It’s the absence of markets that causes poverty

There’s an excellent discussion of a recent finding in development economics over here.

If markets are missing completely, or so unreliable as to effectively be missing, then household separation fails. The extreme case is easiest to think of. If a household is completely autarkic, and can trade with no one else, then it can only consume what it produces. The two decisions are inseparable. If they want a new TV, then they’d better have a source of rare earth elements in their back yard and a passion for soldering.

The importance of knowing if household separation holds or not is that it tells us something fundamentally important about why a developing area is poor.

What’s being looked at is that horrible, $1 a day, poverty that far too many of our fellow humans are stuck in. The big question being, well, are they stuck there because of the way that markets operate? Perhaps “the market” means they can’t get enough fertiliser for example. Or is it that markets simply do not exist and thus they cannot reap the benefits of the division and specialisation of labour and the subsequent trade in the increased production?

The answer appears to be the absence of markets rather than any failure in them. Which leads to an interesting thought about what should be the right way to aid them.

Instead of sending money with which to buy them stuff we should be trying to work out how to create markets. And the most important part of that is in fact information. Not from us to them, but within such communities. And that ties in neatly with something that is becoming apparent from another part of the literature. It may well be that the mobile telephone is the greatest poverty reducing technology of our times. Simply because it does do exactly that, allow the spread of the information that enables markets to do their wealth creation thing. As this excellent paper makes clear.

It’s not quite as simple as “make sure there’s a phone network everywhere and the poor will get rich” but we’re increasingly coming to the view that that’s a damn good start to solving the problem.

UPenn Global Go-To Think Tank Rankings 2014 – how we did

This year’s Global Go-To Think Tank Rankings, which are compiled annually by the University of Pennsylvania, have been released, and the ASI did pretty well. Our global rankings were:

  • 69th in Top Think Tanks Worldwide (Non-US)
  • 16th in think tanks in Western Europe
  • 3rd in Top Domestic Economic Policy Think Tanks
  • 5th in Top International Economic Policy Think Tanks
  • 17th in the Best Use of Social Networks
  • 40th in Think Tanks with the Best External Relations
  • 24th in Think Tanks with the Most Significant Impact on Public Policy
  • 12th in Think Tanks with Outstanding Policy Orientated Public Programmes

The full rankings are here, and congratulations to our friends at other think tanks who also did well, particularly the Cato Institute which came 8th in the total US think tank rankings. We rose in most rankings, and by our own internal measures of impact, media coverage, research quality, events attendance and fundraising, 2014/15 is shaping up to be a very good year indeed.

Reading the report reminded me of the challenge that think tanks (and non-profits in general) all have. As Jeffrey Friedman has observed, when you run a for-profit firm, you have a single measure of success – profit. If you do X and profits go up, keep doing X. If you do X and profits go down, stop doing X. In a complex world having just one thing that matters cuts through quite a lot of confusion.

But, obviously, non-profits don’t have that measure or any single thing we can focus on. For us, it’s a constant struggle. Focus on fundraising too much as a think tank and you end up being good at talking to donors but not good at using their money to make the world better. The tail wags the dog. Focus on media coverage and you become a rent-a-quote. And so on.

The thing you really care about is changing the world. But if that’s done by, say, changing the minds of young people, it takes decades to measure success. If it’s done by focusing on policies implemented, you’re tempted to go for the easy, insignificant win over the difficult long-term change. There’s no single thing you can look at, so it’s tough to cut through the complexity. Rankings like this don’t do that entirely, but every little helps.

With property rights, there are plenty more fish in the sea

We at the Adam Smith Institute need little further evidence that property rights are the best way to an efficient allocation of resources. Even so, more literature on how property rights can work in different industries and regulatory environments is always welcome. A new National Bureau of Economic Research paper looks at how the strength of property rights can affect regulators’ willingness to allow the exploitation of natural resources. They focus on the most common system of regulation, which sees a limited number of firms given the right to extract to the level of a cap set by a regulator. They attribute this, at least partly, to a benign form of regulatory capture.

Commonly, it is seen as an unwelcome anticompetitive force, leading to the overexploitation of resources by monopolistic producers in industries with clearly defined property rights. However, because of the temporary, weak, and ill-defined nature of rights in the natural resources sector, the authors suggest that this analysis is not applicable. Instead, they find that

when property rights to the resource are strong, the regulator’s choice (which is the product of resource harvesters’ influence) coincides with the public interest. However, when property rights to the resource are weak, the regulator’s choice leads to overexploitation. This suggests that the resulting extraction level is closer to the socially-optimal extraction level when rights to the resource are strong.

The authors distinguish between ‘weak’ and ‘strong’ property rights using the probability that such rights will be revoked – the more likely, the weaker the rights. They propose that, when rights are strong, firms influence regulators (either formally by voting in regulatory councils, or by informal means) to choose a lower extraction rate than they would in a situation with less secure property rights, because they are less concerned about those rights being revoked in the future. In addition, regulators discount utility from future harvests less when there is less risk of rights being revoked, causing them to favour less current extraction.

The paper tests this thesis empirically against novel panel data from 178 of the largest commercial fisheries, and finds that regulators are “significantly more conservative” in their management of resources when property rights are most secure. In those cases where poorly managed fisheries switch to a ‘Catch Share’ system, with more secure property rights, there is a significant fall in exploitation, supporting their thesis (the fall prior to the switch is attributed to a gradual policy change in the face of overexploitation):

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If in practice the Coasean idea that the assignation and enforcement of property rights – through their effects on the decisions of regulators – lead to more efficient outcomes, this has important implications for policy. It gives us an even greater incentive (as if we need it) to promote the institution of secure property rights, especially in those resource-rich low-income countries which could be subject to a swift depletion of natural resources due not only to tragedies of the commons, but also to the insecurity of extractive firms property rights.

Nationalising the railways might be popular but perhaps not for the reason people think

Owen Jones tells us that Labour should, to beat the Greens, announce some really popular policy like re-nationalising the railways. And this might well be popular but perhaps not for the reason that people are assuming:

But there are three clear commitments Labour could offer to win over Green defectors. First, renationalise the railways. It would cut through like few other policies, and probably prompt some voters to break out in spontaneous applause. Polling demonstrates a publicly owned railway has near-universal appeal, winning over well-heeled Tory commuters and Ukip voters alike. But it also has a totemic quality about it: a clear demonstration that Labour has taken a decisive stance against the untrammelled market in the era of market failure.

The real complaint, we feel, about the railways is not over who owns and or runs them. It’s over the price of them.

It’s common enough to see people complaining that UK ticket prices are among the highest in Europe. And they are, as a result of a deliberate political decision. More of the revenue to keep them running comes from ticket prices and less from direct subsidy than in most other countries. And that’s the correct decision too. There’s Britons who don’t use a train from one decade to another: difficult to see why they should be taxed to provide cheaper transport for others.

And that’s why nationalisation won’t make much difference. Because doing so isn’t going to reverse that decision that, by and large, people who use trains are the people who should pay to keep trains running. The only way ticket prices will come down is if the taxpayer gets dunned for it. And why should we?

Logical Fallacies: 3. Definitional Retreat

 

The third in Madsen Pirie’s ‘Logical Fallacies’, this video is on the ‘definitional retreat’.

You can pre-order the new edition of Dr. Madsen Pirie’s How to Win Every Argument here