Why governments' attempts to pick winners produce more losers than winners.
One of my new socks has a hole in it already. That's no surprise. Nowadays, at least one of each pair that I buy usually develops a hole within weeks. Or I buy size 10-12s and within a couple of washes, they are down to a size 8 (I am a 9). It's the same with new boxer shorts: fly button gone within a week, shrunk within two, and ragged within a few months. My new shirts seem to have a tendency to develop holes at the elbows, lose buttons, and shrink, like my old shirts never did. Trousers quickly develop holes where trousers never should.
Being a cheap-skate and (as a married man) not too worried how I look down to my grundies, I am still making my old socks and boxers do duty as well. They may show their age a little, but they are still hanging together - few holes, buttons still there, still fit. Old trousers don't get so much of a look in thanks to an expanding waste-line, but old shirts still do duty and soldier on dutifully without needing repairs.
In my subjective impression, there has been such a deterioration in quality of off-the-peg clothing over the past two decades that it barely matters whether clothing is two decades, two years or two months old - it's a moot point which will need replacing soonest.
When discussing indices of price or progress, economists like to talk about hedonic valuation - the improvements in performance (due, for example, to modern technology), which are not reflected properly in changes of prices over time. The classic example is computers, where prices have been quite stable since the early big gains, but the processing power that you get for your money has increased exponentially. If we use raw computer prices as a component of price inflation, they have been a stabilising or modestly deflationary influence. But if we adjust the contributions of computers within the index to take account of their increased ubiquity and power, they are a strong deflationary force - a given unit of processing power costs a tiny fraction of what it used to.
Yet this example has always irritated me. Hedonic valuation refers to the increase in utility that derives from improvements to a type of good. I cannot say that I get twice as much utility from a computer with twice as much processing power. In fact, in recent years, increased processing power seems to have been dedicated mainly to providing the cycles to allow for irritating bells and whistles that actually reduce my utility (the Office paperclip, anyone?). Perhaps, if I were still running Windows 95 on a modern computer, I'd appreciate how much faster it ran. But of course, generally Microsoft won't let me, and finds ways to force me to upgrade. And anyway, would I really care that steps that took 100 ms in 1997 now take 10 ms?
You could see this in a couple of ways. Maybe the hedonic gains from improved hardware are genuine, but they are compensated by the hedonic losses from the bloated, glitchy software that fritters away the hardware improvements. On this basis, there is a good case for viewing the Microsoft monopoly as one of the most pernicious inflationary forces in the modern world. Or maybe we should treat them as one (you can hardly use one without the other), and attribute a limited net hedonic gain to the combination (most core computing tasks - writing, calculating, communicating, researching - are little better than 10 years ago, but some things, like improved graphical capability have brought genuine increases in utility). Whichever, we can say that hedonic valuation is most often used to exaggerate the benefits of the modern world.
As my socks demonstrate, it seems to me that we might usefully apply the logic in reverse. If the price of off-the-peg socks has stayed fairly steady, but the service that one pair of socks would have given a decade ago needed three pairs of socks to do the same job three years ago, or ten pairs of socks now, shouldn't we say that there has been powerful inflation in sock values, on a hedonic basis? Likewise for other clothing items. It seems to me that this is a germ of an idea that goes some way to explaining (along with the increasing gap between earned income and disposable income due to high levels of taxation and property-price inflation) the dissatisfaction that people feel with modern life, despite the statistical evidence that we have been getting progressively better off.
So I started thinking what other things in our life showed significant changes in hedonic valuation.
The big winner, it seems to me, is private transport. Not public transport - our trains and buses offer little greater utility at significantly greater cost than they did half a century ago. But our private transport has genuinely made huge strides beyond the significant cost savings. When you think of the comforts of a modern car, its range, its fuel efficiency, its safety, the longevity of its bodywork, and so on, it is an order of magnitude improvement on its predecessors of two decades ago, let alone five, despite falling costs in real terms. Improvements to planes are less perceptible to the cattle-class passenger (whose experience is not materially better than in previous decades), but their technical improvements are a major factor in the huge reduction in costs of flights and increase in availability and range.
It's hard to think of many other big gains. The internet is genuinely transformative, but the big change was in sufficient bandwidth not to have to wait too long to view a web-page or download an email. ISDN wasn't too bad, and ADSL is fine and has been available to most people for some time now. Massive bandwidth for streaming media and multi-user video games is incremental and to some extent a means to soak up capacity, as Microsoft does for computer hardware, rather than a major improvement in utility.
Have our homes improved that much? Quality of construction may have improved compared to the post-war period, but that was a function of budget. Can we say that our houses nowadays are so much better than what the Victorians built (and not just those of the rich - the almshouses too). Double-glazing and insulation are a big improvement, but poor craftsmanship and quality of product means that they often don't deliver the full extent of the gains that they promise. Heating with gas is a big improvement in terms of convenience and air quality. But beyond that, most people's homes and gardens (for those lucky enough to have them) are barely much more spacious, and the entertainments, comforts and facilities available to them have not improved markedly over the past couple of decades (and in the case of entertainments, arguably deteriorated). Is life really better with CDs than vinyl, or with ipods than CDs (a little in the latter case, maybe)? A mid-sized colour TV beats a small black-and-white telly, but is there really the same degree of utility-benefit between the 32" colour cathode-ray TV and the 42" plasma? Does surround-sound make your day every day? Will DAB radio improve on FM or just leave us in silence half the time? Do the new gimmicks on mobile phones really make a big difference to our lives like their initial introduction and shrinking size did? (I know a lot of people who would still rather have the old Nokia design from 10 years ago.) Is there any meaningful difference in the chairs and sofas that we sit on, or the tables that we eat at, or the toys that children play with, other than that they fall apart quicker than they used to?
What about our consumables? Supermarkets have driven down prices, but have they not also driven down quality? If you want quality meat or vegetables, whether from the up-market ranges in the supermarkets, or from specialist butchers and greengrocers, they cost a lot more than the supermarkets' headline, low-quality prices on which the price-indices so often rely. You can buy cheap wine and beer, but if you want something that wouldn't be better used to make vinegar, the cost carries on upwards. Unique brand items, where generics are clearly distinguishable, like Coca-Cola, do not fall in price. The price of standard packets of crisps may seem not to have gone up too much, but is it just me or is there less in them nowadays and do you need a "Grab Bag" or "Big Eat" to satisfy a craving that a standard packet would have satisfied before? Certainly some of our popular chocolate bars have shrunk, creating an illusion of value when we compare their price with earlier days.
And how about services and trades? Am I getting better value from my bank? Certainly not. I am getting less for more. Lawyers and accountants are the same as ever, but more expensive (if you want a good one, and is it any sort of value to pay less for a poor lawyer or accountant?). Craftsmen and tradesmen are unreliable, take little pride in their work, are happy to leave a job unfinished, or try to pass off a shoddy piece of work as satisfactory. A quality, reliable tradesman is rare as hen's teeth - if you find one, you cherish him, and you will probably have to pay through the nose for his services.
Then there are public services. It is no sleight on the police, but a comment on the impositions placed on them, to say that you need three policemen now to do one policeman's job from a couple of decades ago. Other than to counter the government's false statistics, it is now almost pointless expecting the police to respond to and detect (let alone prevent) a burglary, and not much better for assault. It's not a question of how many minutes after a burglary is reported they arrive, nor even of hours, but of days. Traffic wardens and car-park attendants - well, is there any need to expound? The technology of medicine has improved, but the unlimited demand for free-at-the-point-of-use medical services means that the basic medical services that most people need during the majority of their lifetime are no more easily available now than they used to be, probably less, through no fault of the staff (although the massive inflation in their pay and terms in recent years has not helped overall budgets and provision). Education - is that the strongest example of all of hedonic losses in our public services (and again, not necessarily reflecting on the quality of the staff, but on the restrictions and requirements placed on them)? Our social services haven't improved the lot of the people who they are supposed to help - life at the bottom of the social pile is worse, and more numerous, than ever. Our probation services aren't any better at keeping track of ex-cons and rehabilitating them. Our quangocrats and employees of executive agencies have multiplied manyfold, but to say that the service they provide to the economy has not increased likewise would be an understatement - on the whole, our quality of life is inversely proportionate to their numbers. Civil servants specialize in finding ways of complicating our lives, wasting our money, and creating new constraints and prohibitions. Politicians have forgotten the ethic of public service and pursue their own interests above ours. And so on, for most of the public services. With few exceptions, the changes in their effect on our utility range from neutral to significantly negative, and all the time their costs that fall on us increase.
What we have mostly got in all areas of our lives is increases in complexity and reductions in quality and longevity. Or, if you want something as good as it used to be, large increases in cost. This is our hidden inflation - the factor that fools us into thinking we are better off when we look at our gross pay, but leaves us constantly struggling to make ends meet. If it were possible to incorporate all the changes to the hedonic values of the various things that affect our quality of life, no doubt we would find that we have been in a continuous, massively-inflationary period for half a century, and that the only improvements in our lives are attributable to technological improvements in areas where our political masters had less power to corrupt and undermine their value. Imagine how good life would be if the hedonic gains from technological improvements across the piece were not counteracted by the hedonic losses from the malign effect of politicians, civil servants and abusers of market power...
"We were at all times in danger of forgetting - until rudely awoken by the attack on the New York Twin Towers of September 11, 2001 - that the primary role of government is to look after the physical security of the population and that all else is secondary", The Changing Economic Role of Government in Against The Flow (2005)