Skip to content

Richard Murphy: Useful Idiot or Dangerous Fool? A Masterclass in Misunderstanding Basic Economics

January 12, 2013

Introduction

Richard Murphy describes himself as the UK’s number 1 economics blogger, but his work is so poor that as an ex-economics teacher, I would struggle to give him a grade D for his understanding of the subject. This blog will focus on “Economic Myths”, a Chapter in his book The Courageous State. In this chapter Richard explains we are ruled by “frightened politicians who are pulling the state to pieces”. Richard describes the real enemy of the peace as anyone who thinks the market is a good way to allocate resources within an economy as opposed to the (Courageous) State. Helpfully Richard points out that “detail matters because if it is wrong then the big narratives are also likely to be wrong”. So providing reasons why Richard has the detail wrong would help convince him that his big narrative is also wrong. It should be noted that Richard is funded by a variety of Trade Unions and is interested in reducing “poverty”, although it would appear that “poverty” for Richard is relative (see my previous posting on “Fairness and the Elephant in the Room”).

The World According to Murphy

Under the heading “The Fundamental Flaws in Neoliberal Thinking” Richard makes the following points about Neoliberal thinking:

1. The markets always know best. Any intervention in the process is sub-optimal.

2. All government intervention is sub-optimal (as it is not market based).

3. Tax is a bad thing as it takes choice away.

4. The statement “the world is measurably probabilistic” (Skidelsky) means: “The result is that these economists think that the future is entirely predictable.”

5. “That human beings when engaging in the market place are omniscient – they can clairvoyantly foretell everything that might happen and how likely it is to occur and when”.

Richard then tries to explain why the 2008 financial crisis took place under the heading “Putting all this in context, or why we’re in a mess right now”  he makes the following points:

6. “The assumptions underpinning neoclassical economics are quite absurd… they bear no relationship to reality… we know they don’t work”.

7. Alan Greenspan (ex-Chairman of the US Federal Reserve) and Lord Turner (ex Head of the FSA) admitted mistakes in regulating – they relied on neoliberal economics – a quasi religious belief which was “precisely why we had a crash”.

8. “Bankers were sure neoliberal economics was right because they were the winners”

Finally Richard provides some concluding comments:

9. Economics became difficult because it started using Maths rather than “plain English”. 

10. Richard says he has a problem with Maths when it “flatly contradicts the word we observe”.

The statement “the world is measurably probabilistic” (Skidelsky) means: “The result is that these economists think that the future is entirely predictable.”

11. Business don’t know how to maximise profits so any theory that suggests they do is flawed.

12. Business’s don’t increase sales up to the last point where a profit is made (marginal cost theory) – as this doesn’t take into account overheads, so he says “I kid you not: the whole edifice of neoliberal economics and the mantra so often repeated that business is more efficient than government is made on this type of logic.”

13. The post war period was really successful in the UK, economic policy was largely determined by the government and the abandonment of government intervention and control led to our terminal decline into market based solutions.

Why RIchard has gone wrong

The world is complex. One of the ways we seek to understand it is to simplify things in order to understand them. Economics students learn that a “model” is a tool for understanding how relationships work. Models are a guide. So for example, students are taught that when things get cheaper (prices falling) usually more people will buy them (demand will increase). Its not always true, but generally this sort of understanding works well enough to understand the relationship between prices and demand. If one were to find a situation where a price increase led to an increase in demand, this wouldn’t invalidate the general principle that generally falling prices lead to increasing demand. One good example of this would be goods that are desirable because they are expensive (i.e. high value luxury goods that are prestigious because few people can afford them).  Richard, sadly has missed the point of modelling and believes that because he has found a situation in which the market has “failed”, firstly markets are bad at allocating resources and secondly the government would is much better. It is difficult to see how the second thing follows from the first in an ex-Soviet, ex-Eastern Bloc world, but there it is. The following is a short lesson on how the world really works and why we need to be careful of fools like Richard…

Why Markets Work Best and What Neo-Liberals Really Think

There are two reasons why markets are better at allocating resources (i.e. deciding who gets what, when, how, and for how much) This does not mean that neo-liberals really think that markets are the only solution or that they always work best. The two reasons are known as “consumer sovereignty” and “productive efficiency”. I will de-jargonise. 

Consumer sovereignty simply means that markets are best at working out what people want. They do this because if the market produces something that people don’t want, they won’t buy it. If the market produces something that people do want, then producers will know this (because people will buy it) and make more of it. So we end up with produces making stuff that people want.

The second thing that markets do well is something known as “productive efficiency” – this means that producers (firms, companies etc)who make things are in competition with each other to supply the things that we want. The producers who make better stuff at cheaper prices are the ones who will survive, the ones that make expensive poorer quality stuff will go bankrupt. A good example of this might be the Betamax/ VHS video competition or the development of the ipod versus the CD market. So we end up with the best stuff at the lowest prices.

In summary, the “market” will supply consumers with the stuff that they want at the best prices. Simple really – not offensive and rather intuitive. So, what goes wrong…

Sometimes the Market Fails

Very few pro-market thinkers (including the poster boys of libertarianism such as Friedman and Nozick) believe that the market is the only solution to how an economy ought to be organised. Richard gets confused on this point and effectively sets up a row with the “right” that no-one on the right is attempting to argue with. 

The market is likely to fail in a number of circumstances such as failing to take into account third party costs (e.g. pollution, environmental damage). The market is also likely to under produce certain goods such as state education, health, roads, police, army and the courts. The market is likely to over produce undesirable goods such as drugs and prostitution.

Good economics recognises the limitations of the model being proposed. Clearly the market doesn’t have the solution in all cases and for situations such as market failure – the government is of course the most appropriate mechanism for determining allocation. 

The government, however, is not the best a working out what consumers want and is most certainly not the best at working out how to produce it. One only has to think of the food queues of the old Soviet Union to work out the implications of allowing politicians to work out what we as a nation want. 

Murphy and Other Fools

The reason people like Murphy are dangerous is because they do actually have influence. They don’t realise they are wrong. They don’t really understand the world and they get easily confused. In order to highlight the extend of his failure to understand the world I would like to focus on three statements taken from above:

4. The statement “the world is measurably probabilistic” (Skidelsky) means: “The result is that these economists think that the future is entirely predictable.”

Is something entirely predictable if it is measurably probabilistic? Of course it isn’t nor does any sensible economist think that is the case. Does the world have to deal with probability when making economic decisions – of course they do but that doesn’t mean to say they think it is entirely predictable. A good example of the use of probability in business is the world of insurance. In order to work out what your premium ought to be for your car, there will be a team of actuaries trying to work out the appropriate chances of an incident and the costs of that incident. Do they think the future is entirely predictable? No, they don’t – would they describe the world as measurably probabilistic – yes they would. Murphy’s alternative to using probability theory isn’t set out in his Chapter on Economic Myths, although presumably he would rely on government for working out what is likely to happen in the future – after all – who needs actuarial sciences when we have John Prescott, Harriet Harman, Ed Balls, Gordon Brown and Liam Byrne – they all did a lovely job predicting what was going to happen.

10. Richard says he has a problem with Maths when it “flatly contradicts the word we observe”.

This statement is interesting as it has overtones of the pre-Enlightenment movement. If the maths contradicts the world we observe, either we have the maths wrong or our observations will be wrong. The maths itself is never wrong. In fact, most scientific discoveries, particularly in astro and theoretical physics leap forward when the maths indicate our understanding of the world is incorrect. Think of Einsteins Theory of Relativity disproving Newton (the maths did the work here),  think of how Galileo worked out how the Earth wasn’t the centre of the Universe. In short, Maths scares people and it might be difficult but it can’t be “wrong” – people can be wrong. The use of maths in economics, finance and commerce has been so useful and globally significant that an attack on its use could only be flagged up by the sort of fool who lacks an appreciation of its power.

11. Business don’t know how to maximise profits so any theory that suggests they do is flawed.

This last statement typifies Murphy’s stupidity, beautifully. Economic theory doesn’t state that businesses will maximise profits. Economic theory indicates that businesses will try and maximise profits. The difference ought not to be subtle, but it clearly is too much for Murphy. Every business decision is fraught with many variables, many of those variables will be uncertain. Mistakes, errors, greed, miscalculations are all part of the economic backdrop in the world we live. No-one has access to the future and no-one but Murphy is suggesting we do. The only thing market theory suggests is that rational people will at least try and maximise utility (i.e. the best outcome in accordance with however that is defined for them – and for business that is typically profit) in all situations.

Conclusions

My hope this blog clears some things up in respect to libertarian economic thinking. One has to beware anyone who thinks that government is going to be better than the market at determining what it is we want. After all, we are the market and very few who think about it want their needs supplied and determined by politicians and bureaucrats. 

Advertisements

From → Uncategorized

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: