Another time

No, they’re not public goods. Please look up the definition on wikipedia.

Secondly, this is very odd thinking….we make ourselves poorer by mposing restrictions threfore you must make yourself poorer by imposing he same restrictions?

Finally, no, there is no reason to give up these desirable things. For western world workers are rich….and if they decide they’d like to take a little bit of that extra wealth as increased leisure, a cleaner environment and safer workplaces, then that’s just fine and dandy. That’s the point of the economy, after all, that people get as much as is possible of what they desire.

It really shouldn’t surprise anyone at all that rich people (western world workers) have different desires from poor people (Chinese factory workers for example). In fact, it’s one of the building blocks of whole areas of economics, the heirarchy of wants.

Certain forms of financial innovation can be used to carry out transactions that could be judged to have unpleasant externalities. Since we are in the business of re-organising financial services, now might be a good time to give some thought to this matter.

What I am saying is that the Western labour market is relatively disadvantaged by all sorts of uneconomic encumberances – sensible working hours, workplace safety, healthcare and pensions and so on. This makes the west a bad place to locate new capital investment.

In effect, western worker’s purchasing power is out of proportion to their productivity. Because at the margin (where prices are set) labour is cheaper in some places than others.

But western workers do not want to give up their uncompetitive pay and conditions so, the best alternative is to ensure these uncompetitive conditions (which happen also to be public goods) are extended to as many people as possible. You are right to ask what happens to the neighbours of these newly enriched workers in the developing world. Well, they sell goods and services to them and thus enrich themselves.

I’m not saying that this isn’t happening. I am merely saying that we should be working to accelerate the trend. I will look at the Factory Acts because I am not familiar with them.

As to the question of your model of arriving at a financial market. That is precisely not where my logic takes you. Selling any financial innovation to anyone who would buy it from you is what we had before. This has blown up producing not a gigantic bust and many banks going out of business but a huge round of bailouts. We do not wish to return to the status quo ante. We certainly do not wish to return to the status quo ante with the addition of a massive dollop of moral hazard stemming from the current bailout.

It is therefore legitimate for those who funded the bailout (or took the risk of losses associated with funding the bailout if you are a die hard bull) to say what they will and won’t stand behind the next time around. Splitting investment banks from retail banks might be one avenue, changing accounting standards in order to achieve greater transparency might be another (albeit a fearfully complex one) and there are many others.

If you want to go back to the status quo then you have to come up with an alternative means of removing the moral hazard created by the bailout. A huge wave of fraud prosecutions might do the trick but it would be stupid, vindictive and unlikely to produce results.

I don’t know how to re-regulate finance, but I know that capping pay will achieve precisely bugger all.

Nearly but not quite. What’s happening in the rest of the society around the factory matters: connections to ports, electricity supplies etc….but…OK, for the sake of argument yes.

“The high wages of western workers are therefore undermined by the potential for capital to flee by locating new factories or re-locate existing ones in lower wage economies.”

No, because we’ve already said that average wages are determind by average productivity in an economy. Yes, manufacturing wages might go down as a result of competition in manufacturing from low wage countries but labour can move to the service sector. The average level of wages in the country will not change.

“And workers in low wage economies are not free to obtain higher wages by moving to countries where wages and conditions are better.

Complete freedom of movement would be one solution to this problem but it would tear Western economies apart.”

All three points are true.

“Or, we could make every effort to raise wages (and productivity) and living standards in the developing world.”

Yes….but where do we start? Krugman (and other economists) say that if we raise productivity then wages and living standards will rise as a result. And we know how to raise labour productivity….send more capital for labour to work with. So, to raise living standards in China we should be arguing that capitalists should invest more in China. That’s fine by me but not, I think, what you think is fine.

“The first step in doing so would be to improve labour conditions simply by preventing exploitative practices.”

No. Absolutely not. What you are calling “exploitative practices” are things which increase productivity. Long labour hours, higher pollution levels, less workplace safety….spending to reduce these reduces the output of labour and thus the income that the labourer can earn.

Now, it is also highly desirable that there is indeed workplace safety, that there is a green and pleasant land, that there is leisure. However, these are side effects of wealth having been created, so the wealth has to be created first. They are “luxury goods” in the jargon.

Worth pointing out that we actually did this in the 1880s. We imposed the British Factory Acts upon the Indian textile industry (largely because the British mill owners didn’t like the competition) and the Indian textile industry promptly collapsed. Good for the British mill owners and terrible for absolutely everyone else.

“we may also need some other forms of financial innovation but, by no means all of them.”

Excellent. So let us try and design a system by which we can sort those we do want/need from those that we don’t. How about people think up new ideas and then try to interest others in them? If no one’s interested, then no one wants/needs it. If lots of people are indeed interested then we’ve evidence that the innovation is wanted/needed.

Sounds like a plan…..now all we need is a name. How does “financial market” sound to you?

Thank you for your clarification. The difference between the cost per unit of productivity in the Chinese economy as a whole (including all its clapped out factories and businesses) is very different from the cost per unit productivity in any specific firm which may be either clapped out or not.

The point I was making was that the deployment of a given amount of capital, anywhere in the world will, if competently operated, produce roughly the same output anywhere in the world but the cost of the labour to operate it will vary dramatically.

The high wages of western workers are therefore undermined by the potential for capital to flee by locating new factories or re-locate existing ones in lower wage economies. And workers in low wage economies are not free to obtain higher wages by moving to countries where wages and conditions are better.

Complete freedom of movement would be one solution to this problem but it would tear Western economies apart. Alternatively, western wages could level down to the point at which they become competetive with lower wage economies, again, tearing them apart as living standards fall.

Or, we could make every effort to raise wages (and productivity) and living standards in the developing world. The first step in doing so would be to improve labour conditions simply by preventing exploitative practices.

#40 OK, fair to upbraid me on this. What I perhaps should have said was that it was not the bankers’ greed that caused the crash. The global economy already contained serious imbalances that were nothing to do with the financial sector. I accept that the bankers made this worse and got mighty fat by doing so.

However, I contend that the core underlying problem was a trade imbalance and I further contend that it was the stupidity of the financial services industry (rather than avarice per se) which caused them to do so. As I argued above, I am pretty sure that bankers would have taken the same stupid risks for far less money, so it is not the level of pay that is the problem.

As it happens I am even more skeptical than Rogoff about the degree of benefit to be derived (for society as a whole) from financial innovation. Rogoff cites, as an example of worthwhile innovation, the lower mortgage rates paid by some US homeowners. I am not sure whether he is serious about this since very low interest rates on mortgages (especially the innovative ones) were so instrumental in bidding up the US and UK housing markets as consumers found themselves able to afford greater and greater leverage. Other examples of such innovation facilitated private equity buyouts and securitised risk, which also turn out to have been not entirely benign activities (although I am not claiming that they were always negative).

We need commodity banking to extend credit to businesses and individuals, we may also need some other forms of financial innovation but, by no means all of them. Perhaps if we took the view that the banking sector should stick to the dull stuff that doesn’t require too much leverage. If it did, finance would be simpler and the rewards for doing it would not be so great anyway.

So my point is that I think underlying trade imbalances are more important than financial services. However, if we are going to look at the financial sector, we should look at what it does (and whether that is stupid) rather than obsess about how much bankers get paid.

Charlie2: On the evidence, cultural influences on communities can be enduring and powerful. Sadly, in more than a few neighbourhoods, by way of values and social preferences not much has changed since George Orwell wrote this for the book that was to become: The Road to Wigan Pier (1937) – in chapter 7:

“The time was when I used to lament over quite imaginary pictures of lads of fourteen dragged protesting from their lessons and set to work at dismal jobs. It seemed to me dreadful that the doom of a ‘job’ should descend upon anyone at fourteen. Of course I know now that there is not one working-class boy in a thousand who does not pine for the day when he will leave school. He wants to be doing real work, not wasting his time on ridiculous rubbish like history and geography. To the working class, the notion of staying at school till you are nearly grown-up seems merely contemptible and unmanly.”
http://orwell.ru/library/novels/The_Road_to_Wigan_Pier/english/e_rtwp

Oh, I dunno Sally. Try walking into a dealing room at some point. Quite probably the most ethnically diverse (and diverse in national origin as well) workplaces in the UK.

But the so called free market never seems to work like that. But then the so called free market does not exist. Never has done and never will.

Sure. The continuing problem is:

“Up to 12 million working UK adults have the literacy skills expected of a primary school child, the [HoC] Public Accounts Committee says. . . The report says there are up 12 million people holding down jobs with literacy skills and up to 16 million with numeracy skills at the level expected of children leaving primary school.”
http://news.bbc.co.uk/1/hi/education/4642396.stm

“A £2bn scheme to improve basic skills among adults has been called a ‘depressing failure’ by education inspectors.”
http://news.bbc.co.uk/1/hi/education/4506410.stm

“An estimated 5.2 million adults have worse literacy than that expected of 11 year olds, while 14.9 million have numeracy skills below this level.”
http://news.bbc.co.uk/1/hi/education/4095153.stm

In Tuesday’s Guardian:

“One in six adults aged 18 to 24 in England are so-called “neets” (not in education, employment or training), the Department for Children, Schools and Families statistics from April to June show.”
http://www.guardian.co.uk/education/2009/aug/18/neets-young-people-jobs-recession

What we need to do is invest in people to improve their levels of skill, self respect, confidence and well being and not threaten to cut off their benefits . Also raise the tax threshold to £10K.
Britain has far too many people who earn little or no money because of their poor health, and low education and poor skills. If we can increase someone’s income from £12k to £24K by enabling people to obtain the education, skills, health and confidence, then this will do more for people with low incomes than trying to cap pay at the top end.

In a fascinating turn of events, a coalition of leading left-wingers has today called for higher profits across the economy, with a particular emphasis on improving the returns that capitalists enjoy in the banking sector, and encouraging banks to pursue risky business strategies.

Are we seeing the results of a secret conspiracy between cunning capitalists and deep-cover double-agents, posing as left-wingers? There are two alternative explanations that I can think of: firstly, the left-wing has revealed a hitherto unknown faith in the workings of competition to erase excess profits, or secondly a group of well-meaning individuals haven’t thought things through very well.

What will happen if these campaigners get their wish, and some sort of effective mechanism to restrain pay is brought into force? Think about this simple equation: profit = revenue – costs. Where do bonuses show up in there? Clearly, if revenues are held constant, costs go down, profits go up. Put yourself for a moment in the position of a bank that’s found a lucrative but risky investment strategy of the sort we wish to discourage. Today you make £1m in revenue annually from this ruse, £750,000 of which you pay out to your revolting employees. Does this risky investment strategy become more or less attractive to you tomorrow, should pay be capped at less revolting levels?

Should we expect revenues to stay constant? Well, maybe not. Perhaps competition between banks will see them cut the prices they charge for their services, revenues will fall and the economy will enjoy cheaper financial services? What wonderful outcome that would be! I’m used to thinking of myself as having more faith in competition and market mechanisms than the average left-winger, and finance is a sector that I regard as particularly dysfunctional, but perhaps I have misjudged things and the campaign is predicated upon the expectation that competition will hold back profits[1].

What other possibilities are there? One popular idea is to limit high-pay to some multiple of low pay. This has the potential to achieve redistribtion within companies, rather than a reduction in labour costs across the board. But it has limits. Unless we are to see security guards in investment banks being paid £100,000, such a policy would probably just end up cutting the pay of high earners. Hence generating higher profits. The capitalists will be delighted.

Here’s what I think the left should do: rather than attempt to limit salaries and bonuses directly, it needs to think about revenues. Why do banks make so much money in the first place? If we can address that, then worrying about how revenues are divided up between employees and capitalists won’t seem so important.

[1] If so, I find it hard to understand many of the other economic viewpoints I am associate with the campaign supporters. But that’s another story.

• The Nordic model (welfare state, high level of social protection, high level of taxation, extensive intervention in the labour market, mostly in the form of job-seeking incentives)
• The Anglo-Saxon system (more limited collective provision of social protection merely to cushion the impact of events that would lead to poverty)
• The continental model (provision of social assistance through public insurance-based systems; limited role of the market in the provision of social assistance)
• The Mediterranean social welfare system (high legal employment protection; lower levels of unemployment benefits; spending concentrated on pensions)

http://www.euractiv.com/Article?tcmuri=tcm:29-146338-16&type=News

Andre Sapir’s paper on: Globalisation and the Reform of European Social Models, is here:
http://www.frdelpino.es/documentos/CONFERENCIASYENCUENTROS/OBSERVATORIOS/Espacio%20P%C3%BAblico/Sapir.pdf

The Sapir study concludes that only the Nordic and the Anglo-Saxon models are sustainable.

“Danes are the happiest people in Europe, a survey suggests.”
http://news.bbc.co.uk/1/hi/magazine/6563639.stm

Oddly, the Danes have one of the heaviest tax burdens in Europe – try the OECD Factbook 2009 on Tax revenues:
http://oberon.sourceoecd.org/vl=2033875/cl=20/nw=1/rpsv/factbook2009/10/04/01/10-04-01-g1.htm

Try instead: Kenneth Rogoff on: Why we need to regulate banks sooner, not later, in Wednesday’s Financial Times:
http://www.ft.com/cms/s/0/c2d523c0-8c21-11de-b14f-00144feabdc0.html?nclick_check=1

Rogoff makes a very persuasive case for tougher regulation of financial institutions notwithstanding orchestrated howls of anguish about the loss of innovation and competitiveness that would ensue

Rogoff also – persuasively – rejects the lament, popular among some, that if only Lehman Bros had been bailed out last September the subsequent recession induced by the financial crisis would have been much less severe.

It’s been said before, a financial system based on the principle of privatising the gains while socialising the losses is on a sure road to ruin. The present catastrophe was predicted:

Try this from Warren Buffett in 2003:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

And this from 2002 in Britain about the house-price bubble:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

But they were ignored – because a lot of folks with political influence were raking in pots of money.

So what of the hotshot investment managers that take a percentage of the profits that they earn for their clients? Clients are, generally, happy to pay large fees to people who provide a rather larger investment return than they think they could manage themselves. If they get crap, clients will move their money elsewhere.

But commentary here and elsewhere is very much concerned with the short-term incentives given to hotshot fund managers and the like. Their pay and incentive structure doesn’t really look terribly different from Tiger’s in terms of timescale. The only significant difference is that Tiger’s golf performance (or Ronaldo’s football performance…) is completely irrelevant to anything else, whereas ignoring risk in the financial markets turns out to have bad effects on the whole economy.

You have a nobel in that, then?

And as Marx pointed out, as long as there are competing capitalists competing for access to that surplus value then the wages of the workers will be bid up to reflect their increased productivity.

It’s only when there is a monopsonist hirer of labour that increased productivity does not flow through to increased wages….

This is the article Bloomberg was handing around as the best article to read on the crisis.

This little phrase is doing quite a lot of work here “on their subject of expertise.”

Krugman’s subject of expertise is international trade. On that subject I tend to quote him, not affect to know better.

But that doesn’t make him a health care economist for example….

“if one unit of labour productivity costs exactly the same”

OK. A British (or USian…”western”) worker offers one unit of labour productivity per hour, just imagine. A Chinese labourer has lower productivity. Say, imagine, they offer 1 tenth of one unit per hour.

The Chinese will thus get one tenth of the wages.

Now I do strongly recommend that you read the Krugman essay I mentioned above, for he then explains the next extremely important part.

Average wages in an economy are determined by average productivity in that economy. So we’re not saying that a Chinese worker, working with modern equipment, to make a modern product, has one tenth of the productivity of a USian worker. We’re saying that on average across the Chinese economy productivity is one tenth (because they’ve got an awful lot of shit factories, using shit equipment, to make shit products)….and it’s that average that determines Chinese pay rates.

However, if you Mr. Mulitinational Executive go and build a modern factory in China, making a modern product, then you can get, say, 9 tenths of the productivity of a USian worker but only have to pay one tenth for it….or as you probably do, pay two tenths so that you get the best Chinese workers (yes, multinationals do tend to pay wll above local wages).

What will bring the average level of Chinese wages up to the average level of USian wages is when the level of average productivity in China is the same as the average level of productivity in the USA.

As I say, Krugman lays all this out in his essay and yes, this is exactly the sort of work that he got his Nobel for (or, rather, building upon this couple of centuries old idea from David Ricardo, of comparative advantage).