The difference between this capitalism and this free market stuff

I've a long piece elsewhere looking at the effect of WalMart on the US economy. The basic contention is that the consumer surplus of the company (and possibly Big Box stores in general) is vastly larger than the amount that the owners of the original company have managed to keep for themselves:

The entrepreneurs end up with a lot less of the wealth created than the consumers do. 30 years worth of $300 billion a year in consumer savings is some $9 trillion. In return the (inheritors of) the original entrepreneur has got $100 billion. And yes, to make the point again, that capital value of $100 billion is the net present value of all of the profits they’ll make far off into that future.

Now where I come from (so different that we call it maths not math) our math system tells us that $9 trillion is a rather larger number than $100 billion.

The more sophisticated point that I want to make here is that this is a good example of the different effects that can come from capitalism and from free markets.

In a purely capitalist system, one that did not allow competition, there could still be that same value created: but the distribution of it would be very different indeed. Without any competition at all it would all accrue to the entrepreneurs (although we might possibly expect some goodly portion to leak through to the production labour dependent upon the level of unionisation). With competition however we find that others note the new technology (and yes, WalMart is really just a new technology for retailing) and copy it as best they can. This leads to this very different split of the benefits: the vast majority now accrues to the consumer. For the various people using this new technology must continually cut their prices as the others using this same new technology do so.

Which is, of course, where we want the benefit to be accruing, to the man and woman in the street, this is the point and purpose of the economy. To make the average person as rich as we possibly can.

Which gives us our subtle point. Capitalism might well be a useful way of harnessing greed to encourage people to invest, to produce and roll out new technologies. But it is those free markets that spread that added value throughout the society. Markets, if you prefer, ameliorate the effects of capitalism: which is why they are so damn important, obviously.

Chart of the week: UK unemployment falling only slowly

Summary: UK unemployment is slowly heading down – but fall likely to speed up

What the chart shows: The chart shows the UK rate of unemployment as a three-month centred moving average

Why is the chart important: Following the lead of a number of other central banks (most recently the Federal Reserve), the Bank of England has now embarked on a course of ‘forward guidance’. This is an attempt to lay out the future course of current monetary policy over a longer period of time. The new Governor of the BoE, Mark Carney, has said that Bank Rate will remain unchanged until unemployment falls to 7% from its current 7.8% level (June 2013). The Bank says this will occur in 2016. In contrast to developments in the United States, UK unemployment has been slow to fall; perhaps because it did not rise by as much during the Great Recession. However, the UK economy is now giving all signs of surprising on the upside. This means that unemployment (which is a lagging, not a leading indicator of activity) is likely to start falling faster. Given that inflation is already above the Bank of England’s target, Bank Rate will almost certainly rise well before 2016.

Where Keynes went wrong in Economic Possibilities For Our Grandchildren

Or if it's too much for you to believe that Keynes could have been wrong at all, where current interpreters of Keynes go wrong in thinking about that essay. For of course, Keynes did indeed say that by around and about now we'd all be so damn rich we'd not need to be working hardly at all. At which point we might wonder why so many of today's Keynesians are worried about part time jobs but that would be just snide and sarcastic. There are indeed people who are wondering where that reduction in work and concommittant increase in leisure has gone. What went wrong with capitalism along the way?

To which the answer is nothing at all. It's just that Keynes didn't explicitly spell out the difference between household and market work. The difference is there, with his story of the charlady and of the upper middle class woman bored to distraction because she has servants to do all that for her. The great reduction in working time has come in the unpaid, household, part of production:

Whenever there is a new study on housework, domesticated creature that I am, I like to put on my pinny and go around – just to check that the premise isn't all dusty. This time, a report says that, while chores used to take 63 hours a week 60 years ago, they now only take about two.

That's where the great change has come in, in domestic technology. It's the one thing that Ha-Joon Chang was actually correct about. We've mechanised a huge amount of human drudge work and thus freed up the distaff side of humanity to do something more interesting with their lives. This has included entry into the world of paid work, of course. But it's also meant an increase in leisure for both men and women over these decades.

Keynes wasn't wrong, it's his current interpreters who have rather missed the point. Working hours are getting shorter, have been so ever since Keynes wrote. It's just that it's household production hours that have become shorter. And we are all indeed gaining greater leisure, just as Keynes predicted we would.

Let's make fracking easier by increasing bureaucratic delay!

The Telegraph tells us that there will be more consultation on fracking permits:

In a development that will be welcomed by opponents of fracking, the Environment Agency (EA) said the “current level of public interest” meant that the permitting process was likely to be extended to allow for more consultation.

The Purple Scorpion points to the actual document and then comments:

"The high public interest status could mean an extremely lengthy process", says a lawyer, "taking into account a number of rounds of community consultation". "Given the current level of public interest in unconventional gas and oil exploration, it's likely that we will treat such sites as being of high public interest," the Agency said in the document on its website.

But here's what is actually meant. The Government has decided that fracking would be a good idea and wants to make it simpler and faster to gain a permit to do so. This unelected quango has decided to scupper that desire. Instead of it being "You've like a fracking licence? Here you go" they're going to insist upon lengthy public discussion periods for each and every licence. Effectively, every nutter in hte land will be encouraged to shout out the same old stale, and wrong, arguments for each and every licence.

I've said before that I'm not surprised that economic growth has slowed down in recent decades. We're issuing ever more red tape that stops people from actually being able to do anything: why be surprised when less is done?

And it doesn't bode well when a government cannot contain or control its own bureaucracy, does it?

The horrors of zero hour contracts

You'll have noticed the calls for the banning of zero hours contracts. What we used to call temping in fact. My problem with this call for the banning of said contracts can be summed up with this comment from Natalie Bennett (Leader of the Green Party).

Imagine you get a phone call at 6am each morning, to tell you if you’ll get any work – or pay – each day. You’re awake, dressed, waiting, then it’s “stand down”. That can happen five days in a row, and you’ll get to the end of the week without a penny coming in to your pocket.

No, I don't think I would like to get up at 6 am every day. However, let's just change this a tiny bit:

Imagine you get a phone call at 11am each morning, to tell you if you’ll get any work – or pay – each day. You’re awake, dressed, waiting, then it’s “stand down”. That can happen five days in a row, and you’ll get to the end of the week without a penny coming in to your pocket.

There doesn't seem all that much difference there really. But that second type of work offer has people lining around the block, shouting, screaming even that they'd just love to be employed on such terms. For that's how the opinion and comment pages of the national newspapers are written.

You get up at whatever time, look around for the stories that an editor might be interested in. Then phone them up and pitch them in that small gap between their arriving at work (10 am) and the editorial meeting (11 am). Then you wait for your phone call at noonish which will tell you whether you have been chosen as one of the lucky ones to scribble something for the paper's readers. Note that the actual writing is the smallest part of the work routine: finding something to be written about is what takes the time and effort. Yet you'll only ever be paid if you do the easy part, the writing, and never for the research.

It's a job I've done and was happy to do too. As, obviously, everyone else who write freelance comment pieces is.

There are therefore two things that grate about this shouting that zero hours contracts must be abolished. The first being that it does seem odd that everyone else be denied the joys of the sort of contract that we metropolitan media luvvies think quite normal, desirable even. The second is that Natalie Bennett, the Leader of the Green Party, used to employ people in such a manner when she was an Assistant Editor at The Guardian. It just grates, that's all.

Coming around to the Austrian view of investment and recessions

I don't think it's any surprise to anyone that Madsen and Eamonn, here at the ASI, are rather more Austrian in their view of the world than I am. This is partly just because they are but also because I'm not really sure that I believe in any school of macroeconomics at all. I can see that there are useful things pointed out by all of the different schools: quite happy to accept that the New Keynesians have a point about sticky prices and menu costs, the Marxists aren't entirely wrong to think that class can sometimes matter (which Englishman could reject that basic point?) and so on and on. But I'm also extremely doubtful that any of the various schools manages to capture the full complexity of the economy in the way that, say, the microeconomics of prices and incentives captures activity at that level.

However, this story certainly supports one prime contention of the Austrian story:

Spain's €1bn white elephant airport could be yours for just €100m The first private international airport in Spain that turned into one of the country's biggest white elephants is being sold off for just €100m.

A vast airport built where very few live, fewer go and apparently almost none wish to fly to. This is very much he Austrian story about recessions: the boom times allow monstrosties of this type to be financed and built. A misallocation of capital in fact. And once the system gets sufficiently clogged with such misallocations then recession is going to happen. Further, we'll not return to growth until these misallocations are liquidated and we're back to allocating our capital sensibly, not on these white elephants.

What turns people off this Austrian view is that it almost seems to glory in the bankruptcies which are a necessary part of cleaning up the messes of the previous misallocations. Which isn't quite what is being said: rather that this is a sad necessity which we've got to go through so we might as well recognise that. And as I say, this particular case shows that there's at least one solid truth in that Austrian view.

Demand Matters

Markets are about supply and demand. Scarcely a more banal thing could be said in economics, and yet some of the time it seems like free-market economists look only at supply. Glance over policy recommendations from a free-marketeer and you'll often see only tools for freeing up supply—labour market deregulation, planning reform, a bonfire of the quangos, an end to unbalancing subsidies or tax breaks, liberalisation of trade barriers. These are all fantastic things, which we definitely need. And even through the visor of the AS/AD model, even in a slump, these can make things better both by cutting prices and by raising wealth. But either deliberately or unconsciously, these economists are completely avoiding the demand side.

Is this because there are no doctrinaire libertarian things that can be done on the demand side? I've certainly heard many policies like quantitative easing called "socialism" by fellow travellers, but I'd like to think that my libertarian-leaning friends were more thoughtful than instinctively dismissing ideas they see as ideologically impure out of hand.

And further than that, there are things we can do to make the demand side more libertarian, at least if we don't make the perfect the enemy of the good. School voucher systems are not decried for their "socialism" by libertarians despite the fact that under these systems schools are still paid for and run by the state. Monetary policies that are more free market (and more sensible) than our current one should be looked upon in the same way. It's not the case that anything short of abolishing the central bank is "socialism"—unless we want to completely devalue the word. And even if an intermediate policy were a form of "socialism" or "central planning", the realistic alternative is not a free market in money, but an abysmal central plan!

What are these intermediate policies that free-marketeers seem to be ignoring? Firstly there is nominal income targeting, which relies on markets both to stabilise demand and to allocate that demand among competing industries according to consumer preferences; and secondly counter-cyclical taxes, which rise automatically in good times and fall in bad times. Those are both thoroughly libertarian and entirely focused on demand.

In fact, the two most important libertarian economists of the 20th century—Friedrich A. Hayek and Milton Friedman—both endorsed demand-side policy, in the right circumstances. Friedman blamed the US Great Depression on the Federal Reserve, allowing a massive collapse in the money supply and aggregate demand. Hayek said that after the inevitable collapse of a misallocated capital structure there could also be "secondary deflations", where aggregate demand collapses and there is a costly adjustment period. Both would support monetary policy to deal with this issue—stabilising demand, so as to avoid painful adjustments from big inflationary or deflationary shocks. If money is non-neutral in the boom, why would it be neutral in the downturn?

One response libertarians might make is that Say's Law shows there is nothing we can do about demand. But Say's Law clearly doesn't hold in the short-run, and Austrian economists who rightly critique the assumptions economists often make about equilibria should be absolutely clear of this. In the short-run, a dip in aggregate demand—absent any response from the government, central bank, or hypothetical free banks working together—necessitates a period of deflation. But we know that (at least nominal) wages are sticky-downwards, meaning that calling for an adjustment to the new equilibrium means calling for years of the grave evil of unemployment foisted on millions. Say's Law reasserts itself in the medium- to long-run, and by then the misery and destruction of potential wealth has all already happened.

What libertarians are missing is that the relentless focus on supply is leaving them almost completely out of the conversation, and thus leading to worse policy than necessary. If free marketeers were talking about the best things to do on the demand side, as well as on the supply side, then there would be less of the all-eggs-in-one-basket big project spending stimulus, and more diverse market-oriented ways of countering the demand shortfall.

Kick the 'wise men' out of the Bank of England

In today's City AM, newly-minted ASI fellow Lars Christensen (aka The Market Monetarist) writes on the 'Carney rule'. The Carney announcement is a tiny step in the right direction, he says, but as long as the 'wise men' of the Monetary Policy Committee are running monetary policy, policy will be erratic and unpredictable, preventing adequate planning by firms and adding to market panic in economic downturns. Instead, we should have a strict rules-based system of nominal GDP targeting:

A much better rule would have been to commit to stabilising the level of nominal GDP (NGDP), a measure of aggregate demand, keeping market expectations of NGDP growth on a 4 or 5 per cent growth path. This should be combined with an open-ended commitment to expanding the money base to hit this target. This would avoid the nitty-gritty of the Carney Rule and be clearer and easier to communicate to markets.

Monetary policy based on the discretion of “wise men” leads to market uncertainty and panicky jolts as investors react to tiny changes in central bankers’ pronouncements. Replacing the MPC with rules-based policy would bring discipline and predictability to the Bank of England far beyond what was outlined yesterday.

I would prefer to have no Bank of England at all, with money emerging from the market as outlined by Hayek in 1976. Having said that, perfect is not the enemy of good — replacing the discretion of 'experts' with predictable, market-led rules would be a huge step in the right direction. If Carney's new rule fails, it may come on to the agenda sooner than we think.

Could people please stop trying to plan losers for us all?

An oft expressed contention is that if only we allowed those wise people in Whitehall to plan more of our lives then the future would be made so very much better that we won't mind paying the costs of having those wise people in Whitehall. One problem, among many, with this idea is that it does require the people we're paying for to be wise. Not something that I'm really willing to bet on, that. The Very British Dude makes an excellent point here:

.....the biggest change to transport technology on the horizon, the driverless car. Instead, the Lib-Dems are wibbling about High-Speed Rail which will be almost completely obsolete by 2050 as everyone will be snoozing in their own autonomous vehicles. Such vehicles will run door-to-door on a vastly greater network of tracks (let's call them "roads" shall we?) than any train network will ever be able to compete with.

This is exactly right I think. The planning that we're being offered is that we should have more of a 19th century technology in the 21 st century. And it's entirely ignoring the coming impact of a 21 st century technology.

The arguments in favour of HST and other fast trains etc are capacity and speed. We want or desire a rise in the capacity of people to move around the country simultaneously. And we also want to increase the speed at which they do so because time spent travelling is "dead time". That latter isn't really true what with mobiles and notebooks: and it most certainly won't be true when we're all sitting in the back seats of our Wi Fi enabled cars. Such cars will also solve some to all of the capacity problems: the current road networks can carry a great deal more traffic if it isn't all being directed by that all too fallible few pounds of meat called the human brain.

I will admit to being a little unsure about how quickly computer controlled cars are going to be rolled out. But it wouldn't surprise me at all if they were actually commonplace before anyone even starts breaking ground on HST. Which would be an interesting example of spending £40 billion on a project that was outdated before it was even begun, wouldn't it?

Mark Carney bottles it with baby steps

Mark Carney had the leeway to make radical change here but he's bottled it with baby steps.

The 'Carney rule', promising low interest rates and the possibility of more quantitative easing (QE) until unemployment is low or inflation rises, is definitely an improvement on the current regime. It gives firms clearer guidance on the future stance of policy, removing some of the uncertainty in the world economy today. I expect it to deal with some of today's demand shortage, and more importantly tomorrow's expected demand shortage.

But unemployment and inflation come from both aggregate demand (which the bank can control) and aggregate supply (which it has essentially no control over). Since neither of these numbers distinguish between changes in supply or demand, the Bank is still fumbling in the dark with its guesses over whether a change in inflation comes from demand (which means it should react) or supply (which means it shouldn't). This means firms are still left guessing, and it means that uncertainty still reigns.

What we really need is a truly rule-based system that takes discretion away from nine 'wise men' and uses market forecasts to create real stability. That system is nominal income targeting.