Marinaleda, the new new socialist utopia

Hope springs eternal that there's some method of socialism that will actually work and the latest example, something which is in the words of the author here a beacon of hope to the world, is called Marinaleda. A large village of just under 3,000 souls in southern Spain where they farm the fields in common. Parts of it sound awful:

The town co-operative does not distribute profits: any surplus is reinvested to create more jobs. Everyone in the co-op earns the same salary, €47 (£40) a day for six and a half hours of work: it may not sound like a lot, but it's more than double the Spanish minimum wage....(...)...

All work in the Marinaleda co-operative in shifts, depending on what needs harvesting, and how much of it there is. If there's enough work for your group, then you will be told in advance, through the loudspeaker on the van that circles the village in the evenings. It's a strange, quasi-Soviet experience, sitting at home and hearing the van drive past announcing: "Work in the fields tomorrow for group B".

Well, yes, quasi-Soviet it does sound like. And it sounds awful to me because I'm a city boy. It would be terribly, terribly, easy to sneer at all of this. All those Islingtonistas clinging to the hope that there's an alternative to capitalism even if they'd never actually join in it themselves. And as we can see there is an absolutely and entirely viable alternative to that capitalist ownership of land even if the Islingtonistas are never going to work in the fields for £45 a day. We might even point out that the reason they don't need the capitalists is because they simply stole the land that they're farming which does tend to cut down on capital costs.

However, rather than sneering we should point out the interesting parts:

In addition to the ubiquitous olives and the oil-processing factory, they planted peppers of various kinds, artichokes, fava beans, green beans, broccoli: crops that could be processed, canned, and jarred, to justify the creation of a processing factory that provided a secondary industry back in the village, and thus more employment.

More on that employment part in a moment but note what they actually do with these packed and preserved veggies: they sell them. They may well be a workers' cooperative and good for them if that's what they want to do. But they are still plugged into the market system and as I've often pointed out, it's markets that are much more important than the capitalism part of our economic system. That there is the division and specialisation of labour along with trade in the resultant production is far more important to rising living standards than the relatively minor question of who owns the productive assets.

But there is still one thing they've got badly wrong:

"Our aim was not to create profit, but jobs," Sánchez Gordillo explained to me. This philosophy runs directly counter to the late-capitalist emphasis on "efficiency" – a word that has been elevated to almost holy status in the neoliberal lexicon, but in reality has become a shameful euphemism for the sacrifice of human dignity at the altar of share prices.

Efficiency has nothing to do with capitalism, neoliberalism or share prices: or nothing to do with them that it doesn't also have with any other method of economic organisation. You still want to have the maximum output for the inputs you have available. That's how you maximise what can be consumed of course. And this village is relatively land poor (1,200 hectares) and labour rich (2,700 people) so of course they should be using a labour intensive form of agriculture. That would be true under any economic system, assuming that the entire village is going to try to live off the land. Given the constraints they're working with any economic system would lead to the same strategy (and do note, their constraints include there not wanting to depopulate the village to move into industry elsewhere).

What we've really got here is a workers' cooperative plugged directly into the market system. And good on them and let's hope they all enjoy it. What we don't have here is some radical vision of a different society. For as we well know, the liberal order both allows and encourage different forms of organisation as the customer coops of the Building Societies and the Co Op, the workers' cooperative of John Lewis and Waitrose and the shareholder owned parts of the economy show us. Marinaleda is simply another experiment and as always happens in market based societies, those experiments that work will spread, those that don't won't. Given that most people don't want to live as 14 th century villeins I doubt this will spread: even though that won't stop some people trying to impose it on us all.

The bit that we have to be very careful about is to make sure that this socialist fantasy doesn't get transfigured as it moves from reality into that pantheon of possible utopias. They've not abolished the market, tey really are simply a workers' coop. But such is the British left's disdain for markets (so close to "trade"!) that when it gets over here they're going to be calling for the abolition of markets and that's just not what makes this village work at all.

In which we catch the New Statesman being very silly

Here's the New Statesman putting forward an entirely ludicrous idea. A very silly one indeed:

Yet whilst the financial sector likes to think of itself as the powerhouse of the UK economy, in terms of the tax it pays, it's more of a Wendy house. HMRC figures show a drastic reduction in Corporation Tax contributions since the financial crash – on average just £3.3billion a year, even when the paltry Bank Levy is included.

They are equating the value that a company or industry sector adds to the economy with the amount of tax that that company or industrial sector pays to The Treasury. Which is not just silly it's actively insane.

Quick question: how much tax does the NHS pay? None is I think the correct answer, yes? But we all do think that it's a pretty good thing to have a health care system around, yes? Perhaps not exactly this one, perhaps it could be tweaked or improved or replaced, but we do all agree that the value to us of health care is not reliant upon the tax paid by that health care system?

One of the few thinking lefties that remain notes that the New Statesman isn't correct here:

I’m under the impression that taxes are something you pay out of the contribution you make. The contribution you make being, if you’re a company, the profits you make and the wages you pay. That’s your value add. For finance the waters are muddied, because of TBTF etc., but the vast majority of the people involved in finance are doing work as boring and worthy as the rest. Employing over one million people counts as a contribution to me, so why is the New Statesman being so odd?

But sadly doesn't get the answer quite correct.

It is indeed true that the contribution of a company to GDP roughly equates to the wages paid plus profits made (not entirely exactly, but it's a very good estimate). However, this is not the value to us all of that company's (or industrial sector's) existence or work. For example, the wages paid are, while a contribution to GDP, actually a cost to us of what is produced. For if there's a million people doing banking then there's a million people not wiping babies' bottoms. One must never, if one wants to keep ones' economist secret decoder ring, forget about opportunity costs after all.

What we really want to know is whether having a million people doing banking makes us better off than having a million people doing nappy duty: which means wondering whether the output of the banking sector is more valuable to us than dry and smiling babies. At which point it becomes obvious that the value of a company, and industrial sector, is the value to us of the output of that company and or sector.

Thus the value of banking is that we get to have a banking system. The value of the NHS is that it (occasionally) cures more people than it kills. The value of Google is that we get to Google.

The value or contribution to us all of what people are doing lies not in the taxes they pay and not even in either the profits they make or the number of jobs they create. It is in the value to us of consuming their production. Any other measure of value will inevitably lead to the sort of nonsense that the New Statesman is peddling here.

Something that Adam Smith pointed out 237 years ago when arguing that the correct labour theory of value is the one that measures the value in use of something that has been produced: something we would rather hope that people would have grasped after all of this time.

Inflation drivel

Labour's economic team—led by Ed Balls—is either confused and economically ignorant, or deliberately misleading and opportunistic. After Tuesday's inflation release, they hit out at the government for the continued above-target rate (2.7% over the year to September, the same as over the year to August), as part of their new "cost of living" strategy. Spokesperson Catherine McKinnell said:

This is yet more evidence of the cost-of-living crisis facing families across Britain after three years of this Government's failing policies. Prices have now risen faster than wages in 39 out of 40 months under David Cameron and now we learn that we have the highest rate of inflation of any EU country.

At the same time, shadow chancellor Ed Balls has repeatedly attacked the Tories' fiscal austerity policies, blaming them for the extremely lacklustre recovery from the recession and even suggesting they may have been self-defeating. But at the same time he has also blamed above-target inflation for squeezing living standards.

But which is it? If the Tories were wrong to cut spending, it's because the recession was driven by nominal factors, and cutting spending will further cut aggregate demand, only worsening the pricing mismatch that is leaving resources unemployed and output below potential. But we also know from our basic AD/AS model, the same one that we use to generate the result that falling aggregate demand is bad for output and employment, that higher AD means higher inflation. So if Ed Balls really wants more government spending, any of the models he's relying on would also tell him he'd have to have higher inflation as well. You can't criticise austerity and inflation.

But it goes deeper than this. What Ed Balls is missing is that actually the UK's overall economic policy wasn't particularly austere at all. Certainly at points it could have standed to be a bit easier, especially in the crucial 2008-2009 crash. But basically Ed Balls completely ignores monetary policy, which, in the final analysis, determines demand. The monetary policy committee, which sets rates and quantitative easing (QE) can choose whatever it wants demand in the economy to be. They use a faulty indicator, the consumer prices index. But they interact with the economy by constricting or expanding demand based on their policy goals (inflation close to 2%, stable output and employment).

Imagine the government decided to cut spending by £100bn (an illustrative number). If this was going to bring inflation down to 0%, from 2%, then the Bank of England would be changing its monetary policy if it allowed inflation to fall there. The Bank, knowing this, will manipulate interest rates and asset buying policy (QE) to make sure their goals are met. This is true even though the Bank's current framework leaves so much to be desired. In 2010 and 2011 the Bank allowed inflation to go all the way up to 5.2%, meaning that they more than counteracted the effect of austerity on overall aggregate demand.

What this means is that Ed Balls, were he to slow down the pace of fiscal contraction and nevertheless bring inflation down to 2% now, would worsen the nominal recession, and yet redistribute yet more resources to state control. He may not know this—despite his economic education—or he may be staking out a deliberately misleading and opportunistic set of policies, playing on the public's ignorance of economics.

Would US default be so bad?

The fact that the American government is up and running again is very bad news. Not for the obvious reason that the American government is bloated, self-serving, unproductive, and completely incapable of spending the nation's money efficiently. But for the fact that the budget deal simply postpones problems that should be squared up to.

The fact is that, with a $17 trillion debt ceiling, the American government is really deep in debt. Britain's £1.2 trillion debt looks positively virtuous (which it isn't). But is Congress slicing up its credit card, reining back on its spending and cutting out luxuries, like everyone else has to do when we get into trouble? Not a bit of it. The American government is still living far beyond its means.

The deal hasn't even bought much time. It will keep the government running only until 15 January, and there will have to be more discussion (or horse-trading) on the debt ceiling from 7 February. It doesn't 'solve' anything.

If 'America' (notice how so many commentators say 'America' when they really mean its government) is determined to carry on spending as it does, then it will have to carry on adding to its debt. The only other option is to print the money it needs – in other words, more quantitative easing. And that, of course, is very good for markets – because the new money comes in through the financial institutions, and quite a bit of it tends to stick in the asset markets, inflating the prices of stocks, businesses, houses and the rest. So investors see the benefit even if the rest of us don't.

That might explain why the markets are so sanguine about something that is, in fact, a complete denial of financial prudence within the American government. The trouble is, as we discovered in 2008, you can put off the day of reckoning for quite a time, but eventually your imprudence catches up with you. You can carry on a bit longer by putting everything you can on the credit card, but eventually something messy is going to happen. Nobody knows when that might be. Perhaps a default in the New Year might not be such a disaster, but would make Congress realise that the books have to balance. For long-term American investors, that might actually be cheering news.

Is democracy killing Indian growth?

Lord Desai, former LSE prof and expert on Marxian economics, seems to have lost any faith he once had in the ability of governments to manage an economic system. Talking of his home country, India, at an Adam Smith Lecture in Edinburgh (organised by the Asia Scotland Institute), he complained that the country's growth was being held back by 'policy paralysis'. After some major reforms in 1991 and opening up to world trade, India has been growing at 8% or so until the last couple of years, when the rate has fallen to 5% – something that UK Chancellor George Osborne would dream of, but not great for a large, developing economy. Inflation, meanwhile, has hit double digits. Interest rates have been raised to over 9% in the attempt to control it. Public spending is high, and the current account is in deficit. A third of government revenue goes on debt repayment.

India has had coalitions for quarter of a century, which does not help. Nor does the fact that the Congress Party has been dominated by the Ghandi family for all that time. In a country where two-thirds of the population are under 35, one would expect to see a less patriarchal (or occasionally matriarchal) form of politics. The BJP, for its part, is more ideological and its candidate for PM is a popular outsider. But both parties are statist and neither is fiscally responsible: cronyism and corruption is rife, and with two-thirds of the population getting food subsidies in one form or another, India's welfare state spending is getting even harder to rein back.

And, for a time after 1991, it was all going so well. Perhaps the difference between India and China is that India is a democracy. So Indian politicians are always keen to make promises and give favours to electors at the expense of other people, including future generations who are yet unborn and so cannot complain. No surprise then that its welfare state and public spending are expanding – and, though the economy is still growing, the wealth-creation engine is starting to slow. China, less troubled by such things, might well become wealthy before democratic pressures for redistribution start to do the same. Fine institution though democracy is, it works only if the powers of government, and the potential exploitation of wealth-creators, are strictly limited.

Ireland prepares to leave the bailout, after a policy of spending cuts and tax increases rather than the fiscal stimulus that some urged upon it

It's reported that the Republic of Ireland will leave the 85bn euro bailout package it undertook when its banks collapsed in 2010 by December this year.  Prime Minister Enda Kenny says that Ireland's 4.8% deficit next year will be well ahead of its 5.1% target.

This was done without the massive fiscal stimulus advocated by neo-Keynesians.  It was done by austerity.  The initial plan was for spending cuts to outweigh tax increases by 2:1, though the outcome has been more like 1:1. Ireland has cut child benefit, unemployment insurance, some health services and the capital budget for new buildings and roads.  Tax increases have seen a Universal Social Charge imposed as a surcharge on income tax, starting at 10,000 euros and ranging from 2% to 7%.  There have been increases in property taxes, effective income taxes and PRSI (their equivalent of National Insurance), and in VAT, plus a big increase in wine duty.

While unemployment has fallen, this is mainly down to emigration.  Even so, those leaving tend to acquire new skills abroad, remit funds home, and will probably return when the economy has picked up sufficiently.  Unemployment is about 13.5%, which, while high, is nothing like the levels seen in other bailout countries.

There are still problems, with the economy hovering in and out of recession and a mortgage arrears crisis that has 1 in 8 mortgage holders more than three months behind on payments.  Still, bad banks are being wound down and the future looks quite promising.  It was done by fiscal responsibility rather than fake stimulus, and Ireland firmly and bravely refused to give up its low corporation tax policy despite great pressure to do so, and thus remains an attractive location for business and expansion.

Does the Nobel kill the Robin Hood Tax?

So, that Nobel award then. What's the political lesson we should draw from this?

Myself I would say that it kills the Robin Hood Tax, aka the Financial Transactions Tax (FTT) stone dead.

The 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded jointly to Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller "for their empirical analysis of asset prices".

Along the way Fama and Shiller proved two things. Firstly, the effficient markets hypothesis itself. Which is simply that markets are efficient at processing the information about what prices should be in that market. Shiller then went on to emphasise that it is speculation itself that produces some of that efficiency. Specifically he pointed out that in the US housing market there's no real way to speculate on falling prices. You cannot short houses for example. This meant that those people who thought there was a bubble could not influence prices: for there was no method of their putting their money where their thoughts were. And it is that money following thought which produces the efficiency of the information processing by the market. So much so that Shiller's idea is to introduce futures and options markets for housing to aid in preventing futher bubbles.

Now think of what the FTT people are arguing. That speculation is a bad idea, that we must discourage it through taxation. This is, in the eyes of the above theory, of course entire nonsense. For if speculation is what moves to return prices to their "correct" level, then we want more of it not less.

You can of course still believe in the FTT if you wish. But it's worth pointing out that the Nobel Committee has just declared that the scientific consensus is that you're wrong.

Does the existence of intangible goods mean we shouldn't maximise wealth?

The proposal I made last week—that we abolish parliamentary democracy and turn over decision-making to a a set of betting/prediction markets—faces a number of serious objections. In this post I will deal with the objection that national wealth in principle misses out several important contributions to welfare like liberty, love or other intangibles. I have four further serious objections, which I will attempt to tackle in a third and final piece.

What makes us happy, and helps or allows us to satisfy our desires and preferences, may not be wealth alone. A millionaire who desires only a dishwasher is no better off for all her wealth if she is unable to buy one. A world in which dishwashers are harder to get hold of—perhaps due to a ban—is worse than one in which they are widely available, for a given amount of wealth.

But introducing "for a given amount of wealth" might be begging the question. Our measure of wealth, to be a good one,  will include some correction for changes in prices (like the official measure). Even under our current system of drug prohibition there are measures of illegal substance prices. Similarly, if we banned dishwashers, perhaps in some bizarre return of the lump of labour fallacy, they might still exist, albeit underground and more costly. In this way the measure would show an expected dip in real wealth in the prediction market for the national wealth effects of dishwasher banning.

And many other restrictions on liberty that we'd have independent reasons against would also depress our wealth, e.g. racist employment regulations, restrictions on travel. Even something like the ability to marry could be factored in—if people want to have marriages, they will have a higher demand for housing in areas where marriages are allowed. However this faces a lot of difficulties in a world where so many goods are unpriced and thus we cannot measure all of these effects. And it's unclear whether all of the cost to an individual of, for example, restrictions on marriage would be fully capitalised into house prices. So there might be some reason to expect a wealth maximising state to be less liberal than the ideal happiness-maximising state would be.

Further, typically unmeasured goods like love—which many people see as one of the most important—may not be measured by any element of the wealth markets. While current parliamentary systems don't necessarily directly consider what effect policies will have on aggregate love in the country, were it to be significantly effected by a (proposed) policy they would be able to factor it in. But a pure national wealth-driven system would not.

This is certainly a difficult objection for the model of government, but it isn't necessarily fatal. After all we know there are devastating problems with the current system, including distorted incentive structures, but even more than that public ignorance. We'd want evidence that not only would maximising expected wealth tend to cut the amount of aggregate love in society—it would do so to an extent that outweighed the improvements in policymaking down to an unbiased, properly incentivised and dispassionately rational decision-making system.

We'd need particularly robust evidence to overturn the strong established empirical connections between wealth and happiness (which presumably takes into account the effect of love on happiness). This means the love objection is not telling on our account without much further exploration. As suggested above, there remains the objection that some liberty contributes to happiness without contributing to wealth, or being fully accounted for in wealth measures, and this stands, and should be weighed against the other benefits gained from the wealth-maximising state. And the wealth-maximising state may well be more liberal than current parliamentary arrangements, given what we know about free markets and long-term growth.

Regulation, big government, public debt: not so benign

What is it about Cambridge University economists? They've always been bad, but they seem to be waging some kind of orchestrated campaign right now. Every time one speaks (like Michael Kitson at this week's Economic Research Council Hayek-Keynes debate), they seem to produce the same sound-bites, designed to assure us that regulation, big government and public debt aren't so bad.

The first petition in the litany is: There is no such thing as a free market. All markets have rules, and couldn't work without them. So there's nothing wrong with government intervention in markets. That's crazy. All police forces have corrupt officers, but that doesn't mean we should have more corruption. It's true that markets only work if people respect certain rules – the basic rules of property, honesty and contract, which are happily agreed on by market participants. Government intervention beyond that is usually counter-productive (like the vote-seeking price controls now being canvassed in energy: remember the California blackouts, and invest in candles).

The second is: The British government debt was much higher, as a percentage of GDP, after the Second World War. And we paid that off. So don't worry about adding to the debt either. Hmmm. It took us 50 years to pay off all that debt. And at least it bought us victory over Nazism. All we have to show for today's borrowing is a bigger government and a few dud banks. And Britain's GDP was pretty shot after the War, making the debt a much higher percentage of it. Today's £1.16 trillion is no mean debt – and even that is just the official figure. Add in pension liabilities and all the rest and it is six times that. Affordable? Not if we keep adding to it as we're doing, and less so if and when interest rates rise. It's a dangerous risk.

The third is: Big-government countries like France grow just as fast as small-government countries like Britain. So we shouldn't worry about growing government either. Oh yes we should. There won't be much business done without defence, justice, so countries with some government spending on these things grow faster. But too much, and growth is damaged. It's called the Rahn Curve. A 2009 study of 15 EU countries put the sweet spot at about 30% of GDP. A 2008 study of 21 OECD countries found that higher taxes reduced growth. A 2011 report on 145 countries over half a century found that a 1% of GDP tax rise cut private investment and consumption by twice that amount. Andrew Sentance of PwC found that a cut in taxes produced growth and inward investment. And so on. Keynes himself thought the sweet spot was government spending no higher than 25% of GDP. Ours today is twice that. Cambridge economists please note.

And another thing

Oh, and one last thing that Michael Kitson told us the other day, and which Cambridge economists go on about. It runs roughly: Adam Smith only mentioned the 'invisible hand' once in The Wealth of Nations'. That means it obviously wasn't a big thing for him. So stop going on about it as if it explains everything. This again is utterly wrong. And not just because Smith mentioned it earlier, in The Theory of Moral Sentiments – or that it appears slap in the middle of both, which some folk think is significant.

No: in neither case does it really mean quite what we use it to mean today. But read The Wealth of Nations. Even if Smith never mentioned the 'invisible hand' even once, there is no escaping the fact that this is what the whole book is about. It is about people pursuing their own self-interest and as a result – without specifically intending to – benefiting others too. After all, nobody would voluntarily enter into an exchange unless they thought they would benefit from it. Market exchange benefits both sides in the deal. Government regulation, price-fixing or outright bans on trading eat into that benefit. Such intervention comes at a cost.

Royal Mail privatisation shares not too cheap

Around 700,000 people have applied for shares in Royal Mail, the letters and parcels business being sold off by the British government. This means that the share issue is around seven times oversubscribed, leading to calls that the government has sold the enterprise 'too cheaply'.

No, they haven't. You cannot win the politics of a privatisation sale. If you price the shares too high and nobody wants them, then the sale is a 'failure'. If you price the shares too cheaply, critics complain that the 'family silver' is being sold off at scrap rates.

It's nonsense, of course. After decades of practice, Britain and the world now knows how to organise privatisation sales. For a start, you get the financial institutions to underwrite the offer. You fix a reasonable price for the company, and get the institutions to agree to pick up any unsold shares at that price. So if for some reason the public do not subscribe for the shares, the institutions give you the money anyway. That is hardly a 'failure'. It just means that the institutions – who hold funds and investments on behalf of the public, their customers – buy the shares rather than the public directly.

If you pitch a privatisation share issue at a price which commentators think is a bargain, however, then huge numbers of people will scramble to get into that bargain. When newspaper and broadcast reports by respected analysts agree that the shares are likely to open higher than what people are being asked to pay for them, then it is perfectly rational for people to rush out and buy them, expecting an instant profit. That of course feeds on itself – like the 'must have' Christmas toy, which is only 'must have' because so many people want it that supplies run out, making it even more desirable. In privatisation sales, as more and more people bid, the prospect of buyers making a profit becomes more and more certain – so more and more of them subscribe.

Again, we have learnt how to deal with this. To overcome the political objection that rich folks are buying thousands of shares in order to turn a quick buck, we simply scale back people's allocation depending on the number of shares they requested. So everyone who asked for the minimum gets it, while people who ordered a great many shares will get less, or even none at all (which may be the case for those who have requested more than £10,000 worth of Royal Mail shares. So buyers have to 'game' it – working out what the likely demand might be and what allocation they might end up with if they subscribed differing amounts.

And remember that we never privatise the whole company at once. When the shares have been trading for a while, the government will know precisely at what price to unload the rest, maximising the potential yield. Clever, eh?