Monday, 30 April 2012

Just what does David Cunliffe know about economics? (updated)

I can't help but think very little. Here is a copy of a speech he gave to the New Lynn Women’s’ Branch, New Zealand Labour Party, 29 April 2012. Let me makes just a couple of comments on the economics in the speech.
You hear the National government talking about the need to sell assets because we have so little money in this country. Do you know why we have so little money in this country? It’s because a large percentage of our economic assets are overseas-owned. For example, when the Australian-owned banks make billions in profits here (and it’s up a quarter to a third this year alone). That money isn’t returned to New Zealanders. The money goes straight back overseas.
"we have so little money in this country"? I don't even know what that means. Does Cunliffe? If we really do want more money in this country we can have it just by printing it.

As to the money goes overseas bit I have said this before but let me say it again: Let us assume for a moment that evil foreigners make a NZ$1 profit which, in an effort to piss-off David Cunliffe, they wish to take it back to, say, China. How do they do it? Clearly a New Zealand dollar isn't worth anything in China so the Chinese holder of NZ currency will have to sell their NZ$1 to buy Yuan. But why would anyone want to buy said NZ$1? The only use for a NZ$s is to buy something made in NZ. Thus the buyer of the NZ$s must want it to buy a NZ export of some kind. What is Michael Fry's problem with this? The NZ$1 doesn't go overseas in any meaningful way, it gets spent on New Zealand produced goods and services no matter who gets the profits from the ownership of local firms. If a New Zealander gets the profits they spend them on New Zealand made goods and services, if a foreigners gets the profits they sell the NZ$s to someone who wants to buy New Zealand made goods and services.
While the hippies were out protesting in the streets, a professor at the University of Chicago called Milton Friedman, was selling his students the idea that taxation was evil and that businesses worked best when they were deregulated.
I don't know of anywhere that Friedman calls taxation "evil". I'm sure he believed that the government has a role to play in the economy and thus that taxation would be necessary to fund that role. He thought that the role of government should be limited and thus that taxation should be limited. But this doesn't make taxation "evil". Keep in mind that at the first Mont Pelerin Society meeting Lugwig von Mises clashed with other participants, including Friedman, when they argued that the government had some role in the redistribution of income. Such a redistribution would involve taxation. This topic led to some spirited discussions. According to Friedman, Mises walked out, declaring, "You’re all a bunch of socialists."

Also consider economist Murray Rothbard's view of Friedman and taxation,
One of Friedman's most disastrous deeds was the important role he proudly played, during World War II in the Treasury Department, in foisting upon the suffering American public the system of the withholding tax. Before World War II, when income tax rates were far lower than now, there was no withholding system; everyone paid his annual bill in one lump sum, on March 15. It is obvious that under this system, the Internal Revenue Service could never hope to extract the entire annual sum, at current confiscatory rates, from the mass of the working population. The whole ghastly system would have happily broken down long before this. Only the Friedmanite withholding tax has permitted the government to use every employer as an unpaid tax collector, extracting the tax quietly and silently from each paycheck. In many ways, we have Milton Friedman to thank for the present monster Leviathan State in America.
Rothbard clearly thinks Friedman loved taxes too much!

Also I would think that Friedman thought that business should be regulated but that competition is the best form of regulation. What he argued for was deregulation when competition was being thwarted by inappropriate regulation.
The Republican Party in the US, the Conservative Party in England and the Labour Party in New Zealand enthusiastically took up Friedman’s philosophy, which is now called neo-liberalism.
The major influence on the Thatcher in the U.K. was Hayek rather than Friedman.

As to what Friedman's general political philosophy was he himself used the term "classical liberalism". On this see his book "Capitalism and Freedom". I think it is in the preface that he discusses this point. Given my understanding of political philosophy such a designation seems appropriate. As to his view of the philosophy of science as applied at the study of economics see this famous 1953 essay "The methodology of positive economics". I would guess that Cunliffe has read neither and thus is unable to pass comment on Friedman's philosophical views.
Friedman revived a belief in the “invisible hand” of the market. It was a fairy tale that Adam Smith had said a century earlier would automatically deliver the best of all possible economic worlds.
Adam Smith NEVER said that! See, for example, Gavin Kennedy's blog Adam Smith's Lost Legacy for many discussions of what Smith really did say. Let me point out that Smith believed there were many reasons for markets to failure and thus many reasons for government intervention. A partial list would include:
Here is a list extracted from Wealth Of Nations:
  • the Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’ (WN464);
  • Sterling marks on plate and stamps on linen and woollen cloth (WN138–9);
  • enforcement of contracts by a system of justice (WN720);
  • wages to be paid in money, not goods;
  • regulations of paper money in banking (WN437);
  • obligations to build party walls to prevent the spread of fire (WN324);
  • rights of farmers to send farm produce to the best market (except ‘only in the most urgent necessity’) (WN539);
  • ‘Premiums and other encouragements to advance the linen and woollen industries’ (TMS185);
  • ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
  • ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);
  • patrols by town guards and fire fighters to watch for hazardous accidents (LJ331–2);
  • erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours) (WN723);
  • coinage and the mint (WN478; 1724);
  • post office (WN724);
  • regulation of institutions, such as company structures (joint- stock companies, co-partneries, regulated companies and so on) (WN731–58);
  • temporary monopolies, including copyright and patents, of fixed duration (WN754);
  • education of youth (‘village schools’, curriculum design and so on) (WN758–89);
  • education of people of all ages (tythes or land tax) (WN788);
  • encouragement of ‘the frequency and gaiety of publick diversions’(WN796);
  • the prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population (WN787–88);
  • encouragement of martial exercises (WN786);
  • registration of mortgages for land, houses and boats over two tons (WN861, 863);
  • government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’ (WN356–7);
  • laws against banks issuing low-denomination promissory notes (WN324);
  • natural liberty may be breached if individuals ‘endanger the security of the whole society’ (WN324);
  • limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and
  • moderate export taxes on wool exports for government revenue (WN879).
I would also bet that no economist has ever said that the "invisible hand" of the market would automatically deliver the best of all possible economic worlds. The best you will get from an economist is that competitive markets will give a better (but still imperfect) result than any alternative.
Neo-liberalism has become such a dominant economic philosophy that it is now the only economic philosophy taught in many universities.
Does any university teach a course in "economic philosophy"? I would point out that every economics department in every university will teach, in more than one course, reasons for market failure. Reasons like asymmetric information, market power, externalities, public goods etc.

There are a whole lot more problems with the historical and policy arguments in the speech and for some discussion on these issues you can see the Not PC blog.

If this speech is an indication of the quality of economic advice Cunliffe is getting he needs to change his advisers.

Update: Kiwiblog comments on The Cunliffe speech.


Mark Hubbard said...

If you want to really be scared, Paul, read Cunnliffe on this Red Alert thread, plus all the comments, from the beginning:

Makes all those zombie movies look tame. Cunnliffe will probably be in control of the budget from 2014. Be very afraid.

Eric Crampton said...

That Cunliffe seems to think he can use Bernard Hickey as trump card over Milton Friedman suggests he has little grasp of modern economics. Or of anything else. It would have been less embarrassing had he found some Krugman or Stiglitz quote.

Matt Nolan said...

Bashing a straw man version of economics is in vogue.

It makes me nervous regarding the outlook for policy in a decades time, when society is so keen to attack a discipline for daring to "describe trade-offs".

Eric Crampton said...

I love this comment from Sanctuary over at Dim-Post on the Cunliffe speech:

"Similarly, the idea in his speech that we might not have to abjectly and uncritically worship at the feet of business is a direct challenge to the hegemonistic primacy of business that dominates our civic discourse. Cunliffe notes that neo-liberalism is often now the only economic theory taught in universities (that a crackpot like Eric Crampton can be a senior lecturer is evidence enough of that) but as in the media, the ambient groupthink of neo-liberalism infests every corner of our business establishment. If Cunliffe is for real, he is going to have to have plans to deal with a capitalist class that would respond to any attempt to reign it in with “capital strikes” and “capital flight” and black propaganda campaigns that will make the manipulation of public opinion we saw in the Hobbit dispute look like a beacon of truth and light. Until I see more evidence that the move to proudly embrace social democracy again comes with the willingness to take on capitalism’s response, I’ll reserve judgement on him."

Paul Walker said...

@ Eric. Crackpot. I like that!

The sad bit is we could introduce Sanctuary to some real crackpots!!!

@ Matt. bashing straw economic men is always in vogue. Unfortunately.

@ Mark. The discussion you had with Cunliffe only goes to show that he may believe what he said in his latest speech. And if he becomes Minister of Finance we should be afraid. I am still hoping that Eric is right when he says it is all just playing to the crowd.