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How the ghosts of economists past come back to haunt me

Economy Watch

By Dr Esmond Birnie

What's your favourite Christmas movie? For many it will be one of the versions of A Christmas Carol such as The Muppets Christmas Carol. Consider what Scrooge says about the poor in Victorian England when told they might refuse to enter the grim workhouses: "If they would rather die they had better do it, and decrease the surplus population."

Charles Dickens was taking aim at what he perceived as the dominant view in the economic policy of his day. A view which said that if the government or others tried to increase the income of the poor, this would simply provoke a growth in the population of the poor which would literally eat away any gains to living standards. This gloomy prospect of a surplus population is usually attributed to the thinking of the early 1800s economist and Anglican clergyman Thomas Malthus.

Malthus seems to have been a rather unattractive personality but his views on poverty were rather more subtle than those of Scrooge. Nor did he deserve the abuse he would later receive from the pen of Karl Marx. That said, a more hopeful message - perhaps even one more compatible with Christmas - came from Malthus' predecessor, the Scottish economist Adam Smith, who recognised that human beings could be inventive and wealth creators rather than surplus population.

For Smith this would be especially true if we took advantage of trade following specialisation (what Smith called, "division of labour").

Importantly, given some current debates, Smith thought it could be the common people who would gain most from market-led growth albeit that result would be somewhat dependent on sensible intervention by government, the rule of law and ethical behaviour.

The great danger of Malthus's type of economics is that it can lead to passivity; great social problems are treated as inevitable, as though we can do nothing about them.

The great danger of some of the economics which is sold to governments today, and often it is literally sold, is the opposite assumption.

That is the assumption that governments are all-knowing and all-powerful and therefore can solve all ills. The truth lies in between these two positions.

So, importantly, I want to argue that economics does not have to be Scrooge-like. That said, at least one academic's economics paper claims to show how Christmas involves significant "deadweight losses" (Joel Waldfogel, 1993, American Economic Review).

Christmas obviously produces a significant level of giving and receiving of gifts. The problem with this, from a rather severe consumer preference point of view, is that sometimes we do not get the present we would most like to get! In most cases each individual will have a better knowledge of what they'd like than the gift buyer.

Based on surveys of Yale University students, Waldfogel concluded that gift recipients valued presents at only 70-90% of the price paid. Waldfogel estimated the consequent loss of economic efficiency was about 10 to 30% of that associated with the working of the income tax system.

Obviously, no value is being placed here on the generosity usually associated with gift giving. Interestingly, here again, there is a contrast with Adam Smith who argued we can and should feel benevolence to our fellow human beings.

The mention of tax brings me to my final point.

The first Christmas was preceded by an attempt to reduce tax avoidance; Caesar Augustus' tax registration drive; as recorded in Luke 2:1. Interestingly, many of the economic debates of today were paralleled during the Roman empire. How, for example, could a large welfare state and military establishment be paid for without overburdening the economy? There is even a view that the empire collapsed when a large number of people began to prefer rule by barbarians to Rome's tax system.

Interestingly, according to some historians, rates of taxation under Rome were considerably lower than those experienced in today's economies; customs taxes of 2.5% to 12%, an excise of less than 1% and an estates duty of 5%. Care must be taken, of course, in making comparisons across two millennia. Average living standards in around AD One may not have been much higher than subsistence standards. The economic historian Angus Maddison heroically estimated that today's average level of income per head in the UK is about 60 times higher than it was 2000 years ago. If just about managing means having barely enough to eat, any tax burden is very painful.

In conclusion, and in line with the reformed and converted Scrooge, as sincerely as any economist can, I wish you and yours a Merry Christmas.

In next week's Economy Watch, we hear from Neil Gibson of the UU economic policy centre

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