Monday, March 4, 2013

Economics etc

Originally posted 7 July 2012

Malign economics, or more properly its malign political abuse is the cause of the economic and social problems in the United Kingdom today. Banking crises, civil unrest and tax avoidance are all symptoms of a far deeper problem: the centralisation of power and negation of personal responsibility.

Following the publications of Alfred Marshall’s Principles of Economics in 1890 and later Paul Samuelson’s Economics 1948, neoclassical ideas have dominated the discipline of economics. Elegantly embedding mathematics and Euclidian geometry in the study of political economy, neoclassical economists created a ‘science’ of scarcity. Consumers, producers and the government are pitted against one another, each performing nimble calculus under conditions of perfect information, perfect competition, rationality and unbounded self-interest. The models divorce the economic from the social and step over the contextual issues which weighed so heavily on the scholars of classical political economy such as Smith, Marx and Mill.

The illness

Ignoring social institutions and regarding individuals as mere sumps for utility is a useful abstraction and has given us many valuable insights. As Mill wrote, ‘the first object in every practical discussion should be to know what perfection is’. But its application in public policy has been disastrous. It has led to centralised control, arbitrary performance targets, obscure tax schedules and welfare dependency. Economics focuses on the margin and so too has public policy.

For example there are currently 5.4m people in receipt of an out-of-work benefit.[1]Welfare represents 15% of an ever-growing public expenditure outlay; more than is spent on education and just less than is spent on health care.[2]This in itself is just unfortunate. What is ruinous is that there is no link between social insurance payouts and contributions, no ‘conditionality’. Benefits are seen by many recipients as simply a lifestyle choice, a right, rather than a safety net (as in Beveridge’s original conception). A sacrifice principle approach to welfare has bestowed a right without responsibility, and last August’s riots were a reaction to the (perceived) withdrawal of this ‘right’. What’s more, there are feedback effects into other spheres of policy. For example, work by economist Ronald Cummings[3] has shown that where individuals perceive paying tax as a fair fiscal exchange they are less likely to avoid/evade. Moral hazard permeates the entire economic complex if individuals are relieved of responsibility for their actions. The state spends nearly 50% of gdp and as long as central government is deeply enmeshed in the provision of local services this proportion will continue to grow.

The cure
Competition is not a state of affairs but a process of discovery. Price rarely reflects marginal cost and profit is not exploitation but the signal which drives resources to their best use. Information is disseminated and no single agency ever has access to all of it. Those most proximate and most affected are able to make better decisions than those removed and distant. These are the insights of Austrian economics. From the insights of behavioural economics we know people are highly susceptible to cognitive bias and myopia and so are unlikely to act in the ‘perfect’ way the textbooks purport. Together with the work of economists such as Amartya Sen and Martha Nussbaum they call for a capabilities approach to policy. Services should be provided locally and people should be allowed to compete free from the coercion of technocrats. Above all growth must be allowed to happen organically, without the short-termist, inevitably unstable inducements of government.

[1] (February 2010) The Poverty Site
[3] Cummings et al (2007), Tax morale affects tax compliance: Evidence from surveys and an artefactual field experiment.

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