Moving the money around

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In the run-up to the Conservative conference, the leader of that party’s group in the Assembly set out his plans for the economy.  Now it might be argued that we don’t need to worry too much about what he has to say, since the probability of him ever being in a position to implement any of his policies is diminishingly small.  On the other hand, although he has perhaps set out his views more directly, there are elements of what he has to say which have, undeservedly, become part of the accepted political consensus amongst the parties.  For that reason, they deserve more scrutiny.

Take this one for instance: “It is the private sector in Wales that creates wealth and prosperity.  The public sector, as important as it is in delivering high quality public services for all, moves the same money around.” Now I’ve heard much the same thing said by politicians of different parties; ‘private sector good, public sector bad’ is the sort of conventional wisdom which increasingly underpins both government policy and opposition policy.  But is it true?

It probably depends on what is meant by the words “wealth and prosperity”.  If it means GDP (or GVA if you prefer), then it’s nonsense.  In essence, it really makes no difference at all to GDP whether a particular service is delivered from within the public or the private sector; it all gets counted. 

Perhaps wealth means the wealth of the individual employees.  But again, as long as they get the income every month and can pay the mortgage, whether the house (the main element of many people’s personal wealth) is paid for by a salary in the public sector or the private sector is neither here nor there.

And when those employees her money down to the shops and spend it, do the shopkeepers give a hoot whether their customers work in the public or the private sector?  Of course not; and it makes no difference at all to the retailers’ wealth and income either. 

There is one and only one sense in which I can think that the private sector “creates wealth” in a way that the public sector does not, and that is that the private sector generates profit which some individuals accumulate as private ‘wealth’.  In short, it makes those who own and control the capital ‘wealthy’.  But, and this is a point which people often seem not to understand, ‘making some people wealthier’ isn’t the same as ‘creating wealth’; in a very real sense it is just, to quote Davies in a different context, “moving the same money around” - in this case from the customers of an enterprise to the owners.

National wealth is usually defined as the total net value of all assets, goods and services owned by a nation; and in that definition, it really doesn’t matter at all whether ‘services’ such as education are owned and run by the state or by private individuals; they’re still counted as part of national wealth.  That total national wealth can still grow (which is what ‘wealth creation’ means to me), however those services are owned and run.  It is perfectly possible to have an economy where there is no private sector at all; such an economy would still generate wealth, it’s just that that wealth wouldn’t necessarily be concentrated in the hands of a few. 

(I’m not arguing here that we should adopt such an economy, merely that such an economy is a possibility.  If he’d argued that the private sector was a better way of increasing total national wealth, I’d have more trouble dismissing his argument; but he didn’t – he argued that it’s the only way.)

Whether services are run by the public or the private sector, they still need to be paid for.  And in the grand scheme of things, whether they’re paid for by taxing people or by charging at point of use is also irrelevant.  Both are merely “moving the same money around”; the idea that taxation somehow depends on there being a private sector making profits which can be taxed is another myth.

Ultimately, the idea that only the private sector creates wealth is nothing but ideological dogma which seeks to legitimise the redistribution of wealth from the many to the few.  Like so much in the allegedly ‘post-ideological’ age in which we live, it’s an ideology shared by politicians of many parties.  But there really is an alternative.

Hiding their true reasons

Tweet Like many others, we had a UKIP leaflet fluttering through the letterbox last week.  Whilst it claims to be from UKIP Wales, and names their four European Parliament candidates for Wales, there is not one word of Welsh to be found on it.  Perhaps the printers, in Bodmin, can’t cope with Welsh.  Or perhaps UKIP’s vision of the ‘UK’ which they wish to ‘set free’ is just a very English one, in language at least.

Central to their pitch in the election is immigration; indeed, their leaflet gives more prominence to that issue than it does to the EU - although I suppose that if you blame the EU for everything, there is a connection of sorts. I don’t doubt, sadly, that the pitch on immigration will appeal to many voters, but the logic behind what they are saying deserves and needs to be challenged.  They are appealing, fundamentally, to people’s gut instincts about foreigners, but trying very hard to cloak that by turning it into an economic argument about jobs.

In essence, one part of what they are saying is correct – ‘foreigners’ prepared to work for lower wages can and do damage job prospects in the UK.  But the conclusions that they draw from that simply don’t stand up to examination - because it has nothing to do with immigration.

(It doesn’t follow in any case, of course, that immigrants and cheap labour are synonymous; many immigrants are highly-skilled and highly-paid to go with it.  But let’s assume for the moment, purely for the sake of argument, that a significant proportion of those migrating to the UK are willing to work for lower wages than the ‘natives’.)

It is an inescapable fact that capitalists (often described these days as entrepreneurs, because that word has a more cuddly feel to it) will seek to employ the cheapest labour that they can get, in order to maximise their own profits.  But it really doesn’t matter to them whether that cheap labour is a result of immigration into the UK or a result of labour being cheaper in other countries.  That’s why we’ve seen so much of the UK’s manufacturing industries (and jobs) exported overseas.

In fact, there is an argument which says that cheap labour abroad does more to damage UK jobs than does cheap labour provided by immigration.  At least within the UK, there is a chance that we can police and enforce the minimum wage legislation (or even move to a living wage if the political will were there); prevent the exploitation of child labour; and stop the use of what is close to slavery in some other places.  We can have far less control if the alleged cheap labour simply stays where it is and our home-grown capitalists take the jobs to them instead of waiting for them to come here.

And that underlines why the real problem here is nothing to do with immigration – it is to do with the capitalist ideology and economic system which drives the economy on the basis of making capitalists wealthy rather than on the basis of creating collective wealth. Stopping or controlling immigration does nothing to change that.  And it isn’t something which UKIP have any inclination to change either.

I agree with 'Dave'

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Well, up to a point, anyway.  The idea that our wealth as a society should not be measured in financial terms alone is not a new idea, but it’s one I’d support.  In a world of finite resources and rising population, unbridled consumerism is an untenable future.  But accepting that there is a limit on economic growth doesn’t mean that we cannot become wealthier in other ways; including those other things in a measure of wealth can help us to understand that.

The idea is not without its problems though.  For the have nots to be told by the haves (whether internally to our own country or on an international basis) that they should measure wealth in other ways doesn’t help to feed the hungry or house the homeless.  I normally try and avoid referring to the personal situation of individual politicians, but in this case it’s relevant – a cabinet of millionaires telling us that we must measure our wealth in ways other than the purely financial runs the danger of sounding like an excuse for maintaining the current balance of wealth and power. 

Including other things in our assessment of social wealth depends on those other things being valued by all, not on them being a substitute for material wealth for only some.  People can only really start to value non-material wealth once their basic material needs are met, and are unlikely to be terribly impressed with the concept before reaching that point.

Basic material needs sounds like something which can be turned into absolute terms, but in reality it’s evaluated in comparative terms, and cannot avoid considering the question of aspiration.  Aspiration within a society is likely to be stronger where the difference between the top and the bottom is greatest.  Reducing that level of material aspiration depends on reducing inequality.

That, for me, is the biggest problem with what Cameron has been saying – the idea of building a measure of prosperity which goes beyond the merely financial depends, if it is to be accepted, on the pursuit of greater equality of access to resources.  And I think we can be reasonably confident that that is not what he has in mind.

Wealth, profit, and GDP

Tweet When I was at business school some years ago, one of the lecturers gave us a little demonstration of the difference between personal and collective wealth on the one hand, and GDP on the other. He took a £10 note from his wallet, passed it to the first person in the class, and asked that it be passed around from one to the other, until, after going through 20 pairs of hands, it returned, safely, to him.

His point was a very simple one, that if we assumed that the only money in the room was that solitary £10 note, then 20 separate transactions hadn't changed the amount of total wealth in the room by a single penny. It hadn't even made any of the individuals in the room any less wealthy or more wealthy than they had been at the beginning (although one bright spark did try to get away with only passing on £9.95 so that he could keep 5p profit…).

But the 'GDP' of the lecture theatre, during that few brief minutes, had been £200. And the fact that some of us worked in the private sector, and others in the public sector, hadn't made any difference to our contribution to 'classroom GDP'. GDP isn't the same thing as personal 'wealth', or even total 'collective wealth' – it's more a measure of how many times, and how quickly, money circulates in an economy.

What would have made a difference, though, would be if we had passed that £10 out through the window to the guy who happened to be cutting the grass at the time. It would still have continued circulating and adding to total GDP, but it would have stopped being counted as part of classroom GDP. And the lecturer as an individual, and the people in the room collectively, would have been £10 worse off as well.

It's an analogy for one of the reasons for the under-performance of the Welsh economy. Any economy with a disproportionate number of jobs in organisations whose headquarters are elsewhere will inevitably end up passing some of its wealth and GDP out through the window.

Interestingly, when the UK government passes some of it back to us, it's always called a subsidy or a handout.

Who generates wealth?

Tweet It's not actually a very easy question to answer. Marx took three very thick volumes (well, two extraordinarily thick and one ordinarily thick) to try and answer it, and having waded through it (turgid, to say the least) when I was still at school, I've never been entirely certain that he succeeded.

The common belief seems to be that the private sector creates wealth whilst the public sector merely uses (or even worse, destroys) that wealth. That's an oversimplistic assertion which needs to be challenged more robustly than usually happens, not least because it's an assertion which is a factor in the round of cuts we're about to suffer.

Firstly, we have a whole host of people in Wales (myself included) who work in the private sector for largely public sector clients. Does that make us wealth creators or not? And if I did exactly the same job for a salary in the public sector, would that change my status?

Secondly, the government recently effectively nationalised some banks. Does that mean that they moved from the private sector into the public sector? Does it change their status as wealth creators?

Two simple examples which show that it's actually a rather more complex question than it can sometimes appear.

The hang-up over the relative size of the public and private sectors is another one of those hidden ideological differences. There are a number of reasons why the private sector may do some things better or more efficiently that the public sector, but it ain't necessarily so. And there's no reason why wealth cannot be created by public sector bodies and enterprises.

We'd be better off discussing that we want to achieve and how than getting hung up on arguments about the relative size of economic sectors.

What are we really missing?

Tweet There are a number of basic and very important facts in today's front page story in the Western Mail. There are also a few assertions which are not facts and which need to be challenged. And the headline is a complete non-sequitur.

The headline, like much of the story, seems to be based on the assumption that high earners and wealth creators are almost interchangeable terms. They are not.

Certainly, there are high-earning entrepreneurs who do create wealth, but not all high earners fall into that category. And low-earners can create wealth as well.

There are other high earners who accumulate wealth, mostly by redistributing it from other people into their own bank accounts. Then there were the high earners in the banks and hedge funds who managed to destroy a lot of our wealth by their actions. And finally there are high earners working in the public services. More of any of these might not actually be the answer to anything.

The other myth which needs to be challenged is the idea that becoming wealthy is the same as creating wealth. It is not necessarily thus.

Wales certainly does need to create wealth, in the sense of increasing our overall collective wealth and our levels of GDP per head. That doesn't necessarily involve ever greater levels of inequality, though, and to suggest that it does has more to do with ideology than economics, as does the underlying assumption that 'becoming personally wealthy' is the only driver of economic activity.

The fact that Wales has a comparatively low level of income inequality is actually something which I welcome; the gross levels of inequality which permeate the world in general are a major part of the world's problems, not part of the solution.

If we are to solve Wales' undoubted economic problems, we need to make sure that we understand what they are. A lack of billionaires isn't one of them.