Friday, 19 January 2007

Latest lunatic Tory idea: The return of the Permit Raj

Is there no act of idiocy to which David Cameron will not ascribe in his attempt to woo votes? The latest suggestion from the Conservative’s Working Group on Responsible Business is to impose quotas for producing fatty or sugary foods and alcohol in an attempt to tackle obesity and binge drinking.

If it is true – and so far it is only part of a consultation document – it is a sign of how far the Conservatives have moved from the economic liberalism they briefly espoused under Margaret Thatcher.

Quotas for anything are a disaster. They are aspects of the planned economies that so blighted the lives of billions during the last century. In the first place they are based on the idea that government knows better than individuals how much of a commodity is needed, and that overproduction is wasteful. Liberals understand that overproduction reduces prices, which in turn discourages further production until an equilibrium is found between how much consumers want (and are prepared to pay for) something and how much producers want to make. A quota system assumes that too much is being made, which in turn assumes that too much is being consumed, because consumers are allocating their resources (spending their money) “on the wrong things”.

In other words, Mr. Cameron and his apparatchiks are suggesting that because we are too keen on fatty food and booze, the best solution is to reduce supply through handing out a limited number of production licences.

As well as being obviously illiberal (who is Mr. Cameron, or indeed his 643 colleagues, to decide how much I or any of us want or ought to have of a commodity?) it is painfully stupid. Anybody with an A Level in Economics (that’s a lot of people other than me, then!) knows that quotas are an inefficient and harmful means of reducing supply. A far more effective method and one that distorts economic exchange far less is a tariff or tax system. Rather than reduce the quantity produced by government fiat, the government adds a tax, thus raising the cost and so reducing demand. This is cheaper to administer, raises revenue for government, harms business less than arbitrary quota systems (which might see a firm suddenly lose its quota and so lose its business) and allows individuals to continue to allocate their resources as they see fit.

The quintessential example of the quota system is the Permit Raj or Licence Raj that afflicted India between 1947 and 1990. India’s government was so enthralled by the Soviet Union that they attempted to plan their economy. The Indian State Planning Commission would issue licences for any and all production; without a licence, production of something as mundane as steel was illegal. The result was rampant corruption, as these precious licences were worth a fortune: with supply limited, prices rise, so licensed production of a commodity is even more profitable. In a real sense, quota systems issue licences not just to produce fatty food or steel, but to print money. They also distorted the economy, because Indian manufacturers were not able to use the price signals in the market to respond to consumers needs. Between socialism and corruption, the Indian economy shrank, poverty worsened and people starved.

The Conservative’s quota system would subject to the same problems. The issuing of licences to produce fatty, sugary or alcoholic products would encourage corruption and harm British industry. British consumers (that’s all 60 million of us) would suffer as prices for goods we clearly want would rise. It is one of the most crass examples of interventionist economics in some times. Friedrich Hayek was right to opine that the Conservatives are only fair-weather “auxiliaries” of liberty whose real interventionist instincts will always come through.

What is particularly surprising is that even if they want to impose it, I cannot see how they can. The free movement of goods throughout the EU prevents them from placing quotas on European food entering the UK, so the upshot would not be rising prices and reduced consumption but simply a transfer of supply from the UK to Europe. This whole proposal smacks of one that has not been thought through.

This is very disturbing. There is nothing wrong with politicians seeking to improve public health, though that does not justify their dictating to individuals how they live. However, one would hope that they would utilise intellect and experience in perusing our interests. Indeed, that is rather the point of representative democracy: we cannot all be experts in everything, and where public policy is concerned most of us cannot be experts in very much as we have real jobs to do. Thus we look to our leaders to exercise their knowledge and utilise the time that we free up by paying them to be full-time politicians to pursue our interests.

Sadly, it seems the Conservatives have not been using their time wisely. Instead, they have reverted to type: tell people how to live their lives and damn the consequences!

1 comment:

Kit said...

I was even more worried that Cameron seems to believe that Europe's carbon trading scheme was working.