The effects of throwing money at a large number of apparently deserving causes are self-cancelling

Posted by Tim Congdon in Article Archive | 0 comments

Britain must produce as much food as possible,” Hilary Benn, Secretary of State for the Environ­ment, Food and Rural Affairs, told the Ox­ford Farming Conference in January. For Mr. Benn, who rounded off the proposition by adding “no ifs, no buts”, nothing could be more obvious. Wasn’t Mr. Benn uttering a mere platitude? Who would dispute that every nation must produce “as much as pos­sible”, the maximum, of everything?

Well, Adam Smith, the founder of eco­nomics, would. His key argument in the Wealth of Nations, published in 1776, was that a nation had a finite quantity of resourc­es, which were to be allocated between in­dustries in the most efficient way. Although that may sound banal, it quickly leads to the refutation of Mr. Benn’s maximization idea.

In his chapter “Of restraints upon the im­portation from foreign countries of such goods as can be produced at home”, in book IV of the Wealth of Nations, Smith conjures up the image of wine-making in Scotland. “By means of glasses, hotbeds and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them.”

Given the technological feasibility of this branch of economic activity in late Hanove­rian Scotland, wouldn’t it be sensible to maximise grape output and to produce as much wine as possible? Indeed, wouldn’t it be “reasonable”, as he noted, “to prohibit the importation of all foreign wines to encour­age the making of claret and burgundy in Scotland?” The point is that, because re­sources are finite, the maximisation of one kind of output implies the loss of others. If Scotland’s available labour and capital had been wholly committed in 1776 to wine-making, its production of oats and barley and of linen and whisky would have been much lower.

Smith conjectured that the cost of ob­taining Scottish wine from glasses, hotbeds and hot walls might be “about thirty times the expense for which at least equally good [wines] can be brought from foreign coun­tries”. The answer was for Scotland to allo­cate three units of resources to making whisky and to exchange whisky for wine, leaving 97 units of resources available for other purposes. By comparison, putting all 100 units of resources into the making of wine was barmy. Both the notion of “producing as much as possible” and the word “max­imisation” are deceitful. They rely on the premise that “we” as a nation are not pulling our weight and doing enough to engineer food production. But the economic problem is about resource allocation, not engineer­ing. The issue is not “how do we produce as much food as possible?” but “how should scarce resources be split between different kinds of food output?”

Mr. Benn’s difficulty is that resources em­ployed in farming have alternative uses. Al­though the maximisation of foo d production may be the alpha and omega of his policy-making team in Whitehall, what is to be said about that holy of holies of other Labour pol­iticians, the maximisation of manufactur­ing production? Has it been forgotten that in the late 1990s, New Labour revered the out­put of Cool Britannia’s creative industries?

To an economist, all types of output are equal, as long as they have customers and can be profitably produced without artificial support. Too many government ministers regard some types of output as more equal than others. They feel that they “have to do something” and to make a case for their own departmental hobbyhorse. At any one time, arguments can be heard within officialdom for subsidies to farmers, tax reliefs to manu­facturing and grants to the creative indus­tries. Government spending and taxation are increased, but the effects of throwing money at a large number of apparently de­serving causes are self-cancelling.

The danger in Mr. Benn’s approach is that it will justify tariffs and other restrictions on imports from outside the EU, as well as increased subsidies to the UK farming sec­tor. Alarmingly, the speech gave a nod of ap­proval to farming “self-sufficiency”, as if it would be desirable for all our food and drink to be produced in the UK.

The government seems to have forgotten that it once had a vocabulary and rhetoric that were supposed to distance it from Old Labour. Phrases like “the maximisation of production” and “food self-sufficiency” hark back to a distant era of planning and nationalisation.

The best antidote is to recall Adam Smith, and to ask whether the sponsors of maximised UK food production believe that we should maximise the growing of grapes by building “glasses, hotbeds and hot walls” in the Lowlands of Scotland.

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