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!

 

 

There's No Room For Such An Oppressive Law

As anyone who understands the basics will know, life in a free society involves making choices about what’s best for us by weighing up costs versus benefits. One such example is in deciding where to live. Any government that makes those decisions for us on our behalf by claiming to know what’s best for us better than we do enters the realms of being oppressive. In places like North Korea and Cuba such oppression is commonplace

Alas, I’m sad to read today that the UK government has shown its own oppressive tendencies in proposing a national minimum bedroom size of 6.5 sq m (70 sq ft) as part of a drive to stop landlords carving up houses into ever smaller rooms to maximise rental income, particularly in London where supply is short and demand is great.

While it’s true that some of these rented rooms are not exactly Buckingham Palace, they are rented voluntarily for one simple reason: that for the people in question the benefits of living in London far outweigh the costs of sleeping in a small room. I’ve mentioned before just how numerous the benefits are in living in a large, vibrant city like London. If people want to trade off some of their sleeping luxury to enjoy those benefits in a mutually agreed and mutually beneficial arrangement (not to mention be able to work), then they should be afforded the freedom to do so – not have their freedom oppressed by an interfering government. What this law will actually do is force potentially thousands of low skilled workers out of their rooms, and in many cases out of London and out of their jobs. 

India Is Right To Tell Greenpeace Where To Go

I was delighted to read today that India has told Greenpeace exactly where to go in meddling in its economic growth. I’m not even going to make a big deal as to whether India has de-registered Greenpeace because of fraud or mendaciously inaccurate reporting.

No, what’s most important here is that India is a developing economy that trails far behind the most advanced countries in the world – and still has millions of people in poverty. It is not a country that should have its economic growth impeded by special interest groups that don’t understand that countries like India need to become increasingly more industrial to provide the jobs to get more and more of its citizens out of poverty.

And as I argued in this article for the Adam Smith Institute:

"Although Pigouvian taxes bring in revenue for politicians short-term (for a few decades maybe), the long-term indicators are that the market left to run by itself will naturally make us greener anyway. The reason being: 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.

Consequently, compared with how the market engenders continually increased efficiency, emission taxes probably will turn out to have had only a much more negligible effect on lower energy output and more efficient use of resources than the free market, because the market is driven by efficiency far more than politicians with political interest. If there is a race to make us greener, politicians are more like the tortoise and the market is more like the hare."

 

 

 

 

 

Aha! My Theory About How Needless Traffic Jams Start Has Been Proven Right

When driving down the notorious A11, particularly before it was duelled, I would often be bemused at the occurrence of traffic jams when there were no road accidents and no maintenance work to hold up traffic. I would tell my wife what I was thought was going on - it's what I call the 'flow' factor being interrupted. The flow is how I describe the optimal driving process, whereby when there are no obstacles, if all drivers filter in, speed up and slow in ways that do not impede the natural movement of other cars they are not interrupting the 'flow'. An optimal driving state would occur when no one is made to slow down, speed up or stop against the flow.

As drivers we obviously need to slow down and stop for all sorts of reasons (traffic lights, junctions, roundabouts, queues in rush hour, etc) but a lot of the unnecessary delays are caused by the natural flow of driving being interrupted by people who brake more than they need to. Clearly, with short distances in diversely planned cities, small interruptions are minimal and don't really register on the radar (unless you are a particularly irascible and impatient driver), but on long A roads (like the A11) and motorways careless interruptions to the flow can result in long traffic jams, caused simply because someone was too heavy on the brake pedal.

I was pleased to see this week that there's actually a video which proves my 'flow' theory - it explains how one driver hitting his or her brakes too hard can slow everything down and cause a huge tail back as it sets off a ripple where cars behind it also need to brake until at the end of the chain reaction, traffic has come to a stand still. Naturally, even when cars start moving at the front, by then the tail end of cars is sufficiently halted to see numerous cars joining the back of the tail, and so it goes on, taking ages to clear.

Here is the video- it's the second half that is most compelling. So, from now on, drivers, please do go easy on the brake pedal - for all our sakes.

 

 

 

 

 

 

How Come So Many Students & Politicians Are So Ignorant About Value?

It astonishes me when something so simple and obvious is misunderstood by so many people. This doesn't happen as infrequently as one might expect - and in the case here, I'm talking about the notion that if you don't have tuition fees then vast swathes of important information about value is lost. Alas, the people causing civil unrest in London because they want a 'free' university education are not only blockheaded louts with a crass and arrogant sense of entitlement, they are unapprised of some basic economics - namely, that there is no such thing as a 'free' education, and that if you try to do away with the price of a university degree by passing it onto the taxpayer you distort the essential signposts to value.

 

Unsurprisingly, Jeremy Corbyn (backed by many of his Labour party affiliates) has come out in support, encouraging the angry mob to carry on protesting until university education is 'free'. It's worrying that so many of our students and politicians are this confused about value - not to mention prices, information, and supply and demand. Here is the reality that they are missing.

In proposing to artificially lower tuition fees people are showing contempt for the notion of pricing education at its value. The value of higher education is this. University fees should amount to exactly what it costs to obtain a degree, and fees (prices) should match demand, whereby the right number of people are getting degrees. How do we know what the right number is? This is down to a utilitarian efficiency, which is measured in terms of what we might call practical economic utility. What is meant by 'efficient' here is that an efficient transaction occurs when the overall increase in utility is greater than the overall decrease in utility. In other words, when degrees are priced at their true value - a value that measures costs associated with supply and demand - you have the right number of people doing degrees, and you have the right people paying for them, which is, it won't surprise you, the people actually doing the degrees.

When fees are too low, people will study even though the cost of going to university is greater than the benefits of a university education. When fees are too high, people will be put off studying, which means there'll be too few university graduates. A few of the low-fee protagonists have argued that a decline in applicants would be evidence that the fees are too high. It would not be; it would be evidence of less educational waste, with those no longer doing degrees being the people for whom the cost of going to university is greater than the benefits of a university education.

The current tuition fees system is pretty much the fairest system imaginable: the government loans to those who need the money to obtain a degree, and it only asks for payment when the post-graduate can afford to repay with a small proportion of their earnings. Anyone who thinks that that is unfair has a pretty peculiar idea of unfairness. What you have to realise is that nothing comes for free in education. If tuition fees are scrapped, then the cost of obtaining a degree is then picked up by the taxpayers. Tax that goes on to subsidise higher education amounts to lots of tax paid by low earners to subsidise people better of than themselves. We know this because we know that two thirds of working people do not have a university degree, and we know that on average obtaining a degree boosts one's life earnings by 60%.

Tuition fee subsidies do something else as well - they artificially ramp up demand for places, which has all sorts of negative spillover effects on how people value university education. Labour, under the Blair years promoted the ludicrous idea that they wanted to encourage 50% of school leavers to go on to further education. I assume they never bothered to consider that too many people would end up going to university. Similarly, people averse to tuition fees have presumably never bothered to consider whether too many people might go to university at a reduced rate, and that the lower fees might increase demand to an unhealthy or unmanageable level. As for the fact that however much you increase demand you will not increase the universities' capacity for more students than they can take....nope, there probably wasn't even a mention of that.

The irony is, instead of worrying too much about rising tuition fees, what should be considered is that putting up tuition fees, or demoting some degrees to college level qualifications, might actually be a good thing for the country overall. There's no doubt that higher education brings about huge financial benefits to the county, but there's also no doubt that having too many graduates devalues graduation in the labour market, and that in a state of diminishing returns the financial benefits would no longer bring about such efficiency. We know that currently around 20% of post-graduates are doing a job that doesn't require a degree (this figure might actually be higher) - which is indication itself that there is a surfeit of degrees in a labour market with too few degree-level jobs.

There is another very good reason why value is so important - if degrees are valued commensurate with the landscape of both supply and demand, and of the labour market, there is a better chance of the number of graduate-level jobs matching the number of graduates. For example, the future job market is going to see many current graduate-level jobs replaced by computer technology, but it will also see an increase in other graduate-level jobs that look likely to grow in number. Only a proper market-based further education system can be optimally responsive to a rapidly changing labour market environment, particularly with the proliferation of service-industry jobs.

As I often say on here, prices are the market's method of signalling how much of a good is available against the level of demand for that good. An expensive good (like a degree) costs resources (time and money) but those costs signal that those who value degrees most will get them. The abolition of tuition fees would mean that universities have no way of signalling the true scarcity and value of university places to prospective students, particularly as through a taxpayer-funded system high and low demand opportunities are going to be similar if not equal in price. Students, like people in general, make much more informed decisions in life when signals accurately match supply and demand.

How To Fix Schools

Education secretary Nicky Morgan wants to give parents greater choice in state-funded schools because she thinks schools will “up their game”. We hear this a lot from politicians - they regularly tell us they are trying to do us a favour by giving us more free choice in our public services. Basically, they are trying to sell us the choice-driven qualities of a private enterprise consumer market. Alas, what they fail to realise, or don't want to tell you, is that choice is always going to be sub-optimal when the things being chosen are funded by taxpayers.

Suppose the government nationalised handbags and gave them away for free by obtaining money from our taxes. What would happen? Demand would increase, but supply wouldn't be able to keep up with the demand, because there are a limited number of handbags. Consider a Gucci handbag for £2000 and a Next handbag for £30. Taxpayers cannot fund Gucci handbags for everyone, so they must be rationed. So wealthier people will have the Gucci handbags (because they've paid more tax) and others will queue for Next products.

The problem arises because the government won't be able to match supply to demand. The reason being: it doesn't know how much everyone values handbags, so nationalising handbags would be unsuccessful. The free market of private enterprise doesn't have this problem because the market of supply and demand dictates prices of handbags and tailors those prices to how much people value them.

Rich Rachel may wish to buy a Gucci handbag for £2000 and Skint Sally may only be able to afford a Next handbag for £30. But that doesn't just tell us about wealth; it tells us about desire for handbags too. Loaded Lorraine may have more money than Rich Rachel, but she might have no care for ostentatious handbags and instead prefer to spend £30 on a Next handbag and use the remaining £1970 to pay for a holiday or a painting. The right supply of handbags (and holidays and paintings) depends on how consumers make the trade offs.

Public services paid for by the taxpayers are not better off with the introduction of more choice because the government does not have the supply and demand price mechanism to factor in consumer choices - and thus it has no metric by which it can check people's valuation of the different products. Understanding this is the key to understanding why increased choice in taxpayer-funded services fails to capture what people value.

Suppose we have a city in which there are two only schools - let's call them S1 and S2. One of the schools is bound to be better than the other - let's say S1 is better. In a public sector system where prices are not attached to value, everyone is going to be paying for S1 or S2, but some parents are going to receive better service than others (apply this to state run anything and the same applies). In a state funded, unpriced system (obtained from taxation) everyone is going to prefer S1 over S2, and half the city's population is going to be disappointed that they got S2.

Let's take it to an extreme and suppose that there was no more nationalised education - and that schools were fee-charging, with tax for education (roughly about £10,000 per year, per person) staying in the pockets of families. Now S1 and S2 would operate under a much more efficient system. Here's what would happen. By charging for services, the inequality between S1 and S2 would turn into something better; there'd be an increase in demand for education in S1, which would bid up prices, which would engender lower prices at S2. This process would carry on until the differentiation between S1 and S2 matched the value parents placed on them. Those in S2 would be compensated by paying less for a less-good service, and because parents would be considering the average trade-off, they'd be free to splash out on better education, or have cheaper education and more money in their pockets.

My thought model only had 2 choices - imagine how much better with dozens of choices. Good and expensive or not so good and cheap is the kind of choice we should value (‘not so good’ ought not to mean ‘bad’ though). We are constantly being told that it's wrong to disadvantage those who can't pay for better education like the wealthy can. But not only is it undesirable to attempt to suppress those opportunities, it is also the case that if we stopped wealthy people's ability to buy more than their poor counterparts then monetary value would go out the window. Of course politicians don't really mean this - and neither do the electorate - they really mean everyone is entitled to a decent education. But this favours supply and demand in a free market because it is when choice is obtained and prices match value that standards improve.

I'll wager quite a few of you are uncomfortable talking about schools in this way - after all, education is such an important thing that all talk of cheaper, less good education is surely to be guilty of failing our children. Yes it would be if that were the case - however, given that education is such a precious resource it is precisely for that reason that competition ought to be the mechanism to improve standards.

Of course, it’s worth noting that no one has any trouble understanding this if the subject is mobile phones, cars or televisions. Everyone agrees that if mobile phones, cars and televisions had been funded from taxation for the past 25 years that the products would be far less good, and more expensive (or poorly allocated). Tax-funded projects would generate far less concern for providing consumers with better products at better prices. Why, then, do so few people understand this same principle when it comes to schools?

A system in which schools are funded by taxation frees schools from such a high burden of satisfying consumers' preferences, just as would be the case if this applied to Sony, Panasonic or Apple. By and large private schools provide better educations than state-funded schools, not just because fee paying schools contain a greater proportion of bright pupils, but also because, just like Sony, Panasonic and Apple, the school has market pressure to deliver the standard of education that the parents demand at the price paid.

The popular assertion from politicians that tax-funded schools are best because children deserve a good education gets things backwards. It is because education is such a vital resource that it needs price signals and market competition to allocate those resources better.

Finally, I will grant you that at the moment we are not quite ready to overhaul the current system and make children's education solely a matter for market forces - which means such a system ought to be brought in gradually, and tweaked and refined over time, not piled on to parents in one foul swoop.

But even so, to suggest that in the meantime more taxpayer-funded consumer choice will continue to generate a healthier competition that can greatly increase the standards of education in this country is at best naively optimistic, and at worst, just plain wrong.

Finally, if you are having trouble imaging a life where schools aren't the responsibility of the state, you may like to know (if you don't already) that politicians only took over education in Britain as late as the late 19th century, and in that period a much higher proportion of working class people could read and write competently (90%), whereas nowadays it is thought to be somewhere between 75-80%.

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

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

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

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

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

Economics as a science

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

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

Just as nature's laws find themselves running according to the principle of maximum efficiency, so too would economics if it were left to the principles of economic laws based on prices, supply and demand. You may object that unlike chemical elements, economics involves that complex and erratic phenomenon known as human behaviour, but that's not a valid objection, for as Adam Smith reminds us, the invisible hand acts as a social mechanism that channels collective objectives toward meeting the needs of the people that make up that society, by ensuring competition between buyers and suppliers, which channels the profit motive of individuals into providing products that society desires at prices which are rarely above cost.

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

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

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

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

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


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

Arguing With Feminists About Rape

It's not often I do this, but sometimes reflecting on a public conversation can prove to be pretty informative in highlighting particular areas of erroneous thinking. Here's one such example. I won't disclose names here, but a popular Spectator writer wrote an article about the dangers of rape after nightclubbing in relation to dress, and one of his points caused lots of indignation and opprobrium, with feminists from all over the shop wading in to attack him. The point he made that angered them so much was quite simply this: that a woman in a nightclub is at greater risk of sexual assault if she dresses provocatively.

It's the kind of statement that an economist would have no trouble understanding to be fairly evidently true. But equally it's the kind of statement ripe for twisting to justify annoyance. After the Spectator columnist made that comment he was subjected to waves of abuse from (mostly) women indignantly asserting that:

"Just because a woman dresses provocatively it doesn't mean she deserves to be raped"

"That's bollocks because a great many women are actually raped by someone they know, including their partners"

"It's disgraceful blaming the victim and not the offender"

Alas, the reactionary statements above suffer by being irrelevant to the principal point the article was addressing - that there is an obvious correlation between what we do and what happens to us. Don't misunderstand, I wholeheartedly agree with the feminists' comments above: that dressing provocatively doesn't mean a woman deserves to be raped, and that it's disgraceful blaming the victim and not the offender, and also that a large number of women are actually raped by someone they know - but they are different points to the point that probabilistically a woman in a nightclub is at greater risk of sexual assault if she dresses provocatively.

The backlash statements made by the feminists above are as misjudged as hearing someone say "You are more likely to be mugged in the daylight in Brixton than Kensington" and then responding with "No, that’s wrong because most people get mugged at night, not in the daylight". 

The point the Spectator columnist made is actually a simple point to digest - it was a statement specifically about the relationship between dress and rape - it was nothing to do with letting off rapists lightly or accusing women of deserving what they get if they dress provocatively. Unfortunately the Spectator columnist didn't go into any detailed defence to back up his statement, which is probably why he was the target of a backlash. Equally that is why I stepped into his defence in the discussion, because he was being falsely accused and having his name smeared unfairly.

Let me explain the probability. It's not very difficult to see why if a woman is raped after nightclubbing then probabilistically it is more likely to be a woman dressed provocatively. Imagine a nightclub and a guy with a date rape drug who is going to rape someone that night - you will find that probabilistically he is more likely to end up raping a woman who looks as though she is a candidate for casual sex. This has nothing to do with what any woman deserves to happen to her, or how a lady is advised to dress, or theories of rape overall, it is a simple case of likelihood.

For simplicity's sake, let’s imagine last year there were 20,000 rapes connected to women who were clubbing. The people who committed the rapes will be two different types of offenders: the first group will be those who pre-planned their rape and came equipped looking for their victim; and the second group will be those who ended up raping someone but had little or no expectation of doing so prior to meeting their victim. Predators who brought in date rape drugs would almost always choose women who were dressed provocatively – as few items of clothing as possible – anything to make the rape easier for them, in case it has to be quick in an alley or behind a bush. Some will carry a pair of scissors and target girls with very accessible dress straps where two quick cuts and the girl is naked gives them an advantage. If you looked at crime figures detailing these 20,000 rapes after clubbing you would find the greater proportion were those dressed provocatively. Next, in these situations, women dressed provocatively would often be seen by men as better bets for success in leaving the club with them, and girls who are on the pull will often dress in a manner that lets guys know they are approachable for a romantic liaison (this is inherent in our evolution too).

But that's not all of it: that only takes into account the cases where rape is premeditated. Many unplanned rapes occur when a man leaves with a women and she is too drunk to stop it – she may have passed out, or she may simply be so inebriated that a man can take advantage of her. This I consider rape too because if she is in no fit state to be able to consent then a man should not take advantage and go ahead with intercourse.

So think how many times this occurs over all the weekends spread over the year, and then look at probability again – more attempts will be made by guys to approach girls dressed provocatively, because they will be inclined to head straight for the girls they think are dressed to attract a mate. This means more cases of two such people leaving together, leading to the greater number of women who end up being raped in this way increasing. Or to put it another way, the causality isn't merely due to provocatively dressed women being targets for premeditating rapists, it's due to the fact that lots of rapes end up happening against women who were on the pull or available or open to suggestion - and statistically there is a high probability that women in this sample group will be dressed provocatively, which is why the statement "A woman in a nightclub is at greater risk of sexual assault if she dresses provocatively" is true.

Probability is like that - it isn't a comment about rights and wrongs of an action, it is merely an expression of likelihood. By a similar measure one could say that you're more likely to get burgled if you don't have a burglar alarm; you're more likely to have your car broken into if you leave valuables on the seat; and you're more likely to be a victim of a sexual assault if you're inebriated. Of course, no one deserves to be the victim of burglary, car theft or sexual assault - these are merely observations about the correlation between behaviour and outcomes.

The Home Secretary Is Hasty Over Police Diversity

Home Secretary Theresa May has just issued a so-called “wake-up call” to the police about its chronic shortage of black and ethnic minority officers – a failure she claims reduces public confidence in the force.

Alas, this is a nonsense narrative that fails at every basic level. Just because blacks and ethnic minorities are heavily outnumbered by white people in the police force does not mean that there is overt discrimination going on, much less that this supposed imbalance can and should be corrected by any kind of state mandated action. You would think someone pretty foolish if they said that the primary reason that there are so few female garage mechanics or female bricklayers is because women are being discriminated against. It's a short-sighted and hasty thing to presume that imbalances of gender or ethnicity in the workplaces are naturally due to discrimination.

Why might blacks and ethnic minorities be under-represented? Given that if you're an employer discrimination is an illogical thing to do as it harms you as well (as I explained in this blog post), the most obvious answer to the question is that blacks and ethnic minorities are under-represented because they are more difficult to recruit - probably due to a combination of the number that don't want to work in the police force, and the number that are unqualified or ill-equipped to do so.

Those who condemn discrimination and the supposed undermining of civil liberties by arguing that the police should positively discriminate in favour of more black and ethnic minorities are missing the fact that their proposal is simply another kind of discrimination with the signs reversed. Quite simply, you cannot artificially smooth the path for one group (whether it be for more black officers in the police force or more women in Parliament, or whatever) without artificially hindering the path of the rest of the group (or groups) that fall outside of the purview of the group for whom you are trying to positively discriminate. 

I'm all for looking for new ways to encourage more black and ethnic minority people to acquire the skills and enthusiasm to make themselves candidates for the police, if such things are lacking. But no one should be given a job purely because of their ethnicity or skin colour just to fill a quota.

Jobs should be awarded on two things; on merit (skills, experience, personality, enthusiasm) and on the basis that certain groups of people do actually want these jobs. If most women don’t want to be bricklayers, and if most police officers are white due to the pretext of merit, desire, or some other reason, then this needs to be acknowledged before anyone makes an automatic assumption of unfair discrimination and tries to redress a hastily perceived imbalance.