Economic Nonsense: 46. Profit is a sign of exploitation

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No.  Profit is the reward for investment.  An investor defers gratification and uses their money instead to try to make more money later.  Profit is the compensation he or she receives for doing this.  Part of it takes account of risk, the risk that the investment might not pay off or that the investor might lose the money they put up.  Part of the profit is reward for taking that risk.

The notion of profit as exploitation derives from a mistake made by Karl Marx.  He supposed that value resides in objects, rather than in the mind of the beholder.  Because he thought it resides in objects, he asked how it got there, and answered that value represents the labour it takes to make something.  A price charged above the value of that labour represents "surplus value," and is exploiting the workers who make the object.  Hence comes the notion of profit as exploitation.

In fact people value things differently, which is why they trade.  An object's value to me might represent the other uses I might have made of the money, had I not expended it in producing the object.  If someone values it more than that they will pay a price that includes a profit for me.  Far from being a sign of exploitation, profit serves a valuable human purpose in motivating people to produce goods and services that are of value to their fellow human beings.  It directs us to serve the needs of others in seeking a return for ourselves.  The butcher, the brewer and the baker might seek their own reward in terms of the profit they make, but in doing so they provide others with meat, ale and bread.

Profit is legitimate, and sends signals to others.  If some areas of production show high profits, others are motivated to enter that field themselves and bring extra production onto the market.  The competition with other producers will generally act to restrain or reduce the high profits.

Nationalising the trains won't solve this problem

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It's something of a puzzle why the idea of nationalising the train system again is so popular. The complaint seems to be that ticket pries are high, if we nationalise then ticket prices won't be so high. Apologies for referring to Richard Murphy again but he has laid out that fallacious argument for us:

The Tories want to regulate rail fares.

Almost all rail companies are already state subsidised.

Rail rolling stock leasing is a tax arrangement for the finance industry.

The farce of rail privatisation continues when the state run East Coast route proved that state ownership works best.

And yet only the Greens are stating the obvious, which is that the answer to these state interventions in an industry that should never be in private hands is nationalisation.

I really think the time for rail nationalisation has come.

It is true that ticket prices are high as compared with other European countries. It is also true that there are subsidies. But this does not then go on to mean that nationalisation will reduce train fares. Because the reason that train fares are high is the result of a deliberate and specific political decision. That British train travellers should pay more of the cost of their journeys than do travellers in other European countries.

This is not a function of who owns or who operates those railways. It is, as we say, a function of a deliberate political decision. That there's going to be some mixture of general tax subsidy to railways, plus some measure of income from travellers, is an accepted fact by all. At some point we need to decide what the split between those two is. Should that retired accountant in Norfolk have to pay the full cost of his travels around the country to campaign, should the general taxpayer be subsidising him to do so and if so, to what extent?

The general outcome of this decision is that, here in the UK, we expect those doing the travelling to pay more of the cost of their travelling than other European countries conclude. This is not, as above, an outcome of how the industry is structured, owned nor run. It's simply that we have decided that non-train travellers should be subsidising train travellers less than others conclude.

You can, of course, make other arguments for nationalisation. But this specific one doesn't work. Because train tickets are not priced as they are because there are private operators. But priced as they are because we've decided on less subsidy. And that subsidy could be increased (not that we would argue that it should be) without nationalisation, just as that subsidy could remain the same with nationalisation (not that we would recommend that either).

This is an argument about the correct level of subsidy, not one about who owns or operates. Thus changing who owns or operates changes nothing about the subsidy nor ticket prices.

There's choice and then there's force. Only one is good.

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We can't say that we're against paternity leave here as the current UK rules on such stem directly from the writings of one of us here on this very blog. We can however say that we're very much in favour of choice as a basic feature of the society we live in and against compulsion. Which is what makes this piece in The Guardian so concerning:

Force men to take paternity leave. It will make the world a better place

It should be said that the article itself never does say force. That's rather the invention of the Guardian subs there. Although we should also point out that many of the things that paternity leave are said to promote that are lauded remain, hmm, unproven, shall we say.

However, this is a nice example of what differentiates us classical liberals from the more modern form of liberal. We're all for the world becoming a better place. Except we insist that it is the exercise of choice by consenting adults which makes the world a better place. Not the imposition of behaviour upon people that does so.

So, we're entirely happy with the idea that new fathers take time off with their child. With whatever domestic arrangements anyone wants to make over such matters, including such interesting rarities as the stay at home Dad. You wish to, great, have at it!

What we're not happy with and resolutely oppose is any idea that such behaviour must be imposed upon any individual.

After all, no one does insist that a new mother must take all of the maternity leave to which she is entitled, do they? That goose and gander thing does rather come into play here......

Are EU scared?

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One of the greatest fallacies of the Scottish independence referendum was that Scotland was being offered “independence”. Yes, we would have been independent in many respects. But the undisputed plan was to immediately begin re-acceding to the European Union. 

Whatever this meant - from fulfilling requirements to become a member again to no longer being one of the big players (usually meaning France, Germany and the UK) with a greater say than the other nations - we certainly weren’t going to be independent. 

It was not only concerning to witness it seldom questioned by Scottish people that we would be rejoining the EU - despite expecting an in/out EU referendum as part of the UK - but it is concerning, too, that the majority of pro-EU politicians don’t want to reform it or even to achieve a better deal for Britain.

What is more, there is a lot of scaremongering going on as fans of the European project say we couldn’t survive without many of our decisions being taken in Strasbourg. 

A new report authored by Ewen Stewart, Stuart Coster and Brian Monteith seeks to dispel the myths about the UK’s survival without the EU and explains why a Brexit would not bring economic isolation to the UK as scaremongering claims by politicians suggest.

The paper has five arguments to show why often-repeated political claims are intimidating the British electorate into shutting their minds to the possibility of change and preventing a rational debate taking place:

1. In reality, the EU is more dependent on being able to export to our significant market than we are on selling to the European Single Market.

2. There is a real threat to UK employment, influence and broader prosperity if we do decide to remain an EU member.

3. Our future economic well-being depends instead on gaining access and selling to the faster-expanding markets that lie beyond the EU.

4. Employment growth would be even stronger if Britain was free to adopt bilateral arrangements of its own, outside membership of the EU.

5. A growing percentage of cross-border issues and regulatory requirements are determined now by bodies at the global level.

A lot of research is looked into about the UK's performance in comparison to that of the European Union. And the conclusion reached is that British jobs are not dependent on the EU and so this is no reason to leave. Jobs would in fact be gained by leaving the EU.

The UK has performed much more strongly over the last 6 and 12 year time horizons that EU averages while 14 out of our 20 fastest growing markets are with non-EU nations.

We have global links with the Americas, Asia and Africa, as well as the Commonwealth, meaning it is perfectly possible that the UK could have good trading relationships with not just our European neighbours but the rest of the world by enabling trade policy to be determined at home.

The political stability of the UK, the English language and the rule of law coupled with secure property rights and a population that is by far and away the most diverse in Europe mean we will always continue to benefit from global growth.

If the Scottish independence referendum is anything to go by - scaremongering a population about change can make the positive arguments shine and usually backfires. Hopefully it does.

Yes, it is election season but still, this won't do

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Sadly, we're in an election season, which means that we have those who would rule us displaying their ignorance of the universe we inhabit in pursuit of our votes. Guido has already picked up on this from Natalie Bennett of the Green Party: As newsrooms across the land stop what they are doing to read the Green Party’s response to Labour’s non-dom announcement, it is worth picking Natalie Bennett up on this:

“The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by.”

Now hold on just a darn prosperity-spreading cotton-picking second. Over the last four decades the world poverty rate – people living on a dollar a day or less – has plummetted. ..... in 1970 almost 30% of the globe was impoverished. 40 years later that number is as low as 5%

Or, as that graph above shows, it is actually the poor who have benefited from that globalisation over those decades. As Branko Milanovic explains here:

The top 1% of the global income distribution has seen its real income (adjusted for inflation) rise by more than 60% over those two decades.

What is far less known is that an even greater increase in incomes was realized by those parts of the global income distribution that now lie around the median. They achieved an 80% real increase in incomes.

It is there — between the 50th and 60th percentile of global income distribution, which in 2008 included people with annual after-tax per capita incomes between 1,200 and 1,800 international dollars — that we find some 200 million Chinese and 90 million Indians, as well as about 30 million each in Indonesia, Brazil, Egypt and Mexico. These 400 million people are among the biggest gainers in the global income distribution.

The real surprise is that those in the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%. (The only exception is the poorest 5% of the population, whose real incomes have remained about the same.)

This is, of course, why we here at the Adam Smith Institute support this globalisation, free market sorta stuff. We desire that the poor become richer, this socio-economic system makes the poor richer. Why wouldn't we support it?

More to the point, why would anyone oppose it? For, amazingly in human history, this is the only socio-economic system that does actually achieve this task.

Economic Nonsense: 45. Unbridled capitalism brought about the Great Depression

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In the popular account the stock market went wild in the late 1920s, with people gambling recklessly on stocks and shares, often with money they didn't have.  Shares could only go up, they thought, but they were wrong.  The market crashed, people went broke, investors jumped off high buildings, and without investment GDP plunged and the Great Depression came about.  If it were true it might be a major indictment of unbridled capitalism, but it isn't.

People did overstretch recklessly, assuming the market could only rise, helped by easy money from the Federal Reserve Bank, and the Great Crash came in 1929.  It wiped out many investors, but it did not lead to the Great Depression.  That came later as a direct result of bad policy decisions.  Had those decisions not been made, the stock market crash might have instigated a cyclical downturn and corrected itself after a year or two.

The Federal Reserve Bank, observing that people had bought shares with easy credit, decided to tighten credit and restrict the money supply.  This is what you do not do in a recession, when struggling companies need credit to keep going and companies that see opportunities ahead need money to invest in expansion.  It was a disastrous mistake.

The folly was compounded by protectionist policies.  The Smoot-Hawley Tariff of 1930 shut out most foreign goods to boost home-produced goods in the name of protecting American jobs.  Its effect was catastrophic.  It sparked a beggar my neighbour trade war as other countries responded with tit-for-tat measures.  Unable to sell goods in America, they stopped buying American goods.  International trade plunged and much of the world sank into recession. 

There were other contributing factors.  Banking regulation had been clumsy and restrictive, and left American banks unable to play their part in promoting investment and expansion.  Income taxes were massively hiked in 1932, just when tax cuts could have helped.

Unbridled capitalism did not cause the Great Depression, incompetent government did.  It is another piece of economic nonsense that President Roosevelt's New Deal government activism helped America's recovery from the Great Depression.  It didn't.

New ASI paper: Non-Sense

Out today is a new ASI briefing paper examining Ed Miliband's proposal to end the non-dom provision in the UK tax system. It says:

  • Being a UK resident with non-domiciled status simply means that one does not intend to remain indefinitely. The tax system requires residents to be taxed on their foreign income. Non-doms resident in the UK elect to be taxed on either the arising basis (their worldwide income is taxed automatically) or the remittance basis (they are only taxed on worldwide income if they bring it to the UK). 2008 reforms mean that after 7 years of UK residence, non-doms who choose to be taxed in the latter way must pay a yearly fee of £30,000 (rising to £50,000 after more years of residence).
  • Ed Miliband has claimed that there are 116,000 non-doms but this ignores those of the UK’s 400,000 international students and 6 million foreign-born workers who did not have to file a self-assessment form and those who did file it but did not tick the non-dom box. It is estimated that something like 1 million are not permanent residents, so are by definition non-doms.
  • The rules introduced by Labour (and supported by the Tories) in 2008 ended up only hurting less wealthy non-doms and did nothing to really wealthy ones: electing to be taxed on a remittance basis benefits only those with very high foreign incomes.
  • While most countries tax worldwide income of residents, a significant number including the UK have exemptions for certain people (mostly foreigners) so that they only pay taxes on local income.
  • There is a substantial literature showing that tax systems are very important in deciding where top talent goes. It tells us that punitive changes to the UK tax system could discourage the most valuable potential immigrants from footballers to inventors.
  • Changing how we determine someone’s domicile is likely to have unintended consequences. First, making it easier to acquire a new domicile might reduce inheritance tax receipts, as UK domiciled residents of foreign countries currently pay UK death duties on their worldwide estates. Second, changes to the concept of domicile would have repercussions in other areas of law, such as matrimonial matters and determining the validity of wills.
  • The ethical justifications for Ed Miliband’s view that it is immoral that non-doms do not pay tax on their foreign income are deeply contentious. There is no principled moral case for taxing more than local income.

You can read the full paper here

Abolishing non-doms; welcome to the Laffer Curve

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It's election season so, yes, obviously, all sorts of things are going to be promised. Which gives us Ed Miliband's idea that Labour, if elected, will abandon non-domicile as a tax option. This is an interesting example of where reality meets the Laffer Curve:

The last Labour government toyed with abolishing the non-dom system but simply tightened the rules instead - which were then tightened further by Conservative Chancellor George Osborne.

That is because non-doms still have to pay tax on their UK earnings so successive governments have calculated that, on balance, it is better to have them here making a contribution to the exchequer than to see them flee abroad.

That's a wide reading of Laffer of course, that lower tax rates can lead to higher revenues, higher tax rates can lead to lower. It's something that is obviously true at the extremes and successive administrations, having done those scribbles on the back of the envelope, have assumed that taxing non-doms on their worldwide income would lead to lower revenues.

Miliband thinks this isn't true and so boo yah! to that. However, there's another point that we've not seen anyone mention as yet. Which is that residence and domicile interact in more than one manner. Yes, it is odd that the UK makes this distinction in a way that almost all other countries don't. But that interaction is more complex than just allowing non-doms resident in the UK to not be taxed in the UK on their worldwide income.

The complication is that the distinction allows many who are domiciled in the UK, but not resident, to still be claimed in part by the UK tax system. This is the situation with one of us in fact: not resident in the UK and hasn't been for a couple of decades, but still in part in the grips of the UK tax system as a result of continued domicile.

Further, there's many many more such domiciled but non-resident Brits out there (millions of 'em, million and millions of 'em) than there are the roughly 120,000 resident and non-dom.

Abolition of domicile as a determinant of taxation status would therefore have a much more complex effect than most seem to think. Logically, it might being that hundred thousand odd into the domestic tax net but it's equally going to release every expat from it.

That Laffer Curve really does exist you know, and even in the real world sometimes it bites.

Economic Nonsense: 44. Big business thrives on poor country sweatshops and child labour

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In undeveloped countries people struggle to survive in agricultural economies.  Life is characterized by dawn to dusk heavy labour, even for children, and the rewards are meagre.  Diet is poor and the risk of starvation or at least malnourishment is prevalent.  

In the early years of Britain's industrial revolution, conditions were poor.  Workers toiled for long hours amid safety standards that were often low.  There were sweatshops, and children worked in factories and mines.  This represented an early stage in economic development.  It was a considerable step up from life on farms, where conditions had been worse.  As capital grew, so did the machines that increased productivity and enabled labour conditions to be improved, and for women to leave sweatshops and children to leave the labour force.  It was wealth that made this possible.

Today in developing economies things are made cheaply in crowded working conditions with safety standards considerably below those in the developed world.  Although most countries have rules against it, there are undoubtedly children at work in several of them.  This, too, represents an improvement on the conditions found in the countryside.  The wages paid in sweatshops, well below those in the West, are far above those afforded by the agrarian economy.  Sweatshop workers enjoy higher living standards than their counterparts outside, and put their families' and relatives' names on the waiting list for any vacancies that occur.

This is not "big business" grinding the poor.  It represents a country's labour force reaching up to improve its lot by earning wages not possible elsewhere.  Globalization has made this possible, bringing many of the world's poorest people into the world market.  The goods made cheaply in poorer countries sell to richer ones, providing an inflow of cash to boost the poor country's economy.  This is how China and India have achieved growth rates that have lifted over a billion people out of dire poverty.

As the UK became richer, it was able to improve working conditions and pay, and to eliminate sweatshops and child labour.  The same will be true of today's developing countries.  Many of them are already doing so.  The faster they become wealthy, the sooner this will happen.  The way to speed it up is for rich countries to open their markets and buy as much as they can from poorer ones.

Private parts of the NHS say the NHS should not be privatised

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Just a small note. There's a letter in The Guardian insisting that the NHS should not be privatised in any form or manner. Hey, you know, election season. There's some 100 or more signatories to it. Of whom 46 are listed as being GPs. Yes, General Practitioner. That part of the NHS which has always been privately owned, run and managed, as contractors to the larger organisation.

46% of those shouting that there should not be private sector contracting to the NHS are themselves private sector contractors to the NHS.

It is, of course, possible that their own working experience leads them to believe that such contracting is a bad idea. In which case, of course, we should see the same people (including at least two past heads of the Royal College of General Practitioners) arguing that GP services must be nationalised and sharpish. We don't, so that cannot be their argument.

Which leaves us really with only one possible explanation: a gargantuan ignorance of their own situation. And a general piece of advice to the wise: pay not much attention to the opinions of those who prove themselves, publicly, to be gargantuanly ignorant.