16.05.2007

Who gets what and why

Chris Gray (New Interventions) reviews Tim Harford's The undercover economist Little, Brown 2006, pp288, £17.99

The undercover economist is an interesting book. The author, who works for The Financial Times, says in the introduction that his aim is "to help you see the world like an economist".

That is commendable. Not only that, but Tim Harford has a clear view of what 'economics' (more accurately, political economy) is about: economics, he says, "is about who gets what and why".¹  A useful description, and his book is in some respects a good introduction to the subject. The only drawback is that he leaves a lot of basic facts out of account.

A case in point is his discussion of the Luddites: "Luddism began in the Midlands, a desperate response by skilled textile workers to competition from the latest technology: stocking and shearing frames. The Luddites were well organised, destroying mills and machines ('frame-breaking') and protesting against the new economic system. Contrary to the modern stereotype of an unimaginative thug, the Luddites were responding to a real threat to their livelihoods.

"So did technological change hurt some people? Without a doubt. Did it impoverish Britain as a whole? A ridiculous notion. Without minimising the genuine suffering to those who lost their livelihoods along the way, it's obvious that technological progress made us far better off."² 

We should be grateful, I suppose, that Tim Harford dismisses the idea of the average Luddite as an "unimaginative thug"; he may have even have read EP Thompson's The making of the English working class, where this misconception is given the coup de grà¢ce. But his remarks reveal what becomes explicit by the time you have finished reading the book: he regards capitalism as the final stage of human society; as something that, in the ultimate analysis, cannot be superseded.

Marx's view was very different: Marx saw capitalism as creating the preconditions for a truly human society, along with an agency for its achievement: "What the bourgeoisie produces above all is its own gravediggers."³ 

Tim Harford will have none of this, and there is not a single reference to Marx in his book. This does not of itself invalidate everything that he has to say, but it does mean that his vision is dangerously circumscribed, and that he shows a tendency to accept uncritically the pronouncements of certain post-Marxian authorities.

An instance here is his treatment of the subject of expensive Aids drugs, produced, in the example he gives, by a fictitious company called PillCorp:

"Say that a year's supply of drugs for one customer costs $10 for PillCorp to produce, and retails at $1,000. For rich customers willing to pay - or who have insurance that will pay - that's not really a problem. Each year of treatment transfers $990 from those living with Aids to those who produce the treatment. But a taxi driver in Cameroon might be willing to pay only $50 to buy treatment; beyond that, he'd rather buy food, or petrol for his taxi.

"Because of PillCorp's global price policy, the taxi driver loses out on the treatment, and PillCorp loses out on a chance to make some profit. But if PillCorp were able to make a one-time discount to the taxi driver and sell him the treatment at any price between $10 and $50 - say $30 - everybody would be better off. The taxi driver gets treatment for $30, when he was willing to pay $50. PillCorp receives $30 in revenues for a $10 pill - a profit of $20.

"This is what economists mean when a situation 'could be better'. If we can point to a change that could make at least one person better off, and nobody worse off, we say that the current situation is inefficient, or, in everyday language, that it could be better."⁴ 

'Efficiency'

What Tim Harford is referring to here is what the professionals in their jargon call 'Pareto optimality', associated with the Italian, Vilfredo Pareto (1848-1923), whose conception it is. If we look up 'economic efficiency' in the Penguin dictionary of economics we come across the following:

"Economic efficiency. The state of an economy in which no one can be made better off without someone being made worse off. For this to be the case, three types of efficiency must hold: (a) productive efficiency, in which the output of the economy is being produced at the lowest cost; (b) allocative efficiency, in which resources are being allocated to the production of the goods and services the society most values, and (c) distributional efficiency, in which output is distributed in such a way that consumers would not wish, given their disposable income and market prices, to spend these incomes in any different way."

Before considering this characterisation of economic efficiency in detail, let us look at Tim Harford's example again. Focusing on the interests of the taxi driver, Harford ignores the rich customers, yet there is a prima facie case for saying that if production costs are $10 and the product is selling for $1,000 then these customers are being ripped off. PillCorp would no doubt claim that the high price is justified by the astronomical costs of research and development of the drug, which the firm has to recoup, but, in that case, $10 is not an accurate cost figure, and the research and development costs must be factored in.⁵ 

If PillCorp wish to justify their price by reference to research and development costs, let them produce the evidence - 'open the books', in the time-honoured phrase. If they cannot make a reasonable case, then surely we have a situation in which economic resources (in this case monies needed elsewhere) are being misallocated.

Which brings us back to the dictionary definition of economic efficiency. This, as it stands, raises a number of problems. There is no great difficulty if we take output at the lowest cost: all we need to do these days is to take into account not only monetary costs, but also energy and carbon emission costs. There are a few somewhat more vexing problems concerning allocative and distributional efficiency: in the first case it is surely not a question of producing those goods and services that "society" - who, exactly? - most values, but all those it values, in the proportions that maximise social well-being (however difficult to define that may be); in the second case there may well be grounds for alterations in disposable income of certain individuals - minimum wages would come in under this heading.

The real problem, however, is the very definition of 'economic efficiency' as being "the state of the economy in which no one can be made better off without someone being made worse off." The definition is blatantly ideological. Since any increase in wages and/or improvement in working conditions will tend to eat into profits, it affords grounds for the capitalists to refuse any redistributive proposal as tending to inefficiency. (It was this sort of reasoning that was used to oppose the Ten Hours Bill when it was introduced in the UK parliament in the middle of the 19th century in order to place a statutory limit on working hours: the economist Nassau Senior argued that profits were in fact made "in the last hour", so that any restriction on working hours would threaten the collapse of profit.)

But there is no reason why making the workers better off and the capitalists worse off should necessarily increase inefficiency - the opposite may well be the case. In the early stages of the Iranian revolution in 1979, when the shah was ousted, factory committees (shora), comprising all the workers in a given enterprise, gained control of production in very many factories, and productivity rose in some cases by as much as 50%.⁶  Obviously in such cases there was an increase in efficiency, more goods being produced in a given time, while the enterprises' legal owners were worse off - having in some cases fled the country - and the workers (in control of production) better off.

The tendency to unreality which the Pareto-style conception of efficiency produces is well illustrated by Tim Harford's remarks at one point under the heading 'Efficiency versus fairness', where he writes: "While the perfectly competitive market is perfectly efficient, efficiency is not enough to ensure a fair society, or even a society in which we would want to live. After all, it is efficient if Bill Gates has all the money and everyone else starves to death "¦ because there is no way to make anybody better off without making Bill Gates worse off. We need something more than efficiency."⁷ 

The main point is valid, but the argumentation, as it stands, is not. If Bill Gates has all the money and everyone else starves to death, the end result is that only what Bill Gates is personally capable of producing gets produced, which is surely less efficient than the level of production achievable if Bill Gates allows the rest of us to go on living, by divesting himself (by sale or free gift) of the means of production we need in order to survive. As for perfectly competitive markets, there may possibly exist instances - or near-instances - of them, but they are not the sort of markets that most people encounter. The 'perfect competition' notion may be useful as a theoretical limiting case, contrastable with most kinds of market that we currently have, but that is about all.

'Market failure'

Faced with the widespread absence of 'really existing perfect competition', we are instead confronted with the phenomenon of 'market failure'. Here there is an interesting contrast between Harford's analysis (and prescriptions) and the treatment Michael Yates gives to the topic in his Monthly Review Press article, 'Naming the system'. Yates specifies five types of market failure, while assuring readers that a good many others exist. He instances refusal to produce socially useful products - shipping companies will not finance the construction of lighthouses because other shipping companies would benefit without contributing to construction costs; "negative externalities" - many traditional heavy industry companies cause environmental pollution, whose costs do not appear on their balance sheets, being 'external'; barriers to entry into markets for those who wish to set up businesses in them; and two features of production for a market which appear inevitable.

The first of these is the preservation of inequality: "If there are pervasive and severe inequalities in wealth and income when a market economy begins, these inequalities will be maintained by the normal operation of the markets "¦ If everything needed by a person has to be purchased in the market-place, those with a lot of money to start with have an obvious advantage."⁸ 

He could have added that since the capitalists take care to control the distribution of company profits they have power to give the shareholders and themselves a greater share of the proceeds than what the workers receive, which perpetuates inequality with a vengeance. (Why not? The company is owned by them, not by the workers.)

The second feature is involuntary unemployment, caused by what happens in the business cycle:

"Once a depression begins, market forces can make a crisis worse. In 1932, for example, business firms could have hired workers at bargain-basement wage rates, and they could have borrowed money from banks at near zero interest rates. Had they hired workers and used borrowed money to build new plant and purchase new equipment, output would have risen and unemployment fallen.

"They did neither of these things. They believed that if they did do these things they would have made themselves vulnerable to bankruptcy and competitive takeover if the crisis did not end. Since they could not possibly know if it would end, they took the prudent path of putting whatever money they had in safe places and waiting. This action made the crisis long-lasting and showed that markets can produce socially undesirable outcomes in the form of widespread involuntary unemployment."⁹ 

The above analysis naturally leads Yates to an evaluation of Keynesianism as a remedy for the ravages of unrestrained capitalism (pp133-37), which we cannot pursue here, for reasons of space.

In comparison, Tim Harford's analysis is somewhat scantier, although nonetheless worth reading. Some of the best parts of his book can be found in the opening chapters (1 and 2), where he discusses the economic power that arises from the control of scarce resources. As he neatly puts it, "scarcity is for rent - at the right price".¹⁰ 

His wide-ranging survey includes an excellent exposition of David Ricardo's theory of rent - a subject that Marx develops in volume III of Capital - as well as a short history of Opec (the Organisation of Petroleum Exporting Countries), in which he reveals that, even with prices at around $15-$20 a barrel in the late 1980s, the producing countries were able to make a considerable profit from the cheapest fields, such as those in Saudi Arabia and Kuwait, thanks to production costs of around $2 per barrel.

The other instances of market failure that he considers are those of "asymmetric information", exemplified by the (unsatisfactory) market in second-hand cars, where the seller knows whether or not the vehicle being offered is just a heap of old junk, whereas you, the buyer, do not, and those same "negative externalities" already noticed by Michael Yates.

Hardly surprisingly, this rather truncated set of examples leads Harford to suggest that the problems of 'market failure' can be dealt with by a set of specific fixes for specific instances - a classic reformist strategy. Such fixes may or may not work in individual cases, but the real disadvantage of Harford's analysis lies in his inability to see the full sweep of capitalism as a global economic system (for a corrective, see the CPGB's Draft programme, section 1.3).

Hence Harford ignores the principal case of "scarcity power" under capitalism - namely the separation of workers from ownership of means of production, which forces them to sell their labour-power to the capitalists, who are in the fortunate position of owning said means. Again hardly surprisingly, in this situation workers attempt to defend themselves by forming trade unions, enhancing the scarcity of the resource which they control. The rationale for this was very well expressed by the one-time leader of the Transport and General Workers Union, Frank Cousins, who said: "If there is to be a free-for-all, we are part of the all." Tim Harford, however, seems to think this is a "bad thing".¹¹  This despite his candid admission that "Fairness is not, strictly speaking, a market failure; it is something that even perfect markets do not necessarily provide."¹²  Indeed.

Global inequality

Another topic where Harford and Yates show contrasting approaches is global inequality. Tim Harford says that he visited Cameroon in Africa in order to find out why the country was so poor compared with the United States. He gives his assessment in chapter 8 of his book, which is headed 'Why poor countries are poor'.

Harford describes the state of the roads in Cameroon's commercial capital, Douala, and how the local taxi drivers cope with the situation, and concludes: "Nobody who sees a Douala street scene can conclude that Cameroon is poor because of a lack of entrepreneurial spirit. But poor it is, and it's getting poorer."¹³ 

Why? It appears from what Harford unearthed that the International Bank for Reconstruction and Development (the World Bank) has had some dealings with the country. Harford writes: "The bank discovered that in order to set up a small business an entrepreneur in Cameroon must spend in official fees nearly as much as the average Cameroonian makes in two years "¦ To buy or sell property costs nearly a fifth of the property's value. To get the courts to enforce an unpaid invoice takes nearly two years, costs over a third of the invoice's value and requires 58 separate procedures. These ridiculous regulations are good news for the bureaucrats who enforce them. Every procedure is an opportunity to extract a bribe."¹⁴ 

Tim Harford is happy to generalise from this example: "Poor countries have the worst examples of such regulations, and that is one of the major reasons they are poor. Governments in rich countries usually perform these basic tasks quickly and cheaply, whereas governments in poor countries draw out the processes in the hope of pocketing some extra cash themselves."¹⁵ 

Hence, "the web of corruption foils every effort to improve the infrastructure, attract investment and improve educational standards".¹⁶ 

He really gets quite eloquent on the subject: "The rot starts with government, but it afflicts the entire society. There's no point in investing in a business because the government will not protect you against thieves (so you might as well become a thief). There's no point in paying your phone bill because nobody can successfully take you to court (so there's no point being a phone company). There's no point getting an education because jobs are not handed out on merit (and in any case you can't borrow money for school fees because the bank can't collect on the loan, and the government doesn't provide good schools). There's no point in setting up an import business because the customs officers will be the ones to benefit (and so there is little trade, and so the customs office is underfunded and looks even harder for bribes)."¹⁷ 

Having, to his own satisfaction, plumbed the depths of the problem, Tim Harford is convinced that there is a relatively simple solution:

"One simple reform is to cut red tape, allowing small businesses to be legally established, which makes it easier for their entrepreneurs to expand and borrow money. The legal reforms necessary are often trivial; and, while they still rely on sensible and benevolent government, all it takes is a single minister with his head and his heart in the right place, rather than hoping for an entire civil service to permanently reform.

"Another option, and a vital one, is to enlist the world economy for help. Most poor countries are also very small economies; the entire economy of sub-Saharan Africa is about the size of Belgium's. A small African state like Chad has an economy smaller than that of a town like Shrewsbury's. Tiny countries like Chad and Cameroon cannot possibly be self-sufficient: they need access to cheap fuel, raw materials, loans from international banks and manufacturing equipment. But Cameroonians are trapped behind high barriers to trade - among the highest tariffs in the world, at more than 60%. Such barriers generate revenue for the government and allow it to protect the businesses of cronies and hand out profitable import licences. A small country cannot survive without the world economy. With it, small countries can thrive."¹⁸ 

Really? As usual, Tim Harford does not tell the whole story. About the history of Cameroon, which was a German colonial territory from 1884 to 1914, subsequently divided between Britain and France until 1961, he says not a word. A pro-imperialist observer, Victor Le Vine, writing in the early 1960s, noted the presence of favourable conditions in the south of the country for "plantation crops such as cocoa, coffee and bananas".¹⁹ 

Le Vine also listed timber reserves, possible hydro-electric power from the rivers, minerals such as cassiterite, gold and bauxite. Current exports recorded included palm oil, peanuts, bananas, cocoa, coffee, timber, rubber, meat, livestock and palm kernels. There was some light industry left over from colonial rule, but no heavy industry except for the aluminium smelter at Edea. The construction of a railway line running from the port of Douala to Chad would benefit both countries, but for Le Vine "The conclusion is unavoidable that without massive foreign aid, particularly French aid, the Cameroun Federal Republic cannot continue its present rate of development."²⁰ 

The point behind all these observations which needs stressing is the 'underdeveloped' nature of the Cameroon economy on the morrow of independence in 1961, which goes some way to explaining why Cameroon is "a poor country" (in 1914, when it became independent, Albania was in an analogous position). Tim Harford makes a back-handed reference to these realities by describing countries such as Chad and Cameroon as economically "tiny", but his conclusion that small countries can thrive "with the world economy" is by no means incontestable.

Indeed various African politicians explicitly rejected this assessment in the period following World War II. One of the most forceful exponents of this viewpoint was Kwame Nkrumah of Ghana. Nkrumah emphasised the role of the colonies as "controlled sources of raw materials and outlets for manufactured goods and finance capital".²¹ 

Hence the colonies exported raw materials to the metropoles, receiving finished goods from the latter:

"The simple two-way traffic is implicit in colonial trade. In her African colonies, Britain controlled the export of raw materials by preventing their direct shipment to foreign markets. After satisfying the demands of her home industries, she sold the surplus to other nations and netted the profits herself. The colonial farmer and worker had no share in these profits. Nor was any part of them used in providing public works and social services in the colonies.

"There is a belief that the British government contributed to the costs of administration and public services in their colonies. This is a fallacy. Each colony raised its own budget out of taxes and revenue, and the first charge upon it was the salaries of the European officials of the administration. The construction of railways, harbours and roads was met out of loans raised from local sources, and was undertaken largely to meet the transport and communications requirements of the colonialists. For example, diamonds and gold lay at the basis of South Africa's railway system. Gold prospecting, the finding of coal at Wankie, and the opening up of the copper belt fixed the pattern of Rhodesia's first railways. Our own railways in Ghana were laid down in order to take out minerals and timber from areas of production to the harbour at Takoradi."²² 

I have no extensive knowledge of the economic history of Cameroon under British and French tutelage prior to independence in 1961, but I should be very surprised if it differed greatly from the pattern Nkrumah describes.

Michael Yates in his discussion of inequality between nations stresses the longevity of this condition: "Former World Bank economist Lant Pritchett found that the gap between the poorest and the richest countries grew between 1870 and 1960 "¦ He also found that per capita GDPs continued to diverge after 1960. The rich countries' economies grew more rapidly during these years than did those of the poor nations, further increasing the gap between them."²³ 

Such considerations call Tim Harford's optimistic forecasts into question. Indeed the question, 'Why are poor countries poor?', should be replaced by the question, 'What mechanisms do the metropolitan ruling classes use to ensure the exploitation of the periphery?' Unfortunately no-one on the English-speaking left appears to have addressed this question systematically in print with reference to the period 1980 to date (if readers know of such a work, let us know).

According to Whitaker's Almanac for 2007 the IMF has stepped onto the stage in Cameroon with proposals ostensibly in line with Tim Harford's prescription: "Recent IMF funding has been conditional on reforms such as greater public revenue transparency and privatisation."

On the current showing these policies will not work. In a recent article George Monbiot quotes a report by Action Aid on three African countries which has a bearing on the situation in Cameroon:

"Action Aid studied three very poor countries with major education problems: Malawi, Mozambique and Sierra Leone. After fees were abolished (and when the civil war ended in Sierra Leone), vast numbers of pupils enrolled. But a combination of the rich nations' failure to provide the foreign aid they had promised and the restrictions imposed by the IMF has prevented these countries meeting the new demand. As a result, the pupil to teacher ratio in Sierra Leone is 57:1; in Malawi 72:1 and in Mozambique 74:1. That's the average: in rural areas it can be much higher. Many of the teachers are untrained, and many give up because they cannot survive on their wages. In Malawi, the goods required for the most basic level of subsistence cost $107 a month. A trained teacher receives $55 "¦

"As a result, these countries are stuck in a vicious circle of misery. Until education improves, GDP remains low. Until GDP rises, there is littler money for education. As one of the agencies charged with rescuing countries from poverty [is that right? - CG], the IMF should be seeking to break this circle. But the conditions it attaches for its loans keep these countries in their place. In Malawi the IMF sets the ceiling for public sector wages directly; in Sierra Leone and Mozambique the broader macro-economic rules it imposes have the same effect."²⁴ 

Tim Harford seems unaffected by such considerations. For him there is no alternative: one has to "embrace markets".²⁵  If that means tolerating sweatshops, so be it, since "Workers go there voluntarily, which means - hard as it is to believe - that, whatever their alternatives are, they are worse."²⁶ 

But when is a choice not a choice? If it's a choice between being robbed of £100 and being robbed of £85 I'll choose the latter, but really I don't wish to be robbed of anything. The left's job internationally is to put an end to such robbery.