Category Archives: Economics

In a typically thought-provoking post a few days ago, Chris Dillow at Stumbling And Mumbling discussed why the “left” regards the market as a “right wing” device. His conclusion was that the left falsely equates markets with business, and that the depression in the 1930’s and the Keynesian methods subsequently employed resulted in socialists abandoning market-based theories such as guild socialism in favour of models based upon state intervention.

I am certainly not going to take issue with that analysis, but from a personal point of view I can’t help thinking that this is another issue over which Margaret Thatcher casts her malign shadow. During the ‘Eighties, the phrase “the free-market” in effect became co-opted into – for want of a better term – the Tory brand. Albeit perhaps it was a term that no-one else wanted at the time, but if you opposed Thatcher then it could seem that you had to oppose markets; in becoming synonymous with the free market, I think Thacherism may have given markets a bad name. I certainly suspect that this had a large effect on me personally; although I have never considered myself a socialist, and I have always valued the effectiveness of markets in the economy (well not always, not when I was at nursery), I still used to roll my eyes, either metaphorically or literally, when a Tory, or my Dad, “went off on one” about the unalloyed virtues inherent in the free market.

Antipathy towards Thatherism itself is one reason, but I also think part of the fault lies in the behaviour of certain unthinking Thatcherite drones. Chris says that “much of what (the left) object to about markets shouldn’t be (and isn’t) markets as such but the same things rightists object to – market imperfections”. Fine, but viewing from the sidelines in the ‘Eighties it didn’t look that way to me, and still doesn’t at times. Many “rightists” seem oblivious to and blissfully ignorant of any possible drawback to markets. Particularly when I learned a bit more about economics at school and then at university I found it all to easy to dismiss the pro-market, scratched-record ramblings of some Tory spokesmen; perhaps unfairly. I was and remain far from being an expert in economics, that much should be clear, but many Tories seemed to have gleaned their entire knowledge of the subject from the first page of Lipsey’s “Introduction to Positive Economics” where it discussed the benefits of perfect competition; if only they had turned to page 2 they would have learned that perfect competition is a rare beast indeed, that we are more likely to get imperfect competition, monopolistic competition and oligopolies, and that there are such things as externalities and market failures. Many Tories may indeed be conscious of some market imperfections, but it was hard to tell that under Thatcher when all the simplistic rhetoric was about market forces being able to solve everything.

If, during the ‘Eighties, the Tories had presented me with a realistic view of markets, rather than an idealised one, then perhaps I would have viewed the free market more positively. As it was I think my appreciation of markets was more grudging, like admiring Eric Cantona when he worked wonders in a United shirt. I think it is hard to truly admire something that you see as being a weapon in your opponent’s armoury.

No doubt many people became opposed to the free market because of the Great Depression, but for others I think the matter was up for grabs until Thatcher forced the issue; perhaps in opposing the Tories an appreciation of the free market was thrown out along with the baby and the bathwater, and I may be as culpable as many others in this. As ever, an open mind on matters is to be welcomed.

Chris ends his post by saying it is time for the left to “update their Bayesian priors” and although I am reluctant to claim membership of “the left” I suspect others are less reticent in deciding where I stand. No doubt this is very good advice and I will look into doing some updating right now; just as soon as I find out what “Bayesian priors” actually are.

If I still sound a little hoarse it is because I spent much of Wednesday evening booing Joey; no, not the Ginsters Pasty sponsored Friends spin-off (which I have never seen) but Mr. Barton, footballer, currently of Manchester City.

Actually, I didn’t even do that, but many people did jeer him half-heartedly throughout City’s 3-0 P45-inspiring victory over Newcastle, until he was finally substituted to generous applause because of his pretty good performance that night. I didn’t see the point of booing him during the game; would you boo him if he was clean through on goal, or if he cleared the ball off the line, or was about to take a penalty? Apart from not helping the team, those who booed him through the match really were hostages to fortune.

The reason for City fans’ chagrin is that Barton has asked for a transfer because he wants more money than the club are prepared to pay him, a measly £28,000 per week according to reports. Of course, Joey has claimed he wants to leave for all sorts of other reasons, claiming the club lacks ambition, but in the end it comes down to the fact that he thinks that merely being offered more per week than the average worker earns in a year is “insulting”. This would be less galling if it wasn’t for the fact that were he not a half decent footballer you can imagine Joey would be grateful just to receive a fortnightly giro.

Is Joey pleading poverty? Not quite, but his antics have made me think about the term, or rather about two terms; absolute poverty and relative poverty. The former is a measure that defines those whose level of income has fallen below a definitive poverty line, the latter is usually used to refer to those who earn less than 60% of the median average income. There are arguments over which measure is the best one to use when discussing poverty.

Personally, I favour using absolute poverty; relative poverty seems to be a bit of a statistical conceit. I wince whenever I hear Labour politicians talk about having “taken a million children out of poverty since 1997” when you know they may just be talking about some statistical jiggery-pokery; but then again I wince when I hear Labour politicians talk most of the time anyway. If we are talking about actual poverty then I think we should look at how well off people really are, rather than just how they compare with the average. For example, the number of people in relative poverty will reduce if the poor’s income were to remain static while the median average income falls, which seems nonsensical to me; if this were to happen then you could cheer a cut in levels of poverty, when in fact to me the poor would still be just as poor as before while the average worker would actually be worse off, which seems little cause for celebration.

But there are some misunderstandings about relative poverty; one being that, as those who are poor are defined as earning 60% or less of median income, “there must always be some proportion in poverty”. It is surprising how often I have heard this statement, as if it is proof that relative income is a political tool to ensure there are always some poor to fight for; but even I, as a very poor mathematician, know that if everyone were to earn the same then as a result everyone would earns the median income, therefore everyone must earn more than 60% of the median wage (because everyone would be earning exactly 100% of the median income). If you can accept this as a possible, if unlikely, scenario, then you must accept that there may be numerous other occasions where relative poverty could be zero.

In fact, as my above example shows, relative poverty seems if anything to be more of a guide to inequality; and call me old fashioned but I still think that inequality is something to be concerned about. I may prefer absolute poverty as a definition of poverty, but I do think relative poverty is a useful statistic on its own terms; our relative incomes do affect our access to goods and services and our opportunities in life, we do judge how well off or otherwise we are by comparison with others rather than by an objective assessment of our material wealth. If anything I just think that “relative poverty” is a misleading term, perhaps “inequality index” would be better; either that or people make it crystal clear what they mean and which term they are using when they talk about poverty. The problem with two definitions of poverty, as with two or more definitions of anything, is that people will always choose the one that best supports their case.

But if you think that relative poverty doesn’t matter at all then just have a word with Joey Barton. Actually, if you see him, don’t bother having a word as I wouldn’t expect to get much sense; if you do see him, just give him a slap, and say it’s from me.

There have been some interesting posts over at The Filter^ recently. This one, on the subject of drinking, harks back to an earlier post on the same subject, and follows the author’s usual line that government action will invariably make matters worse, that there are free market solutions to our problems. As usual, Anthony makes some insightful points, most of which I agree with, but I think he seems to just take things a bit too far and reveals what I feel are some of his prejudices.

My attitude to the recent relaxation in the licensing laws is that it is a good thing. Just because some people will overdo it with 24 hour drinking doesn’t mean I should be prevented from having a beer after eleven. The idea that every town centre is a war-zone at the weekend is a myth; I regularly go into Stockport on a Friday (and to a dreaded Wetherspoons to boot) and I cannot think of the last time I saw any trouble there. However, I also work for one of the emergency services, and I know that there is plenty of violence and disorder every night that is entirely drink related. I suppose my attitude is that we should let the free market do what the free market does, but accept that there will likely be externalities as a result, and that we may have to accept an increased role for the public sector, not in opposition to the private sector, but as a consequence of it.

I think that is pretty much my opinion in general; that the free market is the best way of organising things, that is should certainly be given the first go at providing our goods and services, but that we shouldn’t get bogged down in an ideology that the market always knows best. It makes sense to me to accept that the pursuit of profit does not necessarily provide the perfect desired outcome, and that when it fails we shouldn’t begrudge the fact that a public sector solution may be required, and should be valued for what it provides. At the same time, we must be aware that public sector involvement may very well make a situation worse than it was in the first place; we shouldn’t place all of out faith in either sector.

Returning to The Filter^ then; it was this part of Anthony’s original post that got me thinking. Considering an archetypal weekend night he says

The emergency services can complain all they want about how expensive it is to look after us all on a Saturday night, but this merely hints at the underlying problem. If you wish to nanny, expect children. With no financial penalty for drunkenness and irresponsibility – if the public purse picks up the bill, then of course people will make unwise decisions. For those who advocate socialised services that erode personal responsibility, funding A&E is a fair cost.

It is a well written paragraph, and but it seems to start from the point that government and all its agents are to blame and deserve no sympathy for their predicament; but aren’t they really just dealing with the consequences of standard human nature and behaviour? Is there any reason to believe that the welfare state’s nannying has influenced disorder at the weekend? Is it not just down to drunks getting lairy (on drinks bought from private sector providers!)? It sounds as if Anthony believes that the emergency services almost deserve their fate; as if because they are government employees they are complicit in the dependency culture that spawns disorder (when in fact we are far too jaundiced to have a benevolent attitude towards welfarism).

Anthony’s answer is of course that the free market can sort out our problems. It is licensing restrictions and local government red tape that mean only large companies can get planning permission for large bars; cut red tape and a thousand pleasant cafés will bloom (perhaps). But there has been a relaxation of just such regulations in recent years, and with it we have seen an increase in violent disorder and alcohol related crime; I am not suggesting there is a definite cause and effect here, but the facts seem plain. In his response to my comments on his most recent post Anthony suggests that scrapping the NHS and getting people to take out private health insurance will mean people may be hit in the pocket if they kick off and so are more likely to behave; but there already is a financial disincentive in the form of fines and possible imprisonment if you are drunk and disorderly or commit a public order offence, and how many people who get into scrapes will think about the financial implications of responding to a drunken taunt in a pub? How many even bother to go to A&E as it is for their split lip or bust eye? Anthony also suggests the police shouldn’t take drunken brawls between people who like a battle too seriously, and I am sure they would agree; but the police (unlike private sector companies) cannot, and arguably shouldn’t, pick and choose what they deal with. Surely they shouldn’t judge but should just uphold the law and deal with any transgressions they see? I don’t really see how else they should operate.

Anthony is a staunch advocate of the free market, and rightly so; but I think if he has an Achilles heel it is because he doesn’t realise that I am too. He seems to resent almost any action the state may engage in, and to see any argument in favour of public sector action, or any criticism of free market realities, as betraying a statist “government knows best” attitude.

But I have worked in the public sector long enough to know that I don’t fancy any casual extension of the government’s powers, I don’t want the state running more than it has to. The problem is that I have also worked in the private sector long enough to know that they seem little better, and that they share many of the problems and frustrations you find working for the state. To criticise one needn’t mean you have unquestioning faith in the other

Is it impossible to marvel at and embrace the market economy, to be grateful for what it provides us both on its own terms and certainly when compared to the alternatives; and yet to also acknowledge that there is a limit to what it can achieve, that it isn’t perfect, that there are times when the only solution may be government action, and that we can welcome and value that just as highly? It needn’t be a case of either/or, but both, working in partnership to create and protect the wealth and liberties that surely we all value?

People cleverer than I have been discussing the issue of a flat tax across medias both new and old recently. It is a subject that interests me, and although I don’t have a detailed knowledge of the ins and outs of the tax, I do have an opinion.

Simply put, the idea of a flat tax is to replace the current tiered levels of income tax, which increases from 10%, through 22% and up to 40% as income rises, with a single tax rate regardless of how much one earns. Instinctively I would expect to oppose such a move as it not a progressive system of taxation where the richest pay a higher proportion of their income in tax; but the matter is not that simple. Proponents of a flat tax tend to favour a higher personal allowance, of around £10,000-£15,000 rather than our current £4895; as the poorer one is, the larger proportion of your income is made up of the untaxed personal allowance, there is still a level of proportionality to the tax. In addition, with a simplified taxation system there are fewer places for the rich and their accountants to hide their wealth in a thicket of tax loopholes, and levels of compliance increase; this is another way in which the flat tax can in fact be considered fairer to the poor. An accountant friend of mine tells me that there are slim picking these day for those trying to avoid tax; but still, I do think that a flat tax has much to commend it, more than I initially thought I would.

Not surprisingly my pals at the Daily Mail also find the flat tax an interesting idea, although I suspect for rather different reasons to mine. I imagine that some of the things that attract me to the flat tax are the sorts of things that cause the Mail to have reservations, but we cannot always choose our allies and we certainly can’t choose their motivations. However, there remains a problem for the Mail.

When the Adam Smith Institute advocated a 22% flat tax with a £12,000 personal allowance its studies showed that no one would be worse off financially as a consequence. Unfortunately, such a system would accrue only £88 billion in revenues to the treasury rather than the £138 billion currently raised by income tax. Doubtless the ASI don’t see that as too much of a problem, believing that government takes too much money from us all in the first place. Secondly, it is argued that the greater economic efficiencies and incentives resulting from a flat tax will make up this shortfall in revenue (as people are not penalised for working harder and earning more money) and indeed they may do; but they may not. I know the ASI is interested in deregulating gambling (well, they are interested in deregulating pretty much everything, and so support deregulating gambling as a consequence) but to gamble with the finances of the country seems a bit risky to me.

The Economist then commissioned a study into the flat tax to see what would be the result if it was introduced at a level that was revenue neutral (ie. raised the same amount of revenue as is collected by the current system of income tax). It found that there could be a flat tax with a rate of 30% and a personal allowance of £10,000. Those earning less than around £20,000 and more than £50,000 were better off as a result of this change. Unfortunately for the Mail, the people in the middle-income group (earning between £20,000 and £50,000) would end up paying more in tax; these are the very inhabitants of “middle England” that the Mail claims to represent and who pays its wages, the same people who the Mail currently consistently complains are being clobbered by the government and its numerous stealth taxes.

So the Daily Mail will ultimately probably not charge the barricades demanding a flat tax, and if the figures above do accurately show how it would work in practice, then it looks a less enticing prospect than it does in theory.

But of course there is one way we could get a flatter (if not flat) tax tomorrow, and that is simply by combining income tax with the employees national insurance contribution. Then, rather than having an incentive-denting leap in tax rates from the standard 22% to the whopping top rate of 40%, we would instead find that our tax on income only rises from 33% (22% income tax, 11% NI) to 41% (40% income tax and 1%NI) at the top level. Perhaps if we did this, and publicised this “change” in our tax regime, then we would reap some of the benefits the ASI think will come from abandoning a system that so penalises those who work harder. Do you reckon?

I still think the flat tax has much to recommend it, especially when, as I have just explained, the current system is not as progressive as it is sometimes painted; even less progressive when you consider other taxes such as VAT and the Council Tax. I am still quite attracted to the theory; but at the moment I need to know a little bit more about the facts.

I wouldn’t describe myself as an economic illiterate, but my 2:2 in economics is a bit long in the tooth for me to consider myself fluent in the dismal science. Certainly, there are a hell of a lot of people out there who know far more about the subject than I ever will.

But the term “economic illiterate” is something I am getting heartily sick of reading in blogs and elsewhere. It suggests a degree of arrogance and smugness on the part of the writer who uses the term, a certainty that their view of the world is correct and that to disagree cannot be a difference of opinion, but due to a lack of knowledge on the other person’s part. Strange, since economics is a discipline famed for inspiring a wide range of conflicting views and opinions.

Theoretically you would imagine anyone could throw about the charge of “economic illiteracy”; anyone who reads an economic viewpoint different to their own and feels this view has been arrived at through ignorance. In practice the term is almost always used by free-marketeers to dismiss anyone who suggests something less than an entirely laissez faire model. Why this should be I don’t know. Perhaps those of a libertarian bent really do know more about economics than others; or perhaps they view economics more as a science, so that dissent from pure free market solutions is like dissent from the laws of nature. I have less faith that free markets can always provide us all with what we want, I don’t think that economics can be directly compared to the natural sciences, and I feel there are times when state intervention can be desirable, even if it may result in some economic inefficiencies.

A recent hot topic is of course the whole question of aid and the Make Poverty History campaign. Here the charge of economic illiteracy has been widely used to attack what are seen as its well meaning but naive proposals. The suggestion to double aid is often derided as just simplistic and woolly thinking, that it ignores economic realities and the situation existing in Africa. Funny then that many critics of Make Poverty History and Live 8 themselves seem to betray an extremely simplistic world view; that aid can never be effective; that it is just throwing money at the problem and will only find its way into the Swiss bank accounts of corrupt African regimes; that only trade and better governance can help the poor in Africa.

But there is no suggestion that aid should be thrown at corrupt regimes; the intention is for it to be targeted at specific problems, such as combating malaria, and often channeled through NGOs. Moreover, aid forms just a small part of the current campaign, alongside debt relief and trade reform (although we can argue over whether free trade or fair trade is the best way to go, everyone seems agreed that trade is a vital part of the long term solution). To characterise all African governments as corrupt is probably the most telling assumption of those who oppose Make Poverty History and its related campaigns; it is crass and ignorant to lump together the governments of Zimbabwe and, say, Ghana.

If those calling for greater aid are a group of economic illiterates, it is interesting to see that their ranks appear to have been swelled by none other than The Economist newspaper. The current edition includes a leader entitled “Helping Africa help itself” (subscription/registration required), which says,

The aid sceptics, some of them veterans of the industry, their palms calloused from many previous bouts of hand-wringing over Africa, have all the best lines in the debate. Everything has been seen before, they say, nothing has worked. But what do they mean precisely? Do they mean that the World Health Organisation should abandon its efforts to put 3m HIV-carriers on anti-retroviral therapies? Perhaps those already on the drugs should hand them back, lest they succumb to “dependency”. Should Merck stop donating its drug, ivermectin, to potential victims of riverblindness? Let Togo reinvent the drug itself! Perhaps, in the name of self-reliance, Tanzania’s government should stop giving pregnant women vouchers to buy mosquito nets. Get sewing, ladies!

No one should be naive about aid. It cannot make poverty history, and it can do harm. But to say that nothing works is wrong. Cynicism is only the most common form of naivety.

I couldn’t possibly put it better myself. I may not be fluent in economics – indeed I may leave myself open to the charge of being an economic illiterate – but to me The Economist is just talking plain old common sense.

My first venture into digital television was with the ill-fated on/ITV digital a few years ago. When they went bump (while trying to drag a few lower league football clubs with them) I wasn’t all that bothered; most of the channels we lost were rubbish (my wife missed E4, I quite liked Paramount for “Seinfeld“), but we kept the set top box, and still got the BBC digital channels, which were the ones we probably watched the most, and ITV2 was still there for the occasional Inspector Morse re-run. Then, when Freeview started, these channels were joined by some half decent offerings; UKTV History has its moments, the two music channels are okay for a change, Sky Sports News is occasionally worth watching. Basically, it does us fine.

Except the old ITV digital box started playing up; it was getting to the point where I had to pull the plug out of the wall at least once a day when the whole thing froze. Solution? The fantastic new DigiFusion FVRT100, with built in hard drive recorder. Basically, rather than having a separate set top box and video, you have a combined unit which records your TV programmes to a hard disk, so preventing the need to go searching for blank video tapes. It has two tuners incorporated into it, so you can watch one channel and record another; in fact, you can record two channels at the same time, and watch a recording, should you so wish. It also automatically records up to 30 minutes of the channel you are watching onto a temporary file; so you can “pause” and “rewind” live TV. This has become a real boon; when the phone goes in the middle of a programme you are watching, or if your nose tells you your son’s nappy needs changing…now! It’s a little marvel.

You may say that this seems very similar to the Sky+ box, and you’d be right; they are basically the same thing. There are a few differences I have noticed though, in purchasing a Freeview hard drive recorder compared to Sky+

• My box records up to 40 hours, compared to Sky’s 20 hours. Already DigiFusion are talking about bringing out an 80 hour version.
• With Sky, you get the box you are given; with Freeview you have a selection of different boxes to choose from; DigiFusion, Pace, Thomson and Humax all manufacture them. Humax are currently working on a Freeview TV with integrated Hard disk.
• You have to wait for Sky+ to be delivered and installed, at a cost; I bought my box from Currys, plugged it in, and I was away (although I dare say there are technical reasons why you can’t install Sky+ yourself)
• Sky charges a monthly fee for Sky+; unless you are already on one of their more expensive monthly packages. With my box there is nothing else to pay.
• The DigiFusion box is £40 cheaper. I think the Thomson box was cheaper still.

I know that this is a far from scientific comparison of the two systems, and I may have missed some benefits Sky+ has over a Freeview box; obviously you get far more channels to watch with Sky, and you can’t watch Premiership football on Freeview; but isn’t that what the pub is for? Also, I am not saying that Sky+ is rubbish, because it’s not; in fact it is because it is so good that I wanted the same thing for Freeview. What I find interesting in comparing the two systems though, in this regard at least, is how Sky seems to be acting in a way similar to BT, pre-privatisation, where it was a case of “Do you want a new phone? Well, we’ll tell you when you get it, and what it looks like, and when you will be connected.” Yet Sky is part of a massive private company; why would they act in a way I find reminiscent of a public monopoly?

Firstly, of course, in the market for a Sky hard drive recorder, they are a monopoly. Sky alone provides satellite digital television to the UK, and only they provide a hard drive recorder with an integrated satellite tuner. They do face some sort of competition, from Freeview, and cable, but if you want the range of channels that only satellite technology provides, and you want to record one digital channel whilst watching another, then Sky+ is it.

Secondly, I have a feeling that in many ways, large private companies actually have more in common with the public sector than they do with small private companies, at least in their day to day running. I hasten to add that this is just my little pet theory, likely to be contradicted at a stroke by a well placed statistic or two, but it is a theory based on my own observations having worked in the public and private sector, in large and small companies. Of course, private companies have a profit motive that is absent from the public sector, and this will affect their decision-making; but public firms do have their own financial considerations. Meanwhile, within large private companies, you can find vast swathes where the profit motive seems an irrelevant and alien concept; the senior managers who are interested in profits are often insulated and ignorant about how many areas of their business operate. Examples available on request.

People often talk about comparing the public and private sector as if it was a simple divide; Ruth Lea of the Centre for Policy Studies is typical when speaking to the Telegraph of comparing “the dynamic private sector to the wasteful public sector”, but I think this is a simplistic comparison, even if there is some truth in it. Similarly, Tim Worstall replied to my comment on his blog by saying that what he dislikes about the State is “the meetings, conferences, planning sessions and bureaucrats”, and he is right to dislike them; but they are far from the sole preserve of the public sector.

I would say that it is competition that makes the difference, rather than simply whether a firm is in the private or public sector; so, where Sky do not face any meaningful competition, their service suffers by comparison with a similar market where competition does exist.

I think that this illustrates part of my concern when people preach the virtues of the unrestrained free market. It works brilliantly well in many ways, at least where the actions taken to maximise profits coincide with actions that benefit the consumer, as they very often do. However, some people talk about the benefits of the free market and the benefits of perfect competition as if they were the same thing, when in most cases the free market throws up oligopolies and monopolistic competition. If we do just leave things to the free market, what is to prevent a gradual slide towards monopolies across all markets, and where will we stand then? Will we be much, if any better off than under a public sector monopoly; and if not, how can such a drift be prevented, other than by state action of the sort the OFT engage in, and which is so criticised by some proponents of the free market.

What is the answer? You didn’t really come here for an answer did you; I am certainly the wrong person to ask. I am just throwing ideas and thoughts about to see if they make any sense. Do they? I may have a degree in Economics, and so have forgotten more than most people know about the subject, but that is probably the problem; I have forgotten it, and I just carry about a little knowledge at a dangerously low level. I think all I really learnt at college was a cynicism and scepticism towards all economic theories.

I will tell you what I am not saying, however; I am not attacking the free market, and I am not arguing for a large state. Sometimes it is assumed that if you question the free market, or defend the state in any way, then you want politicians to organise everything for us, and for the state to tell us what we are having for tea. I don’t. I want the state to be as small as possible, and for taxes to be as low as possible, albeit I would like them to be more progressive than they are now. And it would be lovely to think that leaving everything to the market would solve all our problems, that some invisible hand will always be there to mop our brow and steer us back onto the right course when things get tough; but it seems a somewhat naïve view to me. I suppose I just think that market failure occures a bit more often than some people believe, and that the state may have to nip in now and then to help out more regularly than some would like.

Or perhaps I have just rambled on, at perhaps too much length, over reacting to what is just a rather fine piece of consumer electronics.