Calls for price controls are economically illiterate

Recently there have been calls for the government to impose maximum prices on everyday goods. These are motivated by the belief that, during this crisis, shops and producers have been exploiting customers by raising the prices of essential items.

Figures from the Office of National Statistics show that this is plain wrong. From the middle to the end of March, prices of dried pasta, kitchen rolls, tinned soup and long-life milk actually fell 1%. Baby food and antibacterial wipes fell nearly three times that.

Yes, there were tiny increases in the price of handwash, toilet roles and cleaning products. And cough medicine is certainly up in price. But the general picture is that most retailers have not actually sought to exploit anyone.

But then, if they want to have any customers left after the crisis is over, that seems to me to be a perfectly sensible strategy.

More generally, though, the calls for the government to cap prices are economically illiterate. When things are in short supply and heavy demand, their prices do indeed edge up. But that induces producers to supply more, and prompts consumers to use things more sparingly, or find alternatives. Which is exactly what you want to happen.

If you put price caps on scarce, you just make them even scarcer. If you thought the shelves were bare after all the panic buying, just wait until you see the effect of price controls.

Owen Jones insists there's inequality and then there's inequality

There are different ways we can measure inequality, most certainly. The usual useful and overarching method is the Gini (either index or coefficient, whichever way you prefer to do it). It’s not a perfect measure given all those different ways that we can measure but it is the one most commonly used, the one referred to when we say that this society is more unequal than that and so on.

Which makes Owen Jones’ latest complaint interesting:

Coronavirus is not some great leveller: it is exacerbating inequality right now

That depends upon the measure of inequality we use. If we do use the Gini for income as our measure then inequality is falling right now. It always does in recessions. The richer among us depend more upon profits and capital income than the poorer. It is capital income which collapses in recessions - more than labour income at least. Those already dependent upon benefits of course see no diminution in their income at all.

Recessions reduce the Gini measure of inequality.

Owen Jones wishes to use different measures and that’s just entirely fine. But there is a proviso to using those different measures - he doesn’t get to come back to using the Gini as we exit recession and it rises, as it always does. Although we’d make a heavy bet at slim odds that he, along with many others, will attempt to so pick and choose their measures.

This economic management thing is difficult, isn't it?

We have some sympathy with this argument, despite its source:

One clear example of an industry not needing a bailout is the supermarkets, which are set to receive a £3bn business rates holiday this year as a result of the government’s support package. Shortly after the rates holiday was announced, Sainsbury’s put out a stock market announcement welcoming the news and highlighting that the company paid more than £500m in business rates last year. The company’s share price surged – the rates holiday is worth more than twice the company’s annual profit. Tesco has a business rates bill of £700m – equal to 50% of its profits for 2019. On Wednesday, the company increased its dividend by 60% – proposing a payout to shareholders of £637m. What possible argument does the company have that it needs a government subsidy?

To find ourselves having even sympathy with an argument put forward by Tax Watch UK feels uncomfortable.

The point that we - rather than Tax Watch - would make about this being that gosh, this managing an economy in detail thing is hard, isn’t it? This being a useful observation for us to carry with us into those sunlit uplands of the post-coronavirus world.

That world out there, that economy, is complex. It isn’t possible for a few people to sit at the centre and decide what should be done in it. It’s not even, as the above shows, possible for those few Fat Controllers to decide in that detail how it should be taxed or not so the idea that they can do anything more complex like decide pay rates, production levels or methods is absurd.

We are, here in crisis, attempting to do some planning of the economy and that’s fine, it’s a crisis. But the lesson to be taken from how badly it’s being done is that it’s not something we should be trying to do in the future.

British business is adapting to crisis

Their response to this crisis shows just how innovative British businesses are.

For example, pubs and restaurants are now doing takeaway meals, which taxi drivers, who now have few other customers, are delivering.

Yesterday I got a box of fresh produce, delivered by a local restaurant. It’s the same produce they’ve always got from their suppliers, but instead of cooking it they are repacking it and delivering it to your door. Local shops are delivering too.

 Within days of the panic buying, supermarkets reserved special times for older people and gave all-day priority to health workers.

They countered hoarding with buying limits. But then stepped up their supplies so quickly that the shelves were re-filled and the limits lifted.

 They marked safe distances on the floor, gave their checkout staff protective screens, and stepped up the cleaning of pin-pads and surfaces.

Such response suggests to me that, when it comes to easing the lockdown, there is no need to impose some detailed Whitehall-style instruction manual on what shops and other businesses can or cannot do. We just need to say what the broad rules are. And within a week, businesses will come up with all sorts of ingenious ways to trade safely that civil servants could never dream up in a decade.

The potential effect of our current stasis on jobs is particularly worrying

I know someone who is an administrator in a large international company with offices round the world. That person has just been furloughed. So, until June, the firm will pay only 20% of their salary, and British taxpayers will pick up the other 80%. The only condition is that the employee does no work at all.

It wasn’t the government’s aim to pay people not to work. Nor that poorly paid local taxpayers should support well-paid international professionals.

Nor that the scheme should be so cynically exploited. In this case, it is only the firm’s UK workers that are being furloughed. That’s because our government’s scheme is so much more generous than those of other countries. This allows multinationals to shift their costs between countries — and get the locals to pay 80% of the bills.

The potential effect on jobs is particularly worrying. Multinationals who furlough British employees will probably shift their work to employees in other countries. When the furlough period is over, will they really want the cost and hassle of moving it back again? Perhaps not.

Of course, the government was pressured to act quickly. But I fear that, in its haste, it may have allowed British taxpayers to be exploited; and may have precipitated the movement of jobs out of Britain.

The quicker we restore economic normality, the better.

Gosh, planning is really difficult, isn't it?

When even The Guardian points out that a centralised and centrally planned system doesn’t work perhaps it really is true that a centralised and centrally planned system doesn’t work? As they are about testing for the coronavirus:

With 400 public health offices forging ahead with testing, the country is a model for others to emulate

As the coronavirus crisis tests the resilience of democracies around the globe, Germany has gone from cursing its lead-footed, decentralised political system to wondering if federalism’s tortoise versus hare logic puts it in a better position to brave the pandemic than most.

Our own system has been to spend £4 billion a year and change on Public Health England - a centralised and centrally planned organisation - to lecture us on the dangers of Cocoa Pops. That might not have been the right decision.

At least one forecast is suggesting that Britain’s outcome from this pandemic will be the worst in Europe. Leading to the thought that if the outcome is worse given exactly the same cause then it must be the system itself which is less than efficient.

However, the real point here is that we can see how difficult planning is in the face of uncertainty. We don’t - no one does - know what really should be done because we just don’t have the necessary information to be able to do so.

Which is all rather Hayek really, isn’t it? That centre cannot gain the information necessary to be able to make decisions. Therefore we cannot rely upon the centre and its plans.

But here’s the thing. Decision making in a pandemic is easy. Easy as compared to decision making about an economy in the absence of a pandemic that is. Currently we’re trying to decide whether to be poorer while retaining more of us or leave some more to die and not be so poor. If not a binary decision then at least close to it.

Now try managing a normal peacetime economy. 65 million people with unique and individual utility functions. At least one billion discrete items are on offer for sale in this economy. That number both growing and morphing as technology marches on and tastes change. That centre is going to be able to plan this?

No one is saying that the current planning - however well intentioned - for the coronavirus is being done all that well. It is though an obvious example of the impossibility of that same centralised and planned process performing a difficult task such as running our economy.

The zero sum fallacy

Ah yes, the Zero Sum Game fallacy returns to haunt us yet again. We can bury it with a stake of logic through its heart at the crossroads, but still it rises from the dead. It’s the one that says wealth is fixed, so that if someone gains more of it, it must be at the expense of someone else having less. It’s often nicknamed the pizza pie fallacy because, with a fixed size of pie, a bigger slice for one person means less pie left for others.

It’s popular on the Left because they don’t like rich and successful people, and think the only way to help the poor is to take that wealth and distribute it. They say the reason the industrialized West became rich was that they stole wealth from poorer countries. It never occurs to them that wealth is created by trade and exchange. You can grow that pizza pie, instead of redistributing it, so that everyone can have a larger share. Wealth was not redistributed by the Industrial Revolution; it was created by it.

The poor don’t improve their lot by having wealth confiscated from the rich. They do it by being part of an economy that grows. The billion-odd people lifted out of starvation in the past 30 years didn’t gain money confiscated from rich people. They did it by creating wealth through trade and exchange, by providing goods and services that people were prepared to buy. They didn’t redistribute existing wealth; they created new wealth.

Some people now call for the wealth of billionaires to be confiscated and distributed. If they did their sums, they would see that people would receive only tiny amounts if this were done, and it would be a one-off that couldn’t be repeated. Society is far better off if we allow people to become billionaires by providing millions of us with goods and services that add value to our lives. It makes us all richer.

We support free markets and free trade because they make the poor richer, and have proved in practice that they can do this. Redistribution doesn’t do that. After the epidemic we want policies that will grow the economy and create wealth, not ones that will shuffle it around without increasing it. We want policies that will enable the poor to become richer, not ones whose only effect is to make the rich poorer.

The economy is more like a fragile ecosystem than a robust machine you can put into stasis

Sadly, our Treasury officials—and all those politicians, with their Oxford PPE degrees—have read too much economics.

Standard economics textbooks explain the economy as a vast machine. They imply that you can switch it off, then switch it back on again, and it will spring back into life.

In reality, the economy is more like an ecosystem. Remember when Chairman Mao mobilized China’s citizens to kill all the sparrows because they were eating the grain?

A plague of insects that ate the crops instead, with no birdlife around to keep down their numbers. And people starved.

Here, we shut down cafes, bars and restaurants. That hit wholesale suppliers, who had to scramble round to find new, domestic, customers. The closures led to lower footfall in towns, and within days the other shops threw in the towel. Their suppliers too are now facing disaster, as are the companies who rent offices and shops to businesses that may never open again.

Once you disrupt the hugely integrated ecosystem of markets like that, things go out of kilter very fast. Health bosses might say we need to lock down for six or nine months, but by then there will be no businesses standing to generate wealth for healthcare anyway. We need to re-open Britain: safely, but as rapidly as we possibly can.

It's an old mistake, perhaps people should stop making it?

Zoe Williams makes a very old mistake:

And there’s an overarching fallacy, that a job many people could do must be inherently low in value.

That lots of people are capable of doing the work, willing to do so, means that the supply is large. The larger it is compared to the demand for that work to be done the lower the price will be. This is why 90% of the actors in the world work buckshee. The number of those who enjoy treading the stage is rather larger than the number we wish to see doing so.

But that is, in the phrase, to know the price and not the value. Which is where that old error is. Aquinas brought it back into Western philosophic thought, Aristotle laid it out, the idea that there is some objective value that can be divined. Something that simply isn’t true.

The only people out here doing the valuations are us humans. Therefore the value is what we place upon it. It is something subjective therefore - what are we willing to pay for this thing, that service or their time and effort?

It’s still possible to go on and insist that there’s some societal value which is different from the individual. We might not think, or I or they etc, that social care is worth more than is currently paid for it but society as a whole does. Well, OK, we have a method of testing that insistence. For the market price is the summation of what we all are prepared to pay for it, whatever it is.

That is, the market price is the average of what we all think something is worth. If you desire that something be paid its true and real value then, given that it is just us humans doing the valuing, the market price is that value. Which is where that ancient mistake becomes visible. For absolutely everyone arguing that there is some true and knowable value is always, but always, arguing that it’s different from the one assigned to it in that market process, aren’t they?

We must be careful with how we value life

Today is my eldest brother’s birthday. He died a few years ago, after a long illness, having told the hospital staff not to revive him when his heart, inevitably, gave out again.

I was devastated to know we would soon lose him. Though I also knew that he had made the right decision.

They say you can’t put a value on human life. But long life is not all we value. When I see virus sufferers taken off to die in hospital isolation without their relatives being able to see them or even attend their funeral, I wonder if we have our moral calculations right. Like when I see elderly patients with other health issues submerged by machines and wires and tubes and people in protective suits. Or planes made into flying intensive care wards to take Italian patients to Germany while their families remain locked down at home.

In ordinary circumstances, doctors consider the effects on families, and on the quality of future life that their interventions might achieve. But now that saving ALL lives has become the political imperative, those values, and the other values of normal daily life, have been legislated away.

That cannot be right, neither for the patients and their families, nor for the lives and welfare of the rest of the population.