Thursday, August 07, 2008

A Top Economist Writes

It is the nature of journalism, even pieces written by top economists, for the pithy remark to take the place of accuracy or meaning. Here are three examples from an article in The Guardian (UK) HERE:

Turn left for growth”

“In contrast to the right, the left has a coherent agenda. It's one that offers not only higher growth, but also social justice”
“A year in prison can cost more than a year at Harvard. The cost of incarcerating two million Americans – one of the highest per capita rates (pdf) in the world – should be viewed as a subtraction from GDP, yet it is added on

Adam Smith described wealth as the ‘annual production of the necessaries, convenience, and amusements of life’. Thus all that is produced ina year – whatever it consisted of, whether it was approved or not (and Smith had his views on what was approvable), and whatever people spent their money on out of their income, savings, or borrowing, added together constituted a measure that year’s wealth.

How then can the expenditure on prisons be ‘viewed as a subtraction from GDP’? The products and services are real, they are produced in the economy, and they would be noted if they were not produced, therefore they are part of the GDP. That the outputs consumed might be 'better' spent elsewhere (make that two-and-a-bit Harvards in the economy instead of one, or, if you like, close Harvard and more than double the prison service) makes no difference to the amount of GDP that year – though it might affect future GDP.

If the annual output of the ‘necessaries, conveniences, and amusements of life’ is reshuffled, or the profits are moved from investment in expanding future output to failed projects instead of profitable enterprises, prodigal consumption instead of frugality, unproductive expenditure instead of productive expenditure, future GDP may be lower. Whatever is done with the elements of the GDP in any year is included in that year’s GDP. The author should (does!) know that but it's only journalism so no harm done.

The right often traces its intellectual parentage to Adam Smith, but while Smith recognised the power of markets, he also recognised their limits. Even in his era, businesses found that they could increase profits more easily by conspiring to raise prices than by producing innovative products more efficiently. There is a need for strong anti-trust laws.”

Careful with glib solutions. Competittion breaks up monopolies. However, it’s what happens next that is difficult. When monopolies are broken there is dislocation and there can (will) be hardship. Adam Smith recognised this in Wealth Of Nations (WN IV.ii.40-45: pp 468-72).

In modern time in the UK, the governments of the day prolonged the monopolistic practices of businesses, large and small, by continuing with prohibitions, protectionism, and tariffs. They still do with mercantile policies. The Left are the fiercest defenders of jobs, at least those in Britain (and sod the lack of jobs elsewhere) and Rightwing governments have been no better at accepting the decline of high-cost, low productivity businesses, if the owners and the workers wave a union jack. Both ignore, in Britain's case the need, as Smith put it, 'to endeavour to accommodate her future views and designs to the real medocrity of her circumstances' (WN Book V.viii.92: p947 - the very last paragraoh of his book). What is the cost to the economy in Britain's 'world role'?

How many millions were poured into the cotton, shipbuilding, steel, coal, and vehicles, with damn all to show for it once the inevitable became real. Those millions released as investment into the rising industries and services – not, please not by government search for ‘winners’ - by abolishing corporation taxes, taxes on savings, and penal tax rates on the poor, would have done the job of transformation more humanely than what was imposed by Left and Right.

During the Great Depression, similar arguments were heard: the government need not do anything, because markets would restore the economy to full employment in the long run. But, as John Maynard Keynes famously put it, in the long run we are all dead.”

War did for the Great Depression what no economic theorists dreamt of drawing too much attention to for obvious reasons – which insane person would ever recommend wars to put right what politicians and those who influence them have mucked up with their short-term non ‘solutions’?

Wars are great mobilisers of capital and labour, which when there is under utilisation and substantial unemployment, there is substantial room for expansion; when there is full employment, wars create the Great Inflations.

The trouble is carrying on Keynesian remedies at full employment – if its difficult to be sacked because of restrictive labour laws, there is no appetite for innovation, technological change, or being competitive. Leftwing State legislation has done and does damage to the economy as much as monopoly ever did.

The fact that in the ‘long run we are all dead’ is true whatever policies by whichever economist we choose to listen to. It is a typical one-line quip that Oxbridge professors are known for, but not very meaningful.

If the author of the above article believes that the today’s Left has better answers than the soon-to-be yesterday’s US Right (probably the exact reverse in the UK and France) and he expects an incoming President in the USA is going to ‘make it better’, then he, and the President elect, is in for a disappointment.

And who is the author of The Guardian article?

Why none other than Joseph Stiglitz, of course! Winner of the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (2001), the economists’ 'Nobel Prize'. So he must know what he is talking about...


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