James Purnell’s confusion on markets


by Chris Dillow    
2:48 pm - February 17th 2010

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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.

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About the author
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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Reader comments


This, though, is just the rationalist hubris of managerialism.

But managerialism is what the left does.

(When not doing tyranny of course ;-) )

You’re right – it seems that Purnell’s just reiterating the New Labour love of ‘choice’ and market mechanisms, assuming that efficiency and innovation in public services will follow. When he spoke at LSE the other day he did make some interesting arguments about allowing more dissent within the Labour movement and party, as part of the ‘empowerment’ agenda he’s talking about. I blogged on this at http://bevuk.wordpress.com. These ideas do seem more novel, and I hope they are followed up.

“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.”

Is this a reason for government not to do something? That if they don’t do it the amount of money dispersed to taxpayers by government will go down. I appreciate it may be a disincentive to the taxpayers in question, but surely the reduced cost is a benefit to government?

I actually oppose the idea of a living wage (if only because I thought that was what the minimum wage was for), but this logic escapes me.

Freedom is slavery! War is peace!

Its pure Third Way bollocks. Oh the nostalgia!

“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.”

I thought this was the argument used against the minimum wage before it was introduced. Surely people doing low paid, but often essential jobs, deserve decent pay otherwise tax payers are in effect subsidising bad employers.

6. J Alfred Prufrock

@5

Well said.

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.

I think you need to explain why you think that’s a good thing. If people are poor, they lack money. Substituting credit for money is not only not a solution to that problem, it carries pretty big risks of making it worse.

Obviously, you don’t want the actual medieval usury laws, but something like a cap on legally required repayments of unsecured loans to something proportional to the annual equivalent of minimum wage might be worth exploring.

soru,

To do that you ignore the chance of someone using a loan to produce money – and having an excellent business plan. Would it not be worse for the poor to stop them becoming less poor because they cannot find the credit to start a business themselves? Perhaps you could suggest a limit based on purpose of loan, but that would be complicated.

7 soru he’s not saying that’s bad per se, he’s saying the consequence that loan sharks will meet the demand for loans, is

10. Alisdair Cameron

Well, you wouldn’t expect anything thought through,principled or coherent from Purnell, would you? Out-of-touch,technocratic,self-serving managerialism at it’s worst.
He’s regurgitating the managerialist text-book verbatim. Obsessed by the erroneous idea that management must bear the ‘values’ of the private sector and is therefore a ‘good thing’. That is the product of neo-liberalism and when he syas welfare,or the NHS or other public services are no longer affordable what he is really saying is that the likes of him, lacking expert knowledge in any of those fields, have made it unaffordable. When he assets that public services are too bureaucratic what he omits is that the likes of him have made them so by virtue of their ideology. And of course it automatically leads not just to waste but to bad management, because all those legions of managerialist mini-Purnells people are endlessly producing new, contradictory initiatives just to justify themselves as ‘change agents’ with ‘entrepreneurial vision’ as prescribed by the neo-liberal ideologues. He is using the term empowerment to position himself as a ‘change agent’, because that will place him in the limelight. What he can’t and won’t do, is cede his position though, so his use of the term is mere posturing rhetoric, a hijack tactic to differentiate himself from the other Third way-ers: he talk the talk, but for personal advancement, rather than conviction.
What he represents is what we’re left with: upper class social authoritarians, Fabians, whatever you want to call them.Both they and big business push constantly for the hive society, in which we subjects are moulded by the school system to be servants of that corporate (in the broadest terms) state. Free-marketeers, genuine ones, libertarians, get little support from big business for that reason. They don’t want free citizens, they want good little workers churned out for them by the schools. And so on.Our ruling cadre are technologically and scientifically ignorant, yes. But they’re ignorant about everything they wish to control- human nature, economics, everything. It doesn’t matter.What matters is control.This desire for control, and system for control. Purnell talks endlessly about empowerment but his Third way shtick shines though.The upshot is a system that is more inflexible than it needs to be, employing disempowered staff who are in effect rewarded for their devotion to systems instead of their commitment to effective relationships with the public, a system which has become excessively risk-averse, target and monitoring obsessed and top-down (control again)and has yet to develop the levers it needs to enable more effective communities.Services have been re-organised in ways that are not effective for what they are trying to achieve:as the systems designer Jake Chapman put it,
we are using systems that can deliver a parcel or a pizza, but which are not very effective at social outcomes. (The last bit is derived from the New Economics Foundation)

11. Mike Killingworth

There’s another problem with schools which Chris touches on without addressing directly.

In no other area of life (apart arguably from marriage, but only our resident loony libertarians will regard that as part of the market economy, either in reality or desire) are consumers (i.e. parents) locked into a decision for so long.

At secondary level, we take a view about the needs of a 16-year-old based on the reality of an 11-year-old, and five years is quite long enough for a “good bear bad, bad bear good” effect to take effect on the quality of a given school’s provision. Since we don’t know what our child will need as it reaches puberty and beyond, and we don’t know how to tell either how good a school is (even government inspectors get it wrong from time to time) let alone whether it’s getting better or worse, we fall back on a proxy – local house prices.

Perhaps we should use those as a proxy for other services, too – GP surgeries, restaurants, bank branches etc etc. It would be just as rational.

This is what you get from a fella who’s never had a proper job.

Beware any politician using the word empowerment, this means ‘you’re on your own, fighting each other like cats in a sack’.

I presume “hard-working poor” are the ‘Deserving Poor’ while those on benefits are the ‘Undeserving Poor’ who he shafted with his Welfare Reform Act, which will forever taint his name. The American insurance industry can’t give him a medal for boosting their profits, but they could at least reward him with a ‘consultancy’, he should have a word with Patricia Hewitt.

Of his suggestions on education, The Spectator says: ‘His answer is broadly similar in tone and substance to Michael Gove’s schools agenda. Says it all really. If there is a future for him in politics he should have a word with Dave “Dave” Camreron.

One American economist said that she considered the lack of numeracy was a major factor in many poor uneducated people taking out loans they could not afford to pay back. As perhaps 20% of the population do ot have the ability to calculate repayments perhaps we ought to look at our education system.

Never mind America. Try these news reports about Britain:

“Up to 12 million working UK adults have the literacy skills expected of a primary school child, the 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

Totally agree with Bob @ 5.

Old-fashioned usury laws may not stop people turning to loan sharks, but would they prevent financial companies from selling debt so efficiently to people? Loan sharks are slightly less accessible and socially acceptable to use than official creditors. Anyway, more and better credit unions are a better short-term solution, and more and better redistribution is a better long-term solution to individual debt.

@ 13 & 14

perhaps we ought to look at our education system

What Again? For the past 30 years we’ve had right-wing governments interfering in education with Titans like Chris Woodhead (head of OFSTED at one point) droaning on about “traditional teaching methods” and excoriating “progressive educational theories”.

Curse those lefties with their trendy ’60s teaching methods who have managed to dodge this 30 year assault !!! Yes, if we have illiterate, inumerate kids leaving school it is all the fault of the left

What matters about setting minimum wage rates is how high the minimum is set relative to average wages.

If the minimum is set low relative to average wages then it won’t have much impact on employment but if it’s set high then it will.

10. Alisdair Cameron – Fantastic deconstruction of all Purnell’s right-wing rubbish.

Of course, ideology (Purnell’s new idea!) is fundamental… so why did the LP ever abandon it… might have been something to do with the thatcherite leadership offered by nulabour.

I would take money on it that James Purnell will be entering the leadership campaign within a decade… that is leadership of the Tories, after he has crossed the floor to sit next to the disgraceful Phillip Blond, who Purnell had the nerve to employ before his thankfully failed coup.

“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”

That might be true of wheat, or bread, but it’s not necessarily true of labour as the ‘raising of the price of it’ in this context is the payment of a higher salary, which might have effects on the quality of labour received (more effort perhaps), and would in fact mean people would buy more.

Of course this doesn’t have to hold, and it doesn’t mean a ‘living wage’ is a good idea. But it suggests these simple rules-of-thumb shouldn’t be used as if they are iron facts.

20. Mike Killingworth

[19] A couple of points here.

First, there are limits to treating labour in the same way as any other commodity. In the limit case, if a significant number of people don’t have any way to make a living wage (and it is at least arguable that this is true of almost all those in this country who are long-term unemployed) then there are political implications in a way that there aren’t for commodities proper.

Second, I submit that the only empirical evidence of a higher price (perversely, in terms of micro-economic theory) leading to a higher demand for labour is where there is monopolistic collusion, such as the barriers to entry to the legal profession. Those who believe in free markets as the answer to everything should certainly oppose lawyers’ privileged access to courts.

Surely a key difference between raising the price of labour and raising the price of a consumable commodity is that those increased wages are transformed into increased spending power – which creates more customers.

Also, setting the minimum wage below the living wage level tends to create poverty traps. If both benefits and the minimum wage are set at or below the minimum level required for a decent standard of living then the incentive to work is limited.

Nor is there any real reason why the minimum wage shouldn’t carry a regional weighting, as the London Living Wage implies. I can think of few policies that would do more to erode the North South divide better than an increase in the minimum wage in richer areas.

“Surely a key difference between raising the price of labour and raising the price of a consumable commodity is that those increased wages are transformed into increased spending power – which creates more customers.”

So doubling all wages would boost spending power and reduce unemployment, would it?

Wonderful.


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