Tag Archives: markets

The future of free enterprise?

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The proofs of a new book out this week [amazon_link id=”1137482567″ target=”_blank” ]A Time for Choosing: Free Enterprise in 21st Century Britain[/amazon_link] just arrived. It’s edited by Kwasi Kwarteng, Ryan Bourne and Jonathan Dupont of the Free Enterprise Group and is a game of two halves: how to reform the state and how to improve the market.

[amazon_image id=”1137482567″ link=”true” target=”_blank” size=”medium” ]A Time for Choosing: Free Enterprise in Twenty-First Century Britain[/amazon_image]

I’ve not read the book but the question that comes to mind paging through is whether there is anything very new in the policy suggestions? The first chapter on ‘The Architecture of Government’ ends with four recommendations: axe half of the Whitehall departments and outsource administration; regionalise the national minimum wage and look at fiscal decentralisation; have a balanced budget rule and no discretionary fiscal policy; stop using official forecasts of GDP and instead use prediction market forecasts. Of these, the fourth is a subset of the first (outsource a Treasury function), and the second is the only really new element among a standard set of conservative preferences. I for one would welcome a serious look at economic decentralisation.

The final chapter, in the markets section, is called ‘Crossroads’ and it recommends: build more (private) housing and airport capacity in London; have a market for immigration visas; renegotiate EU treaties to remove labour market regulation; lower corporation tax and phase out other business taxes. The first of these is controversial across the political spectrum; the others, again, not new ideas. In this half of the book I was disappointed that there is little about making competition policy tougher so markets can work better, although it does advocate account number portability in banking (where there is too little competition) and an end to the compulsory BBC licence fee (an industry where there is already substantial competition so heaven knows that this is meant to achieve).

Anyway, I’ll read it more carefully. There are some interesting policy suggestions in each chapter – some more radical than others. There will be useful material in it for students. But my first impression is that it’s a clear (and well-written) statement of a rather well known world view, covering familiar Westminster territory. It would be more interesting to have the free market take on, say, competition in digital markets, or privacy and surveillance, or a genuinely radical market perspective on the NHS (not covered at all as far as I can see).

It also makes the standard ‘free market’ assumption that the market and the state occupy mutually exclusive territory, so for better markets you need less state. That’s a profound error. We need better both.

The Beatles and class struggle

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[amazon_link id=”0674504763″ target=”_blank” ]Inequality[/amazon_link] by Anthony Atkinson is terrific. I’ll review it properly when I’ve finished. Meanwhile, one thing I really like about it is that he is heading toward policy proposals rooted in a reasonably detailed structural analysis of how the economy works, rather than in abstract macro theory. You get a sense of this in the ‘Setting the Scene’ section from his references to Michal Kalecki’s Class Struggle and the Distribution of National Income and J.K.Galbraith’s [amazon_link id=”1614273251″ target=”_blank” ]American Capitalism[/amazon_link]. Yes, we are talking about market power and the political power to change the rules of the game that flows from it. If the way markets work is flawed, the macro outcomes will be flawed too.

[amazon_image id=”0674504763″ link=”true” target=”_blank” size=”medium” ]Inequality[/amazon_image]  [amazon_image id=”B0010JYWD6″ link=”true” target=”_blank” size=”medium” ]American Capitalism[/amazon_image]  [amazon_image id=”0198285388″ link=”true” target=”_blank” size=”medium” ]Collected Works of Michal Kalecki: Volume 1: Capitalism: Business Cycles and Full Employment: Capitalism – Business Cycles and Full Employment Vol 1 (Collected Works of Micha Kalecki)[/amazon_image]

There are some terrific nuggets of information along the way. To get the UK’s Gini coefficient back to where it was in the 1960s when the Beatles were playing just using taxes and transfers – a 10 point reduction from its current level – income tax would have to rise by 16 percentage points. The political impossibility of post hoc redistribution using only taxation is clear. “This is why many of the policy measures proposed in this book are directed at making the distribution of market incomes less unequal,” writes Atkinson.

A Nobel Prize for real world economics

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The news that this year’s Nobel memorial prize in economics has gone to Jean Tirole is absolutely excellent, a really well-deserved award. I’m not going to compete with the swift and thorough summary already put out by Tyler Cowen. But I do want to add one comment just in case there are people out there thinking, why on earth has the prize gone to an economist who does theoretical, highly mathematical work – isn’t that yet another sign of how remote from the real world the whole discipline of economics has become? No economist who knows Tirole’s work will think so, and I’m sure there will be general delight about his selection, but maybe there are others who might make this mistake.

This is of course a common complaint about economics. It’s only partly true, and therefore partly false. There are for sure some economists who rely too much on basically very simple mathematics to gussy up economic analysis that doesn’t really need any equations. However, often economic thinking about the messy, complicated real world gets to a point at which the inter-relationships between variables are so knotty that mathematics is better able than words to keep track of them. The results are sometimes surprising.

Jean Tirole’s mathematics is of this kind. For example, in the work I know on two-sided markets (those where a platform stands between buyers and sellers), competition and market power look very different than they do in conventional markets like those for clothes or haircuts – so the conclusions competition authorities should draw from pricing on one side of the market might be very different from the usual ones. As the Scientific Background paper says:

“Tirole’s models have sharpened policy analysis. Focusing on the fundamental
features that generate a divergence between private and public interests, Tirole has
managed to characterize the optimal regulation of specific industries. Often, his rigorous
thinking has overturned previous conventional wisdom. For example, he successfully challenged the once prevalent view that monopoly power in one market cannot be profitably leveraged into another market by vertical integration. As a result, competition authorities have become more alert to the potential dangers posed by vertical integration and restraints. More generally, Tirole has shown how the justifications for public intervention frequently boil down to problems of information asymmetries and credible commitments. These general lessons — together with a catalogue of specific applications — form a robust foundation for policy analysis.”

His research has built the fundamental methods for the applied study of actual markets characterised by information asymmetries, moral hazard, lock-in, the exercise of power – features that are all too prevalent in the real world of business. It has huge practical relevance to regulators, including in the financial sector, and competition authorities. As Tyler points out, Tirole has also written on intrinsic motivation versus financial incentives.

The example of his work emphasises a broader point, which is that appropriate mathematics is essential in economics. And as Tony Yates recently pointed out, the maths needed as economics – thank goodness – gets ever closer to the real world is likely to get harder and harder. Say, if the subject takes more seriously non-linear dynamic systems, or strategic interactions between firms with different degrees of market power in a network market. Having said that, I always like F.Y.Edgeworth’s advice to regard mathematics as a kind of intellectual scaffolding, essential for the construction process, but preferably to be removed at the end.

[amazon_image id=”B00MF1FVTC” link=”true” target=”_blank” size=”medium” ]The Theory Of Industrial Organization by TIROLE JEAN (1988) Paperback[/amazon_image]

Cautious giant leaps

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The argument of [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often and How It Can Do Better[/amazon_link] by Peter Schuck is set out wonderfully succinctly in the title, and the book does an excellent job of telling half of the story about the role of governments and markets in delivering economic outcomes.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

The chapters cover a range of reasons for ‘government failure’. To list them, they are: incentives not aligned with the policy’s aims; non-rational choice; lack of information; lack of flexibility in delivering outcomes when circumstances change or things don’t work out; lack of government credibility so essential co-operation is not forthcoming; mismanagement including fraud and abuse. Schuck argues that these barriers to policy success have a “deep, structural, endemic nature.”

The book has many examples of policy failure – it’s an American and to be honest far less amusing version of [amazon_link id=”1780744056″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe. It’s hard to argue with the examples. This book cites also Clifford Winston’s [amazon_link id=”B00D0DIABU” target=”_blank” ]Government Failure versus Market Failure[/amazon_link], which has many more. indeed, there have been loads of policy failures, in all kinds of places and contexts.

An aspect of the argument here that I strongly agree with is the failure of policy analysts to build themselves into their ‘impact analysis’ or whatever framework they use for assessing the likely success of the initiative. In other words, the incentives the policy will create for the people affected to change their behaviour are hardly ever incorporated. Economists often think of themselves as being ‘outside’ the society, in a benign deus ex machina role.Yet all policies alter people’s behaviour and have many side-effects.

Schuck’s book does end with a chapter on policy successes – in fact it finds nine, including Airline Deregulation in 1978, the 1975 Earned Income Tax Credit, the food stamp program, the interstate highway system and the 1965 Voting Rights Act. However, it concludes: “It is hard to know for sure why these (and other) policies have succeeded when so many others have failed. Low costs, simple implementation, strong public good characteristics, and replacing far worse policies are all given as potential explanations. However, Schuck also concludes: “To succeed, the programs needed to engage the actors’ self-interest; they did not need to create new values or transform behaviors.” But he believes that the ‘low hanging fruit’ has gone.

Hence his main recommendation – be cautious. “Realistic meliorism” – make things a little bit better but keep your ambitions modest. The policy ‘doing better’ bit of the book’s title is doing far less.

I’m all for realism. There’s a missing half of the story here, though, which is how government actions unavoidably shape markets, so that to argue ‘don’t do much and just leave it to the market’ is in itself a policy. Collective choices are inevitable and government is how we make those choices. [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often[/amazon_link] should be read alongside Colander and Kuper’s  recent book [amazon_link id=”0691152098″ target=”_blank” ]Complexity and the Art of Public Policy,[/amazon_link] which is about policy as determining the structure of a complex, and uncontrollable (in the old-fashioned policy sense) economy and society.

That approach is hard to get right too, but as it’s impossible not to have a structure within which markets operate, because here we are at a point in history where we have actually existing markets, it surely makes sense for governments to think about that structure. And while caution, in the face of the record of policies ranging from the inept to the horribly counter-productive, is surely sensible, thinking about structure does not automatically point to incrementalism.  Sometimes a cautious giant leap might be just the thing.

The financial crisis and post-structuralism

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It’s been a busy week but on the train to and from York yesterday I finished Hugh Pym’s [amazon_link id=”1472902874″ target=”_blank” ]Inside the Banking Crisis: The Untold Story[/amazon_link] and started [amazon_link id=”140398655X” target=”_blank” ]The Birth of Biopolitics[/amazon_link] by Michel Foucault.

[amazon_image id=”1472902874″ link=”true” target=”_blank” size=”medium” ]Inside the Banking Crisis: The Untold Story[/amazon_image]

Now, Hugh is a friend and colleague of my husband’s at the BBC, so anybody reading this might want to aim off for the personal contact. Having said that, I’ve got no hesitation in recommending his account of what went on inside the Treasury and the Bank of England during that extraordinary period from late 2007 to 2009. It’s a very well-informed description of the to-ing and fro-ing, the agonised discussions and negotiations, the hair’s breadth escape from a collapse of the everyday payments systems – which could have brought, it was feared, a breakdown of social order. The events were so dramatic that even in calm retrospect reading the book set the hairs on the back of my neck on end again – for I had thought at the time it was well worth having enough cash in the house for a few weeks’ worth of groceries and other necessities.

Reading this makes it all the more remarkable that there are a few signs of a replay – continuing international imbalances, the asset price bubbles, the complex and unmonitorable risk-taking by banks. Maybe all financial regulators and economic policy folk should read Hugh’s book to remind themselves of what needs to be avoided. One of the conclusions that emerges from the book is in one sense how well the UK’s policymakers – politicians and officials – dealt with an extraordinary emergency, for all that one can argue about specific judgements or criticise the policies that allowed it all to happen in the first place. The system did not collapse. Decisions were taken at great speed, in a normally slow and cautious environment. It underlines David Runciman’s argument in [amazon_link id=”0691148686″ target=”_blank” ]The Confidence Trap[/amazon_link], that democracies are slow and bumbling when it comes to normal problems but able to achieve cohesive actions in a real crisis.

By contrast, the [amazon_link id=”140398655X” target=”_blank” ]Foucault essays[/amazon_link] sent me to sleep on the way back to London from York – it was Friday evening after all. So far, I’ve grasped that the book will aim for the shift in perspective for mainstream economics that Foucault gave us for punishment and madness, or in other words exploring the consequences of seeing what we regard as natural categories (madness, market forces) as socially constructed instead. It’s enough to make one wish Foucault had still been around for the financial crisis. I can’t remember who recommended the book to me except that it was somebody one would not regard as a natural follower of post-structuralist French philosophy, so despite the snooze I’ve got high hopes.

[amazon_image id=”140398655X” link=”true” target=”_blank” size=”medium” ]The Birth of Biopolitics: Lectures at the Collège de France, 1978-1979: Lectures at the College De France, 1978-1979 (Michel Foucault: Lectures at the Collège de France)[/amazon_image]