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Economics

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.

Danny Dorling, Social Geographer

But perhaps not Danny Dorling economist.

Hundreds of thousands more jobs could be afforded if there were a little more austerity among the rich, a report just published by IPPR shows. It would not take a near-halving of top salaries – just a slight and gradual reduction of income inequalities would make huge savings every year. This is what occurred in the UK between the mass unemployment of the 1930s and the near full employment that lasted into the 1970s. Cutting high wages would allow employers to take on many more employees.

Over the last 30 years, pre-tax income inequality in the UK has increased massively, as it has in the US. Britain has seen massive rises in the incomes of those at the very top of the income scale, leading to increased overall inequality, fewer people earning enough to survive without tax credits and far more young people having to live on benefits because there are fewer jobs than a slightly more evenly distributed payroll would deliver.

Umm, OK, it\’s fine to look at the distribution of incomes in the economy.

But it is something of an error to only look at that distribution: we also want to know what is the effect of the distribution upon growth. Dorling\’s assumption here seems to be that we can change the distribution without changing the growth rate.

And maybe we can and maybe we can\’t but isn\’t that the very question that needs to be answered, rather than simply making the assumption that we can?

Sadly, the actual paper won\’t download for me so I can\’t see his argument in detail.

That paper has now been sent to me and yes, he really does just say that if we take £160 billion or so more in tax off the high income earners then all that will happen is more equality.

He doesn\’t even consider, for a moment, Laffer Effects or anything like them. Geographers doing economics: not a pretty sight, eh?

Unlearning economics

Perhaps he should retitle his blog unlearning logic:

Economics is the study of how we allocate scarce resources, but the fact that the economy is ultimately constrained by scarce resources does not factor into it.

If the economy were not constrained by scarce resources then we\’d not have to study the allocation of that scarcity that does not exist, would we?

Well yes, M\’Lord Skidelsky

George Osborne is wrong. Austerity is for the boom years, not the slump

But given that we didn\’t have austerity during the boom years, given that during the longest bopopm the country has ever known we have a monocular Scot pissing our money in every direction, we don\’t in fact have much of a choice, do we?

I\’ve said it before and no doubt I\’ll have to say it again, the problem with Keynesianism is that even if it does work on the blackboard (something I\’m unconvinced of but so what) it doesn\’t work in that real world.

We\’ve just had, what, three years of 10% of GDP budget deficits? OK, some of that will be reduced as a problem by economic growth, when it happens (as it will, eventually). But to get us back to where we were, with the ability in the national debt to finance another such blow out in it if there\’s another economic bust will require a primary budget surplus of 2-3% of GDP for a decade.

And remembering the cries for extra spending in the 1997-2003 period, when we were in fact running a budget surplus or close to it, does anyone think that that is even remotely politically possible?

No? Quite then, Keynes might work on the blackboard but it doesn\’t in the real world.

Identifying why the economy is so fucked

So pretty soon the point arrives when there\’s a middle-class stranglehold on the jobs that people want to do – notably in politics, the media and the third sector.

When the desirable jobs are spending other peoples\’ money, reporting on spending other peoples\’ money and lobbying to spend other peoples\’ money then you know that the society is fucked.

The Ownership Commission: Proof Perfect of Will Hutton\’s Gargantuan Ignorance

It relly does pain me that Willy Hutton is a Governor of the old Alma Mater. Here\’s the intro to his Ownership Commission:

The Commission\’s starting point is that we believe that companies should be more than networks of contracts, and at their best they can be living, breathing human institutions held together by trust and a sense of common purpose.

Dear God Allfucking Mighty.

Look Willy, the LSE, that institution of which you are a Governor, produced an economics Nobel, a certain Ronald Coase. His Nobel was in part based on his ruminations upon the Nature of the Firm. A paper he wrote and which was published while he was at that very London School of Economics of which you are a Governor.

And the conclusion that Professor Coase came to was that firms, companies, exist when a mere network of contracts is insufficient.

You complete and total asshole: the existence of a company is proof that they are not merely a network of contracts. For if a network of contracts were sufficient for the task at hand then there would be no damn fucking company.

Can somebody tell me why this man is revered as an economic commentator when he\’s so obviously ignorant of the basic nuts and bolts of the subject?

Yes! Yes! Hurrah!

Millions of teachers, nurses, civil servants and other public sector workers are to lose their right to national pay rates, the Chancellor George Osborne will announce in next week’s Budget.

On of the glaring problems with the UK eonomy is to be addressed.

Excellent stuff!

As we know, national pay rates for nurses kill people. About time we changed that.

Of course, what he\’s actually doing doesn\’t go far enough. Instead of calibrating public sector wages to private on a regional basis, good though that would be, the entire idea of centralised pay bargaining should be taken out and shot. Workers negotiate with workplace.

Just as the private sector does.

Are we happier because we\’re richer? Wrong question

We are richer in 2012, but are we happier?
Swing skirts were in vogue, the Royals dominated the front pages, and Germany was shelling out lump sums to Europe in reparations. Was 1952 really that different to life today?

Umm, I believe that by 1952 Germany was having money shovelled at it under the Marshall Plan. But never mind. Here\’s the wrong question:

John Hawksworth, chief economist at PwC, said: \”After adjusting for inflation, and with the population only increasing by around a quarter, this implies that average incomes are more than three times as high in real terms. But whether this extra money has made people happier is harder to answer.\”

The actual evidence is that richer countries are happier, yes. The point about the Easterlin Paradox is that it is wrong. Of course, increasing incomes are subject to the law of diminishing returns so that each rise in income has less effect in making us happier but it is still there, that rise.

But that isn\’t really the point or the corret question. For it isn\’t the level of wealth that really produces the happiness. It\’s the increase in it itself. Living in a growing economy, one radually getting richer, increases happiness. We can see a brighter tomorrow, the kiddies are going to be alright etc. Living in a static or declining economy does not produce those jollies.

And, of course, the effect of an eonomy growing 2 or 3 % a year each year to keep those jollies coming is that over a generation or two that economy will double, triple, even quadruple in size.

But it\’s the growth itself, not the level, which has the greater effect upon happiness.

Doubling down on error

I think it\’s fair to say that Alex Harrowell doesn\’t like me very much.

For the first time on record, the share of Spanish GDP accounted for by profits exceeded that accounted for by wages.

This isn\’t true as I pointed out:

“For the first time on record, the share of Spanish GDP accounted for by profits exceeded that accounted for by wages. ”

Err, no.

Because GDP is not a split between the labour share of income and profits.

It’s a split between the labour share of income, employer paid taxes on employment, consumption taxes, self-employed income (so called “mixed income”) and profits. Plus some other little bits.

That the labour share has fallen below 50% is indeed true. But that does not mean that profits are over 50%.

And he responded:

Tim, on what planet does 46.2 not exceed 46? I know you’re not a member of the reality-based community, but I thought the rightwing operationalisation of post-modern thinking had stopped short of opting out of arithmetic as yet more of the liberal metropolitan elite’s so-called expert consensus.

It goes without saying that you didn’t click through to the link, as the relevant numbers are in the strap line – you wouldn’t even need to read down the story…(and yes, the self-employed are counted).

Then we mutter about how good Google Translate is and I get bored and look up the actual figures:

Spanish GDP stats for 2011 (inc. last quarter) are here:

http://www.ine.es/jaxi/menu.do?type=pcaxis&path=%2Ft35%2Fp009&file=inebase&L=1

In which we find the following:

Compensation of employees, 501 billion and change.

Operation surplus,gross/mixed income, gross, 480 billion and change.

Nett Taxes on production and imports, 91 billion and change.

(Table 7 b for those keeping score at home).

For the final quarter of 2011 they are, in order, 123 billion, 124 billion and 20 billion.

124 billion is indeed larger than 123 billion. But the 124 billion is not profits, it is profits plus self employed income.

Which is and was my point.

\’Neoliberal\’ has a meaning

And it isn\’t \”things I don\’t like\”.

The slow death of Greece was a political project from the start, with politicians accepting the prescriptions of neoliberal economics. The country has become the guinea pig for the future of a Europe ruled by German capital and Eurocrats.

In what paranoid fantasy is what is happening in Greece neoliberal?

The actual neoliberal position (recently affirmed at our meeting in the underground secret headquartersd under the volcano that sank Atlantis) is that the euro itself was and is a bad idea as it\’s not an optimal currency area. And if there is to be a euro then Greece should not be a part of it. Since it is, and it\’s bust, then it should default and devalue.

In short, the neoliberal solution is the Icelandic one, not the Irish, Greek or Portuguese.

So how come we neoliberals (as you know, the modern incarnation of the Green Lizards, Rosicrucians and Illuminati all rolled into one) are getting blamed for the entire fuck up that is happening precisely because no one will follow the prescriptions of neoliberal economics?

The wholesale destruction of the weak welfare state, the massive transfer of public assets to private hands at bargain basement prices, the largest internal devaluation since the 1930s and the loss of national independence are part of the necessary re-arrangement of capitalism for a period of low growth and popular militancy. The supposed \”rescue\” is a test run for a new type of predatory capitalism after the failure of growth through the financial bubble.

And that\’s just lazy left wing rhetorical wankery. The sort of thing spouted just before the vinegar stroke and the ejaculation \”Ooooh, my Marx and Engels\”.

Capitalism, whatever you might think about it, makes money out of economic growth. Engineering the decimation of an economy does no capitalists any good: which is why capitalists don\’t go about engineering such.

Dear God The Guardian does publish some twats…..

What bloody decline in manufacturing?

An Observer editorial:

and address what is the sharpest decline in manufacturing of any advanced economy over the past 30 years,

And my comment there:

Umm, excuse me, but what decline of manufacturing?

http://www.theregister.co.uk/2010/02/22/manufacturing_figures/

Manufacturing output is well over twice what it was in 1950. Heck, it was higher when Maggie left office then when she entered it, higher when Major left than when he entered.

There has been a decline in manufacturing employment, yes. But then there\’s been a decline in manufacturing employment right around the world. Really, the whole world is losing manufacturing jobs. Even China is losing manufacturing jobs.

There has been a decline in manufacturing as a percentage of the economy as well: but as manufacturing output has been growing this just means that the other sectors have been growing even faster.

Oh, and manufacturing as a percentage of the UK economy? At 12%? It the same as France: in fact, it\’s pretty much slap bang on the global average. Around and about 12% of the global economy is manufacturing.

So what is it that everyone is babbling on about?

We\’ve actually got quite a serious problem here. Vast numbers of people really do seem to believe that we\’ve had some collapse of manufacturing in the UK. And they\’re all making plans to do something about something that hasn\’t happened.

If they were instead asking \”what do we do with dim Northern boys now manufacturing is too productive to need them\” then at least they would be asking a question about something that is actually happening: however stupid their answers were.

But running around trying to solve a problem that doesn\’t actually exist is simply stupid or politics: but then I repeat myself.

Err, yes Zoe, you\’re right

I am big and ugly enough to stand accusations of being patronising and naive, of not understanding economics and having a beard.

The economics bit that is.

Real wages in this country have been falling since 1968.

God alone knows where you got that idea from but it\’s such an absurd one that I can\’t believe that you\’ve even shared a library with an economics text, not managed to even grasp the first fundaments by osmosis.

Plain and obvious truth here

\”The role of the private sector is critical because innovation at the technology frontier is quite different in nature from catching up technologically. It is not something that can be achieved through government planning.\”

That\’s about China but it applies everywhere.

The technological frontier is where, by definition, you don\’t know what\’s going to work, what\’s the best thing to do. So how can it be planned?

It\’s one of the critiques I\’ve got of Ha Joon Chang. He often uses the example of S. Korea but what he\’s talking about when he does is their period of catch up growth. It\’s not applicable to a country at that frontier. Doesn\’t stop people saying that he\’s arguing for planning in our economy though, does it?

Why we use money to trade

I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket.

Quite.

It just makes it all so much easier than that web of interpersonal relationships that some would prefer trade to involve.

No Ed, that wasn\’t the 30s mistake

I fear what\’s happening here is that the world is making the 1930s mistake and the ratings agencies are partly responsible for this.

Even though it is clear in Greece, in Ireland, in other countries, in Britain too (that) this austerity isn\’t working, the message is \’Plough on, dig a deeper hole, carry on with an austerity that is failing\’.

You really need to read some Freidman.

The 30s mistake was not austerity. Because there really wasn\’t all that much austerity in the 30s. In the UK the big squeeze was in the 20s (the Geddes Axe) and in the US Hoover doubled Federal spending and blew out the budget deficit.

The mistakes in the 30s were monetary, not fiscal. The UK didn\’t have a horrendous slump in the 30s because we came off the gold standard and thus fixed that monetary problem. The US didn\’t. The Fed allowed the money supply to collapse.

And as you\’ll have noticed, what with QE and the propping up of the banks, we\’re just not making the same mistakes in the 00/10s as were made in the 30s.

Where the situation really is bad, Greece, Portugal, Spain etc, they really are making the mistakes of the 30s. They\’re allowing the money supply to fall and there\’s sod all they can do about it because they\’re in the euro.

All of this leaves room for the argument that fiscal expansion will make things better. Happy, for the moment, to leave room for that argument. But given that the mistakes of the 30s were monetary let\’s make sure we don\’t make monetary mistakes right now, eh?

How very weird from Larry Elliott

Now let\’s look at the economy. Initially, the challenge came from the United States and Germany, but after the second world war the UK was also eclipsed in terms of growth rates and living standards by France, Italy and the Scandinavian nations. More recently, the threat has come from the bigger emerging economies of India and China.

Warning signs of imminent decline have too often been ignored and even when they have been heeded, wrong lessons have been learned.

Who actually cares about relative decline? It\’s absolute levels that matter.

Relative decline comes from the way in which cuntries previously following insane Marxist prescriptions are now joining us in the sunlit uplands of classical liberalism (perhaps overstating things there but still….). This is good isn\’t it? Our fellow humans are gaining better lives: no, not at our expense at all, simply by stopping doing stupid things.

Indeed, we get richer precisely because they do so.

So where\’s the beef? Do I or you care that Britain is 5th, 7 th or 15th in the international league tables for standards of living? Or should we care that living standards are as good as we can make them? That is, we should care about absolute riches, not relative?

Zoe Williams and economics

This was salient for a number of reasons: for a start, that month followed one of the worst quarters on record for new private sector jobs, with just 5,000 posts filled between June and September 2011. From an economist\’s perspective, that is as good as standing still.

Err, no, from an economist\’s perspective that would be an unmitigated disaster. For the economy chews through about 10% of all jobs each year. 3 million or so disappear, 3 million or so are created. Unemployment rises when the disappearing (which tends to be a fairly constant rate, it\’s the creation which tends to vary) is higher than the creation, fall when vice versa.

Call it 750k a quarter, just as a round number. If there were only 5k jobs created then this would indeed be terrible. What Zoe is looking at is not job creation though. She\’s looking at the net number between destriuction and creation, a very, very, different thing indeed.

You might call me a pendant for saying this: but I mention it precisely because I think that Zoe is ignorant of this point.

If Reliance can do Ordnance Survey\’s admin and catering for less money than OS did it themselves, or Boeing can do IT for the Ministry of Defence, and that\’s cheaper, it seems like an obvious boon. But, especially in low-skilled work, you have to wonder how it comes to be cheaper. Nobody\’s invented a quicker way to do cleaning; it\’s more likely that wages are forced down, job security is destroyed, pensions are axed.

Well, there\’s specialisation, division of labour, these sorts of things. And as to no one inventing a quicker way of doing cleaning.

Umm, Zoe is indeed female? One who does her own housework? Has, say, a mop, a broom, a vacuum cleaner? All of which are quicker ways of doing cleaning than a damp rag and a carpet beater?

And might we, just possible, postulate that a team of cleaners who spicialise in nothing but cleaning, say, offices, might have high value, high performance, specialist, such machines in a way that an individual directly employed cleaner might not?

No, of course, I don\’t know and I don\’t insist that it is true but it is possible, no?

The secret of Germany\’s success

While both countries had the same sorts of export surplus in the early 1990s, they have diverged massively since the D-Mark and franc were fixed in perpetuity. Germany has a current account surplus of 5pc of GDP: France has a deficit of 2.7pc, anathema for Colbertistes.

You can see from IMF data that the silent coup took place in the fat years of the global boom when Germany forced down unit labour costs; -1.7pc in 2003, -4.0pc in 2004, -3.3pc in 2005, -1.8pc in 2006.

Just a little note for the various lefties insisting that as Germany has been a successful economy we should therefore do what Germany has been doing.

I\’ve no problem with the idea of looking at what works then copying it. Seems like a very sensible thing to do in fact. But you do have to identify what it is that has been working.

And in Germany it hasn\’t been apprenticeships, nor unions on boards, it isn\’t manufacturing and it\’s not a bank rather than stock market financing system.

It\’s been screwing down the workers\’ wages.

So, when you start advocating screwing down the workers\’ wages so that we can copy Germany I\’ll be all ears. Until then, perhaps you could continue to work on that analysis of what did go right in Germany?