I love this from the Guardian this morning:
A strong and properly regulated free-market economy is the only way to guarantee higher living standards, Theresa May will say on Thursday as she contrasts her economic approach with the call for more state control made by Labour at this week's conference.
All the problems May faces are to be found in the inherent contradictions in what she is saying.
I do not think that anyone doing serious politics really denies that properly regulated markets have a role in society.
Nor does anyone that I know deny that they generate wealth.
But they do not deliver higher living standards for all: a fact that is especially well proven in the USA and now increasingly so in the UK, where in both cases they have delivered massive growth for a few and none at all for many.
And we do know that the Conservatives have been very poor at market regulation: they wanted more relaxed market controls before the 2008 crash.
They also oppose level playing fields in tax whilst their chosen low tax systems for the wealthy encourage inequality, which is now known to be very bad for growth.
Their attitude to tax havens is support them behind a veneer of supposed measures to increase transparency that may well be ineffective in practice.
And as for their measures on the ground, Grenfell Tower was the tragic measure of their failure.
That is the reason why we need more state control.
The reason for it is to challenge monopoly abuse, ensure that essential needs are met when market choice cannot deliver, and to deliver the regulation that is the essential prerequisite of effective markets. Those are the pre-conditions for improved living standards for all but a tiny minority.
And only Labour is, in the UK national arena, talking about delivering that regulation right now. As a result, rather bizarrely, they're offering what May says she wants. And that's her massive, insurmountable and paradoxical problem.
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Yes indeedy.
We need more state control, not because we’re closet communists, but because without a sound societal structure the beneficial elements of the market can’t function to provide higher living standards.
There is an inherent contradiction in lauding the merits of ‘free enterprise’ while simultaneously admitting the need for regulators.
Off Topic I notice Wolfie Schauble is slated for a new job. I don’t know what to make of that.
Would it be too much to expect that wise counsel has decided that Shcauble’s fanatical devotion to austerity is a factor in the rise of Germany’s extreme right, and that any sensible and measured response starts with moving him?
He’s going to be Speaker
The UK tax system is more ‘progressive’ than some countries that some on the left like. Norway for instance has flat 25% income tax for investment income compared with around 50% for ‘earned’ and Portugal its give or take the same story. Here it is broadly the same over the higher rate amount. So unless the target is those with more modest ‘unearned’ income people do not really have much to complain compared with those 2 countries. Even the investment income surcharge since abolished only kicked in over £7K back in 1985 inflation adjusted it would bigger than that by a good margin I would imagine.
Or italy a flat 20%. Or Bolivia and Venezuala only have 13% (for investment income)-25% and 35% respectfully. Or the fact the estate tax in the uk kicks in comparative lowly and the rate is comparatively high while many in just european states do not have this tax at all and ones that do such as Germany far less (ie equivilant rate for equivalent exemption 20%) and while you address the super rich not paying most on the ‘left’ do not and simply decry the last cut in that tax.
You are ignoring the impact of NIC and the opportunity many have to exploit it that matters in the UK
Well unless you can correct me. The big difference between earned and so called unearned income. is between £8k-£45kish (ie higher rate band) due to lack of NI which means ‘unearned income’ is taxed 12% around those amounts. However above the higher rate its only 2%. Therefore unless the main target is the more modest unearned income folk is the 2% really worth complaining about? If it was those other countries I mentioned I would say there definitely is a huge disparity but here not at all.
I would add not all earned income truly is earned and not all ‘unearned’ income is unearned I would add such as a someone like a politician getting paid hundreds of thousands for a quick in and out speech in just 30-60 mins getting the same amount and should pay less tax than a say a landlord who does all the maintenance of his/her properties such as painting/maintenance/safety compliance arragements etc etc and tenant issues all year round
You are ignoring employers NI
Employers NI? Call me skeptical but investment income/being a landlord means its a indiviudual affair more akin to self employment and not to do with the costs of recruiting/hiring staff/ to say wealth is undertaxed cuz it does not bring with it employers NI and Employees NI seems very opaque.
Large amounts of employment income is reclassified to get round NI
Then the problem is around employment practises from businsses and not earned income and so called unearned then?
Yes
And self employed practice
And the ability to arbitrage
It is remarkable how easily such ill-conceived, confused and feeble propositions as “a strong and properly regulated free-market economy” can be presented in (what passes for ‘informed’ opinion in) Britain, as if they made the least sense; or any sense.
The proposition is an oxymoron. You can have your cake and eat it. You can make anything you say mean anything at all (the sole purpose of modern British politics); or mean nothing at all (the sole purpose of modern British Government).
Hi Richard,
Sorry this is a bit off topic but an accountant has challenged your claim that the portion of the national debt that is owned by the State under QE bond purchases is interest free.
https://www.theguardian.com/politics/2017/sep/27/labour-should-be-wary-of-the-magic-money-tree
I am not sure I really understand his reasoning. He says that we pay interest at the BOE rate which is currently 0.25% but who do we pay the interest to?
Could you clarify. Thanks
A letter is on its way to the Guardian
If they do not publish it then it will appear here
I can say he’s wrong for three reasons though
Thanks for taking the time to reply and I look forward to reading your response.
Yes, and as I recall one of your readers is in possession of a letter from the BoE explicitly confirming the fact that the QE debt is interest-free (not that it should need confirming). How embarrassing that might be for Mr Wheatcroft. What on earth was he thinking?
I also notice that that the familiar Mr Worstall makes an appearance in the same location and effectively endorses you by limiting himself (rightly or wrongly) to a very minor and technical point of difference. That in, its own way, is quite satisfying.
Blog to come soon
I’m not sure ‘markets’ simply have a ‘role’ in society.
They are an innate chunk of what society actually is – buying and selling on a voluntary basis is one of the things people do together as a social activity. And have done in just about all but the most isolated human societies going back to ancient times. From Russian friends, I understand there was plenty of free market stuff happening during Soviet times, albeit largely unofficially.
Asking whether markets are good or bad is about as meaningful as asking whether breathing is good or bad. It doesn’t matter – it is what we all do.
I beg to differ
How we regulate markets and what we permit to be traded has enormous consequences
I’d probably put myself down as someone who likes free markets, and hang around a people with similar views to my own.
I haven’t met a single person who truly believes in ‘zero regulation’ or zero state involvement (eg to prevent monopolies). Not one. The issue usually comes down to unique personal preferences on where to draw the line. You say tomayto, I say tomarto, that kind of argument.
Can you nominate any serious commentator one who actually believes in zero regulation or zero state involvement? I’m not asking you to name nutters – but people generally taken seriously.
Try reading US think tank output and James Buchanan
Mr Leonard, notice how ‘markets’ in your first sentence becomes ‘free market’ in the fourth sentence. It is a neat elision, but it will not do.
I think you would need present a much more rigorous argument than this to make a case. Indeed, even if we are to accept wholly your argument about “innate” “stuff” (perhaps you can see where I may be going with the use of the word rigour?), I do not see in what way anything you have written actually addresses (or even approaches) the meaning of the concepts of ‘free markets’ and ‘regulation’ or how they interact, or the consequences of the interaction on the underlying resilience of the concepts.
Sorry John, I assumed my use of the word ‘voluntary’ in my first comment is interchangeable with the word ‘free’. That’s what I mean anyway – where buyer and seller make voluntary decisions.
You might say the decision to buy medicine when sick or food when hungry is not ‘free’ or ‘voluntary’. It is probably not free or voluntary. I’m just distinguishing it from the concept of ‘state coerced with the force of law’.
What about monopoly enforced?
Yes, that is a coercion too – in my 2nd post I said there was a place for the state dealing with monopolies.
Forgive me Mr Leonard, I am not trying to be pedantic, but your second crack at this is frankly not doing much to advance the endeavour. If I understand your attempt at elucidation of the idea; it doesn’t work: to buttress one loose word “free” with eight words “[not] state coerced with the force of law”, loaded, laboured synonyms in search of plausibility. This does not seem to me to take us anywhere (I will pass on parsing what that expression may actually mean, or could mean).
A reasonable, sound, crisp and trenchant alternative to your take on this was supplied below your contribution, by Mr Adams: three words that are more accurate in representing reality – “regulated market economy”.
Somehow, however I do not think that expression works for the ideologists who are trying to turn economics and economic life; what you rather comfortingly call “what we all do”, into a religion; complete with dogmatics.
Tom Leonard –
“Asking whether markets are good or bad is about as meaningful as asking whether breathing is good or bad. It doesn’t matter — it is what we all do.”
You’re absolutely right… trading with each other is as natural as breathing. It’s just something we do.
But we have traffic congestion charges to ease air pollution… international treaties to control carbon emissions… smokeless fire zones… green initiative to plant trees… in short, there are umpteen different forms of regulation for the air that we breathe.
And we’re not the only ones – think back to what the Chinese did prior to the Beijing Olympics.
So yes, trading is as natural as breathing. And if not efficiently and appropriately regulated, it can be just as risky.
Food for thought 🙂
Well said
Tom, what you say, viewed from a cynical perspective is quite true.
People trade. It starts in the playground – my generation traded marbles, my parents traded cigarette cards. Swaps – a barter system – primordial trading. It’s hard-wired human behaviour. Participants quickly learn the laws of supply and demand and relative value because there are always prized rarities.
No ‘money’ was involved at this early stage. I suspect money transactions nowadays start much earlier because children buy the collectibles to trade with. I was disconcerted when I discovered this a number of years ago. Collecting has become marketised and the children with the wealthiest (or daftest) parents win the game. And it is a game: it’s competitive rather than cooperative.
I’m pretty sure that what I see from my doorstep (while I’m having a cigarette) is a bit of ostensible free-market entrepreneur activity. People are trading drugs through a window the way, as a child, I used to buy bottles of orange juice from the dairy at the end of the street when visiting my grandparents. We got to drink it in shot glass portions, because it was special.
But what I’m seeing on a daily basis now isn’t a free market of voluntary trading. Setting aside the issue of the distortion of the price by the element of addiction, which is irrelevant here. The government is cranking-up the price by keeping the market arbitrarily illegal. This introduces an element of risk for dealers at every level of the network which quite reasonably attracts a price premium. Employment protection in this massive industry is worse than poor it’s a negative quantity.
This is a market which cries out for regulation because the social costs through policing , judicial/legal costs and the ludicrous cost of imprisonment; a half decent hotel would be cheaper and much more likely to be reformative. We’re looking at a huge burden on the public purse. The cost of actual and collateral damage in turf wars is incalculable and includes loss of life.
Governments decline to regulate this market because the big profits are made by laundering the profits I suggest.
Another classic example of private profit and socialised costs.
Never let it be said that the tax system is not redistributive. As so often is the case, the ‘common sense’ narrative has it upside down.
When the leader of a state is rolled out in support of a system many now know is not working, I hope that it means that someone somewhere is very worried.
Good.
Sam is also ignoring those of us who don’t earn enough to pay income tax, but pay a very high percentage of income in NICs, if we want to maintain state pension. This is about to increase with the abolition of Class 2 contributions.
It was this quote that really shocked me.
“A free-market economy, operating under the right rules and regulations, is the greatest agent of collective human progress ever created,”
First, why not just say “regulated market economy” then in which we need someone – us, the state – to do the regulation.
Second, the idea that markets are the GREATEST agent of progress is pure comedy. As Tom says trade is just what human do. Why not say language is the greatest agent of collective human progress ever created.
Art, science and medicine that are main agents of human progress, and the ability to cooperate rather than kill each other!
Agreed
I think I’m agreeing with what you are saying about the ‘greatness’ of trade.
The current crop of free marketeers are pretending they’ve invented something. rather as the US neo-cons a few years back were pretending the ‘New Right Economics’ was a sudden novel revelation.
Flints and Bronze axes were traded over vast distances (quite improbable distances by my reckoning as a non-enthusiastic walker).
What ostensible ‘Free’ marketeers don’t seem to acknowledge is that a) there are no free markets and b) in a free market the default and eventual ‘currency’ is violence.
Talking about Grenfell Tower, the MP Emma Dent Coad was a local authority rep on the Board of Kensington and Chelsea TMO when the refurbishment plan was agreed. With your Labour Party connections, do you have any insight into whether central government put any pressure onto them re materials?
I have no Labour Party links
I take objection to the word properly in the opening quote “A strong and properly regulated free-market economy”.
Without being partisan, well perhaps a little to the left of centre, surely we should take exception to the deliberate misuse of language by politicians? It is inconceivable that May believes that her party would ever oversee the regulation of markets for the general well-being of all. Properly, in a Conservative context, surely means that which benefits the minority, those who can move sufficient money to control the the “free” market. It is in her best interest to consider what she needs to say in order to stay in power (good luck with that), and how she can reward the monied elite that pay the piper.
I am with Naomi Klein. The apparent rise of a social perspective in politics is to be welcomed, and with open arms. Even if we do get bogged down in resolving consensus I am heartily sick and tired of tipping my hat to the alternative, discredited, redundant, “properly” regulated free-market shambles that really does benefit the few at the expense of the many.
There seems to be a bit of a push from the Conservatives about Capitalism etc. I feel they are trying to draw a line in the sand and paint a picture of Labour being some kind of anti capitalist/anti free market communists (boo!) and Conservatives who are pro free market which obviously means loads of money for everyone (woo!). I don’t know, I’ve just based this on May’s speech at the BoE earlier, but also this rather baffling article…
http://www.telegraph.co.uk/news/2017/09/28/theresa-may-admits-tories-lost-election-werent-ready/amp/
Thanks for that link joe Starbuck.
Risible isn’t it? Theresa May springs an unnecessary snap election, at great public expense, in an attempt to control her own party then whinges about not being ready for it.
I don’t know how to make a link here, but this sums it up nicely:
https://www.google.co.uk/search?rlz=1C1CHBD_en-GBGB754GB755&biw=1350&bih=610&tbm=isch&sa=1&q=chris+cairns+cartoonist+Lame+duck&oq=chris+cairns+cartoonist+Lame+duck&gs_l=psy-ab.12…86926.90486.0.92913.10.10.0.0.0.0.102.733.9j1.10.0.dummy_maps_web_fallback…0…1.1.64.psy-ab..0.0.0….0.SnfpSq9NVfA#imgrc=mx5If0268mVtvM:
Exactly, but what was quite interesting was her saying that there needs to be more education to young people about the benefits of free markets and ‘sound management of the economy’. The Cons are obviously concerned over Corbyn’s speech at the conference and need to double down their message of balancing the books and how frivolous spending will ruin the economy. Perhaps they could send a few tweets out to those young folk, maybe get some snazzy clipart’s together to make the message look hip, I’m sure that will connect with the 18-25 demographic.
Joe you need to back-pedal through this blog quite a long way.
Conservatives are certainly rattled and not before time.
The claim to be balancing the books is spurious at best and deceitful. What ‘frivolous’ spending are you thinking about?
Young people are probably for a large part, having seen the conservative policies for the past eight years shutting down the economy and removing their life prospects, going to be difficult to persuade that Conservatives have any ‘educational’ wisdom to impart by tweet or any other medium.
Hayek, I believe, thought Statism would lead to Serfdom. I wonder if he ever considered that competitive free markets might lead to the exact same place. In a broader view (than just western liberal democracies (sic)) we see much of the rest of the world reduced to effective serfdom through such “liberal” bodies as the World Bank and the IMF – free-up your markets (so we can plunder your natural resources), sell off your assets (to us), take this aid and buy our products – a shiny new war machine can be yours too.
We seem to need gods. As the old ones lose their credibility it seems we must substitute new ones to replace them – and if you are an economist the name of that god is often “free market”.
I am a fan of markets. I think they are a great invention, of the order of alphabets or wheels.
But markets are not gods. And when you make them into gods disaster is pretty well sure to follow. As we have seen.
As for “free” markets, there is no freedom except within limitations. If we want to play a game the first thing we must do is invent some rules we agree to follow. Otherwise we can’t play a game we will all enjoy. If I play chess I am free to chose whatever move I like, so long as I make a move that is allowed by the rules of chess. If I make a rule that isn’t allowed in those rules we’re not playing chess anymore. It is the rules of chess that make me free to play it.
So “free” markets aren’t actually markets any more. Without an agreed set of rules for the game “market” there is no market. And the set of rules we use for markets is called “regulations”.
So, if someone is for lifting the “burden” of regulations on markets I ask, “well, would you support the deregulation of football”? Let the players do what they want, let the “free marked” rule the game of football. After all, if “free” markets are self regulating, then so should games such as football be self regulating, surely. So, let’s deregulate football. Let the players do whatever they want. And what could possibly go wrong with that?
“encourage inequality, which is now known to be very bad for growth.”
I’m actually quite well read on what the IMF and OECD have said about the relationship between inequality and growth, and the effects are bad by tiny amounts or neutral in the studies I’ve seen. And they exclude the countries with non-market economies like NK, Ven, Ecuador etc from their analyses where the correlation runs the other way : in other words the more equal they are the poorer the society, and the more people would like to leave.
I expect you are more widely read than even myself, so I was wondering what’s the best paper you’ve read that supports the claim that inequality is not just slightly bad, but very bad for growth.
Genuinely wondering.
A good question requiring an answer but I have not got notes ordered to do so quickly and easily to deliver it
For that I apologise
@Paul Hunt – to save Richard some time you could try Googling your question. I find that usually works – lol 🙂
@Paul Hunt
Here you go:
“We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth–that is, when the rich get richer, benefits do not trickle down. This suggests that policies need to be country specific but should focus on raising the income share of the poor, and ensuring there is no hollowing out of the middle class.”
from: IMF Staff Discussion Notes, “Causes and Consequences of Income Inequality : A Global Perspective”
https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Causes-and-Consequences-of-Income-Inequality-A-Global-Perspective-42986
That took 90 seconds to find on Google. There now. Sorted.
Thanks
Paul Hunt wrote:
“I’m actually quite well read on what the IMF and OECD have said about the relationship between inequality and growth, and the effects are bad by tiny amounts or neutral in the studies I’ve seen.”
Paul, can you give some links to these studies as from what I’ve read the opposite is true.
e.g. see here: http://www.oecd.org/newsroom/inequality-hurts-economic-growth.htm
“09/12/2014 – Reducing income inequality would boost economic growth, according to new OECD analysis. This work finds that countries where income inequality is decreasing grow faster than those with rising inequality.”
“The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key: a lack of investment in education by the poor is the main factor behind inequality hurting growth.”
“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate,” said OECD Secretary-General Angel GurrÃa. “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”
“Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand over the past two decades up to the Great Recession. In Italy, the United Kingdom and the United States, the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened, but also in Sweden, Finland and Norway, although from low levels. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the crisis.”
The above doesn’t really support your conclusion does it?
Thanks
I think we’re beginning to learn quite a lot about Mr Hunt
First, for those who have not read him, can I recommend Michael Sandel’s ‘What Money Can’t Buy’ as a thoughtful provocation on where markets are appropriate and where not.
I don’t want to get into semantics about whether markets are ‘strongly, ‘properly’ or whatever regulated. I’m probably with Charles Adams. Maybe a better question is about in whose interests they are regulated. I suspect that most contributors here would agree that that balance of regulation in the neo-liberal world has strongly favoured the business world rather than the citizen. Thats been most pronounced in the finance sector with the disastrous consequences we’ve seen.
However in my experience, there plenty of companies who are happy to have regulation and standards because they genuinely want a level playing field, on which monopolies cannot squeeze out other, often more innovative players. They also have no particular interest in abusing the consumer and yes, Im well aware that there are glaring exceptions. Finance, pharmaceutical and privatised utilities for just a start. The kind of people who are keen on Brexit
Some contributors here seem to be against markets in any form. In which case I’d ask what they would propose as an alternative? Ideally with some real life exemplars that are relevant to the UK. I’d hope that its not the kind of socialism that we saw imposed in the Soviet era, to which some of Corbyns inner circle seem to be attached. That was pretty conspicuously unsuccessful, economically, socially and environmentally. Travel around some of those countries and see the legacy.
The challenge is come up with something genuinely new, that reflects the challenges we face now and in future. Neither May’s Tories with the same old neo-liberalism nor Corbyn’s Labour with reheated ideas from the 70’s have risen to that challenge. To be coarse, both are polishing turds though I don’t doubt that Corbyn’s intentions are more creditable than May’s
The ideas are out there – Richard’s are just one example and I’d list others. People who are not hidebound and locked into old ideologies that are not longer appropriate to the world we face in future. Corbyn’s team showed signs of being open to those ideas – for me it was a real disappointment when it became apparent that they weren’t interested in challenges to their thinking
Robin
Much to agree with
I am concerned some in Labour are anti-market per se. Some are close to McDonnell. That in my opinion is an error.
But the mixed economy post Neil-liberalism has no visionary
Richard
I think you may be wrong about the Soviet era. Scheidel argues in “The Great Leveller” that in fact the Soviet Union and some other similar states achieved great reductions in inequality and other achievements, but at great human cost. Obviously, his argument is more sophisticated than that bald statement, but the Soviet Union was not all bad and we should be a little more nuanced in our judgements.
I think Orwell had to say something on the subject of ‘equality’ on the Soviet era….
Getting back to the Guardian article about Teresa May’s speech, John S. Warren (above) was quite correct about her having her cake and eating it too, and he is not the only one that has noticed. One BTL comment in the Guardian made the following observations:
The article notes that:
‘May has favoured a more interventionist approach since succeeding David Cameron as prime minister in July 2016, announcing support for an industrial strategy and saying that her mission was to create a Britain that worked for those “just about managing” as well as the better off’
So she is not distinguishing herself from Corbyn so much but actually moving closer to his position.
The article also notes that:
‘the prime minister will insist that there are benefits from an open and innovative economy — provided it is reformed and properly regulated’
Rather than “contrasting her approach” she has increased the emphasis on proper regulation.
The idea behind this incoherence (or partial self-contradiction) may be to disguise the fact that the PM is moving closer to Labour by pretending to “contrast ” their positions. At the very least there seems to be some attempt at having one’s cake and eating it too. Either way, there is no doubt now that the centre-ground has shifted.
I think your last comment may be right
But the divide is bigger too
[…] comment was posted on the blog late yesterday by someone called Ed Seedhouse, who I do not know, but it seemed too good not to […]
As far as I remember, Hayek formed his views from watching the rise of Nazism in Germany and Austria.
Hayek’s focus was on the evil that a state can do and we know what the Nazi state did to Jews, the disabled, the mentally ill, Slavics, homosexuals, the political opposition (it’s a long list of suffering).
In a way you can hardly blame him for his views but also I’m afraid it shows how a reaction against extremism can breed extremism itself.
Hayek (and Friedman – even Buchanan) have all in my view also been used by greedy people to justify their greed.