Trade Makes Us Better People

You may have come across a social experiment called The Ultimatum Game. In this game player A (Jack) is given some money, say £50, and asked how much, if any, he proposes to offer to player B (Jill). Jill can accept or reject Jack's offer - but if she rejects it, neither of them gets anything. If Jack and Jill were rational income-maximisers, Jack would offer just £1 and Jill would accept it, because 1 free pound is better than nothing. But this very rarely happens, because humans are not rational income-maximisers.

Having a voracious appetite for fairness, the Jills of this world often reject free money from the Jacks of this world if the offers are not perceived to be an equitable distribution of the £50. Such sensibilities play out more broadly in society, which is why there is a correlation between trade and fairness. This was demonstrated in an interesting study from Herb Gintis that I read about in Matt Ridley's book The Rational Optimist:

"People in fifteen mostly small-scale tribal societies were enticed to play the Ultimatum Game. Those societies with the least experience of dealing with outsiders were the most hard-hearted, ungenerous and narrowly ‘rational’. Machiguenga slash-and-burn farmers from the Amazon most often offered just 15 per cent of the sum to their co-subjects, and in all but one cases, the second player accepted. Likewise, a Hadza hunter-gatherer from Tanzania usually makes a very small offer and experiences few rejections.

On the other hand, players from those societies that are most integrated into modern markets, such as the Orma nomads of Kenya or the Achuar subsistence gardeners of Ecuador, will usually offer half the money just as a Western undergraduate would. The whale-hunting Lamalera of the island of Lembata in Indonesia, who need to coordinate large teams of strangers on hunts, offer on average 58 per cent – as if investing the windfall in acquiring new obligations. Much the same happens in two New Guinea tribes, the Au and Gnau, whose members often make ‘hyper-fair’ offers and yet see them rejected: in such cultures, gifts can be a burden to the receiver because they carry an obligation to reciprocate.”

“The lesson of this study is that, on the whole, having to deal with strangers teaches you to be polite to them, and that in order for such generosity to emerge, costly punishment of selfishness may be necessary. Rejecting the offer is costly for the second player, but he reckons it is worth it to teach the first player a lesson. The argument is not that exchange teaches people to be kind; it is that exchange teaches people to recognise their enlightened self-interest lies in seeking cooperation. Here, then, lies a clue to the unique human attribute of being able to deal with strangers, to extend the division of labour to include even your enemies.”

As well as the progression-explosion of individual well-being and higher standard of living that capitalism has bestowed upon us, it's also essential to note how good capitalism has been and continues to be for the collective benefits of human society, not just in more than material gains, but in corporate kindness too. A society that relies on trade relies on cooperation, respect, fairness, justice and mutual toleration - the whole edifice depends on it. The free exchange of goods, services and ideas does not just make us materially better off, it makes us nicer, more respectful, more tolerant people to be around too - and those collective benefits play out in our living in all-round better societies.

And the kinds of society we have created through increased trade are uniquely human too. In the animal kingdom there are all kinds of cooperation and collaboration within a species - between other primates, between ants, between lions, between wolves, between elephants, between bees, between birds - you name it. But as a rule, cooperation and collaboration between unrelated strangers seems to not occur very often in the rest of the animal kingdom - there are almost no cases of unconnected animals involved in mutually beneficial transactions in the humans are when we trade. There is even a ratchet-type pattern of trade occurring with the development of farming in various countries independently at different times in history when the right conditions were met - Peru first, then China, then Mexico, then North America and Africa, and then Europe.

Perhaps my favourite example of the joy of trade is when I buy an Indian takeaway. People with whom I have little in common cook incredibly tasty food that I value much more than the money I pay to consume it. At the same time, I help the people that sell to me to make a living, and both agents are made better off. In feeding me, the proprietors get to feed their family too. And this extends right across the marketplace.

We are all making each other better off by trade. We are contributing to a nicer, safer, more respectful, more tolerant society, in which our own personal pursuits are helping enrich total strangers too - and when aggregated, it is sufficient to make everyone in that society richer and more prosperous.

Commerce has done more to combat racism, sexism, and unfair discrimination of any kind, and the alleviation of poverty for billions, than any government program. How bizarre then that we live in an age in which trade has done more than anything else to tackle poverty, hardship, injustice, corruption, prejudice, bigotry and disunity, yet the generation that has been the biggest beneficiaries are the most vociferous opponents of it in history.

Ask The Philosophical Muser: Reader Response To Trump & Tariffs

A reader asks about my recent post on Trump's tariffs:

"I don't get everyone's blathering about Trump issuing tariffs to help our domestic steel industry. The President of the United States has an obligation to the steel workers in the US not to steel workers in foreign countries. That's one of the basis on which he was elected, to compensate the home economy for it's (sic) losses"

My response:

Even if we ignore the central point of what I wrote - that Americans themselves are better off without the tariffs (and heaven knows why we'd ignore it, but let's do it anyway for the moment) - one of the rules of thumbs I find generally reliable is that if you transplant a proposition to analogous real life examples and find it doesn't fly analogically, there is a good chance that your proposition doesn't fly in the case you want it to either.

I will offer some examples. So remember the proposition here is that Trump should compensate domestic workers from the threat of foreign competition. So I ask you to think of one other instance in real life where we would countenance such an idea as a moral or rational equivalent.

When Tesco opens a superstore in a nearby town, we don't have an obligation to compensation the local high street businesses. When Amazon can deliver CDs and books to your door at the cheapest rate, we have no obligation to compensate HMV and Waterstones. When average looking Dave loses out to handsome Mike in the pursuit of Kerry's affections, we don't think they have an obligation to compensate Dave for remaining single. When more and more women began to enter the labour market, no one thinks that the government should have compensated men for the increased competition for their jobs. The list goes on.

Similarly, when Americans are made better off by foreign competition in the form of lower consumer costs, the fact that no analogous compensatory situation exists anywhere else in society speaks volumes about its absurdity. Foreign competition should no more be punished for entering the US economy and making Americans better off than increased competition from women, online traders and large supermarkets should be punished for making people better off.

Finally, as I said in a Facebook post in March, when Trump was first tweeting threats about tariffs against the EU:

"Trade is not like a race where you try to untie the laces of fellow competitors in order to make it harder for them to cross the line. In trade deals, the best situation for all the runners is everyone crossing the line together with their laces intact: that is, by all participants removing tariffs and subsidies. Trying to partake in a trade war with other countries by imposing tariffs is like trying to slow them down in a race by tying your own laces to theirs - you both become inhibited in trying to run."

And here is what so many don't understand about trade that they would understand with absolute clarity if it were a running race: even if others wish to run with their laces untied, you are still better off if you run with yours tied up, and encourage others to tie up their own laces and join you over the finish line.

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.

Brexit Ought To Mean Leaving The Customs Union

In case you’ve forgotten, I wrote an article back in December explaining why Brexit must involve leaving the customs union. More recently Ryan Bourne at CapX adds weight to this by alluding to the shocking 12,651 different taxes associated with Common External Tariff (CET), and how the EU is internally trade liberating but outwardly protectionist, as UK businesses outside the EU could face two-way tariffs if they import and export simultaneously.

As we all know, after leaving the EU, the UK will be able to set its own trade deals in keeping with WTO rules. Given that the pain of tariffs is entirely self-inflicted – rather like ramming a broom handle through the spokes of your bike as you’re riding it – the sensible post-Brexit policy for Philip Hammond and Theresa May will be to abolish tariffs altogether and allow manufacturing industries to import more cheaply from anywhere in the world. For as Ryan Bourne points out in the article – a fact that is utterly pain-inducing:

“The CET, coupled with non-tariff barriers imposed by the EU, has resulted in agricultural and manufactured goods prices being around 20 per cent above world prices.”

This should tell you two things. Firstly, as I’ve often remarked on here - that people in the agricultural industry in the developing world are being screwed over here, unable to compete with the EU’s protectionist racket. And secondly, we consumers are being screwed over too because we are paying more than the market value for our goods. Because in case you’ve forgotten, consumption is the primary benefit of trade.

Remember, it’s not Steve’s Steel that pays the tariffs to export, it’s the customers of Steve’s Steel that pay when it is imported. Apparently the EU buys 44% of our exports, whereas we buy just 7% of theirs, which means they tax themselves a lot more than we tax ourselves. The alternatives to exporting to the EU are exporting to non-EU countries or not exporting at all and increasing our home-grown consumption – both of which are more sensible than taxing ourselves - and the EU countries would be wise to adopt the same approach. The outcome – tariff-free trade for both parties, and mutual benefits for both importers and exporters. It’s a no-brainer really. 

Tying One Arm Behind Your Back

It's very frustrating reading all the opinions about what kind of Brexit we will have in relation to trade effects, and whether being outside the EU's customs union will incur the penalty of this or that tariff. For those that don't know, a customs union is a politically constructed trade bloc within which member states trade without tariffs, and outside of which other nations have tariffs imposed upon them. A free-trade area is a politically constructed trade bloc whose nations have signed a free-trade agreement that has very few or sometimes no trade barriers.

The existence of tariffs is infuriating to anyone who understands economics, because they do harm in virtually every area of society. Governments impose them because it gives them a bit of extra revenue, and because there are enough uninformed people in the country who think that by making imports harder the government makes exports and domestic business easier, leading to the domestic economy being better off (an asinine misapprehension that I blogged about here)

The reality is, by increasing the cost of imports, tariffs hurt all domestic economies, as they lead to a decline in consumer surpluses. A really obvious case is seen with the EU's tariffs on agricultural products, which make agricultural products more expensive for EU consumers by putting up barriers to competition. Restricting competition doesn't just inflate prices, it also diminishes quality for the consumer, because if your industry is protected from competitors it is shielded from the need to increase efficiency. And that's to say nothing of the wider costs of tariffs to developing nations trying to compete in a global economy, and all the additional costs to consumers when trade partners retaliate with their own tariffs.

Tariffs are a horrid political interference in free trade, and the harm they impose is hugely frustrating, as seemingly few people ever really stop to question their existence and challenge politicians to put a stop to them. Such are the benefits of free trade that even if every country is imposing tariffs on us, we'd still be better off domestically by not imposing tariffs on foreign exporters. Hearing our political elite spitting and spluttering about negotiating their way out of numerous political interferences is one of the saddest reminders of how frivolously politicians impede and retard all the prodigious benefits of free trade.  

Why Shops Stock Up On Christmas Goods So Early

For the past few weeks I’ve heard/read several people bemoaning the fact that shops are stocking Christmas goods earlier and earlier. You only need to see a tree and tinsel in the shop window in late October and there will be a mass moan. Here’s what the moaners don’t understand – you cannot really blame the shops for opening earlier and earlier, it isn’t really their fault. If the critics knew about non-linearities and feedback effects they would understand what is happening.

To see why shops are opening earlier, consider this simplified feedback model. Suppose we have M & S, Debenhams, John Lewis and Jarrold’s in the city centre. A long time ago all four shops used to stock their Christmas goods from December 1st. One day M & S try to obtain the advantage over the other three by stocking their Christmas goods a week earlier (from November 24th). 

Debenhams, John Lewis and Jarrold’s have three choices; they can do nothing, they can emulate M & S, or they can go one better and stock their Christmas goods earlier (say, from November 17th). If they do nothing they risk losing a week’s vital Christmas trade from opportunist shoppers to M & S; if they emulate M & S then there’s nothing stopping M & S doing the same again, leaving Debenhams, John Lewis and Jarrold’s on the November 24th date and stocking their Christmas goods a week earlier (from November 17th).

So, quite naturally in response they pick the best of the three options by stocking their Christmas goods earlier than M & S. But it doesn’t stop there – what then happens is that each one of their competitors will look to outdo the other by choosing a date earlier than the others. This continues over the years – and if you obtain the statistics you would find a pattern of increased early Christmas stock to match and/or outdo the competition. .

This is what happens when feedback effects occur; the shops are continually under pressure to stock their Christmas goods earlier and earlier to obtain an advantage, which is why you see all these shops beginning their Christmas trading at times that are, to many of you, premature. Their hand has been forced, lest they lose vital trade time to their competitors.

The shops are subject to "feedback" effects – whereby a particular parameter x changes and via a "feedback" route the change in x causes further change in x (thus x is "feeding" back to itself). Feedback systems, depending on the kind of feedback involved, can produce varying "curves" of change when plotted on graph paper – some of which are quite chaotic.

There is a ‘but’ of course – if it were just down to procuring an advantage by trading earlier, then M & S, Debenhams, John Lewis and Jarrold’s would all begin their Christmas trading on January 1st. But, of course, it isn’t like that – there is a balance to be struck, because the shelf room they take up with Christmas stock amounts to a loss of shelf space for other more saleable goods if they are displayed too premature for the festive season. 

The decorations, wrapping paper, cards and bumper chocolates would be counter-productive stock if they were displayed in August in the hope of obtaining a festive head start on the rival shops – which is why the balance between being too early and too late in the year is of huge importance.

* This article was first published here at the Adam Smith Institute.

Truly Bizarre, This: How To Get It & Yet Totally Not Get It At The Same Time

Hmm, this is a strange one! It's not uncommon to see an article in the Telegraph that's along the right lines; and it's not uncommon to see an article in the Telegraph that's a ball of confusion.

It is, however, fairly uncommon to see an article in which the writer is confused in one paragraph, then in the next paragraph comes up with the answer that explains his confusion, but then goes back to being just as confused as when he started.

His grievance is that:

"Kitchen blenders used to be made in the UK, but now no blenders are made here. All of them, every single one, is imported from abroad, mostly from China. What has gone wrong?"

Err... nothing has gone wrong; this is the nature of trade, and what makes two countries progress simultaneously by mutually beneficial transactions. If China has the comparative advantage in x, y or z, then the purpose of beneficial trade is that we buy x, y or z from China, not the other way round. Our writer doesn't seem totally unfamiliar with this principle:

"This is indeed a sad state of affairs. Kitchen blenders are relatively simple to manufacture. Until the late 1980s Kenwood made its iconic blenders in the UK, before moving its operations to China. But why don’t we still make them? The production processes involved – tool setting, machine minding, assembly, testing and packing – can mostly be learned by a workforce in a couple of days.

You don’t need much management experience to run these kinds of operations; to order the right components, ensure the correct specification and quality standards, to keep waste to a minimum, and to make sure that costs are kept under control.

Making kitchen blenders is not rocket science. So why are none of them produced in the UK today? There is a simple reason: the cost base in the UK is too high. Essentially, it costs far more to produce them here than it does in the Far East. As a result, not only kitchen blenders but thousands of other medium and low-tech products, which could perfectly well be manufactured in the UK, are all imported from abroad, mostly from the Far East."

Ahem, yes - couldn't have explained it better myself - it's because we can get these goods cheaper from abroad that it would be more expensive for Brits to buy them as home grown products rather than as imported goods. It's truly bizarre that the writer appears to get the basics of this so well, yet so abjectly fails to grasp why lamenting the lack of UK kitchen blender manufacturing is so foolishly short-sighted.

IEA Paper: How Governments Harm Trade

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

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

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

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

To read the full paper click here

Why Do People Get A Proposition When It's Expressed One Way, But Totally Fail To Get The Exact Same Proposition When It's Expressed Another Way?

There was once a selection task devised by psychologist Peter Wason to show that people don't naturally think well when logical symbols are required. According to statistics over 90% of you will get this wrong.

You are shown a set of four cards placed on a table, which must conform to the rule "If P then Q". That means that whenever there is a card with P on one side, the reverse side of the card must show Q. The visible faces of the cards show as follows:

CARD 1 - P

CARD 2 - not-P

CARD 3 - Q

CARD 4 - not-Q

Wason asks which card(s) must you definitely turn over in order to test the truth of the proposition that "If P then Q" holds? Have a think about it for a few seconds. 

If you're one of the 90+% you've probably reasoned that you need card 1 and card 3. You want to make sure that P has a Q on the other side, and equally you want to make sure that Q has a P on the other side.

But that's not right - the cards you need to choose are cards 1 and 4. Here's why. Because the rule is "If P then Q" you need to check card 1 (P) to ensure there's a Q on the back, but you also need to check card 4 (not-Q) to ensure there is 'no' P on the back. If there is a P on the other side of card 4, then the rule "If P then Q" has been disobeyed. Cards 2 and 3 don't need to be touched.

Now what's strange, Wason found, is that although people struggle in this task when using logical symbols, they don't when those symbols are changed to more familiar real life situations, despite the logical connection between facts being exactly the same. For example, if instead of "If P then Q" the rule used is "If you come into my pub and drink alcohol you must be 18 or over" people get that one right. The visible faces of the cards show as follows:

CARD 1 - Age 15

CARD 2 - Drinking coke

CARD 3 - Age 18

CARD 4 - Drinking vodka

When presented with the task in the social context of under age drinking, virtually nobody has any trouble choosing cards 1 and 4, even though the logical connection is exactly the same as the "If P then Q" proposition a moment ago.

Alas, such inconsistent thinking extends far into our everyday lives too - a good example being Ricardo's phenomenon of comparative advantage, which basically means that the agent that can do something with the least amount of opportunity cost should do that thing.

For example, if Gina can make 4 brownies every 10 minutes and decorate 9 cupcakes every 10 minutes, and Lisa can make 2 brownies every 10 minutes and decorate 6 cupcakes every 10 minutes, Lisa should be decorating cupcakes even though Gina can do it faster, because comparative advantage says that Lisa ought to be decorating cupcakes because she is less bad at it than making brownies.

Comparative advantage is one of the essential tenets of a free market, and it is terrific in its simplicity and efficiency, yet so many people (politicians and the general public) alike misunderstand it.

Donald Trump is currently the person most publically misunderstanding it - his daily spouting of economic nonsense concerning America and trade is one of the most disturbing exhibitions of political confusion I think I've ever seen in a Presidential candidate (and that's saying something).

Perhaps rather like the Wason selection tests people can see a proposition clearly if it's expressed one way yet miss completely exactly the same proposition when it is expressed another way.

Take imports and exports as a good example. The world is a better place when one country, say Britain, export goods in which it has the comparative advantage, and imports goods in which the importing country, say China, has the comparative advantage. The logic is simple: Brits produce more of the things we are good at producing, and other countries produce more of the things they are good at producing.

Doubtless almost everyone can understand and agree with comparative advantage when we say that it's Lisa, not Gina, who should be decorating cupcakes, but a lot of people stop understanding this very same principle when we tell them that if non-UK countries are more efficient at producing some goods than we are, we should be buying those goods from abroad not protecting our own less-efficient industries.

The mystery as to why Paul McCartney wasn't the drummer in the Beatles is no mystery at all - he may have supposedly been better at drums than Ringo, but he was also much better at playing other instruments and writing songs with them than Ringo, so it made perfect sense to have the much better songwriter writing songs on guitar and piano than the slightly better drummer playing drums.  

Once again, everyone understands why Ringo played drums, not Paul, just as everyone understands why we buy our wine from France, Spain and Italy and not Scotland, Finland and Norway - it's just a pity they cannot carry on following the logic to international trade (take note Donald Trump supporters).

Look Who's Gaining Most From Globalisation & Why Things Are Getting Cheaper

We often hear about how much richer the top 1% are getting, and we also often hear about how many people in the lower quintiles in the UK and USA are feeling the pinch a bit. I thought some here might be interested in the latest article from Branko Milanovic (see bottom of page), which gives some nice data and illustrations about some of the things I'm always banging on about in my blogs. Namely...

1) In-country inequality in rich countries like ours has a lot to do with poorer people in less well off countries seeing increases in their real income.

2) The rich are not getting richer at the poor's expense - they are getting richer along with the poor getting richer. The poor's gains are actually greater than those of the rich, as the poor grew their rates of consumption twice as fast as the world as a whole in the past 35 years.

3) As the real income gains in percentage chart I linked below shows, even those feeling the pinch the most - that's Western lower middle classes - have seen real income gains in the past 25 years, and let's not forget they also continue to be in the top 20% of the world's wealthiest people.

4) It is primarily the globalisation of free trade that has caused these worldwide gains.

And that's not the end of it. Have you noticed how much prices have fallen in so many of the goods and services we buy these days? A whole range of things: food, drink, books, movies, music, clothes, computers, cameras, mobile phones, software, fuel, airfares, solar energy, furniture, and most household electrical goods (televisions, fridges, freezers, microwaves, washing machines, cookers, etc) have all become cheaper in recent times, and it is primarily because of more globalised free trade.

The more trade expands, the more competition there is, which means things get made more efficiently, which means humans get better at making things, which means humans feel the benefits in lower prices.

The network of the free market is rather like other networks that benefit from increased connectivity - phone networks, railway networks, social media networks - the more connections added to the nexus the greater (exponentially) its utility.

Think of Facebook as a good illustration (which is very possibly where you were notified of this Blog post in the first place). When you set up your Facebook profile, you gain local connections (real life friends), and if you're like me, broader connections too (friends from all over the world, gained usually through common interests or group connection).

Now the thing is, you don't just benefit from your connections, you benefit from your connections' connections too, and their connections, and so on - because it is through that mass connectivity that you get to share in all the interesting and edifying things out there.

The intriguing article you read about Camille Paglia, or the mind-blowing video you saw of some crazy guy doing a stunt that most of us wouldn't dream of attempting, or the really special friend you now associate with who lives in a continent you've never visited were all thanks to the connections you've gained, or connections friends or friends of friends have gained and made their way into your life.

Just as on Facebook you don't just benefit from your own connections, but by connections generally - similarly, the market works that way for our benefit too. As more and more people from other countries enter the global marketplace, we find an influx of new skills, new innovations and increased competition, which drives up efficiency and drives down prices.

To read the full article (click here).

For further reading, in April 2015 I wrote an article on Branko Milanovic's findings from last year (click here).

It's The Politicians That Need Some Steel

The people that run our country worry me, but the people that want to run our country (Labour, the Lib Dems, the Greens) worry me far more. Despite the fact that, apparently, China has produced more steel in the past two years than the entire UK has since the 19th century (and wow, what a fact that is if it's true!), and the fact that the British steel industry is losing over £1million a day as a result of the collapse in steel prices (can they not spot the obvious supply and demand link between the two facts?), they still want to flirt around with the idea of nationalising British steel - not because it's the prudent thing to do (even the most blockheaded politicians must be able to undertake this basic arithmetic), but because it's popular with UK voters.

I wonder if any of those calling for nationalisation of costly, failing industries ever gave a thought to the concomitant losses in other parts of the public sector (health, social services, defence, police officers on the beat, old age pensions, etc) required to pay the price. Probably not.

One thing they definitely don't give a thought to is the notion that when a business or even a whole industry dies in the free market, it is not only a good thing in the long run, but a necessary thing too. Not only is a death in the market a sign that others are providing the good or service more competitively and efficiently, it is also a necessary departure that makes room for new industries to grow. Imagine if the companies that produced video tapes hadn't died or moved to newer technologies, or suppose people were still trying to make a living producing telephone boxes or designing gramophones - it is easy to see why they wouldn't be solvent anymore.

When obsolete industries shrink or discontinue this helps free up new capital for fresh industries. If we had tried to artificially keep alive the video tape industry, we wouldn’t be enjoying so quickly the improved movie watching experience of DVDs or On Demand TV: if we had tried to artificially to keep alive the old telephone industry, we would have slowed down the growth of the burgeoning mobile phone industry that has seen so many other auxiliary gadgets included on our hand held devices too.

It is just as necessary for a healthy economy to allow providers of extraneous goods and services to shrink or die as it is new ones to emerge. The former is essential to the latter, as there always needs to be fresh capital freed up for new and improved industries. Trying to artificially preserve the British steel industry over more competitive steel production elsewhere is not very different to trying to artificially preserve fax machines at the expense of emails - it is only a more immediate and reactionary example of the same thing.

Alas, it is true that all this does have a negative short-term effect on the workers in the British steel industry, and in some cases on local communities, but artificially propping up an industry that is being outcompeted by a more competitive industry abroad is not the right thing to do, for all the reasons just explained (By the way, if you're still having emotional home-grown difficulty with this point, let remind you of a previous article I wrote for the Adam Smith Institute in which I explain how artificially propping up failing British industries also hurts other British industries in the process).

The reality is, there is a horrible and harmful co-dependency between the masses of our population - who are so Anglo-centric that they fail to understand how competition works, and how stifling competition harms us as well as everyone else - and the pliable politicians that rely on their vote to survive in their roles. The people that govern us, and the people in the shadows wanting to govern us, are toxic to our economy, because they make decisions of popularity, not of prudence, based on the fact that the majority of the people they govern prefer popular myths over prudent truths. As George Orwell once famously said: "In times of universal deceit telling the truth is a revolutionary act", and this nation badly needs a lot more truth injected into the political mainstream.

Poverty & Sweatshops - All Is Not As It Seems

The paradox of sweatshops is this: they are pretty grim places, so lots of people want to see them discontinued. Yet discontinuing them frequently brings about an even grimmer situation for the people working in them, meaning that the people claiming the greatest consternation for the workers are actually the people doing them most harm. Actually, let’s not even refer to them with the misleading terms ‘sweatshops’ – let’s call them what they are: factories of low pay (FLP).

But isn't that where the State should get involved?

In most cases, probably not! They are highly likely to mess it up. You may have some idealistic fantasy about State powers intervening to rescue developing nations from the oppression of heartless corporate hounds, but you know as well as we do that no such thing can ever materialise - and that the only way for citizens of developing countries to climb the ladder of prosperity is for them to be able to trade more freely and openly in a global market.

Nevertheless, it is the case that big businesses go into developing countries because they know workers there will work for much lower wages than in the developed world, which is kind of immoral, right?

Ah, but lower wages than whom?

Lower than workers in the UK.

But why should you think the two nations' wages would be comparable? They both have different cultures and different prices. Comparing the wages of two very different countries with vastly different levels of wealth is pointless. £2 in Bangladesh goes a lot further than £2 in the UK.

It still pains us to see them working in less favourable conditions though.

Sure, but while it often elicits indignation and disgust, the resultant outcome of this is an outcome that benefits both parties. The workers in developing countries get the chance to enter the global market and earn enough to gradually improve their living standards, and the businesses that set up there are able to make a profit and often expand into other areas of the market.

But while it's evidently the case that the businesses are making a profit out of some of the world's lowest paid labour, the question of whether they are morally wrong or simply the first steps of progression for a developing country looms large.

A few points might make this easier. Firstly, as long as the labour is offered voluntarily then FLP workers are working in FLPs because they prefer that work to the alternatives. I recall a US senator in the nineties banning imports that came from FLPs, which resulted in about 50,000 workers being laid off - many of whom either died or went into prostitution. Secondly, the wages that people earn are determined by the marginal revenue productivity of a worker, which varies according to all sorts of factors - most notably, supply, demand and competition. If a Bangladeshi FLP worker creates £3 per hour worth of revenue for a firm, then accounting for the intervening point between profits and productivity, he (or she) will be paid somewhere between £0 and £3 per hour. Paying him more than £3 would be costly to the firm so they would lay him off. Paying him too little would affect productivity, which affects profits.

So is it actually immoral to pay people their marginal revenue productivity when A) doing so offers them hugely greater benefits than the alternatives, and B) if even more of these factories existed there would be more people getting out of their plight?

It is difficult to see how this is immoral - particularly once you realise that paying them more than the value of their labour only ends up hurting everybody else trying to get a foot on the first rung on the labour market. Price signals dictate value. Is that immoral? I don't see how it is, because price signals carry all the vital information about value, which is the very thing that underpins all the economic growth humans experience. It's true that politicians and campaigners could feel indignant and demand a rise in pay, but if such an action guarantees harm for millions of others looking to take advantage of the chance to sell their labour and feed their family, then intervention can just as easily be argued as being irresponsibly immoral. Politicians who lament the fact that Bangladesh has 500 factories fail to realise that an even more prosperous Bangladesh would be one that had 1000 factories. Rewind back time 150 years and we'd be saying the same about the UK.

It is in the employers' interest to help improve the working standards for their employees - things like improved health and safety, shorter days, more comfort, better facilities and regular breaks can only help with productivity and morale. The upshot is, things are tough for Bangladeshi workers, but they would be a lot tougher if protest groups got their way and we stopped buying the goods they produce. The result would be to artificially advantage better off workers by eliminating much of the competition. Saying this isn't denying that it's unfortunate that Bangladeshi workers have a much worse time of it than UK workers - but if solutions proffered are actually a misunderstanding of what helps people and what harms them, it is difficult to argue that anti-FLP campaigners are the moral ones and the rests of us are immoral.

I won't deny that many instances of protesting, boycotting and activism have proven to be valuable vehicles for improvement. But many have not been, as they end up interfering in a market they scarcely understand. As has happened in the past 150 years in the UK and USA, and as had happened more recently in about a fifth of the time in places like Japan, Taiwan, South Korea and Hong Kong, developing countries get a foot on the ladder of prosperity and begin to become more open to the vital market forces of globalisation that will bring them economic growth and increased prosperity.

But why are so many people still are poor?

Be careful! To understand why the answer lies elsewhere you first have to understand why that's the wrong question. The right question is why are so many people so prosperous? Prosperity is not the default state of human beings - poverty and hardship is. For most of our history we have been struggling through poverty and hardship. Then a couple of centuries ago we saw a progression-explosion brought about primarily by science and capitalism. Naturally there were always going to be countries that experienced these changes in fortune first.

So the poverty and hardship we lament now was once our natural state too?

Exactly! Once upon a time, the kind of hardships seen in India and Bangladesh now were seen in the UK then. We in the UK once used to be an underdeveloped country, having citizens who work painstakingly long hours in very poor working conditions for relatively little money. But as we saw the increased growth of capital, the advancements in technology, and the increased opportunity to trade and innovate, we gradually climbed out of poverty and hardship into greater wealth and prosperity.

What we're saying, then, is that developing nations haven't had their progression-explosion yet?

Sort of, and there's no reason to think every country will experience the same kind of progression-explosion. But what is happening is that people in FLPs now are experiencing something similar to what we did 200 years ago - they have improved their own living conditions by being able to earn money and avoid starving to death. Their standard of living is woefully short of ours - but it is only our increased standard of living that has enabled them to begin their climb to better prosperity. And as I pointed out in this blog, we need 600 million new jobs in the next decade to fully employ the world’s eligible workforce, and entrepreneurs and big businesses are the top creators of new jobs, providing 70% of all new jobs in the world, and up to 90% in some emerging economies. It is the world's biggest businesses that do most to drive economic growth in poorer countries.

How so?

Because the global economy is now a vast interconnectivity that has enabled the poorest countries to enter the market in a way that was nigh-on impossible decades ago. Just as the UK was able to bring about the eradication of its own dire labour conditions by becoming wealthier, the same is happening with today's poorer countries. The best way to ensure they continue to increase their prosperity is to keep opening up the market in which they can sell their goods and services.

EDIT TO ADD: One final thought. Habitually we tend to consider much of our moral thinking in binary terms - kindness and generosity are good things, murder and rape are bad things, and so on (yes there are exceptional circumstances, but generally this is true). Often, though, in economics, applying such binary considerations is misjudged, because economics deals primarily with positive statements, not normative ones. Usually when morality comes into economics it is not to do with good and bad, it is to do with better or worse. In other words, normative statements in economics are usually a matter of scale related to whether decisions make people better or worse off in terms of money to live on, well-being, and so on.

Sweatshops as a perfect example to illustrate this. By any standard we are used to in places like the UK and USA, sweatshops are pretty dire places. But given that countries across the world vary greatly in their developmental stages, it is misjudged to simply refer to them as 'bad' in absolute terms, particularly if by bad you mean wanting them discontinued. Because of the plight of countries like Bangladesh, Vietnam, Indonesia, and so forth, sweatshops must be judged not compared with other alternatives in the UK and USA, but instead in comparison to other alternatives in the countries in which sweatshops exist. You can guarantee that sweatshop workers are choosing the best of all the alternatives available to them - alternatives like agriculture, road-building, pulling rickshaws, construction work, hustling in the street, and even worse, prostitution. Those are just some of the alternatives that don't involve death through starvation - and they are all lower paid jobs and involve harder labour than sweatshops. In fact, comparably speaking, much of the work in sweatshops is more skilled labour than any of those jobs (as any dress-making seamstress will tell you).

So the moral situation that people face when talking about sweatshops is roughly this. Given that sweatshops are by far the least bad option for many people, successful campaigns to close them and boycotts against the goods they produce will make those people worse off. Yet speaking out in support of them will cause you grief, and bring accusations that you don't care, even though sweatshops make people better off, and in many cases rescue them from prostitution or death. In summary, then, quite often you either support sweatshops and do the right thing for the people, or you condemn them, get praise, but do the wrong thing for the people. And let's not forget, supporting people's opportunities to work in sweatshops does not mean we can't be a voice for them regarding better working conditions, improved employment protocols, better health and safety, and so forth.

The Science Of Economics: The Truth About Britain Leaving The EU

We've heard a lot this week from EU-friendly politicians (which is pretty much everyone outside of UKIP and a few Conservatives) about the dangers to the economy and the job losses if the UK leaves the EU. The irony seems to be lost on so many - so let me try to explain why this narrative is largely a confused one.

Here's pretty much the bulk of the reality (barring a few exceptions). The vast majority of the jobs that would be affected by the decimation of the EU are the jobs currently taken up by the stuffy EU bureaucrats whose roles are to interfere in the market processes, create documents, employ delegates to push those documents back and forth, and generally just construct protocols and working practices to justify their roles. In many cases these people’s very existence in the job market is only justified because of the EU in the first place (and if you can’t see why that is a problem, you should read this Blog post of mine on opportunity costs).

There is no reason that jobs in the general sphere of trade require the EU to function - in fact, quite the opposite. It's no small irony that the majority of jobs affected by leaving the EU are going to be primarily the extraneous number of bureaucratic roles that are in place because of this monolithic EU structure.

Quite frankly, we would easily be able to enjoy all the benefits of Europe (free movement of people, greater multi-state cooperation, to give two examples) whilst obtaining the national freedom to trade openly and freely and make all our own laws as we see fit. To misunderstand this is to fail to comprehend exactly what a healthy free trade system looks like.

Economics as a science

The best way to explain this is to show how economics works when it is tendered most closely to its scientific principles. The principle it most closely resembles is nature’s principle of parsimony – the law of least effort. People who get this are people who are likely to understand why the market need not be so hampered by so many bureaucrats and their socialist impediments to free trade.

When it comes to how to deal with economics, humans could easily view the natural world as a very influential mother, because the fundamental principle of least resistance is written into the mathematical code of nature. Profligacy is not her game; she leaves nothing to spare on matters of efficiency, and she is always parsimonious with her energy expended. For example, when light travels it reverts to the path of least time; a hanging chain reverts to the shape of lowest centre of mass; and soap bubbles revert to the shape of least surface area and volume. In a similar vein, economics, if left to many of its natural paths of efficiency, would be in a much better state, and also it would be more science-friendly.

Just as nature's laws find themselves running according to the principle of maximum efficiency, so too would economics if it were left to the principles of economic laws based on prices, supply and demand. You may object that unlike chemical elements, economics involves that complex and erratic phenomenon known as human behaviour, but that's not a valid objection, for as Adam Smith reminds us, the invisible hand 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 which are rarely above cost.

This means that in a market in which consumers are free and happy in being able to make mutually beneficial transactions, something resembling nature's fundamental principle of efficiency should play out across the economy.

Applying this to the problematic nature of the EU, we can see the issue more clearly by looking at chemistry. Chemistry is a noble science, and one which returns reliable and consistent empirical data. The main reason for this is that natural laws that underpin the material constituents are not compromised or retarded through human interference. When considering gaseous compounds, the masses of one constituent that combine with a fixed mass of the other constituent are in the ratio of (small) integers to each other. If scientists interfered in this law so that it was no longer obeyed by all gas mixtures, the fundamental constituents of chemistry would be undermined.

This applies pretty neatly to economics as well, at least to the greatest degree. Economics resembles science in that its truths are based on empirical observations and patterns distilled from data. If we treated economics as rigorously as we did chemistry we would find one of the golden rules of economics - the fundamental principle of least resistance (otherwise known as maximum efficiency) - playing out much more prominently.

Not to impute any kind of over-arching sentience to the market, but using sentience analogically here, prices are the result of billions of individual units of activity going on in the global market. Prices are, of course, dynamically in flux according to changes in supply and demand, but what all this amounts to is the fact that no politician, ideological group or economist knows the market better than the market knows itself.

Consequently, top down management or interference from on high are always going to be inadequate to the task of the way markets themselves know the price signals in response to supply and demand activity. Prices are to markets as the path of least resistance is to the natural world – and pretty much everything EU bureaucrats do to interfere in this process makes the European trade market worse off - which means we should have absolutely no qualms about leaving it and enjoying greater freedom to trade with whoever we want.


Edit to add: Of course, it's worth adding that although the natural flow of the economy tends towards the path of least effort, this is in some places a key reason why some kind of light regulation puts the brakes on some undesirable activity. For example, given the human tendency to do things as parsimoniously as possible, some regulatory protocols that guard workers and consumers against potential health and safety dangers in the workplace, product safety, built in obsolescence and some forms of asymmetry of information are quite welcome and necessary. What impedes the process is when politicians interfere in ways that are best left to the market forces - most notably, anything that artificially interferes with prices and the information-carrying signals they exhibit: be that the minimum wage, rent controls, tariffs, business subsidies and so forth.
  

Why We'd Be Better Off If Restaurants Charged Us To Reserve A Table

Restaurants should charge for booking a table at peak times as well as for eating the meal. I'm telling you this not just because I want to tell you something interesting which you may not have considered, but also because what I'm now going to say serves to explain well the economic concept of value, and why we would all be better off if restaurants charged for booking a table at peak times.

It's obvious to everyone that the laws of supply and demand factor in to the dining out experience. A 6pm booking on a Tuesday night at a restaurant that has been open for 10 years is bound to be in much lower demand than a 7:30pm booking on a Saturday night at a restaurant that has only been open a few weeks. That is why taking bookings on a first come first serve basis distorts the true signals of value.

A couple that phones up and books a table at random or a few friends who walk past and grab a table on a whim may not value their table as much as people that would have paid an extra surcharge to eat in there. Consequently, charging for table bookings increases the chances that the people who most value a dining experience have that experience, while at the same time leaving room for less discerning people to choose other restaurants. Plus, if non-price sensitive people pay more at peak times, price-sensitive people should find cheaper meals of the same quality at non-peak times.

So why, then, don't restaurants charge for booking a table? It could be for the same reason that hugely popular concert tickets don't sell for more. But it's probably also the case that popular individual restaurants that adopted this policy unilaterally would place themselves at a disadvantage against other popular restaurants that chose not to charge a booking fee. In all likelihood, this is why reservations do not have the kind of prices that would allocate diners with restaurants more optimally, and create extra societal value in doing so.

If Amazon Behaved Like A Friend

I must have bought over one hundred books from Amazon since its inception - but, alas, I don't know what is up with Amazon's book recommendation algorithm. Apart from the obvious low-hanging fruit it seems to be pretty mediocre at suggesting books for me based on past purchases.

When you're round someone's house their bookshelves are a great way to gauge information about them - you can get a fairly good idea of their education, interests, passions, tastes, beliefs and background - and more importantly here, you can use those observations to suggest books for them with consummate ease.

This leads me to believe either that Amazon's data mining is not as proficient as it could be, or that it's another good example of how there is, and will always be, a significant qualitative discontinuity between computers and the intuitively perceptive abilities of the human brain.

I had an idea a while ago about how interesting a book recommendation of *opposites* or *thematic alternatives* would be for, say, one day a week, where through data mining sellers don't suggest all the same kind of books, but deliberately suggested radically different ones to diversify your tastes and experiences.

So instead of saying, "Hey I see you bought Steven Pinker, Jared Diamond and Malcolm Gladwell, why not try Matt Ridley and Steven J Dubner and Oliver Sacks?" - they'd instead say "Hey I see you bought Jackie Collins, Ricky Gervais and Andy McNab, why not try Soren Kierkegaard, Charlotte Bronte and Thomas Aquinas?"

 

If Amazon behaved like a friend, and really wanted the best for you rather than simply trying to sell you more of what you've already bought, it would throw up a few of those opposites and thematic alternatives to help you keep your thinking fresh and diverse.