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From Venezuela to East Berlin, people will always choose capitalism over socialism

From Venezuela to East Berlin, people will always choose capitalism over socialism

How many people across the world in the history of humanity have fled from a capitalist country to a socialist one?

There was much amusement at the height of the long miners’ strike of 1984/85. A National Union of Mineworkers official from Yorkshire, a crony of Marxist trade unionist Arthur Scargill, sought sanctuary in the Stasi-controlled state of East Germany. He apparently felt unsafe under the jackboot of the Thatcher regime in the UK.

In the 1930s, some tens of thousands moved to Stalin’s Soviet Union, including the father of General Wojciech Jaruzelski, the leader of the last Communist government of Poland in the 1980s.

According to the euphemism used by the late Robert Maxwell in his biography of Jaruzelski, the father then “took a job in the north-east of the Soviet Union”. In other words, he was sent to the Siberian labour camps. He was lucky. Most of the other Poles who moved to the Soviet Union were subsequently shot.

These incidents stick in the mind precisely because they are so rare.

In contrast, when given the chance, millions flee from socialism. Venezuela is but the latest example. According to the United Nations, well over two million people have already escaped, taking with them just whatever they can carry.

The Berlin Wall was constructed in 1961 to prevent people moving from socialist East Germany to capitalist West Germany.

As post-war reconstruction got underway in the 1950s, around 3.5m left for a better life in the West – more than 10m translated into UK population terms. The Wall was built to keep them in.

The problem which the western countries have is not in keeping their own populations in. It is keeping others out, whether it is by Donald Trump’s wall in the US or Matteo Salvini’s refusal to allow boats of refugees to land in Italy.

The reason is simple. Economies based on market-oriented principles work much better than centrally planned ones. Capitalism, for all its faults, offers a much better lifestyle than socialism.

In the 1950s, South Korean living standards were not much better than those of sub-Saharan African countries. Now, South Korea is rich, while the North remains trapped in poverty. High-security levels are imposed by the latter to keep people in place. If they were removed, the country would rapidly become de-populated.

A fundamental concept in economic theory is that of revealed preference. People reveal what they really want not through answers to survey questions, but by their actions. If I say I prefer Pepsi to Coke but always buy Coke, I reveal that I actually prefer Coke.

Given the chance, over the years many millions of people have left socialist countries for capitalist ones. People were even willing to risk death to try to escape the old Soviet bloc countries.

By their actions, people reveal their preferences.

The financial crisis, scandals like Carillion, inequality and homelessness – all these are sticks for “useful idiots”, in Lenin’s phrase, to beat capitalism. But the point cannot be made often enough: whenever people are given the choice, they prefer capitalism to socialism.

As published in City AM Wednesday 29th August 2018

Image: Berlin Wall by Flickr is licensed under CC BY-SA 2.0

 

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Our automated future is brighter than Karl Marx or Mark Carney would ever suggest

Our automated future is brighter than Karl Marx or Mark Carney would ever suggest

Mark Carney, the governor of the Bank of England, hit the headlines at the weekend, claiming that Marxism could once again become a prominent political force in the west.

Automation, it seems, may not just destroy millions of jobs. For all except a privileged minority of high-tech workers, the collapse in the demand for labour could hold down living standards for decades. In such a climate, Communism may seem an attractive political option.

Karl Marx as an economist is a bit of a curate’s egg, good in parts. In the late eighteenth and early nineteenth centuries, it was obvious that the system of factory production was dramatically different to anything which had ever existed, but it was thought that might disappear just as suddenly as it had emerged.

Marx was the first major economist to see that the accumulation of capital in factories represented a new, permanent structure of the economy: capitalism. He developed a theory of the business cycle, the short-term fluctuations in economic growth, which is much more persuasive than the equilibrium-based theories which dominate academic macroeconomics today.

But he was completely wrong on a fundamental issue. Marx thought, correctly, that the build-up of capital and the advance of technology would create long-term growth in the economy. However, he believed that the capitalist class would expropriate all the gains. Wages would remain close to subsistence levels – the “immiseration of the working class” as he called it.

In fact, living standards have boomed for everyone in the west since the mid-nineteenth century. Leisure hours have increased dramatically and, far from being sent up chimneys at the age of three, young people today do not enter the labour force until at least 18.

Marx made the very frequent forecasting mistake of simply extrapolating the trend of the recent past.

In the early decades of the Industrial Revolution, just before he wrote, real wages were indeed held down, as the charts in Carney’s speech show. The benefits of growth accrued to those who owned the new machines. Marxists call this the phase of “primitive accumulation”.

But such a phase has characterised every single instance of an economy which enters into the sustained economic growth of the market-oriented capitalist economies, from early nineteenth century England to late twentieth century China.

Once this is over, the fruits of growth become widely shared.

In fact, Carney’s own charts give grounds for optimism and contradict the lurid headlines around his speech. One is headed “Technology driving labour share down globally”. In other words, the share of wages and salaries in national income has been falling. In the advanced economies, this was some 56 percent in the mid-1970s and is 51 percent now. But all the drop took place before the mid-2000s. If anything, the labour share has risen slightly since.

Similarly, inequality has increased over the past 40 years, but almost all the increase took place in the 1980s. Depending which measure we take, it has either stabilised or fallen since 1990.

The future looks more optimistic than either Marx or Carney suggest.

As published in City AM Wednesday 19th April 2018

Image: Car Factory by Jens Mahnke is licensed under CC0.0
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The balance between wages and capital is shifting – rent seekers had better beware

The balance between wages and capital is shifting – rent seekers had better beware

The first column of a new year is the time for a prediction.

By far the hardest part of forecasting is to identify tipping points. The success rate of calling a break in an established trend is very low.

Accompanied by suitable health warnings, 2018 looks like the year in which the longstanding relationship between capital and labour looks set to change.

The use of the words “capital” and “labour” does not mean that the two are antagonistic in the Marxist sense. Once a country has properly embraced capitalism, there is not a single instance of it ever being abandoned. And “labour” in particular is a very mixed category indeed, covering both university vice chancellors and the people who clean their offices at night.

But it is a useful simplification to describe the players in the evolutionary game of how to divide national income between profits and wages or salaries.

Over the past three decades or so, capital has been winning. The share of profits in national income across the west has risen, and the share of wages has fallen.

The reaction of a number of major companies to President Donald Trump’s cut in corporation tax rate from 35 per cent to 21 per cent suggests that the game is turning.

Almost immediately, firms like AT&T and Boeing announced special bonuses for their workforces. Even the banks got in on the act, with Wells Fargo, for example, raising its hourly minimum wage 11 per cent, to $15 from $13.50. Additionally, the bank plans to donate $400m to community and non-profit organizations in 2018.

The share of wages in American GDP has already started to stabilise. Since 2014, there have been no further falls. Short-term trends like this can be misleading, but for four years the wage share has been constant.

More generally, the surge towards greater globalisation which has characterised recent decades seems to have halted.

Strong political blocs have grown in the west that share a dislike of the liberal, open border consensus which has done so much to hold down the real wages of the less skilled.

The election of Trump is the obvious example. We see it in the vote on Brexit. We see it in the hostility to the free movement of labour shown by governments in Eastern Europe.

On a more parochial level, scrutiny of the “emoluments” (“pay” is too vulgar a word for these panjandrums to use) of chief executives and vice chancellors is intensifying on almost a daily basis.

There is very little resentment of monies made by those who are perceived to have earned it by their personal skill and effort. Entrepreneurs and footballers alike are held in high regard in this respect.

In contrast, there is distinct antagonism towards rent seekers: those at the top who get paid not on their merits, but merely on the basis of the position they hold.

The balance of forces is shifting. Smart politicians and business people should pay close attention during the coming year.

As published in City AM Wednesday 3rd January 2018

Image: Tightrope by Tom A La Rue is licensed under CC by 2.0
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Anti-capitalists in UK universities need a refresher course in the perils of socialism

Anti-capitalists in UK universities need a refresher course in the perils of socialism

The great Harvard economist Joseph Schumpeter, writing in the 1940s, predicted the eventual demise of capitalism. He did not want this to happen. But he envisaged that the “intellectual class” would eventually develop values which were hostile to free markets and private property.

Schumpeter’s definition of “intellectuals” was very wide. He meant people in a position to develop critiques of the economy and society, but who were themselves not responsible for running them.

The social science and humanities departments of almost all British and American universities fit this description perfectly. Even though capitalism offers them a standard of living far superior to that of any alternative system, they appear only too keen to undermine it.

The idea pervades these departments, for example, that the prosperity of the West depends upon slavery. It is this which underpins the current fashion for wanting to pull down statues of historical figures, including Britain’s greatest naval hero, Admiral Nelson.

One of the things on which the success of the West actually does depend is what we might call the empirical mode of thought. Put more simply, a theory is only any good if it is tested successfully against real life evidence.

Slavery still exists even today. In Mauretania, slavery was not abolished until 1981. Today, 1 in 25 of the entire population are estimated to be slaves. Yet Mauretania is not rich. Indeed, it is one of the poorest countries of the world.

For thousands of years, slavery has been widespread. The economy of the Roman Empire was essentially based upon stupendously large estates, all worked by slaves.

Yet none of these societies ever became rich. It is only under capitalism that this has happened. So the idea that slavery makes a society prosperous is rejected very decisively by the evidence. But this does not stop it from being almost an article of faith amongst many British academics.

Ludicrously, many of these people describe themselves as “socialists”.

The point simply cannot be made too frequently that we have seen several major natural experiments, which contrast the empirical performances of economies based upon market oriented principles with those based upon the planned economy principles of socialism.

The United States and the Soviet Union, West and East Germany, South and North Korea, India and China under different forms of socialism until the 1980s and India and China under different forms of capitalism since then. Venezuela is but the latest example. Capitalism wins decisively in every single case.

Countries such as South Korea which were very poor in the mid-20th century and which have adopted the principles of market oriented economics have since flourished.

Economists enjoy arguing amongst themselves. But the profession in general believes in private property and markets as the basis for prosperity. Empirical studies, rather than pure theory, have become much more important within economics in the past 20 to 30 years.

Economists need to take a bit of time out to confront their common enemy. Namely, the unscientific output of many social science departments in British universities.

As published in City AM Wednesday 6th September 2017

Image: Berlin Wall by US Dept of Defense is licensed under CC by 2.0
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Don’t believe the myths: Capitalism has performed well since the financial crisis

Don’t believe the myths: Capitalism has performed well since the financial crisis

Ten years ago, the financial crisis began to grip the Western economies. During the course of 2007, GDP growth slowed markedly everywhere. By the end of 2008, output was in free fall.

A key theme in economic commentary is the sluggishness of the subsequent recovery of the developed economies.

The picture is not quite as bad as it is usually painted. True, last week the Office for National Statistics announced a dip in UK growth in the first quarter of this year. But from 2009, the trough of the recession, to 2016, GDP growth averaged 2.0 per cent a year.  Not exactly a stellar performance. But from 1973, the year prior to the major oil price shock, to 2007, the British economy expanded by just 2.3 per cent a year on average. The contrast between the two periods in the US is slightly greater. From 1973 to 2007, growth averaged 3.0 per cent a year, and since 2009 it has been 2.1 per cent.

There is a very stark contrast with the experience of the 1930s, the last time there was a global financial crisis. This time is different, things have only got better. The recovery may be slower than desirable, but it has been much more widespread than in the years following the Great Depression of the 1930s.

A decisive indicator is the length of time it took not just for growth to resume, but for the previous peak level of GDP to be regained.  So in the UK, for example, the economy started to grow again in 2010. But it was not until 2013 that there had been enough growth for the economy to get back to its 2007 size.

Looking at a group of 18 developed economies, which includes all the main and medium sized ones, GDP had regained its previous peak within 3 years in no fewer than 8 of them. By 2016, everyone in the group except Finland, Italy and Spain had a GDP which exceeded its previous peak.

Three years after output began to fall in 1930, not a single economy had managed to regain its 1929 level of output. Even by 1938, output was below its 1929 level in Austria, Canada, France, the Netherlands, Switzerland and Spain.

Perhaps Keynes’ most powerful insight was why the slump was so prolonged. He developed the concept of “animal spirits”, which are not a mathematically based prediction of the future, but the sentiment of the narratives which companies form about the future. He wrote: “the essence of the situation is to be found in the collapse of animal spirits…. this may be so complete that no practicable reduction in the rate of interest will be enough.”

Zero interest rates and low growth! Keynes got there before us.

Still, capitalism has performed much better in the aftermath of the financial crisis of the late 2000s than it did in the crisis of the early 1930s. Animal spirits may not be buoyant, but they are in much better shape than in the 1930s.

As published in City AM Wednesday 2nd May 2017

Image: Day 20 Occupy Wall Street by David Shankbone is licensed under CC by 2.0
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Do markets solve the problem of discrimination?

Do markets solve the problem of discrimination?

The Prime Minister recently announced that the civil service will now introduce name-blind recruitment.  When people apply for public sector jobs, their name will not appear on the documents sent to the appointment panel.  Major companies such as HSBC, KPMG, the BBC and the NHS are following suit.  Economists have produced a substantial body of evidence which shows that some employers discriminate on the basis of the names of the applicants.

The classic paper was written as long ago as 2003 by two academics at the National Bureau of Economic Research.  The title is “Are Emily and Greg more employable than Lakisha and Jamal? A field experiment on labor market discrimination”.  The article does what it says on the tin. The answer to the question is ‘yes’.  People with names which sound white have a better chance of getting a job than those with names which are obviously black or Muslim. The results have since been replicated in numerous studies.

Perhaps David Cameron’s measures do not go far enough.  The ethnic origin of an applicant will, after all, be immediately apparent at the interview.  The job seekers should really enter the building covered by a security blanket, sit behind screens, and have their voices distorted by computer so they all sound like Stephen Hawking.

More seriously, the question of discrimination was discussed at length by Milton Friedman in his great book ‘Capitalism and Freedom’.  He pointed out that capitalism was by far the most successful form of social and economic organisation for reducing discrimination.  We can readily contrast the situation in, say, the UK or Germany with that of the treatment of so-called ‘enemies of the people’ and their families under socialism in the former Soviet Union and China, and the widespread gender, sexual and religious intolerance found in many Muslim countries.

Friedman’s argument was essentially that a market economy separates economic efficiency from irrelevant characteristics of the product or service being offered.  So when you buy a shirt, for example, you are not interested in the colour or creed of the person who made it, just in whether it is a nice shirt at the right price.

So far, so good.  But Friedman went on to much weaker ground by arguing that the very concept of discrimination did not make sense in a market economy.  In particular, employers who discriminated would be making less efficient choices and so would eventually be forced out of business by non-discriminators.

This makes logical sense.  But there is the question of the additional costs a company might incur in conducting a more extensive search process.  These have to be balanced against the potential loss of efficiency, which might be quite small.  A more fundamental point is that markets for goods and services do not usually expose inefficiencies swiftly.  Substantial differences in productivity between firms in the same industry can persist for years.

Markets are indeed much more colour, creed and gender blind than any other form of economic structure.  But they are not completely perfect, and David Cameron’s initiative is to be welcomed.

As published in City AM on Wednesday 4th November 2015

Image: London by Olivier Bacquet licensed under CC BY 2.0

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