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.