Interviewer: The timing of your book is very propitious. With the coming of the second economic crisis, it has taken on a whole new meaning. What is true and what is not true. Why did you write this book? You started before it was clear that we were in this mess, didn't you?
Interviewee: Yeah, it's been a bit of a hobby for me for a while. I'm a philosophy professor, not an economist. And one of the things that interest me in philosophy are arguments. Philosophers tend to be fascinated by arguments that sound right that turn out not be. We teach critical reasoning to our students, to beware of this to beware of that. But Economics is well known as a minefield of fallacy.
That is, it is extraordinarily easy to come up with sort of do-it-your-own theory of how the economy functions that turns out to be totally wrong.
Interviewer: The book is subtitled "Economics For People Who Hate Capitalism."
Interviewee:Right.
Interviewer: Yet you spend the back half of the book talking about the fallacies of those on the left. Who's the target for this?
Interviewee: Ah, "Hate Capitalism" is strong. Really it is for people who have reservations about Capitalism -
Interviewer: "Unease" I think is the word…
Interviewee: Yeah, and I think thats pretty much everybody. Most people have moral intuitions that are… that are implicitly anti-capitalist. There are features about the system - the way it encourages greed and self interest and so-forth - that, um - or lack of concern for the public good - that makes people nervous.
Interviewee: So, the strategy is to start out by pointing out how a lot of right-wing arguments (I mean, often the right has a bit of a monopoly on economic wisdom, where they just sort of appeal to various, you know, luminaries--Friedman and so forth) as arguments, but in fact the arguments don't hold water...so the idea is to kind of entice people who sort of avoid economics because they think it's just right-wing propaganda.
Interviewer: That's the first kind of big right-wing fallacy you take on, the notion that somehow capitalism is natural (and...allusions to evolutionary biology) and that the markets, if they are left unfettered, will be inherently efficient. You know, current economic situation seems to put a lie to this, but again, bring forward your case.
Interviewee: Well, there's this little parable called "The Prisoner's Dilemma" that's had an enormous influence, um, on people's thinking about it. I mean, not to get into the whole detail of it, but... it comes out of what is called experimental game theory, which is when people put a couple of, usually, students in a room, and you get them to play some little competitive game. And, it's proven surprisingly easy to construct scenarios in which when each person pursues their own interests, it winds up with an outcome that's worse for everybody.
Interviewer: Right.
Interviewee: And, you know, everybody has always been sort of aware of it, but we've gotten, like, really really precise formulations of the conditions under which this will occur. And that has done significant, um, amount of damage to the old-fashioned view that self-interest naturally produces the common good. What we've discovered is that self-interest produces the common good under the right sort of conditions...
Interviewer: ...the right rules...
Interviewee: ...a very well-structured capitalistic economy.
Interviewer: Right.
Interviewee: A lot of this realization also came from the experience with the collapse of the Soviet Union and the transition to... the supposed transition to capitalism that was gonna occur. And a lot of the advice that was getting generated by economists was... getting capitalism was no problem. All you do is just take all this stuff that was owned by the state, just sell it off, and ta-da! You'll get markets. And there were a lot of mea culpas that came out of the economics profession after that, because what they discovered was that, if you just take everything, sell it all off, and let people do whatever they want, what you get is rampant criminality.
Interviewer:
Well, I was going to ask, if the logical conclusion of unbridled pursuit of self-interest is breaking the rules? Because sooner or later, your self interests are going to be so obviously profited by breaking the rules, you will.
Interviewee: Now on the one hand its true, so the old folklorism that says, "If everybody just acts in a bloody minded self-interested way,it's going to be bad for everyone." I mean that is basically true, but the other piece of folklorism that says that the only way we get socially beneficial outcomes is if everybody is selflessly alturistic, engaging in the public good, is also false. There is a genuine in Adam Smith and the classical economists which shows that in a properly structured market economy, which means when people respect the property rights of other people, when people abide by their contracts, and so forth, that in those right conditions, you can allow a kind of selective decline of morality in your society. That is there are many economic interactions in which you can get by with a very very minimal level of moral constraint.
So, there, the...the wisdom that ultimately gets distilled out of 200 years of debates over this sort of self-interest verses alterism is that, again, if you structure the rules properly, you can actually get high levels of public service out of corporations even though that's not their intention.
Heath: The same way, you know, like, in a properly structured sports competition, you can get great athletic performances, even though the athletes themselves may not actually care.
Gregg: Right, right.
Heath: They may just be in it for the paycheck.
Gregg: Back on the right of center. Uhh, and there- there- even in the face of all of this interest in stimulus, there continues to be an orthodoxy around the center-right, that taxes are bad. Because that in the end of the day, taxes suck money out of the system. You talk about the fallacy of the government as consumer. Explain that to me with more detail.
Heath: Well there's, there's a- a picture, in the back of people's minds, where they say um, well you know, the- and often it's expressed in this sort of "the killing the goose that lays the golden eggs" metaphor. That somehow the market, that produces wealth, and the government just sort of skims it off of the market and then spends it.
Gregg: Right. Wastes it. And it's gone.
Heath: Um, and you know, and that- that is a fundamentally mistaken understanding of the relationship between the government and the private sector. Um, neither the private sector nor the government produce wealth. Uh, the- Look, this is a public television station. Um, you're presumably making some money from the public sector, yet right now you're producing economic value,
Gregg: Uh-huh.
Heath: whether or not you're on the public payroll or the private payroll. Doing the job that you do generates the same level of economic value.
Gregg: Cause it's consumers that produce economic wealth, not governments or- or corporations.
Heath: That's right. And this is, right now, an economic transaction occurring between two employees of the state. But it doesn't actually- I mean, so, the state isn't thereby consuming wealth, it's generating a certain kind of product, which the private sector also generates. And so similarly, y'know, a security who's working in the private sector, and a police, uh, person working in the public sector, are both producing the same economic product. It's just the transaction is being organized in different ways. In one case individuals are paying, and the other case people are paying collectively through taxation. But still services are being provided.
Interviewer: you also write about a concept that I think is incredibly important right now that originally came,again, as part of a right-of-centre notion, and this is a whole notion of a moral hazard, traditionally applied to welfare, that if you give, you know, your intentions may be good, you want to make sure that poor people don't suffer unduly, but in doing so you provide a disincentive to work. How is this moral hazard applying right now to the current bank crisis?
Interviewee: hah, well yeah right now it's like moral hazard all over the place. There's so much moral hazard that people stopped worrying about the moral hazard. I mean the term comes from the insurance industry and the observation that if you, if people are fully insured against some bit of bad luck
Interviewer: right, the bad luck follows
Interviewee: they can suffer that bad luck more often
Interviewer: and that's empirically documented, isn't it?
Interviewee: yeah, absolutely, absolutely. It changes people's behaviour. I figured this out once when I rented a car, back when I was a student I had no money and I declined the insurance. And then I started driving the car and all of a sudden I was like, get away from me, they make these roads so narrow. I was incredibly nervous, and so I was driving far more cautiously which made me realize that the way I normally drive is in part, you know, I take certain risks partly because I'm insured. so that's the moral hazard phenomenon. One of the things though that people have begun to realize is that that's an absolutely ubiquitous phenomenon, it's not just with insurance. So whenever you're not bearing the full costs of your choices you have a tendency to make choices that are more costly. So a lot of the concern about, what gets articulated as a concern about personal responsibility and wanting to hold people personally accountable for things is a sort of legitimate outrage about people creating costs for society only because they themselves don't have to bear it. But what I try to point out in the book is that that's a very, very generic feature of insurance systems in general and that often the call for personal responsibility is tacitly an attemp to just sort of undo all of these forms of either private or social insurance that exist, and that has the effect of destroying a very, very significant source of economic value, which is the kind of risk protection we can get by pooling certain forms of uncertainty. So there's a kind of bad cost/benefit analysis that gets done in a lot of these criticisms that hinge around personal responsibility, in that they look at the costs that come from the moral hazard, but they completely ignore the benefits that come from the mutual protection arrangement.
Interviewer: on the centre-left, the notion of just prices, there are things out there that are essential, like electricty, or are socially important, like housing or education and that we should cap these prices. Tuition should be, rent control should be...again, you make the point that invariably these things have also unintended consequences that aren't necessarily good for the economy or even the intended recipients.
Interviewee: there's a long-standing debate about this the extent to which, it's a very long-standing debate, like thousands of years old about the whole concept of just price, and then there's about a hundred-year-old debate amongst people on the left about whether or not you can actually usefully achieve social justice objectives by manipulating prices
Interviewer: right
Interviewee: and the dominant conclusion amongst economically sophisticated leftists is that you can't and that you're better off letting the market determine prices except when you've got something like a pollution exponality or an obvious distortion of the mechanism. But you shouldn't try to manipulate prices just for distributive justice reasons. On the other hand, there is a sort of economically uneducated segment of the left who sees it in straight-forward equality terms, so they think that right-wing governments deregulate prices and then they go up, and left-wing governments are good to the people and so they regulate prices and prices go down. That has an enormous number of unintended consequences. So I give the example of electricity. I mean now, electricity is basically no longer subsidized in Ontario. But during the period in which it was subsidized, there was some crazy political theatre that was done where, you know, the premier goes to some gigantic surburban house with a huge flat-screen television in the background and announces that electricity is going to remain capped. And this is supposed to help the poor. Well, the poor, they may pay a larger percentage of their income in the form of electricity bills, but they consume a whole lot less electricity than the average middle-class or upper-middle-class houses, right, and the problem with cheap electricity is that everybody gets cheap electricity and that's a heinous way of delivering a benefit to the poor. Like if I proposed a welfare program that said for every 1 dollar that goes to poor I'm gonna give 2 dollars to a rich guy, they would say well, you know, why don't you give 3 dollars to the poor? But giving everybody in the whole province cheap electricity, when people in the middle classes consume twice as much electricity as people in the lower classes has exactly that structure, it's a massively inefficient way of delivering that benefit.
Interviewer: you also point, there's the same inefficiency in trying to fiddle wages. We try to often talk about value. You know, it's not right that a teacher gets paid less than a base-read investment banker. In fact it's perverse and morally wrong. This,again, this kind of left-of-centre perspective on things often does not bear the kind of efficiency that the market would otherwise.
Interviewee: I think wages are very complicated and you know everything, I mean, I think there's a broad consensus emerging amongst left and right, is that our capitalist system allocates wages doesn't correspond to anyone's intuitive sense of natural justice. It's not like a natural reward for how good you are. But it's also....
Interviewer: or even in value, as you point out
Interviewee: that's right. Wages are competitively determined, and that generates weird consequences. And I think the piece of the picture that's most important is missing; is that society necessarily must engage in some form of coercion in order to get people to do the jobs that need to be done. And that if you just did an interview with high school students, and people do this, where they ask them, you know, what are your plans, what would you like to be? There was a funny one in the United States where they interviewed a huge number of high-school students and then they compare, like they make a pie graph that shows what the students wanna do and they compare that to a pie graph of the actual economy and what people have to do
Interviewer: what's available, sure
Interviewee: so, you know, clerical support is about 15% of the economy and the number of high school students who intend to go into administer and clerical support is exactly zero, right? And then I make a bit of fun of it, but you know like "rapper" tends to be overrepresented, you know or actor/actress, that kind of thing, model
Interviewer: director...
Interviewee: highly represented, yeah that art house film director, rock musician is over-represented in the aspirations of the high-school students relative to the economic demand for it. So if you look at those 2 pie graphs, then something has to happen between here and here that's going to get people to do these things. So I say, look, to picture how coercive it is, imagine a giant computer that every so often the canadian government tries to generate these computers that'll tell high school students what to do. Imagine a computer that you fed in all your preferences and abilities and then you took a little test and the computer literally assigned you a job, because, in order to reconcile available human resources with social need. That would be extremely coercive. So we don't have to have a giant computer like that and we don't have to have a beurocrat who tells you what to work in. We instead have a labour market.But the labour market has to have that same subtily coercive structure. And one of the ways in which it does that...
Interviewer: it forces people into the jobs that are necessary as opposed to ones that are preferred. Well you in fact, you say something very surprising here
Interviewee: by lowering wages. That's how it does it, by, people compete with one another and it drops wages and increases unemployment.
Interveiwer: well, I've never thought of this before, but you are saying that wages in no small measure are dictated by either the difficulty or the ease of replacing the individual.
Interviewee: yeah, I say that explicitly...
Interviewer: and you use the example of doctors and nurses in a very interesting way.
Interviewee: yeah, the best way to think about your wages is in terms of how easily you can be replaced. And wage differentials are in part, they are incentives for people to enter particular fields. So with doctors and nurses I talk about employment equity because I think that there are, and pay equity, because there are generally perverse consequences of artificially raising salaries in what are called "pink ghettos", areas of primary female concentration. And doctors and nurses provides a very good example because, you know, one of the things that's happened in Canada and a lot of other countries, western countries in the last 20 years or so, is the feminization of medecine, I mean in Canada
Interviewer: oh, they dominate medical schools now
Interviewee: yeah, more than 50% of medical school graduates are female, so and so forth. and, one of the things that's been attracting so many women to medicine is that, these are women who 30 years ago, 40 years ago would have become nurses, because that opportunity was denied to them. But obviously as soon as medical school admissions become open, they gravitate towards medecine, in part because you make so much more money.
Interviewer: because of the pay differential
Interviewee: so, you know, that salary differential between doctors and nurses was a huge incentive to, like, enter the medical profession. And so artificially eliminating that disctinction, or that pay differential, 30 years ago, would have, if anything, diminished the incentive the women have to become doctors.
Interviewer: not that long ago, newsweek had a cover that says "we're all socialists now". How about the fallacy, again, which is quite pervasive now, that laissez-faire capitalism is doomed?
Interviewee: I gave a talk yesterday called "The Unexpected Persistence of Capitalism". There is this sense that comes along with every major economic crisis that now the system's finally up. I was an undergrad in 1987 with the big crash came, and I thought this was the end of capitalism, and that now we had to start thinking about how we were going to organize, you know, a socialist economy and so forth. Some of that comes from a failure to understand what causes these sorts of economic crises. I mean, I don't know how the US government is going to fare in this crisis, but I think capitalism, I can quite commonly predict that capitalism will emerge unaffected. I mean, it's really hard to stamp out markets. A really good analogy is the market for illegal drugs, where that market has been flourishing despite the attempt of many states around the world to stamp it out.
Interviewer: of course
Interviewee: Now anybody who thinks that the war on drugs is a lost cause: Why?because well buyers and sellers have a way of getting together. M...., is necessary committed to the view that any kind of war on capitalism or abolition of capitalism is going to be equally hopeless, right, because they're even talking about stamping out, not just a market for 7 or 8 controlled substances but markets in general. They have this amazing tendency of sort of springing back right? They don't work very well when they are unregulated. But that doesn't mean you can just get rid of them. Again, because people who are selling, people who are buying have this way of getting together. So I think capitalism will persist. Part of the problem comes from peopl not really understanding what causes these crises. And so people have a tendency to subscribe to the old Marxist view which says that there's this very, very deep structural feature of capitalism, a contradiction in the system that generates periodic crises. Whereas the consensus view amongst economists after Cainse's(?) work is that it actually has to do with very specific disruptions in money supply,or in the financial system. I mean, the system relies upon savings being effectively recycled and turned into investment. Like, the crucial thing is that when people don't spend and save, is that that money needs to be recycled and turned into investment.
Interviewer: well, I wanted to ask you about that because we've gone with incredible speed from an orthodoxy around "balanced budgets are good and the way to manage our economy" to the entire western world is now saying "no, no, no, we must invest, we must stimulate the economy, with public spending even if it means the creation of significant deficits. Is there a fallacy in this current orthodoxy?
Interviewee: I don't think so, I think the situation has just taken everybody by surprise. I mean, the big winner from all this is Paul Krugman, right? One of the big debates amongst economists was, Cains didn't think that, the whole problem then with recessions is transforming savings into investment. Cains thought that manipulating money and money supply, interest rates and so on, the monetary tools, were going to be very weak and ineffective and therefore the government had to actually go out and spend. What happened after the 2nd world war was a sort of gradual but steady erosion of the view that fiscal measures would be necessary. People started to be impressed at how much you could do with monetary policy.
Interviewer: Right, by just fiddling around with interest rates, you can control inflation
Interviewee: right, and central banks got flexible exchange rates made it easier and so on, so central bankers got a lot more sophisticated. So even Krugman was saying things a decade ago, saying "actually the world more closely ressembles the classical model because we have, instead of having a market and set interest rates, which never worked very well, we actually have this thing called "the Fed" which sets it. And the Fed does such an amazing job that capitalism actually works closer to how it was supposed to work with the Fed doing the work
Interviewer: that's why you called Alan Greenspan "the Maestro".
Interviewee: that's right, that's right. And so a lot of the old-fashioned ..... were really on the defensive,in trying to argue that sometimes fiscal policy would be required, and the monetary view was in the ascendancy. And one of the big debates that Krugman was involved in was trying to show that well Japan was actually in what's called a "liquidity trap" which is when you can no longer use monetary measures.
Right, right.
Especially when your prime goes down to zero.
Yeah, yeah.
That takes it out of your hands.
So there's the zero lower bound is like then makes you have to flip over to fiscal policy.
But he was on the defensive always trying to argue this
and most economists were sort of skeptical or denying outright this view.
And I think even six months ago if he pulled the profession the majority of people would say "Oh yeah, there's no reason for fiscal measures."
Interviewer: "Yeah... no effect there, why?"
Interviewee: "Because monetary policy is so powerful."
Interviewer: "Right."
So it's only when, when the United States... the United States has clearly run out of monetary options, 'cause they're at zero interest rates. So, fiscal stimulus, right? Back on the agenda. But that's, it's not so much that anyone ever denied that. People just thought you'd never get yourself in a situation where that was the only option.
You write in the book that you two share the unease that many have about a pure laissez-faire capitalist system, yet you clearly are a believer, that this is going to be the dominant system that we're going to have. You want to see kind of things that would improve the workings of the system, that obviously doesn't work in the theory, in the philosophical side. What does that system look like for Joseph Heath?
Well, there's just a little factoid that I quote in the book that I think is so startling that I quote it twice, which is that the Swedish welfare state has achieved higher levels of equality than the Soviet Union ever achieved.
And productivity.
And also they're no slouches in productivity either. Uh, you know, Canada imports paper from Sweden.
Yeah.
Why...? Sweden is a phenomenal economic success story. You know, they've had ups and downs, but um, but from the standpoint of achieving social justice understood in terms of economic equality, they did better than communism.
Right.
So I think the welfare state compromise that it's sometimes called, that is, having a state which engages in complementary production of public goods and club goods, is a broadly speaking satisfactory arrangement. So what I argue for in the book is what I call opportunistic egalitarianism, whereby we have to recognize that being too heavy-handed in trying to achieve more egalitarian social outcomes can severely compromise economic efficiency. You can really muck up the market by, you know, imposing confiscatory taxes on people's incomes and stuff like that. You have to be smart about it.
Heath: One of the things about the welfare states, one of the reasons why - you know, there is a right-wing view that says that states that spend too much and tax too much are going to be punished by the gods of the free market. There's actually no data to support that. That is, the countries that impose very, very heavy levels of taxation upon their population don't have any noticeable differences in long-term growth - than countries that tax more lightly. And if you look at the Scandinavian countries, for example, they're the marquee examples. One of the reasons is because they tax a lot smarter. So for example, those Scandinavian welfare states have VATs like the GST, which is smart taxes, and they also have extremely low taxes on capital. That means low corporate taxes. The United States has some of the highest corporate taxes in the world. All right, so there is some perversity in terms of the Canadian public discourse, in terms of - often people on the left are the ones who are advocating the dumbest taxes.
Gregg: Right.
Heath: But if you tax smart, you can actually achieve a lot more than if you tax dumb. So I think, like, broad-based taxes that try to achieve equality in a heavy-handed way are counter-productive. What welfare states need to do is to have very, very smart taxes, and then to look for opportunities to promote equality in ways that won't actually serve as a drag on the economy. Fiscal stimulus is a great example. When you're in a massive recession, the government can spend its money really, really badly and still produce positive economic outcomes. And so, you know, there's an opportunity to spend a huge amount of money - the extent to which we still rely upon the infrastructure that was built by our grandparents, or our great-grandparents. I mean, you know, look at the number of bridges around this country that are stamped "1934", or "1936".
Gregg (interrupting): -Oh, for sure, for sure-
Heath: Water reservoirs, or this kind of thing, right? I mean, that generation built so much of the infrastructure - and some of the nicest infrastructure, as well - that we still rely upon entirely. Why? 'Cause they had this huge depression that was kind of an opportunity to make those public investments without the usual trade-offs that occur in a growing economy. We're in a situation now where we're also in a position to make those kinds of investments. That's why I call it an opportunity - it's kind of perverse, but that's an opportunity. So I think we need to just be looking out more carefully for those kinds of opportunities.
Gregg: Well, on that kind of almost paradox there, I mean, there's many parallels been drawn between the Great Depression of the '30s, and many of us forget that preceding the Depression, I mean, capitalism was in real trouble. I mean, real trouble. The, you know, the anti-trust sentiment, the assault on the oligarchs - and that after the New Deal, capitalism absolutely flourished. How did that happen?
Heath: Well, capitalism prior to the New Deal was, you know, it wasn't a very reliable economic system.
Gregg: No!
Heath: So, for the last twenty years of the 19th century for example, the United States spent as much time in recession as it did undergoing growth. And remember, I mean, Canada actually had a worse experience in the Great Depression than the United States did. Much higher levels of unemployment and so on. Saskatchewan, where I'm from, two thirds of the province was dependent on food aid, right? There are still houses that are shingled with this salt cod that was sent to Saskatchewan from the maritime provinces. People couldn't figure out how to, like, eat it. They didn't know they had to steam it, and so they'd, like, shingle their roofs with the stuff like that. But I mean, the entire province of Saskatchewan was entirely dependent on food aid. You know, the Great Depression - this did not look like a system that had a lot of future to it, especially right after the Russian revolution and so forth.
Gregg: Right.
Heath: So, a lot of the revision of that view had to do with what's called the "Great Moderation", which is simply that after the second world war, banks got much, much, much, much better at managing the business cycle - which is entirely due to Keynes as well. I mean, that's his huge achievement, is to have basically, as Krugman puts it, cracked the code of -
Gregg (interrupting): Well, and you make the point that we didn't regulate banks until that point.
Heath: ...Yeah, so for example, the most important thing is deposit insurance. That's the biggest thing in terms of contributing to the stabilization of the capitalist system. A lot of the whole story of capitalism is actually the story of insurance. Insurance is hugely, hugely important, but it's sort of subterranean and invisible. But deposit insurance is what eliminated bank runs, and we actually - most people thought we'd never see a bank run again, which is why it was weird to start seeing bank runs, in the last year. And a lot of that has to do, though - those runs were occurring in what's called the "shadow" banking system, not in the regulated banking system, the ordinary commercial banking system. I mean, I haven't gone and taken my money out of my savings account. Why? Because it's all federally insured.
Gregg: Right.
Heath: And it's really, therefore, in this parallel banking system, or else banks that had a lot of exposure to that banking system, where you saw classic bank runs. But this is not something brand new that's occurring, this is just 19th century capitalism, right? It's the same problems of 19th century capitalism, right? Everybody knew, at some point - people forgot, but, largely for ideological reasons, they forgot on purpose, right? But, you know, 19th century capitalism was incredibly unstable, primarily because the financial system was unregulated, it was highly unstable. And the money supply was unregulated and so forth. And so the big lesson of the Great Depression was, the price of money cannot be set by markets, it has to be set by governments. And ever since then, the price of money (in the form of interest rates) has been set by the state. A lot of people argue that the conclusion of the current crisis is that the market - what's called the market price of risk, the price of credit risk - we tried letting markets set that, and that was a catastrophe. And so, the price of risk will never again be set by the market, it would now be an administered price, like the interest rate. But that's all that's gonna happen. I mean, that's gonna be a kind of big change in the inner gears of capitalism, but to the consumer it's not gonna look any different. So you will get, you know, there will be significant structural reform, as a consequence of this crisis. But it's not as though this crisis is sort of like something new under the sun. A lot of the problems of this crisis, but also a lot of the problems that critics of globalization have been pointing to in the last decade, are really just, you know, the same-old, same-old problems of 19th century capitalism coming back. You know, they're problems that were really - we put a damper on with the power of the welfare state. But things that - global structures that sort of exceed the boundaries of the state, or else, parallel banking structures that, you know, exist outside of regulation, tend to then have the same sort of deficiencies and flaws that unregulated 19th century capitalism had. But we kind of know how to solve those problems, because we did solve them, domestically, for a period of about 40, 50 years.
Gregg: Joseph Heath, I want to thank you very much for joining me. As always, it's a real pleasure.
Heath: It's been my pleasure too, thanks.
