Here is such an argument in fact:
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith
Here is such an argument in fact:
This week Royal Mail, the UK's state-owned letters and parcels delivery business, is expected to announce profits of £300m-£400m. A few years back, the Royal Mail looked like a loss-making sunset business. Emails were replacing letters, and delivering bits of paper to 28m homes in every corner of the UK seemed like a good way to go broke.
Now we are sending even more emails – the Royal Mail's staples of greetings cards are being replaced by e-cards too. Bills and statements are going increasingly online, and more of us pay them online rather than putting a cheque in the mail.
But what is saving the Royal Mail is its parcels business. With email we are sending fewer letters, but with the web we are shopping more online. Losses in the letters business are being overtaken by profits in parcels. The UK online retail market was £78bn, up 12.8% on the year before. Department stores' online sales grew by an astonishing 37%. Around one-fifth of our retail purchases are now made online. A business that can deliver to 28m homes now suddenly has a value again.
What Royal Mail needs, though, is new capital to invest in this parcel delivery business. They know they won't get it from the government, which is deep in debt. They need new capital from the market and new strategic partners from business to help them invest it wisely and develop the parcels business. That means privatisation. On this weeks figure, it could be a £3bn business, which means a share offering to the public. On past form, the government will sell 51% and pocket a useful sum. But once the new capital is invested and is making the parcels business even more profitable, it could pick up even more when it sells the other 49%.
Our twelfth thing about capitalism that we're not told is a masterpiece of straw manning. We're told that the free marketeers insist that government can never pick winners and are then presented with a couple of examples of supposed winners that have been picked by government. QED, the free marketeers are wrong.
But that isn't actually our argument: we don't insist that government, or planning, can never produce a winner. Only that it's less likely to do so than a free market approach to such decisions. At which point the proof falls apart.
Chang does tell us of the foolishness that accompanied the 60s and 70s approach to the planning of economies. The famous line from Eugene Black, the World Bank President, that developing countries were fixated on the three totems - the highway, the integrated steel mill and the monument to the head of state. The monuments got overturned along with the head of state, the roads were unused and the steel mills, as I've already mentioned, were built with gay abandon and then left to rot.
Chang's response to this is that South Korea managed it though! POSCO was set up as a state planned and run, financed, company and it has ended up as a thriving steel company. Even though S. Korea didn't have either the iron ore or the coking coal that would normally be domestically produced to feed such a series of plants. Thus planning can indeed work.
To which there are three responses: the first being that an example of not-A is not a refutation of generally-A. For example, we cannot refute the statement that ugly blokes generally don't end up with good looking women by observing the beauty of Simon Cowell's latest squeeze. We could refute ugly men never by such an observation, but not generally. So it is with our observation that governments are generally bad at picking winners, generally make bad investment decisions, is not refuted by the observation that one government, once, managed to invest in a decent enough steel company.
Which is where Chang's straw man argument comes in: he has claimed that the free market argument is that governments can never, while the actual argument is simply less often than alternative methods.
The second is that the power to direct the economy as S. Korea did in the time Chang is talking about isn't something that's available in a free society. You'll note that I've mentioned this before but it's worth using some of the examples that Chang himself gives us:
“However, even when all those carrots were not enough to convince the businessmen concerned, sticks – big sticks – were pulled out, such as threats to cut off loans from the then wholly state – owned banks or even a “quiet chat” with the secret police......(...)....In the 1960s, the LG Group, the electronics giant, was banned by the government from entering its desired textile industry and was forced to enter the electric cable industry.....(...)...In the 1970s, the Korean government put enormous pressure on Mr. Chung Ju-Yung, the legendary founder of the Hyundai Group, famous for his risk appetite, to start a shipbuilding company. Even Chung is said to have initially baulked at the idea but relented when General Park Chung-Hee, the country's then dictator and the architect of Korea's economic miracle, personally threatened the business group with bankruptcy.”
One can hear, all the way from Cambridge, the lascivious licking of the lips at this display of firm authoritarian government in true Confucian style. But I do rather think we'd all agree, being the good little liberals that we are, that whatever the economic results of such plans we'd rather not have a General as dictator with the power to insist upon such things. As indeed we don't and as I've been pointing out, as a result we would get planning driven by democratic concerns, something very different.
The third argument is that Chang is entirely ignoring opportunity costs here. Which is astounding in self-professed economist. For opportunity cost is the first and most important thing that one has to grasp about the subject (the only other is that there's no free lunch). The actual argument is not whether government can decree that a steel mill, or a shipyard, gets built. Nor even whether such projects will make a return on their investment, survive into the future. It is rather whether that money and investment would have produced better returns if employed in another manner? What could S. Korea have built instead of a steel mill or shipyard? Perhaps the profits would have been larger in building a world beating textiles industry?
By resolutely ignoring this point Chang is here showing that whatever it is that he's talking about it's not really economics. For as I say, opportunity cost is the heart of the subject.
The final argument against government picking investments is best described as momentum. The most important part of an economic system is not actually the decision about what to do. It's about what to stop doing. More specifically, how do we decide that a project, an investment idea, as gone wrong and needs to be killed off? It is in this that governments are appallingly bad, horribly, hugely, worse than the private or free market sector.
To take once recent example: the London Olympics. Before the selection of which city would hold it we were told that it would cost some £2.5 billion or so to stage. Once the decision had been made the budget started to balloon. One of the things that drove it through the £10 billion barrier was the realisation that the government plans hadn't included the VAT that the government would be charging itself. A reasonable estimate of the final cost is £20 billion and change. A private sector adventure that was going ten times over budget would have led to a phone call to Paris asking if, despite having lost the selection competition, they'd still like to have the Games. Or even to stick them in Athens, which already had all the stadia from a previous one.
The impetus in politics, the incentive, is never to admit to having made a mistake. Thus government designed projects, even if they turn out to be disasters, tend not to get cancelled. Doubling down, good money after bad, this is how it works. Whereas the free market sector does indeed look at error, agree that it's an error, and closes it down.
Which is as I say the clinching argument against that state planning of investment and industry. It's not that governments can never pick a winner: even the blind monkey finds a banana occasionally. It's not just that governments are less likely to pick a winner either. Nor that private industry hasn't decided upon some stinkers along the way. Even if government and the market were equally capable of picking winners, government's a lot worse at closing down, bankrupting, the losers. And so are resources wasted by government in a manner that the private sector does not.
Summary: UK trimmed mean inflation is 2% - exactly
What the chart shows: The chart shows UK headline consumer price inflation, the old RPI-X measure and trimmed mean inflation, all as 12-month % changes
Why is the chart important: The Bank of England has forecast that inflation, while coming down, will remain above target for the foreseeable future. But the headline or overall rate of inflation is subject to a number of volatile influences. In some countries, eg, the United States, underlying inflation is measured by stripping out food and energy changes. By contrast, a so-called ‘trimmed mean’ measure strips out the fastest and slowest changing components every month, regardless of which they are, in order to achieve a better picture of underlying trends. April data show that the trimmed mean rate is bang on target at 2%, implying that the headline rate could come down more rapidly than expected – as in fact it already did in April
Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulatory from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.
Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.
In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.
Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.
Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.
The Adam Smith Institute is looking for a bright, enthusiastic student on their gap year between school and university to come and work for us. The role would be a mixture of administrative work around the office and helping the ASI team with their research and policy work on an ad hoc basis.
It’s a great opportunity if you want to gain some experience in an exciting think tank. We are nice, fun people to work with, so candidates should enjoy working with others as part of a team. You should be interested in our work and willing to roll up your sleeves to do some of the less glamorous work around the office too.
This position pays £5/hour, and depending on the candidate is either a six-month or year-long position.
If you’d like to apply, send the following to email@example.com:
Applications close on June 10th.
The eleventh thing we've not been told about capitalism is so bizarre as to make me wonder whether Chang was proofread before publication. The layout of the free market position is that Africa is irredeemably doomed to low or no economic growth because of structural factors: ethnic diversity, disease, geography and so on. And the reason that we free marketeers say this is because we're embarrassed about the fact that Africa instituted free market reforms in the 80s and hasn't grown since then. Thus we've invented reasons as to why it hasn't rather than rethinking our committment to free market development.
Chang also tells us that post colonial Africa grew rather well (hmm, well, even he admits not well but better than nothing) in the 60s and 70s. So therefore we free marketeers are doubly wrong. We not only killed off what was working we also prescribed what does not and are now lying about it.
There is one teeny little problem with this. Chang has shifted his decades a bit. There was indeed a change in the 80s but this wasn't the widespread adoption of free market policies. That was the debt fuelled autarkic development that was abandoned. Actual free market policies didn't take root until the 1990s in sub-Saharan Africa (the place Chang and we are talking about) and since the mid-1990s there has indeed been a take off in growth in those countries.
In fact, if we look at the work of people like Xavier Sala-i-Martin (do look him up, his web page is a hoot but he's also one of the most cited economists around) we find that Africa is growing so well that they've actually got rising Sen Welfare. That is, not only are incomes going up but inequality is falling at the same time.
What drove the much slower growth of the 60s and 70s was exactly the set of policies that Chang usually proposes. Infant industry protection, government direction of the economy, planning. And most crucially, borrowing to fund that economic development. And, as is usually the problem when people play socialism at some point you run out of other peoples' money. The actual investments that were made (just about every country decided they needed an integrated steel mill for example. Almost none of which ever worked at anything like capacity as the continent could really support perhaps two, not the dozens planned) simply never did pay back the borrowings made to construct them. So the policy of state directed development not only didn't work it came crashing down in a ghastly and impoverishing heap.
What happened to African development is an argument against Chang's policies, not one in favour of them. And I've already mentioned that I'm not sure that you can do Chang's form of directed development in a democracy. Even if (which I'll not admit anyway, but just for the sake of argument) you can do it in an authoritarian or repressive society, the political dynamic is such that you can't wher the people get to vote.
Take, as an example, Ghana. Nkrumah very definitely believed in the socialist and state directed development model. Vast sums were borrowed in order to construct the industry it was thought the place needed (and there were many a western socialist writing these plans in Accra at the time). But while Nkrumah did become increasingly repressive himself he did still face democratic pressures. So the economic policies favoured the urban population, those who tended to vote (or even riot where they could be seen) rather than the larger rural one. The exchange rate was fixed high for example: to the great detriment of the cocoa farmers trying to export, to the great benefit of the urbanites who wished to import goods. There was indeed an attempt to have that planned economy, to build and protect those infant industries. It's just that they were all bad plans: and as I say, I'm convinced that at least part of the reason the bad ones were followed was precisely because it was a democracy.
No, this does not mean that I think that we should have authoritarian government in order to attain economic development through planning. Quite the opposite: that given that we've got democracy we cannot have that planning because the democratic pressures will lead to bad planning.
So, Ghana, and everyone else who tried to follow the same development path (pretty much everyone) ended up going bust. Which is what gives us the slump of the 80s. Finally the recommendations of the Washington Consensus manage to trickle through the intellectual barriers (and let us recall that the Consensus is really just a list of stupid thing you shouldn't do) and to be applied in the 90s. Since then we've had good and decent growth in sub-Saharan Africa. Hurrah etc: but that is a very different story indeed than the one Chang is telling. Which is what rather makes me wonder whether the book was proofed before publication.
There is one little aside as well. Chang does correctly point out that many to most African countries have bad external transport links. For reasons both historic and geographic. What puzzles me is this. Given that Chang says that a country should not leap into the global marketplace, but should develop at least to begin with behind its own borders, well, given that Africa's had no choice in this, why isn't it developed? If few imports lead to economic development as this encourages domestic production then why haven't African countries developed as they've had few imports?
That is just an aside though. The real problem with our eleventh thing is that Chang just isn't describing things as they really did happen. Sub-Saharan Africa did do the planned and tariff bound infant industry protection thing in the 60s and 70s. And growth was there but feeble: and then the entire system went bust. Once the mess was cleared up and free market policies adopted in the 90s we've seen good and decent growth across the region. And no, it's not the free marketeers who have been ascribing Africa's problems to anything other than economic policy. Quite the contrary: we've been using the benighted continent as absolute proof of our contentions. Managed development was tried and failed: free market development is working.
Do you realise how much we pay for the thrill of watching dancing meatballs?
A couple of years back, Ewan Spence had the same question, and put in a Freedom of Information request to the BBC, Eurovision's sponsoring partner in the UK. They refused to disclose all their production costs for broadcasting the competition on BB1, BB3 and Radio 2. But they revealed that the payment the BBC makes to the European Broadcasting Union was £279,805 in 2009, and £283,190 in 2010.
Since then, journalists have been watching the Eurovision bill grow. Last year, the BBC spent £310,000 – the eqivalent of 2,130 licence fees – on broadcasting Britain's disastrous entry by 76-year-old singer Engelbert Humperdinck (which only four countries gave any points at all—not that we have had many points since the Eastern Europeans turned up and formed a pact to vote for each up).
BBC officials say that their EBU membership also buys it other things, like membership of a news exchange, rights to concert broadcasts and activities around the Olympics. But broadcasting the Song Contest also imposes other costs on the BBC, including travel, hotels and incidentals for its broadcast staff.
Last year, the contest cost €48m to stage in Baku, Azerbaijan. This year's, in Malmö, Sweden, the aim was to do it for much less. Anyone with a television (i.e. virtually everyone) is forced to pay for this embarrassing, political show, whether they watch it (and the BBC) or not. Can that be right?
The tenth thing we have to understand is that actually Americans aren't as rich as all that. This is very important because if that sort of free market capitalist society did lead to the richest society on Earth then of course all the other strictures about how awful free market capitalism is would be rather wasted. We'd start to believe our own lyin' eyes rather than the Reader in Economics at Camdridge and that would just never do.
The rest of the chapter is just hemming and hawing about how we should change the figures to show that actually Americans are not the richest society on the planet. Well, OK, even I'm not going to claim that there aren't certain microstates that beat the US: Luxembourg for example. But comparing a few hundred thousand people to 300 million seems rather like cheating. It would be like comparing Manhattan to Texas for example, just not quite fair. Or, again about the same distortion of scale, comparing the residents of Eaton Square to the entirety of Luxembourg.
Chang has two basic methods in use here to show that the American Dream is just that, a wraith. After we go through all the various ways that we can measure income he agrees that Purchasing Power Parity is the right one. Which is good, for it is. We don't measure just incomes, but incomes as compared to prices in the places the people are living. This gives us a much better idea of living standards. And by PPP measurements, absent those microstates, the US is indeed the winner. To which Chang says but hang about a bit.
Firstly, we know that the US is a more unequal society than many others. Thus the average doesn't give us a true view of how people really live. In an unequal society there will be more people below that (mean) average and thus the real average (ie median) living standard is lower than in a more equal society. Which could even be true but it's not all that large an influence. After we account for all of the taxes and benefits then everyone from Sweden to the US is in a gini (the way we measure inequalty) range of 0.25 to 0.38 or so. And the scale does run from 0.01 to 1.00.
More importantly perhaps we do have some evidence of what actual living standards are at the bottom of the pile in a number of different societies. This chart:
These are the incomes at PPP (so adjusting for price differences) after taxes and benefits. And the comparison is to US median income: so, the bottom 10% in Sweden get 38% of US median income. The bottom 10% in Finland get 38% of US median income. And the bottom 10% in the US get 39% of median income.
Hmm, I think our contention that the US higher average income isn't really valid because the poor get less than the average....thus the greater inequality means that the lives of the poor in the US are worse off than the poor in other countries....doesn't really stand, does it?
The US is definitely a more unequal country. But the poor seem to be about as well (or badly) off as the poor elsewhere.
The other trump that Chang plays is to point out that Americans have longer working hours than people in most other countries. Given that slaving away over a hot desk isn't what life is all about then perhaps we shouldn't all attempt to emulate this US lifestyle then? And while it's true that money isn't everything and that very few of us go into that long dark night bemoaning the paucity of hours we spent working for The Man, Chang has committed a terrible error here. He has assumed that the only form of work we do is paid working hours.
The actual division made is between personal time (we cannot get someone else to sleep for us, take our shower for us), paid working time, household production time and the balance left over is leisure time. The important point to note here is that there is that unpaid working time: that time spent in household production. We might think of digging the allotment to feed the family, childcare time, cooking time, washing and cleaning, repairing the car. It is this time plus paid working time for The Man which produces total working time. And when we look at this total working hours it isn't obviously true that Americans do work more hours than, say, Europeans. It is also possible to substitute household production for paid working time and vice versa. Once can slave over the hot desk to buy a takeaway, or slave over a hot stove to make up for the lack of income from the time not spent at the desk.
In fact, when people actually study exaclty this question (ie, here) they find that the opposite is true, Americans don't work longer hours. For example, the average German woman is working an hour and a half a week more than her US equivalent. And for the men the working hours are almost exactly the same. The German woman might be making sauerkraut at home (I know, terribly culturalist of me) while her American sister goes out to work, earns the money and they buys it: in the process the American sister gaining more leisure time than the German.
It is indeed true, as Chang states, that Americans do more paid working hours per year than Europeans. It is also true that the US is a more unequal society than most of Europe (Italy is actually more so than the US). However, the American poor have incomes around and about the same as the European poor. Americans work fewer unpaid, household production, hours leading to equal or greater leisure time. And as Chang has already admitted, the Americans do indeed, on average have both higher incomes and greater command over consumption opportunities as a result of those higher incomes.
The poor get about the same: the regular guy is both richer and has equal or greater leisure time? Perhaps there is something to say for this free market capitalism stuff they have in the US then?
Footnote. For those who think we shouldn't be talking about household production, please read the Stiglitz Report. The entire issue is well explained there.
The welfare debate has roused emotions on both the left and right, and has led to some outlandish claims. Myth needs to be separated from reality. Here is my take on what we should and shouldn’t believe.
Myth: Welfare spending that goes on pensions is unreformable.
Reality: The state pension eligibility age has risen too slowly.
Opponents of cuts to welfare often cite the proportion of welfare that goes on pensions (48% or a total of £80bn) as proof that the colossal budget is justified. This is lazy reasoning. The problem is not that pensioners necessarily receive too much money per year, it is that they receive it too soon. Life expectancy is rising fast and people are able to contribute to the economy for longer than they used to. If the government were to raise the state pension age over the next two decades to 70 taxpayers would save hundreds of billions and all would benefit from the contribution of older workers. If this change were made by 2030 pensions would still provide for 15 years of retirement, based on experts' guesses of life expectancy then. Historically this change is long overdue – since 1948 life expectancy has risen by 16% but the accompanying rise in the State Pension age has been a meagre 1% for men and 3% for women.