The Desert Island Test

We all know that the price of things is based on laws of supply and demand. There is a greater supply of coal than diamond necklaces, and both are desired, so naturally a diamond necklace is more expensive than a sack of coal. But that begs the question: even though expensive things are expensive due to high desire, to what extent is there high desire for them because they are expensive?

Quite a lot, actually, given how much people value status - it's probably at a level way beyond the expectation of the average casual observer. A good way to show you have lots of disposable income is to pay high amounts for things that come in cheaper varieties (houses, cars, jewellery, clothes, hotel rooms, dining out). So while it's true that some things like diamond necklaces and Ferraris are, in terms of social status, obvious peacock's tails, it's also the higher prices of everyday things that signal status.

A good illustration – one that I didn’t invent - is something called the desert island test. The desert island test is a great way of illustrating just how much of our lives are governed by what people think of us. Imagine yourself to be completely alone on the island but yet fantastically rich, living in a huge mansion, with expensive furnishings, a fast car, fine artworks and a stunning garden.

In this scenario any pleasure you had in your opulent situation could only be derived from its intrinsic rewards – there would be no sense of pleasure from others’ reactions, because there is no one else there to react. It is difficult to say just how much contentment a life of such solitary richness would bring, but I suspect with the loss of that all important component of status gravitas one's possessions would lose a lot of their meaning and joy.

When I think of what I believe human excellence to be – it seems a quite natural observation that as long as people have the necessary things for a comfortable life, you'll find that their happiness, fulfilment and contentment have almost nothing to do with wealth, fame, or anything to do with material acquisition of status goods. 

What gives humans excellence of life is excellence of mind, but not merely at an academic or logical level; excellence of mind is about pursuing love, grace, kindness, generosity, solicitude – and dovetailing them through knowledge, wisdom and intelligence. When you see people courting fame or material wealth or career success for the sake of status, or people looking to build themselves up at the expense of the feelings of others, or people desperate for admiration, kudos, or the opportunity to control others, you know that all these things give exhibition to the fact that such people haven’t developed their minds to a level that will free them from the burden of what will turn out to be mediocre pursuits.  

Gross Domestic Whopper

I've been rather fed up with many of the false assertions made by both sides in the EU Referendum debate. I ended up saying this:

"While the Leave campaigners have also been pretty sub-standard, the Remain gang have been absolutely pathetic with their silly scare stories, facile post-Brexit predictions, and their making of outrageous economic claims that treat the UK voters like children. As for Cameron and Osborne, well, they, like the atrocious Hillary Clinton, will say absolutely anything to anyone to keep people on side and try to win support for their agendas, and have spent the last few years slowly draining themselves of any credibility as thinkers and as having even the remotest consistency in what they claim!"

Asking what the biggest whopper has been is a tough one. If pressed though I'd have to say George Osborne and the Treasury's claim that "Families would be £4300 worse off if we left the EU" -

Even if we overlook the fact that it's impossible to know what the future economy will look like if we leave the EU, when pressed on how they came up with this figure, it turns out to have been a little sleight of hand trick based on projected post-Brexit GDP (the size of our economy) in 2030, and dividing it per head.

If you're paying attention, you should already be able to spot the anomaly - families are not the same as individuals. A quick Google search tells me that the average household size is 2.4 people, which means the figure of £4300 per household is down to £1791 per head. But then you'd have to reduce the number further still because there will be far more households in the UK in 2030, which would make the number even smaller.

Even aside from that, trying to measure our nation's future well-being (let alone present well-being) by our GDP is a bit like trying to count the number of ants in an ant colony - you're just never going to capture all the data, and you are bound to miss loads. The crux of the matter is that we are a lot better off than mere GDP numbers suggest, just as all the things in a happy marriage amount to more than the sum of the couple's joint bank account.

Because GDP only factors in monetised exchanges, it doesn't factor in all the consumer surplus, and nor does it by equal measure factor in the proportion of profligate government expenditure that robs the nation of value. GDP only factors in the cost of what the government provides (education, health, social services, roads, defence, wars in other countries, etc) not the efficacy or desirability of those provisions.

If there are no affordable competitive providers for most of the country on many of the things the public sector provides, it is fairly safe to assume that the costs of those provisions are more than we'd pay for them. In a free market we know how much people in the UK value fruit, paint, Nike trainers, and cars by the prices, which are set in accordance with prices of competitive suppliers.

Not only that but in the absence of free market benefits, the government is bound to provide things that we don't even want. Naturally a full cost-benefit analysis would be too time consuming, but there are a few indicators - and we can arrive at them by asking if we'd pay for these things - many high-level public sector wages, extra police officers, renewable energy quotas, and so on - out of our own pockets or go without.

If the government wastes £500 million on a failed highways project then there is an awful lot of value lost in opportunity costs. On the other hand If you buy a laptop for £250 you are signalling that you value it more than the £250, otherwise you'd buy something else, which means value is not being recorded.

Suppose you value the laptop at £350, then the £100 difference between what you would maximally pay and what it costs is what is known in economics as your consumer surplus. That's £100 of value that's not being recorded. GDP only measures the equilibrium price in the market (as illustrated by the chart below).

Nor does it measure things like all the value Google and Facebook brings to our lives, and the access to all the world's news and knowledge we have, which also keeps adding more onto our net consumer surpluses.

The other point to factor in is that if John's cleaner becomes his wife, and Rita's gardener becomes her husband, then cleaning and gardening in those respective households may no longer show up on the GDP statistics, but that doesn't mean the two households are worse off (quite the opposite).

One of the many problems with Communism is that it erodes away almost all value for services, skills, products and human ambition. To keep the matter simple, suppose there was an island nation that was entirely self-sufficient because the government had closed itself off from all outside trading. If the ruling powers set the prices of everything; apples, wood, clothes, cars, paint, and so on, the nation would be robbed of something vital (this did happen to some extent in the old Soviet Union, in Japan, in Zimbabwe and in Cuba, to name but four places) - there would be no consideration of preference for the citizens.

In a supply and demand free market, prices are dictated by consumer value - so that if apples are too overpriced people will buy oranges until the price of apples come down, and if Jaguars are too expensive people will but BMWs until they come down. This happens in wages too - if a hotel porter earns as much as a heart surgeon then either the incentive to be a heart surgeon diminishes, or the proper value placed on specialised skills is diluted.

Given the foregoing, just like above, it is clear that the GDP of the old Soviet Union or Zimbabwe or Cuba only tells a bit of the story of the plight- it is an unreliable statistic in measuring human qualities, well-being and standard of living because it fails to factor in the value of lots of the economic output. Even though the UK is not a Communist regime, it still has the same issue.

The final thing to mention is that even our free market spending on consumption isn't always a measure of a positive action; if I have to pay to have the wing mirror on my car replaced after a vandal broke it, or buy a burglar alarm, or paint to cover up some graffiti, then these are not examples of good voluntary spending on my part.

The upshot is, GDP is in itself an inadequate measure of value in our country, so projecting a cost per head by dividing a future GDP projection by the current household numbers is about as misleading as it gets.



Sounds Like Backwards Logic To Me

Assisted dying is about to be made legal in Canada. Professor Boer, one of the most vociferous objectors to assisted dying, was on television yesterday asserting (as he often does) that assisted death is not something the Canadians should get into because the most up to date results in the Netherlands have "seen deaths double in just six years" as a consequence of legalisation.

His facts are right, but his reasoning is peculiar, because he mistakenly assumes that an increased number of assisted deaths is a failure and not a success of the policy. The professor is looking at the situation the wrong way. If the issue is that the law prohibits people who want to die from dying, then those opposed to such a law are opposed because it is a law that forces people to stay alive and suffer against their will.

Contrary to Professor Boer's thinking, rather than the increased deaths being indication of a failed policy, they may actually be indication of a successful policy, as it can now mean people are able to die at their own volition. Or to put it another way, if deaths have doubled in six years since the assisted suicide law was passed in the Netherlands, then it may well suggest that before the law was passed an awful lot of people were staying alive when they'd rather be dead.

It is sloppy thinking to simply presume that an increase in assisted deaths is a bad thing, particularly if in endorsing the bill we are endorsing giving everyone who wants to die the chance to do so. Perhaps it's simply the case that there are more people in the Netherlands that want to die than Professor Boer first thought, and perhaps that is true of Canada (and the UK and US) too.

Everything You Always Wanted To Know About Immigration (But Were Afraid To Ask)

You’ve probably heard of Schrodinger’s immigrant – the person who migrates to Britain to simultaneously steal your job and cause a drain on the economy by being a benefit claimant. Although in reality few people actually believe in the existence of Schrodinger’s immigrant (for obvious reasons), there is an awful lot of nonsense spoken about immigration. It’s quite easy to see why. Unless you think about immigration by considering the whole picture, your analysis will be partial, and skewed in an unhelpful way. Let me try to help.

First, are working immigrants a net gain on our society? It's tempting to say yes, as many people do, because, so the narrative goes, most immigrants work, and therefore bring gains to our economy. True, but that's not the best way to look at the net contribution question. Over a lifetime some UK citizens will pay more in tax than they get out of the system in terms of public services, and some will pay less. Long term welfare claimants tend be net beneficiaries, lower earners will tend to be a mixture, but most are not net beneficiaries, and higher earners will all tend to be net contributors. When you consider that the poorest 50% of the population pay only 5% of the total tax collected, it's clear that most people do not get much more out of the system than they put in.

Further, given that most immigrants tend to be among the poorest 50% of the population, then on those figures alone (stress 'alone') technically immigration may not constitute much of a net gain on our society, but it is a gain nonetheless. The graph below shows the fiscal impact of migration on countries in Europe – and as you can see, migrants in the UK are net contributors.

But that's only one corner of the picture, because we have to also factor in the people who gain most from immigration - the immigrants themselves. I think it’s a shame that whenever the subject of immigration comes up (recent Middle East crisis excepted) most people seem to primarily think of the matter in terms of how it affects ‘our country’ by which they usually seem to mean the people already here, by which they usually mean Brits. It’s rare that they think of the effects of immigration from the perspective of the individual immigrants themselves, not the immigrants already here. But, still, there are plenty of people around that are able to think beyond how immigration affects Brits to how it affects immigrants (of which more in a moment). 

What you hardly ever find, however, or at least find too infrequently, is a Brit thinking of the effects of immigration from the perspective of the people left in the immigrants’ country of origin. Given that in most cases when it comes to the poorest countries it is often the poorest people that cannot leave, how much of a negative impact does it have on them when they lose many of their brightest people with the most potential to countries already much more advanced and developed than them (this is what they call the ‘brain drain’)?  

It's quite easy to see why immigrants gain so much from immigration by seeing the situation in reverse - when investment is made in their countries. Developing countries don't have much material prosperity compared to wealthy countries like ours, but they do often have resources and labour to sell. Depending on the nature of their government and the internal civil set-up, what most people in developing nations have as their only genuine chance of working their way to prosperity is their opportunity to sell labour. Because those countries are usually rich in labour (and often in natural resources) but poor in capital they often only get the chance to increase their prosperity with outside investment from large corporations. 

That is why it is important to see that corporate investors are about as attractive to impoverished nations as impoverished nations are to corporate investors, as long as the nation is question has the requisite stability, basic human rights and rule of law to facilitate economic growth. So, far from being the capitalist bogeys that lefties love to excoriate, foreign investors are actually the main drivers of increased capital in developing countries, as well as, along the line, higher wages and increased human rights. In calling for less foreign investment by corporations lefties are also calling for fewer opportunities for many of their citizens by holding down their earning potential. 

The situation works in reverse regarding the subject of immigration, where instead of capital-rich investors coming into labour-rich countries, we have labour-rich immigrants coming into capital-rich countries like ours. Increased immigration to the UK increases the ratio of labour to capital. This would bring almost endless benefits both to the UK and to migrants themselves, but those benefits are reduced slightly by the fact that as our nation has a limited infrastructure (land, housing, schools and hospitals) immigrants also decrease some of the ratio of these things to labour and capital.

This usually would have a knock on effect of decreasing the marginal value of labour and increasing the marginal value of land, housing, schools and hospitals. Given that numerous government regulations impede the natural process of supply and demand curves being in equilibrium, it is obvious that the full benefits of immigration are not being enjoyed.

Take the most obvious example of those four - land, which is obviously also tied in with housing as houses are built on land. A country that has political and special interest group restriction on the supply of land being closely matched to demand naturally is a country in which the benefits of the relationship between labour-rich immigration and capital-rich employers are not being fully realised.

Immigrants aren't a threat to my job, but they might be a threat to some jobs. That's not an argument for reducing immigration, it is simply a point to understand how things work in a competitive market economy. Generally immigrants make the country better off, but more so for highly skilled people, and less so for low-skilled people who are competing for the same jobs. Skills are a resource just as a chocolate cheesecake is a resource. If chocolate cheesecakes are a scarce resource, I'll be paid well for a slice of it in my patisserie, and if skills are a scarce resource then people that have them will be paid well (assuming a demand for those skills).

In other words, if the nation is short of consultants and overflowing with factory labourers then wages for consultants will rise to attract more consultants and wages for factory labourers will be kept low. New people entering the labour market with assets that are in short supply are good for the market, whereas new people entering the labour market with assets in abundant supply are bad for it, but particularly bad for others with similar skills. That's why, in actual fact, the people who are worst affected by immigration in the UK are other immigrants already here, as well as indigenous people who are low-skilled or un-skilled.

For balance, the gains for immigrants have to be measured against the losses felt by their countries of provenance, because if the most skilled people from Africa, Europe and Asia are flocking to more prosperous countries, then our gain is their countries' loss. Given the intrinsic gains by those going to better themselves, all the inward investment in their countries of origin by entrepreneurs, and the benefit of experience they can offer their country by benefiting their own lives (called the 'reverse brain drain'), it's probable that the overall the economic gains outweigh the losses, particularly when you consider that according to the World Bank, migrants will send back well over $400 billion in remittances to developing countries this year, which is triple what the developed world gives in development aid and, because it goes straight to immigrants’ families, avoids some of the corruption problems that bedevil aid money.

Nigeria, Kenya, and Ethiopia are thought to be three of the countries worst affected an exodus of skills and intelligence through human capital flight, which has been very damaging to their nations. But on the other hand, China and India have recently topped the list of those nations experiencing the biggest exodus of human talent, yet not only are they two of the world's fastest growing economies, they are two of Africa's biggest investors too, so to the largest extent it probably plays out that when skills and intelligence leave a country to become more prosperous, some of that prosperity finds its way back into those nations still ripe for overseas investment.

Besides, even if we could enumerate all the cases in which the human capital flight has drained a developing country of important skills and talent, we really just have to take that as a given that humans are naturally primed to look after themselves and their family first, and that the drive to better their situation will always come first. It's not as though we'd ever want any restrictions on people's ability to move upwards on the economic ladder.

Returning to the economic benefits of working immigration to a place like the UK, on top of all the intrinsic benefits we've talked about, there is also the additional benefits immigrants bring in terms of job creation. As we’ve seen, in terms of the economy immigrants bring net benefits to the UK, but a lot of people don’t seem to understand why. This lack of understanding is down to something called ‘the lump of labour fallacy’, which is the mistaken belief that allowing immigrants in to work reduces the availability of work for native born workers. But, of course, this isn’t the case.

Not only do immigrants brings many skills not available in the indigenous workforce, not to mention a work ethic, they also bring with them additional job-creation and also consumer needs too, as well as a rich diversity of culture to enrich indigenous folk. In other words, when immigrants work they create jobs for other people, both in the people they employ directly, but also in the consumer demands they bring with their wants and needs (clothes, groceries, cuisine, mobile phone contacts, haircuts, books).

The lump of labour fallacy mistakenly asserts that jobs are zero sum, in that there is a fixed amount of work to be done and once the right quotient of people have those jobs there are no more to go round. But a simple look at the history of the UK would tell anyone that this isn’t so, so quite why they fall for it with the immigration issue is beyond me. If you think about it carefully, then by the same logic all school leavers who get work must be stealing jobs – but of course we know that isn’t true.  In reality, of course, the opposite happens – when school-leavers get jobs they make the economy larger and the nation more prosperous.

An even further benefit can be seen by looking at the chart below. 

This chart shows the projected UK government debt over the next fifty years under high, low and no net migration projections. Because Britons are getting older and living longer, immigration is probably going to carry on being a vital vehicle to generate the tax to pay for all those pensions and healthcare bills.

One final point and then I'm done. The economic analysis may well look at all those benefits for the UK – the jobs, the taxes, the consumer goods, the diversity and the cultural enrichment - but you may argue that what it doesn't do is factor in the negative effects on the home nation, namely the two biggies: increased security threat and increased friction with locals when integration is a problem. 

On the issue of increased security threat, well yes, immigration may ever so slightly increase threats, but by a similar measure going out in your car increases the risk of car accidents, but no one seriously thinks we should stop driving our cars (while we await driverless cars, that is). Even if we ignore the fact that a lot of the atrocities committed on British soil were not perpetrated by immigrants, it is difficult to claim increased security threat as a problem with immigration, because the government's inability to stop would-be terrorists coming in illegally and thwart the complex problem of home-grown Islamic terrorism is not really a point against the merits of working immigration and beneficial diversity. 

On the issue of friction with locals and lack of integration - yes that is a significant problem in parts of the UK, especially with the sheer volumes of immigration over a relatively short space of time. Pockets of Britain where immigrants do not integrate, and have values that are radically different from ours, are natural sources of tension and frustration in some communities, especially in areas with high unemployment, rapid immigration influxes, low levels of social integration, pressure on public services, and specific challenges linked to certain Islamic groups. It's also a problem that genuine concerns about the issues just mentioned are too often rubbished or written off as mere intolerance or xenophobia, which is sadly too typical of the left. 

Regarding what politicians could do to help the situation; a good start would be lessening some of the restrictive measures that affect planning and building. Britain has a lot more capacity for people, jobs, transport, education and increasing city sizes, but the recipe for its fruition needs to be better in place. Clearly open borders that allow any number in, is problematical, because there's the danger that immigration moves too fast for the more-slowly changing infrastructure. More market forces would improve the balance of supply and demand, but with anything on this scale there are trade offs.

As far as the majority of the general public is concerned, the narrative we have with immigration is the irresistible force of not curbing people's freedom of movement coming smack bang up against the immovable object of not overfilling the UK at the expense of all its infrastructure - and something has got to give. As my blog on big cities argues, places like London are wonderful social and economic metropolises, and there is plenty of scope for many more cities like London, as long as market forces and state governance can see this happening at the optimum rate. You may not know this, but cities currently only cover 2% of the entire planet's land.

Providing options are not retarded, people will still be able to choose the urban or rural settings commensurate with their preferences, even when the UK has hundreds of millions of people. Immigration is currently so high here because so many jobs are being created. What would help the rest of Europe (and us) would be if they enjoyed a similar success - but for that to happen there'd need to be a serous reduction in legislation and interferences in the market.

* In 2011 Michael Clemens looked at the economic estimates https://www.aeaweb.org/articles.php?doi=10.1257/jep.25.3.83 of the global GDP growth that would come if every country in the world abolished restrictions on the movement of goods, capital and labour across national borders. According to the papers Clemens looked at, removing all barriers to trade would increase global GDP by between 0.3% and 4.1%; removing all barriers to capital flows by between 0.1% and 1.7%. Those are big gains that would make the world a substantially richer place. Clemens also found that similar estimates suggest that removing all barriers to international migration would increase global GDP by between 67% and 147%.

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The EU Referendum: Remain or Leave? You Might Like To Ask The Question In Another Way

First a quick intro

While immeasurably worse off than modern times, generally speaking, one good thing in its favour was that in the late 19th century Europe was pretty much borderless, barring a few exceptions - it was a world of free trade, mass immigration, low taxation and hardly any regulation.

Then two world wars interrupted the free flowing migration of widespread trade, and as well as mass murder on an unprecedented scale, socialistic tyrannies were spread across lots of Europe via the Russian, German and Italian dictatorships. Consequently, many of the resultant post-war government interventionist policies that followed the world wars set precedents for the economically stultifying State meddling that we’ve become so used to in the past six decades. Once upon a time, the idea that Europe would need a bunch of unelected socialist bureaucrats for its nations to enjoy the free movement of people, goods, services and capital in a “single market” would have been ludicrous.

The EU officials and their misguided desire to create a single homogenous European identity through stuffy centralised regulation rather than allowing the heterogeneity of individual nations to construct a Europe with their own strengths is bad – not wholly, of course, there are obviously some benefits to inter-relation cohesion – but given that by far the most successful vehicle for progression is the trial and error mechanism of competition and co-operation, the EU monolith is a project that does an awful lot to retard and in many cases jeopardise human progression, particularly in developing countries.

So what is this big question then? I'm glad you asked: The question is: Would you vote for the current EU if you didn’t have it?

With the above intro in mind I think the most helpful way to ask about Europe is not to think of us as currently in and deciding on whether to get out, but actually imagine there was no such thing as the EU in its current form and ask ourselves whether we would vote for such a thing if we had the chance. I think when the question is framed that way, there would be far more people in the UK saying ‘no’ to this EU proposition than ‘yes’, which rather suggests that if they applied their feeling of the proposition in prospect to the actual EU referendum question in retrospect the ‘leave’ contingent should be a lot more numerous than the ‘remain’ contingent.

Don’t get me wrong, I’m not wholly anti the EU – there are some good elements to it (which I mentioned in this Blog post), but the reason I’m voting to leave is because so much of the EU is inimical to free trade, as its unelected busybodies get about as much wrong with their analysis of markets as is possible to get wrong. When two countries, even slightly politically hostile countries, agree to trade, they sign up for a deal in which both have self-interest. Economic trade deals do not need to bear relation to political differences, they are largely transcendent of political borders. The idea of a single marketplace into which you have to pay to gain access to the benefits of trade with a fellow self-interested trader is quite bizarre, particularly when large chunks of the money actually goes towards paying for the bureaucratic centralised structure that we’d be better off without.

So although it is not without its positive elements, broadly I think if offered the chance to vote for it coming into existence, most people of today would not vote for a single currency (the euro) that’s so often inimical to successful free trade, nor for the imposition of a political monolith that tries to homogenise different and diverse countries within Europe as well as imposing stultifying restrictions on their economic well-being (both cases assume, of course, that the individual voting actually does understand these issues competently).

And then there are tariffs

The other big question just about everyone seems to be failing to mention is the one about import tariffs. For sure you’ll hear lots about to what extent we’ll be subject to tariffs if we leave, how many different ones, and what rates the tariffs will be, but I’ve heard no one actually stop and ask “Why the heck do we even entertain tariffs of this kind when it is so obvious (or should be) that tariffs harm both the importer and the exporter?" To me it beggars belief that their ubiquity is so lazily accepted without more pressure for a huge set of culture changes. Let me explain with a simple illustration how it is that import tariffs make both countries worse off.

Some people wish to trade pounds for dollars, or pounds for euros, or euros for yuan and so on. Let's simplify it and say x is one type of currency and y is another. If more x are supplied than demanded, the price falls; if fewer, the opposite. When supply equals demand, the price is at equilibrium, just as it is with bananas, blouses and laptops. To understand this in relation to pounds, dollars or euros you first have to understand why people want to trade currencies. Forget for a moment the incentive to invest in other countries (in land, shares, debt, and so on), and pretend that the only reason to buy British pounds or euros is to buy their goods.

For simplicity, suppose that with the present exchange rate most goods are cheaper in China than in Britain. In other words, Britain is uncompetitive compared to China. Many Brits want to trade pounds for Chinese yuan in order to buy Chinese goods, but not many Chinese want to sell yuan for pounds as very little in Britain is worth buying. Consequently the demand for yuan is greater than its supply, so the price of the yuan goes up. Yuan are now traded for more pounds than before, and pounds for fewer yuan.

The result? The fewer yuan you get for the pound, the more expensive Chinese goods are to the Brits, since Brits have pounds and Chinese goods are priced in yuan. The more pounds you get for the yuan, the less expensive british goods are to the Chinese. The exchange rate adjusts dynamically until pounds offered by Britain equals the quantity the Chinese wish to buy - or in other words, until the prices are on average the same in both countries. This means that by and large Brits export goods in which we have the comparative advantage, and import goods in which China has the comparative advantage - all of which is measured by production costs being low compared to the country with which we trade.

From all of the foregoing, it ought to be obvious that import tariffs make imported goods more expensive for the nation imposing the tariffs (something Donald Trump can't seem to grasp at the moment with his election rhetoric), which affects the goods we buy and the demand for the currency. A British import tariff against Chinese imports would mean the price of the yuan measured in pounds falls, making British goods more expensive to the Chinese, which reduces demand for things priced in yuan and reduces demand for yuan, making UK consumers worse off.

Obviously the reason the Chinese want pounds or dollars is not just to buy our goods, it is to invest; in shares, land, businesses, and government bonds, all of which require our currency. Therefore demand for pounds on the currency market consists in part of demand by the Chinese who want pounds or dollars to buy goods, and in part to invest.

Tariffs do have a bearing on our decision because the EU rather closely resembles a protectionist trade bloc, where a tariff wall has been erected around EU member states which raises the prices of protected goods, making it worse for both buyers and sellers. The economist Patrick Minford suggests consumers waste around 4% of GDP on excessive costs because of EU protectionism, because the EU marketplace has prices fixed significantly above world market prices, and because of this, it distorts the flow of our economy towards these EU-protected goods and away from better value in the marketplace outside the EU.

The consequences of which, as I illustrated above, means inside the EU bloc we produce more of the goods and services over which we do not have the comparative advantage, and fewer goods and services over which we do. Or to put it in even simpler terms, we produce an excessive amount of the things we are less good at producing, and insufficient amount of the things we are better at producing.

There is nothing unique about competition that comes from non-EU producers that necessitates politicians to treat it differently from competition that comes from EU producers or producers in one's own country. As long as suppliers adhere to the requisite standards (standards that can be enforced in their own country pre-export) then there is absolutely no need for any cross-border penalties (tariffs) from politicians.

What about a post-Brexit UK?

Although I’ve given several reasons why I think we should vote to leave the EU, some may feel that I haven’t answered sufficiently the question that everyone seems to be asking: what precisely will a post-Brexit United Kingdom will look like? The reason I’ve not gone into lengthy prose on this is that, truthfully, no one actually knows for sure – quite simply because we don’t know what our government’s policies are going to be if we do exit, nor whether the UK will begin the process of breaking up, particularly with Scotland being so pro-EU, and Wales starting to show more support for remaining in too.

We don’t know what the effects of Brexit will be because we don’t know who’ll be governing the UK if we leave, what economic policies they will adopt, to what extent we’ll remain under certain regulations, what policies will accompany any unilateral free trade we have, or whether immigration levels will drop to the detriment of our economy. Because the truth is, even if we leave there are still a lot of unknowns.

To compound this point, consider leaving the EU and being governed by someone like Jeremy Corbyn - someone even more economically illiterate than many of the EU regulators. Corbyn is a man who wants to renationalise most of our industry, impose further price controls, artificially subsidise our manufacturing industry and bail out any UK industries that lose out to foreign competition. If you are the sort of person that cares about economic growth then Corbyn is a very dangerous leader to contemplate having.

While this doesn't in any way endorse the overall structure of the EU, one tiny thing in its favour is that some of the EU regulations would keep the wolf of Corbyn's Anglo-centric economics quite far from the door, as EU competition law prevents member countries from granting the kind of Corbyn-esque special treatment like subsidising, bailing out ornationalising domestic firms over competitors from elsewhere in Europe (much of this is thanks to Margaret Thatcher and Leon Brittan in the 1980s, both of whom knew the dangers of this).

For me, despite some obvious interruptions to normalcy as we gradually extricate ourselves from much of the EU influence on our laws, regulations and trade, the post Brexit UK probably will go on to be in an even more prosperous nation, and this in spite of the fact that seemingly any party that runs our country is a country mile away from a proper endorsement of the free market (one might say they are all socialists).

It’s worth mentioning too that growth of non-EU economies has outpaced the growth of EU economies in recent years, and looks set to continue at an even greater extent, which means future indication is that leaving the EU would free up Britain's non-EU trade potential, enriching us along the way (since we've had a floating exchange rate the balance of trade is less important than it used to be, as a trade deficit simply means we are up on consumption, which is the primary benefit of trade). A situation in which we treat the most emerging countries like China, Brazil, India and Russia less distantly and patronisingly in deference to Brussels is highly likely to be beneficial to the future UK economy, particularly with our proficiency in exporting services such as in education, digital technology, neuroscience, financial and litigation expertise and the sciences as we are well poised to do.  

How do trade deficits fit into the equation?

Well currently the UK goods trade deficit with the EU is over £77 billion, last I heard, plus we have a service trade surplus of over £15 billion, which means an awful lot of trade to and from, which obviously all agents involved will want to retain, irrespective of whether we leave the EU or not. In other words, by themselves, the arguments that leaving the EU will be terrible for trade are almost certainly spurious.

The other thing you need to realise is that a trade deficit is a good thing, because it means we are consuming more than we are exporting. A lot of people think the net benefit is when the opposite occurs, but they have misunderstood the purpose of trade which is ultimately consumption. I'll explain it with an analogy about my life. I live in Norwich, and I like our market. I like it particularly for the food I often buy there when I visit the city centre. Given that I don't work on the market, but do spend money there, I have what's called a trade deficit with the market. A trade deficit is the amount you spend in a particular place minus the amount you earn there (a trade surplus is just the opposite).

In recent times many Brits have argued that we are worse off because of a trade deficit with China. But by that same logic I would be better off without Norwich market. When people are able to trade to acquire things they want, value is created in their lives, and it makes them better off. Whenever trade increases between James Knight and the Norwich market stalls both James Knight and the market stalls are better off. Similarly, whenever two countries are able to trade to acquire things they want, value is created for its citizens (note, I'm talking about open, mutually beneficial trade).

That's also why trade deficits are not the bogey so many on the left imagine. Recently I bought £750 worth of shirts for £330 in a sale. I earned nothing that Saturday so my trade deficit for that day was £330. By the logic some of the 'Remain' campaign use they would have to tell you that I had a bad day - but, in fact, I had a great day - I bought shirts that I value much more than the money, and the clothes store had a good day because it made a profit on the merchandise (albeit a limited one, it was a sale - but still a profit nonetheless).

Nations consist of millions of people all doing as I am doing. They work to earn money and they buy when they value the goods or services more than the money (the exact opposite is true for sellers). Hopefully you can see now, if you couldn't before, that there is no reason why coming out of the EU should have a negative effect on our trading or our economy, providing the British government's post-Brexit polices are favourable to its citizens. 

To compound the point, here's an exercise for you. Think about all the transactions you've ever undertaken in your life, and then consider whether any of them had the remotest positive bearing to whether we were in the EU or not. I'll bet, like me, you'll find it is virtually none of them. In reality, the reverse is true: when you consider the huge expense, subsidies, trading tariffs and countless regulations that hamper the process of free trade - not to mention the hugely excessive bureaucracy these things create - you'll find the balance sheet has an almost uncountable negative bearing on our transactions.

Note: I haven't mentioned immigration, but will do so in an imminent blog post.

EDIT TO ADD: Personally I suspect that even if we do leave the EU, the Brexiters won't exactly have many reasons to do cartwheels. If the politics of the present day socialist Tory and Labour parties are anything to go by, the post-Brexit UK government will probably actively mirror most of the annoying interferences that are currently present in the EU from which they are filing for divorce.

* To give you a microcosmic example of the cost of overly-bureaucratic political interference by looking just at America, Dan Mitchell of International Liberty (who is about as well researched as anyone on these matters) shows how Americans spend 8.8 billion hours every year filling out government forms, how the economy-wide cost of regulation is now $1.75 trillion, and how for every bureaucrat at a regulatory agency, 100 jobs are destroyed in the economy’s productive sector.

  

On Zoos, The Gorilla, The Death & The Reaction

I'm soon expecting to see the first of many memes expressing the following:

"Every day hundreds of people are dying in x conflict or under y oppression or of z disease and it goes largely ignored, but one gorilla is killed in a zoo and everyone can't stop talking about it and posting photos and comments".

What's been interesting for me about human nature and the reaction is that I'll bet the totality of sadness and regret for the gorilla dying is much greater than it would have been if the boy had fallen over the edge, hit his head and died.

There's probably a threefold reason for this, and possibly not wholly irrational either, roughly along the lines of:

1) There are far more humans than gorillas in the world, so proportional to the size of the species, one less gorilla is (sub)consciously seen as more regrettable than one less human, particularly as there is much talk about whether they could have intervened in a non-fatal way.

2) The cost of this gorilla's life is rightly seen as so easily avoidable, so there is some form of sublimation whereby underlying resentment is (un)consciously directed towards the parents for not keeping a better eye on their child.

3) There are all sorts of multifaceted emotional responses to the death of the gorilla (the photo itself is enough to elicit sadness) which extend to associative thoughts of keeping animals from their natural habitat, the effect the human species has on other animal species, and that there is a taint to the human condition - a kind of fallenness - that other primates do not possess.

Three points on the above. Firstly, as tempting as I'm sure many might find it, I wouldn't wish to see too much opprobrium directed at the parents. While we can all say with hindsight that they could have kept a better eye on the boy, I'm sure every parent will tell you that realistically it's terribly hard to keep your children in the safest proximity to a parent at all times. Even within the vicinity of their parents, children wander, they explore, and 99.9% of the time nothing serious happens. This has been a case with a tragic outcome - but I think if too much condemnation is directed at the parents there will be an awful lot of hypocrisy reflected back at those that condemn (specks and planks in eyes spring to mind).

Secondly, it's understandable why more is made of this incident than of the continual conflicts, oppressions and diseases that blight humanity every day - shooting a gorilla in a zoo is a lot more unusual to the casual observer than the regular torrent of tragedy and adversity one rather expects to see on the news every day.

Thirdly, putting aside all moral views and knowledge of hindsight for a moment - there is one thing I feel certain about: in the heat of the moment, if it were your child down there with the gorilla you'd have very little thought for the well-being of the gorilla, whether it's an endangered species, and so on, you would be terrified out of your mind at the thought of losing your child and be screaming at the response team to shoot the gorilla.

Are zoos good things?

In the wake of the death of Harambe the gorilla, and all talk of whether the fences should have been better, and whether all the decisions were the correct ones, some people have been declaring that zoos are bad things and should be discontinued. Immediately after an event is the worst time to assess a proposition like that, as people tend to be reactionary and not weigh up all the pros and cons (which in most cases are the same before or after events like this) - but I have a couple of thoughts on the matter.

When considering whether zoos are a good thing, what I mean is, do the net positives outweigh the net negatives (including for humans as well as animals)? In most cases, pet ownership seems to me to be a good thing for both the animal and the owners because the pleasures of having a dog or cat or horse at your property far outweigh the costs (food, injections, the looking after time, etc).

Zoos, on the other hand, confer significantly more costs and benefits on animals. The benefits are regular food, low risk of predation or injury from other creatures, and safety from poaching and hunting. The costs are lack of freedom in their natural habitat, and having to put up with lots of people with ice creams looking at them all day, and on the odd occasion getting shot by zookeepers.

From a layman's perspective, my instinct is that the benefits outweigh the costs for the animals, but it's hard to be sure, particularly as one can't know the mind of another creature. Maybe whales and primates in captivity suffer psychologically less than, say, meerkats or iguanas - it is difficult to know.

One of the benefits of zoos is that they offer educational programs for the children, youth and family - but in today's modern age learning potential via videos and the internet is so huge that that might be less of a factor nowadays. Another benefit, and this all depends on the country, but some zoos can help preserve genetic diversity. A third benefit is that folks who see and interact with animals are more likely to support the survival of the species. Thus, whether zoos benefit individual animals or not, they may well benefit the survival of the species and biodiversity.

As everything is a trade off, one can argue that zoos are good things overall because they can serve as important reservoirs/stockpiles of rare and endangered animals and precious genetic variation until habitats can be restored. But one can also argue that zoos are an overall problem because those benefits do not make up for the negatives associated with keeping animals in possibly sub-optimal conditions. 

All that said, once we start to look at some figures, though, we get a better idea of how much value zoos provide. According to a quick Google search, there are over 10,000 zoos in the world, gaining over 600 million vistors per year, and with figures like that it's clearly an industry that's created hundreds of thousands of jobs. Consequently, once you add to that all the scientific research, the animals that are saved from extinction through the breeding of endangered species, and all the public education distilled from their existence, I think it's fairly easy to argue with confidence that for humans zoos are a net benefit to the world. As for whether that constitutes a net gain for humans and animals combined, my gut instinct is that it does - but I'll leave you to make up your own minds on that one. 

* This surely doesn't need saying but obviously I am always talking about zoos that treat animals well and with care. Unquestionably any zoo or circus that fails to do this is disgraceful and should have their licence taken away and never work with animals again.

Bad Ideas Lead To Wrong Conclusions

A new EU law has just come into effect telling tobacco companies they must sell cigarettes with restricted branding as well as containing images highlighting the damaging effects of smoking. Alas, we're getting rather used to these laws, but some people seem to be getting used to them a bit too keenly.

Discussing this issue earlier today on the radio, The Guardian's Zoe Williams made the obvious point that the more undesirable things we make illegal the better society will be. Like many observations of this kind, though, it may be obvious but it's also bonkers. It's one thing to not mind a law on cigarette packaging that tries to reduce the number of smokers - let's face it, it's not the worst law of the land. But it's quite another to say that the more undesirable things we make illegal the better society will be - which is, alas, a sentiment shared by many EU officials.

It's a slippery slope, because crime, like most things, involves a trade-off where if you get more of one thing you get less of other things. Deterrence and punishment are good things, but they don't come for free, therefore it is possible to have them in excess. Crime would be a lot lower if every road in the UK had its own designated police squad, but no one thinks that's a price worth paying.

If you make something illegal you automatically impose a cost on society - and that cost is borne by everyone involved in deterrence and prevention, but also in a small part by victims of other crimes too (the additional resources used preventing or punishing some crimes come at the cost of preventing or stopping other crimes).

Naturally the cost of catching criminals increases when there are lots of offenders, so when you decide to make something illegal you will find that if it is common it is going to be costly. Therefore calling something a crime means it ought to be efficient in terms of prevention and punishment. A crime that produces a net cost to society of £3 per person is not worth preventing if it costs £7 per person to enforce it.

A long standing debate has been about drug-legalisation. Increased enforcement of drug crimes raises the cost of taking drugs, but also the cost of dealing with drug users. It also raises the street price of drugs too, because if buying and selling drugs is a crime it increases the risk for both parties. Because drug demand is usually inelastic there will be increased crime for the purposes of buying drugs too.

Given that both drug sellers and drug buyers do not have the option of calling the police when deals go bad or when there is violence or theft associated with the transactions (drug gangs defending turf, extorting money from weak buyers, etc), there is naturally a lot of extra crime associated with drugs that wouldn't be there if it were legal, which increases drug prices too. And if there is inelasticity of demand then those increased prices won't decrease demand all that much.

Whichever way you cut the cloth, it just isn't the case that the more undesirable things we make illegal the better society will be. As I explained in this Blog post, some of the things people trivialise as simply 'undesirable' are things that millions of people can quite easily enjoy in moderation, whereas as we've seen above (plus with countless other examples I could give) many laws are just too costly to enforce and administer, and many are too oppressive to our liberties to contemplate.

 

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

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

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

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

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

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

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

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

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

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

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

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

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

To read the full article (click here).

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

The Economics Of Terrorism, And Why Islamic State Will Eventually Crumble

A recent poll revealed that just over 70% of people in the UK think that immigration increases the likelihood of terrorism. They are right, but not in any way that should cast aspersions over the merits of immigration, because immigration increases the likelihood of terrorism only in the same way that having roads increases the likelihood of speeding. The cause of an increased likelihood of terrorism is down to something else.

Terrorism, like fruit, vegetables, cars and holidays has a supply and demand curve. Consider terrorism as a good with a demand curve - by which I mean that terrorism is an activity that currently some people wish to engage in to achieve a religious or political goal. The price of engaging in terrorism is paid in the form of the risk of death, injury or imprisonment.

Similarly, there is a demand curve for burglary, speeding, and fraud, and the price paid to do these things comes in the cost of a fine or a prison sentence. To put it in formal terms, we could in theory draw a demand curve for all of these crimes and then plot the likelihood of punishment on the vertical axis, and the number of crimes committed for each on the horizontal axis.

Ascertaining the steepness of the demand curve is like asking whether an increase in the probability of punishment will amount to reduced instances in crimes committed. Measuring the slope of the demand curve for, say, burglary is equivalent to measuring the deterrent effect of the punishment for burglary. Crimes like burglary, which are often committed to feed a drug habit, are likely to have steep demand curves because drug demand is usually fairly inelastic for an addict, which is why recidivism rates for drug addicts are so high. With speeding, on the other hand, the demand curve seems to be pretty flat. In other words, the single appearance of a speeding sign or a camera leads to a huge decrease in the incidences of speeding.

Now when it comes to terrorism and the sort of people who are likely to commit terrorist acts in the name of ISIS, the demand curve is about as far from flat as it is possible to be, because most of the causes with which the terrorists identify are causes bigger than the crime deterrents (including even death). In other words, many terrorists are perfectly willing to die for their cause, believing that in doing so they are offering a noble service to Allah, meaning in most cases there is no deterrent to flatten down the demand curve for terrorism.

If terrorists have no care for the consequences in terms of punishment for the crime, and if Islamic State continues with the same momentum in recruiting willing participants to fight for their cause, then terrorism is going to continue to be a problem, and immigration only changes where the incidences of terrorism take place - be it Britain, France, Germany, Holland or Belgium.

Regarding the aims of Islamic terrorism, and the fact that those aims even seem able to subvert the moral compass of the perpetrators, I see no signs of incidences of terrorism decreasing. The wide scope of this evil regime is that Islamic State leader Abu Bakr al-Baghdadi wants to establish the Caliphate of all Caliphates, unleashing terror everywhere he can, and ruling Islamic State nations under the thrall of their terror-inducing domination.

There is, though, perhaps one fly in the ointment - if only he was a bit more familiar with the works of Plato and Aristotle, or even a bit more cognisant of historical antecedents, he and his fellow Jihadi thugs would see that their aspirations are probably unrealistic in the longer run.

Here's why. A general pattern throughout the history of military or political coups is that even when they are brutal and catastrophic for the citizens, they soon reach a point of relative stability, not least because it's nigh-on impossible to rule a country under continual internal strife. In other words, good conquerors, even Caliphs, totalitarian as they were, still allowed at least a semblance of autonomy and harassment-free administration of people. That's why, even though it is likely that these horrible terrorist incidents will continue to occur, and Islamic thuggery will continue to pop up, the idea of ruling nations consistent with the backward, brutalised, oppressive, freedom denying methods of Islamic State is wholly unrealistic in the long run.