(Title Image: goodfoodshops.blogspot.com)
The next five pieces are going to look in depth at some of the discussion points raised from the previous articles, including where Wales has gone wrong economically as well as some of the big socio-political challenges Wales faces economically.
To start off with, it’s a look at the different roles of both “The Market” and The State in economic affairs and how capitalism has affected Welsh societies winners and losers.
The Invisible Hand: What is “The Market”?
The Market consists of all the official and unofficial systems, models and means by which goods and services are developed, delivered and consumed by society. It determines production costs, sale prices, pay and pretty much anything else you can think of if it’s related to business or the economy.
Most of the western world, including Wales, has a capitalist market economy – decisions about investments, production and distribution are determined by the principle of “supply and demand”; prices are determined by the demand for a product or service and the availability/supply of that product or service. The Market is ultimately driven by scarcity, competition and debt.
There are also other aligned principles such as the cost-benefit ratio (the economic or financial return on an investment), private property rights and private ownership of the means of production (in practice this means governments protect a person’s private property by enforcing laws against theft and governments generally stay away from running businesses).
This isn’t a black and white definition as politics and class play a big role in determining how a market economy works and even whether there should be a market economy at all.
Economic Models: Pros & Cons
I’m not going to list every single economic school or economic model, I’m just going to lump them together under larger umbrellas.
The Free Market
Also known as: Laissez-Faire Economics, Classical Liberalism, Neoliberalism, Merchantilism, “Trickle-Down Economics”
Key Philosophers/Adherents: Adam Smith, Freidrich Hayek, Ronald Reagan, Margaret Thatcher, Milton Freidman, Austrian School
Political Alignment: Conservatism, Conservative Nationalism, Liberalism, Anarcho-Capitalism, Imperialism
Applied in: United States, British Empire, East India Company, UK (1979-1997), Australia (1983-1996)
The free market principle is that supply and demand, as well as consumer choice, should drive economic and political decision making. The decision on where and with whom you spend your money should be the ultimate consideration and, likewise, it’s up to you to make your own money – nobody owes you a living. In theory, the government takes a step back and provides the conditions to let the free market flourish – deregulation, low or flat taxes, competition laws, privatisation of national assets – in the hope that everyone gets wealthier as a result by wealth “trickling down” to the poor through investment and employment by the rich.
- Free market economies often have low taxes and low levels of government intervention, maximising consumer choice and consumer spending power. Only the most desired goods and services are provided, driven by “supply and demand” and competition.
- Goods and services are often produced/provided in the most efficient way possible; there’s an incentive to be more productive in order to increase profits and market share ahead of the competition – even in public services.
- There are clear rewards for innovation and risk-taking. This is sometimes supported by government policy (i.e. tax breaks, no profit limits, patent protection laws/copyright, minimal penalties for bankruptcy). Success often begets more success.
- It’s survival of the fittest; if you lose, you lose big. It entrenches economic and material inequality and the mantra of “letting the market decide” can reduce living standards and wages for those at the bottom or who can’t fully participate (i.e. elderly, disabled) with very little, if any, help for them.
- The drive for profit and efficiency can create dangerous working conditions, produce poor quality products/services, cause environmental harm and cause the sort of risk-taking/underhand behaviour that leads to “boom and bust” cycles and high levels of private debt.
- Market failures see otherwise essential services eliminated for being “unprofitable” or cut back to the point of being unviable – “knowing the price of everything but the value of nothing”.
The Social Market
Also known as: Welfare Capitalism, Mixed Economy, The Nordic Model, Rhine Capitalism, “The Third Way”* (*debatable), Freiberg School, Social Corporatism
Key Philosophers/Adherents: Konrad Adenauer, Ludwig Erhard, Gordon Brown*, Tony Blair*, Bill Clinton*, Jean Chrétien
Political Alignment: Social Democracy, Christian Democracy, Tripartite Corporatism
Applied in: West Germany & Federal Germany (1945-), Norway, Sweden, Iceland, Denmark, Finland, Canada
The Social Market theoretically provides the best of both worlds – the efficiency and competition of the free market with the social conscience of socialistic planned economics. It’s capitalism (supposedly) with a heart and a conscience. It means fair competition, strong workers rights, government intervention where needed, limited redistribution of wealth from rich to poor via a welfare system and progressive taxation….but you still have a choice where to spend your money and you can still win big or lose big.
- Many nations that adopt a social market model also adopt policies such as collective bargaining and involve workers and unions in business management, both of which encourages high rates of trade union membership and, generally, better working conditions.
- Social market economies often have the highest standards of living in the world, higher rates of human development, low unemployment and well-funded public services.
- Social market economies are often technocratic and value education and educators, hold non-academic qualifications in higher esteem and create a very well-educated workforce; they’re often key innovators in social policy and new technologies.
- The provision of a strong social welfare “safety net” may prevent people falling into absolute poverty, but it does little to address inequality; it “humanises” a capitalist system that’s fundamentally exploitative in nature.
- Higher taxes and high degrees of government intervention could stifle economic growth (by reducing consumer spending).
- They aren’t utopias: having a social market doesn’t solve serious social issues such as the integration of first-generation immigrants, depopulation, high rates of youth unemployment, gang culture, racism and political extremism – all of which are serious problems in current social market economies.
Also known as: Chinese Capitalism, “Socialism with Chinese characteristics”, Socialist Free Market, East Asian Model, Dirigisme, Corporatism
Key Philosophers/Adherents: Deng Xiaoping, Charles de Gaulle, George Pompidou, Benito Mussolini, Adolf Hitler
Political Alignment: Chinese Communism, Gaullism, Fascism, Syndicalism
Applied in: China (1978-), Japan (1946-1973), Singapore (1965-), South Korea, France (1958-1974), Vietnam (1976-), Nazi Germany (1933-1945), Russia (1990-)
State capitalism is where the government undertakes, supports or initiates commercial free market activity. Technically, the state owns the means of production (as in a planned economy), but the motive is profit, economic growth and efficiency. So instead of being the “dictatorship of the proletariat” as a step towards creating a stateless society, the government effectively acts as one big corporation.
- State capitalist economies often experience very rapid rates of economic growth in a short space of time by combining features of central economic planning and free-market efficiency.
- Manpower and resources can be mobilised very quickly and the state-backed corporations are often well-placed to target take-overs and acquisitions overseas, as well as producing goods for export.
- The government can raise money quickly by privatising their shares in state-backed companies/”crown jewels” which have grown in value over several years or decades.
- State-backed or supported corporations often act in a similar manner to feudal lords and cartels (i.e. Chaebol in South Korea, keiretsu in Japan, Russian oligarchs) with a concentration of political and economic power – even in a democracy (i.e. Singapore).
- The above is an open door to corruption and cronyism and may be a less efficient way of doing things than both a “proper” market economy or a planned economy; if the government favours one group of companies then all the others suffer because of it.
- State-backed companies are often good at copying others but draw blanks when it comes to innovation and creativity as there’s no market incentive for them to take risks and there’s no “start-up culture”.
Also known as: Socialism, Communism, Collectivism
Key Philosophers/Adherents: Robert Owen, Freidrich Engels, Karl Marx, Vladimir Lenin, Mao Tse Tsung, Fidel Castro
Political Alignment: Socialism, Communism
Applied in: Soviet Union (1917-1991), East Germany (1949-1990), Cuba (1959-), North Korea (1946-)
Inspired, in the main, by the works of Freidrich Engels and Karl Marx, planned economics sees the free market as the systematic exploitation of the working class by the materialist middle class (bourgeoisie) and the financier capitalist and land-owning class. Their solution is for the people as a whole to own the means of production (in practice, via the government), not the capitalists. With this, the economy can be centrally planned so people do what they can based on their individual abilities and take what they need – because a centrally planned economy would eventually produce an abundance of goods to give everyone, regardless of background, a similar standard of living.
- Unemployment is usually eliminated or very, very low. Similarly, most forms of material inequality are (theoretically) eliminated due to state assignment of goods and services like housing as well as state-sanctioned price controls.
- Productivity, technology and public services often see rapid advancements in a short space of time – particularly if they’re under-developed – due to collective ownership of the means of production (i.e. improvement in Cuban literacy and access to medicine rates).
- A theoretical reduction in both waste and misallocation of resources due to the lack of competition between private companies (though the Soviet Union wasn’t known for being a friend to the environment).
- Whenever central planning has been tried it usually isn’t limited to planning the economy, but also includes planning the lives of citizens; collectivist rule can sometimes be just as exploitative and harsher to live under than the worst free market capitalist society.
- As the vast majority of the world used some form of market and usually have governments that value private property, international trade is often difficult if not impossible as “repressive” regimes attract sanctions.
- When central planning fails, people can’t get access to the basics of life and there’s usually no choice – which usually isn’t a problem in even the most aggressive free market states.
The Welsh Economy’s Winners & Losers
The growth in average earnings in Wales since 1998 has broadly kept pace with the rest of the UK, increasing by 33.8% (adjusted for inflation) compared to the UK average of 34.8%. It’s a faster rate of growth that the both the East & West Midlands, Yorkshire & Humber and near enough the same as North West England.
Like GVA figures, while Wales has kept pace, average median weekly full-time earnings were the lowest of the UK’s nations and regions at £498 a week in 2017 – though this is only a few pounds off Northern Ireland and English regions outside London and southern England.
The thing to note is the gap between Wales and Scotland. In 1998, median weekly earnings were just £5 a week higher in Scotland, by 2017 they were £49 a week higher.
Within Wales, there’s no clear pattern – though some areas have come off better than others. 10 local authorities experienced faster real terms growth in median weekly incomes than the UK average, with Ceredigion, Monmouthshire and Bridgend experiencing growth near or above 40% between 1998-2017.
The area with the highest weekly median wages in 2017 was Neath Port Talbot at £569 a week, no doubt because of the Port Talbot steelworks. The lowest was Gwynedd at £421.
See also: Equal Wales: Sex Discrimination – Women
Wales has a distinctly smaller gender pay gap than the rest of the UK. Full-time male workers were paid, on average £92-a-week more than full-time female workers in 1998; by 2017 this had fallen to £68, the second smallest gender pay gap amongst the UK’s nations and regions. There is, however, still a long way to go to catch up with Northern Ireland, which had a pay gap of just £33 a week in 2017.
Across the UK as a whole, the pay gap has barely shifted in 20 years, remaining fairly consistent at around £100 over the period, driven mainly by greater gender pay inequality in London and South East England.
The tax base is far more important in terms of the “affordability argument” when it comes to independence. GVA doesn’t measure wealth, it measures productivity – how much a worker produces. Using GVA figures to say whether a nation or region is “poor” is wrong.
Whether Wales “can afford to be independent” depends on the tax base and tax rates – how much the government has to spend – as well as how they decide to spend that income and on what.
In July 2018, the Public Policy Institute of Wales published a paper looking at this very issue (pdf) with the devolution of income tax in mind.
The paper says that while the difference between median taxpayer incomes in Wales and the rest of the UK is small (£20,100 vs £21,100) there’s a greater variance at the top-end; to be in the top 10% of earners in Wales you need to make £41,200 a year, compared to £48,900 across the UK. Only 14% of all income tax take in Wales comes from top-rate and additional rate taxpayers, compared to 31% across the UK.
This is all worth looking into in more detail another time, but the good news is that there’s probably less income inequality in Wales compared to the rest of the UK (which lends itself well to a social market economic model). The bad news is that there’ll either have to be a lower threshold for the top-rates of income tax or a completely different set of tax bands in Wales to widen the tax base (at least in the short term)
The “Welsh 1%”
According to Barclays, in 2017 there were an estimated 12,500 people in Wales with a net worth of at least £1million – similar to Northern Ireland and ahead of the North East of England.
Topping the Western Mail’s “Rich List“, Wales has (or rather has produced) 5 billionaires – though it rises to around 7 if you count net-worth in dollars rather than pounds – a similar number to the Republic of Ireland and Denmark and ahead of many nations with higher GVA such as Monaco, Belgium and New Zealand.
So there’s no reason why you couldn’t make a substantial fortune coming from or working in Wales and pretty much everyone at the top the Welsh “Rich List” has got there through work and wise investments, not inheritance.
Relative Poverty Rates
Relative poverty is defined as having a household or individual income at or below 60% of the average median income.
The UK average is used to calculate the figures for all of the UK’s nations and regions, but if Wales were independent only the Welsh average median income would be used. If that were the case, then the poverty line would be slightly lower in Wales and, theoretically, the proportion of people living in relative poverty would also reduce slightly.
Using the figures that we have, Wales has the joint-second highest relative poverty rate for all people with the West Midlands. 24% of people in Wales live in relative poverty, falling from 27% in 1998. Perversely, only London – the wealthiest and most economically productive region in the UK – has more people living in relative poverty.
The Welsh figure is, nevertheless, only 2 percentage points higher than the UK figure of 22%. However, Scotland’s relative poverty rate in 2016-17 was just 19%.
What about poverty in specific groups?
Children tend to come off worse. In 2016-17, 28% of children in Wales lived in a household with an income below the poverty line. This is compared to 24% of working age adults and 20% of pensioners.
Despite being very high compared to the rest of the UK, child poverty rates have seen the sharpest decline since 1996-97, falling by 8 percentage points. Pensioner poverty has also declined since 1998, falling from a rate of 26% in 1996-97 and reaching lows of 14% between 2011-2013 before rising again to 20% in 2016-17.
The Working Poor
As I’ve previously mentioned, Wales’ dirty little secret is that many people living in poverty actually come from working households.
In 2016-17, 29% of Welsh households with at least one adult in work had an income below the poverty threshold and even when all adults in a household were working, the figure was still 11%. In-work poverty has actually increased in Wales since 2009-10 as well.
While workless households – probably reliant on welfare – were still at a much greater risk of living in poverty than households where someone works (62%), it’s not a great advert to re-engage with the workforce if there’s anything between a 20% and 50% chance that you’re going to remain in poverty depending on how many people in your household work.
The reasons as to why in-work poverty rates are so high are likely to include: lower pay than the UK average, several years of post-recession wage freezes and high inflation, welfare reform (particularly tax credits and the introduction of universal credit), increased self-employment and people having to switch from full-time to part-time or zero hours work (more on the latter in Part XIII).
What impact does all this have on children?
There’s a proven link between high levels of deprivation and poor achievement at school. Living in poverty is also likely to seriously impact a child’s life chances and both mental and physical health.
Even when their parents do what they’re told is “the right thing” and go out to work, it only halves a child’s chance of growing up in poverty. Where all adults are in work, 15% of children grow up in poverty, rising to 36% if one adult is in work. For children growing up in workless households – which could be due to long-term disability and place other burdens on them like caring responsibilities – the figure rises up as high as 72% (though StatsWales cautioned on the reliability of that data).
Which economic model “works” for Wales and why?
At the moment in the UK we have something in between a free market economy and a social market – there’s a welfare safety net, but it’s not particularly generous; most essential public services are under public control supported by moderate levels of taxation (despite experiments with free schools and private contracts in the NHS in England); where there is a free market it’s regulated, but trade union rights have been curtailed and shareholders often take precedence over workers and customers.
It’s very difficult to say which model would work best for Wales because the application of a particular economic model is wholly dependent on the policies of the political parties we elect. On paper, Labour and Plaid Cymru support at the very least a social market, while the Conservatives in Wales would probably prefer more market involvement in public services without it becoming an American-style free for all in health.
In a nutshell, the current system only works because the alternatives are worse; despite the romanticism for a collectivist industrial past, very few people in Wales would be happy living in a communist society. Meanwhile, the only people in Wales advocating a fully free market are assorted “I’m alright, Jack” headbangers like Patrick Minford.
State capitalism might be a way to generate the high the levels of growth we’re told we need to make independence viable (Part XII), but it would likely come at a heavy price.
The options facing Wales are either continuing largely in the same direction of travel as we currently are (mixed market lite) or putting the social market on a more firm footing by adopting some of the policies of post-War Germany and the Nordic countries (higher tax take, worker councils, technical education, state-owned enterprises, co-operatives).
The social market could be adapted to meet new long-term goals such as a “steady state” economy (Part XII) or meet the challenges of automation (Part XIV) – for example, in the case of the latter, by adopting policies such as a citizens income or “robot tax”.
When should government intervene in The Market?
A pure free-marketeer would argue “never” (even though the protection of property rights by the government is essential for a free market to work), while someone who believes in a planned economy or state capitalism will probably ask, “Market?”
Despite living in a supposedly neoliberal capitalist economy, government intervention is pretty commonplace even if it perhaps doesn’t go as far as some people believe it should. There are many instances where government intervention is accepted as part of responsible economic custodianship and would equally apply to an independent Wales:
- Macroeconomic intervention – Long-term, big-ticket spending to boost economic growth during recessions or create an environment that promotes economic growth (i.e. spending on infrastructure, new schools, new hospitals).
- To change consumer behaviour and control negative externalities – Intervening to stop people from doing harm to themselves or others in a manner that could hit economic growth and business (i.e. regulating gambling, introducing age restrictions, passing regulations on pollution and introducing taxes on sugary drinks).
- Market failure – When private companies fail to meet obligations in a public good or service, the government steps in to either subsidise or provide those goods themselves, whether permanently or temporarily until a more suitable company is found to take over.
- To prevent the creation of monopolies – Monopolies, while great for the person or company owning it, can lead to higher prices, low wages for workers and a lower quality of service (due to a lack of competition). In some sectors, it can be politically and socially damaging (i.e. magnates politically influencing news, Trinity Mirror’s dominance in the Welsh media).
There are also some circumstances where you could argue that the government should not only intervene but actively take control (nationalisation), whether directly, by arms-length (such as via a state-owned enterprise) or via a not-for-profit model.
- Natural monopolies – Monopolies where realistically only a single provider can provide a service due to the high economy of scale, high fixed costs involved and impracticality of allowing competition. Running them for profit would lead to a situation mentioned earlier regarding monopolies, so it might perhaps be best for them to be in public ownership to be run for the public benefit (examples: energy generation & distribution, rail infrastructure, gas, water, roads).
- Services for the public good – Services where there’s no incentive to provide them for profit, it provides some sort of welfare benefit or consuming them doesn’t or can’t reduce the levels of service to others. It’s, therefore, necessary for them to be paid for through taxation or heavily subsidised by the government with any profits generated (if any) shared by taxpayers (examples: healthcare, education, defence, public transport, policing, fire & rescue, prisons).
- Market failure in a piece of key (privately owned) national infrastructure – As alluded to earlier, if there’s a service being provided at profit, but isn’t being used to its full potential or presents some sort of serious economic risk if it was withdrawn, then it may provide justification for the government to take ownership (examples: Welsh Government purchase of Cardiff Airport, the UK Government taking over rail franchises).
- To prevent a financial collapse that would hurt the public – Government ownership of banks can provide a level of stability when they’re near bankruptcy following poor decisions and leadership, as seen during the Great Recession. The UK Government nationalised Lloyds, RBS and HBOS to prevent a run which would’ve turned a serious economic crisis into something resembling the 1920s-1930s. However, as Iceland found out, sometimes letting banks fail is perhaps the right course of action in the longer-run even if it means very real short-term pain.