What is wrong with markets?

In some of my recent blogs I have argued that market economies cannot obviously be wrong in themselves at least under the most obvious understanding of the purpose of the economic system. I of course believe that the most egalitarian market economy is the correct one and that fairness is a major problem for market economies that requires constant rectification.

I fully accept that market economies tend towards inequality and monopoly and that it is necessary to have strong mechanisms in place to counteract these. Robust regulation is required to guard against monopoly and other potential market failures Redistributive mechanisms are necessary to counteract the inequalities that markets generate, and my CLIPH-rate tax system is my proposal to achieve this.

This still leaves it open to argue that there is something (or many things) wrong with markets even if there isn’t a better economic system available. Some political philosophers have made some arguments along these lines in recent years and it is worth considering these.

Michael Sandel is one of the most widely known political philosophers and has been a strong critic of markets. He has argued, for example in his book What Money Can't Buy: The Moral Limits of Markets, that markets impose their own valuations which corrupt and crowd out other values. He has a few good examples in which introducing market solutions can be counter-effective because other values get crowded out.

He goes to great lengths to show that the issue is not just the unfairness engendered by allowing markets into more areas of life in unequal societies, but that rather other important values can be lost as a result. His proposed solution, unsurprisingly to those who know his other work, is that markets should be subordinated to the common will, as determined by democratic discussion.

I was not particularly impressed or convinced by Sandel’s book, despite its being as clearly written as you would expect. Although I would be keen to encourage deliberative democracy I felt the book didn’t add up to much more than a few examples which did not all seem to particularly indicate the need for his vague solution of discussing together whether markets should be disallowed in some cases.

A more philosophically satisfying book from the same year with a similar title was Deborah Satz’s Why Some Things Should Not Be for Sale: The Moral Limits of Markets. Satz proposes a method by which to judge when markets are inappropriate among four categories of harm. This allows her to consider whether markets in various goods (such as sex or kidneys) might be noxious. Those items with markets deemed noxious should either be regulated and restricted or even banned.

Satz makes a clear case for regulating or restricting markets on the basis of arguments that are quite reasonable and which do not depend upon controversial philosophical or political positions. I therefore found Satz’s approach much more useful than Sandel’s to judge whether certain types of goods should not be sold.

So while I am happy to accept that there can be a case for restricting the application of markets in some cases the case for allowing markets remains a strong default position in most cases. Does this mean there is nothing more to be said? Can markets really crowd out other goods as Sandel suggests in some cases he has found?

I am sceptical of the idea that very many people value things according to their market price rather than how the items helps them to in some way live their life better. The most obvious type of counter-example is where someone clearly wishes to show off that they have something which cost a lot of money. This is the familiar idea of a status symbol or conspicuous consumption. The expense of the item might indicate that the person values high quality or wants to show that they have good taste but it could equally be a sign that the person has a high disposable income such that they can afford to waste their resources on something of little or no obvious use value to them.

This perhaps fits in with Sandel’s concern about markets (or money) corrupting other values. Indeed, this goes back to socialists/communists, who talked about the reification of money (i.e. turning money into something that has value in itself).

Now, clearly those who think that the money value of an item has any bearing on the item itself and how we should judge it are clearly making some kind of mistake. In some areas of life, of course, people may view things in entirely money terms, like making abstract investments.* However, if someone does it in their personal life I would think that they are displaying a poor character trait.

Where people have this view it is a tragedy, firstly for them personally as they are probably victims of a misunderstanding about what matters in life. It is also a tragedy in the way it is likely to affect others. Status symbols are positional or hierarchical goods. These are a zero-sum game in that their aim is to create a hierarchy in which others will feel worse about their position. As Fred Hirsch pointed out, positional goods are inherently wasteful and inefficient.

Furthermore, using resources in this manner is going to leave fewer resources in society for people to use on their own lives. A society in which people are primarily concerned with showing off their position will be a tragic one in which everyone is actively trying to put others in a relatively worse position rather than in making the most of their own lives. Of course, if someone really wants to live their life in this way it is up to them—people are perfectly entitled to use their resources in ways that make others worse off. However, I fail to see why anyone would consciously choose a way of life that makes others—and almost certainly themselves—worse off. I would think it is more likely to be an unreflective choice.

Dedicating one’s life to ostentatiously wasting as much as possible is one approach to the good life, but it is a strange one to hold. It isn’t likely to bring about much happiness either since you have to alienate others while doing so rather than nurturing relationships with them. I doubt anyone really has such an approach to life, though sometimes people might fall foul of attempting to show off as if this was a good thing to do.

How should we respond to this concern that people are going to value items of property according to their money value rather than their usefulness? I think the answer is in education and regulation of certain markets. As part of their education children should learn that there are lots of approaches to life and that they have to choose one of these. They should also be given the philosophical tools to consider these.

Markets should only be regulated or restricted if there is a very good reason. The typical argument for regulation is to avoid harm to citizens through market failures and monopolistic behaviours. However, there may be some markets that should be regulated for paternalistic reasons to ensure that children and adults in vulnerable positions are not harmed. We may also want to design the education system and wider society to ensure that people have a good chance of making an active choice over the life they live rather than a passive one. This may, for example, require regulation of advertising.

My overall conclusion is that while I think some philosophers, such as Sandel, go too far in arguing against markets that this does not mean that regulation is a solely technical issue to be determined by economists. Satz provides a basis for determining markets that require further regulation and another basis is the liberal requirement of providing people with the conditions to make authentic choices.

*This may be deemed important by radicals who believe financial markets represent alienation and obscures class relations and exploitation. I will ignore arguments from this perspective because I am unconvinced by the labour value theory of economics and therefore do not see take alienation to be a specific economic issue. Perhaps a further advantage of these kinds of view, however, is that they challenge the type of mistake I characterise in this paragraph. 

New Blog at Manchester Policy

My latest blog for Manchester Policy summarises the ways that I believe IT technology allows governments to re-think the tax and benefits system.

I hope to write further blogs in the future highlighting technological innovations that point to more ways in which IT solutions are changing work, government administration and can be made to do so.

For example, I have seen this week that researchers at the University of New South Wales in Australia are developing a hat that can tell how hard its wearer is concentrating. This technology could have medical applications or be used by employers to monitor employee productivity (or both), Such developments can have utopian and dystopian implications.

What I look out for is ways that technology can make our economic system fairer as well as more productive.

Alternative purposes for the economic system

In my previous blog I discussed the problems with capitalism. I argued that if you want to make the very strong claim that capitalism is wrong it seems necessary to say that an economic system should have a particular purpose that capitalism cannot meet.

My proposed purpose for an economic system was to effectively provide people with the goods that they need and want, and capitalism seems to do this better than any proposed or attempted alternative.

So those who wish to argue that there is something wrong with capitalism presumably think that there are further purposes for the economic system that capitalism fails to meet. From my understanding, these tend to be sociologically inflected views. One holds that communistic social relations would be much better for people than capitalist ones as this would exalt higher goods.

Along these lines, but with the opposite conclusion, is the Randian view that capitalism engenders the highest goods. This is because capitalism requires people to act economically without direction from outside. This individualism is of course entirely imagined—capitalism is a system in which everyone works together, though it perhaps gives more scope for individuals to create new products than other proposed systems.

So does the presumed advantage of creating the right type of person (and/or economic relationship between persons) something that totally overrides other aims of the economic system? Or is this in addition to the job that most people (including myself) take to be the fundamental one of the system? To exclude the requirements for the creation of goods for the members of society seems perverse to me and I don’t think the economic prospects of either hyper-capitalism or communism are very good. 

Laissez-faire economic policy can be reasonably expected to generate huge inequalities. Libertarian utopians are either blind or indifferent to the terrible consequences of their utopia for those who find themselves without any property or the means to earn a high wage. As well as the patent unfairness involves, the instability and inequality will probably result in a less effective economy overall as well. However, Randian libertarianism is so objectively nonsensical I will focus on the left-wing anti-capitalist utopianisms.

On the other hand, communistic systems do not have a great record of success. The USSR had some economic growth but this tended to come at great expense to some members of society, including the repression (and sometimes deaths) of many. Many leftists of course will claim that the USSR did not live up to socialist let alone communist standards, or claim that the actions of Stalin etc. were necessary to fight against Western imperialism. But it seems that leftist proposals either focus on the massive decentralisation of economic decision-making to the local level or the total centralisation of decision-making.

To judge redistributive capitalism against some proposed utopia you would need to specify it and show that the proposed goods would arrive given the (potentially huge) costs of bringing about and maintaining that utopia. The paths to left-wing utopias seem extremely vague and optimistic to me. Those who propose them seem to ignore or downplay the possibility of all sorts of terrible alternatives to emerge. Who says that “smashing the liberal state” won’t bring about an autocracy or theocracy or fascist dictatorship or whatever else?

As you can tell I am very sceptical of judging economic systems on the basis of their alleged sociological effects. I would want to see a lot more evidence that capitalism really made people much more selfish than rival systems, for the utopia to be one that everyone could agree would be worth achieving and I would want to see a fool-proof plan to get from the current system to this utopia.

For example, I don’t see why a society with my Hourly-averaging proposal would any less lead to a communist utopia than a dictatorship of the proletariat. People wanting to increase their net income would have to work more hours irrespective of their position in society and so after a while people might internalise working longer and harder as being good things. 

What is wrong with capitalism?

Some people think capitalism is a terrible evil that must be fought and destroyed. At the other extreme there are those who think that laissez-faire capitalism is the perfect economic system. I think both of these views are hugely mistaken but that the question what is wrong with capitalism is still an important one.

Anti-capitalists think that capitalism is wrong in itself for at least one of two reasons. One is that an alternative system would enable people to become more than they can be under capitalism. The second is that these alternatives could avoid terrible things like exploitation or alienation that are inherent to capitalism. At the other extreme some Libertarians (particularly Randian objectivists) think that laissez-faire capitalism produces the right distribution of goods in society and governments that interfere with the market more than necessary are exploiting those who are required to pay taxes or the costs of regulation.

I am not unusual in thinking both of these views are wrong-headed. But it is interesting to consider how you can argue the inherent rightness or wrongness of an economic system. After all an economic system is not an agent that can be held responsible for what it does—it is what is collectively brought into effect and enforced by our society.

Presumably an argument for or against a type of economic system will have to be teleological. An economic system has a particular purpose and if it does not or cannot achieve that purpose then it is wrong. My (uncontroversial) view is that the purpose of an economic system is to provide people with the stuff that they need and want for themselves and those who depend upon them in a way that is fair to all members of society. In follow-up blogs I will consider somealternative purposes for economic systems and some further arguments against markets.

Capitalist systems do a good job of achieving the above ends because:

1.       They provide people with incentives to work and invest in activities that will produce things that others want.

2.       They allow the transmission of information via prices without the need for any direct oversight.

If we are judging economic systems as I propose above then it is impossible to take the extreme pro- and anti- capitalist positions above. There are innumerable variations on capitalist systems and these should all be judged against any reasonable alternative when choosing which economic system (or range of systems) to support. As a liberal political philosopher I obviously think that we need to adopt the best available theory of distributive justice to decide. But what if we just think in terms of economic systems in general?

Given the position I take above, we should not ignore the consequentialist libertarian (think F.A. Hayek or Milton Friedman) arguments for leaving markets to do their work. In one sense the market is a bottom-up one in the way that left-wing anarchists claim of their proposals. However, instead of people voting to come up with a single communal position on everything under capitalism people vote with their money for what will be produced.

However, the libertarian (dis)utopia provides a good warning against following this market logic too far. Capitalism will tend towards inequality and monopoly, something which 19^th century left-wingers thought obvious from observing their societies and which some researchers such as Thomas Piketty and Tony Atkinson have been attempting to prove more recently. Following the money-voting analogy above you have a system of voting where some people are born with the chance to have a lot more votes than others.

There is an overwhelming case for creating a form of capitalism that is regulated to stop people being in a position to take advantage of one another and to ensure that the benefits of the capitalist system are shared among all those in society and not just a fortunate few. Ideally, people would have the opportunity to obtain a reasonably similar amount of money ‘votes’ over what is produced in society and how much of it they get compared with others.

The position I take above is fairly standard, but I wanted to link it to my tax and benefit reform proposals. The aim of my CLIPH-rate tax proposal is to allow capitalism to do its job in the production of goods while interfering with it in the (mal)distribution of goods.

This is done by taxing those who receive large amounts of income or wealth without having to work for it at the highest possible rates and to provide the maximum possible support those who work long hours at low wages, all while maintaining (or replacing) incentives to work that capitalism provides.

The laissez-faire capitalist state is productive because the poor have to work long and hard to avoid destitution while the rich are encouraged to invest and work long and hard by the huge financial incentives offered to them.

My proposal is to link people’s lifetime income to the amount of hours they have been credited for working (or been excused from working). This means that people will all start from a much more equal economic position (since they cannot benefit heavily from gifts early on in their lives but only over time as they gain more hour credits). It also provides a method to bring closer together the incomes of those who do very well and those who do less well in the economy.

Everyone is in the same economic class as all need hour credits in order to gain an income, and there are strong work incentives. Individuals will benefit from earning more money as they do under all capitalistic systems but they also benefit from working longer and gaining more hour credits. The rich and talented cannot hold the rest to ransom by claiming they will withhold their labour or investments if they are not provided with immense riches in return.

While individuals have their prospects drawn closer together the productive system can be perfectly ruthless. Companies will need to be competitive and innovative in order to survive and succeed and those which do not will face bankruptcy or take-over. There is no need to weep for companies which go bankrupt as these are not persons in any moral sense (though we might feel sorry for investors and workers who lose out having been duped by criminal executives).

The idea behind my CLIPH-rate tax and hourly averaging proposals is to take the best of capitalism while mitigating against the worst in capitalism, thereby creating the best available economic system. 

Interpreting and applying Dworkin’s hypothetical insurance

I have realised that I have not blogged about an article of mine published in the journal Moral Philosophy and Politics entitled The Holistic and Policy-Focused Interpretation of Hypothetical Insurance.

In the paper I consider the best way to understand and make use of Ronald Dworkin’s hypothetical insurance scheme. This is a procedure to determine fair policies to help the less well-off by asking people what they would agree to pay and receive if they did not know whether they were fortunate or not. So to work out how much people who suffer from an illness should get you ask what insurance people would buy themselves if they didn’t know whether they have it or not. If sufferers get less they are not being treated fairly. Conversely, if non-sufferers provide more to sufferers than they would have agreed to receive in the hypothetically equal position then they are not being fairly treated.

This lends itself to an interpretation of the approach that each of these decisions involves a separate decision about a transfer of resources from the fortunate in that regard to the less fortunate in that regard. Add up all of these transfers and you work out how each person should be paying or receiving all told.

The way Dworkin presented the approach lends itself to this interpretation, but he does make clear at times that he isn’t just talking about resource transfers—providing blind people with guide dogs and paraplegics with wheelchairs and carers might be a more sensible insurance choice than giving money.

I believe the best interpretation of Dworkin is a holistic one that allows the parties to hypothetical insurance not in terms of simple payments from fortunate to unfortunate but as a selection between the policies that are available to tax the fortunate and assist the less fortunate from a position of hypothetical equality.

This interpretation contrasts with the idea that each insurance choice is hypothecated from the others so money from inheritance taxation would have to spent to alleviate social inequality rather than go into a big pot to assist the less fortunate. It also contrasts with the insurance-focused understanding of Dworkin that implies that transfers are necessarily the main tool for sorting out inequalities (basically all sensible policy options are open to people to choose in their hypothetical insurance deliberations).

I believe my holistic interpretation better fits with the ideal of resource egalitarianism that people should have as much choice as possible from an equal starting point. It does so by allowing people a choice over the policies that will be used to achieve their insurance preferences.

My suggestion is that Dworkin’s insurance model can be readily applied to tax and benefit policies; though admittedly in some cases it will generate much more determinate and definitive answers than others. On some issues you might need to find out a lot about people’s attitude to risk, their values and the likely effects of various policies in order to work out the fair distribution. However, in my PhD thesis I argued that if you apply this reasoning to the taxation and benefit options then my CLIPH-rate tax proposal would be the popular choice for people choosing from an equal position.

Hourly averaging, the shadow economy and mainstream work

I am pleased to announce my first blog published on the University of Manchester Policy Blog. 

I wrote a piece about the topical issue of tax credits. My argument is that a further advantage of earnings subsidies such as tax credits is that they encourage workers and employers to engage in legitimate activities and expose themselves to scrutiny. This should in turn have positive economic effects. 

I am very much in favour of tax credits. Indeed, my own hourly averaging proposal could be considered as being tax credits on steroids, given that they could be a lot more generous to working people. 

My CLIPH-rate tax proposal goes further than other proposals as it includes all personal income in the tax base. This means that all income is counted in a single tax, which is set up to provide higher net incomes to those who have worked more hours. 

As legitimate work would be a necessary condition for hour credits (and thereby legitimate net income) this would force those engaging in criminal and black market activities to create front businesses to enable those involved to receive any ‘legitimate’ income. Furthermore, as almost all income is taxed if discovered it would be more difficult for people to hide property that they have gained through illegitimate means. 

Having to create front companies would be a costly enterprise that would make criminal activity less remunerative—a tax on crime. More importantly, providing information about these fake front businesses opens up the possibility of scrutiny. Not only would this mean that such enterprises would be more likely to be found out but they would also have linked themselves to all those engaged in the enterprise—all involved would go down with the ship. 

Online course: Introduction to Political Philosophy

I'm pleased to announce that I will be teaching on an introductory course in Political Philosophy with my department next Spring/Summer. There are no entry requirements.

If you know of anyone who might be interested in learning about this subject through an online course then please let them know. 

I haven't taught for a couple of years so it will be good to get back into it and if it goes well I might do more in the future.

Blog hiatus

Apologies to those who have been waiting patiently for blogs on tax, politics and philosophy lately...

I have had a very busy summer and haven't been able to fit any blog-writing in.

I have managed to achieve something though, and here is a photo of Katy and I driving away from the church...

What kind of government punishes poor children?

Why doesn’t the Government offer soft loans to impoverished parents to replace the benefits being cut? What kind of government, or even society, shows total disregard for its worst-off children?

The recently elected UK government has been relentlessly tough on the younger members of society while maintaining support for pensioners. There’s nothing too unexpected about that given their voters. But I find the proposed changes to child support, child tax credits and the extension of the household welfare cap to be particularly concerning.

There is a bizarre masochistic streak in our society at the moment, whether stoked by tabloids or TV shows such as Benefits Street, whereby there is a desire for suffering to be shared out. If this is where we are then I suppose it is democratic to see that through.

However, I don’t understand how any society could seek to hinder the lives and prospects of some of its poorer children. The complaint is presumably that some “feckless” parents have created significant expenses for their society and that the rest of society should not have to support them, or at least only to a limited extent.

However, if this was the only factor in play then I would suggest the obvious policy response is to give parents child-related benefits above a certain threshold in the form of a soft student-style loan rather than allow the children affected to go without. This is exactly what the government has proposed in switching from maintenance grants for poorer students to loans.

Why not do the same for payments to poorer parents? Perhaps the proposed changes are actually intended to send a message? The intention could just be to bring about behavioural change and foster the responsibility that Tories prize. However, whose behaviour is it supposed to change?

It isn’t the children’s behaviour that needs to be changed—it is presumably that of their parents at some point in the past. Punishing some children now in the hope of reducing the number of children in need of help in the future seems particularly cruel. Furthermore, it is possible that the present and future parents whose choices are driving the desire for this action are unlikely to be influenced by cold calculation about the future benefits available for them and their children.

So perhaps the issue is just that the deficit has to be reduced and sadly this is the only way to do so. In terms of government income and expenditure, soft loans to poor parents to enable them to improve their children’s lives will have a relatively low prospect of repayment. But if the repayment threshold were set reasonably low then once the children were grown up some of the money could be recouped.

However, deficit reduction isn’t the only priority for the government. George Osborne relaxed his deficit targets in coalition and has done so again in majority government. The government has now committed to maintaining or increasing defence spending. The deficit could also be cut by tax rises as well. A one-off wealth tax or the introduction of a Land Value Tax would be sensible ways to raise some extra cash without crashing the economy. The government doesn’t care THAT much about the deficit—it is just a reason wheeled out when necessary.

However we have got to this situation where so many people seem supportive of punitive changes to the welfare system I still find it hard to see why soft loans aren’t a more sensible option. Otherwise the aim is to visit the sins of the parents on the children, something I think it unacceptable. 

Thoughts on the budget

The budget announced today came with some surprises, and I thought I would give my stream of consciousness response to the headline changes.

·         The big surprise is the major increase in the minimum wage announced under the heading of a national living wage. As the new ‘living wage’ is national it does not take account of the disparities in regional living costs that the living wage is designed to highlight.

The rebranding of the minimum wage is strange, perhaps designed to muddy the term to rob it of its power. Being cynical, this might be out of a desire to undermine the growing campaign that is highlighting the increasing disconnect between earnings and the cost of living in the UK.

The increase in the minimum wage (as this is what it is) is quite a move by Osborne. It takes a typically left-wing policy proposal and enables the chancellor to portray himself as a friend of the worker.

·         Only workers over 25 get the new living/minimum wage though, as far as I can make out. There are already age-bands designed to give inexperienced school-leavers a chance in the job-market so this isn’t a major departure.

·         What of the low-pay commission, the independent body charged with determining what minimum wage level will be sustainable? They will presumably still be in charge of the ‘real’ minimum wage while Osborne has created another band, over which he has control.

·         I have recently blogged about my preference for tax credits over high minimum wages and the policy here is going in the opposite direction. Cutting the eligibility threshold for tax credits is painful as it further undermines this support to workers and/or the employers who can make use of their labour.

·         Questions remains about what will happen as a result to prices and the job market. Perhaps this will be good at reducing the number of NEETs but at what cost? It might mean that a lot of over-25s end up unemployable as under-25s can be employed for less money than them.

Companies who have to pay their workers more are going to pass this on to their customers in the long run. These increased prices will cost those on frozen benefits and those who do not benefit from the policy as well as everyone else.

It is likely that most people will be losers from this policy and some of those losers will be among the economically worst off. The chancellor claims he represents ‘working people’ but certainly not the working class who might find themselves out of work but with fewer options and less support.

·         Positive proposals: To give credit where it is due, the Buy-to-let tax break cut and tightening up eligibility for "non doms" sounds like good things, though I haven’t had a chance to look in any real detail.

·         A terrible idea: The proposal to increase the inheritance tax threshold was heavily trailed and I was predictably apoplectic about this. Unearned income like gifts and bequests should be taxed more heavily than anything else, according to almost all economic and ethical theories of tax.

·         Punitive:  The punishment imposed on younger people for not having a wealthy and generous family continues. Under 25’s needing benefits and low-earning parents seem to be particular targets of this government, just as they are of tabloids. Today’s changes to maintenance grants, housing benefit, Child Tax Credits and the newly lowered Benefit cap seem to be targeted at these “feckless scroungers.”

As a recent guardian editorial pointed out, there isn’t any actual principle behind the benefit cap—it is benefit-scrounger-bashing-tabloid-fodder. A similar point can be made about the other punitive changes—punish the young and the poor (they don’t vote Tory anyway).

·         What magic happens when someone reaches 25? This budget seems to build on the premise that people become very different at this age. Perhaps this is the government reflecting on the extended adolescence that people are considered to have in this SO-CALLED (by me, right now) binge-drinking and computer-game age.

I’m sceptical that there is anything so considered—the young are not a popular constituency with most voters and so are ripe for cuts. These changes also entrench inequality – with one set of young people trapped in low-paid work which provides little time and money left over for further development, while others can get ahead. It all appeals to the Tory base.

·         Overall trend:  One thing that this budget continues is the removal of state support in many areas and passing this on to individuals (or the BBC). Education is an obvious case, where gradually grants have been replaced with fees and loans. Public transport (such as rail travel) is another area where more revenue comes from passengers and less from government as time goes on.

In-work benefits seem to be going the same way, and I have slightly more of a problem with that than education and public transport subsidy, but I think it is worth noting. My question is whether we really need to give up on a progressive tax system that could fund a fairer society which would encourage people into work, improve their chances of finding some and ensure that they get a reward for it.

This isn’t a universal trend – pensioners and the NHS continue to be funded at previous levels. But it is a noticeable direction of travel. It would be good to have a progressive tax system that enabled us to move in the opposite direction in some cases (tax-credits being my own preferred method).

·         Overall this budget (unsurprisingly) doesn’t get the seal of approval from me. 

The real problem with UK tax credits

In my previous post I was very critical of the argument that Tax Credits are simply a form of ‘corporate welfare.’

However, I want to flag up one very good point raised by Deborah Orr where this claim is quite probably true. Tax credits utilise a working-hours threshold (of 16, 24 or 30 hours depending on family composition) which will have unwanted effects.

This could be seen as a form of corporate welfare where companies will be able to more easily (and potentially more cheaply) hire two part-time staff to do the job that could be done by one.

This might not be an entirely detrimental outcome—tax credits may have been one of the factors why the downturn in the UK economy as a result of the global financial crisis caused mass underemployment rather than mass unemployment. Employers might otherwise prefer one full-time employee to two part-time employees and there will no doubt be someone out there (possibly one of the part-timers) who would prefer to do the job full-time.

But the hour working threshold will still have unwanted effects. There are no doubt numerous cases where both worker and employer would prefer to have more work hours in a week in the absence of the threshold.

A further problem with the hours threshold for tax credits is that it means that these are not doing as much to assist low-paid workers who work very long hours, for example two minimum wage jobs.

But what is the alternative to the working hours threshold? The logical extension is to take account of the actual amount of hours people have worked and give people more support if they a) work longer and b) work at a low wage.

My hourly averaging proposal does this. It therefore represents a much more effective form of earnings subsidy. It is targeted at those who have a low lifetime average income and gives an incentive for people to keep working full time in order to generate more income. 

The Living Wage vs. Earning Subsidies

Is the Living Wage campaign just counterproductive?

There has been much discussion recently about the Living wage, or the lack thereof in many cases. The living wage represents the idea that the current UK minimum wage does not always provide enough to give people an adequate living. Living wage campaigners have two routes open to them – to argue that the minimum wage should be raised to living wage levels or to shame companies into paying their staff a living wage.

I am doubtful that either will succeed, but also that success with either would make a huge difference to the people at the bottom of the wage scale. The campaign to shame (and presumably boycott) companies would have to be pretty universal in order to overcome the competitive disadvantage such firms would face if they start paying their workers more than their competitors. This is a point Engels pointed out 150 years ago. Customers would have to voluntarily shop in the more expensive shops which pay the living wage instead of their cheaper rivals.

This explains the problem with imposing a higher minimum wage as well—that this will be passed on to consumers, many of whom are the low-paid people we wanted to help in the first place.

One recent line of attack is to highlight how much some major companies have been benefitting from the tax credit system. This is calculated by working out how much tax credit money is paid to assist the staff of the company in question.

The comparison is between the current situation (where companies with low-paid employees receive tax credits) and an alternative in which they would be forced to pay more and therefore the state would not have to pay as much.

This is a simple equation but it isn't a meaningful one. The question we face is about policy: Should we use tax credits to raise the living standards of low-paid workers or use minimum wage regulations?

If you change from one policy to the other it wouldn't simply mean that a cheque for the difference would be due. The important question for such an exercise is what represents the relevant counterfactual. If there were no tax credits this would not mean that firms would pay their staff more to get them to this income level. Their workers would just have less money in their pockets.

What about the alternative counterfactual that firms would be forced to pay the living wage? If companies were forced to pay their workers more then they would make all kinds of different decisions. Some would go out of business as they could not compete with foreign competition while some others would cut their workforce and replace them with machines.

But what about those businesses, like Tesco, which would survive and would not be able to employ robots or other technology to do the work? Firms would not respond by just paying their workers more and their shareholders and managers less. Firms might invest in labour saving equipment to reduce the number of staff they need, putting people out of work.

This would cut the tax credit bill, but it would not indicate any ‘subsidy’ to the corporations. The costs would pass mostly onto their customers, but also onto the unemployment bill where workers have lost their jobs.

Whichever way you look at it, tax credits don’t represent a simple subsidy to corporations (except in the cases I mention in my next blog). Some corporations will benefit from them of course, but at most a small fraction of the total cost of the tax credit scheme.

Some of the cost will go in administrative costs, lost incentives and economic inefficiencies. If any unintended group is likely to benefit it will be consumers (which means everyone) who get cheaper stuff, but mostly the scheme will help low-paid workers.

One reason some people are distrustful of the left is that they deem them incoherent or incompetent when it comes to economics and policy and I fear that campaigns like this do not do the egalitarian cause much good.

UK Inheritance tax - why on earth do a lot of people support the proposals even though they shouldn't?

I could write lots of different pieces explaining why the recently leaked inheritance tax changes are economically foolish and make our society less just.

For example, the changes might further heat the dysfunctional housing market—even the rabidly libertarian “Tax Payers Alliance” have queried the wisdom of a policy that gives a tax break to one class of investments—housing. If anything, governments should be doing everything in their power to make housing cheaper not more expensive.

The important fact is that it is reduction of the tax taken on the most obvious of all tax bases – unearned income. And why? To benefit a relatively small number of people who are children of the wealthy.

What I will write instead is about how on earth people will go along with it. Why won’t people be rioting on the streets against a policy that makes no sense in terms of economics or fairness?

Well, the right-wing press such as The Daily Express and Daily Mail have predictably come out very strongly in favour of it. The argument is that people who have paid tax on something shouldn’t have to pay it again, but this is nonsense.

Even an egalitarian such as me would argue that people should be able to keep their property unless it was a matter of national concern that it be taxed or compulsorily purchased. Inheritance tax is not such a tax, however. It is just a crude way to tax beneficiaries in the most convenient way for governments. A more principled approach would be to tax the recipients of bequests but also substantial gifts, as would be done with an accessions tax or my own tax proposals.

If we get rid of the double taxation argument, then, what is left? My theory to explain how the right-wing press can hoodwink its readers into supporting a mad proposal like this is by tapping into a feudalist vein in British thinking.

House ownership is a big part of the recent British psyche (or is it psyschie?) and it represents a major part of many people’s self-identity. They are lords of their suburban castles. British (perhaps English) people buy into the regressive idea of a class system much more than any other country. And what do feudal lords do? They pass their castle onto their children (well, first born male, but the whole edifice breaks down when moving into the modern economic world anyway).

Inheritance tax doesn't even stop anyone from passing their house onto their offspring anyway. Even if the estate did not have the liquid assets to cover the tax this would not stop the squire from taking ownership of the house. They would simply have to pay the difference between the value of the house and the inheritance tax due.

So under the existing (extremely generous) system a widow with one child who dies with only an 800k house to their name at present would have a 60k tax liability. The child would have to find 60k to buy a very expensive house. If they haven’t saved up the money they could just get a mortgage to cover the difference.

No one would provide an intellectual justification for feudalism, but I think that vestiges of this line of thinking are the only reason that people would support the latest IHT changes. Is this really where we are? People supporting terrible policies that almost certainly won’t benefit them or the country as a whole ‘because feudalism’?

Minimum wage and its cost to workers

I have argued in a previous blog that my hourly subsidy proposals should be much more effective at supporting the least economically fortunate than a generous minimum wage.

There are several reasons to prefer targeted earnings subsidies to the minimum wage as a means to increase the living standards of low earners, such as that high minimum wages will price some people out of the job market, make some products and services untenable, benefit low-wage workers from already wealthy families and that it will damage exports from the area and shift the economy to more service work instead.

I wanted to emphasise another important reason that minimum wages can take from the poor while giving to them. According to economic theory (though backed up by a lot of evidence), minimum wage increases will generally be passed on to consumers.

The important question is who will pay the cost of these price increases. If only the goods and services purchased by the economically fortunate increase in price then it is a highly redistributive policy.

On the other hand, if low earners will have to pay a lot more for the goods they buy then the policy simply takes with one hand while giving with another. This is particularly problematic where the minimum wage is having a lot of other impacts on the economy such as increasing involuntary unemployment for the worst off.

The literature on the subject seems to indicate that the latter is true, and that the minimum wage will increase prices substantially for the low workers. Examples are from the USA MaCurdy, 2015 as summarised in the WSJ; Hungary Harasztosi and Lindner, 2015; and the UK Wadsworth, 2010 (also cited in Aitken Dolton and Wadsworth, 2014).

Are there reasons to be sceptical of this argument that earning subsidies might be more effective than the minimum wage at improving the position of the least well off? Perhaps some will worry that the evidence comes from right-wing or mainstream economists. But is there any evidence to the contrary? I would be interested if anyone has any contrary evidence that they can share. 

The Quality of Work

In my previous blog I mentioned that the quality of work is an important element of people’s job or career package. It is therefore of distributive interest and I suggested that an economic system which would provide more high-quality work would be preferable, even if this came at the cost of some economic growth.

I used the term “quality of work” in that post but I should say more about it. Some of those who are interested in this issue of the quality of work are interested in a specific objective notion of the quality of work which differs markedly from the subjective approach implied by my blog.

The subjective approach to judging the quality of work is simply to rely on people’s own ideas and preferences about the quality of the work that they do. Some people you talk to might say that they would not leave their job or career even if they could earn a lot more money--it expresses something about them as a person. Indeed, economists measure job satisfaction using Job Satisfaction Surveys. For example, in 2014 year the Office of National Statistics data indicated that Vicars had the highest overall job satisfaction, despite their low hourly pay. 

This complicates my categorisation of jobs by quality as it is very likely that people will differ wildly in their preferences over the features of jobs. Some people will desire jobs that I have referred to as lower quality over those I have branded as higher quality.

For example, some people might not want the attention or responsibility that comes with the high quality roles and would prefer a low-key role in which they are unlikely to make any mistakes and draw attention to themselves. Indeed, some people might see a particular job as their calling, such as being a nurse, paramedic or a teacher, and this makes this job quality.

I should therefore emphasise that my categorisation of quality was based on the average perception of job quality (which makes no reference to remuneration and other factors). Most people would prefer the jobs I labelled as higher quality all else being equal, but some people will not agree with others. Furthermore, some people will accept money over other qualities of a job much more readily than others.

My categorisation may fit with a quite different approach to categorising work. I will refer this to as the objective approach as it does not make reference to what people actually prefer. The idea here is that some activities are more valuable than others as they relate more to our expression of human values and virtues. Basically, some types of work will make it difficult or impossible to reach full flourishing or self-realisation as an individual, while other kinds of work will lead people towards these.

This is an Aristotelian idea, which greatly influenced a lot of left-wing thinkers, and can be found in Marx’s Economic & Philosophic 1844 manuscripts, and continues to influence philosophical work on the subject. Aristotelian ideas also influenced Catholic thinking via Thomas Aquinas.

Marxist thinkers have emphasised that workers can suffer from False Consciousness and this might lead them to prefer things that are not truly in their interests. They would therefore question the usefulness of the subjective approach, since people may not properly value the work that is good for them in this Aristotelian sense.

Objectivist approaches will therefore emphasise a) a notion of human good (usually relating to flourishing or the expression of virtues), and b) a theory about which types of work or jobs lead to this human good and which do not.

I think what I said in my previous blog is compatible with both approaches to answering questions about the quality of work. This is because people’s judgments about quality will often track those picked out by Aristotle. However, people may place a much greater emphasis on other issues than the quality of the work when making their job and career choices. Pay is an obvious one, but also job security will no doubt be a major factor particularly for those who have or hope to have children.

The purpose of this blog has been to show what lies behind the notion of ‘quality’ that I used in my previous blog. If anyone wants to suggest any objective judgments about work that I have missed out then by all means do so.

Work and Justice: The Quality of Work

This week I attended a very interesting conference at Manchester entitled “Work and Justice” organised by my good friend Liam Shields.

The speakers considered several different issues under this umbrella, such as justice in hiring decisions, the just response to occupational inequalities, gender issues relating to caring and career decisions, and class interests.

One important thread between several of the papers was about questions of the quality of work. The reward for any given job can be seen as a bundle of goods encompassing the pay and the quality of the work. It is important to note that pay is not the only indicator of the quality of a job or career – some people would much prefer to do a less-paid job which they found enjoyable or rewarding.

Indeed, some of the speakers and attendees were interested in the way that some jobs help us to realise and develop ourselves through our work. I refer to this here as the quality of work, and I unpack this notion in another blog.

The basic thought is that some jobs are of higher quality because they would encourage us to use our higher powers such as problem solving through complex work and decision-making. Another aspect is whether the job people do reflects their values and affords them self-respect.

On the other hand, many existing jobs actually do the opposite by discouraging active decision making, utilising simple processes and requiring people to perform work which does not reflect their values.

Jobs are packages of benefits and burdens. What most of the attendees agreed on is that work creates issues of distribution that do not necessarily perfectly track economic distribution. It therefore deserves special attention as an issue.

For example, some people with low incomes are not disadvantaged because they have actively chosen less well paid work that is more rewarding in other ways. Meanwhile the overall package for some highly paid people may not be as great as the pay implies—they may have to work long hours at boring and/or stress-inducing work.

	Low Quality	Mid-Quality	High Quality
Low Paid	Repetitive, low skilled work, e.g. manual labourer, cleaner, catering assistant	Low-paid work with degree of self-direction, e.g. self-employed tradesperson	Rewarding work, e.g. charity worker, poet, artisanal craftsperson
Reasonably Well Paid	Jobs not requiring specific qualifications but some skills e.g. lower management, car factory worker	Jobs requiring qualifications and accreditation e.g. school teacher, social worker, nurse	Professional work, e.g. Some medical doctors, academics
High Paid	Difficult work requiring unusual skills or tolerance to difficult situations, e.g. Some forms of finance work, deep sea diver	Professional work, e.g. Some medical doctors, solicitors	Highly Sought work using rare skills, e.g. People at the top of their field (e.g. sports, law, surgeons).

Table: Job quality and pay. Shading indicates how common such work is.

There are many more jobs of the top-left kind and very few jobs of the bottom right kind. Good and bad fortune will have a major role in who gets the few jobs that are higher paid or higher quality (or both). This fortune comes in at least two forms, family endowment and talent endowment.

People with wealthy are parents will have advantages in the early part of their lives that mean that they can have access to the skills and experience required for these. Many highly sought positions effectively require low-paid internships and these are only open to those with family support. People with more talent will be able to out-compete others for these jobs where they are initially available to all. 

In the worst cases people will be excluded from the high quality jobs on the basis of irrelevant factors, for example where their society is institutionally racist, sexist or religiously discriminatory.

Acknowledging these inequalities is easy, while doing something about these inequalities can be very difficult. Interfering in the hiring processes of employers is difficult at best and in some cases can have significant unintended consequences.

The case for interfering in hiring decisions is much stronger where these relate to discriminatory practices than in the distribution of high-quality work. For one thing it is easier to measure and assess inequalities in people from different groups entering particular jobs and careers than it is to change the nature of the work available to people.

Changing the job market

One approach is to look at the micro-level of hiring decisions by employers. However, interfering in these processes on a significant scale could have serious repercussions on employers and encourage all sorts of inefficient responses to the regulations.

I doubt that state agencies would be able to do a very good job of equalising access to the most highly regarded positions, but let us consider what would happen if they did. Where such jobs are the minority it would simply replace one form of luck with another one: the lottery of talent and family support would be replaced with the lottery of state interference in your favour or against you.

Instead of seeing the problem as a micro-level one of hiring-decisions we can see it as a macro-level one of the jobs and work that is available.

As I have mentioned, there are many more low-quality and/or low-paid jobs. I would suggest that a free-market libertarian-style economy is likely to reduce the amount of high-quality work available as people will be less likely to take the risk on investing to obtain high quality work if there is less of a safety-net.

What about economic systems that would change the distribution of high and low-quality work?

Some forms of socialist economy might provide more of the high-quality work but not necessarily. Socialist-type economies generally suffer from inefficiencies which would reduce what people get from the economy—after all people are all consumers as well as producers and some left-wingers place far too much emphasis on the latter.

Advocates of a Universal Basic Income might argue that this would enable many more people to pursue high-quality work. Employers offering low-quality menial work would have to compete with a life of leisure and this should push up the pay for such work. People could also pursue the high-quality work they would enjoy as they would not need to worry if it did not pay very well.

I will not rehearse my concerns about Basic Income proposals, except to say that it is unlikely to be able to provide a generous level of income without producing economically harmful disincentives to work.

There is something to be said for creating a situation in which there are more opportunities to pursue high-quality work. However, it would be necessary to do this in a way that maintains incentives to work; otherwise we place too much emphasis on the nature of work people do  and not enough on the goods and services that are produced by these processes. After all, workers are consumers as well.

I think my CLIPH-rate tax proposals, described in my book Rethinking Taxation, would create a radically better job market while maintaining strong incentives for people to produce goods and services that people want to consume and enjoy. It would not remove the work I refer to as low-quality in cases where this work produced useful or desirable goods and services.

The main mechanisms within my proposals that would shift the job market towards higher quality work are the guaranteed work programme and the negative-hourly-tax-rate for low earners.

A guaranteed work programme would give the low-skilled a better bargaining position for what I have referred to as “low quality” work (as the Basic Income would). This would provide employers with an incentive to make productivity improvements which would reduce the amount of this work required for their processes, and to provide higher pay in the cases where this work is necessary.

The negative-hourly-income-tax-rate would enable some people to perform high quality work that they would not in a free market environment. For example, people could set themselves up as self-employed and as long as they earned a sufficient income from the work it would be topped-up by their hour-credits. Employers which produce goods or services which workers prefer to produce will also be more viable than they would be under other capitalist systems. This is because they can attract subsidies for low-paid workers who are happy to work in high quality work for a reasonable wage.

These employers and workers would have to find buyers for their products (unlike the Basic Income Proposal), but these firms would be much more able to compete than they would be without the hour-credit system and its subsidies.

Essentially, it would shift the numbers of jobs provided to the right of the table, with fewer low-quality.

Remembering the table from my previous blog, the CLIPH-rate tax would:

1.      Enable people to pursue high-quality work by setting up their own companies with earning subsidies for their activities.

2.      Provide more support to employers which people want to work for.

3.      Encourage employers to pay more for low-quality work, or to alter their processes to make this work less onerous on its staff. This applies to the high-paid-low-quality work as well as low-paid.

As well as improving the quality of work in society, the CLIPH-rate tax would also reduce the pay differentials that flow to people towards the bottom right of the table, for the following reasons:

1.      Greatly reduce the income differentials between many people, meaning that gross income differentials this will be a less serious cause of inequality.

2.      Family luck will play a much smaller role in the distribution of the highly-sought jobs as transfers between generations would be taxed and people would have a strong incentive to seek work to obtain hour credits.

In conclusion, the CLIPH-rate tax would vastly reduce the inequalities in the job packages available, both in terms of pay and quality. Furthermore, it can do so without interfering in the productive processes in ways that would be highly costly to consumers (who are themselves workers). 

Universal Credit and Hour Credits

The move in the UK to combine multiple forms of benefit payments into one Universal Credit is a very sensible idea in theory. Delivering it has proven difficult, however, and I suggest that my hour credit proposal would resolve a lot of these problems.

The problem with having lots of independent forms of benefit is that they can interact in undesirable ways that discourage people from working. The worst situation is that in which people are actually better off if they work fewer hours. But even having high effective marginal benefit withdrawal rates is undesirable.

High marginal rates mean that working an extra hour will not bring nearly as much in net income as it does in gross income. Add the fact that people’s time off work (to do work in their home, caring for others or simply for leisure) is also valuable and people may not take up additional work even if it is available to them.

A recent report by the Resolution Foundation has highlighted that the aim of making work pay is not currently going to be achieved in all cases. Single parents, second earners with children and the disabled in particular are picked out as being provided with insufficient incentives to take up work and increase their hours.

I wanted to highlight the advantages of calculating support in a way that takes account of the amount of hours worked, as my proposed hourly averaging tax system does. The basic idea is that people are given an hour credit for every hour they work for a recognised employer and this is used to calculate their lifetime tax rate. Each person’s tax rate is based on their lifetime average income per hour worked – calculated by dividing lifetime income by lifetime hour credits.

Those who work long hours at a low wage will receive a more generous tax rate than those who earn the same amount of income while working fewer hours. The incentive to work full-time is therefore built into the system.

What has a tax proposal got to do with the Universal Credit benefit system reform? Put simply – you can use the hourly tax system simultaneously for benefits and taxes. Hour credits can be seen to work in one of two ways—that they bring down your tax rate or alternatively that each one brings you additional income at the rate of your hourly net income.

The hour credit system can provide people with additional hour credits instead of the cash benefits they would receive at present. So someone might get five hour credits a week instead of child benefit, 4 hour credits a week as a result of their disability and so on. These hour credits will bring additional income as a result.

The hour credit system therefore puts all benefits into the same currency—additional hour credits. The value of the hour credits relate to the person’s lifetime income statistics, but will be worth at minimum the effective net hourly minimum wage.

We can be sure that additional hour credits will not produce a disincentive to work because people who receive these can still work and get hour credits for this. Working more hours will always generate more income, irrespective of the additional hour credits that each person receives (up to the maximum weekly or monthly limit for work-based hour credits).

The additional-hour-credit system that replaces existing benefits would sit alongside the regular-hour-credit tax system and the two together will encourage people to work while providing generous benefits to those who qualify according to the relevant criteria.

Hourly averaging works by providing earning subsidies to those with a low lifetime hourly average income. We could alternatively call this a negative hourly tax-rate for low earners. People who are economically unfortunate will get their income topped up. However, working will make them better off as they will be able to qualify for more hour credits as well as receiving the income from these.

The aim of a generous benefit system that retains strong incentives to work is very difficult to achieve unless you build incentives to work longer hours into the entire system. Hourly averaging does just this.