Apparently government does all the innovation around here

We have a new contender for silly economic theory of the year here. Marianna Mazzucato's book on how it's really the State, government, that invents everything and that therefore we must, umm, well, I'm not sure actually. Either allow the state to carry on inventing everything or tax everyone more.

Second, government has also increasingly accepted that it funds the risks, while the private sector reaps the rewards. What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most lossmaking elements are socialised, while the profitmaking ones are largely privatised.

I've already spluttered and sworn about that one elsewhere. When the state takes 50% of all of the entire economic output of the entire country, evertyhing produced in aggregate by every man woman and child in the nation, quite how we can describe any profit at all as being privatised I'm not sure. But there's a larger error at the heart of the argument:

Conventional economics offers abstract models; conventional wisdom insists the answer lies with private entrepreneurship. In this brilliant book, Mariana Mazzucato, a Sussex university professor of economics who specialises in science and technology, argues that the former is useless and the latter incomplete. Yes, innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state.

You can prove pretty much whatever you want in any field if you decide to start by ignoring everything everyone else has found out about that field. And the economist who has done the work in this field, about government and private contributions to invention and innovation, is William Baumol.

His finding being that the state, government, and private industry are equally capable of inventing things. Whizzy new machines, whizzy new ways of doing things. He notes that the Soviets managed to make a satellite and a rocket to get it into space and there's pretty much no economic system more state directed than that Soviet one. However, he then goes on to note that innovation is not the same as invention. Innovation is the process by which these whizzy new things disperse through the society (the take up of new technologies if you like) and also the rate at which people find interesting things to do with this whizzy new invention.

The importance of this being that the innovation side is done vastly better by a private sector, a market based one. Technological adoption is faster, more things are found to be done with the invention and so on.

A perhaps even more potent example is the information and communications revolution. The US National Science Foundation funded the algorithm that drove Google’s search engine. Early funding for Apple came from the US government’s Small Business Investment Company. Moreover, “All the technologies which make the iPhone ‘smart’ are also state-funded ... the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.” Apple put this together, brilliantly. But it was gathering the fruit of seven decades of state-supported innovation.

Baumol's point is that the private sector could have come up with these technologies, even though it was the State that did. But only the private, or market, sector could have come up with the iPhone. And it is worth noting that absolutely no government anywhere has managed to come up with anything remotely approaching a smartphone. Which is, as I'm sure you'll be fascinated to learn, the technology with the fastest adoption rate globally of any technology ever.

Or, as Baumol didn't quite say, the Soviets did manage to put a satellite up there but 50 years after that they'd still not managed to make a domestic washing machine that worked. And as Ha-Joon Chang rightly observes, the washing machine has done more to reduce the burden of labour, to free women from its shackles, than any other invention. And it did indeed need the private, market based system to do that.

The supermarkets are killing off the independent petrol stations

A complaint from the independent petrol retailers that those dastardly supermarkets are killing off their business. Which I'm sure they are, opening larger stations, selling fuel at cost and so on. Given that this benefits the consumer long may it continue as well. I don't insist that they should not be allowed to complain about this: that's what trade associations are for. To push the interests of their members, just as unions do for their. Only that we don't have to pay all that much attention to such special pleading. However, they make one complaint that is worthy of closer examination. The supermarkets turn over their fuel faster (this being part of why they are more efficient) and this means that there's less stock actually on the forecourts of the country.

Based on the report, the Government concluded that "in the event of a total disruption to petrol and diesel supplies the retail sector holds up to eight days of fuel capacity to meet current demand". But the PRA was already highly critical of the Government's "grossly misleading" conclusions – even before it discovered it had understated the supermarkets' share of the market. Mr Madderson said DECC had misunderstood how the market works: "They are saying we have eight days capacity. In our view it's two to four days, especially if the supermarkets have a bigger market share than we thought."

Is this a problem? I don't know. Certainly I think I'd be slightly worried if I thought that the country had only 30 minutes of fuel on forecourts. What is the right number is I think is a matter of opinion not one of fact. I'd also posit that something that entirely stops the flow of fuel completely for more than two days is probably something that means we've got larger problems than whether we can drive to the shops.

But what interests me here is the other side of this story. So, let us agree, there is only 3 day's supply at the stations, not the 8 everyone thought. What's the implication of that?

Annual road transport usage of fuel seems to be around 40 million tonnes. 5 day's worth of that is some 500k tonnes, or in litres (assuming petrol is equal in density to water, which is close enough) and at a price of £1.35 a litre, that's some £675 million.

That is, in order to support the road transport system, supply it with fuel, this reduction in the stocks has led to that £675 million's worth of fuel not just sitting around in the system. The capital requirements to support the stocks in the system have therefore declined by exactly that £675 million. If you prefer, the amount of capital that has to be allocated to the transport fuel system has declined by that sum, a sum that can now be used to go off and do something more useful or interesting. Say, finding a cure for Simon Cowell (or is that a cure to Simon Cowell?).

And that's what I think is the interesting point here. OK, maybe 3 day's supply of fuel isn't enough, maybe it is. But there's always another side to these things. In this case, to insist that 8 days is available, someone, somewhere, has to find £675 million to finance that stock. I agree that it is possible that, in extremis, not having the fuel there could cause us all damage. But how much should we all be paying to make sure that greater supply is there? What is, if you like, the insurance premium we should be willing to cough up?

Most importantly, is that insurance premium worth the loss of all the other things we can do with that sum of capital?

As I say up top, I don't know what the correct answer is. But I would insist that this is the right way to consider the question. Increasing stocks at petrol stations might indeed be a nice idea: but it's not costless.

Chart of the week: US household savings rate falls after deleveraging of recession

Summary: Latest GDP revisions also boost household savings

What the chart shows: The chart shows US household savings as % of disposable income

Why is the chart important: The US Bureau of Economic Analysis has just published its most recent major GDP revision. These take place every five years, but the 2013 was more through-going than most, in two ways. First, investment in intellectual property (films, books etc) is now counted as capital expenditure. Second, pension savings is now included in the household savings rate. The revision does not change the past, but it provides a better picture of it. In the case of household savings, it helps explain how US households have managed to deleverage in the aftermath of the Great Recession. However, the recent trend is still for the savings rate to fall. Short-term, that is good news for the economy. Somewhat further out, it is a concern. 

No taxation for representation

Yet another call for the political classes to tax us yet more in order to pay for the political classes:

And that makes the search for an alternative more plausible. Both Sir Hayden and, more recently, Sir Christopher Kelly, chairman of the committee on standards of public life, proposed additional taxpayer funding to make up the shortfall from a donations cap. Politicians ritually argue that the public will not like forking out for a system it does not trust. This now beginning to sound like an increasingly flimsy excuse – and a circular one. The present system actually fuels that distrust. Nor are the sums large: Sir Christopher proposed a £10,000 donations cap and an increased state contribution of £23m a year over five years – the cost of a first-class stamp for every taxpayer.

No, just no.

A political party is simply a private association of individuals banding together for mutual benefit. As such there is no call whatsoever for the taxpayer to fund them. The Conservative Party has no more claim on tax revenues than the Co-Operative does, Labour no more than Littlewoods. All four of those being private associations of individuals banding together for mutual assistance.

If the parties cannot raise the money they think they need (or more accurately, the cash they desire) from those who support them then they've no more right to everyone else's money than I do. Which leads to my proposed slogan: no taxation for representation.

Now, given that that's not actually going to go anywhere a more modest proposal. Let's really sell those titles, as we used to back when we did rule the world. And we've one beneift today as well: we can confer an hereditary peerage without that giving rise to the right to sit in the House of Lords. It would still be necessary to win an election (yes, I know, to foreigners this will sounds very strange but the only people who are actually elected to our upper house of the legislature are the hereditary peers) for such a creation to get there. So, offer each and every political party a settled number of titles to auction off. A couple of Earldoms, a handful of Viscountcies and a slew of Baronages. They cost absolutely nothing at all to make, can be sold for very good prices indeed and, as long as we make them all hereditaries, do not give the holder any power over the rest of us at all.

Why not? Lloyd George was a Liberal so this must indeed be a good and liberal policy, mustn't it?

Of course we should stop subsidising arts degrees

Not that we particularly do subsidise arts degrees, not in England we don't. Students now borrow to pay the course fees for the subjects they study which is as it should be. But some interesting research about why we shouldn't ever go back to subsidising arts degrees whatever else we do with tertiary education. The basic point being that hard and social science degrees contribute to economic growth. Arts degrees do not. The full paper is here but this is probably an easier summary.

Cristiano Antonelli and Claudio Fassio decided to open this Pandora box and concentrate on one impact: economic growth. They perform a cross-country study and take the number of graduates in each field as an indicator of academic output, and see where that leads us in terms of economic achievement. They make the distinction between engineering, hard, social, medical sciences, and humanities in a 11-year panel of 16 OECD countries. The horse race ends with two clear winners, engineering and social sciences, and two big losers, medical sciences and humanities, the latter having a significant negative contribution to growth.

The argument generally deployed is that having a better educated population increases economic growth: thus there should be subsidy to that education. Which is fine of course, but as this paper shows it does rather depend upon what sort of education produces the economic growth. And as we see, the social sciences and hard ones do indeed produce that growth and so there's an argument for subsidy. That the arts degrees do not produce that growth means that this particular argument for their subsidy fails.

But do note that last little part of it: arts degrees reduce economic growth. Quite why: well, have you ever actually looked at an arts degree syllabus these days? They might well instruct well on the importance of feminism to Jane Austen, say, but they do seem to misinform about everything else political and economic. Or it could be of course that it's just the opportunity costs: having intelligent people spending years arguing over the importance of feminism in Jane Austen is a drag on the economy when they could have been out designing bridges instead. Or even serving the coffees that their graduate degree will prepare them for.

But such gross cynicism aside this economic result does indeed lead to an interesting policy idea.

We're all familiar with the idea that there are externalities, that such externalities need to be corrected with the addition of a Pigou Tax. This is simply the flip side of the argument that positive externalities (like, say, the public good of economic growth coming from science education) should be subsidised. Those science and social science degrees produce that increase in economic growth which is indeed a public good worthy of subsidy. Those arts degrees produce a negative externality which must be corrected by a Pigou Tax.

At which point the correct policy is obvious: we should charge the arts students twice the normal fees in order to subsidise the science students. It's a win/ win situation I feel.

Of course big business loves regulation

An interesting little point made in the Telegraph:

In the debate on Britain’s relationship with the European Union, you hear two types of response from business leaders. The first, given generally by those who can afford to pay for large teams of lawyers, compliance officers and Brussels-based lobbyists, is one of tentative approval. The second, inevitably provided by the bosses of small and medium-sized enterprises where every penny must be accounted for and most members of staff have more than a single role, is one of resignation verging on outright hostility.

The point being that big business doesn't really mind regulation because it has the capability of dealing with it while small business hates it with a passion because it does not.

But it actually goes rather further than this. Big business positively delights in much regulation. To understand this we've got to be clear eyed in our appreciation of what the market is really all about. Capitalism, and big businesses are decidedly capitalist organisations, is indeed all about making profit. Get the most out of whatever it is that you're doing. It's the market, the competition that it allows, which is what tempers this this profit gouging. You can't charge what you like for a pint of beer because there's another pub around the corner. Or the supermarket and the couch in front of the telly. Or France sells beer to take home as well.

What regulation does is favour both the incumbents in any activity and also large companies in anytihng at all. For what worries business is not whether they're allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulation means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.

Which is, as I say, why large companies just love regulation. The problem here is of course that it's also large companies that do all the lobbying. Further, that it's the small and new companies that do most of the innovation and nearly all of the job creation. Meaning, in the end, that it's precisely because large companies so like regulation that we should have less of it.

Government in doing something sensible shocker

Sadly though it's not the government that we groan under the yoke of, but the Australian one that has just done something extremely sensible. You may or may not recall that a few weeks back various Oz MPs were getting very hot under the collar about why various tech products cost a lot more there than they do in other countries. They called in the execs and had at them and various fairly weak justifications were offered. Transport costs, small market, high costs of infratstucture and so on. No one quite had the chutzpah to point out that they were simply profit maximising businesses. They charged more in Australia because they could charge more there and that's simply it.

It does appear though that the MPs uderstood what they weren't directly told, for:

Acknowledging that companies have the right to decide the pricing of their own products, the committee made a number of recommendations to address the price of goods in Australia.

Ooooh! What?

It wants the import restrictions in the Copyright Act, 1968 removed and add a clause to allow consumers to circumvent geoblocking to ensure they're getting the best price. It also wants to teach Australian consumers how to get around geoblocking and provide more access to technologies that allow them to do so. Needless to say they will also need educating on how far Australian Consumer Law allows them to go on this.

• If companies do not agree to lift geoblocking, or to give consumers the tools they need to circumvent it, the committee recommended enacting a ban on geoblocking "as an option of last resort". It also recommends voiding any law which seeks to enforce geoblocking.

Blimey, can I emigrate? Politicians make recommendations, based upon the evidence and further, recommendations that will actually solve the problem?

For the companies charge higher prices because they can. Remove their ability to do so by removing the artificial restrictions upon consumers and they will no longer be able to charge those higher prices. Thus they won't.

Isn't this so joyfully different from our own dear Margaret, Lady Hodge, and her practice of offering soundbites without demonstrating any understanding of the basic underlying problem?

Postcode petrol prices

Transporting fuel to Scottish islands is an expensive business. This in turn makes motoring on the islands more expensive. The UK government's solution? It gives a 5p/litre reduction on fuel duty on the islands. Which means millionaires who've retired to Arran enjoy a subsidy from poor motorists on the mainland.

So now everyone else wants to get in on the act. There is an election coming up, of course, and now people on 'remote' parts of the mainland – Devon, Northumberland, North Yorkshire and Wales could be in line for the same cut. The Treasury is asking petrol retailers and customers in 25 Counties to provide details of their prices. Well, we know what they are going to say, don't we?

Don't get me wrong. I'm in favour of any tax reduction of any size on any thing at any time in any place. Taxes are far too high. But as well as being low, taxes should be simple. If you are going to tax fuel, or alcohol or incomes or anything else, tax them equally: don't try to use taxes for social engineering. The long-run results won't be happy.

Back in the 1970s, when the UK gave subsidies to 'assisted areas' that were thought to be in need of special support. Of course, everyone wanted the subsidy, and before long, the entire country was one vast 'assisted area' apart from a small pocket in the South East. That is where this kind of me-too politics takes us.

Politicians should not be empowered to favour any particular groups. They should treat us all equally – if we allow them to discriminate, the opportunities for corruption are huge. If people choose to live in remote places, they need to accept the costs of that – along with the benefits, which might include scenery, solitude, simplicity and much else. We should not tax them for the latter and should not subsidise them for the former.

By manipulating the tax system, politicians skew the decisions people make about where they live and what they do. Bit by bit, we end up gravitating to the subsidised places and working in the subsidised industries – instead of going to where we can be most productive in the most productive industries. And then we wonder why the country is broke.

An interesting question indeed

Mark Thoma asks an interesting question:

I have a question. Why should government spending as a percentage of GDP stay constant as GDP grows?

Sadly he rather spoils it by providing the wrong answer:

It seems that, as we grow wealthier as a society, we would want relatively more of the kinds of goods government provides, e.g. social insurance.

Nothing is a normal good in all income ranges, a normal good being one that we spend the same portion of our incomes on whatever those incomes might be. Everything is, at some point in the range of possible incomes, an inferior (we spend smaller portions of income as income rises) or superior good.

So, yes, it's entirely true, there is no good reason that government as a percentage of GDP stays static as GDP rises. The interesting follow on being whether we do indeed desire more of such social protection as incomes increase.

And I'd say that we've already gopne over the hump from government being a superior good to it being an inferior one.

Imagine life 200 years ago. Yes, indeed, there was charitable provision for medical care, the invalids and the old: but as it turned out, what the people actually wanted was more than just that charity. The voters voted that they wanted government to provide at least more than had previously been done. Yes, we might argue about this but these definitions of superior etc goods are not about what ought to happen but about what people actually do. And people most certainly have voted to have more social insurance than we had when GDP per capita, in current money, was £2,000 a year or whatever.

However, does this hold true today? For we already have social insurance: pensions for the old, food for those unable to afford it, money for the unemployed, top ups to wages for the unskilled, a national health service, care for the orphans and so on and on and on. If GDP doubled, for example, would we be insisting on having twice the social insurance we currently do? I think not actually, I think that given we do indeed have that desired safety net I think that people would generally regard more government as an inferior good. Something we have less of as a portion of our incomes as incomes rise.

The initial question is interesting and the answer is that there is no reason why government should be a static portion of GDP. But I do indeed think that at our current levels of government and GDP that it has become an inferior good, something we'll spend a lower portion on as we get ever richer.

Milton Friedman on the Negative Income Tax

Milton Friedman was born 101 years ago today. The video above isn't as snappy as many of the great Friedman videos online, but I like it because it shows the kind of libertarian Friedman was. Instead of dismissing any policy that fell short of abolishing the state as 'socialism', he came up with innovative and practicable steps towards a freer and richer world. His policy proposals are still relevant and fresh (unlike many of FA Hayek's, for instance) — as a replacement for existing welfare, a Negative Income Tax today could liberate people from the benefits trap. Daniel Hannan's piece on Friedman and school vouchers — another idea as fresh and important today as it was when he first proposed it — is well worth reading too.