Just back from Conference, where the atmosphere was upbeat and united in prospect of success in the OUT campaign (despite as usual what the press had claimed!). I was also intrigued by a fringe group called FreeKip, run by Councillors Bill Etheridge MEP and Paul Brothwood and by Phil Henrick, which is putting together ideas on economic policy and which, as you will know, is very much my own core interest. They have produced a document called The Mount Charles Charter, and I shall be responding to it fully shortly. You can find it here.
At dinner that evening I was at first sitting next to a spare place when a delightful young lady came and sat beside me. We fell into conversation and it transpired that she had recently joined UKIP from Labour. I asked what areas of policy she was most interested in and she soon said that she knew little about the private sector.
Now this should have been a red rag to a bull, but I found myself waffling somewhat and afterwards felt I had not done justice to the subject. So here, with the benefit of hindsight, and in case I see her again, is my Story of the Economist, Three Fishermen and a Politician.
“Once upon a time there was an Economist. Now this was in the days before fishing and politics, whereas of course there have always been economists with us. Our economist liked nothing better than to sit upon the beach looking out to sea and to ponder the ways of the world.
And it came to pass one day as he sat there that he spotted a large shoal of cod swimming about freely in the sea. So he said to himself “Hm. Those fish look good to eat and the people are starving. I wonder how much they are worth?” So he thought, and he thought, and he thought, but eventually he concluded that they weren’t worth anything at all. After all anyone could go out and catch them, but also there were no buyers out there in the sea. So if demand is zero, value must also be zero. Indeed he concluded this principle applies to all natural resources in situ; it is only when Man extracts them that value is added to them.
Now as he sat there, savouring his new-found wisdom, a young man came along and sat and entered into conversation with him. And when he learnt of the fish in the sea he said “Wow. I wonder how much money I could make if I caught those fish and sold them to the people, who are starving”. And the Economist encouraged him, saying that barriers to entry to this industry are low. And so he did.
So it came to pass that in due course the young fisherman landed his first catch upon the quayside. And as he did so the Economist called out to him and asked “How are you going to price your fish? If you price them too high you won’t sell them all, but if you price them too low you won’t make as much money as you might have done.” But the young fisherman was canny and replied “I shall adjust my price as I go along so that I just attract enough customers to buy all my fish.” And so he did.
At the end of the day the young fisherman was ecstatic. “Look at all this money I have made. Let us go to the pub and celebrate”. But the Economist was cautious, saying “That is not your profit, that is only your income. By moving the fish from the sea to the quayside you have added value to the fish because the balance of supply and demand on the quayside is more favourable than it was in the sea. And by finding the marginal price you have maximised your income. But you will not know if you have made a profit until you have deducted your costs.”
It was only at this point that it dawned upon the young man that his costs, which were not inconsiderable, were an entirely separate and unrelated figure to the value he had added to the fish. Only if his income was greater than his costs would he have made a profit, but it might just as easily be the other way around, making him a loss. So he hastily totted up his costs and, to his great relief, discovered that he had indeed made a large profit.
As he and the Economist sat drinking in the pub a second young man came and sat and entered into conversation with them. And when he learnt how much money the first young man had made he exclaimed “Wow. I could do that too, and become as rich as you are”. And the Economist encouraged him saying that barriers to entry to this industry are low. The first young man was also at first pleased at the prospect of having a friend in the industry. And so he did.
But when in due course the second fisherman landed his catch beside that of the first upon the quayside, the first fisherman quickly realised that something was wrong. Although he was doing nothing different, and although the level of demand on the quayside remained unaltered, the supply had doubled, which meant that the marginal price had fallen. He was furious and remonstrated with the Economist, but the Economist reminded him that the law required open competition and that there was nothing he could do. So the two fishermen continued to fish and both made reasonable but not excessive profits.
And it was not long before a third young man came and saw the two fishermen making a reasonable but not excessive profit. So he said to himself “I could do that too.” And so he did. But when he landed his third catch beside the first two, the marginal price fell still further and thence all three fishermen made a meagre profit just above the breadline.
Indeed a fourth young man also came and considered becoming a fisherman. But when he saw the meagre profits the first three were making he decided there was not enough money in it. And so he didn’t. But the people were delighted at the plentiful supply of cheap fish in the shops and considered themselves much better off. As the Economist observed, they were better off because they could now satisfy a greater proportion of their needs.
It was at this juncture that the Politician arrived on the scene. He was under pressure from his voters who were demanding better public services and a more reliable welfare state, and wanted protection from many nasty foreigners who wanted to enslave them in volumes of red tape and regulations, and to chop their heads off. The Politician replied saying “You can have all these services but you must pay taxes for them as they do not grow on trees.” But the people were angry and protested violently saying “These are our Human Rights. They must be freely available to all. If you want to tax anyone, go and tax those fat fishermen over there. Do not tax us as that is not fair.” And so he did.
But the Politician, not being of the UKIP variety, had not done his homework and when he did as the people demanded and imposed a profits tax on the fishermen he discovered it produced very little revenue. So he went back to the people and said again they must pay taxes for the services they wanted. But the people grew even angrier, shouting ‘conspiracy’ and ‘tax evasion’ and ‘fraud’, so the Politician had to find other ways of taxing the fishermen.
So he imposed business rates, and employers’ national insurance, and insisted the fishermen take expensive training courses to obtain qualifications they did not need. And lo his friends in local government joined in too, imposing parking charges and other restrictions, and painting yellow lines all around.
But the fishermen were sore afraid because they knew their costs would now exceed their income. And so they did, and they all went bust.
And the people were by now indignant also, asking “What has happened to that plentiful supply of cheap fish which was in the shops and which is no more, for we are starving once again.” And they blamed the Politician for mismanaging the economy, even though he had simply done as they had demanded.
So they all lived miserably ever after. Indeed quite a lot of them died.”