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October 16, 2006

Jeffrey Sachs is Wrong

Set up a straw man, disprove that contention and then claim victory for your view of the world.

Yes, I know, that's bloggers for you. We do expect rather higher standards from economics professors, most especially when writing in a magazine quite as august as Scientific American.

Jeffrey Sachs:

Austrian-born free-market economist Friedrich August von Hayek suggested in the 1940s that high taxation would be a "road to serfdom," a threat to freedom itself.

Straw man there. Hayek did not say that high taxation would lead to serfdom, rather that planning of the economy would. Which means that looking at the social choices made by the Nordic countries as opposed to the Anglo-Saxon ones do not prove his contention:

Friedrich Von Hayek was wrong

Why is that then? For this reason, as Sachs himself says:

They combine a healthy respect for market forces
The Nordic states have also worked to keep social expenditures compatible with an open, competitive, market-based economic system.

That's the bit. You can indeed, at least in smallish near homogenous societies, have the State as the provider of a number of services without doing too much damage to the economy. But that was never Hayek's point. Rather, that you cannot plan the economy without it leading to that Road to Serfdom.

Sachs thinks he's made a clever point about Hayek and unfortunately he hasn't. The Nordic countries do indeed have large social transfers but they have labour markets and an absence of planning in the economy that is much more like the Anglo-Saxon model than it is like the Mediterranean or Rhineland models of capitalism.

There is more as well:

America's supply-siders claim that the best way to achieve well-being for America's poor is by spurring rapid economic growth and that the higher taxes needed to fund high levels of social insurance would cripple prosperity.

Possibly a reasonable contention.

The results for the households at the bottom of the income distribution are astoundingly good, especially in contrast to the mean-spirited neglect that now passes for American social policy.

OK, what are real incomes for the bottom decile of the population in the US and the Nordic countries? We'll have to adjust for currency differences, for the different costs in those countries and so on but fortunately, someone has done that for us. It's here, and we'll use as a percentage of US median income shall we? Just so that we can compare like with like.

The bottom 10% of the US population get, on average, 39% of the US median income. The bottom 10% of the Swedish population get 38% of the US median income. The bottom 10% of the Finnish population get 38% of the US median income. The bottom 10% of the Danish population get 43% of the US median income....and in Norway, with all that oil, the bottom 10% get 50% of the US median income.

OK, take away the oil state (some 20% of Norway's GDP comes from oil and gas) and we have an interesting result.

We can have a generally open economy with a high rate of redistribution and social care by the state (the Nordic model) and a generally open economy with a low rate of redistribution and social care by the state ( the US one) and the bottom 10% of the population get almost exactly the same amount of money.

Wow, that really does prove how much better the Nordic systems are, doesn't it?

Professor Sachs, please call your office. Your secretary has booked you into that needed Logic 101 course.

October 16, 2006 in Economics | Permalink


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No, it wasn't just central planning. Hayek definitely did believe that the redistributive social democratic state was the first step on the road to serfdom. He certainly thought that something like the NHS would end up being the Gestapo, and if you read Samizdata on the subject of cigarette smoking you will see that this part of his intellectual tradition has not died out at all.

btw, on the subject of government-provided health care, I know it is tedious to keep pointing out that the Nordic countries provide much better health care to their bottom income decile than the USA does, but there you go.

Tim adds: I went and read the Smeeding paper that chart at TCS is based upon and he does indeed make that point. He also adds that food is vastly cheaper in the US and he calls it something of a wash. So do you mind terribly if I continue to use the figures from that paper, as he has already addressed that point?

Posted by: dsquared | Oct 16, 2006 3:52:10 PM

If you go to the CIA factbook you find that per capita gdp -- with the same adjustments-- in
Finland, Sweden & Denmark is 75% of the US.

So given this, it does say something that the poor in the four countries -- the US, finland, Sweden & Denmark actually experience about the same standard of living.

Tim adds: Indeed. The poor live about the same and the rich in the US live vastly better thaqn the rich in the others. We've increased human utility and pleasure there haven't we? So you agree then that the US system is better?

Posted by: spencer | Oct 16, 2006 4:09:44 PM

But Tim hasn't anybody told you that the food consumed by the bottom 10% of the US population is bad for them? If they knew their own minds they would know this and thus it should be taxed out of their reach. Nourishing food - salads and the like - will remain lightly taxed. You see it's for their own good: (the US equivalent of) the man in Whitehall really does know better.

Posted by: Umbongo | Oct 16, 2006 4:15:29 PM