Inequality - 5 Myths Debunked: Myth 1

It's fast becoming clear to me that just about everyone you encounter (barring a few pleasing exceptions) has become convinced that inequality is one of the world's biggest problems that needs urgently addressing. Alas, it's one of the biggest myths that inequality is a massive problem. It is not. What matters primarily is absolute well-being, not relative well-being. If increased inequality was making poorer people poorer then it would be a problem - but that's not happening, because the economic pie is not fixed, and because wealth creation is not a zero sum game. As wealth is created, pretty much everyone's well-being increases in absolute terms.

There are many social commentators from the left misleading their readers with dodgy economics that on the surface can be made to sound reasonable - like, for example, when they tell us how unjust it is that the top 1% of the world’s population owns half the world’s wealth. It's easy to make such a fact sound outrageous, but only if you distort the reality of economics and make people believe that a terrible global injustice is occurring. Such views about inequality are mostly centred on 5 myths, which I will set about dispelling.

Myth 1: Inequality = injustice.

Reality: Inequality does not mean injustice.

Too often we hear that it's an 'injustice' that high earners can earn hundreds of thousands of pounds while other people in the same country are out of work and on benefits struggling to get by. In fact, that kind of redistributionist philosophy is at the heart of the socialist ethos. In the real world, though, while it's a nice aspiration, in economic analysis it doesn't make much sense. It's certainly a shame that unemployed people are out of work and on benefits, but when people call this an 'injustice' they misuse language, a bit like when someone says that an hour is fat or an obese person is sixty minutes. Out of work people claiming benefits are given money by the government and they have their rent paid. That's the right thing that should happen, but to call it an injustice is absurd.

When a guilty rapist gets an undeserved outcome by being found not-guilty in a court of law, there is an injustice; the injustice is commensurate with the extent to which the victims suffer, and the extent to which ordinary citizens are unsafe due to his being free. People's well-being is generally not of this nature. In a great many cases, even if you think X has received an undeserved outcome, it doesn't mean that you've suffered an injustice. Did we suffer an injustice (as some claimed) when lottery lout Michael Carroll won the jackpot? No. It’s true we might have wished it was us, and thought how much more we could have done with the money, but there was no injustice suffered by us in his winning the lottery.

What about when an auntie gives four of her nephews £10 for Christmas and her favourite nephew Tim £20 - have the four nephews suffered an injustice? No. Maybe their aunt's decision was unwise, or petulant, but perhaps in this case it wasn't. Either way, it was her money to do with it as she pleased - and surely she has reasons why she thinks Tim is more deserving. Perhaps he earns less; perhaps he helped her out in the summer; perhaps he's the kindest and most thoughtful - there are plenty of reasons.

Now when it comes to the market, there is inequality in wealth and earnings not because of systematic unfairness, but because people have different talents and they make different life choices. Wages and prices evoke lots of hostility largely in the people who have a curious sense of entitlement and not much understanding of price theory. In recent times since the financial crisis people have been keen to pontificate about the apparently 'excessive' pay of chief executives, politicians, bankers, top sports stars, and so on. Top sports stars probably are overpaid (for reasons you may not expect, which I talk about in this Blog post), but the rest aren't obviously so.

Pascal said famously "The heart has its reasons of which reason knows nothing". Of course, in this case reason knows why people think this way about perceived injustices and entitlements - it is down to this peculiar sensibility called 'fairness' on the one hand, and this disagreeable trait called 'envy' on the other hand. Envy can be good if it catalyses innovation: if Owen envies Bob's success in retail he might work extra hard to achieve similar successes. But envy is bad when it causes Owen to become resentful towards other people's fairly earned successes in a competitive market. Fairness is good but often hard to measure. If Tommy and Billy are told to share evenly a £5 gift from grandma then it is fair that they each get £2.50, and easy to see when fairness has not occurred. But if Paul earns £200,000 a year more than Chris that's not necessarily, and almost certainly isn't, a sign of unfairness. This will lead us nicely to the second myth in tomorrow's blog post.

One final point on this - the other thing that happens when people look for injustice in inequality, particularly in the UK and America, is that they start to become blind to the reasons poorer people are doing less well. The key factors in people's income are work and skills. Households in the top 20% usually have two people working in jobs that require higher skills. Households in the bottom 20% usually have either one person working, nobody working, and often only one adult in the house.

Research by David Henderson at the National Centre for Policy Analysis showed that 81% of families in the top income quintile had two or more people working, whereas in the bottom quintile only 12% of families had two or more people working, and nearly 40% of households had no one working. If you translate that into average number of earners per household, it works out that the top households are three times those at the bottom. Once you factor in education and skills as vital tools for increasing earnings, it is evident that where you are in society is not usually a matter of injustice, it is a matter of lifestyle decisions people have made. Don't misunderstand, many people fall on hard times, they are let down by others, and they have less than ideal family backgrounds. That certainly should elicit sympathy, and a concerted effort to be helped - but it's certainly a misuse of language to call it injustice.

Almost Everything You Need To Know About Competition

 

The one word that best summarises what drives economic improvement is 'competition'. It is competition that brings such significant progress shifts for people in society. If you have a monopoly on a good or service there is no selection pressure to improve and innovate, as consumers have nowhere else to go as an alternative. But with competition, providers are continually looking to improve products, innovate to offer something new, and retain competitive prices too.

It is competition that drives human progress; it is through competition that resources are most efficiently allocated; and it is competition that provides signals regarding which goods and services we want and need, and with whom co-operation will be most beneficial. The more it is realised that competition is the driving force of efficiency, innovation, improved material well-being, and the principal route by which people are lifted out of poverty, the more it is realised that we continually need more market and less government in our daily transactions.

EDIT TO ADD: When I said "we continually need more market and less government in our daily transactions.", a couple of people for some reason thought that was an endorsement for what they often like to call 'unbridled' or 'unfettered' capitalism. It was no such thing. And on that point, let me correct a popular misconception: almost no pro-market person I've ever met thinks that the market should be allowed to run with no government regulatory protocols. So, then, I do not mean that the government shouldn't regulate - here I am talking about the government as an agent in the economy in its own right, i.e. one that produces goods and services. When the government produces goods and services it is usually done so through an absence of, or too little, competition - in fact, when the government runs the service it usually has a monopoly on that service, which stultifies competitive forces.

In saying we need more market and less government, I was talking about their role in the economy as agents of manufacturing, and how competitive firms are more efficient at that. Governments need to regulate, where regulation should only mean forms of light intervention to direct for the common good the way providers and consumers behave. However, to do this it is imperative that the politicians that intervene understand the full range of costs and benefits associated with their actions - and alas they frequently demonstrate to me that they do not (in some cases, of course, they will understand but ignore that understanding because the right decision will be an unpopular one in terms of votes). A nigh-on perfectly reliable rule of thumb is that when politicians try to interfere in the natural mechanism of prices they are getting it wrong. But that doesn't mean there are not necessary government interventions - some light regulation is essential.

The Climate Change Alarmists May Be Putting The Cart Of Wrong Answers Before The Horse Of Right Questions

One of the climate change protestors in London got arrested for vandalising a government building, and had the following to say about it in her blog post (I saw this because my wife is friends with her):

 

"It seems the message of the urgency and importance of real cuts to greenhouse gas emissions is not getting through in conventional ways, and hence the need for a bit of drama. We’ve marched, we’ve petitioned, we’ve written to MPs, we’ve written to ministers, we’ve met our MPs and lobbied, we’ve campaigned and voted in the election, we’ve moved investments and supported businesses who are calling for progress… we’ve used all our democratic powers, and yet still those who are meant to represent us are doing the opposite of what we are calling for"

 

Every sinew of this blogger's being seems wedded to the conclusion that these politicians she is trying to galvanise are too supine to even bother addressing her obviously correct analysis of the climate change situation. Now I've no doubt that most of our politicians are hardly paragons of mental excellence, but I wonder if it ever occurred to her that, in actual fact, her questions may be wrong to begin with, so she is not likely to arrive at the right answers, let alone convince politicians to act on her every wish. Or to put it another way, she may not have realised yet that, in actual fact, the reason politicians are so inactive is because there isn't that much they can do.

 

You see, I'm with the climate change activists on pressing forth the notion that more needs to be done to help countries that have been negatively impacted by climate change - of course that's a good and noble cause. But it's their auxiliary narrative that I think sends them wayward - calling governments to be the ones to instil these game-changing alterations to our economic behaviour - that's where I think they are putting the cart of wrong answers before the horse of right questions. The right questions they should be asking, and seemingly are not, are:

 

a) What realistically can politicians do to change an economy that they have almost zero ability to manage or predict (apart from what they are already doing through green taxes)? 

 

b) Are the people supposedly in crisis because of climate change actually in crisis, primarily, for other more important reasons?

 

c) Are the drastic measures the climate change alarmists are looking to enforce subjected to a proper cost-benefit analysis?

 

Asking the right questions to begin with gives me a gut feeling that the answers to the questions are:

 

a) In all likelihood not much more than they are already doing

 

b) Almost certainly yes

 

c) Almost certainly no

 

Here's what I think needs to be realised in relation to the three answers. If you do a proper cost-benefit analysis of the situation to begin with you can more easily see why the answers are as they are. Just like nature’s physical laws, the natural flow of the economy tends towards the path of least effort (as I explain here in this blog), so although there are exceptional cases (cases already penalised with State-enforced Pigouvian taxes) there are already huge incentives in market transactions to be as parsimonious as possible with energy and resources (as I explain here in this blog).

 

That's the reason governments cannot do very much more (stress 'very much more') to 'tackle' climate change than they already doing. As the blog attached to the first hyperlink explains, the entire nexus of the global economy is a physical system which is all the time tending towards the principle of maximum efficiency, or it would be without all the government interference retarding it. Businesses are already looking for the most efficient means of supplying customers using as little energy as possible, because in a highly competitive market it is in their interest to do so to remain profitable.

 

The goal to reduce energy output can, and has, come in various ways: replacement of human energy for machines, replacement of metal-based technology for higher intensity resources or carbon-cased materials, replacement of paper for digital devices, and so forth – and these are improvements in production that naturally improve business’s cost-effectiveness.

 

The transition from the paper revolution to the digital one required lots of burning of fossil fuels, equivalent to energy being driven into the system from outside, but all the time that external energy is helping the global economy tend towards a path to least resistance very similar to how thermodynamics operates in the natural world. As the old saying goes, you can't make an omelette without breaking a few eggs - and the eggs we've cracked since the Industrial Revolution, while not without some externalities, have done more to improve global standards of living than anything else in human history (more in depth analyses of which you'll find in these blog posts here, here, here, here, and here).

 

On top of how vastly over-exaggerated the government's ability to 'tackle' climate change is, now the other issue needs addressing - the one where climate change alarmists peddle the narrative that the world's poorest people are being drastically hurt by what a thriving global economy is doing to our planet. As I said, where the world's poorest people are in any kind of crisis by climate change, we should be pulling out all the stops to help them.

 

However, the reality is deeper. The world's poorest people's main plights of life are not caused by climate change, they are caused by an inability to participate in a thriving global economy (for all sorts of complex reasons). What you have to realise is that most of the things negatively affecting the world's poorest people now - labour hardship, inadequate access to clean drinking water, low life expectancy, children having to be sent to work, subjugation of women, lack of literacy and numeracy, and conflict over hard to acquire resources - were affecting the vast majority of people before the progression-explosion that began about 200 hundred years ago, and has exponentiated ever since. Before the Industrial Revolution they were the natural state of most humans, and had been ever since the evolution of homo sapiens - they are not for the most part plights that have suddenly been caused by climate change.

 

In fact, if you take the overall picture into consideration, those human plights only began to be eradicated precisely when we started to break a few environmental eggs of industry to create the progression explosion that has brought about the diminution of most of those plights for over six eighths of the world's people.

 

There is still a long way to go, sure - but I hope that will at least offer a slightly broader perspective that factors in the benefits as well for a more balanced view, and gives some exhibition as to why the picture is much bigger than it simply being the case that politicians can 'tackle' climate change with some grand-slam panacea. 

 

 

 

 

 

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.

On Religious Barbarism

If only the perpetrators themselves could see it, but the so-called 'sacrificial deaths' one sees in Islamic terrorism are, ironically, the opposite, because to engage in an act that causes death and suffering to innocents must, in the primary sense, be driven by self-interest (whether apparent or sub-conscious). To subvert one's own moral conscience as an act of genocidal appeasement involves an outrage on the conscience that one might suggest only really comes about in acts of extreme parochialism and selfishness, where the suffering of others is callously disregarded in favour of placating their own image of the their man-made war god.

It remains one the most interesting questions: would anything like the horrors of ISIS have occurred if Saddam Hussein hadn't been removed from Iraq's top position? Is it the case that, as Shakespeare suggested, Western politicians have untuned that string and witnessed the discord that follows, or are people overestimating the extent to which Saddam was a cork holding the prospective genie of Islamic jihad tightly in the bottle?

Evidently it is a little bit of both, plus a lot of other complex factors alongside, not least the gradual emergence of radical Islamic groups in Syria in response to Assad's Baathist dictatorship. I suppose while it cannot be denied that the war in Iraq left the nation in a real mess, and that the post-Saddam political quagmire that emerged created a vacuum from which forces like ISIS could gain more prominence, there are numerous other Islamic groups like al-Qaeda, Boko Haram and al-Shabaab unleashing similar horrors around the world, so it was probably only a matter of time before we ended up with something as disgusting and megalomaniacal as ISIS wreaking this much havoc in the Middle East.

Regarding the nature of ISIS members, I'll grant you, such horrific Islamism doesn't just come in a vacuum. I always think it's important to see the hurt in people and see what pain is behind people's dreadful acts, because there is pain and insecurity somewhere in people's terrible behaviour. To try to imagine what it must be like for a young man in ISIS, one can't fail to realise that in many cases there is a legacy of oppression, pain, dispossession and maltreatment.

Given how primed we are to tribalism, it is unsurprising how easily people find a group in which they can be manipulated to be the wickedest version of themselves - but these are people who've taken it upon themselves to become the most evil, inhumane people on a par with any evil behaviour the modern world has seen, and for that reason they deserve our contempt, irrespective of any precursory reasons they think they may have for joining ISIS.

It's a curious thing the most extreme, barbaric religious fundamentalism that grows roots in susceptible people's minds (it isn't new, it's been going on for centuries) - because what drives it is a peculiar cognitive state of opposites. On the one hand it involves the complete and utter self-abnegation of the agent in total deference to the unchallengeable supremacy of their man-made war god, yet on the other hand it involves a totalising self-righteousness whereby the certainty they place in their beliefs lacks even the basic crumbs of humility most people can call upon through their own moral conscience. Save for a few exceptions where people have seen the error of their ways, ISIS members' absolute unchallengeable confidence in their religious cause is not even able to be challenged by appeals to morality through the conscience, because their dyed in the wool feelings of certainty supersede even their own moral compunction. There really is no surrender to inhuman barbarism quite like a religious one.

It's Important To Understand The Difference Between Complements & Substitutes

To have a basic grasp of what is likely to be a good policy, it is important that politicians understand the vital economic distinction between substitutes and complements. The evidence for most of my life is that many do not. When it comes to substitutes and complements the clue is in the words themselves. For example, in a pub you might find you can get peanuts for free in a dish on the bar and tap water for free by asking for a glass of it. Tap water is a substitute for bought drinks, whereas peanuts are free items that go alongside the drinks you buy. Obviously if you eat a lot of peanuts you're more likely to buy a drink, whereas if you drink lots of tap water you're less likely to. That's a simple illustration of complements and substitutes.

 

Elasticity in the market means that substitutes and complements affect prices. When the price increases for one good, the demand for the substitute will be likely to increase; whereas with goods that complement each other if the price of one increases the demand for the other will be likely to decrease. That's only a simple summation - things get more involved when we start to look at the relationship between different goods, but that basic distinction will do here.

 

In the UK it has recently become a crime for shops to sell e-cigarettes or e-liquids to someone under 18. Now I don’t know how extensive the research has been in the UK, but we know from this recent well-publicised report that in America more than 40 states have banned the sale of e-cigarettes to under-age buyers, and in pretty much every state in which this happened they've seen increased usage of standard cigarettes from minors.

 

Now I'm not suggesting these studies are all that informative, given the complexity of society and numerous other concomitant factors, but it does seem at first glance that the question of whether e-cigarettes are a substitute for standard cigarettes is not really factored in much in our politicians' thinking. If there is a problem with under-age smoking in the UK, and e-cigarettes are a viable, less-unhealthy substitute for the much more harmful standard cigarettes, it might well be the case that allowing them to be sold to minors is a better alternative than banning them outright, particularly given that the American studies indicate that they could increase the usage of more harmful cigarettes.

 

Then again, it might be the case that there is a tangible stigma to smoking (not to mention the cost and bad teeth on top of health deterioration) that's gathering momentum all the time, meaning that the ban of standard cigarettes and e-cigarettes are merely precursors to a diminution in habit that will play out alongside this legislation (apparently, proportionally fewer people smoke now than ever before).

 

Either way, an important rule of thumb for any politician considering any type of legislation that looks to lessen the usage of a thing, is that they must first ensure they can develop a justified confidence that the thing in question is not a substitute for something else that's even more undesirable.

 

Ironically this might be a particularly pertinent distinction to bear in mind with the upcoming debate over the costly renewal of Trident. Those that claim it is an unnecessary expense that could be channelled elsewhere may like to consider that, actually, the prodigious nuclear capability of the world's leading nations is very probably a desirable substitute in place of the global carnage that could be wreaked by some of the less stable nations led by dangerous fundamentalists and megalomaniacal dictators were those deterrents not in place. Given how many centuries it has taken for the world's most developed countries to reach the stage they have in terms of stability and prosperity, it is quite understandable that they would want to guard against having all that undone by failing to invest properly in national security.

 

 

You Don't Expect This Kind Of Confusion In The Financial Times

I am quite baffled how a Financial Times writer can exclaim that as the technology industry is becoming a more prominent user of capital that this means it is (to use her term) "shrinking the economic pie". You'd expect to see this sort of claim in the Guardian or the New Statesman but not the Financial Times.

This is a quite bizarre confusion about the nature of economic growth. We use capital to consume. If we need to use less capital to consume then we can consume more with our supply of capital. This is the primary definition of economic growth. Given the foregoing, it's quite obvious that increased technological capacity is not going to shrink the pie. The more efficient our information technology becomes the less capital is needed, because the more efficient the technology becomes the lower the marginal cost of production, not to mention all the other ways that increased technology frees us up to do so many other things.

It seems the writer Izabella Kaminska, whose profile perhaps tellingly says "Everything she knows about economics stems from a childhood fascination with ancient economies like that of the Roman Empire", is thinking of the economic pie in terms of how improved technology affects GDP - where for example, some of our resources that used to be spent on computers, telephones, etc used to be costlier for us. For example, whereas once it would have been more costly to speak to your mum at the other side of the city, or cousin Betty in Australia, increased technology (text messaging, Facebook, Skype, email, instant messenger) means we don't spend as much. Yes, if you're going to measure calls to mother and cousin Betty in terms of GDP then of course lower sums show up on that part of the balance sheet.

But see how this plays out in terms of life enhancement more broadly. Just think of all the things we can do with our online capacity: Facebook, Skype, and perhaps best of all our Google access to all the world's knowledge. And just think of all the ways that those technological enhancements add to our GDP, both directly and indirectly. Given that our economic growth is based on consumption, the goods and services we can now consume are obviously not causing the economic pie to shrink - they are enhancing it, because they are increasing consumption (and if you don't know why consumption is the mother of all economic growth, I explain why here).

I emailed Izabella Kaminska to state that I just cannot understand why such a claim was made in a respected journal like the FT, when it's so obviously untrue. As yet I've had no reply, and I doubt I will - but if I do, I'll let you know with an 'Edit To Add' addendum.

How Your Appetite For Economics Is First Whetted: Why Does Popcorn In Cinemas Cost So Much?

Yesterday I went to the cinema to see the latest pretty average (although beautifully shot) James Bond film Spectre. I didn't have popcorn - in fact, I *never* have popcorn, because the event of watching a film doesn't induce in me the desire to eat something I wouldn't eat at any other time of the year.

However, this did conjure a reminder of what it's like to begin studying economics, because the expensive price of popcorn is one of the standard starter questions you get when you begin your studies. I recall it well, it takes me back to over two decades ago, and having my eyes awoken to how incredible the subject is and was always going to be.

The question of expensive popcorn is asked in part to whet your appetite for what is to come when you study in depth books by the likes of Deirdre McCloskey and David Friedman (Milton's son) on price theory and first learn properly about things like marginal value, marginal utility, indifference curves, price sensitivity, comparative advantage, consumer surplus and opportunity costs, but the other reason it is asked is because the answer to the question isn't anything like as obvious as it first seems.

Unbeknown to me at the time, the question "Why does popcorn in cinemas cost so much?" was a pretty standard question often rolled out for first year students, along with one about the size of shopping trolleys and whether they had got larger to meet demand or to stimulate increased buying. It was enough to get me immediately hooked.

When you're that age you have just naturally been primed to think that if cinemas charged less for a product then demand would increase. What was different about popcorn? Well, obviously once you are in the cinema with a ticket the popcorn is a pretty standard secondary purchase, and you are ostensibly a captive customer, which explains the high mark up price, right? Not quite. (Oh, by the way, cinemas make a fortune on drinks already, because the drinks they serve are about 70-80% ice).

So, the captive customer theory is a tiny proportion of the truth, but in actual fact it's not that much of a driver of popcorn prices. A price, of course, is an exchange rate between different possible goods or services, which is why competition for cinema customers occurs primarily with ticket prices not popcorn prices. In other words, if people are going to be price sensitive they are more likely to be so with the primary purchase, the ticket, not the secondary purchase, the popcorn. For that reason you are unlikely to see a cinema try to be competitive with its popcorn price.

If you lower popcorn prices you have to raise ticket prices. But raised ticket prices will disincentive people who don't want to eat popcorn, where lower ticket prices and higher popcorn prices won't disincentive ticket buyers. So higher priced popcorn enables the cinema owner to extract high sums from price insensitive popcorn eaters while not driving away price sensitive ticket buyers (in particular, families, pensioners and students - hence the pensioner and student discount tickets).

Studying price discrimination basically teaches us all the ways that sellers can attempt to charge different people different prices based on whether they are price sensitive or not (see my blog post here for more on this). But far from being an ignoble tactic worthy of scorn, it actually leads to advantages all round, as prices are more coterminous with how much value people place on the product, but also in making products more affordable to people who don't have so much disposable income.

In terms of mental exhilaration and opening your eyes to a brand new and enriching way of seeing the world, I don't think it would be overstating it if I said that I think price theory (and all its concomitant studies of behaviour, incentives, etc) is one of top 3 or 4 things a human can study. The benefits are accretive and life-changing. 

 

 

 

 

 

 

 

 

 

 

 

The Super Rich Entrepreneurs Are The Heroes Not The Villains

Two things caught my eye recently, both of which should help give a little perspective to those anti-capitalists that are constantly bemoaning how unequal the world is and how the super rich make life a lot less fair. Even if we ignore the most obvious point they're missing - which is that to generate wealth you need to get people to part with their money voluntarily by providing them with something they want or need, which means creating value in society - there are two other important things to consider.

In the first place, as this article points out nicely - far from being the ugly fat cats that keep millions of people poor, entrepreneurs are actually the real saving graces. We are told 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. Entrepreneurs may be very wealthy, but they are the main drivers of economic growth and the most important players in increasing global prosperity.

In the second place, as this article points out nicely - entrepreneurs do an awful lot with the money they make in terms of generous donations to noble causes. Just the top 5 of the world's most generous charitable donors (Bill Gates, Warren Buffett, George Soros, Azim Premji, and Charles Feeney) have donated over $70 billion thus far, with doubtless much more to come.

So the next time you read that the super rich are the selfish wealth hoarders that need to be brought down, and that entrepreneurs are the ones having a damaging effect on poorer countries' economic growth, the reality that they are the primary job creators and the most generous benefactors might hopefully serve you well in re-examining your perception of them, and of the market in general, if you are one of those to whom that applies.

For Those Who Ever Thought I Sounded Uncaring....

Some people tell me that as my Philosophical Muser Blog is underpinned by economic and philosophical analysis I can appear to be slightly uncaring with regard to the emotional and ethical aspects of situations under discussion. Yet I would hope that anyone who knows me in person knows how highly I regard emotional and ethical aspects of life. Why, then, can it come across as though I don't in some of the articles I write?

I think I know the answer - it's to do with the familiar distinction between positive statements (statements about how things are) and normative statements (statements about how things ought to be). The former involves matters of fact, and the latter involves matters of opinion about ethical considerations. Economic analysis is primarily about positive statements not normative ones. An economist who insists, for example, that rent controls, import tariffs, business subsidies and the minimum wage are ill-advised policies is dealing in positive science not normative values.

To make a normative statement and say what ought to happen one must combine matters of fact with how those facts affect the people involved. If for example rent controls damage the rental sector and impair important information-carrying price signals then one can suggest that politicians ought to vote against it as a policy, and that to do otherwise would be to unethically put vote-winning and popularity over factual assent. This is precisely what you should expect from economic analysis - it is the framework in which ethical statements should be uttered.

Here's an example of a common problem. Usually when there is a phenomenon or a policy change people only tend to focus on how it affects the obvious group (Note: it is absolutely vital that for every policy or topic you consider you must factor in the proper consideration of the fourfold analysis: What are the tangible benefits, the tangible costs, the intangible benefits, and the intangible costs?).

So for example, with a minimum wage rise people's first and often only concern is low-paid workers; with rent controls people's first and often only concern is tenants; with rises in interest rates people's first and often only concern is borrowers, and so on. Economists sometimes seem unsympathetic - but it really isn't the case - it's simply that economists know that in situations like the above, everyone needs to be considered - not just the most obvious group.

That is to say, minimum wage laws have to consider employers too, and people who sit just below that rung of the ladder in the employment market. Rent controls have to also consider landlords, and more widely developers and builders. And increased interest rates, while bad for borrowers, are good for lenders and savers and the value of the pound. Economics is simply about factoring in everyone in the equation.

I'm fully seized of the way economists often speak in such a matter of fact way.  It is not meant to be cold, it's just that economics very closely resembles science (it's one of the softer sciences) in that its truths are based on empirical observations and patterns distilled from data. Economics is very much concerned with human behaviour as well as mathematics and logic too. To say, for example, that labour has a value the same way that goods and services do is not to treat people uncaringly, or to dismiss their well-being (quite the contrary if you value facts and truths as essential parts of human well-being) - it is simply to make a scientific statement, not much different from saying that amino acids give our cells vital nutrients, or that recklessly printing more currency increases the probability of hyperinflation, or that a balanced diet is better for a child than a diet solely consisting of crisps and chocolate.

The other criticism economists get is that while we are good at the theoretics, we are less good at applying those theoretics to actual goings on (a popular case in point is the criticism that not many economists predicted the financial crash of 2008). Again, this is to misunderstand the situation. I'll explain by considering an analogy between economists and garage mechanics. Garage mechanics are in the business of fixing cars when there is a fault. They locate defects by asking the customer what brought them to the garage; they then look at the area of the car in question; they run the engine and listen for anomalous noises; they look for oil spillages, water leaks, structural damage, and so forth. But on top of that they have a service history book - so by consulting that they can also predict when different parts of the car might wear next, as well as forecasting potential hazards.

What they can't predict, though, are rare and unforeseeable events that might impact the car's performance. If the driver starts to drink and drive, or if he crashes on the motorway, or if a hurricane causes a tree to fall on it, then the car will be subjected to future events beyond the forecasting of the garage mechanic. In short, the garage mechanic doesn't know everything about the car's future, but he clearly doesn't have 'no' idea either.

That's a pretty good analogy for what an economist is like - but instead of cars, driving and parts, we have people, behaviour and arguments. Economics looks at how people behave, what incentives they respond to, and all kinds of associative explanatory theories. No human explanatory protocols are perfect, and there's no predicting with 100% accuracy, but that doesn't matter - there are always plenty of reasons to think as we do, and (as my Blog posts indicate) numerous ways to observe patterns, pick holes in people's arguments, see where hypotheses are in error or only half-right, and show the inconsistency between what people claim and what is actually the case.

Lastly, the other reason why people can find themselves affronted by blogs like mine is that they value their opinions - and they are not quite ready to face up to the reality that opinions are like brass when compared to the gold standard of facts, the rhodium of reason and the platinum of logic.

Unlike facts, reason and logic, which withstand all external scrutiny hurled against them, opinions merely confer a judgement that if wrong has about as strong a protective barrier as a shield made of baked camembert. It may be tasty, but it will always be carved up by the gold, rhodium and platinum utensils that penetrate it.

I wrote a whole blog post on the danger of hiding behind the protective shield of opinions (click the link to read more - No One Should Be Entitled To Their Opinions) - but to give you a brief digest if you're pressed for time, if I think that Yes Minister is the best British sitcom, that onion rings are rancid, and that George Orwell's Animal Farm is superior to his Nineteen Eighty Four, these are opinions because there is no objective standard outside of my own view by which such claims can be corroborated. Many people may agree with me, but that doesn't make them facts.

Given that this blog deals with lots of issues whereby other people's opinions are maladies that are best cured by facts, reason and logic, it is understandable that the doctor that tries to administer the medicine is sometimes seen as the knifeman trying to lacerate the flesh. But I promise you, it isn't so - I just want to place a higher premium on what's factual, reasonable and logical than on what's popular and comforting but ultimately short-sighted, misleading and damaging. On a daily basis it strikes me as strange and regrettable that so many of our politicians and social commentators are somewhat reluctant to do the same.

 
 

Why This University 'Problem' Is Actually A Blessing

Following on from a recent blog about the importance of tuition fees, there is another bit of confusion doing the rounds. There used to be a cap to ensure universities had a limited number of students achieving grades AAB or higher at A-level. When the cap was lifted a few years ago, some higher education commentators were concerned that this would lead to the creation of an elite English “Ivy League”, reflective of the American higher education systems, and possibly even alienating students from poorer backgrounds less likely to achieve high grades.

Their fears have come to pass, as currently over half of students achieving AAB or better at A Level are concentrated in just twelve universities (they are: Manchester, Durham, Oxford, Cambridge, Nottingham, Leeds, Exeter, Bristol, Warwick, Birmingham, Sheffield and Southampton.)

However, even though there is a high concentration of high grade students attending just twelve universities, there is absolutely no reason why this should be a problem - in fact, it is quite the opposite: it is a blessing in disguise, because it gives exhibition to the healthiness of competition and the value of incentivisation to do well and go to the best universities.

By equal measure, a competitive higher education market incentivises universities to pull out all the stops to attract the brightest and best students and be as high up as possible in the league table of results nationwide. In a marketplace with healthy competition and demonstrable incentives to strive for high standards you would expect to see cluster groups of high achievers, just as you see in sport, in retail and in entertainment. But competition doesn't just make the best better, it raises (or has the potential to raise) the standard of everyone, because it should incentivise lower performers to up their game, either by improving standards, by innovating to capture an unfilled niche, or in some cases by trying something different altogether.

The other peculiar thing many people tell us is that if a higher education marketplace is too openly competitive it will work against people who are bright but from disadvantaged backgrounds. This is an absurdly counterfactual objection to have, because it will actually have the opposite effect. An education marketplace that is too money-centred will be a bad thing because, in terms of performance and results, selection against bright disadvantaged students will disadvantage the university.

Consider why. Suppose Oxford and Cambridge had hiked up admission fees to attract the elite. Such a policy goes against the thing they should value most - academic credentials. If you are an employer looking to employ an Oxford graduate, who would you prefer; one who got in on scholastic merit, or one who got in because of a privileged financial background? The value of attending Oxford depends largely on the university's reputation, which is built primarily on prior academic excellence of former students. By having applicant quality as the measure of admission, the average student quality can be increased, which then further increases the prestige, which then increases the allure for high-quality future applicants.

A system that neatly balances the admission quantity between talented young people that can pay (and do), and talented people that can't pay and are helped along the way, is a system that is just about right. It is inevitably true that being from a privileged high achieving background does confer advantages on young people that young people from working class backgrounds do not enjoy. This upsets lots of people - but it should not. Privilege mostly comes (either directly or indirectly) from high achievement. Therefore if you want to argue that that is a bad thing, you are arguing that a world in which achievement engenders advantage is a bad thing, which amounts to devaluing merit-based advantages - and to do that is to make a mockery of applying skills and working hard in general.

Are You One Of My Highly Intelligent Readers?

When reading a popular opinion piece in, say, The Guardian or The Telegraph, a good rule to have is this: "Never read the comments". Why? Because in very popular articles there are going to be hundreds, sometimes thousands, of comments, and pretty much all of them will not be worth reading. Given this fact, even if there are one or two decent comments, the time needed to sift through the tosh is just not worth it.

In the couple of times I have looked at lengthy comments sections in those papers I've been astounded that lurking beneath the article there lies a morass of the rude, the confused, the spiteful, the hateful and the downright idiotic. Humans tend not to comment so much if they agree - much more so if they disagree, which is why you are going to find so much hasty bile from the commenters - particularity as so many people are prone to crass misunderstandings and impulsive distortions.

Even in papers like The Guardian - a place where article writers continually get lots wrong - the average article writer is likely to be significantly brighter than most of the people commenting, which adds further weight to the probability that you don't need to read any further than the article itself

On the other hand, there are blogs (The Adam Smith Institute blog, and the blogs of David Friedman and Tyler Cowen, to name but three) that do have huge a readership (though not the size of the Guardian or Telegraph) and also bright and engaging commenters (ASI aside, I still don't read the comments very often, but not for the reasons I don't read comments generally).

This higher standard is probably a combination of a) having a moderator who ensures only respectful comments are published, and b) having fewer, more intellectually bright, curious and discerning readers than your average Guardian or Telegraph article.

This led me to ponder what sort of readers my own blog has. The calibre of my Philosophical Muser Blog readers is going to be, on average, quite high I'd suggest. But what about the calibre of my commenters? Well, given that most people only tend to comment when they disagree, and given that (quite naturally, being the writer) if they disagree I'm going to think they are wrong (and be very willing to engage in debate to try to show it), the corollary ought to be that the average calibre of someone who comments negatively is going to be significantly lower than the average calibre of readers overall, and the argument they've presented is not only likely to be sub-standard, it is likely to be poorly constructed. 

And if I'm right about that, I can think of a good way you can to put it to the test. Go onto Amazon and pick a non-fiction book you think is excellent, and has been acclaimed as excellent by the cognoscenti. Then look at the book reviews - just the five star and the one star will do. What you'll probably find is that in most cases the five star reviews will look as though they are well-written and intelligent, whereas the one star reviews will look as though are poorly-written by overly-emotive simpletons. Further, I'd expect the five star reviews to have a good grasp of the material, and the one star reviews to have a far less clear understanding of the material.

So, then, to all my readers out there (thanks for reading, by the way), if you are someone who likes this blog, finds it intelligent, engages with the material consistent with the author's intention, and pretty much agrees with everything, then the majority of internet data out there indicates that you are a smart, intelligent individual.

If, however, you are someone who is always disagreeing with this blog, and frequently itching to give the articles you read a negative review, then the majority of internet data out there indicates there's a high chance that you have a lot of work ahead of you. LOL!