2:48 pm - February 17th 2010
It’s common for some people to have excessive faith in the power of markets. It’s also common for others to be excessively hostile to them.
Congratulations, then, to James Purnell – because, in a fantastic example of triangulation, he has committed both these errors. He says:
Markets are a wonderful tool: innovative, wealth-generating and elite-busting. But sometimes they don’t serve society. We should bring back the old usury laws so no one need fall victim to loan sharks. We should campaign for a living wage so that no one who works hard ends up in poverty.
These are silly proposals. If we outlaw usury, we won’t abolish loan sharks, but encourage them. Banning usury means that legitimate lenders won’t lend to bad risks because they‘ll not be able to charge a high enough interest rate to cover the risk of default. Such people will therefore turn, as Joe did, to loan sharks. If you criminalize sub-prime lending, criminals will become sub-prime lenders.
Nor is it obvious that a living wage will be an unmixed blessing to the “hard-working poor.” If you raise the price of anything, people will buy less. Some workers will therefore see their jobs and hours reduced. And those who don’t will see much of their higher wages taken away as tax credits fall.
However, if Purnell has too little faith in markets in some senses, he has too much faith in them in others. He says:
Real power [to parents] would mean abolishing catchment areas and having pupils apply two or three years in advance. Oversubscribed schools could then expand, or new providers start up… Parents could be guaranteed one of their top choices.
This, though, assumes that a good school can expand easily without any loss of quality – that the elasticity of supply is high. But is this the case? What if such expansion is limited by the lack of availability of premises?
Or what if teachers’ performance deteriorates when faced with larger class sizes? Or if the school hires more, but worse, teachers? In such cases, parents might find that a good school has turned bad by the time their children go there. In such cases, a market in school places mightn’t work as well as Purnell thinks; he gives us no evidence to assuage such concerns.
There is, I fear, a theme in these apparently contradictory attitudes. Purnell seems to believe that it is an easy job for politicians to both intervene to over-ride markets and to build new ones. This, though, is just the rationalist hubris of managerialism.
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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