23 Things We're Telling You About Capitalism III

In the third chapter of the report from the Cambridge Economics Department Chang tells us that people are not in fact paid according to their individual productivity. He uses the examples of Sven and Ram, Swedish and Indian bus drivers respectively, the first getting some 50 times the annual wage of the second.

Of course Chang is correct in that the individual does not get paid the value of their own productivity. No, even if we consider the time value of the people on the bus, which will indeed be much higher for Sven than Ram, that isn't the reason for the higher income. Nor, actually, is it the barriers to immigration which explain it all: that being what Chang blames it all upon. 

The average wages in any economy will be determined by the average productivity in that economy. Another way of putting very much the same point is that wages are determined by not the job that is actually being done by the worker, but by the next one that could possibly be done by that worker. Ram may indeed drive just as well as Sven. But if Ram's alternative employment is peasant destitution then he'll be paid like a destitute peasant for driving. If Sven can go to Ericsson (or Nokia) and make gumboots (or phones) then he'll be paid to drive a bus very much like a phone maker.

And I'm afraid that it's this very point that Chang gets so horrendously wrong. He does in fact say this:

"It is not simply, or even mainly, because they are cleverer and better educated that some people in rich countries are hundreds of times more productive than their counterparties in poor countries. They achieve this because they live in economies that have better technologies, better organised firms, better institutions and better physical infrastructure - all things that are in large part products of collective action taken over generations."

A point with which I would most certainly agree. But don't forget, Chang is writing a book about how capitalism and the free market just aren't all they're cracked up to be: if so, then how did we end up with the better technologies, better institutions, better firms and infrastucture? Could it, possibly, have anything to do with the fact that we've been largely capitalist and free market for a couple of centuries?

We should be rather harsher than that too. Everywhere, anywhere, that has been roughly free market, roughly capitalist, for the past century is so stinking rich that the bus driver does get paid 50 times what a better one in India gets paid. That's actually the point of the entire socio-economic structure: it makes even bus drivers rich by any global or historical standard.

This isn't confined to any one group or set of countries either. Just since WWII, Hong Kong, Japan, Taiwan, S. Korea have all joined the nations that enjoy that distinction. China is catching up fast. Those countries that haven't haven't: like, for example, the bureaucratic and planned Licence Raj in India which still impoverishes Ram.

This is why the lucky people like us at the ASI, born into a rich country and gloriously happy that this did happen to us, argue so strongly that everywhere else should embrace the joys of free market capitalism. Precisely and exactly because it's the only way anyone has as yet found to make bus drivers gloriously rich.

Perhaps Cambridge just doesn't do irony: or they push all those capable of it off into Footlights or something. For here's what Chang's actual argument in this chapter is. The average person in rich countries is rich because of the institutions, infrastructure and better organised firms in rich countries. This shows that capitalism and free markets don't work because those institutions have been formed by capitalism and free markets. We'll be proving that black equals white next and get ourselves killed on the next zebra crossing.

An end to zombie politics 5: Europe

How readily the Zombie metaphor applies to the politics of Europe: eighteen years of unapproved accounts, eternal squabbles between federalists and anti-federalists; the Euro project itself - intended to unify but achieving the opposite. But none of this matters for this piece, confined to the Zombie character of British responses to the European dream and the nightmare it has become. Instead, I will explain why the government must not ruin its negotiating stance by essentially promising to put its weight behind staying in the EU regardless of the success of negotiations, as I laid out in greater detail in a recent report.

UKIP’s success last Thursday (2 May) and Lord Lawson’s piece in Tuesday's Times (7 May) blow the cobwebs off an issue kicked into touch for three months by January’s  referendum promise. Lawson's article points out that referenda can sometimes be red herrings. Sometimes, as in 1975, they are a device to shut down discussion. On this occasion they could be more of the same. Alternatively they can act as a way for the political class to reconcile themselves to giving up on a favourite project. I’m getting that the current government warms more to the former approach: thus the bonkers ideas floated over the past week.

On the one hand they've considered doing absolutely nothing. This would look magisterial, if an administration bumping along the bottom of the electoral cycle could pull the stunt off; however in the event it will look weak.

On the other hand policymakers have mulled publishing a bill setting out the referendum terms. This scheme would also be as weak as water, vulnerable to disabling amendment when eventually put to Parliament. Similarly, the wheeze of a 'mandate' or 'backing' referendum coinciding with the EU elections next year adds nothing to January’s promise. Both of these are transparent tactics, most likely to irritate voters who deserve to be taken more seriously.

Worst of all is their inherently zombie nature in flinching from the contradictions inherent in the so-called in-out referendum. These stem from the convention that Her Majesty's Government commits itself ex ante to campaign for the renegotiated outcome. It may be that anything less would court accusations of unsportsmanlike behaviour from the other side - our negotiating counterparties in Europe. Such a commitment, however, greatly weakens the UK’s bargaining hand, particularly if following the current plan of linking to a timetable. The other side can simply wait out our negotiators, offer meaningless concessions, or prevail upon the UK to offer further referenda till the electorate sees sense and votes in the EU's preferred direction, as seen previously in France, Ireland and elsewhere – if it is a given that the government will put its weight behind an in vote regardless of the result.

If the government wishes to offer a referendum in good faith, let it put forward a proposal which actually makes sense. It may not get through Parliament, but it will show willing and serve as a clear line in the sand. This would be a bill to bind UK to one and only one referendum regardless of the state of negotiations at the time of a stated deadline. Setting aside party politics, if such a bill were passed it would be more likely than not to strengthen UK negotiators’ hands; it could pave the way for early negotiations if wanted; and it would relieve the post-2015 election government of the nutty ex ante obligation to campaign in favour of the outcome.

The arguments against are trifling: of course it might not get through parliament (and if it did would not bind a future Parliament), but the very attempt sets the agenda both domestically and overseas, going some way to throwing holy water on the zombie hordes of EU politics.

Three ideas that will not be in the Queen's Speech

I was on the Today programme on BBC Radio4 alongside Tom Papworth of Centre Forum.  John Humphrys asked each of us to nominate three pieces of legislation we'd like to have seen in the Queen's Speech setting out the government's priorities for the year.

My first was a bill to allow all employees of small businesses to be registered as self-employed.  This would create huge numbers of new jobs by lowering the non-wage costs borne by employers.  It would also reduce the paperwork they have to cope with, freeing up time to drum up more business, and keeping prices down by lowering their costs.

Secondly I proposed a bill to set the income tax threshold at the minimum wage level for an average working week, making it so that no-one earning less than that would have to pay income tax.  This would give the low-paid the so-called 'living wage' without it costing jobs by raising the costs to employers.  It would indeed involve lost revenue, but there would also be supply side effects as work became more attractive and significant numbers moved off welfare and into work.

For my third point I called for hard drugs to be medicalized, meaning available to addicts at clinics run by doctors and nurses, and for recreational drugs to be legalized.  I pointed out that the so-called 'war on drugs' was being lost, as it has been for half a century.  The new proposal would take the crime out of drug use.  I said I thought politicians would carry on doing more of what they knew did not work, but that more and more were admitting that a new approach was needed.

None of my proposals is in the actual Queen's Speech, but I am confident that at some stage in the future all of them will.

23 Things We're Telling You About Capitalism II

In his second chapter Chang tells us that companies really shouldn't be run in the interests of their shareholders. All this guff about shareholder value is just that, guff. Precisely because shareholders can just cut and run by selling their stock they are in fact the most short term thinkers in the entire system.

An argument for which a case can be made and Chang tried to make it. Unfortunately this doesn't really accord with that real world out there: who actually does, no not in theory, but who actually does have a longer term view than the shareholders? Certainly not politicians as they never look beyond the task of winning the next election. And it would be difficult to accuse British unions of thinking much beyond the next pay negotiation. I might even be true that shareholders don't think enough about the longer term: but there ain't nobody else out there with a longer time horizon than the shareholders have. After all, the current value of the shares is the net discounted value of all future income from them. Any company that really isn't thinking about the long term is therefore going to have a low share price.

But there's a much larger underlying confusion in Chang's thinking here. He talks about other ways of organising matters so that extant companies do indeed exist long into the future: deliberately having strategic stockholders for example, the way that the Japanese keiretsu do perhaps. The problem with this is that there's no particular reason why a specific company should exist for the long term. Indeed, it's often entirely desirable that they do not, that they go bust and the assets then distributed in bankruptcy to those who can make better use of them.

Most growth in the economy, and almost all employment growth, comes from new entrants into the market. It is small firms starting and growing, old firms failing and leaving, which changes the marketplace. Yes, of course, we can all think of examples of the opposite: I can never remember whether it is Ericsson or Nokia that started out making gumboots and switched to mobile phones. But this is very much the exception. It is the start ups that revolutionise the economy to all of our great benefit.

Once we accept that then the very idea of trying to insist upon the long term viability of a specific company becomes a nonsense. We want to be able to increase and grow the economy into the future, yes we most certainly do. But there's no particular reason why the corporate entity called Rover, or Rolls Royce, or Glencore, should survive log term. Indeed, there's good reason why we'd be quite happy for firms to die out at some point. That point being when their particular skills and advantages are no long appropriate to the demands of the rest of us in the economy.

Schumpeter made this point, that capitalism is all about creative destruction. Those small companies do provide the creativity and it is the end of large companies, at the end of their business or technological tether, that get destroyed. Stakeholder interests make that destruction a great deal more difficult. Two recent examples:

Uber is a method of hailing a yellow cab over a smartphone rather than waving your arms on a street corner. This isn't rocket science. But it has taken a year so far to fight through the bureaucracy to get this simple system licensed. And once that had been achieved the "stakeholders", the limo drivers of New York City, sued to over turn that. On the grounds, incredibly, that it would be age discrimination as older people were less likely to have a smartphone. Or, as we might put it, the incumbent stakeholders were resisting their creative destruction.

The blast furnaces at Florange in France are another example. The unions, and then the government acting on the behalf of such stakeholders, are insisting that these blast furnaces must remain open. Except no one at all wants the iron made in these furnaces. Technology has moved on, we now recycle a lot of our iron and steel here in Europe. To the point that we just don't need as many blast furnaces as we did: they've been replaced by electric arc furnaces. So who is doing better for the economy as a whole here? The stakeholders fighting to save the past or the shareholders liquidating that past? I would certinaly argue that the shareholders here have the longer term interests right.

And that's what becomes problematic about that stakeholder, as opposed to shareholder, economy. It becomes static. If the stakeholders, as they will, demand that their interests be protected then the interests of stakeholders will indeed be protected. Which means that we cannot have enough of that capitalist destruction to make room for the new capitalist creation. I'd be willing to accept the stakeholder argument if we did in fact desire a stagnant economy. As we don't, I don't.

Another way of putting this is that by running companies for the benefit of the wider community, rather than purely for the profit of the shareholders, we entrench the power over what that company does, whether it survives, whether it gains entry to government subsidy schemes perhaps, in that wider community of stakeholders. Who will, as Adam Smith didn't quite say, then conspire against the wider public to ensure the continuation of their benefits from their stakeholding interest. Which isn't what we want at all. We want companies to continue as long as they continue to make a profit: for profit is that signal that the output is worth more than the inputs, that value is being added. Once that is no longer true we want the companies to fold and make way for new market entrants. Given that profit is the marker of this success or not then we want these decisions made by those who benefit from the profits: the shareholders. Not by those who benefit from the jobs, or patronage, or political power: so not by the workers, not by the unions and not by the politicians.

If stakeholders get to run the system then we'll still have blast furnaces 50 years after they're technologically obsolete and we'll all still have to stand in the rain to get a cab. For stakeholder interests gum up that creative destruction that is the very essence of capitalism.

It turns out money really can buy you happiness

This is from an NBER working paper () by Betsey Stevenson and Justin Wolfers, using data from Gallup's World Poll. From the Economist:

"Gallup asked respondents around the world to imagine a "satisfaction ladder" in which the top step represents a respondent's best possible life. Those being polled are then asked where on the ladder they stand (from zero to a maximum of 10), and how much they earn. Though some countries seem happier than others, people everywhere report more satisfaction as they grow richer. Even more striking, the relationship between income and happiness hardly changes as incomes rise. Moving from rich to richer seems to raise happiness just as much as moving from poor to less poor. One never really grows tired of earning more."

Greed or common sense? I call common sense. There are a lot of things that make people happy, but affluence seems to be the strongest factor. And by far the largest accumulation of wealth in human history was done after the first Industrial Revolution at the onset of capitalism. Affluence made people happier, more innovative and more inclined towards further progress. It's all about incentives people have, and reaching a higher level of income seems to be the best one. This is what drives modern societies; a desire to innovate, to produce, to fight scarcity and to achieve progress. And no one can do this better than the individual entrepreneurs themselves. 

23 things we're telling you about capitalism I

Ha-Joon Chang tells us, in his book "23 Things They Don't Tell You About Capitalism" a number of things: 23 in fact. Over the next few weeks I'll be examining the core of each of these things and showing, where necessary, why the wrong end of the stick is being waved around so excitedly.

Our first shocker is that there is no such thing as a free market. Given that this is so we should therefore succumb to whatever limitations on our actions All Right Thinking People wish to impose upon them. Without complaint at all of course.

No, that's not a satire of Chang's views here, that's the distilled essence of it.

It is of course true that there is no such thing as a truly free market. Even in anarcho-capitalism (in fact especially there, as there would be no other limits) there are restrictions on what happens in a market. At the most simple, there is societal expectation: if we agree to swap apples for pears than I am indeed expecting you to hand over the apples as I deliver the pears. That in this sense no market is ever truly free does not therefore mean that we should accept any and every restriction upon them. One example of how Chang leaps from the first to the second positions is that he tells it is "obvious" that such things as trade in narcotics or transplant organs should be banned: two things that I most certainly, if not the ASI itself, have long argued should have legal trade in them.

A certain nuance in his argument becomes apparent when he claims that what is the proper limit to market activity is inevitably a political question. For what should or should not be traded is an ambiguous thing. Thus there can be no hard and fast rules and it will depend upon opinion at any one time: thus it is politics. Which, if you believe that there are no hard and fast rules would be true. Whether people can choose their own pint or working hours or narcotic of choice does become just an opinion to be settled by political means. If, and only if, you do already believe that politics, not logic, or rights, or civil liberty, should settle such matters.

We free marketeers do though have a set of hard and fast rules. They're at the heart of what classical liberalism is all about. Best summed up in Mill's freedom to swing the fist ending where the nose of another begins. This does give is hard rules. Subject to one exception, markets are the default: except where the exercise of a market right interferes with the rights of another. I cannot claim a free market in someone else's boots but I most certainly can in my own. I cannot insist that someone else work a certain set of hours: but I can indeed insist that he be free to determine his own.

This gives us our framework to decide upon the regulations he sees as just being political. That "obvious" ban on trade in narcotics not only causes deaths through the violence of the illegal trade, deaths through the impurity of the drugs themselves, gross corruption by the illegal money: it's actually a restiction of my own civil rights to do what the hell I want with my own body. Which may or may not include ingesting things Chang assumes should be banned.

The exception of course is externalities but these are a form of indirect harm and so come under our general rubric. Markets in everything except where the civil liberties of another are being harmed.

Chang further makes the mistake that said regulation of markets needs to be done by the authorities. Laws must be passed to govern behaviour: whereas we all see around us, all the time, markets that are governed by convention, accepted behaviour and just general expectations of how people are going to behave. There is no law that says that one should stand their round: yet social pressure is pretty good at ensuring that people who do not know about the displeasure at their actions. To the point of vehement corrections of said behaviour.

So it is with much of the regulation of markets. To show that norms are required, behaviours expected, is insufficient to make the leap to the insistence that the law must define all of these.

And finally, for this chapter, there is the laughable use of working hour and child labour laws to show that markets and thus capitalism, need to be regulated. For of course it is capitalism and markets, that strange duo, that made restrictions on child labour and working hours even possible.

When we all lived in the abject penury of peasant agriculture there were no possible limits on such working hours. All hands on deck all the time was the minimum needed to keep the family fed. This included children of course: indeed, the way in which small children rapidly become earners in peasant agriculture is used as a reason to explain the high fertility of such families. It's only with increasing urbanisation (capitalism there, with the factories) that fertility rates drop as young children are no longer economic assets but costs. It is only after we start to see the first rising in living standards from that combination of markets and capitalism that we can indeed labour only 10 or 12 hours a day, that we can leave children to have a childhood rather than their grubbing for the pennies that aid in keeping their families alive.

You'd think that a Korean would know this. For of course, the time when Britain was rich enough to be able to do this was some century, century and a half, before Korea was. We don't have to be rich as Croesus to be able to limit, say, child labour. But we do have to have at least started the climb out of abject destitution: you know, that climb that only markets and capitalism has ever managed for anyone?

Ten reasons why the Left should like the ASI, 7: Killing nanny

The Left should back the ASI's objection to having the state make decisions for working class people under the claim that it knows best what is good for them.

The ASI opposes the paternalistic notion that working class people in Britain are incapable of making their own choices.  People in authority, including many involved with the medical profession, often take the view that they know better than ordinary people and are therefore entitled to impose their choices.  They seek both laws and punitive taxes to constrain people into living the lives that 'experts' think they should live.  They ban indoor smoking and hide packets from view, and call for plain packaging and ever higher taxes, and justify all of this on health grounds.  The ASI view is that people are entitled to do unhealthy things if they wish, and while it is acceptable to warn them, the choice must be left to individuals to make.

The same applies to high taxes on alcohol and calls for minimum pricing and restriction on its advertising.  Again, health grounds are adduced, even though Britain is among the low consumers among EU members.  If people feel they derive sufficient pleasure from alcohol to justify any adverse consequences, that is a decision they can freely make.  It is no function of the state to treat them as children incapable of making choices for themselves.  Such an attitude is patronizing.

This is also true of foods deemed by experts to be unhealthy, including fats, salt, sugar and fizzy drinks.  There are proposals for fat taxes, for taxes on fizzy drinks and limits on the salt and sugar content of foodstuffs.  Labelling is acceptable so that people know what they are doing, but measures to force them into diets favoured by 'experts' demean and diminish the values of ordinary people.  These 'experts' never seem to consider that ordinary people, especially low-income people, might find that tobacco, alcohol and appetizing foods add interest and satisfaction to their lives.  These might be what some regard as unwise choices, but they are for people to make as adults, not as the protected wards of an over-mighty state.

It's not crazy to think we can eradicate poverty

The New York Times asks us:

Is It Crazy to Think We Can Eradicate Poverty?

The answer is, of course, no. It's not crazy in the slightest. This does assume that we're talking about actual poverty of course, not that inequality which is disguised as relative poverty. So how do we do this?

Fortunately, this deadly and cyclical form of poverty is already on its way toward obsolescence, and much faster than many development economists expected. The first Millennium Development Goal — to halve the proportion of the world population living in dire poverty by 2015 — was met five years early, as the rate fell to an estimated 21 percent in 2010, from 43 percent in 1990. Some economists had feared that the recession would arrest or even reverse the trend, given how interconnected the global economy is, but the improvement continued, unabated. Annual growth dipped for developing economies in 2009 but has since rebounded to about 5.3 percent a year, a figure dragged down by weaker peripheral European economies.

Yes, it's our old friend, economic growth again. If we have more economic growth then there is more value that can be shared among the various people on the planet. Thus more growth will lead to less of this absolute poverty. This really isn't rocket science.

Which brings us to the question of how we should have more of this economic growth? Two pointers come to mind.

The first being that the last 30 years have been a vast explosion of capitalist/free market globalisation. This has halved global poverty. It is again not rocket science to assume that more capitalist/free market globalisation will continue the process.

The second is that we do actually have a report from thousands of chin strokers about the possible paths of the global economy over the next century. I refer of course to the IPCC. Yes, the climate change people. In their economic forecasts, the ones they use to work out what emissions will be, they put forward this possible family of scenarios:

The A1 storyline is a case of rapid and successful economic development, in which regional average income per capita converge - current distinctions between "poor" and "rich" countries eventually dissolve. The primary dynamics are: Strong commitment to market-based solutions. High savings and commitment to education at the household level. High rates of investment and innovation in education, technology, and institutions at the national and international levels. International mobility of people, ideas, and technology.

It's not only possible, we've actually assumed that it is when creating the case about climate change. You know, this is the scientific consensus?

I would also note that this family, the A1 one, also produces an emissions path that means that climate change isn't actually a major problem. The forecasts are basically that the 21 st century will be very like the 20th. Economic growth will be about the same, increases in energy efficiency about the same, solar and other renewables will continue to get cheaper at about the same rate.

And we do end up with, in A1T at least, one scenario in this family, climate change not being a problem and we entirely beat absolute poverty right around the globe. All from a capitalist/freemarket globalisation. The only fly in the ointment is that none of us free market liberals currently advocating this approach are going to around in 2100 to dance on our opponents' graves. Better have the party now, eh?

Apple's taxdodging ways

Apple's played a clever game in getting around some of the US corporate tax rules:

Apple Inc. (AAPL) avoided as much as $9.2 billion in taxes by financing part of a $55 billion stock buyback with debt rather than offshore cash that would have been billed by the U.S. government, Moody’s Investment Services estimates.

That's pretty good really. A $17 billion bond offering has saved them $9 billion in tax.

As background, US companies don't pay US corporate income tax on their foreign profits that they leave in foreign. It's complex but this is the basic outcome. Apple's got some $100 billion in such profits parked offshore and the shareholders, who do after all really own this money, would like some of it. The problem is that the US corporate income tax is 35%, those offshore profits have only paid perhaps 3 or 4% in tax so far, so 30 odd % will be demanded by the taxman if they're taken back into the US to be sent out as a dividend. So, instead, Apple borrows money in the US and pays that out as a dividend.

Hurrah!

Which brings us to the usual complaint but, well, companies should pay tax on their profits. So why am I cheering someone avoiding doing that? The answer there being tax incidence. It never is a company that bears the economic burden of a tax: it's some combination of shareholders, customers and or the workers. In general with corporation tax we say it's split between the workers and the shareholders. The workers get lower wages: because taxing returns to capital means less capital is employed in that economy. It's capital plus labour that raises productivity, raised productivity raises wages. The shareholders because, obviously, the dividends, the profits, are the return to capital and these are being taxed.

So given that we're not actually taxing the companies why is it that we send the tax bill to the company? Simply because it is convenient to do so. There is no economic reason at all to tax company profits. It's just that they're a nice big pile of money that we can tax, without having to go around all of the investors and workers and collect their little bits.

Which is why I applaud Apple's plan. It's becoming increasingly clear (as Google, Facebook, Vodafone, Boots and so on are showing) that companies are no longer a convenient place to go collect the tax money. They're just too good at not being the patsies and coughing up the cash. Given that the only reason we do tax companies is convenience, if it's no longer convenient then perhaps we should stop doing it?

Simply abolish corporation tax altogether. Make income taxes on dividends and other returns from investment the same as they are from any other source of income. There, job done.

And hundreds of thousands of accountants and lawyers will have to go do something productive for a living. Shame, eh?

Why we do rather like tax competition

You'll have noted the current screams from the left side of the aisle about the terrors and inequities of "tax competition". They're squealing as a pig does when it sees the swill bucket being taken away. For the obvious reasons that Dan Mitchell points out here:

But we do know that simple economic theory tells us that monopolists are more likely to raise prices than firms in competitive markets. Likewise, governments are more likely to raise tax rates if they think taxpayers don’t have escape options. And we also know that the proponents of higher tax rates, such as the statist bureaucrats at the Paris-based OECD, are also the biggest opponents of tax competition. The OECD even complained in one of its reports that tax competition “may hamper the application of progressive tax rates.”

Progressive taxes aren't all that much of a bugbear for us here at the ASI. Our income tax proposal has a large personal allowance in it for example, meaning that the average tax rate continues to rise as income does, asymptotically aproaching the flat marginal rate. This is indeed a progressive tax system and as we're recommending one of those we're obviously not against a progressive tax system. There is also Willy Sutton's point, that you tax the rich because that's where the money is.

However, Mitchell's making a slightly different point. Imagine that you don't like the taxes that are being imposed upon you. No, go on, just imagine. You as an individual voter don't actually have much influence over this. Which is why that option of exit is so important. The ability to simply say "The hell with you lot" and leave. We should note that there are very definitely some campaigners who insist that that exit route should be closed off. As, largely, it already is for US citizens. They can leave the US, certainly, but find it very difficult indeed to escape the clutches of the IRS.

Mitchell's also making a very good Smithian point there. It is indeed true that once businessmen have gathered together for that conspiracy against the public then it is indeed competition from alternative suppliers that is said public's only method of beating the conspiracy. And so it is with government: we can only preserve a modicum of freedom (and a modest portion of our wallet) if we are indeed free to choose among competing providers of those governmental services.

Which is what much of the conspiracy among governments is all about: seeking to deny us that exit, that protection from their monopoliy.