The social market economy

The major thesis of the social market fallacy is that production and distribution are somehow distinct from one another. The purest form of this gross error is the slicing-the-cake simile to which it is often reduced in its popular versions. The social product is the cake, it is all ready, baked and now it is up to some social consensus to decide how to slice it, how big a part to give to labour, to capital, to management etc. Indeed, it sounds plausible that the cake is baked first, distributed afterwards. J.S. Mill was the first to plant this fallacy in the popular mind. For in fact production and distribution happen simultaneously and are interdependent. Who gets what part of the cake is decided while it is being produced (and partly before it). The reason why each factor of production takes a part in baking it is that by contract or tacit custom it is promised to get a certain slice of it. It is this promise that is being broken when the government, inspired by the naïve idea of the “social market", overrides the distribution that had induced the cake to be baked by a redistribution once it has been baked.  But this cake cannot possibly be the same as the one that would have been  produced if the promise of free market contracts and thus  market-determined wages and profits, had been and could have been expected to be kept.

As a last-ditch defence of the “social market", its more sophisticated advocates might admit that the cake called into being by redistribution may well be a bit smaller or taste less well than the one that would have been produced in response to the natural distribution. But this probable shortfall, they argue, is the price we pay for making the distribution, more equal, hence morally superior. The moral superiority of a more equal distribution is an affirmation that is perfectly arbitrary, a bluff waiting to be called. It draws its force from the confidence with which it is announced. An attempt to derive it from something deeper and less subjective than itself is the recourse to arguments of social justice.

Extracts from a speech introducing Liberale Vernunft, Soziale Verwirrung, 27 January 2009 in Zurich.

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The idea underlying the social market economy is that the free market efficiently produces a quantity of goods and would distribute them in a certain pattern among the economic agents who produced it, but that this distribution can be made morally and practically better by making it more “social". This can be done by interventions that do not react back on the productive functions of the market, leaving it free and untroubled. In addition, the economy yields a bonus, so that total production is not only (morally) better distributed, but also greater than it would otherwise be; for in the social market economy, relations between employers and employees are more peaceful, less antagonistic and hence more productive than in a mere market economy.

Let us deal with the minor issue, the bonus first. History provides only meagre lessons about why social upheavals happen and how they are prevented, but such lessons as it does give tell us that revolutions happen after oppression is relaxed and social order is disrupted more by the appeasement of tensions than by the tensions themselves. Concessions to the weaker party teach it that it is entitled to concessions, and will demand more. Industrial relations tend to be worse and strikes more prevalent under heavily redistributive left-wing governments.  There is not the slightest evidence that the rise of the welfare state was conducive to industrial peace and productivity, let alone that it “saved Europe for capitalism" after World War II. [Cont'd - click 'read more']

ISOS: Economic and Social Policy: What Next?

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In case you missed it, we will be holding our first Independent Seminar on the Open Society (ISOS) of 2009 on the 24th February at the Emmanuel Centre in Westminster. We have a strong lineup of speakers that includes Douglas Carswell MP and Jeremy Browne MP. There are places still available. Please click here for more information on how you can join us.

Déjà vu

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The country snowbound, trains not working, strikes and industrial disruption, the Labour government massively in the red, economy sliding to disaster... It's just like the 1970s all over again!

Blog Review 859

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Revisting Ricardo on rent (and Tim Harford on Ricardo on rent).

No, we really don't want to insist that politicians do nothing else in their days than politics. In fact, given the mess they make of politics, can't we insist that they all have other full time jobs? Perhaps if they find enough energy to interfere in our live anyway we could insist they do mandatory overtime?

It doesn't matter whether compulsory volunteering is temporary or permanent: it's still slavery.

The structure of a tax system is indeed extremely important.

Words of wisdom as a quote of the day.

On the (in) efficiency of government.

And finally, no more insane than some investment selection procedures.

The optimum size of government

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Richard W. Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, has an interesting article in the Washington Times on the optimum size of government. 

Rahn explains that economists from the Institute for Market Economics in Bulgaria have determined new estimates of the optimum size of government. They conclude that its optimal size is less than 25 percent of GDP.

Rahn claims that: “Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run". As the excellent Peter Schiff has also argued, reducing its size is the one thing that governments can do to lessen the impact of the financial crisis.

There are of course problems with just looking at GDP as an indicator of the impact of government upon the economy. Through various regulations, the government has so many other ways to lesson the economic competitiveness of the people. Just take a look India before and after Manmohan Singh rightly threw much of License Raj in the intellectual dustbin of history. It is strange that while developing countries are continuing to unburden themselves of regulation with such profound effects on the lives of people, the UK and other more developed countries are heading in quite the opposite direction.

Frankly, 25 percent of GDP does not go far enough for me. This would take us back to pre-WWII levels; instead, we should be aiming to return to pre-WWI levels of less than 15 percent. However, given that UK public spending is over 40 percent of GDP, 25 percent would be a very welcome step.

There are more than pragmatic reasons to believe in small governments, but economic analysis such as this should be enough to convince individuals on the fence, though not many politicians I suspect.

The beginning of the end of the American Dream

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Faced with a deteriorating global economy, the initial rhetoric of global leaders was to oppose a return to protectionism to keep the wheels of trade turning and credit flowing. However, the current pro-protection American administration may well jeopardise this recovery effort and in effect hasten the decline of American growth, draw out the recession and delay its recovery.

Obama has promised change. His website proposes to “enhance competitiveness" and “create jobs" by repealing tax breaks for corporations retaining earnings overseas, and using those savings to lower corporate taxes for companies with operations in the U.S. However, according to the Wall Street Journal, America has the world’s second highest corporate income tax rate of 35% and nearly all of corporate America has extensive operations overseas. Raising their taxes would cause corporate America to lose greater market share to foreign competitors. 

This ties in with the Patriot Employer Act of 2007 introduced by Obama where he advocates American jobs for American workers. But he failed to realise that companies forced to increase wages and benefits will have to pass back additional costs to the already burdened consumer and make significant cutbacks on hiring. What he should have done instead was to create less incentive for jobs to go overseas by cutting back on the high corporate tax rate for all companies. 

Obama’s website stresses that he will “fight for a trade policy that opens up foreign markets to support good American jobs" and “amend the NAFTA" to alleviate the unfair burden placed on Americans. But as the Heritage Foundation points out, NAFTA countries conduct $2.2 billion trilateral trade daily that supports U.S. jobs and bolsters productivity and investment. Coupled with the deteriorating environment and dwindling domestic consumption, a sudden enforcing of trade barriers may cause other countries to retaliate leading to drying up of the export economy. Already burdened firms will go bust and thousands more jobs will be lost.

American policy makers must tread carefully.The CATO Institute rightly suggests that they must “focus on reforms that remove impediments to work, savings, investment and production". Otherwise, non-productive businesses and the increasing flight of capital will contribute to poverty and increase burdens on the state machinery, hastening America’s decline as a place of opportunity, prosperity and growth.

Unsubstantiated promises

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If history offers us any guide, and I strongly believe it does, then all the promises of the Kyoto crowd simply will not materialize. We don’t need to dismantle the one-sided quantitative science of global warming – disproportionately blown up by computer models – we just need to look at the history of previous energy transmission. That’s what Vaclav Smil did, author of Energy at the Crossroads. Natural gas was supposed to have us driving fuel cell cars by now.

Unfortunately this forecast like so many other projections from bureaucrats were terribly flawed. The transformation of the energy supply of modern industrial societies takes much longer than the green guru wants to make us believe. Al Gore should take notice:

• It took oil about 50 years since the beginning of its commercial production to capture 10 percent of the global primary energy market, and then almost exactly 30 years to go to reach 25 percent.
• Analogical spans for natural gas are almost identical: approximately 50 years and 40 years.
• Regarding electricity, hydrogeneration began in 1882, the same year as Edison's coal-fired generation, and just before World War I, water power produced about 50 percent of the world's electricity.
• Nuclear fission reached 10 percent of global electricity generation 27 years after the commissioning of the first nuclear power plant in 1956, and its share is now roughly the same as that of hydropower.
• But coal has reigned supreme since the late 1890s; in 2008, it supplied twice as much energy as it did in 1973.

On this day...

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On this day in 1905, Ayn Rand was born. She would certainly have had plenty to say about the general response to this financial crisis. If this is what you are after, you can do no better than taking a peek at what is coming out from the Ayn Rand Centre.

Blog Review 858

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Rather shocking, Bill Easterly actually says that Jeff Sachs is correct. About one thing at least.

Working for the civil service makes you ill apparently. Clearly we'd better fire a few hundred thousand of them. For their own good of course, you understand.

Or if said bureaucrats are going to act like this can we just shoot them instead?

Actually, perhaps we need to do more work on the appropriate torments.

Next week The Guardian will be running a series on corporate taxation. Here's why just about everything they say will be wrong.

A rose by any other name might smell as sweet but relabel a stimulus as "deficit spending" and it might not garner quite so much support.

And finally, why wait until June 15th?

Market failure, government failure

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We're all aware of the concept of market failure of course: and those who read around here are similarly going to be au fait with the concept of government failure. We tend to try and point out that government failure is going to be worse than the market kind, partly because of the incentives faced by the actors and partly because it's so much more difficult to reverse the government type of failure.

However, if you really want to have gobsmackingly awful failure you have to go further than mere government, bureaucracies, and get the politicians involved. Something which has just happened in fact, as a leftish but good economist notes, a Canadian economist, rightish economist, White House type, the economically literate and even the closest the US has to an economically literate social democrat notes. Congress has just made an entirely idiotic decision.

They've decided to bring back trade protectionism as a way of dealing with the economic downturn. The House version of the stimulus bill states that only US made iron and steel can be used in any of the projects funded. The Senate version says that anything used must be US made.

Einstein once said that lunacy was performing the same actions over again and expecting a different outcome. We tried this, protectionism, in the last big downturn and Smoot Hawley really didn't work all that well, did it? In fact, most people say that it made things worse, not better. I guess we simply have to conclude that the majority of the duly elected politicians of the USA are lunatics.

That economists are united in their opposition won't, unfortunately, make all that much difference. As last year's Nobelist*, Paul Krugman, has pointed out, it's when economists are most united in their policy proposals that they have the least influence.

Sigh.

* Yes, yes, Swedish Bank in honour of, still don't care.