The Economics of Daily Bread9th September 2013

shutterstock_14243473For students of business, Abraham Maslow’s Hierarchy of Needs has much to commend it. Introduced  in 1943 it talks of the building blocks of human motivation and personality in the form of a pyramid.

The Hierarchy of Needs …

At the broad base of the pyramid supporting all others, for without these there would be no survival, are the physiological essentials like food, water and sleep. Sat above these essentials are basic security needs, such as the shelter for one’s family and a safe community. Once these are catered for we move up a level to social needs such as belonging and friendship, then above that matters of self-esteem, personal worth, recognition and accomplishment. Finally at the apex of the pyramid is self-awareness, personal growth and fulfilment.

The entrepreneur may well focus on the peak of the pyramid, sometimes to the detriment of creating solid foundations below. The employee may be more focused on the lower levels of the pyramid, and steadily stretch upwards as each is secured. But most will have an eye on all levels of the pyramid every day of their adult lives. Certainly any good employer looking to achieve goodwill and commitment to their organisation will be alive to ensuring that these building-blocks all feature in their staff development plans.

A worthwhile question for those in employment, is who most helps them to achieve their physiological, security, social, esteem and self-actualisation? Of course individual effort is imperative, as is family. But who has the most beneficial impact beyond that? Is it employers acting to fulfil needs and wants in a free-market and positive workplace and community, or as the politicians would like to dream, is it government?

The French Revolutionary experience …

I recently obtained a book by French Economist Florin Aftalion, An Economic Interpretation of the French Revolution. The turmoil of the times is of great interest, but so often it is incorrectly expressed as a political revolution of social class, the poor against the aristocracy, nobility and bourgeoisie. Of course rather than creating a just society the revolution degenerated into looting, terror, dictatorship and war, but the root causes did not arise from famine caused by variable climate, but of economic crisis and subsequent famine caused directly by a shoddy state.

The similarities with today’s society, two centuries on, are profound. The riots occasioned by the financial crisis around the world, from Asia to the “Arab Spring”, had in their foundation the price of basics from flour to rice. Hit people at the apex of Maslow’s pyramid and they will see it as a setback to be overcome, but hit them (even if through the unforeseen consequences of bad policy ) where it hurts most – creating hunger at the survival base of the pyramid – and they will rise up, and do so repeatedly.

In a strong introduction to his book, Aftalion tears apart the poor v. bourgeoisie argument. Here is a sprinkling of the economic points that he makes, relating the the fermenting of and the first few years of the revolution, many of which apply just as much today;

  • The general level of prices depends upon the quantity of money circulating, whilst relative prices (such as seasonal prices of flour) are an expression of the relative scarcity of goods and services. Price rises are therefore a consequence of other phenomena, not something that just “happens”.
  • In order to win the support or appeasement of the angry elements of the mob (or in a democracy) a rational politician makes promises that will have a decisive effect upon the voting choice of specific groups, whilst remaining silent on the costs (which tend to be diluted amongst the many, or fall upon different voting blocks), and certainly silent on harmful consequences (which tend to be blamed on the next batch of politicians).
  • Those living at the edge (even if it is because of state policies) will support anything that appears to help them in the short-term, whether that be money-printing (to reduce the apparent rate of increase in taxes) or price-controls, regardless of their long-term economic damage. The more severe the crisis, the greater these extreme demands for temporary improvement at the expense of grave deterioration later on.
  • At a time when probably  75% of the economy was agricultural production, the peasant farmer could be either a tenant or a proprietor of land, or both. He might rent out his services as a labourer to others on certain days. Peasants in fact owned 40% of the land, the nobility just 25% and the clergy 10%. So there is no such thing as a “social category” to which one can pin certain organised objectives or ideology, for events are the outcome of a myriad of individual decisions taken by millions of individuals with personal ends in mind.
  • The only order who can be pigeon-holed are those who act solely in the name of the state, as politicians or civil servants, whose livelihood is totally bound up in the continuation of the state in whatever form that may be: Liberty for themselves at the expense of prohibition for their rivals.

So how did these realities manifest themselves? … They resulted in inflation, subsistence crises and interventionism … which only aggravated the crises and led to revolution and more revolution. In real life, this is what happened:

  • The French state, through a series of wars, inadequate budgeting and poor application of taxation was in a mess, spending next year’s revenues today, and desperately falling back on state borrowing and lotteries to fill the gap.
  • Taxes were levied arbitrarily by tax-gatherers who advanced money to the state and then went out to collect even more in taxes. Who you knew and how popular you were affected the levels of tax you paid, and the incentive was for everyone to appear as poor as possible in order to duck big tax bills, which actively reduced productivity.
  • State regulations governing agricultural practice, property rights and trade in grain all acted to restrict efficiency, initiative, innovation and the profit motive, meaning that France failed to enjoy the extraordinary rises in agricultural productivity enjoyed at that time in England.
  • Politicians divided up the remaining common land, supposedly for individuals who would be motivated to increase production. But through the law of unintended consequences the poorest peasants who owned a few animals no longer had access to the communal land to feed them, and moved from subsistence to destitution. Many became desperate vagabonds and highway bandits, or moved to town as rootless unskilled beggars, ultimately comprising some 25% of the population of Paris.
  • Grain was harvested annually. Now those who could afford to buy or hold wheat during the times of abundance performed a socially useful function, as they steadily released their surplus later on, boosting seasonal supply when it was needed and putting a cap on prices. But these stockists were denounced as speculators and the activity was banned. This created monstrous shortages and price rises just prior to each new harvest. Previously, apart from the very worst crop years, the peasants enjoyed enough to subsist for the next twelve months, and sold any surplus. By 1788/9 the price of wheat which, from the 1760s and 1770s had averaged 15 to 25 livres per seitier only fell below 25 around the time of the harvest, then steadily rose, through shortage, doubling to over 50 livres just prior to the next harvest.
  • Price variation in towns became much worse. At the time a Paris labourer could generally earn enough to buy 2 loaves of bread a day to feed a small family, using up a quarter of his income. But when the price of bread doubled, trebled, quadrupled or more he was faced with disaster; even a skilled locksmith would now expend almost all of his daily income on just 2 loaves of bread. In such a scenario riots rather than strikes were the preferred form of protest!
  • To stem the riots King Louis XVI intervened and bread prices were fixed. Of course the non-agricultural populace welcomed this move, not realising that it discouraged farming effort to produce agricultural surpluses, and discouraged baking effort to produce bread itself. In order to protect supplies to the towns and cities, grain convoys would head off towards the cities, across regions denied the opportunity to buy the grain, only to be pillaged en-route.
  • Underlying all this was an increasingly desperate treasury, seeking new taxes and new regulations in order to sustain an unsustainable public debt, and to defer the day of reckoning through more debt, lotteries and money printing.

That didn’t turn out so well did it? If only they had let the free-market sort it out, free of political intervention, and the motivations for all to produce and receive sufficient bread at the best price would have existed.

The current experience:

Nowadays we don’t have the folly of door and window taxes, or the guillotine, but seemingly every distortion created by Government policy (such as High Street retailers threatened by Business Rates) is met by demands for fresh inflationary and employment-destructive distortion, new taxes and regulations (such as on internet traders). Why not just question the wisdom of Business Rates in the first place?

We haven’t had price controls for a few decades, but we have had arbitrary tax rises focused on sectors of society that either have no vote, or reduce motivation and reduce the total tax take, introduced seemingly as a sop to the mob as sectors of society are singled out and blamed. Regulators have been busy attacking commodity “speculators” over the past few years, which will ultimately only lead to greater price volatility.

The politics of divide and conquer hold sway, whilst other taxes that make life harder for everyone such as import duties and employer’s NI are hardly known or talked about. Other popular policies are forever looser credit policy (kicking the can down the road), or more Government “investment” (debt and interest burden for future generations). They love to categorise sections of the populace rather than accept that we are all individuals, and never wish to see the unintended consequences.

Perhaps we get what we deserve. I didn’t catch BBC 5 Live’s output on Energy Day, but did catch some frankly shallow output on BBC TV which suggested that over 70% want to see energy provision nationalised. Perhaps the mob are unaware that successive governments have failed to plan for sufficient energy generation and security, have avoided the critical decisions that could have substantially reduced our energy prices, have focused on costly marginal energy-generating schemes that fit a favoured political posture, and through their social, grant and taxation policies have raised energy costs for all … whilst increasing the likelihood of a black-out in a few years time.

If our education system fails to adequately raise such issues, and if politicians and media are unwilling or unable to enter into reasoned and constructive debate, I wonder how far have we really progressed over the last two centuries? Or is it, just like Aftalion states, that those living on the edge will support anything that appears to help them in the short-term despite the long-term cost?

As the state’s inefficiencies steadily flow through the levels of Maslow’s pyramid, it will ultimately come down to bread. Let us hope that the bread keeps flowing, and is allowed to do so through the motivation and initiative of the free-market rather than intervention.

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