Capitalism just makes things so damn cheap, doesn't it?

You don't have to go far - say to the Labour Party Manifesto, or this time around the Tory one in fact - to find people complaining that capitalism is some form of a rip off. In their lust for profits the plutocrats grind the faces of the workers into the dust, short change the consumers.

And yet we also face the obvious truth of the world around us. Those people living in a place which has been roughly capitalist and roughly free market for any reasonable period of time are as rich as any group of human beings ever have been. They have more than those who came before. And thus it must be true that capitalism makes things cheaper, something not consistent with everyone being ripped off.

And a specific example

Ryanair, Europe’s largest airline by passenger numbers, has helped drive down short-haul ticket prices in Europe by increasing its capacity by 33% in the past two years.

Its cost base, widely acknowledged as the lowest of Europe’s major carriers thanks to low plane purchase, maintenance and staff costs, has allowed it to undercut rivals while still making a profit.

The Irish airline made a profit after tax of €1.3bn (£1.1bn) in the year to the end of March, even though it slashed ticket prices to fill almost 14m seats added during the period.

Chief executive Michael O’Leary said fares had fallen 13% but profitability had doubled over three years. He added: “Frankly I see no reason why that trend won’t continue.”

The capitalist plutocrats can and do cash in by reducing the prices to consumers, making them better off. Which is, of course, why the system works as a whole.

Why shouldn't this be enough extra money for the NHS?

Much is generally made about how the NHS has a different inflation rate from the rest of the economy. Polly has been telling us for years that it needs a 4% rise in the budget each year just to stand still. And it's not obvious that this has to be the case:

Although health has been exempt from the deep cuts that have affected most other Whitehall departments since 2010, the settlements have been nugatory by historical standards. Real spending has risen on average by 4% a year since the mid-1950s. In the 18 years of Conservative rule between 1979 and 1997, it increased by 3% a year. On current plans it will increase by 1.4% a year between 2010 and 2022.

Baumol's Cost Disease comes into play here. As real wages rise then services become more expensive relative to manufactures. And real wages have risen considerably since the 1950s and thus the NHS has become considerably more expensive relative to things that are manufactured. Note that the NHS does pay a little under 50% of its budget in wages.

We might not be all that happy about this but that's just the way this flavour of the universe works. But as Larry Elliott also tells us: 

The recovery from the deep slump of 2008-09 has been the weakest in living memory. There has been no productivity growth and wages are lower than 10 years ago. 

We've not had real wage growth for a decade. Thus the NHS should not be having a higher inflation rate as driven by the Cost Disease, correct?

That is, when real wages are growing strongly perhaps the NHS does have that higher budget growth rate, but when they're not it shouldn't.

Towards a theory about nationalisation

Wanting to nationalise everything is generally, and rightly, seen as a fairly left wing idea. One which seems to run smack into the problem that Britain is a rather conservative nation. At least, that's what we take from this survey result about what should be nationalised, what should remain in the private economic sphere:

The British public is overwhelmingly in favour of keeping a range of services in public hands, a poll has shown. 

A total of 87 per cent of people are in favour of the police being run by the public sector, 84 per cent for the NHS, 83 per cent for the armed forces and 81 per cent for schools, according to statistics released by YouGov.

We can construct entirely reasonable theories about why the police and military should be government run. They are natural state services being the application of state power itself for example. We've also tried private armies and didn't like it very much, we generally refer to that period as the Wars of the Roses.

However, when we look at the fuller list we rather change our minds about this:

In the survey, which looked at 13 industries, it was only telephone and internet providers, banks and airlines that a majority of people believed the private sector should control.

There's actually a close correlation between how long something hasn't been nationalised and whether it should be run by private industry. The things which have always been state run people think should remain so, the things which were sold off decades back should be private, and as the support for nationalised operation rises so does the date at which they were get closer.

That is, the result seems to be driven by something like status quo bias. Or as we can also say, just conservatism, you know, the idea that things are about right and shouldn't be changed very much.

The IFS is quite right here, stamp duty is largely paid by pensioners

The Institute for Fiscal Studies is quite right here, the people who really pay stamp duty on shares are the pensioners:

Labour’s plans to raise taxes on businesses and financial transactions will hit pension funds, reducing returns for savers and harming living standards into old age, the Institute for Fiscal Studies has warned.

Jeremy Corbyn hopes to raise £5.6bn per year with a levy on bond and derivatives purchases, extending the stamp duty charge that already affects share transactions.

He said it would target banks and help repay the damage wrought by the financial crisis.

It is not, of course, the banks who buy and sell shares, but our pensions that do. And a charge on a transaction inside a pension will be paid by that pension.

This is all known as "tax incidence" of course, the thought that all taxes are paid by hte wallet of some live human being getting lighter - on the simple basis that there's only us folks here to pay taxes - and we need to walk through the effect of a tax on the economy in order to work out whose.

However the IFS said that, ultimately, all taxes are paid for by individuals.

This is not new news either. The IFS has issued a couple of papers on the subject in the past. There is also the EU's own investigation into the incidence of a financial transactions tax. Which shows that, yes, the incidence is largely upon  investors - pensioners that is - plus lower wages for the workers across the economy.

Taking the fat cats this ain't. Which is why the Mirrlees Review so strenuously insists that we just should not be having transactions taxes at all, they're simply a bad form of taxation to begin with.

If you do want to try to tax the financial sector there are other and better ways. An extension of stamp duty is the wrong thing to do entirely, it's a tax which should be abolished in its entirety.

This is hardly an onerous goal being set, is it?

The usual suspects are shouting about how the education system is to be starved of that funding vital to all that is good and holy:

The Institute for Fiscal Studies (IFS) said that school funding would fall by nearly 3% by 2021 even with the additional £1bn a year, after adjusting for inflation and a rise in students enrolled.

“Taking account of forecast growth in pupil [numbers], this equates to a real-terms cut in spending per pupil of 2.8% between 2017–18 and 2021–22. Adding this to past cuts makes for a total real-terms cut to per-pupil spending of around 7% over the six years between 2015–16 and 2021–22,” the IFS said.

And we're afraid that we don't quite see it.

Firstly, it isn't true that the marginal costs of another pupil are the same as the average costs of a pupil. Education spending is far more lumpy than that. One more pupil into an extant school might cost the number of pencils they'll chew in a year but not much more than that.

Secondly, and much more importantly, this isn't actually a big ask. The education system is being asked to improve productivity by 1% a year or so. That's very much less than any private sector organisation tries to manage. And anyone at all who thinks that there isn't 1% a year to be ground out of the cost base of a British public service just sin't dealing with reality.

It's entirely true that the recently departed William Baumol had his Cost Disease, that it's more difficult to increase productivity in services than in manufacturing. But do note that he said more difficult, not impossible.

1% a year improvement in productivity, 1% a year reduction in costs? Pah!

The next iteration of the waste food problem

A general observation is that as modern fads and panics rotate through their second, third and fourth iterations then people start losing their minds. The original point becomes entirely forgotten and we end up with the meaningless, or even in gross error, incantation of the fashionable chant.

So it is with this about food waste, now we're onto how much bagged salad gets thrown away

People buying bagged salads with good intentions of eating healthily end up throwing 40per cent away.

The fragile leaves look appetising on the shelves but they have a very short shelf life and soon spoil and become soggy.

As a result, tonnes of lambs lettuce, baby spinach, wild rocket and ruby chard-duos end up in the bin.

New research suggests people throw away around 37,000 tonnes of salad every year, which is the equivalent of 178 million bags.


This is a useful example of failing Chesterton's Fence. Which is the idea that you cannot work out whether something should not exist until you have understood why it was first constructed. Noting a fence is one thing, but it is necessary to work out why the fence was constructed in the first place before it is possible to say it is no longer needed.

And so, why do we have bagged salad? Possibly because, even at these wastage rates, the loss is less than when all had to buy salad bits loose? We don't say that this is so, only that it's the relevant question to be asking.

As to the waste being worth a lot of money, no, of course it isn't. We're throwing it away so it is of no value to us. And yes, it really is true that we are the determinants of our own utility, the value of something to us is the value of something to us, not what either it should be nor what someone else thinks it should be.

But then others do manage to get to that ritual of incantation rather than doing the difficult bit of thinking:

The solution, then, it would seem, can in part come from us, the consumers. By taking personal responsibility and ensuring that we limit our consumption, we can probably dramatically reduce the colossal figure currently hanging over our bagged-salad heads.

It is indeed part of the worship of Gaia that we must reduce our consumption. Or at least acceptable ritual that we should claim to desire to do so, along with St Augustine's caveat of not quite yet perhaps. 

But there is that very proof that people aren't thinking. For of course the actual complaint here is that we're not consuming enough of this bagged salad, isn't it?

Ritual incantations rather than thinking just aren't the way to run the world.

We do love people holding directly contradictory ideas

This is something we humans do rather well, hold two or more directly contradictory ideas at the same time. One particular version of this is prevalent over on the environmental left these days. Which is that renewable energy is just so cheap these days that they're going to take over the entire power sector, while at the very same time any cut in investment funds to designing new methods of renewables would be to condemn the planet, and Flipper and ourselves, to drowning in ever hotter water.

As an example, over at Salon they are running these two stories side by side:

We’ve seen prices for new solar farms below 3 cents per kilowatt hour (kwh) in other countries for over a year now, but before this week, not in the U.S. That changed on Monday when Tucson Electric Power (TEP), an Arizona utility company, announced that it had reached an agreement to buy solar power at the same game-changing price.

TEP says that this is a “historically low price” for a 100-megawatt system capable of powering 21,000 homes — and that the sub-3-cents price is “less than half as much as it agreed to pay under similar contracts in recent years.”

For context, the average U.S. residential price for electricity is nearly 13 centsper kwh, and the average commercial price is 10.5 cents.

And further:

Sen. Maria Cantwell (D-WA), ranking member of the Senate Energy and Natural Resources Committee, criticized Trump for his proposed cuts in clean energy research. “His budget proposes a staggering seventy percent cut to renewables and energy efficiency initiatives,” Cantwell said in a Tuesday statement responding to the budget proposal. “This would devastate an emerging sector of our economy by killing thousands of clean-energy jobs all over the country — all in a misguided effort to hold onto the past at the expense of our future.”

But if solar is now one third the price of conventionally produced electricity then we don't need to be doing any more research, do we? We've done what we needed to do and we can stop now and go on to try and solve the next problem.

Alternatively, of course, there's something hooky with that 3 cents number and we do need to keep researching. But they can't both be accurate complaints. Either we've got cheap renewables and we don't need to research cheap renewables any more or they're not cheap and we must continue. But we simply cannot be where we've achieved our goal and we must still research how to achieve our goal.

A social care lottery just won't work

A social care lottery just won't work

In City AM, Cato’s Ryan Bourne makes a free market case for the Tories’ original plan for social care. The plan was to continue the current system, where a person must pay for their own care until their assets fall to £23,500, after which the taxpayer does so – but raising that floor to £100,000, including housing wealth in the measure, and allowing people to defer payments until after their death. They now want to include a cap on how much any individual can spend before the state steps in and pays for the rest.

This is an absurdly stupid complaint about in work poverty here

This particular complaint should be met with an angry shout of "What the hell did you think was going to happen anyway?" quite possibly with a few cuffs around the ears to encourage thought:

A record 60% of British people in poverty live in a household where someone is in work, according to researchers, with the risk of falling into financial hardship especially high for families in private rented housing.

No, that's not it, this is:

Low pay is a trigger for in-work poverty but the primary determinant is the number of workers in a household, with single-earner families at a very significantly elevated risk of hardship, the study says.

So what the hell else did anyone think was going to happen?

Sigh.

We measure poverty as being below 60% of median household income (and then in various forms, before and after housing costs, disposable income, before and after tax and benefits and so on). We adjust for the size of the household, the number of adults - but not for the number of earners. The median UK household has two earners in it. Thus single earner households are much more likely to be in poverty simply because of the way we measure it, comparing single earner household incomes to that median of dual.

The result is built into our measurement system. We could not reach any other result given that measurement system.

Imagine, just as an example, that the second adult went out to work and the household then spent upon paid child care. As many have actually noted the extra earnings from that second job only just about cover those child care costs. The household isn't any better off. But by our poverty measure that household isn't going to be in poverty any more as a result of two earnings not one.

We must always, but always, remember that we do not actually have any poverty in the UK. That, the absolute poverty, was beaten back in the 1930s. What we have and what we measure today is inequality, the thing we call relative poverty. And if we don't remember this then we're going to be making mistakes similar to the one above.

Single earner households have lower earnings that dual earning ones. Blimey, that's a bit of a surprise, innit?

Economics has moved on, but the law hasn't

In Britain, manufacturers and suppliers can recommend prices to retailers, but they can't enforce those prices through a contract. Retail price maintenance (RPM) has been banned outright since 1964's Resale Prices Act on the grounds that it's anti-competive and hurts consumers. The problem is economics has moved on, but the law hasn't.

That's not the case in the US where the Supreme Court overturned a near hundred year precedent in 2007 to rule that suppliers that set minimum prices weren't necessarily undermining a competitive marketplace. In the US the practice was banned through the courts based on the best available economic theory and evidence. But when new theory and more importantly new data overturned the economic consensus the courts (eventually) took note.

The Competitions and Markets Authority (the regulator tasked with enforcing the law) states that "RPM agreements are usually unlawful because they prevent you (the retailer) from offering lower prices". It's a bit more complicated in reality: suppliers have little incentive to increase their retailer's markup at the expense of their consumers, especially in the face of competition from other brands. It wouldn't be wise for Coca Cola to set a minimum price that boosts Asda and Tesco's bottom lines when they face competition from Pepsi.

Most economists accept that RPM agreements can potentially undermine competition for two main reasons – exclusion and collusion. They make it easier to police collusive agreements at both the manufacturer's and the retailer's level. It might also enable a dominant but inefficient retailer prevent other more efficient retailers from undercutting them with smaller mark-ups.

If that was the only reason to employ an RPM agreement, then banning them would make sense. In fact since the practice was outlawed economists have discovered additional explanations for why a firm might employ an RPM agreement and why it is in the consumer's interest to let them.

To begin with, a range of products from high-end fashion to digital cameras and phones typically require retailers to invest substantial effort in hiring staff to explain and promote their features to customers. This doesn't come cheap. It means hiring more staff, training them and paying them more. That squeezes margins and pushes up prices in store. But a consumer is under no obligation to buy from the retailer who's put the effort in. No-frills retailers can free-ride off the effort of other retailers in promoting the product and sell it at a discount. The threat of free-riding discourages firms from investing in promoting the product and leads to a worse customer experience with less well-informed customers.

Think of a car dealer offering test drives with well-trained staff offering detailed explanations of the vehicle; the incentive to provide those services falls if the buyer has the option of going to a discount retailer afterwards.

If manufacturers agreed a minimum price with their retailers they could prevent no-frills discount stores from undercutting and free riding off of the ones that invested in promoting the product.

But it's not simply blocking free-riders. It also helps resolve a conflict between the incentives of retailers and manufacturers. Retailers have much less to gain than the supplier from promotional services. Retailers tend to make a greater investment attracting customers to their store over other shops, for instance by extending opening hours. If I ran an electronics shop, I might reward repeat customers to attract more customers from other shops. However, I'd have less of an incentive to invest in promoting Apple Macs by displaying them prominently, offering free installation and bundling in products as a special offer, because while I'll sell more Apple Macs I might sell fewer PCs.

It's true that manufacturers could simply pay retailers for floorspace. As UCLA's Benjamin Klein points out Gucci could simply pay a department for their product to be placed in a prominent place, but that would inefficient for a number of reasons. First, the value of floorspace varies from shop to shop. It'd be inefficient for Gucci to go to a great length at determining the value of floorspace in each different shop to them. Second, retailers tend to know better than manufacturers how to market products. Gucci might struggle to specify the exact promotional services that they want the department store to carry out. It is better for Gucci to solve that knowledge problem by creating a financial incentive for shop to push for further sales. Instead of this inefficient duplication of efforts they can just make sure that retailers have a financial incentive to market their products through a bigger markup.

Whether or not America or Britain's approach to RPM is right depends on how often RPM is used to boost competition and how often it's used to suppress competion. If it's the case that RPM is mostly used to police cartels and for dominant dealers to throw their weight around then the UK's approach is right.

But multiple meta-analyses of prosecuted cases of RPM find few cases of it being used to police cartels. Ippolito (1991) reviewed 203 litigated cases of RPM and found that just 13% of case alleged (not proved) horizontal price-fixing, while many more offered evidence suggesting the agreements led to better customer service. Ippolito's review backed up previous research by Overstreet (1983) which found that RPM agreements tended to appear in markets with little scope for either retailer or manufacturer collusion.

A more recent meta-analysis by LaFontaine and Slade (2005) which reviewed 23 papers came to a similar conclusion. They stated:

"...when manufacturers choose to impose such restraints, not only do they make themselves better off, but they also typically allow consumers to benefit from higher quality products and better service provision.

...

The evidence thus supports the conclusion that in these markets, manufacturer and consumer interests are apt to be aligned, while interference in the market is accomplished at the expense of consumers."

The evidence against banning RPM is overwhelming and on the strength of that evidence the US Supreme Court overturned the outright ban on RPM in 2007 moving to a rule of reason approach which requires firms to prove that RPM was being used for the purposes of undermining competition.

Promoting and preserving competition benefits consumers, but too often regulation rules out innovative solutions to potential market failures. Let's fix that and deregulate RPM.