The Fallen Angel

The Economics 101 student will typically treat the issue of trade unionisation with a dollop of distrust. Sneaky suspicious will sap away at their soul as they consider the impact of collective bargaining on the poor old innocent employer's labour demand schedule. Consider, for example, the marvel of the monopoly union model. The firm, given the naughty union's ability to maximise the wage, is forced to choose a restricted level of employment. Demonic unions then force a redistribution of welfare from the worker forced on to the dole to the worker that continues to celebrate company craftsman status. But can we be so simplistic in our understanding of the trade union? We could achieve the usual neoclassical tail chasing and offer complexity over the economic agent's preferences. The classic storyline is the notion of the efficient wage bargain where, given union utility is dependent on both wage and member employment levels, they bargain over both. This can lead to forehead wrinkling phenomenon such as over-manning. Unions may well generate inefficiency, but that inefficiency is characterised by increases in wages and employment levels. A standard “yeah but” moment would be consideration of the concept of seniority pay. Here, we can refer to the impact of the median voter model where, due to 'last-in first-out', the more experienced workers can force unions to return to that wage maximisation result. We're back to bad old unions generating unemployment. But let's step back a mini-minute. Rather than ramble and rant about the nature of the utility function for these apparently obnoxious organisations, let us glean a generously general account of union upshot. Let's finger tap over two possible accounts of the impact of the trade union terror. Out of laziness, let's call them scenarios and describe their basic nature.

To introduce scenario 1 lets first sneer at the “power to the people” beret wearer hell-bent on switching over the white hat and the black hat. It is, according to these fist wavers, the evil employer executing empty ethics. The rider to the rescue is the “thou shalt no longer try and put children up chimneys” trade union. They counteract the bargaining power of the employer and therefore force a redistribution of economic rents from employer to employee. Sounds like fun! I'd certainly get teary eyed as I hear a few verses of the Red Flag. This scenario, however, rejects the Citizen Smith routine. We instead should see Unions as a means to redistribute “between” workers. How? Unions enforce wage norms, ensuring that wages cannot reflect the perfect competitive ideal of marginal revenue productivity of labour. Given the lack of solidarity and differences in bargaining power, they ensure the development of inefficient wage differentials. These differentials increase the problem of working poverty, as the least powerful workers essentially subsidise the wages of workers higher up in the food chain. For example, take the NHS in Britain. One can argue that the bargaining power of the nurses have led to skewed wage differentials with most unfortunate repercussions (such as insufficient monies going to auxiliary workers, with negative knock-on effects in terms of increases in infection rates as monkey cleaners are paid peanuts)

Scenario 2 rejects the bitch, maintaining a most friendly account of the impact of the wonderfully worthy Union. Given labour market failure, firms do not pay wages according to the marginal revenue productivity of labour. How can the worker respond to this affront to perfect competition? They have two options: “voice” (i.e. stay put and demand a fair deal) or “exit” (i.e. stick two fingers up and leave the premises). Independence of workers would lead to inefficiency as, despite preferring "voice" to "exit", workers hide their true preferences due to the fear of experiencing employer retribution. Worker co-operation then becomes a vital aspect of improving the working of the labour market. Here's a classic quote from Commons (1950, The Economics of Collective Action. New York) to hammer home the point: "Collective action means liberation and expansion of individual action; it is literally the means to liberty". We now picture the labour union as an organisation consistent with individualism, self-reliance and freedom. The Union can therefore increase efficiency as it attempts to remove nasty ole underpayment. The individual essentially escapes a crummy coercion. These efficiency gains are then accentuated by these "voice effects", where worker productivity increase due to improvements in worker morale.

And where do I stand? Smug and self-righteous, I'll go with the wage norm analysis.

The Economics of the Family

An important testing ground of neoclassical economics, given its celebration of individualism, is the existence and behaviour of the family. A possible claim is that the family unit represents an accomplished assault against the economist’s feverish insistence that the assumption of free will is bullet-proof. Thus, we could ramble that we are coded at the genetic level with our behaviour constrained to some ‘survival of the species’ instinct. At best, this would mean that the ‘economic agent’ is downgraded where it only represents our ‘lesser self’. The family comes first; everything else is secondary. Does this view, however, grunt guilelessness? It is true to remark that the economist’s study of the family is a diverse slap of vibrant material. It is a literature which the social scientist, desperate to break free from the shackles of the wooliness of their traditional tools, would do well to study in detail. This does not mean I’m getting soft in my old age such that I ignore the weaknesses of neoclassical economics. I do not tribute it as tremendous truth, nor do I fail to appreciate the uselessness that it tends to tip-toe trip towards. The study of the family allows us to refer to some selective successes, but involves also a number of flashy failures.

The study of mate selection represents economics at its very best. This should be an unsurprising conclusion given economists are so delightfully diligent at understanding uncertainty. It’s also elegantly efficient in its banter borrow. Indeed, it represents a mere adaptation of the labour economist’s job search theory. This can be summarised as follows:

The job seeker, given his human capital, adopts a reservation wage strategy. This reservation wage represents the lowest wage that they deem to be acceptable. Any job offer below this minimum will be rejected. Due to information asymmetries, job search is costly. As these costs increase, the reservation wage falls. As the reservation wage falls, the job seeker finds a job quicker

It’s the same beast with search for the sperm donor. Instead of the reservation wage, we can refer to the girl’s ‘reservation quality’ of the boyfriend. The potential mother, just like the potential employee, must take into account the constraints that they face. This involves a number of personal characteristics. Examples include physical attractiveness, labour earnings and children from previous relationship(s). The lady will change this ‘reservation quality’ according to changes in the marriage market. As men become sparser in the population, a wider net will be cast and the minimum qualities needed for a successful match will be lowered. This leads to a problem akin to market failure (and underpayment in the case of the labour economist’s job search): mismatches will develop and the utility from marriage will be, on average, horribly harmed. The approach can be used to understand mate selection patterns that are inconsistent with the extended family’s hopes. You want to ensure your daughter does not marry a div? Manipulate her “reservation quality partner”! For example, everything must be done (from education to birch control) to minimise the risk of unwed pregnancy.

It all gets a tad dodgy though when we move on and start talking about the aftermath of mating: family life. Edgeworth wrote yonks ago that “the first principle of Economics is that every agent is actuated only by self-interest”. Understanding motherhood then becomes a tad awkward. Consider, for example, the following quote from Crittenden (2001, The Price of Motherhood, Henry Holt & Co):

“highly educated and ambitious women who marry, have children, veer their careers toward less demanding work or no work at all, earn less or no money, and wind up divorced and profoundly poorer with custody of and financial responsibility for their children”.

Accounting for these costs within an economic model is not straightforward. The non-pecuniary benefits from interaction with one’s child must exceed these costs. Further, we could get involved in some more general commentary about altruism. See, for example, Becker’s rotten kid theorem. This can be used to show how, despite the existence of the selfish sprog, the family will still be able to achieve the maximisation of household production. We may also like to throw in dodgy dealings such as the idea that the family can be simply compared to the firm. For example, we can refer to the glittering gifts made available by division of labour. Our quest for family life can enable more finely tuned division of labour such that we maximise “output”. We can then reduce concepts such as love as methods to minimise bargaining costs over the division of tasks.

This stuff can be charged as ‘bad economics run amok’. Indeed, I’d like to finish with agreement that neoclassical theory can only have marginal success at understanding the family. We are again reduced to appreciating that rational economic man is more suited to the textbook. Consider, for example, the lone mother's decision to take up paid work. Which of the following statements, supplied by Duncan and Edwards (1997, Lone Mothers and Paid Work - Rational Economic Man or Gendered Moral Rationalities?, Feminist Economics, Vol. 3, pp 29-61) more accurately captures the decision making process?:

(1) Rational Economic Man
"Lone mothers, as individual economic agents, maximize their personal welfare (financial and otherwise) based on cost–benefit calculations of the expected rewards from employing their human capital in the labour market, subject to constraints (such as child care availability) and the competing level of the reservation wage"

(2) Gendered Moral Rationalities
"Economic rationality may be determined by non-market criteria about what is socially right, and may change according to the social context, where these ideas are negotiated, sustained, modified and changed with others...Is it right that I, as a mother bringing up a child by myself, should try for a full-time job? What are my responsibilities? How will my behaviour affect my children? What do others expect from me? What do they see as right, and how will they treat me in consequence?"

I’d have to go with the second one! Economic maximisation is indeed of a secondary “and then…” nature.

The American Dream: Wham, Bam and Thank you Sham

The US is a harvester of poverty. We know that because of the abundance of cross-country analysis, made possible following the development of data sources such as the Luxembourg Income Study. The researcher now has available to him/her rich micro-data that is harmonised and standardised to enable international comparison of income and wealth variable. As an example of this literature, try Smeeding (2006, Poor People in Rich Nations: The United States in Comparative Perspective, Journal of Economic Perspectives, Vol. 20 Issue 1). This notes that:

"[I]n most rich countries, the relative child poverty rate is 10 percent or less; in the U.S., it is 21.9 percent. The only country that can compete is the UK, which has a higher rate but has made a substantial push toward reducing child poverty".

The typical “head in the sand” merchant will employ a two fold method to ignore this evidence. First, they will mutter that relative poverty is a Marxist concept and it really only has a practical application to the developing world. For example, folk will crow about how the so-called poor have a car, a computer, an annual holiday and an air conditioning unit. Poverty, according to this view, should be defined as ‘insufficient funds to eat’. A distinction between poverty and a goody-2-shoes general whine about income inequality should be made. Second, they will splutter that the American Dream operates whereby class is irrelevant and the hard worker will succeed. Both arguments therefore stress the importance of referring to mobility, rather than a static account of poverty/income inequality. So does the US do well in the mobility stakes? Can we support the jolliness of the American Dream or is it another myth to add to the ranks of the right wing abuse of economics?

The literature on mobility can be broken down into two aspects: social mobility and intergenerational mobility. Social mobility suggests that individuals face a steeper age-income profile, where over time they are able to escape temporary poverty via rapid income growth. Intergenerational mobility, on the other hand, suggests that there are opportunities available such that sons, grandsons and great-grandsons face increasingly lower risk of suffering daddy’s woeful position in the income distribution. However, once we look at these issues, the available cross-country empirical research remains glum and suggests that the US is actually an underperformer. A pertinent example is Gangl (2005, Income Inequality, Permanent Incomes, and Income Dynamics: Comparing Europe to the United States, Work and Occupations, Vol. 32 No. 2, pp. 140-162). This makes the following remark:

“[I]n most of Europe, real income growth was actually higher than in the United States, many European countries thus achieve not just less income inequality but are able to combine this with higher levels of income stability, better chances of upward mobility for the poor, and a higher protection of the incomes of older workers than common in the United States”.

A bad start methinks! Another offering, to add to this misery, is provided by Corak (2004, Do poor children become poor adults?, Lessons for public policy from a cross country comparison of generational earnings mobility). The assessment is again depressing reading:

"The United Kingdom, the United States, and to a slightly lesser extent France, are the least mobile countries with 40 to 50% of the earnings advantage high income young adults have over their low income counterparts being associated with the fact that they were the children of higher earning parents."

Next try the article provided by Blanden et al (Intergenerational Mobility in Europe and North America). This makes the following unfortunate comment:

"the extent of intergenerational mobility for sons is lowest in the UK and US, is at intermediate levels for West Germany and is highest for the Scandinavian countries"

Perhaps we should look at something more specific to the US, given the charge that somehow the US experiences economic problems that fortunate Old Europe escapes from? How do a specific immigration population progress in the good ole USA? The American Dream, given problems such as incompatible human capital and weaknesses such as low English proficiency, would predict that second generation Mexican-Americans will flower. However, the evidence suggests otherwise. Livingston and Kahn (2002, An American Dream Unfulfilled: The Limited Mobility of Mexican Americans, Social Science Quarterly, Vol. 83, pp. 1003-1012), for example, finds that

"the wage pattern becomes one of steady decline across generations for men, and stagnation or marginal decline across generations for women"

The American Dream, in terms of the ability to progress according to work effort and ability, can therefore be condemned as a myth. The US, if anything, apes the uselessness of their class ridden Limey cousins. But am I indulging in a snitch of ignorant and a snatch of naïve in my use of the concept? Could the American Dream reflect something much more specific to the US economy? Why yes! And here’s why…

The origins of the welfare state, in general, can be traced back to two aspects. First, we have failures generated by the evolution of capitalism (i.e. severe inequality, with the extreme example being too little resources going to the low income such that the physical efficiency, and therefore the productivity, of these workers cannot be maintained). Second, we have the pesky rebellious nature of the working classes (i.e. we should give them peanuts in order to eliminate the threat of Bolshevik revolution). Modern labour markets then open up an additional gain. Full employment would ensure the existence of uppity workers that demand a redistribution of available economic rents. Capitalism will therefore naturally find an equilibrium where unemployment continues and worker discipline is maintained. The welfare state supports that process. It is ironically conservative in nature as it supports the status quo and the general income inequalities generated by jolly capitalism. Despite this rationale for the welfare state, the US is notorious in its relatively stingy provision. This, on the face of it, looks irrational. Perhaps the rampant right wingers that inflict this great nation have ensured an under provision of welfare benefits? I suggest not! The answer is in the exact nature of the American Dream. It is neither about social mobility nor intergenerational mobility. The US is characterised by a long tail of low skilled labour such that the majority of the population are condemned to a relatively poor standard of living. The important aspect is then actually the extreme inequalities that exist. Hope, in terms of achieving one of those few high income yielding occupations, keeps the herd in their ‘chewing the cud’ place. The American Dream may be a myth, but it is a myth that ensures compliancy. Whilst high income inequality will normally ensure labour militancy, encouraging the consumerist American Dream ensures that the individual follows a “it could be me” attitude. We do something similar in Britain. We call it the lottery.

Deterrence, Gun Ownership and the Senseless Swagger of the Gun Lobby

Concerned about guns and want to participate in the debate over regulation? I wouldn’t be surprised. You’ll be joining a debate characterised by aggressive altercation, ferocious flurry and splendid squabble. But be warned, you’ll first have to get past the cretinous cliché as we suffer the monotonous muttering “Guns don’t kill people, people kill people”. Once we’re through that attempt to avoid apt argument, we can get to the nifty nitty-gritty and celebrate the test of economic principle. More specifically, we can examine the worth of the economist’s attempt to re-define criminology according to microeconomic modelling where it is price that determines the behaviour of the utility maximising economic agent. Thus, the potential criminal weighs up the expected benefits and costs from committing illegitimate acts. That decision can be influenced in a number of ways. Benefits can be minimised by changing macroeconomic conditions. For example, we could increase the economic returns from legitimate activities by reducing poverty and narrowing the wage distribution. However, the analysis tends to favour a focus on the manipulation of costs. It’s the dismal science after all! Traditionally, that cost manipulation investigates the impact of punishment. A potential criminal is deterred from celebrating the crime climax because of the fear of wasting away in prison. However, this isn’t the only method available to us. We also can attempt to increase the risks of criminals meeting their doom. Arming the population will enable self-defence. The criminal must re-think their behaviour because of the threat posed by concealed weapons. In particular, crimes such as burglaries should be substantially reduced. Economics, via the celebration of econometric technique, provides a means to test the relevance of this deterrence dogma. As will be shown, it’s not looking too positive for the gun lobby!

The first paper I’m going to wag a digit at is something a tad general in order to demonstrate the importance of this issue. Consider for a moment the impact that gun ownership could have on life expectancy in the US. Lemaire (2005, The Cost of Firearm Deaths in the United States: Reduced Life Expectancies and Increased Insurance Costs, Journal of Risk & Insurance, Vol. 72, pp. 359-374) has done precisely that. He finds that "firearm violence shortens the life of an average American by 104 days (151 days for white males, 362 days for black males)". We therefore start with a whoops wink to the gun lobby, with evidence of substantial costs imposed by gun ownership. However, this is of course insufficient to test the deterrence hypothesis. We need something more specific. Can we find anything?

The answer is of course an auspicious affirmative. We also can refer to papers such as Cook and Ludwig (2006, The social costs of gun ownership, Journal of Public Economics, Vol 90, pp. 379-391). This offering is able to conclude that "an increase in gun prevalence causes an intensification of criminal violence—a shift toward greater lethality, and hence greater harm to the community". The authors take their results further to demonstrate the social costs associated with their estimates: i.e. if these externalities were to be internalised a gun license fee of $1800 per household may be required. We’re therefore progressing with evidence unsupportive of the deterrence ditty. Indeed, in support of the view that crime effects from gun ownership may be negative, we have Duggan (2001, More Guns, More Crime, Journal of Political Economy, Vol. 109, pp. 1086-114) which concludes that "guns influence crime primarily by increasing the homicide rate"

Determining deterrence as dreary dallying is perhaps not surprising when we also can refer to McDowall and Wiersema (1994, The Incidence of Defensive Firearm Use by US Crime Victims, 1987 through 1990, American Journal of Public Health, Vol 84, pp 1982-1984). This finds that firearm self-defence, relative to gun crimes, is really rather rare. Less than 2 victims in 1000 defended themselves with guns. Hammering home this position, we also have material that investigates the impact of the right-to-carry concealed handgun laws in the US. Rubin and Dezhbakhsh (2003, The effect of concealed handgun laws on crime: beyond the dummy variables, International Review of Law & Economics, Vol. 23, pp. 199-217) fail to find any evidence of significant crime-reducing effects from such legislation.

The deterrence dawdling of gun ownership should be dismissed without consideration. The empirical investigations available just are not supportive of the position. This is not to say that we should ban all guns. There may well be a case for allowing the non-deviants from owning such weaponry. However, that case should be constructed around the usual lower lip tremble: an understanding of freedom and rights. Deterrence theory, and economics in general, cannot be satisfactorily utilised.

Public and Merit Goods: The Failure of Markets and the Impotence of Libertarianism

Neoclassical analysis into the public sector is based on the general perception that “public is bad, private is good”, but with the added acknowledgement that markets are likely to fail because of the distinction between private benefits/costs and social benefits/costs. This wishy-washy position must surely irk the free marketeering prancer. The definition of “limited government” meanders towards muddied and economic analysis becomes increasingly vexed over the predicament of market failure. So how can the monkish libertarian continue his monotonous chanting of the celebration of laissez faire? He/she must bother-boot over the failures that are also generated by the limitations of bureaucracy. Here’s a quick summary of the simpering on offer:

The libertarian storm trooping attack on government interventionism is based on two aspects: the elimination of allocative inefficiencies and the restriction of cronyism. The allocative efficiency line is based on the acknowledgement that economic planning is unlikely to mimic the marvellous market. Thus, we can refer to the complex, distributed nature of knowledge and how- given the complexity of economic affairs- economic planning will tend towards botch, bungle and blunder. The price mechanism then gallops towards a duo of benefits. Static allocative gains are on offer as prices offer the correct signals. They effectively offer a means to pool knowledge “as if” there was an all-knowing central planner. Dynamic gains are then also predicted as the elegant entrepreneur has the incentive, via potential profit gain, to discover knowledge and eliminate ignorance. The argument over cronyism, on the other hand, is based on the nature of influence costs and how politicians can be bought to allow profiteering at the expense of the welfare of the innocent individual. It is ultimately a specific application of principle-agent problems, with concentration of power providing an opportunity for behaviour that is inconsistent with the goal of productivity maximisation.

It should be of no surprise that it is unequivocally uncomplicated to reject the relevance of such ranting. Let’s have a go by choosing one merit good: healthcare. We know that the free market is faulty, with it failing to take into account social benefits and therefore leading to an inefficiently low level of consumption. We therefore have a classic case of market failure. But can we wave a dismissive hand at the libertarian “government fails more” hopeful attempt to maintain their overly simplistic outlook?

Dismissing the Allocative Inefficiency Whinge
First, an example of eureka event: We can’t compare healthcare to the market for chocolate. Healthcare is characterised by imperfect information. More precisely, we have the general concern of asymmetric information which, as the Economics 101 student can tell you, leads to the problems of adverse selection and moral hazard. It’s the latter in which we are interested here. In a nutshell, the patient/consumer is likely to suffer from the moral hazard of profiteering behaviour. For example, we don’t know what we need and what necessarily works. We are therefore offered expensive treatments that do not work. Indeed, these information problems will- with competition- lead to a race to the bottom (where poor delivery, given the need to maintain profit opportunities, becomes the norm). Eliminating such problems isn’t a game of tick-tack-toe. For example, consider the attempt to improve information in the jolly world of plastic surgery. We could use league tables to attempt to allow patients make more informed choice and show the success rates of the available surgeries. However, manipulating these leagues is perfect entrepreneur territory. For example, the multiple-surgery owner can self-select cases, providing an exaggerated success rate by moving success stories to one surgery and failures to another. Planning becomes paramount, eliminating the disease of moral hazard whilst protecting the consumer from error (e.g. expensive drugs demanded out of desperation, rather than clinical justification).

Dismissing the Cronyism Whine
The free marketeer, god bless them, will often forget their Adam Smith and ignore any morality concern that is deemed inconvenient. The focus on the evils of coercion dominates their position, with some utopian notion that the market is based purely on exchange and therefore will deliver the freedom they so dream about. And, to be fair, it is the case that the politician (or the quango working for the politician) does not necessarily have the interests of public/merit good delivery in mind. However, if anything, this is likely to stunt expenditure such that the failure of the private sector is not corrected. This is the result of something akin to the retrenchment hypothesis: i.e. we get inefficiently low levels of funding due to the franchise including the petty middle classes and their electoral demands to reduce tax. This isn’t a call to deny slipper-wearing hooray henrys the vote. It is instead a call to reduce discretionary government policy. Earmarked taxation, with healthcare costs visibly displayed, should be adopted if healthcare is to be provided in sufficient quantity.


I’d like to finish with a suggestion: market forces can inflame economic waste in healthcare. The US’s poor record, combining a system that favour the private sector with relatively high level of healthcare expenditure, would seem compatible with that hypothesis. More detailed evidence also is supportive of that view. Mobley and Magnussen (1998, An international comparison of hospital efficiency: does institutional environment matter?, Applied Economics, Vol. 30 Issue 8, pp 1089-1100), for example, suggest that the US high per capita health care costs partially reflects economic waste and that regulation (plus non-profit hospitals) increases efficiency. Gosh, that isn’t quite consistent with the free marketeer’s preaching.

A Stuck Record: Economics, Suicide and the Irrelevance of Rationality

To what extent can we base suicide around the concept of rationality? Can we simply regard the suicide attempter as a 'victim' of temporary insanity? Alternatively, can we maintain the phenomenon within the comfortableness of the pursuit of utility maximisation? These head scratching questions essentially represent a more extreme test of “free will” economics. However, as argued in this entry, that test is actually only a side issue. Whilst it is quite appropriate to treat the assumption of ‘rational economic man’ with a healthy dose of disdain, there are more worrying issues at hand. Focusing suicidology on the economic concept of rationality is therefore misplaced.

I’d like to start with a standard approach to this depressing issue: i.e. the notion that suicide is generated by the individual’s contempt over the constraints they face on their future opportunities. Thus, we can refer to those that suffer from severe illness that unfortunately severely curtails the quality of their life. To analyse this circumstance within a rational suicide framework, we can model the individual’s discounted expected life time utility. When this utility figure falls below some given threshold, the suicide decision is provoked. But what are the implications of this approach? Clearly, there is then a rationale to aid this suicide decision and allow physician-assisted suicide. We still have free will maintained and the individual is apparently making informed choice with preferences consistent with utility maximisation. However, things aren’t as clear-cut as this euthanasia-supporting account suggests. We'd have to factor in the nasty business of uncertainty and its consequences on economic analysis. Indeed, healthcare can only be understood once we consider the repercussions of asymmetric information. For example, one could argue that euthanasia "mistakes" may occur because of over-reliance on physician knowledge. There is then a potential moral hazard problem where legalised suicide may lead to an over-use of suicide (from cutting healthcare costs in an insurance system to the physician's refusal to admit error in diagnosis). Does it matter if rational suicide exists? We cannot trust the physician to back-up such decision making. We’d only be generating perverse incentives that could, in the worst case scenario, generate unwilling victims.

The second “rational suicide” concern is more aggressive and very much more disagreeable: the suicide bomber. With religion often involved, the media tends to portray these criminals as fellows skewed towards irrationality by the extreme hatred generated by membership of religious cults. Economic analysis has reacted by adapting the concept of social capital. The bomber undertakes a rational investment decision: in return for belonging and deriving utility from group membership, he/she is prepared to give up his/her life in the future. The belief that there will be 'after-life' utility derived from their self-sacrifice is a useful bonus. However, I’d like to be crass in my simplicity here: so bloody what? Does an individualism approach even matter here? Given we want to restrict terrorist activity, we must target the terrorist institution. It is institutional economic approaches that can shed some light on counter-terrorist policy, rather than some inane attempt to model the individual’s utility maximisation decision.

In summary, I wouldn’t want to downgrade the importance of the continuous attack on the concept of free will and therefore the orthodox (and right wing) economic schools of thought that are reliant on it. I just need to stress that the whinge and whine about rational economic man is not enough. Economics has more to offer than just attacking the more inane assumptions used in neoclassical economics.

The Economics of Capital Punishment

Morality splurge on the issue of the death penalty is always rattling away at fever pitch. We get the full political range, from “its state murder” glumness to “eye for an eye” preaching. The economics approach, admittedly with only partial success, tries to avoid such handbag haggling. There is genuine attempt to demonstrate whether the introduction (or continuation) of capital punishment is an efficient response to the problem of crime. Efficiency here refers to the attempt to find some notion of an optimal crime rate, where the diddy dismal scientist can take into account the benefits and costs associated with changes in the criminal justice system. But can we support capital punishment with the tools spawned?

Let’s hop and skip through the weak arguments in order to jump to the important argument. The pro-capital punishment commentator will often, due to a failure to consider the nature of economics, focus on two minor issues: recidivism and accountancy costs. Recidivism refers to the tendency to lapse into previous behavioural patterns. The death penalty can stop the more aggressive forms. No executed prisoner will have the opportunity to kill again after all. We then have a justification to execute the most heinous killers to prevent them from killing again. Of course the recidivism rate for murderers tends to the minor side and we can minimise such problems via more severe prison sentences. After wasting our time with recidivism, the pro-capital punishment commentator will find himself a grey suit and some comfortable slip-on shoes in order to refer to the accountancy of the issue. Simply put, he’ll crow that we can avoid the financial burdens of housing inmates for long prison sentences. Unfortunately the accountancy angle doesn’t hit home in the useful utterance. The constant appealing, in the hope that the innocent aren’t ‘accidentally’ executed, ensures accountancy ambles are second-rate.

The decision to use the death penalty must rest on the magnitude of any deterrence effects. These effects are based on a marvellously simple way of understanding criminal behaviour. The criminal is a simple rational agent who will, by taking into the account of costs and benefits, will attempt to maximise their satisfaction. We all become potential murderers, as we encounter the question “Does the expected utility from committing murder exceed the expected utility from alternative action?”. The argument for capital punishment then looks bullet proof: We must raise the price of murder for potential criminals in order to get less of it. The death penalty raises the price of homicide as long as execution is deemed to be more utility harming than life imprisonment.

The empirical testing of the theory looks like a hallelujah moment. Ehrlich(1975, 1977) uses econometric methods to estimate “murder supply equation”. His time series study suggests 1 execution deterred 7-8 murders; the cross section study suggests the effect is stronger at 20-24 murders. However, we must always be careful of such evidence. It is not possible to prove the deterrence hypothesis, given findings are reliant on the exact econometric techniques adopted. Thus, it is possible to use Ehrlich’s data and sample period but, by adopting different empirical specifications and functional forms, reach divergent conclusions. It becomes even more worrying when we note that there is a likelihood of “publication bias” (either in favour or against) as the researcher uses his/her morality to deliberately bias results by choosing a specific econometric methodology that increases the probability of achieving the results they desire.

One might argue that it’s the anti-capital punishment knee-tremblers that are more prone to this bias problem. We can refer to the notion of a positive income elasticity of demand for humanitarianism. Thus, as our society sees increase in income we may move away from economically rational choices due to perceived fears of brutalisation. But what if we are to take that mighty leap and just accept the literature in favour of deterrence effects? Things aren’t actually made more straightforward. Rather disturbingly, the empirical analysis suggests that deterrence effects increase the quicker you execute. Thus, to maximise deterrence we'd have to maximise the number of “mistakes”. It also suggests only certain forms of execution work (at worst ensuring those bias doubts are fog horned back into our mind). We also should consider potential negative encouraged by the death penalty. For example, the marginal cost from committing multiple murders is eliminated if the death penalty is given to 'joe average' murderer. It therefore delivers perverse incentives to increase your kill rate.

Given the uncertainty over deterrence effects, it would seem prudent to maintain a non-capital punishment policy. The economics simply isnt up to suggesting otherwise...

The Costs of the EU

The debate over Britain's membership of the European club has unfortunately been sidetracked by the rancid right. An assorted bunch of UKIP and flag waving bints have ensured that there is too much "Little Englander" foot-stamping. This has had the unfortunate knock-on effect of sidestepping the logic of the Europhobe position. Nevertheless, we should not be too concerned about this blight blip. The Europhile population ranges from snotty-nosed snivelling student blubbering away on internet forum to the political elite big lads crying about that lost empire influence. There is therefore every reason to assume that the inefficiency of the EU can be eliminated in the future. This post refers to some of the where’s and why’s. We'll start with a dismissal of the herded Europhile's economics and then provide an appreciation of why the folly of political integration will always generate significant costs.

The Economics 101 star will have a heap of basic theory to describe the gains from European integration. So let's start by dismissing their relevance. Perhaps the most hardcore argument is based on the classic application of trade theory. Thus, one can argue that the EU is a preferential trade agreement that, by eliminating forms of trade protectionism between member states, will succeed in generating 'trade creation' gains. It's a persuasive argument, particularly as it is true that protectionism between European states will destroy economic opportunities and therefore reduce economic welfare. However, there are a couple of diddy problems with the logic. First, trade creation effects are only half the story. We also have to consider trade diversion. Here, trade can be inefficiently diverted from non-European countries (who now face European-wide protectionism) to our European neighbours. This, at the very least, will reduce the economic gains from trade effects. Second, there is absolute no need for economic integration to generate these effects. A free trade area is all that is required.

The second argument is the weird beard uncle of geopolitics. We get the argument that Britain is too puny, too insignificant and too bobbins. Whilst it may well be true that England will fail to lift the world cup in my lifetime, this argument is again suspect. In terms of economic analysis, we can refer to the nature of strategic trade policy where economic integration enables a ‘mighty economy’ to compete in markets characterised by oligopoly at the international level. This then ensures the available profits go to Europe and benefit the European! It sounds impressive. However, the practical results are a touch less impressive. We only have to refer to Airbus and its continued crisis. The government subsidised company continues to make planning error, as demonstrated by the mistakes with their A-380 white elephant. For example, Irwin and Pavcnik (2004, Airbus versus Boeing revisited: international competition in the aircraft market, Journal of International Economics, Vol 64, pp 223-245) conclude that the "introduction of the Airbus A-380 will substitute most strongly for existing Airbus aircraft rather than the Boeing 747". The future isn’t bright!

The third common economic argument is that the European cosy-club produces economies of scale gains. There is no doubt that the EU is a behemoth. It has the third highest population (after China and India), managing a figure of approximately 460 million individuals in 2005. But these arguments, given globalisation, are awfully old hat in their application. England outside the EU will still have the availability of world trade markets at Felixstowe Port. Indeed, globalisation means we should actually be talking about political disintegration. The UK, for instance, can forget its empire days and allow the component countries to go their separate way. A 'British domestic market' is no longer required. Generating a super state then becomes economically irrational. This is made more obvious by the EU's part in restricting successful WTO trade liberalisation. We have to realise that regionalism is actually a hindrance to gains from globalisation. Instead European policies are increasingly run according to the aims of the profiteering corporation. As an example of its destructive influence, consider the paper by Crawford (2005, The European Union and Democracy Promotion in Africa: The Case of Ghana, The European Journal of Development Research, Vol 17, pp. 571-600). Here's a taster via its abstract: "This article contrasts European Union (EU) democracy promotion policy in Africa with the reality of its implementation in Ghana…Conclusions are two-fold. First, the EU's political activities in Africa are driven more by its self-interests than by the norms and principles of democratic governance. Second, democracy is narrowly conceived by the EU, being more concerned with limiting state power than extending popular control, consistent with hegemonic neo-liberalism."

Let us now turn attention to a key negative aspect of the EU. Let’s introduce it via the historical dominance of agricultural protectionism. We'll start with a spiffing example of the extent of the waste of the Common Agricultural Policy (CAP): "[CAP] could pay for an upper class ticket to New York on Virgin, and the cows would get a free haircut, manicure and massage plus a choice of 50 different movies thrown in". The common defence for this nonsense is that, by supporting the famished farmer, the countryside way of life is protected. They forget to mention, however, that according to the OECD only 1/4 of direct agriculture subsidies are actually retained by farmers. The money is skewed towards the large farm (the royals do particularly well!) and the corporation. Charges of corporate welfare and redistribution in favour of the rich are therefore quite appropriate. An alternative defence is that domestic food supplies have to be protected. Whilst we may suffer now from higher food prices, we'll give the EU a kiss on the cheek when world food supplies succumb to the terrors of uncertainty in production. Again, on the surface, this looks like a strong argument. However, it is again mere shallow scrawl. Our agricultural sectors can compete and thrive via productivity. As an example, Morgan and Morley (2005, Causality between Exports, Productivity and Subsidies in EU Agriculture) comment that for Britain and Germany "exports have been largely due to increased productivity in their agricultural sectors rather than any beneficial effects of the subsidy system". The UK and German sectors have been able to compete because of efficiency criteria. The subsidy system is then merely getting in the way of that process, given protectionism will harm productivity advancement.

The reason why agricultural subsidies have been so dominant historically is much less palatable. It can be summed up by the notion of influence costs. This is a concept used in the theory of the firm to understand constraints on firm growth. As a firm becomes larger, there are more opportunities for profiteering behaviour (e.g. employees spending their time brown nosing to get ahead). So how can it be applied to appreciating the damage generated by the EU? The lovely libertarian offers us the starting point: the same analysis can be applied to the public sector and the problems of government centralisation. Thus, due to the success of pressure groups, decisions are not made to maximise social welfare. As we move from local government to national government, the opportunities for profiteering increase. As we move from national to supranational, the ability of public accountability to reduce opportunities is hindered further. The EU is then a vehicle to ensure inefficient decision-making is protected from potential electoral conflict where the plebs question why the social welfare costs should continue. Corporate interests demand centralisation as it moves spending and regulatory decisions to an unaccountable area of government.

The waste on the agricultural sector is just one example of the costs spawned by unaccountability. The future may well be more aggressively disagreeable. Consider, for example, the EU’s utter failure to do anything about Europe’s miserable R&D record. Indeed, since 2000 Europe's R&D intensity has been slowing (e.g. in 2005 R&D as % of GDP was 1.84% in the EU, 2.6% in the US and 3.1% in Japan). Amazingly, the EU has suggested that the military sector may offer a solution. Take the following standard European quote: "the European Council explicitly recognised ‘the role that defence and security related R&D could play in promoting leading-edge technologies and thereby stimulate innovation and competitiveness’, and invited ‘the Council to analyse the role of defence R&D procurement in the context of the overall R&D activities in the Union, including the possible creation by the Council of an inter-governmental defence capabilities development and acquisition agency". A Common Armaments Policy that subsidies our arms companies could well be our next drastic mistake. We'd be creating our own military industrial complex and the misery associated. More cost, more policy error and more suffering. Shame on the Europhiles!

Economic Inefficiency – Clinker Capitalism and the Santa Socialist

Clinker? I’m not trying to fling fine-tuned forge fetishism. I’m doing something much more disagreeable: applying that beast known as American slang. It’s not as inane as taking an episode of Friends and assuming it is a good representation of comedy. No, it serves the purpose of characterising capitalism as “an error, a failure and a dud”. I’m going to do this by avoiding the traditional snotty-nosed snivelling favoured by the net nerd neo-socialist. There is no reason to blubber about execrable evils or bawl about monstrous morality. Such scrawny socialists, treading water until their souls launch towards lillylivered liberalism, are so darn easily discounted and give an unnecessarily easy ride for the cretinous conservative. The battle should be confined to efficiency expostulation. The churlish conservative must be educated about economic efficiency and the failures inherent in capitalism.

To demonstrate capitalism’s calamity, one only has to think about the characteristics required for capitalist’s to thrive and gorge on the gravy train. For your informaton, here are some of these little ditties:


(1) Unemployment/underemployment
The employer’s objective is simply the maximisation of their profit. Unfortunately for the free marketeers this can have some rather unfortunate implications. The dastard microeconomic foundations of macroeconomics leads us to the effulgent efficiency wage theory. For example, we can appreciate that work effort is not guaranteed by the labour contract (i.e. employers have to find methods to transform labour power/capacity to work into labour/activity of work). Worker resistance dominates if the cost of losing one’s job is too low. We get an unacceptable level of effort, referred to as “whistle while you work” level of work intensity. Unemployment is necessary to deliver acceptable levels of productivity. There’s applause from the orthodox and the radical economist with this stuff. For example, the Shapiro & Stiglitz’s (1984) shirking model is strikingly similar to Bowles & Gintis (1990) radical economics model. We therefore have to consider the caustic consequences for our understanding of efficiency: With unemployment (or hidden unemployment via underemployment) used to discipline the workforce, profit maximisation is reliant on unemployment. Given involuntary unemployment is a wasted resource, competition will ensure inefficient labour markets.

(2) Discrimination
The Economics 101 student is misled to think that supply and demand conditions determine an individual's wage and employment outcome. Hogwash and balderdash to all that bunkum! We only have to consider the existence of discrimination to kick that in the knackers. The orthodox position is based on Becker’s “taste for discrimination”. The bigoted big bad boss, given his distaste for the lady/black/handicapped/homosexual (or Norwich neanderthal), is prepared to accept lower profits to maximise their utility. It’s a poor theory precisely because discrimination exists in the long run and is not driven out by market forces. We would have to assume the existence of market power, where firms with monopoly profit can maintain abnormal profit indefinitely and therefore can afford to be bigots. However, we do have an alternative explanation. We can again refer to the profit motive and how it encourages inefficient practices. The employer is motivated by gaining greater control over workers via divide-and-conquer strategies. (see Roemer [1979, Divide and conquer: Microfoundations of a Marxian theory of wage discrimination, Bell Journal of Economics, Vol. 10, pp 695-705] for a good introduction to the theory). Wage discrimination can be used to increase profit by dividing workers and increasing overall exploitation. Within that there will be an understanding of an ‘optimal mix’ of ‘worker types’. Moreover, there will be gains from reinforcing racist opinion. For example, occupation crowding of ethnic minorities into jobs deemed menial can be used to strengthen the opinion of ethnic minority inferiority. Profit maximisation requires discrimination in order to minimise labour solidarity, reinforcing further capitalism’s need to adopt an inefficient use of factors of production.

(3) Education
Britain offers a great natural experiment into the repercussions of growth in the tertiary education sector. It has seen a reduction in social mobility. It has also seen an increase in the proportion of unemployed graduates. This should communicate to you that ‘supply side economics’ is a load of guff. Instead, we have to focus on the role of education. More specifically, its human capital role is corrupted by the nature of capitalism. It becomes increasingly sidelined to simple certification and used primarily to justify artificial generated wage distributions. The consequences are again inefficiency generating. Education increases the likelihood of worker mismatch and reduces the productivity gains from education. “Higher quality” workers from poorer income households are denied the same opportunities, as “lower quality” kids from higher income households can more easily acquire the certificates necessary to gain access to the primary labour market characterised by “good jobs”.


I’ve chosen just a few diddy examples to demonstrate the failings of capitalism. Hopefully it will encourage my chummy comrades to avoid the morality spew that they’re prone to. The efficiency argument favours the left wing and can easily be used to beat any wretched right winger in a pub debate.

Theory of the Firm – Knowledge Flaw or Heterodox Cheerleader

Why do firms exist? What determines the firm’s boundaries? They seem such harmless questions. They’re also questions that need to be answered, given the importance of the organisation for our understanding of economic result. Ultimately, for economics, they’re on a par with a child’s “mummy, why can’t I stick knitting needles in the plug socket?”. So it really is a surprise that your average economist-wannabe hasn’t a clue how to answer them. Perhaps one problem is that the implications may just be too unpalatable for the weak-chinned conservatives amongst us. As we attempt to provide a coherent theory of the firm, we will necessarily question the tunefulness of the free market whooping. It’s the poetry from radical thought that begins to shrill and shine.

The Economics 101 theory of the firm is essentially a longwinded lecture about the effective employment of ‘economies of scale’. It’s an atrocious attempt at averting attention from knowledge deficiency. A purely technical understanding of the firm is adopted, where the firm miraculously appears as a means to combine factors of production. The entrepreneur just becomes something that the student finds difficult to spell. The boundaries of the firm are then appreciated with the U-shaped average cost curve, delivered by the twin terrors of economies of scale and diseconomies of scale. Understanding the nature of the firm is then a simple task of woo-wooing over the impact quantity produced has on average costs. Ultimately, we’re left with the notion of the optimal sized firm where average costs are minimised. So what is the problem? Here’s an example of why the usual tales of economies of scale really aren’t up to the task: Why can’t those economies of scale (and scope) advantages be achieved via the formation of entrepreneur alliances? There really is no sufficient justification for the concentration of resources under one entrepreneur. Effectively we only have the required theory to refer to the unlikely notion of a market characterised by natural monopoly (i.e. where such alliances cannot appear as, given the economies of scale are sizeable compared to market demand, there’s only room for one entrepreneur to do his magic tricks). Dismissing the “entrepreneur alliance” plea, however, is actually rather nice’n’neat. We can simply introduce the importance of imperfect contracting. Entrepreneur love-fests will, at the very least, result in bargaining costs and the likelihood of reneging on contracts.

With imperfect contracting, however, our microeconomic marvelling needs re-jigging. We can no longer adopt a simple blueprint approach where the firm can be simply replicated. We have to refer to organisation theory to understand the methods to minimise these contracting problems. The orthodox position is therefore based on the notion of the ‘Coasian firm’, where the notion of transaction costs is introduced to the game. Simply put: Reliance on the market is costly! One just can note the undead army of business lawyers to appreciate that. The argument is then that the firm exists to minimise these costs. Economic planning effectively replaces the market. As the daddy of transaction cost theory remarked: “It can, I think, be assumed that the distinguishing mark of the firm is the supersession of the price mechanism”. We have to refer to the difference between the invisible hand of the market and the visible hand of management.

This stuff doesn’t fit well with libertarian thinking. We live in a world of uncertainty where perfect information is only relevant to the make-believe realm of the textbook. The libertarian will refer to these knowledge constraints and how the market, by providing communally owned information, saves on information costs and provides the correct incentives. The libertarian will use that to attack the nature of government interventionism. Planning is impossible, given the nature of dispersed information. So how can we appreciate the existence of the firm? There is no rationale for the firm, given the focus should be on interaction of entrepreneurs that rely on the market. You don’t need to know that beetle blight has destroyed the crop of your favourite cereal. You can simply react to the increase in price. Prices provide the correct signals that minimise your mistakes and therefore maximise your welfare. Economic planning should be avoided as, given our distributed knowledge, we will make costly mistakes. But here, to understand why the firm exists, we are seeing that economic planning out-trumps the market. The consequences of this cheeriness are cosy. Consider, for example, mumbles about monopoly. To basic free marketeer economics monopoly is either a sign of market inefficiency (as described by the notion of deadweight loss) or a sign of government inefficiency (as influence costs leads to regulation that corrupts property rights). This analysis, however, is the result of naïve (or non-existent) theory of the firm. Once we move away from that analysis (and attempt to explain actual behaviour!), we’re led to analysis that questions the nature of the boundaries of the firm. Without an optimal sized firm, what theoretical reason do we have to reject the belief that the economy can be characterised by “one firm” (i.e. a simple form of socialism).

But this stuff is more than just a whinge at easy targets like “I reads mises.org I does” conservatives. The Coasian analysis also represents a genuine attack on the orthodox position. To see why consider the 1985 article by Phillips in the Journal of Post-Keynesian Economics. With the Coasian traditions fine-tuned by the organisation theorists Alchian and Demsetz, Phillips concludes that they have “inadvertently...pointed to the fundamental contradiction of capitalism which Marx attempted to remedy: the market system results in an inefficient allocation of resources. This can only be remedied when there are private property rights over the information provided by the market. Society organised as a privately owned market will be characterised by a high level of economic planning instead of the individual planning of capitalism. Socialism emerges, at some point, from the historical tendencies of capitalism: increased planning and the growth of the privately owned markets to encompass the entire economy”. Transaction cost theory (as spawned by the likes of Coase) is used to support neoclassical theory without appreciating the consequences of economic power within the firm. The analysis actually sits more comfortably with Marxist theory of the firm, with one of the most important costs of the market highlighted: worker militancy and the need to use hierarchy to minimise labour’s ability to acquire economic rents.

That leads us to the basic conclusion that both Austrian and neoclassical theory has no ‘theory of the firm’. The theory that is available, via Coase and subsequent organisation theorists, is actually no different to radical understanding. To suggest that they are different you’d have to take a utopian view of exchange theory. This would paradoxically eliminate the very need for the firm (e.g. costless transactions in neoclassical theory). God bless Coase and the slide of the orthodox position to the radical smile.

The Economics of Addiction – The Naïve Cannabis Legalisation Spew

The economic analysis for drugs, both theoretically and empirically, is in full inhale. Not surprisingly, given the perceived allocative wonders of the free market, overall the good ole economist munchkins have tended towards partial legalisation of the substances involved. See, for example, Thornton (2007, Prohibition versus Legalization: Do Economists Reach a Conclusion on Drug Policy?, Independent Review, Vol. 11 Issue 3, pp 417-433) for background info on Economist attitudes. His 1995 survey has a slight majority of 52% economists favouring drug decriminisation. Don’t get me wrong here, them their dismal grey suits aren’t all puffing on a bong. Only 16% actually wanted legalisation. However, this describes the relatively pro-drugs nature taken by the discipline. Given this position, this blog entry has two goals. First, to explain the economist’s position and why it apparently favours the end of the ‘war on drugs’. Second, to explain why this is folly and how the evidence involved has been mistreated.

We start with the negative and the following quote from Pudney (2004, Keeping off the Grass? An econometric model of cannabis consumption in Britain, Journal of Applied Econometrics, Vol. 19 Issue 4, pp 435-453): "Cannabis is the subject of much debate, with some recent moves in Great Britain and elsewhere towards a more liberal policy stance. There is little doubt that cannabis is a harmful substance. It is believed to be physically at least as damaging as tobacco, its use raises the risk of accidental injury, it is occasionally associated with acute psychiatric difficulties, and there is a possibility that its long-term use causes impairment of brain function. Whatever the true scale of these health effects, use at an early age and cumulated long-term consumption are the important dimensions of health risk. Thus the dynamic process of cannabis consumption is particularly important". This communicates the standard market failure argument, where a free market will ensure inefficient consumption levels as the cretinous consumer fails to take into account the externalities imposed by their behaviour. The effectuation of efficiency demands that we lower consumption levels, given the utility maximiser will over-consume and ignore the social costs from their behaviour. The evidence now suggests that the health costs do actually exceed that of the evil weed known as tobacco. Aldington et al (2007, The Effects of Cannabis on Pulmonary Structure, Function and Symptoms, Thorax) suggests that, in terms of the health effects considered, "one joint is equal to 5 cigarettes". There are then only 3 options: management via market (using "sin product" taxation), the practice of prohibition or education enhancement.

Let’s first dismiss the education angle. The notion that education can solve our woes is normally the nirvana of the likes of Preacher Blair and his New Crony nuns. However, can we actually indoctrinate the ignoramus towards that holy grail of optimality? On the face of it, it looks straightforwardly simple in its simpering smile. We can crow about the notion of 'anti-markets', where inefficient levels of consumption by the pleb can be discouraged. Nonetheless, the failure of the anti-smoking campaigns to reduce black lung oblivion from tobacco is an upside-down crucifix to the jovial Jaysus judge. Education largely fails to have any significant impact on behaviour. Understanding that bankrupt bungle isn’t any Oliver Twist hardship. We can refer to basic economic psychology models that demonstrate the limitations of the economist's rabid recourse to rationality. We start with the concept of myopia; lovely lingo for short-sightedness. The future costs from current behaviour are effectively discounted towards a value of zero. Why worry about tomorrow’s hospital bed and the bed sores encouraged by the uselessness of the health profession? Whilst nurses are largely characterised as an uncaring money grabbing profession where gossiping out-weighs patient care, we can restrict today’s worries to getting that next drug delirium. Can we educate this time-orientated irrationality out of the drug consumer? It certainly looks a trifle unlikely! Consider, for example, Peretti-Watel (2006, Cognitive dissonance and risk denial: The case of cannabis use in adolescents, Journal of Socio-Economics, Vol. 35 Issue 6, pp 1032-1049). This paper notes the unfortunate consequences of risk denial: "adolescents’ propensity to deny the riskiness of cannabis use was strengthen by both their own use and peer use. Moreover, risk denial was positively correlated to academic achievement and consumption in previous years, and it was also independent from exposure to preventive information at school. As a consequence, this denial should be considered a learned skill, not a lack of knowledge". Here, we have to appreciate the difference between rational behaviour and rationalising behaviour. The druggies, despite education, fail to follow behaviour consistent with utility maximisation. The poor little blighters cannot benefit from the wonders of knowledge.

That’s education effectively eliminated. So what about the alternative of ‘legalise-n-tax'? The legalisation angle is built on the economic analysis known as the ‘rational addiction model’. Whilst this involves drawing some pretty diagrams or getting your greek letters out, the central element is strikingly straightforward: We merely have to adapt the consumer’s utility function to take into account the nature of the product, where future consumption is dependent on the level of current consumption. Given we maintain the hip-hip-hoorah of rationality, price effects will actually remain important. Tax, by increasing the price, can therefore internalise any externalities and ensure optimal consumption levels.

Given rationality, the market can be manipulated and we can marvel at its magical merriment. However, before we get too excited we have to appreciate that, in terms of the nastiness of practicality, there is a crucial flaw with this analysis. That flaw reflects the model’s repercussions for the neoclassical wonder of equilibrium. In simple terms, we have to appreciate that there is instability generated by the notion of multiple equilibria. Thus, marginal changes to the economic environment can lead to significant changes in an individual's consumption levels. That’s not just in terms of standard economic variables such as bank balance betterment. We can also refer to changes in psychological outlook, such as a positive life experience such as dropping a sprog or getting a new girlfriend that looks better than a bucket of smashed jellied eels. This instability ensures that we have to appreciate that price effects can actually have aggressive after-effects. For example, legalisation that reduces price can shift the temporary experimenter to the regular light user. It can shift the light user to the chronic abuser. Indeed, the creation of the chronic user is more likely given the experimenter has not invested any significant effort into his 'addictive stock' (with past consumption then helping to determine the marginal utility from current cosumption). The required tax to hinder the creation of the chronic user, which will magnify the social costs, is therefore likely to be significant. Whilst the Chancellor of the Exchequer may find such taxes blissful in their revenue-raising beauty, the effects for our optimal consumption analysis are less spiffing. For example, we can refer to how tax-regulation can be by-passed by black economy production. This is a certainty where there is any significant difference between pre-tax and post-tax price. Market failure is therefore guaranteed, both in terms of the 'free market' and the regulated market. In such an environment, legalisation is an irrational response. With prohibition we can at least deny some access to the significant proportion of the population that aren’t making 'Homo Economicus' decisions.

And let’s also appreciate that there are actual benefits for consumers from illegality. Keep pot illegal, else the petty middle classes won’t have anything to feel rebellious over. We're increasing their marginal utility from consumption, we're increasing their welfare!

Inefficient Wage Distributions – Flesh Eating Capitalism

Homogeneity is not necessarily the frilly page boy of neoclassical labour theory. It does actually have a purpose as it ensures simplicity in modelling, making the willing PhD wannabe task simply scrummy. However, given it ignores the variegated vicissitude in our varied view, it does impose costs for our appreciation of actual labour markets. Here, I’m not getting all kiss-kiss midnight cowboys over the popularity of our prissy population. I am just taking a moment to celebrate my superiority over my hamstringed neighbour and his inability to string a sentence together. This isn’t aggro arrogance, nor is it ‘no one loves me but my jiving mother’ reactionary rant. Whilst that neighbour of mine is as much use as a Conservative comic, it is merely an appreciation that the variance in our abilities is significant. A wage distribution, assuming compensation reflects standard supply and demand criteria, will be the standard result. We can expect inequality to be generated by the wonders of economic efficiency. Thus, we can refer to two features that ensure scrumptious wages differentials. First, we have to consider human capital. This is defined as any angelic aspect that promotes our precious productivity. Whilst we’ll normally celebrate the gracious work of the “I can’t do” teacher trade, we can also refer to the work of any fellow that makes us more useful: from the mad doctor that stops us from Arthur Fowler shaking to the self-help author that promotes testosterone alternatives that increase our war-face fighting spirit. Second, we can refer to the nature of job characteristics. Jobs aren’t all about counting buttons. They vary in their nature and, assuming some have dirtier and dodgier negative non-pecuniary characteristics, potential workers may have to be compensated via higher monetary benefits. Wage distributions will therefore all reflect the notion of compensating differentials. So far we’ve stuck to the neoclassical bible. But can we argue that wage differentials only reflect human capital and compensating differentials? Could capitalism also be reliant on inefficient forms of inequality? Could profit maximisation be the bogeyman?

The notion that wage dispersion will exist, even in the extreme case of homogeneity in worker quality, is well understood in labour economics. For example, the empirical literature goes back to the likes of Lester (1946, Wage Diversity and Its Theoretical Implications, Review of Economic Statistics, Vol. 28, pp152–159) and Slichter (1950, Notes on the Structure of Wages, Review of Economics and Statistics, Vol. 32, pp 80–91). We therefore have to adapt our theoretical understanding to understand the phenomena. A possibility is the inclusion of monopsony where the individual firm will experience an upward sloping labour curve and therefore have wage-making power. For example, see Bhasker et al. (2002, Oligopsony and Monopsonistic Competition in Labor Markets, Journal of Economic Perspectives, Vol 16, pp 155-174). However, whilst this sweet stuff is sensational for specific sense such as minimum wages, we also have to appreciate the weapon of choice in that wage making behaviour. A key aspect that the employer has to consider is the cost imposed by labour conflict as uppity employees attempt to grab greater goodies. Organisation therefore no longer reflects a simple ‘division of labour’ attempt to maximise the workforce’s productivity. The firm is not merely a means to ensure all mutually beneficial trade are exhausted. It also becomes a hierarchical mechanism required to manage conflict and therefore maintain profiteering. Orthodox theory actually celebrates this position. For example, we have the analysis into internal labour markets. Here, simple supply and demand whimpering is essentially replaced. Workers do not face efficient discrimination, but face an employer attempting to maximise compliancy and minimise the share of economic rents accruing to its employees. Wage norms, rather than supply and demand, are a crucial aspect of this process. Given the need to whack off greater profit, wage differentials are delivered through artificial human resource management techniques.

But what about more visible obvious inefficient wage differentials generated by discrimination? Be it racial, gender, sexual or about a dislike of “I’m more likely to suffer disease” six-fingered Norwich Neanderthal. Will profit maximisation eliminate it? If we follow Becker’s “taste for discrimination” we must respond with an affirmative and a haughty hallelujah. The theory suggests that discriminating employers will be prepared to give up profits in order to maximise their utility and avoid those they deem as undesirables. To have discrimination in the long term we’d have to assume that all employers are homogenous bigots. Despite any upper lip curl we may have over the exploiters, that is clearly an assumption too far. I’ve even been known to buy an employer a “girl’s drink”. As soon as you assume the non-bigot exists (i.e. the employer only interested in profit maximisation), market forces should then drive out the inefficient bigotry. However, that doesn’t occur. We might want to argue that is because of the existence of supernormal profits generated by monopoly power. Inefficient discrimination is allowed to continue as market forces aren’t sufficiently powerful to force that admirably appropriate action. However, we have a possible alternative explanation. In crass simple terms, discrimination becomes a means to stratify the workers and therefore reduce their bargaining power over available economic rents. Via inefficient discrimination, profits are increased. Market forces will not eliminate the inefficiency as we again have profit maximisation dependent on enforcing inefficient labour market practices.

In conclusion, it is reasonable to argue that inefficient wage differentials will naturally develop via capitalism’s profit maximisation peddling. One should never forget that the consequences from this market failure can be harmful. We do have a reduction in economic efficiency. As an example, take the health sector labour market in Balmy Britain. British doctors have done particularly well. Their combination of arrogance and uselessness has not discouraged significantly sizeable earnings elevation. They’ve been given extra funds to buy their Eton eggs, Tim and Tom, a Saab each. And lower down the human capital hierarchy? The likes of the cleaners, encouraged by contracting out that forces competition, have done particularly badly. The end result has not been splendid, super or spiffing. We have hospitals fighting infection due to reductions in the quality of cleanliness. The incentives generated by the wage distribution have led to severe inefficiencies; inefficiencies that are rather visible when you’re a victim of a flesh eating bacteria.

The Work Leisure Trade-Off

Draw me an indifference curve that relates consumption and leisure. Don’t make it black and white though. Get your coloured pens out and impress me with the rainbow. Try to bamboozle me with economics that insists that our behaviour is a licking lips version of vapid Mickey Mouse maximisation. Such suggestion is really just a celebration of the basic blunder of labour economics. It provides a means to suggest that rational economic man kicks any social science analysis in the knackers, making such wishy-washy wizards of inferior interest. Life then is straightforward and spiffing Steve, despite being a pleb, can be relied upon achieving the utopia of optimality. But is that slobbery slab of sense really tickety-boo? This blog entry gives you some near random thoughts of mine on the subject to suggest otherwise. Unfortunately I didn’t get to type a greek letter, nor draw a pretty diagram. It’s purely driven by the gross concept of chaffy comment. I’m therefore going to be nice and neat and consider separate, but sky-scraping skipping connected, contention. First, let’s consider leisure and have some finger tapping over the nature of our pursuit for such pulchritude. Second, let’s then consider the nasty side and the nature of work. Should we support the simper of the special Sunday storm trooper? Should we therefore force serenity Sunday?


1. Do caravan owners deserve pity or contempt?

To consider the nature of leisure let’s start with a question that should exercise our worry lines: Can our drive for income maximisation actually harm our well-being? Our neoclassical comrades attempt to paint us with kiddy paints. These questions are beneath consideration as we are essentially ‘static’ beasts with behaviour brewed at birth. That does not mean that our preferences are constant. We may like boy bands as youngsters and fall further in the abyss as we age and replace such feeble offering with more listless lyric fit for the lift. We may even replace our baby wet-wipe sniff and scratch with the tinge of urine. However, that denies any sense of evolution in our loveliness. We’re essentially just celebrating an ageist framework where the oldy-worlders ogle odious outrage. But what happens if we move from such fiendish foot-stamping fever? Think about the evolutionary process that may inhibit our development. In summary: The puritan drive for greater efficiency can lead the apparently rational consumer to ultimately harming their utility. But how? The link between work and leisure is not as simplistic as neoclassical theory suggests. That theory suggests work is neutral and provides a means to exchange laudable leisure for commendable consumption. It’s nothing more but the means to enable us to achieve that highest possible indifference curve that maximises our ultimate utility. However, that is of course drivel. For example, what is the impact of our attempt to maximise our productivity on our general outlook? Could it actually have an impact on our general behaviour? In crass simple terms, could we effectively become too driven by our desperate search for the wonders of economic efficiency?

A possible answer to this question is instantly provided by the simple microeconomic assumption of maximisation. Here, the consumer should ensure marginal satisfactions are equated. So what happens if there is a rise in wages reflecting productivity gain? The value of working increases and this then increases the opportunity cost of leisure. The rational consumer, to justify leisure, then has to find a means to make it more productive. How can he achieve this? He can invest in the utilisation of ‘capital’ equipment. The consequences aren’t actually attractive. Kaun (2005, Income and happiness: earning and spending as sources of discontent, Journal of Socio-Economics) gives a nasty example to demonstrate them: “Forty to fifty years ago, one could enjoy camping with little more than a tent, ice chest, lantern, and Coleman stove. These, along with a few books, a folding chair, and perhaps a fishing rod represented standard equipment. No longer. Today’s RV is decked with rafts, motorbikes, surfboards, scuba diving equipment and TV antennas. Inside, all the “comforts” of home, including TV, VCR and lap-top computer, leave little time for the Grishman novel lost somewhere in the clutter—if it was included at all. Never mind the negative externalities imposed on one’s crowded neighbors, all of whom have traded one dense urban environment for another. The pleasure derived from the vast array of “goods” will surely be diminished due to the time and annoyance their simple maintenance requires.” And he also summarises the materialism marvellously with the comment “rationality-run-amok”.

Our leisure pursuits are themselves polluted by our experience with work and our obsession with efficiency. We are cretins and the caravan goer is merely celebrating that fact. Don’t see them as cankerous consumers, they’re just more open about the consequences of our contaminated consumption.


2. God bothering Sunday or Zombie celebrating shopping?

Should we allow free markets? Should we allow unfettered capitalism on God’s Sunday? I’m not suggesting we should throw a bible at the beef and bid for Jesus judgement. I’m suggesting that economics can offer us an answer.

On the face of it economics tells us to get out of the churches and consume. We can assume that there is an advantage from Sunday shopping. One can simply argue that reflects opportunity cost of shopping time. See, for example, the rabid rampaging heinous herd in their 4x4 cars flocking to the DIY stores. Employers may be against such shopping spree. See, for example, Freathy and Sparks (1995, Flexibility, labour segmentation and retail superstore managers: the effects of Sunday trading, International Review of Retail, Distribution & Consumer Research). However, the individual is irrelevant. The fetishists must be sated. The businesses are forced to open on Sunday, else they run the risk of losing customers to competitors. Market forces effectively eliminate any cheery choice. If everyone opens we’re then not creating demand (and therefore opportunities), we’re only changing the distribution of consumer demand over the week. The impact on employer opportunities from legislation is therefore limited.

We know that there are likely to be negative economic welfare effects from changing work patterns to include unsociable hours. You could get all Adam Smith on me and anally assume that workers will have to be compensated for working such hours. There is no doubt that, to a marginal extent, this does happen. However, we do also have to factor in the nature of labour markets. We cannot just jump-ship and smoothly skip through ready recruitment. The labour market is characterised by monopsony power that is generated by job market frictions. “Walking away” is then not straight forward. Even for workers who are successful in moving there are imposed costs. Job turnover is not costless. You might as well waste your money on a pricey plumber. Firms therefore have power and can force workers to accept welfare harming changes. We therefore do know that the impact of forced employer hours constraints on employee well-being will be significant.

The issue is whether Sunday opening can overall be seen efficiency improving. You’d have to compare the benefits from easier shopping (e.g. saved travel time because of greater shopping opportunities) and the welfare losses forced on employees. Given the despicable dribbling drove from the slapdash shiftless shopper, I tend to favour the worker. Make Sunday special. Eliminate choice. Not for God, just for the crack.

Mad Military Muppets?

The Arms Trade: Peddling death, profiteering from oblivion! An industry characterised by git and gimp. We can play these sorts of emotive value games all day. There’s no doubt that can be splendid fun. From doom to gloom, we can wile our time away bellowing about the despicable diseased dragoons that gallop our society towards heinous horror. However, how about some rational economic thought? Just for a change! It’s about time that we avoided the primitive elements amongst us: from the left’s lower-lip trembling ‘don’t forget the children’ to the right’s rancid righteousness. To appreciate the arms trade, and therefore the more specific topics of military expenditure and arms production that live within it, there must be a concerted attempt to understand the impact that the military sector has on economic outcome. Are these effects negative? Can we rationally attack the sector by referring to the costs that it imposes on our economies?

Orthodox economics tends towards drudgery. Fundamentals are not debated and the economist refuses to accept the probability of mistake, misbelieve, misconception, miscalculation and assorted other words beginning with the miserable m. However, defence economics is victorious in its vivaciousness. The political economy encompasses a number of political economic schools and we’re able to offer proper critical appraisal. We can compare, contrast; we can accept and appreciate. So let’s have a go and start with a simple account of the available theory.

Neoclassical theory provides us with the notion of ‘market failure’, the bane of the limp-wristed libertarian. The understanding of defence economics becomes side-lined to understanding the factors that determine market optimality. Thus, we can refer to the delivery of the ‘national defence’ good which, due to public good characteristics, will at best be under-provided by the private sector. The rationale is straight-forward: the good has the characteristics of non-excludability and non-rivalry. The profit maximisation objective can no longer be trusted to deliver the nirvana of the exhaustion of mutually beneficial exchange. The naughty ole ‘free riders’ will take advantage of the public good characteristics and refuse to contribute. Who said there’s no such thing as a free lunch?

But is there any problem with this stuff? As usual with Neoclassical 101, we have to stamp our feet and note its over-reliance on the world of textbook curiosity. Can the military really be defined in terms of a public good? Consider its history: from massacring protestors to providing willing scabs to break strikes, the beneficiaries from military sector investment are clearly not even. Exclusion is actually the norm. We’d have to refer to Marxist games about the importance of class and the military’s role in class conflict. This then opens up the need to consider the alternative schools of thought. We have no need to restrict our understanding of economics to just the rant of the theorist that attempts to try and explain away all behaviour as constrained maximisation.

I’m going to separate the alternative analysis according to their relative bitch about the bile generated by the military madmen. We’ll start with something that gets the libertarian in an excited state: liberalism. I’m not talking about the modern liberal voter: i.e. “lets put a penny on income tax and make everything scrummy”. I’m talking here about the cheer leaders for ‘limited government’. Here, we have to focus on the high risk of over-expenditure on the military. It is argued that the selfish economic agents will take advantage of the concentration of resources generated by government provision. Why bother to limit the military sector according to the appropriate concerns about national defence? There is ample opportunity to manipulate politicians to ensure unnecessary redistribution: from the poor ole taxpayer to the arms producing cigar smoker. If this stuff floats your pedal pleasure craft, then your worried brow will be busy getting wrinkled over the means to minimise the magnitude of corruption. Without accountability, we can tut and toot at an obese putrid military sector that gives the libertarian his coronary. Perhaps they just haven’t got round to controlling the naughty US government because they’re too busy chanting “de-fense” at inane sporting event? It’s not for me to judge as they fail to control the growl of the military industrial complex.

So far so negative! So let us for now continue in the misery stakes. Let’s sneer at textbook neoclassicalism whilst effectively, for the crack, also supporting its conclusions. That seems a waste of time, but there is a point. Honest! We start with the sneer. Textbook neoclassicalism is static in nature. Refer to time and the economics student will look up at you with gleaming gusto and refer to the variability of factors of production. But what if we move the analysis to a dynamic approach? In simple terms, the negative effects can be magnified. We have to refer to ‘crowding-out’ effects. There are opportunity costs generated by arms production. Resources needed to build the pretty tanks and dainty aircraft carriers could have been used in the private sector; a sector which can be assumed to be that more competitive, cunning and cute. Economic growth is likely to suffer as we destroy economic opportunities with our devil-may-care desire to gain military hardware.

So far no good: the military sector is likely to be a stuffed pig that drags our economy into the dumps of low potential. Nonetheless, if we move to other political economy schools our predictions can suddenly switchblade towards positive economic effects. Ironically, this theory is often dominated by the cheery lefties amongst us. However, let’s start with something more orthodox. It has been stated that the military sector can bear hug restrict economic growth. However, it is very easy to adapt that orthodox theory to predict the reverse result. One can simply include the notion of innovation within the ranks of market failure. The military sector is then a crucial means to inflate rubbish research rates and generate ‘spin-off’ technologies. The extra R&D generated by improving our military equipment can generate economic opportunities for the private sector. Indeed, if it wasn’t for the risk of ‘weapons of mass destruction’ attacks we wouldn’t have invented the stain-free tie. I’m grateful for the military for making it easier to eat spaghetti bolognaise.

But what about the comrades amongst us? What dinner party material do they have to refer too? There are essentially two camps predicting positive economic effects: the Keynesians and the Marxists. First, via the macroeconomist, we can refer to Military Keynesianism (such as Reaganomics). The military sector becomes vital for manipulating macroeconomic demand. The "true cost" of the military sector is then only appreciated by its relative inefficiency at demand management compared to other forms of public expenditure. And the keyboard warrior Marxists? The military sector provides a means to counteract the instability caused by monopoly capitalism. Military expenditure essentially is seen as a waste, but a waste that doesn’t threaten profit. Not surprisingly, the saucy socialists can refer to the 'permanent arms economy' and the macroeconomic protection of capitalist profits. And there does exist evidence in support of this premise (e.g. counter-cyclical use of military expenditure, plus the links between arms production and economic growth).

And my stance? I'm going to be wishy-washy about it and suggest we can link the different schools. We can start with the liberal understanding of the military-industrial complex. We can use that to understand how the conditions for military growth are generated. We can then refer to both Marxist crisis theory and post-Keynesianism to demonstrate how the nature of the economic system will then insist on maintaining that military waste. Profit must not be threatened. The military sector is then a natural part of capitalism. God bless it?

Charity Donations: The Soulless Stingy versus the Mollycoddling Mug

How much should we donate to charity? Pin money or shed loads? If we are too tight we run the risk of inhibiting the sublime satisfaction generated by altruism. Indeed, we might actually find it difficult to sleep as we cry “what about the nippers and the homeless kittens?” and splatter soak our pillows with shallow tears. On the other extreme, perhaps we become victims and give away too much? Harassed continuously by the pleas- on the street, the telephone and the box- we cave in and set up unnecessary direct debits that bleed that piggybank to an inch of its life. These extremes open up a thumb-sucking dilemma. Whilst we should not reject the importance of altruism for the utility function, we must consider the optimality conditions that impact on our understanding of charity.

The literature on the economics of charity is tiresome and sways away from the clear-cut. As the pesky ort