The Pin Factory Blog

27. "Free market capitalism simply cannot meet society's welfare needs."

Strictly speaking, it is not supposed to. It is a method of social and financial organization that allies itself to the individual motivations which help determine human action. It does do two very important things, however.

In the first place it creates the wealth that allows for welfare provision. Under a free economy people in society can become rich enough to afford higher levels of care for those in need. They may do this through charitable organizations, or they may do it collectively through government. Non-capitalist economies tend to achieve poorer results, and cannot usually afford so high a level of provision.

Secondly, the free economy itself reduces the need for welfare by a variety of market provisions. Recognizing the demand, people respond with insurance policies, health plans and pension schemes, all of which reduce the need for welfare. By encouraging people to make their own provision wherever possible, the free economy reduces the need for state welfare. Self-provided welfare can usually be tailored more closely to each individual's circumstances, whereas collective provision is often provided on standardized levels based on what are perceived as average needs.

Paradoxically, it can be the state welfare system which makes people dependent upon it. It takes the funds to support its provision which people might otherwise have used to pay for their own. In other words, high taxes make people no longer capable of providing for their own welfare. Two-thirds of those receiving benefits in Britain actually pay more in direct and indirect taxation than they receive back from the state.

Furthermore, state services crowd out private choices for many people. Private education, healthcare and pensions compete with state options which are 'free' at the point of consumption. Private alternatives charge fees, but compete with state services which do not (because they have been paid for through taxation). This severely restricts their availability and accessibility for most people.

It's one of the tropes of our times, that the inheritance tax is such a spiffingly new and inventive idea that it must be progressive. In one way of course it is new, starting in 1986 (with the origin as Estate Duty in 1894), in another, it's really rather old.

Feudal England worked on the basis that everything, most especially the land, belonged to the King. Whilst you might have an estate, even the hereditary right to one, you only ever held a lifetime interest in it. At your death, your inheritors would pay a fee to the next lord up in the fedual chain. This progressed all the way to the top, where those who held lands directly from the Monarch paid him at their own moment of inheritance. There were other such details, such as heriot, the right of a lord to seize the best animal or clothes of a serf from his estate.

Fortunately we got rid of such things as the medieval system faded away: land holdings became freeholds, owned absolutely, property rights actually meant that things were inheritable rather than held only for life.

Until, of course, the system of inheritance tax came along again. What is ours is not ours to do with as we wish again, to dispose of as we please. Our inheritors must pay again a fee, to the State this time instead of the feudal lord, for the enjoyment of our property, what we have built and paid for. 

Thus, far from being progressive, the inheritance tax is in fact medieval, positively feudal: we're now simply regarded as serfs of the State, ripe for the plucking upon our passing. 

Blessed are the young, for they shall inherit the national debt.

– Herbert Hoover

Yes, it's true. Fat people and smokers save the government and the health care system money. So can we please go back to doing as we wish, not as we're told? And further, snarl at those who lie to us on this point?

More on 'elf'n'safety. Of course, it's vitally important that the are regulations about workplace safety, fines for breaching them and inspectors to enforce? Yes? Well, such are entirely dwarfed by the effects of the extra wages employers pay to workers for risky activities. The incentives are already there.

If only Bastiat were alive now. No, really: the candlemakers are calling for trade protection. 

Disturbing evidence that there really might be people to dumb to be allowed to vote. 

This compulsory education idea might be worse than previously thought. Much vocational training actually has a negative return. 

Something for our cartophile (?) audience. Another fascinating map site.

And finally, proof that intelligence is not a requirement to be a BBC newsreader. 

26. "Government must 'prime the pump' by stimulating demand through increased public spending."

Some urge that when the economy slows, and people are not spending or investing as much, government should step in with projects of its own to boost demand with public spending. In fact when government does this it destroys private sector jobs by taking away the resources which would have sustained them. Taxes are higher than they might otherwise be, leaving less to be invested in private business and to spend on its products.

Moreover, government uses those resources inefficiently. The administrative costs of sustaining each job are higher in the public sector, and the funds themselves are used less effectively. "Priming the pump" often means spending on infrastructure and civil engineering projects, all capital-intensive and less productive of jobs.

Even in labour-intensive areas, such as the public services, most of the extra money it puts in is swallowed up by increases in the public sector rate of inflation. It simply puts in more cash for public employees to bid for. This happened with the huge sums pumped into UK public services in the post-2000 budgets. All of the money was swallowed, but service improvements were not remotely commensurate with the enormous increases in spending. Indeed, some things became worse.

Private money goes where economic factors signal it should, but government cash follows political demands which are not as commercially viable or as sensible.

It takes a lot of money to sustain each public sector job. The private sector employs more people for the money. "Priming the pump" is a now discredited notion from Keynesian days. It creates a temporary and artificially high demand in certain sectors at the expense of others, followed thereafter by massive dislocation and unemployment when that artificial demand ceases. It tempts government to create artificial short-term 'booms' ahead of elections, with the consequences coming after they have been safely re-elected.

Apologies for the late start on the blog this morning. Slight technical difficulties...

Hopefully everything should be working now. 

The RMT and TSSA – the underground's biggest trade unions – have threatened to ballot their workers for strike action tomorrow, if Transport for London (TfL) does not meet their demands (which is basically impossible, given the time constraints).

The unions object to ticket office closures and the employment of non-union, agency, security or sub-contractor staff on the tube network. That is not surprising. They know that private-sector workers could do a much better job, at a much lower price. Frankly, they could hardly fail to do so. Unfortunately, the fact that TfL is a public-sector monopoly makes it easy to hold them to ransom and commuters suffer as a result.

Using the tube is a nightmare. According to statistics obtained under the Freedom of Information Act, the average commuter on the Metropolitan Line wasted three days, 10 hours and 25 minutes in 2006 due to delays. I hate to think what the figure would be on my (notoriously unreliable) branch of the district line.

These problems are not insurmountable: the Docklands Light Railway (DLR) provides a good model for the future. First of all, it is computerized and driverless. That blunts the power of the unions but also makes it more reliable, since trains can run a set distance from one another, arriving and departing at set times, without reliance on an antiquated human-signalling system.

Secondly, the DLR is operated and maintained by a private franchise, which means better management and greater efficiency. Our report Underground Revolution advocated a similar structure for the rest of the network, which would be split into four vertically integrated businesses (Metropolitan, District, Circle, Hammersmith & City lines; Jubilee and Bakerloo lines; Piccadilly and Central lines; Northern and Victoria lines). Splitting the tube up would promote competition in ideas on innovation, marketing and efficiency, as well as weakening the hand of the unions. Vertical integration would encourage investment in infrastructure and capacity building.

In short, no other policy would make such a difference to Londoners' quality of life.

According to a survey of 3,000 people commissioned by UKTV Gold, a satellite TV channel, Britons are increasingly confusing fact and fiction when it comes to their historical knowledge. While 58 percent believed Sherlock Holmes was a real historical figure, 23 percent believed Sir Winston Churchill was fictional.

On seeing the results of this survey I assumed that I had overslept and woken up on April 1st but, alas, no. It appears to have been a real survey of real people – something which, humour aside, is very worrying indeed.

Education reform, anyone?

In January we had more than a quarter of a million visits, over a million pageviews, and nearly three million hits.

Thanks for reading... 

A quite remarkable economic finding: the slave trade quite possibly being responsible for the shorter life spans of African Americans. 

A note to environmentalists. Here's the list of things that you can usefully worry about and try to change. Rather than the ones you are worrying about.

A nice laying out of the point of economics. It's not trying to tell us how the world should be: rather, trying to tell us how it is. 

And what can sadly happen when an economist moves from describing how the world is to how he thinks it ought to be. 

Guido points out that the investigative committee into MPs' expenses isn't really all that investigative.

A reminder that not everything in the newspapers is quite what it seems. Some quoted there represent no one but themselves. 

And finally, some money on offer if you can teach economics better than a high priced call girl.