Did this Burke really work as an economist?

Seriously, in The City?

Listeners to the Today programme on Radio 4 on Wednesday were treated to a knockabout interview with the architect of the Laffer curve: a graph which purports to show that lower tax rates for the rich will lead to higher tax revenues.

It\’s also a theory which has been widely discredited, both on a theoretical level and in practice.

Disproven in theory? What? You jest, you mean proven in theory the argument now being about where the tax rate that maximieses revenues is, that is what you mean isn\’t it?

Because with the Laffer curve – perhaps unusually for economics – we have a historical instance of it being implemented by a direct proponent. Laffer was an associate of the Reagan administration, which had a staged cut in the marginal higher rate of personal income tax from 70% to 28%. The effect on the budget deficit was also striking. Reagan doubled it to $155 billion and tripled government debt to more than $2trillion. His successor, Bush senior, was forced to raise taxes as the deficit doubled again.

What logic! The deficit rise thus taxes collected must have fallen. But, erm, what happened to spending at the same time?

Not all taxes were treated the same. Payroll taxes were increased. So taxes were cut for higher earners while workers paid more.

Ooooh, dearie me. Something to understand about the US system. The payroll taxes pay for social security. This is supposed to be self-financing over the long term, not reliant upon general revenue. Recall all that stuff about the trust find etc? Those Reagan rises in FICA were all about restoring actuarial balance to the SS budget.

You could characterise it the way Burke has done but it would be deeply misleading at best to do so.

The Laffer curve relies on the twin assumptions that the rich create the output in an economy and that they need incentives to choose idleness over work. But there is little evidence to support these hypotheses. On the contrary, economists from Adam Smith to Karl Marx have known that all value in an economy is created by labour.

Erm, incentives to choose work over leisure I think you\’ll find. And this is true of everyone of course, not just the rich.

But I am fascinated: can someone survive as a City economist while still believing in the labour theiry of value?

36 comments on “Did this Burke really work as an economist?

  1. can someone survive as a City economist while still believing in the labour theiry of value?

    Yes, strange though it might seem. There are various roles in banks and large trading houses which require ‘economists’ (specifically those with degrees, higher degrees or Phd’s in economics as part of their job description), however their use is largely to review business plans and portfolios to ensure that they make economic sense (not just P&L)

    A great deal of economics are about fundamentals (demand/supply, incidence, incentives, etc.), but once you get beyond these fundamentals it can become rather nebulous at which point the prejudices of the individual come out in the particular ‘flavour’ of economist you get (Keynesian, Austrian, etc.).

    I’ve never seen and advert saying “Wanted economist with 1st from Oxbridge – Keynesian’s should not apply.”. Imagine how well this would go down with Human Resources.

    So yes, it doesn’t surprise me that these idiots exist in the City, there is plenty of fat for them to thrive on and they can survive for years between the regular black-bag culls that occur in any bank or trading organization.

  2. There’s the usual startling ignorance in the comments. This one, from a “C” contributor (so, probably, you would expect to be on the Dagenham side of wholly ignorant) is luvverly:

    Except that we are constantly reminded that no one pays more tax than the law obliges them to, so reducing tax won’t reduce avoidance.

    “No one”? Lots of people pay more tax than the law obliges them to – either because they don’t have enough free cash / capital to take advantage of certain allowances, because they are in a rigid PAYE scheme with no flexibility over how they receive their pay, or because they are unaware of the various sensible exemptions, weird boondoggles, special pleading exemptions and simple loopholes that have been left in the system.

    People taking deliberate advantage of such, simply for the purposes of avoiding current tax (buying productive woodland was one from a decade or so ago?) is ‘avoidance’. Flattening the tax system, regardless of the rate, will reduce avoidance simply because it reduces the opportunities for such. I suspect it would also reduce evasion as it becomes more difficult to obscure the source of the money but that’s just a personal prejudice.

  3. It’s is also quite amusing that for the majority of the commentators the underlying point is “how can we maximise government revenue” not “how can we best pay for the things we need the government to do.”

    It’s a completely different world-view.

  4. …. I suspect it would also reduce evasion as it becomes more difficult to obscure the source of the money but that’s just a personal prejudice…..

    In former communist countries (Estonia being a good example) where simplified flat taxes were introduced, a large part of the logic behind it was to reduce evasion.

    There are costs associated with evasion, such as bribes, the inability to best utilise IT so as not to leave a trail, the need to not grow too big.

    If you lower tax rates in an economy where evasion is a big problem, you achieve two things.
    1) Many economic actors decide that the cost / benefit is no longer in favour of evasion
    2) Legitimate businesses take market share from their unregistered competitors as the competitive disadvantage is reduced.

    In fact Greece, Spain and Italy should be working on simplifying their taxes and cutting those most easily evaded.

  5. But I am fascinated: can someone survive as a City economist while still believing in the labour theiry of value?

    Well it would explain a lot…..

  6. But I am fascinated: can someone survive as a City economist while still believing in the labour theiry of value?

    Definitely. Some econonomists will specialise in areas such as trade and country forecasts, forecasting macro indicators, investment strategy, etc, and still be able to hold wacky opinions re taxes/Laffer curves, labour theory of value. Indeed, it can be easy to still retain those opinions as they are not usually communicated/of interest to clients so don’t have to be explained and defended.

  7. He may be using the term “value” when more precisley meaning wealth is produced by labour which in that case is not the labour theory of value. The labour teory of value is that prices are created by labour.

  8. either way it’s garbage, unless by ‘labour’ you include robots; software; the internet, etc., etc.

  9. yes depending on the particular context you would include products of the intellect as labour.

    Anyway in that four sentence paragraph he mixes up “output “, then”value” and then invokes demand side economics , and so it is not clear what he is talking about.
    Hmmmm ..probably demand side economics….probably.

  10. Chris @ 6, as Ronald Reagan would say, “There you go again.” Spoiling things with evidence. Really. You’ll be asking for evidence based medicine soon.

  11. Dinero, letmethink, an even more obvious refutation of the theory that all wealth is produced by labour is that we all get immense value from air, even though that’s not produced by labour (unless you count the efforts of plants and bacteria). Rain’s another (though sometimes it comes in such great quantities as to destroy value).

    Or another example is that I understand that most mines will extract large quantities of rock which they then abandon rather than sell to market, because what they care about is the rare minerals/iron-bearing ore/diamonds/etc, not the labour that went into extracting the rocks.

  12. I meant “obvious” in the sense that the examples I gave I think are even less arguable than letmethink’s ones of robots, software, the internet, by the way.

  13. “Listeners to the Today programme on Radio 4 on Wednesday were treated to a knockabout interview with the architect of the Laffer curve”
    Impressive – Ibn Khaldun dies in 1406. I didn’t know tape-recorders were around then.

  14. Tracy>

    Is air of any utility without people to breathe it?

    I think what actually is meant is not a redefinition of ‘value’ but of ‘labour’ to a point where it simply means all people put together (except the rich, of course) regardless of whether they’re actually engaged in productive activities. Under that definition of labour it’s trivially true that nothing has any value except as a result of human interactions.

    On a slightly different note, I coincidentally saw the Laffer curve in action on an individual basis last night. A friend had just looked up car insurance rates – car insurance is, after all, essentially a tax in this country – and was complaining that his (£1500+) quotes were outrageous, unfair, dishonest, etc etc, and planning how he might evade them, including to the extent of not getting a car. I found him a classic-car insurer who would cover him (entirely legally) for a couple of hundred quid – same car – and suddenly his objections disappeared.

    What always amuses me about those who argue with the Laffer curve is that they invariably seem to also believe in the power of behaviour-altering taxes like those on cigarettes or large-engined cars.

  15. Dave> I have noticed that contradiction too . Some politicians say it is unlikely that people will change their behavior to avaoid tax, or on other occasions they say it is wrong to change ones behaviour to avoid tax , when in fact the operation of the social democrtic system is based on coercing peoples behavior via the tax system.

  16. If I’ve understood it correctly, “labour” in the labour theory of value is the labour that has gone into producing the product (including, depending on your theory, a proportion of the labour that went into developing it and making any capital equipment required to produce it).

    But value can be changed by other factors. For example the development of the internal combustion engine created a new use for petrol and hence increased its value.

    (I’ve read that didn’t actually feed through into a long-term increase in price, but only because supply was increased dramatically. For a given level of output it would have increased the price)

  17. Richard, that is my understanding of LTV too. And it is so self evidently wrong that I can’t believe that it was ever accepted as having anything to do with value.

    I make two nearly identical widges. At the last moment on the second widget my hand slips and I break the widget. An identical amount of labour has gone into each widget, but one of them is now valueless, and one has a value. So much for LVT.

  18. ChrisM>

    It’s not quite that daft. The proportion of widgets that you’d break would be factored in to the labour cost of the widgets you didn’t break. In your example half the widgets break, so it would be reasonable to say that the labour cost per widget is doubled.

    Personally, I find this whole debate nonsensical. Value is an axiom, and needs no justification; it simply is. Asking for an explanation is like asking a mathematician to explain why two things added to another two things gives four things.

  19. (Further to that, consider whether something which has no value – rather than positive or negative value – has any relevance to any economic debate. Plainly not, except insofar as it might get in the way of other economic activity and therefore gain negative value.)

  20. ON widgets. my mate makes 10 perfect widgets in an hour , I , with equal effort, make one broken widget.

    IS my broken widget worth 10 times each of his perfect widgets?

  21. Dave, OK then suppose I spend ages creating widgets and I break them all, or I make lots of widgets, but my neighbour makes better and cheaper widgets. The fact remains the amount of labour I expend on making widgets, and the value they have are not related.

    DocBud, no just a typo 😉

  22. Or, on of my personal favourites courtesy of a commenter on Harry’s Place, I could spend 23 hours a day, dipping swan vestas in vinegar one by one and drying them. Lots of hard work, but of no value whatsover.

  23. Unless I’ve misunderstood, under LTV different kinds of labour can have different amounts of value attached to them.

    All that really does, though, is shift the place where value is defined, and then leave the problem alone because, like I said, any theory of value is an attempt to explain that which cannot be explained. Essentially labour theories of value say that ‘value is the same as the value of work put into something (or got out of it)’ and utility theories of value say that ‘value is the same as the value of the utility provided by something’. In both cases, there is no actual theory, just some meaningless semantics.

  24. Dave (#26) yes, different kinds of labour can have different values, but only to reflect the investment in training. If they’ve both had the same amount of training, they’re supposed to have the same value.

    As you say, utter nonsense.

  25. SteveT (#23), if I’ve understood it properly, your mate’s widgets are only worth more if he’s had the widget training and you haven’t. And even then, his are only worth as much more to reflect the time input into the training.

  26. Value is NOT the same as price. The blackberries growing alongside a footpath have value to the walker (especially if he has kids in tow) but no price. Markets exist because values are subjective and people buy or sell at prices that are lower or higher respectively than the perceived value.
    Karl Marx was an urban intellectual with servants who did the shopping for him, so it is possible that he didn’t understand this, but to accuse Adam Smith of not knowing that is a gross libel.

  27. Indeed – the whole point being that the value of everything (including money) is subjective. You get a transaction when 2 people come together one of whom is offering a good or service for less than the price (in money, goods or services) that the buyer values the item at.

  28. Under that definition of labour it’s trivially true that nothing has any value except as a result of human interactions.

    Well, nothing has any value to *humans* except as a result of human interactions. But before humans evolved, I think it’s safe to say that our non-human ancestors and all the other animals and plants around at the time found value in things like air, water and food, and perhaps pretty things like the equivalent of the peacock’s tail.

    But that doesn’t mean that all value to humans is created by human labour. Oil is valuable to humans because of its chemical properties, as well as because of the human labour put into extracting it and preparing it in more usable forms. That’s why people spend fortunes searching for oil, rather than just digging up whatever happens to be in their backyard and processing it like the economy processes oil. To get something that’s valuable you need *both* the human labour and the underlying chemical properties.

  29. Pingback: A Link to the Past 29/06/2012 « In Defence of Liberty

  30. I believe that Marx said that use value value must be present in a commodity if it is to have exchange value. A broken widget would therefore have no value if it had no use value. It may have a lesser exchange value it has an alternative use and can be sold as scrap.

    Marx also said it was the socially necessary labour time (not labour time per se) that gives value to a commodity. So a commodity that took more time than is efficient (as measured by engineering standards) would not have more value as a consequence of being made inefficiently.

    The replacement of labour by machines does not necessarily negate the labour theory of value. Machines possess the properties of labour. Moreover, machines were built by labour and so the value of a machine is dependent on the socially necessary labour time that went into their construction. A machine’s value is then part surrendered via depreciation into each commodity it produces.

    Even banks create value dependent on socially necessary labour time. Those derivatives with use value (eg hedging) have been conceived and designed by labour processes.

  31. I believe that Marx said that use value must be present in a commodity if it is to have exchange value. A broken widget would therefore have no value if it had no use value. It may have a lesser exchange value it has an alternative use and can be sold as scrap.

    Marx also said it was the socially necessary labour time (not labour time per se) that gives value to a commodity. So a commodity that took more time than is efficient (as measured by engineering standards) would not have more value as a consequence of being made inefficiently.

    The replacement of labour by machines does not necessarily negate the labour theory of value. Machines possess the properties of labour. Moreover, machines were built by labour and so the value of a machine is dependent on the socially necessary labour time that went into their construction. A machine’s value is then part surrendered via depreciation into each commodity it produces.

    Even banks create value dependent on socially necessary labour time. Those derivatives with use value (eg hedging) have been conceived and designed by labour processes.

  32. @TraceyW

    Value refers to the exchange value of a commodity. For a commodity to have exchange value it must have use value and it must have labour content. This explains why air has no exchange value (ie it is free) – it has no labour content in its production or extraction. Of course, if air becomes polluted then labour processes will be required to scrub it clean and to deliver it. Then it will have exchange value.

    @John77

    Blackberries on a bush have use value to a walker (he or she can obtain nourishment from eating them) but they have no exchange value until they are picked and transported to a place of sale. It is the socially necessary labour time required to pick and to transport them which gives the blackberries their exchange value.

    @TraceyW

    Oil has use value (provided by its chemical properties) but it has no exchange value while it is in the ground. Once it has been extracted it acquires exchange value which under the LTV is due to the quantity of socially necessary labour required to extract it. Socially necessary labour time is the time it should take an efficient workforce to extract it.

Leave a Reply

Name and email are required. Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.