Is this the economics they teach at SOAS? George Irvine spouts nonsense

The economist\’s notion of public goods has lost currency in this age of commodities, not just in the EU but particularly in the Anglo-Saxon world. Unlike today, two generations ago, economics undergraduates were taught that such goods were different from soap flakes and hamburgers. Public goods and services are things which need to be supplied – or at least regulated – by the public sector because they are by their very nature collective.

No, that\’s not the definition of a public good and it really would behove a Professor of Economics to get it right. Public goods are by nature non-excludable and non-rivalrous. Those two mean that it\’s very difficult to make money out of them: thus they will be undersuppplied in a pure market system. That is the argument for State intervention: yes, there really are such things as market failures and yes it really can be a good idea to intervene in them. However, we only get to call on the public goods argument when we really are talking about public goods.

These days, however, the distinction between \”public\” and \”private\” has become blurred, and among mainstream economists the consensus appears to be that because the private sector is more efficient than the state, we should limit the public role almost entirely to that of supervision. In Britain, for example, the railways were privatised and an \”internal market\” was created within the national health service on the grounds that this improved the efficiency of service delivery for \”customers\”.

But public supply is not equal to a public good. That\’s a very naughty shading of the meanings.

We can say that certain parts of the health care system are very definitely public goods. The herd immunity and protection from epidemics aspects of vaccination perhaps. This does not prevent granny\’s hip replacement from being rivalrous or excludable.

And train journeys are definitely both.

This still leaves open other arguments for wanting public provision of such goods, but they\’re not public goods and so we cannot use the public goods justification.

Do note also that there\’s nothing in the public goods argument that states that such goods must be publicly provided. Only that there should be intervention. I\’m quite happy that the NHS provides vaccinations. But we could still solve the public goods part of the problem by subsidy to private doctors (erm, actually, with GPs, that is the way the NHS does it) or perhaps a law mandating a full set of vaccinations by a certain age. I don\’t say that these will be better or worse than the current system: only that they would solve the public goods aspect of it all.

Indeed, there are some politicians who – as followers of the economist Friedrich Hayek – would abolish all forms of state supervision or control, and a few who would abolish all taxation.

That ain\’t what Freddie von H said and you know it. Jeebus, strawman or what?

Anti-state ideology goes back a long way, but its major driver in the last century was doubtless the Reagan-Thatcher revolution and, at a global level, what became known as the Washington consensus, ie, the rightwing orthodoxy associated with the IMF and the World Bank.

The, err, right wing Washington Consensus? Dang, it\’s just a short list of stupid things you shouldn\’t do in order not to screw up the economy.

The consensus as originally stated by Williamson included ten broad sets of relatively specific policy recommendations:[1][8]

Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
Redirection of public spending from subsidies toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
Tax reform, broadening the tax base and adopting moderate marginal tax rates;
Interest rates dictated by market forces;
Competitive exchange rates;
Trade liberalization: liberalization of imports, with particular emphasis on elimination of tariffs;
Liberalization of inward foreign direct investment;
Privatization of state enterprises;
Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
Legal security for property rights.

Legal security for property rights is just so right wing isn\’t it? So is directing spending to primary education and primary health care.

Among others, economists such as Anne Krueger and Jagdish Bhagwati helped popularise the notion that civil servants are really \”rent-seeking\” bureaucrats whose contribution to society is nil.

No, the point is that sometimes civil servants are such and that when they are then their contribution to society is negative.

Duck houses for MPs comes to mind.

This does not prevent other bureaucrats, or even the same bureaucrats at other times, being not rent seeking and also great additions to the joy and gaiety of the nation. The point is that we must learn to distinguish between these two and attempt to prevent one and encourage the other.

Market fundamentalism, the best-known US apostle of which was Milton Friedman, was developed inter alia by Thomas Sargent into rational expectations theory, which argued that markets contain all available information and are populated exclusively by fully informed consumers and producers for whom all future risks are calculable.

That\’s not rational expectations either. Which actually is that humans are not systematically wrong but randomly so. Further, this is a modelling assumption which is appropriate for some models and not for others. Just as the model that we\’re all delighted to do something for the benefit of our neighbours is. Child drowning in pond will motivate most of us (except modern police under elfnsafety rules) to wade in altruistically. Baking the bread for free in Padstow for some fucker in Newcastle to eat for free less so.

As a Professor of Economics should know, modelling assumptions do depend upon what you\’re trying to model.

Although there are some circumstances in which it is sensible to privatise, there are many good reasons why wholesale privatisation should be shunned. The first and most important reason is that abolishing universal free access to public services will make us less equal.

That is not a public goods argument, is it now?

By analogy, a major reason for providing universal healthcare as a public service is that decent medical treatment should not be a privilege reserved for the few.

Nor is that.

The same public logic holds for education. Universal literacy may be instrumental to developing a skilled workforce – a notion much loved by Tories – but the real reason we value education is because it is a necessary (though insufficient) component of a well-functioning democratic society. Education is not a commodity to be purchased according to individual preference; it\’s central to the meaning of civilised society.

Indeed, Adam Smith argued that universal literacy was such a public good. And as ever, Adam was right. But we have universal free at the point of consumption State education and we don\’t have universal literacy. So while there\’s a public goods argument for intervention there doesn\’t seem to be a good one for State provision given that it doesn\’t actually solve our public goods problem.

It used to be argued that publicly owned industries are necessary in the case of \”natural monopolies\”; ie, where long-term economies of scale in production make for \”monopoly profits\”. It is only fair that government – through ownership or regulation – captures such revenues for the public benefit.

That\’s actually not quite the argument. Rather than the capturing of such monopoly profits it is that either they should be so captured or they should be regulated so as not to exist.

Also, because natural monopolies (eg, water, energy, transport)

Water may well be a natural monopoly, as is energy distribution. But there\’s absolutely nothing at all about energy generation that makes it a natural monopoly and very little about transport that makes it so.

typically require very large initial capital outlays, often the state alone is in a position to finance them.

And that\’s pure bollocks. You can raise the money to build a power plant, a toll road, in an afternoon in The City. Further, one of the major arguments in favour of the privatisation of the utilities was that for political reasons the Government wasn\’t willing to invest sufficiently in them. Capital expenditure since privatisation has been vastly higher than it was before.

What has happened in recent decades to many public utilities is that, having been established and run by the state often with a strong element of public subsidy, they have been sold to private interests at knockdown prices on the grounds of fiscal rectitude (and with the blessing of the IMF).

Conveniently forgetting that most of them became public utilities through the nationalisation at knockdown prices of privately created firms and infrastructure.

For example, we didn\’t build the NHS hospitals in 1948. We took over those already extant. No doubt someone will be able to tell me when the NHS did first build a new hospital.

Another reason for preferring public provision is where \”external\” costs or benefits exist. A contemporary example of such an externality is where an industry damages the environment. A private company might want to cut down swathes of forest to grow crops for biofuel, disregarding the long-term environmental impact. Such companies typically have short-time horizons – they must make profits for shareholders next year, not next century. Government needs to step in to take the long-tern environmental effect – or any other form of market failure – into account.

Sure, externalities. They again are an argument for intervention: but they are not an argument for public provision.

In short, arguments favouring private over public provision are not just theoretically flawed, but typically favour the few at the expense of the many. The pendulum has swung too far to the right: it\’s time to stand up for public provision.

Perhaps it is and perhaps it isn\’t but by God you\’re going to have to come up with better arguments than this drivel.

10 comments on “Is this the economics they teach at SOAS? George Irvine spouts nonsense

  1. “A private company might want to cut down swathes of forest to grow crops for biofuel, disregarding the long-term environmental impact. Such companies typically have short-time horizons – they must make profits for shareholders next year, not next century. Government needs to step in to take the long-tern environmental effect – or any other form of market failure – into account.”

    Er, in this particular case isn’t it government intervention (ie mandating the minimum proportion of biofuel) that is a direct cause of the rainforests being cut down to grow that biofuel?

  2. This loon was apparently doing a masters at LSE when I was an undergraduate there (not specialising in economics I should add) in the mid 60s. Frankly, the actual process of teaching economics then and there was awful. Irvin’s (wilful?) ignorance illustrates that LSE’s failure in that particular exercise was not confined to undergrads. Mind you he did PPE at Lincoln College, Oxford so, I suppose, the GIGO principle probably extends to that august institution.

  3. This notion that governments have long-term interests, but company directors and shareholders have short-term interests amuses me.

    Any shareholder who is in it for the returns is in it for the long term – most of our shares are in our pensions, ffs.. Governments and ministers are in it to make sure the win the next election, or stay in post (or not stay in post, but get shifted to a better one). Company directors should have long term interests in mind too, albeit that poorly-designed incentives can mess that up.

    But, really, how can anyone even begin to make the argument that governments make decisions for the long term when every minister appointed begins by changing everything that the last one did.

    Show me a government who agrees not to change anything for five years, and I’ll show you one that’s given a nod to the long term. And I’ll vote for it.

  4. …..run by the state often with a strong element of public subsidy, they have been sold to private interests at knockdown prices on the grounds of fiscal rectitude…..

    In plain English the strong element of public subsidy means “running at a loss” hence the knockdown prices.

  5. “No doubt someone will be able to tell me when the NHS did first build a new hospital”

    West Cumberland claims to be the first hospital built by the NHS:
    http://www.buildingyourhospital.ncuh.nhs.uk/index.aspx
    Opened 21st October 1964.

    Whether it was truly a “new” hospital can be debated, since it was not an additional provision but only a replacement for an existing nationalised pre-NHS charitable one (which the NHS subsequently sold off for housing).

    The dates mean that it was approved and built under a Tory government, in fact probably while Enoch Powell was Health Minister, although officially opened 5 days into the Labour government.

    Apparently a new one was needed in 1951, so it only took the NHS 13 years.

  6. The number of NHS beds appears to have fallen by at least 40% since the founding of the NHS. So one can argue that – in net terms – the NHS has still not built any hospitals.

  7. “Do note also that there’s nothing in the public goods argument that states that such goods must be publicly provided.”

    That was my first thought, e.g. GPs (fail – notwithstanding that personal health is not a public good, it’s a merit good) or emptying dustbins (which seems to work fine and at a reasonable cost of under £100 per household per year).

    And power stations are of course not a public good, it’s just a factory supplying stuff that people want and need. But history teaches us that things like the National Grid need the government behind them – not because the power companies didn’t want it and not because they weren’t prepared to finance it, but because of the bloody NIMBYs and landowners who will merrily stomp all over the Invisible Hand and prevent such things happening at affordable cost.

  8. Mark – for things like a national grid you also need common standards eg voltage and frequency etc…. Think also of mobile phones: Europe and a lot of the world was fortunate in that we all agreed on the GSM standard, which meant that only Japan and the USA were incompatible with the rest of the world. To be true, the adoption ofGSM was not forced by a plurality of governments, but it surely helped that a load of governments pitched in behind it, in the form of the detested EU.

  9. Such companies typically have short-time horizons – they must make profits for shareholders next year, not next century.

    Shite. A typical oil and gas project is 10-15 years in conception and construction, and 25-40 years in production and operations. The economics considers these periods, not next year’s profits. And yes, I attended a seminar two weeks ago where the lead economist of a supermajor said precisely that.

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