global abolition of import tariffs and restrictions on fruits and vegetables would, on a static analysis, reduce tax revenue derived from them and increase demand for fruits and vegetables as their prices decreased. But dynamically, reducing the revenue derived from tariffs on fruits and vegetables may well be more than offset from the gains in labour productivity and the increase in national income (and tax revenues) that may result.

David Blanchflower, Andrew Oswald & Sarah Stewart-Brown (2012) found that, after controlling for various other factors, individuals who eat 7 fruits and vegetables a day are found to be significantly happier than those who do not. They further found that this improvement in psychological well-being is nearly as much as the increase in happiness from being employed versus being unemployed!

On top of psychological well-being, greater fruit and veg consumption may also improve general health—itself a benefit—and potentially freeing up healthcare funds. Furthermore, Andrew Oswald, Eugenio Proto and Daniel Sgroi (2009) found that there is evidence to suggest that happiness does raise productivity.

An increase in happiness would also be amplified by the dynamic, contagious effect of happiness: it would spread through the population, further amplifying the economic gains from the easing of import tariffs and restrictions. This phenomenon has been well documented, including in James Fowler & Nicholas A. Christakis (2008).

Some countries already have low import tariffs on fruits and vegetables (in the US tariffs on fruits and vegetables average less than 5% according to Renée Johnson (2014)). But there are several economies where the tariffs are substantially higher; more than three fifths of EU and Japanese tariffs on fruit and veg are between 5-25% and nearly a fifth exceed 25%. Other countries with relatively high import tariffs on fruits and vegetables include China, Egypt, India, South Korea and Thailand.

Perhaps most importantly, the abolition of tariffs and import restrictions on fruits and vegetables would be a big boost to society’s least fortunate, a group particularly hard up during an economic crisis like that from which we are only just recovering.

The abolition of tariffs on fruits and vegetables would reduce their price and increase their consumption. The initial drop in tax revenue would be offset by both the direct improvement in psychological well-being and its contagion that would work to enhance labour productivity, national income, health and happiness. Let’s pick the low-hanging fruit!

Explaining (part of) the UK labour productivity puzzle

Apologies, this is slightly wonkish….one of the puzzles of the current economic recovery is that labour productivity appears to be falling. This just isn’t what we would expect to happen at this point in an economic cycle.

Yes, we do expect it to fall substantially in an actual recession: employers lay off workers more slowly than output falls, meaning that each worker is producing less (the reason for the slowness of the layoffs being that firing someone now and rehiring in the good times costs money, there’s stickiness in what happens here). And productivity we expect to grow strongly in the early stages of a recovery as people sweat that labour they’ve got as output increases rather than immediately going out to hire more people.

So we can happily explain much of what’s happening in that chart using our standard assumptions. Then we get to 2011 and beyond and we’re not sure what is happening there. We really don’t expect to have falling labour productivity at that point. So what is happening?

We can’t tell you exactly and precisely what is happening here: we can’t even tell you how important this next point is to what is happening. But we can tell you that this is absolutely one of the things that is going on. Public sector wages are falling relative to private sector ones. That is part of the cause of that fall in labour productivity.

Here we enter a rather Alice in Wonderland area of economic statistics, the measurement of  public sector labour productivity. In the private sector this isn’t actually easy but it is at least logical. Stripped to its essence we add up the value of what is produced, look at the number of hours of labour required to produce that and divide one into the other. If there’s more production from the same number of hours then labour productivity has risen. Obvious, really.

The important part here being that that “value” is “at market prices”. But we cannot use this method for estimating public sector output. Because most of what the public sector does doesn’t have market prices: how can we “value” the output of a diversity adviser?

Therefore we don’t even attempt to do this. The output of government is defined as what we spend in order to gain this output. Thus public sector labour productivity is equal to, exactly the same as, the wages we spend on public sector labour.

This has, obviously, perverse effects. If we pay a nurse £25 an hour then we record her output as being £25 an hour. If we double her wages to £50 an hour then her output doubles: even as she ignores the same number of patients to do her paperwork. And note what happens to her productivity: it’s just doubled just because we are paying her more.

There is no difference whatsoever in the output: but because of the odd way (through necessity) that we measure labour productivity in the public sector that productivity has just doubled.

This effect will also obviously operate in reverse as well. If we cut public sector wages then we will be cutting public sector productivity. It might be that we get the same actual output in terms of government from those newly more lowly paid civil servants. And that would normally be regarded as an increase in labour productivity: we’re getting the same output for a smaller input. But this method we use to measure public sector labour productivity means that we actually record the opposite effect: lower public sector wages means we are spending less on government and thus we record that value gained from that labour as having fallen. We record labour productivity as falling when we cut public sector wages.

And what has been happening since 2011? Yes, that’s right, there’s been a deliberate attempt to reduce, relative to the private sector, public sector wages. As ONS tells us:

The average pay difference in favour of the public sector has narrowed since the year 2010, which in part reflects the restraints on public sector pay over this period

And we can look in more detail here (page 19 of the .pdf on that page). By the (controversial) way that ONS measures public sector pay (controversial because while it tries to measure qualifications, organisation size etc it’s not adding in pensions accruals and job security etc.) this was lower than private sector in 2001 or so, grew higher than private through the years of the Brown Terror and now there’s a deliberate attempt to manage it down again.

Whether you think those actions of the Brown Years, or the current ones, are justified or not is entirely up to you. But the implication of this for our recorded labour productivity figures is that some portion of that growth in labour productivity over the period 2001 to 2010, and some portion of the fall in it since, is simply the result of the boom and then restraint in public sector pay.

It is, in short, a measurement fault rather than an actual description of anything that is actually happening to labour productivity.

As at the top, we can’t tell you how important this is: that would require a great deal more research. We can however tell you that this absolutely is at least a piece of the puzzle. Why is UK labour productivity falling? Simply because we measure public sector labour productivity by the amount we pay them in wages and we’re deliberately squeezing those wages currently.

My thanks to the prolific commenter Luis Enriques for sparking this line of thought.

Apparently Owen Jones doesn’t know what socialism is

This is a slightly strange error for Owen Jones to have to cop to. The One who would lead us all to the sunny uplands of a socialist economy doesn’t seem to know what socialism is:

“The urge to punish all bankers has gone far enough,” declared a piece in the Financial Times just six months after the crisis began. But if there was ever such an “urge” on the part of government, it was never acted on. In 2012, 2,714 British bankers were paid more than €1m – 12 times as many as any other EU country. When the EU unveiled proposals in 2012 to limit bonuses to either one or two years’ salary with the say-so of shareholders, there was fury in the City. Luckily, their friends in high office were there to rescue their bonuses: at the British taxpayers’ expense, the Treasury took to the European Court to challenge the proposals. The entire British government demonstrated, not for the first time, that it was one giant lobbying operation for the City of London.

Bankers are employees of banks. The employees of an organisation having an ownership right in the profits of that organisation is a form of socialism. In a capitalist organisation the profits would flow, uninterrupted, to the shareholders, not the employees.

The current structure of banking pay in London, with those bonuses, is more like the profit share at John Lewis, of the divvie to the customers at the Co Op, than it is to anything reminiscent of hard line capitalism.

Socialism, despite what Jones may think, is not just whatever he approves of just as the definition of capitalism or free markets is not the same as whatever we approve of here.

By the way, shouting about how 12 times more bankers got big paychecks in the UK than the rest of the EU is simply evidence of the fact that the European finance (indeed, the largest portion of the international, global) industry is largely based in London and The City. It’s no more surprising than finding out that the majority of people paid to make Parma ham are in Northern Italy, the majority of those making Stilton are somewhere north of Watford Gap or that there’s a definite shortage of those paid to herd reindeer in lands where olive trees thrive.

Good grief, even Karl Marx managed to get to grips with the implications of Ricardo and comparative advantage. Might be worth Jones giving that a crack.

So, just what is this economics stuff good for?

Mark Wadsworth asks us an interesting question:

Reading this and this got me thinking.

If we think that we know all this stuff, the temptation - on the part of prodnoses – is to use it to interfere.

Alternatively we could think of economics as a discipline that tells us why we need to tell those prodnoses to bugger off.?  That is its best purpose.  Telling people why they should NOT do stuff.

Is economics best use as a negative or positive thing?

Discuss and inform me.

The answer comes from Ben Bernanke:

Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies.

Yes, sometimes we can propose sensible things as a result of having consulted the economic runes. But the real value is that 90% of the time we can tell damn fools that their damn fool plans are damned foolish.

Nationalisation, rent controls, price controls of all kinds, trade barriers, infant industry protection….there’s a long list of things that people propose again and again, even if vanquished they’ll pop up a generation later. The value of economics is that not only can we point out that they’re damned foolish but even why they’re damned foolish.