How absolutely incredible

Ritchie has just proved that markets cannot work:

This is an argument I have made here, often.

Markets can only work when there is choice. By definition that means there needs to be excess capacity. Unless there are vacant spaces in all schools there is no choice. But excess spaces are wasteful in terms of productivity. We can’t afford that waste.

There is no reason at all for this logic not to apply to all things. Markets require choice, choice requires surplus capacity, surplus capacity is wasteful and thus we shouldn\’t have markets in anything.

There\’s nothing special or specific about schools or education in this logic chain you might note.

Yet we do know that markets are, at times, more efficient than not markets. Thus we know that, at least at certain times and places, this logic chain is not in fact correct. So what is the fault in it?

It\’s in that word \”productivity\”. In an entirely static society, one static in terms of the technology of production and one static in the desires of the consumers, one where productivity itself is static, then the waste of resources by the creation of spare capacity can indeed be something which makes us worse off.

But is society static? Are either the technologies of production or the desires of consumers static? No, most certainly not.

Which is where markets do start to show their value. For what a market does is allow producers to vary their technology of production and also their items produced. And consumers can also pick and choose not only among these varieties but can also express their own changing desires.

We still have this \”waste\” of spare capacity of course: but we also have that continual increase in productivity as solutions to desires get ever better.

Just as an example. I\’ve heard it said that Gorbachov gave a speech in the late 80s, just as he gained power. In which he said that productivity per head had not increased in the Soviet Union since 1913. Yes, there were more people, there was greater capital accumulation and there was more resource extraction. But the actual efficiency with which those things were used had not changed over all of those years.

That\’s why the place was shit poor of course.

For over the same time period productivity in the market economies had been rising by 1-2 % a year, year after year. 70  years of cumulative 1% improvements is, given the joys of compounding, a 100% improvement. 2% over the same period is 300% (ie, at the end of the period production from the same resources is 200% or 400% of starting production from those same resources.).

That\’s one of the things about markets. They are discovery mechanisms as to what is the better way of doing things. And over time, the discoveries of what are those better ways completely swamp any of the inefficiencies of having surplus capacity in which markets can work.

Bonus point: you\’ll have noted those various attempts at measuring the increase in productivity in the provision of public services? You know, the NHS stuff and so on. Recall the fact that productivity hasn\’t in fact been increasing, rather regressing? At the same time that private industry was increasing productivity by some 25% or so over 15 years?

Quite, that\’s markets for you…..even though they do have spare capacity.

37 thoughts on “How absolutely incredible”

  1. “Recall the fact that productivity hasn’t in fact been increasing, rather regressing? At the same time that private industry was increasing productivity by some 25% or so over 15 years?”

    Well, or that industries such as health and education don’t see huge productivity gains, and thus Ritchie’s point might have some validity (I’m not saying it does, just that this simple recognition means your argument against needs something else).

    After all we know productivity in the US healthcare system, which has a larger private component, has fallen sharply over the last 25 years. And it would be interesting to see what productivity, correctly meausured, has been like in the UK private education system.

    Tim adds: “that industries such as health and education don’t see huge productivity gains”….straight William Baumol stuff. Productivity in services is more difficult to improve, yes. But then that just leads to us wanting more markets there so as to increase the effort to increase productivity.

    BTW, I’d be astonished if US health care productivity has fallen over the decades. Well, measured by lifespan perhaps, but not by procedures performed….

  2. The argument on NHS productivity is absurd

    We have more people living longer, needing more care, with an outcome guaranteed to end in death

    That by definition could be called unproductive

    It certainly requires more one to one human input into each person requiring assistance

    But this is a bad thing?

    Tell me how?

  3. Yeah, increased productivity in terms of procedures performed has been a huge boost for the American healthcare system. Or, the quality of care and costs are both lower where fewer procedures are performed (see an excellent Atul Gawande piece in the New Yorker from last year).

    Markets create winners and losers, not always what you want in health and education.

    Tim adds:”Markets create winners and losers”

    Lordy, I’ve called that inane drivel when Neal Lawson comes out with it and it’s still inane drivel from someone doing politics at Oxford (as I assume from your email addy).

    A market is where voluntary exchange takes place. Voluntary exchange only takes place where each participant gains something more valuable than what they give up. Thus, a market, where people make gains from trade through voluntary exchange, only produces winners. If there were any losers then the exchange wouldn’t take place and the market wouldn’t exist.

    Who in buggery is the loser if everyone has more than they started with?

    In short, try doing a little more economics with the politics in your PPE course. Might learn something.

  4. Richard, you often (like above) just string words together without any care as to whether they mean anything. Your comment above is not even wrong, it is merely meaningless. No one sentence above seems to have any connection to other sentences above, and even less connection to Tim’s or your original point.

  5. “Markets create winners and losers, not always what you want in health and education.”

    Food production is even more important than health and education; perhaps we should abolish markets in food. After all if health and education are too important to be left to the market, how much more so food.

  6. Fair point ChrisM. I should have been clearer. Markets are not purely beneficial in health/education/food. The US healthcare system is the perfect example of this. Regulation and some uniformity of provision is required in order to establish acceptable minima. A market is also required to drive innovation but this does not necessitate completely private competition.

    We should certainly try to reorganise/regulate the market in food which currently leaves a minority of the world’s population over-supplied while millions starve. In my opinion this is a sub-optimal outcome.

  7. “We should certainly try to reorganise/regulate the market in food which currently leaves a minority of the world’s population over-supplied while millions starve. ”

    Hmmm I wonder if there is any correlation between a lack of markets in some places and how hungry the local population is. People in Africa are not starving because people in North America have plenty. Places that regulate food production tend to go hungry, the solution therefore is not more regulation.

  8. There is more to reducing waste than avoiding overcapacity. Some overcapacity allows optimisation of subsystems and improved flexibility, both of which can reduce other wastes. The Toyota Production System identifies seven wastes; overproduction is only one of them. Marxists, however, seem overly obsessed with a avoiding a crisis of overproductio., when the other six wastes are rampant.
    The other six wastes are: Unecessary Transportation, Inventory, Unecessary Motion, Waiting, Over-processing, Defects

    If you think productivity of services like health and education cannot be improved, read some John Seddon.

  9. Isn’t there another flaw in Richard’s argument (ie that markets require surplus).

    Doesn’t a planned economy (assuming its aim is to meet the needs and wants of the user) also need a ‘wasteful’ surplus? If a new kid moves into town, the planned system also needs a spare seat in the classroom – and if it doesn’t, that kid goes without (or has to find a school in the next town). And if a person switches from jam to honey on his toast, doesn’t the planned system also need to ensure 1) there is a spare jar of honey for his breakfast tomorrow and b) there is an effective way of not producing that extra jar of jam that will no longer be consumed (or getting it used by someone else).

    The problem with the planned system is that the objective is not to meet the needs and wants of the users, but rather, to fit in with the plans of the planners. And if the planner gets his plans wrong (a likely event given the vast and indeed impossible quantities of information required to get it right), the user goes without, and there will be goods and services produced that nobody wants. That’s pretty much how the USSR worked, and how the NHS works today.

    I think if we had to sum up in a nutshell the ideological difference between Tim and Richard is that Tim believes (as i do) that economic systems should be there to serve users, whereas Richard seems to belive that economic systems should be there to serve the planners (as long as the planners choose things he wants – more tax inspectors, fewer credit derivatives etc).

  10. Tim,

    If you have two hospitals, one clearly better than the other and create a market in health provision, more people will go to the good hospital and fewer to the bad hospital.

    This makes the bad hospital a loser, doesn’t it?

    When people talk about markets in public services creating losers, I think this is what they mean.

    Tim adds: “This makes the bad hospital a loser, doesn’t it?” I see what you mean (and of course know that this is what some mean as well) but when properly explained like that there’s not much rhetorical power to recasting Neal Lawson’s statement as “markets mean shitty suppliers lose”.

  11. Markets create winners and losers, for sure, but it is almost always the customer that is the winner and the poorly performing provider that is the loser. If the poor performer learns their lesson, they can become a winner again.

    Education is not there to provide employment for teachers.

    I will say that again. Education is not there to provide employment for teachers.

    If you have just enough places for pupils, you must rely on proactive intervention to fix a bad school and bad teachers. There is no hard, unavoidable incentive otherwise for bad schools to fix themselves, i.e. teachers standing in front of empty classrooms.

    Just think of coming into a town where there are just enough restaurant settings for all the people who wish to eat. How good will those restaurants be? What value would you get? What service?

    Some will be natural restauranteurs, dedicated and provide a great service. The queue will be round the block.

    The others will still have no HARD need to change, for they will get customers through the door. No, not just customers, they will have a full house! Every night! A full house of customers with no choice remaining, no option but have their money taken in return for what? Slops. If a fight kicks off in the restaurant and you struggle to eat, if at all, then hard cheese.

    As long as there is one substandard State school in this de facto monopoly, the State is failing children and guilty of all manner of injustices. One could almost include false imprisonment.

    Now, back to a proper world:

    A surplus of restaurants and tables will still result in the best places having a queue round the block, but the “unlucky” will still be infinitely more lucky in their second, third or even fourth choices than in the previous scenario, for a bad restaurant will be almost always empty and people will not come back the moment they learn of something better.

    Anyone who tries to assert that “education is not like a restaurant” is, I am afraid, howling at the moon and trying to maintain their own delusions by trying to convince others of the same folly they believe in.

    Education is not there to employ teachers. Bad teachers should be unemployed teachers. With surplus spaces, bad teachers will be confronted with the choice of “improve or die”. I am quite certain the overwhelming number will improve and most will rapidly become good teachers. Those who cannot improve? What are those who object to surplus places now saying? That you WANT to keep those unreformable teachers in front of my kids? To hell with you!

    The conceit is of those who think they can reform a monopoly. No they cannot. They think they are or could be so in control, or know of someone else so in control and so talented, more talented than the combined energies of all the minds of all the parents? Show me these Übermensch! Bring them forth!

  12. Adrian, you are quite right. In a planned economy, a new kid will not move into town because he will not be allowed to move house.

  13. ”but not by procedures performed”

    Ah, I think I see the problem. Productivity is not a measure of output per se, but of outputs given inputs. So simply adding up number of outputs tells us nothing without considering the level of inputs. This is Gorbachev point?

    The first part of your answer I think is circular. Markets are good despite a lack of productivity growth because markets are good. As I said might be right but it doesn’t answer the claim made buy ritchie.

  14. We should certainly try to reorganise/regulate the market in food which currently leaves a minority of the world’s population over-supplied while millions starve.

    This is down to shit government, not market failure.

  15. “This is down to shit government, not market failure.”

    That’s a circular argument: it’s shit government because it doesn’t allow freedom to trade and provide protection for private property. The failure of Africa is down to kleptocracy, and is beautifully described in Freakonomics.

  16. Bad teachers should be unemployed teachers.

    “Bad teachers should not be employed as teachers.” The market should encourage them to go and do something they are good at – it might be campaigning for tax reform, inventing low-carbon power solutions or stacking shelves. The same applies for metals oligarchs, security pundits and PPE grads. Except that there is an effective market for those (as a lot of PPE grads are going to find out on the morning of May 7th.)

  17. Brian, follower of Deornoth

    I think the detail at issue is what is meant by ‘work’. To you and me a ‘working’ market is one that allows everyone to get what they want at the lowest possible cost.

    To Ritchie, a ‘working’ market is one that allows everyone to have whatever he thinks proper for them to have at no cost at all.

  18. SE, yes, but the point I was making was that while they consider themselves teachers they are not employed.

    Once they begin stacking shelves they are no longer teachers.

  19. Ritchie’s arguments always boil down to the idea that he fancies himself smarter than any functioning market you might name. With him it’s always about ego, and rarely about economics.

  20. I’d bet that the cost of firing all the LEA bureaucrats would be less than the cost of oversupply. And of course, with oversupply we get better outcomes.

  21. Mr Murphy rather over-estimates the private sector’s appetite for competition.Should a one supermarket town, pop. 250,o00, find a competitor opening up,neither outfit will stock up to meet the needs of 250,000 : both will split the market down the middle and settle for half each.Redundant staff in the original shop will go across town and work in the new one.Same with
    hospitals ,schools whatever.Nobody is going to be tooled up to the max,so there will be no great over capacity.Trouble is there won’t be any competition either.
    You may as well have de jure state monopoly rather than de facto private monopoly or more often cartels.Modern business tends towards monopoly anyway: look at the merger of American Airlines and Continental.Good business because they were running parallel systems (of administration,marketing,advertising..)They would not be able to make savings if there was n’t huge duplication.Mergers are the big modern story.
    In giving” independent” status to Further Education colleges ,services done centrally by a few local authority clerical officers had to be taken over by setting up a parallel office in each of several colleges in the area.So independence and market competition increased bureaucracy.Admin offices took over teaching space.Where sixty students were concentrated in one place doing (this is an actual example) Religious Studies A level ,five colleges set up in competition,averaging 10 students each so as 12 was the break even point none of the colleges could run the course.
    Mr Murphy is on the right side of the argument but the problems are worse than he describes;not so much excess capacity as no real competitive markets to start with.
    Problem with getting rid of excess capacity in personnel is that spending power goes down so ,unless you have the public sector providing income (70% in some places),there is nobody to buy the goods and services that do get produced.

  22. “You may as well have de jure state monopoly rather than de facto private monopoly or more often cartels.”

    I am not so sure. Even if what you say is true about the actual tendency to have less competition, private enterprises still have to be able to produce goods and services at a price customers will willingly (even if grudgingly) pay. Not so state run enterprises which lack even that driver to be efficient.

  23. “,unless you have the public sector providing income (70% in some places),there is nobody to buy the goods and services that do get produced.”

    Isn’t this arse about tit? The only reason that the public sector can be as high as 70% in some places is because the money is taken from other places. Ultimately, across a tax paying population, it is the private sector that pays for the public sector.

  24. “If you have two hospitals, one clearly better than the other …”

    Speaking as a punter, I don’t necessarily WANT a choice of hospitals. I just want ready access to dependable services, staffed by grunts with long & bitter (ergo, valuable) experience. Supermarkets only “work” (for the sake of argument) because of *repeated switching behaviour by consumers. So, what aisle for sudden onset of acute MI, with unforseen complications? Bear in mind that it’s hard to switch once dead.

    Be specific (i.e. not just vague platitudes about “the market”): re you proposing several major trauma/critical care centres on the go, simultaneously, at any given location? Cinven etc might have something to say on the potential costs of that. Taking your custom elsewhere is still dependent upon a certain degree of available infrastructure and expertise… and unreconstructed, producer-interest-addled NHS grunt that I am, I still don’t buy the supermarket analogy. It’s not how comparable healthcare systems organise acute care, either.

    If you are talking about de-centralising healthcare, then fine. Let’s see less DoH control freakery, for starters. But don’t elevate market economics to something akin to magic.

  25. Speaking as another punter, I do want a choice, because I believe having a choice is the mechanism by which improvements may be made to get ready access to dependable services.

    Of course there is no reason why my views as a punter should outweigh your views as a punter, or indeed vice versa. Thus those that want to opt out of public healthcare should be able to do so, taking their contributions with them. That way, no punter is imposing their will on any other punter.

  26. “because I believe having a choice is the mechanism by which improvements may be made to get ready access to dependable services”

    I don’t necessarily disagree (I’m fairly libertarian in outlook, FWIW), but there’s an awful lot of empty bullshit flung about in the name of “choice and competition” – especially in healthcare. Not to mention damage to existing services, in the name of [usually pseudo-] market reform. It is instructive that when acute healthcare provision is “good”, it is generally the cumulative result of bloody-hard-won experience, often concentrated in one place. It doesn’t *have to mean equality of misery for all. Politicos and management consultants don’t see it that way, of course.

  27. Richard Murphy says NHS productivity has not declined because outcomes have improved. But they have not improved as much as spending has increased. Tool. And why doesn’t he use full stops in comments?

  28. Pingback: Britblog Roundup No 267 - Philobiblon

  29. ” It is instructive that when acute healthcare provision is “good”, it is generally the cumulative result of bloody-hard-won experience, often concentrated in one place.”

    I don’t doubt that, but one would expect expertise to be built up by staff regardless of the system (except insofar as the system encourages or discourages staff retention). That said, if the term acute means A&E type care rather than elective or long term health care, I am more happy (or less peeved) about the state taking care of that. I can see your point here because often with such care people are not in a position to make much choice.

    Personally, I am a fan of free markets primarily because of the “free” bit. For me, the fact that they usually offer better outcomes is a happy extra benefit. I would still be a fan of free markets even if this is were not the case, because I think it more important that people are free. It is no more the state’s job to maximise the economy (even if it could) than it is to maximise peoples’ health.

  30. @ChrisM
    Don’t buy this notion of laissez faire markets being free: the first things that happens as the French geezers who coined the term laissez-faire/laissez passer realised is that the price of land goes up so people can’t move and live where
    there’s work.Answer: l’impot unique or Single Tax on land values which is Mr Worstall’s one concession to common-sense progressive values.Mr Murphy does n’t get it at all,which is ultimately why he’s not worth listening to.
    After that the free market just puts up prices as ,with privatisation,the we know everything brigade turns up to try and run public services working tolerably well like hospital cleaning and the trains ,sacks all the workers and tries to re-hire them at lower rates,making their operations more expensive when you add in over-capacity i.e. cadres of pointless managers,absolutely full of bullshit since they believe they are bringing private sector expertise to the public sector(this is where all those consultants came from) plus of course and last but not least a hefty short-term ,lets take the money and run, profit margin.
    The general run of people are not made more free by being made to live in the same place by an economic system (of private land markets) more immobilising than the South African pass laws for making people literally stay in their place and lumbering young freeborn Englishmen (term loosely applied) with 100k quid upfront debt for the land beneath their houses.Then as soon as they try to get work
    they’re beset with anti-public sector bigots who try to exterminate this type of efficient work and replace it with more expensive private sector often cowboy alternatives.
    It is hard to believe now for all the prating right-wing rhetoric ,that Socialism, by eliminating duplicate/multiple management systems as modern firms do now with mergers ,once rested
    much of its case on the promise to reduce bureaucracy and unnecessary management .
    That case needs re-stating and re-considering IMO.

  31. lost_nurse,

    I tried to make a complaint to the NHS and immediately realised how utterly futile it was (it was about a dentist who seemed to have all the dexterity of Frankenstein’s monster). Immediately I came across questions that no supermarket (or any other free market business) would ask, like had I raised this with the dentist. I was also met with various defences on his side of “well, he might just have been having a bad day”.

    But of course it’s futile. Complaints departments exist in the free market for 1 simple reason: to retain customers. You want them to come back and ignoring their complaints mean that they might not. When you get paid regardless, you don’t have to take complaints very seriously.

  32. Johnathan Pearce

    The discovery process aspect about markets is the crucial insight. What many opponents of markets don’t get is that you don’t need “perfect” choice or whatever for them to work; in fact, it is the lack of knowledge, and the desire to overcome it, that drives markets along.

    DBC Reed, it is true that there are forms of early socialism that were skeptical about the state and fearful of bureacracy. Quite so. If people want to voluntarily pool their resources into communes, they are welcome to do so. There are all manner of ways that folk can voluntarily (that is the key word) choose to order their affairs.

    Alas, in reality, the voluntary bit tends to get ignored, which is why, in reality, socialism inevitably involves creeping state power. Always has, always will.

  33. And of course we do have excess capacity in schools in 2 different ways. Firstly there is strong political disincentives to close schools so there are many areas of declining population where there are far more classrooms than needed. Secondly the number of pupils in a class is ectremely flexible. For political reasons again, there is presure to reduce the size of classes since it keeps up the number of teachers employed. There is considerable evidence that below about 50 pupils reults aren’t much affected by pupil numbers though they are by discipline. The 2 may be related but history shows discipline being maintained in such large classes. So rather than everybody being in a class of 28 in a freeish market one might have a choice between going to a school wiyh good results but where the class sizes were being increased to 40 because of demanf & a crap one where they were being reduced to 15 because nobody wanted to go.

    Ritchie’s argument is much more valid when applied to physical products like potatoes & if his argument is correct supermarkets cannot exist.

  34. NIck:

    You might want to ground yourself in some historical perspective in these matters, esp. in reference to population and food production.

    Just going back from the present (6+ billion) to 1950 (2-1/2 billion) and, then, to 1900 (1.2 billion), there are fewer people starving now than at any time during that past (and the greatest cause of the occurring starvation has been, for at least 50 years, the incidence of violent conflict, which interferes both with markets and with production for those markets).

    The market (and, particularly, with the U.S. as the world’s market leader) virtually eliminated a number of conditions and diseases which formerly scourged the entire world, not only killing people but maiming and incapacitating even more; MILLIONS today are productive contributors who, under previous conditions would, if not killed outright, been a continuous burden on their families and compatriots.

    A few days ago, President Obama delivered himself of words to the effect, “At some point, haven’t they made ENOUGH money?” And, I am sure large numbers thought the expression appropriate. But that just shows how close the President and those thinking similarly are to primitive savages (such as the cargo cultists of Borneo, for instance).

    Large profits for successful entrepreneurs are absolutely required in a successful, progressing economy. Similarly to most other people, an entrepreneur is compensated for actual effort expended or services rendered in the conduct of his enterprise. But that is, typically, a small fraction of what the successful entrepreneur “makes”–we could liken it to wages (which is what it actually is). But, in a market society, the principal function of entrepreneurs is to make guesses about the future direction of the economy and of markets for various of the things about which they have (or think they have) some knowledge and then, to place wagers of their own accumulated capital against others of that same class and function in “zero-sum” transactions on the correctness of their future-oriented perceptions. In such fashion, those frequently successful may pile success upon success to dizzying heights; others might persist at levels not much greater than their managerial wages, while yet others may be reduced, either step-by-step or in one fell swoop, to a condition where they’re unable to continue in an entrepreneurial role.

    It is from the allocation of capital to the various economic sectors by entrepreneurs that all economic performance emerges. To lessen their rewards, whether by taxation, regulation, or outright expropriation would diminish, not increase, the well-being of the the “rest of the market” (not including the entrepreneur). The entrepreneur gets his inspiration primarily from the market by various poorly-understood means and cannot function without the market.
    Nothing of what an entrepreneur thinks or says is of any real or lasting consequence for the market–only his actual entrepreneurial actions in buying and selling. On the other hand, a market without entrepreneurs is actually not possible–the closest approximation would be a machine-like affair churning out the same things day after day in the same quantities and of the same qualities, without the capacity for increase in productivity or product improvement or change of any sort.

    It is possible to interfere with the functions of entrepreneurs and to reduce their “take” but only at greater cost to the economy. Most important to understand is that, unlike those who “work” for a living (and whose l;abor must be “paid for” by the labor of other consumers), the entrepreneurs’ services and the market improvements brought forth are FREE to everyone (except, of course, the entrepreneurs who’ve backed the wrong horses).

    Deal with it.

    This has all been brought about by the extraordinary productivity of the market society, hampered as it is at every turn by what is known as the “welfare” society.

  35. There must be a bit of spare capacity in mechanised industry:with a surge of demand a factory(remember them?) could lay on extra shifts,recruit temporary labour or run machines faster.During the Three Day Week production went down by 20% not the expected 40% because the plant was being worked harder on the days they had current.
    Can’t see how putting prices up would clear demand though putting them down might very well do so .But you would n’t cover your costs.
    Major Douglas being a production engineer realised capital equipment was being under-utilised all over the country and could in fact produce more.He proposed to bridge the gap by National Dividends:subtract the amount of money in circulation from the amount you would need to circulate to keep industry at full capacity and distribute this as a free unearned income for all.Very sensible,modern “dividends’ are rather weedy by comparison.Result: everything working at full capacity .His diagnosis: industry not working at full capacity because there’s not enough money around.All you have to do is get the Gov to take over the creation of credit from the banks and you can start circulating the unearned dividends (no inflation as productivity and credit creation are exactly in phase).
    They might not have had rock and roll these old weird guys in the Thirties but they’d got their act together economically .The Greenshirts were quite as popular movement.And they had boogie woogie piano and blues shouters like Joe
    Turner (later to record Shake rattle and roll and the sublime Boogie Woogie Country Girl) inventing r’n’r by shouting over the top.

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