Wednesday, November 24, 2004

"Social engineering"

ACT's Deborah Coddington complains about "social engineering" in a recent NCEA economics exam, pointing to two specific questions:

'The New Zealand government provides 'free' education at state secondary schools. Explain why this results in a better resource allocation than the free market.'

'Explain why using 'free market' policies causes income inequality.'

Coddington's objection is obviously that these questions place her party's policies in a poor light - and they do. But the problem lies not with a cabal of evil collectivist examiners waging a revisionist campaign to poison the minds of the young against ACT, but with mainstream economics. And it is not the examiners who are being "revisionist", but Coddington herself.

The first question is about market failure, something that ACT likes to pretend don't exist. Why do we have universal public education? Because the free market failed to provide adequately. In the Nineteenth Century, education was a private affair, handled by private schools and charity. Unsurprisingly, this resulted in many people missing out, as the poor chose to put immediate goods (like food and shelter) above long-term ones, while employers generally chose to freeload rather than educate an increasingly mobile workforce. In economics terms, there was substantial underinvestment, because the multiple beneficiaries of education meant that even those who could pay for it had a lower incentive to do so. Universal provision resolved this, to the benefit of all.

It also raises questions of what constitutes a "better" resource allocation. ACT adheres to the dogma that the best allocation is whatever the market produces, but this ignores the fact that markets exist to serve people (rather than vice versa). Most people would consider an allocation where everyone was educated superior to one where some missed out. If ACT disagrees with this, they have not yet been brave enough to say so.

The second question is obviously highly damaging to ACT given the egalitarian attitudes of most New Zealanders, but is widely accepted by economists. The tradeoff between economic efficiency and equity (or equality) is well-known and included in most basic economics textbooks. But what's most interesting is that it is accepted by ACT. In her 2002 conference speech, ACT President Catherine Judd quotes Jim Peron, giving a textbook answer to the question:

A free society will not be one of equality. Once human beings are free, the choices that they inevitably make will change their levels of wealth. Even if we were able to redistribute all wealth equally, once the heavy hand of centralized control was removed, inequality would immediately result. Imagine a society of complete equality of wealth but one where all people were free to make decisions regarding their own lives. If wealth were equal at 8 a.m. it would be unequal by 8:01. Some individuals would spend their money, while others would invest it. Some would gamble with it or buy pastries. Others would purchase tools for work or pay for education or training. Each choice means that the distribution of wealth will become progressively more unequal.

(This parallels Nozick's famous Wilt Chamberlain argument)

The idea that inequality is both a consequence of the free operation of markets and vitally necessary for their proper functioning is a key component of the social darwinist strand of classical liberalism ACT espouses. For Coddington to deny this and complain about economics students being asked to confirm her own party's core beliefs is simply intellectually dishonest.

Coddington ends with a quote from 1984 calling for people to be free to acknowledge the truth. I agree wholeheartedly. But the truth here is not as Coddington claims. The fact is that stones are hard, water is wet - and free markets cause inequality.