Gosh, Ritchie\’s a brave man

The report is, from the outset, fundamentally flawed as a result.

Why ass this mistake mean made? Simply because this whole review is built on the bankrupt model of neoclassical economics.

That\’s how he greets the Mirrlees Review.

You know, the voluminous review of the economics and politics of taxation undertaken by a Nobel Laureate in economics?

During his time at Oxford he published papers on economic models for which he would eventually be awarded his Nobel Prize. They centered around situations in which economic information is asymmetrical or incomplete, determining the extent to which they should affect the optimal rate of saving in an economy. Among other results, they demonstrated the principles of \”moral hazard\” and \”optimal income taxation\” discussed in the books of William Vickrey. The methodology has since become the standard in the field.

Vickrey and Mirrlees shared the 1996 Nobel Prize for Economics \”for their fundamental contributions to the economic theory of incentives under asymmetric information\”.

Someone who actually got his Nobel for considering, in part, optimal taxation under conditions of asymmetric information?

You know, someone who actually knows his subject as opposed to the opinions of a retired accountant from Wandsworth?

Oh, and Ritchie doesn\’t actually mean \”neo-classical economics\” although he\’s too ignorant of the subject to understand that. He means \”neo-liberal economics\”: you know, the modern, market based, Hayek, Mill and Smith were right sort of stuff that he doesn\’t like. Rather than ne0-classical economics which is the marginal revolution, Marshall and all that, price theory etc.

And they’re wrong. Markets are utterly dependent on governments for their survival …(….)…. and by pricing externalities which the market is unable to do.

Marshall, neo-classical economics, is where we first find externalities discussed and the importance of government in correcting the market failure (or their absence from market incentives, to taste).

Lordy but the man can be a twat at times.

18 thoughts on “Gosh, Ritchie\’s a brave man”

  1. “And they’re wrong. Markets are utterly dependent on governments for their survival ”

    Down here in Spain been watching a market operate that’s certainly not dependent on government. Quite the opposite. Provincial government in Malaga has just enacted legislation in an attempt to suppress it. The market? Prostitution.
    You can follow the prices in the classifieds in the papers if you don’t want to do field research. Hourly rates are down between 10 & 25% in a year. Problems oversupply & lack of demand due to drop in tourism & the crisis hitting the local economy.

    Narcotics supply/demand’s another market.The weed crop in the hills is coming in so the price of maryjane is crashing.

    Spud really doesn’t live in the real world does he?

  2. Christ on a bike – doesn’t the report actually recommend taxing externalties?

    I haven’t read it yet – but was surprised to see headline recommendation of VAT on all those things like food and children’s clothes. Does he make the recommendation on condition of an offsetting transfer to the poor?

  3. Markets aren’t dependent on governments for their survival. Markets can operate despite governments trying to destroy them – see the illegal drugs market.
    Whether all markets can operate in the face of government opposition is doubtful, eg it might be difficult to run illegal trans-Atlantic airlines, not just because planes are bulkier than drugs, but because of the inability to peacefully enforce contracts, but it is entirely possible to have a market without government support.

  4. what on earth makes him think that Mirrlees would deny the importance of the government in supporting markets. One of the report authors is Tim “State Capacity” Besley who argues precisely that government must support market if they want to raise taxes and that capacity to do so in a key to development.

    It’s obvious how he operates – he doesn’t read or think about what people he places in opposition to himself write. He projects his imagined version onto them, and then proceeds to critique his own hallucination.

    [this sort of behaviour is alarmingly common. Actually in small order, it’s very hard to avoid not bringing your wider ideas about what you believe your opponents believe to the debate, I’ve been guilty of it myself. But at least I try to minimize it, Richard gorges on it]

  5. As I point out on Richie’s blog, I trade in a market that is independent on government.

    This is a financial market though – I trade interest rate derivatives (swaps) in Africa.

    In most of these markets there are no fixed terms, and those that are have been decided by mutual agreement between banks. We use 3rd party documentation and definitions to resolve any dispute on a trade.

    The ONLY time the governments step in is when they come to tax us of any profits.

    My example is Africa, but even in G10 derivatives governments aren’t involved except at the taxation level. Swap terms are agreed between banks, with a bank derived fixing and contractual terms described by ISDA, the INDEPENDENT swaps dealers association.

    The only time government gets involved is when they tax us or blame us for their follies.

  6. Tyler what happens if one party makes a large loss and refuses to cough up? You don’t by chance take advantage of the state run justice system do you?

    Tim adds: No, not if you’re dealing heroin, no, you don’t.

    Entirely agreed that often (but not always) government can make markets work better. But markets predate government: heck, trade, we know, predates our own species.

  7. comparison with the violent drug trade makes me feel much better about the prospect of government free contracts. Fear not, we can always enforce contracts the drug gang way!

  8. Someone is always sovereign. Governments are just a special case of sovereignty–there is nowhere outside this system.

  9. He is also spectacularly wrong here. The only poverty among the elderly is where people do not claim the benefits they are entitled to.

  10. Aha, here’s why he’s rubbishing it – he wants a job:

    “There is a strong case for an alternative review of taxation to counter Mirrlees from the left. And soon.”

  11. @Luis

    If one party decides not to cough up frankly I do’t care too much. The agreements we decide include a margin clause. So do ISDA docs. They also include break clauses.

    So basically if the other bank runs away we should be ok, because we hold some of their cash already dependent on the market value of the deal. That said, they won’t run away nless they are bankrupt as breaking such a deal would ruin all thei other business, so really all we need to price for is default risk.

    Simples, yes? The long and short though, is that governments are not involved at all.

  12. Ah, the appeal to authority. A Nobel Laureate said it, so it must be true. How about taking advice from the World Bank President, Robert Zoellick, a few days ago?

    “The Nobel Prize for Economic Sciences has been bestowed on many worthy honorees. But it has also been given to those whose love of mathematical models was based on heroic and unrealistic assumptions about humankind.”
    Enough said, eh?.

  13. …..Ah, the appeal to authority. A Nobel Laureate said it, so it must be true……

    No not at all. Tim just said he must be brave to challenge such an authority, seeing as his knowledge of the subject is so tiny. In fact he simply dismisses the report, its not even an argument.

    Experts are not always right, and even idiots are sometimes not wrong. However, if an idiot is challenging an expert, then it’s worth questioning his arguments.

  14. @Nick ‘How about taking advice from the World Bank President, Robert Zoellick, a few days ago?’

    Ah, the appeal to authority.

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