The Pin Factory Blog

Two years ago, the ASI’s No Need to Flinch set out a raft of proposals to shake up the NHS’ demand side. We called on the NHS to treat people as individuals with less heavily aggregated risk pools, we called for funding options to be widened, and we made the case for allowing co-payment on procedures the National Institute for Clinical Excellence would not otherwise fund.

Under this system most would be obliged to purchase insurance—like the car insurance regime in the UK—while end of life care and accident and emergency would be paid for by the state, as determined by a political consensus. The issue then becomes reform on the supply side—hospitals.

Governments have grappled with this for generations, giving rise to perennial complaints about “NHS reorganisation”. In fact, hospital doctors always see the civil servants off: they’re the smartest guys in the room, furnished with the best data and ruthless in exploiting the fear-factor. But the public would be best served if the components of secondary care were broken up to embrace a variety of approaches, so that best-practice emerged continuously from what Tim Worstall’s recent blog post called “market processes …an endless repetition of experimentation”.

This would include all secondary care: ambulances, labs, specialist clinics. Most of all hospitals, although it is often argued that full service calls for concentrating the required skills in big operations. There is something in this, but not so much as to render integrated hospitals beyond competition. In the first place the argument misses the mark. Even now, we accept some specialities in regional if not national settings. Meanwhile national guidelines impair the experimentation which makes for progress. More to the point, even the largest hospital is susceptible to competition. This is because even small reductions in demand threaten the specialist functions which justify its existence.

Disposals also promise relief to the Chancellor. ASI’s 2010 study of the UK’s intergenerational obligations, On Borrowed Time, showed Britain’s secondary healthcare to be worth around £200bn. Considering corporation tax reductions and market increases since then, it could now be worth £300bn.

Let’s recast integrated outfits to maximise choice for scheduled activities where patients have discretion. Let’s also contemplate several business models: overseas groups, newly-listed companies, professional co-operatives and charities or universities. And finally, let’s set aside a fraction of receipts for practitioners, following Bevan with the consultants when he “stuffed their mouths with gold” to win them over to the NHS. So the Exchequer might only get half the headline sum. That would be £150bn, not quite fifteen percent of the national debt, but well worth having.

Best of all, if hospitals failed to attract referrals from GPs, already at arms-length, even the largest would shortly find their specialist functions at risk: market discipline would enforce reform, something beyond seventy years of NHS control. So let's free up the rigid UK healthcare system and inject some innovation, competition and diversity in.

The ONS has a nice set of statistics about how the world of work has changed over the past 170 years. Changes which underlie my insistence that the whole point of this advance and invention stuff is to destroy as many jobs as possible.

In 1841, over one in five workers (22%) were in the Agriculture and fishing industry.

This has now fallen to under 1%. But we produce an awful lot more food than we did back then.

In 1841, a third of the working population (36%) worked in manufacturing and in 1901 this was at a similar rate of 38%.

This has now fallen to 9%. And we do indeed still manufacture an awful lot more by value than we did back then.

The answer to how we did both is that we invented machines that did a lot of the work of those people. Yes, this did indeed mean that these people thus became unemployed: which was the very point of making the invention. The point of the mechanical hay baler is to make manual hay balers unemployed. The point of the robot riveter is to make human riveters unemployed.

And thus those made unemployued by the technological change can go off and work in services. Which is how we all become richer: we've now got the machines doing the food and the manufacturing, the humans doing the services and we get all three: food, manufactured goods and services.

Think about it for a moment, if we still had 22% in farming and 36% in manufacturing then that's 58% of the people. Currently 81% of the population work in services (there's a bit in construction, water etc as well). If we've 58% who cannot be in services because they're in food or manufacturing then we'd, just as in 1841, only be able to have 33% working in services. So, which half to two thirds of the services we currently do get would you like to give up simply because we don't have the people available to do them? OK, we all agree the diversity advisers can go but beyond that?

Quite. By mechanising agriculture and manufacturing we've been able to get the production of both of those that we desire and also have a vast expansion of services that we also get to enjoy. We have more thus we're richer. And that of course is the point of doing such mechanisation: to make us all richer and long may it continue.

Relieving the State of a hospital sector it has never been able to control would raise standards and reduce Britain’s national debt by close to fifteen percent.

In the private sector, if outfits fail they are reorganised, we call this bankruptcy. In the public sector, if outfits fail they are supported with our taxes—heaven knows what to call this—solidarity? compassion? How about hokum?

Yes, they keep us alive; yes, they’re free at the point of use; but let’s get real. NHS hospitals are unwholesome—hospital infections are now an NHS commonplace. They're unfriendly—try getting a diagnosis from a consultant whizzing through ward rounds. And they're inharmonious—listen to front-liners talking about clinicians, consultants about GPs, or any of them about porters. Such ill-feeling leads at best to bloody-mindedness, at worst to irregularities like the mid-Staffordshire deaths or newly-disclosed lapses in late-week aftercare.

And the keeping alive thing isn’t going so well: two years ago, the ASI’s No Need to Flinch presented data showing that the NHS is undistinguished by comparison to its peers. It is certainly free at the point of use, but that’s one of the problems: without pricing we have centralised rationing, priorities set by bureaucrats using clinical pretexts for essentially arbitrary decisions.

The NHS has become an ethical dump. Ordinary people are assumed to be unable to make their own decisions. They face policies which second-guess their choices, ration healthcare surreptitiously, allocate provision according to the state of public finances, and deprive patients of treatments in a public setting if they want to fund them directly.

As to economics, for as long as healthcare is unpriced, it is subject to infinite wants, especially as populations age and new technologies emerge for diagnosis, treatment and bodily modification. Prices would help patients make informed choices, as in the private sector.

Looking at practicalities, as ever in public supply the producers have captured the system, running it for their own purposes. Doctors, nurses, radiographers and pharmacists collaborate reluctantly in an ill-tempered armistice covered by paperwork in triplicate. Compare private healthcare, where professionals co-operate promptly. This is because customers with choices ensure that private healthcare competes to meet their needs. By contrast the NHS monopoly prevents customers going elsewhere; instead the Department of Health creates tick-lists, demoralising practitioners who game them. The NHS needs the discipline and coordinating force of the price system.

Health minister Norman Lamb MP was our guest at an afternoon seminar in the House of Lords which we held in partnership with healthcare specialists LCS International Consultants. Lamb outlined the new measures on social care currently going through Parliament.

The measure has several objectives:

1. to provide services for the well-being of individuals, not the convenience of the providers;
2. a right to be assessed for state care services without being fobbed off;
3. encouraging innovation and promoting integrated services;
4. a focus on prevention;
5. diversity in service provision;
6. a cap on care costs (the so-called Dilnot proposals);
7. a commitment that nobody should be forced to sell their home during their lifetime to pay for care;
8. no postcode lottery and continuity of care if you move;
9. nobody loses care if a provider fails; 
10. better care for young adults, who often fall between child and adult services.

Who could disagree with the aims of all this? Trouble is, to the gnarled political insider, it all sounds like the same wish-list folk have been talking about forever—well, for at least the last thirty years in my experience. We published back then on individual-state partnerships for long-term care finance, basing our ideas on US models that were already working, a good quarter century before Andrew Dilnot discovered them. We are supposed to have had "joined up government" fifteen years ago under Blair, but still people languish in NHS hospital beds because local authorities don't want them on their budget. And as for putting people before providers—give me a break.

A state health and social care system is never going to deliver person-focused care. It's not the way governments work. State institutions are too big to manage, and individual needs are too diverse for a large bureaucracy to accommodate. When this law is passed, lots of new managers will be recruited and maybe a few people's care will be marginally improved: but there will be no radical and systematic shift to care being built around individuals. Providers will follow the new rules, but still will not be enthusiastic champions for the specific needs of each person they try to help. They are simply too big and too inflexible.

Private charities are much better at dealing with the manifold needs of diverse individuals. So are businesses, which only make money if they keep customers happy. Until we break the state's effective monopoly on funding and provision of health and social care, and empower individuals to buy in the services that they want, I fear we will be having the same conversations another twenty-five or thirty years from now.

Chang's twenty third thing is that we really don't need to have lots of bright economists around in order to be able to run a decent economy. This is most certainly true provided that the economy is still run along the right basic lines: which might be the bit that we and Chang disagree about.

It's certainly true that all the time markets, nothing but markets, doesn't quite work. There are a number of imperfections that mean that we cannot just leave everything to voluntary action. We might point to natural monopolies as an example: someone, somewhere, has to stop them rooking everyone. We do like the rule of law which means we've got to have government (sorry anarchists) and the taxes to pay for it (sorry everyone). And there are more subtle problems out there: take externalities for example. By definition these are things that are not included in market prices and therefore are not considered in market transactions. We really cannot therefore conclude that markets will deal with externalities when hte whole point is that markets ignore externalities.

So we're all fine with the idea that we cannot have an entirely and wholly pure market system. Nor would we want one that is entirely capitalist: I'm extremely happy about the idea that the Army is a State run organisation. We tried private capitalism in this field and the Wars of the Roses just don't have that good a reputation. Not from the peon and churl end of the telescope at least and I know darn well that's where I would have been.

However, that doesn't mean that because we cannot be purist about these things that therefore any old intervention into the economy is just fine. Which is what Chang is partly doing. Having shown that some intervention is demonstrably desirable he then goes on to conclude that the sort of intervention he desires has been demonstrated: which the past 22 little notes might have dissuaded you of.

But I will agree that he's right: we don't need vaslty intelligent and highly educated economists running the place for us all to get gloriously rich. As Adam Smith himself said:

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.

You'll note there's nothing there about managing the exchange rate, regulating the bendiness of bananas nor even one word about the employment of economists.

So of what use actually is economics. If we don't need economists to run the country then what point in the entire intellectual exercise? As Ben Bernanke has observed:

Having taken a stab at sociology and political science, let me wrap up economics while I'm at it. 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.

If I am to be fair about economics there's very little in the corpus of knowledge that makes up the field that is really about making the world a better place. Plenty of attempts at such of course, and many more from people who wouldn't know an econ if it came and micced them. What there is a great deal of is warnings about don't do this because you'll make the world worse. As PJ O'Rourke put it about the Soviet Union, shooting all the smart people and then killing off anyone trying to get rich does not great societal wealth make. We've got lots and lots of knowledge about things like that that we shouldn't be doing. There are some areas where things have to be done: those natural monopolies, externalities and so on. But they're few and far between when you think of the vast possibilities of human behaviour.

The real point of economics is to struggle manfully with those very few things which must be done, shoot down in flames at least 90% of the things that are suggested we should do and then leave the rest of it, the vast majority of life, to people to do as they wish as long as they're not harming others or their right to do the same. You know, the liberal idea of free people interacting voluntarily in a free market. Capitalism's just an offshoot of the rights to private property: and one of the lessons of the experiment that was the 20th century is that we do have the data about what happens when you try to do that.

So, capitalism and free markets for all it is then. Which, given that the last 30 years, as the two have spread through globalisation, has seen the largest reduction in absolute poverty in the history of our entire species, is very probably a damn good idea. After all, even if we don't need many economists or much economics to do it, the poor getting rich is what we all want, isn't it?

Our twenty second thing is the rather alarming suggestion that finance must be made deliberately less efficient. This is a very odd indeed thing for an economist to say for our first assumption, right at the very start of the subject, is that the needs and desires of human beings are larger than the ability to assuage them. Thus increased efficiency is always desirable as it means we can assuage more desires with our limited stock of resources. Indeed, we usually go on to say that something that is in infinite, as compared to demand or desire for it, supply is not actually an economic good. So deliberately calling for less efficiency, no, not as a side effect of something else but as an aim in itself, is almost a form of anti-economics.

The claim is that finance now moves more swiftly than the "real" economy. Thus we must slow it down otherwise finance will be, erm, moving too quickly for said real economy. There's no evidence proffered for this assertion: it is simply asserted. People can buy and sell shares quickly which means that the money to build factories, something that takes some time, isn't around seems to be one lunge at a back up. Which is a very strange argument indeed as we don't seem to have any shortage of factories. Nor of investment to build them if someone comes up with a good idea. Indeed, the world seems to be awash with VC funds, with FDI, with bond funds looking for a good home for their cash. Far from finance not funding that "real" economy it's amazingly easy to get cash to follow an idea through, easier than it has ever been I would wager. And there are plenty of people, Nobel Laureates among them, who insist that the recent troubles were all about a global savings glut.

There is one shortage, this is true. Banks (especially UK ones) being unwilling to lend into companies. But this complaint is really just a disguised misunderstanding. Banks simply aren't the appropriate place to get risk capital from: public markets or private investors are. And as I say, there's no shortage of that sort of funding at all. SMEs aren't all that fond of it, true, because gaining such finance means giving up equity. Which is as it should be of course: you want risk capital you've got to share the upside as well as the downside.

Other than that there simply isn't a shortage of capital for companies: so the basic complaint seems invalid. Maybe finance is running faster than the real economy. Finance has certainly screwed up memorably in recent years as well. But if that real economy does still get funded, as well as all the froth that's being complained about, then we can't use the real economy not being funded as an excuse to do anything. And it should be noted too that a lot of the froth is actually the sharing of risk from those real world investments. The wheat futures market spreads the risks the farmer and the baker are taking: meaning that more funding can be offered as risk has indeed been spread. This continues out to even the most exotic markets. Sterling interest rate futures, as one example, mean that both borrowers and lenders can shift the risks of interest rate changes to speculators. Thus meaning that for the same amount of risk carried by lenders and borrowers there can be more lending done. The froth doesn't detract from that real economy funding: it adds to the ability to increase the volume of it in reality.

And I must say that I was most amused by one piece of evidence called in by Chang. He notes that the profitability of the finance sector has risen in recent decades. He uses this as the basis of a claim that obviously it should be pruned back. But profit, excess profit, as Adam Smith pointed out in not quite these words, is proof that you are adding value. So if profitability of finance has risen then that must mean that finance is adding more value. And the idea that we want to stop people doing that is again almost anti-economics.

I suspect that the real basis of Chang's complaints about finance is that his attitude towards it is akin to a Victoiran dowager's about "trade". We know that it goes on, is even necessary, but we most certainly wouldn't want anyone we know to be associated with it.

Summary: Euro area unemployment rose to an all-time high of 12.2% in April

What the chart shows: The chart shows unemployment as a percentage of the labour force in the 17 countries sharing the single currency

Why is the chart important: Unemployment is a lagging, not a leading indicator. This means that it is an effect, not a cause of economic developments. However, it is an important indicator that highlights the amount of spare capacity – slack – in an economy. Rising unemployment is also an indicator of below-par growth. The concern in the euro area is that the continued absence of growth and hence continued rising unemployment will exacerbate social tensions. The euro, allegedly an instrument for greater unity in Europe, is instead forcing the continent apart.

Had Adam Smith somehow survived until today, he would be 290 years old, having been born on 5th June 1723. The economist, now adorning the £20 note and credited with founding the modern discipline of economics (or political economy as it was known earlier) was originally renowned as a moral philosopher for his widely respected Theory of Moral Sentiments.

Go here to see Tyler Cowen and Alex Tabarrok (economists at George Mason University) explain why he was the greatest economist of all time.

Go here for Adam Smith Institute Director Dr. Eamonn Butler's The Condensed Wealth of Nations (and the Incredibly Condensed Theory of Moral Sentiments).

The 21 st thing is that a larger government actually makes economies more flexible: thus we should have larger governments in order to increase the necessary flexibility of the economy. And if the first part were true then the second part might indeed follow: only it isn't, at least not in the sense that Chang means it.

As part of his argument there's one thing that Chang does which is really very naughty indeed. He compares the growth rates of various European countries to that of the US. And he divides the growth rates into two periods: early 1950s to late 70s, late 70s to now (or what was now when he wrote a couple of years ago). He's right that the European economies, with their larger state sectors, grew more quickly than the US did in the earlier period. Hence the claim that larger government can mean more economic growth. Except, well, there's just one thing missing from this calculation: the Wermacht. As the perceptive will have noticed the German Army did have something of a European tour in the years immediately preceeding the early 50s. And the destruction of getting them to go home again was considerable: something which did not happen to the US at the time.

Just as we expect a developing country to have a higher growth rate than a developed one, given that copying is easier than being at the technological cutting edge, so we also expect an economy recovering from a total war being fought on its territory to grow faster than one which is not. So while the growth rates are true we cannot use them as proof that larger governments will create more economic growth.

The real problem with Chang's position though is that he confuses two entirely different things. He talks about employment inflexibility: the way in which it's difficult to get fired and thus the workers all feel secure. He also talks about the existence of a decent welfare state: unemployment pay, health care, retraining opportunities and so on. The problem is that he sees these as being equal: both increase the security felt by the workers and thus increase their flexibility. Which is untrue: they work in very different ways indeed.

It is true that a decent welfare state does lead to greater flexibility in the economy. The workers (and everyone else in fact) will be less stuck in their ways if they know that a change in the economy does not mean destitution. But job security works entirely the other way around: those who are too secure in their jobs won't accept any change at all. Thus reducing the necessary flexibility of the economy.

The reason that this becomes important is because Chang points to the Nordics as evidence of his assertion that you can still have decent economic growth with a large government sector: indeed that it increases growth to have a large such sector. But the very success of the Nordics argues against all of the other strictures about free markets and capitalism that he wants us to understand and adopt. For it is true that they do have large and generous welfare benefits: the unemployment pay, the retraining and so on. They also have decent economic growth. But what they don't have is the sort of regulation, planning and government intervention into the economy that Chang proposes. Look behind the tax numbers (necessary to pay for those benefits) in the economic freedom index and look instead at everything else. They have less regulation of markets than we do, greater economic freedom than even the US, less intervention into capitalism than just about anyone other than Hong Kong. Which is what makes the places work of course: as Scott Sumner is fond of pointing out, Denmark might well be the most classically liberal economy on the planet underneath that welfare state.

All of which I admit I find rather amusing. It is true that the Nordics are nice places to live, despite those crippling tax rates (almost all of which are tumbling down). It is indeed true that they've had very decent economic growth over the years and decades. It's entirely true that they have a lavish social insurance system. But those economies work precisely because they ignore, do absolutely the opposite of, everything else that Chang proposes a government should do to an economy. They're more free market and capitalist than even the US: which is why they work. Indeed, it's probably true to say that the only way in which you can have a social safety net like they have is if you allow capitalism and markets to let rip: how else can you possibly afford to pay for it all?

Ed Balls, the economic spokesman for the UK's opposition Labour party, has suggested that wealthy pensioners should be stripped of their winter fuel allowance. At present, over-60s eligible for the state pension receive £200 a year, and those over 80 receive £300, to hep keep them warm. The policy was introduced some years ago after media stories of pensioners suffering from hypothermia because they could not afford to turn on their heating. Even those in care homes get fuel payments of £100-£150.

Government figures show that withdrawing these winter fuel payments from pensioners who earn enough to pay the higher income tax rates would save £105m. Not a huge dent on an annual government budget deficit of £120bn a year, but every little helps.

The remarkable thing, though, is that a Labour politician should attack the principle of universal benefits at all. (He must, as Westminster-watchers believe, definitely be on the way out.) Giving state benefits to everyone might waste money on people who don't need it—£200 is not a lot to a top-rate income tax payer. But the argument for making state benefits universal is not just that it is administratively easier to do than trying to target the money. The argument is that universality gives the middle classes a stake in preserving the benefit system, as they gain from it too.

I have always thought it a pretty odious argument: that we should waste taxpayers' money on people who do not need it in order to buy their political support for more generous state benefits. And the result of including the middle classes is that they do very nicely out of the deal. Being articulate, politically astute and well represented in Parliament, the welfare state has elided into a system designed for them, rather than the poor. Not just cash benefits, but free healthcare, free education and all the rest – people who could well afford to pay are the biggest gainers.

We need to scrap this entire system of middle-class state patronage and replace it with a negative income tax, so that we can see clearly how much we are spending on welfare support and so that government—and political—activity is clearly focussed on those who genuinely need it.