Liberal Vision

The Stupid 100%

99% are angry. Well, actually, we don’t know how they feel but a minuscule percentage of them are giving up their weekends to vent what they claim is the anger of the rest of us. They’re angry about greed – the greed of the bankers and the policy makers they are blaming for this long economic storm. The last time the global economy seemed so dire, it was the greed of the investors and manufacturers that was blamed for it all. So what are the protesters trying to say? 1% of us are greedy and the other 99% aren’t? After all, if self-interest is such a destructive thing, how else could civilisation have taken off?

This greed of the few idea seems to be shared by Ed Miliband, who recently used his conference speech to set out a new economic doctrine that will appeal to his innately anti-business supporters while accounting for the clear fact that capitalism has served most of us pretty damn well. Ed intends the new dichotomy in the Labour narrative to be the merits of (benevolent) ‘producers’ against (greedy) ‘predators’ in business practice:

Predators are just interested in the fast buck, taking what they can out of the business. … It’s about different ways of doing business, ways that the rules of our economy can favour or discourage.

This is far more momentous than his detractors are currently giving him credit for as, with such language, the Ed formerly known as ‘Red’ has hit upon language that encapsulates the zeitgeist of the economic crisis; his parlance expresses the popular understanding of business – popular in that it is emotive, widely-held and, regrettably, almost entirely without substance.

I recently attended a talk where Dr Eamonn Butler of the Adam Smith Institute very succinctly expressed the antithesis to this: that trade in a capitalist system is entered into voluntarily, and neither party would enter into an exchange unless it is of benefit to them both. As an example, he gave an anecdote of overcoming linguistic and cultural barriers to get his trousers repaired in a Chinese market. Perhaps he paid above normal price for the exchange or the seamstress could have asked for more, yet “my trousers were repaired,” he explained, “and she got paid for her time.” Where then is there room for destructive self-interest in a free market system?

The problem is that we all enter into transactions we come to regret. We have always experienced hotels less grand than first they appear or the cowboy builders whose services we realise all too late should never have been engaged. Having lived myself in China, I can recount numerous situations where a service or product I purchased turn out to be of substandard quality, with little available recourse in a country where stifling bureaucracy does not extend to consumer rights.

And how did I respond? I learned to rely upon recommendations and previous experiences, or I purchased goods online from reputable Western companies. As time went on, I learned from my mistakes. And oddly enough, those companies I turned to were richer than those who had exploited my naivety.

It is not selflessness that achieves long term success but mutual self-interest; nor is it predatory capitalism that causes economic woes but what I would coin stupid capitalism. All around us are the foolish traders: from the idiots in the financial world whose belief they could profit from bad debt saw their wealth and reputation wiped out, to the morons who lost their homes because they took out mortgages they could ill-afford; from the arrogant slum landlords, recently exposed by Channel Four, who thought they’d never get caught, to the tenants ignorant of tenancy law who never reported the criminal behaviour; from the drug user who buys talcum powder from a stranger in the street, to that same dealer who exposes himself to violence and arrest night after night and misses the repeat custom reputation brings with it.

The sad fact is that free exchange does not occur on the terms most favourable to both parties when either party has insufficient foreknowledge of the benefits and risks of the exchange. Often this takes the form of the consumer having false security over the quality of the goods they wish to buy. Very often it is likely that the trader does not realise that the goods are unsuitable or of unacceptable quality as, over the long-term, a poor reputation and legal challenges are likely to run their business to the ground.

In the above cases, government regulation has not only failed to prevent poor exchange, it has facilitated them, by creating black-markets for drugs, a shortage of truly affordable housing or a false sense of security in the financial world. Instead the solution is, naturally, a liberal one: informing choice.

Kite-marks, labelling and ratings are an excellent way of informing the consumer of the quality and negative externalities involved in a trade. From energy efficiency labels on fridges, to the units of alcohol in beer and the sell-by-dates on food, labelling serves to empower consumer decisions and rewards businesses who best fulfil our desires with higher sales. Wherever you are in the world, staying at a hostel branded by non-profit organisation Hostelling International usually avoids the danger of having your travel experience ruined by the slummy accommodation that proliferates the cheap end of the market; so too does Hostel Bookers, whose website allows you to read the ratings and comments of others before you book.

The information given by such media is not always perfect. Amazon’s seller-rating system, for example, allows users to rate only the efficient delivery of the trader and not the quality of the electronic goods many of them sell; while Sushil Mohan’s Fair Trade Without the Froth expose how the Fairtrade Foundation implements a subjective understanding of ‘fairness’, backed up with an expensive regime of demands on its members, which serves to benefit producers in developing countries at the possible expense of subsistence farmers in the Third World.

But whatever the details of its implementation, consumer knowledge is economic power. The narrative that free exchange is always and everywhere mutually beneficial is unlikely to win over many of the 99%. If we are to protect capitalism from popular punitive measures which only make matters worse, a new narrative is needed: it’s not a greedy 1% that must be combated, it’s the ignorance of the 100%.

David M Gibson is a classical liberal and a member of the Liberal Democrats. He is currently interning at Lib Dem HQ for the campaigns team. A collection of his writings can be found at davethedystopian.blogspot.com, as well as on the Freedom Association website.

Tags: Capitalism, protestors st pauls

MILTON FRIEDMAN (1912-2006), CAPITALISM AND FREEDOM (1962)

Milton Friedman was a Nobel Prize winning economist and economic historian, associated with the Department of Economics at the University of Chicago, and was most famous as a ‘Monetarist’.  That is someone who regards the control of the money supply at a very constant, and slow, rate of increase, as central to controlling inflation, and for establishing the best framework for economic growth. He put this in the context of limited government, which establishes a framework for the market, rather than intervening in the market.

He explained his political ideas and public policy suggestions in Capitalism and Freedom, a book advocating a liberalism based on markets, individualism and limited government.     Friedman was not just concerned with business interests, criticising businesses strongly for their activities in trying to rig markets and influence the political process.  As Friedman points out, income inequality is greatest in those countries where the state is most inclined toward economic privileges for powerful interests.    Even in better governed countries, many schemes to help the poorest, and redistribute income, are counter productive. High income tax rates on high earners blocks entry to higher income groups, because it reduces the incentives to  earn income at that level, so the effect is to keep the same people rich.

Similar effects have come from efforts to improve the conditions of the poorest through minimum wages.  These have the effect of improving the income of some low earners, but the overall effect is to keep lower earners out of work as it is less economically viable for employers to hire them.  Friedman warned of the tendencies to bad and counter-productive effects where interventionism goes beyond very modest goals, and very simple methods.  The basis for legitimate interventionism is explained with reference to ‘neighbourhood effects’, in a negative sense, as a label for the impact of individual actions on a locality (or any general group of individuals), where it is very difficult to work out how everyone affected could be individually compensated through the law courts.  There are ‘neighbourhood effects’ in a positive sense when public policy provides something which brings great benefits to most people, and where it would be difficult in practice to charge individuals.  Pollution is an obvious example for Friedman of negative ‘neighbourhood effects’, and city parks are an example of a positive ‘neighbourhood effect’ following from public policy.

Friedman thought that it was a legitimate state activity to alleviate poverty through funds collected by taxation, but that the these efforts should remain simple and direct rather than becoming an element in a variety of schemes, with more than one gaol.  An example of the latter approach is Social Security in the United States, which compels everyone to contribute to a state old age pension fund.  One defence of this program is that it ensures a minimum living standard for the poorest on retirement.  Friedman’s response was that alleviating the poverty of the poorest retired could be done without such a big bureaucratic scheme, which takes away individual responsibility and choice.  Social Security both forces individuals to contribute a certain amount to old age, and to contribute that money to a state fund only, when we should all be free to exercise individual choice on these matters.

Concerns with simplicity and limited gaols led Friedman to suggest a combined program of flat tax, and negative income tax, as a means of funding the state and alleviating poverty.  Flat tax means setting one rate of income tax only at a high threshold, and with very few tax deductions allowed.  He argues that this will raise as much money as a multi-rate tax system, if the flat rate is set at just above the minimum rate in the previous system and well above the income threshold in the previous system.  It will also reduce incentives to find ways to avoid taxation; and reduce the size, and expense, of government tax raising bureaucracies.  This can be combined with a ‘negative income tax’ in which the lowest earners, and those on no income, receive money from the state sufficient to guarantee a basic income. This is contrasted with rent controls and public housing as means of assisting the poorest.  Rent control reduces incentives to rent out homes, and build homes for rent.  It makes housing cheaper for some people, while reducing the amount and quality of housing, particularly for the poorest.  Public housing groups together the poorest, inevitably therefore grouping together that section of the poorest who are poor because of family and psychological problems, creating a concentration of dysfunctional people and a very negative environment, inadvertently creating a negative version of the ‘neighbourhood effect’.

The best way of improving the educational chances of the poorest is to give everyone vouchers for purchasing education, enabling everyone to have choice, and not just those rich enough to afford private education out of post-tax income.  In general, liberty and prosperity for everyone, including the poorest, increases in a society with clear property rights defined by the state; and which avoids measures of price or wage control, economic subsidies and tariffs, as these all harm overall economic efficiency, along with individual freedom.

Tags: Capitalism, Milton Friedman