Friday, August 07, 2009

Filthy Lucre: Economics for those who hate capitalism

I've just finished reading this book by Joseph Heath, and the title alone should be enough to send alarm bells ringing.

Surely, we don't want to empower the fools who hate capitalism with some unjustified ideas that there are rational economic reasons to oppose capitalism.

And the first half of the book is quite a disappointment. The author says the 1st half is dedicated to dispelling right wing economic fallacies, and the 2nd half attacks left wing ideas and fallacies.

The first half seems to think that a libertarian "night watchman state" as described by Nozick has been proven unfeasable, that minimum wages do a lot more than create unemployment and that the real world has all kinds of prisoner's dillemas - situations where the individual parties do not act in the optimal sense and should be regulated by the state.

In each one of these chapters, Joseph Heath simply remarks that it is "more complicated than free market economists suggest" without really justifying why regulations, social welfare and taxes are all justified and beneficial.

The 2nd half of the book is much more agreeable, although it can be a bit long winded in making its point. One chapter that attacks the idea of "fair prices" takes aim at the Fair Trade campaigns, and shows how Oxfam asked for African coffee farmers to be paid double the market price, predictably resulting in a huge coffee glut, and then Oxfam reacted by asking the US gov't to destroy 5 million bags of coffee to keep the prices high.

Similarly, the Body Shop launched its "trade not aid" campaign in the early 90s, where they agreed to buy 6.3 tonnes of shea butter from cooperative producers in northern Ghana, at a price 50% above the local rate. The company decided to add an additional bonus to the price, which was to be invested in local schools or development projects.

What resulted should be obvious to any rational person. of the Body Shop's order created a "shea nut rush", followed by an entirely predictable glut. Farmers stopped growing all sorts of crops in order ot get a slice of the shea-nut action: In the first season, the northern villages, which normally produced about 2 tonnes of shea butter a year, churned out twenty tonnes, nearly four times what The Body Shop wanted... Making matters worse, The Body Shop, after discovering it had overestimated the international market for shea-related products, quickly scaled back its orders for the next season.

In the end, the author managed to attack other bad ideas such as "profits are bad", "capitalism is doomed", "equal pay for all" and "sharing the wealth". Joseph Heath positioned himself as somebody who supports the status quo.

He should double check his blind spots - government spending is wasteful, minimum wages do create unemployment, social security creates moral hazards, and regulation is ineffective.