poorly defined question … setting values “based on the opinion of everybody” does not entail weighting those opinions equally.

In a reasonably competitive economy, in most markets, the ability of the owners of capital / scare resources to manipulate supply and demand is constrained – whether what ability they have is “large” or “small” – well, poorly defined question again. Tim should agree it’s non-zero, at least.

plus, as we move from away from the simplest economic models, assuming perfect competition, perfect information, toward the real world then we get different “weights” on whose “opinion” sets “values” – if somebody has monopoly power, how much? If somebody has private information, of what sort? Tim is surely aware of all this, so I’m not sure which model of his is flawed. All economic models are flawed, in so far was we are nowhere near even having say a general equilibrium model that can incorporate strategic behaviour, for example. On the other hand there are tons of partial economic models that can cope with – or at least give some insight into – all the various shenanigans John sees going on – not sure which of these Tim does/doesn’t adhere to, but bit unfair to accuse him of spreading false propaganda … even with unequal power etc. imperfect markets do set prices according to the interactions and underlying preferences of all participants, even if some participants actions count for a lot more than others, but then again no free-market endorser with half a brain has ever thought otherwise … to endorse free markets (with appropriate institutions, regulations and in most settings) you just have to think the market is a better information processing machine than the available alternatives.

Sure it does: given current asset distribution. You’re reinventing the wheel constantly and getting is square sometimes.

Plutarch:

“Greek biographer and Neo-Platonist philosopher.”

He’s setting prices from his grave?

Can’t really help there. Economics is the study of allocation under conditions of scarcity. Absent scarcity you’re not talking about economics any more.

But the problem is with your model, not mine; your model says that the market value of something is defined by everyone’s opinion. I pointed out that it isn’t; that the only way it could be is if a) no-one had pre-existing capital accumulations, and thus everyone’s opinion was equally relevant and b) no-one could leverage pre-existing capital accumulations to engineer or control supply or demand.

The point is that what you’ve just said is propaganda not fact; the market absolutely does not set values based on the opinion of everybody, it sets values based on the capacity of plutarchs to manipulate supply (by control of scarce resources or the creation of artificial scarcity) and demand (by advertising, buying laws, buying schools etc.) You’re right about the book definition of economics but you’re still wrong about how the market sets its values.

By being wrong, and doing so publicly, you are both buying and propagating a fundamental piece of social propaganda; that the values set by our market are reflective of something other than entrenched capital interests (otherwise known as ‘unreasonably rich people or corporations who can thus afford both armies and politicians’). To get rational consensus valuation you need an actual free market, and free markets are theoretically and practically impossible under conditions of either scarcity or pre-existing capital accumulation.

Can’t really help there. Economics is the study of allocation under conditions of scarcity. Absent scarcity you’re not talking about economics any more.

In practice, value is principally determined by pre-existing entrenched capital and its ability to manipulate both perception and scarcity, particularly in a mass-media/advertising age. I point you again to the “market value” of a good physics teacher versus the “market value” of a terminally bad investment banker.

This is why I’m always drawing the distinction between “created wealth” which relies on an irrational valuation of something, like the a leveraged financial instrument, versus created wealth which relies on doing something new, or doing something old in a new way (like the invention and development of telecommunications technology, or like creating a better way to teach people about bones). The latter is worth doing, the other is not; the latter should therefore be rewarded more by the market. However, it isn’t. The model is therefore broken.

Markets can be manipulated (as in the case of the release of the Sony PS2 or the recent sub-prime situation). Many things are traded generating vast wealth for people who were already rich which have no actual utility or worth at all: such as those sub-prime instruments. Whereas food, water and shelter have utility that is not dependent on consumer confidence. They have something that leveraged financial instruments do not have. What is it? Hard to define.

My problem with arbitrarily assigned value is that people have been taught to think that the arbitrary values assigned are rational. They are bloody well not rational when a stock-market speculator is considered more valuable to society than a physics teacher. That, among many other things, indicates that the system is rigged.

I do not have an answer. Intrinsic worth doesn’t quite exist; it would be nice if it did but it doesn’t. Value is always going to be affected by market forces; that’s what they’re for. Supply and demand make sense as a method for fixing prices in a scarcity economy, particularly if the market is free (which ours is not). I’m not arguing with any of those things. I’m arguing with the perception at large in society that values are necessarily set in the right place just because the market happens to set them. In a 100%-free-zero-scarcity market they might be, but we don’t live in one and we never will.

It is pretty clear that our arbitrarily assigned values are not rational; and yet people still accept the system. It bugs the hell out of me.

But there’s the contradiction. I hate cucumber: its value to me is nothing (so, as it happens, is the value of an iPod). There is not “worth” which is independent of the value assigned by whoever is doing the assinging. Essentially you’re still travelling around the medieval path of trying to discern “real value” a la Thomas Aquinas.

It simply doesn’t exist.

“Regarding taxation” I’ve had a go at that on my own blog, also on the newer thread here which discusses it. It’s not news (well, OK, to those who read economic statistics it isn’t), although I agree it is interesting.

The value/worth distinction is a bugger, I’ll admit. This is because if you look at the world without embedded assumptions, there is a clear difference between something which costs x to make and provides y benefit all the time (say, a cucumber) which can be sold for z: and something which costs a to make and can be sold for b (say, an iPod). The cucumber’s value is z, its worth is y, and its cost is a. The iPod’s value is b and its worth is … well, it’s not worth anything at all if you don’t live in a place with electric power.

So there is clearly a difference between value, which is entirely arbitrary, and worth which is to a limited extent based on how much something costs to make and what benefits it supplies to the owner. But exactly how you distill that into a useful formula is something I (and everyone else who’s tried) am still working on.

This, however, is just easy:

The one I do think is worth making is value/worth “to whom”?

Everyone. In the context that I was talking about. You are talking about exploiting localised economic differentials to move wealth from someone else to you. I am talking about activities which increase the total quantity of wealth available to the human species.

Regarding taxation based on consumption and how it screws the poor to benefit the rich: examine tables 5 and 9 here as they show my argument up very clearly. The whole piece is well worth a read. I’ve felt for some time that the owners of the Great Machine are doing better out of our tax regime than they like to claim; this analysis is pretty solid.

Don’t think the value/worth distinction is worth making.

The one I do think is worth making is value/worth “to whom”?

To which my answer would be the consumer of whatever it is. If the 90 euro specs are of greater value to the consumer than the 400 euro ones then that is value that has been created ( and they probably are, to around 310 euros worth of value….which, yes, I know gives the paradox that we can be creating value by driving down GDP….but that is the way it is).

I did some back of the fag packet stuff and I’m running here from memory. But the top 1% or income earners get around 90 billions or so a year. Government, as we have it, costs 660 billion a year. Even if tax was 100 % on those top 1%, there’s no way at all that they can be made to pay for government as we have it.

You’re assessing only personally held private wealth here.

The place most of the money is currently hiding is in corporate (private) pockets; in the past, there was no such place for a rich merchant to hide money. It was his money, it could be taxed. It’s easier to find under the floor than in Grand Cayman.

and @56:

I’m currently considering flogging prescription glasses over the net in Portugal. Long story why, but an optician here will charge 400 euro just for the lenses for prescription varifocals.

Now, I may or may not do this, but if I’m flogging the same specs at 90 euro, I’ve just created a consumer surplus of 310 euro. And put local opticians out of business.

It’s not necessary to have “systemic wealth” as you put it. Just incremental use of new technologies, the one thing that capitalism does better than any other system (see William Baumol for more on this).

Actually, yes, it is necessary to create new systemic wealth. You are trading on a locational imbalance. I am discussing species economy; total wealth in the world economy that did not exist before. The way you do this right is make something new. The way you do this wrong is trade in leveraged financial instruments.

My analyses are rarely just about Britain or the West unless I specifically say so or the context is unquestionable. When I talk about economic effects and the Great Machine I’m talking about the mechanism by which money flows towards pre-existing concentrations of money internationally. When I talk about creating wealth, I’m talking about creating wealth. Not making a good (or aggressive) trade decisions which take advantage of local differences in economic and technological conditions. That’s just the market; we know that exists.

Regarding capitalism; yes. It is the best bootstrapping system that can be implemented at low bandwidth levels. Read this series for a more developed thesis about this.

Please also note that pointing to the way in which others have created the economic assets that entrepreneurs use (the infrastructure, open source, the WWW, telephone systems, educated workforces etc) is not a way of diminishing the importance of them. Rather, it boosts their importance. For the very definition is that of one who takes extant economic resources and then combines them in a new way to add value to them. And adding value to extant resources is of course the very definition of creating wealth.

And with this I don’t agree. The definition of creating wealth may well speak of value but if so it is flawed at the theoretical level. Creating wealth involves creating worth. Raising a price is described as ‘adding value’ to a product; ask the taxman. Value is assessed in billions of dollars based on ‘consumer confidence’; when the music stopped, look what happened to the economy.

To create actual wealth that can trickle down you have to make something new, or do something different: this is your incremental innovation model of social bootstrapping. What entrepreneurs should be for. The fictional values of large companies are viewed as wealth creation, but as was recently proved on a global scale they aren’t worth a damn thing. One of the most insidious unexamined axioms of the modern economic system is that value is arbitrary but people must be taught to believe it is rational.

A rough guide to a reasonable taxation system would be one that taxes capital less than incomes and incomes less than consumption. Meaning low capital gains taxation, low corporate taxation, higher income taxation and higher consumption taxation. (Please note, I do not mean lower or higher than rates currently extant in the UK, I mean relative to each other.)

They’ve tried this with VAT exemptions.

The problem with taxing consumption goes like this. If you tax consumption of necessities, the poor are paying a tax level intended for the rich; you can’t asset-check someone at the supermarket checkout. If you do not tax food and clothes and public transportation and fuel and electricity and gas, but instead tax “luxury goods” two things will immediately be true; firstly, no-one who is not filthy rich will be able to afford any luxury, because the taxes will have to be very high per item to generate the same amount of money. And secondly, the taxes will be set by the rich (who own the system and will be the only people affected) and will thus be set at a level too low to make a difference. If you try and make value judgements between items (designer versus Primark clothes) you end up in the mess our VAT system is in.

Taxing corporate consumption and private (high) income might work. Currently, consumption taxes look like 4 pounds in 5 on a packet of cigarettes (another reason I don’t buy pre-rolls). If it’s an even choice, people ultimately stop doing it, which is the rationale behind tobacco taxation. Which is, of course, highly addictive… If it’s not a choice, for example being able to drive isn’t for a lot of people depending on job type and rurality, people can’t stop doing it but end up in about 10k of debt per person; this is the rationale behind fuel taxes. …er, wait, what?

Consumption taxes will always disproportionately affect the poor unless there aren’t any poor.

“And what Tim if the resource of the state was not available to enterepreneurs because they won their argument that it should not be paid for by them, or anyone else?”

I do not, and never have done, argue that the State should not exist. I also consistently argue that tax is something that needs to be paid in order to fund that State.

I might disagree about the extent of the State and the taxation levels necessary to fund it, this is true, but please don’t confuse me with anarcho-capitalists. I’m a classical liberal, through and through.

A rough guide to a reasonable taxation system would be one that taxes capital less than incomes and incomes less than consumption. Meaning low capital gains taxation, low corporate taxation, higher income taxation and higher consumption taxation. (Please note, I do not mean lower or higher than rates currently extant in the UK, I mean relative to each other.)

That is, after all, the system of taxation in such social democratic paradises as Sweden. High VAT (and excise taxes), high income tax, low capital taxation, low corporate taxation and no inheritance tax at all.

Looking at the UK system I’d be entirely happy to see CGT at the same rate as marginal income taxes….although I think the reaction here to marginal rates of Sweden’s level would be different as we’re a different society….as long as corporation tax was abolished in its entirety.

What then?

Are we to presume in that case, as the TPA does, that inheritance will provide the alternative resource? And how, if it is not taxed?

Please enlighten – for you seem to be arguing quite convincingly to me for the importance of the state as the bedrock of security, stability, protection and insurance from which entrepreneurs (like me in my time) launch their ideas – and indeed without which most simply could not do so.

Or have I got you wrong, again?

Richard

“Entrepreneurs play an important role, but rarely on their own.”

Of course, by definition. Entrepreneurs are those who organise other economic resources and further, take the risk of failure. That’s actually the definition.

There’s a whole sector of economics which tries to study this point and one set of conclusions (led by William Baumol who one would normally think of as rather a lefty) points to the idea that there are two things we need to separate, invention and innovation.

(Those words themselves have slightly different meanings dependent upon who you’re talking to.)

In this area, invention is the, well, invention of stuff. The phone itself perhaps. Or a laser, or an engine, whatever. Innovation is taken as the spread of that new, if better, invention through the society. (Their definitions at the start of the debate remember.)

The point that these economists make is that there are a number of different ways of getting the first, invention. They point out that the Soviet system certainly invented some pretty cool stuff (and I certainly agree, I still make part of my living by distributing the results of one such Soviet avenue of research).

However, what the capitalist / free market system (and yes, capitalism and free markets are two different things and they do mean both together, not one or the other) is superbly good at, vastly better than any other system anyone has ever tried, is the innovation side, picking up those inventions and getting them into the hands of consumers.

Which is, in their eyes, the reason for the astonishing growth in the capitalist economies over the past couple of centuries. Invention is just fine, but it’s only when people start to use them that their productivity, and thus general wealth, starts to rise.

The entrepreneur is not, as you rightly point out, responsible often for the original invention, nor for the infrastructure used to disseminate it, but they are indeed the people that do the, in this definition, innovation and the reason the system works as it does.

Thus justifying the rewards to the successful: not as rewards, but as above, as incentives to the next lot.

I don’t insist that this is completely correct, this view of the world, even if I think it has huge explanatory value. But that is what the people trying to explain that unique feature of capitalism, the growth, have been pointing at as the explanation.

Please also note that pointing to the way in which others have created the economic assets that entrepreneurs use (the infrastructure, open source, the WWW, telephone systems, educated workforces etc) is not a way of diminishing the importance of them. Rather, it boosts their importance. For the very definition is that of one who takes extant economic resources and then combines them in a new way to add value to them. And adding value to extant resources is of course the very definition of creating wealth.

Tim Worstall writes: ‘My favourite example here is that sure, mobile phones have made lots of people stinking rich. But they’ve made society as a whole vastly richer (try googling “cell phones fishermen Kerala‚” for an example of how) than whatever billions have accrued to the entrepreneurs.’

That’s true – but were the scientists and engineers who developed the technology entrepreneurs? Was Apple’s design guru, Jonathan Ive, an entrepreneur when he was hired by Apple? Entrepreneurs play an important role, but rarely on their own.

Good luck too in your new venture, but remember there’s a strong chance that the technology behind your website is open-source, developed by a community often with motives other than profit. Entrepreneurs play a role here too (as indeed they do in co-operatives and social enterprises) but none of them remotely resemble Julie Meyer’s model of the Individual Capitalist (as spelled out in the report’s foreword), driven by “greatness… not work life balance”. (It’s hard to see how these Individual Capitalists find time to have children, let alone fret about their inheritance. If they do have children perhaps they should worry more about finding some time to see them.)

This debate also got me thinking about some things that are important to my own business. They include:

- A good digital communications infrastructure – and most crucially right now, fast broadband (it would help too if I didn’t have to put up with lamentable customer services from private/privatised suppliers)

- A highly-skilled workforce

- Affordable and good-quality childcare for my young children

- And, needless to say, a banking system that actually works.

Most of these things depend on, at some level, the state. For all their whingeing, the entrepreneurs portrayed in the TPA report don’t just give to the state, they take from it too.

Now, I may ormay not do this, but if I’m flogging the same specs at 90 euro, I’ve just created a consumer surplus of 310 euro. And put local opticians out of business.

It’s not necessary to have “systemic wealth” as you put it. Just incremental use of new technologies, the one thing that capitalism does better than any other system (see William Baumol for more on this).

Ah, well, now you’re in Chris Dillow territory. He who insists that you cannot have a large state entirely paid for by the rich, for the rich don’t have enough money to pay for a large state.

I did some back of the fag packet stuff and I’m running here from memory. But the top 1% or income earners get around 90 billions or so a year. Government, as we have it, costs 660 billion a year. Even if tax was 100 % on those top 1%, there’s no way at all that they can be made to pay for government as we have it.

As Chris points out, if you want a state paid for solely by the rich, you need to have a small state. If you want a large state then you’ve got to tax everyone, because that’s where the money is.
Yup, 35% (the current total tax share as a percentage of income of the working class, including direct and indirect taxes) of everyone’s money is more than 100% of the incomes of the top 1%.

I consistently argue that we should not in fact be taxing the (working) poor. If that means that we have to have less government to pay for not doing so, well, so be it.

Fair enough. Let’s “look through” the Scott Trust. Set up specifically and deliberately to make sure that ownership of The Guardian would not be diluted by inheritance tax.

Great. You and I (and others here in Liberal Conspiracy) make an occasional crust from writing for them. Let’s do that shall we?

You have said several times that you are funded, in some of your work, by the Ford Foundation. Let’s look through that shall we? How many Ford descendants get how much money from that Foundation?

You want to shine the light before we start to change the laws?

Not wholly convinced of that. I agree that marginal tax rates for the high income earners (yes, there is a difference between them and the rich ie wealthy but as neither the UK or US has ever had a serious wealth tax I think he means high income earners) are lower than they have been since WWII around and about.

However, the portion of the total income tax burden that is carried by those high income tax earners is higher now than it has been since, umm, around and about WWII I think.

Got to distinguish between the two, so which do you mean? Marginal tax rates? Or the amount of the entire tax bill that is paid by the rich?

As far as I understood it, he meant neither of these because he was talking in real rather than tax terms. In the past, things that were done for public good; roads, canals, cathedrals, famine relief, dealing with banditry, setting up guilds, exploration of the unknown, science (I’m thinkking of monastic institutions and later the Royal Society) and so on were overwhelmingly (i.e. 100%) funded by less than 5% of the population. The percentage of those things (there’s a lot more things to do now, what with the Enlightenment, education and national health, etc.) that is paid for by taking money from the poor (I am here meaning those who do not own land outright and earn less than, say, Lloyd-George’s 125kpa as it would be in modern money) is massively higher than 0%.

The rich pay for less of the things that are done for the public good than they used to. That’s what he meant talking about “the civic burden”; things done because they should be done, rather than because they accrue any profit.

My favourite example here is that sure, mobile phones have made lots of people stinking rich. But they’ve made society as a whole vastly richer (try googling “cell phones fishermen Kerala” for an example of how) than whatever billions have accrued to the entrepreneurs.

Looked at this way, the $3 million made by an entrepreneur isn’t a reward for their having created $97 million of value for everyone else. It’s an incentive for the next bloke with an idea to create $97 million of value for society to go ahead and do so.

See, here I agree. That’s what real entrepreneurs do. However, did you read my article about how the tied lease has led to the pub industry being taken over and then sold off for flats by “entrepreneurs”? That’s what entrepreneur means outside of the academic or marketing worlds.

Mobile phones (and the Internet, which are intertwined at this level) are the best and only recent example. No-one has created systemic wealth like that since; no-one had created systemic wealth like that, a really new thing, since either the spread of the telephone or of the passenger aeroplane, depending on how you count. That’s the kind of wealth creation you’re talking about.

What economists (and plutocrats) mean is “people who are sitting on a huge pile of cash and employ that cash to end up sitting on a bigger pile”. That’s what they mean when they talk about “wealth creation” these days; they mean the sub-prime market.

People who are going to do something new (the Google guys, or Jim Baen) are not going to leave their country because their country has a sane tax regime. The guys who are all about leveraging pre-existing capital accumulations to end up owning the fruits of other people’s labour and innovation will.

Sevillista @51:

But from the point of view of the people who run the Great Machine, the distribution is most certainly not random. All the money is in the hands of the correct people: i.e. people like them.

The TPA (in Matt’s comment above at #19) claim that inheritance encourages entrepreneurship as inheritances provide people with access to finance without the risks attached to a bank loan. That means they increase entrepreneurship. The effect we discuss in our paper.

This is a completely fact-free assertion (unless Matt Sinclair care to rise to the challenge of providing us with some e.g. the answers to my questions at #24.

Would the TPA, for example, say a Government programme aimed at boosting entrepreneurship through randomly distributing lump-sums throughout the population represents good value for money? And yet this random distribution of cash is how inheritance works to boost entrepreneurship.