A Popular Idea, But A Bad One

We all know really why Jeremy Corbyn is a Brexiter in a Remainer's clothing - it's because he wants our nation to undergo a prodigious re-nationalisation program, and he sees the Brussels Eurocrats as being an impediment to this (one of the few good things about the EU is they prohibit European nations from nationalising, subsidising and bailing out their own interests, as it is, rightly, seen as being inimical to competition from outside industries).

Apparently some of Corbyn's nationalisation plans (like the nationalisation of the railways) are proving hugely popular. Now, while I've written before about the imprudence of nationalised industry in the specific sense (see here and here), and while I have numerous blogs on the benefits of the private sector over the public sector (if you were ever inclined, all of them can be seen by clicking on this Private Sector vs. Public sector tab), I probably haven't written a blog post that swiftly points out why generally speaking nationalised firms are worse for us than non-nationalised ones.

A good place to start here is to remind you of Milton Friedman's famous dictum regarding the four ways to spend money:

“There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.”

Now, given that politicians have certain popularity-gathering incentives to spend taxpayers' money well, you'd think they might have constant mindfulness of appearing to the public to be prudent spenders. In a small sense this is true, yes - but what you have to remember is that due to asymmetry of information, short memories and copious amounts of spin, the relationship between a government's achievements/mistakes and the public's perception of them is pretty opaque and obfuscated - which is precisely what politicians and civil servants love.

If you’re spending someone else's’ money on someone else, as the government does with its various 'investment' schemes (which are rarely investments actually, they mostly mean 'costs') then the motives are likely to be less prudent than if you’re spending someone else's’ money on yourself. But both pale in comparison to if you spend your own money on yourself, which is what private businesses do, and because of which they have a better nose for efficiency, targets and outcomes.

The private sector is astronomically more competitive, because it has to forecast future demand and attract funds competitively. That's why public sector projects are far more notorious for cost overruns, being overstaffed, and for costly time delays.

That is why, apart from government spending that helps the needy and most vulnerable in society, low levels of state spending make society better off. Private investors are generally more prudent because it is their own money at risk, whereas the public sector corresponds to the fourth quarter of Friedman’s quadrant: they spend other people’s money on others far more recklessly.

And while we're at it, the national beef with big business is a strange one too. Quite often goods and services are produced more efficiently when they are produced large-scale. A firm might be able to make 50,000 burger meals in less than twice the time it takes a smaller firm to make 25,000. Trading small-scale often reduces the extent to which comparative advantage takes effect. Bob's metal firm can spend 3 days making 10,000 hooks, and Jim's carpentry firm can spend 3 days making 2,000 varnished boards, whereas one firm making both may take 8 days to produce that quantity.

A firm is said to be a more effective trader if it can produce a good or service at the same quality but at a lower cost than its competitors. And the benefits to society occur when as many firms as possible specialise in their field of comparative advantage and use it to trade. Therefore, it's usually the case that the country's biggest firms are the ones providing the most value for consumers, as well as being the biggest job creators.

To end, here's a thought experiment. Imagine if you pulled 30 people off the street in a random fashion, took them to an airfield, showed them all the parts of a Boeing 747 and asked them to work out how to build the plane from scratch. These non-experts would be clueless regarding how to assemble those proprietary parts - and the take home lesson would be: don't leave big and important jobs in the hands of amateurs, which is exactly how we should feel about our politicians and our economy.

 

Hobson's Choice Of Politicians: Why We're In The Height Of Mediocrity

Get ready to be frustrated more and more in the General Election build up - there will be many politicians that are going to try to appeal to us by promising to offer something 'fair'. Ninety nine times out of a hundred you are going to know that they are not even attempting to talk sensibly or coherently.

If I stood in the street asking random passers by what a banana is, they'd say something like "It's a curved yellow edible fruit", and there would be no disagreement about that description. On the other hand, if I stood in the street asking random passers by what fairness is, they'd say something "The quality of being fair", but there would be countless disagreements about that description in terms of what fairness means in a given context.

Everyone knows what the concept of fairness is, but everyone disagrees about which economic situations are fair and unfair. Consequently, then, I'm fed up hearing politicians saying they want a 'fairer' society, or a 'fair' welfare system or a 'fair' pension system or a 'fair' tax system, because they never tell us what they mean by 'fair' - they just use it wantonly because they know it's a word everyone likes, and everyone will hopefully think them caring and noble.

But what exactly is fairness in these terms? Is something 'fair' if the process by which it arrived is fair? Or is fairness an equitable distribution of something? If a politician fails to explain what he means by 'fair' his statement is ambiguous to the point of being facile. An inequitable distribution need not be unfair. Take a factory as a good example: a floor worker, a supervisor, a manager and a company director have an inequitable distribution of the business's money, but that doesn't make their salary unfair. Equally, stealing from the business in order to give everyone a fair slice of the pie would be an equitable distribution, but the process by which it arrived is unfair.

Cunning politicians and how they try to dupe you
The ambiguity around the word 'fairness' is only a microcosmic example of the wider problem of the dividing glass between what politicians say and what those words actually mean when heavily scrutinised. Politicians are quite used to this sleight of hand rhetoric, because they are taught to speak as ambiguously as possible whilst remaining in the sphere of perspicacity.

If they speak with too much clarity then the electorate will be able to see that they are against the proposal or that they have employed selective information. But if they are too convoluted they will hold no appeal either. So the key to spin is to speak in a way that will get as many of the electorate on their side. And the key to doing this is in making statements that are hard to disagree with but that remain so abstract they continue to be distinct from any coherent policy.

You see, generally speaking the most illogical and fallacious and damaging ideas that politicians come out with are not ideas that make them look immediately senseless and outlandish. They are usually ideas that appear on the surface to be somewhat plausible because they have just enough about them to seduce the average person who is accustomed to only considering ideas in terms of their tangible benefits. To put it another way, if the truth is north, and falsehood is south, most of the dodgy policies that politicians try to run by us are somewhere between north east and east - enough to steer voters off from the best path but not quite enough to have the electorate feel they are going in the opposite direction to what is best for their society.

For two reasons, then, policy-making is likely to make the main parties become more homogenised over time. In the first place because to speak in a way that will get as many of the electorate on your side means choosing from a fairly narrow range of customary voter-friendly phrases. And in the second place, most politicians if they employ a basic standard of reasoning should arrive at more or less the same conclusions about what is the right policy. That they do not - at least not publicly - shows that emotional biases and spin-friendliness are impeding this.

A party really has three groups that are the target of their spin, with one group standing out a mile (this is an oversimplification but not in any way that affects the integrity of the point). There are the two groups who are dyed in the wool either for you or against you, and there are those in between, who make up a variety of comparably amenable individuals. And as I explained in my blog post entitled One Of The Big Ironies Of Blog Writing, there are some you'll never lose, some you'll never win, and a whole assortment of people in between.

Alas, even if we believe it's the inbetweeners that have the most serious decisions to make, and the ones most genuinely open-minded enough to ponder them, I'm afraid the options voters have in front of them is rather like Hobson's choice. Because in asking us to choose between one party or another, we are not being asked to choose between a rump steak and a fillet steak, it's more like being asked to choose between a medium rump steak and a medium-rare rump steak, which is unfortunate if you happen to prefer fillet.

Terrible Ideas On An International Scale

How familiar is this? A Guardian columnist - in this case a woman called Van Badham - sees something she doesn't like and proposes a ridiculously absurd solution to rectify it. On this occasion, the beef is with multinational corporations basing their operations in places where workers are paid a lot less than in countries like ours. The solution, she suggests, is an international minimum wage.

It's almost as though these people live in a bubble that insulates them from any critical thought or even the remotest understanding of consequences linked to actions. Yes, we all dislike it when workers are maltreated, and we'd all join the Guardian in speaking out against these abuses - but her article isn't a groan about that, it's a groan about low wages in the developing world.

To see why an international minimum wage isn't the answer, you have to first understand something basic. The reason the wages of workers in places like Thailand, Bangladesh and Cambodia are lower than in places like the UK is because their productivity is lower. Wages for textile workers in Japan used to be similar to wages in for textile workers in Thailand, Bangladesh and Cambodia, whereas now they are similar to wages in the UK. The thing that's changed in the past few decades is that Japan has become much more productive.

So while low wages in Thailand, Bangladesh and Cambodia (low relative to UK wages, that is) tend to upset cosy Westerners like Van Badham - what she is really upset about is that workers in Thailand, Bangladesh and Cambodia are, for perfectly understandable reasons, not as productive as UK workers.

Consequently, then, an international minimum wage is not going to change this productivity differential. It will, however, do lots of other damage, mostly to the poorest people in the world trying to earn enough to survive.

To see this more clearly, let me offer an analogy. Suppose the value of a manual worker around the globe is comparable to cars. A UK manufacturer can be said to be like a £50,000 Porsche, a Spanish manufacturer can be said to be like £30,000 BMW; and a Thai manufacturer can be said to be like a £7,000 Vauxhall Corsa.

Suppose an international minimum car price were to be introduced. From now on, it is illegal to buy or sell a car for less than £15,000. Who is made worse off? It's not the Porches and the BMWs, it's the Vauxhall Corsas, the Peugeots and the Nissan Micras - in other words, the less valuable cars in Thailand, Bangladesh and Cambodia. What ought to be obvious is that an international minimum car price law won't make cars worth £7,000 any more valuable to buyers, but it will make them illegal to sell at their value, because the law inflates their price by at least £8,000.

Once you bring the analogy back to poorer people trying to earn a living, it should be obvious that as an international minimum wage isn't going to increase the productivity of workers, and therefore won't make them any more valuable to employers, it will make it harder for them to hold down jobs and hinder the general growth of developing nations, not to mention probably increase worker maltreatment in the shape of black labour markets.

Other beneficiaries of an international minimum wage law would be the higher skilled workers who don't lose their jobs through such a policy but can now command higher wages as a result of the international minimum wage starving the market of less-skilled competition. History provides us with a real life example of this when in 1930s America the wages of the textile workers were higher in the north than in the south, where the cost of living was lower. The introduction of the federal minimum wage made it much easier for the northern firms to compete, because the wage advantage the south had was cancelled out, which as expected brought about all kinds of difficulties for the southern textile industry.

After spending five minutes perusing a few more of Van Badham's columns, you see the same error repeated in every one of them; she concerns herself only with who gains from a policy without the slightest attempt to enumerate the costs, never mind weighing up the costs against the benefits and giving her readers a framework for assessing what she thinks are net benefits. If she addressed this, she would be more likely to see why an international minimum wage is a silly idea.

Not only is it a silly idea for reasons already mentioned, it is also an unfair idea because it essentially acts as a tax on hiring workers, taking from the people who buy the goods and passing onto the people who make those goods. And if you're observant you'll probably have noticed by now that the many of the people who buy goods from relatively poor people are also relatively poor people. Even in the developed world - next time you're in Burger King, have a look at the people serving, and at the people waiting to be served - the latter do not, on average, appear to any wealthier than the former.

An international minimum wage would place an unfair burden on the employers who are already doing more than anyone else to provide the jobs to help citizens in developing nations - the employers of low-skilled workers with low productivity. An analogy: at lunch times in school only 10% of the pupils clear away their plates and cutlery afterwards. The headteacher decides there are too many plates and too much cutlery left in the canteen after lunch, so she demands that the pupils who already clear up after themselves should do more to help rather than the pupils who do not. In real life the firms doing most to create jobs in the developed world are like the 10% of the pupils that clear away their plates and cutlery after lunch. It is insensible to demand that they are ones that should clear up some more.

Beware Of Freaks Bearing Gifts

I have a serious question for you. How is it that in the year 2017 an aspiring Labour Party Shadow Chancellor can lead a Communist rally under a flag bearing the hammer and sickle in the heart of London on May Day, where some of the crowd apparently carried a giant poster of Joseph Stalin, with others repeatedly chanting ‘Marx, Engels, Lenin, Stalin’ - and yet this not only fails to make the headlines, but (even more alarmingly) a large proportion of our youngest and so-called brightest people are right behind the movement?

What? That's crazy - Marxist thinkers and dictators have repeatedly ruled over economic shambles after economic shambles and been responsible for millions of deaths through large scale murder, civil conflict, poverty and enforced starvation.

I know, you'd think we'd have moved beyond this level of dangerous nonsense by now.

So why haven't we then?

Because the poison is being offered as medicine in a way that brands it as something delicious. It's easier to serve up arsenic to someone if you give it to them in the form of a chicken Kiev.

Are you describing the Labour Party's election promises?

Yes, and we might as well get them done and dusted early on. Pretty much every policy and idea these Labour politicians will put forward is going to be based on three principal misunderstandings. The trouble is, they are misunderstandings that many people have already swallowed. They come in the following three sound bites, and you're going to hear them repeated over and over again in their election campaign. They are:

1) "We must challenge the injustices of inequality in this country"

2) "We want to make this society one that works for everyone, not just the privileged few"

3) "We need a government that will invest in jobs in this country"

Now, what's wrong with these statements is that they make absolutely no attempt to self-evaluate - that is, they fail to make even the slightest consideration that their claims are untrue at the base level. They begin with an automatic assumption that inequality is necessarily a problem that needs solving, that society is working for a few at the expense at the majority, and that governments can bring value to an economy with job creation.

Aren't these all worthwhile goals?

No they are based on huge misunderstandings about how an economy works.

How so?

Take the issue of inequality. A huge majority of the population seems to agree that inequality is a major social injustice, and that the poorest in society are getting a rough deal because of the increased wealth of those at the top (I've shown as best I can that it isn't the case - see my 'inequality' side bar over to the right of this page for more in depth reading).

Thanks, I'll read that later.

Good, so in the meantime, let me tell you about China, because China is the best example of a country that shows the flawed analysis of the Labour Party's rhetoric on inequality. China went from being hugely poor but not very unequal (in terms of the Gini coefficient measurement) to being much less poor but much more unequal. Using Labour Party logic, if inequality is the main problem then China was better off in the starvation years than it is now in the more prosperous years.

So a country's inequality isn't very important because it's absolute well-being that's the key thing?

Yes, but there's more, because the other important thing that people keep missing about inequality is that rising inequality inside countries is happening in no small part because global inequality is falling. The fall in global inequality is the thing that should most make us glad because it means the world's developing nations are doing better and people are struggling less and less.

So if Marxists like Corbyn and McDonnell really do espouse the edict "From each according to his ability, to each according to his needs" then they should be pleased because that is exactly what is happening with rising inequality in developing nations - the poorest people in the world are being made better off 'according to their needs' by the entrepreneurial investments of the wealthy job-creators in their countries.    

Given that entrepreneurialism and earners in the top quintile determine hugely the levels of inequality within a country, it is perfectly easy to see that in many cases the reason a nation is so unequal is that it is doing so well - i.e. there is a large economy in which to be unequal, but in absolute terms the nation's individuals are doing quite well. India, for example, used to have far less inside inequality because there wasn't so much money in the economy. The USA is the world's wealthiest country but also one of the world's most unequal. In terms of standard of living and material well-being, most people would prefer to live in the USA than they would India.

Interesting! Ok, so what about politicians as job creators, then - it must be good when politicians can invest some of our tax money back into the economy and create jobs, right?

I'd be very wary when politicians tell us they will "invest in jobs in this country". It's a nice sound bite that attracts voters, but if it were a liquid compound it would be made up of 2 parts linguistic dishonesty and 1 part not understanding the economics of jobs.

Please explain.

They use the word 'invest' because they don't want you to know, or often don’t know themselves, that the jobs they are talking about are not investments, they are costs. People get this when the thing in question is wood, or metal or plastic - the fewer raw materials you use for the same output the better. Yet the left seem to forget this when the thing in question is labour, ignoring the fact that jobs are a cost of doing something, and that increased efficiency occurs when we reduce jobs, not create them. The biggest clue that jobs are one of the costs of a project and not one of its benefits is that people have to be offered money to go and do them.

It's the old Milton Friedman story again - when the Asian official overseeing the canal digging project told him that the reason the workers were digging with shovels instead of modern tractors and earth movers was for the purposes of job creation, Friedman responded with the quip "If it's jobs you want, then you should give these workers spoons, not shovels."

Many jobs created are a benefit, of course - but they are not the kind of jobs that Jeremy Corbyn has in mind. His is exactly the sort of party that thinks using 1,000 men to dig a canal with shovels is more beneficial to the economy than using 20 men with tractors, because it creates 980 extra jobs.

Isn't that a slight exaggeration though?

A very slight one, but consider how closely it resembles the political narrative of our left wing parties (which these days includes the Conservatives too). In a normal market of supply and demand, jobs only get created if they provide value in the economy - that is, if they provide things for which people would voluntarily pay money. The only place in the economy where this condition doesn't have to be met is when politicians get involved.

In a supply and demand economy, the goods and services that people require will be provided by suppliers at prices beneficial to both buyers and sellers. The state has a different method; it takes the money we earn (about 60% of all our earnings when all taxes are factored in), keeps what it needs to fatten itself up, and then puts the rest towards paying people to do what they'd otherwise be doing in a supply and demand market. The state is an unnecessary middle man between the demand of buyers and the supply of providers, making these services more expensive in the process.

So without the state's involvement, these services would be provided at market prices, leaving taxpayers with more money in their pocket to spend on other things they want and need?

By and large, yes. A good way to see this is to think about what the state insists on providing - the schools and hospitals and social services and what have you. These things are only provided by the state in name only; in market terms they are being provided by teachers, doctors, nurses, HR staff, cleaners, caterers, care workers, drivers and numerous other individuals. The state can only claim to provide what individuals do actually provide with their skills and labour.

Whenever you hear a politician like Corbyn or McDonnell say they want to create jobs and invest in our economy, they actually mean they want to rob society of value and make us all worse off. To see why, ask yourself this: given how I've explained that individuals like doctors and teachers are the ones doing the jobs, not politicians - what possible jobs could politicians create that would not already have been created by market forces of supply and demand if there were a need for those jobs? Bear in mind we are not talking about services the state already provides, like defence, rule of law and road maintenance, nor about fattening up already bloated public services, we are talking about new jobs these politicians are promising they will create.

You got me there, I cannot actually think of any.

I'm not surprised. Let me expose a myth - politicians don't really create jobs, they only create vanity projects that rob society of value. To understand why, you have to understand that government spending on jobs involves not just the increased cost of doing so compared with markets (bureaucratic overheads, inflated prices), it also involves all the 'unseen' costs to society in the jobs that never get created.

Suppose a private sector firm can provide a service for £1 billon a year, and the government spending project goes ahead and does the same work for £1.5 billion - society rarely notices the loss of value because the £1 billon a year contract never gets seen on the account that it never happens.

So then what you also don't see is the half a billion pounds that now no longer gets spent on goods and service people actually want because it is has already been taken in tax to pay for the government's vanity project. That half a billion pounds extra expenditure is paid for with higher taxes, which plays out in citizens having less to spend on consumer goods, which lessens demand, which reduces employment and so forth.

Ah yes, our old friend the 'unseen' costs.

Precisely - but those costs extend even further than that. If the government doesn't get the half a billion pounds from tax, it can get it using two other methods: it can borrow the money, which is a debt that will be passed on to future generations in the form of higher taxes, and a move that will reduce available funds for other businesses to borrow, and put up the price of borrowing; or it can print more money, which will put the economy's goods and services up in price by a total of half a billion pounds and decrease purchasing power, which will hurt jobs.

It's a bit of an eye-opener isn't it?

Yes, and we're nearly done. The other way that politicians claim to 'invest in jobs in this country' is by spending public money on industries that are popular with voters - which often just means industries based in Britain. For similar reasons, this is a bad idea that robs society of value - not least because these industries would not need any public funding if they were thriving on their own market-based merits.

So if they aren't thriving it is better that they die and create extra unemployment?

Think of the 'unseen' again. Job losses and industry closures are almost always a sign of progression - either improved technology (more online customers and self-service checkouts), more efficient competition (goods cheaper abroad) or changing demand for substitutes (less demand for coal and paper).

My local MP was complaining the other day about Swinton losing 180 jobs to better technology. He doesn't seem to realise that the purpose of a successful economy is to kill jobs as well as create them - kill the value-draining ones and keep and create the value-creating ones. If you don't kill the jobs that no longer offer financial value then the jobs that do offer it are created more slowly, and sometimes not at all. It would be far worse for Swinton to go forward and function sub-optimally with approximately 180 staff members more than it needs in the current climate of digital proliferation.

The other big reason that some industries and businesses are not thriving in the UK is because they are thriving abroad - a fact that makes British consumers better off because we get better value for our money. On top of that there are also the moral hazards that come with politicians using taxpayers' money for propping up industries, and the opportunity costs in the shape of all the places the money doesn't get spent because of it.

These politicians are very good at using words and phrases that sound like they are offering voters things that will be of benefit to them. The reality is very different: they are empty sound bites, employed with deliberately misleading language, based on faulty logic and counterfactual propositions that would have a detrimental effect on the people they purport to help. Don't let their election promises for a better Britain fool you - they are trying to serve you a chicken Kiev stuffed with arsenic.

When Will The Pope Stop Being A Crazy Cat Over Capitalism?

Pope Francis had harsh words for libertarians at the Pontifical Academy of Social Sciences on Friday. He pontificated about the ills of 'radical selfishness'; said that the libertarian individual is 'anti-social' and that he 'denies the value of the common good'.

If I were a Catholic, I'd be thoroughly embarrassed that the head of my church was so abjectly uninformed about such a big subject. I know Catholics believe in miracles - well here's one right in front of them, because it's fairly miraculous that one individual could cram so much nonsense into one short speech.

On the charge of 'radical selfishness' - it's true that a free market is about individuals pursuing their own goals - but as Adam Smith reminds us, this 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 they are willing to pay.

In other words, a society of individuals pursuing their own good leads to an increase in the common good, not a decrease, because trade improves the lives of all who partake in it. And far from making us anti-social, it encourages social co-operation as providers must seek the needs and wants of society in order to provide what they require. Pope Francis's attack on libertarianism is a straw man attack, completely misunderstanding the thing he condemns.

 

Moreover, the Pope's anti-capitalist narrative is contradictory. Suppose I wanted to see a physically healthier Britain but I also wanted to quell the evils of physical exercise, you'd probably think me quite a strange and misguided fellow. My mistake would be a silly one to make, but it's not all too dissimilar to the mistake the Pope makes when he talks about how we need to temper the woeful profit motive of capitalism if we are to bring an end to poverty.

The free market is literally the aggregation of the billions of mutually beneficial exchanges between willing suppliers and consumers every day all over the world. Profit is made when value is created, and value is only created when people supply things that consumers need or want, whether it's food, clothes, electricity, computers, holidays, new technology, fresh knowledge or better medicines.

I'm all for encouraging people to be motivated by love, kindness, generosity and philanthropy, but being down on the profit motive is, in most cases, to be guilty of picking the wrong battle based on an erroneous interpretation of the so-called enemy.

If the Pope is concerned about helping eradicate poverty, as he is perfectly right to be, he would do much better if preached the kind of message conveyed here, here, here, here, and here.

What Babysitting Can Teach Us About The Economy

Let me tell you a story about babysitting, first told by economist Paul Krugman. The story involves The Capitol Hill Babysitting Co-Op, which consisted of many couples who baby sat for each other using the currency of scrips, which were pieces of paper with 30 minutes' worth of babysitting time on each.

Couples earned scrips by babysitting, and they purchased other couples' babysitting time with scrips. Couples all started with 20 scrips (10 hours of babysitting time), but over time there was a problem, because couples became reluctant to use their scrips, which diminished the demand for babysitters. This made it harder for babysitters to sell their babysitting time, which in turn incentivised couples to hoard their scrips, thereby creating a babysitting recession.

So the story goes, Capitol Hill decided that the solution to kick start the babysitting economy was to issue couples with more scrips, which stimulated the demand for babysitting by making couples keener to go out. As more babysitting jobs became available, couples became more incentivised to go out themselves, and voila, the babysitting economy was back in full flow.

The analogy to macroeconomics, according to Krugman, is that in recessions it is harder to earn money as people spend less money, so the economy can be kick-started Keynesian-style by governments issuing more money. This is flawed for two reasons; firstly, when governments issue more money into the economy there are enormous concomitant deadweight costs to the price system. And secondly, the economy isn't like the Capitol Hill Babysitting Co-Op because money is more dynamic and so are prices.

The problem with the babysitting recession was down to what's called sticky prices. Sticky prices is the term for when prices don't adjust quickly enough to changes in the economy. For example, a chain of ice cream parlours may find that an increase in the price of ingredients makes providing ice cream slightly more expensive. But despite this, changing all the prices on the signs and advertising boards may be not worth their while, so their prices stick. Another example, the marginal value of waitresses may decrease by 50p an hour, but restaurants who've invested time in their waitresses may not wish to reduce their hourly rate or recruit new staff.

Price changes can be costly for businesses, particularly in large organisations with tens of thousands of prices to alter on shelves, and the management time required to research optimal prices, to keep an eye on competitors, organise sales staff and negotiate with consumers - sometimes it pays to remain with the status quo.

Anyway, back to the babysitting co-op - the problem the couples found was that prices were sticky, but also that there was no negotiating to stimulate supply and demand such as you find in a real economy. For example, in a babysitting recession couples could negotiate the value of their scrips to bid up demand for babysitters, which would increase the supply of babysitters.

The place that Krugman's analogy falls short is in the fact that money in an economy is not like the scrips, because the scrips were confined only to babysitting, whereas money is confined to anything you want to spend it on. In other words, unlike the scrip, there is nothing on a five pound note that says it must be spent on babysitting, so not only do prices adjust more freely in a market economy by supply and demand changes in one good or service, they do so in relation to every other good and service too. In the babysitting cooperative, there is not much fungibility - which means you cannot say you don't want a babysitter so you'll go out for the night by buying a toaster instead. In an economy, however, if prices rise for apples, you can always eat oranges, or bananas or cereal.

This is why the government printing money is almost always bad for the economy, even if the intentions are sometimes good. To see why with an illustration, have a look at a typical supply and demand graph. Suppose the product in question is bunches of bananas, and the equilibrium point - the point at which quantity supplied and quantity demanded are equal - is £1.20 a bunch, and 2 million bunches are sold per week in the UK.

Now suppose the market for bananas got thrown off equilibrium by a 20% tax. Bananas are now £1.44 a bunch, and because the tax is passed on to the consumers, let us now say only 1.8 million bunches are sold per week. The tax has effectively reduced banana sales by 10%, which negatively impacts buyers and sellers, and denies society lots of consumer and producer surpluses.

Printing money causes increased inflation, which is rather like a tax because those who hold money lose purchasing power. Inflation is to holding money as income tax is to earning an income, therefore printing money is like increasing the tax on savings, which has a knock on effect of altering consumer prices away from their equilibrium point, which then robs society of some of the value created in a free market of supply and demand.

Other government interference, like price controls, taxes and regulations cause further exacerbation to this problem, because they affect the market value of goods and services, which means many firms lack sufficient information to act, which means falling sales, reduced costs, wage cuts, job losses and reduced consumer demand in a downward circular spiral.

People Who Live In Glass Houses Shouldn't Accuse Google Of Being A Monopoly

Just about every paper today is reporting on the story of how Google is apparently a monopoly that may need to be regulated and broken up to allow further competition. This is a big mistake by the European commission, and sadly rather typical of institutions that don't understand monopolies and how widespread value is created through economic power laws (the three newspaper articles I read today don't do much better).

First things first. How can you tell when there is a natural monopoly? That's a serious question - before you complain about monopoly power, you first have to establish that there is a monopoly, then if there is, explain why there is one. Because even if there is one, you'll find there are often many good reasons for monopolies or for dominating firms in particular industries.

One of the main areas of enquiry when there appears to be a monopoly is to ask whether there are good alternatives for consumers, and if so why aren't they being consumed, and if not, why not? And by 'monopoly' we could just mean having the lion's share of the market. For example, suppose Domino's has the lion's share of the pizza market. If consumers think Pizza Hut, Papa John's and other pizza places are a good substitute for Domino's then there is healthy competition. If they don't, despite competing firms, then Domino's are probably providing the kind of pizza (or the kind of price) that a significantly large number of people like.

Now the only way to determine whether competitors are a close alternative is to examine the elasticity of demand. If there is elasticity of demand then if Domino's raises its prices then a lot of pizza eaters will switch to Pizza Hut or Papa John's. If, however, the elasticity is negligible then more pizza eaters will stick with Domino's.

The thing we hate about monopolies is that they are predominant forces that stifle competition - which is bad because it is competition that brings the most significant progress for people in society. If you have a monopoly on a good or service there is no selection pressure to improve and innovate, as consumers have nowhere else to go as an alternative. But with competition, providers are continually looking to improve products, innovate to offer something new, and retain competitive prices too.

Incidentally, I can't help but point out the irony here because the people that most qualify as being monopolistic forces that stifle competition and progress are governments that choose to put industries into public ownership. They are the most unassailable monopolies of all.  

What Google has, just like Facebook and Amazon, is not an unassailable monopoly - it is the possession of the lion's share of innovation and value-creation in its particular sphere of market value. Digital powerhouses, similar to supermarket, electricity, water and railway providers, have the lion's share of industry control not through unfair monopoly power or competition-starving cartels, but because it takes a high level of start-up costs, investment and infrastructure to provide large-scale, high quality services at that level.

Not only do companies like Google, Facebook and Amazon control the lion's share of their particular niche industry, the demand for their services has grown so large precisely because they've created or helped create the market for these services people value, and lest we forget, at a cost lower than their competitors.

There is nothing stopping competing firms coming in to challenge - but if they cannot challenge Google in terms of its efficiency of output then there's no reason why anyone should be concerned about their market size. Obviously if any firm became so enlarged that they used their dominance for ignoble means then of course we should be concerned and look to intervene. But if there's no sign of that happening - and Google, Facebook and Amazon are simply doing what they do really well, and providing mass value in doing so - who is anybody to complain about that?

Moreover, because Google, Facebook and Amazon don't have an unassailable monopoly in terms of shutting out competition, it is therefore highly unlikely that they would do anything that would be to the detriment of consumers. How ironic, then, that an actual monopoly force like the European commission wants to break them up in an attempt to make the industry more efficient, when one of the main reasons those industries like Google, Facebook and Amazon are so far ahead of their competitors is because they have dominated the sectors through predominant efficiency.

Why Those Least In Danger Of Being The Victim Of A Terrorist Attack Are Also Most Likely To Be Afraid Of One

Let me start with two simple questions.

1) Who is more likely to be apprehensive about catching a sexually transmitted disease, A or B?

A) A chaste person

B) A promiscuous person

2) Who is more likely to worry about banging their head on the top of a doorway, A or B?

A) A very short person

B) A very tall person

In both cases the answer is obviously B, because the risk of catching a sexually transmitted disease or banging your head on the top of a doorway are directly correlated with how much multi-partner sex you have and how tall you are.

Now consider a third question.

3) Who is more likely to worry about a terrorist attack, A or B?

A) Someone who has a relatively low risk of being the victim of a terrorist attack

B) Someone who has a relatively high risk of being the victim of a terrorist attack

You'd think the answer ought to be B again, but in this case I'm not so sure. I think there is something about the human spirit that confounds expectations when the danger is terrorism. Let me explain.

 

Consider two people - Jack and Bob. Jack lives and works in London. He commutes to and from work every day, and he eats and walks in central London every day. Bob lives in Oxford, and visits London only very occasionally - no more than once a year. Which one of them is at the highest risk of being the victim of a terrorist incident? By a long way, the answer is Jack. He spends nearly every day in the city in the UK that is by far the most likely to experience a terrorist incident, whereas Bob only visits the terrorism hotspot once annually.

But here's the interesting thing; I'll bet on that one day in the year when Bob is on the same London tube line as Jack, it is Bob who is most apprehensive about there being a terrorist attack, not Jack. It might be true that if you add up the total apprehension felt by both men in a year including calculating journey times, Jack has more aggregate apprehension, but the specific point I'm making still, I think, holds - which is that humans tend to greatly exaggerate small probabilities - and someone commuting in London every day is less likely to overestimate the probability of his being involved in a terrorist incident than someone who visits London once a year.

The other part of this is that terrorism engenders a fear and apprehension that is incommensurably greater than the actual probability of being a victim of terrorism - so an infrequent visitor to London would be more likely to have associative fear in relation to the spectre of terrorism than a regular commuter would have, because the latter has more acute daily experiences of the fact that terrorism is the exception to the regularity of everyday London-based activity, not the rule.

Why Even A General Election Cannot Properly Reflect Society's Real Preferences

Providing two thirds of MPs agree in a vote, we learned today that there will be a General Election in June. General Elections score highly on entertainment value, as do weak opposition parties, but how much do they really tell us about the true power of society's political feelings? The answer is, not as much as you may think.

Arrow’s theorem, which I blogged about recently, shows a fundamental fly in the voting ointment – that is, while we as individuals can have properly ordered preferences, society cannot so easily, because society as a whole has no real coherence when those preferences are aggregated. If I'm in the CD store, I'd prefer The Smashing Pumpkins to Sonic Youth, and Sonic Youth to Pearl Jam, which means, quite naturally, I prefer The Smashing Pumpkins to Pearl Jam. Now if Radiohead were introduced into the mix, I'd prefer Radiohead as first choice, which would change my CD preference. In other words, I'd prefer The Smashing Pumpkins CD to the Sonic Youth CD, but by introducing Radiohead, I'll probably end up with the Radiohead CD.

But here's where it gets strange. Introducing Radiohead may naturally mean I now prefer Radiohead to The Smashing Pumpkins, but it shouldn't change the fact that I prefer The Smashing Pumpkins to Sonic Youth, or Sonic Youth to Pearl Jam. But in society things change, because the aggregation of individual preferences into social preferences brings about strange results, whereby, if we stick with the CD store analogy, society may prefer The Smashing Pumpkins to Sonic Youth, but may prefer Sonic Youth to The Smashing Pumpkins if Radiohead are introduced. If society prefers The Smashing Pumpkins to Sonic Youth, then whether Radiohead are an option shouldn't change that fundamental preference - but it does.

So, in politics, you have all these strange things going on, where society might prefer the Labour to the Lib Dems, but with the introduction of the Greens they prefer the Lib Dems to Labour. Or where society might prefer Bernie Sanders to Donald Trump, but with Hillary Clinton in the mix they prefer Donald Trump to Bernie Sanders.

Perhaps the main reason that society as a whole has no real coherence when those preferences are aggregated is that our revealed choices do not zoom in very closely on the strength of feeling behind those choices. A vote for UKIP (like a vote for Brexit) doesn’t capture whether the voter is a xenophobic knucklehead who wants England to be like the 1950s again, or whether the voter is an intelligent and tolerant astrophysicist who simply want less bureaucracy and more free trade. A vote for the Green candidate doesn’t capture whether it’s a conscientious attempt to help save the woodlands, or whether it’s a protest vote against Labour and the Lib Dems - that sort of thing.

Societal preferences in the form of votes do not convey the strength of feeling; they only convey general preferences where if one candidate is successful another one isn't. They don't convey the fact that a quarter of the Green voters are swinging voters or half of the Conservative voters are dyed in the wool, or that there are more people that hate UKIP in the Labour voting camp than there are people that hate Labour in the UKIP camp. These are the strengths of feeling in society that are never properly captured, and as such, the party political demographic that occupies Westminster is merely a shadow of society's political and economic views and feelings.

My 50 Greatest Albums In 50 Years - Year By Year

Unlike my other blog post on music albums, My Top 68 Albums Of All Time, this one lists what I think is the best album of the year for 50 years, from 1960 to 2010. I stopped at 2010 to allow albums made after that year the room to breathe and secure a bit more longevity - but also for personal reasons on the grounds of not having listened to anything like us much musical variety in the past 7 years. Here's my list, and as you (hopefully) enjoy some of my favourites, and (hopefully) recall some of your own, I hope it evokes some nice memories for you, as it did for me:

 

1960 - Let No Man Write My Epitaph - Ella Fitzgerald

1961 - Genius + Soul = Jazz - Ray Charles

1962 - Burnin' - John Lee Hooker

1963 - A Christmas Gift For You - Phil Spector

1964 - A Hard Day's Night - The Beatles

1965 - Highway 61 Revisited - Bob Dylan   

1966 - Pet Sounds - The Beach Boys   

1967 - Sgt Pepper's Lonely Hearts Club Band - The Beatles  

1968 - Astral Weeks - Van Morrison

1969 - Abbey Road  -The Beatles

1970 - After the Gold Rush - Neil Young  

1971 - Blue - Joni Mitchell

1972 - Can't Buy A Thrill   Steely Dan  

1973 - Dark Side of the Moon - Pink Floyd 

1974 - Diamond Dogs - David Bowie  

1975 - Wish You Were Here - Pink Floyd  

1976 - Songs in the Key of Life - Stevie Wonder  

1977 - Rumours - Fleetwood Mac  

1978 - Parallel Lines - Blondie  

1979 - Rust Never Sleeps - Neil Young  

1980 - Scary Monsters and Supercreeps - David Bowie

1981 - Moving Pictures - Rush

1982 - The Dreaming - Kate Bush

1983 - Script for a Jester's Tear - Marillion

1984 - Hatful of Hollow - The Smiths  

1985 - Hounds of Love - Kate Bush  

1986 - The Queen is Dead   The Smiths  

1987 - Strangeways Here We Come - The Smiths  

1988 - Daydream Nation - Sonic Youth

1989 - The Stone Roses - The Stone Roses  

1990 - Heaven or Las Vegas - The Cocteau Twins

1991 - Screamadelica - Primal Scream

1992 - Automatic For The People - R.E.M

1993 - Suede - Suede

1994 - Dummy - Portishead  

1995 - The Bends - Radiohead  

1996 - If You're Feeling Sinister - Belle & Sebastian

1997 - OK Computer - Radiohead  

1998 - Adore - Smashing Pumpkins  

1999 - Ophelia - Natalie Merchant

2000 - Kid A - Radiohead

2001 - Let It Come Down - Spiritualized

2002 - No More Shall We Part - Nick Cave

2003 - Think Tank - Blur

2004 - Funeral - Arcade Fire

2005 - Z - My Morning Jacket

2006 - Back To Black - Amy Winehouse

2007 - In Rainbows - Radiohead

2008 - @#%&*! Smilers - Aimee Mann

2009 - XX - The XX

2010 - Plastic Beach - Gorrilaz