STATE INTERVENTION AND MARKET FUNCTIONING
The French economist Frederic Bastiat is chiefly remembered for having developed the concept of “opportunity cost” or, more colourfully, “that which is seen, and that which is not seen”. We could put it more simply: there is no such thing as something for nothing.
There is a persistent tendency to see only one side of this pivotal equation, which is hardly surprising when you consider that the entire Keynesian economics canon is steeped in the “free lunch” syndrome of demand stimulation as the panacea for economic growth and prosperity - and for the past eighty years central banks and treasury chiefs have consistently pursued policies of demand stimulation, recently in its most rudimentary form: flooding financial markets with bucketloads of counterfeit.
Bastiat was clear that stimulating consumer demand is both pointless and dangerous when there is nothing to consume. His older colleague, Jean-Baptiste Say, had already taught that (i) production must precede consumption; (ii) supply creates its own demand; and (iii) we produce in order to consume. These are three expressions of a law that has been more honoured in the breach than its observance, to quote Hamlet.
Market intervention No. 1 – the minimum wage
An increasingly topical illustration of governmental wishful thinking masquerading as policy is the notion of a minimum wage. Scientific papers have recently been published purporting to show that any increase in the minimum wage is a public boon. It enhances the health and lifestyle of employees by reducing their working hours, expanding their leisure time and enriching family life. It improves mental and physical fitness; reduces smoking and drug dependency; reduces cases of child neglect; reduces teenage births; reduces the number of low birth-weight babies; not to mention a reduction in chronic stress fatigue and the host of subsidiary benefits that follow for the whole community.
Moreover, the studies demonstrate that every further increase in the minimum wage generates still further benefits. In short, the more that companies pay their employees, the happier, fitter, healthier and altogether better off they and the nation will be!
What an asinine revelation – and just think how much these academic papers must cost to research, peer-review and publish!
Seen, and not seen…..
Back to Bastiat: the stuff these people churn out is patently limited to what they see. What they don’t see is the working of the underlying economic law of marginal productivity of labour - which is actually simpler than it may sound. If the productivity of one’s labour is less than the amount arbitrarily decreed by government to be the wage for that labour, the result will be unemployment. Otherwise the shortfall between the product and that wage will deplete the business’s capital; and if its financial viability is marginal to begin with, it will fail and go bust.
Basically, if a government-decreed wage is set at too high a level, the demand for labour must fall and unemployment at the margin must follow. Some employees in better placed businesses may retain their jobs and enjoy improved living – but, unseen, are (i) those employees who lose their jobs due to the legal enforcement of a higher minimum wage at the margin, and (ii) those prevented from getting jobs in the first place.
Market intervention No. 2 - Technology
While on the subject of jobs, job protection and job destruction, we are all aware of the notion that artificial intelligence (AI), and robotic technology in general, poses a serious threat to employment. One writer for The New York Times suggests in earnest that a tax on robots would compensate for the loss of tax revenue from all the redundancies, as well as the cost of retraining workers who have lost their jobs because of the robots. This implies a logical “equivalence” that simply is not there. For starters, what is a robot? Would machine tool robotics also be taxed? Would reducing tax subsidies on capital investment be equivalent to a tax on robotics? Would a distortion of investment decisions follow?
The NY Times writer claims that the gain in profit achieved by lower payroll taxes is the same thing as receiving a tax subsidy; and hence his argument for taxing robots. According to this logic, the higher the payroll tax, the higher an equivalent robot tax would be. Any government crazy enough to implement this would find that we finish up with neither workers nor robots!
The trouble with all this fiscal juggling is that it ignores the bigger picture. People expressing anguish over AI’s supposed threat to jobs should face the fact that work can never be completely eliminated. People will instead be re-employed – perhaps even making robots! And even if another generation of “robot-making robots” is developed, there will always be a robot-free point of initiation. The silicon-manufacturing arena will always be awash with job opportunities, just waiting for suitably trained operatives to move in.
And if it’s broke, fix it!
Don’t ignore the need to engage clever people able to fix things when they go awry, because if you have any experience of technology you will be aware of the hi-tech mantra: “anything that can go wrong, WILL go wrong – but you will never know when!”
Take my case: if I leave my Mac unattended for more than eight minutes a ghastly column of little black triangles appears in my in-box, each signalling a phenomenon labelled “account error”. The best brains in Virgin Media, my host server, have been summoned but they appear to be utterly defeated by this “tricky little glitch”. They escape as fast as they can after dumping a clutch of WiFi router-boosters that will assuredly “help” (after they’ve gone, naturally) having successfully “paired” them with other boosters plugged in to my wife’s computer. One such technician even suggested it’s a problem “in our area” that Virgin is “working on”, and it has nothing to do with my equipment.
Unbelievably, this whole fiasco started only when I followed expert advice on how to speed up my system, and agreed to replace my 8 year-old software with the latest version. Experience now tells me that the new devices they have just plugged into my computer, including all the “free” add-ons - will soon be consigned, together with all previously delivered gizmos, wires, cables, switches, plugs, chargers and earlier generation mobiles, to the electronic graveyard box behind my desk. Fortunately, I have not let them loose on my pacemaker!
I have found that the only thing guaranteed to get my computer going again is to click on “Restart”, meditate for 6 minutes while the wretched machine reboots itself, and then make hay while the sun shines until the insidious crop of little black triangles invades once more! To be fair, the latest booster did actually make a difference: the column of triangles is now preceded by a column of squiggles to warn me that the triangles are coming soon!
New business opportunities
You will also have noticed that the more advanced the technology, the more prone it is to breakdown. No point in trying to phone for help – if you are lucky, you’ll get through to a call-centre in a Martian time-zone.
There are now small businesses on every high street run by geeks who appear to understand this stuff, dedicated to fixing your desktop, laptop, i-phone, tablet, energy meter, electric gate, TV, hearing aid, remotes, fobs – indeed, anything electronic, including the thousands of “smart” appliances that now incorporate chip technology, even extending to cars that become infuriatingly incapacitated because a mere wing-mirror gismo has buggered the whole works, and the most cost-effective solution is to buy a new car!
Frankly, if this is “artificial intelligence”, you can keep it. Any workforce producing this malfunctioning rubbish would be sacked on the spot. Yet it is reported in many quarters as the biggest threat to jobs since the invention of the spinning jenny that revolutionised weaving 250 years ago!
I know I’m a certified geriatric, but I think that is utter bollocks! It is a major spur to new business and employment opportunities in the vast rectification industry - dedicated to fixing the electronic detritus languishing in hi-tech intensive care wards. If I could find someone to teach my desktop computer to recognise the existence of my desktop printer I would pay good money!
Market intervention No. 3 – “Help-to Buy”
One further instance of government’s vote-catching “fix-it” habit is “Help-to-Buy”. The many thousands who now own homes that would otherwise have been out of reach are, of course, delighted with the Chancellor’s politically motivated decision to use taxpayers’ cash to make cheap loans to lower-income citizens to help them buy houses - at the same time rejuvenating the lagging construction sector.
But then there’s the not seen. Help-to-Buy distortions have inflated new house prices and builders’ margins, yielding huge dividends for shareholders in major house-building firms that can only be described as windfalls.
Does that accord with the intended social outcome?
[I am grateful to Patrick Barron for insights that inspired this essay]