Sunday, 30 April 2017

When Will The Pope Stop Being A Crazy Cat Over Capitalism?

Pope Francis had harsh words for libertarians at the Pontifical Academy of Social Sciences on Friday. He pontificated about the ills of 'radical selfishness'; said that the libertarian individual is 'anti-social' and that he 'denies the value of the common good'.

If I were a Catholic, I'd be thoroughly embarrassed that the head of my church was so abjectly uninformed about such a big subject. I know Catholics believe in miracles - well here's one right in front of them, because it's fairly miraculous that one individual could cram so much nonsense into one short speech.

On the charge of 'radical selfishness' - it's true that a free market is about individuals pursuing their own goals - but as Adam Smith reminds us, this acts as a social mechanism that channels collective objectives toward meeting the needs of the people that make up that society, by ensuring competition between buyers and suppliers, which channels the profit motive of individuals into providing products that society desires at prices they are willing to pay.

In other words, a society of individuals pursuing their own good leads to an increase in the common good, not a decrease, because trade improves the lives of all who partake in it. And far from making us anti-social, it encourages social co-operation as providers must seek the needs and wants of society in order to provide what they require. Pope Francis's attack on libertarianism is a straw man attack, completely misunderstanding the thing he condemns.
Moreover, the Pope's anti-capitalist narrative is contradictory. Suppose I wanted to see a physically healthier Britain but I also wanted to quell the evils of physical exercise, you'd probably think me quite a strange and misguided fellow. My mistake would be a silly one to make, but it's not all too dissimilar to the mistake the Pope makes when he talks about how we need to temper the woeful profit motive of capitalism if we are to bring an end to poverty.

The free market is literally the aggregation of the billions of mutually beneficial exchanges between willing suppliers and consumers every day all over the world. Profit is made when value is created, and value is only created when people supply things that consumers need or want, whether it's food, clothes, electricity, computers, holidays, new technology, fresh knowledge or better medicines.

I'm all for encouraging people to be motivated by love, kindness, generosity and philanthropy, but being down on the profit motive is, in most cases, to be guilty of picking the wrong battle based on an erroneous interpretation of the so-called enemy.

If the Pope is concerned about helping eradicate poverty, as he is perfectly right to be, he would do much better if preached the kind of message conveyed here, here, here, here, and here.

Saturday, 29 April 2017

What Babysitting Can Teach Us About The Economy

Let me tell you a story about babysitting, first told by economist Paul Krugman. The story involves The Capitol Hill Babysitting Co-Op, which consisted of many couples who baby sat for each other using the currency of scrips, which were pieces of paper with 30 minutes' worth of babysitting time on each.

Couples earned scrips by babysitting, and they purchased other couples' babysitting time with scrips. Couples all started with 20 scrips (10 hours of babysitting time), but over time there was a problem, because couples became reluctant to use their scrips, which diminished the demand for babysitters. This made it harder for babysitters to sell their babysitting time, which in turn incentivised couples to hoard their scrips, thereby creating a babysitting recession.

So the story goes, Capitol Hill decided that the solution to kick start the babysitting economy was to issue couples with more scrips, which stimulated the demand for babysitting by making couples keener to go out. As more babysitting jobs became available, couples became more incentivised to go out themselves, and voila, the babysitting economy was back in full flow.

The analogy to macroeconomics, according to Krugman, is that in recessions it is harder to earn money as people spend less money, so the economy can be kick-started Keynesian-style by governments issuing more money. This is flawed for two reasons; firstly, when governments issue more money into the economy there are enormous concomitant deadweight costs to the price system. And secondly, the economy isn't like the Capitol Hill Babysitting Co-Op because money is more dynamic and so are prices.

The problem with the babysitting recession was down to what's called sticky prices. Sticky prices is the term for when prices don't adjust quickly enough to changes in the economy. For example, a chain of ice cream parlours may find that an increase in the price of ingredients makes providing ice cream slightly more expensive. But despite this, changing all the prices on the signs and advertising boards may be not worth their while, so their prices stick. Another example, the marginal value of waitresses may decrease by 50p an hour, but restaurants who've invested time in their waitresses may not wish to reduce their hourly rate or recruit new staff.

Price changes can be costly for businesses, particularly in large organisations with tens of thousands of prices to alter on shelves, and the management time required to research optimal prices, to keep an eye on competitors, organise sales staff and negotiate with consumers - sometimes it pays to remain with the status quo.

Anyway, back to the babysitting co-op - the problem the couples found was that prices were sticky, but also that there was no negotiating to stimulate supply and demand such as you find in a real economy. For example, in a babysitting recession couples could negotiate the value of their scrips to bid up demand for babysitters, which would increase the supply of babysitters.

The place that Krugman's analogy falls short is in the fact that money in an economy is not like the scrips, because the scrips were confined only to babysitting, whereas money is confined to anything you want to spend it on. In other words, unlike the scrip, there is nothing on a five pound note that says it must be spent on babysitting, so not only do prices adjust more freely in a market economy by supply and demand changes in one good or service, they do so in relation to every other good and service too. In the babysitting cooperative, there is not much fungibility - which means you cannot say you don't want a babysitter so you'll go out for the night by buying a toaster instead. In an economy, however, if prices rise for apples, you can always eat oranges, or bananas or cereal.

This is why the government printing money is almost always bad for the economy, even if the intentions are sometimes good. To see why with an illustration, have a look at the graph below. Suppose the product in question is bunches of bananas, and the equilibrium point - the point at which quantity supplied and quantity demanded are equal - is £1.20 a bunch, and 2 million bunches are sold per week in the UK.

Now suppose the market for bananas got thrown off equilibrium by a 20% tax. Bananas are now £1.44 a bunch, and because the tax is passed on to the consumers, let us now say only 1.8 million bunches are sold per week. The tax has effectively reduced banana sales by 10%, which negatively impacts buyers and sellers, and denies society lots of consumer and producer surpluses.

Printing money causes increased inflation, which is rather like a tax because those who hold money lose purchasing power. Inflation is to holding money as income tax is to earning an income, therefore printing money is like increasing the tax on savings, which has a knock on effect of altering consumer prices away from their equilibrium point, which then robs society of some of the value created in a free market of supply and demand.

Other government interference, like price controls, taxes and regulations cause further exacerbation to this problem, because they affect the market value of goods and services, which means many firms lack sufficient information to act, which means falling sales, reduced costs, wage cuts, job losses and reduced consumer demand in a downward circular spiral.

Sunday, 23 April 2017

People Who Live In Glass Houses Shouldn't Accuse Google Of Being A Monopoly

Just about every paper today is reporting on the story of how Google is apparently a monopoly that may need to be regulated and broken up to allow further competition. This is a big mistake by the European commission, and sadly rather typical of institutions that don't understand monopolies and how widespread value is created through economic power laws (the three newspaper articles I read today don't do much better).

First things first. How can you tell when there is a natural monopoly? That's a serious question - before you complain about monopoly power, you first have to establish that there is a monopoly, then if there is, explain why there is one. Because even if there is one, you'll find there are often many good reasons for monopolies or for dominating firms in particular industries.

One of the main areas of enquiry when there appears to be a monopoly is to ask whether there are good alternatives for consumers, and if so why aren't they being consumed, and if not, why not? And by 'monopoly' we could just mean having the lion's share of the market. For example, suppose Domino's has the lion's share of the pizza market. If consumers think Pizza Hut, Papa John's and other pizza places are a good substitute for Domino's then there is healthy competition. If they don't, despite competing firms, then Domino's are probably providing the kind of pizza (or the kind of price) that a significantly large number of people like.

Now the only way to determine whether competitors are a close alternative is to examine the elasticity of demand. If there is elasticity of demand then if Domino's raises its prices then a lot of pizza eaters will switch to Pizza Hut or Papa John's. If, however, the elasticity is negligible then more pizza eaters will stick with Domino's.

The thing we hate about monopolies is that they are predominant forces that stifle competition - which is bad because it is competition that brings the most significant progress for people in society. If you have a monopoly on a good or service there is no selection pressure to improve and innovate, as consumers have nowhere else to go as an alternative. But with competition, providers are continually looking to improve products, innovate to offer something new, and retain competitive prices too.

Incidentally, I can't help but point out the irony here because the people that most qualify as being monopolistic forces that stifle competition and progress are governments that choose to put industries into public ownership. They are the most unassailable monopolies of all.  

What Google has, just like Facebook and Amazon, is not an unassailable monopoly - it is the possession of the lion's share of innovation and value-creation in its particular sphere of market value. Digital powerhouses, similar to supermarket, electricity, water and railway providers, have the lion's share of industry control not through unfair monopoly power or competition-starving cartels, but because it takes a high level of start-up costs, investment and infrastructure to provide large-scale, high quality services at that level.

Not only do companies like Google, Facebook and Amazon control the lion's share of their particular niche industry, the demand for their services has grown so large precisely because they've created or helped create the market for these services people value, and lest we forget, at a cost lower than their competitors.

There is nothing stopping competing firms coming in to challenge - but if they cannot challenge Google in terms of its efficiency of output then there's no reason why anyone should be concerned about their market size. Obviously if any firm became so enlarged that they used their dominance for ignoble means then of course we should be concerned and look to intervene. But if there's no sign of that happening - and Google, Facebook and Amazon are simply doing what they do really well, and providing mass value in doing so - who is anybody to complain about that?

Moreover, because Google, Facebook and Amazon don't have an unassailable monopoly in terms of shutting out competition, it is therefore highly unlikely that they would do anything that would be to the detriment of consumers. How ironic, then, that an actual monopoly force like the European commission wants to break them up in an attempt to make the industry more efficient, when one of the main reasons those industries like Google, Facebook and Amazon are so far ahead of their competitors is because they have dominated the sectors through predominant efficiency.

Saturday, 22 April 2017

Why Those Least In Danger Of Being The Victim Of A Terrorist Attack Are Also Most Likely To Be Afraid Of One

Let me start with two simple questions.

1) Who is more likely to be apprehensive about catching a sexually transmitted disease, A or B?

A) A chaste person

B) A promiscuous person

2) Who is more likely to worry about banging their head on the top of a doorway, A or B?

A) A very short person

B) A very tall person

In both cases the answer is obviously B, because the risk of catching a sexually transmitted disease or banging your head on the top of a doorway are directly correlated with how much multi-partner sex you have and how tall you are.

Now consider a third question.

3) Who is more likely to worry about a terrorist attack, A or B?

A) Someone who has a relatively low risk of being the victim of a terrorist attack

B) Someone who has a relatively high risk of being the victim of a terrorist attack

You'd think the answer ought to be B again, but in this case I'm not so sure. I think there is something about the human spirit that confounds expectations when the danger is terrorism. Let me explain.
Consider two people - Jack and Bob. Jack lives and works in London. He commutes to and from work every day, and he eats and walks in central London every day. Bob lives in Oxford, and visits London only very occasionally - no more than once a year. Which one of them is at the highest risk of being the victim of a terrorist incident? By a long way, the answer is Jack. He spends nearly every day in the city in the UK that is by far the most likely to experience a terrorist incident, whereas Bob only visits the terrorism hotspot once annually.

But here's the interesting thing; I'll bet on that one day in the year when Bob is on the same London tube line as Jack, it is Bob who is most apprehensive about there being a terrorist attack, not Jack. It might be true that if you add up the total apprehension felt by both men in a year including calculating journey times, Jack has more aggregate apprehension, but the specific point I'm making still, I think, holds - which is that humans tend to greatly exaggerate small probabilities - and someone commuting in London every day is less likely to overestimate the probability of his being involved in a terrorist incident than someone who visits London once a year.

The other part of this is that terrorism engenders a fear and apprehension that is incommensurably greater than the actual probability of being a victim of terrorism - so an infrequent visitor to London would be more likely to have associative fear in relation to the spectre of terrorism than a regular commuter would have, because the latter has more acute daily experiences of the fact that terrorism is the exception to the regularity of everyday London-based activity, not the rule.

Tuesday, 18 April 2017

Why Even A General Election Cannot Properly Reflect Society's Real Preferences

Providing two thirds of MPs agree in a vote, we learned today that there will be a General Election in June. General Elections score highly on entertainment value, as do weak opposition parties, but how much do they really tell us about the true power of society's political feelings? The answer is, not as much as you may think.

Arrow’s theorem, which I blogged about recently, shows a fundamental fly in the voting ointment – that is, while we as individuals can have properly ordered preferences, society cannot so easily, because society as a whole has no real coherence when those preferences are aggregated. If I'm in the CD store, I'd prefer The Smashing Pumpkins to Sonic Youth, and Sonic Youth to Pearl Jam, which means, quite naturally, I prefer The Smashing Pumpkins to Pearl Jam. Now if Radiohead were introduced into the mix, I'd prefer Radiohead as first choice, which would change my CD preference. In other words, I'd prefer The Smashing Pumpkins CD to the Sonic Youth CD, but by introducing Radiohead, I'll probably end up with the Radiohead CD.

But here's where it gets strange. Introducing Radiohead may naturally mean I now prefer Radiohead to The Smashing Pumpkins, but it shouldn't change the fact that I prefer The Smashing Pumpkins to Sonic Youth, or Sonic Youth to Pearl Jam. But in society things change, because the aggregation of individual preferences into social preferences brings about strange results, whereby, if we stick with the CD store analogy, society may prefer The Smashing Pumpkins to Sonic Youth, but may prefer Sonic Youth to The Smashing Pumpkins if Radiohead are introduced. If society prefers The Smashing Pumpkins to Sonic Youth, then whether Radiohead are an option shouldn't change that fundamental preference - but it does.

So, in politics, you have all these strange things going on, where society might prefer the Labour to the Lib Dems, but with the introduction of the Greens they prefer the Lib Dems to Labour. Or where society might prefer Bernie Sanders to Donald Trump, but with Hillary Clinton in the mix they prefer Donald Trump to Bernie Sanders.

Perhaps the main reason that society as a whole has no real coherence when those preferences are aggregated is that our revealed choices do not zoom in very closely on the strength of feeling behind those choices. A vote for UKIP (like a vote for Brexit) doesn’t capture whether the voter is a xenophobic knucklehead who wants England to be like the 1950s again, or whether the voter is an intelligent and tolerant astrophysicist who simply want less bureaucracy and more free trade. A vote for the Green candidate doesn’t capture whether it’s a conscientious attempt to help save the woodlands, or whether it’s a protest vote against Labour and the Lib Dems - that sort of thing.

Societal preferences in the form of votes do not convey the strength of feeling; they only convey general preferences where if one candidate is successful another one isn't. They don't convey the fact that a quarter of the Green voters are swinging voters or half of the Conservative voters are dyed in the wool, or that there are more people that hate UKIP in the Labour voting camp than there are people that hate Labour in the UKIP camp. These are the strengths of feeling in society that are never properly captured, and as such, the party political demographic that occupies Westminster is merely a shadow of society's political and economic views and feelings.

Monday, 17 April 2017

My 50 Greatest Albums In 50 Years - Year By Year

Unlike my other blog post on music albums, My Top 68 Albums Of All Time, this one lists what I think is the best album of the year for 50 years, from 1960 to 2010. I stopped at 2010 to allow albums made after that year the room to breathe and secure a bit more longevity - but also for personal reasons on the grounds of not having listened to anything like us much musical variety in the past 7 years. Here's my list, and as you (hopefully) enjoy some of my favourites, and (hopefully) recall some of your own, I hope it evokes some nice memories for you, as it did for me:
1960 - Let No Man Write My Epitaph - Ella Fitzgerald
1961 - Genius + Soul = Jazz - Ray Charles
1962 - Burnin' - John Lee Hooker
1963 - A Christmas Gift For You - Phil Spector
1964 - A Hard Day's Night - The Beatles
1965 - Highway 61 Revisited - Bob Dylan   
1966 - Pet Sounds - The Beach Boys   
1967 - Sgt Pepper's Lonely Hearts Club Band - The Beatles  
1968 - Astral Weeks - Van Morrison
1969 - Abbey Road  -The Beatles
1970 - After the Gold Rush - Neil Young  
1971 - Blue - Joni Mitchell
1972 - Can't Buy A Thrill   Steely Dan  
1973 - Dark Side of the Moon - Pink Floyd 
1974 - Diamond Dogs - David Bowie  
1975 - Wish You Were Here - Pink Floyd  
1976 - Songs in the Key of Life - Stevie Wonder  
1977 - Rumours - Fleetwood Mac  
1978 - Parallel Lines - Blondie  
1979 - Rust Never Sleeps - Neil Young  
1980 - Scary Monsters and Supercreeps - David Bowie
1981 - Moving Pictures - Rush
1982 - The Dreaming - Kate Bush
1983 - Script for a Jester's Tear - Marillion
1984 - Hatful of Hollow - The Smiths  
1985 - Hounds of Love - Kate Bush  
1986 - The Queen is Dead   The Smiths  
1987 - Strangeways Here We Come - The Smiths  
1988 - Daydream Nation - Sonic Youth
1989 - The Stone Roses - The Stone Roses  
1990 - Heaven or Las Vegas - The Cocteau Twins
1991 - Screamadelica - Primal Scream
1992 - Automatic For The People - R.E.M
1993 - Suede - Suede
1994 - Dummy - Portishead  
1995 - The Bends - Radiohead  
1996 - If You're Feeling Sinister - Belle & Sebastian
1997 - OK Computer - Radiohead  
1998 - Adore - Smashing Pumpkins  
1999 - Ophelia - Natalie Merchant
2000 - Kid A - Radiohead
2001 - Let It Come Down - Spiritualized
2002 - No More Shall We Part - Nick Cave
2003 - Think Tank - Blur
2004 - Funeral - Arcade Fire
2005 - Z - My Morning Jacket
2006 - Back To Black - Amy Winehouse
2007 - In Rainbows - Radiohead
2008 - @#%&*! Smilers - Aimee Mann
2009 - XX - The XX
2010 - Plastic Beach - Gorrilaz

Friday, 14 April 2017

How We Educate Children Is Going To Radically Change

Education Secretary Justine Greening spent yesterday telling us how the English school system needs to support those who are struggling and not the privileged few. The desired outcome is correct, but her method for getting there is fraught, because the best way to improve the English school system is to drastically reduce the state's involvement in it. The problem with having the state running our education system is that it makes education far more expensive than it needs to be, and it diminishes the quality in doing so. So pupils get a less good but more expensive education than would be the case if more supply-side competition was introduced. 

I'm now going to tell you something that will startle you, or at least many of you. Without the meddling of the state in our education system, the majority of the pupils that go through the school system would get a similar kind of education to the quality that privately educated pupils get.

Let’s do some maths to illustrate this. Last time I checked, there were 9.7 million pupils in education, with approximately 630,000 attending private school. The government’s annual education spending is usually between £85-90 billion. Given that private schools have charitable status, so get no money from the state education budget, that equates to roughly 9 million state-educated pupils costing the government around £90 billion per year.

That works out at a cost of £10,000 per pupil per year. Now according to ISFA the average cost of private school fees is between £10-11,000 per year. It varies for reasons we needn’t go into here, but as you can see, the average cost to educate a pupil through the state system and the average cost to educate a pupil through the private system are very close. For roughly the same cost the government could send every pupil to the educational standard of private schools (excepting perhaps the very high fee-paying schools). That's even more alarming when you consider that currently only 7% of pupils go to private schools.  

Now I'm not denying that that is a deliberately overly-simplistic model of analysis - not least because even if all schools were of a higher quality nationwide there are going to be hundreds of pupils who through all kinds of background disadvantages and bad choices are not up to the standard of a decent education. But if nothing else, the arithmetic above gives a strong indication of how much the state education system fails to give so many of its pupils value for money (approximately 22% of school leavers in the state system leave with the reading, writing and numeracy skills of an 11 year old).

In the most comprehensive study ever conducted, spanning 25 years of international research comparing state-provided education versus market-competitive education Andrew J. Coulson showed in his paper Markets vs. Monopolies in Education just how far state schools fall behind the more highly competitive market-based schools. This is in no small part due to the fact that market-based education has the flexibility both to meet different needs and cater for diverse abilities of the pupils.

I know many in the UK are currently horrified with the idea of anyone but the state providing our education system, but that's mainly because most people are still relatively unapprised of quite how a market system would work. For ease, you have to remember that if you're paying for your child's education in a market-based system you get to keep more of your money, and the money you pay goes more directly in to benefit your child's education. In other words, more money reaches the school children, because under the current bureaucratic system there are more officials employed in the education sector than there are teachers, and in some schools there are more admin staff than there are teachers.

But what about the poorest people in society - isn't it important that the state provides them with an education?

No, it is important that the state provides them with the funds to acquire an education (vouchers sound like a good idea to me), not the education itself - that should be the parents' responsibility (where there are barriers to this happening then the law should become involved). Think of food - that is vitally important, more so than even education, but the state doesn't have a nationalised food policy, it subsidises hungry people with the cash to buy food.
That is what would happen in a market-based school system - the parents that cannot afford to pay for their children's education would receive the funds to pay for their children's education (and any help they needed), but the schools would be run privately, without the layers of state bureaucracy, meaning the money spent on education more directly benefits the children.
Furthermore, the price and quality of education improves significantly thanks to the forces of competition and increased choice on the part of the parents, and increased accountability on the part of the teachers. And remember, in my low tax, small state, market-driven financially autonomous society parents are going to have a lot more disposable income with which to make economic decisions.
Don't forget too that by and large a proper education is limited only to those who voraciously seek knowledge - the rest are just children herded like sheep into a classroom and narrowly shaped to fit into the agendas of the rent-seekers that govern us. One thing is for sure, just like the UK health system, the UK education system simply cannot be sustained with the current model. So, to finish, I'm going to make a twofold prediction about the future of our education system.

A prediction
In the first place, give it a few decades henceforth (maybe six or seven, possibly sooner) and there won't be any state-funded schools at all. There will be a market-based school system where parents shop for education like they shop for everything else, with the people who cannot afford to shop being given the funds with which to choose school places for their children.

In the second place, as the efficiencies of the market-based education system become more and more apparent, the inefficiencies of school buildings - such as the cost of maintaining the buildings and concomitant taxes, time lost travelling to and from school, changing classes during the day, registration and other administrative hold-ups, the sub-optimal class sizes and the numerous other interruptions to learning - will be weeded out by the gradual transition towards more widespread home-schooling.

Once you add to that the prodigious technological capacity we'll have at our disposal in the future, I predict home tutoring in small neighbourhood coalitions of about 4 or 5 families will be the standard way that children are taught (this will ensure social skills are not omitted). In fact, thanks to the advances of future technology, education will probably be so cheap to provide that the poorest people in society will all be able to be educated at a relative price of next to nothing.

And while you're pondering that, and possibly harbouring concerns about how the poor might be helped along under a more market-led system, just look across at how these young people are doing now under a state-run system, and in the case of those who are worst off, think that it couldn't really be much worse for them than it is now. Literally thousands of young people are leaving school lacking the basic skills and requirements necessary to carve out a career for themselves, in a society in which, thanks to political interference, education is not coterminous with the jobs available, and vice-versa. A more market-driven, technologically innovative system cannot do any worse for these young men and women that the current system - quite the opposite.

Think about it, even by today's relatively unevolved standards (relative to 100 years henceforward I mean) even most poor children have their own device with which to access the Internet, which means they literally have access to the entirety of the whole world's knowledge. Imagine how much more sophisticated learning can be in the future with even better technology and better systems to organise it.

These home school coalitions will benefit the pupils no end: they will be less prone to picking up bad behaviour from other children and less susceptible to bullying or scholastic isolation. For all sorts of reasons related to time, money and resources, home schooling is a remarkably proficient method of teaching children - not just with facts to learn but in shaping them with the wisdom of 'how' to think.

There will also be much more diversity in the ranges of learning available, with specialised learning for pupils with particular types of mental and physical abilities, specific types of interests, nuanced barriers to learning, and the multitude of other ways that a localised, consumer choice-driven, trial and error-based system enriches society.

The effect of state-enforced taxation, in most sectors, not just education, is that it reinforces the monopoly of politicians and diminishes the ability of consumers to spend their own money more autonomously. As we continue to evolve and more people begin to understand that most of society's achievements and advances come from the bottom up not the top down, we will begin to redress the problem, diminishing the state's control on our finances and strengthening our own.

Wednesday, 12 April 2017

Porkies, Damn Porkies, And Statistics

The Guardian will dolefully report that the bottom 20% of households receives less than 5% of UK income, but that those in top 5% receive a whopping 40% - and they are pretty competent at making it sound like we live in a nation of gross injustices.

The problem is, as is often the case with these statistics, they speak only as though people are statically rooted to the present, and only analsyable by their financial income. Such a narrow consideration of people is bound to distort the truth. The reality shows a quite different picture.

For example, many people who show up in those stats as being in the poorer quintiles are pensioners who are retired from work and living quite comfortably in a property they paid off years ago, and with numerous state benefits on top. Another group often classed as poor will be students, whose investment in their future careers makes them appear on the radar as uncomfortably off, but who are, in fact, going to be some of the UK's higher earners.

Trying to capture people's financial situation with an off-the-peg statistical analysis doesn't take into account the temporality of their situation. Perhaps they have just started a business that will go on to do well, or perhaps they are part-time workers whose partners earn well above the median income. Perhaps they are having a bad year and next year will be better. Equally, perhaps some of the higher earners are having a good year, and next year will be worse.

Suppose you go into a poor neighbourhood and talk to someone called Tom. Tom tells you he did better last year than this. You might conclude that Tom is getting poorer. Suppose you then talk to Gerry in that same neighbourhood, and he tells you that he did better this year than last. A random sample across the UK of lots of Toms would give you a perceived narrative that the poor are getting poorer. A random sample across the UK of lots of Gerrys would give you a perceived narrative that things are looking up for the poor.

All that I've said here should hopefully be enough to get you to think carefully in the future when you see these 'grossly unjust' statistics being bandied about - they very rarely tell the whole story. And if you're still wrestling with the notion that assertions about inequality are quite often misleading, I have tons of blog posts on the subject.


Wednesday, 5 April 2017

What Is The Greatest Thing Economics Does?

Economics enlightens us all on several very important considerations about human behaviour. It teaches us to see that pretty much everything is a trade off. That is, if you want more of x you often have to have less of y and go without z. If you buy the £500 washing machine you like, you might not get to buy the £500 painting you also like. If you want a law enforced, the state is going to have to deny you a freedom you once had. If you want more reading time, you might have to have less writing time. Coupled with that is the wisdom that everything has costs and benefits, and that not everything in life is immediately tangible.

Economics teaches us to be attuned to the technique of a full consideration of the four-way dictum of tangible benefits, intangible benefits, tangible costs and intangible costs. This is what life is like: most things impose benefits and costs, and it's up to us how we want to trade them off. Being married comes with all the benefits of being a husband, but it means giving up some of the freedoms of being a single man. Cycling saves on petrol and increases fitness, but it trades off the speed, convenience and luxury of a car.

Habitually most people think too much in terms of tangible benefits, with scant regard for tangible costs, let alone intangible ones. It is always easy to observe tangible benefits. A minimum wage law gives tangible benefits to low-earners, but it also brings all kinds of tangible and intangible costs (job losses, lack of job creation, higher prices) that are hardly ever factored in. The same is true of just about any policy or idea you can think of.

Given the foregoing, I think the answer to the question - What is the greatest thing economics does? - is this: The greatest thing economics does is make the unseen seen. That statement sums up all the considerations above of ensuring all costs and benefits are factored into the equation, and that if you are a politician who is going to make a decision that affects others you need to assess all the unseen factors to your behaviour to understand the consequences of your actions.

It was the great economist Frederic Bastiat who brought the 'seen and unseen' to prominence in a seminal essay called That Which is Seen, and That Which is Not Seen. In that essay he introduced what many will have heard of as the Broken Window Fallacy. It is utterly simple and compelling, yet the fundamental mistake it teaches people to avert is made repeatedly by pretty much every politician in office (past and present), and the vast majority of social commentators too. It is a sickness that seems to afflict all human beings, yet only a tiny minority ever take the medicine of economic analysis to cure it.

In Bastiat's parable of the broken window, a boy breaks a pane of glass, meaning his father will have to pay to have it fixed. The onlookers declare that the boy has actually done the community a good deed because in having to pay the glazier to replace the broken pane the father is helping to stimulate the economy and help the glazier live. By that logic, the economy would be better off is more boys broke windows.

The fallacy Bastiat exposes here is that as soon as you look at the unseen parts of the equation - that the money the victim of the broken window spent getting it fixed is money that he now doesn't have to spend on something he actually wants - the proposition is rightly seen as foolish. The broken window helps the glazier, but at the same time it robs the victim of a new pair of shoes or a coat on which he'd prefer to spend the money, which at the same time robs the shoe and clothing industry of a customer.

The thing is, intuitively most people get this point every day of their lives. They do not think that a tree landing on your house is good for your household economy because it will keep you busy in the evenings when you get home from work. They don't believe that a pandemic is good for the country because it keeps those in the medical services busy; or that a mass rise in unemployment is good for the economy because it keeps the job centres fully staffed; or that a rise in crime is good for the country because it keeps the police busy in work.

Yet, alas, it is common for the public to routinely focus only on the 'seen' part of a policy or idea and overlook or disregard the 'unseen' parts. That is to say, our society is full of people who, when the example in question is less obvious than Bastiat's broken window, wantonly try to tell us that the economy is better off because a young boy has broken someone's window and the glazier will now thankfully be employed to fix it. Whether it's price-fixing, state-sponsored subsidies, bail outs, trade restrictions or numerous public services that could be run more efficiently by the market, society is full of powerful people who habitually fall foul of the broken window fallacy and inflict it on the people they are paid to represent.

If Tom is the chap that had his window broken, and Dick is the glazier that fixed it, Harry is the shoe salesman that misses out on a transaction with Tom. The economy does not even break even with Dick's gain being equal to Tom's loss, because Harry is down on a sale, and Tom paid for something he'd prefer he didn't have to. The economy is full of Toms, Dicks and Harries, and most people tendentiously overlook the Toms and are widely oblivious to the existence of the Harries at all.

Every time people hear a student demand the scrapping of tuition fees, every time a theatre production is subsidised by the taxpayer, and every time a failing business is bailed out by the government under the pretext of 'protecting jobs', they see the Dicks every time - that is, the happy students, the happy theatre company, and the happy business owner that now stays afloat for a while longer.

But people scarcely think of all the Toms that feel the direct costs of these policies, and they hardy ever realise all the Harries that feel the indirect costs even exist at all. The Toms and Harries are the people that feel the costs of university places not being aligned to market signals of supply and demand, and the other members of the arts whose productions now don't go ahead because of the subsidy, and the multitude of businesses that don't get to compete with the ones backed by taxpayers against their will.

Society is full of countless other Dicks and Harries - they are scattered about all over the place, visible only to the enlightened few who understand the wisdom of the 'seen and unseen'. They are the people that never get to live in cities they want to because of special interest environmental groups; they are the young men and women who have been priced out of the job market by a state-mandated price floor; they are high levels of inflation that have occurred because the state controls the money supply; they are the measured increases in what you pay for goods and services in industries that are too heavily taxed - I could go on.

Moreover, Bastiat's 'unseen' identifies the valuable things that don't happen at all because of an unwise policy - like the sale that never happens because of a regulation, or the jobs that never get created because of a wasteful expenditure, the things that never get made because the material resources are being consumed elsewhere, or the consumer and producer surpluses that never materialise because the government taxed the transaction out of existence. 

Suffice to say, all these aforementioned things in the previous two paragraphs are the opportunity costs that rob society of the value it loses by not exhibiting a proper reflection of people's real preferences and what lies behind supply and demand curves - that is, what they would spend their money on if they got to choose how to spend their own money and not have so much of their expenditure dictated to them by politicians.

Once you master the 'seen and unseen' your whole world opens up, as critical observations you once didn't make now come into your vision and expand your understanding of all the effects of a policy, an idea or a belief system. Given that a proper understanding of the 'seen and unseen' is what underpins every subset of economics - costs and benefits, supply and demand, revealed preferences, you name it - I think the enlightening of people to this principle is the greatest thing that economics does.

Sunday, 2 April 2017

The Price Of Everything, But The Value Of Nothing

A fellow on BBC Parliament last night was moaning that the price of diesel going down is bad for the planet. That depends, of course. If he understood price elasticity he wouldn’t have said such a thing. Basically, if a price is inelastic, then a change in that price will likely cause little change in demand, whereas if it’s elastic, it will*.

For example, if petrol and cigarettes increase in price, it won’t change consumers’ buying habits all that much because people need petrol for their cars and cigarettes for their addictions. This is price inelasticity. However, if goods like certain tinned foods, chocolate bars and cars go up in price, this can easily cause quite a change in demand, as consumers will likely switch to different tinned products, chocolate bars and cars. This is price elasticity.

Elasticity and inelasticity are observable factors of life: if your water provider tells you your bill is going up then you can’t really tell them you’re switching to something else other than water instead. Whereas if Cadbury’s put up their chocolate bars by 30% then you could simply switch to Nestle bars.

Once you grasp this basic econ 101 stuff it’s a lot easier to understand human behaviour in the market, and a lot easier to understand and predict how people will respond to incentives. When there are shortages, most people assume it is because there is a scarcity of supply. Sometimes there is, but to generalise here is an amateur mistake, because most shortages are caused by there being less of something than we want, which is not so much conditioned by its supply but by its price (think of Adam Smith's well known diamonds and water example - diamonds are in relatively short supply yet there is not a shortage of diamonds in the marketplace, and yet over 70% of the earth is water yet there are often water shortages).

So a shortage means that the price is lower than the point at which supply and demand are in equilibrium. This is sometimes caused by suppliers not adjusting prices quickly enough, but for the most part it is caused by governments, through regulation, taxes, subsidies or price controls.

I know so many people just take it for granted that when governments interfere in market prices it is for the good of the nation. But a rational, informed thinker understands that the price linked to supply and demand curves is what equals value, not because price is determined by value, but because quantity determines price, and amount consumed is the determiner of value. Equally, for the supplier, price equals cost, not because price is determined by cost, but because price determines quantity, which determines cost. The intersection of supply and demand curves is what gives us prices, and it tells us what people value.

But it's more than that, because this is not to be considered in isolation, it is linked in to every other transaction too. That is to say, every price directly affects every other price because the price of, say, apples, may well affect one's demand curve for, say, oranges or bananas, which may affect one's demand curve for, say, chocolate, coffee or bread - all of which affects sellers' prices and quantities (amount produced) too.

It's not unusual to see people forgetting this in relation to jobs, but indeed the same applies in the labour market too. The price of an input is equal to its marginal cost of production and its marginal revenue product, which is the resultant change in revenue for the employer as a result of the addition of one extra unit when all other factors are kept equal.

The quantity of the input sold is the quantity whereby the marginal cost of production is equal to the marginal revenue product (marginal cost = price = marginal value). In less formal terms that's just a fancy way of saying that if I own, say, a doughnut making business, and want to consider taking you on as an employee, I'll only do so if your wages equal the value of the additional doughnuts you produce. You should be able to imagine now, if you couldn't before, just how much harm price-fixing does here, not just to the job market, but to consumers that help create those jobs too.

One of the main ways that politicians fail the people they represent is by being blind or dismissive of all those things I mentioned above. By controlling the money supply, by increasing the nation's debt with irresponsible borrowing, by increasing the cost of living for the most struggling families, by dis-aligning supply and demand price signals, by overseeing wasteful misallocation of vital resources, and by making otherwise affordable things unaffordable, they press society's billions of revealed preferences under the thumb of their own nest-feathering, and in doing so, make society a place that is wholly unrecognisable from what it would look like if people got to spend their money exactly how they wished.

* As a formal rule, the elasticicity of a supply curve at a particular price is measured by the extent to which quantity increases (as a percentage) divided by the increase in price. On this point, beware of politicians, who very often make polices with almost total disregard to how many supply and demand curves are elastic when there is an effect on price or quantity.