Friday, 31 July 2015

Subsistence economies and self-sufficiency

Many of the protectionist arguments against capitalism rely on the idea of self-sufficiency and independence as a safeguard for unforeseen events. This idea wrongly stems from confusing prudence with self-sufficiency and risk mitigation with protectionism.

It is normal that after being fustigated by so many natural and human-made calamities people seek safety in self-reliance. In the absence of markets for risk protection, subsistence economies may be seen as providing such safety. Yet, such safety is achieved at an enormous cost in terms of living standards.

I shall illustrate this through the personal experience of my ancestors. Before the 1930s, most of my ancestors lived for centuries in a remote village by cultivating small plots of land. They consumed almost all they produced except for the occasional goat that they would sell to buy clothing. If the wolves decimated part of the herd or the weather ruined the harvest they would have a rough year surviving on potatoes and without replacing their rags.

It was a tough life but they were self-sufficient and independent without a need to rely on others. The same happened with the other villagers, with the exception of the only specialized inhabitant (a carpenter) who had to walk to the neighboring villages to offer his services.

My family fortune changed only when, at the age of fifteen, my father and a friend migrated to Lisbon. He survived doing multiple jobs and later returned home to work in a textile mill in a neighboring village, where he also found jobs for his sister and two of his bothers. As a result I and my five sisters had the opportunity to study and to escape the self-sufficiency trap.

The problem with small self-sufficient communities is not that they do not know about division of labor. Indeed, for those with a romanticized view of such communities, my village had a well-developed communal way of herding, a communal bakery and a kind of labor exchange.

However, isolation and small scale prevented them from participating in trade with outsiders and achieve the necessary scale and specialization needed for capital accumulation.

However, the subsequent construction of roads and communication services did break isolation but it did not stop the village decline, why?

Because the lack of transport infrastructures is not the only obstacle to the development of remote areas. Unless they are a tourist hive or their inhabitants are writers or similar professionals able to work from home for a greater market, they will not be able to combine the profit motive with the joint ownership and limited liability needed to undertake risky ventures which are indispensable for the success of capitalism.

So for many millions trapped in small communities, like my ancestors were, the simplest way out is migration.

Yet, there are many still arguing for self-sufficiency or independence in large communities. They typically invoke the lack of scale and the need to safeguard the supply of goods and services considered essential, with an elastic definition that ranges from food, social services, environment and energy. Such calls for self-sufficiency contradict Ricardo’s law on comparative advantage, probably the only consensual law in economics formulated in 1817.

And, this law is not being ignored in non-capitalist societies alone, but also in Western countries at the core of capitalism. For instance, until recently the USA had a law banning the export of crude introduced in 1975 as a retaliation against the Arab oil embargo of 1973. Yet the ban was never lifted due to opposition from oil refineries and environmental groups. Only now, after a sharp increase in oil supply brought about by the new fracking technology and geopolitical considerations, did the refiners opposition eased and there is some hope for lifting the ban.

Obviously, whether to export crude or refined products should be a business decision not a political one. However, once a country tolerates special interest groups based on protectionism it becomes almost impossible to eradicate them. Thus the importance of free trade to control rent-seeking behaviour that undermines capitalism.

Tuesday, 28 July 2015

Production, income and welfare under capitalism

When we take a detached long term look at human history, it is impossible not to be impressed by the global economic growth experienced since the rise of capitalism in the early XIX century. This was achieved despite two destructive world wars and the subjugation of half of the world population under communism throughout most of the 20th century.

In his history of economic growth Angus Maddison (2005) shows that: “Over the past millennium, world population rose 23-fold, per capita income 14-fold, and GDP more than 300-fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, with no advance in per-capita income”.

Yet, during the first eight centuries of the last millennium economic growth barely matched population growth, while life expectancy only rose from 24 to 36 years. However, from 1820 onwards, per-capita income rose twenty-four times as fast as in 1000–1820, population grew six times as fast and life expectancy increased to seventy-nine years in the West and sixty-four in the rest of the world.

Nevertheless, this was not an even process and it is interesting to recall the various phases identified by Maddison as:
1. The “golden age,” 1950–73, when world per capita income grew nearly 3 percent a year, by far the best performance.
2. Our age, from 1973 onwards (henceforth characterized as the neo-liberal order), is the second best.
3. The old “liberal order” (1870–1913) was third best, only marginally slower in terms of per capita income growth.
4. In 1913–50, growth was well below potential because of two world wars and the intervening collapse of world trade, capital markets, and migration.
5. The slowest growth was registered in the initial phase of capitalist development (1820–70), when significant growth momentum was largely confined to European countries, Western offshoots, and Latin America.

This historically unprecedented growth, the result of a combination of science and capitalism, was more pronounced in the West during the post-world war II period. However, since the collapse of communism we have more examples to show the power of capitalism as a production machine. In particular, when we compare the recent experiences of China, Russia and India, we note that Russia and India are lagging significantly largely because they have been more reluctant to endorse capitalism.

Nevertheless, the fact that large populations still live in poverty raises the question of whether they have been left behind by capitalism. This is not a failure of capitalism. On the contrary, it was often the result of misguided pursuits of alternative systems and the slow take-off under capitalism. Indeed, given the recent moves in Africa towards capitalism, one expects that this continent will progressively begin to recover and will accelerate its growth in the next decades.

Likewise, for those who expected the liberation of half the humankind from communism and the recent surge in technological developments to automatically create another era of unprecedented growth, the early history of capitalism from 1820 to 1870 is an important reminder that take-off is usually a slow process.

The transition to capitalism from subsistence, feudal or communist economic systems faces many resistances and the economic cycles of capitalism may slow down such transition. Both need to be assessed separately, as well as the risks of political turmoil. Otherwise, we risk letting such setbacks obscure the remarkable efficiency of capitalism to eradicate poverty and promote economic growth.

Wednesday, 13 May 2015

O ranking de Portugal na Europa: PIB ou PNB?

O Finantial Times de hoje
(http://blogs.ft.com/ftdata/2015/05/13/ireland-is-the-wealthiest-economy-in-europe-or-not/?ftcamp=published_links%2Frss%2Fhome_europe%2Ffeed%2F%2Fproduct )
traz um artigo interessante sobre a discrepância das duas medidas de riqueza na Irlanda, onde essa diferença já atinge quase 20% e tem vindo a aumentar enquanto nos restantes países oscila menos de 5%.

As razões para essa discrepância são bem conhecidas e refletem o peso do investimento estrangeiro e o nível da carga fiscal no país. Quanto mais elevado for o primeiro e mais baixo for o segundo maior será o nível de lucros reportados no país de acolhimento e, consequentemente, maior será a discrepância entre PIB (Produto Interno Bruto) e PNB (Produto Nacional Bruto).

É interessante notar que entre os países do Euro, excluindo o Luxemburgo, a Irlanda aparece em primeiro lugar no ranking do PIB per capita, enquanto Portugal aparece em antepenúltimo (15º lugar). Já no ranking baseado no PNB per capita, a Irlanda cai para o sexto lugar (com um valor próximo da média) enquanto Portugal sobe para 12º lugar (com um valor cerca de metade da média).

Qual será a forma mais rápida de Portugal imitar a Irlanda – atrair mais investimento estrangeiro, baixar a tributação ou ambas? Não parece difícil de perceber que reduzir a tributação dos lucros para portugueses e estrangeiros é pré-requisito e a melhor de conseguir ambas.

Tuesday, 5 May 2015

A nation of shopkeepers?

A reasonable concern about an economic system like capitalism that relies on a large number of (small) enterprises, is that it might degenerate into a society of small-minded people. To paraphrase the disdainful reference of Napoleon and French aristocracy to British merchants – the risk of becoming a nation of shopkeepers.

It is a fact that most of the infrastructure and cultural heritage of humankind was not decided on economic grounds, whether we think about the Pyramids or Mona Lisa. Indeed, some of the major feats of humanity require a level of capital accumulation that is not accessible to individual capitalists and have therefore been often promoted by political or military rulers and religious leaders regardless of any economic calculation.

In fact, Adam Smith had already tackled this question in relation to the British Empire, when he said that: “To found a great empire for the sole purpose of raising up a people of customers, may at first sight, appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.”

Indeed, it is possible that during their short existence, capitalists have already procured more palaces and works of art than the nobility that preceded them. To some they may seem less refined or nouveau rich but, given the nobility’s preference for horses and jewelry, capitalists certainly pushed the human heritage well beyond past forms of wealth accumulation.

The question of whether capitalism promotes conspicuous consumption at the expense of the poor and the arts is not specific to capitalism. Conspicuous consumption is a characteristic of all wealthy classes and new riches, whether obtained through inheritance, lottery or business.

On this matter, one relevant issue is to decide whether corporations should be patrons of the arts and similar aggrandizement or philanthropic endeavors, or if such role and its consequences should be left exclusively to their shareholders.

This decision is often influenced by the tax system which may favor one of the options. Likewise, supporters of managerial capitalism may advocate that company directors are more profligate with donations to the higher arts than individual shareholders would be.

Nevertheless, it is questionable whether governments and directors should impose their own preferences on shareholders. Indeed the shareholders tastes may be very diversified.

For instance, small shareholders are more likely to sponsor local sport teams and artists while the wealthy and corporate directors will sponsor national events and the higher arts. Likewise, the wealthy may be more conspicuous or social minded. For example, Bill Gates has chosen to spend his fortune to fight diseases while one of his co-founders of Microsoft has chosen to spend his money on a super-yacht. These are personal choices and have nothing to do with capitalism.

The role of capitalism is to produce wealth, and the more it produces, the greater the wealth at the disposal of governments, capitalists and foundations to procure the items that will constitute the heritage of future generations.

In this regard, a system of dispersed small enterprises typical of market capitalism is the most efficient to create wealth. So, after all, we may paraphrase Adam Smith and conclude that “a higher aim may be altogether unfit for a nation of small businesses; but extremely fit for a nation whose government is influenced by small business.”

Thursday, 30 April 2015

Capitalist or consumer sovereignty

As it is in the nature of humans to protect acquired advantages by all possible means, we cannot expect leading capitalists to always uphold free competition and other fundamental principles of capitalism.

On the contrary, consumers do not face a similar conflict of interest. If they already have a good product or service they still look out to replace it with another even better. This has led some to view capitalism primarily as a system of consumer sovereignty, usually defined as “the power of consumers to determine what goods and services are produced”.

For instance, Mises argued that capitalists and entrepreneurs “are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain's orders. The captain is the consumer. (Bureaucracy, "Profit Management," p. 226 )

On the contrary, the opponents of capitalism see it as a threat to consumer sovereignty by claiming that for-profit firms will manipulate dispersed and unorganized consumers in order to maximize their profits. These critics substitute or supplement the old Marxist class struggle between labor and capital with a new divide between corporations and consumers.

The relative power of consumers and businesses is an empirical matter, but there is no doubt that one is limited by the other and vice versa. Nevertheless, as we move towards a system of market capitalism we know that we are getting closer to the libertarian ideal of consumer sovereignty. On the contrary, if we move towards managerial or state capitalism consumer sovereignty becomes more and more remote.

Two other important issues concern the role of capitalism in innovation and health safety in relation to new products and processes. In some areas, like fundamental research, it is obvious that consumers' demand cannot be at the helm. Here, the other two sectors – voluntary and state – are better placed to establish mundane or far-fetched objectives, even when they are contracted to the private sector (e.g. space science).

Regardless of whether such programs are promoted by special interest groups (namely the suppliers and producers of such items) or by public interest, there is a need for some sort of arrangement between consumers and capitalists.

So, overall, capitalism is better described as a system of shared consumer sovereignty. A system where the long term self-interests of capitalists work as an incentive to invest in businesses with strong consumer awareness.

The relative preference of consumers for material and spiritual wants can be influenced by the business, voluntary or the state sector, but in no circumstances should any of the three sectors have the power to unduly coerce individual consumer decisions. That is why the freedom of contract and the rule of law are two important principles to protect the capitalist system as a system of shared consumer sovereignty.

Tuesday, 28 April 2015

Wage devaluation: Why Brussels insists on this mistake

The Brussels consensus keeps insisting that to solve the external adjustment problems in the peripheral countries they need a major wage devaluation. They ignore both theory and experience showing that wage and currency devaluations are substantially different and that even the later has limited success in balance of payments adjustment. Moreover, they also ignore the macroeconomic debate and experience on money illusion concerning the differences between real and nominal wage declines.

They persist in their recommendation despite a failure of the current adjustment programmes to show the benefits of such policy. And, unfortunately, some of the countries are eager to accept them unquestionably. For instance, some supporters of the Irish Fine Gael – Labour coalition are calling for a €2 an hour cut (25%) in the minimum wage fixed since 2007 and which is paid to less than 5% of the labour force. Slovenia, has in place measures aimed at cutting the public sector wage bill. Likewise, in Portugal both the government and the main opposition party are disputing the next general election with a proposal to cut the taxes on wages (the so-called TSU).

Regardless of whether nominal wage costs are reduced through cuts in the minimum wage, public servants pay cuts or labour tax reductions, the relevant assessment is how wage cuts impact on take home pay and employer total labour costs, as well as in the government budget.

The following charts drawn from OECD data illustrate some of the misconceptions about nominal wages.



The chart above depicts the evolution of manufacturing hourly wages in Germany and the peripheral countries. It shows that, as expected, they have risen in all countries, except in Portugal.

Now, with rising wages, the so-called labour unit costs (the measure often used to assess competitiveness) will also rise unless productivity gains outpace such rise. The following chart shows that, except in Germany for the period before the 2008 crisis, none of the countries achieved the necessary rise in productivity.



The case of Portugal is especially noteworthy. Since it did not experience a rise in hourly wages, the rise in unit labour costs means that it had a serious decline in productivity. However, the link between hourly wages and unit labour costs does not work only through productivity. Two other factors – employment and nominal wages - also play an important role. Let me illustrate it through a numerical example for Germany and Portugal.

Imagine that the high wage sectors employ 30% and 40% in Portugal and Germany, respectively. Moreover, assume that wages and productivity are 50% higher in the high wage sectors and two times higher in Germany than in Portugal, so that both countries would have the same unit labour costs. What would happen under three different scenarios?

First, imagine that nothing changed in Portugal but in Germany wages continued to rise at 1% and 2% in the low and high wage sectors, respectively. In this case the unit labour costs would rise 1.5% in Germany but remained constant in Portugal.

Next consider the case where additionally 10% of the labour force in the Portuguese low wage sector migrates to Germany increasing the low wage labour market there by 3% without affecting the sector’s average wage and productivity. In this case unit labour costs would remain constant in Portugal and rise slightly less in Germany (1.49% against the 1.50% of the first scenario).

Finally, ponder the case where nominal wages and productivity are cut by 5% in the Portuguese high wage sector. In this case the result would be exactly the same as in scenario two. Only if productivity had not declined as much as wages would we have a reduction in unit labour costs. For instance, if productivity had declined by just half of the nominal wage cut the unit labour costs would be reduced by 1.05% continuing to assume that the labour force in the low wage sector had been reduced or just 0.99% if there was no change in its labour force.

This relationship between employment, wages and productivity depends on how much workers take home out of their salary and whether retained earnings are used to pay taxes or fund pensions. The following chart highlights once more the striking difference between Portugal and Germany in the aftermath of the 2008 crisis.



It can be observed that, on average, the Portuguese took home almost less than 10 percentage points while the Germans took home more than before (1 percentage point). Such a drastic reduction had a dramatic effect on nominal contracts (in particular mortgage loans) and on private consumption. If continued, this could degenerate in a vicious circle of reduced productivity, higher unemployment, higher public debt, higher taxes, lower take home pay and lower productivity, without achieving any significant reductions in relative unit labour costs.

Now, contrast this policy with a policy without nominal wage cuts. Using the numerical example given above and assuming that productivity declined by merely half a percentage, then the rise of unit labour costs would be barely noticeable (0.2%) and the negative impact on unemployment and fiscal consolidation would be much smaller.

In conclusion, the small gains in relative labour unit costs achieved through wage devaluation are too small to justify the large costs in terms of employment and fiscal consolidation.

Friday, 24 April 2015

Catholics against Soares dos Santos

Left-wing politicians are not alone in disliking capitalism for liberating the poor from their franchise on gloom and doom. Some religious leaders also dislike capitalism because they fear that it alienates the poor from their charities.

The charities’ attitude against capitalism is often based on an apparently solid ground. Namely, on the immorality of wealth and the charge that profit-seeking merchants abuse their power of influence to promote inappropriate patterns of consumption among the poor and vulnerable, be it booze, junk food or tobacco.

An illustrative episode on this rash analysis took place recently in Portugal, when a group of Catholics signed a manifest against the award by the Catholic University of the prize “Faith and Freedom” to a well-known capitalist - Soares dos Santos. We will use it to illustrate the issue.

Soares dos Santos is an outspoken and successful Portuguese retailer who recently came under strong criticism for causing a public run into his stores by offering a 50% rebate on all purchases made on labor day (the 1st of May). The Trade Unions were outraged when workers went shopping rather than attend their rallies.

The Union’s reaction was understandable, but the reaction of the protesting Catholics was centered on the grounds that: “he had amassed his colossal personal fortune, through capital gains and accumulation, labor exploitation, and tax dodging” in an economy that “kills, through poverty, massive unemployment, increasing inequality and serious environmental risks”.

This was clearly a mashup between Marxism and the Gospels maxim that: “blessed are the poor in spirit, for theirs is the kingdom of heaven” and that “it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God”.

In fact, Soares dos Santos business success resulted from a strategy of deploying mid-sized supermarkets offering a choice, price and quality somewhere between the local shop and the large supermarket and had nothing to do with business malpractices. So, were his critics simply committing the deadly sin of envy or something else?

They were adopting a puritanical ideal that views wealth as an obstacle or offense to the Christian faith, the ideals of corporatism or the theology of liberation. Whatever the religious movement it is clear that the Church has always been reluctant to accept the liberating role of capitalism. Good Christians practice charity as a way of personal redemption and favor before God and not to eradicate poverty.

To some extent religious charities face the same problem as governmental agencies. If they eradicated poverty they would end up without a job. So, maybe unconsciously, they are more prone to accept economic systems that cause misery (like socialism) than to endorse the most successful system to reduce poverty (capitalism).

For instance, Pope Francis in his Apostolic Exhortation recovered the old criticism of capitalism that “Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world”. Then he wrote that: “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

Others, like Theos, a London-based religious think-tank, took a more friendly stance in their document: "Just Money: How Catholic Social Teaching can Redeem Capitalism".

Although advocates of capitalism do not see a need for redemption, one should consider whether the policies advocated to correct the excesses of market fundamentalism are market perfecting or another remake of social democratic policies for a managed capitalism.

In this regard, the document is vague and mixed. It takes its inspiration from the 1892 Rerum Novarum encyclical, which inspired corporatism, as well as on John Paul’s Centesimus Annus of 1991 and the 2013 exhortation Evangelii Gaudium of Pope Francis, which are critical of capitalism.

The proposed Blueprint for a Better Business based on Catholic Social Teaching offered the following five principles for an ethically based business: 1) a good business is honest and fair with customers and suppliers; 2) good business is a good citizen, in that it considers each person affected by its decisions; 3) has a purpose which delivers long-term sustainable performance, operates true to a purpose that serves society, respects the dignity of people; 4) has to be a responsible and responsive employer; and 5) is a guardian for future generations, because it honours its duty to protect the natural world and conserve finite resources, contributes knowledge and experience to promote better regulation to the benefit of society as a whole.

However, with the possible exception of principle five on externalities, ever since Adam Smith’s Wealth of Nations, all these principles have been shown to be better achieved through market competition rather than moral preaching.

To conclude, the Catholic Church has a legitimate part in calling for a greater role of the voluntary sector in capitalist economies, but these platitudes on business ethics add nothing to market perfecting policies and open a wide door for all kinds of wishful thinking aimed at diluting the fundamental principles of capitalism. Therefore, the Church is doing a disservice to its members by confusing reasonable concerns about the limitations of capitalism with a wide system failure.

Wednesday, 22 April 2015

The left bias against McDonald's

Given the ethics of capitalism and its closeness to a meritocracy it is a mystery why so many dislike it. Of course, the ruling classes in the alternative systems do not like having their position in the established social hierarchy challenged by the new capitalists. Nevertheless, since feudalism, corporatism and communism (partly) have disappeared some time ago it is surprising that so many still continue to dislike capitalism.

The reasons may be analyzed through different angles – social class, political divide, ideology and history. For instance, the left-wing opposition to capitalism can be illustrated through the frequent attacks on McDonald’s restaurants by anti-capitalists protestors.

Given that left wing ideologues are often driven by envy and a false-hearted love for the poor and aversion of the rich, it seems paradoxical that they choose to vent their ire on a restaurant that serves well the poor rather than on a luxury stores like Prada or Bugatti which serve the rich.

McDonald’s is a successful American company in the fast food industry, which now owns 30,000 franchised branches in prime sites in over 120 countries. Its success is mostly due to its ability to offer quality fast food at affordable prices in clean restaurants to a diversified, mostly young, clientele. So, it may be heralded as the symbol of the efficiency of capitalism.

Yet many in the left see McDonald’s as American, authoritarian, abusive of animals, exploitative of workers, unhealthy, unecological, and ruthlessly profiteering. Let me examine some of these claims.

The anti-Americanism endorsed by the left is largely a result of the cold war. And, because many in the left were on the communist side, they needed an American symbol to attack beyond the USA flag. Now, after the collapse of communism, its former supporters sought to rationalize their past ideology by turning to protectionism and anti-globalization. Again, McDonald’s, with its restaurants in every major city of the world, provided a visible symbol of globalization.

In the same way, the left sought new constituencies. For instance, by claiming that McDonald’s was authoritarian as it forced its franchisees to stick to the company brand. Afterwards, since they could not contest McDonald’s superior sanitary levels in the fast food industry, they turned to animal lovers by claiming that it was abusive of animals.

In fact they omit the fact that McDonald’s does not run any farms. However, because they are the main purchasers of some farm produce they want McDonald’s (not the governments) to force its suppliers to follow the demands of the animal rights groups.

The same tactic is used by environmental movements with arguments that are even more ludicrous. For instance, some blame McDonald’s rigorous demand for consistent ingredients for the existence of large chemical conglomerates like Monsanto or Cargill producing soil-damaging fertilizers.

The charge that an irresponsible marketing used by McDonald’s promotes unhealthy diets and obesity is also common.

It is true that kids today do not follow good diets. But can the Big Macs or Chicken Nuggets be blamed for that? Obviously not. The blame lies with their families and schools which, for financial and work reasons, have progressively replaced home-cooked food with cheap frozen meals and takeaways.

Indeed, one of the reasons why McDonald’s is so popular with kids is that they consider a meal there as better than the takeaway around the corner or the fish fingers they eat at school. If anything, the McDonald’s experience shows that it is possible to offer decent meals at an affordable price.

It is not necessary to be an economist to understand that in economies run on a pro-profit basis quality will take over cheap production, since a race to the bottom inevitably condemns its players to failure in a growing economy.

So, the left’s dislike of McDonald’s is fundamentally ideological. Because it epitomizes a living proof that profit-seeking benefits the poor, they see McDonald’s as a threat to their own propaganda.

Tuesday, 14 April 2015

O salário mínimo e o desemprego

Muitos economistas, especialmente entre os de inclinação libertária, colocam uma enfâse excessiva no contributo do salário mínimo para o desemprego, especialmente entre os jovens.

No entanto, uma simples leitura dos dados em dez países da zona euro deixa muitas dúvidas sobre a importância desse impacto.

Como podemos observar na seguinte tabela onde ordenamos os países em função do valor do salário mínimo, houve evoluções muito diferentes.



Entre os países com um salário mínimo elevado, a Irlanda diminui drasticamente o seu valor, enquanto Portugal o subiu significativamente. Entre os países com salário mínimo mais baixo, também a Eslovénia e a Estónia o aumentaram significativamente, enquanto a Grécia e a Espanha o desceram moderadamente.

Entretanto, a respetiva evolução em termos de desemprego apresentada na tabela abaixo mostra-nos o seguinte:


Entre os países que começaram o milénio com salário mínimo elevado e baixo desemprego (Irlanda e Portugal) o desemprego triplicou, enquanto nos países com salário mínimo baixo a Estónia começou com um desemprego muito elevado mas reduziu-o a quase metade mas já a Eslovénia começou com um desemprego moderado mas aumentou-o em cerca de 50%. Entretanto a Espanha e a Grécia que começaram com desemprego muito elevado ainda o aumentaram para mais do dobro.

É óbvio que a evolução dispare de países como Portugal e Irlanda ou da Estónia e Eslovénia questiona qualquer relação forte entre a evolução do salário mínimo e do desemprego.

E, em relação aos países com programas de ajustamento, também é evidente que a evolução pós-2010, foi fundamentalmente determinada pelas consequências da crise de 2008-2009, ampliadas pelos respetivos programas de ajustamento no caso da Grécia e de Portugal.

Note-se no entanto que apenas na Grécia ocorreu uma redução significativa do salário mínimo durante o programa de ajustamento, precisamente o país onde se atingiram níveis de desemprego mais elevados.

Em conclusão, se quisermos identificar as principais causas do desemprego é melhor procurar outras causas que não o salário mínimo.

Friday, 27 March 2015

Luck, merit and hard work

The ethics of capitalism can also be examined in relation to how it rewards individual luck, merit and hard work. Like in many other human activities, success in business results from a mix of luck, merit and work. There are always many that work hard and skillfully but who are unlucky in their ventures while many lazy and inept succeed through sheer luck.

Obviously capitalism does not determine luck. One either has it or not. However, capitalism raises the number of lucky opportunities available as well as our ability to profit from them when they come our way. Because capitalism is based on the principle of free entry (free markets), when one “strikes gold” nobody has the right to take it a away (private property rights) or to prevent its exploitation (rule of law). Moreover, if some do not have the necessary resources to dig it up they may use those of other passive capitalist.

One aspect about luck that cannot be corrected by capitalism is its reproduction and access. For instance, knowing the right people is often the best way to find the best opportunities. So, if one is born in a family of business people he or she is more likely to become aware of such opportunities. However, being rich also brings in many distractions and that partly explains why many business dynasties rarely go beyond the third generation. Overall, the small hereditary bias in luck it is not enough to deny the neutrality of capitalism in relation to luck.

Despite its few limitations capitalism is broadly a meritocratic system. Even if you do not have the required skills you may always bid for other people’s talent. And, should one fail to do so someone else will step in and force you out of the game.

However, capitalism is not a jungle where the strongest prevails in the fight for talent or hard work. By upholding the principle of free contracting, labor and capital usually negotiate long term work contracts rather than opting for piece rate pay. Indeed, this choice is based on calculated self-interest and is not necessarily the result of government imposition.

However, in the case of handicapped workers and less qualified workers there are circumstances when it would not be profitable to employ them even if they were willing to work as slaves. Such cases represent a market failure that needs to be corrected through subsidization or government employment.

With technical progress the number of tasks requiring high qualifications increases while those less demanding in skills are declining in relative terms. Thus access to education is of paramount importance in a capitalist system. The system can be trusted to produce efficiently the necessary qualifications but it cannot ensure equal opportunities in access to education, especially for advanced levels.

Given the importance that education has as a screening device for the top jobs it is normal that those with more resources use all kinds of aid to secure a top school for their children. This ranges from private tuition to crammer schools which are not available to the less favored. Nevertheless, provided that there is a market for student financing and that schools compete for bright students (whether they are poor or rich), those from disfavored families may still secure a place in top institutions.

In what concerns fair promotions and rewards for merit and hard work these are secured under capitalism by giving workers the freedom to change employers. Although there are many instances of nepotism in relation to family and favorites this cannot be extensive, otherwise firms will not be able to maximize profits and stay competitive.

There are however cases where in the short run it would be profit maximizing to lead workers to work to death. This was initially feared given the poor working conditions in the early days of the industrial revolution and because capitalists did not own the workers. However, history has shown that it would be counterproductive since in-the-job training and the costs of hiring would make such behavior untenable.

Indeed, a dramatic example of working slave labor to death was carried out in German and Japanese concentration camps during World War II and proved them to be both inefficient and resisted by some company managers. Obviously in a free labor market, as required by capitalism, workers themselves would not accept that.

Yet, there are industries (e.g. law, auditing and finance) where greed may lead professionals to accept overworking in return for a high compensation and the opportunity of retiring rich at an early age. It is interesting to note that such practices are more common on partnerships than on corporations. That is, the pursuit of profit under overworking conditions is not profitable in the typical capitalist firms - joint stock companies.

In conclusion, despite some early abuses, capitalism turned out to be the closest we got to a meritocracy, rewarding hard work and creating a level playing field to take advantage of one’s luck.

Tuesday, 24 March 2015

The ethics of capitalism

There is a never ending history of blaming capitalism for all evils in society. Vigilantes are always out there looking for market failures and externalities to "prove" the limitations or evils of capitalism.

The most recent accusation is that capitalism is responsible for obesity because the food industry is driven to profit from what Ken Rogoff called coronary capitalism.

The idea that capitalism promotes vice at the expense of virtue is historical nonsense. Otherwise, after 200 years of capitalism, western economies would now be dominated by casinos and brothels. Yet, these vice industries are still niche industries.

The ethic foundations of capitalism are not necessarily the same as the (protestant or other) ethics of the capitalist or the ethics in business. Business ethics is the study or practice of the good or right in a business setting. For instance, the responsibilities of a CEO in relation to the company’s stakeholders. Or whether in some industries managers need to preserve primitive hunting or predatory instincts.

The origins of freedom and individualism go back to Aristotle (384-322 B.C.), who argued that a human being uses his rational mind and free will to pursue his well-being and personal happiness. John Locke (1632-1704) extended these concepts to include the state of nature, natural law, natural rights, social contract, consent of the governed, and the right of property ownership. So, the ethics of capitalism must be discussed around the foundations of capitalism – namely, the ethics of private property, the profit motive and free competition - and not in terms of the social responsibilities of businessmen.

For Adam Smith and Hume the morality of capitalism resided mostly in the virtues of prudence and reciprocity, respectively. For Smith, the first to study capitalism, economics was still a moral science. Only after Marshall, did the prevailing view of economics as a positive science takes its roots based on the assumption that preferences are “given”. The assumption of utility maximization was replaced by wealth maximization and “greed” was adopted as an undisputable microeconomic assumption.

Despite Adam Smith’s demonstration that 'self-love', could be the greatest driver of wealth creation as long as it was restrained by market competition, law, and customary morals, today many sceptics still question either the morality of money-making or wish it to be unrestrained. Some qualify money-making as bad and enterprise as good, but these are truly the two sides of the same coin because the first measures the success of the second.

For Keynes, the distasteful aspects of capitalism would have to be endured until the accumulation of wealth loses its social importance. In his words: “Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight. (JMK, CW, IX, pp.329, 331)”.

Of course capitalism is not flawless. It is true that capitalism is affected by moral dilemmas, market failures and externalities, but these are the exception not the rule. It is also true that it may cause some unhealthy patterns in terms of consumption. But in market capitalism these imbalances are necessarily temporary; while they are bound to be perpetuated under other economic systems and government rule.

In fact the food industry provides a unique proof of this principle. As soon as the junk food became dominant and inefficient, a growing number of enterprising capitalists stepped in to offer all sorts of alternatives without any government intervention; ranging from the organic food industry to keep fit and health clubs.

Indeed if the fast-food industry still caters for so many people it is because of governmental failures rather than market failures. It is because of government failures that we have an ever growing number of families living on social security and low-cost dinners. It is because governments provide lousy school meals that children acquire unhealthy eating habits. And, it is also because of government´s inadequate funding for scientific research in food and health that we have so much voodoo science in what relates to healthy eating habits.

On the contrary, capitalism is part of the solution for these government failures. By competing to provide low income families with affordable and varied meals it facilitates the acquisition of good eating lifestyles.

That is really the beauty of market capitalism. Instead of raising regulatory barriers to protect the incumbents in the food industry competition ensures that they will be under permanent challenge. So, it corrects not only its own imbalances but also those created by devious as well as well-meaning paternalistic governments.

Monday, 23 March 2015

Mariana Mortágua vs. Maria João Marques

As televisões descobriram finalmente uma nova geração de jovens políticas talentosas. Ainda bem! Como a Mariana é uma jovem de esquerda e a Maria João de direita é interessante analisar o que as distingue dos outros jovens políticos e entre si.

Trata-se de duas jovens bloggers que se destacam por serem entusiastas, inteligentes, cultas, bonitas, femininas e simpáticas.

O seu empenhamento, perspicácia e saber não podiam contrastar mais com a perceção geral dos jovens políticos saídos das jotas - geralmente alunos medíocres de universidades igualmente medíocres, produto do nepotismo e intriga partidária, preletores dos lugares-comuns típicos do carreirismo nos jobs for the boys.

É também curioso contrastar a sua feminidade com a de outras jovens políticas. Por exemplo, o contraste da sua beleza natural com o pretensiosismo da beleza de Joana Amaral Dias. Ou, o contraste da sua feminidade, com a dureza de Catarina Martins a repetir a cassete do fanatismo revolucionário. E, ainda mais, o contraste da sua simpatia com o cinismo das not so young comentadoras do programa Barca do Inferno.

A Mariana e a Maria João são por isso duas jovens que podem e devem inspirar a juventude do nosso país. No entanto, o que é que as distingue politicamente?

De forma simplista podemos dizer que ambas se inspiram nos dois ideais do século XIX, a Maria João no liberalismo clássico e a Mariana no socialismo utópico. Por isso, podemos antecipar que a Maria João terá mais razão. De facto, a história e a teoria já nos mostraram abundantemente que o racionalismo da primeira criou liberdade e riqueza enquanto o idealismo da segunda gerou sempre tirania e miséria.

No entanto, isso não significa que no imediato a Mariana não seja mais atrativa para muitos jovens. Em primeiro lugar, porque a nossa comunicação social está excessivamente dominada pela esquerda, que não hesitará em transformá-la numa superstar se isso lhe der dividendos. Em segundo lugar, porque os jovens são naturalmente mais idealistas e impacientes e como tal mais atraídos pelos mitos revolucionários. Mas, e sobretudo, porque a substituição de um estado patriarcal todo-poderoso por uma mão invisível omnisciente despiu o liberalismo radical da empatia indispensável ao ser humano e em especial aos jovens.

Mas não precisava de ser assim. O radicalismo liberal é apenas uma doença infantil dos economistas que tendem a identificar os modelos baseados no mítico homo economicus com a realidade. Os modelos são apenas abstrações necessárias à análise dedutiva ou indutiva mas não podem incluir toda a complexidade humana, tanto mais que apenas agora começamos a saber um pouco sobre o cérebro humano. Por isso, o liberalismo tem de encontrar a sua própria humanidade e simpatia se quiser preencher os sonhos e idealismo da juventude.

Na verdade a renovação do espirito liberal talvez não seja suficiente numa fase de amadurecimento do capitalismo. As novas gerações não podem continuar prisioneiras das ideologias que resultaram das necessidades do século XIX. Têm de criar um idealismo para o século XXII, seja na economia, no papel do espiritualismo e convívio entre religiões, na bioética e na ciência ou em qualquer domínio.

Por isso não se trata apenas de deixar correr o tempo de acordo com o principio de Churchill de que “If you're not a liberal at twenty you have no heart, if you're not a conservative at forty you have no brain”, e desejar pacientemente que a Mariana chegue aos quarenta.

Para aqueles que, como eu, já iniciaram o crepúsculo, é particularmente gratificante ver o despontar de uma nova geração capaz de responder a esse desafio. Por isso, faço votos que a Maria João e a Mariana não se deixem corromper pela inevitável adulação dos media e que mantenham a sua frescura, irreverência, simplicidade e empatia para que o seu exemplo atraia cada vez mais jovens.

Friday, 20 March 2015

About managerial capitalism

Managerial capitalism is the sector comprised by public companies with such a high degree of capital dispersion that in practice shareholders have little or no control over management and the profit motive is often discarded.

Managers' capitalism developed not as the result of any specific ideology but from the natural growth of companies.

So, all non-stated owned big firms are by nature part of this sector as long as their capital grows beyond the resources of a small group of shareholders. For instance, even if the three wealthiest billionaires in the world were to invest all their fortunes to buy a large cap stock like Apple they would own only 30% of the company.

In the managerial sector it is often useful to distinguish three types of firms. Those that operate in regulated sectors and often resulted from the privatization of state monopolies, those that have grown to a dominant position in their sector and the conglomerates.

The emergence of big firms is not a new phenomenon and since the late XIX century there has been a fear that business concentration threatens free markets, the rule of law and the profit motive indispensable in a capitalist society. The concern has always been that business concentration would lead to the abuse of market power, the collusion with politicians would result in an uneven playing field and tax arbitrage for the benefit of a few and the separation between ownership and management would erode the profit drive and encourage waste and self-aggrandizement.

Today’s novelty resides solely on substantial transformations in the governance system. While in the age of the Trusts and the so-called “robber barons” these were still mostly capitalists who paid professional managers a salary of about 20 times that paid to the other professionals, nowadays there is a new layer of professional money managers between the ultimate owners and the managers and these now earn about 300 times the average salary in their companies. For example, it is now possible to find CEOs who earn more in compensation than what they pay in dividends to a shareholder who owns more than 2% of the business.

So, the modern day CEO-cracy has little capital invested in their companies and a strong incentive to maximize the company size and his compensation at the expense of profitability. Indeed, finance theory has contributed for such behavior by replacing profitability with a more ambiguous concept of shareholder value and by promoting a culture of stakeholders responsibility instead of stockholders.

Moreover, the average tenure of Fortune 500 company CEOs was 9.7 years in 2013, with many being recruited internally and going straight into retirement. That is, nominations often are the result of political and internal power struggles as in any bureaucracy rather than business performance.

In fact, the growing mix of business and politics is evident not only in the regulated sectors but also in the remaining sectors of managerial capitalism because of the role played by banks and institutional investors in corporate control. This places the managerial sector somewhere between the state enterprise sector and the market capitalism sector.

Through political favoritism and managers’ desire for size it is not surprising that managers' capitalism has continued to grow despite its inefficiency. For instance, in the two groups referred to below the top 50 managerial firms used twice as much capital as the bottom group.

This raises the question of knowing whether the managerial sector is beneficial for its investors. For this, one needs to know if returns are greater in the managerial sector. Using as a proxy for managerial capitalism the free float, we did a cursory analysis of the top and bottom 50 companies in the S&P500 Index. It revealed that last year firms in the managerial sector had a median return on equity which was lower than in firms with a lower float by three percentage points. Furthermore, the annualized return of stock prices over the past three years was also lower by two percentage points.

Surprisingly, managerial capitalism does not seem able to extract any rents for its own shareholders despite being protected by the political sector. Overall, the system endangers competition, the profit motive and social mobility necessary to keep capitalism a mild Darwinian system where the stronger takes over the weak for the benefit of both.

That is, although there is some truth in the statement that “when we have strong managers, weak directors, co-opted accountants, and passive owners, don’t be surprised when the looting begins (Bogle, J.C. (2003))”, the problem with managerial capitalism is not simply a question of generating some “bad apples”. It is really a cancer that sooner or later compromises free markets, the rule of law and the profit motive.

Yet this should not be the inevitable result of growth. One could still benefit from company size as long as the agency problems had been tackled head on. Unfortunately, the emergence of institutional investors who were supposed to represent a dispersed constituency of individual shareholders has aggravated the problem rather than solve it. For instance, in the USA the 100 largest managers of pension and mutual funds represent the ownership of about 50% of corporate America.

However, they hardly even attend annual meetings. And, quoting Bogle again: “the focus of the mutual fund industry has gradually shifted—from management to marketing, from stewardship to salesmanship, and—just as in the case of corporate America—from owners capitalism to managers capitalism”.

So, with the money managers riddled by conflicts of interest and governance problems similar or even worse than those of the corporations they are supposed to oversee a rising managerial sector can only end in inefficiency.

However, since the alternative to state owned enterprises is often its transformation into a managers’ corporation one has to assess their relative merits. Likewise, since size and job security often come together, for those employed in such firms the managerial model seems similar to many of the ideals of the XIX century utopian socialism.

Wednesday, 18 March 2015

Socialist state capitalism in Scandinavia

State capitalism is a form of capitalism in which the state holds a significant part of the means of production or regulates big companies, interfering directly or indirectly in the majority of the most significant businesses.

This interference is similar to that observed under the so-called crony capitalism, except that is carried out under the guise of the interest of the state. Another feature is that it rejects to be identified with the private sector and capitalism but does not disavow them in entirely. State capitalism exists in democratic or dictatorial regimes, as well as under right or left-wing governments.

In Western Europe there are two distinct forms of state capitalism - the Scandinavian and the Mediterranean. The first was made possible by the rise to power of social democratic parties in Sweden and England in the 1920s which would lead them to the government in the aftermath of World War II, with an extensive agenda of industry nationalization and social policies. The basic ideal of a broad welfare state was common to other political forces, including the Liberal and Conservative party in England, but has since been identified with social democracy.

The British experience with post-war nationalization was progressively abandoned after the Conservative electoral victory in 1951, but it continued in the Nordic countries with a golden age that lasted until the 1970s. For various reasons (namely windfalls) not all Nordic countries experienced a decline as pronounced as that of Sweden. However, we will use the case of Sweden to illustrate the initial success and subsequent decline of the Nordic model.

The Scandinavian initial success in combining strong equality with economic growth has been attributed to special features of their people, namely being ethnically homogeneous protestant societies, to their taxation policies and to a decentralized welfare system.

Some dismiss this golden era as being simply the result of the Western golden Keynesian period of the 1950-1960s compounded by a pragmatic continuation of the liberal policies that had transformed Sweden in a modern industrial country from 1870 to 1936. They reinforce this hypothesis by claiming that Sweden’s decline began in 1968 when the radicalised left wing Social Democrats attempted a ‘third-way’ approach trying to establish an economic system between a free market and a planned economy.

During this period the taxation of business financing was strongly discriminatory in favour of state pension funds and insurance companies. For instance, Henrekson (2007) estimated that in 1980 the maximum marginal tax rate on new share issues was 137% for private household investors but -12% for tax exempt public pension funds, while the rates for debt financed investments were 58% and -88%, respectively.

This attempt to create a market economy without individual capitalists and entrepreneurs proved disastrous. For instance, Axelsson (2006) points out that in 2004 among the top 100 Swedish firms in terms of revenue only 38 started as privately-owned businesses. Moreover, out of these 38, only 2 were created since 1970 while 21 were founded before 1913.

Not surprisingly, despite the initial success in upholding private property, free markets and the rule of law while avoiding the dependency culture often associated with extensive welfare systems, in the early 1990s Sweden went through a dramatic banking crisis with a cost for taxpayers equivalent to 2% of GDP. At the political level it also meant the break of the Social Democrats rule. Since 1991 the liberal conservatives have alternated in power and promoted the introduction of a liberalization program that initiated the end of the Nordic model of state capitalism in Sweden.

Personally, in 2012, I drove through Sweden to Gothenburg and could still feel an atmosphere of decay that was markedly in contrast with the energy I had felt in 1977 when I first visited the country. This was not an impression simply due to my aging. The OECD figures below for GDP per capita also confirm the relative decline until 2005 and a minor recovery thereafter.


There are two important lessons that one can draw from the Swedish experience. First, that there is a limit on how much the weight of the state in the economy can go. Using as an indicator the level of public expenditure as a percentage of GDP, that limit seems to set in when its value reaches 55%. Second, and probably most importantly, capitalism cannot dispense with the profit motive as a driver of innovation and entrepreneurship.

The attempt to socialize profits through state pension funds and the tax system might have contributed to a high level of equality in Sweden but its cost in terms of entrepreneurship was severe. In the end, the pursuit of profit motive always implies a certain degree of inequality. So, the challenge for Sweden, as it moves towards market capitalism, is to find a fair balance between a socially acceptable increase in inequality and the growth of the private sector initiative.

Friday, 13 March 2015

Wild west and “crony” capitalism

Capitalism without rules and capitalism with rigged rules are the two sides of the same coin. In fact, despite claiming to be capitalist, such economic systems violate its basic foundations, namely free markets and the rule of law.

The absence of any form of regulation, whether on working conditions or environment, is often associated with the early days of capitalism in XIX century England. However, Anderson and Hill in their “An American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West”, re-interpreted the wild west history as an experimental libertarian society. They claim that “Private agencies provided the necessary basis for an orderly society in which property was protected and conflicts were resolved. These agencies often did not qualify as governments because they did not have a legal monopoly on "keeping order."”

This is a mistaken reinterpretation of facts. Indeed, all historical experiments quickly have shown that someone (the government) stepped in with a monopoly over law and its enforcement before the country collapsed from civil war or banditry. This has happened in all revolutionary processes as well as in the development of private law experiments (e.g. securities law in XVII century Amsterdam or the merchant courts in medieval Europe).

Presently we may find examples of wild west capitalism in failed states (e.g. Somalia or Libya) or in special territories enjoying reduced or non-existent regulation (e.g. the special enterprise zones in China).

However, the most common is to find situations where, although private property is protected from extortion by law, the law itself and its enforcement may be twisted in favor of the rulers and their acolytes. Like in “wild west” societies, business is carried out under the law of the jungle but this time the strongest is protected by the state. This type of “crony capitalism” is common in dictatorships but exists also in democratic societies.

The “cronies” typically use their control of the state to raid other people’s property, to get rid of competitors, to get favorable tax treatment, privileged access to financing and to secure government procurement contracts and concessions. Often, these advantages are also secured through protection against corruption charges.

Crony capitalism exists to some extent in most capitalist economies but only when favoritism is rampant can we talk of a “crony capitalistic” system.

Unfortunately, there are too many past and present examples of crony capitalism. Among the most extreme historical examples we may mention the Suharto and Mobutu families in Indonesia and Zaire, respectively. Presently, Putin’s Russia or Chaves’ Venezuela are also two of the most extreme examples, although the later would be better described as crony socialism. Obviously, the more regulated a sector is the greater the scope for crony capitalism. For instance, in sectors like banking, real estate, utilities, telecoms, natural resources and casinos. So, not surprisingly, in 2014 the Economist ranked Hong Kong, Russia, Malaysia, Ukraine and Singapore as the top five countries in terms of crony-sector wealth.

The antidotes to crony capitalism are the rule of law and free markets. Indeed, as long as these are upheld, as they should in societies with representative democracy and constitutional liberalism, market capitalism will never degenerate into “crony capitalism” as is frequently anticipated by Marxists and other anti-capitalist movements.

It is important to remember that in their initial stages countries under crony capitalism economies often experience substantial economic growth driven by public or speculative investment. However, when such levels of unsustainable investment comes to a halt due to losses and lack of financing the economic miracle always collapses with huge amounts of debt, abandoned investments and unemployment.

That is, even when apparently successful, one should not be fooled because in the end crony capitalism will always bring misery and a huge misallocation of resources.

Likewise, the frequent examples of crony capitalism under systems of state and managerial capitalism should not be used to confuse these systems with crony capitalism, because such systems have a deliberate policy to change the workings of capitalism.

Friday, 6 March 2015

The role of the voluntary sector

What we call voluntary sector is often referred to as NGOs, third sector, associative sector, non-profit sector, social economy and similar words aimed at differentiating it from capitalism. Non-profit sector would be a better label if it was not used by entities with special incorporation statutes (e.g. cooperatives) to claim preferential treatment under the pretence of being of general interest rather than for the self-interest of its members, promoters and sponsors.

It is important to understand the difference between self-interest and profit. The first can be achieved through cost minimization or service maximization for its members while the second is separate from the services delivered by the providing entity and can only be achieved through profit maximization.

Let me use as an example the motor associations we find in many countries. When I lived in the UK there were two such associations and I joined the AA after comparing the two in terms of their breakdown and other motor services. The price of these two services was bundled in a single annual fee. So, when assessing its value for money I had to weight simultaneously three different services the insurance premium for the cost of recovery and the quality of the recovery service and the extra services provided. The first I wanted it to be as low as possible and the other two as high as possible. So, the AA directors had no way of knowing how to maximize the members welfare except indirectly through their vote during elections. Indeed they probably did not know whether to maximize the number of members or the welfare of the existing members.

However, later on the AA decided to transform into a corporation and issued shares to its members. So I became a shareholder as well as a client subscribing to their services. Now, the directors had a clear mandate – to maximize my profits. Does it mean that they had an incentive to do it by charging me more or reducing the quality of my services. Quite the contrary. While they needed to focus on getting me profits they also had to keep me pleased to avoid losing a customer and attract more clients by offering a better value for money than AA’s competitors. I was also better off because, instead of being tied up to the AA, if I was not pleased with the profits I could sell my shares and still continue as a client as long as the service was worthwhile.

So, in general, whenever a service or product can be produced on a profit basis the capitalist option is preferable. The few exceptions usually involve cost-minimization situations where members are few and compete among themselves so that they may end up being served by a single monopolist service provider that they co-own. For instance, in the banking industry the banks in small countries may find it advantageous to set up a joint non-profit company to run a single national network of ATM machines. As long as this monopoly is not given any privileges by the state and can be challenged by anyone willing to set up a competing service free competition is preserved, despite the lack of profit-motive.

However, as the activity expands, sooner or later a profit-driven corporate will come to challenge the incumbent and non-corporate entities may find it necessary to transform into a profit-seeking corporation. This can be done overnight or through a long and tortuous process of transformation.

Due to economies of scale, bundling requirements and similar conditions, there is always a reasonable number of activities pursued for self-interest by non-profit entities which do not qualify as part of the capitalist sector. However, in a lively capitalist environment such organizations should aim to transform into corporations, instead of adopting an anti-capitalist stance and chasing state privileges. That is, like the informal sector, they should be a nursery for future capitalists.

Now, these non-profit self-serving entities should not be confused with truly altruistic (non-self-interest) organizations. We find these pursing activities where the state or the capitalist sectors are present and as well as in activities of no-interest for both. They use various institutional forms ranging from associations and clubs to charities and foundations. However, their real distinctive feature is whether they are self-serving or not, a differentiation that is not easy to define when they are active in the fields traditionally associated with the government or enterprise sectors.

From the middle ages we inherited charities and mutuals set up to aid the poor with medical, educational and financial services. Many remain to this day, even when their initial motivation has largely disappeared.

For instance, in the past the small savings of the children and poor were too meagre to be of interest for banks. So, when my first child was born I decided to open an account in a Portuguese mutual that gave children a nice money pig to save coins to deposit later with the bank and earn a little interest. Equally, it allowed its members to open a retirement savings account with as little as one Euro monthly and provides nice retirement homes for its members. All these services are subsided by sharing the profits obtained by a mortgage bank owned by the mutual.

However, a well-informed friend of mine, told me that the profits could be much higher if it was not for the fact the banking staff earned on average 30% more than their colleagues in the for-profit banking sector. Obviously, the staff and directors are strongly against the demutualisation of the institution, despite the fact that now all banks offer similar services to small savers. Moreover, I have noticed that many of the beneficiaries of the profit sharing products are indeed middle class. So, this institution is more properly qualified as an hybrid institution self-serving its employees and clients, but with a significant philanthropic activity.

Indeed, today there are an increasing demand for the state to outsource some of its functions to such hybrid organizations. This could be an alternative to the privatization of natural monopolies and other non-sovereign activities carried out by the state. However, this “third-way” has its own governance and agency problems. Although it is reasonable in aid programs one should be careful to avoid stimulating rent-seeking and anti-competitive behaviour.

In conclusion, there are a wide range of activities where cooperation may substitute market competition and humans may voluntarily mobilize to pursue selfless objectives. However, regardless of how well intended their objectives are, their activities and practices should be carefully scrutinized to avoid confusing self-interest with selfless organizations.

Tuesday, 3 March 2015

Notas preliminares sobre a evolução recente da despesa pública

No início do programa de ajustamento em Portugal alertei neste post para a necessidade de corrigir a trajetória da despesa pública, em especial no que diz respeito à evolução da segurança social.

Hoje podemos fazer uma avaliação preliminar do que mudou, pois já dispomos dos dados apresentados na tabela seguinte relativos aos dois primeiros anos 2011-2012.



Relativamente aos dados de 2009 tinha estimado que os cortes necessários em pontos percentuais do PIB seriam 6.0 na proteção social, 1.8 na saúde, 1.2 na educação e 0.7 nas forças de segurança. Como podemos ver na tabela acima a proteção social aumentou 0.8, a saúde reduziu apenas 0.6, a educação baixou 1.4 e as forças segurança tiveram uma diminuição de 0.2 pontos percentuais. Entretanto, o serviço da divida aumentou 1.6 pontos percentuais.

Isto é, nos sectores onde devia ter havido ajustamento, apenas na educação as reduções de despesa atingiram (e até superaram) a correção desejável. Outros sectores também contribuíram para o ajustamento, em particular os transportes com 1.4 e a defesa com 0.9 pontos percentuais, mas tais contribuições não foram suficientes para compensar a ausência de ajustamento nos restantes sectores.

Este ajustamento desequilibrado resultou da redução da despesa ter sido feita sobretudo através dos cortes salariais e do investimento e teve custos significativos em termos de crescimento e equidade. Por exemplo, o agravar dos desequilíbrios na despesa pública ocorreu num contexto em que o PIB caiu mais de 6 mil milhões de Euros em valor nominal.

Pior ainda, a ausência de ajustamento no peso do sector social não significou que os beneficiários deste sector tenham sido protegidos, antes pelo contrário. O crescimento das despesas sociais ficou a dever-se sobretudo ao aumento extraordinário dos beneficiários resultante do empobrecimento da classe média-baixa e do aumento das reformas antecipadas.

Uma das principais explicações reside na continuação do regime de incentivos às reformas antecipadas que foram utilizados por mais de 30 mil funcionários públicos nesses dois anos. Isto é, em vez de se optar por uma política de dispensa de funcionários que devidamente apoiados rapidamente se integrariam no mercado de trabalho privado, optou-se por comprometer de forma permanente a sustentabilidade da segurança social e não se fez qualquer reforma do Estado.

Em conclusão, a redução de 4.1 pontos percentuais no peso da despesa pública (ou 5.4 se considerarmos o efeito combinado do aumento da divida e da diminuição do PIB) foi excessiva para um período de apenas dois anos. Os 8 pontos que dissemos serem necessários podiam e deviam ter sido implementados ao longo dos três anos do programa. Mas, sobretudo, foram muito menos eficazes do que teria sido um corte generalizado de 5 pontos percentuais no orçamento de cada ministério, para já não falarmos numa política de cortes seletivos direcionada para uma verdadeira reforma do Estado.

Friday, 27 February 2015

Um argumento estúpido para acabar com os chumbos

As “eminências” pardas do nosso sistema educativo voltaram esta semana à baila com a ideia de reduzir o insucesso escolar através da passagem administrativa dos alunos que chumbam na avaliação (ou que ficam retidos, na linguagem politicamente correta do “eduquês” nacional).

O argumento foi que estes alunos custavam ao estado cerca de 600 milhões de Euros por ano. Se fosse essa a razão então abolia-se o ensino e o estado pouparia muito mais. É no entanto um argumento estupido se tal custo não for comparado com o custo para a totalidade dos alunos que seriam penalizados pelas passagens administrativas.

Um número muito elevado de reprovações só pode resultar de duas coisas – matérias e exigências desajustadas ou alunos preguiçosos e desmotivados. Pelo que me é dado observar como professor os níveis de exigência baixaram e os alunos não são mais preguiçosos do que sempre foram. Portanto a causa do elevado número de reprovações e desistências é um misto de matérias desajustadas e alunos desmotivados.

As primeiras são o resultado de reformas curriculares constantes e irrefletidas que tentaram impor teorias pedagógicas absurdas e não testadas. A desmotivação também resulta destas reformas mas é sobretudo o resultado da perda de autoridade dos pais e professores. À qual podemos ainda acrescentar a cultura de facilitismo muita espalhada entre nós em que o que interessa é o canudo e não a qualidade e exigência do que se aprendeu (vide episódios recentes que envolveram governantes).

O insucesso escolar tem de ser analisado nas suas múltiplas facetas, nomeadamente na maior ou menor aptidão dos alunos e nos diferentes sistemas e níveis de ensino.

Por exemplo, um sistema de passagem obrigatória pode ser aceitável no sistema universitário se a ele apenas tiverem acesso alunos com boa aptidão. Em tal sistema (como existe em Inglaterra), a passagem obrigatória ou atribuição de um “diploma de consolação” é na prática uma medida disciplinadora. Pois os alunos sabem que se saírem da Universidade com a nota mínima nenhum empregador reconhece as suas habilitações e eles próprios preferem omitir no CV que tiraram o curso.

Porém, nas atuais condições, aplicar tal sistema em Portugal seria inútil. Eu próprio já o testei nas minhas disciplinas sem qualquer resultado, porque outros colegas continuaram a inflacionar as notas e os alunos acabavam por sair com uma média aceitável mesmo sem saber nada. Isto é, sem um sistema de avaliações externas e de calibração da distribuição das notas a passagem obrigatória seria injusta e ineficaz. Tanto mais que o Estado Português, principal empregador de licenciados em Portugal, continua a não valorizar as notas e as escolas no seu recrutamento.

Em conclusão, optar pelo facilitismo das passagens obrigatórias é muito mais custoso do que o insucesso escolar. Atacar o problema do insucesso escolar pelos resultados e não pelas suas causas é uma estupidez.


About the Role of the State

Discussions about the role of the state are invariably contaminated by data misrepresentation and political demagogy.

The Portuguese Government in 2013, called a four billion Euros cut in public spending agreed with the IMF a re-foundation of the state. Like in many similar examples of faux liberalism, it was simply a matter of "get out so that I can sit there". Indeed, the government simultaneously borrowed an equivalent amount to create a new development bank. In a country where the state already controls more than 50% of the banking sector, to create one more state-owned bank, in a model that has already failed in the past in Portugal and the rest of the world, can only be deceit or irresponsibility.

In short, the Portuguese government's proposal for a debate on the role of government is not serious and would not deserve commenting. But a real debate about the role of the state is important and should be always present in political discussions.

As Martin Wolf wrote in a recent article on the topic "this is the most important issue of political economy" and has been debated since antiquity by Plato and other philosophers. As he points out, one of the first questions to ask is about the limits and extent of the protective function of the state. The theme is handled brilliantly by the author so I strongly recommend you read his article.

However, to have an intelligent discussion about such limits it is important to know more or less in detail the current role of the state in terms of function, cost and contribution to national wealth.

For example, public spending is usually broken down into ten categories, as shown in the following table with data for Portugal:



However, this breakdown is not the most appropriate to understand the functions of the state. The functions of the state should be divided into five major activities: sovereignty, regulatory, insurance, production and distribution.

The importance (for good and for bad) of each of these activities has an impact on the various categories of public expenditure listed in the table above but are not necessarily fully reflected in budgetary terms. For instance, regulation may have little or no budgetary costs but can have huge economic costs. Moreover, they may be budgeted or not (e.g. in Portugal the electricity rates paid to regulators are not fully budgeted). Equally, the redistribution function of the state can be undertaken on the revenue or the expenditure side.

We can also question whether insurance, production and distributive activities must be carried out by public or private entities subcontracted by the administration. For example, why contract construction services in public works and not education services. That is, the debate on state production and state provision must be clearly separate from the debate on the functions of the state.

Most importantly, the insurance function must be clearly separated from the redistribution function. For example, whether we are talking of health, unemployment or weather insurance, one must make a clear distinction between a component of compulsory insurance (subsidized or not by the state) and a discretionary component funded by taxes to deal with exceptional situations (epidemics, natural disasters, etc.).

Finally, with regard to life insurance and pensions, in addition to its subsidization, the fundamental debate should be on the minimum and maximum levels. For example, does it makes sense that the State offers pension insurance to millionaires? Given the weight that pensions have in public spending this is perhaps the most critical aspect in any debate about the role of the state.

In summary, a deep and thoughtful debate about the limits to the role of the state needs a breakdown of public expenditure and its financing by each of the five categories of state activity. The creation of an accounting system that allows this analysis should be the first step of any government that wants to make a serious debate about the functions of the state.

Only after agreeing the limits in each state activity should we discuss separately the issues related to the relative effectiveness of direct or delegated administration, as well as how to solve the free-riding, theft and nepotism inherent in any political system.

Wednesday, 25 February 2015

Farto de comentários sobre a Grécia

Estou farto de ouvir falar na Grécia, não porque não seja positivo ver os Europeus a preocuparem-se com outro país que não o seu, mas pela forma como decorre o debate.

Por um lado discute-se até há exaustão o problema Grego como se não houvesse outros problemas semelhantes, e porventura mais perigosos, como acontece em relação à situação na Hungria e à sua política energética de total alinhamento com a Rússia. Talvez seja porque lá os radicais são de direita e a nossa comunicação social vive obcecada pela esquerda.


Por outro lado, fala-se demasiado nos Gregos e nos Portugueses, como se estes fossem um todo, em vez de se discutirem as posições políticas dos diferentes partidos nos dois países. Gostaria de ver o Partido Socialista a discutir as críticas do Pasok ao Syriza ou o PSD a apoiar a Nova Democracia numa verdadeira discussão entre famílias políticas Europeias.

Cada um à sua maneira deve querer o bem do povo Grego e apontar os caminhos que são melhores para o seu futuro. Não existem países bons e maus, existem políticas boas e más!

Tuesday, 24 February 2015

A última lição: A economia e os doentes terminais

O falecimento do meu pai no passado dia de São Valentim foi para mim uma enorme perda. Ele era não só um pai querido, mas também o meu herói e ídolo. Nas suas últimas horas de vida deixou-me mais uma prova do seu amor ao esperar pela minha visita antes de partir.

Desde que aos quinze anos partiu sozinho para Lisboa procurando escapar à pobreza da sua aldeia natal, trabalhou incansavelmente para dar aos seis filhos a educação que ele não tivera. Apesar de não ter concluído a escola primária, recordo-me como ele estudava matemática de forma autodidata para poder ajudar-me a resolver os problemas na escola primária. Foi também ele quem, sem saber de economia, me aconselhou a optar por economia na universidade.



A Serra da Estrela que o viu nascer e morrer despediu-se dele com este arco-íris, o mais bonito que já vi. E, também ele, na forma como partiu me deixou mais uma lição de economia, tal como tantas vezes o fizera ao longo da sua vida de trabalho.

Um mês e meio após ter completado 96 anos de idade sofreu uma trombose intestinal que lhe seria fatal. Dada a sua idade avançada, os médicos acharam que uma intervenção cirúrgica tinha pouca probabilidade de sucesso e como ele não estava consciente chamaram a família para ser ela a decidir se queria deixá-lo morrer sossegadamente ou se queria tentar a operação. Foi uma decisão muito difícil.

Após o esclarecimento dos médicos sobre o sofrimento previsível no pós-operatório, a probabilidade de sucesso e o número de meses adicionais de vida que teria se a intervenção tivesse sucesso optamos pela operação.

É importante salientar que não tivemos de ter em conta qualquer outra consideração que não fosse o bem-estar do doente (fosse de natureza financeira ou familiar) porque estávamos num hospital público financiado por via orçamental. Se estivéssemos num hospital privado seria impossível ter esta liberdade de decisão sem intervenção da companhia de seguros.

Esta liberdade de decisão em relação ao prolongamento do tratamento dos doentes terminais é por vezes debatida por filósofos e economistas em conjunto com outras decisões difíceis sobre eutanásia, suicídio assistido, morrer em casa ou a qualidade da morte, mas poucas vezes se discute o enquadramento institucional que condiciona a decisão em tais matérias, nomeadamente a opção entre sistemas de financiamento da saúde através de seguros ou de dotações orçamentais.

As modalidades de financiamento são porventura mais decisivas do que a escolha entre hospitais operados pelo sector privado, público ou misto e é apenas sobre essas que irei debruçar-me.

Teoricamente podíamos ter seguros ilimitados, mas estes apenas estariam ao alcance de uma minoria. Por isso, com exceção dos Estados Unidos, a maioria dos países desenvolvidos optou por um sistema baseado numa única entidade pagadora dos cuidados hospitalares que pode estar enquadrada no orçamento de estado ou ter um orçamento próprio financiado por contribuições obrigatórias. Este orçamento pode cobrir a totalidade dos custos hospitalares ou apenas uma parte (geralmente mais de 70%).

É evidente que a oferta de cuidados hospitalares é menor nos países pobres e pequenos. Por isso, nesses países o financiamento através de contribuições tem de ser suplementado por transferências orçamentais de forma a assegurar que em situações de perigo de vida todos têm acesso aos tratamentos disponíveis, independentemente das suas contribuições.

É também normal que em contexto de crescente inovação tecnológica os recursos afetos à saúde sejam sempre insuficientes para fazer tudo o que é teoricamente possível para salvar cada paciente. Por isso, são geralmente bem-vindos os seguros privados voluntários que permitem a alguns optar por novos tratamentos mais dispendiosos ou melhores amenidades de internamento.

No entanto a utilização desses seguros para decidir sobre os tratamentos nos casos de vida ou morte coloca os médicos e as famílias dos pacientes perante um tipo de decisão eticamente intolerável. Isto é, retira-lhes a possibilidade de decidir exclusivamente com base no bem-estar do paciente tal como fizemos no caso do meu pai.


Em suma, na forma como nos deixou, o meu pai relembrou-me que a análise custos-benefícios e a teoria económica podem ser necessárias na análise dos sistemas e na alocação de meios à saúde, mas não podem guiar as decisões individuais sobre a vida e a morte dos doentes terminais.

Playing games: aspectos bizarros do nosso sistema judicial

Independentemente da opinião que se tenha sobre a prisão de José Sócrates, não se pode deixar de ficar estupefacto com o que se passou com o recurso da sua prisão preventiva.

Em qualquer país civilizado esperar-se-ia que os recursos sobre prisão preventiva fossem feitos e decididos de forma célere, ou pelo menos dentro do prazo máximo da prisão preventiva.

Creio que qualquer firma de advogados prepararia um recurso em dois ou três dias. Entretanto, o seu advogado demorou quase um mês. Também me parece que nenhum tribunal de recurso precisará de mais de uma ou duas semanas para preparar a sua decisão. Entretanto, o STA deixou passar os três meses da prisão preventiva sem se pronunciar.

A quem serve este triste espetáculo? Por favor deixem-se de “brincadeiras” com a opinião pública e com a justiça.

Monday, 23 February 2015

Medidas anticorrupção (2): Estabilizar o regime fiscal.

Em qualquer país o nível de corrupção é diretamente proporcional à complexidade, iniquidade e natureza predatória do sistema fiscal, e Portugal não é exceção.

Porém, em Portugal o contributo da fiscalidade para a corrupção é ainda mais agravado pela mudança permanente das normas fiscais e regimes especiais. Em cada novo orçamento de estado as alterações fiscais ultrapassam as centenas. Não há nenhum lobby público ou oculto que não introduza regimes específicos, muitas vezes com características surrealistas como acontece nos sectores automóvel e energético.

Como é normal, os políticos e responsáveis tributários gostam de “vender” favores, mas no final acabamos todos com uma carga fiscal cada vez mais elevada.

Ora, é muito simples e barato eliminar esta fonte de corrupção. Basta introduzir na Lei de Enquadramento Orçamental um limite ao número de alterações fiscais que podem ser introduzidas em cada ano. Por exemplo, limitando as alterações substanciais a apenas uma vez por legislatura, e em cada um dos restantes anos permitir apenas alterar um máximo de 5 normas.

Poder-se-á contra-argumentar que todos os anos se descobrem muitos “buracos” ou iniquidades e tal seria irrealista. É verdade que existe uma luta permanente entre o gato e rato na descoberta de fugas ao fisco, mas essa luta só pode ser minorada se o gato e o rato forem limitados no número de investidas que podem fazer.

A vantagem de tal limitação reside precisamente no fato de os políticos terem de pensar duas vezes antes de fazer a sua “reforma fiscal” por legislatura e de ser transparentes na escolha dos cinco buracos a tapar ou dos benefícios a conceder em cada ano.

Será que os proponentes da luta contra a corrupção estão disponíveis para propor medidas deste tipo? Gostaria de saber a sua opinião.

Friday, 20 February 2015

The coexistence of economic systems

In capitalist countries not all activities are conducted in the capitalist sector. There is usually a mix of economic systems that complement and compete against each other and also a competition among various forms of capitalism. This is normal and a permanent feature of capitalism. Nevertheless, the capitalist sector needs to be the leading sector for a country to be considered as capitalist.

Capitalism is probably the only economic system that does not rejects other modes of organization. In fact, it recognizes that some activities are not based on the profit motive while others cannot be carried out through markets. The first constitute the so-called voluntary sector and the second the state sector.

The voluntary sector, also called third sector or social sector, includes both purely altruistic activities and others that are or could be organized through markets but are conducted without a profit motive. Focusing only on self-interest activities let me show how these can contribute to human welfare through clubs and many other forms of associations that do not seek to incorporate.

For instance, consider the case of a choir or a similar activity. Most of us get utility from listening to songs, but only a few can or enjoy singing. The first usually pay to buy records or go to concerts but those in the second group have three options – pay to sing in a choir, sing voluntarily in a choir or be paid to sing in a choir. We may find examples for the three cases. However, there are very few, if any, profit-seeking entrepreneurs offering the first option to willing singers. Likewise, the last option is only available for the top singers. So, most eager singers choose the voluntary option as a hobby.

Now the satisfaction obtained through this hobby derives from three sources – the pleasure of listening and singing in a choir and the pleasure of having an audience. But to get a good audience they usually have to give free or low cost concerts, often at a personal cost in time and money. Even, when they manage to make a little money out their hobby its weight in their utility function is very small when compared with the pleasure of singing, the recognition of an audience and the comradeship of a choir. So, the profit making objective, if any, is negligible and this activity is certainly included in the voluntary sector.

Note, however, that the frontier between the voluntary and the for-profit sector is often fuzzy and shifting. For instance, a conductor in search of paid employment may create a choir to give him a job paid by the singers. Likewise an impresario may contract the singers to profit from their performances. But, an activity may be undertaken by some on a for-profit basis while others do it on a voluntary basis and yet all are pursuing their self-interest.

A similar situation arises in those cases where people join together to fulfil a common need, for example through consumer, housing and workers cooperatives or credit mutuals to provide goods and services that could also be procured from for-profit corporations. Some of these institutions even have corporations among its promoters and sponsors.


This said, the coexistence of economic systems and their fuzzy borders do not prevent us from distinguishing a capitalist from a non-capitalist country on the basis of the relative importance of the capitalist sector.


Thursday, 19 February 2015

The relevance of 25%


What defines a predominantly capitalist economy is the size of the capitalist sector. However, since the size of the voluntary sector is usually small and difficult to measure and the state sector is easier to quantify, it is frequently expedient to measure only the state sector to assess the degree of capitalism in an economy. Typically one measures the role of the state through three indicators – the value of the goods and services it produces through government and state owned enterprises and agencies, how much it spends and how tightly it regulates the other sectors in the economy.

Because government expenditure is the easiest to measure the most used indicator is public expenditure as a percentage of GDP. Globally, based on data used by the Economic Freedom Index (2014) the values range from 14.6% in Guatemala to 139.7% in East Timor. On the lower side of the distribution, with a share of less than 30%, there are more than one third of the countries, most of them too poor to have a welfare system with the notable exceptions of Macau, Singapore, Hong Kong, UAE, Taiwan and the Bahamas.

Among advanced OECD capitalist countries, this share varied between 5 and 15% in the early XX century, but it has risen to the current range of 30 to 58%. The lowest value is found in South Korea (30.2%) and the highest in Denmark (57.6%). Because the prevalence of extended families in Asian explains a lower social expenditure in those countries we note that among the other countries the one with the lowest share is Switzerland (33.8%). So, 25% is the standard amplitude of public expenditure among western capitalist countries.

The increase in the share of the state is mostly due to the creation of welfare systems while the widest amplitude reflects the greater variety in the forms of capitalism. I shall focus on the 25% amplitude because it illustrate better what drives the growth of the state sector and, concomitantly, the shrinking or slow growth of the capitalist sector.

An important insight to understand this amplitude is to look at the percentage of public expenditure devoted to collective goods which generally cannot be run under market capitalism. The OECD has produced this data for 18 of its members for the period 1995-2009. It shows that in 1995 the share of collective goods in total public spending ranged from 30.2% in Luxembourg and 54.9% in the Czech Republic, yet by 2009 its range had reduced to a minimum of 27.5% in Norway and 45.8% in Greece. This reduction may be the result of a faster rise in individual public spending or a reduction in overall government spending biased against investment.

The following table showing the percentage of collective spending in 2009 suggests that,


on average, two thirds of government spending is on individual goods which, theoretically, could be produced under a capitalist system. On average, the collective goods represent only 16% of GDP, ranging from a low of 12.1% in Norway and a high of 23.8% in Greece.

Spending on these goods is strongly influenced by the level of economic development, urbanization and geography. Surprisingly, it does not vary much with the form of capitalism. In fact, only in Hungary and Greece does spending in collective goods exceeds more than 20% of GDP.

So, what really differentiates the various types of capitalism is the government spending for individual consumption. This spending should be broken down into distinct categories. In particular we need to consider separately social spending which accounts for the bulk of individual spending.

The table below shows that public sector social expenditure ranges from 10% of GDP in South Korea to 30% in France. It also shows that mandatory private spending is negligible while voluntary social expenditure is meaningful only in the USA (10.2%), U.K. (5.3%), Canada (5.1%) and Iceland (4.6%).


To some extent total social expenditure is determined by per capita income, age and other demographic factors but it is clearly the result of political choices.

For instance, note that countries that rely more on voluntary private expenditure are not among the top spenders. Is this the result of more efficiency or less coverage? The data does not allow an answer to such question, but this question is fundamental to ascertain the relative comparative advantage of the public and private sectors in the provision of these services.

First, we must split this type of public expenditure into two subsectors: income redistribution and insurance services. This is not easy because redistribution is often made through the provision of subsidised services produced in the public sector. However, old age and survivors public pensions as a percentage of GDP are a good proxy for the size of public spending that could be provided by the capitalist sector. With this indicator we find a wide variability, with values below 3% of GDP for South Korea and Iceland and above 14% for Austria, Italy and France.

Overall, we have that a mere 25 percentage points of public expenditure separates the extremes in capitalist economic systems between market and state capitalism. However, one needs to know the composition of such expenditure to really understand how close each country is to the ideal of market capitalism. Moreover, one needs to bear in mind that the role of the state extends beyond public expenditure and production.