What’s left in economics?

Splendid contribution from Chris at Stumbling and Mumbling, who asks what a coherent set of left-wing economic policies would look like.

He offers:

  1. Macro markets to enable workers to insure against falling demand.
  2. A citizens basic income.
  3. Asset redistribution, including through inheritance taxes
  4. Dismantling the corporate welfare state – the DTI and CAP.

An excellent start. I would propose the following policies as part of a left wing economic policy agenda:

  1. Overhaul competition policy – strengthen the Office of Fair Trading by increasing its powers and resources, crack down on cartels, price fixing, monopoly and oligopolies; break up market dominant companies.
  2. Broaden the base of income tax to remove allowances and tax breaks, including equality of taxes for earned and un-earned income, no separate allowance for capital gains, taxation of capital gains on primary residence, taxation of trust incomes and non-domiciles; and lower income tax rates accordingly
  3. Abolish all tariffs, quotas and other trade barriers
  4. Introduce a carbon energy tax
  5. Relax immigration controls for both skilled and unskilled labour (I would favour completely open borders) – which would benefit both UK citizens and the poor internationally

25 comments on “What’s left in economics?”

  1. Firstly, what do you mean by “left-wing”?

    Secondly, are you familiar with George Stigler’s capture theory? It doesn’t take a lot of Public Choice knowledge to believe that

    “Dismantling the corporate welfare state – the DTI and CAP.”

    and

    “Overhaul competition policy – strengthen the Office of Fair Trading by increasing its powers and resources, crack down on cartels, price fixing, monopoly and oligopolies; break up market dominant companies”

    Are inconsistant. Can you think of an example of a productively inefficient monopoly that is not the result of government policy? The only remit of the Office of Fair Trading, should be the reduction of barriers to trade. And only governments can create barriers.

    Owen replies: By left wing, I mean designed to reduce inequality of income and wealth, and reduce the privileges of wealth. (I am in favour of greater equality of outcome, not greater equality of opportunity.)

    I do not know what you mean by “inefficient” – for society as a whole, a market dominant position is inefficient if it leads to a price which is not equal to social marginal cost; but for a firm, efficiency would mean making goods at a low price but selling, where possible, at a a price above marginal cost. There are plenty of firms that have market dominant positions that make good money for the firm’s shareholders, and which may or may not be efficient , but which do not maximise the efficiency of the economy as a whole (because setting a price above marginal cost reduces aggregate welfare).

    There are many market dominant businesses – Microsoft, Unilever, Coke, Tim’s Scandium Oligopoly, de Beers, Cargill, Google, Sony, etc which are “inefficient” in an economic sense.

    I don’t know what you mean by “not the result of government policy”: if there was no government policy, there would be no business. The question is which government policies we think are beneficial to the economy and society and which are not.

    I can assure you that my idea of what an active and effective OFT would do would look and feel nothing like the corporate welfare state for farmers and British Aerospace.

  2. What about —

    (10) amending the Companies Act so as to provide that a registered limited company must act, not only in the interests of its shareholders, but also in such a way as to protect the interests of all its stakeholders (customers, suppliers, employees) and those of society as a whole? This could include provision for the compulsory representation of employees and customers on the Board of every company above a specified size. There should also be provision to ensure greater transparency in company decisions where these don’t need to be shielded by commercial confidentiality factors, and regulation of managers’ salaries, bonuses, share options, etc., to ensure that the ratio of the average earnings of the company’s employees as a whole to those of the Directors and the top layer of management does not exceed a certain level; and

    (11) A ban on demutualisation, and fiscal encouragement of new institutions on the mutual principle, municipally owned and other locally owned enterprises, cooperatives, and other not-for-profit institutions?

    Brian B

    Owen replies: I am sympathetic to both these, and would support them; though I suspect both would be symbolic rather than effective.

  3. 11 rather goes against 4 doesn’t it? Favouring one form of corporate organisation over another is still a corporate welfare state.
    10? Meh. Rhineland capitalism. Not exactly dynamic.
    1-4?> Yes.
    5? As long as we dismantle monopsonies and oligopsonies at the same time.
    (My scandium oligopoly is probably actually efficient. So few people are interested in scandium at such a low level of interest that it probably is efficient to have only one or two people specialising in it. That would change if the market got larger of course, but as the market size really only supports one or two experts I’m not sure that efficiency wwould rise if another 10 people spent a few years unravelling the marketplace. But that’s special pleading of course.)
    6. No. Tax consumption not income or capital gains. That gets the trustafarians anyway. Income invested, (ie income saved), returns from such savings (whether current or capital) as long as they are reinvested, all tax free, like a super-ISA. When savings are converted into consumption then tax it at the same rate as other income which is not saved. Inheritance tax the same.
    7. Of course.
    8)Mebbe. Revenue neutral though, no hypothecation and at the true cost of the externalites. Maybe Nordhaus’ $10 per tonne C.
    9)Difficult politically but see the logic.

  4. Not to say that I disagree with them, but points 4, 5, 7, and 8 don’t strike me as especially ‘left wing’.

    Also, I know this is ‘blue sky’ and all that, but I see a political minefield ahead trying to reconcile CBI with open-doors immigration.

  5. Tim

    On the contrary – I think that 4, 5, 7 and 8 are all good candidates for a progress, left-wing economic policy.

    4 – removes subsidies to producers which are regressive overall, as they are paid by ordinary working taxpayers for the benefit of agribusiness and the shareholders of the eg the aerospace industry. (In the case of the CAP, they also drive up food prices, which is very regressive.)

    5 – reduces the opportunity for rent seeking by market dominant firms. Rent seeking is good for capitalists and bad for consumers.

    7 – the cost of trade restrictions is borne by consumers, who pay extra for the goods and services they buy, in order to line the pockets of a few protected industries. Abolishing those trade barriers would redistribute income from the few to the many.

    8 – more open immigratin would be of enormous value to the world’s poor (who feature prominently in any left wing calculus). A modest increase (eg 1%) in skilled labour migration is estimated to far outweigh the benefits even of doubling aid).

    I agree that you don’t often hear left wingers espousing these ideas. But they (we) should.

  6. Oh god, no! Alright, I’m basically with Tim, but I still don’t understand why seemingly intelligent people peddle this rubbish.

    We have had arguments about inheritance tax recently; not one – not one of you lefty types – have given me a sound economic reason why you should tax capital. It has all been about “oooh, it’s so unfair, some have it, some don’t”.

    I have given sound economic (coupled, more importantly, with psychological) reasons why capital is immensely useful to both individuals and to economies, i.e. that it allows puchases of goods otherwise unavailable, or the funding of a company which would otherwise be unobtainable.

    Capital is not income, and it should not be taxed as such. It is not viewed as income (otherwise, why do people do the Lottery?); sure, tax the income, but do not tax capital.

    Neither you nor Chris Stumbling, nor even Jarndyce, have given me a sound economic and psychological reason why capital should be taxed. All you have offered is the ame whiney lefty rubbish about “some have it and some don’t and that’s unfair”.

    You want an example of what is “fair”, i.e. an exercise in bringing everybody down to the same level? Comprehensive education. There, that’s fair. Now, has comprehensive education been a success? Even a qualified success?

    No. And I defy you to argue otherwise. And, please, don’t prate about the beneficial effect of nice/pushy middle-class parents on state schools. It’s lies, and if you don’t understand why then you haven’t thought about it.

    All lefty opinions buy is universal mediocrity. They ignore the value of biology: we are animals. Advanced animals, but animals none the less. The laws of natural selection apply to man as to everything else: the fit survive, the unfit die. Why should the fit carry those who are unfit? What you then end up with is a genepool of mediocrity (again, that word. Why do I always associate it with socialism. Oh, yes, it’s because it’s almost tautology).

    The problem with socialism is that it tries to defy the central raison d’etre of humans, i.e. that they are selfish and, like every other organism on this planet, are obsessed with their own survival. You cannot go against natural programming, no matter how you try. Did Animal Farm teach you nothing?

    DK

    Owen replies: Mr Kitchen – I agree, if you are not a socialist then you won’t be much interested in policies whose purpose is to reduce inequality.

    I am an egalitarian – that is, I think the onus of proof is on those who would advocate inequality rather than equality of income, wealth, consumption and well-being. I am very broadly with John Rawls in thinking that a priority for policy is to improve the welfare of the worst-off group in society (by which I mean the world community, and not just our own country). You don’t agree – in which case you are not interested in the question Chris asked (“what would a left wing economic policy framework look like?”).

    However, one thing that might interest you is that all of the policies described above are intended to both reduce inequality and to improve the allocative efficiency of the economy. These are, by and large, measures that will improve the supply performance of the economy – and so make us all richer (about which you care) – as well as making society more equal (about which you do not care). So I think your allegation that the intention is to “level down” in the name of ideology is misplaced.

  7. Oh god, no! Alright, I’m basically with Tim, but I still don’t understand why seemingly intelligent people peddle this rubbish.

    We have had arguments about inheritance tax recently; not one – not one of you lefty types – have given me a sound economic reason why you should tax capital. It has all been about “oooh, it’s so unfair, some have it, some don’t”.

    I have given sound economic (coupled, more importantly, with psychological) reasons why capital is immensely useful to both individuals and to economies, i.e. that it allows puchases of goods otherwise unavailable, or the funding of a company which would otherwise be unobtainable.

    Capital is not income, and it should not be taxed as such. It is not viewed as income (otherwise, why do people do the Lottery?); sure, tax the income, but do not tax capital.

    Neither you nor Chris Stumbling, nor even Jarndyce, have given me a sound economic and psychological reason why capital should be taxed. All you have offered is the ame whiney lefty rubbish about “some have it and some don’t and that’s unfair”.

    You want an example of what is “fair”, i.e. an exercise in bringing everybody down to the same level? Comprehensive education. There, that’s fair. Now, has comprehensive education been a success? Even a qualified success?

    No. And I defy you to argue otherwise. And, please, don’t prate about the beneficial effect of nice/pushy middle-class parents on state schools. It’s lies, and if you don’t understand why then you haven’t thought about it.

    All lefty opinions buy is universal mediocrity. They ignore the value of biology: we are animals. Advanced animals, but animals none the less. The laws of natural selection apply to man as to everything else: the fit survive, the unfit die. Why should the fit carry those who are unfit? What you then end up with is a genepool of mediocrity (again, that word. Why do I always associate it with socialism. Oh, yes, it’s because it’s almost tautology).

    The problem with socialism is that it tries to defy the central raison d’etre of humans, i.e. that they are selfish and, like every other organism on this planet, are obsessed with their own survival. You cannot go against natural programming, no matter how you try. Did Animal Farm teach you nothing?

    DK

    Owen replies: Mr Kitchen – I agree, if you are not a socialist then you won’t be much interested in policies whose purpose is to reduce inequality.

    I am an egalitarian – that is, I think the onus of proof is on those who would advocate inequality rather than equality of income, wealth, consumption and well-being. I am very broadly with John Rawls in thinking that a priority for policy is to improve the welfare of the worst-off group in society (by which I mean the world community, and not just our own country). You don’t agree – in which case you are not interested in the question Chris asked (“what would a left wing economic policy framework look like?”).

    However, one thing that might interest you is that all of the policies described above are intended to both reduce inequality and to improve the allocative efficiency of the economy. These are, by and large, measures that will improve the supply performance of the economy – and so make us all richer (about which you care) – as well as making society more equal (about which you do not care). So I think your allegation that the intention is to “level down” in the name of ideology is misplaced.

  8. Owen,

    I have a serious problem with the principle of equality of outcomes as opposed to equality of opportunity.

    To my mind the former leads not only to mediocrity, but also contains an element of coercion and leads to the most inefficient use of people’s abilities.

    If I may use an example that some may find frivolous, the principle equality of outcomes would mean that every person in England should play soccer for the national side because everyone should get an England cap and a share of the rewards that honour bestows.

    Imagine a national team made up of 11 randomly selected individuals sitting in the dressing room at Wembley about to play a major international. Some would be fit enough to compete against the opposition. Some would have knowledge of the rules of the game. Some would have some talent and there would be a 22 : 50×106 chance that one player had sufficient skill to really play in the national side. Some of the poor saps might even want to be there.

    So there you have our national side for that match; partially skilled, partially fit and partially willing this England side is heading for disaster. However, with planning and by forcing (at gunpoint if necessary) the unwilling to do their bit for the principle the objective of getting every citizen of England a national cap for football would be achieved. Unfortunately the value of that prize would rapidly diminish to zero.

    There is also a very good chance that the 22 people who should have been in that dressing room would be elsewhere being forced to meet the National Basket Weaving Experience target or whatever.

    Equality of opportunity, on the other hand, would mean that every person who had the dream of playing for England would get the chance to start playing football at the beginners’ level. Those whom God/genes/pure chance had granted the skills and who displayed the necessary diligence and desire would gain promotion to higher levels of the sport and perhaps the ultimate honour of playing for their country. Those who did not have the desire to play for England or didn’t have the talent or diligence to get into the national side could be content to play football at a lower level for lesser rewards or they could choose another field altogether in which to excel.

    Opportunity based equality also allows for the best use of available talent. The best footballers get to play football, the best writers write, the best accountants count whether you measure value in pure money terms or on a more general level as the wellbeing of society.

    Personally I would prefer a system that recognises desire, talent and dedication and allows them to flourish over one that requires coercion and leads to mediocrity.

    RM

  9. Sorry, 22 : 506 should read 22 : 50,000,000.

    That’s what comes of pasting formatted word documents into a blog comment box.

    RM

  10. OK, so we’re comparing two utopian extremes at either end of a sliding scale. Reality is probably somewhere inbetween. With blogging completely off the scale somewhere.

    I’d just prefer my reality to be skewed to the opportunity side as much as possible.

    RM

  11. RM: _Equality of opportunity, on the other hand…_

    …is completely unrealizable. So I favour redistribution to correct the inevitable inequalities of opportunity after the fact, or even viewed (Dworkin-style) as an insurance policy from behind the veil of ignorance. All “equality of opportunity” does is substitute one tyranny (of privilege) for another (pseudo-“meritocracy”). Equality of outcome, to some degree, has to be part of the picture.

    I agree with all the others, Owen, except 9. Theoretically, absolutely. But practically I fear its application could undermine the other eight.

  12. RM: Your football analogy is striking because the comparision seems to me to be so clearly inappropriate.

    Football is a game, invented for a purpose, which people choose to play. The purpose is to win the game, within the rules. Win or lose, everyone goes home at the end of the game and it doesn’t matter very much.

    Life, by contrast, shares essentially none of these characteristics. It is not the purpose of life to win, and you can’t go home at the end of the day. In life, as opposed to in football, it really is how you play the game that matters.

    When I say that I believe in equality of outcome, that does not mean that people whose talents and interests are with numbers should be forced to thatch rooves, or that bricklayers should be forced to do the company accounts. I agree that it makes sense for people to spend their time on the work for which they have the talent and interest. But I do not believe that someone who has the good fortune to have been born with, or acquired, particular skills should be able to live a life that is substantially more rewarding than someone who does not have that good fortune.

    Some may worry that unless we reward those with talent, we will stifle their interest in using those skills, and we will all be worse off as a result. I actually don’t believe that is true: I don’t believe that George Best and Bobby Charlton were less committed footballers because they played at a time when footballers’ salaries were less outlandish, nor do I believe that there were any other more talented players at the time who chose not to play professional football because the salaries were not sufficiently astronomical.

    Furthermore, even if there are some people who do what they do only because of the rewards are so immense, I do not believe that society would be significantly worse off if they were replaced by people who were willing to work for less. Terry Semel, the CEO of Yahoo, earns about $200 million a year. Would he do a substantially worse job if he were paid $1 million a year? Maybe he might do it a little less well. And if he chose not to do it at all, would someone willing to do it for $1m a year really do it that much worse?

    There is a sense in your football analogy that countries are in some grand competition with each other, and that unless we identify our best players, and provide them with sufficient rewards, they will either not play, or might even go and play for the other side. But that metaphor is wrong. Despite the common political rhetoric, we are not “competing” with other nations. Our incomes – our well being and quality of life – are determined by our productivity. We are not made worse off by other countries’ success; on the contrary, if other people find ways to make goods or deliver services more cheaply, that can only expand the choices we can make. It is not like a football league, in which the objective is to beat the other side. If we consider that there are reasons to sacrifice some of our productivity in order to live in a better society, that will not mean that we in some sense “lose the game”.

    In short, would be willing to give up some aggregate economic growth in order to live in a less unequal society in which fewer people live in poverty, though I am far from convinced that we would in fact have to make such a trade-off.

    Equality of outcomes does not mean a society of the bland and mediocre. Quite the opposite, it means a society in which people can choose to do the things in which they have the most talent and interest, without allowing the draw of huge rewards to distort those choices. It is a society that celebrates diversity, by allowing everyone to live a decent life whatever talents they have. It is a society that rewards those whose vocation is to sustain and build the fabric of our communities – the teachers, nurses, those who look after the elderly or maintain our public spaces – and not just those who devise new ways to meet our desire for new products, or who have the good fortune to have talents that are relatively rare.

    This is all rather off topic – as I remarked to Mr Kitchen, the question is what a left wing economic policy would look like, and it is a shame to allow that interesting question to be dissipated into a discussion of why anyone would want to hold progressive left views in the first place.

  13. By left wing, I mean designed to reduce inequality of income and wealth

    then why not just confiscate all wealth and divvy it up equally? if you geniunely want equality of wealth, then it’s possible.

    or do you realise that absolute wealth is more important than relative wealth, and that “equality” is defunct of morality and common sense?

    On efficiency, I think that your economic model is internally inconsistant. There’s two types of “textbook” inefficieny – allocative, and productive. Allocative inefficiency arises when P>MC, but this will only be a modest level (since it’s a triangle). Productive efficiency, which you haven’t acknowledged, is a far bigger problem since it applies to every unit produced (i.e. a rectangle) and is when AC>minAC.

    My question to you is this: why do you assume that a monopolist is NOT producing at the lowest average cost? And why do you assume that government would?

    I think this whole framework is misguided, however, and would define monpoly not in terms of market share, but whether there’s barriers to entry. As long as firms can compete, then it’s competitive, and if one firm manages to undercut it’s rivals then that’s because it’s more efficient, not less.

    I was a little sloppy when I said “not the result of government policy”. In the context of barriers to entry, rather than market concentration, the only “monopoly” will be one that has a government granted right to be the sole producer. Yes, government is needed for all business (sort of), but we’re talking about two forms of government; one that protects rights, versus one that removes them.

    So my question is this: what knowledge does a government Minister have, that the CEO of Unilever doesn’t, to know how to provide goods and services for a lower price? If you argue that govt. is needed on efficiency grounds, then why don’t govt. set up a rival business and simply outcompete the private sector?

    It’s nice to see that your experience as a development economist has shown you the virtues of free trade, and the many other liberal economic policies you promote, but i still think you’re hanging on to some outdated and faulty views of how a market economy functions.

    Regards,
    Anthony

  14. Anthony: I am confused, and so are you.

    First, what makes you think that I believe that government would be effective at running businesses? I apologise if I have given that impression. I am not proposing for one minute that governments should run businesses or tell the private sector how to run businesses. I have spent too long working in Government to think that is a good idea.

    I am in favour of competition as a way to improve efficiency and drive down costs, but also as a way to limit rent-seeking by the private sector. That is why I want governments to be more vigilant in reducing the opportunities for firms to exercise market power which allows them to charge prices above marginal cost.

    I well understand the difference between allocative efficiency and productive efficiency, and indeed specifically referred to allocative efficiency in my reply to Mr Kitchen above. Despite your claim otherwise, it is NOT true that the welfare costs of allocative inefficiency are necessarily smaller than the welfare costs of productive inefficiency – as you may recall from whatever economics you have studied, the welfare costs depend on the magnitude of the distortion, the demand elasticities and the utility of consumption for intramarginal consumers. If demand is elastic, and/or the utility of consumption is large, the welfare costs of allocative inefficiency could well be huge. To give a clear example, think of the monopoly pricing of essential medicines, in which the welfare cost of under-consumption because prices exceed marginal cost (an allocative inefficiency) greatly exceed the welfare cost of any productive inefficiency in the medicines production business.

    While we are on basic economics, you are making a very basic error when you claim that a monopolist will try to produce at the point at which average cost is lowest. As any high school student can tell you (I hope), they will do no such thing.

    Firms produce at the point at which marginal revenue equals marginal cost. In perfect competition, marginal revenue is the price, and firms are price takers, so they produce at the point at which their marginal cost equals the price. The number of firms in the market (and hence the industry supply curve and the market price) adjusts in the long run so that price equals marginal cost at the lowest point on the long run average cost curve, which is also where the marginal cost curve bisects the average cost curve.

    But a monopolist is not a price taker. A monopolist faces a downward sloping marginal revenue curve. Like every other firm, they want to produce a quantity at which marginal revenue equals marginal cost. But with a downward sloping supply curve, this means producing at a smaller quantity Q(m) and higher price P(m) than would be the outcome of a competitive market equilibrium. As you can see in the diagram below, at a level of production at which average total costs are declining, at this level of production marginal costs will be below average total costs, and so average total costs are higher than at the competitive market equilibrium. So the profit-maximising monopolist chooses to produce at a quantity a which costs are above the average total cost they would incur at competitive market quantity.

    Diagram of monopoly pricing
    (This diagram shows that at the monopoly quantity, Q(m), the average total cost (ATC) is higher than at the competitive market price Q(mc). Note that at Q(mc) the firm makes a loss (because p is less than ATC) and will therefore exit the business, so a benevolent regulator should instead require the monopoly to price at P(f) at which the firm makes enough money to cover its costs.)

    What is true is that the monopolist will aim to keep its costs to a minimum for a given choice of quantity that it produces. In that sense, it has an incentive to pursue productive efficiency. But what it will not do is choose to produce the quantity at which its average costs are minimised.

    I’m happy to be corrected if I am wrong and if I have, as you say, “outdated and faulty views of how a market economy functions”. But I don’t think there is much controversy about the idea that there are significant welfare costs (which you should care about) and equity costs (which it seems you are less bothered about) as a result of a market equilibrium at which quantities are lower, and prices higher, than the competitive market equilibrium.

    At risk of over simplifying the argument, I am in favour of competitive markets; but I know that competitive markets are not the same as, or likely to be the result of, entirely free markets.

  15. Ok, firstly I just want to respond to your question and clear up a misunderstanding:

    First, what makes you think that I believe that government would be effective at running businesses?

    Because you are assuming that government will possess superior knowledge than private firms – otherwise how else could they improve on efficiency?

    Owen replies: Doh! By ensuring that there are market incentives for firms to improve their own efficiency (or, equivalently, reducing the barriers that would ensure that those incentives operate). If a Government puts up the fuel tax, it creates an incentive for car firms to make more fuel efficient engines; the Government doesn’t need to be able to design car engines to be able to create incentives for people who do.

    I am not proposing for one minute that governments should run businesses or tell the private sector how to run businesses

    So what do you think the Office of Fair Trading should do? In your own words, you want them to “break up market dominant companies” on the rationale that those companies aren’t operating efficiently.

    Owen replies: No: I want them to break up dominant firms on the rationale that the market in which that firm operates is not competitive. When the OFT required brewery firms to divest themselves of pubs, they did not tell publicans how to run their business. They just removed a barrier to competition. When AT&T was split into the Baby Bells, nobody in the US Government needed to know how to run a phone company.

    Also, when I said

    why do you assume that a monopolist is NOT producing at the lowest average cost?

    I didn’t mean their own average cost curve – I apologise for not making it clearer. What I meant was the lowest forseable cost curve that a firm will produce on. i.e. maybe one firm could sell things a little cheaper, but their existence implies that noone else can do any better. I want to compare reality with conceivable reality, and not compare it to hypothetical blackboard constructions.

    Owen replies: You are assuming, falsely, that the only barrier to entry is productive efficiency (ie firm B can enter if and only if it can produce more cheaply than firm A). That is wrong on two counts. First, with increasing returns to scale there are natural monopolies which cannot be challenged if costs of entry are high. Second, other barriers include things like reputation and brands, intellectual property, predatory pricing, vertical integeration etc etc

    Look, the problem is that you’re using textbook microeconomics to claim that government can make efficiency gains by interfering with a free market economy. I think that such textbook logic is incorrect, and therefore we should use an alternatative definition of “competition” and “equilibrium” . Where competition refers to contestability rather than market concentration, and equilibrium is seen as a hypothetical construct rather than an existing situation.

    Owen replies: So let’s get this straight. You accept that my argument is straight out of the textbooks, and consistent with decades of classical (nb not neoclassical) economic thought. Your view is that the textbooks are all wrong, and that we need to redefine terms like competition and equilibrium. And you have the cojones to say that it is me that has a “faulty” view of how a market economy works? Well, I suppose that is one possibility. The other is that you are talking drivel.

    Here’s a problem with neoclassical economics: if the monopolist sets MR=MC, are you including transaction costs of price discrimination in the MC curve? If you are, then the price/quantity mixture will be identical to the competitive outcome. If you don’t, why not?

    Owen replies: because, as any high school student knows, first degree price discrimination is impossible in almost all situations.

    If a monopoly leads to higher prices and lower quantity, then how come Microsoft (your own example of a monopolist) provides a product that has consistantly become cheaper and more widely available? Do you really think that Bill Gates tries to restrict the quantity of Microsoft Windows sold?

    Owen replies: for a given price, Bill Gates tries to sell as many copies as he can. But Microsoft does not sell Windows at marginal cost, does it? If it reduced the price to marginal cost (which is the cost of pressing a CD), it would sell a lot (and I mean a lot) more copies. But Microsoft, for perfectly sensible busines reasons, doesn’t do that. So the answer to your question is that I do not think that Bill Gates tries to sell as many copies of MS Windows as he can. Do you?

    Rather than the static model that you use, I am trying to advocate a market process view that treats the world as dynamic, and full of tacit and local knowledge.

    Now, imagine you are the owner of a large firm that produces tyres. Who do you fear? New entrants that can outcompete you. What is the effect of regulation on a market? It increases the costs of doing business. As an established firm, would you like a law passed that makes it harder for other firms to make tyres? You bet! Sure it’ll increase your costs, but will reduce competition, and therefore increase profits. This is what I mean by monopolies are sustained by legislation. In a free market, anyone can try to make a good tyre, and the company that provides the best combination of quality/price makes the most profit. The more profit he makes, the greate the incentive for other firms to enter, and make prices lower.
    But if it costs money to get the required license, only big firms can prosper.
    That’s why regulations and DTI actually fuel big business, rather than “protect consumers” against it.

    Owen replies: Well that all depends what the regulation is, doesn’t it? If the regulation makes entry harder, then you are right: that would be likely to reduce competition. But strengthening OFT is about doing the opposite. When BT was required to terminate calls from other long distance phone suppliers, did this increase competition in the long distance phone market? You bet. When mobile phone companies are required to allow customers to keep their number if they change company, does that increase competition? You bet. There is such a thing as good regulation.

    I know this is a pretty fundamental discussion, but it’s an important one. Your faith in intervention to correct market failure is built on the faulty ediface of neoclassical economics.

    Owen replies: I do not believe that it is easy to design good interventions, and I am conscious that there are lots of examples of bad regulation (you only need to think of the monstrosity of the CAP). But you cannot jump from saying that because some interventions are inappropriate or badly designed, that it follows that all regulation is bad for the economy. Nothing you have said has come close to suggesting that a stronger and more effective competion policy would not be a highly desirable component of a left wing economic policy.

  16. Owen: obviously, I’m not exactly on the Left (to say the least…), so I won’t bother picking over areas where we’ll obviously disagree, but some thoughts from this discussion from me.

    1. The characterisation of vigorous competition policy as a Leftist measure. Yes and no. I think at times here you’re in danger of conceiving of the Right as a strawman of vested-interest types. But I’ll grant you that a Leftist should be (although, sadly, many haven’t been) more in favour of unleashing competition, even as it might undermine traditional hierarchies.

    2. Not to go too far into the long discussions above, but (and you might agree here) I think it’s a little simplistic to suggest that breaking up all dominant firms will lead to efficiency gains. As Tim’s scandium apologia points to, market structure can sometimes make dominant firms the more efficient. There are all the normal potential arguments here – Schumpeter’s point on R&D; economies of scale, scope, standardisation. Plus, surely conduct (in response to potential as well as actual competition) is more important than market share?

    3. Re the equalisation of opportunity vs outcomes discussion… On one level, I have a lot of sympathy with both you and Jarndyce here – the equality of opportunity argument doesn’t stand up; conceptually, it collapses into tail-chasing (where does opportunity start or end?); in practice, even if you could resolve that conceptual confusion, there are too many luck factors to eliminate.

    So, public policy can (and potentially, should) be used to correct market outcomes in pursuit of social objectives. That doesn’t make me a Leftist though; why I’m not is that I don’t want to pursue equality – to receive suffering, yes; to ensure people can participate, yes; but not to make them equal.

    4. I know you don’t want to get into the normative argument (why be Left?) here, so I’ll leave some questions aside. But I do wonder if part of the Left’s problem is in finding a discourse outside of economics. After all, you say:

    “By left wing, I mean designed to reduce inequality of income and wealth, and reduce the privileges of wealth. (I am in favour of greater equality of outcome, not greater equality of opportunity.)”

    As I’ve tried to express in (3), we could easily come to consensus on specific policy measures – I don’t need to buy into egalitarian objectives in order to support policy that would have egalitarian benefits.

    And that’s what I think the problem with Chris’s question is: there is little need for a Left-wing economic framework. Through the nineteenth and twentieth centuries, the Left’s political assaults changed capitalism, but pretty much achieved all they could by 1989. The effective collapse of totally alternative economic frameworks (socialism, communism, etc), coming after the repudiation of (first) aristocratic privilege and (then) laissez-faire, makes economic discussions for most of us – i.e., not the libertarian Right – fairly prudential, rather than any great clash of principle. So, while you might have a Leftist emphasis in economics, I wonder if the idea of a Leftist framework might ultimately prove a silly distraction.

    The bigger questions for Left and Right now are those where we do genuinely disagree on principle – on citizenship, identity, community, the role of nations, and so on. As I mentioned above, I think the Left has failed as yet to develop a satisfactory account of these; although the same applies to the Right, too.

  17. Blimpish

    Thanks for these comments – insightful and thoughtful as ever. I agree with pretty much all that you say.

    Specifically, you are right that it is not always economically beneficial to break up market dominant businesses – though in these circumstances, it is not clear what kind of ownership and regulation is appropriate.

    The consensus between left and right is based on the the first fundamental theorem of welfare economics: the outcome of a competitive market is pareto-optimal (cannot be improved upon without making someone worse off). That gives rise, as you imply, to a great deal of agreement between left and right.

    But there is substantially less recognition across the political spectrum on the importance and implications of the second fundamental theorem of welfare economics – which teaches us that any pareto optimal allocation of resources can be the outcome of a competitive market, provided that initial endowments are appropriately allocated. This theorem, too often neglected, means that we have a choice about what kind of society we want to live in, even if we believe in competitive markets. By judicious intervention to alter the initial endowments, we can narrow down the range of outcomes that will be generated by a competitive market. A left winger like me thinks that we should exercise that choice. On the right, the view appears to be either (a) that the initial endowment provided by chance (or perhaps God, if that is your view) is morally superior to alternative endowments and should not be meddled with; or (b) that all pareto optimal equilibria are equally morally valid and that there is no basis to choose among them. Obviously I don’t agree with either of these points of view.

    All the best
    Owen

  18. 1. I’m not saying that govt. needs to know how to build car engines, to know how to change incentives in that market. I’m asking you how can govt. know what the MC, MR, AC curves look like? Do you really think that those curves are possible to derive, and act upon? Aren’t they just metaphors, and intellectual thought experiments?

    2. Thus far, you’ve assumed that government correctives are costless. Why would the market outcome necessarily be less efficient than the perfectly competitive outcome + the cost of intervention?

    3. It is obviously true that a firm would perfectly price discriminate if it were free to do so. (Agreed?) The fact that it’s “impossible” in practice implies that there is a cost. Since this cost applies to each unit, is it not a marginal cost? Therefore – and this is my oringial point – you’ve drawn your curves wrong and MC should be upward sloping.

    4. Marginal Cost pricing
    We shouldn’t bring in public goods theory, but you’re effectively claiming that firms “should” charge MC. Should movie theatres not be allowed to charge for a seat? Should airlines be prevented from charging above the price of the in flight meal? Do you really think that it’s the responsibility of govt to make sure that firms set P=MC, or can you not let them decide for themselves how to cover their upfront outlay, and let new entrants challenge them should they be wrong?

    5. Barriers to entry
    (i) increasing returns to scale – why would costs of entry deter a more productive firm from entering? Why can’t they use capital markets to bring forward future income streams and enter the market?
    (ii) reputation and brands – I don’t understand what you expect the OFT to do about this? Smear campaigns?!

    6. Strengthening OFT
    Your examples of “good regulation” (brewaries and mobile phone networks) are all examples that occur within regulated industries. Also, I have faith that for every Bill Gates there’s a Steve Jobs, and that the cheapest way to break up a monopoly is by allowing competing firms to function freely, rather than expensive lawsuits.

    7. Drivel
    The textbook economics you’re using is fundamentally flawed. I know that you’re an open-minded, intelligent person, so please engage in the points that I make (about competition and equilibrium) rather than claim that they must be right because the textbooks said so.
    The reason I bring all this up, is because you’re a development economist, and as such are aware that entrepreneurship is IMMENSELY important. So here’s my challenge: show me a neoclassical textbook model that shows entrepreneurship.

    According to the comparative statics that you’re using as rationale for policy, there is a reconciliation of plans – there is no entrepreneur. If this Walrasian system is accurate, then profit is indeed “excessive” and functionless. But in a development context profit is a signal that there’s inefficiencies. It’s a guide for action, and performs a useful social function.

    Tim Worstall said that you’re a leftie, but a development economist and therefore a free trader. I’ll go one step further and say that to be a (good) development economist you must also be an Austrian. You have to think of change as being endogenous. You have to think that the generation of prices is more important than their manipulation. You have to look at contestability being more important than concentration, and the exportation of conceited macro “plans” as being misguided.

    The thing is, economics is changing. How about a challenge, to demonstrate it?

    Use the economics blogging community to come up with a list of the most important developments in economics over the last 20 years,

    And then we’ll debate whether those insights have more in common with Paul Samuelson of Ludwig Von Mises.

    And then we’ll see if it’s drivel!

  19. Perhaps a touch unkind to say this to someone who’s had the snip (but as I am also childless through choice I’ll allow myself the snark):

    It is not the purpose of life to win

    That isn’t what any Darwinist would say. The perpetuation of one’s genes is winning.

  20. One last point, simultaneously defending the charge that a. marginal cost pricing should be enforced by government, and b. i’m talking drivel:

    Economists: loose your devotion to marginal-cost pricing. The best prices are not necessarily those that equal marginal cost. Prices above marginal cost help convey important information – namely, information about the value of the capital invested that makes provision of the good or service possible in the first place. This information, in turn, is important to entrepreneurs searching for profitable places to invest their money and energies.

    Was Ronald Coase talking drivel?

  21. Anthony – Thanks. I wouldn’t be so foolish as to disagree with Coase. I agree, of course, that there are circumstances in which the general prescription for marginal cost pricing gives rise to a problem. In my day job, I work on the economics of the pharmaceutical industry, so I am very conscious of the problem that marginal cost pricing cannot provide incentives for enterprises with substantial fixed costs.

    But it does not follow – and nor does Coase suggest – that marginal cost pricing is irrelevant. There is a genuine economic cost – in terms of static allocative efficiency – from moving away from marginal cost, which we must be cognisant of. While there may be good reasons for doing so – for example, to create incentives for innovation – we should not ignore the possibly substantial welfare costs of doing so.

    As I argued here a few years ago, we need to think creatively about the right policy framework for creating market incentives for innovators and investors while maximising the benefits to society of those innovations. One of them is to facilitate or allow pricing above marginal cost, but there are other possible approaches, each with advantages and disadvantages.

    I am not unduly worried about charging above marginal cost for Britney Spears CDs. But I am worried about markets which charge above marginal cost for anti-retro viral medicines, even though I recognise that there are sound dynamic economic reasons for allowing pharmaceutical companies to make a return on their investments.

    Furthermore, there are many markets in which charging above marginal cost has a signifcant welfare cost for which there is no discernible economic benefit – there is an entire industry around building “brands” whose purpose is to create artificial market segmentation, and hence create opportunities for rent seeking, but which provide little in the way of aggregate economic benefits.

    In summary: there is a welfare cost to markets in which prices are above marginal cost. Given those welfare costs, the burden of proof falls on the those who would support them to show that the benefits exceed the costs, and that there is no better way to obtain those benefits. Saying that marginal cost pricing is the default assumption in a competitive economy is not the same as saying that it is a rule from which we should never deviate.

  22. There’s lots that I disagree with in that post – on the basic role of government, and on your assumption that they possess the required knowledge to know when MC is and isn’t the appropriate pricing rule. But I’m glad you accept that the basic point I’ve been trying to make isn’t as radical as you’d implied!

    Bringing the debate closer to where we agree, why can’t we analyse phamaceutical products using an intellectual property framework, rather than a micro-economic efficiency one? i.e. permit new entrants via relaxing patent laws, instead of forcing existing firms to alter their business model on the grounds that they don’t price at MC?

    I think that in this regard we’re in agreement at to the ends – fostering the innovation that produces cheap and available drugs – but I think this can be acheived without acting as social planner.

    Owen replies: Anthony – I think your argument would be helped if you avoided the name-calling. We both agree that Government intervention is needed to allow an efficient market to operate; and we both agree that there are trade-offs to be made. I have never advocated an intervention that could even loosely be described as “social planner”.

    Consider a common example: patents. These are an instrument of government – an interference in the free market to grant economic agents a temporary period of market exclusivity in order to create incentives for innovation. There are a great many public policy choices to be made about the design of this intrument: what should it apply to, how long should it last, what sort of exclusivity should it confer, what obligations should fall on the patent holder (eg to publish) and so on. Governments could choose not to implement and enforce patents at all, or they can design a patent regime which aims to create incentives that balance the need to innovate and the desirability of increasing access to those innovations. But it is bizarre to describe a government which seeks to balance those considerations as being engaged in “social planning”?

    More generally, government policy with respect to markets often need to balance considerations of this kind. If you believe Schumpeter – though he has been largely discredited by both experience and theory, but apparently still held in high regard by some people – would make you more tolerant large degree of market dominance and monopolies, but in the end you sitll have to make a judgement about the degree of regulation you need. That isn’t social engineering: it is an unaovoidable obligation of a responsible government.

  23. Owen,

    I think I stated that my analogy might be viewed as frivolous, but I stand by the basic premise which is that as far as is possible everybody should be able to develop their talents according to their desires and abilities and reap the rewards for whatever achievement they attain.

    It is easy in all but the most primitive societies to identify the Terry Semmels of this world and hold them up as examples of “evil inequality”. They existed in socialist societies as much as they exist in capitalist ones. However you measure achievement there will always be a fortunate few who achieve far more than the rest of the population. In reality, Terry Semmels and his ilk are irrelevant. To replace him with a $1 million budget version and take the balance of his income and divvy it up amongst the 5 billion or so people around the world would make very little difference. It works out at less than 4 US cents per head. Even in the slums of Calcutta that isn’t going to do much for anybody.

    The fact is Terry Semmels has a rare ability. He can take an idea and make it into a massively successful company. If he was forced to leave Yahoo (by being fired or through constructive dismissal) he’d probably go and find another idea and do just the same. Whether you or I believe he is worth $200 million a year is immaterial, the shareholders of Yahoo believe it and since he works for them and it’s their money surely that’s their decision.

    If we are to measure a person’s success in strictly financial terms (which I, for one, don’t), the issue isn’t to drag the Terry Semmelses of this world down to the level of the rest of us. The real issue is to make the world a place where even a child in the slums of Calcutta can climb up to the level of Terry Semmels. That is probably an unattainable dream, I know, but how about the grandchild of a Calcutta slum kid?

    Unfortunately that ideal needs there to be a mechanism for one generation to pass on whatever advantages they have achieved to the next. Basically that’s the system we’ve had so far and if one compares living standards today to what they were a couple of centuries ago we as a species have come a long way. Yes, there are still inequalities in this world but less so than in the past.

    I suspect we’re never going to agree on this issue, but personally given the choice, I’ll stick to a system that seems to have proven its worth and try to extend it to those who have yet to experience its advantages.

    The Remittance Man

  24. Pingback: Tim Worstall

Leave a Reply

Your email address will not be published. Required fields are marked *

Published by

Owen Barder

Owen is Senior Fellow and Director for Europe at the Center for Global Development and a Visiting Professor in Practice at the London School of Economics. Owen was a civil servant for a quarter of a century, working in Number 10, the Treasury and the Department for International Development. Owen hosts the Development Drums podcast, and is the author Running for Fitness, the book and website. Owen is on Twitter and