Individualism & Collectivism

Hayek

 

The concept of socialism must be defined it its aims and the actions it proposes to take in order to achieve them. He recognises that its general use is to describe the ideals of social justice, equality, and security. However it becomes more specific in the way that this is brought about such as the abolition of private enterprise, private ownership of the means of production, and the use of central planning.

Hayek laments that many proclaimed socialists are only looking at the first aim of social justice or equality but “neither care nor understand how they can be achieved”. Therefore he understands that there is dispute in that some people support the ends but not the means, and it also raises the question of whether socialisms ultimate aims can be achieved simultaneously.

Here he begins to breakdown the problem that socialism proposes, first by noting that central planning can result in two separate ends in regards to distribution of income, where one use of it may result in equal distribution, similar use of it may result in income reaching the hands of few. Thus, he states that socialism must be approached as a species of collectivism. As collectivism claims that we are interdependent which conflicts with Hayek’s libertarian outlook in that each individual is sovereign of his/hers decisions. So this conflict also applies to socialism, in that there is a loss of an individual’s sovereignty. However, he does mention that the root support of planning comes from rational thought. In that we plan our own decisions, and governments before putting through policy plan in considering bad or good action, or wise or short-sighted action. However he argues that modern socialism does not take the stance of liberal planning in that a framework should be erected in order to achieve this aims, he states that socialism looks to establish is a central direction for all economic action, where all resources are consciously directed. He summarises the dispute in the question:

“For this purpose is it better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals is given the best scope so that they can plan most successfully; or whether a rational utilisation of our resources requires central direction and organisation of all our activities according to some consciously constructed “blueprint”

In order to argue his point he clarifies that a libertarian approach must be accompanied with the correct infrastructure and institutions in order to make competition and the benefits of market forces actually work and to not simply leave things be. I believe that it is here that Hayek begins to develop the point where a system must travel down one road completely or risk failure. In that he expands upon his point citing that legal framework is one example of ensuring competition achieves its purpose. Furthermore, competition should not be supplemented by conscious direction as it is a method in itself which provides the adjustments to our behaviour without the intervention of authority. Then he delivers an integral point: “any attempt to control prices or quantities [he previously mentions how competition solves this problem, e.g. market forces creating price signalling] of particular commodities deprives competition of its power of bringing about an effective co-ordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual’s actions.”

I think that at points like these it seems that Hayek portrays himself against any form of corrective intervention, however he fully realises the existence of negative externalities or factors that may corrupt competition’s benefits. He simply asks the question “are the advantages gained greater than the social costs which they impose” as a condition in which intervention is decided. Hayek considers both the existence of negative and positive externalities, and where price signalling through competition seems to have failed. He argues that the fact we may bring in direct regulation through authority where it is difficult or impossible to develop regulation for competition is not proof to suppress competition where it may function. Here he states that in “no system that could be rationally defended would the state just do nothing”, for the system to be effective however the need for state activity needs to be realised but also stress the creation of effective competitive system by “continuously adjusting legal framework” (alongside the already well-established institutions) thus reducing the occurrence of fraud, deception, exploitation, etc. as the existence of asymmetric information, moral hazards, adverse selection are all realised, and can be acted against appropriately.

Finally, Hayek states the point that not only is complete centralisation an unbelievably difficult task, but more so the sheer loss of freedom in that one single centre decides everything. He argues that there is no middle position, that by going down one path you must commit to it consistently he states that:

“Both competition and central direction become poor and inefficient tools if they are incomplete, they are alternative principles used to solve the same problem.”

“Planning and competition can be combined only by planning for competition, but not by planning against competition.”

It is determined that planning is inevitable, a necessity in ensuring that competition works well, Hayek only critiques the planning that is working against competition, as he has stated before not only due to economic outcomes, but on the fundamental principle of maintain political freedom.

 

Poverty & Equity

Absolute Poverty:

“A condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services”

For the consideration of poverty many countries adopt a national poverty line which considers the income needed to satisfy minimum needs. The World Bank consider extreme poverty to be living on less than $1.25 a day and moderate poverty as living on less than $2 a day.

Relative Poverty:

Relative poverty takes into consideration the income of an individual or household and compares it to the median income of that economy. In relation to the Lorenz curve if there was perfect income equality there would be no relative poverty. In this case they still have enough money to survive, and it is more based around the cultural environment.

Causes of Poverty

There are many causes of poverty; some apply more to certain countries than others

  • Low Wages/Income
  • Unemployment

The individual will have no income, and in countries where there is no welfare system they will struggle to survive.

  • Lack of Human Capital

This is where the individual lacks training or education to get a job, or if their health is at a state where they cannot be productive. This is the case in my countries in Africa as there is shortage of education and health.

  • Geography

Certain areas have less job opportunities, but the people cannot afford to move. There may only be low paying jobs which have adverse effects on health in the given area.

  • Age

In a country with no benefits and no welfare system anyone of old age will struggle to survive unless they have children supporting them

  • Shortage of Merit & Public Goods

This is a lack of education, no housing available, no healthcare, bad living conditions. Etc.

  • War

Has adverse effects on human capital, government, job opportunity, and geography

This can lead into a poverty cycle; it is extremely difficult to break out off. In most places where there is extreme poverty and absolute poverty it is a combination of causes which means that the entire system needs to be rebooted.

Consequences of Poverty

There are many consequences of poverty, as it affects many aspects of life.

  • Low living standards

This may mean that those suffering from poverty may not have access to suitable housing, clean water, or basic food items. This usually results in increased disease and infection

  • Lack of Access to Healthcare (high rates of preventable diseases)

Many people suffer as a result of low living standards and there may not be a healthcare system available. Any healthcare that is offered may come at a considerable expense which they cannot afford.

  • Lack of Access to Education

There are no available institutions for education, making it difficult to break out off the poverty cycle

  • Social Problems

Crime, Violence, Family Breakdown, etc.

  • High rates of infant mortality

The Role of Taxation in Promoting Equity

Direct Tax: Income, Corporation, Capital Gains, National Insurance, Inheritance, etc.

Indirect Tax: Excise (fuel, cigarettes, and alcohol), VAT (Value Added Tax), Sales Tax, Tariffs, etc.

Direct tax is usually a tool used in order to redistribute income, whereas indirect tax is usually used to solve negative externalities related with the consumption of certain products. Indirect taxes are avoidable as they are taxes on consumption.

Proportional Taxation:

This is taxation where it remains at a fixed rate, so it does not depend on income. Therefore it will not change if there an increase or decrease in income.

Progressive Taxation:

This is where the rate of taxation depends on a change in income. So if income were to increase of an individual so would the tax paid. If a tax system is very progressive then the equality in income distribution after taxes is greater. (Suits Index)

Regressive Taxation:

This is the case where the tax rate decreases as the amount subject to taxation increases. This type of tax is more of a burden with those on a lower income, as a result of income elasticity of demand of staple items.

Other Measures to Promote Equity

The provision of public and merit goods by the government, this is in order to supply these to people with a low income who otherwise would not be able to afford it.

The government would do this through the direct provision of these goods, or create subsidies which would make it more affordable for those on lower incomes.

For example this can be the provision of health care services, education institutions. This can also involve the provision of infrastructure that would enable suitable housing (e.g. council houses), clean water supply, access to food (food stamps), and general sanitation.

Without government provisions of these goods it would be under-consumed due to poverty and low income in a free market.

Transfer Payments

This would be the direct redistribution of income to individuals by the government, it is to take money away from certain groups and bring it towards other groups.  This is done in the case of the elderly where they cannot work, so the income produced by those working goes to assisting people in need. In this example it would take the form of old age pension.

There are various other examples of this such as unemployment benefit, child allowances, war veteran benefits, student grants, disability benefits, maternity benefits, and housing benefits, and fuel allowances.

The Relationship between Equity and Efficiency

Government policies to promote equity may have positive and negative effects on the efficiency in the allocation of resources, and growth.

For example the pursuit of high income tax will disincentive high income earner to work, and may encourage them to save their money or to move their money out of the country.

Indirect taxes as a result of their regressive nature will have a negative effect on the distribution of income. But there is also the factor that they are placed to reduce negative externalities which conflicts with the allocation of resources in regards to benefitting the economy.

There can be a trade-off between income equity/equality and efficiency as you this involves direct intervention in the economy which may affect price mechanisms and market forces.

Government expenditure tends to be a restraint on the overall budget. But there is also the factor that government intervention even though the intention may be good may not result in greater equity, and only achieve allocative inefficiency and misallocation of resources.

When there is considerable income inequality it discourages labour as they may have to work harder to receive the same wage, and this leads to less productivity. Furthermore, transfer payments may reduce allocative efficiency as it may discourage people from seeking work. But there is also the argument the vulnerable groups’ still need protection.

Introduction to Macroeconomics

Four Main Economics Goals of an Economy:

  1. Stable Rate of Economic Growth
  2. Low Unemployment
  3. Low & Stable Inflation (standard target of 2%-4%)
  4. Satisfactory Balance of Payments

Other Pursuable Goals of an Economy:

  1. Environmental Sustainability
  2. Economic Equality

Growth:

  • Commonly Measured by Gross Domestic Product (GDP)
  • Measure the Output of the Economy (value)

Unemployment:

  • Commonly Measured by Claimant Count & Labour Force Survey (ILO)
  • “Those out of work, actively seeking work at the current wage rate”
  • Labour Force Survey is thorough and usually reveals higher numbers of unemployment
  • Claimant Count is problematic as not everyone is eligible for unemployment benefits

Inflation:

  • Commonly Measured by the Price of a “Basket of Goods”
    • i.e. Consumer Price Index (CPI) or Retail Price Index (RPI)
    • Inflation: Increase in the Average Price Level of an Economy

Balance of Payments:

  • Referring to the accounts of an economy, national scale balance sheet
  • There are Credits which are considered as Injection (e.g. exports or factor earnings)
  • There are Debits which are considered as Leakage (e.g. imports or factor payments)

Command Economy Vs. Free Market (Round 3)

Video

The Crisis of Capitalism, are we really using the right system? Capitalism has been the champion of the free market system, but is there an issue with the foundation of our system.

David Harvey talks about the inherent failures of our system, but is there really a better alternative?

I personally believe that in this video David Harvey is  biased against the capitalist system.  He does make a point of taking a Marxist point of view to address the issue of barrier points that capitalism may face, and this sets the tone for his perspective. From my understanding Harvey is in favour of more regulation, as he spoke about financial ingenuity and innovation he basically slandered the movement from manufacturing & industry to finance. Due to his bias I believe he failed to develop the point that this change had been positive at the time and lead to substantial economic growth. I assume that Harvey’s stance would be towards a command economy, due to the several factors he mentions.

There are five general points developed, Harvey makes a notable reference to Alan Greenspan’s comments on the crisis (many people had blamed him to be a contributing factor to the sub-prime mortgage crisis) as Greenspan notes that it is human nature that lead to the failure (human frailty). This is in reference to qualities such as greed and instinct for mastery, on this point I would have to agree with Greenspan as no matter what system is used we are a big factor in contributing to error (impossible to have a perfect free market, purely theoretical). The second point is the obsession with false theory; at this point I believe that Harvey establishes him to be against free market economics. Harvey considers that peoples false belief in the efficiency of markets is what contributed to crisis, and mentions Hyman Minsky’s theory of the inherent instability of financial activities. To an extent I would agree that absolute belief in the efficiency of markets can only lead to systemic failure, as free markets are prone to speculation and the development of bubbles.  I believe that Minky’s theory is a fair while analysing economic trends, as instability at certain periods of time is almost unavoidable.

I personally believe that an error of free market economics that led up to the financial crisis was the driving up of the credit economy, which was a result of wage repression after the 80’s. The development of the credit economy let people live beyond their means (increase in effective demand). However there was a vast accumulation of debt, and In the U.S. it was concentrated in the housing market this was a contributing factor to the crisis. In Minsky’s theory he mentions that a mechanism that pushes towards crisis is the accumulation of debt by non-government sectors. I believe that too often the 2007-2008 financial crises is blamed on poor policy and institutional failure and not enough on the fact that the people are to blame as well as those in power.

I fully appreciate David Harvey’s perspective, however I believe whether it is a capitalist system (free market) or a socialist one (command economy) failure and crisis is inevitable part of economics, a part of human nature. We attempt to apply theory to reality, and in that is the digression of successful economies.