6 April 2010

Services Beyond Price

Something is still rankling with me from the Chancellors debate. It is the way that the view commonly held amongst economists that wealth is only created in the private sector is taken as an unquestioned assumption by all three of the suited men who we are supposed to choose between come the general election. This is the same assumption that leads to the captains of industry trying to resist the increase in NI contributions. They create the wealth; they create the jobs. We must not hold them back from this valiant endeavour.

Let's just spend a little while testing this assumption of modern political life. The easiest way to create money, which seems to be effortlessly elided into wealth by most spokespeople on economics, is by engaging in financial fiddles. As Adair Turner himself pointed out, very little of this creates anything of social worth.

Digging deeper we may question the value of much of what is done in the private sector. At the risk of creating an equally distorted picture from the other end of the lens, I could characterise much of what passes for work in the private sector as using a lot of energy to design or produce an item of dubious social value, or persuading somebody else to buy the same.

The justification for arguing that the private sector creates the wealth that the public sector then squanders arises from one of the principles taught to students of introductory economics courses: that taxation is a deadweight loss. In neoclassical diagrams, tax is simply extracted from the economy, as though by a greedy and thoughtless government. Its reinvestment via in valuable services via public sector wages is not drawn, and hence not measured or valued.

In reality, the position is the reverse of what is assumed. It is because what is done in the public sector - whether healing the sick or educating the young - is so valuable to a civilised human society that we don't leave it to the vagaries of market distribution. We decide that everyone should benefit and we share the cost. That is what the public sector means and that is why what is provided by that sector is always going to be more - not less - valuable than what is provided by the private sector, regardless of the amount of money it does or does not generate.

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