HOW MANY SUPPLY-SIDE ECONOMISTS DOES IT TAKE TO CHANGE A LIGHT BULB?
“None” argues NZ Journalist Jane Clifton in her recent article in The Listener on the ‘privatization’ of our electricity generation ‘companies’. “If market conditions are correct, the bulb will change itself”.
Setting aside the fact that our semi-state owned power utilities in New Zealand run on extraordinarily complicated EVA rules that allow them to play ducks and drakes with their capital valuations and game their pricing, in simulated rather than real competition, she has a point.
For myself, I term the pure devotion to markets that is an article of faith among the Neo-Liberal Right Libertarian economists: ‘One-armed Bandit Economics’. Pull the lever and the wheel of life spins. Anything other than an equilibrium solution delivers a line of lemons, whereas a line of $s at the sweet spot pours out a stream of cash.
Not of course that I am arguing against supply-demand analysis in general. The problem is that distribution effects get ignored – and these lie at the gist of the real-world political economy of market forces.
I used to work for the New Zealand Institute of Economics Research [NZIER], which is staffed with lovely, somewhat socially isolated, semi-autistic buffers who meet the Daniel McFadden ‘Everyman’ prescription of an Economist:
‘Sovereign in tastes, steely-eyed and point-on in perception of risk and relentless in maximisation of happiness through monetary reward’.
They were the very epitome of homo economicus. But one trouble that I had was reconciling their assessment of individual contributions to GDP per capita to the equally lovely but much less steely-eyed folk from the Intellectually Handicapped Children’s Society who wandered willynilly onto my bus as I made my way home to meet my boys at the school gates.
For as Daniel McFadden argues [across the population in general] ‘homo economicus is “a rare species”. Such that ‘what most economists consider anomalous is the norm - homo economicus, not his fallible counterpart, is the oddity’:
Which brings me in a somewhat circuitous fashion to Egypt in 1943.
This aberration of neurones was sparked by a recent article by Dean Parker in the New Zealand Herald dated 15th April 2013: ‘What did you do in World War II grandpa? Well, actually, I was appointed Prime Minister in Cairo’, at:
It reminded me that there was a strong Left-Libertarian movement among UK and Allied Servicemen during World War II which put income and wealth distribution issues much higher on the agenda. It led in fact to the short-lived formation of a distinct political party Common Wealth.
As good old Wikipedia explains for us Common Wealth was founded in July 1942 by idealistic British Liberals. ‘It drew on the egalitarian sentiments of the English populace and hence aimed to be more appealing to Labour's potential voters, rather than voters leaning Conservative’. The group called for common ownership, "vital democracy" and morality in politics.
‘Its programme of common ownership echoed that of the Labour Party but stemmed from a more idealistic perspective, later termed "libertarian socialist". It came to reject the State-dominated form of socialism adopted by Labour under the influence of Sidney and Beatrice Webb, increasingly aligning itself instead with co-operative, syndicalist and guild socialist traditions’.
One party proposal was that all incomes should be subjected to an absolute upper limit.
Another was Inheritance Restriction. And the Cairo Forces’ Parliament passed a Bill to this effect on New Year's Day, 1944, by a large majority.
Now these are ideas that seem evergreen to me.
And surely, if you are serious about homo economicus and the good that he can do for us all, not from his benevolence but the regard of his own interest, the last thing that you would want for him, from the point of view of society, is to trammel his enterprising spirit with inherited wealth and excessive rewards to his labours?
THE VALUE OF PREVENTING A FATALITY
Let’s take a short detour back to the wartime thinking of the Forces’ Parliament. The big difference between what the troops faced and what we face on a day-to-day basis is that they were avoidant about becoming one of the million Allied Forces combatants who were killed in WWII. Thoughts of death clarified the mind.
Exploring the economics of this takes us in an interesting direction.
Transport Economists like myself are well aware of the ‘Value of Preventing a Fatality’ concept. As its name implies, it attempts to quantify the cost to society of a life lost in road accidents, ‘as a measure of the aggregate willingness to pay for reductions in individual risk’.
It is if you like, the social ‘shadow price’ of your life and mine, taking account of average levels of income losses and all the community expenses associated with one’s premature demise by misadventure.
In the USA, a VPF is currently worth about $7.5 million.
During World War II, around 400,000 US lives were lost in the conflict. The numbers for the UK [including civilian casualties] were broadly similar.
Adjusted for inflation, $7.5 million in current dollars is the equivalent of about $700,000 in 1945 dollars. So, the loss of 400,000 lives had a social cost of around $280 billion in wartime currency. This compares to US and Canadian loans around $5.5 billion to the UK under the Lend Lease Programs [repaid incidentally with interest by 2006].
Coincidentally, the US National Debt stood at around $260 billion in 1945. Of course, all the bonds issued the US Treasury were honoured.
By contrast, the families of dead servicemen and women were never ‘paid out’ by the state to the full coin – theirs was a ‘shadow debt’.
As a war orphan, I cottoned on to this argument at an early age – and it has always made for a clear distinction for me between Homo Economicus and Homo Reciprocans.
Adam Smith himself did not recommend a dog-eat-dog world, even though he observed in the Wealth of Nations that: ‘nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog’.
Quite the reverse, in the Theory of Moral Sentiments, he has some sound things to say about reciprocity:
‘When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self–love might suggest to us, prefer the interest of one to that of many. The man within immediately calls to us, that we value ourselves too much and other people too little, and that, by doing so, we render ourselves the proper object of the contempt and indignation of our brethren.
‘Neither is this sentiment confined to men of extraordinary magnanimity and virtue. It is deeply impressed upon every tolerably good soldier, who feels that he would become the scorn of his companions, if he could be supposed capable of shrinking from danger, or of hesitating, either to expose or to throw away his life, when the good of the service required it’.
So it was a grave issue for men in the Allied Forces to watch black marketeers, desk wallahs and armchair Colonel Blimps prosper during wartime, with the option of passing on their wealth to their children to create a rentier class - while, by contrast, the wives and children of the servicemen themselves faced relative poverty and deprivation.
TIME TO RECONSIDER INCOME AND WEALTH LIMITATION?
Given what I have said above, it will be of no surprise that I regard as suspect many of the ideas of Right-Libertarian Economists like Greg Mankiw of Harvard.
I always kick the tyres of the argumentation jalopies that they drive. Greg and his friend Tyler Cowen claim that market freedom and personal freedom always go hand-in-glove [regardless of income and wealth distribution issues and never mind the wartime black market profiteers].
To quote Tyler Cowen:
'Economics is sometimes associated with the study and defense of selfishness and material inequality, but it has an egalitarian and civil libertarian core that should be celebrated. And that core may guide us in some surprising directions.
'Economic analysis is itself value-free, but in practice it encourages a cosmopolitan interest in natural equality.
'Many economic models, of course, assume that all individuals are motivated by rational self-interest or some variant thereof; even the so-called behavioral theories tweak only the fringes of a basically common, rational understanding of people.
'The crucial implication is this: If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently'.
But they although they quote Adam Smith with tut-tutting approval in his observation that: 'birth and fortune, as opposed to intrinsically different capabilities, are the primary reasons for differences in social rank’, Greg and Tyler take no account of the perpetuation and accentuation of privilege through the endorsement of excessive income rewards and the protection of heritable wealth.
Bah!
So I reacted recently when Mankiw argued [in a recent post on his personal blog] that the accumulation of $3 million or more in a SEP-IRA retirement account by America’s Older Citizens should continue to be immune from taxation.
He reckons that ‘exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal. Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA. If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million’.
‘So, yes, President Obama's $3 million constraint would be a significant disincentive for saving. It would move the tax code in the wrong direction’.
But what happens to the money when death casts its final shadow price?
Surely, the accumulated funds are passed down to heirs and beneficiaries who benefit by ‘birth and fortune’ and not by capability?
As another Harvard professor Charles W. Eliot has commented:
‘Why do current valuation practices built into the tax code make it possible for investment partners to end up with $50 million or more in entirely tax-free individual retirement accounts when the vast majority of Americans are constrained by a $5,000 annual contribution limit?
‘A simple calculation shows that the US estate tax system is broken. Assets that are passed to relatives or other personal relations are often badly misvalued relative to what they cost on an open market. The total wealth of American households is estimated at more than $60 trillion. It is heavily concentrated in very few hands.
‘A conservative estimate given the lifespans of Americans would be that 2 per cent ($1.2 trillion) is passed down each year, mostly from the very rich. Yet estate and gift taxes raise less than $12 billion, or 1 per cent, of this figure each year’.
So you don’t have to be a full-blown Left-Libertarian to start thinking again about Inheritance Restriction – or indeed Income Limitation – in a world where income and wealth differentials are widening to Continental Drift proportions, output is stagnating, debt is accumulating like a Glacial Ice Cap, and rising generations [excluding a lucky few] are being short-changed and enervated by their bleak prospects.
I might even get a nod from The Economist here, which comments again with respect to McFadden’s explorations of behavioural economics that choices in life and public policy are ‘undoubtedly messier than standard economics. So is real life’. And likewise death and taxes for that matter.
SEE ALSO
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