The Luddites Ride Again

by George Hatjoullis

For those that skipped history a quick read of this will bring you up to date. The Luddites was basically a rebellion against new technology that destroyed established and typically skilled, relatively well paid jobs. It has become synonymous with any such worker based movement that resists productivity enhancing technology in the pursuit of protecting established jobs. It can manifest itself as government policy when it allows subsidies or protection for industries that might best be allowed to die but because of the employment consequences, and the electoral implications, it is difficult to allow. It often echoes in the banner ‘fair trade not free trade’. It is part of the Brexit movement and a very loud part of the Trump phenomenon. The Luddites ride again.

The problem is particularly acute when the industries in question are geographically concentrated (coal, steel, shipbuilding, car manufacture etc). The death of the industry devastates whole communities. Moving is difficult because no one wishes to buy homes in the region, and there are limited opportunities elsewhere. The result is these communities become (understandably) resentful and make great virtue of their jobs and industry, claiming it is a noble way of life being destroyed by unfair free tree trade. They demand the privilege to go down mines, and stand on factory floors, and feed fiery blast furnaces. Along come politicians with only power in mind and promise to secure for them this privilege if they get elected. The result is generally referred to as protectionism.

These jobs are by and large pretty awful and nobody would choose to do them but the need to earn a living and feel useful is strong. The potential of free trade is covered in my blog Economics 7 and the unfair part is highlighted. Free trade definitely expands possibilities but it does not distribute these gains equally. A nation-state may gain from free trade but not all parts of the nation will gain equally. Moreover, as comparative advantage is constantly evolving (often because of technology), at any given point in time, some industries will be losers. It is all very well arguing that free trade is Pareto efficient but this cuts no ice with the losers unless some of the gains come their way as compensation. Economics avoids this discussion (well it would). It is of course our old friend income and wealth distribution. The losers, not unreasonably, resist change unless they are actually going to be compensated.

The reason economics avoids this discussion (and it does) is because it is concerned that if compensation is actually required then the incentive to move in a more efficient production direction is diminished. There is an area of study that looks at compensation schemes that do not disincentivise but it has made little practical progress. The reality is that we will need to move away from money as the main metric of success and by implication materialism. The problem is a social construction and not ‘nature’ as many would argue. It may in fact not be a problem at all.

Economics has another relevant concept here known as Economic Rent. It is the difference between the price paid and the minimum price that needs to be paid to bring forth the supply. This concept applies to risk taking and entrepreneurship as much as anything else. Most entrepreneurs have no idea what they will make when the embark on a project.Most are happy if they just break even and can keep going as entrepreneurs. There is a huge utility it seems in just being an entrepreneur. In part it is much like the utility  people gain from lotteries. No one seriously expects to win big but the idea that one might is very reassuring. Entrepreneurs have the added benefit of being ‘their own boss’ and having a respected social role. They do not need to actually earn huge to become, and remain, entrepreneurs. The implication is that those entrepreneurs that do make it big earn a huge economic rent. The disincentive effect of redistribution may be much less than right-wing economists would have us believe.

There is thus a strong case to be made for retaining the free market system, and free trade, but building in some ‘new’ social constructs that redistribute the gains a bit more equitably. A social wage would be a good start. For example, what if the state paid every citizen a ‘wage’ equal to the tax-free allowance simply making themselves available for work? They continue to receive it in work whatever they earn. Income tax could then be levied on all income from work, perhaps starting a lower rate than 20% but above zero. What if the state also funded a national housing association that aimed to provide low-cost rental accommodation of a good basic standard across the country? It would take time to build up the stock but it would eventually provide homes for all and potentially allow labour mobility. Both need to be paid for out of general taxation but they would go a long way to relieving the instinct to resist change and transition from declining to developing activities. They would help grow the cake from which taxation is creamed off.

The NHS and free education system has gone a long way towards redistributing the gains from trade. However, their effect is blunted by questions of availability of jobs and housing. The council house (and home ownership) system works against labour mobility. The welfare system creates disincentives to work through high marginal tax rates for low paid jobs. Introducing a social wage (and abolishing welfare) and a national housing association eliminates both these problems and completes the basic redistribution system begun in the post-war era. It provides the basic requirements for existence to all citizens. There is almost certainly more cost involved but not necessarily that much more. The welfare budget is already huge and inefficiently administered. The economic rent that many entrepreneurs and professionals earn could be used to finance any additional cost with no long-term loss of supply of people into these activities.