Fed up with misguided economic analyses

A recent commentator on television commented that its was necessary to cut jobs in the public sector as the real economy was not creating sufficient wealth to support the public sector in its current size. The public sector is seen as is an unproductive add on whose services are a luxury which can be dispensed with in a period of austerity. One such luxury is health and safety. What helps a business most in a struggling economy is to cut its over heads, which includes those expensive measures undertaken to improve health and safety. If those costs are cut, the struggling business will survive and more people will be in employment.

However this is to commit the fallacy of confusing what is unquantifiable with what is non-productive. The former applies to the public sector but not the latter. When I was working as a teacher I wondered why people thought I was of less value to the economy than a maker of Christmas cards. The answer lies in the commonly accepted understanding of economics. A simple example can demonstrate this. If a maker of Christmas cards could produce 10, 000 Christmas cards in a year and if they sold at a £1 each he would add £10,000 to the stock of national wealth. I as a teacher could show nothing at the end of the year for my efforts. If I was paid £30,000 a year and income tax was 20% of income, it would take the efforts of 15 card makers to create enough taxable income to pay my wages. No wonder so many private sector workers, resent the comfortable drone like existence of teachers such as me. Going back to my previous example if taxes were cut those workers would be better off. Yet if I am so valueless, why bother to have any teachers at all Even the most Neanderthal of politicians have not suggested that the teaching profession should be dismissed wholesale.

Consider my example from a different perspective, it is the teacher that gives the child the skills and knowledge that enables them to become a productive member of society. If the average wage for an employed adult is £26,000 and a teacher teaches on average a 100 pupils a year in a career of 35 years, they are contributing to the creation of £26,000 x 100 x 35 or £91,000,000 of national wealth throughout their teaching career. Actually this example is nonsense because there is no possible way of knowing the value of the individual teacher’s contribution to this £91,000,000 of wealth creation. What it does demonstrate is the fallacy of relying on statistics to judge the value of an individual’s work. Yet it is the ‘bean counter’ approach that dominates government policy making.

There are the intangible benefits that education gives a student, which are never counted in the evaluation of a teacher’s worth. When I was 15 I was a working class boy with a farming background, whose only knowledge of the theatre was the Christmas pantomime. Our English teacher Mr Wright had high aspirations for us horny handed sons of the soil, he wanted to show us something different. He took my class to see a production of Hamlet at a local theatre. I was entranced and ever since have had a love of the theatre. What about the music teachers who impart a love of music. One of my teaching colleagues helped a student develop the playing violin playing skills that enabled him to pursue a career in folk music. A simple cost benefit valuation so favoured by the government ignores the true benefits of education.

The simplistic economics that undervalues the public sector has had dire consequences for the housebuilding industry. Common sense (all be it a self interested one) tells us that if only the house builders were freed from all the red tape that’s limits where they can build houses and what they can build, many more houses would be built. However this simple analysis ignores the reality of the housing market and the self interest of builders. When New Labour removed many of the restrictions on the design of houses, the consequence were the construction of many ‘miniature’ houses. The shrinking of the size of the house means the builder can get many more houses on the same plot and make more money. A whole new industry has sprung up to make small furniture for these houses. Sofa’s are now sold in 3/4 sizes. These new dwarfish homes are becoming the industry standard, forcing young and growing families to live live in what are very cramped conditions. What the governments’ have done is encourage a race to the bottom amongst builders, to see who can produce the cheapest yet habitable houses.

By freeing the market of almost every government control, it has left the housing market prey to manipulation by the house builders. The major house builders have large land banks, that is sites they own for which they have planning permission, but on which they choose not too build, until prices for houses rise. By restricting the supply of houses, house builders are able to force up the price of houses and maximise the profits on each house sold. Ken Livingstone stated that the average London house builder made a profit of 26% on each house sold. At the time he made this remark a profit margin of 10% profit was considered exceptionally good for any business.

Rackman was a notorious landlord of the 1960’s who treated his tenants badly. Rackmanism became a by word for bad landlords. Now Rackmanism has almost become the accepted standard for many landlords. Practices in the past that would have been frowned on are now almost universally acceptable. When many East End landlords evicted their tenants to make way for better paying tenants wanting to see the Olympic Games; it had implied government approval as it was seen as making the most efficient use of scarce housing stock. No minister spoke up on behalf of those tenants made homeless, they did not matter.

The planning departments of local and central government are better understood not as a cost to the community but a benefit that can increase the welfare and standard of living of all. Regulation would prevent prevent house builders from profiteering by selling sub standard houses made on the cheap. How many millions would benefit if they were not compelled to live in substandard housing stock? If regulations required houses to be carbon neutral or constructed to a higher standard that could enable them maintain a higher internal temperature in winter, it would reduce the consumption of scarce resources and limit the amount of warming gases pumped into the atmosphere. Local government could plan and build social housing, so alleviating the housing crisis.

The introduction of rent controls could be hugely beneficial to British society. Assume the average rent paid by private tenants is £500 per month in London and there are 500,000 such tenants. If those rents were reduced by £100 per month, it would free up £50,000,000 to be spend on other products and services in the London economy. What a boost it would be for struggling London retailers. Landlords would immediately claim that such controls would make it uneconomic for them to rent out houses and discourage new landlords from entering the market, so reducing the the supply of private rented property in the market. The only landlords that would suffer would be those that had over borrowed to buy their houses and who can only prosper by charging exorbitant rents. Why should tenants be forced to subside such landlords by paying excessively high rents? It would also take some of the heat out of an over heated London property market. Prices might even stabilise or fall giving a chance for some to buy their own homes for the first time. Whatever the cost of employing additional staff in planning or housing regulation, it would be more than offset by the benefits financial and otherwise that would accrue to the community.

There is no such term in conventional economic analysis as social profit. The nearest term that comes to mind is public goods, which means that the market cannot profitably supply some goods that are necessary for common welfare. What might be a public good be is very much open to debate. On the right those goods are defence, law and order and not much else, on the left they are welfare and a publicly funded health service. Social costs are a concept accepted by economics, an example is pollution that can be a by product of industrial processes, yet there is no term or concept that equates to social profit. Never in any economic textbook is there any mention of the benefits accruing to society from public administration. Since politicians, if they have studied economics have done it at the elite universities, that only teach alternative economics as a discussion point in seminars to highlight the superiority of the free market system. One senior Liberal Democrat politician described the Treasury as being populated by free market fundamentalists. While there is no understanding of the notion of social profit amongst the governing classes, the public administration will be continually run down to the detriment of the welfare of the wider society.

This essay should not be understood as justifying any activity under taken by public administrations, they as with any business corporation can make mistakes. What I object to is the unwillingness of the current and former administrations to understand that a strong public administrative sector is an essential part of the good society.

One solution is to go back to a politics of value, not calculation. Harold MacMillan (housing minister in the 1950’s) saw there was a desperate need for more housing and pledged to build 300,000 houses a year. Today such a policy would be hedged with a proviso, if … The if being the most important factor, is their not a shadow cabinet spokesman that qualifies any pledge to do good, with the proviso, if we can afford it. Only if politics is based on values are politicians better able to judge the value of the unquantifiable. It is the unquantifiable that is the product of the public sector. Yet this is in some small way done now, the possibility of nuclear annihilation is unquantifiable and yet the government is prepared to invest billions the nuclear deterrent to make this unlikely possibility even more remote. What I am arguing for is policy makers with imagination, which unfortunately is absent from the minds of our leading politicians.


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