Facing Economic Reality – and its retribution

Economic Perspectives 158 – December 2024

The Department for Work & Pensions has recently disclosed that just before Britain’s July election six million adults were on out-of-work benefits just before Britain’s July election – the highest in 30 years. The recent tax rises that, both directly and indirectly, will impact on employment levels can only make matters worse. As I pointed out in my last essay, the painful truth is that taxes levied on employing people are guaranteed to diminish employment opportunities and discourage activities such as starting new businesses, implementing innovation – indeed anything that involves risk-taking. The plan for growth trumpeted by Keir Starmer and his Chancellor Rachel Reeves before the election has been judged a failure by the Office for Budget Responsibility (OBR). All this is part-and-parcel of the socialist delusion and was utterly predictable the moment he and Reeves insulted voters’ intelligence by uttering the word “growth” while raising employers’ national insurance.

The only hope of meeting election promises, such as building 200,000 homes a year, is to induce four of the six million currently paid not to work to abandon the benefit culture, return to work and thereby regain the respect of the society in which they live. Indeed, the study “Pathways to Work” published by Barnsley Council in July found that 4.5 million (seven in 10) who are out of work due to illness expressed a strong wish to return to work, but had not been contacted by anyone in the Department of Employment. Anyone wishing to get back to work hardly needs the stimulus of a letter from a civil servant (paid out of taxes) – a preferable route would simply be to reduce taxes on employment, the precise opposite of what government is doing right now.

But the present regime is incapable of facing up to the ghosts of its own dogma, being in the grip of the redistribution mania exemplified by inheritance tax (IHT). At least the Tory bunch included a number of MPs and Ministers who, having seen and understood the iniquity of IHT, were agitating to ditch it once and for all. They recognised how far IHT strayed from Adam Smith’s criteria that taxes should be “efficient, certain, convenient and fair”. IHT is, by contrast, an attack on the principle of private property itself, confiscating what you already own, having purchased it from earnings that have already been taxed, and you should be entitled to pass it on to heirs without it being taxed yet again.

The economic reality of protectionism

A nation’s wealth is created by its businesses – which includes their originators, innovators, employees and investors who risked their savings when sharing the vision of creating a product that others are prepared to pay for, yielding a surplus. This process has a purpose – the “profit motive” - a purpose readily decried in these twisted times. The purpose is not “to create jobs” – yet another fashionable confusion of an objective with the means of achieving it.

A “successful” product, one that (by definition) people wish to purchase, knows no borders; it will have customers in many different countries whose rulers are not so foolish as to erect trading barriers in the form of tariffs, customs and excise duties, and subsidies.

Yes, a subsidy is also a trade barrier, since it is a payment to domestic producers to protect them from the competition of cheaper goods produced abroad – goods that the local citizenry might otherwise have purchased. When it comes to protectionist policies, ask yourself: Who bears their cost? No, not the foreign competitors who can sell their products anywhere; the world is their market. The burden falls on the citizens whose taxes pay for those pernicious subsidies - the very people that protectionists purport to protect!

And tariffs? They may indeed protect a home industry by making imported goods more expensive – again, the losers are our own citizens locked out of markets for goods that, but for the tariff, they would have bought, all in order to keep foreign goods out, at the same time discouraging our own producers from improving their own productivity. As we see, once again our own citizens are the losers. Indeed, we can formulate a simple law: protectionist policies always cause most harm to the citizens of the country whose government imposes them.

Revisiting the basics

In a functioning economy the natural law of demand and supply operates to bring customers and producers together to trade at a price that satisfies both parties. But note that the “demand” side of the equation already exists because there is always something that we want or need; it is implicit in the human condition. While we may survive on rainwater and berries, that is not a lasting satisfaction because more than that is needed to satisfy demand in its economic sense.

“Supply”, by contrast, is different because it requires work – indeed, it requires the presence of all factors of production (land, labour and capital, plus the entrepreneurial skills to bring them together in functional operation). Consequently we can justly state that production must precede consumption. Our ability to satisfy our demands must be preceded by our work. By choosing to produce a certain good, we indirectly create the demand for the goods we intend to buy with the income we earn from the sale of our produce.

Say’s Law (after Jean-Baptists Say, 1767-1835) describes the unfolding market process: “All purchasers must first be producers, as only production can generate the power to purchase.” Or, “supply creates its own demand”. Say was a French economist who argued in favour of competition, free trade and lifting restraints on business.

Similar principles apply to international trade: if we improve our lives by importing goods we need or desire from overseas, we pay for them with our exports. What is labelled a “balance-of-payments-deficit” is simply the net investment of our overseas trading partners, and vice versa if it’s a surplus.

Say’s ‘law of markets’ directly contradicts the writings of J. M. Keynes, the English economist who insisted that the way to bring a sluggish economy to life is to stimulate “aggregate demand”. Although very little thought is needed to expose the absurdity of Keynes’ proposition, successive governments continue to treat it as holy writ. After all, the simplest way to stimulate demand (and also to win votes!) is to dispense unlimited purchasing power. Hence the favoured practice of central banks everywhere to print money out of thin air, or President Biden’s policy of mailing Fed cheques worth thousands of dollars directly to poorer citizens. But the fools running the farce don’t see how this lusting-for-power charade must end – the ensuing inflation is the snake that eats its own tail. Where’s that power now?

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EMILE WOOLF - DECEMBER 2024