Thursday, 29 September 2016

Aston La Vista, Baby!

Have a look at this picture above, and see if you can guess what type of car this is. Believe it or not it's actually an Aston Martin. It hasn't sold at all well, because there wasn't much market demand for it (it sold fewer than 150 in two years).

So demand for this ugly duckling of a car was low, but the story goes deeper, because the reason Aston Martin put it on the market in the first place was nothing to do with demand - it was due to an EU directive that said all European car companies must adhere to a law which sees CO2 emission averaging 130g/km across the range of cars produced by the company.

So alongside the seat of the pants V8s (that do sell well), Aston Martin had to produce these tosserati mobiles (that didn't sell well) in order to get the average emissions down across their supplies. It's just one of many examples of the market demand being crassly distorted by EU regulations.

Brexit glee anyone?

Wednesday, 28 September 2016

Can't Unite, Won't Unite, Shouldn't Unite

Encouraged by their leader today, Corbynites are peddling the narrative that now Mr C has won again, and with an even bigger majority than last time, the party must unite and get behind their leader in order to attempt to form an effective opposition to the Tories.

I think this is highly unlikely to happen, and nor should anyone actually want it to happen. The Labour Party is made up of a variety of politicians – some on the hard left, some centre left, and many in between – and whether you share their views or not, they are views that are fervently held and that form the basis of their beliefs and goals.

Except by some shadowy pretence, many Labour MPs can’t, and shouldn’t, claim to be behind a shadow cabinet and a set of policies they are not. Divisions of this magnitude exist for a reason, and they cannot ‘unite’ in their goals any more than a vegetarian and a meat eater can unite to share a chicken and bacon pizza.

The group that has taken the party this far to the left has created an irreconcilable impasse that won’t be resolved by everyone in the party pretending to be of the same voice. Given that the members have effectively taken the party hostage, and have made it very difficult for any non-Corbynite to secure enough votes to be the next leader after Corbyn, it seems to me that the non-Corbynites have three realistic options:

1) Look to split the party.

2) Mince around for probably two more election catastrophes until even the Corbynites get fed up with embarrassing losses and realise that the electorate won’t vote for a hardline socialist, and then put forward a more electable candidate.

3) Somehow try to get hundreds of thousands of new anti-Corbyn members to pay up and join in order to outnumber the Corbynites and swing the party back to being electable again.

Almost everyone involved won’t fancy 1 or 2 very much, so it seems to me the only recourse is to look for a few hundred thousand people to sign up and add numbers to the anti-Corbyn side of the vote.

Saturday, 24 September 2016

What's Behind The Labour Curtain?

In changing the rules to allow paying members to vote for the party leader, Ed Miliband couldn't have predicted what a 5 season, 25 disc box set of political drama he's gifted the nation. As someone who was thoroughly bored with second rate politicians arguing over the centre ground like teenagers squabbling over which one of them has the best mobile phone, Ed Miliband, in allowing thousands of dormant socialists to have a voice and change the direction of their party, has unintentionally made things interesting again.

However, entertaining as that may be, the party is in big trouble, with the majority of its MPs currently forced to choose between a revolt or supporting a man in whom they have no conviction. It is the fact that thousands can effectively bring the party to its knees just by paying to join what is probably a fairly transient Marxist version of Thomas Carlyle's Great Man phenomenon, being played out with a cult of personality fad, that makes things alarmingly problematic for those affiliated with Labour, and hugely entertaining for those that are not.

For me, the significant thing that Owen Smith's leadership loss today tells us about the current Labour Party is that Labour is biding its time as a party. Didn't you wonder why Labour has been holding back its better guns and putting forward the dreadful Owen Smith as the best candidate to challenge Corbyn? I mean let me be clear, I'm obviously no supporter of any of the Labour party MPs. But even I can see that in the context of being a credible (or less un-credible) leader there are MPs like Liz Kendall, Andy Burnham, Yvette Cooper, and Alan Johnson who, unlike Owen Smith, are not thought of as being a complete duffer by 99% of people in the country.

It was crystal clear that Owen Smith was not the best they had to offer, so why didn't the Labour Party put forward a less un-credible candidate than Owen Smith? It seems evident to me that it's because they have conceded short-term defeat and have their eyes on the future not the present. Given the size of the pro-Corbyn membership, no challenger stands a chance with the current rules, so the better MPs are probably biding their time until Corbyn presumably stands down after the 2020 election defeat.

Which leads me to my last point. In my view, there is only one current Labour MP that would have a sniff of a chance of being a Labour Party Prime Minister - and that person is Chuka Ummuna. He's young, black, good looking, reasonably likeable, has views that are closer than most in the party to being a weighted average of people who either would or might vote for Labour, and is marginally less terrible than the others. At 25/1 with the bookies, he looks to me a good bet to be the next Labour leader in 2020 after Labour loses the General Election and Corbyn stands down.

Thursday, 22 September 2016

Two Fallacious Memes Doing The Rounds

If you're Facebook friends with people who share memes that are superficially seductive but logically and evidentially dubious, the chances are you've seen two that are doing the rounds (again!!) with some ubiquity this week.

The first one is this charming little exhibition of attempted guilt-eliciting self-promotion:
Here's the comment I made the first time it did the rounds.
Oh dear! What a completely inaccurate and misjudged message on that sign! There's nothing wrong with voluntarily paying that little bit extra to support local shops - particularly when the products are better and there's a community relationship.
But if I saw a sign like that, I'd be more inclined to not give them my custom, because the message they are trying to convey is a load of tosh!
The reality: when you buy from a big business you also help a little girl get her dance lessons, a little boy get his jersey, and a mum and dad put food on the table - many many little girls, boys and mums and dads, in fact.
When you buy from the likes of Sainsbury's, Tesco, McDonald's, Burger King, etc you help support the living of thousands of cashiers, shelf-stackers, fast-food workers, drivers, machine manufacturers, and by extension countless other businesses too numerous to mention.
Furthermore, when you add up the net benefits to families in terms of extra money in their pockets due to supermarket price wars - which I read in Forbes a few weeks ago to be nigh-on £11 billion pounds - it really does expose the short-sightedness of this particular 'local' shop. 
The second one is this rather self-explanatory plea:

Now I've no doubt that this mass response has good intentions at its heart - after all, when there is the square peg of unused food in supermarkets and the square hole of a lot of hungry people in our country that cannot afford their weekly meals, nobody wants to think of wasted food and desperate people missing out.
But as is usually the case, the intentions may be noble, but there are potential problems that the noble intentions fail to capture, as I blogged about here.

Wednesday, 21 September 2016

IEA Paper: How Governments Harm Trade

The following paper, published here with the Institute of Economic Affairs, and entitled How Governments Harm Trade (for the full version, see link at the bottom), is a paper in which I explain the principle behind why in most cases the free market works best when governments do not interfere in the prices society engenders by the laws of supply and demand. Those prices, I will argue, reflect human choices played out on a day to day basis, and are the soundest bottom-up basis on which economies are organised, not the top-down organisations that politicians impose on us.

I will show how value is created in every societal transaction for both agents by the combination of consumer surplus and producer surplus. As this paper will also show, the main regulations one ought to be opposed to are ones that artificially interfere with prices and the information-carrying signals they exhibit.

On the issue of when it is good or bad for the state to be involved in the free market, I use quite a simple and obvious formula. It is this: the state should only involve itself in our transactions when there is a net benefit to society from this involvement. That is, when the benefits of doing so outweigh the costs.

When stated like that, I would think it is hard to find a sane person who disagrees with that proposition. The odd thing about society, however, is that it is full of people who would find little trouble agreeing with the idea in its above propositional form, but who quite comfortably hold numerous beliefs that depart from the above logic. It is this societal anomaly that will be unpacked.

To read the full paper click here

Tuesday, 20 September 2016

The Economist Doesn't Do A Very Good Job With This One

From the days when I used to read it every week (long before the days of the online option) The Economist has always come across as wishing to be economically slightly right of centre and socially slightly left of centre. My impression these days from sporadic reading is that in terms of its economics it is drifting implacably to the left, probably to appeal to a younger readership.

It is still friendly to free trade, but in my view not trenchant enough in its repudiation of bad leftist policies. A good example is this article, which despite being two years old, grabbed my attention this morning when it was shared on The Economist's Facebook page and generated lots of attention in the comments section.

It's not just that the article sits on the fence too much regarding the minimum wage, it's more that by only focusing on how the policy affects statistical employment levels in terms of having only a moderate effect on job losses, it fails to consider the most important statistical group - the people that cannot get a foot on the rung of the employment ladder in the first place (and that's to say nothing of the other negative effects such as unfairly loading the burden onto employers of low-skilled workers and causing price inflations that hit those same people hardest).

An article that makes itself so oblivious to the entirety of the net cost on society is rather like an article on assisted suicide that makes no mention of the pain and suffering of the people that wish to end their life. The minimum wage is basically a tax on people who do the most for low earners - a tax passed on to low-earning consumers, which ought to tell you almost everything you need to know about it (and let's not forget that it has a very dark history with sinister eugenicists who knew exactly what kind of effect it would have on struggling factions of society, as I wrote about in this article for the Adam Smith Institute) .

The minimum wage legislation occurs because the UK government wants low-skilled workers to receive more in wages than the market value of their labour - but it rather reminds us of an old political maxim: don't judge a policy by its intentions.

The desire to ensure low earners have enough to make ends meet is a noble one - but it can, and should be achieved by supplementary benefits, which basically amount to a tax funded by taxpayers as a whole, rather than the minimum wage, which is a tax on people who employ low-skilled workers, where the cost is largely borne by consumers of firms that employ lots of low-skilled workers.

It should be obvious, but as I explained in this blog, if you want to help low-earners it seems bizarre and unnaturally wrong to expect the vast majority of the cost to fall on the sub-section of society already doling the most for low-skilled workers and for consumers who buy the goods and services provided by low-skilled workers.

Like the ill-conceived tariffs I mentioned in a recent blog post, the minimum wage benefits are tangible and easy to endorse, whereas the costs are spread out widely across the population (particularly for people whose labour value falls below the government's mandated price floor and remain unable to sell their labour). Like the tariffs, politicians like minimum wage legislations because they conceal the subtlety of the tax*.

While we're on the subject, have a look at this graph, which measures government spending as a proportion of GDP.

In the past few decades government spending has hovered around the 40% mark of the entire GDP, which constitutes a massive proportion of total spending. Plus if you add on all the hidden taxes in the form of regulations, price controls, tariffs, etc - plus government borrowing, which is basically deferred taxation (which this graph does not factor in), it's probably over 60% of GDP.

That is to say, if the government taxes Jack 20p in every £1 earned and gives some of it to Jill, that transaction is recorded as a tax. If however, the government forces Jack to pay Jill more than her market value, or consume at a price above the market value, those transactions between state and citizen won't be recorded as a tax

Just as the tariffs prevent you from buying cheaper alternative goods and services from more competitive foreigners, the minimum wage prevents you from buying cheaper alternative goods and services domestically. Not only do both these regulations generate many deadweight losses on the economy, they are deadweight losses for which the majority of our citizens continually lobby the government.

Alas, I'm sorry to say - almost all our society is controlled and governed around left wing constructs (progressive taxation, price controls, state-provided health, education, defence, a quasi-governmental central bank that controls interest rates, and it's impossible to undertake any mutually beneficial transaction with another agent without incurring numerous instances of State-regulation or state-enforced taxation on earnings that have already been taxed - usually both).

* To give you an additional point to consider regarding the absurdity of this price floor; suppose our new chancellor Philip Hammond was injected with a potion that made him believe all old banger cars in circulation have suddenly increased in value. 

From now on, irrespective of whether your car is falling to bits, rusty, leaking, worn out or on its last legs, under this new potion’s influence the Chancellor now believes that no car is worth less than £1500. On the basis of this, he creates a minimum car sale law that prohibits anyone from selling a car for under £1500.

Who do you think this will hurt most? You've got it, the people trying to sell inexpensive cars. Philip Hammond's law won't make those cheap cars any more valuable to buyers than they already are - which means the law will simply prohibit a lot of people from being able to buy and sell cheap cars. The same reasoning can be applied to minimum wage laws.

Monday, 19 September 2016

Not Everything Has To Be Pareto Optimal

A reader asked whether in economics we should always strive for Pareto improvements. For those unfamiliar with the term, a Pareto improvement is any action that makes at least one person better off and makes nobody worse off. That is not the same as saying that society enjoys a net benefit, because that can happen while still seeing some people being made worse off.

A new village pub could make 90% of the villagers better off while still making 10% of them worse off. The only way to turn that into a Pareto improvement would be to compensate the 10%. Besides, Pareto optimality isn't much of a measure of a society anyway - a society can have numerous Pareto efficiencies and still be a pretty fraught place to live.

Pareto efficiencies are relatively rare in society because life is a series of trade offs, and it is difficult to do anything in society without making someone else worse off. The prospect of people feeling like they've been made worse off often leads to a stalemate.

For example, suppose your 23 year old son Jack is performing his first piano concert at the local school hall, but you and your wife get a one-off offer of a holiday to stay in a luxury apartment overlooking Central Park courtesy of your best friends Jim and Sue who've won a New York holiday for four in a competition.

The holiday clashes with the piano concert - and what usually would happen is that someone is going to be disappointed, and it must be weighed up with the question of who should be the one disappointed? Personally I think the son should be disappointed.

When there is a stalemate, the economists Nicholas Kaldor and John Hicks came up with a watered down version of the Pareto criterion, called the Kaldor–Hicks criterion, which is a measure of economic efficiency that runs alongside the Pareto-efficiency, but makes less of a demand on the outcome. The Kaldor-Hicks criterion states that a decision can be seen as efficient as long as in theory everyone can be compensated to offset any potential costs.

So in the above case, Jack's parents are made better off by the holiday, whereas Jack is made worse off because his parents won't be there for his big concert performance, so they would need to find significant financial restitution or compensatory action to make things beneficial for all concerned. As long as this can be done in theory, the Kaldor-Hicks criterion is satisfied - and this is a good basis on which to assess cost-benefit analyses.

Thursday, 15 September 2016

An Interesting Thing You Might Not Realise About Unemployment

Unemployment figures are often bandied around by Cassandra-types who portend doom on the state of society. But there are at least two conditions under which slight peaks of unemployment give exhibition to societal progression.

One is when a firm closes down due to competition elsewhere. This will hike up the unemployment figures for a short time, but it also means that in industry there has been an improvement in efficiency (I explain this in more detail here).

The other is when worker productivity means people need to work fewer hours to enjoy the same, or in many cases, a better standard of living (ditto when goods become less expensive).

Compare the working hours of domestic tasks in 1916 to those of 2016, or compare the average time spent working in 1916 to that of 2016 – it’s clear that we do a lot less work in the present age yet we have a vastly superior standard of living.

If you went back in a time machine and invited the average citizen from 1916 to look at the equivalent standard of living in 2016 they would be astounded. As times progress we continually see increased standard of living for less human energy expended, which translates into fewer working hours per year.

Thus it is quite possible, as is the case in America, to have more industrial production than ever before but fewer people employed in manufacturing than ever before. Or to put it another way, our great-grandparents worked a lot harder than us to obtain a standard of living well below ours.

Sometimes it’s true that more jobs equals better standards of living, but not always: there are times when fewer jobs and less working time equals more prosperity and improved standards of living.

Here's another thing you may not have considered. Increase in unemployment could mean that there are lots more people out there unwilling to work, but it more likely means that people looking for work are rational jobseekers.

For example, take every unemployed person in the country. Many of them could increase their chances of work if they lower their standards, but what they are trying to do is strike the balance between the length of search and the type of job.

A rational searcher will hold off taking just anything to increase the chances of finding a more desirable job, up until the point where the costs of the search are not greater than the gains. The unemployment pool makes up a lot of these rational searchers.

On top of all that, there is always this big question, which doesn't get considered often enough - Is Employment Always Desirable For Everyone?

Tuesday, 13 September 2016

Oh, Not This Again!

Today Oxfam has released another one of its 'UK inequality is one of the terrible things that urgently needs addressing' publications. They are singing from a popular hymn sheet, as people so often complain about the UK's income gap between the rich and poor. Perhaps this isn't true of Oxfam, but generally from what I can make out, this behaviour must be primarily driven by envy - for it has no rational basis at all.

It's certainly true that a small percentage of people in the UK have incomes that have generated astronomically more wealth than the rest of the country - but so what? The people suffering from envy of the rich need to be apprised of a few facts. The very rich may have lots of wealth, but:

1) They pay an awful lot in tax - which is a great deal of money that goes towards the UK's schools, NHS, defence, roads, police force, social services, and so forth

2) They create an awful lot of jobs by employing the staff they need to hire and by the personal spending they do.

3) They create a value in society by the money they make, because the people whose money made them rich must have been provided with goods and services that they value more than the money they spent.

4) They leave a lot of money in banks, which helps banks make money, which consequently helps banks' customers get loans for mortgages and small businesses. 

5) They usually pay for private health care, send their kids to private school, travel 1st class, and buy expensive things - all of which means they are rarely competing for the goods and services for which the rest of us compete.

6) They made their money by doing things that the vast majority of the UK population either didn't do or couldn't do. They are wealth creators, not wealth grabbers - and if they didn't have their wealth it does not mean that you suddenly would have. Wealth is earned by innovation and acumen - and to be resentful of wealth is to be resentful of those good human qualities.

Given the foregoing analysis, there is absolutely no justification for people's complaints about the income inequality in the UK - it must, as far as I can see, simply be a case of envy and of dissatisfaction by those who haven't the same skills set or shown the same levels of innovation and acumen.

When the CEO of Sainsbury's makes 15 times what you make he is not benefiting at your expense, just as when China increases its wealth it is not doing so at the expense of the USA. As Milton Friedman famously said:

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”

The fixed pie fallacy involves the mistaken assumption that wealth is like a pie, where if I have a slice of it, it leaves less for you. Wages and wealth are not pie-like - there isn't a fixed or static amount of them like there is pastry and filling on a plate.

Take a step back and consider non-economic examples, like say intelligence, life expectancy and knowledge. These are not pie-like, because they are not zero-sum. Jack can increase his intelligence, life expectancy and knowledge without decreasing Jill's. The same is true of wealth - it can keep expanding - and has done so as history has shown. There are no rational or empirical grounds for being upset with the rich.

Monday, 12 September 2016

Tariffs: Why The Benefits Are Overstated & The Costs Understated

In a week in which tariff-friendly Donald Trump is the shortest price he's been to become US President, in no small part due to his seducing the electorate with promises of import taxes that will help 'make America great again', there are one or two reality checks that need offering.

Perhaps the most important thing you can learn about tariffs is that when (y)our government imposes them on foreigners to make us better off it instead makes us worse off, and also the people trying to trade with us.

Knowing this makes you understand that when politicians want to impose tariffs on outsiders to artificially protect fledgling, ageing or inefficient domestic industries from foreign competition they have their own best interest at heart (votes) and not our own (free trade).

The golden rule about all economic inefficiencies - be they minimum wage laws, rent controls, tariffs, or any regulation of that kind, is that politicians get away with selling the bad policy as popular because the benefits are quite easy for everyone in the country to see, while the costs (that far outweigh the benefits) are more difficult to see because those costs are spread more widely and thinly throughout the nation as a whole.

To illustrate this, suppose there is an ageing firm in the UK called Steve's Steel that employs 3,000 people in Yorkshire. Understanding how the gains and losses of tariffs are distributed is key to understanding the problem with tariffs.

The obvious benefits of lumping a tax on foreign competitors are felt by all the workers at Steve's Steel. The cost of saving those jobs, however, is distributed more thinly through the economy, which means as far as voters go, they see a tangible benefit to 3,000 of their fellow country folk and perceive no real cost to themselves.

Moreover, since the workers and families have every incentive to lobby the government to save their jobs, and the rest of the population have little or no incentive to lobby the government to not subsidise Steve's Steel, there is more of an incentive for the government to listen to those connected to Steve's Steel.

But, alas, while you can see the losses connected to Steve's Steel quite easily, what you don't see are the losses that occur around the rest of the country by subsidising Steve's Steel - the numerous other workers that lose their jobs for every one job saved at Steve's Steel - you never get to see all those who lost their jobs because the tariffs were enacted.

Equally you never see all the reduced consumer income that Brits have due to these tariffs, via the increased prices they pay, nor the lost job opportunities by not having that money to spend elsewhere. You also never see that a British import tariff against, say, Chinese imports would mean the price of the yuan measured in pounds falls, making British goods more expensive to the Chinese, which reduces demand for things priced in yuan and reduces demand for yuan, making UK consumers worse off..

The upshot is, as I've said before on these pages, if you stifle foreign competition directly, you stifle domestic industries too, because somewhere down the line in the complex nexus of global trade, your fellow country folk are the competition.

Sunday, 11 September 2016

This Is An Interesting Paper On Picking The Winner With A 95% Probability

Labour leadership candidate Owen Smith is so unbelievably inept, unworldly, arrogant and socially maladroit that the Independent is starting to wonder whether he's actually a Corbynite sleeper agent.

After all, when a politician is quite so gauche and incompetent, you begin to entertain the idea that even conspiracy theories about him could be credible, particularly when even in a party with more third rate politicians in senior positions than ever before in my lifetime, there are evidently less-ridiculous leadership candidates than Owen Smith.

Still, the Owen Smith story will surely be very short-lived - he has almost zero chance of winning the Labour leadership contest, and even less chance of ever seeing his party win an election with him at the helm, so it looks like Britain is going to see a May vs. Corbyn battle in the next General Election (probably 2020).

On that topical note, today I stumbled upon a very interesting paper, in which the author Andreas Murr from the University of Oxford predicts that according to a Bayesian analysis there is a 95 per cent probability that having the larger winning margin in party leadership elections increases the chances of winning the General Election, and that the party leader with the larger winning margin will almost certainly become the next Prime Minister.

Murr was one of the few people last May to predict what most people didn't expect - that David Cameron, not Ed Miliband, will be Prime Minister for the next term. Of course, given that the PM in opposition Theresa May doesn't have a winning margin due to the fact that the withdrawal of Andrea Leadsom in the leadership race left her as the sole candidate, there is difficulty in comparing how the respective 'winning margins' would play out.

However, given that leaders are so important to the party's chances of winning an election, and that the principal goals of a party are to ensure in-group solidarity and cohesion (as much as possible) and to be popular enough to form a government, I suppose the goal of all parties is to have a leader that best represents a kind of weighted average of the nation, rather than a leader that best represents a kind of weighted average of the party.

To that end, then, Theresa May with her crypto-socialism and small 'c' Conservative identity combination is a country mile ahead of Jeremy Corbyn in terms of probability of her party winning the next election, because she much more closely resembles a weighed average of the nation than Corbyn. That probably explains a fair bit about why Theresa May currently has a whopping 42-point lead in favourability ratings over Jeremy Corbyn.

Thursday, 8 September 2016

What Is The Value Of A Blog Post?

What's the true value of a blog post? The difficulty in ascertaining value is that, unlike say a mobile phone, a pair of trousers or a fridge magnet, the rights of ownership are blurrier, and so are the beneficiaries.

If I sell you a mobile phone, a pair of trousers or a fridge magnet, then the value of these goods is confined to you as the owner. You can give someone else the benefit of them only by giving them up yourself.

Blogs are not like this because blogs contain information and ideas. If I share a blog post you can retain the information but share it with as many people as you like without losing the benefits you distil from it. This means that good blogs that contain lots of benefits for their readers are very likely given away below their true value. 

They are, in a sense, benevolent acts where the benevolence confers upon the author the value of interaction. This also has to be played out, though, against the numerous blogs, articles, newsfeeds, videos and memes competing for your attention and time when you're online. 

While the intrinsic value of the content of good blogs may be high, the online world means that there are many other interesting things out there vying for your attention, which means there are increased ways that other people can enrich your life, and increasing ways you have to out-enrich them to add value to your readers' lives, and increase your readership. 

Wednesday, 7 September 2016

It's More About 'How' It's Done Than 'Who' Does It

Supermarkets provide a good illustration of why it's not who controls the company that matters it is the company's effectiveness in the free market that matters most. Supermarkets like Sainsbury's, Tesco and Morrisons are public limited companies traded on the stock exchange, whereas with Waitrose the workers have mutual ownership, and the Co Op is a consumer cooperative consisting of more than 8 million members having mutual ownership.

What this shows is that it doesn't much matter who runs supermarkets, what matters is how they are run in terms of creating market value. What's creating market value for shoppers is that all these supermarkets are driven on by competition - which is why we get multi-buy deals on food, shopper saving incentives, and the ability to have our groceries delivered to our door if we wish.

The NHS follows a similar heuristic - as long as it is being run most efficiently, and remains free at the point of delivery, it doesn't matter whether it is public services running it or private services. That's because, like supermarkets, market qualities are about efficiency not ownership. For those who want the NHS to be free from the more efficient private services due to an almost religious attachment to its state-ownership, here is a question they need to answer. If they believe state-ownership is the most efficient way to create value why do they not want food nationalised too so that supermarkets are under public ownership?

They'll usually argue that health is different and that you can't subject something as important as health to the markets. But it shouldn't escape their notice that food is pretty important too. Without it we'll die. Why is public ownership better in the case of health but worse in the case of food? No one seems to be able to say, which is the classic sign of it being merely an emotional bias divorced from evidence and reason.

The arguments against the market are too often short-sighted or illogical. The Pope made a similar mistake in a recent encyclical - arguing that water is such a precious resource that it shouldn't be privatised. His logic is backwards: resources that are scarce, precious and valuable need to be guided by market forces of supply and demand, because it is the free market that most efficiently allocates scarce, precious and valuable resources, not governments or private interest groups. Around the world you'll find water shortages are horribly exacerbated by wealthy interest groups benefiting from water subsidies.

Like water, health is scarce, precious and valuable. It's scarce because there is huge demand and limited supply. It's precious because good health is one of the most vital things about being alive. And it is valuable because our health is what enables us to work, function and progress in society. Like all things scarce, precious and valuable, society doesn't need our health services being misallocated or uncompetitively costed or frivolously managed under the guarantee of taxpayers' money.

The introduction of more private run services isn't going to impinge on the NHS's free at the point of delivery ethos, so there is no reason to bemoan private health services at all. With an aging population there is ever-increasing pressure on the health service to greatly increase its efficiency and reduce public spending - and that's only going to happen with market forces replacing state involvement.

So please don't panic - market forces won't affect our ability to have health care readily available, nor will there be any danger of anyone being turned away due to inability to pay (unlike the USA). But mark my words, if the British public don't begin to dismantle the alter before the golden calf of our NHS religion, we are going to be in serious trouble.

Sunday, 4 September 2016

Social Mobility: Separating The Myths From The Facts

A follower of this Blog, who himself blogs as Sub Specie Aeternitatis, emailed a couple of queries about social mobility as per my last post. I wasn't going to make a whole new blog post out of them, but after watching a documentary on south London gangs yesterday evening (with extremely rare and candid footage on account that it was filmed privately by gang members), and observing so many interesting parallels with other kinds of rat races higher up the social strata, I decided I would.

So, this week, new Prime Minister Theresa May made it clear enough that she wants to be the most radical of PMs in tacking the apparent social mobility problem in the UK. Social mobility, like natural selection in biological evolution, is a strong genetic factor in human progression. People at a young age look to climb the social ladder, increasing their skills and earnings along the way - which means that people with better abilities are generally in higher positions.

What also advances this trend is that whenever possible women tend to partner socially upwards, as social gradations are correlated with fewer deleterious genetic variations. In other words, it's assortative mating for better genes. Obviously this translates in the social world as dates at the movies, meals in restaurants, kissing, copulation, marriage, and kids you want to go on to do better than their parents, but in evolutionary terms it's an assortative mating process with fine margins, carried out over thousands of years. It's a biological percentage game, but a subtle and long one.

There is also a natural limit on manageable social groups. You've probably heard of the Dunbar number - it's Robin Dunbar's putative cognitive limit to the number of people with whom folk can maintain stable social relationships. The Dunbar number maxes out at about 150, after which maintenance of that social circle becomes prohibitive*.

This also fits in with anthropological observation of many different hunter-gatherer societies, particularly in environments where food (particularly protein) is hard to obtain, such as arid savannah or in raid forests. The other route that over-large groups take is when one group starts dominating another, and then another, and builds up a fully-tribal structure. This happened in North America, of course, before we colonised it.

The anthropological consensus is that tribal structures begin to develop when agriculture starts to enter the scene, even if only partially. But when a very much richer agriculture develops then the tribal structure becomes more like an empire with a distinctly small leadership (though supported with a praetorian guard to keep order if civil strife gets out of hand).

The Aztecs, Incas, Egyptians and no doubt our Wessex Empire are good examples -- when there were huge numbers of peasants who could be drafted to build huge architectural monuments in between seeding and harvest times. To some extent we can regard the modern nation-state as closely resembling mini-empires. They rapidly took shape in the modern form about 300 years ago with the rise of the artillery regiment.

To use them properly they have to be moved rapidly over decent road and rail systems so this tended to force their territories into much smaller sizes than the old-fashioned empires. Also nation-states are small enough to do what empires were previously unable to do - impose a common language, and close the gap bwtween citizen and state.  

I'm afraid, though, moving to the prsent day, what we see at the moment is that some of the people determined to change social mobility for the better are, while good intentioned, rather ill-informed about precisely what has been happening in the global context, and why times have changed.

A UK background story
Once upon a time, thanks to up and coming advancements like stream powered cotton mills, coal mining, increased agricultural machinery and major increases in the production of metals, textiles, and many other manufactured goods, there were once thousands of fresh job opportunities emerging for people in the UK - creating a new middle class and transferring lots of wealth from the richer faction of society down to those now in industry.

As this continued, 19th century social mobility rose fairly consistently through the majority of the UK population, as opportunity to work begat further opportunities to work, on a durable rinse and repeat cycle. While it was far from all rosy, these were the incipient foundations for what is now a very prosperous modern Britain. Similar developments are occurring throughout the world in countries that are currently as poor as Britain was a century or so ago.

By about the 1870s, most of the relatively poor folk in the large manufacturing cities of the north and the midlands were paying fees (yes, that's right, paying fees) for the education of their children, by and large in what was called the monotorial system (brighter pupils assisting teachers in passing down knowledge to less able pupils), which were as expensive as most of the parents could afford.

The religious charity schools for the poor were also proliferating, as were the more expensive private schools for the emerging middle-classes and the aristocracy (though some of them bore the appearance of grammar schools and began opening their doors to talented children of the poor).

Although the rate of positive social mobility continued to rise, what began to slow it down was the government-mandated institution of state schools in the 1880s - but it's important to point out what should be more obvious to some historians and political commentators - that slowing down of positive social mobility is not the same as a decline. If average height across the population increases by 1.5cm every 20 years from 1880 to 1920, by 2.5cm from 1921 to 1941, and then by 2cm from 1942 to 1962, only a fool would suggest that average height had declined from 1921 to 1962.

The rise and success of grammar schools for the talented workers’ children helped things further still, and by the 1950s, the grammar schools were turning out highly educated pupils on a par with private schools.

An important decline?
A team of sociologists, led by Prof Erzsebet Bukodi, has fairly rigorously shown (and sociological surveys these days have to be more rigorous than yesteryear) that at least in one sense it is possible to argue that the social higher numbers of the population has been declining since the forties. It works like this.

Generally speaking, stabilisation of peak social mobility (declining social mobility on one side, slightly increasing, or stabilising social mobility on the other) will occur when the higher paid strata (about 30% of the population according to Bukodi) can supply from within itself enough of the new middle-class (the new professions and businesses deeply dependent on high-quality scientific training) sufficient expertise to keep the better-off (who are producing most of the value-added goods and services) able to keep their heads above water in this highly competitive age. This is epitomised by the success of London while the rest of the country is growing more slowly.

What's been happening is that most of the country’s workers have not been able to raise their skill levels both relatively (to approximately the top 30% of the country) and even in many cases, absolutely (some of this is still relative to skills in other advanced countries which are able to be traded internationally).

So yes, in one sense, it can be argued that the social mobility of most of the country at most social levels is declining both relatively (to the top 30% of the population) and absolutely (to the past). A social-economic-educational gap is opening up and fewer people than ever before are able to bridge it and join the highest social levels.

But all that said, the stats about earnings and career prospects are only a part of the equation - we must not forget that general prosperity and well-being are about more than just earnings and career prospects – we need to factor all sorts of things like improvements in technology, services, scientific capabilities, access to knowledge and so forth. We must also not forget that the whole landscape has shifted upwards, so being poor relative to better of people these days is still much more prosperous than being less poor relative to better off people in the past.

That is to say, if we define social mobility as whether you can easily move up and down income levels, occupational structures and/or levels of education or other social structures, how this compares to others’ chances, and how much your chances are determined by the equivalent position of your parents, it may be argued that social mobility is declining.

But it is questionable how important this actually is. People of the UK today have a better standard of living, access to more knowledge, better medicine, more leisure time, more films, music, books, better technology, etc than any generation that preceded them. Whichever way you cut the cloth that has to be the most important factor in the social sciences.

Getting the gap part right
Another matter that needs addressing with regard to social mobility is this one. Even if we completely overlook the fact (oft-repeated on here) that a more globalised economy is going to see many of our own domestic jobs and industries losing out to greater efficiency aboard (not to mention changing technologies), a common claim too often made is that poorer people are worse off due to the existence of richer people.

People say this because they assume it holds that if richer people are better off due to the existence of poorer people (which is definitely true), then poorer people must be worse off due to the existence of richer people (which definitely isn't true).

Of course, if you're only interested in relative status then the statement becomes less untrue because relative to a rich person's increase in wealth a poor person can become poorer. But absolute well-being of Tom is the only really important factor, not Tom's wealth in relation to Dick's. As Bertrand Russell once put it, beggars don’t envy millionaires, they envy other beggars who are doing a little better. The well off simply have no reason to view the poor as rivals; they don’t compete for the same jobs, the same private health care, or the same houses in the same school districts.

Take dental care as an illustration. If Harry gets dental care to the quality rating of 15/20 and gets overtaken by richer people who can afford 17/20 dental care, Harry is not made worse off. To complain that Harry is no longer getting the best dental care with the implication that he is now worse off, when what has actually changed is not the dental care he can get but the care others can get, is to treat a relative change as if it were an absolute change.

To tease this out, imagine two hypothetical societies - the first consists of the current UK population, and the second consists of the current UK population plus another 75,000 millionaires. I'm guessing most on the left would prefer the first scenario - after all, an additional 75,000 millionaires drastically increases the inequality in our society.

Ah but you see, unless those 75,000 millionaires got their money by forcing people to part with it against their will, the existence of the 75,000 extra millionaires has made society better off, not worse off.

To see why, for analogical purposes, apply the dentistry model to education. Going to a better school makes you more likely to be accepted into a higher paying job. But the distribution of available jobs in the labour market is not a fixed pie, it reflects, among other things, the distribution of productive abilities available.

Presuming the 75,000 extra millionaires spend some of their money in the education sector, the result will increase the number of educated people, which may for some affect their relative position, but it won't make scholastic standards any worse off in absolute terms - just the opposite. Playing a longer percentage game, the best schools will go on to be better, which will improve the quality of the next best schools, and so on.

There is also the important principle of comparative advantage to factor in: that is, the societal gain by the existence of more and more people that are different to us. This holds true because we gain more by mutually voluntary exchanges with people who are different from us than with people who are similar to us.

Alan Sugar would find it difficult to persuade Claude Littner to wash his car at a mutually agreed price, but he would have no trouble finding willing car washers if he stopped by on any of the numerous roadside forecourts we see dotted about. Alan Sugar is better off by the existence of the car washers and they by his existence, because their different wants and needs make possible exchanges to both of their mutual advantage. Take that to a more general level and you should be able to see why this is the case nationwide.

A relative education matter
Consider for a moment the difference between State-funded health and State-funded education. Our health is primarily measured in absolute terms, not relative terms. I don't feel better about having a migraine knowing that Dick has a brain tumour; my having a fractured jaw bone isn't ameliorated by Tom having a broken spine, and so forth. Education on the other hand has absolute value, but it's predominantly relative in its measurements. That is to say, what matters most is how your academic achievements compare to other people's academic achievements.

An Oxford or Cambridge graduate benefits not just in absolute terms related to his or her own well-being, but as a measure against other Oxbridge graduates, but frequently more importantly, against non-Oxbridge people. For that reason, excessive spending on education is an arms race that imposes negative externalities on society in the direction of those who performed less well. We are always being told that more needs to be spent on education. But if you consider why people say this, they really mean spend more to improve people's relative position compared with others.

There's no denying that education investment is important because if all schools get better that means that students are learning more—becoming better doctors, lawyers, businessmen, parents, farmers, consumers of art and literature, or whatever they are going to use the education for. The result is a more productive economy with more stuff for people to consume and consumers better able to take advantage of what is available to them.

Increased wealth has been important too. Everybody gets richer, which means the quality of schools has increased everywhere. The relative position of everyone is retained and the absolute position of everyone improves, as richer people will still, on average, have better schools, and the less good schools improving on the legacies of the past.

That is why education spending may be too high. If I go to Cambridge university and you go to Leicester, that may result in a better social status for me, which affects my earning potential, carer prospects, etc. Increased spending on academic achievement,  insofar as it confers status, imposes a negative spillover on others, which means people are likely to overspend on education. The analysis of prudent spending would need to be about whether the benefits of an educated populace outweigh the costs of such high spending and its concomitant status-mongering. Alas, also, in a society that places a high premium on status, more people are less inclined to look out for those below them on the socioeconomic ladder

Interestingly, neither education nor health care are fixed resources. There are no barriers to continual increase in education and continual increase in health care, because both evolve with the landscape. Status on the other hand is fixed because it relies on people, of which there is a fixed amount, because other mates are a fixed resource. If my health increases by 5% and everyone else's increases by 30% I am still better off than I was before. But if my status increase by 5% and everyone else's increases by 30% my overall position probably will have fallen.

But there are also negative externalities from low incomes and positive externalities from high incomes. Consider a school that consists of a variety of pupils of varying scholastic abilities. A standard competitive model that factors in status would predict that grades would scale in proportion - so if smart Tom produces significantly better grades than Dick, then Tom will be worth more to the school's status and to a prospective employer.

But caring about both absolute and relative performances, Dick's presence contributes an additional input to the school's other students, because his presence raises the relative status of the brighter pupils. By the same token, Tom's presence contributes a negative input, since his presence lowers the status of other pupils. The market outcome thus brings about something that closely resembles income redistribution.

This can be seen even more clearly if you consider the same situation occurring in a factory. If you replace grades with wages and pupils with factory workers you'd see that increased happiness in the workplace would ultimately show up in the company's bottom line, since the cost on the firm diminishes with a better performing workforce. If everyone in the factory earned the same wage then low productivity workers are being paid more than in proportion to their physical output, and the high productivity worker, less.

The main point about the relative nature of education here is this. Suppose everybody in the world had their scholastic ability reduced by 10%. Nothing would change in relative terms - the brightest group would still be brighter than the 2nd brightest group by the same amount, and they brighter than the 3rd group, and so forth. If everybody in just the UK had their scholastic ability reduced by 10%, there'd be no difference in relative terms within the UK, but there'd be a comparative disadvantage with the rest of the world who didn't incur the 10% reduction. .

Now extend those principles to earnings. If relative position was the only game in town then you would be better off earning £100,000 a year in 1916 than in 2016. But in absolute terms you're far better earning that kind of money today - not just because there are so many more things to spend it on, but because if you had to, for example, cook a Sunday roast, cut the grass, travel 100 miles on holiday or seek medical treatment, you're much better off having access to today's facilities than those of 100 years ago, even if the £100,000 per year earnings in 1916 would make much more difference to your relative position in society.

Or to put it another way, if you had £100,000 a year you could live like a king in 1480, but a king of 1480 would be better off being an average earner in the UK in 2016 than a king in 1480. It's certainly true, and can be argued, that there are some cases in which living in 1916 on £100,000 confers advantages you wouldn't have now. For example, if you wanted a South Bank London apartment with a nice view over the water, £100,000 would have bought you one in 1916 whereas it wouldn't today.

But that would be a weak argument for preferring to live in the London of 100 years ago because there would be far more opportunity costs living in the past than in the present. In other words, the advantages of living in today’s wealthier nation easily outweigh the disadvantages of having lower relative income compared with 1916.

The take home wisdom, then, of this admittedly longer than usual blog post can pretty much be summarised as follows:

1) Social position is not an absolute matter, it is a relative matter, and is contingent on not just the downs of societies over generations, but the ups too.

2) A big thing that affects the ability of some relatively well off people in the UK to move up the social strata is that some relatively less well off people around the world are doing better than before in terms of economic well-being.

3) Social mobility is rendered more trivial than is often exclaimed by the fact that people's lives of today are immeasurably better than at times when social mobility was higher.

4) There are absurdities to statistics if you are too narrow in your perspective. As the above report mentions, in 1979 13% of the UK population was living below the relative poverty threshold (the relative poverty measurement is really only a measure of inequality). By 2005, the real disposable incomes of those in the lowest quintile had risen by more than 50%, and yet 18% of the population was now recorded as living in poverty. In other words, despite the incomes of Britain’s poorest people rising by 50%, the official poverty figures rose by about 50% at the same time.

5) Whenever rich people getting richer is thought by pundits to be a problem, type a little comment at the bottom of their article, reminding them that in most cases a person’s income and wealth simply measure the extent to which they have provided value to society, and the extent to which others have benefited from trade with that person's company.

If you made it this far, well done, you did well - that was a lot to get through!

* Slight side note, as I've blogged about once or twice before, socio-personal socialism remains at its strongest in those Dunbar groups, and becomes diluted as we add more and more people to the mix. as more and more people increases the range of goods and services available, and customers willing to partake in the mutually beneficial exchanges. In that sense, trade is a bit like doing good things for strangers. To succeed in the market economy requires innovation and ingenuity, as well as good character and reputation.

Just as in biology copulation mixes up combinations of genes so that heritable survival traits occur more frequently for natural selection to act on the genotype, similarly the market economy produces survivability in business and commerce, where less-good suppliers are out-competed by better ones. A social mobility-conscious socialism that tried to level things out by extending beyond the socio-personal into the market economy would be bound to retard innovation and progress, just as trying to organise biological organisms from on high would inevitably be less successful than the mechanism of natural selection.

The benefit of the market economy is that trading with strangers transcends the limitations of the Dunbar-esque socio-personal economy, bringing about huge mutual benefits not just for both buyer and seller but also everyone in society too. To try to arrange such an economy in an attempt to mirror the socio-personal economy, as socialists try to do, is a bit like being in a field full of 30 million bees trying to make them all fly clockwise. It's crazy!!