IEA Blog

Anti-consumerism as a gut-feeling has been around for ages. But the attempt to rationalise the sentiment in economic terms is a product of our times – and a successful one at that. With titles like The Spirit Level, Affluenza, All Consuming, The Selfish Capitalist, Prosperity without Growth, Britain on the Couch, Consumed and many more, anti-consumerist literature has become a thriving consumer-good market.

Here’s anti-consumerist economics in one lesson: suppose two individuals, X and Y, attain a monthly consumption level of 100 gold coins each, and are perfectly happy with it. Now X decides to increase his weekly workload slightly, in order to increase his consumption relative to Y. He generates 5 additional gold coins, and spends them on a good which has no practical use whatsoever; it merely serves as a marker of social status vis-à-vis Y.

Y is now under zugzwang. He decides to reduce his annual holidays in order to increase his consumption to 110 gold coins. Y does not derive any pleasure from the additional goods he buys either. They merely serve to demonstrate his ability to keep up with X.

The retaliation of X is not long coming, and so the arms race begins. There is no way out, because given each individual’s preference for a high status relative to the other, both behave rationally from an individual perspective.

A narrow-minded old-school economist would say: “Great, GDP is increasing, economic growth is high. Everything is getting better.” An enlightened anti-consumerist economist would counter: “Look closer. Both X and Y now have stomach ulcers from overwork, take antidepressants, their family lives are brittle, and their social lives are in tatters. They are richer – but only in useless status symbols.” In the words of the Spirit Level authors:

“If an important part of consumerism is driven by emulation, status competition, or simply having to run to keep up with everyone else, and is basically about social appearances and position, this would explain why we continue to pursue economic growth despite its apparent lack of benefits. If everyone wants more money because it improves self-image and status in relation to others, then each person’s desire to be richer does not add up to a societal desire for economic growth” (pp. 224-5).

But there is a daring logical step: from the mere fact that so-called “conspicuous consumption” exists, anti-consumerists conclude that apart from bread, butter and a dry bedsit, virtually all consumption serves no other purpose than status-signalling. This is like jumping from the observation “There are black-haired people in Finland” to the conclusion “Almost all Finns are black-haired.” 

A superficial glance at a large-scale expenditure survey is enough to cast doubt on the anti-consumerist premise. Yes, the average British consumer spends £110 per year on jewellery, clocks and watches; and £290 on hairdressing, beauty treatment and cosmetics. But he/she also spends £135 on milk, £450 on public transport services (excluding air travel), and £760 on insurance products. In total, most of us spend a large part of our budgets on things that are barely observable to others.

Besides, economies where absolute levels of wealth stabilised after having reached a certain level of development have already existed. This describes, more or less, the situation of Argentina between the early 1930s and the early 1990s. According to the logic of the anti-consumerists, Argentinians should have lost interest in material wealth, and fully dedicated themselves to family life and civic engagement instead. A visit to a shopping mall in Buenos Aires suggests otherwise.

Libertarians have traditionally been sceptical of the case for electoral reform, in large part because there appears to be a relationship between high levels of public spending and the various systems of proportional (or near-proportional) representation. The big government countries of Sweden, Belgium, Germany, Holland and Norway, for example, all have proportional electoral systems, whereas relatively smaller government countries like the UK, USA, Canada and New Zealand all use FPTP. It is believed that PR systems produce higher levels of public spending because of the log-rolling required to build a governing coalition after an election.

But whether the electoral system is the independent variable that produces higher public spending in the manner described may be questioned. Today, UK government spending as a proportion of GDP would rival that of most other European countries, suggesting that FPTP is not sufficient protection against the growth of government. It is also the case that Ireland reduced its public spending from 43% of GDP in 1990 to 34% in 2005, making it one of the smallest governments in the developed world, with a system of PR. It may well be, then, that levels of public spending are determined by other factors, such as political culture, and these other factors may be randomly correlated with FPTP or PR.

It is also the case that FPTP enables a political party with the support of a minority of the electorate to assume absolute political power. In the 2005 UK election, for example, the Labour Party won an absolute majority of seats in the House of Commons with only 35% of the popular vote. With the support of only marginally more than a third of voters and barely over a fifth of the entire adult population (including non-voters), the Labour Party was able to introduce a host of draconian and unpopular policies without any constitutional limit on its power.

Libertarians are rightly wary of the tyranny of the majority; FPTP is an electoral system that creates majorities out of minorities. PR systems create coalition governments, where the views of at least half of the voters must be represented (albeit imperfectly).

Within a FPTP system libertarians may sometimes be influential members of the governing majority – as was the case in the 1980s and 1990s. But given the dubious attractions of political power there is surely a much greater likelihood that statist authoritarians will invest the time and effort to attain high office than will benign libertarians. Hence, the majority-creating potential of FPTP is more likely to be used against liberty than to defend liberty.

It would be naive to believe that any electoral system alone can create or protect a free society, but PR must be an essential component of a constitution that limits the power of government and protects the liberty of individuals. Libertarians should support AV in the forthcoming referendum.

Mark Thompson’s vigorous defence of the BBC’s role and contribution to broadcasting marks the first skirmish in the build up to re-evaluating the licence fee and the role of the corporation. It’s a fight that comes round every few years and which the BBC usually wins. This time, however, things could be different – and they certainly should be.

The amazing transformation in broadcasting technology and output in recent years makes it increasingly impossible to intellectually defend the BBC’s extraordinarily privileged position. The explicit aim should be to radically reduce the BBC’s broadcasting remit with the intention of abolishing the licence fee altogether in the not too distant future.

Read the rest of the article on the ConservativeHome website

I have no constitutional objection to the Alternative Vote system (AV). Fears over constantly hung Parliaments or permanent coalitions are largely unfounded. In Australia, where AV was introduced in 1919, it has, with the exception of the election last week and the 1940 General Election, delivered strong governments despite the presence of popular “third parties” such as “State Labour” in New South Wales during the 1930s and 40s, the Australian Democrats in the 70s, 80s and 90s and the Greens from 1993.

But AV is not a good way to elect Members of Parliament who will support radical free-market economic reforms. Why is this? In the United Kingdom today almost 50% of the population rely on the government for a sizeable portion of their income, and even more receive some money in the form of tax credits or old-age support.

In the most recent General Election, the British Conservatives (not exactly running on the most radical free-market platform) polled 36% of the vote. Just over a third of British voters were willing to give their “primary vote” for a party willing to cut the deficit quickly and enact the beginnings of free-market school reform.

Any party that wishes to become government under AV will be elected on the second, third or fourth preferences of those parties who finish lower down the ballot paper. If a large proportion of the population receive money from the system, then it is difficult to imagine them placing their second preferences for a party that will withdraw social benefits, ahead of one that pledges to retain them. To put it another way, a lot of those on the left would give their preference to a social democrat candidate, but few on the right would give theirs to a free marketeer.

Market liberals need to remember that Thatcher won 42% of the vote in 1983 – and it is highly unlikely she would have gained a lot of second preferences. Changing the voting system may be good for other reasons, but it makes a government that will be willing to enact radical free-market reform less likely.

The Institute for Fiscal Studies’ recent analysis of the budget – purporting to show that it isn’t “progressive” as the financial hit taken by the poorest decile of society is higher in percentage terms (although not in cash terms) than that suffered by the richest – shows how stagnant debate has become about redistribution of wealth and about economic policy more generally. This presents both a challenge and an opportunity for supporters of free markets.

The IFS is a reputable think tank and there’s no reason to doubt the numbers they have produced. But there are good grounds for challenging their relevance. In public relations terms, they may have tripped up the coalition government – and particularly the Liberal Democrat section of it – but in policy terms, there aren’t many lessons to derive from the IFS’s latest release of data.

What’s at issue is the extent to which the government’s tax and benefits policy promotes so-called “fairness” and the extent to which it encourages social mobility. The term fairness has come to mean a policy which, in immediate cash terms, benefits the poorest at the expense of the richest, or – more often – hurts the richest even more than it hurts the poorest.

Interpreting policies in this way is perverse. To give an extreme example, it seems that a budget that increased people’s welfare payments from £8,000 per annum to £10,000 per annum but legally prohibited them from entering the workforce would be deemed “progressive” under the IFS model. On an immediate snapshot of household income, those at the poorer end of society would be better off – but their long term prospects would clearly have been harmed enormously.

What really needs to be measured is not percentage alterations in tax and benefits packages, but the dynamic effects the tax and benefit system have on increasing overall economic growth and assisting and incentivising people in realising their aspirations. This sort of approach doesn’t lend itself as easily to a bar chart that can be printed in a national newspaper, but is surely the more intelligent way to attempt to tackle low economic growth and an increasing bunkerisation of the poorest in a welfare dependency culture.

The traditional terms of “left” and “right” are not helpful dividing lines in this debate. In recent weeks, I’ve been categorised as both a hard right winger and as one of the country’s most influential left wingers. Although this type of political categorisation is commonplace, it is extremely unhelpful.

Left/right terminology has started to mean little more than a reference to the vested interests that an individual or group is believed to lobby for. The IEA – and free marketers more generally – need to continue to show how market-based reforms are not a cynical attempt at stacking the odds in favour of the wealthy but help the poor too. In fact, in very many cases, free market reforms are particularly vital for the poor. Policies that rely entirely on redistribution of wealth may provide the illusion of improving the lot of the poorest in society, but little more. A structure that encourages social mobility is what is needed – ensuring that work and enterprise is rewarded and incentivised. That would be a “progressive” approach, motivated by “fairness” and these are two terms that free market advocates should seek to claim for themselves.

I am inclined to agree with the view of The Times that the government should not get bogged down in the argument about the impact of the June budget on the poor. The IFS is probably correct in its analysis suggesting that this was not really a “progressive” budget in the technical sense – although the IFS analysis is also limited in that it does not model second-order consequences as people adapt to tax and benefit changes. This argument could run and run and detracts from the whole point of the budget – to get a grip on our huge fiscal deficit. It’s basically a party-political argument and the government should politely but decisively move the agenda on.

Slightly more problematic is yesterday’s statement from the Equality and Human Rights Commission that it may have to consider “appropriate enforcement action” against the Treasury for not conducting a rigorous analysis of the impact of the budget on “vulnerable groups” – women, ethnic minorities, the disabled and the elderly. The Commission, recently castigated for wasteful spending (its budget is well over £50 million a year), has long been subject to mission creep, but has not previously sought a veto on fiscal policy. The apparent enforcement powers were one by-product of the dogs-dinner Equality Act 2010, which I have previously criticised.

The whole future of the EHRC needs looking at closely, particularly given its poor management and its odd relationship with the Government Equalities Office. The issue of “Equality” should be detached from “Human Rights” as there is no logical connection between them. But the legislation itself also needs fundamental revision – even if the EHRC stays its hand, the feminist campaigning group the Fawcett Society has already announced it is seeking judicial review of the budget for neglecting to assess whether it has a disproportionate effect on women.

The impact of budgets on individuals is very difficult fully to understand, let alone model: I was once, many years ago, working in this field and I know this only too well. If the courts are to judge whether or not an analysis is adequate we are in big trouble. Forget Jarndyce v Jarndyce: Any Aggrieved Pressure Group v. The Treasury could keep lawyers in clover for decades.

And any cuts in public expenditure are bound to have an impact on one or more allegedly vulnerable groups. Together the allegedly vulnerable groups account for about two-thirds of the population. Only white males under 60 seem not to present any problems to our Equality watchdogs.

“When John Maynard Keynes talked of persistent under-employment, he did not mean that, following a big shock, economies stay frozen at one unchanging level of depressed activity. But he did think that, without external stimulus, recovery from the lowest point would be slow, uncertain, weak, and liable to relapse. His ‘under-employment equilibrium’ is a form of gravitational pull rather than a fixed condition.”

Or so it is argued by Robert Skidelsky in a recent article. He contrasts his Keynesian views with this.

“Contrary to Keynes, orthodox economists believe that, after a big shock, economies will ‘naturally’ return to their previous rate of growth, provided that governments balance their budgets and stop stealing resources from the private sector.”

These orthodox economists, according to Skidelsky again, base their reasoning not on business fears of government bankruptcy. Rather, what they are worried about is the “governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders.”

I agree with Skidelsky in thinking these “orthodox” economists – if that is what they believe – are so far off beam that they will never get it straight. The notion that economies are being held back because business people have taken on board and are reacting to macroeconomic forecasts of harder times ahead, that they are cutting back production today because of the forecasts they have themselves made, is about as ridiculous an economic theory as it is possible to conceive.

Business people do not react to the total economy; they react to their own order books. What is causing the slow, painful recoveries we see everywhere is that governments have diverted immense parts of our productive effort into useless non-value-adding forms of production. Demand for output will not rise because we are not producing goods and services from which real increases in incomes can be earned. Without such real increases in our ability to buy, we cannot purchase what others have produced. Demand, as was once understood, is constituted by value adding supply.

I therefore completely agree with Skidelsky where he writes:

“The trouble is that the current crisis finds governments intellectually disabled, because their theory of the economy is a mess.”

It is just that he and I disagree about which aspects of the prevailing theory actually are in a mess. Since governments did more or less what Skidelsky recommended back in 2009, he should have a good hard look at the theory he is still trying to peddle. More debt and wasteful spending is not the answer. Most people, looking at the damage that such policies have caused, are beginning to understand this for themselves.

Unfortunately, they, along with their governments, have no active theories to help them find their way out of the phenomenal mess we are in. Still, they are working it out as they finally begin to cut back on expenditure and work their way towards more market-based solutions.

But this can clearly be said: wherever the answers are, they are not to be found in any of the Keynesian instruction manuals now in use.

The drug policy of the UK has, for years, taken the line of being ‘hard on drugs’, aiming to stamp out use and drug related crime through ever tougher laws and regulations. It means that simply for possessing a class B drug such as cannabis, a person can be sent to prison for up to 5 years. For a Class A drug like ecstasy this is 7 years and intent to supply could lead to life imprisonment.

Despite these increasingly harsh measures, levels of drug use in Britain have remained among the highest in Europe. A 2007 report by the UK Drug Policy Commission showed that Britain had the second highest number of drug related deaths in Europe and the highest addiction rates and rates of multi-drug use.

Is the solution, then, to impose even harsher punishments on drug use? The same report concluded that while jail sentences had increased, drug use had become more common. The harsher sentences were seemingly having little or no effect.

This is where, it seems, Britain can learn from the change of direction that Portugal has taken. In July 2001, Portugal declared a mass decriminalisation of all drugs. Decriminalisation, in this case, means an individual is permitted to possess enough of a substance for personal use and while the drugs still technically remain illegal, possession and use is considered an administrative infraction rather than an actual criminal offence.

So what has this led to in practice for the drug issue in Portugal? One of the most common fears of such a move is that it will lead to an increase in use, especially amongst the young, based on the perception that the government is giving its approval to the practice. It seems this is not the case. The prevalence of drug use in Portugal among young people has declined for almost all substances, as shown in the figures below.

The potential for an increase in drug tourism was another concern. However, it appears to have been largely unfounded. Around 95% of drug offenses in Portugal are committed by Portuguese citizens compared with close to zero by citizens from other EU countries.

According to media reports, the European Commission is planning to introduce taxes on commodities as part of the new EU 2020 strategy, the successor of the failed Lisbon Strategy for Growth and Jobs. The taxes may be imposed on fossil fuels and metals, as well as renewable commodities such as timber and water.

Interestingly, the main argument to justify a commodity tax is not environmental protection. The European Commission apparently wants to ensure commodities are used more efficiently, arguing countries that use commodities efficiently will be competitive in times of rising prices and strong competition for resources. The underlying rationale behind these arguments is at least plausible.

Special taxes on commodities are not, however, a suitable way of achieving this objective. They would imply that the European Commission exactly knows how every commodity can be used most efficiently. Moreover, in a changing market environment, the tax rates would need to be adjusted constantly for maximum efficiency. The proposals therefore presume that officials can obtain sufficient knowledge to set the “correct” tax rate – in other words, they reflect a belief in central planning.

Instead, the European Commission should believe in markets. Only markets are able to provide the information for the highest efficiency. This information is the market price, which signals to all market participants the scarcity of a good. If prices increase, innovators will find new techniques or machines to use commodities more efficiently. As F. A. Hayek stated in his article “The Use of Knowledge in Society”, “The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction.”

Every distortion of prices, such as a tax, will distort the allocation of commodities. Free and competitive markets do the best job of ensuring efficient resource consumption.

There has been much discussion over the last week about the coalition government’s first 100 days. Some of this analysis has been useful (like that on this blog), whilst much of it has been rather odd. There has been a rush to judgement as if we can state with some certainty what the government is and isn’t going to do after only 14 weeks.

However, the task that the government has set itself – to reduce the size and role of the state – is a long-term task, and what makes it more difficult is that the key change is not merely a matter of economics and politics, but involves a significant cultural shift.

The biggest cultural change that the government needs to make is to eradicate the sense that people are due certain entitlements. Instead of assuming that they are entitled to benefits and services as of right, people need to come to terms with the fact that what they receive comes at the expense of others: welfare benefits can only be granted to some because others pay tax. Calling a benefit an entitlement ignores the fact that the money has to be earned by someone and then taken by government.

Matching the idea of entitlement is the problem of resentment. This is the sense that government does not work for us, does not care and might actually be operating against us. Some who feel this resentment do so because they feel they are paying taxes that are being squandered on others. But the highest level of resentment actually comes from those who benefit most from the entitlement-based system of welfare. It is those who benefit the most from welfare and the professionals who depend on these structures that feel most strongly that the state is against them.

I would argue that this latter form of resentment arises precisely because of the belief that welfare recipients, backed by welfare professionals, are entitled to certain goods and services as of right and without having to make any contribution themselves. What matters now is not what one does but the mere fact that one is. The job of the new government is to change this attitude and make it clear that benefits come with strings attached. This is a task that will take much longer than 100 days.