Sunday, 18 February 2018

Put The Scandinavian Myths To Bed Now

You can't very easily claim to be a serious thinking person if you have been taken in by the widely promulgated myth that Scandinavia is both:

a) Some kind of empirically demonstrable example of the success of socialism in action.


b) What Jeremy Corbyn wants to create for the UK.

These contentions are so fatuous, that if they were a human being, they would be the illegitimate love child of Owen Jones and Angela Rayner. The reality is, every time the Scandinavian countries have weighed in too heavily in favour of socialistic models things have gone poorly - and every time they have weighed in heavily in favour of markets things have gone significantly better.

By and large, private individuals in Scandanavian countries have a relatively free rein in the means of production. Scandinavian countries do push the boat out a bit on welfare, but that is not the same as a Corbyn-esque command economy built on envy, price fixing and punitive confiscatory measures.

The much vaunted political aspects of social democracy that turn up in places like Norway, Sweden, Finland and Denmark are funded by everyone else's trade. To claim that Scandinavian social democracy is a good advert for socialism is a bit like claiming that opening bars and restaurants is a good advert for protection rackets.

Scandinavians embrace the fruits of the market as a means of providing welfare - it works in conjunction with markets, not in opposition to them. Scandinavian success comes in spite of a fattened up taxation system, not because of it. The fiscal redistribution policies happen because of flexible, lightly regulated markets and fairly substantial levels of economic freedom  

For further reading, I recommend this. Here's a summary.

Scandinavia’s success story predated the welfare state. Furthermore, Sweden began to fall behind as the state grew rapidly from the 1960s. Between 1870 and 1936, Sweden enjoyed the highest growth rate in the industrialised world. However, between 1936 and 2008, the growth rate was only 13th out of 28 industrialised nations. Between 1975 and the mid-1990s, Sweden dropped from being the 4th richest nation in the world to the 13th richest nation in the world.

• As late as 1960, tax revenues in the Nordic nations ranged between 25 per cent of GDP in Denmark to 32 per cent in Norway – similar to other developed countries. At the current time, Scandinavian countries are again no longer outliers when it comes to levels of government spending and taxation.

• The third-way radical social democratic era in Scandinavia, much admired by the left, only lasted from the early 1970s to the early 1990s. The rate of business formation during the third-way era was dreadful. In 2004, 38 of the 100 businesses with the highest revenues in Sweden had started as privately owned businesses within the country. Of these firms, just two had been formed after 1970. None of the 100 largest firms ranked by employment were founded within Sweden after 1970. Furthermore, between 1950 and 2000, although the Swedish population grew from 7 million to almost 9 million, net job creation in the private sector was close to zero.

Scandinavia is often cited as having high life expectancy and good health outcomes in areas such as infant mortality. Again, this predates the expansion of the welfare state. In 1960, Norway had the highest life expectancy in the OECD, followed by Sweden, Iceland and Denmark in third, fourth and fifth positions. By 2005, the gap in life expectancy between Scandinavian countries and both the UK and the US had shrunk considerably. Iceland, with a moderately sized welfare sector, has over time outpaced the four major Scandinavian countries in terms of life expectancy and infant mortality.

Scandinavia’s more equal societies also developed well before the welfare states expanded. Income inequality reduced dramatically during the last three decades of the 19th century and during the first half of the 20th century. Indeed, most of the shift towards greater equality happened before the introduction of a large public sector and high taxes.

• The development of Scandinavian welfare states has led to a deterioration in social capital. Despite the fact that Nordic nations are characterised by good health, only the Netherlands spends more on incapacity related unemployment than Scandinavian countries. A survey from 2001 showed that 44 per cent believed that it was acceptable to claim sickness benefits if they were dissatisfied with their working environment.

• Other studies have pointed to increases in sickness absence due to sporting events. For instance, absence among men due to sickness increased by 41 per cent during the 2002 football World Cup. These shifts in working norms have also been tracked in the World Value Survey. In the 1981–84 survey, 82 per cent of Swedes agreed with the statement ‘claiming government benefits to which you are not entitled is never justifiable’; in the 2010–14 survey, only 55 per cent of Swedes believed that it was never right to claim benefits to which they were not entitled.

• Another regrettable feature of Scandinavian countries is their difficulty in assimilating immigrants. Unemployment rates of immigrants with low education levels in Anglo-Saxon countries are generally equal to or lower than unemployment rates among natives with a similar educational background, whereas in Scandinavian countries they are much higher. In Scandinavian labour markets, even immigrants with high qualifications can struggle to find suitable employment. Highly educated immigrants in Finland and Sweden have an unemployment rate over 8 percentage points higher than native-born Finns and Swedes of a similar educational background. This compares with very similar employment rates between the two groups in Anglo-Saxon countries.

• The descendants of Scandinavian migrants in the US combine the high living standards of the US with the high levels of equality of Scandinavian countries. Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. This suggests that pre-existing cultural norms are responsible for the low levels of poverty among Scandinavians rather than Nordic welfare states.

• Many analyses of Scandinavian countries conflate correlation with causality. It is very clear that many of the desirable features of Scandinavian societies, such as low income inequality, low levels of poverty and high levels of economic growth, predated the development of the welfare state. It is equally clear that high levels of trust also predated the era of high government spending and taxation. All these indicators began to deteriorate after the expansion of the Scandinavian welfare states and the increase in taxes necessary to fund it.

Thursday, 15 February 2018

Ask The Philosophical Muser: On Seatbelts

Here's my latest Q&A column - if you have any questions for me, you can message me on Facebook, or email them here

A Facebook friend made contact to query my claim that it's obvious that people drive less safely with seatbelts on. The query was along the lines of this: "I don't see why this is the case, surely even with a seat belt on people try to drive as carefully as possible because it's in their self-interest to do so?"

My answer: It seems obviously true, but like many supposedly obviously true things, it is false. To see why, you only need consider the statement when said this way - "If a driver has no seat belt he or she will drive more carefully" - a statement that is very obviously true, and one that no one has any issue with.

Consequently, saying "people drive less safely with seatbelts on" is just another way of saying "people drive more safely with seatbelts off". Both are equally true, they are just different words to say the same thing.

Saturday, 3 February 2018

The Liberty-Hating Feminists & SJWs Are Confused About What 'Societal Norms' Actually Are!

As a result of feminist duress, first the Professional Darts Corporation and then Formula One announced that they will be forcing walk on girls and grid girls into unemployment under the pretext that the tradition is "at odds with modern day societal norms".

As usual, the feminists and social justice warriors driving this are confused about what 'societal norms' are. Societal norms - a term that is problematic at the best of times - are created, not by top down hegemony, but by bottom up local decisions that result in net utility for the decision-makers.

The societal norm that means most of us don't drop litter, spit at one another or play loud music late at night is based on society's aggregation of revealed preferences. In other words, most of us don't like those things so we don't do them. It is the individual search for utility and the collective aspiration for cooperation that decides societal norms - and the irony being missed by those opposed to grid girls is that individual search for utility is far and away the most widespread societal norm that exists.

When feminists and social justice warriors tell us society should be opposed to something freely chosen because it departs from the rubric of 'societal norms', like jobs for women in sport, all they are really doing is forcefully imposing their own beliefs and views on people that have different wants, needs and priorities. They are doing the opposite of what they claim: they purport to be standing up for women, but what they are actually doing is trying to rob a proportion of women of something they value.

Madeline Grant makes an excellent point along those lines in this article:

"One great irony of the ongoing debate is the fact that, while the BBC and other employers are enduring a forensic examination over gender pay, feminist campaigners are backing moves to upset one of the few areas of economic life in which women have a clear advantage – the ability to trade on good looks – or “erotic capital”, to borrow Catherine Hakim’s phrase.

Jobs in pole dancing, high fashion, hostessing and the promotional modelling work, performed by the Formula 1 grid girls, all enable women to trade on their beauty. Often, the opportunities for beautiful women far outstrip those granted men. Fashion modelling, for instance, carries a female premium of anywhere from 25% and 75%."

This kind of short-sightedness stretches far beyond cases like this - the whole business is riddled with contradictions and inconsistencies, and most of them are based on one of two things: they either a) misunderstand how equality of outcome and equality of opportunity have to be traded off against each other, or b) fail to account for the factors surrounding revealed preferences and the liberty and freedom to enjoy them.

For example, they just cannot seem to grasp the basic principle that in a society in which everyone is totally free (within reason) to act in accordance with their preferences and priorities, the result will be a diverse assortment of highly unequal outcomes. Different people will trade on looks, on talent, on education, on risk, on unsociable hours, on physical strength, on interpersonal skills, on entrepreneurialism, and a whole range of other things that are valued differently in the marketplace, and that generate varying salaries accordingly.

Of course, when people are being unfairly treated, there is a human need to leap to their defence. How ironic here that the people being unfairly treated are those women who want to trade on their marketable assets but are being robbed of their income because of feminists' confusion about how societal norms are constructed.

Because, you see, it's the revealed preferences of individuals that make the trading on looks, on talent, on education, on risk, on unsociable hours, on physical strength, on interpersonal skills, and on everything else valuable in the marketplace, possible.

Feminists and social justice warriors need to wake up to the fact that these are the societal norms - and they are based on the fact that society is a multifarious mix of different people who want different things, and not always the same things feminists want or should feel entitled to demand to further their own narrow ideology.

Tuesday, 30 January 2018

There's No Uglier Sight Than Mobs Of People Devoid Of Perspective

There is no uglier sight in society today than young lefties, with the best standard of living of any group of human beings that have ever been alive, taking to the streets to splutter and moan about how indignant they are that free sweeties that someone else has to pay for are not being given to them in such plentiful quantities.

It is no coincidence that the majority of the Corbynistas are young people. Young people have no capital and often no job yet, so directly they pay none of the costs of redistributionist policies, but enjoy many of the benefits. They are also not as experienced in life, so haven't had the chance to develop a more informed worldview.

But there is another reason why they demand such economic foolishness from our politicians - they don't actually know how lucky they are, and have been born into a world in which the many riches we enjoy are not only just taken for granted, but have actually primed young people to expect more and more without really having a proper perspective of just how remarkable and incipient this economic enrichment for humans actually is.

Young people of today live under conditions that their grandparents would have found luxurious, and that their great-great-great-great grandparents wouldn't have even thought possible, and that most of the people that have ever lived in our 200,000 year history wouldn't have even been able to contemplate was possible - yet they still go around like spoiled brats complaining about how unfair and unequal society is.

Society has many tough elements, and it may be a quite ghastly place compared to our best utopian fantasies - but when juxtaposed with the reality of 99.9% of human history, we are in the period of a great enrichment that is, lest we forget, still in its infancy. By all means, let's speak out against things that are genuinely wrong in society, but for goodness' sake, please can the parents of these young lefties help rattle a sense of perspective into their parochial little minds?

The great irony
The great irony they need to be made to realise is that it is only because we have experienced such a progression explosion in the past 150 years that we even think in such terms of an improved standard of living and harbour expectations about material prosperity for all. Such is the incredible progress we have made, that we live our lives through a lens of expecting economic progress with a sense of entitlement that would be completely alien to anyone who lived prior to the Industrial Revolution.

And just a little further back, it just wouldn't have occurred to someone living in the time of Shakespeare to ask whether they were materially better off than their parents, because nobody really had any reason to think that humans could progress very much more than they had already - after all, for the 10,000 years prior to Shakespeare, progression, compared to what we know now, was occurring at the pace of a snail wading through treacle.

And you'll notice this is why the phenomenon occurs so readily in young people: the reason young people demand such a higher standard of living is because they have such a relatively high standard of living. Far fewer older people are likely to be on the streets exclaiming how tough today's standards of living are because they have had decades to appreciate just how much progress we and the rest of the world have made. Young people, on the other hand, have just taken exponential progress for granted, and are too often mincing around with their placards utterly devoid of just how incomprehensibly incredible their lifestyle would have been for their great-grandparents.  

Perhaps the best example that underpins what I'm saying is the widespread obsession people have with the so-called injustices of inequality (a subject on which I've blogged numerous times before). Yes we do have inequality, but as above, the main reason we have it is because we have so much human wealth, and because the economy is not a fixed pie, so people who provide lots of value for others can increase their wealth and make millions of others better off by doing so.

Inequality is actually a good problem; it's not something that people in Shakespeare's time would have had to worry about much because there wasn't anything like as much wealth to focus on. Nobody in the world today is poorer than they would have been in pretty much any other time in human history.

Finally, on top of not knowing just how remarkably prosperous their lives are, the other alarming thing I find about the young left is just how full of bile, hate and intolerance so many of them are. Most of them are not careful thinkers who have weighed up the arguments of both sides - they are chameleon-like reactionaries that have joined together as part of a mob mentality that detests the things that have made humans prosper and pulled us out of the quagmire of hardship and low life expectancy.

And while they are in this frame of mind, buoyed by a simpleton cult figure like Corbyn, and egged on by a Shadow Cabinet with about as much intellectual proficiency as a KFC 14 piece Bargain Bucket, heaven only knows what damage and economic stultification they are capable of inflicting on our society if they ever get into power.

Sunday, 21 January 2018

McDonnell's Fantasy Analogy

On The Andrew Marr Show this morning, Shadow Chancellor John McDonnell came out with a ludicrous analogy to try to explain the benefits of bringing services into public ownership. Think of it like buying a house, he said - you make the initial investment, get returns on renting it as an asset, and then further down the line it becomes a money-maker.

Fantasist John McDonnell has always been an intellectual lightweight, and today's analogy was no exception. Even if we're kind to him, and ignore all the obvious problems with the reasoning behind his analogy (which you can distil in previous blogs here, here, here and here), there's another obvious way that returning a service to public ownership is not like buying a house as an income-generating asset, which I'll explain.

McDonnell's analogy forgets the most important problem with bringing a service into state ownership: it creates all the downsides of monopoly power, and denies all the benefits and innovations of competition. Competition doesn't just keep suppliers in check in terms of price and quality, and consumers well served in terms of lower prices and increased efficiency, it is also the driver of new ideas and improvements on existent ideas.

A service run under a state monopoly has much less of an acute eye on commercial demand, and therefore pays suboptimal regard to price and quality too. In terms of investment, the opportunity costs of buying a house are the other forgone investments and their concomitant returns. Given that house buying is about the best asset-returning venture in the marketplace, the opportunity costs in terms of a return are all-but non-existent.

On the other hand, the opportunity costs associated with state monopolies in terms of forgone opportunities are about as overwhelming as it gets. And this in a week when there is indication that Labour's re-nationalisation project is going to cost an up front sum of around £176 billion (or £6500 for every household).

This is the dangerous fantasy economics of Corbyn and McDonnell: £176 billion for more expensive, less efficient, lower quality, innovation-stifling re-nationalised services. There is almost no analogue to buying a house here - not that we should expect anyone in the Shadow Cabinet to understand this.

Wednesday, 17 January 2018

Why Don't We Like It When The Universe Makes Us Smarter?

The widespread human aversion to correction is one of the most peculiar of all peculiarities. People don't like being shown to be wrong - so much so that they'd rather intransigently yoke themselves to a comfortable falsehood than open themselves up to a refreshing new fact or an illuminating experience of improved reasoning. There are multiple causes of this, with some degree of overlap - the usual offenders are:

1) Lazy-thinking - the path of least resistance is, by definition, the easiest method of approach. It takes time and effort to acquire knowledge and develop your reasoning skills, and relatively few people bother to do this with any aplomb.

2) Status and ego - some people find it hard to admit they're wrong, so would rather stubbornly close themselves off from revising their erroneous opinions.

3) Tribal identity - many views and beliefs are bound up in the identity of a particular group or allegiance, particularly religious and political views, which overwhelmingly bias individuals against changes of mind.

4) Emotional biases and confirmation biases - reasoning ability can be impaired by emotions, and conformation bias occurs as we look to justify our views by seeking out information that supports what we already believe.

There are others too, but those are the main four, and between them they have quite a stultifying effect on human beings' ability to be correct about things. The only cure for this sort of thing is to wake yourself up to how painstakingly, ludicrously irrational this is - I mean, why *wouldn't* you want to be correct about as much as you can be? And related to that, why *wouldn't* you want to be shown an improved way of thinking about a situation or learn a new fact? 

Learning new facts and improving your reasoning is the universe's way of making you smarter - it is one of the things that people should embrace most, yet it is so often one of the things from which people casually shy away.

Here's what I'd advise you to try: from now on, the next time you get even the faintest hint that you're wrong abut something, or that your interlocutor appears to be making a point that could bring about a fresh perspective for you, embrace it - be enthralled by it, and look at it as an invitation to open a door you'd previously only known to be closed.

You see, when we want to be, I think we humans are fairly adept at sensing weaknesses in our own position when up against smarter people. I don't think the feelings and sensations are alien. As an experiment of self-discovery, let me encourage you to try to own those feelings when they arrive. The next time you sense you've been holding on to a view or belief that needs correcting or revising, stop and take ownership of how it makes you feel.

You may feel threatened, or embarrassed, or obstinate, or defensive, or angry with yourself, or even ashamed that if you change your mind you're going to upset people close to you. I promise you, you will feel at least one of those things. But don't worry - it's the universe's way of inviting you to be smarter, and encouraging you to embrace and be glad of the opportunity.

And if that doesn't turn out to be enough to help you engage in the opportunity, remind yourself that what the universe is asking you to do is nothing different to what you've already being doing all your life - enjoying new discoveries and welcoming fresh perspectives. You don't mind being right on whether it's okay to drop litter, or on what the hottest planet in our solar system is, or on the properties of plutonium, or on whether theft should be illegal - you're just being asked to follow what you've started to its logical conclusion and remain consistent with it at every juncture.

Every time you become a better thinker, or less wrong about something, or more rational, you've made gains for life - you've taken another step on the journey of mental exhilaration. Don't fight it: thirst for it, enjoy it, and embrace it with open arms.

Saturday, 13 January 2018

With This Basic Error, Trump Is Doing His Best To Hide His 'Genius'

Oh dear, Donald Trump really doesn't get this economics thing at all. We read today that he has now declared he will use NAFTA negotiations to make Mexico pay for the wall. Alas, a 'stable genius' like this really shouldn't be making so many category errors.

Trump has spent the best part of a year explaining to Americans how, under current NAFTA rules, Mexicans export far too many goods and services to America, and that that is hurting the domestic economy.

Yet now through NAFTA renegotiations he's "going to take a small percentage of that money and it’s going towards the wall” - which infers that Americans will receive either US dollars or Mexican pesos as payment for the wall.

At which point, one has to ask: what the heck is Trump on about? If he's on about payment in dollars, then Mexicans first must acquire the dollars to pay the wall bill – and to do this, Mexicans must sell goods and services to Americans. It is only through selling more goods and services to Americans that Mexico will get more dollars to pay for the wall. But this contradicts Trump's rhetoric about dissuading more Mexican exports to America.

And if Trump means payment in Mexican pesos, then his reasoning is equally flawed, because he unwittingly commends the very thing he has spent the last year rejecting - that is, increased sales of goods and services from Mexico to America. 

The upshot is, the only way that Mexicans can fulfil Trump's wish is if they export more real goods and services to America - something Trump mistakenly presumes is a benefit to Mexicans at a cost to Americans. Trump needs to make up his mind whether he wants to slow down the Mexican imports he thinks harm his domestic economy or whether he wants to speed up the Mexican imports to pay for the wall.

Lastly, there is an outside chance that a 'stable genius' like Trump thinks (although I doubt it) Mexico will pay for the wall through US import tariffs. Yet as anyone with even a sketchy understanding of economics will know, tariffs do not just hurt foreign exporters, they hurt the domestic economy too.

If Trump raises import tariffs he will raise the prices of imports from Mexico too, meaning Americans will buy fewer of those goods or pay higher dollar prices for the goods they keep on buying. Either way, Americans are paying for the wall.

And where Mexicans are hurt by higher tariffs, they will have fewer dollars from their exports to America, which means they will have less to spend on American goods, which will do the other thing Trump claims to hate - hurt American jobs. Must do better, Donald!

Sunday, 7 January 2018

Healthonomics: Not Everyone Values Healthcare Equally

In a recent Blog post I explained why public sector provision is usually not good value for money compared with the private sector. This shouldn't be as bewildering as it is to lefties, because no one sane thinks that the state should take over, say, the running of the food industry, or the hair and make-up industry, or the clothes industry. Equally, very few people think that something like national defence or the rule of law should be given up by the state.

There are, however, some services that most people think ought to be provided by the state that would be better off provided by the price system of private enterprise. A good example is health care. A frequent problem with health care analyses is that people tend to think of health as some kind of special category whose remit sits outside of market capability. This is not so - it is perfectly straightforward to get people to pay for their healthcare like they do their social care or even their food and drink, while having a tax-based welfare system that caters for the unfortunate folk that require a helping hand.

Food, drink, heating, clothes and shoes are all important necessities for humans, but there is no National Food Service or National Clothes Service - they are provided by markets, and anybody who cannot afford these things is given welfare money with which to buy them. The same should be true of health care, where a safety net is provided, but where the services are provided by markets, with competition reducing prices and increasing quality.

Market forces would also help incentivise people to look after their health a bit better if they valued good health more than the costs of indulgence and bad health. Evidently, Brits like the NHS ethos, but remember that every good thing about the health service is already being done by market forces - it is being provided by nurses, doctors, cleaners, caterers, porters and receptionists, not the state. The state is only the abstraction that pervades the process of provision and adds on bureaucratic costs while doing so. 

Crunching some numbers
Let me run some numbers by you to prove the point. The NHS has 1.7 million employees, and there are 65 million people in the UK. That means there is one NHS worker for every 38 people in the UK - which, fairly obviously, is way too many in terms of assessing commercial demand. Last time I checked, the annual health bill per person is about £2,000. If asked "Would you rather the government let you keep an additional £2,000 a year of your money but you had to pay for your own health care when it was required?" it's obviously better for you, and most people, if you say yes, especially if you remember that health care would be cheaper if it was driven by market incentives.
Remember, a health system emerged in the past 150 years quite naturally and organically. The state, in gradually commandeering this service and making health care much more expensive, hampered people's ability to govern their own affairs and disincentivised them to even try that hard. You probably cannot imagine how much capital would be freed up if health care prices were to be in line with supply and demand. People would pay less tax, but have more money to spend, and have all round better, less-expensive health care.

The main reason that people seem to think we need a state-run health system is to provide health for people that cannot afford it. But that's a flimsy reason - the system would be better if people keep their money to pay for their own health care, and any instance when a citizen's ability to pay is in jeopardy, the state can give them the funds to pay for it, without the price system being interfered with (remember that when all is totalled up, the average citizen spends about 60% of their entire income on taxes).

Let's have a recap about how things are at present. The current system for most people is one whereby the state forces National Insurance out of your hand and then sells you some of the value back in the shape of health care insurance that you may or may not need. What you have to ask yourself is, on what grounds can we distinguish between needing a state-run national health service any more than a state-run food service, or a state-run bicycle service, or a state-run TV channel?

What I'm really getting at is this. If the state sets up a system in which you are likely to pay in more than you get out, many will overuse the service relative to the intrinsic benefits it provides. The same is true of higher education; when university education is subsidised by other taxpayers, some people will study even when the education they receive is worth less to them than what it costs others to provide it. In both the cases of health and higher education, incentives have been skewed.

Consumer choice is primary
Here's what's really important that very few people acknowledge. In private markets, health care is valued differently by different people: we are a very diverse range of people in society, and although non-economists find it hard to get to grips with this - the fact is, not everyone feels the same about the benefits of health care, or the trade off between their life choices and how they spend their money.

Only the consumer - that's you and me - knows whether we'd prefer reassurance from a doctor about a throat infection, or the benefits from not visiting the doctor's surgery; or whether we'd prefer a bit more junk food and an increased probability of a heart attack, or healthier food and a longer life expectancy. And the best way to combine the expertise of the providers with the revealed preference of the consumers is through the price system - which will only be near equilibrium if consumers spend their money more freely.

Doctors are professionals; they know things about our health that we do not, and they can make us better, which is why they command high salaries. Patients, on the other hand, are professionals too - they are professionals over their own lives. When it comes to your own wants, needs, desires, preferences and budget, you are the world’s biggest expert. No qualification, skill or service can match your knowledge of yourself.

Let me use my car as a real life analogy. My Subaru has one or two faults. The passenger-side speaker is intermittently faulty, and the driver-side electric window motor is broken. Clive Atthowe, my mechanic, knows how to fix these faults, and we both know how much it will cost (about £750 for parts and labour). The cost and the expertise to fix these things are based on Clive Atthowe's knowledge - but what Clive won’t know is how much I value having a working speaker and electric window against the value of £750 and doing without them.

The same is true of cleaning the car. The hand wash roadside services have the machinery to get my car cleaned much better and quicker than I can, but they don’t know my trade off preferences for a car cleaned less frequently and saving on the cost and hassle of regular visits to the hand wash station.

This information, and many other examples like it, are precisely what the price system is based on - the marginal value of goods, services and labour, all coterminous with the value we place on them. That is why, government interference aside, you can be confident that when you buy a bar of chocolate, a microwave, or a car, the price you are being charged is proximally close to the value that every individual places on those products as a weighted average of society.

It’s been designed, not from on high, but through billions of local decisions every day, to solve the supply and demand problems and the asymmetry of information problems, while factoring in investment costs, risks and so forth, to ensure that every price very closely reflects society’s aggregated revealed preferences.

There may be some mileage in a centralised health system, but implicit in that framework would have to be a scenario for individuals where their preferences and their expenditure are more closely aligned. Put it this way, if the NHS didn’t exist and the current model was put forward as the way to design it, anyone economically savvy would reject it and opt to create something different. Like the European Union, people tend to be emotionally connected to it because it’s already there and has been for years, more than they are emotionally connected to it because it's the model they would choose to create from scratch.  

A world full of better alternatives
Incidentally, from what I've seen, I rather like the idea of a health savings account, like the one in Singapore, where instead of the state taking money through taxes and letting you have it back in the form of free health care, you get to keep more of your money to put into a medical savings account.

That money is used to pay for your health care where you can negotiate doctor-patient contracts in a market system, much like you would now with insurance and banking, and what you don't spend on health throughout your life gets added to your pension pot. Naturally when you spend your own money directly on health you are more careful with your health, what you consume and how you behave.

What is often not realised is that the best solution to goods and services is market-based solutions, but a mix of market and state can often be worse than even just the state running things (as the US health system and UK railways demonstrate). Mixing market incentives with political ones is often a toxic recipe, because you often get the worst of both worlds, whereby special interest groups obtain too much power, public money makes things less efficient, and market signals are ignored when the state backs it with a guarantee.

Kate Andrews at the IEA talks about the NHS's relative performance in this article:

"While countries like Switzerland and Germany spend a few percentage points more of their GDP on healthcare than the UK, many countries – including Hong Kong, South Korea, Portugal, Australia, and Iceland – spend close to the same or less, and fare better when it comes to patient outcomes. It is clear that what sets the NHS apart from its European neighbours (and indeed, the rest of the developed world) is its extremely centralised system that allows for almost no competition or patient choice. The UK’s unwillingness to adopt the social insurance systems that dominate Europe is what separates it on the league charts – usually ranking in the bottom third of international comparisons."

Remember, also, vital goods and services are just the kind of important things that need to be allocated most efficiently by the signals of supply and demand. There is no reason why health shouldn't follow the same template, rather than how it currently is (in the UK) whereby the state forcibly takes whopping sums of money from us and compels us to prop up a health system that has the weeds of information asymmetry, unfairness, perverse incentives and sub-optimal allocation of resources entangled in its flowerbed, and a shortage of price-based reflection of revealed preferences in its DNA.

It's important to remember, the services don't have to be radically altered - just the way they are run and how they are paid for. What you have to remember is that currently there are consumers and providers, and politicians as middle men who take lots of our money to pay for healthcare and then give us that healthcare if and when we need it. It is a system that not only cannot be sustained, it's also one that is a recipe for mass inefficiency.

A change is imminent - here's where to start
The best way to reform a large superstructure like the NHS is to reform it bit by bit, and start with the low hanging fruit - the bits every Tom, Dick and Harry can see are not fit for purpose. So let's pick a few obvious examples.

The first is that it is absolutely ridiculous how much of the NHS resources the binge culture drains, where drunk people need medical attention because they've over-consumed in an irresponsible way. Some of those cases take up to 6 medical staff and usually two police officers too. Such people should be given a bill for this.

The second is doctor's appointments - missed appointments cost the NHS a few billion pounds a year, and once you add on all the people that have an appointment that didn't need one, that probably triples. A price incentive has to be built into this.

Plus, and a lot of this has already happened or is happening, numerous goods and services that do not need to be built into the centralised NHS framework - things like facilities management, payroll, HR and staffing agencies, catering, imaging and pathology, community health services and after-care, pensions, portering, laundry, IT and cleaning - that could instead enjoy increased competition and patient choice for the consumer (some of these are already privatised to good effect).

This will be broadened out to gradually include more GP surgeries, out of hours services, diagnostic services, community nursing and a range of other community services, which will cut down on public costs and improve efficiency.

It has to be said, there have been some disastrous private financial contracts handed over, where the provider has made a loss and found the contract agreement to be financially unviable - something which can be avoided if the gradual process occurs in the right way.

The other thing that needs to accompany these changes (and will) is the increased technological advancement that makes all these links between how people can keep more of their money and pay in accordance with usage more viable. So, for example, if charging for the NHS usage whilst pissed on a Saturday night were introduced tomorrow, it would be a bureaucratic nightmare to enforce. Fast forward to a time when the entire administrative cost can be finalised with a quick tap of a card or a fingerprint on a scanner and it will be much easier, because the concomitant behind the scenes technology will also be more sophisticated.

Remember, someone in the 1950s would be quite astonished to think that you could walk in to a supermarket, scan the goods in your basket and tap a payment card on the sensor to complete the transaction. Imagine in the future when money earned and money spent on health care can be so much more prodigiously efficient thanks to advanced technology.

An awful lot of positive developments in society are made possible by life-changing technology. Think of any detective movie in the old film noir era with Humphrey Bogart and Robert Mitchum and imagine how much easier their cases would be to solve with a smart phone. Think of how much easier the protracted scientific revolution would have been if all the exponents had laptops and the internet. Think of how much quicker the Industrial Revolution would have gathered momentum with more advanced electrical and combustion capabilities.

But all that's just the boring stuff about NHS service minutia - the really compelling part to all this is how radically improved systems are when information signals related to preferences play out more freely. When I buy white goods (fridge, freezer, washing machine, etc) I never pay extra to insure them because it's a certain additional cost against a small probability of ever needing that insurance. Some people are risk-averse and willingly pay the extra, usually unnecessarily, but sometimes the peace of mind is worth the cost. Others just get duped because of ignorance or price-insensitivity. Either way, the price system reflects those different choices, and a law that insisted everyone insure white goods would be one that is bad for consumers.

Not only would it fail to reflect people's revealed preferences in the price system, it would also disincentivise us to look after those goods as well as we would if we picked up the cost more directly. You'd defrost your freezer less frequently if you knew that once it packs in the government has a ready-made replacement all bought and paid for with your taxes. Under that system society will get through a lot more freezers too, which means the annual bill is higher. Think of that as a good analogy for the NHS.

But there's more. Misallocating resources occurs when the price system cannot take into account not just what people want, but what they don't want too. A taxpayer subsidised system like the NHS encourages overuse because there are sunk costs in terms of all the National Insurance you've paid.

Consider my Subaru again. I told you earlier that one of the electric windows stopped working. The garage said it would cost over £700 to replace the motor, so I decided I could live without one of the windows working. Now if cars, like health, came under a nationalised system, whereby I could get the window motor fixed under public expense to which I'd already contributed, I may well do so - but I'd be doing so not because I value the fixed car window more than the £700, but because the sunk costs have already occurred in the paid taxes.

Only I know whether I value the cost of fixing the car window more than spending the £700 on other things, so a nationalised car policy that encouraged me to overestimate the value I placed on fixing the car window would be more of a hindrance to me than a help. The same is true of a nationalised heath service - it just takes a bit more imagination to see how radically different it could be, and will, be, in the future.

* Politicians from different parties keep squabbling about who has got the most attractive peacock’s tail, where biggest peacock’s tail here means how much money they will put into the NHS. They try to call this their health policy, but that’s not a health policy, it’s a redistribution of income policy. A health policy, which politicians are apparently too frightened to propose for fear of committing blasphemy against subscribers to the religion of the NHS, would be a policy that lays out plans for properly modifying the health care framework, and one that tackles the funding problem and helps align usage and incentives and constraining usage by making the costs more accountable to the consumer. Simply bleating about how much extra funding you can put in, and increasingly burdening future generations to do so, does nothing to attempt to tackle the fundamental problems.

Wednesday, 3 January 2018

Another Thing Corbyn Doesn't Get: Opinion Polls Are Deceptive About Our Preferences

Jeremy Corbyn's New Year speech was full of buoyancy about how he's a Prime Minister in waiting because the policies he endorses are popular with voters. The problem is, he misunderstands the most primary error in his evaluation: that opinion polls are deceptive about what people actually do want, as opposed to what they say they want.

Below is a recent poll showing the public appetite for the nationalisation of various services in the UK. As you'll see below, more people want energy, water, railways, post, health and education to be run by the state than not. The corollary is that although many people think Corbyn the man is a bit of a plonker, his policies are apparently more widely popular than they are unpopular. In this post I will show you why popular opinion ought to be meaningless in creating government policy.

Alas, the YouGov poll is fairly meaningless, because it doesn't tell us what people actually desire - it tells us only what people claim to desire when they don't feel the costs of those desires. I want a £4000 top of the range television if you are going to buy it for me; whereas if I'm buying my own television, I'll probably spend about a quarter of that.

Similarly, when a British citizen is asked if she wants more public money spent on health care, railways and the energy sector, and if she wants employers to be forced to lower their staffing levels so others can receive a minimum wage, she will quite happily say 'yes' if she doesn't have to bear any of those costs. She may have to bear a tiny proportion of the costs through increased taxation, but those costs are spread thinly enough that no one individual feels it very acutely.

Moreover, a poll asking you whether you support renationalisation of the railways is not very likely to have the result affected by your vote, so you are less likely to have spent much time analysing the pros and cons of a nationalised railway.

The only poll that genuinely covers your revealed preferences is the poll where you feel the full costs and benefits of your decisions - and that only happens when your decisions are market-based, with the full gamut of consumer surpluses and opportunity costs factored in. I would buy a £1000 television for the consumer surplus, and wouldn't buy a £4000 television because of the opportunity costs associated with that additional £3000 expenditure.

Polls, therefore, are fairly meaningless in telling us what politicians should do with our money, because the poll choices are divorced from the personal ramifications of those choices. To discover what British citizens really want you have to allow them to spend more of their money, and reveal their preferences in a market-based economic landscape. Unlike in state policy, the market will respond, as prices and quantity will adjust accordingly to supply and demand.

Sunday, 31 December 2017

Homework For Owen Jones In 2018.....

The regularly confused Owen Jones had an article out over Christmas in which he laments what he perceives as the rise of individualism and the demise of solidarity in society (Jones' perception is based on the results of a survey by the European Commission, where apparently 52% of the people surveyed are hoping for more solidarity).

Owen Jones predictably blames all this on what he calls 'Thatcherism' or 'neoliberalism', which, according to him, has encouraged a maximisation of individualism that has sought to "bulldoze every last remnant of solidarity we felt".

This is, of course, utter hogwash, built on the fact that neither Jones nor the European Commission understands the concepts they are trying to evaluate. Humans do not look to maximise individualism, we look to maximise utility. In conjunction with this, economics is a proper empirical method for assessing what humans prefer given many combinations of goods, services and opportunities for mutually beneficial exchanges.

Therefore, what Owen Jones sees as selfish individualism is no such thing, because the pursuit of human utility for each individual is underpinned by solidarity in cooperation. Once you factor in the billions of combinations of goods and services and the billons of combinations of tastes and preferences, you see that suppliers only provide what consumers desire, and at a price people are willing to pay.

Consequently, economics is about human preferences and behaviour played out in the form of mathematics (utility). For example, indifference curves represent a series of combinations between two different economic goods, and they play out in geometrical terms when slopes of indifference curves on a graph reflect marginal value. This is the very basis on which utility operates - but fairly obviously this is based on cooperation between buyers and sellers, not on the kind of isolated individualism that Jones thinks has bulldozed this country.

What Jones also doesn't understand is that the process that drives the death of failing industries in the UK is part of the very same solidarity we were just talking about. Industries that fail do so for exactly the same reason that salt and vinegar flavoured crisps succeed at the expense of strawberry flavoured crisps - people are revealing their preferences and relying on each other to try to maximise their own utility.

So when small corner shops close because their customers switch to the nearby Tesco; and when a music store closes because people download their tunes straight from the Internet; and when businesses are made better off by importing Chinese steel than by supporting British steel, there is no bulldozing of solidarity - just cooperation with more efficient agents for the benefit of increasing utility.

The market's revealed preferences are simply instances of increasing utility spread thinly across society, whether that's by producing things cheaper, using fewer resources or being more efficient with time. These matters of individual utility are part of solidarity in cooperation; they are not at odds with solidarity as Jones thinks. Cooperation helps individuals to maximise net utility.