Benchmarking this neo-liberal thing

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We're told that the disastrous collapse of all we hold most dear over the past couple of years has put the final nail in the coffin of neo-liberalism. You know, this free markets, light regulation, lots of trade and economic liberty that we here at the ASI uphold. We've even been told that the experiment, started when Maggie Thatcher came to power, has failed, that having been tried it has been found wanting, and now it's time for the clever people to tell us all what to do.

Hmm.

Oxford Economics says that gross domestic product per person has fallen to £22,700 on average in 2009, down from £23,000 in 2005 after adjusting for inflation – a fall of 1.3%. In Labour's first two terms GDP per head grew 12.6% and 8.3% respectively.

Sorry, what's that? The worst economic crisis since whenever has simply shaved off the last few years of economic expansion? We're all living in the gross and absolute poverty that we were immiserated by those four short years ago?

So, err, what was GDP per capita in 1979 then? From here, it was £11,500 and in 2005 it was £19,842*. So that's a 73% rise in general living standards (no, GDP isn't perfect for this but it will do) over the time period of our experiment in neo-liberalism.

Now of course I cannot speak for you, only for myself, but I would say that a near doubling of economic wealth in a mere generation is a pretty good advertisement for a system of economic organisation. That there are ups and downs is regrettable of course but the important thing is that over time we make two steps forward for every one back. As we have indeed been doing and as had just about every place that's ever adopted this liberal capitalism thing ever since they adopted it.

So far from proving that the experiement or the system has failed I would say that we've pretty good evidence that it's been wildly successful: so much so that we really owe it to the children to carry on with it.

* The difference in the two numbers for 2005 is the different inflation adjustments. Oxford is using 2009 pounds, the second figures are in 2003 pounds.

There is no such 'thing' as value

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1. There is no such 'thing' as value

The value we accord to different things is very important to us, but value does not reside in objects. An object might have length and breadth and depth, but value is not something that inheres in the object. It exists instead in the mind of the person contemplating that object. We speak loosely of something having value, but that value is neither in the object nor a property of it. It represents instead a person's valuation of the object.

Because value exists only in the mind of someone who contemplates the object, it is necessarily subjective. Different people will accord different valuations to the same thing, making it more valuable to some than to others. Value may change over time even in the mind of one person. Something he or she values highly at one time might be less valued by them at a later time.

Trade and exchange take place precisely because different people accord objects different valuation. A barter deal is done because each person values the other's object more than the one they themselves have. A purchase occurs because the person with the money values the object more, whereas the person with the object values the money more. Both gain from the exchange, because each parts with something they value less, and receives something they value more. Trade thus creates wealth by giving the parties involved more value than they had before.

Because value does not reside in objects, there can be no external or objective valuation. There is no "labour theory of value" telling us, as Marx said, that something is worth whatever labour it took to produce, and that when something sells for more than its "labour value" this represents the "surplus value," or exploitation charged by the producer. Not so; it represents the higher valuation placed on the object by the buyer over the seller.

Similarly there can be no valuation based on factor inputs such as land, capital and labour. Value is in the mind of the person, and is entirely subjective. A thing may incorporate many inputs in its production, but still be worthless if no-one wants it. In practice this tends to limit what is produced to that which people will value more than the production costs. Entrepreneurs seek opportunities to produce goods that people will value, and for which they will pay more than the production costs. They guess ahead what valuation people might place on the future output. Given that our valuations change over time, sometimes they get it wrong; but the rewards go to those who successfully anticipate the value people will place on their output.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.

Philosophical observations on economics

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I rather think that in the aftermath of the financial crisis there will be much rethinking about economics. Many of the current economic models did not fare well in either predicting or explaining what happened. The initial response, that the crisis was caused by greedy bankers taking too large risks under too light a regulatory framework, has increasingly given way to a view that points to the part played by governments and their central banks in making credit too easy and money too cheap. People responded to the signals this sent out, making loans that would not have been made had credit been tighter, and incorporating poorly quantified risks they would have been more cautious of had money been harder to get.

I intend to make a series of philosophical observations that do not purport to be original insights, but which, taken together, bear on the nature and study of economics.I will set them out in a series of short pieces over the next few days. They are not asserted as necessary truths, but rather as suppositions which seem to be supported by the evidence. Inputs, constructive criticism, and further similar observations from others are all welcome.

1. There is no such 'thing' as value.
2. People seek to improve their lives.
3. Every economic activity uses energy and resources that might have sustained other economic activity.
4. Price is transient.
5. For every multiplier there is a de-multiplier.
6. Inflation is not a cost-push phenomenon.
7. There is no equilibrium position in economic activity.
8. Inflation and unemployment are not inversely related.
9. Economic statistics are a subset of history.
10. Most economic factors change when time is entered into them.

On banning things in the name of Gaia

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You'll recall that our masters over in Brussels decided to ban the incandescent light bulb all in the name of protecting Gaia? You might also recall the occasional mutter from the likes of me that we really don't want government picking technological winners in quite such a manner? Even if you don't, here's an illustration of the point:

Light-emitting wallpaper may begin to replace light bulbs from 2012, according to a government body that supports low-carbon technology.

A chemical coating on the walls will illuminate all parts of the room with an even glow, which mimics sunlight and avoids the shadows and glare of conventional bulbs.

Now as someone who works in the lighting industry* at times I'm a little more suspicious of this new technology than the journalists who have been printing this press release are. However, it does illustrate one problem with this "picking winners" approach. Note please though that I'm not talking about the government funds going into developing this new technology, rather I'm interested in the banning of the old.

Lighting as a whole is going through a technological revolution. It's quite obvious that at some point in the coming decades light will be provided by some variation of Light Emitting Diodes (LEDs, as this is a form of). The incandescent bulb will be gone after having had its century in the Sun. But so also will the mercury vapour bulb, including the compact fluorescent lights which we are now all urged to install and consume.

And the problem with the banning of the incandescent is that we're currently being forced into investing in the re-equipping of a large percentage of domestic light fixtures because CFLs will not work everywhere that incandescents do: and the LED technologies are just not ready for prime time yet.

That is, because politicians have to do something, anything, right now, are entirely incapable of simply doing nothing and allowing the world to unfold at its own pace, we've been forced into the very expensive process of adopting a third light technology. An unnecessary one: if we'd left well alone we would have gone from incandescent to LED without the costs of retro-fitting for CFLs.

That's why we don't want politics or politicians deciding which technologies we may use: they always, but always, make the wrong decisions.

 

* Just to note that my work in the lighting industry makes money out of people using mercury containing bulbs. So I'm delighted personally by this stupidity but I do try not to think that what is good for Tim Worstall is also good for Great Britain.

Avoiding a Greek tragedy

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Greece is in trouble over its debt, particularly after the discovery that its budget deficit was around twice as large as a percentage of GDP as had been expected. The Prime Minister George Papandreou announced a series of significant spending cuts, including a 10% cut in overall government operating budgets and a cut in social security. Despite this, his plans failed to glean credibility with all three international rating agencies. Although the UK has a lower debt as a percentage of GDP at 68.6% compared to Greece's 112.6%, its budget deficit is slightly higher as a percentage, and so far plans for debt reduction come to cuts of only 3.2% a year according to the IFS, far lower and less ambitious than those of Greece.

The credit agencies may be waiting for an expected change of government before they seriously question the UK's treasured AAA rating, but whoever wins the approaching general election will have to do much more than Greece to appease the credit agencies and prevent government borrowing costs spiraling out of control.

The lesson to learn from Greece's experience is that a bold plan is sometimes not sufficient, although unquestionably necessary. Leonard Mlodinow's book "The Drunkard's Walk" cites the psychological effect of providing fuller justifications to alibis in order to bolster their credibility in almost all walks of life: Mr Papandreou announced huge cuts, but failed to explain where exactly they would fall. The UK's Prime Minister in 2010 would have to make absolutely clear what would be cut, as well as by how much if its plan is to attain adequate credibility. Whilst general aspirations to cuts by the Conservatives in all departments except health and international development may be a start, a serious programme involving specifics is urgently needed. A new government would not have very long to appease the agencies, so a plan may have to already be in place.

Policies for 2010: Workfare

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Workfare is another policy idea whose time finally seems to have come, with both Labour and the Conservatives signed up to its basic principles, which are largely derived from the United States’ welfare reforms of the 1990s. Our 2007 report Working Welfare by Katharine Hirst provides an excellent guide to these reforms, and the lessons the UK can learn from them.

The primary feature of ‘workfare’ is that all unemployed people seeking state support should face immediate work requirements – no work, no benefits. Subsidized jobs and compulsory work experience should be the preferred options, but if no such employment can be found then welfare claimants should have to do community service. Those with severe education deficiencies may undergo training, while claimants with alcohol and drug problems would be expected to undergo treatment. The key here is to make taxpayer support something which must be earned – not something to which one is simply entitled. The point is to prevent dependency becoming pathological, and to get unemployed Britons working again.

The other main feature of workfare is that it involves contracting out welfare provision to competing private and voluntary agencies, who would be paid according to their results. In other words, for each individual claimant they would receive part of their payment only when that claimant has found work and kept a job for a specified period of time. The longer someone had previously been without work, the greater the performance bonus for the provider would be. Thus there would be a strong incentive towards active, individually-tailored welfare provision that focused on re-entry into the labour market.

This much seems to be well-understood among policymakers. There is also an appreciation of the importance of simplifying the benefits system – perhaps replacing the current 50-or-so separate benefits with just two or three basic ones – while paying particular attention to marginal tax rates for those moving from welfare to work, to ensure that work always pays. But one thing which has largely been overlooked, and which played an important role in the success of the American reforms, is decentralization. Since the cost of living varies across the country, so too should benefit levels (and, indeed, the minimum wage, if we must have one). Over time, this ought to become one of the functions of local councils.

What is seen and what is not seen

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As M. Bastiat pointed out all those years ago the difficult part of thinking about economics is the looking for the things which are not seen. As with the recent changes to taxation at the top end of the income scale and more specifically of bankers.

JP Morgan, the giant US investment bank, has warned the Chancellor it may scrap plans to build a £1.5bn flagship European headquarters in Canary Wharf if politicians don't rein in their attacks on the City.

We can sometimes model the effects of tax changes (and of regulations etc.) on the activities that people already undertake. The opposite results of the income and subsitution effects and possibly the balance: maybe even a close approximation to the actual sum.

But it's very much harder, near impossible, to work out what would/could have happened without the new taxes and regulations and what will happen. Instead of who will work less or who will relocate out, who would have worked more, who would have relocated inwards, what new businesses will now not be started?

Just as an example, the new top rate of taxation of 50% is estimated by the Treasury to have net income of around £2 billion a year. Others disagree and think it could be less and even negative in its revenue effects. But if those who would have come but now will not, as with this JP Morgan development, are not going to be paying into the UK taxation pot then we're closer to the tax rise leading to a fall in revenues.

In other words, when we look for the Laffer Curve and its inflection point we need to be looking at not just what can be seen but the potential futures which are not seen.

In praise of Will Hutton

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No, I agree, not what you expect  to see here, a piece praising Will Hutton, he of the government should regulate and intervene everywhere shtick. But sometimes it is neceessary to praise those you disagree with, as I am now doing with Will Hutton.

We are looking disaster in the face. A British version of Fannie Mae and Freddie Mac must be created now. Legislation to create a Gordon Mac should be introduced before the summer recess.

An interesting idea floated on 22 June 2008. Then we had Paul Krugman on July 14 2008 saying that the two FM's were in fact part of the cause of the problems. Specifically that their public/private role was a problem. On July 15 that year, James Hamilton thinks they're a problem. On the 16th, Larry Summers says that "one hopes that we are now witnessing the end of this particular experiment in creative capitalism".

And on Christmas Eve the news was floated out that:

The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.

Yes, that's right, they not only went bust they now have (something which the commercial banks do not have) unlimited taxpayer support. Oh, and their senior management is still getting bonuses: $6 million this year.

Without Will Hutton where would we be? How would we know what not to do if he were not there to guide us?

Thus praise is due to Will Hutton. As with the recent comment about Polly Toynbee from Fraser Nelson: every compass needs its butt end.

Making healthcare a human right a mistake

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The “right to health" is enshrined in several major international treaties, many national constitutions and forms the basis of policy for nearly every major aid agency and humanitarian NGO.

Unfortunately, treating health as an enforceable human right does not work.

Traditional human rights like free speech and the right to peacefully enjoy property have helped restrain the actions of authoritarian governments all over the world.

Since the Second World War, however, international human rights treaties have added positive rights such as health. These require government action, not just restraint.

Positive rights were intended as political aspirations. However, revisions by the UN’s International Covenant on Economic Social and Cultural Rights have made signatory governments legally obliged to “respect, protect and fulfil" the right to health for all individuals.

This new interpretation of the right to health is used as a political tool. The UN’s ideological commissars insist that human rights risk being infringed whenever healthcare is provided through the insurance market or other private means.

Canada’s 2005 Supreme Court decision to overturn Quebec’s ban on private health insurance was criticised by UN experts on the grounds that it interfered with the right to health. The health systems of Korea and Switzerland have similarly been criticised for having too much private involvement, despite delivering high quality services.

Meanwhile Brazil’s constitution recognises the right to health, but shortages are common in state pharmacies. Patients therefore sue the government, creating an intolerable burden on the judicial system. More than 1200 cases of judicial review are sought in the Rio Grande do Sul region alone each month.

The right to health is a blind alley. Traditional rights let people lift themselves out of poverty, giving them the resources to afford clean drinking water, good nutrition and the decent healthcare systems necessary to achieve good health.

Jacob Mchangama is head of legal affairs at the independent Danish thinktank CEPOS. He has written a paper that challenges the widespread acceptance of the existence of a human right to healthcare for IPN. It can be accessed through their website here.