How to make everybody richer

Tuesday 31st May 2011

The World Bank have released a report looking at how 100 countries have performed economically in the last 30 years. Which is useful; there are lots of ideas about how to grow economies, so let’s see which ones work best:

“this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes… These results tend to support earlier findings that beyond core functions of government responsibility — including the protection of liberty itself — the expansion of the state to provide for various entitlements, including so-called economic, social, and cultural rights, may not make people richer in the long run and may even make them poorer.”

So economically, its free markets, low taxes, and small government which makes us all richer. Good to know, eh?

The bewildering thing is that people have argued this for a century and a half, and this is not the first piece of evidence to support the argument, not by far. And yet lots of people (mostly in the Guardian, it seems…) will still argue against this, will argue against the evidence.

So much for pragmatism, I guess.

Posted at 1:51 am | Posted In: Politics Tagged:



Tuesday 31st May 2011, 12:34 pm

I don’t disagree, partly because I don’t really know anything about economics, that in theory, yes, small government, low taxes, free market –> increase in mean average wealth.

But at the same time all of these measures make life a lot harder for the people at the bottom who are poor and who have little opportunity to be otherwise – because of the skills they do or do not possess, their education level, other responsibilities or problems in their life (carers, the disabled, etc) or the things they want to do with their lives (teaching and nursing spring to mind as being professions which require a fairly specialist skill set, a determined sense of call or vocation, and which do not pay well).

Possibly the economic freedom you argue for makes the rich richer, whilst a larger state and higher taxes makes them poorer, but I cannot see how a larger state makes the *poor* any poorer. If I’m wrong, please do explain.

I don’t think people argue against the evidence, so much as argue against the idea that liberalism gets us the outcome we really desire. I think a larger state helps the poor to be less poor even if it does make the rich less rich. That’s certainly teh case if you compare the US to the UK – the US has a liberal economy which leaves a lot of people poorly educated, without healthcare, and very badly off economically, whilst making other people unnecessarily wealthy. Here the gap is less wide. The rich are less rich, but the poor are less poor. And personally I’d far prefer things that way round.

My problem with liberalism is this assumption that everyone has the resources to go out into the world and make a lot of money, whereas a more supportive state accepts that some people are disabled or have learning difficulties or have parents and children who need their time and care and prevent them from being able to work – plenty of peoples’ circumstances simply prevent them from being the next Bill Gates.

And plenty of people simply don’t want to be. There are plenty of necessary and valuable professions which are not well-paid enough for there *not* to be a welfare state and that’s not going to change overnight simply because we lower taxes and downsize the state. Liberalism assumes that everyone simply wants to be richer – whereas plenty of people want to be comfortably off and meanwhile do jobs which don’t earn well but which really contribute to society, and if we were to turn around and say, no, let’s downsize the state and take away that provision of healthcare and education which allows you to live on a teacher’s or a nurse’s salary without fearing for the future of yourself or your children – I think that’s dishonourable.

I also think liberalism forgets that some people are disadvantaged from birth by not getting the parenting – or the education – that others get. I think liberalism almost blames people for living in those kinds of circumstances. In an ideal world maybe we would all have the capacity to make lots of money and live well in a liberal state, but this isn’t an ideal world.

I hope that’s vaguely coherent. I should be revising.


Tuesday 31st May 2011, 3:18 pm

I think it’s true in pretty much any society, however you choose to shape it, that there will be people at the bottom who are poor, and don’t have the opportunity to make themselves less so. As such, yes, it’s important that we have a state which can help to equalise this difference (with universal healthcare and universal access to high-quality education – sadly lacking at the moment). But equally, as well as doing things to help, we should look at how the state is making life difficult for them.

Taxation is key to this. Higher taxes mean lower growth; which means that businesses find it harder to do work, and so tend to grow slower. The slower growth means that they don’t create jobs as quickly as if there were no taxes. The result, obviously, is increased unemployment. So yeah, we’ve levied a tax to help out those poor people. Excellent! Except that tax also costs some of those people jobs, and a job is really what they want (in most cases).

Additionally, when people do find jobs, there are all sorts of taxes that are levied on that. It’s insane that someone can get a low-paid job in this country (below median wage), and still have to pay income tax (at quite a high marginal rate too, when you consider their share of income tax, the employers’ contribution, and NI). So high taxation, rather than helping the less well off, is a hindrance.

Now, we do still need some amount of taxation. It’s a hindrance, but we still need a state to perform certain core functions, such as protecting liberty, and to provide some sort of “safety net”. But the big state means big taxes, and that doesn’t help anyone.

The fair criticism of this type of economic liberty is that the gap between rich and poor tends to increase. That’s true, to an extent, but at the same time everybody gets richer. I can only speak for myself, but I simply don’t care how much the richer members of society earn, I don’t care how big a gap there is. What’s important is what happens on the whole, and I think the system which enriches everybody is hugely more preferable.

You say that liberalism assumes “everyone has the resources to go out into the world and make a lot of money”. I’m not sure that’s fair; it’s perfectly consistent to be in favour of economic liberalism, whilst understanding that some people do have issues, that there needs to be some way to help those people (in fact, it could be argued that such a position is a key part of liberalism). Most liberals – even people like Milton Friedman – argue that the state has a role to play in at least facilitating access to things like education, healthcare and welfare.

Finally, you say that “liberalism assumes that everyone simply wants to be richer”. Liberalism simply assumes that people are the best judges of what they want, and that they should be allowed to make that choice. It’s not about assuming what anyone wants, because by definition liberalism is about not making that assumption, about letting people choose for themselves! And yes, some people don’t care about money, just as some people do. Liberalism lets them express that choice.


Tuesday 31st May 2011, 11:34 pm

Actual reply later. Realise little point in pulling an all-nighter to revise if instead I just procrastinate instead. If I’m going to procrastinate I may as well sleep – or just man up and go and do some work. Au revoir! xx


Wednesday 1st June 2011, 7:29 pm

Haven’t really got the time to be reading this report in detail; I skimmed it though, and it does seem a little light on actual data. Furthermore, it’s quite hard to show that the two things are actually causal, rather than just correlated.

It could well be the case that people who are more affluent tend to also push for increased freedoms, and/or prosperity itself tends to foster freedoms c.f. Ancient Athens, where they paid for their democratic posts by using money extorted from their empire.

Furthermore the metric they seem to use is GDP, which doesn’t show anything about income distribution; it could well be the case that the mean/median income is going up, but the income of e.g. the lower quartile falls; all that’s necessary is that the growth of the incomes of the upper quartile grows faster, which is an inequality gap.

Personally, I wouldn’t mind it if growth was slower (if you believe that on a finite planet you can have infinite growth you’re either mad or an economist) as one of the problems we’ve had recently is growth that’s essentially unsustainable, built entirely on debt, speculation and the artificial inflation of the price of assets. There is something to be said for building businesses and societies in a more controlled fashion, without the mad excesses of financial engineering to which our economy has been subject.

Another point I want to make:

There were Aztecs (or Mayans… forgive me my glossing over of history) who believed, sincerely, that they needed to cut a man’s heart out every day to appease the Sun God, or else they risked the Sun not coming up the next day. And sure enough, their sacrifice was accepted, and the Sun rose.

The data looks good; killing a dude is really well correlated with the Sun continuing to come up, which is really good for society as a whole. Is it morally justified to continue with the practice of human sacrifice?

I realise the rhetorical parallels are ropey in places, but nonetheless it may well be the case that pure economic reason suggests that the best thing to do is to throw some segment of the population (that is, the unlucky and most vulnerable ones) under the bus. They’re not getting their hearts ripped out like their unlucky forefathers of history (which, I suppose, certainly counts as richer, the heart probably commanding quite a value on the organ-donor black markets), but I’m not sure they would really thank you for telling them that.

There may well be a purely objective thing to do. But, alas, I’m not perfectly objective.


Wednesday 1st June 2011, 11:11 pm

Fair point about correlation and causation. Don’t think it’s applicable here; there have been enough examples of countries moving to more liberal economies and then getting richer (look to the Far East, for instance). It doesn’t seem to be a coincidence that when countries liberalise their economy, they get richer.

As to looking at income distribution, you’re right that this paper doesn’t. Yet others have; for instance if you look at places like the US and the UK – with relatively liberal economies – wages throughout the economy have risen; the poor are better off than they were in the past. In fact, this is exactly what’s happening in China at the moment, wages are being driven upwards. So the comparison with human sacrifice is somewhat overdramatic, I think it’s fair to say.

“if you believe that on a finite planet you can have infinite growth you’re either mad or an economist”

I read recently that in much of the West (situation is different in places like China), we’ll never need to build another blast furnace to process iron ore into steel (maybe on a very small scale for certain types of reprocessing, but that’s it), we’ll never need to make any more steel. Because we can recycle the steel that’s already been processed, and there’s rather a large amount of waste steel available for such. And even better than that, there’s a growing readiness to re-use materials where possible (especially in the construction industry, which I think is the biggest consumer of materials in the UK; certainly it’s the sector which produces the most waste).

That resource efficiency represents growth. Actually, in the West, it represents quite a lot of our growth, and that is a result of our relatively liberal economies (I read a paper from Krugman – i think – a while ago which makes this point quite nicely; compared the growth of the US after WW2 to that of the Soviet Union).

When you dig down a bit deeper quite a few sustainability issues come down to exactly this sort of thing. Solving those problems, making the world more efficient and thereby “greener”, could – should – actually make us richer.

I suppose growth is finite; when we reach the most efficient ways to do everything, there probably can’t be any more growth. It’s somewhat of an understatement though to say that we’ve got some way to go before that happens (if it’s even possible)…

Write a comment: