Here is Ritchie telling us all what is wrong with the current world economic order.
Which is great. But I presume he knows this means abandoning just about everything that is taught in undergraduate economics as a result, which underpins the flawed logic of Anglo-Saxon capitalism as a whole – not just banking?
Let’s start with what goes:
- Profit maximisation. This is a complete nonsense. Economists think it discounted future cash flow, accountants a measure of the past, and no one can measure either.
- The idea of markets being efficient. This requires profit maximisation to be true. But we don’t profit maximise and those who seek to do so just abuse others by extracting monopoly rents, which is inefficient. It also requires us all to be clairvoyant, and there is some evidence we are not.
- Ignoring externalities – the fact the market assumes we can abuse the planet as a ‘free gift of nature’.
- The idea that wealth is created by markets. Wring, wealth is created by people – the means of ownership of the structure in which they work has little to do with the value of what they do – but efficient management has. there’s no evidence that efficient management is the exclusive preserve of the private sector – although there’s ample evidence of bad management in all sectors.
So Lord Myners, I agree – but let’s sweep away the whole destructive nature of neo-conservative economics and move on. Let’s not tinker at the edges. And let’s be clear about what we’re doing. Nothing else will do.
As an exercise in collaborative crowdsourcing new internetthingummybob can we, in the comments section, see how many fallacies and displays of ignorance we can find in that series of statements?
I\’ll start with the easy one: externalities. These are taught at GCSE level and at every level of economic education above that. So far from ignoring them they\’re central to the entire subject. They first really get examined in Alfred Marshall\’s work of the 1890s (and do please note that Marshall was pretty much the founder of the neo-classical school and also the writer of the basic textbook used for decades). Arthur Pigou (the man who first hired Ritchie\’s beloved Keynes as an economist) developed the idea and what we might do about externalities and had it cracked by the 1920s. There have even been Nobel Prizes awarded for their study (Coase won his in part for this).
Ooooh, yes, another one, wealth not being created by markets. That would be news to Adam Smith now, wouldn\’t it? David Ricardo would also raise an eyebrow. The division of labour and specialisation of it then leads to voluntary exchange of the production stemming from it. Voluntary exchange, by its very definition, creates wealth for both parties involved: no one would make such an exchange if it impoverished them. What is the word we use to describe where voluntary exchange takes place? A market.
And, umm, what in hell has the method of ownership got to do with markets anyway? You can have markets and capitalism, markets and socialism…..
Please do carry on…..
“there’s no evidence that efficient management is the exclusive preserve of the private sector”
True, but there is ample evidence that the state tends to be inefficient at nearly everything. I am no economist but in support I offer you the 1970s. I remember the lights going out, telephones not working and the quality of the cars. I was only a child, but for me, the miracle of markets was proven beyond reasonable doubt by what I experienced.
Surely just about all of Ritchie’s arguments make the perfect the enemy of the good (the Nirvana fallacy?), as this one does. Because ‘Anglo-Saxon capitalism’ does not produce perfect outcomes with perfect efficiency, we should abandon it in favour of some as-yet unspecified, theoretically better alternative. Because perfectly efficient markets would require human clairvoyance, and we are not clairvoyant, we should abandon the idea of markets in favour of some other method of exchange which doesn’t require us to be clairvoyant.
Furthermore, Ritchie has yet to propose a new world economic order that is anything other than a form of capitalism. He may think everything taught in economics courses around the world is wrong, but he’s still putting forth his alternative interpretation within the capitalist framework. He is not, after all, advocating new and unique ways of measuring value or allocating resources.
there’s no point interacting with a man who, for example, when it is repeatedly pointed out to him that externalities are core economic theory, will not modify his view that economics ignores externalities.
Yes, more straw men than a Wizard of Oz convention. Not sure whether he really is this ignorant, or just uses the right buzzwords to keep the TUC gig going.
Here’s a couple:
“Profit maximisation. This is a complete nonsense. Economists think it discounted future cash flow, accountants a measure of the past, and no one can measure either.”
Is there really a professor anywhere teaching that discount cash flow is about profit maximisation? DCF is used to value income producing assets (it’s a stock concept as you like to say Tim), whereas accounting profits is measuring performance (a flow concept). They just ain’t measuring the same thing.
“The idea that wealth is created by markets. Wring, wealth is created by people”
Ditto to whatever else has been said.
I’ve always suspected he doesn’t even understand what a market is, and this is now the dead giveaway. He doesn’t. ‘Markets’ and ‘people’ aren’t opposites. A market is just an expression to describe the meeting place between a buyer or seller (which may be an abstract concept or a physical place) who create wealth by trading their respective surpluses. That’s all it is – a tool for people to use, no more no less. Markets need people and people need markets. The opposite of ‘market’ is I suppose ‘self sufficiency’, which is a very inefficient way to create wealth.
“the means of ownership of the structure in which they work has little to do with the value of what they do – but efficient management has. there’s no evidence that efficient management is the exclusive preserve of the private sector – although there’s ample evidence of bad management in all sectors”
I really haven’t a clue what the great man is trying to say here. He is right that the means of ownership (whatever that means) has little to do with value, but then says ‘efficient management has’. WTF? Not sure what he means by ‘efficient management’. But it is clear he doesn’t understand where value comes from.
Bellagerens:
“Furthermore, Ritchie has yet to propose a new world economic order that is anything other than a form of capitalism”
No, he knows what it is. It is an order where whatever Ritchie thinks is a good idea gets done. He uses fluff words like ‘socially useful’ and ‘community expectations’ but what he really means is ‘stuff Ritchie likes’. Typical authoritarian. Likes planning but only where he is the planner.
“Profit maximisation. This is a complete nonsense.”
Tell him what, he can go for profit minimisation in his own life. I’d be obliged if he could let me know how living in penury works out, assuming he can still afford an Internet connection.
Meanwhile, I’ll try to profit maximise as best I can. I mean, he’s right that I can’t tell the future, but I have a few ideas: getting a job, spending less than I earn, saving and investing wisely, that kind of thing. I dunno, maybe I’m going about this all wrong, but I figure that Ol’ Micawber had it about right.
“Because ‘Anglo-Saxon capitalism’ does not produce perfect outcomes with perfect efficiency, we should abandon it in favour of some as-yet unspecified, theoretically better alternative.”
Tell him what, he can set up a little society in which everyone lives by his rules, whatever they are. If it works better than this ‘Anglo-Saxon capitalism’ lark, it’s bound to take off. Isn’t it?
>The idea that wealth is created by markets. Wrong, wealth is created by people
Dear God, this seems to be the labour theory of value: if I spend 50 hours making a non-working clock, it’s worth more than one that works and took 25 hours to make.
By externalities, is the cost to everyone else of allowing the TUC to exist included? I’d love to see a pigou tax on that!
Humans (all) are profit-maximizers but the profit to be maximized is always a psychic experience and only sometimes one to which numbers may be attached. In acting, we choose, which always means choosing that thought best at the moment of choice. The potentially nearest of the alternate choices (or its money equivalent) constitute what we call the “cost” of our choice. Exactly the same
consideration applies whether one chooses to donate a sum of money to Haitian relief, to spend the sum on a vacation, to spend the sum on goods one can expect to sell for double the sum, or even to spend the sum on goods which can be sold for double the sum in order to donate the doubled sum to Haitian relief. All the same.
If a man sells at prices “too high,” he’s likely to called “greedy.” But he’ll just as likely be called “greedy” if he sells at prices which are “too low.” The only difference is in who does the calling: his customers (if “too high”) or his competitors (if “too low”).
There’s OVERWHELMING evidence of efficiency
in the private sector and its superiority. In fact, the evidence lies in the fact that it’s only in such system (or by comparison with such system) that any comparison whatsoever can be made (it being comparison itself in which “efficiency” is even defined–a ratio, as it were). The inability of other systems is entirely due to their inability to value their assets or their expenditures, a deficiency
only partially (and very unsatisfactorily) offset by the expedient of comparison with similar items in the private sector.
There is only one function in which it can be said that the State can, with any justification, be said to be “efficient.” That is in the exercise of violence to preclude or minimize its (violence’s) occurrence
more widely in social interactions; to do so, we endow it ( State) with monopoly power (except in cases of self-defense) to employ violence against those committing or threatening violent acts (and
certain other behaviors). In this case, it is not demanded that the State deliver such service at the lowest possible cost or even at cost thought to be comparable to its delivery by some private entity; it’s simply given an amount of money called a “budget” and charged with delivering as much as possible of the service for that amount.
violent and certain other antisocial acts
Tim:
In your last line, you say we can have “markets and socialism.” That’s OK if you mean markets can coexist with some socialistic practices or that some markets can even exist under socialism (whose meaning is that government owns the means of production, i.e., communism or that govenment directs all means of production, i.e., national socialism) but a market society cannot coexist with either form of socialism. In a market society, the determination of who shall own the means of production is determined by the consumers; it is they, who by their buying and abstention from buying, determine who makes profits and who makes losses (and in what amounts), who should expand, etc.