Thursday, 30 November 2017

Britain, Trade Histories & The EU


A reader emailed to ask about Britain's historical relationship with free trade and Europe, and whether the current uncertainty surrounding Brexit makes things precarious for us. Here's my reply:

There was little free trade in Britain until it was taken up consciously as national policy around about the mid 19th century. Previously, tariffs were sometimes sky high, as in the case of the French against British wool products, British tariffs against Indian cotton cloth, etc.

But also there was no mass immigration because welfare was only available locally to select inhabitants. The nearest thing we came to it, except very recently, was the French Huguenots in the early 1700s fleeing persecution. As expected, Londoners kicked up a stink and a special Act had to be passed allowing them to stay. Excise taxes at border posts, as before, could be very high.

Of course, Europe then was far different to now - it amounted to lots of principalities with border posts. Germany had a score of them and Italy a dozen until late in the 19th century - so any merchants travelling down the Rhine had to repeatedly pay excises at border posts. Only a few cities in Europe, such as Antwerp and Hamburg were freer.

It was only when Ricardo's arguments about free trade started to become more widely appreciated that cities became freer. David Ricardo would often be heard in the House of Commons in the early part of the 19th century extolling the virtues of removing tariffs, but the most the UK responded with was Imperial Preference - whereby, free trade was freer with its colonies but not with other nations.

Then two world wars interrupted the free flowing migration of widespread trade, and as well as mass murder on an unprecedented scale, socialistic tyrannies were spread across lots of Europe via the Russian, German and Italian dictatorships. Consequently, many of the resultant post-war government interventionist policies that followed the world wars set precedents for the economically stultifying State meddling that we've become so used to in the past six decades.

Once upon a time, the idea that Europe would need a bunch of unelected socialist bureaucrats for its nations to enjoy the free movement of people, goods, services and capital in a "single market" would have been ludicrous - but alas, that is what we have with the current EU from which we've just promised to distance ourselves.

During the next sixty years or so, Britain became more diverse in its trade agreements with the rest of the world, and although there have been some serious peaks and troughs, generally we have been going in the right direction. This has been the beauty of a freer market unbound by over-regulation and special preference blocs. If it’s beneficial for Britain to trade with France for wine, Germany for BMWs, China for steel, Kenya for coffee and Brazil for bananas, then that’s what will (should) happen.

All any country wants in terms of trade is to import goods in which foreign exporters have the comparative advantage, and export goods in which they have the comparative advantage – and within that process find the nations that have the most attractive comparative advantage. The Netherlands may have a comparative advantage over us in terms of fuels and metals, but if there is an even greater comparative advantage by having a fuel and metals trade deficit with the United States and Japan then that option is preferable.

So trading with anyone with whom a mutually beneficial transaction occurs is the desired result. Apart from a few exceptions regarding meeting quality standards, the idea of even having to talk of 'having access to a market' by going through doors in a politically constructed labyrinth is preposterous.

One shouldn't forget that, ostensibly, the post-World War 20th century was unprecedented, and the nations that came together to co-operate in the reparation job deserve a lot of credit. We live in the most peaceable Europe we’ve ever seen, and no doubt attitudes to union and unity have helped. The problem is, I think it has gone way too far, and there are interferences in our freedoms, and in prices too, which go way beyond the desire to secure peaceful co-existence.

The European Union has effectively put up a de facto wall around its bloc to protect its own European agents from more competitive prices outside the EU, which makes it more difficult for poorer African, Asian and South American traders to compete. If the EU opened its barriers to free trade with, say, Africa on farming, and stopped subsidising its own farmers, as one example, it would be the first big step towards the revival of the developing nations' agricultural industries.

Rather like our own NHS on a smaller scale, the EU is the world’s best living example of the limit of economies of scale, where once an institution becomes too fattened up you get dis-economies of scale**, where scores of extra management are added to the workforce, along with such increased bureaucracy and self-preservation that lack of communication and inadequate understanding from the top to the bottom, and sideways too, means there are more problems than solutions. I think history will show that our coming out was a good thing for us, and a catalyst for good in Europe too as other nations will follow suit.

Then of course there is another charge to level against big bureaucracies - it's what's called the Ringelmann effect, which is the tendency for individual members of a group to become increasingly less productive as the size of their group increases. A good example is in a tug of war event, where you'll usually find there is an inverse relationship between how many of you there are pulling your team's side of the rope, and the magnitude of each agent's individual contribution to the total effort.

Another example, when you're in a crowd and the speaker enters the stage and says good morning, there is usually a murmured response. When he says "come on you can do better than that", the reciprocation is much louder. The volume of the words you utter will be less loud than if you were asked to respond on your own.

This phenomenon of increased group size resulting in lower individual effort or productivity is also known in psychology as social loafing. Large institutions like the EU, the civil service, and local authorities are going to be replete with social loafing, particularly when you factor in Parkinson's law and the Allen curve, which is even more reason why we're better off out of it.

Wednesday, 29 November 2017

It's Time For A Post-Racial World


It’s time that humanity moved forward with its understanding of how humans define one another. Here’s some practical advice - it certainly works for me. Ditch the term ‘race’ when trying to define individuals according to their skin colour or nationality. The word ‘race’ has too many negative connotations and associative misunderstandings about what humans are and how they treat one another - it's time to wise up!

It’s far better to use the word ‘race’ in terms of our being the human race, although personally I prefer to say the human species. Either way, race or species refers to us humans as a collective, and with that, all the shared genetics, behaviours, evolutionary legacies, hopes, dreams, fears, insecurities and curiosities that bring about a kind of oneness implicit in our species.

After that, we have a breakdown of different types of human, where race used to mean anything from skin colour, to facial features, to wherever on the planet someone comes from. Needless to say, there is a word that adequately covers a breakdown of the human species in terms of belonging to a social group that has a common national or cultural tradition - and that word is ‘ethnicity’, which includes one’s heritage, and 'nationality' which includes the status of belonging to a particular nation.

People from Germany or Canada or Ethiopia have a different nationality, ethnicity and heritage, but they are all part of the same human race. That’s why, when a child is born from a German father and an Ethiopian mother, they are dual heritage, not mixed race.

Skin colour is also nothing to do with race. Skin colour is to do with a number of genetic factors, which is linked to ethnicity too - but at a genetic level, melanin is the primary determiner of skin colour. If the human race is the only viable definition of race, and if skin colour is genetically determined, then racial discrimination on the basis of skin colour is a foolish, short-sighted misnomer.

I mentioned genetics, and genetics is another way that the human race can be broken down into categories. There are relatively very few differences in the number of genes between organisms. The human genome has 3 billion nucleotides but only somewhere between 20,000-25,0000 genes. A gene is a rather arbitrary designation anyway - it simply means a series of nucleotides that code a protein. Most evolutionary changes are the result of gene duplications, inversions and translocations.

The pretexts that people have used (and sadly still use) to determine a basis of racial discrimination are both arbitrary and ill-conceived. Their definitions bear no relation to similarity or diversity in the genetic populations. For example, generally speaking, there is more genetic diversity between a man in Nigeria and a man in Kenya than there is between a man in Nigeria and a man in Belgium, Holland or Spain.

This is because humans originated in Africa, and there have been longer execution times for mutations to have occurred in Africa than in the shorter time that humans have migrated to Europe. The longer the time for mutations, the greater the genetic diversity - so perceived genetic similarity as a basis for racial discrimination is also absurd, and always has been.

So, let's recap: skin colour is down to genes; ethnicity and heritage is where in the world you come from and the culture(s) with which you identify, and the only way that race should have any meaning is in recognising that human beings are one species, and that what makes us different is miniscule compared with all the things that make us remarkably similar.

Now we have got all that straight, let's all use the appropriate language to help move towards a post-racial world, where our place of birth, our skin colour, our nationality, culture and heritage, and our genetic features are not tools for contention and division - and where someone can get engaged to someone else of a different heritage and no one thinks even the slightest thing of it.  

 
EDIT TO ADD: There have been a few people (although far in the minority) unhappy with me that I am triviallising 'race' as a valid genetic subspecies description.

Indeed, yes, I am, because even a sketchy understanding of genetics will tell you that race does not easily conform to a genetic subspecies description. If genetics is the way one wants to frame this, then 'race' as a synonym for subspecies is very unsound genetically. A genetic basis for demarcating race is nothing like as pronounced as you may think. Genetic variations among populations that are spuriously called different races are much smaller than is often imagined, and this will continue to narrow more and more as we move forward as a species and become even more globally diversified.

As I hinted in the Blog, the genetic differences between a person from Nigeria and a person from Sweden are frequently fewer on average than the genetic differences between many sets of people who onlookers might say are from the same race based on all kinds of loose descriptive terms. Genetics demonstrates that what you might call race blend seamlessly together through all sorts of genotypic variations - the change is a continuum.  

There is relatively very limited genetic variation in the human species in terms of what people habitually call race with regard to genetic markers. The odds are the genetic difference between you and an equatorial African is not greater than the genetic difference between you and your next door neighbour who you may well call the same race.

Evolution has played a long percentage game in shaping us over hundreds of thousands of years, and compared to all the ways humans are similar, nothing about human beings in any area you'd care to mention is genotypically, phenotypically or psychologically distinct enough to warrant more than a tenuous acknowledgement of fairly trivial differences. Further, most of what humans define as races are a hotchpotch of localities, not even terribly distinct ones. The vast majority of this diversity reflects individual genotypical uniqueness far more than it does the race definition.

Degrees of genetic differentiation are primarily about containing some unique alleles or sometimes different frequencies of alleles. What is actually required is a level of genetic differentiation that is well above the degree of genetic differences that actually exist among what people who observe local populations call a 'race'.

The next time someone tries to tell you that race is an established definition for subdivisions of the human species, ask them the following: using the criterion of genetic differentiation alone, what sufficient delineation would you posit as satisfactory to define a race within the human species? It is very unlikely you'll get an answer, and if you do, it won't be an empirically satisfactory genetically distinctive subdivision of homo sapiens, as there is also no classification of DNA sample that is amenable to a straightforwardly defined racial population or racial phenotype.

And finally, even if we're super-generous to the point of choosing to ignore all of the above, it is still the case that nationality, ancestry, ethnicity, heritage and skin colour perfectly well cover the definitions required, and do so better than the more ambiguous, and sometimes totally incorrect, term race.

Put it this way. If I asked a random selection of people to name an instance when race is used without there being a less ambiguous alternative, people would struggle. On the other hand, if I asked a random selection of people to name cases where race was used to describe something that is better defined by another term, no one would have any trouble naming an example.

This is what I think is going to start to change in the coming decades. Language is always evolving, and many of the terms that get modified are done so because their original appearance came at a time when humans understood a lot less about these things. And this in a world that is becoming ever more connected and genetically diverse.

Sunday, 26 November 2017

Ask The Philosophical Muser: On Washing Up and Cycle Helmets



Here's my latest Q&A column - if you have any questions for me, you can message me on Facebook, or email them here j.knight423@btinternet.com

Q) My husband and I both work full time, and take it in turns to cook the evening meal. He thinks it is better if the one who cooks also washes up, giving each of us one night off from the kitchen out of every two. I would prefer a system where one cooks and the other washes up. Who is right?

A) You both have points in your favour. Your case makes the best out of utility but the worst out of efficiency, whereas his does the opposite. After cooking dinner, the cook has diminishing utility which makes washing up harder for him or her than for the other, which is an argument in favouring of a system where one cooks and the other washes up. But preparing and cooking dinner involves externalities in the form of making mess, so a system whereby the cook also washes up incentivises him or her to make as little mess along the way as possible. In an ideal scenario, your system if preferable, as long as you both signal your care for the other one by making as little mess as possible along the way. Failing that, get a dishwasher!

Q) Dear Philosophical Muser, What is the overall effect of cycling helmets on accident and emergency units in the hospital?

A) Dear Reader, I've no idea, but I could hazard a guess. While cycle helmets greatly reduce what would otherwise be minor injuries, they also convert some accidents from fatal to near-fatal or serious injury - meaning, if that is the principal concern of your enquiry, they are likely to place an extra strain on the NHS. 

The other thing to consider is that even in absolute terms they may not benefit the cyclist, particularly if drivers are more likely to drive less cautiously around a cyclist with a helmet on. Equally, it may also be the case that people who ride with cycle helmets on are, on average, safer and more conscientious riders than those that do not. Or it may be true that cyclist with helmets on feel safer and therefore ride less safely. All these have to be factored in to the analysis.

EDIT TO ADD: There is a debate going on at the moment as the government is considering whether to make it mandatory for riders to wear a cycle helmet. Alas, both those for the proposal and those against it are basing all their arguments only on what they perceive is the least risky and statistically safer - they are giving almost no thought to the most important factor: the freedom of individuals to decide how they wish to ride - with or without a cycle helmet.

It is not the state's job to try to govern in loco parentis, whether that's on the matter of cycle helmets, alcohol, cigarettes, fatty foods, or whatever. There are costs and benefits to all things, and it is the job of the individual to decide how they weigh up those costs and benefits with regard to their own utility.

Some prefer to cycle without a helmet, saving on the cost of the helmet, increasing their awareness of what's going on around them, and knowing that they will cycle more cautiously without a helmet on, and drivers around them will likely to the same. Some, on the other hand, prefer to buy the helmet because the costs of having a helmet are less to them than the benefits. Both those decisions are absolutely fine, which is why the state should not a pass a law that makes wearing cycle helmets compulsory.

 

Thursday, 23 November 2017

There's No Such Thing As A Free Lunch - Or Is There?


An idea that's absolutely central to economics is the idea that 'There is no such thing as a free lunch'. One of the aims of this maxim is to warn overly-idealist people that when something is offered for free, it almost always means that someone else has to pick up the cost. A good example is the foolishness behind some people's wish for there to be 'free' university education - they seem wilfully oblivious to the fact that the cost of a 'free' education must be picked up somewhere.

Strictly speaking, judging by the letter, the long-standing 'There is no such thing as a free lunch' maxim applies broadly throughout economics. Even on those rare occasions when you can acquire something that's totally free to you and of no cost to the provider, there is almost always an opportunity cost somewhere, even if it's simply something else you didn't do whilst enjoying your freebie.

While all that's true, it is possible to identify something in the economy that could aptly be classified as a free lunch - it occurs every time there is consumer surplus and producer surplus - that is, when there is a personal gain beyond the cost of something. When you would buy a cinema ticket for a cost of £10 but the gross benefit to you is £15 worth of pleasure, the £5 of consumer surplus is the free lunch in the equation* (the same applies the other way round with the provider's producer surplus).

(*If you want to quibble, the opportunity cost of not enjoying alternative consumer surpluses instead of the cinema trip's consumer surplus can be factored into the equation, but there's no real need to do so, particularly if one makes the assumption that usually activities with the most consumer surplus are the ones we'd most frequently choose anyway).

The economic growth and increased prosperity we enjoy in society is made up of billions of these free lunches. They are where value is created, and all of those consumer surpluses and producer surpluses from which we benefit - they are the things in the economy that could pass a free lunches.

Monday, 20 November 2017

Two Different Ways To Charge For The Same Experience


When I was a young boy my parents used to take me to Great Yarmouth pleasure beach about once a year. For several years I remember that we used to have to pay a fee at the entrance gate and then all rides would be free to go on as many ties as we wanted. Then after a few years the policy changed. From now on, entrance is free but every ride costs a fee, paid for by exchanging cash for tokens.

When the pleasure beach changed payment policy my father was unhappy - he preferred the old 'pay once at the door' system because he felt it was better value for money. In one sense he was right - a one off fee that enables you to keep going on ride after ride until you are ready to collapse is certainly squeezing every drop of value out of the entrance fee. But in another sense, and perhaps the most important sense - the sense of value - the new charging system was better.

Here's why. What my father didn't realise is that there's an important difference between the marginal price of something and the average price. In the fairground, the average price is the fee divided by the number of rides, whereas the marginal price is the price of each additional ride. Once you've paid at the door, the marginal price of extra rides over and above your perceived optimum number is negligible. Paying at the gate and going on just a few rides is a very expensive and inefficient way of going to the fairground - but paying once and being blind to the costs of each extra ride is also bad, because you may end up going on more rides than you want to just to get your money's worth.

This is exactly what its like in 'eat all you can' buffets (still my second most read Blog post) or drink all you can for £20 in a bar - customers very often try to maximise the value of their cost by eating and drinking as much as possible - way beyond what they would ideally consume. You don't need me to tell you that when goods and services are priced in relation to what is consumed (per ride, per meal or per drink) people don't consume so irresponsibly.

Businesses are looking to find the maximum that everyone will pay, translating that to highest charges at the gate or on a per ride basis, and turning that into producer surplus. Of course the Great Yarmouth pleasure beach cannot charge everyone the most they will pay because every customer is different.

But what they can do is average it out; whereby, if customers who would be willing to pay a high price are the ones whose frequency of rides is the highest, then charging on a per ride basis is rather like charging a high entrance price on the gate for those who will pay it, and a slightly lower price for those who will not (although this has to be offset against the fact that charges on a per-ride basis may engender queues that disincentivise some from paying, whereas a pay at the entrance fee won't have this problem).
 
If you're super-attentive to the pros and cons of these two methods of charging, and can understand this from the perspective of the consumer, you can probably see why a lot of public sector market signals are off whack. For example, with strategies such as aligning public sector pay with inflation, using taxes to fund services that are not naturally public goods, regulations and price fixes that impede free trade, and just about anything that fails to optimise the clear information signals for whether there is commercial demand, you are dealing with a menu of inefficiencies and value-losses.  

For more on these different types of pricing - very apt too, given that Black Friday is imminent - see my blog post here.

Tuesday, 14 November 2017

Power Law Inequalities & Geniuses


In response to my recent Blog post on inequality, a friend brought up power laws and asked about their relationship with inequality. This is very apt at a time when we've just been subjected to a sub-standard piece of propaganda from the BBC called The Super Rich & Us - a recent programme presented by someone who doesn't understand much about economics, interviewing other people (some of whom were economists) who also don't understand much about economics. With a better understanding of the subject, they wouldn't have spent the best part of two hours utterly confused about most of the matters regarding inequality, power laws, living standards, supply and demand and consumption.

The relationship between power laws and inequality is largely built on society's revealed preferences, but there's a little more to it than that. Power laws do lead to concentrations of wealth falling in a small proportion of the population's hands. But they are nothing much to worry about: they are to be expected because in a free market where goods and services are freely exchanged for money, the rate of consumption always exceeds the rate of service for an individual.

In other words, there are more ways for Jack to procure goods and services from other providers than there are ways for Jack to provide goods and services to others. Whether you're a lawyer, a taxi driver or a circus clown, you earn money providing a particular skill to your customers.

But the money you spend (at Tesco, on Amazon, at the hairdresser’s, at the garage, etc) goes in multiple directions. Lots of people want food, books, a haircut, fuel, etc, so concentrations of wealth fall in the hands of large-scale providers, who are a small proportion of society, relative to the number of consumers.

(By the way, point of technicality, even consumers are providers in that their consumption provides producer surplus for other providers, but that’s not central to the point being made).

So you can hopefully see why power laws exist, and also how wealth can be concentrated in a few hands very quickly. To give you a much simpler illustration than something as complex as UK society; suppose 20 people are put on an otherwise uninhabited island with treacherous weather conditions. They have to stay on the island for one year, and each inhabitant is given 15 tokens a day with which to buy food from a delivery helicopter that lands every day at noon. What they don’t spend on food, they keep, and at the end of the year whatever tokens they have saved can be exchanged for £3 per token.

During their stay it emerges that there is an expert in building safe, warm tent sheltering from the natural plants. For a fee of 350 tokens per person, payable over the next 50 weeks, all 19 of the other inhabitants can have a tent built for them, thereby enjoying warm, dry and safe nights of sleep for their island duration. At the end of the year our tent building expert will have seen a significant concentration of wealth in his hands, at the expense of the other 19 islanders, but they will have enjoyed a year’s worth of tent-related benefits.

That’s a very simple illustration of a much wider phenomenon that is going on across society, where innovators, writers, musicians and hugely successful business owners are the beneficiaries of these power law transfers. Nobody would have any difficulty seeing a just power law inequality in my island scenario - but yet when the situations apply to real business goings on in society, preferences, they don't seem to get it. To the extent that most inequality is the result of an aggregation of society's revealed preferences - inequality is one of the most democratic of all human phenomena.  

But if you take society as a collection of individuals, you’ll find another important trend that plays out in power laws: there should be a continual natural trend towards progression and improvement. Here's what I mean.

Humans are generally working (either together cooperatively or independently) to make their own lives better, and despite exceptions, this engenders an inclination towards making the world a better place, whether it’s through all the benefits of trade, innovations with which we are continually seeking to improve products, technology and new designs, or lest we forget, the numerous formal institutions that (with mixed results, but generally more pros than cons) make laws and implement regulations that are thought to make society a better place to live.

Because the nature of trade and work constantly involves tweaks, improvements and innovations here and there, and further multiplied both across society and in a fairly linear fashion across time, we have a situation where (despite obvious peaks and troughs and chaotic anomalies and degrees of randomness in the system – world wars, financial crashes, tsunamis, etc) there is a fairly inevitable (or at least high probability) and stable trend of human progression built into the system.

And it's this trend that's another catalyst for generating inequality - the fact that nature is not very democratic (looks, size, shape, talents, intelligence, sensory apparatus, opportunity and background), and therefore it is expected that there won't be equal outcomes. There is a notable difference in all of these human qualities in each of us, as their attainment depends on undemocratic things like fortune and pursuit, as well as hard work, skill and application.

Consequently, then, inequality has a lot do with the fact that humans are tenaciously trying to improve themselves, and the fact that progression is in our blood - it is not just an inevitable part of our journey, it is an exhibition of how influential and advancing our species can be - particularly when you factor that into this observation about human beings.

Wednesday, 8 November 2017

Here's Someone Who Should Know Better!


Having once read Daniel Kahneman's very good book "Thinking, Fast and Slow", and being no stranger to Thomas Nagel (you know Thomas Nagel, the writer of the hugely famous "What Is It Like To Be a Bat?" essay), I was interested to stumble on Nagel's review of the book here.

It's generally a good review, but what struck me from Nagel's review is the bit where he gets on to economics, and in that section makes the audacious claim that a 10% chance of $1,000 is better than a 50% chance of $150. This is a basic GCSE-type error Nagel is making, because one of the quintessential tenets of economics is that we don't get to say what other people value, we let their own decisions provide the signals.

Mathematically it's certainly true that the value of such choices is possible outcomes x probabilities, and economics doesn't disagree with that. But there are no grounds in economics for claiming that a 10% chance of $1,000 is better than a 50% chance of $150, because 'better' depends entirely on the individual's trade off of expected value when measured against the risk.

If Betty is pretty well off and has no disposable income issues she might well prefer a 10% chance of $1,000, in the knowledge that she can treat herself to something nice if she wins, but not worry at all if she doesn't. On the other hand, Joan, who is struggling to pay her food bill this month would be well advised to go for the 50% chance of $150 rather than just 10% chance of $1,000, as the higher probability of $150 is of much more immediate value to her. This is basic stuff, and Nagel should know better.

What Nagel is missing, so it would appear, is that in economics rational expectations theory is not the same as expected utility theory - even though he is talking about them in the same breath. Expected utility deals with already extant probabilities, whereas rational expectations are about decisions and outcomes where interaction generates probabilities and explains why they are so.

The above decision regarding the money is not about expected utility, it is about a forecast of value measured against risk. For that reason, it would not be at all unnatural for two different people to be faced with the same probabilistic circumstances, yet perfectly rationally opt for different risks, based on the immediacy of their need.

Sunday, 5 November 2017

Extending The Corbynomics Sham To 16 Year Old Voters Will Harm Them, Not Help Them


Talk about being subtle: the left wing parties, led by Labour, treated 16 years olds as electoral chattel by pushing for them to have a vote in order to improve the number of seats their party has in the House of Commons (people of that age tend to vote for more left wing parties).

Unsurprisingly, as it would disadvantage their own political standing, the Tories filibustered the debate, meaning that there was no time for a Parliament vote on whether to lower the voting age to 16.

It was a squalidly transparent claim of Labour to want to 'empower' young people - no one was falling for it. But this does bring to bear another important factor in how young people embracing left wing economics and the promise of free sweets are going to one day pick up the bill for all the fiscal irresponsibility they demanded in their youth - nicely illustrated in one of the most iconic (and multifariously applicable) images of our generation:
 
 
The young people who are trusting Jeremy Corbyn's ludicrous magic money forest economic policies do not seem to realise that the government must raise taxes in the future on the very people they are trying to help now. It's a bit like buying your son a games console on his 14th birthday but then telling him he only gets to play on it if he pays for it on his 21st birthday. At no point along the way can this boy think of the games console as a free gift.
 
At the moment Corbyn wants to defer increases in taxation (for anyone earning up to £80,000 pa) by borrowing. The economics behind what I'm now going to tell you is more complex than my simple illustration, but not in any way that alters the efficacy of the generalised arithmetic. Suppose Corbyn wants to tax you £100 to help wipe out student debt. Here are some possible scenarios (figures rounded for simplicity):
 
Scenario 1: Corbyn taxes you a £100, which you remove from your £1000 savings account, leaving £900. A year from now, your bank account has grown (at 10% interest - again for simplicity) to £990.
 
Scenario 2: Instead of taxing you, Corbyn borrows the £100. This leaves £1000 in your savings account, which grows to £1100 a year from now. At that point, Corbyn taxes you £110, leaving £990 in your bank account.
 
Scenario 3: Corbyn taxes you £100, reducing your bank account to £990. Then he lends you the £100 back at 10% interest, raising your bank balance to £1000, which grows to £1100 a year from now. At that point Corbyn demands repayment of his loan, so you fork over £110, leaving £990 in your bank account.
 
Note that despite some complex tweaking of the knobs to adjust for real values over a lenthier execution time, all three scenarios bear out on the taxpayer no differently - the only major factor at play is the time that it is recouped. In other words, Helen the student who wants all her free sweets now is going to pay for them later in life anyway in ways that will esacape her naked eye.
 
The government is merely a representative agent of the taxpayers, and politicians are a bit like magpies - they steal from the shiny objects of enterprise to line their nests (magpies don't really do that - but it's part of popular mythology) - in that any good things that politicians can do for citizens are done as the result of extrapolating from the fruits of other people's labour.
 
Raising taxes depletes our present day assets, and increasing borrowing to pay for Corbyn's short-sighted policies depletes our future assets and only defers its main damage to a few decades' time when Jezza is a distant memory. No wonder Corbyn loves these policies - he'll be long gone when the voters that love them most end up feeling the costs.

Friday, 3 November 2017

Everything You Should Know About The Housing Crisis


The housing situation in the UK would be laughable if it were not so saddening. Put simply, the housing crisis is almost entirely caused by the politicians that govern us - but what makes it even worse is that these politicians are trying to fix the problems they've caused with policies that add harm to the crisis that is already the result of their interference.

That doesn't sound ideal.

No, it's rather like if a bad driver knocks a cyclist off her bike and then tries to administer very inexpert first aid, but in doing so gets in the way of the ambulance crew trying to get to the scene of the accident.

I see, tell me more. What exactly is the housing crisis in the UK?

The housing crisis is largely made up of one twofold problem: there is a shortage of affordable housing. That is to say, there are not enough houses to match demand, and because of this the available housing is too expensive for many young people to afford.

And why is this the fault of politicians?

The shortage occurs because the government specifies rigid building standards, restricts the use of land that can be built on, and subsidises mortgage borrowing (all these policies push up the cost of housing and create a scarcity of suppliers). Due to inflation and planning restrictions, politicians continue to cause the huge rise in property prices, as they ensure that supply cannot meet demand.

So, then, what can be done to rectify the situation?

If demand is high and supply scarce enough to cause a drastic shortage, the obvious solution is to deregulate some of the brown/green land prohibitions and allow the natural forces of the market to bring supplies closer to demand. One of the ineluctable laws of economics is that if demand increases and supply decreases or remains unchanged there will be a higher equilibrium price to account for the scarcity of supply. So for example, younger prospective house buyers find it harder to obtain an affordable purchase, and people renting property or even just a room find that a larger proportion of their income is going on rent. Also, when claimants of housing benefits constitute a greater part of the market, rents are hiked up. As a corollary, higher rents engender a surge in buy-to-let investments, which forces up house prices, which comes full circle in justifying high rent.

So it's a kind of negative spiral?

Yes, but with an obvious solution. If renting out property is hugely profitable, and housing restrictions are relaxed or in some cases lifted, then investors will look to build more property in order to generate more profits. If lots of investors do this then housing supplies will increase, demand will lessen, and prices will be brought down.

Yes, it makes sense - I can see why it is important not to artificially restrict supply.

Indeed, but restricting supply is only one part of the problem our politicians have caused - the other is much more subtle, but arguably even more damaging to the housing market.

Oh, what's that? I'm intrigued.

I thought you would be. I am talking about the government's injection of extra money into the economy and how that negatively impacts people's purchasing power through money devaluation. A look at the housing market and the difference between old and young people will show this. For young people the cost of getting on the housing ladder has risen to reflect all the additional money that has been put in circulation.

You mean that older people got to buy their houses prior to this, so they benefit from higher house prices that are now disproportionately higher than they originally paid?

Yes, spot on. All the ways the economy is devalued, through printing money, through excessive borrowing, and through deficit spending, society is being turned into part Ponzi scheme part credit-pumping pyramid scheme where those nearest the new currency gain the most and those furthest away from it lose out, because by the time all this extra money reaches them it comes in the form of higher prices, which are reflected in higher house prices, where in places like London, where demand far outweighs supply, housing is unaffordable for most people in the UK.

Thanks for the explanation.

You're welcome. A fact from Dominic Frisby's article in The Guardian might interest you:

"Between 1997 and 2007 the housing stock grew by 10%, but the population only grew by 5%, and house prices rose by more than 300%."

Golly gosh!

Quite!! This shows quite clearly that supply and demand are out of whack here, and much of it is to do with the whopping increase in the supply of money that’s in circulation, coupled with frivolous lending. House price inflation has gone out of control as more and more mortgages are issued and more capital is created in the form of 1s and 0s on a bank computer. Cheaply created money ensures that there are bubbles, and societies built on easy debt are going to burst, as was the case in 2008. Once you add in all the loose lending from abroad and include those vast sums of money that flood into our housing market, you see that even though there is lots of new housing being built in our major cities, house prices are still unaffordable for the majority of young people. Couple all that cheap money with the very restrictive planning laws we mentioned and it’s a recipe for inflated prices, making a heavily regulated building sector the preserve of a small group of wealthy suppliers.  

You also mentioned that politicians are trying to fix the problems they've caused with policies that add harm to the crisis. What did you mean?

Oh yes, so I did. Having seen how the state has caused the housing crisis by the toxic combination of starving supply and devaluing currency, making houses both in short supply and more expensive, let me mention two government policies that have been tried as a method of easing the housing crisis, but for what ought to be fairly obvious reasons, have worsened it.

Let me guess - something to do with affecting supply and demand?

You're learning fast. Yes, the first is their help to buy scheme, which comes in the shape of government equity loan and mortgage guarantee schemes. The problem is, while regulations are not relaxed, perpetuating the supply-side problem, the help to buy scheme simply increases house prices and while raising affordability for the signatories, makes house buying even harder for everyone else.

What else?

Another terrible idea is rent controls, which although thankfully have not happened in the UK in recent years are an issue in other countries, and are a favoured policy of some of the opposition parties, not least the aspiring Prime Minister Jeremy Corbyn.

What's wrong with rent controls? They are looked upon by some as an answer to the affordability problem for tenants.

Alas, as with help to buy schemes, they have the opposite effect though. Rent controls artificially lower the price of renting an apartment to below the market rate. That’s a terribly bad idea. The consequence of this economic short-sightedness is a housing shortage. When the government makes rent artificially cheaper it means landlords want to rent out fewer units than they otherwise would.

So the long term vision of having more affordable housing for people will also be compromised with artificial rent controls?

Yes, think about it this way. Suppose you’re a property developer looking to spend millions of pounds building a huge apartment complex in a major city – and let’s say you’re thinking of either London or Auckland. Suppose London has a rent control policy and Auckland doesn’t, and all other factors are equal – you’d head straight off to Auckland to avoid developing apartments in a place that makes you charge below the market rate to rent them out.

Yes, I can see that.

This also knocks-on to affect economic growth too, as entrepreneurs will be reluctant to locate to a country that artificially induces goods and services to be priced below the market level.

Got it.

And here’s another way rent controls create shortages – they disincentivise already available rooms from being rented out. Suppose you live in Lambeth or Pimlico and you have a room to rent. If the state-induced rent control places the room at 70% of the value you place on it, you may well decide to leave the room unoccupied and use it for storage or an office instead. Every time a decision like that is made the government effectively eliminates hundreds of units from the rental market.

I guess rent controls would also lower living standards too?

That's right. If landlords have to artificially lower their profits they will be tempted to lower their own standards in order to cut costs and make up for their losses. They will be disincentivised to maintain properties in the way that they would if they were being paid what their rooms are worth. The consequent effect is that re-wiring isn’t done as frequently; general repairs are scarcer; utilities don’t get replaced when they begin to show faults, and the neighbourhoods (from gardens to graffiti) are cared for less. You may think that cutting corners to engender shoddier living standards won’t be tolerated by clients, but that won’t be a problem for landlords. With artificially low prices they will be able to fill their shoddy rooms twenty times over.

So help to buy and rent controls are bad ideas, what then can be done to help?

Relaxing regulations and loosening the brown and green belt zoning are key things that would be a big help. To understand why this is so important, let me give you an idea of how the land lies (pun intended) at the moment. The UK is 60 million acres in size, and the population is 65 million people, which equates to just under 1 acre per person. However, the land is not divided up to equate to 1 acre per person. Less than 1% of people own 70% of all the UK land (mostly comprising Aristocrats, Baronets and the Landed Gentry). Yet the average Brit lives on 340 square yards which totals about 8% of the entire land, which would translate as 12.5 people per acre instead of 1 person per acre.

Yep, it's obvious to anyone who has ever flown over the UK in a plane that there is plenty of land available to be built on.

Yes.

And most of it non-green belt land too.

Yes again. To those who assert that Britain has reached its capacity on how many more people it can fit in - it's just not true! Last I heard the UK National Ecosystem Assessment (NEA) worked out that the proportion of England's landscape that is built on is a mere 6% (in fact, once you include parks, allotments, and domestic gardens into that equation, the actual figure is more like 2.27%). Or to put it in an even more compelling way, excluding parks and gardens, if we were to quadruple the size of every city, town and village in the UK, it would still be the case that just over 90% of UK land is not urbanised.

Now obviously I'm not saying that every bit of non-urban land can be built on - there are important areas of natural beauty, there are mountains, rivers, canals, lakes and reservoirs; and there is important land for farming, horticulture and silage, but the mere suggestion that the UK is overcrowded, and that we are full, is frankly ludicrous, and ought to be put to bed right away!.

Some cities are cleary overcrowded though, aren't they?

Don't make such an assumption - you have to understand why cities have so many people in them. Rural areas are quieter because fewer people like to live in them - and house prices are very expensive in bust cities because more people want to live there. It's simple logic - the reason London has 8.6 million people and rural towns have only a few thousand is because more people prefer to live in London than they do rural towns. The reason being, not only is there is a greater abundance of the aforementioned benefits in more populous areas, there are also better career prospects, higher salaries, better nightlife, greater choices of restaurants, a richer choice of entertainment, more tourist attractions, better public transport, greater diversity of people – the list goes on. 

But yet in terms of probability, the highest number of complainers of over-crowdedness will most likely come from a highly populated area, which probably explains why to them the UK feels overcrowded.

Most people who pontificate on overcrowding are likely to be pontificating from a vantage point of high population density. The people with the highest probability of feeling an intense population density are those who live in the densely populated areas. For example, if city x has 7 million people and a village y has 1000 people, and only x and y exist, there is only a 1 in 7000 probability that you don't live in city x.

What, so this means the UK is not overcrowded? I don't get it.  

The mistake people are making is that they are trying to average population density of people instead of averaging over square miles. You can't get a proper picture of the UK's people to area ratio by counting how densely populated a populated area is - the only way is to assess how densely populated the average square mile would be when considering each square mile as a weighted average of total population and total area. A tube station in the rush hour can be overcrowded; so can a concert venue without proper door control - but as you suggested, take a trip around the UK by plane and look down, and for the most part you won't see crowds of people, you'll see fields and woodlands.

Ah right, so the measuring method is dodgy?

It's far from ideal because it's quite misleading. The rate of urban areas in relation to square miles is vanishingly small - there is potential for literally millions more people living in the UK. Of course, just like all sensible immigration policies, a nation must ensure it has the schools, hospitals, roads, etc to support more people, but given the myriad qualities and benefits one distils from living in places like London, that ought to be something that's greatly encouraged.

Yeah, it certainly is the case that in some areas of the UK the infrastructure hasn't quite kept up with population demand.

True, but once you accept the general maxim that more people means more cultural and social benefits, it's easy to see that inadequate facilities does not mean the nation is overcrowded, it simply means that the UK infrastructure has not progressed conterminously to facilitate the social and cultural benefits that come with an increased diversity of people."

While we are here, I'd like to talk about something else please - London house prices. 

Oh yes.

Hardly a day goes by without hearing someone complaining about London house prices.

I think London is a fantastic city - far and away the best in the UK. A lot of other people agree, and because of that they want to live there. Such demand means London house prices are high, but that's not bad for society.

It sounds like a bad thing if you want to live in London.

Yes, but we are talking about society as a whole, not just people who want to live in one city. The negatives of high house prices for buyers are offset by the positives of high house prices for sellers. There is no net loss for society.

But lower prices benefit society, right?

They benefit buyers but those benefits are offset by costs to sellers. Low prices are a benefit to consumers in one principal way - when they cause consumers to buy more of what they want. Consider a large Domino's pizza costing £12. If you buy a Domino's pizza for £12 you are signalling that you value it more than the £12, otherwise you'd buy something else.

Yes, no disagreement so far.

Right, now suppose you value a £12 large Domino's pizza at £15, the £3 difference is what is known in economics as your consumer surplus. If Domino's makes £7 on the pizza (their producer surplus) then society has a net value gain of £10. That applies to anything – cinema tickets, washing machines, clothes, DVDs, and so on.

Now suppose the price of a Domino's pizza falls to £11 and Domino's producer surplus drops to £6. Nothing has changed in net terms because Domino's loss is the customer's gain. But something else does change. What then happens is that more people are willing to buy Domino's pizzas. All the people who were willing to pay £11.50 for a pizza didn't buy one when they were £12, but will now. All these extra purchases create more consumer surplus, which creates more societal value. Remember Domino's gains too because they sell more pizzas (the very reason businesses cut prices).

Why doesn’t the same thing happen with housing?

The key difference between Domino's and housing is that Domino's don't have a fixed supply of pizzas - they can make as many as the demand necessitates. Housing supply increases are severely restricted by regulations, bureaucracy and influential lobbying groups (as we've already discussed), which means even a theoretical drop in property prices couldn't benefit consumers in the same way lower pizza prices could.

The upshot is that by and large the properties go to people who most value owning property in London. People with alternatives to living in highly priced London will take those options, leaving in most cases the people in London who most value living there. Moreover, as demand to live in London drives up prices, much more prudent use is made of the limited space available. Not only do prices that rise with demand ensure the best allocation of residents to the fixed number of properties, it also ensures that the best use is made of the land.

It's our old friends supply and demand again.

It sure is. The primary cause of London's housing problem is overly-stringent regulations that starve supply in an inelastic market (the inelasticity being the limited supply of land). London is the main place where the demand to live there is hugely greater than the supply-side availability, not least because the supply is limited to a 1500 km2 area, whereas the buyer-side demand comes from anywhere in the world, and not always from people who want to buy those properties to live in.

Perhaps the government should try to alleviate the problem by restricting London house buying to UK folk?

Definitely not, because stated another way, it is tantamount to banning foreigners from buying property in our country, which would be a wholly oppressive and foolish thing to do.

But there are too many properties sitting empty in London because foreigners are simply buying them as assets, not as places to live.

Do you know how many empty properties there are that are owned by foreign investors?

No, not off hand.

Then how can you say there are too many if you don't know how many there are? Look, I know all those buyers who purchase properties in London as an investment but have no intention of living in them make many of you mad. But the reality is, there are not thousands of London homes sitting empty while at the same time there are thousands of people looking for housing in London - it's simply not true.

But there are quite a few - shouldn't the government do something?

No. Even if we ignore the fact that such an intervention would be xenophobic, wanting the state to intervene to prohibit transactions just because they think the wrong kind of people are buying these properties is problematical. You may argue that people who want to live in London but couldn't afford the properties, and people without homes at all, would value those more than foreign investors, but the knowledge that those properties are far out of their price range shows evidentially that those properties are not being bought at the expense of either of those groups of people. It's a tragedy that there are so many people who are homeless in the UK, but people buying expensive properties in London are not the cause of their plight, and nor are any actions that prohibit those purchases going to be the solution.

Secondly, and following on from the first point, even just a basic understanding of economics would inform people that Britain is actually better off when those properties are sold, irrespective of whether the buyer is an English person or a foreigner.

Really, how can that be so?

To see why foreign buyers make Britain better off, and why banning them would be counterproductive (not to mention xenophobic), consider who benefits when an Englishmen (Jack) buys a house from a second Englishman (Tom). Suppose Jack buys a house from Tom for £300,000. Jack must value the house at more than £300,000 otherwise he would be unwilling to buy it, and Tom must value the money more otherwise he would be unwilling to sell it. Suppose the maximum Jack would pay is £310,000 - his consumer surplus (the difference between the most he'd pay and what he actually pays) is £10,000. Suppose that Tom would have sold his house for no less than £295,000, then his surplus is £5,000, which means the transaction generates a net societal surplus of £15,000

Now suppose that up steps Johnny foreigner, out-bidding Jack by £7,000, offering him £307,000. Jack gets no benefit from the sale of Tom's house to Johnny foreigner, but Tom's surplus has risen to £12,000, meaning that if Johnny's consumer surplus is the same as Jack's then society now has a net gain of £22,000, which is £7,000 more than when the transaction was between Jack and Tom (there are complex reasons why, in terms of a weighted average, we’d expect the consumer surplus to be roughly the same – but we won’t deviate into that now). Of course if you ban Johnny foreigner then Jack gains, but his gain is less than the loss incurred by Tom - plus on top of that you also have to count Johnny's lost consumer surplus. 

The desire to ban foreigners from buying homes in the UK (by which we really mean London) is perfectly coterminous with the definition of xenophobia you’d find in any dictionary – it is a desire to impose an unfair discriminatory procedure on a bunch of people solely on the grounds they do not share the same nationality as you.

The test for you, dear reader, not just on this, but in life in general, is to keep a check on how often in the free market you find yourselves favouring people who just happen to share your nationality – in terms of jobs, goods and services – over people who happen to be of a different nationality. For I hope I don’t need to remind you too often that the more globalised we become the more we should erode away these old misconceived notions of jobs, goods and services being available only to people who share your place of birth.

Finally, a more general point about all this is that I think it's more the case that in the modern age lots of people have become quite furtive about telling the truth. The truth used to be valued so much more highly, but since socially we became more emotionally linked (which, don't get me wrong, has been excellent in so many ways) there is a widespread fear of telling the truth about things like wealth, value, wages, inequality, discrimination and so forth for fear of sounding blunt or uncaring.

When Jack tells us about the problem of homelessness in London, his default position is to frame it relatively in relation to rich property owners (inequality) instead of as an intrinsic issue of how homeless people are struggling on their own terms and need some help in life. The properties that rich tycoons have the luxury of being able to buy are usually homes in the region of £1-5 million pounds - they are unaffordable to the vast majority of people in the UK, and have almost nothing to do with the reason the homeless people are on the streets.

But there is another politicised aspect to the housing crisis that no politician wants you to think about. Politicians don’t want house prices to be lower, because lower house prices are seen as a sign of a failing economy, and a big turn off for home owners (home owners are fairly influential as they tend to vote in greater numbers than renters). The housing debacle in the UK has created a vicious circle - more people’s wealth has become dependent on the value of their home, so there is more and more for politicians to lose if they loosen the restrictions on housing. As most politicians are home owners (often multiple home owners) and many also have rental income from second and third properties, you can be quite sure that things aren’t going to get better anytime soon.
/>