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Deregulation, public services and the law of diminishing returns

Vacancy at the Economy Inn by (aka Brent), licensed under Creative Commons Attribution 2.0 Generic, file at his recent book Bleakonomics, Rob Larson presents a more realistic view of American capitalism than the one we got from our New Labour “amerophiles”. Larson organises his book around three major issues of our time. This makes the task of bringing the two books together easier than it otherwise would be.

Contrary to New Labour’s efforts in continuing the embedment of neo-liberalism, Larson sees this as a serious cause of the problems of labour. He identifies the elements of the ideology as: the belief in deregulation of industry, business and finance; getting rid of the interventionist state so diminishing social services; globalising production, trade and financial services; and privatising public services.

Larson’s three issues are: the deterioration of the world’s natural systems; the social conflicts arising from concentrated wealth; and the financial instability of market bubbles and crashes. The key concept used in the environmental section is “exter- nalities”, which he says are the unpaid-for positive and negative effects, or benefits and costs, of the free market on people not party to the current deal. He refers to these outcomes of the neo-liberal market as “goods” and “bads”. The bads cause troubles in people’s lives which when politicised become issues. The key concept in considering the concentration of wealth is “inequality in bargaining power between capital and labour”.

He is excellent on the violent history of industrial relations in the USA, and on the use by “oligopolistic” firms to avoid violence today by globalising jobs to countries with poorer workers and stricter discipline. However, instead of the class struggle as such, his main concern is the market power gained by successful firms through the “economies of scale”. Market power he defines as “the ability of firms to influence prices and engage in anti-competitive behaviour”.

Larson’s third issue is the effect of neo-liberalism on financial activities. Deregulation has allowed accumulated wealth to flow around the world destabilising countries like Argentina, whole areas like South-East Asia and finally the UK and the US, followed by the whole world`s financial system. Deregulation set wealth free in the “Big Bang”, globalisation allowed it to slosh around the world, the accompanying loss of social services ensured that the most vulnerable paid the price, and privatisation accumulates concentrated and centralised wealth into fewer hands in a very short time. This wealth then allows the plutocrats power over politicians, and Larson’s oppositional heroes are the Occupy Wall Street movement.

Larson is one of a “new breed” of social scientist and empirical economists. The old neo-classical economics of the 1960s were mainly theoretical and mathematical, but did accommodate Keynes’ rule that when people were spending the government was not, but when the people were not spending the government was. Empirical economists, on the other hand, are committed to using the “laws” of supply and demand as hypotheses to be tested through observation and empirical generalisation leading to revision of economic theory.

My problem with his view that “the law of diminishing returns” to the production process does not work in this instance, since it is trumped by “the law of increasing returns to increased scale” is that he cuts down his definition of diminishing returns to make it work. If he had allowed that changing one factor of production, say increasing labour, results in diminishing returns to efforts, unless all other factors are increased as well, then he could have accounted for the economics of the expansion of capitalism into the whole world, and explained “increasing returns”.

It’s a good book to hold in your hand – and this comes from the quality of print and design as well as the content. Don’t be put off by the economics terms, Larson is an excellent guide in the use of economics to explain the mysteries of our contemporary life, even if like me you find the use of Marx’s methods more rewarding.

This review was initially published in CLPD’s Campaign Briefing journal, available in full here

One Comment

  1. ShirleyKnott says:

    The wealthy intend to save the planet (for themselves) by accelerating inequality, and vacuuming up all the resources! When that happens, ‘we’, the 99% will be desperate for the least crumbs in order to survive, and will not care so much about our brethren who can’t catch a crumb. We’ll be scrabbling so hard for those crumbs we won’t notice our life expectancy being reduced (already happening in USA – has dropped by FIVE years for women with low education – first time ever recorded), and so they’ll save the world from overpopulation in Malthusian ways. Ayn Rand would be sooooo proud of her kids.

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