The Guardian notes that Richard Lambert of the CBI said this week that:
In a free society, it's not the job of a politician — or, for that matter, of a regulator — to argue that a particular form of activity is or is not of social value.
Let’s try that on the following for which there is undoubtedly market demand:
¬? Slavery
¬? Child labour
¬? Prostitution
¬? Drugs
I could go on.
Do I need to do so?
Market enthusiasts are really making complete fools of themselves at the moment. They need to face reality: just because there is a market for something does not make it right. Just because a price can be set does not mean there is value. Willing participants does not even mean benefit results.
Have these people never heard of externalities? Or ethics? Or society? Or democracy?
If not, how worried should we be?
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Pity you didn’t go on. Burglary, robbery with violence, shoplifting, fraud etc are OK on the CBI spokesman’s criteria.
Clearly they don’t believe anything goes. The examples you quote are one’s where there is a clear social cost. Lambert was referring to criticism of businesses where there was, according to the politician, little evidence of a substantial social benefit.
Slavery, child labour and (to a lesser degree) prostitution are illegal because they damage the people carrying out the work. They are, in the end analysis, morally wrong, because they involve people being forced to do things that they do not want or should not have to do.
It is hard to see how banking is in any way similar to this.
Of course Lambert is right. Footballers, television actors, journalists, nutritionists, coal miners are all arguably “socially useless”. Where does that take us?
The truth is that what you believe in appears to be wages set by the state on the basis of what you think people ought to get, rather than set by the market to reflect demand.
Oh, drugs are illegal because – well, I’m not sure anyone has understood why for a very long time. Presumably because western governments want to support organised crime and terrorism and illegal drugs are the best way to fund such operations.
Slavery: well, this isn’t exactly a voluntary exchange between master and slave, is it? A market requires willing buyers and sellers.
Child labour: do you really think that if this were legal in the UK there would be a surge in kids being taken out of school by their parents to be sold to factories?
Prostitution: a number of countries have legalized this. I believe that in this country working as a prostitute is not illegal, although living off ‘immoral earnings’ is. I haven’t noticed this liberty being the cause of great hardship.
Drugs: well, alcohol and tabacco are clearly two very popular drugs.These are taxed,and there are some regulations about where and by whom they may be sold, but again, society has not collapsed because of this. The drugs which are not available through a legal voluntary exchange between producer and consumer cause much more damage to society.
Yes, the sale of some goods and services gives rise to externalities. It is the proper role of the tax system to capture these.
A strange comment for Richard Lambert to make, given that he spends a lot of his time arguing that British industry is of social value. Indeed that’s one of the things he’s paid to do as CBI Director-General. That’s what firms pay his wages for.
I’d argue that in a “free society” it’s the job of politicians to speak their mind about any issue they choose – whether industry likes it or not. If they don’t do that, we end up living in a corporate dictatorship rather than a democracy. If the public doesn’t like what the politicians are saying, they can of course vote them out.
Alex
That is not what Lambert said
He argued against the democratic right of politicians to regulate markets
That is very, very dangerous
Only fools and charlatans cannot see that
Richard
Markets do not exist in the abstract. They can only exist and have only ever existed within a framework of law, and dare one say it, morality. Things go wrong where the framework is not grounded in freedom under justice and morality.
Neither socialism nor “Capitalism” is so grounded, since both are in their different ways coercive and exchanges do not take place freely. Freedom to work for a penurious wage or a penurious benefit, or to starve, is no freedom.
Much of the financial services industry is about securities trading. Securities are to a large extent titles to land wrapped up in packages such as equities. The trading of land titles is entirely unproductive since nothing is created in the process, since the purchase of land is a “release” fee from a previous owner to enable the new owner to make better use of it. No additional land is produced and the entire process is parasitic. The lending of money for the purchase of these titles is the underlying cause of bubbles and busts.
The Pope has commented on this recently here
http://www.vatican.va/holy_father/benedict_xvi/encyclicals/documents/hf_ben-xvi_enc_20090629_caritas-in-veritate_en.html
Socialists, Libertarians, and the CBI’s policy wonks and PR people would all do well to study this before coming out with statements about what governments should and should not do.
@Steve Hemingway
Externalities both positive and negative all eventually turn up in the rental value of land. Look, for example, at the boost to land values (house prices) along the route of the new High Speed commuter line to Kent.
http://property.timesonline.co.uk/tol/life_and_style/property/investment/article1931030.ece
The value created by this massive investment is being pocketed by owners of land which has now become more accessible.
The way to deal with the externalities is to collect the value through the taxation of the rental value of land, in place of existing taxes which largely ignore externalities. But land value taxation is the great unmentionable.
I didn’t read that in the Guardian report, and I suspect neither did you. Regulators are given clear terms of reference for the regulation of their industries and in the case of most businesses, the quality of the social value of the business is not one of the issues for the regulator.
Politicians are a different matter, but because they make the rules, but Lambert is right that in a free society the politicians should not be concerned whether an activity has a social value or not, merely whether it has an absence of social harm. Perhaps that is the difference between the pleasant liberal land that he espouses and the coercive form of government that you advocate.
Arguing that it is a democratic right for politicians to overregulate markets is something “Only fools and charlatans” would do.
One only has to look at the Governments in the past and present that have tried this and at the same removed peoples democratic rights.
A few examples, Soviet Union, Cuba, Venezuala.
The correlation between the strong regulation of basic markets and the loss of democracy is frankly beyonf arguement
He argued against the right of politicians to determine what is socially useful, which is not the same thing.
I imagine Gordon Brown believes that left leaning think thanks are socially useful whereas right leaning think tanks are not. And David Cameron no doubt thinks the opposite.
Surely, if we want to avoid a dictatorship, the only response is that what is “socially useful” is for society to determine, and society does so by making something profitable or otherwise.
Richard,
“He argued against the democratic right of politicians to regulate markets”
I am confused as to why you think that democracy is so wonderful, or why democracy should confer any “right”.
This government were elected by less than 22% of the electorate—what mandate, i.e. “democratic right”, does it have to pass laws over the other 78%?
DK
Richard Murphy,
You may be interested in my posting at Counting Cats which explains from a libertarian position why in a libertarian/free market society slavery and other forced labour is impossible. That is not to say that you have to approve of liberty and free markets, but the argument that people could become slaves in such a society is erroneous.
The issue of child labour is always difficult, because of the question of what rights children have and what responsibilities adults have towards them. The biggest question is at what age somebody should be counted as a child. I started working at my local theatre when I was 14; the hours I could work were strictly limited by law, which suited neither myself nor them since I was rather a good followspot operator. It was an enormously positive experience in my life and, being from a rather poor family, gave me my first financial independence. It bought my first computer for instance (a ZX81, and now I feel old). My father, born in 1929, began full time work when he was 14. My own view is that the age of majority needs to be lowered, since it acts as a barrier to young people getting on with their lives.
But should parents be allowed to force their children into work? I think not. Since we all accept that children are not of the same status as adults- they are inescapably dependents until some age at which they can fend for themselves- it is reasonable to presume that adults have a “duty of care” towards children and cannot simply treat them as property. At what point that ceases and young people should get full personal rights will always be a matter for debate, but using it as an argument against free markets is underhanded. Free markets naturally require consent; if a young person is not seen as old enough to consent, then they cannot participate in the market. Ultimately, a free market dogma in itself is no more likely to feature child labour than e.g. a communist regime; a commissar may decide that children should work for the good of society, also. There’s nothing explicit in socialism to stop him making that decision.
Drugs and prostitution are matters for individuals and are not, of course, anything to do with the state, just as non-paying sexual practices, e.g. homosexuality, are a matter for the private person and not for the state.
Sorry for the double post, but I want to just add something-
You are presenting a regulated state as a form of guaranteed protection for citizens from the abuses (or presumed abuses) that you list. The problem is that the big state does not offer any such guarantee, since what rights a person has are dependent on a kind of Humean felicitous calculus by those in charge of the society, and the felicitious calculus is inevitably arbitrary- driven by opinions of what is “socially good” and contains no explicit rights. So whereas in a liberal free market, nobody can be forced to perform any act by diktat- though circumstance generally requires them to do some work of use to some other human beings- there is no such guarantee in a social market.
There have been considerable rumblings on both sides of the Atlantic about forcing young people into some form of “community service”, which is effectively forcing youngsters into work gangs against their will. Various socially based arguments for this are made. One could reasonably presume that if adopted, such a scheme is likely over time to grow more, not less, demanding on the time and labour of the young, since more “socially useful” work can always be found.
It is thus clear that while forced labour is impossible in a liberal free market, state forced labour- partial slavery- cannot be guaranteed not to occur in a statist society. Your freedom from forced labour is only that which the state chooses not to impose. The social argument makes slavery more, not less, likely. If the state wants to force some women into a “joy division”, for the good of society, there is nothing to stop it. Women just have to hope that the state doesn’t want to do that.
We thus see that the implication of your posting- that the state is a guarantor of freedom from abuses which free markets would feature- is in fact the exact opposite of the practical situation. If and when the state decides to force teenagers into chain gangs, they will have no choice but to comply, or face all the force of the state against them. Since it is likely that the penalties for non-compliance are likely to fall on parents, such a regime effectively forces parents to be complicit in the pressing of their offspring into forced labour, even if they may personally object. That is not very free, is it?
It is certainly true that the state cannot necessarily be relied on as a guarantor of rights per se, but the limitation on the state which should prevent the horrors Ian B describes is the democratic process. It is unlikely that people will vote for these horrors (although of course, I am aware that Hitler was democratically elected, nothing can be wholly depended on).
The best way of maintaining freedom is the constant tension and conflict between the market and the democratic state.
I don’t like the current government. I didn’t like the previous one and I have reason to believe I won’t like the one that is to come (roughly quoting Benjamin Zephaniah). I don’t think many othre people like it either. However, in general, people do have an unfettered right to vote and if they really hated the current state of affairs they would turn out to vote for someone else, apart from Tweedle dum and Tweedle Dee.
Yes, I do believe the government has a right to argue that some forms of activity are of no value or indeed negative value. Whatever the theory says, I do not believe that most people’s liberty would be enhanced by an unregulated free market. We should remember why the government started regulating markets in the nineteenth century.
IanB Libertarianism is one of those fundamentally sound ideas which taken to an extreme leads on to nonsense.
It suffers, moreover, from a basic flaw. The whole question of rights of ownership of land and natural resources is simply ignored, or it is assumed that the rights belong to the first claimant. This leads to the following situation.
A ship with 100 people on board arrive at a fertile and uninhabited island. They discover a chest containing the title deeds to all the land on the island and divide it equally between them.
A second ship arrives and the people disembark. The first arrivals approach them with labour contracts.
Under the libertarian society you seem to be advocating, with no free land available, those who are not landowners have no option but to accept whatever terms are forced on them, or starve. Where is the freedom?
A corollary to Ian B’s argument, above, is the fact that in the twentieth century slave labour came to be employed on a scale that dwarfed anything in human history, and this was by countries – USSR, China, Cambodia – that did not have free market economies, but rather state control on the spectrum that Mr Murphy advocates.
@Peter Risdon – the rise of Marxism came about because so-called free markets were anything but. People wanted to be free of the hunger and privation that were a feature of the economic free-for-all of the first phase of the industrial revolution.
Marxism was based on a false understanding and led, predictably, to most of the horrors of the 20th century; don’t forget that Hitler’s popularity was largely based on fear of communism.
But there is a problem that still has to be addressed. Neither libertarianism nor socialism address it. Right and Left are wrong.
Henry Law-
A ship with 100 people on board arrive at a fertile and uninhabited island. Etc…
How often does that actually happen Henry? It’s no use putting up hypotheticals unless they have some relation to reality.
The apportionment of land currently is due to all manner of historical accidents, and none of it is “fair”. But any attempt to redistribute it “fairly” would lead to a Zimbabwesque collapse by taking land from those productively using it and handing it around willy-nilly to people who would probably be less productive on it. Still, there is an argument for a one-off redistribution if you want to risk the chaos. I don’t, but that’s just me.
The point is, in an advanced economy land ownership just doesn’t matter very much. There is plenty of land available for rent, and very few of us need much land to sustain ourselves. Many businesses can be run from a single office. Richard Murphy doesn’t need rolling acres of farmland to be a prosperous economist. So in an advanced economy, we don’t really need to worry about land. Yes, it’s irksome that the Duke Of Wotsit makes lots of money from rents because his distant ancestor did something for the king, or whatever, but it’s not the end of the world.
In a free (or indeed mixed) economy, there are so many options for prosperity that we can step beyond arguing about land taxes; it’s just mad old Henry George’s obsession that refuses to die. Even Karl Marx derided him as a monomaniacal nutter. Prosperity in an advanced economy is not tied to resource ownership. It is tied to productivity. A carpenter does not need to own a forest; he makes his money turning low value wood (which he purchases) into high value furniture. It doesn’t matter whether the tree farm is in his own country, or another, even. Resources don’t matter. What matters is how much value you can add, that’s all.
Richard, you are taking his comments out of context. He was very clearly responding to Lord Turners comments about the purported lack of social value of some banking activity, and he was suggesting this was outside of Turner’s remit in his capacity as the head of the (soon to be defunct) FSA. In that context his comments seem perfectly sensible, in marked contrast to yours!
Ian B: “Prosperity in an advanced economy is not tied to resource ownership. It is tied to productivity.”
I don’t think that theory stacks up in practice, other than in situations where the resource in question is so abundant as to have little value, resulting in labour being scarce relative to the raw materials, or the area has few natural resources and therefore has to rely on productivity to create prosperity.
[…] made what seemed to me a glaringly obvious comment on this blog and I got the most extraordinary […]
@IanB All the land in Britain is owned by someone. Actually in England, the someone is the Sovereign. All the land in the USA had been distributed by 1889, the last to go being Oklahoma. The parable is an exact encapsulation of the true situation.
Fair distribution of land is not necessary and is indeed likely to be harmful. Fair distribution of the rental value of land is all that is required.
“Land ownership doesn’t matter”
“There is plenty of land available for rent”
These statements is so absurd that it impossible to know where to begin. I suggest that you get yourself a musical instrument and go busking. You will then notice that location is important. In fact, it is of critical importance. You will find that the best locations are already taken. If you want to busk on the London underground you will have to go on a waiting list. That shows there is economic rent waiting to be collected. But when busking was free but unauthorised, you found buskers at Oxford Circus, not at Dollis Hill. That is location value.
Even in these days of the internet you cannot run an office unless you are in a location with decent broadband. See what happens when you are out of range. Location matters.
It is not agricultural land ownership which is the issue, but urban land which is worth thousands of times more than agricultural land because it is thousands of times more productive.
Your carpenter earns his livelihood turning low value wood into high value furniture. But he needs to be in a location where he can both obtain raw materials and receive customers. The furniture industry did not grow up in the middle of nowhere, but in city locations like Shoreditch, close to suppliers and close to markets. There was a whole commercial infrastructure around the furniture industry, suppliers of veneers, varnishes, tools, glues, nails, screws, ironmongery and brassware fittings. The carpenters rented workshops and paid rent for them. Competition for space led to rents rising to the maximum that tenants could afford, thereby driving wages down to a minimum. The same for land for housing. It is Ricardo’s Law of Rent in action.
Why do you think the price of “houses” is so high as to be barely affordable? Bricks and mortar are not sky high in price. It is the price of the land on which they stand that is bid up through the workings of the market. More than half the price of a house is the price of the land on which it stands. Paying off the debt then consumes people’s purchasing power for decades. And the lending of money for house purchase is what fired up the bubble and bust, as it has done so many times before.
A substantial proportion of the value of securities such as equities is the value of land and the income stream consists of economic rent of land.
Land doesn’t matter any more? Yet they say that the housing market is the motor of the economy. How do you square the two? If you really believe land doesn’t matter, make over to me some city centre land titles. As for George being derided by Marx, that is a good recommendation. Sorry, the account you are giving of the economic process does not hang together. The fact that it is the standard and generally accepted one explains why we have got into the present pickle.
Henry, I am intrigued by your analysis, but I think you have some flaws to resolve.
The London Underground example is not rent of land – its just a licence to busk. The fact that there is a waiting list demonstrates that they have the price wrong! I am sure that Dollis Hill is just an etc, but you might say the same about Wembley Park – its location and timing!!
“You cannot run an office unless you are in a location with decent broadband”. Your just making this up. Don’t know what decent broadband is, but internet access tends to follow demand, rather than drive it, unless you want an office in the middle of nowhere.
You furniture industry example is interesting from an historical perspective, but I think the world is somewhat different now, and where you locate is much more complex than this analysis describes.
And your house price analysis is also much too simplistic to be of any use.
The London Underground example is a clear example of the value of location. Other things being equal, a busker will collect more in an hour at Victoria, the busiest station on the network, than they will at Vauxhall, a couple of stations away. Nobody would bother busking at places like Gants Hill and it is probably just about worth doing it at Hammersmith. “Just about” is the least someone will accept, and the figure probably tracks the minimum wage. Thus Hammersmith is the marginal location.
The point here is that any earnings above what can be made at the margin are due to advantages of location. This is nothing other than economic rent as described by Ricardo. The fact that LUL charge a licence fee means that they have chosen to leave the economic rent with the performers, probably for the sake of simplicity. But note that it would be possible in principle to charge different fees for different locations and there would still be takers. Note also that because a licence fee also becomes chargeable for the use of the marginal location, the additional cost reduces the takings below the acceptable minimum and consequently the marginal site goes out of use, thereby establishing a different margin, a better site becoming that where the takings are the least that a performer will take.
Decent broadband does indeed follow demand, but all I know is that just ten miles outside Gothenberg the connection, using 3G, is flaky. Which has all sorts of implications, like not being able to download and transfer large files, not be able to use Skype, not being able to stream video, aggravation over getting a connection at all, etc. You would not want to put a business there that depended on it. Three miles closer into town, people have broadband. The presence or absence of this service will have a definite effect on land values, wrapped up in house prices.
Of course the world is more complex than the furniture industry analysis describes, but land value still depends on access and other infrastructure. Docklands was not viable as a financial centre until the Jubilee Line extension was built. This cost £3 billion and added in aggregate about £10 billion to land values.
How is the house price analysis too simplistic? Identical houses sell for different amounts and can be let for different rents, depending on their location. The value of a house is the cost of the bricks, mortar and labour needed to put it together. Anything more is, by definition, land value. It can’t be anything else. Call it scarcity value if you want but it is the value of the site, stripped of anything that may be standing on it.
[…] made what seemed to me a glaringly obvious comment on this blog and I got the most extraordinary […]
Henry, it’s just amazing the ignorance there is about land as an economic entity. But pick up any economic textbook and see what there is to say about it. Absolutely zilch. It’s true that land is invisible once it’s built on. But the ignorance is dangerous because it will compel us into continuous boom/bust cycles. The whole current crisis can be described simply as unregulated credit creation piling into a dysfunctional land market.
Ian B: The point is, in an advanced economy land ownership just doesn’t matter very much.
Try telling that to the people of Merced, California being kicked out of their homes by the banks! The “advanced” economy of California (arguably the most advanced in the world) cannot allocate people to houses remotely rationally. The economic value of homelessness and empty houses (becoming vandalised or crack dens) is much lower than homed people, cared for houses. Capital destruction like this is never rational for an economy. The banks advanced credit money to home owners based on the security of land ownership. The occupiers borrowed the money based on the income flow and anticipated capital appreciation of land. The collapsing state finances, homelessness, property destruction is centered on the land ownership issue. Rather than irrelevant, it’s demonstrably at the core.
And when did land ownership stop mattering much? After the invention of the plough? The steam engine? the transistor? the Internet? England/Ireland in the 19th century was an advanced economy, but it didn’t stop the mass starvation of non-landowners while the land owners feasted! The land owners used violence and threats of violence to ensure continued exports from starving landless.
Ian B: Resources don’t matter. What matters is how much value you can add, that’s all.
Actually the value you add is almost entirely irrelevant. Prices are what determine the exchange of goods and services, not values. Prices are generally determined by markets. Market power and structure depend on monopoly, not value. Those holding monopolies tend to charge prices far in excess of costs, provided the value exceed still the price. A corner shop or post office often adds enormous value. Without it, people would have to drive, plan or do without. Perhaps 200 properties rise in price an average of £5000 each. That shopkeeper adds £1m of market price to the housing, and another £1m to vacant plots nearby. How much value did the shopkeeper add? Does it matter to the shopkeeper? Does it matter to the resource owners (land in this case)? To the economy?
The answer is that the value added by the shopkeeper matters. But not to the shopkeeper. It matters to the home owners, the land owners, government, banks and the economy. So the resources (land) matter in the distribution. The value added by the shopkeeper matters little to the shopkeeper. Their return is in the markup of goods from wholesale to retail at that location. The wholesaler will charge more (because of increased transport costs), while the retailer will have to cover shop rent, taxes and home rent (from the land owner), but be constrained in prices by competition from nearby villages. If the retailer is lucky, they can make subsistence returns (less than minimum wage) on their shop delivering £2m of resource price uplift, adding value in excess of £100k per annum.
In due course, the banks will advance new credit money to home owners secured on their land (resource) and buildings. The occupiers will pay for most the value added by the shop in bank repayments or home rents. The value added by the shop is shared between the resource owners when the shop is opened, and the financial institutions staff and shareholders.
What I find interesting is just how polarised the discussion of these topics is. Some people here consider it beyond doubt that resources (especially land), credit creation policy and the structure of taxation are key determinants of poverty, stability and prosperity. Others consider them matters of little importance or relevance. Why does it seem so hard to communicate across this gap?
Unusually, on the substantive point of the blog entry, I agree with TRUK this time.
Adrian said “Prices are what determine the exchange of goods and services”. Hmmmm. Actually the exchange happens because you have a willing buyer and seller. If you have a big vat of milk to sell you will look for the best price you can get but you have no choice over the exchange, unless you really like milk. So price is not the cause, but rather an outcome.
And “Market power and structure depend on monopoly, not value. Those holding monopolies tend to charge prices far in excess of costs, provided the value exceed still the price. ” Double Hmmmm, but not really. A monopoly supplier might have the benefit of no competition, but there still has to be a willing buyer. Why do you think cost has anything to do with it? Surely the point is that competition will drive price down to a level such that efficient sellers can make a return commensurate with the risk.
Your analysis of the value added by shopkeepers is quaint nonsense, but I am struggling to see the point you are trying to make