Tuesday, 2 May 2017

Beware Of Freaks Bearing Gifts

I have a serious question for you. How is it that in the year 2017 an aspiring Labour Party Shadow Chancellor can lead a Communist rally under a flag bearing the hammer and sickle in the heart of London on May Day, where some of the crowd apparently carried a giant poster of Joseph Stalin, with others repeatedly chanting ‘Marx, Engels, Lenin, Stalin’ - and yet this not only fails to make the headlines, but (even more alarmingly) a large proportion of our youngest and so-called brightest people are right behind the movement?

What? That's crazy - Marxist thinkers and dictators have repeatedly ruled over economic shambles after economic shambles and been responsible for millions of deaths through large scale murder, civil conflict, poverty and enforced starvation.

I know, you'd think we'd have moved beyond this level of dangerous nonsense by now.

So why haven't we then?

Because the poison is being offered as medicine in a way that brands it as something delicious. It's easier to serve up arsenic to someone if you give it to them in the form of a chicken Kiev.

Are you describing the Labour Party's election promises?

Yes, and we might as well get them done and dusted early on. Pretty much every policy and idea these Labour politicians will put forward is going to be based on three principal misunderstandings. The trouble is, they are misunderstandings that many people have already swallowed. They come in the following three sound bites, and you're going to hear them repeated over and over again in their election campaign. They are:

1) "We must challenge the injustices of inequality in this country"

2) "We want to make this society one that works for everyone, not just the privileged few"

3) "We need a government that will invest in jobs in this country"

Now, what's wrong with these statements is that they make absolutely no attempt to self-evaluate - that is, they fail to make even the slightest consideration that their claims are untrue at the base level. They begin with an automatic assumption that inequality is necessarily a problem that needs solving, that society is working for a few at the expense at the majority, and that governments can bring value to an economy with job creation.

Aren't these all worthwhile goals?

No they are based on huge misunderstandings about how an economy works.

How so?

Take the issue of inequality. A huge majority of the population seems to agree that inequality is a major social injustice, and that the poorest in society are getting a rough deal because of the increased wealth of those at the top (I've shown as best I can that it isn't the case - see my 'inequality' side bar over to the right of this page for more in depth reading).

Thanks, I'll read that later.

Good, so in the meantime, let me tell you about China, because China is the best example of a country that shows the flawed analysis of the Labour Party's rhetoric on inequality. China went from being hugely poor but not very unequal (in terms of the Gini coefficient measurement) to being much less poor but much more unequal. Using Labour Party logic, if inequality is the main problem then China was better off in the starvation years than it is now in the more prosperous years.

So a country's inequality isn't very important because it's absolute well-being that's the key thing?

Yes, but there's more, because the other important thing that people keep missing about inequality is that rising inequality inside countries is happening in no small part because global inequality is falling. The fall in global inequality is the thing that should most make us glad because it means the world's developing nations are doing better and people are struggling less and less.

So if Marxists like Corbyn and McDonnell really do espouse the edict "From each according to his ability, to each according to his needs" then they should be pleased because that is exactly what is happening with rising inequality in developing nations - the poorest people in the world are being made better off 'according to their needs' by the entrepreneurial investments of the wealthy job-creators in their countries.    

Given that entrepreneurialism and earners in the top quintile determine hugely the levels of inequality within a country, it is perfectly easy to see that in many cases the reason a nation is so unequal is that it is doing so well - i.e. there is a large economy in which to be unequal, but in absolute terms the nation's individuals are doing quite well. India, for example, used to have far less inside inequality because there wasn't so much money in the economy. The USA is the world's wealthiest country but also one of the world's most unequal. In terms of standard of living and material well-being, most people would prefer to live in the USA than they would India.

Interesting! Ok, so what about politicians as job creators, then - it must be good when politicians can invest some of our tax money back into the economy and create jobs, right?

I'd be very wary when politicians tell us they will "invest in jobs in this country". It's a nice sound bite that attracts voters, but if it were a liquid compound it would be made up of 2 parts linguistic dishonesty and 1 part not understanding the economics of jobs.

Please explain.

They use the word 'invest' because they don't want you to know, or often don’t know themselves, that the jobs they are talking about are not investments, they are costs. People get this when the thing in question is wood, or metal or plastic - the fewer raw materials you use for the same output the better. Yet the left seem to forget this when the thing in question is labour, ignoring the fact that jobs are a cost of doing something, and that increased efficiency occurs when we reduce jobs, not create them. The biggest clue that jobs are one of the costs of a project and not one of its benefits is that people have to be offered money to go and do them.

It's the old Milton Friedman story again - when the Asian official overseeing the canal digging project told him that the reason the workers were digging with shovels instead of modern tractors and earth movers was for the purposes of job creation, Friedman responded with the quip "If it's jobs you want, then you should give these workers spoons, not shovels."

Many jobs created are a benefit, of course - but they are not the kind of jobs that Jeremy Corbyn has in mind. His is exactly the sort of party that thinks using 1,000 men to dig a canal with shovels is more beneficial to the economy than using 20 men with tractors, because it creates 980 extra jobs.

Isn't that a slight exaggeration though?

A very slight one, but consider how closely it resembles the political narrative of our left wing parties (which these days includes the Conservatives too). In a normal market of supply and demand, jobs only get created if they provide value in the economy - that is, if they provide things for which people would voluntarily pay money. The only place in the economy where this condition doesn't have to be met is when politicians get involved.

In a supply and demand economy, the goods and services that people require will be provided by suppliers at prices beneficial to both buyers and sellers. The state has a different method; it takes the money we earn (about 60% of all our earnings when all taxes are factored in), keeps what it needs to fatten itself up, and then puts the rest towards paying people to do what they'd otherwise be doing in a supply and demand market. The state is an unnecessary middle man between the demand of buyers and the supply of providers, making these services more expensive in the process.

So without the state's involvement, these services would be provided at market prices, leaving taxpayers with more money in their pocket to spend on other things they want and need?

By and large, yes. A good way to see this is to think about what the state insists on providing - the schools and hospitals and social services and what have you. These things are only provided by the state in name only; in market terms they are being provided by teachers, doctors, nurses, HR staff, cleaners, caterers, care workers, drivers and numerous other individuals. The state can only claim to provide what individuals do actually provide with their skills and labour.

Whenever you hear a politician like Corbyn or McDonnell say they want to create jobs and invest in our economy, they actually mean they want to rob society of value and make us all worse off. To see why, ask yourself this: given how I've explained that individuals like doctors and teachers are the ones doing the jobs, not politicians - what possible jobs could politicians create that would not already have been created by market forces of supply and demand if there were a need for those jobs? Bear in mind we are not talking about services the state already provides, like defence, rule of law and road maintenance, nor about fattening up already bloated public services, we are talking about new jobs these politicians are promising they will create.

You got me there, I cannot actually think of any.

I'm not surprised. Let me expose a myth - politicians don't really create jobs, they only create vanity projects that rob society of value. To understand why, you have to understand that government spending on jobs involves not just the increased cost of doing so compared with markets (bureaucratic overheads, inflated prices), it also involves all the 'unseen' costs to society in the jobs that never get created.

Suppose a private sector firm can provide a service for £1 billon a year, and the government spending project goes ahead and does the same work for £1.5 billion - society rarely notices the loss of value because the £1 billon a year contract never gets seen on the account that it never happens.

So then what you also don't see is the half a billion pounds that now no longer gets spent on goods and service people actually want because it is has already been taken in tax to pay for the government's vanity project. That half a billion pounds extra expenditure is paid for with higher taxes, which plays out in citizens having less to spend on consumer goods, which lessens demand, which reduces employment and so forth.

Ah yes, our old friend the 'unseen' costs.

Precisely - but those costs extend even further than that. If the government doesn't get the half a billion pounds from tax, it can get it using two other methods: it can borrow the money, which is a debt that will be passed on to future generations in the form of higher taxes, and a move that will reduce available funds for other businesses to borrow, and put up the price of borrowing; or it can print more money, which will put the economy's goods and services up in price by a total of half a billion pounds and decrease purchasing power, which will hurt jobs.

It's a bit of an eye-opener isn't it?

Yes, and we're nearly done. The other way that politicians claim to 'invest in jobs in this country' is by spending public money on industries that are popular with voters - which often just means industries based in Britain. For similar reasons, this is a bad idea that robs society of value - not least because these industries would not need any public funding if they were thriving on their own market-based merits.

So if they aren't thriving it is better that they die and create extra unemployment?

Think of the 'unseen' again. Job losses and industry closures are almost always a sign of progression - either improved technology (more online customers and self-service checkouts), more efficient competition (goods cheaper abroad) or changing demand for substitutes (less demand for coal and paper).

My local MP was complaining the other day about Swinton losing 180 jobs to better technology. He doesn't seem to realise that the purpose of a successful economy is to kill jobs as well as create them - kill the value-draining ones and keep and create the value-creating ones. If you don't kill the jobs that no longer offer financial value then the jobs that do offer it are created more slowly, and sometimes not at all. It would be far worse for Swinton to go forward and function sub-optimally with approximately 180 staff members more than it needs in the current climate of digital proliferation.

The other big reason that some industries and businesses are not thriving in the UK is because they are thriving abroad - a fact that makes British consumers better off because we get better value for our money. On top of that there are also the moral hazards that come with politicians using taxpayers' money for propping up industries, and the opportunity costs in the shape of all the places the money doesn't get spent because of it.

These politicians are very good at using words and phrases that sound like they are offering voters things that will be of benefit to them. The reality is very different: they are empty sound bites, employed with deliberately misleading language, based on faulty logic and counterfactual propositions that would have a detrimental effect on the people they purport to help. Don't let their election promises for a better Britain fool you - they are trying to serve you a chicken Kiev stuffed with arsenic.