The World's Greatest Healthcare Plan?

In just about every economy I know of, there are numerous state-mandated distortions going on whereby normal market signals are being skewed either by being exaggerated or by being suppressed.

Because of this, people frequently get paid more than the marginal value of their labour, higher prices get passed on as costs to customers, as do lower prices as costs to providers (the medical profession - the topic of this blog - is perhaps the worst case in point), and the whole price system of value being attached to choices becomes distorted.

As well as all the other costs to society in the shape of lost value and forgone opportunity, what also happens is that people are given perverse incentives, which means when they are acted on there are all sorts of sub-optimal outcomes in relation to supply, demand, cost, quality, access and lifestyles.

Now it's fair to say that America's healthcare system has been in a bit of a mess for the past few years, with Obamacare proving to be far from effectual. For those unfamiliar with how it works, I'll try to summarise what I see with an analogy, where the people around the table are American citizens. 

There is a group of 7 friends sitting at a table with a big cake they are about to share. Obama's grand plan was to invite 4 other friends around to share the cake while at the same time promising that the 7 people's share of the cake wouldn't be any smaller. Obama carried on maintaining that the USA is a country of 10 or 11 people eating a cake and only 8 or 9 are paying for it, and thus he wanted the other 2 to chip in.

Both sides of the debate constantly seemed to be lacking two vital things; 1) The solution of making the cake bigger, and how to do it. And 2) The fact that there is more than one type of cake, and by inviting friends over you might have to change from a cake you like to one you don't. Moreover, it would be more fruitful for some of the critics (on both sides) if they learned the difference between health care and health insurance (Those who had a healthcare plan and were on board with Obama's vision probably thought those who were the most recent to sign up would get whichever leftover options were available).

Anyway, Donald Trump, who never seemed that keen on Obamacare has now, after meeting Obama at the White House, decided he might be interested in keeping some of the key provisions of Obamacare.

Given the foregoing, I thought you might be interesting in this proposed legislation for American healthcare, sponsored by a member of the House Republican leadership and a member of the health committee in the Senate - it is modestly titled The World’s Greatest Healthcare Plan. Read the whole thing, please do - but for a bullet-pointed summary, here are the major provisions of the legislation:

• It repeals all the ACA mandates and replaces current tax and spending subsidies with a universal tax credit that varies by age and geography, but is the same regardless of income.
• It ensures that the health care safety net will always be adequately funded, regardless of the number of people with private insurance.
• It allows Medicaid to compete with private insurance, since the size of the tax credit for private insurance is roughly equal to the federal contribution to a well-managed Medicaid plan.
• It allows employers to buy individually-owned insurance for their employees — insurance which they can take with them from job to job.
• It replaces all tax-favored medical accounts with a Roth Health Savings Account.
• It gives employers and employees new tools to control costs, allowing them to convert insurance benefits of marginal value, dollar-for-dollar, into take-home pay.
• It denationalizes and deregulates the exchanges and subjects competing health plans to a type of “free market risk adjustment.”

Here is a summary of the major provisions of the legislation, with links to short white papers explaining each of them. Here are 25 problems in the ACA that the legislation is designed to correct. Whether it would still be beset by many of the political problems that plague domestic healthcare plans is still the big question. But it's an interesting proposal to look over - particularly if you're an American reader.

Let Me Tell You Your Secrets....

Hey, my dear reader, I care about you and feel I know you quite well. Let me tell you some of your secrets. You have a great need for other people to like you; you have a tendency to be critical of yourself; you have a great deal of unused capacity which you have not turned to your advantage; you have found it unwise to be too frank in revealing yourself to others; your sexual adjustment has presented problems for you; you prefer a certain amount of change and variety and become dissatisfied when hemmed in by restrictions and limitations; at times you have serious doubts as to whether you have made the right decision or done the right thing; and you pride yourself as an independent thinker and do not accept others' statements without satisfactory proof.

I also know that while you have some personality weaknesses, you are generally able to compensate for them; that you are disciplined and self-controlled outside, yet you tend to be worrisome and insecure inside; at times you are extroverted, affable, sociable, while at other times you are introverted, wary, reserved; that some of your aspirations tend to be pretty unrealistic; and that security is one of your major goals in life.

Impressed? Feel like I know you personally really well? Well please don't be. I mean, I'm sure I do know many of you pretty well, and some of you better than you think J, but all those things I wrote above are actually part of a psychology test that Bertram R. Forer gave in 1948. It was called his Diagnostic Interest Blank - and it was to a group of his psychology students who were told that they would each receive a brief character vignette or profile based on their test results. One week later Forer gave each student a supposedly personalised sketch and asked each of them to rate it on how well it applied. In reality, each student received the same sketch, with the traits I listed above.

Fairly obviously (I'd hope), what is most noticeable about the traits is that they are far from specific to particular individuals - they are general traits and behavioural patterns that are seen in pretty much all humans. It is a natural human tendency to "prefer a certain amount of change and variety and become dissatisfied when hemmed in by restrictions and limitations" and to "have a tendency to be critical of yourself". As an individualised profile, there is nothing special about the reading at all.

As anyone who has scoffed at astrology, fortune telling, mediums who claim to contact the dead and crystal ball gazing will know - the Forer effect (also called the Barnum effect) is a cunning form of subjective validation which can get credulous people to part with their money by being told things they either consciously or subconsciously want to hear.

Now the thing is, part of the motivations for writing my Blogs, and why I have to be hard on people sometimes, is because the world of elected politicians, media journalists and newspaper columnists is awash with Forer effects designed to manipulate the public into embracing their policies, reading their newspaper articles, buying their books, and so on.

And it's no coincidence that the variables most strongly influencing the Forer effect in gullible customers are very closely similar to the variables that underwrite the misleading political narrative that so many people fall for - namely: the subject believes that the analysis applies chiefly to them and their life conditions; the subject too easily defers to authority of the speaker without much critical evaluation of what's being said; and lastly, the subjects prime themselves to narrowly focus on all the positives they hear while blocking out or not considering the negative connotations (as per Bastiat's Seen and Not Seen, which forms the basis of most economic and political errors of judgement).

The Trump election - which I'm not going to go on about repeatedly in Blog posts - provides an interesting window into this effect in action, but also with a strange twist of tonic. On the one hand many of the Clinton supporters were carrying on being naïve to the subjective validation her establishment kind comes out with. While on the other side, there appeared to be a mass rejection of the establishment Forer effect, but by almost equal measure a mass of wide-eyed anti-establishment suckers who ended up electing a complete moron like Trump by falling for his subjective validation. Oh how the world needs an intellectual revolution right now!

 

 

On Why Those Polls Keep Misleading The Masses

The polls keep drastically confounding expectations, and lots of people want to know what's going on. How can something as relatively straightforward as asking people which way they will vote and collating statistics on that basis repeatedly turn out be so difficult? Like the weather, it should be impossible to nail it to an exact science, but surely the indicators should be more reliable than this, shouldn't they?

I don't want to claim to have a sixth sense - it's probably just good intuition, but the last three big political events have been cases where I felt confident of the result, even though the pollsters looked to convince me I was wrong. The majority seemed confident that Ed Miliband's Labour would win more seats than David Cameron's Conservatives last May, but I felt quite confident that the public wouldn't buy Miliband's message. Ditto Brexit - even though just before bedtime on the eve of the results I felt confident that we'd vote to leave the EU, the pollsters and bookmakers declared it highly unlikely. And now the same with Trump, who was a 5-1 outsider a few hours before the result, but who confounded majority expectations and won the Presidency. Assessing the feeling in the run-up, this wasn't much of a surprise to me either.

My record is not perfect, however - for quite a while I remained unconvinced that rank outsider Jeremy Corbyn would win the Labour leadership election the first time around against what I thought were more mainstream candidates (Andy Burnham, Liz Kendall & Yvette Cooper) - but I was completely wrong about the extent to which hoards of people were ready to vote for someone so far on the hard left.

Given that society can be divided into far more groups that many people ever do, there are clearly important sub-sections of society that are not getting captured in the polls. And anyway, populations are very large, and at best polls are only a small sampling of a demographic - it's difficult to take the pulse of the electorate if you place the measuring instrument on the sole of the nation's foot.

Polls are also seductive to people because many find it difficult to accept open-endedness and uncertainty in life. People are tendentiously drawn to simple stories with binary subplots that fit their preconceptions. The notion that things like elections and referendums are often beyond the scope of human predictions is something that few people wish to embrace, which is probably why the egoism of 'expert'-based prediction hangs around.

What's evident, aside from how polls fail to capture so much public opinion, is that polls are unreliable at capturing the following sets of society: the set in which people have been unsure how they were going to vote, or been unwilling to say, or been susceptible to an unexpected change of mind, or not been honest or open, and also the set in which people for whatever reason thought they'd vote one way but ended up not voting at all.

We have to face up to the fact that there is a huge epistemological gulf between the pre-voting opinion polls and what people have actually voted for on the day. The only sure-fire opinion poll of reliability is the result itself.

Finally, what would help people predict with greater accuracy would be an increased understanding of what the societal landscape is actually like. Taking the UK voting population as a whole, they can be divided roughly into 5 groups.

Group 1) Older people who think the nation needs a big state to govern its people, and like (within reason) the kind of governance we have at present.

Group 2) Younger people who think the nation needs a big state to govern its people, and like (within reason) the kind of governance we have at present.

Group 3) Older people who think the nation needs a big state to govern its people, and dislike the kind of governance we have at present.

Group 4) Younger people who think the nation needs a big state to govern its people, and dislike the kind of governance we have at present.

Group 5) People (older and younger) who think the nation does not need a big state to govern its people, and are gradually trying to influence change in a more libertarian framework of thinking.

Group 5 is currently the smallest group but is also quite a rapidly proliferating group. They are the people who would likely vote if economically savvy pro-market candidates came along, but may not be inclined to vote for the kind of politicians we have at the moment. Group 4 is a large group and is also a rapidly proliferating group. It consists of conscientious, left wing, green-friendly social justice warriors who want a big change of personnel in government. They want more of the same size government (bigger if possible), just not this kind of big government. This group, along with group 3, also feel quite stridently that inequality is a huge problem, that the government screws over the poor, and that the systems needs a complete socialist revolution type of overhaul.

Groups 1 and 2 are the two large groups (with group 1 being a lot larger than group 2) that help perpetuate the status quo by being somewhat complacently accepting of the system as it currently is, and not very much into revolutionary politics. These groups, in particular group 1, consist of lots of people who just vote one way out of habit, dyed in the wool allegiance, or just blithely out of a sense of duty to partake in democracy.

Trying to predict outcomes of elections and referendums involves getting a good grasp, not just of these 5 groups, but also of the multitude of potential sub-groups into which they could divide in the run up to voting day. That's why, once you offer the population a Remain or Leave vote in the EU Referendum, and then in the build up throw in all kinds of complications like reliability of claims, forecasting the cross-national outcomes of either decision, economic projections related to trade deals, immigration and market fluctuations, it becomes a very intractable business to predict - and ditto the UK General Election and the recent Presidential Election.

The Deliveroo Riders Should Get On Their Bikes With This One....

I published the following article on the Adam Smith Institute blog yesterday - but there is more to add at the bottom:

In the wake of the recent tribunal which declared that Uber drivers should be classed as employees with rights to the minimum wage, holiday pay and so forth, we read today that something similar is happening with Deliveroo, as riders seek to unionise and gain similar workers' rights as Uber.

Deliveroo is a company that provides a delivery service on behalf of thousands of restaurants across the country, and it classes its riders as self-employed "independent contractors", on a pay rate of £3.75 per delivery.

It is true that under such conditions they lack some of the regular workers' rights many of us have, such as paid holiday and the right to the minimum wage, but it's incredibly short-sighted to assume that that means there is a problem needing fixing - after all, by equal measure, Deliveroo contractors also enjoy some working benefits most of us do not; namely, the flexibility to work the hours that best suit them, and as little and as often as they wish.

Rather like how the decision made against Uber was so drastically wrong, the same will apply here, because there is an abject failure to understand that in a dynamical and diverse market, a 'one size fits all' imposition frequently harms little niche elements that are doing perfectly well as they are.

The ability of Uber and Deliveroo workers to be classified as flexible, autonomous independent contractors ostensibly running their own businesses as available drivers and riders will be, for many, a much more beneficial set-up (ditto numerous others on zero hour contracts) than the myopic imposition of terms and conditions that would no longer favour their flexible working patterns.

When left alone, firms like Uber and Deliveroo are beneficial to the economy (for employer and consumer) precisely because they involve conditions that those who favour them will take advantage of, and those that do not, won't. Even under the new terms of £4.25 per ‘drop’, most Deliveroo cyclists are earning significantly above the minimum wage as the average worker makes two deliveries per hour, equating to £8.50/hour.

It's hardly rocket science; people who want to earn the minimum wage and have holiday pay and less flexible working arrangement will not be Uber drivers or Deliveroo riders. On the other hand, people who want to be self-employed contractors under the flexible conditions offered by Uber and Deliveroo will. That is the very nature of a free market.

Not only is this far from rocket science, there is even a quote in the article from one of the riders that with closer examination would provide him with the answer he ought to be looking for. The Deliveroo rider laments that "We don't get an hourly fee, so that means at times when there aren't that many deliveries and it is not that busy, we can be waiting for up to an hour for a delivery without getting paid a penny." - which really ought to give the game away.

If only this young man could see that the problem with his campaign is heavily hinted at with the words he utters - for if there are times when it is not that busy, and riders can be waiting for up to an hour for a delivery without getting paid a penny, it's not exactly going to help out the situation by forcing Deliveroo to shell out a state-mandated £7.20 an hour to all its riders, is it? All it will do is skew the market value of the Deliveroo rider operations and harm all the people who benefit from riding for Deliveroo under the present conditions. 

 

And then, we learn that Labour Shadow Cabinet MP Clive Lewis uttered this little gem - and I mention it only because this is the man who is currently the bookmakers' favourite to be the next Labour leader:

"They need to ask themselves if they have a sustainable business model if they have to exploit their workers like this in order to be viable"

Oh dear, this is infuriating. Who the heck is Clive Lewis to tell them whether their business model is sustainable, or to declare that workers freely involved in a contract are 'exploited'? He's so short-sighted and/or so arrogant that he cannot even entertain the notion that, actually, society is full of people in roles that suit their needs well. That is why the vast majority of Uber drivers - the people the likes of Clive Lewis are deciding on their behalf are 'exploited' - are unhappy about the ruling.

And as is usually the case, what this opposition model overlooks is all the hidden costs - because it never factors in all the would-be Deliveroo riders who won't now work if this ruling goes ahead. An individual – an actual person with a mind and a will – wants to be a Deliveroo rider and is willing to offer his or her services to make some money under the conditions they favour. No one forces this mutually beneficial transaction, but that it happens shows that both agents are better off.

Yet socialists like Clive Lewis are so averse to people having their say in how they conduct their business that they want to wilfully prevent a sub-section of society from enjoying similar benefits, yet sell the idea as though they are trying to help them.

Of course it's true that some Deliveroo riders would go along with Clive Lewis, but their motives are highly dodgy - it's because they think a state intervention can help them earn more than the marginal value of their labour. Alas, it's a nice trick if you can pull it off, particularly if you don't care about the people providing the means by which this arrangement benefits both parties, or about the many intangible losers who don't show up on the radar but who've had an opportunity denied them.

 

Dear Remainers, One Day You'll Be Relieved Brexiteers...

Even though pretty much everyone is behaving as though pretty much everything has changed, the reality is, pretty much nothing has changed. The EU referendum was always an advisory result that needed to be ratified by Parliament, so Theresa May was never going to be able to invoke Article 50 and start formal exit negotiations with the EU without the House of Commons vote taking place.

And apart from the odd disgraceful public servant who should be shown the door,  the majority of MPs will honour the referendum and vote leave, even if they are in constituencies where remain has the majority vote. The reason being, MPs that defy the will of the British people are unlikely to survive after the next general election, which means individual MPs are more likely to respect the referendum result.

As for whether it's a hard, soft, clean or messy Brexit, well the reality is, it probably won't make all that much difference long term, because the mid-to-long-term future of the EU is about as sticky as a lorry full of treacle spilling its load in the middle of the channel tunnel.

Here’s the thing, it’s fairly straightforward. Anyone with even a sketchy understanding of the very basics of trade and competition should know that any country that leaves the EU’s protectionist bloc will be better off in the medium to long term (there are usually short term shocks and tumults with radical breaks from the status quo, so don’t let it fool you).

This can be understood by anyone who understands why artificially constructed free trade inhibitors make the people within the border worse off as well as those on the outside (something I also covered in the articles attached to the above hyperlink).

You see, this is the first generation of people in the world's history that has had access to the entire world's knowledge, and moreover the ability to communicate so freely at a global level. My prediction involves two main things happening: 1) wider understanding of how trade and competition bolster people's economic well-being, and 2) wider understanding of how politicians retard this process.

 

Both are likely to happen at some point in the future - it's hard to say precisely when - but what this means is that the EU is being allowed to get away with its stultifying practices only for as long as it can continue to not get found out by a larger number of people.

What they have been getting away with is a socialistic protectionist bloc set up and run to favour its two largest single currency member states - Germany and France. It should be remembered that the European Union was originally a creation of American post-war foreign policy as a bulwark against the communist forces of the Soviet Union. The American plan, tacit though it might have been, was to keep European nations in check against ideologies it felt were threatening or economically repressive.

It was a very unnatural political union. As time went on the EU trade bloc became more and more evidently a sovereignty-stripping monolith used to gradually mould other EU members into the Franco-German line, guarding them against competitive forces and globalised free trade. In other words, the main beneficiaries of EU policies have been Germany and France, its two biggest economies, both having their interests best served by the rules they create.

For most of that time France has been like a microcosmic version of the union to which it is conjoined - protectionist over its own citizens, whereby local French connections are encouraged, with Germany, being the EU's strongest export country, having the most to gain from the EU and the most to lose by its gradual dismantlement.

While all this has been going on, numerous smaller European nations have lost out big-time by supplanting their own national currencies for the Euro, thereby ending their ability to competitively trade their currency against other currencies, and adjusting their fiscal and monetary policies in accordance with market signals. Not to mention that Eurozone nations were able to borrow money far more cheaply with the single currency than their with own currency, which, as is plain for all the world to see, has been an economic disaster for them.

Even if we put aside all the other things that are drastically wrong with the EU, the current situation is rather like this. Germany is like a big company that wants to sell some of its premises to smaller businesses (Ireland, Cyprus, Greece, Portugal and then followed by Italy and Spain) but will also willingly loan the money to the buyers in the hope that they make enough of a success of their businesses to pay them back, but do so by rigging the terms so that debtor submission was always a highly likely culmination - one that domestic politicians surreptitiously pass on to their taxpayers.

But, alas, because of the failing economies of those in debt, paying Germany back is hugely problematical, with the inevitable outcome being the European Central Bank trying to keep domestic banks' heads above water by printing more currency and attempting to hold it in spite of the numerous Eurozone liabilities, not to mention the huge public sector expenditure crisis that's hitting the whole of Europe (including the UK) and will only get worse as domestic governments try desperately hard work to out how to untangle themselves from public sector knots without getting strung up by the electorate.

Mark my words, and remember where you read them, because quite simply, very few people are telling you the truth about the future of the EU and how it is going to be torn to shreds as more and more member states look to follow us in tearing ourselves away.

You may think it's hard to imagine the EU not existing in a form similar to its current set-up, but radical future differences are hard to predict. And one only need imagine how many radical changes someone from the 60s or 70s would have failed to predict about the 40 or 50 years that followed to get an idea of how radically different our future Europe can be. The day when even the staunchest Remainers thank their lucky stars they are not in the EU will, I'm confident, be a reality at some point in the next decade or two -  much like how those that used to argue fervently for the UK to adopt the Euro are now doubly glad we didn't.

Try Before You Buy: The Opposite Outcome To What You May Expect

I’ve seen this kind of stat before, but I happened to stumble on this page - an article informing us that in the United States a couple that does not live together prior to getting married has a 20 percent chance of being divorced within five years, whereas if the couple has lived together beforehand, that number jumps to 49 percent. In other words, a couple is nigh-on two and a half times more likely to divorce if they live together beforehand.

Clearly all the indication is that the try before you buy method doesn’t guard against the marriage ending - quite the opposite it would appear. If you’re still in your nascent stages of economics, you might be tempted to ask the question: what is it about living together prior to marriage that increases your chances of being a divorcee? But a better way of doing economic analysis is to first realise that it may not be the living together premaritally that increases the probability of divorce, it may well be, and in fact almost certainly is, more distal factors associated with what kind of people live together before marriage and which do not.

For example, many Christians who would not live together before marriage for faith-based reasons are likely to be the kind of people that take marriage seriously enough not to divorce. By equal measure, many couples who will easily disregard any (admittedly declining) social norms about pre-marital co-habitation will probably just as equally disregard any (admittedly declining) social norms about the stigma of divorce too. A corollary of this is that if you are the sort of person who easily disregards social norms, you are perhaps more likely to be the sort of person who more easily disregards niceties and mindful considerations that keep a marriage safe from divorce.

Work Out What You Want To Say And Find A Fact That Sounds Like You're Saying It

Open any left wing paper and on a weekly basis you'll be overrun with stories of societal injustice where we are told the income gap between rich and poor is disastrous, that the rich get rich at the poor's expense, that real incomes have stagnated for the majority, and that the poor have been getting poorer.

All of those claims are untrue, but the left wing newspapers are regularly providing us with skewed or bogus statistics to show why they think they are true. A puzzling question in scenarios like this is to consider whether these distortions are cases of economic naïveté or cases of mendacity where they try to be creative with the facts in order to get people to believe their fabrications.

It's probably a bit of both, and as such I will tell you where I think they are going wrong. One category error here is in reading too much into statistics without trying to understand how those statistics actually relate to the dynamical nature of human beings.

Take the statistics we often see relating to income inequality. The first thing to point out is that those statistics begin with a false premise, because there are actually no static income categories - people move around in different categories depending on where they are in their life stage (age being a big determiner of where you are in your career). Secondly, different statistical groups have different numbers of people, which also skews the data.

For example, it is totally possible for the richest people to receive a higher share of the UK's overall income yet still see their personal incomes fall. This is not a contradiction, it is simply the case that some people were in the top 1% and then dropped out, and others increased their income at the expensive of those in the top quintile. Equally, it is possible that the share of the income going to those in the lowest quintile can decline even though those in that group see an increase in their own personal incomes.  

To highlight another case where statistics deceive, let's take for example a claim I saw in the Guardian this week about households not feeling the benefit of economic growth. The writer made this claim by asserting that there has only been about a 6% increase in household incomes in the past 40 years. As you can imagine, the people writing in the comments section were outraged.

The statistic though is deceptive because household income is a misleading way to gather data. What you should look at instead is real income per person, where you'll find it has risen by about 51% (or something close to that last I checked). How can both those stats be true?

Well, what's been happening in those 40 years is that average household numbers have dwindled in terms of individuals in a household, whereas number of households has increased as more people have bought their own place and moved out of the family home. The increase in the average number of persons per household is caused by increased economic growth. That is, people move out and become home owners because they can now afford to do so. Complaints about household stagnation are really complaints about individuals doing better.

Being a regular Guardian reader, but not on their side in most economic arguments, I have to find myself wondering why you will never see a Guardian writer talking about the positive parts to the human growth story. When they wanted to talk about Labour's term in office in 1997 to 2010 they would usually use per capita income statistics to talk of its successes; whereas when they wanted to criticise Cameron and Osborne they would usually use household income statistics when they wanted to depict failure.

Not only is it the case that increases in real income enables more people to live on their own, and no longer with their parents, or house sharing - what we have is a statistic that actually results from increased real incomes but yet can be used to look like stagnation when describing households. A reduction in the number of people living in a household will bring down average household income when better off individual start their own household.

If the Guardian printed something along those lines their piece wouldn't technically be inaccurate, but it would be wholly misleading. Suppose there are, as I think there are in America, approximately 40 million people living in households whose income is in the bottom 20% and 65 million living in households in the top 20%, measuring income inequality is going to mislead.

If different groups contain different numbers of people, a stat about income inequality concerning the bottom and top percentages is deceptive. Moreover, in a changing time when people get paid more for their work, those that either don't work or work part time will fall behind those that work full time. But it goes deeper, because there are other factors that contribute to income inequality that are not merely society's injustices, they are simply the result of billions of individual choices that people have made.

Remember even St Paul in his letter to the Galatians declared that we do actually reap what we sow as well - not that we should hold back from caring for and helping those less well off than us, but that actually society is not a melting pot of injustices, but rather it is an aggregate of millions of people reaping what they sow in terms of millions of life decisions made every year of their lives.

As I've said before in a previous blog or two, the biggest determiner of how well people are doing is work. A household that has two workers in it will usually be doing better than a household with one. A household with no workers will be doing worse still. Last time I fact checked, the top 20% of households have four times as many workers as those in the bottom 20%, and more than five times more in full-time work. That is going to make a huge difference - and it is one of the most disingenuous things we do to say this doesn't matter.

Alas, Ken Loach, the director of very enjoyable films such as Kes, Riff-Raff and Raining Stones, treated us to a litany of these basic category errors on Question Time this Thursday - demonstrating to the entire country that while he's a good movie-maker, he is basically clueless about how economies work, and blind to how individual choices eventuate in the societal outcomes we see.

 

Income inequality is caused by people contributing different amounts to society, and that is reflected in the wage differentials. The left are always going on about how unfair society is because there is so much income inequality. But even by the time we reach puberty we ought to have worked out that this is the opposite of the truth. A society that has unequal income distributions based on having unequal societal contributions is hardly one that ought to be called unfair - it is the playing out of what Paul said in Galatians.

Yes in spite of this, the very notion that inequality is caused by some contributing a great deal to society and some producing considerably less is scarcely mentioned, which is surprising because every person reading this will know of people to whom both examples apply.

Those in the bottom 20% of earnings not only have far fewer people in work, they have fewer skills and less education with which to contribute as much as the top earners to society. The bottom 20% will have far fewer university graduates and people with college qualifications than the top 20%, and these are important statistics that demonstrate not an unjust society, but one that is a lot more just than many care to acknowledge.

Moreover, that's not quite the end of it either, because as well as the Guardian's and Ken Loach's mendacity in skewing the narrative, income inequality stats are quite naturally misleading in other ways too. For example, they omit the welfare received by those in the bottom 20%, which amounts to substantial benefits to which the recipients contribute nothing. In fact, it may shock you to know, but the bottom 50% of earners in society pay only about 5% of the total tax generated.

Last time I checked, transfers from the government to the welfare recipient accounted for around 78% of resources for people in the lowest quintile. Not only does this mean we live in a society in which the rich heavily subsidise the poor; it means that the inequality statistics that are always appearing in the social commentary of the left are based on just 22% of the lower quintile's income - their earned income, where the rest constitutes handouts.

Another popular way to underestimate growth and overestimate inflations is to refer to a price index to make your case - the most popular one being the consumer price index (CPI). It's easy to use the consumer price index to focus more heavily on the lower prices of the recent past (thus flagging price increases) and focuses less heavily on the higher prices of the recent past (thus overlooking price reductions).

When you go to Tesco and come away happy that your bananas and your cereal and your flaxseed were all cheaper than last month, do you honestly think that those reductions came from nowhere? Had you bought grapes and tinned fruit and fresh fish you might well have found that you had paid more than last month. Only a fool would focus on the goods they happen to flag as being reduced and naturally assume that Tesco’s net price index was lower than last month. 

It’s another easy way to create a false impression by only focusing on one aspect of the situation. You might be perturbed by price rises if I only told you about the increase in price in train and bus fares, newspaper obituaries, postage stamps, and chocolate bars over the past 25 years. Less so if I only told you about mobile phones, computers, media players, and most household electrical goods (televisions, fridges, freezers, microwaves, washing machines, cookers, etc).

That is what the consumer price index does – it focuses most heavily on the things we used to get cheaper and overlooks all the things we used to pay more for. It is impossible to present a meaningful value index that encapsulates all elements and is without bias. Even a totalised economic price index would still be devoid of many factors that are related to good consumption – pleasure, utility, happiness, and well-being are four examples.

Moreover, as will be pointed out in the early chapters of many economic text books, analysis of inflation must also factor in changes in products that are concomitant with price increases. The most obvious example is cars, which are more expensive these days, but also full of features that would have been considered a luxury a few decades ago (I remember as a young boy being fascinated by a neighbour's new Ford Sierra because it had electric windows).

Think back to when cars were first prototyped and think about the vast progressions since those early days. Not only have cars become safer every year, they have improved their speed, their efficiency, their technology and their luxury, as well coming equipped with alarms, air conditioning, satellite navigation systems and CD players (these days it's actually now an iPhone played through the car stereo with an auxiliary port).

Cars that used to be luxury are now standard and affordable for the majority, and this applies to laptops, mobile phones, video cameras and similar such things. Also someone of today has access to all the world's knowledge, access to the most up to date research, countless public services benefits that were once inaccessible, and communication with the world's most developed countries.

Most of the taxes paid are by people with an above average income, and many with a below average income are receiving transfers of wealth from the top downwards. Statistics about income greatly exaggerate the differences in standards of living, particularly so nowadays. Lefties have a tendency to exaggerate what Jack has and understate was Jill has, to construct fallacies of injustice.

I think a lot of the problem is that people tend to assume that when people get rich they do so at the expense of others getting rich. But this is to fall for the fixed pie fallacy. Think about it; if having billionaires was detrimental to the rest of the population then America would be one of the poorest countries in the world, as it has over 500 billionaires.

But the wealth of the richest doesn't occur at the expense of the poor - just the opposite - it helps create wealth for others in the population. In fact, last I read in Forbes the number of billionaires and millionaires in the world began to decline, which indicates that more people are seeing their real incomes go up. Just over 50% of American households have incomes of $50,000 and higher, whereas fifty years ago the number of households with the equivalent purchasing power was less than half that.

A lot of people who are statistically recorded as being not well off in terms of income are actually some of the most well off people in the land - wives of high-earning husbands, pensioners who have retired, but who own their own home and have assets that do not count as income; university graduates who are going to go on to earn a good living, young adults who are still in the high income family home, and young professionals at the start of their career who've yet to start earning what their qualifications and training will see them go on to earn.

All of the above will fall under the Guardian's statistics as being low earners, because statistics don't differentiate between the people who are going to have low incomes for much of their lives and those that have not or will not. Many of the people whose incomes are in the bottom two quintiles in the early parts of their working life will go on to be in the top two quintiles in the next 10 to 20 years of their working life.

For this reason, income inequality measured at any given time is not representative of income inequality over people's lifetimes. Nor is it representative when huge cash transfers from the government are omitted, nor the large taxes paid by the higher earners, nor the wealth of pensioners and the future wealth of the young but well educated post-graduates. The rhetoric from the media-celebrity left is all a bit of a mess really, and unless more people in the country stop encouraging them, wise-up and learn some of the basics, they won't grow out of it anytime soon. 

In failing to admit these truths, the left are letting down the people whose causes they are purporting to champion. While they assert that the poor are victims of injustice and that through no fault of their own society has placed roadblocks in front of their path to success, they gloss over many of the actual reasons why some do less well than others.

In other words, in many cases (although not all cases, of course) what those falling behind need is not so much a character embellishment but a reality check and a few home truths about the decisions they've made. I don't mean we should turn into a society that is judgemental towards those who've made a series of bad life decisions - but to do as the left does and not only fail to acknowledge these things but also pretend they are not there by writing their own hackneyed, distorted version of the reality, is helping nobody.

Saying Britain Is Overcrowded Doesn't Make It True!

To those who assert that Britain has reached its capacity on how many more people it can fit in - it's just not true! Last I heard the UK National Ecosystem Assessment (NEA) worked out that the proportion of England's landscape that is built on is a mere 6% (in fact, once you include parks, allotments, and domestic gardens into that equation, the actual figure is more like 2.27%).

Or to put it in an even more compelling way, excluding parks and gardens, if we were to quadruple the size of every city, town and village in the UK, it would still be the case that just over 90% of UK land is not urbanised.

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

As I explained in a past Blog post:

"Regarding overcrowdedness, the upshot is, rural areas are quieter because fewer people like to live in them - and house prices are very expensive in Central London and Manhattan because more people want to live there.  Its simple logic - the reason London has 8.6 million people and rural towns have only a few thousand is because more people prefer to live in London than they do rural towns. The reason being, not only is there is a greater abundance of the aforementioned benefits in more populous areas, there are also better career prospects, higher salaries, better nightlife, greater choices of restaurants, a richer choice of entertainment, more tourist attractions, better public transport, greater diversity of people – the list goes on. 

In terms of probability, the highest number of complainers of over-crowdedness will most likely come from a highly populated area, which probably explains why to them the UK feels overcrowded. Most people who pontificate on overcrowding are likely to be pontificating from a vantage point of high population density. The people with the highest probability of feeling an intense population density are those who live in the densely populated areas. For example, if city x has 7 million people and a village y has 1000 people, and only x and y exist, there is only a 1 in 7000 probability that you don't live in city x.

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

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

It certainly is the case that in some areas of the UK the infrastructure hasn't quite kept up with population demand, but once you accept the general maxim that more people means more cultural and social benefits, it's easy to see that inadequate facilities does not mean the nation is overcrowded, it simply means that the UK infrastructure has not progressed conterminously to facilitate the social and cultural benefits that come with an increased diversity of people."

If There's One Must-Read Book Of The Past Few Years, I Think It Is This One....

In my opinion, one of the most important books in recent years is Matt Ridley’s Evolution of Everything - it's one of the few books in the modern era that I think can justifiably be called a must-read book.

After his excellent works The Red Queen and The Rational Optimist, Matt Ridley’s Evolution of Everything makes the case that bottom-up evolution rather than top-down design is the main driving force that has shaped much of culture, technology and society, and is shaping our future.

He argues, quite rightly that change in technology, language, morality and society is incremental, inexorable, gradual and spontaneous, and that much of the human world is the result of local human action, not of centrally planned human design; it emerges from the interactions of millions, not from the top down organisations of a few.

I should say, though, that while it's true he covers a wide range of topics, and gets most things right - from the internet to bankers, from crop circles to education, from the nurture vs. nature debate to technology, from mind to money, from genes to morality, and many more topics - the book is not perfect by any stretch of the imagination.

Some of the arguments involve selectively loose cherry-picking which is offered up to conveniently support some of his contentions at the omission of perfectly good contra-examples. And in a couple of the chapters, the one on religion being the best example, he builds too many presumptions on top of the central thesis of the book.

The other thing worth saying is that although the book is a very good compilation of how relevant the bottom-up understanding of society is to the reader, it's not as though this is the first time it has been argued. In fact, the book itself is based on the prescient wisdom of Lucretius in his masterpiece De Rerum Natura - (a work I've read multiple times, and one that seems more impressive each time I read it).

Evolution of Everything is also underwritten by decades of formal contributions to economics from the likes of Bastiat, Smith, Ricardo, Coase, Marshall, Hayek, Schumpeter, Mises, Hazlitt, Rothbard, Sowell, Friedman, McCloskey and Boudreaux, about how markets and society evolve primarily through local transactions, not command economies from on high.

It's a must-read for precisely the reason the critics hate it - because it involves a revolutionary (if long-standing) message that the majority of people haven't intellectually assimilated or emotionally accepted. That when left to act freely in accordance with our local initiatives, we frequently bring about societal progressions, economic growth, increased prosperity, reductions in global poverty, and an enhanced well-being and standard of living that puts to shame the self-serving and misjudged attempts to engender this from on high.

It's a message I, and many like me, have been trying to get across for years - one that is anathema to the politicians, ideologues, demagogues, self-appointed authority figures, socialists, environmentalists, cult leaders, and eco-warriors alike - that evolution is a phenomenon that extends far beyond the natural selection of biology. And that things that are widely believed to be the sovereign brainwork of the controlling few, such as morality, the economy, technology, science education, government, money and all manner of cultural norms - are actually, in Ridley's words, "phenomena of evolutionary emergence — of complexity and order spontaneously created in a decentralised fashion without a designer."

Bottom up, not top down

Central to the message is not just that bottom-up evolutionary emergence usually does a better job of organising and innovating that top-down control freakery; it's that the myth that nothing would ever get done without human direction from on high is a continually stultifying, misleading and damaging myth  - not just because of the deadweight costs and inefficiencies it imposes on societies, but because it persists with the precarious cult of personality and perpetuates Thomas Carlyle's anachronistic Great Man theory.

It is all too easy to tendentiously ascribe great theories, ideas and discoveries to great figures in history. As we know, Newton is most closely associated with the incipient knowledge of gravity, Maxwell with electromagnetism, Smith with free markets, Darwin with natural selection, Mendel with genetics, Einstein with relativity, Watson and Crick with the double helix of DNA, and so on. But those theories, ideas and discoveries didn't occur in a vacuum, they were a large group effort, and if it had not been them it wouldn't have been long before other names would have been the associative names.  

Perhaps the best living example of the phenomenon of the evolutionary emergence of a thing of complexity and order spontaneously created in a decentralised fashion without a designer is the means by which you're reading this - the Internet. Nobody sat down one day and planned the Internet as a fait accompli phenomenon - it is a global system of interconnected computer networks that evolved over time, and is still evolving, in a cumulative step by step process of trial and error that tailors to our tastes and needs.

The emergence of the Internet - like cities, cars, houses, clothes, supermarkets, science and medicine - was driven by consumer demand, be it for global communication, widespread knowledge, online shopping, social networking and the countless other benefits it brings to human beings all across the world. It provides a microcosmic example of markets in general - where the complex emergence of order occurs not from being designed top down, but by a long natural selection-type process of good and useful ideas surviving, and bad ones being weeded out.

The same is true in pretty much all walks of life. Leading figures in history don't really proscribe morality, Chancellors don't really run economies, Prime Ministers don't really run countries, and singers don't really catalyse brand new genres. Of course, individuals can be influential and help the world along, but one of the most perpetuated fallacies throughout history, and still alive and kicking in the present, is that these things are planned and designed rather than evolved on a trial and error basis.

The rational calculations of trial and error are the driving force behind our progression, not top-down prescriptions. The theologian that tells you how to be a good person, and the moral philosopher who enunciates the rules for being an ethical citizen are basing their precepts on what humans have already worked out over lengthy execution time through the evolutionary basis of trial and error.

Attitudes to sex are an interesting example of how evolution of thought changes thinking. Once upon a time homosexual practices were utterly frowned upon by large swathes of society, and punishable by law. At the same time attitudes to under age sex and abuse were relatively relaxed. Fast forward a few decades, and now (thankfully) the opposite has occurred in both cases - society is much less tolerant of under age sex and abuse, and homosexuals can live freely and openly in a more tolerant society.

This example, and many others like it, demonstrates how much our morality is an evolved, learned phenomenon. It's also a fact that the more economically developed and prosperous nations have become, the better their citizens have behaved. Similarly, the more state-oppression, dictatorship, and lack of basic rights seen in history, the worse they've behaved.

The main cause of why people are still stuck in poverty is the unaccountable power of corrupt self-serving politicians against citizens that lack the basics required to be a successful trading nation with access to the global free market economy. Corrupt officials and poverty-stricken citizens are sprung from the same root. This was true for most people for most of human history - now it's still only true for a proportion of people alive today, but still true nonetheless. 

The places where people struggle most are the places where politicians live parasitically off the fruits of the citizens' labour. While once it was primarily for luxury and war, now it is for control and indulgence off the backs of people who've not yet won the battle over the state for free trade, private property rights, stable rule of law, limited political interference, lower taxes and personal liberty.

Darwinian efficiency

What's most vital in all this is that the Darwinian model of natural selection is by far a more efficient and powerful driving force for improvement, prosperity and advancement than any top-down designer, precisely because it is the accumulation of individual efforts into one grand collective effort that sows the seeds (as Leonard Read's tremendous essay I Pencil shows better than anywhere else I've seen - all of our technology and material accomplishments are made by a cooperative endeavours, not by the few people associated with such gadgets).

The energy revolutions that have helped reduce our human effort and replaced it with the harnessing of animals and machines have mirrored nature's law of least effort in providing a correlation between energy expended and progress rapidity. A train being able to get us from A to B quicker than on foot, or a machine that can pack meat into tins quicker than the human hands, are the kinds of progress that when aggregated lead to, on average, a person in country A that consumes 7 times the energy of a person in country B, and one who is likely to be about 7 times richer too.

There is also an interesting observation by Edward Glaeser about the near perfect correlation between urbanisation and a nation's prosperity - that is, the countries where the majority live in cites are wealthier (about four times wealthier) than countries where the majority live in rural districts. Further, the faster the city grows in size, the more efficient it grows per head, largely due to the benefits of recombination of ideas in densely populated areas.

A term called Schumpeter's gale (coined by economist Joseph Schumpeter) is a term that observes that market progress is built on both failures and successes - what he called a 'perennial gale of creative destruction'. In other words, for the economy to progress with strong businesses that have the innovative impetus to survive, it must also contain less-strong businesses whose lack of success makes them fragile to the point of discontinuing. Schumpeter, in using a Darwinian analogue, called this 'industrial mutation'. And as another fine economist, Ludwig von Mises (1881-1973), was shrewd enough to point out in the 1940s:

"The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction. They bother neither about the vested interests of capitalists nor about the fate of the workers who lose their jobs if as consumers they no longer buy what they used to buy."

Émile Chartier had a lovely way of analogising this:

"Every boat is copied from another boat. Let’s reason as follows in the manner of Darwin. It is clear that a very badly made boat will end up at the bottom after one or two voyages, and thus never be copied. One could then say, with complete rigor, that it is the sea herself who fashions the boats, choosing those which function and destroying the others."

The upshot is, the free market is the place where free citizens drive the outcomes - we are the bosses, which is why the things the agents in question govern have the highest probability of being the most efficient. As Matt Ridley reminds readers in the book:

"It is axiomatic among right-thinking people that there are many things the market cannot provide, and therefore the state must.  The sheer magical thinking inherent in this thought is rarely examined.  Because the market cannot do something, why must we assume that the state knows better how to do it? Take six basic needs of a human being:  food, clothing, health, education, shelter and transportation.  Roughly speaking, in most countries the market provides food and clothing, the state provides healthcare and education, while shelter and transportation are provided by a mixture of the tow - private firms with semi-monopolistic privileges supplied by government:  crony capitalism, in a phrase. Is it not striking that the cost of food and clothing has gone steadily downwards over the past fifty years, while the cost of healthcare and education has gone steadily upwards?"

Here's something I find quite intriguing about human progression

This section is probably interesting enough to justify its own separate blog post - but anyway, you may have noticed that more than ever before the world's two dozen most advanced economies are knowledge-based economies - service and technology based expertise are at the forefront of their growth, not the sweat and toil of manufacturing goods, and obviously not agrarian labour.

There is a good reason for this - we progressed from agrarian to manufacturing to knowledge-based economies, as did a handful of other countries that did so at roughly the same pace. All the other advanced economies did so, or are doing so at a slightly slower pace, and there is good reason why.

Not all countries will progress at the same rate - there will always be countries that get their foot in the door first, and are then followed by others. But what underpins this truth is something even more fundamental and revealing - it is probably impossible to jump the natural threefold order of progression: that is, it is probable that every country on the road, from majority poverty to majority well off, has to go through the threefold process of being agrarian, then manufacturing, then knowledge economies.

We see a lot of frustration that some countries are developing more slowly than others, but given that we established that no authority figures control economies, they occur bottom-up and are driven by the people, it could be that every country that is going to progress or advance has to go through the quite hard and labour-rich process of being a manufacturing country first before it becomes as prosperous as the world's leading economies (and even then, things like geography, climate and political situations in neighbouring probably will continue to have a bearing).

I suppose the logic is obvious really - it's difficult to become a financial service economy until you have gradually harnessed the infrastructure through the manufacturing process. National and international progress, again like biological evolution, occurs in small incremental steps, not giant leaps (the only caveat to this is that now so many countries are advanced, and now everyone is globally connected, it's quite likely that the developing nations will have a leg-up in their own version of the progression explosions we enjoyed when no one else was prosperous 200 years ago).

The other remarkable thing, as Matt Ridley points out in the book, is that inventions pretty much always come along at the right time - there are rarely products or services that come along years too early or years too late. Think about it; when have you ever known a good to be invented and sit idly for a lengthy period of time until we developed the technological wherewithal to utilise on it? Equally, when have you ever identified a desperate societal need for something and found we had to wait a lengthy period of time for it to be introduced? The answer is pretty much never.

And the reason is fairy obvious - technological emergence is concomitant with the whole nexus of other emergences - they interrelate, and they emerge in the period of time when they would be most use for a particular industry. Required innovations find their innovators rather than the other way round. Gloves find hands and glasses find eyes, not vice versa.

Patterned evolution

As we now know from reading works like Richard Dawkins' The Selfish Gene, the body of an organism is a mere vehicle for the genes to propagate themselves. It is the selfishness of the gene that is the primary driving force for the survival of the organism (same with markets) - it is these acting in accordance with local effects that goes on to produce the splendour we see in the biological diversity of plants, fungi and animals.

Any system where information is transmitted, provided there is reproduction fidelity and random elements, should mirror the evolutionary process we see in biological kingdoms, including ideas and the sharing of knowledge. It's a sobering thought, but had the materialist philosophies of Democritus, Epicures and Lucretius - particularly the idea that nature is made up of constituent parts - not been both suppressed and surpassed by competing monotheistic theologies of the era, we probably would have known about many of the post-1550 scientific discoveries long before we did.

Final word

To finish, we said earlier that the Internet is perhaps one of the best analogies of microcosmic free market in action - it has evolved into a wonderful nexus of human activity, all unplanned, all emerging from local incentives and bottom up ideas. On top of that, it should also be noted that if you transported an arcadian farmer from his habitat to the present day and showed him the Internet he would think it too sophisticated and complex to have emerged evolutionarily, and far too wonderfully ordered to be the result of local evolutionary emergence.

Yet if you apply Leonard Read's I Pencil model to something as complex as the Internet you'll find it takes something as prodigious as the collectivised human species to design something like it. Further, just imagine how much we'll take our sophisticated emergence in the years ahead - imagine the future digital democracy (as some have called it), is ability to share more and more ideas, and make people accountable like never before - what people from Lucretius to Ridley have posited is just the beginning.

Think back to a few hundred thousand years ago, and consider those primeval grunts from our ancestors as they began to make sense of their surroundings. They never could have imagined that those inceptive primate sounds would one day evolve into the entire world of languages, literature, poetry, philosophy, science and technology that we have today. And just as Lord Of The Rings, the Manhattan skyline, space travel and the Hadron Collider would have been far beyond the imaginative precipitations of our primeval ancestors, so too is much of humanity's future evolution beyond us today.

We are picking up pace in this modern age as we reach new heights and new depths in shorter passages of time - and the driving force behind this is bottom up, local ideas, as people gradually wean themselves off the old top-down ways of thinking. I think that is the essential realisation that the greatest number of people need the most, and Matt Ridley's book Evolution of Everything is a good place to start.