Saturday, February 11, 2006

Social mobility myths

An excellent commentary in The Times today from Jamie Whyte, who is, according to the by-line, a philosopher and author. As the headline says, Whyte asks Why are we all so stuck on the virtues of more social mobility? He makes the seemingly obvious, although rarely mentioned, point that:
Those who recommend social mobility tend to focus on upward movements. John was born into a bottom-income quartile family, but now he is in the top quartile. Good for John. Alas, every upward social movement requires an equal quantity of downward movement. Just as a tennis player cannot climb the world rankings without others falling, so John’s ascent in the social rankings guarantees that others descend. And their losses must be exactly equal to John’s gain. When everyone is taken into account, it is simply impossible for social mobility to deliver a net benefit.

He also points out that:
In modern economies, the intelligent and well-educated tend to have higher incomes. Intelligence and educational performance are largely inherited, through both nature and nurture. People tend to marry within their own social class. If these tendencies are very strong, then we should expect almost no social mobility in a meritocracy. Those with the attributes that get them to the top (merit, let’s call it) will produce children with merit, who will also get to the top and produce children with merit . . . and so on for generation after generation.
Indeed, this was largely the point made by Charles Murray and Richard Hernstein in their book The Bell Curve, although much of it was lost in the accusations of racism when the book came out.

Anyway, have a look at Whyte's article.

30 Comments:

Anonymous Ilana said...

I was fascinated by this article as I was discussing something very similar yesterday. In the 60s we were all told that a meritocracy was the only solution to the ills of class divisions, but it now seems that within a few years meritocracy produces social divisions as rigid - if not more so - as any imposed by the class system.
The trigger for me was an article in the Guardian about a study showing how where you are born affects your chances in life, the implication being that if you are born in a poor neighborhood your chances are poor and vice versa. This being the Guardian, the clear implication was that it was up to the government to improve social services in the poor areas and this would solve the problem.
But isn't it just as likely that you are born where you are because of the factors that made your parents poor (or rich) - intelligence, character, physical attractiveness etc. - and it is these factors that affect how your life proceeds?
Having said that, I think that "social mobility" may be a straw man. After all, we know that living standards overall have risen, and surely this should be the aim, rather than any artificial concept of "mobility".

11:51 AM  
Anonymous Michael Stone said...

Isn't this just the old "zero sum game" myth? How does my rise from scruffy, Yorkshire pauper to middle-class American mean that someone else must go the other way?

When we work, we create wealth. More wealth = more wealthy people. Unless we "work" for the govt. of course.

4:09 PM  
Blogger Scott Callahan said...

Michael,

No, it's not the zero sum game myth (although you are correct that it is a myth and that too many people buy into it.) When measuring social mobility by looking at a move from one economic "quartile" to another...ie in relative rather than absolute terms...it is a fundamental fact that a move up for one person is a move down for another. Of course, this demonstrates the silliness in measuring economic mobility in relative terms. The fact is even the poorest people today (in the US and the UK) live better than very well off people 150 years ago. But pointing that out is not going induce wealth re-distribution, which is why such things are always measured on a relative basis.

SC

4:53 PM  
Anonymous jamal said...

charles murray's work is irrational and biased.

5:32 PM  
Anonymous Anonymous said...

"The fact is even the poorest people today (in the US and the UK) live better than very well off people 150 years ago."

Sorry fella, but that is just not true.

9:22 PM  
Anonymous Geoff said...

Jamal and Anonymous ... hey, those are some of the most sharp and incisive arguments I've heard for a long time. You've got me convinced.

Maybe a few more words of evidence for our less clued bretheren, perchance, should you wish to be taken seriously?

11:41 PM  
Blogger Scott Callahan said...

Anon,

See here.

76% of "poor" households in the US have air conditioning. How many rich households had air conditioning 150 years ago?

Almost 75% of poor households own a car. 30% own two or more. How many rich households owned a car 150 years ago?

97% of poor households have a color television. How many rich households had a television 150 years ago?

73% own a microwave oven. How many rich households 150 years ago had a microwave oven?

I think you get the idea.

SC

8:31 AM  
Blogger JohnM said...

A 1997(?) Pollard and Adonis study (A Class Act) showed that class mobility had declined in the UK since the 1950s. If mobility was once higher than it is now, then it suggests that certain human interventions can increase (or decrease) mobility.

I don't want to get into the specifics of which interventions are likely to be positive, but I should point out that the comprehensive school solution became orthodoxy during the late sixties as evidenced by the number of grammar schools shut by Margaret Thatcher. The result doesn't seem to have increased mobility or egalitarianism.

However, I do want to defend the notion of mobility being a desirable objective.

First of all this is not a zero sum game. If two students both work hard then both will be better off than if either or both slacked off. This is because a country's economic cake can grow or shrink. It is not a tennis tournament. So I reject the notion of equal quantity of downward movement.

Second, if mobility can change, it follows that in a time of low mobility some children born by chance in less privileged backgrounds do not achieve their full potential. The corollary is that some children born in more privileged background who would otherwise have failed, maintain their social status. It is morally indefensible to argue that such a situation is desirable. It may be possible to argue that whilst a government may ameliorate such a situation it cannot entirely eliminate it without introducing excessively coercive measures.

I think it obvious that a government should not act to decrease mobility. Whether you agree that governments ought to make interventions that increase mobility would depend on whether (a) this is not a private matter and the government has a right to intervene (b) intervention will tend to make the situation better.

It's worth noting that the 1944 Butler education act that created grammar schools had cross party consensus as the best way to achieve a (more) meritocratic society. In contrast the comprehensive movement seems nowadays to be driven by egalitarianism - a completely different goal.

8:54 AM  
Blogger Martin said...

Scott,

With all due respect, the examples you cite all relate to nothing more than the ability to purchase "stuff".

How could a person from 150 years ago possibly have had air conditioning, a TV or a microwave? Come on!

It is thoroughly pointless to use the ability to buy stuff as an indicator of social mobility or greater universal wealth. Most of the stuff that you cite is likely to have been bought on a credit card, or with some other financial instrument the use of which would have been beyond the reach of the vast majority even 25 years ago. How does the ability to increase your debts make you more socially mobile?

And in any event that stuff has in all likelihood made by some wee lassie in a sweatshop outside Shanghai. It's only made there because it used to be made in the UK, but the manufacturers realised they could vastly increase their margins by closing a down their factory here, thereby putting the relatives of their British customers out of work, and re-opening in Shanghai without all that pesky health and saftey regulation, and all the minimum wage nonsense.

That benefits them - how does that benefit us? Do goods manufactured overseas become intrinsically cheaper overnight? Only if the price is reduced.

The commentor who mentioned grammar schools properly addresses half of the argument. The grammars enabled academically-gifted childrn from less affluent backgrounds the opportunity to receive a higher grade academic education. That way they were able to proceed to the universities and the professions very much more easily than they can now.

Killing the grammars was the worst thing the Labour Party has ever done.

That was the damage done then - but there is further damage being done now.

The globalisation process also works against social mobility. The theory behing globalisation is that its the best possible route for lifting the underdeveloped world's average income, which it does do - however, that is only achieved by lowering the developed world's average income to the same level. I don't mind a level playing field, but I'd rather it wasn't levelled on my or my nephews' and nieces' heads.

Just within the last two weeks, Stephen Roach of Morgan Stanley in New York has written a paper outlinging the effect that our current system of global labour arbitrage has on average income, and he has made precisely the same points.

In a world in which labour can move freely, it's not the guys at the top who get squeezed hardest, its's the guys at the middle and the bottom. The abuse of the H1-B visa system in the US, which has been quite massively abused by employers in order to displace American programmers and IT professionals, is a classic case in point. Another was the decision by Irish Ferries to replace all their staff with Eastern European migrants prior to Christmas.that brought 100,000 people out on to the streets of Dublin, but it still happened. Why do they do it?
Beacuse they can.

One of your other commentors wrote that government shouldn't interfere with mobility. Global labour arbitrage could not happen without the consent, or in the UK's case the active endorsement, of governments. It is utterly destructive of mobility and is a classic example of governments working against the interests of citizens - if anybody remembers what that word means any more.

1:35 PM  
Blogger Scott Callahan said...

MK,

You said:

"How could a person from 150 years ago possibly have had air conditioning, a TV or a microwave?"

That is precisely the point. People today are, in absolute terms, far better off than people 150 years ago. There is more stuff available at more affordable prices.

And I wasn't using the ability to buy stuff as an indicator of social mobility. I was using it as an indicator of how much better off poor people are today than even rich people were 150 years ago.

SC

2:33 PM  
Anonymous Anonymous said...

We haven't exactly had much of a meritocracy for the last 50-100 years. For there be some kind of genetic sorting you would need at least 3-4 generations-so we have a ways to go.

It will be interesting when this tipping point occurs. Will people just accept that they are inferior? Or will they question the social order much more harshly than today? We might even get school reform-

11:24 PM  
Anonymous Anonymous said...

Wait - do you mean that smart people make more money? Live better? That liberal social engineering has nothing to do with it?

I am stunned - just stunned. And here I thought there was no gambling here in Casablanca.

My bad.

8:02 AM  
Blogger Stephen said...

MK and others: Unfortunately your arguments betray the failure of current education to instil even the basics of economic knowledge. If you read up a bit on "comparative advantage" you will see how offshoring jobs and globalisation benefits everybody: both the people in the country where jobs go, who get jobs, and the people in the country where jobs leave, who get cheaper goods. Cheaper goods means more disposeable income to spend on other things, which means new, higher-paying jobs in other sectors. Everybody wins.

Imagine if the British Government had managed to successfully keep all the manufacturing jobs in the UK that are now done in the Far East. What would have happened? British people would be paying through the nose for manufactured goods, which would have left them with precious little to spend on the service economy which has blossomed since manufacturing died. And tell me honestly: would you rather work in a dirty, noisy factory doing dangerous work, or would you prefer to be an estate agent or an accountant?

1:21 PM  
Anonymous Alasdair said...

Perhaps this concept might help ...

While zero sun applies within the grouping of quartiles - where a movement from one quartile to another must be balanced by a another's movement in the opposite direction - that zero sum only applies to position within the grouping of the quartiles, and does not necessarily reflect whether median values for the entire grouping and its quartiles may be moving up or down or staying put ...

When someone goes from last quartile of middle class to first quartile of middle class, everyone below the destination position moves down one position, and three people each move down to the next lower quartile ...

Zero sum does not apply when there is movement between groupings of quartiles ...

When some goes from last quartile of middle class to second quartile of upper class, the average for all members of all classes goes up by the appropriate arithmetic amount ...

(I was reading figures earlier this morning that India has gone from having 50 M people in the middle class to having 250 M people in the middle class over a comparatively short period recently ... I do not remember where, so I cannot post the cite URL - hopefully, someone r4eading this will be able to)

9:02 PM  
Anonymous Alasdair said...

(AARRGGHH)

zero suM ...

OY

9:03 PM  
Blogger Martin said...

Stehen,

Thank you for your comments on the state of my education. I'm a retired solicitor.

I am well aware of the principle of comparative advantage, whereby both sides are enriched by the process of trade. Put bluntly, it's 'You sell us cinnamon, we sell you guns'.

You write that,

"offshoring jobs and globalisation benefits everybody: both the people in the country where jobs go, who get jobs, and the people in the country where jobs leave, who get cheaper goods. Cheaper goods means more disposeable income to spend on other things, which means new, higher-paying jobs in other sectors. Everybody wins."

That comment deserves to be put to proof. Where are these new, higher-paying jobs being created in the UK by the globalisation process? What other new, higher-paying sectors are being created in the UK by globalisation?

Come on, spit it out!

Globalisation does not produce a comparative advantage to both parties, but an absolute advantage for those manufacturers who close factories in the West, re-open in China and then re-import the goods that were otherwise made in the UK back into the UK. It creates an absolute advantage for those service providers who close call centres in Glasgow and re-open in Bangalore. There is no creativity in this process, simply a process of labour arbitrage. The test of your thesis is whether or not you see globalisation reducing the price of the you buy goods in the shops or reducing the price of your insurance premia. Have they? Come on, let's have examples!

Both processes have been described by Dr. Paul Craig Roberts, assistant Treasury Secretary under Reagan and former deputy editor of the 'Wall Stret Journal', as 'export substitution'. He's dead right.

You write that,

"Imagine if the British Government had managed to successfully keep all the manufacturing jobs in the UK that are now done in the Far East. What would have happened? British people would be paying through the nose for manufactured goods, which would have left them with precious little to spend on the service economy which has blossomed since manufacturing died. And tell me honestly: would you rather work in a dirty, noisy factory doing dangerous work, or would you prefer to be an estate agent or an accountant"

Well, prices would be higher, yes, but so also would wages, so the effect of one would cancel out the effect of the other. The service economy has blossomed, ytrue - but the critical test for any good or service is whether or not it is required, which perhaps goes some way to explaining the level of the new business failure rate.

And you forget that a fixed manufacturing/service economy is far better at exploiting the aptitudes of its workforce. In a mixed economy, a boy whose aptitudes as a plumber would be far more likely to obtain an apprenticeship as a plumber than being forced into a dead-end, skill-less call-centre McJob.

One of the reasons the service sector has blossomed is that really no other form of manufacturing, unless providing an absolutely unique service, is likely to be economically viable. And you can thank the banks for that one.

No nation can remain independent unless it is able to produce what it consumes.

9:43 PM  
Blogger Allan@Aberdeen said...

It should be pointed out that people such as Sir Digby Jones (formerly of the CBI - Confederation of British Importers) are apt to say, when asked the question of how we pay China and India for the manufactured goods which we import from there, that we sell the high-value hi-tech 'clever' items to them in return for us buying the low-tech mass-produced items from them. Has this deluded fool, and his like, never heard of Japan and Korea, nations of clever people who have long left our army of graduate social workers in the dust?

10:59 PM  
Blogger Stephen said...

MK: I too was trained as a lawyer, but learned nothing of economics until I retrained as an accountant. I was and remain astonished that I obtained knowledge that is essential to understand how the world works, by accident. I did not say you were uneducated, but that there is a lacuna in general education.

Your definition of comparative advantage is serviceable but is apparently limited to trade in commodities. In fact it applies to everything. Every country has a comparative advantage in something, not limited only to the natural resources which happen to be found within its borders. China currently has a comparative advantage in manufacturing, because it has cheap labour. If we let them do all the manufacturing, it benefits us, because it costs us less to have goods made. If we insisted on keeping manufacturing in the UK, goods would cost more, which is pointless.

You ask for proof of globalisation's benefit. I can buy a microwave oven at Tesco for £25. How they manage to manufacture a relatively complex and material-rich good like that, including retail margins etc, for the price of a haircut in the City, I do not know. But they do, so I benefit. Same with DVD players. You can now buy one for the price of two DVD movies!

My "keeping manufacturing in the UK" argument was more proof. But you try to refute it by saying wages would be higher. It's hard to see how manufacturing goods that will only be used in the UK (since no-one else would buy our high-priced goods) could be more profitable than providing services on a global market would be. And there would be far fewer jobs available, because of the small market.

The service economy has blossomed, ytrue - but the critical test for any good or service is whether or not it is required, which perhaps goes some way to explaining the level of the new business failure rate.

The critical test is success in the market, yes, but I'm not sure what the new business failure rate has to do with globalisation?

And you forget that a fixed manufacturing/service economy is far better at exploiting the aptitudes of its workforce. In a mixed economy, a boy whose aptitudes as a plumber would be far more likely to obtain an apprenticeship as a plumber than being forced into a dead-end, skill-less call-centre McJob.

Well, I don't think plumbing jobs are going to be disappearing soon! In fact, plumbers are an excellent example of the market in action. For those who have the strength of character to ignore society's distaste for the work and go for the apprenticeship, there's some pretty good money to be made.

It's easy to dismiss entry-level service-industry jobs as "dead-end" and "McJobs" but the truth is they are a kind of apprenticeship for service jobs: dealing with customers is a pretty important service economy skill, just as welding is an essential skill for a boilermaker. Someone who learns to deal well with customers may go on to a sales job; someone who discovers he enjoys managing the other workers at McDonalds may become a manager. There's a reason why all the McDonalds workers are young: they don't spend their whole working lives there. They get their apprenticeship, then move on.

One of the reasons the service sector has blossomed is that really no other form of manufacturing, unless providing an absolutely unique service, is likely to be economically viable. And you can thank the banks for that one.

No, you can thank the market for that. Banks don't decide economic viability, customers do. The bank's primary concern is to keep their customers' capital safe. You wouldn't be happy if you went to withdraw money, only for the bank to say, "Sorry, we put your money into MG Rover, and now it's gone; have a nice day!" would you?

No nation can remain independent unless it is able to produce what it consumes.

No, no, no! Such "independence" is both ludicrously expensive, and impossible to achieve in practice. And pointless. As long as a country generates sufficient foreign exchange from producing in its fields of comparative advantage, other countries will happily sell it whatever it needs. Why would Britain refuse to sell something to another country, and deprive itself of revenue? So why would others do that to us? Iran goes on about the US and the West all the time- but still sells its oil to the West. It has to: it needs the money.

The independence argument makes as much sense as saying you can't be truly independent as a person unless you grow your own food, build your own house, weave your own clothes... Sure, you can do it. But you'll have a standard of living well below those who sensibly concentrate on doing what they are good at (like being a solicitor) and trusting the market to provide everything else.

Which brings us neatly on to the point made by allan@aberdeen: the "clever people" of Japan are almost completely dependent on the outside world for everything from their energy to their raw materials. If they had remained "independent" they wouldn't have been very clever.

And this notion of international competitiveness is also very wrong-headed: how have Japan and Korea left Britain "in the dust?" Have we become a third-world nation? Have we become suddenly poor, soliciting loans from the World Bank? Far from it: in fact we are being urged to write off our loans to the third world! How rich do you have to be to afford to simply write off loans?

If your neighbour starts to come up in the world, does that mean you have to go down to compensate? Zero-sum thinking!

1:30 PM  
Anonymous Alasdair said...

Stephen - you have hit the nail on the head !

If one's neighbour comes up in the world, then, with respect to social status, one is found wanting ... after all, just because We allow them to live next to We Important People, that in no way implies that We feel any need to have any of them in Our Set !

5:31 PM  
Blogger Martin said...

Stephen,

You write that,

"Your definition of comparative advantage is serviceable but is apparently limited to trade in commodities. In fact it applies to everything. Every country has a comparative advantage in something, not limited only to the natural resources which happen to be found within its borders. China currently has a comparative advantage in manufacturing, because it has cheap labour. If we let them do all the manufacturing, it benefits us, because it costs us less to have goods made. If we insisted on keeping manufacturing in the UK, goods would cost more, which is pointless."

I cannot recall the last time a British political party specifically campaigned in favour of losing British jobs to outsourcing. "We" have had no say in the matter.

And please advise what comparative advantage is offered by the country of Bhutan.

Manufacturing in China does not cost 'us' less: it costs the manufacturer less.

"I can buy a microwave oven at Tesco for £25. How they manage to manufacture a relatively complex and material-rich good like that, including retail margins etc, for the price of a haircut in the City, I do not know. But they do, so I benefit. Same with DVD players. You can now buy one for the price of two DVD movies!"

Your comment on the role played by overseas manufacturing in the price of a microwave oven is based on one whopping assumption - how do you know that a similar item manufactured in the UK would automatically cost more? You do not know that. You cannot know that. You theorise that it is true. It may even be true. But you cannot prove it to be true.

It might be absolutely untrue. Whilst Chinese labour might be cheaper, British labour might be vastly more efficient and motivated, producing many more micros per hour than the Chinese. With more micros to sell, the price should automatically drop.

You also forget that other factors might be at work. Might not a retailer also be able to supply a microwave oven cheaply because it might be receiving free finance from its suppliers, through its excessive tardiness in paying their accounts? Or by using its economies of scale to lower its costs through the aggressive re-negotiation of its milk supply contracts?

Again, you fall into the trap of citing the ability to buy 'stuff' as a meter of personal and national wealth. As I said to Scott, whose answer I'm sorry I didn't get round to properly replying to, the ability to buy 'stuff' is meaningless if the purchases can only be financed by larger and larger dollops of unsecured credit. How does anyone get richer that way? Unless, of course, you're the supplier...or the credit card issuer...

"My "keeping manufacturing in the UK" argument was more proof. But you try to refute it by saying wages would be higher. It's hard to see how manufacturing goods that will only be used in the UK (since no-one else would buy our high-priced goods) could be more profitable than providing services on a global market would be. And there would be far fewer jobs available, because of the small market"

Again, you make an assumption. If you don't know what the goods are, how can you tell that nobody would buy them?

And what makes you think the job market would be smaller? As any fule know, if you are building new and complex products, new skills develop. Other sectors rise to service those skills. You state as fact a theory which is by no manner of means a foregone conclusion. It is an economic reality that R & D follows smanufacturing, and the loss to outsourcing of at least 17% of the USA's manufacturing jobs since 2000 might have been one of the reasons behind the Competitiveness Initiative that President Bush announced in the State of the Union address.

And I notice that you still haven't cited an example of the 'new jobs' that you mentioned springing up in the UK due to globalisation.

"I don't think plumbing jobs are going to be disappearing soon! In fact, plumbers are an excellent example of the market in action. For those who have the strength of character to ignore society's distaste for the work and go for the apprenticeship, there's some pretty good money to be made.

It's easy to dismiss entry-level service-industry jobs as "dead-end" and "McJobs" but the truth is they are a kind of apprenticeship for service jobs: dealing with customers is a pretty important service economy skill, just as welding is an essential skill for a boilermaker. Someone who learns to deal well with customers may go on to a sales job; someone who discovers he enjoys managing the other workers at McDonalds may become a manager. There's a reason why all the McDonalds workers are young: they don't spend their whole working lives there. They get their apprenticeship, then move on."

Well, yes, there used to be a premium in being a plumber, because successive governments' determination to push as many teenagers into higher and further education as possible placed a radical premium on their services.

However, the recent massive influx of migrant, in many cases temporary, labour has had a negative impact on wages and wage-earning capacity. In 2003, George Borjas of Harvard noted that a 10% increase in population leads to a 3-4% reduction in real wages. Last June, Mervyn King told an audience in Bradford that immigration had had the effect of 'reducing inflationary pressure' i.e. keeeping down wages.

Now, it's all well and good having arguments like this when, personally, the issue is academic - but the people who are bearing the brunt of this have the same concerns, liabilities and responsibilities as we do. They need to eat and they have bills to pay. Although the Polish plumbers may be cheap (the sole criterion of worth or merit nowadays, apparently), they are diminishing the earning capacity of British plumbers. How does that make the country richer?

My experience of dealing with clients was that it takes nothing more than an ability to speak properly to people. If you have it you have it, if you don't you don't. There are a surplus of 'mays' and 'mights' in the rest of your argument for it to sustain close scrutiny. And you assume that all staff leave McDonalds because they have learned their apprenticeship in serving customers - again, an insupportable assumption. And don't you think that one of the reason McDonalds might hire young staff is simply because they are cheaper? If that were the case, it might be excluding potentially excellent older customer service staff on the basis of an arbitrary decision which might actually be hurting the company's interests - for example such a person might be able to generate a vastly greater degree of goodwill than others, resulting in many more return visits, better word of mouth, etc.

"I'm not sure what the new business failure rate has to do with globalisation?"

Re-reading my original comment, I don't think I could have been understood as saying the new business failure rate had anything to do with globalisation. For the avoidance of doubt, I was referring to the lack of thought given by many new business start-ups as to whether or not the service they are providing is viable. And the banks, certainly, can be thanked in part for the small business failure rate. How many businessess close every year because banks are too eager to call in their liabilities before they have even had a realistic chance of establishing themselves?

"Such "independence" is both ludicrously expensive" -Proof, please?

"and impossible to achieve in practice" - Not so. The critical thing about a nation which is capable of producing what it consumes is that some things, 'stuff' in other words, might (gasp!) not be available. You might not be able to buy sun-dried tomatoes and feta cheese at four o'clock in the morning (one of the consequences of the 24 hour society is that nobody gets a good night's sleep any more), but you would be able to survive. The nation would survive - and one makes no apology for believing that attachment to the citizens of one's own nation is more wholesome than bearing an equal attachment to the welfare of citizens of other nations. No offence intended, Scott.

"As long as a country generates sufficient foreign exchange from producing in its fields of comparative advantage, other countries will happily sell it whatever it needs."

We have a trade deficit of £48 billion. What earnings are we producing exactly? And precisely what is our 'comparative advantage' in such an environment now?

"Why would Britain refuse to sell something to another country, and deprive itself of revenue?" -

Congratulations - you've just made the argument for selling enriched uranium to Iran.

"So why would others do that to us? Iran goes on about the US and the West all the time- but still sells its oil to the West. It has to: it needs the money."

The Yom Kippur War and the first oil crisis settled forever the debate about whether buyers or sellers have more power in oil transactions. The one definite effect of the globalisation process you commend is that it has driven up the demand for, and price of, resources. I haven't heard of the Iranians begging us to buy their oil recently. Right now, they can probably say anything they like. And the day that the Chinese offer more than the west for Iranian oil is the day on which we should all be very frightened.

"The independence argument makes as much sense as saying you can't be truly independent as a person unless you grow your own food, build your own house, weave your own clothes... Sure, you can do it. But you'll have a standard of living well below those who sensibly concentrate on doing what they are good at (like being a solicitor) and trusting the market to provide everything else."

So there is something fundamentally defective in the structures of independent nations which means they cannot support markets of their own? Can only international markets be guaranteed 'to provide everything else'?

"the "clever people" of Japan are almost completely dependent on the outside world for everything from their energy to their raw materials. If they had remained "independent" they wouldn't have been very clever.

And this notion of international competitiveness is also very wrong-headed: how have Japan and Korea left Britain "in the dust?" Have we become a third-world nation? Have we become suddenly poor, soliciting loans from the World Bank? Far from it: in fact we are being urged to write off our loans to the third world! How rich do you have to be to afford to simply write off loans?

If your neighbour starts to come up in the world, does that mean you have to go down to compensate? "

The Japanese operate prohibitive tariffs on foreign goods that are otherwise manufactured in Japan. They are also a virtually zero immigration nation.

They have grown by protecting Japan first.

The difficulty with the writing off loans argument is that the loan monies came from taxation, or from government borrowing underwritten by the taxpayer. Although the government might feel like displaying the largesse required to write off loans, the ultimate liability for payment would remain with the taxpayer. It makes one wonder what they were doing making loans with my money in the first place.

It would be nice to think that one would not have to go down if one's neighbour comes up, but the principal tool for effecting globalisation, labour arbitrage, has no impact other than lowering living standards in countries which are net exporters of jobs. See Roach, above.

11:30 PM  
Anonymous Richard said...

MK - you said "Most of the stuff that you cite is likely to have been bought on a credit card, or with some other financial instrument the use of which would have been beyond the reach of the vast majority even 25 years ago. How does the ability to increase your debts make you more socially mobile?"

As a "retired solicitor" did you never get into debt? Did you have a mortgage? These financial instruments are exactly what you suggest they are not - they are a means of social mobility. They allow people to make use of money they have not yet earned in order to improve their lives, take themselves up Maslow's pyramid, and if they have good judgement they can use this facility to improve their earning potential and pay the credit off more easily.

Credit is essential to economic development at every level, from the individual through small businesses and large corporations and government bodies through to entire nations. It can bite those that use it foolishly, but life tends to bite the foolish. That is what being foolish means, it means lacking judgement and so making decisions that come back to bite you!

12:41 AM  
Anonymous Richard said...

MK - another one "Your comment on the role played by overseas manufacturing in the price of a microwave oven is based on one whopping assumption - how do you know that a similar item manufactured in the UK would automatically cost more? You do not know that. You cannot know that. You theorise that it is true. It may even be true. But you cannot prove it to be true."

This suggests you don't understand free-market economics. If goods manufactured abroad were not cheaper than those made in the UK then they would never have taken over completely in the market from those manufactured here. And I am sure it can be proved true, just by the records of how much it was costing to make microwave ovens here, and by studies of maximum theoretical poductivity compared to pay.

In any case, why does it need to be proved? Sound economics is not pure mathematics. It is based more on well-founded judgement than on proof, and Stephen's judgement seems fairly sound on that point. You arguing against it just because he has no proof at hand seems to me to be fairly wild misdirection rather than well-crafted argument.

12:49 AM  
Blogger JohnM said...

I cannot recall the last time a British political party specifically campaigned in favour of losing British jobs to outsourcing. "We" have had no say in the matter.

On the contrary, people vote at the checkout. Several organisations have run "Buy British campaigns". For example the Wilson government in the 1960s. There was little or no effect. British people voted overwelmingly to buy foreign products because they were perceived to be cheaper, better quality or both.

The only way to prevent such job losses is with protectionist measures such as subsidies or tariffs. I should have thought the sorry story of British Leyland provides a salutary lesson.

Your comment on the role played by overseas manufacturing in the price of a microwave oven is based on one whopping assumption - how do you know that a similar item manufactured in the UK would automatically cost more? You do not know that. You cannot know that. You theorise that it is true. It may even be true. But you cannot prove it to be true.

Stephen seems to provide proof but you dismiss it. You are quite correct: just because no manufacturer is currently producing microwave ovens in the UK, that does not constitute absolute proof that someone could not start a business tomorrow and turn a profit. However we can't prove that either.

In such cases Occam's Razor applies.

9:09 AM  
Blogger Stephen said...

MK, you said:

The Yom Kippur War and the first oil crisis settled forever the debate about whether buyers or sellers have more power in oil transactions. The one definite effect of the globalisation process you commend is that it has driven up the demand for, and price of, resources. I haven't heard of the Iranians begging us to buy their oil recently. Right now, they can probably say anything they like. And the day that the Chinese offer more than the west for Iranian oil is the day on which we should all be very frightened.

It's not a question of debate, but of markets. Yes, the first oil crisis demonstrated the power of the OPEC cartel, but that power has waxed and waned over the years, and you cannot escape the fundamental fact that a market needs both a buyer and a seller. If the price of oil goes above the cost of replacements, it will not be bought. There are all kinds of oil alternatives that become viable above £90-a-barrel oil. So the oil producers do need to moderate their demands.

As to China, they buy their oil in the world market the same as anyone else, and would be fools to pay more than it's worth to them. Since they aren't fools, they don't. The day oil is worth much more to them than to us, ie the day their demand drives prices above our alternatives, is not a day to be feared: we will simply turn to our alternatives.

1:03 PM  
Blogger Stephen said...

MK, as a matter of interest, how would you propose the Government prevent jobs being lost to offshoring? Should there be laws requiring all UK companies to employ people who are resident in the UK only, and forbidding foreign companies from operating in the UK (since otherwise all the UK companies would simply relocate their legal residence to avoid the restrictions)?

2:54 PM  
Blogger Martin said...

Richard,

I'm a retired solicitor, not a "retired solicitor".

The fundamental difference between using a mortgage to improve your life and credit card debt to improve your life is that the mortgage is secured; the possibility of the property's loss should provides the incentive to earn, which in turn should aid social mobility.

A personal guarantee underwriting business borrowing serves the same function.

However, unless you're in the property business a mortgage borrower is likely only to have one mortgage at a time, procured for the purposes of securing a roof over their heads. The ability to obtain a mortgage is determined upon the applicant's ability to pay - they must have some earning power before they apply.

I don't think I've ever said that credit per se is a bad thing. My concern is that the engine of our economy now seems to be purchases made with a very much higher level of unsecured credit than was available 30 years ago, and I am rather fearful of the consequences of a sharp economic downturn.

You are certainly entitled to your opinion of my argument, as I am entitled to my opinion of yours - and I see that you admit that economics is based as much in judgement as proof.

JohnM,

You rightly note that the 'Buy British campaigns' failed. You also note that the reason for this was perception. Perhaps not reality.

At the times those campaigns were mounted, the economic model the country was using was not conducive to their success, employing as it did both tariffs and prohibitive taxation.

As for the relative merits of tariffs, see Japan, above.

There is a very powerful case to be made for tariffs, under the correct circumstances. Would the existence of tariffs on imports actually harm an economy which imposed anything other than extremely limited taxation? Wouldn't have thought so. The absence of taxes should fuel growth and make the country an extremely attractive place in which to invest.

Of course, in order for that situation to come about we would have to leave the EU. Wouldn't that be a pity.

I think it was Pat Buchanan who once wrote that he could see no point in citizens being taxed at 40% and foreign goods imported for zero, when the foreign goods could be taxed at 40% and the citizens taxed at zero. Can't see much fault with that. It all depends on how big a government you want - but one imagines that were any such fundamental reform of our taxation system suggested, the lawyers and accountants would leave the last bullets for themselves.

And if such a model were adopted, we would then be able to engage in real 'free trade' - negotiating with individual nations the arrangements which would enable both parties to actually exercise their comparative advantages for their own enrichment, as opposed to having Mandelson sitting over in Brussels haggling for an extra tuppence on every imported sock sold between Kerry and Vilnius.

Your comments on Occam's Razor are noted - however, the prevailing corporate mindset seems to have been expressed by Sir Digby Jones at the CBI in November 2004, when he said that he didn't think there wan any country better suited for globalisation than Britain, and didn't anticipate there being much white-collar work here within ten years.

It would seem that it might not be long before Occam himself is outsourced. Never mind, I'm sure by that time we'll all be doing very well in those new jobs created by globalisation that Stephen mentioned earlier. What were they again?

Stephen,

Alternatives may become viable above $90 a barrel - but as I've said above, I'm a little afraid of a sharp downturn which might be caused by, say, the Chinese dumping the mountains of dollars they hold when they believe it suits them to do so - such as when they decide to invade Taiwan.

Of course they buy their oil in the world market - which is why they invest so heavily in Angola! I rather foolishly thought they might have been investing heavily in Africa and South America in pursuit of their own national interest and their economy's demand for resources.

One has to wonder whether, if piush comes to shove, the process of turning to alternatives will be quite as straightforward as you describe.

Re limiting offshoring -

Any UK company that offshores UK based jobs while still deriving income from UK residents? Taxed at 95%.

Any UK company that changes residence to avoid these restrictions but still derives income from UK residents? That would be a crime.

Well, you did ask me.

"Should there be laws requiring all UK companies to employ people who are resident in the UK only, and forbidding foreign companies from operating in the UK (since otherwise all the UK companies would simply relocate their legal residence to avoid the restrictions)? "

I don't know what you're getting at here. Are you suggesting a law against 'onshore offshoring'? If foreign workers are being hired to displace British ones, definitely. If you are suggesting that a UK business operating a subsidiary in Dubai should employ only British people there, that's absurd.

4:34 PM  
Anonymous Anonymous said...

mk: I have a lot of time for your arguments, although we both know that they run quite counter to prevailing market theories. My personal feeling is that globalisation has contributed hugely over the last 10-15 years or so to the wealth of quite a number of people, those taking the high and low tech jobs from us in western societies, and of course mostly to those who owned the companies that outsourced. It's been a bonanza for them, for the City, and so on. But what makes me suspicious is that we only ever hear from the beneficiaries (City scribes, plutocrats), and never from the casualties. Going from manufacturing microwaves to keeping the till at Tesco's is an economic and skillset downgrade, whichever way you read it.
The truth is that we don't know yet whether exporting most of our manufacturing and relying solely on service industries is great trading or the biggest economic error we have ever made.
If we never get the great unravelling, then our fears will have been unfounded. But even economic bulls can see that there are some huge imbalances and the system is vulnerable to a shock.

10:02 PM  
Blogger Stephen said...

Any UK company that offshores UK based jobs while still deriving income from UK residents? Taxed at 95%. Any UK company that changes residence to avoid these restrictions but still derives income from UK residents? That would be a crime.


OK, how about a UK company selling all of its assets to a newly-registered foreign company? Or will UK companies be forbidden from selling their assets to foreign companies? This will do wonders for investment in business assets, not so?

Each time you restrict the market, a loophole is found. So you plug the loophole. This gives rise to other loopholes. Eventually the law of unintended consequences comes visiting. Rent-control laws sound like a good idea in theory: in practice they lead to slums. If people sitting and thinking about how to direct the economy really worked better than markets, the USSR would be the single remaining world power and Cuba would be a paradise.

You and Anonymous fret about independence and whether trusting the markets is the right thing. In truth there is no choice. Planned economies lie in ruins across the globe.

A little analogy: London, like all cities, can of course not feed itself (just as the UK can no longer manufacture the goods it requires). In theory, the logistical problems of getting tons of food into London each and every day, are nightmarish. Imagine you were the government official charged with that exercise. Even with superhuman organisational skills, it's unlikely you would get it right. But you don't have to. The markets do it, all automatically. I don't think too many Londoners worry about their dependency on the countryside for their food.

4:14 PM  
Anonymous Anonymous said...

Couple of comments; I think we are basically in agreement on the role of markets being the ideal, except that, what are presented as 'free markets' are often anything but. The cheapness of the China trade is currently a product of the Chinese keeping their currency artificially low as a protectionist measure. So we are exporting jobs and know-how to the Chinese on the basis of a currency peg and their willingness, temporarily (10-20 years?), to work in conditions and for rewards that we in western societies would find unacceptable. Who benefits ? Marginal decrease in the price of stuff for sure (but only marginal and also temporary), and for this we give up knowledge and high-value-added employment. Often permanently. But the real beneficiaries of this deflation are those who own capital, the shares of companies exporting jobs, and that is a lucky few.
Strategic considerations also come into play here. Is it wise for a country to give up entirely its ability to feed and clothe and heat itself on the basis that it can provide financial services for large parts of the world ? Financial services will quickly be forgotten if the shit hits the fan; if oil is hiked to $200, what will be our ability to feed ourselves properly if it is all imported ?
In demand/supply models, shit is not supposed to hit the fan, or only in slow motion, allowing alternatives to be produced etc.
Doesn't happen like that.
James Goldsmith (no socialist he) was a believer in developed countries trading hermetically with each other, and only opening to developing societies under certain conditions (why try to compete with Chinese jailworkers for instance). Tough for developing countries for sure, but our governments are supposed to look after us first.
Now I know markets eventually regulate, but governments are there to ensure that such self-regulation does not include unfortunate things such as mass starvation and riots, great depressions and so on.

6:23 PM  
Anonymous Anonymous said...

Just a random web wanderer....

I'd like to thank you all for this carefuly worded and constuctive debate, a rarity. I've been 'stuck' on this issue for some time, unable to really make sense of it. Although I'm no closer to being able to convince myself one way or the other, I certainly am far more informed.

4:27 PM  

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