Adam Smith was an arch-critic of the regime-hopping strategies of the exclusive stockholding corporations, the forerunners of today’s multinational corporations. The British East India Company, granted a Royal Charter, was supposed to be acting on behalf of the sovereign to meet the country’s commercial objectives. The free hand given to the Company would presumably be couched, in modern parlance, as a ‘competitive’ strategy for Britain.
This post by Matthew Watson, showing how rude Smith was about these corporations’ strategies, is the latest in our series exploring the intellectual history of the modern ways people talk about the ‘competitiveness’ of national economies.
Do nations or states ‘compete’ with each other in a meaningful way? We have already explored the thinking of Paul Krugman, Adam Smith, Robert Reich, and the Tax Justice Network on this question. Their answers are, to summarise broadly: ‘no – or at least not in the way people commonly suppose.’
This ‘competition’ between states, we’ve argued, bears no economic relation to the microeconomic competition between firms or companies in a market. The shortest way to illustrate this, perhaps, is to note that a failed company is one thing: a failed state is another beast altogether.
But there are influential people who disagree.
Following last week’s blog on top-end income tax rates by Prof. Matthew Watson, today’s blog highlights a detailed new report (summarised here) which is launched today, on the same subject. It looks closely at the evidence behind claims about the revenue effects of cutting or hiking top income tax rates in the UK.
The report was launched (ahead of the May 7th election) by the Tax Justice Network, with the help of today’s Fools’ Gold blogger, and it shows how the official evidence on these revenue yields is subject to such huge, irreducible uncertainties that they are essentially meaningless. Perhaps more damningly these estimates are, as the report’s author John Thompson notes:
Where the parties stand on top income tax rates
The Labour government increased the top income tax rate for anyone earning above £150,000 per year from 40 to 50 percent from April 2010, the first increase since 1974. The coalition government cut the rate to 45 percent in April 2013.
Current manifesto pledges are:
- Conservative: haven’t ruled out a cut in the top rate to below 45p in the £
- Labour: will restore the top rate to 50p
- Liberal Democrats: no specific pledges on top rate.
- Green Party: a top rate of 60p in the £
- SNP: has said it supports a top rate of 50p.
- UKIP: a 40p top rate.
- Plaid Cymru: a 50p top rate
“so selective as to be unreliable and, if relied upon, worthless or worse.”
In his latest essay for us, Prof. Matthew Watson of Warwick University looks at the utterings of John Redwood, one of Britain’s most vociferous proponents of the idea that tax cuts for the very wealthiest will make an economy more ‘competitive.’ (Take a look at this article to get a flavour of Redwood’s ‘competitive’-tax-cuts-for-all-ailments stance.)
Watson’s article precedes an in-depth report that we will be co-publishing next week, skewering the evidence that UK politicians are using when they make claims about what happens when you change top income tax rates.
An earlier version of this post appeared on the Politics Reconsidered blog in April 2014. Permission to re-post is very gratefully acknowledged.
Competitiveness myths, Income Tax and expansionary austerity
By Matthew Watson
Some small signs of growth for the British economy here, some small uptick in numbers in work there, and the nature of modern party politics seems to dictate that dubious claims about the expansionary nature of austerity will come marching back into view. Throw in some spurious comments about the endorsement of competitiveness policy and they tend to stifle further political debate.
I had convinced myself that I was too long in the tooth to ever see anything new in these tired old arguments. However, in this respect at least, I am now approaching the first anniversary of the day when the words ‘thank goodness for John Redwood’ entered my head for the very first time. This was such an unexpected occurrence that it requires some explanation.
The British Conservative Party describes Redwood as “a hard-hitting campaigner” and, in an attempt to vest this hard-hitting campaigner with authority, visitors to its website are told that he is a “businessman by background”. Last spring, he did what I had thought was impossible in the peddling of competitiveness myths. He put two and two together to come up with something well in excess of four when suggesting that the Treasury had been proved “utterly wrong” in its prediction that a five-percentage-point income tax cut for the richest 1% would lead to reduced overall tax revenues. Here was proof, should there have been a need for it, that if the lens through which you view the world is sufficiently skewed then you can make even the most basic statistics say anything you please.
Redwood’s variant of the expansionary austerity thesis took the following form. Ripping the heart out of the welfare system to fund top-end tax cuts, he seemed to be saying, places the British economy on a level of competitiveness that would otherwise be unattainable: it has reawakened a dormant entrepreneurial spirit to such an impressive degree, he was saying, that more rather than less tax was paid overall in the first year of the new lower rate. More people have been put into work through releasing society’s highest fliers from the “anti-competitive” burden of funding the welfare state, and they paid the Government back for its courageous pursuit of austerity to the tune of a whopping extra £9 billion in tax.
Well, perhaps he didn’t express himself in quite such grandiose terms. However, this was still the gist of his comments.
Two points should be made in response.
(1) Redwood managed to take one thing that was true – HM Revenue and Customs did indeed collect £9 billion of additional tax receipts in 2013/2014 compared with 2012/2013. But he then proceeded to turn it into a series of claims for which he had no evidence.
The increase in tax receipts did not follow a proportionate increase in the number of people paying tax. As the UK’s Office for National Statistics and even the Government’s own Office for Budget Responsibility have shown, the greatest difference resulted from existing taxpayers paying more of what was due. The pre-announced reduction of the top rate of income tax from 50% to 45% was accompanied by a loophole big enough for any competent accountant to drive a bus through it.
The real issue here is the outbreak of tax-switching that ensued. High earners delayed payment on tax that was due at 50% in 2012/2013, so that it could be paid instead at the lower rate of 45% in 2013/2014. The country’s highest earners, in other words, simply refused to look a gift horse in the mouth. This tax-switching artificially depressed revenues in the earlier time period and enhanced them in the later one, so there is no need to search too far for explanations of 2013/2014’s bumper crop of tax receipts. And certainly there is no need to embrace Redwood’s particular brand of expansionary austerity alchemy and the competitiveness myths that serve to sustain it.
(2) Even if his argument could be made to stand up in its own terms, however, does it not reveal a startling lack of ambition at the heart of UK Government economic policy? Redwood is, after all, a former Shadow Secretary of State for Trade and Industry and Prime Minister David Cameron’s specially selected appointee to head the Conservative Party’s Policy Review Group on Economic Competitiveness. But the only thing he seems to be able to say having held those briefs is that innovation is incentivised by tax cuts. [If so, they might like to answer each of these points, in turn.]
Surely, though, there is more to the likelihood of having a marketable idea than whether or not you live in a low-tax environment. Are we really likely to believe that entrepreneurs keep all their best ideas to themselves if personal tax rates are set above a certain threshold? Austerity has not only placed a blanket of conformity over British economic policymaking. It now also seems to be encroaching upon what politicians are willing to say about the nature of modern economic life more generally.
Redwood’s intervention into the debate about tax competitiveness and top-end tax cuts was as instructive in this regard as it was unhelpful if a serious debate is finally to be had about the necessary supporting conditions for economic innovation. Desperately needed debates of this nature would appear to be yet another victim of UK austerity politics.
By Matthew Watson, Professor of Political Economy, University of Warwick.
The Presbyterian Church in the U.S. has put out a press release entitled “Tax Justice: A Christian Response to a New Gilded Age”.
As the report’s summary notes, it
“provides a framework for engaging in discussions about the large and growing concentration of income and wealth in U.S. society and about the tax structure as part of an agenda for addressing economic inequities.”
We have no religious affiliations of any kind, but we feel the report itself contains plenty of good sense, calling for tax systems to be based on progressivity, transparency, solidarity, sustainability and adequacy. But what is of interest here is that they weigh in directly on the issue of tax ‘competition’. For example, they recommend:
“reducing the use of tax expenditures, shelters and havens, and supporting more adequate international standards to reduce tax competition within and among nations
. . .
[a] communal sense of gratitude prompts measures to restrain jurisdictional tax competition (a “race to the bottom”) that beggars neighbors and makes it impossible for governments to address even the most pressing social needs.
. . .
States themselves should seek to reduce competition among their own cities, suburbs, and rural areas”
Our emphasis added. The report, written by a former World Bank economist, doesn’t contain anything that is analytically new. The reason we point to it is just to illustrate that initiatives that recognise these problems exist all over the place (see this, too, from the Uniting Church in Australia.) One of our goals is to try and stimulate debate and encourage more people to engage directly in this terrain.
You can register here to attend TJN’s annual discussion workshop, held in association with the Association for Accountancy & Business Affairs and City University, London, which will be held on 25th-26th June 2015.
The workshop theme is Should Nation States Compete? The outline programme is published below (it may be subject to alteration). A fuller programme including paper abstracts is available here.
The ways people talk about the ‘competitiveness’ of countries so obviously relates to the economy that they must have their roots in economic theory – wouldn’t you think?
In the first of a series of pieces exploring the history of competitiveness thinking, Matthew Watson suggests that things are not quite so simple.
This article will be stored permanently in our new history section.
Slot machine man and the origins of the “Competitiveness” discourse
By Matthew Watson
In one telling, competitiveness discourse is a way of talking about the economy without the need to get too close and personal with the technicalities of economic theory. After all, however often economists-in-the-wild are invited onto our television screens to speak about how competitive the economy has become today, no self-respecting academic economist is likely to grubby themselves with a concept so utterly lacking in analytical rigour.
In an alternative telling, however, competitiveness discourse would be a way of talking about the economy which has been embedded in economic theory for as long as there has been a modern discipline of economics. All that stuff in Adam Smith with which people are most familiar – the ‘invisible hand’ metaphor and the passage about the self-interest of ‘the butcher, the brewer and the baker’ – seems to consistently invoke thoughts of competitiveness.
So, which is it to be? Is competitiveness an intellectual reference point that academic economists have conspicuously avoided — or one that they have always held in a warm embrace? Both cannot be correct at the same time.
My answer, as is so often the case when faced with a stark choice, is that neither perception is right.
There is evidence, it is true, of the use of the word ‘competition’ in The Wealth of Nations. For the Smith anoraks out there, some combination of it or its derivatives appears 155 times. However, it requires a strategic reading into Smith’s work of current concerns about competitiveness to make this mean anything more than the mundane task of ensuring that economic agents position themselves sustainably relative to market prices. It is about organising production so that selling goods at the ‘natural price,’ where all productive inputs are reasonably rewarded, does not mean having to sell at a loss.
“The results of bargaining away regulatory oversight of corporate activity certainly helps to enhance the utility that companies can extract from their productive activities. If the single goal of managing and administering modern market institutions is to embed corporate interests, then this seems to be the way ahead.
But if the goal is to make the economy react to a rather wider political agenda, then we need to explore and understand the particular intellectual origins of competitiveness discourse.”
Nowhere was competitiveness understood as a logic of behaviour where competent economic agents try to undercut each other to load the market environment to their own advantage. In short, this was a game that companies played solely against the structure of natural prices, not against one another. What is more, while the structure of natural prices was a meaningful baseline for companies because it told them what they needed to do to cover their production costs, the same could not be said of countries.
It required significant evolution in the underlying system of economic thought before something could emerge that is more familiar from today’s perspective. In particular, it needed successive reincarnations of a creature called homo economicus: the legendary figure of ‘economic man’ who has been used to populate economic theory. The most important developments in this regard were brought to life in the 1920s by Frank Knight, the Chicago economist who was at the forefront of the American turn towards neoclassicism.
Neoclassical economic theory always made strange demands on individual economic agents, and Knight made them stranger still. His most well known book Risk, Uncertainty, and Profit requires ‘economic man’ to live in a highly idealised mathematical world where behaviour necessarily traces out the result of a geometric equation. To do this, homo economicus must possess boundless knowledge, and infinite rationality to act on that knowledge. (This, by the way, robbed this agent of genuine intelligence: economic behaviour was reduced to automatic responses to external stimuli, and no longer needed to be thought through.)
Acknowledging this state of affairs, Knight later characterised ‘economic man’ as treating “other human beings as if they were slot machines”. This ‘slot machine man’ was the first homo economicus in the history of economic thought to have the modern meaning of competitiveness inscribed into it as a behavioural instinct. Economic man thus became the ultimate bargaining agent, able to wheel and deal in an instinctive manner to ensure that everyone automatically sells to him at the lowest possible price and buys from him at the highest possible price. By creating it this way, Knight also removed its social relevance drawn from the game that might be played against the structure of natural prices. Instead, economic theory became all about mapping the logical implications of allowing purely utility-maximising agents to compete against one another for their own ends.
Knight did not pretend that the characteristics of homo economicus could ever be captured by an actual person. But this was not the point he was trying to illustrate. This was, above all, a thought experiment: homo economicus designed specifically to act out the utopia of neoclassical economic theory. It was a caricature – but a caricature with rich political implications because it was a symbol of perfection. Slot machine man represented the highest stage of evolution of economic man within the peculiar world of neoclassical economic theory. If you wish for the sake of analytical simplicity to restrict the objective of everyday life to nothing more than chasing utility, then this is as far as it is possible to take homo economicus.
Modern competitiveness discourse – including in relation to the way that whole nations compete with each other – has its intellectual origins in exactly the same thought experiment. So it is relevant to ask whether it remains fundamentally trapped within it. The results of bargaining away regulatory oversight of corporate activity certainly helps to enhance the utility that companies can extract from their productive activities. If the single goal of managing and administering modern market institutions is to embed corporate interests, then this seems to be the way ahead. But if the goal is to make the economy react to a rather wider political agenda, then we need to explore and understand the particular intellectual origins of competitiveness discourse.
Clearly this is not just of academic interest. Today, competitiveness discourse is so ingrained into the management and administration of modern market institutions that it has become increasingly difficult to think of the latter other than through the lens of the former. So it has become a politically debilitating concept. Showing that it was not always this way demonstrates that it does not have to be this way forever, and that political alternatives are possible. There is no formal logic of competitiveness that necessarily has to be lodged at the heart of economic theory, as Knight himself made abundantly clear, when he admitted that his slot machine man was merely a convenient modelling device. Modern economics had evolved quite happily for 150 years from Smith’s Wealth of Nations to Knight’s Risk, Uncertainty, and Profit blissfully unaware of any supposedly necessary attachment to modern meanings of competitiveness.
Only in the subsequent century did the two things become forged so closely together – leaving the contemporary political imagination all the poorer for it.
Matthew Watson is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick and a Professorial Fellow at the UK’s Economic and Social Research Council.
The term “UK PLC” — the ‘PLC’ bit standing for Public Limited Company — evokes notions that whole countries behave like corporations. It is routinely trotted out by politicians in the United Kingdom: why, this FG editor even heard (and gnashed teeth at) this very term on the BBC’s Today Programme this morning, on a day when 100 UK business leaders signed an open letter suggesting that the UK must display that it is “open for business” by supplying further tax cuts and other goodies to large corporations.
Versions of these kinds of slogans, implicitly equating the interests of large corporate players with the wider national interest, can be found in most countries.
In our latest article, Will Davies asks how slogans such as these – which are intimately intertwined with notions of ‘national competitiveness’ – have managed to achieve such sway over policy-making, around the world.