Amazingly, Willy Hutton believes in markets too much

Economies are like corks. They have inbuilt upward momentum driven by productivity and population growth. That momentum can be reversed for 18 months or two years in a typical recession when investment and consumption have run ahead of themselves, and of necessity fall back. But like a cork the economy will eventually bounce back to the surface – where it would have been had the recession not happened.

An economy left alone would indeed do that. An economy that has too much interference in it will not: there wasn\’t much bobbing in the Ottoman or Zimbabwean economies. That is, bad policy can stop this happening while in an absence of policy whether good or bad we do indeed get the cork bouncing back up.

And it is current bad policy that is causing the slow economic growth. One little story from the front lines of the global scandium trade. There\’s several waste streams that you can extract Sc from. I\’m working on a couple myself, as regular readers will know. There are Chinese companies working on the same waste streams….although the Chinese, not European ones. Excellent, that\’s fine, competition n\’all.

The Chinese can have the idea, build the factory and be in production in the time it takes me to get an environmental licence to proceed here in the EU. No, I don\’t recommend Chinese levels of pollution. But I do wish that people would understand that such regulation has a cost: that cost being, obviously, slower economic growth.

One (and note, only one) of the reasons for slow European and US economic growth is simply the encrustation of regulations that make growth slower. It\’s not solely (or even mainly, in my view) a macroeconomic problem. It\’s a micro one, one that will only be solved by micro means.

My solution would be quite simple in fact. No, don\’t abolish the regulations. Just make the bureaucracy pay for the applicant\’s complete application costs (including all engineering studies, appeals, lawyers, consultants and report writers) out of said bureaucracy\’s budget. That would get their thumbs out.

28 comments on “Amazingly, Willy Hutton believes in markets too much

  1. Just make the bureaucracy pay for the applicant’s complete application costs (including all engineering studies, appeals, lawyers, consultants and report writers) out of said bureaucracy’s budget. That would get their thumbs out.

    I disagree, citing Yes, Minister. The higher the budget, the more important the bureaucracy. Also it would lag based on the financial year, so they’d say “we could only process X applicants this year, 17X applied, next year we forecast 37X so give us 40 times the budget just to be safe.” In practice of course they’d get a fraction of that so there would be an almighty queue for applications. Why would the bureaucracy care that companies were missing out on permits? They’re still doing all their work and getting paid, and the longer the queue the more important they’d seem to be.

    Now if you combined that with “you can do it until the permit gets denied” you might be on to something.

  2. I agree, If someone had made the Home Office pay for CRB checks, it would have been designed properly (for sports coaches for example):

    Register once with a National Governing Body, with proof of address once a year.
    Report NGB Number to every school
    Every school registers they have coach with NGB
    If coach is caught, police report to NGB, NGB contacts schools.

    Instead we have Crapita getting £40 per school per coach per year. Unbelievable.

  3. Neither Matthew or Ken or even Tim are right. The solution is the southern European method – bribery. Those who really want something will happily pay for it. And if the bribery rates were published then everyone can budget for the cost.

  4. SBML: That fits with my theory, it’s the obvious way the queue order would be decided. With a dose of patronage, of course – I’m sure Mr Hutton’s journalism application would end up at the front of the list completely by accident.

  5. Re economies being like corks – bouncing back etc – what’s the ACTUAL MECHANISM the brings the “bounce back”? Keynes said there wasn’t one: i.e. he said economies can get stuck in permanent high unemployment equilibrium. Plus I can’t see what the mechanism is. On the other hand our economies bounced back from recessions in the 1800s, which was before the days of deliberate government stimulatory measures.

    Tim’s population and productivity idea doesn’t fit the bill. I mean is he saying that an economy with a constant population can’t bounce back? As to productivity increases, they of themselves won’t increase employment levels.

    I’m genuinely puzzled by this one. What is the “bounce back” mechanism? I don’t know.

  6. My alternate idea is that we find the dork who designed the CRB check and terminate them with extreme prejudice. No pension, no payoff, and an automatic termination of any public contract with any firm said dork goes to work for. Which would prevent Crapita hiring the undeserving tosser. A few examples like that and the little tossers might have an incentive to work properly. We could have an annual competition to nominate the most idiotic and biggest waste of public money – with a massive cull of those responsible. (If I were a dictator for a day, this would also happen to everyone who has ever suggested a national ID card system. Anyone ever found to have supported the concept gets canned, no pension, no public sector contract work. Pour encourager les autres)

    There would be no increase in any budgets to pay for the extra costs created by said systems if we did it Tim’s way of course. If the idiots really believe it is valuable, it must be paid for from their existing budgets.

    My problem with SBML’s solution is that we do need something like a criminal records check and corruption is hardly the way to achieve this.

  7. Ralph Musgrave

    Economies bounce back like corks because people who lose jobs find new ones, the machines and factories that were sold end up in the hands of those with capital and start producing again.

  8. RM
    If I understand what you’re getting at…
    Yes you could have a Pareto equilibrium at 90 even 99% unemployment. Not very helpful, deficient demand, etc.
    But demand is not deficient, in time it is limitless. In time those 99% unemployed go legit and rejoin the official workforce.
    Maybe, like. Don’t take my word for it.

  9. Ken, I said bribery was the answer, not corruption. If everyone knows about the bribery, it’s not secret and so can’t be corrupting. But it’s just an increased cost of doing business, but one that is more efficient at allowing stuff to get done than bureaucracy.

  10. If, as Tim says, incomes are rising then the bureaucracy becomes so much more affordable in this the best of all possible worlds.

  11. Ken and Bloke in France,

    You are both assuming and the necessary demand comes from somewhere. I still don’t see where it comes from.

    There is what’s called the “Pigou effect”. That’s the fact that when prices fall, the real value of the monetary base and national debt rise, so the value of private sector financial assets rise. And that would induce the private sector to spend. But my hunch is that that doesn’t explain the rebounds from recessions in the 1800s: the price falls just weren’t big enough.

    I’m still baffled.

  12. DBC Reed, no bureaucracies reduce income growth and are undesirable. Too much bureaucracy reduces income outright. The best of all possible worlds is more private sector, less public sector where externalities and public goods are dealt with optimally. Diversity advisers, five a day coordinators and children’s commissioners are all very far from optimal.

    Ralph, the employee finds a new job. He can spend. Not only that he can borrow against his future income. Some of the recession is caused by precautionary saving (people stop spending as much money in case they get into difficulty), this reverses as the shock that caused the recession passes.

  13. @Ken
    The private sector does n’t have any bureaucracy then?That ‘s funny because London appears to be entirely offices and is extremely prosperous. (Bureaucracy meaning running things from offices ,I have always tended to believe, from the etymology.) In fact, given competition, you would get two or even more private sector offices. When I worked once in the public sector ,we got, effectively, privatised, and all the jobs that were done centrally by a few low-paid clerical officers at the local authority , popped up in each of the several different establishments so they had one Human Resources/ Personnel department per location instead of one centrally. These decentralised offices got so big they took over space being used by the people actually providing the services. They began controlling policy. As King Gillette expounded in his book : competition increases bureaucracy. Originally ,one of socialism’s main arguments was that it reduced waste on support offices ( as when, in the private system now, mergers are predicated on one of the merged concerns axing offices , combining computer systems and securing economies of scale etc).
    The private sector can’t have it both ways: if mergers save money by centralising office work ,unmerged offices waste money.

  14. DBC Reed, clearly we are talking about the public sector bureaucracy. Why is this different? fundamentally because the public sector creates no wealth. It does activities that foster wealth – managing a justice system, a secure nation, it does some activities that also help to foster wealth but could be done differently – healthcare & education and does activities that are wealth destroying – the diversity advisors etc.

    Your example is really just another aspect of the non-wealth creating nature of the public sector. In a normal market situation, companies that foster out of control bureaucracies would find themselves outcompeted and disappear, but since their captive “customer” base is the hapless public, idiocies of the sort you cite are commonplace. (I’m not saying it doesnt happen in the private sector, just that it tends to competed away)

    Your last sentence appears to suggest that the State should be responsible for everything, since it would be a single centralised provider. In fact mergers are known to have limits in the private sector as institutions reach a size difficult to manage (there is a limit to size for banks in terms of efficiency for example) or that fall afoul of competition laws.

  15. @Ken
    Actually the public sector establishment that I worked in was Further Education. This is ,even in the balmy days of public control was ruthlessly competitive: if you did n’t get any students for your course one year, it did n’t run. I once spent a year preparing a course for the local university only for it “to fail to form.” There was a the famous case of Mrs Guy ,a part-timer ,who taught in Swindon for many years only to find herself one year with no work at all.
    There was a frequently repeated tale of a local authority in the Midlands where the popular (esp with Muslim students) Religious Studies A level was monopolised by one college which had 80 students .Come deregulation, liberalisation and college independence to compete, all 10 colleges in the area offered the course recruiting maximum 10 students in some colleges. All of these were declared uneconomic because the minimum funding requirement was 15 students. So no students got the Religious Studies course.
    Please explain how your vague concept of wealth is affected by a college or school going private. How does this increase the economic potential of the students who successfully complete courses (or the economic value) under the private system?
    Private sector good/public sector bad is superstition.
    BTW Gillette favoured centralising services in one corporation and tried to get Teddy Roosevelt to run for President on his privately funded ticket.

  16. The problem in your example is that you still only had one customer – the State. If there had been true deregulation all those courses would have run, everyone would have lost money. Colleges would have pulled out or gone under and eventually we would have had a match between demand and supply. The lesson I would take from your example (based on minimal info) is that the RS A level wasnt particularly well taught at the previous monopoly provider (since it would otherwise have maintained its position), although I can see other potential reasons – distance, choice.

    There is a need for public provision of public goods and to regulate externalities. When regulation becomes excessive (tim’s original point), we find the trade off between dealing with the externality and efficiency going the wrong way – diversity advisors etc.

    Should the State be in education? No, although I thoroughly approve of redistribution to pay for education – basic education has public good characteristics and is good for equality of opportunity -the Rawlsian test. I also thus favour redistribution for healthcare. Neither of these need be provided by the State. In the case of the NHS I dont favour the reforms beloved of Tim – it’s going to end up looking like your FE example, except the private sector will find mispriced ops (eg the proper cost will not be charged) and they will make supernormal profits undermining other NHS services.

  17. We expect choice without central control to result in competition and innovation. Imagine if every child had a school voucher that could be topped up and every school was competing to get students. (We’d probably also add more valuable vouchers for the poor, to compensate for their disadvantages). The best schools would expand, the worst ones would fail.

    Schools would then compete to offer the best education, there might be school corporations that managed many schools, to allow for a reduction in overheads, or for sharing of scarce, but useful teaching resources. Technology might be introduced to allow better learning experiences (MOOCs are seen by some as forerunners of this). Instead of some nitwit in the education department decreeing that we should use electronic whiteboards, we’d see the most suitable and best tech.

    There would probably be some losers just as there would be winners (I’d expect more winners than losers). There would still be an accreditation process and attempts to spread best practice. We’d probably have minimum standards – £rs, but beyond this, people would be free to offer what courses they wanted and their students wanted.

    In aggregate we would expect to see educational standard rise, students going to schools suitable for their interests and abilities and long run rises in economic growth due to increased human capital.

  18. Private schools already compete to provide an A level education. The problem is that they fail on the cost benefit analysis by charging in fees circa 500% what the public sector providers spend per pupil. If this competition is to be a level playing field , the spend per pupil would have to be uniformly at the level of schools charging maximum fees.

  19. DBC Reed, firstly not all public schools cost that much. Secondly, in the real world, we have people who provide the Aston Martin and people who provide the Toyota Yaris. It is not surprising that we find a variety of different products on the market catering to different demands. Your claim is akin to demanding that everyone should be given the money to buy an Aston Martin. Note that the improvement of the Toyota Yaris is dependent on its competition with other cars of the same class.

    If you want to attack the education as a private good there are far better reasons:

    1) Failures in education provision are substantially more damaging than buying a crap car.
    2) There would be a tendency to create sink schools with poor, underpriviledged and disruptive children would gather.
    3) A lack of information may prevent a proper market clearing price being achieved.

    2) is a serious issue, but one that already exists to some extent. 3) could be dealt with via compulsory publication of statistics. 1) is a serious issue, but again one that already exists to some extent. On the other side are expected gains from competition and innovation.

  20. @Ken
    ‘A’ levels are of a uniform standard ; at least, the same subject examined by the same exam board will be invariant in standard.
    You appear to want a competition where no expense is spared in one private establishment (Aston Martins) and costs are cut to the bone (Yaris) in the public sector. Along comes a voucher system and the Aston Martin customers get a discount, which they do n’t really need (like the winter fuel payment) while the Yaris class can’t pay the residue of the colossal fees for the Aston Martin education. Result: rich people get a State hand-out (or payback on tax ).
    Please demonstrate the difference from the Winter Fuel Payment system which last winter was paid to well-off expats
    living in a Mediterranean climate.
    Education vouchers are a bit old hat ,even in right-wing middle-class circles such as this, I would suggest .

  21. Oh dear, you seem to think that everyone should get an Aston Martin. No, the whole point of competition is that Yaris customers get a better Yaris because the Yaris is in competition with Nissan, Ford, Audi etc versions of the Yaris.

    You’ve fixated on the least important part – oh noes, rich people would get a state subsidy. Wow, rich people get a state subsidy in the provision of the NHS and they can buy private insurance (and yes I know the NHS doesnt allow mixed care nominally). Or that rich people get child benefit until recently. Or rich people can go to a state school and then (oh noes) get private tutoring. Get real.

    You asked how private sector provision would boost education and wealth. I said competition would boost quality of service provision. You said “public schools are expensive”. I pointed out that in all markets, provision varies from the expensive to the budget. You demand that the State should provide Aston Martins. I explain this isnt necessary. Your reply is that vouchers are a subsidy for owners of Aston Martins. In this post, I explain that owners of Aston Martins get a variety of state subsidies and this doesnt alter the fact that introducing competition even at the budget end would improve provision.

    In case you’ve not noticed we already have expensive public schools – the Aston Martins. And we have a monopoly State provider that provides one model of education: Yes, it’s a Lada.

  22. @Ken
    Arguing by analogy is never a good idea and this Aston Martin/Yaris analogy proves it. We are not talking about young people obtaining cars but passing A levels which are accepted as of a uniformly high standard and value (in providing ongoing opportunities for career progression and personal development).A good A level must be worth tens of thousands of pounds in life chances to students of whatever class. In studying for these it seems reasonable that in a competitive situation ( which already exists as of now), whatever help is given the students should be of roughly equivalent quality : to go back to the analogy= Why should some kids get the hand-crafted individual treatment of Aston Martin (who will fit out your car to your own specification) while the majority get the cheap and cheerful mass production methods of the State? No reason: save snobbery and class hostility.
    We used to bash out A levels in FE for about £1,000 a head per subject ( this is what the college received; we did n’t get that in pay).
    We used to get good results; One girl from a bog standard council estate background got 5 Grade A’s at A level in one sitting (she obtained the two extras by attending the College’s evening classes) She was n’t accepted at Oxbridge on class grounds naturally. We could have done even better with dedicated teaching rooms, more sets of books and better pay and conditions (we had to fight to keep A levels at the college until they turned into a cash cow) . This is the real world.

  23. DBC Reed
    Unfortunately the analogy works perfectly well. You want to force everyone to get the “same” help. This is absurd. Your idea would require that we abolish private schools, have criminal penalties for private tutoring and ban parents from helping – alternatively you want everyone to be given £20,000 or more to equalise the education spend.

    In the real world, we are actually talking about whether the standard of “bog standard” comprehensives would improve via competition. Economic theory suggests that it will – competition fosters innovation and reduces producer capture.

    You then want to talk about individual cases and how matters would be improved by more money. If money followed students and you were successful, you would not need to “fight to keep” anything, competition would have given you what you want.

    BTW, students rarely if ever are rejected on “class” grounds at Oxbridge. Most Dons are left of centre and tend towards admitting State candidates over Private candidates. I would note that nowadays 5 A levels at A grade is no longer surprising (the standards have slipped – if you look at the Telegraph rankings for A levels, the top 100 schools are achieving between 3.5 A stars and 5 A stars on average per student). For the more competitive courses, this would be no more than average. The primary reason why students fail to be admitted is because for the limited number of places in a course at a particular college, there were better candidates.

    This isnt to say discrimination doesnt happen, just that it tends to be far less important than ability and the luck of the draw (being with other better candidates in a pool). The Laura Spence affair is a classic example – she was rejected in favour of other better candidates including others from State schools.

  24. @Ken “Economic theory suggests that ..competition fosters innovation and reduces producer capture.” Economic reality suggests the opposite.
    The biggest expenditure for ordinary people ( and by extension of the Law of Rent ,everybody else) is the rent and the mortgage. No matter that we have a mass of smallish and large builders and developers, the privatised system cannot build enough houses to meet demand. (Contrast Macmillan’s 300,000 houses p.a.in a mixed economy, [200,000 were council houses] with present levels) .We now have a sub prime mortgage system backed by State guarantee- government intervention on a massive scale. It is plain as a pikestaff that the economic theory of free markets doesn’t pan out in practice.
    To return to A levels and comparisons with motor cars: it is impossible to interpret your argument to mean any more than, in a race, the Aston Martin will beat the Lada. This is kinda obvious but you will not admit any consideration of unit costs: the price of the Aston Martin is considerably higher accounting for the entire difference in performance. There is some tortuous argument that in a competition which threatens to put the Lada schools out of business that they will, with the same spend, innovate and improve.Not really plausible.

  25. DBC Reed

    Why dont we have more houses? Back to Tim’s original point – it’s the regulations, not the market. The market doesnt work because we have regulations. Do we want an unfettered market? Probably not, I like the green belt etc, but it is perhaps too tight.

    The other big problem in the UK is the single pole nature of London and the SE. We need to shift the capital – I suggest Newcastle or Liverpool. Whitehall and the Houses of Parliament.

    The point with the cars is far simpler – yes, the Aston Martin is better than the Lada, but so are the Yaris, the Ford Focus, the Nissan etc. You are focusing on the Aston Martin but what you should be thinking about instead is the Lada vs. other small cars. The unit price is lower and better with competition. The UK state education system is not a Lada of course, it is a British Leyland car…

  26. @Ken These durned regulations. What regulations?You seem to forget that Henry George drew up his theory that landowners formed a monopoly that kept up property prices ,in the manner of a cartel, artificially restricting the supply and increasing the price of land, whilst he was living in California when it had a tiny population and scarcely any law and order let alone building or zoning regulations.
    Your Aston Martin analogy ,weak to start with, keeps falling down because the end product is A levels (not cars). You demand competition on A level grades between establishments with rich Aston Martin resources and staff ratios, up against the mass production methods of volume A Level makers. The Aston Martin producers fail the competition on cost; they are not cost competitive.It might be possible to draw a graph plotting increased grades with increased costs but the public schools would be way above the optimum line.

  27. @ DBC Reed. The Green Belt and local planning regulations.

    Let’s imagine there were no laws preventing the shift of farmland to housing. Do you really think there would be a shortage of housing? The US for example has no shortage of housing, although where there are geographic limitations (eg Manhatten) prices can be very high.

    Secondly, you are still the in planning mindset. You obsess over the Aston Martins. In a free market, people are allowed to buy Aston Martins, just as they are allowed to choose to spend 30K to send their kids to Eton. You seem to think that the Aston Martin producers fail because they are expensive, but the point in a free market is that everyone can choose what they spend their money on. The State (or rather taxpayers) agree to put up money for education, perhaps more money for the poorest, but essentially the entire education budget is divvied up per head. Then everyone gets to choose where to go.

    You want to plan things so that we get an “optimal” production: hence your bizarre claim that Aston Martin producers are not cost competitive: Yes, they are more expensive than a Yaris, but in a free market you are allowed to buy something expensive. I’m saying everyone gets to choose and the market clears and we get innovation.

    I wonder if you think somehow that there is something inherently unfair about the competition in the final A level exam between children at state schools and Eton? In the real world this is always going to happen: via higher socioeconomic status, tutoring, etc. My suggestion is for improving the quality of the “bog standard comprehensive”, not for righting social wrongs such as some people being able to buy more expensive schooling.

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