239 years of The Wealth of Nations

Today is the 239th anniversary of the publication of The Wealth of Nations by Adam Smith. For nearly a quarter of a millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for a fair chunk of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market. The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live.

Yes, it's very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. Luckily, you do not have to read it, because you can download my Condensed Wealth of Nations instead.

And yet, Adam Smith's original is the book which took economics out of its primitive phase and made it distinctly modern. With a bit of time and effort, any of us can understand what Smith says because what he is describing is all around us today.

The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country's wealth is what it produces. In that first sentence, he had invented the idea of gross domestic product. In the second, he notes the wealth of individual citizens of that country depends on how many citizens are sharing this GDP. (So there,he had invented the idea of GDP per capita.) In the third, he talks about how many people are actually working to produce this wealth. (The concepts of the participation rate, and productivity.) Before we are past the first page, we can see that this is sensational stuff.

But surely his greatest breakthrough was the realisation that we do not have to conquer people or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world.

Teachers unions are bad for kids

Though everyone typically sees unions as being mainly for the benefit of their members, teachers' unions use a lot of pro-student rhetoric and often come across fairly angelic. They probably do have only the kids' interests at mind, but a new paper suggests that their existence doesn't necessarily benefit those kids.

Data comparing students' outcomes to teacher unionisation has until recently been fairly lacking. But according to the new study published last month, duty-to-bargain laws (which  mean employers need to work with unions) lead to significantly worse labour market outcomes for students in schools subject to them.

Previous research has shown us that teacher collective bargaining laws increase teacher union membership and increase the likelihood that a school district unionises for the purpose of collective bargaining—i.e. they achieve their direct goals. But looking into the effect on the kids has been hampered by a lack of information liking people’s outcomes and the time that duty-to-bargain laws were passed.

This new study, conducted in the US by Michael F. Lovenheim and Alexander Willen, takes the timing of the passing of the duty-to-bargain laws between 1969 and 1987 and links them with long run educational and labour market outcomes among 35-49 year olds in 2005-2012, i.e. those subject to them..

What they found was that men subject to increased unionisation work less hours as adults and earn less. There is also evidence of a small decline in educational attainment for men and a long-run negative effect on labour supply for women that is equal in magnitude to that of men.

Of course, some of the kids tin this paper were subject to a vastly different educational environment than exists today, so we can't necessarily extrapolate to the UK. Nonetheless the general finding is quite plausible, and should contribute to policy debates around increasing or reducing the role of collective bargaining in the education sector.

If future research in this field continues to make the negative relationship apparent, we may be ever closer to exposing how teaching unions lower educational standards by supporting the timeservers over the strivers in the teaching profession.

More evidence that all schools should be free schools

Free schools raise standards - not just in the schools themselves, but in the traditional state schools in their neighbourhood. That is according to a new report from the think tank Policy Exchange. And it should come as no surprise. That is exactly what happened in Sweden, after it reformed its education system in 1991 and allowed charities, faiths, voluntary groups and private companies to open schools rather like the UK's free schools.

Schools that are independently run but still supported by taxpayers – and paid by results, basically in proportion to the number of pupils they attract – are better motivated to think more deeply about the education they provide and how they provide it. Despite the fact that free schools are still highly regulated – much more so than their counterparts in Sweden – that is exactly what they do. So they stimulate other, unreformed, schools in two ways. First, they provide a model for what is achievable. Second, local state schools realise that they have to improve if they are to continue to attract pupils and justify their own existence. Simple really.

People make two arguments against free schools. First, they say that they are more selective than other schools and so it is not surprising that they get better results because they get more able pupils from generally better-off, better-educated parents. But look at another country, the United States, with its so-called charter schools. Often, these have been set up in the least promising areas, inner-city areas rife with drugs and violence, where all or nearly all pupils are from generally poor, minority families. The uplift in performance, though, is startling. Many of these schools are set up by parents, or parents and teachers, precisely because the existing government-run schools are do depressingly and young-life-ruiningly dismal. but those concerned local people make their schools secure places to learn, ban drugs and tolerate 'no excuses'. And you know what? The children shine.

The other objection is that free schools in the UK are wasteful because they are often set up in places where there are already spare places in traditional state schools. Indeed: rather like the case in those American cities I have just mentioned. Setting up a new, different, better-motivated school in an area where there are only 'sink' schools is no waste: it is one of the most cost-effective things you could do. Preventing better schools from setting up is rather like preventing better restaurants from opening up when there are still spare tables in the local greasy-spoon.

The government says it will create another 500 free schools. Frankly, we should turn every school in the country into a free school.

Wilkinson and Pickett are, yes, still wrong

This would simply be laughable if it weren't for the fact that it's so dangerous. Richard Wilkinson and Kate Pickett are, once again, telling us that it's all inequality that fuels our woes. And yet they've entirely misunderstood the statistic that they're using to prove that this is so. And to add to the embarrassement Wilkinson at least is supposed to be a demographer, meaning that he really is supposed to know how badly he's cocking things up here. Yes, we're being rather fierce here but rightly so:

New statistics from the ONS have revealed that women in the most deprived areas of England can expect to have 19 fewer years of healthy life than those in the most advantaged areas. For men, the figure isn’t much better, with a gap of over 18 years. To put that into perspective, those born in the poorest parts of England can now expect to live the same, or fewer, healthy years as someone born in war-torn Liberia, Ethiopia or Rwanda. And a third of people in England won’t reach 60 in good health.

Those statistics are here. And the first part of the paragraph is correct. Ages at death in poorer areas, health before death in poorer areas, are lower/worse than they are in richer areas.

But this has absolutely nothing at all to do with life expectancy at time of birth. Simply because no one at all is even attempting to measure life expectancy at birth. What people are measuring is age at death, health before death, in certain areas.

The difference is, and you may have noticed this, people actually move around during their lives. Further, it is not (necessarily) true that income inequality leads to health inequality. For it is also true, as we've pointed out many a time before, that health inequality can and will lead to income inequality. That ghastly disease that cripples someone in their 40s is going to have an impact on their income during the remainder of their life. We cannot therefore look at income inequality and claim that it causes health inequality. Simply because there are two processes at work.

Further, we cannot look at lifespans in an area and insist that these reflect the life chances of those born in that area. Take, as an example, a retirement town like Bournemouth (say, any other will do). People often retire there at, say, 65. Can we then look at average lifespan in Bournemouth and correlate it to that of someone born in Bournemouth? No, of course we can't: for the average lifespan in Bournemouth is going to be boosted by including large numbers of people who only impact the numbers after they've survived to age 65. And, obviously, those rich enough to be able to move for their retirement.

This migration over lifetimes will lead to selection: the richer will go to richer areas (if nothing else on the grounds that they can afford the property prices) and the poorer will go to poorer areas. At least part of what is being measured is therefore the effects of this selection, not the life chances of those born in these areas. As such we simply cannot accept the conclusions they are making from this data.

And as up at the top, Wilkinson at least is supposed to be a demographer and he really is supposed to know all of this. It astonishes that they keep pushing this obviously incorrect line.

These statistics are compiled on the basis of LSOAs, lower super output areas. There's some 32,844 of these in England. That is, each LSOA is a unit of roughly 1,500 people give or take a bit. So, how many people die in the same 1,500 people strong grouping that they are born in? The geographical area inhabited by that same 1,500 people? Moving three streets over on marriage would take you out of such a small area.

Quite, somewhere between not very many and none these days. These statistics are simply valueless in trying to prove what Wilkinson and Pickett want to torture them into showing.

Logical Fallacies: 16. The gambler's fallacy

https://www.youtube.com/watch?v=jJYaDv0Y1K8  

Madsen Pirie's series of logical fallacies continues with 'the gambler's fallacy'.

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

Ed Miliband's TV debates law

Following the TV debate row in the UK, Labour Party leader Ed Miliband says a future Labour government would pass a law to ensure that live television debates become permanent features of general election campaigns. The law would establish a trust to establish the dates, format, volume and participants. I was once shocked by the alacrity with which politicians proposed new laws as the answer to any problem. Then I came to see it more as an interesting fact of anthropology. Now I see it more as an art form. The invention that goes into making new, pointless or counterproductive laws is truly a pinnacle of human achievement.

It is sublime that a politician who cannot get other people to debate with him should propose a law to force them. Exquisite that this new law should be backed up and overseen by a new quango. Uplifting that the law's proponents should think that the process would be fair, democratic, and easy.

It won't, of course. As I have mentioned here before, it is by no means clear that TV debates have any place in the constitution of the UK. After all, we do not live under a presidential system, and we do not elect presidents at general elections. Rather, we elect individual Members of Parliament in our local constituencies, and it is those MPs, or at least their parties, who decide who goes into 10 Downing Street. TV debates, by contrast, suggest that we are in fact electing a head of government. They suggest that individual MPs are of no account, mere members of that person's Establishment. They suggest that we are electing an executive, not a legislature that can hold the executive to account. Already, the executive in the UK has far too much power over Parliament, and Parliament has too little control over the executive. TV debates can only make that imbalance more profound.

As for timing, who knows if the five-year fixed election cycle, introduced in 2010, will last? If parties split on key issues, for example, the country might find itself without a coherent government. The calls for a fresh election would be overwhelming. And how to decide who should debate anyway? Is it decided on the basis of current representation in Parliament (in which case UKIP, though polling 15%, would be nowhere)? Or on the basis of the polls (in which case the Lib Dems, currently part of the government, would be nowhere)? Should parties that stand in only part of the UK (the Scot Nats or the Ulster Unionists, for example) be represented in the national debate? If so, how deeply?

The only people who would win every time are the lawyers. I sometimes wonder if, like the mice in Hitchhiker's Guide to the Galaxy, it is actually for their benefit that the world is currently configured.

Two interesting little points about climate change

Two little snippets that caught our eye. The first:

Percentage of annual net electricity generation by renewables in 1948: 32

Percentage of annual net electricity generation by renewables in 2005: 11

The main difference of course is the fall in the relative import of hydroelectric power.

The second:

Two months after the floods, while delivering the final order on a long-running case against the 330 megawatt Srinagar hydropower project on the Alaknanda, the supreme court issued a moratorium on dam construction in the state. It wanted an expert committee to investigate if dams in the state caused environmental degradation and exacerbated flooding and review 24 hydel projects on the Alaknanda and Bhagirati rivers that the wildlife institute of India had vetoed for causing irreparable ecological damage. These dams, with a combined capacity of 2,900 megawatts, need nearly 10,000 hectares (24,710 acres) of land and will submerge 3,600 hectares of forests.

Renewable energy is good we are told these days. But we are also told that renewable energy is not good. There's a certain desire that these people make up their dam minds.

Either climate change is the most severe threat to us all, in which case build the dams, or it isn't, in which case we can worry about a few thousand acres of forest. But one of other of these concerns really does need to have primacy.

Anything else would simply be a conversation of the dammed.

Questions in The Telegraph to which the answer is no

Sometime we are asked question to which the answer is obvious:

Is the answer to Britain’s problem of how to revitalise the North Sea creating a new national oil company?

No.

The justification offered for this bizarre idea is as follows:

Given the harsh new realities of attracting the right kind of investment into the North Sea now could be the right time to revive the idea of a new British National Oil Company. This would help to fill the void that is left as companies like Royal Dutch Shell, Chevron, BP and Total gradually start to moderate their investment in the region.

Well run, technologically superb, profit seeking companies are leaving the North Sea. Thus we should substitute a state managed (for which read "not well run"), technologically naive because it is new, and not necessarily profit seeking company to try to exploit the same assets.

It's not going to work, is it? Throwing the state and bureaucracy at something not deemed profitable does not suddenly make the state's activities profitable. And we really do want our tax money, if it is to be invested in industry at all, to be invested in things that make a profit. To do otherwise is to make us all poorer.

The correct action in the North Sea is to, as we have been all along, capture the resource rents through taxation and ten leave well alone. If the best people in the world think it's worth exploring or extracting oil under such circumstances then great. If they think it's not worth it then so be it. Having investment decisions made by the Treasury is not going to improve matters here.

If it's difficult to attract the "right sort of investment" then perhaps the right sort of investment is none?

Economic Nonsense: 21. Inheritance tax is needed to prevent some having an unfair start in life

This question carries the assumption that life is some sort of race in which we are all struggling to outdo everyone else. Life is not like that. We are not racing against others because we all have different characters and different goals. There is a different finish line for each of us. Even the pace at which we choose to pursue our goals varies with the character of individuals. One widely-held aim of parents is to give their children a decent life, even a better life than they had themselves. Many put effort into achieving this; it seems to be a natural and widespread aim. When society prevents them from passing on their assets to their children after death, they often find other ways of achieving that aim. This can take the form of using influence to place their children in comfortable jobs. It can be done by transferring the assets while they are still alive. It can lead people to set up complex trust schemes beyond the reach of the taxman.

Inheritance Tax is taxing money that has already been taxed when it was earned. The provision parents worked to make for their children, paying tax as they did so, is now taxed again, removing part of their incentive to create wealth in the process. For many recipients, the bequest comes as a lump sum when they are already established and probably own their home. It is thus available for investment or to start a business. Taxing it greatly reduces these possibilities. The capital pools built up by a family business such as a shop, for example, can be dissipated on death by Inheritance Tax, with a consequent economic loss to society, a loss that impacts employees and customers.

People are not equal and cannot be made so. They are differently talented. Some are genetically equipped to develop athletic prowess if they work at it. For others it might be music or mathematics. The notion that 'fairness' requires they should all have equal chances sits ill with what life is actually like. We should not be trying to impose an equality that does not fit, but on extending to everyone the opportunity to better their lives.

No, John is not responsible for gender gaps

Gender baiting has launched again in the United States, but this time it’s personal. Quite literally – the oppressors’ names are John. From The New York Times:

Fewer large companies are run by women than by men named John, a sure indicator that the glass ceiling remains firmly in place in corporate America.

Among chief executives of S.&P. 1500 firms, for each woman, there are four men named John, Robert, William or James. We’re calling this ratio the Glass Ceiling Index, and an index value above one means that Jims, Bobs, Jacks and Bills — combined — outnumber the total number of women, including every women’s name, from Abby to Zara. Thus we score chief executive officers of large firms as having an index score of 4.0.

The NYT didn’t stop there; the article goes on to use its new Glass Ceiling Index to compare political successes, too:

I have to hand it to the NYT - this is an excellent propaganda piece. Determining the success and advancement of women in their careers to how those numbers compare to men named John, Robert, James, and William gives you some pretty damning results.

Left-leaner’s will find any opportunity they can to blame the sexism and discrimination that is still rooted on our society on employers and business culture; that way they can legislate quotas and pay structures across the board, and at least create the illusion, through force, that equality exists.

But evidence, even from the NYT's own sources, suggests that employers are not the problem.

The NYT's report was “inspired by a recent Ernst & Young report, which computed analogous numbers for board directors…for every one woman, there were 1.03 Jameses, Roberts, Johns and Williams — combined — serving on the boards of S.&P. 1500 companies.”

Lets look at that report a bit closer. It is the case that the number of male directors at S&P 1500 companies is hugely disproportionate to the number of female directors (84%/16%), but there is also evidence that the tide is changing. The graph below details that while far more men hold directorships, they also tend to be significantly older in age; 49% of female directors at these companies are under the age of 60 (compared to only 33%) of men, and 31% of male directors are over the age of 68 (compared to only 11% of women).

Like many other occupations, a lot of perceived gender gaps are going through transitional periods; as women become more educated than men, we start to see changes in occupation breakdowns (but it’s not in the interest of gender-baiters to report it).

My colleague Ben has recently blogged on a paper that found if you control for a person’s background and length of time in the work force, “being female increases the chance of becoming CEO. Hence, the unconditional gender pay gap and job-rank differences are primarily attributable to female executives exiting at higher rates than men in an occupation where survival is rewarded with promotion and higher compensation.”

It’s not employers and it’s not corporate culture that’s holding women back; the reality is that women are making different choices than men. Many of them have to do with family planning, but many of them come down to different goals and ambitions.

Examples include both political and career ambitions. Women and men “win elections at equal rates, raise comparable amounts of money, and receive similar media attention” yet very few women are wanting or willing to run for pubic office. Research conducted in 2012 found that millennial women "just aren't very interested in being the top executives of high-profile companies." Of all the women aged 22-33 polled, only 15% actively wanted to lead a large, prominent business one day.

The NYT can use the Johns and Jameses of the world to paint political and market systems as sexist all they want, but their provocative Index completely misses the point. Women are choosing not to take their careers as far as they can go. And that's okay - if that choice makes them happy and gives them opportunity to peruse other meaningful things. But the real glass ceiling for women is being held up society at large, which often compels women from a young age to make different decisions than men.

Are women being educated about their career options properly? Do they feel supported to have kids (or not have kids) on their own terms? These are the issues that are really holding women back. If we actually want to address gender gaps in the work place, let's let John get on with his job while we tackle our deeply entrenched, and often bias, cultural norms.