Economists are morally superior beings, scientifically proven that is

A lovely paper discovered by Paul Walker over in the land where Kiwis live standing on their heads:

Does an economics education affect an individual’s behavior? It is unclear whether differences in behavior are due to the education or whether those who choose to study economics are different. This issue is addressed using experimental evidence from the Trust Game where trusting and reciprocating behaviors can be measured. First, it is shown that economics students provide greater trusting investments and reciprocate more. Accounting for the selection effect, these effects are explained by those who choose to study economics and not directly from the education being provided. Thus, economists play well with others and these social preferences are not taught in the classroom.

We who have studied economics are thus morally superior because we do play nicely with others: the reasons being that playing nicely with others is the reason we went to study economics.

Well, Hurrah! for that.

However, this does pose a problem for us as we try to explain it to others. For we’re, in some manner, captivated by those very examples of playing nicely together than the market offers us. We can see how competition is the method by which we decide who to cooperate with and that the vast majority of economic activity isn’t in fact competition at all, it’s cooperation. The seemingly vast and impersonal market itself is simply a description of how we all, the many billions of us, choose to cooperate to our mutual advantage.

Great, excellent and it’s all true. But note what the paper is telling us. We’re, because we chose to study economics, inclined to believe all of that anyway as that’s the way our own personalities work. But our task is to get across the points about such cooperation to those who simply do not have those same basic beliefs about human behaviour that we do. No wonder it sometimes comes out as a dialogue of the deaf: we don’t get what they don’t believe at root, that humans are naturally cooperative beings and markets are the way that we do this.

Thus, we might posit, the existence of this idea that trade, the economy itself, is a zero sum game. We have one view of human nature, they another and the fact that ours is correct doesn’t matter so much as the fact that they don’t believe us or the main point itself.


Companies are the cells of the economy

An interesting point being made by Ronald Coase here:

Wang: Microeconomics is about demand and supply. Compared with classical economics, marginal analysis clearly offers a deeper understanding of consumer choice. But I don’t think it is equally powerful in explicating production, the supply side of the economy.

Coase: To understand production, we have to go back to Adam Smith’s division of labor. It serves well as a starting point, even though the modern economy today has become far more complicated.

Wang: This must be Smith’s most undeserving failure. Modern economics is built on Smith’s framework of the “invisible hand”. But it leaves no room for the division of labor.

Coase: Modern economics shows little interest in production. I am not sure production function tells us anything about production in the economy.

Wang: Adam Smith used the pin factory as an example to develop his analysis of the division of labor. Today, to investigate the division of labor, we can no longer afford to confine our focus to a single firm. Instead, we have to study the organizational structure of production.

Coase: That’s right. The firm remains the cell of the economy, but the intricate relations and constant interactions among the cells determine economic dynamism.

It’s that last line that so particularly interests me. For it’s often pointed out that companies are little sections of a command economy and thus, some leap to say, obviously it’s possible to have a command economy because we actually do.

It’s possible however to run Coase’s analogy in two ways. One is to make that distinction between the cell itself and the entire organism, which do run to different rules. Another might be to compare it to physics: we know very well that there are entirely different rules at the quantum level and at the macro.

Any such analogy can be pushed too far of course but with the economy that cell might well be subject to central planning: but it’s the interaction of all of those limited plans which leads to the vibrancy of the economy as a whole. We as entire human beings cannot and do not work by the same rules that apply at the cellular level: nor do economies work well subject to the same rules that might apply at the company or organisational level.

I’m not sure the Russians have got the hang of this sanctions thing yet

I’ve been continually amused by the Russian reaction to the sanctions that have been imposed upon the country over Crimea and the Ukraine. First they ban imports of fruit and veg from the EU and US. That’s clearly and obviously something that damages Russian citizens more than it does anyone else. Then there was the delightful idea that they would have price controls on the supplies they could get: exactly what not to do to encourage domestic production and imports from new suppliers. And now we’ve got them closing down McDonald’s branches in Moscow over “food safety violations“.

Russia has shut down four McDonald’s restaurants in Moscow for alleged sanitary violations in a move critics said was the latest blow in its tit-for-tat sanctions tussle with the west.

The federal monitoring service for consumer rights and wellbeing announced on Wednesday that the offending outlets included the famous restaurant on Pushkin Square that opened just before the fall of the Soviet Union. The body said the eateries were being shut down for “sanitary violations” discovered during inspections this week.

No, no one at all believes that it’s for any reason other than those sanctions. Quite apart from anything else the floor in a Maccy D’s will be cleaner than the average food preparation table elsewhere in Russia.

But of course there’s more to it than that: obviously, those who would eat at McDonald’s, ie the Russian citizenry, are discomfited by this. McDonald’s Canada, which owns (last I heard at least) 50% of the stores will lose money. But here’s where it gets really fun. The other 50% owner is Moscow City Council (again, last I checked).

So, err, Russian sanctions against the US reduces the cash income of the local council in Moscow.

I’m unconvinced that they’ve quite got the point of sanctions just yet: you’re trying to hurt the other guy, not yourself or your own citizenry.

An independent Scotland should use the pound without permission from rUK, says new ASI report

Today the Adam Smith Institute has released a new paper: “Quids In: How sterlingization and free banking could help Scotland flourish”, written by Research Director of the Adam Smith Institute, Sam Bowman. Below is a condensed version of the press release; a full version of the press release can be found here.

An independent Scotland could flourish by using the pound without permission from the rest of the UK, a new report released today by the Adam Smith Institute argues.

The report, “Quids In: How sterlingization and free banking could help Scotland flourish”, draws on Scottish history and contemporary international examples to argue for the adoption of what it calls ‘adaptive sterlingization,’ which combines unilateral use of the pound sterling with financial reforms that remove protections for established banks while allowing competitive banks to issue their own promissory notes without restriction. This, the report argues, would give Scotland a more stable financial system and economy than the rest of the UK.

According to the report, adaptive sterlingization would allow competitive, private banks to issue their own promissory notes backed by reserves of GBP (or anything else – including USD, gold, index fund shares or even cryptocurrencies like Bitcoin). With each bank given powers to expand and contract its balance sheet relative to demand, this system would be highly adaptive to changes in money demand, preventing demand-side recessions in modern economies such as the ones that led to the 2008 Great Recession.

The report’s author, Sam Bowman, details Scotland’s successful history of ‘free banking’ in the 18th and 19th centuries and the period of remarkable financial and economic stability which accompanied it. Historical ‘hangovers’ from this period, like Scotland’s continued practice of individual bank issuance of banknotes, are still in place today, making Scotland uniquely placed for a simple transition to the system outlined in the report.

The report highlights evidence from ‘dollarized’ economies in Latin America, such as Panama, Ecuador and El Salvador, which demonstrate that the informal use of another country’s currency can foster a healthy financial system and economy.

Under sterlingization, Scotland would lack the ability to print money and establish a central bank to act as a lender of last resort. Evidence from dollarized Latin American countries suggests that far from being problematic, this constraint reduces moral hazard within the financial system and forces banks to be prudent, significantly improving the overall quality of the country’s financial institutions. Panama, for example, has the seventh soundest banks in the world.

The report concludes that Britain’s obstinacy could be Scotland’s opportunity to return to a freer, more stable banking system. Sterilization, combined with reform of Scottish financial regulation that:

  • removed government liquidity provisions to illiquid banks,

  • established mechanisms to ‘bail-in’ insolvent banks by extending liability to shareholders, and

  • shifted deposit insurance costs onto banks and depositors rather than taxpayers,

would improve standards and competitiveness in banking, while significantly reducing the prospect of large-scale bank panics and financial crises.

Commenting on his report, the Research Director of the Adam Smith Institute, Sam Bowman, said:

The Scottish independence debate has repeatedly foundered on the question of currency, but if Scots look to their own history they will find that their country is a shining example of how competition in currency and banking can ensure a stable and effective banking system. Scotland’s free banking era was an economic and intellectual Golden Age, and its system of competitive note-issuance was recognised by such thinkers as Adam Smith as one of the root causes of the country’s prosperity during this time.

The examples of Panama and other dollarized Latin American economies are proof that countries can thrive when they unilaterally adopt another country’s currency. Combined with a flexible, adaptive banking system, the unilateral use of another country’s currency can instill a discipline in a country’s financial sector that neither a national currency nor a currency union can provide. Scotland’s banking system is almost uniquely primed for such a system of ‘adaptive sterlingization’. The path outlined in this paper would go almost unnoticed by the average Scot – until the next big economic shock, when they might just wonder why their system was so much more stable than that of the country they’d left behind.

This train fare question isn’t difficult you know

The Guardian rather jumps the shark here:

The Guardian view on rail fares: unfair
Travelling by train produces benefits for everyone – less air pollution, lower greenhouse gas emissions, fewer traffic jams. Passengers should not have to pay two-thirds of the cost

Actually, a small engined car with four people in it has lower emissions, lower pollution, than four people traveling by train. So it simply isn’t true that everyone benefits from more train travel.

There are indeed some truths there though. It simply would not be possible to fill and empty London each day purely by private transport: some amount of commuting public transport is going to be necessary. And there’s no reason why those who benefit from that should not pay for it: as they largely do through the subsidy of London Transport paid for by Londoners.

But on the larger question of who should pay for the railways of course it should be those who use the railways that pay for it. Some City fund manager who commutes in from 50 miles outside London should not have his lifestyle choice subsidised by the rest of us. We should not be taxing the man who cycles to work at minimum wage in order to pay for wealthier people top travel longer distances.

The Guardian is, once again, forgetting that there is no magic money tree. If rail users do not pay for the railways then there is no unowned cash that can be diverted to doing so. Either the rest of us put our hands in our pockets or we don’t. And why should the poor pay taxes so the middles classes can live in the greenbelt?