Yes, it is election season but still, this won't do

Sadly, we're in an election season, which means that we have those who would rule us displaying their ignorance of the universe we inhabit in pursuit of our votes. Guido has already picked up on this from Natalie Bennett of the Green Party: As newsrooms across the land stop what they are doing to read the Green Party’s response to Labour’s non-dom announcement, it is worth picking Natalie Bennett up on this:

“The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by.”

Now hold on just a darn prosperity-spreading cotton-picking second. Over the last four decades the world poverty rate – people living on a dollar a day or less – has plummetted. ..... in 1970 almost 30% of the globe was impoverished. 40 years later that number is as low as 5%

Or, as that graph above shows, it is actually the poor who have benefited from that globalisation over those decades. As Branko Milanovic explains here:

The top 1% of the global income distribution has seen its real income (adjusted for inflation) rise by more than 60% over those two decades.

What is far less known is that an even greater increase in incomes was realized by those parts of the global income distribution that now lie around the median. They achieved an 80% real increase in incomes.

It is there — between the 50th and 60th percentile of global income distribution, which in 2008 included people with annual after-tax per capita incomes between 1,200 and 1,800 international dollars — that we find some 200 million Chinese and 90 million Indians, as well as about 30 million each in Indonesia, Brazil, Egypt and Mexico. These 400 million people are among the biggest gainers in the global income distribution.

The real surprise is that those in the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%. (The only exception is the poorest 5% of the population, whose real incomes have remained about the same.)

This is, of course, why we here at the Adam Smith Institute support this globalisation, free market sorta stuff. We desire that the poor become richer, this socio-economic system makes the poor richer. Why wouldn't we support it?

More to the point, why would anyone oppose it? For, amazingly in human history, this is the only socio-economic system that does actually achieve this task.

Economic Nonsense: 45. Unbridled capitalism brought about the Great Depression

In the popular account the stock market went wild in the late 1920s, with people gambling recklessly on stocks and shares, often with money they didn't have.  Shares could only go up, they thought, but they were wrong.  The market crashed, people went broke, investors jumped off high buildings, and without investment GDP plunged and the Great Depression came about.  If it were true it might be a major indictment of unbridled capitalism, but it isn't.

People did overstretch recklessly, assuming the market could only rise, helped by easy money from the Federal Reserve Bank, and the Great Crash came in 1929.  It wiped out many investors, but it did not lead to the Great Depression.  That came later as a direct result of bad policy decisions.  Had those decisions not been made, the stock market crash might have instigated a cyclical downturn and corrected itself after a year or two.

The Federal Reserve Bank, observing that people had bought shares with easy credit, decided to tighten credit and restrict the money supply.  This is what you do not do in a recession, when struggling companies need credit to keep going and companies that see opportunities ahead need money to invest in expansion.  It was a disastrous mistake.

The folly was compounded by protectionist policies.  The Smoot-Hawley Tariff of 1930 shut out most foreign goods to boost home-produced goods in the name of protecting American jobs.  Its effect was catastrophic.  It sparked a beggar my neighbour trade war as other countries responded with tit-for-tat measures.  Unable to sell goods in America, they stopped buying American goods.  International trade plunged and much of the world sank into recession. 

There were other contributing factors.  Banking regulation had been clumsy and restrictive, and left American banks unable to play their part in promoting investment and expansion.  Income taxes were massively hiked in 1932, just when tax cuts could have helped.

Unbridled capitalism did not cause the Great Depression, incompetent government did.  It is another piece of economic nonsense that President Roosevelt's New Deal government activism helped America's recovery from the Great Depression.  It didn't.

Economic Nonsense: 44. Big business thrives on poor country sweatshops and child labour

In undeveloped countries people struggle to survive in agricultural economies.  Life is characterized by dawn to dusk heavy labour, even for children, and the rewards are meagre.  Diet is poor and the risk of starvation or at least malnourishment is prevalent.  

In the early years of Britain's industrial revolution, conditions were poor.  Workers toiled for long hours amid safety standards that were often low.  There were sweatshops, and children worked in factories and mines.  This represented an early stage in economic development.  It was a considerable step up from life on farms, where conditions had been worse.  As capital grew, so did the machines that increased productivity and enabled labour conditions to be improved, and for women to leave sweatshops and children to leave the labour force.  It was wealth that made this possible.

Today in developing economies things are made cheaply in crowded working conditions with safety standards considerably below those in the developed world.  Although most countries have rules against it, there are undoubtedly children at work in several of them.  This, too, represents an improvement on the conditions found in the countryside.  The wages paid in sweatshops, well below those in the West, are far above those afforded by the agrarian economy.  Sweatshop workers enjoy higher living standards than their counterparts outside, and put their families' and relatives' names on the waiting list for any vacancies that occur.

This is not "big business" grinding the poor.  It represents a country's labour force reaching up to improve its lot by earning wages not possible elsewhere.  Globalization has made this possible, bringing many of the world's poorest people into the world market.  The goods made cheaply in poorer countries sell to richer ones, providing an inflow of cash to boost the poor country's economy.  This is how China and India have achieved growth rates that have lifted over a billion people out of dire poverty.

As the UK became richer, it was able to improve working conditions and pay, and to eliminate sweatshops and child labour.  The same will be true of today's developing countries.  Many of them are already doing so.  The faster they become wealthy, the sooner this will happen.  The way to speed it up is for rich countries to open their markets and buy as much as they can from poorer ones.

Economic Nonsense: 43. Private enterprise cannot generate public goods such as lighthouses

In fact private enterprise supplies many public goods, although few commentators think they should provide all public goods.  Lighthouses are often cited as an example of essential services that only the state can provide, but the Nobel laureate Ronald Coase showed that many lighthouses were indeed built and operated by private enterprise.

They had their origin in the hilltop fires that were lit near ports to guide incoming ships.  These eventually evolved through wooden or stone towers into their modern form with steady improvement in their illumination.  They were financed by contributions from nearby ports, which incorporated the costs into landing fees charged on boats entering the harbour.  The state's role was to allow operators to levy such charges, in order to counter free riders who might seek to benefit from the lighthouse without contributing to its upkeep.  When the state took over their maintenance and operation, it was not because they were failing, but to standardize the charges which were then subject to wide local variations. 

Britain's Royal National Lifeboat Institution (RNLI) is an example of an independent public service supported by voluntary contributions rather than out of taxation.  For a few years in the 19th century the RNLI did take government money, but found its private contributions dropped off by more than it received in tax support, so it reverted to voluntary finance, which it maintains to this day.  Because contributions are voluntary, there are undoubtedly freeloaders who benefit without contributing, but there are enough public-spirited people to sustain it through their support.

The usual way of providing public goods privately is by a charge levied on users, as the early lighthouses did.  Modern technology makes it easier to identify users and to charge those who wish to benefit from the service.  The BBC was originally financed by a licence fee to provide and broadcast its programmes, but later media providers have used first advertising, as with ITV, and then subscription services, as with Sky.  Many would say that it is fairer and more appropriate for public services such as these to be paid for by those who benefit from them, rather than use taxpayer funds.

Economic history isn't what a lot of economists think it is

That's something of a problem, that economic history is not actually as a lot of economists think it is. Here, for example, is Paul Krugman on the current UK recovery:

Britain’s economic performance since the financial crisis struck has been startlingly bad. A tentative recovery began in 2009, but it stalled in 2010. Although growth resumed in 2013, real income per capita is only now reaching its level on the eve of the crisis — which means that Britain has had a much worse track record since 2007 than it had during the Great Depression.

The rest of the column is about austerity, wrong economic policy, Keynes, you get the general picture. However, Britain's economic history in the 1930s is really not what is being assumed there. In fact, it's Britain's economic history in the 1930s which gave us the whole idea of expansionary austerity....which actually showed it could work.

What Neville Chamberlain did was to take Britain off the gold standard and allow the corrency to devalue (about 25%). At the same time he cut government spending significantly and brought the budget back into some kind of balance. This actually worked: By 1934 Britain was back above 1931 levels of output and it all became just a nasty blip unlike that Depression that the US suffered (the 1920s in te UK were a different matter). That is, fiscal austerity combined with monetary laxness worked and worked very well.

Krugman wants to tell us that it hasn't worked this time: OK, that's fine, it hasn't worked in hte same manner. Krugman also wants to tell us that fiscal expansion would have: but that's to miss the lesson of the 30s. Osborne devalued the pound and had that loose monetary policy through QE. This should have worked as before: but it didn't. What was the one thing that Osborne didn't have? Fsical austerity. So, expansionary austerity worked once, didn't work a second time. And what wsa different was that the second time we didn't actually have the austerity. This isn't an argument that therefore expansion would have worked: it's simply a note that we didn't actually do what worked last time.

Please note, we're not actually arguing that repeating Chamberlain's actions would have worked this time. Rather, we're remarking upon the misunderstanding of what he did, that misunderstanding of what history was. The UK's 1930's recovery is proof that that basic idea, of expansionary austerity, can in certain circumstances work. We cannot therefore go around using it as an example of it not working. and if we do want to apply that lesson to today then the answer would be that it's not worked as well this time around because there hasn't actually been any austerity, even if the monetary policy has been spot on.

Economic Nonsense: 42. A planned economy is more rational than an unplanned one

Very few people advocate an unplanned economy.  At a simple level people might suppose that having intelligent and informed people direct the economy is better than having it proceed by blind chance.  But this is not the choice.  The choice is between an economy in which millions of individual decisions made daily interact with each other to produce an overall order, and an economy whose overall order is sought by a few people gathered around a table trying to direct it.  In other words the choice is not between planning and chaos, but between an order produced by the few and an order produced by the many.  It is between planning done by a few at the centre, and planning done by many at the periphery.

When a person makes an economic choice, to buy or not buy, to stay in a job or to change employment, it is not necessary for the information about that choice to be collected and relayed to a directing authority.  The choice itself impacts upon the economy sending information through it that causes it to change and respond.  In a centrally planed economy the information has to be relayed to the centre so that those in charge can add it to other inputs and decide how to respond to it.  That process takes time, and much of the information is outdated or submerged into a fog of other data before it can reach the centre and be acted upon.  In a spontaneous, interactive economy, its effect is immediate.

Much as the directing authority might try to ascertain the circumstances of individual economic participants, they cannot hope to have more knowledge of them than the individual concerned.  The market economy thus has more information at its disposal, and it can act more rapidly, responding to imbalances and redressing them.  This means that the centrally planned economy is by no means more rational than the spontaneous one.  It is true that the billions of transactions that have input into a market economy might be too large for an individual mind to encompass, but that makes it complex rather than irrational.  

Economic Nonsense: 41. Immigration is bad for the economy

Many argue that immigration harms the economy.  Some suppose that immigrants are attracted by welfare, and come to live off benefits at the taxpayers' expense.  Others assert the contradictory claim that "they come here to take our jobs."  Schrödinger's immigrant, like his cat, seems to manage two states simultaneously.  Some point to the pressure on services and resources, with immigrant children filling classrooms and their sick taking up hospital beds and lengthening waiting times to see doctors.

The reality is that most immigrants are young and ambitious, coming to better their lives.  They are overwhelmingly fit and looking for work.  Many of the jobs they take up are ones whose low pay and long hours do not appeal to the native population.  Most do not draw benefits or take up hospital space.  In some sectors they help fill skill shortages, and many UK businesses clamour for more educated and talented foreigners to be allowed in.

The work they do adds to our GDP and boosts growth.  The taxes they pay boost our public finances.  Most immigrants have shown some drive in being prepared to move to a new country to improve their lot.  Some have scraped up cash to finance their trip.  Some have taken risks on their journey.  They constitute a huge net plus to the economy, not a minus.  

It is true that in some areas, particularly if they concentrate, they can put pressure on local facilities.  A minority seeks to retain a culture that sits ill alongside the tolerance and liberalism that Britain has developed over its history.  These are indeed problems, but they are ones that can be addressed and dealt with, and some are temporary rather than long-term. 

Immigrants do one more positive thing for the economy.  Most countries in Europe face declining and ageing populations, and will encounter difficulties if there are not enough young people in work and paying taxes to support the elderly with appropriate services.  The UK population is not declining, and it is immigration that is making the difference.  Far from constituting a problem, it is in this case a solution.  

Only government can screw up markets this badly

A quite lovely piece in The Observer awailin' an' a moanin' about how cocoa is rising in price, which will make chocolate a luxury good, yet also complaining that the cocoa farmers aren't making enough to continue farming. We usually suspect that a rising price will feed through into a better income for producers so that's that problem solved then. Indeed, it's difficult to work out how it could be otherwise:

“In the next five years the price of chocolate will skyrocket, and we should think about it as very much a luxury,” said Alejandro Litovsky, founder of consultancy Earth Security Group. In a recent report, Earth Security forecast a cocoa shortfall of a million tonnes by 2020.

Scary, eh?

The chocolate industry is reaping the harvest of poor working conditions and rock-bottom prices in the cocoa heartlands of west Africa, a situation that is driving potential farmers out of the industry in droves.

But it's horribly difficult to understand how we can end up with both happening over time. Rising prices for the beans, and thus the chocolate made from them, will mean that farming those beans will produce a higher income and thus keep farmers in the process or attract more to it.

Unless, unless, of course, there's something screwing up that market mechanism. Ah:

Local investment is hampered by high taxes on farmers, with around 40% of the money paid by commodity buyers going to the government.

Ah, the government is taking a whacking great tax wedge out of the cocoa trade. Meaning that the transmission process of consumer prices to producer prices is prevented in part. And thus we have our problem, the market not working becuase of that governmental intervention.

This isn't all that much of a surprise either. Cocoa farmers in West Africa tend to be poor rural peasants. Political power in such countries comes from the rather richer urban voters. Thus the incentive is for government to sting the farmers and spend the money in the urban areas. This has in fact been going on since Ghana became independent under Nkrumah. There the mechanism was to set the exchange rate very higher. This benefited the urbanites, from whom political power flows, who were able to import at reasonable prices, and hit those rural farmers exporting the cocoa cash crop.

So it appears that there really is something wrong in the cocoa market. That is, there's too much government and not enough market going on. We do, of course, support the campaigners who are bringing such abuses to our attention. But we'd be a great deal happier about it if they could manage to divine accurately what the problem actually is:

But campaigners argue that manufacturers and retailers should do much more. “If the five biggest chocolate companies spent 1% of the $86m they spend on marketing on the Ivory Coast, they could train and support half of the farmers there,” Mechielsen says. “Where are the priorities of those companies?”

Why not suggest that the government lower that taxation rate so the market can have the room to breathe and work?

Economic Nonsense: 40. Too much wealth is owned by too few people

Underlying the claim is an assumed egalitarianism.  How much is "too much" and how few is "too few?"  Obviously those making the criticism have some concept in their minds of how they would like to see wealth distributed in society, and it seems they would prefer a more equal distribution than is currently the case.  The obvious question is "Why?"  The answer often given is that this would be 'fairer', but since they seem to define 'fairer' as 'more equal', this is not very helpful.

It does not help, either, that many of these measures of inequality only count certain forms of wealth.  Many people in the UK see equity in housing as their main source of wealth.  For some it is pensions.  Many assessments of wealth distribution, on the other hand, only count assets and investments, and thus miss much of the wealth owned by ordinary people.  Few if any seem to count entitlements to such things as health and education as part of measured wealth, even though they undoubtedly improve the living standards of the average citizen.

It could be argued that societies with an unequal distribution of wealth are able to increase wealth faster, and that poorer people in those societies become richer more rapidly than those living in more equal societies.  To poorer people it matters that they are able to command more resources.  It matters less to them that software multi-billionaires have widened the gap between them and made society less equal.  

Part of the reason this criticism persists is envy, the resentment that some have more, yet aspiration is often motivated by the observation that some have it better.  The success of others can inspire the desire to emulate instead of simply envying.

The false zero sum game probably plays a role in this criticism, the notion that because some own so much, the rest must make do with less.  In fact wealth in constantly being created, and creating wealth is a far surer route out of poverty than redistribution.  Instead of envying those richer than themselves, people would be better advised to try to copy them.

Economic Nonsense: 39. Only strong government regulation can hold big business in check

It isn't strong government that causes concern for big business.  They are more worried about the smaller, newer businesses that might take away their trade.  It is competition, not government that they worry about.  Big business often cozies up to big government.  It employs lobbyists to negotiate with civil servants and ministers, and hammers out agreements on what types of regulations should be introduced, and how they should be implemented.

Big business can cope with regulation.  It can afford the staff to deal with compliance.  Small businesses, especially start-ups, find it more difficult to afford the money or the staff time that regulatory compliance takes up.  Big business knows this, and often strikes deals with lawmakers to impose regulation that will deter newcomers from entering the market.  Far from it being used to control big business, regulation often helps big business by imposing unacceptable costs on its real or would-be competitors.  People speak of "regulatory capture" when the industry works with government to secure helpful regulation.

Some regulation is needed to reassure the public that it will not fall victim to sharp practice or shady dealing, but five words should be engraved above the door of every legislator: "Competition is the best regulator."  It is competition that keeps firms striving to deliver high quality and keen prices.  The fear of losing trade is more powerful than the fear of incurring the displeasure of government.

Regulation is commonly used to protect those in the market from competition by those who might enter it.  If no-one can trim hair without training and a certificate, the prices charged by existing hairdressers will not be undercut.  If no one can enter the taxi trade without a medallion or a two-year training course, the fares charged by existing cabbies will be protected.  All rules like these are done in the name of protecting the public, but in reality it is the established operators that they most commonly protect.

To control big business government should pursue a policy of promoting competition.  It should make it easier, not harder, to enter established markets.  This, more than regulation, will keep firms attentive to their customers.